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U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 2:00 p.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Shays, Oxley, Biggert, Hart, Rogers, Kanjorski, Bentsen, J. Maloney of Connecticut, S. Jones, Capuano, Sherman, Meeks, Inslee, Moore and Lucas.

    Chairman BAKER. I would like to call this hearing of the Capital Markets Subcommittee to order and invite all of our witnesses to please take seats at the witness table. I'm advised that Members are on their way to the hearing and in order to facilitate progress, we'll go ahead with opening statements at this time.

    Today marks the second in a series of hearings the subcommittee has undertaken with regard to reform of insurance.

    Our current hearing focuses on the need to modernize product approval processes. Unlike the rest of the financial services industry, insurers are subject to a patchwork quilt of State regulatory requirements.
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    In many States, insurance products are not only subject to prior approval of the form language, but also to strict regulation of the price and the appropriate rate. These result in time delays in form and rate approvals that vary widely from State to State.

    A national rollout of a new product across all 50 States can literally require many years. Why should consumers have to wait for the lowest common denominator in order to have access to a new and desirable product?

    Consumers in all States are being harmed, in my opinion, by this excessive regulatory bureaucracy; and in the worst States, such as the unfortunate case of Louisiana, it makes it difficult to get approvals at all.

    In fact, I would like to enter into the record, at this point, a letter from my own Acting Commissioner in Louisiana, and quote just a couple of lines:

    ''The bottom line is that insurance companies are leaving Louisiana because of the prior approval system that is overseen by a politically appointed board. The system is clearly slowing down the speed with which companies can respond to the marketplace and the system must be changed.

    ''This is why the Louisiana Department of Insurance has worked with the industry and consumers to develop a move to a file-and-use system. Such a system adds speed to the ability to market approval of product and services.

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    ''We, at the Department of Insurance, are committed to continuing our efforts to remove barriers and the restrictions to competition in the Louisiana insurance marketplace.''

    And I suspect that the Acting Commissioner's perspectives are not unique. In a review of data of approval times required on a particular product line, unfortunately Louisiana's approval timeline was the worst in the country.

    I am also told that approximately 16 companies during the first 6 months of this year have withdrawn from the Louisiana market because of the product and form approval delays.

    One company doing business in the State has reported an average approval delay amounting to 305 days for a new liability insurance product. That's really unacceptable.

    A bill reforming product regulation is currently moving through the legislative process in Louisiana, and I'm hopeful of its passage.

    In New Jersey, just last week, the biggest automobile insurer, State Farm, decided to pull out of that market because the rate reviews had become so onerous and, in their opinion, politicized.

    It's reported that since September of 1999, State Farm lost almost a quarter of a billion dollars cutting the company's net worth there in half. Just this week, one of the largest insurers in the world, AIG, also decided to exit the New Jersey market due to the regulatory environment.
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    As a result of these decisions, in excess of one million New Jersey drivers will need to find new coverage in a very difficult market. That is more than one out of every five drivers in the State.

    Today, the fourth largest writer of automobile insurance in New Jersey, Liberty Mutual, is also talking about abandoning the automobile market. That would add an additional half million drivers to the uninsured list.

    In fact, according to figures provided by the American Insurance Association, 27 States with very stringent price controls were the most expensive States for the auto insurance consumer with annual expenditures averaging well in excess of $600.

    The States are not without some success stories, however. Colorado and Michigan are known for their efficient review and approval of new and diverse products.

    Illinois has been successful. In Illinois there are more insurers competing for business, giving consumers more choice at relatively low cost and there are fewer uninsured motorists.

    Wisconsin has also had similar results.

    Of course this begs the question: Why are those States not being used as models for reform? I am anxious to hear how the National Association of Insurance Commissioners and the National Conference of Insurance Legislators have reviewed this matter, and what are their findings.
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    The bottom line, as we all know and recognize, is that reform is dramatically needed. I would like to express my appreciation to both panels of witnesses here who are appearing today for their willingness to come forward. I have reviewed the testimony, and I believe it gives excellent insight into the significance of this problem.

    I would also express my appreciation to Chairman Oxley for his leadership in this subject matter. He has joined us here today.

    I recognize Mr. Kanjorski at this time for his opening statement.

    Mr. KANJORSKI. Thank you, Mr. Chairman, for the opportunity to comment before we begin the hearing on the insurance product approval process and the need for modernization.

    I commend you and your continued interest in the current issues affecting the insurance industry and your commitment to educating the Members of our subcommittee about these matters.

    Presently, a tangled web of regulations often slows the ability of insurance companies to introduce new products nationwide, to the pace of baby steps. This sluggishness in new product and rate approval by insurance regulators frequently creates competitiveness concerns for insurance companies.

    The insurance industry has consequently contended, for a number of years, that we need to design and implement a new regulatory system to straighten out the regulatory maze, better the quality and timeliness of filing reviews, and improve competition.
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    If sensibly put into practice, these actions should ultimately benefit consumers by increasing their choice of and lowering their rates for insurance products.

    The National Association of Insurance Commissioners has created its ''Speed To Market Working Group'' to respond to these concerns.

    This group, as I understand, is seeking to develop and implement State-based uniform standards for policy, form, and rate filings for appropriate product lines.

    The NAIC hopes that this initiative will shorten the length of the prior approval process and lower the cost involved in reviewing and improving rates and policy forms in the States and territories.

    As part of the initiative, the NAIC has divided its work among two subgroups. They are the Improvements To State-Based Systems subgroup, and the Coordinated Advertising Rate and Form Review Authority subgroup, otherwise known as CARFRA.

    CARFRA is working to streamline the review process for rates and forums, particularly for life and health products. CARFRA hopes one day to provide insurers with single point of product filings and establish a coordinated regulatory review process among insurance regulators.

    Currently, ten States, including my own State of Pennsylvania, are piloting a CARFRA project and NAIC hopes to launch the system nationally by May of next year.
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    In my view, the need to update and streamline our Nation's insurance regulations and laws have become increasingly apparent, especially in the wake of the 1999's law to modernize our national financial services industry.

    Not surprisingly, our current insurance regulatory system, with more than 50 separate jurisdictions, often delays the nationwide introduction of new products.

    Executives at some insurance companies have previously noted that it can take 18 months or longer to obtain the necessary approvals to sell a new insurance policy or annuity on a national basis.

    In our dynamic economy, rare is it that the slow are rewarded. The insurance industry is certainly no exception to this rule.

    We should consequently work to improve the efficiency and effectiveness of the regulatory system for insurance in the months ahead. I will therefore continue to keep a watchful eye on NAIC's speed to market initiative and examine its effects on both companies and consumers.

    We may additionally need to pursue complementary reforms in the insurance industry at the Federal level.

    It is also my sincere hope that as we continue in our efforts to modernize insurance regulation, we will work to provide adequate and appropriate safeguards to protect the interests of individual consumers.
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    In closing, Mr. Chairman, I believe it is important that we learn more about the views of the parties testifying before us today and, if necessary, work to further refine and improve the legal structures governing our Nation's insurance system.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Chairman Oxley.

    Mr. OXLEY. Thank you, Chairman Baker, and thanks for holding this important hearing today on speed to market issues.

    I'm pleased that this subcommittee is reviewing the need for modernization and reform in our current system of insurance product approval.

    Insurers are subject to the jurisdiction of over 50 different State regulators, each with its own set of rules and regulations. Companies have to navigate their way through a mind-numbing maze of conflicting regulatory requirements to offer products to consumers.

    The current patchwork system for insurance regulation imposes significant unnecessary costs on insurers and results in unnecessary delays in getting new products to market.

    Ultimately, the consumer bears the cost of this bureaucratic morass facing higher prices and product unavailability.

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    Other financial industries in the United States, such as banking and securities, do not face significant delays. Those products get approved either immediately or for some securities products, within a few months.

    In contrast, companies trying to plan a nationwide rollout for new insurance products have sometimes faced delays of up to 2 years. That is simply unacceptable.

    Over the last several years, I've asked the National Association of Insurance Commissioners to focus on this glaring problem. By all accounts, the NAIC has made some progress and I applaud their efforts.

    In particular, I'd like to thank the director of insurance for my home State of Ohio, Lee Covington, who has been a great leader for the NAIC on State-based reform of the product approval process.

    I would also like to commend Commissioner Fitzgerald of Michigan. Both Commissioners have agreed to join us today to report back on the NAIC's efforts.

    Make no mistake about it, true reform is clearly necessary. It is my hope that our State legislators and insurance commissioners can enact such reform.

    If not, Congress will return to this issue with our own solution.

    While the NAIC has moved ahead with two initiatives, one for life insurance and one for property casualty insurance, the jury is still out on the effectiveness of these programs.
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    In fact, we will hear from a number of witnesses today who will say these initiatives don't go far enough and are a long way from reforming the system.

    Mr. Chairman, I appreciate your continued leadership on this subcommittee to help us understand the problems facing the insurance industry and insurance consumers.

    I look forward to the subcommittee's continued work in this area and I yield back the balance of my time.

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

    Mr. Bentsen or any other Member.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Mr. Chairman, I want to thank you for holding these hearings. This is my seventh year on this subcommittee and I can remember when I was first on this subcommittee and we struggled with the battles between the insurance industry and the banking industry, and I think as we see, with the passage of the Gramm-Leach-Bliley Act, along with the continued integration of the American economy and the disintermediation of the American financial sector as it relates to consumers, that these types of issues are going to continue to rise to the top.

    And I think that this subcommittee is going to find itself confronted more quickly, or sooner rather than later, with some need to balance both a Federal uniform standard, whether it is bringing product to market, or how regulation comports with other Federal financial regulators, and what the State regulators are able to do in the structure they have under the NAIC.
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    And I would also say that we will find ourselves, as we have in the past, struggling to balance protecting what remnants there are of McCarran-Ferguson, and ensuring that there is sufficient consumer regulation and parity at the State level, at the same time, in trying to achieve those uniform standards.

    I know the Chairman and the Ranking Member are well-versed and have been through many of these battles as has the Chairman of the Full Committee, and what is, I think, most interesting and perhaps maybe most telling in what action we take, is that these battles used to be fought across the hallway and now you've got Members of both Committees sitting on the dais here today, and that hopefully will hasten us to find the most appropriate approach to trying to address this continually vexing problem that this subcommittee, at least the predecessor subcommittee, has tried to deal with.

    And I thank the Chairman for calling the hearings.

    Chairman BAKER. Thank you, Mr. Bentsen.

    Ms. Biggert.

    Mrs. BIGGERT. Good afternoon and thank you, Chairman Baker, for holding this hearing. Globalization, rapid technological change and comprehensive financial services reform all have conspired to change dramatically the marketplace for insurance products in the United States.

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    In light of these changes, I think we can all agree that it's time to bring insurance regulation into the 21st century to ensure continued product innovation, enhance competition, and better serve the customer.

    Insurance rate deregulation, in my home State of Illinois, is an example of a system that has worked well, not just for regulators and insurers, but most importantly for the consumer.

    Let's look at what a system with no rate regulation has produced. Illinois has a very small residual market and significantly more auto and homeowners insurers competing for business than States with stringent regulation.

    The premiums and loss ratios in Illinois are well below most other States with large populations, allowing State regulators to initiate other innovative safeguards, such as early warning systems and computerized market conduct exams.

    In short, let me put all parochial interests and personal bias aside and objectively state that Illinois has one of, if not the most, efficient systems in the country.

    Rate regulation works in Illinois and it has worked very well for nearly 30 years. My hope is that Illinois can serve as a model for other States that want to serve consumers better.

    On the subject of form regulation, Illinois is not quite as special, and no matter how special any State may be, the problem is that there are 50 of them and that continues to present challenges for insurers servicing customers in multiple States.
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    Each State has its own set of rules, procedures, and interpretation for whether a new insurance form or policy can pass.

    The consequences often hurt the consumers most. Consumers should have access to new products, competitive prices and choice, and we must modernize the current regulatory system to ensure that they do.

    Today's hearing provides a great opportunity to highlight what works and what doesn't work. I think all the witnesses here today, and especially my fellow Illinoisans, State Representative Terry Parke, the President of the National Conference of Insurance Legislators; Ms. Rita Nowak, Alliance of American Insurers; and Mr. Phil O'Connor, the former Illinois Director of Insurance.

    Thank you, Mr. Chairman. I yield back the balance of my time.

    Chairman BAKER. Thank you, Mrs. Biggert.

    Mr. Capuano, did you have a statement?

    Mr. Inslee.

    Mr. Shays.

    Mr. SHAYS. Thank you.
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    Just to welcome our witnesses. I appreciate them being here today. And thank you for calling the hearing.

    Chairman BAKER. Mr. Rogers.

    Mr. ROGERS. Thank you, Mr. Chairman.

    I appreciate the opportunity.

    I want to thank Frank Fitzgerald, Michigan's Insurance Commissioner. I had the great privilege to serve with Mr. Fitzgerald in the State legislature where he distinguished himself, and continues to do so in the role of Insurance Commissioner in Michigan.

    We appreciate it. He hass led the charge for modernizing pricing and regulation of commercial lines, and I look forward to your comments today, sir.

    Michigan is leading the way under your leadership and the leadership of John Engler in Michigan, and we certainly appreciate your being here today and the work you're doing in Michigan.

    Thank you.

    Chairman BAKER. Thank you very much.

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    We would like to now call on our first tag team. I understand by prior agreement, we have a division of time between the two distinguished commissioners, the Honorable Frank Fitzgerald, Commissioner of the Michigan Insurance Bureau, Office of Financial and Insurance Services, and the Honorable Lee Covington, Director, Ohio Department of Insurance on behalf of the National Association of Insurance Commissioners.

    We would recognize each of you for 3 minutes to make opening statements. Please be aware, all witnesses, your full statement will be incorporated as part of the record.

    Feel free to summarize and we would like to, as best possible, have the statements of the other witnesses be under 5 minutes to allow Members to have as many questions as possible.

    Thank you for appearing here today.

    Mr. Fitzgerald.


