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COMMERCIAL INSURANCE MODERNIZATION

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 21, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–101

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

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 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 21, 2006 .................................................................................................... 1

Appendix: 

June 21, 2006 .................................................................................................... 35

WITNESSES 

WEDNESDAY, JUNE 21, 2006

Bouhan, Richard M., Executive Director, National Association of Professional 

Surplus Lines Offices, Ltd. .................................................................................. 24

Gates, David A., Senior Vice President and General Counsel/Secretary, 

Generali USA Life Reassurance, on behalf of the American Council of 

Life Insurers ......................................................................................................... 23

Heinze, Bernd G., Esq., Executive Director, American Association of Managing General Agents .......................................................................................... 12

Minkler, Tom, President, Clark-Mortenson Agency and Chairman, Government Affairs Committee, Independent Insurance Agents and Brokers of 

America ................................................................................................................. 8

Nutter, Franklin W., President, Reinsurance Association of America ................ 22

Ochenkowski, Janet, Senior Vice President, Risk Management for Jones Lang 

LaSalle, on behalf of Risk and Insurance Management Society ...................... 14

Sinder, Scott A., Esq., The Scott Group, on behalf of the Council of Insurance 

Agents and Brokers .............................................................................................. 10

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 36

Kanjorski, Hon. Paul E. ................................................................................... 38

Bouhan, Richard M. ......................................................................................... 40

Gates, David A. ................................................................................................. 50

Heinze, Bernd G. .............................................................................................. 56

Minkler, Tom .................................................................................................... 61

Nutter, Franklin W. ......................................................................................... 68

Ochenkowski, Janice ........................................................................................ 76

Sinder, Scott A. ................................................................................................. 81

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Written statement submitted by American Association of Independent 

Claims Professionals (AAICP) ...................................................................... 100

Hon. Ginny Brown-Waite: 

Responses to questions submitted to AAMGA ............................................... 103

Responses to questions submitted to RAA ..................................................... 107

(1)

COMMERCIAL INSURANCE MODERNIZATION 

Wednesday, June 21, 2006

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 2:02 p.m., in room 

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

[chairman of the subcommittee] presiding. 

Present: Representatives Baker, Bachus, Royce, Kelly, Kennedy, 

Tiberi, Brown-Waite, Feeney, Campbell, Kanjorski, Moore, 

Capuano, and Miller of North Carolina. 

Chairman BAKER. I call this meeting of the Capital Markets Subcommittee to order, and I welcome all of our witnesses and participants today. 

Just by way of advisory, Mr. Kanjorski and I were just observing 

the likelihood of a significant series of votes commencing around 

2:30. 

The staff will be visiting with those on the second panel to see 

if we can figure out a way to facilitate moving ahead to get all witnesses’ testimony on the record. 

Once we get into that lengthy consideration, we hate to keep everybody waiting around, but at the same time, we don’t want to 

trouble you with preparation of the testimony and not have it received. 

They may be visiting with some of you in the next couple of minutes to figure out how we can best manage this issue. 

Today, the committee meets to discuss the need for reform in the 

arena of insurance, and particularly, to discuss the assets of H.R. 

5637, now pending before the committee. 

As is evident, the differing State regulatory structure presents 

considerable impairment to the development of product by not enabling competitive forces to work properly, resulting in fewer offerings to consumers and, all too often, an unnecessary increase in 

premiums. 

Today, we focus really on a very narrow sector of the problem, 

the non-admitted, or what is traditionally known as the surplus 

lines. 

These companies have become increasingly important since 9/11, 

as well as the unfortunate catastrophes that have impacted the 

Gulf States. 

2

This is a commercial marketplace and generally viewed as being 

very well-developed and sophisticated, without any State price controls or requirements of mandatory coverage. 

Given the sensitivity of the terrorism issue, the Port of New Orleans, the oil and gas business offshore, our shipping interests, the 

movement of hazardous materials, and the high catastrophic impact of hurricanes, this is of unique and considerable importance 

to the Members from my State. 

Unfortunately, this last resort market is, in my opinion, being 

hampered by burdensome and conflicting rules—State rules on premium tax collection, broker licensing requirements, and over-regulation of commercial purchasers. 

Re-insurance is vital to our marketplace and enabling it to function in a more efficient manner, I believe, is beneficial to us all. 

I specifically want to commend Mr. Moore and Ms. Brown-Waite 

for their co-sponsoring, in a bipartisan way, H.R. 5637, which I 

think is a very targeted remedy to a clearly identified problem. 

Establishing uniform tax treatment, creating a home State deference, streamlining access to non-admitted markets, and compelling States to recognize their own re-insurance accreditation standards, are among its chief and important goals. 

In the coming months, it is my intention to take a closer look at 

other areas of concern, such as agent and company licensing, freedom in pricing, and speed to market issues. There is much work 

to be done in all of those areas. 

However, the surplus lines and re-insurance reform, I think, are 

very important and a big first step, and I appreciate all those who 

will be heard from today and their contribution in moving the committee work forward. 

Chairman BAKER. Mr. Kanjorski? 

Mr. KANJORSKI. Mr. Chairman, we return this afternoon to a 

topic that we have often discussed in recent years, the need for insurance regulatory reform. This time, we will focus on the issue of 

commercial insurance modernization. 

As I have previously said, no matter what side one takes in this 

long-standing debate on regulatory efficiency, it has become increasingly clear to me that this is no longer a question of whether 

or not we should reform insurance regulation in the United States, 

instead, it has become a question of how we should reform insurance regulation. 

As you know, Mr. Chairman, we have begun to develop a growing consensus in Congress about the need to improve insurance 

regulation. 

During our previous hearings on insurance reform, we have also 

received extensive testimony from many witnesses advocating the 

creation of an optional Federal charter, a proposal that I believe 

merits our attention. 

Furthermore, since our last hearing on insurance regulation, 

some of our colleagues in the Senate have introduced Senate Bill 

2509, the National Insurance Act, to create an optional Federal 

charter. 

Rather than overlaying Federal mandates on top of State regulations, an optional Federal charter would, in my view, create a sensible, separate, and streamlined regulatory system. 

3

In the future, Mr. Chairman, I hope we will take the time to convene hearings on, and study the implications of, their proposal. 

Nevertheless, the focus of today’s proceedings is H.R. 5637, the 

Non-Admitted and Re-Insurance Reform Act. Many sophisticated 

participants in our insurance markets have complained about problems in the regulation of surplus lines and re-insurance, and H.R. 

5637 seeks to address these concerns. 

Large commercial entities, major insurers, and re-insurance companies all operate across State lines. They both want and need 

greater regulatory efficiencies. As I have learned more about these 

concerns about licensing, invoicing, and documenting, I have become increasingly sympathetic about the need to address them. 

Before moving forward with consideration of this bill, however, 

we need to hear from the National Association of Insurance Commissioners (NAIC). Last year in testimony before our panel, the 

president of the NAIC noted that Federal legislation, ‘‘may be needed at some point to resolve conflicting State laws regulating multistate transactions,’’ involving surplus lines. She also observed that 

Federal legislation was ‘‘not needed’’ in the area of re-insurance. 

The development of good public policy requires the input of all 

interested parties and constituencies. In this case, the NAIC is one 

very interested party. Even if we ultimately decide to disagree, we 

need to engage them in a constructive dialogue. 

While H.R. 5637 is well-intentioned, I am also somewhat concerned that proceeding with piecemeal reform legislation like this 

bill could hamper future efforts to adopt more comprehensive proposals like the optional Federal charter. 

In the area of health insurance, the many Federal mandates that 

we have imposed have made it more difficult to develop a national 

consensus on far-reaching reform. We should not repeat that mistake here. Nevertheless, I also recognize that we should not allow 

the proverbial perfect to be the enemy of the good. 

In addition, I am concerned that this legislation does little to establish a Federal expertise in the area of insurance. At times, this 

lack of expertise has caused difficulties for us. 

For example, although many Members of Congress had concerns 

about the insurance industry’s ability to respond to the 2001 terrorist attacks, they had difficulty in immediately identifying Federal experts to advise them in these matters. 

The deficiency of Federal knowledge about the insurance industry might have also impeded our efforts to adopt expeditiously the 

terrorism re-insurance backstop law. As a result, we may want to 

consider how we could improve H.R. 5637 to enhance the Federal 

Government’s understanding of the business of insurance. 

In closing, Mr. Chairman, I commend you for continuing to focus 

our committee on insurance regulation. These are important discussions for us to have, and important matters for us to resolve. 

Chairman BAKER. I thank the gentleman for his statement. 

Ms. Brown-Waite? 

Ms. BROWN-WAITE. Thank you very much. I certainly want to 

thank you, Mr. Chairman, for holding this hearing today and look 

forward to hearing from the witnesses who are on the panels as 

well. 

4

This subcommittee has been engaged in overall insurance reform 

for several years, and in this endeavor, there are dozens of issues 

that Congress must consider. 

I have introduced H.R. 5637, the Non-Admitted and Re-Insurance Reform Act, will provide solutions to two aspects of that reform. 

The bill does have bipartisan support. Today, the regulation in 

the surplus lines market is fragmented and cumbersome. Insurers 

and brokers who want to provide insurance across State lines are 

subject to a myriad of different State tax and licensing requirements. 

For instance, if a company in Florida was to transport a product, 

say parts for a space shuttle, to Houston, Texas, the non-admitted 

insurance company they use must comply with the regulations of 

at least five different States. 

Oftentimes, these regulations will conflict, making it impossible 

with today’s complex situation out there, for one company to comply with all of them. 

This situation leaves policyholders and underinsured individuals 

with little choice of providers. 

Moreover, most of the companies that purchase insurance in the 

non-admitted markets do so every day. These sophisticated commercial entities have educated risk advisors on staff with a thorough knowledge of the market and their risk exposure. 

Yet, in most States, these companies are required to shop around 

the admitted market and be denied several times for coverage that 

they know they cannot get, so they should not have to make those 

phone calls, and only then are they permitted to shop in the surplus lines market. 

This practice is needless and cumbersome, and only adds to the 

cost to the policyholder. 

On another front, in the re-insurance market, some State regulators are taking it upon themselves to throw out arbitration agreements between re-insurance providers and the primary carriers. 

These are contractual agreements decided upon by sophisticated 

parties on both sides of the transaction to settle disputes without 

tying up courts. 

