[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
IMPROVING INSURANCE FOR CONSUMERS--INCREASING UNIFORMITY AND EFFICIENCY
IN INSURANCE REGULATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCE AND HAZARDOUS MATERIALS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 19, 2000
__________
Serial No. 106-155
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
67-117CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Finance and Hazardous Materials
MICHAEL G. OXLEY, Ohio, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana EDOLPHUS TOWNS, New York
Vice Chairman PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania ELIOT L. ENGEL, New York
CHRISTOPHER COX, California DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California BILL LUTHER, Minnesota
GREG GANSKE, Iowa LOIS CAPPS, California
RICK LAZIO, New York EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois RALPH M. HALL, Texas
HEATHER WILSON, New Mexico FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Covington, Hon. J. Lee, Director, Ohio Department of
Insurance.................................................. 6
Hillman, Richard J., Associate Director, Financial
Institutions and Markets Issues, General Accounting Office. 54
Mendelsohn, Robert V., Chief Executive Officer, Royal &
SunAlliance on Behalf of the American Insurance Association 36
Milesko, Glen J., President and Chief Executive Officer, Banc
One Insurance Services Corporation, on Behalf of the
American Bankers Association Insurance Association......... 40
Nabers, Drayton, Jr., Chairman and Chief Executive Officer,
Protective Life Corporation, on Behalf of the American
Council of Life Insurers................................... 25
Smith, Ronald A., President, Smith, Sawyer & Smith, Inc., on
Behalf of the Independent Insurance Agents of America...... 46
Turner, John G., Vice Chairman, ING Americas, on Behalf of
the Financial Services Roundtable.......................... 18
Urban, Philip H., President and Chief Executive Officer,
Grange Insurance Companies, on Behalf of the National
Association of Mutual Insurance Companies.................. 31
Material submitted for the record by:
General Accounting Office, responses for the record.......... 88
Mendelsohn, Robert V., Chief Executive Officer, Royal &
SunAlliance on Behalf of the American Insurance
Association, responses for the record...................... 94
Milesko, Glen J., President and Chief Executive Officer, Banc
One Insurance Services Corporation, on Behalf of the
American Bankers Association Insurance Association,
responses for the record................................... 90
Nabers, Drayton, Jr., Chairman and Chief Executive Officer,
Protective Life Corporation, on Behalf of the American
Council of Life Insurers, responses for the record......... 92
National Governors Association, letter dated September 19,
2000....................................................... 107
Smith, Ronald A., President, Smith, Sawyer & Smith, Inc., on
Behalf of the Independent Insurance Agents of America,
responses for the record................................... 101
Turner, John G., Vice Chairman, ING Americas, on Behalf of
the Financial Services Roundtable, responses for the record 97
Urban, Philip H., President and Chief Executive Officer,
Grange Insurance Companies, on Behalf of the National
Association of Mutual Insurance Companies, responses for
the record................................................. 99
(iii)
IMPROVING INSURANCE FOR CONSUMERS--INCREASING UNIFORMITY AND EFFICIENCY
IN INSURANCE REGULATION
----------
TUESDAY, SEPTEMBER 19, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Finance and Hazardous Materials,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:14 a.m., in
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley
(chairman) presiding.
Members present: Representatives Oxley, Gillmor, Ganske,
Shimkus, Towns, Barrett, Luther, Rush, and Dingell, (ex
officio).
Staff present: Robert Gordon, majority counsel; Yong Choe,
legislative clerk; and Bruce Gwinn, minority professional
staff.
Mr. Oxley. The subcommittee will come to order.
The Chair will recognize himself for an opening statement.
Last July, this subcommittee held a hearing on improving
insurance for consumers, increasing uniformity and efficiency
in insurance regulation. We received a statement of intent from
the National Association of Insurance Commissioners signed by
all of the insurance commissioners detailing their commitment
to achieving uniformity. NAIC President George Nichols, who is
with us today, also committed to following through with
concrete and measurable steps toward achieving that reform by
the time of today's hearing.
On our first panel I am pleased to have testifying a rising
star in the insurance industry, the Honorable J. Lee Covington,
Director of the Ohio Department of Insurance. Lee has helped
spearhead the Commissioner's work to modernize our insurance
regulatory system and agreed to join us today to report back on
the NAIC's efforts. By all accounts, the NAIC has in fact made
significant progress; and I would like to thank in advance both
Commissioner Lee and President Nichols for their outstanding
work.
A reform in Glass-Steagall took Congress over 65 years to
achieve, and I recognize that modernizing insurance reform will
not happen overnight. Unfortunately, however, the NAIC in the
past has too often been accused of talking the talk but not
walking the walk. While I continue to fully support the NAIC's
work, I hope that we can keep reform efforts at an expedited
pace. I don't think the ranking member and I have 65 years to
invest in that.
I challenge both the States and the industry to work toward
December of this year to put into action the first plans for
achieving uniformity of insurance regulation, with
comprehensive reform efforts following soon thereafter. This
will mean the Congress and the State legislatures will have to
work closely together with the insurance commissioners to forge
the reforms and to be prepared to act swiftly on implementation
once a consensus is reached. I hereby commit to doing our part
in achieving these reforms.
In addition to uniformity, we must work together on better
coordination among the regulators. I asked both President
Nichols and the OCC Chief Counsel Julie Williams last July
whether coordination had been achieved among the financial
regulators or if more work needs to be done. Clearly, the
hoped-for consultations required by the Gramm-Leach-Bliley Act
is not being sufficiently conducted. Ms. Williams indicated
that more congressional action may be required to govern the
flow of information sharing and to protect the confidentiality
of those reports.
It is my sincere hope that the agencies will be able to
work together to report back to Congress on the best way of
achieving this coordination. If not, Congress will return to
this issue next year with our own solution. Consumers are not
being adequately protected by the current system, and follow-up
congressional legislation on this subject may, in fact, be
necessary.
For example, in 1992, Martin Frankel was permanently banned
by the securities industry for fraudulent activities, and yet
he was able to secretly control a small securities firm which
he later used as a platform for conducting the biggest
insurance scam of the decade.
If the insurance regulators had a coordinated system with
the securities regulators to flag fraudulent actors, they would
have never let Frankel take control of numerous insurance
underwriters. Conversely, if the securities regulators were
updated on the continued fraudulent trading activities, both
pretend and real, of Mr. Frankel, they could have taken further
action to prevent the abuse of the system.
In the year 2000 Americans deserve to have an integrated
financial regulatory system where one hand knows what the other
is doing. I am proud that we have undertaken and made
significant progress on an ambitious reform of our insurance
regulatory system. I thank the witnesses who have agreed to
join us today to help us understand where we are in this
effort, how far we can go, how far we have to go, what
alternatives we should be considering and what Congress can do
to help better protect consumers and the competitiveness of the
industry.
I now turn to the ranking member, the gentleman from New
York, Mr. Towns, for an opening statement.
Mr. Towns. Thank you, Mr. Chairman, and also thank you for
holding this hearing.
We last visited this issue in the context of Gramm-Leach-
Bliley, a very important piece of legislation that modernizes
our securities banking and insurance laws. Gramm-Leach-Bliley
addresses a critical aspect of insurance modernization: the
harmonization of State insurance regulations. The harmonization
means more competition as State regulatory systems fall out of
the way of interstate commerce, raising the standards for
customer service and product innovation. Consumers will realize
more choices and lower prices as the insurance provisions of
Gramm-Leach-Bliley are implemented.
But, as significant as it is, Gramm-Leach-Bliley is only a
first step in reforming insurance regulation. Since Gramm-
Leach-Bliley was enacted, those in the industry have been
diligent in shaping the change. In July, at the first part of
this year, we heard testimony about what a uniform system might
look like. Today, we will continue that discussion, hearing
from more of those who have been and will continue to be
instrumental in this process.
I believe something needs to be done to bring uniformity to
the insurance industry. Just what that something is, is a
question that we need to have answered before moving forward.
Some have suggested a Federal chartering system, very much
like the Federal banking chartering system. Others suggest a
State-run chartering system or an interstate reciprocal
recognition compact.
I said all of that to simply say that it is a difficult
issue. I am pleased we are having a second hearing to further
look at options for improving efficiency in the insurance
industry. I look forward to hearing from our witnesses; and let
me again thank you, Mr. Chairman, for calling this hearing and
furthering the dialog on insurance modernization. Thank you.
Mr. Oxley. I thank the gentleman.
The Chair now recognizes the gentleman from Illinois, Mr.
Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. I will be brief.
I want to thank you for calling this hearing today. I want
to thank the panelists, a wide range of people. I think we will
get--hearings are very important for Members of Congress,
especially for me, because I like to sit, and I like to listen,
I like to learn. And this is really a natural addition to what
we did in the financial services bill. This should not surprise
anybody that people are now starting to ask these questions
since the financial--since insurance was the only financial
institution that still would be under regulation by the State.
Illinois prides itself on being a tremendous insurance
State; and my good friend, Nat Shapo, continues to do a great
job in its regulatory arena. What I like to brag about the
State of Illinois is that we don't regulate rates, we let the
market dictate rates; and I think the vast majority of
Americans would be better served under that type of State
purview.
But I look forward to the hearing today. As the ranking
member mentioned, we have a lot to really learn and discuss as
we proceed cautiously forward.
With that, Mr. Chairman, I thank you for this hearing. I
yield back my time.
Mr. Oxley. Thank you.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
I would like to thank the Subcommittee Chairman for his important
work in putting together this hearing. This Committee has worked in a
bipartisan fashion on insurance reform throughout the term, and the
Subcommittee Chairman's efforts have helped pave the way for
significant reforms.
Last November, this Congress made history by achieving something
that no Congress in the previous 66 years had been able to accomplish--
agreeing to comprehensive financial services modernization. The Gramm-
Leach-Bliley Act was a critical first step towards uniformity in
insurance regulation. It established the first ever uniform privacy
protections for consumers, and the first ever uniform licensing system
for insurance agents and brokers. That statute requires regulators to
begin coordinating with each other.
These were important steps to begin modernizing the regulation of
insurance. But they are only first steps.
In July, I challenged the insurance commissioners to put their
shoulder to the wheel and begin the process of modernizing insurance
regulation. I stressed the need for deadlines in implementing plans for
speed to market, rate filings, and producer licensing reforms. I also
told the commissioners that we expected significant progress between
July and today's hearing. We have invited Commissioner Covington to
join us today to give us a full briefing on the NAIC's activities. By
all reports, the NAIC has made progress.
I fully support the NAIC's efforts. I look forward to finalizing
plans on the more simple reforms by this December, with more
comprehensive reforms soon to follow. In return, Congress must be ready
to move forward with any federal reforms needed to help the States
protect consumers.
Last July I also emphasized the need for regulatory coordination.
The General Accounting Office is releasing a report on their
investigation of Martin Frankel, who committed the single largest
insurance scandal last decade. A critical GAO conclusion is something
that our Committee has been stressing throughout--the financial
regulators need to do a better job of sharing enforcement and
examination information. Regulatory coordination may not require
Congressional action. But if the regulators can't do it alone, Congress
will step in to get the job done right.
I challenge the regulators to work together on a new data base
system to share information to prevent fraud. And I challenge our
industry witnesses here today to work with the States to implement
uniformity and coordination.
Congress should expect to see real reforms put together by the end
of this year, with implementation beginning shortly thereafter. And it
is my strong hope that the State legislatures will be able to proudly
stand behind this effort.
The unfolding of the Martin Frankel scandal demonstrates that much
work still needs to be done. As I stated last July, ``One way or
another, insurance regulation will be reformed.'' I hope that we can
all work together towards fulfilling this effort.
______
Prepared Statement of Hon. Bobby L. Rush, a Representative in Congress
from the State of Illinois
Mr. Chairman, I thank you for taking the time to conduct this
hearing on the important subject of Improving Insurance for Consumers,
while Increasing Uniformity and Efficiency in Insurance Regulation. I
also thank the panel of insurance professionals and administrators who
will present their testimony of solutions to the problems surrounding
the coverage and protection of consumers.
Insurance protection allows members of the public to interact,
facilitate business needs and promote personal growth and prosperity,
without the fear of tremendous loss due to mistakes or minimal errors
in judgement. The insurance industry is responsible for providing a
safeguard to consumers as well as the business community. This should
be accomplished without imposing strict regulations that reduce
consumer protection, erodes consumer trust, and eliminates the
consumers right to privacy and security.
The disturbing GAO report entitled ``Scandal Highlights Need for
Strengthened Regulatory Oversight'' highlights a miscarriage of justice
which resulted in ``more than $200 million in insurance company assets
over nearly an 8year period.'' Scams like these induces consumer
distrust in the insurance industry. I am concerned that individual
failures by insurance regulators, and legislation which does not do
enough to strengthen consumer confidence, will have far reaching
negative impacts in this nations commerce.
I am interested to hear what steps will be taken or proposed to
reduce the potential for insurance scams.
I look forward to hearing from our witnesses testimony on how this
congress can move forward in a collective effort to mitigate problems
with consumer protection in the insurance industry.
______
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Mr. Chairman, I want to thank you for holding this hearing on
improving insurance regulation for consumers. Consumers should be our
uppermost concern, because in most cases, consumers pay the biggest
price when regulators fail to do their job.
We will hear important testimony today about how regulators failed
to protect consumers in the insurance fraud case of Martin Frankel.
Taxpayers, and policyholders whose losses are not covered by state
guarantee funds, will bear much of the burden attributable to Mr.
Frankel's embezzlement of insurance assets in excess of $200 million.
Today's General Accounting Office's report, which I requested,
demonstrates that state insurance regulators were either too blind to
see, or too unwilling to acknowledge, the scam Mr. Frankel perpetrated,
openly and fearlessly, over a period of eight years. The simple fact is
that Mr. Frankel succeeded, not because he was so clever, but because
state insurance regulators lacked the skill, authority, access to basic
information, resources, and ``healthy skepticism'' needed to protect
consumers.
Perhaps most alarming is the fact that even when Tennessee's
insurance regulators finally figured out what Mr. Frankel was doing,
they did not warn the public or regulators in other states. Instead,
they gave him 60 days to redeposit the assets of Franklin American Life
Insurance Company in an account in Tennessee. That's like saying, ``I
know you have been stealing from me, but I'm giving you 60 days to
steal from someone else so you can pay me back.''
And that appears to be what happened. During that 60-day period,
Mr. Frankel bought another insurance company and entered into a
fraudulent reinsurance scheme, producing additional insurance company
losses of $5 million in Arkansas and $45 million in Virginia. With
these two additional frauds, Mr. Frankel was able to accumulate $50
million of the $57 million Tennessee demanded he put in an account in
that state.
Even if state regulators had been more alert, even if they had the
resources, authority, access to basic information, and all other things
they currently lack, the actions of regulators in Tennessee raise an
important question. Does the present system of 50 independent, state
insurance regulators encourage each regulator to put too high a
priority on taking care of policyholders in his or her own state,
instead of exposing a fraud that also affects policyholders in other
states? Unless what happened in Tennessee can be explained as an
isolated and abnormal occurrence, one could conclude that, under the
present system, no one is protecting all insurance consumers against
fraud.
Certainly, this case also points out things the states can and
should do to strengthen their anti-fraud efforts. For example, had
state insurance regulators bothered even to check with their own state
securities regulators, the more than $200 million in losses
attributable to Mr. Frankel's alleged thievery may have been avoided.
And, had employees of the Mississippi State Insurance Department
bothered even to talk with each other, the Mississippi department would
never have approved redomestication of a Frankel-controlled company
with assets of more than $100 million at the very moment Mississippi
examiners were close to uncovering Frankel's fraudulent activities.
I understand that, in response to this case, the National
Association of Insurance Commissioners (NAIC) has proposed both short-
and long-term actions that state insurance departments should take.
Some of these recommendations will require action by state
legislatures. Others will take development by NAIC committees, as well
as legislative implementation by the states, and could take several
years to implement.
A far more timely response is needed, especially now that the
Gramm-Leach-Bliley Act lets banks, insurance companies, and securities
firms engage in each other's businesses. No longer will the fraudulent
schemes of rogues like Martin Frankel harm only insurance
policyholders. Instead, investors, banks, and the American taxpayer who
underwrites bank solvency, may be threatened as well.
Mr. Chairman, if state regulators cannot do the job insurance
consumers deserve and require, new regulatory mechanisms must be put in
place that will.
I look forward to the testimony of the witnesses.
Mr. Oxley. The Chair now turns to our first witness, the
Honorable J. Lee Covington, Director of the Ohio Department of
Insurance Columbus, Ohio. Mr. Covington, welcome back and look
forward to your report.
STATEMENT OF HON. J. LEE COVINGTON, DIRECTOR, OHIO DEPARTMENT
OF INSURANCE
Mr. Covington. Thank you, Chairman Oxley, members of the
subcommittee. My name is Lee Covington. I am Director of
Insurance in the State of Ohio and in that capacity I serve as
Chair of the National Association of Insurance Commissioner's
Regulatory Reengineering Task Force and the Electronic Commerce
and Regulation Working Group.
Thank you for inviting me here to testify regarding the
efforts of Ohio and other State insurance regulators to
implement Gramm-Leach-Bliley and to modernize State insurance
regulations. Mr. Chairman, I am especially pleased to be here
because our home State of Ohio is a leading State in
modernizing our regulatory system to fully meet the needs and
expectations of insurance consumers and the financial services
industry.
Ohio was the first State to adopt reciprocity for agent
licensing. We implemented just a last year a state-of-the-art
Internet agent licensing system, and we are piloting the
National Insurance Producer Registry. I recently adopted
regulations and will be seeking legislation to speed the time
for insurance product approvals. I also chair the NAIC
committee with the goal of facilitating the use of e-commerce.
Mr. Chairman and members of the committee, I join my
colleagues in thanking you for your long-standing support of
functional regulation of insurance by the States and for your
interest in and support of our efforts to make real progress in
our regulatory modernization initiatives. Your commitment and
work in this area is having a real impact in Ohio and through
our combined efforts will benefit Ohio's consumers and
insurers.
A full update of our work to implement GLBA since your July
hearing is provided in my written testimony.
With respect to privacy, the NAIC's Privacy Working Group
completed work on a privacy model just last week, and our full
membership will vote next week on that model. This model tracks
GLBA closely and will give insurers clear, uniform guidelines
to follow. Ohio already has in place privacy laws that meet the
requirements of GLBA and exceed the requirements of GLBA.
With respect to multi-State agent licensing under GLBA,
earlier this month we took another important step toward our
goal of one-stop agent licensing by launching a pilot of the
National Insurance Producer Registry in four States, as I
mentioned before, including Ohio; and we expect all States to
be operational in 2001. Through NIPR, nonresident agents will
receive a license on a reciprocal basis within 24 hours of
submitting an electronic application.
Mr. Chairman, moving now to our modernization initiatives,
during the subcommittee's July hearing and, as you mentioned
this morning, you recognized that insurance commissioners
through our statement of intent have demonstrated now that we
can talk the talk. Through our licensing initiatives and wide
action in other areas, Mr. Chairman, we want to show you that
we can indeed walk the walk when it comes to implementing
meaningful reforms.
I am excited to report that State regulators remain
strongly committed to our modernization initiatives with
unprecedented consensus and we have accomplished just what you
had hoped to see, specific proposals with specific timeframes.
I applaud the outstanding leadership of NAIC President George
Nichols, who is here with me today, and the intense work of
each State insurance commissioner since this law's enactment.
We have moved forward on our bold set of reforms.
I want to give you an update on the progress of two of our
most important initiatives that go far beyond the requirements
of GLBA.
First, the Speed to Market Working Group. Regulators agree
that, under the current system, it takes far too long to
introduce new insurance products. This is not good for
consumers, and it is not good for the insurance industry. The
working group recently announced that it would appoint two
subgroups to focus its efforts.
First, the Coordinated Advertising, Rate, and Form Review
Authority subgroup will develop the details for a single-point
product filing process through a centralized organization and
uniform standards where appropriate. A limited launch of
CARFRA, as we call it, in 10 States is now scheduled for the
first quarter of 2001.
A second subgroup, which I chair, will evaluate various
recommendations for improving other State-based systems,
including a list of recommendations that includes electronic
filings, commercial lines deregulation where appropriate, and
movement toward a more market-oriented regulatory system where
appropriate. This subgroup was charged with developing
recommendations by December 2000.
The second initiative that is one of our most important is
the National Treatment of Companies Working Group. It is
charged with establishing regulatory procedures that will treat
eligible insurance companies the same across the Nation, and it
has set forth time lines for achieving this goal, including,
first, adoption of a uniform company application by all States
before the end of this year; second, development of ``best
practices'' for regulatory reviews by June, 2001; and, finally,
full implementation of the complete national treatment process
from June, 2001, through June, 2002.
We look forward to the continued positive impact that these
initiatives will have on our work to protect consumers through
an efficient and effective regulatory system; and we look
forward to working with the Congress, our Governors,
legislatures, and all other interested parties as we continue
to develop and implement the GLBA required regulations and
legislation and our State regulatory modernization initiatives.
Thank you, Mr. Chairman, members of the committee.
[The prepared statement of Lee Covington follows:]
Prepared Statement of Lee Covington, Director of Insurance, State of
Ohio
introduction
Chairman Oxley and members of the Subcommittee, my name is Lee
Covington. I am the Director of Insurance in state of Ohio and serve as
Chair of the National Association of Insurance Commissioners' (NAIC)
Regulatory Re-engineering Task Force, the Electronic Commerce &
Regulation Working Group, and the Improvements in State-Based Systems
Subgroup of the Speed to Market Working Group.
Thank you for inviting me to testify regarding the efforts of Ohio
and other State insurance regulators, in our own States and through our
work as members of the NAIC, to implement the Gramm-Leach-Bliley Act
(GLBA) and modernize State insurance regulation. I am especially
pleased to be here because Ohio is a leading State in modernizing our
regulatory system to fully meet the expectations of insurance consumers
and the financial services industry.
Mr. Chairman and members of the Committee, I thank you for your
leadership in working to enact GLBA in the face of changing consumer
demands and a financial services industry marked by globalization,
convergence, consolidation, and technological innovation. I join my
colleagues in thanking you and this committee for your support of
functional regulation of insurance by the States when enacting GLBA,
for your continued support of State insurance regulation, and for your
support of our efforts to make real progress in our regulatory
modernization initiatives.
During the Subcommittee's hearing on July 20, 2000, Chairman Oxley
noted that insurance commissioners, through their ``Statement of
Intent'', ``have demonstrated now that they can ``talk the talk''; if
they can also ``walk the walk'', then insurance consumers and producers
can fully benefit from uniformity without the need for a new federal
system.'' Chairman Oxley also requested an update ``to assess what
progress has been made and whether there is a sufficient continuing
commitment to uniformity.'' Further, Chairman Oxley ``hope[d] that the
NAIC working groups [would] not only be able to come up with specific
proposals for achieving their goals, but to attach specific time frames
to implement those proposals in the 50 States.'' I am excited to report
that State insurance regulators remain strongly committed to our
modernization initiatives with unprecedented consensus, and after a
series of meetings leading to our most recent National Meeting, we have
accomplished just what you had hoped to see--specific proposals with
specific time frames. I applaud the outstanding leadership of NAIC
President George Nichols over the past 10 months and the intense work
and commitment of each State insurance commissioner as we have moved
forward on each of our initiatives.
Today, I would like to make three points about where State
regulators stand in implementing GLBA and achieving our modernization
goals--
First, the NAIC and State insurance regulators are on track to
implement all provisions of GLBA, and move beyond its
requirements with our own plan to achieve national uniformity
and efficiency for agent licensing.
Second, consistent with the ``Statement of Intent--The Future
of Insurance Regulation'' signed by all state Insurance
Commissioners in March of this year, the NAIC and State
regulators are working with the insurance industry and
consumers on several fronts to develop specific programs with
specific time frames for implementation that will substantially
improve the insurance supervision process while creating
regulatory efficiencies and reducing costs for insurance
companies and agents.
Third, I am proud to report that our experience in Ohio
provides a good example of the substantial progress being made
toward modernizing State insurance regulation.
state regulators are on track implementing glba
At the Subcommittee's hearing on July 20, 2000, NAIC President
George Nichols gave a detailed summary of the steps being taken by NAIC
and State regulators to implement GLBA. He concluded: ``The NAIC and
State insurance regulators are well on the way to implementing the
provisions of GLBA as intended by Congress.'' His statement remains
true. The NAIC completed several additional steps of our GLBA
implementation at meetings held in Kansas City and Dallas after
President Nichols testified.
My testimony today provides an update concerning State regulatory
efforts to implement the three basic GLBA mandates identified by
President Nichols--
a) Coordinating and cooperating with Federal functional regulatory
agencies that supervise banks and securities firms;
b) Issuing privacy rules to protect the non-public financial
information given by consumers to insurance providers; and
c) Establishing a national licensing system for insurance agents and
brokers in order to avoid the creation of the National
Association of Registered Agents and Brokers (NARAB).
I will also update you on two additional areas--national treatment
of insurers and speeding insurance products to market--where State
regulators are moving beyond the requirements of GLBA to modernize our
regulatory system.
cooperating with federal regulators under glba
The NAIC continues to believe that establishing sound working
relationships with Federal regulators is absolutely essential for State
insurance departments under GLBA. Long-standing efforts to work closely
with our Federal counterparts are now consolidated under the NAIC's
Coordinating with Federal Regulators Working Group, which has been
given broad responsibility to stimulate cooperation at all levels.
The NAIC's first priority for establishing regulatory cooperation
is to negotiate and sign written agreements between Federal and State
agencies laying out the ground rules for sharing information and
keeping it confidential when necessary. When signed by individual State
insurance departments and Federal agencies, these comprehensive
agreements will permit information to be shared regarding financial
condition, market conduct, and regulatory enforcement matters. At
present, NAIC is negotiating model regulatory cooperation agreements
with Federal banking agencies as follows--
Federal Reserve Board--After four months of joint effort, NAIC has
recently received the latest version of a draft agreement from the
Federal Reserve staff. This agreement was distributed last week to
members of the Coordinating with Federal Regulators Working Group for
review and comment. We expect to reach final agreement on a model by
the end of the year.
Office of Thrift Supervision--NAIC approved a comprehensive model
regulatory agreement with OTS in June of this year. So far, the
agreement has been signed by 23 States. This number will rise as more
States direct their attention to completing Federal cooperation
agreements.
Comptroller of the Currency--The OCC says it will soon deliver to
NAIC a comprehensive draft agreement based upon the OTS model. When
NAIC receives it, we will distribute it to Working Group members for
review and comment. Currently, 28 States have signed a more narrow
consumer complaint sharing agreement with OCC that was approved by NAIC
in 1999.
Federal Deposit Insurance Corporation--FDIC is working on a draft
agreement, and will be sending it to NAIC in the near future.
The second priority for effective cooperation is to establish
personal contacts at Federal agencies that will foster open
communication, mutual understanding, and practical cooperation on
monitoring and enforcement matters. The process of establishing such
personal contacts between State and Federal regulators is going very
well. While we have good initial working relationships with all the
banking regulators, our contacts with the Federal Reserve and OCC are
the most advanced due to the immediate demands of handling the
Citigroup merger and increased insurance activities by national banks.
Relations with the OCC are a good example of how we are proceeding.
During the past year, the Coordinating with Federal Regulators Working
Group conducted a series of day-long meetings with senior OCC
supervision officials and State insurance experts to exchange views and
explore general supervision methods. Now, relations are moving forward
to resolving the important details of developing examination procedures
that address proper supervision of insurance activities by national
banks. Through these efforts and continue cooperation and
communication, we expect to develop an efficient and effective
framework for implementing functional regulation as required by GLBA.
We hope to avoid Federal preemption of State insurance laws wherever
possible. NAIC expects this natural evolution from general policy
discussions to coordinating supervision details will serve as the model
for establishing sound working relationships with each of the Federal
banking agencies during the coming year.
meeting glba consumer privacy requirements
Members of the NAIC have been discussing and addressing the privacy
of personal information, including health information, for more than 20
years. In 1980, the NAIC adopted the Insurance Information and Privacy
Protection Model Act, which generally requires insurers to receive
authorization from individuals (``opt-in'') to disclose personal
information. In September 1998, NAIC adopted the Health Information
Privacy Model Act because of the special issues surrounding health
information. This model treats personal health information as a
different type of information that receives a higher level of privacy
protection. NAIC records indicate that 17 States have adopted all or
part of the 1980 model, while the 1998 health model has not yet been
adopted by any State. The NAIC believes State privacy regulations based
upon the 1980 and 1998 NAIC models will exceed GLBA requirements, which
means they will remain in force under Section 507 of that law.
To meet the recent challenge of specific GLBA privacy requirements,
the NAIC's Privacy Issues Working Group moved swiftly to construct
model insurance consumer privacy regulations that will serve as
guidance for States that do not presently have regulations satisfying
the Title V privacy provisions in GLBA. The purpose of these
regulations is to help State insurance authorities comply with the
minimum requirements of GLBA quickly while State Insurance
Commissioners consider whether additional privacy protections are
needed across-the-board for all consumers of financial services,
including insurance.
After six months of public comment and hearings on four separate
drafts, the Working Group approved a final model privacy regulation
last week at the NAIC's Dallas National Meeting. Upon approval by the
full NAIC membership, which is expected during the next month, this
model will move to the States for consideration. States adopting this
model will be assured that they meet the minimum requirements of GLBA.
In drafting the model regulation, the Working Group sought to
strike a good overall balance between achieving uniformity with Federal
privacy rules and adequately protecting personal information more
commonly associated with insurance products. The NAIC model also tracks
the November 13, 2000, effective date and July 1, 2001, compliance
deadline set forth in the Federal regulations.
Some departures from the Federal rules were necessary to reflect
the special nature of the insurance business and its impact on
consumers--
1. In the NAIC model regulation, ``consumers'' include not only
individuals who have a direct relationship with an insurer, but
also other individuals such as claimants, beneficiaries, and
persons entitled to coverage under group plans, employee
benefit plans, and workers' compensation plans.
2. Because insurance providers typically collect much greater amounts
of health information than banks, the NAIC model includes
provisions that protect personal health information. The health
provisions of the model regulation give health information a
higher level of privacy protection than financial information
receives under GLBA. In general, insurers are prohibited from
sharing protected health information with any other party--
affiliate or non-affiliate--without the express consent of the
consumer to which the information applies (opt in). The 1980
NAIC Model adopted by 17 states contains this same general
rule, and therefore, insurers in those states are already
complying with these provisions. Finally, to promote uniformity
and implementation of privacy protections, the health
provisions of the draft model regulation will not apply to
insurers who are in compliance with the health information
privacy regulations promulgated by the Department of Health and
Human Services (HHS) pursuant to the Health Insurance
Portability and Accountability Act (HIPAA).
satisfying the narab provisions in glba
Following passage of GLBA, the NAIC moved quickly to amend its
Producer Licensing Model Act to comply fully with the NARAB provisions
in GLBA, and earlier this month, the NAIC launched a pilot of the
National Insurance Producer Registry (NIPR). The model act is the
vehicle for States to satisfy the GLBA statutory requirements because
it fully implements the requirements for licensing reciprocity and
uniformity among States. Adoption of the model by a majority of States
by November 2002 will assure that NARAB will not be created. Although
our immediate goal is minimum compliance with GLBA, our ultimate goal
is for all 50 States to be operating under a national system of unified
standards and procedures.
The NAIC is taking several additional steps to improve agent
licensing. In partnership with the National Insurance Producer Registry
(NIPR), a non-profit affiliate of the NAIC, we have been aggressively
investing over the past three years in modernizing our technical
infrastructure to develop a more centralized producer licensing
processing center. As stated previously, earlier this month, NIPR began
a pilot project with four states participating, including Ohio, and we
expect to have all states operational in 2001. Through NIPR, non-
resident agents will be eligible to receive a license on a reciprocal
basis within 24 hours of submitting an electronic application.
At present, the NAIC maintains a regulatory network and centralized
database of 2.6 million of the Nation's 3 million producers. This
information is available to regulators and insurance companies over the
Internet, and is updated daily by automated processes at the State
insurance departments.
Currently, 32 States are online with the Producer Database and the
target is to have all 50 States contributing to PDB between December
2000 and June 2001. Because PDB is a mirror of the State licensing
database, NIPR is creating a single system to automatically process
appointments, terminations, and uniform non-resident license
applications on behalf of individual State insurance departments
against data in PDB within 24 hours of receiving the electronic data
from an insurance company or producer. Approximately 110,000 producer
appointments and terminations are being processed by 24 States through
NIPR monthly right now, and we expect to have the entire system
operational and all 50 States participating in 2001.
The next key step in this process will be the implementation of a
single electronic licensing application. These system improvements will
bring about regulatory efficiencies that far exceed the expectations in
NARAB and set the stage for national uniformity.
going beyond glba and modernizing regulation--national treatment of
insurers
One key area where State regulators are moving beyond the
requirements of GLBA is national treatment of insurers doing business
in multiple jurisdictions. This year, the NAIC established the National
Treatment of Companies Working Group, and gave it responsibility for
identifying regulatory procedures that will treat eligible insurance
companies the same across the Nation. One such procedure involves the
licensing process for an insurer to obtain a certificate of authority
to conduct business in a State. Already, 29 states are participating in
the NAIC's Uniform Certificate of Authority Application (UCAA), and one
more is in transition. The Working Group's goal is to have all 50
states and the District of Columbia using the UCAA by December 2000.
Another goal is standardizing the licensing review process. While
the UCAA provides a uniform application, the Working Group is looking
to expand this effort to also include standardized review criteria
nationwide. NAIC plans to develop a streamlined operating structure
that would give certain companies ``national treatment'' for regulatory
procedures related to company licensing, solvency monitoring, holding
company supervision, approval of mergers and acquisitions, market
conduct reviews, and corporate re-organizations.
At NAIC's National Meeting in Dallas last week, the National
Treatment of Companies Working Group discussed these regulatory
efficiency goals, and set forth a timeline for achieving them in four
progressive steps--
1. Obtain commitments from all NAIC members to participate in the ALERT
program, using the UCAA, by December 2000, and to achieve
active participation by all NAIC members by June 2001. ALERT
stands for ``Accelerated License Evaluation Review
Techniques'', a program that streamlines regulation by
promoting the single license application process, including the
application form and review timelines, which is accepted in all
participating States.
2. Develop ``best practices'' for reviewing significant holding company
transactions and company licensing applications by December
2000 and June 2001, respectively, and encourage all States and
the District of Columbia to administer such reviews on a
consistent and uniform basis.
3. Implement the national treatment process through a memorandum
agreement between June 2001 and June 2002, and continue to
examine whether additional legislative action is need to fully
implement the national treatment initiative.
