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STATEMENT OF

J. ROBERT HUNTER[^1],

DIRECTOR OF INSURANCE

BEFORE THE COMMITTEE ON

COMMERCE, SCIENCE & TRANSPORTATION

OF THE U.S. SENATE

OCTOBER 22, 2003

"STATE OF INSURANCE REGULATION"

Insurance regulation is at a crossroads. Most states are rolling back
insurance consumer protections and weakening their oversight of the
industry, while pressure from some insurers is growing for increased
federal regulation. Some powerful elements of the insurance industry
want to be allowed to choose either federal or state oversight (e.g.,
ACLI, AIA, banks selling insurance). Under such an "optional federal
charter" plan, if the federal government actually effectively regulated,
these companies would be allowed to retreat to state regulation. Other
elements of the industry favor no federal role at all, except bailouts
such as the Terrorism Risk Insurance Act (e.g., NAII, AAI, NAMIC).

While insurance companies disagree on the need for federal regulation,
they are unanimous in their desire to use the possibility of federal
oversight as leverage to press the states to reduce extant consumer
protections or hold off needed new protections. Insurers know that state
regulators will want to move fast to reduce the regulatory burden (that
is, the consumer protections they require) in order to hold onto some
extra insurers in the regulatory turf wars that are coming. There is
even talk of interstate compacts to limit regulation to one state or to
otherwise "harmonize" regulation, although the states with higher
standards \-- the sopranos, tenors and altos \-- will be asked to
"harmonize" by learning to sing bass.

Few ask consumers what they think. I am therefore most grateful to you,
Chairman McCain, Ranking Member Hollings and members of the Committee,
for this opportunity to explain how insurance regulation can be improved
to help consumers.

# BACKGROUND

Insurance is regulated by the states under a remarkable delegation of
authority in the McCarran-Ferguson Act. There is no insurance oversight
by the federal government, nor are there standards for effective
regulation, but there is an exemption from the antitrust law, which very
few other American industries outside of major league baseball enjoy.
Thus, for example, insurers routinely use rating organizations to
jointly project inflation costs into the future.

Insurers have, on occasion, sought federal regulation when the states
increased regulatory control and the federal government regulatory
attitude was more lazes-faire. Thus, in the 1800s, the industry argued
in favor of a federal role before the Supreme Court in [Paul v.
Virginia]{.underline}, but the court ruled that the states controlled
because insurance was intrastate commerce.

Later, in 1943 in the [SEUA]{.underline} case, the Court reversed
itself, declaring that insurance was interstate commerce and that
federal antitrust and other laws applied to insurance. By this time,
Franklin Roosevelt was in office and the federal government was a
tougher regulator than were the states. The industry sought, and
obtained, the McCarran Act.

Notice that the insurance industry is very pragmatic in their selection
of a preferred regulator \-- they always favor the least regulation. It
is not surprising that, today, the industry would again seek a federal
role at a time they perceive little regulatory interest at the federal
level. But, rather that going for full federal control, they have
learned that there are ebbs and flows in regulatory oversight at the
federal and state levels, so they seek the ability to switch back and
forth at will.

Consumer organizations strongly oppose an optional federal charter,
where the regulated, at its sole discretion, gets to pick its regulator.
This is a prescription for regulatory arbitrage that can only undermine
needed consumer protections.

Further, the insurance industry has used the possibility of an increased
federal role to pressure states into gutting consumer protections over
the last three or four years. Insurers have repeatedly warned states
that the only way to preserve their control over insurance regulation is
to weaken consumer protections. They have been assisted in this effort
by a series of House hearings, which have not focused on legislation or
the need for improved consumer protection, but have served as a platform
for a few politicians to issue ominous statements urging the states to
further deregulate insurance oversight, "or else." (See statements by
industry representatives and Members of Congress below.)

# CAN INSURANCE BE DEREGULATED?

There are good reasons that insurance has, historically, been subject to
regulation. The most obvious one is that a consumer pays money today for
a promise that may not be deliverable for years. That promise must be
secured from many threats, including insolvency and dishonesty.

No one seems to dispute the need for oversight of insurer solvency and
bad management behavior. Insolvency regulation has been upgraded, thanks
in large part to the interest in the issue of Warren Magnusen and John
Dingell (which is how insurers first became aware of the value of
Congressional pressure on state regulators.)

