[Senate Hearing 110-1194]
[From the U.S. Government Publishing Office]






                                                       S. Hrg. 110-1194

                       OVERSIGHT OF THE PROPERTY
                    AND CASUALTY INSURANCE INDUSTRY

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 11, 2007

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation






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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel

















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 11, 2007...................................     1
Statement of Senator Klobuchar...................................    71
Statement of Senator Lott........................................    62
Statement of Senator Nelson......................................    82
Statement of Senator Pryor.......................................     1

                               Witnesses

Bowman, Julie Benafield, Insurance Commissioner, State of 
  Arkansas; Member, National Association of Insurance 
  Commissioners..................................................    14
    Prepared statement...........................................    16
Hood, Hon. Jim, Attorney General, State of Mississippi...........     3
    Prepared statement...........................................     5
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America........................................................    22
    Prepared statement...........................................    23
Regan, David W., Vice President, Legislative Affairs, National 
  Automobile Dealers Association.................................    54
    Prepared statement...........................................    56

                                Appendix

Calvin, Michael R., Interim President and CEO, American 
  Association of Motor Vehicle Administrators, prepared statement    87
Response to written questions submitted by Hon. Maria Cantwell 
  to:
    Julia Benafield Bowman.......................................    94
    J. Robert Hunter.............................................    97
The National Association of Realtors, prepared statement.........    90

 
                       OVERSIGHT OF THE PROPERTY
                    AND CASUALTY INSURANCE INDUSTRY

                              ----------                              


                       WEDNESDAY, APRIL 11, 2007

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:22 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Mark Pryor, 
presiding.

             OPENING STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Well, let me go ahead and call the hearing 
to order.
    I want to thank my colleagues for being here this morning. 
And I know we'll have a few more drift in. There's a lot going 
on on the Senate calendar today. We have a number of hearings 
and a number of things going on on the floor, so you'll see 
some Senators come and go here.
    I'd like to thank our panel of witnesses. In fact, we 
originally had two panels, and Attorney General Hood and 
Commissioner Bowman have graciously agreed to just consolidate 
the two panels to make it, I think, easier on everybody. But 
I'd like to thank everybody for being here. Mostly what we're 
going to talk about today is the property and casualty 
insurance industry. I think everything's fair game, but 
generally the focus is property and casualty lines of 
insurance.
    We want to really look at the industry and look at the 
insurance markets in the U.S. to make sure the industry's 
healthy--that it's doing the things it's doing--that customers 
and consumers are being served here all over the country.
    I'd like to thank Senator Inouye for allowing me to chair 
the hearing this morning. He invited a number of witnesses 
today, many of whom said yes. And we appreciate your being 
here.
    I will note that we did try to invite a number of property 
and casualty associations to appear today. Some had conflicts, 
some felt like this might be an unfriendly venue for them, 
which is unfortunate. We're not going to name any names, 
Senator Lott. But----
    [Laughter.]
    Senator Pryor. Anyway, for various reasons, none of them 
were able to appear today, but they have been invited, and we 
want you to know that they were invited. We wanted to give them 
a chance to speak their piece.
    I would like to just make my remarks very, very quickly, 
and then allow the panel to give their remarks. We have a 
couple of Senators here who have to slip out and cover some 
other hearings at which either they will chair or the ranking 
members will have to introduce someone, et cetera. So, let me 
just be very brief.
    You know, we had a terrible hurricane season in 2005. There 
were lots and lots of homes and personal property that were 
damaged all over the Gulf Coast and this country. However, 2005 
proved to be one of the most profitable years for the insurance 
industry. Property and casualty insurers earned an 
unprecedented profit of $28 billion in 2006, reversing a net 
loss of $5.4 billion in 2005. Policyholder surplus grew for the 
fourth straight year in 2006 to approximately $498 billion, up 
13\1/2\ percent from approximately $439 billion. While the 
profitability of the industry is not in question, the treatment 
of customers, policyholders, consumers, by the property and 
casualty insurance industry has raised some flags.
    We have heard, in my office--and I'm sure every Senator in 
the Senate today has heard--complaints of various kinds from 
constituents about how they've been treated by their insurance 
companies. And I'm sure that some of these are very valid, some 
of them, you know, may just be based on misunderstandings or a 
misreading of the contract, et cetera. So, we certainly 
understand that. But we know that the insurance industry is a 
very important industry for this country. There are lots of 
issues that relate to insurance. It's an important part of our 
Nation's economy. It's very important to citizens all over this 
country, and, truly, all over the world.
    So, with that, what I would like to do is just acknowledge 
our panelists today, allow them to make some statements, and 
then, if we want to make some opening statements--but I know 
that there are some Senators that need to hurry on to a 
subsequent hearing. Would that be okay with my colleagues? Is 
that OK?
    Let me just introduce them in the sequence that they'll 
speak, and then we'll give everybody 5 minutes to make an 
opening statement. If you could keep it brief, I know we would 
appreciate it. But I know you've come here, traveled a long 
distance, and have some important things to say.
    First will be Attorney General Jim Hood. He's the Attorney 
General of the State of Mississippi. And I have a fondness in 
my heart for attorneys general, because I used to be one, 
before----
    [Laughter.]
    Senator Lott. They all look alike.
    [Laughter.]
    Senator Pryor. You know, before they kicked me out of that 
organization, I enjoyed being an attorney general.
    Next, we have Julie Benafield Bowman. She's the 
Commissioner of the Arkansas Insurance Department. It's great 
to have you here. Then we have Dr. Robert Hunter, Director of 
Insurance for the Consumer Federation of America. And last, we 
have David Regan, Vice President, Legislative Affairs, National 
Automobile Dealers Association.
    So, again, thank all of you all for being here.
    Attorney General Hood, if you could open us up.

         STATEMENT OF HON. JIM HOOD, ATTORNEY GENERAL, 
                      STATE OF MISSISSIPPI

    Mr. Hood. Thank you, Senator Pryor.
    I thank your state very much for coming--for taking our 
people in who fled from the storm. And many of you--and from 
other states--you know, the bright spot in all of this has been 
how the church groups have come down and torn out sheetrock and 
done so much for our people on the Gulf Coast. And thanks to 
the Senate and Senator Lott for all the work that you've done, 
and getting us money to help us try to get on our feet down 
there for our homeowners and businesses.
    There were actually three storms that we've had to 
experience as a result of Katrina--Katrina itself, when it hit. 
The insurance claims handling practices and their refusal to 
pay was the second storm. And now we're experiencing the third 
storm, and that is the astronomical cost increases of insurance 
premiums that are inhibiting our rebuilding efforts down on our 
Gulf Coast.
    I'm, as Attorney General--Senator Pryor, you know very 
well--it seems like every 2 weeks, us attorneys general send 
y'all a letter requesting that the Federal Government not pre-
empt State law. So, very seldom do we come to the Federal 
Government and ask for help. This is one of those situations, 
because we are dealing with an industry that our states are 
unable to properly regulate. And I'll give you Exhibit A, that 
being the way State Farm has treated the people of the State of 
Mississippi after the hurricane hit, and their--the way they've 
handled their practices.
    I spoke, here, to the--a Congressional panel recently, and 
a lobbyist for--and Mark Racicot, I believe, was his name, was 
talking about that the state had intimidated State Farm, that 
an attorney general had attempted to prosecute them and bullied 
them, basically, a company of that size, which is ridiculous. 
And Senator Lott has a document, I think, that will show what 
actually was going on down on our Gulf Coast, and what the 
insurance companies were actually doing, and that is an exhibit 
that I believe he'll be talking with you a little about.
    One I'd like to mention to you is Exhibit A and what State 
Farm did, and that's attached to my testimony here. It's a 
letter from State Farm, after--we had reached a settlement 
agreement with them, and part of the settlement agreement was 
that I not indict them for crimes in Mississippi. They had said 
all along they were going to stay in Mississippi and continue 
to write policies. But, you see, that's what was vital to us, 
because they're 33 percent of the market on the Gulf Coast, and 
they're 25 percent statewide. If I'd of indicted them, and they 
would have pulled out of the State of Mississippi, then we 
would have had a gap that could not have been filled. And they 
threatened the state. And this is why I want the Federal 
Government to step in, take away their antitrust provisions, 
and license them on a Federal level, because there have got to 
be some controls, because they, in the past, have had such 
power and strength, they can stomp their foot and people run 
away. As AG's know, we have a duty, no matter how much heat 
they crank up--they sent out letters. They didn't send me one. 
I'm actually a State Farm policyholder, myself. But, you know, 
the--one of their sentences is, is, ``Simply put, we cannot 
continue to write new policies under a contract that is now 
being reinterpreted by the courts and certain elected 
officials.'' They have attempted to--they've criticized Senator 
Lott, and tried to claim that just because it was his home, 
that he's involved in this. He's seen what has happened. He's 
been on the ground--he's got a document he is going to talk 
about--and seen some of the problems. And I appreciate Senator 
Lott standing up and fighting for his people down on our coast, 
and the people of Mississippi statewide, because, you see, when 
they pulled out, they stopped writing policies all over the 
State, stopped writing new in--new homeowners policies. And 
that impacted their own insurance agencies up in north 
Mississippi, where I'm from. They're not able to do it. And it 
was just punishment. It was an attempt to intimidate the people 
of the State of Mississippi, particularly a Federal judge, who 
is senior status now, a very conservative Federal judge, who 
found that one of their provisions was void, the anti-
concurrent cause provision, because it basically made the 
policy worthless. And, furthermore, he found what has been in 
Mississippi a State law of proximate cause for over 100 years, 
the burden of proof is on the--in an all-risk policy--is on the 
insurance companies. So, they've tried to intimidate the State, 
and that's why we need Federal regulation.
    Now, I've mentioned the fact that we have reached a--an 
initial settlement with State Farm in our State civil 
litigation. And, there again, part of that was to keep them 
within the State. But what they did, they tried to claim that 
we are the ones who are trying to change their contract. In 
fact, they changed their own policies by issuing what's called 
a wind/water protocol. That is attached to my testimony as 
Exhibit C, I believe, and they--we had to transcribe it. But 
what it did, it went out September 15, and it changed the whole 
way the policy is written. It required them to dump off on the 
Federal taxpayers, through the Federal Flood Insurance Program, 
by changing--if you have Federal flood insurance--on page 2 of 
that transcript, you can clearly see--they require, if they--if 
you have flood insurance, then we don't pay anything on wind. 
They make the Federal Government pay it all. And they don't try 
to develop a percentage as to how much of it was wind. So, 
they're not even--they're not even, you know, honoring their 
own policies.
    I mentioned the anti-concurrent clause provision that's 
already been stricken. And I don't like to complain. And I'm 
out of time. But I'd briefly like to suggest a couple of things 
that--and that's what you asked me to do--as to what we, maybe, 
should try to develop, proposed solutions.
    You know, I think what we should do is some kind of 
government all-risk, whether the government takes it or we 
require the insurance companies to take all the risk in every 
state, be licensed--in order to be licensed by the Federal 
Government, you would have to cover all risk in all states and 
spread that risk around. I'm a free-market person, and I'd 
rather see us, probably, do it that way. But if they won't 
participate in that type of program, then maybe the Government 
needs to take it over and take wind versus water.
    Because, you see, in closing, the bottom line is this. If 
there's a slab out there, you can't tell what took that 
property out. And the burden is on the insurance companies to 
prove that. And the reason that we define a situation of wind 
versus water as a dichotomy that's false, and it's developed by 
the insurance industry, because what they can do in a 
situation, if it's a slab and they don't know, they dump over 
on us taxpayers. We're having to pay it anyway. So, at some 
point we need to settle this situation, one way or the other.
    I appreciate your attention and for inviting me to be here, 
and I'll be glad to answer any questions that I'm able to.
    Thank you.
    [The prepared statement of Mr. Hood follows:]

        Prepared Statement of Hon. Jim Hood, Attorney General, 
                          State of Mississippi
Overview
    Good morning, Mr. Chairman and Members of the Committee. Thank you 
for inviting me here today to discuss the availability and 
affordability of property and casualty insurance in the Gulf Coast and 
other coastal regions. My name is Jim Hood, and I am the Attorney 
General for the State of Mississippi. I am encouraged by the 
Committee's attention to this urgent matter.
    We cannot solve the problems that face the insurance industry 
without understanding the true nature of those problems. The citizens 
of Mississippi are experiencing first-hand the overwhelming power of 
the insurance industry, an industry that cannot be effectively 
regulated by state insurance commissioners. Short of Federal criminal 
prosecutions, the industry is not, in practice, limited in any 
meaningful way by the Federal Government. The insurance industry is 
running wild.
    Much of this debate has centered on the sanctity of contracts. For 
example, State Farm has complained that their policies are ``now being 
reinterpreted by the courts and certain elected officials.'' [See 
Exhibit A] That would indeed be a problem, if it had actually occurred. 
What really happened is much different.
    The Mississippi Attorney General's Office (hereinafter ``MSAG'') 
has learned that State Farm acted after Hurricane Katrina to create and 
implement three different tactics for denying coverage. These tactics 
are not set forth in the policies themselves. Homeowners could not 
agree to those conditions, because they were never made aware that 
requirements outside of their policies would be used to deny their 
coverage. On information and belief, these policies were not presented, 
for review, to our state's Insurance Commissioner. State Farm's 
policies on the Mississippi Gulf Coast are not being ``reinterpreted'' 
by the courts and elected officials--they are being ignored altogether 
by the ``good neighbors'' who issued them.
    What remedy do these citizens have? Tens of thousands of 
Mississippians have failed to get any relief from State Farm's agents, 
catastrophe team members or mediators. To add insult to injury, our 
citizens are then criticized as being litigious when they turn to the 
courts for relief after they have been unable to get it any other way. 
Their former homes are ridiculed by disparaging references to houses 
built on sandbars. Somehow the homeowner's expectation of payment is 
preposterous, but the industry's decision to issue a policy on what 
they later decide is a risky property and collect premiums is not 
questioned. An honest assessment would acknowledge that Mississippians 
do not live on sandbars and hold insurers accountable for honoring 
policies they write. We also have to question the quality of the 
actuarial data used to set rates if the premiums charged are not 
related to actual risk.
    Defenders of the industry brag that only 1 percent of Katrina 
claims are currently disputed, but fail to mention that the insurance 
industry defines ``claim'' as a demand for payment under an applicable 
policy. This definition conveniently omits the common scenario in which 
a homeowner reports wind damage for coverage under a wind policy, and 
State Farm denies that any wind damage occurred. The industry 
definition of a ``resolved'' claim seems, in many instances to be 
synonymous with ``closed.'' Homeowners who participated in mediation 
and received ten cents on the dollar for their damages may have their 
cases counted as closed, but these are hardly satisfied customers. 
Self-reporting of customer satisfaction by the insurance industry 
cannot be taken at face value.
    The MSAG has worked diligently to reach an agreement with State 
Farm that would encourage them to continue doing business in the State 
of Mississippi. Insurance Commissioner Dale's recent announcement of an 
agreement with State Farm to re-examine approximately 35,000 claims 
represents more than a third of the claims recognized by State Farm in 
Mississippi. However, no extraordinary deals should be required here at 
all. State Farm has had nineteen months to evaluate and pay these 
claims. They do not need a deal with either the MSAG or the Insurance 
Commission in order to pay what they owe.
    The remainder of this report will briefly outline the following:

   tactics State Farm used to circumvent contractual 
        obligations;

   the impact of those tactics and other conduct on the 
        National Flood Insurance Program (NFIP);

   lessons learned from Hurricane Katrina.
I. Tactics Used by State Farm to Circumvent Contractual Obligations
A. A Combination of Tactics: Selective Application of Anti-Concurrent 
        Causation Clauses and the Adoption of a Wind/Water Protocol
    Legal gymnastics in the form of anti-concurrent causation clauses 
and a wind/water protocol were employed by State Farm after the storm 
to deny coverage. Policy exclusions should be understandable to the 
agents selling the policies, the customers buying them, and the 
personnel interpreting them when a claim is made. The so-called ``anti-
concurrent causation clauses'' and the water exclusions featured in 
Homeowners policies that became disputed after Katrina are excessively 
convoluted and confusing. Members of the Committee are urged to review 
Exhibit B for the comprehensibility of these provisions.
    In August of 2006, the Honorable Judge L.T. Senter, Jr. of the U.S. 
District Court for the Southern District of Mississippi, Southern 
Division, found Nationwide's anti-concurrent causation clause to be 
unacceptably vague in the Leonard case, pointing out that ``[t]his 
reading of the policy would mean that an insured whose dwelling lost 
its roof in high winds and at the same time suffered an incursion of 
even an inch of water could recover nothing under his Nationwide 
policy--. . .--I do not believe this is a reasonable interpretation of 
the policy.'' \1\ An honest and realistic assessment of whether this 
language is likely to be applied consistently and fairly by employees 
and vendors with varying degrees of training and experience working 
under challenging circumstances, yields little certainty.
---------------------------------------------------------------------------
    \1\ Leonard v. Nationwide Mutual Insurance, 438 F. Supp. 2d 684, 
689 (S.D. Miss. 2006).
---------------------------------------------------------------------------
    State Farm may have recognized this problem. A wind/water protocol 
issued September 13, 2005, instructed CAT workers, in under three 
pages, how to make coverage decisions. The protocol was prefaced with 
this explanation:

        Because of the combination of wind and water damages many homes 
        sustained from Hurricane Katrina, the following materials have 
        been developed and are intended for use as a guide for handling 
        various wind and/or water claims in Louisiana, Mississippi and 
        Alabama.

    [See Exhibit C]
    Surely Homeowners policies issued by State Farm already 
contemplated that in a hurricane, a combination of wind and water 
damages could and would occur. The wind/water protocol was not 
available for policyholders' review but it was, by its very language, 
designed to evaluate their right to coverage.
    Notably, the protocol maintained the anti-concurrent causation 
clause, but only in certain situations. The second page of the protocol 
features the following language:

        Damage to Property Caused by Flood Waters with available Flood 
        Policy: Where wind acts concurrently with flooding to cause 
        damage to the insured property, coverage for the loss exists 
        only under flood coverage, if available . . .

    [See Exhibit C]
    Stated differently, the protocol dictates that if damage is caused 
by both wind and water, the policyholder only gets paid if they have a 
flood policy. If they have a wind policy, they get nothing. Thus, the 
anti-concurrent causation clause is applied to deny claims of 
policyholders who have no flood insurance, and is used to shift the 
burden to the Federal Government through the NFIP. The burden on the 
NFIP is discussed at length in the next section.
    The insurance industry is quick to cite the need for predictability 
as a reason to exit the Mississippi market, but policyholders deserve 
predictability too. At the very least, their rights should be 
interpreted under the policies they sign, not protocols developed after 
the storm.
B. The Third Tactic: Introducing New Terminology after the Storm
    The most generic definition of a hurricane is a ``tropical 
cyclone.'' Thus the event of a hurricane is defined by a combination of 
wind and water. Reducing claims to a question of ``wind versus water'' 
is a simplification that reflects the insurance industry's approach to 
claims and has little or nothing to do with the actual experience of a 
hurricane.
    It is easy enough to neatly sort out which policyholders have 
purchased wind coverage, flood coverage, or both. Looking at a concrete 
slab that used to be a family home and determining with any reasonable 
degree of certainty that 50 percent of the damage was caused by wind 
and 50 percent was caused by water is a tall order, not to be 
undertaken lightly by under-qualified adjusters and/or rookie, or even 
seasoned, engineers. Individual lawsuits filed since Katrina have 
inevitably featured a battle of weather experts, but the actual 
decisions regarding causation of damage were not made onsite by 
professional weather experts. Soliciting the advice of adjusters and 
engineers to determine whether a home was destroyed by ``wind or 
water'' makes any ensuing ``investigation'' more closely correlated 
with the availability of coverage than the factual findings of damage.
    After the storm, the MSAG received complaints from homeowners who 
were advised by State Farm employees or vendors that they could not 
recover for wind damage unless they demonstrated ``discernible wind 
damage.'' Placing the burden on the policyholder to prove the nature of 
the damage represents a departure from long-standing Mississippi law. 
The term ``discernible wind damage'' is not included in policy language 
or Mississippi law, which makes it a disturbing standard to use when 
determining whether a family will have their coverage denied and live 
indefinitely in a FEMA trailer. This is yet another illustration of how 
policyholders were unable to rely on the language in their actual 
policies because State Farm changed the rules.
II. Impact of These Tactics on the NFIP
    Wind and water occur together naturally in a hurricane, but not in 
insurance policies. Part of the challenge of keeping the NFIP and 
private insurers viable is untangling our understanding of these two 
forces of nature and either imposing a somewhat artificial division in 
order to allocate risk and assess damages or developing a unified 
approach that accurately reflects the reality of the destruction a 
hurricane can cause.
    In our investigation, we found evidence that adjusters for E.A. 
Renfroe, working for State Farm, were dispatched to damage sites and 
instructed to determine whether the damage could be categorized as a 
slab, ``popsicle stick,'' or ``cabana.'' ``Popsicle stick'' is industry 
slang for a foundation with support pilings intact; a ``cabana'' is 
industry slang for a structure that maintains some degree of post and 
lintel support but is otherwise a skeleton due to water washing 
through.
    Not much effort beyond riding past the property in a car and 
looking out the window would seem to be required to make this 
determination, but the fees for this adjusting ``service'' were passed 
along to the NFIP. Adjusters were instructed that if they found the 
property to be in one of these three conditions, they were to request 
that an engineering inspection be ordered to provide additional 
guidance in assessing the damage. This subsumes that the adjusters were 
not considered qualified or sufficient to make a final determination as 
to the cause of damage. However, many of these adjusters at this stage, 
without the benefit of an engineering report and often without the 
benefit of proper flood training and certification themselves, would go 
ahead and recommend maximum payment of flood coverage and contents 
through the NFIP.
    So, to illustrate, a home is insured by State Farm under a 
homeowner's policy for $500,000 for structural damage and $250,000 for 
contents; in addition the homeowner purchases $250,000 of protection 
against structural damage due to flood and $100,000 for contents due to 
flood pursuant to NFIP policies. An adjuster visits the damage, and 
determines that maximum coverage is available under the NFIP.
    Software programs used by the industry to price home repairs and 
reconstruction are admittedly not regulated by the NFIP.\2\ This can 
result, for example, in a claim against an NFIP policy, with a 
calculation of $1.00 per square foot for drywall repair, and a 
companion claim under a Homeowners policy for the same property, 
calculating a drywall repair at $0.60 The MSAG is also aware of at 
least one instance in which a list of contents submitted by the 
insureds bore no resemblance to the list of contents ultimately 
submitted by their insurance provider for payment on that same claim to 
the NFIP. On the second list, items had been added, and values had been 
elevated to bring the claim up to the amounts needed to trigger 
coverage through the NFIP.
---------------------------------------------------------------------------
    \2\ Associated Press. Isabel Claims under Scrutiny, Baltimore Sun, 
March 12, 2004, ``NFIP claims director James Shortley said the program 
does not regulate the software that adjusters use, explaining, `We 
would have to verify prices in every little town'.''
---------------------------------------------------------------------------
    Continuing our illustration, the adjuster then advises the 
homeowner that further investigation will be needed to assess the 
extent of wind damage. However, by approving payment through the NFIP, 
the adjusters have already made a decision about the ratio of damage 
attributable to wind and that attributable to water. Unfortunately, the 
ratio is not based on the actual damage. It is based on the 
availability of coverage. Damage should be assessed first, then the 
availability of coverage. Reversing this order turns the entire premise 
of insurance on its head.
    The claims adjusting process continues as an engineer may then 
visit the property and submit a report of damage to State Farm. The 
homeowners were not allowed to see these reports. Even though the 
report was requested in order to assist the adjuster's evaluation, the 
reports were not given to adjusters. The reports were not given to the 
claim representatives or even openly circulated within State Farm 
catastrophe offices. Records of whether and when engineering reports 
had been ordered and received were accessible only to a limited number 
of catastrophe employees, and the reports themselves were reviewed by 
only a handful of people.
    The MSAG is not aware of any instances in which a professional 
engineer's conclusion established a ratio of wind to water damage that 
contradicted the initial assessment of flood damage by an adjuster. In 
fact, the engineering reports usually did not separate wind and water 
damage out into any sort of ratio or proportion at all. How then, is a 
relatively untrained adjuster considered qualified to do a perfunctory 
inspection and determine that the proportion of damage correlates with 
the limits on Federal flood policies?
    Clearly State Farm is willing to spend the NFIP's money with only 
nominal investigation, but is much more deliberate and hesitant to 
spend its own. This may explain why the industry experienced record-
breaking profits last year and the NFIP is on track to be bankrupt by 
September of this year.
III. Lessons Learned from Katrina
    What is the appropriate response of state and Federal Government 
when an insurance company simply disregards its contractual 
obligations? How can anyone accurately assess whether or not an 
insurance company can reasonably be expected to continue doing business 
in coastal areas without getting to the truth of how much a private 
insurer actually owed, and how much of that was improperly passed on to 
the NFIP? If another hurricane hits, and the insurance industry uses 
the same tactics they did after Hurricane Katrina, who can stop them? 
If the industry's anti-trust exemption if not revoked, we will probably 
be asking ourselves these same questions after the next disaster.
    Insurers want to argue both that it is unreasonable to expect them 
to cover coastal areas and that government involvement is not warranted 
because it would ``displace'' private capital. If private industry 
continues to abandon the 130 million Americans who live in coastal 
regions, one could hardly say that private capital has been displaced. 
It has been withdrawn, and a vacuum exists that threatens the housing 
market and economic viability of significant parts of our country. One 
of the biggest benefits the insurance industry has to offer, the 
ability to capitalize risk and spread it globally, is completely absent 
in areas that have been abandoned after natural disasters. The industry 
opposes government intervention on the grounds that it will simply 
shift risk around, rather than spreading it, but Hurricane Katrina has 
shown us the industry's willingness to shift its own obligations onto 
the taxpayers supporting the NFIP.
    The insurance industry has also asserted that the 2005 hurricane 
season wiped out premiums and underwriting for the last several years 
in Mississippi and Louisiana. If the premiums charged in Mississippi 
were not enough to cover the policies, then perhaps the inquiry should 
be into whether or not State Farm's actuaries anticipated implementing 
this scheme to maximize coverage under the NFIP when they recommended 
the rates in effect when Katrina hit.
    Further, if homeowners can only expect to recover the amounts they 
paid in through premiums, what is the difference in what a private 
insurer can offer and a government-backed catastrophe savings account? 
Many of our citizens would have been overjoyed to recover the amounts 
they have paid in through premiums, but were denied even that modest a 
benefit of their bargain with insurance companies.
    According to recent publicity by State Farm,\3\ they have 
``handled'' about 84,000 claims and paid out ``over one billion 
dollars'' in Katrina claims in Mississippi, excluding all payments made 
through the NFIP. That averages out to less than $12,000 per claim and 
covers claims from an undisclosed number of Mississippi's eighty-two 
counties. Insurance Commissioner Dale's agreement, under which State 
Farm will ``re-examine'' approximately 35,000 claims and ``make 
millions of dollars available'' may give the appearance of relief, but 
guarantees policyholders nothing but another opportunity to be 
exploited by State Farm.\4\ If State Farm could not make an accurate 
determination of the cause of damage right after Hurricane Katrina, how 
will they do a better job after nineteen months of cleanup and rain?
---------------------------------------------------------------------------
    \3\ State Farm' Announces It Will Suspend Writing 
Homeowners and Commercial Policies in Mississippi. http://
www.statefarm.com/about/media/media_releases/mississippi_home.asp. 4/2/
2007.
    \4\ Associated Press, Insurance Regulator Says State Farm Agrees to 
Re-examine Hurricane Cases. USA Today, March 19, 2007.
---------------------------------------------------------------------------
    The industry's reverence for contracts is again belied by this 
widespread practice of engaging policyholders in wrangling for months 
or years to eventually have a small portion of their claim paid as a 
``settlement.'' People who have survived natural disasters are in no 
position to negotiate their insurance coverage after the fact, but this 
is exactly what they are being required to do.
    Payment of claims is a contractual obligation but is frequently 
treated as a benevolent gift from the insurer to the insured. Katrina 
has shown us that the regulatory status quo is not adequate to protect 
policyholders' contractual rights.
IV. Conclusion
    The MSAG's office has, in good faith, engaged in tireless efforts 
to work with State Farm to make insurance affordable for our citizens. 
However, we recognize that accepting premiums is not the same thing as 
``doing business.'' If a State Farm insurance policy is nothing more 
than a meaningless security blanket, then Mississippians do not benefit 
from having them stay in the state to collect premiums. As the struggle 
in our state and throughout the country demonstrates, insurance 
companies are free to take the money and run from the market whenever 
they choose. At the same time, prospective homeowners are unable to get 
federally-backed mortgages without purchasing homeowners insurance. It 
is for this reason that a discussion of free markets is not entirely 
appropriate when applied to a product that people are legally required 
to buy.
    No easy reconciliation of the competing interests in this 
discussion can be made, but Congress urgently needs to take actions to 
keep homeowners from losing faith in the insurance industry altogether. 
Consumers who faithfully pay their premiums should not have to wonder 
why, after nineteen months of inspections, mediations, phone calls and 
letters, they are no better off than those who did not buy insurance at 
all. If the industry wants to serve coastal areas, they must be held 
accountable, just as any other business would be. The antitrust 
exemption provided by McCarran-Ferguson has yielded outrageous results. 
If the industry pulls out of coastal areas, it cannot then object to 
the government's response in assisting an abandoned segment of the 
population. Thank you for inviting me today. I look forward to your 
questions.
Exhibit List:
    Exhibit A--Letter issued to State Farm customers stating it will no 
longer offer new homeowners policies to Mississippians.
    Exhibit B--Anti-Concurrent Causation language found in homeowners 
insurance policies issued by Allstate, Nationwide and State Farm.
    Exhibit C--Wind/Water Protocol issued by State Farm on September 
13, 2005.
                               Exhibit A
                                       State Farm Insurance
                                                 Duluth, GA
Lynn Gunn
Pelahatchie, MS.

Dear Lynn,

    Recently, State Farm' announced it will no longer offer 
new homeowners or commercial insurance policies in Mississippi. This 
decision certainly didn't come easily or quickly--it's unfortunate, but 
necessary. The unpredictable legal and political environment in the 
state leaves us unable to accept any additional risk in the Mississippi 
homeowners market. Simply put, we cannot continue to write new policies 
under a contract that is now being reinterpreted by the courts and 
certain elected officials.
    We've built our business by talking to people and by establishing 
relationships and helping them protect what they value most. Rest 
assured, that's what we will continue to do.
    You are a valued customer with whom I'm proud to call this state 
home. We want to work with you to make Mississippi stronger and more 
vibrant than ever before. While we cannot offer homeowners or 
commercial insurance policies in addition to the ones you already own, 
we look forward to meeting your insurance and financial services needs 
through the more than 70 other products State Farm offers. These 
include auto, life and health insurance, as well as a variety of 
financial services.
    I invite you to call your State Farm agent with questions you may 
have about what I've shared in this letter, or about what you may read 
or hear in the news.
    It is an honor for us to serve you. I appreciate your business and 
your loyalty.
            Sincerely,
                                                     G. Webb Howell
                                  State Farm Vice President--Agency
                               Exhibit B
    Taken from Allstate Property and Casualty Insurance Company Deluxe 
Homeowners Policy, Elmer and Alexa Buente v. Allstate Insurance Company 
et al, Civil Action 1:05CV712 LTS-JMR, U.S. District Court, S.D. Miss., 
Judge Senter's Memorandum Opinion, March 24, 2006.

    With respect to the insured dwelling (Section I, Coverage A) and 
other structures (Section I, Coverage B):

    Losses We Do Not Cover . . .

        We do not cover loss to the [insured] property consisting of or 
        caused by:

        1. Flood, including but not limited to surface water, waves, 
        tidal water, or overflow of any body of water, or spray from 
        any of these, whether or not driven by wind.
          *          *          *          *          *

        4. Water or any other substance on or below the surface of the 
        ground, regardless of its source. This includes water or any 
        other substance which exerts pressure on, or flows, seeps or 
        leaks through any part of the residence premises.
          *          *          *          *          *

        21. Weather conditions that contribute in any way with a cause 
        of loss excluded in this section to produce a loss.
          *          *          *          *          *

        23. We do not cover loss to property . . . when:

                (a) there are two or more causes of loss to the covered 
                property; and

                (b) the predominant cause(s) of loss is (are) excluded 
                under Losses We Do Not Cover, items 1 through 22 above.

    With respect to personal property (Section I, Coverage C, Personal 
Property Protection):

    Losses We do Not Cover . . .

        We do not cover loss to [insured personal] property caused by 
        or consisting of:

        1. Flood, including, but not limited to surface water, waves, 
        tidal water or overflow of any body of water, or spray from any 
        of these, whether or not driven by wind.
          *          *          *          *          *

        4. Water or any other substance on or below the surface of the 
        ground, regardless of its source. This includes water or any 
        other substance which exerts pressure on, or flows, seeps or 
        leaks through any part of the residence premises.
          *          *          *          *          *

        13. Weather conditions that contribute in any way with a cause 
        of loss excluded in this section to produce a loss.
          *          *          *          *          *

        15. We do not cover loss to [insured personal] property when:

                (a) there are two or more causes of loss to the covered 
                property; and

                (b) the predominant cause(s) of loss is (are) excluded 
                under Losses We Do Not Cover items 1 through 14 above.

    Taken from Nationwide homeowners insurance policy, Paul Leonard and 
Julie Leonard v. Nationwide Mutual Insurance Company, Civil Action 
No.1:05 CV475 LTS-RHW, U.S. District Court, S.D. Miss., Judge Senter's 
Memorandum Opinion, August 15, 2006.

    Section 1, Property Coverages
    Coverage A--Dwelling
    Coverage B--Other Structures
    Coverage C--Personal Property

    Property Exclusions, Section 1

    1. We do not cover loss to any property resulting directly or 
indirectly from any of the following. Such a loss is excluded even if 
another peril or event contributed concurrently or in any sequence to 
cause the loss.
          *          *          *          *          *

        (b) Water or damage caused by water-borne material. Loss 
        resulting from water or water-borne material damage described 
        below is not covered even if other perils contributed, directly 
        or indirectly to cause the loss. Water and water-borne material 
        damage means:

                (1) flood, surface water, waves, tidal waves, overflow 
                of a body of water, spray from these, whether or not 
                driven by wind.
          *          *          *          *          *

    (n) Windstorm or hail to any:

                (1) structure, other than a building, including the 
                supports and screens, with a roof-like covering of 
                cloth, metal, plastic or fiberglass, whether or not the 
                structure is attached to a building.

                (2) screens, including their supports, around a pool, 
                patio or other areas.

                (3) property lines and similar walls, including 
                seawalls, greenhouses, hothouses, slathouses, trellis, 
                pergolas, cabanas and outdoor equipment used to service 
                the residence premises.

                (4) structure, including property in or on the 
                structure, which is in whole or part, in or over water.

    2. We do not cover loss to any property resulting directly or 
indirectly from the following if another excluded peril contributes to 
the loss:
          *          *          *          *          *

        (c) Weather conditions, if contributing in any way with an 
        exclusion listed in paragraph 1 of this Section.

    Taken from State Farm homeowners policy, John Tuepker and Claire 
Tuepker v. State Farm Fire & Casualty Company, Civil Action No. 
1:05CV559 LTS-JMR, Judge Senter's Memorandum Opinion, May 24, 2006.

    Section I, Losses Insured
    Coverage A--Dwelling
    Coverage B--Personal Property

    Section I--Losses Not Insured

        1. We do not insure for any loss to the property described in 
        Coverage A which consists of, or is directly and immediately 
        caused by, one or more of the perils listed in items a. through 
        n. below, regardless of whether the loss occurs suddenly or 
        gradually, involves isolated or widespread damage, arises from 
        natural or external forces, or occurs as a result of any 
        combination of these:

                a. collapse, except as specifically provided in Section 
                I Additional Coverages, Collapse.
          *          *          *          *          *

        2. We do not insure under any coverage for any loss which would 
        not have occurred in the absence of one or more of the 
        following events. We do not insure for such loss regardless of: 
        (a) the cause of the excluded event; or (b) other causes of the 
        excluded event; or (c) whether other causes acted concurrently 
        or in any sequence with the excluded event to produce the loss; 
        or (d) whether the event occurs suddenly or gradually, involves 
        isolated or widespread damage, arises from natural or external 
        forces, or occurs as a result of any combination of these:
          *          *          *          *          *

                c. Water Damage, meaning:

                        (1) flood, surface water, waves, tidal water, 
                        tsunami, seiche, overflow of a body of water; 
                        or spray from any of these, all whether driven 
                        by wind or not;
          *          *          *          *          *

        3. We do not insure under any coverage for any loss consisting 
        of one or more of the items listed below. Further, we do not 
        insure for loss described in paragraphs 1 and 2 immediately 
        above regardless of whether one or more of the following: (a) 
        directly or indirectly cause, contribute to or aggravate the 
        loss; or (b) occur before, at the same time, or after the loss 
        or any other cause of the loss:
          *          *          *          *          *

                c. weather conditions.

    However, we do insure for any resulting loss from items a., b., and 
c. unless the resulting loss is itself a Loss Not Insured by this 
Section.
                               Exhibit C
                                                 September 13, 2005

State Farm Claim Associates handling CAT FL
in the Central and Southern Zones
Property and Casualty Claim Consulting Services

                             Re: Wind/Water Claim Handling Protocol
Action Required
Summary
    Because of the combination of wind and water damages many homes 
sustained from Hurricane Katrina, the following materials have been 
developed and are intended for use as a guide for handling various wind 
and/or water claims in Louisiana, Mississippi and Alabama.
Action
    The protocol below outlines the process that should be used for 
determination of coverage in those locations.
Protocol Detail
    Each claim should be handled on its merits. A causation 
investigation should be conducted and appropriate claim file 
documentation is required. Any available information should be 
considered in making a coverage determination. This information will 
include, but is not limited to:

   Evidence gathered at the onsite inspection. This includes 
        documentation of physical evidence such as water lines, an 
        examination of the debris, and an analysis of the physical 
        damage to the structure.

   Evidence gathered at neighboring locations.

   Information from witnesses and policyholders.

   Input from experts that may be retained to provide guidance.

    The damage to insured properties will fall into the following 
categories and should be handled as detailed below:

   Damage to the property was caused by windstorm.

   Damage to separate portions of the property can be 
        attributed to either windstorm or excluded water.

   Damage to the property was caused by excluded water; with no 
        available coverage.

   Damage to the property was caused by flood waters; covered 
        by an available flood policy.
Damage Caused by Windstorm
    When the investigation indicates that the damage was caused by 
windstorm, the claim will be handled under the applicable provisions of 
the involved properly policy. Consideration should be given to 
determine if a hurricane deductible or a windstorm hail exclusion 
endorsement is involved and the claim handled accordingly.
Damage to Separate Portions with Distinguishable Wind and Excluded 
        Water
    Each type of damage should be documented in the claim file. The 
claim representative should calculate the separate damage attributable 
to each peril and handle the adjustment accordingly. In those cases 
where the policyholder has policies for both a windstorm and a flood, 
payments should be issued under the applicable policy.
Damage Caused by Excluded Water
    When the investigation indicates that the damage was caused by 
excluded water and the claim investigation does not reveal independent 
windstorm damage to separate portions of the property, there is no 
coverage available under the homeowners policy pursuant to the 
following language in Section 1 Losses Not Insured:

        ``2. We do not insure under any coverage for any loss which 
        would not have occurred in the absence of one or more of the 
        following excluded events. We do not insure for such loss 
        regardless of: (a) the cause of the excluded event; or (b) 
        other causes of the loss; or (c) whether other causes acted 
        concurrently or in any sequence with the excluded event to 
        produce the loss; or (d) whether the event occurs suddenly or 
        gradually, involves isolated or widespread damage, arises from 
        natural or external forces, or occurs as a result to any 
        combination of these:
          *          *          *          *          *

    c. Water Damage, meaning:

        (1) flood, surface water, waves, tidal water, tsunami, selche, 
        overflow of a body of water, or spray from any of these, all 
        whether driven by wind or not . . .''

    Other Losses Not Insured may be applicable, including 2.c.(2) and 
(3), 3.(a), (b) and (c).
Damage to Property Caused by Flood Waters with Available Flood Policy
    Where wind acts concurrently with flooding to cause damage to the 
insured property, coverage for the loss exists only under flood 
coverage, if available. The flood damage claim should be handled 
consistent with the terms of the flood policy providing coverage as 
outlined in Operation Guide 71-06.
Claims Where the Causation Investigation is Ongoing
    Payment can be made under a reservation of rights for ALE or Loss 
of Income under the property policy until the final coverage decision 
is made. The policyholder should be advised in writing that:

   The investigation is ongoing.

