Page 1       TOP OF DOC


Wednesday, November 5, 2003
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 2:30 p.m., in Room 2127, Rayburn House Office Building, Hon. Richard H. Baker [chairman of the subcommittee] presiding.
    Present: Representatives Baker, Shays, Bachus, Royce, Kelly, Miller, Tiberi, Kanjorski, Sherman, Inslee, Moore, Lucas of Kentucky, Israel, Ross, Emanuel, and Scott.
    Also Present: Representative McNulty.
    Chairman BAKER. I am informed that Mr. Kanjorski is on his way. With that understanding, I am going to proceed to call our meeting of the Capital Markets Subcommittee to order for the purpose of receiving testimony today on the advisability and need for reform of our current national insurance regulatory marketplace.
    I am looking forward to hearing the perspectives of the members of our distinguished panels today as to the need for, and the nature of, proposed regulatory reform. Over the past years, the subcommittee has examined this subject matter and received various recommendations and stated plans of action. We certainly hope to hear encouraging reports on the status of those reform efforts.
 Page 2       PREV PAGE       TOP OF DOC
    I feel it is very important to state that reform is essential, because delivery of product to consumers, where limited, now results in unnecessarily high premium rates. The lack of competitive product in the marketplace only further sustains those non-responsive rate structures.
    I do think it appropriate for the committee to move only after careful analysis and understanding. But we should seek the broadest possible scope of reform while recognizing the importance of the State structure in the protection of consumer interests. I do not think those goals are mutually exclusive.
    While we seek the broadest scope of possible reform, I also understand there are limiting factors for proposals that may not ultimately gain Congressional approval. Other than no reform, dead reform is equally unacceptable. I appreciate the efforts made to date by all of the parties who have exhibited interest in seeing national uniformity in various perspectives, but I don't think that we frankly have made sufficient progress through the current hearing date that would not in fact cause the Congress to take further actions on its own initiative.
    It is my hope that we receive from each perspective, from all market stakeholders, recommendations that can be weaved together into some sort of policy platform that could possibly lead to congressional action next year. Short of that, it would be my hope we could at least reach agreement on a time line by which meaningful reforms could be attained through State and local initiatives, and, absent attaining that goal, suggesting automatic congressional action after waiting a few more years.
    I am not encouraged, because the Graham-Leach-Bliley effort only took about 75 years. Sarbanes-Oxley, fueled by a national crisis, took a few months. Somewhere between a few months and 75 years, I think the insurance regulatory structure is probably solvable. Seeing how we are closing out the first real decade of discussion on this matter, maybe we are further down the road of progress than some may expect.
 Page 3       PREV PAGE       TOP OF DOC
    Given those perspectives, I certainly welcome each of you to the hearing today and look forward to receiving your comments.
    Chairman BAKER. Let me turn to this side. Is there any member on this side who has an opening statement that would—Mr. Israel.
    Mr. ISRAEL. Mr. Chairman, I had planned to introduce one of our experts, if it is appropriate to do that now.
    Chairman BAKER. Since we have a number of requests for members to introduce, particularly members of this panel, and while we are waiting Mr. Kanjorski, why don't we proceed with those specific introductions.
    Please proceed, Mr. Israel.
    Mr. ISRAEL. Thank you very much, Mr. Chairman. I appreciate your convening this very important hearing on insurance regulation. And while there is a diversity of opinion on this issue, and while I continue to study it, I am very pleased that one of our experts today is a distinguished elected official on Long Island, which I represent, and it is my privilege to introduce him to the committee.
    He is a fellow Long Islander, Senator Kemp Hannon, of New York. He is Co-chair on the National Conference of State Legislatures Task Force on the Federalization of Insurance Regulation. Senator Hannon is uniquely qualified to provide us with insight into the ongoing debate of the role of the Federal Government in insurance regulation.
    Senator Hannon also serves as the chairman of the New York State Senate Health Committee, and has previously served as chair of the Council for State Governments Committee on suggested State legislation.
    I am very eager to hear his insights. I look forward to working with him and enjoy the relationship, the bipartisan relationship that we have on Long Island. I am so pleased to welcome him to this committee today.