If these agreements are valid in a State that is accredited by 

NAIC, they should be valid in all accredited States. Accordingly, 

H.R. 5637 specifies that only the tax policies and licensing regulations of the State in which the policyholder is domiciled govern that 

transaction. States may still enter into tax allocation and remittance agreements with other States, but this bill specifies which 

law will take precedence, thus, taking the guesswork out of the 

process. 

Insurance providers, therefore, only need to comply with the law 

of the policyholder’s State in one transaction. 

The bill also requires States within 3 years of passage to participate in the National Association of Insurance Commissioners’ National Insurance Producers Database, and to adopt regulations 

under NAIC’s Non-Admitted Insurance Model Act. 

It also allows sophisticated commercial entities direct access to 

the surplus lines market, as well as prohibiting States from voiding 

5

established contractual arbitration agreements between re-insurers 

and primary companies. 

Obtaining insurance for unique or high risk products in the nonadmitted market already has its own obstacles, and a quagmire of 

inefficient State rules certainly does not help. 

With re-insurance rates at an alarming rate, companies should 

be encouraged to stay out of the courts and follow their own arbitration agreements. 

I think that the bill provides some commonsense solutions to the 

non-admitted and re-insurance market, and that it enjoys bipartisan support. 

I certainly thank the chairman for holding this hearing today as 

well as the participants in the panel. 

Chairman BAKER. I thank the gentlelady for her statement. Mr. 

Moore? 

Mr. MOORE. Thank you, Mr. Chairman. I would like to thank 

Chairman Baker for holding today’s hearing on commercial insurance modernization, and look forward to hearing the witnesses’ testimony on the specific reforms included in H.R. 5637, the Non-Admitted and Re-Insurance Reform Act. 

I would also like to welcome Dick Bouhan from the National Association of Professional Surplus Lines Offices, which is 

headquartered across the State line from my district in Kansas 

City, Missouri, and also David Gates, general counsel of Generali 

USA, also based in Kansas City, Missouri. 

Congresswoman Ginny Brown-Waite and I introduced H.R. 5637 

on Monday with strong bipartisan support, and strong support on 

this committee; 14 of the 16 co-sponsors are members of the Financial Services Committee, both Republicans and Democrats. 

The bill that is under discussion today would significantly improve the regulation of two specific areas in the commercial insurance marketplace, namely, surplus lines and re-insurance transactions. 

This could sometimes, with directly conflicting State laws in the 

surplus lines market, create unnecessary inefficiencies and make it 

difficult, if not impossible in some cases, for producers and others 

to comply with their legal duties. 

In the case of State premium tax payments in particular, the 

patchwork of 55 different laws in the areas of allocation formulas, 

tax due dates, and competing tax authorities, make little sense for 

the producers who place multi-state policies and the businesses 

that are seeking multi-state coverage. 

In most States, surplus lines premium taxes are levied at the 

State level, but at least in one State, Kentucky, as Mr. Sinder’s testimony notes, those taxes are actually levied at the city and county 

level as well, creating a situation in which one State alone has several hundred different taxing authorities. 

In addition, 11 States and the District of Columbia have no laws 

stipulating how or even whether surplus lines taxes should be allocated to other States if there is a risk insured in those States. 

Testifying last year in front of the subcommittee on behalf of 

NAIC, one insurance commissioner acknowledged the need for reform of surplus lines regulation, specifically with regard to the way 

premium tax allocation is handled. 

6

According to Commissioner Diane Koken, ‘‘Either Federal legislation or another alternative such as interstate compact may be 

needed at some point to resolve conflicting State laws regulating 

multi-state transactions. 

‘‘The area where this will most likely be necessary is surplus 

lines premium tax allocation. 

‘‘Federal legislation might also be one option to consider to enable multi-state property risks to access surplus lines coverage in 

their home States under a single policy subject to a single set of 

requirements.’’ 

It is important to note that H.R. 5637 does allow States to enter 

into a compact to establish an universal allocation formula for premium tax revenues and by limiting collection of surplus lines premium tax revenues to the home State of an insured business, this 

legislation has a built-in incentive for States to finally create an efficient allocation method. 

No State has an incentive under this bill to lose premium tax 

revenue. 

Additionally, H.R. 5637 includes necessary reforms in the area of 

re-insurance. This legislation would prohibit the extraterritorial application of State laws, and allow insurers and re-insurers to resolve disputes pursuant to contractual arbitration clauses. This reform is long overdue and is necessary to restore regulatory certainty to the re-insurance market. 

Other members of the subcommittee, and possibly a few of our 

witnesses, may want to discuss the broader issue of how insurance 

is regulated in this country. I think that is a reasonable and necessary discussion to have, and I know that this is something the 

subcommittee and full committee have examined, and will continue 

to examine, but for now, I look forward to considering legislation 

that is narrowly focused on addressing problems in two specific 

areas of the commercial insurance marketplace. 

I thank you, Mr. Chairman, and I look forward to hearing from 

our witnesses today. Thank you. 

Chairman BAKER. I thank the gentleman. Mr. Royce? 

Mr. ROYCE. Thank you, Chairman Baker. Thank you for holding 

this hearing on commercial insurance modernization. It is very 

timely. I certainly want to thank Congresswoman Ginny BrownWaite and Congressman Dennis Moore for introducing the Non-Admitted and Re-Insurance Reform Act of 2006. 

I must say that I’m very encouraged that this committee is considering legislation to improve the regulatory environment facing 

insurance consumers and underwriters, because I think there is 

widespread agreement now that our Nation’s insurance regulatory 

system impedes the ability of insurance consumers to have optimal 

coverage at the lowest possible cost. 

I think if we go back to 1868, there was a misguided Supreme 

Court ruling at that time that insurance was not considered an article of commerce and therefore, not subject to the interstate commerce clause, but subsequent to that, of course, Paul v. Virginia 

was later overturned by a Supreme Court decision where Congress 

decided to leave insurance regulation solely in the hands of State 

legislators. We did that through the passage of McCarrin-Ferguson 

back in 1945. 

7

Today, I think it is clear to many on this committee that the insurance marketplace is not only national in scope, but frankly, 

global in nature. The legislation offered here by Representatives 

Ginny Brown-Waite and Dennis Moore is prima facia evidence that 

Congress needs to play a role to improve efficiency in insurance 

regulation. 

While I applaud the efforts of my colleagues to improve the reinsurance sectors here, I also believe that Congress should work to 

help all consumers of insurance. I believe individuals, not just businesses, would greatly benefit from more competition and choice 

among insurance providers. 

In addition to considering this legislation, I hope that this committee, and the Members here, will consider the creation of an optional Federal charter for insurers. 

I thank you again for your leadership on all of this, Mr. Baker, 

and I yield back, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. Mr. Capuano, did you 

have a statement? Any member? Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. I really appreciate your 

holding this hearing. I appreciate your commitment to modernizing 

America’s insurance market to make the industry more competitive 

and deliver better rates and customer service to consumers. 

I was happy to help write the original NARAB legislation in 1999 

that became part of the Gramm-Leach-Bliley Act. NARAB responded to the simple problem that insurance agents were spending more time doing paperwork than meeting with their clients. 

Every State demanded different rules and regulations just to do 

business. Some of those States required paper clips. Some required 

staples. Some required pink paper. Some required white. 

It just wasn’t working very well for the consumers, the people 

who had an insurance agent who would move to a new home, and 

that meant they would lose the services of a trusted independent 

agent that they had worked with for years. Fifty different States 

found 50 different ways to make money from the agents who were 

trying to just take care of their customers, and it really wasn’t fair. 

NARAB became law in 2001 when 29 States signed onto the reciprocity between their agents. It has reduced but not eliminated the 

burdens on our agents. 

Four of the largest States have not implemented NARAB, and 

some of the others have adopted requirements that erode reciprocity and move away from the uniformity that was desired. 

I believe that the time has come for this committee to re-examine 

NARAB and see what can be done to fulfill that promise, when we 

have all States but four being a part of NARAB, it is time for us 

to take a look at what Congress can do to bring all States together. 

I appreciate the fact that you are holding this hearing and I look 

forward to the comments of the witnesses on this issue. 

Chairman BAKER. I thank the gentlelady for her statement. 

There being no further members with opening statements, I want 

to welcome each of our witnesses to the hearing. As is the usual 

practice, we request that you make your oral statement in 5 minutes or less. Your full written statement will be made part of the 

record. We do appreciate your courtesy in participating. 

8

I am told that the votes are in the near term, and when we do 

get to that point, I will proceed down to about 5 minutes left, then 

recess. We will probably be gone about 20 minutes, just to give you 

some idea of the state of play as best as we know it. 

It is my pleasure to welcome Mr. Tom Minkler, president, ClarkMortenson Agency, and chairman of the Government Affairs Committee, Independent Insurance Agents and Brokers. 

Please proceed, sir, at your own leisure. 

STATEMENT OF TOM MINKLER, PRESIDENT, CLARKMORTENSON AGENCY AND CHAIRMAN, GOVERNMENT AFFAIRS COMMITTEE, INDEPENDENT INSURANCE AGENTS 

AND BROKERS OF AMERICA 

Mr. MINKLER. Thank you and good afternoon, Chairman Baker, 

Rranking Member Kanjorski, and members of the subcommittee. 

My name is Tom Minkler and I am pleased to be here today on 

behalf of the Independent Insurance Agents and Brokers of America, and to provide my association’s perspective on the non-admitted insurer/re-insurer legislation that is the focus of this hearing. 

I am currently chairman of the IIABA Government Affairs Committee. IIABA is the Nation’s oldest and largest trade organization 

of independent insurance agents and brokers. We represent a nationwide network of more than 300,000 agents and brokers and employees. 

I am also president of the Clark Mortenson Agency, a New 

Hampshire based independent insurance agency that offers a broad 

array of insurance products to commercial and personal consumers 

in New England and beyond. Clark Mortenson writes $36 million of premium in eight office locations in two States. I am licensed in 14 States, and approximately 15 to 20 percent of my business is in the non-admitted or 

what is called the surplus lines market. 

Therefore, I am very familiar with the hodgepodge of varying 

State requirements in this market that provide little consumer 

benefit. 

Non-admitted or surplus lines insurance provides coverage for 

unique or hard-to-place commercial property and casualty risks. By 

this, I mean coverage that is unavailable or unaffordable in the traditional or admitted insurance market, and is sold by insurers that 

are not admitted or licensed to do business in the particular State 

where the policy is located. 

