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SMART INSURANCE REFORM

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 16, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–38

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 16, 2005 .................................................................................................... 1

Appendix: 

June 16, 2005 .................................................................................................... 57

WITNESSES 

THURSDAY, JUNE 16, 2005

Covington, J. Lee II, testifying as the former Director, Ohio Department 

of Insurance .......................................................................................................... 17

Koken, M. Diane, Pennyslvania Insurance Commissioner, testifying as President, National Association of Insurance Commissioners .................................. 22

Muhl, Edward J., testifying as the former Insurance Commissioner of Maryland and the former Superintendent of Insurance, New York State Insurance Department .................................................................................................. 24

Pickens, J. Michael, testifying as the former State Insurance Commissioner, 

Arkansas Department of Insurance .................................................................... 10

Serio, Gregory V., testifying as the former Superintendent of Insurance, New 

York State Insurance Department ..................................................................... 13

Shapo, Nathaniel S., testifying as the former Director, Illinois Department 

of Insurance .......................................................................................................... 19

APPENDIX 

Prepared statements: 

Kelly, Hon. Sue ................................................................................................. 58

Kanjorski, Hon. Paul E. ................................................................................... 60

Covington, J. Lee II .......................................................................................... 62

Koken, M. Diane ............................................................................................... 72

Muhl, Edward J. ............................................................................................... 123

Pickens, J. Michael ........................................................................................... 127

Serio, Gregory V. .............................................................................................. 134

Shapo, Nathaniel S. .......................................................................................... 140

(1)

SMART INSURANCE REFORM 

Thursday, June 16, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, 

AND GOVERNMENT-SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in 

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

[chairman of the subcommittee] presiding. 

Present: Representatives Baker, Ryun, Bachus, Manzullo, Royce, 

Kelly, Ney, Fossella, Biggert, Barrett, Feeney, Hensarling, Davis of 

Kentucky, Kanjorski, Moore, Israel, Clay, McCarthy, Lynch, Miller 

of North Carolina, Scott, Watt, Davis of Alabama, Wasserman 

Schultz, and Pomeroy. 

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

Markets Subcommittee to order and welcome all our participants 

this morning. 

The committee is again revisiting a subject which we have examined over the course of literally years on many occasions, the goal 

of which is to provide a regulatory system which enables creativity 

and innovation in insurance product while serving the interests of 

consumers in the most responsive manner possible. 

The history of insurance regulation in the Nation is one of some 

considerable interest to anyone who has reasons to purchase or rely 

on deliverability of an insurance product, and the work of the committee specifically over the past several years has been to try to 

seek out a balance of all the competitive stakeholder interests and 

at the same time move toward a system which is more reflective 

of free market principles. 

It is difficult to understand how a very simple, straightforward 

life insurance policy, which is intended to be sold nationally, will 

require 54 different regulatory entities’ approval before it is permissible to market nationwide. 

I will simply go back to comments of commissioners over the 

course of the last few years. In 1999, the then-president of the National Association of Insurance Commissioners, President Reider, 

stated that regulation and regulators will have to change if they 

expect to maintain relevance, admitting his own frustration in 

hearing people say not just in his own department but in commission meetings that they are not going to change because they have 

always done it in that way in the past. He was committed to 

change. 

2

In the year 2000, NAIC President Nichols stated that if regulation of insurers market conduct does not change, then the States’ 

right to regulator insurance could be lost. 

In 2002, NAIC President Terri Vaughan stated, ‘‘There are many 

cases where it is difficult to rationalize the different regulatory requirements across States. Many of our regulatory differences are 

the result of historical accident rather than a reasoned response to 

differing market conditions.’’ 

In 2004, NAIC President Ernie Csiszar stated, ‘‘The system has 

outlasted its usefulness in many ways. Regulators tend to overregulate the trivial, such as the reams of paperwork, and underregulate the essentials, like solvency and corporate governance 

issues.’’ 

In an earlier committee hearing, two commissioners participated. 

Michigan’s Insurance Commissioner Fitzgerald and then-Ohio 

Commissioner Covington responded to a question from Chairman 

Oxley, which was, ‘‘If Congress sets a goal of 3 or 4 years for 

achieving comprehensive uniformity by NAIC for product approval, 

do you and Mr. Fitzgerald feel confident you can meet the goal?’’ 

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

to meet that kind of goal. As we have said before, the current system is not good for consumers, not good for the companies. We 

must meet that goal.’’ 

Mr. Fitzgerald responded, ‘‘I agree with that, and if over the next 

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

is a need to have questions raised about whether we can effectively, at the State level, solve problems that you have helped to 

identify and that we are identifying as well.’’ 

The disappointment is that was 4 years ago, and I think that is 

the platform from which I would like to begin today. This is not 

about assigning responsibility to any individual, to any organization. It is merely the point that the Congress has been, over a period of many years, been saying to those who are in the regulatory 

business, ‘‘Let’s get this fixed.’’ And we have had many different 

approaches to get it fixed. Unfortunately, at least in my perspective, it is still not fixed. 

If the SMART Act is viewed as an inappropriate response to the 

identified problems, then I am still looking for someone to place on 

the table the response that is appropriate in light of all the identified concerns that most commissioners have agreed in fact do exist. 

So as we go forward, we will again revisit the provisions of the 

SMART Act, attempt to come to some agreeable resolution on an 

approach which the committee finds advisable and hope to move 

forward in the coming months with a proposal that provides the relief that I think all of us agree is warranted and justified. 

Mr. Moore, did you have an opening statement? 

Mr. MOORE. Yes, I do. Thank you, Mr. Chairman. 

Chairman Baker, I would like to thank you for holding this hearing today on ways that Congress can improve and strengthen the 

State-based system of insurance regulation. 

And I also want to thank our witnesses who have flown in from 

around the country to testify here today and the ones at the table. 

I look forward to hearing from our witnesses ways in which this 

committee and Congress can work together toward greater uniVerDate 0ct 09 2002 13:18 Sep 11, 2006 Jkt 029456 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 F:\DOCS\HBA167.160 HFIN PsN: TERRIE
3

formity in insurance regulation with the goal of modernizing regulation of an industry that plays an important role in our economy 

and in the daily lives of our constituents. 

I also look forward to hearing from our witnesses the ways in 

which NAIC is currently attempting to achieve uniformity at the 

State level. I appreciate the efforts of Chairman Oxley and Chairman Baker to modernize insurance regulation, and while I do not 

support the SMART Act as currently drafted, I think the debate 

over how Congress can and should reform the State-based system 

of insurance regulation is certainly worth having. 

I hope that as this process moves forward, this committee will be 

able to forge a compromise that will result in uniform improved 

standards in the areas of market conduct, insurer and in producer 

licensing and multi-State filing of life insurance forms, among others, as well as more competitive markets for personal lines, which 

will ultimately benefit our consumers. 

In the area of fostering greater competition in the insurance marketplace, Mr. Chairman, I have real concerns with Title 16 of the 

SMART Act, as currently drafted. The State of Kansas currently 

operates under a relatively competitive file and use system for 

most lines of insurance, and while greater competition and marketbased pricing would apply downward pressure on rates, total rate 

deregulation could have a potentially detrimental effect on consumers. 

As the SMART Act process moves forward, I will continue to explore the flex rating provisions in Title 16, which would allow for 

greater pricing freedom without wholly preempting the States’ ability to review rate increases or decreases. 

The National Conference on Insurance Legislators has an interesting flex rating model law that may be worth considering, and 

the States’ experience with flex rating from Alaska to South Carolina and many in between could be instructive as well. 

Again, Mr. Chairman, thank you for holding this hearing, and I 

look forward to hearing from our witnesses. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Ryun? 

Mr. RYUN. Mr. Chairman, thank you for convening this hearing. 

And I want to thank all of our witnesses. I look forward to your 

testimony. 

Our goal in this reform process is to improve uniformity between 

States but also to increase competition and improve consumer 

choice. 

As we move toward this goal, I am hopeful that we are able to 

achieve it through existing State-based systems. I believe that our 

end goal must continue to make the State systems work without 

a Federal regulator. 

Throughout this process, the committee has received input from 

all sides of the industry, including the State insurance commissioners, and I am pleased that we have a number of our commissioners, both past and present, here with us today, and I would 

particularly like to welcome our Kansas State insurance commissioner, Sandy Praeger, whose advice I appreciate and whose input 

I will continue to look forward to. 

4

There are certainly differences of opinion on what form this effort 

should take, but there is wide consensus that improvements need 

to be made. I believe that we must continue to focus on improving 

uniformity between States. This will help avoid the race to the bottom with companies drawn to States with less stringent laws. 

Mr. Chairman, I appreciate the attention you are giving this 

matter. I look forward to the hearing and our witnesses, and I yield 

back my time. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. I want to first 

thank you for holding another important hearing regarding the 

SMART Act. 

And I also want to thank the distinguished panel members and 

witnesses today for their testimony on this important subject. 

Efforts to streamline insurance regulation by the States have 

been slow in development, and I agree with those that say that 

interstate insurance products need to be treated as interstate commerce by our regulators. However, this is my point: I remain skeptical about the need for a new, large Federal bureaucracy to completely replace the current State regulatory structure we have. 

Now, since Chairman Oxley and Chairman Baker have announced their road map for insurance regulatory modernization, I 

have been interested in understanding the differences between the 

different States’ insurance rate regulations. I look forward to a discussion today about the States that have moved toward less regulation and the effects that that has on consumers. 

Any legislation the committee considers must balance streamlined regulations for businesses with consumer protections. I will 

not support any legislation that does not provide strong consumer 

protection against discriminatory practices and that does not protect personal financial data and personal health data. 

The States have strong regulations against discriminatory practices and anticompetitive practices, and many of these laws do not 

harm overall market competition. 

Thank you again, Mr. Chairman, and I yield back the balance of 

my time. 

Mr. ROYCE. [presiding] Thank you, Mr. Scott. 

Let me begin by commending Chairman Baker but also commending Chairman Oxley for their efforts to modernize the regulation of our Nation’s insurance industry. I think we can all agree 

that consumers of insurance products can benefit from more efficient regulation, and it is clear to me that the leadership of this 

committee is trying to help the marketplace for the better. 

I support the intent of the SMART Act, which is to harmonize 

regulatory standards of over 50 regulatory regime insurance providers, the regime that frankly every one of these providers must 

face in 50 States, in 50 jurisdictions. 

Let me add, though, that in addition to SMART, I believe that 

this committee should also consider creating an optional Federal 

charter for insurance companies. And in my view, this optional 

Federal charter would improve the insurance marketplace to the 

benefit of consumers. 

5

If we take the life insurance marketplace as an example, life 

products do not share geographic characteristics that may be prevalent in other insurance sectors. If life insurers could go to one regulator for approval to offer their products, then insurance firms 

would spend less time in negotiations with 55 different regulatory 

bodies and more time developing market-friendly products. 

Furthermore, fewer obstacles to entry would create a more competitive market, giving consumers more choices and certainly more 

choices at better prices if they did not have to go through this regulatory conundrum. 

I have great confidence that an optional Federal charter would 

drive much needed market-based reform, and frankly the consumer 

would be the greatest beneficiary with lower costs if this were 

done. 

The benefits of an optional Federal charter would not be limited 

to the consumer, however. As a member of the International Relations Committee, I have pressed other nations to open up their 

markets to our financial services products, such as India and Korea 

and countries across Africa. 

Unfortunately, in many of these government-to-government negotiations, the insurance sector is not well represented because there 

is no Federal regulatory body with a seat at the table. Banks and 

thrifts have many voices to drive pro-growth policies—the Fed, the 

FDIC, the OTS, the OCC. However, the insurance industry does 

not have a strong voice speaking on its behalf. 

The creation of an optional Federal charter would go a long way 

to solve this problem and will result in more jobs, higher wages for 

thousands of employees in the insurance industry and better returns for debt and equity investors. 

I am a strong supporter of increasing efficiency in our insurance 

marketplace. Consumers will be the greatest beneficiaries, but our 

economy would also benefit. 

Again, I appreciate the leadership of Chairman Oxley and Chairman Baker on the SMART Act, and I hope they will also entertain 

the idea to create an optional Federal charter for insurers. 

And at this time, let’s go to the next member in succession, that 

would be Mr. Miller. No statement? 

Mr. Watt, do you have an opening statement? 

Mr. WATT. Thank you, Mr. Chairman. I will not take 5 minutes 

or 3 minutes, whatever the time limit is. 

I would just observe from my service, both on the Financial Services Committee and the Judiciary Committee, how striking it is 

that a group of people who came to power professing support for 

States’ rights have just so completely and thoroughly disregarded 

the notion in so many ways that I just cannot allow it to go without 

mention. 

I guess the reason I came to this hearing was to try to understand how this or anything else in this area, as I have been trying 

to understand in tort law, which throughout my lifetime had been 

reserved to the States, in insurance law, in predatory lending. I 

mean, the list just keeps growing and growing and growing of 

areas in which people who have come into government railing 

against the power of the Federal Government and talking so aggressively about how they support the rights of States just think 

6

that States are stupid now and that they somehow have a monopoly on the ability to regulate everything and do it correctly. 

I just do not understand it, and I mean, I keep trying in every 

context in which we are given the opportunity, and I still do not 

understand. Maybe some of these witnesses or the Chair or somebody will tell me how this fits, because I do not get it. I do not get 

it. 

I yield back, Mr. Chairman. 

Mr. ROYCE. I thank the gentleman for yielding back. I will just 

point out that the Articles of Confederation did not work that well 

for this Republic, so several hundred years ago we went to a system that was federalist in nature where the Federal Government 

handled— 

Mr. WATT. Is this in response to my— 

Mr. ROYCE. I am just continuing my remarks, taking the opportunity since the gentleman yielded back. 

Mr. WATT. I thought you had already made your remarks. 

Mr. ROYCE. Well, I am using up the remainder of my 5 minutes 

just explaining that in other areas of commerce this has worked 

out fairly well, but there was a reason why we gave up on the Articles of Confederation and why we found that interstate commerce 

was very efficient when handled at the Federal level. 

And with that said, let me move to Mr. Ney of Ohio for his opening remarks. 

Mr. NEY. Thank you, Mr. Chairman. 

I want to thank Chairman Baker for holding the hearing today. 

Personally, I will be in and out at some meetings, but I intend 

to come back and also look over the testimony, because I think it 

is important. Also, I think your testimony today will be interesting, 

as some of these are former commissioners, of course. Lee Covington is here, who was our commissioner in Ohio. 

When I was in the State senate, I chaired the Insurance and 

Banking Committee. That is what we called it, Insurance and 

Banking. At that time, back in Ohio, it was said that if interstate 

banking came to the State of Ohio, it would completely finish the 

State off, and how dare there be a concept of interstate banking. 

A lot of things have changed, a lot of things have blended. 

But I will give an observation at that time in the State senate, 

up to 1994 when I left there, whether it was Dick Celeste as Governor, with his insurance commissioner, or after that, Voinovich, or 

even before that, Jim Rhodes, when he was Governor, Democrat or 

Republican, the insurance commissioners would come to us and 

their staff and they would say, ‘‘This is what has happened.’’ The 

National Association of Insurance Commissioners and States would 

start to fall in line to conform to some Federal policies of adopted 

provisions. I thought that worked pretty good. 

I am not sure, and this is not a dispersion on individuals or anything, I am just not sure that that has happened in the recent past. 

Ann Benjamin, our insurance commissioner, comes and talks to 

us regularly. I think she does a great job, as I think Lee did in our 

State. I think we have had a good, well-run State. But as I told 

Ann, if there are internal disputes there where something is not 

working right today, that is not going to cut it here on Capitol Hill, 

and it will lead to questions about should we have this type of legVerDate 0ct 09 2002 13:18 Sep 11, 2006 Jkt 029456 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\DOCS\HBA167.160 HFIN PsN: TERRIE
7

islation. I do not pretend to know this legislation backwards or forwards, but I give Chairman Baker and Chairman Oxley credit for 

introducing this to get the subject laid out on the table. Some people want an optional Federal charter. 

The only thing I would warn, though, because I remember with 

the insurance agents and different groups, when they came to talk 

to you in the legislature, you had to raise your hand and say, ‘‘I 

swear to the McCarran and Ferguson principles,’’ and then you 

could have a decent conversation. So things change. 

But the one thing I would throw out there, and it has got to be 

thought well through, this is just not an easy piece of legislation 

or law to look at. If you have a Federal entity and this Federal entity is created and something does not go right and we create another Federal entity and hire more staff and they become the regulators, and then everybody runs to Capitol Hill saying, ‘‘We just 

had a Federal rule proposed and we hate that and let’s go fight it,’’ 

sometimes people will get what maybe they wish for. And I just 

think as the process goes, that we just have to consider the States’ 

end of it but also consider how this would be pieced together, will 

it really work? 

So I am up in the air on some things, but I think your testimony 

will be valuable today to take a good look at maybe what has went 

right and what has went wrong in putting this together nationally 

through the States. 

Thank you, Mr. Chairman. 

Mr. ROYCE. Thank you, Mr. Ney. 

The ranking member, Mr. Kanjorski, of Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

We return this morning to a topic that we have often discussed 

in recent years, the need for insurance regulatory reform. No matter what side one takes in this long-standing debate on regulatory 

efficiency, it has become clear to me that this is no longer a question of whether we should reform insurance regulation in the 

United States; instead, it has become a question of how we should 

reform insurance regulation. 

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

regulation. In an attempt to advance these efforts, you have also 

crafted a lengthy and complex outline for achieving regulatory reform in the insurance industry. This evolving proposal has, at best, 

received lukewarm support from many of the parties to which I 

have spoken about the draft reform plan. 

