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74–624 PS 2001

OVER-REGULATION OF AUTOMOBILE INSURANCE:

A LACK OF CONSUMER CHOICE

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

AUGUST 1, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–42

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Texas

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman

PETER T. KING, New York

ROBERT W. NEY, Texas

CHRISTOPHER COX, California

DAVE WELDON, Florida

WALTER B. JONES, North Carolina

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ERIC CANTOR, Virginia

PATRICK J. TIBERI, Ohio

LUIS V. GUTIERREZ, Illinois

KEN BENTSEN, Texas

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

MICHAEL CAPUANO, Massachusetts

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

(III)

C O N T E N T S

Page

Hearing held on:

August 1, 2001 .................................................................................................. 1

Appendix:

August 1, 2001 .................................................................................................. 27

WITNESSES

WEDNESDAY, AUGUST 1, 2001

Ahart, Thomas, CPCU, AAI, President, Ahart, Frinzi & Smith Insurance,

on behalf of the Independent Insurance Agents of America ............................ 7

Hunter, J. Robert, Director of Insurance, Consumer Federation of America ..... 9

Litan, Robert E., Vice President and Director, Economic Studies, Brookings

Institution ............................................................................................................. 4

Snyder, David F., Assistant General Counsel, American Insurance Association ........................................................................................................................ 6

Zeman, Robert L., Vice President and Assistant General Counsel, National

Association of Independent Insurers .................................................................. 11

APPENDIX

Prepared statements:

Kelly, Hon. Sue W. ........................................................................................... 28

Oxley, Hon. Michael G. .................................................................................... 36

Ferguson, Hon. Mike ........................................................................................ 38

Ahart, Thomas .................................................................................................. 55

Hunter, J. Robert .............................................................................................. 62

Litan, Robert E. ................................................................................................ 39

Snyder, David F. ............................................................................................... 46

Zeman, Robert L. .............................................................................................. 103

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kelly, Hon. Sue W.:

‘‘Jersey Way Wrong Way,’’ New York Daily News ......................................... 30

State Rate and Form Law Guide .................................................................... 32

Hunter, J. Robert:

Written response to a question from Hon. Janice D. Schakowsky ............... 90

Alliance of American Insurers, prepared statement ............................................. 125

(1)

OVER-REGULATION OF AUTOMOBILE

INSURANCE:

A LACK OF CONSUMER CHOICE

WEDNESDAY, AUGUST 1, 2001

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

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

2220, Rayburn House Office Building, Hon. Sue W. Kelly,

[chairwoman of the subcommittee] presiding.

Present: Chairwoman Kelly; Representatives Tiberi, Inslee,

Schakowsky, Moore, Capuano, Crowley, and Clay.

Also present: Representative Ferguson.

Chairwoman KELLY. First of all, I want to welcome all of you.

This hearing on the Subcommittee on Oversight and Investigations

is going to come to order. Without objection, all Members’ opening

statements will be made part of the record.

This afternoon, we are holding a hearing on the effects of State

over-regulation of automobile insurance on consumer choice. State

insurance commissioners bear a responsibility to promote a competitive climate in which consumers can choose from a number of

stable and solvent companies at competitive prices. When that climate is not maintained, there are going to be warning signs.

Unfortunately, the alarm bells are sounding in New Jersey and

Massachusetts. It is apparent from the exodus of companies from

New Jersey and the refusal of many insurance companies to do

business in Massachusetts that the regulatory climate for automobile insurance in those States has turned into an oppressive one.

In New Jersey, over one-half of the 15 largest auto insurers in

the country have either already left or will leave in the near future.

Over one million people in New Jersey will lose their automobile

insurance with a dwindling supply of alternative companies willing

to do business in that State.

Massachusetts might be in even worse shape, with two-thirds of

those same 15 largest insurers either writing little or no business

or refusing to do business at all in the State. Why are the people

of Massachusetts denied the right to do business with the insurer

of their choice? Why do they continue to tolerate a system that has

driven two-thirds of the largest, most competitive providers out of

the State?

Meanwhile, in free-market States such as Illinois and South

Carolina, there are numerous auto insurance companies providing

2

consumers with real choices at competitive prices without subsidizing risky drivers with bad records. For instance, in South

Carolina, the number of insurers accessible to consumers has doubled since the State eliminated artificial price controls. It is that

contrast that we are here to examine today.

I would note that the New York insurance superintendent has

been watching the events in these States very carefully, especially

across the border in New Jersey, and has drawn the right conclusion. If there is a problem with high auto insurance rates, the answer is more competition and sound fraud enforcement, not just

regulation. That is why New York is pursuing a package of real reform to catch and prevent insurance fraud, bar drivers who won’t

pay their insurance from recovering damages, and allowing more

choices and incentives for lower cost repairs. That sounds like reform, and that will bring real results for New York’s drivers.

I have a recent op-ed, written by the New York Insurance Superintendent, Greg Serio, that I believe sets out a strong case for the

reforms that they are working on in New York. I am going to ask

unanimous consent to have it made part of the record.

Hearing no objection, so ordered.

[The information can be found on page 30 in the appendix.]

Chairwoman KELLY. Before us today, we are honored to have a

distinguished panel of auto insurance experts to share their

thoughts and observations with us on these issues. I thank all of

you for taking the time out of your day to be here and to share

your thoughts with us. We need to take a look at how the regulations in these States are being affected by the State’s regulation

and the consumers’ needs, and I look forward to discussing those

issues with you.

I also want to inform Members of my subcommittee and their

staff, it is my intention to strictly enforce the 5-minute rule, and

I would appreciate their cooperation in notifying their Member if

their Member decides to appear.

We have been joined today by my friend from New Jersey, Mr.

Ferguson. He is a Member of the Financial Services Committee,

but he is not a Member of this subcommittee. I would ask unanimous consent to allow him to participate as if he was a Member

of this subcommittee.

Hearing no objection, so ordered.

In addition, we have received a statement from the Alliance of

American Insurers, and I am going to ask unanimous consent to

have that made part of the record.

Hearing no objection, so ordered.

[The prepared statement of the Alliance of American Insurers

can be found on page 125 in the appendix.]

Chairwoman KELLY. I am now going to go to the panel, and I

want to inform the panel that I am not only pleased to have you

here today, but I am also going to ask you to remember that we

have your written statements, therefore, I will ask you to hold your

remarks within the 5 minutes.

I would first like to go to Mr. Ferguson, who has an opening

statement, I believe.

[The prepared statement of Hon. Sue W. Kelly can be found on

page 28 in the appendix.]

3

Mr. FERGUSON. I do have a brief opening statement.

Chairwoman KELLY. Thank you.

Mr. FERGUSON. First of all, I thank the chair for your graciousness in hosting me here today. As a Member of the Full Committee

who certainly has an interest not only in this topic, but also in today’s proceedings, in particular, since we are talking about, one of

the States we are talking about is my home State. I do have a brief

statement, and I appreciate the opportunity to be with you here

today.

Certainly, I know today is not a beat-up session on New Jersey

or Massachusetts, as much as it is a learning process, looking at

some of the things that perhaps we can improve upon and certainly

maybe some things that are not going well in some of our States.

Automobile insurance in my home State of New Jersey, as we

know, is in dire need of reform. New Jersey has been overburdened

with strict regulations resulting in a reduction of competition and

choice between insurance companies with equitable rates. I appreciate my presence here today and the chair for having me here

today to attend the hearing and to focus on this lack of consumer

choice in New Jersey and some of the announced withdrawals of

four auto insurers in our State within the last year.

Specifically, I am interested in discussing with our panel the

challenging regulatory climate in New Jersey and the benefits of a

much more competitive market found in States like Illinois and

South Carolina. The State of New Jersey auto insurance market

has been criticized for being both politicized and over-regulated,

and also we have been criticized for enacting laws within our State

in the last few years which have crippled the market.

Recently, two of the top five automobile insurers announced that

they were being forced to withdraw from the New Jersey market,

citing the burdensome regulatory system, exceedingly delayed decisions by our State commissioner and restrictions on rate adjustments.

