![](media/image1.png)

**STATEMENT OF THE**

**INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA**

**COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION**

**UNITED STATES SENATE**

**October 22, 2003**

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

Good afternoon Chairman McCain, Ranking Member Hollings, and Members of
the Committee. My name is Tom Ahart, and I am pleased to have the
opportunity to give you the views of the Independent Insurance Agents &
Brokers of America (IIABA) on the current state of insurance regulation
and IIABA's views on the role Congress can play to reform and improve
the current system. I am President of the Ahart, Frinzi & Smith
Insurance Agency in Phillipsburg, New Jersey. I am also a past President
of the IIABA.

IIABA is the nation's oldest and largest national trade association of
independent insurance agents and brokers, and we represent a network of
more than 300,000 agents, brokers and agency employees nationwide. IIABA
members are small, medium and large businesses that offer customers a
choice of policies from a variety of insurance companies. Independent
agents and brokers offer all lines of insurance---property, casualty,
life, health, employee benefit plans and retirement products.

**Introduction**

At the outset, Chairman McCain, I must note that IIABA applauds the
Committee's interest in this issue as we have many challenges facing the
state-based system of insurance regulation. It is our expectation that
this hearing will be the first step in what promises to be a
comprehensive and ongoing process, and we hope we will have the
opportunity to present our views at each and every stage of your
deliberations on these crucial questions.

In the last few years, the perceived need for reform has increased. The
enactment of financial services modernization legislation and the
emergence of an increasingly more consolidated, more global financial
services industry have sparked new interest in the concept of an
"optional" federal insurance charter and, more generally, in federal
regulation of the business of insurance. Proponents of such proposals
argue that federal insurance regulation would promote greater
uniformity, reduce costs and cause less frustration than the current
multi-state system.

IIABA believes it is essential that all financial institutions be
subject to efficient regulatory oversight and that they be able to bring
new and more innovative products and services to market quickly to
respond to rapidly evolving consumer demands. It is clear that there are
deficiencies and inefficiencies that exist today, and there is no doubt
that the current state-based regulatory system should be reformed and
modernized. At the same time, however, the current system is exceedingly
proficient at insuring that insurance consumers---both individuals and
businesses---receive the insurance coverage they need and that any
claims they may experience are paid. These aspects of the state system
are working well, and I have little doubt that this Committee will hear
any testimony to the contrary. The optional federal regulation
proposals, however, would displace these well-running components of
state regulation as well and, in essence, thereby "throw the baby out
with the bathwater."

As we have for over 100 years, IIABA supports state regulation of
insurance---for all participants and for all activities in the
marketplace. Yet despite this historic and longstanding support, we are
not confident that the state system will be able to resolve its problems
on its own. In fact, we feel there is a vital role for Congress to play
in helping to reform the state regulatory system, and such an effort
need not replace or duplicate at the federal level what is already in
place at the state level. We propose that two overarching principles
should guide any such efforts in this regard. First, Congress should
attempt to fix only those components of the state system that are
broken. Second, no actions should be taken that in any way jeopardize
the protection of the insurance consumer, which is the fundamental
objective of insurance regulation.

Under the proposal that IIABA has been developing in conjunction with a
broad-based group of insurers and insurance producers, these overarching
principles would be satisfied through an approach under which---

> \(1\) Every insurer, agent and broker would be subject to only a
> single---albeit a state---regulator for licensing determinations,
> solvency regulation, financial audits, corporate transaction reviews
> and corporate governance requirements;
>
> \(2\) The procedures under which states review proposed insurance
> policy forms would be limited to 30 days, and the requirements that
> apply to rate approvals essentially would be eliminated for any
> insurance coverage sold in a "competitive" marketplace; and
>
> \(3\) Although no substantive consumer protection requirements would
> be eliminated or displaced, incentives for states to create compacts
> to streamline the market conduct examination process would be provided
> and limitations would be placed on the ability of state regulators to
> conduct "fishing expedition"-type examinations.

To explain the rationale under girding this approach, I will first offer
an overview of both the positive and the negative elements of the
current insurance regulatory system. I will then provide a more complete
explanation of IIABA's proposal to address the negative while retaining
the positive elements of the current system.