4. Develop enabling State legislation, if necessary, to provide state
insurance regulators with the legal authority to implement a
national treatment system by June 2003.
The Working Group also discussed possible legal options for
implementing national treatment. Using a model law, memorandum
agreement, interstate compact, and Federal involvement were all
considered. The use of a memorandum of understanding was considered to
be an appropriate vehicle for accomplishing the initial implementation
of the national treatment process in Goal 3. For the long-term, an
interstate compact was considered as a possible vehicle for
implementing national treatment if necessary from a legal and
implementation standpoint.
speeding up the product approval process
The Speed to Market Working Group is responsible for identifying
one-stop filing procedures and a more efficient process for State
regulatory approval of insurance products marketed to consumers. State
regulators recognize that under the current 50-state system, it takes
far too long to introduce a new insurance product. This is not good for
consumers or the insurance industry. In Dallas, this Working Group
appointed two subgroups to focus its efforts on speeding up the product
approval process.
The Coordinated Advertising, Rate, and Form Review Authority
(CARFRA) Subgroup will develop the details for single-point product
filing. CARFRA is a proposal that will assist insurance regulators in
reviewing and approving rate, form, and advertising filings by creating
a new centralized organization specifically tasked with that goal for
participating States. It will provide insurers with a single point of
contact and uniform standards for eligible products. For consumers, it
will speed beneficial insurance products to market while preserving
high quality regulatory review and effective consumer safeguards. At
the Dallas national meeting, the Speed to Market Working Group
announced that a limited launch of CARFRA will occur within the first
quarter of 2001, and assigned the subgroup the responsibility for
developing the operational procedures necessary to implement CARFRA.
A second subgroup, the Improvements in State-Based Systems
Subgroup, which I chair, will evaluate various suggestions for
improving State-based systems. It will review a list of suggestions
that include, but are not limited to:
Implementation of the System for Electronic Rate and Form
Filings (SERFF) in all states. SERFF uses a point-to-point
electronic communication tool where filings are sent from
insurers over the Internet and routed to a State from a central
server;
Agreement on a uniform approach to filing exemptions for
products sold to large commercial policyholders;
Staffing and training of rate, form, and advertising review
units to ensure quality reviews and prompt turnaround time for
filings;
Elimination of any requirements that are not published in
statutes, regulations, bulletins or guidelines;
Evaluation of prior approval requirements and movement toward
market-based regulation;
Improvements to the Market Conduct Examination process; and
Improvements in consumer education.
The Speed to Market Working Group tasked the Improvements in State-
Based Systems Subgroup with the responsibility for developing specific
proposals by the December 2000 NAIC national meeting. The Working Group
also heard comments from interested parties during its meeting in
Dallas. Representatives from consumer interests and various sectors of
the insurance industry provided input and guidance to shape the CARFRA
proposal and encourage improvements to State regulatory processes. The
Subgroups have planned a series of meetings during September and
October, and the entire working group plans to hold another meeting in
November 2000.
facilitating the use of e-commerce
The NAIC E-Commerce and Regulation Working Group, which I chair,
developed a resolution adopted by the NAIC earlier this year endorsing
the Uniform Electronic Transactions Act and issued a self-assessment
guide for use by the states to identify ten (10) potential barriers to
the use of e-commerce. Within the next few weeks, the Working Group
expects to adopt a Model Bulletin for use by the States to implement
many of the recommendations set forth in the self-assessment guide. The
NAIC has been progressive in its work to facilitate the use of e-
commerce, recognizing that both consumers and insurers want the cost
savings and convenience of using the internet to purchase insurance.
ohio is a leader in modernizing state insurance regulation
I am proud to report that the State of Ohio has become a leader in
implementing the policies necessary to implement GLBA and modernize
state insurance regulation. In Ohio, we are committed to fostering a
competitive marketplace for the benefit of consumers and the insurance
industry, and focusing our regulatory resources in priority areas that
add the most value to our work of protecting Ohio consumers. Through
our independent efforts and by implementing the NAIC initiatives, we
are seeing real progress as we continually work to carry out these
objectives.
With respect to GLBA implementation, Ohio currently has in place
privacy laws that exceed the requirements of GLBA, and we plan to
introduce legislation in the near future to make minor procedural
changes to the law to fully comply with GLBA. We have also established
good working relationships with each of our Federal agency counterparts
through personal meetings involving regional heads of the respective
Federal agencies. In addition, Ohio participates on the NAIC team that
regularly meets with representatives of the Federal Reserve Board in
Washington D.C.
Most notably, in the area of agent licensing, Ohio has led the
country. Ohio was the first State that enacted reciprocal licensing for
non-resident agents, and therefore, was the first State to comply with
GLBA's NARAB provisions. In addition, last year, Ohio implemented a
state-of-the-art internet agent licensing system that is regarded as
one of the best in the country, if not the best. Using this system, an
agent can submit an application on-line, pay the application fee on-
line, complete the fingerprinting and background check using an
electronic system, schedule a test on-line, take the test using a
state-of-the art system, receive the exam results immediately after the
test, walk out with a license if successful, and obtain a company
appointment on the same day using our internet appointment process, all
of which takes less than 7 days. Because of this work, Ohio was
selected to be one of the four pilot states for the National Insurance
Producer Registry, which was launched earlier this month. As stated
previously, NIPR will allow one-stop licensing for non-resident agents
in all 50 States.
With regard to insurance regulatory modernization initiatives, Ohio
is also a leader. Just yesterday, I signed two regulatory bulletins
that will allow 81% of all property and casualty insurance products to
be submitted on ``file and use'' basis. I plan to seek legislation that
will move our product filing system to a file and use system for all
appropriate products and exempt certain products and rates from the
filing requirement altogether where appropriate. For example, just
yesterday, I signed a bulletin that exempted from the filing
requirements all Special Filings and Excess Rate Consent Filings. To
support these initiatives, Ohio was among the first--and was the
fastest--to introduce the NAIC-sponsored System for Electronic Rate and
Form Filing (SERFF). SERFF will be a vital tool for implementation of
CARFRA and improving the filing and approval process for products not
selected for the CARFRA process. Ohio has already received 165 property
and casualty filings since March 2000, and we believe the new web-based
version of SERFF, scheduled for release in October 2000, will open the
door to widespread use among the industry and all of the States.
As noted earlier in my testimony, as Director of Ohio Department of
Insurance, I chair the NAIC's E-Commerce and Regulation Working Group,
the goal of which is to facilitate the use of e-commerce, and the
Improvements to State-Based Systems Working Group, the goal of which is
to improve the State-based insurance product approval process.
We look forward to the continued positive impact these initiatives
will have on our work to protect consumers through an efficient and
effective regulatory system.
congress can help improve state regulation
Improvements in several Federal laws affecting State insurance
regulation would help give us all the tools we need to meet the
challenges of the modern marketplace. During Congressional
consideration of GLBA, the NAIC suggested several amendments to Federal
laws that would be useful.
The primary benefit of making the following changes to Federal laws
is to achieve uniform regulatory procedures and national enforcement
quickly by using the existing system of State regulation. The NAIC
proposes that Congress--
Provide State insurance regulators with access to the national
criminal information database (NCIC) through the NAIC or its
affiliates for regulatory purposes and for checking criminal
histories as required by the Federal Insurance Fraud Prevention
Act. (18 USC 1033)
Grant Federal immunity from liability for NAIC and NIPR
database activities related to creating a national licensing
and enforcement system.
Protect the confidentiality of regulatory communications among
NAIC, State regulators, and Federal agencies.
NAIC and its members will be pleased to provide additional
information and assist Congress in adopting Federal legislation to
achieve these goals.
conclusion--state regulators are meeting the glba and modernization
challenge
Working together through the NAIC, Ohio and other State insurance
regulators are well on the way to implementing the provisions of GLBA
as intended by Congress. More importantly, we have shown real progress
in our efforts to do far more than Congress or industry representatives
have asked us to do regarding uniformity, efficiency, and
modernization. We look forward to working with Congress, our Governors
and legislatures, and all other interested parties as we continue to
develop and implement the GLBA required regulations and legislation,
and our State insurance regulation modernization initiatives.
Mr. Oxley. Thank you, Mr. Covington.
The Chair would recognize himself first for a couple of
questions.
Let me indicate, first of all, we appreciate the work that
you and the group have done. There is a lot on your plate. What
obstacles do you see to achieving uniformity and what can
Congress do to help you achieve those goals?
Mr. Covington. Mr. Chairman, certainly there are always
obstacles in the implementation process. But we feel very
confident that we have put ourselves the best position to win
and so we are very optimistic that we can overcome any
obstacles during the implementation process. I think it will
take a concerted effort by all interested parties to come
together and agree on an approach and for moving forward.
Certainly we have different competing interests between
insurers, banking, agents and consumer groups. There will have
to be, as in any public policy, some compromise and some
consensus as we move forward.
With respect to how Congress can--well, let me mention also
that the State legislative process certainly could be an
obstacle. But we are optimistic that we can implement many of
these initiatives without--on our own initiative. We will work
very hard to move forward on those initiatives that we can get
in place very quickly; and if we need to move forward through
the State legislation process, we will certainly do so.
There are a number of----
Mr. Oxley. Let me interrupt, what specifically would the
potential problem be with the State legislatures? You mean in
terms of implementing the reforms or something that would go in
the opposite direction?
Mr. Covington. Mr. Chairman, I think a potential obstacle
could just be time. So the NAIC members have certainly focused
on initiatives that we can implement on our own, on our own
without State legislative approval; and we find that we can do
that in many areas.
One of the things that I will note is the National Council
of Insurance Legislatures has been very supportive of our
efforts. We have worked very closely with them. Again, we feel
very optimistic that they are on board with these initiatives
and the need to modernize our insurance regulatory system. So
we are very optimistic about that process. But we want to move
forward with the reforms we can make.
And then, if necessary, let me highlight that if necessary
and if legally necessary, in some areas, we can work with our
State legislatures to solidify the framework that we establish.
Mr. Oxley. So in response, but our--I asked you
specifically what we could do. The bottom line, as I take it,
is we need to keep watching what you do. But in terms of
moving--in terms of legislation, that would not be helpful at
this point, is that fair?
Mr. Covington. We don't see at this point that legislation
is necessary. We do encourage the committee and thank the
committee for its oversight role, for its monitoring and for
holding us accountable toward--as we move forward in the
regulatory processes.
One thing that Congress may be able to help us do is to
provide access to the National Crime Information Center, the
information that is provided through that Center. That will
certainly help our efforts. We may need help in the area of
confidentiality, as you mentioned earlier. In addition to that,
currently States have indemnity under State indemnity laws and
sovereign immunity; and it may be necessary that the NAIC also
be granted that type of immunity as we work concertedly through
that association.
Those are some specific things that may arise in the
future, and we will certainly come back and work with this
committee and the Congress if we need those.
Mr. Oxley. Thank you.
Let me now recognize the ranking member, the gentleman from
New York.
Mr. Towns. Thank you very much, Mr. Chairman.
Frankel operated in five different States, and the scams he
perpetrated went on for 8 years. Doesn't it clearly indicate
that the failure to detect this fraud is not unique to the
State of Tennessee but instead a common problem for all of the
five States?
Mr. Covington. Well, Congressman Towns, certainly we have
recognized that there are deficiencies in the system. I must
admit that, as you know, I came today to testify on our
modernization initiatives and am not fully prepared to address
that issue. We did not have the issue in Ohio. I am not a
member of the ad hoc task force that the NAIC put together. We
would certainly be happy in the future to provide the
appropriate person from the NAIC, including President Nichols,
to provide a full briefing of our activities to address the
issues that arose in the Frankel matter.
Mr. Towns. Well, can we--I will move on to another subject.
I respect that.
In your statement you asked Congress to provide State
insurance regulators with access, access to the National
Criminal Information Data Base maintained by the Justice
Department. However, the GAO report says Justice officials
claim that the only reason most State insurance regulators do
not currently have access to the criminal history data is
because they lack law enforcement authority. How many State
insurance regulators have authority to enforce criminal laws
which Justice says they need to get access to the Federal
criminal history data base?
Mr. Covington. Congressman Towns, I do not have the
specific numbers, but that is correct that many of our States
do not have law enforcement authority under the current laws.
That is--I have reviewed the ad hoc report in preliminary
detail in a preliminary fashion. I do know that is one of the
recommendations that the ad hoc task force has placed on the
table, that States pursue law enforcement authority under that
statute so they can access that data.
Mr. Towns. Many of the recommendations require further
development by the NAIC committees and implementation by State
legislatures and, therefore, could take a long, long time to
implement. Do you have any idea when you feel this could be
implemented?
Mr. Covington. Congressman Towns, I do not have a precise
estimate on the time that it would take to implement all these
initiatives. I do know that we are working very hard to
implement the initiatives that we can, and there are many that
we can do on our own. We agree that the process today is too
slow. We are working hard. I think, as we have demonstrated
over the last 6 to 9 months, we can act quickly; and we look
forward to addressing those issues in the very near term.
Mr. Towns. Suppose we get into timetables, and if a State
fails to implement the recommendations by some point in the
future would the State lose its NAIC accreditation?
Mr. Covington. Congressman Towns, again, I am probably not
the best person to testify on that matter. There is a detailed
ad hoc report. There is probably--I know what there is another
person that can address those issues more precisely. I do know
that a number of those matters are under consideration.
Mr. Towns. On that note, I yield back, Mr. Chairman. Thank
you very much.
Mr. Oxley. The Chair now recognizes the gentleman from
Iowa, Mr. Ganske.
Mr. Ganske. Thank you, Mr. Chairman. I would note that Mr.
Covington is from Ohio and the lead paragraph in our staff memo
quotes from the Insurance Commissioner of Iowa. It must be just
a coincidence.
I think this is an interesting hearing. I have another
hearing, so I will have to leave after I hear the next panel's
testimony.
I am interested in getting educated on the pros and cons of
some of the proposed solutions for improving the efficiencies
and sharing of insurance. I would, as a caveat, point out that
25 years ago Congress passed a law called the Employee
Retirement Income Security Act that preempted State insurance
regulation in health care and that we have been dealing with
the consequences the last 4 or 5 years here in Congress with,
in my opinion, insufficient oversight of HMO abuses. So when we
look at such things as a Federal charter I think we will need
to learn some lessons from the past on that.
As I look over the request that NAIC is making to Congress,
for instance, utilizing Social Security numbers for licensing
purposes, granting exemptions there the Fair Credit Reporting
Act, providing State insurance regulators with access to
national criminal data bases, granting Federal immunity from
liability for data base activities and protecting the
confidentiality of regulatory communications, all of these
areas involve privacy issues. And it is the privacy issue which
I think will be the major issue involving insurance and
banking, securities, financial services, for the next several
years. That is a Gordian knot to solve the problem so that we
protect consumers and yet at the same time provide for ability
to do research, to utilize those data bases in ways that would
be useful to protect consumers as well as to potentially affect
consumers' privacy. So it is useful, I think, to have this
hearing, but I think at the basic level it is part of a larger
problem that Congress is going to be dealing with.
I must admit that I have a--I think the McCarren and
Ferguson Act has been a good act. As a Republican, I have
spoken on the floor many times on the benefit of State control
and local control, whether it is for education or for insurance
or other things. I think it is correct in that the closer you
can get to the constituent, the citizen, the person affected
with your government, the more common sense you tend to see,
rather than regulations coming out of Washington.
Finally, I would just add as a warning, for those who are
thinking that it might be good to have a Federal charter, just
sometimes be careful for what you wish for. Because you very
well may end up not with one layer but with two. The political
process can get very, very messy. And for those in the business
community who don't want to see additional regulations, I would
be very, very careful on this issue.
With that, Mr. Chairman, I will yield back.
Mr. Oxley. The gentleman yields back.
The Chair is now pleased to recognize the gentleman from
Illinois, Mr. Shimkus.
Mr. Shimkus. I just have one question for Mr. Covington.
In putting together a uniform licensing system, what steps
can the regulators take to ensure that their data bases will be
coordinated with the securities and banking regulator data
bases to integrate oversight and prevent fraud?
Mr. Covington. Congressman, we are certainly committed to
cooperative effort with the Federal agencies, and we have
ongoing dialog currently with all of our partner Federal
agencies to achieve just what you have cited, to try to have
coordination between the information and sharing of that
information. And it is even more important in this day of
convergence through Gramm-Leach-Bliley, and we are very
committed to achieving that objective.
Mr. Shimkus. Can you explain the Coordinated Advertising,
Rate, and Form Review Authority?
Mr. Covington. Congressman, the coordinated advertising
rate and review authority is a mechanism through which we can
have a one-stop, single-filing process through a centralized
facility with uniform standards for application. That is the
basis of what the CARFRA, as we call it, proposal entails.
We have appointed just last week a work group to ferret out
all of the details of that proposal, and will be conducting a
limited launch of that authority in the first quarter of 2001.
It may sound like a simple idea, and it is meant to be simple,
but that is the basics of what CARFRA provides for.
Mr. Shimkus. Thank you, Mr. Chairman. I yield back.
Mr. Oxley. The gentleman yields back.
Mr. Covington, thank you so much for your appearance today.
And best of luck in your endeavors. We will be watching very
closely and keeping close contact with you and all the NAIC
folks regarding this very important issue.
Thank you very much.
Mr. Covington. Thank you, Chairman Oxley, and thank you for
your leadership.
Mr. Oxley. The Chair would call up our next panel: John G.
Turner, Vice Chairman of ING Americas from Minneapolis,
Minnesota, on behalf of the Financial Services Roundtable; Mr.
Drayton Nabers, Jr., Chairman and Chief Executive Officer,
Protective Life Corporation, Washington DC, on behalf of the
American Council of Life Insurers; Philip H. Urban, President
and Chief Executive Officer, Grange Insurance Companies,
Columbus, Ohio, on behalf of the National Association of Mutual
Insurance Companies; Robert V. Mendelsohn, Chief Executive
Officer, Royal & SunAlliance, Charlotte, North Carolina; Glen
J. Milesko, President and Chief Executive Officer Banc One
Insurance Services Corporation, Milwaukee, Wisconsin, on behalf
of the American Bankers Association Insurance Association; Mr.
Ronald A. Smith, President, Smith, Sawyer & Smith Inc.,
Rochester Indiana, on behalf of the Independent Insurance
Agents of America; and Richard J. Hillman, Associate Director,
Financial Institutions and Markets Issues, GAO, here in
Washington.
Gentlemen, thank you all for your appearance. And we will
begin with Mr. Turner. And if we can, if we have enough
microphones to go around, Mr. Turner, I would ask of you and
the panel to keep your statements to 5 minutes so that the
panel has plenty of time to answer questions and develop the
issue.
All of the prepared statements will be made part of the
record and so ordered.
Mr. Turner.
STATEMENTS OF JOHN G. TURNER, VICE CHAIRMAN, ING AMERICAS, ON
BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE; DRAYTON NABERS,
JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PROTECTIVE LIFE
CORPORATION, ON BEHALF OF THE AMERICAN COUNCIL OF LIFE
INSURERS; PHILIP H. URBAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GRANGE INSURANCE COMPANIES, ON BEHALF OF THE NATIONAL
ASSOCIATION OF MUTUAL INSURANCE COMPANIES; ROBERT V.
MENDELSOHN, CHIEF EXECUTIVE OFFICER, ROYAL & SunALLIANCE ON
BEHALF OF THE AMERICAN INSURANCE ASSOCIATION; GLEN J. MILESKO,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, BANC ONE INSURANCE
SERVICES CORPORATION, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION INSURANCE ASSOCIATION; RONALD A. SMITH, PRESIDENT,
SMITH, SAWYER & SMITH, INC., ON BEHALF OF THE INDEPENDENT
INSURANCE AGENTS OF AMERICA; AND RICHARD J. HILLMAN, ASSOCIATE
DIRECTOR, FINANCIAL INSTITUTIONS AND MARKETS ISSUES, GENERAL
ACCOUNTING OFFICE
Mr. Turner. Chairman Oxley, Ranking Member Towns, and
Representative Ganske, I am John G. Turner, Vice Chairman, ING
Americas, and former Chairman and CEO of ReliaStar Financial
Corporation.
ING Americas is part of the Amsterdam-based ING Group. We
are one of the largest integrated financial services
organizations in the world, and after acquisition of Aetna
Financial Services is completed this year, we will have over
$100 billion of assets in the U.S. Worldwide, ING has over 500
$billion in assets under management.
This year marks my 40th year in the life insurance
business. I can tell you from personal observation over time,
the forces for change in the regulatory arena have never been
more compelling.
The Financial Services Roundtable national association,
whose membership is reserved for the 100 largest diversified
financial services firms, including banks, insurance companies,
and securities firms, very much welcomes this opportunity to
testify before you on a very major piece of unfinished business
in the modernization of the American financial system, the
creation of an optional Federal insurance charter that will
parallel the national banking charter.
Let me emphasize at the outset that the Roundtable strongly
favors effective and efficient regulation, regulation that is
market based and serves consumer needs in a competitive and
innovative way.
Mr. Chairman, there has never been a broader consensus on
the need for major structural improvement in the regulation of
insurance. Simply improving the State insurance system given us
by the past may not be sufficient for those insurers that
compete directly with other financial services firms on a
national level. State reform can come, but with 51 regulators,
interstate reciprocity is unlikely to achieve a uniform
national platform. Nonetheless, we do strongly support the
NAIC's very great reform efforts and will continue to work
closely with President George Nichols and his colleagues.
Congress should enact a thoroughly modern, market-oriented
Federal insurance system to promote positive reform in the
States. The case for reform is compelling.
First, and most obviously, we now have a truly national
market for financial services. In each State, to do business,
an insurer must be separately qualified, its agents separately
licensed and its products and forms separately reviewed and
approved under the laws of that State.
The NAIC has promoted model laws, but 51 distinct
jurisdictions must enact them. Each State is free to modify the
model act terms and often does so. Each separate law is then
separately interpreted by the insurance department and courts
of that State.
Legal similarity is, in practical terms, far from legal
uniformity or certainty. The absence of uniform products and
rules, the multiplicity of licensing and filing requirements,
and the resulting inability of insurers to offer uniform
products in a timely manner in response to market needs
inevitably add cost and burden to both providers and consumers.
Second, insurance is a trillion-dollar business that should
operate a seamless, uniform regulatory structure. A Federal
functional regulator is an obvious option that deserves serious
consideration. Insurance touches virtually every household in
this country. It is thus striking and disturbing that no single
national agency has overall expertise in insurance.
An agency with in-depth industry knowledge of insurance
products would serve a number of important policy goals--
effective consumer protection, strong prudential supervision,
the prevention and management of financial crises, and the
fostering of private sector innovation.
Third, resources are a significant issue in a State-only
system. Despite the best efforts of the NAIC and the States,
the quantity and quality of insurance department staff varies
widely among the States. A Federal insurance regulator would
have, for example, the resources to be an effective and
sophisticated regulator of solvency and multinational
companies.
Fourth, in regulation, as in the marketplace, lack of
competition can breed inefficiency and stand-pat attitude.
Competitive choices promote and enhance innovation, efficiency,
quality and governmental performance, benefiting both regulated
companies and customers. A dual Federal-State system produces a
creative and productive tension that tends to improve the
quality of regulation and the business options available to the
private sector. Ending the State monopoly and insurance
regulation will strengthen the entire system and our economy.
And finally, in insurance, unlike other financial services
sectors, there are no legacy systems at the Federal level.
Consideration of new Federal regulatory framework provides
a truly unique opportunity. In designing a new Federal
regulatory framework, we do not have to reengineer or reform.
We have the opportunity to create a brand-new system,
responsive to the rapidly changing marketplace.
In closing, I want to thank you, Mr. Chairman, for holding
this very important hearing and for your commitment to fully
explore this issue. We look forward to working with you over
the coming months, and would be delighted to answer any
questions you might have.
[The prepared statement of John G. Turner follows:]
Prepared Statement of John G. Turner, Vice Chairman, ING Americas
Chairman Oxley, Ranking Member Towns, and Members of the Committee,
I am John G. Turner, Vice Chairman, ING Americas. ING Americas is part
of Amsterdam-based ING Group. We are one of the largest integrated
financial services organizations in the world with over $400 billion in
assets under management. ING Americas is composed of ING's integrated
financial services operations in North America and South America. The
region consists of more than 25 businesses.
On May 1, 2000 ING entered into a definitive agreement to acquire
ReliaStar Financial Corp. The deal was completed on the first of this
month. I served as Chairman of the Board and CEO of ReliaStar. ING US
Financial Services offers individuals and institutions: life insurance
and annuities; employee benefit products and services; life and health
reinsurance; retirement plans; mutual funds; bank products; and,
personal finance education.
My career in the financial services industry spans more than three
decades. During that time, I have witnessed numerous changes at not
only my company, but across the entire financial services industry.
Today, we are at a critical moment in our industry's history.
The Financial Services Roundtable very much welcomes this
opportunity to testify before you on a major piece of unfinished
business in the modernization of the American financial system--the
creation of an optional federal insurance charter that will parallel
the national banking charter. Global competition, the integration of
the financial services industry under Gramm-Leach-Bliley, and the
emergence of the ``wired'' consumer on the Internet lead to the
inescapable conclusion that this task is timely--indeed, long overdue.
The Financial Services Roundtable actively supported enactment of
last year's Gramm-Leach-Bliley Act. While that was indeed an historic
achievement, it did not complete the task of financial modernization.
The Roundtable brings an important perspective to the present
discussion because it is now a financial services association, not just
a banking association. Our evolution parallels the emergence of a
national financial services industry. The Roundtable is a national
association whose membership is reserved for the 100 largest
diversified financial services firms, including banks, insurance
companies, and securities firms. The Roundtable supports the goal of
pursuing the creation of a modern, national insurance charter while
retaining and improving the option of insurers to be regulated through
a state-based system.
Let us emphasize at the outset that the Roundtable strongly favors
effective and efficient regulation, regulation that is market based and
serves consumer needs in a competitive and innovative environment.
There has never been a broader consensus on the need for major
structural improvement in the regulation of insurance. Through two
decades of rapid financial, technological and market changes in the
financial services industry, reforms in the state system unfortunately
have failed to provide the consistency and flexibility necessary to
adequately respond to these changes and consumer needs. The existing
state system may not be ``broken,'' but it clearly has fundamental
problems. All the national insurance trade associations recognize this,
as does the National Association of Insurance Commissioners (NAIC),
evidenced by its own wide-ranging State Regulation 2000 initiative.
Efforts to develop a seamless, functionally more efficient state
regulatory system are underway, and the Roundtable supports these
efforts.
However, simply improving the state insurance system given us by
the past may not be sufficient for those insurers that compete directly
with other financial services firms on a national level. State reform
can come, but with 51 regulators, interstate reciprocity is unlikely to
achieve a uniform national platform. As I stated earlier, we strongly
support the NAIC initiative and will continue to work closely with NAIC
President George Nichols and his colleagues.
Similar to the state/federal banking system, giving insurers the
option of regulation under either a properly structured optional
federal insurance charter or a state-based system will optimize their
ability to serve the economy's future needs by creating a healthy
competitive environment that fosters innovation and market efficiency.
The recent action by the American Council of Life Insurers to support
both reforms takes exactly the right approach, and we applaud them.
The Roundtable believes that our task is to design an insurance
regulatory structure consistent with Gramm-Leach-Bliley and the global
financial services marketplace while maintaining and enhancing consumer
protections. We have the opportunity to build from scratch a state-of-
the-art, twenty-first century structure to serve the existing, but
still growing and evolving, financial services industry. To do less
will compromise the U.S. financial services industry relative to its
foreign competitors and, more importantly, ill serve American
consumers.
the case for the optional federal charter
Congress should enact a thoroughly modern market-oriented federal
insurance system to promote positive reform in the states. In the past,
financial reform has often been impelled by a crisis. There is no
crisis now, and we should not wait for one. The case for reform is
compelling.
First, and most obviously, we now have a truly national market for
financial services. Of all the financial services companies, only
insurance is predominantly regulated on a state-by-state basis. In each
state, to do business, an insurer must be separately qualified, its
agents separately licensed, and its products and forms separately
reviewed and approved under the laws of that state. The NAIC has
promoted model laws, but 51 distinct jurisdictions must enact them.
Each state is free to modify the model act terms, and often does so.
Each such law is then separately interpreted by the insurance
department and courts of that state. Legal similarity is in practical
terms far from legal uniformity or certainty. Multiplicity and
inconsistency are inevitable.
The absence of uniform products and rules, the multiplicity of
licensing and filing requirements, and the resulting inability of
insurers to offer uniform products in a timely manner in response to
market needs inevitably add cost and burden to both providers and
consumers. Inefficiencies and lack of flexible rules in many insurance
departments can compound the problem by failing to respond, in an
adequate and timely fashion, to insurers' innovative attempts to meet
marketplace demands. This problem is exacerbated by the proliferation
of complex hybrid products combining elements of securities, banking
and insurance. This phenomenon will only increase as the Internet and
other technologies drive the marketplace.
Gramm-Leach-Bliley has given rise to a striking example of how the
state system works to the disadvantage of the insurance industry in a
nationwide financial services economy. This new law includes demanding
privacy provisions that require all financial services companies,
including insurance firms, to develop substantial compliance and
disclosure programs. This major set of tasks will take many companies
more than a year to complete. In early March, seven federal regulatory
agencies coordinated to issue essentially the same proposed rules,
which were then promulgated as substantially identical final rules. The
federal agencies also have provided practical relief by making
compliance with these rules voluntary for the banking, securities, and
other non-insurance financial services firms under their jurisdiction
between November 2000 and July 2001.
In contrast, the NAIC in mid-June released a draft model state
regulation for comment. After the comments have been received and
digested, a final model rule must then work its way through the NAIC
committee and board review process before being officially released. Of
course, final NAIC model rules will not automatically take effect in
any state. Each of the 51 insurance departments must decide what it can
issue and when. Each must also decide whether it can and will provide
compliance relief until July 2001 parallel to what the federal agencies
have announced and the NAIC has recommended. Obviously, the timetable
for insurance is going to be much tighter than for any other
``financial'' services company, all of which already know the rules
with which they must comply. The failure of the state system to produce
timely rules has left insurers in regulatory limbo and will give many
too little time to comply. We cannot wait for them to play catch-up. To
be sure, the marketplace won't wait.
Second, insurance is a trillion-dollar business that should operate
under a seamless uniform regulatory structure. A federal functional
regulator is an obvious option that deserves serious consideration.
Insurance touches virtually every household in this country. It is thus
striking--and disturbing--that no single national agency has overall
expertise in insurance. To be sure, a number of federal agencies,
including the Securities and Exchange Commission (SEC), the Labor
Department, and the Federal Emergency Management Agency (FEMA),
understand important aspects of the insurance business. However, this
expertise is fragmented and incomplete.
This industry and the economy generally would benefit from the
presence of an agency with in-depth industry knowledge of insurance
products within the national government. The integration of financial
services organizations and financial products and globalization of all
financial markets increases the need for a federal agency expert, if
not advocate, regarding insurance. As we have seen in banking and
securities, such an agency serves a number of important policy goals:
effective consumer protection, strong prudential supervision, the
prevention and management of financial crises, and the fostering of
private sector innovation.
Third, resources are a significant issue in a state-only system.
Despite the best efforts of the NAIC and the states, the quality and
quantity of insurance department staff varies widely among the states.
A federal insurance regulator would have, for example, the resources to
be an effective and sophisticated regulator of solvency
Moreover, as American insurers expand internationally to serve an
increasingly global financial marketplace, they will need a credible
home country regulator. It will be difficult for states to serve as an
effective regulator of multi-national companies.
Fourth, in regulation as in the marketplace, lack of competition
can breed inefficiency and stand pat attitudes. Competitive choices
promote and enhance innovation, efficiency and quality in governmental
performance--benefiting both regulated companies and customers. A dual
federal-state system produces a creative and productive tension that
tends to improve the quality of regulation and the business options
available to the private sector. Indeed, the NAIC's SR2000 initiative
itself suggests the merits of a dual system, because it clearly
responds to the movement among insurance companies to develop a federal
charter option. Ending the state monopoly in insurance regulation will
strengthen the entire system and our economy.
In the dual banking system, recent history is replete with
examples. Without belaboring the point, undoubtedly the healthy
competition between the Federal Reserve and Comptroller of the Currency
(OCC) has permitted innovation in the marketplace. ``Wild card''
statutes enacted at the state level (which allow state banks to engage
in all national bank activities without an explicit and specific state
authorization) further illustrate the point. The prominence of state
chartered banks in New York and Alabama and the vitality of the state
banking system across the country five years after national banks
gained interstate branching authority demonstrate that states can and
do effectively provide a competitive alternative.
Finally, in insurance, unlike other financial services sectors,
there are no legacy systems at the federal level. Consideration of a
new federal regulatory framework provides a unique opportunity. In
designing a new federal regulatory framework, we do not have to re-
engineer or reform. We have the opportunity to create a new system
responsive to the rapidly changing marketplace. We need not, for
example, perpetuate an outmoded system of rate and form regulation. It
will be possible to incorporate the best in the state system, and at
the same time modernize based on a contemporary appreciation of the
power of market solutions and a full understanding of the implications
of technology and the innovations that have occurred in the financial
markets.
In closing, I want to thank you, Mr. Chairman, for holding this
important hearing and for your commitment to fully explore this issue.
We look forward to working with you over the coming months. I will be
delighted to answer any questions you might have.
issues in developing a modern federal-state insurance structure
While the case for a federal chartering option is compelling, we
have no illusions about the substantive and political difficulty of
enacting such a law. Gramm-Leach-Bliley demonstrates that reform of the
financial regulatory structure can occur without a crisis or sense of
overwhelming problems, but that financial modernization legislation
takes a long time and is not easy. Experience also suggests that as a
bill moves through Congress rigorous and spirited debate and the
crafting of concrete answers will not only improve the bill, but also
have the salutary effect of stimulating reforms at the state level.
As we will sketch out briefly, a large number of issues must be
resolved.
1. Nature of the Federal Charter Alternative
Perhaps the most basic question is whether the new federal
insurance system should be completely federal or whether it should
leave national companies subject to some state law. One suggestion
might be to couple enactment of a new federal system with amendments to
the McCarran-Ferguson Act that would provide federal enhancements to
foster a more seamless state-based system for multi-state insurance
providers that remain state chartered.
The answers to these basic questions will establish the outlines of
the entire system. At this early stage in the debate, the Roundtable
has not determined its position on this set of issues. At the moment,
we are inclined to recommend testing the proposition that the immediate
goal should be a complete, free-standing federal charter system,
including a federal guaranty arrangement.