This market is often described as a safety valve for the traditional insurance market. It serves an essential purpose to provide 

insurance to many larger commercial entities and is quite substantial. 

For example, gross premium volume generated by the total surplus lines industry was approximately $33 billion in 2004. 

I have submitted a more formal statement for the record that 

lays out many of the problems with the current State-by-State regulations of the surplus lines market and how it negatively impacts 

consumers. 

Today, I would like to give you some real world examples of problems that I have experienced writing coverage for commercial customers. 

9

For example, a business client has locations in Massachusetts, 

New Hampshire, and Vermont that require insurance coverage 

through the surplus lines market; the process to obtain the proper 

coverage would be very different, even though the client’s physical 

locations were within a 100 mile radius of each other. 

In Massachusetts, we, the broker and the client, would have to 

provide certified evidence that there were no companies willing to 

provide coverage in the standard market, while in New Hampshire 

and Vermont, there is no standard due diligence step. 

The filing process will be a manual process in two of those 

States, with Vermont requiring two separate filings to two different 

departments within that State. In New Hampshire, the filing is online. 

The actual tax rate is different for each State: New Hampshire 

at 2 percent; Vermont at 3 percent; and Massachusetts at 4 percent. 

Additionally, two States require the individual broker, myself, to 

be licensed, while in the third State, the corporation is the licensed 

entity. 

I have just described the scenario for a business owner with locations in three States; imagine if they had locations in 10, 20, or 

even 50 States. 

This brings me to the legislation before us. The Non-Admitted Insurance and Re-Insurance Reform Act solves many of the problems 

that I have just discussed. The legislation effectively streamlines 

surplus lines regulation while making the insured’s home State the 

source of regulation for individual surplus lines transactions. 

It also would streamline access to the surplus lines market by 

waiving State due diligence requirements for the sophisticated 

commercial entities that constitute a significant portion of policyholders in this marketplace. 

It does not deprive any State with a connection to the risk being 

insured from its share of premium taxes. What it does allow is the 

broker to pay the taxes on a multi-state risk only to the policyholder’s home State and leaves it to the State to work out the appropriate allocation. 

IIABA supports the specific reforms included in this bill. Most 

importantly, we strongly believe that the overall approach taken by 

this bill is the right way to go. 

This is evident by the strong bipartisan support and consensus 

within the insurance industry. The legislation preserves the State 

system insurance regulation while achieving much needed uniformity rather than choosing more extreme reforms such as the 

creation of a Federal regulator. 

IIABA believes the best use of Federal legislative authority is to 

help make the existing system more efficient and uniform through 

a mix of national standards with State enforcement and uniformity 

achieved through both incentives and preemptive of certain State 

laws. 

The SMART draft of 2 years ago would have tackled most aspects of the insurance regulatory system all at once. In contrast, 

this legislation would single out two areas, surplus lines regulation 

and re-insurance supervision, where there is general consensus for 

early action. 

10

We strongly support the step-by-step approach to achieving reform. 

In conclusion, IIABA applauds the sponsors of this bill, and we 

urge the subcommittee to promptly act on the Non-Admitted Insurance and Re-Insurance Reform Act of 2006. 

If there is one message that we would like to leave with the subcommittee, it is that we believe this bill is an excellent example of 

a pragmatic reform that utilizes targeted Federal action to improve 

the State-based regulatory system. 

IIABA is hopeful that H.R. 5637 will be an important first step 

in a process that will result in additional reforms to State insurance regulation, particularly regulation of producer and insurance 

company licensing. 

Thank you again for the opportunity to testify today. 

[The prepared statement of Mr. Minkler can be found on page 61 

of the appendix.] 

Chairman BAKER. Thank you for your participation. 

Our next witness is Mr. Scott A. Sinder of The Scott Group, appearing here today on behalf of the Council of Insurance Agents & 

Brokers. Welcome, Mr. Sinder. 

STATEMENT OF SCOTT A. SINDER, ESQ., THE SCOTT GROUP, 

ON BEHALF OF THE COUNCIL OF INSURANCE AGENTS AND 

BROKERS 

Mr. SINDER. Thank you, Mr. Chairman, Ranking Member Kanjorski, and members of the subcommittee. Thank you for the opportunity to testify today. Thank you, Congresswoman Brown-Waite 

and Congressman Moore for introducing this legislation. 

I am testifying today as the general counsel for the Council of Insurance Agents & Brokers. The Council, as many of you know, represents the Nation’s top 1 percent of insurance brokerage firms. 

There are only 250 members, but collectively, they sell or place 

over 90 percent of all commercial insurance that is sold in this 

country. 

The Council has been seeking this type of reform for decades. I 

want to emphasize one thing at the outset, and picking up where 

Mr. Minkler left off, this bill is not a de-regulation bill. This bill 

would simply consolidate regulation so that any multi-state transaction is subject to one, and only one, set of rules. 

In the current environment, if you are a client who has exposures in all 55 jurisdictions regulated in this country, you are subject to 55 different sets of rules. As Congressman Moore pointed 

out, in Kentucky, there are dozens more when you add the county 

and municipality premium tax provisions. 

The home State approach that is taken under this bill is completely appropriate. It is appropriate for this reason. If you think 

about surplus lines insurance, it is insurance that is placed in a 

non-compulsory manner. No one is required to buy it. The commercial insured’s who do buy it buy it to protect their treasury. They 

are not protecting a piece of property in any given location. That 

piece of property is what secures their entitlement to monies 

should the property be damaged. 

There are many different ways that they can insure that risk: 

they can self insure; they can create a captive; they can buy insurVerDate 0ct 09 2002 16:59 Jan 16, 2007 Jkt 031530 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 F:\DOCS\31530.TXT HFIN PsN: TERRIE
11

ance in the mini-market; or they can do so in the surplus lines 

market. 

What they are protecting is their corporate treasury. That treasury is located in the State which is their principal place of business. The regulator in that State, therefore, has the greatest nexus 

to that consumer. 

There are five basic areas of surplus lines regulation in every 

State. The basics of these rules in all States are almost the same. 

It is the details that vary in a way that makes it very cumbersome. 

On these charts on the right, for example, is a policy that is for 

a national chain drug store retailer. It covers exposures in 17 

States. Each State requires that on the very first page of the policy 

they put a disclosure notice. 

The disclosure notice says that this policy is being sold by a carrier that is not admitted in the State and they are not protected 

by the guarantee fund of this State. They have to do that 17 times 

for each and every State in which the policy covers business. 

They have to file premium tax statements in each and every 

State where the policy covers an exposure. This is a set of the premium tax filings for this client. This is for 16 States. 

This client has 40 surplus lines policies. This is the filing, the 

premium tax filing, for one of those policies in 17 States. The 

broker who placed this business, Aon, has to do this 40 times for 

each of the surplus lines products covered in this program. 

In addition to premium tax payments, which you have heard a 

lot about, the declination rules are when you are permitted to access the marketplace; when you can go to the surplus lines marketplace rather than place through an admitted insurer. 

Every State has rules. All the rules basically say you are permitted to do so when you can demonstrate that you cannot place 

this risk in the admitted marketplace. 

The problem is papering that. Some States require five affidavits. 

Some States require three formal declinations in letter form. Other 

States require you just to on your own basis, of your own knowledge, make a determination of whether or not it is available. 

It is not satisfying the substance of the requirement that is difficult; it is satisfying the procedural one. This carries forward the 

carrier eligibility, broker licensing, and the other filings, the administrative filings, that are required in each State. 

All of this legislation would do primarily—there are two exceptions—is require that each of those transactions would be subject 

just to that one single State of rules. 

The two exceptions are these. One is the eligible carrier provisions that are included in the bill. Those provisions would set a national standard that would pick up on the NAIC’s model act and 

say that everyone would use the same basic determination factors 

for determining whether or not a carrier is eligible to receive that 

business in the surplus lines marketplace. 

Today, every State has a variant of these rules. To my knowledge, there is almost no carrier that is approved in all 55 jurisdictions on the surplus lines list. One reason is that most of these carriers are admitted carriers in at least one State, which takes them 

out of the surplus lines marketplace in that State and makes them 

12

ineligible to receive a surplus lines placement for exposures insured 

in that State. 

The bill would rectify that through the home State rule provision. It also would establish a national standard picking up on this 

NAIC rule so that everyone would apply the same basic rules. 

Today, 32 States already have some variant of that model in place. 

The final exception is the automatic export exception, which 

again would allow more sophisticated commercial consumers to 

more immediately access the surplus lines marketplace without 

complying with the declination rules. 

Mr. Chairman and members of the committee, thank you for the 

opportunity to testify today. Of course, I would be happy to answer 

any questions you may have. Thank you. 

[The prepared statement of Mr. Sinder can be found on page 81 

of the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Mr. Bernd G. Heinze, executive director of 

the American Association of Managing General Agents. Welcome. 

STATEMENT OF BERND G. HEINZE, ESQ., EXECUTIVE DIRECTOR, AMERICAN ASSOCIATION OF MANAGING GENERAL 

AGENTS 

Mr. HEINZE. Thank you very much, Mr. Chairman, Ranking 

Member Kanjorski, Mr. Moore, Ms. Brown-Waite, and members of 

the subcommittee. First and foremost, Mr. Chairman, the American Association of Managing General Agents would like to commend you for your leadership of the subcommittee, and thank the 

sponsors of H.R. 5637. 

This is an absolutely vital and necessary modernization reform 

effort that will keep the surplus lines industry where it needs to 

be and move it forward with greater protections to the consumers 

and those people who depend upon our marketplace for security 

and protection. 

We commend the efforts of this committee and are very anxious 

to work with you and your staff members to move this effort forward. 

To let you know what we have done so far, this evening, we will 

be sending a blast e-mail out to all of our members encouraging 

them to support this legislation, and also to advise their local elected representatives to send this information on to their retail producers. 

We have sent information on to the National Association of Insurance Commissioners to advise the Producer Licensing and Modernization Committee and the Surplus Lines Taskforce how vital 

and important the Non-Admitted and Re-Insurance Reform Act is 

to our industry. 

We are also pleased to be working with Mr. Minkler, Mr. 

Rusbuldt, Mr. Symington, and our colleagues at the Big I, Mr. 

Bouhan and our colleagues at the National Association of Professional Surplus Lines organizations in support of this effort. 