**1. The Current State of Insurance Regulation**

As the United States Supreme Court has so aptly put it, Number range
CHAPTER"\[p\]erhaps no modern commercial enterprise directly affects so
many persons in all walks of life as does the insurance business.
Insurance touches the home, the family, and the occupation or the
business of almost every person in the United States."[^1] "It is
practically a necessity to business activity and enterprise."[^2]
Insurance serves a broad public interest far beyond its role in business
affairs and its protection of a large part of the country\'s wealth. It
is the essential means by which the "disaster to an individual is shared
by many, the disaster to a community shared by other communities; great
catastrophes are thereby lessened, and, it may be, repaired."[^3] Thus,
it is "the conception of the lawmaking bodies of the country without
exception that the business of insurance so far affects the public
welfare as to invoke and require governmental regulation."[^4] Since the
inception of the business of insurance in the United States, it is the
states that have carried out that essential regulatory task. Today,
state insurance departments employ over 11,000 individuals and address
hundreds of thousands of consumer complaints and inquiries annually, and
they draw on over a century-and-a-half of regulatory experience they
endeavor to protect the insurance consumers of this country.

These core regulatory tasks of state insurance regulators can
essentially be divided into the following eight categories:

> \(1\) Regulation of the coverage parameters of insurance contracts;
>
> \(2\) Sales practices regulation;
>
> \(3\) Claims practices regulation;
>
> \(4\) Claims dispute mediation/resolution;
>
> \(5\) Claims payment guarantees---state guaranty funds regulation and
> solvency regulation;
>
> \(6\) Claims payment guarantees---qualification standards and
> financial audits;
>
> \(7\) Insurer licensing, merger review and corporate governance
> regulation; and
>
> \(8\) Insurance agent/broker licensing and qualifications to do
> business regulation.

As a general matter and as explained in more detail below, the
regulatory performance of the state system on the first five of the
eight categories---all of which directly involve regulation of the
interaction between the consumer and the insurer-----is superlative. It
is only with respect to determining and monitoring insurers, agents, and
brokers' qualifications to do business and financial health that the
state system has developed the inefficiencies that are now the focal
point of the cries for reform.

> **a. The Positive**---**Protecting Consumers and Ensuring Claims Are
> Paid**

The goal of all insurance is to protect the purchaser (or their heirs)
from calamity. At its most basic level, this means that the consumer
purchases an insurance contract and, in exchange for the premium paid
for that contract, the consumer receives a promise from the insurance
company that they will be compensated for any losses they experience
that are covered under that contract. From the consumer perspective, it
is imperative that the insurance contract be adequate for their needs
and that the insurer actually pay any claims that are made under that
contract. In both of these respects, the historical performance of state
insurance regulators is impeccable---they ensure that necessary coverage
minimums are included in insurance contracts and, perhaps even more
importantly, they make sure legitimate claims are paid.

Regulators play two very distinct roles in ensuring that claims are
paid. First, they are responsible for guaranteeing that funds are
available to pay any and all claims that arise. Despite their best
efforts to oversee and audit insurers' financial solvency, insurance
companies---like national banks and savings and loans---sometimes fail.
The state system of insurer guaranty funds---which are like Federal
Deposit Insurance Corporation (FDIC) insurance but for insurance
companies instead of banking institutions---works. It has paid out over
\$11 billion to cover claims asserted against insolvent insurers since
they were first created in the mid-1970s, and none of that money has
been at taxpayer expense.

Second, state regulators play a vital role in mediating disputes that
arise on a daily basis between consumers who have submitted claims and
insurers who contend that the claims either are illegitimate or are not
covered by the insurance policy. The respective bargaining positions
between tens of millions of insureds---such as individuals and small
businesses---and their insurers is tremendously skewed. Insurance
consumers therefore regularly rely on the intervention of state
regulators on their behalf when claims disputes arise. Large segments of
every insurance department in the country are dedicated to assisting
with the resolution of such disputes, and all available evidence
suggests that insurance consumers are very satisfied with those local
efforts.