 Page 4       PREV PAGE       TOP OF DOC
    I yield back my time, Mr. Chairman.
    Chairman BAKER. Thank you, Mr. Israel.
    I believe Mr. Ross has an introduction that he would like to make at this time.
    Mr. ROSS. Thank you, Mr. Chairman.
    One of our panelists today, an expert witness, comes from my home State and actually grew up in my district and is someone I think is doing an outstanding job on behalf of our state.
    And I am pleased to introduce Mike Pickens, the Commissioner of Insurance for the State of Arkansas. And Mike was appointed Insurance Commissioner in 1997, back when I was still in the State senate, and was reappointed for a second 4-year term in 2001. He is a graduate of Pine Bluff High School, which has an exceptional football team this year.
    He has attended the University of Mississippi, or Old Miss as we call it, in Arkansas, and he returned to the University of Arkansas at Little Rock where he attended the school of law, and received his juris doctorate degree.
    And prior to his post as the Insurance Commissioner, Mike was a partner in the Little Rock law firm of Friday, Eldridge, and Clark where he practiced in the areas of insurance defense, representing policyholders in personal injury and workers' compensation litigation.
    In Arkansas, the Commissioner is responsible for protecting insurance consumers through insurer solvency and market conduct regulation. And, as a licensed independent insurance agent myself, I can speak firsthand to the efforts of this agency in ensuring that companies conduct their businesses fairly and in a manner that puts the consumers first.
    The Arkansas Insurance Department has been identified as one of the Nation's most progressive insurance regulatory agencies by the A.M. Best Company, one of the country's oldest and most highly respected insurer rating organizations.
 Page 5       PREV PAGE       TOP OF DOC
    Mike was elected President of the National Association of Insurance Commissioners back in 2002, which is composed of the chief insurance regulatory officials from the 50 States, the District of Columbia, and four of the five U.S. Territories.
    I am pleased to hear that the National Association of Insurance Commissioners is making progress in its efforts to modernize State regulation with implementation of the insurance regulatory modernization action plan that was adopted back in September of this year.
    I look forward to Mike's testimony and the other witnesses' that have joined us today, and I appreciate this committee's commitment to examining this industry that is essential to all Americans. Thank you, Mr. Chairman.
    Chairman BAKER. Thank you, Mr. Ross.
    Mr. McNulty, would you care to make an introduction?
    Mr. MCNULTY. I thank the Chairman and the Ranking Member for allowing a nonmember of the committee into the room today for the purpose of making an introduction.
    I also want to welcome Commissioner Pickens, whom we have surrounded by New Yorkers. I also want to extend greetings to my very dear friend, Senator Kemp Hannon, with whom I served in the assembly many, many years ago, and Greg Serio, the Superintendent of Insurance from New York, who will be introduced a bit later by another member of the panel, but who I want to greet because he is a friend and he is a constituent.
    And, finally, I want to introduce my longtime friend, Senator Neil Breslin. Senator Breslin is not just an outstanding lawyer and a great Senator, and considered an expert on insurance issues, but, more importantly to me, he and the members of his family have been friends to me and the members of my family for a very, very long period of time. And it is always great to be with him, to work with him, and to welcome him to Washington, and I look forward to being with him soon back home in the district.
 Page 6       PREV PAGE       TOP OF DOC
    So I welcome all of the panelists, especially my State Senator. Thank you, Mr. Chairman, and I thank the Ranking Member.
    Chairman BAKER. Thank you, Mr. McNulty.
    Mrs. Kelly, did you wish to make an introduction at this time?
    Mrs. KELLY. I do. And thank you very much, Mr. Chairman. I really appreciate your holding this hearing on improving insurance regulation, which is an issue of great concern not only to me and the members of the committee, but to people across the country who are consumers of the products.
    Today we are going to have a lot of diverse witnesses with distinct interests, backgrounds, and experiences. And despite all of these unique perspectives, I think we all agree that protecting consumers and providing the best service possible are really the goals that we are focused on here today.