We have also sent information on to the Financial Services Authority in London and all of our Lloyd’s of London and market 

members, the syndicate members and underwriters there, letting 

them know how important this effort is, and we are also working 

13

with NCOIL and the American Legislative Exchange Council to encourage them, from a State aspect, to support this effort as well. 

We are very gratified to see bipartisan support of this bill and 

hope that our continued efforts in conjunction with those of our colleagues will help move this matter forward as productively as we 

can. 

Mr. Chairman, we live in very uncertain times, and the American Association of Managing General Agents believes that this bill 

provides pragmatic reform and modernization of the surplus lines 

and re-insurance market to bring needed uniformity and consistency of a State-based regulatory framework while affording America’s businesses and private consumers protection and access to stable markets to protect their risk exposures. 

It will streamline compliance requirements while at the same 

time enhance efficiencies and improve on processing components in 

the overall insurance transaction. 

Some of the key benefits and components are flexibility and the 

ability to respond quickly and adapt to changing market needs and 

those of our consumers and policyholders. 

This bill will allow that to be enhanced and furthered in a great 

degree of speed. 

The AAMGA is the Nation’s largest dedicated trade association. 

Since 1926, we have been serving the surplus lines and wholesale 

insurance distribution network. Our members write in excess of 

$23.9 billion of premium each year in all 50 States. Roughly, that 

translates into approximately 72 percent of all the surplus lines 

premium that is written in the United States today. 

We feel that we have a great degree of opportunity to work with 

you, Mr. Chairman, to continue the focus to modernize commercial 

insurance markets and thereby implement procedures and regulations that will enhance uniformity and competition while maintaining the State-based system of insurance regulation and the surplus 

lines market’s fundamental precept of freedom from rate and form 

to benefit consumers and businesses in the protection of their risk 

exposures. 

There are certain fundamental aspects in everyday practice and 

operation that this bill will help our members and the surplus lines 

industry complete. 

That would primarily be to enhance the speed to market of new 

and needed insurance products and services. 

Mr. Chairman, you mentioned the advent of the hurricanes last 

year, the fires in California and Texas, all those things as Ms. 

Brown-Waite mentioned with the space shuttle and transactions 

that occur in the State of Florida, where the admitted markets may 

not be as interested in coming into the market right away with 

products and services. 

The surplus lines market can afford great opportunities to respond to those needs. 

This bill will also stimulate open competition in the creation of 

innovative risk products, specifically addressing or manuscripted to 

the needs of the consumer, establish and mandate an uniform simple tax allocation formula and system for multi-state risks, making 

the payment of proportional tax more equitable and efficient. 

14

It will facilitate uniform and consistent compliance requirements 

for surplus lines’ agents and brokers now that the insured’s home 

State will have authority and regulatory primacy, and will encourage individual initiatives towards sustained growth to protect increased risk exposures. 

Along with our independent claim professional members and our 

colleagues at the American Association of Independent Claim Professionals, who also see the need for strong reform efforts to break 

down antiquated State barriers, we are very encouraged by this 

legislation. 

In conclusion, Mr. Chairman, I would just like to state that we 

all know that insurance is the DNA of capitalism and free market 

entrepreneurship. It provides the ability of varying needs of security from risk and stimulates the growth of business opportunities, 

provides incentives for research and development that help create 

jobs and positive returns on investment and equity. 

For the public and the private consumer, H.R. 5637 will afford 

continuity and recovery from fortuitous events based upon terms 

and conditions of coverage, and will enhance the surplus lines market overall. 

Thank you again very much, Mr. Chairman, for giving us the opportunity to testify today. We will also be very happy to answer 

any questions you have and to continue our work with your committee and staff as we move this legislation forward. 

[The prepared statement of Mr. Heinze can be found on page 56 

of the appendix.] 

Chairman BAKER. Thank you, sir. We appreciate that willingness 

to be of assistance. 

Ms. Ochenkowski, if I may suggest that the committee now recess so that you do not have to rush through your statement. We 

are down to just about 5 minutes on the vote. I expect we would 

recess for about 20 minutes and them come back and pick up 

where we have left off. 

The committee stands in recess. 

[Brief recess] 

Chairman BAKER. I would like to reconvene this meeting of the 

subcommittee and express appreciation to all of our participants. 

This will be the last break for the afternoon. I am sure that members will trickle back in as we proceed. 

In order to make the best use of time, I would like to go ahead 

and call on Ms. Janice Ochenkowski, senior vice president, Risk 

Management, Jones Lang LaSalle, appearing today on behalf of the 

Risk and Insurance Management Society. 

Welcome. 

STATEMENT OF JANET OCHENKOWSKI, SENIOR VICE PRESIDENT, RISK MANAGEMENT, JONES LANG LASALLE, ON BEHALF OF RISK AND INSURANCE MANAGEMENT SOCIETY 

Ms. OCHENKOWSKI. My name is Janice Ochenkowski, and I am 

the vice president of the Risk and Insurance Management Society, 

known as RIMS, which is the country’s largest professional risk 

management association. 

I am also the senior vice president and director of Global Risk 

Management for Jones Lang LaSalle, which is a commercial global 

15

real estate and financial services company located in Chicago, Illinois. 

I appreciate the opportunity to appear before you today on behalf 

of RIMS to speak about the issue of modernization of commercial 

insurance. 

RIMS is in a very unique position to participate in this hearing 

because we represent the commercial consumers of insurance. Our 

members, roughly 4,000 companies, represent corporations, public 

entities, and municipalities who buy insurance. 

We have a strong view on how the process should proceed, and 

we support the modernization of commercial insurance in this bill. 

Operating on a global basis as the primary insurance buyer for 

Jones Lang LaSalle, I see every day the numerous inefficiencies in 

the current State-based system. 

Commercial consumers should not have to deal with this hobbled 

system. We should use the proposals within this bill to address current inefficiencies. 

I applaud the members of the subcommittee for presenting us 

with this Act, which we believe is a meaningful blueprint for reform of the surplus lines insurance. 

RIMS believes that the Non-Admitted and Re-Insurance Reform 

Act of 2006 is necessary to address the regulatory problems that 

are causing disruptions in the surplus lines insurance market. 

My colleagues on the panel have discussed a number of them 

with you already. However, I can explain from the purchaser’s perspective one additional aspect, the manner in which applicable 

taxes are sent to the various States. 

As previously noted, there are three different mechanisms. In 

some States, the broker is able to calculate and transmit taxes on 

my behalf. In other States, the broker is able to calculate but may 

not transmit the taxes, and in a third grouping of States, I must 

calculate and transmit the taxes. 

The way the system works is that we collect premiums. My company is a property manager and a licensed pension advisor. Our responsibility is to purchase insurance on behalf of our client properties, more than 400 buildings in over 30 States. 

We collect the premium from each property, and because of certain ERISA provisions, we are not able to co-mingle those 400 

checks into a single account, but must send out 400 checks to our 

insurance broker. 

The broker separates the premium from the tax, pays those taxes 

which it can, and returns to us the funds for those taxes which we 

must pay ourselves, with a list of the States for which we must do 

the calculations. 

We then must issue a third set of checks in order to transmit the 

payments to the States. This is the same money that has gone back 

and forth 3 times before we can finally pay our tax bill. 

There has to be a better way to do this. We believe that many 

States have also implemented the licensing rules that discriminate 

against out-of-State agents and brokers, and require our brokers to 

pay local brokers to stamp approval on an already negotiated insurance program. 

16

In RIMS’ perspective, in the free, open, and transparent market, 

risk managers will be able to negotiate the best rates, best terms, 

and best conditions for the coverage needed by their companies. 

Currently, the surplus lines policy rates and forms are not regulated by the States, and we think it is prudent to include freedom 

from rate reform and regulation for surplus lines policies in a Federal statute governing the commercial property and casualty insurance, because we think it would promote a more competitive marketplace. 

Some States require that before an insurance buyer can obtain 

insurance, a diligent search of authorized insurers must be made. 

This slows the procurement process and at times adds costs that 

are eventually passed on to purchasers. RIMS believes that this 

process should be streamlined. 

The Non-Admitted and Re-Insurance Reform Act of 2006 provides answers to problems commercial insurance buyers are experiencing in obtaining surplus lines insurance by placing the authority in the home State of the insured. We support this and believe 

it will allow sophisticated commercial policyholders to proceed with 

the purchase of insurance and maintenance of the risks in an appropriate manner. 

RIMS would also offer to provide the subcommittee with some 

recommendations improving the exemption provision of this bill. 

We strongly support the Non-Admitted and Re-Insurance Reform 

Act of 2006, and look forward to working with your committee and 

Congress on this important piece of legislation. 

We thank you for your time, your interest, and your leadership 

in this matter. Thank you. 

[The prepared statement of Ms. Ochenkowski can be found on 

page 76 of the appendix.] 

Chairman BAKER. Thank you very much. 

Mr. Sinder, I would like to start, since you brought the document 

trail there, there is an ad on television now where the guys are all 

sitting around the table trying to figure out how to save money, 

and somebody says what about all this and what does it cost, millions. 

Without giving product attribution, what does all that cost? Is 

there a way to assign the duplicative regulatory compliance, not in 

a dollar amount, but at some percentage of costs allocable to all of 

that? 

Mr. SINDER. I am going to divide it into several categories of 

costs. There are raw administrative costs. There is paper. Not to 

make light of it, but to do this 40 times for the 40 different policies 

is enormously expensive, as Ms. Ochenkowski said. 

Chairman BAKER. Ochenkowski. 

Mr. SINDER. Ochenkowski. I apologize. 

Chairman BAKER. Don’t worry. I had to be coached a little bit 

myself. I am not bragging or anything. 

Mr. SINDER. I think you also lose your speed of access to this 

marketplace, which means it is not as utilized as much as it should 

be, and even when it is, I think it means that you have lag time 

in getting the policies to the consumers who most need them, so 

you lose what you are supposed to be getting in terms of the insurance coverage. 

17

I think you can sort of divide it into those two groups. 

Chairman BAKER. It would seem to me in a technology-driven 

world, paper registration—I am a big advocate in the SEC world 

of business reporting language, which is a technology based reporting methodology for financial institutions and hopefully for all public operating companies—to have that kind of mail activity going 

on has to have a significant effect on the bottom line of the companies that are required to file. 

If it is possible to achieve some guesstimate of what that relates 

to, it would be helpful for the committee to get its hands on some 

substantive dollar figure or percentage that might be out there in 

the industry to help us get ahold of it. 

