[Senate Hearing 113-21]
[From the U.S. Government Publishing Office]
S. Hrg. 113-21
STREAMLINING REGULATION, IMPROVING CONSUMER PROTECTION, AND INCREASING
COMPETITION IN INSURANCE MARKETS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
SECURITIES, INSURANCE, AND INVESTMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE CHALLENGES AND BENEFITS POSED BY THE CURRENT SYSTEM OF
INSURANCE LICENSING FOR AGENTS AND BROKERS OPERATING OUTSIDE OF THEIR
HOME STATES, AND FOR REGULATORS SUPERVISING THEM
__________
MARCH 19, 2013
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson Deputy Staff Director
Glen Sears, Deputy Policy Director
Erin Barry Fuhrer, Professional Staff Member
Beth Cooper, Professional Staff Member
William Fields, Legislative Assistant
Greg Dean, Republican Chief Counsel
Chad Davis, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Securities, Insurance, and Investment
JON TESTER, Montana, Chairman
MIKE JOHANNS, Nebraska, Ranking Republican Member
JACK REED, Rhode Island BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey DAVID VITTER, Louisiana
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
KAY HAGAN, North Carolina MARK KIRK, Illinois
ELIZABETH WARREN, Massachusetts TOM COBURN, Oklahoma
HEIDI HEITKAMP, North Dakota
Kara Stein, Subcommittee Staff Director
Brian Werstler, Republican Subcommittee Staff Director
(ii)
?
C O N T E N T S
----------
TUESDAY, MARCH 19, 2013
Page
Opening statement of Chairman Tester............................. 1
Opening statements, comments, or prepared statements of:
Senator Johanns.............................................. 2
WITNESSES
Monica J. Lindeen, Commissioner of Securities and Insurance,
Montana State Auditor, on behalf of the National Association of
Insurance Commissioners........................................ 4
Prepared statement........................................... 19
Jon A. Jensen, President, Correll Insurance Group, and Chairman,
Government Affairs Committee, on behalf of the Independent
Insurance Agents and Brokers of America........................ 6
Prepared statement........................................... 22
Scott Trofholz, President and CEO, The Harry A. Koch Company,
Omaha, Nebraska, on behalf of the Council of Insurance Agents
and Brokers.................................................... 7
Prepared statement........................................... 25
Baird Webel, Specialist in Financial Economics, Congressional
Research Service............................................... 9
Prepared statement........................................... 29
Additional Material Supplied for the Record
Prepared statement of the National Association of Insurance and
Financial Advisors............................................. 37
Letter of support for NARAB from a coalition of insurance
industry groups................................................ 39
Letter of support for NARAB from the National Association of
Insurance Commissioners........................................ 40
Prepared statement of the National Association of Professional
Surplus Lines Offices.......................................... 41
Prepared statement of Bernd G. Heinze, Esq. Executive Director,
the American Association of Managing General Agents............ 43
Prepared statement of the Advocates for Insurance Modernization.. 52
Prepared statement of Catherine Weatherford, President and CEO,
Insured Retirement Institute................................... 68
(iii)
STREAMLINING REGULATION, IMPROVING CONSUMER PROTECTION, AND INCREASING
COMPETITION IN INSURANCE MARKETS
----------
TUESDAY, MARCH 19, 2013
U.S. Senate,
Subcommittee on Securities, Insurance,
and Investment,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee convened at 3 p.m. in room 538 Dirksen
Senate Office Building, Hon. Jon Tester, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN JON TESTER
Senator Tester. I want to call to order this hearing of the
Securities, Insurance, and Investment Subcommittee. This
hearing is entitled, ``Streamlining Regulation, Improving
Consumer Protection, and Increasing Competition in Insurance
Markets.''
I look forward to hearing from our witnesses this afternoon
about some of the challenges and benefits posed by the current
system of insurance licensing for insurance agents and brokers
operating outside of their home States and for the regulators
tasked with supervising them.
Currently, an agent or broker seeking to operate in
multiple States must do so in each State individually, meeting
different State-specific requirements and seeking approval from
each State's jurisdiction, a process that can be time consuming
and unwieldy.
Senator Johanns and I introduced legislation last year, the
National Association of Registered Agents and Brokers Act, to
create a nonprofit association to provide one-stop licensing
for agents and brokers operating outside of their home State
while preserving the authority of State insurance regulators to
supervise these markets.
Our legislation, S. 534, which we just reintroduced last
week with 12 bipartisan cosponsors, would provide insurance
producers with the option of becoming a member of the National
Association of Registered Agents and Brokers, or otherwise
called NARAB, provided they meet the professional standards set
by the Association. Membership in NARAB would streamline the
licensing process for agents and brokers, enabling them to be
licensed once under a single standard rather than following
different standards in each State, thus saving time and money.
The Association would set rigorous professional and consumer
protection standards while preserving the ability for
regulators to supervise and discipline producers.
The concept of NARAB was first introduced in 1999 in the
Gramm-Leach-Bliley Act. More recently, it has been introduced
as stand-alone legislation. The legislation that Senator
Johanns and I have introduced enjoys the support of the
National Association of Insurance Commissioners and
representatives of the insurance industry, including those
representatives with us here today.
I think it is fitting that Senator Johanns and I begin our
tenure as Chair and Ranking Member of this Subcommittee focused
on this common sense legislation which we both want to see
signed into law. And let me say how much I look forward to
working with Senator Johanns and his staff on this Subcommittee
to build consensus, to hold agencies accountable, and ensure
that regulations and markets function fairly and efficiently.
We have our work cut out for us, but I know that Senator
Johanns will be a great partner.
I am looking forward to hearing from all of our witnesses
this afternoon about the impact of the NARAB legislation, its
evolution over time, and its potential impact on consumer
protection, market competition, and the State system of
insurance regulation.
With that, I turn it over to you, Senator Johanns, for your
opening statement.
STATEMENT OF SENATOR MIKE JOHANNS
Senator Johanns. Well, thank you, Mr. Chairman, for calling
this hearing, first of all, and to our panel of witnesses,
thank you for being here today. We appreciate it.
I also want to offer a word of thanks to the Senator from
Montana for his leadership on S. 534, the National Association
of Registered Agents and Brokers Reform Act of 2013, a piece of
legislation that, as the Senator indicated, we want to see
signed into law, and we look forward to the discussion today.
I also want to say a special thanks to a good friend, Scott
Trofholz from Omaha. Thank you for making the trek back out
here. We just saw you recently, so it is good to see you here.
The subject under discussion today, as we all know, is an
important one to insurance agents and brokers in Nebraska, but
for that matter, it is important across the United States.
If we succeed in reducing administrative and bureaucratic
barriers to entry in the interstate insurance marketplace, it
logically follows that competition will increase and,
hopefully, costs will go down. Obviously, this represents a win
for everybody involved. Our small business insurance producers
will face a reduced burden in obtaining licensing in other
States. Customers will have greater access to insurance
producers and products. And the vital role of our State
insurance regulators will be preserved.
The State-based insurance regulatory regime is one that
works well, but I am extremely sympathetic to the
administrative burden borne by our Nebraska-based producer who
is seeking to write policies on a customer's business venture
mere miles away across the river in Iowa, write a policy on the
vacation home in Colorado, and maybe the retirement property
that they invested in in Arizona, hoping for that day of
retirement.
I look forward to hearing from the insurance producers on
our panel today about the specific challenges they face with
the current system of insurance licensing and what the proposed
legislation might do to help.
I am also interested in hearing from the panelists on how
they feel market competition may increase as a result of the
framework of this legislation and to what extent this potential
increase may result in increased insurance options for
consumers.
Further, I am encouraged that this legislation does have
the support of the National Association of Insurance
Commissioners, and I look forward to hearing Commissioner
Lindeen's perspective on the role our State insurance
commissioners envision playing if this legislation is enacted.
I also want to wrap up and just say I look forward to
working with Senator Tester on this committee. We can get a lot
done working together, and let us just go out and do it. Thank
you.
Senator Tester. Absolutely. Well, thank you, Senator
Johanns.
And I want to welcome the four witnesses to the panel here
today. These four folks have spent a lot of time working in
this field and I want to thank them for their willingness to
take time out of your busy schedule and be here with us this
afternoon. I will introduce you all and then we will just go
right down the line with the testimony. I would ask you ahead
of time, keep your testimony, I think, within 5 minutes. Your
entire written document will be a part of the record and that
will give us some time to ask the difficult questions.
Commissioner Monica Lindeen is the Montana Commissioner of
Securities and Insurance and the State Auditor. As Auditor, she
protects securities and insurance consumers through education,
fairness, and transparency. During her tenure as State Auditor
and Insurance Commissioner, her office has returned more than
$200 million to investors and insurance consumers in Montana.
Montana is not a particularly big State. This is a big deal.
And in November of last year, she was elected Vice President of
the National Association of Insurance Commissioners. Just as a
side note, I worked with Monica Lindeen when I was in the State
Legislature when she was a legislator and I was a legislator.
She is the hardest working person that I have ever been around.
Thank you very much for being here, Monica.
Mr. Jon A. Jensen serves as government Affairs Committee
Chairman of the Independent Insurance Agents and Brokers of
America, IIABA. As the President of Correll Insurance Group
based in Spartansburg, South Carolina, he is also the South
Carolina National Director for the Independent Insurance Agents
and Brokers of America and the Past National Chairman of the
Big ``I'' Insurance PAC Board of Trustees. I want to thank you,
too, Jon, for taking the time for being here. Welcome to the
panel.
Scott Trofholz, who Senator Johanns spoke about, serves as
President and Chief Executive Officer of The Harry A. Koch
Company located in Omaha, Nebraska. He is also a member of the
Board of Directors of the Council of Insurance Agents and
Brokers. Before joining The Harry A. Koch Company, he served as
Marketing Representative, Service Office Manager, Regional
Marketing Manager, and Branch Manager of Crum and Forster, a
Xerox subsidiary. I want to thank you for being here, Scott,
and very much appreciate your time in making the trek from
Omaha.
And last but certainly not least, we have got Baird Webel,
a Specialist in Financial Economics with the Congressional
Research Service. Mr. Webel has written extensively on
financial institution policy, including the insurance industry,
and coordinated the CRS report on the Dodd-Frank Act. Before
joining CRS, he worked as a Congressional staffer for
Representative Cooksey. So I want to thank you for being here,
Baird. As I told you when you walked in, you are the first
``Baird'' I ever met, so it is great to have you on the panel,
if for that reason alone.
With that, I want to thank you all once again, and we will
start with your testimony, Commissioner Lindeen.
STATEMENT OF MONICA J. LINDEEN, COMMISSIONER OF SECURITIES AND
INSURANCE, MONTANA STATE AUDITOR, ON BEHALF OF THE NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS
Ms. Lindeen. Chairman Tester, Ranking Member Johanns, and
Members of the Committee, thank you for the opportunity to
testify this afternoon and for your leadership on the NARAB II
legislation.
My name is Monica Lindeen, Montana State Auditor,
Commissioner of Insurance and Securities, and Vice President of
the NAIC. The NAIC supports the current NARAB legislation
before you today, and on March 8, we sent a letter of support
to Congress. We also supported the Senate version of the bill
in the last Congress.
Insurance producers play a very important consumer resource
role in the U.S. insurance system as the regulators of more
than 6.8 million individuals and business entities licensed to
provide insurance services in the United States. NAIC members
recognize that streamlined nonresident producer licensing is an
important goal.
However, I want to emphasize that efforts to do so must not
undermine existing State authorities to protect insurance
consumers and take enforcement action against malfeasant
producers. State insurance regulators take our consumer
protection responsibilities very seriously, and our support of
this legislation is contingent on the preservation of our
ability to carry out that mission as we regulate our markets
and enforce State insurance laws.
State regulators have broad authority to protect consumers
through licensing, data collection, and taking action against
violators of State insurance laws. My written testimony details
our authorities in that area, but I want to briefly focus today
on our enforcement record.
In 2011, State insurance departments received millions of
consumer inquiries and more than 283,000 official complaints,
leading to many civil and criminal investigations as well as
the suspension or revocation of nearly 25,000 licenses and
nearly 5,000 fines, totaling over $73 million and resulting in
$115 million in restitution for consumers.
Turning to the legislation itself, allow me to offer
comments about the road that brought us here today. Insurance
commissioners have worked continuously to address nonresident
producer licensing reform, starting with the NAIC's Producer
Licensing Working Group in the late 1990s and the NARAB Working
Group in the early 2000s. The NAIC developed and adopted a
Producer Licensing Model Act to facilitate nonresident
licensing and improve reciprocity. States met and exceeded the
nonresident reciprocity requirements of the Gramm-Leach-Bliley
Act and continue to work diligently toward uniformity in
resident licensing standards.
Even with all of our progress, NARAB II would further
streamline the administrative process of nonresident licensing,
but not at the expense of consumer protection, State revenues
or market regulatory authority. Today's bill contains
improvements over previous versions, and hopefully, with
support from both regulators and producers, it will continue to
attract bipartisan cosponsors and votes as it works its way
through the process.
The proposed legislation would establish NARAB with a
governing board comprised of eight State insurance
commissioners and five insurance industry representatives. This
strong regulatory majority ensures that consumers' best
interests are served by establishing membership criteria,
drawing from the highest standards that exist in State law.
In addition to the strong regulator majority on the board,
the legislation also preserves the existing authorities of
States with respect to resident licensing, market regulation,
and consumer protection, and the supervision and enforcement of
laws related to producer conduct. The bill also includes
important disclosures to the States, maintains business entity
licensing, and protects State revenues and fee structures to
ensure there is no additional cost or revenue loss to those
States.
Another important provision requires pre-notification to
State regulators and the NAIC of any producer seeking to do
business on the basis of NARAB membership. While the States
will no longer issue licenses to nonresidents seeking NARAB
membership, the bill requires notice and a 10-day look period
during which a State may bring up any objections to a producer
that seeks to do business in their jurisdiction.
Last, the bill requires the board to establish a strong
ethical conduct code related to the NARAB's affairs and
operation and mandates an FBI criminal background check from
applicants who have not had one within the last 2 years,
further raising the bar in the area of consumer protection.
Taken together, these provisions preserve State regulatory
authority to police insurance markets and protect consumers.
In conclusion, we look forward to working with you to
advance the NARAB II legislation. The bill is the result of
many years of discussions among State regulators, the producer
community, and Congress. We cannot stress enough the
improvements included in this version of the legislation and
agreed to by all involved are absolutely critical to our
support while preserving State authority, and our endorsement
should not be interpreted as support for any further preemption
of State insurance laws. Insurance regulatory reform should
always begin and end with the States.