   No coverage decision has been made.

   In the event it is determined that there is no covered 
        damage, no further payment will be made on ALE or Loss of 
        Income.

   They may undertake an independent investigation.

    All claims in this category must be reviewed by the Claim Team 
Manager before a final decision is made. Management should be involved 
in any claim where it is deemed necessary to retain an expert to assist 
in the determination of causation.
For More Information
    Any question on this protocol should be directed to your Claim Team 
Manager.

cc. P & C Claims Executive
Southern Zone Executive and Claim Managers
Central Zone Executive and Claim Managers
P & C Claims Directors and Consultants
Catastrophe Services Claim Managers
Catastrophe Services Section and Team Managers
Zone Section Managers

    Senator Pryor. Thank you.
    Ms. Bowman?

 STATEMENT OF JULIE BENAFIELD BOWMAN, INSURANCE COMMISSIONER; 
 STATE OF ARKANSAS; MEMBER, NATIONAL ASSOCIATION OF INSURANCE 
                         COMMISSIONERS

    Ms. Bowman. Thank you.
    Chairman Pryor, Vice Chairman Stevens, Senator Lott, 
Senator Vitter, thank you very much for the opportunity to 
testify here today.
    Thank you. I usually don't need a mike. I'm usually told I 
had a big mouth anyway, but I'll use it.
    I was asked to testify today on the role of insurance 
commissioners in regulating the property and casualty insurance 
industry, the financial health of the property and casualty 
insurance industry, and its market activities, such as pricing, 
underwriting, and settling claims.
    As the Insurance Commissioner for the State of Arkansas, 
I'm also a member of the National Association of Insurance 
Commissioners.
    Related to the topic matter today, I am--I serve as the 
Vice Chair of the National Association of Insurance 
Commissioners, Market Regulation and Consumer Affairs 
Committee, and am a member of various task forces at that 
Committee level.
    I'll provide you, today, with my perspective, to help you 
understand how insurance regulators protect consumers, and, in 
my view, on the health of the property and casualty insurance 
industry and their market activities.
    The first thing, and most important job of an insurance 
commissioner, is consumer protection. That's our first goal. 
That's the mission of an insurance commissioner. That's the 
first thing we look at. And this is accomplished by maintaining 
strong, cooperative regulatory oversight of insurers' solvency 
and monitoring insurer marketing activities so that a healthy, 
competitive marketplace exists to serve consumers.
    In its simplest form, insurance regulation is about two 
things. The primary job of an insurance regulator is to make 
sure that insurance companies remain solvent so that they can 
pay the claims as they become due, and to make sure that 
insurers treat their customers and claimants fairly.
    Second, there's a misunderstanding about what constitutes 
an insurance market and how insurers go about serving their 
markets. One could assume that each State has a single 
marketplace, but that's probably inaccurate. For example, in 
Arkansas, we don't spend a whole lot of time worrying about 
hurricanes. I think my fellow commissioners in the Gulf States 
spend a lot of time worrying about hurricanes and how to 
finance those problems. Our property insurance writers are more 
concerned about earthquakes, tornado--I mean, earthquakes, 
tornados, lightning, hail, those type issues. Certainly, those 
can be very devastating. We have a lot of earthquake risk, 
because of the New Madrid Fault in Arkansas.
    And, while you might view Arkansas as a small State, from 
an insurance perspective, it's really not. We have two distinct 
insurance markets when it comes to personal lines: in auto 
insurance, as well as home insurance--homeowners' insurance. 
Little Rock is an urban area which is very different from the 
rural areas of Arkansas, so there's a lot of difference when 
you're looking at insuring automobile liability in the Little 
Rock area and homeowners' insurance in the Little Rock area, as 
to those rural areas in Arkansas. As I mentioned earlier, the 
eastern part of our State has the earthquake exposure that is 
very different from the western portions of Arkansas.
    Third, in spite of paying for the record levels of 
catastrophes in 2004 and 2005, as Senator Pryor mentioned, the 
financial health of the property and casualty insurance 
industry has never been better. It is safe to say that 2006 was 
a very good year for the U.S. property and casualty insurance 
industry. There were no hurricanes that made landfall in 2006, 
and other catastrophe losses were low. The lack of major 
catastrophes, combined with favorable market pricing 
conditions, led to a record year for insurers. The industry 
posted an underwriting gain of over $34 billion, and it 
achieved its lowest combined ratio in years, estimated to be 
92.6 percent. Let me explain that just a little bit.
    The combined ratio is a way to determine if insurers made 
money on their insurance operations, with 100 percent combined 
ratio being at the breakeven point. So, we look at 100 percent 
being the breakeven point. So, a combined ratio below 100 
percent means that the underwriting part of the business was 
profitable. Remember, I said that their combined ratio was 92.6 
percent, well below the 100 percent that's the marker.
    In addition in--to making money on underwriting, insurers 
also make money on their investments. Between underwriting 
results and their investment results, the property and casualty 
industry's policyholder surplus grew to almost $480 billion. 
So, the property and casualty industry is very healthy, despite 
the losses that they received year before last.
    Finally, I will comment on insurer pricing, rate 
regulation, and insurer practices related to claim settlement 
and underwriting.
    In particular, I would like to explore some myths that are 
promoted by some who hope that you would do away with State-
based regulation, or at least offer them a choice of regulatory 
frameworks. You will probably hear from industry 
representatives that rate regulation causes them to be less 
competitive than they might be otherwise. They generally refer 
to rate regulation as price control. This is an inaccurate 
term. The process in almost all States for virtually all 
insurance products written by property and casualty insurers 
starts with the insurance company actuaries preparing a rate-
change proposal, and providing it to insurer management. 
Management considers the input from their actuaries and their 
marketing people, and they decide whether a rate filing will be 
submitted. And then, if so, how much that rate filing might be. 
That rate filing has been prepared and submitted to the 
regulator, to the insurance commissioner. In some cases, it 
must be approved by the regulator in advance. Most States, 
though, and in many lines of business, it doesn't. For example, 
in Arkansas, the personal lines, and most small commercial 
lines, the rates would be filed, and the insurers would be able 
to use them within 20 days, as long as the markets are 
competitive. Prior approval would only be required if I were to 
find that the particular market is noncompetitive. In Arkansas, 
workers' comp is subject to prior approval, as well as medical 
malpractice. Those rates are subject to prior approval. 
Otherwise, it's a file and use. Insurers that write large 
commercial risk would not even be required to make a filing.
    Insurers often maintain that price controls make them 
noncompetitive. I think you will agree that the financial 
performance of the property and casualty industry in recent 
years makes these statements ring hollow. I expect that some 
witnesses will agree with these statements and suggest that 
insurance regulators should do more to lower prices, and I 
would welcome any questions you have about the industry and 
regulation of the property and casualty industry.
    [The prepared statement of Ms. Bowman follows:]

 Prepared Statement of Julie Benafield Bowman, Insurance Commissioner; 
     State of Arkansas; Member, National Association of Insurance 
                             Commissioners
    Chairman Inouye, Vice Chairman Stevens, Senator Pryor and Members 
of the Committee, thank you for the opportunity to testify here today 
on the role of insurance commissioners in regulating the property and 
casualty insurance, the financial health of the property and casualty 
insurance industry, and its market activities such as pricing, 
underwriting and settling claims.
    My name is Julie Bowman. I am the Insurance Commissioner for the 
State of Arkansas and an active member of the National Association of 
Insurance Commissioners (NAIC). Related to the topic matter of today's 
hearing, I serve as Vice Chair of the NAIC's Market Regulation and 
Consumer Affairs Committee and am a member of the Workers' Compensation 
Task Force, the Speed to Market Task Force, the Operational 
Efficiencies Working Group.
    Today I would like to provide my perspective to help you understand 
how insurance regulators protect consumers and my views on the health 
of the property and casualty insurance industry and their market 
activities.

   First, the most important job of an insurance commissioner 
        is to protect insurance consumers. This is accomplished by 
        maintaining strong, cooperative regulatory oversight of insurer 
        solvency and monitoring insurer marketing activities so that a 
        healthy competitive marketplace exists to serve consumers.

   Second, there is misunderstanding about what constitutes an 
        insurance market and how insurers go about serving the markets 
        that they choose to serve.

   Third, in spite of paying for record levels of catastrophes 
        in 2004 and 2005, the financial health of the property and 
        casualty insurance industry has never been better.

   Finally, I will comment on insurer pricing, rate regulation, 
        and insurer practices related to claim settlement and 
        underwriting. In particular I would like to explore some myths 
        that are promoted by some who hope that you would do away with 
        state-based insurance regulation or at least offer them a 
        choice of regulatory frameworks.
Insurance Regulation and Consumer Protection
    The most important job of an insurance commissioner is to protect 
insurance consumers. This is accomplished by maintaining strong, 
cooperative regulatory oversight of insurer solvency and monitoring 
insurer marketing activities so that a healthy competitive marketplace 
exists to serve consumers.
    In its simplest form, insurance regulation is about two things. The 
primary job of an insurance regulator is to make sure that insurance 
companies remain solvent so that they can pay claims as they become due 
and to make sure that insurers treat their customers and claimants 
fairly. An insolvent insurer does not have the resources to pay its 
claims and therefore, is of no use to either its policyholders or those 
with claims against them. A recalcitrant insurer that fails to comply 
with state consumer protection laws and regulations also can be a 
problem if it fails to deliver the expected insurance benefits to 
consumers at times when they are needed the most.
    The goal of financial regulation is protecting consumers against 
excessive insurer insolvency risk. Insurance regulators protect the 
public interest by requiring insurers to meet certain financial 
standards and taking remedial action when needed. Congress has chosen 
to leave the regulation of insurers to the states under the terms 
specified in the McCarran-Ferguson Act, and state legislatures have 
created regulatory frameworks in state law to address financial 
regulation. A typical state would have capital adequacy standards that 
would include minimum capital and surplus requirements to protect 
policyholders and claimants against unexpected increases in liabilities 
and decreases in the value of assets held by insurers. In addition, 
states also use a risk-based capital test that more specifically 
measures the risks each insurer assumes. Risk-based capital is intended 
to provide capital adequacy standards that are related to risk, that 
raise the safety net for insurers, that are uniform among states and 
that provide for regulatory action when actual capital falls below the 
standard.
    States also have enacted legislation that regulates the reserves 
that an insurer is obligated to set aside for future claims payments. 
One of the uncertainties for property and casualty insurers is to 
determine the reserves needed for claims that have already occurred, 
but not yet paid. Regulators review insurer financial statements and 
actuarial opinions to assess whether insurers are establishing adequate 
reserves for unpaid losses.
    There are investment restrictions specified in state laws. State 
laws take a conservative approach to insurer investments with most 
states limiting the amount of investments an insurer can make in non-
investment grade assets. State regulators work collectively through the 
NAIC's Securities Valuation Office (SVO) to monitor the assets held by 
insurers. The SVO assigns a credit rating to assets that are not 
otherwise rated by a rating agency such as Standard & Poors or AM Best. 
This function helps state examiners with their evaluation of the assets 
that an insurer holds as part of a financial examination.
    These regulatory requirements are of little value if there is no 
mechanism in place to monitor insurers' compliance with the 
requirements. The purpose of solvency monitoring is to ensure that 
insurance companies are meeting regulatory standards and to alert 
regulators if action is needed to protect policyholders' interests. 
State regulators have established a vast solvency monitoring system 
that encompasses a range of regulatory activities, including financial 
reporting, early-warning systems, financial analysis and onsite insurer 
examinations. Annual and quarterly financial statements filed by 
insurers serve as the principle source of information to assess insurer 
financial position. Insurers generally are examined every 3 years. 
States coordinate the financial examinations through the NAIC 
association-wide or zone exams process to avoid duplicative or 
redundant examinations of the same insurer.
    State insurance regulators have developed a certification program 
for insurance departments. The goal of the certification process is to 
ensure that a state's solvency regulation meets certain minimum 
requirements so that other jurisdictions can have a degree of 
confidence in the state's financial oversight of its domestic insurers. 
Adopted in 1990, the NAIC's Financial Regulation Standards and 
Accreditation Program establishes standards that states must meet to 
become accredited. Each insurance department's financial regulatory 
framework and monitoring program is reviewed by an independent review 
team that assesses the department's compliance. A compliance review 
will look at three areas: laws and regulations; regulatory practices 
and procedures; and organizational and personnel practices. States that 
pass the review are recognized as accredited states.
    Market regulation deals with insurer pricing, product development 
and market practices. If insurers are able to use their market power to 
raise prices above competitive levels, then regulators can improve 
market performance by setting a price ceiling at the competitive price 
level. This rarely happens as the competitive structure of most markets 
prevents insurers from acquiring significant market power.
    Market regulation also encompasses review of contractual language 
before it is sold to consumers. This basic consumer protection helps 
both the insurer and the policyholder by having an expert state 
employee review the insurance contract before the transaction with the 
policyholder. Property and casualty insurance contracts are based in 
state laws and regulations. State regulators with expertise in the 
state's civil justice system and requirements enacted by the state 
legislature review the contract for statutory compliance.
    Another form of market regulation is the market analysis and market 
conduct examination process. Market analysis is about the collection of 
data and review of it to determine if insurers are treating 
policyholders and claimants fairly. Market conduct examinations are 
called if the regulator suspects that an insurer is failing in this 
duty. Some market conduct exams are done without suspicion of wrong 
doing. In this type of exam, a regulator would review a sampling of 
claims files to see that statutory timeliness requirements are met and 
that the insurer provided the claimant with a reasonable settlement in 
accordance with the policy provisions.
Insurance Markets
    While the rest of the world thinks of the United States as having 
the largest insurance market, it is not a single marketplace but rather 
a combination of smaller markets that, when aggregated, yield a $1.35 
trillion ``marketplace.'' In comparison, the insurance market in Japan 
is roughly $475 billion and the U.K. is $300 billion. The largest state 
market is California with $124 billion in written premiums. Only Japan, 
the U.K., France Germany and Italy have larger markets than California. 
Following California is New York with $116 billion, Florida with $92 
billion and Texas with $82 billion. Of the top ten jurisdictions in the 
world, four are the states previously mentioned. My state, Arkansas, 
has $8.6 billion, slightly less than Poland and Mexico, but larger than 
the insurance markets in Argentina, Turkey, Israel and Thailand.
    One could assume that each state has a single marketplace, but even 
that comparison is inaccurate. For example, in Arkansas, we do not 
spend much time worrying about hurricanes. I know my fellow 
commissioners in the Gulf States spend a great deal of time thinking 
about them and how to finance the devastating losses that they cause. 
Our property insurance writers are more concerned with tornados, 
lightning and hail. We also have some earthquake risk as we are exposed 
to the New Madrid Fault. Although you might view Arkansas as a small 
state from an insurance perspective, we have two distinct insurance 
markets when it comes to personal lines polices such as auto insurance 
and homeowners insurance. Little Rock is an urban area with different 
market dynamics than the rural areas of the state. As I mentioned 
earlier, the Eastern part of our state has earthquake exposure that is 
different from the Western portions of the state.
    Since insurance markets are different, insurers approach them in 
different ways. Citizens in Western Arkansas have no difficulty 
obtaining earthquake coverage, while the Eastern residents, 
particularly those living near the fault line, have recently 
experienced some availability problems and the prices for the coverage, 
when offered, have risen sharply. In most of the country, for most 
lines of business, insurance is a voluntary offering by a private 
enterprise with the intent that the insurance sold will generate 
sufficient revenues to pay all claims and expenses with a little bit 
left over to provide a profit for the owners. Sometimes the public 
misperceives that they have a right to obtain insurance.
    We do have some obligation to make sure that our citizens can 
obtain the essential insurance coverages that they need. Most state 
governments require that citizens buy auto insurance if they wish to 
operate a motor vehicle. Banks and other lending institutions generally 
require the purchase of property insurance as a condition for obtaining 
a loan. Thus, it is in the public's interest for government to take 
steps to see that all citizens are served by making available auto 
insurance and property insurance to those that need it. When the 
private sector chooses not to serve a market, the states generally have 
stepped in and created a residual market to meet that pressing need. A 
variety of types of residual market mechanisms are available in the 
states, including FAIR plans, catastrophe funds, assigned risk plans 
and joint underwriting associations.
    Nationwide, the property and casualty insurance market for 
individuals and businesses is healthy and competitive. It has been well 
recorded that, despite record catastrophic losses, the industry is also 
enjoying record profits. However, there are some coastal regions of the 
country where the insurance market is in crisis, due largely to 
insurers' reluctance to provide insurance in areas of perceived high 
risk and, subsequently, the reinsurance costs associated with those 
areas. It is important for you to know that insurance costs are not 
going up directly to recoup the losses of 2004 and 2005. They are going 
up because the losses of 2004 and 2005 have demonstrated a level of 
risk potential for the future that has insurers rethinking what their 
prospective losses will be going forward. When an insurer suffers a 1-
in-500 year event in consecutive years, it rightly begins to question 
the validity of its models and risk management assumptions, and adjusts 
its future expected losses accordingly. At the same time, reinsurers 
are drawing those same conclusions, which add to the overall price 
increase.
    In terms of what areas of the country are suffering an insurance 
crisis, another important distinction is the difference between coastal 
states and coastal regions within those states. Most coastal states, 
perhaps with the exception of Florida, have a relatively healthy 
property and casualty market in the vast majority of the state. Even in 
Florida the auto insurance market is performing well; however, the 
property insurance market is troubled. In Alabama, only 2 of the 67 
counties are having insurance issues, and even within those counties, 
the problems are limited largely to within just a few miles of the 
coast. In Mississippi, 6 of its 82 counties are directly experiencing 
problems. Louisiana, which took the brunt of hurricane Katrina, only 
has experienced troubles in the 24 of its total 62 coastal parishes. 
These trouble spots are somewhat limited, but they comprise the bulk of 
the cases we have all heard about on the news, where insurance costs 
are skyrocketing, building has come to a standstill, and mortgage 
defaults are on the rise.
    In some areas of the country however, the lack of availability and 
affordability is impacting the entire state--as is the case in Florida 
and South Carolina. The Florida market has been battered by 8 storms in 
2 years resulting in $38 billion in losses, and the impact spans 
virtually the entire state. For those living in Florida's high-risk 
areas, the real tragedy occurred after the storms as policyholders 
experienced displacement, shortages in building supplies, shortages in 
homebuilding labor, rising insurance premiums, mortgage defaults, and 
the unavailability of private insurance. Even today, one can sea blue 
tarps covering homes that have not been repaired fully from the prior 
hurricane seasons.
    Although the voluntary market recapitalized by infusing 
approximately $1 billion of new capital into the private market, this 
situation is not self-sustaining. There are a far greater number of 
insurance companies exiting the homeowners insurance market than there 
are new companies entering. Even for those companies staying in the 
market, there has been a significant retrenchment. Companies are 
enforcing stricter underwriting standards to limit their exposure in 
certain high-risk areas or limiting types of property they select to 
insure.
    South Carolina has been at the forefront of regulatory 
modernization and is considered a model regulatory environment by many 
insurers. The state also adopted the 2003 International Building Codes 
and has not had a direct hit from a major hurricane (e.g., Category 3 
or better) in nearly two decades. Yet, South Carolina is experiencing 
many of the same problems that the Gulf Coast states are experiencing. 
Shortly after Hurricane Katrina, admitted carriers were seeking to 
increase rates by 100 to 200 percent, decreasing coverage by requiring 
5 to 10 percent deductibles, non-renewing long-term policyholders and 
discontinuing writing new business in certain areas. Surplus lines 
carriers were increasing rates even more--by as much as 300-400 
percent. Condominiums were particularly hard hit as insurers recognized 
the risk concentration they presented. One development saw its premium 
increased from $126,000 to $879,000 and it took 5 different insurers to 
piece together the coverage. Many condominium owners in South Carolina 
are retirees and senior citizens on fixed incomes so, again, this 
problem is having a disparate impact on a large segment of the 
population who do not have many options.
    South Carolina has implemented many of the measures the insurance 
industry says need to be in place to create the kind of free-market 
environment that would enable the private sector to handle this 
problem, and yet, the state is seeing only scattered relief from the 
lack of available and affordable property insurance. In South 
Carolina's coastal counties, the number of policies written by admitted 
insurers has only increased 3 percent, while population has grown 9 
percent, building permit activity has increased 27 percent, and 
property values have increased 28 percent since 2000. Like other 
coastal states, South Carolina also has a Wind Pool to pick up policies 
that the private market won't cover. From 2001 through the third 
quarter of 2006, the written premiums for the Wind Pool increased 88 
percent for residential lines and 448 percent for commercial lines. In 
the past several months, however, there are indications that the 
coastal property insurance market may be improving. Insurers are not 
reporting the same problems acquiring reinsurance as they did in 2006. 
Other insurers and producers have indicated that capacity within the 
reinsurance market has increased and that reinsurers are looking at 
deploying that increased capacity in the coastal property insurance 
market in South Carolina and other southeastern states. Additionally, 
the Wind Pool has reported that it is losing some of the condominiums 
that it insured in 2006. These condominiums are canceling coverage with 
the Wind Pool because they are finding better coverage and/or better 
rates elsewhere. Recently, the Wind Pool indicated that it has had some 
days with negative written premium. All are indications that there is 
more capacity within the market.
    Outside of Florida, those markets are absorbing the impact of 
recent catastrophic events, but in areas that were hit hardest, 
insurers are responding as if the next big catastrophe is certain to be 
a hurricane that hits the exact same region in the Gulf Coast, and 
pricing coverage accordingly. This begs the question, what happens if 
the next catastrophe is an earthquake in the Midwest or a massive 
Nor'easter in New England? Will those policyholders see a doubling and 
tripling of their rates because insurers are not adequately hedging 
their risk, and we as a nation are not doing the pre-event building, 
planning, and mitigation steps that limit those losses? Clearly, people 
who build and buy homes or operate businesses directly in harms way, 
whether that is on a coastline or a fault line, should pay insurance 
costs that reflect that risk, but they should not be the scapegoats for 
insurers, reinsurers, risk modelers, regulators, and legislators who 
fail to learn the lessons of 2004 and 2005.
Financial Health of the Property and Casualty Industry
    Let me first caution that the figures I am providing are 
preliminary and might change slightly as more information arrives in 
regulators' offices. Annual financial statements are due March first of 
each year. There are some insurers who ask for and are granted filing 
extensions. When the filings are received, they undergo a thorough 
evaluation with many checks and balances known as ``crosschecks'' that 
are applied to assure that the data submitted is complete and as 
accurate as it can be. This process takes time.
    It is safe to say that 2006 was a very good year for the U.S. 
property and casualty insurance industry. There were no hurricanes that 
made landfall in 2006 and other catastrophe losses were low. The lack 
of major catastrophes combined with favorable market pricing conditions 
led to a record year for insurers. The industry posted an underwriting 
gain of over $34 billion and it achieved its lowest combined ratio in 
years, estimated to be 92.6 percent. The combined ratio is a way to 
determine if insurers made money on their insurance operations with 100 
percent combined ratio being a break-even point. Thus a combined ratio 
below 100 percent means that the underwriting part of the business was 
profitable. In addition to making money on underwriting, insurers also 
make money on their investments. Between underwriting results and 
investment results, the property and casualty industry's policyholders' 
surplus grew to almost $480 billion.
Rate Regulation and Insurer Practices
    You likely will hear from industry representatives that rate 
regulation causes them to be less competitive than they might be 
otherwise. They generally refer to rate regulation as price control. 
This is an inaccurate term. The process in almost all states for 
virtually all insurance products written by property and casualty 
insurers starts with the insurance company actuaries preparing a rate 
change proposal and providing it to insurer management. Management 
considers the input from their actuaries and from their marketing 
people and decides whether a rate filing will be submitted and, if so, 
how much will be charged. The rate filing is then prepared and 
submitted to the state regulator. In some cases, it must be approved by 
the regulator, but for many states and many lines of business, it does 
not. For example, in Arkansas, for personal lines products and small 
commercial lines products an insurer would file the rates and be able 
to use them within 20 days as long as the markets are competitive. 
Prior approval would be required only if I were to find that a 
particular market is noncompetitive. Insurers who write large 
commercial risks would not even be required to make a filing.
    Insurers often maintain that price controls make them 
noncompetitive. I think you will agree that the financial performance 
of the property and casualty industry in recent years makes that 
statement ring hollow. I expect that some witnesses will agree with 
these statements and suggest that insurance regulators should do more 
to lower prices.
    Insurance is a cyclical business. In some years, insurers make a 
decent return and, in other years, competitive forces lead them to 
lower prices and they lose money. Catastrophes can affect the bottom 
line. It is a regulators job to balance the competing interests of all 
parties to the insurance contract. Insolvent insurers do not pay claims 
so insurance regulators must be sure that insurers are charging 
adequate rates. Consumers want to pay low prices for quality insurance 
products. Thus the insurance regulator must assure that rates are not 
excessive and that the insurance contract delivers reasonable benefits 
that comply with state laws and regulations. Insurance consumers want 
their insurers to treat them fairly with regard to price and claim 
settlement. Thus the insurance commissioner is charged with making sure 
that rates are not unfairly discriminatory. I say ``unfairly 
discriminatory'' because rates are, by nature, discriminatory. Insurers 
assess the risks that each consumer presents and have a rating system 
that uses a variety of risk classification factors to determine the 
price that a person or family will pay. Each state has an Unfair Trade 
Practices Act and many have Unfair Claim Settlement Practices 
Regulations that govern insurer conduct in the marketplace.
    The invitation letter to this hearing inquires about claims and 
policy writing practices of insurers. Insurance is a business of 
contracts. Each insurance policy is a contract between the policyholder 
and the insurer to perform certain activities if certain unintended 
events occur. The requirements for the coverage provisions of insurance 
contracts are based in state law and regulation. It may be that if a 
state has enacted a law or regulation, it is because some insurer at 
some time disadvantaged a policyholder or claimant who complained about 
the treatment to a state legislator who drafted a law to fix the 
problem. Thus, not all insurance contract provisions have a law in 
place that specifies how that contract is to be drafted. Since actions 
of insurers are local, it also safe to say that no two states have 
exactly the same laws on the books.
    Recent news events related to the 2004 and 2005 hurricane seasons 
have shown a spotlight on insurance contracts. The most common problem 
was consumer dissatisfaction with claim settlements related to whether 
it was wind or water that caused a particular loss. This problem arose 
because the coastal consumer cannot go to a single insurer and obtain 
all of the coverages he or she needs. The National Flood Insurance 
Program (NFIP) was created in the 1960s because insurers no longer 
wanted to provide coverage for floods. The storm surge in hurricanes is 
considered to be a flood by the insurance industry and the NFIP. To be 
fully covered in a coastal county, a family might need to purchase 
three separate insurance policies: a homeowners policy from a private 
insurer that covers all perils except for wind and flood, a wind policy 
from a state-based Wind Pool and a flood policy from the NFIP. The 
problem for the consumer arises when there is debate about which of the 
perils caused a particular loss. In other words, did the wind knock 
down the house before the storm surge washed all the wreckage away or 
did the house withstand the wind only to be washed away by the storm 
surge? When all that remains of the house is a pile of rubble, it is 
difficult for claims adjusters to determine which peril was responsible 
for the damages. Having multiple adjusters assessing a single loss only 
compounds the problem.
    A companion problem is the fact that the homeowners policy, the 
wind policy and the flood policy all have different coverage limits and 
the details of what is covered differ in each policy. Thus, it is 
possible for a well-meaning homeowner to try to do the right thing by 
purchasing three insurance contracts and end up with a shortfall at 
claim settlement time.
    Much has been made of the anti-concurrent cause language in a 
standard property insurance policy. This provision is a direct result 
of the bifurcated insurance system we have, and was developed by the 
insurance industry to protect insurance companies from having to pay 
for losses (in this case, flood losses) which are excluded from 
coverage and for which they did not collect a premium. It is a 
provision that frankly had not been tested at the magnitude of a storm 
like Hurricane Katrina where wind and water losses were so wide spread. 
Some have suggested that this provision allows companies to avoid 
paying their obligations of coverage when flood damage is present. This 
is not the intent of that language, and the vast majority of companies 
do not distort the provision to shirk their obligations. In 
Mississippi, for example, where this issue has become the subject of 
much debate, Commissioner Dale issued a bulletin immediately following 
Hurricane Katrina to all property and casualty insurers instructing 
them that the burden of proof for determining the cause of loss is on 
the insurers, not the policyholders. Furthermore, Commissioner Dale 
advised companies that when there was doubt as to whether damage was 
caused directly by flood or wind, the insurers were to err in favor of 
covering the insured.
    Despite this, there have been serious allegations that some 
companies or adjusters have wrongly denied claims while misconstruing 
this provision, and they are now being forced to defend that contention 
to their insurance department or in the courts. The fact that insurers 
feel compelled to structure their policies to create legal barriers to 
segregate various perils (with the cost to defend these legal barriers 
often factored into rates), and those barriers add confusion and 
uncertainty for policyholder who are now challenging those barriers in 
courts. It is worth considering a system that offers consumers an all-
perils policy that covers wind and water and eliminates the need for 
this provision along with any possible distortion or manipulation of 
its intent.
    Our role as insurance commissioners is to foster an industry that 
prepares people before and then provides for them after some of the 
worst possible events that they may endure in their lifetime. Thank you 
for taking the time to hold this hearing, for inviting me here today to 
participate, and for your continued interest and leadership on this 
crucial issue. I am pleased to answer any questions that you may have.

    Senator Pryor. Great, thank you.
    Mr. Hunter?

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Hunter. Good morning.
    I also formerly served as the Federal Insurance 
Administrator and ran the National Flood Insurance Program 
under Presidents Ford and Carter, and also as Texas Insurance 
Commissioner.
    In 2004, four hurricanes hit Florida. The property and 
casualty insurance industry set a record profit. In 2005, 
Katrina and other hurricanes, another record profit. In 2006, 
no storms, a third straight record profit. A total, over the 3 
years, of $157.4 billion in profit, which amounts to profit, 
not premium, $524 for every American, or $1,574 per household, 
in profit.
    At the same time, as you've heard, there have been some 
problems of getting claims paid along the Gulf Coast. And 
profits are a good thing. A strong industry is necessary. But 
unjustified profits and excessive capitalization and 
precipitous acts by insurance companies to stop writing 
business or drop business or jack up prices--I got a call last 
night from my daughter, who's price in--5 miles off the coast 
in Florida, in a very modest home, is now well over $5,000 a 
year, and she really can't afford it.
    After Hurricane Andrew hit, in 2002, the insurance industry 
had--said they had a problem, and they wanted to retool. And we 
all worked on it. I worked with them in Florida, and then later 
in Texas as Commissioner. They said they needed to sharply cut 
back coverage through deductibles and other provisions. They 
said they needed to jack up prices significantly using 
scientific models. They said they needed State pools to dump 
high risks. And they got all those things.
    They also said--and I know it personally, because I was 
commissioner, and I also heard it in Florida--they also said 
that when these three things were done, there would never be 
any kind of crisis again. That was their promise in order to 
gain these--and yet, we know today they reneged on that. Now, 
whether they mismanaged the transition after Hurricane Andrew 
or are gouging today, I leave it to you to consider which it 
is, but if you look at the profits, you might think it might be 
the latter.
    Consumers face serious insurance problems outside of the 
Gulf Coast, as well. Attorney General Spitzer, before he became 
Governor, of course, found bid-rigging, hidden kickbacks, the 
largest, most sophisticated insurers in the country--I mean, 
buyers, rather--the largest, most sophisticated buyers were 
duped by the insurance companies because of their antitrust 
exemption and other things. Insurers use identical or similar 
claims processing systems throughout the country to 
systematically underpay claims; and yet, State regulation has 
not done anything about it.
    Congress should study these serious issues; and, in doing 
so, Congress should reject insurance industry proposals that 
have been introduced, such as the creation of an optional 
Federal charter, which would, astonishingly, given the weakness 
of State regulation, actually gut the few protections that are 
in place. If you're going to move, Congress, please make sure 
that consumers are protected, not insurance industry 
protection.
    For example, in the wake of Hurricane Katrina along the 
Gulf Coast, the insurance commissions would have no authority, 
under an optional Federal charter-type provision, to actually 
re-regulate rates or move in and protect consumers.
    We urge Congress to reject the anti-consumer proposals. 
Instead, look for options that would improve competition and 
oversight of the market. My main message to you is that tough 
oversight of the market is not incompatible with vigorous 
competition. The proof is California's auto insurance market. 
Proposition 103 was passed by the people. It included a total 
competitive package, which included repeal of the State 
antitrust exemption, and it also included vigorous regulation. 
It has the best system of prior approval rate regulation in the 
Nation, and tended to hold prices down to the--to a reasonable 
level. It has allowed insurers to realize profits that are 
slightly above the national average since it was introduced, 
but the consumers have seen prices drop dramatically. When it 
passed, California's auto insurance rates were 36 percent 
higher than the Nation, they were the third highest State in 
the country. Today, they're the 19th, and their rate is 
actually below the national average. So, the combination of 
regulation and competition working together, why not both? They 
both seek the same goal, they both seek the lowest possible 
price consistent with a fair return for the insurer. They can 
work together.
    So, immediate steps that Congress should consider are:
    One--and this is the most important--repeal the antitrust 
exemption. And we like S. 618 very much, and we thank Senator 
Lott and the others who have supported that. We've testified, 
already, before the Judiciary Committee, about that.
    We like the idea of clearer disclosure for the benefit of 
consumers. And, again, we point to Senator Lott's bill as a 
good example of what we're talking about, S. 1061.
    We'd like to see the FTC freed up to help consumers in 
the--in these markets, particularly unfair discrimination that 
we know exists throughout the country. Things like use of 
consumer's occupation or educational attainment to price 
insurance is not right.
    FTC should also study the unfair claims settlement 
practices of insurers, particularly the use of computerized 
systems designed to underpay claims, being used across the 
industry.
    We should look at the questions of title insurance and 
other things that inappropriately drive up home purchasing 
costs, and the kickbacks involved there.
    Consumer groups do not care who regulates insurance, 
really. They don't care if it's State or Federal. But we do 
care that the regulatory system be excellent. We are critical 
of the current state-based system, but we will not accept a new 
Federal system that's worse.
    Mr. Chairman, it's--it is possible to create a regulatory 
system, whether it's State or federally based, that protects 
consumers and forces vigorous industry competition. We think 
this hearing is a great first step toward those goals.
    [The prepared statement of Mr. Hunter follows:]

    Prepared Statement of J. Robert Hunter, Director of Insurance, 
                     Consumer Federation of America
    Good morning, Mr. Chairman and members of the Committee. Thank you 
for inviting me here today to discuss the state of the property/
casualty insurance industry in America and the quality of insurance 
regulation. My name is Bob Hunter. I am the Director of Insurance for 
the Consumer Federation of America. CFA is a non-profit association of 
300 organizations that, since 1968, has sought to advance the consumer 
interest through research, advocacy and education. I am a former 
Federal Insurance Administrator under Presidents Ford and Carter and 
have also served as Texas Insurance Commissioner. I am also an actuary, 
a Fellow of the Casualty Actuarial Society and a member of the American 
Academy of Actuaries.
    America's insurance consumers, including small businesses, are 
vitally interested in high quality insurance regulation, quality that 
is weak and declining throughout the Nation today. Therefore, your 
hearing is timely. We especially appreciate the fact that the Committee 
is beginning its review with an overall examination of insurance 
regulation--why it exists, what are its successes and failures--rather 
than solely reviewing proposed legislation. In order to determine 
whether Federal legislation is necessary and what its focus should be, 
it obviously makes a great deal of sense for the Committee to first 
conduct a thorough assessment of the current situation. If the 
``problems'' with the present insurance regulation regime are not 
properly diagnosed, the ``solutions'' that Congress enacts will be 
flawed.
    In this testimony, I will first discuss why regulation of the 
insurance industry is necessary, including a review of the key reasons 
regulation is required and why some current developments make 
meaningful oversight even more essential. I will then point out that 
consumers are agnostic on the question of whether regulation should be 
at the state or Federal level but we are very concerned about the 
quality of consumer protections that are in place, wherever the locus 
of regulation resides in the future. I will then list a few of the most 
pressing problems, including claims practices and availability 
concerns, that insurance consumers are presently facing that require a 
regulatory response.
    I then provide a brief history of the insurance industry's desire 
for Federal regulation in the early years of this country and the 
reasons why the industry switched to favoring state regulation in the 
later half of the 19th century. The industry is now split on the 
question of whether state-based regulation should continue. I will 
point out that the industry has generally shifted its allegiance over 
the years to support the oversight by the level of government that 
imposes the weakest regulatory regime and the fewest consumer 
protections. Since this balance shifts over time, some insurers now 
favor a new system where they can change from state to Federal 
regulation or back again at their whim, should a regulator propose 
rules that they do not like.
    I explain why market ``competition'' alone cannot be relied upon to 
protect insurance consumers, despite insurer attempts to reduce or 
eliminate consumer protections. The absence of regulatory oversight of 
policy forms (i.e., coverages) and risk classifications (i.e., how 
consumers are grouped for the purpose of charging premiums) often leads 
to a hollowing out of coverage offered in insurance policies, unfair 
discrimination and the abdication of the insurance system's primary 
role in loss prevention. Industry deregulation proposals--
euphemistically termed ``modernization'' or ``uniformity''--will likely 
increase the already widespread problems of insurance availability and 
affordability and further erode incentives for loss prevention.
    Furthermore, industry claims that competition is incompatible with 
regulation are not borne out by the facts. The experience in states 
like California demonstrates that appropriate regulation enhances 
competition, while also ensuring that insurers compete fairly and in a 
manner that benefits consumers. The maximization of both competitive 
forces and regulatory oversight in California has resulted in a 
generous return for these companies and high-quality protection for 
consumers.\1\
    I then set forth the principles for a regulatory system that 
consumers would favor, showing ways to achieve regulatory uniformity 
without sacrificing consumer protections.
    Finally, I briefly discuss some of the regulatory proposals put 
forth in recent years by the insurers, including the optional Federal 
charter approach and the SMART Act, both of which CFA strongly opposes. 
We do indicate support for S. 618, a bill that would repeal the 
McCarran-Ferguson Act's broad antitrust exemption that insurers enjoy, 
to end the collusion in pricing and other market decisions that are 
legal today. The Senate Judiciary Committee is working on S. 618, which 
also has broad support from other national consumer organizations.\2\
Why is Regulation of Insurance Necessary?
    The rationale behind insurance regulation is to promote beneficial 
competition and prevent destructive or harmful competition in various 
areas.
    Insolvency: One of the reasons for regulation is to prevent 
competition that routinely causes insurers to go out of business, 
leaving consumers unable to collect on claims. Insolvency regulation 
has historically been a primary focus of insurance regulation. After 
several insolvencies in the 1980s, state regulators and the National 
Association of Insurance Commissioners (NAIC) enacted risk-based 
capital standards and implemented an accreditation program to help 
identify and prevent future insolvencies. As fewer insolvencies 
occurred in the 1990s through to today, state regulators appear to be 
doing a better job.
    Unfair and Deceptive Policies and Practices: Insurance policies, 
unlike most other consumer products or services, are contracts that 
promise to make certain payments under certain conditions at some point 
in the future. Consumers can easily research the price, quality and 
features of a television, but they have very limited ability to do so 
on insurance policies. Because of the complicated nature of insurance 
policies, consumers rely on the representations of the seller/agent to 
a far greater extent than for other products. Regulation exists to 
prevent competition that fosters the sale of unfair and deceptive 
policies and claims practices.
    Unfortunately, states have not fared at all well in this area. 
Rather than acting to uncover abuses and instigate enforcement actions, 
states have often reacted after lawsuits or news stories brought bad 
practices to light. For example, the common perception among regulators 
that ``fly-by-night'' insurance companies were primarily responsible 
for deceptive and misleading practices was shattered in the late 1980s 
and early 1990s by widespread allegations of such practices among 
household names such as MetLife, John Hancock, and Prudential. MetLife 
sold plain whole life policies to nurses as ``retirement plans,'' and 
Prudential unilaterally replaced many customers' whole life policies 
with policies that didn't offer as much coverage. Though it is true 
that state regulators eventually took action through coordinated 
settlements, the allegations were first raised in private litigation; 
many consumers were defrauded before regulators acted.
    The revelations and settlements by New York Attorney General Eliot 
Spitzer show that even the most sophisticated consumers of insurance 
can be duped into paying too much for insurance through bid-rigging, 
steering, undisclosed kickback commissions to brokers and agents and 
through other anticompetitive acts. The recent New York Times article 
on long-term care insurance claims abuses are another example of 
serious problems consumers face in the current weak regulatory 
climate.\3\ The appalling abuses of consumers that occurred in the wake 
of Hurricane Katrina are also a noteworthy example of the inadequacy of 
state oversight.
    Claims abuses: Consumers pay a lot of money for insurance policies, 
which are promises for future protection should some unfortunate event 
occur. If these promises are broken, the consumer can be devastated. 
Many concerns have been raised about such broken promises in the poor 
performance of property-casualty insurers in paying legitimate claims 
in the wake of Hurricane Katrina. Consider this startling blog from the 
President of the Association of Property/Casualty Claims Professionals, 
James Greer, posted on the website of the Editor of the National 
Underwriter:

        James W. Greer, CPCU: Although I live and work in Florida, my 
        home is on the Mississippi Gulf Coast where I have family 
        spread from one side of the state to the other. I spent 6 
        months there leading a team of over 100 CAT adjusters and 
        handling the wind claims for the state's carrier of last 
        resort.
        I personally walked through the carnage, saw the people, and 
        felt the sorrow. I climbed the roofs, measured the slabs, and 
        personally witnessed very visible and clear damage caused by 
        both water AND WIND.
        I also observed something else that surprised me, and, after 28 
        years as a claims professional who has carried ``the soul'' of 
        a bygone industry in my practices and preachings, I was ashamed 
        of those to whom I had vested a lifetime career: An 
        overwhelming lack of claims adjusters on the Mississippi Gulf 
        Coast. The industry simply did not respond.
        The industry appeared as distant to the Miss. Gulf Coast as the 
        Federal Government was accused of being to New Orleans. It was 
        as if some small group of high-level financial magnates decided 
        that the only way to save the industry's financial fate from 
        this mega-disaster was to take a total hand's off approach and 
        hide beneath the waves and the flood exclusion.
        While media reps repeatedly quoted, ``Each claim is different 
        and will be handled on its own facts and merits,'' the carriers 
        behaved as one . . . if there was evidence of water, or you 
        were within a certain geographic boundary, adjusters were 
        largely absent on the coast. (Emphasis added.)
        (Actually, State Farm did have one of the largest CAT 
        facilities, located centrally on the coast, but there was 
        little evidence of other carrier presence.)
        I personally observed large carriers simply refusing to 
        respond, or even consider arguments of wind involvement . . . 
        well-rationalized sets of facts, coverage and legal arguments. 
        The silence from industry officials ``far from the field'' who 
        retained the authority for claim decision-making was deafening.
        In an article posted on the Association of Property & Casualty 
        Claims Professionals' website shortly after Katrina hit, I 
        described the catastrophe as ``Claims Greatest Challenge,'' and 
        pondered the industry would respond. Now we know.
        As a member of an old Aetna family that has been widely 
        dispersed since its demise in the 1990s, I remember the day 
        when leaders of that fine company routinely cited, and tried to 
        honor, the social/moral contract the insurance industry had 
        with society. It is clear that, in today's business 
        environment, the soul of the insurance industry is missing, and 
        despite the rhetoric of its PR machine, the industry no longer 
        recognizes such a social/moral obligation.
        As a lifetime claims professional, I will never quit writing, 
        teaching and showing those who are interested the way things 
        should be done to serve the best interests of the industry and 
        its customers according to the best practices and behaviors of 
        a bygone claims age. Perhaps someday a change in mindset will 
        once again begin to evolve.
        Clearly, for the Mississippi Gulf Coast, the Katrina 
        catastrophe, the animosity and the litigation, it was never 
        really about flood . . . nor was it about the flood exclusion. 
        It was, and is, about the failure of the insurance industry to 
        keep its promise . . . a promise that it will respond when loss 
        occurs.
        The only thing sold in insurance is peace of mind. The victims 
        of this storm, and certainly those in Mississippi, will never 
        again find peace of mind in insurance.
        Actions do speak loudest. On the Mississippi Gulf Coast, the 
        insurance industry simply failed to act. In the end, it will 
        pay dearly for that decision, as will all of society.
        James W. Greer, CPCU, President, Association of Property & 
        Casualty Claims Professionals (PCCP) \4\

    There are also adverse implications for consumers in the use of 
claims payment software by insurance companies. Insurers have reduced 
their payouts and maximized their profits by turning their claims 
operations into ``profit centers'' by using computer programs and other 
techniques designed to routinely underpay policyholder claims. For 
instance, many insurers are using programs such as ``Colossus,'' sold 
by Computer Sciences Corporation (CSC.) \5\ CSC sales literature touted 
Colossus as ``the most powerful cost savings tool'' and also suggested 
that the program will immediately reduce the size of bodily injury 
claims by up to 20 percent. As reported in a recent book, ``. . . any 
insurer who buys a license to use Colossus is able to calibrate the 
amount of `savings' it wants Colossus to generate . . . If Colossus 
does not generate sufficient `savings' to meet the insurer's needs or 
goals, the insurer simply goes back and `adjusts' the benchmark values 
until Colossus produces the desired results.'' \6\ In a settlement of a 
class-action lawsuit, Farmers Insurance Company has agreed to stop 
using Colossus on uninsured and underinsured motorist claims where a 
duty of good faith is required and has agreed to pay class members cash 
benefits.\7\ Other lawsuits have been filed against most of America's 
leading insurers for the use of these computerized claims settlement 
products.\8\
    Programs like Colossus are designed to systematically underpay 
policyholders without adequately examining the validity of each 
individual claim. The use of these programs severs the promise of good 
faith that insurers owe to their policyholders. Any increase in profits 
that results cannot be considered to be legitimate. Moreover, the 
introduction of these systems could explain part of the decline in 
benefits that policyholders have been receiving as a percentage of 
premiums paid in recent years.
    Colossus has been bought by most major insurance companies in 
response to marketing efforts by CSC promising significant savings. 
McKinsey & Company has also encouraged several companies to use 
Colossus.\9\ ``Before the Allstate launched a project in 1992 (called 
CCPR--Claims Core Process Redesign), McKinsey named its USAA project 
`PACE' [Professionalism and Claims Excellence]. At State Farm, McKinsey 
named its project `ACE' [Advanced Claims Excellence].'' \10\
    When McKinsey introduced Allstate to Colossus, ``McKinsey already 
knew how Colossus worked having proved it in the field at USAA.'' \11\ 
This quote was footnoted as follows: ``See McKinsey at (PowerPoint 
slide number) 7341: ``The Colossus sites have been extremely successful 
in reducing severities with reductions in the range of 10 percent for 
Colossus-evaluated claims.'' \12\
    I have been a witness in some of the cases against insurers using 
the Colossus product and I am covered by a protective order in these 
cases (I could go on at length about why these protective orders are 
bad public policy, particularly coupled with secrecy provisions in 
settlements, in that the bad practice that was uncovered often 
continues to harm people). I am, therefore, limited in this testimony 
to what is in the public domain. However, as I describe above, there is 
public information about the use of common consultants and vendors by 
insurance companies that have adopted Colossus and similar systems. I 
strongly urge this Committee to probe the question of whether these 
vendors and consultants have been involved in encouraging and 
facilitating collusive behavior by insurance companies with these 
claims systems. I also urge you to investigate whether a similarity in 
Hurricane Katrina claims payment procedures and actions (or non-
actions), as mentioned above, could indicate collusive activity by some 
insurers.
    The use of these products to cut claims payouts may be at least 
part of the reason that consumers are receiving record low payouts for 
their premium dollars as insurers reap unprecedented profits. As is 
obvious in the following graph, the trend in payouts is sharply down 
over the last twenty years, a period during most state insurance 
regulators have allowed consumer protections to erode significantly and 
when Colossus and other claims systems were being introduced by many 
insurers.\13\


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    It is truly inappropriate for property/casualty insurers to be 
delivering only half of their premium back to policyholders as 
benefits.\14\
    State insurance departments have been sound asleep on the issue of 
the negative impact that Colossus and other such products have on 
policyholder rights, and even on the right to good faith claims 
settlements. The Federal Trade Commission (FTC) should be empowered to 
undertake investigations and other consumer protection activities to 
help stop the insurers from engaging in such acts on a national basis.
    Insurance Availability: Some insurance is mandated by law or 
required by lenders to complete financial transactions, such as 
mortgage loans. In a normal competitive market, participants compete by 
attempting to sell to all consumers seeking the product. However, in 
the insurance market, participants compete by attempting to ``select'' 
only the most profitable consumers. This selection competition leads to 
availability problems and redlining.\15\ Regulation exists to limit 
destructive selection competition that harms consumers and society.
    Lawsuits brought by fair housing groups and the Department of 
Housing and Urban Development (HUD) over the past 15 years have 
revealed that insurance availability problems and unfair discrimination 
exist and demonstrate a lack of oversight and attention by many of the 
states. NAIC had ample opportunity after its own studies indicated that 
these problems existed to move to protect consumers. It retreated, 
however, when, a few years ago, insurers threatened to cutoff funding 
for its insurance information database, a primary source of NAIC 
income.
    Serious problems with home insurance availability and affordability 
surfaced this spring along America's coastlines. Hundreds of thousands 
of people have had their homeowners' insurance policies non-renewed and 
rates are skyrocketing. As to the decisions to non-renew, on May 9, 
2006 the Insurance Services Office (ISO) President and CEO Frank J. 
Coyne signaled that the market is ``overexposed'' along the coastline 
of America. In the National Underwriter article, ``Exposures Overly 
Concentrated Along Storm-prone Gulf Coast'' (May 15, 2006 Edition), the 
ISO executive ``cautioned that population growth and soaring home 
values in vulnerable areas are boosting carrier exposures to dangerous 
levels.'' He said, ``The inescapable conclusion is that the effects of 
exposure growth far outweigh any effects of global warming.''
    Insurers started major pullouts on the Gulf Coast in the wake of 
the ISO pronouncement. On May 12, 2006, Allstate announced it would 
drop 120,000 home and condominium policies and State Farm announced it 
would drop 39,000 policies in the Wind Pool areas and increase rates 
more than 70 percent.\16\ Collusion that would be forbidden by 
antitrust laws in most other industries appears to be involved in the 
price increases that have occurred. (See section below entitled ``Where 
Have All the Risk Takers Gone?'' below.)
    One obvious solution to discrimination and availability problems is 
to require insurers to disclose information about policies written by 
geo-code, and about specific underwriting guidelines that are used to 
determine eligibility and rates. Such disclosure would promote 
competition and benefit consumers; but state regulators, for the most 
part, have refused to require such disclosure in the face of adamant 
opposition from the industry. Regulators apparently agree with insurers 
that such information is a ``trade secret'' despite the absence of 
legal support for such a position. In addition, though insurance 
companies compete with banks that must meet data disclosure and lending 
requirements in underserved communities under the Community 
Reinvestment Act (``CRA''), insurers refuse to acknowledge a similar 
responsibility to communities.
    Reverse Competition: In certain lines of insurance,\17\ insurers 
market their policies to a third party, such as creditors or auto 
dealers, who, in turn, sell the insurance to consumers on behalf of the 
insurer for commission and other compensation. This compensation is 
often not disclosed to the consumer. Absent regulation, reverse 
competition leads to higher--not lower--prices for consumers because 
insurers ``compete'' to offer greater compensation to third party 
sellers, driving up the price to consumers.
    The credit insurance market offers a perfect example of reverse 
competition. Every few years, consumer groups issue reports about the 
millions of dollars that consumers are overcharged for credit 
insurance. Despite the overwhelming evidence that insurers do not meet 
targeted loss ratios in most states, many regulators have not acted to 
protect consumers by lowering rates.
    The markets for low value life insurance and industrial life 
insurance are characterized by overpriced and inappropriately sold 
policies and a lack of competition. This demonstrates the need for 
standards that ensure substantial policy value and clear disclosure. 
Insurers rely on consumers' lack of sophistication to sell these 
overpriced policies. With some exceptions, states have not enacted 
standards that ensure value or provide timely, accurate disclosure. 
Consumers continue to pay far too much for very little coverage.\18\
    Information for Consumers: True competition can only exist when 
purchasers are fully aware of the costs and benefits of the products 
and services they purchase. Because of the nature of insurance policies 
and pricing, consumers have had relatively little information about the 
quality and comparative cost of insurance policies. Regulation is 
needed to ensure that consumers have access to information that is 
necessary to make informed insurance purchase decisions and to compare 
prices.
    While the information and outreach efforts of states have improved, 
states and the NAIC have a long way to go. Some states have succeeded 
in getting good information out to consumers, but all too often the 
marketplace and insurance regulators have failed to ensure adequate 
disclosure. Their failure affects the pocketbooks of consumers, who 
cannot compare adequately on the basis of price.
    In many cases, insurers have stymied proposals for effective 
disclosure. For decades, consumer advocates pressed for more meaningful 
disclosure of life insurance policies, including rate-of-return 
disclosure, which would give consumers a simple way to determine the 
value of a cash-value policy. Today, even insurance experts can't 
determine which policy is better without running the underlying 
information through a computer. Regulators resisted this kind of 
disclosure until the insurance scandals of the 1990s, involving 
widespread misleading and abusive practices by insurers and agents, 
prompted states and the NAIC to develop model laws to address these 
problems. Regulators voiced strong concerns and promised tough action 
to correct these abuses. While early drafts held promise and included 
some meaningful cost-comparison requirements, the insurance industry 
successfully lobbied against the most important provisions of these 
proposals that would have made comparison-shopping possible for normal 
consumers. The model disclosure law that NAIC eventually adopted is 
inadequate for consumers trying to understand the structure and actual 
costs of policies.
    California adopted a rate-of-return disclosure rule a few years ago 
for life insurance (similar to an APR in loan contracts) that would 
have spurred competition and helped consumers comparison-shop. Before 
consumers had a chance to become familiar with the disclosures, life 
insurance lobbyists persuaded the California legislature to scuttle it.
Are the Reasons for Insurance Regulation Still Valid?
    The reasons for effective regulation of insurance are as relevant, 
or in some instances even more relevant, today than five or 10 years 
ago:

   Advances in technology now provide insurers access to 
        extraordinarily detailed data about individual customers and 
        allow them to pursue selection competition to an extent 
        unimaginable 10 years ago.

   Insurance is being used by more Americans not just to 
        protect against future risk, but as a tool to finance an 
        increasing share of their future income, e.g., through 
        annuities.

   Increased competition from other financial sectors (such as 
        banking) for the same customers could serve as an incentive for 
        misleading and deceptive practices and market segmentation, 
        leaving some consumers without access to the best policies and 
        rates. If an insurer can't compete on price with a more 
        efficient competitor, one way to keep prices low is by offering 
        weaker policy benefits (i.e., ``competition'' in the fine 
        print).

   States and lenders still require the purchase of auto and 
        home insurance. Combining insurer and lender functions under 
        one roof, as allowed by the Gramm-Leach-Bliley Act, could 
        increase incentives to sell insurance as an add-on to a loan 
        (perhaps under tie-in pressure)--or to inappropriately fund 
        insurance policies through high-cost loans.

   Insurers are gutting coverage inside of homeowners insurance 
        policies in ways that are difficult for consumers to understand 
        or overcome.\19\

    As consumers are faced with these changes, it is more important 
than ever that insurance laws are updated and the consumer protection 
bar is raised, not lowered.
Given that Regulation is Important for Consumers, Who Should Regulate--
        the States or the Federal Government?
    Consumers are not concerned with who regulates insurance, but they 
are concerned with the ability of the regulatory system. Consumer 
advocates have been (and are) critical of the current state-based 
system, but we are not willing to accept a Federal system that guts 
consumer protections in the states and establishes one uniform but weak 
set of regulatory standards.
    I am one of the very few people who have served as both a state and 
Federal insurance regulator.\20\ My experience demonstrates that either 
a Federal or state system can succeed or fail in protecting consumers. 
What is critical is not the locus of regulation, but the quality of the 
standards and the effectiveness of enforcement of those standards.
    Both state and Federal systems have potential advantages and 
disadvantages:

------------------------------------------------------------------------
               Item                       Federal             State
------------------------------------------------------------------------
Experience overseeing all aspects   No                  Yes
 of insurance regulation?
Responsive to local needs?          No                  Yes
Handle individual complaints        No                  Some States
 promptly and effectively?
Limited impact if regulatory        No                  Yes
 mistakes are made?
Not subject to political pressure   No                  No
 from national insurers?
Not subject to political pressure   Yes                 No
 from local insurers?
Efficient solvency regulation?      Yes                 Yes
Effective guarantee in event of     Yes                 No
 insolvency?
Adequately restricts revolving      Maybe               No
 door between regulators and
 industry?
More uniform regulatory approach?   Yes                 No
Can easily respond to micro-trends  No                  Yes
 impacting only a region or a
 state?
Can easily respond to macro-trends  Yes                 No
 that cross state borders?
Has greater resources, like date    Yes                 No
 processing capacity?
------------------------------------------------------------------------

    Despite many weaknesses that exist in state regulation, a number of 
states do have high-quality consumer protections. States also have 
extensive experience regulating insurer safety and soundness and an 
established system to address and respond to consumer complaints. The 
burden of proof is on those who for opportunistic reasons now want to 
shift away from 150 years of state insurance regulation to show that 
they are not asking Federal regulators and American consumers to accept 
a dangerous ``pig in a poke'' that will harm consumers.
    CFA agrees that better coordination and more consistent standards 
for licensing and examinations are desirable and necessary--as long as 
the standards are of the highest--and not of the lowest--quality. We 
also agree that efficient regulation is important, because consumers 
pay for inefficiencies. CFA participated in NAIC meetings over many 
months helping to find ways to eliminate inefficient regulatory 
practices and delays, even helping to put together a 30-day total 
product approval package. Our concern is not with cutting fat, but with 
removing regulatory muscle when consumers are vulnerable.
Top Six Problems Facing Insurance Consumers Today
1. Insurers Are Increasingly Privatizing Profit, Socializing Risk and 
        Creating Defective Insurance Products by Hollowing out 
        Insurance Coverage and Cherry Picking Locations in Which They 
        Will Underwrite
    There are two basic public policy purposes of insurance. The first 
is to provide individuals, businesses and communities with a financial 
security tool to avoid financial ruin in the event of a catastrophic 
event, whether that event is a traffic accident, a fire or a hurricane. 
Insurers provide this essential financial security tool by accepting 
the transfer of risk from individuals and by spreading the individual 
risks through the pooling of very large numbers of individual risks. 
The pool of risks is diversified over many types of perils and many 
geographic locations.
    The second essential purpose of insurance is to promote loss 
prevention. Insurance is the fundamental tool for providing economic 
incentives for less risky behavior and economic disincentives for more 
risky behavior. The insurance system is not just about paying claims; 
it is about reducing the loss of life and property from preventable 
events. Historically, insurers were at the forefront of loss prevention 
and loss mitigation. At one point, fire was a major cause of loss. This 
is no longer true, in large part due to the actions of insurers in the 
20th century.\21\
    Left to a ``competitive'' or deregulated market, insurers are 
undermining these two core purposes of insurance. They have hollowed 
out the benefits offered in many insurance policies so they no longer 
represent the essential financial security tool required by consumers 
and have pushed the risk of loss onto taxpayers through Federal or 
state programs. The most glaring example of these two actions is 
demonstrated by insurer actions in the wake of Hurricane Katrina. 
Losses covered by insurance companies were a minority fraction of the 
losses sustained by consumers because insurers had succeeded in 
shifting exposure onto the Federal Government through the Flood 
Insurance Program,\22\ onto states through state catastrophe funds and 
onto consumers with higher deductibles and sharply reduced coverage 
inside of the homeowners insurance policy. Despite the worst 
catastrophe year ever in terms of dollars paid by the private insurance 
industry, the property-casualty industry realized record profits in 
2005. The trend toward shifting risk away from the primary insurance 
market has clearly gone too far when the property-casualty insurance 
industry experiences record profits in the same year as it experiences 
record catastrophe losses.
    The critical conclusion here is that what the insurance industry 
calls ``competition,'' which is essentially a completely or virtually 
deregulated market in which price collusion is not prevented by the 
application of antitrust law, will not protect consumers from unfair or 
unreasonable classification, policy form or coverage decisions by 
insurers. The overwhelming evidence is that a market failure regarding 
policy forms and coverage has triggered a need for greater regulatory 
oversight of these factors to protect consumers.
Where Have All the Risk Takers Gone? Unaffordable Home Insurance that 
        Covers Less and Less Risk
    In 2004, four major hurricanes hit Florida, but the property-
casualty insurance industry enjoyed record profits of $40.5 billion. In 
2005, Hurricane Katrina resulted in the highest hurricane losses ever, 
but the insurance industry also had another record year of profits, 
which reached $48.8 billion. Here is a chart from a Los Angeles Times 
article on this subject: \23\


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    Since the article was published, the property-casualty industry has 
reported the largest annual profit in its history. In 2006, the 
industry net income was $68.1 billion.\24\ To put this into 
perspective, the $157.4 billion in profit over the last 3 years equates 
to roughly $524 for every American, or $1,574 per household.\25\
    Some might argue that insurers are risk takers. Although, that may 
be true for the reinsurance industry,\26\ it is certainly not true for 
the primary market. The primary market has succeeded in eliminating 
much risk. This is not an opinion, but a simple fact.
    If one purchases a property-casualty insurance company's stock, 
with few exceptions, one has bought into a business that is lower in 
risk than the market in general, hurricanes notwithstanding. This is 
shown in any Value Line publication, which tests the risk of a stock. 
One key measure is the stock's Beta, which is the sensitivity of a 
stock's returns to the returns on some market index, such as the 
Standard & Poor's 500. A Beta between 0 and 1, such as utility stocks, 
is a low-volatility investment. A Beta equal to 1 matches the index. A 
Beta greater than 1 is anything more volatile than the index, such as a 
``small cap'' fund.
    Another measure of a shareholder's risk is the Financial Safety 
Index, with 1 being the safest investment and 5 being least safe. A 
third measure of risk is the Stock Price Stability reported in 5 
percentile intervals with 5 marking the least stability and 100 marking 
the highest.
    Consider Allstate. At the same time the company has taken draconian 
steps to sharply raise premiums and/or cutback coverage for many 
homeowners in coastal areas, it has presented shareholders with very 
low risk: \27\ Beta = 0.90; Financial Safety = 1, and Stock Price 
Stability = 95.
    ValueLine posts results for 26 property/casualty insurers.\28\ The 
simple averages for these carriers are: Beta = 0.97; Financial Safety = 
2.4; and Stock Price Stability = 83.
    By all three measures, property/casualty insurance stocks are of 
below-average risk, safer than buying an S&P 500 index fund. Therefore, 
long-term below-average returns for insurers should be expected given 
the low-risk nature of this investment. The low returns demonstrate 
that the capital market is performing efficiently by awarding below-
average returns to a below-average risk industry.
    Another measure of how property/casualty insurers have insulated 
themselves from risk is the extraordinary profits they have earned in 
recent years. In 2004, insurers posted their largest dollar net (after 
tax) profit in history ($40.5 billion) despite the fact that four major 
hurricanes caused significant damage in Florida. Insurers achieved 
another record of $48.8 billion in 2005, despite the unprecedented 
losses caused by hurricanes Katrina, Rita, and Wilma. In 2006, profits 
were the highest yet because of low hurricane activity, excessive 
rates, the use of programs to systematically keep payments to 
policyholders low and other reasons discussed in this testimony.
    How did insurers do it? Some of the answers are clear:
    First, insurers made intelligent use of reinsurance, securitization 
and other risk spreading techniques. That is the good news.
    Second, after Hurricane Andrew insurers modernized ratemaking by 
using computer models. This development was a mixed blessing for 
consumers. While this caused huge price increases for consumers, CFA 
and other consumer leaders supported the change because we saw insurers 
as genuinely shocked by the scope of losses caused by Hurricane Andrew. 
Insurers promised that the model, by projecting either 1,000 or 10,000 
years of experience, would bring stability to prices. The model 
contained projections of huge hurricanes (and earthquakes) as well as 
periods of intense activity and periods of little or no activity.
    In the last year, however, Risk Management Solutions (RMS) and 
other modelers are moving from a 10,000-year projection to a five-year 
projection, which will cause a 40 percent increase in loss projections 
in Florida and the Gulf Coast and a 25-30 percent jump in the Mid-
Atlantic and Northeast. This means that the hurricane component of 
insurance rates will sharply rise, resulting in overall double-digit 
rate increases along America's coastline from Maine to Texas. The RMS 
action interjects politics into a process that should be based solely 
on sound science. It is truly outrageous that insurers would renege on 
the promises made in the mid 1990s. CFA has called on regulators in 
coastal states to reject these rate hikes.
    It is clear that insurance companies sought this move to higher 
rates. RMS's press release of March 23, 2006 states:

        `Coming off back-to-back, extraordinarily active hurricane 
        seasons, the market is looking for leadership. At RMS, we are 
        taking a clear, unambiguous position that our clients should 
        manage their risks in a manner consistent with elevated levels 
        of hurricane activity and severity,' stated Hemant Shah, 
        President and CEO of RMS. `We live in a dynamic world, and 
        there is now a critical mass of data and science that point to 
        this being the prudent course of action.'

    The ``market'' (the insurers) sought leadership (higher rates), so 
RMS was in a competitive bind. If it did not raise rates, the market 
would likely go to modelers who did. So RMS acted and other modelers 
are following suit.\29\ It is simply unethical that scientists at these 
modeling firms, under pressure from insurers, appear to have completely 
changed their minds at the same time after over a decade of using 
models they assured the public were scientifically sound. RMS has 
become the vehicle for collusive pricing.
    A year after CFA warned the coastal states and the NAIC about the 
problems with RMS new methods, little protection for consumers has been 
put in place. Consumers and businesses in coastal areas have suffered 
significant harm in the form of unjustified rate increases because the 
NAIC took no action to end collusion and the retreat from science by 
the modelers. Florida, to its credit, did not allow the new model to be 
used by primary insurers and it appears as if Georgia has not allowed 
it either. In the meantime, residents in the other 16 states along the 
coast have been paying rates up to 50 percent higher solely because of 
the changes adopted by RMS and other modelers. At the same time, it has 
become more and more obvious that those who questioned the scientific 
legitimacy of the modeling changes were correct.
    Consider the series of investigative articles on this topic that 
ran in the Tampa Tribune earlier this year indicating that the 
scientists consulted by RMS on their model no longer support the 
methodology that was used. ``On Saturday, one of the scientists whom 
Risk Management Solutions consulted, Jim Elsner, a professor of 
geography at Florida State University, told the Tribune that the 
company's five-year model `points to a problem with the way these 
modeling groups are operating' and that the results contain assumptions 
that are `actually unscientific.' . . . Thomas R. Knutson, a research 
meteorologist with the National Oceanic and Atmospheric Administration 
in Princeton, N.J., and another Risk Management expert panelist, said 
Saturday the five-year timeline didn't come from the experts. `I think 
that question was driven more by the needs of the insurance industry as 
opposed to the science,' he said.'' \30\
    Scientists not employed by RMS are also speaking out: `` `It's 
ridiculous from a scientific point of view. It just doesn't wash well 
in the context of the way science is conducted,' said Mark S. Frankel, 
director of the Scientific Freedom, Responsibility and Law Program at 
the American Association for the Advancement of Science, in Washington 
. . . Charles Watson, an engineer who specializes in numerical hazard 
models, said RMS acted irresponsibly. `Especially for something with 
trillions of dollars in property value, and peoples' lives and 
livelihood are literally at stake in these decisions. It is 
irresponsible to implement before peer review. There are tremendous 
policy implications.' '' \31\
    Even RMS's competitors are stating that the methodology for the 5-
year model does not represent good science. In an article in 
Contingencies, the magazine of the American Academy of Actuaries,\32\ 
AIR's Senior Vice President, David A. LaLonde, said, ``We [AIR] 
continue to believe, given the current state of the science, that the 
standard base model based on over 100 years of historical data and over 
20 years of research and development remains the most credible model.'' 
AIR's entire premise in the article is that short-term projections, 
like 5 years, are not appropriate. Since AIR followed RMS's lead in 
using the 5-year model despite their misgivings, LaLonde acknowledged 
that policyholders have experienced rate increases of ``as much as 40 
percent higher than the long-term average in some regions.'' AIR also 
seems to confirm the possibility of collusion between modelers and 
insurers, stating that, ``. . . many in the industry challenged 
catastrophe models and called for a change.''
    To date, the NAIC has been absent on an issue that is vital to 
millions of Americans who live and work near the Nation's coastlines. 
As stated above, this regulatory negligence has harmed millions of 
consumers.
    In a third major development, insurers have not only passed along 
gigantic price increases to homeowners in coastal areas, but they have 
also sharply gutted coverage. Hurricane deductibles of two to 5 percent 
were introduced. Caps on home replacement costs were also added. State 
Farm has a 20 percent cap. Other insurers refuse to pay for any 
increased replacement costs at all, even though demand for home 
rebuilding usually surges in the wake of a hurricane, driving 
replacement costs up sharply. Insurers also excluded coverage for laws 
and ordinances, so that if a home has to be elevated to meet flood 
insurance standards or rewired to meet local building codes, insurers 
no longer have to pay.
    But the most egregious change was the introduction into homeowners 
insurance policies of the anti-concurrent causation (``ACC'') clause. 
This is the most draconian reduction of all that insurers have 
attempted to impose in recent years. It removes all coverage for wind 
damage if another, non-covered event (usually a flood) also occurs, 
regardless of the timing of the events. Under this anti-consumer 
measure, if a hurricane of 125 miles-per-hour rips a house apart but 
hours later a storm surge floods the property, the consumer would 
receive no reimbursement for wind losses incurred. This is 
intellectually ambiguous, even if the language creating such an 
unbelievable attempt to confuse consumers is found to be clear.
    At a hearing held by the House Financial Services Oversight 
Subcommittee on February 28, 2007, Mississippi Attorney General Jim 
Hood testified that a number of insurance companies operating on the 
Gulf Coast had tried to escape paying legitimate homeowners' claims 
after Hurricane Katrina through the use of ACC clauses. Although the 
ACC clauses were invalidated by a Mississippi judge, insurers intended 
to refuse to pay wind damage caused by the hurricane if flooding 
occurred at about the same time, even if the flood hit hours after a 
home was damaged by wind. The court ruling only affected insurers in 
Mississippi, so insurers may still be using ACC clauses in other states 
in the region.
    In some cases, particularly those involving the complete 
destruction of a home down to a slab, insurers did not even seriously 
study or ``adjust'' the claim, declaring the wind coverage to be 
trumped by the flood. Such cases often lead to the payment of full 
flood coverage, even if all or some of the losses paid by the NFIP were 
really caused by wind damage that should have been paid by insurers 
under a homeowner's policy.
    Consider a $200,000 home that is covered by just a homeowners 
policy, with no flood insurance protection. Assume that hurricane winds 
strike the home for several hours, causing $150,000 worth of damage. 
Two hours later a flood hits, causing an additional $25,000 in damage 
for a total damage of $175,000. If the insurer of the home has an ACC, 
the policyholder would get nothing. If the policyholder had, in 
addition to the homeowners policy, a flood policy for $200,000, the 
wind claim would be denied and taxpayers would likely pay $175,000 when 
they should only pay $25,000. Insurers who get paid handsomely to 
service the flood insurance program, the Write Your Own (``WYO'') 
companies, should be prohibited from having policy language that has 
the effect, as ACC does, of shifting insurer losses onto the taxpayers. 
Congress must make sure that the flood program is not being used by 
private insurers as a place to lay off their obligations.
    Finally, insurers have simply dumped a great deal of risk, non-
renewing tens of thousands of homeowner and business properties. 
Allstate, the leading culprit after Hurricane Andrew, is emerging as 
the heavy once more in the wake of Katrina. After Andrew, Allstate 
threatened to non-renew 300,000 South Floridians, provoking a state 
moratorium on such action. Today, Allstate is non-renewing even in Long 
Island and not writing in entire states, like Connecticut. Yes, you 
heard me right, all of Connecticut, even places many miles from the 
coast!
    These actions present a serious credibility problem for insurers. 
They told us, and we believed that Hurricane Andrew was their ``wake 
up'' call, with the size and intensity surprising them and causing them 
to make these massive adjustments in price, coverage and portfolio of 
risk. What is their excuse now for engaging in another round of massive 
and precipitous actions?
    Insurers surely knew that forecasters had predicted for decades 
that an increased period of hurricane activity and intensity would 
occur from the 1990s to about 2010. They also surely knew a storm of 
Hurricane Katrina's size, location and intensity was possible. The New 
Orleans Times-Picayune predicted exactly the sort of damage that 
occurred in a series of articles 4 years ago.\33\
    Take Allstate's pullout from part of New York and their refusal to 
write any new business in the entire state of Connecticut. It is very 
hard to look at this move as a legitimate step today when no pullout 
occurred after Hurricane Andrew. Why isn't the probability of a 
dangerous storm hitting Long Island or Connecticut already accounted 
for in the modeling--and rate structure--that were instituted after 
Hurricane Andrew? This type of precipitous action raises the question 
of whether Allstate is using the threat of hurricane damage as an 
excuse to drop customers they have had but do not want to retain for 
other reasons, such as clients in highly congested areas with poorer 
credit scores. Whether it was mismanagement that started a decade ago 
or the clever use of an opportunity today, consumers are being 
unjustifiably harmed. Insurance is supposed to bring stability, not 
turmoil, into peoples' lives.
2. The Revolution in Risk Classification has Created Many Questionable 
        Risk Characteristics, Generated New Forms of Redlining and 
        Undermined the Loss Prevention Role of the Insurance System
    As discussed above, one of the primary purposes of the insurance 
system is to promote loss prevention. The basic tool for loss 
prevention is price. By providing discounts for characteristics 
associated with less risky behavior and surcharges for characteristics 
associated with more risky behavior, the insurance system provides 
essential economic signals to consumers about how to lower their 
insurance costs and reduce the likelihood of events that claim lives or 
damage property.
    Over the past fifteen years, insurers have become more 
``sophisticated'' about rating and risk classification. Through the use 
of data mining and third party databases, like consumer credit reports, 
insurers have dramatically increased the number of rating 
characteristics and rate levels used.
    We are certainly not against insurers using sophisticated analytic 
tools and various databases to identify the causes of accidents and 
losses. We would applaud these actions if the results were employed to 
promote loss prevention by helping consumers better understand the 
behaviors associated with accidents and by providing price signals to 
encourage consumers to avoid the risky behaviors surfaced by this 
sophisticated research.
    Unfortunately, insurers have generally not used the new risk 
classification research to promote loss prevention. Rather, insurers 
have used new risk classifications to undermine the loss prevention 
role of insurance by placing much greater emphasis on risk factors 
unrelated to loss prevention and almost wholly related to the economic 
status of potential policyholders. The industry's new approach to risk 
classification is a form of redlining, where a host of factors are 
employed that are proxies for economic status and sometimes race.
    For example, although Federal oversight of the impact of credit 
scores in insurance underwriting and rating decisions has been quite 
poor,\34\ it is well-documented in studies by the Texas and Missouri 
Departments of Insurance that credit scoring is biased against low 
income and minority consumers.\35\ And recently, GEICO's use of data 
about occupation and educational status has garnered the attention of 
New Jersey legislators.\36\ But other factors have not received similar 
visibility. Several auto insurers use prior liability limits as a major 
rating factor. This means that for two consumers who are otherwise 
identical and who are both seeking the same coverage, the consumer who 
previously had a minimum limits policy will be charged more than the 
consumer who previously was able to afford a policy with higher limits. 
As with credit scoring and occupation/educational status information, 
this risk classification system clearly penalized lower income 
consumers.
    Once again, deregulated ``competition'' alone will not protect 
consumers from unfair risk classification and unfair discrimination. 
Once again, this market failure demands close regulatory scrutiny of 
the use of risk classification factors when underwriting, coverage and 
rating decisions are made.
    Let me present one more example of the illegitimate use of risk 
classification factors to illustrate our concern. Insurers have 
developed loss history databases--databases in which insurers report 
claims filed by their policyholders that are then made available to 
other insurers. Insurers initially used the claims history databases--
Comprehensive Loss Underwriting Exchange (CLUE) reports, for example--
to verify the loss history reported by consumers when applying for new 
policies. However, in recent years, insurers started data mining these 
loss history databases and decided that consumers who merely made an 
inquiry about their coverage--didn't file a claim, but simply inquired 
about their coverage--would be treated as if they had made a claim. 
Penalizing a consumer for making an inquiry on his or her policy is not 
just glaringly inequitable; it undermines loss prevention by 
discouraging consumers from interacting with insurers about potentially 
risky situations.
    Although insurers and the purveyors of the claims databases--
including ChoicePoint--have largely stopped this practice after much 
criticism, simple competitive market forces without adequate oversight 
harmed consumers over a long period and undermined the loss prevention 
role of the insurance system. Moreover, as with the use of many 
questionable risk classification factors, competitive forces without 
regulatory oversight can actually exacerbate problems for consumers as 
insurers compete in risk selection and price poor people out of 
markets.
3. Insurance Cartels--Back to the Future
    The insurance industry arose from cartel roots. For centuries, 
property-casualty insurers have used so-called ``rating bureaus'' to 
make rates for insurance companies to use jointly. Not many years ago, 
these bureaus required that insurers charge rates developed by the 
bureaus. (The last vestiges of this practice persisted into the 1990s).
    In recent years, the rate bureaus have stopped requiring the use of 
their rates or even calculating full rates because of lawsuits by state 
attorney generals. State attorney generals charged in court that the 
last liability insurance crisis was caused in great part by insurers 
sharply raising their prices to return to ISO rate levels in the mid-
1980s. As a result of a settlement with these states, ISO agreed to 
move away from requiring final prices. ISO is an insurance rate bureau 
or advisory organization. Historically, ISO was a means of controlling 
competition. It still serves to restrain competition since it makes 
``loss costs'' (the part of the rate that covers expected claims and 
the costs of adjusting claims) which represent about 60-70 percent of 
the rate.\37\ ISO also makes available expense data to which insurers 
can compare their costs in setting their final rates. ISO sets classes 
of risk that are adopted by many insurers. ISO diminishes competition 
significantly through all of these activities. There are other such 
organizations that also set pure premiums or do other activities that 
result in joint insurance company decisions. These include the National 
Council on Compensation Insurance (NCCI) and National Insurance 
Services Organization (NISS). Examples of ISO's many anticompetitive 
activities are attached.
    Today the rate bureaus still produce joint price guidance for the 
large preponderance of the rate. The rating bureaus start with historic 
data for these costs and then actuarially manipulate the data (through 
processes such as ``trending'' and ``loss development'') to determine 
an estimate of the projected cost of claims and adjustment expenses in 
the future period when the costs they are calculating will be used in 
setting the rates for many insurers. Rate bureaus, of course, must bias 
their projections to the high side to be sure that the resulting rates 
or loss costs are high enough to cover the needs of the least 
efficient, worst underwriting insurer member or subscriber to the 
service.
    Legal experts testifying before the House Judiciary Committee in 
1993 concluded that, absent McCarran-Ferguson's antitrust exemption, 
manipulation of historic loss data to project losses into the future 
would be illegal (whereas the simple collection and distribution of 
historic data itself would be legal since that would be a pro-
competitive activity). This is why there are no similar rate bureaus in 
other industries. For instance, there is no CSO (Contractor Services 
Office) predicting the cost of labor and materials for construction of 
buildings in the construction trades for the next year (to which 
contractors could add a factor to cover their overhead and profit). The 
CSO participants would go to jail for such audacity.
    Further, rate organizations like ISO file ``multipliers'' for 
insurers to convert the loss costs into final rates. The insurer merely 
has to tell ISO what overhead expense load and profit load they want 
and a multiplier will be filed. The loss cost times the multiplier is 
the rate the insurer will use. An insurer can, as ISO once did, use an 
average expense of higher cost insurers for the expense load if it so 
chooses plus the traditional ISO profit factor of 5 percent and 
replicate the old ``bureau'' rate quite readily.
    It is clear that the rate bureaus \38\ still have a significant 
anti-competitive influence on insurance prices in America.

   The rate bureaus guide pricing with their loss cost/
        multiplier methods.

   The rate bureaus manipulate historic data in ways that would 
        not be legal absent the McCarran-Ferguson antitrust exemption.

   The rate bureaus also signal to the market that it is OK to 
        raise rates. The periodic ``hard'' markets are a return to rate 
        bureau pricing levels after falling below such pricing during 
        the ``soft'' market phase.

   The rate bureaus signal other market activities, such as 
        when it is time for a market to be abandoned and consumers 
        left, possibly, with no insurance.

