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INCREASING THE EFFECTIVENESS

OF STATE CONSUMER PROTECTION

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

MAY 6, 2003

Printed for the use of the Committee on Financial Services

Serial No. 108–25

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chairman 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

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 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

CHARLES A. GONZALEZ, Texas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman 

STEVEN C. LATOURETTE, Ohio 

MARK GREEN, Wisconsin 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

LUIS V. GUTIERREZ, Illinois 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

JOSEPH CROWLEY, New York 

CAROLYN B. MALONEY, New York 

CHARLES A. GONZALEZ, Texas 

RUBEN HINOJOSA, Texas 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 6, 2003 ....................................................................................................... 1

Appendix: 

May 6, 2003 ....................................................................................................... 29

WITNESSES 

TUESDAY, MAY 6, 2003

Ario, Hon. Joel S., Insurance Administrator, Oregon Insurance Division, Secretary-Treasurer, National Association of Insurance Commissioners ............. 7

Atchinson, Brian K., Executive Director, Insurance Marketplace Standards 

Association ............................................................................................................ 11

Hillman, Richard J., Director, Financial Markets and Community Investment, 

U.S. General Accounting Office .......................................................................... 9

Hunter, J. Robert, Director of Insurance, Consumer Federation of America ..... 13

Marema, Lenore S., Vice President, Legal and Regulatory Affairs, Alliance 

of American Insurers ........................................................................................... 14

Parke, Hon. Terry, Illinois State Representative, Past President, the National 

Conference of Insurance Legislators accompanied by Mr. Robert W. Klein, 

Ph.D., Associate Professor & Director, Center for Risk Management and 

Insurance Research, Georgia State University .................................................. 5

APPENDIX 

Prepared Statements: 

Kelly, Hon. Sue W. ........................................................................................... 30

Oxley, Hon. Michael G. .................................................................................... 32

Gutierrez, Hon. Luis V. .................................................................................... 34

Ario, Hon. Joel S. .............................................................................................. 36

Atchinson, Brian K. .......................................................................................... 59

Hillman, Richard J. .......................................................................................... 64

Hunter, J. Robert .............................................................................................. 78

Marema, Lenore S. ........................................................................................... 88

Parke, Hon. Terry ............................................................................................. 102

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Ario, Hon. Joel S.: ....................................................................................................

Written response to questions from Hon. Luis V. Gutierrez ........................ 110

Hunter, J. Robert: ....................................................................................................

Written response to questions from Hon. Luis V. Gutierrez ........................ 114

National Association of Mutual Insurance Companies, prepared statement ..... 120

(1)

INCREASING THE EFFECTIVENESS 

OF STATE CONSUMER PROTECTION 

Tuesday, May 6, 2003

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATION, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to call, at 3:04 p.m., in Room 

2128, Rayburn House Office Building, Hon. Sue W. Kelly [chairman of the subcommittee] presiding. 

Present: Representatives Kelly, Hensarling, Garrett, Murphy, 

Brown-Waite, Barrett, Renzi, Maloney, and Davis of Alabama. 

Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order. I 

just want to say that without objection all members’ opening Statements will be made part of the record. Subcommittee chairs and 

ranking minority members will be recognized for five minutes each. 

All other members will be recognized for three minutes each for 

their opening Statements. We will alternate between the majority 

and the minority. 

I am going to begin by simply saying that I have called this hearing today to review an issue that we feel is of utmost importance 

to all consumers, and that is the effectiveness of State insurance 

market conduct oversight. When it comes to insurance needs, consumers need to know that they are not being misled by products 

and that valid claims will be paid quickly. It is the responsibility 

of State insurance commissioners to efficiently regulate market 

conduct with the best interests of the American people in mind. 

Consumers need to know, they need to understand, and we have 

with us today some people who will testify about what the current 

conditions are. We have Joel Ario, the Secretary-Treasurer of the 

NAIC and the Insurance Administrator of Oregon. He is going to 

testify that protecting consumers is the first priority of insurance 

regulation. 

Commissioner Ario, I could not agree with you more, and we are 

here to make sure that State insurance regulators are up to the 

task. 

The NAIC first began to look closely at market conduct regulation in the early 1970s and admittedly has made some modest improvements since then. Recently, both the NAIC and NCOIL have 

been reviewing the need to modernize market conduct surveillance 

to better serve consumers. They have come up with some interesting ideas, particularly after Chairman Oxley requested a GAO 

investigation. It is promising that there is a greater focus on 

2

achieving clear and specific guidelines for proper oversight. However, ideas will only get us so far, and the American people deserve 

action and they deserve action now. 

Far too often, we have seen State legislatures fail to act upon 

good ideas of organizations such as the NAIC and NCOIL. It is 

only when Congress pressures the States, for example, with the 

NARAB provisions that I fought to include in Gramm-Leach-Bliley, 

that consumers finally get to see results. There must also be considerable coordination between States, as the varying nature of 

market conduct regulation from State to State is quite problematic. 

Across the country, we have seen consumers harmed by the current 

patchwork of State systems that involve too much duplication, with 

too few standards and no systematic approach to detect patterns of 

improper conduct. 

The negative impact on consumers is two-fold. 

First, consumers suffer higher prices and less choice due to overlapping, inefficient, requirements which needlessly increase the 

cost of doing business. 

Second, consumers are exposed to bad actors who slip through 

the regulatory gaps due to improper targeting of resources. We 

need to develop a systematic comprehensive approach, with clear 

standards that will target resources more efficiently. Until then, a 

lack of consistency from State to State will continue to hurt all 

Americans by undermining protections and that drives up costs. 

While State regulation of insurance market conduct has not 

served consumers well in some respects, I would like to stress that 

these inadequacies should not be interpreted as a need for more 

regulation, which could further harm consumers. Instead, I hope 

that we can, and I feel we must, work together to find an efficient 

and effective way to regulate insurance market conduct without 

creating more unnecessary burdens on the entire industry. Simply 

put, we do not need to pursue more regulation, but more effective 

regulation. I would like to thank all of our witnesses today for appearing before the subcommittee, and I look forward to hearing 

from you on how we can accomplish these goals. 

We have been informed that Mr. Gutierrez has just had a new 

grandchild, so Mr. Gutierrez will probably not be able to make today’s hearing. We congratulate Mr. Gutierrez, and I hope that his 

staff will deliver our congratulations to him. I understand how that 

feels, to be a new grandparent. It is a lovely feeling. 

And now I would like to take care of one bit of business. The 

Subcommittee on Oversight and Investigations will come to order. 

Before we begin our hearing, the chair has one small piece of 

housekeeping. 

The chair has been informed by the chair of the full committee 

that he is in receipt of a letter from the gentleman from Texas, Mr. 

Hinojosa, tendering his resignation from the Subcommittee on 

Oversight and Investigations. It is the chair’s understanding that 

the gentleman from Alabama, Mr. Davis, who is here I believe 

today, will be elected to fill the subcommittee’s vacancy at the next 

full committee meeting. Therefore, pending the action by the full 

committee, the chair asks unanimous consent that the gentleman 

from Alabama be permitted to participate in hearings held by this 

3

subcommittee as if he had been so elected. Is there any objection? 

If not, so ordered. 

For further opening Statements, Ms. Maloney. 

Ms. MALONEY. Thank you, Madam Chair, from the great State 

of New York. I thank you for having this important hearing. I 

thank the witnesses for appearing today before the subcommittee 

to share their views on State regulation of insurance and consumer 

protection. 

The incredibly diverse and vibrant U.S. insurance market owes 

much to the preservation of regulation by the States. In many ways 

they act as individual laboratories and allow experimentation that 

is not possible on the federal level. The focus of State insurance 

regulators on their individual markets allows them the ability to 

develop thorough expertise that can benefit consumers and the industry. 

I particularly appreciate the emphasis and the testimony of the 

Insurance Administrator of Oregon, which states that the first priority of State insurance regulation is protecting consumers. While 

State regulation has adapted to the changing insurance market for 

over 100 years, regulators face new challenges today to keep up 

with the new global financial services environment. Given these 

market changes, the GAO study is particularly timely conducted by 

the GAO, which provides a snapshot of how market analysis and 

market conduct regulation is being conducted in the States. 

The GAO testimony acknowledges that the National Association 

of Insurance Commissioners is emphasizing the need for nationwide standards for market analysis and market conduct examinations to its members. 

However, the GAO testimony highlights some major deficiencies 

in manner in which the States conduct this regulation and practice 

today. The GAO points to a lack of agreement on standards for examinations and training of examiners, inconsistent reliance by one 

State on the work of another, and an exam scheduled that overly 

burdens some companies and fails to adequately examine others. I 

believe these are serious fundamental problems that must be resolved to preserve the effectiveness of State insurance regulation. 