And I thank you for your time this afternoon and look
forward to your questions.
Senator Tester. Thank you, Commissioner Lindeen.
You may proceed, Mr. Jensen.
STATEMENT OF JON A. JENSEN, PRESIDENT, CORRELL INSURANCE GROUP,
AND CHAIRMAN, GOVERNMENT AFFAIRS COMMITTEE, ON BEHALF OF THE
INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA
Mr. Jensen. Thank you, Chairman Tester and Ranking Member
Johanns. My name is Jon Jensen and I am President of Correll
Insurance Group, headquartered in South Carolina. I am also
Chairman of the Government Affairs Committee of the Independent
Agents and Brokers of America, also known as the Big ``I''.
The Big ``I'' strongly supports S. 534, or NARAB II, which
was introduced last week by the Chairman and Ranking Member and
12 other bipartisan original cosponsors. This legislation is
one of the top priorities for the Big ``I'' and I thank you
both for your leadership on this issue.
Members of the Subcommittee are likely well aware of the
Big ``I'' 's steadfast and unwavering support for State
regulation of insurance. We strongly believe that States are
the most appropriate and effective regulators of this vital
financial sector. However, while the foundation of State
regulation remains strong, sufficient progress on producer
licensing reform has not been achieved, despite the best effort
of State regulators. As a result, there is a critical need for
targeted Federal legislation, such as NARAB II.
State law requires insurance agents and brokers to be
licensed in every jurisdiction in which they conduct business,
which forces most producers today to comply with inconsistent
standards and duplicative licensing processes. These
requirements are costly, they are burdensome and time
consuming, and they hinder the ability of insurance agents and
brokers to effectively address the needs of consumers. In fact,
the current licensing system is so complex and so confusing for
our members that many are forced to retain expensive
consultants or vendors or hire staff people dedicated to
achieving compliance with the requirements of the States in
which they operate.
My own firm maintains hundreds of licenses. I myself am
currently licensed in 27 States. Many producers in my agency
have more than 20 State licenses, and we have six internal
staffers who share responsibility for maintaining and updating
these licenses. These are six staff who could otherwise be
engaged in client service work, but instead are mired in
needless administrative paperwork. The compliance costs
associated with maintaining these hundreds of licenses is
significant. In addition to agent licenses, my agency must also
maintain business licenses in many States where we operate.
In addition to the time and compliance costs associated
with the agent and agency licensing, I have also experienced
firsthand the real opportunity costs the current system
creates. My agency has on numerous occasions missed
opportunities for new business solely because we are not
licensed in the correct State. At one point, we had a license
application delayed for almost 45 days because there was an
error in the application, but no one in the insurance
department could figure out what that error was. After 45 days,
we found out the problem. It really was just simply that we had
not capitalized a word. The application was corrected in
literally 2 minutes and we are finally allowed to write
business in that State.
There is a better way, and that is the NARAB II legislation
that you, Mr. Chairman and Ranking Member, have introduced. The
NARAB II proposal would immediately establish the National
Association of Registered Agents and Brokers and provide a
long-awaited vehicle for obtaining the authority to operate on
a multi-State basis. NARAB II ensures that any agent, broker,
or agency which elects to become a member of NARAB will enjoy
the benefits of true licensing reciprocity.
In order to join NARAB, an insurance producer must be
licensed in good standing in his or her home State, undergo a
recent criminal background check, and satisfy the criteria
established by NARAB. This criteria would include standards for
personal qualifications, training, and experience. The bill
would not allow a race to the bottom to occur, as it instructs
the board to consider the highest levels of insurance producer
qualifications established under the licensing laws of the
States.
NARAB's simple and limited mission would be to serve as a
portal or central clearinghouse for insurance producers and
agencies who seek the ability to operate in multiple States.
NARAB II merely addresses marketplace entry and appropriately
leaves regulatory authority in the hands of State officials. In
short, the NARAB II proposal would strengthen State insurance
regulation, reduce unnecessary redundancies and regulatory
costs, and enable the industry to more effectively serve the
needs of insurance buyers. And, it would achieve these results
without displacing any State regulatory oversight.
I thank the Subcommittee for its efforts on agency
licensing reform and look forward to working with you all on S.
534.
Senator Tester. Thank you, Mr. Jensen, for your testimony.
Please proceed, Mr. Trofholz.
STATEMENT OF SCOTT TROFHOLZ, PRESIDENT AND CEO, THE HARRY A.
KOCH COMPANY, OMAHA, NEBRASKA, ON BEHALF OF THE COUNCIL OF
INSURANCE AGENTS AND BROKERS
Mr. Trofholz. Good afternoon, Chairman Tester, Ranking
Member Johanns, and Members of the Subcommittee. Thanks so much
for this opportunity. I am Scott Trofholz, the President and
CEO of The Harry Koch Company, which is based in Omaha,
Nebraska. From a startup small business almost 100 years ago,
we have grown to the largest independent agency in the State of
Nebraska, with clients including Fortune 500 companies, small
businesses, and everything in between.
I am testifying on behalf of my firm as well as members of
the Council of Insurance Agents and Brokers, which represents
the Nation's largest insurance agencies and brokerage firms. I
am also on the board of the Council.
From our perspective, it is terrific that you are holding
this hearing and that S. 534 has been introduced to create the
National Association of Registered Agents and Brokers. We think
the reform of nonresident producer licensing is an idea whose
time has come. Let me put it to you this way. Our organization
first formed a task force to work on this issue in 1933.
As for myself, I hold nonresident licenses in 48
jurisdictions. We have over 80 licensed professionals in our
firm, and you can do the math and see the administrative cost
and the compliance burden this creates. I am constantly filling
out paperwork that requires a significant amount of
administrative assistance and adds costs to our firm and to our
clients' costs. These regulations are quite often redundant and
almost always cumbersome.
You would have no compliant from us if these regulations
were about assuring a standard of professionalism, but they are
not. In addition to the initial licenses, we face annual
renewals in all jurisdictions and must comply--and must satisfy
all the underlying requirements, such as pre-licensing and
continual as well as post-licensure oversight.
As you Senators know very well, there has long been a
debate about the parameters of State regulation and Federal
oversight. Not all of us on this panel have agreed on this. But
on this particular issue, consensus among the major
stakeholders has been reached. We all agree that we need a tool
such as NARAB to achieve administrative simplicity and
uniformity while assuring consumer protection.
I especially want to thank all the State regulators,
including Commissioner Lindeen, for all their work on this
issue--changing laws and licensing practices in their States,
working together at the NAIC to address the issues through
model standards and the bully pulpit, and working with all the
stakeholders and legislators in developing this important
proposal.
Regulatory reform is a difficult process and the regulators
take the brunt of a good deal of griping along the way. But we
really do appreciate their diligence in protecting consumers
and providing a vibrant insurance marketplace.
The idea behind NARAB is pretty simple. It does not create
a Federal license but rather would serve as a clearinghouse for
nonresident producer licensure. It would be purely optional and
self-funding. Not a dime of Federal money would be required. In
order to be a member of NARAB, a producer would first have to
be duly licensed in his or her home State. The board of NARAB,
whose majority would be made up of insurance regulators, would
set the criteria of NARAB membership and the standards of
professionalism would be at least as high as the most stringent
State. When a producer meets that standard, he or she can
utilize NARAB as the clearinghouse to receive that nonresident
license.
NARAB would submit licensing fees to the States and the
States would not lose any revenue. This is truly a win-win
scenario. If NARAB is not the most efficient means through
which the producers can be licensed, nothing compels a producer
to use it. The governance of the organization assures the State
regulators will be able to fully protect and, we believe,
enhance the quality of individuals engaged in insurance
transactions.
As has already been stated, the original NARAB versions in
Gramm-Leach-Bliley created an incentive for the States to move
toward reciprocity. Reciprocity has smoothed over some of the
differences, but unless there is real uniformity in
administrative procedures, brokers and insurance consumers will
continue to suffer from unnecessary costs.
Again, Mr. Chairman and Senator Johanns, we are grateful
for your leadership on this issue and look forward to working
with you.
Senator Tester. Thank you, Mr. Trofholz. I appreciate your
testimony, and we will proceed with Mr. Webel.
Mr. Webel.
STATEMENT OF BAIRD WEBEL, SPECIALIST IN FINANCIAL ECONOMICS,
CONGRESSIONAL RESEARCH SERVICE
Mr. Webel. Hello. Mr. Chairman and Ranking Member Johanns,
thank you very much for the opportunity to testify today. My
written testimony contains additional detail and background on
insurance regulation and different Federal attempts to
influence insurance regulation. Today, I will focus on NARAB
and insurance producer licensing.
Before I begin, I just would like to let everybody know,
which I know you know, that CRS's role is to provide objective,
nonpartisan research and analysis for Congress and we do not
take positions on particular legislation.
As everyone has stated, the States are the primary
regulators of insurance. This leads to some multiplicity of
regulation across State jurisdictions, almost inevitably so.
There have been attempts to unify or harmonize State regulation
by both the insurance regulators and the insurance legislators
at the State level for many, many years. But despite such
efforts, we hear stories as we have heard from the rest of the
panel about the costs and inefficiencies in various parts of
the insurance regulatory system.
The attempts that have been brought before Congress to
address this have largely been in the realm of either a
complete Federalization of the system or some Federal, shall we
say, help for other bodies in the insurance regulatory system
to achieve this uniformity. Although I would say, if I were
writing this, the word ``help'' might be in quotation marks,
because not everyone in the system has welcomed such help.
The NARAB provisions, as mentioned, were originally part of
the Gramm-Leach-Bliley Act. They provided for the creation of a
NARAB Association, which would allow people to operate across
State lines with a single membership in this Association. But,
as we have heard, there continue to be problems, partly because
the NARAB Association in Gramm-Leach-Bliley was not mandatory.
The States were given the opportunity to institute either
reciprocity or some sort of uniformity in the system, which
they did, and the NAIC certified that as many as 47 different
jurisdictions reached the reciprocity standards. But I think
that, again, as the details that have been given, there are
some issues that have come up with it and we have continued to
hear problems from people despite the reciprocity legislation
that is in place.
I think that the problems that one continues to hear,
despite the reciprocity legislation that is in place, leads to
the conclusion as we consider further legislation that the
details of the legislation really do matter, that there can be
little details--little differences between States can add up to
big differences to the producer licensing experience.
The NARAB II legislation that is before the Congress today
basically does away with the conditionality that was found in
NARAB I, and institutes the NARAB structure immediately. It has
changes to the board structure that was originally in the NARAB
I legislation. It has changes, to some degree, to the oversight
that the NAIC would have on the NARAB organization. But the
organization remains deeply embedded in the State regulatory
system, with a majority of the board being insurance
commissioners.
Another part that has been added since NARAB I are
provisions providing for Federal Attorney General and FBI
assistance or authority in background checks, which has been a
point of contention or point of difficulty with some States in
terms of accessing, I believe, the Federal resources on
criminal background checks.
I think that another lesson that can perhaps be learned in
the 15 years or so since the Gramm-Leach-Bliley is also that
continued oversight by Congress matters. I think anyone that
has been on Capitol Hill for a while knows that when a law is
passed instructing the executive branch to do something, it
really helps when Congress keeps their thumb on the executive
to make sure that it happens. That is in a situation where
Congress frequently has budgetary oversight or much more direct
oversight mechanisms on the body that is undertaking the
authority.
In this case, it becomes a private body that is sanctioned
by Congress, and I think that that brings up challenges as to
how does Congress continue to oversee what it has created. And
I find it very interesting that one of the initial NARAB
legislation--NARAB II legislations--included reports directly
to Congress. But the administration basically objected to the
reporting because it was a reporting to both the executive and
to Congress. The newer legislation does not have the reporting
to Congress and I think that is in response to those concerns,
but that may be something that Congress will want to think
about again as to how it is going to oversee the NARAB
organization going forward.
If you have any further questions, I would be happy to
answer them.
Senator Tester. Well, thank you, Mr. Webel. I appreciate
your testimony as well as everybody else's.
Since it is just the Ranking Member and myself, I do not
know that we are going to put the clock on. I am going to ask a
few questions and kick it over to you, and when you get tired,
you can kick it back.
I want to start by once again thanking you for all the work
that each and every one of you have done on this. Your
respective organizations have been very positive in the efforts
to streamline the State insurance licensing process and you
need to take that back to not only yourselves, but anybody in
your organization that it applies to. Without your work, I
think it is fair to say that Senator Johanns and myself would
not have been able to introduce this bill. So thank you for
that.
I want to talk a little bit about consumer impact, consumer
protection as it relates to NARAB. Can each of you discuss from
your perspective the potential impact of the streamlined
licensing process as conceived through the NARAB on consumers,
positive or negative. We will start with you, Commissioner.
Ms. Lindeen. Thank you, Mr. Chairman, Senator. I would
just--I would start out by saying that, once again, State
regulators really do take protecting consumers very seriously.
It is our number one priority, as I am sure you have heard
before. And our support of this legislation really is
contingent on that preservation of that ability to protect
consumers and making sure that we are regulating our markets
and enforcing State insurance laws, as I said.
The legislation appropriately, we believe, leaves
regulatory authority in the hands of State officials, which
does nothing, then, to limit our ability to protect consumers
by upholding those laws in our home States. So I think that is
probably the number one reason why we think that this bill as
it stands is a good piece of legislation.
I would also note that, in some cases, NARAB producer
membership requirements may be even tougher, may provide for
even tougher regulations, which I think Mr. Webel mentioned,
when it comes to fingerprinting and FBI background checks. We
think that that is important, as well. Obviously, right now,
there is only about half the States that actually require that.
And, finally, I would just say that any time you can have
multiple sets of eyes on something when it comes to regulation,
it is a good thing. So we think that this is a good bill as it
stands for consumer protection.
Senator Tester. Good. Mr. Jensen, do you have anything to
add?
Mr. Jensen. Yes. Thank you, Mr. Chairman. I do find it
interesting this morning, as I was preparing for this hearing,
I did get an email from a fellow agent of mine and he said,
``Make sure that you mention that this is not just a pro-agent
bill. This is absolutely pro-consumer.'' He said, ``The quicker
that I can go to market for one of my clients, the better I
serve my client.'' And I think that is a very appropriate
comment on his part.
I know from my own personal standpoint, when I have a
client that is a small businessman who calls me and tells me
how excited he is to be venturing into another State and
expanding his business and I have to say, wait a minute, slow
down. Do not be so excited. We do not have a license there. It
will take us a day or two, or a week, or 45 days to be able to
facilitate that for you. It is a very dampening effect, I
think, on small business. There is no question about it. And so
I think this is, by far, a very pro-consumer piece of
legislation.