In addition, in 1999, the State Commission required a 15-percent

rate reduction to policyholders, forcing insurers to provide the cut

before enacting many of the reforms that would have enabled insurers to adjust their rates without increased market volatility.

Some insurers have not been able to reduce by 15 percent the rate

reductions within the strict State regulations and have chosen to

exit the State, rather than to try and work with the State Commission.

Today, New Jerseyans have seen a loss of consumer choice and

an increase in rates without relief from some of the regulatory burdens, leaving potentially a million drivers uninsured. It is my hope

that today’s witnesses will touch upon this research and the analyses that they have done within the State and to provide some suggested solutions to the growing number of uninsured drivers in my

home State.

I thank the chair for your graciousness again for having me here.

I yield back.

[The prepared statement of Hon. Mike Ferguson can be found on

page 38 in the appendix.]

Chairwoman KELLY. Thank you very much. We are delighted to

have you here.

4

I am going to move now to the panel, since there are no more

opening statements, and we have before us Mr. Robert Litan, the

Vice President and Director of Economic Studies for the Brookings

Institution.

Mr. Litan, I apologize for the fact that we haven’t got a long

enough table there. You are really kind of hanging on by your fingernails, but thank you for hanging on and for being here.

Mr. Litan worked in two capacities for the Clinton Administration. He was the Associate Director for the Office of Budget and

Management and the Deputy Assistant Attorney General for the

Antitrust Division of the Department of Justice. I am going to introduce you as you speak, if you don’t mind. I am not going to introduce the whole panel now. In the interest of time, I would like

to go on with you first, Mr. Litan.

As I said before, we have your written statements. Without objection, they will be entered as a part of the record. So, if you would

be willing to try to stay within the timeframe, that would be appreciated. I just want to explain the lighting system. There is a box

here with the lights. The green light means you have 5 minutes,

the amber light means you have 1 minute left, and when the red

light comes, it means that you might just hear me tapping. That

means summarize it quickly.

Thank you. It is an important issue. I don’t mean to make light

of the issue, but the thing is that we need to hear from you. So

I want to hear from you all, and then we will have some questions.

So, Mr. Litan, will you please proceed.

STATEMENT OF ROBERT E. LITAN, VICE PRESIDENT AND

DIRECTOR, ECONOMIC STUDIES, BROOKINGS INSTITUTION

Mr. LITAN. Thank you very much, Madam Chairwoman. It

sounds like you have already summarized my testimony.

[Laughter.]

Mr. LITAN. But what I am going to do here today is summarize

very briefly the major findings of a study that will be released by

the AEI-Brookings Joint Center, which I codirect. This study was

directed by Professor David Cummins of the University of Pennsylvania. Here are a few key points that are worth noting:

Number one, academic scholars, including those who participated

in our study, overwhelmingly agree that auto insurance rates

should not be regulated. Insurance is not a natural monopoly, but

instead, over 100 firms typically compete in most states. Like other

firms in our economy, insurers ought to be free to compete subject

to the antitrust laws.

Two, the AEI-Brookings study looked at three States where auto

rates have been regulated: Massachusetts, New Jersey and California. The findings for Massachusetts and New Jersey are similar.

In both States, rates have been held down which looks like a good

deal for consumers, but is not, on closer inspection. Artificially low

rates discourage entry into the business and discourage existing insurers from staying, as has been pointed out. In Massachusetts, for

example, in 1982 all top ten auto insurers in the State were national firms, but by 1998, only three were national. In New Jersey,

five of the Nation’s top ten auto insurers do not do business in the

5

State. The net result is that regulation deprives consumers of

choice.

Binding regulation also punishes good drivers by forcing them to

subsidize bad ones. In Massachusetts, for example, some high-risk

drivers receive subsidies as high as 60 percent, requiring some lowrisk drivers to pay 11-percent higher premiums. In South Carolina,

where rates were recently deregulated in 1999, 42 percent of consumers were forced to buy in the so-called residual or involuntary

market in 1992, requiring significant subsidies from other drivers.

And by 1999, this State residual market facility had a cumulative

deficit of over $2 billion—then South Carolina deregulated. But the

point is that subsidizing high-risk drivers makes absolutely no economic sense, as it can lead to higher accident rates and loss costs.

California has been an exception to these patterns, but only because Proposition 103 turns out not to have been that binding.

Claims costs for insured vehicles in the State, unlike energy costs,

actually fell after 1988, so insurers were not forced to abandon

California, as they were in New Jersey and Massachusetts. In addition, the most controversial part of Proposition 103, the 20-percent

rollback, was never fully implemented, for constitutional reasons.

What about States that have deregulated? Well, let us look to

South Carolina. As I said, it deregulated in 1999, and guess what?

Insurers came flooding back to the State, doubling in number.

Meanwhile, South Carolina’s residual market has almost disappeared simply because insurers can now charge according to

risk. What about Illinois? As has been mentioned, there has been

deregulation there for over 3 decades. The result, almost no residual market. Meanwhile, Illinois consumers have roughly twice the

number of auto insurers to choose from than is true in New Jersey.

One of my Brookings’ colleagues, Cliff Winston, has documented

that in other industries, where prices and entry have been deregulated, efficiency and productivity have dramatically improved. Professor Cummins, who led our study, has documented significant inefficiencies in the insurance industry that could be rooted out if the

forces of competition were simply unleashed.

So is there any role left for regulation? Yes, there is: To ensure

solvency, number one; to protect consumers from unscrupulous

practices, number two; and, finally, to help standardize forms for

personal lines and small businesses so that customers can easily

compare prices.

State insurance officials should not have to spend their scarce

dollars on collecting rate data and, in some cases, approving them.

Thank you, and I look forward to your questions, and I beat the

time clock.

[The prepared statement of Robert E. Litan can be found on page

39 in the appendix.]

Chairwoman KELLY. You did, indeed. Thank you very much, Mr.

Litan.

Next, we move to Mr. David Snyder, the Assistant General Counsel for the American Insurance Association. Mr. Snyder previously

served in the Pennsylvania Department of Insurance and has been

employed by several major insurers.

Mr. Snyder, thank you very much for appearing today.

6

STATEMENT OF DAVID F. SNYDER, ASSISTANT GENERAL

COUNSEL, AMERICAN INSURANCE ASSOCIATION

Mr. SNYDER. Thank you very much for the opportunity to be

here, distinguished Chairwoman Kelly and members of the subcommittee.

The association which I represent is composed of member insurers that not just provide auto insurance in the U.S., but do so

around the globe. The lessons and experience they have can be applied to the subject of your hearing today. And thank you for holding this hearing, because the issue of State auto insurance regulation is an issue that is important to consumers, public officials, and

insurers.

Most States currently have the extraordinary authority to fix

prices on personal auto insurance, something they don’t have for

virtually every other product, including absolute essentials such as

food, housing, and even the automobiles being insured. The damage

that can be done with this far-reaching power is now evident in

States such as New Jersey, which is experiencing the exit of companies that insure 20 percent of the market and Massachusetts,

where consumer choices are very limited, both due to the regulatory system’s denial of needed rates.

State rate regulation harms consumers, when the underlying

costs paid by auto insurance are declining, by retarding the market’s lowering of its prices, as happened in California. But when

the costs of providing insurance are perennially high or rising,

costs such as auto repair, increased litigation, increased medical

costs, rate suppression can cause severe market dislocations and

shortages, as now being felt in New Jersey.

State rate regulation hurts consumers because they have fewer

choices. It hurts insurers because they have less capital than they

need to operate in the market and even harms the public officials

administering the system by forcing them to make political decisions on issues they know should be left to the private economic

marketplace.

But State rate regulation has additional negative impacts. It is

often used to mandate hidden subsidies that are not cost-based.

This obviously harms the consumers who are paying those subsidies, but it also harms the subsidized parties, because it hides

from them and the public the preventable causes of higher-thannecessary losses, such as too lenient supervision of beginning drivers, a newly emerging pattern of fraudulent behavior or hazardous

intersections in congested areas. This, in turn, results in delaying

effective measures to prevent accidents, deaths, and injuries, such

as graduated licensing laws, antifraud measures, and more effective enforcement of the traffic laws.