    Mr. FITZGERALD. Mr. Chairman, thank you and thank the Members for holding this hearing today and giving the National Association of Insurance Commissioners an opportunity to discuss the very important reform steps that have been taken over the past 15 months.
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    Chairman BAKER. If I could just trouble you to pull the mike a bit closer, we can hear you a little better.

    Mr. FITZGERALD. Thank you.

    It was in March of 2000 that the NAIC adopted the Statement of Intent: The Future of Insurance Regulation. At that time, nine working groups were established and I was asked, along with Commissioner Diane Copland of Pennsylvania, to co-chair a working group entitled ''Speed to Market''.

    How could products, the rates, and the forms come to market more quickly, but with sufficient consumer protections in place and hopefully at less cost for the companies and ultimately for the consumers.

    This is a big challenge, but it's one that I believe that we are meeting. In the past 8 months, the NAIC has established the Coordinated Advertising Rates and Forms Review Authority or CARFRA, in a limited launch phase, to show that, in fact, the States can come together, develop national standards for products, list where there are deviations under State law from those national standards and work to eliminate those, and allow a company to come to CARFRA, enter a single door literally through a computer, and within 45 days, come out of that door and be able to use that product in all of the States that participate in CARFRA and that participated in the approval of that product.

    We, on May 1st, began the operation of CARFRA. We have received our first filing under CARFRA, and through the course of the summer expect to receive more.
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    Although we have only ten States and three products involved at the current time, that was done purposefully, because what we want to do is know that the procedure can work, and we believe very much that it will, and then, beginning this fall, expand the number of States and expand the number of products that are involved.

    So that approximately a year from now, we would have a working CARFRA mechanism that would allow all 51 jurisdictions in the United States, including the District of Columbia, to participate.

    This will dramatically speed the delivery of products to the marketplace, will reduce the cost that goes into getting the products there and, at the same time, will allow consumers to receive the highest possible oversight.

    This is an unprecedented step in the over 130-year history of State regulation of insurance. It's the first time that national standards have been developed, the first time that we have a coordinated State approach to this sort of approval.

    We believe that over the coming months, we will, as insurance regulators, demonstrate that this will work. We have the support, especially of the life insurance industry, which has very much asked for this. We will work forward to include all States and the District of Columbia in this process.

    We thank the subcommittee for the opportunity to talk about this, and I look forward later to the questions that the Members might have.
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    Thank you.

    Chairman BAKER. Thank you very much. We appreciate your courtesy, sir.

    Mr. Covington.


    Mr. COVINGTON. Chairman Baker, Members of the subcommittee, I serve as Chair of the Speed To Market Improvements, a State-based systems working group.

    As the subcommittee has recognized in its opening statements, insurance regulators also recognize that historically it has taken far too long to introduce new insurance products in all 50 States. This is not good for consumers, it is not good for the industry.

    Commissioner Fitzgerald just talked about the CARFRA proposal. The Improvements To State-Based Systems initiative addresses speed to market for products not reviewed by CARFRA, including most property and casualty products at this point.

    The Improvements To State-Based Systems plan, adopted in December, calls for a 30-day period of time for an introduction of products on a nationwide basis, and 60 days under exceptional circumstances.
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    And also implementation of what is most commonly referred to as an informational or competitive rating system for most commercial lines' rates.

    The plan squarely addresses most, if not all, concerns relating to product filing procedures by adopting three major best practices or operational efficiencies currently used by many States.

    First, the creation of review standard checklists by every State in a common format that will be accessible to the NAIC's central website.

    The State of Colorado estimates that after institution of review standards checklist, over 90 percent of their insurance products complied, were filed with the department, complied with the law, and were able to be introduced within a 30-day period of time, up from 20 percent compliance before the implementation of these review standard checklists.

    In just 5 months since release of the plan, it was adopted in December, a common format was created in over 28 States representing 60 percent of the United States' insurance property and casualty market. These States report 100 percent completion of the checklist, and those checklists will be completed by the end of June to mid-July.

    And we continue to receive reports that additional States will be completed by that time period.

    Particularly it is important to note that 14 of the 17 largest States have reported that they will be completed by mid-July.
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    New Jersey, the ninth largest insurance market, is over 50 percent complete at this point. We are well on our way to our goal of having all States completed in 2001.

    In addition to that, the plan calls for implementation of an electronic filing system in all States. We call it the System for Electronic Rate and Form Filing (SERFF) system. Currently, the NAIC's plan calls for active filing status in at least 41 States by the end of the year, with remaining States to be added in 2002.

    Twenty-four States are accepting filings currently and 23 States are in the testing phase.

    SERFF will allow us to be able to monitor the performance of States and of insurance companies. And finally we want to work to create greater uniformity.

    I've already talked about the commercial lines area, the plan for that. And in addition to that, this year we are working on personal lines, and have already had one meeting where we had 18 panelists testify before the NAIC, and we will continue that work throughout the summer and through the remainder of this year.

    Thank you, Mr. Chairman, for the opportunity to be here, and I'll be glad to answer any questions.

    Chairman BAKER. Thank you very much. We appreciate your testimony, sir.
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    Our next witness is the Honorable Terry Parke, Illinois State Representative, and President of the National Conference of Insurance Legislators, who is here on behalf of the National Conference of Insurance Legislators.


    Mr. PARKE. Thank you Chairman Baker and Members of the subcommittee.

    Again, I am State Representative Terry Parke. It is my privilege to serve as President of the National Conference of Insurance Legislators or NCOIL. NCOIL is a organization of State legislators whose primary public policy concern is insurance and insurance regulation.

    Since its inception more than 30 years ago, NCOIL has supported State regulation of the business of insurance as authorized by Congress in the McCarran-Ferguson Act.

    The States have established a strong record under that organization. Insurance markets have grown and have become increasingly competitive in terms of price and products.

    NCOIL legislators are ready to do what it takes to build upon that record. NCOIL recognizes that there is no escape from the fact that powerful technological and competitive forces challenge the State-by-State system of insurance regulation.
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    NCOIL supports the efforts of the National Association of Insurance Commissioners to bring about needed efficiencies in the State-based system.

    NCOIL supports the NAIC Statement of Intent of March 2000, which outlines a plan for the future of insurance regulation under the Gramm-Leach-Bliley Act of 1999.

    That statement and the NAIC's efforts since then have addressed, among other things, the need to speed and synergize the State-by-State process of policy form and rate approvals, the need for speed to market, and that is the focus of this hearing.

    The NAIC has conceived and put into motion a voluntary plan to facilitate one-stop shopping for price and product approvals. The NAIC has initiated a trial run or limited launch of the plan, known as the Coordinated Advertising Rate & Form Review Authority, or CARFRA, in ten States.

    NCOIL could support efforts to take this laudable NAIC effort one important step further. That step would overcome the fact that CARFRA is voluntary, that its opinions are advisory, and that it allows individual States to retain their own authority.

    NCOIL could support efforts aimed at a totally independent State-based regulatory facility. Its purpose could be to decide on policy form and rate approvals.

    Such an entity would have absolute authority, take its authority directly and totally from State governments and be totally State-based and State-funded.
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    Its strength would lie in its power to make fast, effective and final decisions. Its success, we recognize, may require some ceding of State authority, possibly through an interstate compact or other means.

    NCOIL has long advocated interstate compacts. But your subcommittee, Congress, and all interested parties should view a compact not as an end in itself, but rather as a tool to achieve a greater goal. That of course would not be the only option.

    Among other options would be to let the market prove itself as a regulator. Any such move would, of course, require the presence of adequate solvency safeguards to protect against any self-destructive or overly competitive behavior. It would also require aggressive policing of the insurance marketplace with adequate punishment of any abusive sales and claims-paying practices.

    A market approach can work. I am proud to say that Illinois has put its faith in the market since 1971. Illinois consumers have benefited from overall premium rate levels that are below most other States with high populations and heavy traffic.

    Auto insurance is readily available in the private market in Chicago. The residual market is small. Nationwide surveys indicate that the percentage of uninsured motorists is below the average of other populous States.

    Other studies show that more auto and homeowner insurers are competing for business in Illinois. Illinois has more than doubled the number of competing insurers than States like Massachusetts and New Jersey, States that have price controls.
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    States have begun moving toward a market solution. NCOIL has adopted a commercial lines deregulation model act in 1999. Since 1995, 22 States have instituted some form of commercial lines are and form filing deregulation.

    Less than one month from now, NCOIL will consider a comprehensive deregulation bill that would establish a competitive use and file system in States that adopt the measure. It would cover personal as well as commercial lines.

    Solvency safeguards are already up and running and they have been for some time. State adoption of NAIC model uniform laws aimed at monitoring the financial strength and claims-paying ability of insurers through an NAIC accreditation program greatly reinforced and improved upon those safeguards. The fact of it is that for more than a century, the record of State insurance regulation compares most favorably with that of the regulation of other financial service institutions.

    Significant steps toward improved regulation in the insurance marketplace have begun. NCOIL commissioned a study which identified areas where States need to improve the market conduct examination process. NCOIL is monitoring the process of the NAIC today and the coordination of multi-State market conduct exams, the training of market conduct examiners, and the validity of self-policing.

    NCOIL will mark progress in that regard when it holds its public hearing in Chicago on July 12th.

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    Illinois introduced market conduct examinations in 1970 in tandem with its move to competitive regulation in Illinois. Market conduct examinations evaluate underwriting, advertising, agency operations, marketing, and claims practices.

    NCOIL believes that State regulation has served the needs of the families and businesses that buy insurance and has fostered a strong market of financially sound competitive insurers.

    Now NCOIL recognizes the need to respond to new challenges and modernize State-based insurance regulation.

    NCOIL is more than willing to work with all interested parties to make that happen.

    I'm ready to answer any questions, Mr. Chairman.

    Chairman BAKER. Thank you very much. We appreciate your appearance here.

    Our last witness on this panel is Mr. William Fisher, Vice President and Associate General Counsel for the Massachusetts Mutual Life Insurance Company, on behalf of the American Council of Life Insurers.

    Welcome, Mr. Fisher.

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    Mr. FISHER. Thank you, Mr. Chairman.

    I am appearing today on behalf of the American Council of Life Insurers, ACLI, which has 426 members who account for over 80 percent of the life insurance in force in the United States.

    Speed to market is the ability to bring products to the marketplace in a timely and efficient manner, but without sacrificing consumer protections. This is unquestionably one of the most important matters confronting our business.

    Chairman BAKER. Mr. Fisher, I'm sorry, could you pull the mike a little closer and we can hear you much better.

    Mr. FISHER. In late 1999, the ACLI completed a comprehensive study of the current state of life insurance regulation, which identified speed to market as a highly pressing issue.

    I have a copy of that report which I would like to submit for the record.

    Concern about speed to market was reinforced by a February 2000 survey in which ACLI CEOs identified this issue as being the single most important issue in need of reform.
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    Today, life insurers compete directly with non-insurance financial services institutions, such as banks and mutual funds. The national banks do not need explicit regulatory approval to bring products to market on a nationwide basis, and can be in the marketplace in a matter of weeks.

    Securities firms typically get regulatory approval from the Securities and Exchange Commission in a matter of 3 to 4 months. In contrast, life insurance product approvals from all 50 State insurance departments take anywhere from 6 months to 2 years to complete.

    The product approval process also involves application of differing State laws, and even where the laws are uniform, differing interpretations, standards and requirements.

    Mass Mutual's experience helps to illustrate the problem. In the 52 jurisdictions in which we do business, we have 41 different State versions of our basic universal life product.

    For our individual life insurance products, it takes approximately 4 weeks for an experienced person working full time simply to put together a single product filing for all States.

    And I have with me the instruction manual that that area uses. It's three inches thick and I think it really demonstrates the problem.

    Delays in the product approval process also result in lost opportunities. We estimate that for last year alone, we lost at least $80 million in sales measured by premium due to the inability to get products to market quickly.
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    This is not however just an insurance company problem. Consumers suffer, because the inability of companies to bring products to market quickly also means that it translates into consumers' inability to obtain the best price or most favorable product features that a company can offer.

    Last November, the ACLI released a report entitled ''An Optimal Approach To Insurance Product Regulation.'' The basic points of the optimal structure are: establishment of uniform national standards for products, establishment of a single entity with sole jurisdiction over products, filing of products with a single entity on a file and use system rather than the current prior approval system.

    Consumer protection would be continued because filing would require certification of compliance with applicable standards, and enforcement of compliance would be through market conduct examinations. I have copies of that report which I would also like to submit for the record.

    Commissioner Fitzgerald and Director Covington have just described the NAIC CARFRA initiative, and let me give you the ACLI view of CARFRA.

    While CARFRA, in its initial phase, does not achieve many of the objectives set forth in the ACLI report, the ACLI believes that CARFRA is a significant NAIC accomplishment and a very good first step toward the realization of a broader solution.

    Creation of a single point of filing, coupled with a 45-day approval time, is very encouraging. At this point, however, there are a number of practical considerations that limit the benefit of CARFRA.
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    This pilot phase of CARFRA involves ten States and two products of interest to the ACLI. One important issue relative to the uniform national standards still remains unresolved.

    And finally, even with an effort to produce national standards, CARFRA currently involves over 200 deviations per product in the ten pilot States.

    That being said, the ACLI recognizes that CARFRA is in a very early stage and making it a success is clearly a long term process. Success will be measured by participation by all States and achievement of true uniform national standards.

    This will be a very challenging task, which will require the continued dedicated efforts of NAIC members as well as changes in State legislation.

    The ACLI is committed to working with regulators and legislators to achieve that result.

    In sum, the financial services marketplace has changed very dramatically in the past years, and our system of insurance regulation has not kept pace.

    Immediate and substantial reform is necessary to assure the long-and short-term well being of our business.

    I appreciate this opportunity to appear today, and will be happy to answer any questions.
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    Chairman BAKER. Thank you very much, Mr. Fisher. We appreciate your participation here today.

    I'd like to start with the observation that I think each of you are in agreement that the current model or process presents problems not only to the business interests marketing products, but to consumers who depend on the products for various and sundry reasons.