Senator Tester. OK. Scott.
Mr. Trofholz. I agree with everything that has been said so
far. Any time we can have uniformity and less administrative
headache and get things to the market quicker, the end is that
the consumer benefits, and that is what we are all trying to do
in the first place.
Senator Tester. OK. Baird, anything that----
Mr. Webel. Yes. As written, and I think as people are
intending to carry it out, that it would result in increased
competition and increased competition is generally good for the
consumer.
Senator Tester. OK. Good.
Commissioner Lindeen, to you specifically, can you comment
on how NARAB would impact your ability and the ability of your
fellow commissioners to protect consumers, and if that answer
is it would have no impact, that is a good enough answer for
me, but if it would have an impact, I would like to know.
Ms. Lindeen. Senator Tester, I would say that it would have
no negative effect on our ability to protect consumers.
Senator Tester. Very good. I am going to kick it over to
you, Senator Johanns.
Senator Johanns. Let me start with Scott, if I could. I
used this example of a person who maybe lives in Iowa, but you
service their business and they have various interests in other
States. Is that a common occurrence? Is that something you deal
with on a regular basis?
Mr. Trofholz. Absolutely. The world is getting smaller, and
in many cases, you are taking an example of a personal
insurance policy, but businesses do business across multi
States. And so, as I mentioned to you, we have over 650
licenses in our small firm and it is just--it is not so much
the process, it is which State requires what. I mean, it is
the--we just would like to have one place to go to get that all
done and it would speed up the process. And again, as we talked
about, the redundancies would come out of this, which should be
better for the consumer in the end. But that happens all the
time.
Senator Johanns. Mm-hmm. Jon, do you have thoughts on that?
Mr. Jensen. Yes. I absolutely concur, and it is even--it is
very difficult for us, because the States may change their
regulations from year to year. So we think we have a grasp of
it and know what we are doing and then discover some change has
occurred and all of a sudden it is back to the drawing board. I
guess as small business owners and professionals, we find that
very frustrating, to think we do not know that what we are
doing is absolutely proper.
Senator Johanns. Commissioner, on the issue of, let us just
take a typical consumer complaint. Let us say that you have a--
the law passes. You have an agent in another State other than
your own State, but they are doing business in your State. They
have lawfully complied and you have a constituent in Montana
who feels that they have been cheated or something. Do you then
have jurisdiction of that complaint? Is that how that would
work, because that activity occurred in your State?
Ms. Lindeen. Senator, I would definitely be able to
continue to investigate the consumer complaint, and if I found
that there was any issue with a law being broken, I would be
able to then deal with the producer in the appropriate manner,
absolutely.
Senator Johanns. If I could jump over to Baird, what about
this legislation do you think has a better chance of working
than previous attempts, because there have been some previous
attempts to try to streamline or reciprocity to try to deal
with this issue. What makes this better and different,
hopefully?
Mr. Webel. I think that the existence of the organization,
the ability to have the single license is an important aspect.
I think that it has the potential to really streamline things.
But, as I said, a lot really depends on how things are carried
out.
I will go back to a law passed in 1981 and 1986 on risk
retention groups that was supposed to provide, essentially,
home State regulation of a risk retention group which would
then operate across the country. If you listen to the risk
retention group associations now, they will complain about the
various barriers that have been put up by States which they see
as not giving them access across the country.
So I think that, as I said, the details and the ongoing
implementation of it really matters in terms of are there
little things that are done to prevent people from truly
operating across the country and who decides? Does it take a
Federal lawsuit? If a producer feels like they should be able
to operate in another State, but somehow is not being able to
do so underneath the law, do they actually have to file a
lawsuit in Federal court to obtain some kind of judgment that
they should be able to do so? There are a lot of barriers that
can come up after legislation is actually written.
Senator Johanns. Sure. Any of the other panelists have any
thoughts about that? We not only want to pass the legislation,
but we would like to look out there 5 years, 10 years, and say,
you know, this was the key. This was the secret and now we can
see all this benefit that is occurring.
Commissioner.
Ms. Lindeen. If I could, Senator, if I could, I would like
to just step back for one moment and just kind of remind
everybody that after passage of the Gramm-Leach-Bliley Act, I
mean, there were these standards set in place and the States
were asked--they said that States, at least 27, 28, 29 States
had to meet those standards. The States worked very hard to
meet those standards and exceeded what the Act asked for. We
had, as was mentioned, I think, earlier in one of the
testimonies, we had 47 States who were meeting those standards.
So we have come a long way, and I think that a lot of
times, these things just do not happen overnight. I think that
it is very important that the devil is in the details. Once
NARAB is created and we have that governing board, we are going
to have 2 years to be able to work out the details, and I think
that we have got a lot of history and knowledge in terms of
what needs to be done to make sure that this works
appropriately and that the process is more effective and more
efficient for everyone involved.
Senator Johanns. OK. Scott or Jon, do you have thoughts?
Mr. Trofholz. Yes. We were part of the authorship of NARAB
I, and after seeing what some of the things that we needed to
improve upon that were done, that is where we came up with
NARAB II and helped cosponsor this and we think we have worked
a lot of those, if I can use the term, ``bugs'' out of the
system to make this more uniform and less costly from an
administrative standpoint.
Senator Johanns. Mm-hmm. Jon.
Mr. Jensen. Yes, Senator. I would say one critical
difference, that this actually does create NARAB. In 1999, it
was only a threat as such.
Senator Johanns. Right. It was, if you do not do this, then
you might get whatever.
Mr. Jensen. Correct. And this actually creates the vehicle.
Senator Johanns. Mm-hmm. I would think insurance agents
across the country would be desperately clamoring for this. I
cannot imagine--because it would seem to me so common, like in
a city like Omaha, because you are right on the border, you are
going to have business from other jurisdictions around you.
This would be, it would seem to me--it would seem like
virtually every client who walked in would have these
complexities where you have got to make sure your licenses are
current, et cetera. So it would seem to me that the insurance
industry would absolutely demand that this would be
implemented. Am I seeing that right?
Mr. Jensen. Absolutely.
Mr. Trofholz. Absolutely. Since 1933, we have been trying
to do this correctly, so we are hoping we can push this one
across the finish line.
Mr. Jensen. The burden is greater than you can imagine
inside our own walls. It is tremendous. And as Scott mentioned,
small business is expanding out. It is not just in personal
lines. It is in those businesses seeking economic growth
outside of their own neighborhoods.
Senator Johanns. OK. I will kick it back to you, Jon.
Senator Tester. Thank you.
It has only been 80 years. What the heck. Government works
deliberately, I guess. That is code for slow.
[Laughter.]
Senator Tester. Commissioner Lindeen, in your testimony,
you highlight a careful balance the NARAB establishes between
the board and the State insurance regulators. Can you highlight
exactly how the NARAB Board would work in coordination with
offices like yours to transmit membership decisions, fees,
complaints to individual States.
Ms. Lindeen. Senator, thank you for the question.
Obviously, once the board is in place and they have set their
rules and processes and they would be--if they have a
producer--I am just going to give you an example. If they have
a producer who has somehow or another broken one of those rules
that was set by NARAB, obviously, they are going to have an
issue and take care of that with the producer. But they will
make sure that they pass that information down to us. Are there
other specific examples that you can think of?
There is going to be a lot of coordination. Obviously, we
have a lot of producer licensing databases that are in place
already that the NAIC and the industry take advantage of in
terms of tracking producer licensing, tracking any complaints,
any violations, fines that have occurred. And I think that
there definitely will be an ability for the board to continue
to have access to that information and also have the ability to
contract with an outside organization to do that, as well.
Senator Tester. OK. So you feel confident that the
legislation is complete enough that the lines of responsibility
are clear?
Ms. Lindeen. Senator----
Senator Tester. Between the board and the commissioners'
offices?
Ms. Lindeen. Senator, I believe that the legislation is
clear enough in terms of setting the parameters in an
appropriate manner----
Senator Tester. OK.
Ms. Lindeen.----with the appropriate amount of regulators
on the board giving us the authority we need. Yes, sir, I do.
Senator Tester. OK. Both Mr. Jensen and Mr. Trofholz talked
about 48 licenses, 27 licenses in different States, anywhere
from six to 80 compliance officers on those. Have you been able
to quantify in terms of time or money the cost which the
current system ends up costing consumers because of the added
administration when you have to be registered in 27 States or
48 States or whatever it might be?
Mr. Trofholz. That is--Senator, that is difficult.
Chairman, it is difficult for us to come up with a number. We
can tell you internally what it costs us to process that, and I
would assume a good share of that would go back into the
consumer because we would be much more efficient. You know,
that varies by agency. But we have one person that spends 2
days a month doing this kind of stuff.
Senator Tester. OK.
Mr. Trofholz. That is a rough estimate, and that does not
include all the other things, the renewal, the State license,
the continuing education, all the things that go along with
that.
Senator Tester. OK.
Mr. Jensen. We know inside our office that it costs us tens
of thousands of dollars. But to tell you, Senator, what it
costs the consumer is hard to say.
Senator Tester. Yes.
Mr. Jensen. It is hard to quantify. It is a matter of
quicker to the market, better for the consumer.
Senator Tester. I got you. There are people from soup to
nuts that work in the insurance industry as far as size goes.
Could you talk about the impacts of NARAB as it applies--I am
talking to Jon and Scott again--as it applies to market
competition and what the impact would be, if any, on smaller
producers and their ability to compete.
Mr. Jensen. I think, personally, that the smaller producers
are probably--have a greater benefit by NARAB. Organizations
such as Scott and myself that have a little more size to them
have resources inside the walls that can handle these things,
whereas a smaller agent that may have four or five employees
has no way of really being able to deal with the various
regulatory climates in the various States. They do not have the
internal resources to be able to do that, and in many cases,
they are just having to walk away from pieces of business that
they may be able to produce because they cannot handle it. They
cannot serve their client in the best way they need to, so they
must pass it on to someone else who has better resources.
Mr. Trofholz. That is the same answer.
Senator Tester. OK.
Mr. Trofholz. I agree with Jon 100 percent on that.
Senator Tester. All right. Baird, you talked a little bit
about--and do not let me put words in your mouth, OK? You
talked about the background checks, and if I heard you right,
that there could be a problem accessing the Federal database.
Mr. Webel. When you review the kinds of things that people
have said in the past 10, 15 years, I believe there have been
issues with the State regulators having some question as what
they can access in terms of the Federal databases and whether
they can get complete information or not. And so I think that
the sections in the bill now, I believe were put in
specifically because of those sorts of problems----
Senator Tester. To be able to enable that?
Mr. Webel. Yes.
Senator Tester. You talked about the board change. You
talked about the conditionality. Was there anything else in
this bill that was changed that you saw that might help with
its passage? It is a very similar question to the one Senator
Johanns raised.
Mr. Webel. From the original one, or----
Senator Tester. Yes. From NARAB, the first one.
Mr. Webel. The actual implementation rather than
conditionality is the biggest thing.
Senator Tester. OK.
Mr. Webel. I think that the fact that it continues to be
very deeply entwined in the State regulatory system, the bill
is not a Federal takeover of the system, this seems to be
something that Congress has hesitated over before--Federal
takeovers of the system--but is willing to sometimes use
Federal preemption to make the system more efficient. And so
the bill seems to follow in the same vein of the things that
have passed in the past.
Senator Tester. OK. My last question, and actually, it will
go to Monica again, on keeping out bad actors. I mean, how--and
maybe it goes back to being able to have access to the
database. Maybe it is just communication between the different
States and ultimately this would help facilitate that. But how
would the board ensure the highest professional ethical
standards, but more importantly, how would they keep out the
bad actors? How do you see that coming down the pike, prevent
the bad actors from becoming NARAB members to begin with?
Ms. Lindeen. Well, Senator, I think that the background
checks are an important part of that, making sure that every
State in every case is doing those, well, through the NARAB
board, that those background checks are occurring. And,
obviously, it is also important, then, that the board would
have access to all the data that is already out there about
individuals through our database systems. So I think that that
is the number one, I think, way that that can be accomplished.
And, as you say, communication is always important.
But I think that, once again, I just really want to--this
is based on some comments that were made--just stress the fact
that NARAB is not--would have no regulatory authority.
Obviously, this is just a tool to facilitate a process that is
still going to continue to preserve State regulators'
authorities to protect those consumers.
Senator Tester. OK. Thank you.
Senator Johanns.
Senator Johanns. If I could just follow up on that
question, as I understand the legislation, there is a 10-day
period----
Ms. Lindeen. Right.
Senator Johanns.----and I am assuming that that 10-day
period would be utilized by commissioners to take a look and
maybe something pops up. Maybe this person is under
investigation in another State for some kind of wrongdoing. You
could push back then on that person doing business in your
State, right? Explain how that would work.
Ms. Lindeen. Senator, I appreciate that, and I would have
added that to my response to Senator Tester's question, because
that is another key element in this piece of legislation, is
that each State would be able then to have that 10-day look-
back period, and if they had any problems that had occurred in
their jurisdiction, they could push back, and hopefully, that
would be--that the board then would look at that and say, there
is an issue here.
Senator Johanns. OK. One thing I would always ask in the
Governor's office when people would come to me with a great
idea, I would always say, explain to me who is for you and who
is against you. Tell me, in this legislation, do you know of
any group that would be out there that would, after this
hearing, call us and say this is a problem, this is why we do
not like this legislation? And, Commissioner, I will start with
you.
Ms. Lindeen. I do not know of any. Honestly, Senator, I
think it is a lovefest.
Senator Johanns. Good.
[Laughter.]
Senator Johanns. We like those once in a while, too, you
know.
Ms. Lindeen. No, but it is not something--it is not a
lovefest that came easily, obviously. These are discussions and
negotiations that have been occurring for years. And I think
that it is--I think we have come to a point now where we can
all agree on some specifics in order to move forward, to give
industry what they want, which is the ability to have a
streamlined process so that they can get their products so that
they can do their work for their consumers and that we, as
regulators, can do our job, as well, which is to protect
consumers. And so I think that it is to a point where we all
agree and we need to move forward.
Senator Johanns. Jon, Scott, any thoughts on that?
Mr. Jensen. I completely echo that and we know of no one
that would oppose this now.
Senator Johanns. Mm-hmm.
Mr. Trofholz. I agree with Jon.
Senator Johanns. Yes.