Many participants in the insurance community have also expressed strong reservations and deep concerns about this plan. For 

example, the North Dakota legislature has passed a resolution indicating that the proposal would ‘‘impair, erode and limit the ability of State governments to regulate the business of insurance.’’ 

A committee in the Ohio assembly has also urged us to oppose 

the plan. In addition, the National Association of Realtors has expressed its opposition to efforts to impose ‘‘a system of mandatory, 

uniform national standards for personal and commercial property 

insurance.’’ 

Moreover, the consumer groups have determined that the sweeping proposal would override important State consumer protection 

8

laws, sanction anticompetitive practices by insurance companies 

and incite State regulators to further weaken insurance oversight. 

After expending considerable time and effort studying these matters, Mr. Chairman, the National Association of Insurance Commissioners have raised their own concerns about your proposal to reform insurance regulation. I am therefore very pleased that we will 

have before us today the leader of this venerable organization. 

Diane Koken is a savvy and confident overseer of Pennsylvania’s 

insurance markets. Because she has also served under Republican 

and Democratic governors, she can offer us a bipartisan perspective 

on insurance regulatory reform. 

During our previous hearings on insurance reform, we have received extensive testimony from many witnesses advocating the 

creation of an optional Federal charter. 

Mr. Chairman, although your evolving plan still does not address 

this important issue, the consensus for creating such a charter continues to grow. Rather than overlaying the Federal bureaucracy on 

top of State regulation, an optional Federal charter would, in my 

view, create a sensible, separate and streamlined regulatory system. Such a dual oversight has worked generally well in the banking industry for many decades, and we should now consider applying it to the insurance industry as well. 

Moreover, because of its standardized products and nationwide 

marketplace, the life insurance industry, from my perspective, is 

particularly ready for the adoption of an optional Federal charter. 

While the issue of insurance regulatory reform is an important 

one, I am very disappointed that we are meeting on a bill that has 

yet to be introduced, for which there is no pressing need before resolving the critical issue of extending the Terrorist Risk Insurance 

Act. 

After tomorrow, we will have just 9 weeks remaining on the official legislative calendar for this session. The Federal backstop to 

provide economic stability for American workers and businesses, 

however, will expire at the end of this year. We need, therefore, to 

move expeditiously on matters of the greatest importance. 

We need to improve the Financial Services Committee legislation 

to extend this important program. We need to write a report. We 

then need to pass the bill on the House floor. We also may need 

to work to resolve any differences with the Senate’s version of the 

legislation to extend the program. The time is short, we need to act 

now to extend the Terrorism Risk Insurance Act. 

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

our committee on issues of insurance regulation. I also hope, however, that we will henceforth get our priorities in order and resolve 

the issue of extending the Terrorism Risk Insurance Act as quickly 

as possible. These are important discussions for us to have and important matters for us to resolve. 

Thank you. 

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

60 of the appendix.] 

Mr. ROYCE. Thank you, Mr. Kanjorski. 

We will go to Mr. Hensarling from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

9

And I certainly want to thank Chairman Baker for his hard work 

on this issue that is very important to American consumers. 

I believe the best and most effective consumer protection is always going to be a competitive marketplace. That is where I believe we should concentrate our legislative efforts. That is why I 

am very glad to see that the SMART Act draft takes a number of 

serious steps to make our insurance markets more competitive and 

thus more consumer friendly. 

History, hundreds of years of history and including recent history 

shows us that competition works. In the not-too-distant past in our 

Nation’s history, the airline trucking industry, long distance industry, natural gas industry, to name a few, were all heavily regulated. Many had barriers to entry, all had some facet of price controls. And yet we finally came to a more enlightened view, and as 

a Nation, as we deregulated these industries, real prices fell 15 to 

40 percent in a 2- to 5-year period. 

And so I think we need to look at history as our guide. It shows 

us that in order to get to a point of effective competition in the insurance industry, we have got to carefully examine what has been 

limiting choice and driving up costs for consumers. I believe one of 

the most important factors is, quite simply, price controls. 

And, certainly, I believe the evidence continues to mount that 

consumers living in States with minimal or no price controls pay 

significantly less for most types of insurance than do consumers residing in States with significant price controls. These consumers 

have experienced firsthand the benefits of a deregulated insurance 

system, so it is important that we look to these States as models 

when considering any type of regulatory reform. 

I am particularly looking forward to the testimony of Mr. 

Shapo—did I pronounce your name right? Shapo. I am particularly 

looking forward to Mr. Shapo’s testimony in regard to the Illinois 

experience, which I think will be quite instructive. 

And, so, again, Mr. Chairman, I look forward to working with all 

my colleagues in doing something that can make insurance more 

affordable for the vast majority of Americans. 

And with that, I yield back my time. 

Mr. ROYCE. Thank you. 

Mrs. McCarthy of New York, do you have an opening statement? 

Mrs. MCCARTHY. Thank you, Mr. Chairman. No, I will wait for 

listening to the witnesses and then ask my questions. Thank you. 

Mr. ROYCE. Thank you. We will go to Ms. Sue Kelly of New York. 

Mrs. KELLY. Thank you, Mr. Chairman. 

The McCarran-Ferguson Act enshrined the principle of State regulation of our national insurance market. State regulation of insurance insured that customers received the best protection and that 

developers of insurance products were meeting the needs of all consumers in the market. 

In the 60 years since the McCarran-Ferguson Act was passed, financial markets have changed immensely, and competition within 

the insurance industry and between insurers, banks, and securities 

firms has become really fierce. 

While national and international standards exist, the emerging 

insurance retains the same regulatory patterns, unfortunately. 

10

Several years ago, this committee took the lead in passing 

NARAB to encourage States to adopt a uniform licensing standard 

or face a National Association of Retail Agents and Brokers. And 

we wrote that bill so that we would encourage the industry to police itself. The measure has worked to bring the States together but 

has not eliminated duplicate regulation, and it is not finished. 

I support States’ rights, and I oppose Federal preemption of 

States. Consumers, however, are the ones who are harmed by the 

inability of the insurance industry to compete nationwide on financial products. The sick and the elderly need access to new products 

that recognize changes in medicine and retirement savings. Homeowners and small businesses need new products to match their 

growth in equity and opportunity. 

I urge the current and former commissioners who are present 

here to work with each other, to work with the industry and to 

work with this committee to develop an insurance market for the 

21st century. We are not there yet. 

I also want to note that TRIA, the Terrorism Risk Insurance Act, 

expires at the end of this year. Millions of policyholders around the 

country are already being notified that their terrorism insurance 

will not be available for them next year if this Congress does not 

act. Our economy cannot afford to be slowed down by the fear of 

loss from terrorism. We must have terrorism insurance, and it 

must be available, and it must be available soon. 

I am pleased to see that New York’s former insurance commissioner, Greg Serio is here. He has been a tireless advocate for TRIA 

and for insurance consumers in New York nationwide. I look forward to hearing from him, and I look forward to hearing from all 

of the witnesses here today. 

Thank you. 

Mr. ROYCE. Thank you, Ms. Kelly. 

Now we will go to our testimony from our panel of witnesses. We 

thank them for joining us today. 

We are going to hear first from Mike Pickens, testifying as the 

former State insurance commissioner, Arkansas Department of Insurance; and then Greg Serio, testifying as the former superintendent of insurance, New York State Insurance Department; 

Lee Covington, testifying as the former director of the Ohio Department of Insurance; Nat Shapo, testifying as the former director of 

the Illinois Department of Insurance; Diana Koken, Pennsylvania 

Insurance commissioner, testifying as president of the National Association of Insurance Commissioners; and Ed Muhl, testifying as 

the former insurance commissioner of Maryland and the former superintendent of insurance for New York State Insurance Department. 

We will start with Mike Pickens. 

STATEMENT OF J. MICHAEL PICKENS, TESTIFYING AS THE 

FORMER STATE INSURANCE COMMISSIONER, ARKANSAS DEPARTMENT OF INSURANCE 

Mr. PICKENS. Mr. Chairman, ranking member and committee 

members, thank you once again for this opportunity to testify on 

the important issue of insurance regulatory reform. 

11

I want to take this opportunity to commend the chairman and all 

the committee members on your continued interest in and enlightened progressive work on this important issue. This is an issue 

that is vital to all of us who are insurance consumers, to our financial services marketplace, and to the United States economy. 

It is consumers, not the insurance industry, who bear the burdens and pay the costs when regulation is ineffective and when 

regulation is inefficient. This issue of regulatory modernization is 

not about deregulation, it is about better consumer protection, it is 

about more competition, and it is about better products and better 

prices for consumers. 

When I was NAIC president in 2003, our membership, which included at that time some 22 brand new chief regulators, made it 

clear they wanted the NAIC to have a strong, credible voice in 

Washington, D.C. That is why we created a Governmental Affairs 

Committee, we created the State-based ASSURE initiative, and we 

hired Washington insiders to help us educate Congress about our 

issues. 

At that time, as now, State regulators were faced with essentially three options. Number one, we could develop our own modernization plan and get it passed in each State, one State at a time. 

We could engage the House Financial Services Committee and the 

subcommittee and provide technical expertise and input on the 

Federal tools of the SMART approach where the threat of preemption could be used as both a carrot and a stick to help expedite necessary and appropriate State-based reforms. Or we could do nothing and confront the very real possibility of the creation of a socalled optional Federal charter, which would result in total preemption and the total loss of all State authority. 

Wisely, in 2003, our membership chose options one and two. We 

met in Austin, Texas, and we pounded out our plan, which we entitled, ‘‘A Reinforced Commitment Insurance Regulatory Modernization Action Plan.’’ We also began to work hard implementing this 

plan in each and every State in the country. And, in addition, we 

began working to develop a relationship based on credibility, trust 

and technical expertise with Members of Congress. 

It is in this spirit of consumer protection, reform, credibility and 

trust that I began working with this committee when I became an 

NAIC officer. It is also in this spirit that I and others were asked 

earlier this year to work with committee staff in providing objective, expert input on the SMART initiative. 

Now, let’s give credit where credit is due. State regulators, working through the NAIC, have in fact made some progressive 

progress in implementing the 2003 action plan and their 2004 road 

map. They have worked hard, and they have made significant 

progress in bringing about uniformity of laws and administrative 

and regulatory processes in the areas of producer and company licensing, making better products available to consumers just as 

quickly as possible and working to protect consumers from fraud in 

areas like viatical sales and sales of insurance policies on military 

bases. And where appropriate, State regulators have provided their 

expertise to Congress on Sarbanes-Oxley, the Terrorism Risk Insurance Act, the U.S.A. Patriot Act, asbestos, civil justice and medVerDate 0ct 09 2002 13:18 Sep 11, 2006 Jkt 029456 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 F:\DOCS\HBA167.160 HFIN PsN: TERRIE
12

ical malpractice reform and international insurance issues, among 

a host of others. 

Still, as hard as they are working, State regulators are somewhat 

limited in how much they themselves can do to pass needed laws 

and implement what I think we all agree are long overdue reforms. 

State regulators must have the help and support of their governors 

and their legislators to implement the reforms. 

However, in far too many States, and all of us have seen this, 

when budget gets tight, State regulators see their consumer trust 

funds raided for other purposes, their programs are frozen or they 

are cut, their legislation gets caught up in the politics of the moment, whatever that may be, and some of their most experienced 

personnel leave State government for the perceived greener pastures of the private sector. Reforms get stalled, they languish, and 

are eventually pushed aside. 

This is not in the best interest of our consumers or of our insurance markets. Regardless of how hard they work, State regulators 

cannot do the job alone, and they need your help and support. 

Now, I am a strong supporter of State insurance regulation, and 

that is why I have been willing, and I appreciate the committee 

asking me to engage and work with the committee on the SMART 

approach. I want to make it very clear today that I am opposed to 

Federal preemption of State insurance laws, but it must be noted, 

under the SMART approach, preemption need never occur. 

SMART does not use preemption but rather it uses the threat of 

preemption to help State regulators overcome the political and 

other obstacles that exist in some States so that they can in fact 

implement, enforce, and continue to regulate the reforms that they 

already have promised under our 2003 action plan and the 2004 

road map. Honestly, I see SMART as an opportunity for State regulation, not as a threat. 

Gramm-Leach-Bliley required States to develop and implement 

producer licensing reforms, and as Representative Kelly mentioned, 

if this was not done within a specified period of time, State regulators would lose their authority to a newly created Orwelliansounding Federal agency—the National Association of Registered 

Agents and Brokers. How did the States respond to this threat of 

preemption? They set an NAIC speed record in creating a model 

law and getting it passed and implemented in all the States, including the largest markets in the country. 

Similarly, following a rash of high-profile insolvencies in the late 

1980’s and 1990’s, Representative Dingell of Michigan encouraged, 

and I use that word kindly, encouraged State regulators to reform 

or to be eaten alive by the Federal Government. State regulators 

responded affirmatively and developed the NAIC Financial Solvency Accreditation Program. So this approach that is used under 

SMART has been used in the past, and State regulators have responded positively. 

You know, it is said that the greatest champions respond to the 

greatest challenges. They rise to the occasion, they work best and 

they deliver the most when the stakes are the highest. In my book, 

State insurance regulators are in fact great champions who will, as 

they have always done, respond courageously and prove to be victorious when the chips are down. 

13

But from my objective perspective, they need your support and 

your help, and SMART just may—just may—be the tool State regulators need to help expedite promised reforms in the State. 

Thank you for this opportunity to work with you on this initiative, and I look forward to answering your questions. 

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

127 of the appendix.] 

Chairman BAKER. Thank you very much, sir. I appreciate your 

good statement. 

Next witness is Mr. Gregory V. Serio, former superintendent, 

New York State Insurance Department. 

STATEMENT OF GREGORY V. SERIO, TESTIFYING AS THE 

FORMER SUPERINTENDENT OF INSURANCE, NEW YORK 

STATE INSURANCE DEPARTMENT 

Mr. SERIO. Good morning, Mr. Chairman and members of the 

subcommittee. 

Modernizing insurance regulation is a multifaceted undertaking, 

comprising the dual tasks of updating both insurance statutory 

standards as well as insurance regulatory standards, in addition to 

monitoring case law developments that also serves a role in the evolutionary process of the law. 

Insurance regulators and legislators both saw the need for modernization as a matter of culture rather than as a static event, and 

their representative groups—the NAIC, the National Conference of 

State Legislatures and the National Conference of Insurance Legislators—undertook a series of initiatives over the past 5 years to 

help construct a coordinated approach to insurance reform. 

Key to that effort was the creation of a productive dialogue with 

key members and committees in Congress, this subcommittee and 

you, Mr. Chairman, and your members, chief among them, to forge 

a consensus on the key areas needing reform and the best way to 

achieve these mutually desirable goals. 

The underlying common thread among all the players, both Federal and State, in the early stages of the insurance reform dialogue 

was to avoid replication of the awkward dynamics of the discussions leading up to the passage of the Gramm-Leach-Bliley legislation where it is universally agreed that State insurance, legislative 

and regulatory community members, did not have an effective voice 

in that process. 

Having a seat at the table, as they say, and, more importantly, 

a voice that would and could be heard, was a critical condition 

precedent to engaging in any discussion on insurance modernization. 

Equally well understood, however, was that seats at the table 

had to be earned by a willingness to compromise for the larger good 

of meaningful insurance reform. Quality of the insurance reform 

being considered in these early discussions was measured by the 

same standard that is still being applied to the current deliberation: Can adequate uniformity in laws and regulations be achieved 

so as to be able to justify the continued support of the State-based 

system of regulation? 

Uniformity was, and continues to be, the gold standard for measuring effective modernization of State insurance regulation, but it 

14

also has proven to be a far more elusive goal than many had 

thought. Perhaps it is because some did not realize that the quest 

for uniformity within a State-based system would still require some 

States to shed some individual autonomy. Perhaps it is because 

some erroneously thought that uniformity would mean deregulation when it clearly does not. Or perhaps it is because at the end 

of the day there may not be the same level of commitment to modernization of insurance policy and practice, as many had originally 

thought. 

The ongoing dialogue between public policymakers and regulators must continue to focus on the issue of uniformity if we are 

to assure that laws keep pace with the rapidly changing dynamics 

of the domestic and international insurance market. 

Uniformity is also a crucial element to the public’s better understanding of insurance, how it works and what they can expect and 

should expect from it. In the mobile society we live in today, the 

public should have reasonable expectations that the rules applied 

in one jurisdiction are reasonably similar to those in another jurisdiction and that they are not forsaking adequate insurance regulatory protection simply because they are moving from point A to 

point B. 

Uniformity also allows regulators to more smoothly and effectively join in joint regulatory actions with less concern for nuances 

from one State to another that could undermine or complicate a 

multistate market conduct or financial examination. 

Indeed, uniformity would seemingly be the regulators’ friend, allowing them to focus on examination, enforcement and consumer 

protection activities and the enemy of the unscrupulous market 

player who arbitrages the vast variety and the bodies of law and 

regulatory environments by opportunizing inconsistency in those 

State laws for mischievous purposes. 

It would be unfortunate if the efforts to have regulatory modernization were hampered or stalled because of the inability to 

achieve consensus on uniformity of standards in certain critical 

areas. Inability to gain agreement on uniformity would also undermine all that which has occurred up to this point in time in the 

name of uniformity. 

The NAIC’s accreditation program, the many model laws and 

regulations promulgated by the NAIC and NCOIL, the successful 

implementation of the Gramm-Leach-Bliley functional regulation of 

financial holding companies by both Federal and State authorities 

and now the SMART legislative model put forward by the House 

Financial Services Committee are all examples of efforts taken individually and jointly by these entities to pursue greater uniformity 

in the statutory basis of State insurance regulation. 

