State Insurance Regulation: Efforts to Streamline Key Licensing  
and Approval Processes Face Challenges (18-JUN-02, GAO-02-842T). 
                                                                 
The National Association of Insurance Commissioners (NAIC),	 
through its Accreditation Program, has made considerable progress
in achieving uniformity among state insurance regulators. In	 
addition, competitive pressures from further consolidation in the
financial services sector and enactment of the Gramm-Leach-Bliley
Act has focused attention on regulator reforms in the insurance  
industry. NAIC's Producer Licensing Reciprocity and Uniformity	 
initiative aims to streamline the licensing process for  selling 
insurance in multiple states. State regulators are also trying to
streamline regulatory processes to bring new insurance products  
to market more quickly. NAIC's Speed to Market initiative focuses
both on developing a more centralized filing and approval process
life and health insurance products and on improving existing	 
state-based approval processes for other types of products.	 
Finally, NAIC's National Treatment of Companies initiative aims  
to facilitate the licensing process for conducting business on a 
multistate basis. However, NAIC and the states face significant  
challenges in implementing their initiatives.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-842T					        
    ACCNO:   A03686						        
  TITLE:     State Insurance Regulation: Efforts to Streamline Key    
Licensing and Approval Processes Face Challenges		 
     DATE:   06/18/2002 
  SUBJECT:   Insurance companies				 
	     Insurance regulation				 
	     Regulatory agencies				 
	     Standards evaluation				 
	     Reporting requirements				 
	     NAIC Accreditation Program 			 
	     NAIC Speed to Market Initiative			 
	     NAIC Producer Licensing Reciprocity and		 
	     Uniformity Initiative				 
                                                                 
	     NAIC National Treatment of Companies		 
	     Initiative 					 
                                                                 

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GAO-02-842T
     
Testimony Before the Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises, Committee on Financial Services, House of
Representatives

United States General Accounting Office GAO To Be Released at 2: 00 p. m.
EST on Tuesday, June 18, 2002 STATE INSURANCE

REGULATION Efforts to Streamline Key Licensing and Approval Processes Face
Challenges

Statement for the Record by Richard J. Hillman Director, Financial Markets
and

Community Investment GAO- 02- 842T

Page 1 GAO- 02- 842T Mr. Chairman and Members of the Subcommittee: We are
pleased to discuss our observations to date of ongoing efforts to develop
and implement more uniform regulatory processes within the insurance
industry. We have long held the view that state insurance

regulation can be enhanced through greater uniformity. In the past, we have
encouraged insurance regulators to implement more uniform regulatory
standards, usually in the context of financial oversight. Over the

past decade, the National Association of Insurance Commissioners (NAIC),
through its Accreditation Program, has made considerable progress in
achieving greater uniformity among state insurance regulators in carrying
out their financial solvency oversight responsibilities. More recently,
competitive pressures stemming from further consolidation of industries in
the financial services sector and enactment of the GrammLeach-

Bliley Act (GLBA) has kept attention focused on regulatory reforms in the
insurance industry. Many insurance industry participants advocate more
uniform standards as

a way to help streamline regulatory processes in an effort to make
conducting business on a multistate or nationwide basis easier. Of
particular interest are those processes related to licensing individual

producers (agents and brokers) who sell insurance, approving new insurance
products that insurers wish to market, and licensing companies to sell
insurance. NAIC has undertaken several initiatives designed to streamline
these regulatory processes. As requested, this statement focuses on three
initiatives, highlighting their status to date, the issues

encountered, and their prospects for success. These initiatives are commonly
referred to as: * Producer Licensing Reciprocity and Uniformity,

 Speed to Market, and  National Treatment of Companies.

NAIC?s Producer Licensing Reciprocity and Uniformity initiative aims to
streamline the licensing process for producers that desire to sell insurance
in one or more states in addition to their state of residence. GLBA calls
for a majority of states to either adopt uniform producer licensing laws or

Page 2 GAO- 02- 842T reciprocate with other states in the licensing process
by November 2002. 1 If the states fail to act, GLBA establishes a body
called the National Association of Registered Agents and Brokers (NARAB),
which would

take over producer licensing functions from the states. NAIC intends to
satisfy GLBA?s reciprocity provisions first, believing that reciprocity will
be easier to achieve in the near term, followed by actions to improve
uniformity in the producer licensing process. Preliminary indications
suggest that NAIC may be close to certifying enough states to satisfy GLBA?s
requirements. However, some state insurance departments in relatively large
markets may not be eligible for certification, as they are not willing to
lower their standards on certain licensing requirements such as criminal
history checks using fingerprint identification. Industry representatives
and NAIC acknowledge that until the states with relatively large insurance
markets reciprocate in the producer licensing process, this initiative will
not be fully successful.