**b. The Negative**---**Product Regulation and Duplicative Oversight**

As you will hear from the testimony give today, it becomes evident that
all of the perceived shortcomings of state regulation of insurance fall
into two primary categories---it simply takes too long to get a new
insurance product to market, and there is unnecessary duplicative
regulatory oversight in the licensing and post-licensure auditing
process.

In many ways, the "speed-to-market" issue is the most pressing and the
most vexing from both a consumer and an agent/broker perspective because
we all want access to new and innovative products that respond to
identified needs. The reality of today's marketplace is that banking
institutions and securities firms are able to develop and market new and
more innovative products and services quickly, while insurance companies
are hampered by lengthy and complicated filing and approval requirements
in 50 states. As a result, insurance companies ---and, derivatively,
agents and brokers selling their products and services---are at a
competitive disadvantage compared to their counterparts in other
financial services industries.

Today, insurance rates and policy forms are subject to some form of
regulatory review in nearly every State, and the manner in which rates
and forms are approved and otherwise regulated can differ dramatically
from State to State and from one insurance line to the next. While most
insurance codes provide that policy rates shall not be inadequate,
excessive or unfairly discriminatory, and that policy forms must comply
with state laws, promote fairness, and be in the public interest, there
are a multitude of ways in which States currently regulate rates and
forms. These systems include prior-approval, flex-rating, file-and-use,
use--and-file, competitive-rating and self-certification. These
requirements are important because they not only affect the products and
prices that can be implemented, but also the timing of product and rate
changes in today's competitive and dynamic marketplace.

The current system, which may involve seeking approval for a new product
or service in up to 55 different jurisdictions, is too often
inefficient, paper intensive, time-consuming, arbitrary and inconsistent
with the advance of technology and regulatory reforms made in other
industries. As you have heard previously, it often takes two years or
more to obtain regulatory approval to bring new insurance products to
market on a national basis. Cumbersome inefficiencies create opportunity
costs, and the regulatory regime in many States is likely responsible
for driving many consumers into alternative markets mechanisms. As a
result, the costs of insurance regulation are exceeding what is
necessary to protect the public, particularly in the area of commercial
insurance. In order to keep insurers competitive with other financial
services entities and maximize consumer choice in terms of the range of
products available to them, changes and improvements are needed.

Similarly, insurers are required to be licensed in every State in which
they offer insurance products, and the regulators in those states have
an independent right to determine whether an insurer should be licensed,
to audit its financial solvency and market-conduct practices, to review
mergers and acquisitions, and to dictate how the insurer should be
governed. With the exception of market-conduct examinations, it is
difficult to discern how the great cost of this duplicative regulatory
oversight is justified, especially in light of the fact that the
underlying solvency requirements are essentially identical from State to
State. Market conduct examinations present a somewhat more thorny issue
because, although the majority of sales and claims practices
requirements and prohibitions are similar across the country, there are
local variations. It is, of course, difficult for a regulator to
determine compliance with another jurisdiction's requirements. At the
same time, it seems wholly unnecessary for each regulator to examine
every insurer on every aspect of their compliance practices given that
there is such an extensive overlap in requirements.

**2. Solutions**

Although heroic efforts have been made to date, state regulators and
legislators face the near impossible challenge of addressing and
remedying the identified deficiencies unilaterally. For the most part,
these reforms must be made by statute, and state lawmakers face
practical and political hurdles and collective action challenges in
their pursuit of such improvements on a national basis. Despite the
actions of the States on producer licensing reform over the last two
legislative sessions, real-world realities suggest that it is
extraordinarily difficult, if not impossible, to pass identical bills
through the 50 state legislatures

Although the proposed optional federal regulation proposals might
correct certain deficiencies, the cost is incredibly high. The new
regulator would serve to add to the overall regulatory
infrastructure---especially for agents and brokers selling on behalf of
both state and federally regulated insurers---and undermine sound
aspects of the current state regulatory regime. The best characteristics
of the current state system from the consumer perspective would be lost
if some insurers were able to escape state regulation completely in
favor of wholesale federal regulation. Federal models propose to charge
a distant and likely highly politicized federal regulator with the
implementation and enforcement of a single set of rules that would apply
equally across all States and all insurance markets. Such a distant
federal regulator may be completely unable to respond to insurance
consumer claims concerns and its mere creation could spark fears that
this will prove to be the case. Nor can a single regulatory system
harmonize the diversity of underlying state reparations laws, varying
consumer needs from one region to another, and differing public
expectations about the proper role of insurance regulation. The
potential responsiveness of a federal regulator to both industry and
consumer needs in several critical areas could therefore jeopardize the
fundamental purpose of insurance regulation and must be considered
questionable at best.