Most notably, the insurance industry compact, now passed by 

more than 15 States, a concept embraced by the NAIC and executed by the NAIC, first championed by NCOIL so many years ago 

and included within the SMART draft, provides a structural framework for assuring uniformity across the spectrum of issues over the 

long term. 

To promote the concept of uniformity as the keystone to insurance regulatory modernization, the NAIC issued last year its road 

map for regulatory improvements to serve as a complementary docVerDate 0ct 09 2002 13:18 Sep 11, 2006 Jkt 029456 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 F:\DOCS\HBA167.160 HFIN PsN: TERRIE
15

ument to Chairman Oxley’s vision for improvement of the Statebased system of insurance regulation, as he laid it out to the NAIC 

at its spring 2004 national meeting. 

Identifying points of consensus and earmarking points of disagreement allowed all participating in the working dialogue to find 

areas of agreement quickly on the so-called low-hanging fruit and 

to concentrate our efforts on the more specific questions before us. 

Indeed, the NAIC in its vision statement expanded the perspective 

of the chairman’s view, at his invitation, I should say, by including 

provisions of greater financial surveillance and holding company 

oversight, two issues that have taken on even greater importance 

given the events of the past several months. 

The two road maps were and are not competing documents. They 

were and are the basis upon which consensus on national standards can be built. The SMART bill, as currently drafted, is a worthy progeny of the original road map initiative. It contains many 

provisions that were originally in the NAIC vision statement. The 

SMART dialogue does not presume that the SMART draft will be 

the final word on any issue, as serious discussion still needs to be 

had on issues like rate regulation, the national partnership, and 

preemption powers. And State insurance regulators need to know 

that they are gaining the tools they need to effectively regulate the 

business of insurance in a new world order. 

From the mutually constructive beginnings of these discussions 

and the valuable work products that have come from the open dialogue that has been the hallmark of this public policy undertaking, 

though there has been some erosion in the trust and confidence of 

all players with respect to that joint commitment to see this process through to what was once the articulated goal of all involved, 

to modernize State insurance regulation in a manner that benefits 

both insurance consumers and industry participants. 

Consequently, those who would prefer a more radical reform of 

insurance regulation or those who envision a weakening of insurance regulation in the name of reform now see new life being 

breathed into their efforts largely on the strength of the notion that 

those who prefer to improve State-based regulation are now a camp 

divided. 

Uniformity of laws and regulation will allow the State-based system of regulation to become more effective and efficient in its enforcement of the law, as already noted. It will also allow the industry’s own efforts to improve regulatory compliance, internal controls and corporate governance to be more effective. 

The self-regulatory mechanism model now in place in the securities market and embodied in the NAIC can be greatly replicated 

and enhanced in the insurance sector with greater uniformity of 

laws and transparency of regulatory processes. 

Organizations like the Insurance Marketplace Standards Association, once challenged by the regulators to provide greater disclosure of information and transparency in their processes, has shown 

that self-regulatory bodies can thrive in insurance and even 

achieve greater regulatory efficiencies for its companies, as we have 

seen in New York, Texas, Massachusetts and now incorporated into 

the NAIC Market Examiners Handbook, accepting IMSA work 

16

product and analyses in the planning and execution of market conduct exams. 

Greater uniformity in laws and regulation can and will make 

self-regulatory and best practices organizations like IMSA even 

more effective at promoting good market conduct by insurers and 

better at integrating their activities into the standard regulatory 

process. 

Uniformity, where applied, has paid dividends. In producer licensing, the flow of information between the States has given the 

United States for the first time a real national system of agent licensing regulation. At the same time, it has also made it infinitely 

easier for agents to expand beyond the borders of their space, creating a far more dynamic insurance marketplace. 

The leveraging of technology by State insurance departments in 

this new regulatory paradigm has made life for agents and regulators even better. In product development, as seen in the concentration of efforts on life products in the Interstate Compact Initiative, and in the speed to market advancements made in New 

York, Ohio and elsewhere, real benefits in uniformity of process 

and policy are being realized. 

Uniformity of laws, regulation and processes has been the stated 

goal of the NAIC since its origin over 130 years ago. It has been 

true to the quest and has made particularly impressive strides over 

the past 5 years from its statement of intent to its reinforced commitment to modernization, to the road map, to the passage of interstate compact legislation and producer licensing initiatives and 

other uniform standards. 

Its members also know that modernization of regulation and the 

uniformity upon which it is based is very much a process and not 

an event. Changes will be necessary from time to time, and the ebb 

and flow of negotiation and compromise will always benefit all parties in the long run even if it seems that one side is giving more 

than the other at any given moment. 

Maintaining the long-term perspective of preserving the Statebased system of insurance regulation, not simply because it is the 

historical method of regulation but because it is the system best 

suited to meet the demands of a changing world, will be all the motivation that regulators to understand and embrace the give and 

take of the SMART deliberative process. 

The Congress will also understand that it stands within the best 

position when it works with the States in a cooperative venture to 

improve the State-based system rather than substituting a new 

Federal regulatory body for a regulatory system that already works 

quite well and is poised to be even better with greater uniformity 

of policy and process. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Serio can be found on page 134 

of the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Mr. Lee Covington, testifying as a former director, Ohio Department of Insurance. 

Welcome. 

17

STATEMENT OF LEE COVINGTON, TESTIFYING AS THE 

FORMER DIRECTOR, OHIO DEPARTMENT OF INSURANCE 

Mr. COVINGTON. Thank you, Mr. Chairman. 

Mr. Chairman, Chairman Oxley, ranking member, members of 

the committee, I thank you for the invitation to testify before your 

committee today on the important issue of insurance regulatory reform. 

First, Mr. Chairman, I want to express my deep appreciation for 

your past courtesies to me during my service as Ohio insurance director and the outstanding support and working relationship I had 

with you and your tremendous staff on a number of very important 

pieces of legislation. It is very good to be with you again today. 

I have had the pleasure of working with the committee during 

the development of SMART, providing high-level policy and structural insights and technical assistance on specific issues addressed 

in SMART. I appreciate the opportunity to work with you to ensure 

consumers have the necessary regulatory protections, consumer 

choice, and competitive markets inuring to their benefit as well as 

assuring a reasonable regulatory environment for companies and 

agents delivering vital insurance products and services to policyholders. 

During the past 5 years, since adoption of the NAIC’s statement 

of intent, the NAIC, NCOIL, NCSL have all had great leadership, 

including one of the very best, my good friend, Commissioner Diane 

Koken, current NAIC president. Each organization has had an unprecedented level of commitment, focus, work, and energy throughout this time period, and their current and past efforts are really 

remarkable. 

Significant progress has been made on a number of initiatives 

contained in the original statement of intent, as outlined in my 

written testimony, including operationalizing the national insurance producer registry and enhancing and deploying SERF under 

the strong leadership of Alabama Commissioner Walter Bell, who 

is with us today. 

For very understandable reasons, other initiatives have been 

slower in development and implementation, and the effectiveness of 

some initiatives, as currently operationalized, remains unclear. For 

example, the NAIC–NCOIL market conduct surveillance model law 

was approved 4 years after the adoption of the statement of intent 

in 2000, and to my knowledge, only one State has adopted any 

version of that model to date. 

And the property and casualty commercial rates and foreign policy model law, adopted in 2002, which incorporates a competitive 

rating system for most commercial lines insurance, based on actuarially sound principles, has not been adopted, and to my knowledge, has not been introduced in any State in the country. 

After all the efforts to institute regulatory reforms over the past 

5 years, regulators, legislators and other stakeholders widely recognize the challenges and obstacles to achieving reform, which includes most significantly the collective action issue. 

The development of model laws and initiatives through the 

NAIC’s extensive committee and consensus process takes substantial time, something all of your members have experienced here in 

Congress, I am sure, and in the end, the NAIC has no authority 

18

to pass model laws, and the challenge of seeking adoption by individual State legislators is substantial, even with the strong support 

and work of NCOIL and NCSL. 

And, also, another challenge is the continued proliferation of unwritten rules, known by most as ‘‘desk drawer’’ rules, and the lack 

of execution, according to the intent of a particular model law or 

reform initiative. 

Based on the Ohio experience, necessary reforms can be implemented. Ohio was one of the first, or the first State, to adopt its 

own reform initiatives or the NAIC’s reform initiatives, including 

SERF in 2000, with 40 percent of all filings now submitted via 

SERF, and the average review time of 15 to 20 days, a reciprocal 

agent licensing system enabling agents to be licensed within 5 days 

in Ohio and in all NIPR States, the use of market analysis data 

calls to focus resources on companies having the greatest likelihood 

of regulatory noncompliance and the implementation of a risk-focused approach to financial examinations, long used by the Federal 

banking regulators. 

While no new measures were implemented with respect to rate 

filings, Ohio has long embraced a competitive rating system based 

on sound actuarial principles. And as a result, Ohio citizens consistently enjoy homeowner rates ranking from 2nd to 5th best in 

the country and automobile rates ranking between 14th and 17th 

best in the country. 

With regard to the current national rate and form review process, which I understand Mr. Shapo is going to address in more detail, a little background may be helpful. 

In December 2000, the NAIC issued its Speed-to-Market Working 

Group report, and in that report it recommended a no-filing system 

or informational-only filing for most commercialized rates and 

forms, and in spring 2002, based on the report, adopted the property and casualty commercial rate and policy form model law. 

While a very limited number of States have enacted independent 

incremental reform, no State, to my knowledge, has enacted the 

NAIC model. 

With respect to personal lines rates and forms, with a very limited number of exceptions, the status quo remains in tact, and little 

interest appears to exist among regulators to even address the 

issue of personal lines rates. 

In Ohio, for homeowners insurance, consumers enjoy an average 

savings of $160 to $170 compared to the yearly average for the rest 

of the Nation of $535. For automobile insurance, that savings again 

is around $170 off of the average of $775. And when compared to 

States with price control rate regulatory schemes, those savings 

would be even more. Competition works, Mr. Chairman, and I am 

pleased that you and your committee continue to pursue a competitive marketplace that benefits consumers. 

Most, if not all, insurance regulatory stakeholders agree reform 

is needed, and the debate is about how, by whom and under what 

timeframe reform should be accomplished. Commissioner Koken, in 

her usual eloquent and thoughtful opening address during the 

NAIC summer meeting, reinforced this point. 

To this end, fair questions for this committee to consider include: 

first, whether the States will ever be able overcome the collective 

19

action issue; second, how long will it take States to complete this 

work; and, third, even if the necessary model laws are actually 

adopted, will States ever be able to operationally coordinate their 

work, as intended, when executing their duties under those laws? 

SMART provides the opportunity for States to maintain a Statebased regulatory system with needed reform. While some may object to the preemption provisions, which should only be used as a 

last resort, the question exists as to what other options do policymakers have if the States cannot institute the agreed upon reform 

initiatives? 

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

for the very positive working relationship in the past. I look forward to continuing to work with you and my friends and former 

colleagues at the NAIC to assure SMART meets our common goals 

of necessary consumer protection, consumer choice and competitive 

markets that benefit consumers. 

I look forward to answering your questions. 

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

62 of the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Nathaniel S. Shapo, former director, Illinois 

Department of Insurance. 

Welcome, sir. 

STATEMENT OF NATHANIEL S. SHAPO, TESTIFYING AS THE 

FORMER DIRECTOR, ILLINOIS DEPARTMENT OF INSURANCE 

Mr. SHAPO. Good morning, Mr. Chairman. Thank you for the opportunity to appear before you again as you consider important 

issues pertaining to interstate commerce. 

Mr. Chairman, if I generically describe the insurance market, 

hundreds of sellers intensely competing with each other for customers who actively comparison shop, no one would say that the 

industry should be subject to price controls, but insurance has a 

long history of government rate regulation. I will review this background briefly to explain why I believe these price controls in today’s marketplace should be presumed unjustified. 

Government regulation of insurance rates is entirely appropriate 

at its conception. In the 1800’s and early 1900’s, the fire insurance 

marketplace developed a unique market defect. Carriers routinely 

underpriced their products in the quest for market share. Crude reserving methods and unsophisticated financial oversight led to 

mass insolvencies following catastrophic urban fires, leaving consumers exposed in their hour of greatest need. 

So beginning in the early 20th century, legislatures passed statutes which allowed and encouraged carriers to collude through rating bureaus. These statutes empowered insurance regulators to review rate levels for adequacy and excessiveness. These price controls were necessary to substitute for the usual regulator of price—

competition—which had been intentionally destroyed. 

Price controls were thus used to keep rates up to promote solvency, not down to ensure affordability. 

In 1944, the Supreme Court declared that insurance was interstate commerce and that Federal law, including the Sherman Act, 

applied. The next year, convinced by industry and State regulators 

20

that competition was harmful to solvency, Congress passed the 

McCarran-Ferguson Act, limiting the Sherman’s Act applicability 

to insurance. 

The Act intentionally incentivized all the States to allow collusion and to pass rate regulatory laws. This was a reasonable choice 

given conditions in 1945, but the auto and homeowners markets 

have changed since then. Independent carriers began competing 

with the fixed bureau rates that resulted from McCarran-Ferguson. 

Rate advances and carrier actuarial techniques and government financial regulation obliterated the need to artificially prop up prices 

for solvency purposes. 

The market was transformed by competition, which is obvious to 

the most casual observer. For instance, many car insurers broadcast ads on national TV, each claiming to offer a better price, directly naming competitors and giving examples of better rates offered to specific consumers. 

Even though rate collusion between carriers is over, price controls still thrive. They have morphed, however, from their original 

legitimate purpose as a solvency tool and are now used as a means 

to ensure product affordability. 

Summarizing this history, since collusion was officially sanctioned by congressional and other policymakers, price controls were 

once entirely appropriate, but government rate regulation for the 

purpose of keeping a product affordable, as practiced today, is a 

cardinal sin in a competitive marketplace. 

The mismatching of means and ends in insurance rate regulation 

is not benign. This committee has gathered extensive evidence 

demonstrating that rate regulation has not kept prices down; rather, it routinely distorts markets and withers supply to the detriment of consumers. 

For instance, as this committee has heard, the New Jersey marketplace was ruined by rate rollbacks and aggressive prior approval 

regulation. Carriers left the State in droves, prices did not go down, 

and qualified applicants could literally not find coverage. 

I was privileged to serve as Illinois director of insurance for 4 

years. Illinois has no law prohibiting excessive or inadequate rates 

in personal, auto and homeowners insurances, but rates are surely 

regulated in Illinois. Instead of government passing on the proper 

price a seller can pay in a competitive market, personal lines, auto 

and homeowner rates are regulated by the most ruthless force in 

a capitalist economy: The law of supply and demand. 

Illinois has consistently had the most or nearly the most carriers 

writing auto and homeowners insurance of any State in the country. Prices have been stable, either in the middle of the State 

rankings or below average. Coverage in Illinois is not just affordable, it is widely available. The assigned risk plans have far less 

than 1 percent of the market. 

Illinois regulates the insurance marketplace in areas where consumers are in need of government intervention. Consumers cannot 

fully understand solvency forms and market conduct where the 

State affirmatively regulates these aspects of the market to prevent 

a race to the bottom. This includes monitoring the market for unfair discriminatory practices. 

21

Government must do this to protect consumers. The consumers 

do know how to protect themselves by comparison shopping based 

on price. They do it every day in every other competitive market. 

Competition keeps prices reasonable, it reacts to the marketplace 

far more nimbly than government can ever hope to, and it ensures 

a capital without fear of irrational government capture flows to 

market, producing adequate supply. Nothing about insurance 

makes it immune from these laws of economics. 

Because of this, I note that market-based reforms in other businesses were referenced by the committee this morning. None of 

these markets, as described, were nearly as competitive as insurance. Why is the more competitive industry still subject to price 

control? Thus, the Illinois system should not be considered an experiment, nor should it be regarded as unusual. Illinois’ approach 

could not be more mainstream. 

Instead, government price controls in a competitive market are 

strained. This is very much Congress’ concern. Insurance price controls greatly affect interstate commerce in many ways, since government capture of insurers’ capital in one State affects policyholders in other States by putting the common fund at risk. I believe that Representative Kelly and I spoke about this issue the 

last time I testified here. 

Rate regulation does not serve the purpose for which it is used 

today, and it diverts scarce government resources from areas where 

consumers cannot protect themselves and where government must 

regulate. And, quite unfortunately, price controls needlessly antagonize property casualty carriers. These companies should be 

natural allies of State regulation, because their products are attune 

to local markets which are affected by backers particular to individual States, like tort law. 

But more and more such carriers, including former staunch supporters of State regulation, are openly supporting a Federal charter 

in Congress. This is particularly disconcerting to someone like me 

whose strong preference has always been to retain the primacy of 

State regulation if feasible, because I believe that State regulators 

are professional and dedicated public servants who ably perform an 

essential social function. 

Thus I urge the committee that if it pursues insurance reform 

legislation, rate regulation should be at the top of the list, bar 

none. Nothing could be more appropriate than for the congressional 

committee tasked with regulating a particular kind of interstate 

commerce to examine that market, which this committee has done, 

create a full record which demonstrates that the conditions which 

spurred a previous and unique congressional policy choice are no 

longer present, which this committee has done, and to update the 

law to bring an outlier industry into line with prevailing American 

public policy, favoring a regulation of competitive markets by supply and demand, which this committee is considering. 

I would like to conclude by sincerely thanking Chairman Baker 

for his outspoken support of competitive markets. The chairman 

should be commended for his clear thinking and political courage 

in making this a priority. 

Thank you again for your time and consideration. 

22

[The prepared statement of Mr. Shapo can be found on page 140 

of the appendix.] 

Chairman BAKER. Thank you very much, sir. I appreciate your 

courtesy. 

Our next witness is Ms. Diane Koken, the Pennsylvania insurance commissioner, also appearing here today as president of the 

National Association of Insurance Commissioners. 