State regulators are also trying to streamline regulatory processes to help
bring new insurance products to market more quickly. NAIC?s Speed to Market
initiative has focused both on developing a more centralized filing and
approval process for some types of life and health insurance products and on
improving existing state- based approval processes for other types

of products. NAIC?s Coordinated Advertising, Rate, and Form Review Authority
(CARFRA), a regulatory entity composed of state insurance regulators, is the
mechanism through which they have tried to implement the concept of a single
point of product filing and approval. However, a recent trial of CARFRA with
10 participating states revealed that insurers were not attracted by it.
Many observers commented that CARFRA failed

because companies still had to satisfy numerous individual state
requirements, or deviations, in addition to the basic CARFRA review
criteria. NAIC is now attempting to overcome this problem by developing

an interstate compact, a legal mechanism under which states would cede
product review and approval authority for certain types of insurance
products to a regulatory commission, allowing it to eliminate deviations the
individual states are unwilling to remove on their own. Other Speed to
Market improvement efforts are directed toward existing state- based

systems. Chief among these has been the development and implementation of
the System for Electronic Rate and Form Filing

1 GLBA gave NAIC, in consultation with state insurance commissioners,
responsibility for reviewing and certifying the states that have met the
uniformity or reciprocity provisions. States that agree to reciprocate on
producer licensing matters agree to accept the licensing decisions of other
states, even though the requirements may be different.

Page 3 GAO- 02- 842T (SERFF). This system offers insurers the means to
submit information such as rate and policy form data on proposed products
electronically to regulators to help reduce the processing time associated
with product filings. However, industry representatives continue to
emphasize their

desire for more streamlined product reviews and approvals that go beyond
technical improvements to the rate and form filing process.

NAIC?s National Treatment of Companies initiative, renamed National
Treatment and Coordination, aims to facilitate the licensing process for
companies desiring to conduct business on a multistate basis. Many of the
same issues encountered under the Speed to Market initiative have also
surfaced in this initiative. NAIC and state regulators largely abandoned
initial efforts to create a more centralized insurer licensing and oversight
process in favor of improvements to existing state- based licensing
processes. The primary accomplishment of these improvement efforts to date
has been the implementation of a common insurer license application form,
the Uniform Certificate of Authority Application (UCAA). Currently, NAIC and
state regulators are trying to reduce the number of additional state
deviations beyond the UCAA requirements. Again, technical

enhancements to form submissions have outpaced efforts to develop common
review and approval criteria for company license applications.

In response to GLBA, NAIC has expedited efforts under its Producer Licensing
Reciprocity and Uniformity initiative to streamline and simplify the process
for allowing producers licensed in one state to become licensed in other
states. GLBA required that states enact certain reforms simplifying and
bringing more efficiency to the insurance producer licensing process.
Traditionally, agents licensed in one state generally had to meet the
separate licensing requirements for each state where they wanted to sell
insurance. Since licensing requirements differed substantially, this
requirement imposed significant burdens on producers in terms of time,
effort, and monetary costs. To comply with GLBA, a majority of the states
must adopt either uniform licensing requirements or reciprocity by November
2002. With reciprocity, states must accept the decision of another state to
approve a license and

may not impose any additional licensing requirements. GLBA also gave NAIC
responsibility for determining whether a state meets the uniformity or
reciprocity provisions. If a majority of regulatory jurisdictions (29 states
and territories) do not meet either the uniformity or reciprocity provisions
by November 12, 2002, GLBA provides for the establishment of NARAB by
Nationwide Producer

Licensing Reciprocity Is Unlikely Without Higher Uniform Standards

Page 4 GAO- 02- 842T the federal government, which would take over producer
licensing functions from the states. NAIC developed and promoted the
Producer Licensing Model Act (PLMA)

to help states comply with GLBA?s reciprocity provisions. To date, many
states have passed laws based on PLMA attempting to comply with GLBA?s
reciprocity requirements. However, NAIC has not yet officially announced the
number of ?compliant states? based on its review of the

states? laws and implementation plans. Meanwhile, some states with
relatively large insurance markets have expressed concerns that will likely
keep these states from implementing fully reciprocal producer licensing
practices. These states appear reluctant to ?lower? their standards on

certain antifraud and consumer protection measures, particularly those
related to conducting criminal background checks using fingerprint
identification and bond requirements for producer applicants. NAIC continues
to address these concerns, which were not fully resolved

through PLMA, in its efforts to develop more uniform state producer
licensing requirements.