The Roundtable recognizes that the insurance business and insurance
regulation has considerable commonality across lines (property and
casualty, health, life) and thus, any proposed alternative charter
should extend to all lines.
2. A New Federal Regulator
A number of federal options and models already exist for the
insurance chartering agency: (1) A new insurance bureau within an
existing cabinet department; or (2) A new independent agency.
Related issues are whether it should issue only a single type of
charter, authorizing the charter recipient to engage in all types of
insurance activities (including life, health, p&c) or separate charters
for specified lines of business. Determination of appropriate entry
standards and requirements for both new charters and changes in control
will be a critical initial task.
Further, if a guaranty arrangement applying federal insurance law
is to be established, should it be independent of the chartering
agency? An independent agency?
The possibility of creating a self-regulatory organization (SRO)
and its scope of responsibility should be considered. Market conduct
and consumer protection, including the licensing and supervision of
insurance producers, might be appropriate. Gramm-Leach-Bliley included
provisions that will lead to the establishment of a National
Association of Registered Agents and Brokers (NARAB) in three years
unless a sufficient number of states enact state agency laws permitting
interstate agency operations on a reciprocal basis. The NAIC's SR2000
initiative seeks to obviate the need for NARAB by meeting this
deadline.
Finally, the issues of which courts will have jurisdiction to
resolve disputes involving federally regulated insurers and which law
will be applied must be resolved. Federal courts might be granted
jurisdiction over federally regulated entities and if so must determine
what substantive law to apply (i.e. federal law, state insurance law or
a combination of the two).
3. Consumer Protection Issues
Consumer protection is an integral part of state regulation and
strong consumer protections will necessarily be part of a federal
charter structure. A federal charter offers many benefits to consumers,
such as nationwide application of the laws and uniformity of
application across state lines. Additionally, the legislation could
provide consumers with a list of prohibited insurance sales,
underwriting, and claims practices. This would give consumers upfront
confidence that insurers must act properly or face penalties. Further,
a federal market conduct system could be established which would
provide periodic marketplace ``check-ups'' to identify inappropriate
and illegal activities by companies.
4. Solvency Regulation
A core function of the federal regulator will be solvency
regulation. A threshold issue is whether the existing state risk-based
capital regime should be adopted as-is, or rethought. One point of
reference would be the capital standards of the European countries. The
question of an early warning system for insurer weakness should be
considered. The banking ``prompt corrective action'' regime tied to
capital levels is an option to consider, but may not be the most
appropriate model.
Risk-oriented examinations and supervision are being used
increasingly for major banking organizations, with far less attention
to the traditional asset-based ``snapshot'' on-site examinations.
Creation of a federal charter should include a thorough consideration
of the most appropriate types of examination for each type and size
category of insurer.
5. Addressing Insolvencies
Effective solvency regulation should make insolvencies a rare
occurrence, but should they occur the principal choice is whether
federally chartered companies should be subject to the guaranty system
under federal insurance law or state insurance law. If federal
insurance law is applied, the question then is whether state-chartered
insurers might participate in it, as an alternative to participation in
any state arrangement. One possible federal ``backstop'' mechanism
would be an assessable mutual reinsurance company. Federal solvency
oversight would presumably follow, as is the case today with insured
state banks. Another option would be to establish a federal bankruptcy
regime for federally chartered insurers.
Proponents of applying federal insurance law argue it makes the
federal charter more attractive and should serve to enhance the stature
of federal insurers as they expand internationally. It also would go
hand-in-hand with the regulation of federal insurers. In view of the
continuing debate over federal deposit insurance, lender of last resort
issues, and the possibility of Treasury funds as the ultimate backstop,
and the potential impact on existing state guaranty systems, this topic
should be thoroughly analyzed.
As the Congress debates the merits of creating an optional federal
charter for the insurance industry I want to underscore the following
point. There can only be one guaranty structure for the industry. In
the area of solvency, single supervision and implementation is
imperative.
6. Holding Company Issues
The threshold question is whether any federal insurance holding
company regulation or supervision is needed at all, particularly in
light of the availability of financial holding company status under
Gramm-Leach-Bliley or savings and loan holding company status under the
Home Owners Loan Act.
Affiliate transaction rules to protect the integrity of an
insurance company affiliate and the interests of policyholders would be
necessary. It has also been suggested that an insurance source of
strength policy be adopted that would parallel the one in bank holding
company law for the benefit of bank subsidiaries. Neither of these
require full holding company regulation. If a federal mutual insurance
company charter is to be created, then a mutual insurance holding
company statute should be considered as a corollary.
7. A System that Places Maximum Reliance on Competitive Markets
Insurance is a highly competitive field, and experience has shown
that reliance on the market is the best way to give consumers good
insurance products at fair prices that reflect the risks involved.
However, compared to other financial sectors, insurance is in many ways
subject to burdensome and time-consuming over-regulation. In banking
and securities, twenty years ago Congress removed rigid, prescriptive
regulation that prevented firms from being able to respond to consumer
needs. These changes benefited consumers through better prices, wider
product offerings, and more responsive providers. In insurance,
Illinois has shown the way through a market-based system for
determining insurance prices and products. That state has one of the
most competitive, pro-consumer insurance environments in the United
States. That is a model to be studied in the development of a new
federal system. We would note that in conjunction with the creation of
a competitive, market-based federal system, existing federal insurance
antitrust laws should be reconsidered to determine how best to extend
certain needed limited antitrust protections to federally-chartered
insurers.
If markets are allowed to flourish with rates and coverages
established by competition, the need for government-mandated
involuntary or residual markets will be greatly reduced because most
individuals or businesses seeking insurance will have already obtained
it in the market. On the other hand, it has been demonstrated that
politicized (as opposed to risk-based) pricing can destroy the
voluntary market. If competitively determined actuarially based rates
are the focus of any federal insurance charter, then residual market
issues will be minimized.
8. Taxation
State and federal tax issues must be considered. Federal charter
reform should be tax neutral as far as the states are concerned.
9. Transition Period
Implementing these changes will require some time especially with
respect to issues such as creating the proper backstop mechanism for
insolvent insurers.
The Financial Services Roundtable urges the Committee to begin
actively developing legislation creating a federal insurance charter
and agency and to modify the McCarran-Ferguson Act to maximize the
ability of the states to modernize the state insurance regulatory
system. This is the next major task for financial modernization, and
the needed legislation must be developed from a financial services
perspective. The Roundtable with its diverse membership is especially
well-suited to work with the Committee and other interests to craft
legislation that we can all be proud of. We stand ready to do so. Thank
you for your time and attention.
Mr. Oxley. Thank you, Mr. Turner.
Mr. Nabers.
STATEMENT OF DRAYTON NABERS, JR.
Mr. Nabers. Thank you, Mr. Chairman. The ACLI is the
principal trade association for life insurance companies. From
our perspective, your hearing is quite timely, and we very much
appreciate your interest and involvement.
My message this morning is simple and urgent. The insurance
business is a vital component of the U.S. economy. It provides
a wide array of essential financial and retirement security
products and services to all segments of the American public.
However, for our business to remain viable and serve the needs
of our customers effectively, the present system of insurance
regulation must become far more efficient.
Please don't misconstrue our agenda. We are not seeking
less regulatory oversight. Effective consumer protections are
absolutely essential to us. So is appropriate regulation of
company solvency.
What we are calling for is much more efficient
administration of the statute's rules and regulations to which
we are subject. The current regulatory environment is
unacceptable. That is a consensus within almost all quarters of
the insurance industry, and it is a consensus that we believe
is broadly shared by our regulators.
As the financial marketplace has evolved, our system of
insurance regulation has not kept pace. The present system was
instituted at a time when insurance was not even deemed
interstate commerce. As a consequence, many of the
underpinnings contemplate companies doing business only within
the borders of a single State. Today, most life insurers do
business in multiple jurisdictions, if not nationally or
internationally.
The most serious problem we confront is the difficulty in
bringing new products to market. Life insurance must get new
products and disclosure statements approved on a State-by-State
basis. For a product to be introduced nationally, there are 51
different laws with their accompanying regulations to be
complied with. The process of getting approvals for national
distribution is extremely costly, cumbersome and enormously
time consuming. It can take a year or more to complete, and in
some instances, considerably longer.
There are a number of other significant problems with the
current regulatory system, including agent licensing, company
licensing and market conduct examinations. These and other
concerns are identified and prioritized in the material at the
end of the written statement we have submitted.
After more than 2 years of study, the ACLI board of
directors reached a decision in June on how to move ahead with
its regulatory reform efforts. Its decision was to address the
issue on two tracks, each with an equal and very high priority.
Under the first track, the ACLI will redouble its effort to
work with the States and the NAIC to modernize the State-based
system. Under the second track, the ACLI will develop draft
legislation providing for an optional Federal charter of life
insurers, such as Mr. Turner discussed. No decision has been
made on how to proceed once that drafting process is completed.
Let me say a few words about what the ACLI is doing on each
of these tracks. First, the NAIC must be commended for its
effort this year to overhaul and modernize the State insurance
regulation. Over the last year, I have had the singular
pleasure to work closely with Kentucky Insurance Commissioner
and NAIC President, George Nichols, who is with us or was with
us earlier this morning. Commissioner Nichols has been tireless
and courageous in his efforts to forge a consensus among the
regulatory community on a comprehensive plan for modernizing
State regulation.
The NAIC leadership and many other forward-looking
regulators, including Commissioner Covington, who spoke to us
earlier, deserve great credit for recognizing the critical need
for reform and then taking swift action this year to develop an
agenda for change. We realize that the NAIC alone cannot make
regulatory reform happen. Governors and State legislators must
work hand in glove with their insurance regulators to fashion a
regulatory system that promotes efficiency across State lines
and enhances important consumer safeguards.
We believe State regulation will always be a fundamental
part of our regulatory framework. We intend to work with the
States for as long as it takes to see State regulation
modernized appropriately.
At the same time, the ACLI board thought it essential to
give serious consideration to an optional Federal charter for
life insurers. Many of our companies are convinced that the
insurance business urgently needs a dual charter system
analogous to those presently found in the commercial banking
thrift and credit union businesses.
At present, well over 200 ACLI and member company
representatives are working on the details of the optional
Federal charter legislation. We hope to have the drafting
process completed by the end of the year, at which time our
board will consider next steps.
As the States and the NAIC move forward, they may conclude
that they need the assistance of Congress to achieve the degree
of uniformity that they and we seek. The ACLI would support
that concept, and we ask that you keep an open mind to it. And
we at the ACLI may conclude that it is necessary to present you
with a proposal for the creation of an optional Federal charter
for life insurers. We ask that you keep an open mind to that
possibility as well.
Mr. Chairman, I hope our testimony gives you and the
members of the subcommittee a sense of the importance we place
on reforming and revitalizing the insurance regulatory system.
And I reiterate that we are not seeking to weaken insurance
regulation, but rather to make it operate more efficiently.
That concludes my remarks. I would be pleased to answer any
questions which you or members of the subcommittee might have.
And thank you very much for inviting me.
[The prepared statement of Drayton Nabers follows:]
Prepared Statement of Drayton Nabers, Jr., Chairman & CEO, Protective
Life Insurance Company on Behalf of the American Council of Life
Insurers
Mr. Chairman and members of the Subcommittee, my name is Drayton
Nabers, and I am Chairman and CEO of Protective Life Insurance Company
and Chairman of the Board of Directors of the American Council of Life
Insurers (ACLI). The ACLI appreciates the opportunity to appear before
you this morning to present the views of life insurance companies on
the subject of insurance regulation and the pressing need to bring our
system of regulation into line with the needs and circumstances of
today's marketplace. The ACLI is the principal trade association for
life insurance companies, and its 435 member companies account for
approximately 75% of the life insurance in force in the United states.
My message to you this morning is both simple and urgent. The
insurance business is a vital component of the U.S. economy, providing
a wide array of essential financial and retirement security products
and services to all segments of the American public. However, for the
insurance business to remain viable and serve the needs of its
customers effectively, our system of insurance regulation must become
far more efficient. This is not a call for less regulation. It is a
call for strong regulation administered efficiently, preserving the
paramount importance of effective solvency regulation and appropriate
consumer protections.
I would like to cover three points this morning. First, why
regulation is so important to us at this juncture. Second, what the
ACLI has been doing to assess the current regulatory environment and
identify areas that are in need of improvement. And third, the options
for improvement we are focusing on and how we are pursuing them.
importance of efficient insurance regulation
As the members of this Subcommittee can appreciate more than most,
the marketplace environment in which life insurers and other financial
intermediaries compete has changed dramatically in the past several
years. Importantly, the role of regulation in this new competitive
paradigm has increased significantly.
Historically, life insurers competed only against other life
insurers. Whatever the inefficiencies of insurance regulation,
companies incurred them equally. Existing companies had learned how to
cope with the unwieldy regulatory apparatus, and potential new entrants
almost always looked to existing companies and charters because of the
difficulty of creating a new one. The status quo, while often
frustrating, did not present insurers with serious competitive
problems.
Today, the situation is radically different. Life insurers, as
providers of investment and retirement security products, find
themselves in direct competition with brokerages, mutual funds, and
commercial banks. These non-insurance firms have far more efficient
systems of regulation, often with a single, principal federal
regulator. Without question, the regulatory efficiencies they enjoy
translate into very real marketplace advantages. Our system of
insurance regulation now stands as perhaps the single largest barrier
to our ability to compete effectively.
In the context of this new competitive environment, insurers'
inability to bring new products to market in a timely manner is the
most serious shortcoming of the current regulatory system. National
banks do not need explicit regulatory approval to bring most new
products to market on a nationwide basis. Securities firms typically
get regulatory approval for new products in several months. By
contrast, life insurers must get new products and disclosure statements
approved in each state in which the product will be offered, and
different jurisdictions often have widely divergent standards,
interpretations, and requirements applicable to identical products.
Without question there are individual states that are quite prompt in
reviewing a company's product form filings. Others are not. And the
problem, of course, is getting approval in multiple jurisdictions,
which is extremely costly, extremely time consuming, and can take a
year or more--and in some instances much longer.
The advent of Gramm-Leach-Bliley and an increasingly diversified
financial services landscape will only intensify concerns in this area.
For example, there is evidence that firms having both insurance and
securities operations are allocating capital away from the insurance
unit due largely to the inefficiency of the insurance regulatory
system. New securities products can be brought to market in a more
timely and cost-effective manner than their insurance counterparts.
Over the long run, the implications to insurers and their customers of
these adverse capital allocation decisions are serious, and they can be
expected to worsen as consolidation and cross-industry diversification
continue.
Even with respect to products such as whole life insurance, which
have no direct analog in the banking or securities businesses, we face
competition from other providers of financial services for the
consumer's attention and disposable income. Moreover, the costs of
regulatory inefficiency are necessarily borne directly or indirectly by
the public.
The present state-based system of insurance regulation was
instituted at a time when ``insurance'' was not deemed to be interstate
commerce. Consequently, the underpinnings of that system--which remain
pervasive today--contemplate doing business only within the borders of
a single state. Today, most life insurers do business in multiple
jurisdictions if not nationally or internationally. And, the system has
been cumulative, with new laws, rules and regulations often added but
old ones seldom eliminated. In short, our system of regulation has
failed to keep pace with changes in the marketplace, and there is a
very wide gap between where regulation is and where it should be.
For many life insurers, making regulation more efficient is now an
urgent priority. Companies no longer believe they have the luxury of
being able to wait for years and years while incremental improvements
are debated and slowly implemented on a state-by-state basis.
acli study of insurance regulation
By the late 1990s, life insurers had concluded that it was
imperative for the industry to address the issue of regulatory reform.
In September of 1998, the ACLI Board of Directors instructed the
association to undertake a detailed study of life insurance regulation.
The objective of this study was to pinpoint those aspects of
regulation--both state and federal--that are working well and those
aspects that are hindering insurers' ability to compete effectively and
thus in need of improvement. This study broke life insurance regulation
down into 35 individual elements (e.g., agent and company licensing,
policy/contract form approval, solvency monitoring, guaranty
associations, nonforfeiture). Individual elements were then rated based
on eight factors (uniformity, speed/timing, cost, objective achieved,
necessity/relevance, expertise/capacity, sensitivity to industry needs/
views, and enforcement/penalties) and assigned one of four overall
``scores'' based on the eight factors. The overall scores were
excellent, good, needs improvement, and unsatisfactory.
This study was completed in November of 1999 and revealed
widespread dissatisfaction with the current regulatory system. No
element of regulation was rated ``excellent,'' 14 elements were rated
``good,'' and 21 of the 35 elements received negative scores, with 16
rated ``needs improvement'' and five rated ``unsatisfactory.''
Taking into account the problems with the present regulatory
environment identified in the first part of the study, a second phase
evaluated possible avenues for improvement. While a number of
regulatory models were considered, only three were viewed as having
significant potential: improving the state-based system; federal
(national) standards administered by the states; and an optional
federal charter. A forth option, regulation by state of domicile, was
considered in some detail, but was viewed as more problematic than the
other three. The study drew no conclusions as to which of these options
should be pursued.
The study concluded that life insurers generally believe the laws
and regulations on the books are necessary and appropriate. However,
these laws are seldom uniform across all states and, even where
uniform, are frequently subject to divergent applications and
interpretations. Having to comply with even uniform laws 50+ times is
costly and time consuming. When those laws differ and when
interpretations of identical or similar laws differ significantly
state-to-state, an insurer's ability to do business in multiple
jurisdictions is severely hindered. Given these considerations, the
life insurers do not seek diminished regulation. Rather, they seek a
far more efficient means of administering the laws and regulations to
which they are now subject.
A copy of the ACLI report, entitled ``Regulatory Efficiency and
Modernization: An Assessment of Current State & Federal Regulation of
Life Insurance Companies and an Analysis of Options for Improvement,''
is being made available separately to provide additional background on
this issue.
prioritization of concerns
The ACLI's efforts to modernize the life insurance regulatory
system have from the outset been spearheaded by chief executives of our
member companies. These executives have set the agendas, orchestrated
the activities, and established the priorities. As the ACLI completed
its study of regulation, these CEOs concluded that they should
prioritize the shortcomings identified in the report for two reasons:
first, to explain more precisely to our state regulators which concerns
are the most pressing from our perspective, thereby enabling state
regulators to better set their own agenda for change; and second, to
assist the ACLI in evaluating its own options for regulatory reform.
The ACLI surveyed all its member company CEOs late last year to
identify their most prominent concerns about the current regulatory
system. Each CEO was asked to categorize all the problem areas
identified in the report as a ``critical problem,'' a ``major
problem,'' a ``minor problem,'' or ``not an issue.'' They also selected
the five elements of life insurance regulation they felt should be the
ACLI's top priorities for regulatory reform. And finally they selected
the one element of regulation they felt was the most critical problem
facing their company.
The following are the principal conclusions drawn from the survey:
Policy form/contract approval (speed to market) is clearly the
one element of regulation CEOs believe is most in need of
reform.
Although the level of concern regarding other elements did not
come close to that of policy form/contract approval, CEOs did
identify others as in critical need of reform. Over half of the
CEOs found agent appointments, agent licensing, replacements,
reserving and valuation actuary opinion, market conduct
examinations, company licensing, charter authority,
advertising, state taxation of life insurance companies, and
statutory accounting to be critical or major problems.
All elements relating to authority to do business were
assigned a fairly high priority among CEOs. Elements relating
to financial regulation, on average, were assigned a lower
priority.
The Executive Summary of the CEO survey is appended to this
statement.
acli policy
In June of this year, the ACLI Board of Directors reached a policy
decision on how to proceed with its regulatory reform project. Its
decision was to address regulatory reform on two tracks. Under the
first track, the ACLI will work with the states and the National
Association of Insurance Commissioners (NAIC) to improve the state-
based system of insurance regulation. Under the second, the ACLI will
develop draft legislation providing for an optional federal charter for
life insurers. Both tracks were given equally high priority and are
discussed below.
track one--improving the state-based system of regulation
Improving a state-based system of regulation has never really been
an ``option'' for the ACLI: rather, it is a given. While substantial
changes to the present system must be made, regulation of insurance by
the states will always be a fundamental part of our regulatory
environment.
For this reason, the ACLI Board directed the association to
redouble its efforts to work with state insurance regulators, the NAIC,
and state legislators to reform state regulation in a way that
addresses the shortcomings identified in the ACLI study. The Board made
clear that there will be no higher priority at the ACLI. This aspect of
our regulatory reform effort is being overseen by a group of company
chief executives and is chaired by Sy Sternberg, the chairman-elect of
the ACLI and Chairman, President and CEO of New York Life.
This group has worked very closely with the NAIC and its leadership
as the states have moved forward to implement their agenda for state
regulatory reform outlined in a document adopted earlier this year
entitled Statement of Intent: The Future of Insurance Regulation. The
ACLI and its member companies have been making every effort to provide
the NAIC with thoughtful and detailed input designed to help implement
this statement of intent successfully. The focus of our efforts is in
those areas identified by both the NAIC and the ACLI as particularly
important, to wit: product regulation (speed to market); producer
licencing; market conduct examinations; privacy; and so-called
``national treatment.''
From the ACLI's perspective, the yardstick for gauging the success
of regulatory reform in the principal areas where change is necessary
is quite simple: uniform standards; consistent interpretations of those
standards; and a single point of contact for dealing with multiple
jurisdictions. Only in this way will insurers doing a national business
be able to operate effectively and provide their customers with the
products and services they are demanding.
The NAIC and its leadership deserve credit for the way in which
they have stepped up to the task of developing a strategy for
implementing meaningful reform. In a very short period of time, they
have forged a strong consensus among the states for progressive change
and set forth a conceptual blueprint for action. While the true measure
of success, of course, will be the actual implementation of appropriate
reforms, the NAIC has shown strong commitment and effort over the
course of the last year.
From the ACLI's perspective, this effort to improve state insurance
regulation has no set timetable for completion. While we believe it is
imperative to move quickly, we will pursue the goal of an efficient
state-based system of insurance regulation regardless of how long it
takes to implement.
track two--optional federal charter
At the same time the ACLI Board reaffirmed its commitment to
improve state regulation, it also directed the association to draft
legislation providing for an optional federal charter for life
insurance companies. The ACLI Board has not made any decision to seek
the introduction and passage of such legislation in Congress once the
drafting work has been completed. That decision will be made at a later
date taking into account a number of relevant factors.
The decision to draft optional federal charter legislation reflects
several different perspectives within our membership. A number of
companies believe the insurance business is badly in need of a dual
regulatory system analogous to that presently found in the commercial
banking, thrift, and credit union businesses. Such a system enables
institutions to select a state or federal charter based on the
particular needs and circumstances of their operations. For example,
companies doing business in multiple jurisdictions might be more
inclined to opt for a federal charter so that they will have to deal
with only a single regulator. On the other hand, companies doing
business in a single state might find a state charter to be far more
practical and cost-effective. Other companies are skeptical that at the
end of the day individual state regulators and state legislators will
be able to cede authority to the extent necessary to implement a system
of uniform, efficient state regulation. Although motivations might
differ, there is a strong consensus within the ACLI membership that
serious consideration of an optional federal charter is a necessary and
appropriate step at this time.
As with the effort to improve state regulation, the ACLI's optional
federal charter project is being overseen by a group on CEOs, and I
chair that group. A comprehensive drafting process is now under way
involving well over 200 ACLI and member company representatives. Our
goal is to have draft legislation in hand by the end of the year for
further consideration by the ACLI Board.
The ACLI's efforts in this regard involve only the details of how
the life insurance business should be regulated. While a federal
insurance regulator would certainly have the authority to regulate all
lines of insurance, the ACLI is deferring to the property and casualty
and health insurance businesses for the specific regulatory
requirements appropriate to those lines.
conclusion
Mr. Chairman, I hope this statement gives you and your Subcommittee
a clear sense of the importance we place on reforming and revitalizing
the insurance regulatory system. The current framework is clearly
unacceptable, and that fact is generally acknowledged today by
regulators and regulated alike.
It is worth reemphasizing that our agenda here is not deregulation
of life insurers but more efficient administration of laws and
regulations, particularly for companies doing business on a multi-state
or national basis. Strong regulation, both in terms of assuring company
solvency and providing protections to insurance consumers, is in the
best interests of our business in the short and long term. The ACLI
fully supports that goal.
In sum, we would be remiss if we did not fully explore all viable
alternatives to achieving a more efficient and effective insurance
regulatory environment. That is why the ACLI is pursing the issue on a
two-track basis. State regulators are to be commended for the progress
they are making in addressing the issue. Nevertheless, when achieving
meaningful reform entails gaining agreement by more than 50 regulators
and legislatures and who will need to cede administrative
responsibilities to central decision makers, the challenge is certainly
daunting.
As the states move forward, they may conclude they need the
assistance of Congress to reach the degree of uniformity they seek. The
ACLI would support that concept, and we ask that you keep an open mind
to it. By the same token, we may conclude that it is necessary to
present you with a proposal for enacting legislation creating an
optional federal charter for life insurers. We ask that you keep an
open mind to that possibility as well. The need to reform the insurance
regulatory system is simply too important to foreclose any reasonable
alternatives.
Mr. Chairman, the ACLI again appreciates the opportunity to present
the views of its member life insurance companies on the importance of
insurance regulatory reform. We would be pleased to provide you and the
members of the Subcommittee with any additional information that might
be helpful as your consideration of this critical issue continues.
Mr. Oxley. Thank you, Mr. Nabers.
Mr. Urban.
STATEMENT OF PHILIP H. URBAN
Mr. Urban. Good morning. Mr. Chairman and members of the
House committee, my name is Philip H. Urban. I am President and
Chief Executive Officer of the Grange Insurance Companies, and
I am testifying today on behalf of the Alliance of American
Insurers, the National Association of Independent Insurers, and
the National Association of Mutual Insurance Companies, which
together represent more than two-thirds of the property
casualty insurance industry. I appreciate the opportunity to
testify on an issue vital to my company's remaining competitive
in today's financial services marketplace.
My company and the others who are members of the three
trade associations have been strong proponents of State-based
insurance regulation. State regulation is simply the best
public policy for the business of insurance and for your
constituents.
In my own State of Ohio there are regulatory conditions
that are conducive to competition, but at the same time
protective of consumers' rights. However, changes in markets
and technology demand that State-based insurance regulation be
modernized. The States, working with industry and the NAIC, can
achieve regulatory modernization. The National Conference of
State Legislatures, in partnership with the National Conference
of Insurance Legislators, will soon undertake an evaluation of
modernization options at the State legislative level.
At its March 2000 meeting, the NAIC adopted a ``Statement
of Intent'' which identified nine areas in State insurance
regulation that need modernization. One objective of this work
is to make improvements in processes that will result in
products being more promptly offered to consumers.
Most States require a property casualty insurer to obtain
prior approval from the insurance regulator in order to
introduce a new product or modify an existing one. States could
resolve this problem today by adopting a market-driven approach
to rate and form filings.
The essence of our public policy argument is quite simple.
Companies doing business across the country or in a single
State need to be able to serve markets with a minimum of
difficulty. Open competition regulation would free regulators
from the onerous task of approving countless rate and form
filings and would shift the focus to monitoring business
practices and ensuring that consumers are being adequately
served.
Insurers would be able to get new products to markets with
fewer impediments, while consumer interests would be protected
through more competitive prices, more product choices and a
reformed market conduct enforcement system.
Access to markets is another area that needs modernization.
The NAIC has a project to create a uniform application form for
companies to enter the various State jurisdictions. We support
that plan. We strongly believe that access to markets is a
desirable State-based regulatory outcome that should be
available to every company, not just those companies that meet
a specific size requirement and agree to abide by certain
operating procedures.
With respect to consumer protections, a new standard for
market conduct regulation is an important aspect of a
deregulated insurance marketplace. The trade associations have
suggested to the NAIC's Market Conduct Issues Working Group a
12-point program to improve the market conduct examination
process. A copy is attached to this testimony.
These are challenging tasks. In our view, State regulation
needs to be modernized without the creation of a new
bureaucracy or a centralization of a regulatory structure that
could ultimately impose new costs and requirements on insurance
companies.
While we embrace the effort to modernize regulation, there
are some concerns. One of these is the subject of privacy.
Frankly, we were disappointed by the recent actions of the NAIC
Working Group on privacy. That proposal, if adopted by the
NAIC, expands the regulatory requirements of insurers by
requiring insurance not even mentioned by the Gramm-Leach
Bliley act in the area of consumer privacy. This does not meet
the overall policy goal of equal treatment for all market
participants. We hope that this approach is not one that will
be adopted in an other areas.
There is a need for a new paradigm and State regulatory
action promoting uniformity and consistent treatment. This
model fails that test.
A systematic plan for implementation at the State level,
including regulatory and legislative activity, must be
established. The NAIC and NCOIL and the NCSL could develop and
execute that plan jointly.
The implementation plan should be built around an analysis
of the legal requirements of each State and should include a
projected timetable for initiating each step based on these
State laws. The details of the plan should be public, leaving
no question in the mind of regulators, industry, consumers and
the Congress that a true plan to implement reform is ongoing.
We would expect Congress to continue to monitor progress in the
States.
That said, we would point out that we are committed to
improving the State-based system of insurance regulation and
are prepared to spend our time working toward implementation of
these reforms.
In conclusion, the NAIC State insurance commissioners and
legislatures should be commended for their work over the past 6
months in identifying the tasks that need to be done to improve
State-based insurance regulation. But this is only the
beginning. While change is called for, it must be done right.
Congress is rightly watching this process, but should not
create a stampede toward impractical and unworkable solutions.
We are ready and willing to assist State regulators in
achieving modernization of insurance regulation by the States.
Thank you.
[The prepared statement of Philip H. Urban follows:]
Prepared Statement of Philip H. Urban, President and Chief Executive
Officer, Grange Insurance Companies on Behalf of the Alliance of
American Insurers
Mr. Chairman, and members of the House subcommittee, my name is
Philip H. Urban. I am President and Chief Executive Officer of the
Grange Insurance Companies, and I am testifying today on behalf of the
Alliance of American Insurers (Alliance) and the National Association
of Independent Insurers (NAII) and the National Association of Mutual
Insurance Companies (NAMIC).
Grange Mutual Casualty Company is a regional multi-line property
and casualty insurance company headquartered in Columbus, Ohio. Our
company is licensed in 11 states; and in terms of premium volume, we
rank solidly within the top 100 property and casualty insurers in the
United States. In addition to our property and casualty insurance
companies, the Grange family of companies includes the Grange Life
Insurance Company and The Grange Bank, a federal thrift. We offer Auto,
Home, Business, Life and Banking products exclusively through an
independent agency distribution system.
The Alliance represents 325 companies, both mutual and stock,
writing over $30 billion in annual premiums.
NAII, of which I currently serve on the Board of Governors,
represents approximately 675 property/casualty companies in the United
States that write $92.9 billion in annual premiums representing every
type of property/casualty coverage, including automobile, homeowners,
business insurance, workers' compensation and surplus lines.
NAMIC, of which we are a member, represents nearly 1,300 member
companies and about 40 percent or about $118 billion of the property/
casualty premium written across the country. NAMIC companies have a
long record of service to insurance consumers and their communities--
more than half of NAMIC member companies have been in business over 100
years.
I appreciate the opportunity to testify today on an issue vital to
my company remaining competitive in today's financial services
marketplace: State-based insurance regulatory reforms.
My company and the others who are members of the three trade
associations have been strong proponents of state-based insurance
regulation. In fact, during last year's debate on financial services
modernization, our industry constantly sounded the trumpet of state-
based insurance regulation. My company has long believed that insurance
regulators should be closest to the companies they oversee and to the
consumers they serve. When states regulate insurance, companies enjoy a
level of access important to the resolution of conflict; and consumers
benefit from a state regulator responsive to their needs. Working
effectively, state regulation is simply the best public policy for the
business of insurance and for your constituents. In my own state of
Ohio, there are regulatory conditions that are conducive to
competition, but at the same time protective of consumers' rights. In
fact, it is the competition that allows my company and other insurance
companies in Ohio, to offer products to consumers at an affordable
price.
However, changes in markets and technology demand that state-based
insurance regulation would benefit from modernization. Congress has
already given consideration to an area of modernization when it adopted
the Gramm-Leach-Bliley Act (GLBA), which rightly reasserted the primacy
of state regulation.
My company and the other companies I represent today do not see
federal regulation as an appropriate approach to modernization of state
regulation. The states, working with industry and at the National
Association of Insurance Commissioners (NAIC), can achieve regulatory
modernization and in fact much activity is being directed to that goal
under the leadership of NAIC President, George Nichols, Commissioner of
Insurance of the State of Kentucky. The National Conference of State
Legislatures (NCSL) in partnership with the National Conference of
Insurance Legislators (NCOIL) will soon undertake an evaluation of
modernization options at the state legislative level.
At its March 2000 meeting, the NAIC, adopted a ``Statement of
Intent'' which identified nine areas in state insurance regulation for
which modernization is needed. Although the NAIC is not empowered to
implement reforms by itself, the associations I represent today were
pleased that the NAIC recognized the need for change and was committed
to developing reforms that could be implemented in the states. In the
last six months, the NAIC has made efforts to follow through on the
``Statement of Intent.''
One objective of this work is to make improvements in processes
that will result in products being more promptly offered to consumers.
Most states require a property/casualty insurer to obtain prior
approval from the insurance regulator in order to introduce a new
product or modify an existing one. In addition to product prior
approval, rates that determine premiums and rate changes require prior
approval. States could resolve this problem today by adopting a market-
driven approach to rate and form filings.
The prior approval process is due for change because it was
developed in the states at the time the McCarran-Ferguson Act was
adopted. At that time, the insurance business was more like a cartel
than a competitive business. Rating bureaus set rates that all
insurance companies adhered to unless they sought regulatory approval
for deviation. There was little creativity in products, and regulation
was more important than competition.
But today, competition among insurers is fierce and intense.
Companies compete on price and product. Innovation is key to success in
the marketplace and also necessary to meet the rapidly changing needs
of fast moving business, economic, technology, life style and legal
changes that characterize our economy and society today. This
marketplace calls for modernized insurance regulation compatible with
today and not 1946. It calls for competition to set rates and drive
innovation. The role of the regulator needs to evolve to catch up with
the evolution of the insurance marketplace.
One of the benefits of state regulation is that it allows for
experimentation. One state has experimented with competition as the
primary regulator. The experiment took place 30 years ago in Illinois.
The experiment worked and Illinois continues to operate under a
competitive system with good results. Various analyses show Illinois is
a highly competitive state. Products are available, innovation is rapid
and citizens pay fair, competitive prices for insurance.
While other states have embraced different versions of competition,
many have not. In some states, the regulatory behavior is not always
consistent with a commitment to competition. Change is needed in such
situations, but a ``one-size-fits-all'' approach, centrally
administered, is not the solution.