Welcome, Ms. Koken. 

STATEMENT OF M. DIANE KOKEN, PENNSYLVANIA INSURANCE 

COMMISSIONER, TESTIFYING AS PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Ms. KOKEN. Mr. Chairman and members, thank you very much 

for the opportunity to be here with you today. 

And I am pleased to also mention my fellow regulators that are 

joining me here today. Sitting behind me is the president-elect of 

the NAIC and the superintendent of Maine, Alessandro Iuppa, and 

secretary treasurer of the NAIC and elected commissioner from 

Kansas, Sandy Praeger, and also the commissioner from Alabama, 

Walter Bell, and the director from Idaho, Gary Smith. 

I was first appointed as insurance commissioner of Pennsylvania 

in 1997. I have since served under three different governors, starting with Tom Ridge, Governor Schweiker and currently Governor 

Rendell. 

Prior to my 8 years in public service, I was the general counsel 

of an insurance company and had been there for 23 years. So I 

have over 30 years of commitment to insurance, because I believe 

it is important to American families and to American businesses. 

It is important for insurance regulation also to be responsive to 

the needs of a modern and evolving regulatory marketplace. State 

insurance regulators recognize the importance of safeguarding insurance consumers. We believe that the State regulators perform 

well as functional regulators and that State officials are in the best 

position to respond quickly and to fashion remedies responsive to 

local conditions. 

State insurance regulators are public servants elected and appointed, representing the same people who are your congressional 

constituents. We share your goals regarding the importance of regulation that balances the need for vigorous consumer protection 

with vigorous business competition to provide a healthy insurance 

marketplace for consumers. We are proud that responsive and effective consumer protection is the hallmark of State insurance regulation. 

The States and the NAIC are on time and on target to modernize 

State regulation where improvements are needed while preserving 

the benefits of consumer protection that is our real strength. In 

some areas, the goal is to achieve national uniformity because it 

makes sense for both consumers and insurers. In areas where different standards among States reflect regional needs, we are harmonizing State regulatory procedures to ease compliance by insurers and agents doing business in those markets. 

The system today works, and today in fact the property and casualty industry is sitting on record surpluses with loss ratios better 

than they have been in the last 30 years. The draft SMART Act 

23

incorporates unacceptable levels of Federal preemption that we believe would create both legal and practical problems for the insurance industry and its customers. A thorough analysis of the 

SMART Act by 117 insurance regulatory experts from your home 

States identified concerns where the bill would preempt many important State laws to protect consumers. 

Federal preemption of State insurance regulation denies your 

congressional constituents the benefits of important State services 

and protections, as has already been proven in existing Federal 

programs, such as FEMA in its administration of the National 

Flood Program, and ERISA, through its taking away State authority to assist your constituents. 

Unlike banking and securities, insurance policies are inextricably 

bound to the separate legal systems of each State. The policy itself 

is a contract written and interpreted under the laws of each State. 

When a property and casualty or life claim arises, their legitimacy 

must be determined according to State legal codes. State courts 

have more than 100 years of experience in interpreting and applying these State laws. 

Although the NAIC and the States can accomplish most modernization goals without Federal legislation, there are four areas 

where new Federal laws are needed to help State insurance regulators do our job even better. One, to give State insurance regulators access to the FBI’s criminal database in the same manner 

as Federal banking and securities regulators. Two, to protect the 

sharing of confidential regulatory information among Federal and 

State banking, securities and insurance regulators. Three, to 

amend Title 31, USC, section 3713, to assist State insurance company conservation, rehabilitation and liquidation. And four, to restore the Federal income tax exemption for certain insolvent insurance companies. 

And, of course, I would be remiss not to mention our own strong 

support of the important TRIA initiative to protect consumers in all 

of our States. 

The NAIC wants to play a positive role in helping the House Financial Services Committee evaluate the draft SMART Act by providing technical assistance as regulatory experts and policy input 

as State officials. However, the NAIC cannot support Federal legislation that includes broad Federal preemption of State consumer 

protection laws or Federal supervision of State insurance regulation. 

As the SMART Act has not yet formally been introduced as a 

bill, it is premature for the NAIC to take a position to either support or oppose it. The NAIC and its members have cooperated fully 

over the years with important inquiries by Congress into the adequacy of the State regulatory system. We believe these inquiries 

have demonstrated clearly that local and regional State regulation 

of insurance is the best way to meet the demands of the consumers 

for this unique financial product. 

We will continue to work with Congress and within State government to improve the national efficiency of State insurance regulation while preserving its long-standing dedication to protecting the 

American consumer. 

24

I thank you again for this opportunity and for your continued interest in what we believe is a very important topic, and we look 

forward to continue to be engaged with this committee. 

[The prepared statement of Ms. Koken can be found on page 72 

of the appendix.] 

Chairman BAKER. I thank you for your statement. 

Our next witness is Mr. Edward J. Muhl, testifying today in his 

capacity as a former insurance commissioner of Maryland and also 

a former superintendent of insurance for New York State Insurance Department. 

Welcome, sir. 

STATEMENT OF EDWARD J. MUHL, TESTIFYING AS THE 

FORMER INSURANCE COMMISSIONER OF MARYLAND AND 

THE FORMER SUPERINTENDENT OF INSURANCE, NEW YORK 

STATE INSURANCE DEPARTMENT 

Mr. MUHL. Thank you, Mr. Chairman and members of the subcommittee. My name is Ed Muhl, and I very much appreciate the 

opportunity to be on this panel. 

My background spans nearly 40 years in the insurance industry, 

serving in both the public and the private sectors. I was first appointed insurance commissioner of Maryland by the Democratic administration of Governor Hughes, was reappointed by a second 

Democratic administration of then-Governor Schaefer, and during 

that tenure I was elected president of the NAIC. 

I was subsequently appointed superintendent of insurance for the 

State of New York by the Republican administration of Governor 

Pataki, and my wife says if I ever decide to do it a third as a regulator that I will be all by myself. 

I have also served in the private sector with insurance companies, accounting firms, as well as consulting firms. Over these 40 

years, I have experienced regulation from the perspective of a company official, a regulator, a consultant and as a consumer. 

Mr. Chairman, I strongly suggest to you and the subcommittee 

members that there is an enormous redundancy of costs and procedures in the present system of regulation which serves only to add 

premiums paid by the consumer, and it also raises the level of frustration in trying to deal with the complexity of this process. 

I am very pleased that this committee is taking the initiative to 

look at the basic processes that affect all of us, and hopefully you 

will conclude that the present system is in need of some change. 

Having said that, I believe that State regulation of the business 

of insurance remains better positioned to respond to unique issues 

of both consumers and companies in certain geographic areas. Unfortunately, the difficulty remains in the inability of the present 

system to attain the uniformity that is necessary to eliminate the 

redundancy of these costs. There are simply too many independent 

and diverse focal points of authority in the States and the U.S. territories to be able to gain consensus. The result is a very costly and 

a very redundant system. 

Now, I started in regulation in 1982 and have seen efforts of individual regulators and the NAIC to try to simplify the process, 

gain uniformity and eliminate the unnecessary. Unfortunately, 

there has been only limited evidence of success over 20-plus years. 

25

Now, when I became the New York superintendent, my experience was that the New York Insurance Department was one of the 

strongest in the United States. It was and remains today. And, certainly, it was one of the slowest in responding to timeline issues. 

For an example, we conducted a review of all 160-plus regulations to determine if any needed to be updated or were obsolete or 

no longer useful to effective regulation. Some of these regulations 

were unchanged for 100 years but were still strictly enforced by the 

department despite the costs and the inefficiencies. 

Now, the review resulted in the elimination of 50 outdated ones, 

and the remainder were changed, which benefited many and certainly increased the effectiveness of the department. 

Now, the career staff in many insurance departments prove 

every day to be extraordinary and dedicated individuals, and they 

take their task of regulating the insurance industry quite seriously. 

Many of the oversight processes are handed down generation to 

generation with no time available to look beyond the daily work because of the volume. The entire system needs to be looked at, it 

needs to be stirred to find a better way to deal particularly with 

the more important issues. 

And, finally, Mr. Chairman, one point on rating. I served as a 

regulator at a time when the rating law of the State was prior approval. Then it was changed by the State legislature to competitive 

rating. And, finally, when I moved on to New York as the superintendent there, that State had flex rating. 

Going from a prior approval to an open competition forum proved 

to me that competition is an effective regulator of rates, which allowed me to make better use of my limited staff resources by putting them to use in the area of market conduct examinations and 

other sensitive areas. It was not an easy transition, but once the 

competitive forces came into play and the interest of the consumers 

and the industry were in balance, the system worked very, very 

well, and I would urge a close review of the benefits of such a rating mechanism. 

Now, I have had the privilege to have been asked by the committee chairman and the staff to review many of the titles of the 

SMART draft and to offer comment and my views as a former regulator. I applaud this committee’s efforts in looking into the current 

system. I look forward to offering additional support, and I wish to 

thank the chairman and the staff in giving me the opportunity to 

voice my opinions. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Muhl can be found on page 123 

of the appendix.] 

Chairman BAKER. Thank you, Mr. Muhl. 

I will start with you. Attempting to establish a consensus on the 

trigger required for the committee to act in an appropriate and 

timely manner, there have been numerous discussions over the 

past 5 or 6 years where the particular regulator would come forward and say, ‘‘We have this plan, and if it does not achieve the 

operable results we want in X years, then the Congress perhaps 

should consider acting.’’ 

Virtually, every one of those self-established timelines has come 

and gone with regularity. Is there something tangible you could see 

26

on the horizon that if it did not occur in some fixed time clock that 

the Congress should then act or is it your considered opinion, based 

on all that has preceded us, that it is just time for the committee 

to go ahead, take up the bill and have a vote and just let people 

establish their perspective on whether there needs to be continued 

defense of the system we now have or take the modest step that 

I think the proposal that we have circulated for comment suggests? 

Mr. MUHL. The short answer, Mr. Chairman, is that I am not 

sure if you will ever get to a point under the present system of 

gaining the uniformity that is really necessary. I think a lot of the 

things that the Congress has done in the past to generate some activity by the States to hold, if you will, the hammer and the carrot 

out has given the States some incentive to finally say, ‘‘Yes, we 

need to do something, and all of these small things and concerns 

that we have had in the past, we can really just ignore those and 

let’s get to a point where we can solve the problem.’’ 

As I mentioned earlier, I am a firm believer in State regulation. 

I am also, though, equally concerned about the costs that are in the 

system that you just simply cannot get out unless you reach a consensus. In other present systems, with what I have seen over the 

years, it is difficult, if not impossible, that you are going to reach 

that consensus. 

So I think a push from Congress, I think there are certainly provisions within the SMART draft that I have seen and offered my 

opinions on, that certainly will do that, giving the States opportunities to say finally, ‘‘Here is a timeframe, you need to do this. It 

makes good logic and sense. It is going to ultimately benefit the 

consumer as well as the companies themselves. So you really 

should do this,’’ giving the States an opportunity to accomplish that 

on their own but drawing the line somewhere, and that somewhere 

would be a 2- to 3-year period. I think that is going to serve well 

to try to advance some of these issues that are very important. 

Chairman BAKER. Well, you have mentioned the carrot-and-stick 

approach. I regret to inform you they have eaten all our carrots. 

I mean, we have got no more time left. 

Mr. Serio, in prior discussions in your former capacity, we had 

discussed what and when. I am just trying to get the day to a point 

where we establish the line Mr. Muhl was talking about. I think 

it is time to draw it and to act on a bill and let members take a 

position on the proposed reform. 

Given this subcommittee’s work only, 20-something hearings, 

meetings, discussions, we have circulated the draft to every stakeholder we can find, I have got all sorts of letters establishing all 

sorts of perspectives, do we need to do anything else or is it time 

to take up a bill, in your perspective? 

Mr. SERIO. In my view, the SMART process has allowed the coalescing of all these issues and all these discussions and all these 

positions to come into one place. 

As Mr. Muhl mentioned a moment ago, the regulatory review 

that we did in New York when Governor Pataki first came into office was a thorough process. I was Mr. Muhl’s first deputy at the 

time, and it went beyond just identifying the regulations that were 

old or obsolete, it was getting them actually off the books on the 

27

regulatory side but then also going back to the legislature and saying the underlying legislative authority was no longer necessary. 

The SMART process has given us that same type of discipline 

that we went through back in 1995, that it was this thorough baseline review. And, look, a lot of people did not like the regs that we 

were taking off the books or did not like the ‘‘desk drawer’’ rules 

that were being abandoned because everybody has their own little 

piece of this. But when we told them what the overall and the overarching purpose of this was is to focus on those things we really 

need to do, we really got some consensus on that, and the process 

under Executive Order number 2 turned out to be a tremendous 

success. 

I think you can equate that experience with what the SMART 

process has done, but now it is time for people to start making 

some baseline decisions about, Okay, what can they go for, what 

can’t they go for? Maybe we put this into two steps instead of one 

step, as I would suggest on rate regulation, for example, taking a 

step to flex before you get to competitive rating, but let’s make that 

call now. 

Let’s figure out what can we do and let’s get it done, the lowhanging fruit that I talked about, things that I think everybody at 

the table can agree on, and I think Commissioner Koken also mentioned a number of things that there are not disagreements on. 

That should be done, and I think that the SMART process can 

show a real positive yield by getting some final decision-making 

done on those issues that we can at least agree on. 

Chairman BAKER. Thank you. My time has expired. 

Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

In my opening remarks, I discussed the need for the committee 

and the House to get our priorities in order and particularly resolve 

the question of terrorism risk insurance. I know that the chairman 

of the subcommittee shares my interest in seeing this process move 

along. 

Anyone on the committee who wants to, tell us whether or not 

you think this terrorism risk insurance is essential and whether it 

should be extended and what type of priority is it? 

Diane? 

Ms. KOKEN. Well, the NAIC is fully supportive of extending 

TRIA, and we believe that it is critical and essential and in fact 

also recommended that group life be included in any extension. We 

have concerns about the ramifications on consumers, small businesses, large businesses alike if in fact this is not extended. 

Mr. KANJORSKI. Thank you. Does anybody else want to voice an 

opinion on that? 

Yes, Mr. Pickens? 

Mr. PICKENS. Mr. Chairman, I certainly would agree that TRIA 

should be extended. That has been NAIC’s position for a number 

of years now. Adding group life at this time I think makes perfectly 

good sense, and I would just address Mr. Kanjorski’s concerns. 

I do believe TRIA is certainly a more urgent issue at this time, 

but I know all of you ladies and gentlemen are capable of walking 

and chewing gum at the same time, and I think you can deal with 

28

the TRIA issue and also hold a hearing like this one looking forward and again appreciate the opportunity to be here. 

Mr. SERIO. Mr. Kanjorski, I got faked out by that question the 

last time I was before you when you asked pretty much the same 

question, but then you followed it up with, ‘‘Well, if you are coming 

to us looking for TRIA help and for financial support, why are you 

telling us that we cannot do insurance regulation,’’ and so I will not 

take the bait twice. 

But I will say this: I mean, clearly, and this is something that 

we have discussed with the New York congressional delegation 

many times over, and I think New York is clearly in the forefront 

of support for TRIA extension, but I take your point seriously about 

this idea of why can’t we do these things together. We can do a 

TRIA together and work it out, and the States and the NAIC specifically provided much of the technical support behind the TRIA 

bill and was also responsible for a lot of the implementation of 

TRIA components in terms of working with the industry. 

Likewise, when the Fair Credit Reporting Act came up for renewal a year or 2 ago, there were some people that got very nervous about the idea of a Federal preemption and making it permanent. Well, once we sorted through that at the NAIC, we came out 

supporting the permanency in the preemption on fair credit reporting, because that was something that really had a uniform basis 

across all State lines. 

So I think the idea that TRIA is one of those manifestations that 

we can use to show that we can do this on a uniform basis, that 

it is not just a terrorism act for New York or for Washington, D.C. 

or Chicago but it is something that we need to do on a uniform 

basis the same way across all State lines, not only helps support 

the idea that TRIA needs to be extended but the fact that the Federal Government can actually work in concert with the States and 

can create some of these uniform standards. 

Mr. KANJORSKI. Very good. I just want to add to that comment, 

though, that we all are aware that the delay that is occurring out 

there is a tremendous blockage, and I think it is a challenge maybe 

to the six members of the panel. 

You should show us the capacity of the industry to come together 

and alert the leadership in both parties in the House and the Senate that this is intolerable, that we have nine more weeks left and 

then we are not going to have terrorism risk insurance in the 

United States, and the destabilizing nature of that to the economy 

as a whole and to the construction industry and potential technical 

defaults that are going to occur out there are huge. 

So I guess I will not take any more time, other than to challenge 

the panel. We cannot seem to break the loggerhead or the delay, 

and we are certainly encouraging the industry to come together 

and show your ability, at least on this single issue, to work together to help us get something positively done. So take that as a 

challenge. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

29

Obviously, we had a lot of testimony with six of you here, and 

I tried to listen very closely. If we could just for a moment set aside 

the argument of preemption and federalism, I would like to focus 

on the price control issue. And just as a matter of public policy, is 

there anyone on the panel who wishes to share with me why price 

controls are necessary or even helpful to the consumers? I can see 

where they may be helpful to the producers, those who are marketing, but why if we have a competitive marketplace, why are 

they necessary or helpful? 

Mr. Serio, please, you want to— 

Mr. SERIO. I will start with that, and it goes back to something 

that Mr. Muhl referred to, the breakout between prior approval of 

rates, flex rating and open competitive rating. 

