Segment 1 Of 3     Next Hearing Segment(2)

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Tuesday, June 4, 2002
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 2:00 p.m., in Room 2128, Rayburn House Office Building, Hon. Richard H. Baker [chairman of the subcommittee] presiding.
    Present: Representatives Baker, Ney, Shays, Royce, Ose, Rogers, Biggert, Hart, Kanjorski, Bentsen, Sherman, Moore, Lucas of Kentucky and Israel.
    Chairman BAKER. I would like to call this meeting of the Capital Market Subcommittee to order. The meeting today is the first in what will be a series of meetings over the coming weeks to assess the advisability and desirability of reform in the marketing of insurance products nationally. In the course of facilitating what we hope will be an important resolution of these issues is a significant number of panelists who, over a period of weeks, will each give perspectives from their particular assessment of the advisability of any approach that should be considered by the committee.
    In the course of this, I am certain the committee will learn a great deal, as we have a number of perspectives represented in the course of all of the hearings. While we have no specific purpose in mind for the end conclusion of these hearings, it certainly is evident that some regulatory reform is in order where a regulated financial institution may market a product which, on its face, is not called insurance, but, in effect, is insurance that is not subject to the 50-State review process and can enter into the marketplace rather freely.
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    A similar product labeled insurance by an insurance company must go through a rather long and deleterious process in order to see that product marketed in like fashion. There are many other instances which may be of concern, and I am certain the witnesses today will bring many to our attention. But this is a first step in what I hope will lead to a conclusion before the end of this Congress in some legislative recommendation for action that the committee may consider.

    Chairman BAKER. At this time I would like to recognize Mr. Kanjorski for an opening statement.
    Mr. KANJORSKI. Thank you, Mr. Chairman. Today we meet for the first time this year to discuss the insurance industry and the challenges that it faces. I commend you for your diligence in convening this series of hearings. Your efforts to educate the members of our committee about insurance regulation will potentially serve as the basis for future legislative action. I suspect, however, that it will take us at least several years to forge a consensus on this complicated set of issues.
    The American insurance industry, as you know, is broad and diverse. According to one estimate, we have approximately 5,763 insurance companies operating in the United States. These companies vary greatly in size, structure, and product offerings. For the last 150 years, the States have also traditionally regulated these insurers.
    Nevertheless, a discussion of insurance regulatory reform, including various proposals designed to increase the efficiency, promote the uniformity of insurance regulation, or create an optional Federal charter, flows naturally from our actions in the 1999 law to modernize the financial services industry. That statute removed the obstacles that prevented banks, securities firms, and insurers from affiliating and competing with each other. It also provided for the regulation of financial products by function, rather than by institution. Additionally, that law reaffirmed the McCarran-Ferguson Act of 1945, which calls for the regulation of insurance at the State level.
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    The 1999 reform law has also begun to change marketplace dynamics. In fact, a number of insurers have reported that they increasingly find themselves in direct competition with brokerage firms, mutual funds, and commercial banks, all of which may have a competitive advantage due to their arguably more efficient federally-based regulatory systems. For example, in many instances, a bank may introduce a new product immediately without any action by their regulator, and securities firms can typically bring new products to market within 90 days. Insurers, however, sometimes have to wait more than a year to secure all of the required approvals to offer a new product nationwide.
    As a result of these and other changes, some now contend that the current regulatory system for the insurance industry has become too cumbersome and requires reform. For example, a recent study by the American Council of Life Insurers concludes that the lack of uniformity in State laws, the burden of dealing with numerous jurisdictions, and the excessive time required for new product approval are of paramount concern of insurers who want to compete nationally.
    In response to these mounting criticisms of State insurance supervision and the growing recognition that market forces have changed the financial services industry, the States have initiated their own efforts to modernize insurance regulation, primarily through the National Association of Insurance Commissioners.
    This debate over how to reform insurance regulation has also seeped into Congress. Earlier this year, our colleague, Congressman John LaFalce, introduced H.R. 3766, the Insurance Industry Modernization and Consumer Protection Act. His bill would allow insurers to obtain an optional Federal charter and afford consumers with various protections. As we begin our series of hearings, I want to commend my ranking member for his leadership on this important issue.
    From my perspective, the most important thing that we can do in the short term to help the insurance industry is to pass legislation to provide a Federal terrorism reinsurance backstop until the private sector can address the problem. In the long term, we should also explore how to modify insurance regulation and whether we should create an optional Federal charter.
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    One idea that merits our consideration is whether we should create a tiered regulatory structure for the insurance industry as we have already done for investment advisors. The Federal Government would regulate insurers above a certain size or in certain business lines, while States would retain the responsibility for regulating the rest. During these debates, we should also carefully examine consumer protection issues. In the end, consumers should be the ultimate beneficiaries of our actions.
    In closing, Mr. Chairman, I believe it is important that we learn more about the views of the parties testifying before us today. Their comments will help us to better understand the different approaches to reforming insurance regulation and the key challenges the industry faces. I also look forward to working with you over the coming weeks and months as we proceed with additional hearings to examine today's evolving insurance marketplace and the need for regulatory reform.
    Chairman BAKER. Thank you, Mr. Kanjorski.
    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 140 in the appendix.]

    Chairman BAKER. Mrs. Biggert.
    Mrs. BIGGERT. Thank you, Mr. Chairman. As we are all aware, financial services reform, technology and globalization have dramatically changed the marketplace, and as such, we need to bring insurance regulation in the 21st century to adjust with the environment in which we now live and work.
    Two questions immediately come to mind. First, what is the best path to follow; and second, why should we adjust with the times in the first place?
    Well, we are here today to help answer the questions of the best way to proceed, and in terms of the why, we simply must change in order to guarantee that American product innovation and competition remain the gold standard to which others around the world strive to imitate.
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    Mr. Chairman, many times our States provide the best guidance for us to follow as we consider laws at the Federal level, and this is one of those times. In my home State of Illinois, our system has worked well for insurers, consumers and regulators alike. Illinois has a very small residual market, and significantly more auto and homeowners competing for business than States with stringent price regulation. Consequently, the premiums and lost wage ratios in my State are well below most other States with large populations, high traffic density, and urban centers of activity.
    Importantly, this system of less regulation has freed up government resources to allow State insurance departments to redirect regulatory attention where it is most needed, including effective solvency regulation and rehabilitation or liquidation of troubled companies. Many argue that any action Congress may take should bring about a system that resembles the one found in Illinois. We will hear some of those arguments this afternoon.
    While I believe that both the States and the Federal Government have a role in regulatory affairs, there definitely are some industries that the Federal Government should not touch with a 10-foot pole. Whether or not the insurance industry falls into that category, I do not yet know. That is why we scheduled this series of hearings: to listen, to ask questions, and to examine the issue a little closer.
    So let me offer a special welcome to the Alliance of American Insurers, an organization with its headquarters in Downers Grove, Illinois. For over 75 years, the Alliance has faithfully provided property and casualty coverage to thousands of policyholders, and I know that the Alliance's Ann Spragens is well regarded in the insurance world and will have some important things to say about the current and future state of insurance regulation. So I look forward to hearing from her and the other witnesses that are here.
    Thank you, Mr. Chairman.
    Chairman BAKER. Thank you, Mrs. Biggert.
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    Chairman BAKER. Mr. Bentsen.
    Mr. BENTSEN. Thank you, Mr. Chairman. Thank you for calling this hearing and the subsequent hearings that will come from this. The chairman and the ranking member will remember that over the last several years, as this committee struggled with the passage of financial modernization, we often stumbled over the fact that because of McCarran-Ferguson and the fact that insurance is the only financial product which is not regulated really in any form or fashion at the Federal level, that it made it very difficult for us to achieve financial modernization. We ultimately did, and some would argue that as a result of that, we chipped away at McCarran-Ferguson.
    But I think that the chairman is very prescient in calling this hearing and pursuing this matter, because I think we have come to the realization that as it is for securities and as it is for other financial products, the same is true for insurance, that it is not—the United States is not a conglomeration of 50 different markets, but rather, we are 50 different States that are subdivided among 50 different regulators, and that may well not be the most efficient means by which to both deliver a product to consumers and also ensure that consumers are adequately protected.
    This will be a very difficult issue. I would presume that one, I hope that the committee pursues and follows through on, but I think Mr. Kanjorski is right, it is probably an issue that will take some years to accomplish, but I think it is a step in the right direction, and I think that the committee and the Congress should go into this with their eyes open, understanding that market forces are going to require us to move in this direction, that we have also shown through experience that you can have a dual regulatory structure at the Federal and State level which adequately protects consumers, and we should not be concerned in trying to create a similar structure for the insurance market.
    So I appreciate the chairman calling this hearing.
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    Chairman BAKER. Thank you, Mr. Bentsen.

    Chairman BAKER. I welcome our panelists here this afternoon. I certainly appreciate each of your participation.

    Chairman BAKER. At this time, I would introduce Mr. Wayne White, President and Chair of Home Mutual Fire Insurance Company, who is here today on behalf of the National Association of Mutual Insurance Companies. Mr. White.


    Mr. WHITE. Thank you, Mr. Chairman.
    Chairman Baker and members of the subcommittee, it is an honor to have the opportunity to address you at this hearing on insurance regulation and competition for the 21st century. My name is Wayne White, and I am President and Chairman of Home Mutual Fire Insurance Company in Conway, Arkansas. I come before you as a representative of the 1,300 members of the National Association of Mutual Insurance Companies. NAMIC is the largest property and casualty trade association.
    I have been asked to discuss insurance regulation, including a perspective on the National Association of Insurance Commissioners, advisory organizations such as the Insurance Services Office; rating organizations such as A.M. Best, Standard & Poor's; and finally, to provide you with NAMIC's position on the future of insurance regulation. Each of these issues are discussed at length in my written testimony.
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    NAMIC is encouraged by the NAIC's post-GOBA performance with respect to the mandated tasks, as well as to the statement of intent. The NAIC also deserves recognition for focusing attention on key marketplace improvements, such as speed to market and market conduct for which NAMIC member companies are asking. While the NAIC can recommend standards for reform and raise the profile of important market reform issues, they cannot act alone. In the final analysis, before Congress intercedes, State legislative action must be the focus of modernization initiatives.
    There are important and effective national organizations that are prepared to lead this reform effort in the States. Already, the American Legislative Exchange Council, ALEC, the National Conference of Insurance Legislators, NCOIL, have endorsed competitive rating language that satisfies the speed to market concerns of the property casualty insurance industry.
    This Friday in PhiladelpHIAA, the National Conference of State Legislature's executive committee task force to streamline and simplify insurance regulation will meet to consider State legislative options for speed to market and market conduct reform. Their proposals will be approved by this fall so that the States may be considering these issues in January.
    Other organizations have played significant roles in the evolution of insurance practices. Rating bureaus came into being in the late 1800s and operated without disruption until the enactment in 1945 of McCarran-Ferguson, which recognized the authority of the States to preempt Federal antitrust legislation and laws and regulate insurance rates and forms. The role of rating bureaus has changed and their rates and forms require regulator endorsement, thus giving birth to the prior approval process currently in effect in more than one-half of the States.
    Today, these bureaus are transforming to advisory organizations and gather premium and loss data for State regulators and the public as well. They also promulgate standardized forms for use by companies that affiliate with them. Rating organizations provide another piece of the regulatory puzzle. These independent organizations provide ratings of insurance companies based on financial and operational analyses, and give regulators an additional perspective on the companies licensed in their jurisdictions.
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    The information presented today should make our position clear. The regulation of the insurance industry is best left to the States. The issues we are dealing with are not new, but have simply gained a higher profile as a result of the convergence of the financial services industry. A recently released public policy paper, Regulation of Property Casualty Insurance, the Road to Reform, outlines the major items in need of regulatory attention.
    In addition, it points out the flaws in a Federal solution to insurance regulation, flaws such as the propensity of Federal bureaucracies to use the regulatory process as a means of social engineering; the potential for an unfair environment for smaller companies; the additional costs associated with a dual regulatory system that must still deal with the tort laws that are unique to the individual States, and recognition that the cost of such a system will be passed on to the consumer. Many of the issues put on the table by those desirous of Federal involvement are simply of such a purpose as to make it easier for large companies to do business.
    The areas for reform have been clearly defined. However, we must remember that changes in regulations and business practices are driven by consumer demand. It is at that level which is closest to the consumer that the process of change is most effective. Now it is up to the States to enact changes in public policy that will make the difference, and we urge you to give it time to work.
    Chairman BAKER. Thank you, Mr. White.
    [The prepared statement of Wayne White can be found on page 198 in the appendix.]