The essence of our public policy argument is quite simple.
Companies doing business across the country or in a single state need
to be able to serve markets with a minimum of difficulty. Inability to
do this disadvantages both insurers and consumers. Prior approval of
rates and forms frequently takes months to secure, costing insurers
valuable marketing opportunities and depriving consumers the advantages
of new and improved risk-sharing products. The length of the prior
approval process also inhibits the ability of insurers to compete
successfully with other, less regulated segments of the financial
services industry.
``Open competition'' regulation would free regulators from the
onerous task of approving countless rate and form filings and would
shift the focus to monitoring business practices and assuring that
consumers are being adequately served. Insurers would be able to get
new products to markets with fewer impediments, while consumer
interests would be protected through more competitive prices, more
product choices and a reformed market conduct enforcement system.
The NAIC Speed-to-Market Working Group has recently proposed a new
entity, the Coordinated Advertising, Rate, and Form Review Authority
(CARFRA), to expedite the approval process for the filing of some new
rates and forms. This proposal has had little exposure, and it is too
early to fully judge it. But it indicates that state regulators see the
need to improve the rate and form filing system in many states. The
process for dealing with rates and forms is determined by state
statute.
In addition to NAIC action, the American Legislative Exchange
Council has adopted a model rate and form law that would modernize
insurance regulation and allow faster adjustments in the marketplace.
NCOIL also adopted a model to improve this process. The two
organizations will work to reconcile their respective models. On the
issue of model rating laws, the NAIC had a good competitive rating
model that is no longer in its repertoire of model laws. The Speed to
Market Working Group intends to consider a model rating law and we
believe they should consider the work of these legislative
organizations.
The NAIC has indicated a commitment to deal with issues relating to
the culture of state regulation with a goal of educating the insurance
department staffs toward a competition mind-set. We applaud that
effort. We think these commitments should provide better responsiveness
in rate and product market adjustments to meet the demands and the
needs of consumers, accompanied by cost efficient regulation.
Access to markets is another area in which modernization is needed.
The NAIC has a project to create a uniform application form for
companies to enter the various state jurisdictions. We support that
plan. We strongly believe that access to markets is a desirable state
based regulatory outcome that should be available to every company, not
just those companies that meet a specific size requirement and agree to
abide by certain operating procedures. We believe that this will help
maintain a more level ``playing field'' for insurers. Work being done
in the states to adopt uniformity or reciprocity in producer licensing,
consistent with GLBA, will also help. The NAIC is looking at other ways
to moderate or eliminate the state by state burdens of doing business.
With respect to consumer protections, a new standard for market
conduct regulation is an important aspect of a deregulated insurance
marketplace. The NAIC, through its Statement of Intent process, has
agreed to study market conduct regulation. The trade associations have
suggested to the NAIC Market Conduct Issues Working Group a 12-point
program to improve the market conduct examination process. A copy is
attached to this testimony.
Hallmarks of the new standards include elimination of duplicative
market conduct exams, creation of more uniform market conduct laws and
regulations and adoption of alternative mechanisms to create a more
efficient market conduct surveillance system.
Also included is the notion that market conduct exams should be
``for cause'' only, with remediation as their central purpose.
Companies should be allowed to cure business practices deemed deficient
to ensure that the needs of insurance consumers are met. And while a
``for cause'' exam must be thorough, the cost to a company must not be
open-ended. Examiners should be subject to reasonable time and cost
limitations that will encourage the prompt completion of the procedure.
State regulators are also considering integration of other market
conduct techniques such as desk audits, limited scope exams and insurer
self-audits to mitigate against the need for states to regularly
conduct even ``targeted'' exams.
These are challenging tasks. In our view, state regulation needs to
be modernized without creation of a new bureaucracy or a centralization
of a regulatory structure that could ultimately impose new costs and
requirements on insurance companies. State regulation can and should be
done by the states. While barriers to markets and doing business must
be eliminated, it must not be forgotten that for property/casualty
insurance products local market conditions affect the product and
price. A few of the many examples are tort law, the weather, population
density and traffic congestion.
While we embrace the effort to modernize regulation, there are some
concerns. One of these is the subject of privacy. Frankly, we were
disappointed by the recent actions of the NAIC Working Group on
privacy. That proposal, if adopted by the NAIC, expands the regulatory
requirements of insurers by requiring information not even required by
GLBA in the area of consumer privacy. This does not meet the overall
policy goal of equal treatment for all market participants. We hope
that this approach is not one that will be adopted in other areas.
There is a need for a new paradigm in state regulatory action of
uniformity and consistent treatment. This model fails that test.
The key to regulatory modernization is quick implementation of the
proposals to meet the demands of the marketplace. The best-crafted
reforms will only be as good as the regulatory and legislative
strategies to secure their enactment.
Progress will be recognized when fundamental reforms in rate and
form regulation, company licensing and market conduct are at work in a
majority of states. Many of these reforms will have to be enacted by
state legislatures, a difficult activity to coordinate for which
results cannot be guaranteed. Other changes to state standards can be
put into place by regulators using existing authority.
Either way, a systematic plan for implementation at the state
level, including regulatory and legislative activity must be
established. The NAIC, NCOIL and the NCSL could develop and execute the
plan jointly.
The implementation plan should be built around an analysis of the
legal requirements in each state to accomplish them and should include
a projected timetable for initiating each step based on these state
laws. The details of the plan should be public, leaving no question in
the mind of regulators, industry, consumers and the Congress that a
true plan to implement reform is ongoing. We would expect Congress to
continue to monitor progress in the states.
That said, we would point out that we are committed to improving
the state based system of insurance regulation and are prepared to
spend our time working toward implementation of these reforms. It is
simply our belief that a formal and public strategy be adopted by all
the parties who have a role to play in achieving this goal.
In conclusion, the NAIC, state insurance commissioners and
legislators should be commended for their work over the past six months
in identifying the tasks that need to be done to improve state-based
insurance regulation. But this is only the beginning. While change is
called for, it must be done right. Congress is rightly watching this
process, but should not create a stampede toward impractical and
unworkable solutions. Speed and good judgement are both necessary to be
balanced. We are ready and willing to assist state regulators in
achieving modernization of insurance regulation by the states.
Thank you.
Mr. Oxley. Thank you.
Mr. Mendelsohn.
STATEMENT OF ROBERT V. MENDELSOHN
Mr. Mendelsohn. Mr. Chairman, distinguished committee
members, my name is Bob Mendelsohn. I am Group Chief Executive
of Royal & SunAlliance Insurance. We are a global company based
in London. We have been in business since 1710, and we write
insurance in 130 countries around the world. I am also Chairman
of our U.S. operation, Royal & SunAlliance. I am testifying
this morning on behalf of the American Insurance Association,
an association of over 370 property and casualty companies.
I moved to London 3 years ago to take on responsibility for
a worldwide company. Before that, I spent 4 years as chief
executive of a national insurance company here in the U.S.;
before that, 20 years with a company working my way up to the
position of President and Chief Operating Officer of a group of
companies that were regional and specialty companies, operating
around the United States. So I have seen the regulatory scheme
from the viewpoint of a small regional company, from the
viewpoint of a national company, and now from the viewpoint of
a global company.
I can tell you, based on my personal experience, that the
current regulatory system is broken. It will not serve us well,
here in America, into the 21st century, and there is no doubt
that reform is called for. The future of our industry depends
on a competitive and healthy marketplace, but the regulatory
regime we operate in discourages the competition and innovation
demanded by the new economy, and it threatens our
competitiveness in a world economy. I think fundamental change
is long overdue.
The current system single-mindedly focuses on government
price and product controls separately created and administered
in each State. This discourages innovation, it discourages
competition and it leaves insurers at a disadvantage compared
to federally regulated financial services. A subset of this
problem is the sheer time it takes here in America to get
products and forms approved. There are better ways.
Individual State regulatory requirements are also
frequently inconsistent with each other. It increases
compliance costs, discouraging technical innovation and makes
it difficult for insurers to service customers when we operate
in different States.
Individual State regulatory requirements are also
inconsistent with the growing use of the Internet. I think in
the technology world the consumers will see the best products
and prices on offer from companies operating here in the States
and all over the world, and will insist upon a regulatory
system that allows them access to the best price and the best
product.
American Insurance Association members have long been
struggling with these issues, and we are convinced that the
answer rests with market-based approaches to regulation. Our
efforts have been guided by the end belief that there must be
an insurance regulatory structure that provides better service
to the insurers and to the economy and to consumers.
What should that system look like? Here are our principles
of reform:
First, market and consumer demand, not command and control
regulatory fiat, should dictate the products sold and the
prices charged.
Second, companies should have the option to obtain a single
charter that would allow them to do business nationally.
Third, insurance companies that operate across State lines
should be able to count on uniform, one-stop regulation that
focuses only on those areas where an ongoing regulatory role
serves the public interest.
Regulatory requirements should be enforced in a timely,
impartial and professional manner. Insurance companies should
be able to operate on a level playing field vis-a-vis the other
financial services firms that provide similar products to our
global competitors and the alternative market.
And finally, the regulatory system should embrace and
encourage the use of new technologies by insurers in every
aspect of their business. I think that a regulatory system
based on those principles will free up government resources,
will allow State insurance departments to direct their
attention to where it is most needed, which is effective
solvency regulation, rehabilitation or liquidation of troubled
companies and the prevention of frauds, such as the ones
referred to by Congressman Towns earlier this morning. It will
free up a tremendous amount of government resources presently
devoted to rate and form regulation.
We support the NAIC's efforts. This last March, the NAIC
overwhelmingly approved forward looking statements of intent on
insurance regulations. We share their goals to modernize
insurance regulations to meet the demand of our new
marketplace, and we applaud the spirit of their effort and have
provided substantive input. However, we anxiously await that
State blueprint, perhaps by December of this year, so we can
measure their recommendations against the AIA principles for
reform, which I outlined this morning, and to determine whether
additional State or Federal action is warranted.
We know the market is not going to wait for us. If we don't
act soon, we might just find ourselves irrelevant in the future
marketplace.
Thank you, Mr. Chairman, for this hearing this morning and
we would urge you to keep the heat on.
[The prepared statement of Robert V. Mendelsohn follows:]
Prepared Statement of Robert V. Mendelsohn, Group Chief Executive of
Royal & SunAlliance
Chairman Oxley, my name is Robert Mendelsohn and I am Group Chief
Executive of Royal & SunAlliance, a global insurance group writing more
than $17 billion in insurance premiums worldwide and employing more
than 7,000 in the United States. As immediate past chair of the
American Insurance Association, which represents over 370 property
casualty insurers, I want to thank you for the opportunity to testify
before this Committee.
For AIA members, insurance regulatory reform is, and will continue
to be, a key concern. The ability of insurers to bring products to
market in a timely and cost-effective manner, along with uniform
regulatory treatment regardless of where they are domiciled and where
they do business, is critical.
Insurance regulation is not a new topic for this Committee or for
Congress. Several times in the past, internal industry forces
(including those surrounding the liability crisis of the mid-1980's or
the solvency concerns of the early 1990's) led to a review of the
system at both the state and federal level. What is different now is
that external forces, including a new era of global markets and
financial services modernization, are propelling the examination.
But this isn't just about changes in the marketplace following the
critical enactment of Gramm-Leach-Bliley, or the specter of federal
regulation--it is fundamentally about the ability of insurers to
survive, and thrive, in the 21st century. Insurance industry mergers
and acquisitions, convergence of the various financial services
industry sectors, globalization, and technology have altered the
economic and operational landscape in which AIA members do business.
Yet, the insurance regulatory environment has remained stagnant or,
worse, has grown increasingly bureaucratic. For every incremental
movement toward greater efficiency or uniformity, there are many new
state-specific regulatory requirements that result in cost, delay, and
frustration for insurers--with little or no consumer benefit. A
fundamental change in perspective is long overdue.
Recognizing that the long-term best interests of policyholders,
insurers, and the overall economy are served by an efficient, effective
regulatory system, AIA has spent the last twelve months examining the
``value chain'' associated with the regulation of insurance companies
and products and identifying opportunities--based on both domestic and
international regulatory models--to remove current regulatory
impediments to competition, thus creating greater value for all
stakeholders.
From that discussion and analysis of the current regulatory system,
several themes emerged:
An entrenched state focus on government price and product
controls, which discourages product innovation and competition.
In many states, a chronic and growing delay in regulatory rate
and form approvals. Other federally-regulated financial
services industries have no similar regulatory obstacles to
getting products to market quickly.
Inconsistency among state statutory and legal requirements and
the administration of state systems. The need to meet differing
regulatory demands in each jurisdiction increases compliance
costs, discourages technological innovation, and makes it
difficult for insurers to service customers doing business in
more than one state.
Incompatibility of the state-based regulatory system with
emerging technologies. A regulatory system dependent on state-
by-state price and product controls is inconsistent with new,
expanding technologies such as the Internet, a medium that
recognizes no state or federal boundaries.
These themes underlie guiding reform principles adopted by the AIA
earlier this year:
ELIMINATION OF PRICE AND PRODUCT OBSTACLES. Market forces, rather
than regulatory approvals, should dictate the products sold by insurers
and the prices they charge.
OPTIONAL NATIONAL CHARTERING. Companies should have the option of
obtaining a single charter that would allow them to do business in all
regulatory jurisdictions. States must not discriminate against such
companies in favor of those that obtain licensing on a state-by-state
basis.
UNIFORMITY. Insurance companies that operate in multiple
jurisdictions should be subject to one stop, non-duplicative regulation
and uniform laws governing only those areas where an on-going
regulatory role serves the public interest, including market conduct
activities, agent licensing, claims practices, solvency, and
liquidation.
TIMELY AND FAIR ENFORCEMENT. Regulatory requirements should be
enforced in a timely, impartial, and professional manner, and fines and
other penalties should be proportional to the violation at issue.
LEVEL PLAYING FIELD. Insurance companies should be able to operate
on a level regulatory playing field vis-a-vis other financial services
firms that provide similar products, global competitors, and the
alternative market.
TECHNOLOGY-FRIENDLY REGULATION. The regulatory system should
embrace the use of new technologies by insurers in every aspect of
their business.
Regulation that embraces these principles will benefit consumers,
insurance companies, and insurance regulators in several ways:
First, regulatory reform (especially elimination of government
price and product controls) frees up government resources and allows
state insurance departments to redirect regulatory attention where it
is most needed, including effective solvency regulation and
rehabilitation or liquidation of troubled companies. A sharper
regulatory focus is particularly important in states under fiscal
constraints or attempting to downsize their governments. Ultimately,
consumers also benefit from a streamlined and efficient insurance
regulatory system that reduces regulatory costs for insurers.
Second, product innovation will be enhanced if insurers are able to
bring new coverages to market more quickly because they do not face
extensive regulatory delays getting those coverages approved by the
state regulator. Faster product introduction will also allow insurers
to better serve the changing needs of individuals and businesses. In
addition, in the new world of Gramm-Leach-Bliley, creative new
products, representing a more integrated financial services sector,
will emerge. Lengthy rate and form approval processes that are
applicable to ``insurance products'' within the scope of the Gramm-
Leach-Bliley Act will hinder insurers' ability to compete effectively
with banking and securities firms that operate without these
constraints.
Third, regulatory reform will make the purchase of insurance easier
and less costly for policyholders. Further, a streamlined commercial
lines regulatory system would attract risk financing capital, including
insurance capital, back to the U.S. from various off-shore
jurisdictions to which it has migrated due, in part, to less
restrictive regulatory environments. U.S. insurers will then be able to
compete more effectively with alternative risk financing mechanisms,
including securitization.
Fourth, regulatory reform will encourage more insurance companies
to enter new markets, enhancing competition and therefore producing
greater availability and lower prices.
Recognizing these benefits, AIA has been actively engaged in
advancing the elimination of government rate and form controls on a
state-by-state basis for a number of years. Most states are moving very
cautiously. Due to political opposition from certain local interests,
regulatory reform efforts have not been as sweeping as the external
economic environment demands, and there are significant variations
among states that make it more difficult for regional, national, or
global insurers to operate on a uniform basis.
The forces of modernization, industry consolidation, advances in
technology and globalization are widely acknowledged by industry
leaders represented on this panel, but they are also acknowledged by
the industry's regulators. This past March, the National Association of
Insurance Commissioners overwhelmingly approved a forward-looking
``Statement of Intent: the Future of Insurance Regulation.'' In
conjunction with this undertaking, nine new working groups were
created--five to address implementation issues arising from the Gramm-
Leach-Bliley Act and four to drive the NAIC leadership's regulatory
reform priorities.
The Statement of Intent declares that state insurance regulators
must modernize insurance regulation to meet the realities of an
increasingly dynamic, and internationally competitive, insurance
marketplace. NAIC President George Nichols, who spearheaded the effort
and appeared before this Committee in July, has announced publicly that
if state regulators cannot meet this challenge within the next year,
the door may be open to federal regulation. Although there is no
``official'' NAIC deadline or clear definition of success, various NAIC
sources have indicated that regulators will produce a blueprint for
reform no later than December 2000, if not earlier. Indeed, as the
Committee has heard this morning from Ohio Director Lee Covington,
progress is being made at the NAIC on these issues. Director Covington
himself is playing a key role in the speed to market effort.
AIA applauds the spirit of the NAIC effort, and we have provided
substantive comments to virtually all of the Working Groups. ``Speed to
Market''--i.e., the ability to bring products to market in a timely and
cost-effective manner--and ``National Treatment''--i.e., uniform
regulatory treatment for national companies--have been focal points of
our efforts. We will continue to work with the NAIC to produce needed
regulatory reform in these and other areas.
As mentioned earlier, AIA favors a market-based approach to
insurance regulation that does not rely on prior government review or
approval of prices or products, but permits competitive forces to
respond to consumer demand. The time to implement this approach is now,
as financial services modernization is evolving--not later when the
size, shape and grade of the financial services playing field will
largely be determined. AIA urges this Committee to hold the NAIC to a
timetable, to encourage it to move quickly towards a more efficient,
beneficial, and market-oriented system, and to be prepared to act if
the state regulatory system fails to modernize itself. AIA also will be
evaluating the NAIC's blueprint for reform against our own regulatory
reform principles to determine whether additional state or federal
action is warranted.
Many will attempt to define this effort as a debate over state
versus federal regulation. We reject that. It is not about who
regulates. It is about real reforms that are necessary if we are going
to remain a competitive, vibrant industry. The marketplace isn't going
to wait for us. Inaction and complacency about insurance regulatory
reform will render the industry outdated and possibly irrelevant.
Again, I commend the Committee for holding this hearing and I thank
Chairman Oxley for the opportunity to speak today on an issue that is
of critical importance to the insurance industry and the constituents
it serves.
Mr. Oxley. Thank you, Mr. Mendelsohn.
Mr. Milesko.
STATEMENT OF GLEN J. MILESKO
Mr. Milesko. Good morning, Mr. Chairman. I am chief
executive officer of Banc One Insurance Group, and I am here
today on behalf of American Banker's Associations Insurance
arm, also known as ABAI. ABAI's members are banking
organizations engaged in the business of insurance. My own
company is one of the country's leading bank insurance programs
that represents over 5 million policyholders nationwide,
generating annual premium sales in excess of $2 billion, claim
payments of $75 million, and revenues exceeding $500 million.
In the time allotted to me this morning, I will explain why
ABAI supports optional Federal chartering for insurance
companies and agencies, and I will outline some of the key
features of our proposal, which is based on the dual banking
system.
ABAI supports Federal chartering of insurance companies and
agencies because we believe that Federal chartering would
benefit consumers by permitting more uniform policies, greater
product choice, price competition, and increased product
availability and mobility. It would stimulate competition in
the insurance industry to the benefit of the industry and
consumers. It would enhance the quality of insurance regulation
while maintaining the integrity of the State system, and it
would provide more uniform, consistent and comprehensive
regulation for larger insurance companies and agencies.
Let us take a closer look at these benefits. Benefit No. 1:
Optional Federal chartering would enhance the delivery of
insurance to consumers. While State regulation of insurance is
a long and commendable history, it imposes many impediments on
the delivery of insurance. For example, every State has varying
levels of prelicensing requirements. Every State has different
customer collateral forms and filing requirements. Most States
have specific and different rules for each insurance product
type and distribution method. Existing State regulations also
inherit the development of new products and e-commerce delivery
where a real sense of urgency is required. Under our proposal,
none of these impediments would apply a federally chartered
insurance company or agency.
Benefit two, optional Federal chartering would stimulate
competition in the insurance industry to the benefit of both
consumers and the industry. Some State insurance laws inhibit
competition. State anti-rebating laws are an example, so are
State rate laws. Our proposal would stimulate competition in
the industry by allowing premium rates to be set by the market
and by permitting rebates.
Benefit number 3: Optional Federal chartering would enhance
State regulation. The dual banking system has resulted in
healthy competition between State and Federal banking
regulators. Moreover, that competition has not diminished the
role of State regulators. Today, State banking departments
charter and supervise two-thirds of all commercial banks,
including some of our Nation's largest banks. There is no
reason to believe that insurance regulators could not
experience the same competitive benefits that banking
regulators have experienced.
Benefit number 4, optional Federal chartering would provide
for a more uniform, consistent and comprehensive regulation of
larger and complex insurance firms. Under our proposal, the
Federal regulator would have the resources, the expertise
necessary to examine, supervise and regulate large and
increasingly global insurance firms. Also under our proposal, a
federally chartered insurance company or agency that is subject
to supervision by a single Federal regulator would be able to
comply with the uniform and consistent national regulatory
structure.
Now, I will briefly outline ABAI's proposal.
Our optional Federal chartering proposal calls for the
appointment of a Federal commissioner to charter and supervise
Federal insurance companies and agencies. federally chartered
insurance companies would be subject to a comprehensive set of
financial regulations, all of which are designed to ensure
their safe and sound operation. To protect consumers, federally
chartered insurance companies and agencies would be subject to
comprehensive, unfair trade practice, patterned after the
NAIC's model Act, Federal law would govern the terms and
conditions of insurance policies issued by a federally
chartered insurance company. The commissioner could not,
however, regulate the rates charged for insurance or require
policy forms to be preapproved. Our proposal also calls for the
creation of a Federal guaranty corporation, patterned after the
Federal Deposit Insurance Corporation.
In summary, we believe that ABAI's Federal optional charter
would be good for consumers, good for the insurance industry
and the State regulatory system. We also believe that the dual
banking system offers a reasonable model for optional Federal
chartering, and we are pleased to see in a statement released
today that the Council of Insurance Agents and Brokers endorses
that approach.
Thank you again for the opportunity to appear before this
subcommittee.
[The prepared statement of Glen J. Milesko follows:]
Prepared Statement of Glen J. Milesko on Behalf of The American Bankers
Association Insurance Association
Mr. Chairman and members of the Subcommittee. My name is Glen
Milesko. I am the Chairman and Chief Executive Officer of Banc One
Insurance Group, and I am here today on behalf of the American Bankers
Association Insurance Association (``ABAIA'').1 My testimony
today also reflects the views of the American Bankers Association.
---------------------------------------------------------------------------
\1\ The American Bankers Association Insurance Association is a
separately chartered trade association and non-profit affiliate of the
American Bankers Association. ABAIA's mission is to serve as a forum
for long-term national strategy among banking organizations on
insurance matters, to propose legislation and regulations that permit
banking organizations to participate fully in the business of
insurance, to protect all existing insurance powers of banking
organizations, and to monitor insurance developments at the state level
with the support of the nation-wide network of state banking
associations.
---------------------------------------------------------------------------
ABAIA's members are banking organizations engaged in the business
of insurance. My own company, for example, was established in 1990 and
has one of the country's lead bank-insurance programs. It is comprised
of a nationally licensed, full line insurance agency with over 3,000
licensed agents; one credit life and two property and casualty
reinsurance companies; one multi-state direct credit life insurance
company; a third party administrator of self-funded company health and
dental plans; and an international life reinsurance company located in
Dublin, Ireland. Banc One Insurance Group represents 5 million
policyholders nationwide, generating annual premium sales in excess of
$2 billion, claims payments of $75 million and revenues exceeding $500
million.
ABAIA appreciates the opportunity to appear before the Subcommittee
as it examines the regulation of insurance and the issue of an optional
federal charter for insurance firms.
A little over two years ago, ABAIA developed its own ``blueprint''
for the federal chartering and regulation of insurance firms. While
Congress considered financial modernization legislation, we put that
blueprint on the ``back burner.'' Now that financial modernization has
been enacted, we have made optional federal chartering a priority for
our Association, and we are in the process of transforming our
blueprint into a specific legislative proposal.2
---------------------------------------------------------------------------
\2\ During the past two years, we have discussed our blueprint in
both private meetings and public forums with many interested parties,
including major insurance trade associations, representatives of the
National Association of Insurance Commissioners, representatives of
consumer groups and the staff of this Subcommittee. We have made
various revisions to the blueprint based upon those discussions. We
plan to continue to engage in a dialogue with any and all interested
parties as we work on our draft bill and once it is complete.
---------------------------------------------------------------------------
In the time allotted to me this morning, I will explain why ABAIA
supports optional federal chartering for insurers and insurance
agencies, and I will outline some of the key features of our proposal.
The Benefits of an Optional Federal Charter
ABAIA supports optional federal chartering for insurers and
insurance agencies because, as I will explain, we believe that federal
chartering would:
(1) benefit the consumers of insurance by permitting more uniform
policies, greater product choice, greater price competition and
increased product availability and mobility;
(2) stimulate competition in the insurance industry to the benefit of
the industry and the consumers of insurance;
(3) enhance the quality of insurance regulation, while maintaining the
integrity of the state insurance regulatory system; and
(4) provide more uniform, consistent and comprehensive regulation for
larger insurers and insurance agencies.
Optional federal chartering would benefit many consumers. State
regulation of insurance has a long, and commendable, history. However,
as our nation's economy has become more national and international,
state insurance regulation has been unable to address the needs of
consumers who seek new and more uniform products.
Consider the impact of state regulation on insurance policies.
Today, each state regulates the terms and conditions of an insurance
policy sold within it's borders. With 50 states, it is not surprising
that policy requirements vary from state to state. If an insurer sells
policies in multiple states, the insurer must either sell different
policies to consumers in different states or use a uniform policy that
incorporates the requirements of all of the states in which the policy
will be sold. This means that policies issued in multiple states are
either not uniform or they are overly complex. In today's mobile
society, a consumer should be able to receive the same policy
regardless of where the consumer resides.
The following demonstrates other examples of how disparate and
archaic the current process is for national and Internet insurance
sales.
Inconsistency in agent licensing. Each state has varying
levels of prelicensing education and different methods and
education content for ongoing continuing education. With state
regulation there is a need to separately apply in each state
using different forms with different requirements to obtain a
nonresident license, and a need for each agent to be appointed
in each state by every carrier he/she represents.
Inconsistency In Collateral Forms and Filing Requirements.
Each state in which sales are made will have different customer
collateral forms and filing requirements. If the customer
replaces one insurance product with another, for example, each
state will have its own form requirement that will vary in
content and size, ranging from one page to several pages. If an
insurer makes a change to a form, re-filing may be required
before it is used. If used on the Internet, filing requirements
also will vary with each state.
Inconsistency in Sales and Advertising Requirements. Most
states have specific and different rules for each insurance
product type and distribution method. Additionally, many states
require sales materials and advertising to be filed before they
are used. Most states are currently unclear on advertising
requirements for Internet sales and whether filing of sales
materials is required.
Existing state insurance regulations also inhibit the development
of new insurance products. Currently, the states review, to varying
degrees, the introduction of new insurance products. If an insurer
plans to offer a new product in every state, this review process can
take months, even years. Such time delays rob consumers of product
innovations and product choice. Additionally, e-commerce delivery
cannot be encumbered, long-term, through state-by-state differences.
Most companies, including other financial services firms, are able to
introduce new products to meet the needs of consumers as those needs
change.
Under our proposal, a federally chartered insurer or insurance
agency that is supervised by a single federal regulator could meet the
changing needs of consumers by offering uniform products nationwide and
by introducing new products and services without any governmental
review.
Optional federal chartering would stimulate competition in the
insurance industry to the benefit of both consumers and the insurance
industry. A basic tenet of our economy is that free and fair
competition builds strong and efficient companies that are responsive
to the needs of their customers. Currently, however, some state
insurance laws inhibit competition in the insurance industry to the
detriment of consumers and the industry. State anti-rebating laws are
an example of anti-competitive state laws. Anti-rebating laws prohibit
an insurer or insurance agent from rebating premiums to a consumer as
an inducement to purchase a policy. Rebates are a legitimate form of
price competition that can reduce costs for consumers. Many other
industries, such as the automobile industry, use rebates to lower costs
for consumers.
State rate laws are another example of anti-competitive state
insurance requirements. These laws set the price for certain forms of
insurance, such as auto insurance. There is, however, little
justification for price controls in an industry in which there is
relative ease of entry, such as the insurance industry. New entrants
can serve to lower rates that are artificially inflated. Furthermore,
the elimination of such price controls can, over time, lower the cost
and increase the availability of insurance.3
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\3\ Support for this view can be found in a recent study authored
by Scott Harrington for the AEI-Brookings Joint Center for Regulatory
Studies. That study, entitled ``Insurance Deregulation and the Public
Interest,'' found that auto insurance is less costly and more available
in 14 states that do not require prior approval of rates than in 27
other states that do require prior approval.
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Our optional federal chartering proposal would stimulate
competition in the insurance industry to the benefit of consumers and
the industry by allowing premium rates to be set by market forces and
by permitting federally chartered insurers and agencies to engage in
price competition through rebates.
Optional federal chartering would enhance state insurance
regulation. Since 1863, commercial banks have been free to choose to be
regulated by either a state or the Federal Government. This dual
chartering option for banks, commonly referred to as the dual banking
system, has resulted in a healthy competition between state and federal
banking regulators.
Competition between state and federal banking regulators has
stimulated the development of new products and services for consumers.
Decisions by federal banking regulators have permitted banks to sell
annuities, expand securities and mutual fund activities, and certify
the security of Internet transactions. Other innovations, like variable
rate mortgages and NOW accounts, which pay interest on transaction
balances, first appeared in banks subject to state regulation.
Competition between state and federal banking regulators also has
fostered better supervision of banking organizations. Permitting
institutions a choice of regulators forces a regulator to update and
improve examination techniques and examiner training.
Importantly, the competition between state and federal banking
regulators has not resulted in a ``race to the bottom'' through the
relaxation of basic safety and soundness standards, nor has it
diminished the role of state regulators. Today, state banking
departments charter and supervise approximately two-thirds of all
commercial banks, including some of the nation's largest banks, and
state-chartered banks hold approximately 42 percent of the nation's
total banking assets.
There is no reason to believe that insurance regulators could not
experience the same competitive benefits from optional federal
chartering that banking regulators have experienced under the dual
banking system.4
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\4\ We recognize that the National Association of Insurance
Commissioners is engaged in an effort to enhance the quality and
responsiveness of state insurance regulation. ABAIA strongly supports
that effort. However, we believe that the NAIC's efforts and the
creation of an optional federal insurance charter are NOT mutually
exclusive and, in fact, very much complement one another.
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Optional federal chartering would provide for more uniform,
consistent and comprehensive regulation of larger and complex insurance
firms. It is a challenge for any single state regulator, especially one
with limited resources, to supervise an insurance firm that is active
in many different jurisdictions. Under our proposal, the federal
insurance regulator would have the resources and expertise necessary to
examine, supervise and regulate large, and increasingly global,
insurance firms.
Many insurance firms, like my company, are engaged in the business
of insurance in every state, and in other countries around the globe.
Needless to say, complying with different rules and regulations in more
than 50 different jurisdictions is both difficult and costly. Under our
proposal, a federally chartered insurer or insurance agency that is
subject to supervision by a single federal regulator would be able to
comply with a regulatory scheme that is uniformly and consistently
applied throughout the United States and abroad.
ABAIA's Proposal
I will now outline the key features of our optional federal
chartering proposal. Not surprisingly, the fundamental elements of our
proposal are patterned after the dual banking system. Given the banking
industry's positive experience with that system, this was a natural
choice for us. We realize, however, that there are differences between
the business of banking and the business of insurance. For that reason,
our proposal melds features of the dual banking system with some
features of state insurance law. We also realize that there may be
better ways to provide for an optional federal charter for insurance.
Nonetheless, we hope that by outlining our proposal--even though it is
not in final form--we can further the dialogue on this issue.
Office of the National Insurance Commissioner. Our proposal calls
for the creation of a new bureau within the Treasury Department--the
Office of the National Insurance Commissioner. The head of this office,
the National Insurance Commissioner, would be a Presidential appointee,
who would serve a five-year term. The National Insurance Commissioner
would have the power to charter, supervise and regulate insurers and
insurance agencies. Fees paid by federally chartered insurers and
insurance agencies would finance the operations of the Office of the
National Insurance Commissioner.
The proposed Office of the National Insurance Commissioner is
patterned after two existing Treasury bureaus, the Office of the
Comptroller of the Currency, which charters national banks, and the
Office of Thrift Supervision, which charters federal thrifts.
An obvious alternative to a new bureau within the Treasury
Department (or a new bureau in some other federal department) is the
creation of a new independent regulatory authority. We have no
objection to this alternative. Our selection of a bureau within the
Treasury is based upon our desire to parallel the structure of the dual
banking system. It also reflects our belief that a single Commissioner
can be a more effective regulator than an agency managed by a
commission or a board.
Two New Federal Entities. The National Insurance Commissioner would
have the power to charter two new federal entities: ``National
Insurers,'' which could underwrite insurance, and ``National
Agencies,'' which could broker or sell insurance. National insurers
could be organized in either mutual or stock form, and they could be
owned by mutual or stock holding companies. Federally chartered
insurers could underwrite all forms of insurance. However, like a state
insurer, a federally chartered insurer could not underwrite both
property and casualty insurance and life insurance within the same
company.
The Commissioner could not issue a federal charter to an insurer
that did not meet minimum capital requirements or that lacked the
management or financial ability to operate in a safe and sound manner.
We do not view a federal charter as a means to evade more stringent
state regulation, nor do we intend to give federally chartered firms
any unfair competitive advantage over state insurers on the basis of
solvency regulation.
Financial and Operational Regulations. Federally chartered insurers
would be subject to a comprehensive set of financial and operational
regulations, all of which are designed to ensure their safe and sound
operation. These regulations would include: (1) minimum paid-in capital
requirements; (2) risk-based capital requirements; (3) reserve
requirements equal to actual and estimated claims; and (4) investment
limitations.