    The issue should be, how do we move more quickly to resolve the problem, and what methodology should be utilized.

    For example, the CARFRA 10-State experiment on limited product lines appears to have enjoyed some success, but as Mr. Fisher has just pointed out, there still are an extraordinary number of exceptions to the CARFRA requirements since it, one, is voluntary, and two, the States tend to be protective of their particular orientation on a given matter.

    Representative Parke, you indicated that your organization had some concerns about the progress that could be achievable under CARFRA, but does the organization have a model of its own that it sees as responsive in a timely way or an improvement to CARFRA that you might suggest?

    Mr. PARKE. Well, Mr. Chairman, I might point out that under the Gramm-Leach-Bliley Act, which was just passed last year, there are a number of triggers that said the States had a responsibility to do it and one of those was the agents licensure where you said that you needed, by November of 2002, to have 29 States pass some meaningful uniform and reciprocity agents' licensing.
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    I am proud to say that through the NAIC efforts and through the Agents Association, and through NCOIL, we now have exceeded those 29 and are ready.

    The NAIC is looking and using CARFRA as an answer. It could be the answer, but we are looking, working with them, trying to figure out other ways to do it. We've talked about interstate compact, which is in many ways similar to what CARFRA is.

    What you have to remember is that we now have the responsibility to meet your triggers, which you've established under GLBA. I think we're doing it.

    I think if you give the States the opportunity to continue, have hearings, put the pressure on us, we will continue to respond and I think through that, we will come up with the answers that'll be both good for the industry and good for the consumer.

    Chairman BAKER. Let me follow up on that point. With regard to the 29 States approval, that doesn't represent a significant portion though of premium dollars written or agents licensed, because we have still have not yet broken into the large insurance markets.

    Given that and the subcommittee's attempt to set a trigger that would be acceptable and achievable at the State level, I think there is the recognition on my part that we very much appreciate and have sensitivity to State regulation and enforcement, but that structure has a very difficult time of being totally justified when you have such enormous disparity in local approval requirements, you know, having to have something typed in a certain place facing a certain way.
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    That is almost back to monastery-type days in handwriting style.

    Representative Parke, you seem to indicate that additional hearings would be helpful.

    Given the seriousness of this, do we really need to just have hearings, or do we really need to contemplate steps a little more aggressive, or wait until next fall and just see how it all falls out?

    Mr. PARKE. I might respectfully say you've set the guidelines. You've told us what the States are expected to do. Now let us do it. Give us the time lines that you've established and say, all right, fine. Let it work, and I believe that the States will respond.

    I'm pleased to tell you that on the Governor's desk right now in Illinois, is the agents licensure. We're the fifth or sixth largest insurance producer in the United States. I believe that the Commissioner from Michigan can also speak to it, but I think they are very close.

    So we see that there are definitely a couple of major States, Florida, New York, and California, which are large producers of insurance, that are still working on it. We are hopeful that they also will be able to come to the table and pass some meaningful insurance legislation that complies with the GLBA.

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    Chairman BAKER. Thank you.

    Commissioner Fitzgerald, there is significant difference between standardization of forms and reciprocity and then the higher standard of uniformity.

    In order for us to have a market that works sensibly, isn't uniformity what we really have to get to?

    Mr. FITZGERALD. Uniformity, or a very high level of standardization, I think, is the goal not only of Commissioners, but certainly of the industry, and would benefit the consumers of this country.

    One of the great benefits of CARFRA is that, for the first time, we now have a common agreement as to not only what constitutes appropriate national standards for the products that we've begun with, but also what the differences are across the ten States, and that will of course be expanded then to include the other States.

    We have felt all along that CARFRA will help serve as a cleansing mechanism for the State legislatures. To see that, in fact, there are many of those, such as the ''i'' is not dotted in the proper place. Requirements on the book that do not serve to protect consumers nor benefit the companies can be removed, will be removed.

    I believe that over the coming several years, we're going to see a very high level of standardization occur for those products that are a part of the CARFRA process, but importantly, it will also make legislators across the country far more sensitive to the fact that you can have this sort of nationalized system occur and that they can comfortably let go of many of the old rules that in the year 2001 and beyond simply serve no purpose.
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    Chairman BAKER. Thank you. I have exhausted my time.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    I'm impressed with the success and the movement of NAIC. What I am worried about though is two things; enforcement, since I understand it is voluntary at this point, and so there really isn't any enforcement mechanism.

    But more than that, let me break out, how do you anticipate the rates to operate? Is there going to be a national or a State-by-State rate?

    How will this happen?

    Mr. FITZGERALD. We think, Congressman, that initially forms will be the area in which the greatest benefit can be had. That over time, I think that through the legislative process, the rate issue is really going to take care of itself.

    We are moving in the direction of a much more open rating system where, similar to Illinois, companies can simply go ahead, use rates and allow the marketplace to regulate. And the marketplace can, very efficiently, regulate rates.

    The consumer protection that needs to be afforded comes on the forms side, and even Illinois continues to review forms. And that's where we believe, in the long term, the CARFRA concept can best work.
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    Mr. KANJORSKI. And I agree. I think that in getting uniform policies and processes that are going to work, you are well on your way, and I think we're going to make this not only in the 29 States, but the big ones are going to eventually come in as well.

    I'm more interested in what the National Association has done. They put together a great working group and a great organization, but it turns over and it is hardly representative of the people.

    It is, in most instances, appointed insurance commissioners of whoever occupies the governor's office at that precise moment, and then on the other end, some are elected. So we have sort of a mishmash. The underlying structure of the organization, is it one-man/one-vote, or one commissioner/one vote?

    If 29 of the small States get together, can they order the other 21 larger States to conform to something?

    Mr. FITZGERALD. The NAIC does operate on a one State/one territory.

    Mr. KANJORSKI. So it's even worse than the Senate?

    Mr. FITZGERALD. It operates on a one-person/one vote system. And so, yes, indeed, as you have turnover occur, changes can occur in direction of that organization.
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    However, I think over the past 15 months, the reform direction that we have launched is so well-established, and the interest of the Congress is so high, that there is simply no going back, and that we will see an acceleration of reform occurring through the NAIC.

    And as Representative Parke has testified, I think you're going to find the State legislators beginning to work very actively in this reform and standardization movement.

    Mr. KANJORSKI. Let me throw out something that I've been interested in in the last couple of Congresses. We have something kicked around up here known as ''catastrophic insurance.''

    And catastrophic insurance is to cover hurricanes, earthquakes, and tornadoes. I think we leave floods out, because they are too expensive for some reason.

    But if you look at where catastrophic insurance is covering, it's covering Florida, Texas, California, and a few of the Midwestern States.

    The theory is that we would create a fund, a secondary insurance fund, that would be underwritten by the Federal Government to make the rates sufficient to encourage buyers in these States that are at high risk.

    Not a bad policy, but the question is, why should somebody in Kokomo, Indiana, underwrite a hurricane survivor in Miami?

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    But more than that, the thing that disturbs me is that drive toward uniformity. Sharing the risk conflicts with, sometimes, the free market system of where investments should be made.

    If we allow a property risk in Honolulu to be the same as Kokomo, Indiana, and if you're going to invest your dollar, the likelihood of making a profit will be in Honolulu much faster than in Kokomo, Indiana.

    In fact, we know from prior experience, hurricanes and other things, the base underwriters of insurance are going to be in Kokomo, Indiana. They're really picking up the additional rate.

    What mechanism do we have in the NAIC to cover that problem when it eventually emerges? I know it isn't there yet, but as you go into the ring here, it definitely will occur where there will be people who are picking up the cost of insurance.

    I'll throw another quick one out. A recent study indicates that heart conditions are experienced in higher proportions in Appalachia than in other States, having some correlation with economic conditions.

    Are we going to end up with a national rate for heart conditions, or we going to have an exclusion if you live in Appalachia, or a higher premium?

    So it goes to health insurance, it goes to property damage, and in what way do you envision the NAIC to come to grips with those problems?
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    Mr. FITZGERALD. I think you've identified a very important point. That is that property and casualty insurance tends to be a much more local undertaking.

    In Michigan, we are not much concerned about hurricane protection or earthquake protection. Flooding can be important and ice damming in the winter resulting from heavy snows is very important to us, but not in Florida.

    That is why ultimately I think we will probably see a movement across the States toward true deregulation of rates as they pertain to property and casualty insurance, and let the marketplace bear that burden and that risk, so that you don't have somebody in Kokomo, Indiana picking up the tab for a hurricane that has occurred in Southern Florida, for example.

    Life insurance, to a great extent, has become deregulated on price, more of a file and use system across the country. There you can have a far greater standardization of rate than with property and casualty products that are more dependent on local activity.

    So again, Congressman, I think what we will see is a very fast evolution of State laws that will take into account exactly what you have identified as an issue facing us, and that is how do we have those who face a risk bear that risk most appropriately from a rate standpoint.

    Chairman BAKER. If I may, Mr. Kanjorski.

    Mr. PARKE. Just one comment, if I may. Congressman I may say that when I get a call on an insurance problem with my constituents, fortunately Congress doesn't deal with it, that's the responsibility of the State. So they call their State representative or State senator. It does not make any difference whether that Commissioner is elected or appointed.
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    When I have a problem and I can't get the liaison in the insurance department to handle that problem, I'll go directly to the commissioner. I don't care how he got there, he's the source of the answer. And I expect those answers to come from those insurance commissioners. And if I can't get the right answers on a consistent basis, then I go to the governor or the people and try to figure out a way to remove that person so we can get the right person in there.

    So to me, it doesn't make any difference if they are elected or appointed. As a legislator, my responsibility is to my consumer who has a problem.

    Mr. KANJORSKI. I understand and I agree, but I've been watching some of the States and I notice that very often insurance commissioners who stand for an election tend to take more populist views; sometimes that doesn't comport with the best of sharing the risk.

    Chairman BAKER. If I may, Chairman Oxley.

    Mr. OXLEY. Thank you, Mr. Chairman.

    Director Covington, welcome.

    Could you explain to us desk drawer rulings? Indeed, even in a case where you have uniformity of laws, isn't the interpretation of that law critical to try to find some kind of reasonable solution to the issue?
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    Mr. COVINGTON. Chairman Oxley, we do have a problem with desk drawer rules and what I call ad hoc determinations by departments across the country today.

    One of the goals of the review standards checklist that I talked about earlier is to eliminate those desk drawer rules. That's the first step in creating greater uniformity across the country.

    In fact, much to my chagrin, we found one desk drawer rule in Ohio and we're going to eliminate that desk drawer rule.

    But many States have many desk drawer rules, so it is an issue. The plan that we adopted in December addresses that issue.

    Mr. OXLEY. If Congress sets a goal of 3 to 4 years for achieving comprehensive uniformity by NAIC for product approval, do you and Mr. Fitzgerald feel confident you can meet that goal?

    Mr. COVINGTON. Chairman Oxley, I think we've got to meet that kind of goal. As we said before, the current system is not good for consumers, it's not good for insurance companies. We must meet that goal.

    And I think that we've set in action a plan that will do that. In just over a year, we set a vision for modernizing insurance regulation. We established a plan for doing that. And now we're quickly, at an extraordinary pace, implementing that plan, so I think that's a reasonable timeframe.
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    Mr. OXLEY. Mr. Fitzgerald.

    Mr. FITZGERALD. I agree with that. I think a 3 to 4 year horizon is appropriate for the governors, the legislators, the insurance regulators of this country to work together. We've very clearly identified the issues. We now need to have some time to be able to address those.

    If, over the next 2 to 3 years, you haven't seen significant progress, then I think there need to be questions raised about whether we can effectively, at the State level, solve the problems that you have helped identify and that we are identifying.

    Mr. OXLEY. Representative Parke, during the testimony back when we were considering Gramm-Leach-Bliley, one of the most effective pieces of testimony came from Illinois in describing the Illinois system. I understand you haven't had re-regulation now for some 30 years in the life insurance side of things, and it's worked quite well for consumers and the industry.

    If that is the case, and I assume you would agree that that's the case, why haven't other States adopted that model?

    Why hasn't NAIC sought to adopt the Illinois model?

    Mr. PARKE. I think that what we have found is that this is a blast across the bow. I believe the insurance commissioners understand now, under GLBA, that you mean business. And quite frankly it's still something that the State legislators in some States have to understand that you mean business.
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    And I think that many times it's easier to just continue to do what we've done before, there's no need to change, and so therefore many of the regulators and their departments have been there for a long time. They haven't had to do it.

    I've gone to any number of NAIC meetings, and I've watched and listened and it's non-stop work from morning till night. And I think that their desire to make sure that the speed in the market is something that really happens, and I think that they have the will and desire. I know the State legislators that are members of NCOIL and we try to bring in the chairmen of the various State insurance committees to educate them on insurance.

    I think we're going to get the attention of the legislators in the various States that we mean business, and if we don't do it, then Congress is going to do it for us.

    Mr. OXLEY. Thank you for your testimony. I was an original member of what we called the Conference of Insurance Legislators (COIL) back then in the 1970s, and clearly, the organization has come a long, long way, providing great leadership from the State legislative side of the issue and you are to be congratulated for your efforts.

    Let me just ask our two Commissioners what their take is on the Illinois model and whether it's being considered in the overall context of the NAIC proposals.

    Mr. COVINGTON. Chairman Oxley, as I testified previously with regard to commercial lines insurance, the plan that we adopted in December clearly sets forth a move to a competitive rating system for most commercial lines insurance products.
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    Right now, there are four States that have a system that is very similar to that plan. Fifteen States had the discretion of their legislative statutes in order to move forward with that plan.

    The remainder of States will need legislation.

    With regard to personal lines, it does become more complicated, even in Illinois. Even in Illinois, where they do not regulate the rate, they do regulate the classification system. When you look at a product in the rate, there's the rate, there's the classification, and there's the product.

    Even in Illinois, they regulate the classification system. So that's one of the issues that we are studying currently as to how to best and most efficiently regulate that classification system, or whether we should regulate it at all.