NAIC?s PLMA provides a blueprint or model for state legislation to help
bring states into compliance with GLBA, provided it is enacted without
significant changes. PLMA sets forth the basic nonresident (out- of- state)
licensing requirements that mirror the reciprocity provisions set forth in
GLBA. 2 States adopting PLMA are expected to grant licenses to nonresident
applicants who have met the basic reciprocity requirements.

To address any additional state requirements beyond the basic reciprocity
requirements, PLMA also contains a waiver provision (in Section 16) that
grants insurance commissioners authority to waive additional requirements
for nonresident applicants. For instance, in Texas, the

Insurance Commissioner has been granted authority to waive a recently
enacted requirement that nonresident applicants be fingerprinted, although
the waiver can be revisited each year.

At its summer national meeting earlier this month, NAIC reported that 46
states had passed some version of the PLMA. As required under GLBA, NAIC
must now certify the states that have met GLBA?s reciprocity

2 NAIC?s PLMA stipulates that nonresidents shall receive a nonresident
producer license if they: (1) are in good standing in their home state, (2)
submit the proper request for licensure and pay the required fees, (3)
submit the application for licensure they submitted in their home state, and
(4) reside in a state that awards nonresidents producer licenses according
to these same requirements. Most States Have Recently

Passed New Producer Licensing Laws

Page 5 GAO- 02- 842T provisions related to producer licensing. NAIC is using
a two- pronged certification process that encompasses: (1) a legal analysis
of each state?s

legislation and regulation pertaining to producer licensing, and (2) a
review of checklists or surveys that are being completed by each state
regulator, describing how the insurance department intends to carry out its
producer licensing functions. The questions in the checklist generally focus
on the state?s producer licensing requirements, authority to waive
requirements, and postlicensing requirements. As of June 12, 2002, NAIC had
posted checklists from 41 states containing information on how regulators
intended to implement their state?s version of PLMA.

While preliminary indications suggest that NAIC is close to certifying
enough states to meet the GLBA?s legal requirement, other concerns remain
that will likely prevent full reciprocity on producer licensing matters in
all states. Factors that may prevent full reciprocity include some states?
reluctance to waive certain antifraud and consumer

protection measures and state implementation practices that may be
considered nonreciprocal. Although a large number of states have passed some
form of PLMA, some

states did not remove or waive certain licensing requirements that may
conflict with GLBA?s reciprocity provisions. Our review of the checklists
submitted to NAIC and discussions with industry representatives and

regulators showed that a few states do not appear ready to waive certain
existing antifraud and consumer protection requirements. Most commonly,
these nonresident licensing requirements are related to criminal history
checks (using fingerprint identification) and bond

requirements for some producers. NAIC officials had anticipated that these
requirements would be major areas of disagreement among states. 3 We
observed that some states were reluctant to eliminate their existing

requirement to conduct a criminal history check on nonresident applicants
using fingerprint identification. For example, California?s insurance
regulators said that while the state supports the goals of streamlining and
creating more uniformity in state licensing procedures, California would not
eliminate its nonresident fingerprinting requirement (and other key

3 Related to this debate, we also observed some confusion and ambiguity
among state regulators over the extent to which additional state consumer
protection measures will or will not be allowed under GLBA (Savings
Provision). Concerns of Some States

Are Likely to Prevent Nationwide Reciprocity

Page 6 GAO- 02- 842T existing requirements) in order to satisfy the
reciprocity provisions of GLBA. The regulators believed that eliminating
this and several other existing requirements to achieve reciprocity with
other states would

weaken their current standards and consumer protection measures. 4 In
Florida, a recently enacted PLMA expresses the state?s desire to meet the
reciprocity and uniformity provisions of GLBA but also incorporates
nonresident fingerprinting requirements under its consumer protection
provisions. 5 According to industry officials, some states continue to
maintain fingerprinting requirements despite the passage of some form of
PLMA legislation. Some state officials acknowledged that waiving nonresident
producer licensing requirements to satisfy GLBA?s reciprocity provisions
could theoretically open a window of opportunity for

undesirable individuals to enter the insurance industry. For instance,
states where insurance regulators do not have the authority to conduct
criminal background checks on producer applicants could provide such access.
We have previously expressed concern that many insurance regulators lack the
authority to conduct criminal background checks on industry applicants (in
contrast to regulators in the banking, securities, and futures industries)
and have supported actions to help establish such authority. 6 , 7 Bond
requirements for nonresident producers, intended to protect consumers and
states from financial losses resulting from errors or misconduct, have also
surfaced as a problematic issue in many states.