Mr. SINDER. Mr. Chairman, we can poll our surplus lines placing 

brokers and get that information and submit it to you after the 

hearing. 

Chairman BAKER. That would be terrific. 

I might note that there have been some who suggest that we 

should wait on the coalitions of State actions, compacts. I have had 

various meetings with the NAIC over the years in getting new 

timelines for reform. 

This type of what appears to be generally agreed upon, consulted 

with all stakeholders’ type of approach, still has not been done as 

a result of that State coalitional approach. 

My point being if this works out and appears in operation to be 

as successful as all of us hope, is not there some legitimacy for—

I will go back to an earlier proposal I had called the SMART Act, 

which was trying to move product approvals to the national level, 

keeping consumer protections at the State level. It turned out to 

be the not-so-smart approach. 

Is this a test program for seeing how we can get a more nationalized product approval system in place? All of the arguments I have 

heard previously against the SMART Act would seem to be applicable here. 

What am I missing? What is so unique? Is it only that this does 

not apply to mandatory coverage, or are there other reasons why 

this is acceptable generally to stakeholders, where a similar approach might not be acceptable in another direction? 

Mr. SINDER. Mr. Chairman, if I may. One difference between this 

and some of the other provisions in the SMART Act, which doesn’t 

speak one way or the other about those provisions, is you do not 

need any Federal standards here. 

By virtue of the fact that you are really going to rely on the home 

State regulator, you are not really affecting those rules as they are 

in place, so it is very easy to effectuate these provisions. 

We have been supporters of the SMART Act and all of its provisions. We remain supporters of them. 

I think this is even easier to effectuate than many of the other 

provisions. 

Chairman BAKER. If this is effectively implemented, does that 

give comfort that the SMART Act provisions might be more palatable going forward, or is it in any way related? 

Mr. MINKLER. Mr. Chairman, I would say from our position that 

this is actually the beginning of the expansion of SMART, even 

though it has taken two pieces of that. This is exactly the model 

18

that we would look forward to in other areas, in license reform, reciprocity from States, those types of things. 

We think that this is the perfect solution and is the perfect 

model for the other tenants of SMART. 

Chairman BAKER. Any counter opinion to that? 

Mr. HEINZE. No counter opinion, Mr. Chairman, but from our 

perspective, we agree that breaking up into the various increments 

that SMART had contained and going after matters like this is the 

appropriate time. It is the right policy. It is the right legislation to 

move this matter forward. 

I once had a judge tell me in a very adversarial process back in 

my lawyer days when we were contrasting each other with briefs 

and motions, he said Mr. Heinze, I wonder how many more trees 

must die so that this litigation may live. This is absolutely unnecessary. 

We need to afford the consumers, we need to afford this industry, 

the opportunity to access the surplus lines market easily, to afford 

protections of security, and to come into where risk exposures now 

are either self-insured or not insured, as well, as a result of this 

type of regulatory morass, which we believe H.R. 5637 will help 

correct. 

Chairman BAKER. Thank you. I think our past actions up here 

have been to go out and buy fertilizer to put on the trees. I don’t 

know how we can make it more complex. 

Mr. Bachus, did you have questions? 

Mr. BACHUS. I would like the panel to elaborate about the importance of re-insurance and non-admitted insurance, particularly in 

light of 9/11 and the hurricanes that have hit our coasts, and why 

this legislation is particularly critical at this junction. 

Ms. OCHENKOWSKI. I can answer on behalf of the buyers of insurance. Many of the larger, more complicated risks are risks that the 

traditional standard insurance marketplace is not willing to cover. 

We must go to the surplus lines market in order to adequately 

protect those risks. Being able to do so in an efficient, economical 

way is in the best interest of us as consumers, and it keeps the 

process moving in a smoother fashion. 

Mr. SINDER. As I understood the question in terms of the surplus 

lines piece, I think it is vital for natural catastrophe exposures and 

tree exposures, even for non-complex commercial risks like homes, 

more and more on the Gulf Coast, once you get above the flood program limits, the rest of the coverage that is needed for homes is 

provided through the surplus lines marketplace in many cases. 

This bill, for a homeowner in Alabama, would have no direct effect, because that policy placement would continue to be regulated 

by the Alabama rules. 

What the program really does do, what the bill would do in the 

surplus lines marketplace is it would bolster the surplus lines marketplace overall, and by making it stronger, you would expand the 

capacity. That capacity would be available not just for the very 

complex risks, as was discussed, but also for others who need access for the more unusual type risk, like the flood exposures. 

Mr. HEINZE. Mr. Bachus, Mr. Nutter from the Re-Insurance Association of America is on the next panel after us, and I am sure 

he will have some information for the subcommittee with regard to 

19

re-insurance aspects from the surplus lines initiative and from 

what our members see, this bill will preclude the extraterritorial 

application of State laws to preserve the certainty of re-insurance 

contracts which are so vital now in this risk economy and environment that we live in. 

We believe Mr. Nutter’s comments will add additional information for the record. 

Mr. BACHUS. I appreciate that. We had hearings back on June 

4th, 11th, and 18th, of 2002. There was consensus then that we 

needed this legislation. I think that in light of recent events, it is 

even more critical. 

I do see us getting to the point of where, without this insurance, 

without this legislation, we will be denied coverage just in the 

standard markets moving forward. 

I think it is certainly beyond the critical point. I do think, as you 

say, the States’ willingness to assert extraterritorial jurisdiction is 

really the essence of the problem. 

I would praise Chairman Baker and Congresswoman Ginny 

Brown-Waite for bringing forth this legislation, which has bipartisan support. I would think that the leadership would give it a 

strong priority in moving it over to the Senate. 

I have no further questions, unless there is anything that you, 

as panelists, would like to tell us, other than your testimony, something that has come to light. 

Mr. MINKLER. At the risk of being redundant with my colleagues, 

I think that with this legislation and the issues that you have addressed, not necessarily in the main insurance level but in the secondary market, the surplus market, I think the efficiencies that 

would be provided through this legislation for the consumer to get 

to this marketplace and expand this marketplace would serve all 

of us well, including the consumers. 

Mr. BACHUS. All of these costs are passed on to the consumer, 

ultimately. We are concerned because of rising rates, and because 

of rising risks. It is in need of some relief. 

Chairman BAKER. I thank the gentleman for his comments. Ms. 

Ginny Brown-Waite. 

Ms. BROWN-WAITE. Thank you very much. As you can tell, we all 

should be much thinner than we are because we have run from one 

meeting to the next to vote. 

I just have a question, and that is do those who write in the nonadmitted market tend to focus on a region or a type of product or 

both? 

Mr. MINKLER. Speaking from the practitioner’s standpoint, the 

answer is yes to all the above. There are a variety of appetites, if 

you will, at the carrier level, both geographically, and for the class 

and type of risk involved. 

There are some insurance companies that focus on certain classes to the exclusion of others. To a great extent, there is an appetite 

that goes across the board and across regions, too. 

It is kind of a convoluted answer, but it is truly a mixed bag, if 

you will. 

Mr. HEINZE. Ms. Brown-Waite, from the standpoint of the agents 

and brokers, there are many who are writing in one geographical 

area or in one State, but most are now multi-State operations, 

20

where they do concentrate their operations by area of specificity, by 

line of business. 

For instance, there may be an agent or broker that specializes 

in day care centers or nursing homes, or as you mentioned before, 

the transportation of space products in Florida, or homeowner risks 

that are prone to catastrophic events along the shorelines of the 

United States. 

There will be specialists in those areas. There is a niche market 

which has developed in the surplus lines marketplace that really, 

again, translates and underscores the need for your wisdom of having introduced this Act to bring uniformity, certainty, and consistency, so that all States can operate under the same type of principles, and the consumer can obtain the protection they need at the 

price they can afford, so that competition can rein supreme in this 

entrepreneurial environment. 

Only in that way can we generate growth and development in 

this market sector, and give investors the type of confidence and 

comfort they need for their additional and continued investments. 

Chairman BAKER. I thank the gentlelady. Mr. Moore? 

Mr. MOORE. As you all know, under the direction of NAIC, the 

States have been trying to reform the commercial insurance market for many years. So far, their efforts have not been successful. 

Will the States be able to make any meaningful regulatory 

changes in the area of surplus lines and re-insurance regulation 

without Federal legislation like the bill before us today? 

Any one of you, I would like to hear from you, please. 

Mr. SINDER. Congressman, I believe the answer to that question 

is absolutely not. The first surplus lines taskforce of the NAIC 

started in the mid-1980’s. They had models that they have tried to 

enact across the States, but they have been unsuccessful. 

There have been proposals to do a tax compact. They have been 

rejected as recently as the most recent NAIC meeting. 

As you pointed out in your opening statement, even Commissioner Koken, in her role as president of the NAIC, expressed extreme doubt that they would be able to do it without Federal guidance. 

Mr. MOORE. Thank you. Any other witnesses wish to make a 

statement? 

Mr. MINKLER. Yes, Congressman. I would say that with the passage of NARAB a few years ago that Congresswoman Kelly mentioned before, we have seen incremental increases in cooperation 

amongst the States, but we are nowhere near where we need to be. 

This is exactly the type of legislation model that we need to move 

ahead with what the intent of NARAB was back then, including 

and broadening in future legislation licensing and that type of 

thing. 

Mr. MOORE. Thank you. 

Ms. OCHENKOWSKI. Representing the consumer, and from our 

perspective, I do not believe that they would be able to get together 

in order to present or to handle this issue in any unified manner. 

Mr. MOORE. Thank you. 

Mr. HEINZE. Congressman, when Chairman Baker and Chairman 

Oxley construed the SMART Act several years ago, one of their 

21

opening statements was that this was not supposed to be Federal 

preemption but Federal guidance. 

While we have great confidence in the National Association of Insurance Commissioners, and their leadership, and the things they 

are working on with the surplus line agents and brokers that we 

represent, this would be great additional guidance for them to have 

a consistent place, a uniform structure with which they could all 

operate, and I do not think we would find much opposition from 

them either. 

Mr. MOORE. My thanks to all of the witnesses. Thank you, Mr. 

Chairman. 

Chairman BAKER. Thank you, Mr. Moore. 

Mr. Campbell? 

Mr. CAMPBELL. No questions. 

Chairman BAKER. Does any other member wish to be recognized? 