    Chairman BAKER. Our next witness is no stranger to the committee room for sure. Welcome, Mr. Steve Bartlett, President of Financial Services Roundtable and a former distinguished member of this committee. Welcome, Mr. Bartlett.

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    Mr. BARTLETT. Thank you, Chairman Baker and Ranking Member Kanjorski and members of the committee. It is good to be here.
    The Financial Services Roundtable greatly appreciates the opportunity to participate in what I believe will turn out to be the first of blockbuster hearings in this area. I am here on behalf of our 100 member companies and their CEOs who identified the creation of an optional Federal charter for insurance companies as a top priority of the industry on the date of our inception as we reconstituted an integrated trade association. They identified this as a top priority on day one of the organization, Mr. Chairman, back in 1999.
    We believe it is time, Mr. Chairman and Mr. Kanjorski and members of the subcommittee, to create order out of chaos, to unleash the genius of the competitive marketplace, and to allow a national market to function as a national market in conjunction with regulation, not in spite of it. In short, it is time for Congress to create an optional Federal charter; not tomorrow or next year or 5 years from now, but now.
    In inviting the Roundtable to testify, you have asked us for an overview of the economic and marketplace challenges facing the insurance industry, which I shall do. As a predicate to that, though, I would like to make four quick points:
    First, as these hearings will reflect, and please note from all of the witnesses, there will be no real disagreement about the need for significant reform in modernization. I do not believe anyone will come to you and say there is not a problem to be fixed.
    Second, perhaps most important, the optional Federal charter and legislation aimed at improving State regulation are mutually complementary rather than mutually exclusive. They can and should be combined into a single, integrated piece of legislation.
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    Third, modernization of insurance regulation is about the economy and our customers, the American consumers, your constituents; not about turf battles, not about barriers, not about all of those things around it, but it is about the consumers.
    Finally, Congress can ill-afford, I believe, to wait for a crisis to prompt comprehensive reform.
    Now, the marketplace challenges. The direct and indirect cost to national companies of dealing with the inconsistent laws and regulatory requirements of 55 different regimes are enormous. These costs are today borne by customers and reflected in industry profitability. In my written testimony I have provided some of those estimates. It is profitability, after all, that allows our companies to offer products and services at the lowest possible cost to the consumer. In the year 2000, Mr. Chairman, the property casualty rate of return, known as ROR in the industry, was 5.8 percent, and for life insurance was 10 percent.
    By contrast, the rate of return for commercial banks was 16.7 percent, and the rate of return for diversified financial services companies was 21.3 percent, and for the Fortune 500 overall was 14.6 percent. Again, that is contrasted with 5.8 percent for property and casualty.
    The myth that insurance companies are wildly successful and overcapitalized is precisely that: a myth. Since its peak in 1999, the capital of the U.S. nonlife industry has declined by $58 billion, or 17 percent. The ratio called the trade combined ratio, or TCR, which is the ratio of an insurance company's losses and expenses to its premiums is one way to view profitability. In 2000, the trade combined ratio was 116. That means that these companies are paying $1.16 out for every dollar they earn in premium. Clearly, under the current system, insurance companies are not as healthy as others in the financial services sector.
    In fact, it is reasonable to assume that under the current State-based system, diversified financial services companies will continue to steer away from insurance as a core business. The true cost of State-based regulation is manifested in the resulting lack of competition and choice for consumers. Companies cannot indefinitely pay out much more in cost and losses than they receive in premium while continuing to serve their customers properly. Consumers ultimately will bear their cost in reduced choice and convenience.
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    On the regulatory consequences side, Mr. Chairman, the fact is that the existing regulatory structure adds a tremendous cost burden on insurers and consumers and, at the same time then, stifles competition. The need to get individual State approvals, for example, for products, mean not only long delays in bringing products to market; in some jurisdictions this can take years, but also huge costs associated with time, complexity, and duplication due to the differing requirements and standards of 55 different jurisdictions, even though in the case of many national companies, it is one product and the same consumers.
    The NAIC has invested enormous time and effort into seeking to reform the system. We applaud those efforts and support those efforts. But these reforms towards uniformity absent an optional Federal charter of a competitive Federal charter simply cannot succeed. The world is different from where it was 57 years ago when McCarran-Ferguson was enacted. Unlike that time, the United States is now a single national market for all financial services, including insurance. The world has changed a lot in 57 years. As in every other industry, insurance companies that operate on a national basis should be able to choose one-stop regulation that is free of duplication, redundancy, and inconsistent requirements and interpretations.
    The principles that we have chosen to lay out, Mr. Chairman, are briefly, first, any Federal system that must be consistent with effective, high-quality State insurance regulation; second, any framework of Federal regulation must be truly optional; third, a Federal charter should be designed to permit insurance companies of all sizes and types to engage in multi-State operations; fourth, a new Federal framework must represent the best in modern regulation, and that means deregulation of rate and form; fifth, the system should be comprehensive; sixth, the new Federal regulators should have the stature and resources appropriate to the task.
    Mr. Chairman, thank you for your boldness in holding these hearings and for your commitment to the competitive marketplace.
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    Chairman BAKER. Thank you very much, Mr. Bartlett.
    [The prepared statement of Steve Bartlett can be found on page 143 in the appendix.]

    Chairman BAKER. Our next witness is Ms. Ann Spragens, senior Vice President and General Counsel for the Alliance of American Insurers. Welcome, Ms. Spragens.


    Ms. SPRAGENS. Thank you very much, Mr. Chairman, Ranking Member Kanjorski, and members of the subcommittee.
    I have served in the current position I hold for 6 years at a National Trade Association representing property and casualty insurers and, consequently, my comments today will be related only to property and casualty insurance, not life and health. Prior to that, I served for 16 years as a regulator in the State of North Carolina, and that combined experience informs my testimony today.
    I am going to explain why the Alliance supports State regulation and has since 1922, which was our inception, and also what modernization we view is needed in order to bring State regulation into better alignment with contemporary economic needs of policyholders and insurers. In addition to that, you have also asked me to comment on the adequacy of revenues available to insurance departments to carry out their functions.
    First, we support the regulation of property and casualty insurance by the States. P and C products directly reflect the rights and remedies created by each State's law, governing torts, property use and ownership, contracts, domestic relations, corporations law, and a myriad of other subjects. As long as States retain the powers granted to them by the Constitution, this will continue to be the case, and property and casualty products must reflect those differences. As a result, the regulation of the property and casualty industry cannot be carried out without recognizing State-specific law. We believe that States should, therefore, regulate property and casualty insurance as being most familiar with their own laws and their own needs.
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    We also believe in functional regulation and the usefulness, the continuing usefulness of the McCarran-Ferguson Act. The need for solvency regulation serves policyholders and insurers alike. The financial strength of insurers and confidence in them promotes economic stability for all concerned. There are some who have suggested that modernization of State insurance regulation is really an effort to escape regulation. The Alliance says it is not. It is an effort to align regulatory functions with economic realities of a new century.
    The Alliance believes the regulation of property and casualty insurance should concentrate on efficient regulation of solvency with a greater emphasis on market conduct examination and a movement away from the current level of rate and form regulation, especially for commercial lines. Already, 24 States have, in the last 5 years, enacted simplified rate and form filing requirements for commercial lines because they have recognized that it is appropriate to do so and that the marketplace demands it.We believe there is still work to be done to harmonize these changes and obtain them in some jurisdictions that have yet to do so.
    It is the need for speed which we believe should drive modernization: Speed to market to provide consumers with product choices, speed in licensing approvals with minimum redundancy, speed in the examination process using practices that focus on sound risk assessment to engage financial strength and a review of market behavior.
    Are State insurance regulators adequately funded to carry out that job? We believe they are, to perform functions appropriate to the modern marketplace. However, this may require a realignment of the resources that are available to them and how they are used.
    We note that there is budgetary distress in many States across all functions, not just insurance regulation, due to the current drop in revenues from income tax and nonwage income. I think you will see that reflected in The Wall Street Journal today. However, approximately 50 percent of regulatory budgets go to other things beyond conventional insurance regulation, according to a book published in 2000 by the American Enterprise Institute entitled Optional Federal Chartering and Regulation of Insurance Companies, and we will be glad to make these graphs available to the committee.
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    So States find that they are starting to outsource some of these functions and interestingly, as they tighten their belts, it is the rate and form function that we see being outsourced, a tacit recognition, I believe, that this is the least essential part of insurance regulation and does suggest the possibility of realigning the use of those resources in the fashion that I have described.
    Mr. Chairman, this does conclude my oral comments. I offer them together with my written testimony and I hope they will be accepted into the record, and I will be glad to accept any questions from the committee.
    Chairman BAKER. Thank you, Ms. Spragens. Yes, your testimony and that of all witnesses today in their entirety will have their testimony included in the record.
    [The prepared statement of Ann W. Spragens can be found on page 181 in the appendix.]