As front-end regulatory controls such as price regulation have been
eliminated for personal lines and small businesses by the states
individually and for small businesses by the actions of the National
Association of Insurance Commissioners (NAIC), consumers have been
promised that back-end market conduct oversight would be improved. These
promises have proven to be empty. For example when small business
pricing was deregulated by the NAIC and many states adopted this
approach, nothing was done to correct the hopelessly incompetent market
conduct system that exists in most states. (The GAO has recently
documented the failures of the state market conduct system in great
detail.)

The big question is: can price and product regulation be eliminated? The
insurance companies say "sure," but never discuss the potential adverse
impact on consumers.

Product regulation is very important for consumers. An insurance
contract is a complex legal document. Consumers cannot be asked to pick
out good or avoid bad deals by reading these documents. It won't happen.
If insurers are free to write any contract that they want, some sharp
dealers will come in with illusory policies that look good but take away
the apparent coverage in the fine print. There will develop competition
to write poor products that unwary consumers will buy.

Consumers are in no rush to have bad products appear in the market, even
though insurers insist that "speed-to-market" is somehow a critical
issue. It makes no sense to remove front-end control of these products
and wait for market conduct exams or, as is more usual, lawsuits, to
clean up the mess.[^2]

However, consumer groups do want efficient regulation. I, and others
from the consumer community, worked very hard at the NAIC to eliminate
inefficient regulatory practices and delays, even helping put together a
30-day total product approval package. Our concern is not with fat
cutting, it is with removing regulatory muscle when consumers are
vulnerable.

Price regulation is a complex issue. It does not suffice to say that
"competition is good and regulation is bad" as insurers often do.

First of all, insurance is not a normal product like a can of peas or
even an auto. One cannot "kick the tires" of the complex legal document
that is the insurance policy until a claim arises, perhaps years after
the purchase.

Second, the level of service offered by insurers is usually unknown at
the time a policy is purchased. Some states have complaint ratio data
that help consumers make purchase decisions, and the NAIC has made a
national database available that should help, but service is not an easy
factor to assess.

Then there is the solidity of the insurance company. You can get
information from A.M. Best and other rating agencies, but this is also
complex information to obtain and decipher.

Finally, there is the price of the policy itself. Some insurers have
many tiers of prices (we have seen mare than 25 for some companies) for
similar looking insureds. Online assistance may help consumers
understand some of these distinctions but only when they actually apply
is full underwriting conducted. At that point, the consumer might be
quoted a much different rate than he or she expected. Frequently,
consumers receive a higher rate, even after accepting a quote from an
agent.

And, after all that, underwriting may result in the consumer being
turned away.

When you shop for a can of peas, you see the unit price, all the options
are before you on the same shelf, when you get to the checkout counter
no one asks where you live and then denies you the right to make a
purchase, you can taste the quality as soon as you get home, and you
don't care if the pea company goes broke or gives much service. In
short, peas are simply not insurance.

Price regulation considerations vary by line of insurance. Large
commercial insureds have insurance experts, called "risk managers," on
staff. They need less help from government. Individuals and small
businesses may need help. They are not well informed consumers and often
go into the insurance purchase decision with an odd combination of fear
and boredom. They frequently go to an insurer or agent and say the
something akin to "take me, I'm yours," a shopping strategy that does
nothing to discipline the market price[^3].

The degree of insurance regulation that is needed varies by
line-of-business, something insurers often don't admit. Consider three
life insurance products as an example of this fact. Term life, cash
value life and credit life. We believe that the regulatory response to
these three products must be different.

Term life insurance is easy for consumers to understand. If you die in
the term, whatever that time frame is, your beneficiaries receive the
face amount of the policy. Consumers understand this very well so
coverage is not an issue. Dead is dead, so service is not much of an
issue compared to, say, auto claims. Solvency may also be somewhat less
of an issue, depending upon the length of the term. The decision centers
on price. Excellent online price services exist (CFA's favorite is
[www.term4sale.com](http://www.term4sale.com/)).

Because of the simplicity of the decision-making process, term insurance
prices are very competitive and have fallen, year-by-year, for decades.
Price regulation is not needed in this line of life insurance.