Mr. Webel. I am not aware of any specific groups that have
expressed opposition. I would note that it is, to some degree,
a Federal preemption of some State laws. There will be people
out there that may be unhappy about that. And having attended a
conference of the National Conference of Insurance Legislators
(NCOIL) as a Federal representative, I will tell you that there
are insurance legislators in the country that do not trust the
Federal Government very much. So I think that you may still
hear from some people that are not happy with the legislation.
Senator Johanns. Mm-hmm.
Mr. Webel. I would just note that that organization, NCOIL,
as a whole, has taken a neutral stance on the NARAB II
legislation.
Senator Johanns. You know, here is what I would offer, and
then I have no other questions. But this is a comment I would
offer. I do not know that there is anybody in Congress more
States' rights oriented than the two people sitting up here
today. My entire background was State and local before I came
here to join the President's cabinet, entirely. I have said
over and over again, I just think regulating closest to the
people affected is the best way of doing business.
However, I have seen this issue rattle around and rattle
around and rattle around, and it seems to me if there was ever
a sweet spot to be achieved, this legislation achieved it
through working together and compromise and giving here and
giving there, to recognize that the States are the regulators
in this area. And I do believe that the legislation respects
that. I really do.
The other thing I would say, if this problem is not solved
at some point, then I think you have a risk of other
legislation at some point in time that turns everything upside
down.
Ms. Lindeen. Yes.
Senator Johanns. And to me, that would be extremely
worrisome. This legislation has the best chance of solving a
very, very difficult problem, in my opinion, and I certainly
agree with you. There are people that push back on anything
that has a Federal flavor to it. But for the work of many who
tried to reach that sweet spot, we would not be here today, and
I just think that this is such an important step. Otherwise,
other consequences are awaiting us that I do not think we will
like nearly as much, because this has been such a problem for
so long. Eighty years is long enough, and my hope is we can get
this problem solved.
Ms. Lindeen. We thank you both for your leadership in
helping us do that.
Senator Johanns. I am done.
Senator Tester. Well, thank you, Senator Johanns. I very
much appreciate those remarks, as I appreciate the remarks of
the panel today. I meant it in the beginning when I said, thank
you for your time. I know you could all be doing something else
and you are not. You are here advocating for this bill, or at
least giving us information about this bill. So I want to thank
you for that.
This hearing has really underscored the importance of
legislation to finally establish the National Association of
Registered Agents and Brokers and has highlighted all of the
efforts that have occurred up to this point. I certainly look
forward to working with Senator Johanns and many of our
witnesses today and others in getting this legislation across
the finish line.
To that end, I have a few documents that I want to submit
into the record. I have a letter of support for NARAB dated
February 19 from a broad coalition of insurance industry
groups; a letter of support for NARAB dated March 8, 2013, from
the leadership of the National Association of Insurance
Commissioners; written testimony from the National Association
of Professional Surplus Lines Offices; written testimony from
the Advocates for Insurance Modernization; written testimony
from the American Association of Managing General Agents; and
written testimony from the Insured Retirement Institute.
Senator Tester. The hearing record will remain open for 7
days for any additional comments or for any questions that
might be submitted to the record.
With that, thank you all. This hearing is adjourned.
[Whereupon, at 3:58 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF MONICA J. LINDEEN
Commissioner of Securities and Insurance, Montana State Auditor
on behalf of the National Association of Insurance Commissioners
March 19, 2013
Introduction
Chairman Tester, Ranking Member Johanns, and Members of the
Committee, thank you for the opportunity to testify this afternoon, and
thank you both for your leadership on the NARAB II legislation, S. 534,
which we are here to discuss today.
My name is Monica Lindeen, and I am the Montana State Auditor and
Commissioner of Insurance and Securities. I currently serve as Vice-
President of the National Association of Insurance Commissioners
(NAIC), and I present this written testimony on behalf of that
organization. The NAIC is the United States standard-setting and
regulatory support organization created and governed by the chief
insurance regulators from the 50 States, the District of Columbia, and
five U.S. territories. Through the NAIC, we establish standards and
best practices, conduct peer review, and coordinate our regulatory
oversight. NAIC members, together with the central resources of the
NAIC, form the national system of State-based insurance regulation in
the United States.
The NAIC supports S. 534. On March 8, the other NAIC officers and I
sent a letter supporting the bill to the Chairmen and Ranking members
of the Senate Banking Committee and the House Financial Services
Committee. We also supported the Senate version of the bill in the last
Congress.
As the regulators of more than 6.8 million individuals and business
entities licensed to provide insurance services in the United States,
the NAIC recognizes that streamlined nonresident producer licensing is
an important goal, but I want to emphasize that efforts to do so must
not undermine current State authorities to protect insurance consumers
and take enforcement action against malfeasant producers. State
insurance regulators take our consumer protection responsibilities very
seriously, and our support of this legislation is contingent on the
preservation of our ability to carry out that mission as we regulate
our markets and enforce State insurance laws.
Policing Insurance Producers and Protecting Consumers
State regulators' top priority is the protection of insurance
consumers. We do this in a variety of ways, from licensing and
collecting data on insurers and producers to investigating consumer
complaints and violations of State insurance laws. We also consistently
try to educate consumers regarding their rights and recourses against
unscrupulous actors.
Licensing
The State insurance departments have a strong track record
regarding the licensing of individuals and business entities through
pre-licensure requirements and evaluations and post-licensure consumer
protection and market regulation. In addition, State coordination is
facilitated through the State Producer Licensing Database maintained by
the NAIC.
In order to be licensed, insurance producers must pass an
examination by specific line of authority. In addition, many States
require pre-licensing education training prior to a candidate taking a
producer licensing examination. In addition to the examination process,
producer applicants undergo a background check, which includes the
fingerprinting of applicants in many States.
Once licensed, most States require an insurance producer to obtain
what is known as a company appointment to sell a company's products.
States typically require insurance producers to complete 24 hours of
continuing education training every 2 years, with three of the 24 hours
addressing ethics.
Monitoring and Tracking Producers
State insurance departments monitor the activities of producers
licensed in their State as part of their market conduct regulation
responsibilities. When producers operate in multiple jurisdictions,
departments must coordinate efforts to track producers and prevent
violations. Special databases maintained by the NAIC assist States by
sharing information about the activities of insurance producers. One
such database, the Regulatory Information Retrieval System (RIRS),
contains information on producers and companies against which some type
of regulatory action has been taken. The Special Activities Database
(SAD) contains data on unauthorized activities and disciplinary actions
taken by other regulatory agencies other than a State insurance
department. Finally, the Complaints Database System (CDS) provides
online access to closed complaints.
The NAIC also maintains the State Producer Licensing Database
(SPLD), a nationwide comprehensive database of individuals and business
entities licensed by States to sell, solicit or negotiate insurance.
The SPLD allows States to share information to facilitate the licensing
process and track producers licensed in more than one State.
Information shared in the Producer Database (PDB), which companies
access to conduct due diligence prior to appointing an agent, includes
demographic and biographical information, current and historical
license information, types of licenses held, authorized lines of
business, and a record of insurance regulatory actions (listed in
RIRS). Finally, the SPLD links to SAD and CDS databases to provide
States a comprehensive regulatory picture of an insurance producer.
This information is pushed to the States through the NAIC's
Personalized Information Capture System or PICS Alerts. When one State
takes a regulatory action against a producer, all States in which the
producer holds a license are electronically notified.
With SPLD in place to serve as a cornerstone, the National
Insurance Producer Registry (NIPR), a nonprofit affiliate of the NAIC,
connects State insurance departments with insurers, producers,
licensing service providers, and other stakeholders in the licensing
process. Among its many benefits of such a wide-area network, NIPR's
state-of-the-art electronic filing system provides efficiencies to the
licensing of producers by facilitating the electronic licensing
application process; automating the producer appointment and
termination process; providing companies access to data contained in
the PDB; and streamlining billing and collection of licensing and
appointment fees.
Complaints and Enforcement Actions
State regulators have broad statutory authority to regulate and
police their markets on behalf of consumers. State insurance
departments take in hundreds of thousands of consumer complaints every
year that lead to civil or criminal investigations, fines, and
restitution for consumers.
While specific processes vary from State to State, in most cases,
action begins with a consumer complaint or inquiry. Professional staff
at State insurance departments thoroughly review complaints and
investigate whether State laws have been violated by either a producer
or an insurer. If a State regulator determines a producer has violated
State law, remedies include fines, cease and desist orders, and
suspension of licenses to keep bad actors from harming consumers. In my
own State of Montana, in 2011, we levied 29 fines totaling $125,000,
and recovered over $78,000 for consumers through 11 restitutions. For
the same year, nationwide, State insurance departments received more
than 283,000 official complaints, leading to the suspension or
revocation of nearly 25,000 licenses, and nearly 5,000 fines totaling
over $73 million and resulting in $115 million in restitution for
consumers.
Additionally, many States have formed separate criminal insurance
fraud units. These units, which may or may not reside within the
State's insurance department, investigate insurance fraud in order to
prevent bad actors from harming consumers and to keep fraudulent claims
from increasing the cost of insurance. Recent years have seen an
increase in the number of fraud investigators employed by the States as
awareness and scrutiny of insurance fraud has increased.
Educational Efforts
In addition to monitoring producers and investigating potential
producer violations of State insurance laws, State regulators also
provide educational materials, comparison guides, seminars, and strive
to improve our outreach to help consumers know their rights.
Independently and through the NAIC, State regulators issue frequent
consumer alerts; we also share information about insurance companies
through tools such as our Consumer Information Source (CIS) service,
including closed complaints, licensing information, and financial data
on producers and insurers. CIS allows consumers to obtain key
information before purchasing an insurance policy.
NARAB II--Background
Turning to the legislation itself, allow me to offer comments about
the road that brought us here today. As you know, the proposed
legislation will amend the Gramm-Leach-Bliley Act to create a nonprofit
corporation known as the National Association of Registered Agents and
Brokers, or NARAB, in order to streamline nonresident market access for
insurance producers licensed in their resident States. NARAB will be
led by a Board of Directors, the majority of which will be State
insurance commissioners, and the Board will establish membership
requirements applicable to eligible nonresident insurance producers.
Membership will permit insurance producers to access insurance markets
similar to what nonresident producer licensing allows.
Insurance commissioners have worked for a very long time to address
nonresident insurance producer licensing reform. Starting with the
NAIC's Producer Licensing Working Group in the late 1990s and the NARAB
Working Group in the early 2000s, the NAIC developed and adopted a
Producer Licensing Model Act (PLMA) to facilitate nonresident licensing
and improve reciprocity. States met and exceeded the nonresident
reciprocity requirements of the Gramm-Leach-Bliley Act and continued to
work diligently toward uniformity in resident licensing standards.
In the mid-to-late 2000s, the NAIC reconstituted its NARAB Working
Group in order to update and strengthen our approach to reciprocity.
After a considered evaluation of new issues and administrative
practices, the NARAB Working Group recommended the NAIC adopt a
heightened standard for reciprocity, which was adopted by the NAIC
Executive Committee and Plenary in 2009. A subsequent review determined
that the States continued to meet and exceed GLBA's reciprocity
standard.
Even with all our progress, the NAIC agrees that further
improvement is needed. The States have made such significant progress
in reforming producer licensing that today's system is unrecognizable
from the system of 10-15 years ago. However, the narrow, targeted area
of the nonresident insurance producer licensing process is one of the
exceptionally rare instances where we believe Federal legislation could
be used. NARAB II would streamline the administrative process of
nonresident licensing (or its equivalent under NARAB), but not at the
expense of consumer protection, State revenues or market regulatory
authority.
Specific Provisions of Interest
Today's bill contains improvements over versions introduced in
previous Congresses, and hopefully with support from both regulators
and producers, it will continue to attract bipartisan co-sponsors and
votes as it works its way through the legislative process. I would now
like to take a few moments to address some of the provisions in the
NARAB II bill that were crucial to winning the support of State
regulators.
The proposed legislation would establish NARAB with a 13-member
governing board comprised of eight State insurance commissioners and
five insurance industry representatives. This strong regulator majority
serves to ensure that while the industry has several seats at the
table, regulators will be able to ensure that consumers' best interests
are served by establishing membership criteria drawing from the highest
standards that exist in State law. NARAB will be administering what has
been a regulatory function, and so it should be guided by regulators.
As a result, the bar will be raised with respect to nonresident
producers seeking to access other markets. This will virtually
eliminate the risk of a race to the bottom where consumer protection is
concerned. In addition to the strong regulator majority on the board,
the legislation also preserves the existing authorities of States with
respect to resident licensing, market regulation and consumer
protection, and the supervision and enforcement of laws related to
producer conduct and possible disciplinary actions. These components of
our regulatory programs are essential to serving our monitoring
function and protecting consumers.
The bill also includes important disclosures to the States,
maintains business entity licensing, and protects State revenues and
licensing structures to ensure there is no additional cost or revenue
loss to the States--something that is critically important. NARAB's
administrative costs will be funded through fees paid by producers.
Another important provision from our perspective requires pre-
notification to State regulators and the NAIC of any producer seeking
to do business on the basis of NARAB membership. Therefore, while the
States will no longer issue licenses to nonresidents seeking NARAB
membership, the bill requires notice and a 10-day ``look'' period
during which a State may bring up any objections to a producer that
seeks to do business in their jurisdiction through that membership.
Lastly, the bill requires the board to establish a strong ethical
conduct code related to NARAB's affairs and operation, and mandates an
FBI criminal background check from applicants who have not had one
within the previous 2 years. The latter requirement further raises the
bar in the area of consumer protection.
Taken together, these provisions preserve State regulatory
authority to police our markets and to protect insurance consumers
while streamlining the licensing process for insurance producers, and
help to explain why the NAIC has chosen to support the bill we are
discussing today.
Conclusion
We look forward to continuing our consumer protection efforts and
working with you to advance the NARAB II legislation. The bill is the
result of many years of negotiations and discussions between State
regulators, the insurance producer community, and your respective
staffs. We cannot stress enough that the improvements included in this
version of the legislation, and agreed to by all involved, are
absolutely critical to our support. We thank the sponsors and
cosponsors for working with us to achieve a good bill that accomplishes
the goals of facilitating nonresident licensing and at the same time
preserving State authorities. NARAB represents a unique and very narrow
case where Federal legislation can be used to streamline a process,
while preserving State authority, and should not be interpreted to
suggest support for any further preemption of State insurance laws.
Insurance regulatory reform should always begin and end with the
States.
Thank you again for the opportunity to be here and I look forward
to your questions.