    Chairman BAKER. Ms. Spragens, I note that you believe, as does Mr. White, that the need for reform is most appropriately pursued at the State level. What are the specific top 2 or 3 things that you think should be achieved in order to facilitate a more efficient market which has not yet been accomplished by the States?
    Ms. SPRAGENS. We believe that further reform is needed in connection with rate and form review particularly. This is an area where current economic realities no longer require the same level of agency activity that may have been true in the past. The role of a regulatory agency is not to supplant the decisions of consumers, it is in order to enhance them. We believe that that time has come when rate and form regulation should be loosened on the front end, with market conduct regulation brought at the so-called back end, to assure that consumers are protected.
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    Chairman BAKER. What about product approval, new product approval?
    Ms. SPRAGENS. New product approval comes within that category.
    Chairman BAKER. What about the ability to speed up claims processes from a consumer perspective? It is a very difficult morass, sometimes, coming from different State perspectives with multi-State claimants involved. Is there anything that can be done there?
    Ms. SPRAGENS. I so much appreciate you asking that question. We recently conducted a survey about 2 years ago gaging the level of consumer confidence in State government's ability to carry out its functions compared to other levels of government, and we found that consumers hold State government in very high esteem in connection with its responsiveness, which is the key point in connection with responding to claims issues.
    Chairman BAKER. And Louisiana was in that survey?
    Ms. SPRAGENS. All of the States were, sir.
    Chairman BAKER. Oh, thank you.
    Ms. SPRAGENS. As was Pennsylvania and Illinois and so on. So that in responding to the particular requirements of specific State laws which will control how claims are paid, that is, what is compensable and what is not, State government was deemed to be the best level and venue for that function.
    Chairman BAKER. Assuming we would pursue the State level with regard to rate and form, including new products, how long would one want to wait before the Federal Government would act? Is there an agreed upon window? Mr. White may want to get in on this too. Is this a problem that could be resolved in a year or 2, or is this a Gramm-Leach-Bliley problem and we are going to wait a decade? What kind of a clock should we start?
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    I asked this question last year of the NAIC who appeared before the committee when outlining the goals which they had in mind, and we could never get agreement on even how long the clock should run. Maybe that is where we ought to start.
    Ms. SPRAGENS. May I suggest that perhaps a clock is not the way we want to look at it; that what we ought to be doing is gauging the substance of the reforms that are being engaged and brought to bear, because it is functional regulation that is being examined, Mr. Chairman.
    Chairman BAKER. Oh, no doubt. I would say that if there was not a substantive reform within some period of time, then the Congress should pursue substantive reforms was my point.
    Mr. White.
    Mr. WHITE. I think I would agree with that. Your reference to Gramm-Leach-Bliley was very appropriate. However, at the State level, we realize that not every State legislature meets on a regular schedule. Some, as in my State of Arkansas, meet only every other year. So it is important that we give this process time to work through the State legislative efforts. And in our case, Arkansas, we are, in fact, working with our commissioner this year on a package to achieve each of these points that we have discussed: Speed to market, open competition on rates, use and file, as far as new forms, new products; company licensing requirements being made much easier. Each of those issues will be addressed in a package presented by the Arkansas commissioner this year to our legislature. We feel very hopeful, of course, that we will achieve some progress in those areas.
    Chairman BAKER. But even if you meet every other year, is this a 4-year problem to be fixed? Is there any outside clock? We are going to agree on something before we finish here.
    Mr. WHITE. Well, we might not agree on a time frame.
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    I would say that there is not a specific limitation. I realize that we must take action. The regulators certainly realize, with congressional oversight, that they must take action, but I would agree with the Alliance, that I think you measure this more clearly by the results, the significance of the efforts, the achievements as they occur and, at some point, if progress is not being made, then it may require a change in direction. But our position is that the State regulators can, with the assistance of the legislatures, can accomplish what it is we need to accomplish.
    Chairman BAKER. Well, my time as expired, but I would just make a concluding remark. It would seem appropriate at some point, given the length of discussion that we have already had nationally on these concerns, without identifiable progress being made, there ought to be some point at which the whistle is blown and the Congress begins to debate some of these topics, and I do not know when that point is, but at least we agree on that. I thank you very much.
    Mr. Kanjorski.
    Mr. KANJORSKI. Thank you very much, Mr. Chairman.
    Mr. White, I want to continue along your line of thought. It appears that in Arkansas they are working very diligently, but suppose they are totally successful in everything they do. How is that going to provide uniformity in the 55 jurisdictions that Mr. Bartlett talks about?
    Mr. WHITE. Congressman, I believe that we are in a unique position in Arkansas in that our commissioner is currently the Vice President of the NAIC and sees his position as a leader in that organization as an opportunity to take the progress that we can make in Arkansas and carry that across the country during his term, hopefully, as President of the NAIC, working through NCOIL, working through the NCSL, working through ALEC, those organizations that are actively encouraging our State legislatures to react to these —.
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    Mr. KANJORSKI. What was the term of your president?
    Mr. WHITE. Sir?
    Mr. KANJORSKI. What was the term of the president?
    Mr. WHITE. The term of the president is 1 year.
    Mr. KANJORSKI. And in response to Mr. Baker's questions, within a year we should therefore know whether we are going to be successful or not.
    Mr. WHITE. Well, that would be nice. In reality, this process, as we all know, began with the adoption by regulators of the statement of intent by the NAIC membership. That occurred in March of 2000, so the process has only just begun. Yes, we are in the second year of that, but I think an evaluation of the progress made on that statement of intent thus far is probably in order. Some of these things, as I mentioned, have been accomplished because of congressional oversight; some because of Federal legislation has required that as a part of Gramm-Leach-Bliley. But producer licensing uniformity has now been passed in 45 States, the most recent I believe being Tennessee. That is something that was required and has been satisfied to this point. That, in itself, was a milestone, because it is the first, after our—several years ago, the response to financial accreditation—.
    Mr. KANJORSKI. But that is only about an 80 percent success rate, with 45 States joining out of 55 jurisdictions.
    Mr. WHITE. Yes, sir, and I believe the requirement under GOBA was 29 States and the NAIC is very comfortable that they are making progress. We realize there are large States that have not signed on to that process, certainly.
    Mr. KANJORSKI. Yes. Mr. White, I am really torn because I think there is a lot of merit to what Ms. Spragens said in regard to States providing a closer response but, on the other hand, but I see the insurance industry having to compete with the banking industry, the securities industry, both of which are national in scope and nationally regulated. On the other hand for the middle to moderate and small insurance company, I think they can continue to do business on a State basis, but I think for the major companies, they are going to be at a decided disadvantage if we do not find some way to clear the field for them. I do not know what that way is, but some way that they can get a product to market very quickly and be competitive with other financial industry participants. And if they are not, they will ultimately be at a grave disadvantage.
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    Mr. Bartlett, what do you think of potentially having a two-tiered system where we could identify those who would opt in for a national charter because of either their size, the products they write, or the nature of their market being national? Maybe we could identify 10 percent or 20 percent or 25 percent of the market for whom there will be a national charter, and while the second tier group would remain on the State basis.
    Mr. BARTLETT. Congressman, we have not examined the specifics of a tiered system, and we would like to do that, to work with you on it. But in general, I think that an optional Federal charter would result by the competitive marketplace in essence, a two-tiered system.
    My own view is that most companies would continue to opt for a State charter because they are comfortable with that, they have made it work and they are in one or two or three States. The national companies and many of them, perhaps most, would then opt towards a Federal charter, assuming it is a competitive charter, very similar to what we have in banking. I would caution, I think, the committee against trying to decide in advance which companies get the Federal charter and which companies get the State charters.
    I think companies, based on their own market niche and based on the charter themselves, will be able to decide that, but I think it will end up to be the national companies with the Federal charters and the State companies with the State charters. But I think the companies and the marketplace will end up deciding that.
    Mr. KANJORSKI. Mr. Bentsen, I thought, made a great point, that we all anticipated in 1999 when we passed the Modernization Act that we were going to have to address this problem of the Federal charter for insurance companies at some point in the future. To jump a little ahead of that idea, should we project how this is going to affect the tort law system of the 50 States? Are we going to be here 10 years from now saying we should have uniform tort laws throughout the United States?
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    Mr. BARTLETT. That is an excellent question, because that is often sort of thrown up as a straw man. The fact is, as we discovered with the dual-charter system in banking, a Federal charter does not require, nor should it, for the Federal Government to change individual State laws. The Federal charter will—each company would still have to operate within each State law just as they do today and, Mr. Kanjorski, just as they do in every other industry, whether it is banking or steel or coal or home building, they have to comply with the State laws in the States where they operate and still have a Federal charter, so that is perfectly compatible.
    Mr. KANJORSKI. Don't they write policies very often using words of art that are crafted by their individual supreme courts so that a policy that uses these words or is interpreted as using these words are understood by the consumer If we take that away from the law as discerned in each of the 50 States and we put it into one uniform contract, how is that going to impact on the legal interpretation?
    Mr. BARTLETT. There may be a State in the Union that has a shortage of good layers to interpret Supreme Court cases and write those policies, but I do not know of that State. The fact is that these companies, even under a State-by-State system, every company proposes a product or a form or a policy proposes it for that State and they would continue to do that.
    With a Federal charter, however, they could propose a product and bring it to market in a speed to market to all 50 States at once. It is then incumbent, as it is in every other industry, for the company to comply with the laws, both the Federal laws and the laws of the State in which they do business. No difference.
    So in short, there is no need to change any or to preempt any State laws with regard to contract law, tort law, or liability laws in any way. Companies should simply be able to have a Federal charter, offer a national product, as they do in every single other industry. This is the only industry that I know of where you are required to go and get permission State by State by State. It makes no sense. Perhaps it made sense in 1945. It makes no sense today. It just simply costs consumers time, convenience and money.
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    Mr. KANJORSKI. I know my time is running out. Do you have any estimate of what the real cost of this State-by-State regulation is?
    Mr. BARTLETT. I do not have an overall estimate. We asked one company, just one company for what they estimated their cost to be, and this was not the largest company by any means, but they are in, I think, 40 States or something like that. They estimated that just the cost of complying with the regulations in filing their forms cost them about $25 million a year of excess cost. Now, that is not the cost of the lost market, that is not the cost of the higher premiums because they cannot serve their consumers, that is just the cost of filling out the forms. That was one company alone.
    Mr. KANJORSKI. That $25 million is to how much business written or on what premium? In other words, is it a 2 percent cost, a 3 percent cost?
    Mr. BARTLETT. It was about 2 percent of their premiums. About 2 percent cost to their premium holders, and that is not for the cost of the lost market, just for the cost of filling out the forms, basically.
    Mr. KANJORSKI. Which would be removed if we had a Federal charter?
    Mr. BARTLETT. If that company chose to have a Federal charter. Under an optional Federal charter, just as it is with banking, every company could then decide which is the best for their particular competitive niche, and thus the competitive marketplace would decide, driven by consumers.
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    Chairman BAKER. Mrs. Biggert.
    Mrs. BIGGERT. Thank you, Mr. Chairman.
    Ms. Spragens, witnesses at one of our previous subcommittee hearings testified that States like Illinois and South Carolina, and I think that Mr. White mentioned this also where they have allowed the insurance marketplace to work, they have created more innovation and competition and coverage availability. Would you agree with that?
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    Ms. SPRAGENS. We certainly would, and believe that is an approach that can be very successfully implemented in any State.
    Mrs. BIGGERT. Mr. White, would you like to expand on that too?
    Mr. WHITE. Yes, ma'am. Obviously, a look at the statistics and the experiment originally, beginning in 1969 in Illinois, gives evidence to the fact that an open market does, in fact, increase competition. The residual market in Illinois, as you mentioned in your opening remarks, is greatly reduced. The choices available to the consumers in your State are much more varied in nature now. The average prices of the insurance premiums fit somewhere in the middle of the country, which would indicate a competitive market, both in products as well as price.
    I do not see, and I guess responding in part to your question and in part to some of the comments I have heard, our association, in fact, does represent about 40 percent of the property and casualty premiums written in this country, and we have very many small members in our association, but we also have 5 of the 10 largest writers, and our board of directors as unanimously agreed that States such as Illinois and their regulatory practices are the models that we should attempt to follow in our efforts to modernize.
    Mrs. BIGGERT. Do you think that it would make a difference, having an optional Federal charter versus the State regulation to make less regulation, or would there be—do you see it with the Federal that there would be more regulation and it would take away that regulation and competition?
    Mr. WHITE. I have, in my experience in this industry, as well as in the industry of public accounting from which I originally came, I have never encountered a situation where the addition of the Federal Government into the process reduces regulation or increases efficiency. In fact, it would appear to me that the initiation of that process itself would add additional costs to the companies involved, in addition to creating potentially an unlevel playing field for the smaller companies that do not elect a Federal charter. Playing by two sets of rules.
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    Mrs. BIGGERT. Thank you.
    Mr. Bartlett, would you agree with that? I guess what I am trying to ask, if you have uniformity and reciprocity when there is no Federal option, but you would still have the regulation, would that be greater or less—.
    Mr. BARTLETT. Congresswoman Biggert, the regulatory burden, I have 100 companies who are members, all the large companies, we share many of the same companies, and by 100 companies are unanimous that the regulatory burden, with an optional Federal charter, some of them may not opt for a Federal charter, would be dramatically reduced for a number of reasons: speed to market, the competitive nature of a Federal charter with great deregulation and form deregulation, and just simply a competitive charter as it works in the banking industry.
    So there is no disagreement within my companies as to the Federal charter would reduce their costs rather dramatically. Obviously, it is their money, so they have looked at it pretty strongly.
    They are also unanimous, by the way, in believing that the Illinois model of rate and form deregulation is the right model for the Federal market. That is modern regulatory standards where you regulate for safety and soundness and for consumer protection, but not on rates and products. So our companies believe strongly that allowing a Federal charter would dramatically decrease costs; not only increase costs, but would decrease costs.
    We support uniformity. I mean, we support this drive towards uniformity. It helps. But in the best of cases, the success, if we achieve success and it has not achieved success yet; if it achieves success, success is you convert a grossly inefficient regulatory structure to a merely largely inefficient regulatory structure. You still do not solve speed to market, you still do not provide relief for a national market, and you still do not provide a competitive charter for a company that wants to have a competitive option.
    Mrs. BIGGERT. Could you explain just a little bit more a competitive charter, what you mean by that?
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    Mr. BARTLETT. Well, the best comparison is in the banking industry. J.P. Morgan Chase is one of the largest banks in America, one of my largest members, and they have a State charter, because for a variety of reasons they believe, and it has worked for them, that a State charter works best for them. Most of the other national companies have national charters, so in the banking industry, similar to this, a company could choose which charter is best for their marketplace, their customers, their structure, and then they choose.
    Thus, you have a regulatory—the opposite of what we have today, a regulatory drive to excellence, and I will pick on the Chairman's State, where a company based in Louisiana, if they are, for whatever odd reason, they are dissatisfied with the regulatory structure in Louisiana, could choose a Federal charter as an option. I know that is unlikely, Mr. Chairman, but it is always possible.
    So a competitive charter then allows the marketplace and ultimately the consumers, through those companies, to choose.
    Mrs. BIGGERT. Thank you.
    Thank you very much, Mr. Chairman.
    Chairman BAKER. Thank you, Mrs. Biggert.
    Ms. Hart.
    Ms. HART. Thank you, Mr. Chairman.
    I kind of have an out of left field question because I was a State Senator for 10 years and I sat on the insurance committee, and through the whole Gramm-Leach-Bliley debate, one of the issues that the NAIC had taken up dealt with keeping the State as a regulator for insurance, but somehow having this model NAIC insurance regulation that all of the States should comply with, which sounds to me like they were looking for everybody to have the same rules, but to have the State still be the enforcer.
    I do not know if that is still the case, but I would like to hear your thoughts about that theory, if that is what you are really looking for when you looking to have sort of both levels be involved, but not really, especially those of you who endorse the continuation of the State and really not having a Federal charter?
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    Ms. SPRAGENS. What the NAIC has been promoting and, frankly, what we support is more harmonization and more uniformity in process. That is different than the great rich variety of State substantive law that I mentioned in my testimony that controls casualty and property products. Money is notoriously fungible and it perhaps can be regulated in a different way. Casualty risks are unique. They vary significantly from State to State. Take, for example, the difference in catastrophe risks posed by weather and geology. That cannot be made, homogenized nationally.
    So it is process that can be greatly enhanced, while preserving what is a Federal system blessed by our United States Constitution, and that we believe will continue.
    Process can be improved dramatically. This is where there can be uniformity in the speed of turnaround, for example, on whatever filings are required and appropriate within a given State.
    Finally, our view is that an optional Federal charter would not be an alternative. It would, in fact, be a second layer of regulation. It would not be more efficient. We believe that proponents would not be satisfied with it if they had it, because it simply is not going to play out that way. The proposals that currently have been floated, of which we are aware contemplate continued activity in State residual markets, for example, which necessarily brings to bear all of the State requirements on what coverage has to be placed in those markets and controlled.
    Another aspect of this that is extremely grave from our perspective and why we focus on process uniformity and harmonization is the issue of the level playing field. If very large companies pull out of the State system and take with them their statistical data, this means that the ability to aggregate credible, statistically credible data will be significantly compromised.
    This is a unique problem to the property and casualty industry. You will not see this on the life side, for example, or in other industries. That data provides significant confidence for consumers and for insurers alike who are small or midsized to be able to participate in the marketplace in an environment of financial solidity. So we believe all of those issues are crucial and should be examined very carefully in connection with any discussion of an optional charter.
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    Ms. HART. Thank you. Anybody else on that specific issue?
    Mr. BARTLETT. I would. Let me just take the catastrophic risk or the catastrophe risk. The catastrophe risks between Pittsburgh and Cleveland are pretty similar, between New Orleans and Houston are pretty similar, between, pardon me, Congresswoman, between St. Louis and East St. Louis are pretty similar. All other types of industries trade and do business across those State lines with cities that are side by side, and it is only an insurance industry that has to go through these extra steps.The data collection is an easy one to solve. You solve that in the—I do not believe that is insurmountable.
    As far as the idea that uniformity in the end can solve the problem, it seems to me in the best of circumstances, 10 years from now, 15 years from now, in a best case, if we achieve full uniformity, that means the uniform, every uniform standard would have to be set by someone, perhaps the then-commissioner of insurance in Arkansas, and sort of jaw-bone to the other States, which strikes me of at least having the possibility of having uniformly bad standards in some cases, because there is no national forum to debate those in a public way, such as the U.S. Congress.
    So I think that having more uniformity, more efficiency set by the State-chartered organizations competing with a Federal charter that offers that competitive model is the one in which you end up achieving what is best for the consumers and best for the national marketplace.
    Ms. HART. Thank you. I see my time is up. Thank you, Mr. Chairman.