    More recently, insurers have begun to utilize new third party 
organizations (like RMS and Fair Isaac) to provide information (often 
from ``black boxes'' beyond state insurance department regulatory 
reach) for key insurance pricing and underwriting decisions, which 
helps insurers to avoid scrutiny for their actions. These organizations 
are not regulated by the state insurance departments and have a huge 
impact on rates and underwriting decisions with no state oversight. 
Indeed RMS's action, since it is not a regulated entity, may be a 
violation of current antitrust laws.
    The Senate Judiciary Committee is in the midst of a review of the 
antitrust exemption. The Chairman and Ranking Member have introduced S. 
618, a bill that would repeal the antitrust exemption and allow the FTC 
to get involved if the insurers engage in anticompetitive behavior not 
immunized by the state action doctrine. CFA supports passage of S. 
618.\39\
4. Reverse Competition in Some Lines of Insurance
    As indicated above, some lines of insurance, such as credit 
insurance (including mortgage life insurance), title insurance and 
forced placed insurance, suffer from ``reverse competition.'' Reverse 
competition occurs when competition acts to drive prices up, not down. 
This happens when the entity that selects the insurer is not the 
ultimate consumer but a third party that receives some sort of kickback 
(in the form of commissions, below-cost services, affiliate income, 
sham reinsurance, etc.).
    An example is credit insurance added to a car loan. The third-party 
selecting the insurer is the car dealer who is offered commissions for 
the deal. The dealer will often select the insurer with the biggest 
kickback, not with the lower rate. This causes the price of the 
insurance to rise and the consumer to pay higher rates.
    Other examples of reverse competition occur in the title and 
mortgage guaranty lines, where the product is required by a third party 
and not the consumer paying for the coverage. In these two cases, the 
insurer markets its product not to the consumer paying for the product, 
but to the third party who is in the position to steer the ultimate 
consumer to the insurer. This competition for the referrers of business 
drives up the cost of insurance--hence, reverse competition.
    We know from the investigations and settlements by New York 
Attorney General Eliot Spitzer that even sophisticated buyers can 
suffer from bid rigging and other negative consequences of ``reverse-
competition''. Even when unsophisticated consumers purchase insurance 
lines that don't typically have reverse competition, these buyers can 
suffer similar consequences if they do not shop carefully. Independent 
agents represent several insurance companies. At times, this can be 
helpful, but not always. If a buyer is not diligent, an agent could 
place the consumer into a higher priced insurer with a bigger 
commission rate for the agent. Unfortunately, this happens too often 
since regulators have not imposed suitability or lowest cost 
requirements on the agents.
5. Claims Problems
    Many consumers face a variety of claims problems. Often, their only 
recourse is to retain an attorney, an option that is not affordable for 
consumers in many situations. For example, many Gulf Coast residents 
are in litigation over handling of homeowners claims by insurers after 
Hurricane Katrina. We have seen many reports from consumers of 
situations that appear to involve bad claims handling practices, 
particularly related to policy forms that appear ambiguous.\40\
    Some insurers have also adopted practices that routinely ``low-
ball'' claims offers through the use of computerized claims processing 
and other techniques that have sought to cut claims costs arbitrarily.
    See the fuller discussion of claims problems earlier in this 
testimony.
6. The Revolving Door between Regulators and the Insurance Industry 
        Results in Undue Industry Influence at the National Association 
        of Insurance Commissioners
    Consider this list of recent NAIC Presidents and their current 
place of employment:

        2006: Al Iuppa--moved in mid-term as NAIC President to become 
        chief lobbyist for the insurer Zurich Financial Services Group

        2005: Diane Koken--recently resigned as Pennsylvania's 
        commissioner to, as an AP story put it: ``Koken . . . said she 
        has accepted a nomination to the board of a national insurance 
        company. She declined to identify the company but said she 
        expects to be elected in April and decided to step down 
        effective February 19 to avoid potential conflicts of 
        interest.'' \41\

        2004: Ernest Csiszar--moved in mid-term as NAIC President to 
        lobby on behalf of the property-casualty insurers as President 
        of the Property Casualty Insurers Association

        2003: Mike Pickens--currently lobbies on behalf of insurers as 
        a private attorney

        2002: Terrie Vaughn--currently lobbies on behalf of life 
        insurers as a Board Member of Principal Financial Group

        2001: Kathleen Sebelius--currently Governor of Kansas

        2000: George Nichols--currently works for New York Life

    The revolving door of regulators to industry and of industry to 
regulators is particularly troubling given the role of the NAIC in 
state insurance regulation.\42\ The NAIC plays a major role in guiding 
state insurance oversight, yet it is organized as a non-profit trade 
association of regulators and, consequently, lacks the public 
accountability of a government agency, like an insurance department. 
For example, it is not subject to Freedom of Information statutes. In 
addition, policy decisions are made at the NAIC by allowing each state 
one vote, not matter the population of the state. This means that the 
Commissioner of Insurance in South Dakota has equal influence as the 
California or New York regulator. The result is that regulators in 
states comprising a minority of the country's population can determine 
national policy for the entire country. This problem is exacerbated by 
the inappropriate industry influence resulting from the revolving door 
between regulators and industry.
Why Have Insurers Recently Embraced Federal Regulation (Again)?
    The recent ``conversion'' of some insurers to the concept of 
Federal regulation is based solely on the notion that such regulation 
would be weaker. Insurers have, on occasion, sought Federal regulation 
when the states increased regulatory control and the Federal regulatory 
attitude was more laissez-faire. Thus, in the 1800s, the industry 
argued in favor of a Federal role before the Supreme Court in Paul v. 
Virginia, but the court ruled that the states controlled because 
insurance was intrastate commerce.
    Later, in the 1943 SEUA case, the Court reversed itself, declaring 
that insurance was interstate commerce and that Federal antitrust and 
other laws applied to insurance. By this time, Franklin Roosevelt was 
in office and the Federal Government was a tougher regulator than were 
the states. The industry sought, and obtained, the McCarran-Ferguson 
Act. This law delegated excusive authority for insurance regulation to 
the states, with no routine Congressional review. The Act also granted 
insurers a virtually unheard of exemption from antitrust laws, which 
allowed insurance companies to collude in setting rates and to pursue 
other anticompetitive practices without fear of Federal prosecution.
    From 1943 until recently, the insurance industry has violently 
opposed any Federal role in insurance regulation. In 1980, insurers 
successfully lobbied to stop the Federal Trade Commission from 
investigating deceptive acts and practices of any kind in the insurance 
industry. They also convinced the White House that year to eliminate 
the Federal Insurance Administration's work on insurance matters other 
than flood insurance. Since that time, the industry has successfully 
scuttled any attempt to require insurers to comply with Federal 
antitrust laws and has even tried to avoid complying with Federal civil 
rights laws.
    Notice that the insurance industry is very pragmatic in their 
selection of a preferred regulator. They always favor the least 
regulation. It is not surprising that, today, the industry would again 
seek a Federal role at a time they perceive little regulatory interest 
at the Federal level. But, rather than going for full Federal control, 
they have learned that there are ebbs and flows in regulatory oversight 
at the Federal and state levels, so they seek the ability to switch 
back and forth at will.
    Further, the insurance industry has used the possibility of an 
increased Federal role to pressure NAIC and the states into gutting 
consumer protections over the last three or 4 years. Insurers have 
repeatedly warned states that the only way to preserve their control 
over insurance regulation is to weaken consumer protections.\43\ They 
have been assisted in this effort by a series of House hearings, which 
rather than focusing on the need for improved consumer protection have 
served as a platform for a few Representatives to issue ominous 
statements calling on the states to further deregulate insurance 
oversight, ``or else.''
    This strategy of ``whipsawing'' state regulators to lower standards 
benefits all elements of the insurance industry, even those that do not 
support any Federal regulatory approach. Even if Congress does nothing, 
the threat of Federal intervention is enough to scare state regulators 
into acceding to insurer demands to weaken consumer protections.
    Unfortunately for consumers, the strategy has already paid off, 
before the first insurance bill is ever marked up in Congress. In the 
last few years, the NAIC has moved suddenly to cut consumer protections 
adopted over a period of decades. The NAIC is terrified of 
Congressional action and sees the way to ``save'' state regulation is 
to gut consumer protections to placate insurance companies and 
encourage them to stay in the fold. This strategy of saving the village 
by burning it has made state regulation more, not less vulnerable to 
Federal takeover.
    The NAIC has also failed to act in the face of a number of serious 
problems facing consumers in the insurance market.
NAIC Failures to Act
    1. Failure to do anything about abuses in the small face life 
market. Instead, NAIC adopted an incomprehensible disclosure on 
premiums exceeding benefits, but did nothing on overcharges, multiple 
policies, or unfair sales practices.
    2. Failure to do anything meaningful about unsuitable sales in any 
line of insurance. Suitability requirements still do not exist for life 
insurance sales even in the wake of the remarkable market conduct 
scandals of the late 1980s and early 1990s. A senior annuities 
protection model was finally adopted (after years of debate) that is so 
limited as to do nothing to protect consumers.
    3. Failure to call for collection and public disclosure of market 
performance data after years of requests for regulators to enhance 
market data, as NAIC weakened consumer protections. How does one test 
whether a market is workably competitive without data on market shares 
by zip code and other tests?
    4. Failure to call for repeal of the antitrust exemption in the 
McCarran-Ferguson Act as they push forward deregulation model bills. 
Indeed, the NAIC still opposes repeal of the antitrust exemption even 
as they deregulate . . . effectively seeking to deregulate cartel-like 
organizations.
    5. Failure to do anything as an organization on the use of credit 
scoring for insurance purposes. In the absence of NAIC action, industry 
misinformation about credit scoring has dominated state legislative 
debates. NAIC's failure to analyze the issue and perform any studies on 
consumer impact, especially on lower income consumers and minorities, 
has been a remarkable dereliction of duty.
    6. Failure to end use of occupation and education in underwriting 
and pricing of auto insurance.\44\
    7. Failure to address problems with risk selection. There has not 
even been a discussion of insurers' explosive use of underwriting and 
rating factors targeted at socio-economic characteristics: credit 
scoring, check writing, prior bodily injury coverage limits purchased 
by the applicant, prior insurer, prior non-standard insurer, not-at-
fault claims, not to mention use of genetic information, where Congress 
has had to recently act to fill the regulatory void.
    8. Failure to heed calls from consumer leaders to do something 
about contingency commissions for decades until Attorney General 
Spitzer finally acted.
    9. Failure to even discover, much less deal with, the claims abuses 
relating to the use of systems designed to systematically underpay 
claims for millions of Americans.
    10. Failure to do anything on single premium credit insurance 
abuses.
    11. Failure to take recent steps on redlining or insurance 
availability or affordability. Many states no longer even look at these 
issues, 30 years after the Federal Government issued studies 
documenting the abusive practices of insurers in this regard. Yet, 
ongoing lawsuits continue to reveal that redlining practices harm the 
most vulnerable consumers.
    12. Failure to take meaningful action on conflict of interest 
restrictions even after Ernie Csiszar left his post as South Carolina 
regulator and President of the NAIC in September 2004 to become 
President of the Property Casualty Insurers Association of America 
after negotiating deregulation provisions in the SMART Act desired by 
PCIAA members.
NAIC Rollbacks of Consumer Protections
    1. The NAIC pushed through small business property-casualty 
deregulation, without doing anything to reflect consumer concerns 
(indeed, even refusing to tell consumer groups why they rejected their 
specific proposals) or to upgrade ``back-end'' market conduct quality, 
despite promises to do so. As a result, many states adopted the 
approach and have rolled back their regulatory protections for small 
businesses.
    2. States are rolling back consumer protections in auto insurance 
as well. New Jersey, Texas, Louisiana, and New Hampshire have done so 
in the last 2 years.
    3. NAIC has terminated free access for consumers to the annual 
statements of insurance companies at a time when the need for enhanced 
disclosure is needed if price regulation is to be reduced.
Can Competition Alone Guarantee a Fair, Competitive Insurance Market?
    Consumers, who over the last 30 years have been the victims of 
vanishing premiums, churning, race-based pricing, creaming, and 
consumer credit insurance policies that pay pennies in claims per 
dollar in premium, are not clamoring for such policies to be brought to 
market with even less regulatory oversight than in the past. The fact 
that ``speed-to-market'' has been identified as a vital issue in 
modernizing insurance regulation demonstrates that some policymakers 
have bought into insurers' claims that less regulation benefits 
consumers. We disagree. We think smarter, more efficient regulation 
benefits both consumers and insurers and leads to more beneficial 
competition. Mindless deregulation, on the other hand, will harm 
consumers.
    The need for better regulation that benefits both consumers and 
insurers is being exploited by some in the insurance industry to 
eliminate the most effective aspects of state insurance regulation such 
as rate regulation, in favor of a model based on the premise that 
competition alone will protect consumers.\45\ We question the entire 
foundation behind the assumption that virtually no front-end regulation 
of insurance rates and terms coupled with more back-end (market 
conduct) regulation is better for consumers. First of all, there are 
many reasons why competition in insurance is weak (see a list of these 
reasons attached as Attachment 2). The track record of market conduct 
regulation has been extremely poor. As noted above, insurance 
regulators rarely are the first to identify major problems in the 
marketplace.
    Given this track record, market conduct standards and examinations 
by regulators must be dramatically improved to enable regulators to 
become the first to identify and fix problems in the marketplace and to 
address market conduct problems on a national basis. From an efficiency 
and consumer protection perspective, it makes no sense to lessen 
efforts to prevent the introduction of unfair and inappropriate 
policies in the marketplace. It takes far less effort to prevent an 
inappropriate insurance policy or market practice from being introduced 
than to examine the practice, stop a company from doing it and provide 
proper restitution to consumers after the fact.
    The unique nature of insurance policies and insurance companies 
requires more extensive front-end regulation than other consumer 
commodities. And while insurance markets can be structured to promote 
beneficial price competition, deregulation does not lead to, let alone 
guarantee, such beneficial price competition.
    Front-end regulation should be designed to prevent market conduct 
problems from occurring instead of inviting those problems to occur. It 
should also promote beneficial competition, such as price competition 
and loss mitigation efforts, and deter destructive competition, such as 
selection competition, and unfair sales and claims settlement 
practices. Simply stated, strong, smart, efficient and consistent 
front-end regulation is critical for meaningful consumer protection and 
absolutely necessary to any meaningful modernization of insurance 
regulation.
Is Regulation Incompatible With Competition?
    The insurance industry promotes a myth: that regulation and 
competition are incompatible. This is demonstrably untrue. Regulation 
and competition both seek the same goal: the lowest possible price that 
is consistent with a reasonable return for the seller. There is no 
reason that these systems cannot coexist and even compliment each 
other.
    The proof that competition and regulation can work together to 
benefit consumers and the industry is the manner in which California 
regulates auto insurance under Proposition 103. Indeed, that was the 
theory of the drafters (including myself) of Proposition 103. Before 
Proposition 103, Californians had experienced significant price 
increases under a system of ``open competition'' of the sort the 
insurers now seek at the Federal level. (No regulation of price is 
permitted but rate collusion by rating bureaus is allowed, while 
consumers receive very little help in getting information.) Proposition 
103 sought to maximize competition by eliminating the state antitrust 
exemption, laws that forbade agents to compete, laws that prohibited 
buying groups from forming, and so on. It also imposed the best system 
of prior approval of insurance rates and forms in the nation, with very 
clear rules on how rates would be judged.
    As our in-depth study of regulation by the states revealed,\46\ 
California's regulatory transformation--to rely on both maximum 
regulation and competition--has produced remarkable results for auto 
insurance consumers and for the insurance companies doing business 
there. The study reported that insurers realized very nice profits, 
above the national average, while consumers saw the average price for 
auto insurance drop from $747.97 in 1989, the year Proposition 103 was 
implemented, to $717.98 in 1998. Meanwhile, the average premium rose 
nationally from $551.95 in 1989 to $704.32 in 1998. California's rank 
dropped from the third costliest state to the 20th.
    As of 2003, the average annual premium in California was $832.69 
(ranked 19th) vs. $837.88 for the Nation.\47\ Since California 
transitioned from relying simply on competition--as promoted by 
insurers--to full competition and regulation, the average auto rate 
went up by 11.3 percent while the national average rose by 51.8 
percent--a powerhouse result for California's consumers! \48\ In 1989, 
California consumers were paying 36 percent more that the national 
average, while today they pay virtually the national average price.
How Can Uniformity be Achieved Without Loss of Consumer Protections?
    CFA would endorse a more uniform national or multi-state approach 
if certain rigorous conditions were met. The attached fact sheet, 
Consumer Principles and Standards for Insurance Regulation,\49\ 
provides detailed standards that regulators should meet to properly 
protect consumers, whether at the state, multi-state or national level. 
It should be noted that none of the proposals offered by insurers or on 
behalf of insurers to Congress come close to meeting these standards.
    One obvious vehicle for multi-state enforcement of insurance 
standards is the NAIC. The NAIC Commission of the Interstate Insurance 
Product Regulation Compact began operation with a small staff on June 
13 of this year. We have favored empowering the NAIC to implement such 
a multi-state approach only if the NAIC's decision-making procedures 
are overhauled to make it a more transparent, accountable body with 
meaningful regulatory powers. These steps would include public access 
to insurer filings during the review process and formal, funded 
consumer participation. To date, regulators have refused to take these 
steps. Moreover, the Commission will be unlikely to carry out its role 
as a truly independent regulator due to inadequate funding. The 
Commission will be receiving and reviewing life, annuity and long term 
care filings for at least 27 states, but its current budget only allows 
for a total staff of three people. As stated above, recent NAIC 
failures demonstrate that it is not an impartial regulatory body that 
can be counted on to adequately consider consumer needs.
    Because of its historical domination by the insurance industry, 
consumer organizations are extremely skeptical about its ability to 
confer national treatment in a fair and democratic way. It is essential 
that any Federal legislation to empower the NAIC include standards to 
prevent undue industry influence and ensure the NAIC can operate as an 
effective regulatory entity, including:

   Democratic processes/accountability to the public, which 
        must include: notice and comment rulemaking; on the record 
        voting; accurate minutes; rules against ex parte communication; 
        public meeting/disclosure/sunshine rules/FOIA applicability.

   A decision-making process subject to an excellent 
        Administrative Procedures Act.

   Strong conflict of interest and revolving door statutes 
        similar to those of the Federal Government to prevent undue 
        insurance industry influence. If decision-making members of the 
        NAIC have connections, past or present, to certain companies, 
        the process will not be perceived as fair.

   Independent funding. The NAIC cannot serve as a regulatory 
        entity if it relies on the industry for its funding. The bill 
        should establish a system of state funding to the NAIC at a set 
        percentage of premium so that all states and insured entities 
        equally fund the NAIC.

   National Independent Advocate. To offset industry 
        domination, an independent, national, public insurance counsel/
        ombudsman with necessary funding is needed. Consumers must be 
        adequately represented in the process for the process to be 
        accountable and credible.
Regulation by Domiciliary States Will Lead to Unacceptably Weak 
        Standards
    When I was Texas Insurance Commissioner, I had to go into another 
state to seek a court order to declare an insurer, domiciled in the 
other state, insolvent. The commissioner of that state refused to do so 
because of local politics (several ex-Governors were on the Board of 
the failed insurer).
    CFA opposes allowing a domiciliary state to essentially act as a 
national regulator by allowing domiciled companies to comply only with 
that state's standards. This approach has several potential problems, 
including the following:

   It promotes forum shopping. Companies would move from state 
        to state to secure regulation from the state that has the least 
        capacity to regulate, provoking a ``race to the bottom.''

   The state of domicile is often under the greatest political 
        and economic pressure not to act to end harmful business 
        practices by a powerful in-state company.

   The resources of states to properly regulate insurance vary 
        widely.

   It is antithetical to states' rights to apply laws from 
        other states to any business operating within their borders. If 
        such a move is made, however, it is imperative that consumers 
        have a national, independent advocate.

   It promotes a lack of consistency in regulation because 
        companies could change domiciliary state status.

   Residents of one state cannot be adequately represented by 
        the legislature/executive of another. If a resident's state 
        consumer protections did not apply, the resident would be 
        subject to laws of a state in which they have no 
        representation. How can a consumer living in Colorado influence 
        decisions made in Connecticut?

   Rather than focusing on protecting consumers, this system 
        would change the focus to protecting itself and its regulatory 
        turf, as has happened in the bank regulatory system. State and 
        Federal banking regulators have competed to lower their 
        consumer protections to lure banks to their system.

   We would be particularly concerned with proposals to give 
        exclusive control of market conduct exams to a domiciliary 
        state. Unscheduled exams by a state are very important for that 
        state's ability to protect its consumers from abuse. States 
        must retain the ability to act quickly based on complaints or 
        other information.
``One-Stop'' Policy Approval Must Meet High Standards
    Allowing insurers to get approval for their products from a single, 
unaccountable, non-state regulatory entity would also lead to extremely 
weak protections unless several conditions are met:

   An entity, such as the NAIC's Coordinated Advertising, Rate 
        and Form Review Authority (CARFRA), that is not subject to 
        authorizing legislation, due process standards, public 
        accountability, prohibitions on ex parte communications, and 
        similar standards should not have the authority to determine 
        which lines would be subject to a one-stop approval process or 
        develop national standards. It also must have funding through 
        the states, not directly from insurers. Independent funding 
        ensures that the regulatory entity is not subject to unfair and 
        detrimental industry influence.

   Any standards that apply must be high and improve the 
        ability of consumers to understand policies and compare on the 
        basis of price. Consumers do not want ``speed-to-market'' for 
        bad policies.

   Any entity that serves as national standard setter, reviewer 
        and/or approver needs Federal authorizing legislation. An 
        ``interstate compact'' or ``memorandum of understanding'' is 
        unworkable and unaccountable.

   Giving the regulated insurer the option to choose which 
        entity regulates it is an invitation to a race to the bottom 
        for regulatory standards.

   Standardization of forms by line has the potential to assist 
        consumers if done in such a way to enhance understanding of 
        terms, benefits, limitations and actual costs of policies.

   Public/consumer input is essential if the entity makes 
        decisions that ultimately affect information provided to and 
        rates charged consumers.

   We support the concept of an electronic central filing 
        repository, but the public must have access to it.

   To retain oversight of policies and rates affecting their 
        residents, states must have the ability to reject decisions of 
        the entity.

   Any national system must include a national, externally 
        funded consumer-public advocate/counsel to represent consumers 
        in standard setting, development of forms, rate approval, etc.
Current Federal Proposals
    Given the extremely sorry state of state regulation, it is hard to 
believe that a Federal bill could be crafted that would make matters 
worse. Yet, insurers have managed to do it--not once, but twice! Their 
bills not only don't provide the basic standards of consumer protection 
cited above, they would undermine the extremely low standards of 
consumer protection now extant in many states.
    Greater resistance in Congress and extremely low public opinion of 
insurers in the wake of their poor performance after Hurricane Katrina, 
which occurred as the insurers rolled to 3 years of record profits in a 
row, has led insurers to step back from regulatory ``reform'' right 
now. As one insurance lobbyist told me, ``We are not pushing in this 
atmosphere--we do not want to risk having a bill that actually might 
enhance regulation, our goal all along has been deregulation, not 
uniformity.'' Nonetheless, it is important to reflect on how harmful to 
consumers these proposals would be.
Insurer Dream Bill #1: Optional Federal Insurance Charter
    The bills that have been drafted by trade associations like the 
American Bankers Association and the American Council of Life Insurers 
would create a Federal regulator that would have little, if any, 
authority to regulate price or product, regardless of how non-
competitive the market for a particular line of insurance might be. 
(One of these bills was introduced last year by Senators Johnson and 
Sununu as S. 2509.) The bills also offer little improvement in consumer 
protection or information systems to address the major problems cited 
above. Insurers would be able to choose whether to be regulated by this 
weak Federal regulator or by state regulators.
    Consumer organizations strongly oppose an optional Federal charter 
that allows the regulated company, at its sole discretion, to pick its 
regulator. This is a prescription for regulatory arbitrage that can 
only undermine needed consumer protections. Indeed the drafters of such 
proposals have openly stated that this is their goal. If elements of 
the insurance industry truly want to obtain uniformity of regulation, 
``speed to market'' and other advantages through a Federal regulator, 
let them propose a Federal approach that does not allow insurers to run 
back to the states when regulation gets tougher. We could all debate 
the merits of that approach. CFA and the entire consumer community 
stand ready to fight optional charters with all the strength we can 
muster.
Insurer Dream Bill #2: SMART Act
    The State Modernization and Regulatory Transformation (SMART) Act 
was proposed by former House Financial Services Chairman Michael Oxley 
and Representative Richard Baker as a discussion draft in 2005. Rather 
than increase insurance consumer protections for individuals and small 
businesses while spurring states to increase the uniformity of 
insurance regulation, this sweeping proposal would override important 
state consumer protection laws, sanction anticompetitive practices by 
insurance companies and incite state regulators into a competition to 
further weaken insurance oversight. It is quite simply one of the most 
grievously flawed and one-sided pieces of legislation that we have ever 
seen, with absolutely no protections for consumers. The consumers who 
will be harmed by it are our Nation's most vulnerable: the oldest, the 
poorest and the sickest.
    For example, the discussion draft would have preempted state 
regulation of insurance rates. Imagine the impact on the Gulf Coast of 
that brilliant idea! This would leave millions of consumers vulnerable 
to price gouging, as well as abusive and discriminatory insurance 
classification practices. It would also encourage a return to insurance 
redlining, as deregulation of prices would include the lifting of state 
controls on territorial line drawing. States would also be helpless to 
stop the misuse of risk classification information, such as credit 
scores, territorial data and the details of consumers' prior insurance 
history, for pricing purposes. The draft approach goes so far as to 
deregulate cartel-like organizations such as the Insurance Services 
Office and the National Council on Compensation Insurance, while 
leaving the Federal antitrust exemption fully intact.
    What the draft does not do is as revealing as what it does require. 
It does not create a Federal office to represent consumer interests, 
although the draft creates two positions to represent insurer 
interests. It takes no steps to spur increased competition in the 
insurance industry, such as providing assistance or information to the 
millions of consumers who find it extremely difficult to comparison 
shop for this complex and expensive product, or eliminating the 
antitrust exemption that insurers currently enjoy under the McCarran-
Ferguson Act. Insurers are not required to meet community reinvestment 
requirements, as banks are, to guarantee that insurance is available in 
underserved communities. Nothing is done to prevent insurers from using 
inappropriate information, such as credit scores or a person's income, 
to develop insurance rates.
    CFA supports the goals outlined in several sections of this draft. 
As stated above, we are not opposed to increasing uniformity in 
insurance regulation. Unfortunately, however, in almost every 
circumstance in which the draft attempts to ensure uniformity, it 
chooses the weakest consumer protection approach possible. Like the 
OFC, this approach has no chance in the current Congress, given the 
outrage over insurer practices and profits.
Insurer Dream Bill #3: Non-admitted Insurance/Reinsurance Regulation
    This sharply scaled-back version of the SMART Act would only apply 
to surplus (non-admitted insurance) lines of insurance and reinsurance. 
It has been introduced this year by Senators Martinez and Nelson as S. 
929. It would provide for a method of collecting state premium taxes 
for surplus lines and allocating this income to the states. It would 
give deference to the regulations of the home state of the entity 
purchasing the insurance policy and in regulating surplus lines 
brokers. Further, the bill would adopt the NAIC's non-admitted 
insurance model act for eligibility requirements for surplus lines 
carriers on a national basis, preempting other state laws. It allows 
large buyers of insurance to get surplus lines coverage without having 
to show, as most states require today, that a search of the licensed 
market was made and no coverage was found.
    It would give deference to the home state of the ceding insurer for 
regulation, prohibiting any state from enforcing extra-territorial 
authority of its laws. Solvency regulation would be done by the state 
of domicile of the reinsurer.
    CFA opposes this bill because it is based upon many faulty 
assumptions. First, it assumes that large buyers of insurance are 
sophisticated enough that they don't need protections that would 
normally be provided in an insurance transaction. Of course, the 
investigations and settlements implemented by New York Attorney General 
Eliot Spitzer mentioned above refute this assumption.
    Secondly, the bill assumes that the domiciled state of an insurer 
is best for solvency regulation. This is not true. As indicated 
earlier, when I was Insurance Commissioner of Texas, we had to 
investigate an insolvent insurer in another state because the 
commissioner of that state refused to do so. We list above several 
other objections to giving deference to the state of domicile, which 
are also relevant.
    Third, the bill raises concerns about great regulatory confusion 
and ineptitude that would likely result when the state of the insured 
entity regulates all parts of that entity's insurance transaction. What 
does Iowa, for instance, know about the hurricane risk/claims of the 
operations of an Iowa business on the Gulf Coast or how no-fault or 
other unique state laws should apply to a given claim situation?
    Fourth, the bill would allow consumers to be harmed in the event 
that a surplus lines insurer becomes insolvent. This is because the 
guaranty associations in all states do not cover claims for surplus 
lines insurers. This may be no problem for the defunct policyholder and 
the defunct insurer, but it sure is a problem for the people that the 
policyholder may have injured.
A Pro-Consumer Bill: The Insurance Consumer Protection Act of 2003
    Only one recent bill considers the consumer perspective in its 
design, adopting many of the consumer protection standards cited in 
this testimony. That was S. 1373 introduced by Senator Hollings. The 
bill would adopt a unitary Federal regulatory system under which all 
interstate insurers would be regulated. Intrastate insurers would 
continue to be regulated by the states.
    The bill's regulatory structure requires Federal prior approval of 
prices to protect consumers, including some of the approval procedures 
(such as hearing requirements when prices change significantly) being 
used so effectively in California. It requires annual market conduct 
exams. It creates an office of consumer protection. It enhances 
competition by removing the antitrust protection insurers hide behind 
in ratemaking. It improves consumer information and creates a system of 
consumer feedback.
    If Federal regulation is to be considered, S. 1373 should be the 
baseline for any debate on the subject.
A Pro-Consumer Bill Whose Time has Come: Amending the McCarran-Ferguson 
        Act to Remove the Antitrust Exemption
    Insurers say they want competition alone to determine rates. The 
best way for Congress to help spur competition in the insurance 
industry would be to repeal the McCarran-Ferguson Act, as proposed by 
S. 618. This would test the industry's desire to compete under the same 
rules as virtually all other American businesses.
    Wisely, S. 618 also unleashes the Federal Trade Commission to 
perform oversight of anticompetitive insurer behavior, a key step 
necessary for effective and efficient consumer protection. We strongly 
support passage of this legislation.
Another Pro-Consumer Bill: Improving Disclosure to Consumers
    One cause of the problems we have witnessed in the settlement of 
Hurricane Katrina claims is that consumers cannot understand complex 
insurance policy language. Senator Lott's Bill, S. 1061, the 
``Homeowners' Insurance Noncoverage Disclosure Act,'' is an essential 
step to help people know what will not be covered if some calamity 
occurs to a home. The use of the FTC, an agency too long restrained 
from helping Americans with insurance problems, is also welcome. CFA 
supports passage of S. 1061.
Conclusion
    CFA looks forward to working with the Committee to strengthen 
consumer protections for insurance, Mr. Chairman. I will be happy to 
respond to questions at the appropriate time.
Endnotes
    \1\ See ``Why Not the Best,'' an analysis of why California has the 
best regulatory scheme in the Nation at www.consumerfed.org.
    \2\ The consumer groups that support S. 618 include CFA, the Center 
for Economic Justice, the Center for Insurance Research, the Center for 
Justice and Democracy, Consumers Union, the Foundation for Taxpayer and 
Consumer Rights, New Jersey Citizen Action, Public Citizen, and United 
Policyholders.
    \3\ ``Aged, Frail and Denied Care by Their Insurers,'' March 26, 
2007.
    \4\ ``Your Own Worst Enemy, Continued,'' Blog of Sam Friedman, 
Editor, National Underwriter Magazine, www.property-casualty.com, 
February 21, 2007. Posted on January 31, 2007 23:06. The blog has other 
interesting posts on this subject.
    \5\ Other programs are also available that promise similar savings 
to insurers, such as ISO's ``Claims Outcome Advisor.'' These are bodily 
injury systems but other systems, such as Exactimate, ``help'' insurers 
control claims costs on property claims.
    \6\ ``From Good Hands to Boxing Gloves--How Allstate Changed 
Casualty Insurance in America,'' Trial Guides, 2006, Berardinelli, 
Freeman and DeShaw, pages 131, 133, 135.
    \7\ Bad Faith Class Actions, Whitten, Reggie, PowerPoint 
Presentation, November 9, 2006.
    \8\ Ibid.
    \9\ ``. . . Mc Kinsey & Co. has taught Allstate and other insurance 
companies how to deliver less and less.'' Berardinelli, Freeman and 
DeShaw, page 17.
    \10\ Ibid. Page 57.
    \11\ Ibid. Page 132.
    \12\ Ibid.
    \13\ CFA tested this drop in benefits related to premiums to see if 
it could be attributed to a drop in investment income. Over the 
timeframe studied, there was a 3 percent drop in investment income. 
Since insurers typically reflect about half of investment income in 
prices, CFA believes that the drop in investment income accounts for 
only 1.5 points of the 15-point drop. That is, investment income 
explains only about one-tenth of the drop in benefit payouts to 
consumers per dollar expended in insurance premium.
    \14\ Insurers contend that the loss adjustment expense is a benefit 
to consumers. Obviously, this is a ``benefit'' that does not go to the 
consumer or repair cars, doctor bills, etc. But even the loss and LAE 
ratio itself is at a record low for many decades, at under 70 percent.
    \15\ The industry's reliance on selection competition can have 
negative impacts on consumers. Insurance is a risk spreading mechanism. 
Insurance aggregates consumers' premiums into a common fund from which 
claims are paid. Insurance is a contractual social arrangement, subject 
to regulation by the states.
    The common fund in which wealth is shifted from those without 
losses (claims) to those with losses (claims) is the reason that the 
contribution of insurance companies to the Gross National Product of 
the United States is measured as premiums less losses for the property-
casualty lines of insurance. The U.S. Government recognizes that the 
losses are paid from a common fund and thus are a shift in dollars from 
consumers without claims to those with claims, not a ``product'' of the 
insurance companies.
    Competition among insurers should be focused where it has positive 
effects, e.g., creating efficiencies, lowering overhead. But rather 
than competing on the basis of the expense and profit components of 
rates, the industry has relied more on selection competition, which 
merely pushes claims from insurer to insurer or back on the person or 
the state. States have failed to control against the worst ravages of 
selection competition (e.g. Redlining).
    Some of the vices of selection competition that need to be 
addressed include zip code or other territorial selection; the 
potential for genetic profile selection; income (or more precisely 
credit report) selection; and selection based on employment. Targeted 
marketing based solely on information such as income, habits, and 
preferences, leaves out consumers in need of insurance, perhaps 
unfairly.
    \16\ ``Insurers Set to Squeeze Even Tighter,'' Miami Herald, May 
13, 2006.
    \17\ Such as credit insurance, title insurance and force-placed 
insurance.
    \18\ My April 26, 2006 testimony before the House Committee on 
Financial Services on title insurance, detailing the reverse 
competition impact on that vastly overpriced product, can be found at: 
http://www.consumerfed.org/pdfs/Title_Insurance_
Testimony042606.pdf.
    \19\ See the discussion of the anti-concurrent causation clause 
below.
    \20\ I was Texas Insurance Commissioner and Federal Insurance 
Administrator when the Federal Insurance Administration was in HUD and 
had responsibility for the co-regulation of homeowners insurance in the 
FAIR Plans, as well as flood and crime insurance duties.
    \21\ Through such innovations as the creation of Underwriter's 
Laboratory.
    \22\ The National flood Insurance Program has been in place since 
1968 because insurers could not price or underwrite the risk. The 
program has now developed the information for such pricing and 
underwriting and consideration should be given to returning some of 
this risk to private insurance control. The Federal program has had 
excessive subsidies and has been ineffective in mitigating risk as well 
as the private insurers could do it.
    \23\ Gosselin, Peter, ``Insurers Saw Record Gains in Year of 
Catastrophic Losses,'' Los Angeles Times, April 5, 2006.
    \24\ ``Review/Preview,'' A.M. Best and Co. January 2007.
    \25\ U.S. Census Bureau, Projections of the Number of Households 
and Families in the United States: 1995 to 2010.
    \26\ CFA is still researching that question.
    \27\ ValueLine, December 22, 2006 edition.
    \28\ The stocks are ACE Ltd., Alleghany Corp., Allstate Corp., 
American Financial Group, W.R. Berkley Corp., Berkshire Hathaway, Inc., 
CAN Financial, Chubb Corp., Cincinnati Financial, Everest Re Group, HCC 
Insurance, Hanover Insurance Group, Markel Corp., Mercury General, Ohio 
Casualty Corp., Old Republic International Corp., PMI Group, Inc., 
Partner Re, Ltd., Progressive Corp., PLI Corp., Safeco Corp., St. Paul/
Travelers Group, Selective Insurance, Transatlantic Holdings, 21st 
Century Insurance Group and XL Group, Ltd.
    \29\ According to the National Underwriter's Online Service on 
March 23, 2006, ``Two other modeling vendors--Boston-based AIR 
Worldwide and Oakland, Calif.-based Eqecat--are also in the process of 
reworking their hurricane models.''
    \30\ New Speaker Challenges Insurance Risk Projections, Tampa 
Tribune, 1/10/07.
    \31\ Ethicist Questions Insurance Rate Data; Tampa Tribune, 1/12/
07.
    \32\ What Happened in 2006? Contingencies, March/April 2007.
    \33\ McQuaid, John; Schleifstein, Mark, ``Washing Away,'' New 
Orleans Times-Picayune. June 23-27, 2002.
    \34\ Federal agencies with potential oversight authority paid 
virtually no attention to the possible disparate impact of the use of 
credit scoring in insurance until Congress mandated a study on this 
matter as part of the Fair Access to Credit Transactions (FACT) Act 
(Section 215). Unfortunately, the agency charged with completing this 
study, the Federal Trade Commission, has chosen to use data for this 
analysis from an industry-sponsored study that cannot be independently 
verified for bias or accuracy. It is very likely, therefore, that the 
study will offer an unreliable description of insurance credit scoring 
and its alternatives.
    \35\ ``Report to the 79th Legislature: Use of Credit Information by 
Insurers in Texas,'' Texas Department of Insurance, December 30, 2004; 
``Insurance-Based Credit Scores: Impact on Minority and Low Income 
Populations in Missouri,'' Missouri Department of Insurance, January 
2004.
    \36\ Letter from Consumer Federation of America and NJ CURE to NAIC 
President Alessandro Iuppa regarding GEICO rating methods and 
underwriting guidelines, March 14, 2006.
    \37\ A list of activities of ISO is attached as Attachment 3.
    \38\ By ``rate bureaus'' here I include the traditional bureaus 
(such as ISO) but also the new bureaus that have a significant impact 
on insurance pricing such as the catastrophe modelers (including RMS) 
and other non-regulated organizations that impact insurance pricing and 
other decisions across many insurers (credit scoring organizations like 
Fair Isaac are one example).
    \39\ My testimony on this bill at the Senate Judiciary Committee 
hearing of March 7, 2007 can be found at http://judiciary.senate.gov/
pdf/03-07-07McCarran-FergusonHearing-HunterTestimony.pdf.
    \40\ Reviews of calls to the Americans for Insurance Reform hotline 
are available at www.insurance-reform.org.
    \41\ ``Diane Koken Resigns After Ten Years as PA Insurance Chief,'' 
The Associated Press, Feb. 13, 2007. See http://www.yorkdispatch.com/
pennsylvania/ci_5225171
?source=sb-google.
    \42\ Studies over the years show that 50 percent of all 
commissioners come from and return to the insurance industry. Studies 
also show that about 20 percent of state legislators serving on 
insurance committees in state legislatures are actively employed 
directly or indirectly by the insurance industry.
    \43\ The clearest attempt to inappropriately pressure the NAIC 
occurred at their spring 2001 meeting in Nashville. There, speaking on 
behalf of the entire industry, Paul Mattera of Liberty Mutual Insurance 
Company told the NAIC that they were losing insurance companies every 
day to political support for the Federal option and that their huge 
effort in 2000 to deregulate and speed product approval was too little, 
too late. He called for an immediate step-up of deregulation and 
measurable ``victories'' of deregulation to stem the tide. In a July 9, 
2001, Wall Street Journal article by Chris Oster, Mattera admitted his 
intent was to get a ``headline or two to get people refocused.'' His 
remarks were so offensive that I went up to several top commissioners 
immediately afterward and said that Materra's speech was the most 
embarrassing thing he had witnessed in 40 years of attending NAIC 
meetings. He was particularly embarrassed since no commissioner 
challenged Mattera and many commissioners had almost begged the 
industry to grant them more time to deliver whatever the industry 
wanted.
    Jane Bryant Quinn, in her speech to the NAIC on October 3, 2000, 
said: ``Now the industry is pressing state regulators to be even more 
hands-off with the threat that otherwise they'll go to the feds.'' So 
other observers of the NAIC see this pressure as potentially damaging 
to consumers.
    Larry Forrester, President of the National Association of Mutual 
Insurance Companies (NAMIC), wrote an article in the National 
Underwriter of June 4, 2000. In it he said, ``. . . how long will 
Congress and our own industry watch and wait while our competitors 
continue to operate in a more uniform and less burdensome regulatory 
environment? Momentum for Federal regulation appears to be building in 
Washington and state officials should be as aware of it as any of the 
rest of us who have lobbyists in the Nation's capital . . . NAIC's 
ideas for speed to market, complete with deadlines for action, are 
especially important. Congress and the industry will be watching 
closely . . . The long knives for state regulation are already out . . 
.''
    In a press release entitled ``Alliance Advocates Simplification of 
Personal Lines Regulation at NCOIL Meeting; Sees it as Key to Fighting 
Federal Control'' dated March 2, 2001, John Lobert, Senior VP of the 
Alliance of American Insurers, said, ``Absent prompt and rapid progress 
(in deregulation) . . . others in the financial services industry--
including insurers--will aggressively pursue Federal regulation of our 
business . . .''
    In the NAIC meeting of June 2006, Neil Alldredge of the National 
Association of Mutual Insurance Companies pointed out that ``states are 
making progress with rate deregulation reforms. In the past 4 years, 16 
states have enacted various price deregulation reforms . . . (but) 
change is not happening quickly enough. . . . He concluded that the 
U.S. Congress is interested in insurance regulatory modernization and 
the insurance industry will continue to educate Congress about the slow 
pace of change in the states.'' Minutes of the NAIC/Industry Liaison 
Committee, June 10, 2006.
    \44\ Florida has held hearings on the practice.
    \45\ If America moves to a ``competitive'' model, certain steps 
must first be taken to ensure ``true competition'' and prevent consumer 
harm. First, insurance lines must be assessed to determine whether a 
competitive model, e.g., the alleviation of rate regulation, is even 
appropriate. This assessment must have as its focus how the market 
works for consumers. For example, states cannot do away with rate 
regulation of consumer credit insurance and other types of insurance 
subject to reverse competition. The need for relative cost information 
and the complexity of the line/policy are factors that must be 
considered.
    If certain lines are identified as appropriate for a 
``competitive'' system, before such a system can be implemented, the 
following must be in place:

   Policies must be transparent: Disclosure, policy form and 
        other laws must create transparent policies. Consumers must be 
        able to comprehend the policy's value, coverage, actual costs, 
        including commissions and fees. If consumers cannot adequately 
        compare actual costs and value, and if consumers are not given 
        the best rate for which they qualify, there can be no true 
        competition.

