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THE NEED FOR INSURANCE REGULATORY REFORM

HEARING

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS,

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 3, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–66

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

DEBORAH PRYCE, Ohio 

RICK RENZI, Arizona 

RICHARD H. BAKER, Louisiana 

CHRISTOPHER SHAYS, Connecticut 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SHELLEY MOORE CAPITO, West Virginia 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

BLACKBURN, MARSHA, Tennessee 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

JEB HENSARLING, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

(V)

C O N T E N T S 

Page 

Hearing held on: 

October 3, 2007 ................................................................................................. 1

Appendix: 

October 3, 2007 ................................................................................................. 55

WITNESSES 

WEDNESDAY, OCTOBER 3, 2007

Bell, Hon. Walter, Commissioner, Alabama Department of Insurance, and 

President of the National Association of Insurance Commissioners ............... 10

Bykowski, John, President and Chief Executive Officer, SECURA Insurance, 

on behalf of the National Association of Mutual Insurance Companies ......... 11

Condron, Christopher M., Chairman of the Board and Chief Executive Officer, 

AXA Equitable Life Insurance Company, on behalf of the American Council 

of Life Insurers ..................................................................................................... 13

Counselman, Albert R., CPCU, President and Chief Executive Officer, 

RCM&D, Inc., on behalf of The Council of Insurance Agents & Brokers ........ 15

McCartney, William H., Senior Vice President, Insurance Regulatory Policy, 

United Services Automobile Association, on behalf of the American Insurance Association ................................................................................................... 17

Soto, Alex, CPCU, ARM, President, InSource, Inc., on behalf of the Independent Insurance Agents & Brokers of America, Inc. .................................... 19

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 56

Bell, Hon. Walter .............................................................................................. 58

Bykowski, John ................................................................................................. 80

Condron, Christopher M. ................................................................................. 91

Counselman, Albert R. ..................................................................................... 101

McCartney, William H. .................................................................................... 122

Soto, Alex .......................................................................................................... 136

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Statement of the National Association of Professional Insurance Agents ... 152

Royce, Hon. Edward R.: 

Letter to the NAIC Reinsurance Task Force from the European Commission on Internal Markets .............................................................................. 156

(1)

THE NEED FOR INSURANCE 

REGULATORY REFORM 

Wednesday, October 3, 2007

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:37 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Moore of 

Kansas, Scott, Bean, Hodes; Pryce, Hensarling, Baker, Shays, Manzullo, Royce, Capito, Garrett, Gerlach, Davis of Kentucky, Roskam, 

and Marchant. 

Ex officio: Representative Bachus. 

Also present: Representatives Pomeroy and Fossella. 

Chairman KANJORSKI. The hearing of the subcommittee will 

come to order. 

I ask unanimous consent that Mr. Pomeroy and Mr. Fossella be 

permitted to participate in today’s hearing. Without objection, it is 

so ordered. Also, without objection, all members’ opening statements will be made a part of the record. 

We meet this afternoon to review and discuss the need for insurance regulatory reform. Now that we have completed our initial 

work in the House on extending the Terrorism Risk Insurance Act 

for a second time, I am pleased that we can finally turn our attention to another important insurance issue. 

This hearing is the first in a series that we will convene on insurance regulatory matters during the 110th Congress. Although 

we have already reviewed this topic in a variety of ways during 

about two dozen hearings since the start of the decade, approximately one-third of the members joined the Capital Markets Subcommittee this year. This hearing, therefore, will give them an opportunity to begin to learn the issues. It will also provide veterans 

of our panel with a fresh look at these matters. 

The vast majority of interested parties in the debate on insurance regulatory modernization, myself included, agree that there is 

no longer a question of whether or not to pursue reform. The question we must answer is how best to achieve this reform. To do so, 

we must start at the beginning and establish in this Congress a 

better appreciation of the industry’s needs, a clearer understanding 

of recent developments in the domestic insurance marketplace and 

2

world stage, and an enhanced awareness of the policy 

underpinnings of the industry’s existing regulatory structure. A 

careful examination of these points will help to lay the groundwork 

for any decision that the Capital Markets Subcommittee will make 

in the future. 

On this point, I want to explain, briefly, my plan for the process 

by which we ought to proceed to consider insurance regulatory reform. Today, we will hear from a number of key participants in the 

insurance industry, including the regulators, on the need for regulatory modernization. In their oral testimony, I hope that our witnesses will confine their remarks to their experiences in the current system and to any new developments in the insurance industry. I am also curious to know if any recent changes point in favor 

of or against pursuing certain regulatory reforms. 

Because many others asked to testify today, we will hear additional perspectives on the need for reform in a subsequent hearing 

or in future hearings. This issue is important and complicated. The 

imposition of the Federal Government in some form into an area 

traditionally regulated by the States has enormous implications for 

insurers, businesses, and consumers. Therefore, we should not rush 

into considering reform legislation. 

After establishing a need for reform, we will begin to explore policy options for reform. During these hearings, we will hear from a 

number of stakeholders representing a variety of views on generic 

reform options. Additionally, we will almost certainly convene separate hearings at some point on discrete issues like solvency protections, enforcement systems, product approval, and best practices 

for reform implementation. 

Before moving to finalize any legislation, I would additionally envision that we will create bipartisan, member-driven task forces to 

study targeted issues related to insurance regulatory reform and 

will put together recommendations for a bill. These task forces 

should help us to reach a consensus. I invite my colleagues to let 

me know of their interest in leading and serving on these task 

forces. 

With a solid understanding of these complex issues, this subcommittee, and eventually the U.S. Congress, can make meaningful, well-thought-out reforms. This process is not a sprint. We need 

to review these issues and the potential consequences of changes 

to the industry, consumers, business, and the general public. 

Let me be clear: I have no battle plan, no ax to grind, and am 

open to considering all points of view. I may have inclinations toward pursuing certain reforms, but I have made no final decisions 

about how to implement such reforms and how to build a broad 

consensus that garners the support of many, not just a slim majority. I plan to work through the issues step-by-step. 

In reviewing the testimony of our witnesses today, I know they 

all hold strong opinions on which reforms might best accomplish 

their particular goals or undermine their perceived competitive advantages. American businesses and families rely on insurance 

daily. It is our job in Congress to balance the need of consumers 

to have the most innovative and worthwhile insurance products on 

the market against the economic stability and efficiency of the insurance markets. 

3

In closing, I am optimistic that through careful deliberation and 

hard work, we can identify a genuine consensus about how best to 

achieve regulatory reform in the insurance marketplace. 

I am also appreciative of the work of my ranking Republican 

member, who joined me in sending out the invitations to our witnesses. It is my hope that bipartisanship will continue to guide our 

work in this area in the months ahead. I also look forward to an 

opening dialogue today. 

The gentlelady from Ohio, Ms. Pryce. 

Ms. PRYCE. Thank you very much, Mr. Chairman. 

I would like to start by relating a story retold in the National 

Association of Insurance Commissioners’ 1995 annual report. It describes a fascinating scenario. 

It is the story of the very first NAIC meeting, described as ‘‘remarkable in its harmony.’’ The New York superintendent of insurance and the founder of the NAIC, George Miller, told the Baltimore underwriter, ‘‘The commissioners are now fully prepared to go 

before their various legislative committees with recommendations 

for a system of insurance law which shall be the same in all States, 

not reciprocal, but identical. The companies and the public will 

both be largely benefited.’’ That was in 1871. 

And 126 years later, in the 1980’s and 1990’s, the Democraticcontrolled Congress, still looking at this, criticized promises by the 

States and the NAIC to modernize the insurance regulatory system, issuing reports entitled ‘‘Failed Promises’’ and ‘‘Wishful 

Thinking.’’ 

In 2000, the NAIC appeared before this committee and promised 

the Congress uniformity in their statement of intent on modernization. In 2001, product review uniformity was sought through 

CARFRA. In 2002, the NAIC president said that CARFRA was 

being replaced by the Interstate Compact. 

Finally, in 2003, after the GAO issued a major critique of States’ 

lack of coordination and market conduct oversight, the NAIC announced that the collective action problem was too great a challenge to overcome, and they would likely be unable to meet it. 

Six years ago, at yet another hearing, Chairman Oxley asked the 

NAIC representatives, ‘‘If Congress sets a goal of 3 to 4 years for 

achieving comprehensive uniformity by NAIC for product approval, 

do you feel confident you can meet the goal?’’ The response was 

that, ‘‘The current system is not good for consumers. The goal must 

be met, and if it is not met, then there needs to be questions raised 

about whether the States can solve the problems identified.’’ Six 

years have passed, and it is clear that the problems cannot be 

solved by the States alone. 

Where progress has occurred, it has been largely because of Federal pressure. For example, the achievement of uniform solvency 

standards and reciprocal agent licensing standards has been pursuant to congressional mandates or threats. And consumers have 

been well-served by the Risk Retention Act that was passed in 

1981 to allow liability consumers to form their own self-insurance 

underwriting and purchasing groups. We have also seen progress 

with Gramm-Leach-Bliley and, hopefully, TRIA. Targeted reforms 

work. In the banking industry, the optional Federal charter has 

worked. These are not mutually exclusive efforts. 

4

I will be introducing legislation later this year with some of my 

Democratic colleagues to expand risk retention to allow businesses 

to band together to address their property as well as their liability 

insurance needs. This effort is supported by universities, hospitals, 

health-care providers and numerous other groups, and it is another 

example of how Congress can act to create more options and more 

uniformity without requiring additional Federal presence. We 

should also see if we can find the best aspects of the dual banking 

system and determine if or whether they should be applicable to 

insurance regulation. 

Along with the chairman, I am open to any and all approaches 

that move us forward in reforming the market. We can all agree 

that serious concerns have been raised about the efficacy of the 

current regulatory framework. These are inefficiencies that are 

hurting consumers and stifling innovation. We do not need to count 

back to 1871. We have had over 15 hearings and roundtables on 

insurance reform in the last several years alone. The need is clear. 

The time to act is now. 

I am ready to put my full energies into working with you, Mr. 

Chairman, and with the chairman and ranking member of the full 

committee on a package of reforms wherever we can achieve consensus and move the markets forward. 

I appreciate your holding this hearing, and I look forward to the 

testimony with an open mind, in terms of reaching some consensus. 

Thank you, sir. 

Chairman KANJORSKI. Thank you, Ms. Pryce. 

Mr. Sherman of California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I think the gentlelady from Ohio has it right in her historical 

analysis, and that is, what uniformity we have gotten from the 

States has been as a result, often, of Federal pressure. And hopefully, this hearing will do the trick again, or the series of hearings, 

and perhaps we will not need legislation, but we do need a system 

by which products can be approved more quickly. And the standards for judging whether those products meet consumer needs need 

to be more uniform. 

We have had throughout this country’s history the State regulation of insurance. I am not eager to jump away from that, but I 

am also not eager to be listening to another round of complaints 

about how long it takes to get products approved, particularly in 

the life and annuity area. 

Secondly, I would point out that, although on this panel I do not 

think we are hearing from the insurance agents—I am sure, with 

future panels, we will—I do not think any optional Federal charter 

or any of the other Federal reforms of which we are thinking will 

directly affect insurance agents. But they are important stakeholders, and more importantly, they are there on the ground, looking at the interests of consumers, and should be able to benefit us 

with their expertise. 

If we do end up having to go with an optional Federal charter, 

we have to make sure that this is not a lowest-common-denominator charter. The whole idea of forum shopping or regulator selection or hopping has the feel of it that, well, companies will just go 

to whichever regulator gives them the best deal. We need to make 

5

sure that any optional Federal charter has very strong consumer 

protections. It does not need to be a collection of each of the most 

restrictive ideas any of the 50 States can come up with, but it also 

should not be a circumstance where a Federal regulatory agency 

views itself as competing for business by trying to serve its customers, namely, the individual insurance companies. 

So I look forward to continued good consumer protection and, 

hopefully, to a faster process of approving new products. 

I yield back. 

Chairman KANJORSKI. The gentleman from Louisiana, Mr. 

Baker. 

Mr. BAKER. Thank you, Mr. Chairman. 

I certainly appreciate your continuing interest in this subject. I 

know you and I have spent many hours over the past years engaging in efforts to find some regulatory remedy for this most complex 

issue. 

Of all of the sectors of the financial world, the insurance world 

is the one that enjoys the least or the lowest rate of return on equity. It has the most regulatory barriers, and it has the most significant challenges in the political and economic world today. 

As an outgrowth of the Hurricane Katrina problem, the committee has already acted to pour the wind casualty insurance into 

the flood insurance program, which we all know is such an enormous success. We have passed recently a national catastrophe program for the State of Florida, which we are told will not adversely 

impact the taxpayers of the United States, but if you were to start 

out—for whatever reason I could not conceive—to start your own 

insurance company today and would want to sell that product nationally, you would have to go through 54 different, varying regulatory processes in order to have that product sold. 

You would then be told that in some States you can use red 

paper, in others pink, in others green; some you staple, some you 

paper clip, while others you must sort individually. In some places, 

there are countersignatory requirements. In others, it is anyone’s 

guess. 

This is a mess, and we are moving, unfortunately, in the wrong 

direction in this session of the Congress to make matters worse, 

not better. It is clear academically, intellectually, and any kind of 

‘‘ly’’ you want to apply to it, that the less we regulate industry and 

provide a more competitive environment, the more likely there is 

to be products offered at a better price to the consumer. Look at 

auto rates across this country, and look at where States act in the 

consumers’ best interest and regulate everything that moves. We 

have fewer providers, higher rates, and more disgruntled automobile insureds. 

The way for us to proceed is to find a way to lessen the regulatory burden, to allow people to innovate and, yes, even come to 

Louisiana and sell hurricane coverage if we allow free markets to 

function in a rational way. 

Mr. Chairman, I know your thoughts on these matters. I know 

how hard you have worked in the past, and I really look forward 

to working with you to find the magic cure to this problem that has 

only taken us 40 years to examine. 

Thank you. 

6

Chairman KANJORSKI. Thank you, Mr. Baker. 

The gentlelady from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Chairman Kanjorski and Ranking Member Pryce, for holding today’s hearing on insurance regulatory reform. 

In addition, I would like to thank all of our distinguished panelists for sharing their expertise with us today. 

I think it is safe to say that the members who serve on this committee would agree that America’s preeminence in the economic 

world hinges upon the health of our capital markets and on our 

global leadership in the financial services industry. 

Earlier this year, New York City Mayor Michael Bloomberg and 

U.S. Senator Charles Schumer commissioned a report on what 

changes were needed to keep the United States competitive in the 

global marketplace. One of the report’s top recommendations was 

the creation of an optional Federal charter for insurance. 

In July, Representative Royce and I introduced the National Insurance Act of 2007 to address issues of competitiveness and consumer choice. The bill would create an optional Federal charter for 

life and property-casualty insurers. Designed to emulate the regulatory structure found in the dual banking system, the NIA would 

give insurance providers the choice of being regulated at the State 

level or by the new Federal regulator. The bill gives consumers 

what they want: choice and protection. Insurance customers will 

have more pricing and product options, driven by a competitive 

marketplace freed from State price controls and regulatory hurdles, 

as Congressman Baker just alluded to. Consumer protection would 

be strengthened. 

The current State-based regulatory system has hurt the U.S. insurance industry’s ability to compete globally. In 2006 alone, the 

U.S. insurance services’ trade deficit totaled $24 billion. The current system, which requires insurers to work with 51 different 

State regulators, is burdensome and slows the time to market for 

new products sometimes by years. This discourages insurance innovation and product development. A national charter would foster 

greater industry innovation and agility. 

The insurance industry has changed and has evolved dramatically since 1871 when the National Association of Insurance Commissioners was established, but for 136 years, the regulatory system has not significantly changed. It is time to allow the insurance 

industry to move into the 21st century so we can more effectively 

compete on the global stage and provide more pricing and product 

options to our consumers. 

As a resident of and as a representative for the State of Illinois, 

I have seen firsthand the benefits to consumer pricing and to product options in a deregulated environment. We can extend those 

benefits nationally with this bill. For years, hearings have been 

held identifying the problems inherent in the current system. Insurance reform needs to happen, and we should start now. 

I look forward to your testimony and to your recommendations 

for how you feel we should proceed. 

Thank you. 

Chairman KANJORSKI. The gentleman from California, Mr. 

Royce. 

7

Mr. ROYCE. Chairman Kanjorski, I thank you. I thank you also 

for holding this hearing and for your leadership on this issue. 

I think that, you know, as to this hearing, which really focuses 

on some of the flaws in the current regulatory structure, an element of this is going to be looking at what the viable alternative 

is to this. And as Congresswoman Melissa Bean has just explained, 

she has introduced legislation, of which I am a cosponsor, but this 

is legislation that the Bloomberg-Schumer Commission and the 

U.S. Chamber Report on Competitiveness in the United States has 

recommended to us. 