    Chairman BAKER. Mr. Ose, you are recognized for 5 minutes.
    Mr. OSE. Thank you. Mr. Chairman, if you would clarify something for me. Are issues dealing with the solvency of the insurance companies and the regulatory environment that they live in, are they subject to this hearing?
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    Chairman BAKER. I am sorry, could you restate?
    Mr. OSE. Are issues of solvency and the regulatory environment of insurance companies the subject of this hearing also?
    Chairman BAKER. Certainly. This is an informational hearing for the members of the committee and to consider all perspectives of reform where appropriate.
    Mr. OSE. I would like to ask Mr. Bartlett about an issue. It is my understanding that in the early 1990s, overseas financial institutions were not allowed to own domestic insurance companies; is that correct?
    Mr. BARTLETT. Yeah. I don't know. The overseas companies own domestic companies now.
    Mr. OSE. I am aware of that now. But it is my understanding that in the early 1990s that was the case. I am speaking specifically to the issue of Executive Life in California and its purported ownership or control by Credit Lyonnais in France.
    Mr. BARTLETT. I was sitting on this committee back then, so I don't know.
    Mr. OSE. Does anybody on the panel know the answer to that?
    Mr. Chairman, the reason I raise the issue is one of the questions that I think we have to consider in the context of Graham-Leach-Bliley and its implementation is not just the positive impacts of this legislation but also what happens if everything goes south, as it did in California, when a particular company, for whatever reason, was judged to be illiquid or not liquid at all, and was ordered liquidated by the insurance commissioner.
    The situation that arose was that there is some evidence to suggest that a company based in France was fronting for Credit Lyonnais, which my understanding is, was statutorily prohibited by law; in other words, another—a foreign financial institution, owned and controlled by arguably the Government of France at some point or another, was in a position to control the prospects for dissolution of a domestic insurance company.
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    And the reason that is germane is that there are now 300,000 policyholders in California, all of whom had their annuities or coverages given a haircut. And I would hope in the context of our discussion about the implementation of the regulations for Graham-Leach-Bliley, that we would not only look at the positive side but also give consideration to how to avoid a repeat of a cram-down haircut on as many as one, let alone 300,000 people, as happened in California.
    With that I yield back.
    Chairman BAKER. Thank you, Mr. Ose. That is certainly a subject of importance and we should have rules which construct, as best we can, a method to ensure that no policyholder is left in that circumstance as a result of a corporate failure when the premium payers have done their part. And, it is—I will need to know a great deal more about the matter which you have brought to the committee's attention, But certainly we will investigate that and all similar situations and try to preclude that from recurrence if possible.
    Mr. OSE. I appreciate the chairman's offer. I will be happy to share with him the information that I have. It has to do primarily, as I understand it, with whether or not someone can come in, allegedly break the law, be judged to be illiquid, the company is liquidated, and then 8 or 9 years later they pay a nominal fine relative to the appreciated assets that they otherwise controlled.
    Chairman BAKER. I assure you that in Louisiana we have someone who is an expert on that subject.
    Mr. OSE. I think he is sitting right down there, isn't he?
    Chairman BAKER. Thank you. Mr. Ney, did you have questions?
    Mr. NEY. Thank you, Mr. Chairman. The question I have is do you believe that a Federal regulator can be as responsive to industry and citizens as a State regulator? I mean we got Lee Covington in Ohio—I wanted to put in a plug for Lee, since I am from Ohio. I used to chair insurance and banking in the State. And we dealt for years with doing our part on the McCarran-Ferguson when different regulations needed to be implemented, and we would respond with each other through the National Conference of Insurance Regulators, et cetera.
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    I just wonder if a large Federal regulator would be as responsive, and I know you can—States vary differently with people that run the insurance. And I know there is argument of elected versus, you know, people that are appointed and some of the political ramifications of elected process.
    But I just wonder in general, anybody, do you have an opinion on the responsiveness of a large Federal regulator? And the reason I state that, if something happened and we went to the Federal side, you know, I just wonder with rules and regulations, some people who would support that would be coming back in about 5 years saying, look what is being done to us; can you please save us from what is going on with the Feds?
    Ms. SPRAGENS. Yes. Perhaps the best answer I can give you is that consumers believe that the States are more responsive. And in that regard I would make available to the committee, should you be willing to accept it, a survey that the Alliance of American Insurers did about 3 years ago, I think, comparing consumers' attitudes about the responsiveness of different levels of government to deal with various issues. That question was specifically asked, and that is a response that we obtained that was the result of a Roper-Starch survey on our behalf.
    Mr. NEY. Okay. But just to follow up on that, if citizens through surveys believe that—but what about the practical reality of something the Fed creates that becomes the nightmare of the century, and the same citizens come back 5 years from now saying, what is going on, this is all bogged down?
    Ms. SPRAGENS. As we have tried to envision how Federal regulation of property and casualty insurers might take place in order to recognize the regional- and State-specific differences that I have outlined, it seems to us that inevitably what occurs is that a proxy for the State system is actually created.
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    It would be regionalized. There would have to be expertise based upon what is taking place within a particular geographical area. It seems to us, therefore, that it suggests strongly that it would be inefficient to create that layer.
    Mr. BARTLETT. Mr. Chairman, let me try—Federal regulatory agencies can be as responsive or more responsive to some States or less responsive to other States, just the way it works in the banking circles. I have, from time to time, some of my members who will talk with me about their dissatisfaction with the State regulatory agency and how they long to be under a Federal regulatory agency in banking, and vice versa. I have it exactly the reverse.
    So the marketplace ends up deciding. That is why one of the real advantages in the last 10 years really to the ''dual structure,'' which is what it is called in the industry, is as competitive regulation towards excellence.
    So various charters tried to provide better regulation that provides safety and soundness but also is efficient. Now, that only works as long as it is an optional charter, so as long as it is truly optional and a company can choose either one, depending on what State they want to charter in and depending on what the Feds are doing at that time, that is what makes it work is a truly optional charter.
    On the subject of McCarran-Ferguson, Mr. Chairman, I must say, Mr. Chairman, I come not to repeal McCarran-Ferguson, but to fulfill it. McCarran-Ferguson, the law itself in 1945 contemplates and provides for legislation such as we are discussing today of an optional Federal charter. In fact, at the core of McCarran-Ferguson it says: provides for an antitrust exemption to allow companies to, as long as they are in a regulated market, to collude on prices on a legal basis.
    What this would do is to say in a deregulated price regulation market, you would no longer have the antitrust exemption. And that is the way it should be.
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    Mr. NEY. Let me put one twist to it, because I have got the yellow light on. Some people would argue that the only way to do this is a Federal charter. But what about not throwing the baby out with the bath water and making some reforms that it is not necessarily a Federal charter but something that revolves around NARAB and how that worked.
    Mr. BARTLETT. NARAB is a good step. It is helpful. It doesn't get the job down. It doesn't provide for speed to market. It doesn't provide for competitive marketplace. It doesn't provide for Houston and New Orleans to be able to do business together in the insurance business. It is good so far as it goes. But absent an optional Federal charter, not a required but an optional Federal charter, at the end of the day it can't succeed.
    Mr. WHITE. Mr. Ney, also if you allow the concept of the NARAB provision, for instance, that tends to acknowledge that we will, in fact, look to the Federal Government to set the standards and tell the States what they need to do. The discussion of an optional Federal charter—I guess my question would be: Whose option? It seems that the policyholders, the consumer in this case, have been left out of the equation.
    The company makes the selection of that option, in fact, because it is better for them. Assuming that is the right choice for their consumer, that may work out just fine. But in the case of a situation in New Jersey, for instance, where New Jersey instituted some extremely stringent regulatory policies, in practice, and almost cleared the State of any insurance market at all, made it extremely difficult on their consumers, at least the repercussions from that decision were confined to the State of New Jersey.
    If you had a Federal regulator and that same type of mistake was made, you have just impacted hundreds of thousands, maybe millions of consumers, beyond that one area and it is much more difficult to back-track and fix that problem.
    Chairman BAKER. Mr. Shays.
    Mr. SHAYS. Thank you, Mr. Chairman. Mr. Chairman, I sometimes think that you get bored in life and need to find controversial issues to kind of just test your intellect.
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    Chairman BAKER. Thank you very much.
    Mr. SHAYS. I also want to say to Mr. Bartlett that as a new Member, I remember your extraordinary activity as a Member of Congress, and I thought that you were the most energetic and effective Member in Congress. And I was very sad to see you choose to leave this place because you were a real model to me and many others.
    What would be the alternative to a charter bank—chartered insurance—I am sorry—to having more Federal uniformity? What would be the alternative if you didn't have action from Congress?
    Mr. BARTLETT. If there is no action from Congress on an optional Federal charter, then in my opinion, particularly in the property and casualty market, companies would continue to exit. We would continue to have major problems with Europe and other trading partners who object to this as a trading barrier. Consumers would continue to pay some percentage; one estimate of 2 percent higher in premiums.
    Mr. SHAYS. So let us assume, though, wouldn't the alternative be for there to be a real effort to get the States to seek to have uniformity?
    Mr. BARTLETT. Yes.
    Mr. SHAYS. Why isn't that—.
    Mr. BARTLETT. Perhaps there could be some success in that. But there are two problems with that; there are several if all you get is uniformity. One is the uniformity has to be imposed by someone, and right now the system of NARAB which has not been adopted by States, representing by my estimate some 30 percent of the premiums, but a uniform standard then would have to be imposed or determined by someone. If that someone is not a national—a Federal regulator, or is not the U.S. Congress, it would be the jawboning effect of the NAIC and whoever is the current chairman.
    So in some years you could get excellent standards; in others you can get uniformly bad standards. But the uniform standards, if we ever achieve fully uniform standards, which I don't believe we ever could, they would still be imposed by someone; and the someone would be less transparent then a Federal charter or by the U.S. Congress.
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    Mr. SHAYS. When I was in the State house, there was this real effort to have uniformity wherever you could. But I was trying to think, is it different industries where there is an incentive for there to be uniformity? Is there any incentive for States to try to build up a uniformity with other States? I can throw that out to Mr. White or to others.
    Mr. BARTLETT. Briefly, I think there is. But what there is, is the threat of an optional Federal charter, in my opinion, in that the States are trying to achieve uniformity, and they really are. So I think there is some incentive, but it is the incentive to eliminate the inefficiency.
    Mr. WHITE. On that point, I believe we would agree that certainly the State regulators are beginning to feel the heat. When George Nichols, who at the time was president of the NAIC, a commissioner from Kentucky, put forth the principles outlined in the statement of intent, I think that was a reaction to the fact that we do in fact have a system that needs fixing and these are the steps we believe as regulators we should take to fix them.
    Mr. SHAYS. I find it rather interesting to think of how we are becoming more and more dependent and interactive with the rest of the world; how they must view coming into the United States, and how they could—I mean, if we had to deal with different regions in France or England or Germany and follow different regulations, I think we would begin to think it was designed purposefully for restrictive practices. So this is something we are encouraging with overseas markets.
    Ms. SPRAGENS. But those overseas markets, taking the EU as an example, there are situations where there is not absolute uniformity in all requirements there either.
    Mr. SHAYS. That is a good point.
    Ms. SPRAGENS. If one reverses the argument, one finds that the same things can be said almost anywhere globally.
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    Mr. SHAYS. That is a very good point. In other words, we still have to deal with England, we still have to deal with France, as separate entities?
    Ms. SPRAGENS. Yes, we do.
    Mr. SHAYS. So that argument basically goes out the window. In other words, California and Illinois are different. We can make the same claim that we have the same problem of going to Europe.
    Mr. BARTLETT. Congressman, I think that the European Union is particularly tough on that argument. They seem to be, while maybe not winning the political argument, they seem to be winning the intellectual argument in the World Trade Organization and others that this is a trade barrier, and it is thrown up to us with every negotiation that we have with lowering trade barriers in Europe and elsewhere. So it does seem to be—you shouldn't adopt this regulation, this law, just to eliminate the trade barrier. But it comes—it is generally believed to be a real trade barrier in the United States market that does not exist in the European Union.
    They are not perfect. They have got a lot of problems, too, but they seem to be ahead of us in this area.
    Mr. SHAYS. Bottom line, there could be Federal legislation that establishes a Federal charter. There could be States that decide to link up and have uniformity. And just tell me—my red light is on—but if you could respond to this, what would be the market force that will ultimately push us in one direction, in this direction? What will be the market force that does that?
    Mr. BARTLETT. I think for a long time, perhaps forever, you would end up with a dual charter. Some companies would choose the States—.
    Mr. SHAYS. No, that is not what I am asking. I am asking—right now, we are kind of in between here, wondering where we are headed. And I am interested to know is there a natural market force that is going to force Congress ultimately to act or force the States to act.
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    Ms. SPRAGENS. If I may answer that question. One market force that is already at work that has caused 24 States to already revise, say for example, their rate and form filing requirements is the multi-State insured on the commercial side. That is recognized as an important need. States are attempting to respond more quickly. And in addition to that, as has already been mentioned, there is a desire on the part of regulators simply to respond to their constituent needs, including insurers.
    Mr. SHAYS. Thank you. Thank you, Mr. Chairman.
    Chairman BAKER. Thank you. Mr. Bentsen.
    Mr. BENTSEN. Thank you, Mr. Chairman. I apologize for having to leave to meet some constituents.
    It is ironic to bring up the European Union. I don't want to go down that path. But we did just have a hearing a couple of weeks ago about their proposed financial services regulations and the idea of having a regulator of a consolidated entity, and whether or not our insurance regulatory structure would run afoul of that to the extent that you had U.S. Insurance companies that wanted to do business within the Euro zone area. But I don't want to get—I don't know that that is an issue, in and of itself, of whether or not you ought to have a Federal charter.
    But it does strike me as surprising, still, that the industry has not come to the conclusion that a dual charter is not such a bad thing. And I will use as an example the securities industry. There is a dual regulatory system where the SEC is responsible for regulating the national market function; the States are responsible really for consumer, individual consumer regulation.
    Now, one could say, well, look at the current situation with securities and the research analyst situation, and perhaps the SEC was slow to fulfill its role. But arguably—and I know the chairman has raised some concerns about this—the States, in this case the State of New York, has actually—the State regulator has actually fulfilled its role.
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    Why is it that we couldn't have a similar situation by having a dual charter system for the insurance industry? I don't think anyone is talking about changing the solvency to having a Federal regulator for solvency purposes. I think it is the idea of how you have a national market regulator for what is—particularly in the case of life insurance, because it is an investment product, is becoming—is a national marketplace.
    And I would also add—I mean, this is an issue that is problematic in my State on the P&C side, which arguably is a completely different product. But how do you deal with the companies that are pulling out? We have a problem with mold in Texas, with wind storm coverage in Texas. And so I am not sure that we haven't finally come to the conclusion that we need to have a dual national charter. I still don't understand why there is this concern about it.
    And why we can't have—I mean, we have blue sky laws that affect the securities industry. And States are still allowed to set requirements for registration, still allowed to set requirements for who can sell what types of securities, and yet we have a national marketplace. Why can't we do the same with insurance?
    Ms. SPRAGENS. That is an abundance of riches of questions. I am certain I won't respond to all of them, but let me try. First of all, the Alliance and our member companies do not support a dual charter because we do not believe that it will deliver the efficiencies that are hoped for. We are very quick to say that more efficiency is needed, but we don't believe that will actually produce it. In terms of comparisons with regulators from other industries, they are different industries.
    The national marketplace for the capital markets does make sense perhaps to regulate at a Federal level. Casualty risks, however, are very local in their character. There is no true property casualty national product that does not have to be tailored to local circumstances based upon State law and particular geological and geographical requirements, for starters.
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    Mr. BARTLETT. Congressman, in the industry, at least as I define it, which is the large integrated companies—those that have other options of other things that they can and are doing in the financial services marketplace—it is unanimous. It is unanimous. It has been unanimous for several years. Those companies that are members of mine. Some are more vocal than others. Unfortunately, some are not vocal out of a misplaced fear of retribution by State commissioners. I think that is misplaced. But some don't believe it is misplaced, so they are not as vocal or as forthcoming.
    But among those companies that are large and integrated and national, there is zero debate about whether or not an optional Federal charter will help the American consumer and provide a much more rational marketplace. And the only disagreement is how vocal that they choose to be individually.
    Mr. BENTSEN. Well, I would just say—go ahead.
    Mr. WHITE. I would, I guess, question the analysis of that, only in the sense that we are attempting to compare the cost of a dual regulatory system with the cost of the present system. And yet we don't know the details of what that dual regulatory system may bring: the layers of additional bureaucracy that may be required, the regional offices, the people that are closer to the consumer. And it would appear to me that even if we had, in a perfect world, the ideal piece of legislation that could create a dual charter situation and give us an option, we absolutely have no belief that perfect piece of legislation is what we are going to end up with when it comes out at the end. I think we are dealing with an unknown in that regard.
    Mr. BENTSEN. Thank you.
    Chairman BAKER. Thank you. I just want to make sure the record is accurate, Mr. White. In your response to a question from Ms. Biggert about preferred structure of markets, I think you indicated that the Illinois plan was something you found to be—model—was one you found to be desirable, and that consumers were well served because there was more competition and better prices in the market as a result of that type of system. Is that accurate?
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    Mr. WHITE. Yes, sir, that is accurate.
    Chairman BAKER. Is there any reason why that model wouldn't be good nationally?
    Mr. WHITE. I don't believe there is a reason. I don't know all of the details within the Illinois system. But the concepts that are in place there certainly are concepts that would work in other property and casualty markets.
    Chairman BAKER. We found something we can agree on. Thank you very much. Does any other member have—Mr. Bentsen.
    Mr. BENTSEN. I have two points. But one is, Mr. Bartlett, just to get some clarification up front if this question were ever to be asked, because Ms. Spragens sort of segments out the P&C industry—presumably the Financial Services Roundtable would want a Federal charter, a broad Federal charter—you don't want to subdivide the industry between life, life and investment or versus—.
    Mr. BARTLETT. Right. P&C and life. Yes, sir.
    Mr. BENTSEN. Ms. Spragens, I do agree that there is certainly a State nature to the P&C industry, but I will remind you that subsequent to September 11th, the P&C industry was in Washington, hat in hand, with a very good case about the need for a federally structured backstop for P&C.
    And we have looked at other issues. In fact, I have been a sponsor and cosponsor in the past of Federal reinsurance market for P&C for national disaster. So it does sort of cut both ways.
    Ms. SPRAGENS. May I respond?
    Mr. BENTSEN. Sure.
    Ms. SPRAGENS. We believe that terrorism is not an insurable risk. We paid it out of good faith and concern for our policyholders. We are in the business of paying claims, and we want to. Nonetheless, the lesson of 9/11 is that terrorism is not rational in the sense that casualty risks insured by the property casualty industry can be rationalized. As a result, we do not believe that it is insurable. And that is the reason that we came here.
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    Mr. BENTSEN. I don't disagree with you because, as I said, I agreed with parts of your industry when it came to the question of national disaster risk, as well, and whether or not there was a sufficient reinsurance market. So I do think there are some Federal roles here.
    Thank you, Mr. Chairman.
    Chairman BAKER. Thank you. If no other member has any further comment, I want to thank the panelists for their participation. We found your testimony to be of value. We do appreciate it. Thank you very much.
    Chairman BAKER. I would like to ask our second panel to come forward. Okay. I would like to welcome each of you to the committee's hearing this afternoon. We appreciate your willingness to participate.
    Our first witness is the Honorable Mark Young, State Representative from Vermont, who appears here today on behalf of the National Conference of Insurance Legislators. Welcome, Representative Young.


