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INSURANCE REGULATION AND COMPETITION FOR

THE 21ST CENTURY

HEARINGS

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JUNE 4, 11, 18, 2002

Printed for the use of the Committee on Financial Services

Serial No. 107–72

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

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

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missiouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman

CHRISTOPHER SHAYS, Connecticut

CHRISTOPHER COX, California

PAUL E. GILLMOR, Ohio

RON PAUL, Texas

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

WALTER B. JONES, North Carolina

STEVEN C. LATOURETTE, Ohio

JOHN B. SHADEGG, Arizona

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

VITO FOSSELLA, New York

JUDY BIGGERT, Illinois

GARY G. MILLER, California

DOUG OSE, California

PATRICK J. TOOMEY, Pennsylvania

MIKE FERGUSON, New Jersey

MELISSA A. HART, Pennsylvania

MIKE ROGERS, Michigan

PAUL E. KANJORSKI, Pennsylvania

GARY L. ACKERMAN, New York

NYDIA M. VELA ́ ZQUEZ, New York

KEN BENTSEN, Texas

MAX SANDLIN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

FRANK MASCARA, Pennsylvania

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

STEVE ISRAEL, New York

MIKE ROSS, Arizona

(V)

C O N T E N T S

Page

Hearings held on:

June 4, 2002 ...................................................................................................... 1

June 11, 2002 .................................................................................................... 43

June 18, 2002 .................................................................................................... 87

Appendixes:

June 4, 2002 ...................................................................................................... 135

June 11, 2002 .................................................................................................... 223

June 18, 2002 .................................................................................................... 323

WITNESSES

TUESDAY, JUNE 4, 2002

Bartlett, Hon. Steve, President , Financial Services Roundtable ........................ 6

Harter, Steven J., President and CEO, National Association of Professional

Insurance Agents ................................................................................................. 30

Phillipus, Michael D., Vice President of Communications and External Affairs, Risk and Insurance Management Society ................................................ 28

Spragens, Ann W., Senior Vice President and General Counsel, The Alliance

of American Insurers ........................................................................................... 8

White, Wayne, President and Chairman, Home Mutual Fire Insurance Company, on behalf of the National Association of Mutual Insurance Companies ........................................................................................................................ 5

Young, Hon. Mark, Vermont State Representative, on behalf of the National

Conference of Insurance Legislators ................................................................... 26

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 136

Gillmor, Hon. Paul E. ....................................................................................... 138

Israel, Hon. Steve J. ......................................................................................... 139

Kanjorski, Hon. Paul E. ................................................................................... 140

Royce, Hon. Ed .................................................................................................. 142

Bartlett, Hon. Steve ......................................................................................... 143

Harter, Steve ..................................................................................................... 153

Phillipus, Michael D. ........................................................................................ 165

Spragens, Ann (with attachments) ................................................................. 181

White, Wayne .................................................................................................... 198

Young, Mark ..................................................................................................... 214

WITNESSES

TUESDAY, JUNE 11, 2002

Gasper, Joseph J., President and Chief Operating Officer, Nationwide Financial Services, Inc., Chairman, American Council of Life Insurers ................... 46

Mattera, Paul, Senior Vice President and Chief Public Affairs Officer, Liberty

Mutual Group on behalf of Liberty Internation ................................................ 67

Nicely, Tony, Chairman, President And CEO, Geico Insurance Companies;

Chairman, National Association of Independent Insurers ............................... 48

Nutter, Franklin W., President, Reinsurance Association of America ................ 68

Restrepo, Robert P. Jr., President, and CEO, Allmerica Property & Casualty

Companies; Chairman-elect, American Insurance Association ........................ 65

Young, Donald A., President, Health Insurance Association of America ............ 50

Page

VI

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 224

Gillmor, Hon. Paul E. ....................................................................................... 226

Israel, Hon. Steve J. ......................................................................................... 228

Kanjorski, Hon. Paul E. ................................................................................... 229

Royce, Hon. Ed .................................................................................................. 230

Gasper, Joseph J. ............................................................................................. 231

Mattera, Paul .................................................................................................... 249

Nicely, Tony ...................................................................................................... 258

Nutter, Franklin W. ......................................................................................... 286

Restrepo, Robert P. Jr., .................................................................................... 300

Young, Donald A. .............................................................................................. 309

WITNESESS

TUESDAY, JUNE 18, 2002

Ahart, Tom, President, Independent Insurance Agents and Brokers of America .......................................................................................................................... 94

Gilliam, Scott A., Director of Government Relations, Cincinnati Insurance

Companies ............................................................................................................ 115

McOwen, Wayne E., Vice President of External Affairs, Guard Financial

Group .................................................................................................................... 120

Milesko, Glenn J., President and CEO, Banc One Insurance Services Corporation, on behalf of the American Bankers Insurance Association and the

Financial Services Coordinating Council ........................................................... 96

Sternberg, Hans, Chairman and CEO, Starmount Life Insurance Company .... 118

Van Osdall, John, Chairman, Council of Insurance Agents and Brokers ........... 98

Vaughn, Terri, President, National Association of Insurance Commissioners ... 91

APPENDIX

Prepared Statements:

Oxley, Hon. Michael G. .................................................................................... 324

Kanjorski, Hon. Paul E. ................................................................................... 326

Royce, Hon. Ed .................................................................................................. 327

Vela ́zquez, Hon. Nydia ..................................................................................... 328

Ahart, Tom ........................................................................................................ 330

Gilliam, Scott A. ............................................................................................... 344

McOwen, Wayne E. .......................................................................................... 350

Milesko, Glenn J. .............................................................................................. 358

Sternberg, Hans ................................................................................................ 398

Van Osdall, John .............................................................................................. 401

Vaughn, Terri ................................................................................................... 411

ADDITIONAL MATERIAL SUBMITTED

McKechnie, J. Kevin A.:

Written response to questions submitted by Members during the hearing 435

American International Group, Inc., prepared statement .................................... 439

American Land Title Association, prepared statement ........................................ 444

General Accounting Office, prepared statement ................................................... 446

National Association of Insurance and Financial Advisors, prepared statement ...................................................................................................................... 464

(1)

INSURANCE REGULATION AND COMPETITION

FOR THE 21ST CENTURY

Tuesday, June 4, 2002

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 call, at 2:00 p.m., in Room

2128, Rayburn House Office Building, Hon. Richard H. Baker

[chairman of the subcommittee] presiding.

Present: Representatives Baker, Ney, Shays, Royce, Ose, Rogers,

Biggert, Hart, Kanjorski, Bentsen, Sherman, Moore, Lucas of Kentucky and Israel.

Chairman BAKER. I would like to call this meeting of the Capital

Market Subcommittee to order. The meeting today is the first in

what will be a series of meetings over the coming weeks to assess

the advisability and desirability of reform in the marketing of insurance products nationally. In the course of facilitating what we

hope will be an important resolution of these issues is a significant

number of panelists who, over a period of weeks, will each give perspectives from their particular assessment of the advisability of

any approach that should be considered by the committee.

In the course of this, I am certain the committee will learn a

great deal, as we have a number of perspectives represented in the

course of all of the hearings. While we have no specific purpose in

mind for the end conclusion of these hearings, it certainly is evident that some regulatory reform is in order where a regulated financial institution may market a product which, on its face, is not

called insurance, but, in effect, is insurance that is not subject to

the 50-State review process and can enter into the marketplace

rather freely.

A similar product labeled insurance by an insurance company

must go through a rather long and deleterious process in order to

see that product marketed in like fashion. There are many other

instances which may be of concern, and I am certain the witnesses

today will bring many to our attention. But this is a first step in

what I hope will lead to a conclusion before the end of this Congress in some legislative recommendation for action that the committee may consider.

Chairman BAKER. At this time I would like to recognize Mr. Kanjorski for an opening statement.

Mr. KANJORSKI. Thank you, Mr. Chairman. Today we meet for

the first time this year to discuss the insurance industry and the

2

challenges that it faces. I commend you for your diligence in convening this series of hearings. Your efforts to educate the members

of our committee about insurance regulation will potentially serve

as the basis for future legislative action. I suspect, however, that

it will take us at least several years to forge a consensus on this

complicated set of issues.

The American insurance industry, as you know, is broad and diverse. According to one estimate, we have approximately 5,763 insurance companies operating in the United States. These companies vary greatly in size, structure, and product offerings. For the

last 150 years, the States have also traditionally regulated these

insurers.

Nevertheless, a discussion of insurance regulatory reform, including various proposals designed to increase the efficiency, promote

the uniformity of insurance regulation, or create an optional Federal charter, flows naturally from our actions in the 1999 law to

modernize the financial services industry. That statute removed

the obstacles that prevented banks, securities firms, and insurers

from affiliating and competing with each other. It also provided for

the regulation of financial products by function, rather than by institution. Additionally, that law reaffirmed the McCarran-Ferguson

Act of 1945, which calls for the regulation of insurance at the State

level.

The 1999 reform law has also begun to change marketplace dynamics. In fact, a number of insurers have reported that they increasingly find themselves in direct competition with brokerage

firms, mutual funds, and commercial banks, all of which may have

a competitive advantage due to their arguably more efficient federally-based regulatory systems. For example, in many instances, a

bank may introduce a new product immediately without any action

by their regulator, and securities firms can typically bring new

products to market within 90 days. Insurers, however, sometimes

have to wait more than a year to secure all of the required approvals to offer a new product nationwide.

As a result of these and other changes, some now contend that

the current regulatory system for the insurance industry has become too cumbersome and requires reform. For example, a recent

study by the American Council of Life Insurers concludes that the

lack of uniformity in State laws, the burden of dealing with numerous jurisdictions, and the excessive time required for new product

approval are of paramount concern of insurers who want to compete nationally.

In response to these mounting criticisms of State insurance supervision and the growing recognition that market forces have

changed the financial services industry, the States have initiated

their own efforts to modernize insurance regulation, primarily

through the National Association of Insurance Commissioners.

This debate over how to reform insurance regulation has also

seeped into Congress. Earlier this year, our colleague, Congressman John LaFalce, introduced H.R. 3766, the Insurance Industry

Modernization and Consumer Protection Act. His bill would allow

insurers to obtain an optional Federal charter and afford consumers with various protections. As we begin our series of hearVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
3

ings, I want to commend my ranking member for his leadership on

this important issue.

From my perspective, the most important thing that we can do

in the short term to help the insurance industry is to pass legislation to provide a Federal terrorism reinsurance backstop until the

private sector can address the problem. In the long term, we should

also explore how to modify insurance regulation and whether we

should create an optional Federal charter.

One idea that merits our consideration is whether we should create a tiered regulatory structure for the insurance industry as we

have already done for investment advisors. The Federal Government would regulate insurers above a certain size or in certain

business lines, while States would retain the responsibility for regulating the rest. During these debates, we should also carefully examine consumer protection issues. In the end, consumers should be

the ultimate beneficiaries of our actions.

In closing, Mr. Chairman, I believe it is important that we learn

more about the views of the parties testifying before us today.

Their comments will help us to better understand the different approaches to reforming insurance regulation and the key challenges

the industry faces. I also look forward to working with you over the

coming weeks and months as we proceed with additional hearings

to examine today’s evolving insurance marketplace and the need

for regulatory reform.

Chairman BAKER. Thank you, Mr. Kanjorski.

[The prepared statement of Hon. Paul E. Kanjorski can be found

on page 140 in the appendix.]

Chairman BAKER. Mrs. Biggert.

Mrs. BIGGERT. Thank you, Mr. Chairman. As we are all aware,

financial services reform, technology and globalization have dramatically changed the marketplace, and as such, we need to bring

insurance regulation in the 21st century to adjust with the environment in which we now live and work.

Two questions immediately come to mind. First, what is the best

path to follow; and second, why should we adjust with the times

in the first place?

Well, we are here today to help answer the questions of the best

way to proceed, and in terms of the why, we simply must change

in order to guarantee that American product innovation and competition remain the gold standard to which others around the world

strive to imitate.

Mr. Chairman, many times our States provide the best guidance

for us to follow as we consider laws at the Federal level, and this

is one of those times. In my home State of Illinois, our system has

worked well for insurers, consumers and regulators alike. Illinois

has a very small residual market, and significantly more auto and

homeowners competing for business than States with stringent

price regulation. Consequently, the premiums and lost wage ratios

in my State are well below most other States with large populations, high traffic density, and urban centers of activity.

Importantly, this system of less regulation has freed up government resources to allow State insurance departments to redirect

regulatory attention where it is most needed, including effective

solvency regulation and rehabilitation or liquidation of troubled

4

companies. Many argue that any action Congress may take should

bring about a system that resembles the one found in Illinois. We

will hear some of those arguments this afternoon.

While I believe that both the States and the Federal Government

have a role in regulatory affairs, there definitely are some industries that the Federal Government should not touch with a 10-foot

pole. Whether or not the insurance industry falls into that category, I do not yet know. That is why we scheduled this series of

hearings: to listen, to ask questions, and to examine the issue a little closer.

So let me offer a special welcome to the Alliance of American Insurers, an organization with its headquarters in Downers Grove, Illinois. For over 75 years, the Alliance has faithfully provided property and casualty coverage to thousands of policyholders, and I

know that the Alliance’s Ann Spragens is well regarded in the insurance world and will have some important things to say about

the current and future state of insurance regulation. So I look forward to hearing from her and the other witnesses that are here.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mrs. Biggert.

Chairman BAKER. Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman. Thank you for calling

this hearing and the subsequent hearings that will come from this.

The chairman and the ranking member will remember that over

the last several years, as this committee struggled with the passage of financial modernization, we often stumbled over the fact

that because of McCarran-Ferguson and the fact that insurance is

the only financial product which is not regulated really in any form

or fashion at the Federal level, that it made it very difficult for us

to achieve financial modernization. We ultimately did, and some

would argue that as a result of that, we chipped away at

McCarran-Ferguson.

But I think that the chairman is very prescient in calling this

hearing and pursuing this matter, because I think we have come

to the realization that as it is for securities and as it is for other

financial products, the same is true for insurance, that it is not—

the United States is not a conglomeration of 50 different markets,

but rather, we are 50 different States that are subdivided among

50 different regulators, and that may well not be the most efficient

means by which to both deliver a product to consumers and also

ensure that consumers are adequately protected.

This will be a very difficult issue. I would presume that one, I

hope that the committee pursues and follows through on, but I

think Mr. Kanjorski is right, it is probably an issue that will take

some years to accomplish, but I think it is a step in the right direction, and I think that the committee and the Congress should go

into this with their eyes open, understanding that market forces

are going to require us to move in this direction, that we have also

shown through experience that you can have a dual regulatory

structure at the Federal and State level which adequately protects

consumers, and we should not be concerned in trying to create a

similar structure for the insurance market.

So I appreciate the chairman calling this hearing.

Chairman BAKER. Thank you, Mr. Bentsen.

5

Chairman BAKER. I welcome our panelists here this afternoon. I

certainly appreciate each of your participation.

Chairman BAKER. At this time, I would introduce Mr. Wayne

White, President and Chair of Home Mutual Fire Insurance Company, who is here today on behalf of the National Association of

Mutual Insurance Companies. Mr. White.

STATEMENT OF WAYNE WHITE, PRESIDENT AND CHAIRMAN,

HOME MUTUAL FIRE INSURANCE COMPANY, ON BEHALF OF

THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES

Mr. WHITE. Thank you, Mr. Chairman.

Chairman Baker and members of the subcommittee, it is an

honor to have the opportunity to address you at this hearing on insurance regulation and competition for the 21st century. My name

is Wayne White, and I am President and Chairman of Home Mutual Fire Insurance Company in Conway, Arkansas. I come before

you as a representative of the 1,300 members of the National Association of Mutual Insurance Companies. NAMIC is the largest

property and casualty trade association.

I have been asked to discuss insurance regulation, including a

perspective on the National Association of Insurance Commissioners, advisory organizations such as the Insurance Services Office; rating organizations such as A.M. Best, Standard & Poor’s;

and finally, to provide you with NAMIC’s position on the future of

insurance regulation. Each of these issues are discussed at length

in my written testimony.

NAMIC is encouraged by the NAIC’s post-GOBA performance

with respect to the mandated tasks, as well as to the statement of

intent. The NAIC also deserves recognition for focusing attention

on key marketplace improvements, such as speed to market and

market conduct for which NAMIC member companies are asking.

While the NAIC can recommend standards for reform and raise the

profile of important market reform issues, they cannot act alone. In

the final analysis, before Congress intercedes, State legislative action must be the focus of modernization initiatives.

There are important and effective national organizations that are

prepared to lead this reform effort in the States. Already, the

American Legislative Exchange Council, ALEC, the National Conference of Insurance Legislators, NCOIL, have endorsed competitive rating language that satisfies the speed to market concerns of

the property casualty insurance industry.

This Friday in PhiladelpHIAA, the National Conference of State

Legislature’s executive committee task force to streamline and simplify insurance regulation will meet to consider State legislative options for speed to market and market conduct reform. Their proposals will be approved by this fall so that the States may be considering these issues in January.

Other organizations have played significant roles in the evolution

of insurance practices. Rating bureaus came into being in the late

1800s and operated without disruption until the enactment in 1945

of McCarran-Ferguson, which recognized the authority of the

States to preempt Federal antitrust legislation and laws and regulate insurance rates and forms. The role of rating bureaus has

6

changed and their rates and forms require regulator endorsement,

thus giving birth to the prior approval process currently in effect

in more than one-half of the States.

Today, these bureaus are transforming to advisory organizations

and gather premium and loss data for State regulators and the

public as well. They also promulgate standardized forms for use by

companies that affiliate with them. Rating organizations provide

another piece of the regulatory puzzle. These independent organizations provide ratings of insurance companies based on financial

and operational analyses, and give regulators an additional perspective on the companies licensed in their jurisdictions.

The information presented today should make our position clear.

The regulation of the insurance industry is best left to the States.

The issues we are dealing with are not new, but have simply

gained a higher profile as a result of the convergence of the financial services industry. A recently released public policy paper, Regulation of Property Casualty Insurance, the Road to Reform, outlines the major items in need of regulatory attention.

In addition, it points out the flaws in a Federal solution to insurance regulation, flaws such as the propensity of Federal bureaucracies to use the regulatory process as a means of social engineering; the potential for an unfair environment for smaller companies;

the additional costs associated with a dual regulatory system that

must still deal with the tort laws that are unique to the individual

States, and recognition that the cost of such a system will be

passed on to the consumer. Many of the issues put on the table by

those desirous of Federal involvement are simply of such a purpose

as to make it easier for large companies to do business.

The areas for reform have been clearly defined. However, we

must remember that changes in regulations and business practices

are driven by consumer demand. It is at that level which is closest

to the consumer that the process of change is most effective. Now

it is up to the States to enact changes in public policy that will

make the difference, and we urge you to give it time to work.

Chairman BAKER. Thank you, Mr. White.

[The prepared statement of Wayne White can be found on page

198 in the appendix.]

Chairman BAKER. Our next witness is no stranger to the committee room for sure. Welcome, Mr. Steve Bartlett, President of Financial Services Roundtable and a former distinguished member of

this committee. Welcome, Mr. Bartlett.

STATEMENT OF STEVE BARTLETT, PRESIDENT, FINANCIAL

SERVICES ROUNDTABLE

Mr. BARTLETT. Thank you, Chairman Baker and Ranking Member Kanjorski and members of the committee. It is good to be here.

The Financial Services Roundtable greatly appreciates the opportunity to participate in what I believe will turn out to be the first

of blockbuster hearings in this area. I am here on behalf of our 100

member companies and their CEOs who identified the creation of

an optional Federal charter for insurance companies as a top priority of the industry on the date of our inception as we reconstituted an integrated trade association. They identified this as a top

7

priority on day one of the organization, Mr. Chairman, back in

1999.

We believe it is time, Mr. Chairman and Mr. Kanjorski and

members of the subcommittee, to create order out of chaos, to unleash the genius of the competitive marketplace, and to allow a national market to function as a national market in conjunction with

regulation, not in spite of it. In short, it is time for Congress to create an optional Federal charter; not tomorrow or next year or 5

years from now, but now.

In inviting the Roundtable to testify, you have asked us for an

overview of the economic and marketplace challenges facing the insurance industry, which I shall do. As a predicate to that, though,

I would like to make four quick points:

First, as these hearings will reflect, and please note from all of

the witnesses, there will be no real disagreement about the need

for significant reform in modernization. I do not believe anyone will

come to you and say there is not a problem to be fixed.

Second, perhaps most important, the optional Federal charter

and legislation aimed at improving State regulation are mutually

complementary rather than mutually exclusive. They can and

should be combined into a single, integrated piece of legislation.

Third, modernization of insurance regulation is about the economy and our customers, the American consumers, your constituents; not about turf battles, not about barriers, not about all of

those things around it, but it is about the consumers.

Finally, Congress can ill-afford, I believe, to wait for a crisis to

prompt comprehensive reform.

Now, the marketplace challenges. The direct and indirect cost to

national companies of dealing with the inconsistent laws and regulatory requirements of 55 different regimes are enormous. These

costs are today borne by customers and reflected in industry profitability. In my written testimony I have provided some of those estimates. It is profitability, after all, that allows our companies to

offer products and services at the lowest possible cost to the consumer. In the year 2000, Mr. Chairman, the property casualty rate

of return, known as ROR in the industry, was 5.8 percent, and for

life insurance was 10 percent.

By contrast, the rate of return for commercial banks was 16.7

percent, and the rate of return for diversified financial services

companies was 21.3 percent, and for the Fortune 500 overall was

14.6 percent. Again, that is contrasted with 5.8 percent for property

and casualty.

The myth that insurance companies are wildly successful and

overcapitalized is precisely that: a myth. Since its peak in 1999, the

capital of the U.S. nonlife industry has declined by $58 billion, or

17 percent. The ratio called the trade combined ratio, or TCR,

which is the ratio of an insurance company’s losses and expenses

to its premiums is one way to view profitability. In 2000, the trade

combined ratio was 116. That means that these companies are paying $1.16 out for every dollar they earn in premium. Clearly, under

the current system, insurance companies are not as healthy as others in the financial services sector.

In fact, it is reasonable to assume that under the current Statebased system, diversified financial services companies will continue

8

to steer away from insurance as a core business. The true cost of

State-based regulation is manifested in the resulting lack of competition and choice for consumers. Companies cannot indefinitely

pay out much more in cost and losses than they receive in premium

while continuing to serve their customers properly. Consumers ultimately will bear their cost in reduced choice and convenience.

On the regulatory consequences side, Mr. Chairman, the fact is

that the existing regulatory structure adds a tremendous cost burden on insurers and consumers and, at the same time then, stifles

competition. The need to get individual State approvals, for example, for products, mean not only long delays in bringing products

to market; in some jurisdictions this can take years, but also huge

costs associated with time, complexity, and duplication due to the

differing requirements and standards of 55 different jurisdictions,

even though in the case of many national companies, it is one product and the same consumers.

The NAIC has invested enormous time and effort into seeking to

reform the system. We applaud those efforts and support those efforts. But these reforms towards uniformity absent an optional

Federal charter of a competitive Federal charter simply cannot succeed. The world is different from where it was 57 years ago when

McCarran-Ferguson was enacted. Unlike that time, the United

States is now a single national market for all financial services, including insurance. The world has changed a lot in 57 years. As in

every other industry, insurance companies that operate on a national basis should be able to choose one-stop regulation that is free

of duplication, redundancy, and inconsistent requirements and interpretations.

The principles that we have chosen to lay out, Mr. Chairman, are

briefly, first, any Federal system that must be consistent with effective, high-quality State insurance regulation; second, any framework of Federal regulation must be truly optional; third, a Federal

charter should be designed to permit insurance companies of all

sizes and types to engage in multi-State operations; fourth, a new

Federal framework must represent the best in modern regulation,

and that means deregulation of rate and form; fifth, the system

should be comprehensive; sixth, the new Federal regulators should

have the stature and resources appropriate to the task.

Mr. Chairman, thank you for your boldness in holding these

hearings and for your commitment to the competitive marketplace.

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

[The prepared statement of Steve Bartlett can be found on page

143 in the appendix.]

Chairman BAKER. Our next witness is Ms. Ann Spragens, senior

Vice President and General Counsel for the Alliance of American

Insurers. Welcome, Ms. Spragens.

STATEMENT OF ANN W. SPRAGENS, SENIOR VICE PRESIDENT

AND GENERAL COUNSEL, ALLIANCE OF AMERICAN INSURERS

Ms. SPRAGENS. Thank you very much, Mr. Chairman, Ranking

Member Kanjorski, and members of the subcommittee.

I have served in the current position I hold for 6 years at a National Trade Association representing property and casualty insurers and, consequently, my comments today will be related only to

9

property and casualty insurance, not life and health. Prior to that,

I served for 16 years as a regulator in the State of North Carolina,

and that combined experience informs my testimony today.

I am going to explain why the Alliance supports State regulation

and has since 1922, which was our inception, and also what modernization we view is needed in order to bring State regulation into

better alignment with contemporary economic needs of policyholders and insurers. In addition to that, you have also asked me

to comment on the adequacy of revenues available to insurance departments to carry out their functions.

First, we support the regulation of property and casualty insurance by the States. P and C products directly reflect the rights and

remedies created by each State’s law, governing torts, property use

and ownership, contracts, domestic relations, corporations law, and

a myriad of other subjects. As long as States retain the powers

granted to them by the Constitution, this will continue to be the

case, and property and casualty products must reflect those differences. As a result, the regulation of the property and casualty

industry cannot be carried out without recognizing State-specific

law. We believe that States should, therefore, regulate property

and casualty insurance as being most familiar with their own laws

and their own needs.

We also believe in functional regulation and the usefulness, the

continuing usefulness of the McCarran-Ferguson Act. The need for

solvency regulation serves policyholders and insurers alike. The financial strength of insurers and confidence in them promotes economic stability for all concerned. There are some who have suggested that modernization of State insurance regulation is really an

effort to escape regulation. The Alliance says it is not. It is an effort to align regulatory functions with economic realities of a new

century.

The Alliance believes the regulation of property and casualty insurance should concentrate on efficient regulation of solvency with

a greater emphasis on market conduct examination and a movement away from the current level of rate and form regulation, especially for commercial lines. Already, 24 States have, in the last 5

years, enacted simplified rate and form filing requirements for commercial lines because they have recognized that it is appropriate to

do so and that the marketplace demands it.We believe there is still

work to be done to harmonize these changes and obtain them in

some jurisdictions that have yet to do so.

It is the need for speed which we believe should drive modernization: Speed to market to provide consumers with product choices,

speed in licensing approvals with minimum redundancy, speed in

the examination process using practices that focus on sound risk

assessment to engage financial strength and a review of market behavior.

Are State insurance regulators adequately funded to carry out

that job? We believe they are, to perform functions appropriate to

the modern marketplace. However, this may require a realignment

of the resources that are available to them and how they are used.

We note that there is budgetary distress in many States across

all functions, not just insurance regulation, due to the current drop

in revenues from income tax and nonwage income. I think you will

10

see that reflected in The Wall Street Journal today. However, approximately 50 percent of regulatory budgets go to other things beyond conventional insurance regulation, according to a book published in 2000 by the American Enterprise Institute entitled Optional Federal Chartering and Regulation of Insurance Companies,

and we will be glad to make these graphs available to the committee.

So States find that they are starting to outsource some of these

functions and interestingly, as they tighten their belts, it is the

rate and form function that we see being outsourced, a tacit recognition, I believe, that this is the least essential part of insurance

regulation and does suggest the possibility of realigning the use of

those resources in the fashion that I have described.

Mr. Chairman, this does conclude my oral comments. I offer

them together with my written testimony and I hope they will be

accepted into the record, and I will be glad to accept any questions

from the committee.

Chairman BAKER. Thank you, Ms. Spragens. Yes, your testimony

and that of all witnesses today in their entirety will have their testimony included in the record.

[The prepared statement of Ann W. Spragens can be found on

page 181 in the appendix.]

Chairman BAKER. Ms. Spragens, I note that you believe, as does

Mr. White, that the need for reform is most appropriately pursued

at the State level. What are the specific top 2 or 3 things that you

think should be achieved in order to facilitate a more efficient market which has not yet been accomplished by the States?

Ms. SPRAGENS. We believe that further reform is needed in connection with rate and form review particularly. This is an area

where current economic realities no longer require the same level

of agency activity that may have been true in the past. The role

of a regulatory agency is not to supplant the decisions of consumers, it is in order to enhance them. We believe that that time

has come when rate and form regulation should be loosened on the

front end, with market conduct regulation brought at the so-called

back end, to assure that consumers are protected.

Chairman BAKER. What about product approval, new product approval?

Ms. SPRAGENS. New product approval comes within that category.

Chairman BAKER. What about the ability to speed up claims

processes from a consumer perspective? It is a very difficult morass, sometimes, coming from different State perspectives with

multi-State claimants involved. Is there anything that can be done

there?

Ms. SPRAGENS. I so much appreciate you asking that question.

We recently conducted a survey about 2 years ago gaging the level

of consumer confidence in State government’s ability to carry out

its functions compared to other levels of government, and we found

that consumers hold State government in very high esteem in connection with its responsiveness, which is the key point in connection with responding to claims issues.

Chairman BAKER. And Louisiana was in that survey?

Ms. SPRAGENS. All of the States were, sir.

11

Chairman BAKER. Oh, thank you.

Ms. SPRAGENS. As was Pennsylvania and Illinois and so on. So

that in responding to the particular requirements of specific State

laws which will control how claims are paid, that is, what is compensable and what is not, State government was deemed to be the

best level and venue for that function.

Chairman BAKER. Assuming we would pursue the State level

with regard to rate and form, including new products, how long

would one want to wait before the Federal Government would act?

Is there an agreed upon window? Mr. White may want to get in

on this too. Is this a problem that could be resolved in a year or

2, or is this a Gramm-Leach-Bliley problem and we are going to

wait a decade? What kind of a clock should we start?

I asked this question last year of the NAIC who appeared before

the committee when outlining the goals which they had in mind,

and we could never get agreement on even how long the clock

should run. Maybe that is where we ought to start.

Ms. SPRAGENS. May I suggest that perhaps a clock is not the way

we want to look at it; that what we ought to be doing is gauging

the substance of the reforms that are being engaged and brought

to bear, because it is functional regulation that is being examined,

Mr. Chairman.

Chairman BAKER. Oh, no doubt. I would say that if there was not

a substantive reform within some period of time, then the Congress

should pursue substantive reforms was my point.

Mr. White.

Mr. WHITE. I think I would agree with that. Your reference to

Gramm-Leach-Bliley was very appropriate. However, at the State

level, we realize that not every State legislature meets on a regular

schedule. Some, as in my State of Arkansas, meet only every other

year. So it is important that we give this process time to work

through the State legislative efforts. And in our case, Arkansas, we

are, in fact, working with our commissioner this year on a package

to achieve each of these points that we have discussed: Speed to

market, open competition on rates, use and file, as far as new

forms, new products; company licensing requirements being made

much easier. Each of those issues will be addressed in a package

presented by the Arkansas commissioner this year to our legislature. We feel very hopeful, of course, that we will achieve some

progress in those areas.

Chairman BAKER. But even if you meet every other year, is this

a 4-year problem to be fixed? Is there any outside clock? We are

going to agree on something before we finish here.

Mr. WHITE. Well, we might not agree on a time frame.

I would say that there is not a specific limitation. I realize that

we must take action. The regulators certainly realize, with congressional oversight, that they must take action, but I would agree with

the Alliance, that I think you measure this more clearly by the results, the significance of the efforts, the achievements as they occur

and, at some point, if progress is not being made, then it may require a change in direction. But our position is that the State regulators can, with the assistance of the legislatures, can accomplish

what it is we need to accomplish.

12

Chairman BAKER. Well, my time as expired, but I would just

make a concluding remark. It would seem appropriate at some

point, given the length of discussion that we have already had nationally on these concerns, without identifiable progress being

made, there ought to be some point at which the whistle is blown

and the Congress begins to debate some of these topics, and I do

not know when that point is, but at least we agree on that. I thank

you very much.

Mr. Kanjorski.

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

Mr. White, I want to continue along your line of thought. It appears that in Arkansas they are working very diligently, but suppose they are totally successful in everything they do. How is that

going to provide uniformity in the 55 jurisdictions that Mr. Bartlett

talks about?

Mr. WHITE. Congressman, I believe that we are in a unique position in Arkansas in that our commissioner is currently the Vice

President of the NAIC and sees his position as a leader in that organization as an opportunity to take the progress that we can

make in Arkansas and carry that across the country during his

term, hopefully, as President of the NAIC, working through

NCOIL, working through the NCSL, working through ALEC, those

organizations that are actively encouraging our State legislatures

to react to these —.

Mr. KANJORSKI. What was the term of your president?

Mr. WHITE. Sir?

Mr. KANJORSKI. What was the term of the president?

Mr. WHITE. The term of the president is 1 year.

Mr. KANJORSKI. And in response to Mr. Baker’s questions, within

a year we should therefore know whether we are going to be successful or not.

Mr. WHITE. Well, that would be nice. In reality, this process, as

we all know, began with the adoption by regulators of the statement of intent by the NAIC membership. That occurred in March

of 2000, so the process has only just begun. Yes, we are in the second year of that, but I think an evaluation of the progress made

on that statement of intent thus far is probably in order. Some of

these things, as I mentioned, have been accomplished because of

congressional oversight; some because of Federal legislation has required that as a part of Gramm-Leach-Bliley. But producer licensing uniformity has now been passed in 45 States, the most recent

I believe being Tennessee. That is something that was required and

has been satisfied to this point. That, in itself, was a milestone, because it is the first, after our—several years ago, the response to

financial accreditation—.

Mr. KANJORSKI. But that is only about an 80 percent success

rate, with 45 States joining out of 55 jurisdictions.

Mr. WHITE. Yes, sir, and I believe the requirement under GOBA

was 29 States and the NAIC is very comfortable that they are making progress. We realize there are large States that have not signed

on to that process, certainly.

Mr. KANJORSKI. Yes. Mr. White, I am really torn because I think

there is a lot of merit to what Ms. Spragens said in regard to

States providing a closer response but, on the other hand, but I see

13

the insurance industry having to compete with the banking industry, the securities industry, both of which are national in scope and

nationally regulated. On the other hand for the middle to moderate

and small insurance company, I think they can continue to do business on a State basis, but I think for the major companies, they

are going to be at a decided disadvantage if we do not find some

way to clear the field for them. I do not know what that way is,

but some way that they can get a product to market very quickly

and be competitive with other financial industry participants. And

if they are not, they will ultimately be at a grave disadvantage.

Mr. Bartlett, what do you think of potentially having a two-tiered

system where we could identify those who would opt in for a national charter because of either their size, the products they write,

or the nature of their market being national? Maybe we could identify 10 percent or 20 percent or 25 percent of the market for whom

there will be a national charter, and while the second tier group

would remain on the State basis.

Mr. BARTLETT. Congressman, we have not examined the specifics

of a tiered system, and we would like to do that, to work with you

on it. But in general, I think that an optional Federal charter

would result by the competitive marketplace in essence, a twotiered system.

My own view is that most companies would continue to opt for

a State charter because they are comfortable with that, they have

made it work and they are in one or two or three States. The national companies and many of them, perhaps most, would then opt

towards a Federal charter, assuming it is a competitive charter,

very similar to what we have in banking. I would caution, I think,

the committee against trying to decide in advance which companies

get the Federal charter and which companies get the State charters.

I think companies, based on their own market niche and based

on the charter themselves, will be able to decide that, but I think

it will end up to be the national companies with the Federal charters and the State companies with the State charters. But I think

the companies and the marketplace will end up deciding that.

Mr. KANJORSKI. Mr. Bentsen, I thought, made a great point, that

we all anticipated in 1999 when we passed the Modernization Act

that we were going to have to address this problem of the Federal

charter for insurance companies at some point in the future. To

jump a little ahead of that idea, should we project how this is going

to affect the tort law system of the 50 States? Are we going to be

here 10 years from now saying we should have uniform tort laws

throughout the United States?

Mr. BARTLETT. That is an excellent question, because that is

often sort of thrown up as a straw man. The fact is, as we discovered with the dual-charter system in banking, a Federal charter

does not require, nor should it, for the Federal Government to

change individual State laws. The Federal charter will—each company would still have to operate within each State law just as they

do today and, Mr. Kanjorski, just as they do in every other industry, whether it is banking or steel or coal or home building, they

have to comply with the State laws in the States where they operate and still have a Federal charter, so that is perfectly compatible.

14

Mr. KANJORSKI. Don’t they write policies very often using words

of art that are crafted by their individual supreme courts so that

a policy that uses these words or is interpreted as using these

words are understood by the consumer If we take that away from

the law as discerned in each of the 50 States and we put it into

one uniform contract, how is that going to impact on the legal interpretation?

Mr. BARTLETT. There may be a State in the Union that has a

shortage of good layers to interpret Supreme Court cases and write

those policies, but I do not know of that State. The fact is that

these companies, even under a State-by-State system, every company proposes a product or a form or a policy proposes it for that

State and they would continue to do that.

With a Federal charter, however, they could propose a product

and bring it to market in a speed to market to all 50 States at

once. It is then incumbent, as it is in every other industry, for the

company to comply with the laws, both the Federal laws and the

laws of the State in which they do business. No difference.

So in short, there is no need to change any or to preempt any

State laws with regard to contract law, tort law, or liability laws

in any way. Companies should simply be able to have a Federal

charter, offer a national product, as they do in every single other

industry. This is the only industry that I know of where you are

required to go and get permission State by State by State. It makes

no sense. Perhaps it made sense in 1945. It makes no sense today.

It just simply costs consumers time, convenience and money.

Mr. KANJORSKI. I know my time is running out. Do you have any

estimate of what the real cost of this State-by-State regulation is?

Mr. BARTLETT. I do not have an overall estimate. We asked one

company, just one company for what they estimated their cost to

be, and this was not the largest company by any means, but they

are in, I think, 40 States or something like that. They estimated

that just the cost of complying with the regulations in filing their

forms cost them about $25 million a year of excess cost. Now, that

is not the cost of the lost market, that is not the cost of the higher

premiums because they cannot serve their consumers, that is just

the cost of filling out the forms. That was one company alone.

Mr. KANJORSKI. That $25 million is to how much business written or on what premium? In other words, is it a 2 percent cost, a

3 percent cost?

Mr. BARTLETT. It was about 2 percent of their premiums. About

2 percent cost to their premium holders, and that is not for the cost

of the lost market, just for the cost of filling out the forms, basically.

Mr. KANJORSKI. Which would be removed if we had a Federal

charter?

Mr. BARTLETT. If that company chose to have a Federal charter.

Under an optional Federal charter, just as it is with banking, every

company could then decide which is the best for their particular

competitive niche, and thus the competitive marketplace would decide, driven by consumers.

Mr. KANJORSKI. Thank you, Mr. Chairman.

Chairman BAKER. Mrs. Biggert.

Mrs. BIGGERT. Thank you, Mr. Chairman.

15

Ms. Spragens, witnesses at one of our previous subcommittee

hearings testified that States like Illinois and South Carolina, and

I think that Mr. White mentioned this also where they have allowed the insurance marketplace to work, they have created more

innovation and competition and coverage availability. Would you

agree with that?

Ms. SPRAGENS. We certainly would, and believe that is an approach that can be very successfully implemented in any State.

Mrs. BIGGERT. Mr. White, would you like to expand on that too?