______
PREPARED STATEMENT OF JON A. JENSEN
President, Correll Insurance Group, and
Chairman, Government Affairs Committee
on behalf of the Independent Insurance Agents and Brokers of America
March 19, 2013
Introduction
The Independent Agents and Brokers of America (IIABA) thanks the
Committee, and especially Subcommittee Chairman Jon Tester and Ranking
Member Mike Johanns, for the opportunity today to testify in support of
agent licensing reform. IIABA's support for State insurance regulation
is well-known to observers of the insurance industry and to the Members
of the Subcommittee, and we continue to confidently believe that States
are the most appropriate and effective regulators of this vital
financial sector. However, while our support for State regulation
remains unwavering, we are just as strongly committed to the pursuit
and implementation of regulatory and legislative reforms that address
the inefficiencies and unnecessary duplication that continue to hinder
its effectiveness. The foundation of State regulation remains strong
and offers considerable benefits, but the difficult truth is that
sufficient progress on producer licensing reform and similar
marketplace access issues has not been achieved. The need for effective
licensing reform is greater than ever.
Producer Licensing Reform and the Need for NARAB II
State law requires insurance agents and brokers to be licensed in
every jurisdiction in which they conduct business, which forces most
producers today to comply with inconsistent standards and duplicative
licensing processes. These requirements are costly, burdensome and time
consuming, and they hinder the ability of insurance agents and brokers
to effectively address the needs of consumers. In fact, the current
licensing system is so complex and confusing for our members that many
are forced to retain expensive consultants or vendors or hire staff
people dedicated to achieving compliance with the requirements of the
States in which they operate.
Some observers mistakenly believe that most insurance agents
operate only within the borders of the State in which they are
physically located and that the problems associated with the current
licensing system only affect the Nation's largest insurance providers.
The marketplace, however, has changed considerably in recent decades.
There are certainly agencies that have elected to remain small and
perhaps only service the needs of clients in one or two States, but
that is no longer the norm. My firm spends tens of thousands of dollars
per year on licensing fees alone, but the more significant cost for us
is the immeasurable staff time that goes into maintaining hundreds
licenses and responding to the duplicative State requirements and
document requests. For smaller businesses, which lack the staff and
resources of larger competitors, the exorbitant cost and unnecessary
complexity of ongoing licensing compliance is especially burdensome.
Research conducted by IIABA has found the following:
Approximately 60 percent of IIABA member businesses have a
staffer whose duties are dedicated to obtaining and maintain
the appropriate insurance licenses for the agency and its
personnel. On average (across all agencies surveyed), insurance
agencies have one full-time equivalent employee dedicated to
such activities.
About 3 percent of insurance agency operating expenses, on
average, are spent on licensing compliance efforts. This
percentage is highest for the smallest agencies (4.3 percent).
The inefficiencies, unwarranted expenses, and redundancy associated
with the existing licensing system are further exacerbated because many
insurance agents serve the needs of consumers and business located in
other jurisdictions. Both society and the insurance marketplace have
changed considerably in recent decades, and it is incredibly common for
insurance agencies to work with customers in other States. IIABA's
largest members today operate in all 50 States, and it is increasingly
common for small and mid-sized agencies to be licensed in 25-50
jurisdictions as well. In fact, research conducted by our association
has found that producers who operate in more than one State are
licensed in an average of nine jurisdictions.
Lack of True Reciprocity
Perhaps the most significant deficiency with the current licensing
mechanism is the inability of States--despite their best efforts--to
fully implement true licensing reciprocity.
Congress recognized the need to reform the multi-State licensing
system in 1999, when it incorporated the original NARAB subtitle into
the Gramm-Leach-Bliley Act (GLBA). GLBA did not provide for the
immediate establishment of the National Association of Registered
Agents and Brokers and instead included a series of ``act or else''
provisions that encouraged the States to simplify the licensing
process. In order to forestall the creation of NARAB, at least a
majority of States (interpreted to be 29 jurisdictions) were required
to license nonresidents on a reciprocal basis. To be deemed ``NARAB
compliant,'' GLBA mandated that States issue a nonresident license to
any applicant who meets three simple criteria: (1) is licensed in good
standing in his/her home State, (2) submits the appropriate
application, and (3) pays the required fee. The Act is precise and
States that a nonresident license must be issued ``without satisfying
any additional requirements.'' In short, GLBA required compliant States
to accept the licensing process of a producer's home State as adequate
and complete, and no additional paperwork requests or other
requirements are permitted (no matter how trivial or important they may
seem).
Unfortunately, true reciprocity remains elusive. Agents and brokers
hoped meaningful and tangible reform was imminent following GLBA's
passage and the subsequent enactment of at least elements of the
Producer Licensing Model Act (PLMA) by most jurisdictions, but
insurance producers still await the promised benefits a dozen years
later. Producers expected the implementation of something analogous to
a driver's license-type system, which might allow nonresidents to
easily and efficiently operate in multiple States after qualifying for
licensure at home. Congress's action in the late 1990s spurred some
activity and modest State-level improvements, but insurance producers
have been largely disappointed by the lack of meaningful progress made
in recent years.
States too often ignore the principle of reciprocity and opt
instead to reevaluate and second-guess the licensing decisions of a
person's resident State. Although the GLBA and the PLMA clearly
establish the limits of what may be required of a nonresident
applicant--a nonresident in good standing in his/her home State shall
receive a license if the proper application or notice is submitted and
the fees are paid--States continue to impose additional conditions and
fail to respect the licensing determinations made by resident
regulators. The imposition of these extra requirements (such as the
submission of documents and other information that have already been
provided to the home State regulator) makes it impossible for many
insurance producers to quickly obtain and efficiently maintain the
necessary licenses and violates the reciprocity standards established
in Federal and State law.
The Gramm-Leach-Bliley Act empowers the National Association of
Insurance Commissioners (NAIC) to determine whether States have
achieved and maintain compliance with the requirements of the NARAB
reciprocity standard. The NAIC has previously asserted that nearly
every State has satisfied the standard, yet the suggestion that so many
jurisdictions recognize nonresidents on a truly reciprocal basis would
surprise the practitioners who must regularly comply with the extra
hurdles and requirements imposed by States.
Duplicative Layers of Licensing Requirements
While most observers are aware that insurance agents and brokers
must obtain a license in every State in which they operate, fewer
recognize that nonresidents often confront three layers of duplicative
and redundant licensing requirements in each jurisdiction.
Specifically, many insurance departments require nonresidents to (1)
obtain an individual insurance license, (2) obtain a similar license
for the applicant's agency, and (3) register as a foreign corporation
with the Secretary of State, even when the State's corporate statutes
impose no such mandate. These multiple layers of licensure offer no
additional benefit or protection to consumers, yet they impose
considerable costs, delays, and unintended consequences on the agent
and broker community. The effects of these requirements are
considerable for insurance producers who operate in multiple States,
and the enforcement of many of these rules violates the principle of
reciprocity and the GLBA/NARAB standard. Addressing these problems
would produce significant benefits and enable insurance firms to focus
greater resources on serving the needs of consumers.
The NARAB II Proposal
IIABA believes the most efficient, effective, and sensible way to
address the licensing and marketplace access problems discussed above
is through targeted legislation at the Federal level. Limited Federal
legislation can effectively remedy identified deficiencies in the
current system, establish greater interstate consistency in key areas,
and preserve day-to-day regulation in the hands of State officials.
This pragmatic and politically feasible approach can be used on a
compartmentalized issue-by-issue basis to address acknowledged problems
and to establish uniformity and interstate consistency where necessary.
Our experience in recent years suggests that there are certain
problems with the State regulatory system that are resistant to reform
via the traditional path of model laws and State-by-State legislative
action. Targeted Federal legislation can overcome the structural
impediments, collective action challenges, and other practical and
political barriers that have stalled previous reform efforts. There are
only a finite number of areas where uniformity and consistency are
essential, and Congress has the ability to address each of these issues
on a national basis. This can be done through a single legislative act
or a series of bills and can be achieved without dismantling,
replacing, or impairing the State-based system. State regulators do a
tremendous job protecting consumers and ensuring the solvency of
insurers, and nothing should be done to undermine or jeopardize their
ability to do so on a prospective basis.
IIABA specifically supports the use of this approach to address the
licensing problems identified above, and the most appropriate and
practical way to do so is through the NARAB II legislation, which has
twice passed the House of Representatives. This legislation, S. 534,
has once again been introduced in this Congress by Subcommittee
Chairman Jon Tester and Ranking Member Mike Johanns. Companion
legislation (H.R. 1155) has been introduced in the House of
Representatives by Insurance Subcommittee Chairman Randy Neugebauer and
Rep. David Scott. The NARAB II proposal would, as the NAIC has
previously stated, ``achieve the goal of nonresident reciprocity in
insurance producer licensing'' and ``work in partnership with existing
State licensing operations.'' The measure has enjoyed broad industry
support, and nearly the entire insurance industry has endorsed the
legislation. The NAIC, too, has fully endorsed S. 534. Finally, the
legislation enjoys strong bipartisan Congressional support, and in fact
it already enjoys the support of 14 bipartisan original cosponsors in
the Senate and 41 in the House.
The NARAB II proposal would immediately establish the National
Association of Registered Agents and Brokers and provide agents and
brokers with a long-awaited vehicle for obtaining the authority to
operate on a multistate basis. It would eliminate barriers faced by
agents who operate in multiple States, establish licensing reciprocity,
and create a one-stop facility for those who require nonresident
licenses. The bipartisan proposal benefits policyholders by increasing
marketplace competition and consumer choice and by enabling insurance
producers to more quickly and responsively serve the needs of
consumers. S. 534 ensures that any agent or broker who elects to become
a member of NARAB will enjoy the benefits of true licensing
reciprocity. In order to join NARAB, however, an insurance producer
must be licensed in good standing in his/her home State, undergo a
recent criminal background check (long a priority of State insurance
regulators), and satisfy the criteria established by NARAB. These
criteria would include standards for personal qualifications, training,
and experience, and--in order to discourage forum shopping and prevent
a race to the bottom--the bill instructs the board to ``consider the
highest levels of insurance producer qualifications established under
the licensing laws of the States.''
NARAB's simple and limited mission would be to serve as a portal or
central clearinghouse for insurance producers and agencies who seek the
regulatory authority to operate in multiple States. The bill discretely
utilizes targeted congressional action to produce efficiencies and is
deferential to States' rights at the same time. S. 534 merely addresses
marketplace entry and appropriately leaves regulatory authority in the
hands of State officials. The proposal does nothing to limit or
restrict the ability of State regulators to enforce State marketplace
and consumer protection laws. State officials will continue to be
responsible for regulating the conduct of producers and will, for
example, investigate complaints and take enforcement and disciplinary
action against any agent or broker who violates the law. In short, the
NARAB II proposal would strengthen State insurance regulation, reduce
unnecessary redundancies and regulatory costs, and enable the industry
to more effectively serve the needs of insurance buyers--and it would
achieve these results without displacing or adversely affecting State
regulatory oversight.
Conclusion
The IIABA thanks the Subcommittee for its efforts--past and
present--to implement tangible and effective insurance marketplace
improvements. We appreciate today's hearing on ``Streamlining
Regulation, Improving Consumer Protection and Increasing Competition in
Insurance Markets'' and we look forward to working with you on passage
of the NARAB II proposal.
______
PREPARED STATEMENT OF SCOTT TROFHOLZ
President and CEO, The Harry A. Koch Company
on behalf of the Council of Insurance Agents and Brokers
March 19, 2013
Chairman Tester and Members of the Subcommittee, thank you for the
opportunity to testify before you today in support of The National
Association of Registered Agents and Brokers Reform Act. My name is
Scott Trofholz. I am the President and CEO of The Harry A. Koch
Company, based in Omaha, Nebraska. I personally have been with The Koch
Co. for 22 years. We are a profitable and growing 96-year-old firm
offering consulting and insurance solutions for businesses and
individuals with exposures throughout country. Koch clients include
Fortune 500 Companies, small businesses and everything in between. We
offer commercial lines, employee benefits, bonds and personal
insurance. We are the largest family owned agency in Nebraska and
employee around 100 residents. My testimony today is on behalf of my
firm, as well as the member firms of the Council of Insurance Agents
and Brokers (The Council). I'm a member of the Board of Directors of
The Council, which represents the Nation's leading, most productive and
most profitable commercial agencies and brokerage firms. Council
members specialize in a wide range of insurance products and risk
management services for business, industry, government, and the public.
Operating both nationally and internationally, Council members conduct
business in more than 3,000 locations, employ more than 120,000 people,
and annually place approximately 80 percent--well over $250 billion--of
all U.S. insurance products and services protecting business, industry,
government and the public at-large, and they administer billions of
dollars in employee benefits. Since 1913, The Council has worked in the
best interests of its members like myself, securing innovative
solutions and creating new market opportunities at home and abroad.
Creating an effective and efficient insurance regulatory system in
the United States is important not only to insurance brokers and the
industry in general, but to policyholders and the economy as a whole.
Agent and broker licensing is a critical piece of the insurance
regulatory scheme.
Nonresident insurance agent and broker (``producer'') licensing is
a growing bureaucratic issue for me and my colleagues. For example, I
currently hold nonresident licenses in 48 jurisdictions. Our agency has
approximately 88 licensed individuals, 35 of whom are licensed in
multiple jurisdictions, who hold a total of 630 licenses across the
country. Besides the licensed individuals, the agency is also licensed
as a nonresident in 49 States and holds a resident license in our home
State. For an agency of 103 staff members, we have a dedicated person
who is responsible for all licensing compliance. The time spent on
renewals and new license applications is considerable due to the fact
there are certain States that require additional requirements, besides
the license application or renewal fees. These additional requirements
must be submitted to the State before the license can be issued. These
items include (but are not limited to) criminal background checks,
proof of citizenship, and fingerprints. These additional compliance
requirements create more costs to the agency, take time away from the
producers, and make the licensing process more unwieldy. I'm constantly
facing paperwork to try to stay on top of the multitude of regulations
that are quite often redundant and almost always cumbersome. As for our
trade association, my predecessors on our Board of Directors formed a
task force to work on the growing problems of nonresident producer
licensure--in 1933.
Although insurance agent and broker licensing processes have
improved over the last decade and a half--due to the enactment of the
NARAB provisions of the Gramm-Leach-Bliley Act (GLBA)\1\ and the
reforms put in place by the States since that time--there remain
redundancies, inefficiencies and inconsistencies across the States that
result in unnecessary costs on insurance producers and consumers due to
the regulatory and administrative burdens the requirements impose. This
is why The Council supports adoption of The National Association of
Registered Agents and Brokers Reform Act of 2013 (``NARAB II''), and
the creation of NARAB. We are especially grateful to you, Mr. Chairman,
and Sen. Johanns, for your willingness to lead on this issue through
the introduction of S. 534 (and the 12 bipartisan other sponsors in the
Senate) and we look forward to working with all of the members of this
Committee to see this effort through.