While we focus today on market analysis and market conduct examinations, I look forward to continuing this discussion to the full 

range of State insurance regulatory issues. I thank the chairwoman 

for calling this hearing, and I look very much forward to your testimony. 

Chairwoman KELLY. Thank you, Ms. Maloney. 

Mr. Barrett? Mr. Davis, have you an opening Statement? 

Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman, and 

thank you for permitting me to be here today. Before my colleague 

from New York joined me, I was tempted to say that only in the 

House can you join a subcommittee and become ranking member 

on the same day, for at least a day. 

Let me welcome the panel here today. I will not make a very 

long opening Statement. I would simply say this, one of the consistently vexing issues that we are facing right now as a body and as 

a committee is the byplay between the States having a lot of leeway to fashion their own regulatory structure, and the practical 

difficulty in a modern 2003 economy when predictability does not 

4

exist across the country. We face that in a host of contexts, from 

tort reform to preemption, and certainly to the kinds of issues that 

you are talking about today. 

One of the advantages of being on this committee is that we do 

have a chance on a fairly regular basis to engage these issues in 

a somewhat non-confrontational fashion. We do have the advantage 

on a pretty consistent basis of engaging these issues in a manner 

that helps us learn, instead of one that automatically polarizes us. 

So I look forward to hearing your testimony and to being edified 

by it today. 

Thank you, Madam Chairwoman. 

Chairwoman KELLY. Thank you, Mr. Davis. 

Mr. Hensarling? 

Mr. Renzi? 

Mr. RENZI. Thank you, Madam Chairwoman. 

Thank you to our panel today for your testimony. I look forward 

to hearing it. I know we are looking at today the effectiveness of 

our State insurance markets. I particularly am concerned and I am 

interested in understanding a little bit of how we get away from 

so much of the patchwork of our regulation. I found as an insurance agent that it leads to what I feel is much more higher prices 

and less product choice. I would like to see more of an emphasis 

on regulations that are uniform as it relates to our licensing of 

agents, as well as kind of signature laws. I am hopeful today that 

some of your testimony will cover that, and I look forward to it. 

Thank you. 

Chairwoman KELLY. Thank you, Mr. Renzi. 

Our panel today consists of the Honorable Terry Parke, Illinois 

State Representative, past President, the National Conference of 

Insurance Legislators. 

He is accompanied by Mr. Robert W. Klein, Ph.D., Associate Professor and Director, Center for Risk Management and Insurance 

Research at the Georgia State University. 

Then we have the Honorable Mr. Joel Ario, Insurance Administrator from the Oregon Insurance Division. He is Secretary-Treasurer of the National Association of Insurance Commissioners. We 

welcome you. 

Mr. Richard Hillman, Director, Financial Markets and community investment at the U.S. GAO. We welcome you. 

Mr. Brian K. Atchinson, Executive Director of the Insurance 

Marketplace Standards Association. We are glad to have you with 

us. 

And then we have Mr. J. Robert Hunter, Director of Insurance, 

Consumer Federation of America. Welcome, Mr. Hunter. 

And then Ms. Lenore Marema, Vice President, Legal and Regulatory Affairs, Alliance of American Insurers. 

Thank you all very much for being here. We begin with you, Mr. 

Parke. 

5

STATEMENT OF HON. TERRY PARKE, ILLINOIS STATE REPRESENTATIVE, PAST PRESIDENT, THE NATIONAL CONFERENCE OF INSURANCE LEGISLATORS, ACCOMPANIED BY 

ROBERT W. KLEIN, PH.D., ASSOCIATE PROFESSOR & DIRECTOR, CENTER FOR RISK MANAGEMENT AND INSURANCE RESEARCH, GEORGIA STATE UNIVERSITY 

Mr. PARKE. Thank you, Representative Kelly, members of the 

subcommittee. 

My name is Terry Parke. 

First, I would like to express my appreciation for having the opportunity to speak to you today. It is my privilege to represent the 

residents of Schaumberg and Hanover Townships in the northwest 

suburbs of Chicago, in the Illinois General Assembly. 

It is also my privilege to have served as President of the National Council of Insurance Legislators, NCOIL, in 2001. In that capacity, I testified before the modernization of insurance regulation 

before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. In that testimony, I said an effective market conduct regulation would be essential to overall modernization. That testimony pointed out that strong regulation of 

conduct in the marketplace would be essential if States move from 

the present-day prior-approval system to strong regulation targeting actual company misconduct. 

In today’s testimony, I will provide you with the content of a preliminary report of the Insurance Legislators Foundation, as an educational and research arm of NCOIL. The primary report was received by the ILF on May 2 and will be the subject of a public hearing at the Hotel Intercontinental in Chicago on June 6. NCOIL is 

happy to release the document in conjunction with the holding of 

this hearing. 

The preliminary report identifies fundamental and sweeping 

changes that would bring insurance market regulation as practiced 

today into the 21st century. It offers ideas that can bring insurance 

regulation in line with the reforms and new attitudes that have 

begun to take shape in the regulation of financial services in the 

United States and overseas. 

The preliminary report points out that their needs to be a fundamental re-thinking of the philosophy and approach toward market 

conduct regulation and surveillance. In many respects, regulators 

have become de-factor quality control auditors for insurers. This is 

not an effective use of regulatory resources and does not serve the 

public interest. The present system has become a patchwork in 

practice, varying from State to State. It is arbitrary and places an 

excessive burden and uncertainty on insurers. The preliminary report contains ideas that would benefit consumers by eliminating 

costly regulatory redundancies. These redundancies increase the 

cost of products and stifle innovation. Such regulatory redundancy 

can also deter an insurer from entering markets and thereby reducing consumer choice. 

Representative Kelly, members of the subcommittee, changes in 

market conduct regulation are essential and indispensable components of improving the efficiency and effectiveness of insurance regulation and insurance markets in America. 

6

Today’s report is part of a second and final phase of a four-year 

study of market conduct regulation which James Schacht of 

PricewaterhouseCoopers and Dr. Robert Klein of Georgia State 

University conducted. The first phase of that study compiled in 

2000 found, among other things, widespread disagreement regarding the purpose of market conduct examinations, especially as to 

whether such examinations should focus on general business practices, or only on specific violations of law, and little coordination of 

market conduct examination by States, leading to widespread and 

wasteful redundancies. 

Today’s preliminary report responds to those and many other 

real-world, present-day issues. Critics say that the present market 

conduct surveillance system fails to acknowledge insurers’ compliance programs, self-assessment, and independent assessment activities. The primary report shows how States could establish 

standards for effective compliance programs. 

Most specifically, we envision a regulatory approach in which the 

CEOs of each regulated insurer would certify that the company he 

or she manages has operated in ways that do not harm consumers. 

In this new system, each CEO would certify to regulators that the 

company he or she manages has complied with the standards, or 

in the negative, would identify the standards that the company has 

not met, along with the steps to remediate the problem. Such selfpolicing systems would include incentives for insurers self-assessment activities aimed at determining improper market conduct 

practices. 

In our earlier report, it was noted that 85 percent of the insurers 

surveyed performed critical analysis or retained independent assessors to detect improper market conduct practices. Self-assessment 

activities improve compliance, discourage violations and foster corrections. 

This concept of self-policing is not unique to the insurance industry. Other regulatory agencies are shifting from prescribing specific 

behavioral controls to articulating principles of guidelines for companies to follow, and then allowing them to develop effective controls meeting them. The recent proposed anti-money laundering requirements for the insurance industry provide a clear example of 

this shift. The proposed rule for insurance companies concerning 

section 352 of the PATRIOT Act provides broad discrepancies, but 

allows insurers to establish specific program elements to achieve 

the intent of the section of the Act. 

The preliminary report points out that there is often a lack of coordination with regard to multi-State examinations. The preliminary report identifies the need to give the domiciliary State the 

main responsibility for monitoring the surveillance activities of an 

insurer and its affiliates. Critics point to a lack of statutory authority with regard to market surveillance. Only two States—— 

Chairwoman KELLY. Mr. Parke, I am sorry to interrupt you, but 

you have five minutes and your five minutes are up. I would like 

to have you summarize what you are going to say. I want to inform 

all of our witnesses that your written testimony is in total in the 

record, and many of us have read your testimony. So we are asking 

you today to give a summary of what your testimony is. The green 

light means you have five minutes; yellow means you have one 

7

minute to sum up; and red means you are out of time. In the interests of making sure that some of the people who have flown in can 

get the planes to fly back out, I am going to try to keep this hearing to five minute segments. 

So, Mr. Parke, I let you go over a little bit because in fact we 

had a little problem here with the lights, but at this point, if you 

could sum up, I would appreciate it. 

Mr. PARKE. That is fair. I have to catch a plane myself, so I am 

along with the problem. 