    And that's what we are endeavoring to do this year as we look at personal lines. So the plan has not gotten so far as to the personal lines area, but that's an issue we're working on this year.

    Mr. FITZGERALD. Mr. Chairman, my belief is that, in fact, as I've stated earlier, the marketplace can very effectively regulate and protect consumers on the issue of rates for commercial lines. And I also believe it can do so in personal lines.

    But there needs to be, I think, a recognition on the part of everyone, citizens as well as legislators, that, in fact, taking this step, while it may seem to be walking off a cliff when it comes to the ability to protect consumers, ultimately will bring greater benefit to consumers of an extremely competitive personal lines market, as well as the ability of companies to compete very openly within States.
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    Now I state that not as an NAIC position, but as one that I hold as the Commissioner for the State of Michigan.

    I think you may hear more about this as a part of the second panel today on the property casualty side.

    Chairman BAKER. If I may, we just got an announcement. We have three votes pending. We have about 7 or 8 minutes remaining. I don't know, Mr. Bentsen, it's your option. Would you care to be recognized now?

    Mr. BENTSEN. With the Chairman's indulgence.

    Chairman BAKER. Absolutely. It would be my intent—oh, I'm sorry, Chairman Oxley? All right, it would be my intent to recess the subcommittee pending Mr. Bentsen's comments and we would be in recess for about 15 minutes and return as quickly as possible.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    I get the impression from looking at the testimony, Mr. Fisher, that the ACLI is appreciative of the speed to market initiative of the NAIC, but is concerned that it maybe doesn't go far enough in providing I guess what would be an insurance blue sky for purposes of speed to market.
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    Is that a correct interpretation?

    Mr. FISHER. I think we are certainly more than appreciative, we're very supportive of it.

    But you are correct, as I said in my testimony, in identifying the fact that it does not really meet all of the objectives that we see as the optimal system of regulation, and specifically it does have a single point of filing, but there are still individual State approvals within that single point of filing.

    We are looking for a single point of filing with jurisdiction over products for all States and acting on behalf of all States. That is one big difference.

    Mr. BENTSEN. And Representative Parke, in your testimony, you state the idea I believe for the concept of perhaps a State-run national organization, but very separate from the Federal Government.

    I guess my question to the entire panel is, one, with the speed to market initiative, is there a legal need at some point for a Federal uniform standard to provide some legal certainty?

    And second of all, what would something like a Federal blue sky, which otherwise does not impose upon State consumer regulation, and I realize that's broad assumption, would that be something that NAIC or Representative Parke, your organization would be in favor of or is that something that you think would work.
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    I realize that securities and insurance really are different animals in many respects. Insurance products are not necessarily as uniform as a lot of securities products. But it seems to me that that might be an answer to your problem and perhaps to Mr. Fisher's organization's problem.

    Is that something that you all see as achievable, and do you think you need some Federal uniform standard at some point.

    Mr. PARKE. If nobody's going to jump in, I will.

    I believe that giving the NAIC the time, their commitment is there to solve that problem. We have worked well with them. They've shown an interest in making sure that the State legislators have input into developing that kind of a system.

    I'm confident the NAIC and the insurance industry can work together to find an answer to that problem, and I do not believe that the Federal Government has a role in solving that problem.

    Now, if we can't, then I think that you have a responsibility to the citizens of this Nation to find an answer that works, and to the insurance industry, because we need products that consumers can use in a short period of time, because the interest sensitive nature of the product or the competitive nature with other institutions is necessary, so an answer has to be found.

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    Mr. FISHER. I'd just like to point out it's an intriguing idea and theoretically I guess it could work. I think product regulation is a far more difficult issue to work with than say agent licensing.

    And as it was, there was certainly opposition from many States to the NAREC proposal. So I'd like to be optimistic that the approach you're talking about would not encounter opposition.

    I'm not quite as positive on that.

    But in addition, I think if you're talking about congressional action, there may be other solutions to the problem that would have to be examined, and I think we'd want to be very sensitive to looking at the same Congress perhaps pursuing different solutions at the same time.

    Mr. FITZGERALD. The greatest degree of competition that insurers face today with the other financial services marketplaces is really on the life and annuity products, not so much the property and casualty products.

    And I would concur with Representative Parke's earlier statement that the use of the interstate compact is a mechanism that the State legislatures and governors can very effectively use to create the nationalized, but State-based system that take the elements of CARFRA and makes CARFRA the place to go for whatever product approval or rate form approval that might have to occur.

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    It is voluntary today, but the States that are a part of it, if they are going to become a part of it, basically say that we will go along with what the CARFRA decision is.

    So what you propose would certainly be an intermediate step between the system that we have today and having, for example, a Federal regulatory system in place.

    But again, I think that the States can demonstrate over the coming 3 to 4 years that, in fact, that step might not even be needed.

    Chairman BAKER. Mr. Bentsen, we're under 3 minutes. I'm told that we will have another vote in about an hour, so the good news is, when we get back, we may be able to finish with this panel.

    I'm told that Members do have additional questions. We'll return as soon as possible. Thank you.


    Chairman BAKER. I'm informed that we will expect another vote on the floor somewhere around 5:00. It would be my hope that we could proceed to conclude today's business before being interrupted with that vote.

    I recognize Mrs. Biggert at this time for questions.

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    Mrs. BIGGERT. I want to direct this question to my friend and former colleague in the Illinois House, Representative Terry Parke.

    Terry was and still is known by all his colleagues in the Illinois General Assembly as the insurance guru, so I'm happy that he is here to enlighten us today.

    Representative Parke, do you think that the Illinois rating law, which uses a market-oriented approach provides less protection for consumers than other laws of other States?

    Mr. PARKE. Congresswoman, I would say that people seem to think because we let the insurance industry go about their business that there's no oversight. Quite frankly, it's completely the opposite.

    Under our market conduct examinations, we probably are more stringent than the majority of the States to make sure that solvency and marketing and all the other ways of checking the quality of an insurance company is there. And they review those insurance policies that are offered up.

    So there seems to be a misconception that because we have no rating law that it's wide open and wooly. It's not. Our insurance department is known as one of the best insurance departments in the United States, and that's because we have a professional staff that reviews all those products, reviews the companies, make sure that they are operating properly and that we protect the consumers.

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    Mrs. BIGGERT. Well, then, if the consumers are protected under the Illinois system, wouldn't uniformity be most easily achieved if we moved towards a file-and-use, or a use-and-file system rather than a prior approval system in the marketplace for all the States?

    Mr. PARKE. Well, I've served in the Illinois House 17 years, and during that time, I think the last time there was any legislation presented in the Illinois House to change what we have in Illinois may have been 10, 12 years ago.

    Since then, even our most liberal and consumer-oriented legislators have come to the realization that what we have in Illinois works to protect consumers. If it wasn't, we would have all kinds of legislators introducing legislation to change what we're doing. It is not happening.

    The consumer in Illinois is well protected and we believe we're doing a good job. If we're not, the legislators will come in and try and change it.

    Mrs. BIGGERT. Thank you. I think that's probably true with a number of bills that are introduced each year in the Illinois legislature. If you can find something to tweak, it's done.

    Thank you.

    Then, Mr. Fisher, if a consumer, say in Massachusetts, wants to buy disability insurance from you that you're selling in New York, can they do that if Massachusetts' insurance department is still delaying approval of your product?
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    Mr. FISHER. No. It's a State-based system and I think that regulators and certainly companies would frown upon individuals crossing lines and companies participating in that type of activity.

    So if a product is not approved in a given State, it really means you should not be marketing that product to the residents of that State.

    Mrs. BIGGERT. So this really does affect your ability to roll out a new product if some States have approved it and some haven't, and if they are neighboring States in particular.

    Mr. FISHER. It most definitely does, I can tell you, having been in the home office of Mass Mutual for 30 years. Mr. Parke and I were talking a few minutes ago. He's a former Mass Mutual agent. He was probably the guy who was calling us on the phone some years ago and we didn't have a product in Illinois.

    There are tremendous pressures when we roll out a product and we can't roll it out in all States. And that's the norm, by the way. We will usually go for 35 to 45 States in our initial rollout.

    The remaining States are a problem, and in some cases we do not have products in some States and have just not been able to get them approved, and you finally give up, or the requirements are so different from other States that you have to totally reprice the product, and then you have to do a basic cost/benefit analysis.
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    And in many cases, we have just concluded that a product is just not going to be available in a given jurisdiction.

    Mrs. BIGGERT. Thank you.

    Just one other question to Representative Parke.

    NCOIL has not endorsed the Illinois model. Have you tried to bring that up to them, or is this something that you presented to your group, or has your organization endorsed any of such models?

    Mr. PARKE. You're talking about the NCOIL? Are you saying NCOIL is not?

    Mrs. BIGGERT. Yes.

    Mr. PARKE. I'm sorry?

    Mrs. BIGGERT. I just wanted to state, have you discussed with the other members of NCOIL, the State legislators, the Illinois model and how that could work in their State?

    Mr. PARKE. Absolutely. We have done that, and it's also been discussed at the NAIC meeting. I've been at meetings where it's been brought up. Our insurance commissioner has made a point for us to go. He's also made a point to make sure that whenever I discuss the Illinois experience, that we tell them how the insurance industry is highly checked and rechecked under our market conduct programs, to make sure that they understand it.
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    Yes, we've talked about it and there is interest from other States. I've gotten requests for our legislation, so yes, there is, and we see that some of them are starting to move that way.

    But again, I will reemphasize that GLBA has really been the shot across the bow of the States to say, hey, it is time for you to reevaluate the product lines, how fast it is to get approval on products, because the consumers need these products and you're going to have to provide the services to the companies and to the consumers.

    Mrs. BIGGERT. Thank you.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Biggert.

    I want to return to the topic one more time before we release our witnesses, make another run at it, maybe this time with the prior admonition I was a State legislator for 15 years before losing my mind and coming to Congress.

    So I have great regard for State regulation and State authority, but there is a point at which we have to say, let's take a look at this.

    There are bank products, swaps, fixed income annuities, others that are not called insurance products under banking law, but it's a pretty fuzzy line.
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    And then there's clearly securities products which are, you know, hedges that are basically insurance product in consequence, although not regulated that way.

    So we have two industries under Gramm-Leach-Bliley, securities and banking, that have the ability to go to market without individual prior approval from the States that are competitive to the other component in the market.

    That in itself is an imbalance which we feel some responsibility to address, because we have created the ability for the others to form these new structures.

    Second, the consumer interest in this matter is the most important, and facilitating access to the best product at the lowest price would result, I believe, from this effort.

    To that end, you've suggested that, don't do anything else right now. We're in good faith, we're moving fast, and only act if we don't get it done.

    My difficulty with that approach is 3, 4 years from now, if we haven't got it done, then we've got to start then. It would seem appropriate to suggest this.

    How about legislation, near term, next year, that says 3 years from the passage of that bill, if you haven't adopted nationally the standards in CARFRA, maybe the National Association of Registered Agents and Brokers (NARAB), some standard, if you want to just call it CARFRA as the model, then in 3 years hence that becomes the method of implementation, as opposed to some who share grave concerns about saying the words ''national charter.''
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    What's your reaction to that, so that we don't get to a point of meltdown, assuming the worst. If you're correct, triggers don't matter because you're going to achieve the uniformity that is desirable.

    But let's not wait till we get to the train wreck to start talking about controlling the traffic flows.

    What's your response.

    Mr. FITZGERALD. I think that taking that sort of a step, similar to what was done with NARAB, for example, perhaps strikes the appropriate balance between the interests of the Congress and the ability of the States to, I believe, best execute the regulation that occurs.

    It would also have the advantage, of course, of keeping in the process the State's governors and legislatures.

    We are showing through CARFRA that the States can come together, so if the members felt that sort of a step was appropriate, I think that would be far superior to taking the bigger leap of creating a regulatory option of either Federal or State regulation. It would keep the best balance in place right now, and I think ultimately for the consumers of this Nation, allow them the greatest access to the regulators, those of us at the State level.

    And I do have the advantage of being not just the chief regulator for Michigan for insurance, but also for banking, credit unions, consumer lending, as well as for securities. And so I'm seeing the entire spectrum.
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    It's an interesting challenge, but it's one that I think demonstrates where we are going in the future. And that is the markets are coming together. The regulators ultimately probably have to come together too to be able to do the best job, and ultimately there probably needs to be some partnership between the Federal and the State systems with the State systems still having the predominant role in execution of regulation.

    Chairman BAKER. Does anyone want to express a concern about it?


    Mr. COVINGTON. Mr. Chairman, I just might comment. I think Commissioner Fitzgerald's comments relate primarily to life insurance products. With regard to property and casualty products, I will concede that based on political pressures, in a number of States, that it will be an uphill battle to implement some of the property and casualty reforms that we're seeking.

    We could probably, I don't want to get into naming names today, but you've talked about your own challenges in your home State. And I would not be fair if I did not recognize that and concede that there are going to be enormous challenges to getting that done.

    And that's the only thing that I would share. I don't want to get into the details of how we accomplish that. It's hard from a philosophical approach to give up the State regulation, but I do think I need to share that with the subcommittee, that there are a number of large States, significant States where consumers, I think, are being hurt because they don't have a good market because of over regulation today.
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    And we're seeing that. And we've seen pullouts in States. We've seen good Ohio companies, we have a lot of good property and casualty companies who will not go into certain States because of rate oppression and in the end, that hurts consumers.

    Chairman BAKER. Thank you, sir.

    Mr. PARKE. Mr. Chairman, as I said earlier, I've been in the legislature 17 years and I sometimes try to read between the lines. And it's been my impression that Congress may have had the will to do more with GLBA than they probably would have.

    I think that the intent, as an outside observer not knowing the facts, but the intent was that this is the opening volley. This is something that must be complied with. The intent is to be understood and you mean it, and to not let it work, I think, is not the intent of the legislation.