Cash value insurance is a complex product. It is, essentially, a term
policy with a bank account hidden inside the product. The problem is
that the industry has resisted calls for tools to help consumers more
easily understand what is going on inside the policy or to create
suitability requirements for its agents. It is very difficult to know
exactly what part of the first year premium (if any-- often, it is none)
goes into the bank account. CFA's actuary, who handles our service for
life insurance, tells me that even he frequently can't tell a good
product without running the policy details through our computerized
service to see how it works. Consumers are confused. Competition is
weak. Prices have not declined in the way term prices have.

For this product, prices should be subject to more control than exists
today unless the industry truly agrees to stop the obfuscation and
promote rules that let the consumer see what each policy is truly like.

Credit life insurance is a product sold along with a loan, such as a car
loan. The car dealer may offer the coverage that would pay off a loan if
an insured dies, so that this person's family would own the car
outright. The problem is that consumers do not go to car dealers to buy
insurance. They have not even thought about it until the dealer starts
the sales pitch. If the consumer decides to buy the coverage, the
consumer does not then go out and shop for an insurance company. The
dealer has already done that for the consumer.

Guess what the criteria the dealer uses in making the choice of credit
life insurer? The amount of the commission is, of course, the decisive
factor. (Some car dealers make more money selling insurance than cars.)
Prudential Insurance Company once said in a hearing in Virginia, that
they did not sell much credit life insurance because "we are not
competitive, our price is too low."

This
purchase-of-insurance-by-the-commissioned-agent-not-the-consumer/buyer
has a name: "Reverse Competition." In this line of insurance,
competition drives the price up, not down.

Credit life insurance must have price regulation. States have recognized
this by limiting the price that can be charged, with widely varying
maxima. New York and Maine consumers pay one-fifth of the rate of
Louisiana consumers, although Louisianans obviously do not die five
times faster than Mainers. Even though the credit life insurers, car
dealers and other powerful lobbyists have succeeded in keeping the price
outrageously high in most states, at least there are caps in every
state, as there must continue to be.

# IS REGULATION INCOMPATIBLE WITH COMPETITION?

The insurance industry promotes a myth: regulation and competition are
incompatible. This is demonstrably untrue. Regulation and competition
both seek the same goal: the lowest possible price consistent with a
reasonable return for the seller. There is no reason that these systems
cannot coexist and even compliment each other.

The proof that competition and regulation can work together in a market
to benefit consumers and the industry is the manner in which California
regulates auto insurance under Proposition 103. Indeed, that was the
theory of the drafters (including me) of Proposition 103. Before Prop.
103, Californians had experienced significant price increases under a
system of "open competition" of the sort the insurers seek. (No
regulation of price is permitted but rate collusion by rating bureaus is
allowed, while consumers receive very little help in getting
information, etc.) Prop. 103 sought to maximize competition by
eliminating the state antitrust exemption, laws that forbade agents to
compete, laws that prohibited buying groups from forming, and so on. It
also imposed the best system of prior approval (of insurance rates and
forms) in the nation, with very clear rules on how rates would be
judged.

As our in-depth study of regulation by the states revealed,[^4]
California's regulatory transformation\--to rely on both maximum
regulation and competition\--has produced remarkable results for auto
insurance consumers and for the insurance companies doing business
there. The study reported that insurers realized very nice profits,
above the national average, while consumers saw the average price for
auto insurance drop from \$747.97 in 1989, the year Proposition 103 was
implemented, to \$717.98 in 1998. Meanwhile, the average premium rose
nationally from \$551.95 in 1989 to \$704.32 in 1998. California's rank
dropped from the third costliest state to the 20^th^.

I can update this information through 2001.[^5] As of 2001, the average
annual premium in California was \$688.89 (Rank 23) vs. \$717.70 for the
nation. So, from the time California went from reliance simply on
competition as insurers envisioned it to full competition and
regulation, the average auto rate fell by 7.9% while the national
average rose by 30.0%. A powerhouse result!

# STATE REGULATORY/LEGISLATIVE FAILURES

Compare the outstanding improvement in consumer protection in California
with the collapse of regulatory resolve at the national, NAIC level.
Here is a small sample of NAIC failures and consumer protection
rollbacks:

##### Failures To Act

1.  Failed to do anything about abuses in the small face life market.
    Instead, they adopted an incomprehensible disclosure on premiums
    exceeding benefits, but did nothing on overcharges, multiple
    policies, or unfair sales practices.