**This year, Sen. Fritz Hollings (D-S.C.) has introduced the Insurance
Consumer Protection Act (S. 1373).  This legislation takes a very
dramatic approach by proposing to repeal the McCarran-Ferguson Act.  In
addition, S. 1373 would create a "Federal Insurance Commission," an
independent panel within the Department of Commerce. The commission
would be the sole regulator of all interstate insurers offering property
and casualty insurance as well as life insurance. As with any proposal
that would shift regulation from the states to the federal government,
IIABA strongly opposes this legislation.**

**There are several key components to S. 1373 that IIABA strongly
objects to. Under this legislation, a newly formed commission would have
full authority over both rates and policies, while at the same time
allowing consumers to have a right to challenge rate applications before
the commission. The commission would also be responsible for licensing
and standards for the insurance industry, annual examinations and
solvency reviews, investigation of market conduct, and the establishment
of accounting standards. The bill would also allow the commission to
investigate the organization, business, conduct, practices and
management of \"any person, partnership or corporation in the insurance
industry.\"  It would appear that insurance agents and brokers would
fall under this definition. IIABA believes that by creating this
commission, S.1373, would only take everything that is wrong with the
current state system and shift it to the federal level, where there is
even less accountability. We are specifically troubled that this
legislation would regulate agents from all states and for all lines of
business who do business across a state line in what will inevitably be
a new massive Washington bureaucracy. While IIABA does have problems
with the current multi-state licensing system, we think that adding
another layer of regulation on top of this** is a big problem.

We believe that the states are better positioned to accommodate
diversity and to respond to change. However, weaknesses exist in state
regulation today. Unnecessary distinctions among the States and
inconsistencies within the States thwart competition, reduce
predictability and add unnecessary expenses to the cost of doing
business. Similarly, outdated rules and practices do not serve the goals
of regulation in today's financial services marketplace. Nevertheless
and as noted previously, there is much that is good about the current
state-based system that would be jettisoned through the creation of a
federal regulator, including an enforcement infrastructure upon which
consumers throughout the nation heavily rely to protect their interests.
Federal charters and the establishment of a full-blown, unprecedented,
untested and likely politicized regulatory structure at the federal
level are not the answer.

What is needed is a third way---a system that builds on, rather than
dismantles, the States' inherent strengths to meet the challenges of a
rapidly changing insurance environment. It must include mechanisms to
promote the establishment of more uniform and consistent regulations and
regulatory procedures, but must be poised to respond faster and more
fully to the reality of electronic distribution and to emerging industry
trends such as globalization and consolidation. It must modernize areas
in which existing requirements or procedures are outdated, while
continuing to impose effective regulatory oversight and necessary
consumer protections. The result, for all stakeholders, should be a more
efficient, modernized and *workable* system of insurance regulation.

For the last year, IIABA has been spearheading a cooperative attempt to
develop just such a proposal. We have been working with other trade
associations and directly with an array of national and regional
insurers in an effort to identify precisely what must be fixed and how
that might be done without displacing the components of the current
system that work so well and without creating additional layers of
government bureaucracy. Through this process, four specific areas for
reform and the constraints on the mechanisms for that reform have been
identified, and we have begun assembling a draft proposal for
accomplishing these reforms. In my remaining testimony, I will outline
the four components of this draft proposal.

**a. Rate and Form Filing and Review/"Speed to Market" Reform**

As previously discussed, the product regulation requirements in most
States require insurers to file new rates and forms with the insurance
commissioner and obtain formal regulatory approval before introducing
them in the marketplace. Accordingly, an insurer that wishes to
introduce a new product on a national basis may be forced to seek
approval in up to 55 different jurisdictions. The process can be
inefficient, paper intensive, time-consuming, arbitrary and inconsistent
with the advance of technology and the regulatory reforms made in other
industries. These cumbersome inefficiencies create unnecessary costs and
delays, reduce industry responsiveness and drive many consumers into
alternative market mechanisms. The regulatory regime in many States
exceeds, in terms of scope and cost, what is necessary to protect the
public.