In essence, we have a report that we are going to make public 

today that addresses market conduct. We think it will talk about 

the concerns that this committee has expressed. We think that 

there needs to be a new approach to market conduct in which insurance companies and insurance regulators can use the resources 

to make sure that those bad actors are in fact held accountable. 

That can be done through market conduct. And the rest of the insurance industry that are complying, doing a good job and serving 

consumers and making a profit are not penalized for those that are 

not doing a good job. We think this approach is worthwhile and 

worthy, and we will push it at the NCOIL conference that will be 

established in a month at our summer meeting that will be in Williamsburg, Virginia. 

[The prepared statement of Hon. Terry Parke can be found on 

page 102 in the appendix.] 

Chairwoman KELLY. That sounds terrific, and I hope you will put 

a copy of that report in the hands of the staff here. 

Mr. PARKE. That is already being done. Thank you. 

Chairwoman KELLY. Good. Thank you so much. 

Mr. Ario? 

STATEMENT OF HON. JOEL S. ARIO, INSURANCE ADMINISTRATOR, OREGON INSURANCE DIVISION, SECRETARYTREASURER, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. ARIO. Thank you, Madam Chair. My name is Joel Ario and 

I want to join Representative Parke in thanking you for holding 

this hearing this afternoon. Having read the comments of both 

Representative Parke and Mr. Hunter, I see there is no divergence 

there. There is a lot of divergence of opinion on this panel. I am 

anxious to get to the questions myself, so I will be brief in summarizing my written comments and really focus on four points. 

First, as you have already mentioned, effective consumer protection, focused on local needs. This is the hallmark of State insurance 

regulation. 

Second, because of this focus on local needs, this is not an area 

where one-size-fits-all works. It needs to be adapted to local circumstance. 

Third, effectiveness and efficiency are not mutually exclusive. Effectiveness is most important, but we think there are many ways 

in which we can make the system more efficient as well. 

And then finally, the foundation of an effective and efficient system is a rigorous market analysis program. I noted several mentions of that in the opening Statements. I think that is the foundation really that we are trying to develop for a program that draws 

8

on all the different areas of market regulation, to identify and respond to the real consumer problems in the marketplace. 

Let me take you to those in turn. Gain, the purpose of State insurance regulation, and it has been this way for 125 years, is consumer protection. Insurance is a different kind of product than either banking or securities or really any of the other financial products out there. It is a more complex kind of product. What kind of 

policy will be offered to the consumer? What will be the price of the 

policy? What are the specific policy terms and conditions? What is 

included, what is excluded from the policy? What does the fine 

print say? Is a claim valid when it is filed? If it is valid, how much 

is it worth? These are all questions that are very complicated. They 

often lead to misunderstandings between consumers and insurers 

and they often lead to consumer complaints to our offices. 

We handle on a national basis 3.5 million consumer complaints 

a year in the 50 States. That works out to an average of 7,000 complaints in every State. I would venture to guess that is an order 

of magnitude, or maybe more different than the amount of complaints that come in on the other financial service products. Responding to those consumer concerns, listening carefully to what 

the consumer says in those complaints, and trying to get to the real 

issues of those complaints—they are not all valid. There are some 

complaints that come in that are not, but a number of them, most 

of them raise important issues. Our job is to follow those complaints and address them in our marketplace and make that marketplace work for consumers at the local level. 

Second point, this is not an area that one size fits all. There 

surely are areas where there is commonality. In the life insurance 

industry, we have recognized as regulators a number of parts of life 

insurance regulation that ought to be more uniform, and we are 

taking aggressive action to address those. But you get into some of 

the other lines of insurance, and the differences are important between the States. Terrorism is a different problem in New York 

than it is in my State of Oregon. Hurricanes and other kinds of disasters that befall coastal communities make for a much different 

homeowner market in Southern Florida than a homeowner market 

in the Midwest. 

If you look at health marketplaces, you will see the way the local 

provider networks work, the way the hospital networks work, all 

have a fundamental effect on how the insurance products are delivered in those markets and how the insurance products are put together. 

Some suggest, and Representative Parke just did, I think, that 

we could have a uniform system across the board for this, and usually it comes with the recommendation that he makes, which is 

that the State of domicile would be the appropriate State to take 

the lead. There is a lot of merit in that, and I think the NCOIL 

study is a good study that will help us move forward. But there are 

some problems with that kind of model, too. 

Take the terrorism issue. Terrorism is not a big issue in my 

State. We have not had a lot of quarrels with the insurance companies over their terrorism coverage, their exclusions, and so forth. 

But I know in your State of New York, it is a much different situation. Superintendent Serio spends a lot of time on that issue. When 

9

I call up Greg and say, ‘‘Gee, Greg, now that I have checked into 

this company that is domiciled here in Oregon and does business 

in New York’’—I do not have a big carrier that fits this, but say 

I did—and called up Greg, and said, ‘‘I have checked them out, and 

on a generic basis, they do a good job with their terrorism filings 

with us, so just trust me, leave it alone, don’t worry about what 

they do in your market,’’ he would not be very happy, because he 

would say his marketplace is dramatically different than mine, and 

he has a different stance on exclusions. He has a different stance 

on a number of issues. I understand that. I agree with that. It is 

a different kind of marketplace. That is the kind of situation I 

think that we want to work on the problem, but it is not a onesize-fits-all type of situation. 

Third point, there are efficiencies to be gained. A lot of this I 

think does and should focus on market conduct exams. One of our 

major initiatives at the NAIC this year is uniform exam procedures. We have identified four different areas in the examination 

process where we think there ought to be clear uniformity. 

First is scheduling. If we can schedule in a consistent and uniform basis, we can minimize duplication. 

Second, if we can do pre-exam planning in the same kind of way, 

we can then deliver to the companies clear expectations of what a 

market conduct exam is going to be, what is expected of the company, what the regulator will want to see. 

And third, in the examination procedures, if we can do those 

more uniformly, we can have a more predictable process for everyone. It can be a more efficient process. It can be done more quickly 

and so forth. 

And then finally, if exam reports are written in a consistent and 

uniform fashion, we can better understand and compare results. 

I see I am already to the red light, too, so I will skip my last 

point on market analysis and make just a very quick conclusion. 

We again welcome this hearing. We will not get the job done that 

we want to get done by ourselves. You are right that the Congress 

pushing on us, NCOIL pushed on us, the industry pushing us, Bob 

Hunter pushing on us; all of those things are important to getting 

our job done. The worst case, the absolute worst case for us would 

be an overreaction to the problems and to create a one-size-fits-all 

federal solution. It just would not work for consumers. 

Finally, the key for all of us is to keep our eye on the ball here, 

the main objective which is effective consumer protection. 

Thank you. 

[The prepared statement of Hon. Joel S. Ario can be found on 

page 36 in the appendix.] 

Chairwoman KELLY. Thank you. 

Mr. Hillman? 

STATEMENT OF RICHARD J. HILLMAN, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GENERAL ACCOUNTING OFFICE 

Mr. HILLMAN. Thank you, Madam Chairwoman and members of 

the subcommittee. I appreciate the opportunity to provide you with 

GAO’s preliminary observations from our work on State insurance 

regulators’ oversight of market activities in the insurance industry. 

10

My focus today is on, one, the States’ use of market analysis and 

on-site examinations and market regulation; and two, the effectiveness of the National Association of Insurance Commissioners’ efforts to improve these oversight tools and encourage the States to 

use them. 

Regarding our first objective, on the States’ use of market analysis and on-site examinations and market regulation, we found 

that all States do some level of market analysis, but few States 

have established formal market analysis programs to maintain a 

systematic and rigorous overview of companies’ market behavior 

and to more effectively identify problem companies for more detailed review. The way State insurance regulators approach and 

perform market conduct examinations also varied widely across the 

States. 

While NAIC has developed a handbook for market conduct examiners, States are not required to use it, and we found that it is not 

consistently applied across States. Moreover, the handbook is not 

intended to provide guidance for some important aspects of market 

conduct examinations; for example, how often examinations should 

be performed or what criteria States should use to select companies 

to examine. 

We also found that the number of market conduct examiners differed widely among States and that there were no generally accepted standards for training and certifying examiners. These differences make it difficult for States to depend on other States’ oversight of market activities. Most of the States that we visited told 

us that they felt responsible for regulating the behavior of all companies that sold insurance in their State, regardless of their State 

of domicile. Thus, even in those States that did market conduct examinations, the effort is often neither efficient nor effective because 

the pool of companies is too large for any one State to handle. 

Moreover, since most States are not coordinating their examinations with other States, some large companies reported being examined frequently and sometimes simultaneously by multiple States, 

while other companies were examined infrequently or never. 

Regarding our second objective, to assess NAIC’s efforts to improve the States’ market conduct programs, we found that since the 

mid-1970s, NAIC has taken a variety of steps to improve the consistency and quality of market conduct examinations. However, despite the NAIC’s longstanding efforts and some limited successes, 

progress towards a more effective process has been slow. 