Mr. WHITE. Yes, ma’am. Obviously, a look at the statistics and

the experiment originally, beginning in 1969 in Illinois, gives evidence to the fact that an open market does, in fact, increase competition. The residual market in Illinois, as you mentioned in your

opening remarks, is greatly reduced. The choices available to the

consumers in your State are much more varied in nature now. The

average prices of the insurance premiums fit somewhere in the

middle of the country, which would indicate a competitive market,

both in products as well as price.

I do not see, and I guess responding in part to your question and

in part to some of the comments I have heard, our association, in

fact, does represent about 40 percent of the property and casualty

premiums written in this country, and we have very many small

members in our association, but we also have 5 of the 10 largest

writers, and our board of directors as unanimously agreed that

States such as Illinois and their regulatory practices are the models that we should attempt to follow in our efforts to modernize.

Mrs. BIGGERT. Do you think that it would make a difference,

having an optional Federal charter versus the State regulation to

make less regulation, or would there be—do you see it with the

Federal that there would be more regulation and it would take

away that regulation and competition?

Mr. WHITE. I have, in my experience in this industry, as well as

in the industry of public accounting from which I originally came,

I have never encountered a situation where the addition of the Federal Government into the process reduces regulation or increases

efficiency. In fact, it would appear to me that the initiation of that

process itself would add additional costs to the companies involved,

in addition to creating potentially an unlevel playing field for the

smaller companies that do not elect a Federal charter. Playing by

two sets of rules.

Mrs. BIGGERT. Thank you.

Mr. Bartlett, would you agree with that? I guess what I am trying to ask, if you have uniformity and reciprocity when there is no

Federal option, but you would still have the regulation, would that

be greater or less—.

Mr. BARTLETT. Congresswoman Biggert, the regulatory burden, I

have 100 companies who are members, all the large companies, we

share many of the same companies, and by 100 companies are

unanimous that the regulatory burden, with an optional Federal

charter, some of them may not opt for a Federal charter, would be

dramatically reduced for a number of reasons: speed to market, the

competitive nature of a Federal charter with great deregulation

and form deregulation, and just simply a competitive charter as it

works in the banking industry.

16

So there is no disagreement within my companies as to the Federal charter would reduce their costs rather dramatically. Obviously, it is their money, so they have looked at it pretty strongly.

They are also unanimous, by the way, in believing that the Illinois model of rate and form deregulation is the right model for the

Federal market. That is modern regulatory standards where you

regulate for safety and soundness and for consumer protection, but

not on rates and products. So our companies believe strongly that

allowing a Federal charter would dramatically decrease costs; not

only increase costs, but would decrease costs.

We support uniformity. I mean, we support this drive towards

uniformity. It helps. But in the best of cases, the success, if we

achieve success and it has not achieved success yet; if it achieves

success, success is you convert a grossly inefficient regulatory

structure to a merely largely inefficient regulatory structure. You

still do not solve speed to market, you still do not provide relief for

a national market, and you still do not provide a competitive charter for a company that wants to have a competitive option.

Mrs. BIGGERT. Could you explain just a little bit more a competitive charter, what you mean by that?

Mr. BARTLETT. Well, the best comparison is in the banking industry. J.P. Morgan Chase is one of the largest banks in America,

one of my largest members, and they have a State charter, because

for a variety of reasons they believe, and it has worked for them,

that a State charter works best for them. Most of the other national companies have national charters, so in the banking industry, similar to this, a company could choose which charter is best

for their marketplace, their customers, their structure, and then

they choose.

Thus, you have a regulatory—the opposite of what we have

today, a regulatory drive to excellence, and I will pick on the Chairman’s State, where a company based in Louisiana, if they are, for

whatever odd reason, they are dissatisfied with the regulatory

structure in Louisiana, could choose a Federal charter as an option.

I know that is unlikely, Mr. Chairman, but it is always possible.

So a competitive charter then allows the marketplace and ultimately the consumers, through those companies, to choose.

Mrs. BIGGERT. Thank you.

Thank you very much, Mr. Chairman.

Chairman BAKER. Thank you, Mrs. Biggert.

Ms. Hart.

Ms. HART. Thank you, Mr. Chairman.

I kind of have an out of left field question because I was a State

Senator for 10 years and I sat on the insurance committee, and

through the whole Gramm-Leach-Bliley debate, one of the issues

that the NAIC had taken up dealt with keeping the State as a regulator for insurance, but somehow having this model NAIC insurance regulation that all of the States should comply with, which

sounds to me like they were looking for everybody to have the same

rules, but to have the State still be the enforcer.

I do not know if that is still the case, but I would like to hear

your thoughts about that theory, if that is what you are really looking for when you looking to have sort of both levels be involved,

17

but not really, especially those of you who endorse the continuation

of the State and really not having a Federal charter?

Ms. SPRAGENS. What the NAIC has been promoting and, frankly,

what we support is more harmonization and more uniformity in

process. That is different than the great rich variety of State substantive law that I mentioned in my testimony that controls casualty and property products. Money is notoriously fungible and it

perhaps can be regulated in a different way. Casualty risks are

unique. They vary significantly from State to State. Take, for example, the difference in catastrophe risks posed by weather and geology. That cannot be made, homogenized nationally.

So it is process that can be greatly enhanced, while preserving

what is a Federal system blessed by our United States Constitution, and that we believe will continue.

Process can be improved dramatically. This is where there can

be uniformity in the speed of turnaround, for example, on whatever

filings are required and appropriate within a given State.

Finally, our view is that an optional Federal charter would not

be an alternative. It would, in fact, be a second layer of regulation.

It would not be more efficient. We believe that proponents would

not be satisfied with it if they had it, because it simply is not going

to play out that way. The proposals that currently have been floated, of which we are aware contemplate continued activity in State

residual markets, for example, which necessarily brings to bear all

of the State requirements on what coverage has to be placed in

those markets and controlled.

Another aspect of this that is extremely grave from our perspective and why we focus on process uniformity and harmonization is

the issue of the level playing field. If very large companies pull out

of the State system and take with them their statistical data, this

means that the ability to aggregate credible, statistically credible

data will be significantly compromised.

This is a unique problem to the property and casualty industry.

You will not see this on the life side, for example, or in other industries. That data provides significant confidence for consumers and

for insurers alike who are small or midsized to be able to participate in the marketplace in an environment of financial solidity. So

we believe all of those issues are crucial and should be examined

very carefully in connection with any discussion of an optional

charter.

Ms. HART. Thank you. Anybody else on that specific issue?

Mr. BARTLETT. I would. Let me just take the catastrophic risk or

the catastrophe risk. The catastrophe risks between Pittsburgh and

Cleveland are pretty similar, between New Orleans and Houston

are pretty similar, between, pardon me, Congresswoman, between

St. Louis and East St. Louis are pretty similar. All other types of

industries trade and do business across those State lines with cities

that are side by side, and it is only an insurance industry that has

to go through these extra steps.The data collection is an easy one

to solve. You solve that in the—I do not believe that is insurmountable.

As far as the idea that uniformity in the end can solve the problem, it seems to me in the best of circumstances, 10 years from

now, 15 years from now, in a best case, if we achieve full uniVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
18

formity, that means the uniform, every uniform standard would

have to be set by someone, perhaps the then-commissioner of insurance in Arkansas, and sort of jaw-bone to the other States, which

strikes me of at least having the possibility of having uniformly

bad standards in some cases, because there is no national forum

to debate those in a public way, such as the U.S. Congress.

So I think that having more uniformity, more efficiency set by

the State-chartered organizations competing with a Federal charter

that offers that competitive model is the one in which you end up

achieving what is best for the consumers and best for the national

marketplace.

Ms. HART. Thank you. I see my time is up. Thank you, Mr.

Chairman.

Chairman BAKER. Mr. Ose, you are recognized for 5 minutes.

Mr. OSE. Thank you. Mr. Chairman, if you would clarify something for me. Are issues dealing with the solvency of the insurance

companies and the regulatory environment that they live in, are

they subject to this hearing?

Chairman BAKER. I am sorry, could you restate?

Mr. OSE. Are issues of solvency and the regulatory environment

of insurance companies the subject of this hearing also?

Chairman BAKER. Certainly. This is an informational hearing for

the members of the committee and to consider all perspectives of

reform where appropriate.

Mr. OSE. I would like to ask Mr. Bartlett about an issue. It is

my understanding that in the early 1990s, overseas financial institutions were not allowed to own domestic insurance companies; is

that correct?

Mr. BARTLETT. Yeah. I don’t know. The overseas companies own

domestic companies now.

Mr. OSE. I am aware of that now. But it is my understanding

that in the early 1990s that was the case. I am speaking specifically to the issue of Executive Life in California and its purported

ownership or control by Credit Lyonnais in France.

Mr. BARTLETT. I was sitting on this committee back then, so I

don’t know.

Mr. OSE. Does anybody on the panel know the answer to that?

Mr. Chairman, the reason I raise the issue is one of the questions that I think we have to consider in the context of GrahamLeach-Bliley and its implementation is not just the positive impacts

of this legislation but also what happens if everything goes south,

as it did in California, when a particular company, for whatever

reason, was judged to be illiquid or not liquid at all, and was ordered liquidated by the insurance commissioner.

The situation that arose was that there is some evidence to suggest that a company based in France was fronting for Credit Lyonnais, which my understanding is, was statutorily prohibited by law;

in other words, another—a foreign financial institution, owned and

controlled by arguably the Government of France at some point or

another, was in a position to control the prospects for dissolution

of a domestic insurance company.

And the reason that is germane is that there are now 300,000

policyholders in California, all of whom had their annuities or coverages given a haircut. And I would hope in the context of our disVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
19

cussion about the implementation of the regulations for GrahamLeach-Bliley, that we would not only look at the positive side but

also give consideration to how to avoid a repeat of a cram-down

haircut on as many as one, let alone 300,000 people, as happened

in California.

With that I yield back.

Chairman BAKER. Thank you, Mr. Ose. That is certainly a subject of importance and we should have rules which construct, as

best we can, a method to ensure that no policyholder is left in that

circumstance as a result of a corporate failure when the premium

payers have done their part. And, it is—I will need to know a great

deal more about the matter which you have brought to the committee’s attention, But certainly we will investigate that and all similar situations and try to preclude that from recurrence if possible.

Mr. OSE. I appreciate the chairman’s offer. I will be happy to

share with him the information that I have. It has to do primarily,

as I understand it, with whether or not someone can come in, allegedly break the law, be judged to be illiquid, the company is liquidated, and then 8 or 9 years later they pay a nominal fine relative to the appreciated assets that they otherwise controlled.

Chairman BAKER. I assure you that in Louisiana we have someone who is an expert on that subject.

Mr. OSE. I think he is sitting right down there, isn’t he?

Chairman BAKER. Thank you. Mr. Ney, did you have questions?

Mr. NEY. Thank you, Mr. Chairman. The question I have is do

you believe that a Federal regulator can be as responsive to industry and citizens as a State regulator? I mean we got Lee Covington

in Ohio—I wanted to put in a plug for Lee, since I am from Ohio.

I used to chair insurance and banking in the State. And we dealt

for years with doing our part on the McCarran-Ferguson when different regulations needed to be implemented, and we would respond with each other through the National Conference of Insurance Regulators, et cetera.

I just wonder if a large Federal regulator would be as responsive,

and I know you can—States vary differently with people that run

the insurance. And I know there is argument of elected versus, you

know, people that are appointed and some of the political ramifications of elected process.

But I just wonder in general, anybody, do you have an opinion

on the responsiveness of a large Federal regulator? And the reason

I state that, if something happened and we went to the Federal

side, you know, I just wonder with rules and regulations, some people who would support that would be coming back in about 5 years

saying, look what is being done to us; can you please save us from

what is going on with the Feds?

Anybody.

Ms. SPRAGENS. Yes. Perhaps the best answer I can give you is

that consumers believe that the States are more responsive. And

in that regard I would make available to the committee, should you

be willing to accept it, a survey that the Alliance of American Insurers did about 3 years ago, I think, comparing consumers’ attitudes about the responsiveness of different levels of government to

deal with various issues. That question was specifically asked, and

20

that is a response that we obtained that was the result of a RoperStarch survey on our behalf.

Mr. NEY. Okay. But just to follow up on that, if citizens through

surveys believe that—but what about the practical reality of something the Fed creates that becomes the nightmare of the century,

and the same citizens come back 5 years from now saying, what

is going on, this is all bogged down?

Ms. SPRAGENS. As we have tried to envision how Federal regulation of property and casualty insurers might take place in order to

recognize the regional- and State-specific differences that I have

outlined, it seems to us that inevitably what occurs is that a proxy

for the State system is actually created.

It would be regionalized. There would have to be expertise based

upon what is taking place within a particular geographical area. It

seems to us, therefore, that it suggests strongly that it would be

inefficient to create that layer.

Mr. BARTLETT. Mr. Chairman, let me try—Federal regulatory

agencies can be as responsive or more responsive to some States

or less responsive to other States, just the way it works in the

banking circles. I have, from time to time, some of my members

who will talk with me about their dissatisfaction with the State

regulatory agency and how they long to be under a Federal regulatory agency in banking, and vice versa. I have it exactly the reverse.

So the marketplace ends up deciding. That is why one of the real

advantages in the last 10 years really to the ′′dual structure,′′

which is what it is called in the industry, is as competitive regulation towards excellence.

So various charters tried to provide better regulation that provides safety and soundness but also is efficient. Now, that only

works as long as it is an optional charter, so as long as it is truly

optional and a company can choose either one, depending on what

State they want to charter in and depending on what the Feds are

doing at that time, that is what makes it work is a truly optional

charter.

On the subject of McCarran-Ferguson, Mr. Chairman, I must

say, Mr. Chairman, I come not to repeal McCarran-Ferguson, but

to fulfill it. McCarran-Ferguson, the law itself in 1945 contemplates

and provides for legislation such as we are discussing today of an

optional Federal charter. In fact, at the core of McCarran-Ferguson

it says: provides for an antitrust exemption to allow companies to,

as long as they are in a regulated market, to collude on prices on

a legal basis.

What this would do is to say in a deregulated price regulation

market, you would no longer have the antitrust exemption. And

that is the way it should be.

Mr. NEY. Let me put one twist to it, because I have got the yellow light on. Some people would argue that the only way to do this

is a Federal charter. But what about not throwing the baby out

with the bath water and making some reforms that it is not necessarily a Federal charter but something that revolves around

NARAB and how that worked.

Mr. BARTLETT. NARAB is a good step. It is helpful. It doesn’t get

the job down. It doesn’t provide for speed to market. It doesn’t proVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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vide for competitive marketplace. It doesn’t provide for Houston

and New Orleans to be able to do business together in the insurance business. It is good so far as it goes. But absent an optional

Federal charter, not a required but an optional Federal charter, at

the end of the day it can’t succeed.

Mr. WHITE. Mr. Ney, also if you allow the concept of the NARAB

provision, for instance, that tends to acknowledge that we will, in

fact, look to the Federal Government to set the standards and tell

the States what they need to do. The discussion of an optional Federal charter—I guess my question would be: Whose option? It

seems that the policyholders, the consumer in this case, have been

left out of the equation.

The company makes the selection of that option, in fact, because

it is better for them. Assuming that is the right choice for their

consumer, that may work out just fine. But in the case of a situation in New Jersey, for instance, where New Jersey instituted some

extremely stringent regulatory policies, in practice, and almost

cleared the State of any insurance market at all, made it extremely

difficult on their consumers, at least the repercussions from that

decision were confined to the State of New Jersey.

If you had a Federal regulator and that same type of mistake

was made, you have just impacted hundreds of thousands, maybe

millions of consumers, beyond that one area and it is much more

difficult to back-track and fix that problem.

Chairman BAKER. Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. Mr. Chairman, I sometimes think that you get bored in life and need to find controversial

issues to kind of just test your intellect.

Chairman BAKER. Thank you very much.

Mr. SHAYS. I also want to say to Mr. Bartlett that as a new

Member, I remember your extraordinary activity as a Member of

Congress, and I thought that you were the most energetic and effective Member in Congress. And I was very sad to see you choose

to leave this place because you were a real model to me and many

others.

What would be the alternative to a charter bank—chartered insurance—I am sorry—to having more Federal uniformity? What

would be the alternative if you didn’t have action from Congress?

Mr. BARTLETT. If there is no action from Congress on an optional

Federal charter, then in my opinion, particularly in the property

and casualty market, companies would continue to exit. We would

continue to have major problems with Europe and other trading

partners who object to this as a trading barrier. Consumers would

continue to pay some percentage; one estimate of 2 percent higher

in premiums.

Mr. SHAYS. So let us assume, though, wouldn’t the alternative be

for there to be a real effort to get the States to seek to have uniformity?

Mr. BARTLETT. Yes.

Mr. SHAYS. Why isn’t that—.

Mr. BARTLETT. Perhaps there could be some success in that. But

there are two problems with that; there are several if all you get

is uniformity. One is the uniformity has to be imposed by someone,

and right now the system of NARAB which has not been adopted

22

by States, representing by my estimate some 30 percent of the premiums, but a uniform standard then would have to be imposed or

determined by someone. If that someone is not a national—a Federal regulator, or is not the U.S. Congress, it would be the

jawboning effect of the NAIC and whoever is the current chairman.

So in some years you could get excellent standards; in others you

can get uniformly bad standards. But the uniform standards, if we

ever achieve fully uniform standards, which I don’t believe we ever

could, they would still be imposed by someone; and the someone

would be less transparent then a Federal charter or by the U.S.

Congress.

Mr. SHAYS. When I was in the State house, there was this real

effort to have uniformity wherever you could. But I was trying to

think, is it different industries where there is an incentive for there

to be uniformity? Is there any incentive for States to try to build

up a uniformity with other States? I can throw that out to Mr.

White or to others.

Mr. BARTLETT. Briefly, I think there is. But what there is, is the

threat of an optional Federal charter, in my opinion, in that the

States are trying to achieve uniformity, and they really are. So I

think there is some incentive, but it is the incentive to eliminate

the inefficiency.

Mr. WHITE. On that point, I believe we would agree that certainly the State regulators are beginning to feel the heat. When

George Nichols, who at the time was president of the NAIC, a commissioner from Kentucky, put forth the principles outlined in the

statement of intent, I think that was a reaction to the fact that we

do in fact have a system that needs fixing and these are the steps

we believe as regulators we should take to fix them.

Mr. SHAYS. I find it rather interesting to think of how we are becoming more and more dependent and interactive with the rest of

the world; how they must view coming into the United States, and

how they could—I mean, if we had to deal with different regions

in France or England or Germany and follow different regulations,

I think we would begin to think it was designed purposefully for

restrictive practices. So this is something we are encouraging with

overseas markets.

Ms. SPRAGENS. But those overseas markets, taking the EU as an

example, there are situations where there is not absolute uniformity in all requirements there either.

Mr. SHAYS. That is a good point.

Ms. SPRAGENS. If one reverses the argument, one finds that the

same things can be said almost anywhere globally.

Mr. SHAYS. That is a very good point. In other words, we still

have to deal with England, we still have to deal with France, as

separate entities?

Ms. SPRAGENS. Yes, we do.

Mr. SHAYS. So that argument basically goes out the window. In

other words, California and Illinois are different. We can make the

same claim that we have the same problem of going to Europe.

Mr. BARTLETT. Congressman, I think that the European Union

is particularly tough on that argument. They seem to be, while

maybe not winning the political argument, they seem to be winning

the intellectual argument in the World Trade Organization and

23

others that this is a trade barrier, and it is thrown up to us with

every negotiation that we have with lowering trade barriers in Europe and elsewhere. So it does seem to be—you shouldn’t adopt this

regulation, this law, just to eliminate the trade barrier. But it

comes—it is generally believed to be a real trade barrier in the

United States market that does not exist in the European Union.

They are not perfect. They have got a lot of problems, too, but

they seem to be ahead of us in this area.

Mr. SHAYS. Bottom line, there could be Federal legislation that

establishes a Federal charter. There could be States that decide to

link up and have uniformity. And just tell me—my red light is on—

but if you could respond to this, what would be the market force

that will ultimately push us in one direction, in this direction?

What will be the market force that does that?

Mr. BARTLETT. I think for a long time, perhaps forever, you

would end up with a dual charter. Some companies would choose

the States—.

Mr. SHAYS. No, that is not what I am asking. I am asking—right

now, we are kind of in between here, wondering where we are

headed. And I am interested to know is there a natural market

force that is going to force Congress ultimately to act or force the

States to act.

Ms. SPRAGENS. If I may answer that question. One market force

that is already at work that has caused 24 States to already revise,

say for example, their rate and form filing requirements is the

multi-State insured on the commercial side. That is recognized as

an important need. States are attempting to respond more quickly.

And in addition to that, as has already been mentioned, there is

a desire on the part of regulators simply to respond to their constituent needs, including insurers.

Mr. SHAYS. Thank you. Thank you, Mr. Chairman.

Chairman BAKER. Thank you. Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman. I apologize for having

to leave to meet some constituents.

It is ironic to bring up the European Union. I don’t want to go

down that path. But we did just have a hearing a couple of weeks

ago about their proposed financial services regulations and the idea

of having a regulator of a consolidated entity, and whether or not

our insurance regulatory structure would run afoul of that to the

extent that you had U.S. Insurance companies that wanted to do

business within the Euro zone area. But I don’t want to get—I

don’t know that that is an issue, in and of itself, of whether or not

you ought to have a Federal charter.

But it does strike me as surprising, still, that the industry has

not come to the conclusion that a dual charter is not such a bad

thing. And I will use as an example the securities industry. There

is a dual regulatory system where the SEC is responsible for regulating the national market function; the States are responsible

really for consumer, individual consumer regulation.

Now, one could say, well, look at the current situation with securities and the research analyst situation, and perhaps the SEC was

slow to fulfill its role. But arguably—and I know the chairman has

raised some concerns about this—the States, in this case the State

24

of New York, has actually—the State regulator has actually fulfilled its role.

Why is it that we couldn’t have a similar situation by having a

dual charter system for the insurance industry? I don’t think anyone is talking about changing the solvency to having a Federal regulator for solvency purposes. I think it is the idea of how you have

a national market regulator for what is—particularly in the case of

life insurance, because it is an investment product, is becoming—

is a national marketplace.

And I would also add—I mean, this is an issue that is problematic in my State on the P&C side, which arguably is a completely

different product. But how do you deal with the companies that are

pulling out? We have a problem with mold in Texas, with wind

storm coverage in Texas. And so I am not sure that we haven’t finally come to the conclusion that we need to have a dual national

charter. I still don’t understand why there is this concern about it.

And why we can’t have—I mean, we have blue sky laws that affect the securities industry. And States are still allowed to set requirements for registration, still allowed to set requirements for

who can sell what types of securities, and yet we have a national

marketplace. Why can’t we do the same with insurance?

Ms. SPRAGENS. That is an abundance of riches of questions. I am

certain I won’t respond to all of them, but let me try. First of all,

the Alliance and our member companies do not support a dual

charter because we do not believe that it will deliver the efficiencies that are hoped for. We are very quick to say that more efficiency is needed, but we don’t believe that will actually produce it.

In terms of comparisons with regulators from other industries, they

are different industries.

The national marketplace for the capital markets does make

sense perhaps to regulate at a Federal level. Casualty risks, however, are very local in their character. There is no true property

casualty national product that does not have to be tailored to local

circumstances based upon State law and particular geological and

geographical requirements, for starters.

Mr. BARTLETT. Congressman, in the industry, at least as I define

it, which is the large integrated companies—those that have other

options of other things that they can and are doing in the financial

services marketplace—it is unanimous. It is unanimous. It has

been unanimous for several years. Those companies that are members of mine. Some are more vocal than others. Unfortunately,

some are not vocal out of a misplaced fear of retribution by State

commissioners. I think that is misplaced. But some don’t believe it

is misplaced, so they are not as vocal or as forthcoming.

But among those companies that are large and integrated and

national, there is zero debate about whether or not an optional

Federal charter will help the American consumer and provide a

much more rational marketplace. And the only disagreement is

how vocal that they choose to be individually.

Mr. BENTSEN. Well, I would just say—go ahead.

Mr. WHITE. I would, I guess, question the analysis of that, only

in the sense that we are attempting to compare the cost of a dual

regulatory system with the cost of the present system. And yet we

don’t know the details of what that dual regulatory system may

25

bring: the layers of additional bureaucracy that may be required,

the regional offices, the people that are closer to the consumer. And

it would appear to me that even if we had, in a perfect world, the

ideal piece of legislation that could create a dual charter situation

and give us an option, we absolutely have no belief that perfect

piece of legislation is what we are going to end up with when it

comes out at the end. I think we are dealing with an unknown in

that regard.

Mr. BENTSEN. Thank you.

Chairman BAKER. Thank you. I just want to make sure the

record is accurate, Mr. White. In your response to a question from

Ms. Biggert about preferred structure of markets, I think you indicated that the Illinois plan was something you found to be—

model—was one you found to be desirable, and that consumers

were well served because there was more competition and better

prices in the market as a result of that type of system. Is that accurate?

Mr. WHITE. Yes, sir, that is accurate.

Chairman BAKER. Is there any reason why that model wouldn’t

be good nationally?

Mr. WHITE. I don’t believe there is a reason. I don’t know all of

the details within the Illinois system. But the concepts that are in

place there certainly are concepts that would work in other property and casualty markets.

Chairman BAKER. We found something we can agree on. Thank

you very much. Does any other member have—Mr. Bentsen.

Mr. BENTSEN. I have two points. But one is, Mr. Bartlett, just to

get some clarification up front if this question were ever to be

asked, because Ms. Spragens sort of segments out the P&C industry—presumably the Financial Services Roundtable would want a

Federal charter, a broad Federal charter—you don’t want to subdivide the industry between life, life and investment or versus—.

Mr. BARTLETT. Right. P&C and life. Yes, sir.

Mr. BENTSEN. Ms. Spragens, I do agree that there is certainly a

State nature to the P&C industry, but I will remind you that subsequent to September 11th, the P&C industry was in Washington,

hat in hand, with a very good case about the need for a federally

structured backstop for P&C.

And we have looked at other issues. In fact, I have been a sponsor and cosponsor in the past of Federal reinsurance market for

P&C for national disaster. So it does sort of cut both ways.

Ms. SPRAGENS. May I respond?

Mr. BENTSEN. Sure.

Ms. SPRAGENS. We believe that terrorism is not an insurable

risk. We paid it out of good faith and concern for our policyholders.

We are in the business of paying claims, and we want to. Nonetheless, the lesson of 9/11 is that terrorism is not rational in the sense

that casualty risks insured by the property casualty industry can

be rationalized. As a result, we do not believe that it is insurable.

And that is the reason that we came here.

Mr. BENTSEN. I don’t disagree with you because, as I said, I

agreed with parts of your industry when it came to the question

of national disaster risk, as well, and whether or not there was a

26

sufficient reinsurance market. So I do think there are some Federal

roles here.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you. If no other member has any further comment, I want to thank the panelists for their participation.

We found your testimony to be of value. We do appreciate it. Thank

you very much.

Chairman BAKER. I would like to ask our second panel to come

forward. Okay. I would like to welcome each of you to the committee’s hearing this afternoon. We appreciate your willingness to participate.

Our first witness is the Honorable Mark Young, State Representative from Vermont, who appears here today on behalf of the National Conference of Insurance Legislators. Welcome, Representative Young.

STATEMENT OF HON. MARK YOUNG, VERMONT STATE REPRESENTATIVE, ON BEHALF OF THE NATIONAL CONFERENCE

OF INSURANCE REGULATORS

Mr. YOUNG. Thank you, Mr. Chairman, members of the subcommittee, thank you for inviting the National Conference of Insurance Legislators, or NCOIL, to testify before you today. I am Representative Mark Young, and it is my privilege to represent residents of Addison and Rutland Counties in the State of Vermont

legislature. It is my further privilege to serve as Vice Chair of the

NCOIL State-Federal Relations Committee.

NCOIL welcomes your request for testimony on State insurance

guaranty funds and residual markets. The guaranty funds provide

an example of how well State insurance regulation can work. In

fact, it may be worth noting here that none of the present-day critics of State insurance regulation have identified the State guaranty

fund system as being inefficient, ineffective, or in need of major reform.

I will first provide some basic details on State guaranty funds

and their purpose. Then I will move on to discuss how the funds

have fulfilled that purpose.

In each State a guaranty fund consists of insurers doing business

in that State in a particular line of business covered by the fund.

State insurance guaranty funds make good on the outstanding

insurance obligation of insolvent insurers. At the point where the

assets of an insolvent insurer are insufficient to meet claims obligations, the guaranty funds pay the balances up to limits set by State

statute. The funding of those payments comes from the assessments of the remaining insurers, which range from 1 to 2 percent

of premium volume, but are also pro rata to the State market share

and the lines of business in which the insolvent insurers had engaged.

Each State has its own guaranty fund laws for life and health

insurance and for property and casualty insurance. Some States

have additional guaranty funds set up for workers’ compensation

and surplus lines insurance. These State laws conform substantially to the model laws adopted by the National Association of Insurance Commissioners.

27

All States post-assess insurers to cover insolvent insurance

claims, except the State of New York which pre-assesses its property and casualty guaranty fund up to $200 million. The insurers

licensed in the State constitute the guaranty fund in that State

under the supervision of a board of directors and, ultimately, the

State’s insurance commissioner. The State guaranty funds coordinate their work, especially with regard to multi-State insolvencies,

through two national organizations: the National Organization of

Life and Health Insurance Guaranty Association, and the National

Conference of Insurance Guaranty Funds.

Guaranty funds serve as an effective and efficient backstop to

safeguard consumer interests in cases of insolvency. The funds

have assured continuance of coverage to policyholders of insolvent

insurers; paid more than $14 billion in the last 25 years to policyholders; they have grown in financial capacity, and done so at no

direct cost to State or Federal taxpayers; and have shown that

guaranty funds work and do not need to be fixed in any significant

way.

The funds have been there when needed. The property casualty

fund system has stood the test of Hurricane Andrew, which felled

several insurers, as well as many other insolvencies caused by increases in the costs and severity of medical malpractice claims and

the expansion of toxic and environmental tort liabilities.

The guaranty fund system was sufficient when Mission Insurance Group became insolvent in 1985, resulting in 700 million in

State guaranty fund payments, the largest amount for a single insurer in history.

The system worked during the next 4 years when five more national insurers were placed in liquidation, resulting in State guaranty fund payments of an additional 1.9 billion in claims.

On the life and health side, the guaranty system effectively met

the challenge of the early 1990s, when the live insolvency activity

reached its peak. In 1991 alone, there were 23 new insolvency

cases on the life side. One of these cases, Executive Life, involved

in excess of 10 billion in policy obligations. The guaranty associations effectively protected Executive Life policyholders by transferring their covered policy obligations to a third party insurer. While

the guaranty associations are still making payments to the assuming insurer on behalf of Executive Life policyholders, it is estimated

that the total guaranty association costs will be about 2.5 billion

on a net present value basis.

State guaranty funds operate and pay claims at no direct cost to

State treasury or taxpayers. The policyholders of all insurers ultimately bear the costs as a part of their premium payments.

I might really go into and explain residual markets. States have

also established many different residual market programs to make

available insurance to individuals and businesses having difficulty

obtaining coverage where the normal market has ceased to function

effectively. Residual markets are important for high risk applicants

or individuals and businesses with poor loss records.

Residual market insurance premiums are set at a lower level

than they would be if they were established on a strictly actuarial

basis. Therefore, coverage is attainable for everyone who wants or

needs insurance. Profits and losses of each residual market proVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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gram are shared by all of the insured in States selling a specific

type of insurance. Residual market programs are rarely self-sufficient and generally require assessments to insurers, which are ultimately passed on to all insurance consumers.

Against this backdrop, the idea of a separate and competing Federal guaranty system of insurers operating under a Federal charter, such as those proposed in Congress by Senator Schumer and

Representative LaFalce, could not help but weaken the State-based

system. It would weaken the strong State consumer safety net, deplete its capacity from 4.8 billion to less than 3 billion, and reduce

its overall risk pools. It would build another layer of overhead, create duplication in process, and add unnecessary expense.

We believe this system has worked well and is no way broken.

Congress, I respectfully submit, does not need to fix it, replace it,

or establish anything parallel to it.

While guaranty funds and residual pools stand well today, we believe continued oversight is absolutely essential to the continuance

of their effective function. We submit that an interstate compact

idea is one that is available if needed. But for now, the guaranty

fund system does not require the focus of Congress, although your

constructive oversight is welcomed and appreciated.

I thank you for the opportunity to provide this testimony. My

written submission is far more detailed than the time would allow

me to address orally. And, Chairman Baker, I would ask, given the

short notice of this hearing, that the formal record be held open so

that I might submit final comments. I thank you.

[The prepared statement of Hon. Mark Young can be found on

page 214 in the appendix.]

Chairman BAKER. Thank you, Representative Young. I would

make the announcement that for all purposes, for all members as

well as all witnesses, the record will be held open for an additional

30 days for any final comments that anyone might choose to offer

after the hearing is adjourned. Thank you, Representative.

Chairman BAKER. Our next witness is Mr. Michael D. Phillipus;

is that correct, sir?

Mr. PHILLIPUS. That is correct.

Chairman BAKER. Vice President of Communications and External Affairs, Risk and Insurance Management Society. Welcome, Mr.

Phillipus.

STATEMENT OF MICHAEL D. PHILLIPUS, VICE PRESIDENT OF

COMMUNICATIONS AND EXTERNAL AFFAIRS, RISK AND INSURANCE MANAGEMENT SOCIETY

Mr. PHILLIPUS. Thank you. Good afternoon, Chairman Baker,

Congressman Kanjorski, and members of the subcommittee. My

name is Michael Phillipus. I am Vice President of External Affairs

and Communications for RIMS, the Risk and Insurance Management Society, the largest professional organization in the risk management community. I appreciate the opportunity to appear before

you today on the issue of insurance regulation and competition in

the 21st century.

RIMS member companies, which comprise over 4,000 consumers

of commercial insurance, support the advancement of efficient insurance purchasing abilities. RIMS membership includes 84 perVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
29

cent of the Fortune 500 companies, as well as approximately 950

companies with less than 500 employees.

I would first like to spend a few minutes on several issues that

the committee had asked me to address: specifically, alternative insurance markets and surplus lines.

The job of a risk manager is to protect and preserve physical, financial, and human resources. One of the primary means of accomplishing this job is through the purchase of insurance. The first

hard market of the 21st century has made this job even more difficult, and risk managers are forced to be more creative in minimizing risk to their organization and their employers. More and

more often, risk managers are turning to alternative markets to

procure necessary coverage.

Captive insurance companies are an important part of the alternative insurance market. Captives are closely held insurance companies whose insurance business is primarily supplied and controlled by its owners, who are also the principal beneficiaries.

The advantages for establishing captive insurance companies include reduced operating costs, flexible coverage, direct access to reinsurance, some assurance of stability of premiums and coverage

terms. Risk retention groups are a form of captive insurance companies. These groups provide certain insured with casualty protection on a homogeneous basis that removes their risk from volatile

industry cycles and provides focused service customized to their exposures. Authorized by Federal law, they are incorporated under

State law and governed by the law of the State of domicile.

The Liability Risk Retention Act, or the LRRA, passed in 1996

does not permit risk retention groups to underwrite property insurance. This limitation reduces the number of insurers that can underwrite property insurance at a time when market restrictions

from terrorism threats, combined with the hard market, have driven prices up and reduced availability. RIMS urges Congress to expand the LRRA to permit risk retention groups and risk purchasing groups to write all coverages except personal lines and direct statutory workers’ comp coverage.

In order to adequately ensure unique, difficult to place, or highcapacity insurance risk, risk managers frequently use the surplus

lines, or sometime called the excess lines market. Rather than an

alternative market, the surplus lines market is better described as

a supplemental market to the licensed/ admitted market. The surplus lines market, in effect, serves as an outlet or a safety valve

market to be utilized by risk managers and their brokers when the

desired coverage cannot be found among the States admitted/licensed insurers, or when market forces or conditions in the admitted/licensed market causes voids and gaps to occur in coverage for

certain types of risk.

Freedom of rate and form is essential for the surplus lines market to have the flexibility to quickly and adequately respond to the

risk manager’s insurance needs, particularly for hard to place, distressed, unique, or high-capacity limits.

I would now like to discuss RIMS’ position on insurance modernization, specifically optional Federal insurance charter. RIMS

recognizes both the incredible promise and the inherent hazards of

an optional Federal insurance charter. The Society appreciates the

30

serious and complex implications of allowing insurers to obtain a

federal license that would allow them to operate nationwide. The

current system in the United States is inefficient.

Negotiating rate and form regulations in more than 50 jurisdictions is expensive and time consuming. A single regulator, to establish risk-based capital and surplus requirements as well as requirements for public disclosure of rates and forms, would reduce costs

and restrictions for U.S. Purchasers and act as an incentive for increased participation by foreign companies.

The State regulation system needs to remain accessible to those

insurers who choose not to participate in the Federal option. Ideally an optional Federal charter would spur improvement and innovation at the State level. The NAIC has taken measurable steps to

reform State insurance regulation, most notably the adoption of the

State certification program, speed-to-market initiatives, and steps

to deregulate commercial lines of insurance.

By the very nature of State regulation, however, it is almost impossible to achieve uniform laws and regulatory interpretation of

those laws. Nevertheless, creation of an optional Federal charter

should involve the NAIC on a consultative basis to ensure that

States’ rights and revenue issues are properly addressed.

RIMS understands that it may be a long road to approve an optional Federal charter legislation, but we believe that the time for

this idea to become reality is now.

In the end, all of those risk financial options are crucial to risk

managers, but there is no one-size-fits-all solution for insurance

commercial consumers. While the alternatives discussed today provide some relief, RIMS ultimately favors a system unfettered by

overreaching regulation, one that has the ability to add flexibility

to respond to the various needs of the consumer and the changing

marketplace. Certainly small and mid-sized companies benefit from

the oversight protection provided by the State insurance regulation

system. Care must be taken that this system does not restrict the

movement of product and the ability of consumers to attain adequate and affordable coverage.

Thank you for the opportunity to speak today. I appreciate your

time, your interest, and your leadership.

Chairman BAKER. Thank you, Mr. Phillipus.

[The prepared statement of Michael D. Phillipus can be found on

page 165 in the appendix.]

Chairman BAKER. Our next witness is Mr. Steven Harter, President, National Association of Professional Insurance Agents. Welcome, sir.

STATEMENT OF STEVEN J. HARTER, PRESIDENT, NATIONAL

ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS

Mr. HARTER. Thank you. Mr. Chairman, members of the committee, my name is Steve Harter. I am the owner, chief principal,

for Select Risk Management in Ava, Missouri. I also have the

honor of serving as the current President of the National Association of Professional Insurance Agents. We are a trade association

representing independent insurance agents and their employees in

all 50 States and Puerto Rico.

31

Mr. Chairman, as you have asked us to do, PAI will outline some

of the key competitive issues faced by multi-State insurance producer operations, including the issues regarding countersignature

laws.

PIA is absolutely committed to a reform of the insurance producer system in a manner that means effective oversight for public

protection. The progress that has been made with the new single

NAIC Single-License Producer Model Act has been wonderful, but

it hasn’t yet been adopted in all jurisdictions. In addition to these

States, there are also challenges in some of the States that have

designated themselves as NARAB compliant by virtue of reciprocity

only.

Collectively, these minority jurisdictions still pose challenges in

the following areas:

First of all, countersignature laws. Since 1970 PIA has worked

to repeal countersignature laws as well as the secondary level of

insurance statutes that, while not technically called or classified as

countersignature laws, in effect act in concert to frustrate open

nonresident participation.

Much progress has been made in the repeal of the

countersignature laws, and only a few remain. PIA appreciates and

is sensitive to the unique market and public policy circumstances

that exist in Florida and Nevada, but believes their issues can be

solved without countersignature laws.