    Mr. YOUNG. Thank you, Mr. Chairman, members of the subcommittee, thank you for inviting the National Conference of Insurance Legislators, or NCOIL, to testify before you today. I am Representative Mark Young, and it is my privilege to represent residents of Addison and Rutland Counties in the State of Vermont legislature. It is my further privilege to serve as Vice Chair of the NCOIL State-Federal Relations Committee.
    NCOIL welcomes your request for testimony on State insurance guaranty funds and residual markets. The guaranty funds provide an example of how well State insurance regulation can work. In fact, it may be worth noting here that none of the present-day critics of State insurance regulation have identified the State guaranty fund system as being inefficient, ineffective, or in need of major reform.
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    I will first provide some basic details on State guaranty funds and their purpose. Then I will move on to discuss how the funds have fulfilled that purpose.
    In each State a guaranty fund consists of insurers doing business in that State in a particular line of business covered by the fund.
    State insurance guaranty funds make good on the outstanding insurance obligation of insolvent insurers. At the point where the assets of an insolvent insurer are insufficient to meet claims obligations, the guaranty funds pay the balances up to limits set by State statute. The funding of those payments comes from the assessments of the remaining insurers, which range from 1 to 2 percent of premium volume, but are also pro rata to the State market share and the lines of business in which the insolvent insurers had engaged.
    Each State has its own guaranty fund laws for life and health insurance and for property and casualty insurance. Some States have additional guaranty funds set up for workers' compensation and surplus lines insurance. These State laws conform substantially to the model laws adopted by the National Association of Insurance Commissioners.
    All States post-assess insurers to cover insolvent insurance claims, except the State of New York which pre-assesses its property and casualty guaranty fund up to $200 million. The insurers licensed in the State constitute the guaranty fund in that State under the supervision of a board of directors and, ultimately, the State's insurance commissioner. The State guaranty funds coordinate their work, especially with regard to multi-State insolvencies, through two national organizations: the National Organization of Life and Health Insurance Guaranty Association, and the National Conference of Insurance Guaranty Funds.
    Guaranty funds serve as an effective and efficient backstop to safeguard consumer interests in cases of insolvency. The funds have assured continuance of coverage to policyholders of insolvent insurers; paid more than $14 billion in the last 25 years to policyholders; they have grown in financial capacity, and done so at no direct cost to State or Federal taxpayers; and have shown that guaranty funds work and do not need to be fixed in any significant way.
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    The funds have been there when needed. The property casualty fund system has stood the test of Hurricane Andrew, which felled several insurers, as well as many other insolvencies caused by increases in the costs and severity of medical malpractice claims and the expansion of toxic and environmental tort liabilities.
    The guaranty fund system was sufficient when Mission Insurance Group became insolvent in 1985, resulting in 700 million in State guaranty fund payments, the largest amount for a single insurer in history.
    The system worked during the next 4 years when five more national insurers were placed in liquidation, resulting in State guaranty fund payments of an additional 1.9 billion in claims.
    On the life and health side, the guaranty system effectively met the challenge of the early 1990s, when the live insolvency activity reached its peak. In 1991 alone, there were 23 new insolvency cases on the life side. One of these cases, Executive Life, involved in excess of 10 billion in policy obligations. The guaranty associations effectively protected Executive Life policyholders by transferring their covered policy obligations to a third party insurer. While the guaranty associations are still making payments to the assuming insurer on behalf of Executive Life policyholders, it is estimated that the total guaranty association costs will be about 2.5 billion on a net present value basis.
    State guaranty funds operate and pay claims at no direct cost to State treasury or taxpayers. The policyholders of all insurers ultimately bear the costs as a part of their premium payments.
    I might really go into and explain residual markets. States have also established many different residual market programs to make available insurance to individuals and businesses having difficulty obtaining coverage where the normal market has ceased to function effectively. Residual markets are important for high risk applicants or individuals and businesses with poor loss records.
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    Residual market insurance premiums are set at a lower level than they would be if they were established on a strictly actuarial basis. Therefore, coverage is attainable for everyone who wants or needs insurance. Profits and losses of each residual market program are shared by all of the insured in States selling a specific type of insurance. Residual market programs are rarely self-sufficient and generally require assessments to insurers, which are ultimately passed on to all insurance consumers.
    Against this backdrop, the idea of a separate and competing Federal guaranty system of insurers operating under a Federal charter, such as those proposed in Congress by Senator Schumer and Representative LaFalce, could not help but weaken the State-based system. It would weaken the strong State consumer safety net, deplete its capacity from 4.8 billion to less than 3 billion, and reduce its overall risk pools. It would build another layer of overhead, create duplication in process, and add unnecessary expense.
    We believe this system has worked well and is no way broken. Congress, I respectfully submit, does not need to fix it, replace it, or establish anything parallel to it.
    While guaranty funds and residual pools stand well today, we believe continued oversight is absolutely essential to the continuance of their effective function. We submit that an interstate compact idea is one that is available if needed. But for now, the guaranty fund system does not require the focus of Congress, although your constructive oversight is welcomed and appreciated.
    I thank you for the opportunity to provide this testimony. My written submission is far more detailed than the time would allow me to address orally. And, Chairman Baker, I would ask, given the short notice of this hearing, that the formal record be held open so that I might submit final comments. I thank you.
    [The prepared statement of Hon. Mark Young can be found on page 214 in the appendix.]
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    Chairman BAKER. Thank you, Representative Young. I would make the announcement that for all purposes, for all members as well as all witnesses, the record will be held open for an additional 30 days for any final comments that anyone might choose to offer after the hearing is adjourned. Thank you, Representative.