We had an interesting experience in New York that jaundiced me 

a little bit about a direct move to open competitive rating, and it 

happened in a part of the auto market that a lot of people do not 

see on a daily basis. We actually have open competitive rating in 

the livery market. You file a rate and you can charge anything 

within that filed rate. And the taxi companies, the taxi insurance 

companies got into a very overheated, competitive price war. 

Now, first of all, for the financial regulators, that becomes a very 

difficult thing to manage because you have to make sure that there 

is not money just there today, and I understood your point earlier 

about deregulation in other industries, but those other industries 

do not make promises for 5 years or 10 years down the road. They 

deliver a product, that product is delivered well, and pretty much 

the economic transaction is complete. Well, you have to make sure 

that these companies have got this money somewhere down the 

road. 

Well, anyway, delivery insurance companies got into this fierce 

competitive battle in this open rating system. All brought rates 

down very far only to find out that the rates were inadequate. And 

when we started to tell them they had to start bringing those rates 

back up, they came in and started asking for rates not just back 

to the rates they had filed but rates on top of that. So there were 

some companies that had a vicious price war where rates went 

down 30 or 40 percent but within 2 years rate requests in the 100 

percent range were being asked for. 

Now, to go from prior approval to competitive rating without a 

mid station like a flex rating system where you can start to gauge 

what the competitive environment is and what it will accommodate, I think that is a very important first step to take. 

Mr. HENSARLING. And I think I understand the argument in 

favor of some type of transition, I understand that, but I am trying 

to understand does anybody favor the ultimate goal of being necessary to protect the consumer to have price controls since arguably if I am buying a car or a hamburger or anything else in society, with the exception of those handful of items that have traditionally been viewed as natural monopolies, we allow market forces 

to ‘‘protect me.’’ My observation is that they work pretty well. 

Yes, ma’am? 

Ms. KOKEN. I would also point out that part of the economic incentive or disincentive can be that in many of the coverages in the 

personal lines they are mandatory coverages, which really throws 

30

a bit of a wrench into the competitive model. Auto insurance is not 

something that people have an option in most States to purchase; 

they must purchase. But the overarching concern also needs to be, 

and certainly from the regulators’ perspective is, that in addition 

as we look at the whole equation and the inadequate excess of our 

unfairly discriminatory rate aspect, what we are primarily focusing 

on is the solvency issue. 

As was pointed out by Mr. Serio, because you are buying a promise today that is not going to be paid off for a substantial period 

of time and there are and can be incentives to undercut and charge 

inadequate rates as well as excessive rates, we do believe that 

there needs to be a balance for that overall— 

Mr. HENSARLING. I understand the solvency argument. I thank 

you. 

Mr. Shapo, I sense that you may have a different opinion. 

Mr. SHAPO. Yes. The argument about a mandatory product is 

something I have heard before, and it is a mandatory product, but 

I am not sure why that would change the laws of economics. If it 

is an inelastic demand curve, I would think that would mean we 

were more interested in making sure there was adequate supply, 

and price controls, if they do anything, choke off supply. So I mean, 

I am not aware of any economic study that would suggest that 

there needs to be price controls for a mandatory product. 

Like I said, I am not an economist, but I think that if we were 

going to adjust because of that, the last thing we would want to 

do is turn to measures which would reduce supply when everybody 

needs the product. 

Also, we do not regulate the price of food and we have to eat. 

There are all kinds of things that are necessary in life which we 

do not do price controls on. 

Mr. HENSARLING. Thank you. I see my time has expired. 

Chairman BAKER. I thank the gentleman. 

Mr. Israel? 

Mr. ISRAEL. Thank you, Mr. Chairman. 

Let me join Ms. Kelly in welcoming Mr. Serio who did an outstanding job as the superintendent of insurance in New York. 

We had an interesting meeting of the Democratic whip team this 

morning with Mr. Hoyer, and some of the discussion was about an 

outbreak of partisan eruption in the Judiciary Committee, and Ms. 

Wasserman Schultz stood up, who is a member of the Judiciary 

Committee, and said, ‘‘You know, I am on the Financial Services 

Committee, which is one of the most bipartisan committees, one of 

the most constructive committees. We always find a way to work 

together.’’ 

And that certainly is true. We found a way on GSE’s, we found 

a way on SCRA, and hopefully we will find a way on TRIA, because 

as valuable and as important as this discussion of Federal regulation of insurance may be, we can walk and chew gum at the same 

time. We need to address TRIA. It is critically important. 

When I talk about TRIA at home, most people’s eyes glaze over, 

and so I would like—and perhaps Ms. Koken can lead us off, because I know the NAIC has passed a resolution on this—what 

would happen if we did not extend TRIA? What would the implications and ramifications be if we only focused on Federal optional 

31

charters and did nothing to TRIA by the end of this year in the 

nine legislative weeks left? 

Ms. KOKEN. I think that not acting on TRIA is going to create 

difficult market issues, because in fact in a free, competitive marketplace on the issue of terrorism coverage, the carriers will choose 

not to cover it. There are certain circumstances in which they will 

be required to cover it, like workers’ comp, which cannot be excluded from policies 

And so I think that we are likely to see impacts on small employers, large employers perhaps with concentrations in one location 

that cannot find workers’ comp coverage or in the building sector 

where it is difficult based on the location to get the proper liability 

coverage. And I think, therefore, it will have an economic impact 

on the communities that we all live in. 

Mr. ISRAEL. Thank you. 

Mr. Serio, would you comment on that? 

Mr. SERIO. Yes. The superintendent between Ed Muhl’s tenure 

and my tenure was our friend Neil Levin, who liked to say that the 

past is prologue. I do not think there is any guessing game about 

what is going to happen, because we already saw it happen. 

Now, in the 14 months it took between 9/11 and the passage of 

TRIA 1, you already saw the disruption that occurred in the marketplace. There were not only economic disruptions because coverages were constrained and because prices went up, but you also 

saw the industry going to State regulators or State legislatures 

saying, ‘‘We need relief from the standard fire policies,’’ the socalled New York standard fire policy that had allowed for coverage 

for fire following any kind of an event, including a terrorism event. 

That same dynamic is going to occur all over again. You are having these discussions not just on the economic impact if TRIA does 

not get extended but also what are the policy implications, and that 

is a discussion going on in a lot of places right now, and I think 

you will end up having the same type of result. I think what occurred in 2001–2002 is likely to occur again if TRIA is not extended, and that will be that you are back to this issue again of 

each State individually having to take up the question about what 

they do for their own market. 

And bringing it back to the issue at hand today, TRIA allows 

uniformity across State lines so you do not have a depletion of 

things like standard fire policy, so that you do not have a further 

mismatch of policy regulations around the States. 

Mr. ISRAEL. Thank you, Mr. Chairman. I yield back my time. 

Chairman BAKER. Thank you, Mr. Israel. 

Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. 

Commissioner Koken, it is not any secret, in the press or here 

on the Hill about the relationship between the NAIC and Congress. 

This has not been a very good relationship. I am wondering if you 

can explain to the committee what steps you have taken to improve 

that relationship in terms of personnel and in terms of outreach? 

Ms. KOKEN. Well, I would first point out that the NAIC and the 

officers have been committed to continuing the dialogue and being 

available for any Members of Congress at any time. And, in particular, I think what you are referring to is that last year at the 

32

NAIC there was a change of officers where the president left in 

mid-year, in June, and I was not elected to fill that vacancy until 

September. We took steps at the NAIC, first of all, to change our 

bylaws to put in place a president-elect so that we could assure 

that there would always be continuity in the NAIC in our relationships and our dialogue, and in fact the president-elect is here with 

me today. 

So that was certainly one step, but we recognize that we needed 

to be able to respond to this committee on the draft proposal that 

was put together, and so we put together a team of 117 regulators 

to go through each of the titles and develop a response. 

In addition, I would say that the head of our Washington, D.C. 

office also left and we were in the process of replacing that individual. We do have someone who will be officially starting on July 

1st, and so certainly to the extent that there has been a perception 

of our lack of dialogue on this, we remain and are very engaged, 

have been engaged through over a 1,000 hours of work in analyzing 

this important piece of draft legislation, and certainly we remain 

willing to discuss and meet with any members of this committee 

on any insurance issue, because we do believe that we possess a 

level of technical expertise based in our State experience. 

Mrs. KELLY. I thank you for that response. I think the NAIC is 

really too important to the insurance industry for the doors to be 

closed between us. 

Ms. KOKEN. I agree. 

Mrs. KELLY. And for some time I felt that they were. 

I would like to just pose a question to the entire panel. Chairman 

Greenspan has said before this committee that the market for terrorism reinsurance just does not really exist, and I would like to 

know from each of you, would you prefer a Federal Government 

run reinsurer or a sponsored entity with a corporate structure? 

Let’s just start with anybody who wants to pick up on that. 

Why don’t we start with you, Mr. Pickens? 

Mr. PICKENS. I certainly would prefer private market solutions, 

and I believe there are some out there. In fact, Ernie Csiszar, the 

NAIC president last year in 2004, has recommended some very 

good private market solutions for the problem of terrorism risk insurance and catastrophes in general, and one of those is a tax-free 

catastrophe reserve, passing a law that would allow insurance companies to place money aside, put money away for a rainy day, if 

you will, when you have a catastrophe or a terrorism attack. That 

is something that would be very helpful. 

There are also other mechanisms in securitization that are good 

private sector approaches. But in the meantime, I think we truly 

need to reenact TRIA, because it has provided a safety valve for 

the market, and it does give reinsurers some relief and keeps them 

in the game, if you will. 

But there are some good private market approaches. I would like 

to see those in the long run. Whether or not those can be included 

in the current TRIA bill, I do not know, but certainly prefer a private sector approach as opposed to a government-run program. 

Mrs. KELLY. Mr. Pickens, I want to point out one thing: If we 

just have a mere extension of TRIA, it does not solve anything. So 

we really need to fix this problem. 

33

Anybody else on this panel want to respond to me—Mr. Serio? 

Mr. SERIO. You may need the same carrot-and-stick approach 

that we were talking about with respect to modernization of insurance regulation for the industry. It is a little perplexing that over 

the last 3 years since TRIA has been in effect that there has not 

been a private sector solution percolate to the top of everybody’s attention, and I think it is because at the end of the day TRIA is not 

really an insurance industry bill; it is an insurance consumer bill. 

And so maybe we need to reconnect TRIA to the insurance industry and give it kind of that carrot-and-stick approach that we want 

to foster the development of a uniform catastrophe-reserving type 

of mechanism, whether it is for terrorism or otherwise, because if 

you are talking on the east coast or in the Gulf coast, you can use 

this for hurricanes as well, particularly after last year’s events in 

Florida. 

But there needs to be some kind of a compulsion to get the private sector to bring some of those ideas that Mike referred to the 

surface. And I think a bill that kind of broaches that issue that 

way will get the industry reengaged in that discussion in a meaningful way. 

Mrs. KELLY. Anybody else want to tackle it? Yes? 

Ms. KOKEN. Well, I would suggest that putting in TRIA again 

for, say, a 3-year period would allow the marketplace and the industry to have the time necessary to put together a model, and I 

know there are discussions that are ongoing now, but put together 

a model that would work to create a private long-term solution. Because I agree with you, it would remain a stopgap, but I think it 

is a critical stopgap, and then there needs to be some time and effort put into a longer-term solution. 

Mrs. KELLY. Ms. Koken, it has been 3 years since we have had 

TRIA, and in 3 years we have people coming back saying, ‘‘We need 

3 more years.’’ There is no guarantee that in 3 more years there 

will not be people coming back saying, ‘‘We need 3 more years.’’ 

There is a time when we need to have closure on this. 

So I respectfully disagree with the fact that we need 3 more 

years. An extension has to have an end at some point, because the 

Federal Government cannot always be expected to be the insurer 

of first resort. 

Thank you, Mr. Chairman. 

Chairman BAKER. Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

I do have some questions about the proposals to eliminate State 

price regulation. My concerns are about some of the other factors 

that go into underwriting decisions, about what price to offer to 

consumers, and my understanding is that the draft document 

would eliminate a lot of the State classification systems. 

I think, Mr. Shapo, I think you perhaps have spoken most forcefully on the panel opposing State regulation of premium insurance. 

Would you also eliminate the State regulation of what may be considered in underwriting? Some things I want to be considered. I 

want driving records to be considered in automobile insurance. I do 

not want the neighborhood someone lives in to be considered. 

Would you also repeal all of that State regulation of what may be 

34

considered in underwriting in the prices that are offered to consumers? 

Mr. SHAPO. Representative, most States have an unfair discrimination law that starts with the presumption that if a rating factor 

is actuarially justified— 

Mr. MILLER OF NORTH CAROLINA. I am sorry, speak up. 

Mr. SHAPO. I am sorry. Most States have a rating law that creates a presumption in a statute, and it has been affirmed in case 

law, that actuarially justified underwriting and rating factors are 

presumptively legal. Most States allow territorial rating or some 

form of territorial rating. 

I would start with the presumption that if the factor is actuarially justified, it should be allowed, and the presumption could be 

rebutted and overcome. For instance, most States have laws that 

prevent—in fact, all States have laws that prevent using race as 

an underwriting factor. And if there are other factors that are considered socially noxious and unacceptable, then I think that the 

system now allows that. 

And I think it is a different issue than what I was trying to testify about before. I was talking about laws that give the authorization to review rates for inadequacy and excessiveness, which, essentially, today is basically used an excessiveness tool when the 

focus used to be inadequacy. 

As I said before, I have a strong presumption about that, and I 

do not think the amounts, the levels, the number should be regulated, and I would start with a presumption that— 

Mr. MILLER OF NORTH CAROLINA. And you do support the States’ 

ability to set classification systems of what information can be considered in setting rates and what rates are being offered to consumers. 

Mr. SHAPO. I would certainly support some oversight body’s ability to do that. And I think that will be something that this committee will have to grapple with, whether such exceptions to actuarial justification are okay, whether that is a decision that needs 

to be made at the Federal level or the State level. I think some 

oversight legislative committees and legislature should have the 

ability to declare certain factors socially noxious and unacceptable. 

Mr. MILLER OF NORTH CAROLINA. Okay. Anyone else? 

Mr. Pickens? 

Mr. PICKENS. Yes, sir, just to follow up on what Nat said. All 

States do have unfair discrimination laws which prohibit certain 

types of underwriting, and my understanding, from my reading at 

least of the SMART drafts, that that would not be adversely affected. 

Now, just one cautionary note, though: I do not think that any 

regulatory body wants to get too much into the details of underwriting, and the reason for that is you can adversely affect solvency. For example, if there are—anything that increases the risk, 

if there is not an increase in price associated with that, then losses 

will increase and the company will lose money, and the company 

will eventually go out of business or have solvency problems. 

So I do not think you want to play politics, if you will, with underwriting, other than the fact that in insurance we want to prohibit unfair discrimination, price increases based on race and other, 

35

as Nat said, socially obnoxious or unconscionable type factors. I 

would caution that we do not want to get too much into underwriting decisions, because if we do, what I think may be fair and 

you think may be unfair becomes subjective at some point. And 

also, again, ultimately, if it increases the risk, there has to be I 

guess a corresponding increase in the price or you will have solvency problems and lack of availability. 

Mr. MILLER OF NORTH CAROLINA. Well, the problem with your 

answer is I cannot tell you what you have said. For instance, do 

you think it is actuarially sound to distinguish premiums based 

upon the income of the insured in homeowners or automobile insurance? 

Mr. PICKENS. Based on the income of the insured? 

Mr. MILLER OF NORTH CAROLINA. Or credit history. Income or 

credit history of the insured. 

Mr. PICKENS. Now, credit history is something that obviously has 

been shown that there is a corresponding—on an actuarially sound 

basis, there is an increase in the risk of somebody that has a high 

credit score. 

Now, what we have done using the NCOIL model, the National 

Conference of Insurance Legislatures, State regulators, and we 

passed it in Arkansas, was a model that prohibited certain factors 

being considered in the credit score. That is certainly justified. If 

somebody the has had medical bills that were beyond their control, 

things of that nature, that is justified. 

Basically, when I say, ‘‘increase the risk,’’ what I am talking 

about, as Nat said, if you understand the term, ‘‘actuarially sound,’’ 

if you do not keep rates actuarially sound, you will end up with solvency problems with companies. 

Mr. MILLER OF NORTH CAROLINA. What I understand actuarially 

sound is that there really is a difference in risk based upon these 

factors, which I understand, but some of the limitations on classification systems, as Mr. Shapo seemed to acknowledge, was that, 

yes, some of them may be actuarially sound in the sense that, yes, 

these two different people may actually pose a different risk. What 

makes the risk different is not one we want to allow a distinction 

based upon for societal reasons. 

Mr. PICKENS. And, again, most States do not, and that is what 

I was saying, socially unconscionable things. Income is not allowed 

as an underwriting factor, race is not allowed as an underwriting 

factor. There are a number of things that are not allowed at this 

point. But I guess the question I ask is, where do you draw that 

line, and I think you have to be careful that you do not step over 

that line, because when you do you end up with solvency problems 

with companies. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Tiberi? 

Mr. TIBERI. Thank you, Mr. Chairman. 

Chairman BAKER. Excuse me, I made an error. I passed over Mr. 

Manzullo. 

Mr. TIBERI. I think that is correct. 

Chairman BAKER. In the regular order, he is next. 

Mr. TIBERI. Thank you. 

Chairman BAKER. Mr. Manzullo? 

36

Mr. MANZULLO. Thank you. I appreciate that. 

I have, actually, more comments than questions. Coming from Illinois, I appreciate the fact that there is a lot of competition involved in insurance. When we decided to shop for insurance on our 

farm, even though farm casualty insurance has gone up substantially in the past several years, we noticed a lot of competition 

going on, and there are some surprising differences in rates. 