However, less progress has been made on the secondary level of

statutes that act in concert with countersignature laws. In some

States the per se countersignature law was repealed but the companion statutes were not.

As an example, many times the case, if I have a commercial client who secures a business operation in another State, under

countersignature laws I am forced to secure the services of a resident countersigning agent from that State that my client will not

know and whom I might not know either. This resident agent must

already be licensed in this State to write the specific type of coverages for my client’s new operation in that State, as well as already be appointed by the carrier with which all other aspects of

their coverages have been placed. As the principal producer on the

full account, I must still be sure that all forms and the carriers are

authorized to write and issue the type of coverage being secured.

The in-State agent would then technically place the business by

merely countersigning the policy form and collecting a fee for services.

Under a State with secondary statutes, I might be able to perform all the regular tasks and issuance of coverage for any client;

however, the State might require that I deliver a copy of the policy

for the business location through the services of an in-State resident agent operating in the county where the business is located.

Another issue is the single-license producer versus the agent

broker license. A number of jurisdictions have yet to adopt a singlelicense format. The nature of our business requires that we perform both functions for clients’ insurance needs. Thus, in these

States we are required to secure both agent and broker licenses as

resident producers. As nonresidents we must select one or the

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other, thus limiting the type of activities to be performed for our

client in that State.

Yet another issue is the agent-only jurisdictions. These jurisdictions do not recognize the broker’s status, something fundamentally

required for our clients’ needs, whether on a resident or nonresident basis. If in my resident State I am licensed under the single-license producer approach, and by nature of my business operations I am acting in a broker capacity, I am forced to change into

an agent for nonresident purposes in the jurisdiction, something

that may or may not be possible or even wanted.

Another issue is the individual versus the business entity. Today,

several States only make available an individual producer license.

In these jurisdictions, PIA members operating in a business entity

basis are forced to only have one of their individually licensed staff

members file as a nonresident in those States. This creates numerous legal, insurance appointment and tax problems for such agencies, and, in PAI’s opinion, lessens the comprehensiveness of the

State’s oversight of the insurance operation.

We also have an issue regarding foreign corporation filings. This

is an example of noninsurance government officials applying a onesize-fits-all solution. In simple terms, persons operating in what

would be considered a nonresident status must first file for and secure foreign corporation licenses permitting them to enter the

State.

Insurance departments have over 150 years’ experience with the

structure, authority, and expertise required for this issue. PIA

wants insurance producers relieved of this additional foreign corporation filing. It is duplicative of the nonresident licensing process.

Background checks: This committee’s efforts related to the passage of H.R. 1408 are much appreciated by PIA and its members.

Prior to its passage, PIA’s board adopted a position last September,

making it clear that we support H.R. 1408 as the preferred process

along with the one-time electronic fingerprinting of all individuals

currently licensed as well as anyone applying for a license in their

resident State. Is This process should be recognized on a reciprocal

basis for nonresident filings as well.

In conclusion, PIA is working on a Federal proposal addressing

the concerns we outlined today, the details of which will be discussed in a future hearing by our partners at the IIABA.

We believe this proposal acts to refine and improve on GrahamLeach-Bliley, NARAB, and supports NAIC’s current additional reform efforts. PIA’s charge from its members is to participate in and

ensure that all four areas of reform activity—model laws, State-byState reforms, multi-State compacts, and additional Federal proposals—come together in a single coordinated and complementary

system.

Accordingly, PIA opposes Federal optional charter proposals because at their core they are designed and operated as an additional

competing insurance system. Neither our customers nor our members need a 56th insurance jurisdiction.

Again, I would like to thank you for allowing PIA to testify before this committee on this important issue.

Chairman BAKER. Thank you, Ms. Harter.

33

[The prepared statement of Steven J. Harter can be found on

page 153 in the appendix.]

Chairman BAKER. After listening to your list of the conflicting requirements for the licensed agents, it would seem hard to comprehend that there wouldn’t be fairly significant support for some

sort of national licensure purposes, just to simplify the list which

you have elucidated for the committee today. It is mind-boggling

enough.

Mr. HARTER. You ought to be on this end of it.

Chairman BAKER. In the earlier panel, there was some discussion about the Illinois model which, as I understand it, is an open,

competitive system allowing—as described by one of the advocates

of the system—allowing competition, providing consumer choice at

pretty good price. It is not a prior approval State. There are no

speed-to-market issues. Do you see the Illinois model as a model

which has advantages from an agent perspective?

Mr. HARTER. I think any State that speeds the process—I think

the Illinois model is user-friendly from an insurance agent’s perspective. Many States are going in that direction.

Chairman BAKER. Representative Young, I understand the concerns from a State perspective about a Federal intervention unnecessarily into the conduct of its business. But at some point there

has to be an acknowledgment that if there is not State-by-State action, then demands of the marketplace will require that the Feds

do something.

I don’t take from your comments that there is—and frankly from

any witness’s—that anybody feels that speed-to-market issues are

insignificant; that creating uniformity in agent licensing isn’t appropriate; that making market conduct examinations relatively uniform in application, eliminating arbitrary price fixings and allowing competition in the marketplace to govern the price and the

product—if those were the issues around which we had principal

concern, what is a reasonable clock?

If we were to in good faith, say in an NARAB on steroids, States

of the world get out there, get it done by—what is a reasonable

clock in your view?

Mr. YOUNG. Well, I think my understanding is that the NARAB

idea or suggestion, many of the States have already adopted those

measures, and I believe 18 months in advance of the deadline.

I realize all States have not done that. The earlier panel spoke

about legislatures that only meet every 2 years or that type of

thing. But I do not see it being a long, drawn out affair to put a

time limit on it. I do not. Four years, possibly, something of that

nature.

Chairman BAKER. So if we could as—the committee is going to

have additional hearings. As a matter of fact, the next hearing is

going to be dealing with some of the international issues that were

raised in the earlier panel. It is going to be a broad series of hearings over the course of the summer. But at end of it, I think there

are going to be a number of issues on which there is pretty much

clear agreement, and there are going to be a handful of issues on

which there is going to be some contentious decisions to be made.

If that is the way in which this develops and we resolve to let the

34

States act within a certain time frame, they being unable to act

whatever that time frame is, then we have to act.

As you point out, NARAB has been partially successful. But some

of the numbers don’t speak really to the operational compliance.

Merely adopting a reciprocity agreement doesn’t get uniformity. If

you both agree to have a countersignatory requirement, that is not

moving in the right direction.

Is it pretty much the agreement of the panel that those general

issues that I have outlined are areas where we could make some

progress on the question of whether or not it happens State by

State or whether it has to be done by Federal intervention is the

issue?

Mr. Phillipus.

Mr. PHILLIPUS. I do agree that there has been improvement on

the State side. And as I indicated in my testimony, RIMS is supportive of NAIC’s continuing efforts. However, we do think that the

optional Federal charter gives additional latitude to insurance consumers. And in the case of the RIMS members particularly, those

are large corporations which have sophisticated risk management

departments in management of financial issues, and they are looking for quite often rapid answers to problems that they face.

We have seen over the last few years the advent of issues such

as the Y2K employment practices, liability, e-risks. And these are

things which generally have come up rather quickly. And generally

the marketplace has responded from the surplus line side or outside of the United States as opposed to within-State basis, and they

have been generally innovative in their approach.

And those are the type of creative solutions that risk managers

and their member companies are looking for.

Chairman BAKER. Thank you, sir. Mr. Kanjorski.

Mr. KANJORSKI. Mr. Young, as I gather, your argument is that

States can best supervise and handle the regulatory process, safety

and soundness oversight, and all of the other issues regarding insurance at this point. Is that correct?

Mr. YOUNG. That is correct, sir.

Mr. KANJORSKI. If that is the case, then why is there federal

pressure here in Washington and on the Hill for us to enact a terrorist reinsurance support system for the insurance companies?

Why don’t the individual States just do that?

Mr. YOUNG. I think that issue is larger than what the States can

deal with on their own. The previous speaker had mentioned that

terrorism probably is not an insurable risk for an insurance company, certainly not an insurance company sitting here as a legislator. But that huge impact is not an insurable risk or a predictable risk and really surmounts the capacities of the States to individually deal with it.

Mr. KANJORSKI. Well, if the States are going to regulate and we

are going to do the reinsurance and the bailing out, what kind of

protections do the American taxpayers generally have from the acts

of Congress to benefit the ability to underwrite certain risks?

Mr. YOUNG. Well, I still say it is a risk that rises about the normal insurance market and is too large for the normal insurance

market to take in stride, or could be. They certainly have paid

35

claims for September 11th, but it is foreseeable that it could happen that they could not stand to cover those claims.

Mr. KANJORSKI. I understand that. I have been a supporter of the

Federal terrorism reinsurance support system. But if the States

can handle all of these things, why shouldn’t we just pass a law

apportioning out to the States what the reinsurance should be,

what their support requirements would be, and let them go ahead

and handle it? I see sort of an inconsistency here for us to say that

this is able to be and is being well handled on he State level and

yet, quote, there are times or needs when we have to come to the

Federal Government, unquote.

And this is not the first time. In health insurance, vaccination

insurance, and other support systems, the Federal Government has

had to step up, and I think rightly so. I am not condemning the

States. I think it is beyond their capacity to handle some problems.

And it seems to me if that is the case, there seems to be a very

strong case at least for the potential of an optional Federal charter.

Mr. YOUNG. I think from my comments that the guaranty fund

has worked so well, that certain size claims can certainly be covered by assessment on a State-by-State level. I think there is a

point by which we exceed the capacity of the assessment system to

cover those losses.

Mr. KANJORSKI. Are these products and regions so unique that

if we allow some companies to get an optional Federal charter, we

are eviscerating some protection for consumers or the uniqueness

of the State or region in which the company is involved?

Mr. YOUNG. I don’t think so. But I will say that the guaranty

fund now works quite well for companies that are regulated in another jurisdiction—in another State. They are formed in another

State, and they work well regardless of where the loss is.

Mr. KANJORSKI. In a prior life that I lived as an attorney, I had

some experience with performance bond insurance. And there were

some States that had a regular habit of having their insurance

companies underperform and declare bankruptcy when any substantial claims were made. As a matter of fact, I used to recommend to some of my clients not to purchase a surety bond if it

came from a particular State.

Is it not rather difficult for businesses and for lawyers and for

everyone else to know what the solvency standards is for an insurer, or the particular criteria in the various States with which

we are dealing? Whereas, if we had a national charter, there would

be one regulator, there would be one safety and soundness standard, and a calmness of certainty would exist across the States as

to what companies were solvent and what companies were

unsolvent?

Mr. YOUNG. I think it is imperative and I think its function is

that we trust other States to regulate their insurance companies.

And through the accreditation process that has been formed, we

know that insurance commissioners and departments across the

country are adequately supervising the insured that are within

those States.

Mr. KANJORSKI. At one time we did that for prescription drugs

in this country. We did not have the Federal Drug Administration.

I guess we could go back and allow each State to handle that type

36

of regulatory question, but would that not be awfully redundant

and expensive for drug companies to have to qualify in each State

and meet the particular conditions that each State would want to

lay down? Whereas, if you had one Federal process, it allows for

speed-to-market for product, and it allows for less risk to the consumer.

Mr. YOUNG. I really don’t know if I am qualified to answer that.

Mr. KANJORSKI. Well, it is interesting. On your point on representing the companies and brokers and sales operations, is there

a fear within the organization that in going to an optional Federal

charter that your members will be more at risk? If so, what would

the risk be?

Mr. HARTER. I think the risk is having another jurisdiction. You

wind up with 56 jurisdictions instead of the 55 that you have now.

The industry, the agent broker industry, has been very resilient.

They have been able to respond to working with the various different State departments, and we feel that those departments are

effective. They are very responsive to the individual States and the

consumer laws, et cetera, in the States where they operate, and we

see the systems being complementary as working with each other

as being the answer to it, not replacing one with another.

Mr. KANJORSKI. Well, why couldn’t you, because it is 56 jurisdictions, not one jurisdiction? Is that the major problem, that we

would have a 2 percent increase in jurisdictions involved, that we

should deny the national companies the ability to save the 2 percent that Mr. Bartlett talked about in costy?

Mr. HARTER. I do not know how to respond to the 2 percent because that is not a number that I am familiar with. But I do not

know whether that is accurate or not, but it is not necessary. The

system as it stands, by working with a set, a uniform set of standards being managed, if you would, by the States, the individual insurance departments, I think you can solve the issues.

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. Shays.

Mr. SHAYS. Mr. Chairman, I get a lot of constituents who come

to my office and want there to be a Federal solution to whatever

particular problem; they just see it much more simply done if there

was just this one policy.

I think this is a fascinating debate, having served at the State

level, because sometimes the argument to cut costs and to go on

a Federal level could be made almost in every conceivable industry.

So I am trying to get a handle on ultimately what is the right way

to approach this. Is this a State responsibility, and therefore should

the States just be the ones to deal with it, or is it a Federal one?

I guess what I would want to ask the panel would be this question: Is there a clear benefit of reductions in cost by having a onesize-fits-all opportunity? Will there be more competition as a result

of it? Will the consumers see lower prices? Is that the bottom line

argument on one side versus the other argument, that if you have

State-level activity, that you will have, in some cases, better protection for the consumer?

I know for instance when we went to regional banking, all of our

banks went under. Maybe they should have been nationalized. But

I mean, not nationalized, but maybe they should have, when we

37

lost our banks, maybe it should have been that they should have

gone just beyond the New England region.

I would just like the panelists to address the issue of cost versus

the issue of doing something on a smaller scale means that you

don’t have everybody negatively impacted if you face bad times.

Mr. YOUNG. I guess I would have to tip my hand here a bit. I

sit here this afternoon as the President and CEO of a national

bank, and from everybody’s comments this afternoon, I have been

kind of incredulous that I have it so good on the regulatory front.

My regulators are in Boston. In asking questions of regulators, it

takes a length of time, if ever, to get a response from my regulator.

My customers on the bottom of their forms are told if they have

a consumer complaint to call Washington, and I do not think they

are responded to as well as if it was a local or State insurance matter.

Quite frankly, if I did not have probably the sixth or the eighth

oldest charter in the United States, I would have gone to a Statechartered system a long time ago in that I would have contact with

my regulator in a much better case.

So I think, I really do believe, that in a dual chartering situation,

the consumer is not as well served as by State regulation.

Mr. PHILLIPUS. Congressman, I think some of the points that Ms.

Harter brought up are some of the concerns that our members

have. The idea of having to have a document shipped across the

country for a signature from someone who had not participated in

the process, just because it is required, ultimately increases the

cost to our members, the consumers, the ultimate buyers of insurance.

Likewise, for example, as risk managers one of the common complaints I hear is an issue regarding something as simple as automobile insurance, and the fact that if you decide to take a lot of

risk yourself as a company, you have to fill out countless forms for

uninsured motorists, personal injury protection, and medical payments to reject them. Every State has a different form, sometimes

requiring up to six different signatures, sometimes three different

forms; and there are costs associated with it when the insurer has

to provide those stacks—which can be this thick—for some of our

members to the risk manager. And then the time has to be spent

by the agent, the broker, and the risk manager to review the documents, make sure they are correct, and then they get sent back. Ultimately, all you are doing is saying we want to accept the risk ourselves.

So from a consumer standpoint, we see that as a waste, we see

that as inefficiency, and we see that there are opportunities to reduce costs, to improve the system, and we think that the optional

Federal charter would provide that opportunity.

Mr. HARTER. I do not think the Federal charter is the answer to

it at all, in responding to what Mr. Phillipus has said. Many of the

States have laws, no fault laws, you have many different laws that

these uninsured motorist forms are responding to. I am not sure

that is the intent of the optional Federal charter, to do away with

that.

You also have situations where the national companies certainly

do not intend to be all things to all people in these States. You are

38

still going to have situations where I as a broker and as an agent

am dealing with a customer that maybe has a federally chartered

policy, they have a local State-chartered policy, and I do not have

any idea how all of that is going to come together. All I can foresee

right now is it is going to be an incredible problem that we probably do not have to get into if we can pull everything together, we

can merge the concerns, we can have some uniform standards that

are still regulated at the State level. I do not know of anyplace

where anybody is going to get any satisfaction with hundreds of

thousands of consumer complaint calls coming into a bureau here

in Washington, and those are literally the kinds of numbers that

the State insurance departments deal with.

Mr. SHAYS. Could I just follow up a second? It just strikes me,

though, that intuitively, costs have to go down to the consumer actually, to the participants, to the insurance industry itself, and obviously to the consumers, if you have a more uniform system. And

so I mean, I think you really have to stretch it to make any other

assumption. I think choices go up potentially as well if you have

more competition, and I think you would encourage more competition.

The other side of it though, it seems to me, is that there is a bit

more security on the State level. So it seems to me when I am looking at this, I see a greater opportunity for the consumer with a national system, at least a national option; but on the other side, the

potential that if there is a screw-up, if times are bad, you could

have—you can have a system that can be more in jeopardy with

a national system than if you have the potentially regional State

systems, that you will have some good ones and some bad ones, but

there will be more protection. That is kind of how I am viewing it

as I listen to this hearing.

Chairman BAKER. Thank you, Mr. Shays.

Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman.

Representative Young, you talked about your experiences with

your bank in having a national bank charter. I have to say when

Congress was trying to pass financial modernization over the 20

years that it worked on it, and when we spent—Mr. Baker and I

and others spent the last 8 years working on it—it was not the

Texas banking commissioner who was up here—who is a friend of

mine—that was up here arguing that national banks ought to have

some abilities to sell insurance because it was closely related to

banking under the Bank Holding Company Act, it was the Comptroller of the Currency. Now I realize he was the bane of existence

for a lot of people in the insurance industry.

But there is something to be said for a single-headed dog versus

a 55-headed dog who is doing your bidding for you. And that is one

thing I worry about this industry; because again, even in the P&C

market, and Ms. Spragens makes a very good point when she testified that there are geographical differences. But it is for the most

part—I mean we are not a 50-State segmented market. And Ms.

Harter raises the issue about agents who are now multi-State

agents, and most businesses now I think, a lot of the growing businesses are multi-State businesses, and we have had to grapple with

39

ERISA at our end in how we deal with that in the health insurance

field. So I mean, that is what you are fighting against.

Ms. Harter, in your testimony, if I read this correctly, the PIA

board of directors three times has adopted sort of a statement of

principles for reform; and in that, you talk about creating a collaborative shared resources uniform effective system. I think that is all

well and good. But I am skeptical that 50 States, 50 State legislatures, can adopt a uniform system that preempts each other’s State

where you may need to have that at some point in time. Federal

preemption, of course, can be very unpopular, and other times the

industry really wants it badly.

So those are the issues that I think Congress has to address. I

appreciate the fact that, well, we do not want another bureaucracy,

we do not want another one we have to go through. But last week

I was in a meeting with somebody from a national financial services firm which is not one of the big Wall Street firms, it was not

a huge conglomerate, but this firm’s brokers were a lot like your

members; they are NASD, NYSE, they are registered insurance

brokers in their State, they are a conglomeration of small businesses; and yet somebody in the home office has to sign all of the

documents for all 50 States or wherever they are operating in—I

assume it is all 50 States—so it is a convoluted system.

I think those are the issues that we are trying to deal with or

the Congress is trying to deal with as we continue to see financial

modernization occur, with or without our acquiescence.

So I think it is going to become—the pressure is going to become

increasingly greater for some sort of dual system. As Mr. Phillipus

said, in reading his testimony, the bigger clients—and it is probably moving downstream—that the bigger clients, for risk purposes, are going to set up these captive companies, because they

are becoming multi-State and it is going to be a lot easier.

So I would encourage you—I do not really have a question—I

would just encourage you to take a very hard look at how we might

be able to come up with a dual system. The States are still going

to play a very important role, because the States control the solvency. I do not think anyone is talking about setting up an insurance fund for the insurance industry at the Federal level. I am not

sure we want to bite that piece off. But it is a two-way street, because as Mr. Kanjorski said, you know, talked about the terrorism

issue that I had raised, the industry has come to us for disaster

insurance, flood insurance—which is an important issue in my area

of the country, is the federally insured program. So we have to figure out some sort of two-way street, how we are going to work with

this market as it evolves.

Chairman BAKER. Thank you, Mr. Bentsen. I just want to make

one additional comment.

It is clear that there are areas of agreement where current bodies of rules and regulations are inappropriate; they do not enable

the consumer to have any particular right that is of value, they inhibit the free flow of product, they stifle the pricing of product, they

inhibit the appropriate conduct of business by the agents themselves. So we can identify those problems.

As opposed to the establishment of a national bureau of insurance with a big office down on K Street somewhere, it seems to me

40

this problem can be divided. On the one hand, commonsense regulatory structure that is national in nature. If we were to take the

NAIC approach and make the Illinois model the national model, for

example, we are talking about how we get there: Does the Federal

end do it or does the NAIC with the State legislature adopt a system, State by State? No big difference. The end of the process

would be similar.

On the other side of the coin, however, we do need State advocacy with regard to consumer protections and that the Attorney

General and the appropriate insurance regulator would still maintain their right to act and to determine solvency requirements. So

that without the necessity of creating a Federal bureaucracy, you

could establish national rules by which market practice could be reformed, while reserving to the States the right to defend consumers

and to preserve financial protections for the taxpayers.

Somebody tell me why that does not make sense.

Mr. HARTER. It makes all the sense in the world to me. I think

it is exactly what we are asking to be done.

Chairman BAKER. Mr. Phillipus?

Mr. PHILLIPUS. I agree. That is the type of—I think we are approaching it from a slightly different approach, but we are not suggesting the creation of a new bureaucracy. We are suggesting we

just need a little bit of innovation and we are open to how we get

there, but we think the end result is where we need to be and we

can make concessions along the way.

Chairman BAKER. This is only 2, 3 hours into the first hearing.

We have a long road to travel. But I keep hearing the same things

over and over. We are all really saying we see the problem, we disagree on how we are going to fix it, but at the end of the day, we

are all going to look pretty much the same. The only question is

whether we have a building with a Federal name on it or whether

we have just simply national standards of conduct that are applicable in all States.

Representative Young, can you respond?

Mr. YOUNG. I would hope the coalition of NAIC, NCOIL, NCSL,

could pull this off without there being a need for a Federal building, quite frankly.

Chairman BAKER. Had they acted in the last 8 or 10 years, I

would be just happy as a clam. But I think the problem is that we

have been discussing these issues at the national level for quite

some time: NARAB, although with some degree of success, is not

where we had hoped; and that reciprocity does not look like uniformity; and that at some juncture we could all agree as reasonable

people that if it is not done by a date certain, the Congress will

act. Maybe that is the message that needs to be related more directly that would encourage constructive dialogue so that the inappropriate Federal intervention would not occur.

Mr. Shays or Mr. Bentsen, any further comments?

Mr. BENTSEN. If the chairman will just yield, I think you are on

target, because if you will recall when we did the Gramm-LeachBliley bill, the final compromise that was worked out and took forever to get done set these standards that had to be met, and there

is still disagreement over whether it is a clear entry into the marketplace, and so the chairman is right. I mean, it may not be—we

41

may be talking about something that is more of a hybrid; we may

be talking about something that is more of a federally established

SRO-type structure or something that creates this uniformity. Because I think one can make the argument that we have been waiting on the States for a long time to come up with this uniformity

in the market. And this has happened in Congress, it happens all

the time, the market moves far past us and we are playing catchup, and I think you all are in that position right now.

Chairman BAKER. As a fairly conservative free market Republican, it is very hard for me to say let us create a new Federal regulator. But something has to be done with the current system, and

I would hope that in the time remaining with the record being

open, you would respond with your thoughts on the specifics of how

such an approach might be constructively considered.

Chairman BAKER. If there are no further comments, our meeting

stands adjourned. Thank you.

[Whereupon, at 4:20 p.m., the subcommittee was adjourned.]

(43)

INSURANCE REGULATION AND COMPETITION

FOR THE 21ST CENTURY

Tuesday, June 11, 2002

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 call, at 2 p.m., in Room 2128,

Rayburn House Office Building, Hon. Richard H. Baker [chairman

of the subcommittee] presiding.

Present: Representatives Baker, Ney, Bachus, Royce, Oxley,

Weldon, Hart, Rogers, Tiberi, Kanjorski, Bentsen, Moore, Maloney

of Connecticut, and Lucas of Kentucky.

Chairman BAKER. I would like to call this hearing of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises regarding insurance regulation and competition

for the 21st century to order. Today’s hearing is a continuation of

the committee’s review of current regulatory structure of the insurance marketing and practices with an eye toward determining the

advisability of what needed reforms may be considered by the Congress. In the course of these hearings we will hear from a number

of participants from various market perspectives, each of whom has

recommendations to make to the committee for consideration and

subsequent action.

It would be my hope that in today’s continuation I am looking

forward to the testimony of those who have agreed to appear before

the committee, and advise you that the Members will be in and out

as the day proceeds, but in order not to delay anyone, we are going

to try to be as much on time as possible. Five minutes after is pretty much on time for the congressional committee. So I welcome you

and will do so more formally at the appropriate time.

Chairman BAKER. Chairman Oxley, did you have an opening

statement for the record today?

Mr. OXLEY. I do, Mr. Chairman, and thank you.

Today insurance represents one of the critical foundations for our

Nation’s infrastructure. In fact, insurance now represents about 6-

1/2 percent of consumer household spending, exceeding entertainment, clothing and health care. Insurance has become an integral

part of consumers’ lives, and without it, few people would be able

to own homes, drive cars, obtain medical care or provide retirement

security for their families.

And yet our American insurance market place is entering into a

time of crisis. States collect enormous revenues from insurers,

44

spending only a fraction on insurance regulation and on consumer

protection. Some States fix prices below the levels necessary to attract adequate capital even where extensive competition does or

could exist. And each State imposes its own regulatory regime for

formal approval, creating long delays for consumers and making it

impossible for insurers to provide products uniformly nationwide.

Consumers ultimately bear the cost of this reduced competition and

innovation.

The current patchwork system of insurance regulation also has

far-reaching international consequences. The financial services

marketplace is rapidly becoming more global, with our trade negotiators prying open foreign markets to American products. We

could not be strong overseas if we are not strong at home. And we

could not argue that foreign markets need to be more open and

transparent when our domestic market is still Byzantine and impenetrable.

To remain competitive we need to speak with one voice from our

country to harmonize international regulations and ensure adequate consumer protections and solvency oversight. Consumers

cannot be adequately protected if insurers are subjected to conflicting requirements at the international, Federal and State levels.

It is my primary hope that our State legislators and insurance

commissioners can enact meaningful reform. The States have had

some success, significant progress in agent licensing reform, solvency oversight and accreditation. I would note, however, that this

success is far from complete and has only occurred in the face of

congressional legislative pressure, pressure that will continue to

grow if the pace of reform does not improve.

Numerous groups have now come forward to our committee desperate for reform. In fact, some people have tried to take advantage

of this by jumping the gun and coming forward with proposals before the committee has had a chance to fully review the great number of issues that Congress needs to analyze in considering any

proposals. But we cannot and will not risk such an important foundation of America’s infrastructure without understanding all of the

risks involved and developing a public record with all industry and

consumer groups participating, and that is why, Mr. Chairman, I

congratulate what we are doing in this series of hearings. We are

just beginning to search out a consensus on what reforms might be

achievable. Our goal is an industry that is competitive and profitable and brings consumers the efficiency and effectiveness they deserve.

I appreciate our witnesses coming today to help us grapple with

these very difficult issues and look forward to their testimony. I

would like to offer a special welcome to Joe Gasper, at present the

chief operations officer of Nationwide, a great company that just

happens to be based in my home State of Ohio.

With that, Mr. Chairman, I yield back.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 136 in the appendix.]

Chairman BAKER. Thank you, Mr. Chairman.

Chairman BAKER. Mr. Moore has indicated he has no opening

statement.

Mr. Kanjorski, do you care to make a statement at this time?

45

Mr. KANJORSKI. I will submit something for the record.

The CHAIRMAN. For the record, thank you, Mr. Kanjorski.

[The prepared statement of Hon. Paul E. Kanjorski can be found

on page 229 in the appendix.]

Chairman BAKER. Mr. Rogers, did you have an opening statement? Did you care to make an opening statement, sir?

Mr. ROGERS. Yes, Mr. Chairman, if I may. Thank you, Mr. Chairman.

Just briefly, and I want to first thank the first panel. I do want

to talk to an individual who is joining us on the second panel, and

I appreciate all of you being here to speak on the dynamic that is

happening in the insurance industry right before our eyes and the

furious and sometimes adversarial regulation conditions in which

you operate in State after State across this country. You are the

industry that people love to hate, but it is absolutely crucial that

we make sure that you can survive with the free market bent, so

you can provide efficiency to those consumers. I am glad you are

here today to help us weed through a very difficult circumstance

and so we can understand the impact of tort law and sometimes

the changing market conditions as we continue to provide insurance services.

I just wanted to take a moment, Mr. Chairman, and welcome

Bob Restrepo from Allmerica, and I want to compliment him. Their

parent company bought kind of a small insurance company in my

hometown called Citizens Insurance. That was the place when I

was growing up where people wanted to go to work. They were

great corporate citizens. They were involved in every activity in our

community. They employed and provided great conditions and a

great product, an insurance product. When citizens was purchased,

we heard all the rumors that certainly sent a shock wave through

a small town in mid-Michigan that they were going to up and leave

and be torn apart and sold off and moved in several different directions.

And I want to compliment Bob for taking over and not only continuing that tradition of being a great corporate citizen for our community, but growing and expanding on it, investing in it, moving

some operations there, rewarding the very talented people who are

there, and making good things happen in our small town.

So for all the bad things you hear about corporate America and

mergers, this was a great success story for us and really, I think,

for the consumers who are continuing to buy that product. So I

wanted to welcome Bob here today. And from Howell, Michigan, a

small town in the Midwest, we thank you for what you have done

and what you are continuing to do, and the great things you are

doing with Allmerica. You are making great changes there for all

the right reasons, and we appreciate it. And welcome.

Thank you, Mr. Chairman. I yield back the remainder of my

time.

Chairman BAKER. Thank you, Mr. Rogers.

Chairman BAKER. There being no further Members to issue an

opening statement, all Members’ statements will be made part of

the record, and the record will remain open for an additional 30

days for any statements any Member chooses to submit for the

record.

46

Chairman BAKER. At this time, Mr. Tiberi, we would be moving

to our panel of witnesses. I understand you may have some interest

in making a remark at this time.

Mr. TIBERI. Yes. Thank you, Mr. Chairman.

It is with great pleasure that I recognize one of my constituents

actually who is on the panel, the first panel, Joe Gasper, who is

the COO, as Mr. Oxley mentioned, of Nationwide Financial, and

also a board member of Nationwide Financial, and also president

of Nationwide Financial and Nationwide Life Insurance Company;

a native of Steubenville, Ohio, and now a resident of Dublin, Ohio,

which is the district that I represent.

And Nationwide actually is headquartered in the district that I

represent in downtown Columbus. In fact, Nationwide is now developing an area called the Arena District. For any hockey fans in the

audience, the Columbus Blue Jackets are Columbus’s newest major

league team, and thanks to Nationwide in a small part, a wonderful corporate citizen who I have had the opportunity to work with,

watched Nationwide grow up, being a Columbus native over the

last 30 years, and had an opportunity as a legislator to work with

not only the financial company, but also the other companies that

Nationwide is involved in.

As the panelists know, Mr. Gasper is chairman of the board of

the American Council of Life Insurance, president of the Association of Life Insurance Companies, and a member of the board of

the Insurance Marketplace Standards Association. In his spare

time in Columbus, he is on the board of Columbus Children’s Hospital, and BalletMet, and the OSU Foundation board. He is a graduate of the Ohio State University, where our President is going to

be speaking on Friday. It is great to have him here today.

Great to see you, Joe.

Chairman BAKER. Thank you, Mr. Tiberi.

Chairman BAKER. And we would now proceed with our panel of

witnesses. For operating procedures we generally try to keep remarks to 5 minutes. Your full testimony will be made part of the

official record to enable Members to have as much time for questions after your remarks.

Welcome, Mr. Gasper. It certainly is a privilege to have you here

today, and we look forward to your remarks.

STATEMENT OF JOSEPH J. GASPER, PRESIDENT AND CHIEF

OPERATING OFFICER, NATIONWIDE FINANCIAL SERVICES,

CHAIRMAN, AMERICAN COUNCIL OF LIFE INSURERS

Mr. GASPER. Thank you, Mr. Chairman and members of the subcommittee. Mr. Chairman, there is one thing that just about all the

witnesses here in these hearings can agree on, and that is the current state of the insurance regulatory system is lacking in uniformity and efficiency, and these lapses diminish the ability of the

insurers to compete effectively in a changed financial services marketplace or to serve our customers’ needs in the most productive

and efficient manner.

Where we disagree is on the remedy. Life insurers believe that

an optional Federal charter, with emphasis on the word ′′optional,′′ is by far the most effective way to bring the regulation of insurers

in line with the needs of consumers and the reality of the financial

47

services marketplace. Today many insurers do business not just

across one or two State borders, but nationwide and around the

world. Our competition is no longer just other insurers, but foreign

and domestic banks, mutual funds, multinational financial conglomerates. The current system requiring virtually every facet of

our business activities to be approved in 51 jurisdictions has become an overbearing administrative burden and a competitive albatross. The subject of this hearing, product regulation, is a prime example of that problem.

Banks, among our chief competitors in the financial services

market, can roll out an innovative new credit instrument countrywide within 30 days. A similar product developed by a securities

firm might take it a bit longer, perhaps 60 days, to meet SEC requirements. For a life insurer the process of getting each states approval can require as long as 2 years. And ultimately, because each

State requires something a little different, the insurer winds up

with 35 to 40 different products, not just one. The competitive implications of this disparity in regulatory efficiency are enormous

and are the major reasons for our pursuit of an optional Federal

charter.

But while speed to market is an important reason, it is by no

means the only one. Many activities that are routine for other

types of businesses are an ordeal for the insurance industry; advertising, mergers and acquisitions, market conduct, company and

agent licensing and more. There is a long list of problem areas.

The fact is that the current State-based system of insurance regulation was not designed to accommodate national companies, and

it doesn’t. That is not to say that it should be eliminated and replaced by Federal regulation. Far from it. Many of the ACLI member companies plan to remain State-regulated. A Federal charter

should be an option for those businesses, organizations, products,

markets, and strategic plans that would be well served by a less

burdensome and expensive alternative.

I would like to close by focusing on two points. The first is that

life insurers along with the banking and securities industry now

form a triumvirate of essential financial service providers with

striking similarities between the three in terms of their mission,

their products and their importance to the financial health of the

Nation. And yet, unlike banking and securities, there is no Federal

insurance mechanism to address insurance issues on a broad scale,

no Federal repository of insurance expertise, no agency at the Federal level to address critical issues affecting this multitrillion-dollar

industry and its hundreds of millions of customers. The recent debate over terrorism insurance coverage serves only to underscore

the existence of this void in Federal insurance knowledge and authority.

To look at it another way, consider what would happen if there

was a crisis in the stock market, but no SEC for Congress to turn

to for guidance, no Federal securities agency to initiate broad corrective actions to reassure investors in foreign markets. Congress

would be forced to query a succession of State securities regulators

to try to piece together information on what went wrong and then

to come up with its own plans to address the problems, all within

a very short time frame and under intense pressure. Can we afford

48

any longer to leave the insurance industry and its customers in a

similar position?

The second point is that while we recognize a change of this

magnitude will take time, we do not believe that we have the luxury of waiting through two or three Congresses producing Federal

legislation aimed only at arm-twisting the States to become more

uniform. The States with our full support are already trying to use

an incremental approach to regulatory reform. However, incremental changes, while helpful, cannot address in comprehensive

fashion the full range of regulatory problems facing our industry.

What we strongly urge this committee to do is to keep focusing

on one remedy that can eliminate overnight all the uniformity and

efficiency problems that we have, the optional Federal charter.

Thank you, Mr. Chairman.

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

[The prepared statement of Joseph J. Gasper can be found on

page 231 in the appendix.]

Chairman BAKER. Our next witness is Mr. Tony Nicely, Chairman, President and CEO of GEICO Insurance, and Chairman of

the National Association of Independent Insurers.

Welcome, Mr. Nicely.

STATEMENT OF TONY NICELY, CHAIRMAN, PRESIDENT AND

CEO, GEICO INSURANCE COMPANIES, CHAIRMAN, NATIONAL

ASSOCIATION OF INDEPENDENT INSURERS

Mr. NICELY. Thank you, Mr. Chairman. Good afternoon, Mr.

Chairman and members of the subcommittee. My name is Tony

Nicely. I am Chairman and CEO of GEICO. GEICO is the fifth

larger private passenger insurer in the United States, employing

18,000 associates. I also serve as chairman of the National Association of Independent Insurers, and it is in that capacity that I am

honored to testify before you today. NAII’s 700-plus membership

comprises all types of insurance companies, writing approximately

$98 billion in annual premiums. NAII’s diverse mix of insurers provide us a broad perspective from which to comment on the conditions of insurance regulation.

NAII supports State regulation of insurance and opposes Federal

involvement in the regulation of the insurance industry. We believe

that geographic and State conditions are such that consumers’

needs differ from State to State. The goal of regulators should be

to balance insurer solvency with an open and competitive marketplace.

Today I would like to highlight two issues, financial regulation

and data reporting. A more detailed discussion of these topics is included in my written statement. Solvency regulation is the single

most important role that States play in the regulatory arenas. The

improvements made to the States’ solvency regulatory system over

the past 10 years have reduced the number of insurer insolvencies.

Almost all States have adopted the financial requirements of the

NAIC Financial Accreditation Standards program. The system is

based on strict financial reporting requirements and regular financial examinations. All insurers must comply with financial regulatory standards, including uniform laws prescribing capital and

surplus requirements as well as types of investments insurers may

49

hold. All but the very smallest insurers are required to certify and

file audited financial statements on an annual basis. The annual

statement reporting requirements are far more comprehensive than

normal GAAP reporting standards.

It should be noted that the tragic events of September 11, which

caused the largest insured loss in history, are not expected to cause

the insolvency of a single U.S. Insurer. We think that this is testimony to the general success of the State solvency regulatory system.

While financial oversight is the most important role of the State

regulators, State guaranty funds are also critical as the safety net

in the event of an insurer insolvency. Since their origins in the

1970s, State guaranty funds have paid out over $9 billion in property/casualty claims to make sure that the promises made to insurance buyers are kept.

In general, the State financial regulatory system is working effectively. We believe Federal intervention in this area is ill-advised

and unnecessary. We are also skeptical of any plan to overlay Federal standards over the current State-based guaranty fund system.

The issue of data reporting and availability is another critical

area that I would like to highlight briefly. Many States and many

small and medium-sized insurers rely on supplemental rating information developed by advisory organizations such as the Insurance

Services Offices in order to administer their rating programs.

Under current optional Federal charter proposals, insurers would

not be required to report data and could be constrained from reporting data because of Federal antitrust exposure. Without the

availability of aggregate loss cost data, these smaller and midsized

insurance companies would not have credible data and would be

unable to compete with larger companies that can rely solely on

their own data.

NAII believes that State regulation is the most effective way to

achieve a competitive insurance market and to target products to

meet local needs. However, we agree that the insurance regulatory

system must improve. Progress has been made in the areas of rate

and form filing, agent licensing, company licensing and market conduct examinations. State legislators and regulators have particularly—have been particularly receptive to competitive-based reform

measures for commercial lines consumers. The NAII believes that

such reforms would also benefit automobile and homeowners insurance buyers.