If particular subsidies are desirable, they should be applied

through legislation above-board, not, as so often is the case,

through back-door methods, because the regulator can hold hostage

through the rate-approval process a company’s entire financial ability to function in the State.

Finally, rate regulation of the kind embodied in most U.S. State

laws is contrary to international best practices. As more countries

establish their insurance markets, competition for global insurance

capital will intensify. Regulatory systems which assure solvency,

7

but leave pricing to the market, will emerge as the most capable

of attracting capital.

The U.S. should not be left behind in the global competition because of a legacy of State price control systems. So, regardless of

your viewpoint, whether as consumers, as public officials or as insurers, rate regulation, as embodied in most State laws, is inherently capable of abuse. And when abused or even used as envisioned, it ultimately harms the very people who are intended as its

beneficiaries.

Thank you, and I would be pleased to answer any questions you

may have.

[The prepared statement of David F. Snyder can be found on

page 46 in the appendix.]

Chairwoman KELLY. Thank you. You, too, went in under the

wire. Thank you very much, Mr. Snyder.

Next, we have Mr. Tom Ahart. Did I pronounce that correctly?

Mr. AHART. Ahart.

Chairwoman KELLY. Ahart, pretty good. President of the Ahart,

Frinzi & Smith Insurance firm located in New Jersey, who is testifying on behalf of the Independent Insurance Agents of America.

Mr. Ahart is a chartered property casualty underwriter, an accredited adviser of insurance in New Jersey.

Mr. Ahart, thank you very much for being here, and we look forward to your testimony.

STATEMENT OF THOMAS B. AHART, CPCU, AAI, PRESIDENT,

AHART, FRINZI & SMITH INSURANCE, ON BEHALF OF THE

INDEPENDENT INSURANCE AGENTS OF AMERICA

Mr. AHART. Thank you very much. Good afternoon, Chairwoman

Kelly and members of the subcommittee.

As mentioned, I do own an insurance agency in New Jersey. It

is a second-generation insurance agency started by my father in

1950. We currently have half of our business in personal lines, and

I also am an auto insurance buyer in New Jersey, including three

young drivers. So I do have firsthand knowledge.

[Laughter.]

Mr. AHART. Also, I will be president of the Independent Insurance Agents of America in October.

Chairwoman KELLY. Congratulations.

Mr. AHART. Thank you. Well, maybe, right.

[Laughter.]

Mr. AHART. One crucial theme you will hear the IIAA say repeatedly is our desire to identify mechanisms that can be used to help

foster uniformity of the existing State insurance regulatory systems. At the same time, we recognize that in many respects insurance remains an inherently local business. And any system of insurance regulation must be flexible enough to accommodate differing local, State and regional needs.

The current problems related to the over-regulation of auto insurance rates in many States implicate both the potential benefits

of greater uniformity and the need to accommodate different local

contexts. Rates that will be viewed as adequate will, of course, vary

from State-to-State with the specific conditions of the respective

marketplaces.

8

In many States, however, dozens of auto insurance carriers have

withdrawn from the insurance markets over the course of the last

2 decades because of excessive efforts to account for such conditions

have resulted in approved rates that have been grossly inadequate.

In a competitive economy such as ours, insurance companies cannot be required to lose money. In some States, however, the only

effective alternative for them, with respect to auto insurance, has

been to abandon the marketplace completely. And in New Jersey,

in order to leave the auto marketplace, you need to turn in your

license and leave in all lines. And even though they are making

money in other lines, it still is paying some of them to leave New

Jersey completely, just because of the loss in auto insurance.

Consumers suffer because their insurance markets are underserved and because drivers with better driving records and those

that live in lower exposure areas subsidize other drivers. Consumers also suffer, because even in times when approved rates are

more than adequate, insurers are reluctant to reduce prices for fear

that they will not be able to raise them again if cost inflation accelerates. Insurance agents also suffer because of the lack of markets

and fewer products to sell. The challenges any reform effort in this

context must overcome are thus significant.

I would now like to spend a few moments discussing in more detail the rate regulatory environment in two States in which it is

particularly onerous, my home State of New Jersey and Massachusetts.

In New Jersey, new carriers may change premiums without affirmative approval of the insurance commissioner. We have a prior

approval law, and it generally takes at least 6 to 12 months for the

commissioner to make an initial ruling. The commissioner has not,

however, granted a significant rate increase request in recent memory, and the last several commissioners have refused to grant any

increases at all during an election year. The futile process is coupled with two particularly burdensome regulatory requirements:

First, although insurance companies are not guaranteed any

profits, they are prohibited from earning more than 6 percent in

profits from their sales of auto insurance over any 3-year period.

This excess profits law is very difficult for companies to make any

kind of rate of return.

Second, carriers are required to take all comers, meaning they

are required to insure any licensed New Jersey driver that has less

than eight points that applies for coverage. Because of the difficulty

in raising rates under the State’s procedures, drivers with good

driving records inevitably subsidize those with poor records.

In Massachusetts, the maximum auto insurance rates for all carriers are established globally. In August of each year, briefs are

filed by both industry and Government representatives, and a full

trial-type hearing is then held that can last 3 to 4 months, during

which they have testimony and all kind of different presentations.

At the conclusion of these proceedings, the insurance commissioner

unilaterally sets the rates that will apply during the next year.

In summary, auto insurance needs to be more uniform, while respecting the differences within each State. We need to allow the

free marketplace to work by enhancing competition. At the same

time, we need to remove politics from the rate-making system.

9

In New Jersey, commercial lines has been deregulated for a period of time, and the commercial marketplace has blossomed. Years

of company insolvencies and higher premiums have proved to be

wrong in commercial lines. Likewise, States like Illinois and South

Carolina, who have had similar problems like New Jersey and

Massachusetts, have changed to make their laws more competitive

and their marketplace more competitive, and at the same time

their premiums have been reduced.

So, with that, I thank you for the opportunity to present our testimony and look forward to any questions you may have.

[The prepared statement of Thomas B. Ahart can be found on

page 55 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Ahart.

Next, we have Mr. Robert Hunter, the Director of Insurance for

the Consumer Federation of America. Mr. Hunter served as the

Federal Insurance Administrator under both Presidents Ford and

Carter. Mr. Hunter, we are pleased to have you here today. Thank

you for testifying.

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF

INSURANCE, CONSUMER FEDERATION OF AMERICA

Mr. HUNTER. Thank you, Madam Chairwoman.

Consumers agree that there needs to be more uniformity and

more efficiency in the regulation of rates and forms. And, in fact,

we participated in a process of developing methods for more efficient, timely and effective review of rates and forms through the

National Association of Insurance Commissioners over the last

year, including the CARFRA and Improvements to State-Based

Systems Initiatives. We have even proposed ways which will shorten the time regulation takes to no more, in any State, than 30 to

45 days.

The assumption, however, that over-regulation of auto insurance

as a major consumer problem in America is not right. The real

problem that we face as consumers is market conduct abuses that

are not caught by the State regulatory regimes in any State, much

less in one or two States. So you have vanishing premiums, you remember, with Prudential and MetLife and insurers like that. You

have State Farm putting on parts that were found by courts to be

fraudulent and in breach of contract. You have race-based premiums now recently being caught and red-lining in minority communities that courts have ruled against.

These are the issues that are very important to consumers. They

really abuse consumers, and these are the ones that have national

implications. The States have done a poor job in policing these

practices.

There is no groundswell from consumers for faster products or

less review of rates and forms. I have never, out of 27,000 calls I

have received in my career that I have estimated, had a consumer

say, you know, we need less look at the insurance companies or,

you know, I can’t find some product that I am looking for that some

company wants to get to market.

Some of the new ideas that insurance companies come up with

have potential to downright harm consumers. Congress right now

is looking at the possibility of controlling use of the human genome

10

by health insurers, for example. That is a potential problem. Credit

scoring is now being used in auto insurance by 93 percent, according to Conning and Company in a study that just came out today.

Some insurers, they say, give more weight to the type of credit card

you own or other elements of your credit history than to your driving record when establishing auto insurance prices.