According to industry observers, bond requirements have proven difficult to
change or remove because they are established in state laws and regulations.
NAIC commented that such requirements may not be

4 The six nonresident producer licensing provisions that California
Department of Insurance officials cited as critical were those requiring:
(1) criminal background checks using fingerprint identification on
applicants, (2) that organizational applicants designate a natural person to
exercise authorities granted by licensure, (3) that a broker maintain a bond
on file, (4) that certain agents and solicitors file agency appointments,
(5) approval of

fictitious names that applicants intend to use for conducting business, and
(6) that an agent selling long- term care insurance receive specified
training. 5 Florida also has many other requirements it does not plan to
eliminate. State regulators believe their requirements are necessary to
protect Florida?s uniquely large elderly population. 6 Insurance Regulation:
Scandal Highlights Need for Strengthened Regulatory Oversight, (GGD- 00-
198, Sept. 19, 2000). 7 Financial Services Regulators: Better Information
Sharing Could Help Reduce Fraud, (GAO- 01- 478T, Mar. 6, 2001).

Page 7 GAO- 02- 842T appropriate for a producer seeking to conduct business
on a multistate basis, because they do not take into account current
commercial realities (e. g., a producer?s annual volume of business is not
taken into consideration in determining the amount of a bond). NAIC
officials have

also voiced concern about the cumulative impact of individual state bonding
requirements in the context of facilitating multistate producer licensing.

Another issue relates to the postlicensing requirements producers must
satisfy after obtaining a license. Licensing requirements waived or removed
to satisfy the reciprocity requirements of GLBA could resurface as
postlicensing requirements, undermining the benefits of regulatory
streamlining. In our review of the checklists submitted to NAIC, we found
that many states said they have the authority to waive requirements

relating to nonresident licensing. A handful of states also reported having
postlicensing requirements that could limit or place conditions on
nonresident producer activities. For instance, one state reported that it
could waive evidence of company appointments 8 as an application

requirement but would ask for this evidence as a postlicensing requirement
before the producer could conduct any insurance activity. Overall, we did
not identify any significant use of additional postlicensing requirements,
but such practices could inhibit the implementation of regulatory
reciprocity among states.

Although NAIC may be close to certifying enough states to avoid the creation
of NARAB, other efforts to achieve greater uniformity must be successful
before nationwide reciprocity is realized. Some states, often

those with relatively large insurance markets, intend to maintain certain
antifraud and consumer protection measures even though such requirements may
be inconsistent with GLBA?s reciprocity provisions. For instance, the
California Department of Insurance did not support the adoption of NAIC?s
PLMA, designed to satisfy GLBA?s reciprocity provision, because ?the Model
Act does not include several important enforcement tools that are contained
in California law presently.? Industry representatives have emphasized that
the larger states need to reciprocate (accept the licensing decision of
other states) before producers can fully

8 An appointment refers to the authority an insurer gives to a producer to
transact insurance business on the insurer?s behalf. Nationwide State

Reciprocity Hinges on Concerns and Participation of Larger States

Page 8 GAO- 02- 842T benefit from improvements aimed at streamlining the
licensing process to conduct business in multiple states.

NAIC?s Uniform Producer Licensing Initiatives Working Group is currently
addressing a number of issues related to producer licensing to help states
achieve more uniformity. The group?s areas of work include those related to
background checks, prelicensing education, continuing education, and
definitions for limited lines of insurance. These efforts will also have to
address the concerns of states that have been unwilling to ?lower the bar?
on their existing regulatory requirements. Achieving nationwide

reciprocity in the area of producer licensing is tied to the success of
these uniformity efforts. However, it remains uncertain whether or when more
uniform producer licensing practices will be adopted that satisfy the

concerns of those states with the largest insurance markets. Through NAIC?s
Speed to Market initiative, state insurance regulators are trying to
streamline regulatory processes associated with insurance product approvals
to make products available to consumers more quickly. A principal aspect of
this initiative is to develop a more centralized

product filing and approval process for certain types of insurance products
that are sold on a multistate or nationwide basis. NAIC established the
Coordinated Advertising, Rate, and Form Review Authority as a vehicle for
providing insurers with a single point of filing and

approval. However, insurers balked at the initial CARFRA trial, saying the
process still incorporated too many individual state requirements beyond a
common set of review criteria. In response, NAIC is now exploring the use

of an interstate compact as a mechanism for overcoming the issue of having
to satisfy the product review and approval criteria of each individual
state.