But I also noticed more in automobile liability insurance. We 

have 4 cars and 5 drivers, and 3 of those drivers are ages 17, 19 

and 21, and we work with a very aggressive agent in Illinois who 

is continually combing the market to get the best rates. And I just 

laugh when I see some of these national advertisements where you 

call and they are not centered in Illinois, and I call the 800 number 

and they think they are giving me a deal, and one actually quoted 

me a rate that was twice what we are paying now, which we think 

obviously is too high. But that is only because of competition. It 

has to be. 

So anything that would interfere with the ability of States to 

allow competition would be difficult for me. I have a federalist 

issue here, and that is States have the right, as far as I am concerned, to regulate or not regulate. It is not an issue of the Federal 

Government. Where I think the Federal Government has a role is 

with regard to products. I have seen where insurance products are 

very similar to banking products, investment products, and the 

banks can get those approved lickety split, and sometimes the insurance products going through the individual States can take so 

long that by the time the approval occurs, that product has worn 

out. 

And the reason I could see some Federal jurisdiction with regard 

to the product is the fact that these products cross State lines, they 

are all over the place, whereas an insurance policy is centered 

where the cars, where the individual lives or where their home is. 

Any comments on that? 

Yes. However you want to take it. Well, go ahead, both of you, 

don’t fight. 

Ms. KOKEN. Well, I think you raise some valid points and certainly we have a great deal of concern about the issue of encouraging competition. For example, in Pennsylvania, we do have 1,700 

companies that write insurance, but on a national level, we are 

concerned about speed-to-market and getting those products out 

quickly. And we looked at this in different ways, and one of the 

things that we did develop is the interstate compact which we believe would provide a single point of filing for life annuity, longterm care policies that would address that concern for those products. 

We passed the interstate compact in 2003, in July, and in the 

first year we had nine States that passed the compact. This year, 

we have had six States so far, plus we have Texas and Vermont 

that have passed it but the governor has not yet signed it. So we 

are almost up to 17 States and 23 percent of the premium. When 

we get to 26 States, or 40 percent of the premium, the compact will 

be implemented. So we recognize that. 

But for property casualty products, we have done a great deal of 

work in the States in setting up checklists and developing a techVerDate 0ct 09 2002 13:18 Sep 11, 2006 Jkt 029456 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 F:\DOCS\HBA167.160 HFIN PsN: TERRIE
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nology-based filing program, which is SERF, and I can tell you that 

in 2001 there were 5,000 filings on SERF, and so far this year 

there have been 210,000 filings on SERF. 

Mr. MANZULLO. Let me hear what Mr. Shapo has to say on it. 

Thank you. 

Mr. SHAPO. Thank you, Representative. 

I wanted to follow up on the question of what Congress’ role 

would be in overseeing this. I think when it comes to rates that it 

is not an impingement on federalism or if you have a strong belief 

in State rights, because in many ways the prevalent rate regulation 

today is a result of congressional action itself. Congress 

incentivized the States to encourage collusion and to pass rate regulatory laws 60 years ago. And in large part today’s system grows 

from that. So I think it is not Congress going any further than it 

has gone before. It has no further intrusion on States’ rights. 

Also, it clearly affects interstate commerce, rate regulation. 

There are studies that argue that rate regulation has led to the industry being less capitalized, not as much supply available, which 

clearly affects interstate commerce when the practices of some 

States. 

Mr. MANZULLO. Well, I mean, what Congress did 6 years ago just 

because it is precedent does not make it right. 

Mr. SHAPO. No, but— 

Mr. MANZULLO. I mean, the issue is whether or not this body has 

the authority to tell a State or not to tell a State that it has to fix 

the rates or not fix the rates. I mean, either we are wholly excluded 

from the area or we are not, and I think it is the latter. 

But what I wanted to add in there is I noticed on page 4 of the 

Covington testimony and page 7 of the Koken testimony is the fact 

that what you are trying to do is something similar to the Commission on Uniform State Laws where, for example, the uniform commercial code was adopted. There is a uniform Commission on Traffic Laws trying to get the States to come together on a consensus 

because it used to be bills and notes that differed by States and 

now I think it is Article 6 or 7 of the other uniform commercial 

code. Is that what you are trying to do? 

Chairman BAKER. And that will be the gentleman’s last question, 

as his time has expired, but please respond. 

Mr. SHAPO. Mr. Chairman, if I might, it is not just that Congress 

has set a precedent generically, it is just that Congress has, in 

large part, contributed to the varied situation in the market today. 

So it is quite appropriate, I believe, for Congress to revisit its past 

policy decision, which had led to serious ramifications in the market, and consider whether that had a negative impact on interstate 

commerce. 

Mr. MANZULLO. Thank you. 

Chairman BAKER. I thank the gentleman. 

Before I recognize the next member, I just owe members, and 

then I realized observers, an explanation as to recognition procedure. I have been informed by the Democrats side that members 

would be recognized in order of seniority. We continue to observe 

on our side by time of arrival, if you are here, to be recognized. So 

despite my insistence on uniformity, we are now beginning to look 

like the NAIC up here. 

38

Accordingly, I recognize Mr. Clay. 

Mr. CLAY. I thank the chairman, and seniority does have its benefits. 

Chairman BAKER. Depending on where you are, I guess. 

Mr. CLAY. My question is for Mr. Pickens. The SMART Act, we 

all know, has not been supported by consumer groups. Many have 

written that the SMART Act would override State consumer protection laws, promote anticompetitive practices by insurance companies and preempt State regulation of insurance rates. Why do you 

believe that SMART will use only the threat of preemption and not 

use preemption? Are there guarantees of this, and please elaborate. 

Additionally, please detail your opposition to the optional Federal 

charter. 

Mr. PICKENS. First of all, I believe the reason that consumer 

groups are opposed to the SMART approach is largely because they 

would like to see the creation of a Federal insurance regulator. 

Some of those people, Bob Hunter being one of those, has made it 

very clear that he would like to see the creation of a Federal insurance regulator. 

The reason that I am opposed to an optional Federal charter 

really is pretty simple. Number one, I believe that a State-based 

approach to regulation, which is encompassed to SMART, is much 

preferable to the creation of a new, huge bureaucracy in Washington, D.C. I do not think we need the creation of a new Federal 

agency to regulate insurance. 

I think what you would see ultimately is—bottom line is, State 

regulators are closer to insurance consumers in both proximity and 

in their philosophies. It is easier for me to get a hold some regulator in Little Rock than it would be to get a hold of one in Washington, D.C. 

I think also, bottom line, and I think one of the reasons the State 

legislators have been concerned and governors have been concerned, is that you would ultimately, I think, see a flow of premium 

tax dollars, which all of the States depend on, coming to Washington, D.C. We collect around, I think, $110 million, $112 million 

in premium taxes. None of that money goes to the Insurance Department in Arkansas. It all goes to run other State agencies for 

a number of programs. So if we were to lose a fraction of that to 

the Federal Government in Arkansas, it could hurt us a lot. 

So that is primarily the reason I am opposed to an optional Federal charter, and I think we are all in agreement. 

The reason I say the threat of preemption is what SMART poses 

as opposed to preemption and why I see it as an opportunity is because my understanding of SMART, of what the ultimate goal of 

the SMART process is, and I know we have a market that will be 

thrown out there very soon, but the ultimate goal is to basically 

take the work that the NAIC has done through the 2003 action 

plan, through the 2004 road map, and say, ‘‘Okay, States, here is 

what you all have committed to do. We are going to give you a set 

period of time to do to keep this commitment that you have made 

to us these number of years, and if you do not do it, what you already have come up with will be the law of the land.’’ And you will 

enforce it, you will continue to be the enforcer. 

39

Now, what I understand there is some misunderstanding about 

or some disagreement about is really on what the details of the legislation are. There may be some on the committee who would like 

to see things in the SMART Act that are not necessarily contemplated under the 2004 road map or the 2003 action plan. So I 

think that is where the debate should be centered, and, again, I 

think it is totally appropriate to throw down this bill as a marker 

to get everybody to come to the table and let’s talk about it. 

Mr. Chairman, we have a saying in Arkansas, ‘‘Fish or cut bait,’’ 

and you guys have it in Louisiana, and we have some more colloquial sayings that we cannot say in public. But the bottom line is, 

it is time to get down to business, I think, and take some action. 

Mr. CLAY. Let me ask one more question before my time runs 

out, and this is on TRIA. 

And I will ask Mr. Muhl. He looks like he wants to answer a 

question. 

I was in favor of the immediate triggering of the make available 

requirement for the 2005 program year. I agree that the Federal 

backstop should be extended for terrorism risk insurance until the 

Congress, the administration and private sector stakeholders can 

agree on a permanent solution for problems associated with trying 

to underwrite acts of terrorism. I do not, however, favor a permanent government backstop. 

How long do your studies indicate that the backstop may need 

to remain in place? Are there differences in present-day government estimates and the industry estimates regarding the amount 

of time a backstop is needed? 

Mr. Muhl? 

Mr. MUHL. Thank you. I actually have no idea how long it would 

take to hopefully come up with a private solution versus a Federal 

solution. I am in favor of, being that there is not a private solution 

at the present time, I know there are efforts that they are trying 

to get the private sector involved in that process, to get something 

up and running, but it does not exist right now. But I am a firm 

believer in just to keep the markets calm that in fact you need 

some sort of a solution. 

My preference is to see a private solution versus a Federal solution, but, again, whether ultimately there is going to be a private 

solution, I have absolutely no idea. But if there is not one in the 

next couple of years, then I think the direction that everybody is 

going about not pushing this TRIA for expansion I think is the 

right thing to do, but I think it is appropriate to do it now because 

there is no solution. 

Mr. CLAY. Thank you for your response. 

And thank you, Mr. Chairman. 

Chairman BAKER. Mr. Tiberi? 

Mr. TIBERI. Thank you, Mr. Chairman. 

Mr. Covington, good to see you. We miss you in Ohio. 

I apologize for missing your testimony, but let me harken back 

to June of 2001 when Chairman Oxley had asked you a question 

that if Congress set a goal of 3 to 4 years for achieving comprehensive uniformity by the NAIC for product approval, could the NAIC 

meet that goal, and you answered, yes. 

40

Can you tell me what the progress has been at the NAIC over 

the last 4 years since that question was asked? And is there, in 

your opinion, comprehensive nationwide uniformity? 

Mr. COVINGTON. Thank you, Representative Tiberi. 

As you know, I have been out of NAIC for 2 years, and so I might 

defer that question to Commissioner Koken as to the progress that 

has been made over the last 2 years, but I will note that in my testimony I noted that the NAIC adopted a commercial lines rate and 

form model, and to this date no State has adopted or, to my knowledge, even introduced that model. So I think the record speaks for 

itself with regard to that. And there appears to be, as I indicated, 

little interest in addressing the personal lines rate modernization 

issue. 

So, again, I think because of the challenges and the obstacles 

noted in Nat Shapo’s testimony and in my testimony, that it will 

be difficult, if not impossible, to achieve those particular reform initiatives under the current framework. 

But I would defer the progress question to Commissioner Koken. 

Mr. TIBERI. Okay. 

Ms. KOKEN. I would comment that the State regulators are very 

concerned about always balancing the interest of fee markets 

against the importance of the consumer and protecting that consumer in all circumstances. But I would say that I believe that the 

States have made huge progress in establishing checklists and 

feeding off the approval time within each State as well as our initiative for life and health of the compact. So I think that there 

have been a lot of changes. 

I can tell you that I talked to a major company recently to ask 

if they were going to support the compact in New York, and they 

said to me that with the new checklist and the procedure in place, 

an approval time of 30 days would actually be going backwards because they are getting much quicker approvals. So I think there 

has been tremendous progress in both large and small States 

across the country, but totally focused on what they believe is in 

the best interest of the consumers in their State. 

Mr. TIBERI. Just a follow-up, Commissioner, do you think that 

the SMART Act, by setting deadlines and standards for States to 

meet, will help achieve nationwide uniformity quicker? 

Ms. KOKEN. Well, I am not sure that nationwide uniformity is 

necessarily the goal across the board. The goal is to protect the consumer, that is our number one goal, and in some cases that means 

we are looking for uniformity, in some cases it means uniformity 

of process and not uniformity of law. 

There are certainly dramatic differences around the country, and 

each State faces different types of risk for their consumers. I mean, 

we do not have coastal issues in Pennsylvania but we have mine 

subsidence issues which they do not have in Idaho. So we think 

that pursuing the standard of uniformity across all lines, across all 

States is not necessarily the approach as much as streamlining, improving, modernizing and continue to evolve the regulation of insurance. 

Mr. TIBERI. My sister, who lives in Cincinnati, a consumer, 

butting the district of my colleague to the right here, would, I 

think, benefit from uniformity in terms of being able to buy prodVerDate 0ct 09 2002 13:18 Sep 11, 2006 Jkt 029456 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 F:\DOCS\HBA167.160 HFIN PsN: TERRIE
41

ucts in Kentucky versus Cincinnati. Isn’t the advantage to the consumer if there was more uniformity in that sense? 

Ms. KOKEN. Well, it is a balancing factor. There certainly are 

benefits to having uniformity, but, certainly, the tort law, the contract law in Kentucky, I would suspect, is different than the laws 

in Ohio. And the State insurance departments and the State policies have to reflect those particular issues in each location. 

Mr. TIBERI. Thank you. 

I yield back, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Scott? 

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

You know, I just cannot support a legislation that does not provide strong consumer protections especially against discriminatory 

practices, and I have some concerns that the SMART Act would not 

and does not currently provides protections against insurance redlining and other discriminatory practices. There are many States 

that do. 

Each of you are either present or former directors or insurance 

commissioners, and I would like to ask you, given that, given my 

concern about the lack of discriminatory protections in this bill, do 

you believe that the SMART Act should adopt stronger protections 

against discriminatory practices? 

You first, Mr. Shapo. 

Mr. SHAPO. I was really asked to testify about competition generally, only specifically, not on the draft of the bill, but I do believe 

that the bill, in its draft form anyway, specifically preserves unfair 

discrimination laws with respect to the standard list of prohibitive 

factors, including race. 

Mr. SCOTT. Okay. 

Mr. Serio? 

Mr. SERIO. Yes. That is my reading of it as well. Let me take 

your question from a slightly different perspective also. The consumer protection issue is the greatest thing to wave around, and 

we all do it. When we were in office, we made sure that the consumer was being protected. You have a responsibility as public officials to make sure the consumer is being protected. But there are 

a couple of different ways to get at that issue of consumer protection. 

When Ed and I first came into the insurance department in 

1995, we were told that New York does not allow certain types of 

products because they are bad for the consumer. Well, two things 

we found out. Number one, there were consumers who actually 

wanted some of the things that we were prohibiting, and, number 

two, if they were not getting it from us, they would go right across 

the line and go and get it someplace else. 

So one of the things that I think uniformity would allow, and I 

think the deliberative process behind the SMART bill would be to 

try and create a uniformity so you have the same level of consumer 

protection from one State to the next, that instead of having these 

varying degrees, and it goes back to the previous question also, the 

varying degrees of consumer protection or the notion of consumer 

protection, you actually have one set of uniform standards across 

the lines. 

42

Particularly for people who live in media markets that intersect 

two or three States at a time, they have no idea what the rule is 

in one State versus the other. All they know is that, ‘‘I want that 

kind of coverage, and if I cannot get it in my State, I am going to 

go across the State line and get it someplace else.’’ 

And so you have this issue, and I think the SMART bill already 

reflects a lot of that because it is trying to create a foundation of 

the protections that are already largely afforded by all of the 

States, redlining being one of them. That is uniform across all the 

States. Gender discrimination, age and demographic and race discrimination are all prohibited on most lines of insurance coverage, 

and I do not think that is really going to change with the enactment or whatever the final SMART bill might look like. And we 

know that is not going to happen because you will not let it happen, because no public official is going to allow the undoing of redlining laws. 

Mr. SCOTT. Ms. Koken, I believe you are the only sitting commissioner of insurance among all of you; is that right? 

Ms. KOKEN. Yes. 

Mr. SCOTT. Could you provide a comparison between the Illinois 

insurance regulatory environment and the SMART Act? Specifically, what I am getting at is, does the SMART Act provide the 

level of consumer protection, especially against discrimination, that 

your State provides? 

Ms. KOKEN. Well, I guess it is my understanding from the review 

that was done by the review committee, the group of regulators, 

that there were Illinois regulators that looked at the SMART Act 

provisions with regard to a comparison of Illinois. I did not personally do that. 

And there were lists, I think, of around 12 specific consumer protections that the Illinois regulator believed would be lost to consumers if in fact the SMART Act was passed in its current draft 

proposal. 

Mr. SCOTT. Good. Thank you very much for that answer. 

Let me ask about rate controls, another issue that is on my 

mind. What is the effectiveness of rate controls now in the States? 

Are they holding down rates or are they reducing competition? And 

would national deregulation increase competition or encourage consolidation within the insurance industry? 

Chairman BAKER. And that will have to be the gentleman’s last 

question, as his time has expired, but please respond. 

Mr. SHAPO. I think that it is well established, generally, in scholarly literature and in front of this committee in previous hearings 

that price controls do not have the effect of lowering prices, and in 

fact they have the effect of greatly limiting availability. They choke 

off supply. 

The most extreme example is New Jersey which had the most 

aggressive price controls with rate rollbacks and very tough prior 

approval regime. And what happened there was the carriers began 

to restrict how much business they wanted to write, which, in 

itself, explains the problem with the system. 

Whenever sellers are going out of their way to try to sell less 

rather than more, I think it is a pretty good sign that the market 

is not working, and carriers pulled out of the market. And the issue 

43

there was supply, supply, supply, which was badly impaired while 

rates did not lower, and it became a fact of life there that wellqualified risk could go out looking for coverage for weeks without 

getting it. People could walk into an agency with a terrific driving 

record and excellent credentials otherwise and not get coverage, 

which is a perverse result. 