In evaluating potential solutions to these problems, it is essential to
recognize that uniformity is very difficult to achieve for property and
casualty lines product regulation. Due to geography and other factors,
some States must take into account issues that other States need not
address. In addition, States may subject rates and forms to different
levels of regulatory scrutiny, and personal lines and commercial lines
products might also be treated differently.

Consumer protection concerns also limit the range of potential options
to some extent. The concern is that the quicker and easier it is to have
a new product or rate approved, the less protection consumers will
receive. The solution thus must strike a balance between timely and
quality reviews and appropriate consumer protections. In addition, "race
to the bottom" and "turf" concerns have to be taken into account.
Particularly under a scheme that employs a single point of review,
States that use more stringent rate and form processes will be hesitant
to accept the introduction of products or policies approved under more
lenient guidelines. We believe it is possible, however, to strike an
appropriate balance between realizing meaningful speed-to-market reform
and protecting consumer interests.

Based on these objectives and considerations, the IIABA proposal is
designed to do three things: (1) make the system more market-oriented;
(2) make the system faster; and (3) create greater accountability. On
the *form approval* side of the equation, this would be accomplished by
preempting any state law that requires more than allowing all proposed
forms (both commercial and personal lines) to be used no later than 30
days after they have been filed with the insurance commissioner unless
the rate or form is disapproved within that time period. Under such a
system, an insurer must at most file a proposed form with the insurance
department 30 days in advance of the proposed effective date, and the
form must be used at that time unless affirmatively disapproved by the
regulator. If a department affirmatively approves the filing at any time
within the 30-day period, the insurer may use the form immediately.
Under the proposal, regulators would be entitled to a single 15-day
extension of this disapproval period if an approval application is
incomplete, and more permissive state filing/approval requirements would
not be affected.

Under this approach, the current requirement that filings be done in
every state in which the product will be offered would not be disrupted
and current state form requirements would not be preempted (except as
discussed below). In both the personal and commercial lines context, any
disapproval must be articulated in writing and be based substantively on
a properly promulgated statute, regulation or final court order. Many
regulators have historically disapproved policy forms based on
unpublished and unsubstantiated "desk drawer rules," but such actions
would be impermissible under our approach. As noted previsously, more
permissive form filing and approval requirements would not be displaced
by the federal rules.

Under our draft proposal, *rate approval* is treated much differently
than form approval because the competitive market generally is the most
efficient and effective regulator for rates. At the same time, in
markets that are not sufficiently competitive, regulators need to retain
the ability to monitor rates and to intervene to disapprove rates when
necessary. Accordingly, under the draft proposal, any regulatory review
requirement for rates in competitive markets that requires more than the
filing of the rates with the insurance department would be preempted.
States, however, will remain empowered to approve or disapprove rates in
"non-competitive" markets if an affirmative finding has been made
determining that the market is "non-competitive." That determination
would be subject to federal court scrutiny under the proposal.

**b. Producer Licensing**

Insurance agents and brokers must be licensed in every State in which
they conduct business, and many producers face considerable hurdles in
complying with inconsistent, duplicative and unnecessary licensing
requirements when they operate on a multi-state basis. Although state
licensing reforms adopted over the last two years offer great promise,
additional improvements and refinements are necessary. The core proposal
that we are developing to address this problem is to mandate licensing
reciprocity in all states and thus achieve meaningful licensing reform
that is national in scope. This could be accomplished by prohibiting a
State in which an agent or broker is seeking to be licensed on a
non-resident basis from imposing any licensure requirement on that
person other than submission of proof of licensure in their home state
and the requisite fee. Under a reciprocal licensing system that is
national in scope, any individual agent or broker would only be
confronted by a single set of licensing requirements.