Recently, NAIC has increased the emphasis it places on market 

analysis and market conduct examinations as regulatory tools that 

could improve States’ abilities to oversee market conduct. With 

more consistent implementation of routine market analysis, States 

should be better able to use the resources they already have available to target companies requiring immediate attention. 

Also by applying common standards for market conduct examinations, States should be able to rely on regulators in other States 

for assessments of an insurance company’s operations. These improvements should, in turn, increase the efficiency of the examination process and improve consumer protection by reducing or eliminating existing overlaps and gaps in regulatory oversight. 

11

However, if NAIC cannot convince the various States to adopt 

and implement common standards for market analysis and examinations, current efforts to strengthen these important tools for consumer protection are unlikely to result in any fundamental improvement. 

In summary, we support the goal of increasing the effectiveness 

of market conduct regulation through development and implementation of consistent nationwide standards for market analysis and 

market conduct examinations across the States, in order to better 

protect insurance consumers. The emphasis placed on these issues 

by NAIC has increased substantially over the last three years. 

We believe that NAIC has taken the first step in the first direction, however much work remains as NAIC and the States have not 

yet fully identified, reached agreement on, and implemented appropriate laws, regulations, processes and resource requirements that 

will support the goal of an effective uniform market oversight program. 

Madam Chairwoman, this concludes my prepared statement. I 

would be happy to respond at the appropriate time to questions. 

[The prepared statement of Richard J. Hillman can be found on 

page 64 in the appendix.] 

Chairwoman KELLY. Thank you, Mr. Hillman. I want to say that 

I found your report very interesting, very cogent. I hope our other 

panelists have a chance to read it. 

Mr. Atchinson? 

STATEMENT OF BRIAN K. ATCHINSON, EXECUTIVE DIRECTOR, 

INSURANCE MARKETPLACE STANDARDS ASSOCIATION 

Mr. ATCHINSON. Good afternoon, Madam Chairwoman and members of the subcommittee. Thank you for the opportunity to speak 

with you today on this important topic. 

I am Brian Atchinson, Executive Director of the Insurance Marketplace Standards Association. IMSA is an independent nonprofit 

organization created in 1996 to strengthen consumer trust and confidence in the life insurance industry through a commitment to 

high ethical market conduct standards. IMSA member companies 

comprise more than 200 of the nation’s top life insurance companies, representing approximately 65 percent of the overall market 

share for individually sold life insurance, annuities and long-term 

care insurance products. 

From 1992 to 1996, I previously served as Superintendent of the 

Maine Bureau of Insurance, and in 1996 as President of the NAIC. 

Prior to joining IMSA, I served as an executive officer in the life 

insurance industry. As a former regulator and company person, my 

views on market conduct regulation come from a number of different vantage points. Insurance regulation is intended to ensure 

a healthy competitive marketplace and to protect consumers. 

We have come a long way since the first market conduct exams 

in the 1970s. Unfortunately, the current State-based system of 

market conduct regulation presents challenges that even some in 

the regulatory community acknowledge is in need of improvement. 

There is little uniformity in the manner in which individual States 

conduct market conduct exams. State market conduct exams have 

been described as being like snowflakes: no two are alike. 

12

Insurance companies often are subject to simultaneous or overlapping market conduct exams from different States applying different laws and regulations. This lack of uniformity results in significant cost and human resource burdens on insurance companies 

that translate into higher costs ultimately passed on to consumers 

in the form of higher prices for their products. The challenge for 

regulators and for the industry is to create a uniform system of 

market conduct oversight that creates greater efficiencies for the 

insurance industry, while maintaining appropriate consumer protections. 

The NAIC has been working toward uniform regulation for some 

time, but the pace of change has been slow and has prompted more 

efficient and effective alternatives. Regulators could improve the 

current system of market conduct regulation in several ways. For 

instance, today’s market conduct exams tend to focus on identifying 

technical violations that may have little actual impact on consumers. Perhaps the focus should shift to exploring whether a company has a comprehensive system of policies and procedures in 

place to address market conduct compliance issues. 

Also, State insurance departments should not view market conduct exam activity as a source of revenue or general fund subsidy. 

Rather, departments should be determining whether a company 

has a system in place to detect and remedy market conduct improprieties before they become widespread. This practice would allow 

market conduct regulation to better serve consumer interests. 

IMSA’s mission, the Insurance Marketplace Standards Association, is primarily to strengthen trust and confidence in the life insurance industry through high ethical standards. IMSA qualification also provides a consistent, uniform template of market conduct 

compliance policies and procedures. To meet IMSA standards, a 

company must have in place a comprehensive system of compliance 

throughout the organization, undergo an external assessment, and 

then undergo a new assessment every three years. Companies that 

qualify for IMSA devote considerable resources to maintaining 

those standards, and are well-positioned to respond quickly to 

State regulatory inquiries or to comply swiftly with new State legislative requirements. 

The U.S. PATRIOT Act offers a prime example. As you know, 

this law gives federal authorities much wider latitude to monitor 

potential money laundering activity. Recently, the media reported 

that terrorists, drug dealers and other criminals may be using life 

insurance products to launder money. With an infrastructure of 

policies and procedures in place to detect and cure questionable 

sales practices based on IMSA’s principles, an IMSA-qualified company is already in a good position to comply with the intent of federal anti-money laundering efforts. 

In the last two years, IMSA has gained greater acceptance by 

regulators and rating agencies. In fact, a small but growing number of State insurance departments use IMSA membership and 

qualification as an informational tool as they plan and conduct 

market conduct exams. We applaud these efforts. With State insurance department budgets under tremendous pressure, we encourage regulators to pursue all available means to leverage increasVerDate 0ct 09 2002 15:24 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\89933.TXT MICAH PsN: MICAHW
13

ingly limited resources. IMSA can serve as a valuable resource towards that end. 

Neither regulators or companies alone can ensure that the marketplace is always operating in a fair and appropriate manner at 

all times. Organizations like IMSA, working in conjunction with 

regulators, can offer invaluable support to reform market conduct 

regulation and may even offer a blueprint for reform solutions. 

In conclusion, IMSA believes the market conduct regulations 

should be more uniform and efficient, and we will continue to work 

with you, the NAIC and State and insurance departments to explore ways to improve market conduct regulation for the benefit of 

consumers, regulators and insurers alike. 

Thank you very much, Madam Chair, for the opportunity to participate in this hearing and to address this important topic. Thank 

you. 

[The prepared statement of Brian K. Atchinson can be found on 

page 59 in the appendix.] 

Chairwoman KELLY. Thank you very much. You are my hero because you stayed within the five-minute line. 

Mr. Hunter? 

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF 

INSURANCE, CONSUMER FEDERATION OF AMERICA 

Mr. HUNTER. Good afternoon, Madam Chair, members of the 

committee. I am Bob Hunter, Director of Insurance for Consumer 

Federation, a former Texas Insurance Commissioner, and Federal 

Insurance Administrator under Presidents Ford and Carter. 

No one could deny that State insurance commissioners have a 

poor record when it comes to market conduct oversight of the insurance industry, and consumers have been abused as a result. We 

could go through many examples. The lack of excellence is particularly concerning in an era where less regulation of products is done 

at the time they are introduced, exposing consumers to greater risk 

of damage by bad insurance policies not reviewed by anyone at the 

State insurance department level. 

The NAIC itself has Stated that greater, more aggressive consumer protections are needed in this new era, and we agree. The 

unique nature of insurance policies, which are complex legal documents not easily understood by consumers, and insurance companies that are granted antitrust exemption by the federal Congress, 

requires more extensive consumer protection than other consumer 

commodities. State systems should be designed to promote beneficial competition such as price competition, loss mitigation efforts, 

but to deter destructive competition such as selection competition, 

redlining in the cities and so on, reverse competition such as credit 

insurance where prices are driven up by high commissions and 

other unfair sales practices. 

We believe that the following items are important to consider as 

you look for ways to upgrade the State market conduct oversight 

capacity. First, there should be minimum standards for market 

conduct examinations. That would be good for consumers. We have 

supported them on the national NAIC level and we would support 

them at the federal level, but we are very concerned about weak 

14

uniform standards. We are very concerned that that would lead to 

abuse. 

The accreditation type of approach was very successful in upgrading State financial examinations might be used to achieve 

these kinds of goals. There must be enforcement criteria in the 

standards. There must be private causes of action as an important 

complement to market conduct examinations, because market conduct examinations are only prospective, and cannot grant restitution to already-harmed consumers, and consumers do not at this 

point trust the track record of the States. 

Consumers oppose self-certification programs in the form that 

some have proposed, and specifically we oppose the NCOIL proposal that we have heard today. Self-certification in the post-Enron 

era is problematic at best. That is not to say self-certification could 

not be part of what a State looks at in determining whether an insurer is meeting State standards. 