2.  Failure to do anything meaningful about unsuitable sales in any line
    of insurance. Suitability requirements still do not exist for life
    insurance sales even in the wake of the remarkable market conduct
    scandals of the late 1980s and early 1990s. A senior annuities
    protection model was finally adopted (after years of debate) that is
    so limited as to do nothing to protect consumers.

3.  Failure to call for collection and public disclosure of market
    performance data after years of requests for regulators to enhance
    market data, as they weakened consumer protections. How do you test
    if a market is workably competitive without data on shares by zip
    code and other tests?

4.  Failure to do anything as an organization on the use of credit
    scoring for insurance purposes. In the absence of NAIC action,
    industry misinformation about credit scoring has dominated state
    legislative debates. NAIC's failure to analyze the issue and perform
    any studies on consumer impact, especially on lower income consumers
    and minorities, has been a remarkable dereliction of duty.

5.  Failure to address problems with risk selection. There has not even
    been a discussion of insurers explosive use of underwriting and
    rating factors targeted at socio-economic characteristics: credit
    scoring, check writing, prior bodily injury limits, prior insurer,
    prior non-standard insurer, not-at-fault claims, not to mention use
    of genetic information, where Congress has had to recently act to
    fill the regulatory void.

6.  Failure to do anything on single premium credit insurance abuses.

7.  Nothing has been done on redlining or insurance availability or
    affordability. The vast majority of states no longer even look at
    these issues, 30 years after the federal government issued studies
    documenting the abusive practices of insurers in this regard. Yet,
    ongoing lawsuits continue to reveal that redlining practices harm
    the most vulnerable consumers.

###### Rollbacks Of Consumer Protections

1.  The NAIC pushed through small business property/casualty
    deregulation, without doing anything to reflect consumer concerns
    (indeed, even refusing to tell us why they rejected our specific
    proposals) or to upgrade "back-end" market conduct quality, despite
    promises to do so.

2.  As a result many states adopted the approach and have rolled back
    their regulatory protections for small businesses. Nebraska and New
    Hampshire joined the list of states that have deregulated just this
    year.

3.  States are rolling back consumer protections in auto insurance as
    well. Just this year, New Jersey, Texas, Louisiana, and New
    Hampshire did so.

4.  The NAIC just terminated free access for consumers to the annual
    statements of insurance companies at a time when the need for
    enhanced disclosure is needed if price regulation is to be reduced.

######## NCOIL: At the Insurance Industry's Beck and Call

As bad as the NAIC and some state regulators have been, the National
Conference of Insurance Legislators is worse. NCOIL is directed by a
significant number of legislators who work for the insurance
industry.[^6] On several issues that are currently being debated in
Congress and the states, NCOIL has offered recommendations that would
negatively affect many insurance consumers, recommendations that often
mirror insurance industry proposals.

For example, on May 6, 2003 Illinois State Senator and insurance agent
Terry Parke offered Congressional testimony on NCOIL's proposals to
improve oversight of "market conduct" abuses by insurance companies.
Parke's written testimony did not comment on the state regulatory
failures that led to well-known market conduct abuses that cost
consumers millions of dollars, such as the infamous life insurance
market conduct abuses by the nation's largest insurers such as
Prudential and Met Life. Instead, Parke offered recommendations that
would allow insurance companies to "self certify" that they are
complying with market conduct requirements and would largely restrict
oversight of insurance companies to the state where the company is
headquartered.

In the wake of the Enron and WorldCom scandals, we are astonished that
NCOIL would propose allowing insurance companies to essentially regulate
themselves. Even worse, NCOIL proposes to put the state that is most
subject to political pressure -- the state where an insurance company is
based -- in charge of market conduct regulation for that company.

NCOIL has also offered model legislation on the use of credit scoring
for insurance purposes, which has been adopted by several states. The
legislation would allow insurers to continue to use credit scores to
grant insurance policies and establish rates, even though serious
concerns have been raised about the logic of using credit history to
predict consumer accident propensity (why would getting laid off in a
recession make a person a bad driver?), the inaccuracy of these scores,
and the disproportionate impact that this practice has on low income and
minority consumers. NCOIL's model bill would only ban the use of credit
scoring if it is the [sole]{.underline} factor used in the underwriting
or pricing of insurance, which means that the bill offers no protection,
as credit scoring is never the sole factor used for these purposes.