Why they have recommended this? Well, if we went back a few 

years, we would have seen that the financial center of the world, 

undisputedly, was New York. But now capital is a mouse click 

away, so if you have a situation in the United States where you 

have 51 separate markets and you are trying to do business in 

those markets and you watch as insurance out of London and out 

of Tokyo and out of Hong Kong—as you watch the competitive disadvantage that the United States is in and you watch the regulatory burden and the costs of bringing new products to market, 

which can take up to 2 years now, and the cost to the consumer, 

you begin to understand why this has become a concern for economists, for industry leaders, for Senator Schumer, for Mr. 

Bloomberg, and for those who want to see this remain the financial 

capital of the world. 

Debbie Pryce is a former judge. She has a judicial temperament; 

she is patient. But as she says, she has sat through 15 hearings 

now as we have discussed the fact that we have been unable to get 

concurrence and agreement. And so these inefficiencies still remain 

across our system, this patchwork structure that we have, with 51 

different regulators that are not consistent with world-class regulation. We need a world-class regulator. 

And I believe the National Association of Insurance Commissioners has operated with the best of intentions. But, ladies and 

gentlemen, it has been 136 years. And these concerns are now concerns that have led so many prominent citizens and economists to 

ask us to look at this concept because it works so well in the banking industry, an optional Federal charter. And I think the American consumer has the most to gain. 

Let me point out for you several subsets of our own constituents 

who have the most to gain—members of the Armed Forces, onethird of whom are relocated every year pursuant to Federal order. 

Every time they move—within days, they have to move, of notification—they keep their banks, they keep their investments, their securities, but regardless of where they are moved to, they have to 

start from scratch when it comes to insurance products. All of you 

who send children away to college start from scratch when it comes 

to insurance products. 

The time and money spent whenever anybody relocates—and in 

addition, considering the compliance costs to our system of 51 State 

regulators, just for the ACLI, they did a little study on Federal regulation. What would the result be in compliance cost if there was 

one set of standards just for that segment of the industry? $5.7 billion annually. That is not including property-casualty insurers. 

8

So, in a competitive market like the one which would be created 

under an optional Federal charter, those savings will undoubtedly 

be passed on to the consumer. In this ever-changing global marketplace, we have to have a world-class regulator able to properly regulate this critical industry, and an optional Federal charter is necessary to achieve this result, especially given the fact that, under 

the WTO, the E.U. and others are going to take action given this 

cumbersome, impossible situation we have and given the fact that 

our own industry now cannot get access and cannot get entry into 

markets worldwide on insurance products because of this cumbersome system that dates back 136 years here in the United 

States. 

I yield back, Mr. Chairman. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Royce. 

Now Mr. Scott of Georgia, by way of Scranton, Pennsylvania. 

Mr. SCOTT. Absolutely, the great hometown of my distinguished 

chairman. 

Let me just say, Mr. Chairman—first of all, let me thank you for 

having this very, very important hearing on insurance regulation. 

And let me thank the ranking member, of course, as well for holding the hearing. 

I feel that this hearing is very timely, as the issue of insurance 

regulatory reform has certainly been a hot-button issue for some 

time now. Insurance regulatory reform is an issue many involved 

agree requires action; there is no question about that. However, it 

is evident that the approach to the concerns involved are certainly 

mixed at best, and that is why this hearing is so important, to hear 

the variety of concerns. 

As the insurance industry continues to be primarily regulated at 

the State level and many involved wanting increased Federal oversight, I am interested to hear the views and concerns of our distinguished witnesses as we work toward some sort of consensus of our 

distinguished witnesses. I believe we all agree that regulatory reform is, indeed, necessary, but in any type of reform, it will take 

more time, discussion and compromise on how we move forward, 

because we want to take into account the actual operations of these 

businesses and how to ensure that whatever action we do take also 

does not deter competition, that it does not loosen efficiency or increase costs of operating. From the development of global markets 

to the various and detailed policy rationales toward pursuing regulatory reform, we must take all into account and listen to both 

sides of the issue before taking any further action. 

There are some very, very critical questions that have to be answered. For example, how big will a national office of insurance 

need to be to handle the millions of consumer inquiries and complaints that State regulators receive each year? How big will that 

office be? Are there other Federal agencies that would be dealing 

with consumers that should be used as a model in this regard? 

Now, one of the complaints of some in the industry is that it 

costs too much in compliance to introduce new products. We have 

to examine that. We have to give specific examples of new products 

that have not been introduced because of the cost of regulation as 

opposed to a business decision that a product is not competitive or 

profitable. 

9

What assures that the marketplace will become no less competitive under a Federal regulator than it is currently under State regulation? 

Finally, this question: Doesn’t Congress have a duty to first use 

its significant influence, our resources, to try and help fix the current system before creating a brand-new competing system? 

The insurance industry is vital. It is the cornerstone of our financial service industry, because in it is our safety net across the 

board. It is critical that these questions be examined and thoroughly answered so that we can effectively determine the best way 

to move forward on this very critical issue of insurance regulatory 

reform. 

With that, Mr. Chairman, I yield back the balance of my time, 

and I look forward to the witnesses. 

Chairman KANJORSKI. Thank you very much, Mr. Scott. 

Well, now it is my pleasure to introduce our excellent panel: 

The Honorable Walter Bell, the commissioner of the Alabama Department of Insurance and president of the National Association of 

Insurance Commissioners; 

Mr. John Bykowski, president and chief executive officer of 

SECURA Insurance, testifying on behalf of the National Association of Mutual Insurance Companies; 

Mr. Christopher M. Condron, chairman of the board and chief executive officer of AXA Equitable Life Insurance Company—and a 

former constituent of mine who is still very active in the Scranton, 

Pennsylvania area and with the University of Scranton—testifying 

on behalf of the American Council of Life Insurers; 

Mr. Albert R. Counselman, president and chief executive officer 

of RCM&D, Incorporated, testifying on behalf of the Council of Insurance Agents and Brokers; 

Mr. William H. McCartney, senior vice president of Insurance 

Regulatory Policy, USAA, testifying on behalf of the American Insurance Association; and 

Mr. Alex Soto, president of InSource, Incorporated, testifying on 

behalf of the Independent Insurance Agents and Brokers of America. 

Gentlemen, I welcome all of you. 

I say ‘‘gentlemen,’’ because there are no ladies, Deborah, but in 

the future, I am sure there will be. 

Ms. PRYCE. We are trying. 

Chairman KANJORSKI. Under the rules, we all have received your 

printed testimony. What I would ask you to do is to summarize 

within 5 minutes, if possible, your testimony so that we can get to 

the question-and-answer period. I will not be terribly strict with 

you, but if you push me to the wall, then I will become very strict, 

and I do not want to do that. But we look forward to your testimony, and then particularly to the responses in the question and 

answer period. 

Mr. Bell? 

10

STATEMENT OF THE HONORABLE WALTER BELL, COMMISSIONER, ALABAMA DEPARTMENT OF INSURANCE, AND 

PRESIDENT OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. BELL. Chairman Kanjorski, Ranking Member Pryce, and 

members of the subcommittee, thank you for inviting me to testify 

before you on the need for insurance regulatory reform. 

As we examine our insurance system, we must take into consideration the needs of and the protection of all consumers. 

As stated, my name is Walter Bell. I am the commissioner of insurance in Alabama and the president of the NAIC. I also serve as 

vice chair of the Executive Committee for the International Association of Insurance Supervisors, which is a group of 130 countries 

worldwide. 

I am pleased to be here today on behalf of the NAIC to update 

you on our ongoing successful effort to improve the State system 

of insurance supervision. As has been stated, State insurance officials have served as a front line of U.S. insurance regulators for 

over 150 years. Our record of consumer protection and industry 

oversight is second to none in the world. 

Insurance is a unique and complex product that is fundamentally 

different from other financial services, such as banking and securities. Most consumers find themselves concerned with the insurance 

coverage or lack thereof only in a time of crisis. State regulators 

have strengthened the State insurance regulatory process in any 

number of areas, including speed to market for product, rates and 

form filing, solvency, producer licensing, and fraud detection and 

prevention. 

An ambitious speed-to-market initiative puts in place an interstate compact to develop uniform national product standards and 

to provide a central point of filing. The compact allows insurers to 

file new life insurance annuities and other wealth-protection insurance products and receive one, single, streamlined review. 

Since the last time we talked about the compact before Congress, 

it has moved from concept to reality. To date, 30 States have implemented the compact, representing over 50 percent of the insurance 

market premiums nationwide. There has been a drastic reduction 

in the major insolvencies in recent decades. Regulators can now 

identify more quickly when insurers are troubled and can react 

more quickly to protect consumers. 

In January 2005, the NAIC launched an online fraud-reporting 

mechanism. Consumers, employees, and others can now report 

wrongdoings to State enforcement authorities on a confidential 

basis. The SERFF program for electronic rate and form filings has 

been a huge success. Insurers choosing SERFF to file their products experience a much shorter turnaround time than under the 

traditional paper filing processes. Some SERFF filings are turned 

around in a single day. Currently, SERFF is being used by all jurisdictions and by over 3,000 insurance companies. 

The next time someone tells you about an undocumented sob 

story about pink paper or paper clips from the decades past, tell 

them they need to leave the Pony Express behind and enter the 

Internet age. 

11

State insurance officials remain deeply committed to achieving 

greater uniformity in the producer licensing process, demonstrated 

by the standard, uniform producer licensing application now used 

in every State. In addition, the NAIC has developed a uniform electronic system designed to help navigate State-specific requirements 

for State licenses to write insurance. Each State and in some cases 

even zip codes represent a distinct market, with varying risk, products, and price. Most of the Nation’s 4 million insurance agents and 

brokers operate today in three or fewer States. Today, companies 

of various sizes sell on an unprecedented basis products across 

State lines on a national basis. 

Some will tell you the world is changing, and we need to catch 

up to foreign countries. Let us put that argument to bed right here. 

When State insurance markets are compared to other national insurance markets around the globe, the size and scope of those 

States’ markets and, therefore, the responsibilities of the States’ 

regulators typically dwarf the markets of whole nations. Four of 

the top 10 and 26 of the top 50 insurance markets in the world are 

U.S. States. For example, Mr. Chairman, the insurance market in 

your home State of Pennsylvania is the twelfth-largest market in 

the world, larger than the insurance market of China. 

Consumer protection demands that State insurance officials be 

ever-vigilant to respond to the changing needs of consumers, the industry, and the modern marketplace. We would urge careful analysis, as has been stated, of any proposal to achieve the modernization of insurance supervision through Federal legislation. Even 

well-intended and seemingly harmless Federal legislation can have 

a negative impact on existing State protections for insurance consumers. We respectfully request Congress, consumers and the insurance industry to work with us to continue to modernize what we 

have been doing to protect consumers. 

Thank you very much for this opportunity today, and I look forward to your questions. 

[The prepared statement of Mr. Bell can be found on page 58 of 

the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Bell. 

Next, we will hear from Mr. Bykowski, the president and chief 

executive officer of SECURA Insurance, testifying on behalf of the 

National Association of Mutual Insurance Companies. 

Mr. Bykowski? 

STATEMENT OF JOHN BYKOWSKI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECURA INSURANCE, ON BEHALF OF 

THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Mr. BYKOWSKI. Good afternoon, Chairman Kanjorski, Ranking 

Member Pryce, and members of the subcommittee. 

My name is John Bykowski, and I am testifying today on behalf 

of the National Association of Mutual Insurance Companies. 

NAMIC is the Nation’s largest P&C insurance company trade association, with more than 1,400 members. 

I am the president and CEO of SECURA Insurance Companies, 

which are headquartered in Appleton, Wisconsin. Our company 

began in 1900, and we now write about $330 million in personal, 

12

commercial and farm products through 400 independent agencies 

in 13 States. And I currently serve as the chairman of NAMIC. 

NAMIC appreciates the opportunity to testify today on this very 

important issue. NAMIC supports a reformed system of State regulation. While we agree with some of the criticisms you will hear 

today, ultimately, NAMIC believes reform at the State level is 

more likely to produce better results than further Federal involvement in the insurance industry. Let me explain why NAMIC and 

an overwhelming majority of property-casualty companies feel this 

way. 

Since its inception, the U.S. property-casualty insurance industry 

has been regulated at the State level. NAMIC believes that State 

regulation has generally served consumers and insurers well over 

the years but that it has not kept pace with changing times. For 

example, long after other large national industries experienced 

sweeping deregulation, property-casualty insurance companies remained subject to some form of price controls in most States. That, 

more than anything else, must change. Other matters that deserve 

attention include the lack of uniformity among States’ underwriting restrictions, blanket coverage mandates, and arbitrary and 

redundant market conduct examinations. 

That said, NAMIC believes State insurance regulation has many 

strengths that are worth building upon. Chief among these are the 

ability of State departments to adapt to local market conditions, to 

experiment, to learn from each other, and to respond to the unique 

needs and concerns of consumers and insurers in their States. 

Unlike banking and life insurance, property-casualty insurance is 

subject to local risk factors, such as weather conditions, tort law, 

medical costs, and building codes. State regulation is able to take 

account of these differences in ways that Federal regulation would 

not. Once more, because of their thorough knowledge of local conditions, State regulators are attuned to the needs and interests of 

each State’s consumers, such as hurricane risks in Florida and 

Louisiana or earthquakes in California and Missouri. A distant 

Federal regulator would not have the ability to be as responsive to 

those same concerns. 

Many States have made progress in recent years toward adopting 

needed reforms. They have softened company licensing restrictions, 

and in most cases, they have moved away from strict rate regulation. In fact, only 16 States still require prior approval of rates. Influential national organizations representing thousands of State 

legislatures have called for the abolition of prior approval rate regulation. 

Federal intervention in insurance regulation could take several 

forms, ranging from a complete Federal takeover or to an OFC, 

such as embodied in H.R. 3200, or to the narrower Federal tools 

approach already pursued by the House Financial Services Committee in H.R. 1065, the Nonadmitted and Reinsurance Reform 

Act. 

With respect to H.R. 3200, NAMIC believes an optional Federal 

charter would lead to negative outcomes that would far outweigh 

any potential benefits, and anticipated benefits would not be realized. Let me briefly outline our greatest concerns. 

13

First, it is clear that Federal regulation has proven no better 

than State regulation at addressing market failures or in protecting consumer interests. Moreover, unlike State regulatory failures, Federal regulatory mistakes could have disastrous, economywide consequences. The Savings and Loan debacle is an example 

of what can happen. 

NAMIC is also concerned that, while proponents of Federal regulation may design a ‘‘perfect system,’’ they can neither anticipate 

nor prevent the imposition of disastrous social regulation at the 

Federal level. I quote ‘‘social regulation.’’ I mean measures that 

tend to socialize insurance costs by spreading risk indiscriminately 

among risk classes. Regulations that restrict insurers’ underwriting 

freedom often have this effect. Having the ability to accurately assess and classify the risks of loss associated with particular individuals and property is essential to the property-casualty insurance 

industry. 

Proponents of H.R. 3200 like to point out that it is ‘‘optional,’’ but 

NAMIC believes the choice offered by an optional Federal charter 

would prove illusory. The cost to a company from adopting a Federal charter is likely to be quite high, and switching back and forth 

would be impossible for smaller insurers. Most small insurers 

would be trapped in the regulatory system they initially chose. The 

result would be an unlevel playing field, since only the largest insurers would be able to afford the option of switching regulators, 

thus reducing competition in the market. 

In conclusion, NAMIC believes that, while the States have not 

acted as rapidly or as thoroughly to modernize insurance regulation, they have picked up the pace of reform and appear headed in 

the right direction. Given this recent progress and the risks associated with creating an entirely new Federal regulatory structure, 

NAMIC is convinced that reform at the State level is the best and 

most appropriate course of action for consumers and insurers alike. 

Thank you. 

[The prepared statement of Mr. Bykowski can be found on page 

80 of the appendix.] 

Chairman KANJORSKI. Thank you. 

Next we have Mr. Christopher Condron, the chairman and chief 

executive officer of AXA Equitable Life Insurance Company, testifying on behalf of the American Council of Life Insurers. 

STATEMENT OF CHRISTOPHER M. CONDRON, CHAIRMAN OF 

THE BOARD AND CHIEF EXECUTIVE OFFICER, AXA EQUITABLE LIFE INSURANCE COMPAN, ON BEHALF OF THE 

AMERICAN COUNCIL OF LIFE INSURERS 

Mr. CONDRON. Thank you, Mr. Chairman. Thank you, Congresswoman Pryce and committee members. It is nice to be here this 

afternoon. 