When I was Texas Insurance Commissioner, I first heard of the

use of credit scoring when a woman told me she was being surcharged for her insurance because she had declared bankruptcy 7

years earlier. I asked what kind of insurance it was, and she said

‘‘auto insurance,’’ and I almost fell over, because I couldn’t understand the connection between the fact that she had filed bankruptcy a few years ago and her driving ability. But I really got mad

when she told me she never went bankrupt, that she, as a single

mother, got a second job, pulled herself out and withdrew the bankruptcy, but it was still being used to up-rate her by the insurance

company. I think Government needs to look at those kinds of

things and see if those are proper to use.

Progressive Insurance Company in Texas is now using Global Positioning Satellites to follow cars around so that they track where

you are, where you are going, what time you drive, and so on in

cars they insure. I think Government needs to look at that. That

is an incredible invasion of privacy, in my view.

Regarding New Jersey and Massachusetts, these two States, over

the last 5 years, had rates of return, New Jersey of 8.3 percent,

compared to 10.8 in the Nation, and in Massachusetts, 8 percent.

They are slightly below the national average, but there is no crisis

of profitability in these States. The traffic density in New Jersey

is 2.67 times the national average, and in Massachusetts, it is 2.19

times the national average, and therefore their rates are going to

be high, and particularly in New Jersey, where you have one of the

richest benefit systems in the entire country, Mr. Ferguson. It is

very rich. That obviously costs money.

Can companies succeed in New Jersey? Absolutely. New Jersey

Manufacturers is a classic example, and Plymouth Rock in Massachusetts is another example of a very successful company competing in that State. The market share in New Jersey of New Jersey Manufacturers has gone from 9.8 percent in 1994 to 12.7 percent in 1999. They have the lowest complaint ratio in the State.

They have paid dividends to policyholders every year since 1918—

$1.4 billion in dividends in the last 10 years alone to policyholders.

Therefore, you can succeed in New Jersey. You have to be efficient.

Maybe why companies are withdrawing is they are not competitive.

Consumers have looked at California’s auto insurance regulatory

system, and we find California to be the best practices in the country.

I would conclude here because I see the red light is on.

[The prepared statement of J. Robert Hunter can be found on

page 62 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Hunter.

Finally, we are going to hear from Mr. Robert Zeman. He is the

Vice President and the Assistant General Counsel for the National

Association of Independent Insurers. Mr. Zeman directs the State

11

Government relations activities for the NAII. Mr. Zeman, we appreciate having you here today and look forward to your testimony.

STATEMENT OF ROBERT L. ZEMAN, VICE PRESIDENT AND ASSISTANT GENERAL COUNSEL, NATIONAL ASSOCIATION OF

INDEPENDENT INSURERS

Mr. ZEMAN. Thank you. Good afternoon, Madam Chairwoman,

Members of the subcommittee.

NAII represents over 690 property/casualty insurance companies.

We are the largest property casualty trade association. Our perspective on this issue is that, indeed, some States have excessive

regulation and that impedes the ability of consumers to have a

wide array of choices in the marketplace. The good news, however,

is that other States do take a more competitive approach, with

clear benefits for consumers, more choices for consumers, and these

competitive States provide the road map for State-based reform

that can be accomplished in the more troubling States.

Yes, in the view of our members, New Jersey is a State where

excessive regulation has restricted competition, and thus had a

negative impact on consumers. We recently conducted a specific

analysis of the problems in the automobile insurance regulatory

system in New Jersey, and the results confirmed the concerns that

have been expressed by our members for some time and the points

that have been made by other panelists today.

New Jersey has a highly politicized and volatile regulatory system that makes it very difficult for insurance companies to compete, contrary to Mr. Hunter’s assertion. The culmination of these

regulatory factors and restrictions has hurt the marketplace and

hurt New Jersey’s consumers, and it is clearly evidenced by the

companies that have made their independent decisions to withdraw

from the State.

Other witnesses have given details about the problems in New

Jersey, and they are detailed in our written statement. But first

and foremost, would be the onerous rate regulatory system that

was outlined by the agent representative. Other problems include

restrictions on rate adjustments in the involuntary, as well as the

voluntary market, and all of this is of critical importance to our

members.

The results of our analysis were confirmed by an independent

study conducted by Professor John Worrall of Rutgers University.

And basically he concluded that all of the problems in New Jersey

have indeed resulted in fewer firms writing business in the State

and fewer choices for consumers. And the 1999 rate rollback was

mentioned, where the rollback was implemented, but the cost-saving measures were never really fully implemented.

Now, some of the reforms recently implemented in New Jersey

at least have elements of steps in the right direction, but major additional reform is needed, and the details of our suggested reforms

are in our statement.

Now, in Massachusetts as well, as you have heard, we see similar problems. There is unequivocal evidence in the marketplace

that the strict regulatory environment, the strict regulation of

rates, and forms, and underwriting has led directly to a decrease

in the choices available to consumers. And by law, as was noted,

12

the commissioner actually sets the rates in Massachusetts. That is

a result of the legislative system that is in place. It is that legislative, regulatory structure which needs to be reformed. All of this

has a tremendous adverse impact on consumers in Massachusetts.

But as I said at the outset, there is good news in other States,

and a few of them have been mentioned, but you need to be aware

that there are actually several States out there that take a more

competitive approach, and a wide array of academic studies, our

own surveys and our own studies with our members have confirmed the same thing; that in the States with the more competitive environments, consumers have a better choice. They have more

choices in terms of coverages and insurers from which they can get

coverages. There is less subsidies, there is more accurate pricing.

These are all clear benefits for consumers in the more competitive

environments.

It is most important to note that some States like Illinois, where

I come from, and Wisconsin, have used the more competitive system for years. But the best news of all was mentioned regarding

South Carolina, which went from a restrictive regulatory environment to a more competitive approach. And very quickly the number

of companies doing business there doubled, rates fell, the residual

market population fell. There are a number of solid indicators of

the progress that was made in South Carolina, and it gives us hope

for other States.

Some Insurance Departments across the country are implementing operational reforms that have been proposed by the National Association of Insurance Commissioners. But in addition to

those operational efficiencies, we need better public policy, legislative changes in the more restrictive States. We are also pleased

that the National Conference of Insurance Legislators just produced a model bill which would help truly enhance competition, but

that model, or elements of it, must be enacted by the States.

NAII has continued to believe, and we will continue to support

State regulation, we believe the State-based system can work. We

totally reject any assertion by Mr. Hunter or anyone else that the

California system is better for consumers. Their study was completely flawed, ignoring the fact that the reduction in premiums

have been due to a reduction in losses. The prior approval system

in California has hurt consumers. Other academics have said that

if not for the prior approval system in California, rates probably

would have gone lower. But, because of the prior approval system,

companies, even when they saw loss costs going down, felt somewhat reluctant, perhaps, to increase rates or to lower rates as far

as they could for fear of inability to raise them down the road.

Proposition 103 has been a bad deal for consumers in California.

Clearly, when you look at the total landscape across the country,

the total academic evidence, the experience of our members countrywide is that in the more competitive States there are better

choices for consumers, less subsidies, and those States provide the

road map for State-based reform.

I have gone over time—my apologies.

[The prepared statement of Robert L. Zeman can be found on

page 103 in the appendix.]

13

Chairwoman KELLY. I have been clocking exactly the number of

seconds. You are not that far over, but thank you very much.

I appreciate the testimony of all of you today. I have a few questions.

I, first of all, want to say, Mr. Snyder, for a tired Congresswoman, it was nice to read your testimony. You sure summed it

up and made it easy for me to read, and I thank you very much.

I appreciate that.

We have been joined now by several other members. I am going

to start the questioning here. I just want to welcome the people

who have come in—Ms. Schakowsky, Mr. Moore, Mr. Clay.

I am going to just ask one question, and I would like an answer

from all of you. New York insurance costs have been rising, in

large part because of $1 billion in fraud that is committed annually. But instead of imposing price controls, the governor is fighting

the fraud head on. New York is cutting the reporting and processing time for medical claims. It is letting consumers pick

preapproved doctors and repair shops in exchange for lower rates.