    Many times my colleagues will say, let's not move any further until we see if it's working. We have shown in the States that we are working, we are achieving the goals that you established.

    Certainly that's why you are having a hearing here today is to try to say, we expect more, not just the minimums. And we hear that.

    Chairman BAKER. I was really playing back your words that, if we can't get it done, then maybe it's appropriate for Congress to act.
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    I'm trying to find a middle ground here, if we set some time line. If it's not 3 years, then maybe it's 5 years. But some limit which reasonable people can agree, well, if we can't get it done by then on these sets of standards, then maybe it is appropriate for the Congress to act in some additional manner.

    And if it's not CARFRA in 3 years, I'm just asking this, you know, maybe you don't have to give me the specifics today, but think about it. What would that box look like.

    I will confess I was involved, to some small extent, in Gramm-Leach-Bliley and you'll be shocked to learn there was a considerable bit of political discussion ongoing in that room, and sometimes that tends to limit what the sausage will look like when it's finished.

    So I can assure you from my perspective there were those who were a great deal more enthusiastic about going a lot further than just getting us up to 1990. Some of us actually would have liked to have gotten the law up to about 2001, but we're going to work on that.

    In order to facilitate this and not have the hanging contingent of people in your capacity feeling like the Congress is going to act recklessly, and without regard for your responsibility, we, on the other hand, want to feel like we're getting it done at a level sufficient to make markets work, and some agreement between those two positions to establish CARFRA, NARAB, you pick' em, in some timeframe appears to me not to be that irresponsible, rather than wait and find out well, we just didn't get it done. Now we're going to start looking at it.

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    And that's really the purpose of these hearings. How do we move forward with the assurance at some point reasonably in the future, we establish a market principle that makes sense for everybody. And that doesn't require a response. I just want to communicate that in the best way I can.

    Yes, sir, Mr. Fisher, did you want to comment?

    Mr. FISHER. Mr. Chairman, I guess I would have to express a slightly different viewpoint from that of my fellow panelists.

    One potential concern we have, aside from any constitutional issues that might be lurking out there on that type of proposal, is that if, in fact, things could not get done, then an awful lot of time has been lost in the process.

    And we have grave concerns about that. You heard about the loss of sales that my company alone is experiencing. If you multiply that by the number of insurance companies doing business, and I'm just talking life insurance, it greatly ups the ante.

    The ACLI, as you know, is looking at different options and pursuing different options currently, although a final decision has not been made on one of them, for improving regulation of insurance, life insurance.

    Assuming that a decision is made to pursue the other option, other than the State's option, we believe that it might be appropriate to pursue both options concurrently.

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    If the States are capable of proving that they can achieve the efficiencies, then it may well be that Congress would want to look and maybe we should discontinue the pursuit of the other option.

    But we do have concerns about the time involved.

    Chairman BAKER. Well my point for initiating the question was, we don't want not to be cooperative in allowing the commissioners, the legislators, and the States to engage in what they believe to be responsible for their consumers. But at some point, we have to establish we can't wait any longer.

    And I'm merely trying to get a date by which reasonable people can agree we can't go past this. And at that point, we would then have a requirement, that we could also agree would be reasonable, that makes whatever the next modest step that's agreed to automatically implemented.

    The concern we have is that we don't take any near term action, that we find ourselves 3 years hence with still partial implementations and disparities, particularly in property and casualty, and that there is indeed great pressure to act very quickly as opposed to a more studied approach that is more responsive to the States.

    And that's my point, and I appreciate your testimony.

    Mr. Sherman, I believe you're next for recognition.

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    Mr. SHERMAN. I would think that prompt approval of new insurance products could have a couple of advantages to the consumer. Either you're in a State where there's a particular type of insurance that might fit your needs and it's not available, or several companies that could offer that type are not allowed into your State, and you're stuck choosing from only one or two companies without perhaps the requisite level of competition.

    I come from a big State, California. I've been dazzled and occasionally confused when presented the entire smorgasbord of available insurance products. And I'm surprised to be here at a hearing that seems based on the idea that there might be more insurance products that my constituents need to buy that somehow they're not being offered.

    Can one or two of the panelists identify a type of product that isn't available in a major State or a contour of that product that isn't available in California or some other major State, that you could explain to me, that my constituents would be better off buying if only they could?

    Mr. COVINGTON. Mr. Sherman, I do have an example of a product. A good company in our State of Ohio, Nationwide Life Insurance Company, introduced or tried to introduce a product a few years ago, a long-term care product, coupled with an annuity, so that you had both a savings component and a protection component for the central long-term care needs.

    And I know your State probably has a lot of seniors, a large senior population.

    Mr. SHERMAN. And an awful lot of interest in long-term long-term care insurance, although I guess you could buy these separately, I don't know if there's a shortage of annuity policies, for example.
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    Mr. COVINGTON. This product was a unique product that served a particular marketplace. We know today that the company was not able to get that product approved in six of the largest 12 States. That's not good for consumers, it's not good for the company that's trying to compete with other financial services.

    Mr. SHERMAN. I mean, I can go to a store and buy toothpaste, I can go to a store and buy socks, I've never seen an opportunity to buy the two packages together. I never needed that opportunity. I just buy them separately.

    Is there anything about this product that's any different than simply purchasing separately at a competitive price, a retirement home coverage policy on the one hand, and an annuity on the other. Other than the fact that the two are packaged together, was there anything special about this policy?

    Mr. COVINGTON. There were differences. I'm certainly not a product expert, but as the product was explained to us, we thought it was innovative, we thought it treated a particular market in our State. We approved the product very quickly in Ohio, and we think it benefited consumers.

    Mr. SHERMAN. Why in those other States did they face a hang up except for the fact that nobody had seen that particular combination?

    Mr. COVINGTON. That's a great question and I don't have an answer for you.
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    Mr. FISHER. I can help to answer that question, Congressman. First of all, with respect to the question about whether it is better to have and can't you do it through two products rather than through one. I'm not an actuary, but it is important to understand that there are some basic loads or fees associated with the product just to cover the cost of issuance and administration, so you lose out.

    It's cheaper to have something combined in one product than two.

    Mr. SHERMAN. But, I mean, we could always posit the idea that maybe there's somebody who needs boat insurance and, you know, coverage for their stamp collection from theft. And I'm sure that you can't buy those two policies together.

    What I'm saying in effect is I'm looking for a product that isn't available in major States, not just a unique combination of two products that can probably be purchased separately. Otherwise, there would be a dazzling array of combos that aren't available.

    Mr. FISHER. Not necessarily. One product would certainly be cheaper. When you're talking about the long-term care arena combining some of these products, that is a newer type of long-term care product on the street. It is a very efficient product.

    Going partly to your question about what about the other States, why, I can speak to one of those States. There's a law on the books that was literally over 100 years old and said you can't combine two lines into one. That was it. That was the sole reason for that jurisdiction's proper refusal to approve the product. They did not have the regulatory authority.
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    That law was changed, by the way.

    Mr. PARKE. Congressman, I might flip this around another way, in looking at it and say that some products should not be approved and speed to market is not the ultimate goal. Protecting the consumer from the product that is marketed to be there when the consumer needs that product is another.

    I want my insurance departments to be deliberative and make sure that they take time to review and make sure that policy——

    Mr. SHERMAN. I understand that argument. Kind of the underlying hearing here is that we're going to have, as I understand it, the possibility of two avenues to get a product approved. And if you feel that we've got to make sure that bad products aren't approved, if anything, we should stick with the present system.

    If the goal is to make sure that good products are approved and approved quickly, then we might need to change the law.

    What I'm trying to explore with my questions here is, is the present system of saying the only way to sell a product to a Californian is to go through the California Insurance Commissioner's office who may, for a variety of reasons, not let you sell that product.

    Is that a problem, or is this a solution in search of a problem?

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    Chairman BAKER. Mr. Chairman, if I might, I'm sorry, you've exhausted your time by a small measure.

    And just a line response, if I might. I'll use my own State as an example. On average it takes in excess of 300 days a year to get any new product approved.

    We have significant withdrawal from our market in large measure and I have a statement from my current acting commissioner, our former commissioner has other difficulties——


    Chairman BAKER. ——Indicating that it would be of great help to have form uniformity to expedite delivery of appropriate products to consumers. And the purpose of the hearing is not really to establish a national charter issue, which is underlying the statement I think the gentleman was asking.

    Mr. SHERMAN. If it wasn't a national charter, is the focus of this hearing some sort of Federal system to approve products more quickly.

    Chairman BAKER. No, really it was to have the commissioners report on the progress with the voluntary initiative known as CARFRA, which involves ten States on limited product line, and also to have others comment on whether or not they viewed a problem in the market.

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    And all these four gentlemen have indicated they perceive there is a problem that might be difficult to resolve with State initiatives. They are optimistic they can do so, but they understand the Congress' interest and intent to see it resolved in a timely basis.

    Mr. SHERMAN. So our focus here is to see whether the States in combination are doing a good job, with the possibility of some Federal role?

    Chairman BAKER. I'm the last person to explore or suggest that another Federal regulator is a good thing in Washington, but I will say that despite the best efforts of the States, if we can't have uniformity and approval forms marketing, there is a consequence to consumers as a result of that, and this hearing is to have their report, make assessments as to that progress, and at some later time determine if additional action by the Congress may be warranted.

    Mr. SHERMAN. I commend the Chairman for holding these hearings and I yield back the entire balance of my time.


    Chairman BAKER. Thank you very much, and as usual, we're always on the same page.

    Ms. Hart, did you have a question?

    Ms. HART. I do, Mr. Chairman, but I'll be brief.
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    First I want to thank the panelists for being here. I served in the State legislature for 10 years and I served on the banking and insurance committee in Pennsylvania, so I dealt with a lot of these issues, and one of the things that I think is most interesting is that, without the Federal Government taking over control of insurance regulation, we can somehow assist the States in coming to some common ground. And that's what I believe we're looking for here.

    I have a couple of people from different States before me. My question is how far should we go when it comes to us playing a role, and I know some of you may have answered some of these questions because I wasn't here the whole time, but if you would just humor me.

    I'm interested in knowing right now, I know you go through your associations, the NAIC and I guess some of the professional associations as well to try to make everybody as uniform as possible.

    But when it comes to our role, do you see us being involved in some kind of way, and what would that be?

    Is it oversight?

    Is it just shaking your hand and being friendly?

    Is it beyond that?

    Mr. FITZGERALD. Friendliness is always good. I think the role that this subcommittee and this Committee is playing in oversight is a very appropriate one. The commissioners know legislatures clearly are learning that the Congress does take a great interest in the insurance system of this country.
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    I think that a continuation of this oversight and an indication of the interest is going to keep the pressure on certainly for us to continue bringing about the reforms that are necessary.

    I would hope that ultimately that is the only role that the Congress would have to play, that the States can prove themselves capable of bringing about the reforms that will move us over the coming years and put the insurance industry in the position it needs to be viz a viz the other financial service industries, to allow them to compete effectively and allow the consumers in this Nation to have the quality products and the appropriate degree of oversight and regulation that is necessary to best protect them.

    So my ultimate hope is that this sort of hearing on an on-going basis would be the role that the Congress can best serve.

    Mr. PARKE. I might also point out that GLBA has given us the guidelines with time triggers, saying you must achieve these goals.

    The States are working toward that and we are achieving those goals. So I think that you have played a role of establishing in the minds of all people in the insurance arena that Congress is going to watch.

    You've already established those guidelines. Now let us work toward solving those guidelines. And if you see that we're not hitting the triggers, then I think you do have a responsibility to come back and revisit some form of GLBA with new triggers and maybe those triggers would be appropriate in other areas than you've already dealt with.
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    Mr. FISHER. I certainly agree with Representative Parke, but GLBA really addresses an agent licensing issue, but only in part. I don't think it's addressing the speed to market issue from the ACLI's standpoint. As I mentioned, we are pursuing a track right now, assuming there is an ultimate decision to pursue the track other than the State track.

    I think we would be looking to Congress to carefully evaluate that option. It's not a question of taking regulation away from States, it's a question of setting up a system that is comparable to that which the banks enjoy.

    Ms. HART. Right now, if you had to assess cooperation among the States, would you say that since Gramm-Leach-Bliley, cooperation has improved and that the insurance regulators are working together more, or do you think that it really hasn't changed from before that?

    As a constituent service person, I spend a lot of time, unfortunately, trying to contact other States trying to get somebody a license to help somehow get a product that might have been coming out of a Pennsylvania company into another State.

    We have all kinds of problems, and there seems to me to be just really no consideration for another State among some of the States' insurance regulators.

    Has that changed?

    Mr. FISHER. I think it's fair to say that through the NAIC especially, the State regulators have always worked with one another. I think Gramm-Leach-Bliley and the changing marketplace have really heightened that concern, especially because I think regulators have a better understanding of the regulated industry's concerns.
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    However, the other side of that is that nobody should underestimate the daunting challenge ahead of the State-based systems in terms of achieving uniformity for speed to market, because you are talking about major changes to a wide array of laws in a large number of States, and you're really going right up against the question of State sovereignty.

    Chairman BAKER. Thank you, Ms. Hart. Your time has expired.

    Ms. Jones.

    Ms. JONES. Thank you, Mr. Chairman, for holding this hearing.

    I would like to particularly welcome Mr. Covington from Ohio—I'm from Ohio, just in case you didn't know that, Mr. Covington—to our hearing.

    Previously, our subcommittee did not have the responsibility for insurance. There was probably not much reason for us to get to know each other, but now that there is, it'll be fun to get to know you. I look forward to having the opportunity to work with your staff and mine, as we walk down this road.

    I left my glasses on my desk.

    You're Mr. Fisher to the far right? Is that correct? Is that you?

    Mr. FISHER. Yes.
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    Ms. JONES. My question, Mr. Fisher, when I first came to banking, which was last term, and we were discussing handling HR 10, the opinion I got from everywhere around the world was that the insurance industry did not want to be regulated, please leave us alone, and so forth, and so forth, and so forth.

    Was it that I didn't get the right signal by this new legislation, let me just put it like that.