    Chairman BAKER. Our next witness is Mr. Michael D. Phillipus; is that correct, sir?
    Mr. PHILLIPUS. That is correct.
    Chairman BAKER. Vice President of Communications and External Affairs, Risk and Insurance Management Society. Welcome, Mr. Phillipus.


    Mr. PHILLIPUS. Thank you. Good afternoon, Chairman Baker, Congressman Kanjorski, and members of the subcommittee. My name is Michael Phillipus. I am Vice President of External Affairs and Communications for RIMS, the Risk and Insurance Management Society, the largest professional organization in the risk management community. I appreciate the opportunity to appear before you today on the issue of insurance regulation and competition in the 21st century.
    RIMS member companies, which comprise over 4,000 consumers of commercial insurance, support the advancement of efficient insurance purchasing abilities. RIMS membership includes 84 percent of the Fortune 500 companies, as well as approximately 950 companies with less than 500 employees.
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    I would first like to spend a few minutes on several issues that the committee had asked me to address: specifically, alternative insurance markets and surplus lines.
    The job of a risk manager is to protect and preserve physical, financial, and human resources. One of the primary means of accomplishing this job is through the purchase of insurance. The first hard market of the 21st century has made this job even more difficult, and risk managers are forced to be more creative in minimizing risk to their organization and their employers. More and more often, risk managers are turning to alternative markets to procure necessary coverage.
    Captive insurance companies are an important part of the alternative insurance market. Captives are closely held insurance companies whose insurance business is primarily supplied and controlled by its owners, who are also the principal beneficiaries.
    The advantages for establishing captive insurance companies include reduced operating costs, flexible coverage, direct access to reinsurance, some assurance of stability of premiums and coverage terms. Risk retention groups are a form of captive insurance companies. These groups provide certain insured with casualty protection on a homogeneous basis that removes their risk from volatile industry cycles and provides focused service customized to their exposures. Authorized by Federal law, they are incorporated under State law and governed by the law of the State of domicile.
    The Liability Risk Retention Act, or the LRRA, passed in 1996 does not permit risk retention groups to underwrite property insurance. This limitation reduces the number of insurers that can underwrite property insurance at a time when market restrictions from terrorism threats, combined with the hard market, have driven prices up and reduced availability. RIMS urges Congress to expand the LRRA to permit risk retention groups and risk purchasing groups to write all coverages except personal lines and direct statutory workers' comp coverage.
    In order to adequately ensure unique, difficult to place, or high-capacity insurance risk, risk managers frequently use the surplus lines, or sometime called the excess lines market. Rather than an alternative market, the surplus lines market is better described as a supplemental market to the licensed/ admitted market. The surplus lines market, in effect, serves as an outlet or a safety valve market to be utilized by risk managers and their brokers when the desired coverage cannot be found among the States admitted/licensed insurers, or when market forces or conditions in the admitted/licensed market causes voids and gaps to occur in coverage for certain types of risk.
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    Freedom of rate and form is essential for the surplus lines market to have the flexibility to quickly and adequately respond to the risk manager's insurance needs, particularly for hard to place, distressed, unique, or high-capacity limits.
    I would now like to discuss RIMS' position on insurance modernization, specifically optional Federal insurance charter. RIMS recognizes both the incredible promise and the inherent hazards of an optional Federal insurance charter. The Society appreciates the serious and complex implications of allowing insurers to obtain a federal license that would allow them to operate nationwide. The current system in the United States is inefficient.
    Negotiating rate and form regulations in more than 50 jurisdictions is expensive and time consuming. A single regulator, to establish risk-based capital and surplus requirements as well as requirements for public disclosure of rates and forms, would reduce costs and restrictions for U.S. Purchasers and act as an incentive for increased participation by foreign companies.
    The State regulation system needs to remain accessible to those insurers who choose not to participate in the Federal option. Ideally an optional Federal charter would spur improvement and innovation at the State level. The NAIC has taken measurable steps to reform State insurance regulation, most notably the adoption of the State certification program, speed-to-market initiatives, and steps to deregulate commercial lines of insurance.
    By the very nature of State regulation, however, it is almost impossible to achieve uniform laws and regulatory interpretation of those laws. Nevertheless, creation of an optional Federal charter should involve the NAIC on a consultative basis to ensure that States' rights and revenue issues are properly addressed.
    RIMS understands that it may be a long road to approve an optional Federal charter legislation, but we believe that the time for this idea to become reality is now.
    In the end, all of those risk financial options are crucial to risk managers, but there is no one-size-fits-all solution for insurance commercial consumers. While the alternatives discussed today provide some relief, RIMS ultimately favors a system unfettered by overreaching regulation, one that has the ability to add flexibility to respond to the various needs of the consumer and the changing marketplace. Certainly small and mid-sized companies benefit from the oversight protection provided by the State insurance regulation system. Care must be taken that this system does not restrict the movement of product and the ability of consumers to attain adequate and affordable coverage.
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    Thank you for the opportunity to speak today. I appreciate your time, your interest, and your leadership.
    Chairman BAKER. Thank you, Mr. Phillipus.
    [The prepared statement of Michael D. Phillipus can be found on page 165 in the appendix.]

    Chairman BAKER. Our next witness is Mr. Steven Harter, President, National Association of Professional Insurance Agents. Welcome, sir.