We are confident that the States can and will continue to improve the regulatory system. We will continue to evaluate Federal

proposals with an open mind, but believe it is premature for Congress to expand the Federal regulatory role. NAII has completed an

extensive analysis of the two optional Federal charter proposals.

These two proposals, frankly, generate more questions than answers. They provide such broad regulatory authority to the Federal

insurance regulator that it is difficult to assess the ultimate impact

on consumers or the industry. All stakeholders must become fully

aware of what Federal regulation of insurance would mean to insurance buyers.

Competition and product choices serve the consumer best. Many

States are moving toward modernization, but some still need to be

50

prodded. Ongoing oversight by this committee can help impress

upon those States the urgency of acting now. We believe modernization at the State level is an achievable goal.

And in closing, the NAII believes that a flexible, innovative and

competitive State regulatory system is the most efficient and costeffective way to deliver protection to the insurance buyers. Thank

you.

Chairman BAKER. Thank you very much, Mr. Nicely. We appreciate your testimony.

[The prepared statement of Tony Nicely can be found on page

258 in the appendix.]

Chairman BAKER. Our next witness is Mr. Donald Young, who is

President of the Health Insurance Association of America. Welcome, Dr. Young.

STATEMENT OF DONALD A. YOUNG, M.D., PRESIDENT, HEALTH

INSURANCE ASSOCIATION OF AMERICA

Dr. YOUNG. Yes. Thank you, Mr. Chairman, distinguished members of the subcommittee.

The members of the Health Insurance Association of America

provide a wide range of health insurance products, including medical, dental, supplemental, long-term care insurance and disability

insurance. I am delighted to have this opportunity to provide our

views about the general issue of insurance regulation.

Health insurance is primarily regulated by the States. However,

health insurers are also increasingly subject to Federal laws. Proposals before the Congress such as the Patients’ Bill of Rights

would dramatically expand this Federal role. The regulation of

health insurance is complex. Many everyday health insurance functions simply have no other counterparts in other types of insurance.

While HIAA has long supported the State regulation of insurance, we also recognize that there are issues that need to be addressed, such as speed to market, and inconsistencies between Federal and State rules. Privacy provides a useful example of the

interaction between Federal and State laws and difficulties that

can arise for insurers. Congress addressed privacy in HIPAA, but

HIPAA does not preempt all State privacy laws. Instead State laws

more restrictive than Federal requirements continue to apply. As

a result, insurers must determine for every State in which they do

business whether State law is more or less stringent than the Federal requirements. And some States continue to adopt new privacy

laws. Therefore, the comparison cannot be a one-time endeavor.

The bottom line is that current law forces an insurer operating in

multiple States to implement multiple privacy plans incurring

greater expenses than would have been the case if a single uniform

privacy law applied. This could be said for other issues regulated

by both Federal and State laws.

One suggested solution for the regulatory problems is the optional Federal charter. Under this concept, federally charted insurers would primarily be regulated at the Federal level. HIAA has

not taken a position on any of the pending optional Federal charter

proposals. However, establishing an optional Federal charter appears to require several steps. First policymakers need to carefully

51

review existing State regulatory and other oversight roles. Next

they must decide which of these should be replicated in a Federal

regulatory structure. Finally, for each issue, and there are many,

they need to identify the specific regulatory policy that will apply

to federally regulated insurers.

All of this is a significant challenge. As currently drafted, optional Federal charter proposals provide very little in the way of

the statutory framework for regulating health insurance products

at the Federal level. Rather, they defer most decisions to Federal

regulators.

I would like to end by acknowledging that the States, through

the NAIC, the National Association of Insurance Commissioners,

are making serious efforts to streamline the regulation of insurance. The NAIC is also now exploring the use of interstate compacts as a way to improve consistency and reduce the regulatory

burden. Such compacts raise a host of structural process and policy

issues. We are working very closely with State insurance regulators

to help assess these matters.

HIAA would welcome the opportunity to work with members of

this committee as you continue to examine the important issue of

the regulation of insurance. Thank you.

Chairman BAKER. I thank you, Doctor. We appreciate your testimony today.

[The prepared statement of Donald A. Young can be found on

page 309 in the appendix.]

Chairman BAKER. Mr. Nicely, last year in a hearing which we

conducted on speed to market issues, you participated and in the

course of that hearing indicated that the competitive rating system

that Illinois has adopted was a favorably viewed methodology. Do

you still view the Illinois model as one which is—offers advantages?

Mr. NICELY. Yes, Mr. Chairman, we do. It is not the only model,

but it is certainly a model that we favor. Frankly, we have not

found, and I personally have not found, anything in a nonmonopolistic society that serves the consumer better than the free market

system that we have in this great country, and Illinois has that

system. Certainly other States have similar systems that would be

file-and-use systems. And two States that had very onerous regulation of rates, South Carolina and—actually a jurisdiction, meaning

the District of Columbia, and a few years back moved to an open

rating system, and they have found many new players and rates

stabilized.

So, as I spoke to the National Association of Insurance Commissioners earlier this year, I believe that any commissioner who has

worked in an open-competition State would say that it has served

their citizens well.

Chairman BAKER. Certainly. In order to get to that perspective,

a national basis, and being reliant today on the State leadership

to achieve that end, what would be your expectation if you had to

run a clock on seeing a 50-State uniformity initiated either by the

NAIC, State insurance regulator or whatever moving force might

be out there to get such a—or how long should the Congress wait

before we act? At some point, I think we agree that there is some

level of difficulty in the markets today because of inefficient regulaVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
52

tion. And one day we are going to have to take action. How long

would you suggest the Congress wait?

Mr. NICELY. Let me answer that question this way, Mr. Chairman. I believe that even the toughest States are now beginning to

see the light because of a number of reasons, and one of those reasons is that we are having a much better informed consumer today

than we have ever had in our history. Let’s take one of the toughest States of all, the State of New Jersey. Things have gotten so

bad in New Jersey and consumers so riled up by paying the highest

automobile insurance rates in the Nation that the Governor has—

himself has recently said, I propose modernization and will work

to do everything possible to modernize the regulatory system in the

State of New Jersey.

It is my belief that other legislators will also begin to feel that

way because the consumer, as was said in the opening statements

by Chairman Oxley—consumers deserve better than paying higher

rates than they should. And I believe that even tough States like

New Jersey we will see moving forward. If we see no progress at

all, then I would say more is required. But I believe even New Jersey we will see some progress in the very near future.

Chairman BAKER. Well, in the interim would there be—would it

be ill-advised to move forward with the proposal that would take

the Illinois model and make that a national plan? I mean, is there

any downside to that?

Mr. NICELY. In my personal opinion, yes, sir, because as soon as

you begin to tell the States that they have to use one form of competition over another, we are likely to get some political backlash.

Chairman BAKER. But if it is optional?

Mr. NICELY. If it is optional, it is still the same way, because I

believe that when we get into optional—if we just have optional

ratemaking, that is not likely to happen. So when we say optional,

we say an optional Federal charter that would get into things like

how do you handle residual markets, how do you handle reparations, what law do you use for tort, and many other things.

So I don’t think that you could just cut this up into little bitty

pieces and say, well, we will just impose open rating on every

State. If we could do that, that would be wonderful, but I don’t believe that that would be possible.

Chairman BAKER. I thank you.

Mr. Gasper, I know you don’t necessarily share that view, but

what sense of urgency do you have as to the need for reform? I

have, of course, read your statement, but if we knew we could get

where we need to be in 2 years, is that too long?

Mr. GASPER. Mr. Chairman, I don’t have to live in your reality

of politics, but I would suggest to you that we are almost 15 years

too late. Keep in mind that I am here as the president of a life insurance company, and I am representing an organization that represents life insurance companies, not property/casualty. I could

make the case that the automobile business is a State oriented

business, but the life insurance business is a national business. But

if you look at this in terms of what happened in the mid-1980s in

this country, with high interest rates and then with the equity

markets, the whole business has changed. It is no longer a life insurance business. We are a top 10 life insurer in the United States,

53

and we get 40 percent of our premium through payroll deduction.

It comes to us every 2 weeks through 401(k) plans or 457 plans for

cities, counties and States in the United States. So think about it.

Whether or not you think of it as a life insurance company, 40 percent of our business is coming from retirement savings plans.

And so the market has changed dramatically. Life insurance is

now a national business. It is really an international business too

in some respects. It is not life insurance, it is retirement savings.

It is about long-term savings, and what we have is a regulatory

system that essentially is regulating it like it was traditional life

insurance 40 years ago.

So the idea of waiting 2 years for real reform is not appetizing

to me because I think we are essentially behind the times for this

particular industry. And I keep emphasizing how we compete

against banks and how we compete against security firms. We are

not just competing among ourselves. If we were just competing

with insurance firms, we would all be disadvantaged equally, but

our competition is coming from mutual funds and banks.

Chairman BAKER. Thank you, Mr. Gasper. My time has expired.

Mr. Kanjorski.

Mr. KANJORSKI. When you say ′′this industry,′′ now you are talking about the subset life insurance industry or the insurance industry as a whole?

Mr. GASPER. Well, I am speaking for the subset life insurance industry, which is the life, annuity and long-term savings retirement

industry.

Mr. KANJORSKI. So your theory is we could create tiers identifying different aspects of the industry. But I suspect that Nationwide handles other insurance products, doesn’t it, besides life insurance?

Mr. GASPER. Nationwide is a large property/casualty insurer,

writes a tremendous amount of—.

Mr. KANJORSKI. What does that side of the company—.

Mr. GASPER. Well, I think that Nationwide, Nationwide in total

as an enterprise likes the idea of insurers having an option. We are

not talking about doing away with State regulation. We are talking

about giving individual companies choice—so if Mr. Nicely’s company wants State regulation and wants to remain State-regulated,

he can. If GEICO decides that it wants to be federally regulated,

it can. So all we are asking for is choice.

Mr. KANJORSKI. In all aspects, though. You are not just talking

about life insurance.

Mr. GASPER. In all aspects, from my company’s point of view.

From the industry’s point of view, as I sit here today as chairman

of the ACLI, I am speaking for the life insurance industry.

Mr. KANJORSKI. All right. Mr. Nicely, your company is nationwide, without the trademark name. You sell life insurance, don’t

you?

Mr. NICELY. No, sir, we sell in 48 of the 50 States. We do not

sell in New Jersey or Massachusetts because of the owners’ regulation there.

Mr. KANJORSKI. Okay. Well, and you honestly don’t see any damage to having a level playing field nationwide? You are very satisfied with the present State regulation?

54

Mr. NICELY. Very is an overstatement, sir. We are satisfied. We

certainly believe that State regulation must improve. We also believe that it will improve. There has been gradual improvement in

all aspects of the regulation and in some States much greater than

others.

Mr. KANJORSKI. We seem to be pushing the States to do that,

though. I am wondering whether they have—what their own inclinations would be.

Mr. NICELY. Many of the States are doing it on their own. Some

are doing it because they are being coerced, and others are just so

resilient that they haven’t moved yet. But as I said, and in answer

to the Chairman’s question, I believe even those States are beginning to see the light and will make the changes. The consumer is

going to demand it.

Mr. KANJORSKI. What would you think if we looked at an optional charter that was tiered either to specific aspects of the industry or to the size of the companies involved, and giving that sort

of an option? Those companies that are—I don’t know what the

rate is, but equivalency of having 10 billion in assets in banks,

whatever that would be comparable to, to give them a high tier and

give them an option for a national charter, but the lesser companies to say—.

Mr. NICELY. I certainly wouldn’t recommend that. Now, if you

want to consider the tier on the basis of carving out certain segments of the industry, such, as Mr. Gasper said, the life insurance

industry, that may be possible. We don’t write life and wouldn’t

propose to speak for the life insurers, but I can certainly see the

legitimacy of some of the arguments being made by Mr. Gasper.

But the property/casualty is such a complex industry that goes to

so many of the laws of the various States that carving that out

with a national charter is so complex that I believe it will take several years just for all of the players even to understand what is

being proposed as you do that.

Mr. KANJORSKI. Don’t you see sometime in the future, though,

your company expanding to cover all aspects of insurance?

Mr. NICELY. Not necessarily, because we are one of those companies that believe if you can do one thing better than anyone else,

it might be more profitable than trying to do a lot of things as well

as anyone else. We simply would like to be the best automobile insurer in the Nation.

Mr. KANJORSKI. Don’t you think if you get particularly successful, some hawk will be circling and maybe taking—.

Mr. NICELY. Well, of course that is probable, and when we get

there, of course we may have a different view on how large we

would like to be. But right now we only insure 5 percent of the

autos in the Nation, and we would like to insure a larger number.

Mr. KANJORSKI. You raised an interesting question that has disturbed me a little bit, that if we move too precipitously on this

question, we invite a hearing 2 years or 5 years from now on the

question of adopting tort law standards, because obviously the distinctions in premiums and rates are very closely aligned with the

tort law of the particular State involved. Do you see this as a potential problem that we —.

55

Mr. NICELY. I certainly do, in the highest of magnitude. Of

course, in a way this debate goes back 200 years from Adams and

Jefferson as to what really is best left to the States, and under the

property/casualty industry, the needs in Alaska are very different

than Texas, and Texas is very different than Florida and New

York, et cetera. And I certainly wouldn’t propose that a lot of the

things, financial responsibility for instance—in certain high-income

States it is the States have judged that they should have a higher

level of financial responsibility, and other States it is much smaller. So you really do open the proverbial Pandora’s box.

Mr. KANJORSKI. What do you think about the question on tort

law? And I might say not only tort law, but contract law, because

certainly that is going to bring in all the different inconsistencies

in the various States. What—how do you respond to that, Mr.

Gasper? What should we do in regard to that?

Mr. GASPER. I think the answer revolves around two different industries. And so as Mr. Nicely has described the property/casualty

industry, especially the auto and homeowners end of it, these are

very important issues, and I think the States vary widely. When

you talked about life insurance, which is essentially a national

product, we don’t see a lot of difference in terms of the statutory

requirements inside a State or even what goes on in terms of the

courts within the State that would really matter in terms of life annuity and long-term savings.

Mr. KANJORSKI. But that is part of your company that also is in

favor of a national charter that handles the same type of insurance

as Mr. Nicely’s company. What would they think about the question?

Mr. GASPER. What would Mr. Nicely’s company think?

Mr. KANJORSKI. No. How would your side of the company that

handles casualty and loss deal with the tort and contract law?

Mr. GASPER. I think that our company would essentially say that

Mr. Nicely should have a choice. If he believes State regulations

make sense for GEICO, he should be able to stay there. If

Nationwide’s property and casualty operations thought that it

made sense to be a nationally regulated company in order to get

to market quicker or lower cost, it should have that choice. All Nationwide is asking for is a choice.

Mr. KANJORSKI. All right. Am I overtime—my time has expired,

Mr. Chairman.

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. Ney.

Mr. NEY. Thank you, Mr. Chairman. I want to welcome all of the

panelists today. I think it is very obviously an important subject,

and I appreciate the chairman’s desire to get this all out on the

table.

I would like to start with Mr. Gasper, welcome, being from Ohio,

and also treat you pretty nice. I had a leak this morning in my ceiling, and you can guess where I am insured.

Let me just lay something out here that obviously is pretty understandable. Federally-chartered companies will be exempted from

State-imposed market conduct rules. We know that. So if a consumer from our State were to go with the federallychartered and,

say, you know, with you all, and they would be under a different

56

set of sales rules than a consumer that would go with a State-chartered company, so that consumers would be entitled to different illustrations, lemon laws, et cetera. I mean, I think we all agree that

that is the way the system would work.

So it goes to the point—I understand what you are saying about

choice, and there is an opt-out provision, but the scenario I described, don’t you think it is going to be confusing for the consumer

to be able to shop within the States and have to do an awful lot

of groundwork?

Mr. GASPER. I think it gets confusing for consumers now. If I buy

my life insurance or annuity policy in one State then I move to another State, am I still being regulated by the State that I was in?

I think from the standpoint of life insurance, annuities, 401(k)s, I

think the consumer’s perspective is that they should be able to get

the same kind of quality, the same kind of protection, in every

state.

So my view would be that if consumers fully understood all the

nuances that occur in 51 jurisdictions and the fact that when we

get a product approved, many times we have to have 40 different

requirements for the same product because there are 40 different

applications for the same product because that is how the States

operate, I think the consumers would be totally bewildered by that

considering what they believe they are buying.

Mr. NEY. Of course, if you move from one State, you still know

what the rules were when—you know, when you incurred that policy in the State that you lived in. But I just—and I want to go back

to one other thing. Also, Mr. Nicely testified about State regulators,

the 1980s, some of the problems. I have got some, you know, information up here, and some of the things from your testimony, it

points out that they did a better job when they needed to. I am just

wondering what your comment would be, Mr. Nicely, on the fact

that, you know, what about if we could get the State regulators to

once again, if they want their jurisdiction upheld, to be able to look

at ways to streamline some of the problem areas? Do you think

they could do that or not?

Mr. NICELY. Of course they could, and I think they can. If you

are asking a question does oversight by this committee—is it useful, and may it speed up the process, yes, I think the answer to

that is true also.

So I commend the committee for your oversight and hope that

you will be one of those interested, very interested parties that

helps to keep the pressure on the States to bring about these reforms.

Mr. NEY. This may be an observation. I have dealt for years with

the HIAAA, of course with Nationwide and others, and different insurance entities over the years. I chaired insurance and financial

institutions in the Ohio Senate when I was there. And, you know,

the Bible was McCarran-Ferguson. The Bible was State regulation.

That was the first things. Once you got that out of the way, you

could have a nice conversation with each other. You know, where

did you stand on that issue?

And the only thing—I understand about expediency. I do look at

the bottom line end to the consumers and how they are going to

be confused or not on choices, because they will be dealing in some

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cases, even if there is an opt-out, with the Federal Government. I

just—it is hard, I think, for a lot of people—maybe not others, but

a lot of people over the years have had one mind-set to understand

how possibly you can shift jurisdiction, and how many new staff do

the regulators have, and do they promulgate rules and regulations

that we are so busy we can’t even keep up with particular oversight of those, and what happens to the consumer in those cases.

And maybe you will be back here in a few years saying, oh, my

goodness. Look what is happening to us. So I—you know, there is

a lot to be talked about. But I think I just find it hard to understand how that—what caused this whole shift to go towards, you

know, the Federal Government is better. We are here from the government and here to help you.

Mr. GASPER. I would not make the case that it is better. I am

making the case about a choice, about an option. There are many

banks that inside their organization will have a federally chartered

bank and a State-chartered bank. I can see big organizations having federally chartered life insurance companies and State-chartered life insurance companies within the same family of companies. So it is not about better or worse. It is about choice. And a

little competition could occur between the regulatory bodies in

terms of who is the most efficient. Who is the one that basically

is doing the best job for the consumers. So it is not about better

or worse. It is about choice.

Mr. NEY. Thank you.

Chairman BAKER. Thank you, Mr. Ney.

By time of arrival, Mr. Moore, you’d be next if you have questions.

Mr. MOORE. Mr. Gasper, every State already has in place safeguards to protect insurance consumers, and these protections

would vary State by State. And I guess my question to you is what

consumer protections would be necessary if we created this optional

Federal charter that you are proposing here?

Mr. GASPER. I believe that in our proposal essentially we are not

trying to eliminate anything in terms of consumer protection. As a

matter of fact, I think we are trying to strengthen it by streamlining it so that it makes sense on a national basis.

Our view would be that the State regulator would promulgate

rules for state chartered companies. The Federal system would

build on that, but would be uniform across the country. And there

would be little distinction between State and Federal regulation

when it comes to protecting consumers.

Mr. MOORE. Do you believe the proposal that you have right now,

the draft proposal that you have now, speaks to that adequately?

Mr. GASPER. I think in concept, it does. I think the devil is always in the details, and I think we have to flesh it out, but I think

the makings are there to essentially bring all of the protections

that consumers have today into the Federal system, and then the

plus could be streamlining those so that they are better understood

by the companies and the consumers and less costly to administer.

Mr. MOORE. You have talked, Mr. Gasper, about a proposal I

think is modeled similarly to the dual banking system that regulates commercial banks, thrifts and credit unions and is optional.

58

Does yours apply though your proposal only to life insurance lines

or other lines in the insurance industry?

Mr. GASPER. As I mentioned, I am here representing the life insurance industry as chairman of the ACLI. My own company as a

major property/casualty company does support the concept of

choice.

Mr. MOORE. You say does?

Mr. GASPER. Does support the concept of choice. But as I think

about the issue of life insurance, I am absolutely convinced that it

is a national business, it is not a State business, and that Federal

regulation would make more sense in terms of efficiency.

Mr. MOORE. To the other two panelists, Mr. Nicely and Dr.

Young, I guess my question would be if you would support or not

oppose a limited charter for regulation of only life products, and

why or why not? How do you see this?

Mr. NICELY. The NAII has not taken a position on the life side.

Personally I would not oppose it. I mean, I can certainly see some

of the arguments that the life insurers are making, but it is a very

different ballgame when it comes to the property/casualty side, Mr.

Moore and Dr. Young.

Dr. YOUNG. We also do not have a position. An important question would be, though, the nature and scope of the charter and how

it would work. Would the charter be given to a company—if the

company is in life and long-term care and medical and a variety

of businesses, would that charter apply, in which case health would

be drawn in, or long-term care would be drawn in? So an important

question is how the charter would work, or, conversely, would the

charter work by line of business or by specific product? All those

kinds of issues would have to be hammered out before we could

really look at that effectively.

Mr. MOORE. Thank you.

Mr. Gasper, does a vote in favor of pursuing an optional Federal

charter bill in Congress suggest that most of the members of your

association would choose Federal regulation over State regulation?

Mr. GASPER. I am not in the position to say that. I know there

is a large, very large mutual insurance company inside the association that has indicated that it would stay State-regulated, but we

have not had any poll. If I were to guess, I would think there would

be a lot of companies that would stay State-regulated. These would

be regional companies.

Many of our member companies only do business in a handful of

States, and the markets they serve are more traditional in terms

of life insurance. I would think that the large national companies

that are more in the retirement savings business, the long-term

savings business, would look with a strong eye towards a national

charter.

Mr. MOORE. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Moore.

Mr. Royce, you would be next.

Mr. ROYCE. Thank you, Mr. Chairman.

Mr. Gasper, a prominant insurer in my part of the country has

described to me a case where one State’s onerous product approval

process prevented the insurer from offering a life insurance product

which had a lower cost and lower insurance rates, due to the buVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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reaucratic costs involved in that State’s justification process. Now,

from my standpoint, it makes sense if you have got a scenario

where regulators would require justification for an increase in

rates, but it is a little difficult to see why the administrative process should be prohibitively burdensome for insurers seeking to

bring lower-priced insurance products to the consumers in that

State. And I believe it is part of an unintended consequence of different States’ regulatory processes that allows consumers in one

State to benefit from lower rates while the consumers from another

State are barred from enjoying those lower rates, when the only

justification that I can see for this price differential is the bureaucratic process, not specific underwriting facts. And I wondered if

this is the kind of example that your own company has run into,

or perhaps you are cognizant of this situation where others in the

industry have run into this type of situation? Mr. Gasper, could

you respond on that?

Mr. GASPER. Yes. I could give you many cases for my own company. And when I asked the ACLI member companies, I was literally inundated with cases. The one I remember in addressing the

NAIC was we came up with a product which was a combination annuity/long-term care product that we thought was very attractive

to help people start to save for long-term care in an annuity format. We had some very large States approve it, and we had some

very large States not approve it. And, you know, we were taken

aback by it. I mean, it is the same policy.

So, yes, there are many, many instances where we essentially

will take a product, file it in a majority of States, and have at least

four or five big States with large populations not approve the product or take 2 years to approve the product.

Mr. GASPER. And then when the product is finally approved, you

know, something else has become more popular. So it is a problem.

Mr. ROYCE. Well, I thank you, Mr. Chairman. I thank you for

calling this hearing, and we will look forward to hearing from the

second panel.

Chairman BAKER. Thank you, Mr. Royce.

Mr. Bentsen?

Mr. BENTSEN. Thank you, Mr. Chairman.

Mr. Nicely, you mentioned that in the property and casualty

business, it is obviously different in Alaska than it is Texas and

New York, et cetera. I guess the problem is, I think everybody has

agreed, that in the life insurance market, that there aren’t 50 different markets, there is one national market; and—but in the property and casualty market, you are arguing there are still 50 or 51

different markets. But do you all allocate your capital? You are operating in 48 of those 51 markets. Are you allocating your capital

to the number of policies that you write based upon the capital that

you raise from each of those markets, or do you raise your capital

in a national market and then allocate differently?

I mean, I guess the point is aren’t you subsidizing in some cases

one State’s operations against another State’s operations?

Mr. NICELY. No, sir, we don’t. That is one of the reasons why we

do not operate in New Jersey and Massachusetts, because at one

time we were licensed to write in both of those States, and we

chose not to allow customers from other States to subsidize those

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two States. So while our capital is not allocated to the various

States, it is certainly sufficient to protect the consumers in all of

those States. And of those 48 States and the District of Columbia

that we do business in, we want to grow our business in all of

those States.

Mr. BENTSEN. Mr. Gasper, in your testimony, you talk broadly

about what a Federal charter would look like, and that it would

take over the regulatory apparatus of the States, an optional Federal charter. Mr. Nicely in his testimony talks in great length

about State guaranty funds and the necessity of them. Is the intention of a Federal charter, for those companies which opted into a

Federal charter, that there would be a new guaranty fund that

they would also opt into, or would you maintain the State guaranty

fund?

Mr. GASPER. Initially the best way to think of all this is you take

what you have and you let federally chartered insurers participate

in it, and then you give the regulatory authority the opportunity

to improve it as things change.

Mr. BENTSEN. So you would have a Federal guaranty fund or

not?

Mr. GASPER. I just got a note here; someone is going to help me

get a little more specific.

Essentially, we would preserve the State guaranty funds and

have federal insurers become part of the State guaranty system.

Mr. BENTSEN. So, Mr. Nicely—or let me ask the entire panel

this. Then you really would have a form of dual regulation in the

banking system. For instance, you know, if you are a State bank,

you are regulated by the Fed, and you are also regulated by the

F D I C, and both those entities have regulatory powers theoretically for the benefit of consumers, for the benefit of safety and

soundness. Under your proposal for a Federal charter, if an entity

opted to take the Federal charter, they still would be under some

State regulation for purposes of their membership in the State

guaranty fund?

Mr. GASPER. Essentially the way to think about it is that the insurer is protected by this in the State in which its policyholders

live. The national charter system would essentially suggest that

national insurers would get the benefit of the existing guaranty

system. That is how we would see it playing out.

Mr. BENTSEN. But they would stay within the State, whichever

State guaranty fund. If they are in the New Jersey or whatever,

they would stay within that, and the New Jersey regulator would

oversee their capital adequacy?

Mr. GASPER. Yes. It is about aggregating those funds. But it is

essentially, regardless of where you would live, with a federally

chartered company you would have the protection, and it would not

vary by which State you are in and where you are insured.

Mr. BENTSEN. Thank you.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Bentsen.

Mr. Bachus?

Mr. BACHUS. Thank you, Mr. Baker.

Mr. Gasper—well, I will ask all of the panelists this, anyone that

is familiar with this. And what I am talking about is Federal efVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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forts to promote State uniformity in regulations. In Gramm-LeachBliley, we adopted the NARAB Licensing Provisions. Has licensing

of agents been any easier than, say, it was 3 years ago as a result

of those attempts?

Mr. GASPER. I would say that there have been improvements.

Have we gotten to what we would think should be sort of the national way of doing it? The answer is no. I think there are still 30

percent of the producers or agents who sell insurance that are not

under the system today.

Mr. BACHUS. I think we didn’t really go as far as some advocated

or as we could have gone in NARAB, and I think several States are

still holding back. But maybe do you anticipate when those States

get on board that we will?

Mr. GASPER. It would be difficult for me to say by State. Again,

I am giving the States the credit for the progress. But getting 70

percent is not what I think we need to run the business.

Mr. BACHUS. All right.

Mr. NICELY. I certainly would agree. There has been a large improvement, but it is not perfect yet.

Mr. BACHUS. Sure. Do you think that was maybe because some

States have lagged behind, or do you think that is because we

didn’t go far enough in Gramm-Bliley-Leach, Gramm-Leach-Bliley?

Or do you think that that is just not the right solution?

Mr. GASPER. I think it is the nature of the beast if your objective

is uniformity and speed. I think it is the nature of having 51 jurisdictions working with different legislatures which makes it a tremendous uphill battle. The wind is clearly in their face for getting

to complete uniformity.

We believe the life insurance industry needs to be regulated to

compete with the mutual fund industry, to compete with the banks,

to compete with the securities firms. I mean, that is the standard

that has been set. Our competitors basically have defined the level

playing ground that we must get to. And the idea that we might

be able to get to 70 percent or 80 percent of that is essentially unacceptable as we try to compete.

Mr. BACHUS. What you are talking about, when you say securities companies or banks, you are talking about their ability to raise

capital as opposed to your ability because of the current regulatory

structure?

Mr. GASPER. I think that in terms of the education process for

this committee, when we say life insurance, I think we initially

think about traditional life insurance.

Our industry has evolved and my company is heavily involved in

the retirement savings, long-term savings business. So essentially

we are competing for 401(k) business. Okay. Nationwide is the

third largest administrator of 401(k)s in the United States. Most of

our employers have less than 100 employees. We are not issuing

life insurance contracts for those employees; it is the 401(k) business. We are competing with Fidelity, with Schwab, with Citibank,

with other mutual funds. That is the market we find ourselves in.

So that is the point I was trying to make; that if you go back

to 1970, we are all trying to sell traditional life insurance. Today

the vast majority of the companies are trying to compete in the

long-term savings retirement business.

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Mr. BACHUS. Do you have a disadvantage over banks and securities companies in raising capital because of the current regulatory

structure in insurance?

Mr. GASPER. As a public company I don’t think we have any

more limitation in terms of raising capital. I don’t see it as an

issue.

Mr. BACHUS. Do you have limitations?

Mr. GASPER. The only thing inefficiant regulation would bring

into it is that it does put our industry at a disadvantage as we try

to compete for the retirement savings; and, to the extent that we

get a smaller share, we are going to get smaller earnings increases.

And that certainly relates to our ability to raise capital.

Mr. BACHUS. Okay. No more questions.

Chairman BAKER. I will just take the balance of that gentleman’s

time then.

I would also make the point that a bank selling an annuity

doesn’t have to go through the 50-State approval process that a life

insurance company selling a similar product called life insurance

has to go through.

Mr. GASPER. Well, that became interesting as the banking industry sort of was manufacturing annuities and not having to go

through the State regulatory system. Today they do. In essence,

they would have to. We sell a lot of annuities through banks as

such.

Chairman BAKER. Thank you, sir.

Mr. Lucas?

Mr. LUCAS OF KENTUCKY. Thank you, Mr. Baker.

Mr. Gasper, I am wondering, having been in the life insurance

business for 30-some years and seeing the companies go through

the trials and tribulations of trying to get product approval, I can’t

think of a reason why we shouldn’t modernize under one system,

because I would think that the consumer would be so much better

off and the products would be much more cost-effective. It is kind

of like you are competing against the banks and the mutual funds

with one hand tied behind your back maybe for a year or 2 years

or 3 years, or with both hands tied behind your back in some cases

when you can’t get the product approved.

I just can’t understand why the life insurance business

wouldn’t—you know, I am not for bigger government, but, you

know, one size fits all here, and I just can’t see any good reason

why we shouldn’t do this on a national basis. Is there any? Am I

missing something here?

Mr. GASPER. I think you are right on point. I think, when you

step back and look at the business, the nature of the business, it

is a national business. It is a business, and it has changed dramatically in the last 30 years. Banks are selling insurance, stock brokers sell insurance. It is—traditional insurance agents are selling

insurance. So it just screams for the idea that it is a national product, and it screams for an opportunity for companies to be nationally regulated.

Mr. LUCAS OF KENTUCKY. It just seems like to me that this is

a lay-up shot and a no-brainer. I don’t know why we would get resistance on this.

63

Mr. GASPER. Well, that is how I would see it, but I am pretty

naive when it comes to—.

Mr. LUCAS OF KENTUCKY. So am I.

Mr. GASPER.—when this is all done.

Mr. LUCAS OF KENTUCKY. So am I. Thank you.

Chairman BAKER. Thank you, Mr. Lucas. I am sure somebody

will be around to explain it.

Mr. Tiberi? Do you have a question, Mr. Tiberi?

Mr. TIBERI. Yeah, I do. I have a couple questions, Mr. Chairman.

Thank you.

Chairman BAKER. Sure.

Mr. TIBERI. To Mr. Gasper first off—and I wish my colleague Bob

Ney were here, because he was the chairman of the insurance committee in the Ohio Senate. But I think that just over the last 10

years, the life insurance industry has changed significantly. And

the point that I am going to make, and I would like you to comment on it because you have touched on it already a bit, and that

is the life insurance industry becoming much more different than

my dad’s life insurance. The point that I am going to make is as

a public employee in the State of Ohio, as a State legislator, and

as any public employee through the State of Ohio, through the

Ohio deferred compensation system which was started in the early

1990s, you get a sheet of different options as a public employee

that you can invest in through deferred compensation; and you

have what you would expect to have there, and that is banks as

options, securities firms as options, and then you suddenly have

Nationwide Insurance Company, which I think of today still as a

property and casualty company, but yet Nationwide is a huge player in the State of Ohio in that market competing with banks and

insurance companies.

Can you touch upon how many States you, as Nationwide Life,

today are in with those types of plan?

Mr. GASPER. We are the largest insurance company involved in

section 457, public sector plans. We probably now are involved in

at least seven or eight States. We are endorsed by the National Association of Counties; we are endorsed by the United States Conference of Mayors. We probably have over six or seven cities and

counties throughout the United States, and those are large counties

like Cook County in Chicago, but small counties where there might

only be 35 or 40 employees, and in most of those large cities and

counties, we are doing exactly what you described: We are having

to put our options against bank options, credit union options, mutual fund options, and we compete, and the employee gets all those

choices. And it is wonderful for employees to have those choices,

but when it takes us an enormous amount of time to get products

approved to participate in those plans, we are disadvantaged.

Mr. TIBERI. And so today, Mr. Gasper, you are operating much

more like a bank or a securities company as the head of a life company within a larger structure than you are to your sisters within

the Nationwide Company that are in the property, casualty, and

health business; am I right?

Mr. GASPER. Right. In the past, with traditional life insurance,

the main concern was dying too soon. Now, there is still an enormous business there, and Nationwide participates in it. But what

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Americans are concerned about is living too long, outliving their income, and that is essentially what we are trying to compete in and

the business we are trying to compete in. And it’s only the industry

essentially today that can guarantee you an income for life. You

can give an insurance company X amount of dollars, and they can

guarantee you an income for life. So it is not like your father’s life

insurance company, nor my father’s; it is—again, I keep calling it

the retirement savings, long-term savings business that we are

competing in. And we are competing with other insurance companies, but we are also competing with banks, mutual funds, and securities firms.

Mr. TIBERI. Just to switch directions a little bit, you spend most

of your time in Ohio. Ohio, like many other States, has struggled

with revenues. One of the criticisms that has come from this proposal is that States like Ohio would lose revenue if they optioned

into the Federal system. Could you comment on that?

Mr. GASPER. That is a great question, because the proposal as we

outlined it, the premium taxes would stay right inside the State,

and we would expect the companies, you know, to pay their fair

share of taxes in the States. So the premium tax would stay in the

States. And if you look at how States tend to regulate insurance,

essentially what they do is charge the companies for the regulation

that occurs. And my suspicion is essentially States are losing

money regulating insurance companies today. So they would keep

the premium tax and get out of a business where essentially they

are not making money today.

Mr. TIBERI. Thank you.

And one last question, Mr. Chairman, for Mr. Nicely. From your

perspective, as a property and casualty company only, do you have

the same competitive issues that banks and securities and health

companies do? Or, the issue that somebody touched on earlier, the

speed to market issues that life insurance companies have today?

Mr. NICELY. Not really. All insureds are required to go through

the same process. So while in some cases it may be onerous and

too long, at least there is a level playing field.

Mr. TIBERI. Thank you.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Tiberi.

Gentlemen, we very much appreciate your participation in our

hearing today. The record will remain open not only for Members

to express further opinions, but for you as well should you have an

addendum to your own remarks here today. We certainly appreciate your time and assistance in this difficult matter. Thank you.

Chairman BAKER. And I would ask at this time if our panelists

are available for the second panel to come on forward, please.

I would like to welcome each of you to our hearing this afternoon.

As you know, we request that your testimony, as best can, be contained to 5 minutes. That would be helpful. And, of course, your

entire testimony will be made part of our official record.

With that, I would like to first introduce Mr. Robert Restrepo,

Jr., President and CEO of Allmerica Property and Casualty. Welcome, Mr. Restrepo.

65

STATEMENT OF ROBERT P. RESTREPO, JR., PRESIDENT AND

CEO, ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.,

CHAIRMAN-ELECT, AMERICAN INSURANCE ASSOCIATION

Mr. RESTREPO. Thank you very much, Mr. Chairman. As you

mentioned, my name is Robert Restrepo, and I am President and

CEO of Allmerica Property and Casualty Companies, located in

Worcester, Massachusetts. Our two flagship property/casualty insurance companies are Hanover Insurance, which operates primarily in the eastern part of the country, and Citizens Insurance

Company of America, based, as Congressman Rogers mentioned, in

Howell, Michigan.

Allmerica ranks 23rd among all property and casualty insurers

in the United States. Although we are certainly not among the

largest insurance companies, we are strong advocates and supporters of comprehensive insurance regulatory modernization, including optional Federal chartering.

I am here today on behalf of the American Insurance Association,

where I am incoming chairman. I appreciate the opportunity to testify this afternoon about the insurance regulatory system both in

the U.S. and abroad, and, in particular, AIA’s support for optional

Federal chartering as a way to make the current State regulatory

system more effective and more efficient for all stakeholders.

Mergers and acquisitions, changes in the various financial industry sectors, globalization, technology, and, most recently, the tragic

terrorist attack of September 11th, each of these have had a tremendous and very different impact on our industry. Yet with all

this change, the insurance regulatory environment has remained

largely unchanged since 1945 when the McCarran-Ferguson Act established the principle of congressional deference to State insurance regulation.

For every incremental movement towards greater State regulatory efficiency or uniformity, there are many new State-specific

regulatory requirements that result in cost, delay, and frustration

for insurers, with little, if any, consumer benefit. AIA fully supports modernizing and improving the State regulatory system, and

we continue to work toward that end. However, we also believe

that Federal regulation is a more appropriate choice for certain insurers and their customers. Regulatory reform, including optional

Federal chartering, will benefit the insurance mechanism as a

whole. In particular, it will help the individuals, families, and businesses who rely on property and casualty insurance products for

their short- and long-term financial security.

We commend the subcommittee’s focus on this topic as part of

your broader examination of insurance regulation in the postGramm-Leach-Bliley era. The current State regulatory system imposes significant costs on insurers and, ultimately, our customers

as well as the economy at large. Statutes and regulations are not

uniform, and in many States regulatory actions prohibit insurers

from responding effectively to marketplace changes.

Meanwhile, the legal and economic environment in which we operate is changing at a breakneck speed. The bottom line is that

consumers ultimately pay more for less adequate risk protection

than they would under a more dynamic and fluid regulatory system.

66

The National Association of Insurance Commissioners has acknowledged the need for a more efficient regulatory system, focusing in on what it has called speed to market. The NAIC’s recommendations move in the right direction, but ultimately fall short

of a true market-based approach. AIA remains committed to the

State reform process, but we urge Congress to move forward with

the creation of an optional Federal charter.