If not, at this time—one other point of clarification, just as to how 

the process works. 

For an insured to access the surplus lines, I understand they 

have to be denied coverage for whatever is sought three times, and 

then can move to the surplus market, but if we do not pass the bill 

now pending, there is still the right under the current regime for 

a State commissioner to deny access to the surplus line carrier. 

Is that a correct characterization? My belief is that the bill enables the surplus lines to respond to that capability without having 

to rely on a jurisdictional approval. 

Is that correct? 

Mr. SINDER. It is absolutely true with respect to specific carriers 

because of the eligibility rules. It is also true, I believe, that some 

commissioners issue letter rulings that say for certain types of insurance, they are going to deem it not available, and for other 

types of insurance, they are going to deem it available, so they can 

do exactly what you suggested. 

Chairman BAKER. In my case, where we have a Hurricane 

Katrina effect and insurers withdraw, then there may be an opportunity upon an appeal and a demonstration that there is no alternative choice for a surplus lines’ remedy in that case. 

Mr. SINDER. The inanity of many of the States’ rules is that even 

in a jurisdiction like Louisiana, where you know that coverage is 

not available, you still may have to demonstrate on a policy-by-policy basis that you were not able to get it. For each policy that you 

seek to place, you need to satisfy the declination requirements. 

Chairman BAKER. Terrific. Thank you very much. 

I want to express my appreciation to the panel for your contribution, and we expect other members to have follow-up questions, so 

we will keep the hearing record open for 30 days. Thank you. 

If I can ask our next panel to come forward when convenient. 

I want to welcome the members of this panel to our hearing. As 

is always the case, we ask that you try to constrain your oral presentation to 5 minutes. Your written testimony is part of our official 

record. We welcome you here to the committee’s consideration. 

Our first witness is Mr. Franklin W. Nutter, president, Re-Insurance Association of America. Welcome, sir. 

22

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA 

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

The Reinsurance Association is a national trade association representing property and casualty organizations that specialize in reinsurance. 

I am pleased to testify today on H.R. 5637, legislation to streamline the regulation of non-admitted insurance and re-insurance. 

The RAA supports the principles of this legislation. I would like 

to highlight certain aspects of it that we think are particularly important. 

The RAA applauds Representatives Brown-Waite and Moore for 

addressing a key improvement in the efficiency of regulation of reinsurers, and that is the elimination of the extraterritorial application of State laws. 

As a result of our 50 State system of regulations, significant differences have emerged among the States with respect to re-insurance regulatory requirements. The NAIC and State regulators are 

to be applauded for their efforts toward greater uniformity in the 

adoption of model laws and regulations and the creation of a system of accreditation for States to meet minimum standards for regulation. 

Unfortunately, this has not prevented the States from pursuing 

varying and sometimes inconsistent regulatory approaches to re-insurance. One of the best examples of this is the extraterritorial application of State laws. Approximately 14 States in the re-insurance area apply their laws on an extraterritorial basis, meaning 

that the State law not only applies to insurers and re-insurers 

domiciled in the State, but to all insurers licensed in that State. 

The RAA strongly supports the principle set forth in Title II, section 201, that addresses these inefficiencies. This provision retains 

the ability of State insurance regulators to regulate their domestic 

insurers and re-insurers and the re-insurance transactions of their 

domestic companies. 

The Act simply preempts the extraterritorial application of State 

law and articulates the type of laws that States cannot apply on 

an extraterritorial basis. 

Secondly, the RAA supports the principle set forth in Title II, 

section 202, that provides that the State of domicile of a re-insurer 

shall be solely responsible for regulating the financial solvency of 

the re-insurer if the State is an NAIC accredited State. 

Allowing the State of domicile of the re-insurance company to be 

the single regulator for solvency will help streamline re-insurance 

regulation significantly and will add much value to the value of the 

U.S. re-insurance license. 

Because the NAIC requires that accreditation laws be substantially similar, all accredited States have the same basic solvency 

protections and laws in place, even if they may differ in the details. 

This legislation keeps re-insurance solvency regulation intact. It 

does relieve the re-insurer from having to file supplemental, and at 

times inconsistent, financial information in as many as 50 States, 

yet provides all States with access to financial information on the 

U.S.-licensed entity. 

23

The third point that I would like to make is that the RAA does 

support the principle set forth in section 202(b)(3) that the credit 

requirements of the domicile of the re-insurer should be exclusively 

applied to allow the ceding insurer to take financial statement 

credit in all other States. 

To achieve uniformity in the ceding companies financial statement requires a single State’s credit statutes to apply. The NAIC’s 

accreditation system and model credit for re-insurance law seek to 

achieve this result. 

This statutory provision will achieve the uniformity needed by 

ceding companies and re-insurers. 

The RAA supports this legislation, and stands ready to work 

with the committee to see that this legislation does move forward. 

We believe that re-insurance regulatory reform will improve the 

value of the U.S. re-insurance license and strengthen financial regulation. Thank you very much. 

[The prepared statement of Mr. Nutter can be found on page 68 

of the appendix.] 

Chairman BAKER. Thank you, sir. Our next witness is Mr. David 

Gates, senior vice president, general counsel and secretary, 

Generali USA Life Reassurance, on behalf of the American Council 

of Life Insurers. Welcome. 

STATEMENT OF DAVID A. GATES, SENIOR VICE PRESIDENT 

AND GENERAL COUNSEL/SECRETARY, GENERALI USA LIFE 

REASSURANCE, ON BEHALF OF THE AMERICAN COUNCIL OF 

LIFE INSURERS 

Mr. GATES. Thank you, Mr. Chairman. It is my pleasure to be 

here this morning, and I would also like to thank Mr. Moore for 

his welcome. I would point out that I live on the Kansas side and 

he is my representative, so thank you. 

Today, I am here to speak on behalf of H.R. 5637 as a representative of the American Council of Life Insurers. In that organization, I serve as the vice-chair of the Re-Insurance Committee. 

Additionally, as part of my background, I would point out to you 

that for a number of years, I served as an insurance regulator in 

the State of Nevada. I also served as a member of the NAIC’s Executive Committee, and I served as the president of the NAIC in 

1989. 

I have experience on both sides of the lines on these matters, and 

I hope to bring that to bear in this testimony. 

First off, I would like to point out that the testimony that we are 

delivering here today is not directed at the individual regulators 

themselves who by and large try very hard to do the best job they 

can. 

Unfortunately, they are laboring in a system that at this point 

is becoming increasingly unresponsive to a global insurance industry with global capital flows and interrelations that, at this time, 

they do not have the resources and capabilities to administer. 

A few points about life re-insurance, which you will find a little 

bit different than some of the other forms of re-insurance in the insurance marketplace. 

First, re-insurance is a long term relationship. Our contracts are 

measured in terms of decades. Additionally, this is, as has been 

24

pointed out, a commercial transaction on a business-to-business relationship, most often negotiated with the actuaries of the life insurance company, negotiating on an iterative basis with the actuaries of the re-insurance company. 

It is hard to fathom a relationship that is more of a commercially 

sophisticated transaction and negotiation than that type of activity. 

Additionally, the availability of re-insurance is becoming increasingly vital to the life insurance industry in the United States. 

Today, approximately 50 percent of the risk that is assumed by life 

insurers is ceded into the re-insurance market. 

As of the end of 2005, there are approximately $5.9 trillion of life 

re-insurance in force in the United States. 

Turning to the issues of regulation and the need for greater certainty and a more level playing field, which is an absolute vital 

necessary, as has been pointed out by many of the other witnesses 

this morning, the examples of some of the issues that we are encountering at this point is a circumstance where we have a re-insurance transaction that is engaged, that has activities that are 

subject to both New York’s and California’s jurisdiction. 

We will have a circumstance where we will need a bank issued 

letter of credit. We go and obtain a bank issued letter of credit, but 

the form of the letter of credit that is acceptable in the State of 

New York is rejected by the State of California. 

Additionally, we routinely find that we encounter what are 

euphemistically called ‘‘desk drawer rules’’ in the insurance industry. These are preferences on the part of the insurance regulators, 

as opposed to statutes or regulations that are supposed to be regulating our industry. 

Additionally, in the life insurance arena, we find that the regulatory environment that we operate in is falling increasingly further and further behind those of other financial services sectors. 

For example, the 1985 series of statutes that deal with the transfer of risk require a one-size-fits-all re-insurance structure. 

When I, as the re-insurer, go to negotiate with a ceding company, 

I am unable to tailor my re-insurance to the particular needs of 

that ceding company. I have a statutory mandated re-insurance 

structure that I must use, and I cannot, as I pointed out, tailor my 

offering to the needs of that particular company. 

The ACLI supports the efforts of this committee, and we hope 

this initiative will move forward. 

[The prepared statement of Mr. Gates can be found on page 50 

of the appendix.] 

Chairman BAKER. I thank you, sir. I appreciate your testimony 

and your contribution. 

Our next witness is Mr. Richard M. Bouhan, executive director, 

National Association of Professional Surplus Lines Offices. Welcome, sir. 

STATEMENT OF RICHARD M. BOUHAN, EXECUTIVE DIRECTOR, 

NATIONAL ASSOCIATION OF PROFESSIONAL SURPLUS 

LINES OFFICES, LTD. 

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

Baker and members of the committee, particularly Congressman 

25

Moore, thank you for the welcome. I, at least, was born in Kansas. 

I live across the line, but I was born in the Jayhawker State. 

My name is Dick Bouhan, and I am the executive director and 

general counsel of the National Association of Professional Surplus 

Lines Offices, known as NAPSLO. I am pleased to be here today 

to offer testimony on H.R. 5637, the Non-Admitted and Re-Insurance Reform Act of 2006. 

NAPSLO is a national trade association representing the surplus 

lines industry and the wholesale insurance marketing system. 

NAPSLO is the only association to represent both surplus line companies and brokers, and in that context, we represent the surplus 

lines marketplace. 

NAPSLO, and its board of directors and over 800 members, are 

encouraged by the initiative that the committee has demonstrated, 

particularly the leadership of you, Chairman Baker, and Representatives Ginny Brown-Waite and Dennis Moore, by introducing 

this important and timely piece of legislation. We are pleased to 

offer our unwavering support. 

NAPSLO has been a proponent of State insurance based regulation. Surplus lines is a product of the State-based regulatory system. Unfortunately, the 50 State system has gone askew, and is 

now fraught with inconsistency and problems. 