---------------------------------------------------------------------------
\1\ Pub. L. No. 106-102, 113 Stat. 1338 (1999).
---------------------------------------------------------------------------
We believe that creation of NARAB is the best means through which
we can achieve comprehensive producer licensing reform. NARAB II
creates a national ``passport'' for such licensure. Insurance producers
licensed in their home States can obtain nonresident licenses for any
and all other States through the NARAB licensing clearinghouse. It is
optional for agents--so an agent can choose to go through NARAB or
directly through the States. Moreover, NARAB would not replace or
displace State insurance regulation. Indeed, the legislation takes
great pains to ensure that there is no question regarding State
authority, and clarifies the State's continuing role in the licensure
process through the notice period and regulator participation in NARAB,
as well as incorporation of the highest State standards in NARAB's
licensing requirements.
In my testimony today, I will provide you with an overview of the
difficulties faced by Council members in their daily efforts to comply
with the current State licensing requirements, as well as a brief
discussion of the proposed legislation. First, however, I would like to
thank the State insurance regulators, including Commissioner Lindeen,
Montana's Insurance Commissioner and the NAIC's Vice President, for all
their work on this issue: changing laws and licensing practices in
their States; working together at the NAIC to address the issue through
models, standards, FAQs and the bully pulpit; and working with all the
stakeholders in developing this important proposal. The regulators are
to be commended for working in good faith to develop a NARAB proposal
that will work for everyone--consumers, insurance producers, and
regulators. Regulatory reform is a difficult process, and the
regulators have been the brunt of a good deal of griping along the way,
but we really do appreciate their hard work, diligence, and patience,
and look forward to continuing to work with them as the process
continues.
State Insurance Agent and Broker Licensing Today
GLBA's NARAB provisions required that a majority of the 56 U.S.
insurance regulatory jurisdictions \2\ enact either uniform agent and
broker licensure laws or reciprocal laws permitting an agent or broker
licensed in one State to be licensed in all other reciprocal
jurisdictions simply by demonstrating proof of licensure and submitting
the requisite licensing fee.
---------------------------------------------------------------------------
\2\ The 56 jurisdictions are the 50 States, the District of
Columbia, Guam, the Northern Mariana Islands, Puerto Rico, Samoa and
the Virgin Islands.
---------------------------------------------------------------------------
After enactment of GLBA, the State insurance regulators, through
the NAIC, chose to pursue enactment of reciprocal licensing
requirements, and pledged to ultimately exceed reciprocity by
establishing uniform producer licensing requirements in all the States.
The regulators amended the NAIC's Producer Licensing Model Act (PLMA)
to meet the NARAB reciprocity provisions, and most of the States
followed by enacting some sort of licensing reforms. In 2002, the NAIC
officially certified that a majority of the 56 U.S. insurance
regulatory jurisdictions met the NARAB reciprocity requirements,
thereby averting creation of NARAB.\3\ In 2010, the NAIC recently
undertook a recertification review and determined that 40 jurisdictions
(39 States and the District of Columbia) are currently reciprocal for
producer licensing purposes.\4\ Seven States that had previously been
certified as reciprocal are no longer so.
---------------------------------------------------------------------------
\3\ NAIC NARAB (EX) Working Group Report: Certification of States
for Producer Licensing Reciprocity Adopted Aug. 8, 2002; NAIC
Certification of States for Producer Licensing Reciprocity, Sept. 10,
2002.
\4\ NAIC NARAB (EX) Working Group, First Supplement to the ``Report
of the NARAB Working Group: Recommendations of States Continuing to
Meet Reciprocity Requirements of the Gramm-Leach-Bliley Act,'' Sept.
2011, available at http://www.naic.org/committees_ex_pltf_
narabwg.htm.
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Even among the States deemed reciprocal, however, administrative
inefficiencies and inconsistencies remain that affect every insurer,
every producer and every insurance consumer. In a study scheduled to be
released this spring, the Foundation for Agency Management Excellence
(FAME)\5\ has compiled extensive data on State licensing laws and
regulations, as well as implementation of those laws and rules. Despite
similar requirements in many of the States, the research shows that
differences and inconsistencies abound--whether its business entity
lines of authority (required in approximately 30 States, but not
required in the rest); pre-licensing education requirements (some
States require no pre-licensing education, the rest require between 20
and 200 hours of education); producer appointments (some States require
individuals to be appointed with carriers, some require agencies to be
appointed, some require both, some require renewals, some are
perpetual, etc.); and numerous other requirements. While these may seem
like small issues, they can easily turn into large problem for entities
with insurance producers licensed as residents in multiple
jurisdictions: they must constantly renew licenses throughout the year,
based upon the individual requirements in each State.
---------------------------------------------------------------------------
\5\ FAME is a 501(c)(3) charitable and educational organization
administered by The Council of Insurance Agents & Brokers and is
located in Washington D.C.
---------------------------------------------------------------------------
Reciprocity has helped smooth over some of these differences, but
unless there is real uniformity in administrative procedures as well as
statutory requirements, brokers--and insurance consumers--will continue
to suffer from unnecessary costs.
Almost all of the member firms of our association, like our own,
continue to hold hundreds of resident and nonresident licenses across
the country. For some, the number of licenses has actually increased
since enactment of GLBA. One Council member, for instance, has
approximately 5,000 licensed individuals, 3,100 of whom are licensed in
multiple jurisdictions, who hold 76,100 licenses across the country.
Another member has approximately 1,400 individuals holding 12,000
licenses nationwide. In addition to initial licenses, Council members
face annual renewals in 51-plus jurisdictions, and must satisfy all the
underlying requirements, such as pre-licensing and continuing
education, as well as post-licensure oversight. This redundancy costs
Council members anywhere from tens of thousands to many millions of
dollars annually to administer.
In addition to the lack of full reciprocity, the standards by which
the States measure compliance with licensing requirements differ from
State to State, as well. These include substantive requirements--pre-
licensing education, continuing education and criminal background
checks, for example--as well as the administrative procedures to comply
with these requirements. In addition to the day-to-day difficulties the
current set-up imposes, the lack of uniform application of law among
the States inhibits efforts to reach full reciprocity. Some States may
be disinclined to license as a nonresident a producer whose home State
has ``inferior'' licensing standards, even a State with similar or
identical statutory language. In fact, several States that have failed
to adopt compliant licensure reciprocity regimes (notably California
and Florida) claim their refusal is based on this absence of uniform
standards--thus implying that the standards of other States do not
measure up.
The NAIC has attempted to move the States toward uniformity, and we
are especially grateful for the herculean efforts that many State
regulators have made toward this goal. Following on the PLMA, the NAIC
adopted uniform licensing standards (ULS), which include 42 separate
standards purporting to establish uniform approaches to licensing
issues ranging from an applicant's age, to education requirements, to
examinations, to applications. The NAIC has spent most of the last
decade encouraging the States to adopt the ULS, and in 2008 performed
as assessment of every State's compliance with the standards. A report
was issued, and a follow-up was done in 2009.\6\ The 2008 report and
2009 follow-up found a significant lack of uniformity across the
States, particularly on licensure requirements such as fingerprinting/
background checks, where divergent State approaches are extremely
burdensome on producers.\7\
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\6\ NAIC Producer Licensing (EX) Working Group, Producer Licensing
Assessment Aggregate Report of Findings, Feb. 19, 2008; NAIC Producer
Licensing (EX) Working Group, Producer Licensing Assessment Progress
Report, Mar. 16, 2009.
\7\ NAIC Producer Licensing (EX) Working Group, Producer Licensing
Assessment Aggregate Report of Findings, Feb. 19, 2008, p. 14.
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Even if there were broad State compliance with the ULS, however,
producer licensing requirements would be far short of uniformity for
the simple reason that a significant number of the ``uniform
standards'' do not create a single requirement for the States to meet,
rather they serve more as suggestions or a menu of options to guide
State action.
Of the 42 standards, there are roughly 17 that do not require the
States to meet a uniform requirement. Some of the 17 are clearer than
others in their lack of standard-setting (Standard 12, for example,
provides that the standard for failure of examination and re-testing is
to be ``determined by each State''), but all give the States
flexibility that is unwarranted if the goal is to have the same
requirements in every State.
These numbers--and, more critically, the regulatory and
administrative burdens they represent--vividly demonstrate that,
despite the improvements that resulted from the enactment of NARAB,
comprehensive reciprocity and uniformity in producer licensing laws
remains elusive, and it does not appear the NAIC and the States are
capable of fully satisfying those goals. That is not a slight on the
regulators--it is almost an impossible task getting regulators,
legislators, and other stakeholders from 56 different jurisdictions to
agree to a single set of licensing requirements and procedures--but it
is the reason we need a national licensing framework.
NARAB II
The inability of the States to fully implement licensing
reciprocity and to make real progress toward uniform laws and
regulations has been demonstrated repeatedly in the dozen years since
GLBA's enactment. The Federal law put pressure on the States and
resulted in real improvements in licensing processes, but the
resistance to comprehensive change has stymied attempts to achieve
comprehensive reform. As a result, brokers continue to face differing
licensing obligations across the States, imposing administrative and
financial burdens that affect not only brokers, but consumers as well.
This is why The Council--as well as all other major stakeholders,
including the State insurance regulators represented through the NAIC,
support enactment of S. 534, the NARAB II legislation.
NARAB would be a self-regulatory national licensing authority
operated by a Presidentially appointed Board of Directors. A majority
of the Board would be State insurance regulators, with the remainder
representing the various segments of the insurance industry.
NARAB membership would be voluntary. Insurance producers--agents,
brokers, and agencies--who opt to become members of NARAB would have to
obtain resident licenses from their home States before applying for
NARAB membership. Once licensed in their home States, producers
operating in multiple jurisdictions could apply for NARAB membership
and one-stop nonresident licensing. To qualify for membership, a
producer would be required to comply with NARAB's membership criteria.
The NARAB Board would establish the membership criteria, which would
include standards for personal qualifications, education, training and
experience. In addition, NARAB member applicants would be required to
undergo a national criminal background check if their resident State
does not require one. Nonresident States would be prohibited from
imposing any requirement upon a member of NARAB that is different from
the criteria imposed by NARAB.
Applicants would have to pay the fees mandated by each State to
receive licenses. Moreover, NARAB would levy and collect assessments
from members to cover administrative expenses. The licenses would be
obtained from, and the fees would be paid to, NARAB, which would ensure
that appropriate licensure applications are filed with, and the
requisite fees paid to, each State from which NARAB members seek a
license. In other words, NARAB would function as a clearinghouse to
more efficiently process multi-State license applications.
NARAB membership would be renewed annually, and NARAB would have
the authority to bring disciplinary actions to deny, suspend, revoke or
decline renewal of membership. The membership criteria for any NARAB
member must meet and exceed the highest professional requirements that
currently exist among States. Thus, as a practical matter, to be
eligible for NARAB membership a producer would have to effectively
satisfy the substantive licensing requirements for all the States.
NARAB would thus be given the authority, among other things, to:
Create a clearinghouse for processing insurance producer
licenses which would avoid duplication of paperwork and effort
State-by-State;
Issue uniform insurance producer applications and renewal
applications to apply for the issuance or renewal of State
licenses;
Develop uniform continuing education standards and/or
establish a reciprocity process for continuing education
credits;
Create a national licensing exam process; and
Utilize a national database for the collection of
regulatory information concerning the activities of insurance
producers.
Finally, the legislation does not seek to replace or displace State
insurance regulation. Indeed, the bill very clearly retains State
regulatory authority over insurance producers. Although NARAB would
have an important role in the licensing of nonresident insurance
producers, the bill clarifies the State regulators' continuing role in
the licensure process through the notice period and regulator
participation on the NARAB Board and in standard setting. Moreover,
State regulators would continue to supervise and discipline producers,
and would continue to enforce State consumer protection laws.
Conclusion
The licensing of insurance agents and brokers across the country is
unnecessarily burdensome, inefficient and costly. The States have
worked for years to devise a system to overcome the obstacles created
by 56 different jurisdictions seeking to do it their own ways, but for
understandable reasons, the political dynamic in those jurisdictions
has precluded uniformity. The NARAB provisions of the Gramm-Leach-
Bliley Act, enacted in 1999, were the first step in the process toward
creating a sensible, streamlined system. Meanwhile, the pace of
interstate activity in the insurance marketplace has outstripped the
pace of reform efforts in individual States. The NAIC leadership is to
be commended for embracing the administrative simplicity that would be
achieved through the enactment of S. 534. We strongly believe that this
legislation is needed to finally create a State insurance producer
licensing system that works for today's agents and brokers--and today's
marketplace.
Thank you for your consideration of our views, and for your
willingness to devote your legislative attention to this issue.
______
PREPARED STATEMENT OF BAIRD WEBEL
Specialist in Financial Economics, Congressional Research Service
March 19, 2013
Mr. Chairman, Ranking Member Johanns, Members of the Subcommittee:
Thank you for the opportunity to testify before the Subcommittee.
My name is Baird Webel. I am a Specialist in Financial Economics at the
Congressional Research Service. This statement responds to your request
for testimony addressing the general topic of today's hearing and
particularly legislation before the Subcommittee. My written testimony
begins with a discussion of some general approaches that Congress has
taken in addressing insurance regulation in the past and this is
followed with a section addressing insurance producer licensing, past
proposals for a National Association of Registered Agents and Brokers,
and S. 534, the National Association of Registered Agents and Brokers
Reform Act of 2013. The testimony concludes with an appendix providing
general background on insurance regulation drawn from forthcoming and
past CRS reports.
CRS's role is to provide objective, nonpartisan research and
analysis to Congress. CRS takes no position on the desirability of any
specific policy. Any arguments presented in my written and oral
testimony are for the purposes of informing Congress, not to advocate
for a particular policy outcome.
Insurance Regulation and Federal Legislation
The individual States have been the primary regulators of insurance
in this country for the past 150 years. The 1945 McCarran-Ferguson Act
specifically authorized the States' role and Congress has recognized
State primacy in insurance regulation in more recent laws shaping the
financial regulatory system, such as the Gramm-Leach-Bliley Act (GLBA),
also known as the Financial Services Modernization Act of 1999 (P. L.
106-102), and the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act; P.L. 111-203). Although Congress may have
generally reaffirmed the State-based system in such laws, the operation
of the system has continued to be of interest to Congress, as
evidenced, for example, by this hearing today.