    I think we also all agree that a lack of consistency and regulation from State to State hurts Americans by undermining protections and driving up costs. And the solution is a more efficient and systematic approach to regulation.
    As we continue our work on these issues, I am really honored to have the opportunity to introduce—we have a couple of witnesses from the State of New York. I understand that some have been introduced, but I would like to introduce the Superintendent of Insurance, Greg Serio. He has been wonderful for our offices to work with.
    And, Greg, we are very happy to have you here today. There is a lot of important issues that we are going to discuss here today. But I don't think there is anything that is more important than doing what we have to do to make sure that not only are we protecting our consumers, but that they understand the products that they are purchasing.
    And, I believe that Mr. Serio has prided himself, and I am happy, too, because I applaud him in what he has been doing, because while carrying out his duties as a Superintendent of Insurance in New York, he has undertaken many successful programs and initiatives at the New York Insurance Department, including a successful effort to adopt the model producer licensing statute.
 Page 7       PREV PAGE       TOP OF DOC
    I also would like to welcome Senator Breslin. I understand someone has also introduced you. It is a pleasure to have you all here today. I am hopeful that we are able to wrap our arms around this and come to some conclusions on it. We tried a long time ago, several years ago, to address this issue, and tried to get passed a bill that the insurance industry had been interested in trying to get passed for self-regulation since 18—it was pending in Congress since 1847. We got part of it done; we just have to get the rest of the job done. I am hopeful that some of the testimony today is going to finish that up.
    It is really a pleasure to have you here. I look forward to your testimony and to your initiatives that you are offering to modernize insurance regulation in a way that is going to better serve all of us.
    Thank you, Mr. Chairman. Yield back.
    Chairman BAKER. I thank the gentlelady.
    Mr. Kanjorski for an opening statement.
    Mr. KANJORSKI. Thank you, Mr. Chairman. We meet today for the second time in the 108th Congress to consider insurance issues.
    Today's hearing will focus on the latest modernization efforts announced by the National Association of Insurance Commissioners, and the prospects for achieving State-based regulatory reform.
    Before we hear from our experts, I believe it is important to review some observations about the insurance industry that I have raised at our previous hearings on this matter.
    Insurance, as my colleagues already know, is a product that transfers risk from an individual or business to an insurance company. Every single American family has a need for some form of insurance, especially products like auto, renters' or homeowners' insurance. The vast majority of these families also has or wants other insurance products, like life, health and long-term care policies.
 Page 8       PREV PAGE       TOP OF DOC
    The McCarran-Ferguson Act authorized the States to regulate the insurance business. And 4 years ago this month, the Congress reaffirmed this system in approving the law to modernize the financial industry. As a result, each State currently has its own set of statutes and rules governing the insurance marketplace. Traditionally the States have highly regulated the insurance industry. Many States, however, have begun to experiment with their regulatory models in recent years. In the last several sessions of Congress, our committee has held regular hearings about the need for regulatory reform in the insurance industry.
    During these debates, we have heard from a variety of viewpoints on the need for reform and the options for achieving it. These hearings have also helped to educate us generally about the mechanics of the insurance industry and the latest regulatory developments in it. As a whole, however, the Federal Government continues to lag behind in its knowledge of insurance issues.
    As our witnesses from Mass Mutual will point out later today, the insurance business is the only portion of the financial services industry that does not have a regulatory presence in Washington.
    At times, this lack of expertise has caused difficulties for us. For example, although many Members of Congress had concerns about the insurance industry's ability to respond to the 2001 terrorist attacks, they had difficulty in immediately identifying Federal experts to advise them in these matters.
    The deficiency of Federal knowledge about the insurance industry might have also impeded our efforts to adopt expeditiously the terrorism reinsurance backstop law. Everyone involved in the debate on future insurance regulation agrees on the need for reform.
    From my perspective, promoting competition through fair and effective regulation should ultimately result in better and more affordable insurance products for consumers. While I am pleased that the National Association of Insurance Commissioners recently released an action plan for pursuing further modernization efforts for regulating the insurance marketplace, this proposal was developed 3-1/2 years after the release of its paper calling for the efficient market regulation of the insurance business.