The NCOIL credit-scoring bill was developed at the behest of the
industry, which realized that real reform might emerge as consumers
across the nation expressed outrage over higher prices due to
consideration of irrelevant credit histories. The NCOIL vote on this was
telling. Members from five states (MI, NY, VT, ND and LA) accounted for
60 percent of the vote. Members from North Dakota represented 8 percent
of the vote (its population is 0.2 percent of the national population).
At least seven of the 25 members on the NCOIL committee that proposed
this legislation are employed by the insurance industry. The vote does
not appear to be representative of much other than insurer wishes.

While not every proposal NCOIL offers is anti-consumer, many are. Other
examples of recent anti-consumer moves by NCOIL include:

-   After years of effort, consumer groups persuaded the NAIC to adopt a
    credit personal property insurance model bill with a 60 percent loss
    ratio standard, which is necessary because credit insurance is added
    to a sale of some other products with huge, often hidden commissions
    being paid to the seller. Because the seller selects the insurer,
    not the customer, credit insurance suffers from "reverse
    competition," driving prices up. Thus a loss ratio limit is vital to
    control cost. A short time after NAIC acted to control the loss
    ratio, the industry went to NCOIL, which had never worked on the
    issue, and got them to issue a resolution opposing the loss ratio
    standard. If NCOIL prevails, consumers who purchase this form of
    credit insurance will pay millions of unnecessary dollars.

-   Consumers requested that NCOIL adopt a consumer participation
    program, like that sponsored by NAIC, in which a few consumer
    representatives can come to the meetings to present consumer
    positions. NCOIL would cover participants' expenses, with consumer
    groups supplying the time of their advocates. Not only did NCOIL
    reject this mechanism for allowing consumer input, they also voted
    down the more modest measure of waiving registration fees for
    consumers, effectively shutting out all consumer input from their
    meetings.

-   NCOIL adopted a property/casualty insurance regulatory model bill
    that is intended to cut consumer protections by reducing regulatory
    authority. The model goes so far as to say that the model should not
    be adopted if a state has gone even further in removing consumer
    protections than the bill proposes, i.e. the model is only
    recommended for use when it lowers protection but is not recommended
    for use if it raises protections. The model does not require the
    insurer to even file rate increases with an insurance commissioner
    until 30 days after it begins to charge consumers more. The
    commissioner, under the model, could not disapprove even an
    excessive rate if the market was "competitive" under a set of
    standards that would make a finding of non-competitiveness nearly
    impossible.

-   NCOIL's Insurance Compliance Self Evaluation Privilege Model Act
    would give insurers a privilege of secrecy for anything they claim
    as \"self-audit\", effectively allowing the industry to shield
    itself from responsibility for its market conduct actions.

What has Caused the States to Move So Suddenly to Cut Consumer
Protections Adopted Over a Period of Decades ?

In a word, "pressure," from insurers and from a couple of Members of
Congress.

####### Industry Statements

What follows are examples of industry attempts to use the federal
government interest in insurance to pressure the NAIC into action:

1.  The clearest attempt to inappropriately pressure the NAIC occurred
    at their spring 2001 meeting in Nashville. There, speaking on behalf
    of the entire industry, Paul Mattera of Liberty Mutual Insurance
    Company told the NAIC that they were losing insurance companies
    every day to political support for the federal option and that their
    huge effort of 2000 to deregulate and speed product approval was too
    little, too late. He called for an immediate step-up of deregulation
    and measurable "victories" of deregulation to stem the tide. In a
    July 9, 2001 [Wall Street Journal]{.underline} article by Chris
    Oster, Mattera admitted his intent was to get a "headline or two to
    get people refocused." His remarks were so offensive that I went up
    to several top commissioners immediately afterwards and said that
    Materra's speech was the most embarrassing thing I had witnessed in
    40 years of attending NAIC meetings. I was particularly embarrassed
    since no commissioner challenged Mattera and many had almost begged
    him to grant them more time to deliver whatever the industry wanted.

2.  Jane Bryant Quinn, in her speech to the NAIC on October 3, 2000,
    said: "Now the industry is pressing state regulators to be even more
    hands-off with the threat that otherwise they'll go to the feds." So
    other observers of the NAIC see this pressure as potentially
    damaging to consumers.