The largest potential impediment to such a proposal is the concern by
some that it could create incentives for certain States to establish
lenient requirements with the hope that producers might flock there for
resident licenses. Such a "race to the bottom" would be detrimental to
the goal of fair, responsible regulation. To address the concern, the
draft proposal would empower the NAIC to establish minimum standards for
licensure. Only agents or brokers licensed as a resident in states that
satisfy these minimum standards would be able to benefit from the
preemption of state licensing authority over non-resident agents. If an
agent or broker resides in a state that does not adopt the
minimum-licensing standards, the proposal would explicitly enable that
producer to apply to a state in which they do business and that has
adopted such minimum standards to be licensed as a resident. Through
this mechanism, Congress also could dictate minimum licensing standards.
Under the draft proposal, for example, the minimum licensing standards
would be required to include the performance of a criminal background
check, utilization of standardized licensing cycles and application
forms and fees in the filing process, imposition of a standardized trust
account requirement for use in any state that requires maintenance of
such accounts, and the mandatory availability of agency-level licenses.

**c. Company Licensing/Transaction Review/Corporate**

**Governance/Insolvency Standards/Financial Audits**

Like insurance agents and brokers, insurers currently must be licensed
by every State in which they do business. They also must satisfy a
variety of corporate organization, solvency and governance requirements
and go through multiple reviews of proposed corporate transactions (i.e.
change in control, mergers and acquisitions) and financial audits.
Insurers need a single set of requirements; requisite compliance with
the rules of multiple states creates delays and adds unnecessary costs
without adding any tangible consumer benefit. Compliance with multiple
audit procedures also is needlessly inefficient, costly and
administratively cumbersome for insurers.

As in the insurance producer context, in developing potential solutions,
the possibility of a race to the bottom and regulatory turf concerns of
state insurance departments must be considered. In particular, state
insurance departments likely will be hesitant to accept licensing,
solvency and auditing determinations made by other States where the
insurer does a significant amount of business in their States.

Regulation in this area also must contemplate the financial risks at
stake if insurer solvency is not sufficiently regulated and companies
become financially unsound. Concerns about possible strains on the
guaranty system and the need for bailouts (such as in the savings-and
loan-crisis) are never far from the surface when dealing with this area
of regulation.

To remove duplicative and inconsistent requirements and examination
procedures while at the same time maintaining sufficient protection for
policyholders and the public, the proposal for companies tracks the
producer licensing proposal by preempting the ability of all States to
impose any licensing/transaction, review/corporate or
governance/solvency standards or requirements on any non-resident
company that is licensed by a State that is accredited by the NAIC. An
insurer would be able to select as its "home state" either its State of
domicile or its State of incorporation. States still would be free to
require non-resident companies to be licensed but only upon proof of
home-state licensure and the submission of a fee. The draft will clarify
that any company that satisfies such federal "passport" requirements can
offer products in a non-resident state even if the state does not try to
license them through the federally approved process (if the state does
license in a federally permissible way, an insurer would have to comply
with the state requirements, however). Hence, although any State could
impose more stringent requirements on its resident companies, the system
would remain uniform from the perspective of each individual insurer
because each insurer would need to comply with only one set of
substantive requirements.

To stem a potential "race to the bottom," a company will be required to
be licensed in an "accredited" state in order to use its license as a
passport to do business in other states and have the preemption outlined
above apply to its activities in those non-resident states. The
legislation would empower the NAIC to continue to conduct the
accreditation process, subject to two new requirements.

First, additional accreditation requirements would have to be
incorporated into the NAIC's accreditation requirements, including the
new producer licensing minimum standards and any company minimum
licensing, solvency or other standards that Congress chose to
incorporate.

Second, the NAIC's accreditation criteria and any determination that a
State is (or is not) accredited would be subject to review and
disapproval either by a federal agency or by a federal court. Such
oversight would be limited to reviewing NAIC determinations regarding
what standards must be satisfied to become accredited and applications
of those standards to states that have applied for accreditation.

To ensure that no company would be penalized (and thus unable to qualify
for the "passport" rights) by virtue of the fact that it is domiciled in
a non-accredited state, the legislation would permit an insurer to
choose an alternative state of "residence" for licensing purposes if its
state of domicile and its state of incorporation both are not
accredited. Tentatively, the legislation will allow such an insurer to
be licensed in the accredited state in which it does the most business
based on premium volume. This should increase the pressure on all states
to become accredited.