Over the years, NAPSLO and other industry stakeholders have 

worked with the NAIC to try to overcome the inefficiencies. It is 

clear that the time has come for Congress to intervene before these 

problems substantially undermine the ability of the surplus lines 

market to function effectively. 

Chief among NAPSLO’s concerns is the inconsistent way in 

which States manage their premium tax allocation remittance requirements. The proper allocation and remittance of surplus lines 

premium taxes to the States on multi-State risks has been a growing problem for decades, as the number of multi-State risks increases. 

The failure of the States to establish a uniform and consistent 

method of remitting these premium taxes has caused confusion and 

complexity in the marketplace. 

The genesis of this problem lies in the conflicting and inconsistent State tax laws. NAPSLO is pleased that the subcommittee 

has recognized the problems associated with the premium tax allocation remittance system and has incorporated a common sense solution into the bill. 

This legislation creates an uniform system of premium tax allocation and remittance and authorizes States to enter into a compact 

as a means of harmonizing various State laws. 

Let me clarify that the proposed system for tax allocation remittance in no way changes the broker’s obligation to remit premium 

taxes to the proper State tax authority. Rather, it brings clarity 

and certainty to a system that is fundamentally flawed and in need 

of repair. 

NAPSLO is also pleased that the bill creates a system of home 

State deference for surplus lines insurance transactions. Without 

home State deference, the surplus lines policy covering exposures 

in multiple States would subject the broker to multiple compliance 

requirements. 

26

To illustrate my point, consider a broker who has a policy with 

five exposures in five different States. This requires the application 

of five separate laws and five different tax filings. It also requires 

compliance with five different diligent search standards and five 

different licensing requirements, and also the provision of five different warnings, as was demonstrated earlier in Mr. Sinder’s presentation. 

Now, imagine how this problem would translate nationwide with 

a policy with exposures in 50 States. 

The bill mandates that no jurisdiction other than an insured’s 

home State may require a surplus lines broker to be licensed in 

order to sell, solicit, or negotiate surplus lines insurance. 

NAPSLO is encouraged that this important concept has been included in the bill. 

Finally, NAPSLO is encouraged by the subcommittee’s determination that access to the surplus lines marketplace should be 

streamlined for the sophisticated commercial purchasers, as defined in the bill. 

This legislation will provide more efficient access to the surplus 

lines market for sophisticated buyers to meet their unique insurance needs. 

The bill also establishes safeguards by including disclosure requirements that inform sophisticated buyers of the nature of the 

transaction and secures their written permission prior to any coverage placement in the surplus lines marketplace. 

This legislation is the right policy at the right time. H.R. 5637 

is the correct approach. Again, NAPSLO commends Chairman 

Baker for his leadership, and for holding this hearing, and thanks 

Representatives Brown-Waite and Moore for introducing this important piece of legislation. 

We look forward to working with the subcommittee as this bill 

moves through the legislative process. 

I thank you for your time and attention regarding this complex 

and crucial segment of the insurance industry, and I stand ready 

to answer any questions that you might have. 

[The prepared statement of Mr. Bouhan can be found on page 40 

of the appendix.] 

Chairman BAKER. Thank you, Mr. Bouhan. 

I would like to start with Mr. Gates. In your testimony, you 

made reference to a statutory constraint on your ability to tailor a 

re-insurance product to a particular customer. Could you elaborate 

for me that particular concern? I am not sure I understand that. 

Mr. GATES. I would be glad to. In 1985, under the guise of an 

NAIC model law, there was a development of a regulation called 

the risk transfer rule. In the risk transfer rule, it specifies that 

when there is to be a life insurance transaction—excuse me—a life 

re-insurance transaction assuming risk from a life insurer, we have 

to do a specified structure for that particular contract. 

It tells me various types of language that I have to have in the 

agreement. It tells me the risks that I have to transfer in that 

agreement, and it effectively constrains my ability to come into a 

particular company and do something specific to their needs. 

Chairman BAKER. Regardless of what the customer wants? 

27

Mr. GATES. Right. I will give you an example from our days when 

my predecessor company actually wrote individual life insurance. 

We were going into the marketplace. We wanted a particular product that would have allowed us to transfer the risk inherent in certain equity indexed annuities. 

What we needed to transfer was the risk revolving around the 

subject of the market fluctuations. We were able to go out and find 

a company that specialized in that type of risk, a company that had 

a hedging operation in its investment operation, that was very excellent at doing those types of things. We secured that re-insurance, but we could take no credit for it on our financial statements 

because it was outside the boundaries of what was allowed for 

under those rules. We did it as prudent management of our company, but again, because of the strictures of the laws, we were unable to take credit for it. 

Chairman BAKER. We are going to need to get together with lawyers and see if we cannot address that. That is just nuts. There is 

no reason why a willing buyer and a willing seller cannot get together on the terms of a deal without government constraint standing in the middle, particularly when there is no public policy purpose served by the constraint, or is there? 

Mr. BOUHAN. The regulators would say to you that there needs 

to be some assurance that effectively all of the risk is being transferred, but I believe that even today, the insurance regulators recognize that a more discerning regulation, a more flexible standard, 

can be and should be developed that allows you to tailor the particulars of a transaction to— 

Chairman BAKER. But those regulators do not worry about any 

other counterparty risk, and whatever rates you are charging the 

insurer is not a subject of their review, and that is more to the core 

of the consumer interest in that argument. 

Mr. BOUHAN. I would absolutely agree with you. Please don’t 

take my comments as anything more than an attempt to inform 

you. I do not agree with their approach. 

Chairman BAKER. No. I took it only as instructional, not as persuasive. Thank you. 

Mr. Nutter, on the effect of the bill and specific to the arena of 

terrorism re-insurance, is there any identifiable benefit to the adoption of the proposed Act to enable the market to function more efficiently? 

The Administration, of course, has had grave concerns about 

TRIA, its extension, wanting the market to function, and unfortunately, at this point, market function has not been all that significant. 

Is this in your judgment an Act that will enhance capital formation in that arena? 

Mr. NUTTER. It’s an excellent question. Certainly, individual companies look at the exposures they write, particularly in the area of 

terrorism, and make some judgment about their willingness to 

commit capital to write a risk that many insurers and re-insurers 

would view as not insurable in the traditional sense. 

Indeed, TRIA has been a particularly valuable piece of legislation 

to give insurers and re-insurers the opportunity to work within the 

context of the retentions that the companies have. 

28

The efficiencies that are contained in this proposal, this bill, will 

make it more appropriate for companies to commit capital in the 

United States to a licensed entity. It would go beyond my ability 

to say that companies are going to commit to writing terrorism 

risk. I cannot say that. I could say that the efficiencies associated 

with a single regulator and eliminating the extraterritorial application of laws will indeed reduce the cost and inefficiencies in the 

current State system of regulation. 

Chairman BAKER. We, at least, are not going to make it any 

worse. I think that is a safe conclusion. 

Mr. NUTTER. We can certainly make it better. 

Chairman BAKER. Thank you. Mr. Moore? 

Mr. MOORE. Mr. Bouhan, can you talk a little bit about the work 

you have done with NAIC’s surplus lines working group regarding 

the establishment of non-admitted insurance model laws? 

I know that NAIC has tried over the years unsuccessfully to try 

to resolve the inconsistencies that currently exist in these States. 

Mr. BOUHAN. Let me first speak to the tax issue, which I have 

been working with the NAIC on for four iterations of it, probably 

over the last decade-and-a-half. 

One was an effort to try to set up a clearinghouse mechanism, 

electronic clearinghouse mechanism, and two other efforts have 

been to try to set up a harmonization of the underlying laws. 

In all three instances, these have not been successful. The most 

recent one is our proposal that NAPSLO put forth to the NAIC to 

establish an interstate compact, and we have had that out before 

the NAIC for over a year. There was a hearing, as mentioned earlier, a hearing about this at the NAIC meeting before the surplus 

lines taskforce about a week ago, and the whole idea was sort of 

panned, I would say, by the surplus lines staff, and I think ‘‘panning’’ might be a kind phrase. 

We have just not been successful in getting them to try to deal 

with this issue of harmonizing the laws, particularly for the payment of taxes. You have heard ad nauseam about the problems, 

and they are real problems. They just do not seem to want to get 

together to address this problem. 

The same way with the multiple State compliance. That is another issue which is starting to raise its head because more and 

more brokers are getting licenses on a non-resident basis in more 

and more States, and now they are subject to the multiple compliance in all these States, and the NAIC does not seem to want to 

really address that issue at all. That was part of our compact proposal, too. 

It has been a very difficult time to get them to deal with the 

problems. I think, in all fairness, it is 50 States trying to come to 

a single conclusion and trying to harmonize different laws with different policy ideas as they see them. It becomes a very difficult 

problem to solve. 

Mr. MOORE. Thank you to the witnesses, and thank you, Mr. 

Chairman. 

Chairman BAKER. I thank the gentleman. Mr. Bachus? 

Mr. BACHUS. Thank you, Mr. Chairman. Let me ask the panel 

this. I get the sense—as members begin to learn about re-insurance 

and these different issues, it becomes more and more apparent to 

29

me that there is a big distinction between what we are talking 

about here and the primary market, as far as the State regulators. 

State regulators, the justification there is protection of the public. You may have a sophisticated or non-sophisticated party. 

With these issues we are dealing with, they are basically a commercial contract between two highly sophisticated commercial entities. I am not sure that I see the justification for the States. Perhaps it is a solvency issue. You would think that these large commercial entities have a lot at stake, and really it is the entity that 

is going to suffer, not the public. 

You are actually having the States intervene in what is a very 

competitive market. You have the double taxation problems—what 

is the justification for the States to regulate say coverage or rates 

in a case of two commercial highly sophisticated enterprises? I 

think the chairman also alluded to that. 

Mr. NUTTER. Mr. Bachus, if I could respond in part, and perhaps 

Mr. Gates would, as well. In the property casualty re-insurance 

area, the States do regulate for solvency. They do not regulate for 

purposes of rates and contract terms. 

Because there is no consumer component of a contract between 

an insurer and a re-insurer, there really is not a reason to regulate 

in that area. That has worked just fine. 

What we unfortunately see is another level of competition, that 

is the States competing with each other to regulate for solvency. 

What this legislation would really do is retain solvency regulation, 

but bring it back to what the NAIC’s accreditation system is really 

all about, that is, having a State of domicile regulate for purposes 

of solvency as well as the basic transaction. 