   Policies should be standardized to promote comparison-
        shopping.

   Antitrust laws must apply.

   Anti-rebate, anti-group and other anti-competitive state 
        laws must be repealed.

   Strong market conduct and enforcement rules must be in place 
        with adequate penalties to serve as an incentive to compete 
        fairly and honestly.

   Consumers must be able to hold companies legally accountable 
        through strong private remedies for losses suffered as a result 
        of company wrongdoing.

   Consumers must have knowledge of and control over flow and 
        access of data about their insurance history through strong 
        privacy rules.

   There must be an independent consumer advocate to review and 
        assess the market, assure the public that the market is 
        workably competitive, and determine if policies are 
        transparent.

    Safeguards to protect against competition based solely on risk 
selection must also be in place to prevent redlining and other 
problems, particularly with policies that are subject to either a 
public or private mandate. If a competitive system is implemented, the 
market must be tested on a regular basis to make sure that the system 
is working and to identify any market dislocations. Standby rate 
regulation should be available in the event the ``competitive model'' 
becomes dysfunctional.
    If the industry will not agree to disclose actual costs, including 
all fees and commissions, ensuring transparency of policies, strong 
market conduct rules and enforcement then it is not advocating true 
competition, only deregulation.
    \46\ ``Why Not the Best? The Most Effective Auto Insurance 
Regulation in the Nation,'' June 6, 2000; www.consumerfed.org.
    \47\ State Average Expenditures and Premiums for Personal 
Automobile Insurance in 2001, NAIC, July 2005.
    \48\ Insurers have posted excellent profits as well. Over the 
decade ending in 2004, California insurers enjoyed a return on equity 
for private passenger auto insurance of 11.1 percent vs. 8.5 percent 
for the Nation (Report on Profitability by Line by State 2004, NAIC).
    \49\ Attachment 1.
                              Attachment 1
       Consumer Principles and Standards for Insurance Regulation
    1. Consumers should have access to timely and meaningful 
information about the costs, terms, risks and benefits of insurance 
policies.

   Meaningful disclosure prior to sale tailored for particular 
        policies and written at the education level of the average 
        consumer sufficient to educate and enable consumers to assess a 
        particular policy and its value should be required for all 
        insurance; it should be standardized by line to facilitate 
        comparison shopping; it should include comparative prices, 
        terms, conditions, limitations, exclusions, loss ratio 
        expected, commissions/fees and information on seller (service 
        and solvency); it should address non-English speaking or ESL 
        populations.

   Insurance departments should identify, based on inquiries 
        and market conduct exams, populations that may need directed 
        education efforts, e.g., seniors, low-income, low education.

   Disclosure should be made appropriate for medium in which 
        product is sold, e.g., in person, by telephone, on-line.

   Loss ratios should be disclosed in such a way that consumers 
        can compare them for similar policies in the market, e.g., a 
        scale based on insurer filings developed by insurance 
        regulators or an independent third party.

   Non-term life insurance policies, e.g., those that build 
        cash values, should include rate of return disclosure. This 
        would provide consumers with a tool, analogous to the APR 
        required in loan contracts, with which they could compare 
        competing cash value policies. It would also help them in 
        deciding whether to buy cash value policies.

   A free look period should be required; with meaningful state 
        guidelines to assess the appropriateness of a policy and value 
        based on standards the state creates from data for similar 
        policies.

   Comparative data on insurers' complaint records, length of 
        time to settle claims by size of claim, solvency information, 
        and coverage ratings (e.g., policies should be ranked based on 
        actuarial value so a consumer knows if comparing apples to 
        apples) should be available to the public.

   Significant changes at renewal must be clearly presented as 
        warnings to consumers, e.g., changes in deductibles for wind 
        loss.

   Information on claims policy and filing process should be 
        readily available to all consumers and included in policy 
        information.

   Sellers should determine and consumers should be informed of 
        whether insurance coverage replaces or supplements already 
        existing coverage to protect against over-insuring, e.g., life 
        and credit.

   Consumer Bill of Rights, tailored for each line, should 
        accompany every policy.

   Consumer feedback to the insurance department should be 
        sought after every transaction (e.g., after policy sale, 
        renewal, termination, claim denial). The insurer should give 
        the consumer notice of feedback procedure at the end of the 
        transaction, e.g., form on-line or toll-free telephone number.

    2. Insurance policies should be designed to promote competition, 
facilitate comparison-shopping and provide meaningful and needed 
protection against loss.

   Disclosure requirements above apply here as well and should 
        be included in the design of policy and in the policy form 
        approval process.

   Policies must be transparent and standardized so that true 
        price competition can prevail. Components of the insurance 
        policy must be clear to the consumer, e.g., the actual current 
        and future cost, including commissions and penalties.

   Suitability or appropriateness rules should be in place and 
        strictly enforced, particularly for investment/cash value 
        policies. Companies must have clear standards for determining 
        suitability and compliance mechanism. For example, sellers of 
        variable life insurance are required to find that the sales 
        that their representatives make are suitable for the buyers. 
        Such a requirement should apply to all life insurance policies, 
        particularly when replacement of a policy is at issue.

   ``Junk'' policies, including those that do not meet a 
        minimum loss ratio, should be identified and prohibited. Low-
        value policies should be clearly identified and subject to a 
        set of strictly enforced standards that ensure minimum value 
        for consumers.

   Where policies are subject to reverse competition, special 
        protections are needed against tie-ins, overpricing, e.g., 
        action to limit credit insurance rates.

    3. All consumers should have access to adequate coverage and not be 
subject to unfair discrimination.

   Where coverage is mandated by the state or required as part 
        of another transaction/purchase by the private market (e.g., 
        mortgage), regulatory intervention is appropriate to assure 
        reasonable affordability and guarantee availability.

   Market reforms in the area of health insurance should 
        include guaranteed issue and community rating and, where 
        needed, subsidies to assure healthcare is affordable for all.

   Information sufficient to allow public determination of 
        unfair discrimination must be available. Geo-code data, rating 
        classifications and underwriting guidelines, for example, 
        should be reported to regulatory authorities for review and 
        made public.

   Regulatory entities should conduct ongoing, aggressive 
        market conduct reviews to assess whether unfair discrimination 
        is present and to punish and remedy it if found, e.g., 
        redlining reviews (analysis of market shares by census tracts 
        or zip codes, analysis of questionable rating criteria such as 
        credit rating), reviews of pricing methods, and reviews of all 
        forms of underwriting instructions, including oral instructions 
        to producers.

   Insurance companies should be required to invest in 
        communities and market and sell policies to prevent or remedy 
        availability problems in communities.

   Clear anti-discrimination standards must be enforced so that 
        underwriting and pricing are not unfairly discriminatory. 
        Prohibited criteria should include race, national origin, 
        gender, marital status, sexual preference, income, language, 
        religion, credit history, domestic violence, and, as feasible, 
        age and disabilities. Underwriting and rating classes should be 
        demonstrably related to risk and backed by a public, credible 
        statistical analysis that proves the risk-related result.

    4. All consumers should reap the benefits of technological changes 
in the marketplace that decrease prices and promote efficiency and 
convenience.

   Rules should be in place to protect against redlining and 
        other forms of unfair discrimination via certain technologies, 
        e.g., if companies only offer better rates, etc. online.

   Regulators should take steps to certify that online sellers 
        of insurance are genuine, licensed entities and tailor consumer 
        protection, UTPA, etc. to the technology to ensure consumers 
        are protected to the same degree regardless of how and where 
        they purchase policies.

   Regulators should develop rules/principles for e-commerce 
        (or use those developed for other financial firms if 
        appropriate and applicable.)

   In order to keep pace with changes and determine whether any 
        specific regulatory action is needed, regulators should assess 
        whether and to what extent technological changes are decreasing 
        costs and what, if any, harm or benefits accrue to consumers.

   A regulatory entity, on its own or through delegation to an 
        independent third party, should become the portal through which 
        consumers go to find acceptable sites on the web. The standards 
        for linking to acceptable insurer sites via the entity and the 
        records of the insurers should be public; the sites should be 
        verified/reviewed frequently and the data from the reviews also 
        made public.

    5. Consumers should have control over whether their personal 
information is shared with affiliates or third parties.

   Personal financial information should not be disclosed for 
        purposes other than the one for which it is given unless the 
        consumer provides prior written or other form of verifiable 
        consent.

   Consumers should have access to the information held by the 
        insurance company to make sure it is timely, accurate and 
        complete. They should be periodically notified how they can 
        obtain such information and how to correct errors.

   Consumers should not be denied policies or services because 
        they refuse to share information (unless information is needed 
        to complete the transaction).

   Consumers should have meaningful and timely notice of the 
        company's privacy policy and their rights and how the company 
        plans to use, collect and or disclose information about the 
        consumer.

   Insurance companies should have a clear set of standards for 
        maintaining the security of information and have methods to 
        ensure compliance.

   Health information is particularly sensitive and, in 
        addition to a strong opt-in, requires particularly tight 
        control and use only by persons who need to see the information 
        for the purpose for which the consumer has agreed to the 
        sharing of the data.

   Protections should not be denied to beneficiaries and 
        claimants because a policy is purchased by a commercial entity 
        rather than by an individual (e.g., a worker should get privacy 
        protection under workers' compensation).

    6. Consumers should have access to a meaningful redress mechanism 
when they suffer losses from fraud, deceptive practices or other 
violations; wrongdoers should be held accountable directly to 
consumers.

   Aggrieved consumers must have the ability to hold insurers 
        directly accountable for losses suffered due to their actions. 
        UTPAs should provide private cause of action.

   Alternative Dispute Resolution clauses should be permitted 
        and enforceable in consumer insurance contracts only if the ADR 
        process is: (1) contractually mandated with nonbinding results, 
        (2) at the option of the insured/beneficiary with binding 
        results, or (3) at the option of the insured/beneficiary with 
        non-binding results.

   Bad faith causes of action must be available to consumers.

   When regulators engage in settlements on behalf of 
        consumers, there should be an external, consumer advisory 
        committee or other mechanism to assess fairness of settlement 
        and any redress mechanism developed should be an independent, 
        fair and neutral decision-maker.

   Private attorney general provisions should be included in 
        insurance laws.

   There should be an independent agency that has as its 
        mission to investigate and enforce deceptive and fraudulent 
        practices by insurers, e.g., the reauthorization of FTC.

    7. Consumers should enjoy a regulatory structure that is 
accountable to the public, promotes competition, remedies market 
failures and abusive practices, preserves the financial soundness of 
the industry and protects policyholders' funds, and is responsive to 
the needs of consumers.

   Insurance regulators must have a clear mission statement 
        that includes as a primary goal the protection of consumers:

   The mission statement must declare basic fundamentals by 
        line of insurance (such as whether the state relies on rate 
        regulation or competition for pricing). Whichever approach is 
        used, the statement must explain how it is accomplished. For 
        instance, if competition is used, the state must post the 
        review of competition (e.g., market shares, concentration by 
        zone, etc.) to show that the market for the line is workably 
        competitive, apply anti-trust laws, allow groups to form for 
        the sole purpose of buying insurance, allow rebates so agents 
        will compete, assure that price information is available from 
        an independent source, etc. If regulation is used, the process 
        must be described, including access to proposed rates and other 
        proposals for the public, intervention opportunities, etc.

   Consumer bills of rights should be crafted for each line of 
        insurance and consumers should have easily accessible 
        information about their rights.

   Regulators should focus on online monitoring and 
        certification to protect against fraudulent companies.

   A department or division within the regulatory body should 
        be established for education and outreach to consumers, 
        including providing:

        -- Interactive websites to collect from and disseminate 
        information to consumers, including information about 
        complaints, complaint ratios and consumer rights with regard to 
        policies and claims.

        -- Access to information sources should be user friendly.

        -- Counseling services to assist consumers, e.g., with health 
        insurance purchases, claims, etc. where needed should be 
        established.

   Consumers should have access to a national, publicly 
        available database on complaints against companies/sellers, 
        i.e., the NAIC database. NAIC is implementing this.)

   To promote efficiency, centralized electronic filing and use 
        of centralized filing data for information on rates for 
        organizations making rate information available to consumers, 
        e.g., help develop the information brokering business.

   Regulatory system should be subject to sunshine laws that 
        require all regulatory actions to take place in public unless 
        clearly warranted and specified criteria apply. Any insurer 
        claim of trade secret status of data supplied to the regulatory 
        entity must be subject to judicial review with the burden of 
        proof on the insurer.

   Strong conflict of interest, code of ethics and anti-
        revolving door statutes are essential to protect the public.

   Election of insurance commissioners must be accompanied by a 
        prohibition against industry financial support in such 
        elections.

   Adequate and enforceable standards for training and 
        education of sellers should be in place.

   The regulatory role should in no way, directly or 
        indirectly, be delegated to the industry or its organizations.

   The guaranty fund system should be a prefunded, national 
        fund that protects policyholders against loss due to 
        insolvency. It is recognized that a phase-in program is 
        essential to implement this recommendation.

   Solvency regulation/investment rules should promote a safe 
        and sound insurance system and protect policyholder funds, 
        e.g., providing a rapid response to insolvency to protect 
        against loss of assets/value.

   Laws and regulations should be up to date with and 
        applicable to e-commerce.

   Antitrust laws should apply to the industry.

   A priority for insurance regulators should be to coordinate 
        with other financial regulators to ensure consumer protection 
        laws are in place and adequately enforced regardless of 
        corporate structure or ownership of insurance entity. Insurance 
        regulators should err on side of providing consumer protection 
        even if regulatory jurisdiction is at issue. This should be 
        stated mission/goal of recent changes brought about by GLB law.

        -- Obtain information/complaints about insurance sellers from 
        other agencies and include in databases.

   A national system of ``Consumer Alerts'' should be 
        established by the regulators, e.g., companies directed to 
        inform consumers of significant trends of abuse such as race-
        based rates or life insurance churning.

   Market conduct exams should have standards that ensure 
        compliance with consumer protection laws and be responsive to 
        consumer complaints; exam standards should include agent 
        licensing, training and sales/replacement activity; companies 
        should be held responsible for training agents and monitoring 
        agents with ultimate review/authority with the regulator. 
        Market conduct standards should be part of an accreditation 
        process.

   The regulatory structure must ensure accountability to the 
        public it serves. For example, if consumers in state X have 
        been harmed by an entity that is regulated by state Y, 
        consumers would not be able to hold their regulators/
        legislators accountable to their needs and interests. To help 
        ensure accountability, a national consumer advocate office with 
        the ability to represent consumers before each insurance 
        department is needed when national approaches to insurance 
        regulation or ``one-stop'' approval processes are implemented.

   Insurance regulator should have standards in place to ensure 
        mergers and acquisitions by insurance companies of other 
        insurers or financial firms, or changes in the status of 
        insurance companies (e.g., demutualization, non-profit to for-
        profit), meet the needs of consumers and communities.

   Penalties for violations must be updated to ensure they 
        serve as incentives against violating consumer protections and 
        should be indexed to inflation.

    8. Consumers should be adequately represented in the regulatory 
process.

   Consumers should have representation before regulatory 
        entities that is independent, external to regulatory structure 
        and should be empowered to represent consumers before any 
        administrative or legislative bodies. To the extent that there 
        is national treatment of companies, a national partnership, or 
        ``one-stop'' approval, there must be a national consumer 
        advocate's office created to represent the consumers of all 
        states before the national treatment state, the one-stop state 
        or any other approving entity.

   Insurance departments should support public counsel or other 
        external, independent consumer representation mechanisms before 
        legislative, regulatory and NAIC bodies.

   Regulatory entities should have a well-established structure 
        for ongoing dialogue with and meaningful input from consumers 
        in the state, e.g., a consumer advisory committee. This is 
        particularly true to ensure that the needs of certain 
        populations in the state and the needs of changing technology 
        are met.
                              Attachment 2
Why Insurance Is an Essential Public Good, Not Some Normal Product That 
        Can Be Regulated Solely Through Competition
    1. Complex Legal Document. Most products are able to be viewed, 
tested, ``tires kicked'' and so on. Insurance policies, however, are 
difficult for consumers to read and understand--even more difficult 
than documents for most other financial products. For example, 
consumers often think they are buying insurance, only to find they 
bought a list of exclusions.
    2. Comparison Shopping is Difficult. Consumers must first 
understand what is in the policy to compare prices.
    3. Policy Lag Time. Consumers pay a significant amount for a piece 
of paper that contains specific promises regarding actions that might 
be taken far into the future. The test of an insurance policy's 
usefulness may not arise for decades, when a claim arises.
    4. Determining Service Quality is Very Difficult. Consumers must 
determine service quality at the time of purchase, but the level of 
service offered by insurers is usually unknown at the time a policy is 
bought. Some states have complaint ratio data that help consumers make 
purchase decisions, and the NAIC has made a national database available 
that should help, but service is not an easy factor to assess.
    5. Financial Soundness is Hard to Assess. Consumers must determine 
the financial solidity of the insurance company. One can get 
information from A.M. Best and other rating agencies, but this is also 
complex information to obtain and decipher.
    6. Pricing is Dismayingly Complex. Some insurers have many tiers of 
prices for similar consumers--as many as 25 tiers in some cases. 
Consumers also face an array of classifications that can number in the 
thousands of slots. Online assistance may help consumers understand 
some of these distinctions, but the final price is determined only when 
the consumer actually applies and full underwriting is conducted. At 
that point, the consumer might be quoted a much different rate than he 
or she expected. Frequently, consumers receive a higher rate, even 
after accepting a quote from an agent.
    7. Underwriting Denial. After all that, underwriting may result in 
the consumer being turned away.
    8. Mandated Purchase. Government or lending institutions often 
require insurance. Consumers who must buy insurance do not constitute a 
``free-market'', but a captive market ripe for arbitrary insurance 
pricing. The demand is inelastic.
    9. Incentives for Rampant Adverse Selection. Insurer profit can be 
maximized by refusing to insure classes of business (e.g., redlining) 
or by charging regressive prices.
    10. Antitrust Exemption. Insurance is largely exempt from antitrust 
law under the provisions of the McCarran-Ferguson Act.
    Compare shopping for insurance with shopping for a can of peas. 
When you shop for peas, you see the product and the unit price. All the 
choices are before you on the same shelf. At the checkout counter, no 
one asks where you live and then denies you the right to make a 
purchase. You can taste the quality as soon as you get home and it 
doesn't matter if the pea company goes broke or provides poor service. 
If you don't like peas at all, you need not buy any. By contrast, the 
complexity of insurance products and pricing structures makes it 
difficult for consumers to comparison shop. Unlike peas, which are a 
discretionary product, consumers absolutely require insurance products, 
whether as a condition of a mortgage, as a result of mandatory 
insurance laws, or simply to protect their home or health.
                              Attachment 3
Collusive Activity by the Insurance Services Organization That Is 
        Allowed by the McCarran-Ferguson Antitrust Exemption
    The ISO website has extensive information on the range of services 
they offer insurance companies. The website illustrates the deep 
involvement that this organization has in helping to set insurer rates, 
establishing policy forms, underwriting policies and in setting other 
rules.
    Some examples:

   The page ``The State Filing Handbook,'' promises 24/7 access 
        to ``procedures for adopting or modifying ISO's filings as the 
        basis for your own rates, rules and forms.''

   The page ``ISO MarketWatch Cube'' is a ``powerful new tool 
        for analyzing renewal price changes in the major commercial 
        lines of insurance . . . the only source of insurance premium-
        change information based on a large number of actual 
        policies.'' This price information is available ``in various 
        levels of detail--major coverage, state, county and class 
        groupings--for specific time periods, either month or quarter . 
        . .''

   ``MarketWatch'' supplies reports ``that measure the change 
        in voluntary-market premiums (adjusted for exposure changes) 
        for policies renewed by the same insurer group . . . a valuable 
        tool for . . . strategically planning business expansion, 
        supporting your underwriting and actuarial functions . . .''

   ``ISO's Actuarial Service'' gives an insurer ``timely, 
        accurate information on such topics as loss and premium trend, 
        risk classifications, loss development, increased limits 
        factors, catastrophe and excess loss, and expenses.'' 
        Explaining trend, ISO points out that the insurer can 
        ``estimate future costs using ISO's analyses of how inflation 
        and other factors affect cost levels and whether claim 
        frequency is rising or falling.'' Explaining ``expenses'' ISO 
        lets an insurer ``compare your underwriting expenses against 
        aggregate results to gauge your productivity and efficiency 
        relative to the average . . .'' NOTE: These items, predicting 
        the future for cost movement and supplying data on expenses 
        sufficient for turning ISO's loss cost filings into final 
        rates, are particularly anti-competitive and likely, absent 
        McCarran-Ferguson antitrust exemption protection, illegal.

   ``ISO's Actuarial Services'' web page goes on to state that 
        insurers using these services will get minutes and agendas of 
        ``ISO's line actuarial panels to help you keep abreast of 
        ratemaking research and product development.''

   The ``Guide to ISO Products and Services'' is a long list of 
        ways ISO can assist insurers with rating, underwriting, policy 
        forms, manuals, rate quotes, statistics, actuarial help, loss 
        reserves, policy writing, catastrophe pricing, information on 
        specific locations for property insurance pricing, claims 
        handling, information on homeowner claims, credit scoring, 
        making filings for rates, rules and policy forms with the 
        states and other services.

    Finally, ISO has a page describing ``Advisory Prospective Loss 
Costs,'' which lays out the massive manipulations ISO makes to the 
historic data. A lengthy excerpt follows:

        ``Advisory Prospective Loss Costs are accurate projections of 
        average future claim costs and loss-adjustment expenses--
        overall and by coverage, class, territory, and other 
        categories.

        Your company can use ISO's estimates of future loss costs in 
        making independent decisions about the prices you charge for 
        your policies. For most property/casualty insurers, in most 
        lines of business, ISO loss costs are an essential piece of 
        information. You can consider our loss data--together with 
        other information and your own judgment--in determining your 
        competitive pricing strategies.

        ``The insurance pricing problem--Unlike companies in other 
        industries, you as a property/casualty insurer don't know the 
        ultimate cost of the product you sell--the insurance policy--at 
        the time of sale. At that time, losses under the policy have 
        not yet occurred. It may take months or years after the policy 
        expires before you learn about, settle, and pay all the claims. 
        Firms in other industries can base their prices largely on 
        known or controllable costs. For example, manufacturing 
        companies know at the time of sale how much they have spent on 
        labor, raw materials, equipment, transportation, and other 
        goods and services. But your company has to predict the major 
        part of your costs--losses and related expenses--based on 
        historical data gathered from policies written in the past and 
        from claims paid or incurred on those policies. As in all forms 
        of statistical analysis, a large and consistent sample allows 
        more accurate predictions than a smaller sample. That's where 
        ISO comes in. The ISO database of insurance premium and loss 
        data is the world's largest collection of that information. And 
        ISO quality checks the data to make sure it's valid, reliable, 
        and accurate. But before we can use the data for estimating 
        future loss costs, ISO must make a number of adjustments, 
        including loss development, loss-adjustment expenses, and 
        trend.

        ``Loss development . . . because it takes time to learn about, 
        settle, and pay claims, the most recent data is always 
        incomplete. Therefore, ISO uses a process called loss 
        development to adjust insurers' early estimates of losses to 
        their ultimate level. We look at historical patterns of the 
        changes in loss estimates from an early evaluation date--
        shortly after the end of a given policy or accident year--to 
        the time, several or many years later, when the insurers have 
        settled and paid all the losses. ISO calculates loss 
        development factors that allow us to adjust the data from a 
        number of recent policy or accident years to the ultimate 
        settlement level. We use the adjusted--or developed--data as 
        the basis for the rest of our calculations.

        ``Loss-adjustment expenses--In addition to paying claims, your 
        company must also pay a variety of expenses related to settling 
        the claims. Those include legal-defense costs, the cost of 
        operating a claims department, and others. Your company 
        allocates some of those costs--mainly legal defense--to 
        particular claims. Other costs appear as overhead. ISO collects 
        data on allocated and unallocated loss-adjustment expenses, and 
        we adjust the claim costs to reflect those expenses.

        ``Trend--Losses adjusted by loss-development factors and loaded 
        to include loss-adjustment expenses give the best estimates of 
        the costs insurers will ultimately pay for past policies. But 
        you need estimates of losses in the future--when your new 
        policies will be in effect. To produce those estimates, ISO 
        looks separately at two components of the loss cost--claim 
        frequency and claim severity. We examine recent historical 
        patterns in the number of claims per unit of exposure (the 
        frequency) and in the average cost per claim (the severity). We 
        also consider changes in external conditions. For example, for 
        auto insurance, we look at changes in speed limits, road 
        conditions, traffic density, gasoline prices, the extent of 
        driver education, and patterns of drunk driving. For just three 
        lines of insurance--commercial auto, personal auto, and 
        homeowners--ISO performs 3,000 separate reviews per year to 
        estimate loss trends. Through this kind of analysis, we develop 
        trend factors that we use to adjust the developed losses and 
        loss-adjustment expenses to the future period for which you 
        need cost information.

        ``What you get--With ISO's advisory prospective loss costs, you 
        get solid data that you can use in determining your prices by 
        coverage, state, territory, class, policy limit, deductible, 
        and many other categories. You get estimates based on the 
        largest, most credible set of insurance statistics in the 
        world. And you get the benefit of ISO's renowned team of 
        actuaries and other insurance professionals. ISO has a staff of 
        more than 200 actuarial personnel--including about 50 members 
        of the Casualty Actuarial Society. And no organization anywhere 
        has more experience and expertise in collecting and managing 
        data and estimating future losses.''

    ISO's activities extensively interfere with the competitive market, 
a situation allowed by the provisions of the McCarran-Ferguson Act's 
extensive antitrust exemption.

    Senator Pryor. Thank you.
    Mr. Regan?

          STATEMENT OF DAVID W. REGAN, VICE PRESIDENT,

            LEGISLATIVE AFFAIRS, NATIONAL AUTOMOBILE

                      DEALERS ASSOCIATION

    Mr. Regan. Thank you, Mr. Chairman and Members of the 
Committee.
    I'm David Regan, Vice President of Legislative Affairs for 
the National Automobile Dealers Association. Our members sell 
and service all makes--international nameplate, domestic 
nameplate, from the Mini Cooper to the Mack Truck. Also, last 
year we sold 20 million used vehicles. So, our members have a 
direct interest in the integrity of the titling process and the 
availability of reliable VIN-based vehicle history data.
    Each year, thousands of wrecked, flooded, and stolen 
vehicles are sold with clean titles to unsuspecting consumers. 
Fraudulent resellers thrive, for three reasons. One, the 51 
jurisdiction State motor vehicle titling regime is confusing, 
contradictory, and incomplete. Two, just because an insurance 
company declares a total loss does not always mean that the 
insurance company has to obtain a new title reflecting that 
severe damage. And, three, there is no public database for 
total-loss vehicles, and dealers and consumers do not have 
enough timely access to DMV title data.
    Last year, the insurance companies totaled approximately 5 
million vehicles. Unfortunately, the total-loss vehicle sold 
today at salvage auction could be tomorrow's raw material for 
the fraudulent rebuilder and title-washer. The confusing State 
title laws and the loss mitigation model of the insurance 
companies work in tandem to the detriment of consumers.
    There's one central economic fact about the loss mitigation 
model of the insurance companies. The cleaner the title at 
salvage auction, the higher the sales price for a totaled 
vehicle. Therefore, the insurance companies have a powerful 
short-term economic incentive to oppose more aggressive State 
titling laws, and to under-report under existing State titling 
laws. However, consumers and dealers have exactly the opposite 
economic interest. Before making a purchase, they want to know 
if a vehicle has ever been declared a total loss. 
Unfortunately, if the insurance company fails to report the 
total loss to the DMV and obtain a branded title, no public 
document may ever exist to put future purchasers on notice that 
the car was declared a total loss. This failure to report 
shifts the risk of nondisclosure to subsequent purchasers.
    To remedy this lack of disclosure, Congress--NADA believes 
that Congress should enact S. 545, which would require 
insurance companies to make commercially available the 
following information: the VIN of the total-loss vehicle; the 
date of the declaration of total loss; the odometer reading of 
the vehicle on the date of total loss; a simple reason for 
total loss, such as flood, salvage, or stolen and recovered; 
and whether or not the airbag deployed as a result of the event 
triggering the declaration of total loss. This disclosure would 
be made when the insurance company sends a loss payoff to the 
insured. Please note that none of this VIN-based data would 
trigger any privacy concerns under Federal or State law.
    Also, it is our understanding that this new Federal 
disclosure requirement would not pre-empt State laws, but 
simply would complement the disclosure regime under existing 
State title branding statutes.
    There is precedent for such a system. In the U.K. and in 
Australia, insurance companies already provide total-loss data. 
Also, here in the United States the NICB provided, for the 
first time, some total-loss data when vehicles were flooded in 
the 2005 hurricanes. NADA applauds the efforts of the NICB in 
this regard. But if it is in the public interest to post the 
VINs of hundreds of thousands of Katrina cars, isn't it also in 
the public interest to post the VINs of the millions of 
vehicles that are totaled every year because of severe 
accidents?
    Also, Congress should ask some questions of the insurance 
companies to determine the extent to which they share total-
loss data among themselves. For example, if insurance company A 
totals a car, and the wrecked car is then purchased at salvage 
auction, repaired and resold with a clean title to an 
unsuspecting consumer, what happens when that consumer tries to 
insure the vehicle that they have just purchased? Can insurance 
company B access some industry database to determine if the 
vehicle has been declared a total loss? If so, can insurance 
company B then use that information to refuse to write coverage 
or to charge a higher premium to reflect the higher risk of the 
rebuilt vehicle? If so, will the insurance company then inform 
the consumer that that car is actually a rebuilt wreck rather 
than an undamaged vehicle? These are the type of questions that 
we would like to see asked and answered in the context of 
congressional oversight about this issue of total-loss 
disclosure.
    In conclusion, before buying a used vehicle, consumers, 
businesses, and dealers want to know one thing: Has the car 
ever been declared a total loss? The declaration of a total 
loss is the most significant event in the economic life of a 
motor vehicle. That should be--that information should be 
publicly available prior to any purchase. Using today's 
technology and the existing databases of the insurance 
companies, this disclosure is possible. We volunteer to work 
with any and all interested parties to make public access to 
total-loss data a reality.
    Thank you for your interest in this issue, and we'll be 
happy to take your questions.
    [The prepared statement of Mr. Regan follows:]

   Prepared Statement of David W. Regan, Vice President, Legislative 
            Affairs, National Automobile Dealers Association
More Complete and Timely Total Loss Data Are Necessary To Combat Title 
        Fraud
    My name is David Regan. I am Vice President of Legislative Affairs 
for the National Automobile Dealers Association. NADA's 20,000 
franchised auto and truck dealerships sell, service and repair new and 
used car and trucks, all makes and models from the Mini Cooper to the 
Mack Truck. NADA's membership penetration is 93 percent of all domestic 
and international nameplate dealerships. The majority of NADA's members 
are small, family-owned and community-based businesses, and NADA's 
members employ more than one million people nationwide.
Overview of the Title Fraud Problem
    At NADA, we applaud the members of this Committee and Senator Lott 
in particular for focusing on such an important national issue. 
According to news accounts, flooding caused by the Gulf Coast 
hurricanes in 2005 damaged more than 500,000 vehicles. Unfortunately, 
many of these severely damaged vehicles have been reconditioned and 
sold to unsuspecting buyers. In an effort to put consumers on notice of 
the nature of the problem, NADA's website (www.nada.org) contains tips 
on how to spot a flood vehicle. However, increased public awareness is 
only a part of the solution.
    This problem is not limited to ``Katrina cars.'' Flooding in New 
England and North Carolina and other areas of the Nation has led to 
countless other flood vehicles. Moreover, cars severely damaged in 
accidents are a major part of the title fraud problem as well. If an 
insurance company deems a car to be ``totaled'' as a result of 
collision, theft, or fire damage, the vehicle might be rebuilt and 
given a clean title that does not disclose damage. Last year, we 
believe that insurance companies totaled approximately five million 
vehicles.
    Each year thousands of totaled vehicles are fraudulently sold to 
unsuspecting buyers as undamaged vehicles. These vehicles may then 
surface in the classified section of your local newspaper, at a 
wholesale auto auction, in a consumer-to-consumer sale, or as a ``trade 
in'' on the lot of a franchised dealer. The fraudulent rebuilders and 
resellers enjoy substantial profit margins because: (1) state motor 
vehicle titling laws are confusing, contradictory and incomplete; (2) 
insurance companies have a short-term economic interest in under-
reporting total loss vehicle data; and (3) the public and private 
sectors have failed to exploit existing technology to produce timely 
electronic transparency for motor vehicle title histories.
    Today, I will outline how confusing state title laws and insurance 
company practices benefit fraudulent rebuilders and resellers and how 
S. 545 could help remedy this problem.
Disparities in State Titling Laws Create Opportunities for Fraud
    The laws of fifty states and the District of Columbia govern the 
titling and registration of motor vehicles, creating a systemic lack of 
uniformity. A motor vehicle title documents ownership of a specific 
vehicle, whereas a motor vehicle registration provides permission to 
operate a specific vehicle. Although the trend in state titling laws 
has been toward more uniformity during the past several years, the 51 
jurisdictions still conduct business 51 different ways. Each 
jurisdiction has created a distinct paper title, different computer 
programs to issue and track titles and registration, and a separate, 
extensive body of statutes and regulations to govern the titling and 
registration of motor vehicles within their respective borders. 
Additionally, these discrepancies can be complicated by the informal 
policies and procedures used by title clerks, which may vary even 
within jurisdictions.
    In common usage, a ``title brand'' is a notation on the face of a 
certificate of title that provides notice to all subsequent purchasers 
of the damage, condition, or prior use of a vehicle. A ``brand'' is a 
word, symbol or abbreviation printed on the title itself. The 51 
titling jurisdictions use a wide variety of brands, such as 
reconstructed, salvage, rebuilt salvage, rebuilt, restored, 
reconditioned, junk, non-repairable, taxi, police, flood damage, fire 
damage, unsafe, and repaired. The complete list is extensive and 
confusing.
    Because 51 jurisdictions title vehicles 51 different ways, many 
opportunities for fraud exist. Under the current system, any 
unscrupulous rebuilder can repair or refurbish a wrecked or flood 
damaged car (typically a late model car ``totaled'' by an insurance 
company) and then obtain a ``clean'' or ``washed'' title in a state 
with weak title disclosure rules. The new title will contain no 
reference to the damage, leaving the buyer (consumer, wholesale auction 
or retail dealer) to rely on a physical inspection of the vehicle that 
may not expose the extent of the damage or rely on commercially 
available title history products, such as Auto Check and CARFAX.
    The vehicle history products in the market today are helpful, but a 
clean vehicle history report is not conclusive evidence that a vehicle 
has never sustained significant damage. Vehicle history services can 
only report information to which they have access. While title history 
products have improved in the past few years, the 2005 settlement 
between State Farm Insurance and the state Attorneys General 
demonstrates the extent to which the title data within a state 
department of motor vehicles is incomplete. Many state titling laws do 
not require insurance companies to obtain a salvage title for every 
totaled vehicle. Moreover, the insurance companies have a powerful 
economic incentive not to obtain a salvage title. Insurance companies 
receive higher sale prices for these totaled vehicles at salvage 
auctions if the titles are not branded. As a result, DMV title 
databases do not include all totaled vehicles.
Insurance Company Procedures Exacerbate the Problem
    Every year millions of motor vehicles are ``totaled'' by insurance 
companies, and many of these vehicles routinely re-enter used car 
commerce. Typically, an insurance company ``totals'' a vehicle when the 
projected repair costs are too excessive in relation to the fair market 
value of the vehicle immediately prior to the flood or accident. Once 
the insurance company has totaled a car, the company usually sends a 
check to the insured, takes possession of the vehicle, and sells the 
damaged vehicle at a salvage auction to mitigate loss. Unfortunately, 
fraudulent rebuilders frequently buy totaled vehicles at salvage 
auction, repair them, and sell the cars as undamaged to an unsuspecting 
buyer, thereby reaping huge profits.
    The current loss mitigation model used by insurance companies 
increases the likelihood of subsequent fraudulent activity. The 
attached chart (``How Total Loss Vehicles Reenter the Market'') and 
explanatory material attempts to present the interrelationship between 
the state titling laws and the loss mitigation model of the insurance 
companies. While this process may vary from state to state and from 
insurance company to insurance company, the graphic depicts the lack of 
transparency that increases risk to subsequent buyers. The red flags 
indicate the points in the process where fraudulent activity may occur.
    If the insurance company fails to obtain a salvage title for the 
totaled vehicle, no public document may ever exist to put future 
purchasers on notice that the car was totaled. The insurance company 
may fail to report the status of the vehicle to the DMV because:

        (a) The state titling law may not trigger an obligation by the 
        insurance company or the original owner to report to the DMV; 
        or

        (b) State law may contain a reporting obligation, but the 
        insurance company may fail to comply because of administrative 
        oversight.