Mr. SCOTT. Ms. Koken? 

Ms. KOKEN. I guess I am not a New Jersey regulator, however 

New Jersey does border my State, so I have some familiarity, and 

I believe that Mr. Shapo is talking about their auto marketplace. 

And in fact it was more than price restrictions that created the 

problems in New Jersey. It had to do with the fact that they also 

regulated by providing that the entire State would have the same 

territory rating. So what that encouraged is people in the rural 

areas were actually subsidizing people in the urban areas, and so 

it paid for companies not to write in the urban areas because they 

were getting more per customer in the rural areas. And then they 

required all companies that write there to participate in their insurer of last resort, which created more problems. 

And so really it is a classic case of essentially overregulation ultimately choking the market, but I think that I cannot say that price 

restrictions were not a factor but they were certainly not the only 

factor in what happened there. And we certainly believe that the 

review of rates to assure that they are not inadequate or excessive 

or unfairly discriminatory is an important consumer function that 

State regulators do in each State. 

Chairman BAKER. The gentleman’s time has expired. 

Just for the sake of clarity of the record, Mr. Scott, I want to, 

not taking your time, just add a response to your question relative 

to SMART Act provisions and discrimination practice. It occurs in 

Title 16 of the proposal, Protection of State Antidiscrimination Provisions. We have chosen to rely on the State consumer advocacy 

process to address those general concerns, and specifically, it says, 

‘‘Nothing in this title shall preempt any State statute, regulation 

or order to the extent that it prohibits the use of race, color, religion, creed, ethnicity or national origin as an underwriting or rating factor or classification.’’ 

To the extent that any State now protects consumers from those 

ill-advised approaches to market regulation, the SMART Act makes 

clear the States are in control of those concerns. 

Mr. SCOTT. Thank you for that clarification, Mr. Chairman. 

Chairman BAKER. Thank you, Mr. Scott. 

Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman. 

As Mr. Tiberi mentioned, I have a district down south from him 

in the Commonwealth of Kentucky, spent my business career helping companies simplify their business processes, come to common 

standards of information to be able to share back and forth, and 

the benefit was invariably reduced cost, reduced transaction time, 

improvements in customer service. But I come to this hearing as 

not an expert in insurance but really with a question. 

The commonwealth, we have in place a system that is very similar to the SMART approach. It has a competitive rating under certain circumstances which include a flex band, and for example, for 

44

forms, all forms need to be filed with the State but they are 

deemed approved by default unless they are specifically disapproved within the waiting period of 60 days. 

My first question, our commonwealth has a competitive stable 

property and casualty insurance market, which incorporates a fileand-use system for forms filing. In other words, companies can file 

their products with the State and then go ahead and use them. 

SMART incorporates on a nationwide basis a file-and-use system 

for forms review, and my question, just from our local experience, 

and I would like Mr. Muhl to comment on this first, do you think 

that that will reduce filing time and bring improvements to the 

marketplace? 

Mr. MUHL. I believe that it will. I am sorry, did— 

Mr. DAVIS OF KENTUCKY. Go ahead. Mr. Muhl first and then Mr. 

Covington can comment. 

Mr. MUHL. I believe that it will reduce the time involved in getting products out on the street, being able to make them available 

to consumers for their purchase and use. I am a firm believer in 

the competitive rating system. I think a use-and-file system is 

good. A flex band rating is also good. 

I have found, though, through my experience that in fact getting 

involved in a prior approval mechanism and then a competitive rating and a file-and-use system that if you create a very competitive 

situation, that those rates involves in that process are going to find 

the lowest levels. There is going to be product availability, there is 

going to be choice for the consumer. 

And I think that kind of a process, that kind of a system is good 

for everyone. It is good for the industry having those products to 

sell, certainly good for the consumer in having not only prices that 

are very reasonable in, say, a lot of these products but particularly 

having available a lot of these products. And I think those kinds 

of systems if you can create it, I think everybody benefits. 

Mr. DAVIS OF KENTUCKY. Mr. Covington, you wanted to add 

something? 

Mr. COVINGTON. Yes, Congressman. Let me just be clear that 

file-and-use is only a name, and the relevant issue is how that system is executed. Today, we have examples across the country 

where States have file-and-use, use-and-file, but many view those 

States and some of the most price controlled rate regulatory environments in the country. And so as you move forward, I encourage 

the committee to explore ways how you can achieve your goals and 

ensure that the legislation is specific enough to ensure that any 

system is operated as intended. 

Mr. DAVIS OF KENTUCKY. I think personally wherever we can 

come to common standards, especially where the industry comes together working with the States to have common standards of information, form-sharing can be very helpful. 

One question I would like to follow-on with that, if a rate moved 

with a flex band, for example, 25 percent and it did not have to 

be approved by the State, my question is, SMART incorporates a 

transitional flex band system with a full competitive rating. Do you 

think that nationwide competitive ratings for insurance sectors 

that are stable and healthy, not in the controversial high-risk 

45

areas, will consumers more choices, will be a better way to deal 

with it as well as addressing the cost issue? 

And maybe Mr. Shapo would comment on that. 

Mr. SHAPO. I am sorry, could you rephrase it? 

Mr. DAVIS OF KENTUCKY. Do you feel that the flex band system, 

for example, if there was a percentage set, for example, like a 25 

percent flex band common standard for— 

Mr. SHAPO. Did you mean as a transition method or as an end 

result? 

Mr. DAVIS OF KENTUCKY. Looking as an end result. 

Mr. SHAPO. My presumption would be that the end result would 

better be competition for supply and demand, which are the most 

ruthless regulators in the marketplace, are allowed to work. I fully 

acknowledge that there may be very good reasons to phase toward 

that result, but my preference would be that the end result would 

be competition for many reasons. 

I mean, I think we presume that competition is the best regulator for price throughout the economy. I am not aware of any reason to believe that insurance is immune from the laws of economics. The reasons for price controls previously in insurance had nothing to do with availability and affordability. And for all the reasons 

I spoke of before and got into more depth in my written testimony, 

I think that that should be our presumption. 

And it is not entirely benign to even have a more open system, 

as you are describing, because it takes resources to administer 

that, and there are things that government must do to protect consumers. 

Consumers can protect themselves shopping for price, they do it 

all the time, in every market. The average consumer is not an accountant, cannot figure out the balance sheet of a company. Government has got to do that for the consumer. The average consumer is not a contract lawyer. Government should be reviewing 

forms. 

Mr. DAVIS OF KENTUCKY. I appreciate that. We saw in Kentucky 

how a lack of competition in health insurance areas, just as a business owner, led to a 400 percent increase in premiums for most 

business providers as opposed to the road to ruin was paved with 

good intentions. 

Did you want to share something, Mr. Serio, and then Ms. 

Koken? 

Chairman BAKER. That will be the gentleman’s last question. His 

time has expired, but please respond. 

Mr. SERIO. I will give you a real-life example of how flex rating 

can help and how open competitive rating can help but not from 

the typical perspective of prior approval. Prior approval is generally 

done to avoid increases of insurance rates. 

New York and a number of other States have seen a significant 

decrease in the loss costs on automobile insurance across the board, 

and it has been a very positive development in automobile insurance. Yet since flex rating had expired in New York, there was no 

system compulsion for the carriers to start to reduce their rates. 

And it took the department to have to start going and prodding 

these guys to start to reduce their rates. 

46

If flex rating had still been in place, I can tell you that the rates 

would have gone down a lot faster, as they should be. And now, 

only now, after 8 months of this process, has the marketplace started to gin up the competition and only because some companies are 

advertising relentlessly for lower insurance rates that the other 

guys have started to pick on to it. But it was very slow in developing because nobody felt that competitive pressure, because everybody knew they were going to have to come pass through the regulatory process in order to get any rate reduction. 

If you have a flex rating system, and I think the flex protects 

from the rate going too low where it becomes irrational or inadequate, the flex would still allow those rates to go down by the 

competitive pressure rather than having to wait for an insurance 

commissioner to have to approve a 5 or 8 or 10 percent rate decrease. Just like we should not be approving a 2 or a 3 percent rate 

increase because let the competitive market deal with that issue. 

That is not going to be material to the financial condition of that 

company. 

Mr. DAVIS OF KENTUCKY. Okay. Thank you. 

Chairman BAKER. The gentleman—oh, I am sorry. 

Ms. KOKEN. Well, I would just comment very briefly that certainly there can be rate creep that does occur in a flex band situation that may not benefit the consumer and I will not go into that, 

but the other point I would make is that of course there are certain 

lines where there is very little competition within the State where 

it is critical to have a greater level of oversight, for example, in a 

number of States medical malpractice insurance is one where there 

is very little competition, and in some States there is very little 

competition in the health insurance arena also. 

And so, certainly, I think that an across-the-board approach is 

not one that is going to balance the interests of the consumers 

versus the industry, and you need to look more closely. 

Mr. DAVIS OF KENTUCKY. Thank you. 

I yield back my time, Mr. Chairman. 

Chairman BAKER. Thanks. 

Ms. Wasserman Schultz? 

Ms. WASSERMAN SCHULTZ. Thank you, Mr. Chairman, and let me 

just tell you that I now live for the day that I am a couple of rows 

back from here and understand why. And since my assignment to 

the Judiciary Committee, I have an even greater appreciation for 

our ability to work in a bipartisan spirit here. So I appreciate it 

very much. 

Let me just comment that I think, not across all lines necessarily, but definitely in some lines, particularly life insurance, 

that we should consider that it might make sense to have some 

Federal aspect of regulation, not necessarily a national charter but 

with some good consumer protection, I think we could go in that 

direction. 

Mr. Pickens, you talked about potential insolvency and the politics of underwriting. We have experienced that in Florida, no question about it. After Hurricane Andrew, we had seven insurance 

companies, I think it was at least seven insurance companies, that 

went insolvent because of the politics of underwriting and the politics of the competition of underwriting. 

47

Insurance companies were low-balling rates, were significantly 

undercharging for property and casualty insurance, way undercharging, and as a result, after Hurricane Andrew, a 100-year 

storm, almost a lifetime storm, 7 of those companies went under. 

And today, in 2005, our consumers are still struggling. We still 

do not have a fully restored P&C market in Florida especially after 

last year when we got hit by four hurricanes in 6 weeks. 

The gentlelady from New York made a reference to her frustration with TRIA and how long is it going to go on and you need another 3 years. Let me tell you, I can feel her pain, because I have 

been feeling it for 15 years. We all have in Florida. There is certainly more certainty in the fact that we both know that we will 

get hit by a hurricane somewhere in this country as compared to 

a terrorist act and where we will get hit by a hurricane. We have 

a much more narrow region and more predictability. 

So with that in mind, how would States make the necessary adjustments with Federal regulation because the SMART Act includes property and casualty insurance. With Federal regulation, 

how would a State like mine make the adjustments that they need 

to make based on our unique needs? 

And secondly, we have struggled with the insurance of first resort, the insurance of last resort, we have multiple JUA’s, joint underwriting associations, that although by law in Florida they have 

to be the insurance of last resort, essentially when there is no market they become the insurance of only resort. And that really is extremely problematic. 

So while we are talking about that, what has not been raised 

here is the issue of a national catastrophe fund, and while we are 

talking about Federal regulations, I think it would be important to 

reinsert that issue into the dialogue, because I think it is necessary. Every State in this country, every region in this country 

suffers from some type of Federal disaster. So I would like to hear 

your comments on that, all of you, actually, before my time expires. 

Ms. KOKEN. I guess I would just mention that is an issue that 

the NAIC and the commissioners are very concerned about. In fact, 

we have a working group that the Florida commissioner is very active on looking at just that issue on how we could create a mechanism for major catastrophes. 

Ms. WASSERMAN SCHULTZ. If you can comment on what you see 

as the obstacle in Congress to a national catastrophe fund, because 

I know that it has been discussed before and sort of fallen by the 

wayside and is adrift at this point. 

Mr. SERIO. Money is probably the biggest problem, the concern 

being that, and I think Mike Pickens mentioned it in his testimony, 

there have been these discussions about catastrophe reserving or 

catastrophe fund, the concern being, if you go back to TRIA 1 and 

the discussion there, there was real concern about bottling up a lot 

of capital, and what would become non-working or non-performing 

capital, in a fund like the British Pool Re has for their terrorism. 

How do you make this thing work without really hamstringing 

that capital, and catastrophe reserving is one way you can do that. 

Because what it does, it really keeps the capital in the insurance 

companies and working for them but allowing them to accumulate 

48

the kind of capital that they need to deal with a Florida situation 

or some other kind of a natural disaster, anything. 

Another way to do that, and, again, everybody thought that 

maybe the securities markets and the swaps market would come 

up with a workable program for doing swaps on catastrophes, that 

in New York, it is terrorism; Florida, it is coastal and the hurricane; in California, it is earthquakes. Can we really do this? That 

has not really developed the way people had hoped it would. We 

really had a vibrant marketplace for these things, because at the 

end of the day the smart money knows that they cannot really control the weather, and they cannot control a spate of earthquakes 

or four hurricanes, which never happened before. 

So I think there is going to have to be some new thinking in this 

before anybody can say, ‘‘Yes, this is the right way to do it.’’ Because the sharing of that risk has been hard to do in that way. Individual State funds always get overwhelmed on that 1 year in 100 

years. And so the reserving issue may still well be the best way to 

do it. That is how New York got through 9/11 by having essentially 

a reserve account on hand. 

And maybe catastrophe reserving and promoting that among the 

insurance companies is the best way to actually get at that issue. 

So wherever it is that they are writing and whatever risks they are 

facing they have that money put aside to deal with those one in 

50-year events. And then you figure out a way, how do you get that 

money back out when you find out that that event has not occurred? 

Chairman BAKER. Mr. Pickens, did you want to jump in? 

Mr. PICKENS. Mr. Chairman, just very quickly, you asked what 

would be in something like SMART for Florida, and I would draw 

a distinction between Federal regulation and what I see as the ultimate goal of the SMART bill. 

To me the ultimate goal of the SMART bill is to preserve State 

regulation, not to create a Federal regulator. What I see would be 

in the SMART legislation or something positive for a State like 

Florida would be the flex band rating, would be the fact that it 

would be easier in Florida for insurers to get rate when they needed to get rate, and moving toward a competitive marketplace, I 

think, would be a benefit to the State. 

Florida, as all of us know, has a tough rating environment. It can 

become highly politicized, as you read about in the newspapers. So 

I think that could be the best thing for Florida. And for a Florida 

regulator, it seems like to me something like a flex band rating 

would take a lot of heat off of the regulator if your law would allow 

for more flexibility in rates without the regulator having to be involved. 

Chairman BAKER. The gentlelady’s time has expired. 

Mr. Bachus? 

Mr. BACHUS. I thank the chairman. 

First, I would like to say, welcome, Walter Bell, who is the Alabama insurance commissioner, who is serving as chairman of 

NAIC’s Speed to Market Task Force. 

And I guess my first question would be on that, and I will ask 

Ms. Koken—did I pronounce that right? 

Ms. KOKEN. Yes, Koken. 

49

Mr. BACHUS. Okay. I know that this compact goes into effect 

when you get either 40 percent of the States or the premium or either 26 States. How soon do you think that will come about? 

Ms. KOKEN. Well, given the significant progress we have been 

making with 9 States in 2004 and at least 8 States this year and 

we think there will still be more, we really think that we are on 

track to have the 26 States or 40 percent of the market by the end 

of next year. 

Mr. BACHUS. Okay. End of 2006? 

Ms. KOKEN. Yes. 

Mr. BACHUS. Okay. Let me ask the entire panel this: Do you 

think that State regulation of insurance has served the consumer 

or protected consumers? Do you think it has done a good job? 

Mr. MUHL. My personal opinion, if I may, is that I think State 

regulation has been very sensitive to the needs of consumers, particularly in certain geographic areas. It is closer to some of the 

unique issues that come up, and I think the consumer, as well as 

a lot of the industry, has benefited from State regulation. So I am 

a believer that it is the better of regulation. 

Mr. BACHUS. Is there anybody that disagrees? 

I will say this: When you have price controls, I think they can 

impact consumers negatively. When you have high administrative 

costs on getting products out, that is a negative impact on the consumer. When you run up the administrative costs on licensing or 

delaying products in getting to the market, I think those negatively 

impact consumers. 

But I guess my question is on what we more traditionally call 

consumer protection, you know, fraudulent products, misrepresentation. And I have not really heard any debate and I do not know 

about other Members of Congress but I have not heard anyone 

offer and argue that the State system is not protecting consumers. 

I do hear that it is unnecessarily driving up the cost because of 

these delays and having to deal with 50 different States. 

I will ask Insurance Commissioner Koken, I think in your testimony you said that normally 8 to 10 years is reasonable for putting 

these reforms in place; is that right? 

Ms. KOKEN. The statistics show that I think it is around there 

for implementing a compact, an interstate compact is what I was 

comparing. We believe that there continue to be a lot of important 

initiatives underway for modernizing, but it is an evolving marketplace, and that is not going to stop. But I would support the belief 

that the State regulators are very involved in addressing the concerns of the consumers on a local level. 

I know in your State Commissioner Bell was very active in assisting the flood victims and was there immediately to help address 

their concerns. So we do believe that there are substantial numbers 

of questions that are dealt with by State insurance commissioners. 

They live in the communities, they have a sense. 

Mr. BACHUS. I guess what I am saying, there has been some talk 

about 4 to 5 years is appropriate time, but I do know that in prior 

times when we have dictated to Congress certain actions be taken, 

I think 8 to 10 years is more a norm than 3 to 4 years. Does anybody disagree with that or agree? 