3.  Larry Forrester, President of the National Association of Mutual
    Insurance Companies (NAMIC), wrote an article in the [National
    Underwriter]{.underline} of June 4, 2000. In it he said, "...how
    long will Congress and our own industry watch and wait while our
    competitors[^7] continue to operate in a more uniform and less
    burdensome regulatory environment? Momentum for federal regulation
    appears to be building in Washington and state officials should be
    as aware of it as any of the rest of us who have lobbyists in the
    nation's capital...NAIC's ideas for speed to market, complete with
    deadlines for action, are especially important. Congress and the
    industry will be watching closely...The long knives for state
    regulation are already out..."

4.  In a press release entitled "Alliance Advocates Simplification of
    Personal Lines Regulation at NCOIL Meeting; Sees it as Key to
    Fighting Federal Control" dated March 2, 2001, John Lobert, Senior
    VP of the Alliance of American Insurers, said, "Absent prompt and
    rapid progress (in deregulation) ... others in the financial
    services industry -- including insurers -- will aggressively pursue
    federal regulation of our business..."

##### Congressional Statements

The leading Member of Congress involved in putting pressure on the
states to further deregulate is House Financial Services Committee
Chairman Michael Oxley. Below are some recent statements Chairman Oxley
has made on the matter.

"Make no mistake about it, true reform is necessary[. It is my hope that
our State legislators and insurance commissioners can enact such reform.
If not, Congress will return to this issue with our own
solution.]{.underline}" (Emphasis added) Opening statement at 6/2/01
Hearing, "Insurance Product Approval: The Need for Modernization."

"...why are Massachusetts and New Jersey afraid to adopt the models used
successfully in Illinois and now South Carolina..." Opening statement at
8/1/01 Hearing, "Over Regulation of Automobile Insurance: A Lack of
Consumer Choice."

"...price fixing and heavy anti-consumer regulations...have led to a
balkanized system that can be inefficient, denies consumers choice, and
is destroying the industry's competitive ability to raise capital.
Today...we turn from assessing the current inefficiencies to a review of
the various proposals for reform. Consensus will be difficult, but
America deserves our every effort..." Opening statement at 6/4/02
Hearing, "Insurance Regulation and Competition for the 21^st^ Century"
(Day 1).

"...our American insurance marketplace is entering into a crisis...Some
states fix prices below the levels to attract adequate capital...And
each state imposes its own regulatory regime, creating long delays for
consumers, and making it impossible for insurers to provide products
uniformly nationwide\...It is my primary hope that our State legislators
and insurance commissioners can enact meaningful reform. The States have
had some success...I would note however that this [success is far from
complete and has only occurred in the face of Congressional legislative
pressure, pressure that will continue to grow if the pace of reform does
not improve]{.underline}. (Emphasis added) Opening statement at 6/11/02
Hearing, "Insurance Regulation and Competition for the 21^st^ Century"
(Day 2).

"As many of you know, my interest in reform is not new. Several years
ago I asked the NAIC to focus on this glaring problem and they responded
in March, 2000 with a Statement of Intent...Since that time, the NAIC
has experienced some successes and some failures. In the face of
Congressional legislative pressure, the NAIC has made progress in agent
licensing reform...Unfortunately, the NAIC has met with less success in
efforts to modernize the product approval process...Unfortunately, it is
becoming increasingly apparent that the NAIC may be facing an
insurmountable task...this Committee will not sit idly by. I am
committed to working on this issue for the long haul, looking at all the
different facets of the industry. We will keep building...we will not
let up..." Opening statement at 6/18/02 Hearing, "Insurance Regulation
and Competition for the 21^st^ Century" (Day 3).

"...a problem that has reached crisis proportions in some States: the
increasing difficulty consumers face in finding available insurance for
their homes and cars...(a) crisis being caused in part by the archaic
system of insurance price controls imposed by some states...wrong-headed
regulation..." Opening statement at 4/10/03 Hearing, "The Effectiveness
of State Regulation: Why Some Consumers Can't Get Insurance.\"

"I believe that we're reaching agreement on the fundamental nature of
the problem and are nearing agreement on a framework to fix it...[We
will be discussing a number of short-term legislative proposals to fix
the state system later this year, and hope that the states can act
quickly...before Congress needs to step in and provide additional
impetus. (Emphasis added)]{.underline} Opening statement at 5/6/03
Hearing "Increasing the Effectiveness of State Consumer Protections."