    The settlement between State Farm and 49 state attorneys general 
confirms that this is not a hypothetical problem.
    Insurance companies have a powerful economic incentive to oppose 
more aggressive title laws or to underreport under existing laws. A 
total loss vehicle with a clean title is likely to sell at auction for 
substantially more than the same vehicle with a salvage or flood title. 
In other words, there is a market-based premium for a clean title and a 
market-based penalty for a salvage or flood title.
    Consumers have exactly the opposite economic interest--they want to 
know if a vehicle has been declared a total loss. The decision to total 
a vehicle is based on a variety of factors and may vary from company to 
company and from insured to insured, but one fact is abundantly clear--
a declaration of total loss is one of the most material factors in 
determining the value of a vehicle. Every subsequent purchaser would 
want to know--prior to the sale--if a vehicle has been totaled.
The Solution must Focus on Pre-transaction Transparency: Insurance Data 
        on Total Loss Vehicles Should Be Released to the Public and DMV 
        Data Should Be Enhanced and Released More Quickly
    The type of disclosure advocated in S. 545 is consistent with the 
Federal and state privacy laws that strictly limit the use of personal 
information obtained in the titling process. The Federal Driver Privacy 
Protection Act and similar state statutes limit the distribution of 
names and addresses included in title databases. The distribution of 
VIN-based title branding data or VIN-based total loss vehicle data 
would not include the personal identifiers protected by those statutes.
    More transparency, more timeliness, and more technology are 
necessary to provide buyers more complete and reliable VIN-specific 
data before a purchase. All buyers of a used vehicle (consumers, 
businesses, wholesale auctions, and even automobile dealers taking a 
vehicle in trade) have the same economic interest--determining fair 
market value prior to purchase. A more complete, near real-time title 
history would provide a more accurate picture of a vehicle's prior 
condition/use. The insurance companies should be commended for 
providing some total loss vehicle data for many of the flood vehicles 
from the hurricanes. The VINs for some of these vehicles are now 
available on the website of the National Insurance Crime Bureau, but 
more should be done. One good example of this is PEMCO Insurance in 
Washington state, which voluntarily disclosed total losses due to heavy 
storms in November 2006. S. 545 would require the disclosure of the 
following total loss data: the VIN of a totaled car; the reason for the 
total loss (flood, collision, stolen, etc.); the date of total loss; 
the odometer reading on that date; and whether or not the airbag 
deployed. Armed with total-loss information, consumers, businesses, 
dealers, auto auctions--anyone buying used cars--should be able to 
easily identify one of these severely damaged vehicles, even if the 
title was washed.
    We understand that this legislation would NOT pre-empt state motor 
vehicle titling laws, but would create a separate data set that could 
be used to complement title data held by DMVs.
Comments about the National Motor Vehicle Title Information System 
        (NMVTIS)
    Congress has recognized that technology should play a critical role 
in this arena. The Anti-Car Theft Act of 1992 authorized the creation 
of NMVTIS. As envisioned, NMVTIS would become the single source for 
title history data from all 51 jurisdictions. The American Association 
of Motor Vehicle Administrators (AAMVA) has attempted to link all 51 
databases in real-time using a combination of Federal funds, state 
funds, and internal resources. The system envisioned would provide 
real-time, title clerk-to-title clerk linkage and then provide third 
party access to title histories. NMVTIS has not been completed because 
state resources are required to reconfigure state DMV systems to 
communicate with NMVTIS. AAMVA's attempts to design and implement a 
system to provide public access to NMVTIS have not been successful.
    NMVTIS should be reconfigured to focus on providing consumers 
transparency prior to a transaction. The vast majority of the resources 
of NMVTIS have been used in an attempt to link DMVs so that title 
clerks can talk to title clerks electronically before issuing new 
titles. Unfortunately, most title fraud occurs before a title clerk 
ever sees an application for a new title. DMVs document motor vehicle 
ownership after a transaction has occurred. Moreover, DMVs do not have 
the statutory authority, expertise, or financial resources to package 
and market VIN history data to the public.
    NADA has also expressed concerns to the AAMVA leadership regarding 
the existing economic model for NMVTIS. First, additional Federal 
funding is not likely, so completion of the system is highly doubtful 
absent an additional source of funding. Second, even if additional 
public funding were forthcoming we have serious doubts the current 
model would be self-sustaining. Third, the private sector still does 
not have access to the title data in NMVTIS, despite the 1992 Anti Car 
Theft Act requirement granting such access. As a result, we have stated 
on numerous occasions publicly and privately, that NMVTIS must be 
redesigned to achieve its original purpose.
    NADA believes the best solution is a partnership between AAMVA and 
a private sector vendor that has the funding and technological 
expertise to build upon the existing NMVTIS system. Private sector 
information vendors are essential to the distribution of data to 
consumers. Any NMVTIS-based solution must rely on the private sector to 
package and market title histories to the general public. These vendors 
already buy title data from DMVs in bulk, usually every month. If the 
states simply provided daily electronic updates instead of monthly, the 
private sector could use technology to close the window for fraud. The 
end result would be an efficiently administered, up-to-date system that 
would provide consumers with more timely information. The very same 
technology could be used to provide title clerk to title clerk access 
as well.
    Congress should require the Department of Justice to implement the 
1992 Anti-Car Theft Act to require insurance companies to disclose 
total loss data and salvage auctions to disclose sales data. DOJ has 
existing statutory authority to create more motor vehicle title 
transparency in a matter of months. 49 U.S.C.  30501-30505. Congress 
should compel DOJ to initiate the rulemaking that was originally 
intended and enforce the penalties under existing law for failing to 
submit data to NMVTIS. The rule should: (1) recognize that NMVTIS has 
been created; (2) require insurance companies to submit to NMVTIS VIN-
based information on total loss vehicles; (3) require salvage auctions 
and junk yards to submit to NMVTIS VIN-based information for vehicles 
sold at salvage auctions and junk yards; (4) require NMVTIS to engage a 
private sector joint venture partner to market the NMVTIS data to 
consumers no later than December 31, 2007; and (5) encourage state DMVs 
to submit VIN-based motor vehicle title and registration data to NMVTIS 
in electronic batch form every 24 hours. All data marketed to the 
public must comply with Federal and state privacy protection statutes.
    NADA believes S. 545 to require insurance companies to make total 
loss data available to perspective purchasers would complement a newly 
configured NMVTIS with AAMVA working with the private sector to more 
aggressively enhance consumer access to title history data.
Conclusion
    Any solution to the title fraud problem must be viewed through the 
pre-transaction lens. The technological solution to the problem of 
flood vehicles--and all other title fraud--lies in creating near real-
time, pre-transaction access to the vehicle history data that DMVs, 
insurance companies, and salvage yards currently collect. The enactment 
of S. 545 would provide a dramatic step in the drive to provide 
consumers more pre-transaction transparency.
    NADA and the franchised automobile and truck dealers throughout the 
country are prepared to assist with efforts to eliminate title fraud. 
Thank you for the opportunity to present our views, and I look forward 
to your questions.
         Exhibit A: How Total Loss Vehicles Reenter the Market
    Box 1. The process begins when an insurance company declares a 
total loss on a vehicle.
    Boxes 2a-2d. In step 2, the insurance company determines if the 
nature and extent of the damage requires the insurance company to 
obtain a salvage or flood title under state law. (The fact that the 
insurance company declares a total loss does not automatically trigger 
an obligation under state laws to obtain a salvage title. Each state 
has specific statutory and regulatory requirements that control this 
process.) Under 2a, the insurance company permits the consumer to 
retain the vehicle after receiving a total loss payment. This creates a 
red flag because the original owner could repair and resell without 
disclosure to the unsuspecting buyer in box 5b. In 2b, the company 
obtains a salvage title, so that title should accompany the vehicle 
throughout the process and surface in the title history search based on 
DMV records. However, when the insurance company does NOT obtain a 
salvage title, as in 2c, the red flag is noted because the vehicle will 
go to the salvage auction with a clean title, despite having been 
declared a total loss.
    Boxes 3a-3d. Step 3 captures the representative transactions at a 
salvage auction. Reputable buyers at salvage auctions, the recyclers in 
box 3b, purchase the totaled cars for scrap or parts. The potential for 
fraud still exists, however, as shown in box 3d. Unscrupulous resellers 
will purchase the wrecked vehicle solely to obtain a VIN with a clean 
title. They will then switch that VIN with a stolen vehicle of the same 
make and model. In some instances, criminals will walk a salvage yard 
just to collect VINs. If the VINs have ``clean'' vehicle history 
reports, the criminals will steal the same make, model, and year, and 
simply switch the VIN with a clean VIN plate. Box 3c depicts the 
rebuilders (legitimate and fraudulent) purchasing vehicles at salvage 
auction.
    Box 4. This step shows that legal and illegal activity may occur 
after the vehicle is rebuilt. In box 4a the legitimate rebuilder 
obtains the necessary title documents and fully discloses the nature of 
the damage when selling to the informed consumer in box 5a. However, in 
boxes 4a and 4b no such disclosure occurs so a red flag is noted. In 
4b, even if the rebuilder received a salvage title at auction, the 
fraudulent rebuilder simply washes the salvage title by obtain a clean 
title in another state. Then the fraudulent reseller unloads the 
damaged car to the unsuspecting consumer in box 5b without disclosure. 
The consumer may obtain a title history report, but the data in the 
private sector database may not be current enough to assist the 
consumer before the purchase. Similarly, a licensed dealer may not have 
access to title data prior to a trade-in. In box 4c, the fraudulent 
reseller does not even have to wash the title, because the insurance 
company never notified the DMV of the total loss. Moreover, the 
unsuspecting consumer can find no protection at all in relying on a 
title history because the insurance company has never provided the DMV 
any information about the total loss.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                                 ______
                                 
                                                     April 11, 2007
To: Members of the Senate Commerce Committee
From: Salvage Auto Fraud Reform Coalition (SAFR)

    In 2005, over five million vehicles were ``totaled'' by insurance 
companies, including over 500,000 from Hurricanes Katrina and Rita. 
Unfortunately, thousands of these wrecked, flooded, or stolen vehicles 
are sold with clean titles to unsuspecting consumers each year. We, the 
undersigned, who represent millions of U.S. workers, believe 
legislation is necessary to require that insurers make total-loss data 
available to the public, thereby ``red-flagging'' the vehicle forever, 
and putting consumers on notice of a vehicle's serious damage history.
    Too often totaled cars are rebuilt and returned to the 
marketplace--but without a ``red flag'' to alert consumers. Many of 
these totaled vehicles are dangerous, yet insurance companies are not 
required to make the VINs public. Clearly, the most direct and 
effective method to provide consumers with more complete vehicle 
histories is for insurance companies to make the VINs of totaled 
vehicles available to the public.
    Insurance companies already collect total-loss disclosure 
information, however, they do not provide this valuable information to 
consumers. The disclosure of total-loss data would be VIN-based and 
would not include any personal identifiers protected by Federal and 
state privacy laws. Consumers could obtain this total-loss information 
easily and quickly through existing vehicle history providers.
    Last year Congress examined the problem of title washing and title 
fraud to protect consumers from unknowingly purchasing flood and 
salvage vehicles. Hearings were held on the issue, and total-loss 
disclosure legislation was introduced in the Senate and House. Once 
again, legislation has been introduced in the 110th Congress in both 
the Senate (S. 545) by Senator Trent Lott, R-Miss., and the House (H.R. 
1029) by Representative Cliff Stearns, R-Fla.
    Passage of total-loss disclosure legislation would provide used car 
buyers an important tool for making better decisions about vehicle 
safety and fair market value. We respectfully urge you to support 
committee consideration of this important safety and consumer 
protection legislation early this session.
            Sincerely,

National Automobile Dealers Association
Alliance of Automobile Manufacturers
American International Automobile Dealers Association
Association of International Automobile Manufacturers
Automotive Recyclers Association
Automotive Service Association
Experian
Honda
Hyundai Motor America
Mazda North American Operations
National Auto Auction Association
National Independent Automobile Dealers Association
Volkswagen of America, Inc.

    Senator Pryor. Thank you very much.
    I want to thank all the panelists for their opening 
statements.
    Let me start, if I may, with Commissioner Bowman. You 
mentioned some catastrophic risks in the State of Arkansas. I 
think you mentioned earthquakes, tornados, hailstorms, and I 
guess ice storms and floods. So, I assume, from your statement 
there, it's fair to say that these catastrophic challenges with 
insurance are not limited just to the Gulf Coast area. All over 
the country, you have chances of catastrophic losses. Is that 
fair to say?
    Ms. Bowman. That's exactly right. All States are concerned 
about the different catastrophic possibilities. All States--I 
think, looking over all the States, except maybe one--I think 
North Dakota has, probably, fewer catastrophic possibilities 
than the other States, but they all have some sort of 
catastrophe possibility.
    Senator Pryor. Can you just give us a--maybe a one minute 
tutorial on rates, how rates are set? For example, if there's a 
hurricane on the Gulf Coast, does it cause rates in Arkansas to 
increase? Or if there's an earthquake on the West Coast, will 
it cause the rates in Maine to increase? Could you tell us how 
the rate structure works?
    Ms. Bowman. No, they should not. They are--it's state-by-
state, basically. The--for instance, your constituents in 
Arkansas should not be paying for the--through their policy, 
should not be paying for the catastrophes on the Gulf Coast for 
what they had. The rates would be set based on the losses or 
the--not the losses, but the future projections for what the 
model might be in Arkansas. For instance, they're going to look 
at what--they're going to look at what the history has been, 
and what they project the future might be, in Arkansas, for 
projected losses for the catastrophes in Arkansas specifically.
    Senator Pryor. When you say----
    Ms. Bowman. They would not pay for the Gulf Coast. They 
would not take that into account.
    Senator Pryor. When you say they ``should not,'' or they 
``would not,'' in your experience do they take that into 
account, though?
    Ms. Bowman. No, we are looking at that. Each insurance 
department looks into that. When the rates are filed, we look 
at that and make sure that that's not taken into account. We 
look at each rate--each time that a rate is filed, we look at 
three things, and all the departments do this. We make sure 
that when the rate is filed it is not inadequate, it is not 
unfairly discriminatory--because rates themselves are 
discriminatory--and it is not too high. You're not looking to 
make--you're making sure that the rate is appropriate and that 
it is fair.
    Senator Pryor. And you also review the policies in the 
State. For example, what the attorney general was talking about 
a few moments ago--and the term he used was ``anti-concurrent 
causation''--not just you, but the States, the State insurance 
commissioners and departments, they look at the language of the 
policies to make sure that they're not misleading and that 
they're clear and that they're not being marketed in the wrong 
way. Is that one of your consumer protection functions?
    Ms. Bowman. Absolutely. Every policy must be filed with us, 
and we review those. As a matter of fact, we have a rule and 
reg in Arkansas that those policies must be written at 
basically an eighth-grade reading level. It's called a Flesch 
Score----
    Senator Pryor. OK.
    Ms. Bowman.--and that--that's a national--pretty much a 
national standard of how they must be written.
    Senator Pryor. All right, thank you.
    Senator Lott?

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Well, thank you, Mr. Chairman, for having 
this hearing. And I want to thank Senator Inouye, our full 
Committee Chairman, and Senator Stevens, for cooperating with 
our staffs and the Subcommittees to have hearings of this 
nature.
    And I want to thank all the panel. You're all very 
interesting and very well qualified to help us in this area. 
But you did raise a number of questions that I'd like to 
pursue, so I ask my chairman and my colleague to bear with me, 
because this whole issue wells up so many questions and so many 
emotions in me that it's hard for me to, you know, control all 
the concerns and the questions that I might have.
    But let me just begin on the other--left side, or the right 
side from the audience, with Attorney General Hood from 
Mississippi. Thank you for being here. Thank you for your 
testimony. I thought you did a very good job. And thank you for 
the job you've done in the State. You took on the biggest boy 
in town, and I think you handled it very well.
    I know it was a tough decision for you, because you had a 
lot of evidence of misconduct and fraud. But I think you chose 
a solution, rather than revenge, which was a very powerful 
force. And those of us that have suffered and bled together in 
Hurricane Katrina area, our whole state and our neighbors in 
Louisiana and Alabama and Texas, with Katrina and Rita.
    I won't go into a long history, but this is particularly 
profound for me, because when I practiced law, I was with the 
firm that defended State Farm. And I've had my insurance--my 
entire life was State Farm insurance, although I'm pulling away 
from that as fast as I can now. And I lost my house. I didn't 
have a slab, because my house was actually about 8 or 9 feet up 
off the ground, and I just had dirt under the house. And when I 
got there, I didn't have a slab, I had nothing, just a plot of 
ground. And so, I have experienced all the difficulties that a 
lot of people have along the coast.
    I also lost my car, a 2 year old, I believe it was, 
Escalade, General Motors product. I took it 12 blocks from the 
beach, parked on the north side of my office building, 
convinced it would be safe from wind and water. And when I got 
there, I opened the door, and water poured out. It had about 3 
feet of water in it. It looked fantastic. Beautiful car. Only 
problem was, it wouldn't crank, and it was totaled. I wonder 
where it is today. And so, you know, I experienced that.
    I was very interested, Commissioner--is that your title, 
Commissioner? Bowman--about how you require understandable 
language. Maybe I should move to Arkansas, because----
    Ms. Bowman. We'd welcome you.
    [Laughter.]
    Senator Lott. Well, going back to when I was trying to be a 
young lawyer, I always thought that the policy languages were a 
bunch of total gobbledygook. People don't have the foggiest, 
faintest idea of what they really have covered, or not covered. 
And we need to make sure that it is defined in plain English.
    The reason why I know we need to do it is because the 
industry opposes that--you know, to have some area where it's 
highlighted what you have or what you don't have, in some 
understandable sense. If lawyers can't understand it, or if 
judges and lawyers will argue over it, what about the average 
man or woman working in the shipyard or in a poultry plant or 
in the Toyota plant in north Mississippi? So, we've got a lot 
of work to do here.
    So, I've experienced it, and it's emotional with me, and I 
admit it. But, for the property and casualty industry--not just 
State Farm, but Allstate and Nationwide and all the others--to 
be denying claims when you--if you had a slab, it was 
concluded, ``Oh, it was all water.'' Zero wind damage. Now, who 
believes that? Defies common sense. We were pounded for hours 
before the tidal surge came in. And so, there clearly was wind 
damage. I was told, in my case, ``Oh, no, no, you had no wind 
damage.'' And yet, we have all kinds of evidence to the 
contrary. After the fact, I actually found part of the siding 
of my house 35 feet up off the ground in a live oak tree. Still 
there. The water was not that high. It might have been 21 feet. 
No, wind put it up there. But I--so, I had no siding damage? 
The list goes on.
    But what we want here--and at the same time claims were 
being denied and saying, ``We're not going to provide insurance 
along the coast,'' and then eventually, ``Oh, well, we're not 
going to cover, you know, homes statewide,'' the industry is 
recording historic profits, and CEO--State Farm CEO gave 
himself an 82 percent pay raise, or something of that nature. 
This is outrageous. And I have found them to be arrogant and 
meanspirited and convinced that they can whip Attorney General 
Hood and Congress and me and anybody else who gets in their 
way. Well, they may have a surprise coming. With the help of my 
colleagues, we're going to try to fix some of these problems.
    And so, let me come to you, Attorney General Hood. Let me 
first introduce a document here. Maybe we should call this 
document D, because a couple have been--already been 
introduced. This is correspondence between engineers. It's 
identified--this came to my attention just yesterday--from 
forensicanalyst.com. And they had been doing business with 
State Farm, but State Farm had stopped doing business with 
them. But the--these e-mails begin with, ``Subject: We are back 
in business with State Farm for now.'' And then, this person 
says, ``This is very good news, but I have serious concern 
about the ethics of this whole matter. I really question the 
ethics of someone who wants to fire us simply because our 
conclusions don't match his or hers. If State Farm is going to 
tell us what to put in our reports, then I think we have a 
situation similar to State Farm wanting my personal financial 
information. In my opinion, we need to find a more rational and 
ethical client to be dealing with.''
    Attorney General Hood, are you familiar with this document?
    Mr. Hood. Yes, sir, Senator Lott. We obtained this during 
our grand jury investigation. And I've heretofore been unable 
to comment about the document. However, yesterday, while I was 
on the plane up here, a lawyer found this in discovery, so it 
now is in the--it is in the civil realm. But this document, one 
sentence in here that I thought particularly disturbing for our 
Federal Government to be looking at was that the--they're 
talking about--in the second paragraph, about placing 
percentages of damage to property. Initially, State Farm 
requested that the engineers give them a percentage of damage, 
meaning wind versus water, whichever the percentage was. And 
then they came back and they wanted no percentages, because 
they said that they'd have to settle for that. And, two, what's 
more important for the Federal Government is that they were 
worried about having to prorate the Federal Government claims 
that they had already agreed and just allowed, without even 
investigation, the--us taxpayers to have to pay 100 percent on 
the Federal flood claims. So, I'm glad that this document came 
out, and this is what we were looking at in our criminal 
investigation.
    Senator Lott. Would you explain, as you understand it, 
exactly, now, who these e-mails are between? Who are these 
people?
    Mr. Hood. It's--Forensics is a North Carolina engineering 
firm that State Farm had engaged to handle some of their 
contract engineering examinations. Randy Down is the one 
sending the letter to Bob Kochan, who is the manager, or--and 
part owner, I think, of this Forensics.com.
    What had happened was, State Farm was coercing them to 
change their engineering reports. And, in fact, they were going 
to--they did fire some of the people who wouldn't go along with 
them.
    Senator Lott. And you have a lot more evidence of this type 
in your files, I presume, some of which has not been made 
public, but----
    Mr. Hood. Yes, sir. I'm--I was unable to comment on them. 
And I thought it was unfair attacks for the industry to send a 
lobbyist up here--Racicot, I believe, was his name--to attack 
us on going after them down there. The last sentence down here 
in this particular e-mail, of the first aspect of it, it says, 
``It's obvious that State Farm would love to see every report 
come through as water damage so that they can make the minimum 
settlement. I now see why the Attorney General's Office is 
already involved down there.'' We had a case, but, had we 
indicted them, they would have left the State, shut down every 
claims office, and they would have left such a hole that the 
other companies could not have come in and filled it. So, we 
were left with a choice: indict them, they leave the State; or 
try to settle with 'em. And, as you spoke about, that's what we 
reached. And that's still going on. They haven't fully complied 
with the requirements that the Federal judge has placed on them 
to reach a final settlement. But these are the kind of 
documents that we've been--we've had to sit by and bite our lip 
and watch their comments of how innocent they are.
    [The information referred to follows:]

From: ``Randy Down''
To: ``Bob Kochan''
cc: ``Nellie Williams''
Sent: Tuesday, October 18, 2005 8:54 AM
Subject: Re: We are back in business with SF . . . for now!

Bob,

    That's very good news. But I have a serious concern about the 
ethics of this whole matter.
    Lecky (is this a man or a woman?) seems to be a very highly 
qualified adjuster to be making engineering conclusions that are more 
accurate than ours. I really question the ethics of someone who wants 
to fire us simply because our conclusions don't match hers (his?). If 
SF is going to tell us what we are to put in our reports then I think 
we have a situation similar to SF wanting my personal financial 
information. In my opinion we need to find a more rational and ethical 
client to be dealing with. Too many eggs in this basket to be risking 
it on SF. They had already contradicted themselves regarding the 
reports--with Mark (?) wanting percentages stated and his counterpart 
calling a few days later and telling us to resubmit two reports that 
had shown percentages and saying that SF absolutely does not want them 
shown because they would then have to settle for the portion that was 
reportedly caused by wind. I see now why other firms are bowing out.
    Does this Lecky person understand that eye witness accounts are 
standardly included in a forensic report, when available? To ignore 
them would seem to be ignoring potential facts in the investigation 
that could hurt our credibility later.
    Her concern about the emotional element in the engineer's decisions 
may have some validity (although I doubt It in Brian's case). But what 
about the obvious fact that SF would love to see every report come 
through as water damage so that they can make the minimum settlement. I 
now see why the Attorney General's office is already involved down 
there. She needs to be careful about what she is doing and saying.

--Randy
                                 ______
                                 
--Original Message--
From: Bob Kochan
To: Randy Down; Nellie Williams
Sent: Monday, October 17, 2005 7:17 PM
Subject: We are back in business with SF . . . for now!

Good Morning gang!

    Hope this finds you both well this AM. I managed to get us back on 
the roles with SF but we need to have a very frank conversation with 
the boys down south to be sure that we don't fall in the same trap.
    Between us, the client feels that Brian relied solely on eye 
witness testimonies of others who were trapped in their attics and 
panic stricken at the time during the height of the storm. Very biased 
opinions of folks who may or may not have actually seen a significant 
portion of the storm's effect on the subject house. I have copied you 
both on an e-mail I sent to Brian last night in reply to his 
conversation with Lecky King about this matter.
    We also will need to adjust Manny's report such that the 
conclusions are better supported. I happened to have been on that house 
site and was able to convince Ms. King based upon what I saw that the 
house roof first blew off weakening the walls and remaining structure 
then the tidal wave came through . . . now known to have been in the 
35-38 foot high range . . . knocked down the rest of the structure and 
sent it floating away. Anyway she seemed to buy that but it is only 
because I explained to her where 1 saw sections of the roof and other 
debris. I also agreed with her in lot so ways. So we may need to redo 
the wording of that report.
    Randy, as you were down and out this afternoon, I had to make a few 
decisions without consulting you . . . sorry but time was of the 
essence in this matter and timing did prove to be critical . . . I have 
committed to SF that we will send a new Structural PE to the site of 
Brian's investigation tomorrow and have him perform a separate and 
unbiased investigation of the loss. If we come up with the same 
determination, we will only bill for one report, the final one. If we 
come up with a different conclusion, we will absorb the total cost of 
both reports . . . But Nellie I will need for you to distribute the 
expenses over the other reports so we don't completely loose out OK?
    Anyway I am calling for a conference call at 9:30 our time with 
everyone to go over this matter in detail and make sure we are all 
playing under the same guidelines.
    Lastly, I will mention to you that Lecky told me that she is 
experiencing this same concern with the other engineering companies who 
are using engineers who happen to live in the area. In her words . . . 
They are all too emotionally involved and are all working very hard to 
find justifications to call it wind damage when the facts only show 
water induced damage. I don't know if that is the problem in our team's 
case but we must be careful that these reports have technically 
defensible conclusions when submitted.
    I will call in as the leader and will await each of your contacts 
at 9:30 Tuesday AM.

            Bye for now,
                                                        Bob

    Senator Lott. Yes. Well, of course, what we're looking for 
here are potential solutions--please, Mr. Chairman, bear with 
me, if you would--in how we deal with this in the future.
    Now, one of the things that--it seems to me--and I should 
say this, not you--that the industry used flood insurance to 
make it appear that they were actually providing insurance to 
the customers. And so, if you had flood insurance, you paid 
flood insurance, maximum of $250,000 per house, $100,000 for 
content--then the companies, quite often, the same companies--
in my case, State Farm--became the agent to get the money for 
flood insurance. They delivered the check and, in effect, said, 
``OK, congratulations, you got $350,000, total.''
    One of the things coming out of the hurricane that is 
obvious to me is, we do need this flood insurance reform. We 
need to increase the level of coverage, and we need to increase 
what people pay. It's obviously not actuarily sound. Congress 
had to come in and bail out the program twice in significant 
amounts of money. And I just--I'm very suspicious that the 
industry uses this as a cover to make it look like they're 
really doing something. And, oh, by the way, they get a fee, of 
course, for handling this money--this claim, which is then 
given to their--the person that they insure, and then they deny 
it.
    The other thing is, I do really think we need to take a 
serious look at the current exemption from the--from antitrust 
laws. The McCarran-Ferguson--it was done in 1940 under very 
questionable conditions and process at that time. Now, they 
will--they are using--the big boys are using the little guys to 
come up here and say, ``Oh, my goodness, if you do that, we'll 
be put out of business, because we've got domestic companies in 
Mississippi and, I'm sure, in Arkansas and other States, and 
they use this rate-gathering process to determine what rates 
they're going to set.'' I'm interested in a solution here. And 
if there are some problems, I'd like to find a way of safe 
harbor, maybe, for the smaller companies or just a $2 billion 
exemption, but find a solution. But what they don't say is--
they complain about it, ``Oh, well, we need this rate-setting 
capability.'' The truth of the matter is, the big companies 
really don't. And what--but they don't mention that it does 
allow collusion. And there's another area where I am very 
concerned that collusion is, in effect, allowed under this 
exemption. Do you have a impression of that, Attorney General 
Hood?
    Mr. Hood. Yes, sir. I don't recall any specific--our 
investigation was not geared toward----
    Senator Lott. Yes.
    Mr. Hood.--those aspects. That's something the Federal 
Government definitely needs to look into. And ours was strictly 
geared on the insurance fraud statute. It applies to insurance 
companies in Mississippi, and it applies to claimants. And our 
investigation was strictly looking at their claims practices. 
But I can tell you that, with the power that the industry has, 
as a whole, they can dictate to a State. New Jersey--I think 
they pulled out of the state of New Jersey.
    Senator Lott. Well, they pulled out of part of Alabama, and 
Alabama's Attorney General I don't think was going after them. 
And the Senators weren't raising as much Cain as I was, and 
didn't have the lawsuits pending as much. But yet--and they 
said, ``But we're not going to cover that part down there in 
south Alabama.'' What was their problem?
    Mr. Hood. They're cherry-picking what areas they want to 
cover and they're dumping the rest off on the taxpayers through 
the State-funded Wind Pools. And, you know, I proposed, in 
response to their announcement that they were going to pull 
out, that if they're going to be licensed in Mississippi, that 
they ought to have--and they write all lines in other States, 
homeowners and so forth--they ought to have to write it all 
over the State of Mississippi. That's what Florida did.
    Senator Lott. Yes.
    Mr. Hood. That was a proposal to try to respond. But 
perhaps that--that's maybe what the Federal Government should 
require and allow them to distribute the list--the risk 
nationwide.
    Senator Lott. Yes. Thank you very much, again, Attorney 
General Hood.
    Ms. Bowman, I was interested in a couple of things you 
said. One, that rates don't--or, rates are not supposed to be 
affected in other States. As a matter of fact, my colleague 
Senator Larry Craig, from Idaho, who--I think his residence in 
the Washington area was on a boat. And he noted that his rates 
went up. And it had a tag line, in effect, saying, because of 
something to do with Katrina--Katrina was in his rate 
increase--his boat insurance was going to go up in Virginia. 
Now, how could that be?
    Ms. Bowman. Well, it shouldn't. Now, you can get into 
reinsurance, and when you are talking about reinsurance, it 
could have an effect overall, because the insurance companies 
do reinsure, and the reinsurance companies are looking at an 
overall effect. It should be minimal because of how the risk is 
spread so thinly. It should be very small when you're talking 
about the risk that's spread. But, from State to State to a 
policyholder just at the company level, it should not. But I'm 
very surprised to hear that it would say ``because of Katrina'' 
that----
    Senator Lott. I was, too. And, apparently, so was he.
    Ms. Bowman. Yes.
    Senator Lott. Because I suspect they use it as cover to 
jack up rates all over the country. And, at the same time, they 
were denying these claims and were refusing to insure, they're 
also asking the State insurance commissioner in our State, and 
probably other States, for 200, 400 percent increases.
    Ms. Bowman. I would think that the insurance commissioner 
for that State would be interested in looking at that policy.
    Senator Lott. On your plain English, you--do you feel like, 
in your State, you know, plain understandable language is 
required? And do you get it?
    Ms. Bowman. It's required. Do we get it? I think we get 
what is required. We get, in Arkansas, about 40,000 phone calls 
a year to our consumer services division. And a lot of those 
phone calls have to do with explaining what those terms mean 
and what those policies mean. I agree with you that saying that 
it's an eighth-grade reading level and understanding level may 
not be exactly what it is----
    Senator Lott. Right.
    Ms. Bowman.--because I even have a hard time, sometimes, 
understanding--I mean, I'm supposed to be in the business, 
right?
    Senator Lott. Right.
    Ms. Bowman. I agree that it is difficult to----
    Senator Lott. Right.
    Ms. Bowman.--to understand.
    Senator Lott. Well, thank you for your efforts.
    Mr. Hunter, it's good to see you again.
    Mr. Hunter. How are you?
    Senator Lott. I take it you would be, as you indicated, for 
some reform, if not repeal, of the antitrust exemption.
    Mr. Hunter. Yes.
    Senator Lott. I think you would probably be supportive of 
flood insurance reform in a variety of ways.
    Mr. Hunter. Including, I think, the Flood Insurance Program 
should prohibit its write-your-own companies, that they pay a 
very healthy fee to, by the way----
    Senator Lott. Right. Right.
    Mr. Hunter.--from allowing anti-concurrent causation-type 
clauses in their policies, which will--which has the tendency 
to dump risk onto the taxpayer that they don't deserve.
    Senator Lott. You think plain English makes sense?
    Mr. Hunter. Plain English makes sense, but the problem is, 
it's a complex legal document. I've talked to thousands and 
thousands of consumers. They understand every word, and they 
don't have a clue what's in there. They can read every word and 
understand it. It's in eighth-grade English, that's true. But--
--
    Senator Lott. The best lawyers----
    Mr. Hunter.--that doesn't mean anything----
    Senator Lott.--I know wrote those policies.
    Mr. Hunter.--because you have--the fact that you understand 
every word doesn't mean you understand a big, long, complex 
insurance policy, where clause 1--you have to look at clause 
13, which refers you to clause 24. By the time they get three 
paragraphs in, they're lost, even though they understand the 
words.
    Senator Lott. It sounded like some of our government 
officials in the Federal Government----
    Mr. Hunter. Yes, it's like the Federal Register.
    Senator Lott.--wrote those policies. It's very, very----
    Mr. Hunter. When I was a government official, I used to 
write stuff that I understood, and, by the time the lawyers got 
it ready for the Federal Register, I had no idea what it said.
    Senator Lott. Yes. All right.
    [Laughter.]
    Senator Lott. But, of course, I'm very anxious, also, about 
this damage to, you know, the title washing bill. And I know 
you've been supportive of that, and you mentioned it--the bill, 
in particular. Geez, you know, that, to me, looks like a--just 
a classic case of fraud or--I mean, it--it's--to me, it's 
criminal that you would be foisting off on an--you know, an 
innocent consumer a vehicle that, you know, looks good, but 
that's been totaled somewhere down the line by--because of a 
wreck, a flood, hurricane, whatever.
    Mr. Hunter. Absolutely. There has to be clear disclosure 
for the consumers to understand what they're getting. I mean, 
we--you can't possibly tell--a normal consumer can't--whether a 
car has been in a flood or an accident----
    Senator Lott. Right. But here's my concern. I actually had 
this bill, a year or so ago, when we were trying to move it, 
and what happens is, you know, very interested and good people 
wanted to add to it. And, you know, consumer advocates wanted 
to make it more wonderful. In Congress, the more wonderful you 
make the bill, the heavier it gets, and the more likelihood 
it'll die. This is an issue that needs to be addressed. It 
needs to be done this year. We have bipartisan, bicameral 
support. I've talked to subcommittee chairman Bobby Rush in the 
House, Cliff Stearns, down in Florida, as a cosponsor. We need 
to move this clean and quick. And so, I hope that you would 
help us, you know, achieve that. It's one of these things we 
can do, because everybody seems to acknowledge it needs to be 
done.
    And I want to thank the automobile industry for getting on 
the point here. You could very easily, in effect, be a 
participant--your industry--in this fraud. But, no, you are--
your people wind up getting burned, quite often, and you do 
want honesty. You want to comment on that, Mr. Regan?
    Mr. Regan. Yes, sir. And thank you, Senator Lott, for your 
efforts, not only in the context of this legislation, but for 
years you've been on the forefront of trying to address title 
fraud, trying to address it legislatively. And I think your 
efforts several years ago, frankly, have helped, to a certain 
degree, to draw attention to this issue and to get some of the 
States to act collectively and try to move to more standard 
State titling legislation. But we've come to the conclusion 
that we need to look at this from a technology perspective 
rather than from the----
    Senator Lott. Well, and these automobiles not only leave 
the Gulf Coast hurricane area and wind up----
    Mr. Regan. Yes.
    Senator Lott.--in north Mississippi, where Attorney General 
Hood's from, they wind up in North Carolina or Virginia.
    Mr. Regan. Right.
    Senator Lott. So they clearly are involved in interstate 
commerce.
    Mr. Regan. Right. For every one retail transaction----
    Senator Lott. Or in Arkansas. We----
    Mr. Regan. Right.
    Senator Lott. We'll get the attention of----
    Mr. Regan. Yes.
    Senator Lott.--the Chairman here.
    [Laughter.]
    Mr. Regan. For every one retail transaction, there 
typically are two wholesale transactions associated with that.
    Senator Lott. Yes.
    Mr. Regan. And we have industrywide support. We have the 
auctions that support this. The auction industry's two broad 
components--one, the salvage auction that disposes of vehicles 
that have been totally--that have been totaled; and the other 
auction--the other segment of the auction industry really 
facilitates the flow of vehicles that are basically ready for 
resale by retailers, and it facilitates the flow of those 
vehicles throughout the country. And if we could--if we could 
inject into the wholesale process this total-loss disclosure 
concept, it would enable the auctions to spot these vehicles, 
red-flag these VINs so that they--that basically you'd only 
have the curbstoners, who are the unlicensed, basically 
illegal, dealers of these vehicles out there. The curbstoners 
would be, kind of, the distributors of last resort here.
    Senator Lott. Right.
    Mr. Regan. And this legislation really is about attacking 
the fraudulent economic model of the curbstoners, as much as 
anything else.
    Senator Lott. Well, thank you all again for being here. You 
know what the greatest danger is? I've seen it happen many 
times over my 35 years in Congress. You have a disaster, you 
have an incident, and we're all fired up, and we're alarmed and 
determined to do something about it, and then time goes by, and 
your attention is diverted, and your passions cool, and it 
becomes--you get the money, and you hightail it, and you don't 
have time to actually address the law. We have a problem in 
this country with future expected cataclysmic disasters, 
natural and manmade. We need to think about these things.
    If we could just work in these four areas that have been 
addressed here today, we could make a huge difference. Help us 
keep the attention on this, and let's try to find a way to get 
these targeted pieces of legislation done to help people all 
over this country when they're faced with future situations 
like we had.
    Mr. Chairman, I believe my 4 minutes expired----
    [Laughter.]
    Senator Lott.--about 20 minutes ago.
    [Laughter.]
    Senator Lott. But thank you very much for your lenience.
    Senator Pryor. Thank you.
    Senator Klobuchar?