I am the CEO of AXA Financial and the chairman and CEO of 

our principal insurance operating subsidiary, the AXA Equitable 

Life Insurance Company. 

AXA Equitable was founded in 1859 as the Equitable Life Insurance Society of the United States, and we became a member of the 

Global AXA Group 15 years ago. And today, the AXA Group is one 

of the world’s three largest diversified insurance companies. 

14

I am also a member of the Board of Directors of the American 

Council of Life Insurers. As the principal trade association for life 

insurance companies, the ACLI’s 373-member companies represent 

93 percent of the industry’s overall assets. 

The views I express today reflect not just my experience since 

2001 while running AXA Equitable but also my prior experience as 

president and chief operating officer of Mellon Bank Corporation, 

now Bank of New York Mellon, and as the CEO of Dreyfus Corporation, the Bank of New York Mellon’s mutual-fund subsidiary. 

National banks like Mellon and mutual-fund companies like 

Dreyfus are principally regulated at the Federal level. The same 

holds true for most broker dealers. While that creates a significant 

competitive advantage, I am not here just to advocate fairer competition. I am here because the current archaic, State-based regulatory system is increasingly impairing our industry’s ability to efficiently manufacture and deliver the kinds of products and services 

that your constituents and our customers so desperately need, 

products and services that insurers are uniquely qualified to manufacture and deliver. 

For most of our 148-year history, our principal business was protecting people against the risk of dying too soon, but about 10 years 

ago, our business mix began to change. Increasingly today, our 

focus is protecting people against the risk of outliving their assets. 

We do that with variable annuities, which offer the benefits of investing in the capital markets while providing the peace of mind 

of downside guarantees. 

Insurers hold the only franchise in the financial services industry 

that can guarantee Americans that they will not outlive their assets. As a result, we are uniquely positioned to help this Nation address the challenges posed by the aging of the 77 million baby 

boomers: longer lifespans; the increasing elimination of definedbenefit pension plans; and the low levels of retirement savings. 

For us to continue to be a viable part of the solution to this Nation’s challenges, however, the need to substantially overhaul the 

current State-based regulatory system is both urgent and critical. 

And while I am encouraged that we are making progress, I am concerned that we have not effectively explained the consequences of 

failing to move quickly. 

And that may be due to just how well we have done as an industry in shielding our customers and you from what we face. Could 

you imagine the implications if the auto industry were regulated 

the way insurance is, by 50 separate States, with local regulators 

empowered to determine if cars sold in their States will be lefthand- or right-hand-drive, or when new models could come to market, or what safety features could be offered? Yet, that is exactly 

what we tolerate when it comes to insurance. 

Our current system creates numerous regulatory gauntlets 

through which everything we do must pass: our product designs; 

the capital and reserving standards we must meet; how we administer our products; our sales practices; and the licensing standards 

for our agents. The result fractionalizes our business. It is common 

for us to have a dozen or more different versions of the same product in the marketplace at the same time. 

15

There are States in which we can only sell a product that is 

three generations older than what we are allowed to sell in most 

of the rest of the country. And since an insurer’s home State regulator gets to determine capital requirements for business done nationwide, it creates the potential for erratically disparate protections of consumers within the same State. This simply makes no 

sense and it is unfair. 

At a time when most industries are increasingly looking to establish global regulatory standardization to deliver better value to customers, continuing to embrace this system does a disservice to all 

Americans. 

Candidly, I was stunned at what I found when I joined this industry 6 years ago. At Dreyfus, I could get a new product to market in all States in less than 60 days with no variations. In insurance, it is closer to a year, and the product still will not be approved in all States, and even where it is, it has often been 

changed and, in some cases, fundamentally and substantially. 

The stifling effect that this has on our ability to help solve America’s retirement security crisis cannot be overstated. It also creates 

enormous headaches and inefficiencies for our agents, which, at 

AXA alone, number over 90,000. That is one reason why thousands 

of them have come out in favor of the Federal regulation through 

groups like Agents for Change, AALU and NAILBA. 

A University of Georgia study recently estimated that the costs of this system are close to $6 billion a year more than if we had 

a single national regulator. And we all know who is paying for 

that. 

While the costs should be of concern to all of us, there is something more important at stake, and that is our ability to use our 

unique franchise to help address the retirement security crisis our 

Nation is facing. That is in your hands. 

We are not seeking easier regulation. We will gladly live with 

tough standards. What we are urgently seeking is the opportunity 

to choose uniformity in a single regulator. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Condron can be found on page 

91 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Condron. 

Our nest witness is Mr. Albert Counselman, the president and 

chief executive officer of RCM&D, Incorporated, testifying on behalf 

of the Council of Insurance Agents and Brokers. 

Mr. Counselman? 

STATEMENT OF ALBERT R. COUNSELMAN, CPCU, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, RCM&D, INC., ON BEHALF 

OF THE COUNCIL OF INSURANCE AGENTS & BROKERS 

Mr. COUNSELMAN. Good afternoon, Chairman Kanjorski, Congresswoman Pryce, and Congressman Bachus. It is a pleasure to be 

here, representing the Council of Insurance Agents and Brokers. 

My firm is the largest agency and brokerage firm in Maryland. 

We are agents, and we are also one of the 65 largest commercial 

insurance agencies and brokerage firms in the country. 

In recent years, there has been a huge convergence in this sector 

of agents and brokers. Many of the problems we see in the fragVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
16

mented State system are being exacerbated. The current regulatory 

structure is not equipped to handle an insurance marketplace that 

is international in scope. My firm serves clients in 50 States and 

in multiple countries, not unlike most council member firms, yet 

strikingly different from the local mode of operation that existed 20 

or even 10 years ago. Like the marketplace, our clients have risks 

and exposures that transcend State boundaries. The current State 

regulatory patchwork cannot keep up due to the globalization of 

the business. 

The Council is very grateful to Representatives Bean and Royce 

for introducing the National Insurance Act of 2007. The bottom line 

is that this bill provides real choice for all participants in the insurance marketplace. The critics of this bill often seem to forget that 

the Federal charter for agents, brokers, insurers and reinsurers is 

an option, period, and the success of the dual banking charter system is a simple testament to how and why it will work. 

The primary objective of insurance regulation is to monitor and 

regulate insurer solvency, the most essential consumer protection, 

as it will remain so. While some risks and insurance markets remain local or State-based, in general, insurance has become an 

international marketplace in which risks are widely spread and 

losses are widely felt. Rather than encouraging increased availability and improving affordability of insurance to cover such risks, 

the State regulatory system does just the opposite. By artificially 

making each State an individual marketplace, it constrains the 

ability of carriers to compete and, thereby, reduces availability and 

affordability. 

Let me give you a couple of examples. 

Transparency with respect to compensation is a hot issue, and 

we support uniform disclosure rules. While the States impose explicit requirements, it is impossible to satisfy the differing requirements of the States with a uniform compliance approach. For clients with exposures across the Nation and their brokers who are 

trying to serve them efficiently and economically, the differing requirements serve no apparent consumer-protection purpose. 

The second example is licensure. After the enactment of GrammLeach-Bliley and its NARAB provisions, the NAIC pledged not only 

to reach reciprocity but, ultimately, to establish uniformity in producer licensing. Most States retain a variety of individual requirements for licensing, and they all differ with respect to fees, 

fingerprinting, certifications, among other requirements. 

The 183 producers in my firm, for example, hold 183 resident licenses in four States and 512 nonresident resident licenses. As you 

can imagine, this requires significant monetary and human resources. 

Seven years after NAIC’s adoption of a Producer License Model 

Act, the regulators still cannot agree on the meaning of basic yet 

critical terms that are contained in every State law, such as what 

it means to sell, solicit, and negotiate insurance. Nor can they 

agree on the meaning of other critical provisions of the law, even 

when the language in their individual State provisions are identical word-for-word. While these may seem like small issues, and 

individually they may, taken as a whole they are significant. Commissioner Bell accurately recounts the efforts that regulators are 

17

making to achieve results at the State level, but that is no substitute for Federal action on the matter. 

My third example is speed to market. Let me give you a personal 

story. A few years ago, PAR, an errors and omissions insurer for 

whom I am a director, needed to revise its coverage form. PAR had 

to refile the coverage form in 35 States where PAR writes coverage 

for 65 insureds. After 2 years and huge cost, all 35 States approved 

the filing. Every policyholder in this insurance company is a sophisticated insurance executive. Two years and massive cost is absurd. We advocate for complete deregulation of rates and forms for 

commercial lines of insurance. 

Finally, although the NAIC has attempted to institute regulatory 

reforms without Federal involvement, the reality is that today’s 

marketplace demands far more dramatic action than the States 

alone are able to provide. Competition and efficiency in the insurance industry lag behind other financial service sectors largely due 

to the regulatory inefficiencies and the inconsistencies in the State 

regulatory system. 

I am grateful for this committee’s interest and work, but the root 

of the complaints that I see against the OFC proposal are inherently protectionist. The business of insurance and the consumers 

that business needs to serve have moved beyond artificial State 

boundaries, and it is long past time that the regulation of that 

business move beyond those artificial boundaries as well. Companies and producers should have a choice between State and Federal 

oversight, and consumers should be able to choose between companies and producers who can provide the best service and the best 

performance. 

Again, thank you, Mr. Chairman. 

[The prepared statement of Mr. Counselman can be found on 

page 101 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Counselman. 

And now, Mr. William McCartney, the senior vice president for 

insurance regulatory policy, USAA. 

Mr. McCartney? 

STATEMENT OF WILLIAM H. McCARTNEY, SENIOR VICE PRESIDENT, INSURANCE REGULATORY POLICY, UNITED SERVICES 

AUTOMOBILE ASSOCIATION, ON BEHALF OF THE AMERICAN 

INSURANCE ASSOCIATION 

Mr. MCCARTNEY. Chairman Kanjorski, Ranking Member Pryce, 

and members of the subcommittee, good afternoon. My name is 

William McCartney, and I am senior vice president, insurance regulatory policy, United Services Automobile Association in San Antonio. 

USAA was founded in 1922 by a group of 25 Army officers who 

found that they couldn’t get automobile insurance because typical 

insurers equated their frequent moves with being bad risks, so they 

started their own insurance company. Today, USAA is a fully integrated financial services company, providing insurance, banking, 

and investment products to six million current and former members of the U.S. military and their families. Our mission is to be 

the provider of choice to the military community. 

18

I am testifying today on behalf of USAA and our property casualty insurance trade association, the American Insurance Association, and the American Insurance Association’s more than 350 

members. 

Today, I will talk about an insurance regulatory framework that 

hasn’t been updated since 1945, when FDR was President and this 

Nation was at war with Germany and Japan. No other segment of 

our economy has gone that long without being modernized. We 

strongly support H.R. 3200 as a vital means of rationalizing this 

industry for consumers today. 

By way of background, earlier in my career I served for 7 years 

as Nebraska’s Director of Insurance. During that time, I was active 

in national insurance issues and served as an officer of the National Association of Insurance Commissioners for 3 of those years, 

including as NAIC president in 1992. 

I have always believed that the primary and overarching focus 

of insurance regulation must be on the financial condition of insurers, and I used to believe that the States could achieve uniformity 

and consistency of regulation without Federal intervention. In fact, 

in the early 1990’s, in a hearing before a House Energy and Commerce Subcommittee, I asked the members to give the States time 

to plug the holes in State regulation; and I told the subcommittee 

that if the States failed to do so, I would be among the first to come 

back and tell that to Congress. Well, 15 years later, here I am. 

The fact is, today’s State-based regulatory approach is misguided. 

The system of price and product controls empowers regulators, not 

consumers. It creates instability and disorder, not uniformity and 

consistency. And, finally, continuing in the current system will put 

consumers at greater risk by driving insurers out of markets, rather than promoting solvency. 

Today, let me mention just one example of how the current system does not empower consumers. As Mr. Royce said, each year a 

third of USAA’s members move at the direction of the Federal Government. I would like to tell you about one, but because he is on 

active duty right now, I have to protect his name. 

He is a sergeant who serves in the United States Army. Pursuant to Federal order, he has moved nearly every year since he enlisted. He recently purchased a vehicle in Georgia, his home of 

record, but shortly thereafter was moved to Texas. All it took was 

a change of address form to update his checking and savings accounts, credit cards, mutual funds, and retirement accounts. But 

unfortunately for this sergeant and every member of the Armed 

Forces, his automobile, renters, and umbrella insurance products 

are not portable. So, for these, the change of address form was just 

the beginning. 

Even though he had the same risk profile in Texas as he had in 

Georgia, USAA had to reunderwrite, reprice, and reissue each of 

those products on a Texas policy form, and some of the coverages 

changed because of State requirements. We also had to send him 

new proof-of-insurance cards in a Texas-specific format. Next year, 

when he moves to some other State, we will get to do it all over 

again. 

Instability and disorder, not uniformity and consistency, characterize the current system. Imagine if cell phones were regulated 

19

the way we regulate the insurance industry. What if your cell 

phone coverage ended when you crossed a State line or that the 

provider required a different model phone for each State? Would 

consumers pay for a service that required them to have three, four, 

or five plans, or carry three, four, or five different telephones every 

time they crossed a State line when on vacation or, in the case of 

our military men and women, change duty stations? Imagine the 

effect that that would have on communication. Consumers wouldn’t 

stand for it, and neither would Congress. 

And the current system puts consumers at greater risk by driving companies out of markets, rather than focusing on promoting 

solvency. In spite of the States’ continued assertions that improvements have been made and are under way, the fundamental problems have not been significantly addressed, and they cannot be. 

We are dealing with a system that has 51 regulators and 100 

separate legislative bodies. Most insurance regulators want to do a 

good job and have the best of intentions, but they are limited in 

what they can do under a regulatory design that is over 60 years 

old. 

So what should Congress do? We urge you to enact H.R. 3200, 

the National Insurance Act of 2007, sponsored by Representatives 

Bean and Royce. This bill would create a national insurance framework, but it would allow insurers that want to remain State regulated to do so. Similarly, consumers who want to deal only with insurers subject to the oversight of their State regulator could choose 

to do business only with those companies. However, consumers who 

value consistency of products and service, regardless of where they 

reside, like our men and women in uniform, could choose to do 

business with nationally regulated insurers. 

Thank you for allowing me to appear here today and for holding 

this hearing on this important issue. I look forward to responding 

to your questions. 

Chairman KANJORSKI. Thank you, Mr. McCartney. 

[The prepared statement of Mr. McCartney can be found on page 

122 of the appendix.] 

Chairman KANJORSKI. And finally, Mr. Alex Soto, president, 

InSource, Incorporated, testifying on behalf of the Independent Insurance Agents and Brokers of America. 

Mr. Soto. 

STATEMENT OF ALEX SOTO, CPCU, ARM, PRESIDENT, 

INSOURCE, INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA, INC. 

Mr. SOTO. Good afternoon, Chairman Kanjorski, Ranking Member Pryce, and members of the committee. I am the immediate past 

president of the Independent Insurance Agents of America, and immediate past chairman of the same organization. You know it as 

the ‘‘Big I.’’ 

We are 300,000 men and women across the country. We are the 

intermediaries between the insurance companies and the consumers. Because we are independent agents, we represent multiple 

insurance companies, and we thank you for holding this hearing on 

an area that is of critical importance to all consumers and our clients. 

20

The current system of State regulation does indeed work, and in 

particular State regulation does work effectively to protect consumers. State officials are positioned to respond to the needs of the 

local markets and the local consumers. Also, protecting consumers 

against insurance company insolvency, which is the primary goal 

of the regulator, is done effectively at the State level, I think most 

people would agree. 

However, the State system also has been rightly characterized as 

slow and inefficient, with different laws and regulations that add 

unnecessary expense; and we believe that congressional legislative 

action is necessary to help reform the State regulatory system. The 

IIABA believes that the best method of addressing the deficiencies 

is a pragmatic, middle-ground approach that utilizes Federal legislative tools to establish the greater interstate consistency in key 

areas, and so we navigate the middle ground in the various positions. 

Evidence of the viability of this approach is the Nonadmitted and 

Reinsurance Reform Act, which passed the House overwhelmingly 

by voice vote this year and unanimously last year. Unlike other reform proposals, this legislation has near unanimous support. 

An additional area where targeted reform could be achieved is in 

the area of agent licensing. We already talked about it. 

The more serious challenges facing the people that I represent, 

my constituents, is a redundancy in the cost requirements arising 

when seeking nonresident residence licenses, and Mr. Counselman 

already alluded to that. 