 Page 9       PREV PAGE       TOP OF DOC
    Absent demonstrated advances in these State insurance regulatory efforts going forward, the Congress may need to consider altering the statutory arrangements through the creation of an optional Federal chartering system or the adoption of other reforms.
    In closing, Mr. Chairman, I want to commend you for bringing these matters to our attention. I believe it is important that we learn more about the views of the parties testifying before us today, and, if necessary, work to further refine and improve the legal structures governing our Nation's insurance system. I yield back.
    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 59 in the appendix.]
    Chairman BAKER. Thank the gentlemen. Mr. Lucas.
    Mr. LUCAS. Mr. Chairman, I am not big on formal opening statements, but I would like to say that this is of a particular interest to me, since I spent, in my prior life, 32 years in the insurance business and I had a lot of frustrations about the speed to market of products and so forth, working in many States.
    And I look forward to the testimony here. And I am hoping that we can move forward and get some very meaningful reform. Thank you.
    Chairman BAKER. Thank you, Mr. Lucas.
    Mr. Bachus, did you have an opening statement?
    Mr. BACHUS. Mr. Chairman, I will make it brief. I want to thank you, first of all, for holding this hearing. Since the jurisdictional change in 2001 to include insurance as a part of the House Financial Services Committee, I have heard from numerous regulators in various sectors of the insurance industry on this very important issue.
    While I applaud the life insurance industry for attempting to make their case of the need for a dual system of insurance regulation in their bid to compete with federally regulated security products, I still have many concerns regarding various proposals for an optional Federal insurance charter. In particular, proposals which include the property and casualty line of insurance as a part of the Federal charter.
 Page 10       PREV PAGE       TOP OF DOC
    As you may know, Alabama has a $1.3 billion per year insurance business, resulting in $240 million of insurance premium taxes every year. A proposed optional Federal insurance charter not only could reduce this important source of State revenue in an era of tight State budgets and dwindling State income taxes but will also threaten the ability for States to adequately fund their State insurance departments.
    Issues such as state insurance premium taxes must be addressed as part of any optional Federal insurance charter. Currently our Alabama Insurance Commissioner, Walter Bell, is working with the National Association of Insurance Commissioners on an insurance regulatory modernization plan, which will include a streamlined uniform regulatory process for product approval and additional consumer protections.
    I look forward to hearing about this proposal today from the NAIC, and comments from the independent insurance agents on this new proposal.
    In addition, I look forward to listening to representatives of Mass Mutual, Hartford, and the Council of Insurance Agents and Brokers on their innovative proposals for modernizing our insurance regulatory system.
    And again, I thank you for holding this hearing.
    Chairman BAKER. Thank you, Mr. Bachus.
    Any member desiring to make an additional opening statement? Mr. Scott.
    Mr. SCOTT. Thank you very much, Chairman Baker and Ranking Member Kanjorski. I want to thank you for holding this hearing today. And I just want to also just mention how important the insurance industry is.
    Several of my constituents have expressed opposition to a national approach, but nevertheless I will listen today to the testimony with an open mind. Thank you, Mr. Chairman.
    Chairman BAKER. Thank you, Mr. Scott.
 Page 11       PREV PAGE       TOP OF DOC
    Any further opening statements? If not, at this time I would like to proceed to recognize the members of our first panel.
    The first to be recognized would be the Honorable Mike Pickens, Commissioner of Insurance for the great State of Arkansas, who appears here today as the President of the National Association of Insurance Commissioners, and is accompanied by the Honorable Gregory Serio, Superintendent of Insurance from the State of New York.
    Chairman BAKER. Mr. Pickens, you are certainly warmly welcomed here today.
    Mr. PICKENS. Mr. Chairman and members of the subcommittee, thank you very much for allowing us the opportunity to be here today. It truly is a privilege to have a chance to advise you of the progress State regulators have made in our consumer protection and market-oriented regulatory reform efforts.
    I particularly appreciate my Representative, Mr. Mike Ross, or one of our Representatives in Arkansas, and his kind introduction.