It is barring uninsured drivers from filing claims, raising the penalties for fraud and making the attorney general a special prosecutor for insurance fraud.

Do you think this is a better approach to reducing the costs and

increasing the choices for the consumers, instead of imposing a sort

of a stop-gap price control that is only going to probably worsen the

problems in the long run?

I would be glad to have any of you answer this. I would like to

hear especially from you, Mr. Litan.

Mr. LITAN. There is an old saying in economics that if you have

a problem, you want to have a solution that directly attacks it, and

you have outlined that if the problem is fraud, you attack it directly, not indirectly.

Now, Mr. Hunter raised in his testimony some legitimate points

about market misconduct. He said, and I think it is true that if you

look across the country, insurance departments have scarce resources. Many of them are underfunded. They have difficulties getting revenue from their State legislatures. But wouldn’t it make a

lot more sense to get them out of the business of doing rate regulation, which as I said makes no economic sense, and use those resources to attack the market misconduct, which includes, by the

way, not just misconduct by insurance companies, but also misconduct by insured, fraudulent claims?

So I think it makes all of the sense in the world to attack the

problem directly.

Chairwoman KELLY. Does anyone else want to—Mr. Hunter,

would you like to speak?

Mr. HUNTER. Yes. Well, you know, New York has been, for decades, viewed as the State to look to by the rest of the country kind

of for leadership in a lot of issues. That is probably why they have

prior approval for their auto insurance.

Chairwoman KELLY. So you think New York is a pretty good

State?

Mr. HUNTER. It is a very good State on regulation, I mean, historically, anyway. I don’t know how currently, but actually it does

have prior approval of auto insurance rates. So, if the PIP rates are

14

going up because of fraud, they still have to come forward to the

Department and say we want to raise the rate and get the approval

of the Department, and I think that is appropriate. And I do think

that the direct attack on the PIP fraud is the right approach in any

State that has a problem with fraud in PIP.

Chairwoman KELLY. Apparently, I have just been advised by

counsel. New York has flex rating, not prior approval, for private

passengers.

Mr. HUNTER. That is not true.

Chairwoman KELLY. Well, that is what we have here.

Mr. ZEMAN. They have flex rating for private passenger automobiles.

Chairwoman KELLY. We do have flex rating in New York.

Mr. SNYDER. Madam Chairwoman.

Chairwoman KELLY. Yes?

Mr. SNYDER. If I might add further to the comments, New York

is at a juncture at this point, a very important juncture. It has a

fundamentally good no-fault system of reparations benefits, but a

growing fraud problem has exerted significant cost pressures all

across the system and has resulted in, for example, a residual market plan growing alarmingly over the past few years.

The State administration, as I understand it, is proposing really

a twofold approach: The first is to address the underlying fraud

problems by something called Regulation 68, which would require

prompt notification of claims, among other factors, and would increase penalties and increase resources to fight the fraud that is

broken out there. That is clearly something that needs to be done.

The second thing is, the Administration is proposing the continuation of important free-market elements that have been added to

the New York system, without which the market could very well

go the way New Jersey has. That includes the flex rating process—

the idea that, at least for some slight amount of rate increase, it

is something the companies can get when they really need it. If

that is not continued by the legislature, and there is opposition in

the legislature, it could well be that we would have the same kinds

of problems in New York State that we do elsewhere. So, the Administration is trying to address both the maintenance of the private enterprise elements in what is otherwise a very strict regulatory system and to address the underlying problems.

Thank you.

Chairwoman KELLY. Thank you very much.

Mr. Zeman, you have something you would like to say?

Mr. ZEMAN. Just briefly. I agree with what Mr. Snyder has said.

From our indications, clearly, fraud is the major problem in New

York right now. And, clearly, the package that you outlined before

the State legislature is clearly directed at that problem and can go

a long way toward resolving issues in New York. New York does

have flex rating now. It does sunset frequently. And down the road

in New York, New York might want to look at either making that

permanent or considering additional, more competitive regulatory

systems.

But, clearly, for now, you are absolutely right, Madam Chairwoman, the package that is oriented toward fraud in the legislaVerDate 11-MAY-2000 14:36 Feb 05, 2002 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 74624.TXT HBANK1 PsN: HBANK1
15

ture would be a major step toward reform, for the benefit of consumers.

Chairwoman KELLY. Thank you very much.

I wanted to say that, according to the State Rate and Form Law

Guide of the American Insurance Association, they say that New

York does have private passenger flex rating.

Mr. HUNTER. That may be correct. I may have been thinking

back a couple of years.

Chairwoman KELLY. Your comment, Mr. Zeman, is about the

sunset problems with it.

Mr. ZEMAN. Yes.

Chairwoman KELLY. Something that we may need to discuss

with our New York colleagues in the State Assembly and Senate.

In the meantime, I am going to turn now to Mr. Clay. We welcome you, Mr. Clay, and thank you very much for being here.

Mr. CLAY. Thank you very much. Just a few questions.

Mr. Snyder, you testified that over-regulation by States such as

New Jersey and Massachusetts not only penalizes good drivers to

subsidize bad ones, but also forces citizens in the rest of the country to subsidize high-risk drivers in those States. Can you elaborate

how this negative subsidization occurs.

Mr. SNYDER. Yes, sir, I can.

Problems in the auto market in New Jersey can be spread to all

other lines of property and casualty insurance, through something

that is phrased a ‘‘lock-in law.’’ In other words, in order to exit

from the auto market, you have to give up the ability to do all

other lines of property and casualty business. So you start with a

spot problem in automobile insurance, and pretty soon you have a

problem that affects homeowners and commercial property and casualty insurance.

Then, if the company involved is part of a larger national company, the shortfalls in New Jersey have to be made up from somewhere, and they are made up from capital that has been contributed to the company by policyholders in other States. So you have

even an interstate subsidy issue going on with respect to New Jersey.

Mr. CLAY. OK. Along those same lines, say in States where there

is no regulation—I represent Missouri—and you know rates vary

according to zip codes and other factors, do you ever take into consideration drivers’ records, good drivers, no claims ever filed? Do

you ever take that into consideration when you set premiums and

rates?

Mr. SNYDER. The driving experience of the drivers?

Mr. CLAY. Yes.

Mr. SNYDER. It is one of the many factors, one of the principal

factors that are used—the driving experience also. The conditions

under which the driving occurs, is it driving to and from work,

which are the highest accident times. All of those factors are considered, as is the make and model of the motor vehicle, because we

know there is very different loss and theft experience with respect

to motor vehicles. So there are many, many factors that are used

to determine as accurate a rate as possible. There is a strong market incentive for that, to be as accurate as possible in rating.

16

Mr. CLAY. Just to be clear, you are advocating today against

over-regulation by the States of New Jersey and Massachusetts,

correct?

Mr. SNYDER. That is correct.

Mr. CLAY. You don’t think there should be Rate Commissions

and all of that?

Mr. SNYDER. We think there is a proper role for regulation, principally in the solvency area, because that is ultimately the promise

that the insurance company makes, that it is going to be there

when you have a claim. We also believe that regulations should be

pro-competitive.

Mr. CLAY. Yes.

Mr. SNYDER. And, unfortunately, rate regulation, which was

well-intended, can have a very, very adverse impact on consumers,

generally, in terms of creating shortages that didn’t have to exist.

Mr. CLAY. What factors prompted the New Jersey and Massachusetts statutes?

Mr. SNYDER. Both States are high-cost states. They are perennially high-cost States. They have prior approval systems of regulation. In fact, in Massachusetts, it goes beyond that to the State directly, doing what it calls fixing and establishing the rates. Once

a determination is made that the market isn’t competitive, and

that is routinely made, despite evidence to the contrary.

So, when you get the combination of high costs and a rate approval system, a rate regulatory system that gives the State the

authority to set prices, you have a very volatile situation with the

results that you have got in Massachusetts and New Jersey, which

means that ultimately consumers aren’t benefited because shortages are unnecessarily created.

Mr. CLAY. Mr. Litan, let me ask you, you know, some States, I

guess most States now, mandate auto insurance. Do you know of

any associations who oppose that initiative in any State? Most of

them don’t, do they?