    Mr. HARTER. Thank you. Mr. Chairman, members of the committee, my name is Steve Harter. I am the owner, chief principal, for Select Risk Management in Ava, Missouri. I also have the honor of serving as the current President of the National Association of Professional Insurance Agents. We are a trade association representing independent insurance agents and their employees in all 50 States and Puerto Rico.
    Mr. Chairman, as you have asked us to do, PAI will outline some of the key competitive issues faced by multi-State insurance producer operations, including the issues regarding countersignature laws.
    PIA is absolutely committed to a reform of the insurance producer system in a manner that means effective oversight for public protection. The progress that has been made with the new single NAIC Single-License Producer Model Act has been wonderful, but it hasn't yet been adopted in all jurisdictions. In addition to these States, there are also challenges in some of the States that have designated themselves as NARAB compliant by virtue of reciprocity only.
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    Collectively, these minority jurisdictions still pose challenges in the following areas:
    First of all, countersignature laws. Since 1970 PIA has worked to repeal countersignature laws as well as the secondary level of insurance statutes that, while not technically called or classified as countersignature laws, in effect act in concert to frustrate open nonresident participation.
    Much progress has been made in the repeal of the countersignature laws, and only a few remain. PIA appreciates and is sensitive to the unique market and public policy circumstances that exist in Florida and Nevada, but believes their issues can be solved without countersignature laws.
    However, less progress has been made on the secondary level of statutes that act in concert with countersignature laws. In some States the per se countersignature law was repealed but the companion statutes were not.
    As an example, many times the case, if I have a commercial client who secures a business operation in another State, under countersignature laws I am forced to secure the services of a resident countersigning agent from that State that my client will not know and whom I might not know either. This resident agent must already be licensed in this State to write the specific type of coverages for my client's new operation in that State, as well as already be appointed by the carrier with which all other aspects of their coverages have been placed. As the principal producer on the full account, I must still be sure that all forms and the carriers are authorized to write and issue the type of coverage being secured. The in-State agent would then technically place the business by merely countersigning the policy form and collecting a fee for services.
    Under a State with secondary statutes, I might be able to perform all the regular tasks and issuance of coverage for any client; however, the State might require that I deliver a copy of the policy for the business location through the services of an in-State resident agent operating in the county where the business is located.
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    Another issue is the single-license producer versus the agent broker license. A number of jurisdictions have yet to adopt a single-license format. The nature of our business requires that we perform both functions for clients' insurance needs. Thus, in these States we are required to secure both agent and broker licenses as resident producers. As nonresidents we must select one or the other, thus limiting the type of activities to be performed for our client in that State.
    Yet another issue is the agent-only jurisdictions. These jurisdictions do not recognize the broker's status, something fundamentally required for our clients' needs, whether on a resident or nonresident basis. If in my resident State I am licensed under the single-license producer approach, and by nature of my business operations I am acting in a broker capacity, I am forced to change into an agent for nonresident purposes in the jurisdiction, something that may or may not be possible or even wanted.
    Another issue is the individual versus the business entity. Today, several States only make available an individual producer license. In these jurisdictions, PIA members operating in a business entity basis are forced to only have one of their individually licensed staff members file as a nonresident in those States. This creates numerous legal, insurance appointment and tax problems for such agencies, and, in PAI's opinion, lessens the comprehensiveness of the State's oversight of the insurance operation.
    We also have an issue regarding foreign corporation filings. This is an example of noninsurance government officials applying a one-size-fits-all solution. In simple terms, persons operating in what would be considered a nonresident status must first file for and secure foreign corporation licenses permitting them to enter the State.
    Insurance departments have over 150 years' experience with the structure, authority, and expertise required for this issue. PIA wants insurance producers relieved of this additional foreign corporation filing. It is duplicative of the nonresident licensing process.
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    Background checks: This committee's efforts related to the passage of H.R. 1408 are much appreciated by PIA and its members. Prior to its passage, PIA's board adopted a position last September, making it clear that we support H.R. 1408 as the preferred process along with the one-time electronic fingerprinting of all individuals currently licensed as well as anyone applying for a license in their resident State. Is This process should be recognized on a reciprocal basis for nonresident filings as well.
    In conclusion, PIA is working on a Federal proposal addressing the concerns we outlined today, the details of which will be discussed in a future hearing by our partners at the IIABA.
    We believe this proposal acts to refine and improve on Graham-Leach-Bliley, NARAB, and supports NAIC's current additional reform efforts. PIA's charge from its members is to participate in and ensure that all four areas of reform activity—model laws, State-by-State reforms, multi-State compacts, and additional Federal proposals—come together in a single coordinated and complementary system.
    Accordingly, PIA opposes Federal optional charter proposals because at their core they are designed and operated as an additional competing insurance system. Neither our customers nor our members need a 56th insurance jurisdiction.
    Again, I would like to thank you for allowing PIA to testify before this committee on this important issue.
    Chairman BAKER. Thank you, Ms. Harter.
    [The prepared statement of Steven J. Harter can be found on page 153 in the appendix.]