However, if a State relies on such information, it must be made 

public and the tests made by self-certification groups must be 

transparent. Consumer feedback should be used after policy terminations, claims denial and other actions by insurance companies. 

There ought to be a way of finding out not just complaints, but 

some kind of interview process periodically used by the States. 

There should be suitability rules in place, particularly for cashvalue life insurance policies to assure that sales of proper products 

are made. 

The NAIC should be requiring certain data to be collected, some 

of it for market shares, entries and exits and so on, but also zip 

code data to see if redlining is occurring; underwriting guidelines 

to determine how insurers decide what to write and how to price; 

and claims handling guidelines to determine the rules for claims 

processing. While there has been progress by the NAIC in details 

of how exams are to be done, they have not achieved effective or 

efficient examinations. Consumers want effective examinations. We 

also agree that efficient examinations is a good goal and we think 

that it can be improved without giving up effectiveness. 

We need a thorough examination of what has gone wrong in previous market conduct exams that have missed a lot of really bad 

situations. It is hard to fix a system that has not been analyzed. 

I would be happy to respond to your questions at an appropriate 

time. 

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

page 78 in the appendix.] 

Chairwoman KELLY. Thank you, Mr. Hunter. 

Ms. Marema? 

STATEMENT OF LENORE S. MAREMA, VICE PRESIDENT, LEGAL 

AND REGULATORY AFFAIRS, ALLIANCE OF AMERICAN INSURERS 

Ms. MAREMA. Thank you. I am delighted to be here to represent 

the views of the Alliance of American Insurers. We are a national 

property-casualty trade association. We have 340 property-casualty 

insurance companies as our members, and our members range in 

all sizes, from the smallest to the very large companies. 

15

What I thought I would do here in my five minutes is share some 

of our members’ experiences with you about the current State market conduct examination system. Our members would share three 

concerns they have about the system with you. We would have 

three ways in which we think it can be improved. Then I would 

like to talk a little bit about how we think we need to proceed. 

If our members had one overriding concern about the current 

market conduct examination system, it would be that States need 

to better target companies for examination. They need to target 

companies with problems. Many times our members really do not 

see among the States a rational basis for triggering an examination. I do not think I could State this better than one of the consumer groups did at a recent NAIC meeting when they said that 

the States really need to focus on the biggest problems, not the biggest companies. 

Secondly, States need to better coordinate market conduct examinations. In the current system, each State can call an examination 

with little regard or any regard for what any other State is doing. 

It is not uncommon for a very large insurance company to have a 

dozen or more market conduct examinations pending at any given 

time. 

Thirdly, there is a lack of consistency in examination procedures. 

The NAIC has a market conduct examination handbook that tells 

States how to do it, but there is a variety of different ways that 

States have implemented it. Just to give you on example, the handbook requires that companies get notified of the exam. The notice 

that a company could get can vary from six minutes to six days to 

sixteen days to sixty days, and it can be specific or it can be very 

general and so forth. 

So those would be the three problems that I would cite from our 

members’ perspective in the current system. What to do about 

that? Much has been made about the differences in State laws and 

regulations. I think if you are talking about market conduct examinations, I think we are talking more not about differences in laws 

and regulations, but difference in the 50 States’ processes and 50 

States’ implementation of that. The lack of coordination leads to 

duplication and overlapping. Really, the inconsistent State procedures are the real problem. 

Having said that, I think the groundwork is in place to change 

that. If you look at the NAIC’s testimony, Superintendent Ario has 

listed a wide variety of market conduct activities that the NAIC 

has under way to correct some of these problems. But there are 

three of those NAIC initiatives that we think will produce real-time 

change in the current system. 

The one is the market conduct analysis that they intend to develop. We think there is a wealth of information that already exists 

in the State insurance departments to help them better target companies for examination: consumer complaints, reports that companies do on major changes that they have made in their companies, 

and so forth. The appeal that this market conduct analysis has to 

us, it is something based on data that all States have; it is something they can all do; they can all do it now; the data that they 

have is applicable to all lines, all companies. I think it would bring 

States up to a certain bar that they would all be doing analysis on 

16

the same data in a consistent manner. That is a work in progress 

at the NAIC. It is going to take some doing to put together. 

Secondly, they are doing an exam tracking system, the ETS. 

That is going to be an electronic system where there will be a centralized system of scheduling. That, to us, gives the States really 

the vehicle that they need to better coordinate an exam. When a 

State wants to call an exam, they will be able to look at the ETS 

and see what other States are doing with regard to that particular 

company. 

And last, certainly, is the uniformity effort that the NAIC has 

going on, in particular some of the items in that. I would cite the 

standard data call. The NAIC has developed really the basic information that all States should need to do an exam in, and in the 

same format. That, from our companies’ perspectives, those three 

items are going to be very, very helpful. 

How would we proceed? The key here is going to be State implementation. I will say in my remaining time, from the Alliance perspective, real change is change in behavior in the State insurance 

departments that conduct market conduct exams. For example, it 

is a good thing for the NAIC to develop a standard analysis, but 

from our perspective success is when all States actually use it. It 

is good for them to develop an examination tracking system; that 

is really needed. But the success is when all States input their data 

into it. It is really good for them to develop uniformity in procedures for examinations, but the real key to success is when our 

members see an examiner coming through the door who utilizes 

those procedures. 

My organization supports State insurance regulation. We think 

that it has served consumers best over time because it responds to 

local needs. We think the States can fix these problems. I think the 

NAIC has laid the groundwork and more importantly, we see a 

strong commitment from the NAIC leadership to do this. So we are 

operating from the presumption that the problem is going to be 

fixed at the State level and it will get done. 

Thank you. 

[The prepared statement of Lenore S. Marema can be found on 

page 88 in the appendix.] 

Chairwoman KELLY. We thank you. I thank all of you for your 

testimony. In particular, I would like to go back to you, Mr. Parke, 

just for a minute, and talk to you. You mentioned the Illinois model 

in your testimony. Do you think that Illinois’ system of insurance 

regulation focuses on less regulation on the front end and more on 

the back end? Do you think that that targets the insurance department resources in the areas that will most benefit the consumers, 

like the market conduct oversight? Do you think that that has 

worked well? 

Mr. PARKE. As a matter of fact, the State of Illinois is one of the 

most competitive States in the union. We have some of the largest 

amount of insurance companies selling insurance in the State of Illinois. That is because the free market system works. Competition 

works. They regulate each other because competition requires that. 

The consumer is not left alone. The insurance department uses 

market conduct. It also regulates solvency and also takes a good 

look at consumer complaints. 

17

In the State of Illinois, we find that there is an awful lot of members that have diverse thinking. I have been in the General Assembly 19 years and I have never really heard a whole lot of legislators 

pushing to change the current system that is there. And there are 

a lot of different points of view. We have some members that are 

very pro-consumer, and yet we do not see a cry from Illinois legislators to change the current system. Competition works when you 

leave it alone and let it function. 

Chairwoman KELLY. What kind of coordination is going on between NCOIL and the NAIC to improve the market regulation? 

Mr. PARKE. Well, the report that we have is going to be presented. We are going to review it on June 6 in Chicago, and then 

we are going to look at the next three meetings of NCOIL, starting 

with our Williamsburg program, to try to see what kind of model 

legislation can be derived from this report. 

We believe that the model legislation that will be used by various 

legislators to be taken to the State capitals to be refined based on 

what the needs of that State’s needs for market conduct would be, 

I think there is a strong cry to change the current system of market conduct, and I think that Illinois will be one of those, if I have 

anything to say about it, that will be presenting a new approach 

to market conduct. I believe progressive legislators in the other 

various States will do the same. 

Chairwoman KELLY. Since you brought up the model legislation, 

what do you think the chances are of the model legislation actually 

getting there, and how long do you think it is going to take the majority of the States to pass the legislation in some kind of a uniform 

manner and with some sort of uniform implementation? As we 

have heard today, that is critical. I am asking this question because I authored the NARAB legislation and we are still working 

on it. So I am wondering how long you think it will take you to 

get this done. 

Mr. PARKE. I think NARAB is a fine example, and I am glad you 

brought it up. Quite frankly, the goal was 29 States. We exceed 

that. We are at 42 States. Yes, there are two or three major States 

that have not done it, but quite frankly those States have internal 

questions and they have issues that are unique to those States, and 

I think that they are struggling and working through it. Eventually, I think that will come about and will happen. 

As far as legislators, we believe in the next 12 months that we 

will present at NCOIL, probably sooner than that, a model bill that 

the legislators can take back to the various States. Again, fine-tune 

it based on what that State’s needs are and what the consumers’ 

needs are, and I think you will find that a great majority of the 

States will move forward with some kind of uniform market conduct program. 