There are a number of compelling reasons for Congress to move

forward with optional Federal chartering. First, a level playing

field is critical to the long-term viability of the insurance industry.

The Gramm-Leach-Bliley Financial Modernization Act changed the

rules of competition for insurers, banks, and securities firms.

Second, new technologies do not recognize State-specific regulatory barriers. Those barriers make it harder for insurers, agents,

and policyholders to get full access to these technologies.

Third, the insurance business is increasingly national and international in its customer-focused and regulatory needs. Optional

Federal chartering would let companies and customers choose the

regulatory approach that is most suitable for their size and scope

of operations.

Fourth, the challenges facing the property and casualty insurance industry are also increasingly national and international in

scope. Terrorism, natural catastrophies, fraud, and asbestos litigation are just some of the major issues that our industry faces, but

the current decentralized regulatory system lacks the tools to effectively address these issues in a comprehensive manner.

I note this committee’s interest in addressing the role of the

United States in seeking insurance reforms around the world. The

U.S. should continue to play that role, but we also must address

our own shortcomings in our current system. Insurers and consumers alike all over the world will benefit from open and competitive markets that give consumers ready access to needed products

at competitive prices.

We believe that optional Federal chartering will help achieve

that goal. Working with other sectors of the financial services industry through the Financial Services Coordinating Council, AIA

has developed a set of principles for an optional Federal charter

that would accommodate all lines of insurance. You have in my

prepared text an outline of each of these principles. Taken together, these principles assure that the new regulatory system is

responsive to the needs of customers and claimants, taxpayers, and

the public at large. Through the FSCC, our organizations are also

working to develop a single legislative proposal which we hope to

release shortly. We recognize that this will be a long legislative

process, but we look forward to working with you to advance a bill

that would result in a safe, sound, and solid regulatory system.

Optional Federal chartering will bring numerous benefits to consumers and to the public at large. Consumers will save money as

the market becomes more efficient and competitive. They will also

have more product options. Optional Federal chartering will also

enhance the U.S.’s position as a trading partner and address criticisms that we have received from abroad that the current system

is protectionist. The changing marketplace at home and abroad

makes comprehensive insurance regulatory reform imperative. A

67

new structure will assure a healthy consumer-oriented U.S. property and casualty insurance industry for the 21st century.

We appreciate the subcommittee’s attention to this important

issue, and later on I will be happy to answer any questions that

you all have. Thank you.

Chairman BAKER. Thank you, sir.

[The prepared statement of Robert P. Restrepo Jr., can be found

on page 300 in the appendix.]

Chairman BAKER. Our next witness is Mr. Paul Mattera, who is

the Senior Vice President and Chief Public Affairs Officer for Liberty Mutual Group on behalf of Liberty International. Welcome, sir.

STATEMENT OF PAUL MATTERA, SENIOR VICE PRESIDENT

AND CHIEF PUBLIC AFFAIRS OFFICER, LIBERTY MUTUAL

GROUP, ON BEHALF OF LIBERTY INTERNATIONAL

Mr. MATTERA. Thank you, Mr. Chairman.

Mr. Chairman, Mr. Kanjorski, members of the subcommittee, my

name is Paul Mattera, Senior Vice President and Chief Public Affairs Officer for Liberty Mutual Group.

Liberty Mutual is primarily a property and casualty insurance

company based in Boston with $14 billion in revenue and over

37,000 employees in the United States and in 15 countries. Liberty

is the leading provider of workers’ compensation insurance in the

world. The fifth largest P&C insurer in the United States, and the

second largest U.S. based international insurer.

I am here today to express the company’s long-held belief that

State-based insurance regulation is fundamentally sound and

should not be abandoned in favor of a Federal model or dual charter model of regulation.

I have also been asked to discuss the EU model of insurance regulation and to consider what lessons might be learned from the European experience. Let me start by describing the EU model. The

EU has significantly liberalized company licensing so that a company licensed in one member country can operate as a branch or

a subsidiary in other countries without additional licenses. This socalled passport system is the key feature that sets the EU apart

from the U.S. However, like the U.S., the EU has strong preference

for so-called host control; that is, the country in which the business

is conducted retains regulatory authority.

Even where uniform rules exist, local interpretation can vary

widely. Now, the EU has recently abolished rate and product regulation, but financial, accounting, tax, market conduct, and other requirements continue to be applied by the host country. So, the notion of on a single unified regulatory structure has not yet come to

pass. Some aspects of the company’s operations are regulated by

the home country, some by the host country, and both subject to

the directives of the E C.

Mr. Chairman, I would like now to make just a few quick points

about the EU model and about the U.S. system in contrast. First,

the EU model is not a panacea. While there are lessons for the

U.S., streamlined licensing, reliance on competitive markets, it is

too simple to say that it should be the model for the U.S.

Second, we don’t need the EU model to promote global competition. The U.S. system is neither a trade barrier for foreign competiVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
68

tors seeking to do business in the U.S., nor does it prevent U.S.

companies from entering foreign markets.

Three, reform takes time. The EU system has taken nearly three

decades to get where it is, and it is still changing. Before we abandon the U.S. model, the Congress should send a clear message to

the NAIC and to the States that they must accelerate the modernization agenda and complete it within a reasonable time frame

or risk Federal takeover.

Fourth, State-based insurance regulation is fundamentally

sound. The State system has served consumers and providers well

over the last century; however, considerable improvements are

needed for the system to meet the challenges of the 21st century.

One of those challenges is the expansion of class action and asbestos liability and its impact on the solvency of our industry. State

regulators have not been effective advocates in this regard, and

their performance will have to improve or the calls for Federal regulation will get louder.

Fifth, Federal or dual charter models are deceptively simple. By

promoting uniformity, they imply that all regulatory functions can

be managed by a single regulator. But dual regulation, as in the

EU, may be closer to the reality where residual markets, guaranteed funds, rate regulation perhaps, market conduct are all left to

the States.

Sixth, and last, insurance regulation is inextricably tied to State

law. States have the constitutional prerogative to establish liability

laws and other reparation systems. Since insurance is so closely

tied to these laws, it follows that insurance regulation should remain State-based. Move insurance regulation to Washington, and

the underlying reparations laws, workers’ compensation, automobile reparations, and so on will inevitably follow.

Finally, Mr. Chairman, I urge the subcommittee to move cautiously as it considers the best model for regulating the property

and casualty markets and promoting competition in the 21st century. Thank you.

Chairman BAKER. Thank you, sir.

[The prepared statement of Paul Mattera can be found on page

249 in the appendix.]

Chairman BAKER. Our next witness is Mr. Franklin Nutter,

President of the Reinsurance Association of America. Welcome, Mr.

Nutter.

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT,

REINSURANCE ASSOCIATION OF AMERICA

Mr. NUTTER. Mr. Chairman, members of the committee, thank

you very much. Reinsurance is certainly the most global of the insurance businesses that you will address as part of your oversight

hearings regarding insurance regulation. All of the members of our

association are either licensed, authorized, or accredited in all U.S.

jurisdictions. I am not here today to endorse one system of regulation over another, but, as the committee requested, to address some

issues that have arisen in the context of reinsurance regulation.

Reinsurance is effectively the insurance of insurance companies.

It serves the purpose of reducing an insurance company’s volatility;

it has the effect of spreading the risk across the capital markets

69

of the world, and, as this committee is well aware, addresses catastrophe exposures that insurance companies have.

To put reinsurance in its proper perspective, the net reinsurance

recoverables by all U.S. property/casualty insurers represents 144

percent of the total property and casualty surplus of all U.S. insurance companies. The NAIC’s own statistics show that in the year

2000, there were 3,300 foreign reinsurers that did some business

in the United States, although it is clearly heavily concentrated

among a smaller number of companies.

Reinsurance is regulated differently than you hear from other

parts of the industry. A reinsurance company that chooses to be licensed in the United States is subject to all of the same regulatory

requirements for solvency regulation as an insurance company, but

reinsurers are not regulated with regard to the rates that they

charge or the coverages that they write, largely because those contracts are deemed as written between sophisticated commercial

parties. Reinsurers do not have any direct relationship with insurance consumers.

For those companies who choose not to be licensed in the United

States, reinsurance is regulated on an indirect basis largely

through credit for reinsurance laws, which effectively provide the

accounting treatment that is given to insurance companies for their

use of reinsurance. Reinsurance companies that are not licensed in

the United States and choose to do business on that basis,

collateralize their obligations through trust funds, letters of credit

or other forms of security to make certain that reinsurance is collected.

The issues that I would like to comment on include credit for reinsurance. There have been some at the National Association of Insurance Commissioners forums suggesting that the collateral requirements imposed upon nonauthorized reinsurers should be reduced. The U.S. insurance market is heavily dependent on a global

reinsurance market, and yet insurance regulators cannot be expected to understand the accounting or the regulatory schemes

throughout the world. Regulators have confidence in the collectability of reinsurance largely through the requirement for

collateralization of the non-U.S. reinsurance obligations. It is difficult to comprehend how the U.S. system could impede competition

based upon the statistics that I gave you earlier; and, indeed, if the

Congress is to consider an optional Federal charter or minimum

Federal standards, our association would urge the Congress to incorporate a strong credit for reinsurance regulatory system similar

to the NAIC’s model and regulation.

I have commented in the text of my testimony on the inconsistencies among the State systems, often referred to by other panelists, regarding the costs and inefficiencies of dealing with a multistate system. When you are dealing with a multi-state, indeed global, insurance part of the system, such as reinsurance, there is particular concern about the extraterritorial application that some

States apply their laws to insurance and reinsurance. It is important that the difficulty in complying with States is recognized in a

system where States do not respect the laws and regulations of the

other States.

70

We have also commented in the written testimony about an issue

that is referred generally as mutual recognition. The laws addressing regulation of reinsurance in various countries are quite varied.

There is no globally recognized method of conducting reinsurance

regulation, yet some have suggested that the States of the United

States should recognize other countries’ regulatory systems, and

thereby relieve insurance companies who do business in the United

States from the licensing or collateral requirements that would be

imposed upon them in the United States. We have opposed that

initiative largely because we feel that it cannot proceed until there

is a more uniform international accounting system; until the States

recognize the regulatory system among themselves; and, third, that

judgments entered into in the United States are recognized and enforced abroad.

The last issue that I did want to raise is receivership. Insurance

companies that are insolvent or have financial problems are not

subject to U.S. bankruptcy laws; they are subject to insolvency laws

and receiverships on a State-by-State basis. Generally we find

those laws to be archaic and inefficient. Often reinsurance

recoverables are the principal asset in those receiverships. We have

participated in the drafting of a uniform national receivership law.

If the Congress were to consider a national system or minimum

standards, we would strongly encourage a uniform national receivership system be implemented.

And, lastly, I am not here to endorse one system over the other,

but to say that there are a number of alternatives available for the

future structure of insurance and reinsurance regulation, including

minimum Federal standards, and that we believe that it is incumbent to find that critical balance between the cost and efficiencies

of the system and a competitive and secure regulatory environment

for reinsurance. Thank you very much.

Chairman BAKER. Thank you, Mr. Nutter.

[The prepared statement of Franklin W. Nutter can be found on

page 286 in the appendix.]

Chairman BAKER. Mr. Mattera, in a portion of your written testimony you submitted, you made a comment with regard to the system and its effectiveness in Illinois that I read as being a favorable

view of that system. Is there legitimate reason, in your mind, for

the Congress not to act on some Illinois-like model, given the

length of delay we have encountered with State-to-State regulatory

enhancements? Can you comment?

Mr. MATTERA. I would be happy to comment, Mr. Chairman. The

Illinois system certainly is probably the best example among the

States of one which promotes open and competitive—an open and

competitive market. We think the Illinois system as it relates to

the commercial lines is one that is achievable through a State-byState attempt at reform. And, indeed, both through NAIC leadership and hard decisions made by State legislators in a great number of States over the last 2 or 3 years, a great deal of progress

has been made in opening up, if you will, the commercial lines to

a more competitive market.

Our sense—our company’s sense is that there is resistance to the

notion of the Illinois model as it relates to the personal lines. I

question whether—and, with all due respect, whether an open and

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competitive rating system like Illinois is one that is achievable in

Federal law, which is what has led us to question, you know, the

utility and the viability of either a Federal or an optional charter

approach. A significant reason for one’s support for either of those

approaches, it seems to me, is the opportunity to engage in a more

competitive market, and we have some serious misgivings that it

is unlikely to be achieved at least with regard to the personal lines.

Chairman BAKER. Commercial lines, possibly; personal lines,

probably not.

Mr. MATTERA. Is probably not.

Chairman BAKER. Is your view? Thank you.

Mr. Restrepo, you also have made comments about the Illinois

model. Do you have a different view, or do you think that it is an

advisable direction for us to explore?

Mr. RESTREPO. We clearly think the Illinois model is the best

practice and clearly one of the best State regulatory systems that

we have encountered, both within my company and representing

the AIA. To the extent that that kind of model is adopted nationally, it would certainly be an improvement, but it really doesn’t get

us where we would like to see the regulatory system move eventually. And we think, given the changes in the industry as companies

become more focused on regional sectors, on specific lines of business, workers’ compensation, let’s say, as companies become more

specialized, they are going to want choices regarding the regulatory

system that would best meet the needs of their shareholders and

their customers, and which is why we are strong advocates of the

Federal option, Federal charter option.

Chairman. BAKER. In exploring this, I don’t know if you are in

a position to answer this particular question, but as it relates to

your company’s marketing in Illinois and the competitive environment in which you operate, is it your opinion that Illinois consumers enjoy a broader array of product at a better price as a result?

Mr. RESTREPO. They clearly enjoy a better price. And probably

one of the single greatest or single—probably the best characteristic of the regulatory system in Illinois is it is pretty free;

companies are free to charge what they think they need to charge

to both compete and make a profit. So, clearly, from a rate regulation standpoint it is very attractive, and the consumers in Illinois

benefited, contrasted with States that we do business with, unlike

GEICO in New Jersey and Massachusetts where, combined, New

Jersey and Massachusetts represent almost 15 percent of our premium volumes, and those two States probably have the highest

automobile insurance rates in the country.

Chairman BAKER. I had an omission on my part. I meant to ask

the prior panel if it would be advisable, in light of the decision to

withdraw from offering product in New Jersey, if there were an alternative method to allow you to enter the New Jersey market,

wouldn’t that really be beneficial to New Jersey automobile drivers? It seems to me that the solution there is more competition and

less regulation.

Mr. RESTREPO. I agree 100 percent.

Chairman BAKER. And, however we can provide access to product

is generally beneficial to consumers.

72

Mr. RESTREPO. Consumers in both States are suffering not only

from a lack of markets, but a decreasing number of markets as

companies either go bankrupt or decide to exit the State. And any

kind of regulatory system that will promote more competition

would make New Jersey, and Massachusetts a more attractive

place to do business.

Chairman BAKER. Thank you.

And one last quick one. Mr. Mattera, given your perspective on

this, the NAIC has—I can say, I have sent some telegrams—independently indicated an interest in seeing a time line, you know, a

direction toward uniformity, not necessarily just reciprocity. But

even with our best effort, they have some areas where they have

enjoyed more success than others; but when it comes to market

conduct examination reform, they really lag behind there more so

than anywhere else. Why do you think that is? What is the problem?

Mr. MATTERA. I think the short answer with regard to market

conduct is that they have simply taken it up later in the process.

It has been I don’t want to say a lower priority, but in terms of

trying to tee up issues in some sequence, it has been the third or

fourth issue in that sequence. So I don’t know that it has been the

most difficult problem to deal with; I think it is one that they have

simply chosen to deal with a little bit later on.

Chairman BAKER. If that is the case and it is only a timing issue,

if we are going to get through the entire list, and let’s just assume

we agree on what the list is, how many years are we talking in

order to get the job done?

Mr. MATTERA. Of course, I don’t know the answer to that. I

would like to make this comment, though: I mean, we have seen,

and there has been some questioning to this effect, that when the

States—when their collective feet are held to the fire, when the

Congress is forceful with respect to the—you know, the accountabilities—and I think agent licensing is a perfect example of that—

there has been good response. Now, some can argue about—I think

someone said 70 percent of the market is—you know, is there, but

30 percent isn’t, and we can argue about how you define success,

but I think objectively, you know, 45, 46, 47 of the States have

come in line.

I mean, there is a—and not to pander—there is a very important

role for this committee and for the Congress in identifying the

kinds of change that need to be made so that insurance markets

in this country across all 50 States operate more smoothly, more

openly, with more transparency, competitively to identify what

those areas of change are and then establish some time line within

which the States have got to act. And if they don’t act in that time,

then I think, you know, the gloves come off. And there are steps—

and I don’t presume to suggest to you what they may be, but then

there is perhaps—there are actions that the Congress can take,

whether it is Federal standards or preemption or otherwise.

But as I said earlier in my opening remarks, the EU has arrived

at what some have described as, you know, a good example of open

market regulation. I would say they are not quite there yet; but

even so, it has taken them nearly three decades.

73

So how much time, Mr. Chairman? I don’t know. But I think

without some kind of fixed date in the future, we may not have the

kind of change that all of us, I think, at this table would want to

see.

Chairman. BAKER. Thank you, sir. My time has expired.

Mr. Kanjorski?

Mr. KANJORSKI. That would be about 2032? I don’t think many

members of the committee will still be here, and I am not sure how

much interest the Congress will have in insurance at that point.

Since both of you have your principal headquarters in Massachusetts and you differ so widely on this issue, do you want to tell me

why? What is the distinguishing reason? Why are you so much in

favor, and why are you so much opposed to it?

Mr. RESTREPO. Well, maybe I will go first. Even though we are

only separated by 50 miles, we have two very different companies,

two very different marketing plans. And I can’t speak for Liberty

Mutual’s plans. We compete with them in some markets, but they

are a much bigger company than we are. So we have different—

.

Mr. KANJORSKI. But you sell the same type of insurance.

Mr. RESTREPO. But we have different markets. One of the markets that we are looking to get into, our traditional market is, as

a regional company, in Michigan and the Upper Midwest and then

New England primarily. We do some business in the Southeast.

But increasingly we are looking to enter a market that we define

as sponsored, where we go to large employers or associations, like

the American Automobile Association, to sponsor our product to

their employees or members.

So one of the restrictions we have as a regional player is trying

to enter new States. And so we would like to have the option—to

support our marketing plans as we venture into that market, we

would like to have the option of considering a different regulatory

environment that would make it easier for us to enter that kind

of a market and also to enter new States if we choose to expand

our regional presence.

Mr. KANJORSKI. And you are almost nationwide at Liberty, and

you say it is easier to stay at a State level.

Mr. MATTERA. Well, we are. We are countrywide—I hate to use

the word nationwide. We are countrywide.

I guess there are three reasons that I can offer. One is philosophical. And it is hard to sort of back away from what is a philosophical belief; that because the underlying reparation system is

State-based, the regulatory system must itself remain State-based.

There is that philosophy that guides a lot of our thinking. That is

first.

Second, perhaps more practically, Liberty is primarily a largerisk underwriter. I mean, we are one of a handful of insurance

companies in this country who insure the Fortune 500 risks, AIG,

Travelers, Liberty. There aren’t very many who really play in the

market. That is essentially a deregulated market. And even in the

middle commercial market, there has been significant movement

over the last 2 or 3 years, as I commented earlier, in the direction

of more competition in price and product.

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So there is—we see on the commercial side more progress being

made. That may not be as visible to some companies; it is quite

visible to us.

And then, thirdly, we are a substantial player in the personal

lines market. Now, not like Mr. Nicely, who I think said that

GEICO has 5 percent of the personal lines premium revenue in the

country, Liberty is at 1 or 1-1/2 percent. So, we are significantly

smaller, but we are substantial, and in that area we feel as though

we have been reasonably successful, sort of slugging it out in

States, regulator by regulator, forcing the issue, getting the rate

level, getting the policy changes, able to conduct our business. It

takes time, it is inefficient, it adds cost, but at the end of the day

we have managed to get through that process reasonably well.

And so those are the best answers that I can give you, Mr. Kanjorski, as to why we are rooted in the notion that the State-based

system ought to remain as such.

Mr. KANJORSKI. And both of your companies are writing both in

Massachusetts and New Jersey, unlike some of the others?

Mr. MATTERA. Well, we are writing in New Jersey, and we are

certainly writing in Massachusetts, and we are writing in all of

those States that are held out as the parade of horribles. And I am

not here to tell you that it is just hunky dory for us. It is not. We

lost $100 million in the year 2000 in New Jersey, it is a lot of

money, but we think we are turning the corner in that State.

Mr. KANJORSKI. Is that being subsidized by—.

Mr. MATTERA. It is a fair question.

Mr. KANJORSKI. —Pennsylvania payers?

Mr. MATTERA. At the end of the day, there are implicit subsidies

in the insurance business. I don’t think one can walk away from

that. So the answer to your question, I suppose, is yes.

Mr. KANJORSKI. What happens if the Congress takes no action,

and the State insurance commissioners feel the pressure is off of

them, and we are here again 5 or 8 years from now?

Mr. MATTERA. I mean, you are asking me. I think that is the absolute worst possible result.

Mr. KANJORSKI. Someone said it should have been done 15 years

ago; Mr. Gasper, in his testimony. And I don’t know how long Mr.

Baker is here, but I am here 18 years, and it is the first time that

I recall testimony regarding any Federal involvement with the

charters. As a matter of fact, it used to be considered a poison pill

on the Hill to mention Federal charter and insurance in the same

sentence, but now we are being inundated by some companies.

Mr. MATTERA. But if you go back to, I am thinking, the 103rd

Congress, Mr. Dingell, the notion of failed promises and the need

for rejuvenated solvency regulation within the insurance industry,

the result of that cajoling, the result of that effort was, you know,

an accreditation program developed at the NAIC, sold to the

States, enacted by the States, which did elevate considerably—and

I don’t know if there are many people who would argue against this

notion—considerably elevated both the tools by which State regulators measure financial condition and act on companies that are

failing, and also the standards, through risk-based capital standards and otherwise. And so if there is a success of State regulation,

I think it is fair to say it was—it is the accreditation process, and

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that was a direct result of Federal threats to take over that aspect

of the insurance regulatory structure.

Mr. KANJORSKI. I just have one additional question. Mr. Nutter

talked about the national scope of receiverships or conservatory operations. Do you two gentlemen agree that we should have a national standard on that, or should we leave that to the States, if

we come out of nothing else, to a national standard on the receiverships?

Mr. RESTREPO. You are asking me? I think that would be a step

in the right direction, sir.

Mr. MATTERA. I guess it would be inconsistent for me to sort of

hold the view that a national standard is something that Congress

should jump to at this time. I think, consistent with my earlier

statement, I know we would prefer to see the Congress’s other

means to achieve the same result.

Mr. KANJORSKI. Okay.

Mr. Chairman, my time has expired.

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. Ney?

Mr. NEY. Thank you, Mr. Chairman.

I wanted to pose the question, Mr. Restrepo, to the AIA. Looking

at State insurance guaranty funds that exist, I think we can recognize that most of those funds have done a good job over a period

of time. Now, either in your proposal or the gentleman from New

York, I think that it would be the hope that even if an entity goes

in a State charter or Federal charter, it could still have the backing, inclusion of those State-guaranteed funds; is that correct?

Mr. RESTREPO. That is correct. Our proposal requires no change

to State-guaranteed funds, to State premium taxes, or to State residual market mechanisms.

Mr. NEY. Let me pose a question based on that. So, let’s say that

I am the head of a State guaranty fund, and for some reason, the

new Federal regulatory system is set up, I feel that it is inadequate, or just so choose to say that you are chartered with the

Feds, now you are on your own, you are out of our guaranty fund.

Now, I understand the repercussions of that for a State; but what

if that scenario happened, and that happened in several States?

Would the Federal then have to set up a guaranty fund?

Mr. RESTREPO. Not necessarily, sir. I think that is a detail, obviously, that would —.

Mr. NEY. That is a big one.

Mr. RESTREPO. That is a big detail that needs to be addressed

in the legislation. I think, from our standpoint right now, we feel

that the State guaranty funds should continue to operate as they

are currently operating.

Mr. NEY. I am just trying to think of—you know, we can think

of any scenarios. I am just trying to think of a scenario from a

State regulator’s point of view, and they can’t regulate you, but you

are in the guaranty fund, and they feel something just didn’t go as

it should, and then they could kick you out of that. And I just wonder where that leaves us. It is a very valid item, I think, that has

to be looked at.

Mr. RESTREPO. I agree.

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Mr. NEY. The other question I have that I think is interesting

for Mr. Nutter, isn’t it true that reinsurers are largely unregulated

under State laws?

Mr. NUTTER. Reinsurance rates and the forms or the coverages,

the contracts written between insurers and reinsurers are generally not regulated by the States; but an insurance company or a

reinsurance company that is licensed in the United States is subject to all the same solvency standards, laws, holding company

statutes as insurance companies.

Mr. NEY. So wouldn’t a Federal—if we created a Federal regulator—be able to tighten the regulations then nationwide on, for example, you know, your type of industry?

Mr. NUTTER. We have no position in favor of a Federal national

system, but it is quite clear that reinsurance tends to be—because

of the global nature of it, tends to have issues that transcend State

borders and, in many cases, transcend national borders. The State

system is an awkward system, if you will, to deal with a business

that is writing contracts on a multistate and often a multinational

basis.

Mr. NEY. So you basically are disputing, then, that you are not—

that you are free from State regulation?

Mr. NUTTER. There is no question that a reinsurance company licensed pursuant to State law is subject to all of the same solvency

regulatory standards other than rate and form regulation. Much of

the U.S. reinsurance market is written by non-U.S. reinsurers who

are subject to regulation only through the collateral requirements.

They fund their obligations through letters of credit or trust funds

or other funds withheld.

Mr. NEY. One other question I had real quick. What is the angle

of the WTO? I saw that in one of the testimonies. I understand

what Europeans have been talking about. Am I to gather that

there will be eventual filings against us at the WTO? Somebody

mentioned WTO in their testimony.

Mr. MATTERA. I don’t know that I did, but I did make some references, I was asked to, to the EU and the regulatory model there.

And I did make some further comment. Maybe I can just expand

on it.

Some have suggested that the 50-State regulatory system is a

trade barrier because it is inefficient. Now, as ugly as what I am

about to say next sounds, I think it is the truth. An inefficient system per se is not a trade barrier so long as it applies equally to

all who seek to do business in that market. That is not to apologize

for what is admittedly an inefficient system in the U.S., but I don’t

see the argument that somehow, unless we create a single regulatory structure, either an optional charter or pure Federal regulatory structure, somehow we are going to be in violation of WTO

or imposed trade barriers. I don’t see that argument at all, if that

is where you are going.

Mr. NEY. I just read it.

Mr. NUTTER. It was in my testimony that the WTO was mentioned because some of these issues about collateral requirements

have been considered by the International Association of Insurance

Supervisors, by the NAIC, and there have been references at the

WTO for these kinds of things; nothing in the trade barrier level,

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but in the context of questions about whether or not any of our regulatory requirements in the reinsurance area would be considered

anticompetitive or create barriers, as Mr. Mattera says.

Mr. NEY. Thank you.

Chairman BAKER. Thank you, Mr. Ney.

But that inefficiency does create a higher premium cost if you

can get product. And in some cases where the regulatory barrier

is so bad—New Jersey—some people don’t even go. So I think that

is the economic reality.

Mr. Bachus?

Mr. BACHUS. Thank you.

First of all, Mr. Restrepo, what Mr. Ney was saying about the

LaFalce—all these proposals I have seen don’t allow a State to regulate a federally chartered property and casualty insurance company. And I think it is sort of Pollyanna to think that the States

are going to allow a federally chartered company to participate in

their State insurance guaranty fund. I think clearly constitutionally they can say, you can’t participate; we can’t regulate you,

you can’t participate. And in that case I don’t see any alternative

to having a Federal guaranty fund.

Now, do you believe that constitutionally we can take the States

out of the regulatory business and at the same time require the

States to supply an insurance guaranty fund?

Mr. RESTREPO. I think, number one, we are—a company that

chooses the Federal charter as an option is still controlled by State

laws.

Mr. BACHUS. But not—.

Mr. RESTREPO. Regulatory, as it relates to market conduct and

financial solvency, would change, but we would still be using—a

company that chooses that option would still be using the same

statutory accounting principles that most insurance companies operate under.

Mr. BACHUS. But I think clearly the State could say, you can’t

participate if you are not subject to market conduct rules.

Mr. RESTREPO. As I understand it, that would be a State’s prerogative.

Mr. BACHUS. That is what I am saying, it would be their prerogative.

Mr. RESTREPO. But as a practical matter, even though a State—

from my perspective, even though a State wouldn’t be regulating,

let’s say, the financial solvency, they would still have access to the

information to make an informed decision whether or not they

want an individual company to participate in it.

Mr. BACHUS. They would. And if they decided that the Federal

regulation was loose, whatever —.

Mr. RESTREPO. But in the best interest of the consumers in that

State, I think most informed State regulators would want to have

the maximum amount.

Mr. BACHUS. I think they want the fees that are generated, too.

Mr. RESTREPO. Well, and they want the participation in the fund.

And if they had a solvent company —.

Mr. BACHUS. But they wouldn’t be able to regulate; so how would

they be able to determine?

Mr. RESTREPO. They would be able—.

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Mr. BACHUS. I am just saying—.

Mr. RESTREPO. —to have access to the information to make a decision whether or not they wanted company A or B.

Mr. BACHUS. But would they have any power to do anything

about it when they got the material?

Mr. RESTREPO. I imagine they could kick the company out.

Mr. BACHUS. Well, that would be State regulation now.

Let me go on to something else. How many people are employed

in the various States in regulating insurance companies? Do you

know how many? How many employees of the State insurance regulators?

Mr. RESTREPO. I do not know.

Mr. BACHUS. Anybody got a figure?

Mr. MATTERA. Well, I mean, it varies wildly from State to State.

You know, whether there are sort of relativities associated with

size of population or not I can’t say. But Texas probably has in excess of a thousand employees regulating insurance. California probably well over that. Massachusetts probably a fewer than a hundred. So it varies widely.

Mr. BACHUS. From maybe 100,000 nationally—.

Mr. MATTERA. Oh, I see. In total, I don’t know. But—I don’t

know.

Mr. BACHUS. When we have Federal regulation, have a Federal—

we have Federal employees regulating. That would be in addition

to the State, to the employees at the State regulators. Now, somebody has to pay for that regulation.

Mr. MATTERA. That is right.

Mr. BACHUS. Doesn’t that add to the cost or couldn’t that?

Mr. RESTREPO. Well, under our proposal, companies that would

choose a Federal option would be paying the freight of the new regulatory system, so the taxpayers would not be hurt.

Mr. BACHUS. So they would actually pay for the Federal regulations.

Mr. RESTREPO. That is correct. They would pay for their choice.

Mr. BACHUS. You know, for property and casualty insurance particularly, don’t State regulators often play a big role in seeing that

claims are paid? I mean, that has always been my observation.

Mr. RESTREPO. State regulators are responsible for market conduct. One of the areas that they get involved with is, obviously, responding to complaints about—from consumers who don’t like the

way a claim was—.

Mr. BACHUS. So you would—the Federal regulator that would be

formed would actually insure that claims were paid properly?

Mr. RESTREPO. That they—yes, that they—that claims were

being handled in compliance with—.

Mr. BACHUS. With State law?

Mr. RESTREPO. —with State law or according to the Federal regulations.

Mr. BACHUS. So you would have a Federal regulator that would

be interpreting insurance contracts under the law of the pertinent

State. So the Federal regulators would have to interpret the law

of 50 different States and the territories?

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Mr. RESTREPO. No. They could be handling the complaint. A

claim rep would be settling a claim in compliance with the local—

.

Mr. BACHUS. Well, you know, even to determine whether a valid

claim is being asserted, you have to go to State law to see whether

that is a valid claim.

Mr. RESTREPO. That is correct.

Mr. BACHUS. So they would—you would have a Federal regulator

that would be having to interpret the law of all 50 States, and if

there were a dispute it would have to be resolved in the State

court. So your Federal regulator could be involved in litigation in

all 50 States and yet the federally chartered insurance companies

would have to pay all the freight for that?

Mr. RESTREPO. Yes.

Mr. BACHUS. It could be pretty expensive.

Mr. RESTREPO. For the companies that exercise that choice, yes.

Mr. BACHUS. I have never had a—I have never—of course, I am

a Congressman, but I have never had a constituent complain to me

about the lack of claims being paid, so I don’t see that there is a

problem. So, you know, from my standpoint I have got to wonder

why I want to fix a system, at least in payment of claims, that

seems to be functioning well.

Mr. RESTREPO. Well, we are in the business, obviously, sir, of

paying claims; and that is good to know.

Mr. BACHUS. That is sort of—when the public deals with you,

that is—basically, their interest is seeing that their claims are

paid, paid properly and adequately paid.

Mr. RESTREPO. That is correct.

On the other hand, though, there are consumers that are looking

or would like to entertain new products, and they see new risks

that they would like to insure. The thrust of our proposal is really

to accelerate our ability to respond to those emerging needs.

Mr. BACHUS. I am just saying I don’t hear customers out there

saying their claims aren’t being paid.

Mr. RESTREPO. That is good to hear.

Mr. BACHUS. And you agree, I think.

Mr. RESTREPO. I think we have a pretty good reputation.

Mr. BACHUS. That is not a big problem. In a nation full of problems, that doesn’t seem to be a problem. Yet we are going to create

a national regulator charged with—one of their duties is to see that

claims are paid and replace a system that apparently is working

quite well.

Mr. RESTREPO. That is one aspect of the regulatory authority.

Another, though, would be rate regulation and product regulation,

I think, as we have mentioned.

Mr. BACHUS. I understand the product part. I understand that.

But couldn’t we fix that by having Federal mandates to the States

for uniformity with regard to approval of products and et cetera?

Mr. RESTREPO. We could.

Mr. BACHUS. That could take a much smaller federal bureaucracy than one that has to monitor every claim, has to interpret

every contract.

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Mr. RESTREPO. We could, but our most recent experience even

with the NARAB is, as we have heard, only 70 percent of the people are really—the consumers have been affected.

Mr. BACHUS. Well, some of those deadlines aren’t here yet,

though. So with NARAB—.

Chairman BAKER. Thank you, Mr. Bachus.

Dr. Weldon.

Dr. WELDON. Thank you, Mr. Chairman.

Mr. Restrepo, how do you think Florida could benefit from an optional charter, Federal charter, particularly with the States’ increased risk for natural disasters, specifically hurricanes?

Mr. RESTREPO. Well, one of the biggest risks, obviously, are natural catastrophes. Natural catastrophes, as you are intimating,

don’t know State boundaries.

There have been efforts under way over the past couple of years,

both on a national and a regional basis, particularly in the Southeast, to establish pools, risk pools; and one of the biggest impediments is getting the agreement of State regulators who have differences in the statutory authority that is granted them, differences politically. Some are elected. Some are appointed. Being

able to get States with common interests, such as States bordering

Florida and the Southeast, to come up with alternative risk transfer mechanisms that certainly Florida consumers have, they are

very difficult to move through a State-regulated process.

I think having a Federal charter as an option would allow

States—would allow new companies to come into Florida and not

be subject, obviously, to Florida regulatory restrictions and be able

to offer products that perhaps aren’t offered right now. Certainly

under different terms and conditions as well.

Dr. WELDON. Thank you.

Mr. Nutter, earlier in the year we heard a lot from the insurance

companies about the post-9/11 status of their industry. I don’t

know if we have heard anything about the reinsurance market. If

we did, I don’t recall. Did that adversely affect the reinsurance industry? And what is the status of the reinsurance industry right

now, post 9/11?

Mr. NUTTER. Thank you for the question, Dr. Weldon.

It is estimated the reinsurance market, both domestic and foreign market that serves the U.S. Market, will probably pay twothirds of the claims that arise out of the September 11 disaster. If

the loss estimates are between 40 and $70 billion, you can make

your own calculations. So you can see it was an enormous financial

impact on the reinsurance markets.

Having said that, I am not aware of any reinsurer that has been

threatened for its solvency for that; and indeed I think the market

has responded extremely well to pay for the catastrophe loss associated with September 11th.

Dr. WELDON. Has there been any impact on capacity, or are the

demands of insurers for reinsurance being adequately met?

Mr. NUTTER. The impact on capacity has largely been limited to

issues about coverage for acts of terrorism.

With respect to capacity for other kinds of risks, such as natural

catastrophe risk, it does not appear that that has affected the capacity. Indeed, there were a number of new insurers and reinsurers

81

that were begun after September 11 believing that there was a

market opportunity and capital wanted to be in the market. Reinsurance rates have risen fairly dramatically. Capacity appears to

be plentiful, with the exception of acts of terrorism where there

clearly are some limitations in the reinsurance market.

Dr. WELDON. So insurance companies wanting to get reinsurance

to cover natural disasters are not facing any kind of difficulty in

obtaining reinsurance.

Mr. NUTTER. Perhaps you have two primary companies sitting

here who probably should answer the question.

I would say that, indeed, property catastrophe reinsurance rates

have risen.

Dr. WELDON. So there is plenty of capacity, but rates have gone

up. Is that what you are saying?

Mr. NUTTER. Rates have certainly gone up.

Dr. WELDON. But aren’t those two things related? As there is

more capacity, rates tend to come down.

Mr. NUTTER. Generally, that has been true. If you look at Hurricane Andrew and the subsequent Northridge earthquake, indeed

insurance rates rose. Capacity seemed limited at the time. The

market responded over time. Indeed, you now have a highly competitive market with a reasonable amount of capacity.

As you know, Dr. Weldon, we believe that there still is a need

for a Federal role with respect to catastrophe capacity dealing with

both natural disasters and for acts of terrorism; and we commend

you for your leadership in that regard. There is not sufficient capacity to deal with costs associated with acts of terrorism. There

is no question about that. Indeed, for major catastrophic events

there are limitations in the reinsurance market to deal with the

kind of hurricane or earthquakes that might hit a major metropolitan area. A Federal role in both areas would be very important.

Dr. WELDON. Do either of you, Mr. Mattera or Mr. Restrepo,

want to add to that at all?

Mr. RESTREPO. The only thing I—go ahead.

Mr. MATTERA. No, I would just like to maybe underscore an issue

which has perhaps recently become more apparent; and that is the

very urgent need for buyers of worker’s compensation insurance

and providers of worker’s compensation insurance to have in

place—for the Congress to put in place a Federal backstop at a

high level for a short period of time. Because it is becoming increasingly apparent that those employers with large concentrations

of employees, particularly in the urban core of this country, it is—

the providers are exposed. Those who are self-insuring that risk

are exposed. Ultimately, the economy is exposed.

Certainly, the House has done its part; and we are all focusing

our attention, of course, now to the Senate.

Mr. RESTREPO. Two examples, Congressman, that I would cite regarding the impact of reinsurance on the U.S.

Number one, from the capacity standpoint, we got the same limits, but we don’t have terrorism coverage, and we are paying 30

percent more. That is just a microcosm. I can’t say that is an average of everybody.

On the second issue, I would raise, just to support what Mr.

Mattera just mentioned, we have also changed our underwriting atVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00091 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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titudes about larger companies. We don’t write many of them, but

people that employ more than a hundred people or in our case even

50 people at one site, we are withdrawing capacity because we

don’t—we are not able to find reinsurance for that kind of exposure

as a result of the lack of Federal backstop.

Dr. WELDON. I just had one quick follow-up for you, Mr. Mattera.