    Mr. FISHER. Are you talking about the regulators or the industry?

    Ms. JONES. Regulators.

    Mr. FISHER. You might want to address that question to the regulators.

    Ms. JONES. I know what they think. I'm asking you, Mr. Fisher.


    Ms. JONES. Have I put you on the spot?

    Mr. FISHER. This seat is getting a tad hotter than it was a minute ago.
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    I think it is fair to say, on a more serious note, Gramm-Leach-Bliley was really addressing the question of functional regulation and who should regulate what.

    That is getting into the question of, to some extent, turf, to use the term bluntly.

    I think that there certainly was some opposition to it, and Gramm-Leach-Bliley ultimately passed.

    What we're talking about today is really not a question of functional regulation and who should regulate what, but what efficiencies should be built into the system of insurance regulation.

    Ms. JONES. That was a great answer, but it didn't answer my question. My question is what was your personal position with regard to whether or not there should be some Federal regulation greater than currently exists on the industry, the insurance industry?

    Mr. FISHER. Again, I think the Gramm-Leach-Bliley was not getting into the question of whether there should be Federal regulation.

    Ms. JONES. Again, you know, I got accused of being one of these terrible examiners, because I made people answer my question. Answer my question, please.

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    What's your opinion, it's either a yes or a no, or something.

    Mr. FISHER. Of whether?

    Ms. JONES. Of whether or not there should be greater regulation by the Federal Government on insurance in the States, and it should be removed from State insurance regulators?

    Mr. FISHER. Assuming that the ACLI pursues the two tracks that it is currently pursuing, the ACLI would not favor elimination of State regulation. There are many ACLI member companies who would want to continue to be regulated by the States.

    However, companies which might have an interest in an optional Federal charter, assuming that decision is made, I think the ACLI would want to pursue that track.

    Ms. JONES. Mr. Covington, do you want to tackle that for me? A similar question. If this is a hot question. We'll go on to the next question.

    Mr. COVINGTON. If you could restate the question?

    Ms. JONES. During the course of the debate over Gramm-Leach-Bliley, or HR 10, which is a lot easier to say, there was the whole discussion that the State insurance industry or regulators or the like were not interested in being included in some revamping of your responsibility, that much of the regulation should be left to the State insurance agencies as it currently existed.
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    What's your position?

    Mr. COVINGTON. What I can speak to is what the State regulators' position was, and that was that we supported functional regulation at the State level.

    I can't speak to the industry's position.

    Ms. JONES. I guess I have to wait till I get me an industry panel then.

    Can you answer this about whether the insurance industry finds itself at a disadvantage as compared to the foreign insurance industry with regard to the delay in product approval?

    Mr. FISHER. I don't think that's really an issue, because if the foreign insurance industry is doing business in this country, it is subject to State regulations, so it would be subject to the same issues. The competitive disadvantage, there is some within the industry, is because if I can't get my products to market, I may be behind one of my insurance competitors.

    However, a large amount of the competitive disadvantage is viz a viz other financial services sectors, such as banks and mutual funds, who can get their products to market more quickly.

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    Ms. JONES. And I'm out of time, darn it. I guess I'll just have to yield.

    I was getting ready to get to you, Mr. Fitzgerald. Maybe on another occasion.

    Chairman BAKER. Mr. Meeks.

    Mr. MEEKS. Thank you, Mr. Chairman, and I will be brief. I happened to have a meeting with some of the industry on this question just this past week.

    Also, there was a meeting that we had, a report that came by from the Consumer Federation of America and unfortunately I didn't get the chance to hear the testimony, so I don't know whether or not you addressed this or not.

    But they seemed to have some concerns recently that in an effort to satisfy our concerns with delays for new products and rates, that the State commissioners will make some recommendations that will roll back some of the consumer protections that had been won on the State level.

    So I guess I was wondering, especially with reference to—and I guess I'll address this to Mr. Covington—the NAIC's speed to market working group. What did you put in, or was there anything put in there to appropriately protect consumers from the reforms that are being proposed?

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    Mr. COVINGTON. Congressman, we just received in the last week-and-a-half, the Report from the Consumer Federation of America, and have not had an opportunity to review it in full.

    We will be having meetings where that report will be presented to the National Association of Insurance Commissioners and considered by us during the process.

    As we testified, for commercial lines insurance, the plan calls for an informational filing or a competitive rating system.

    We believe that this protects consumers better because you don't have artificial price suppression which impacts the availability and choice for consumers in the marketplace, and that exacerbates some problems in the marketplace.

    With regard to personal lines insurance, we have just begun the process of evaluating the best regulatory system for personal lines, and we've had one medium where we've had 18 panelists testify before the subcommittee, and we will continue that work throughout the year.

    Mr. MEEKS. Let me just make sure that I understand, because I understand that in the industry right now, there is a lot of artificial pricing where a number of insurance groups have given so-called discounted prices, knowing that in just 3, 4 years, the price is so cheap that ultimately they're going to have to charge a much higher premium 3, 4 years down the line, and therefore putting the companies, some of these same companies, in financial difficulty.

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    And again, I'm just trying to see if there's anything specifically being put in place right now, as we're working on this reform, that specifically says or specifically talks about how we're going to take care of the consumers to make sure their protection's in place.

    Mr. COVINGTON. Well, let me just comment, Congressman, with regard to the financial solvency of the companies.

    The NAIC has instituted a financial accreditation program, and in that program, there's a financial analysis. And one of the things that will be looked at is the adequacy of rates to support the business. So there is adequate consumer protection from a financial solvency perspective.

    In addition to that, most State laws already say that rates cannot be excessive, unfairly discriminatory or inadequate, so that is a protection in and of itself as well.

    So there are adequate protections in the consumer plan that was adopted by the National Association of Insurance Commissioners.

    In addition, the plan calls for greater consumer information so that they can price shop more effectively, which we think we should encourage all consumers to do. There is enormous competition in this marketplace, and consumers should shop better.

    We can assist them in that effort by providing better price information.
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    Mr. MEEKS. Mr. Fitzgerald, what about CARFRA?

    Mr. FITZGERALD. I think the most significant point is that, as we have worked on the speed to market program over the last 15 months, both for CARFRA which is directed right now more toward life, as well as the improvements to State-based systems, we are not removing any consumer protections.

    In fact, doing things that have not been done before. For example, the review panels for CARFRA. We have established standards for those examiners who will serve on those panels to make sure that they are experienced, have the appropriate training, as well as experience, to provide the highest quality review.

    Those are the sorts of things that we are doing to ensure that into the future, we will have the consumers of this country protected when it comes to insurance products.

    But at the same time, we have to look for steps where we can speed the process so that products, quality products, can become available more quickly.

    And from an industry standpoint, on a similar standard to what's happening with banking and securities products, so everybody can ultimately benefit.

    Mr. FISHER. Congressman, if I could also just respond from a life insurance viewpoint. Rate regulation is not an issue that pertains to the life market. It's really a property and casualty issue. If that is a concern for anybody, it's not one that applies to the life side of the house.
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    As Commissioner Fitzgerald suggested, we are not talking about elimination of consumer protections, we are just talking about more uniform but strict product requirements.

    Chairman BAKER. Thank you, Mr. Meeks, your time has expired.

    I'd like to express appreciation to this panel for your participation. Members will reserve the right to formally submit questions that they may advance to you at a later time.

    We do appreciate your courtesy in appearing here today. Thank you very much.

    I'll call our second panel up.

    Let me make this advisory. We really need to try to get our testimony concluded and potential questions asked somewhere around 5:00 o'clock, because I'm told we could have the final vote of the day on the floor somewhere around 5:00.

    So as you're getting settled, there is a potential to summarize your statements as you proceed on this next panel.

    Since we have five different individuals presenting testimony, it will be difficult unless we expedite statements as much as practicable.

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    Chairman BAKER. I'd like to introduce our first witness in the hearing this afternoon, Mr. Robert Gowdy, President, OneBeacon Insurance Group, Chairman, American Insurance Association, (AIA), on behalf here today of the AIA.

    Welcome, Mr. Gowdy.


    Mr. GOWDY. Thank you, Chairman Baker. My company writes both personal and commercial and property and casualty insurance——

    Chairman BAKER. And pull that mike really close. They're not very sensitive, sir.

    Mr. GOWDY. Thank you.

    We write property and casualty insurance throughout most of the United States so we certainly know firsthand the challenges of operating with 50 different regulators.

    Today, I am appearing on behalf of the American Insurance Association, which represents over 370 major property casualty insurers. And on behalf of that entire membership, I'd like to thank you for the opportunity to testify before this panel.
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    Speed to market or the ability to bring products to market in a timely and cost-effective manner is a fundamental and longstanding concern of the AIA and its entire membership.

    I will focus my verbal comments today on three things: the costs imposed by our current regulatory system, the challenges in today's operating environment that necessitate speed to market reform, and the benefits that such reform would provide.

    Over the past two decades, most sectors of the financial services industry have undergone regulatory reform to facilitate speed to market for the introduction of innovative products that have certainly reshaped our financial landscape.

    I think customers have benefited greatly through lower prices, and certainly expanded product and service options. Against that backdrop of increasing reliance on marketplace and competition dynamics in the other financial services, the property casualty insurance industry stands out as an exception.

    We remain one of the most heavily regulated industries with respect to both price and product controls. Each of the 50 States, the District of Columbia, and the various U.S. territories impose their own substantive and procedural filings, review procedures, approval requirements.

    The costs imposed by our archaic State regulations are systemic. A major problem is a process known as form regulation, which you talked about before. Simply put, excessive form regulation prevents insurers from developing innovative new products to serve their customers better.
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    Each State has its own set of rules, procedures, interpretation, idiosyncracies, regarding whether a new insurance form or policy passes muster. Identical issues are treated differently from State to State.

    As an example, my own company launched a new combined auto and homeowners insurance product for customers aged 49 and over called ''Prime Time.'' Based on the results that we had had in Canada and our own internal studies, we wanted to provide a premium reduction and extra coverage. It was a clear winner for consumers.

    We started the filing process in 1998 and despite our best efforts, 3 years later, we still don't have approval in five popular States. This is just one example of the excessive form regulation that creates enormous difficulties bringing quality products to the market and allowing local insurers to receive the benefits and the economies of a national operation, and even more difficult, to serve a commercial customer operating in multiple States.

    In addition to discouraging innovation, the extensive delays in new product approval are tantamount to a hidden tax. According to Professor Richard Butler of Brigham Young University, the loss of consumer welfare due to lengthy delays in product approval and launch amounts to an average countrywide hidden tax for new products of about 9 percent.

    This implicit tax is borne by both commercial and personal lines customers.

    Rate regulation, or more specifically I should say, price controls, impede an insurance company's ability to adjust prices up or down. The result, consumers are hurt in several ways and here are a few.
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    First, States that have stringent price controls have long had the most expensive auto insurance costs in the Nation. In contrast, as you heard earlier, jurisdictions that have adopted a market-based approach have given consumers the lowest auto insurance prices.

    Second, lower risk policyholders, for example, safe drivers, are forced to subsidize those who present a greater risk. By encouraging riskier activities, such subsidies drive up total system costs and may result in unfair redistribution of income.

    Chairman BAKER. Can you give me a summary, because we've exhausted our 5 minutes, if you can.

    Mr. GOWDY. OK. In the States that have addressed the issue of rate regulation, consumers, I think, benefit. Illinois is the one State that does not have property casualty insurance price controls of any kind and consumers clearly benefit.

    Because of population, traffic density, the presence of a large metropolis, and other factors affecting losses, Illinois normally would be expected to rank among the top ten States for auto insurance costs. However, Illinois is right in the middle, runs 24th, 25th, or 26th, among States for auto insurance prices, and I think competition has been the key factor.

    There are significantly more auto insurance companies competing in Illinois than in similar urbanized States such as New Jersey or Massachusetts that have strict price controls.
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    One more example, if I have the time?

    Chairman BAKER. Very quickly, please.

    Mr. GOWDY. That's right here in the District of Columbia, which historically has been I think identified with heavy regulation, bureaucracy, and high insurance costs. It is another real world example of how speed to market reform can dramatically improve and rejuvenate a sluggish insurance market.

    Since the District eliminated price controls, rates have declined. DC. Director of Insurance Larry Morella, has said publicly that many people have been pleasantly surprised at the number of companies, even small companies who now are willing to enter and sell policies in DC., which is a relatively small market, as a result of the change in regulation here.

    In closing let me just quickly revisit the benefits, based on what's happened in Illinois, DC., and Michigan is another example, savings in insurance costs, more product options and insurance markets that are better equipped to keep up with fast-paced change in our economy, new competitors entering or re-entering the market, and a reduction in the subsidies that lower risk consumers often have to provide to those of higher risk characteristics.

    In closing, I would like to thank the subcommittee and specifically you, Chairman Baker, for holding these hearings. Thank you again for the opportunity to speak today on an issue I think is of critical importance for our industry, and how we compete against the other financial services industries.
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    Thank you.

    Chairman BAKER. Thank you.

    I'm going to restate that everyone's full statement will be made part of the record, and in the time you have, try to summarize, because I think the questions from the Members will be particularly helpful to your various interests.

    Our next participant is Mr. Robert L. Zeman, Vice President, Assistant General Counsel, National Association of Independent Insurers, and on behalf of the National Association of Independent Insurers and the Alliance of American Insurers, and you are accompanied today by Ms. Rita Nowak, Assistant Vice President, Alliance of American Insurers.

    Welcome, Mr. Zeman.


    Mr. ZEMAN. Thank you, Mr. Chairman, and subcommittee Members as well. We appreciate the opportunity to testify on this important issue. Together, our organizations represent over one thousand property casualty insurance companies.
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    Support for the ability of insurers to compete in the marketplace has been the hallmark of our organizations from their inception.

    We are hearing now though, from our members, unprecedented levels of concern regarding the regulation of rates and forms in many States and how that is hurting competition. And you've heard many examples today. We won't belabor that.