Chairwoman KELLY. Thank you. 

Mr. Ario, you testified that it may make sense to shift some of 

the focus from the front end, review through the rate and form review process, to a combination of self-certification and back-end 

view through desk exams or other approaches. I wonder if you 

would talk to us a minute about that, just expand on that a little 

bit. 

18

Mr. ARIO. Madam Chair, I would be happy to. I think the Illinois 

case is a good example. There is a competitive market there with 

more of a back-end approach. We are looking at this in Oregon. We 

are shifting some of our rates and forms analysts who currently 

spend all of their time looking at filings as they come through the 

front door, and still doing some of that. 

I think Mr. Hunter makes some very good points about the need 

to look at some products, anyway, on the front end because of the 

complexity and the difficulty consumers have with those products. 

We are shifting some of that resource towards the back end and relying on self-certification, the kind of things that Brian Atchinson 

talked about. We have check-lists now on our web page that companies fill out to show exactly what their form does and does not contain. If we send a message to the companies that we are going to 

take them at their word on those things, as a starting point, but 

trust and then verify. 

We are going to then go out and spot check on the back end 

whether those forms actually do comply in the way that they are 

certified to comply. We are probably going to have to catch some 

people doing it wrong, but if we do catch them and make examples 

of them, I think companies will get the idea, and I think it will improve the filings on the front end, frankly. A lot of the filings that 

come in now, since they know we are going to review them on the 

front end, some of the filings come in as kind of an opportunity to 

discuss; let’s just throw it at the regulator and see what they think. 

If we have a self-certification and hold them accountable and then 

spot-check on the back end, I think that that system is workable, 

not for all products, but for some products. 

Chairwoman KELLY. Thank you. 

I am out of time. Ms. Maloney? 

Ms. MALONEY. Thank you. 

Mr. Hillman, my first question is for you. You indicated in your 

testimony that some States have some insurers that face multiple 

examinations from different States. Specifically, you described a 

situation in your written testimony where over a three-year period, 

three companies in your study of large companies were examined 

17 times or more over three years, while six were examined between one and five times. I guess my question is, do you have any 

suggestions to correct this type of different treatment for different 

insurers? 

Mr. HILLMAN. There is a wide variety of steps that the State insurance regulators could take to improve the efficiency and effectiveness of their market conduct examination programs. Perhaps 

one of the most important things would be the development of consistent standards for market analysis and market conduct examinations, so that one State can rely on the activities of another 

State in conducting those analyses and examinations. 

Right now, because things are so inconsistent, there is no reliance on State activities and one State insurance department regulator believes they must look at all the insurance companies within 

their State—those that are domiciled and those that sell insurance, 

but domiciled in another State—rather than relying on the form of 

State insurance regulation. 

19

In addition to consistent standards, we also believe that there 

needs to be more consistent laws, more consistent regulations, 

more consistent processes, and the development of resources with 

appropriate expertise to conduct market examinations. 

Ms. MALONEY. Mr. Ario, would your organization be the one to 

come forward with these consistent standards? 

Mr. ARIO. Ms. Representative, that is correct, yes. The one point 

that I would make on the exam—— 

Ms. MALONEY. Are you working on them? 

Mr. ARIO. Yes. We are working on uniform standards for examinations and we are working on a uniform analysis system. I think 

Mr. Hillman is correct that those processes will help improve this 

sort of situation. 

The one other comment I would make, though, is that without 

knowing exactly which companies we are talking about, in the 

property and casualty market, for instance, there are three large 

insurers that are the three largest insurers in almost all 50 States. 

They represent almost half the market. Given that there are different situations in different States, there may be reasons why different States would want to examine them. It should not be over 

the same issues. We need to solve that problem. But if States have 

different kinds of issues with the same company, you still may 

have a number of exams of the same company. It should not happen with small companies; it should not happen with companies 

that are only engaged in a few different States, but it will sometimes happen with larger companies. 

Ms. MALONEY. First of all, I want to thank you for your testimony and for highlighting the incredibly complex situation facing 

insurance companies operating in New York City and State, the 

State and city that I represent, and their efforts to offer terrorism 

insurance. I agree that this situation poses very unique problems 

that demands the local expertise of New York regulators. But given 

the Statements by GAO and yours also confirming the findings of 

duplication of examination and varying levels of training for examiners, can you give the subcommittee any kind of specific date 

when you believe that the NAIC standards that you are working 

on will come forward? A year? Two years? 

Mr. ARIO. Representative, I wish I could promise you a date certain for the whole nine yards here. What I can tell is that on the 

uniform exam procedures, which is the project that is furthest 

along for us, we have already 40 States self-certifying compliance 

with at least two of the four areas of uniformity. Our goal this 

year, which I think we will achieve, is more than 40 States selfcertifying to all four areas. 

The next step will be, again, trust but verify. We expect it of ourselves, too. We are asking the companies and Lenore and her crew 

to give us complaints when States certify and then in practice are 

not doing what they certified to. So there will be some implementation there, but that project will be more or less completed this year. 

Market analysis; that is going to take maybe a couple of years, 

and to build the collaborative models, to build the trust among the 

States and the consistent reliance, that I would probably ball park 

at a three-to five-year time frame. This is not easy stuff. Insurance 

is complicated, as you suggest, with terrorism, and there are examVerDate 0ct 09 2002 15:24 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\89933.TXT MICAH PsN: MICAHW
20

ples like that all across the board. I think the key, if I were in your 

shoes, would be to look at, is there steady progress, not so much 

is it done by a date certain, but next year if we have a hearing or 

when you are looking at what we are doing, have we made consistent, steady progress. That would be the way I would measure 

what is happening. 

Ms. MALONEY. Just as a follow up, Mr. Hunter and the other witnesses, do you think that the self-regulation works, and the initiatives that are detailed, will they be successful in combating the existing inefficiencies in insurance market regulation? 

Mr. HUNTER. Well, we are very skeptical, but if self-regulation is 

transparent and the States rely on it and we can see exactly what 

is going on, then we can trust it. But if it is a black box, then we 

are very afraid of it because we do not believe that certain companies are going to tell the truth. We know some companies are doing 

some bad things to consumers, and we cannot trust a black box 

system of self-certification. 

Chairwoman KELLY. Thank you very much, Ms. Maloney. 

Ms. MALONEY. Thank you. 

Chairwoman KELLY. Mr. Barrett? Sorry. 

Mr. Hensarling? No. 

Mr. RENZI. Mr. Renzi? 

[Laughter.] 

Chairwoman KELLY. Mr. Murphy, were you here before Mr. Garrett? 

Mr. Renzi? 

Mr. RENZI. Yes, ma’am? 

Chairwoman KELLY. You were here before either one of these 

two? I am just taking people in order. You are here, okay. 

Mr. RENZI. Thank you, Madam Chairwoman. Thank you so 

much. 

Gentlemen and ma’am, thank you so much for your testimony. 

I wanted to move to the subject matter of agent licensing reform. 

I know, Mr. Hunter, you are experienced in this field. I want to ask 

you, I know that with the 56 jurisdictions that we have under 

NARAB, I think Mr. Parke you spoke to the fact that you were 

proud of the fact that 49 of them—— 

Mr. PARKE. Forty-two. 

Mr. RENZI. Forty-two have some sort of reciprocity as it relates. 

Is that also to agent licensing? 

Mr. PARKE. It is basically agent licensing. 

Mr. RENZI. Okay. As it relates to that, is there a uniformity there 

that has been established yet, so that an agent can go on, submit 

one application, one set of requirements, and then pay the individual fees by State? 

Mr. PARKE. The answer is there are 38 States that are doing that 

now. 

Mr. RENZI. Okay. So we have uniformity, not just reciprocity, but 

uniformity with 38 States, so that one application merges with all 

38 States. 

Chairwoman KELLY. Mr. Ario, do you want to answer that? 

Mr. RENZI. Thank you. 

Mr. ARIO. Yes. We are working hard on uniformity, but the question really is, I think, if I have a license in one State, if I am a 

21

resident agent, can I get into the other 49 States very easily? The 

answer to that is yes. 

Another one of the hats that I wear is the President and CEO 

of a group called the National Insurance Producer Registry, which 

operates an electronic gateway. So I am an agent now in any one 

of the States. I can go up on that gateway and enter my information showing that I am an agent in good standing, and be licensed. 

I think there are 15 States now that are on that electronic gateway, and there will be all 50 probably by the end of next year 

would be my guess. So although for resident agent purposes there 

may be differences in the laws, it does not really matter to the individual agent because they only want one resident license. They just 

want to be able to then, once they have that, to get into all the 

other States. That is what we are very close to achieving. 