In most States, a person such as myself who wants to transact 

business in a neighboring State has to get three separate licenses, 

one for myself, one for my agency, and on top of that we have to 

register the corporation in each jurisdiction just to simply serve our 

clients. We believe that targeted Federal legislation preserves the 

right to States to supervise and discipline individual producers but 

would not impact the day-to-day regulation of insurance. 

I would be remiss in not discussing briefly our strong opposition 

to another suggested method to achieve reform, which is the creation of an optional Federal charter. If insurance regulation is 

shifted to the Federal Government, our agents would not be as effective in protecting consumers. Let me take the time, because time 

is brief, to give you just one simple anecdote. 

When Hurricane Andrew hit my area—and I live in Miami, Florida, and unfortunately we have lived through a number of hurricanes—we had started the year before in an orderly moving of a 

book of business from one major national insurance company to 

various companies. We had agreed not to do business together anymore, and we agreed to do it on a month-by-month basis as policies 

expired and not to disturb mortgagees, additional insureds, and the 

insureds themselves. Unfortunately, toward the end of the process, 

in August of 1992, Hurricane Andrew struck, and we found ourselves at InSource with 17 insureds who were about to be nonrenewed but had substantial damage to their properties. Roofs 

were blown off. Walls had been torn down. 

I made an appeal to this national insurance company for help. 

Please maintain the insurance for these people until they can repair the property sufficiently to get another company attracted to 

21

write their insurance. I made a home office appeal. I went through 

their government affairs officer and was turned down every single 

time. 

I then made an appeal to the insurance commissioner of the 

State of Florida, and the next day we got an emergency order requiring that insurance company, for a limited period of time, to 

renew the policies for these people. 

I am going to tell you that I cannot imagine a Federal regulator 

or series of regulators or series of ombudsmen being able to protect 

the consumers at that level, and that is why we believe in not dismantling the existing process but rather improving it. Even 

though—even though optional Federal charter is mentioned to be 

optional, it is not optional for our members and it is not optional 

for the clients that we represent, because invariably we are going 

to have to place some of them with companies that are State regulated and others that are going to be regulated by the Federal Government. We would be forced to deal with a Federal regulator and 

a State regulator. 

Proponents of OFC also assert Federal regulation is important if 

the United States is to remain a global financial services leader. 

IIABA believes that purported decline in U.S. capital markets’ competitiveness for insurance companies does not stem from State regulation but rather other U.S. competitive concerns, such as disparate tax treatment, diverse financial reporting standards, and 

excessive costs of litigation. 

So, in conclusion, we believe that targeted Federal legislation to 

improve State-based systems presents the Members of Congress 

with a compromise that is achievable and something that we can 

all work on together. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Soto can be found on page 136 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Soto. 

In listening to it, it seems we have rather diverse testimony. 

Some people think we have a problem, and others do not see it that 

way. And sometimes, I wonder whether we are providing a solution 

in search of a problem. And of course, what I mean by that is obvious, that there is no reason for us to move ahead. But I seem to 

hear a recognition from all of the witnesses that things could certainly function a lot better than they do. 

Starting with that proposition, what I would like to know is what 

would be the number one, two, and three issues that should be addressed if you had the choice of telling us what to address? Anybody on the panel who wants to take that. 

Mr. CONDRON. I would say time to market is very critical, because we are disadvantaging consumers in terms of how long it 

takes us to put a new product on the market. I will give you just 

a quick example. Our Accumulator 07 product after 7 months still 

isn’t approved in five States, and one of those States will never approve the product. 

Secondly, I would say consistency in reserve requirements. The 

way the system works now, individual States can require different 

reserves, which is basically your cost of capital, your one asset, can 

require different costs of reserves by State. So New York can reVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
22

quire different reserves than Arizona; and, as a result, companies 

end up being inconsistently regulated across the system. 

And I would say, finally, that the inability of our current system 

to allow our agents to freely work across State lines—you know, a 

simple example would be if a client moves from Pennsylvania to 

Arizona and they want to talk about their insurance policy and 

their Pennsylvania agent isn’t licensed in Arizona, they can’t talk 

to him, and he is probably not going to want to get licensed in Arizona. 

So the example that was given about moving, the USAA problems of people moving around, the State licensing system is arcane. 

No other part of financial services requires State licensing State by 

State. They have blue sky laws in the securities industry, where 

you take one exam, you are automatically licensed in every State. 

That doesn’t exist in the insurance industry. So I would say those 

would be my three. 

Chairman KANJORSKI. I think that is very good. That is a good 

start, as far as I am concerned. 

We have three elements here, none of which really requires a 

Federal charter. Time to market, we could easily do that. It is 

something we do in Pennsylvania in agriculture. If you meet the 

Pennsylvania Department of Agriculture requirements, you are capable of doing business in all 50 States in the country. That is by 

Federal act. 

We could easily say if you qualify under New York State insurance regulation or California State insurance, or whatever State we 

pick as an idealized standard, that would qualify that product that 

you are interested in getting to market immediately, so you would 

have only one market to put it through. 

The reserve requirements would be pretty much the same thing, 

that uniformizing a reserve requirement. Whatever is determined 

to be the reserve requirement in the select State or States, it would 

be uniform throughout the country. As for agents working across 

State lines, that would be in conjunction with licensing, which 

would be easy to uniformize, it would seem to me. 

Mr. CONDRON. Well, the States have been at it for a long time. 

Today, 30 States are in a compact. They have been at it forever. 

The big States aren’t there. New York is not there, California is not 

there, Florida is not there, and they are likely never to be there. 

Chairman KANJORSKI. Why is that, sir? 

Mr. CONDRON. Because each State has different rules and regulations. Some are required by the State legislature; some changes are 

required by the State senate. So the insurance commissioners 

themselves as a group, a very able and hardworking and diligent 

group of people, they have their hands tied. And you have different 

goals in different States. And you know, we have been at it for a 

long, long time now trying to get uniformity, and it hasn’t happened, and, frankly, it never will. 

Chairman KANJORSKI. Mr. Counselman? 

Mr. COUNSELMAN. Mr. Chairman, thank you. 

I come at it from a different direction, I think. I think there is 

a fundamental change in how business is done in the United States 

today versus how it was done when I came into the business, which 

was 35 years ago, when my association, the Council of Insurance 

23

Agents & Brokers, was started, which was 94 years ago; and I 

think that the fundamental change is that our clients are doing 

business nationwide and internationally. So, therefore, that is how 

we are doing business. Even if I were just one office in one city, 

I would be doing business throughout the country all the time for 

my clients and also out of the country all of the time for my clients, 

and that was the exception in the past. 

So I think that what we have now is something that was designed to fit what was appropriate when it was designed, but we 

need a fundamental change in how regulation is done today to reflect how business is done today, which is all the time, even from 

small offices of our member firms as well as from larger offices of 

member firms, business is done nationally and internationally on 

a daily basis. And so we are trying to make something fit, and it 

takes us a long time to make change through 50 legislatures, and 

we just can’t move fast enough that way anymore. 

It just doesn’t fit. The model doesn’t fit anymore, and that is why 

I think we have to take this opportunity to look at this and say, 

what is the right way to build it? How can we really protect the 

consumer? And then also at the same time allow the insurance 

companies and the agents and brokers to flourish in serving the 

consumer. 

So I think the fundamental change that we have to look at is 

completely change the structure, and that is why I think OFC is 

so important, because that will cause it to happen. 

Chairman KANJORSKI. Mr. McCartney? 

Mr. MCCARTNEY. Very briefly, Mr. Chairman. Thank you. 

And with all due respect, I think I need to disagree with the fundamental premise of your question that there are two or three or 

four issues that we can tackle and then the problem will go away. 

I just don’t believe that we can do this piecemeal. We have to have 

an approach that deals with the entire problem. 

And, you know, from my perspective, representing a company 

that represents men and women in uniform, anything that doesn’t 

cover the whole range of products probably is not going to be a satisfactory solution. 

Chairman KANJORSKI. So your theory is we need to go from this 

point to a Federal system overnight? 

Mr. MCCARTNEY. I think your analogy of how the Pennsylvania 

Department of Agriculture standard then becomes accepted in 

every other State is one that might have some merit to talk about. 

At the same time, though, it really has to have some teeth, because in the States where the Federal Government has come on 

with directions and mandates to the States in the area of insurance, by and large the States haven’t been able to get there. 

Chairman KANJORSKI. It is an interesting discussion. I do not 

mean to eat up all the time, but the discussion had a lot of the fear 

of fairness and who would have priority if we have a dual system. 

In a dual system, I see a need for insurance companies to have a 

right to do business in one single State or one or two States for 

those that do not wish to go national. But you could construct a 

system that way, and then you end up with forum shopping and 

you end up with some States setting up regimentations that are 

advantageous to attract business as opposed to accomplishing busiVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
24

ness. And you get that—we have it in some of the areas—shopping 

around, if you will, for forum or license. And rather than see that, 

we could go to a Federal system that maintains a State system 

within categories of control so that if a State system gets out of 

control, the Federal regulator would have authority to come into 

place. 

Mr. Soto? 

Mr. SOTO. Mr. Chairman, I agree with the way you started your 

statement and your question, which is if you create a laundry list 

of problem areas—and, obviously, for selfish reasons, agency reform 

and licensing reform would be about at the very top of my list, but 

also speed-to-market issues and forum regulations issues. And you 

target them and you go at them and therefore preserve those qualities that are still good in the State system. 

I mean, the fact is the State system has a lot of problems, but 

we don’t need to demonize them. So there is a lot of good experience there, wealth of background and information, and let us preserve it, but let us target the areas where we need change. 

Chairman KANJORSKI. I have to state my preference. I have great 

fear in creating another Homeland—what is the name of that agency? 

Ms. PRYCE. Homeland Security. 

Chairman KANJORSKI. The Department of Homeland Security. I 

cannot even remember the name of the agency, but it is a disaster. 

And, you know, it has been in effect for 5 years and probably will 

not get straightened out for another 5 years, because that is the 

way the Federal Government functions. 

I can’t imagine what we are going to do if we take a huge industry like the insurance industry and screw it up for 5 or 10 years 

before it gets its feet in place. It could be a disaster. You know, I 

don’t want to be a solution in search of a problem. I think that is 

what we could do if we want to do the magnificent total picture of 

reinvention. 

Anyway, I have spoken enough. Ms. Pryce? 

Ms. PRYCE. Thank you, Mr. Chairman. 

Following up on some of the issues you touched on, two things 

concern me the most about this issue. And let me just tell you what 

they are, and then you can all jump on them if you care to. 

One is the global economy and how insurance is affecting that, 

how we are working through those issues on a State-by-State basis. 

You know, we talk in this committee a lot about trade in services. 

Right now, who does represent your industry when it comes to negotiating trade deals? We have heard from Schumer and Bloomberg 

and the U.S. Chamber that we are suffering a competitive disadvantage because of State-by-State regulation. Mr. Soto disagrees 

with that. He thinks it is because of taxes and litigation, other 

things. So that is my first one. 

The other is, you know, the retirement security crisis and how 

these new products, especially on the life side of the industry, can 

contribute to helping us solve this big problem that our country 

faces, and are we as a government standing in the way of the assistance that this country really needs because we are allowing 

each State to independently and specifically regulate—perhaps regulate these solutions out of being? 

25

And so that is two big questions, and who wants to go first? All 

right. Let us hear from Mr. Bykowski. 

Mr. BYKOWSKI. Thank you. 

First of all, I would like to thank the chairman for his comments 

about concerns of creating this huge Federal bureaucracy, because 

certainly NAMIC would share those concerns. And we would like 

to talk about one of the key issues facing the regulatory reform we 

believe is the issue of rate regulation, heavy rate regulation in 

some States. In those States that have a reasonable regulatory system for handling rates you will find the most competition. 

In my home State of Wisconsin— 

Ms. PRYCE. Are you addressing either one of my problems here? 

Mr. BYKOWSKI. I can’t speak to the life insurance questions. 

Ms. PRYCE. Then how about the global economy question? 

Mr. BYKOWSKI. Well, there is no doubt that we live in a global 

economy. But the insurance world, particularly the property casualty insurance world, has to deal with the local issues that affect 

it. The problems that we have in Florida are not the same as we 

have in Wisconsin or in California. 

Ms. PRYCE. So Mr. Condron? 

Mr. CONDRON. Yes, first of all, Congresswoman, I would say AXA 

is an interesting example, because we are in 50 countries. And 

when you come outside of the United States of America and you 

say who represents the insurance industry in the United States, 

the NAIC tries to be a body that speaks for the insurance industry, 

but they can’t commit the industry. They don’t have any power to 

commit the industry. They don’t have the—they are not vested 

with the power from all the States. Each State views each issue 

differently. 

So, from a trade standpoint, we are at a competitive disadvantage globally, and I think that is something that really needs to be 

considered. Because the securities industry, the banking industry, 

and all of the other financial services industries are well represented by a Federal regulator who can represent them globally 

in the global marketplace. 

Turning to your retirement security question, let me give you an 

example. In 1975, the average price of a home in this country was 

$47,000; today, it is $181,000. In 1975, the average price of a gallon 

of gasoline was $0.57; today, it is over $3. Think about if you retired in 1975 and think about how you would be able to pay those 

incremental costs if you hadn’t invested whatever nest egg you had 

accumulated in some kind of investment that would have grown 

over time. 

And the beauty of what our industry does is we allow people to 

make investments in the securities industry, in the capital markets, and we put downside protection in place for them. So today 

someone age 60 puts $100,000 into a variable annuity contract, 

they pick whatever investment they want, and we guarantee them 

that after age 70 they can trade that investment account, regardless of how little it might be worth, for guaranteed income for life. 

So beginning at age 70 that 60-year-old could get $11,000 a year 

for life or all of the upside from their investment portfolio. Those 

are the kinds of products our industry is providing. 

26

Ms. PRYCE. And the current system is in the way of those products coming to market quickly? 

Mr. CONDRON. Sure. We can’t get those products out there. We 

can’t get them approved. And when we get them approved, there 

are different variations in different States, different minimum 

guarantees they will allow us to offer, different reserving requirements, which means different costs to the consumer. So there is an 

inconsistency. 

I will give you another example. In Chicago, in Illinois a year 

ago, there was only one person who approved any insurance products for the whole State. So everything just sat there in line waiting to be approved, and we waited a year for one of our products 

to be approved in the State. 

Ms. PRYCE. In fairness, Mr. Bell, do you want to have the few 

seconds I may get left from the chairman? 

Mr. BELL. Thank you, Congresswoman Pryce. 

You mentioned the global economy. In some of the ACLI’s representative, in terms of their talking of the global economy from 

1977 and 1987, well, if you look back 10 years ago, the global market was very different than what it is today. China had not entered 

the global market at that time. India had not entered the global 

market at that time. So two-thirds of the world population have 

come on line basically in the global economy within the past 10 to 

15 years, and so that is making a very different kind of situation 

in terms of what is going on from the Schumer report out of New 

York talking about where it is. 

Shanghai was not a marketplace. Hong Kong was a very small 

marketplace in terms of the global market. Taking the capital from 

New York, London was not even doing nearly what it is doing 

today. 

Mr. SHERMAN. [presiding] Thank you, Mr. Bell. 

The time of the gentlelady from Ohio has expired. 

We are not going to recess. I will be in this chair until Mr. Kanjorski can come back. We have one vote. 

Mr. Condron, you suggested that this Federal charter is a good 

way to be able to protect people from outliving their savings. My 

concern is that no one in the insurance industry is willing to market—it is not the regulators’ fault—an inflation-adjusted—a genuinely inflation-adjusted longevity policy. Are you aware of any insurance company that is trying to—and I don’t mean something 

tied to the stock market, I mean something tied to the Consumer 

Price Index—that is trying to market a policy that will assure 

somebody that if they outlive their savings and they live to be 100 

years old—and we all aspire to that—that they will be able to afford the then existing prices? 

Mr. CONDRON. Yes, I am not aware of any specific product on 

point, but I would make the point that it is a very doable product 

to design. 

Mr. SHERMAN. It is a doable product to design. The problem is 

not these regulators. 

Mr. CONDRON. Yes, it is. 

Mr. SHERMAN. The problem is that it is a lot easier to sell a noninflation-adjusted product, which sounds great to the 50- and 40- 

and 30-year-olds in my district, but it isn’t going to buy them a 

27

hamburger in the year 2060 or 2050 or whatever year they—in any 

case, voting for this Federal charter isn’t going to get me the kind 

of longevity protection that I would like to see from my constituents, because, as far as you know, nobody wants to sell it. 

Mr. CONDRON. We are already providing longevity protections. 

Mr. SHERMAN. But not inflation-adjusted. 

Mr. CONDRON. Not directly. But if you look at the historical performance of the stock market, it is triple the rate of inflation. 