Mr. LITAN. Most States do mandate auto insurance.

Mr. CLAY. Yes, right.

Mr. LITAN. Yes.

Mr. CLAY. But do you know of any insurance associations that

ever opposed mandating auto insurance?

Mr. LITAN. Some people are shaking their heads. I don’t, but

there are other people here——

Mr. CLAY. Mr. Snyder, would you answer?

Mr. SNYDER. Yes, sir. We have traditionally opposed mandatory

insurance, but recognize that it has some appeal, and we have tried

to work within the system accordingly. But we do, as a policy position, oppose mandatory insurance.

Mr. CLAY. I see.

Mr. ZEMAN. And the same for our organization. For the record,

we have opposed it. It is another example of over-regulation.

The States, when they mandate, they don’t always mandate just

the fact that you have insurance, but having a specific amount that

allegedly is right for everyone. We think it should be a matter of

consumer choice, a matter of consumers selecting the right benefit

levels for themselves.

17

Mr. CLAY. Mr. Zeman, let me ask you about choices, and premiums, and pricing for insurance. I represent an urban area in

Missouri, and the rates vary so widely throughout my State. Now,

I realize that there are factors that set your rates, but let us take,

for instance, a 70-year-old retired woman parks her car in a garage, never had a moving violation, never an accident, and never

filed a claim, but she pays the same rate as, say, a younger driver

who has had moving violations, who has filed claims.

What causes that?

Mr. ZEMAN. First of all, I would like to know more details about

whatever this case is. But, second, Missouri, we generally hear, has

a positive environment. There are a number of companies doing

business there and giving consumers other opportunities and other

choices. So, if any individual feels that he or she is not paying the

right amount of premium, one thing that we recommend is they

shop around to other companies. The companies, as Mr. Snyder

and others indicated, use a number of factors to determine insurance rates. It is not a one-size-fits-all, and that needs to be considered as well.

Mr. CLAY. OK.

Mr. HUNTER. Mr. Clay, actuarially, the older person typically

does pay less than the younger person, and people with accidents,

everything else being equal, do pay more than people that don’t

have accidents.

Mr. CLAY. Except for in Missouri. See, I am a consumer in Missouri, and I shop around for my auto insurance. As a member of

the State legislature, I was able to use an address in the State capital, which is in a rural setting. Legally, I can do that. And my premiums were a lot less than what I pay now in the City of St. Louis

because that is now my legal residence. I don’t have any moving

violations. I haven’t filed any claims. I have a garage, park my car

in it.

Mr. HUNTER. The other factor is territory. They do charge differential rates based upon where you live, and the cities do pay

more. There is no question.

Mr. CLAY. Based upon zip codes or what factors are related

there?

Mr. HUNTER. Some companies do use zip codes.

Mr. HUNTER. It depends on the State, but some companies use

zip codes and some companies don’t, but there is definitely a territorial aspect to the rating.

Mr. ZEMAN. Different companies definitely use different rating

plans. And you know what? It is another example of competition

and how companies find different market niches, and ultimately we

think that benefits consumers.

Mr. CLAY. And now I heard Mr. Hunter say that you don’t have

a crisis of profitability.

Chairwoman KELLY. Mr. Clay, I am sorry, but you have gone

well over your 5-minute limit.

Mr. CLAY. Perhaps someone on this side would like to share their

5 minutes with me.

Chairwoman KELLY. Perhaps they would.

Mr. CLAY. Perhaps.

[Laughter.]

18

Chairwoman KELLY. Perhaps they would, but right now I am

asking you—I am saying that everyone——

Mr. CLAY. OK. I will stop now, and perhaps they can get back

around to me.

Thank you, gentlemen.

Chairwoman KELLY. Thank you. Yes, if we want, we can have a

second round. Thank you.

We will move now to Ms. Schakowsky.

Ms. SCHAKOWSKY. Thank you, Madam Chairwoman.

I have to tell you that as a person who self-identifies as a consumer advocate, I always find it somewhat difficult to swallow

when industry people come in and tell us what is really good for

the consumer, and then the person representing the consumer advocacy organization is opposed, in general, to the proposals. What

is a consumer to do? How are we to understand what is really in

our interest?

My background is, as I say, dealing with consumer organizations

and then in the State legislature, where we dealt with problems in

Illinois, by the way, of insurance red-lining, various kinds of discrimination, particularly based on neighborhood. And I have to tell

you that in all of my experience, never once has a consumer come

to me and said, ‘‘I am so sick of all of these regulations. I am really

wanting to see this industry more deregulated.’’

So, perhaps, and I do apologize for coming in late, but I am trying to understand how exactly the consumer—well, let me ask a

threshold question. Why are we here? Are you seeking national

actin on auto insurance regulation; are any of you? Mr. Snyder,

what do you hope to get from us?

Mr. SNYDER. Madam Congresswoman, I think the first thing is

that as the Congress looks at insurance issues, and particularly the

Financial Services Committee, more than had been the case in the

past, it is important to understand the functioning of it, so that important decisions that you will have to make in the future you can

make on the basis of that information.

Ms. SCHAKOWSKY. And what might we be looking at, in terms of

auto insurance? Just single that——

Mr. SNYDER. We are looking at a record of——

Ms. SCHAKOWSKY. No, for potential action in the future.

Mr. SNYDER. We support an approach that would return the auto

insurance market and all other property and casualty markets to

a free enterprise model, rather than a model in which the State or

Federal Government or anyone else has the authority to fix prices,

has the authority to make all kinds of market-based determinations that ultimately, in the end, results in unnecessary shortages,

and disruption. And New Jersey is a classic example, absolute

chaos in the market that benefits no one.

Ms. SCHAKOWSKY. So we are focusing just on rates here.

Mr. SNYDER. We are focusing on rate regulation and over-regulation, in general, by the States today.

Ms. SCHAKOWSKY. Yes, Mr. Zeman.

Mr. ZEMAN. If I may, one of the reasons why you don’t hear consumers in Illinois complaining is because we hold Illinois up as the

model for other States.

19

Ms. SCHAKOWSKY. Oh, I know, I know, I know. But we do have

a good deal of regulation. We do have a good deal of regulation.

Mr. ZEMAN. That is true. It is true. Illinois is not without regulation.

Ms. SCHAKOWSKY. And we are not without regulation.

Mr. ZEMAN. That is right.

Ms. SCHAKOWSKY. And, in fact, some of us would like to think

that there ought to be a little bit more regulation. So what I am

not hearing is we love it, because the insurance industry is so

great, and in fact we would like a little less regulation to make it

even better. This has never come up in conversation.

Mr. Hunter, did you want to comment?

Mr. ZEMAN. Can I add one more?

Mr. HUNTER. I just wanted to say that the reason the insurance

companies want hearings like this is to pressurize the States to try

to deregulate and take away consumer protections.

Ms. SCHAKOWSKY. And what would those be?

Mr. HUNTER. They are pushing very hard. The National Association of Insurance Commissioners has moved very fast to try to simplify regulation, to try to make it quicker, to make it more effective, and to even promise that in any State, even with the toughest

regulation, that within 30 to 45 days, there will be a final answer

on any filing. They have done all of that. That is not enough for

the insurers. Now they want to deregulate auto insurance. The insurance companies came back to the NAIC and started pressurizing them late last year, early this year. They are starting to look

at it again, and that is what is going on.

Ms. SCHAKOWSKY. Well, you heard Mr. Snyder’s summary of why

this is bad for consumers, why the current regulatory system is bad

for consumers. Can you summarize then why you disagree with

that.

Mr. HUNTER. Well, every State has a slightly different regulatory

regime. No State has no regulation. Even Illinois has regulation of

forms, for example. You can’t put a policy out in Illinois without

getting approval. So every State has a slightly different regime.

The legislatures of the State make their mind up, and quite frequently it has to do with how much urbanization there is, and

there has been red-lining in a lot of the big cities.

Ms. SCHAKOWSKY. Including mine.

Mr. HUNTER. There have been serious problems. And so the

States, over the years, have moved to tougher regulation in those

situations. In the more rural areas, they have not moved that

tough. That is historic.