Legislative proposals to change various aspects of the insurance
regulatory system have been introduced periodically over the years
since 1945. These proposals have ranged from relatively minor
adjustments to completely rethinking the role of the Federal Government
in the system. The approaches considered by Congress in the past have
included:
Creation of a Broad and Optional Federal Regulatory System for
Insurance
Examples of this include several different bills calling for an
optional Federal charter for insurers akin to the current dual banking
regulatory system, in which a bank may receive a charter from either an
individual State or a Federal regulator. The most recent such
legislation to be introduced was H.R. 1880 in the 111th Congress, which
was referred to the House Committee on Financial Services.
Creation of a Federal Regulatory System for Particular Types of
Insurance
In the discussion over the past decade about the possibility of
increased Federal involvement in insurance issues, arguments are
sometimes made regarding the differing local characteristics of
insurance, which is particularly applicable to property/casualty
insurance. Some have thus suggested that, rather than a full-scale
Federal charter for insurance, it would be more appropriate to have
Federal regulation for lines of insurance that face largely the same
characteristics across the country. During House committee
consideration of legislation (H.R. 2609, 111th Congress) incorporated
into the Dodd-Frank Act, amendments were offered to create a Federal
charter for reinsurers and to create a Federal charter for bond
insurers. These amendments were withdrawn before being voted upon in
committee. The reinsurer amendment was also offered as a stand-alone
bill (H.R. 6529, 111th Congress), which was referred to the House
Committee on Financial Services.
Expansion of Other Federal Regulatory Powers to Include Insurance
Federal oversight on insurance could be implemented from entities
that are not set up specifically to address insurance. For example,
legislation (H.R. 3126, 111th Congress) incorporated into the Dodd-
Frank Act initially would have authorized the Consumer Financial
Protection Bureau to oversee title, credit, and mortgage insurance,
although the final bill did not do so. The Federal Reserve, following
the Dodd-Frank Act, regulates holding companies that have banking
subsidiaries, including many whose primary business is insurance, as
well any companies designated by the Financial Stability Oversight
Council (FSOC) as systemically important, which could include insurance
companies.
Federal Preemption of Multiple State Regulatory Authority in Favor of a
Single State
Congress took this approach in the Liability Risk Retention Act
(LRRA; 15 U.S.C. 3901 et seq), which was enacted in 1981 and amended
in 1986. The LRRA allows a limited range of State-chartered insurance
companies to operate throughout the country without licenses from the
individual States. Other examples include the Nonadmitted and
Reinsurance Reform Act (NRRA), which was enacted as part of the Dodd-
Frank Act. The NRRA provides that the home State of the insurance
consumer would have primary tax and regulatory authority over surplus
lines insurance.
Broad Federal Standard Setting to be Carried Out by Other Entities
The National Association of Registered Agents and Brokers (NARAB)
provisions of the Gramm-Leach-Bliley Act, which would be further
amended by S. 534 under discussion today, are a primary example of this
sort of approach. Congress sets the broad goals of uniformity and
reciprocity in insurance producer licensing but creates a private body
with the authority to fill in the details and manage the process.
Another example would be a provision of the NRRA, which preempts State
laws on eligibility of surplus lines insurers if they conflict with
National Association of Insurance Commissioner (NAIC) model laws.
Insurance Producer Licensing and NARAB
Licensing of insurance agents and brokers (known generally as
``producers'') has long been an integral part of the insurance
regulatory system. Individual States typically require that insurance
producers operating within their borders obtain a license from that
State, and different licenses are also often required for different
lines of insurance. Such licensure provides a mechanism for insurance
regulators to enforce standards of conduct, particularly with regard to
consumer protections, as well as providing a revenue source to help
defray the cost of the insurance regulatory system. Aspects of
insurance producer licensing include specific education or knowledge
requirements, such as continuing education, and, in some States,
criminal background checks. The NAIC has adopted model laws regarding
licensure and a model insurance producer license form, but individual
States are free to modify NAIC models, or not adopt them at all,
resulting in variability in licensing requirements across the country.
Insurance producers who operate in multiple States have long sought
increased uniformity and reciprocity across States to reduce their
costs resulting from the multiplicity of license requirements.
In addition to the costs that might result from the specific
aspects of the insurance licensing system, any professional licensing
regime acts as a barrier to entry for those who might be interested in
providing services that require a license. Economic theory suggests
that such barriers increase consumer costs to some degree and have the
potential to be used as a protectionist measure to prevent competition,
allowing license-holders to extract economic rents from consumers.
Whether or not the public benefits resulting from licensure outweigh
the costs is a decision to be evaluated on a case-by-case basis by
public policymakers. Some form of licensure for those in the financial
services industry has been generally accepted and is required in
Federal law for people involved in securities transactions with the
public, for example.
GLBA and NARAB I
Provisions in the Gramm-Leach-Bliley Act sought to address
insurance producer complaints about the variation in State licensing
requirements through a sort of provisional Federal preemption of State
laws. The law called for the creation of a private, nonprofit licensing
body, the National Association of Registered Agents and Brokers, whose
insurance producer members would have been authorized to operate across
State lines without individual licenses from every State. While backed
by Federal authority, the NARAB to be created by the provisions in GLBA
(hereafter referred to as ``NARAB I'') would have been entwined in the
system of State regulation. Membership in NARAB I would have been open
only to people already holding a State insurance producer license and
the NAIC would have appointed the members of the NARAB I board and had
other oversight authorities.
The NARAB I language in GLBA also offered the States the
opportunity to avoid creation of the NARAB I organization if a majority
of the States created among themselves systems of either uniformity or
reciprocity in insurance producer licensing within a 3-year window
after passage of GLBA. The NAIC was given the authority to determine
whether the States met the GLBA standard with the possibility of
Federal judicial review of this determination. The individual States
and the NAIC reacted relatively quickly to this opportunity with the
promulgation of an NAIC model law that would provide for reciprocity
and the adoption of laws providing for reciprocity in sufficient number
of States that the NAIC determined the GLBA standards were met; as a
result, the NARAB I organization was not created.
The GLBA statutory requirements for reciprocity may have been
satisfied by 2002, but insurance producers continued to identify
inefficiencies and costs of the State licensing system in the years
following. In 2008, testimony before a House subcommittee, for example,
an insurance agent representative indicated that States continued to
``impose additional conditions and requirements''\1\ on nonresident
agents despite the reciprocity called for in law. In 2009, the
Government Accountability Office (GAO) cited issues regarding
fingerprinting and background checks as particular barriers to
uniformity or reciprocity in producer licensing and as potentially
posing a problem for insurance consumer protection. GAO also found
differences in licensing requirements and insurance line definitions as
potentially creating inefficiencies that ``could result in higher costs
for insurers, which in turn could be passed on to consumer[s].''\2\ In
addition to concerns about the substance of the reciprocity in place,
reciprocity laws have not been adopted by every State. The NAIC
certified 47 States as reciprocal, but the three States not certified
were California, Florida, and Washington, which together have nearly 20
percent of the Nation's population.
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\1\ Statement of Tom Minkler on behalf of the Independent Insurance
Agents & Brokers of America, Subcommittee on Capital Markets,
Government-Sponsored Enterprises, and Insurance, Committee on Financial
Services, U.S. House of Representatives, April 16, 2008, p. 6,
available at http://archives.financialservices.house.gov/hearing110/
minkler041608.pdf.
\2\ U.S. Government Accountability Office, Insurance Reciprocity
and Uniformity, GAO-09-372, April 6, 2009, p. 21, http://www.gao.gov/
products/GAO-09-372.
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Concerns about the effect, or lack of effect, of the NARAB I
provisions have prompted some Members of Congress to seek a further
legislative solution.
NARAB II Legislation
Legislation to mandate the creation of a NARAB organization
(hereafter referred to as NARAB II) was first introduced into the House
of Representatives in the 110th Congress (H.R. 5611), with similar
legislation in the 111th Congress (H.R. 2554). The House passed these
bills in both Congresses by voice vote, but the legislation was
referred to committee when received by the Senate. NARAB II legislation
was introduced in the 112th Congress (H.R. 1112) and the 113th Congress
(H.R. 1155). Unlike the previous Congresses, the House did not bring
H.R. 1112 to the floor in the 112th Congress. H.R. 1155 has been
referred to committee in this Congress. Senate legislation to create
NARAB II was first introduced in the 112th Congress (S. 2342), with the
bill reintroduced in this Congress as S. 534.
Although specific legislative provisions, such as the precise
makeup of the NARAB organization's board, have changed in the various
iterations of NARAB II legislation, the bills have retained the same
essential purpose. The bills would amend the NARAB sections from GLBA
to remove the conditionality and instead create a NARAB organization
regardless of State actions on reciprocity and uniformity. The NARAB II
legislation would create an organization very similar to that
originally envisioned in GLBA. It would be a nonprofit, private body,
whose members would be required to be State-licensed insurance
producers, but who would also be able to operate across States without
having licenses from the individual States.
Among the differences between the NARAB II proposed in S. 534 and
the original NARAB I are----
Appointment of the Board:
NARAB I was to have a seven-member board appointed by the NAIC.\3\
S. 534 specifies a 13-member board appointed by the President and
confirmed by the Senate. Eight of the 13 are to be State insurance
commissioners, with the remainder being representative of the insurance
industry.
---------------------------------------------------------------------------
\3\ The NAIC could lose this appointment authority if (1) States
representing 50 percent of the total commercial lines insurance
premiums did not satisfy uniformity or reciprocity requirements and (2)
the NAIC had not approved the bylaws or was unable to supervise the
organization.
---------------------------------------------------------------------------
Oversight by the NAIC:
In addition to the board appointments, NARAB I provided several
other methods of NAIC oversight, including NAIC approval of NARAB bylaw
changes and rules, and NAIC review of disciplinary actions.\4\ S. 354
gives much less direct authority to the NAIC. For example, NARAB II
would file changes to bylaws with the NAIC, but the NAIC would not have
the authority to disapprove the changes.
---------------------------------------------------------------------------
\4\ The NAIC could lose its oversight authority under the same
conditions as the possible loss of its board appointment authority.
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Criminal Background Checks:
S. 354 requires a Federal criminal background check prior to
membership in NARAB II and provides for the performance of these checks
by the U.S. Attorney General, including the authority of the Attorney
General to charge fees to defray the costs incurred. There were no
similar provisions on background checks in GLBA for NARAB I.
Appendix. Background on Insurance and Insurance Regulation
Insurance companies constitute a major segment of the U.S.
financial services industry. The industry is often separated into two
parts: life and health insurance companies, which also often offer
annuity products, and property and casualty insurance companies, which
include most other lines of insurance, such as homeowners insurance,
automobile insurance, and various commercial lines of insurance
purchased by businesses. Premiums for life/health companies in 2011
totaled $581.4 billion and premiums for property/casualty insurance
companies totaled $436.0 billion.\5\ Assets held by the insurance
industry totaled approximately $7.5 trillion according to the National
Association of Insurance Commissioners (NAIC).
---------------------------------------------------------------------------
\5\ Premium amounts used are net premiums written from AM Best,
2012 Statistical Study: U.S. Property/Casualty--2011 Financial Results,
March 26, 2012, and AM Best, 2012 Statistical Study: U.S. Life/Health--
2011 Financial Results, March 28, 2012.
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Different lines of insurance present very different characteristics
and risks. Life insurance typically is a longer-term proposition with
contracts stretching into decades and insurance risks that are
relatively well defined in actuarial tables. Property/casualty
insurance typically is a shorter-term proposition with 6-month or 1-
year contracts and greater exposure to catastrophic risks. Health
insurance has evolved in a very different direction, with many
insurance companies heavily involved with healthcare delivery,
including negotiating contracts with physicians and hospitals and a
regulatory system much more influenced by the Federal Government
through Medicare, Medicaid, the Employee Retirement Income Security Act
of 1974 (ERISA),\6\ and the Patient Protection and Affordable Care Act
(ACA).\7\ This testimony will concentrate primarily on nonhealth
insurance.
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\6\ P.L. 93-406, 88 Stat. 829.
\7\ P.L. 111-148, 124 Stat. 119.
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Insurance companies, unlike banks and securities firms, have been
chartered and regulated solely by the States for the past 150 years.
One important reason for this is an 1868 U.S. Supreme Court
decision.\8\ In Paul v. Virginia, the Court held that the issuance of
an insurance policy was not a transaction occurring in interstate
commerce and thus not subject to regulation by the Federal Government
under the Commerce Clause of the U.S. Constitution. Courts followed
that precedent for the next 75 years. In a 1944 decision, U.S. v.
South-Eastern Underwriters Association, the Court found that the
Federal antitrust laws were applicable to an insurance association's
interstate activities in restraint of trade.\9\ Although the 1944 Court
did not specifically overrule its prior holding in Paul, South-Eastern
Underwriters created significant apprehension about the continued
viability of State insurance regulation and taxation of insurance
premiums. By 1944, the State insurance regulatory structure was well
established, and a joint effort by State regulators and insurance
industry leaders to legislatively overturn the South-Eastern
Underwriters decision led to the passage of the McCarran-Ferguson Act
of 1945.\10\ The Act's primary purpose was to preserve the States'
authority to regulate and tax insurance.\11\ The Act also granted a
Federal antitrust exemption to the insurance industry for ``the
business of insurance.''\12\
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\8\ Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1868).
\9\ U.S. v. South-Eastern Underwriters Association, 322 U.S. 533
(1944).
\10\ 15 U.S.C. 1011 et seq.
\11\ Richard Cordero, Exemption or Immunity from Federal Antitrust
Liability Under McCarran-Ferguson (15 U.S.C. 1011-1013) and State
Action and Noer-Pennington Doctrines for Business of Insurance and
Persons Engaged in It, 116 ALR Fed 163, 194 (1993).
\12\ 15 U.S.C. 1012(b). The Supreme Court has made clear that the
business of insurance does not include all business of insurers in
Group Health and Life Insurance, Co. v. Royal Drug, Co., 440 U.S. 205,
279 (1979). For further explanation of this distinction, see the CRS
Report RL33683, Courts Narrow McCarran-Ferguson Antitrust Exemption for
``Business of Insurance'': Viability of ``State Action'' Doctrine as an
Alternative, by Janice E. Rubin.
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After 1945, the jurisdictional stewardship entrusted to the States
under McCarran-Ferguson was reviewed by Congress on various occasions.