Mr. SHERMAN. Given the phenomenally bad economic policies 

and trade policies we are following, I wouldn’t tell any of my constituents that they were safe unless they had inflation adjustment. 

And nobody wants to sell it. And it is not the regulators’ fault. You 

know your industry pretty well, and there is not anybody who is 

trying to register such a policy. 

Mr. McCartney, you put forward all the problems of somebody 

moving from Georgia to Texas. They had to be rerated. They had 

to get a new card of proof of insurance. But if we are going to solve 

those problems don’t we need to federalize the tort system and federalize the vehicle code? It occurred to me I moved from one part 

of Los Angeles to another, I had to be rerated. So, you know, the 

guy moves from Georgia to Texas, he has to be rerated. Are we 

going to have that seamless moving from Georgia to Texas if we 

just have an optional Federal charter? 

Mr. MCCARTNEY. First of all, the optional Federal charter bill, 

H.R. 3200, does not replace State tort laws or premium taxes or 

anything. 

Mr. SHERMAN. So if I move from one State to another I expose 

my insurance company to additional courtroom risks. If I move 

from one neighborhood to another, which obviously occurs in a 

State move, I expose you to higher risks or lower risks that I will 

be in an automobile accident. So if I move from one place to another, you and I are going to have a lot of paper and a lot of telephone conversations before we are done updating my policy even if 

you don’t get an optional Federal charter or you do. We still have 

all these other problems. 

Mr. MCCARTNEY. Mr. Chairman, there is absolutely no reason 

why USAA could not provide a USAA member with a 3-year policy. 

There is no reason for it to be reissued. If somebody moved from 

Nebraska to Michigan, Michigan has a no-fault law. The policy 

would provide that we will provide whatever benefits at whatever 

limits you have suggested are required by the State. There is no 

reason—it may need— 

Mr. SHERMAN. So my insurance company, though—I mean, we at 

least have one regulator for the whole State of California, and the 

insurance companies could give you a different rating when you go 

to renew your policy if you just move from one neighborhood in LA 

to another. So there are different risks, apparently—at least my insurance company thought so—if I just moved within a jurisdiction. 

But I want to move on to Mr. Bell. My concern is that at least 

one State could have a major depression in its own State, be desperate for the kinds of jobs that they could get if they could just 

get some insurance companies to move in. If let us say the State 

of Desperation were to establish really low capital requirements 

and some insurance companies moved into that State and had very 

28

low capital, could they still sell insurance in my home State of California? 

Mr. BELL. That is a very good question, Congressman. What 

would happen is that your insurance commissioner would then look 

at the application once that State came across. And if in fact if it 

was national, then they would be able to. If it was a Federal charter, they would be able to. But if on a State-by-State system— 

Mr. SHERMAN. I mean under the present system. 

Mr. BELL. Under the present system today, that particular insurance commissioner could require additional deposits. 

Mr. SHERMAN. So if I am an insurance company in Nebraska, I 

don’t have to just convince Nebraska officials that I am safe and 

sound, I have to convince each and every State that I have adequate capital. 

Mr. BELL. They may have registered and became licensed in Nebraska 10 years ago and they are just moving into your State. So 

their financials could very easily change over that time. As you 

know, the financial statements can change on a day-by-day basis, 

let alone over time. 

Mr. SHERMAN. So I have 50 different regulators all deciding 

whether on a particular day I have sufficient capital to be able to 

pay off if I have a disaster or whatever else would cause me to 

have to write a lot of checks to a lot of consumers. 

Mr. BELL. As we look at a lot of financial statements on insurance companies, we see that from quarter to quarter there are 

drastic changes in their financial situations, and that would say 

what the commissioner is looking at at that particular time, yes, 

sir. 

Mr. SHERMAN. I would point out that my time has expired, and 

yet there is no one else here to yield to. I will stay here for about 

2 more minutes, and then I will rush on over and vote. Hopefully, 

by then another member will be here asking questions. We have 

4 minutes to vote, so really just a minute-and-a-half to ask questions. 

I will ask—let me see, part of your name is hidden, sir, so I will 

just say Mr. B. We have 14,000 regulatory employees in the various States. Now if half of the companies get Federal charters, do 

7,000 of those folks have to move here to Washington, or do we fire 

those 7,000 and hire a different 7,000? We lose their institutional 

memory, or is that institutional memory useless because it is about 

how to do State-by-State regulation? And if we are not going to fire 

half of those 14,000, but we are going to have to hire another 7,000 

here in Washington, what is good about moving from 14,000 to 

21,000 regulators? 

Mr. BYKOWSKI. I don’t believe that there is anything good about 

moving the regulatory environment from the States to Washington. 

We are certainly not in favor of that. 

I can point to the regulatory environment in the State of Wisconsin, where we have 900 companies licensed to do business and 

over 100 domiciled companies in the State, and we have a tremendous competitive marketplace. And the regulatory— 

Mr. SHERMAN. Let me redirect that question also to Mr. 

Counselman, whom I know does favor a national charter. 

29

Mr. COUNSELMAN. Mr. Chairman, I think that we would see different—there would be a movement, yes. But it would be gradual, 

and it would only require those to move who are actually having 

to approve the licensing approvals. 

Mr. SHERMAN. So how many Federal employees would we have 

to hire here in Washington? 

Mr. COUNSELMAN. I certainly don’t think I could even guess at 

that number, but it would be certainly displacing some of those 

that are— 

Mr. SHERMAN. That is the 2-minute warning. We stand in recess. 

[Recess] 

Mr. MOORE OF KANSAS. [presiding] If we could resume, please, 

and we will get this hearing going and finished. And Mr. Baker, 

you are next, sir, if you would. 

Mr. BAKER. Thank you, very much, Mr. Chairman. 

Commissioner Bell, there is an old country and western song 

that starts out, ‘‘You had me at hello.’’ You created a slightly different version for me today. It is called, ‘‘You lost me at hello.’’ I 

have to revisit a little history with you on where my personal frustrations lie in all of this. 

Mr. BELL. Yes, sir. 

Mr. BAKER. As chairman of the Capital Markets Subcommittee 

7 years ago, a witness appeared that in the statement said, with 

regard to modernization, we are just around the corner from it. 

Six years ago, I had a hearing, and they promised me uniformity 

for product review in a program called CARFRA. 

Five years ago, President Vaughn testified the interstate compact 

was the solution, and she expected very quickly to get a significant 

group of States in place to make the interstate compact operational. 

However, 4 years ago when Chairman Vaughn reappeared, at 

that time before Congresswoman Biggert, asking the question 

about the failure of CARFRA, Chairman Vaughn replied that the 

main thing came down to the deviations that were in place. No kidding. I bet it took a lot of study. 

In looking at a hearing that Chairman Oxley was involved with 

7 years ago, Chairman Oxley asked both the commissioner of 

Michigan, Commissioner Fitzgerald, and Ohio Commissioner Covington this question: ‘‘If Congress sets a goal of 3 to 4 years for 

achieving comprehensive uniformity by NAIC for product approval, 

do you, Mr. Fitzgerald, feel confident that you can meet that goal? 

And you, Mr. Covington?’’ 

Mr. Covington responded first: ‘‘Chairman Oxley, I think we have 

to meet that goal. As said before, the current system is not good 

for consumers. It is not good for insurance companies. We must 

meet that goal.’’ 

Mr. Fitzgerald responded, ‘‘I agree with that. If over the next 2 

to 3 years you have not seen significant progress, I think there 

needs to be questions raised about whether we can effectively at 

the State level solve the problems you have identified.’’ 

That was 7 years ago. 

Now, I have a piece of correspondence from the NAIC in reference to what was then known as the SMART Act, which turned 

out to be not so smart, asking for a comment on that legislation. 

30

It was 47 pages. The ‘‘Dear’’ and the ‘‘Sincerely’’ were the only two 

friendly words in that 47 pages. 

I have to say, as an organization, the one most likely to drag the 

effort to reform down will be NAIC. There is an inability to reach 

a political willingness to understand that the organization’s reluctance is not just about whether somebody puts their stamp on a 

piece of paper, it is about whether the people who work and pay 

taxes and who have to have insurance as a matter of economic necessity, not because they choose to buy it, can get access to a product that meets their needs at a decent price. 

Now as to the compact that you just mentioned that was adopted, 30 States, I believe you said, were engaged in that process. The 

scope of that compact, is that life only or is that everything? 

Mr. BELL. Congressman, that is life, annuities, disability, and 

long-term care. It is a product that we are working that we think 

has some basis that we can do that on. We have 36 national standards in that compact now. 

Mr. BAKER. Let me ask this question. My staff told me—and I 

have no way to know this. My staff told me there have been perhaps over 300 product approvals since that compact has gone into 

place. Is that the correct number? 

Mr. BELL. Three hundred? 

Mr. BAKER. Yes, sir. 

Mr. BELL. The compact was started, took its first filing in June 

of this year. I don’t know the number, but I don’t think it is as high 

as 300 yet. 

Mr. BAKER. Is it over 100? 

Mr. BELL. You know, we have the director of that compact here 

with us today. 

Mr. BAKER. Would they be available to kind of shout out a number? 

Mr. BELL. We received six filings today, and there are many others in the queue. 

Mr. BAKER. Out of those six, how many of those—or are they just 

all in the queue? 

Mr. BELL. That was received today. 

Mr. BAKER. Oh, today. Okay. You are not saying that is the total 

number of receipts; you are just saying that is what is in today’s 

mail. 

Mr. BELL. That was what was received today. 

Mr. BAKER. I understand. Could you at some time tell the committee in the form of correspondence what the status of the compact result has been, maybe with some sort of monthly progress report? We would just like to see what is really going on there. Because it appears— 

Mr. BELL. We would be happy to provide that. 

Mr. BAKER. I appreciate that. Because there seems to be great 

reliance on that in your testimony that that is a notable achievement, and I have my doubts. 

With regard to the paper clip and colored paper requirements, I 

looked quickly—I didn’t have time, because I wasn’t expecting 

that—at the e-file SERFF system. I believe that is the system to 

which you make reference that gets people into the technological— 

Mr. BELL. That is correct. 

31

Mr. BAKER. Now, if I were a company and I had a product that 

was going to be sold in all States, how many times would I have 

to enter that data? Could I sit down once and fill out a form and 

be done? 

Mr. BELL. Yes, sir. 

Mr. BAKER. That is not what I have been told. I have been told 

that if you are going to file and sell in the various States, you have 

to file a different form for each State. You have to hit that computer 50 or 51 times. Now, is that wrong? 

Mr. BELL. I am not sure how many times you have to hit your 

computer enter button, but we know that 50 States are using 

SERFF and that 46 States accept all major lines and 50 accept all 

PC lines. 

Mr. BAKER. Well, I am told that each State still maintains its 

own approval variances, that the form is not a single form which 

someone can fill out one time and thereby be filed in all appropriate States to market that product. 

I would like to have a follow-up, if I may, on what the approval 

process looks like and whether in fact when the recipient entity 

gets the document do they in fact copy that filing and put it by 

paper copy into a file and then reenter the data into their own electronic storage system? And do some States actually require a written correspondence from the applicant that shows an original handwriting on a paper document which is generated at the State end 

and mailed back to the applicant? Yes, that is correct. 

Mr. BELL. You answered the question for me, Congressman. 

Mr. BAKER. Thank you. Let me point out that if there is an ability to get this done, your organization has to take on the substantive policy reality of this problem. You are costing this country 

and the consumers of insurance products millions of dollars in 

wasted time and premium. 

Now, I know the view is that you stand between those in the 

market who would dupe and take advantage of the innocent consumer of insurance product. This is a competitive world, and Eliot 

Spitzer is still alive and well, and there are a whole lot of them 

all across this country willing to take on anybody who violates 

their fiduciary duty. But there is no public service served by a recalcitrant approach to say no to reform at any level, at any level. 

And laying claim each time you appear before this committee, as 

you have in my entirety of hearings on the matter of insurance reform, we are 2 to 3 years away. We are 2 to 3 years away. You 

ought to put it to music. It is a great song. 

Thank you. 

Chairman KANJORSKI. The gentleman from Kansas, Mr. Moore. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

To the members of our panel, in the 109th Congress the surplus 

lines industry presented a compelling case that there existed serious regulatory problems with their market that needed reform. I 

worked on a bipartisan basis with Ginny Brown-Waite of this committee and in the House to pass legislation that would ease some 

of these burdens and create a more uniform regulatory system. Can 

any of you, if any of you care to, please tell me specific examples 

of problems that you, your company, or trade association have with 

the current insurance regulatory system? 

32

Yes, sir, Mr. Counselman? 

Mr. COUNSELMAN. Congressman Moore, I would like to thank 

you for your leadership in that area, because it has been significant. 

We have—we do filings whenever we make an excess of surplus 

lines placement, and we have to do it in each State in which there 

is a risk on the policy. And the filings themselves are different, the 

requirements are different in each State, and you have to file different directions and compute the tax separately. We go through 

that process—I would say in my office we go through it on a weekly 

basis, not a daily basis, with different risks that we insure. And it 

is usually part of a program, it is not the entire program, but parts 

of the policies. And because of that legislation, we feel that we are 

going to have a uniform way of providing that filing in the future. 

So we are going to have real savings to the customer in the future. 

Of course, it has just happened, but under the current system we 

pretty much have to guess where the proper premium allocations 

go to which State, and we have to follow—I don’t know if it is colored paper. I don’t know about yellows and pinks and greens. I 

don’t think it is colored paper, but it is different types of paper, and 

it has to be different types of filings. So it is very complex, and it 

is about to become very simplified, and think I think that is going 

to result in more coverage being available to more insureds, because of the simplification. 

Mr. MOORE OF KANSAS. Thank you, Mr. Counselman. 

Anybody else care to comment? 

Mr. CONDRON. I think what you have done is terrific, but it is 

tackling a piece of a bigger problem and no different than Congressman Kanjorski’s question about what are the three big issues. 

Well, they are the three big issues, but, as Mr. McCartney said, 

you know, it is much more complex than that. 

Mr. MOORE OF KANSAS. Sure. 

Mr. CONDRON. So a holistic approach to solving this problem on 

behalf of the consumers in this country, I think, is what we would 

ask you to be serious about considering. 

Mr. MOORE OF KANSAS. Thank you. 

Anybody else? 

Mr. BELL. Congressman, I think that when we start looking at 

how the filings are being done, 60 percent of the filings are being 

done electronically these days and there is no paper involved. In 

the State of Alabama, we have even gone as far as to say that you 

have to use the SERFF system, and other States have done the 

same thing. So we can get away from this anecdotal stuff of paper 

filings, what kind of papers you use, what kind of paper clips you 

use and whether you put them in the left-hand corner or the righthand corner. 

Mr. MOORE OF KANSAS. Thank you, sir. 

Mr. SOTO. Congressman, if you notice that even though we differ 

at this table as to the methodology, we all happen to agree with 

you that that is a great step forward, and that is why we believe 

that pragmatic, middle ground to attack these problems and get 

them solved takes us away from arguing whether aspects of a massive plan are going to be detrimental, we are going to have a tremendous increase in the Federal bureaucratic process or not, 

33

whether you believe in it or not. But this is a pragmatic approach 

which is working. We salute you for it. 

Mr. MOORE OF KANSAS. Thank you. 

Yes, sir, Mr. Bell again. 

Mr. BELL. We hear a lot about the regulatory systems. Well, all 

of the companies do not do the same kind of things. Some companies use credit scoring when it comes to a filing. Some companies 

do not. So the regulatory scheme will have to take into consideration the variance from over 7,000 insurance companies in this 

country. If we could get all insurance companies to have one application, then we would solve a lot of problems. But I don’t think 

that is going to happen, and we are not looking for that to happen. 

But I do not think that is going to happen, and we are not looking for that to happen. 

Mr. MOORE OF KANSAS. Thank you. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman from California, Mr. 

Royce. 

Mr. ROYCE. Thank you. 

I was going to ask a question of Mr. McCartney. 

Given your previous position as a former president of the NAIC—

I think you said it was in 1992—I thought I would go back to this 

quote that Congresswoman Pryce had collected, that she started 

with, and the quote comes from George Miller, the founder of the 

NAIC in 1871. 

Again, what he said was, ‘‘Insurance law shall be the same in all 

States, not reciprocal but identical in all States, not retaliatory but 

uniform in all States.’’ 

You know, back then, in 1871, there was still some institutional 

memory of what had happened with the Articles of Confederation 

and why we had a commerce clause and why we were trying to 

have one market in the United States. Yet, here we are, as we have 

discussed, 136 years later, and we have seen some instances where 

there was some forward movement but then three steps back as 

different States and insurance commissioners can always back out 

of any common agreement. I thought you could share with us some 

of your observations on that. 