Now, in my testimony I put forth that California has the best

system in the country because it combines both regulation, as a

backstop, with real competition; that is, they apply the antitrust

laws, they get rid of the antigroup, and antirebate laws. They allow

the companies to really fight and have to operate at arm’s length,

unlike in most States where there is an antitrust exemption, even

with no regulation.

So I think, if you want to look to a best-practices model, look at

California. Since Proposition 103, the rates have fallen by 12 percent; whereas, the typical State has gone up by 37 percent. The assigned risk plan has almost disappeared, the uninsured motorist

20

has fallen about in half, and the insurance companies made the

most profits. The biggest complaint, as you have heard again today

is, ‘‘Oh, we made too much money in California. It is terrible for

consumers.’’ Well, we like it that way, when rates are falling, and

they are making money.

Chairwoman KELLY. Thank you very much, Ms. Schakowsky. I

am sorry you are over time here.

We are going to move to Mr. Moore.

Mr. MOORE. Thank you, Madam Chairwomanperson. I appreciate

the testimony of the witnesses here.

Mr. Snyder, if I understood your testimony, basically, it was that

the insurance companies would like less regulation, more competition or opportunity for the market to work. Is that essentially correct?

Mr. SNYDER. That is correct.

Mr. MOORE. What do you say to Mr. Hunter and what he just

said and some of his concerns about consumers and the way that

insurance companies affect consumers?

Mr. SNYDER. Well, let me start by saying this: There are probably a million consumers in New Jersey right now that are wondering how effective their regulatory system really is as they are

cast out into a market without some of the very players that are

major players in virtually every other State. And it is the insurance

regulatory system, with its element of price control, which is truly

extraordinary in this day and age, for any product anywhere in the

United States, indeed, anywhere in the world, for the Government

to be able to directly set prices, as it can in virtually every State.

When that authority is exercised in an environment with otherwise

high costs, significant market shortages can occur which, in turn,

benefits no one, certainly consumers most of all.

So the issue today is, as this subcommittee looks at the largest line of property and casualty insurance, almost $120 billion is this

line of insurance in the United States. So it is appropriate for this

subcommittee to look at its dynamics and its regulatory system and

what is the best way to deliver those products to consumers. It

needs to look at the different models that are out there.

Now, Mr. Hunter mentioned California. Fortunately, for the

drafters of Prop 103, it was put in place at a time in which other

factors were dramatically driving down costs. The Supreme Court

there reversed what is called a third-party bad-faith doctrine,

which allows two actions to be brought in every automobile accident case. That reversal dramatically cut costs. In addition, highway safety measures and antifraud measures occurred at the time

when Prop 103 came in, in California.

Now, because those costs were going down, the rate regulator

didn’t need to force the premiums down because they were going

down on their own. In fact, the evidence seems to be that the premiums would have gone down even more dramatically if the companies functioned under a system where if they needed to adjust

to market conditions by raising rates, they could do that. Compare

that with the absolute disaster in New Jersey and Massachusetts,

where there are few national players, where consumers do not have

the choices they do elsewhere.

Mr. MOORE. Thank you, Mr. Snyder.

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Mr. SNYDER. That is how we prevent that kind of thing from

happening. It is what we are focusing on.

Mr. MOORE. Mr. Zeman, I believe you testified that levels of insurance should not be mandated; is that correct, sir?

Mr. ZEMAN. That is the position of our association, that it should

be up to each individual and their family to make the choice as to

what level is right for them.

Mr. MOORE. Should there be minimum levels of insurance by

people who drive cars?

Mr. ZEMAN. That largely reflects what many States have right

now—you know, a minimum level. In some States, it varies from

State-to-State.

Mr. MOORE. Do you agree with that, that there should be minimum levels and that States should be able to set minimum levels?

Mr. ZEMAN. Again, actually, our position is that it is bad public

policy for the States to mandate the purchase of insurance and

mandate the specific levels as well. There have been tremendous

problems in enforcing this, since compulsory was tried back in the

1920s.

Mr. MOORE. So you are saying or your association would be taking the position that people could drive automobiles without any insurance if they chose to do that?

Mr. ZEMAN. No. Well, our position is that people should be adequately insured, and that includes making sure they have underinsured motorist coverage to protect themselves if they are hit by

an uninsured motorist.

Mr. MOORE. Well, how do you do——

Mr. ZEMAN. We do recognize that the vast majority of States

have adopted compulsory provisions, so we work with our members

in helping them implement in those States.

Mr. MOORE. But you disagree with a requirement or a mandate

for minimum levels of insurance?

Mr. ZEMAN. Philosophically, yes, because of the mandate.

Mr. MOORE. We are talking about the real world here. I am not

talking philosophy.

Mr. ZEMAN. Once again, the position of our members is that the

specific levels should not be mandated by the States.

Mr. MOORE. Not even a minimum level.

Mr. ZEMAN. Not even a minimum level.

Chairwoman KELLY. Thank you very much. Mr. Moore, have you

finished? Do you want one more question?

Mr. MOORE. I think my time is up.

Chairwoman KELLY. Just about.

Mr. MOORE. Thank you very much.

Chairwoman KELLY. OK. Thank you.

I turn now to Mr. Capuano. Oh, I am sorry. We have Mr. Tiberi.

Mr. Tiberi, do you have questions?

Mr. TIBERI. Yes, but I will defer to the——

Chairwoman KELLY. I will take you first.

You two can fight it out over there, just let us go.

[Laughter.]

Mr. TIBERI. Thank you, Madam Chairwoman. I apologize. I was

at a markup actually.

22

Just a couple of observations and then maybe a question, an

open-ended question to everyone on the subcommittee.

First, Mr. Hunter, you mentioned about State legislatures making the law. I am from Ohio, and we have a court that likes to

make the law in Ohio. So I would take exception to your statement,

specifically with respect to auto insurance, by the way.

We had, in Ohio, a few years back, a bill that was introduced

dealing with no fault insurance. And through testimony in the Insurance Committee, both positive and negative, it became clear

that, at least from Ohio’s perspective, no fault would have a detrimental effect to consumers, ultimately, Ohio, because of a lack of

competition because insurers wouldn’t be writing there, at least in

Ohio, which I think is considered a competitive State for the industry.

There are two Ohio companies that are large companies, national

companies, that do not write in either Massachusetts or New Jersey. I don’t know if anyone here is an expert at least on what

would the reasons be that a national company not write in New

Jersey and Massachusetts.

Mr. AHART. As an agent in New Jersey, we have had quite a few

national companies not participate in New Jersey, and it is pretty

simple. It is just because they don’t believe they can make money

in New Jersey.

Mr. TIBERI. And companies that are writing in New Jersey, what

reason is it that they continue to write there?

Mr. AHART. Some of them have large books of other lines of business other than auto, and some are making money in auto insurance. You know, efficiency clearly is a key to that, but the simple

fact is, again, there wouldn’t be so many leaving if they could actually make money. And the fact is that so many are leaving right

now, it is really starting to put a burden on a lot of the others that

can’t even absorb the 25-percent market share that is going to be

missing once those companies leave.

Mr. TIBERI. In Ohio, with this most recent court decision, there

have been several companies that have already pulled out of writing in Ohio. Are there other States where an example could be

used or either a legislature or the court has regulated, has gone

farther, in terms of regulating the industry, where there has been

a significant pullout of carriers? Can anyone point to that?

Mr. HUNTER. Not really. Usually, there are threats, but they usually don’t follow through. There were threats, for example, as Proposition 103 was being debated, that if that happens, we are going

to pull out, but they didn’t. In fact, 17-percent more company

groups are writing now in California than before.

Mr. LITAN. But we discussed earlier in the testimony the flip

side, and that is South Carolina deregulated, it went the other direction, and the number of insurers doubled within the space of a

little more than a year.

Mr. HUNTER. I might comment on that too.

The numbers of insurers doubled, and I have done a little bit of

research. I only got the testimony notice yesterday, but I made a

couple of phone calls. The doubling of companies in South Carolina

is almost exclusively within groups that are already in the State,

when they have added very high-cost, nonstandard companies,

23

which I have great difficulty finding a great consumer benefit out

of this sudden inrushing of very high-priced companies into South

Carolina.