Another aspect of this initiative encompasses efforts to improve existing,
conventional state- based systems. A notable outcome of these efforts is
NAIC?s System for Electronic Rate and Form Filing, or SERFF, which is
designed to expedite the mechanics of submitting product rate and policy
form filings to regulators. Other efforts to streamline product review and
approval processes focus on reducing differences among the states? product
filing requirements and identifying best practices. Product Approval

Reforms Use Both Centralized and StateBased Approaches

Page 9 GAO- 02- 842T Many insurers, particularly those in the life and
health insurance business, claim they have been at a competitive
disadvantage in marketing and

selling investment- oriented products because banks and securities firms-
their primary competitors in these product lines- can seek regulatory
approval from a single regulator. In response, insurance regulators have

tried to devise a one- stop filing and approval process for products that
will be sold in multiple states. CARFRA is the mechanism that regulators
devised to offer the industry a single source for product reviews and
approvals. NAIC launched a pilot of the CARFRA product approval process in
May 2001 with a single point of filing mechanism, national standards, and
disclosure of any additional state requirements or deviations. The CARFRA
pilot consisted of regulators from 10 states that agreed to review new
product filings on three types of life and health insurance products: term
life, individual annuities, and individual medical supplements. CARFRA?s
centralized product review and approval process was based on national
standards along with consideration of individual state standards. NAIC?s
goals were to be able to process a product filing within 30 days of receipt
to CARFRA if the product conformed to national standards and to

process any ?outlier? filings within 60 days- those product filings that
conformed to the national standards but required further review against the
variances for the states in which the products were to be sold. After
CARFRA?s decision, each state had the option of either accepting or
rejecting the product. The CARFRA process also took advantage of technology
enhancements utilizing SERFF.

Since the launch date, only two filings have been received under the CARFRA
process. According to NAIC, industry representatives said that CARFRA was
not attractive because too many state deviations to the

national standards existed. In general, the larger states participating in
the CARFRA pilot program had the most deviations, often requiring the
submission of additional forms and documentation beyond that necessary to
satisfy the common review criteria. In addition, industry observers said

that CARFRA was abandoned because participation in it was voluntary and it
had no legitimate enforcement authority as a regulatory entity. Industry Was
Not Attracted

to Initial Trial of CARFRA?s Centralized Review Process

Page 10 GAO- 02- 842T After rethinking the CARFRA process, NAIC has
considered several alternative methods of streamlining the product approval
process. Instead of totally disregarding the CARFRA process, NAIC opted to
restructure it as an interstate compact, building on the processes and
national standards

already developed. NAIC is currently finalizing a proposal for an interstate
compact that would establish a commission known as the Interstate Insurance
Commission for Annuities, Life Insurance, Disability Income, and Long- Term
Care Products to set standards and streamline review and approval processes
for such products. NAIC is currently soliciting input on a draft interstate
compact and intends to finalize a version that state regulators can vote on
at the fall national meeting in September 2002. The

compact would require states to delegate product review and approval
authority on certain products to the new commission. As well as reviewing
and approving certain types of insurance products, this entity would also
have the authority to set standards.

The proposed interstate compact focuses on annuity, life insurance,
disability income, and long- term care products. State insurance regulators
have recognized that some life and annuity products are fundamentally
distinguishable from other types of insurance products (e. g., property and
casualty), since many products sold by life insurers have evolved to become
investment products. Consequently, these investment- oriented products face
direct competition from products offered by depository institutions and
securities firms. According to NAIC, competitive pressures have provided the
impetus to develop more streamlined product approval processes for certain
insurance products. NAIC hopes the commission established through an
interstate compact will help the states implement a

more streamlined product review and approval process. The new commission
would develop and implement national standards for certain life and annuity
insurance products that would supersede the standards of member states that
enact enabling legislation for the compact (compacting states). These
participating states would then consider adherence to the national standards
as having the force and effect of statutory law. Up to now, the states have
not generally eliminated their

individual deviations to a common set of review criteria. Compacting states
must enact the compact into law, effectively ceding their authority to
review and approve the specified insurance products to the commission. As
proposed, the commission provides for the establishment of a 14- member
management committee to manage the affairs of the

commission. Six permanent committee members would represent the compacting
states with the largest premium volume for annuities and life insurance
products. Other compacting states would fill the remaining Regulators Are
Now

Exploring Interstate Compacts to Centralize Product Approval Processes

Page 11 GAO- 02- 842T board member positions on a rotating basis. Geographic
considerations would also be used in establishing the management committee.