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. That's an act to follow.
    Thank you all for being here. And I thought I would tell 
Senator Lott that one of my first jobs when I was in college 
was, actually taking consumer statutes and writing them in 
plain language for the Attorney General's Office of Minnesota. 
And I did that as a lawyer; now, I can say that I understand 
this issue. And I also was thinking, as I listened to all of 
you and appreciated Senator Lott's devotion to this issue, that 
during the recess, I was up in Grand Forks, North Dakota, and 
East Grand Forks and saw the damage there. Of course, it had 
been many years ago, and to the point where the flooding was 
two stories high, I think, and there were markers of where this 
flooding was, and I saw the tremendous rebuilding that's gone 
on, and how things can work when it's done well.
    And so, I also have been very concerned, just hearing about 
what went on in the southern part of the United States. I've 
heard some of the stories around Minnesota. It just seems to me 
that when people have these things happen, they should be able 
to get insurance, it shouldn't be so hard to get these claims 
paid, and that there must be a better way to do this.
    I just have a few questions about whether you believe that 
more Federal regulation of the property and casualty insurance 
industry as a whole is necessary, and if you'd like to see more 
Federal/State cooperation, and what Congress could be doing to 
make this go more smoothly and be better for the citizens of 
this country.
    So, Attorney General Hood?
    Mr. Hood. I would like to see both State and Federal 
regulation. I've always supported the State's authority under 
law to cover. But there are gaps now that need to be filled. 
Basically, all the Federal regulation that you have is a 
Federal criminal prosecution. For an industry this large that 
can intimidate a State, such as things that they've done in 
Mississippi, is--and then they have--they have a PR machine 
that's incredible. You know, they keep talking about they've 
paid all these claims, but maybe 1 percent--you know, how they 
come at their percentages? They come at their percentages 
because those people that they call it a flood claim, they 
don't count those claims. They play with the statistics and the 
percentages. So, a State can easily be intimidated, leaders in 
a State. They pulled out of our State, for example, and stopped 
writing new policies. So, there has got to be--what you're 
doing, by looking at this issue, has probably kept them from 
completely shutting down and pulling out of the State of 
Mississippi--State Farm, that is. Allstate, Nationwide, the 
other companies are watching what's going on, as well. So, I 
thank you for investigating this issue. But I really think that 
we need to look at some of the antitrust aspects and have full 
Federal and State regulation.
    Senator Klobuchar. Thank you.
    Ms. Bowman. I think that consumer protections are best done 
closer to the consumer, and so I'm more of keeping regulation 
at the State level. I think there are some areas that probably 
the Federal Government--the Federal Government already is in 
the business of insurance regulation, and I think that there 
are some areas that are better for the Federal Government to be 
in, and that would be the TRIA area, if we see that has--that 
has worked well, and probably should continue there. I think 
that's been a great incentive for the private companies to 
continue to write for those kinds of coverages.
    And I appreciate that Senator Lott wants to look at the 
antitrust provision of McCarran-Ferguson. Just because it's 
been that way for a long time doesn't mean we ought to keep it 
that way. But I appreciate the fact that he wants to look at it 
carefully before we change it, because I am concerned about the 
domestic companies in Arkansas, the small companies, and the 
data-sharing information for ratemaking. That is important.
    But, again, in--especially in the small States, when we're 
looking at consumer protections--I mean, we know a lot of our 
consumers on a first name basis, and they know us on a first 
name basis. And, again, we get those 40,000 phone calls a year 
in Arkansas, and they can call us, they know where to find us, 
they can come to our office. And we understand what they're 
talking about when they call us and they need help, and we 
understand the dynamics, you know, in the small States 
especially, when they ask us the questions. And when there is a 
disaster, when the small town of Dumas, in Arkansas, is--half 
of it is blown away by a tornado, we can get there immediately 
and go help them find their insurance agent or their adjuster 
and help them within just a matter of hours. And I think that's 
very important.
    One thing, too, that I think we might want to consider, 
that I wasn't asked or--and I'm--sometimes I stick my nose 
where I'm not supposed to, but I do that anyway--is when we're 
talking about flood insurance, perhaps we should consider--and 
the anti-concurrent-cause clause--consider an all-perils 
policy. And--you know, look at the all-perils. Have a company 
cover all perils so that you don't have the problem with the 
anti-concurrent-cause clause issue, so that you don't have to 
determine who's going to cover, whether it was wind, water, you 
know, something like that. That might be something for them to 
look at. And I think that some of the companies have been 
approached about this issue, and that it is doable. And perhaps 
looking at the flood program in a--maybe a different way, maybe 
as more of a backstop or a reinsurance. I think there are some 
ideas out there to look at. So, I appreciate the fact that this 
Committee--and I told Senator Pryor this yesterday--I 
appreciate the fact that this Committee is looking at insurance 
as it hasn't in the past several years. I think it's very 
timely, and I really do appreciate it. I think it's--I think 
it's very important.
    But, again, your--I've gone beyond your question, but I'm a 
woman and I'm a lawyer, and so I do that all the time. But I do 
think--in answer to your question, I do think State regulation, 
as far as insurance is concerned, the more we can keep there, 
the better. But, again, there are some places where--that we 
need your help, and--at the Federal level.
    Senator Klobuchar. OK. Thank you very much. I have to get 
going, but I will maybe talk to the two of you about this in 
the future. So, thank you.
    Thank you very much.
    Senator Pryor. Thank you, Senator Klobuchar. Thank you for 
coming today.
    I have a few more questions for the panel. I'm not going to 
try to use my entire 4 minutes like Senator Lott did.
    [Laughter.]
    Senator Pryor. But I may be close to that.
    Let me ask, if I can, Mr. Regan, about S. 545.
    Mr. Regan. Yes.
    Senator Pryor. When I was the Attorney General in my State, 
we had some hurricanes. I don't remember if they were in 
Florida or exactly where. And, sure enough, we saw some--a lot 
of salvage vehicles come in our State, and all kinds of 
problems. And, one of the things we learned very quickly is, 
our salvage title law at the State level needed some cleaning 
up. But the problem is, we could clean ours up, but they could 
still come from other States, like Senator Lott talked about a 
minute ago. So you think that S. 545 will fix that problem 
nationally?
    Mr. Regan. I think that the approach of Senator Lott's 
bill, which is to push total-loss information into the public 
domain faster than that information trickles through the DMV 
process and the titling process, will help significantly. This 
is really the last set of data that are collected in fairly 
discrete places that--you know, basically, the computer 
databases of the insurance companies. If we can push that data 
out, at the same time continue to push the State DMV data out, 
then I think the combination of those two sets of data will be 
very powerful. It--you know, to say that it will fix the 
problem is a big task, because this is a very--as you well 
know, this is a very, very complex set--complex issue with a 
lot of complex players and a lot of different stakeholders. But 
the last--really the last big unknown out there, I think--or we 
think, as an association--is the total-loss data. If we can get 
that into the public domain, that will be a very powerful tool, 
very powerful information set.
    Senator Pryor. Some in the insurance industry--not all, but 
some--have been reluctant to have a VIN-based disclosure. Do 
you know why they're reluctant?
    Mr. Regan. I think, as I've--we've said in our written and 
in the oral testimony, they basically have a self-economic 
interest. Even if they comply fully with State titling laws, 
not every vehicle that is declared a total loss necessarily 
gets a salvage title. So, if you're still complying with State 
law in pushing that vehicle through the State titling system, 
it may not require a salvage title, and the cleaner the title, 
the higher the purchase price at salvage auction. Whereas, if 
Senator Lott's bill were to become law, that vehicle would be 
red-flagged--you know, that VIN would be red-flagged, 
basically, as soon as the total-loss settlement occurs. Then 
you get less at salvage auction. You know, that's--if you look 
at it in that small box, then it's--the insurance company may 
take a hit. But we think that the public interest demands that 
you look at it, at the big box; the big box being, you know, 
what happens to that vehicle after it gets sold at salvage 
auction? And questions that we raised in my oral testimony, you 
know, how is that vehicle reinsured? Why is it not in the 
economic interest of all the insurance companies to know that a 
total loss has been declared so that, you know, they're not in 
the business of shifting that, you know, one bad apple, you 
know, from one company to the other?
    Senator Pryor. Let me ask this, too. Why shouldn't the law 
require that, at the point of sale, there be a notice or a 
sticker or something on a sheet of paper posted in the window 
so that there is a notice to the consumer about the status of 
that vehicle and whether it has ever been salvaged?
    Mr. Regan. In----
    Senator Pryor. Why shouldn't we do that?
    Mr. Regan. In 1988, that very question was addressed at 
great length in the context of the Federal Trade Commission 
putting the Car Buyer's Guide rule into place. And ultimately, 
the point-of-sale notice requirement, whether it's condition of 
use, whether it's notice about a specific defect in the 
vehicle, that approach was rejected, in the context of that 
very extensive rulemaking; and, instead, the FTC chose to use a 
different approach, which is--the Car Buyer's Guide says, 
``Here's what your warranty is. If you have a warranty, here it 
is,'' whether it's, ``You know, if you don't have a warranty, 
it's as-is. If you do have a warranty, it's either limited or 
there's the manufacturer's warranty.'' Or, if there's an 
extended service contract, there's a box to check on that. And 
also, that Buyer's Guide encourages the individual to get the 
vehicle inspected. You know, the bottom line, there is no 
substitute to buying a vehicle from somebody you know and trust 
or, if you're not in that position, there's no substitute to 
having the vehicle inspected. And so, it is--you know, the--
while I appreciate your concerns there, in essence, the Federal 
Trade Commission has kind of addressed that, and has chosen--in 
the 1990s, they reexamined the rule, and they agreed to stick 
with the same choice.
    Senator Pryor. OK.
    Let me ask Mr. Hunter, if I may, about a software issue, 
when it comes to claims adjusting and investigation. I'm aware 
of two types of software. One's called Colossus, one's called 
Claims Outcome Advisor. And there are probably others on the 
market; I'm not just picking on those two. But, as I understand 
it, some people that have looked at that software believe that 
when claims adjusters and companies are using that software, 
they will systematically underpay on claims. Is that your 
experience? Could you tell the Committee about that?
    Mr. Hunter. Yes, that's--there seems to be a--an ability--
and I would encourage you to look at the book ``From Good Hands 
to Boxing Gloves,'' which explains how it was used in Allstate, 
and--the ``boxing gloves'' being if you don't accept their 
offer, which is a lowball, you go--you end up in court. And 
that was the recommendation of McKinsey, and that's where that 
quote came from, McKinsey's suggestion to Allstate of how to 
implement this. And that became the title of the book by a 
trial lawyer who brought a case and got these slides of 
McKinsey, who introduced Colossus. Colossus, COA, Claims IQ, 
were three systems that deal with--those are bodily injury 
claims. There are other systems that deal with property damage 
claims, like Xactimate and some others that are used, I'm sure, 
down in Mississippi, when the--after Hurricane Katrina. So, you 
have different types of systems, some of which at least have 
the appearance, according to lawsuits and this book, of ability 
for the management to dial in a savings that they want to 
achieve in the claims process for the following year. And that, 
obviously, is a extremely serious situation, and there doesn't 
seem to have been any market-conduct examinations that have 
caught it. There have been very few market-conduct examinations 
that have even touched on it by the States.
    Senator Pryor. Should that market conduct be evaluated at 
the State level or the Federal level?
    Mr. Hunter. State--well, I think it should be evaluated at 
the Federal level, because I think there are some serious 
questions about how come suddenly all the--you know, many 
insurance companies are using these systems. And some will say, 
``Well, it's because my competitors are suddenly able to come 
in with lower rates, because they're saving so much money on 
claims.'' But, nonetheless, whatever it is, it's not fair to 
the people who are hurt.
    Mr. Hood. Senator Pryor, may I----
    Senator Pryor. Yes, sir.
    Mr. Hood.--speak out of turn about this issue of software? 
This is something that we've found in our investigation that's 
disturbing, that the softwares are programmed differently for 
the cost payments on the Federal flood program versus the 
insurance policies themselves. For example, in the programs 
it's set up to pay a dollar for sheetrock removal, where--for 
flood program--for us taxpayers to pay it--whereas, if the 
insurance company pays, you know, they only pay 60 cents. And 
I'm not sure if it's square footage or--I actually have that 
calculated. But I do know, for us taxpayers, it's a dollar to 
pay it, for the insurance companies, it's 60 cents.
    Senator Pryor. And you found out--you found that out 
through your investigation?
    Mr. Hood. Yes, sir. I think some of those documents are 
actually out in public domain, under--where some civil lawyers 
have discovered documents. It's--they're running about 9 months 
behind us, and I can try to lay hands on those public 
documents, where those--that has occurred, as well, and that's 
set up in their software system.*
---------------------------------------------------------------------------
    \*\ [The information referred to is retained in the Committee 
files.]
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    Mr. Hunter. And it's not just claims. We have black boxes 
that are being used to price hurricane insurance that are--a 
lot of States have no clue what's going on inside those black 
boxes. And then there are black boxes being used by Fair Isaac 
and others to come up with credit scoring surcharges, which 
sometimes can be 100 percent if you happen to be poor. And 
things like that, that are beyond the regulatory reach of the 
States, because it used to be that every time a price was 
varied within a insurer's pricing system, it was through either 
a rating bureau or by the insurer, and was regulated. But it 
isn't true anymore. It's not regulated.
    Senator Pryor. Mr. Hunter, let me also ask--Ms. Bowman, a 
few moments ago, mentioned an all-perils policy. I'd like to 
get your thoughts on that.
    Mr. Hunter. I ran the National Flood Insurance Program. I 
actually would think a all-perils policy would be good. But I'm 
very concerned about giving the Federal Government more 
authority right now, given the Flood Insurance Program. The 
Flood Insurance Program promised the taxpayers--that we tried 
to administer when I was running the program--was that we did 
a--we--was to--in exchange for a program that gave subsidized 
rates to people, the future building would be done wisely, and 
that the--and the land use would be controlled in a way that--
and new construction would be paid--would be charged full 
actuarial rates. We required that flood maps were updated every 
3 years.
    In Hancock County, Mississippi, recently, there were 76 new 
flood maps. On average, the old flood maps were 20 years old 
and were 10 feet too low. So, people were building what they 
thought were safe houses, and they were actually 10 feet below 
the level. People who thought they were outside the floodplain 
were actually in the floodplain, because the floodplain was 
much bigger, because the water is much--was much higher.
    If the Flood Insurance Program cannot be administered 
soundly, why would you expand it to anything new--wind or 
anything like that? If a--if the program is encouraging unwise 
construction through--and charging inadequate rates; therefore, 
the--if I build 10 feet below the flood level, I should pay a 
very high actuarial rate, according to the program--but if a--
if the program thinks I'm actually at the 100 percent level, 
when I'm not, it's not going to charge me much of a rate at 
all.
    So, you have all these problems in the current Federal 
program. I would be first in line for a--an all-perils policy 
involving the Federal Government if we had a way to fix the 
flood program and show how the program----
    Senator Lott. Would you allow me to jump in?
    Senator Pryor. Sure.
    Senator Lott. Maybe we could do this----
    Senator Pryor. Sure, go ahead.
    Senator Lott.--together.
    My colleague from Mississippi, Congressman Taylor has an 
all-perils bill that he's introduced in the House. I've been 
taking a look at it. A couple of my concerns are that--you 
know, how would that work? And even though I might not sound 
like it, I still want to leave as many things as I can in the 
private sector. I don't want us to become the insurance company 
for all disasters in America. I'd like the private sector to do 
that.
    The other thing, though, is--I'm concerned that--for 
instance, I saw one proposal that was written up in, I think, 
The New York Times, that--where some of the big companies have 
proposed, ``Well, yes, we ought to have that. And, by the way, 
we ought to say that any disaster that's over $6 billion, the 
Government would pick up the rest.'' Well, geez, nice, thank 
you very much. In other words, ``If there's any kind of a 
problem, we're going to kick it off to you guys.''
    And--for instance, I've always--I have supported, since 9/
11, the terrorism insurance. And then, when it came up for 
renewal in 2005, there was resistance from the Office of 
Management and Budget to extending it. But I was convinced that 
we still needed it. But, this time, I'm not going to support 
the extension, because what has happened is, the private sector 
hasn't stepped in to provide the coverage, because the 
Government is doing it.
    So, and the----
    Mr. Hunter. I total agree----
    Senator Lott.--Government's not doing it very well. And, by 
the way, you know, we've got to have terrorism insurance for, 
you know, buildings in Rankin County, Mississippi. I don't 
think that terrorists are going to hit Rankin County.
    Mr. Hunter. Yes.
    Senator Lott. So, I don't--just--those are a couple of key 
questions that I've got to get--you know, settled in my mind. 
How do you respond to it?
    Mr. Hunter. Yes. Well, I--well, first of all, as you know, 
I have historically opposed the extension of the terrorism 
program, too, because I don't think it's necessary, and I think 
the industry can handle it, except for nuclear/biological/
chemical. I don't--I do think they need help in that area. 
But--and I'm--I have historically opposed expanding the 
catastrophe coverage nationally, too; in part, because of the 
serious, awful problems in the flood program. If the Federal 
Government is going to mess up one program, I don't think we 
should give them another one to mess up. I think it should be 
done as some kind of reinsurance, where the flood part would be 
reinsured, but that it would be done under a--under some kind 
of formula where the industry had a piece of the action, some 
skin in the game--a lot of skin in the game on everything, 
except maybe some of the flood and some of the terror--the very 
high, mega-catastrophes. But I don't--I don't even want to go 
that far yet, because I'm afraid that the Federal Government, 
as--FEMA has run this program has made it a mess. And I am--
therefore, I'm reluctant to have--to endorse any kind of even 
multiperil policy. But it could be designed in a way that would 
maximize private-sector involvement, and work, but it has to 
work with real active involvement and oversight by the Federal 
Government.
    Senator Pryor. Ms. Bowman, did you want to add something?
    Ms. Bowman. I did. Can you tell I'm on the edge of my seat?
    I was not at all advocating that the Federal Government 
take over the all-perils policy at all. I think the private 
sector--the private market would do that. The companies would 
do that. I agree, the Federal Government should not expand in 
that area. And the--then the flood program would become the 
reinsurance, possibly, for the all-perils, in some fashion. 
And, of course, that would take a lot more study. Again, the 
devil's in the details, always. But certainly, as I mentioned, 
and maybe wasn't clear on, the companies--I believe that some 
representatives from the National Association of Insurance 
Commissioners has talked to some higher-ups, whoever they may 
be, from some of the bigger companies who say, ``Yes, we think 
that is a possibility of our writing the all-perils policies 
for--including flood, and to take care of this anti-concurrent-
cause clause.''
    Senator Pryor. Attorney General Hood, let me follow up on 
that, on the anti-concurrent causation. What is the status of 
that right now in Mississippi? How does that stand in your 
State right now?
    Mr. Hood. A Federal District Court judge made that finding, 
and it's now--and the industry has it on appeal to the Fifth 
Circuit, as to whether or not it--that clause is valid. He did 
it on an ambiguity----
    Senator Pryor. OK.
    Mr. Hood.--issue.
    Senator Pryor. So, in other words, a Federal judge looked 
at it, saying, ``Ambiguous. It's going to be construed against 
the writer of the policy, the drafter of the contract,'' and 
so, right now is it for all insurance companies or just the one 
company?
    Mr. Hood. The court is applying that same rule of law in 
dealing with all the companies on the anti-concurrent cause 
provision.
    Senator Pryor. OK. So, as it currently stands in 
Mississippi, it's on appeal. But the insurance companies lost 
that argument at the trial-court level. But on a national 
level, these anti-concurrent causation clauses are in insurance 
policies all over the country. Is that right? Is that fair to 
say?
    Mr. Hood. Yes, sir, that's what I understand, that most 
every State has that. And that's been their argument, that the 
insurance commissioners approved it. But that's not--the--a 
State court has the right to decide--and a Federal court, based 
upon State law--what is a--an ambiguous provision, or whatever. 
And it's our position that that's a violation of our consumer 
protection statutes, because it's a bait-and-switch. Anti-
concurrent cause clause, as this Federal judge described it in 
his opinion, is that if wind weakens your house, blows the roof 
off, as we found in some reports, and then you get an inch of 
water in your property and it further weakens the structure, 
and then it blows it away, they don't owe you a dime. Nothing. 
And here's--let me just tell you, at--this is good example. My 
roof in--up in Jackson; I'm about 160 miles inland--on the 
house I have blew off. They--State Farm, my insurance, they 
paid for my roof, no problem. But take Senator Lott's house, 
down there. If it blew it off in--at my house, 180 miles inland 
with 100-knot winds, think what it did to his house down there. 
They zeroed him out. They say, ``We don't owe you a dime, 
because it's the anti-concurrent cause provision.'' Now, that's 
just ludicrous. And that's what they're actually--I didn't 
believe that they would do it. I didn't believe they would use 
that. But in their own court filings--we've got documents where 
they--they're arguing all this in court, and they're taking it 
up on appeal. They're actually doing it. Some of the smaller 
companies go, ``Wait a minute, y'all are abusing this. You 
know, you're going to get us all beat, and they're going to 
strike this clause nationally.'' And that's probably--hopefully 
what will be the outcome of all this, the way they've strong-
armed people--and other companies, too. Allstate, some of the 
others, have been using it, as well--abusing it.
    Mr. Hunter. The fact that it's in every State is proof of 
the weakness of the oversight. This is--if ever there was an--a 
dishonest, intellectually ambiguous at least--intellectually 
ambiguous, if not-in-the-words ambiguous--it's at least--no one 
could imagine that, ``My roof blows off and then an inch of 
water 3 hours later, I get nothing.'' You just couldn't 
possibly believe it, ``No, my company wouldn't do that.'' 
People come to an insurance company with trust. And these guys 
were--that is such a despicable clause. The fact that every 
State has approved it is just--it's a--an embarrassment for 
State regulation.
    Senator Pryor. Attorney General Hood, let me ask you, on 
the salvage title issue with automobiles, have you had a 
salvage title problem in your State that is related to Rita and 
Katrina? And a second question is, is the State able to know--
where the vehicles that have been totaled as part of the 
hurricane, and have been supposedly salvaged out as part of the 
hurricane--do they know where those vehicles have ended up?
    Mr. Hood. No. We--you know, as--you just have to deal with 
what staff we have in our consumer protection.
    Senator Pryor. Sure.
    Mr. Hood. We were dealing with price gouging and all those 
things. We did investigate some of the motor vehicles. We 
rattled the chain really hard, threatened a lot of the 
wholesalers, basically, if they didn't disclose, if they had 
any idea--so, we just tried to beat it down with just practical 
applications. But Arkansas, they bring titles over to 
Mississippi and wash them----
    Senator Pryor. Yes.
    Mr. Hood.--because ours is so lax. And, you know, there was 
a lot of chop-shops in the hills of northeast Mississippi, and 
there was a lot of problems with that. This is a law 
enforcement issue that they're raising on this bill. You 
remember, it started probably during your tenure as AG. State 
Farm actually came forward. Now, I don't know what caused them 
to. But us AGs settled with State Farm----
    Senator Pryor. Yes.
    Mr. Hood.--where they had--they had--they'd have a title, 
they'd buy it in, and it would be in the name of the person who 
wrecked the car. Then they would take it to a auction. It would 
sell, and State Farm's name was never in the title, so you 
never knew that it was actually a totaled vehicle. We worked--
--
    Senator Pryor. They'd wash it. They'd wash the title.
    Mr. Hood. Yes. We worked with them, and they sent people 
back to Mississippi and every State in the Union, and us AGs 
worked with them. They paid for this, to go track those 
vehicles down and pay those people the difference between a 
wrecked car and a--and I bragged on them in that. In fresh 
releases--I like working with the industries when they do the 
right thing. And it is a problem, and, I think, nationally, if 
we had a standard titling system, where that title is stamped 
``totaled vehicle'' or something, it would really help the 
consumers.
    Senator Pryor. Yes. I think that's right, too.
    One last question for you, Attorney General Hood. We've 
talked a little bit about how some of these insurance companies 
deliberately, systematically try to underpay claims, and there 
are some incentives built in with their adjusters, et cetera, 
to try to meet goals and underpay claims. Is it your 
experience, after Katrina, that that is still going on in your 
State?
    Mr. Hood. It is. In their software--there again, it's 
required for--if you have three--like carpenter, plumber, and--
three people, contractors you have to hire, then you're 
entitled to a--an overhead and profit. And you're--because 
you're acting as a general contractor. You're spending your 
time off of work, and things like that, to organize these 
efforts. We're going to have to go back now and look at all of 
these claims for the failure to pay overhead and profit, 
because they'll delete--they will shut that provision off in 
their software, and they will refuse to pay that to homeowners 
who have no clue that they're entitled to additional money. The 
homeowners would think, ``I'm not entitled to any additional 
money for that.'' But you are. I mean, you're entitled to be 
able to hire a general contractor and give them that money. And 
so, we--I feel comfortable, based upon the activity I've seen 
down there, the way they've handled these claims, we're going 
to probably have to go back and re-evaluate all of these claims 
with all these companies. And that's a systematic problem that 
has been found nationwide. There's been several class-actions 
nationally in other States, where they've had to go back and 
pay a lot of these damages. So, that's a--that's the next 
battle that I've got on the front, and I'd--I'm hoping we can 
get this settlement behind us on this one, and then move on and 
make sure that they're paying that under the settlement that we 
have on the table.
    Senator Pryor. OK.
    Senator Lott?
    Senator Lott. Mr. Hunter, and maybe Commissioner Bowman 
would like to get in on this, too, why is it so difficult to 
determine what rates will be in the insurance industry? I mean, 
you have to set rates or prices in all kinds of industry, but 
we have this special carve-out for the insurance industry. And 
I--I don't understand why that's so complicated or difficult, 
even for a little domestic company, you know, to decide what 
rates they're going to charge.
    Mr. Hunter. Well, it is an actuarial calculation, and it 
does require historic data. And the--but the argument that 
they're not--that if you repeal the antitrust exemption, that a 
small company could not have access to data is wrong. It's just 
wrong. If you go back to the testimony--Representative Jack 
Brooks had hearings on the--in the House Judiciary Committee--
lengthy hearings, and I think you've read, maybe, the--some of 
the report, because that's where all this oddity of how it--how 
the bill passed, the McCarran Act, with people being assured 
that it was only a 2-year moratorium and all that, and it 
turned out to be a permanent moratorium, with a little word-
changing in conference. And the--but if you look at the 
testimony of the hearings, they had these--many experts at--in 
antitrust law testify, and they said--every one of them, 
regardless of their point of view about whether to--the bill 
should be--whether you should repeal it or not--every one of 
the experts said that the collection and dissemination of 
historic data--purely historic data--would pass muster, because 
it would be a pro-competitive act. So, small companies would 
still have the data they need. And the--and there's no doubt 
about it, if you review that--and I think you see the same kind 
of things from the Antitrust Commission and others--that that 
would happen. If--the question--where the insurance industry 
currently is doing things that would be illegal if you--is when 
they actually project the--those historic data into the future 
and estimate, ``Well, what's it going to cost next year? What 
do you think is--loss is going to be next year? How much is 
inflation going to be?'' All--but these are things of 
competition, how much is inflation going to be and questions 
like that. I mean, if--why don't you allow builders to have a--
their own building antitrust exemption? Because they--it would 
be nice for them to be able to know what the--to all agree 
together on what the bricks and labor are going to cost next 
year, and just add their own profit. But that's what they have 
today. The insurance ratings organizations, the cartel-type 
organizations, not only collect the historic data, they project 
it, they manipulate it, they decide how to tweak it, how to--
what law changes mean, and things like that. They do all these 
things that competitors should do by looking at the market. And 
small companies would be protected, in terms of getting their 
historic data. They would just have to make their own 
adjustments to the data. And there are plenty of actuaries 
available, and others, to do that. There are consumer actuaries 
and other kinds of actuaries, public actuaries. There are more 
public actuaries than there are actuaries working in the--like, 
ten times more consulting actuaries than there are actuaries 
working in rating organizations.
    Senator Lott. What about it, Commissioner Bowman? Do you 
have any comments on that?
    Ms. Bowman. Well, there are several things that go into 
ratemaking. One is loss costs, and there are other expenses and 
things like that. And when you're looking at experience, for 
instance, you need to look at the population. For instance, for 
the smaller companies, there--you need to look at credible 
data. And when you have the smaller companies, their population 
is going to be smaller. For instance, for nursing home 
liability, you may only have a population of five nurses. And 
so, their loss experience is not going to be very credible. As 
opposed to if you were able to pool that data and you're 
looking at the loss experience from thousands of nurses, what 
has happened in the past, so that you can predict the future.
    Senator Lott. Thank you.
    Mr. Hunter, do mutual companies pay a less corporate 
effective tax rate than stock companies?
    Mr. Hunter. I think so, but I'm not really an expert at it. 
I----
    Senator Lott. Well, who----
    Mr. Hunter.--think that you'd better ask somebody else.
    Senator Lott.--who is? I can't seem to find out anybody who 
can help me----
    Mr. Hunter. I believe they get a--I believe they get a tax 
break, but I--but I'm not absolutely sure how it works.
    Senator Lott. OK. I'll find somebody else to answer that.
    Let me just conclude my participation--thank you, Senator 
Pryor, for having the hearing and for allowing me to have a 
little extra time--I do think we need to look at some law 
changes in some of these areas that we've mentioned. But, also, 
I always am an incurable optimist at--I believe there's a way 
to get a--you know, a result of all of all this. What I'm 
looking for here is for the insurance industry to pay--go back, 
to pay the claims that have been filed, the lawsuits, settle 
those, pay the claims, review the claims--and I'm talking about 
all the companies, particularly the big three. What we want is 
the people to get fair treatment. That's all we're really 
looking for. But that also has to include providing insurance 
statewide, including the last foot before you jump into the 
Gulf of Mexico, at an affordable rate and a reasonable rate. 
That's one of the problems that bothers me. While they're not 
settling, and jacking rates, and not paying people, they're 
making--they're having these historic, outrageous profits on 
the backs of the people that need coverage.
    So, what a--you know, if we can find a way to do those 
three things, I think, you know, the companies will be better 
off, and I know the people will be better off.
    Thank you all for your time.
    Senator Pryor. Thank you.
    Senator Nelson, thank you for joining us today. I know 
you've been in a very similar hearing in the Banking Committee.

            OPENING STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman. We're trying to 
move a bill that Senator Lott is cosponsoring in trying to 
address this overall question of affordability and availability 
of insurance, which is a critical question in the State of 
Mississippi. It's a critical question in Florida. And in trying 
to address that, to bring consensus in an industry that has no 
consensus, as to what should be the Federal role; where, 
indeed, there's just outright warfare between insurance 
companies and reinsurance companies, and the reinsurance 
companies don't want the competition of State catastrophe 
funds. The bill also addresses whether or not there should be a 
regional catastrophe fund as a backup before you ever get to 
the question of should there, or should there not be, a Federal 
catastrophe fund, and all of these things.
    But you're, Mr. Chairman, focusing more on the oversight of 
this insurance industry. And I take it that, as I've been 
testifying in the Banking Committee, you've been going into 
things like the antitrust exemption and so forth.
    Let me just mention, from my own experience, that one of 
the problems is, we have a revolving door in the regulation of 
insurance. An insurance commissioner in most of the States is 
appointed, not elected, as they are in Mississippi and as they 
used to be in Florida until I left, and then the insurance 
industry had its way and got the insurance commissioner 
appointed; and, by the way, in Florida, not even appointed by 
one person, like the Governor, so you can have accountability; 
he is appointed by the Governor and the entire cabinet. And 
albeit the insurance commissioner is doing an excellent job, 
and he's a professional, and he worked for me when I was the 
elected insurance commissioner; nevertheless, what happens in 
most of the States is a revolving door. I want you to hear 
this, Senator Lott. The person who is appointed insurance 
commissioner comes out of the insurance industry and he or she 
is there, on the average, less than a year. And guess what 
happens in the revolving door? Goes right back into the 
insurance industry. Now, that's one of the things that could 
help tighten up the regulation of insurance.
    The NAIC is an excellent organization. And they, by the 
way, have endorsed our bill to try to build this emergency 
consensus commission on the insurance catastrophe. Hopefully, 
they're going to weigh in on this, because when the big ones 
hit, Katrina and Rita, they were Category 3's. And a Category 3 
did to your coast, Senator Lott, exactly what you would expect 
a Category 3 to do. But what everybody didn't expect was, on 
the back side of the hurricane, in the winds from north to 
south, all of the additional water caused the drainage canals 
to drain into the main canals, the canals filled up, the 
pressure built and breached the canals in two places, and the 
rest of the bowl of New Orleans filled up, with all the 
attendant economic and personal loss that occurred.
    So, I know you've got one of the best right there because I 
used to get him to help me. And yet, we've got a problem. And 
we've got to address this problem. And I don't know how to 
address it, other than trying to do it the way we were 
confronted in the mid-1990s in Florida, with a paralyzed 
marketplace, and that is to reach out and build consensus. The 
argument that I made today in the Banking Committee--look at 
the experience of Katrina. It's well over $200 billion of 
economic loss, and guess who has paid most of that? Uncle Sam. 
Well over $100 billion that Uncle Sam is shouldering. And, as a 
result, at the end of the day, in these major kind of natural 
catastrophes, the Federal Government's going to pick up the 
tab. So, why don't we have a rational system in which to pick 
up the tab, and where risk ought to be allocated, and how you 
best mitigate that risk? And that means a lot of things, not 
just, you know, catastrophe funds; that means building codes 
being enforced and new building materials and new building 
structures and better weather forecasting.
    By the way, we've got a satellite under the jurisdiction of 
this Committee that has gone on the blink--no, it hasn't gone 
on the blink--it's a 5-year designed life. We're at the end of 
the fifth year. If that satellite goes caput on us--it has 
improved our accuracy on the prediction of the path of a 
hurricane by 15 percent--if it goes out, we are--and we don't 
have a replacement. And, of course, that, in this Subcommittee 
that I chair, is one of the alarm bells that NOAA or NASA or 
somebody needs an additional $400 million. We put that 
satellite up within 12 months, from start to finish. We could 
do that on this particular satellite. That's just another part 
of this very complicated problem.
    I didn't ask a question. I just pontificated.
    [Laughter.]
    Senator Pryor. Do you want to ask a question?
    Senator Nelson. Well, I would hate to go by the opportunity 
of hearing all of these eminent witnesses without saying 
something, but what do you think about what I said, Mr. Hunter?
    Mr. Hunter. You know I always agree with everything you 
say, Senator.
    [Laughter.]
    Mr. Hunter. You weren't here when I said that my daughter, 
who lives in Hollywood, just got her premiums charge of a 
little over $5,000, and can't afford it, and wants to know if 
she can still stay in Florida.
    Senator Nelson. It has gotten so bad. People cannot afford 
to stay in their homes because of the double whammy of property 
taxes and insurance premiums. And that's the subject upon which 
we just testified to the Banking Committee, with Governor 
Crist.
    Mr. Hunter. Well I think what Florida did was--in the 
special session, was very thoughtful and wise, to 
disintermediate some of the reinsurance. Because I was asked, 
then, to come down and do some of the calculations for the 
State, and we found that the reinsurers were charging up to ten 
times their own actuarial rate calculation in the layers we 
were looking at. And so, as a result, they were--and they 
admitted, when we talked to them privately, that they were 
greedy.
    Senator Pryor. Any other questions?
    Senator Nelson. Well, I would just add this. Part of the 
way that we worked our way out of the problem back in the early 
1990s, after the monster hurricane, Hurricane Andrew, people 
could not get insurance from the private marketplace. All 
right? The entire economy of a state such as Florida was 
operating on the availability of homeowners insurance because 
if you don't have homeowners insurance, you can't build homes, 
and you can't sell homes, and you can't make loans on homes. 
Now, I have just mentioned three major industries that are the 
engines of a state's economy: construction, real estate, and 
banking. The way that we had to address it, since the private 
marketplace did not respond--because the insurance companies 
wanted to pull out, and they were; we had 11 insurance 
companies go bust after Hurricane Andrew. We had insurance 
companies fleeing the state of Florida. And those who stayed, 
like Allstate, canceled 50,000 policies. By the way, they're 
doing that in droves right now as a result of the 2005 
hurricanes.
    So, where was the only place that people could get 
homeowners insurance so that the State did not economically 
grind to a halt? It was a quasi-government insurance company. 
Then, it was called the JUA, the Joint Underwriting 
Association. Today it's morphed into a bigger creature called 
Citizens Insurance Company.
    Interestingly, what the legislature of Florida has just 
done is, the previous law said that you could only get 
insurance from that creature as a last resort, if it wasn't in 
the private marketplace, and the rates in that creature--then 
the JUA, now Citizens--had to be higher than the normal 
marketplace, because it was last resort. Problem was, last 
resort was the only place that people could get insurance. So, 
today the legislature in Florida has made that quasi-government 
insurance company a competitor of the private marketplace, much 
to the chagrin of the insurance companies. They don't want the 
competition. But you can't have it both ways. You can't say, 
``You're going to have the free reign of the market 
competition, and then you did not, Mr. Insurance Company, offer 
the free marketplace insurance policies so that people could 
buy them.''
    So, now we're suddenly seeing, just as a result of that one 
thing--the Governor just testified this morning that he's 
seeing rates come down as a result of that.
    Would you comment on that, Mr. Hunter?
    Mr. Hunter. Yes, I--I think that the expansion of Citizens 
into full homeowners policy and the competitive approach is 
wise. If you look at several States that have done competitive 
State funds for worker's comp, they've worked quite well, and 
have stabilized some tough markets.
    What bothered me more than anything--and I even mentioned 
this earlier, before you came--is, when I was commissioner in 
Texas, and before that, when I was working with Florida, when 
the Academic Task Force was working on the post-Andrew stuff--
is that the industry--basically, we said we need three things, 
we need models for rates, because we would--and we agreed with 
them--and they--and--but it meant doubling, tripling, 
quadrupling the rates--they said we needed a Citizens or 
someplace to dump our high risks, and we need to cut our 
coverages with deductibles and other things. And if we do that, 
and we understand it's going to be painful, in the future 
you're going to have stability. That was what they told me in 
Texas. And I believe that's what they told people in Florida, 
too.
    But now we don't have that stability. And that, to me, is--
especially at times of incredibly high profits, for them to be 
acting so precipitously people--to drop people, to jack up 
prices, double, triple, just--and walk away--I find that just 
very hard to take, given the promises that were made a decade 
ago.
    Senator Nelson. There's a phrase, Mr. Chairman, in 
insurance that is typically applicable to health insurance. And 
the phrase is ``cherry-picking.'' And what it means is that an 
insurance company is going to cherry-pick, like picking 
cherries, the risks that it wants to insure. Well, guess what 
those risks are? Those risks, in health, are the less risky 
person, the healthier person, the younger person. They don't 
want to insure the old and infirm because that's where they're 
going to have to pay out. So, too, in the property and casualty 
market. What you're seeing is, they want to shed this risk 
because they feel like it's too much of a risk. They want to 
make money on less risk because they have more certainty of 
making money.
    Now, that's the way, if you're running a business, you'd 
certainly like to have it. But what are they in the business 
of? They're in the business of insuring risk with a commodity 
that is, now, not a luxury, it's a necessity because you can't 
own a home unless you have insurance, unless you don't have a 
mortgage. You can't drive a car unless you have insurance 
because it's State law. And you sure better have some health 
insurance. And if you don't, we see the consequence of that 
with 44 million people who are uninsured, of which all of the 
rest of us pay, because they do get healthcare.
    I think we've got to rethink this whole issue. Now, I don't 
know that I'm where Senator Lott is with regard to the 
antitrust exemption. I just simply haven't immersed myself into 
that enough. But I know that we're at a time in which the 
Federal Government, if it is going to pay the tab of a major 
catastrophe, at the end of the day, we have to have a more 
rational system. And the private marketplace, that normally 
would work, will not work when the risk is so high that no one 
company can withstand the risk. And that's what we are 
presented with regarding these potential natural catastrophes. 
And it doesn't have to just be a hurricane; it can be an 
earthquake in San Francisco, or an earthquake in Memphis; it 
can be a tsunami, of which we have seen the effects over in 
Asia; it could be any number of things. And we've got to get 
our mind above this and ahead of the power curve.
    Thank you, Mr. Chairman.
    Senator Pryor. Thank you, Senator.
    We're going to keep the record open for 2 weeks for Senator 
who want to submit questions in writing.
    Also, I noticed Senator Lott offered some documents. We'll 
certainly make those part of the record.
    And I want to, again, thank the witnesses for being here. I 
know you traveled distances to be here, and I appreciate you 
all being here. And we're going to continue to look at 
insurance issues over the course of this Congress, and I really 
appreciate you all getting us started on the right foot.
    So, the hearing is adjourned. Thank you.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]
                            A P P E N D I X

  Prepared Statement of Michael R. Calvin, Interim President and CEO, 
          American Association of Motor Vehicle Administrators
    Thank you for providing the American Association of Motor Vehicle 
Administrators (AAMVA) the opportunity to provide a written statement 
for the printed record to clarify some information about the National 
Motor Vehicle Title Information System (NMVTIS), state motor vehicle 
titling laws and Passenger Vehicle Loss Disclosure Act (S. 545).
    AAMVA is a state-based, non-profit association representing motor 
vehicle agency administrators and senior law enforcement officials in 
the United States and Canada. Our members are the recognized experts 
who administer the laws governing motor vehicle operations, driver 
credentialing, and highway safety enforcement.
    NMVTIS is a system that allows an electronic means to verify and 
exchange titling, brand, and theft data among motor vehicle 
administrators, law enforcement officials, prospective purchasers and 
insurance carriers. NMVTIS allows state titling agencies to verify the 
validity of ownership documents before they issue new titles. NMVTIS 
also checks to see if the vehicle is reported ``stolen''--if so, the 
states don't issue the new titles. Brands are not lost when the vehicle 
travels from state to state, because NMVTIS keeps a history of all 
brands ever applied by any state to the vehicle.
    NMVTIS, once fully implemented nationwide, will allow access to a 
variety of vehicle-related information for consumers, dealers, lenders, 
insurance companies, law enforcement officials and state motor vehicle 
administrators. AAMVA and its membership have continuously demonstrated 
its ongoing belief in NMVTIS by investing more than $25 million of 
AAMVA money for development, deployment, marketing and maintenance of 
the system. This investment by AAMVA far exceeds the investment made to 
date by the Federal Government in this federally mandated system.
    Through AAMVA's continued efforts to implement the system, data on 
approximately 55 percent of all registered vehicles in the United 
States is available through NMVTIS (See Appendix A). Many of the states 
have seen tangible benefits from using NMVTIS (Appendix B). For 
example, in March 2005, the state of Florida cracked a car theft ring 
responsible for cloning more than 250 cars worth $8 million and it was 
able to identified cloned vehicles prior to issuing new titles as a 
result of working with other participating states of Arizona and 
Virginia. As another example, the state of New Hampshire has benefited 
from the recapturing of brands lost by other non-participating states--
1,760 in 1 month, which helps to eliminate washed titles. As you can 
see from these examples, AAMVA has been successful in our effort to 
complete the implementation of NMVTIS. What Congress must remember is 
that the implementation of NMVTIS is still the responsibility of the 
Federal Government. AAMVA, as the operator of NMVTIS on behalf of the 
Department of Justice, has developed and is operating the system that 
has been fully implemented in several states. Additionally, a number of 
other states are currently in development, and several other states, 
while not fully on-line with NMVTIS, are providing data to the system.
    A nationwide role out of NMVTIS has been severely hampered by a 
lack of Federal funding for this Federal mandate. Additionally, the 
continuing failure of the Department of Justice to complete its 
rulemaking responsibilities regarding the reporting of total loss 
information from insurance companies, as well as information from junk 
and salvage operators, has also contributed significantly to the delay 
in fully implementing the system. Federally authorized reviews of the 
system, as well as the events of September 11, 2001, have also 
contributed to implementation delays. If Congress would provide the 
necessary funding, and prompt the Department of Justice to complete its 
rulemaking responsibilities, it would be more compelling for the 
remaining states to become on-line participants in NMVTIS.
    AAMVA believes the long-term NMVTIS financial model initially 
envisioned by the association, when fully implemented, will be self-
sustaining. The AAMVA Board of Directors developed and approved a 
financial strategy that would ensure the economic viability of the 
system. This plan is based on an annual fee structure for participating 
states that will, when all states are fully implemented, provide the 
funding necessary for the operation and maintenance of NMVTIS. This 
funding plan does not, at this point, include any potential revenue 
that could be generated by providing information to private sector 
users, but those potential future revenues could be used to lessen the 
financial impact on the states.
    AAMVA continues to strongly believe that the Federal Government 
should fund NMVTIS until it has been implemented nationwide (See 
Appendix C). As a result of the support from members on this Committee 
and other Members of the Congress, both the House and Senate included a 
soft earmark in the FY 07 Commerce, Justice, and Science Appropriations 
bill, however the year-long CR eliminated all projects.
    Thank you for the opportunity to comment on the current and future 
status of NMVTIS. AAMVA continues to believe that, when fully funded 
and implemented nationwide, NMVTIS can meet all of the original 
intentions of the Anti-Car Theft Act of 1992, including public access 
to pertinent vehicle information prior to their purchase of a vehicle. 
If S. 545 moves forward from the Committee, AAMVA request that language 
be added requiring (a) that the total loss information be supplied to 
NMVTIS and (b) the Departments of Justice and Transportation work 
together in order to adopt the same terminology in order to prevent 
confusion.
    We appreciate support from members of the Committee in trying to 
get Federal funds in the FY 07 CJS bill and we would appreciate if the 
Committee can help get the Department of Justice to complete their 
required rulemaking, and look forward to working with all interested 
parties to ensure the successful nationwide implementation of NVMTIS.
                               Appendix A


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                               Appendix B
Participating States Reap Tangible Benefits From National Motor Vehicle 
                   Title Information System (NMVTIS)!
Arizona
   Has detected 15,864 possible stolen vehicles.