Additionally, to ensure accountability and transparency of
operations, federally chartered insurers would be: (1) subject to
generally accepted accounting principles (not regulatory accounting);
(2) required to establish a comprehensive system of internal controls;
(3) required to create an audit committee composed entirely of outside
directors; and (4) required to undergo an annual audit and actuarial
analysis by outside auditors and actuaries. Similar requirements were
imposed upon banking organizations after the savings and loan crisis.
Consumer Protection. Federally chartered insurers and insurance
agencies would be subject to unfair trade practice standards, patterned
after the NAIC's model unfair trade practices act. Among other matters,
those standards would prohibit: (1) the misrepresentation of benefits;
(2) false and misleading advertising; (3) defamation; (4) boycott,
coercion and intimidation; (5) false statements; (6) unfair
discrimination; and (7) unfair claims practices. Furthermore, the
Federal Insurance Commissioner would have the power to adopt other
market conduct regulations as needed. Federally chartered insurers and
insurance agencies also would be subject to the provisions of the
Gramm-Leach-Bliley Act governing the sharing of personal financial
information and to a prohibition on the sharing of medical information
without the affirmative approval of a customer. State privacy laws
would not apply to federally chartered insurers or insurance agencies.
Insurance Policies Issued by a Federally Chartered Insurer. In
order to allow federally chartered insurers to issue uniform insurance
policies, federal law, not state law, would govern the terms and
conditions of insurance policies issued by a federally chartered
insurer. The Commissioner would be directed to issue regulations
implementing this requirement. The Commissioner could not, however,
impose any regulation on the rates charged for insurance or require
policy forms to be pre-approved.
We believe that, over time, the elimination of price controls would
lower the cost and increase the availability of those forms of
insurance that have been subject to rate regulation. To help ensure
this result, we would make the federal anti-trust laws applicable to
federally chartered insurers. Also, we would require federal insurers
to share their rates and policy forms with the Commissioner once they
are in use so that consumers could compare prices and policy terms.
Supervision of Federally Chartered Insurers. As a general rule, the
Commissioner would be required to conduct annual, on-site examinations
of each federally chartered insurer. An exception to this general rule
would apply to insurers that are adequately capitalized and fully
reserved. They would be subject to a bi-annual examination cycle.
Another exception would be for the largest, most complex insurers,
which would have examiners located on-site on a permanent basis.
Failure to cooperate with an examination would subject an insurer to
civil money penalties.
The Commissioner also would have the authority to take an
enforcement action against any federally chartered insurer or insurance
agency that violated applicable federal law or regulations. These
actions would include cease and desist penalties and civil money
penalties patterned after those applicable to banking institutions.
National Guaranty Corporation. Our proposal calls for the creation
of a federal guaranty corporation, the National Insurance Guaranty
Corporation, to guarantee insurance policies issued by federally
chartered insurers.5 The Corporation would be patterned
after the Federal Deposit Insurance Corporation (``FDIC''). A five-
person board of directors would govern the Corporation. The board would
include the Federal Insurance Commissioner, the Chairperson of the
Securities and Exchange Commission, the Chairperson of the FDIC and two
individuals appointed by the President, one of who would be the
Chairperson of the Corporation. The Corporation would establish two
separate funds, one for life and health policies and another for
property and casualty policies. The type of policies covered by these
funds and the scope of coverage would be patterned after NAIC model
laws.
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\5\ The current version of our proposal also would permit a state
insurer to apply for membership in the Corporation. State insurers that
did so would be subject to a limited oversight by the Corporation.
---------------------------------------------------------------------------
Insurers whose policies are protected by the Corporation would be
subject to semi-annual, risk-based assessments. Until such time as
those assessments would cover the operations and potential liabilities
of the Corporation, the Corporation would rely upon a line of credit
from the Treasury Department to cover its operations and liabilities.
The proposal would limit exposure to losses by empowering the
Corporation to take corrective actions against insurers that fail to
meet applicable capital and reserve requirements. These corrective
actions escalate in severity as an insurer's condition deteriorates.
Ultimately, they require the Corporation to place an insurer into
receivership or conservatorship before it exhausts its capital and
reserves. This ``taxpayer protection'' provision is based upon powers
given to the federal banking regulators after the savings and loan
crisis.
We recognize that the creation of a federal guaranty corporation
may be one of the more controversial features of our proposal. However,
we believe that pre-funded guaranty funds patterned after the deposit
insurance funds would provide the best protection for the consumers of
insurance. Also, a federal corporation is consistent with our desire to
have two independent, and complementary insurance regulatory systems.
Taxation. Finally, our proposal would not alter state tax laws,
including state premium taxes.
Conclusion
In conclusion, ABAIA believes that an optional federal charter
would be good for consumers, the insurance industry and the state
regulatory system. We also believe that the dual banking system offers
a reasonable model for optional federal chartering.
Thank you again for the opportunity to appear before the
Subcommittee.
Mr. Oxley. Thank you, Mr. Milesko.
Mr. Smith.
STATEMENT OF RONALD A. SMITH
Mr. Smith. Thank you, Mr. Chairman, committee members. I am
Ron Smith. I am an insurance agent from a small town in
Indiana. I am here on behalf of the Independent Insurance
Agents of America. We represent some 300,000 agents and
employees across the country. We are the oldest and largest
agent association in America. Much has been said by the
panelists to date, and I will try and be brief in my comments,
but I would like to touch on a few things specifically.
We all admit that we do have a changing market. There is no
question about that, but we have long been supporters of State
regulation and we continue to have that position. As I say,
that I do believe that we have to fix some of what State
regulation is all about right now, and I think the
commissioners have started down that path. Their statement of
intent has really made a difference, and they have been moving
much more rapidly than they have in the past. I think Congress
has helped make sure that that has happened.
I would like to specifically talk about four things that
are particularly important to us: agent producer licensing
privacy, product regulation and consumer protections.
First, in the agent producer licensing arena, as a small
agent in a small town, I would tell you that I operate and have
licenses in 16 States. The current licensing model is rather
inefficient, time consuming and frustrating to me as a
particular producer. I would tell you that a model licensing
bill, model licensing law that the insurance commissioners have
been working on is one that our association supports. We have
had discussions as late as Friday with some revisions that we
think need to take place in that model law. We will probably
have some more discussions in the next week or 2. If we can get
that model law, I think we will have 50 State associations
working very hard to clear a lot of the log jams in our current
licensing process. It is, trust me, a time-consuming and
expensive endeavor for an agency like ours.
No. 2, privacy. Privacy, we believe, is something that is
extremely important. For years, we have protected the privacy
of our clients. As the financial services industry is evolving,
I believe that we as agents also have to disclose more and more
things to our clients. Our belief is that we make--we have to
make sure that there is a level playing field. All people
providing financial services must meet the same privacy
standards and must be guided by the same set of standards or we
will have confusion across the States.
Part of regulation. Our Association is on record as being
in favor of commercial lines, rate deregulation. We believe
that the marketplace can indeed determine rate regulation as
long as we have and continue to maintain a competitive market.
We think the NAIC can oversee that procedure and we believe
that we can enact some of the pieces that will let companies
bring products to market quicker. We believe that, indeed, is
an essential piece as we move forward in the process of getting
product to our consumers.
And last but not least, consumer protections. Through all
of what we are doing, we as agents have been very mindful of
consumer protections and how important they are. We think the
proper place to enforce consumer protections for insurance
industry is with the NAIC. We think the various commissioners
know their constituents on a broad basis and know exactly what
they want and what they demand, and we believe that the NAIC is
the place to have that continue to take place.
We see the financial services arena as changing very
rapidly. We as an association, as a group of agents, are
committed to working with the NAIC to pushing them into
furthering their efforts, their speed to market, their various
statements of intent that they have made. I would tell you as a
personal note, as an agent, I have now been attending the NAIC
meetings over the course of the last 3 years. There is a sense
of urgency at the NAIC that has not been demonstrated before. I
believe they understand the pressures that they are under. I
believe that they are implementing the framework that they need
to move forward into the 21st century and to continue to
regulate insurance properly. Thank you very much.
[The prepared statement of Ronald A. Smith follows:]
Prepared Statement of Ronald A. Smith, President, Smith, Sawyer &
Smith, Inc.
Good morning. My name is Ron Smith. I am President of Smith, Sawyer
& Smith, Inc., an insurance agency located in Rochester, Indiana. I am
the current State Government Affairs Chairman and a Past President of
the Independent Insurance Agents of America, the country's oldest and
largest national association of insurance producers, representing more
than 300,000 independent insurance agents and employees. IIAA's
membership is composed of large and small businesses that offer
consumers a wide array of products, ranging from property, casualty,
life, and health insurance to employee benefit plans and retirement
programs.
I appreciate the opportunity to testify this morning on a topic of
great interest and critical importance to independent insurance
agents--the future of insurance regulation.
i. introduction
I should note at the outset that we have been ardent supporters of
state regulation of insurance throughout our more than 100-year
existence. Our national board of directors has repeatedly affirmed our
support for state regulation--for all participants and all activities
in the marketplace.
For 200 years, states have successfully accepted and performed the
role of insurance regulation, nearly uninterrupted. When a 1944 Supreme
Court decision produced uncertainty about the scope and preeminence of
state regulation, Congress swiftly reacted by passing the McCarran-
Ferguson Act the following year. That act ``restore[d] the supremacy of
the States in the realm of insurance regulation'' and its statement of
federal policy could not be more clear: ``The business of insurance,
and every person engaged therein, shall be subject to the laws of the
several States which relate to the regulation or taxation of such
business.''
We do not believe there is sufficient justification for abandoning
this traditional policy approach. The states have a historical
expertise in the realm of insurance regulation, and there is an absence
of any such expertise at the federal level. State regulators have been
the virtually exclusive protectors of such interests since the creation
of an insurance industry in this country. We hope to ensure that their
authority and expertise in the regulation of the business of insurance
is not overturned or undermined, even as other industries become more
heavily involved in providing insurance services.
Despite our longstanding support for state regulation, we recognize
that the current regulatory system does not always operate as
efficiently as it should. Agents, like other industry players,
sometimes become frustrated with state regulation, and there are
certainly areas where the existing system can be enhanced, streamlined,
and made more uniform across state lines. Changes in the marketplace in
recent years, combined with advances in technology and a new set of
emerging realities, make such improvements necessary, and we are
committed to working with policymakers and our colleagues on these
issues.
While it may not always be perfect, the current system is working.
The entire body of state insurance law--statutes and regulations--is
frequently revised and updated to address evolving issues and to ensure
comprehensive consumer protection. Preservation of the applicability of
these state regulations is essential because no comparable regulations
exist at the federal level and no federal regulator has expertise in
this arena. By their regulation, the states ensure that those who
engage in the business of insurance are qualified to do so, remain
appropriately qualified, offer sound insurance products, and comply
with reasonable safeguards for the protection of consumers. Given the
important role that insurance plays in our lives, this is essential.
Over the last several months, the National Association of Insurance
Commissioners (NAIC) has aggressively considered and debated how the
current regulatory regime might be modified and improved. This effort
began with the adoption of the ``Statement of Intent,'' a document
which outlines a framework of principles through which the country's
insurance regulators have begun to address the challenges and
opportunities confronting state regulation. The statement is
essentially a blueprint of issue-specific goals that the NAIC intends
to tackle in the immediate future. These objectives relate to issues
that must be addressed quickly, such as the implementation of the
Gramm-Leach-Bliley Act (GLBA), and those issues that will take longer
to resolve, such as the state response to globalization, the emergence
of technology, and the call for reform of the current regulatory
system.
ii. agent and producer licensing
One area of insurance regulation that has drawn warranted criticism
is the manner is which states license insurance agents. Our agent and
broker members increasingly operate in multiple states and obtain
growing numbers of nonresident licenses, and they struggle to stay on
top of the required paperwork and clear the logistical and bureaucratic
hurdles that are in place today. Staying in compliance with the
distinct and often idiosyncratic agent licensing laws of every state is
no easy task. It is an expensive, time-consuming, and maddening effort
for many agencies, and a dedicated staff person and tremendous
financial resources are often required to manage an agency's compliance
efforts. These opportunity costs and wasted man-hours could be better
spent working on behalf of our customers. Many of our members are
frustrated because they are trapped in a licensing system full of
antiquated, duplicative, unnecessary, and protectionist requirements.
Adding to the frustration is the fact that these inefficiencies exist
at a time when advances in technology have encouraged society to expect
ease, efficiency, and speed--even from government agencies and state
insurance departments.
The problems associated with the current system can be divided into
three main categories: (1) the disparate treatment that nonresidents
receive in some states; (2) the lack of standardization, reciprocity,
and uniformity; and (3) the bureaucracy generally associated with agent
licensing. The NARAB provisions contained in the Gramm-Leach-Bliley Act
ensure that these three problem areas will be addressed soon--either by
the automatic implementation of the provisions themselves or by the
enactment of preemptory reforms at the state level.
Elements Required to Forestall NARAB's Creation
The ``NARAB provisions'' contained in Subtitle C of Title III of
the Gramm-Leach-Bliley Act offer the promise that effective licensing
reform may finally be imminent. NARAB, the National Association of
Registered Agents and Brokers, is an entity that does not exist today
but is one that would be created if the states cannot on their own
reach the licensing reform goals outlined by Congress. In essence, the
NARAB provisions put the ball in the states' court. The new licensing
agency will only be established if the states fail to take the steps
necessary to forestall its creation. In this way, the threat of NARAB
creates a strong incentive for the states to reinvent and streamline
the current multi-state licensing process.
The GLBA is clear about what it is required to prevent the
establishment of NARAB. The creation of the new ``agency'' will only be
averted if a majority of states (defined by virtue of the statute as 29
states or territories) do not achieve the specified level of licensing
reciprocity or uniformity. The Act is specific about the reforms that
are necessary, and it gives the states two options--licensing
uniformity or licensing reciprocity.
Reciprocity is the easier test to satisfy, and it is the initial
goal of state policymakers. To achieve reciprocity, the Gramm-Leach-
Bliley Act requires that a majority of states license nonresident
agents and permit them to operate to the same extent and with the same
authority with which they operate and function in the resident state.
This sounds simple, but every state will need to make statutory and
regulatory changes in order to meet the level of reciprocity required.
The reciprocity standard in the NARAB provisions essentially requires
each qualifying state to meet a 3-part test:
First, states may not impose any unique licensure requirements
on nonresidents and may only require a nonresident to submit
(1) a license request; (2) proof of licensure and good standing
in the home state; (3) the appropriate fees; and (4) an
application.
Second, states must offer continuing education reciprocity to
any person who satisfies his/her home state requirement.
Third, states must not ``impose any requirement . . . that has
the effect of limiting or conditioning [a] producer's
activities because of its residence or place of operations,''
excluding countersignature requirements.
In short, to satisfy the NARAB test, states must offer full
reciprocity to nonresident agents--without imposing any additional
obligations or requirements. In order to be ``NARAB-compliant,'' a
state must be willing to accept the licensing process of a producer's
home state as adequate and complete. No additional paperwork or
requirements may be required--no matter how trivial or important they
may seem.
The states collectively have three years to achieve the required
level of reciprocity. If 29 states fail to offer reciprocity to
nonresidents by November 12, 2002, the NAIC will begin the process of
establishing NARAB, as provided by the statute. The law requires that
the new entity begin operation within two years of the initial
deadline. It is unlikely, however, that NARAB will ever come into
existence. IIAA believes the states will meet the level of reform
required by Congress and create a licensing system that is in fact
superior to that offered by the NARAB provisions.
Recent Reform Activity / NAIC Producer Licensing Model Act
Even before the passage of the Gramm-Leach-Bliley Act, efforts were
underway to reform and streamline the existing licensing system, and
some significant strides had already been made. The NAIC, for example,
had developed a national application form for agents, established the
Uniform Treatment Initiative (an initial step toward reciprocity), and
developed groundbreaking regulatory tools such as the Producer Database
and Producer Information Network. In addition, many states have
recently taken action to eliminate longstanding discriminatory
barriers, such as countersignature laws, residency requirements, and
solicitation restrictions. The focus on agent licensing reform,
however, has clearly intensified since the enactment of the GLBA.
The most critical response has been the development of the
``Producer Licensing Model Act,'' a model law adopted by the NAIC. The
hope is that every state legislature will consider and adopt the
proposal, thus providing much needed uniformity to the current
licensing system. We believe the Producer Licensing Model Act will be
the starting point for agent licensing reform in every state, and we
commend the NAIC for the hard work and dedication associated with its
development.
The model was initially adopted in January, and revisions to the
existing product will be considered by the NAIC in early October. The
adoption of the amended model in the coming weeks will be the
culmination of more than two years worth of effort by state
policymakers and many in the private sector. We are particularly proud
of the pivotal role that IIAA played in the development of the
proposal. Early in the process, we assumed a leadership role by
bringing together all of the various private sector groups to discuss
many of the issues that had divided the insurance industry. Our efforts
to broker consensus were successful in a number of key areas and helped
enable the NAIC to proceed quickly with its consideration of the model.
The proposed revisions to the model are significant and will lead
to the adoption of the model in the states. As this subcommittee knows,
IIAA and its membership had some concern with the original version of
the model. One ambiguously worded licensing exemption would have
created a loophole that would have allowed unlicensed and unqualified
individuals to offer advice and guidance, discuss policy options with
unknowledgeable consumers, and materially revise existing policies and
insurance contracts. IIAA encouraged the NAIC to delete the unnecessary
exemption, and the NAIC's NARAB Working Group, the committee with
jurisdiction in this area, recommended on Friday that the provision be
deleted altogether. To its credit, the NAIC has now taken steps to
eliminate the potential for conflicting interpretations, avoid the need
for judicial interference, and most importantly, protect insurance
consumers.
The NAIC Producer Licensing Model Act addresses a wide range of
issues and will result in unprecedented uniformity among the states.
Among other items, the model includes the following:
A requirement that any person ``selling,'' ``soliciting,'' or
``negotiating'' insurance be licensed and a prohibition against
unlicensed individuals performing these same functions without
a license--regardless of the context;
Definitions of the major lines of insurance;
The recognition of a uniform process for obtaining a resident
license;
The creation of a common set of requirements for obtaining
nonresident licenses;
The recognition and acceptance of a common national
application--for both residents and nonresidents;
Uniform standards for agent/insurer appointments;
The establishment of true licensing reciprocity; and
The elimination of discriminatory licensing requirements.
The NAIC model will bring uniformity to the licensing process in
many ways that are not required under the NARAB provisions of the
Gramm-Leach-Bliley Act. The bill does, however, contain the provisions
necessary for a state to become ``NARAB-compliant'' by establishing the
requisite level of reciprocity.
While the model law offers many important benefits, the NARAB
deadline is still the focus of significant attention. States will have
no more than two legislative sessions to address this issue, so timing
is certainly critical. Despite the challenge, we are committed to
working with the states to achieve agent licensing reform and forestall
the creation of NARAB by the November 2002 deadline. In fact, our
members and state organizations are already working closely with state
departments of insurance and the industry to lay the groundwork for
legislative action in 2001. We believe many states will take action on
this issue beginning in January, and we are optimistic that the NARAB
threshold of 29 states may even be cleared by the end of 2001--nearly
one year ahead of the timeframe established in the GLBA.
NAIC President George Nichols, NARAB Working Group Chair Terri
Vaughan, and the leadership of the NAIC have made it clear, however,
that they will not settle for uniformity and reciprocity in 29 states
alone. While clearing that 29-state hurdle is all that is required
under the GLBA, the insurance regulators are pushing for ``national''
reform. We wholeheartedly support the notion that effective reform must
be national in scope and commend them for their hard work in this
regard. The NAIC has made it clear that simply reaching the bare
minimum required by federal law is not enough, and their words have
been supported with actions and leadership.
National Insurance Producer Registry
The NAIC's vision for reinventing agent licensing--a vision that we
share--does not end with the ultimate state adoption of the Producer
Licensing Model Act. The licensing process will be further
revolutionized by the work and continued development of the National
Insurance Producer Registry (NIPR), a non-profit affiliate of the NAIC.
NIPR is the private-public partnership directed by a nine-member Board
of Directors. The Board is composed of four regulators, a NAIC
representative, three insurer representatives, and one agent/broker
representative.
Today, NIPR is responsible for developing and maintaining the
Producer Database (PDB) and the Producer Information Network
(PIN).1 Once the necessary statutory changes are implemented
at the state level, NIPR will utilize technology and its existing
services to create a simpler and cost-effective licensing environment
for agents. NIPR recently unveiled a detailed plan that will ultimately
lead to the development of a system through which agents will obtain
nonresident licenses in multiple states by using a single on-line point
of entry. In the near future, a person licensed and in good standing in
their home state will have the ability to obtain licenses in other
states by submitting a single license application to NIPR, along with
the payment of both state and NIPR fees. Upon receipt, NIPR will
perform an automated verification to ensure that the producer holds an
active resident license and will then issue, at the direction and on
behalf of the state(s), the appropriate nonresident licenses.
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\1\ PDB is an electronic database consisting of information about
producers and includes information about a producer's licensing status,
appointment history, and disciplinary actions. PIN is an electronic
communications network that links state insurance regulators with the
entities they regulate in order to facilitate the electronic exchange
of producer-related information.
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IIAA currently sits on NIPR's Board of Directors, representing the
interests of the producer community with regard to these important
initiatives, and we are very encouraged by the progress that the NAIC
and NIPR have made to date. Given the importance of NIPR's mission to
the agent and broker community, we have proposed that the makeup of the
Board be reconsidered. Specifically, we have proposed adding two new
producer representatives to the board (thus establishing parity between
the insurer and producer communities) and adding two additional
regulator representatives (thus preserving the balance between the
private and public sectors). While we commend NIPR for opening its
meetings to an expanded audience, we believe the reconstitution of the
Board is critical. The decisions of the Board directly impact the agent
and broker community, and we believe that perspective should have an
equal voice in the development of NIPR policies and services.
Regulator and Industry Access to the NCIC Database
An area in which significant reciprocity is lacking is the manner
in which states investigate the criminal histories of potential license
holders and verify the information submitted on license applications.
States today have a variety of different requirements and processes for
doing this. Some states simply ask an applicant whether they have a
criminal history or if they have committed some act that would preclude
them from licensure. Other states require applicants to submit a
criminal background report with their application. There are also those
states that take a proactive role in this process and may even require
applicants to submit fingerprint cards so that an individual's record
can be checked thoroughly. Whatever the actual process, states
typically impose their own individualized background check requirements
on nonresident applicants--regardless of whether the applicant's
criminal background has already been reviewed by any other state.
There is concern that the wide disparity in requirements and trust
among the states in this area could undermine the effort to achieve
licensing reciprocity. A state with strong background check
requirements is naturally uncomfortable licensing an individual who has
not previously gone through the same rigors and background review that
the state would otherwise require. However, under the NARAB provisions,
a state could arguably have to license such an individual.
One possible solution is to centralize this function, develop a
common process, and require only one background check for every
producer, which could be updated on a periodic basis and/or whenever a
new nonresident license is sought. This could perhaps be facilitated by
providing NIPR with limited and clearly defined access to the National
Crime Information Center (NCIC) database. Similar processes exist in
other contexts, and we believe it is a model worth considering. The
NAIC has asked Congress to authorize NCIC access, and we continue to
support this concept.
Given the sensitivity of the information contained in the NCIC
database, however, any grant of access must be thoughtfully considered
and properly constructed. This issue raises serious privacy concerns,
and the proper balance must be obtained. IIAA, in conjunction with
other insurance industry associations, has already developed a proposal
that would provide insurance regulators with access to the database so
regulators can effectively and proactively perform their licensing
responsibilities. The proposal would also provide limited access for
employers who wish to perform personnel checks on employees or
potential employees. In our view, there is no public policy
justification for providing unlimited and unqualified access to these
files to anyone that might request them.
iii. privacy
State policymakers are also taking action to satisfy the Gramm-
Leach-Bliley Act's Title V privacy requirements. There is perhaps no
more important topic in politics today than ensuring that the private
information of individuals remains just that--private.
This is also an area where uniformity of regulation and enforcement
is critical. Privacy regulations and requirements should be uniform
both among the states and with the requirements that will be imposed on
banks and other financial services providers by the federal banking
agencies, the Securities and Exchange Commission and the Federal Trade
Commission. This uniformity is essential to ensuring that the ``level-
playing field'' aspirations of the GLBA are fully realized. If the
obligations are not uniform, then consumer protection will be
undermined and competition among financial services providers will be
negatively affected--likely to the detriment of state-regulated
insurance providers. It also is necessary to ensure that insurance
agents that also are subject to the jurisdiction of a federal
regulator--such as a life insurance agent that also is a registered
securities broker--are not subject to conflicting or inconsistent
privacy obligations.
In order to provide national uniformity in the regulation of
consumer privacy, the NAIC is developing a model regulation. This
model, which is intended to be promulgated as a regulation by state
insurance departments, addresses the privacy of financial information
(as required by Title V of the GLBA) and the privacy of health or
medical information. We are fairly satisfied by the approach the NAIC
has taken on the financial side, and we believe the model regulation is
consistent with the federal regulations. We have some concerns with the
structure of the health information piece and continue to vet the
latest draft with our members. We have been pleased, however, by the
NAIC's willingness to discuss and debate the scope and nature of its
proposal.
iv. product regulation
The NAIC's reform agenda also calls for a review of how states
regulate the development of insurance products and their introduction
into the marketplace. As part of the ``Speed to Market'' initiative,
the NAIC is considering the manner in which states regulate policy
forms and rates and is identifying ways to improve the multi-state
system. IIAA recognizes that the NAIC is tackling this issue even
though not compelled to do so by any federal mandate, and we commend
the organization for making this a priority.
Today, while each state's particular approval mechanism may differ,
rates and policy forms are subject to some form of regulatory review in
nearly every state. While most insurance codes provide that rates shall
not be inadequate, excessive, or unfairly discriminatory and that
policy forms must comply with state laws, promote fairness, and be in
the public interest, there are a variety of ways in which states
currently regulate rates and forms. These systems include prior
approval, flex rating, file and use, use and file, competitive rating,
and self-certification. The manner in which rates and forms are
approved and otherwise regulated can differ dramatically from state to
state and from one line to the next. These requirements are important
because they not only affect the products and prices that can be
implemented, but also the timing of product and rate changes in today's
competitive and dynamic marketplace.
The current system is too often inefficient, paper intensive, time-
consuming, arbitrary, and inconsistent with the advance of technology
and the regulatory reforms made in other industries. Many argue that
regulation of insurance and the cost of regulation exceeds what is
necessary to protect the public, particularly in the area of commercial
insurance. It is hard to disagree with the call for rate and form
modernization when considering that it often takes two years or more to
obtain regulatory approval to bring new products to market on a
national basis. Cumbersome inefficiencies can create lost opportunity
costs, and the regulatory regime in many states is likely responsible
for driving many consumers into alternative market mechanisms.
IIAA is optimistic that the NAIC's Speed to Market initiative will
lead states to review and revise their laws to ensure that new
products, coverages, forms, and plans can enter the marketplace in an
efficient, timely, and responsive manner. We are strong believers in a
free and competitive market, and we support efforts to enhance
competition and product innovation. We must be careful, however, to
strike a proper balance between free enterprise innovation and consumer
protection and not take actions that place consumers at risk.
Improvements can be made in the area of product regulation, but this
effort should not result in an abdication of regulatory oversight.
Instead, we hope this modernization effort will bring about
enhancements to the review process, allow the industry to introduce
products more efficiently, and permit insurers and agents to be more
responsive to the needs of the public.
As part of its Speed to Market initiative, the NAIC recently
unveiled a proposal to create the Coordinated Advertising, Rate, and
Form Review Authority (CARFRA). The plan to establish this new
organization was only recently released, and there are many issues and
questions that must still be addressed. The NAIC is now moving quickly
to consider the details of this new concept, and it may be that CARFRA
offers a viable mechanism for coordinating and standardizing the rate
and form approval process. In addition to creating the CARFRA proposal,
the NAIC has established a subgroup to develop a series of
recommendations aimed at further improving state-based filing and
review procedures. This subgroup is composed of five regulators, two
insurer representatives, two consumer advocates, and an agent/broker
representative. We are pleased to sit on this committee and believe it
is an excellent way to facilitate dialogue among the parties affected
by product regulation.
v. consumer protections
Perhaps most importantly, the NAIC's modernization agenda does not
forget about consumers. In fact, consumer protection is the leading
principle and highest priority guiding the NAIC's activities. The
NAIC's Statement of Intent begins by saying: ``Our primary goal is to
protect insurance consumers, which we must do proactively and
aggressively.'' Although the NAIC has established a new Consumer
Protections Working Group dedicated to discussing specific statutory
protections and promoting the adoption of safeguards in the states, the
emphasis on consumer protection affects all of the NAIC's efforts.
Unfortunately, the NAIC's focus on consumer protection has been
challenged and undermined in recent months. In three separate
instances, the Office of the Comptroller of the Currency (OCC) has been
asked by banking industry groups to toss aside state level insurance
sales consumer protections. Specifically, these groups have asked the
OCC to preempt consumer protections previously enacted in
Massachusetts, Rhode Island, and West Virginia.
An ill-advised OCC preemption opinion issued in response to these
requests could disrupt regulatory activities in the more than 30 states
that have substantively identical insurance sales protection provisions
in place. This is especially troubling because--virtually without
exception--these consumer protections were enacted with the support of
consumer advocates as well as both the banking and insurance industries
in each state.
The West Virginia experience is illustrative of this concerning
trend. There, the local banking association that petitioned the OCC
actively negotiated the parameters of the law that they have asked to
be preempted, and they endorsed enactment of that legislation. Over two
dozen banks are actively selling non-credit forms of insurance in the
State of West Virginia and their efforts do not appear to be hampered
in any way by the challenged provisions. Any allegation that the West
Virginia provisions at issue should be preempted because those
provisions ``prevent or significantly interfere with'' the ability of
banks to engage in insurance agency activities thus appears to be
completely unwarranted.
A large and diverse group of parties wrote to the OCC during two
public comment periods to question the agency's authority to consider
these questions and to encourage the agency to preserve the challenged
protections. This group included the NAIC; the National Conference of
Insurance Legislators (NCOIL); the National Conference of State
Legislatures (NCSL); members of Congress; individual state legislators,
attorneys general, and insurance commissioners; and consumer advocates
(including the Consumer Federation of America).
We have urged the OCC to not deem any of the challenged consumer
protection requirements preempted for two overarching reasons. First,
it is clear the OCC does not have the power to determine whether state
insurance regulations are preempted by Section 104 or by any other
federal law. The GLBA makes clear that the states are empowered to
regulate the insurance activities of everyone, including national
banks. The only limitation on that authority is Section 104, but the
OCC has absolutely no authority to interpret the parameters of that
provision. Second, even if the Comptroller did have the authority to
pass on such preemption questions, it is clear that state insurance
sales consumer protection provisions like the challenged requirements
do not ``significantly interfere'' with the ability of banks and bank-
affiliates to engage in insurance agency activities in any way. The
challenged provisions were enacted to address serious insurance
consumer concerns, and none violate the preemption standards
established in Section 104.
The manner in which the OCC proceeds will have a dramatic effect on
the future of insurance regulation. We are concerned because we believe
that preemption of these state laws by the OCC would undermine the
functional regulation framework that is at the core of the Gramm-Leach-
Bliley Act.
vi. conclusion
By enacting the Gramm-Leach-Bliley Act, Congress in some ways threw
down the gauntlet to state policymakers. In the 10 months since the
law's historic passage, state insurance regulators have proven that
they are up to the challenges at hand. Not only are they fulfilling the
obligations created by the GLBA, they are also reforming insurance
regulation in other crucial ways. State legislators are also proving
that they are prepared to modernize and enhance state regulation of
insurance, and legislative groups such as NCOIL and NCSL are engaged in
these discussions and working closely with the NAIC. In the weeks and
months to come, we will continue to work closely with the NAIC, state
legislators, our member agents, and other interested parties to achieve
meaningful reform on a national basis.
IIAA appreciates the opportunity to comment and present our views
on the state and future of insurance producer licensing. As you
continue to consider these issues, please know that we are happy to
provide any further assistance or information that this subcommittee
might deem appropriate and helpful.
Mr. Oxley. Thank you, Mr. Smith.
Mr. Hillman.
STATEMENT OF RICHARD J. HILLMAN
Mr. Hillman. Mr. Chairman and members of the subcommittee,
I am pleased to be here today to discuss with you our report on
insurance regulation that is being released today. This report
requested by Congressman Dingell presents our evaluation of
insurance regulatory oversight and information sharing
triggered by a highly publicized insurance investment scam
allegedly masterminded by Martin Frankel. My testimony today
focuses on three issues.
First, I will briefly describe how the alleged investment
scam operated. Second, I will describe some of the information
sharing and regulatory weaknesses exposed by the scam. Finally,
I will discuss the crucial importance of enhancing regulatory
information sharing going forward in the new era under Gramm-
Leach-Bliley.
Martin Frankel is under indictment for allegedly embezzling
more than $200 million in insurance company assets over nearly
an 8-year period. Mr. Frankel, a former securities broker who
was banned from that industry in 1992, with assistance from
others, allegedly obtained secret control of entities in both
the insurance and securities industries. In 1991, he allegedly
exercised secret control over a small securities firm called
Liberty National Securities. The same year, he allegedly
anonymously established an entity known as Thunor Trust using
the names of nominee grantors as the apparent sources of the
money.
Between 1991 and 1999, Mr. Frankel operating through
fronts, allegedly used Thunor Trust to purchase seven insurance
companies in six States. After purchasing these companies, the
companies' assets were sold and apparently replaced with
government bonds purchased on the insurer's behalf by Liberty
National Securities. These securities firms then allegedly
provided monthly statements to each insurance company detailing
an active and profitable bond trading strategy that were, in
fact, fabrications.
It appears that the securities transactions never happened
as reported, and Federal authorities allege that Mr. Frankel
actually stole the insurers assets and used the funds to
perpetrate the investment scam and support his lavish
lifestyle. After operating for nearly 8 years, the scam began
to unravel as insurance regulators placed more scrutiny on the
insurers asset custody arrangements. Federal and State
authorities now have criminal and civil cases pending against
Frankel, and others allegedly connected to the scam. Mr.
Frankel, while being held by German authorities and facing
extradition to the United States, has not yet been convicted
for any of the actions that are attributed to him. As yet, the
whole story has not been told.
Weaknesses associated with insurance regulatory tools and
inadequate oversight and coordination activities contributed to
delays in detecting the investment scam for years. We observed
regulatory weaknesses in each of three key phases of regulatory
oversight, namely, approval and change on insurance company
ownership, routine financial analysis and onsite examinations.
Table 1, in my prepared statement today, summarizes the
weaknesses we identified in each of the phases of regulatory
oversight.