Additionally, the commission can establish product standards only after
legislative enactment of the compact by 12 states, and can review products
and render approvals or disapprovals on products only after legislative
enactment of the compact by 26 states.

The impetus for exploring the use of interstate compacts appears to be an
increased sense of urgency to resolve current product approval issues and a
realization among state officials that regulators have gone as far as they
can to streamline product approval processes after the CARFRA trial setback.
To overcome industry objections to state deviations beyond

CARFRA?s review criteria, state lawmakers would have had to change their
states? product review and approval requirements to a common, uniform set of
criteria. NAIC concluded that an interstate compact presented the best way
to accomplish uniform product review and approval standards along with a
single point of filing mechanism.

The success of NAIC?s Speed to Market initiative largely hinges on whether
or not a significant number of state legislatures agree to cede their
regulatory authority to a separate entity on certain insurance product
standards and approvals. Proponents of interstate compacts believe such

an approach could be successful if the compact entity develops fair rules,
disclosure and due process requirements, sunshine rules (allowing regulators
to revisit and decide whether to continue with an interstate compact
approach after a specified date), and other informational filing

requirements and processes. In contrast, other industry observers believe
states have little motivation to change to a single point of filing process,
in part because of considerable differences in approaches toward product
approvals and consumer protection measures. It remains uncertain how many
states will pass enabling legislation to establish interstate compacts

for product approval functions or whether states with large insurance
markets will embrace this approach.

NAIC?s Speed to Market initiative has also included efforts to improve
existing conventional state- based product review and approval processes.
Regardless of whether a more centralized process is used for certain types
of life and health products, existing state- based review and approval
processes will continue to be used for property and casualty products and

many other life and health products for the foreseeable future. NAIC ?s

improvement efforts in this area, better known as Improvement to State
Technology Enhancements

Lead Improvements Efforts on State- Based Systems

Page 12 GAO- 02- 842T Based Systems, aim to enhance states? rate, form, and
advertising review units by reforming and standardizing their approval
processes.

One of the most notable advances in improving state- based product review
and approval processes has been SERFF, which offers a standard electronic
form for new product filings with the states. SERFF enables regulators to
receive, comment on, and approve or reject insurance industry rate and form
filings electronically. SERFF is becoming increasingly popular, though it is
not available for all types of products in each state. At its summer
national meeting, NAIC reported that 50 states

and the District of Columbia were licensed to accept product filings through
SERFF and that 474 companies were licensed to use the system. Several
industry representatives we spoke with acknowledged the merits of SERFF but
explained that it still does not resolve more fundamental issues related to
differences in product review and approval processes

across states, many of which are based on statutory requirements.
Additionally, to the extent that some states do not fully utilize SERFF for
all lines of insurance, the cost benefit is diminished for insurers if they
have to maintain a second paper product filing system as well. NAIC has also
developed the Review Standards Checklist that gives insurers information on
state rate and form filing requirements in a common format by product line.

Other efforts under NAIC?s Improvements to State- Based Systems focus on
reviewing and eliminating ?unnecessary? product filing requirements that
have accumulated over time. In particular, NAIC and state regulators are
trying to identify and reduce those regulations that no longer provide

useful oversight value as well as ?desk- drawer? rules that have evolved
over time but that are not specified by statute, such as a requirement to
use a certain type of form.

NAIC has also developed a model law aimed at streamlining the product
approval process for commercial property and casualty insurance. The
Property and Casualty Commercial Rate and Policy Form Model Law, adopted by
NAIC in March 2002, would ease some of the current state rate and form
submission requirements if adopted by the states. The model recommends a
?use and file? regulatory approach for commercial rates

and a ?file and use? approach for commercial policy forms. Under this model
law, notices of commercial rate changes would be filed for informational
purposes only and not subject to approval. Commercial policy forms would be
filed 30 days prior to their use and would be subject to regulatory review
and approval. One industry association pointed out that regulators from two
states with large insurance markets said the

Page 13 GAO- 02- 842T model would not be adopted in their states. Trade
representatives we spoke with could not speculate on the model law?s
prospects for passage

at the state level, but indicated that its chances for approval faced
challenges because commercial rates have risen substantially in the past
year, exacerbated further by the September 11th attacks.