CONSUMERS DON'T CARE WHO REGULATES -- IT'S THE QUALITY STUPID!

The prime issue with consumers is not who regulates insurance; it is
whether insurance regulation is effective and efficient.

As a former state regulator, I have always supported state regulation of
insurance, but now that I see the ease in which states panic and are
willing to trade consumer protections to protect their turf, I am
reevaluating my life-long support. CFA intends, over the next few
months, to meet with consumer, business, labor and other interests to
determine whether CFA should end its support of state regulation.

We have already determined one thing: optional federal charter
legislation is harmful to consumers. The writers of these bills have
readily admitted to me, to their credit, that their intent is to set up
a "race to the bottom" where, in a search for regulatory market share,
regulators will compete with each other to attract insurers by lowering
consumer protections. Consumers can not allow this race to get started
anymore than insurers would agree to a system where consumers could vote
to decide which regulator would oversee the insurance industry (creating
a race in the other direction).

When the NAIC began its process to head off federal oversight, consumer
groups came together to write a white paper to list the consumer
protections we sought. That paper, "Consumer Principles and Standards
for Insurance Regulation," is attached to this statement. It presents
the principles by which consumers will measure any proposal for
insurance regulatory reform, be it state or federally based.

##### Federal Options 

At the moment, federal regulatory options include the Hollings Bill, the
optional federal charter idea espoused by part of the insurance
industry, a simple bill that would repeal the antitrust exemption
combined with oversight of the delegation of insurance regulation to the
states and, perhaps, minimum standards for regulatory effectiveness and
efficiency.

####### Hollings Bill

Only one bill before Congress considers the consumer perspective in its
design, adopting many of the proposals made in our white paper. That is
S. 1373 by Senator Hollings.

The bill would adopt a unitary federal regulatory system under which all
interstate insurers would be regulated. Intrastate insurers would
continue to be regulated by the states.

The bill's regulatory structure requires federal prior approval of
prices to protect consumers, including some of the process language
(such as hearing requirements when prices change significantly) so
effectively used in Prop. 103. It requires annual Market Conduct exams.
It creates an office of consumer protection. It enhances competition by
removing the antitrust protection insurers hide behind in ratemaking. It
improves consumer information and creates a system of consumer feedback.

S.1373 is a good bill and should be the baseline for any debate on the
subject before this committee.

####### Optional Federal Charter

The bills that have been proposed would create a federal regulator that
would have little, if any, authority to regulate price or product,
regardless of how non-competitive the market for a particular line of
insurance might be. These bills represent the wish list of insurer
interests, and include minimal, if any, regulation, coupled with little
improvement in consumer information or protection systems.

As stated above, the bills put forth by the industry are an amazing
attempt to play off the federal government against the states. For
consumers, these bills are poison and cannot be fixed. If these elements
of the industry truly want to obtain "speed to market" and other
advantages through a federal regulator, let them propose a federal
approach that does not allow insurers to run back to the states when
regulation gets tougher. We can all debate the merits of that approach.

CFA and the entire consumer community stand ready to fight optional
charters with all the strength we can muster.

[Amend the McCarran Act to Provide Federal Oversight and, Perhaps,
Minimum Standards for Efficient and Effective Regulation]{.underline}

Insurers want competition to set rates, they say. How about a simple
repeal of the antitrust exemption in the McCarran Act to test their
desire to compete under the same rules as normal American businesses do?
We will then see just how much they want competition.

Another amendment to the McCarran Act we would suggest is to do what
should have been done at the beginning of the delegation of authority to
the states -- have the FTC and other federal agencies perform scheduled
oversight of the states' regulatory performance and propose minimum
standards for effective and efficient consumer protection. The Hollings
bill or the provisions of Prop. 103 might be the basis for such minimum
standards.

# CONCLUSION

Insurers talk a good competition game, but they do not walk it. Rarely
will those calling for deregulation seek to give up the antitrust
exemption or increase the provision of consumer information or do the
other things needed to make competition effective. Insurers seek to set
up systems designed to make dual regulators fight with each other for
market share by weakening consumer protections; never proposing strong
regulatory floors to avoid such a result. Most insurers do not seem to
want effective and efficient regulation. Rather they appear to want no
regulation.