In some cases, the identified weaknesses involved a lack of
the appropriate policies and procedures for identifying
problems in the Thunor Trust insurers. At other times, State
insurance regulators failed to follow existing policies
procedures or recommended practices. Overall, however,
regulators did not act in response to red flags raised by the
actions of Thunor Trust, insurance companies or Liberty
National Securities. These red flags did not necessarily rise
to the level of illegality but individually, and certainly
collectively, they should have led regulators to ask more and
harder questions, the answers to which very likely would have
uncovered the scam much sooner.
We believe that all financial regulators, including State
insurance regulators, have a positive responsibility to act
with professional skepticism. It is clear that for many years
in this case, insurance regulators did not.
I was pleased to find that the insurance regulators working
with NAIC have recognized the weaknesses we have identified,
and while much more needs to be done, they have begun
addressing them to help reduce the industry's vulnerability to
fraud.
The final topic I want to briefly mention is the importance
of regulatory information, sharing particularly in the area of
Gramm-Leach-Bliley. At nearly every stage of the scam I
describe d for you today, regulators could have exposed the
fraud sooner and limited the damage if there had been better
and more consistent sharing of regulatory information.
Insurance regulators will need to apply the lessons learned
from this scandal and effectively share regulatory data between
themselves and their banking and securities counterparts.
Going forward, all financial regulators will need to
consider regulatory data from other financial vectors to
properly oversee the business relationships and transactions
between institutions in different financial sectors. While it
is too early to fully assess regulatory oversight coordination
efforts emanating from Gramm-Leach-Bliley, I am pleased to
report that there are signs that Federal and State regulators
recognized the need to improve coordination and are taking the
first steps to formalize coordination mechanisms.
Mr. Chairman, this concludes my statement and I would be
pleased to respond to any questions that you or the members may
have.
[The prepared statement of Richard J. Hillman follows:]
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Mr. Oxley. Thank you, Mr. Hillman.
Let me begin a line of questioning with Mr. Turner.
Mr. Turner, in your testimony you state that simply
improving the State insurance system may not be sufficient for
those insurers that compete on a national level, and you also
note you fully support the ongoing efforts of the NAIC on the
reform efforts. Could you give us a threshold of what you
believe constitutes sufficient reform over the next several
years by the States to obviate the need for an optional Federal
charter?
Mr. Turner. Let me--I will answer the question, but I don't
think we have even a few years. I think this is an issue that
needs to be addressed very quickly in less than a few years,
but as others have mentioned, the two key areas that absolutely
require improvement and uniform treatment are product approval
and agent licensing, and there has to be very significant
changes in the way those areas are dealt with, I think, really
across all lines of insurance.
Having said that, I just want to point out an inherent
problem in the current system and one we are dealing with right
now, and that has to do with the privacy regulations in Gramm-
Leach-Bliley where the banks and securities firms already know
the regulations that they are going to be having to comply with
next July where the insurance industry, because of the
regulatory process, has no such knowledge and that--the limited
time we have to respond to the regulations promulgated in each
State really puts us at a competitive disadvantage, and this is
a problem inherent in the system that really is difficult to
deal with.
Mr. Oxley. Thank you.
Mr. Nabers, should the efforts by the NAIC at some point
fizzle out and Congress is unable to act to fill that void,
what effect do you see on your industry, both short term and
long term?
Mr. Nabers. Well, the effect would be absolutely enormous.
There is no issue confronting our industry that is more serious
or compelling than regulatory reform, and many in our industry
consider it as a viable issue. We are moving in markets that
are moving forward at breakneck speed. The Internet is
contributing to this. Gramm-Leach-Bliley is contributing to
this. To be in an industry where a new product cannot be
marketed nationally in less than a year is an enormous
handicap. So if efforts to reform the regulatory system fizzle
out, I would imagine that life insurers, and really insurers
throughout the country, would be at an enormous competitive
disadvantage, and you might see the industry become irrelevant.
Mr. Oxley. Let me move on. I want to follow that up later,
but I want to ask Mr. Urban, as you know, you heard Mr. Smith
testify that our current State system for rate filing is
``inefficient, paper intensive, time consuming, arbitrary and
inconsistent with the advance of technology in the regulatory
reforms made in other industries.'' Do you agree with that
statement, and how would that affect your customers?
Mr. Urban. Mr. Chairman, with all respect as a
businessperson, I could make a case that all regulation is
inefficient, paper-intensive, time-consuming, and arbitrary and
inconsistent at times. So I think the notion that one form of
regulation is superior to another form of regulation because it
removes those might be a fallacy. The fact is, what we have
today is a system that in the property and casualty side of the
business, we understand how it works. Probably the worst thing
that I could imagine would be to make a quick decision to do
away with State regulation, impose a Federal regulation and
instead, what you do is you, in effect, turn upside down a
multi-hundred billion dollar industry that arguably impacts
every consumer, every constituent in the United States who
needs to buy insurance.
It seems to us that there would be some effect to consumers
if you lost State regulation, and I think the effect would be a
negative one. Right today, in the State level of regulation, it
is very much a one-to-one, one-on-one sort of a process
relative to the consumers interest. You think about a consumer
sitting in a small town, say, upper Sandusky, Ohio, who has a
problem with his or her insurance, it is very easy for them to
pick up the phone and call the State insurance department and
have a very intimate discussion about how to solve that
problem.
Our concern with doing away with State regulation going to
a Federal model would be that it would just be that much more
difficult for every person to ever get their local one-on-one
issues ever addressed, so in our minds, we really strongly
favor a coordinated unified--I heard a couple of words I like.
I liked ``harmonized'' I heard earlier today, those seem very
good words, but within the context of State regulation as
opposed to Federal.
Mr. Oxley. Mr. Mendelsohn, regarding disaster insurance,
you testified that the streamline commercial lines regulatory
system would bring insurance capital back into the United
States. Can you elaborate on this and discuss how this might
help consumers get better disaster insurance coverage?
Mr. Mendelsohn. I think the issue is not so much disaster
insurance coverage as relating to the point Mr. Urban made, the
availability of capital to support the insurance business in
the United States. And there is no question that whether the
regulation is Federal or State, whether it is commercial lines
that are deregulated or personal lines as well, what is
necessary is a different system, one that allows the government
to spend its money wisely on the areas that will maximize the
impact on consumers. Our view is that the regulation of form
and the regulation of rate, whether on the commercial side or
on the personal side, is creating disincentives for investment
in the American insurance industry, because it raises our costs
and gets in the way of speed to market of the products that are
being developed elsewhere in the world.
So I think an efficient regulatory system where Federal or
State is the important issue, and that is why we support the
NAIC's efforts to streamline State regulation. But on the other
hand, if it does not appear that that is going to happen
quickly enough, I think we have to have an alternative
solution.
Mr. Oxley. Thank you. The chairman's time has expired. The
gentleman from New York.
Mr. Towns. Thank you, Mr. Chairman. Let me begin by asking
you, Mr. Smith, you mentioned that you are licensed in 16
States, I think it is.
Mr. Smith. Yes, that is correct.
Mr. Towns. And you talk about it is time consuming and
expensive. Now, could you sort of describe that in terms of
renewal process to every so many years you have to have your
license renewed?
Mr. Smith. Yes, I do. I have to apply to the State. The
NAIC, about 2 years ago, adopted a uniform license application.
Unfortunately, not all States are using that uniform license
application. So you can't submit that to every State for your
license. The other issue that arises then is whether or not a
given State will accept the continuing education that I have
imposed on me in Indiana as sufficient for my license. We are
getting closer. I don't mean to be disparaging. I am trying to
be factual. The NAIC, I think, has recognized that they do have
a problem in licensure and they are trying to streamline it.
That is why we have been working so hard on this model Act, and
we think that if we can get this model Act to a point where
everyone agrees on it, that we might very well be able to
accomplish the reciprocity, and we are still confident that
that will happen, and indeed, the requirements for Gramm-Leach-
Bliley will be met.
But the process, it just takes a while. I have a secretary
that does this, and it is her favorite thing to complain to me
about. It is just something that takes a while to do, pure and
simple.
Mr. Towns. Mr. Mendelsohn, I think it was you, you
indicated--used the phrase, and I would like for you to expound
on it a little further, ``operating on a level playing field.''
What do you mean by that?
Mr. Mendelsohn. Well, Congressman, essentially, in the post
GLB era, we have securities firms, investment ban, insurance
companies, both life and property and casualty, commercial
banks, mutual fund organizations, all looking at how to deliver
financial products to the consumer, products that will meet
particular consumer needs. We have all of those different
industries now starting to come together to compete for the
consumer dollar, offering the consumer new products, new
services, the technology lets you do. The concern of the
industry has always been that all of the various components of
that financial services business, banks, insurance companies
and so on, all have the same economics affecting the production
of their products and services and have the same opportunity to
offer those products and services to the consumer. So that is
the level playing field that we have been talking about.
Mr. Towns. Thank you very much. Let me go over to you, Mr.
Hillman. It is true that only 12 of the 50 States have either
the authority or access to the data needed to enforce the
Federal prohibition against convicted felons working in the
insurance business.
Mr. Hillman. The NAIC has reported to us that it is,
indeed, yes, just a handful of insurance departments.
Mr. Towns. We have a lot of problems here. I noticed in
terms of the discussion, in terms of whether we should do it in
Federal level or State level or whatever, but let me ask the
question here. How many feel that establishing a Federal
commission would be a solution to the problem? I know you do
Mr. Milesko, you just said you might as well raise your hand.
Yes.
Mr. Milesko. Mr. Congressman, I think what is clear, and
there is a consensus here today, is that everybody thinks the
current system needs to be fixed. And what we are really
proposing is, let us fix the current system of State
regulation, but in addition, let us offer an alternative in
terms of optional Federal chartering just as we have in the
banking, and let us let the companies and the agencies make
their choice as to which would work best for them.
Mr. Towns. Let me just go back to this. I think with Mr.
Urban, I am trying to keep up with these names here. You talked
about a timetable. Now, if the timetable is not met, or what do
you consider an adequate timetable, and if it is not met, what
should happen? First, what is an adequate timetable?
Mr. Urban. Congressman, I don't have a timetable that says
by date certain X should have happened. It has taken a long
time for the industry to get where it is today. It is a huge
industry, many participants and constituencies to be involved.
I can't imagine a quick solution is the right solution. So my
timetable would be more along the lines, along steady
reasonable progress, which, by the way, I think is happening.
My perspective today is the industry is far more energized
toward the notion of gaining uniformity, getting consistency
across States than it has, in my experience, in the business.
At the NAI board level, there is actually working groups
working very diligently on the same subjects that the NAIC is
working on, looking for common solutions for uniformity outside
of Federal regulatory solution. So my mind, is the processes to
improve and to gain uniformity, to knock down some of the
barriers that we have heard described here this morning? That
ball is already rolling down the hill. That process has already
been started.
I would like to make the point that I think that it should
be given a chance to work. The energy is there. I see the
commitment there. Many of the industry associations are working
together in a way that they haven't in the past, and I think
the end result will be a productive one. It is going to take
some time, which I think it rightly should, considering the
size of the industry and the impact on consumers and
constituents. So I don't think that there is a short timeframe
answer to this, and rightly shouldn't be.
Mr. Towns. The only thing I guess which would be my concern
is that if, for any reason, a State doesn't comply what kind of
penalties should be, I think that is the concern, because you
have a lot, you are dealing with a lot of things, Governors,
State legislation, you are dealing with a lot of things, so if
the State doesn't comply what do you do, what do you recommend?
Mr. Urban. I am not an expert on what you do if a State
doesn't comply. It seems to me that gets to be a State rights
issue, and I don't know who penalizes the State. I mean, who is
the ``who'' in that penalizing the State discussion. So I
really don't know the answer to that. I do know that there is
pressure within every State to the insurance departments from
the industry to get on board with some uniformity and some
modernization, so it would be maybe at an insurance
department's peril to ignore that sort of pressure. So it is--
maybe it is not a perfect answer, but the fact is there is
pressure everywhere to reform and improve the insurance
operation.
I don't think anybody would argue that what we have today
is perfect. Certainly the reform movement and the modernization
movement is underway independent of any sort of Federal
solution.
Mr. Oxley. Gentleman's time has expired. The Chair is
pleased to recognize the gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. Following up on Mr.
Urban, does State regulation of insurance add value to your
product?
Mr. Urban. Yes. It adds value to the product in several
ways. Insurance, in most cases, is such a personal product to
buy, you are insuring your automobile or your life or your
property or your home, and the need to have local understanding
of the markets, of the weather, of population densities, of the
local State laws or whatever it happens to be, I really think
that the State regulatory process brings value to the consumer.
Yes, it costs a little bit because of the need to have multiple
State understanding. We do have to add to our expenses and some
of the activities that we have to do to deal with that, but
that is really a minor component of our cost structure, if we
suddenly did away with all of that, wouldn't have a tremendous
impact on the way our company operated, but it could have a
tremendous impact, a negative one, I might add, to the
consumers.
Mr. Shimkus. Following up on that, and you ended up with
the consumer, which is a lot of the focus of my questions today
is do the consumers feel that there is value added?
Mr. Urban. Well, I think so. I happen to read every
insurance department complaint that we get, I wish we got none,
but we do get them and the consumer truly, they all sort of
read like this, Mr. Commissioner, I have a problem, please help
me. And I think that is a very much rubber-meets-the-road kind
of situation where the consumer does believe that they get a
value out of having that local State relationship, and it
really works pretty effectively, because we know the
regulators, they know us, much better than we could ever have
possibly in some sort of a Federal regulatory environment.
Mr. Shimkus. Same question for Mr. Mendelsohn.
Mr. Mendelsohn. Opposite answer.
Mr. Shimkus. Surprise, surprise.
Mr. Mendelsohn. People in other parts of the world insure
their lives and their homes and their automobiles. Other
systems have been proven to be as effective for the consumer in
those other parts of the world as our State regulatory system.
In the UK where there is a single regulator, there are local
ombudsmen, so that if the insured has a problem, instead of
contacting the regulator, he contacts an insurance ombudsman,
an advocate for the consumer. So there are different systems in
different parts of the world.
What we are finding in the technology world is that a good
idea for a product or service that is developed in Australia or
is developed in Canada or is developed in the U.S., we can move
around the world because of technology, and in jurisdictions
that don't have prior product and prior price approval, you
implement that product right away. Here in the United States,
we commence a year-long process of negotiating with 50 separate
regulators for what is a product that can be introduced in
Australia or Canada or the U.S. or the UK much quicker.
So I think there are other ways of doing it. Whether those
other ways are uniform State regulation or uniform Federal
regulation to me is not as important as achieving the goal of
speed to market and transparency for the consumer, but you can
look after the consumer in different ways than we do here in
the US.
Mr. Shimkus. This is really an amazing hearing coming on
the heels of the Bridgestone/Firestone issue, State Farm
obviously had been a credible company in Illinois, and one of
its analysts tried to send information to the NHTSA too, and he
did three times, well before a lot of the casualties had
occurred. And so part of the debate is how do we provide a
better clearinghouse for information? This does fall into this
debate, though. Because with 50 States voluntarily sending
information to NHTSA or the consumer product safety commission,
how does it get sorted through, and is there a better way?
Maybe NAIC can address that in some of their debates as they
are trying to uniformly address other issues.
I don't want to get too far off on that, but it is timely
with current events that we have seen in other hearings that
have taken place.
Mr. Mendelsohn, I wanted to ask--no, let me see, I am
sorry. I wanted to ask Mr. Milesko, you mentioned a product
being developed if there was a national chartering, or I get
the terminology wrong, but also a government secured, similar
to the FDIC product that we offer for financial institutions,
but you failed to mention another federally insured product
that we no longer have, which is FSLIC.
Aren't we--is there not some concern that taxpayers, based
upon fraudulent or misguided investment opportunities, would
have to, in essence, bail out nationally chartered or sponsored
insurance companies as they did with the savings and loans?
Mr. Milesko. Well, I think Congress has learned a lot
through the savings and loan crisis, and I think what we have
tried to do and would hope to do is to apply that learning as
we develop, you know, a national guaranty fund that would be
very similar to the FDIC, which was established in 1933, and we
would have a line of credit that would be put out that the
companies would have to participate in. And I think it can
work, the FDIC works fairly well today, but it would have to
have oversight and it would have to be watched.
Mr. Oxley. Gentleman's time has expired. Gentleman from
Wisconsin, Mr. Barrett.
Mr. Barrett. Thank you, Mr. Chairman. Thank you for holding
this hearing and I want to welcome all the people here today,
Mr. Milesko especially from Wisconsin. It is nice to have you
here. I certainly understand the drift of the conversation that
with the changes in the financial world, that there is a need
for a larger playground and that the State-by-State
demarcations might be somewhat outdated. So I can see the
attraction to some sort of oversight at a different level.
At the same time, I am a little taken aback because from my
days as a State legislator and coming here, I always thought it
was unspeakable to, in any way, disturb a caring person and
that the State regulation of insurance was like the 11th
commandment, and that it was nothing that we should ever get
involved with here at the Federal level. So hearing some of the
comments today, again, takes me by surprise a little bit, and I
wonder if part of it is the frustration with regulators in
general, and maybe a little bit of the grass is greener on the
other side, which I would caution you against, but also just
the desire to try to have the dual system, and so I want to
understand a little bit better the dual system that is
perceived.
Mr. Mendelsohn, you seem to be one of the most aggressive
advocates for it. Is this a situation, as you have sort of
foreseen this, would a company make a decision to become a
federally chartered company, or would it be done on a product-
by-product basis? What are you looking for?
Mr. Mendelsohn. Well, first of all, I should be clear that
from the American Insurance Association standpoint, we are, at
present, not advocating dual chartering. We are supporting the
NAIC's effort to reform State regulation but suggesting, as Mr.
Milesko has suggested, that in the event the States don't get
their act together, there be this alternative available. That
would be company chartering, that is, the ability to do
business in the 50 States of the United States under a single
Federal charter, similar to what the banks operate.
Mr. Barrett. That would take you out of the State system
entirely for every single product that that company----
Mr. Mendelsohn. Well, no, that is what licensing of the
company, the ability to do business within the State,
obviously.
Mr. Barrett. But in materials of all the oversight that you
would then cast your lot with the Federal regulations, whatever
they may be.
Mr. Mendelsohn. Yes, I would say that would be, if we went
down that route, that would be true in terms of the chartering,
and the oversight of the company would be at the Federal level.
We would advocate rate-informed freedom as well as letting the
consumer and the marketplace dictate the prices at which
products are sold so that the States then could turn their
regulatory effort to looking over the anti-fraud solvency
liquidation, those sources of issues. I think that it is the
way it might work.
Mr. Barrett. How big is the form issue?
Mr. Mendelsohn. It is huge. If you look at any of the
companies represented at this table, the number of people that
we have working solely to file forms with the States, if you
want to change a provision within a policy, you have got to go
and file all over the place to get approval for that change. In
the electronic world, that is simply not a system that makes
much sense. So the approval of forms is what prevents product
innovation. In the E-world, we see these people developing
products and services that are sold 2 weeks later. Some succeed
in the marketplace, some fail, but it is marketplace forces
that decide. The concept of sitting down as we do with our E-
partners and saying okay, well, that is a great idea, and we
will be able to bring it to market 18 months from now; it is
just, it is yesterday's world, not tomorrow's, so actually it
is important.
Mr. Barrett. You said it could take your company up to a
year to get a prior time market. Is it because of the year?
When you say it takes a year, what are you specifically
referring to? Give me an example, please.
Mr. Nabers. Let us just say that we want to introduce a
life insurance policy, a permanent life insurance policy. We
would have to file that, we do business in 50 States, we would
have to file that in each of the 50 States, and in each of the
50 States they had different requirements with respect to a
manila insurance policy. So we would make a filing that would
try to comply with requirements of each of those States
ordinarily, and at least a dozen or more of the States there
will be correspondence that will take place over the 6, next 6
to 12 months on this particular policy, maybe marketing
materials relating to it.
So you may get approval in 35 or 40 States in the 6 months,
but if you are a national company, you are going to do national
advertising, you still need to wait for the rest of the States
to come into line, so maybe at the end of 12 months you have
approval from 48 States and you launch. If they are innovative
features related to that policy something that regulators
haven't seen before, you can be talking about 18 months before
that policy is approved because now you are corresponding with
30 or 40 States with respect to the new features, and that has
to be worked out. You send the States a letter, it takes maybe
a month or so before you get response, then you try to comply
with the requirements the State has imposed, so it is a very
cumbersome procedure as it is currently set up.
Mr. Barrett. If I could indulge for one follow up question,
please.
Mr. Ganske [presiding]. Without objection.
Mr. Barrett. When I was a State legislator, I was one of
the uniform law commissioners for our State, and that was a
group that got together to try to make sure all the State laws
were comparable and would work together. How active in the
insurance field is the attempt by the States to work together
to have uniform insurance laws throughout the country?
Mr. Nabers. Well, as a number of us have commented today,
there is a sense of urgency within the NAIC to create
uniformity within the current system. So right now there is a
lot of activity to lean toward a uniform approach to product
approval and whatnot. Previous to the year 2000, it was more a
piecemeal approach, and sometimes if they adopted a uniform law
and would make modifications to it, generally uniform laws were
not adopted in all 50 States.
Mr. Barrett. Thank you, Mr. Chairman.
Mr. Ganske. I guess it is my turn. I have an interesting
book here, the Optional Federal Chartering and Regulation of
Insurance Companies edited by Peter Wallison, and there is a
chapter in here by Robert Hunter, Consumer Federation of
America, and I just think it might be interesting to read part
of what he says.
Should there be minimal standards for all States to meet?
Should Congress take over certain aspects of regulation? Which
ones? How do we ensure that there is not a perverse competition
from market share between a State charter and a Federal charter
through lax regulation between States and Federal Government as
there is between some States right now? Should the antitrust
exemption be maintained? Could certain efficiencies in money
and time be achieved by centralizing certain functions? And I
would add to that, while efficiency is important, I think
security is important also for the industry.
He goes on, Congress has to consider the Federal history
with respect to insurance regulation, which can be summed up in
three words: ``what, me worry?'' The Federal Government's total
lack of capacity to understand insurance is troubling. Consider
these examples. When Mr. Hunter testified before Congress
during the last liability crisis, he appeared on the same
morning as the chairman of the FTC. The chairman had no
prepared statement. When he was asked to explain what the FTC
thought was causing the crisis, he answered he did not know,
and if he did know, he would be breaking the law. That was
because Congress had taken away the FTC's right to study
insurance in 1980. It seems that the FTC had been punished for
having had the audacity to tell consumers that whole life
insurance was not a good deal. That should give pause to those
who think that a Federal role would automatically be better,
whichever side you are on that one.
And then he goes on to say, the Supreme Court has ruled
that ERISA preempts State insurance regulation. That ruling has
created a regulatory black hole wherein consumers can fall to
their death. As bad as State regulation has been, it has never
allowed an insurer to change the rules after a claim occurs.
Yet the United States Supreme Court allowed an insurer to lower
AIDS coverage from $1 million to $5,000 after a man became ill
with the disease.
He concludes, as Congress considers the possibility of some
Federal role in insurance, it should not fall into the
``either/or'' trap as some might say. The Federal role might be
an optional one, partial one, minimal standards, technical
assistance, or some other new approach.
Before asking you to comment on that, we have had testimony
here before the National Conference of Insurance Legislators,
and they had this in their testimony. The essential question is
this: Is there a way to preserve the system of State-based
regulation, and at the same time, accommodate the need for
national licensing, or as some have called it, national
chartering, and they think there is a way. That way is through
interstate compacts. Under a compact, a State could enact
licensing or chartering rules that would have full force of law
in each of the compact jurisdictions across State lines.
The establishment of an interstate compact for insurance
regulation would require a single uncomplicated legislative Act
in each compacting State. States that wish to join the compact
would enact that legislation. It would provide for
establishment of a compact agency that would act through a
governing body. The governing body would include insurance
commissioners from each compacting State. The compact agency
would have legal standing in State laws and courts, and it
would be accountable to the governments of the compacting
States.
My question is this: What do you think of NCOIL's proposal,
should we be pushing for State compacts?
Mr. Urban. And if you want to comment on the statement by
Mr. Hunter, feel free.
Mr. Urban. First of all, on compact, I am not an expert on
that. That sounds like an interesting concept. It doesn't sound
so different from the notion of the industry working with the
members of the NAIC to come up with common rules of
modernization and uniformity. So within that arena, seems like
it might be a reasonable approach.
On the Bob Hunter comments, I find myself in sort of an
uncomfortable position, frankly, for the first time in my
professional life. I might actually agree with Mr. Hunter on
some of his points. I can't imagine a worse environment for an
insurance company and consumers than having a company be able
to choose to be regulated at the State level or to be regulate
d at the Federal level. There would be an almost intense
pressure for the two to have different regulatory approaches to
the same industry. So you would have companies operating side
by side in the same States selling to the same consumers
regulated in a different fashion. I can't imagine how that is
good for consumers, certainly know that wouldn't be good for
companies. And my view of regulation, probably the worst
outcome would be the dual option, Federal regulation would be
slightly less onerous.
Mr. Ganske. Mr. Nabers, you probably don't agree with that,
but would you comment on the NCOIL's proposal?
Mr. Nabers. Yes. The NAIC is studying quite intensely the
use of interstate compacts that create the kind of uniformity
that we in the industry seek, and the NAIC wants to give, and I
think that is probably the best route for the NAIC to take in
achieving the kind of uniformity that we seek, and I am
certainly no expert on interstate compacts. I do know that they
have been used successfully in the banking field with respect
to bank regulation or State regulation of banks.
So I certainly think that it is an idea that needs to be
pursued, though your statement says the legislation that would
be enacted in the various States is simple legislation. That is
true. The seeding of authority from legislative bodies to
insurance commissioners and insurance commissioners to a
central regulatory group is something that is going to take a
lot of thought and political understanding to accomplish. But
the concept, I think, is a sound one, and the NAIC is studying
it.
Mr. Ganske. Mr. Mendelsohn, does the AIA have a position on
interstate compacts? Do you think this is a good way we ought
to look at going?
Mr. Mendelsohn. Well, obviously, we, like the other
associations, are studying all of the alternative ways and have
not yet taken a public position on that. I think that the one
common thread that I see in all of this is a recognition that
the current way of doing business of the 19th century
regulatory system is not working in the 21st century, and all,
regardless of the political point of view that we bring to the
table, agree that radical change is necessary in how we work.
Whether that is by way of compact, by way of the States,
voluntarily working together or the Federal Government having
to take a role, my personal view is it is very difficult to get
50 State legislatures or 50 State insurance commissioners to
radically change the way they do business, and therefore, there
is going to have to be some central Federal prodding along of
the process. And I think that, the difference of views that you
have heard this morning is about how we fix the existing
system. There is not a tremendous amount of debate about
whether the existing system needs to be fixed.
Mr. Ganske. I thank you, and looks like I have used up my
time. So the gentleman from Minnesota, Mr. Luther.
Mr. Luther. Well, thank you, Mr. Chairman and first, I want
to welcome Mr. Turner from Minneapolis here, very nice to see
you. And thanks for sharing your expertise with the committee.
I just want to ask a question, Mr. Turner, and perhaps any
others, too, just to really to inform the committee, on the
whole issue of State privacy laws, if you could comment, give
us your thoughts on State privacy law, the impact of the
Financial Services Modernization Act and the OCC on those laws,
and whether you would support any additional Federal
legislation, and perhaps others that have thoughts can join in
too. But I would appreciate your thoughts on that.
Mr. Turner. Well, privacy is a very important subject for
us, and for really all Americans, and I guess our position
currently is, it is appropriate to move toward the
implementation of the Gramm-Leach-Bliley criteria for privacy
regulation at the State level. That is a good starting point to
put all financial services industries on an equal basis. And we
certainly support as an industry moving in that direction.
Obviously, there are elements of the privacy debate that
probably go beyond the Gramm-Leach-Bliley criteria, and those
are issues that will have to be dealt with over time but I
think certainly, job one is to effectuate or implement the
Gramm-Leach-Bliley ground rules.
Mr. Luther. If there is anyone else that wishes to comment,
and on that whole issue then of the preemption, that preemption
issue, the OCC, any further comments or thoughts that you or
others would have on that issue?
Mr. Turner. Can you clarify the nature of the preemption
issue?
Mr. Luther. Well, just, I think the issue being whether
that, the State model that Minnesota and some other States have
enacted, how that, the effect of that in view of the passage of
the legislation, and whether or not that would be preempted by
the Federal legislation, or if additional legislation would be
needed from your point of view.
Mr. Turner. I am not familiar enough with the subject.
Mr. Smith. The Independent Insurance Agents of America
would believe that, indeed, those State laws should not be
preempted, that the States had the right to enact those laws,
they have enacted those for their consumers, their State has
done that and we believe that those laws should remain as they
are and not be preempted by the OCC.
Mr. Luther. Any other comments from any of the panelists on
that issue? Okay. Thank you. Thank you, Mr. Turner, nice to
have you here. I yield back, Mr. Chairman, thank you.
Mr. Oxley. The gentleman from Illinois, Mr. Rush.
Mr. Rush. Thank you, Mr. Chairman. I want to thank the
panelists also for their testimony, and I want to get right to
my question. Mr. Mendelsohn, you and I see eye to eye on the
fact that the collective effort needed between Federal and
States for this reform, but I think we differ in that on the
question of whether it would have a market-based approach to
insurance regulation without prior government review or
approval of prices or products, which I think would be
beneficial to the consumers. Can you suggest how a market-based
approach would permit competitive companies to provide
services, product, that is, in the best interest of the
consumers?
Mr. Mendelsohn. Certainly. The innovations in products and
services that we are seeing around the world today are being
driven in large part by the market, changes in technology,
changes in the ability to offer financial products, blended
financial products, risks being covered in different ways than
they have before. And it is true that in many jurisdictions
today, the ability to introduce those products takes a very,
very long time.
In a system in which rate and form is unregulated, then
essentially innovation, the best products win in the
marketplace. The consumer will buy the product that delivers
the best value to them, and what we see in other countries and
certainly in the UK when a good idea comes up and a company
starts selling a product, if it is successful in the
marketplace because it meets consumer needs, other companies
then copy it, drive down the costs.
My view is that the whole by-product of the electronic
world is the customer becomes truly the king, the customer can
go on the Internet and see what products and services are on
offer anywhere in the world, and ultimately, it is they, not
we, who are going to drive reform. They are going to demand
access to these products and services. And they do work in
other places.
When we look at the advance here in the United States now,
we have prior approval of rate in some States, open rating in
others. Clearly the open model is a much faster and more
flexible model, and as long as one of my other panelists said
this morning, as long as we have a competitive marketplace, and
my goodness, here in the U.S. with thousands of insurance
companies, we have a competitive marketplace, people compete to
offer the best product at the lowest price. And it is my belief
that the prior approval of the nature of the products slows
that process down. Bureaucrats, with all due respect, react to
things that are different from what they saw before by slowing
the process down instead of letting those products go to the
marketplace and succeed or fail, based on their own merits.
That is my personal view.
Mr. Rush. Thank you. I want to ask Mr.--maybe you can take
a shot at this one, too. My constituents are mostly concerned
not only in terms of the strength and viability and
competitiveness of the industry, but they are also concerned
about insurance abuses, particularly such as redlining, and
frankly, I am encouraged by that the OCC, and now that it is
engaged in agreements with several State insurance departments
in an effort to share information concerning consumer
complaints. My question is, aside from simply collecting of
data of consumer complaints, should there be more of a
proactive search for data on insurance abuses, such as
redlining?
Mr. Mendelsohn. Well, I think that again, whether we have
Federal regulation or State regulation, it is incumbent upon
the regulator to make sure that there is a level playing field
for the consumer, just as we are asking for a level playing
field among the financial institutions.
And, again, I don't view that issue as being one that
depends on what kind of regulation we have. The regulator, the
ombudsman, whatever we call the person responsible for products
and services provided, has to ensure that they are provided on
a level playing field. So I don't really see that as a Federal
versus State issue, Congressman. I think that's incumbent--it
is in the industry's best interest that we treat the consumers
on a level playing field and I think it is in the government--
whether it is State or Federal's best interest to make sure
that the regulator looks at us and makes sure that that is
happening.
Mr. Oxley. The gentleman's time has expired. The Chair is
pleased to recognize the ranking member of the full committee,
the gentleman from Michigan, Mr. Dingell.
Mr. Dingell. Mr. Chairman, first of all, I thank you.
Second of all, I commend you for these hearings. Third of all,
I note that as Yogi Berra used to say, ``This is deja vu all
over again.'' It seems like every time we read about the States
and insurance regulation, we find that it is written about in
connection with some massive rascality which has gone on
uncaught by the State regulators.
So I have a few questions here for Mr. Hillman.
Mr. Hillman, do you think it is fair to characterize the
performance of State insurance regulators and this Frankel case
as a travesty?
Mr. Hillman. Certainly a travesty of effective insurance
regulation, Congressman.
Mr. Dingell. Now, had State insurance regulators checked
with State securities regulators about Liberty National
Securities, the firm Frankel said he had been using to invest
insurance company assets would they have been alerted to the
fact that fraud was underway?
Mr. Hillman. Yes. There are a number of inconsistencies
that such a check would have revealed, and caused regulators to
ask additional questions. For example, the address of the real
Liberty National Securities registered with the securities
regulators did not match addresses on the account statements of
insurance companies. Second, the officers of the real Liberty
National Securities did not match the names of individuals
signing the asset confirmations being sent to the insurance
companies and to regulators.
Finally, the real Liberty National Securities had reported
assets of less than $100,000. Certainly that level of assets
couldn't support the massive trading activity that that
securities firm said they were conducting.
Mr. Dingell. The scam began in 1991. If insurance
regulators had checked with securities regulators as early as
1991, would it not have been possible for the regulators to see
that fraud was going on; and if not, would it not have been
detected much earlier?
Mr. Hillman. Yes, it would be possible to detect a fraud
much earlier. For example, if the insurance regulators had
access to information that the securities regulators had from
their CRD system, they may have found that one of the grantors
showed a disciplinary record. Upon further review and
discussions with that grantor, they would have learned that
that grantor actually wasn't putting up the funds. And through
questioning such as this, they may have been able to uncover
this much sooner.
Mr. Dingell. Is there any reason why State insurance
regulators cannot and did not check with state securities
regulators in this matter?
Mr. Hillman. No, there is no reason why they couldn't check
with securities regulators.
Mr. Dingell. Your report says that Tennessee regulators
performed four, four onsite examinations of Frankel-controlled
insurers and did not find any material weaknesses, even though
Frankel had already embezzled insurers' assets before the
examinations were conducted. How is it possible for insurance
examiners to miss the fact that a company's assets were no
longer there?