    First, though, Mr. Chairman, I would like to take this opportunity to thank you for your interest in and your support of our important work. Your oversight of State insurance regulation truly has been a positive force for necessary change. And we recognize that.
    I commend Financial Services Committee Chairman Mike Oxley. I commend you, Mr. Chairman, and I commend all of the members of the Financial Services Committee for what I believe is your highly progressive leadership on these issues.
    Mr. Chairman, let there be no doubt, State insurance regulators are committed to creating a regulatory system for the 21st century, one that both protects our fellow insurance consumers but also one that facilitates growth and stability in the financial services marketplace.
 Page 12       PREV PAGE       TOP OF DOC
    Our goal is very simple: It is to make regulation more effective and more efficient; but also, at the same time, to make it less costly and less burdensome. I believe we have demonstrated commitment by our expeditious compliance with the Graham-Leach-Bliley Act of November of 1999.
    The NAIC has to date certified 41 States as being GLB-compliant in producer licensing. That constitutes 67 percent of the premium volume in the country. We expect very soon to certify New York, who just passed a bill this summer as being GLB-compliant. And when that happens, we will have 75 percent, 75 percent of the marketplace GLB-compliant.
    All 50 States and the District of Columbia have passed privacy laws or regulations to protect consumers' personal financial and health information. And as has already been mentioned today here, Mr. Chairman, in September State regulators unanimously passed a reinforced commitment insurance regulatory modernization action plan.
    This action plans sets out our goals in the areas of consumer protection, market regulation, speed to market for insurance products, producer licensing, insurance company licensing, solvency regulation, and change in insurance company control. The action plan also allows the NAIC to use our highly successful financial solvency accreditation program to enforce compliance where it is necessary and appropriate to do so. This action plan sets deadlines by which States should accomplish these goals.
    And, Mr. Chairman, I am here today, first and foremost, to commit to you that the NAIC and State regulators will reach these goals, but also to tell you that we can't do it alone. I believe, significantly, we are not alone in our efforts. Over the last several years we have enjoyed some very important allies in our work, all of whom—or many of whom, I should say, are at the table with me here today: the National Conference of Insurance Legislators, a group that Chairman Oxley helped found, and the National Conference of State Legislators have endorsed the NAIC's interstate compact for life insurance, annuity, disability and long-term care products. We received that endorsement just this summer.
 Page 13       PREV PAGE       TOP OF DOC
    Both NCOIL and the NCSL have signed joint resolutions with the NAIC, clearly stating their support of State regulation of our modernization work, and also their strong opposition to a Federal regulator of the business of insurance.
    In October, the Council of State Governments passed a similar resolution that was sponsored by the CSG chair and my Governor, Mike Huckaby, in Arkansas.
    Mr. Chairman and Members, State regulators want and need your help and support, too. You each are very influential political leaders in your respective States. Please help us keep the pressure, help us keep the pressure on the insurance industry and encourage them to support our modernization efforts, not to undermine them in the States.
    Mr. Chairman, we also believe that it is important to note that the vocal minority of the industry out there calling for a Federal regulator for insurance consists of the very largest banks and life insurance companies that operate in the country today. The insurance business is significantly different from the banking and securities business. It touches every man, every woman, every child, every family in this country, including your families and my family. And the only people standing between all of us consumers and what far too often becomes these huge corporate bureaucracies are home-State, home-grown insurance regulators.
    Is it the real consumers our States, the grassroot consumers that are in Washington asking for a Federal regulator of the insurance business, or is it just the lobbyists for these huge insurance companies? Ask your constituents if they want to call some far-away government bureaucracy to help them with a consumer complaint about their roof or their car or their home or a life insurance or health insurance policy.
    If you ask your constituents—who I assure you don't always understand the legalese and the small print that are in ever-increasingly complex insurance policies. When a consumer needs to call 911, they want that call and they expect that call to be a local call, not a long distance call.
 Page 14       PREV PAGE       TOP OF DOC
    And as taxpayers, I think all of us would agree that none of us can afford the creation of yet another huge new costly bureaucracy in Washington, D.C., one that most certainly, ultimately, will be less accountable and less responsive than home-State regulators.