Mr. ZEMAN. If I may, rates have fallen for consumers in South

Carolina—let me finish, please—and the residual market population has gone down as well. So there are a number of factors, indisputable, that the South Carolina deregulation has been a success story.

Mr. HUNTER. Unfortunately, as I pointed out in my testimony,

the South Carolina data that you are relying on is wrong. The

NAIC left the recoupment charges out of the data.

Mr. ZEMAN. Once again, Mr. Hunter, you are talking about rates,

and I stand by what I said about rates, in terms of the companies

there and the residual market population has decreased—no dispute there.

Mr. LITAN. It went from, roughly, a million people in the assigned market to only about 50,000 today.

Mr. HUNTER. There was no assigned market in South Carolina.

Mr. LITAN. Residual market.

Mr. TIBERI. I know my time is about to expire. Can I ask the

other two witnesses who haven’t spoken yet if they have any clue?

Mr. SNYDER. Thank you very much, Congressman. I think the

issue here is to apply the lessons in every other product and market to insurance, and it really functions according to the same

rules.

What occurs in States where costs are high, and in Ohio, you are

right, there were some very adverse court decisions, but the legislature dealt with that, and that law was signed yesterday.

But in States where those costs continue to rise unaddressed,

and there is price regulation which is imposed on insurance companies, just as if it were imposed on food producers or anyone else,

the result would be to create scarcity in the market. Because a

company, when unable by Government fiat to earn what it needs

to cover its costs, will try to reduce the number of products that

it is selling in that market.

And we have that case in both Massachusetts and New Jersey,

where major national writers, including writers which are based in

your State, as you mentioned, are simply unable to do business because of the economics imposed upon them through Government

regulation.

The fundamental point today is apply the same lessons that we

know from every other product to insurance, and you will find that

it will function the same way. Reduce or eliminate the price regulation, allow the prices to go where they need to, work with insurance companies, and consumer groups, and highway safety groups,

and law enforcement to continue to address the underlying problems, deal with those court cases that are completely outliers, and

you’ll have a very, very positive system, one that costs less for consumers and one in which consumers have a maximum amount of

choice. And they are being denied that because of the over-regulation principally resulting from rate regulation.

Now, let me add one other thing. This does not imply that abuses

that insurers may engage in cannot be addressed by the Government. Clearly, the antidiscrimination laws, clearly, other laws conVerDate 11-MAY-2000 14:36 Feb 05, 2002 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 74624.TXT HBANK1 PsN: HBANK1
24

tinue to apply to insurance companies. Laws that apply to businesses, generally, would apply to insurance companies. And we

have said that if optional Federal chartering is adopted, we are

willing to give up totally with the antitrust exemption, but let us

leave that aside.

The reality is that the abuses can be addressed, but the automobile insurance market can be made healthy again and be assured to be healthy in every State if we simply apply the lessons

to that product that we do to every other product.

Thank you.

Chairwoman KELLY. Thank you very much.

We are going to go to Mr. Capuano.

Mr. CAPUANO. Thank you, Madam Chairwoman.

I am from Massachusetts, gentlemen.

First of all, I would echo Ms. Schakowsky’s question, why are you

here? The Massachusetts legislature is in session, they are working

on their budget. Go tell them. Why are you telling us? I mean, I

appreciate it.

Chairwoman KELLY. Because I am running this hearing, Mr.

Capuano.

[Laughter.]

Mr. CAPUANO. Fair enough. That is a fair answer.

Mr. LITAN. They asked us to come.

Mr. CAPUANO. That is a good answer.

[Laughter.]

Mr. CAPUANO. Well, thank you very much. It was very interesting.

[Laughter.]

Mr. CAPUANO. I guess I want to make one statement, because in

some of the stuff I was reading before I got here, I noticed there

were some quotes from some executives from Liberty Mutual that

may be pulling out of the auto insurance business in Massachusetts. And just as a footnote, last I knew, Liberty Mutual was adamantly opposed to Federal charters. Now, they may have changed

their tune since in the last week or two, but as of 2 weeks ago, they

were adamantly opposed to it. Now, they may or may not be part

of the industry, and I know that that will be a discussion.

But just as another footnote, a subfootnote to that, if and when

you get Federal charters, please recognize that there will be many

of us who will then try to hold you to other Federal laws that you

don’t want to be held to—many little things like fair housing standards when the insurance comes to us. Another argument for another day, but you can’t just get Federal charters without getting

Federal requirements as well, at least—you might be able to, but

not from me.

[Laughter.]

Mr. CAPUANO. The third comment I want to make is when I hear

deregulation, lately, I get a little nervous. It didn’t work so well in

energy. It didn’t work so well in airlines. Every day I read the

paper, I went to a hearing just yesterday, it is not working so great

in the stock market right now. We have got analysts who are getting questioned. Deregulation is not the panacea of business. And

as we all know, there is regulation in the insurance industry. Even

25

in those States who have allegedly ‘‘deregulated,’’ they still have

regulation.

I guess the other point I want to make is, for those of you who

don’t know, Massachusetts has had three governors now who have

each been vehement proponents of little or no Government regulation on anything, and it is the governor in Massachusetts who appoints the rate setters. So, if there is a rating problem in Massachusetts, the first stop you should make is to the governor of Massachusetts, the last three of whom have run on antiregulation. So,

if there is a problem, see them.

I also want to make another comment. Very clearly, I don’t like

the Massachusetts auto insurance system. It is terrible. It is horrendous. It is archaic. It does subsidize bad drivers at the expense

of good drivers. Being a good driver, I am one of them. It is also,

in my opinion, incredibly discriminatory. I believe, in my heart,

that it is unconstitutional because of rating territories. In Massachusetts, I don’t know other States, rating territories almost uniformly conform to where racial minorities and economically deprived people live. It is almost a perfect overlap. That is discrimination, gentlemen, in my opinion. An argument for another day in

a State court, more than likely.

All that being said, the fact that companies have withdrawn from

Massachusetts, you are right, and again I agree with you. The

Massachusetts system needs to be overhauled. There are ways to

do it that don’t jeopardize some of the fundamental concerns we

have in consumer fairness, minimum coverage, because I would respectfully disagree that I believe strongly in minimum coverage requirements because I know plenty of people, personally, who without that minimum coverage would be in serious trouble today.

All of that being said, though, I am glad you came, and I am glad

the chairlady asked you to come, and I am glad you respected her

wishes.

[Laughter.]

Mr. CAPUANO. I would respectfully request, unless you want to

come and ask for a Federal charter, which if you do, fine, I will tell

you right now, I am going to start talking about other things as

well. I don’t have any opposition to Federal charter, but you are not

going to just get on a silver platter, I hope, just the Federal charter

without the Federal requirements. And for me, when it comes to

auto insurance, we will talk a lot about auto insurance discrimination when it comes to my constituents and whatever Federal plan

there will be.

But other than that, I do thank you for coming today, and enlightening me and educating me a little bit anyway.

Chairwoman KELLY. Thank you very much, Mr. Capuano.

There is a vote on the floor. We have all had a period of time

in which to ask some questions of you.

I am going to enter into the record the State Rate and Form Law

Guide that I mentioned earlier from the American Insurance Association, making that a part of the record. And hearing no objection,

so ordered.

[The State Rate and Form Law Guide can be found on page 32

in the appendix.]

26

Chairwoman KELLY. I, also, want to say that there are no more

questions. I am sure there are questions, but since we have a vote

on the floor, I know that these additional questions members may

want to submit to you in writing.

So, without objection, the hearing record will remain open for 30

days for members to submit written questions to these witnesses

and to place their responses in the record.

With that, I want to say thank you very much, gentlemen. This

was a very interesting hearing. I appreciate your being here. It, obviously, is something that we need to continue to explore until we

come up with some right or at least illuminating answers on the

topic.

The panel is excused with our great thanks and appreciation for

your time. The hearing is adjourned.

[Whereupon, at 3:20 p.m., the hearing was adjourned.]

(27)

A P P E N D I X

August 1, 2001

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