Mr. RENZI. So under your model, sir, an agent would be able to 

go online, fill out one application, provide maybe a photograph or 

fingerprints, and then pay individual fees by jurisdiction. I think 

we have 56 jurisdictions. And then you would be able to be quickly 

licensed. We have agents in my State who have waited months and 

months. 

In one case, we got testimony in my State of an agency who provides an insurance product for nursing homes, very needed in the 

property-casualty field. And to maintain their licenses alone, they 

are paying probably close to $100,000 a year, if you look at the 

labor costs and everything else involved, never mind the time 

frame and the different requirements they are having to jump 

through to get it done. So under your model, you are saying that 

this will be accomplished within a year? 

Mr. ARIO. I am not sure, Representative Renzi. I do not know 

which State you are from, but if it is not Oregon, you ought to come 

to Oregon because—— 

Mr. RENZI. Well, it does not matter what State I am from. What 

I am saying to you is, if I am a licensed agent in any State, will 

I be able to have not just the reciprocity, but the uniformity of a 

simple application, one application with individual fees, or is that 

not going to be in the future? 

Mr. ARIO. Representative, for resident licensing, there still will 

be a need to go to the individual State where you are a resident 

and get that license. 

Mr. RENZI. I understand that. 

Mr. ARIO. But once you have that primary license, when within 

a year I think we will be at a situation, we are already at 15 

States, I think we will be close to all 50 States a year from now. 

Once you have that license, you will be able to get licensed as a 

nonresident in all of the other States through an electronic licensing process. 

Mr. RENZI. With uniformity, sir? 

Mr. ARIO. It is not even really uniformity. It would simply be, all 

you have to do is say, I am a resident in good standing in X State. 

With that and your fee—we are still working on the fingerprint 

issue—but a few little things like that there would not even be another full application. We are trying to get the system close to driver’s licenses. If you have a good driver’s license in one State, you 

22

can basically drive in the other States. That is the system we are 

trying to get. 

Mr. RENZI. Where are we headed on the idea of counter-signature 

laws as it relates to that kind of—— 

Mr. ARIO. I think counter-signature laws ought to be eliminated. 

It was one of the safe harbors in the NARAB provisions. 

Mr. RENZI. Thank you. 

Mr. Hunter, is there a harm to eliminating counter-signature 

laws? 

Mr. HUNTER. Not from a consumer perspective, no. 

Mr. RENZI. Okay. Can I ask the panel, anyone with the expertise, 

where are we on uniformity as far as advertising on the Internet? 

Is it the domicile State that controls the laws as it relates to insurance agents who advertise on the Internet and what content? Mr. 

Parke? 

Mr. PARKE. Quite frankly, I would defer to the NAIC. 

Mr. ARIO. Representative, advertising is I think a good example 

of an area that fits something that Mr. Atchinson said earlier, 

which is we used to spend a lot of time in our market conduct 

exams focused on fairly technical issues. Many of those were in the 

advertising area. 

I know in our department, we used to spend maybe one-third of 

our examination time on advertising issues, pretty narrow advertising issues, that kind of question of exactly, is this an Oregon ad 

or was it done from some other States. We do not do advertising 

hardly ever in our market conduct examinations anymore, and we 

have not had any up-tick in consumer complaints. So I think that 

is an area where there is not a lot of consumer abuse. Mr. Hunter 

will give you some examples, there are some areas with the elderly 

and so forth, but by and large, I have not heard people worry too 

much about that issue. 

Mr. RENZI. Thank you. 

Thank you, Madam Chair. 

Chairwoman KELLY. Thank you, Mr. Renzi. 

Mr. Davis, welcome to our committee, and your first question period. 

Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman. 

Mr. Hunter, let me direct my first set of questions to you. You 

were probably the most persistent critic of a multi-State regulatory 

framework. I want to ask you about a couple of premises behind 

that. I would imagine that the people on the committee who disagree with you would say that there might be very strong arguments for consistency with respect to, say, life insurance. There is 

not likely to be a lot of variation from State to State, by and large, 

in that area. 

However, it would seem that there might be significant variation 

when it came to two other classes of insurance: property-casualty 

losses, given varying threats from weather in different parts of the 

country; and the second one, of course, just being general health insurance, where there certainly is a real sparsity of health care in 

some areas, and very good and abundant health care in other 

areas. How do you address, briefly, those two sets of concerns, that 

if we try to craft a more nationalized system, it will not be able 

to account for those last two classes of insurance? 

23

Mr. HUNTER. Well, it will be more difficult, obviously. We have 

not opposed trying to craft multi-State approaches, as long as consumer protection is high and people are protected. We do get concerned about whether or not a consumer from State X that is 

harmed. Who is accountable? Who do they go to? That becomes a 

little bit of a problematic question, absent a federal approach 

where the government here is doing that. 

But we think it is possible to craft multi-State approaches. We 

do not oppose them. What we really want to make sure is that consumers are protected, whatever the approach, whether it is a local 

approach or a national approach. If the protections are good, we 

are happy with it, as long as there are ways to observe how it is 

doing; there is transparency in the process. 

Mr. DAVIS OF ALABAMA. Give me an example of a multi-State approach, for example, that would address weather differences in 

States that face some high-risk of weather adversity. I am trying 

to get some vision of what a multi-State approach would look like 

that was not national in character. 

Mr. HUNTER. Well, you could have multi-States along the east 

coast and gulf coast of the United States dealing with the hurricane risk. There are multi-State approaches being used. In fact, 

one State, Florida, has taken some leadership, but most stakes look 

to Florida, for example, to certify that the models being used to 

project hurricane losses are fair and reasonable, so the other States 

rely. So I would call that sort of a multi-State approach on a very 

specific type of loss that is unique to certain parts of the country. 

Mr. DAVIS OF ALABAMA. How do they handle causes of action 

that cross multi-State lines? 

Mr. HUNTER. Well, the local State cause of action would apply, 

so that would be different. If a consumer was harmed and brought 

an action, it would be different, depending on the State even under 

a multi-State regulatory approach. 

Mr. DAVIS OF ALABAMA. Mr. Ario, let me ask you the next set of 

questions. From your perspective, obviously your premise is you defend the multi-State patterns that the States do a consistently good 

and effective job of policing consumer violations. Having said that, 

I think we would all probably agree with Mr. Hunter’s assertion 

that there have been numerous instances where for whatever reason States have failed and various companies have done a number 

of things that we would certainly frown upon. 

To the extent that States are not able to do a more effective job, 

what is the reason for that? Is there some particular aspect of the 

States having to do their own enforcement that prevents them from 

being as effective as a national system might be? 

Mr. ARIO. Representative, I think there has been in the past a 

lack of focus on the question of market analysis. In a lot of situations, I think, as has been testified by other members here, the 

question of who gets examined and when is one that is not clear 

and done in a rigorous way. 

So that is why in our work we put a great deal of emphasis on 

the concept of analysis. We have a rich continuum of data that we 

get at the State level—3.5 million consumer complaints, hundreds 

of thousands, literally, or Braden form product filings, producer actions, investigations—all of which tell us a lot about what is going 

24

on in our marketplace. I think we need to put more rigor into taking that information, and in a more rigorous modeling kind of way, 

look at it, identify key data points, identify outliers on those data 

points, and then address them. 

Market analysis, as the GAO report points out, is a relatively 

new concept. Everybody did it in one form or another, but it was 

not very rigorous and it was not a separate discipline. It is evolving 

now as a separate discipline. I think that frankly holds a lot of the 

key to addressing both the concerns of the industry and the consumers. On the industry side, we get away from the trivial problems and focus on the real problems. On the consumer side, we do 

not miss the problems; we identify the problems and get to them 

earlier. We are never going to find everything. Crooks are always 

clever, but we will find a lot more through market analysis. 

Mr. DAVIS OF ALABAMA. I think my time has expired, Madam 

Chairwoman. 

Chairwoman KELLY. Thank you very much. 

Mr. Garrett? 

Mr. GARRETT. Thank you and good afternoon, everyone. It is good 

to see somebody on the panel that I used to associate with when 

I was in my former days as a legislator myself. Good to see you 

again. 

I will throw the first question out to you, Representative, and 

this is a little bit off the mark of the others, but it is something 

we were working on in New Jersey, and that is the standards on 

life insurance and the speed of proposals with regard to approval 

forms and what have you. NAIC had proposed interState compacts 

for speed of market reform of life insurance products. Can you tell 

us a little bit about where that is? Whether NCOIL, if you know, 

has endorsed that compact yet? 

Mr. PARKE. We have not endorsed it formally. We are looking at 

it. The concept has just been out nine months or so, and they have 

proposed it. We are reviewing it at our meetings and talking about 

the pros and cons. 

A concept like this is not an easy product to try and approach 

to doing something. There are members that have expressed strong 

opposition to this, and we have members that think that this is a 

direction that we have to go in for speed to market, to allow the 

financial services industry to be able to compete in a world marketplace. I think that is a driving factor that may ultimately pass 

that, but NCOIL has not taken a formal position on that issue. 