In your opening statement you defended the State regulatory system, and then in response to I think it might have been Mr. Ney’s

questioning you acknowledged that it was inefficient. Those are the

words that you used.

Mr. MATTERA. Uh-huh.

Dr. WELDON. I am sorry.

Mr. MATTERA. And you think there is a contradiction in there

some place, do you?

Dr. WELDON. Yes. Can you kind of explain to me why you would

come before our committee and defend an inefficient system?

Mr. MATTERA. I am not defending.

Dr. WELDON. I am not trying to put you on the spot. It is just

you said it.

Mr. MATTERA. No, it is a fair question. We prepared—the company prepared a white paper some months ago called, The Case for

State Regulation, and when it was first drafted it had a different

title. It was called, In Defense of State Regulation. We thought

about that, and we thought that there was actually a subtle but

important distinction between defending the State system and trying to make the case for the State system.

Fundamentally, the State insurance—the State-based insurance

regulatory system is sound. But it is inefficient. There is a great

deal of change that must occur.

I don’t think I need to elaborate all of those points unless we

have got another hour, and I would be more than happy to do that.

Dr. WELDON. Well, the impression I get is that it is an inefficient

system but that carriers like you have adapted well to that inefficient system and that there is really no gain to changing the system because you have already accommodated to it.

Mr. MATTERA. That would be a large overstatement.

The number of truth in there I think, though, is that the system

is solvable to some degree. That is not to say that there aren’t significant changes.

You see, there has been a lot of discussion in the first panel and

this one about uniformity, the notion that, you know, we are not

going to get to where we want to go unless we have a set of regulations across the 50 States that are uniform one to the other. We

don’t believe that uniformity is the Holy Grail in insurance regulation.

Dr. WELDON. Uniformity doesn’t necessarily mean greater profitability, correct?

Mr. MATTERA. Put profitability aside. I mean, just conceptually,

philosophically. I mean, uniformity —I mean, obviously, profitability is the end game for a provider of insurance. But service to

customers, staying in business, I mean, all of that is equally important.

My point is only that one can have what is, you know, sort of

inherently inefficient systems that are effective and don’t need to

83

be replaced. Where the inefficiencies become so great as to sort of

thwart the proper carrying out of the business and service to customers, then change needs to take place.

I think we are there today. We need to make changes. The system is too inefficient. But I don’t think that inefficiencies, per se,

are the reason for change, so long as the rules are effective. They

are not effective across the vast number of States, and change does

need to be made. So I am not defending the system. I am defending

the notion of a State-based regulatory structure.

Dr. WELDON. Well, my time has expired. It has been a very interesting hearing. Thank you, Mr. Chairman.

Chairman BAKER. Sure.

Mr. Bachus, you had an additional question.

Mr. BACHUS. Thank you.

I think I would also endorse, you know, Federal promotion of

State efficiency and, in some cases, I would say uniformity, too. But

let me—Mr. Restrepo, let me ask you this question. What is your

projection for the number of people that would be employed by the

Federal insurance regulator that you want to create, number of

people that would be employed?

Mr. RESTREPO. Sir, I wouldn’t hazard a guess. I don’t know.

Mr. BACHUS. It could be any number, couldn’t it?

Mr. RESTREPO. Yes.

Mr. BACHUS. I wonder if anybody, you know, in proposing this

if they have thought through how many employees would be created, how big this agency would have to be. Do you know of anybody that has done any study on that?

Mr. RESTREPO. No, we haven’t.

Mr. BACHUS. And whether those employees would be in addition

to or in lieu of those folks back there in the States that are regulators?

Mr. RESTREPO. I think it would be certainly a company choosing

a Federal option, since they are paying the freight, would have an

incentive to encourage a system that wasn’t only effective but obviously efficient and—.

Mr. BACHUS. But you—it wouldn’t be the companies that would

be in charge of how many people worked at the regulator.

Mr. RESTREPO. No, that is true. But to the extent that—.

Mr. BACHUS. You know—.

Mr. RESTREPO. Obviously, in the company’s best interest to have

a system that was not overstaffed.

Mr. BACHUS. I would be interested in that.

Mr. LaFalce has brought forth this legislation. I would be interested—he is not here. I would be interested in asking him what he

envisions as far as the number of employees that would be needed.

Mr. Nutter, let me—.

Mr. KANJORSKI. Maybe I should take a little opportunity on that.

Probably no additional employees like the Department of Homeland Security will cause now additional employees.

Mr. BACHUS. Let me ask just the one final—.

Chairman BAKER. I am sensing meltdown, but go for it one more

time.

Mr. BACHUS. Mr. Nutter, I mean, am I right that reinsurers are

largely unregulated by the States today, right?

84

Mr. NUTTER. Mr. Bachus, a reinsurance company, including all

the members of my association, are licensed in the United States

by a State or are accredited. They are all subject to all the same

financial reporting solvency standards and the holding company

statutes as any other insurance company.

Mr. BACHUS. Do they have separate rules for reinsurers?

Mr. NUTTER. With regard to licensing and solvency regulation,

none whatsoever. With the respect to a non-U.S. reinsurer, access

to the reinsurance market in the United States is achieved through

collateral requirements, trust funds, letters of credit. It is an optional system.

Mr. BACHUS. I just don’t—I have never known of much State regulation of reinsurers, I mean, other than your licensing; and I am

not saying that is bad.

Mr. NUTTER. No, I understand that.

Just to clarify that, Mr. Bachus, the real distinction between the

insurance market served by these two companies and the reinsurance market is that the reinsurance market is a competitive market with respect to rates and the coverages because it is a market

between commercial entities. You don’t have a regulatory structure

that looks at rates and forms as you would in the primary insurance industry.

Mr. BACHUS. But, you know, I guess what I am saying, if you

created a Federal regulator, then there would at least be potential

there to tighten regulatory oversight on reinsurers, which I am not

sure is needed, but I certainly—.

Mr. NUTTER. Well, certainly you would want a system in place

that had a solvency oversight system, much as you have at the

State regulatory level, and a system that dealt with the credit.

Mr. BACHUS. Are the States doing a good job of that today?

Mr. NUTTER. The States have actually done a very credible job

with regard to credit for reinsurance. I think Mr. Mattera referenced the House Commerce Committee hearings of the late

1980s, early 1990s that did, in fact, generate an enormous amount

of State legislative activity dealing with credit for reinsurance statutes; and indeed there have not been the kind of solvency issues

that we saw in the 1980s that gave rise to these hearings.

Mr. BACHUS. So you don’t see any need for any additional regulatory oversight?

Mr. NUTTER. At the Federal level?

Mr. BACHUS. Yes.

Mr. NUTTER. Mr. Bachus, our testimony really has been if you

are going to create the option, here are issues that should be addressed.

Mr. BACHUS. But you don’t see a need for any, do you?

Mr. NUTTER. We are not here to promote either system. If the

Congress chooses to do that or to create national standards for

State regulation—there are just certain features we think are important.

Mr. BACHUS. Thank you.

Chairman BAKER. Thank you Mr. Bachus.

Mr. Kanjorski.

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With that, I want to express my appreciation to you. It has been

a productive hearing today. We certainly do appreciate your comments.

The record will remain open should you choose to make additional comment or forward further information for the committee’s

consideration.

Thank you very much, and our meeting stands adjourned.

[Whereupon, at 4:26 p.m., the subcommittee was adjourned.]

(87)

INSURANCE REGULATION AND COMPETITION

FOR THE 21ST CENTURY

Tuesday, June 18, 2002

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 2:00 p.m., in Room

2128, Rayburn House Office Building, Hon. Richard H. Baker

[chairman of the subcommittee] presiding.

Present: Representatives Baker, Ney, Gillmor, Weldon, Biggert,

Ose, Rogers, Kanjorski, Bentsen, Maloney of Connecticut, Sherman, Inslee, Shows, Ross, Grucci, and Lucas of Kentucky.

Ex officio present: Representative Oxley.

Chairman BAKER. I would like to call this meeting of the Capital

Markets Subcommittee to order.

This hearing represents the third such meeting of the committee

in our exploration of the need for reform with regard to the marketing and sale of insurance products nationally. The one thing

that is clear to date is that the current system is not working as

well as it could. And despite the best efforts of state regulators and

those involved in the markets, the inability to control the actions

of 50 independent regulators is a very daunting task. The end-loser

in the process in the current environment, of course, in my view,

is that of the consumer, who often finds limited choices or highpriced choices as a result of the lack of competitive forces.

We have had testimony from some CEOs of insurance companies

that they simply do not participate in certain states in the marketing of their product because of the regulatory constraints. That

certainly is not acceptable.

Having recognized the significance of the problem, it is also apparent that we will not be able to seek resolution in a short-term

window. It is a very complicated matter requiring thorough study

and examination, and the members of the committee are entitled

to have all available information to make the best appropriate decision. However, Chairman Oxley has expressed on repeated occasions his interest in seeing the committee do its work, that we

move toward a reasonable goal as quickly as is possible, and that

we do it in the most professional manner available to us. As a result, this hearing will not be the last. There is much more work

for us to do before beginning discussions of legislative proposals.

In the likelihood that Mr. Kanjorski would be here shortly, he

has been the proponent on the committee of what we call

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roundtables, where we get folks together in a room, roll up our

sleeves, and just sit there until we get something done. We are contemplating a roundtable with regard to the issues raised in these

three hearings over the course of the next couple of months—and

I was praising you in your absence, Mr. Kanjorski, talking about

your advocacy of roundtable approaches and that it is advisable, I

think, given the nature and complexity of this subject, certainly

over the course of the next couple of months to attempt to form an

environment for such a roundtable to take place, assisting us in

identifying all the areas where it is evident that there is significant

agreement.

And I guess that would be sort of the concluding perspective is

that as difficult as it will be to have a plan on which all parties

can agree, there are significant areas where many people do find

agreement and we should move in those areas certainly as quickly

as we are able. To that end, I am certainly appreciative of all those

who will appear here today. Your input and testimony will be helpful to the committee members as we move forward in the coming

months.

With that, Mr. Kanjorski, if you have an opening statement, I

would like to recognize you.

Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, we

meet today for the third time to analyze various proposals to increase the efficiency and uniformity of insurance regulation in the

United States. I again commend you for your diligence in convening this series of hearings. Today’s proceeding should help us

to better appreciate the regulatory models used in other sectors of

the financial services industry and how these sectors might be affected under various proposals to reform insurance regulation.

At our previous hearings, we have heard from both sides of the

ongoing policy debate about reforming insurance regulation and

creating an optional federal charter. Some of our witnesses have

argued that the needed reforms are most appropriately pursued at

the state level. Others have suggested that joint state and federal

oversight would most effectively address the regulatory efficiency

problems plaguing the industry. We will hear similar views today.

No matter what side one takes in this long-standing debate, it

has become clear to me that there is no longer a question of whether we should reform insurance regulation in the United States. Instead it has become a question of how we should reform insurance

regulation.

This reform effort will likely prove difficult given the diversity

and complexity of the insurance industry. As a result, I suspect it

will take us several years to forge a consensus on this complicated

set of issues.

Later today I plan to continue to explore whether we should create a tiered regulatory structure for insurance similar to the oversight system we devised for investment advisors. Under this system, the Federal Government would regulate insurers above a certain size or in a certain business line while states would retain the

responsibility for regulating the rest.

We should also continue to carefully examine the consumer

issues as we proceed in the weeks ahead. We should, for example,

find out the cost and benefits of a streamlined regulatory system.

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We should further determine what safeguards are needed to protect the interests of consumers. In the end, consumers should be

the ultimate beneficiaries of our action.

Additionally, Mr. Chairman, I am particularly pleased that

Wayne McOwen will testify before us today. Mr. McOwen serves as

a senior vice president of Guard Financial Group, which is based

in my congressional district. Guard Financial Group operates several subsidiaries and affiliates that participate in various aspects

of the insurance and financial services industries. I have previously

found Mr. McOwen’s insights informative and instructive, and his

comments today will help us all to better understand the needs of

a small, progressive insurer.

In closing, I look forward to hearing from our distinguished witnesses and to learning more about their views for improving insurance industry regulation. As we continue to examine these issues,

I am confident that our careful analysis will allow us to eventually

identify a bipartisan consensus on the most effective and appropriate way to move forward.

Chairman BAKER. Thank you, Mr. Kanjorski.

[The prepared statement of Hon. Paul E. Kanjorski can be found

on page 326 in the appendix.]

Chairman Oxley, did you have an opening statement?

Mr. OXLEY. I do, indeed. Thank you, Mr. Chairman. Today, the

committee holds its third and final hearing on its series examining

various proposals to reform insurance regulation. I am very pleased

that Chairman Baker has devoted so much time and energy to this

issue, which is of the utmost importance to insurance consumers

across the country.

While we have just scratched the surface of this very complicated

matter, this series of hearings has established the foundation for

the committee’s future work in this area. And I can assure you

there will be future work. This committee will remain focused on

this issue until true reform is achieved.

As many of you know, my interest in reform is not new. Several

years ago, I asked the National Association of Insurance Commissioners to focus on this glaring problem, and they responded in

March of 2000 with a statement of intent, ‘‘The Future of Insurance Regulation,’’ which established NAIC’s platform for modernizing insurance regulation. It was a good first step and laid out

goals and timetables for action.

Since that time, the NAIC has experienced some successes and

some failures. In the face of congressional legislative pressure, the

NAIC has made significant progress in agent licensing reform, and

I commend their efforts. However, there is still much work to be

done. First, to make reciprocity a reality in every state and to

achieve the ultimate goal of uniformity. I also remain troubled that

many of the larger states, with the bulk of the agent-broker population, have either not yet passed legislation or have passed legislation that may not meet the NARAB requirements.

Unfortunately, the NAIC has met with less success in its efforts

to modernize the product approval process. Almost a year ago to

the day, the NAIC testified before this subcommittee and held out

CARFRA as the solution to the life insurance product approval

problem. Now, the NAIC has largely abandoned the initial

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CARFRA approach and has shifted gears to an interstate compact

mechanism. The interstate compact mechanism has been around

for quite some time and raises some difficult issues. It is too early

to say whether such a system will succeed or fail, but one thing is

for certain: consumers cannot afford another misstep.

I am here not to blame the NAIC for lack of reform. The leadership team at the NAIC has done yeoman’s work, and I would like

to thank Commissioner Terri Vaughan, who is with us today, Ohio

Commissioner Lee Covington, Illinois Commissioner Nat Shapo,

and others for their important leadership efforts.

To a large degree, their hands are tied. The NAIC can approve

initiative after initiative but it is the state legislatures that must

act on them. Unfortunately, it is becoming increasingly apparent

that the NAIC may be facing an insurmountable task.

Mr. Chairman, it is my hope that organizations such as NCOIL,

which I helped to found back in the 1970’s when I was in the Ohio

legislature, will take an active role also in this important reform

process.

It is my sincere hope that the alliance between the NAIC and

state legislators will bring reform to this industry. However, this

committee will not sit idly by. I am committed to continuing working on this issue for the long haul, looking at all the different facets

of the industry. We will keep building on our reform efforts, and

we will not let up until consumers receive the most effective and

competitive marketplace that can be created.

Mr. Chairman, again, my congratulations on this effort at three

very important hearings to set the stage for future activity. And I

yield back the balance of my time.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 324 in the appendix.]

Chairman BAKER. Thank you, Mr. Chairman. Mr. Ross, did you

have a statement?

Mr. ROSS. Thank you, Mr. Chairman. Actually, I do not have a

statement. I got here early in hopes of being able to ask a couple

of questions soon after what I am sure will be some very brief testimony from this panel.

Chairman BAKER. Thank you, Mr. Ross. Mr. Ney? Mr. Gillmor?

Mr. GILLMOR. I will just enter my statement in the record, Mr.

Chairman. And I do commend you for moving forward on this important subject.

Chairman BAKER. Thank you, Mr. Gillmor. Mr. Bentsen did not

have an opening statement.

If there are no further members wishing to make an opening

statement, at this time I would like to move to our panel of witnesses, and I certainly do appreciate all of your willingness to appear and participate. As you probably know, we encourage you to

keep your remarks to five minutes. Your prepared text will be

made part—if possible, your prepared text will be made part of the

official record. And that facilitates us being able to get to our question and answer period, which is usually very productive for us.

With that, I would like to welcome the Honorable Terri Vaughan,

who is here today in her capacity as president of the National Association of Insurance Commissioners. Welcome, Commissioner.

91

STATEMENT OF TERRI VAUGHAN, PRESIDENT, NATIONAL

ASSOCIATION OF INSURANCE COMMISSIONERS

Ms. VAUGHAN. Thank you, Mr. Chairman and members of the

subcommittee. It is an honor and a real pleasure to be here with

you.

Today, I would like to make a few basic points. First, the sole

reason for government regulation of insurers and agents is to protect American consumers. Effective consumer protection that focuses on local needs is the hallmark of state insurance regulation.

We understand local and regional markets and the needs of consumers in these markets and we recognize that consumer protection is the purpose of our jobs and the basis of our statutory authority.

The subcommittee’s theme for these hearings is insurance regulation and competition for the 21st century. While commercial competition is certainly a significant aspect of the insurance markets

in the United States, it has not been the primary purpose of government regulation. The primary purpose is consumer protection.

And once the consumer protection responsibilities of government

insurance regulators are satisfied, it is fair to ask how the system

of regulation can be made most compatible with the demands of

commercial competition without sacrificing the needs of consumers.

The NAIC and state regulators have given this much attention

over the years, and we continue to give this matter our highest attention.

Paying for insurance products is one of the largest consumer expenditures of any kind for most Americans. Figures compiled by

the NAIC show that an average family, people right here in this

hearing room, can easily spend a combined total of $4,500 each

year for home, auto, life, and health insurance coverage. Protecting

insurance consumers in a world of hybrid institutions and products

must start with the basic understanding that insurance is a different business than banking and securities. Insurance is a commercial product based upon a number of subjective business decisions.

During 2000, we handled approximately 4.5 million consumer inquiries and complaints regarding the content of policies, treatment

of consumers by their insurance companies and agents, and many

of those calls led to a successful resolution of the problem at little

or no cost to the consumer.

During your June 4th hearing one of the industry witnesses testified that a recent Roper opinion poll concluded that the public

rates state government is better than the Federal Government at

consumer protection and this statement does not surprise us. State

regulators know from years of firsthand experience that when consumers need help with insurance sales or claims problems, they

naturally look to their local state agency charged with supervising

insurers to get assistance.

While recognizing the inherent strength of our system when it

comes to protecting consumers, we also agree that there is a need

to improve the efficiency of the system. And in March 2000, we

adopted the NAIC statement of intent on the future of insurance

regulation, endorsing a new action plan to do this. Working in their

individual states and collectively through the NAIC, the commisVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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sioners have made tremendous progress. And looking ahead we will

continue to deliver on the goals and objectives set forth in the

statement of intent, that is creating an efficient market-oriented

system, regulatory system for the business of insurance.

In Attachment A of my written testimony, you will find a status

report on our modernization efforts.

In responding to the demands of insurance consumers in each

state, the NAIC generally agrees with the comment by a previous

industry witness that state uniformity is not the Holy Grail. However, where appropriate, we are working to achieve full regulatory

uniformity to benefit both consumers and insurance providers. And

marketing life insurance is one area where we agree with the industry that national uniformity is needed to enable to life insurers

to market products nationally.

To accomplish uniform supervision of life insurance products

within the state system, we are currently working with state legislators and regulators to draft an interstate compact that gets the

job done while preserving necessary and effective state consumer

protections. The goal of the compact is to establish a single point

of filing, where life insurers would file their products for approval

and thereafter, assuming the product satisfies appropriate product

standards created jointly by the compacting states, insurers would

be able to sell those products in multiple states without the need

for making separate filings in each state.

Over the next few months, we will continue to work with legislators and regulators, as well as consumer and life insurance industry representatives to develop model compact legislation.

If I could just for a moment digress and respond to a comment

that Chairman Oxley made in his opening comments. We have not

abandoned CARFRA. In fact, we view CARFRA as a critical first

step to creating an interstate compact. Through CARFRA we developed uniform standards, we developed a coordinated review process, and we continue to pursue CARFRA because it provides essential building blocks for the interstate compact. In fact, in June we

just added 12 new states to CARFRA, I think demonstrating that

CARFRA remains an important element of our reforms.

The subcommittee asked us to address a few specific questions

in our testimony, and let me do that. In the producer licensing reform area, to date 46 states enacted legislation designed to satisfy

Gramm-Leach-Bliley and that legislation is being considered by

four additional jurisdictions. This represents about 76 percent of

total nationwide premiums. While these numbers are significant,

we continue to work toward the goal of uniformity.

In approving the insurance product approval process in both life

and property and casualty industries, I previously mentioned our

work on the interstate compact for life and annuity products. In addition, we are working to achieve operational efficiencies in the

rate and form filing area. And we are pursuing changes to the regulatory framework for property and casualty rates and forms.

Our achievements and goals for operational efficiency are detailed in my written statement. However, I would like to highlight

one area. That is our electronic rate and form filing system,

SERFF. Almost 500 companies are now using SERFF, are filing

rates and forms with the states. One company told us that with

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SERFF, its cost per filing has dropped from $38 down to less than

$10 per filing with added savings because regulatory review is done

more quickly. With SERFF, we have a ready-made opportunity to

streamline and generate savings to companies and presumably

their customers, and we wonder why more companies are not taking advantage of SERFF since many have testified to the NAIC

about the cost and the time savings.

In the area of market-based regulatory reform, the NAIC has developed a streamline model law to implement reforms for commercial lines. Recent consideration of commercial lines rate regulation

led to the conclusion that commercial insurance consumers will

generally be better served by less restrictive regulatory interventions and a greater reliance on competition. We are working with

state legislators to enact the model in the states, and we are also

studying the benefits of market-based models for personal lines

markets. However, we have not yet concluded our recommendations.

The system of state regulation in the United States has worked

well for 125 years. We understand that protecting America’s insurance consumers is our first responsibility. We understand that the

markets have changed and that modernization of state insurance

standards and procedures is needed to ease regulatory compliance

for insurers and agents.

We ask Congress and the insurance industry participants to

work with us to implement the NAIC’s modernization initiatives

through the state legislative system. It is the only practical way to

achieve the necessary changes quickly, in a manner that preserves

the state consumer protections that are expected by the public. The

state process may take more effort than having an insurance czar

in Washington but it rewards the citizens and consumers in each

state by giving them control over important aspects of insurance

and claims procedures that affect their financial security and the

communities in which they live.

We look forward to continuing to work with Congress, with you,

and within state government to improve the national efficiency of

state insurance regulation while preserving its long-standing dedication to protecting American consumers.

Thank you.

[The prepared statement of Terri Vaughan can be found on page

411 in the appendix.]

Chairman BAKER. Thank you very much. It is evident we have

votes on the floor. I was thinking this through. If anybody understands the assumption of risks, probably our four witnesses do. You

have just assumed a three-vote risk. Rather than rush the next

witness and try to get the testimony in before we have to leave to

vote, I suggest we recess now. We will return as quickly as we can.

I am going to guess about 20 minutes. And as soon as I can get

back, we will start back up again.

We stand in recess. Thank you.

[Recess.]

Chairman BAKER. We will now reconvene our hearing. Members

will be filtering back from the vote momentarily. But given that,

and not wanting to detain anyone longer, let me introduce our next

94

witness, Mr. Tom Ahart. Is that correct? President of the Independent Insurance Agents and Brokers of America.

Welcome, sir.

STATEMENT OF TOM AHART, PRESIDENT, INDEPENDENT

INSURANCE AGENTS AND BROKERS OF AMERICA

Mr. AHART. Thank you very much.

Chairman BAKER. You will need to punch your little button on

that thing. Got it? There you are.

Mr. AHART. Thank you very much, Chairman Baker. I appreciate

the opportunity to be here and appreciate the full committee and

the subcommittee looking into this issue.

We have listened to a lot of testimony and read testimony from

the other hearings and would like to say that we agree that there

is definitely a need for reform in the regulatory area. When we look

at the way it is regulated right now that the state basis, there are

a lot of good issues at the state basis but there are two issues in

particular which we need to help and that is the speed to market

issue and the over regulation in the licensing and post licensing

audit issue.

On the speed to market issue, as an agent, especially from New

Jersey, I can tell you there is definitely a problem in getting products—new products out to consumers. Often it is years before new

products can get to consumers, which hurts insurance companies.

It hurts the agents and brokers. And it hurts the consumers, who

don’t have the opportunity for the new types of programs. So we

definitely need to do something with that.

There is also still a problem with licensing, both at the company

and the agent-broker end, and we would like to do something with

that.

So although we recognize the need for reform, we don’t agree

with some of the other proposals in certain areas. First of all, from

the proposals we have heard, there are really two. One is to keep

the status quo, which would keep the state regulation basis as it

is. And although we think the state regulators do a fantastic job

for the most part in protecting consumers, there are certain areas,

as we mentioned, with speed to market and licensing issues that

remain a problem. Again, I would like to say that the state regulators in protecting the consumers are great in making sure that

minimum coverages are provided. They are great in taking care of

claims disputes and claims inquiries which happen often at the

state level. And they are very good at operating their guarantee

fund, which has not had to any taxpayer input since its inception

in the 70’s.

The other option, other than status quo, is going with federal

charters and some type of federal regulation. Our problem with the

federal regulation overall is, number one, we believe it is overkill.

We think that there definitely are problems in the system, as we

mentioned, with speed to market and with inefficiencies in licensing. But, as we also mentioned, there are a lot of good things that

are done by the state regulators. And the federal charters or federal regulation doesn’t necessarily tackle the problem. I can see situations where you could have a new federal bureaucracy or federal

legislator which actually operates as one of the poorest states

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might operate or one of the ones that don’t do the job so well and

you could actually then be hurting other states that have good regulation.

Again, coming from New Jersey, we have great state regulators

but we have some real political problems that impede what they

can do. And in those situations, if we had something like that at

the federal level, which there is no guarantee it wouldn’t be that

way, it would be terrible for everybody.

So, first of all, I think that it could be overkill. Second, I don’t

necessarily see that it attacks the problem. The problems are,

again, speed to market issues. The problems are inefficiencies in licensing and whatnot. And federal charters don’t necessarily attack

those issues.

What I would like to propose is our solution, which we have been

working together with different insurance companies, with different agent-brokers groups, with state regulators, and with legislators. And we are offering a pragmatic middle ground approach,

which is a compromise between the status quo and federal regulation. What we believe is that we should continue to use state regulation, which has worked well for over 150 years but use federal

legislative tools to help with specific issues.

To give you some examples on the speed to market issue, we

would use uniformity and a model similar to the Illinois model in

that on forms we would use file and use provisions with a 30-day

review period so that when products are—when forms are filed, the

regulators would have 30 days to look at them and they would be

deemed approved unless they are disapproved, which would move

products along.

On the rate end, we also would follow the Illinois model where

we have the competitive market model. And the rates would be

filed but they could not be disapproved on competitive markets.

States would only be able to disapprove them on non-competitive

markets.

Well, on agency and company licensing we would really use reciprocity, which is starting to work now with the NAIC model. And

what we would do is have both companies and agents have approval in their resident states. And once they are approved in their

resident states, they would be able to have reciprocal, non-resident

licenses in other states by just showing their current resident license as well as paying the fee.

In addition, in market conduct exams, we think that that should

be regulated better and that it is completely inefficient right now

and we try to move those inefficiencies and reduce the cost. We

would try to limit the use of those in non-resident states so that

they can only require an exam to review compliance with properly

promulgated statutory and regulatory requirements.

Also, just getting back to the agency company licensing end for

a minute, we think that you could use the legislative tool of preempting states rights, for instance, on the counter signature laws,

which would get rid of those if they are a problem.

So, in conclusion, I would just like to say we recognize that there

is a problem. We ask Congress to help as soon as they can. We believe that they should meet with the states and work with the

NAIC and come up with a solution similar to our proposal, which

96

is a middle of the ground, pragmatic approach which uses the wellfounded base of state regulation but uses legislative tools to help.

And we believe that would protect consumers in the outcome.

Thank you very much.

[The prepared statement of Tom Ahart can be found on page 330

in the appendix.]

Chairman BAKER. Thank you, Mr. Ahart. We appreciate your testimony.

Our next witness is Mr. Glenn J. Milesko, president and CEO of

Banc One Insurance Services Corporation, appearing here today on

behalf of the American Bankers Insurance Association and the Financial Services Coordinating Council. Welcome, Mr. Milesko.

STATEMENT OF GLENN J. MILESKO, PRESIDENT AND CEO,

BANC ONE INSURANCE SERVICES CORPORATION, ON BEHALF OF THE AMERICAN BANKERS INSURANCE ASSOCIATION AND THE FINANCIAL SERVICES COORDINATING COUNCIL

Mr. MILESKO. Thank you, Mr. Chairman. The banking

industry—

Chairman BAKER. And you will need to pull that mike a little

closer. It is hard to hear you, sorry.

Mr. MILESKO. The banking industry is keenly interested in the

regulation of insurance because it is actively engaged in that business. In 2001, 1,900 banking organizations were in the insurance

business. And ABIA’s member banks sold more than $50 billion in

premium volume.

Our experience with the state regulatory labyrinth has led us to

conclude that it is not suitable for all insurers and producers, especially those operating in multiple states or using the Internet to

reach consumers. An alternative is urgently needed.

These hearings show that many others share our frustrations

with the lack of uniformity among state laws, the failure of the existing system to allow products into the market on a timely basis,

the continued existence of multiple agent licensing and continuing

education requirements, and the competitive disadvantage insurers

face relative to banks, security firms, and mutual funds in the delivery of like financial products. And these shortcomings remain despite federal pressure on the state system to modernize.

We believe that the solution to this problem is to give insurers

and producers a choice between federal and state regulation. Federal regulation would be an option, not a replacement, for state

regulation. The system has worked well in banking for 140 years.

We believe it would work well for insurance.

Dual chartering has actually strengthened the banking system—

the state banking system. Over 70 percent of banks are state chartered and it is the charter of choice for new banks. Why? Choices

has kept banking vibrant, innovative, and diverse. The alternative

regulatory environments serve as laboratories for change that have

led to the development of products that are now commonplace, all

to the benefit of consumers. Choice has also promoted better, more

efficient supervision. Any soulution must also rely on market-based

competition rather than price controls for establishing rates for insurance products. It is ironic that we avoid price controls on food,

97

clothing, and shelter, commodities more necessary to human survival than insurance, yet rate regulation persists all to the detriment of consumers.

Last year, Illinois state representative Terry Park, then president of NCOIL, testified before this committee that because his

state eliminated rate regulation for auto insurance, such insurance

is readily available to consumers, and at a lower cost than in other

states. He also noted that Illinois has more than double the number of competing insurers than either Massachusetts or New Jersey, two states whose rigid rate controls have led to the highest average auto rates in the nation.

For these reasons, our optional federal charter proposal does not

permit regulation of rates or forms. Instead, we would protect consumers through strong solvency and market conduct standards and

the application of antitrust laws. Our proposal includes risk-based

capital standards, investment standards, and dividend restrictions.

Federally chartered insurers and producers would also have to adhere to vigorous market conduct standards, preventing unfair competition and deceptive acts and practices.

Regular reporting, examination of federal insurers and producers, and strong enforcement authority would be part of the federal regime. The combination of strong solvency and market conduct standards, backed by examinations and potential enforcement

actions, would ensure that federal insurers and producers operate

for the benefit of policy-holders and that consumers are protected.

Now, let me broaden the perspective and speak for the insurance

banking and securities interests that together make up the FSCC.

In my 30 years in the insurance business, I have never encountered an issue this significant where there is such agreement.

Here, these industries are approaching Congress shoulder to shoulder with a single message. We agree on the nature of the problems

confronting the current system. We agree on principles for addressing those problems. And we agree on the details of a legislative solution.

This consensus reaches beyond the FSCC. The Financial Services

Roundtable, the Council of Insurance Agents and Brokers, the Financial Services Forum, all are in support of an optional federal

charter.

In large measure, we credit this consensus to your efforts, Mr.

Chairman, and to the efforts of Chairman Oxley for moving in a

deliberate fashion to investigate the workings of the state regulatory system. We are grateful for your interest and believe these

investigations have favored support for a comprehensive rather

than an incremental approach to regulatory reform. The scope of

the problem is simply to great and the need to act too strong for

incremental measures to succeed.

Mr. Chairman, there is a rare convergence of interest here and

a broad consensus for a very specific course of action. On behalf of

the ABIA and the FSCC, I urge you to move forward with an optional federal charter for the insurance industry. The members and

staff of the ABIA and the FSCC stand ready to assist in this endeavor.

Thank you very much.

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[The prepared statement of Glenn J. Milesko can be found on

page 358 in the appendix.]

Chairman BAKER. Thank you very much, sir.

Our next witness is Mr. John Van Osdall, Chairman, Council of

Insurance Agents and Brokers. Did I pronounce that correctly, sir?

Mr. VAN OSDALL. You did.

Chairman BAKER. Oh, terrific.

STATEMENT OF JOHN VAN OSDALL, CHAIRMAN, COUNCIL OF

INSURANCE AGENTS AND BROKERS

Mr. VAN OSDALL. Thank you, Chairman Baker.

Chairman BAKER. You are welcome.

Mr. VAN OSDALL. And Ranking Member Kanjorski and subcommittee members, thank you for the invitation to be here today.

Today, I am representing the Council and I think, as you know,

the Council of Insurance Agents and Brokers tends to represent the

insurance agents in the United States that represent the larger

business interests. We probably handle or place each year about 80

percent of the commercial insurance business that generates

throughout the United States. So that is really our phase and the

direction that we would like to have our comments made in today.

We want to thank the fellow panelists also, particularly Commissioner Vaughan, who has done yeoman’s work in the area of licensing for us and licensing reform, and that is very much appreciated.

It has gone a long way and we know that we still have a ways to

go. So thank you very much.

And Tom Ahart is with us today in a capacity that also is very

similar to ours in the idea of believing that this is the time for

more federal intervention in the regulatory process.

We really feel strongly that this is the appropriate time to begin

talking about the options for federal regulation and federal intervention. And to that end, our FAME organization, which is really

a newly created research report that was being released today for

the first time, is entitled, ‘‘The Cost and Benefit of Future Regulation Options for the U.S. Insurance Industry.’’ About a year ago, we

engaged an independent economic consulting firm to do a study of

regulatory approaches and options that we should be considering.

And we think they have done a good job and are looking forward

to sharing this with you.

The Council is also very interested in the possibility of SROs. We

have watched the SROs work in many models in professional organizations throughout the United States. We think that this may

offer a real opportunity and hope that the committee will look into

the SRO model. We have seen it work in the bar associations for

years throughout the United States. And we feel that this may be

the kind of solution that could be meaningful as you consider it.

Apparently the states have crossed the threshold in adopting

NARAB. And I think it should be commented also that the NARAB

model itself is based on the National Association of Securities Dealers’ models. So this is another SRO that we think has done well

over the years. We really suggest that you seriously consider it as

you go about your deliberations.

We really support reform in any form. We need reform. The idea

of the speed to market that you are now considering, the idea of

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the flexible rates and policy forums that you are now considering,

we think is really a step in the right direction and we applaud you

for that.

None of the concepts and the regulatory approaches that you

seem to be considering we think are mutually exclusive. We think

that there is room for each of these considerations and would like

to do anything we can to encourage that.

Again, NARAB we think is a good template. It is really a carrot

and a stick sort of a template. We think that it has a good effect.

We think it has had the result of improving state regulation. We

think that without the NARAB as the carrot and as the stick, that

we would not have nearly made the progress that we have made.

We think the Illinois model is really the great model for the future

of insurance regulation and that would be beneficial for our clients,

who again tend to be the larger commercial insurance buyers.

We also know that congressional oversight is very important and

whether it be done by an independent, newly created agency or a

part of an existing agency, like the Treasury Department, would be

workable from our vantage point. We think that that will also be

encouraged by the optional federal chartering.

So we are here to support to you. We thank you for what you are

doing and want to be a part of anything we can do to further the

effort.

Thank you, Mr. Chairman.

[The prepared statement of John Van Osdall can be found on

page 401 in the appendix.]

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

have a statement? Yes, I will get you in regular order. Thank you.

Commissioner Vaughan, I was interested in how the compact

process would actually be formalized. As I understand it, the compact has not yet been formally prepared so there is not a document

yet ready to circulate. That is subject to NAIC approval, I believe.

Which would then have you take the next step of going to each

state legislature to adopt the provisions of whatever the compact

elements are. And my question is, in good faith, what do you see

as the time necessary to achieve that in light of what has happened

with NARAB?

Ms. VAUGHAN. Well, in light of the producer licensing activities,

the enactment of Gramm-Leach-Bliley slightly less than three

years ago, we now have legislation enacted in 46 states. Now, I am

not going to say that we could enact interstate compact legislation

in 46 states in two-and-a-half years. I think that would be a pretty

optimistic time frame. But I do think the key to all of this, as you

have said, as Chairman Oxley said, is the participation and support of the state legislators. We are working very closely with them

on this. They have the—NCSL has a task force to streamline and

modernize state insurance regulation, and they spent about a day

in Philadelphia a week ago working on the interstate compact draft

with us, having a hearing, inviting people to come in and testify,

and making some suggestions to us on ways that we could improve

the draft so that it could be acceptable to the legislators.

So we are working very closely with them. And our plan is to

have it in a form that we can adopt as a membership of the NAIC

in September and hopefully have some legislative endorsement at

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some point in the fall so that we can introduce it in state legislatures next January. I think if we can do that, and I am confident

we can meet that time line, I believe that we can very quickly get

a significant group of states in place to make the interstate compact operational.

The current draft that we have says that the interstate compact

does not become fully operational, in the sense of approving products, until we have at least 26 states or 50 percent of the market.

And I am pretty confident that we could do that in short order.

Chairman BAKER. So you are basically guesstimating a three to

five year window?

Ms. VAUGHAN. You are going to make me put a time frame on

this.

Chairman BAKER. Oh, I was just going to give it my best shot.

Ms. VAUGHAN. Boy, let me tell you with respect to producer licensing. The challenge that we have had is that we can get a whole

bunch of states very quickly, we did that in producer licensing. We

got 46 states. And then we have got four or five jurisdictions that

you just have to pull along and pull along and really work with.

And the challenge that we face is that we are as an organization

unfortunately are being judged by you folks in terms of all states.

And when it is really—it is just a few states, it is three or four

states that are a problem and it may be a problem in the interstate

compact. We are working very hard to get the large states on

board, and we believe that we are going to be able to do that. But

I would have a hard time promising and committing to all 50 states

in a particular period of time.

Chairman BAKER. I understand. Thank you.

Mr. Ahart, how do you feel about the Illinois model? Do you find

that to be a reasonable structure?

Mr. AHART. Yes, definitely. As we look to the speed to market

issues, first of all, with forums it would be a perfect model for us.

And then it would be a file and use model in that companies would

file their forms and they would have 30 days to approve them. And

they would know within 30 days whether approved or not and then

they could use them. On the rate side, it is pretty much a free marketplace on the rates. They file the rates but they are allowed to

use them right away on a competitive marketplace. If a certain

marketplace is deemed uncompetitive because of very few companies writing the business, then the state would have the ability to

work on those rates or approve or disapprove them. But it would

be a great model. And that was one of the legislative tools we

would like to use by adopting similar provisions to the Illinois

model.

Chairman BAKER. What would be your objection to the Illinois

model being made national?

Mr. AHART. I would have no objections to that.

Chairman BAKER. Terrific.

Mr. Milesko, do you think the Illinois model goes far enough for

you?