Mr. Hillman. Mr. Congressman, our report says that, as you
say, that there were four onsite examinations conducted. They
weren't all done in Tennessee. One was done in Oklahoma,
Tennessee, Missouri. Better enforcement procedures, better
enforcement of existing procedures is certainly a method that
could have been used. NAIC has a model law, I believe it is
number 295, where companies are only supposed to accept
statements from national banks or State banks or trusts and
hold those assets in those organizations. In our review, and in
this instance, those were held by a securities firm which is
inconsistent with this model law.
Mr. Dingell. Why didn't they find the fraud?
Mr. Hillman. In our view, it was simply a lack of
professional skepticism.
Mr. Dingell. Now, in your statement you noted that the
Frankel Insurance Company's assets were reported to be invested
in government securities, that in many cases the total assets
of the company were completely turned over every business day.
Can you think of any legitimate business strategy that would
justify these high turnover ratios, and why didn't State
regulators question the high levels of reported trading
activity? In the stock markets, this would be call churning.
Mr. Hillman. Exactly. I see no legitimate reason for these
high asset turnover ratios, particularly in an insurance
company. In our view, the reasons State regulators didn't
question this activity included a couple of factors. First, the
lack of securities-related expertise to assess risks, and
second, a lack of guidance available by NAIC to flag a high
asset turnover ratio and a risky practice such as this.
Mr. Dingell. Were the profits that Frankel reported as
investments in government securities typical of what
investments in other government securities were earning?
Mr. Hillman. The reported earnings were often higher than
normal market returns.
Mr. Dingell. Wouldn't that constitute a warning to anyone
who did an audit?
Mr. Hillman. It certainly should.
Mr. Dingell. Now, when an examiner for the Tennessee
Department of Commerce and Insurance determined on February 1,
1999, that it was a possibility that Mr. Frankel's insurance
company, ``had been looted of its assets,'' the Tennessee
department did not warn the public or other State regulators,
did it?
Mr. Hillman. During our review we found no evidence that
the information was proactively shared with other State
regulators to help prevent the possibility of a potential scam
from spreading.
Mr. Dingell. If that warning had been sent out, would it
not have alerted both other regulators and the public at large
to the fact that this company was being looted?
Mr. Hillman. It could very well have.
Mr. Dingell. Is it your understanding that instead of
alerting regulators in other States, the State of Tennessee
chose to ask Mr. Frankel to redeposit the assets of Franklin
American Life Insurance Company in a qualified bank account
within 60 days?
Mr. Hillman. Yes, to the best of my knowledge.
Mr. Dingell. Isn't this a little bit like saying I know you
have been stealing from me but I am giving you 60 days to steal
from someone else so that you can pay me back?
Mr. Hillman. I can't speculate on their motives. However--
--
Mr. Dingell. Did Franklin during this period of time
purchase an additional insurance company in Arkansas for $5
million and enter into a fraudulent reinsurance scam with
Settler's Life in Virginia that gave him another $45 million?
Mr. Hillman. He did indeed.
Mr. Dingell. Now, the money that Mr. Frankel used to
deposit in an account in Tennessee came from money stolen then
from two other insurance companies during the 60-day period the
Tennessee regulators gave him; is that correct?
Mr. Hillman. That is correct.
Mr. Dingell. Now, did regulators in Arkansas or Virginia
contact Tennessee's regulators, or did Tennessee's regulators
contact the regulators in those two States asking for
information about the activities of Franklin American and those
who control it?
Mr. Hillman. We found no evidence documenting such
communication. However----
Mr. Dingell. Do you believe that in fraud cases of this
type, the present state of 50 independent State insurance
regulators makes each regulator put too high a priority on
taking care of policies in his or her own State instead of
exposing fraud that affects policyholders in other States?
Mr. Hillman. We believe there is little incentive on the
part of State insurance departments to tell another State about
problems with a domestic insurer, principally because that
could exacerbate those problems as other States act to protect
their own policyholders.
Mr. Dingell. Would I be fair in inferring that only 12 of
50 States have either the authority or access to data needed to
enforce Federal prohibition against convicted felons working in
insurance businesses?
Mr. Hillman. According to the NAIC, only a handful of
States have the ability to access criminal history data.
Mr. Dingell. So an adequate enforcement authority at the
State level is a problem here, is it not?
Mr. Hillman. Yes, it certainly is. Right now the States and
NAIC indicate that they do not currently have a mechanism to
obtain criminal history data that would allow them to identify
persons with a criminal record that are trying to enter the
insurance business.
Mr. Dingell. Now that Gramm-Leach-Bliley has become law,
fraud in one financial section, like insurance, can affect
banks and securities firms as well. Is it true that Connecticut
is the only State to have a memorandum of understanding with
the Federal Reserve providing for the sharing of information in
cases where banks and insurance companies are affiliated?
Mr. Hillman. That is true. To date, the Federal Reserve has
one MOU with the State of Connecticut as a result of the
Citigroup merger involving Travelers Insurance Company, though
additional MOUs are anticipated. We also are aware that the OTS
and OCC have entered into MOUs with a number of States.
Mr. Dingell. Isn't it fair to observe that the inability or
the failure of the reluctance to share information creates
serious problems for regulators in both industries?
Mr. Hillman. Yes. It may be a serious problem if regulators
do not share regulatory information on affiliates across
industry sectors or regulatory information on undesirables to
prevent the migration of rogues from one industry to another.
Mr. Dingell. Mr. Chairman, you have been overly generous
with time. I thank you. I have other questions but I will wait
for another time.
Mr. Oxley. I thank the gentleman. The Chair would indicate
that written questions may be posed to any of the panel
members.
Mr. Dingell. With the permission of the Chair, I will
submit additional questions for the record of Mr. Hillman, and
I want to thank him and the panel, but I particularly want to
thank you for your courtesy to me.
Mr. Oxley. Without objection.
We thank all of our panel for an excellent discussion. Some
very, very pressing issues. The subcommittee stands adjourned.
[Whereupon, at 12:22 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
General Accounting Office Response to Questions From the Honorable Tom
Bliley, Chairman, House Commerce Committee
Question 1. Now that Congress allowed private-sector financial
integration with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Response. We would like to highlight two critical coordination
issues. First, regulators need to share supervisory information about
those institutions that choose to affiliate across sectors in the
financial industry. This need is addressed in Gramm-Leach-Bliley for
bank and insurance regulators, but securities regulators were not
included. While it is too early for definitive answers, our work shows
a desire to improve coordination on the part of all regulators.
However, securities regulators have been less active in looking for
mechanisms to improve interindustry coordination. Difficulties remain
in successfully sharing supervisory information among regulators. For
example, in some states, confidentiality laws exist that preclude
sharing of examination workpapers, even with other insurance
regulators. Second, in order to inhibit the migration of rogues from
one industry to another, there needs to be sharing of information about
the history of individuals who have been subject to disciplinary
actions in banking, securities or insurance. The mechanism for sharing
this type of information needs to be easy enough to make both adding
information and cross-checking routine for all regulators.
Question 2. If the States fail to act on the NAIC's proposed
reforms, and no alternatives are forthcoming from Congress, what would
the costs be to the American consumers?
Response. We have not reviewed ongoing uniformity initiatives being
developed by NAIC and the states. If the Committee desires, we could
discuss future work in this area. However, if insurance regulation
remains in its present form, one cost to the American consumers would
be unnecessary vulnerability to frauds such as that allegedly
perpetrated by Martin Frankel.
Question 3. According to your report, ``At nearly every stage of
the scam that we have described for you today, regulators could have
exposed the fraud sooner and limited the damage if there had been
better and more consistent sharing of regulatory information.''
Congress mandated better coordination among the agencies in Gramm-
Leach-Bliley, but there appears to be some resistance. Can you describe
the critical avenues of communication that you believe should be taking
place?
Response. Improved regulatory communication needs to occur at all
levels, including between state and federal financial regulators,
between state financial regulators of different industries, and between
insurance regulators in different states. The barriers to effective
communication, in most cases, are not legal but rather institutional
and cultural. In the Frankel matter, had state insurance regulators
accessed basic information from state securities regulators, the scam
could have been uncovered much sooner. Furthermore, when suspicions of
fraud finally surfaced, a proactive alert to other insurance regulators
could have prevented the scam from spreading further and limited the
damages.
Question 4. If the NASD and NAIC databases performed automatic
checks on unfavorable incidents of matching names, or if review of
insurers trading activities and the condition or location of securities
traders were coordinated between the SEC and NAIC, could we have
stopped Martin Frankel earlier?
Response. Yes, we believe so if such checks were routinely done. In
the Frankel case, regulators did not access broker-dealer information
until 1999, or many years after the scam began in 1991. Early checks
would have revealed discrepancies about the size of the broker-dealer
(Liberty National Securities), its location, and its trading activity.
Had regulators followed up on the discrepancies at an early stage, we
believe it is much more likely the fraud would have been detected.
Regarding name checks, Frankel never used his real name in the
insurance industry so such checks would not have helped in this case.
However, name checks of the grantors of Thunor Trust would have
revealed unfavorable incidents with one of the grantors in the
securities industry. Additional scrutiny by the regulators of the
grantors and their sources of funds may have led to earlier detection
of the scam.
Question 5. If the State insurance commissioners implemented
uniform solvency regulation through a centralized system, could Martin
Frankel have been stopped sooner?
Response. It would depend upon what was included in a uniform
system. For example, we believe Frankel could have been stopped sooner
if the system had included such things as (1) routine background checks
of insurance company principals across financial industry sectors, (2)
routine intra and interstate information sharing among all financial
regulators and (3) appropriate laws, regulations, and processes to
safeguard and verity insurer's assets that are not in the physical
possession of the insurer.
Question 6. The SEC says that they are prevented by statute from
using regulatory information from insurance regulators to discipline
brokers. But couldn't they use the information to put brokers on their
watch or investigation lists?
Response. It seems reasonable to us that disciplinary information
from both insurance regulators and from bank regulators could be used
in this fashion. However, SEC, in commenting on our report, did not
indicate this ability.
Question 7. Do you believe that the financial regulators will
coordinate their efforts on their own without further oversight or
pressure from Congress?
Response. We believe some coordination would occur. However,
continued active oversight by Congress should increase the likelihood
of more substantive progress. For example, on Page 50 of our report we
suggest Congress may want to request that NAIC periodically report to
Congress on the implementation of its corrective actions in order to
encourage and monitor progress by regulators. We specifically suggest
that such a report to Congress include efforts and agreements between
insurance regulators and banking and securities regulators.
Question 8. If we don't ensure better coordination between our
insurance, banking and securities regulators, could Martin Frankel
happen again?
Response. Yes. Even with better coordination, fraud still can
happen. Improved coordination among regulators makes earlier detection
of fraud more likely.
Question 9. What does Congress need to do to enable the State
regulators to coordinate with the Attorney General in performing
criminal background checks to prevent fraud?
Response. This is an area that needs continued attention. However,
it is clear to us that state insurance regulators need to be on par
with their counterparts in the banking and securities industries to
perform routine criminal history checks on individuals seeking to enter
the insurance industry. Some state insurance regulators, per their own
state statutes, have the ability to conduct criminal background checks
on industry applicants while others do not. Justice officials agreed
with the NAIC that most state insurance regulators do not have legal
access to nationwide criminal history data. Congress could solve this
problem by providing a legislative basis for giving state insurance
regulators the right to obtain the results of nationwide criminal
history background checks on individuals, similar to those currently
performed by the FBI for banking and securities regulators.
______
American Bankers Association Insurance Association
October 2, 2000
The Honorable Thomas J. Bliley, Jr.
Chairman
Committee on Commerce
United States House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
Dear Chairman Bliley: Thank you for your questions regarding my
testimony on improving the uniformity and efficiency of insurance
regulation, which I presented to the Subcommittee on Financial
Hazardous Materials on September 19, 2000, on behalf of the American
Bankers Association Insurance Association (ABAIA). My responses to your
questions appear below. In each case, I repeat your question then
provide a response.
Question 1: How much progress has the NAIC made in the last two
months on achieving uniformity, and how much faith should we be placing
in their efforts?
Response: ABAIA applauds the NAIC's efforts to achieve greater
uniformity of state insurance regulation and hopes that it is
successful in those efforts. However, we have serious doubts about the
NAIC's ability to achieve this goal. In order to be successful, the
NAIC must not only obtain the agreement of 50 state insurance
commissioners, but also the agreement of 50 state legislatures. The
NAIC has a good record in developing model laws and regulations.
However, its record in having those model laws and regulations actually
adopted by all states is not so successful. In many cases, the NAIC has
been unable to have its model laws adopted uniformly by the States.
Question 2: What are the minimum results we should insist on from
the NAIC effort, and what sort of time-lines can Congress reasonably
expect for implementation?
Response: At a minimum, the States should focus on uniform
licensing requirements, product consistency, speed to market and
privacy. Anything less than complete uniformity in these areas will
continue to deny new products to consumers and will continue to impose
unnecessary regulatory costs on the industry. Time is of the essence.
Consumer needs and technological changes, especially changes brought
about by the Internet, demand the immediate elimination of regulatory
inefficiencies.
Question 3: What can Congress and the industry do to help the
States achieve uniformity?
Response: ABAIA believes that the enactment of an optional federal
charter for insurance companies and insurance agencies is the best way
to achieve uniform regulation of insurance. Concurrent with the
enactment of such a proposal, we urge the Congress to continue to press
the States on uniformity. In the early 1990s, Congressional oversight
on solvency issues forced many useful changes in state regulation.
Question 4: If the States are unable to make progress in
implementing uniformity reforms over the next year, what alternatives
should Congress consider?
Response: Again, we believe that the enactment of an optional
federal charter is the answer to uniform regulation. Dual chartering
has worked well in the banking industry for over 135 years, and, as we
explained in our testimony, it would benefit consumers, the industry
and state regulators.
Question 5: What are the easiest issues for the States to achieve
before moving on to the more comprehensive uniformity issues?
Response: The two most pressing issues are uniform licensing and
product approval. Conflicting licensing requirements are a clear
impediment to the delivery of insurance products to consumers.
Similarly, delays in approval of products rob consumers of product
choice and innovation. The average life of a new product is six months,
yet it can take eighteen months or more to get a new product approved
by the various states.
Question 6: Now that Congress has allowed private-sector financial
integration with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Response: Information sharing among state regulators and between
state and federal regulators is critical, especially the sharing of
information regarding problem agents and companies. Also, to the extent
possible, it would be useful to have joint examinations and periodic
meetings between regulators.
Question 7: If the States fail to act on the NAIC's proposed
reforms, and no alternatives are forthcoming from Congress, what would
the costs be to the American consumers?
Response: The current regulatory structure is overly complex and
inefficient. This makes it difficult for consumers to compare
alternative products and it increases the cost of insurance for
consumers. Uniform regulation through an optional federal charter would
permit the development of uniform policy forms, ease the distribution
of insurance, permit consumers to more easily compare policies, and
introduce greater price competition for products.
Question 8: According to your written testimony, ``Most States are
currently unclear on advertising requirements for Internet sales and
whether filing of sales materials is required.'' Since the Internet is
by nature a global entity without State borders, how can insurers
comply with 50 different State laws for the same advertisement without
a Federal or national regulatory system?
Response: This is a good example of the problems insurers and
agents face under the current state system. The Internet is an
efficient means for insurers to market insurance and for consumers to
purchase insurance. However, as the States impose different
advertising, licensing and disclosure requirements on Internet
insurance transactions, the industry and consumers cannot fully take
advantage of the Internet.
Question 9: You testified that the dual chartering option for banks
has not resulted in a race to the bottom, but has instead created a
healthy competition between state and federal banking regulators. What
kind of benefits might consumers expect from this healthy competition?
Response: Some of the consumer benefits that would flow to
consumers as under an optional federal charter include greater product
uniformity, better product distribution, greater product innovation and
more price competition.
Question 10: You testified that a consumer should be able to
receive the same policy regardless of where the consumer resides. But
Mr. Urban testified that local market conditions can affect the product
and price in the property/casualty industry, with local concerns such
as tort law, weather, population density and traffic congestion
affecting the product regulation. Can you comment on this?
Response: The various states require that property and casualty
policies include various provisions, not all of which are the same. A
federally chartered insurance company would be able to issue policies
subject only to the terms and conditions required by the federal
insurance commissioner, not the various state commissioners. Also, with
respect to the applicable rate for such a policy, it would be possible
for a federal insurer to develop a blended rate that is based upon
national risks, just as insurers develop rates based upon state risks
today.
Question 11: You testified that the proposal from the ABAIA would
prohibit the new Federal regulator from imposing any rate requirements
or policy pre-approvals. You also quoted a recent study which found
that auto insurance is less costly and more available in the 14 states
that do not require prior approval of rates than in the 27 other states
that do require prior approval. Why do the states have rate approval
requirements, and is ABAIA's proposal politically feasible?
Response: Rate regulation was originally intended to ensure that
companies did not jeopardize their solvency through mispricing. Today,
there are other, more direct ways, to supervise solvency. Furthermore,
several states have moved to reduce or eliminate rate regulation.
Illinois is an example, and Mr. Urban, who appeared before the
Subcommittee on behalf of the National Association of Mutual Insurance
Companies, told the Subcommittee ``Illinois is a highly competitive
state. Products are available, innovation is rapid and citizens pay
fair, competitive prices for insurance.''
Sincerely,
Glen J. Milesko
President and Chief Executive Officer
Banc One Insurance Services Corporation
______
American Council of Life Insurers
October 2, 2000
The Honorable Tom Bliley, Chairman
Committee on Commerce
U.S. House of Representatives
Rayburn House Office Building
Washington, DC 20515-6115
Dear Mr Chairman: I appreciate your interest in increasing the
uniformity and efficiency of the insurance regulatory system. As I
indicated in my written statement before the subcommittee, this issue
is now a matter of great urgency for our business.
My answers to your questions follow. If there are any additional
questions you have or if I can provide you or your staff with any
additional information, please do not hesitate to contact me.
Question 1. How much progress has the NAIC made in the last two
months on achieving uniformity, and how much faith should we be placing
in their efforts?
Response 1. The NAIC has made exceptional progress in developing a
conceptual framework for making the state-based system of regulation
more efficient. Of course, some aspects of the changes the NAIC and
life insurers seek may necessitate legislation, and state legislatures
will have to cooperate with state insurance regulators and the NAIC to
bring about needed reform in a uniform manner. One area where the NAIC
is making significant progress involves agent licensing. The NAIC has
just completed a two-year effort to develop a model agent licensing law
which, if enacted by the states on a uniform basis, will establish the
foundation upon which a national agent licensing system can be built.
However, if states insist on retaining their own unique requirements
and adopt the model law with material deviations, the uniformity needed
to support a national licensing system will never materialize. In
short, the open question is whether the NAIC and the states will
ultimately be able to translate concept into actual regulatory
efficiency, and do so to the extent necessary to meet the demands of
today's insurance marketplace.
Question 2. What are the minimum results we should insist on from
the NAIC effort, and what sort of time-lines can Congress reasonably
expect for implementation?
Response 2. From the outset, the ACLI has set a clear objective for
an efficient state-based system of life insurance regulation: uniform
standards, consistent interpretations of those standards; and a single
point of contact for dealing with multiple jurisdictions. The more this
objective can be achieved in the critical areas identified in the ACLI
study of regulation and in the CEO survey appended to our statement,
the greater the NAIC's measure of success. Though time is of the
essence, the ACLI has not set a timetable for this task. Since we
believe state regulation will always be an important component of the
insurance regulatory landscape, we will work to make it more efficient
regardless of how long it takes.
Question 3. What can Congress and the industry do to help the
States achieve uniformity?
Response 3. The states may conclude that they need assistance from
Congress (e.g., something conceptually akin to NARAB in Gramm-Leach-
Bliley) to achieve the degree of uniformity necessary to put in place a
modernized system of insurance regulation. The ACLI would be supportive
of such a concept.
Question 4. If the States are unable to make progress in
implementing uniformity reforms over the next year, what alternatives
should Congress consider?
Response 4. This question and Question 11 raise an important point.
Understandably, the NAIC views its progress toward an efficient system
of regulation as having a direct bearing on the need for Congress to
consider alternatives, including an optional federal insurance charter.
And there are certainly those in the insurance industry that share that
perspective. Others, however, do not directly link improvements to a
state-based system of insurance regulation to the question of whether
an optional federal charter or some other avenue to regulatory
efficiency should be pursued. For example, many life insurers simply
believe there should be a dual charter system for insurers. They want
both an efficient state charter option and a workable federal
alternative, and believe both should be aggressively pursued at the
same time.
Question 5. What are the easiest issues for the States to achieve
before moving on to the more comprehensive uniformity issues?
Response 5. As noted in the answer to Question 1, the NAIC has made
significant progress in the area of agent licensing. A model law has
been completed, and the NAIC has developed the infrastructure that will
support a centralized, automated agent licensing system. This issue is
farther along in the development stage than many other important
issues, due in large part to the pressure applied on the states by the
NARAB provisions of the Gramm-Leach-Bliley Act. In fact, many believe
that the degree of uniformity achieved by the states in this area will
be predictive of the overall success of the NAIC's regulatory reform
agenda. We have also developed recommendations for improving the
timing, scope and coordination of the multi-state market conduct
examination process, which can be implemented quickly and without the
need for legislation while a long-term solution to this issue is
devised. Additionally, the company licensing process (for authority to
do business in a state) could be markedly improved in the short-term if
states participate in the NAIC's ALERT initiative and agree to uniform
company admission standards. Finally, while the multi-state product
approval process is one of the more complicated issues to address, a
comprehensive solution is urgently needed for insurers to compete
successfully in rapidly changing markets and to help correct the
growing competitive imbalance between life insurers and other financial
services providers.
Question 6. Now that Congress has allowed private-sector financial
integration with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Response 6. Communicating relevant information between and among
the various financial service functional regulators is imperative. As
firms increasingly diversify, this coordination will be even more
important. Beyond that, the ACLI would not support merging functional
financial service regulators. We believe the regulatory needs of
insurers, banks, mutual funds, and securities firms are quite different
and necessitate unique regulatory expertise. We believe functional
regulators dedicated to the particular needs and circumstances of the
firms and markets they oversee are necessary, particularly in an
increasingly complex financial services environment.
Question 7. If the States fail to act on the NAIC's proposed
reforms, and no alternatives are forthcoming from Congress, what would
the costs be to the American consumers?
Response 7. We believe the costs would be substantial. For example,
our inability to bring new products to market effectively denies
consumers innovative new products and services. Competing financial
service firms will rapidly occupy this space in the marketplace if we
are slow to meet consumer demands, especially in the critical area of
retirement security. We are already seeing evidence of diversified
firms allocating capital away from insurance and into banking or
securities due to the inefficiency of the insurance regulatory system.
As firms diversify further, these adverse capital allocation decisions
would likely increase. Inefficient regulation also imposes higher costs
on insurers, and these costs are in whole or in part passed along to
consumers. Companies have squeezed efficiencies out of their own
operations, but to date have had little success in moving toward a more
efficient and cost-effective regulatory system. Taken together,
concerns of this nature could seriously damage the insurance industry
and impair the ability of insurers to provide valuable financial and
retirement security products to consumers.
Question 8. What are the costs to consumers of State regulation,
and why do you believe that national treatment or an optional federal
charter might decrease those costs?
Response 8. The unnecessary hard and soft costs associated with the
redundancies and inefficiencies of state regulation are enormous. These
costs are passed along to consumers. Many believe that only by putting
in place a federal charter alternative will the states have sufficient
impetus to achieve significant improvements in efficiency (e.g.,
witness the steps the Conference of State Bank Supervisors has put in
place). More generally, many of the major problems of the current
system involve doing business in multiple jurisdictions. Having
``national treatment'' under a state-based system of regulation or a
federal charter option with a single federal regulator would achieve
(hopefully) the objective the ACLI outlined in response to Question 2:
uniform standards; consistent interpretations of those standards; and a
single point of contact for dealing with multiple jurisdictions.
Matters such as policy form approval and company licensing would not
have to be done 50+ times, often pursuant to non-uniform standards and
administrative interpretations. By doing these things once on a uniform
basis, regulatory protections can be maintained while the huge costs
attributable to the duplicative and redundant oversight are
substantially reduced.
Question 9. If the current State reform efforts fizzle out, and
Congress does not respond with strong federal action, what would the
effect be on the long term viability of the insurance industry?
Response 9. As with our answer to Question 7, we believe the
consequences would be severe. The marketplace is far less tolerant
today of inefficiency than it once was, and market developments are
much more rapid. Consumers now demand efficiency, and tools such as the
Internet give them enormous ability to seek and find value on a global
basis. From a broader perspective, the markets reward efficiency and
penalize inefficiency. If insurers cannot become more efficient and
cannot respond to market developments quickly, they will risk becoming
irrelevant in the dynamic financial services marketplace. The
consequences to the economy would be extremely adverse.
Question 10. If Congress were to move forward with an optional
federal charter, should we consider an approach similar to NARAB which
gives the States a statutory deadline in which to act, with failure
meaning the creation of a potentially state-run system with certain
Federally imposed standards?
Response 10. The ACLI believes that approaches such as NARAB should
be considered as part of the overall effort to make a state-based
system of regulation operate more efficiently. Such approaches may at
some point prove necessary--or they may not. The concept is certainly
one avenue toward ``national treatment'' within the context of a state-
based system of regulation.
Question 11. At what point should Congress start considering an
optional federal charter? Aren't the States making significant progress
right now towards uniformity without federal interference?
Response 11. As explained in answer to Question 4, many believe
that an optional federal charter should exist along side of an
efficient state-based system of regulation. The two systems of
regulation are complementary, not mutually exclusive. Putting in place
a dual charter system for insurance analogous to that found in the
commercial banking, thrift, and credit union business is an issue that
Congress should seriously consider, and many believe that it is
imperative for that consideration to be undertaken immediately.
Question 12. How do you respond to the argument that an optional
Federal charter would disadvantage smaller producers that don't want to
subject themselves to Federal regulation?
Response 12. Two points are relevant here. First, if a small
insurer, perhaps one doing business in a single state, determines that
state regulation is more advantageous, that insurer would simply not
elect the federal charter option and would remain state regulated.
Under a dual charter concept, companies are not forced to become
subject to a regulatory scheme they conclude would be disadvantageous.
The optional federal charter is just that--an option. Second, for small
insurers doing business in multiple jurisdictions, an optional federal
charter may be even more beneficial than for larger companies. Small
companies do not have the same resources (human and financial) as their
larger competitors to get products approved in all jurisdictions. And
they do not anticipate the same volume of sales as larger companies out
of which they can recoup their capital outlays. Consequently, it is a
smaller company doing business in multiple jurisdictions that has much
to gain from a federal charter option.
Sincerely,
Drayton Nabers, Jr.
______
Responses for the Record of Robert Mendelsohn, Chief Executive Officer,
Royal and SunAlliance, on Behalf of the American Insurance Association
Question 1. How much progress has the NAIC made in the last two
months in achieving uniformity, and how much faith should be placed in
their efforts?
In March 2000, the NAIC unanimously approved its ``Statement of
Intent: the Future of Insurance Regulation.'' Since March, nine NAIC
Working Groups have been meeting regularly in an effort to develop a
blueprint for needed reforms to the state-based system. This blueprint
is expected to be published in December. At that time, AIA will
evaluate the progress that has been made, and have a better sense of
how much faith should be placed in the NAIC's on-going efforts.
Question 2. What are the minimum results we should insist on from
the NAIC effort, and what sort of time-lines can Congress reasonably
expect for implementation?
Last spring, the AIA Board of Directors ratified a set of ``guiding
principles'' for regulatory reform. These principles could be achieved
in either a state- or a federally-based insurance regulatory system. As
such, we believe they are the appropriate standards for assessing the
NAIC's blueprint for regulatory reform. The principles are as follows:
A Market-based System. Market forces, rather than regulatory
approvals, should dictate the products sold by insurers and the
prices they charge--thus, the critical importance of rate and
form deregulation. AIA is willing to consider scaling back the
McCarran-Ferguson antitrust exemption in exchange for a market-
based system that eliminates the type of command and control
regulation that has been repealed for so many other industries
in the U.S.
National Treatment. Companies should have the option of
obtaining a single charter that would allow them to do business
in all fifty states. States must be prohibited from
discriminating against such companies in favor of those that
obtain licensing on a state-by-state basis.
Uniform Regulatory Requirements. Insurance companies that
operate in multiple jurisdictions should be subject to one
stop, non-duplicative regulation and uniform laws governing
market conduct activities, agent licensing, claims practices,
solvency, liquidation, and other areas where an on-going
regulatory role is in the consumer interest. In these areas,
regulations should focus on the issues that really matter to
the insurance buying public, and not impose excessive and often
meaningless requirements that remain in place long beyond
whatever limited benefit they purported to provide at the time
they were promulgated.
Timely and Impartial Implementation. Enforcement of regulatory
requirements should be timely, impartial, and professional, and
fines and other penalties should be proportional to the
violation at issue.
Level Playing Field. Insurance companies should be able to
operate on a level regulatory playing field vis-a-vis other
financial services firms that provide similar products, global
competitors, and the alternative market.
Technology for the 21st Century. The regulatory system should
embrace the use of new technologies by insurers in every aspect
of their business.
AIA recognizes that regulatory reform, whether at the state or
federal level, will take some time to implement, but we should expect a
blueprint by the end of this year that should include the principles
stated above. That blueprint should include meaningful implementation
timetables that place responsibility on individual states to improve
their systems. Recognizing that this is a long-term project,
implementation efforts that include changes to individual state systems
should be well underway by mid-2001.
Question 3. What can Congress and the industry do to help the
states achieve uniformity?
Within the context of a state-regulated system, federal legislation
can help the states achieve uniformity by preempting state requirements
that impede effective commerce, such as government price controls; the
development of national standards that preempt conflicting state
requirements (e.g., the new e-signature law); creation of a single
port-of-entry licensing system (e.g., the Risk Retention Act); or a
NARAB-type approach. All of these can be done within the context of a
system of state regulation, without establishing a system of either
mandatory or optional federal regulation. By contrast, national
standards that do not preempt conflicting state requirements (e.g.,
Title V of Gramm-Leach-Bliley) do not facilitate uniformity.
The insurance industry can help the states to achieve uniformity by
either supporting the aforementioned Congressional actions, or by
advancing ``model'' laws or regulations in the states. AIA, for
example, was active in the development of the NAIC's new model Gramm-
Leach-Bliley privacy regulation, and we will work to achieve its
adoption in the states.
Question 4. If states are unable to make progress in implementing
uniformity reforms over the next year, what alternatives should
Congress consider?
Optional federal chartering, which was discussed at length during
the September 19 hearing, is an alternative that would merit serious
consideration in this situation.
Question 5. What are the easiest issues for the states to achieve
before moving on to the more comprehensive uniformity issues?
As a result of the NARAB provisions of Gramm-Leach-Bliley, states
already have a head start on the agent licensing issue.
Question 6. Now that Congress has allowed private-sector financial
integration, with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Gramm-Leach-Bliley affirmed the concept of ``functional
regulation,'' through which insurance, bank, and securities regulators
all maintain regulatory authority over their respective sectors. AIA
believes that functional regulation is the only viable approach in a
regulatory structure through which some sectors (banks and securities
firms) are regulated at the federal level, while insurance remains a
state-regulated business. As such, statutory integration should not be
considered unless Congress chooses to consider a federal approach, such
as optional federal chartering. Gramm-Leach-Bliley does establish a
consultative relationship between the federal reserve and state
insurance regulators on solvency matters. It is AIA's understanding
that a number of discussions among federal functional regulators and
the NAIC have occurred.
Question 7. If the states fail to act on the NAIC's proposed
reforms, and no alternatives are forthcoming from Congress, what would
be the costs to the American consumer?
For AIA members, the ability to bring products to market in a
timely and cost-effective manner, along with uniform regulatory
treatment regardless of where they are domiciled and where they do
business, could determine their survival in the 21st century. But
consumers also will suffer if the system is not reformed.
Examples of benefits that will flow to consumers from regulatory
reform are as follows:
Consumers are likely to have more product options;
Insurance markets will better keep up with fast-paced change
in the economy and the financial needs of individuals,
businesses and families;
In those state insurance markets where strict regulation of
pricing has kept insurers out of the market, new competitors
will enter or re-enter the market.
Consumers should realize savings in insurance costs as the
market becomes more efficient, competitive, and the costs of
unnecessary regulation are squeezed out of the system.
Regulatory reform should also increase the availability of
insurance in areas that sometimes experience shortages of
carriers willing to provide insurance, including areas subject
to natural disasters. Although prices may rise in such areas to
adequately cover the true risk, product options like
deductibles and discounts for loss mitigation would also
increase.
Regulatory reform will reduce subsidies that lower-risk
consumers often provide to those with higher risk
characteristics (e.g., high risk drivers).
Question 8. What are rate and form approvals, how do they affect
consumers, and how does that regulation differ from other industries?
Property-casualty insurance is one of the nation's last major
industries still shackled by heavy regulation of prices and products
(rates and forms). All 50 states, the District of Columbia, and the
various U.S. territories regulate the insurance industry separately.
Pricing of insurance products typically must be submitted, reviewed and
approved by state regulators, often even if an insurance company wants
to reduce prices. Both routine and innovative new products (insurance
policies and endorsements) currently have to be reviewed and approved
by dozens of states before they can appear in the marketplace on a
nationwide basis. This causes delays in launching these new products
and sometimes creates enough roadblocks that new property-casualty
insurance products are not launched at all, an indication that the
market is not working efficiently for consumers.
Over the past two decades, key American industries--including
railroads, airlines, trucking, energy, telephone, banking, and
securities--have seen deregulation of pricing, products and entry into
new markets. Moreover, for insurers headquartered in other nations that
are key U.S. trading partners and competitors in the global
marketplace, much less restrictive regulation helps foster innovation
and competition.
Question 9. You testified that a streamlined commercial lines
regulatory system would bring insurance capital back to the U.S. Can
you elaborate on this, and discuss how this might help consumers get
better disaster insurance coverage.
The alternative (non-regulated) market for commercial insurance has
grown from an estimated 21% in the early 1980s to approximately 35%
today. Much of that growth has come in the form of captive insurance
companies formed by large U.S. corporations to provide insurance for
the company's own property, liability and other related risks. A large
majority of captive insurers are domiciled offshore. Bermuda alone
accounts for 34% of the total, followed by the Cayman Islands (24.4%),
and Guernsey (8.5%). Luxembourg, Barbados, and the Isle of Man are
other leading locations for captive insurers, while Vermont is one of
the few locations in the U.S. to have a significant concentration of
captive insurers. With the exception of Vermont and a few other states
with relatively small number of captive insurers, this has meant a flow
of insurance capital and jobs away from the U.S.