NAIC?s initiative to foster ?national treatment of companies? has been
revised since its inception and is now focused on making improvements to
existing state processes related to insurer licensing. This initiative and
others were highlighted in NAIC?s Statement of Intent: The Future of
Insurance Regulation, endorsed by NAIC in March 2000 in response to

GLBA and changes in the financial services sector. Initially, efforts under
the National Treatment of Companies initiative were directed at centralizing
oversight for multistate insurers. Now renamed National Treatment and
Coordination, the initiative is currently aimed at streamlining state- based
review processes and application submissions for company licenses. Many of
NAIC?s efforts under this initiative have

focused on implementing technology to support a common electronic
application form, the Uniform Certificate of Authority Application, or UCAA.
Like developments under the Speed to Market initiative, enhancements to the
process of submitting forms have outpaced efforts to develop common review
and approval criteria.

Initially, the National Treatment of Companies initiative encompassed
movement toward a single, unified process for supervising multistate
insurers. Oversight functions such as licensing reviews, financial solvency
monitoring, and market conduct oversight would have been conducted

through a more centralized, streamlined process. However, as we previously
reported in 2001, state regulators largely abandoned the goal of
centralizing regulatory oversight for multistate insurers under this
initiative and focused their efforts on improving existing company

licensing processes. 9 Some efforts to streamline other regulatory processes
for large, multistate insurers have been shifted to other NAIC working
groups. For instance, NAIC is undertaking an effort to better coordinate and
execute financial analysis and examination activities

9 Regulatory Initiatives of the National Association of Insurance
Commissioners, (GAO- 01- 885R, July 6, 2001). ?National Treatment? Efforts
Now Aimed at Streamlining Insurer Licensing Processes

Improvements in Licensing Insurers Favored over Broader Centralized

Oversight

Page 14 GAO- 02- 842T among regulators that oversee affiliated insurers from
multiple states under a holding company structure.

From its inception, NAIC and state regulators tried to devise an operational
concept for a ?national treatment? program that would offer insurers a
state- based system that could provide the same efficiencies in

many areas of oversight as a federal charter for insurance companies. Many
of the options considered were based on a centralized regulatory function
that often allowed the insurers? state of domicile to perform regulatory
activities on behalf of the other states. State regulators ultimately
rejected a national treatment concept covering a broad array of regulatory
oversight functions based on deference to insurers? domiciliary state.
Furthermore, a planned test of a national treatment program in 2001 was
cancelled. Activity on this initiative is now focused on streamlining
existing state- based company licensing processes for the benefit of

insurers that wish to conduct business in multiple states. Current efforts
under NAIC?s National Treatment and Coordination initiative are focused on
developing more streamlined state- based application and review processes
for insurer licensing. Much of NAIC?s work on this initiative centers on the
implementation of a common electronic application form, the UCAA. According
to NAIC, this form is now available for use in all states. Closely tied to
the development of the

UCAA are efforts to develop a more common, uniform set of review criteria
for insurer applications. The UCAA offers insurance companies a web- based,
electronic application form to obtain a license in any state. Although the
application would still be submitted to and reviewed by individual state
insurance departments, the format would remain the same and could be
submitted electronically. The UCAA provides formats for newly formed
companies seeking a Certificate of Authority in their domicile state, for
existing companies desiring to expand their business into other states, and
for existing insurers that want to amend their existing Certificate of
Authority.

While the technology supporting a common application form has been
developed, regulators have yet to agree on a common set of review criteria
related to insurer licensing. In the absence of uniform criteria, insurers

must separately submit supplemental applications beyond the UCAA information
to individual states, often in paper form. Industry representatives maintain
that these separate application requirements Application Enhancements Have
Outpaced Efforts to

Develop More Uniform Insurer Licensing Process

Page 15 GAO- 02- 842T negate some of the benefits of using the UCAA form
rather than conventional state application forms.

NAIC and state regulators continue striving to develop more uniform review
criteria for licensing insurers. In April 2002, NAIC provided documentation
on 91 additional state- specific requirements beyond those in the UCAA
application. 10 Again, as was the case with the other initiatives, a
principal issue in developing a common set of licensing review criteria has
been the challenge of addressing each state?s individual requirements.
Through its Accelerated Licensure Evaluation and Review Techniques

(ALERT) program, NAIC and state regulators are trying to reduce these
additional state requirements (by 40 percent this year), particularly those
not based on state statutes. While efforts to implement UCAA have been
successful from a technical perspective, its common use in conjunction with
a more standardized licensing review process has not yet materialized and
remains uncertain.