Some narrow exceptions to the 50-State structure of insurance
regulation have been enacted, such as one for some types of liability
insurance in the Liability Risk Retention Act (LRRA) created by
Congress in 1981 and amended in 1986.\13\ In general, however, when
proposals were made in the past \14\ to transfer insurance regulatory
authority to the Federal Government, they were successfully opposed by
the States as well as by a united insurance industry. Such proposals
for increased Federal involvement usually spurred a series of
regulatory reform efforts at the individual State level and by State
groups, such as the NAIC and the National Conference of Insurance
Legislators (NCOIL). Such efforts were directed at correcting perceived
deficiencies in State regulation and forestalling Federal involvement.
They were generally accompanied by pledges from State regulators to
work for more uniformity and efficiency in the State regulatory
process.
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\13\ 15 U.S.C. 3901 et seq. See CRS Report RL32176, The Liability
Risk Retention Act: Background, Issues, and Current Legislation, by
Baird Webel.
\14\ Most such proposals prior to the 1990s focused on relatively
narrow amendments to McCarran-Ferguson rather than large-scale
replacement of the State regulatory system.
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A major effort to transfer insurance regulatory authority to the
Federal Government began in the mid-1980s and was spurred by the
insolvencies of several large insurance companies. Former House Energy
and Commerce Committee Chairman John Dingell, whose committee had
jurisdiction over insurance at the time, questioned whether State
regulation was up to the task of overseeing such a large and
diversified industry. He chaired several hearings on the State
regulatory structure and also proposed legislation that would have
created a Federal insurance regulatory agency modeled on the Securities
and Exchange Commission (SEC). State insurance regulators and the
insurance industry opposed this approach and worked together to
implement a series of reforms at the State level and at the NAIC. Among
the reforms implemented was a new State accreditation program setting
baseline standards for State solvency regulation. Under the
accreditation standards, to obtain and retain its accreditation, each
State must have adequate statutory and administrative authority to
regulate an insurer's corporate and financial affairs and the necessary
resources to carry out that authority. In spite of these changes,
however, another breach in the State regulatory system occurred in the
late 1990s. Martin Frankel, an individual who had previously been
barred from securities dealing by the SEC, slipped through the
oversight of several States' insurance regulators and diverted more
than $200 million in premiums and assets from a number of small life
insurance companies into overseas accounts.\15\
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\15\ See, for example, ``17-Year Sentence Affirmed for Investor Who
Looted Insurers,'' New York Times, March 24, 2006, available at http://
www.nytimes.com/2006/03/24frankel.html?ref=
martinfrankel.
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Another State reform largely implemented in the late 1980s and
early 1990s was the introduction of State insurance guaranty funds.\16\
These funds, somewhat analogous in function to the Federal Deposit
Insurance Corporation (FDIC) for banks, provide protection for
insurance consumers who hold policies from failed insurance companies.
If an insurance company is judged by a State insurance regulator to be
insolvent and unable to fulfill its commitments, the State steps in to
rehabilitate or liquidate the insurer's assets. The guaranty fund then
uses the assets to pay the claims on the company, typically up to a
limit of $300,000 for property/casualty insurance \17\ and $300,000 for
life insurance death benefits and $100,000 for life insurance cash
value and annuities.\18\ In most States, the existing insurers in the
State are assessed to make up the difference should the company's
assets be unable to fund the guaranty fund payments. This after the
fact assessment stands in contrast to the FDIC, which is funded by
assessments on banks prior to a bank failure and which holds those
assessments in a segregated fund until needed. Insurers who are
assessed by guaranty funds generally are permitted to write off the
assessments on future State taxes, which indirectly provide State
support for the guaranty funds.
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\16\ For more information, see CRS Report RL32175, Insurance
Guaranty Funds, by Baird Webel.
\17\ National Conference of Insurance Guaranty Funds, ``Facts and
Statistics,'' available at http://www.ncigf.org/media-facts.
\18\ National Organization of Life & Health Insurance Guaranty
Associations, ``Frequently Asked Questions,'' available at http://
www.nolhga.com/policyholderinfo/main.cfm/location/questions.
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The Gramm-Leach-Bliley Act
The 1999 Gramm-Leach-Bliley Act (GLBA)\19\ significantly overhauled
the general financial regulatory system in the United States. Support
for GLBA came largely as a result of market developments frequently
referred to as ``convergence.'' Convergence in the financial services
context refers to the breakdown of distinctions separating different
types of financial products and services, as well as the providers of
once separate products. Drivers of such convergence include
globalization, new technology, e-commerce, deregulation, market
liberalization, increased competition, tighter profit margins, and the
growing number of financially sophisticated consumers.
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\19\ P.L. 106-102, 113 Stat. 1338.
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GLBA intended to repeal Federal laws that were inconsistent with
the way that financial services products were actually being delivered,
and it removed many barriers that kept banks or securities firms from
competing with, or affiliating with, insurance companies. The result
was the creation of a new competitive paradigm in which insurance
companies found themselves in direct competition with brokerages,
mutual funds, and commercial banks. GLBA did not, however, change the
basic regulatory structure for insurance or other financial products.
Instead, it reaffirmed the McCarran-Ferguson Act, recognizing State
insurance regulators as the ``functional'' regulators of insurance
products and those who sell them.\20\
---------------------------------------------------------------------------
\20\ Functional regulation would entail, for example, insurance
regulators overseeing insurance products being offered by banks, while
banking regulators would oversee banking products offered by insurers.
Institutional regulation tends to focus more on the charter of the
institution so, for example, banking regulators oversee all the
activities of a bank even if the bank is offering insurance products.
---------------------------------------------------------------------------
Some insurance companies believe that in the post-GLBA environment,
State regulation places them at a competitive disadvantage in the
marketplace. They maintain that their noninsurer competitors in certain
lines of products have federally based systems of regulation that are
more efficient, while insurers remain subject to perceived
inefficiencies of State insurance regulation, such as the regulation of
rates and forms as well as other delays in getting their products to
market. For example, life insurers with products aimed at retirement
and asset accumulation must now compete with similar bank products.
Banks can roll out such new products nationwide in a matter of weeks,
while some insurers maintain that it can take as long as 2 years to
obtain all of the necessary State approvals for a similar national
insurance product launch. In the aftermath of GLBA, the largely united
industry resistance to Federal intervention in insurance changed. Many
industry participants, particularly life insurers, larger property/
casualty insurers, and larger insurance brokers, began supporting broad
regulatory change for insurance in the form of an optional Federal
charter for insurance patterned after the dual chartering system for
banks.\21\
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\21\ Banking charters are available from both the individual States
and the Federal Government. For more information on optional Federal
charter legislation, see CRS Report RL34286, Insurance Regulation:
Federal Charter Legislation, by Baird Webel.
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GLBA also addressed the issue of modernizing State laws dealing
with the licensing of insurance agents and brokers and made provision
for a federally backed licensing association, the National Association
of Registered Agents and Brokers (NARAB). NARAB would have come into
existence 3 years after the date of GLBA's enactment if a majority of
the States failed to enact the necessary legislation for uniformity or
reciprocity at the individual State level. The requisite number of
States enacted this legislation within the 3-year period, and thus the
NARAB provisions never came into effect. The issue of insurance
producer licensing reciprocity or uniformity continued, as some saw and
continue to see problems in the actions taken by the individual States.
Not every State has passed legislation implementing reciprocity, and
some have argued that it has not always been implemented as smoothly as
desired even in those States that did.
Insurance after the Gramm-Leach-Bliley Act
Congress passed the Gramm-Leach-Bliley Act to enhance competition
among financial services providers. Though many observers expected
banks, securities firms, and insurers to converge as institutions after
it passed, this has not occurred as expected. In fact, the major merger
between a large bank, Citibank, and a large insurer, Travelers, which
partially motivated the passage of GLBA, has effectively been undone.
The corporation that resulted from the merger, Citigroup, has divested
itself of almost all of its insurance subsidiaries. Although large
bank-insurer mergers did not occur as expected, significant convergence
continued. Instead of merging across sectoral lines, banks began
distributing-but not ``manufacturing''-insurance, and insurers began
creating products that closely resembled savings or investment
vehicles. Consolidation also continued within each sector, as banks
merged with banks and insurers with insurers. In addition, although
Congress instituted functional regulation in GLBA, regulation since has
still tended to track institutional lines.\22\
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\22\ See CRS Report RS21827, Insurance Regulation After the Gramm-
Leach-Bliley Act, by Carolyn Cobb.
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From the 107th through the 110th Congresses, congressional interest
in insurance regulatory issues continued. A number of broad proposals
for some form of Federal chartering or other Federal intervention in
insurance regulation were put forward in both houses of Congress and by
the Administration, but none were marked up or reported by the various
committees of jurisdiction.\23\ In the same timeframe, a number of
narrower bills affecting different facets of insurance regulation and
regulatory requirements were also introduced in Congress, including
bills addressing surplus lines \24\ and reinsurance, insurance producer
licensing, and expansion of the Liability Risk Retention Act beyond
liability insurance.
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\23\ Broad proposals from the 107th to 110th Congresses included
the National Insurance Act of 2007 (S. 40 and H.R. 3200, 110th
Congress); the National Insurance Act of 2006 (S. 2509 and H.R. 6225,
109th Congress); the Insurance Consumer Protection Act of 2003 (S.
1373, 108th Congress); and the Insurance Industry Modernization and
Consumer Protection Act (H.R. 3766, 107th Congress), and the 2008
Blueprint for a Modernized Financial Regulatory Structure released by
the U.S. Treasury and available at http://www.treasury.gov/press-
center/press-releases/Documents/Blueprint.pdf.
\24\ Surplus lines insurance is insurance sold by insurance
companies not licensed in the particular State where it is sold. For
background on this insurance, see CRS Report RS22506, Surplus Lines
Insurance: Background and Current Legislation, by Baird Webel.
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Insurance and the Financial Crisis
As the 110th Congress approached its close, the financial crisis
that began in 2007 reached panic proportions with the conservatorship
of Fannie Mae and Freddie Mac, the failure of Lehman Brothers, and the
government rescue of American International Group (AIG) in September
2008. This crisis overlaid a range of new issues and arguments to the
previously existing debate on insurance regulatory reforms. The
financial crisis grew largely from sectors of the financial industry
that had previously been perceived as presenting little systemic risk,
including insurers. Some see the crisis as resulting from failures or
holes in the financial regulatory structure, particularly a lack of
oversight for the system as a whole and a lack of coordinated oversight
for the largest actors in the system. Those holding this perspective
increased the urgency in calls for overall regulatory changes, such as
the implementation of increased systemic risk regulation and Federal
oversight of insurance, particularly larger insurance firms. The
generally good performance of insurers in the crisis, however, also
provided additional affirmation to those seeking to retain the State-
based insurance system.
Although insurers in general are considered to have weathered the
financial crisis reasonably well, the insurance industry saw two
notable failures--one general and one specific. The first failure was
spread across the financial guarantee or monoline bond insurers. Before
the crisis, there were about a dozen bond insurers in total, with four
large companies dominating the business. This type of insurance
originated in the 1970s to cover municipal bonds but the insurers
expanded their businesses since the 1990s to include significant
amounts of mortgage-backed securities. In late 2007 and early 2008,
strains began to appear due to this exposure to mortgage-backed
securities. Ultimately some bond insurers failed and others saw their
previously triple-A ratings cut significantly. These downgrades rippled
throughout the municipal bond markets, causing unexpected difficulties
for both individual investors and municipalities who might have thought
they were relatively insulated from problems stemming from rising
mortgage defaults.
The second failure in the insurance industry was that of a specific
company, American International Group.\25\ AIG had been a global giant
of the industry, but it essentially failed in mid-September 2008. To
prevent bankruptcy in September and October 2008, AIG sought more than
$100 billion in assistance from the Federal Reserve, which received
both interest payments and warrants for 79.9 percent of the equity in
the company in return. Multiple restructurings of the assistance have
followed, including nearly $70 billion through the U.S. Treasury's
Troubled Asset Relief Program (TARP). The rescue ultimately resulted in
the U.S. Government owning 92 percent of the company. The assistance
for AIG has ended with all the Federal Reserve assistance repaid and
the sale by the U.S. Treasury of all of its equity stake in the
company.
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\25\ See CRS Report R40438, Federal Government Assistance for
American International Group (AIG), by Baird Webel.
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The near collapse of the bond insurers and AIG could be construed
as regulatory failures. One of the responsibilities of an insurance
regulator is to make sure the insurer remains solvent and is able to
pay its claims. Because the States are the primary insurance
regulators, some may go further and argue that these cases specifically
demonstrate the need for increased Federal involvement in insurance.
The case of AIG, however, is a complicated one. Although AIG was
primarily made up of State-chartered insurance subsidiaries, at the
holding company level it was a federally regulated thrift-holding
company with oversight by the Office of Thrift Supervision (OTS). The
immediate losses that caused AIG's failure came from both derivatives
operations overseen by OTS and from securities lending operations that
originated with securities from State-chartered insurance companies.
The 111th Congress responded to the financial crisis with the Dodd-
Frank Wall Street Reform and Consumer Protection Act,\26\ which enacted
broad financial regulatory reform. Although the Dodd-Frank Act had a
number of provisions that directly and indirectly addressed insurance,
it left the States as the primary functional regulators of insurance.
The Dodd-Frank Act provisions that most directly addressed insurance
and are of ongoing concern were (1) creation of a Federal Insurance
Office (FIO); (2) systemic-risk provisions, such as the creation of a
Financial Stability Oversight Council (FSOC) with the authority to
oversee systemically important insurers; and (3) previously introduced
provisions harmonizing the tax and regulatory treatment of surplus
lines insurance and reinsurance (the Nonadmitted and Reinsurance Reform
Act).\27\ Provisions in the law regarding holding company oversight
could also affect a number of companies who are primarily insurers, but
who also have banking or thrift subsidiaries and are thus overseen by
the Federal Reserve following the Dodd-Frank Act.
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\26\ P.L. 111-203, 124 Stat. 1376. See CRS Report R41350, The Dodd-
Frank Wall Street Reform and Consumer Protection Act: Issues and
Summary, coordinated by Baird Webel.
\27\ For more information on the specific insurance provisions in
the Dodd-Frank Act, see CRS Report R41372, The Dodd-Frank Wall Street
Reform and Consumer Protection Act: Insurance Provisions, by Baird
Webel.
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Attention on insurance regulation in the 112th Congress was largely
occupied with follow-up to the Dodd-Frank Act. The Dodd-Frank Act left
many of the specifics up to regulatory rulemaking and this rulemaking
is still ongoing. Of particular concern was the specific approach that
the Federal Reserve may take to bank or thrift-holding companies who
are primarily involved in insurance and the possibility of FSOC
designating some insurers and systemically important and thus subject
to additional oversight. Neither issue reached a resolution during the
112th Congress.
Additional Material Supplied for the Record