While companies form captive insurers for several reasons,
including tax advantages, freedom from the inflexibility and the
complexity of dealing with very different regulatory systems in 50
states, is another important reason. Large, national corporations with
multi-state operations and their insurers find it particularly
difficult to deal with often slow, complex and non-uniform state-based
regulatory systems. Streamlining commercial regulation in the United
States would be one factor in helping to keep insurance jobs and
capital in the U.S.
Restrictive rate and form regulation in the homeowners' insurance
line have led to availability problems in a number of catastrophe-prone
states. However, the natural catastrophe problem is a complex issue
that is not directly related to commercial lines deregulation.
Question 10. You testified that the need to meet differing
regulatory demands in 50 different states increases costs and
discourages technological innovation. Can you elaborate on this?
Inflexible state requirements specifying exact data record layouts
and formats for electronic transmission of data make it more difficult
and less economical for carriers to incorporate new technologies and
standards into their information systems. This has been a major
challenge for carriers as states move toward electronic filing systems
that are not necessarily uniform in layout, format, or data reporting
requirements.
Question 11. You testified that the AIA has focused on speed to
market for insurance products and national treatment for companies. Why
are these the first stepping stones for uniformity, and how will
achieving these goals help in reaching more comprehensive uniformity.
Speed to market--the ability to bring products to market in a
timely and cost-effective manner--is critical to the insurance
industry's ability to serve its customers and to compete with the
myriad other risk management alternatives that are available in an
environment of increasing globalization and convergence. AIA favors a
system where competition in the marketplace, not actions of insurance
regulators, determines price and product. A market-based system would
provide the greatest possible uniformity because the demands of the
marketplace do not stop at state borders, nor do they distinguish
between federally- and state-regulated institutions.
AIA also recognizes that there are some issues for which the market
may not be an appropriate surrogate for regulation, such as licensing,
solvency regulation, market conduct oversight, and so forth. In these
areas, national treatment is the goal. The NAIC's National Treatment
Working Group is focusing on a single licensing system, but the NAIC
leadership recognizes that the broader issue of national treatment
involves uniform across-the-board regulatory treatment regardless of
where a company is domiciled and it does business.
______
Responses for the Record of John G. Turner, Vice Chairman, ING Americas
on Behalf of the Financial Services Roundtable
Question 1. How much progress has the NAIC made in the last two
months on achieving uniformity, and how much faith should we be placing
in their efforts?
Answer: I am certainly encouraged by the efforts of George Nichols
and the NAIC. I think he has done an admirable job of identifying many
of the problems in the current state-based regulatory structure. I
would add, though, that in light of the extraordinary and rapid changes
in the marketplace, reforms have to come soon. Otherwise, insurers will
continue to operate at a competitive disadvantage, and will get left
behind.
Question 2. What are the minimum results we should insist on from
the NAIC effort, and what sort of time-lines can Congress reasonably
expect for implementation?
Answer: I would hesitate to impose an arbitrary deadline, but will
again say that significant and substantial reform and modernization
cannot wait any longer. As you know, Mr. Chairman, no matter how
meritorious NAIC model laws and regulations may be, they are non-
binding on the states and must be separately proposed and ratified in
51 jurisdictions. Each state is free to modify the model act terms, and
often does so. Each such law is then separately interpreted by the
insurance department and courts of that state. Achieving uniformity
this way is a task likely to take years, if at all.
Question 3. What can Congress and the industry do to help the
States achieve uniformity?
Answer: Congress can continue to serve a vital role by holding
hearings and gathering information to highlight the problem insurers
face in the current system, notably in the areas of licensing, product
approval, and privacy. It is my view that the specter of congressional
action is a strong and visible incentive for the states to implement
long overdue changes.
Question 4. If the States are unable to make progress in
implementing uniformity reforms over the next year, what alternatives
should Congress consider?
Answer: S. 900 was a great first step in financial modernization.
The NARAB provisions contained in that Act serve a useful purpose in
promoting uniformity reforms by the NAIC. The Roundtable believes that
an optional federal charter would be the most effective way to achieve
a seamless and uniform regulatory structure. I cannot overstate the
myriad redundancies in a 51 jurisdiction regulatory structure.
Question 5. What are the easiest issues for the States to achieve
before moving on to the more comprehensive uniformity issues?
Answer: That question may be better directed to the NAIC, but I
will say this: Both industry and the regulators have articulated the
problems with the status quo on a number of issues--agent licensing,
speed to market, and privacy. I am willing to continue working with the
NAIC on constructive solutions to these urgent problems.
Question 6. Now that Congress has allowed private-sector financial
integration with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Answer: This is an important question. The umbrella supervision
established by S. 900 represents a tremendous advancement in the
regulatory structure. There is no question that coordination among the
regulators is essential. A streamlined, uniform regulatory matrix would
benefit both industry and consumers.
Question 7. If the States fail to act on the NAIC's proposed
reforms, and no alternatives areforthcoming from Congress, what would
the costs be to American consumers?
Answer: The costs would continue to be significant. Studies have
estimated that complying with burdensome, duplicative, and inconsistent
rules and regulations in 51 jurisdictions costs consumers hundreds of
millions per year. There is no question that increasing uniformity
would dramatically reduce these costs.
Question 8. In your testimony, you state that ``simply improving
the State insurance system . . . may not be sufficient for those
insurers that compete . . . on a national level.'' You also note that
you fully support the ongoing efforts of the NAIC to reform the State
system. Give us a threshold of what you believe constitutes sufficient
reform over the next few years by the States to obviate the need for an
optional Federal charter.
Answer: Yes, the Roundtable supports, encourages, and applauds the
NAIC's reform efforts. At the same time, we have a healthy skepticism
that simply improving the current system will address all of our
concerns--or that it can be achieved in a timely manner. Let me offer
one striking example which, I think, illustrates the problems insurers
face today: It takes an average of 45 days to bring a securities
product to market. In stark contrast, it takes 9-18 months for a
similar insurance product to reach the consumer. An unlevel playing
field forces insurers to operate at a competitive disadvantage relative
to other financial services companies and poorly serves the insurance
consuming public.
Question 9. If Congress established an optional federal charter for
insurers, how would the resulting competition between the federal and
state regulators help consumers?
Answer: The Roundtable believes that competition between the
regulators would produce better, more effective regulation. For
instance, we believe that products would get approved in a much more
timely fashion if we had a dual insurance system. Addressing this speed
to market problem is vitally important. The dual banking system has
been effective in reducing the amount of time it takes for banking
products to be approved. We can only assume that a dual insurance
system would produce the same efficiencies.
Question 10. Would an optional federal charter work equally well
for all lines of insurance, or would it be easier to achieve in certain
lines of business?
Answer: The Roundtable believes that an optional federal charter
would work equally well for all lines of insurance. We believe
increased competition, greater choices and lower costs for consumers,
and better regulation would be the hallmarks of an optional federal
charter system.
Question 11. If the current state efforts begin to falter, should
Congress consider a NARAB type approach which would give the States a
certain period of time to achieve key goals, with failure to do so
resulting in the creation of Federally imposed nationwide treatment run
by the States with Federal involvement as a backstop if the States
refuse to comply?
Answer: NARAB was a positive development. But I am not sure that we
have the time to consider another NARAB type approach. The marketplace
is not going to wait for insurers who have to play catch up due to a
non-uniform, multi-state regulatory structure. Remaining at a
competitive disadvantage is no longer an option.
Question 12. Can you explain the difference between ``politicized
pricing'' and ``risk based pricing'' of insurance products?
Answer: Risk based pricing, unlike politicized pricing, is
competitively determined and takes into account the actual risks
involved. As Congressman Shimkus pointed out, Illinois has a market-
based system for determining insurance prices and products that would
serve as a useful model in the development of a new federal system.
Experience has shown that reliance on the market is the best way to
give consumers good insurance products at fair prices that reflect the
risks involved.
Question 13. You testified that many State insurance departments do
not have the same quality or quantity of staff resources that a federal
regulator would have. If an optional Federal charter were created,
wouldn't that deplete the resources of those State Departments even
more, or could the states then group together into a state-run
centralized system?
Answer: I believe that an optional federal charter would make state
regulation more effective. Competitive choices promote and enhance
innovation, efficiency and quality in governmental performance--
benefiting the regulated entity but more importantly, the consumer. A
dual-federal state system produces a creative and productive tension
that tends to improve the quality of regulation and the business
options available to the private sector. Indeed, the NAIC's SR2000
initiative itself suggests the merits of a dual system, because it
clearly responds to the movement among insurance companies to develop a
federal charter option. Ending the state monopoly in insurance
regulation will strengthen the entire system and our economy.
______
Responses for the Record of Philip H. Urban, President and Chief
Executive Officer Grange Insurance Companies on Behalf of the Alliance
of American Insurers
Question 1. How much progress has the NAIC made in the last two
months on achieving uniformity, and how much faith should we be placing
in their efforts?
Response. In the past two months, the NAIC has adopted a privacy
regulation and made changes to its producer licensing model act. The
regulators also have moved closer to defining more uniform standards
for company licensing and rate and form filings. The NAIC has made some
progress, but it is too early to be able to fully evaluate their
proposals. There is, however, concern that state insurance regulators
are not moving toward a market-based regulatory approach. If
modernization of state insurance regulation is to be a success for all
parties, that needs to be the case. In the final analysis, state
legislatures will appropriately play a key role in the improvement of
state regulation.
Question 2. What are the minimum results we should insist on from
the NAIC effort, and what sort of time-lines can Congress reasonably
expect for implementation?
Response. In terms of minimum results, the complexity of insurance
regulation precludes an easy answer. Given the fact that the states are
sovereign, the process for improving and modernizing state regulation
will necessarily take some time. The process can be facilitated by the
NAIC if it does good work in developing model laws and in giving
guidance to the states in their operations.
In relation to the property and casualty industry, because of
different tort law and other local factors that affect rates, forms,
and claims handling, such as weather, catastrophe exposure, population
density and traffic congestion, we should not seek to achieve a one-
size-fits-all uniformity. In the areas of producer licensing, company
admissions to do business in a state, privacy requirements and various
other aspects of insurance regulation, more uniformity would be
preferable. The timeline for uniformity in producer licensing has been
set by Congress with respect to the provisions in the Gramm-Leach-
Bliley Act (GLBA) that creates the National Association of Registered
Agents and Brokers (NARAB). The Accelerated License Evaluation Review
Techniques (ALERT) program concerning admissions to do business in a
state is under rollout. How the states will approach privacy regulation
for insurance companies is an open question. The National Conference of
Insurance Legislators (NCOIL) is considering its own model law.
One area that needs improvement by the states in order to address
the need for a more competitive marketplace is the reform of state rate
and form regulation. The property and casualty industry has urged the
NAIC to consider improvements in the way those filings are handled
today. Those improvements would not require changes in state law and
thus could be accomplished with relative speed.
In addition to the regulatory structures and processes, states need
to concentrate on the culture of regulation. We do not believe that a
bad regulatory culture will produce a better result because it is in a
different structure. We think it is premature to put a precise
timetable on these improvements. We believe Congress should
periodically seek input from the industry to determine if reasonable
progress is being made at the NAIC.
Question 3. What can Congress and the industry do to help the
States achieve uniformity?
Response. The interest that Congress has shown in state insurance
regulation is healthy. It is partly responsible for the energy and
focus now seen at the NAIC on the issue of modernizing insurance
regulation. More time is needed in the process at the NAIC and in the
states to see what can be achieved. It is our conclusion at this time
that there is not any clear litmus test that will indicate a clear
failure of state regulation.
Question 4. If the States are unable to make progress in
implementing uniformity reforms over the next year, what alternatives
should Congress consider?
Response. As indicated in the answer to question #3, it is too
early to consider any litmus test and therefore too early to consider
alternatives that should be put before the Congress.
Question 5. What are the easiest issues for the States to achieve
before moving on to the more comprehensive uniformity issues?
Response. States should first satisfy the GLBA requirements
(producer licensing and privacy), and then work on reforms to rate and
form filings, company licensing and market conduct examinations.
Question 6. Now that Congress has allowed private-sector financial
integration with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Response. The NAIC has taken the initiative to reach out to federal
regulators and determine what is required in the way of integration.
Four of the nine task forces created by the NAIC are working on issues
of coordination of regulation under GLBA. We understand from NAIC
reports and representations from individual insurance commissioners
that there is a lot of exchange of information and conversation taking
place between the state and federal regulators.
One critical area for coordination would be solvency regulation. It
will be important to preserve the separation of accounts and funds of
the affiliated financial entities. Fraud investigation and prevention
as well as protecting consumers from improper practices such as tying
are other critical areas for coordination.
Question 7. If the States fail to act on the NAIC's proposed
reforms, and no alternatives are forthcoming from Congress, what would
the costs be to the American consumers?
Response. We do not know how to answer the question on costs to
American consumers. There is a benefit to consumers from state
regulation, which has worked well. State regulation has helped create a
competitive marketplace. It responds to local needs. It is close to the
consumer. It is our belief that state regulation can work well in the
future.
Proposals for federal regulation or a greater role for the NAIC
also have a price tag. These proposals will need to be weighed against
issues such as costs in dollars, benefits of political and fiscal
accountability in state regulation and more.
Question 8. Mr. Smith testified that our current state system for
rate filing is ``inefficient, paper intensive, time-consuming,
arbitrary, and inconsistent with the advance of technology and the
regulatory reforms made in other industries.'' Would you agree with
this statement, and how does this affect consumers?
Response. As a businessman, I believe that any type of regulation,
be it at the federal, state, or local level, can be classified in the
burdensome terms used by Mr. Smith to describe the current state-based
insurance regulatory system. They are broad terms that are used to
describe practically every kind of regulation, and in my opinion should
not be reserved only for state insurance regulation.
With that said, there are clearly faults in the rate filing
process. That is why a market-based system of rate-setting is
preferable to cumbersome prior approval processes. In Illinois, as I
mentioned in my testimony, the 30-year experience with competitive
rating without regulatory intervention has proved a great success.
As mentioned in the response to question #2, it is just as
important for states to concentrate on the culture of regulation as it
is on regulatory structures. A bad or deficient regulatory culture will
not produce a better result simply because it is part of a different
structure. The Department of Housing and Urban Development (HUD)
venturing into insurance regulation with total disregard for actuarial
and underwriting principles is a clear example. We would consider that
type of federal regulation to fit all of the criticisms that Mr. Smith
leveled at the current system for rate filings in the states.
Question 9. If we want to forestall an optional federal charter,
how can we encourage the States to adopt more uniform regulations, and
how can industry best assist these efforts?
Response. Perhaps the best way to forestall an optional federal
charter is to involve state legislative organizations in this debate.
To that end, the insurance industry already has been actively involved
with NCOIL and with the National Conference of State Legislators
(NCSL). Overtures also need to be made with the National Governor's
Association (NGA).
Question 10. You testified that progress towards uniformity in key
areas may require legislative enactments by State legislatures, which
you suggested would be difficult. How can we make sure that the State
legislators are included in this process and support uniformity
efforts?
Response. As the answer to the previous question suggests, Congress
and the industry need to fully engage state legislators in this debate
so they understand the desirability of taking action to reform state-
based insurance regulation. In the final analysis, state legislators
will determine the scope and shape of the modernization of state
insurance regulation.
Question 11. If the States can ensure a non-discriminatory system,
which issues should be the first candidates for national treatment?
Response. For the property and casualty industry, the areas of
regulation that deal with rates, forms, underwriting and claims reflect
true local market conditions and are not necessarily candidates for
uniformity. They are, however, candidates for improved regulatory
practices and procedures. On the other hand, the areas of access to
markets such as licensing a company, licensing an agent and various
corporate matters, standards for electronic commerce and privacy are
probably best treated uniformly.
But the question as to candidates for ``National Treatment'' begs
the questions of what kind of National Treatment, possible redundant
regulation or expense, and costs vs. benefits. However, Congress has
already determined that producer licensing should be the subject of
uniformity or reciprocity.
Question 12. You testified that the NAIC's privacy models ``do not
meet the overall policy goal of equal treatment for all market
participants.'' Can you elaborate on this, and suggest how equal
treatment can be achieved?
Response. The NAIC privacy regulation contains a health information
privacy provision that goes beyond the financial privacy regulation
promulgated by federal regulators for the banking industry as well as
the provisions of GLBA. As a result, insurers will be put at a
potential marketing disadvantage, and the different disclosure notices
they will receive from the different financial institutions will
confuse consumers.
Question 13. What do you believe should constitute the minimum
level of acceptable implementation of uniformity within the next year?
Response. The level of complexity and the fact that the discussion
at the NAIC has just gotten to the solution stage would make it
premature to determine what should happen within a year. Additionally,
as I indicated, uniformity in and of itself is not necessarily
appropriate as to all aspects of property and casualty insurance
regulation. Finally, the costs and benefits of any regulatory scheme
have to be considered together. The values of state regulation have to
be measured against some potential inefficiencies. As improvements and
modernization in state regulation are achieved, the picture will become
clearer as to what is an ``acceptable'' level of implementation of
regulatory modernization in the states.
Some standards are more clear than others. A majority of states
(29) should adopt the reciprocity option described in the NARAB
requirement under GLBA. All states should adopt a privacy regulation.
All states should make a commitment to implement the uniform company
licensing application and a uniform company licensing process.
Regulators also should agree to work toward rate and form filing
reforms, although if any changes necessitate legislative action, that
could take several years.
______
Independent Insurance Agents of America
October 2, 2000
The Honorable Thomas J. Bliley
Chairman, Committee on Commerce
United States House of Representatives
2125 Rayburn House Office Building
Washington, DC 20515-6115
Dear Chairman Bliley: Thank you for your letter dated September 22,
2000. I was honored to testify recently before the Subcommittee on
Finance and Hazardous Materials, and I appreciate the leadership that
you and Chairman Oxley have exhibited in the area of insurance reform.
The Independent Insurance Agents of America (IIAA) recognizes your
dedication on this front, and we look forward to continuing to work
with you in the future. Per your request, I have also responded to your
written questions, and each is addressed on the pages that follow.
Please feel free to call upon me or the IIAA if we can be of any
additional assistance. We are prepared to assist you in any way you
deem appropriate.
Very truly yours,
Ronald A. Smith
Past President, IIAA
cc: The Honorable Mike Oxley
Chairman, Subcommittee on Finance and Hazardous Materials
Question 1. How much progress has the NAIC made in the last two
months on achieving uniformity, and how much faith should we be placing
in their efforts?
Response. Over the last several months, the National Association of
Insurance Commissioners (NAIC) has aggressively considered and debated
how the current regulatory regime might be modified and improved. This
effort began with the adoption of the ``Statement of Intent,'' a
document which outlines a framework of principles through which the
country's insurance regulators have begun to address the challenges and
opportunities confronting state regulation. The statement is
essentially a blueprint of issue-specific goals that the NAIC intends
to tackle in the immediate future. These objectives relate to issues
that must be addressed quickly, such as the implementation of the
Gramm-Leach-Bliley Act (GLBA), and those issues that will take longer
to resolve, such as the state response to globalization, the emergence
of technology, and the call for reform of the current regulatory
system.
Question 2. What are the minimum results we should insist on from
the NAIC effort, and what sort of time-lines can Congress reasonably
expect for implementation?
Response. In a recent white paper, the NAIC stated the following:
``While some may argue that regulation dampens competition or
promotes the interests of one particular interest group over
another, insurance regulation represents a series of
compromises between competing interest groups. Some insurance
regulation is decidedly pro-consumer, while other facets of
insurance regulation may be characterized as pro-insurer or
pro-third party. The business of insurance regulation must
involve a continuous rebalancing of benefits to competing
interest groups. To the extent that regulators are successful
in their balancing efforts, a vigorously competitive
marketplace can co-exist with reasonable controls designed to
protect consumers and other parties to insurance
transactions.''
As the NAIC suggests, the appropriate barometer for measuring
whether the States are effectively regulating the industry is whether
(1) the insurance marketplace is competitive, and (2) whether consumers
are adequately informed, protected, and represented. We believe this is
the fairest and most appropriate criteria for judging State reform
efforts. We have already seen significant progress in recent months,
and we expect more of the same in the weeks and months to come.
Question 3. What can Congress and the industry do to help the
States achieve uniformity?
Response. One way in which Congress can help the States achieve
agent licensing uniformity is by providing insurance regulators with
limited and well-defined access to the National Crime Information
Center (NCIC) database. I know your committee is already discussing
this possibility, and we believe that regulator access could promote
both uniformity and consumer protection.
Given the sensitivity of the information contained in the NCIC
database, however, any grant of access must be thoughtfully considered
and properly constructed. This issue raises serious privacy concerns,
and the proper balance must be obtained. IIAA, in conjunction with
several other insurance industry associations, has already developed a
proposal that would provide insurance regulators with access to the
database so regulators can effectively and proactively perform their
licensing responsibilities. The proposal would also provide limited
access for employers who wish to perform personnel checks on employees
or potential employees. In our view, there is no public policy
justification for providing unlimited and unqualified access to these
files to anyone that might request them.
Question 4. If the States are unable to make progress in
implementing uniformity reforms over the next year, what alternatives
should Congress consider?
Response. Even before the NAIC outlined its ``Statement of Intent''
agenda, the States were successfully revising insurance regulation in
numerous ways. Over the last couple of years, many states have
eliminated discriminatory barriers to interstate commerce, made it
easier to bring insurance products to market, and provided numerous
other regulatory reforms. The States also proved that they were up to
the challenge of regulating e-commerce, and nearly one-half of the
States enacted the Uniform Electronic Transactions Act (UETA) in the
single legislative session since its adoption by the National
Conference of Commissioners on Uniform State Laws. In fact, the
recently enacted Electronic Signatures in Global and National Commerce
Act was, in large part, based on this state-developed solution.
These steps, combined with the NAIC's recent actions, suggest to us
that the current system can work. For this reason, we believe it is
premature to be considering alternatives to the current state
regulatory system.
Question 5. What are the easiest issues for the States to achieve
before moving on to the more comprehensive uniformity issues?
Response. This is a difficult question to answer. The States have
already begun to address the reform issues that are easy to address and
are now shifting their focus to tougher challenges. Although insurance
reform will not be an easy task, it is apparent that State policymakers
are committed to tackling the challenges ahead.
Question 6. Now that Congress has allowed private-sector financial
integration with the enactment of the Gramm-Leach-Bliley Act, what
should we do to integrate the financial regulators, and what are the
most critical areas that should be coordinated?
Response. We are watching with great interest how the various
financial regulators will work cooperatively in the weeks, months, and
years to come. On the insurance side, the NAIC and individual state
regulators have begun to work closely with their counterparts in a
variety of ways, and we have been generally satisfied to date with how
this has worked.
We are very concerned, however, by certain actions taken by the
Office of the Comptroller of the Currency (OCC). In three separate
instances, the OCC has been asked by banking industry groups to toss
aside state level insurance sales consumer protections. Specifically,
these groups have asked the OCC to preempt consumer protections
previously enacted in Massachusetts, Rhode Island, and West Virginia.
An ill-advised OCC preemption opinion issued in response to these
requests could disrupt regulatory activities in the more than 30 states
that have substantively identical insurance sales protection provisions
in place. This is especially troubling because--virtually without
exception--these consumer protections were enacted with the support of
consumer advocates as well as both the banking and insurance industries
in each state.
Our concerns with the OCC's recent actions are further outlined in
my written testimony. I should note again, however, that it would
undermine efforts to achieve regulatory coordination if this federal
agency begins to preempt state consumer protection laws. We also fail
to see how that would serve the American public in any way.
Question 7. If the States fail to act on the NAIC's proposed
reforms, and no alternatives are forthcoming from Congress, what would
the costs be to the American consumers?
Response. As noted in my responses to these questions and in my
formal written testimony, we believe the States have taken considerable
steps in recent months to achieve regulatory reform. We expect that the
States will continue to act upon meaningful reforms, provided the
proposals are truly in the best interests on consumers.
Question 8. You testified that your members are frustrated because
``they are trapped in a licensing system full of antiquated,
duplicative, unnecessary, and protectionist requirements.'' Can you
elaborate on that, and discuss how the Gramm-Leach-Bliley Act might
help address some of those frustrations?
Response. One of the most important responsibilities facing state
regulators of insurance is the duty to properly license agents to
conduct the business of insurance within a given state.
Advances and changes in the marketplace have led increasing numbers
of agents and brokers to operate in multiple states, which means that
they must obtain more and more licenses. For example, my agency is a
relatively small one, yet we are licensed in over a dozen states. It
can be difficult and confusing to stay on top of the required paperwork
and to clear the logistical and bureaucratic hurdles that are in place
today. Staying in compliance with the distinct and often idiosyncratic
agent licensing laws of every state is no easy task. It is an
expensive, time-consuming, and maddening effort for many agencies, and
a dedicated staff person and tremendous financial resources are often
required to manage an agency's compliance efforts. These opportunity
costs and wasted man-hours could be better spent working on behalf of
our customers.
Conflicts and differences between States over continuing education,
licensing, and paperwork requirements have created an entire new
industry dedicated to helping agents decipher and comply with the
layers of complex regulations. In essence, the problems associated with
the current system can be divided into three main categories: (1) the
disparate treatment that nonresidents receive in some states; (2) the
lack of standardization, reciprocity, and uniformity; and (3) the
bureaucracy generally associated with agent licensing.
However, the NARAB provisions contained in the Gramm-Leach-Bliley
Act ensure that these three problem areas will be addressed soon--
either by the automatic implementation of the provisions themselves or
by the enactment of preemptory reforms at the state level.
Question 9. If the States are unable to make significant progress
towards uniformity on speed-to-market and national treatment, could
Congress consider another NARAB approach to help encourage the process?
Response. This is a difficult question to address at this time. We
believe the States should have an adequate opportunity to address these
issues. If the NAIC and the States are forced to move too hastily, it
may result in recommendations and solutions that are not in the best
interest of consumers.
Question 10. How can the National Insurance Producer Registry be
used to help the NAIC coordinate their efforts with the securities and
banking regulators and combat fraud?
Response. It is our understanding that the NAIC and individual
states are today working closely with other functional regulators to
combat fraud, and we encourage these efforts. However, the National
Insurance Producer Registry (NIPR) only addresses producer licensing
and producer appointments, so its impact on fraud prevention is
naturally limited. Other industry players generate far more consumer
complaints and are the subjects of greater numbers of enforcement
actions, and any public policy effort to address fraud must be
considered with this fact in mind. Individual states and the NAIC
apparently maintain databases with this type of complaint information,
but we are unaware of any plans to share this information with other
regulators or to make it public.
NIPR, however, does have the potential to drastically improve the
manner in which agents and brokers obtain licenses. We are very pleased
by the progress that this effort has made in recent months, and we are
particularly happy to report that NIPR is in the process of becoming
compliant with the Fair Credit Reporting Act.
My written testimony also describes the producer community's
efforts to reconstitute the makeup of NIPR's Board of Directors. As
noted above, NIPR's mission is limited solely to agent and broker
licensing and appointment issues, yet producers have only one
representative on the Board. In contrast, there are three insurer
representatives on the Board.
Given the importance of NIPR's mission to the agent and broker
community, we have proposed that the makeup of the Board be
reconsidered. Specifically, we have proposed adding two new producer
representatives to the board (thus establishing parity between the
insurer and producer communities) and adding two additional regulator
representatives (thus preserving the balance between the private and
public sectors). While we commend NIPR for opening its meetings to an
expanded audience, we believe the reconstitution of the Board is
critical. The decisions of the Board directly impact the agent and
broker community, and we believe that perspective should have an equal
voice in the development of NIPR policies and services.
Question 11. How can we best conduct uniform background checks on
agents to combat fraud, and what issues do we need to be concerned
about?
Response. Any public policy response to insurance fraud should not
be limited to or focused on insurance agents. Most complaints received
by state insurance departments are in fact generated by consumers
following encounters or experiences with insurers or their employees.
While it is essential that the industry work to identify and remove
rogue agents from the system, it is important to recognize that agents
are not the cause nor the subject of most consumer complaints.
One way to facilitate the effective use of background checks would
be to provide insurance regulators with limited and well-defined access
to the National Crime Information Center (NCIC) database, a possibility
which your committee is apparently already considering. At the same
time, we strongly believe that any grant of access to the NCIC database
must be thoughtfully considered and properly constructed. This issue
raises serious privacy concerns, and the proper balance must be
obtained. As you know, IIAA (in conjunction with other industry trade
organizations) has already developed a proposal that would provide
insurance regulators with access to the database so regulators can
effectively and proactively perform their licensing responsibilities.
Our Washington representatives are prepared to work with you and your
committee on this issue and to address it thoughtfully and with due
consideration.
Question 12. How much progress has the NAIC made on establishing
uniformity for insurance agent licensing, and what are the lessons to
be drawn from this effort that could be applied to other uniformity
efforts?
Response. We commend the NAIC for its efforts to reform the agent
licensing process, forestall the creation of NARAB, and strengthen
state regulation. Our members know firsthand the burdens, costs, and
bureaucracy associated with the current system, and they look forward
to realizing the promise of a reciprocal and more uniform multi-state
licensing system. It is also our hope that reform of the agent
licensing system will preserve state regulation--without reducing
consumer protection or creating competitive disadvantages for certain
insurance providers.
The licensing of insurance producers is a critical component of
state regulation. Licensing statutes impose minimum eligibility and
consumer protection requirements to ensure that a licensed individual
or firm is qualified for the activities in which they are engaging.
Laws regulating the licensing of insurance producers protect the
insurer/insured relationship by attempting to ensure that prospective
policyholders obtain reliable insurance that is adequate for their
needs. As the United States Supreme Court has recognized, licensing
laws embody a
series of regulations designed and reasonably adapted to
protect the public from fraud, misrepresentation, incompetence
and sharp practice which falls short of minimum standards of
decency in the selling of insurance by personal solicitation
and salesmanship. That such dangers may exist, may even be
widely prevalent in the absence of such controls, is a matter
of common knowledge and experience.
Licensing laws are therefore designed to increase the likelihood
that insurance purchasers will obtain from qualified persons products
that best meet their needs--and that the insurance they purchase will
be reliable and appropriate for their purposes. Demonstrating
competence to sell insurance products and being subject to an
appropriate set of consumer protection requirements and state
enforcement mechanisms are still absolute necessities. The licensing
process constitutes the primary mechanism by which regulators can stop
unscrupulous actors and intervene to protect the public. Without
licensing, there is little practical way for states to effectively
supervise and regulate the qualifications and actions of insurance
providers.
The NAIC's primary response to the Gramm-Leach-Bliley Act and
answer for agent licensing reform is the Producer Licensing Model Act,
a model law that attempts to achieve a number of goals. Perhaps most
significantly, the model provides the level of licensing reciprocity
required for a state to become ``NARAB compliant.'' While most of the
model's provisions do not affect a state's ability to satisfy the NARAB
requirements, many of them bring greater uniformity to the multi-state
licensing process. Our members generally support the model's core
reciprocity and uniformity provisions, and we believe the adoption of
these provisions will simplify and streamline the licensing process and
make the creation of NARAB unnecessary.
One of the issues unrelated to NARAB compliance that is addressed
by the model is the ``scope of licensure'' issue. The act purportedly
requires a person to be licensed if he/she performs any of three
defined activities or functions--selling, soliciting, or negotiating
insurance. While it might appear at first blush that the model requires
anyone selling, soliciting, or negotiating to be licensed, one must
also consider the model's licensing exemptions. An individual or entity
satisfying one of the exemptions need not be licensed. Throughout the
development of the model law, we consistently pointed out our concerns
with the model's licensing definitions and exemptions and proposed
numerous alternatives. The NAIC, however, chose not to address these
issues during the model's initial development.
Despite the model's ambiguous and imprecise drafting, it is clear
that the regulators who drafted the model intended to prohibit
unlicensed individuals from engaging in insurance sales or
solicitations and from providing advice, counsel, or recommendations to
consumers--regardless of whether the consumer is a new or existing
customer. In fact, the Co-Chairman of the NAIC Agent Licensing Working
Group described the intent by saying that the model was not meant to
authorize unlicensed individuals ``to sell, solicit or negotiate other
insurance or additional coverage or provide quotes for expanded
coverage on an existing policy.'' We believe this is the proper public
policy. In our view, existing policyholders should be secure in knowing
that individuals offering advice or recommendations are as qualified,
competent, and accountable as those who would offer the same services
to a new customer. While we take comfort in the fact that the NAIC
appears to agree with us on the underlying policy question, we are
concerned that the intent of the model law is not adequately expressed
in its text.
Given growing concerns about the model's ambiguity on the ``scope
of licensure'' issue, we have asked the NAIC to revise the act to make
clear that unlicensed individuals may not legally solicit the sale of
insurance, offer advice or recommendations, cross-sell products, or
otherwise act in the capacity of someone who should be licensed--
regardless of whether these activities occur in connection with an
existing policy. We have urged the NAIC to help eliminate the potential
for conflicting interpretations, avoid the need for judicial
interference, and most importantly, protect insurance consumers. The
adoption of appropriate clarifications would greatly enhance the
model's prospects for passage in a uniform manner nationally, and none
of the suggestions being considered alters or conflicts with the intent
of the regulators involved in the drafting process.
To its credit, the NAIC's NARAB Working Group recently took action
on this issue and unanimously recommended that Section 4(b)(8) be
deleted from the model. This was one of the clarifying suggestions that
we offered to the NAIC, and we are pleased that it was adopted so
overwhelmingly by the committee with jurisdiction over such issues. The
NAIC's Executive Committee and Plenary body are scheduled to consider
the deletion of this unnecessary provision on October 4, and we are
hopeful that the regulators will approve this clarification. We believe
this is the proper public policy position, and it is consistent with
the NAIC's stated intent. If this modest step is not taken, the NAIC
will be making a serious misjudgment that threatens its efforts to
obtain licensing uniformity and forestall the creation of NARAB.
During its recent consideration of these issues, the NAIC's NARAB
Working Group also developed a series of guidelines that outline the
intent of the regulators in addressing the scope of licensure issue. A
copy of these guidelines is attached for your review.
The NAIC has the opportunity to prove that the states can modernize
state regulation while also protecting consumers and preserving the
high standards of licensure. We hope the NAIC will grasp this
opportunity and prove that these objectives are not mutually exclusive.
The NAIC has said that the primary goal of its reform agenda is to
protect consumers proactively and aggressively. Clarifying the model's
``scope of licensure'' provisions is consistent with this overarching
principle, and we continue to encourage them to do so.
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