The legislation also must account for the possibility that the NAIC will
refuse to implement the program and/or that the States will decide to
boycott the process. In either event, the legislation will incorporate
the back-up provisions included in NARAB. Hence, either if the NAIC
refuses to implement the accreditation procedures as required under the
Act or if a majority of States do not become accredited within a
specified number of years, an independent body would be established
either to stand in the shoes of the NAIC in conducting the accreditation
process or---if States refuse to comply---to act as a licensing
clearinghouse so that insurers will qualify for the
licensing/solvency/etc. single set of requirements envisioned under the
overarching approach. The proposal utilizes a combination of the NARAB
back-up provisions and the Risk Retention Act non-resident state
regulatory provisions to create these fall-back sets of provisions. The
tighter they are designed, the less likely it is that the NAIC and/or
the States will refuse to comply with the intended NAIC accreditation
procedures.

**d. Market Conduct Examinations**

Insurers are subject to examinations from insurance departments in
multiple States. Exam procedures are inefficient and requirements are
duplicative as a result of lack of coordination between States. Multiple
exams are costly and administratively cumbersome for insurers. There
often does not appear to be a sound justification for the examination
and there are no restrictions on most insurance department's exercise of
their market conduct examination power.

At the same time, however, it must be noted that market conduct directly
involves consumer protection issues and, as a result, turf concerns and
political concerns can be prevalent. Moreover, the focus of market
conduct examinations is supposed to be on sales practices that occur
where the customer is located rather than where the company resides,
undermining the practicality of mandating a home-state regulation
approach.

To reduce the administrative costs of compliance by clarifying the
circumstances under which a regulator of a non-resident insurer may
conduct examinations, the frequency with which such examinations may be
conducted, and the review procedures that will apply, the proposal would
require that, in the non-resident state, examinations may be conducted
only to review compliance with properly promulgated statutory and
regulatory requirements, and that no insurer can be deemed to have
"failed" such an examination unless it is provided with an explanation
in writing that sets forth the statutory and/or regulatory requirement
that allegedly has been violated. The proposal includes a provision
permitting any claim that a regulator is exceeding the scope of his or
her authority to be brought in federal court.

In an effort to facilitate greater coordination of market conduct
examinations where appropriate, the proposal includes a provision
authorizing and encouraging the use of multi-state compacts to
facilitate market conduct examinations.

**[Conclusion]{.underline}**

Although IIABA supports the preservation of state regulation of the
business of insurance, we believe that reforms to the current system are
necessary and essential. Specifically, IIABA believes the best
alternative for addressing the current deficiencies in the state-based
regulatory system is a pragmatic, middle-ground approach that utilizes
federal legislative tools to foster a more uniform system and to
streamline the regulatory oversight process at the state level. By using
federal legislative action to overcome the structural impediments to
reform at the state level, we can improve rather than replace the
current state-based system and in the process promote a more efficient
and effective regulatory framework.

Rather than employ a one-size-fits-all regulatory approach, a variety of
legislative tools could be employed on an issue-by-issue basis to take
into account the realities of today's marketplace and to achieve the
same level of overall reform as the imposition of a federal regulator.
The specific ideas outlined above are just a few of the many specific
solutions that could be adopted under this type of approach. Instead of
relying on the agenda of a displaced and possibly politicized federal
regulator, however, insurance regulation would continue to be grounded
on a more solid foundation---the century-and-one-half worth of skills
and experience that the States have as regulators of the insurance
industry. The advantage of this approach is that it offers the best of
all worlds. It will promote the establishment of more uniform standards
and streamlined procedures from State to State, protect consumers while
enhancing marketplace responsiveness, and emphasize that the primary
goals of insurance regulation can best be met by improving, not
abandoning, the state-based system that has been in place for over 150
years.

[^1]: *United States v. South-Eastern Underwriters Ass\'n*, 322 U.S.
    533, 540 (1944).

[^2]: *German Alliance Ins. Co. v. Lewis*, 233 U.S. 389, 415 (1914).

[^3]: *Id.* at 413.

[^4]: *Id.* at 412.