    Finally, the insurers and the agents in our States don't want the increased costs and the multiple layers of regulation a Federal regulator ultimately would create. And our State governments and our consumer protection guarantee funds can't afford what would inevitably be the loss of premium tax and other revenues that must ultimately go to fund a Federal regulator. And Mr. Bachus has already alluded to that. That is a serious concern for our governors and legislators.
    So in closing, Mr. Chairman and subcommittee members, let me just again ask that you please continue to support our State-based, market-oriented regulatory modernization efforts. All of us that are grassroots consumers in our States want and need you to do so.
    Again, thank you for your leadership. Thank you for the opportunity to visit with you here today. And we look forward to answering your questions.
    Chairman BAKER. Thank you, Commissioner.
    [The prepared statement of Hon. Mike Pikens can be found on page 110 in the appendix.]
    Chairman BAKER. Our next witness this afternoon is the Honorable Neil Breslin, State Senator from the State of New York, who appears here today on behalf of the National Conference of Insurance Legislators. Welcome, Senator.
    Mr. BRESLIN. Chairman Baker, members of the subcommittee, thank you for inviting the National Conference of Insurance Legislators, or as we refer to NCOIL, to testify before you here today.
 Page 15       PREV PAGE       TOP OF DOC
    I am a New York State Senator, representing the city and county of Albany, which amounts to some 300,000-plus people.
    NCOIL is a nonpartisan organization of State legislators whose primary purpose is to develop and promote legislation that protects consumers and fosters a vibrant insurance industry.
    As I stated in testimony before Chairman Oxley and the members of the Subcommittee on Commerce in the year 2000, NCOIL welcomes the oversight of Congress on insurance regulation. We are grateful for the ongoing dialogue with the committee and efforts to improve the State-based insurance regulation.
    Under State regulation, insurance markets have grown and become increasingly competitive. There are more than 3,300 property and casualty insurance companies and over 1,800 life and health insurance companies now in competition throughout the U.S. Markets.
    At the outset, I would like to commend the NAIC for their work to improve insurance regulation. Their recently adopted action plan clearly demonstrates their understanding of the challenges facing insurance regulations in the 21st industry. While such pronouncements are laudable, they demand follow-up with real measurable results, and, more important, such regulatory improvements need to happen without delay.
    And I might parenthetically add, the NAIC, NCOIL, and the NCSL are working together in a way that they never did before.
    In my testimony today, I will report to you on the progress NCOIL has made to improve regulation of the insurance marketplace and our vision for continued modernization.
    The key areas of reform. I am here to say that insurance regulatory modernization is well on its way. By the end of the year, NCOIL will have adopted model laws or passed resolutions in support of NAIC model laws addressing four areas of insurance regulation, requiring immediate improvement.
 Page 16       PREV PAGE       TOP OF DOC
    I would like to take a moment to provide you with a brief overview of what NCOIL has done in each of those areas. First, as Commissioner Pickens pointed out, insurance producer licensing. The States rose to the challenge to reform producer licensing laws, albeit on the threat from the Federal takeover of the multi-state licensing function as proposed by NARAB and GLBA. The number of States was 29. We far surpassed that. Today the NIC has certified 41 States as meeting the requirements for producer licensing reciprocity under GLBA. I am happy to report that the last State last month was New York, and I can assure you that the bill will pass the muster of the GLBA requirements.
    Secondly, speed to market for insurance products. Critics of State regulation point to a State-by-State regulatory approval process as too slow and too cumbersome, putting insurance carriers on an unlevel playing field with other financial service providers.
    NCOIL has taken a two-pronged approach to improving the insurance product approval process. First, for the approval of property casualty products, NCOIL has adopted the Property Casualty Insurance Modernization Act. The NCOIL model is a step towards the competitive rating system which is found in Illinois.
    The NCOIL model offers States an alternative to prior approval mechanisms that can stifle innovation and force higher prices upon all consumers. To date, several States have based their insurance rate modernization initiatives on the concepts found in the NCOIL model law.