In this statement, we have discussed three of the initiatives outlined in
NAIC?s Statement of Intent for regulatory modernization- licensing
nonresident producers ( Producer Licensing Reciprocity and Uniformity),
approving new products ( Speed to Market), and coordinating the oversight of
companies that operate in multiple states ( National Treatment of
Companies). While it appears that NAIC is close to certifying enough

states to meet GLBA?s reciprocity requirements before November 2002 to avoid
the creation of NARAB, several states, including some of the largest, either
will not have full reciprocity or will satisfy this requirement only by
temporarily waiving- not eliminating- statutory requirements for nonresident
producers. Similarly, the states? effort to streamline the product approval
process- CARFRA- failed largely because, even in the 10 states that
conducted the pilot, individual states would not give up state- specific
requirements that they believed were important. Finally, as we pointed out
in our earlier reports, 11 the original objectives of National Treatment-
providing regulatory treatment for ?national companies? 10 At the time,
NAIC?s figures did not include additional requirements from one other state.
NAIC?s breakdown of these additional requirements revealed that 30 were
required by state

statute or regulation, 16 were characterized as administrative or
informational, 15 were financially oriented, 10 were required by other state
agencies, 10 were required for identification purposes (most often
fingerprint identification requirements), and 10 others were miscellaneous.
11 GGD- 00- 198 and GAO- 01- 478T. Conclusions

Page 16 GAO- 02- 842T comparable to that under a single federal regulator-
were quickly narrowed to focus on the implementation of the UCAA, a single
application form that companies can submit to multiple states when

applying for a license to sell insurance. Even in the case of the UCAA,
which has been adopted by all states, individual states have retained
additional state- specific requirements because they believe that the UCAA,
by itself, lacked some important features, such as fingerprinting of company
principals.

While the specific details of state regulators? actions in each of these
areas have varied, there have been similarities in the pattern of
accomplishment. In each case, improvements, sometimes dramatic, have been
made in efficiency by streamlining and applying technology, for example,
standardizing forms and using technology to submit applications for
licensing or product approval. There has been considerably less success in
reaching agreement on the more substantive underlying issues. In each case,
some states that consider themselves to be stricter or to have more consumer
protections have been reluctant or have refused to lower their standards. If
the objective of NAIC?s agenda of regulatory reform and modernization is
simply to have all states agree, then what has occurred thus far may be
considered a failure. However, if the objective is more uniformity and
reciprocity with an overall improvement in regulatory

performance, then the holdout states may be the only defense against the
weakening of both regulatory oversight and consumer protections. We do not
suggest that every individual state deviation or objection is appropriate or
desirable. However, if some states did not object to giving up
fingerprinting, for example, as a means of conducting in- depth criminal and
regulatory history background checks of agents or company owners and
management, consumers would likely be more at risk and regulation would be
less effective. In that case, neither uniformity nor reciprocity would
represent regulatory progress.

For its part, we believe NAIC has made a concerted effort in promoting more
uniform regulatory processes and requirements. NAIC has also demonstrated
successes in implementing technology to improve efficiencies in licensing
and product approval processes. Now, continuing success on many regulatory
streamlining efforts desired by industry depend on state legislatures?
willingness to trust other regulatory entities, either other states or
entities such as the commission created by the compact, with certain
regulatory functions and decision- making authority. Many states, often with
the largest insurance markets, are not likely to take such a step unless
they are convinced that other states and regulatory entities operate under a
set of standards comparable to their own.

Page 17 GAO- 02- 842T State regulators? efforts to date suggest that in
certain areas, state regulators and NAIC may not be able to achieve
uniformity through

common consent (e. g., criminal history checks using fingerprint
identification, uniform criteria for product approvals and company
licensing, and others). To the extent this is true, ongoing federal
oversight and, possibly, federal intervention (as in the case of GLBA?s call
for NARAB should state action fall short) may be needed to provide impetus

for positive change and continuing improvement in state regulation of
insurance. For further information regarding this testimony, please contact
Richard J. Hillman, Director, or Lawrence D. Cluff, Assistant Director,
Financial Markets and Community Investment Issues, (202) 512- 8678.
Individuals making key contributions to this testimony include Emily
Chalmers, Vashun Cole, Rachael Demarcus, Barry Kirby, and Angela Pun.
Contacts and Acknowledgments (250078)
*** End of document. ***