    Chairman BAKER. After listening to your list of the conflicting requirements for the licensed agents, it would seem hard to comprehend that there wouldn't be fairly significant support for some sort of national licensure purposes, just to simplify the list which you have elucidated for the committee today. It is mind-boggling enough.
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    Mr. HARTER. You ought to be on this end of it.
    Chairman BAKER. In the earlier panel, there was some discussion about the Illinois model which, as I understand it, is an open, competitive system allowing—as described by one of the advocates of the system—allowing competition, providing consumer choice at pretty good price. It is not a prior approval State. There are no speed-to-market issues. Do you see the Illinois model as a model which has advantages from an agent perspective?
    Mr. HARTER. I think any State that speeds the process—I think the Illinois model is user-friendly from an insurance agent's perspective. Many States are going in that direction.
    Chairman BAKER. Representative Young, I understand the concerns from a State perspective about a Federal intervention unnecessarily into the conduct of its business. But at some point there has to be an acknowledgment that if there is not State-by-State action, then demands of the marketplace will require that the Feds do something.
    I don't take from your comments that there is—and frankly from any witness's—that anybody feels that speed-to-market issues are insignificant; that creating uniformity in agent licensing isn't appropriate; that making market conduct examinations relatively uniform in application, eliminating arbitrary price fixings and allowing competition in the marketplace to govern the price and the product—if those were the issues around which we had principal concern, what is a reasonable clock?
    If we were to in good faith, say in an NARAB on steroids, States of the world get out there, get it done by—what is a reasonable clock in your view?
    Mr. YOUNG. Well, I think my understanding is that the NARAB idea or suggestion, many of the States have already adopted those measures, and I believe 18 months in advance of the deadline.
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    I realize all States have not done that. The earlier panel spoke about legislatures that only meet every 2 years or that type of thing. But I do not see it being a long, drawn out affair to put a time limit on it. I do not. Four years, possibly, something of that nature.
    Chairman BAKER. So if we could as—the committee is going to have additional hearings. As a matter of fact, the next hearing is going to be dealing with some of the international issues that were raised in the earlier panel. It is going to be a broad series of hearings over the course of the summer. But at end of it, I think there are going to be a number of issues on which there is pretty much clear agreement, and there are going to be a handful of issues on which there is going to be some contentious decisions to be made. If that is the way in which this develops and we resolve to let the States act within a certain time frame, they being unable to act whatever that time frame is, then we have to act.
    As you point out, NARAB has been partially successful. But some of the numbers don't speak really to the operational compliance. Merely adopting a reciprocity agreement doesn't get uniformity. If you both agree to have a countersignatory requirement, that is not moving in the right direction.
    Is it pretty much the agreement of the panel that those general issues that I have outlined are areas where we could make some progress on the question of whether or not it happens State by State or whether it has to be done by Federal intervention is the issue?
    Mr. Phillipus.
    Mr. PHILLIPUS. I do agree that there has been improvement on the State side. And as I indicated in my testimony, RIMS is supportive of NAIC's continuing efforts. However, we do think that the optional Federal charter gives additional latitude to insurance consumers. And in the case of the RIMS members particularly, those are large corporations which have sophisticated risk management departments in management of financial issues, and they are looking for quite often rapid answers to problems that they face.
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    We have seen over the last few years the advent of issues such as the Y2K employment practices, liability, e-risks. And these are things which generally have come up rather quickly. And generally the marketplace has responded from the surplus line side or outside of the United States as opposed to within-State basis, and they have been generally innovative in their approach.
    And those are the type of creative solutions that risk managers and their member companies are looking for.
    Chairman BAKER. Thank you, sir. Mr. Kanjorski.
    Mr. KANJORSKI. Mr. Young, as I gather, your argument is that States can best supervise and handle the regulatory process, safety and soundness oversight, and all of the other issues regarding insurance at this point. Is that correct?
    Mr. YOUNG. That is correct, sir.
    Mr. KANJORSKI. If that is the case, then why is there federal pressure here in Washington and on the Hill for us to enact a terrorist reinsurance support system for the insurance companies? Why don't the individual States just do that?
    Mr. YOUNG. I think that issue is larger than what the States can deal with on their own. The previous speaker had mentioned that terrorism probably is not an insurable risk for an insurance company, certainly not an insurance company sitting here as a legislator. But that huge impact is not an insurable risk or a predictable risk and really surmounts the capacities of the States to individually deal with it.
    Mr. KANJORSKI. Well, if the States are going to regulate and we are going to do the reinsurance and the bailing out, what kind of protections do the American taxpayers generally have from the acts of Congress to benefit the ability to underwrite certain risks?
    Mr. YOUNG. Well, I still say it is a risk that rises about the normal insurance market and is too large for the normal insurance market to take in stride, or could be. They certainly have paid claims for September 11th, but it is foreseeable that it could happen that they could not stand to cover those claims.
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    Mr. KANJORSKI. I understand that. I have been a supporter of the Federal terrorism reinsurance support system. But if the States can handle all of these things, why shouldn't we just pass a law apportioning out to the States what the reinsurance should be, what their support requirements would be, and let them go ahead and handle it? I see sort of an inconsistency here for us to say that this is able to be and is being well handled on he State level and yet, quote, there are times or needs when we have to come to the Federal Government, unquote.
    And this is not the first time. In health insurance, vaccination insurance, and other support systems, the Federal Government has had to step up, and I think rightly so. I am not condemning the States. I think it is beyond their capacity to handle some problems. And it seems to me if that is the case, there seems to be a very strong case at least for the potential of an optional Federal charter.
    Mr. YOUNG. I think from my comments that the guaranty fund has worked so well, that certain size claims can certainly be covered by assessment on a State-by-State level. I think there is a point by which we exceed the capacity of the assessment system to cover those losses.
    Mr. KANJORSKI. Are these products and regions so unique that if we allow some companies to get an optional Federal charter, we are eviscerating some protection for consumers or the uniqueness of the State or region in which the company is involved?
    Mr. YOUNG. I don't think so. But I will say that the guaranty fund now works quite well for companies that are regulated in another jurisdiction—in another State. They are formed in another State, and they work well regardless of where the loss is.
    Mr. KANJORSKI. In a prior life that I lived as an attorney, I had some experience with performance bond insurance. And there were some States that had a regular habit of having their insurance companies underperform and declare bankruptcy when any substantial claims were made. As a matter of fact, I used to recommend to some of my clients not to purchase a surety bond if it came from a particular State.
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    Is it not rather difficult for businesses and for lawyers and for everyone else to know what the solvency standards is for an insurer, or the particular criteria in the various States with which we are dealing? Whereas, if we had a national charter, there would be one regulator, there would be one safety and soundness standard, and a calmness of certainty would exist across the States as to what companies were solvent and what companies were unsolvent?
    Mr. YOUNG. I think it is imperative and I think its function is that we trust other States to regulate their insurance companies. And through the accreditation process that has been formed, we know that insurance commissioners and departments across the country are adequately supervising the insured that are within those States.
    Mr. KANJORSKI. At one time we did that for prescription drugs in this country. We did not have the Federal Drug Administration. I guess we could go back and allow each State to handle that type of regulatory question, but would that not be awfully redundant and expensive for drug companies to have to qualify in each State and meet the particular conditions that each State would want to lay down? Whereas, if you had one Federal process, it allows for speed-to-market for product, and it allows for less risk to the consumer.
    Mr. YOUNG. I really don't know if I am qualified to answer that.
    Mr. KANJORSKI. Well, it is interesting. On your point on representing the companies and brokers and sales operations, is there a fear within the organization that in going to an optional Federal charter that your members will be more at risk? If so, what would the risk be?
    Mr. HARTER. I think the risk is having another jurisdiction. You wind up with 56 jurisdictions instead of the 55 that you have now. The industry, the agent broker industry, has been very resilient. They have been able to respond to working with the various different State departments, and we feel that those departments are effective. They are very responsive to the individual States and the consumer laws, et cetera, in the States where they operate, and we see the systems being complementary as working with each other as being the answer to it, not replacing one with another.
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    Mr. KANJORSKI. Well, why couldn't you, because it is 56 jurisdictions, not one jurisdiction? Is that the major problem, that we would have a 2 percent increase in jurisdictions involved, that we should deny the national companies the ability to save the 2 percent that Mr. Bartlett talked about in costy?
    Mr. HARTER. I do not know how to respond to the 2 percent because that is not a number that I am familiar with. But I do not know whether that is accurate or not, but it is not necessary. The system as it stands, by working with a set, a uniform set of standards being managed, if you would, by the States, the individual insurance departments, I think you can solve the issues.
    Chairman BAKER. Thank you, Mr. Kanjorski.
    Mr. Shays.
    Mr. SHAYS. Mr. Chairman, I get a lot of constituents who come to my office and want there to be a Federal solution to whatever particular problem; they just see it much more simply done if there was just this one policy.
    I think this is a fascinating debate, having served at the State level, because sometimes the argument to cut costs and to go on a Federal level could be made almost in every conceivable industry. So I am trying to get a handle on ultimately what is the right way to approach this. Is this a State responsibility, and therefore should the States just be the ones to deal with it, or is it a Federal one?
    I guess what I would want to ask the panel would be this question: Is there a clear benefit of reductions in cost by having a one-size-fits-all opportunity? Will there be more competition as a result of it? Will the consumers see lower prices? Is that the bottom line argument on one side versus the other argument, that if you have State-level activity, that you will have, in some cases, better protection for the consumer?
    I know for instance when we went to regional banking, all of our banks went under. Maybe they should have been nationalized. But I mean, not nationalized, but maybe they should have, when we lost our banks, maybe it should have been that they should have gone just beyond the New England region.
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    I would just like the panelists to address the issue of cost versus the issue of doing something on a smaller scale means that you don't have everybody negatively impacted if you face bad times.
    Mr. YOUNG. I guess I would have to tip my hand here a bit. I sit here this afternoon as the President and CEO of a national bank, and from everybody's comments this afternoon, I have been kind of incredulous that I have it so good on the regulatory front. My regulators are in Boston. In asking questions of regulators, it takes a length of time, if ever, to get a response from my regulator. My customers on the bottom of their forms are told if they have a consumer complaint to call Washington, and I do not think they are responded to as well as if it was a local or State insurance matter.
    Quite frankly, if I did not have probably the sixth or the eighth oldest charter in the United States, I would have gone to a State-chartered system a long time ago in that I would have contact with my regulator in a much better case.
    So I think, I really do believe, that in a dual chartering situation, the consumer is not as well served as by State regulation.
    Mr. PHILLIPUS. Congressman, I think some of the points that Ms. Harter brought up are some of the concerns that our members have. The idea of having to have a document shipped across the country for a signature from someone who had not participated in the process, just because it is required, ultimately increases the cost to our members, the consumers, the ultimate buyers of insurance.
    Likewise, for example, as risk managers one of the common complaints I hear is an issue regarding something as simple as automobile insurance, and the fact that if you decide to take a lot of risk yourself as a company, you have to fill out countless forms for uninsured motorists, personal injury protection, and medical payments to reject them. Every State has a different form, sometimes requiring up to six different signatures, sometimes three different forms; and there are costs associated with it when the insurer has to provide those stacks—which can be this thick—for some of our members to the risk manager. And then the time has to be spent by the agent, the broker, and the risk manager to review the documents, make sure they are correct, and then they get sent back. Ultimately, all you are doing is saying we want to accept the risk ourselves.
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    So from a consumer standpoint, we see that as a waste, we see that as inefficiency, and we see that there are opportunities to reduce costs, to improve the system, and we think that the optional Federal charter would provide that opportunity.
    Mr. HARTER. I do not think the Federal charter is the answer to it at all, in responding to what Mr. Phillipus has said. Many of the States have laws, no fault laws, you have many different laws that these uninsured motorist forms are responding to. I am not sure that is the intent of the optional Federal charter, to do away with that.
    You also have situations where the national companies certainly do not intend to be all things to all people in these States. You are still going to have situations where I as a broker and as an agent am dealing with a customer that maybe has a federally chartered policy, they have a local State-chartered policy, and I do not have any idea how all of that is going to come together. All I can foresee right now is it is going to be an incredible problem that we probably do not have to get into if we can pull everything together, we can merge the concerns, we can have some uniform standards that are still regulated at the State level. I do not know of anyplace where anybody is going to get any satisfaction with hundreds of thousands of consumer complaint calls coming into a bureau here in Washington, and those are literally the kinds of numbers that the State insurance departments deal with.
    Mr. SHAYS. Could I just follow up a second? It just strikes me, though, that intuitively, costs have to go down to the consumer actually, to the participants, to the insurance industry itself, and obviously to the consumers, if you have a more uniform system. And so I mean, I think you really have to stretch it to make any other assumption. I think choices go up potentially as well if you have more competition, and I think you would encourage more competition.
    The other side of it though, it seems to me, is that there is a bit more security on the State level. So it seems to me when I am looking at this, I see a greater opportunity for the consumer with a national system, at least a national option; but on the other side, the potential that if there is a screw-up, if times are bad, you could have—you can have a system that can be more in jeopardy with a national system than if you have the potentially regional State systems, that you will have some good ones and some bad ones, but there will be more protection. That is kind of how I am viewing it as I listen to this hearing.
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    Chairman BAKER. Thank you, Mr. Shays.
    Mr. Bentsen.
    Mr. BENTSEN. Thank you, Mr. Chairman.
    Representative Young, you talked about your experiences with your bank in having a national bank charter. I have to say when Congress was trying to pass financial modernization over the 20 years that it worked on it, and when we spent—Mr. Baker and I and others spent the last 8 years working on it—it was not the Texas banking commissioner who was up here—who is a friend of mine—that was up here arguing that national banks ought to have some abilities to sell insurance because it was closely related to banking under the Bank Holding Company Act, it was the Comptroller of the Currency. Now I realize he was the bane of existence for a lot of people in the insurance industry.
    But there is something to be said for a single-headed dog versus a 55-headed dog who is doing your bidding for you. And that is one thing I worry about this industry; because again, even in the P&C market, and Ms. Spragens makes a very good point when she testified that there are geographical differences. But it is for the most part—I mean we are not a 50-State segmented market. And Ms. Harter raises the issue about agents who are now multi-State agents, and most businesses now I think, a lot of the growing businesses are multi-State businesses, and we have had to grapple with ERISA at our end in how we deal with that in the health insurance field. So I mean, that is what you are fighting against.
    Ms. Harter, in your testimony, if I read this correctly, the PIA board of directors three times has adopted sort of a statement of principles for reform; and in that, you talk about creating a collaborative shared resources uniform effective system. I think that is all well and good. But I am skeptical that 50 States, 50 State legislatures, can adopt a uniform system that preempts each other's State where you may need to have that at some point in time. Federal preemption, of course, can be very unpopular, and other times the industry really wants it badly.
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    So those are the issues that I think Congress has to address. I appreciate the fact that, well, we do not want another bureaucracy, we do not want another one we have to go through. But last week I was in a meeting with somebody from a national financial services firm which is not one of the big Wall Street firms, it was not a huge conglomerate, but this firm's brokers were a lot like your members; they are NASD, NYSE, they are registered insurance brokers in their State, they are a conglomeration of small businesses; and yet somebody in the home office has to sign all of the documents for all 50 States or wherever they are operating in—I assume it is all 50 States—so it is a convoluted system.
    I think those are the issues that we are trying to deal with or the Congress is trying to deal with as we continue to see financial modernization occur, with or without our acquiescence.
    So I think it is going to become—the pressure is going to become increasingly greater for some sort of dual system. As Mr. Phillipus said, in reading his testimony, the bigger clients—and it is probably moving downstream—that the bigger clients, for risk purposes, are going to set up these captive companies, because they are becoming multi-State and it is going to be a lot easier.
    So I would encourage you—I do not really have a question—I would just encourage you to take a very hard look at how we might be able to come up with a dual system. The States are still going to play a very important role, because the States control the solvency. I do not think anyone is talking about setting up an insurance fund for the insurance industry at the Federal level. I am not sure we want to bite that piece off. But it is a two-way street, because as Mr. Kanjorski said, you know, talked about the terrorism issue that I had raised, the industry has come to us for disaster insurance, flood insurance—which is an important issue in my area of the country, is the federally insured program. So we have to figure out some sort of two-way street, how we are going to work with this market as it evolves.
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    Chairman BAKER. Thank you, Mr. Bentsen. I just want to make one additional comment.
    It is clear that there are areas of agreement where current bodies of rules and regulations are inappropriate; they do not enable the consumer to have any particular right that is of value, they inhibit the free flow of product, they stifle the pricing of product, they inhibit the appropriate conduct of business by the agents themselves. So we can identify those problems.
    As opposed to the establishment of a national bureau of insurance with a big office down on K Street somewhere, it seems to me this problem can be divided. On the one hand, commonsense regulatory structure that is national in nature. If we were to take the NAIC approach and make the Illinois model the national model, for example, we are talking about how we get there: Does the Federal end do it or does the NAIC with the State legislature adopt a system, State by State? No big difference. The end of the process would be similar.
    On the other side of the coin, however, we do need State advocacy with regard to consumer protections and that the Attorney General and the appropriate insurance regulator would still maintain their right to act and to determine solvency requirements. So that without the necessity of creating a Federal bureaucracy, you could establish national rules by which market practice could be reformed, while reserving to the States the right to defend consumers and to preserve financial protections for the taxpayers.
    Somebody tell me why that does not make sense.
    Mr. HARTER. It makes all the sense in the world to me. I think it is exactly what we are asking to be done.
    Chairman BAKER. Mr. Phillipus?
    Mr. PHILLIPUS. I agree. That is the type of—I think we are approaching it from a slightly different approach, but we are not suggesting the creation of a new bureaucracy. We are suggesting we just need a little bit of innovation and we are open to how we get there, but we think the end result is where we need to be and we can make concessions along the way.
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    Chairman BAKER. This is only 2, 3 hours into the first hearing. We have a long road to travel. But I keep hearing the same things over and over. We are all really saying we see the problem, we disagree on how we are going to fix it, but at the end of the day, we are all going to look pretty much the same. The only question is whether we have a building with a Federal name on it or whether we have just simply national standards of conduct that are applicable in all States.
    Representative Young, can you respond?
    Mr. YOUNG. I would hope the coalition of NAIC, NCOIL, NCSL, could pull this off without there being a need for a Federal building, quite frankly.
    Chairman BAKER. Had they acted in the last 8 or 10 years, I would be just happy as a clam. But I think the problem is that we have been discussing these issues at the national level for quite some time: NARAB, although with some degree of success, is not where we had hoped; and that reciprocity does not look like uniformity; and that at some juncture we could all agree as reasonable people that if it is not done by a date certain, the Congress will act. Maybe that is the message that needs to be related more directly that would encourage constructive dialogue so that the inappropriate Federal intervention would not occur.
    Mr. Shays or Mr. Bentsen, any further comments?
    Mr. BENTSEN. If the chairman will just yield, I think you are on target, because if you will recall when we did the Gramm-Leach-Bliley bill, the final compromise that was worked out and took forever to get done set these standards that had to be met, and there is still disagreement over whether it is a clear entry into the marketplace, and so the chairman is right. I mean, it may not be—we may be talking about something that is more of a hybrid; we may be talking about something that is more of a federally established SRO-type structure or something that creates this uniformity. Because I think one can make the argument that we have been waiting on the States for a long time to come up with this uniformity in the market. And this has happened in Congress, it happens all the time, the market moves far past us and we are playing catch-up, and I think you all are in that position right now.
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    Chairman BAKER. As a fairly conservative free market Republican, it is very hard for me to say let us create a new Federal regulator. But something has to be done with the current system, and I would hope that in the time remaining with the record being open, you would respond with your thoughts on the specifics of how such an approach might be constructively considered.

    Chairman BAKER. If there are no further comments, our meeting stands adjourned. Thank you.
    [Whereupon, at 4:20 p.m., the subcommittee was adjourned.]

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