Mr. MILESKO. It is a good model. We like the free competition,

but we also are concerned that—I think we are concerned that it

doesn’t go far enough in terms of allowing some of the other issues

to be addressed. It does talk about the licensing. It talks about the

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rate and forms. But I think there are other issues that still need

to be addressed that are much broader than just what we are doing

in Illinois.

Chairman BAKER. And if you would for at least my purposes, I

would love to have your written thoughts as to the objections of

pursuing a line of that sort. In trying to understand it, it would be

helpful to know the specific areas of contention that the organization would have with that type approach.

Mr. MILESKO. Well, right now we operate in all 50 states. When

we look at the issues that we have in terms as an insurance company, it just addresses I believe the agents. For example, in one

state it takes us over a year to get our certificate of authority. In

other states, such as North Carolina, Connecticut, there is a three

year seasoning requirement for the legal entity to be licensed in

doing business before it can get approval in those states. In many

cases, the capital surplus requirements are much higher than the

NAIC model. So I am looking at it from an insurance company perspective as well as from a national agency perspective where we

need to be licensed with our 5,000 agents in all the states.

Chairman BAKER. Sure, thank you very much. My time has expired.

Mr. Kanjorski?

Mr. KANJORSKI. I am going to put you on the spot, Ms. Vaughan.

Could you name the three to four states that give you the worst

trouble?

Mr. MILESKO. From my standpoint, the states are New York,

California, Texas are some of the worst states.

Mr. KANJORSKI. Are the worst states?

Mr. VAN OSDALL. May I comment on that?

Mr. KANJORSKI. Yes.

Mr. VAN OSDALL. From a licensing standpoint, the big three that

we are missing, really, are California, New York, and Florida. They

have a significant portion of the premium. In fact, the Council of

Insurance Agents and Brokers filed suit against both Nevada and

Florida this past week because we continue to have such concern

about the punitive income- sharing arrangements that those two

states protect their local agents with. That has been of great concern to us. That has a real impact on our business.

Mr. KANJORSKI. So it is just the small states that give you trouble?

Mr. VAN OSDALL. Just the small states, right.

Mr. KANJORSKI. What is the worst disadvantage if we went to a

federal or a federal optional charter, Ms. Vaughan?

Ms. VAUGHAN. I think the worst disadvantage would be the inability of the regulators in Iowa to address the local market issues

in Iowa. And to give you a specific example, we have a very large

senior citizen population in Iowa. We have the highest percentage

I think in the country over 85. And so that means that we have

had to focus a lot of attention in that area. And I guess I have concerns as a regulator from Iowa about whether the federal regulator

would be sensitive to the market issues that we encounter in Iowa.

Mr. KANJORSKI. Very good. Mr. Ahart, you are sort of looking for

the best of all worlds, state regulation, federal legislative tools, and

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reciprocity of licensing. That would be Christmas on the Fourth of

July, right?

Mr. AHART. I think it is very doable actually. Right now, we have

a very good state regulation process in almost all areas. The one

problem again with federal charters, whether they are optional or

mandatory, is for agents and others they are mandatory because

you would have to deal with your national companies as well as

your regional companies. And they are against speed to market, licensing issues, things like that. If you went after each issue with

federal tools for uniformity and reciprocity and let the state regulators handle the rest of it, which they are doing so well, you could

tackle those issues as they came about. So I think it is very doable.

Mr. KANJORSKI. Mr. Milesko, you talk about the federal optional

charter, and what I am curious about, if we were to allow insurance companies to select a federal charter or state charters, how

would that impact on the cost of administration at the state level?

Wouldn’t that take money that now flows to the states for regulation and take that away from them and have to flow to the Federal

Government for regulation and wouldn’t there be a shortfall since

we are having two distinct bodies of regulation, how do you make

that distinction up?

Mr. MILESKO. I think the insurance companies that are national

companies and national agencies that would opt for the federal

charter would pay the costs. And those companies also would still

participate in the guarantee funds.

Mr. KANJORSKI. But would they contribute to the states?

Mr. MILESKO. Yes.

Mr. KANJORSKI. In other words, pay the states, as you are now,

and pay an additional fee for the benefit of the federal charter?

Mr. MILESKO. Yes.

Mr. KANJORSKI. Okay.

Mr. MILESKO. It would overlay on top of the state system.

Mr. KANJORSKI. And you think there is uniformity in the large

companies to assume a greater burden of cost for regulation?

Mr. MILESKO. I think the cost savings would more than pay for—

Mr. KANJORSKI. Offset.

Mr. MILESKO.—the additional costs that they would pay for a

federal regulator.

Mr. KANJORSKI. Okay. Mr. Osdall, while you were talking about

the tremendous accomplishments of the SROs, the chairman and I

had a slight discussion on the auditing field. Do you think that

they do the best in the world?

Mr. VAN OSDALL. I do not have any comment on that.

[Laughter.]

Mr. VAN OSDALL. I think if you look at the—I can’t speak to the

auditing field, excuse me. No.

Mr. KANJORSKI. You are turning into a good politician. That is

what we do, shut up when you can’t say something good, right?

I think this has been a great panel, Mr. Chairman, in terms of

setting out all the choices. I am just wondering—going back to your

opening statement and my tremendous affection for roundtable discussions, I hope the panel that is here today are part of that roundtable because I think they would certainly help us to find some

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common ground. And their input I think would be most worthwhile

for the committee.

Chairman BAKER. I thank you, Mr. Kanjorski. It will be a big

roundtable and we will try to get everybody a seat.

Mr. Ney?

Mr. NEY. Thank you, Mr. Chairman. The question I had, Mr.

Van Osdall, under some of the proposals, you would have to have

a federal charter license and then you would still have to have a

state license, I assume. Would you support that dual regulatory licensing situation?

Mr. VAN OSDALL. Well, we know that at the end of the day there

is going to be some dual regulation. I think we don’t escape that.

I think one of the interesting things that you will see in our report

that is being released today is of the premium taxes that are taken

by the various states, about 10 percent of that amount is actually

used to run the regulatory agencies within the state. So we know

that we are already paying a tax to the state. We therefore also

feel that the additional cost—going to Mr. Milesko’s comment about

also satisfying a federal regulator where necessary—at the end of

the day we think will cost less in the hidden or internal costs of

an insurance company in providing the consumer the product. That

does not seem—the duplicative cost does not seem to be a concern

when we weigh it against the benefit of the ease of doing business

and being able to more quickly deliver the product to our client.

Mr. NEY. One other question based on state and fed. Several

years ago, the FTC started to look at business practices and Congress banned them from doing that because you are state regulated. If we embark down this path of the federal charter, would

you accept the fact the FTC and such other entities could look at

your business practices and do an entire regulatory scheme?

Mr. VAN OSDALL. We would do that.

Mr. NEY. You would accept that. One question I had for anybody

who would like to answer, if you could. What are you hearing from

the consumers of the country? Are they focused at all, any people

calling and consumers saying, ‘‘Gee, I think fed is better than

state.’’ Is anybody actually hearing from any of the consumers that

use your product?

Mr. MILESKO. Maybe I could take a try at that.

Mr. NEY. I am not talking about the ones you might have wrote

a letter to to tell them about the hearing. I mean genuine people.

Mr. MILESKO. One of the things that we have been able to do on

the bank insurance side is use a lot of the banking systems because

of the penalties, when you violate any of the banking regulations

and apply those to the system that we have put in place on the insurance side.

To give you an example of that, last year we did $2.7 billion in

annuity sales and because of the systems and the edits that we

have built in, there were less than $5,000 of complaints and

charge-offs that we had to make good for consumers. So the number of complaints we get in relationship to the premium volume

that we write is de minimis. And I think part of that is because

we try to the extent we can to systematize everything we do. And

if we went with the optional federal charter, it would make it that

much more efficient. And I could give you some examples of very

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specifically today, in terms of pre-licensing education, just to deal

with licensing but you take each one of these issues separately. In

Arizona, there is no requirements. In Colorado, there are 90 hours

of pre-licensing study.

Mr. NEY. Let me interrupt you—on my time, but what about the

consumers? What are you hearing from—I understand you are saying—I gather you are saying there will be better educational practices.

Mr. MILESKO. Right.

Mr. NEY. You will be better able to do better for the consumers.

Are you actually—anybody hearing anything from people that are

calling up and saying, ‘‘Hey, I have been looking at this issue.’’

Mr. AHART. I would just like to say that we have—being an insurance agent, we deal with our consumers all the time. We talk

to them actually a lot about state versus federal regulation. Their

biggest concern is there is a lot of questions on claims and coverage

situations and things like that that they feel fairly comfortable

going to their State Department of Insurance on. And I think they

would be very uncomfortable going to a federal bureaucracy to find

those problems—they like to deal as local as they can with those

issues.

Ms. VAUGHAN. I would say we don’t have a lot of consumers calling us out of the blue and saying what they are thinking about

having federal regulation of insurance, because the average consumer is not really aware that this debate is going on. But when

I am out speaking and I am talking to consumer groups or I am

talking to high school teachers and I make them aware of the debate, I can tell you, the reaction I get is not a good one. They want

to know that they can go to their local insurance regulator to deal

with issues. And that gets back to the 4.5 million consumer inquiries and complaints that we have every year and the fact that they

know that there is someone there that can contact when they have

a problem.

Mr. NEY. Sorry, Mr. Milesko. Did you have an observation on

that or the consumers or any interaction?

Mr. MILESKO. Well, I think the biggest thing for consumers is the

access to new products, innovative creative products, and what we

have been able to do, for example, with annuities and some of the

other products that we are now bringing to customers and consumers that maybe didn’t have the opportunity to get that in the

past. And I think generally if you look at the track record, there

aren’t fines, there aren’t penalties, there aren’t consumer complaints, there aren’t censures.

And I know in one of the other panelists’ testimony they were

talking about the number of consumer issues. And I guess the

point that I would make is with the optional federal regulator and

the way we would put it together, I think you would cut down on

the number of complaints and offer the consumers potentially better products at lower cost because of the savings involved.

Mr. NEY. My time has expired. Thank you.

Chairman BAKER. Thank you, Mr. Ney. Mr. Ross?

Mr. ROSS. Thank you, Mr. Chairman. And, first for Mr. Milesko,

I am trying to sort this thing out and figure out exactly where I

am going to come down. And one of the concerns that I have, and

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all of you have done a great job today in providing testimony that

has been very helpful to us, both verbally and in writing, and I

want to thank each of you for joining us here today, or at least a

few of us. For property and casualty insurance, state insurance regulators often play an important role in helping to ensure that

claims are paid. I served for 10 years in the state senate, so I have

some understanding of how it works at the state level. This involves helping to interpret the insurance contract under the law of

the pertinent state to determine whether a valid claim has been asserted. From everything I understand, the consumers, at least in

my state, are happy with this system. As far as I can recall, 10

years as a state senator and 17 months as a Member of Congress,

I have never had a constituent upset with the aspect of insurance

regulation and how it works by each respective state, at least at

this time.

Why do you think that my constituents in rural Arkansas would

be better protected by a distant federal regulator located in Washington, D.C., some 1,200 miles away, rather than one located in our

capital city in Little Rock, some hour and a half away.

Mr. MILESKO. Well, the state laws, number one, would continue

to apply. The federal regulator would regulate those national companies and national producers but it would overlay, again, on the

states. I mean in terms of the state regulator would still be involved.

In terms of the claim payment on the property and casualty side,

I would have to think about that a little bit in terms of the complexity with which those claims come in. From my standpoint, I

think to the extent we can simplify the entire process, a sign of an

intelligent man I think is to take something very complex and

make it simple. And one of the things that we have done in the

insurance industry is we have made it very, very complicated, overly complicated from the standpoint particularly on commodity products, such as auto and homeowner’s. And I think a lot of that may

be smoke and mirrors. A commodity product, if there is a claim

such as an auto policy or a homeowner policy, it pretty much goes

down to what the forum says and that determines whether there

is a claim or isn’t a claim.

Mr. ROSS. You said you need to think about it a while, and I

think a lot of us need to think about a lot of aspects of all of this

before we move forward with trying to pass a piece of landmark

legislation that will totally change how we have done things forever.

If you could be so kind, sir, after you have had time to think

about, if you could maybe provide me or this committee, especially

me, with a letter of your thoughts—

Mr. MILESKO. Absolutely.

Mr. ROSS.—on how it can be regulated from Washington, how is

that best going to serve my constituents as opposed to being regulated at the state level. And I know you said you need some time

to think about it, and I respect that. But after you have thought

about it for a while, and I will let you define what a while is, then

if you could provide to me in writing and perhaps this committee,

I would appreciate your thoughts on that.

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One follow-up question. Do you know how many people currently

work for all the—collectively for all the state insurance departments nationwide?

Mr. MILESKO. No, I do not.

Mr. ROSS. It is 11,000, roughly. It is roughly 11,000. And with

the proposal that you are advocating being optional, I can only assume that all the current state employees would still be needed on

the state level. So what is your projection, I am looking for a number, regarding how many people the federal insurance regulator

would need to employ? How many jobs—keeping in mind that this

country is already spending $1 billion every 24 hours simply paying

interest on the national debt, given the current financial condition

of this country, exactly how many new federal jobs do you propose

that we create and roughly how much do you think we would need

to pay each of those people a year?

Mr. MILESKO. Well, I think it would be considerably less than

using 50 states to do the regulation. I think if you look at the total

cost of the state insurance regulation, if my figures are correct, it

is $880 million. You compare that with say the OCC, a federal regulator does it for $400 million. So I think there could be some savings there over time. The cost of the regulation, again, is paid by

the industry at this point, the number of individuals it would probably be similar to one of the other federal regulators, if you looked

at it as an example. But I think those are issues that would need

to be looked at and worked through.

Mr. ROSS. So are you saying that we could reduce the 11,000

state employees that are out there?

Mr. MILESKO. I think there possibly could be some redundancy

depending on how—

Mr. ROSS. And you think you could do it at the federal level for

less than 11,000 employees and do it as effectively and as timely?

Mr. MILESKO. I think you could on a national basis. You would

eliminate—think about it. You have got 50 states, 50 different

ways of doing things. Fifty different systems that currently are in

operation. If you have one, it is very logical to assume that you are

going to do it much more efficiently.

Mr. ROSS. Where are we going to find these people that already

have training and are qualified?

Mr. MILESKO. Well, if you look at when Banc One got into insurance, we now have 5,000 licensed agents. Where did we find them?

We found them from the independent agency system. We found

them from colleges that we trained and educated to do that. I think

there are a number of people that are involved in regulation, involved in insurance and would look at that as an opportunity.

Mr. ROSS. So what was the number again on how many jobs you

would propose that we create?

Mr. MILESKO. I don’t have a specific number. I think that is

something that you would have to work through as we have further

dialogue on the proposal.

Mr. ROSS. A hundred? A thousand? Ten thousand?

Mr. MILESKO. I think it is going to be less than a thousand, considerably less because if you looked at 50 states with 11,000 and

one federal regulator, I would think there has got to be some—it

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has got to be a lesser number. I don’t know if it would be mathematically proportional but there would be a lesser number.

Mr. ROSS. So this government that is going back to the days of

deficit spending for the first time since 1997 is spending a billion

dollars every 24 hours paying interest on the national debt, we

probably—at a time when we need to be cutting government, you

are proposing that we increase to the tune of maybe a thousand

new federal jobs?

Chairman BAKER. Mr. Ross, if I may, your time is well exhausted.

Mr. ROSS. Well, if I could—

Chairman BAKER. We will come back to you because there is not

going to be many of us here in a few minutes, and I want to give

a couple of other members time, particularly your ranking member

wanted, without objection, one minute to follow-up on a prior comment.

Mr. KANJORSKI. Yes, Mr. Milesko, in response to Mr. Ross and

your response to me seem to be different. I asked you whether or

not the insurance industry would maintain in what I understand

your optional charter, which would mean all of the states would

have to maintain their commissions and process, and there would

be additional federal regulator cost, you seem to indicate to my answer that the companies were going to pick up that additional cost.

Mr. MILESKO. That is correct.

Mr. KANJORSKI. Are you saying now that you are looking to get

an efficiency out of reducing the states’ participation and making

that up on the federal level and paying for the federal level or are

you making a commitment for your association that the insurance

industry is going to pick up the additional cost, whether it is a

thousand additional employees or 10,000 additional employees? I

thought that is going to come out of the cost of the insurance industry.

Mr. MILESKO. The insurance companies and the national producers that choose to go—or the optional federal charter would pick

up the cost.

Chairman BAKER. Let me make sure we get the answers correct,

because it is apparently a misunderstanding, I think, as between

the answers to Mr. Kanjorski and Mr. Ross. If you would not mind

on that particular point, just give us a letter back that explains the

companies’ willingness to pay appropriate cost because we can’t do

both. We can’t save money by not paying for the state if we are

going to tell Mr. Kanjorski we are going to pay for the state and

the federal. And therein is the conflict, if we are understanding it

properly. Is that satisfactory, Mr. Kanjorski?

Mr. KANJORSKI. Yes.

Chairman BAKER. Ms. Biggert?

Mrs. BIGGERT. Thank you, Mr. Chairman. I guess I should say

that I am very proud to be from Illinois, hearing all about Illinois’

model. And I have to say that I was in the state legislature, but

I can’t take credit for the passage of the model, since it happened

before I was there. But I think that what has happened in Illinois

has been very good, and it really is a model for the country.

Commissioner Vaughan, I wanted to ask you about dealing with

the state legislatures again. About how long does it take from the

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time that a state legislature might decide to pass a model law that

NAIC has from the inception to final adoption of a law that you

have suggested?

Ms. VAUGHAN. That is going to depend to some extent on the

state in Iowa, for example. We know that we need to get this

model, speaking of the interstate compact, or any model, producerlicensing model a couple of years ago, we needed to get that adopted by the NAIC and ready to go very early in the fall because many

state legislatures come into session in January. And so you need

that lead time in the fall to get the bill drafted and into the hopper

in the states.

So there are a number of states where you can, if we have something ready in say, September, you can get into the state legislatures in January. There are other states that only meet every other

year. And so you have to wait an extra year to get it in.

And then there are some states where the legislative process just

tends to be slower and they need to mull it over for a while. We

are seeing that happen, for example, in New York, with the producer licensing legislation. It is something that has been in there

for a while but they are kind of working it through the system.

Mrs. BIGGERT. More like the time that it takes Congress probably to adopt something.

Ms. VAUGHAN. Right.

Mrs. BIGGERT. Have any of the NAIC model laws been adopted

by state legislatures without amendment so that it might be uniform?

Ms. VAUGHAN. Certainly. A number of our accreditation models,

the models that the NAIC has required for accreditation, risk-based

capital, codification, use of the examiner’s handbook, financial examiner’s handbook, many of those are adopted on a very widespread basis with very few amendments. There may be in one or

two states but it tends to be a highly uniform system in financial

regulation.

Mrs. BIGGERT. Okay, well, some efforts have been made to

streamline the agent’s license through passage of NAIC’s model

producer licensing law and through construction of a single point

filing mechanism, CARFRA. Have any of these licensing laws

passed exactly the same in many of the states?

Ms. VAUGHAN. In the producer licensing area, we can get you

specific numbers on how many of the 46 states did exactly the uniform producer licensing model, a number of states did. Not all of

the 46 states, I have to be honest with you, did it. But I think a

critical thing is that of the 46 states they all enacted the elements

that were necessary for us to build a streamline non-resident producer licensing system.

One of the things we are trying to do is build a system where

an insurance agent can go one place, file one application, do it electronically, have it go through some automated review process and

then get basically an electronic notification that they are licensed

within 24 or 48 hours, if it is a clean application. If it is not clean,

if there are disciplinary issues, then it goes to the state to decide

what to do with it.

But in order to do that, you have to have a certain amount of

uniformity in the system. You have to have uniform applications,

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uniform lines of authority, and there are some minimal elements.

And we are getting those pieces in place that are critical to do our

national non-resident licensing system. And we now have I think

15 states online doing non-resident licensing. We have processed

over 2,000 non-resident licenses this year already through our nonresident licensing system. And our goal was to have 35 states on

board by the end of the year.

Mrs. BIGGERT. So on the rate and form filing, how many products

have been approved under this mechanism?

Ms. VAUGHAN. CARFRA has been kind of an interesting animal.

The intent when we built CARFRA, that is our streamline coordinated rate and form review system, the intent was to build a system that would allow for coordinated review, that would allow us

to do a speedier review, that would allow us to set national standards so that we could identify state deviations against those standards and really streamline the process. And we did that last May.

We went online with 10 states and three products.

And the good thing is that the products that have been filed with

us, we have done the review, we have done it very quickly. Everybody has been happy about how it has worked. The sort of disappointment, I think, is that we have only gotten two filings so far.

It is clearly not what we expected. We thought that this was going

to be something that people would jump on board with. And, as we

spent the fall dealing with the events of September 11th and dealing with what we were seeing emerge in CARFRA, we were trying

to understand what was holding CARFRA up, the success of

CARFRA.

And it appeared to be a number of issues. In the companies,

there were certain sort of cultural issues. They were used to doing

it one way and one has to get past that, not just in the regulatory

side but also on the company side. Second, there was some technology issues. They needed to have our electronic system up and

running in order to do it. Issues about which lines of insurance

were chosen.

But I think the main thing came down to the deviations that

were in place. We had 10 states. Two of those states, New York

and Texas, had a significant amount of deviations. A number of the

other states had a couple, but that is really what led us to focus

on the sort of the next stage of CARFRA, evolving CARFRA into

something that would allow us to deal in a very systematic way

with the problems of deviations and getting to more uniformity in

the standards. And that is where we have gotten to the interstate

compact.

Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Ms. Biggert.

Mr. Bentsen?

Mr. BENTSEN. Thank you, Mr. Chairman.

Mr. Milesko, in your testimony, in talking about the optional federal charter, you talk a lot about the upside in terms of bringing

product to market and developing product for the benefit of the

consumer and doing it more quickly. But I am a little concerned

in your discussion with respect to consumer protection. And I have

to say I sort of agree with the idea of a federal charter. But I think

that—I am concerned that your proposal or your association’s proVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00119 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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posal is a little light when it comes to consumer protection. And

you stated in response I think to Mr. Ross that federally-chartered

insurers would still be subject to state laws. But in the summary,

in your testimony, it seems to state otherwise, that once you opted

for a federal charter, you would be under a federal charter and

there is not necessarily any parity provision that would carry state

laws or federal laws the other.

And Mr. Ross had the concerns about the 11,000 employees and

the state regulators and how big is the federal regulator, I don’t

particularly care about how many employees there are one way or

the other. But our experience has been with the federal banking

regulators, that they have not always been the most effective consumer protection regulators at the retail level. And I tell you this

just because I think it is something you all need to think about.

I think, quite frankly, Mr. Van Osdall’s testimony is some of the

best testimony I have read on this subject because I think your

group has started to wrap this all together, of saying if you are

going to have a federal regulator, fine, but you need to have some

connection between the federal regulator who is looking at the national market with state regulators or someone who is looking at

the retail market vis-a-vis how the securities market works.

And you talk about NARAB as being some form of a SRO. And

I really think you need to consider that both from a policy perspective and arguably from a political perspective as well. Because I

think that while you are right, that having the flexibility to bring

product to market, the flexibility to license will benefit the consumer in that regard, it concerns me that it is just a lot harder to

get the Federal Government to respond on a retail consumer complaint than it is to a state regulator. And it is something that I

think you all need to go back and take a hard look at your proposal

and how you are developing it.

If you look at what Mr. Ahart is proposing, it is just amazing

how it is moving the direction because he is talking about a federal

preemption, I assume, using federal statute to preempt and create

a de facto federal system run by the states.

So I think even the independent insurance agents understand

the necessity for some sort of federal structure. But I am just concerned that your federal charter system doesn’t go quite far

enough.

Mr. MILESKO. I think we need to look at that. I think that that

makes a lot of sense. I think that having a federal charter, though,

would eliminate some of the issues that you have currently like

with the Franko case as an example, where the individual, Franko,

was not—

Mr. BENTSEN. I read your testimony. It wasn’t detected necessarily as quickly, although the banking regulators have not always been on top of the issues as well.

Mr. MILESKO. Right.

Mr. BENTSEN. And the other thing is—and, again, I tend to agree

with your position in the abstract, I think also the comparison that

the OCC—using the OCC comparison, remember, as you well

know, the OCC is not the only regulator of national banks. The

FDIC is also a regulator of national banks and looks at safety and

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soundness. So I just think you need to go back an take a hard look

at that.

Mr. MILESKO. Let us get back to you and take a look at that.

Mr. BENTSEN. Appreciate it.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Bentsen.

Dr. Weldon?

Dr. WELDON. Thank you, Mr. Chairman. I had a question for Mr.

Ahart. I thank you for your testimony. I wanted to get an opinion

from you regarding—my question is would a federal charter perhaps benefit high-risk states, as I represent Florida and we pay

very, very high, understandably, premiums for property casualty

insurance. Do you feel that a federal regulator would be perhaps

better able to provide the necessary oversight and market sensitivity to what is going on in states like Florida? Your opinion

there?

Mr. AHART. Sure. Actually, I am almost a brother in there, I

guess, because I come from New Jersey and we have very high

rates in auto insurance. So I can feel the pain. I think that a federal charter program would not help that situation at all. I think

the issues in New Jersey and Florida can best be dealt with and

understood by someone in Florida and someone in New Jersey and

someone that deals with that every day. Again, to me, a federal

chart is really overkill. And I am not sure why we would handle—

if we have specific issues involving market conduct, speed to market, things like that, I am just not sure why we wouldn’t just attack those issues rather than replace the whole system.

Again, I just think that somebody in those states can best see

those problems better than somebody from Washington, D.C.

Dr. WELDON. Do the other three witnesses agree with that or disagree, or do you want to comment on it at all?

Yes, Ms. Vaughan?

Ms. VAUGHAN. I would be happy to comment. I think this demonstrates some of the differences between banking insurance that

Congressman Bentsen was identifying and that is there really are

some local issues and there are some significant consumer protection issues involved in insurance. There is nothing more frustrating

to me than to hear some of the proponents of an optional federal

charter say it works in banking, therefore it can work in insurance,

because as an insurance regulator, I know that there are very significant differences between banking and insurance, and the fact

that we have to deal with things like hurricanes and earthquakes

and they vary across the country and we have different auto insurance systems and we have things in New Jersey that are driving

auto insurance costs that don’t exist in Iowa, where we have the

lowest auto insurance rates in the country.

And so we have very different markets. And I would agree that

I have a hard time seeing how a federal, an optional federal charter could solve the market problems that you have in Florida that

exist because of the geographic issues and the weather-related

issues that you face.

Dr. WELDON. Yes, Mr. Osdall.

Mr. VAN OSDALL. I think your comment also embraces the whole

idea that at some point there needs to be cooperation between both

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the federal and state level to solve some of the issues we deal with

and a hurricane may be one of those issues, an earthquake may be

one of those issues. Certainly, terrorism on the table today is one

of the great issues. Without the federal influence, without a federal

solution to the terrorism issue, we would be nowhere because what

the states have generally done is accepted the terrorism exclusions

that are represented by the insurance companies. So I do think

there are those legitimate areas where we have to have the cooperation and the support of the Federal Government in the insurance industry.

Dr. WELDON. I thank you, Mr. Chairman. I yield back.

Chairman BAKER. I might take that minute just for a point of

clarification from the commissioner. By way of current body of law

in consumer protection, let’s assume for the moment that a Louisiana Congressman buys an annuity from a New York company.

He then is retired, moves to California, where he is deceased. His

heirs live in Wyoming and South Carolina. And the company refuses to give them their money. If I am understanding the law correctly, Louisiana law applies, which is the only state, not common,

law, civil code, that you would either have to litigate it in a common law court using Louisiana law or hire a Louisiana counsel and

fly everybody to Louisiana to litigate the issue. Now, tell me, how

simple is that?

Ms. VAUGHAN. Not simple. And I am not a lawyer, so I won’t pretend to understand how this legal system would work. But I think

what this demonstrates also is insurance is very complicated and

that the issues in life insurance are fundamentally different from

the issues in auto insurance and homeowners’ insurance and commercial lines insurance, and medical malpractice. We have not one

insurance market but multiple insurance markets.

In life insurance, annuity insurance, disability insurance, and

long-term care insurance, people buy long-term products. They

move from state to state. That is different from auto and homeowner’s, where you buy a product and it covers you in the state in

which you live for one year or six months and then you renew it

where you are.

Dr. WELDON. Mr. Chairman, can I reclaim my time? I want to

ask a follow-up question to what she just said.

Chairman BAKER. Sure, absolutely.

Ms. VAUGHAN. Can I finish just one second?

Dr. WELDON. Yes, go ahead, go ahead.

Ms. VAUGHAN. I was going to say in life annuity, disability, and

long-term care, that is why we have agreed, the commissioners

have agreed, that we need to have more uniform national standards to address the issue, the fact that people move from state to

state. And we agree with that. That is a different problem, but it

is not the classic problem affecting all insurance markets.

Dr. WELDON. Okay, well, I think you partially answered my

question. But my question was a federal charter for auto is going

to illicit more of a negative response. A federal charter for property

casualty is going to elicit more of a negative response than a federal charter for life insurance is what—because the case he made

is a very good case.

Thank you, Mr. Chairman, for your indulgence.

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Chairman BAKER. Oh, certainly. Please proceed, Commissioner.

Ms. VAUGHAN. Thank you very much. I think we have property

casualty insurance. We have life insurance. We have very local

issues in property casualty insurance. And the reality is you don’t

have nearly as many local issues in life insurance. I would agree

with that. The risks that life insurers assume, mortality risks, interest rate risk doesn’t tend to vary from state to state. Consumers

move from state to state.

And so we agree that you need some kind of national uniformity

in life insurance. The problem is that we don’t want to throw the

baby out with the baby water. One cannot create a federal regulatory system in Washington without impacting the important consumer protections that we have in place, without impacting the

property casualty side in the industry. So the question is can we

find a targeted solution to get to national product standards in life

insurance and annuity insurance, which we agree we need, without

gutting the rest of the system? And that is what led us to the interstate compact.

Chairman BAKER. Thank you very much. And I want to express

my appreciation to all of you for your contributions. It has been a

very helpful hearing. We appreciate your remarks. The record will

remain open for an additional 30 days—oh, I am sorry, Mr. Rogers,

I didn’t see you. Mr. Rogers?

Mr. ROGERS. It is the price you pay for being a new guy, Mr.

Chairman.

Chairman BAKER. Or for not being here.

[Laughter.]

Mr. ROGERS. Well, it is good to see you, Mr. Chairman. Doesn’t

he look handsome today, everybody?

[Laughter.]

Mr. ROGERS. I want to also thank Commissioner Vaughan; not

being a lawyer and being from Iowa really ranks up there. Your

credibility is fantastic around here.

Mr. Ahart, I wanted to ask a question. You talked about in your

proposal preserving state regulation while having Congress act to

reform the state insurance regulatory system. And you mentioned

specifically speed to market. And I am curious if you can explain

how you can do that and still address the issue of speed to market

within the confines of that what seems like a contradictory—

Mr. AHART. Sure, what we would is use again federal legislative

tools. We would have federal legislation that would preempt state

rights on the issues of forms and rates. So we would pretty much

recommend adopting, similar to the Illinois model, where states

would have to follow a file and use provision on forms and have

only 30 days to review. Where on rates they would be able to—companies would file but would automatically be able to use them in

competitive markets. So that by having those uniform standards,

states would need to use those but it still would be regulated from

the state level.

Mr. ROGERS. Great. I just want to follow up with Mr. Milesko on

that same vein. We have got about 7,400 state legislators across

the country, which should send shivers up your spine with regulation. And I was one of them on the Financial Services Committee.

We have heard from the different witnesses regarding the chalVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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lenges facing state legislators in uniformity and speed to market

and agent licensing. And as we kind of move forward, what do you

think is the proper role for Congress to address those issues?

Mr. MILESKO. I think the dialogue that we are having today,

roundtable discussions, I think is very appropriate to get these

issues on the table. They will look at the merits of all the proposals. Now, we certainly would defend the optional federal charter, which leaves the state system as it is and just overlays a federal system on top of that.

Mr. ROGERS. I yield back the remainder of my time, Mr. Chairman. The handsome, very handsome chairman of the committee.

Chairman BAKER. Very helpful member, I might add. Thank you

very much, Mr. Rogers.

I want to thank each of you for your participation here this afternoon. It has been very helpful. And the record will remain open for

30 days for any additional comment. And I forgot, Mr. Kanjorski

wants another minute.

Mr. KANJORSKI. I just wanted to make the point, we were talking

about the various states. I am not sure, but some states elect their

state insurance commissioners, and others are appointed. If any of

the members would like to express an opinion, if we go to a national charter, are we going to create another national office of national insurance commissioners who run along with the President,

or do you think that an appointive Cabinet position? I really want

your opinion on the election process in various states and how that

impacts on some of the problems that we see in the insurance business on the state regulatory level.

Mr. VAN OSDALL. I would like to offer comment on that. The

elected position, without having the background in the business

and the training and understanding, I think, has been one of the

things that continually slows down those very issues that we are

trying to address and tackle. You can almost look at it state by

state and when it becomes an elective position, which is often a

stepping stone to another position, you have a transient person filling that job in many cases. And that has been a real detriment to

insurance regulation, I think, over the years.

Mr. KANJORSKI. Yes?

Ms. VAUGHAN. I am not going to take a position on which is better. I happen to be an appointed commissioner, and I am proud to

be an appointed commissioner. And I have very fine colleagues who

are elected commissioners. And I think we have had some very fine

elected and appointed commissioners. But I think what this reflects

is the idea of local control. And the citizens in Kansas have decided

that an elected commissioner is what works for them. And the citizens of Iowa have decided that an appointed commissioner is what

works for them.

Mr. KANJORSKI. But if the Federal Government takes up the position that we are going to overpower the states and create a federal charter, we are going to decide what now is covered by an

elected official will be covered by an appointed official?

Ms. VAUGHAN. You are overriding the decisions that are made by

the citizens of those states with respect to the markets in their

states, by the legislators, the state legislators, the elected commisVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00124 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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sioners, and whoever is in there working on the state insurance

market issues.

Mr. KANJORSKI. Is that an argument against having a federal

charter?

Ms. VAUGHAN. I would say that there is a question—it gets back

to the question of whether a federal regulator can best understand

and create a regulatory environment in Iowa when they are based

in Washington, D.C. and they don’t understand our Iowa markets

and our Iowa consumers and our Iowa issues. So this is all about—

one has to go back to this is all about consumer protection. The

reason that regulators exist is consumer protection. And the question is what is the best way to frame that consumer protection.

And we at the NAIC believe that regulators that are local, given

that so much of insurance issues are local and so many of the

issues that consumers deal with come at times of crisis and stress,

things that we have to help consumers with—their house burned

down, their company is not paying for it, their child needs an operation and the insurance company won’t pay for it—that these are

things that local people are best able to respond to.

Chairman BAKER. Thank you, Mr. Kanjorski. Another issue that

has to be resolved is the term that someone would serve. In Louisiana, for several commissioners it has been 20 years to life. So

that has to be worked out.

[Laughter.]

Chairman BAKER. I would like to thank you again and excuse

this panel so we may hear from our next gathering of witnesses.

Thank you very much.

I would like to welcome each of our participants to our second

panel and certainly appreciate your willingness to appear here

today. Our first panelist is Mr. Scott A. Gilliam, who is Director

of Government Relations, Cincinnati Insurance Companies.

Welcome, Mr. Gilliam.

STATEMENT OF SCOTT A. GILLIAM, DIRECTOR OF GOVERNMENT RELATIONS, CINCINNATI INSURANCE COMPANIES

Mr. GILLIAM. Thanks, Mr. Chairman, Ranking Member Kanjorski, and members of the committee. I am with Cincinnati Insurance Company. We are a property and casualty and life insurance

company. We operate in 31 states, with a premium volume of about

$2.5 billion a year and a million policies in force. So we are not the

biggest but we are not a small county mutual.

I was asked to talk about consumer protection issues today and

how they impact the question of whether insurance regulation

should remain a state-based system or whether a federal approach

to insurance regulation should be considered.

My first point today, already touched on by some of the first

round of questions, consumers are served best by state regulation.

For consumers, the strength of the state-based system of insurance

regulation lies in its ability to respond to consumers, to adapt to

local market issues, and to enable states to experiment and learn

from each other. State insurance commissioners become experts in

the individual state issues they face, enabling other commissioners

to learn from their experience. In this way, the insurance regulatory system evolves to meet new challenges. Accessibility is anVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00125 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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other advantage that state insurance regulation has over the federal regulation insofar as consumers are concerned. No one can

quarrel with the fact that it is easier to deal with regulators in the

consumer’s home state than by having to call 1-800-Washington in

order to get help with a consumer insurance issue.

The accessibility of insurance regulators to consumers would suffer under an optional federal charter system given the likelihood of

consumer confusion with the two systems. Under an optional federal charter system, state-chartered insurers and federally-chartered insurers would operate side by side in the states. Under those

circumstances, consumer access to regulatory protection would be

needlessly complicated by the mere existence of dual regulatory

systems and the resulting confusion as to which system has jurisdiction over a particular consumer complaint. Insurance consumers

should not have to roll the dice when deciding whom to contact for

a problem.

The warning made by Chairman Oxley in his opening statement

last week, that consumers cannot be adequately protected if insurers are subject to conflicting requirements at the federal and state

levels, seems equally applicable to the situation insurance consumers would face with conflicting federal and state consumer protection systems.

It is also doubtful whether the Federal Government would have

the resources and expertise necessary to effectively and efficiently

protect insurance consumers. It would take a huge effort to duplicate the activity of the states in this regard. Consider two key

facts. In the year 2000, insurance consumers made approximately

four million consumer inquiries and complaints to state regulators.

State insurance regulators employ 12,500 regulatory personnel nationwide and those departments spend $853 million annually to be

the watchful eyes and helping hands on consumer insurance problems.

We feel the Federal Government is simply not equipped to take

on such a role and develop a regulatory authority for insurance

consumer protection as sophisticated and widespread as the state

system that has been 200 years in the making.

My next key point, the benefits of state regulation to insurance

companies also benefit insurance consumers. The benefits of the

state insurance regulatory system on insurance companies also

translate into benefits for insurance consumers in the form of competitive markets. Let’s consider a few examples.

Unique knowledge of markets and local conditions. States are the

only logical choice for the comprehensive regulation of insurance

given their unique knowledge of local markets and conditions.

State regulators know the insurance markets within their borders.

Although there are uniform national concerns in the industry, as

in many others, in uncountable ways insurance involves concerns

of an intensely local nature. The concerns in Ohio, for example,

with its multiple urban centers, lakefront communities, and manufacturing base are quite different from the insurance issues raised

in Iowa with its thousands of farmers and few large urban areas.

Less risk of regulatory mistakes. Under state regulation, good

regulatory initiatives spread to other states and conversely the bad

ideas tried in one state prevent others from making the same misVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00126 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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takes by offering real market examples. Having 50 different regulators is less risky than gambling on a single federal regulator who

might have an axe to grind against the insurance industry and ultimate power over the industry to swing the axe.

Another example: State regulation encourages innovation. Insurance companies often use a particular state as a laboratory for testing new product ideas or competitive strategies before they are introduced on a national level. Good products and good competitive

strategies in one state often spread to other states. Likewise, unsuccessful strategies in one state often educate the rest of the industry and lead to better products and more competitive markets

in all the states.

So where are we today? While state regulation of insurance has

worked very well, the realities of changing market conditions, including globalization and financial services convergence and consolidation demand a more efficient regulatory system, including

greater coordination and consistency across the states. While some

are calling for federal regulation to address the changing face of

the insurance industry, we feel state regulation still works best.