    Second, for the approval process for life insurance and related products, NCOIL worked closely with the NAIC and the NCSL with the development of the Interstate Insurance Product Regulation Compact. It was my privilege to recommend the compact approach and testimony at a hearing here in Congress in the year 2000. NCOIL earlier this year adopted a resolution supporting the compact and is encouraging the States to consider it during the 2004 legislative session.
 Page 17       PREV PAGE       TOP OF DOC
    Thirdly, company licensing. NCOIL adopted in July of 2000 the Company Licensing Modernization Act. The model act can promote consistency among the 50 States in licensing insurance companies, using procedures in the NAIC uniform certificate of authority application.
    The NAIC has made good progress streamlining and simplifying company licensure through its ALERT program. However, State-specific deviations still remain. State enactment of the NCOIL company licensing model will bring greater uniformity to company licensing.
    And, finally, market conduct regulation. As NCOIL past President Terry Park testified in May of this year before the Oversight and Investigations Subcommittee, problems with the current market conduct regulatory system are glaring.Representative Park based his statement on a 4-year study made by the research arm of NCOIL. Those findings of the NCOIL study are consistent with State market conduct regulations found in the recent GAO report on market conduct.
    As Representative Park testified in May, NCOIL planned to begin developing a model law addressing the problems with market conduct. I am happy to report to you that NCOIL will consider a market conduct surveillance model act when it convenes its annual meeting later this month. That model act would provide a statutory framework for market conduct regulation currently not found in most States. Once the model law is adopted by NCOIL, and enacted by the States, market conduct regulations will provide consumers with a greater level of protection than they have today.
    In conclusion, it is no coincidence that over the past 3 years, NCOIL has doubled its efforts to bring about real and measurable improvements to the insurance regulation. State legislators are acutely aware of the forces at work to create an optional Federal charter for insurance companies.
    Our heads are not in the sand. We understand that political and marketplace realities demand that we improve State regulation. We understand that the status quo is not an option. In previous testimony before this subcommittee, NCOIL articulated its unwavering opposition to any encroachment on State insurance regulation. Our position has not changed. NCOIL strongly believes the creation of a new Federal bureaucracy would be unwise and most likely harmful and counterproductive to insurance buyers.
 Page 18       PREV PAGE       TOP OF DOC
    NCOIL welcomes the attention that you, Chairman Oxley, and other members have given to the issue of insurance regulation. There is no question that your focus has expedited the pace of reform.
    I would be happy to answer questions after the panel. Thank you very much, Chairman.
    Chairman BAKER. Thank you very much, Senator. We appreciate your participation here today.
    [The prepared statement of Hon. Neil Breslin can be found on page 61 in the appendix.]
    Chairman BAKER. Our next witness is the Honorable Kemp Hannon, Senator for the State of New York, appearing today on behalf of the National Conference of State Legislatures. Thank you, Senator.
    Mr. HANNON. Thank you very much, Mr. Chairman, members of the subcommittee. Thank you, Mr. Israel, for your kind remarks in introducing me. Thank you for the opportunity to testify on behalf of the NCSL. I have submitted some written remarks and just will make some highlights from there.
    As was said, I am Kemp Hannon. I am a New York State Senator, where in that body I serve as chair of the Health Committee.
    Since 2001 I have served as co-chair of NCSL's Task Force to Streamline and Simplify Insurance Regulation. Currently my co-chair is Representative Frank Martino of Illinois.
    NCSL is a national bipartisan organization. And for the last 3 years we have worked hand in hand with NCOIL and with NAIC to work on a coordinated effort to streamline and simplify insurance regulation while preserving the advantages of the State system. I want to thank all of the members of this subcommittee and the staff for the interest they have had, especially since Graham-Leach-Bliley, in financial services and insurance regulation.
 Page 19       PREV PAGE       TOP OF DOC
    Our position is that we strongly support the State regulation of the business of insurance, because we believe it is a different kind of product, one best suited for State regulation. Whereas banking and securities and mutual funds are about access to capital and risk-taking, insurance is a guarantee, a legal promise to pay benefits if and when someone loses their home, their health, their income, or a loved one.