Are you saying 8 to 10 years is a reasonable amount of time? 

50

Now, would you say that we started in 1999 or 2003 for most of 

these things that we are asking you to come into compliance with? 

Mr. PICKENS. Mr. Bachus, I would say that 8 to 10 years is an 

awfully long period of time, to be honest with you. What the appropriate period of time is I am not sure, but I know that when you 

look at things like the NARAB provision in Gramm-Leach-Bliley, 

insurance regulators were able to accomplish that within a 3-year 

period, well within a 3-year period, accreditation. And Mr. Pomeroy 

was around for that battle and certainly one that I am glad I 

missed. But when Mr. Dingell and Congress put heat on State regulators, they did what they needed to do in short order. 

So I do not know that this body would be willing to wait 8 to 10 

more years based of some of the things that I have heard and read. 

What the period of time is I think is something that is the subject 

for debate. 

Mr. BACHUS. Could I ask one more question? 

Chairman BAKER. Sure. 

Mr. BACHUS. And you call can respond very quickly. 

I noticed, Mr. Pickens, you have I think endorsed the SMART 

Act; is that right? 

Mr. PICKENS. No, sir. I have not endorsed the SMART Act, per 

se. What I have said is that I believe, and I said it in my testimony, that when considered against the optional Federal charter or 

enacting a State-by-State approach over a period of time, SMART 

certainly could be a useful tool to State regulators to help them expedite the reforms that we have already agreed to and committed 

to this body that we would enact. 

Mr. BACHUS. I am going to just ask that each of the members—

Commissioner Koken has outlined, I think, starting on page 12 or 

13 of her testimony what she thinks is wrong with SMART. I 

would ask the rest of you all to read that testimony and give me 

a one- or two-page response to whether you agree or disagree and 

what parts you would agree or disagree with what she said. Because I think that is at least a valuable piece of testimony and a 

good starting point in considering this legislation. 

Thank you. 

Chairman BAKER. I thank the gentleman. The gentleman’s time 

has expired. 

I would ask unanimous consent for the gentleman, Mr. Pomeroy, 

to be recognized and seated as a member of the subcommittee for 

the purposes of the hearing today. As a distinguished former commissioner himself, he fits right in with the panel. 

Welcome, sir. 

Mr. POMEROY. Thank you very much, Mr. Chairman, and I very 

much appreciate the ongoing diligent work you have brought to the 

somewhat obscure but highly important issue of insurance regulation. Clearly, everyone who has watched you work, whether or not 

we are necessarily agreeing with where you are going, understands 

the sincerity of the effort you put behind it. It really is to be commended. 

Unique to hearings, I did not really care what the panel said, it 

was just a pleasure to be in their company again. I consider myself 

personal friends with each of them and would like to note for the 

record that each has made a significant personal effort to improve 

51

the function of the insurance marketplace, always to the benefit of 

the consumer. And I was very impressed with your public sector 

work, and for those of you no longer in the public sector, I am impressed with your private sector. 

Ed Muhl is somewhat unique having served as a regulator, then 

he went on to a distinguished performance in the private sector, 

came back as a regulator again. They called him Retread Ed in Albany. 

I am also pleased, Mr. Chairman, that this panel was able to 

capture the dynamic of the discussion of those presently regulating 

and those who now have different perspectives perhaps because 

they no longer are regulators. I think that this is a useful dynamic. 

While up at the NAIC meeting last weekend, I mean, we are all 

friends, we are all trying to in the end advance the same aims, we 

just have different perspectives and those will vary over time depending on how you look at things. But this has been a good panel, 

I think, having this mix. 

I would have a couple of points of observation relative to earlier 

comments that have been made, as to the terrorist coverage afforded by TRIA. I think that we are not at a point in time where 

we want to walk away from that. I think that TRIA ought to be 

extended. I think it has worked. And, essentially, if you are going 

to have private capacity to entirely handle the still infant, undefined and somewhat infinite risk of terrorist exposure, you are 

going to have to have higher rates and extraordinary reserves established. 

I think that dealing with this as a contingent funding mechanism, as TRIA has done, has really gotten us tremendous capacity 

without much up-front dollars. And that has saved the American 

people a lot of money. And so I hope that we can continue with the 

TRIA approach, at least for the immediate future. 

As to the SMART legislation, and I have been interested in this 

discussion, I think that—let’s throw our cards on the table—the 

most controversial part of the bill is the property casualty rate preemption piece of it. And if the chairman wants that included, he 

is to be commended for his courage, I suppose, but it has made 

passing the bill, in my opinion, much less likely. 

So let’s go across the panel and I would ask you whether you 

think that the property casualty State rate approval preemption 

whether that is a critical part of the legislation, as you see it. 

Let’s start with Mr. Pickens and just run right on down the 

panel. 

Mr. PICKENS. Mr. Pomeroy, first of all, thank you for your comments, and I certainly second all of those right back at you. You 

have been a good friend and appreciate your advice over the years. 

I do believe it is important to include some rate provisions in the 

SMART legislation. And the reason is because I think that in a 

competitive market, in a competitive market, not in a noncompetitive market, but in a competitive market, the best regulator of 

rates is the marketplace. 

And I believe the regulators should always have the authority in 

a competitive to determine when rates are excessive, inadequate or 

unfairly discriminatory, but for prior approval of rates I think the 

time has come and gone for prior approval of rates. And I think if 

52

you look at the States where prior approval exists or has existed, 

even though it may not be the only reason that there are problems 

in those markets, it certainly is a primary reason. 

And, again, I think something like flex band rating is a good 

transition to a competitive rating scenario, but I would always like 

to see the regulator be able to determine that rates are inadequate, 

excessive or unfairly discriminatory on the back end. I think regulators always need that ability. 

Mr. SERIO. I think the SMART dialogue has brought us a long 

way on the rate issue. Yes, it is crucial as far as an issue, and it 

has been an issue of particular importance to me, but I think 

where the dialogue has gone, the dialogue has gone from where it 

was just a competitive rating, moved just to competitive ratings, 

and now talking about a transitional period and understanding the 

value of flex rating, I think that that kind of a construct can work. 

So long as there is enough backsize authority for the regulators 

to make sure there is enough financial support for the rates that 

are being charged, I think that the rating issue can be resolved 

amicably for everybody involved in the SMART bill. 

Mr. COVINGTON. Thank you, Congressman Pomeroy, and thank 

you for your kind comments. I too think that the rate issue is a 

critical issue to be included in the legislation. It works, it has been 

proven to work. It works in Ohio, it works in Illinois. I have not 

been given any evidence that it does not work in some place, other 

than with maybe respect to coastal type issues. 

And right now it diverts scarce resources that should be spent on 

other priority regulatory issues and really distorts the marketplace. 

That is what really all the studies show. 

So I do think that the rate issue should be included in SMART. 

Mr. SHAPO. My answer is, yes. We were talking about it the 

other day. I did not get to finish my hard sell on you. I had to leave 

to go see a client, if I remember correctly. 

Yes, I think it should not only be included, I think it should be 

the first issue that is dealt with, not the last. It should not be the 

first one jettisoned, it should be the first one dealt with. And that 

is because it is the biggest impediment to interstate commerce in 

the regulatory system. It is the most mismatched aspect of the regulatory regime, harmful to consumers, it hurts supply, diverts 

scarce resources, and it is very much Congress’ business. This a result of past congressional action. Congress made a policy choice 6 

years ago to disable competition to enable collusion. So it could not 

be more Congress’ business. 

And if the goal of the SMART Act is to protect the fundamental 

primacy of the States in regulation and if the goal is to try to come 

up with a workable system and to stave off a Federal charter, 

again, I think this is the first issue that should be included, not 

the first issue that should be jettisoned. Because it unfortunately 

needlessly antagonizes natural allies of State regulation: The property casualty industry. 

Property casualty carriers definitely do need to be attuned to 

local markets and have traditionally been, not all of them, but generally have been strong supporters of State regulation, and that is 

changing now. There is— 

53

Mr. POMEROY. The chairman is being very lenient on time, so 

you will have to move this along. 

So I hear we have to preempt the States to protect their primacy. 

Mr. SHAPO. Yes, and it is particularly apt on this issue, because 

the States are doing what they are doing because Congress 

incentivized them to do it. It was explicit congressional policy to try 

to get the States to pass prior approval rate regulation across the 

board. 

Ms. KOKEN. I would say that all of the members of this panel 

have all been commissioners, and all support the importance of 

streamlining rate regulation. However, we believe that how that is 

done and the balancing for the benefit of the consumer and balancing that against the needs of the insurers should be done by the 

States. So we would not support preemption of rates. 

Mr. MUHL. Mr. Pomeroy, it is good to see old friends and colleagues. Life and time has treated you well. 

An answer and a response to what you had asked, I believe a 

less restrictive rate regulation is a key element to making the process less costly ultimately for the consumer and creating a very competitive process that the companies can function in. I think everybody benefits. So I think it is very much a key in the SMART draft 

to have that as a key piece of the legislation. 

Mr. POMEROY. I would just, in closing, Mr. Chairman, indicate 

that I believe, just talking about politics, there is some considerable 

feeling here, probably on both sides of the aisle, that this might be 

a judgment best left to the States and they will find their own way 

based upon what works for their marketplace. And if there would 

need to be a Federal preemption of that State decision-making, I 

think there would need to be a demonstration beyond inefficiency 

for insurance companies and inefficient functioning of the marketplace, really more of a demonstration of severe market dislocation 

of an irreparable dimension that required this type of action. 

But it is early and who knows, there has been a lot of things 

passed around here that I would have never guessed would have 

made it. So I think this dialogue and the chairman’s substantive 

dealing with this topic are certainly key strategies to advancing the 

ball here. 

Thank you very much. 

Chairman BAKER. I thank the gentleman for his contribution, 

and my assurance is we are not going to surprise anybody. It will 

not be a sneak attack. 

Ms. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

You probably all thought you were just about finished till I 

walked in, so I will not take very long. I just wanted to ask one 

quick question of my friend from Illinois, the former insurance 

commissioner, Mr. Shapo. I would be remiss if I did not. 

My question is, don’t government price controls on insurance reduce consumer options and make insurance less available, and 

then it would drive more consumers into the secondary residual 

markets? More States have such markets. 

Mr. SHAPO. Representative, thank you. It is very good to see you. 

Thank you for all your past kindnesses. 

54

The answer is, yes, price controls will not reduce prices but they 

will reduce supply. They will reduce availability. Affordability and 

availability end up running into each other, and attempts to increase affordability fail for themselves but then they end up hurting availability. 

In Illinois, where market forces are used to regulate prices, as 

they are throughout the economy, the assigned risk plans are infinitesimal, far less than 1 percent of insureds in the State. 

Mrs. BIGGERT. Yes. We seem to have the Illinois model where we 

really have a lot of competition. 

Mr. SHAPO. Yes, ma’am. And it has a 30-year track record. And 

it is not to be seen as an experiment, I don’t think, or kind of a 

unique outlier that somehow manages to work. I mean, it would be 

bizarre if it did not work. This is the way commerce is regulated 

throughout the economy, and if not for strange historical circumstances which do not exist anymore, there would be no talk 

about regulating insurance rates. 

Mrs. BIGGERT. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman BAKER. I thank the gentlelady. 

I feel I need to make at least sort of a summary statement as 

to the public expressions I have made on the subject of the necessity for a proposal seeking some sort of uniformity that is clearly 

not there today and the probability that at least I will propose, subject to Chairman Oxley’s consent, some action by the committee in 

the course of the remaining legislative time. 

There have been numerous hearings and meetings. We even had 

things called roundtables. Everybody just come in and sit down and 

talk. I mean, I wake up and think about insurance, and if that is 

not a distressing thought. 

At least you got Fannie Mae off my mind. Maybe that is the improvement. 

The point, though, in trying to be objective and understanding, 

this is a very convoluted process to alter with State legislatures 

and governors and commissioners and companies and agents involved in all of this, it is not easy to point to a particular direction 

and say, ‘‘Let’s go there and get this fixed.’’ 

But let me just run through some things to put it on the record. 

Ms. Koken, I am not citing you as the current NAIC Chair as responsible for any. This is an ongoing discourse with the NAIC and 

the general NCOIL, everybody, to try to how do we get where we 

believe we need to go? 

The Health Carrier Prescription Drug Benefit Management 

Model Act, zero States; Health Carrier Claim Audit Guidelines 

Model Act, one State; Individual Health Insurance Portability 

Model Act, one State; Model Regulation to Implement Individual 

Health Insurance Portability Model Act, one State; Health Information Privacy Model Act, zero States; Health Care Professional 

Credentialing Verification Model Act, one State; Quality Assessment and Improvement Model Act, two States. This is boring. 

It is numerous numbers of model acts which have less than 10 

States who have, as of the date of preparation, January 2005, have 

moved. These items have not been on the public docket for a matter of weeks, months, literally years, in some cases for more than 

55

a decade. We have had commissioners repetitively saying, ‘‘You 

know, about 3 years is what we need.’’ And I think I heard a 3-

year statement today. 

The 3 years clock has worn out. We have wound it too many 

times. We are going to have to take some action. 

Now, why do I think this is so vitally important? When you look 

at the fees and assessments made by States through the regulatory 

process on companies and you look at the disposition of those revenues in relation to consumer protections, about 8 percent of the 

fees collected go to regulatory purposes. 

Now, if I had to ascribe any single thing that affected the cost 

of providing insurance to consumers at a more competitive price, I 

would start looking at State governments’ role. And, believe me, 

coming from Louisiana with our history in insurance regulation, I 

am an expert on that kind of stuff. 

You know, who is looking at that rate review process and determining whether or not the fees and assessments are really adequate and necessary for consumer adequacy? 

Then you look to the NAIC itself, it is an unusual organization 

in that the bulk of members or majority are appointed, they do not 

have enforcement authority, they cannot go to the legislature and 

say, ‘‘Do this or else.’’ In fact, given the history of the model act 

considerations, there is no downside consequence to a legislature 

ignoring a well-intentioned commissioner from following their studied recommendation. 

But then to make it even more specific, today, in your outlining 

of goals and assessing the progress made and identifying things 

you think are moving in the right direction, the statement was 

made that uniformity is not the goal. Well, that is a deep policy difference that we have. Uniformity is the goal. 

Secondly, with regard to price preemption, I know that is volatile. I know that members have extreme concerns, but I also understood you to say that flex band has some concerns for you and that 

the current prior review process may be the way to stay. 

This all leads me to conclude that we need to have a centrist bill 

boiled down to the core principles we started with 2 years ago, put 

before the committee and let members make a decision whether or 

not adopting a proposal that provides the standards established by 

the SMART Act with some sort of price relief, subject to the protections that those who have raised issues in the hearing today are 

guaranteed those protections are in place, centered around the 

real-life practical experience of those States who have moved generally in that direction. Louisiana has a flex band. I mean if we can 

do it, anybody can do it. 

And so I think that there is ample opportunity for us to work. 

I am making this long diatribe simply to announce that going forward the NAIC and everybody should have, who have interest, a 

copy of the draft. We want to hear comments and assuming Chairman Oxley gives his consent and I get a committee slot to do it, 

we are going to come back and put a proposal on the floor. So start 

those cards and letters to your congressmen. 

Get everybody ginned up, we are coming, and I hope this is not 

a surprise to anybody, but I also hope that you understand that 

this, as some have indicated on the Democrat side, that this is 

56

driven by deep-held policy convictions, not for any particular interest other than to have a market that functions and provides consumers with products at a reasonable price. 

And I certainly do not wish to put you in any untenable position, 

Ms. Koken, but it would be rude of me not to offer you the chance 

to make any comment that you would choose to make if you choose 

to. 

Ms. KOKEN. Well, I thank you for that and would also thank you 

for the opportunity to appear here today and to be engaged in this 

dialogue, because we do recognize the importance of it. 

I think that I would only want to clarify that I was not suggesting that the State insurance regulators are in support of a 

prior approval system. Certainly, in many States, they have gone 

to a flex band but in many other States they have gone to file and 

use. And I am not here to say that flex band or file and use or use 

and file is preferable under any circumstance but to say that the 

balancing that occurs to determine what is best for the consumer. 

So that we think is a State issue. 

But, certainly, we appreciate that it is critical that there be 

greater uniformity that occurs in the marketplace, and our compact 

and SERF initiatives and NAPR and the whole list are evidence of 

that. We recognize that in some situations the goal is not for absolute uniformity, uniformity of process, but, certainly, throughout 

the whole process our goal is to balance the business efficiency with 

the interests of the consumer, and I certainly appreciate that that 

is also your goal and that we share the same common vision of trying to get to a better solution, and we continue to want to be engaged, as you revise and come out perhaps with a new draft of the 

bill. 

Chairman BAKER. I thank you for your courtesy. 

Mr. Scott, did you have any further comments? 

Mr. SCOTT. Very briefly, Mr. Chairman. I just want to again extend my bipartisanship support to you and again to commend you 

for your consideration of the concerns that have been raised on the 

Democratic side, particularly in the area of preemption, in the area 

of consumer protections and the points that I raised, of course, on 

the discrimination to make sure that we have a strong bill going 

forward that has the utmost end consumer protections. 

But, again, I commend you for agreeing to hear those concerns 

and to move forward with the bill, and I look forward to working 

with you as we iron these things out. 

Chairman BAKER. I thank the gentleman for his kind statement. 

If there is no further statement by members, I duly appreciate 

each of your participation here today. It has been I think a constructive and very helpful meeting. 

Our meeting stands adjourned. 

[Whereupon, at 1:12 p.m., the subcommittee was adjourned.] 

(57)

A P P E N D I X

June 16, 2005

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