Then you had also spoken about the particular problem with 51 

different regulators that many of our military personnel face as 

they go from one State to another, maybe touching on the New 

York signature requirement and some of these other impediments 

to our military and to those who move, and I will turn it over to 

you, sir. 

Mr. MCCARTNEY. Thank you, Congressman Royce. 

Let me give you an example. When our military is deployed, oftentimes, they have 5 minutes or 10 minutes a week to deal with 

their personal financial products, if that. USAA has tried to move 

as much of the products and as much of the services we can to the 

Internet because those folks might be in a foxhole over in Iraq or 

Afghanistan and have one of those notebook computers and be able 

to try to do some things. To my knowledge, USAA is one of the few 

companies, if not the only, that will write soldiers while they are 

deployed without a medical examination, and it is frustrating to us, 

for example, that, as to two fellows in the same foxhole, one of 

34

them may be able to apply online and effectuate the coverage in 

5 or 10 minutes, while the fellow next to him in the same foxhole 

cannot do that because the State Insurance Department from 

where he came will not allow it. 

Now we are to the point where more and more States will allow 

it, but in the one or two or three States that do not, we do not even 

bother to try to get approval because we have gotten clear signals 

from the department that they will never approve it. So those are 

the kinds of things that are particularly frustrating for the military 

community that there are two people in the same foxhole with two 

different products. 

Mr. ROYCE. There was another issue that I recently became 

aware of, and I will ask you this question about the NAIC’s ability 

to reach an agreement with respect to international regulatory 

standards. 

Do they have the enforcement authority over the 50 States? Because this is a common source of contention with Europe and elsewhere as we try to gain access to markets overseas and they try 

to gain access to markets here. 

The reason I ask this is it would appear to me that there is a 

pretty clear disconnect between the NAIC’s willingness to participate in these international dialogues and their ability then to enact 

any kind of meaningful legislation as a consequence. This is important because there is a letter that has been sent to the head of the 

NAIC’s Reinsurance Task Force from the European Commission on 

Internal Markets, and with the approval of the Chair, I would like 

to insert a copy of that letter into the record. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. ROYCE. Thank you, Mr. Chairman. 

In that letter, the EU warns that, unless the Reinsurance Task 

Force comes up with a new proposal, there may be potentially punitive actions taken against U.S. institutions all through the EU to 

reciprocate for the kind of treatment for foreign institutions here 

in the United States. They cannot believe this fractured market, 51 

separate markets here in the United States, and they are threatening action. 

So I would ask you, and maybe, perhaps, Mr. Condron would like 

to comment, too. Are you concerned that foreign regulators may 

begin to take punitive actions against the U.S. entities because of 

the treatment their insurers and reinsurers are receiving here in 

the United States? 

Mr. MCCARTNEY. Mr. Royce, I will defer to Mr. Condron on that 

because I am certainly not an expert in trade matters, but let me 

just point out that attachment three to the NAIC’s written testimony lists the 50 largest insurance markets, and among those 

are—I do not know—20 States. It is a little bit misleading because 

the United Kingdom is listed separately. Spain is separate. France 

is separate. What you are talking about are those companies coming together for a single market where you are able to do business 

in all the European communities. So it is a little bit misleading to 

list them separately on this list. 

Mr. ROYCE. Good point. 

Mr. Condron. 

35

Mr. CONDRON. Congressman, thank you for your support of the 

optional Federal charter. 

I thank the Congresswoman as well. 

You know, I cannot speak to what punitive action the EU would 

take, but I think that the main point is that the U.S. insurance industry has no common regulatory voice that can speak for it or regulatory voice that has the power to implement any decisions that 

they might make. I think, you know, as to all of the fine efforts 

that have been made by the commissioners in the NAIC, they are 

not unified, and they never will be, and that is part of the problem 

here. 

Mr. ROYCE. So we have the SEC. We have the Fed. We have the 

OCC that all serve to get financial instruments to represent the interests of the banking industry in terms of gaining access to markets overseas, and you are speculating that the National Association of Insurance Commissioners is not going to have that same 

clout or seat at the table in terms of opening those markets for 

competition? 

Mr. CONDRON. They just cannot. You know, they cannot agree on 

what the reserving requirements will be on universal life insurance 

policies, or when they do agree, they cannot get all of the States 

to go along, and that is the frustration, I think, Commissioner Bell 

and all of the commissioners have always had with the NAIC. 

Mr. ROYCE. That is what is hurting our competitiveness. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much. 

Mr. Scott of Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Let me ask each of you, or whomever would answer this particular question, as we look at this issue. 

How big would a national office of insurance need to be to handle 

the millions of consumer inquiries and complaints that State regulators receive each year? 

Mr. SOTO. Congressman, I would not be able to venture a guess, 

but if you really think about the vagrancies that occur in every one 

of our individual communities, you would have to have individuals 

close enough to the locales and with the authority to be able to 

react quickly to the needs of consumers, and that appears, to me, 

to be a very massive undertaking. I do not know what their number is, but it will be big, and it will grow continuously. 

Mr. CONDRON. I think I see a different approach. 

We are doing things 50 different times right now. We are doing 

it over and over 50 times. So I would say the size of a national regulatory overbody, like the optional Federal charter, in the aggregate would take less people than the current State system does. 

Mr. COUNSELMAN. Congressman, the OFC bill does have a proposal that suggests that there would be regional consumer offices 

or consumer complaint offices so that there would be a mechanism 

to respond. Certainly, wherever the complaints might be coming 

from, they need to be responded to. 

Mr. BELL. Congressman, the reality of the situation today is, 

with market conducts and consumer complaints and inquiries that 

we receive, we would probably be looking at somewhere between 10 

and 12 percent of the current staff members who are part of the 

36

State regulations today that are devoted to that, and I can look at 

that from my own department. 

Mr. SCOTT. Let me also ask you this question, and I have heard 

the complaint or the concern that you have 50 different States and 

51 different State regulations, but if States are a legitimate regulatory entity, do you believe that States are able to make rules to 

comply with what that State deems important for that population 

and that, in effect, different regions are different with different 

backgrounds, with different local needs and that, perhaps, the consumer could be better served and competition enhanced with that 

kind of sensitivity played to those local needs and, having the independence to grow in their own way and on their own time, that 

that would further ensure competition within the industry? 

I mean, don’t you see clearly the benefits of having States’ and 

local communities’ having the most direct input that one size does 

not fit all, perhaps, particularly with an industry like insurance 

where the vulgarities of the whole Nation are so different? This is 

a very, very diverse Nation. Insurance is a very, very personal, 

grassroots entity. Even down in the South where I am from, I 

mean, there are different formats, but—you know, you have weather patterns. You have demographic patterns. You have so many differences. You have industrial patterns. You have health patterns 

that are different. In some parts of the country, people live longer 

than others. 

So this State versus National issue, I think, needs to be looked 

at with a more jaundiced eye than with what we are looking at it. 

Wouldn’t you agree? 

Mr. BYKOWSKI. If I may respond to that, I felt for a minute there 

that you were reading from my prepared statement because, certainly, NAMIC feels that we would much rather deal with our 

State regulators when we have those types of issues. I can pick up 

the phone and call my commissioner of insurance and discuss a 

regulatory problem. In fact, the commissioner has called me on a 

number of occasions to seek input on those types of issues, and I 

just cannot imagine what it would be like to have to call someone 

in Washington, D.C., and ask him about some specific issues relating to some of the States we do business in and trying to get the 

types of results that we are capable of getting on a local basis. 

Mr. MCCARTNEY. Congressman, if I may, for all of your constituents, if they wanted to continue to be customers of companies that 

are regulated by the insurance regulator in your State, that is their 

choice. They can do that. For others, they say, you know, ‘‘I am perfectly fine with USAA, and USAA now has a national regulator. I 

prefer consistency in my product and consistency and uniformity in 

my service. I will opt for a federally regulated company.’’ So it does 

not really displace the current system. 

Mr. SCOTT. But would it enhance competition— 

Mr. MCCARTNEY. Absolutely. Absolutely. 

Mr. SCOTT. —more than the State? 

Mr. MCCARTNEY. It would facilitate companies going into new 

markets. It would be incredible what would be unleashed if companies had the degree of freedom to compete on forms and prices and 

everything else that we see in other aspects of the financial services’ community. 

37

Mr. SOTO. One of the concerns that we have is that—we are 

building a portfolio, we are independent agents, and I represent a 

number of insurance companies. 

One of the concerns I have is, as we build the protection for a 

particular client, we may actually have their automobile with a 

State domestic company, the homeowners with another State domestic company but have the personal umbrella, the personal 

nexus, with a national company. To date, some difficulties have 

arisen. We have to navigate and help that client navigate that appeal. Certain appeals occur at the local level. Certain appeals occur 

at the Federal level, and it creates confusion and distortion for the 

insured. 

Again, we do not want to defend—with all due respect to Mr. 

Bell, who happens to be a personal friend, I do not want to defend 

a lot of aspects of the State system. I happen to believe that we 

need to improve it but with specific targets. 

Mr. CONDRON. I will just say, Congressman, that the things that 

you were referring to really do not resonate in the life business. In 

the life insurance business, you do have a very strong argument for 

uniformity across all 50 States and territories. I would say, you 

know, think about if the mutual fund you owned was different in 

your State versus in Congressman Kanjorski’s, Pennsylvania. It 

serves no purpose. 

In terms of local regulation, we already have it with the SEC’s 

regional office and FINRA regional offices. They are very effective. 

They regulate us on certain things out of their New York offices. 

They are very effective. It is a system that actually works very 

well. 

Mr. SCOTT. Well, let me just finalize one question if I may, Mr. 

Chairman. I know my time is running out. 

One of the complaints of some in the industry is that it costs too 

much in compliance to introduce new products. 

Could you give me some specific examples of new products that 

have not been introduced because of the cost of regulation as opposed to a business decision that a product is not competitive or 

profitable? 

Mr. MCCARTNEY. Congressman, it is not the aspect of the cost as 

much as the knowledge that, in some States, you will never get approval, and so you do not even try. 

When I was speaking earlier about the State that will not allow 

for online applications of life insurance products, we do not even 

try because the signals from that department are clear that it is 

never going to get approved, and so cost is much less of an issue 

than the stifling effect on innovation that the different requirements of the States have. 

Mr. SCOTT. Thank you, sir. I appreciate your indulgence with 

your time. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman from New Jersey, Mr. Garrett, for 5 minutes. 

Mr. GARRETT. Thank you. 

Thank you for the testimony of the committee. 

Mr. Bell. 

Mr. BELL. Yes, sir. 

38

Mr. GARRETT. Back when I was in the State government, I had 

an opportunity to go and speak before a group of the regulatory 

and compliance officers, and when I told them what State I was 

from, there was just basically a groan, knowing how hard it is to 

file in the great State of New Jersey, not that you need to be defended; it is just in regards to Mr. Baker’s comments. I appreciate 

what Mr. Baker was saying, and there may be truth to what he 

was saying there, but I think, also, the point needs to be made that 

some of the pushback on some of these issues as to why things do 

not come more uniformly is not just from the commissioners. There 

is an element to that, but it is also from the legislative body as well 

as the legislators who are hearing, in large part, from the consumer groups and the like that we retard any movement toward 

moving forward. We also hear from the insurance industry, certainly. Clearly, though, when the legislators move from the State 

level to the Federal level, we gain all wisdom, and so that is how 

we are able to resolve these issues on the national level. 

One issue, though, that you might be able to address or the other 

people might be able to comment on—and I do not know the answer to this as I look to you. I am told that the States currently 

get almost $3 billion, $2.75 billion, in nonpremium tax revenues 

from insurers and producers. I know from being in State government that it all doesn’t go to pay for the Insurance Department. 

There are often bribes to the insurance companies that we raise 

these fees, and then we use that for a whole bunch of other programs in the States. 

If we were to go this way—first of all, that number is about 

right. If we were to go this way and carriers became national carriers or carriers regulated on the Federal level, would we begin to 

see diminution in those dollars going to the State coffers? If the answer to that is yes, then, B, what impact does that have either on 

the departments or on all of the other things a State usually likes 

to spend money on? 

I will start with Mr. Bell and then Mr. McCartney. 

Mr. BELL. Thank you very much. 

Let me say that the State of New Jersey today is one of the legislatures that has printing legislation for the interstate compact, so 

there has been much changed in the State of New Jersey. 

Mr. GARRETT. After I left, it got better. 

Mr. BELL. But there has been. 

The impact on the financial resources of the State—much of the 

State’s resources that we use in other areas of the State come from 

the premium tax that we collect. The fees that we collect to run the 

department go in to run the department primarily, per se. If, in 

fact, we do not spend it, then we send some back to the general 

fund, but that would have a tremendous impact on the general 

fund budgets of all States. 

Mr. GARRETT. Mr. Counselman. 

Mr. COUNSELMAN. Our current bill would not address taxes. We 

would not replace taxes or move taxes, and States would continue 

to have a right to tax premiums, the OFC people. 

Mr. MCCARTNEY. H.R. 3200 specifically provides that insurance 

companies will continue to be liable for premium taxes in every 

State in which they operate. 

39

Mr. GARRETT. How about nonpremium tax revenue? 

Mr. MCCARTNEY. Well, for the most part, the nonpremium tax 

revenue is limited to those States that have fee-based insurance departments. 

Mr. GARRETT. My understanding is they are fee-based. 

So the figure that I had was $2.75 billion in nonpremium tax 

revenue. So you are saying that there would not be a diminution 

for those States if those carriers became federally regulated? 

Mr. MCCARTNEY. No, that is not necessarily true because, if it is 

a fee related to regulation, then those fees are going to be paid to 

the national regulator instead of to the individual States. There 

would be an offset in formulating the degree of regulation that is 

being asked of the States because it is now being done by the Federal Government. 

Mr. COUNSELMAN. Congressman, they could still tax premiums, 

which is the other portion and the larger portion. 

Mr. GARRETT. All right. The other question—and maybe we can 

have a comment from Mr. Condron and from Mr. Bykowski on this. 

It is the issue on competitiveness. I have a feeling that you two differ on what would actually happen here. One argument—well, I 

will make the arguments for you. 

One argument is that you have greater competitiveness by the 

national aspect of this and—without putting words in your mouth, 

but you can speak to this—that now just the opposite would happen, that little guys out there would no longer be able to be in the 

same competitive ball game and would be squeezed out. 

Can you tell me which one of you is correct? 

Mr. BYKOWSKI. Well, there are 1,400 insurance companies that 

are members of our trade association, and almost every one of 

them are concerned with Federal regulation versus State. We want 

to maintain the State regulatory model. Many of our member companies are single State or are few State operations. There is no 

doubt about the competitive nature of the market in many of the 

these States. I will use the State of Wisconsin, as an example, with 

900 companies doing business. I do not think that a Federal regulatory business model would help that. 

Mr. GARRETT. Mr. Condron. 

Mr. CONDRON. You may be drawing a distinction between the life 

business and the property and casualty business. 

In the life business, I think the competitive argument is very 

clear. It tends not to be a local business; it is a national business, 

and from our perspective, it should have a national regulator. I 

think you have two different insurance businesses here, and I 

think that—you know, I would encourage you to think about it that 

way. 

Mr. COUNSELMAN. Congressman, the commercial business has 

that same approach. It is a national approach. For some companies, 

it is national, and for many companies, it is regional, but commercial business is certainly a national approach. 

Mr. GARRETT. Thank you. My time is used. 

Thank you. 

Chairman KANJORSKI. Thank you very much. 

The gentlelady from Illinois, Ms. Bean. 

40

Ms. BEAN. Thank you, Mr. Chairman. I have two questions. The 

first is for Mr. McCartney of USAA. 

You mentioned that you serve the military and, in trying to serve 

those men and women, that uniformity would assist you in doing 

that. I want to point out that the NAIC points to its SERFF system 

as streamlining and modernizing insurance regulation. Have you 

worked with that system? What has your experience been relative 

to streamlining the process of bringing products to market to those 

whom you serve? 

Mr. MCCARTNEY. Congresswoman, thank you, and thank you and 

Mr. Royce again for introducing H.R. 3200. We are very, very 

pleased. 

Ms. BEAN. Thank you. 

Mr. MCCARTNEY. With respect to SERFF specifically—and I have 

an example in my written testimony—from our perspective, SERFF 

is somewhat helpful, but not really. To a large extent, all it does 

is saves us on postage, mailing fees, forms individually to each 

State Insurance Department. There are still State-based forms. As 

I mentioned in my testimony, we recently made a filing that would 

allow for an online—an Internet—discount. By the time it was all 

said and done with all of the State forms, it came to over 1,000 

pages. So I do not view that as being an example of significant 

modernization or streamlining. 