Mr. BACHUS. You and Mr. Gates both mentioned a global marketplace and the global nature of this whole business. Are there 

competitive advantages for foreign re-insurers? I would think domestic re-insurers with the 50 State regulatory scheme in place, 

have a different approach than a foreign re-insurer. 

What do they do, letters of credit? How do they function in that 

market? 

Mr. NUTTER. The State system now, of credit for re-insurance, 

does recognize companies that are licensed in the United States as 

well as companies that are not licensed. Those companies secure 

their transactions with security, letters of credit, or funds withheld. 

Let me give you a statistic to reinforce the point about the global 

nature of this business and how it is reflected in this legislation. 

Mr. BACHUS. I would think in that regard, it seems to me that 

a domestic license is being de-valued by this whole environment. 

Mr. NUTTER. An excellent point, and that is what the statistic is 

about. The property casualty re-insurance market has actually 

been a dynamic area of capital formation since the early 1990’s. 

After Hurricane Andrew—I do not remember the exact number—

six to eight new re-insurers were formed with capital in the $10- 

to $12 billion range. 

After the events of 2001, another five or six new re-insurers, new 

capital, were formed. Again in 2005, another series of new re-insurers were formed. Not one of them was domiciled in the United 

States—not one of them. 

30

One of the reasons that they do not domicile here is this competitive and cumbersome nature of regulation between the States. 

When investors can go to a country that has a single regulator for 

solvency and a single set of rules applicable to the re-insurance 

transaction, and, pursuant to the State system, provide capacity 

into the United States. This is to be encouraged. 

Your instincts are right, that the current State regulatory system 

indeed is a deterrent, if you will, to forming a license in the United 

States. Licensing should be encouraged, in our view. 

Mr. BACHUS. I would certainly think that the legislation that Ms. 

Brown-Waite and Mr. Moore are offering us would at least encourage domestic re-insurance companies to form. 

I can also see domiciled overseas, you would avoid the tax environment that you have here, where there is so much uncertainty 

or double taxation. Is that true? 

Mr. NUTTER. I am sure that it is a consideration as companies 

look at where to domicile, but the companies that do business from 

overseas are also subject to excise taxes here as well. 

Mr. BACHUS. They are not escaping that. 

Mr. GATES. If I may, one thing to point out in your comments 

about the multiplicity of jurisdictions, we are engaged in a circumstance right now where the State of California is in the process 

of attempting to adopt a very, very expansive view of how it should 

regulate, regardless of the domicile of a particular insurer or re-insurer, the financial circumstances of any company that happens to 

have a California license. 

Our company has a California license. We have clients who operate in California. Our parent company, because we are foreign 

owned, provides support to us because of the large amount of 

money that is involved in the nature of the life re-insurance that 

we are providing. 

The circumstances require me to go to the State of Missouri and 

get approval of those transactions with an affiliate, and we do that 

routinely, but under the new California rules, I would have to also 

get approval from the State of California of those very same transactions that have been passed upon by my domiciliary regulator. 

I think everyone understands the difficulty when you try to—

when you have two masters, it is very, very difficult to appease 

them both. 

Chairman BAKER. The gentleman yields back. Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. There is a provision 

in the bill that allows the creation of a compact for distribution of 

revenue. Since the bill goes into effect immediately without the 

compacts being entered into, the compacts would come after the 

fact. 

As I understand the logic of the bill, the collector would be the 

State of the corporate entity where they are living. Let’s take WalMart. Suddenly, the State of Arkansas would get a tremendous 

windfall in revenue. 

What would incentivize them to enter into a compact to share 

that with other States? 

Mr. BOUHAN. Because there are exposures that Arkansas would 

have that are from other large national corporations that are domiVerDate 0ct 09 2002 16:59 Jan 16, 2007 Jkt 031530 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 F:\DOCS\31530.TXT HFIN PsN: TERRIE
31

ciled in say New York, Missouri, or California, for which they 

would get their fair share of the revenue, too. 

Mr. KANJORSKI. Their fair share would only be out there if they 

had some relationship with that transaction. Arkansas only has 

one company, Wal-Mart. Why would they want to share the proceeds? I’m being facetious, of course. 

Mr. BOUHAN. It’s reciprocal in that sense is the idea. 

Mr. KANJORSKI. There was that famous television program or 

movie, ‘‘Follow the Money.’’ If I were a State that had the obligation or had the right to enter into a compact and I were a net winner in distribution, why would I want to enter into a compact ever 

with anybody to share the additional proceeds? 

Mr. BOUHAN. I understand what you are saying. 

Mr. KANJORSKI. Don’t we have to work something out there now 

with the legislation to provide for the distribution of revenue instead of throwing it out there into the ether and allowing compacts 

to be formed when they may never ultimately be formed? 

Mr. BOUHAN. The idea of the compact was to provide a jurisdictional basis to form more or less a clearinghouse so this money 

could be collected and then distributed based upon a common allocation system. 

Mr. KANJORSKI. I understand, but what I am saying to you is if 

I’m Arkansas, and I am getting 10 to 20 times the revenue, what 

is my incentive? 

Mr. BOUHAN. If they get all the Wal-Mart money, and they get 

nothing else from any other State, then they are not going to have 

too much of an incentive. 

Mr. KANJORSKI. So, there are going to be winners and losers 

here. 

Mr. BOUHAN. Yes, there will be. 

Mr. KANJORSKI. 25 of the States will be losers and 25 of— 

Mr. BOUHAN. Right now in the system, it is so opaque, it is so 

confusing, that there is no certainty or clarity as to what to do. 

Mr. KANJORSKI. They may not be distributed correctly now. 

Mr. BOUHAN. There are going to be winners and losers, but I do 

not know if you are going to know who they are necessarily. 

Mr. KANJORSKI. It sounds like a great class action, doesn’t it? 

Mr. BOUHAN. I beg your pardon? 

Mr. KANJORSKI. It sounds like a great class action for a lawyer 

to straighten that out. 

Mr. BOUHAN. Yes, it does. 

Chairman BAKER. I’ve got a bill on that, too. 

Mr. BOUHAN. Those words—‘‘simplifies tax’’—have crossed my 

ears before. 

Mr. KANJORSKI. All I am raising the question on this issue for 

is there are a lot of compelling reasons why the legislation would 

accomplish a lot of positive events that I could sympathize with, 

but in some of these areas, particularly revenue, I think it is something important to pay attention to and get it done now, and have 

it in the base bill so we do not just allow—I come from the State 

of Pennsylvania, and we built Interstate 80 across Pennsylvania 

and had to cross about 70 or 80 miles of New Jersey in order to 

get to New York. 

32

If my recollection is correct, although it is a little foggy with age 

now, it took New Jersey about 25 years to close down route 46 because 46 has business properties on it, and they did not want to 

take the traffic away in order to open up I–80. 

There was little incentive to force them to do that. It took a 

whole generation for them to come on board. 

Mr. BOUHAN. We presented the compact idea to the NAIC in the 

last 2 years, after numerous efforts to try to deal with this issue. 

Often, when we would talk to the NAIC people about why they 

weren’t willing to get together, why they weren’t willing to try to 

move to solve the problem, the insurance regulators that represent 

the NAIC would tell us that well, you see, we can deal with insurance matters, but we really cannot deal with tax and revenue matters. This is a whole different set of committees and our legislature. 

We have to go through the Governor’s Office on occasion. They 

came up with many problems. 

We thought maybe if we could come up with the compact idea, 

that would allow the compact to circumvent just the insurance laws 

themselves. That was one of the reasons we were trying to present 

the compact. 

Mr. KANJORSKI. I understand that. I have to tell you, if I were 

a big winner, it would take me an awful lot of time before I would 

join a compact to take revenue away from my State. I’m just suggesting that I think that is an important issue that we would have 

to resolve now. 

Do you have outlines as to how we could equitably do that distribution? Has someone worked on that particular issue, outside of 

just giving the authority to create a compact, that we actually create how the structure would work that we could incorporate into 

the legislation? 

Mr. BOUHAN. There was a few years ago a proposal called 

NITCH, which is non-admitted insurance information tax clearinghouse. It was an electronic clearinghouse idea in which the brokers 

would submit the information and the taxes and it would be in effect distributed to the various States in that way. 

That never really got off the ground too far, but it was a clearinghouse idea. There was some information there and some studies 

that were done to try to look at how this would be accomplished 

in that NITCH study. That was about 1996, which I can pull out 

of my files somewhere and take a look at. 

The problem with the NITCH project was at the end of the day, 

it still never harmonized the laws between the States. It never 

came up with the standard allocation system. We do not have a 

standard allocation system now. 

If I am a broker in Missouri, and I have exposures in five States, 

and the five States have different allocation systems, I do not know 

which allocation system to use. They may be different. In fact, 

often they are different between the States. Some may be based on 

square footage. Some base it on revenues of the plant. We do not 

know which one to use. The whole system is confusing. 

Also, the companies submit information to the regulators as to 

the amount of premium they write in each State. They allocate at 

the company level the surplus lines premium to the State based 

upon the exposures in those States. 

33

The brokers have to do it, too. They do it separately. They use 

different systems because there is no standard system. 

Mr. KANJORSKI. Can we establish in the Act the State with the 

best and most equitable practices and adopt that as the standard? 

Mr. BOUHAN. Yes. 

Mr. KANJORSKI. Why don’t you take the time to analyze which 

State would be the best? If you remember in the progressive era 

with the standardization of agricultural products, the 50 States 

could not agree, and ultimately they agreed to use the Pennsylvania standard. If you were approved by the Pennsylvania Department of Agriculture, you were deemed approved nationwide. It 

worked very successfully for 100 years. 

There has to be one State that has been sophisticated in this 

that we could perhaps place in the legislation. 

Thank you, Mr. Chairman. 

Chairman BAKER. Gentlemen, I want to express appreciation to 

you on behalf of the committee for your participation. It has been 

very helpful. 

As we move forward, we certainly want to continue receipt of 

your perspectives and recommendations on how we can perfect the 

pending proposal. 

Obviously, there is a critical need. I am just delighted to participate in an insurance hearing where everybody seems to be agreeing. This is a rarity and I am enjoying every minute of it. with 

that, our meeting stands adjourned. 

[Whereupon, at 4:03 p.m., the subcommittee was adjourned.] 

(35)

A P P E N D I X

June 21, 2006

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