   Identified cloned vehicles prior to issuing new titles as 
        result of working with other participating states of FL and VA.

   Identified duplicate titles initiated by a crime ring using 
        Canadian documents.

   Has realized a closer and more efficient working 
        relationship with law enforcement.

   Has experienced a reduction in customer wait time and the 
        ability to identify problems upfront due to online, accurate 
        data.
Florida
   In March 2005, FL cracked a car theft ring responsible for 
        cloning more than 250 cars worth $8 million.

   Identified cloned vehicles prior to issuing new titles as a 
        result of working with other participatingstates of AZ and VA.
Indiana
   BMV Title Supervisor, who has oversight of NMVTIS, declared 
        ``NMVTIS is the best tool ever used!''

   Stated that NMVTIS identifies brands daily that were missed 
        by non-participating states (i.e., titlewashing).

   Has experienced a great reduction in lawsuits by consumers 
        who were given clear titles with missing brands (e.g., salvage, 
        rebuilt).

   Has realized a closer and more efficient working 
        relationship with law enforcement.
Iowa
   Since August 16, 2004, IA Motor Vehicle Enforcement has 
        investigated 161 reported stolen vehicles--resulted in seizure 
        of stolen vehicles and apprehension of suspects.

   Has carried forward brands that would have otherwise 
        remained ``washed'' from the titles.
New Hampshire
   Identified cloned vehicles prior to issuance of a new title 
        which eliminated additional clones.

   Saves time and money by no longer requiring clerk to 
        manually update state record with returned title information--
        NMVTIS does is instantly!

   Benefit from capability to track which vehicles are moving 
        to be registered in another state.

   Have detected possible stolen vehicles--46 theft notices 
        received in 1 month.

   Has benefited from the recapturing of brands lost by other 
        non-participating states--1,760 in 1 month--eliminates washed 
        titles.

   NH's MV Supervisor, who has oversight of NMVTIS, stated the 
        amount of funds spent to implement NMVTIS ``represents a small 
        fee considering the savings on . . . insurance fraud, cloning 
        vehicles, stolen vehicles, odometer fraud, preventing washed 
        brands for consumer protection--all thanks to NMVTIS!''
Ohio
   Has experienced ``exceptional cooperation'' with OH Law 
        Enforcement, consumers, licensed OH dealers and motor vehicle 
        insurance carriers.

   Since August 2004, has detected 3,817 possible stolen 
        vehicles through NMVTIS.

   Since August 2004, has carried forward 22,458 vehicle brands 
        through NMVTIS.
South Dakota
   Has captured brands lost by other non-participating states.

   Saves time and money by no longer requiring clerk to 
        manually update state record with returned title information--
        NMVTIS does is instantly!
Virginia
   Has seen a 17.47 percent decrease in motor vehicle thefts 
        since 1992.

   Averages 8,640 hits on stolen vehicles per year.

   Has captured brands lost by other non-participating states.

   Discovered ``cloned'' vehicles prior to issuing new titles 
        as result of working with AZ and FL.
                               Appendix C
              NMVTIS Timeline and Federal Funding Provided
1992
   Anti-Car Theft Act passed; DOT has oversight of NMVTIS
1993
1994
1995
1996
   Initial funding from DOT--$890,000

   Pilot states are identified

   Anti-Car Theft Improvements Act is passed, moving NMVTIS 
        from DOT to DOJ
1997
   Initial DOJ funding--$1 million

   Additional pilot states are identified
1998
   DOJ funding--$2.8 million
1999
   Pilot completed

   GAO recommends DOJ perform a life-cycle cost benefit 
        analysis

   DOJ funding frozen (combined w/2000 appropriation)--$3.05 
        million (had been $3.15 million; $100,000 deducted for GAO cost 
        benefit analysis)
2000
   System in production

   GAO still conducting cost benefit analysis

   DOJ funding frozen (combined w/1999 appropriation)--$3.05 
        million (had been $3.15 million; $100,000 deducted for GAO cost 
        benefit analysis)

   June--GAO publishes its cost benefit analysis report: the 
        system is found to have the potential to save consumers from $4 
        billion to $11.3 billion annually

   DOJ releases FY99/00 funding--$6.1 million

   9/11 occurs and the emphasis moves from vehicle to drivers/
        identification issues

   No funding received for 2 years
2002
   No Federal funding provided
2003
   DOJ funding--$3 million
2004
   DOJ funding--$494,700
2005
   No Federal funding provided
2006
   IJIS releases a report for DOJ revaluating NMVTIS and 
        concludes that ``NMVTIS program provides an invaluable benefit 
        to state DMVs and the public community as whole''
2007
   The U.S. House and Senate included NMVTIS in both the FY 07 
        CJS spending bills but Congress did not enact individual 
        appropriations bills.
                                 ______
                                 
       Prepared Statement of The National Association of Realtors
Introduction
    The National Association of REALTORS (NAR) appreciates 
the opportunity to present its views on property and casualty insurance 
to the Committee on Commerce, Science and Transportation. We thank 
Chairman Inouye and Ranking Member Stevens for holding this hearing to 
investigate this issue of concern to homeowners and commercial property 
owners in the Gulf Coast and other regions of the country.
    The National Association of REALTORS is America's largest 
trade association, representing more than 1.3 million members involved 
in all aspects of the residential and commercial real estate business. 
Ensuring the availability and affordability of property and casualty 
insurance, therefore, is a top priority for members of NAR.
    The storms that hit the Gulf Coast region in 2004 and 2005 have had 
a significant impact on the availability and affordability of property 
casualty insurance for homeowners and commercial property owners in the 
region. These effects have been felt up the Atlantic seaboard as far 
north as New England. Even states that have not suffered catastrophic 
losses in decades are feeling the effects of insurance companies not 
renewing policies and refusing to write new policies, especially in 
coastal areas. In addition, the costs associated with the Federal 
recovery efforts from these storms are being borne by taxpayers across 
the country.
    It is for these reasons that NAR strongly encourages the members of 
this committee and Congress to develop a comprehensive policy that will 
protect property owners, address insurance availability and 
affordability, acknowledge the importance and limitations of markets, 
and recognize the respective responsibilities of property owners and 
all levels of government.
Overview
    The catastrophic events of 2004 and 2005 have shown the need for a 
comprehensive, forward-looking natural disaster policy. Such a policy 
would recognize that property owners, private insurance markets, and 
all levels of government must work together in order to successfully 
address the problems (e.g., lack of available and affordable property 
insurance) currently plaguing disaster-prone areas.
    The availability and affordability of property insurance is, at its 
core, a consumer issue. The importance of available and affordable 
insurance to homeowners, commercial property owners and those who would 
like to own their own home or place of business cannot be overstated. 
Unfortunately, it is also something that consumers nationwide--even 
those who are not in what have traditionally been considered 
``disaster-prone'' areas--now know all too well.
    The National Association of REALTORS believes that any 
real solution to the insurance problems now facing this country must go 
beyond a discussion of natural disaster insurance and include a 
comprehensive natural disaster policy that addresses, but is not 
limited to, insurance availability and affordability. A comprehensive 
natural disaster policy also should take into account the 
responsibilities of multiple actors including property owners, 
insurance companies and each of the different levels of government in 
preparing and paying for future catastrophic events. Consequently, 
although this hearing is titled ``Oversight of the Property and 
Casualty Insurance Industry,'' our statement offers suggestions for 
what REALTORS believe should be included in a comprehensive 
approach to addressing future catastrophic natural disasters.
Residential and Commercial Properties at Risk
    A strong real estate market is the linchpin of a healthy economy, 
generating jobs, wages, tax revenues and a demand for goods and 
services. In order to maintain a strong economy, the vitality of 
residential and commercial real estate must be safeguarded.
    Today, insurance availability and affordability concerns are not 
limited to the Gulf Coast region. We have heard from REALTORS 
in numerous states, including New York, New Jersey, South Carolina and 
North Carolina, expressing concerns about the availability and 
affordability of property insurance. Their insurance concerns extend 
beyond homeowners' insurance and include multifamily rental housing and 
commercial property casualty insurance.
    Insurance is a key component to financing the purchase of real 
estate. Without property casualty insurance, lenders will not lend; 
without insurance, borrowers are typically in default of their mortgage 
terms. The limited availability and high cost of insurance, therefore, 
not only threatens the ability of current property owners to hold onto 
their properties, but also to slow the rate of housing and commercial 
investment in these communities. Either of these threats could, in 
turn, further delay the rebuilding of communities on our storm-ravaged 
coasts.
    The inability to obtain affordable insurance is a serious threat to 
the residential real estate market, impacting not only single family 
detached homes, but condominiums, co-operatives and rental units as 
well. New home purchases, resale transactions and housing affordability 
are affected in the following ways:

   Homeowners' insurance is a necessary component in securing a 
        mortgage and buying and selling a home. If a potential 
        homebuyer is unable to obtain or afford the required insurance, 
        the sale will not be completed. As a result, potential 
        homebuyers are excluded from the market.

   The cost of owning a home is directly tied to insurance 
        costs. Homeowners are required by their mortgage lenders to 
        maintain homeowners insurance, regardless of its cost. If the 
        homeowner is unable to afford the cost of that insurance, the 
        mortgage is in default and the lender may foreclose. If 
        disaster insurance coverage is required, potential buyers may 
        choose not to purchase a home because the insurance they need 
        is too expensive. If disaster coverage is optional but 
        expensive, owners may choose to go unprotected.

   Insurance costs impact rent levels. Insurance costs incurred 
        by multi-family property owners are ultimately passed on to 
        tenants through higher rents. This impacts housing 
        affordability, particularly for low-income renters.

    Many of NAR's commercial members in the Gulf Coast and coastal 
regions have also reported problems with commercial insurance 
availability and affordability. Members have experienced large 
increases in premiums--in some cases more than four-fold with 
concurrent increases in deductibles and decreases in coverage--and in 
some cases, a complete lack of availability. These changes put the 
property owner at greater financial risk to recover from losses, while 
also affecting property values since dramatic insurance increases often 
cannot be passed on to tenants. For example, in the multifamily housing 
sector, the ability to pass on increased insurance costs in the form of 
higher rent is often limited by market conditions, rent stabilization 
laws and strict limits imposed on federally subsidized landlords. The 
commercial property owner faces similar problems because leases may 
cover more than 1 year and may include limitations on the amount of 
expenses that may be passed on to the tenant. Thus, when insurance 
costs rise from $0.10 to $0.50 cents per square foot, the landlord must 
absorb most of the increased costs.
    Often it is the smaller property owner that suffers the greatest. 
Small owners cannot offset the increases in insurance costs for one 
property with lower insurance costs in other parts of the country; nor 
are they able to negotiate a lower multiple property rate. In 
commercial real estate, there is a point at which insurance becomes 
unaffordable--when insurance expenses are so high that the property no 
longer generates sufficient income to cover expenses. This problem 
forces many owners to sell their property.
Catastrophic Natural Disasters are a National Issue
    The catastrophic events of 2004 and 2005 should serve as a wake up 
call that highlights not only the importance of having insurance, but 
also that individual property owners, insurance companies, all levels 
of government, and taxpayers have a role in preparing for and 
recovering from future catastrophic events. The ongoing recovery from 
these storms shows that all taxpayers in the country have a stake in a 
Federal natural disaster policy because their tax dollars are funding 
recovery efforts.
    As a result of the 2004 and 2005 hurricanes, attention has focused 
on Florida and the Gulf Coast states, but other areas of the country 
are also susceptible to large-scale natural disasters. Damage caused by 
any of the following events could be as great as, if not greater than, 
that caused by Hurricane Katrina: a repeat of the 1906 San Francisco 
earthquake, another 1938 ``Long Island Express'' hurricane, or a 
significant seismic event along the New Madrid fault, which extends 
from northeast Arkansas, through southeast Missouri, western Tennessee, 
western Kentucky to southern Illinois. While it is true that not all 
areas of the country are susceptible to the large-scale disaster 
scenarios above, the effects of these disasters certainly would be felt 
by all taxpayers.
Elements of a Comprehensive Natural Disaster Policy
    The National Association of REALTORS encourages Congress 
to develop a comprehensive natural disaster policy that encourages 
personal responsibility, promotes mitigation measures, ensures 
insurance availability, and strengthens critical infrastructure (e.g., 
levees, dams, bridges, etc.). NAR supports the creation of a Federal 
natural disaster policy that will promote available and affordable 
homeowners' insurance in disaster-prone areas.
    NAR supports the creation of a Federal policy to address 
catastrophic natural disasters that:

        1. Protects property owners by ensuring that transparent and 
        comprehensive insurance coverage is available and affordable, 
        with premiums being reflective of the risk involved;

        2. Acknowledges the importance of personal responsibility of 
        those living in high-risk areas to undertake mitigation 
        measures, including the purchase of adequate insurance;

        3. Provides property owners adequate incentives to undertake 
        mitigation measures where and when appropriate;

        4. Acknowledges the importance of building codes and smart land 
        use decisions while also emphasizing that proper enforcement of 
        both is best left in the hands of state and local governments;

        5. Recognizes the role of States as the appropriate regulators 
        of property insurance markets while identifying the proper role 
        of Federal Government intervention in cases of mega-
        catastrophes; and

        6. Reinforces the proper role of all levels of government for 
        investing in and maintaining critical infrastructure including 
        levees, dams, and bridges.

    NAR believes that now is the time for Congress to address a 
comprehensive natural disaster policy that includes natural disaster 
insurance. The lack of a national natural disaster policy has had a 
measurable direct impact on the availability and affordability of 
property casualty insurance in many parts of the country. The inability 
to obtain affordable homeowners' insurance is a serious threat to the 
residential real estate market--and thus, our economy.
    Homeowners and commercial property owners need insurance to protect 
themselves, their families and their property in case of catastrophe. 
However, if insurance is not available or affordable, many make the 
unfortunate, but understandable, decision to purchase only the minimal 
amount or type of insurance required. This is precisely the decision 
many Californians have made--buying the required property casualty 
coverage but foregoing earthquake insurance due to its high cost. The 
problem with this rational economic decision is that if ``the big one'' 
hits, and people are not insured for that type of catastrophe, then the 
American Taxpayer, that is to say everyone in the country, will pay. 
NAR believes that people who bear risk should pay a fair share--by 
obtaining and maintaining adequate insurance coverage.
    Property owners should have confidence that their homes and 
businesses will survive future catastrophic events. Appropriate 
mitigation measures can help to create that confidence. Federal and 
state governments can provide incentives (e.g., tax credits, insurance 
rate reductions) to property owners to undertake appropriate mitigation 
measures for their homes and businesses. Research conducted by the 
Multihazard Mitigation Council of the National Institute of Building 
Sciences found that a dollar spent on mitigation saves society an 
average of four dollars.\1\
---------------------------------------------------------------------------
    \1\ Multihazard Mitigation Council, ``Natural Hazard Mitigation 
Saves: An Independent Study to Assess the Future Savings from 
Mitigation Activities, Volume 1--Findings, Conclusions and 
Recommendations,'' National Institute of Building Sciences, Washington, 
D.C. (2005), p. 5.
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    States are the appropriate regulators of property insurance 
markets, but there is a proper role for the Federal Government in 
addressing mega-catastrophes. Some disasters are just too large or 
unpredictable for the private market to deal effectively with the 
resulting damage. At some level, there may be an appropriate role for 
the Federal Government to intervene in insurance markets to prevent 
market disruption and insolvencies among insurance companies. The level 
of intervention, however, must be set at a level that will not 
interfere with normal market forces. The difficulty lies in determining 
the level at which such intervention would be appropriate.
    Finally, an essential part of a comprehensive natural disaster 
policy is the recognition of the basic responsibility of government at 
all levels to build and maintain infrastructure. Hurricane Katrina was 
not the largest hurricane to ever hit the Gulf Coast, but the failure 
of the levees protecting New Orleans contributed significantly to the 
loss of life and property from that storm. USA Today reported on 
January 29, 2007, ``The Army Corps of Engineers has identified 146 
levees nationwide [including three in Hawaii, two in Alaska, and 13 in 
Arkansas] that it says pose an unacceptable risk of failing in a major 
flood.'' \2\ According to the article, the City of Hartford, 
Connecticut last year spent $5 million to repair levees to protect 
thousands of properties worth approximately $2 billion--properties that 
otherwise would have been required to purchase flood insurance.\3\ The 
cost of maintaining levees can prove very costly, but is a relative 
bargain when compared to the potential loss of life and property as 
shown by the failure of the levees in New Orleans. Moving forward, NAR 
believes that all levels of government must do a better job of 
shouldering their respective responsibilities.
---------------------------------------------------------------------------
    \2\ Peter Eisler, ``146 U.S. Levees May Fail in Flood,'' USA Today, 
January 29, 2007. http://www.usatoday.com/news/nation/2007-01-28-
levees_x.htm?POE=NEWISVA.
    \3\ Ibid.
---------------------------------------------------------------------------
    To summarize, NAR believes that it is in the best interests of all 
Americans to have a comprehensive Federal natural disaster policy that 
includes aggressive mitigation and appropriate assumption of risk so 
that affordable insurance for homeowners and commercial properties is 
available. Having a comprehensive natural disaster policy is essential 
in the coming years. There is no guarantee that 2007 or any future 
years will be as benign for natural catastrophes as 2006. The question 
is not whether there will be another Katrina-like event in size and 
scope of destruction, but when. As we have learned, it is far less 
costly to prepare ahead of time than to fund recovery efforts.
Proposed Legislative Approaches
    Congress has, with varying levels of success, debated and voted on 
natural disaster legislation since the 1990s. The National Association 
of REALTORS encourages a healthy and vigorous debate during 
the 110th Congress that leads to sound and productive legislation. NAR 
supports the efforts of Members of Congress, especially Senators Bill 
Nelson (D-FL) and Mel Martinez (R-FL), who have introduced and co-
sponsored seven bills to address this critical issue.
    Legislation introduced in the Senate during the 110th Congress 
takes different approaches to addressing the natural disaster insurance 
issue including: allowing insurance companies to accumulate tax-
deferred catastrophic reserves (S. 926), allowing homeowners to create 
catastrophic savings accounts similar to health savings accounts (S. 
927), offering mitigation tax credits (S. 930), streamlining 
regulations for ``surplus lines'' of insurance (S. 929), creating a 
Federal fund to sell reinsurance to states with catastrophe funds (S. 
928), funding hurricane research (S. 931), and creating a bipartisan 
commission to study various insurance-related ideas and report back to 
Congress (S. 292).
    Mitigation has been proven to save money in the long-run. Ensuring 
that infrastructure is sound, as shown by the comparison of Hartford 
and New Orleans above, can also be life-saving. NAR believes that all 
reasonable proposals should be considered as part of a comprehensive 
solution to address future catastrophic events. The ultimate result of 
any legislation should be to ensure that property casualty insurance is 
available and affordable to homeowners and commercial property owners.
    As a first step toward creating a comprehensive natural disaster 
policy, NAR strongly encourages the Senate to enact legislation to 
reform the National Flood Insurance Program in order to ensure its 
long-term viability.
Conclusion
    Thank you again for offering the opportunity to present to the 
Committee the views of the National Association of REALTORS 
on the need for a comprehensive natural disaster policy. NAR encourages 
Congress to develop a comprehensive approach to natural disaster 
preparedness that encourages personal responsibility, promotes 
mitigation measures, ensures insurance availability, and strengthens 
critical infrastructure (e.g., levees, dams, bridges, etc.).
    Passage of an appropriate comprehensive national disaster policy is 
a top legislative priority for REALTORS nationwide. We stand 
ready to work with the members of the Committee on Commerce, Science, 
and Transportation and others in Congress to develop a responsible 
natural disaster policy that addresses the needs of consumers, the 
economy and the Nation.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                         Julie Benafield Bowman
    Question 1. It appears in the wake of large past catastrophes such 
as Hurricanes Katrina and Rita, insurance companies are choosing to 
reduce significantly their risk exposure by increasing deductibles, 
non-renewing policies, and not writing new policies. You mentioned in 
your testimony that, due to the New Madrid fault, parts of Arkansas are 
at risk for earthquakes. As you know, Washington State is also at risk 
for earthquakes. Even so, it has been reported that nearly eight out of 
ten Washington homeowners are not covered by earthquake insurance. 
First, a homeowner must qualify for earthquake coverage. Next, there is 
usually a high deductible and--given the value of the average home 
today--the homeowner faces paying out tens of thousands of dollars 
before coverage would kick in. Finally, the premium frequently proves 
to be too expensive given the perceived risk and perceived risk 
mitigation. Based on your experience in Arkansas and as a member of 
NAIC, do you believe that there are functioning State markets for 
earthquake insurance?
    Answer. The availability and affordability of earthquake insurance 
nationwide is limited by the willingness of insurance companies to 
cover it, and for those that are, by the willingness of consumers to 
pay for it. This is true even for state-run entities like the 
California Earthquake Authority, where the take-up rate is around 14 
percent largely because the coverage is expensive and comes with 
limitations. Insurers perceive the potential severity of a massive 
earthquake to be in the hundreds of billions of dollars; an amount that 
could threaten the solvency of the entire industry. In areas of known 
seismic risk, where the insurance is clearly most needed, there is 
little market to speak of. In areas where there is relatively low 
earthquake risk, coverage is readily available at modest prices.

    Question 2. Should residential earthquake insurance be included in 
a standard homeowner's policy for areas where there is a significant 
risk of earthquakes?
    Answer. Currently, earthquakes largely are an uninsured peril, 
particularly in areas where the threat is greatest, due to the cost and 
availability of covering it. Mandatory inclusion of earthquake coverage 
would address the uninsured aspect, but not the affordability aspect. 
Offering earthquake coverage as an optional coverage also does not 
address affordability. Hurricane Katrina has shown us the two prongs of 
the problem: the lack of comprehensive coverage, and the high cost of 
providing this coverage. We can't solve one without addressing the 
other. An all-perils insurance policy that closes gaps in coverage and 
gets more people insured is good public policy, and we support that 
concept, but Federal Government involvement, or spreading the risk 
through capital markets may be necessary to spread the risk over time 
and help make such coverage affordable.

    Question 3. Should the structure of the home and the contents of 
the home have separate deductibles? What are the implications for 
separate deductibles rather than a single deductible when filing a 
claim?
    Answer. Generally there is not a separate deductible for the 
dwelling and the contents. If a greater amount of risk is retained by 
the homeowner, prices will be lower to reflect the lower loss costs 
passed to the insurer. Thus, having two deductibles instead of one 
would result in the homeowner retaining a greater portion of the risk. 
While this would result in lower prices, it might add confusion to an 
already complicated product.

    Question 4. An earthquake endorsement in a standard homeowner's 
policy generally excludes damages or losses from floods and tidal 
waves--even when caused or compounded by an earthquake. However, loss 
caused by landslide, settlement, mudflow and the rising, sinking and 
contracting of earth may be covered if the damage resulted from an 
earthquake. I can see the parallels between Attorney General Hood's 
testimony regarding anti-concurrent causation clauses with respect to 
Katrina and the earthquake insurance policies offered in my State. Has 
NAIC taken a position on insurers use of anti-concurrent causation 
clauses in their policies?
    Answer. The anti-concurrent cause language in a standard property 
insurance policy is a direct result of the bifurcated insurance system 
we have, and was developed by the insurance industry to protect 
insurance companies from having to pay for losses which are excluded 
from coverage and for which they did not collect a premium. Some have 
suggested that, following Hurricane Katrina, this provision allowed 
companies to avoid paying their obligations of coverage when flood 
damage was present. This is not the intent of that language, and the 
vast majority of companies do not distort the provision to shirk their 
obligations. Despite this, there have been serious allegations that 
some companies or adjusters have wrongly denied claims while 
misconstruing this provision, and they are now being forced to defend 
that contention to their insurance department or in the courts. The 
fact that insurers feel compelled to structure their policies to create 
legal barriers to segregate various perils (with the cost to defend 
these legal barriers often factored into rates), and those barriers add 
confusion and uncertainty for policyholders who are now challenging 
those barriers in courts, speaks to the need for an all-perils 
insurance policy. An all-perils policy would effectively eliminate the 
need for the anti-concurrent language along with any possible 
distortion or manipulation of its intent.

    Question 5. What if any role should the Federal Government play 
when it comes to earthquake insurance?
    Answer. If earthquake insurance is combined under an all-perils 
policy, the cost for those in seismically active areas could make the 
coverage unaffordable. All-perils insurance solves the public policy 
problem of personal responsibility where those at risk are purchasing 
the right insurance, but does not address the other problem of 
affordability. The Federal Government should work with the states to 
develop mechanisms to address the affordability issue. Again, 
delivering comprehensive coverage will eliminate gaps in coverage and 
confusion, and then the states and the Federal Government can focus on 
making that coverage affordable.

    Question 6. I take it from your testimony that you believe 
repealing the anti-trust exemption under McCarran-Ferguson Act could 
harm the property and casualty insurance market, particularly for 
smaller companies, by threatening or eliminating the use of well 
established market mechanisms. What are these key specific market 
mechanisms?
    Answer. The existing market mechanisms that could be threatened or 
eliminated if Federal antitrust law were applied to their operation 
include:

   policy form standardization;

   joint underwriting and residual market underwriting (i.e., 
        high-risk pools);

   sharing loss cost data;

   statistical activities conducted by rating and advisory 
        organization; and

   operation of state insolvency funds.

    Each of these practices benefits consumers and helps foster a 
competitive market for insurance. It is the smaller and medium sized 
insurers that would be particularly harmed if these practices were 
narrowed or eliminated by operation of the Federal antitrust laws. 
Economists have long argued that an efficient and effective market for 
insurance depends upon the sharing of information. Smaller insurers 
with less claims experience, less sophisticated databases, and fewer 
resources benefit from access to collective data about the marketplace. 
Limiting the availability of this critical factual information will set 
up barriers to smaller insurers entering into and effectively competing 
in the market. Standardized insurance forms and definitions of risk 
also enhance competition by easing comparison shopping for consumers 
and allowing for improved data sharing pools for calculating loss 
costs. Joint underwriting provides a method for insurers to share risk 
that no insurer would assume alone such as high-value or high-risk 
properties. A lead insurer in cooperation with other insurers spread 
the risk by each insuring a portion. The limited Federal antitrust 
exemption guards these collaborative efforts from charges of 
anticompetitive behavior. Repealing the limited antitrust exemption 
would squeeze those collaborations and limit the insurance options 
available to owners of high-value or high-risk properties. It would 
likely chill the ability of any single insurer to write a policy that 
assumes total risk and to secure reinsurance as a backstop at a 
reasonable rate. Finally, rating and advisory organizations collect and 
disseminate statistical information, compile aggregated loss cost data 
helpful in trending analyses, and provide other services that allow 
small and medium-sized insurers to compete, thereby improving pricing 
and choices for consumers. Without rating organizations, small and 
medium sized insurers would be harmed by the lack of available loss 
cost information necessary for complete knowledge about the risks they 
seek to insure.

    Question 7. As you know S. 618, the Insurance Industry Competition 
Act of 2007 amends the McCarran-Ferguson Act to make the Federal Trade 
Commission Act applicable to the business of insurance to the extent 
that these businesses are not regulated by state law. What is the 
danger of having the FTC provide a floor for consumer protection with 
respect to property and casualty insurers for States?
    Answer. State insurance regulators have as their primary mission 
the protection of consumers. Every state has antitrust and unfair 
competition laws, unfair trade practices laws, and laws and regulations 
specifically directed at insurance sales and claim practices. State 
regulators and attorneys general play complementary and supportive 
roles in monitoring and investigating insurers, agents, and brokers to 
prevent and punish activities prohibited by those state laws. These 
activities involve constantly reacting to changing market conditions 
and practices that are often state-specific. It also involves taking an 
active role and making adjustments to methods and policies that 
anticipate new challenges that threaten consumers and market stability. 
Every day conscientious, skilled, experienced regulators monitor and 
investigate business activities related to the two major obligations 
insurers owe to consumers--issuing sound policies and paying claims on 
time. Current Federal expertise and capacity necessary to evaluate 
insurer conduct and practices is limited, at best, because of the long 
and successful history of state regulation. It would take time for 
Federal officials to become sufficiently expert in the business of 
insurance to effectively establish consumer protections and there is a 
risk that any Federal standards would conflict with or lower existing 
state protections. Market uncertainty concerning which enforcement 
regime is applicable will harm consumers and insurers.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                            J. Robert Hunter
    Question 1. In 2002, Washington State enacted legislation 
restricting the use of credit scoring in insurance. Insurance companies 
can no longer use credit history to cancel or non-renew an individual's 
insurance policy. Insurance companies also can no longer deny coverage 
or determine premiums using the absence of credit history, the number 
of credit inquiries, collection accounts identified as medical bills, 
the initial purchase or finance of a vehicle or house that adds a new 
loan to the person's existing credit history, the total available line 
of credit, or use of a particular type of credit card, debit card, or 
charge card. Even with Washington State's strong laws, I continue to 
have concerns regarding the potential disparate impact the use of 
credit scores has on protected classes of consumers in my state, and 
more broadly, across our Nation.
    As you know, Section 215 of Fair and Accurate Credit Transactions 
Act of 2003 required the Federal Trade Commission (FTC) to complete a 
study regarding the potential disparate impact credit scoring for 
insurance purposes has on protected classes of consumers no later than 
2 year after enactment. The study is still pending. In your written 
testimony, you raised concerns that the data the FTC has chosen to use 
for its analysis comes from an insurance industry-sponsored study that 
cannot be independently verified for bias or accuracy. You argue that 
it is likely that the study will offer an unreliable description of 
insurance credit scoring and its alternatives. In brief, how should the 
FTC have designed its study to ensure that there is no bias in its 
design and the information's accuracy could be independent verified?
    Answer. The FTC should obtain data directly from insurers and the 
requested data should be driven by the analysis necessary to satisfy 
the requirements of the Section 215 study. The FTC has reversed the 
process--its study is based upon the data the industry is willing to 
provide. It is unreasonable for the FTC to rely upon data the industry 
is willing to provide when the industry has a clear interest in the 
outcome of the study and when the industry can bias the study by 
providing biased data--biased in terms of what data are provided or 
biased in terms of incorrect or erroneous data. Attachment 1 is a 
letter which describes our concern with the FTC approach and our 
suggestions for what they should have done.
    (All attachments are retained in Committee files.)

    Question 2. Are insurance scoring models treated as confidential 
proprietary information under many state laws? What percent of property 
and casualty insurers use credit scores as part of their underwriting 
decisions?
    Answer. Most states treat the insurance scoring models as non-
public information. Texas, Virginia and Connecticut are among the 
states which make the models available to the public. The overwhelming 
majority of insurers--over 90 percent as measured by market share--use 
consumer credit information for either underwriting (decision to offer 
or decline insurance), tier rating (which base rate level or rating 
tier to assign a consumer to) and rating (as a discount or surcharge 
off the base rate). More important, insurers' use of credit information 
has great weight, or impact, on the premiums consumers pay. For auto 
insurance, the most important factors determining premium are credit 
history, prior liability limits and prior insurance. The Michigan and 
Texas Departments publish lists of insurers using credit information on 
their respective websites.\1\
---------------------------------------------------------------------------
    \1\ Links to TX and MI list of insurers using scoring models: 
http://www.tdi.state.tx.us/company/creduse.html; http://
www.michigan.gov/cis/0,1607,7-154-10555_12902_15784-111965
_,00.html.

    Question 2a. How complex is the model that produces an insurance 
score? Typically what factors are included? Typically, how heavily is 
an individual's insurance score weighted by his or her credit score? 
Has the relative weighting changed over time? Who has the authority to 
ensure that prohibited factors are not included in insurance score 
models?
    Answer. The models range from relatively simple--a dozen or so 
factors--to quite complex--several dozen factors. Attached are examples 
of eight credit scoring models.\2\ Attachments 2i and 2j show a Summary 
of Major Factors and a study of the impact of these factors on pricing 
of insurance. What is striking about the models is how few of the 
factors related to payment history and how many relate to economic 
status and other behaviors not relevant to payment history.
---------------------------------------------------------------------------
    \2\ Attachment 2a. ChoicePoint, 2b. State Farm, 2c. Met Life, 2d. 
AIG, 2e. Met Gen, 2f. Progressive, 2g. Allstate, 2h. Hartford.
---------------------------------------------------------------------------
    An insurance score is based on information in the consumer's credit 
history but is not the same as the consumer's lending credit score. 
Insurance scoring has taken on greater importance over time in 
determining a consumer's premium for both auto and homeowners 
insurance. State insurance regulators are charged with ensuring 
prohibited factors are not included. However, most state laws are based 
on the National Conference of Insurance Legislators' model law, which 
provide little consumer protection in terms of prohibited factors in 
the scoring models. There is no need to use race as a factor, for 
example, because other permissible factors are very predictive of race.

    Question 2b. Are some insurers including factors such as education 
and occupation as part of their insurance score? Can education and 
occupation be considered proxies for prohibited factors? If insurers do 
include such factors in its proprietary scoring model, and the model is 
kept confidential under the law of the State in which the insurer is 
licensed to operate, would there be any opportunity for public 
disclosure? If not, should there be public disclosure that insurers are 
using such factors, particularly if it results in an adverse decision 
for the applicant or current policy-holder?
    Answer. A pure insurance score is based solely on information in 
the consumer's credit history. Some insurers are developing a scoring 
system for tier placement that combines credit history (or pure 
insurance score) with other factors, such as prior liability limits, 
prior insurance, education, occupation and other factors, typically 
related to economic status.
    There is generally no opportunity for public disclosure. A few 
states require filing of underwriting and tier placement rules--
Michigan, Florida and Texas are examples--but consumers are generally 
in the dark about what factors insurers consider in setting premiums. 
In theory, consumers should learn about certain factors through an 
adverse action notification pursuant to the Fair Credit Reporting Act. 
However, these notices are limited to adverse actions resulting from 
insurers' use of information from credit bureaus (also known as 
consumer reporting agencies). However, even this consumer protection 
has been undermined by insurer and credit bureau practices. Insurers 
claim they do not need to send an adverse action notice to new business 
applicants even if the consumer received a high premium because of 
credit information. In addition, even when an adverse action notice is 
provided, the reasons provided by insurers/credit bureaus are so 
generic that they completely fail to inform consumers. Attached are 
some ``reason codes.'' Improved disclosure is vital. See the Center for 
Economic Justice's (``CEJ'') comments regarding disclosure to the 
Washington Insurance Commissioner (Attachment 2k).

    Question 3. Do you believe that Congress should look at restricting 
the use of credit scoring in insurance similar to what Washington State 
has done or should it prohibit the use of credit scoring in insurance 
entirely? Are there some States that currently prohibit the use of 
credit scores in insurance for its lines of personal insurance?
    Answer. Congress should prohibit the use of consumer credit 
information as the practice is inherently unfair, discriminates against 
low-income and minority consumers and is arbitrary in practice. 
Attachment 3 is a report of CEJ which gives you detailed discussion of 
these issues.

    Question 4. Some insurers argue that there is a correlation between 
poor credit histories and the likelihood of filing a homeowner or auto 
insurance claim. And as a result of using the predictive value of 
credit scores to fine tune the rates that it can offer its customers, 
insurers can charge higher premiums for riskier customers and better 
rates to customers with good scores, instead of spreading the risk 
equally across it customer base. To the best of your knowledge, is 
there evidence of a causal relationship between an individual being 
late on mortgage payments or credit card bills and a higher risk for 
filing a claim under a homeowners or auto insurance policy?
    Answer. There is a ``correlation'' between credit scores and 
insurance claims, but it is a spurious correlation, meaning that credit 
scores are simply a proxy for some other factor that is truly causative 
of insurance claims. For example, if the racially discriminatory impact 
of credit scores was removed, we believe credit scores would no longer 
correlate to insurance claims.
    Credit scoring classifications raise prices for the poor and 
minorities. Insurers fought to keep Florida from adopting a regulation 
that would have simply made it improper to use a class that the insurer 
could not certify did not have a disparate impact on prohibited classes 
of people.
    Before the use of credit scores became widespread, insurer 
classifications were transparent, with the data in insurers' rate 
filings showing any correlation. Just as important, the traditional 
segmentation of classes of consumers who paid different rates was 
predicated upon a legitimate thesis that was later tested and confirmed 
as data became available. For example, the thesis for charging higher 
rates for those with poor driving records would be something like ``By 
demonstrating poor driving behavior in the past, consumers who have had 
accidents and received tickets, are likely to be poor drivers in the 
future.'' The data confirm this particular thesis. But there is no 
comparable legitimate thesis for the use of credit scoring to set 
rates, just a data-mined ``correlation'' that may not even be valid and 
which is not available to the public to confirm.
    What is absolutely clear is that the insurers' explanation for a 
relationship between credit scores and insurance claims is without 
merit. Insurers argue that a good credit history leads to a good credit 
score, a good credit score probably means a consumer is fiscally 
responsible and a fiscally responsible consumer is likely to a good 
manager of other risks. This argument fails at every point. A good 
credit history does not necessarily equate to a good credit score as 
the scoring models penalize consumers who:

   live in low-income communities

   are more likely to experience an unexpected economic or 
        medical emergency

   whose credit information in a particular credit bureau is 
        incomplete

   who shops around for the best deals

   who doesn't use credit very much

    Should a victim of a hurricane, an earthquake or a job layoff due 
to outsourcing be charged more for insurance because of events such as 
these? Should low-income people, who tend to live paycheck to paycheck, 
be penalized for falling ill and falling a bit behind on credit card 
payments? Are people in these situations really irresponsible? What 
makes them worse drivers or homeowners when tragedy strikes?

    Question 5. In some states, insurance commissioners are elected 
and, in some states, they are appointed. From the perspective of 
protecting consumer's interests, does it make a difference in how an 
insurance commissioner enters his or her office?
    Answer. Elected commissioners are generally more responsive to 
consumer needs than appointed commissioners. An extraordinary number of 
appointed commissioners come from the insurance industry prior to 
becoming commissioner and return to industry after serving, often for a 
year or two, as commissioner. This is not the case with elected 
commissioners. But there is a caveat regarding elected commissioners 
that I must raise. We have seen some very anti-consumer elected 
commissioners who use insurance industry money to get elected. The best 
system would be elected commissioners with solid campaign finance rules 
that reduced or eliminated contributions from the regulated parties.

                                  