Ms. BEAN. Thank you. 

My second question is in relation to some testimony from July 

of 2006 before the Senate Banking Committee. Undersecretary 

Randy Quarles of the Treasury cautioned that the likely inability 

for individual State insurance regulators to get a firm handle on 

the risks that large, complex insurance companies pose to our Nation’s insurance system, coupled with a lack of a Federal role in the 

State-based insurance regulatory system could leave a large blind 

spot in evaluating risks that are posed to the general economy and 

financial markets. 

So I want to direct my question to Mr. Condron since you head 

up a national entity. What are your comments on that? 

Mr. CONDRON. Yes. I mean, I think that is a pretty astute comment because the products that we are delivering to the marketplace today are very complex financial products that require—they 

require hedging. They require the use of derivative instruments, 

and they are very complex products to understand to figure out 

what kind of reserves should be put in place and to be sure that 

the companies that are making these guarantees are going to be 

here 50 or 75 years into the future to honor the guarantees they 

are offering to their clients. 

So I think that there is a risk and that you just do not have the 

sophistication at the State level that you could accumulate on a national basis with the Federal charter. 

Ms. BEAN. Thank you. 

I yield back. 

Chairman KANJORSKI. Thank you. 

The gentleman from Illinois, Mr. Manzullo. 

Ms. BEAN. Can I yield a moment to my good friend, Mr. Royce? 

Chairman KANJORSKI. Oh, surely. 

Mr. ROYCE. Thank you, Mr. Chairman. 

41

I thank the gentlelady for yielding. 

I wanted to ask Mr. Bell a question because, in going over your 

testimony, you cite many undertakings by the NAIC which have 

been adopted by a number of States. Thirty States have adopted 

the Interstate Insurance Compact. Thirty-three have implemented 

a uniform product coding matrix within SERFF. Twenty-six States 

are mentioned as using the P&C products requirement locator tool. 

I am assuming these are all successful measures. 

Are you aware of any substantive measure pushed by the NAIC, 

in the realm of regulatory modernization, which has been adopted 

by all 50 States? I understand, in the past, progress has been 

made, and then States have dropped out because, as discussed, 

State legislatures will see a bill coming through. Members of the 

State Senate and State Assembly will say it sounds good, but in 

so doing, they have opted out. I was just wondering. 

Can you cite an example like that where we have seen that kind 

of success where everybody has stayed in all 51 markets here? 

Mr. BELL. Congressman, that is a great question. 

The solvency issue of the NAIC that is put forth has all of the 

States involved in the solvency and in the accreditation process of 

the NAIC with the exception of New York, and I will tell you that 

New York at the current time is looking at going into the accreditation system. It is one where we are very, very hopeful that they 

will use our system even though they are using one that is comparable to the system currently. 

Mr. ROYCE. Well, I will just close, Mr. Chairman, by saying that, 

for example, with SERFF, many States adopt the requirement, and 

then they add all of these additional requirements on top of the generic from which the insurer has to comply, and all of a sudden, 

it is different. It is different in all of these areas. So I will just close 

with that point. It has been a long way in coming, and I think we 

have a viable alternative to this, an alternative that works worldwide, which is to consider one market for the United States. 

Thank you. 

Chairman KANJORSKI. The gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you. 

I appreciate you all being here this afternoon. I guess I have 

more questions than perhaps can be answered. 

I started practicing law in 1970. I have been through, probably, 

1,500 to 2,000 real estate courses. The respite was passed in 1975, 

and the whole purpose of that was to standardize the closing of 

real estate transactions in the United States and to protect the consumer. It has been nothing but a total failure with HUD. Every 

year, we have to come in and fight HUD that wants to use a simple 

disclosure requirement to regulate the entire industry. I mean, I 

used to be able to close a transaction in 20 minutes to a half an 

hour. Go in there now, and you have papers like this. Look what 

happened to the real estate market. There is not anything in all 

of that Federal intervention and in all of the Federal disclosures. 

Nothing helped out the real estate industry, and it has been a lot 

worse. It has made it much more expensive to close, and no one 

knows what they are signing anymore. I take a look at instance 

after instance. 

42

For example, we just passed the Terrorism and Risk Insurance 

bill, and if it were not for one man who is my constituent who 

heads up Rockford Mutual, all of the mutuals would have been 

dragged into it, and with the gracious work of Mr. Kanjorski, we 

exempted companies that have under $50 million in book from having to offer that particular type of insurance. 

Why would we want to federalize the entire insurance industry 

and have hearing after hearing after hearing on some unknown, 

unnamed regulator? I am just really astonished that those of you—

I am going to give you a hard time—who are proposing a Federal 

regulator did not come in here with a model. Maybe the chart 

would look like Hillary Care. I mean—but you cannot propose a 

huge, monstrous change in the manner in which insurance is regulated without having a model. You know, maybe the model is 

FEMA. Maybe the model is the Department of Homeland Security. 

I would not trust insurance to any organization in this city. No 

one knows how many people would be on the board, who the regulators would be, where they would be from, what the conflict of interest would be. I mean, I can understand the argument in favor 

of when it comes to instruments, because they are complex, these 

investment instruments, and it does take time. It does take time 

for the States, but as I look at how regulations come about, I mean, 

I just wonder what was going on in the real estate industry that 

compelled this national takeover. 

I mean, there was a national takeover in the casket business. 

You know, there is no interstate jurisdiction in burying somebody 

unless their spirit goes across State lines, and yet, they came in. 

Now there is this Federal disclosure when you go to a funeral 

home. Who looks at that? You want to get somebody planted, but 

somebody came into this town and said, ‘‘We need Federal regulation in order to standardize what is going on,’’ and I find it amazing here that many of the Democrats, who are supposed to be the 

liberals, are arguing for federalism, and many of my esteemed conservative colleagues are arguing for the national takeover of this. 

Mr. ROYCE. Will the gentleman yield? 

Mr. MANZULLO. No, I have been here for 2 hours. I am not going 

to yield, okay? 

I guess my question is: Why would you propose something unless 

you have a model? Give me the model Federal agency that is doing 

a great job in controlling. Anybody. 

Mr. CONDRON. I would be happy to. 

I think there are several. I think the OCC that is overseeing the 

banks. I think the SEC and I think FINRA, all three of which are 

United States Government regulatory bodies or at least are connected to the Federal Government, all of which are regulating 

parts of the financial services industry very effectively, very efficiently and very economically, I might also add, with local offices 

around the country. 

Mr. MANZULLO. You know, I chaired the Small Business Committee, and there are nightmares that came up with the SEC, on 

different sections of Sarbanes-Oxley that we passed, that could 

have knocked these little guys right out of business. I mean, what 

I hear as a Member of Congress is that people who get rolled—especially when I chaired the Small Business Committee, it is the litVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
43

tle guys inevitably who get rolled by the big guys, and it is over 

and over and over again. Now, I would entertain that, if that is 

possible, if you are thinking about trying to have jurisdiction attached to a product or to a group of products as opposed to an industry, itself. 

For example, in the example that you gave about some type of 

financial product that had derivatives attached to it—I am not sure 

of the word that you used—I can say, well, you know, that would 

make sense because you want to get that to market in a hurry, etc. 

You know, if you take a look at the real estate industry, sure, 

the brokers are licensed through the States. You go to a closing. 

There has been a complete federalization of the real estate closing. 

I mean, it has been federalized. If you want to get something 

changed, do you know what happens? You have to come to Washington, and you have to fight with HUD. 

Mr. Soto. 

Mr. SOTO. Yes, Congressman. 

I will give you another model. It is FEMA and the National Flood 

Insurance Program, not as a good example, by the way, which you 

can imagine. I will tell you this. 

Twenty-five years ago, I was part of a group of 12 individuals 

who were invited to come here to Washington to work on reforming 

the National Flood Insurance Program. Interestingly enough, one 

was the representative from USAA, and when we met here, we indicated to the FIA and to FEMA that the National Flood Insurance 

Program had inadequate coverage, inadequate limits, and they 

were not charging actuarially sound rates. They were allowing people to rebuild in coastal, fragile areas, and there was no uniformity 

between the private market forms and the National Flood Insurance Program. 

Twenty-five years later, Katrina occurred, and the deficiencies in 

the coverage, specifically business interruption and additional living expense, were not there. The commentary all along the way 

was, ‘‘It takes an act of Congress in order to change it.’’ We spent 

about 6 to 8 months coming up here. We ended up reforming how 

the dec page looked, and we ended up reforming the application 

and reorganizing the manual. The substantial important coverage 

did not occur because the Federal Government is not nimble, and 

it is not able to quickly respond. I have the same fears that you 

do. 

Mr. MANZULLO. I have no time left, but I—does somebody else 

have a comment? 

Mr. COUNSELMAN. Congressman, I would also like to reinforce 

the example in banking. 

I am a director of a community bank, and we are a State-chartered bank, and we like it that way, and it works very well for us. 

So I think that model works for insurance as well as long as a local 

or a regional company has that option, which, I think, is a good 

thing. They should have that option. A national company, the M&T 

Bank in Maryland—I am from Maryland. They are from New York, 

but they are in Maryland. They are a national bank, and their 

predecessor was All First Bank. All First Bank, before it was acquired by M&T Bank, actually made a decision to change from national regulation to State regulation, and they became a StateVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
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chartered bank. So they had that option. They wanted to do that, 

and that is what they did, and it was a regulatory matter. 

So I think the model is the banking industry, and if we operate 

on that model, we can do this. A regional company can do well as 

well as a national company which has a different interest can do 

well. 

Mr. MANZULLO. I guess I sparked some interest. Would anyone 

else like to respond? 

Mr. BYKOWSKI. I think it is a mistake to assume that because 

dual regulation works to some extent in banking that it will work 

in the property-casualty insurance industry. A checking account is 

one thing. A checking account is the same thing in Wisconsin as 

it is in California, but in the insurance coverages and the needs of 

the consumers that are served by the property-casualty insurance 

company vary dramatically by region, and I do not think that having to deal with the Federal bureaucracy as an option is the right 

answer. 

Mr. BELL. It is a very good point in terms of the real estate industry. 

When we look at the CMS and the products that are just going 

out, now the Federal side of that is looking to try to get the States 

back into the market conduct side of it because it has been such 

a disaster in terms of the way it has been rolled out to the public. When we look at the $20 billion due from the taxpayers to the PPGC shortfall or at the $20 billion of the NFIP overrun, I mean 

you cannot name an insurance company that is dependent upon the 

taxpayers of the country to be able to keep it solvent or to pay the 

insolvencies when it would go out. So we have an insolvency system that nobody spoke of that is not anywhere nearly dependent 

upon the Federal Government as all of the Federal Government 

programs are. 

Mr. MANZULLO. I am still open to this thing. I am just speaking 

out loud and thinking out loud, and I have no time left, but Mr. 

Royce is a good friend of mine, and perhaps we can create some 

time. 

I yield back whatever time I have. 

Chairman KANJORSKI. Thank you. We will assume you have 

some. 

Mr. MANZULLO. Thank you. 

Chairman KANJORSKI. I do want to take a moment—I know it is 

very common—and we practice it on both sides of the aisle here—

to criticize the Federal Government and its failure to do anything 

correctly. 

Mr. Manzullo, you brought up an interesting question of burial 

and that you are just trying to plant somebody. You may think that 

way until you get the bird flu or anthrax, and you had better be 

sure that person is planted uniformly and correctly, or you are 

going to wipe out half the population of the country. 

So now, with the amount of transient capacity that we have in 

the United States, it is important to have uniform standards that 

are followed and questioned. I remember bringing the issue up. 

You know, in anthrax, you have to understand—I will not go into 

the bird flu on this, but on anthrax, the human body becomes a factory, a manufacturer, of anthrax. So, if you were successful in deVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
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termining where the bodies were buried and you dug them up and 

you used the product within the dead bodies, you would just increase the amount of anthrax you could distribute in the country, 

and we do not have in the United States a uniform policy of protection of how we dispose of the bodies of people who would die from 

anthrax poisoning. So it is something to look at. I wanted to go on 

and give you an analogy. 

You and I are both old lawyers. I may be, actually, an older lawyer than you are, but the other day, I was talking to one of my 

aides who is in law school, and I asked him how students today appreciate the Uniform Commercial Code and the Sales Act. When I 

said the Sales Act, his eyes glassed over, and he sort of looked at 

me like, what is the Sales Act? Well, you and I know, when we 

were in law school, we spent a year finding out what the Sales Act 

was about. That does not exist anymore in law schools. That is 

something of old England. They do not talk about the Sales Act 

anymore. 

So, you know, we have had the uniformed commercializing of our 

system. It does take a long period of time. When you think about 

it, it probably took 30 to 40 years for the Uniform Commercial 

Code to permeate the business community. But I think we all have 

to say that the number of transactions that are held in the United 

States today could never have been as successfully handled under 

the Sales Act as they are under the UCC. 

Then finally, I always point out to my friends who argue about 

the uniformity of the railroad gauges, that in the United States, 

some brilliant son of a gun decided to have a uniform gauge in the 

50 States so we would not have to change our railroad cars and engines at every State line that we passed through, but in Australia, 

just up until 30 years ago, when you would go from one province 

to another, you had to stop the train, reassemble, and put new 

wheels on because you were going onto a new track. The lack of 

industrial development in Australia was phenomenal until they 

went through this upheaval. Of course, the problem is, the longer 

you wait, the greater the cost and the greater the upheaval because 

we all get experienced in dealing with the tried and the true. 

Then, finally, I heard you damn again the failure of the Federal 

system. If we would just all reach in our pockets and pull out our 

bills, we would discover that it was not until 1914 that we had 

common national currency in the United States. At one time, Philadelphia was the major printer and distributor of American currency. It caused a problem if you were in San Francisco and somebody gave you a demand note drawn on the Bank of Philadelphia. 

You were not quite sure whether it was good or not, and it was 

very hard to call Philadelphia at that time since the telephone 

would not have been invented for another 50 years. Now we take 

for granted the Federal Reserve notes and how great it is to have 

that uniformity. 

As we went through the crisis this last month, the fact that interest rates can be changed overnight and that sophisticated reaction to catastrophe—if you go back to the 1907 crisis, it almost 

brought the Nation down. Here—not that I am going to predict 

that we are over it—we are certainly much further along and in a 

much more involved and more sophisticated society. 

46

So, although I have a tendency to be relatively conservative and 

fight change simply because I do not want to learn a new system—

that is the truth of the matter—I think there is merit on both sides 

of this argument. Quite frankly, I am torn. One day, I wake up, 

arguing for a national standard to see how it could be done. Then 

the next day, I wake up, and I hear the echo of Mr. Soto, and I 

say, we cannot afford to have that happen, and we will do it in 

other stages. 

I am convinced of one thing. There is no question in my mind 

that this Congress has some objectives that we should go after, and 

that is to simplify some of the complicated systems that are happening now. Whether we call it an ‘‘optional charter’’ or just how 

sophisticated it is or what areas we go into, I do not think we can 

question the argument that the country will be more competitive, 

will be more price conscious and probably less regulated—the industry—than it is now, and it will protect our international competition area. I think all of those things are probably important because it seems to me—again, I am not an economist, but as we do 

those things, we will create wealth for the United States, and I 

think that is probably what we are all trying to be about. 

So my offer to you, as an extension to the other side of the aisle, 

is we will hold hands together and go down these rapids that we 

are riding, but I think we will make it. 

I do not know if anyone has any further questions that they want 

to ask. 

Mr. ROYCE. Well, Mr. Chairman, I will just close any commentary with one last question, and that is—I am sure that we all 

agree in this debate, wherever we are in the particulars, that regulation should be based on consumer protection and fair, consistent, 

impartial treatment of insurers’ products instead of a relationship 

on political connections. 

The question I was going to ask is: Would we have world-class 

regulation today over the banking system if, instead of our current 

system, we elected—if we elected—the Chairman of the Fed, of the 

OCC? Should we elect the Chairman of the SEC? 

I would just ask Mr. Soto and maybe Mr. Counselman for your 

observations on that premise. You know where I stand. I think, for 

those who are in the national market, we give them an option. We 

allow the States to regulate on a State basis. We allow for those 

who want to be part of a national and an international market to 

have this option like the banking industry has, but I would just be 

interested in your observations about the efficacy of such a proposal. 

Chairman KANJORSKI. I have one question before they go to that. 

My question to you is: Who would be silly enough to run? 

Mr. ROYCE. Well, that is the problem, those silly enough to run. 

Mr. SOTO. I am not sure I am qualified to delve into the part 

about whether the Chairman of the Fed or of the OCC or others 

like that should be elected or appointed, and I suspect, by the way, 

that you stated your question, that you are dubious on that. 