At the same time, we realize that in order to preserve state regulation during these changing times, the current system of statebased insurance regulation needs to be modernized, streamlined,

and made more efficient. We have already heard about the strong

and growing effort underway within the National Association of Insurance Commissioners to modernize state insurance regulation

and it appears a national regulatory agenda is taking hold.

But there still remains work to be done. We would be remiss if

we did not acknowledge that the efforts by the NAIC to modernize

state insurance regulation are only a start. Virtually every area of

insurance regulation needs to be improved if the state-based system is to meet the challenges of a modern insurance market. But

unlike those companies who would abandon the state system and

start over with federal regulation or dual regulation, the Cincinnati

insurance companies are committed to doing the hard work needed

in the state capitals to modernize, streamline, and increase the efficiency of state regulation.

Two more quick points and I will conclude. What if the states do

not follow the lead of state insurance regulators and the NAIC and

enact the reforms needed to modernize state regulation or do not

act soon enough or do not do enough to re-invigorate state insurance regulation? In this event, our company is intrigued by the possibility of using federal legislation to encourage the states to undertake more rapid and comprehensive reform of state insurance regulation. While we are yet undecided on the form such legislation

would take, we would prefer a model that would allow the NAIC

to be active in crafting the reform legislation states need to enact

to avoid federal regulation.

In suggesting that Congress consider the use of federal legislation to encourage reform at the state level, we are mindful of the

dangers incumbent in opening these issues up for federal legislative debate. And while we recognize these dangers, we believe that

using federal legislation to encourage reform at the state level as

a last resort is certainly better than jumping hook, line, and sinker

into a federal system of insurance regulation.

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My final point this afternoon, my company feels that state regulation is the preferred model of regulation for all lines of insurance,

property, casualty, and life insurance. Many in the industry think

of my company as a property, casualty company only, but we do

have a significant life insurance operation with over $100 million

in premium a year. In fact, our life subsidiary, Cincinnati Life Insurance Company, is a former member of the American Council of

Life Insurers. I bring this to your attention in reply to what seems

to be the growing refrain in Washington, that we should not think

twice about lobbing off the life industry and handing it over to federal regulators. My company strongly disagrees with this point of

view and believes that state regulation works best for all aspects

of the industry, including life insurance as well as property and

casualty. A reform system of state insurance regulation for all lines

of insurance, including life, is far superior to an unproven system

of federal regulation.

Thank you.

[The prepared statement of Scott A. Gilliam can be found on

page 344 in the appendix.]

Chairman BAKER. Thank you, Mr. Gilliam.

I take particular pleasure in introducing our next witness, Mr.

Hans Sternberg, a long-time friend and resident of Baton Rouge,

Louisiana. More importantly, he and his wife, Donna, have been

accomplished business people and very civic-minded in their work

within the community. So it is a pleasure to welcome you here

today in your capacity as chairman and CEO of Starmount Life Insurance Company. Welcome.

STATEMENT OF HANS STERNBERG, CHAIRMAN AND CEO,

STARMOUNT LIFE INSURANCE COMPANY

Mr. STERNBERG. Thank you, Mr. Chairman.

Chairman BAKER. You have to hit the little button on the front

of the mike. It is not on.

Mr. STERNBERG. Thank you, Mr. Chairman, Ranking Member

Kanjorski, and members of the subcommittee. My name is Hans

Sternberg. I am chairman of Starmount Life Insurance Company.

We employ 63 people and are admitted in 18 states. I am here to

offer my perspective as the owner of a small family business. In

fact, four years ago, when our premiums were under $4 million, I

boasted we were America’s smallest life company. This year, premiums will exceed $18 million. Obviously, still small, but growing.

I spoke to Chairman Baker about the optional federal charter to

be sure small independents are not excluded by high capital or revenue minimums. Companies like mine need this legislation because

the present system imposes high regulatory costs and restricts

market access. Regardless of size, all companies pay the same dollars to comply with legislation—regulation. Thus, smaller companies bear a higher percentage cost than larger ones. To Geico,

which testified here just one week ago, $100,000 is pocket change.

Not to companies like Starmount.

One of our divisions sells life insurance by mail. The economics

of direct mail selling assume we reach all names on productive

mail lists. Unfortunately, barriers to entry in many larger states

makes this impossible. Conversely, we generally avoid the 12

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smaller states, like Delaware, North Dakota, Idaho, Montana, Wyoming, and Rhode Island, with 2 million people or less, because the

costs of regulation make it difficult to be profitable there.

Not only is Starmount barred from many larger markets, but

citizens of both state groups lose the competitive benefits new companies bring. For example, greater product choice, lower prices,

better service.

Here are other examples of what we face. One, for several years

we bought insertion privileges in the Visa monthly bills of our local

bank, which allowed us to send marketing material to the bank’s

several hundred thousand Visa cardholders. It was our most profitable venue. Then the bank won a 50-state military contract. We

lost all opportunity to continue selling through the bank because

the bank needed a company which could serve all its customers.

There was no way to replace that business.

Two, we once developed a policy at a cost of $20,000 to $25,000,

which is a lot for a company our size. It was approved in all our

states except two. After three years, we abandoned the program. It

is not economical to promote to only part of our customer base, plus

there is the constant fear of mailing to the wrong jurisdiction.

Three, for years we ran a newspaper ad in several states but one

fined us $10,000. That state has a unique rule we didn’t know

about. If you show even one rate in an ad, you must show all rates.

That would have meant 188 of them. We obviously no longer run

ads in that state, but such foolishness is solely political protection

for entrenched marketers who oppose competition.

Four, at one time we used brochures to sell in supermarkets. The

distributor inadvertently sent the one state’s material to some WalMart stores. The insurance was approved by both states, but the

minor differences caused a $7,000 fine. We stopped using brochures

in grocery stores, so the consumer lost that option.

Five, we have insurance product filed for two and a half years

but not yet approved in every state. The excessive delay is expensive and frustrating. In the end, the consumer has less choice.

Six, our largest division uses agents to sell supplemental health

benefits to companies. To take advantage of a 50-state opportunity

offered us by a major national retailer, we recently partnered with

a national carrier, giving half the potential sales to the partner.

For us, it is better to have half the business rather than none. But

the sales relinquished by us will involve millions. Over the next

two years, licensing for this program will cost over $100,000.

The present system will always handicap Starmount’s efficiency.

We are forced to charge the consumer more as well as to fall short

of our sales potential because of unnecessary and inconsistent legislation and regulation.

I hope this committee remembers the small companies which regularly encounter these bureaucracies.

Thank you for this opportunity.

[The prepared statement of Hans Sternberg can be found on page

398 in the appendix.]

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

final panelist is Mr. Wayne E. McOwen, Vice President of External

Affairs, Guard Financial Group. Welcome, sir.

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STATEMENT OF WAYNE E. McOWEN, VICE PRESIDENT OF

EXTERNAL AFFAIRS, GUARD FINANCIAL GROUP

Mr. MCOWEN. Thank you. Chairman Baker, Ranking Member

Kanjorski, and members of the subcommittee, my name is Wayne

E. McOwen. I am senior vice president for government affairs and

industry relations for Guard Financial Group.

I thank you for the opportunity to offer comments, and I join my

industry colleagues in applauding your commitment to insurance

regulation reform. Guard Financial Group is engaged in the full financial services arena of insurance, banking, and investments. Accordingly, we are subject to multi-state, as well as federal, regulation.

My purpose today is to offer observations on the advantages of

choice. As requested, my comments will address the regulation of

insurer business practices and issues of regulatory choice and regulatory competition.

State regulators scrutinize the financial viability and business

practices of insurers through a process of examinations. Such

exams are conducted routinely at scheduled intervals but can also

be triggered by circumstances. The primary public policy objective

or regulators is solvency. The financial exam focuses on insurers’

adherence to universally-accepted financial standards. The process

is as precise as mathematics.

Whereas there is consistency to the focus on the objective components of an insurer’s financial health, the evaluation of business

practices or market conduct is neither universal nor uniform and

can be somewhat subjective. Consumer protections are a priority of

state insurance regulators, yet the process is complex, costly and

rife with inconsistencies that limit its benefits.

Especially problematic is the interpretation of regulations; what

are considered fair business practices or arbitrary or capricious actions in one jurisdiction may not be in another. Sometimes variations of the same requirement are problematic, such as when performance benchmarks differ for no apparent reason. Consider coverage cancellation rules, for instance. There is no clear rationale for

why policy holders of one state are accorded a 30 or a 45 day notice

or more while those in another state receive only 10. With postal

services standard country-wide, this patchwork of delivery notice

rules seems unnecessary and only confuses consumers, particularly

multi-state commercial policy-holders for whom such rules may

have different business consequences.

The market conduct process is by design duplicative. Carriers are

subject to the scrutiny of regulators in all states of operation.

Exams conducted by one state may be duplicated by another to

evaluate identical business practices. Duplicative exam fees and

the down time of staff engaged in the process raise the cost of

doing business and fragmentation can exist even within the same

state when two or more agencies share regulatory responsibilities.

For more than 100 years, the dual regulatory system has worked

successfully for banks. Applying a similar model for certain insurance operations portends all the benefits derived from choice.

Choice, America was founded on it. Competition, America thrives

on it. Why, then, is the prospect of regulatory choice for insurers

and competition between state and federal regulators so difficult to

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accept? Admittedly, an optional federal charter does not have universal appeal but the operative word here is optional. For insurers

doing business in a multi-state arena or for those marketing a limited number of products with consistent risk factors, a streamlined

federal regulatory process portends a wider selection of more innovative and competitive offerings. Simply stated, regulatory choice

for insurers translates to more choice for consumers.

The National Association of Insurance Commissioners is to be

commended for its leadership and resolve toward the uniformity

and consistency of state regulation. But without an impelling incentive, expect the process to continue to move slowly.

Here are some compelling reasons to accelerate the process: The

demands of an expanding global economy; increasing strains on insurance from a complex legal system; providing viable insurance

products via e-commerce; federal initiatives such as the Patient’s

Bill of Rights and the pending Health and Human Services medical

privacy rules all boast arguments for a centralized authority in certain circumstances.

Providing the insurance industry with a strong national voice

does not require reinventing the wheel. A system of federal and

state regulation should be neither exclusionary nor duplicative but

simultaneous and complementary. Ideally, it would identify the

best practices of state regulatory systems, precisely the process engaged by state regulators in crafting model laws aimed at encouraging uniformity. But encouraging it is not the same as requiring

it. A federal regulator could have the tools to make it happen.

Finally, our preparedness to meet the far-reaching and extraordinary challenges of possible further terrorism events illustrates

the key role of the Federal Government. Stakeholders did not approach 50 states for a solution to terrorism insurance, they went

directly to Washington. The founding fathers were judicious in

crafting a federal umbrella that would not impair states rights.

Their goal was to strengthen the system by bringing structure and

unity. More than two centuries later, we struggle with this concept

and its application to the regulation of insurance, a mechanism

that the events of September 11th reaffirmed is so critical to our

economy and to our lives.

Thank you.

[The prepared statement of Wayne E. McOwen can be found on

page 350 in the appendix.]

Chairman BAKER. Thank you very much. Again, this panel has

also been very helpful.

Mr. Sternberg, I found the examples you cited, the regulatory inefficiencies, to be quite troubling, and frankly, those are the kinds

of examples that the committee needs to understand better; the

fact that you are licensed in two adjoining states and had marketing material reversed and still found yourself financially liable

I think points out some of the difficulties of the current system.

To that end, we have had earlier testimony in another hearing

in which a CEO of an insurance company indicated that they had

withdrawn and would not return to the state of New Jersey primarily because of the regulatory complexities within the state.

That leads me to remember a conversation you and I were having

earlier with regard to the size of the industry today versus a year

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or two ago. Could you give the committee that information, on

what is happening in the marketplace from your perspective?

Mr. STERNBERG. Yes, I actually can. I did a little research before

I came up. Five years ago, there were 1,748 life insurance companies in this country. Today, there are 1,454. That is a drop of 16

percent. I understand something similar—that is for life companies

only—I understand something similar is happening in the P&C industry. And part of that is normal consolidation, but also, a lot of

it is because companies are struggling to make a profit. The ROE,

return on investment—on equity—is not good in the life insurance

company—industry. It doesn’t approach the banking industry. And

we are suffering because of it. And you are going to see more

shrinkage.

Chairman BAKER. And would the likely outcome of this, as capital formation and start-up costs are difficult, if you were in business and approved in all 50 states, had your regulatory costs behind you, wouldn’t it make sense from a business perspective that

companies who find themselves in that posture not to be too excited about lowering regulatory barriers because you might have a

Starmount coming around the corner?

Mr. STERNBERG. Well, certainly. We would be twice as large

today if we could operate in more states or significantly larger. And

there are some entrenched feelings on that, sure. But I would assume most of the larger companies would prefer to have a national

charter also, though I am not aware of the testimony on that.

Chairman BAKER. Thank you.

Mr. Gilliam, I have asked other panelists along the day and over

the course of the few weeks their view of the Illinois system which

in my judgment is sort of the other side of the coin in this process

where you file and you don’t have to even have rate pre-approved

and it seems to be working fairly well there with a lot of competitive product at pretty good prices for folks in Illinois as opposed to

New Jersey where you have insurers trying to leave the market.

If we were to try to come to some agreement, and I am just fishing

for less volatile territory here, particularly on the life insurance

side, the advisability of a national location for your filing similar

to the Illinois structure, leaving consumer protection to the states.

I see the viability of having someone local to call, some local point

of accountability if you are defrauded or have difficulty in getting

settlement but doesn’t the logic of having more competition make

a great deal of sense from a consumer perspective, forget property

and casualty, forget automobile because they are more difficult. Do

you still have the same objections if you go in that narrow of an

approach?

Mr. GILLIAM. Just so I am clear, are you just talking about life

insurance products now?

Chairman BAKER. Yes.

Mr. GILLIAM. I would echo the remarks of Commissioner

Vaughan when she was asked a similar question. Clearly, there are

less differences in the nature of life insurance products than P&C

products on a national basis. I have heard some say a life insurance policy is a life insurance policy in Florida, Iowa, or Washington state. But I guess what I would say is I see the point there,

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proval and so on is there to allow a company like his to file one

product and have it approved in all 50 states simultaneously, I

think that is a great thing.

But I guess we would say if the states can do that—and again,

that may be a big hurdle because they haven’t come that far yet—

but if the states can do that, why not have them do it, versus going

to a new, untested national or federal situation?

Chairman BAKER. Though I guess my response to that would be

in your best judgment, if all things worked well, how long is it

going to take us to get to a uniform system even with regard to

life, much less everything else?

Mr. GILLIAM. That is the $64 billion question. How much time do

we give the states to do this? How far do they have to go before

we say they have met their charge? Is it like a NARAB system

where when a majority of states do it, it is okay? I don’t think that

probably works, because a system where 29 states of 50 do something is not like having a national system. And I guess I would add

on that is why we are intrigued by the idea of using some federal

legislative authority to urge the states to action. It is clear that the

states have to act and modernize. This is not going to be an issue

that is around for 20 years, like Gramm-Leach-Bliley. There is too

much at stake in terms of the changing face of the marketplace. It

has to be addressed in the next five, ten years at the very latest.

So I can’t tell you how long it is going to take the states. But

our view is let’s give them a shot. If they don’t look like they are

reacting, let’s put some federal onus on them. And at the end of

the day, if they can’t do it, then we may have to rethink things.

Chairman BAKER. I think that is much of the thinking here. We

had hoped that NARAB would be the shot. We had hoped that we

could see more positive development with regard to premium dollars regulated. But it just doesn’t seem to be moving very well. And

I guess we have to come to some decision about how much longer

can we wait and then explore in the meantime whether an Illinoislike model doesn’t make a great deal of sense at least in some product lines, reserving consumer protections to the state. That to me

doesn’t seem to be on the edge of irresponsibility at least.

Mr. GILLIAM. And I did fail to mention that we also jump on the

Illinois bandwagon. All of us in the industry love the way things

are done in Illinois, but with all due respect, it is also done well

in the great state of Ohio.

Chairman BAKER. Well, I certainly have great regard for the

state of Ohio, sitting on this committee, and would look at that

very advantageously.

Mr. Kanjorski?

Mr. MCOWEN. Excuse me, Mr. Chairman, may I comment on

that last question?

Chairman BAKER. Certainly, yes.

Mr. MCOWEN. I think there is another issue to the licensing of

products. One doesn’t just file to be approved to sell a product in

the state. First, a certificate of authority has to be obtained from

that state. One has to be licensed to do business. And there is a

great deal of inconsistency in terms of state approval of companies

to do business. And whereas I indicated in my testimony that the

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less true that although you might be licensed to write business and

accepted to write business in one state, you may not be accepted

as readily in another state.

Having then gotten the license, another issue, of course, as mentioned, is filing those products for acceptance.

Chairman BAKER. Thank you very much.

Mr. Kanjorski?

Mr. KANJORSKI. Mr. Chairman, I have been listening to the witnesses today and, of course, Mr. Sternberg surprises with a small

company like that asking for a national charter. That is really

gamesmanship in terms of wanting to get out there to compete.

That is great.

There was one suggestion on the earlier panel about using SROs,

self-regulatory organizations. And perhaps we could expound on

that to think about that as the entity to create uniformity of policies, language policies. Even dealing with the rates in some way or

methodology of setting rates.

What I am most interested in, having been here maybe too long,

is whenever the Federal Government reaches out its arm to help,

it generally has its other hand out to extract a price. And in the

insurance industry, that could be an extraordinary price.

As Mr. Gilliam knows, we worked on catastrophic insurance not

too many years ago. And when you analyze what was attempting

to be done legislatively was to force the residents of Idaho to pay

a premium to cover the residents of Florida against hurricanes. It

was looking at a national problem of disasters and saying the residents of that one area or the present based were insufficient to

cover the risk so that we wanted to enlarge the base nationwide.

Either use it by adding on to the premiums and surcharging premiums across the board or the Federal Government using the base

of the taxpayers to stand the expense that was unique to a single

region or a single state.

I am just wondering have you given some thought—maybe Mr.

Sternberg, I will direct it to you first—would you be disappointed

if the Federal Government says that if we are going to allow you

to write insurance nationwide, that we also are going to require

you to charge a uniform premium or to write in the states of New

Jersey and Massachusetts, which seems to be nobody’s desire at

this time, for some reason or another. But can’t you envision the

time when politically a President of the United States will direct

his cabinet officer or Members of Congress would get together and

say, ‘‘Boy, the big state of Massachusetts and the big state of New

Jersey have a problem in auto insurance, and we want the federal

commissioner to direct all P&C writers that they have to write in

these states even though they take a loss.’’

Mr. STERNBERG. Of course, I am a life company.

Mr. KANJORSKI. I had an example for your company. Let’s suppose that longevity in Pennsylvania is average 85 years of age but

in L.A. it is only 65 because of smog. Would you want to have to

charge and offer the same premium in L.A. as you would in Pennsylvania?

Mr. STERNBERG. Yes, that would not in the life industry create

a major problem. The price-fixing that I thought I heard you say,

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price controls have never worked. And they didn’t work in the

Nixon administration, they won’t work here.

Mr. KANJORSKI. How would we set the rate on the life insurance

if you had a life expectancy in L.A. of 65 because of smog and a

life expectancy in Pennsylvania because of the beautiful weather of

85?

Mr. STERNBERG. Well, I think it would work even better than it

works in a constricted marketplace as you have now. You would

have a lot of people out there—

Mr. KANJORSKI. You would charge different premiums based on

the state lines?

Mr. STERNBERG. Well, that isn’t quite the way we do it in the life

business. We are in 18 states and what we do, we base it on the

health of the individual and our own products and our own cost

structure.

Mr. KANJORSKI. But isn’t there an environmental factor as to

where you live, the impact on your life expectancy?

Mr. STERNBERG. Not that we have come across, no, sir.

Mr. KANJORSKI. There isn’t any?

Mr. STERNBERG. It has to do with health. For example, if we

have an American citizen who is living in Africa 10 months out of

the year, we will not insure that person. But if we have a foreign

person who is living over half the year in the United States and

getting their health care here, we will. So it is where you get your

health care that would determine.

Mr. KANJORSKI. But you wouldn’t see any difference in life insurance of insuring someone in a smog city like L.A. as compared to

Iowa, nice fresh country air?

Mr. STERNBERG. The only thing we would pay attention to is

crime. If it is a high-crime area, we generally tend to avoid it.

Otherwise—

Mr. KANJORSKI. Then you wouldn’t write the policy?

Mr. STERNBERG. We would not write the policy.

Mr. KANJORSKI. Then maybe that gives me the example. But the

federal commissioner says L.A. is a very important town for votes

and we are going to order your company to sell life insurance in

L.A. so that we don’t lose the benefit of the electoral vote for the

next presidential election; are you going to be happy with that situation?

Mr. STERNBERG. I have never faced it before.

Mr. KANJORSKI. Well, there is no federal commissioner.

Mr. STERNBERG. But there are state commissioners, there are 50

state commissioners.

Mr. KANJORSKI. Yes, but you can pick up and leave the state of

California and he can’t tell you to do anything. You have got 49

other states to do business in. If you have got a national charter,

he is going to say, ‘‘If you want to do business in those 18 states

you like now, Mr. Sternberg, you are going to have to do it in California, too, and here are the terms and conditions you are going to

have to do it under.’’ Do you want that done to you?

Mr. STERNBERG. Would I like that? No. Would I abide by it?

Sure. If everyone else in the industry has to abide by it also, then

we would do it. I would just spread my risk further.

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Mr. KANJORSKI. Well, I am just wondering, I am posing the question because I am hung up, quite frankly. I am a person who recognizes the distinct differences between regions and states in the

country and the country as a whole. I sometimes make the comparison that going to Utah as an Easterner is like going to Austria.

It is almost a different country in terms of the make-up of the people and the climate and everything else. And I think since I have

gotten elected to Congress, I have gotten a great deal more respect

for the differences that exist in the country as opposed to the sameness and the uniformity of the country. And I am just wondering,

insurance seems to be a very personal thing to me. It is insuring

property in a particular area. It is insuring my life or someone that

is close to me. It is a very localized, very special community area.

And I am wondering if we nationalize it whether we are going to

lose something there or are we just going to further cause the big

operators, the huge operators to dominate the field.

I sometimes wonder with H.R. 10 whether we haven’t consolidated the financial services industry to the point where they no

longer have to pay attention to the state of Iowa, who cares? There

is another state out West that I think the largest bank is $100 million. Is it Iowa or another state? But, anyway, they are so insignificant that a lot of major companies don’t even look at them. It is

a flea on the back of an elephant. Maybe that is a good example

too, considering what the elephant represents. But don’t you fear

that that may happen if we nationalize insurance?

Mr. STERNBERG. Actually, the exact opposite will happen, because, as I mentioned, there are states we won’t go into because

the populations are too small, whereas if we didn’t have to face the

extra regulation that those states now impose on us, we would be

happy to be in those states. We would love it.

Mr. KANJORSKI. Mr. McOwen, I know you write workman’s compensation insurance. And being an old workman’s compensation

administrative law judge, I never did understand the massive jurisdictions—I didn’t even understand how you come up with premium

rates, quite frankly. It just was so complicated as to safety standards, et cetera, that apply in the various states and the rates that

apply, et cetera. But how would that work? Would there be an advantage or a disadvantage to the say, small states as compared to

the large industrial states, if the premium and policy requirements

were uniform?

An example, I think it is present now in Pennsylvania, the minimum workman’s compensation is like $350 a week, something in

that range. And yet in the state of Mississippi, I think it is $110

a week. So that if you get injured, they tell you to drop on a train

and drop off in Pennsylvania if you are injured in Mississippi because you will make out a hell of a lot better. But isn’t this a problem that if we uniformize it that we take away the state uniqueness? Even sometimes policies and costs like that being used as an

economic advantage by states wanting to attract industry, they try

and drive the price down or the benefits down?

Mr. MCOWEN. Well, I think that there are a couple of answers

to that question. And one answer is to examine the way states deal

with this issue. Now, part of state regulation is that insurance

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flects the state regulator’s interest in having a fair rate to the consumer. But it also reflects the regulator’s interest in the solvency

of the carrier. Rates are set by risk factors. And a large risk factor

or a high risk factor engenders a higher rate. A low risk factor engenders a lower rate. And it is up to the insurance company to help

the consumer find a way to mitigate his risk factors to earn a lower

rate.

I would assume that a federal regulator would be as interested

in solvency as a state regulator. So it would not seem likely to me

that a federal regulator would impose a restriction or an edict that

says you must charge the same rate in all states. Rather, I would

say that the national regulator would be concerned for solvency

and therefore would continue to look at rates being charged relative to risk factors, which generally are not geography. I mean

even in one state you have parts of states where auto rates may

be higher than others or different kinds of rates are higher or

lower.

Mr. KANJORSKI. Well, as a Member of Congress, I would be very

much tempted to make a uniform workman’s compensation payment throughout the entire country instead of seeing different

rates in different areas simply because I find it very difficult to understand how a person who has a total disability can live at the

rate paid in Mississippi relative to what the rate is in New York

or Pennsylvania. And wouldn’t it be our temptation here to pass

legislation saying there shall be relatively uniform rates paid in

workman’s compensation throughout the country? We are not setting the rate of the premium or what is going to be paid, we are

just saying fairness. Or the large states get together and say, look,

why are we paying so much more compared to these small states

and they are stealing our industry. Let’s get the Congress to pass

a uniform rate, then that takes that away from competition.

Chairman BAKER. We can come back to this. Let me get Ms.

Biggert in.

Mr. KANJORSKI. Oh, surely. Oh, I am sorry.

Chairman BAKER. Ms. Biggert?

Mrs. BIGGERT. Thank you, Mr. Chairman. This question is for

Mr. Gilliam. You heard NAIC Commissioner Vaughan testify in the

first panel about the new efforts of NAIC to achieve uniformity

through interstate compacts and yet she also, when I asked her

about CARFRA, that it didn’t seem to be working so they virtually

have abandoned that to go to the interstate compacts. And yet a

year ago, when NAIC testified here, it was to be the answer to the

product approval problem for life insurance and that I think it was

said that in approximately a year from now we would have a working CARFRA mechanism that would allow all 51 jurisdictions to

participate, plus the District of Columbia, and that doesn’t seem to

have happened, and that was abandoned. Aren’t you a little bit

skeptical about how this interstate compact will work?

Mr. GILLIAM. I don’t think I can be skeptical yet. If you use—

and, again, I mean no disrespect to the NAIC. In fact if Commissioner Vaughan felt like the Lone Ranger here this afternoon, I am

her loyal sidekick, Tonto. But perhaps the CARFRA interstate compact example is an example of why if CARFRA ends up on the cutting room floor, why one idea is tried and if doesn’t catch on, we

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move to something else. And I think that is a healthy thing, to look

at new innovative ways to handle that situation.

Mrs. BIGGERT. Well, then how many years do you think it takes

to judge whether a program is a success or a failure? And how

many—in this world of competition, with the other financial institutions, how many products can be lost by the insurance industry

waiting for something that will work as far as the regulation?

Mr. GILLIAM. Well, single point of filing and approval of products

in one state and all states is certainly the Nirvana we are all looking for. And I can’t look into my crystal ball and tell you that we

give the states a year and a half, two years, three years, five years,

ten years. We have to a lot faster than we did with Gramm-LeachBliley, but I guess my point is let’s at least give some consideration

to letting the states get this thing right before we turn it over to

1-800-Washington.

Mrs. BIGGERT. Okay, thank you.

Then, Mr. Sternberg, I would just like to thank you for your testimony. I think it very clearly put what is really happening in the

industry and how the regulations are affecting you, I think very

succinctly. And appreciate your testimony.

Mr. STERNBERG. Thank you.

Mrs. BIGGERT. And I would just like to ask one question, and

that is how is the life insurance industry faring under the current

regulatory structure? Are smaller companies disappearing?

Mr. STERNBERG. Yes, they are. There are 16 percent less today

than there were five years ago. And there will be 10 or 15 percent

less in another five years. And I think the whole industry has, in

terms of the investment community, has a serious problem because

we are not throwing off—and I am saying big and small, we are

not throwing off the kind of profits that would command the investments that need to be made in every industry to keep up with the

world.

Mrs. BIGGERT. Okay, thank you.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Ms. Biggert.

Dr. Weldon?

Dr. WELDON. Thank you, Mr. Chairman. I just have one question

for Mr. Gilliam. Prior to Hurricane Andrew, we had 1,200 property

casualty companies in the state of Florida, and now I think we are

down to less than 200. Some of the inflation in premiums that we

have seen in the property and casualty sector obviously is attributable to the reasonable calculations of risk. But there are some

people in our state who legitimately argue that a big component—

or component of the price inflation has been a decline in competition, basically. And there are a lot of proposals being put forward

to try to bring more carriers into the state.

One of the questions I get asked is this issue of a federal charter,

it would make it easier for companies to come into the state, increase the number of companies, increase the amount of competition, and perhaps have an impact on premiums. How would you respond to that? You made some very persuasive arguments about

this current system working well. How would you respond to that

question?

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Mr. GILLIAM. I think it would have just the opposite effect. I

would hold out Florida as the national poster child for state regulation, because the issues that Florida faces with its high probability

of risks for hurricanes and catastrophes is far different from what

the risks are in Iowa or Nevada or other states. And if we have

a national federal regulator who is overseeing everything, there is

not going to be as much sensibility on his or her part as to the

unique concerns in Florida.

Dr. WELDON. Well, let me clarify my question. I would never—

at least I don’t think I would ever want to preempt state regulation. I view this as sort of like the approach in banking where you

have the option of state licensing or state chartering versus a federal charter. How would you respond? You were on a roll there, do

you want to continue? You were starting to say you thought it

would make things worse?

Mr. GILLIAM. Well, you bring up the general issue of disaster and

catastrophe, and I failed to bring my trailer load full of data on

that issue. That will be the subject of many more hearings before

this committee. But having been very involved on the national

scene on legislative issues dealing with catastrophes, I can’t see

how the creation of an optional federal charter is going to bring

more competition to Florida in terms of insuring catastrophic risks.

I wish I had some of my data with me, but I think in the last five

years, while there may be a smaller number of companies selling

P&C coverage in Florida, it is a much more competitive market.

The prices are kind of leveling out. And I believe that your state

mechanisms, the JUA and so on, have become vastly depopulated.

And I just can’t think of any advantages to an optional federal

charter in terms of the problem with insuring catastrophic risks in

Florida.

Dr. WELDON. Well, thank you very much. I appreciate your comments.

And I want to commend you, Mr. Chairman, for the panel that

you put together. I think we have heard some very, very good testimony on this issue.

Chairman BAKER. Thank you, Doctor.

Mr. Kanjorski?

Mr. KANJORSKI. Yes, Mr. McOwen, I will go back to you on that

workman’s compensation, just to clear it up. Would we be in effect

going into a national workman’s compensation system if we have

a federal charter? And how would that impact on the state legal

systems that apply workman’s compensation, the competitiveness

of rates, the competitiveness of payments under the workman’s

compensation system, how would that work?

Mr. MCOWEN. Well, I think that there are a couple of issues

there. Workers’ compensation has two parts. One part is medical

coverage. And the other part is lost wages. If you were to standardize the wage loss component, there would probably be an adjustment, a rate adjustment in terms of being able to support that

wage loss component in the marketplace.

Ultimately, the cost of workers’ comp reflects the experience of

losses and the lost costs involved in determining the rates. And I

don’t think that under a federal system that would change. I think

the insurance, it works because of spread of risk, and it would conVerDate 11-MAY-2000 10:01 Dec 19, 2002 Jkt 000000 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 C:\DOCS\80131.TXT HBANK1 PsN: HBANK1
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tinue to work because of spread of risk. It works because of fair

prices charged for the exposure. And, as I said earlier, higher exposures engender higher costs, lower exposures, a lower cost. So I

think that that would continue to be true.

What I think that might help with the administration of workers’

compensation is that a single charter, if a company wanted to have

a federal charter, it would have fewer individual market conduct

issues and regulatory issues to navigate in terms of the efficiency

of its company. And a greater efficiency would then be reflected in

the cost of its product and its ability to get new products to market

and its ability therefore to serve the consumer. And I think therein

is the advantage.

Mr. KANJORSKI. Very good. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Kanjorski.

Just to follow up a point, Mr. McOwen, with regard to the issue

of a national charter and let’s say, property and casualty in Florida. Your point you made a moment ago was that the industry

works by spreading risk, so that if you have a loss in a particular

area or line, that those losses as to the corporation will be offset

by profits from other areas of activity. It would seem to me to be

fairly advantageous, if I was in that marketplace, to have insurance in lovely Pennsylvania, Florida, as many places as I could get

because the likelihood of repetitive loss spread across the broader

market would be far less, thereby making capital adequacy a much

more sure thing than if I was a single line person located on the

coastline of Florida and that is the only place I sold. Is that logic

flawed?

Mr. MCOWEN. No, I think that logic is accurate. I am not sure

that a federal charter is necessarily the answer to market availability in a state with a catastrophe exposure. I think an optional

federal charter is intended to answer other questions than market

availability. However, you are correct, spread of risk is certainly

what makes insurance work. And the ability to write the same

kinds of exposures in multiple states is an advantage for a company. Unfortunately, we cannot write hurricane exposure insurance, for instance, in 50 states. There are only a few states that

have a hurricane exposure. And, again, I don’t think an optional

federal charter is intended to enhance market availability or to answer those problems of catastrophe issues.

Chairman BAKER. Sure, no. But my point, contrary to that of Mr.

Kanjorski, subsidization of some other consumer of the same company located in a different jurisdiction, that occurs because capital

is fungible. Where you have losses, you use those resources to pay

off the losses. And you hope by having the risk spread in broad

enough jurisdictions, you make enough money on the whole to be

able to remain solvent. So my only point was that broader geographic exposure, at least in that marketplace, makes some sense.

Mr. Kanjorski?

Mr. KANJORSKI. Well, the only point—you are absolutely right,

but when you carry that to its logical conclusion, the people in

Pennsylvania would be paying a higher insurance rate because of

the losses of Mr. McOwen’s company in Florida.

Chairman BAKER. Correct.

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Mr. KANJORSKI. So you would be accomplishing, outside of the

federal system of catastrophic insurance but you would be saying

because you have a national charter, you folks in Pennsylvania on

the high mountains that never get flooded, never get a hurricane,

your premium is going to go up because we have losses in Florida.

And that may be the disadvantage of having the federal charter,

because right now the insurance concentrates, particularly in the

smaller companies, so that it gives the area that doesn’t have that

catastrophic potential or the potential loss, they don’t pay a premium for that. And that is where capital will flow.

Let me give you the example. If you had a client that wanted to

build a $100 million building, and you have the choice of Kokomo,

Indiana or Miami Beach, Florida. Naturally, there wouldn’t be

much rocket science to think that if it goes to Miami Beach, Florida, appreciation is going to be much better on his asset. But the

thing in the insurance business, that if you honestly assess premiums for risk, his premium against hurricane loss in Florida is

probably going to put his rate two or three times what it would be

in Kokomo, Indiana. Therefore, he would look at Kokomo, Indiana

as a potential investment because of the high risk. If you

uniformize that risk, you are going against social policy and encouraging capital to flow to the highest risk areas, because the

under-risk areas are going to pick up the premium for it.

Mr. MCOWEN. Well, could I add a comment to that?

Chairman BAKER. Certainly, jump in.

Mr. MCOWEN. If you look at the federal flood model—

Mr. KANJORSKI. Well, that is subsidized.

Mr. MCOWEN. Well, but the point I was going to make is that

flood insurance is required for homeowners who live in areas where

there is a likely flood. We don’t require all homeowners in all states

to buy flood insurance to spread the risk. But we do require all

homeowners who live in a flood area to buy flood insurance.

Mr. KANJORSKI. Yes, but it is so subsidized.

Mr. MCOWEN. It is subsidized, but the price reflects the fact that

there is exposure to flood in those areas. I am just addressing the

fact that—

Mr. KANJORSKI. No, no, but by virtue of the fact that it is subsidized, we are spreading the risk to the entire country. The taxpayers are picking it up on an equal basis. That is a tremendous

spread of the risk, but we do it through governmental activity.

That is exactly what we probably do not want to do, to give an area

that has a great disadvantage an equality with other areas, because we are going to require either the private marketplace to

pick it up by virtue of the federal charter or subsidization by using

taxpayers’ money—the country as a whole, to pick up that loss.

The very nice thing about insurance now is that it stays very

close to the supply and demand of the marketplace.

Mr. MCOWEN. Right.

Mr. KANJORSKI. It is a real market force once the conditions are

worked out and rates are worked out. But we are talking about disturbing that when we are talking about spreading the rates uniformly by either action of the Congress or action of the federal commissioner or by subsidization. That changes the marketplace.

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And I think I hear from most of the insurance industry that they

really like their free enterprise system and supply and demand and

really don’t like all of us to stick our hands in their brew, if you

will. And we have been doing it in several ways like subsidization.

But at least that is an honest—we say it is so important, federal

taxpayers are going to subsidize terrorist insurance, we are talking

about subsidizing. No question about it. But here now we are talking about indirectly, through charter mechanism and federal control, the ability to subsidize to the entire country base without putting that up to a vote or without having the investor or the insured

have any say in the matter.

Chairman BAKER. But I think that happens today, Paul, to some

extent where you have a large corporation that is licensed to do

business in 50 states, who has capital available. The regulator

looks at the capital adequacy of the parent company. And the company sets its rate based on, let’s say, competitive factors, the fact

that it can have a loss leader and offer a product at a lower price,

it captures significant parts of the market. Then go back to the regulator and allege now because of market conditions, people going

out of a business, you have a higher likelihood of loss, you are

going to raise your premium.

So I think it happens indirectly today. You are correct, I think

it makes it more pronounced.

Mr. KANJORSKI. No, but today State Farm was able to get out of

Florida. They just said we won’t write casualty loss insurance in

Florida, because it is a loss. Under our system, they are not going

to be allowed to get out of Florida. We are going to say you are licensed nationally. Florida has a problem because of its hurricanes.

But you are going to write insurance in Florida and pass it off to

the other 49 state participants or you are not going to have your

federal charter. And you know, the Congress would ultimately do

that.

And when I look at the three major states here that are giving

us problems—I didn’t catch the fourth—but New York, California,

and Florida are the least cooperative, apparently, in getting this

uniform system on a state basis, compact basis, started, I begin to

wonder just why they do that. And they are the three states for

catastrophic insurance and have taken advantage of catastrophic

insurance. They are the three states that perhaps a what, about 20

percent of the American population and maybe about 40 percent or

50 percent of the economic activity of the country.

Chairman BAKER. Now, I think that may go to economic issues,

wanting to maintain control of significant parts of the market without the enhanced competition that would be brought about if you

didn’t have the barriers. But—

Mr. KANJORSKI. Mr. Chairman, I know that we could go for—

Chairman BAKER. Yes, we probably will.

Mr. KANJORSKI. I just want to thank you. I think these have

been great hearings. The first panel and this panel have been very

informative. I can’t think of too many hearings that I have been

this interested in, quite frankly, since I have been in Congress.

Chairman BAKER. And that is saying something, because this is

the third of these hearings that have gone four and five hours. And

we have actually been interested in the topic. So you all have done

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a marvelous job. Thank you very much. I do express our appreciation. Should you have additional comments, the record will remain

open for 30 days, as all members may have additional time to file

any amended statements they wish to file for the committee’s purposes.

With that, I thank you, and our meeting stands adjourned.

[Whereupon, at 5:00 p.m., the subcommittee was adjourned.]

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June 4, 2002

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