    As you've also heard, there is significant diversity across the States on how property and casualty rates and forms are regulated.

    Many States have grossly outdated laws that impede competition, and those include the prior approval laws. In our written statement, we cover the spectrum of rate regulatory laws, and we won't belabor the details there.

    But there are States that take more competitive approaches and our members, in an array of academic studies, have found that the more competitive approaches have real value for consumers as well as industry and regulators.

    Both of our organizations have conducted surveys of our members on a State-by-State basis regarding speed to market, that is, the filing of rates and forms and how they are treated.

    And we received some very positive feedback regarding some States with good examples including lesser forms to complete and a clear process.
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    But we did find in other States, members' comments that they found impediments to approvals in the rate and/or form filing process.

    Examples of the barriers to speed to market are listed in our written statement as well.

    I'll just point to two key ones.

    Number one, they were concerned about slow review, even acknowledgement of filings in a number of States, and unwritten standards or desk drawer rules, which have already been referred to in this proceeding.

    Now some of these hurdles can be at least partly ameliorated by implementing operational reforms at the insurance department level, things that can be done right now without statutory or regulatory changes.

    However, in other States, there is a need for a public policy change, a change in the law away from the prior approval system toward a more competitive perhaps file and use system.

    Now in constructive fashion, we are following up with each and every State to discuss the results of the survey with each State regulator, and having very valuable discussions.

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    What we have found is many States are indeed moving and implementing some of these reforms. Now we mentioned that we have found, our members have found great value in competition across the States.

    Our statement covers, and I won't begin to belabor here, but I want to emphasize there is a growing and very current and new body of academic evidence that confirms the value of the more competitive systems across the States and the benefits that they can have for consumers.

    For example, through less subsidization, greater availability of products. Those are clear benefits for consumers in the more competitive environments.

    And Illinois has been discussed already today, but we want to make it clear, a number of other States, including Wisconsin, South Carolina, and others, have taken more competitive approaches so it has been shown that the States can rise to the task.

    Now our organizations support a model approach which also we won't belabor here, but it's balanced with consumer safeguards. Yes, it brings the benefit of competition in the marketplace, but balanced with consumer safeguards including making provisions to assure that consumers have adequate information.

    Part two of the solution, in addition to the public policy or law changes, involves changes at the insurance department levels, making them more efficient.

    Now there are early signs in the State legislatures over the past few years and even during this round of State legislative sessions. A number of States did at least look at this issue, and we worked of course as well with a number of the State legislative groups, including NCOIL, who is here today.
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    But the American Legislative Exchange Council has already produced a model law on this subject. We hope NCOIL will do the same for personal lines as it has done for commercial lines.

    Of course, the National Conference of State Legislatures, along with the NAIC have looked at this issue. And I've shortened my testimony obviously. But the NAIC has been the leader in driving the operational efficiency reforms at the State level.

    But again, in summing up, we need reform on two fronts; changes in laws in the States where needed, and changes in the operational efficiencies where needed.

    Now we do see some signs of progress out there in the States through the activities at the NAIC, adoptions by the individual States of the recommendations of NAIC, studies by the State legislative groups that I mentioned, and action in a limited number of State legislatures thus far.

    Clearly, however, there is a need for more reform in the States, no question about it and the time has come for truly unprecedented and more meaningful cooperative dialogue among State regulators and legislatures, and us in the industry, consumer representatives and other interested parties. We pledge our assistance in doing all we can to help reach the goal of modernization including better speed to market all consistent with the vision of Gramm-Leach-Bliley.

    I went a little over time. Thank you very much.
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    Chairman BAKER. Thank you, Mr. Zeman.

    Our next witness is Mr. James A. Blum, CPCU, Chairman and President, Brotherhood Mutual Insurance Company, Chairman, National Association of Mutual Insurance Companies, on behalf of the National Association of Mutual Insurance Companies.

    Welcome, sir.


    Mr. BLUM. Thank you, Mr. Chairman and subcommittee Members. My company writes in 30 different States, but I'm here today particularly in my capacity as Chairman of the National Association of Mutual Insurance Companies—or NAMIC—today.

    Companies doing business across the country or in a single State need to be able to enter a new market or establish prices with a minimum of difficulty.

    The NAMIC Board has adopted a pro-competition model for commercial and personal lines of insurance similar to the regulatory framework used in Illinois.

    NAMIC believes a pro-competition model is the most effective public policy to achieve speed to market.
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    Illinois discontinued prior approval requirements 30 years ago, as was mentioned earlier today, for rates, and consistently their rates are below other States with similar demographics.

    There is more competition among homeowners and automobile insurers in Illinois than in any other State. After the South Carolina legislature modernized auto insurance ratemaking practices in 1997, South Carolinians benefited from the choices provided by almost twice as many insurers.

    To refute what I have said in favor of competition, some will refer you to what has been written about California's celebrated passage in 1988 of Proposition 103.

    Auto insurance rates have fallen and complaint volume at the California Department of Insurance is low. However, it was a series of explicit public policy choices to limit the cost of insuring drivers, not the institution of prior approval, that has caused prices to go down in California.

    Then there is New Jersey. New Jersey of course was spoken of today as well. Prior approval is one of many regulatory obstacles that drive up costs in the State, and six of the ten largest auto insurers do not do business in New Jersey.

    And we heard about State Farm and AIG today.

    Obviously, there will be even less incentive to lower rates among those companies left in the New Jersey market.
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    Holding the NAIC solely accountable for enacting insurance regulatory reforms is not a realistic expectation. Individual regulators clearly have a role to play in their States to raise the profile of and enlist support of these important market reform issues.

    Given the non-binding nature of the NAIC, I would submit that the more powerful players in any struggle for State regulatory modernization are the State legislators.

    Working closely with State legislative organizations like NCOIL, the NAIC has been able to coordinate enactment of the necessary legislation for accreditation in nearly every State across the country in the 1990's.

    This example underscores the type of action that we all seek to achieve for speed to market reform.

    Property casualty markets are structurally competitive. There is no apparent benefit to companies or consumers in a system where rates must be approved prior to their implementation.

    NAMIC supports model legislation to be adopted by each State to establish competition as a matter of State law, relieving all commercial writers from prior approval requirements and allowing personal lines writers to set the price of their product without government approval.

    One academic study has concluded that in States with the strictest regulatory approval process, entry to the market can take almost 90 percent longer than it does in States with fewer approval requirements.
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    There are also widespread industry complaints about the use of so-called desk drawer or non-statutory regulatory requirements. In other words, regulatory decisions are being based on rules with no basis in law.

    These hearings are helpful to the reform process and we welcome them. They keep all parties engaged in the discussion of how competition can be enhanced in all segments of the financial services industry.

    No insurance company and no State will be unaffected by the outcome of this debate.

    The NAIC did well to develop its statement of intent in March 2000, focusing its attention on the most pressing market reform issue, speed to market.

    But this is a preliminary, critical step of an important, but nonetheless voluntary organization. Ultimately, the accountability for reforming insurance regulation is with State legislatures. We believe they are up to the task.

    Thank you for this opportunity to appear today, and I tried to stick closely to the text.

    Chairman BAKER. Thank you very much, Mr. Blum, we certainly appreciate your testimony here today.

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    Our next witness is Mr. J. Robert Hunter, Director of Insurance, Consumer Federation of America.

    Welcome, Mr. Hunter.


    Mr. HUNTER. Thank you, Mr. Chairman.

    I am Bob Hunter, Director of Insurance for the Consumer Federation of America, and I served as Federal Insurance Administrator under Presidents Ford and Carter, and as Texas Insurance Commissioner.

    First, I would like to tell Congress that these hearings and other activities by Congress have been used by the insurance companies to try to push the States and NAIC into submission to cut away vital consumer protections, not just to get rid of the fat, but to go beyond that, to cut into protections what we need.

    I just have a few comments. I'll try to stay within 5 minutes.

    Consumers do not want speed to market for bad products. There is no evidence that consumers are clamoring for insurance products, nor any evidence that there are products that are not available.

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    There's certainly no pressure for speed to market coming from the victims of life insurance company vanishing premium abuses or churning abuses, or race-based premiums.

    Deregulation does not assure more competition or beneficial competition. For instance, deregulated policy forms can make price competition impossible. That's why Illinois regulates policy forms.

    Competition is not always beneficial for consumers. Some forms of competition are absolutely harmful to consumers. For example, competition that leads to insolvency. Nobody proposes getting rid of that regulation.

    Reverse competition in credit insurance, where competition is for the bank or car dealer and the competition drives up rates to allow bigger kickback commissions. Fine print competition where insurers would hollow out the coverage with clever policy language to offer low rates, but with no coverage, and selection competition, such as redlining in our cities.

    These are competitions that should not be allowed. Just enacting deregulation without making competition effective will not produce good results. Prior approval rate and form regulation intelligently coupled with the repeal to many of the State anticompetitive laws, such as antitrust laws not imposed, works best.

    Consumers do not care if the Federal Government or the States regulate insurance. We only care that the protections be acceptable and excellent.

    Consumers do not favor a system where the regulator gets to choose who regulates them. This is a sure prescription for a race to the bottom in insurance regulation.
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    Consumers support many of the changes that the NAIC has underway. We identified many of the ways States could shorten the regulatory process. We supported a 30-day limit on final action. We supported getting rid of the desk drawer rules.

    What we don't support is mindless deregulation, which we say is just stopping regulation to make competition happen. That is not the way to make competition happen. States have not fared well in controlling unfair and deceptive policies and practices. MetLife, John Hancock, Prudential, all those abuses were raised first in private litigation.

    We fear that mindless deregulation, as proposed by the insurers, will result in a bonanza to class action lawyers as it is certain that worse products will be in the market if deregulation occurs.

    Regulation is also needed to ensure that consumers have access to information. In my written testimony, I listed eight consumer principles and standards for regulation that consumers use to determine if a State or Federal bill meets consumer needs.

    The NAIC has moved fast to deregulate, since nothing motivates like the fear of loss of turf. However, we think they've gone too far in commercial insurance since small businesses, being not sophisticated, should have regulatory protections that now they have eliminated.

    In personal lines, forms must be regulated, as I said, and rates, particularly risk classifications, should be regulated. These have profound impacts on people.
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    For example, a consumer's credit history now carries more weight in determining auto insurance premiums than driving record.

    Another class being tested is global positioning satellites in autos. And what's next? Certainly health and life insurers will use the human genome to rate risks if they're not regulated.

    One State stands out as having the best auto insurance regulation. Our study shows that California rates have fallen 12 percent since 1989, while in a typical State rates rose by 40 percent, and the profits for insurers were excellent, presents the best method.

    So we ask Congress to carefully consider all the proposals you see before you to see if principles and standards that we've set out for consumer protection are part of any action you take. We would like to work with you, Mr. Chairman, on helping set those standards if, in fact, that is your desire.

I21Chairman BAKER. Thank you very much, sir.

    Mr. Philip R. O'Connor, President, PROactive Strategies, Inc., former Director of Insurance, Illinois Department of Insurance.

    Welcome, Mr. O'Connor.

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    Mr. O'CONNOR. Thank you, Mr. Chairman, and thank you to the subcommittee, and especially thank you to your staff. They've put in a lot of hard work getting this hearing together very quickly, and I hope it is not unappreciated.

    You know, this is probably the longest discussion that's ever been held anywhere on the Illinois system.

    And I find it particularly interesting, because the Illinois system is not well-known and is not well-understood. When I came to the Illinois Department of Insurance in 1977 as the Director of Research, that was only 6 years into the process for the system that we have in Illinois today.

    All that time, I undertook to conduct some research that was the first research of its kind to compare, as a group, competitive States with prior approval States. And similar research has been conducted now many times over in the subsequent years.

    The academic conclusion of the research is pretty clear. There are really no benefits that flow from prior approval that you can't otherwise get, and there are actually a lot of opportunities for unintended consequences.

    However, I'm going to admit to something here. In those early years of the Illinois system, I would say for the first 10 years, we were actually a little embarrassed by it. We felt a little bit like we were going to the NAIC meetings and our mothers had dressed us funny.

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    We were the only ones that really had no law dealing with property and casualty insurance rates.

    And after I did my research, and after I served as director, I gradually did come to the conclusion that there was really no point in the entire ritual that was being engaged in around the country.

    That is really the benefit of the Illinois system. We can go into more detail later as to what all the different features are that prevent consumer abuse in Illinois, but the basic thrust of it is that we rely on the antitrust laws, we rely on competition, we rely on strong market conduct and solvency regulation. In Illinois there is a focus on directing regulatory resources in a way that is more productive.

    Virtually every important innovation in solvency regulation in this country has come out of Illinois in the past 25 to 30 years. We can go into that in more detail.

    Let me comment briefly on Bob Hunter's reference to California.

    Many of us have seen the Consumer Federation of America paper that Bob did, and I have no doubt that the conclusions in it are held by him and CFA very sincerely.

    I have to disagree though on an important point. Everyone agrees the situation today in California is substantially better than it was in 1988 when Prop 103 passed. The question is how come?

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    The ''how come'' that I provide to you is that there have been a number of things in California that have gone directly to the underlying loss costs in the system that have come down.

    These include the decision just before Prop 103 by the California Supreme Court to eliminate bad faith lawsuits by third parties. We've seen a variety of other things, whether it's California being the first State to go to primary enforcement of seatbelts, much more aggressive drunk driving enforcement and so forth.

    So what's really happened in California in the last 10 years, after Prop 103, is it's taken about 10 years to get California pretty much back to its ranking a little bit higher than the middle of the pack in this country on auto insurance rates, just where it was about 5 or 6 years before Prop 103.

    They had a terrible run up in costs in California. The public reacted. I think it was an incorrect diagnosis. But the issue deserves a lot of analysis and a lot of research.

    One final point about California. There is a problem in a system when, for 10 years on a sustained basis, the return on net worth, that is the profit level in auto liability, is twice the national average.