I will tell you that we still perceive that insurance is different 

from banking. We have at the State level a number of appointed 

insurance regulators and a few elected. Candidly, I have discussed 

that issue with many people over the years and with people who 

47

have been in the business a lot longer than I have, and we find 

that there are good ones and there are bad ones on both sides. 

There are good ones who are elected and also bad ones and good 

ones. 

So, beyond that, I am not qualified to give you a broader opinion. 

Perhaps someone else will. 

Mr. COUNSELMAN. I agree with Mr. Soto. I would be very concerned about that position being elected, just as most States have 

been concerned. In most States, it is an appointed commission—the 

commissioner is an appointed position—and I think that is the 

more appropriate manner in which to regulate insurance. 

Mr. ROYCE. Thank you, Mr. Counselman. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Let me ask a question while I am here, 

too, because I brought up the issue of creating a new bureaucracy. 

Is there a way to avoid creating a new bureaucracy? Maybe, Mr. 

Bell, I could point this to you. 

Is there some way we could press into service the existing State 

agencies out there and just federalize them or quasi-federalize 

them? That is, allow them to operate as they are now on matters 

of issuing State licenses but operate as Federal people if they are 

dealing with an optional Federal charter? Could that functionally 

work and then have a very small office of the insurance commissioner here in Washington for Federal optional charters that would 

deal and implement through those State agencies? 

Mr. BELL. Congressman, they told me a long time ago that I was 

not in the business of passing law; I was in the business of regulating. I think you would have to pass a law in that area. 

Chairman KANJORSKI. But do you think it could effectively work? 

You know, I do not see a big advantage to spending 5 years of assembling 10,000 people down here in some big building in Washington if we do not have to do that, and it seems to me that a lot 

of the requests that you all are asking for here do not take a lot 

of bodies. It just takes a little thinking and common sense and a 

good computer, and it could probably be put together. I mean, the 

three things Mr. Condron mentioned we could do. If somebody had 

the authority to say, ‘‘This is an order. Do this,’’ boom, it would be 

done. 

Mr. BELL. We have asked and have requested, and if we go back 

to the Smart Act that Representative Baker was mentioning earlier, the States came for some Federal tools to do certain things, 

and in the end, we ended up with 37 preemptions coming out of 

the Smart Act. 

I think that you would have to be careful in the preemptions of 

the States because then you would have to deal with the Governors 

and the State legislators there, but I think that Federal tools that 

are used judiciously in terms of helping the States get to—we have 

30 States. If we had a Federal tool that says that, you know, ‘‘By 

this time, if this is not going to happen, you will become a part of 

the interstate compact for life, health and insurance annuities and 

products that are more of a national kind of product,’’ that would 

go a long ways. If we had a— 

Chairman KANJORSKI. We can do that along with creating an optional charter. We are capable of writing down conditions and sayVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
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ing to these other 20 States, ‘‘You have had enough time, and we 

are going to tell you that, in so many years, you are either going 

to do this or you are going to get an optional Federal charter imposed on you or be put out of business.’’ 

Mr. BELL. There is always going to be a disincentive as to why 

you do not want to go on the other side of it, and I think that you 

certainly have something there. The Federal database— 

Chairman KANJORSKI. Yes. I am going to tell you that I am as 

frustrated as Mr. Baker was when he indicated this. He and I have 

been working on this thing for many years. We are starting to grow 

gray beards, thinking that this was all going to come about and in 

listening to representatives of your body tell us we are just a few 

years away. I am now convinced that, without some coercion from 

the Federal Government, you are just not going to get those other 

20 States, and I am not sure if I were in California or in New York 

or in Texas that I would join you either. California is the seventh 

largest Nation for doing insurance business. Why would they want 

to get involved with all of these other States? 

Mr. BELL. Well, we are happy to say that legislation is in New 

York currently on the interstate compact, and we think that there 

will be some movement in California on it also. 

Chairman KANJORSKI. So you think that we should look at the 

possibility of putting a final time frame out there and say, ‘‘Do it 

or else you are dead?’’ 

Mr. BELL. That would certainly help the NAIC and State regulations go a long way in terms of modernizing the system and the 

reform of the system that, I think, the industry is looking for. Yet, 

it would still leave, certainly, the solvency and the consumer protection issues in the hands of the State. 

Chairman KANJORSKI. What do we do when Lloyd’s of London 

comes to visit me and tells me that they are solvent and that they 

want to get in, in a big way, in reinsurance and in the terrorism 

field but that they are sick and tired of having to deposit $18 billion into the Bank of Citicorp or of New York as their proof of capacity to perform? 

I mean, those guys are a little antsy about their 250-year history 

in the insurance business. They think they have a credibility factor 

built up there, and they do not particularly like the way they get 

treated by the kids over the pond. Isn’t that something that we 

have to attend to if we are going to do business in the EU or if 

we are going to do business in Asia? 

Mr. BELL. The meeting that prompted the letter that Congressman Royce has entered into the record today was a meeting that 

I was having with Commissioner Greeley from the EU, and it was 

the issue that we were talking about, and that was the reinsurance 

collateralization issue. 

There has been much talk on the reinsurance collateralization 

issue, but understanding the transparency of many schemes in the 

world in terms of regulations is not nearly as transparent as it is 

here in this country. When we look at certain countries, Lloyd’s is 

in a unique position. Lloyd’s is not a company, Lloyd’s is a group 

of names; so—they don’t have an entity that is a company, so it has 

made it very difficult. 

49

When you look at other companies in the reinsurance business, 

they have been able to—Swiss Re, Munich Re—they have been able 

to transition the market into the United States on a much better 

basis than having to go through, because they have been able to 

put a domicile company here in the United States. 

The collateralization issue is not just unique to the United 

States. They require collateralization in France on some of these 

issues. There is a reinsurance directive going on now in the EU 

that has been worked on for some time and still is not in place. 

The Solvency Two issue that has been put forth, they have been 

working on that since about 1999, and expect it to be in place by 

2012. I mean, so it is not an easy transition going from one solvency scheme to another solvency scheme. 

We have a task force that I have directed at the NAIC that we 

will look at a scheme in reinsurance collateralization that will provide that a company with a proper transparency regulatory system, 

the proper capitalization, the company will be able to get to zero 

reinsurance collateralization. And I think that is what the EU is 

looking for. 

We had a recent dialogue with the EU just this past Sunday here 

in Washington with the NAIC, in conjunction with the NAIC meeting. That meeting is setting some tones for where we are going forward. 

Chairman KANJORSKI. Very good. I am going to let Mr. Scott ask 

a question, but first, would it be fair to say—listening to all your 

testimony and your responses to some of the questions—that everybody at this table agrees that Congress should be working on doing 

something legislatively, regardless of what we call it? That there 

is some role that we have to help solve the problem that we have 

in insurance regulation in this country? 

Is that reasonable to say? Does anybody object to that? 

Mr. COUNSELMAN. We agree. 

Chairman KANJORSKI. That is good. Everybody agrees. We have 

a green light from the table. We can do anything we want, Ed. 

Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman, for letting me ask another 

question. But I would love to put it on the table to get a response, 

because I think it is at the crux of what we need to do, because 

protection of the insurance consumer is of the utmost consideration—and particularly you, Mr. Bell, and I think, Mr. McCartney, 

who represents the agents, to respond to this, and others, if you 

can. 

But given the fact that that is our primary concern, where are 

the components within the State system, if any, that we need to 

fix that do, in fact, jeopardize any protection for the insurance consumer? Are there any areas under the current system at the State 

level that we need to address that jeopardize any protections for 

our consumers? 

Mr. BELL. One of the major problems that we currently see, and 

that is, Alabama has some coasts, in terms of being a coastal State; 

and one of the areas that we are looking forward to is trying to 

make sure that we have a stable, available market in coastal properties. We have that from Maine to Texas currently. 

50

The market has moved very drastically in terms of the modeling 

that it is doing in terms of how it looks at future disasters, coming 

forward. And this has certainly been since 2004–2005 that one of 

the major concerns that we have as regulators today in those coastal States is making sure we have available markets there, that it 

is not going to shut down the economic drive of the States in those 

markets. Because 50 percent of the people in the United States 

want to live within 50 miles of a coastline, so that is driving a huge 

economic piece there. So it is very incumbent upon us to come up 

with a scheme that will allow us to make sure that those markets 

are stable, available, and affordable. 

Mr. SCOTT. And you are moving on those schemes? 

Mr. BELL. Yes, we are, sir. 

Mr. SCOTT. Yes, sir. 

Mr. BYKOWSKI. If I may, I think that if there was one single 

issue from a regulatory perspective that would be most helpful to 

all consumers would be the deregulation of pricing in the States. 

We see in those States that have heavy rate regulation, we have 

an availability problem. Consumers have a hard time finding reasonably priced insurance, property casualty insurance. 

Those States that have the free market and the file-and-use systems where the regulators are not nitpicking on the pricing, but insurance companies are allowed to price their products based on the 

risks that they are underwriting and that they see, the choice for 

the consumers is much better. 

Mr. CONDRON. A quick example: We introduced long-term care as 

a rider on our life insurance contracts, and we can’t get long-term 

care approved in somewhere around 20 States at this point. And 

I mean, that is—talk about consumer protection, you know, that 

violates the ability of people to be able to access something that 

they desperately want to be able to buy. 

Mr. SCOTT. Okay. 

Mr. COUNSELMAN. Congressman, I would add, any availability 

and affordability issue, from a sales point of view, for the customer 

is important. And I would say that difficult lines of insurance for 

availability and affordability typically are, as Commissioner Bell 

has just addressed, the coastal areas in particular. And whenever 

we have a risk that is in a coastal area, it is difficult to place. 

And then, in a totally different area of insurability, it is health 

insurance, particularly for a small group. And that tends—that is 

a State issue, as forms are different and requirements and rates 

are different in different States. But it is an issue that needs to be 

solved. 

Mr. BELL. Point of clarification, and that is that to my colleague, 

that long-term care is a product that has had serious problems in 

terms of the ratings, in terms of the pricing. Fifteen years ago 

when it was a huge, hot product, it was underpriced. And there 

have been substantial increases that we have had to pass along to 

the consumers to get it to where it is going to be a viable product 

going forward. 

So there are some real serious, complex issues in terms of looking at long-term care. 

Mr. CONDRON. I recognize that, but our product that we are trying to get approved just accelerates the payment of the death benVerDate 0ct 09 2002 16:33 Jan 28, 2008 Jkt 039904 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\39904.TXT HFIN PsN: TERRIE
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efit to use it for long-term care, and we can’t get it approved. So 

it is a little different than what you are talking about, Commissioner. 

Mr. BELL. And we are looking at that product very seriously 

right now in the viatical settlement model that we have just approved. 

Mr. SOTO. Yes, Mr. Chairman. I am originally from Cuba, and 

I came as a political refugee in 1960. In Spanish we have an expression, ‘‘El mango bajito.’’ El mango bajito translates, ‘‘Go for the 

low hanging fruit,’’ and if you listen to our testimony here today, 

we all agree that reforming surplus lines and reinsurance has been 

a great success, that that worked very well as a targeted measure. 

If we just listen to Commissioner Bell say that he would welcome—his organization would welcome tools that would help them 

bring about the rest of the States, and it doesn’t have to be the 

full—the full OFC solution, but he is looking for targeted tools to 

help bring along his brethren States. And it would seem to me that 

in looking for what areas or what roads to go down, go down el 

mango bajito. 

Chairman KANJORSKI. The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Well, we just had the Big I tell us we ought to go for the lowhanging fruit. Mr. Condron, should we go for the low-hanging fruit 

as a first step and then see where we go? Would you actually oppose a bill that went after the low-hanging fruit? 

Mr. CONDRON. I would, because I think—I would oppose it, because I think it wouldn’t solve the problem. We would be back 

here, you know, trying to chip away at this, one little piece at a 

time, when a comprehensive solution is the only logical way to go 

at this problem. 

Mr. SHERMAN. Mr. Counselman? 

Mr. COUNSELMAN. Congressman, I absolutely agree that lowhanging fruit will never get us to where we need to be in this economy. 

Mr. SHERMAN. And you don’t want to harvest that first and 

then— 

Mr. COUNSELMAN. We need to go after the big issue, and that is 

how we regulate in this economy. It has to be different. And I think 

the NAIC has a lot to offer, and we could use a lot of what they 

have already built. But we have to take the bigger view in order 

to get what we need. 

Mr. SHERMAN. Let me play devil’s advocate for a second. 

Say, okay, you guys who advocate a Federal charter have done 

such a wonderful job, why don’t we only allow a Federal charter? 

Why should we allow insurance companies to pick whether they 

want to live under a Federal standard or pick to move to any of 

the 50 States where they could have a low standard? 

Is there anyone here that supports an exclusive Federal charter, 

by a show of hands? 

Let the record show that no hands went up. 

Mr. McCartney, if you are for an optional Federal charter, why 

not an exclusive Federal charter? Why should insurance companies 

be able to pick? I don’t get to pick which set of rules or laws I comply with; I am pretty much stuck with one set. 

52

Mr. MCCARTNEY. It is a model that has worked a long time for 

the banking industry, and it has worked very well for the banking 

industry. 

Mr. SHERMAN. Well, it has worked for the banking industry. 

Some would argue that the banking industry has not done a good 

job by consumers, that—I mean, letus put it like this: Talk to any 

of my constituents who have recently gotten an overdraft fee and 

tell them we want to regulate insurance companies just like we do 

banks. 

Other than that, I mean, we have a single Federal system for a 

whole lot of other areas. They work well. Why should we pick the 

banking industry? Why not pick the securities industry? Why not 

pick the arms export control regulation regime? Why do we pick 

banking as our model? 

Mr. MCCARTNEY. The State-based system of regulation has been 

around for 130, 140 years. This would be the least disruptive model 

of anything that is being considered. 

Mr. SHERMAN. Mr. Soto has the least disruptive model. 

Mr. MCCARTNEY. No, actually, in many respects, this is much 

less disruptive than that, because one of the things you are talking 

about is Federal standards; and so the Federal Government would 

then dictate to the States what they would have to do, and at least 

in this case, the States could continue to regulate the business in 

their States that is under State regulation. 

So it would be less disruptive than any of the other alternatives. 

Mr. SHERMAN. Let me tell you about a little problem I have. I 

am from California. My voters voted for Prop 103. They voted for 

it by a narrow margin—well, by a moderate margin; and then a 

year or two later decided they really loved it. 

Am I supposed to go back to my constituency and say, I have 

acted at the Federal level to, in effect, repeal the protections that 

Prop 103 gave to, particularly, automobile insurance customers, 

Mr. Counselman? 

Mr. MCCARTNEY. No, because those protections would still be in 

place for consumers in California who want to deal under that system. 

For USAA members— 

Mr. SHERMAN. Let us put it like this: Folks from the industry 

have already said you are not really in love with rate regulation, 

and so wouldn’t every company selling automobile insurance in my 

State get a Federal charter as opposed to a rate regulation charter? 

Do you know any company in your industry that wants rate regulation and would therefore opt for the California charter? 

So basically my people all voted for rate regulation, and then I 

come here and I vote for a national Federal charter, and then they 

don’t get rate regulation. 

Mr. MCCARTNEY. I am sure there will be some insurance companies continuing to do business. I know of a couple of national insurance companies that deal in automobile insurance that are opposed 

to the optional Federal charter proposal. I would assume they 

would stay regulated by the States and continue to do business in 

your State. 

Mr. SHERMAN. Not if some of the people I know got themselves 

elected insurance commissioner in my State. We change that every 

53

4 years. Trust me, I know some up-and-coming politicians who 

would assure 100 percent Federal charter should they be elected. 

I believe my time has expired. As you can tell, I am kind of with 

the chairman here. I want to see some reform, and I don’t know 

how much fruit we should try to harvest. 

Chairman KANJORSKI. First of all, I thank the panel. I think it 

has been a great panel. I certainly enjoyed it. Every time I have 

a hearing on this, I learn a little bit more. 

As Mr. Baker said, we have had maybe two dozen of these 

things. So after four or five dozen, we should probably be very experienced, and be ready to go in about 2035. 

But with that, we will close the hearing. The Chair notes that 

some members may have additional questions for this panel which 

they may wish to submit in writing. Without objection, the hearing 

record will remain open for 30 days for members to submit written 

questions to these witnesses and to place their responses in the 

record. 

I now ask unanimous consent that the statement of the National 

Association of Professional Insurance Agents be submitted as part 

of the record. Without objection, it is so ordered. 

There being no further business, this hearing is adjourned. 

[Whereupon, at 5:40 p.m., the hearing was adjourned.] 

(55)

A P P E N D I X

October 3, 2007

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