Insurers seek to continue to use Congress to pressure the states into
giving up necessary consumer protections out of fear of loss of
regulatory turf. To date, the pressure on the states from the Hill has
come primarily from a few Members of Congress not in this body. I
strongly urge you to resist engaging in such activity because it is a
detriment the needs of your constituents.

I urge the Committee to continue your study of insurance regulation. The
proper focus of Congress is not to encourage mindless deregulation by
the states, but to encourage greater competition and economic
efficiencies while strengthening, not lowering consumer protection
standards.

Thank you for the opportunity to appear here today. I will be happy to
answer your questions at the appropriate time.

***Consumer Principles and Standards for Insurance Regulation***

1.  **Consumers should have access to timely and meaningful information
    of the costs, terms, risks and benefits of insurance policies.**

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

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

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

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

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

-   Free look period with meaningful state guidelines to assess
    appropriateness of policy and value based on standards the state
    creates from data for similar policies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-   Bad faith causes of action must be available to consumers.

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

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-   Private attorney general provisions should be included in insurance
    laws.

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

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

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

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

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

-   Insurance departments should support strong patient bill of rights.

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-   Focus on online monitoring and certification to protect against
    fraudulent companies.

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

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

-   Access to information sources should be user friendly.

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

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

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

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

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

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

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

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

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

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

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

-   Antitrust laws should apply to the industry.

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

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

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

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

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

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

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

6.  **Consumers should be adequately represented in the regulatory
    process.**

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

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

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-   Regulatory entities should have well-established structure for
    ongoing dialogue with and meaningful input from consumers in the
    state, e.g., consumer advisory committee. This is particularly true
    to ensure needs of certain populations in state and needs of
    changing technology are met.

## 

[^1]: Mr. Hunter served as Federal Insurance Administrator under
    Presidents Ford and Carter and as Texas Insurance Commissioner.

[^2]: There are several reasons why it is dangerous for consumers if
    regulators focus exclusively on "speed to market."

    First, consumers, who have been victimized by such abuses as life
    insurance policies that promised rates of return they could not
    give, consumer credit insurance policies that pay pennies in claims
    per dollar in premium, and race-based pricing are in no hurry for
    such policies. Second, in some trials of product deregulation in
    health insurance, policies with low prices often were found to have
    fine print that eliminated most coverage. Third, standards to ensure
    fair pricing, adequate disclosure and a more honest marketplace are
    urgently needed and should be a part of any process for faster
    product approval, particularly in the era of globalization and
    Internet sales. Fourth, CARFRA, a voluntary organization set up by
    the NAIC to offer "one-stop" approval over several states, is
    dangerous for consumers. CARFRA lacks direct accountability to the
    relevant public: consumers in affected states. There is no assurance
    that their standards for product approval will benefit consumers.
    For example, if a panel made up of Montana members approves a rate
    or policy for use in California, then it will be difficult for
    California consumers to object. CARFRA must be an independent,
    legally authorized entity with democratic processes, such as
    on-the-record voting, notice and comment rulemaking,
    conflict-of-interest standards, prohibitions on ex-parte
    communications, etc. CARFRA cannot rely on the industry it regulates
    to provide its funding. Moreover, the same issues consumers find
    dangerous in CARFRA exist in the interstate compact concept.

[^3]: Another problem with insurance is the inertia of consumers. That
    is, the reluctance to change carriers for even fairly large price
    breaks. Consumers fear that new insurers would be more apt to drop
    them after a claim than their old insurer. This inertia is a drag on
    the competitive force of consumer decisions.

[^4]: "Why Not the Best? The Most Effective Auto Insurance Regulation in
    the Nation," June 6, 2000;
    [www.consumerfed.org](http://www.consumerfed.org/).).

[^5]: [State Average Expenditures & Premiums for Personal Automobile
    Insurance in 2001]{.underline}, NAIC, July 2003.

[^6]: "Many State Legislators Involved with National Insurance
    Organization Have Close Ties to Insurance Industry," CFA, 07/09/03
    (at www.consumerfed.org).

[^7]: Of course, Mr. Forrester knows that this is a life insurer
    problem, which is not the case for his members, who are
    property/casualty insurance companies.