    Now I'm not against profits, but there is a difficulty there. That difficulty probably is a manifestation of the reluctance of the insurance companies to lower their rates voluntarily, when loss costs have come down, out of fear that once having lowered them, if costs go back up again, it will be a real problem trying to raise them to match those costs again.
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    And that's one of the inadvertent, unintended consequences of prior approval, whether it's in California or anywhere else. It creates so much uncertainty that it actually tends to drive up the cost of capital and makes companies more reluctant to do that which they would otherwise do in a competitive system.

    So I would recommend that people look very closely at the Illinois system. It could fit on about two pages, both the statutes and the regulations that are associated with it. But over 30 years it's worked extraordinarily well.

    Chairman BAKER. Thank you very much, Mr. O'Connor, and I do take great interest in the model and do wish to explore further an understanding of how it has functioned for consumer interest.

    I do wish to have better in-depth understanding of the California model and the ramifications there, given the claims made by Mr. Hunter.

    I'm going to facilitate this a bit, so that the other two Members might choose to pursue a couple lines of questions.

    I have a couple of statements for anyone who chooses to respond in writing at a later time relative to my inquiry on the progress made to date by the State-led effort and the suggestion that we take CARFRA, CARFRA/NARAB, or some unknown standard yet to be determined, and establish that as the goal in some duration, 3 years, 4 years, 5 years, based on the presumption that earlier witnesses' testimony are correct. At least on the property and casualty side, there may be difficulties in moving toward more uniformity. Is there any advisability to that approach versus some, as another member suggested earlier in the hearing, is this really all about a national charter?
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    No, it's not. It is an attempt to find out how, I believe for consumer benefit, we standardize offerings and forms so you can compare product and see what prices really look like, which sometimes is complicated and difficult to do today.

    And also, it is to expedite the entry of new products into the marketplace and not unreasonably restrain development of those products.

    And if you would just get that back to us at your convenience, but obviously the sooner the better.

    And then, Mr. Hunter, I want to let you know that I read everybody's testimony in advance of the hearing, and I read every line. I have some concerns, not as to your principal view nor the claims made with regard to the effort to unreasonably deregulate at the cost of the consumers' interest.

    Mine goes more toward the statements concerning the subcommittee and NAIC. Page 2: ''With regard to this hearing, consumers do care that insurers have been blatantly using the threat of congressional interest, including this hearing, to bludgeon the NAIC and the States into submission.''

    That parallels sort of the opening line of your testimony today. That would seem to indicate to me you think that, for whatever reason, I'm in some insurance agent's back pocket.

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    I don't expect a response. On page 5, I see: ''NAIC had ample opportunity, after its own studies indicated a problem, to move in the direction of protecting consumers, but retreated when the industry threatened to cut off database funding, a primary source of NAIC funds.''

    If there's evidence of that, I want to know about it.

    Third, page 7: ''It is unfortunately clear that the NAIC approach is leading toward mindless deregulation.''

    I'm the last person in America to defend an insurance commissioner, given Louisiana's history, but I have to State on the record that I find that claim with regard to the 50 State regulators to be somewhat troublesome that they would be viewed as moving without any concern for consumers at all.

    And then finally: ''We ask Congress not to allow the industry to continue to use you as a threat to gain the mindless deregulatory changes they propose.''

    My point here is not to engage in a tit for tat kind of exchange with you at all. I just find these comments with regard to our process here and our intentions, particularly given the scope of your membership, to be problematic.

    I do want to engage with consumer associations, all of them, not for the purpose of disenfranchising anyone to protect profits. I think other Members can assure you I have weighed into a number of topics of considerable controversy with perhaps a degree of enthusiasm that some Members have not enjoyed.
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    I will weigh into this one in the same manner, but I do not want the public record to have, on the face of it, a statement unanswered that appeared to go at the heart of our motivation, and I would yield to the gentleman if he should choose to respond.

    Mr. HUNTER. I'll be happy to send you a letter with all the quotes that are being used by the industry. I never implied you, sir, or the subcommittee. I said the industry was using it that way, and I will be happy to send you the quotes.

    Chairman BAKER. I would appreciate it. If I'm being used by somebody, I'm either stupid or I'm not aware of my circumstances. I yield back my time.

    Ms. JONES. Thank you, Mr. Chairman. I will attempt to be brief. Mr. Hunter, I wanted to give you an opportunity, in my short amount of time, because you are the consumer advocate on this panel of wonderful insurance industry folks.

    I don't mean to disparage anybody, but I want to give you a chance to respond to any of the statements by the other people that testified, Mr. Hunter.

    Mr. HUNTER. Sure, there are a couple. I don't think we've been able to identify any products that haven't been able to get to market. I think there are probably very good reasons why a combined homeowners auto policy and for people over 49 years old was disapproved in a few States, but it could very well be discriminatory against poor people and younger people. And so I don't think that we've identified a product that hasn't gotten to market that maybe should have. I've heard a lot about 2-year delays and 3-year delays.
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    We've done some research on that. A lot of the delays are like this. A filing comes in. Thirty days later, some questions are asked. A year later the company responds, and then it's approved. Then the company complains it took over a year to approve a product. Well, it was in their control for a year. And that happens quite frequently. I won't get into an argument with my friend, Mr. O'Connor, about the California study except to say that my research covers the points he made, and I think I have shown that California is the best system for consumers and excellent for the industry as well.

    Ms. JONES. Several of you have cited studies. Can you tell me the source and the funder of any of the studies that you have discussed that support your statements? I believe, again, sir with the white hair. I'm sorry, I can't see your name, because I left my glasses. I think you cited a study. Mr. Gowdy? Thank you. You cited a study, and also, sir, to the far right, you also cited a study that you support. Can you tell me who did these studies? Maybe if I used my list I might be better off. I apologize.

    Mr. O'Connor and Mr. Gowdy both cited studies in their statements, and I was wondering who completed the studies and where and who funded the studies.

    Mr. ZEMAN. I'll begin. Actually this is Bob Zeman, and it was in my testimony, both written——

    Ms. JONES. Excuse me, Mr. Gowdy. Mr. Zeman. OK.

    Mr. ZEMAN. I briefly reference the number of academic studies. They were produced by a number of well-known professors, including Professor Scott Harrington from the University of South Carolina and Professor Darcy from the University of Illinois.
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    Ms. JONES. Do you know who funded either of those studies?

    Mr. ZEMAN. As far as I know, they were actually funded by the universities and also in conjunction—some of these were done by the Brookings Institution as well.

    Mr. O'CONNOR. Congresswoman, there are studies over the 30 years that have looked at the question: ''Is market performance better under competitive laws versus prior approval?''

    The first of those studies was actually financed primarily by State insurance departments. These were the studies that were conducted in the later 1970's. I did one of the first ones at the Illinois Insurance Department as a Research Director.

    A large number of studies were done in that context.

    Following that period of time, the insurance industry, either individual companies or some of the trade associations, would finance some of these studies.

    The General Accounting Office performed one or two of these. More recently, there have been a combination, I believe, some in the States, some by industry funded by companies, some by academics and so forth. And then in the more recent Brookings Institution ones, I believe that there may have been some company contributions to Brookings.

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    Certainly in my own studies that I've done over the years, I was never asked to find any particular thing. It is fair to say that my original work, done at the Illinois Insurance Department, led to convincing, a, myself; b, ended up convincing the National Association of Insurance Commissioners. We ended up putting out a model bill in 1981 on competitive rating. We actually ended up convincing the industry, which was very skeptical when it came to worker's compensation price competition, which many of them adamantly opposed, and which we achieved in Illinois in 1982. So it's kind of a real mix.

    Ms. JONES. Thank you. Let the record be clear that I did not infer that any findings of any of the studies were asked for in any particular way.

    I come from a legal background as a judge and a prosecutor, and that's always an appropriate question when someone says they produced a study to find out who wrote it and who did it.

    Mr. O'CONNOR. My mother always likes me to keep my skirts clean on these things.

    Ms. JONES. I'm out of time. But if the Chairman will allow you to respond, I'd be glad to hear your answer.

    Mr. GOWDY. Congresswoman, the study I referred to was done by Professor Butler at Brigham Young, that was, I think, funded by the Brookings Institute. Amongst its findings was a ranking of States by how long they took to approve various forms and rate filings.
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    And as the Chairman noted, Louisiana—pardon?

    Ms. JONES. Where was Ohio?

    Mr. GOWDY. Ohio was in the middle.


    Mr. GOWDY. I think Louisiana did take the top rank, and your Chairman cited some of the numbers from that study.

    Ms. JONES. Thank you, sir. Thank you, Mr. Chairman.

    Chairman BAKER. Yes, ma'am. Ohio was number 19. Louisiana was number one with an average across all lines of 222.7 days. Ohio had an average of 80.0 days. So once again, you've excelled greatly in your achievement.


    Chairman BAKER. Mrs. Biggert.

    Mrs. BIGGERT: Thank you, Mr. Chairman.

    Once again I'd like to welcome someone from Illinois. As State Representative, Terry Parke is the insurance guru of Illinois, I think I'd have to ask the question, what does that make Phil O'Connor? I guess it would be the Grand Pubah of insurance in Illinois.
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    I also had the opportunity to work with him when he was head of the Commission where we created the Human Service Agency in the State of Illinois. So he's done an awful lot for the State, and I welcome him here.

    My question is, it's my experience that Illinois consumers have been very accepting. I know there was some reference that consumers don't really care what kind of regulation there is, but they've been accepting of the Illinois regulation structure because we, as State legislators, when I was there and Representative Parke testified, that there really is nothing brought forward to the State legislature to change the system.

    Could you tell us in your experience if you think that's the case? Are consumers concerned about how insurance is regulated in Illinois or not regulated?

    Mr. O'CONNOR. Let's face it. Nobody's crazy about insurance, OK? We don't really like buying it. We don't like to have to deal with it when there's a claim, but we're sure glad we have it. When we do want to buy it, we want to have a fair price.

    I think generally speaking in Illinois, things have worked well. The issue hasn't risen to a high degree of controversy I'd say in about 20 years.

    The last time we had a controversy in Illinois, it was a very abbreviated one. It was in 1986 and 1987. And it really had to do with liability insurance for things like day-care centers, municipalities and so forth.

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    I'll give you one example. One of the things that the competitive rating situation in Illinois has forced regulators and the General Assembly to do is to be much more creative about dealing with problems rather than simply resorting to price regulation. That's why in the late 1970s and early 1980s, Illinois was the first and, I would submit, to this day has done the best job of dealing with the problem of urban insurance availability.

    This goes to the question Bob Hunter was dealing with about products not getting to market. A lot of States had a heck of a time or companies had a heck of a time in some States getting to market new homeowners products that dealt with the problem of the replacement cost of a home, if it burned down, being much greater than the market value. So they were very reluctant to write homeowners policies on such a home because, by golly, if it burned down it would cost $200,000 to replace it. You'd have to do a cash settlement, while the market value might be $50,000.

    So in Illinois what we came up with and pushed the companies toward was a policy that fixed the house or gave you the market value. This, among other things, really solved the problem in Illinois, to this day, of availability of conventional homeowners insurance in every neighborhood in the city of Chicago.

    And I think that was one of the good things about not having rate regulation. We had to think of real solutions rather than dream up something with rate regulation they made everybody happy for a short period.

    Mrs. BIGGERT. Right. Thank you. And I did want to also ask a question of Rita Nowak who is here. I'm also delighted to welcome her, because she's one of my constituents from Downers Grove, Illinois.
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    Ms. NOWAK. Thank you.

    Mrs. BIGGERT. Again, welcome to you. We've been talking a lot about the regulatory variances that occur State by State, but I understand that there are also variances within a State based on the individual lines of businesses. How much does this lack of uniformity across product lines cost insurance companies in terms of approval time?

    Ms. NOWAK. The variances within a State by product line probably are not costing insurers a significant amount of money at this point in time.

    Normally the variances are between personalized and commercial line products. With commercial line products, the regulations are a little bit broader, a little bit easier to deal with. In the commercial lines regulatory environment, you're going to find more file and use in forms, more open competition on the rate side.

    On the personal lines side, they're more restrictive.

    Companies are aware of that. They're looking for functionality here. If they understand the functionality of the law and how it works, then they're able to file their products and then subsequently get them approved.

    Mrs. BIGGERT. So you don't see that we need to really address the problem yet?

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    Ms. NOWAK. At this point, from our members' perspective, at least from the Alliance perspective, they have not identified that as a critical issue.

    What our members are looking at is functionality. If it's a prior approval let's say for a personal automobile, we should still be able to see that product get approved within 30 days. They're looking for functionality.

    Mrs. BIGGERT. Thank you.

    Mr. GOWDY. May I respond to that?

    Mrs. BIGGERT. Absolutely.

    Mr. GOWDY. From the AIA member companies, this is a problem for us. The CARFRA example that was used by NAIC applied only to life products at this point in time. There is really no similar standardization process that's going on in the property casualty area, other than this attempt to produce the rules and get these desk type standards out on the table and get them into a manual.

    Massachusetts tried it for just one product, and their manual for one product was three inches thick.

    This is a major problem of rules being onerous, rules being different in terms of what it takes to file and approve a form or a rate in either commercial lines or personal lines.
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    Mrs. BIGGERT. And do you have some possible solutions to this problem?

    Mr. GOWDY. I think it's absolutely necessary that we let the marketplace play a bigger role and try to keep the rules and standards to the things that are important such as financial solvency. The States have not done a very good job, and we have many examples of that. And market conduct. And there again, I think we can improve upon that dramatically.

    Mrs. BIGGERT. Thank you. I see my time is up. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mrs. Biggert.

    Unless there are further questions, I want to thank each of you for your patience in wading through a lengthy hearing this afternoon and for your participation.

    We will keep the hearing record open for an additional 30 days longer than usual in order to facilitate your answers to prior questions. And I'm informed Members also may be forwarding additional questions for you to consider.

    And if you have additional perspectives you'd like to offer in light of the proceedings, we would welcome those as well.

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    Thank you very much. The hearing is adjourned.

    [Whereupon, at 5:05 p.m., the hearing was adjourned.]