Mr. GARRETT. Okay, thanks. 

As someone who has been involved, not necessarily directly involved, with market conduct studies, but at least in the next room 

while they were going on, and seeing how they can impact upon the 

industry, on the company, I guess my question that I will throw 

out to the panel, if that is okay, and I think some of the testimony 

may have been along this line as well, is that the focus so much 

by the regulator is on the minutiae of it, and for those in the industry that are on the front line with the consumer would never say 

that it is the most important aspect of it. 

Some may view the word as the technical side of the equation instead, as opposed to the other end of the equation where if you 

work for the department, you know that it is easy to see where the 

25

problems are and it is easy to see which ones of the companies are 

the problem companies, because those are the ones that are getting 

all the complaints to the department. How do we address that? Is 

that really more not just simply an issue of simply solving this by 

coming up with a uniformity standard, because at the end of the 

day you may still get a system that you already sign onto as the 

appropriate system and is uniform across the board. 

Mr. Hunter would agree that it addresses consumer complaints 

at the end of the day, but is it a problem locally with the local department, the State department, the one that is enforcing it, still 

going after the minutiae as opposed to the overall end-game, which 

is to provide better service to the consumer? 

Mr. ATCHINSON. If I might comment, certainly congressman, I 

think you touch on an issue I think that is becoming more prominent among most of us that have been studying this issue, which 

is how does one make sure that everyone is focusing on the forest 

and not just on the trees. 

I think the PATRIOT Act was one recent example of looking to 

ensure that financial service companies have an infrastructure in 

place that will, as a matter of course, require ongoing tracking and 

checking and monitoring and ensuring that there is self-corrective 

action taken when in fact problems are identified, as opposed to 

waiting three or four or five years until the market conduct exam 

is conducted, and only then discovering something that if there was 

an infrastructure in place might have been self-identified and selfcorrected early on. That is not to say that in every instance some 

of these technical violations may not warrant attention, but the experience has been that all too often there is such an obsession with 

checking the minutiae, that oftentimes some of the larger systemic 

issues are not identified or given the priority that they warrant. 

The organization I am with, IMSA, is just one example of how 

those sorts of infrastructures can be supported and encouraged, 

and if anything can complement the work of the regulators. 

Mr. GARRETT. I would suggest a couple of things that could help 

us focus on the bigger picture would be if the States would do some 

interviewing of some of the consumers that complain in more 

depth, and try to bring that together and look for commonalities; 

and some interviews of agents. Agents quite frequently on front 

line in knowing when something is going wrong in a company or 

many consumers are getting hurt; and also monitoring these lawsuit discoveries. There is a lot of documents that come out that are 

incredible gold mines of abusive behavior that should be somehow 

routinely looked at by the States. 

Mr. PARKE. I would like to point out an observation in listening 

to the discussion. Because of the federal chartering of insurance is 

an issue that is underpinning a lot of the discussion, there is no 

guarantee, ladies and gentlemen, that you are going to solve the 

problems if you go to a federal charter. You are still going to have 

the underlying problems. That is not going to get solved just because you change from one venue to another. The other problem is 

the establishment of the huge bureaucracy that is going to be needed to take care of it. That system is being done in the various 

States. 

26

The old analogy, do you want to deal with 50 monkeys or one big 

gorilla I think is an issue that you have to ask yourself. Do you 

want to deal with this issue? We believe that we deal well on insurance. Is it perfect? No. Are there flaws? Yes. Can we solve them? 

Yes. You are giving us direction. GLBA was a fine start to give us 

direction. I think we have shown the ability to perform, to do 

things, to take care of those issues that are brought to our attention. 

Whatever you decide by virtue of your hearings to ask the States 

to comply with, I believe that we will make a good-faith effort and 

probably not only achieve, but exceed, as we have done with 

NARAL. 

The other question that you have to ask yourself is, there is a $10 billion premium tax issue. The States will lose that if you go 

to a federal program. That is something that we cannot easily accept either. You are going to have to review what will you do with 

this $10 billion that States will lose if you move in that direction. 

So as a subcommittee, you have other questions on using market 

conduct as a basis. 

I think nobody up here is complaining that market conduct is not 

an effective tool. It can be a lot better. We are going to move in 

that direction, and I appreciate having the opportunity to testify 

today before you. 

Mr. GARRETT. If I can ask one more? 

Chairwoman KELLY. Your three minutes over time and you did 

not get any testimony from Ms. Marema, so perhaps you would like 

to have her testify. 

Ms. MAREMA. I just wanted to echo the need for market conduct 

analysis, better analysis, better targeting of companies. Of course, 

if you are not sure why you are there in the first place, it is easy 

to focus on minutiae. I think some of the reforms that we see the 

NAIC doing and that we think are the key ones, once States are 

better able to target companies, they are going to know why they 

are there. It is going to be easier to focus on the companies’ general 

business practices and so forth. 

Chairwoman KELLY. Mr. Garrett, if you want to ask another 

question, please do. There is no one else here and we have these 

witnesses. As long as we have the experts before us, the purpose 

of this hearing is to find out information so we can help get this 

running smoothly. 

Mr. GARRETT. Well, and I do not want to delay anything, but 

that is the picture that appeared in my mind when you made the 

reference to the 50 monkeys out there, and I am not sure which 

department of insurance you are referring to among those 50 monkeys. 

[Laughter.] 

Mr. PARKE. It was an analogy. It was not directed at anybody. 

Mr. GARRETT. So my question is not a flippant one, but just I 

guess falls on the lines that you were saying, and you as well, and 

that is, at the end of the day, the hearings that we hold today 

hopefully drive home the effort to achieve the appropriate uniformity with regard to the market studies that are done. 

The question is, as we leave here, do we have a role, then, on 

the federal level in having the federal government take a preempVerDate 0ct 09 2002 15:24 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 C:\DOCS\89933.TXT MICAH PsN: MICAHW
27

tive step with regard to the market studies themselves, or is it appropriate for your analogy of the 500-pound gorilla to step into that 

role as far as conducting them? Or is our role here simply to try 

to facilitate and get to the optimum level of uniformity as far as 

the studies that are being done? 

Mr. PARKE. If I could address the, I will tell you that the message that you send today is heard and understood, and I take it 

back to legislators from the various States at our meetings. I tell 

them, they mean business; they expect changes; they expect uniformity; they expect reciprocity; and they expect market conduct to 

be more effective and efficient. That is the message I am taking 

back, and I think we hear your message loud and clear that there 

is pressure on you to try and make a difference, and the consumer 

ultimately is the goal that we all have to protect and make sure 

that they have a competitive product to solve the problem that will 

come from insurance. 

Chairwoman KELLY. Mr. Parke, I think there is no one on this 

committee that would object to your taking that message back and 

disseminating it to the 50 monkeys. 

[Laughter.] 

Mr. PARKE. You got it. You got it. 

Mr. ARIO. Terry has analogized this to monkeys. I will analogize 

this to my nine-year-old son, as State regulators. My nine-year-old 

son, he needs to be encouraged and pushed and cajoled into doing 

the right thing, but I have to let him get it done himself, and usually if I try to force the issue beyond a certain point, it is counterproductive. 

I think that is basically where we are on this issue. We need to 

be pushed and pushed hard to do the right thing, but to try to force 

us at this point into anything through some federal legislation I 

think would end up being counterproductive. 

At some point, if it does not happen, I think you have to look at 

other options. But at this point, I think you have got receptive ears 

out here, so I think these kinds of hearings are the kind of means 

that ought to be used. 

Chairwoman KELLY. Mr. Atchinson, do you want to add something there? 

Mr. ATCHINSON. I just wanted to add my voice to that last point, 

because I certainly think that there is a lot of good work being 

done, but I think the role that this subcommittee and the committee can play is to help focus and prompt the sort of action that 

is being considered and contemplated. I refer to my tenure as a 

regulator going back 10 years ago, and while there are a lot of good 

intentions, some of the initiatives launched then to reengineer regulation are still under way today. I do think that deadlines have 

a way of focusing most any of us, and that would apply to the organizations participating in this hearing. 

Thank you. 

Chairwoman KELLY. Thank you, Mr. Atchinson. 

The chair notes that some members may have additional questions for this panel and they may wish to submit those in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to the witnesses and to 

place their responses in the record. This hearing has been very inVerDate 0ct 09 2002 15:24 Nov 03, 2003 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 C:\DOCS\89933.TXT MICAH PsN: MICAHW
28

teresting and I hope it is moving us along in the right direction. 

We gratefully thank you for spending as much time as you have. 

This hearing is adjourned. 

[Whereupon, at 4:30 p.m., the subcommittee was adjourned.] 

(29)

A P P E N D I X

May 6, 2003

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