    For over 150 years, we have effectively protected consumers, ensured that the promises made by insurers are kept, and we think it is a system that is worth preserving. State legislators accept the responsibility for creating a system meeting the challenges of the modern financial marketplace.
    The legislators and Commissioners have developed a shared vision for modernizing insurance regulation. We already have made significant progress in critical areas, and expect to continue widespread reform in the future.
    So for 2 years we have had a Task Force to Streamline and Simplify Insurance Regulation, working with the NAIC and NCOIL, open meetings, sitting, negotiating the proposed model compact for life insurance, annuities, disability and long-term care insurance, having that compact first adopted by NAIC, and then further hearings where we reached out to all interested consumers, parties, Attorney Generals in order to get comments.
    We identified speed-to-market issues as the issues greatest in need of attention. The compact for life insurance, et cetera, came about with a balance, geographical balance, large State/small State balance, in terms of the amount of insurance premium regulated, as well as the geographic balance.
    And the NCSL this summer endorsed a model statute, only the third time in its history endorsing a model statute. And in recognition of the significance of what this Congress has done in passing Graham-Leach-Bliley and starting a new era in regard to financial service regulation, we also endorsed this summer a statement of principles to guide State legislative efforts to modernize property and casualty insurance rate and form requirements, an area where States continue to make significant progress.
 Page 20       PREV PAGE       TOP OF DOC
    State legislators will play an important role in other areas of reform, and we endorse the NAIC's modernization action plan.
    We ourselves, on an ongoing basis, have just established a Financial Services Standing Committee, so that the task force efforts can be continued as well as we can address the other issues raised by GLB.
    We believe that any Federal legislation in the area of insurance regulation would be a tremendous mistake. We believe that the Federal legislation would endanger effective State regulation, undermine consumer protection, and threaten the creation of a vast new costly Federal bureaucracy.
    It also risks introducing a host of unforeseen and unintended consequences. While it is easy to theorize what you would want to do in a model world for new insurance regulation, I think it is far more difficult, if not impossible, to establish and operate one. As chair of the Health Committee in New York, I deal daily with the unforeseen consequences of the 1974 ERISA Act, the first Federal effort in the area of insurance.
    ERISA effectively transferred authority for employer-sponsored benefit plans, the self-insured plans, from the States to the Department of Labor and Federal judiciary. It basically created a nonsystem for dealing with health insurance and gave pretty much the regulation of that nonsystem a bad name. It would be very easy to see how Federal action in the areas of life and property and casualty insurance could bring about similar unforeseen circumstances.
    And under the umbrella of my criticism of Federal regulation, I direct my attention also to the concept known as the optional Federal charter.
    We encourage you to continue on the ongoing dialogue with the States as we work to modernize insurance regulation, while preserving the advantages of the State system. We think that State reform, rather than Federal legislation, offers the best promise for a regulatory system meeting the needs of both consumers and industry in the 21st century.
 Page 21       PREV PAGE       TOP OF DOC
    I thank you very much for your attention and would be very willing to answer any questions you may have.
    Chairman BAKER. Thank you very much, sir.
    [The prepared statement of Hon. Kemp Hannon can be found on page 86 in the appendix.]
    Chairman BAKER. I will start questions with Mr. Breslin. I appreciate the observations you have made with regard to the progress by the organization in setting model reforms in place, and certainly agree that the four targeted areas that the organization has outlined are certainly critical to the reform effort we are attempting to facilitate.
    You also indicated that, at least with regard to the licensing reform, that the Graham-Leach-Bliley trigger did have some operable consequence in obtaining the reforms achieved to date. Give me a reason for or reasons why, if we were to take the view in some period of time, a year, 2 years—and we will negotiate the terms—why we couldn't take the models adopted by the organization, and say that those have to be in place within a time certain.
    From the perspective that Graham-Leach-Bliley mandates triggered necessary reforms at the State level, what is wrong with taking—for example, the Illinois model, which I happen to think is a very good model, your company licensing reform—I understand you are soon to adopt your market conduct regulation reform model—take your work, and, as we often do in politics, make it our own and put a trigger date on it? Respond to it, if you would.
    Mr. BRESLIN. I think that ultimately may be something to be considered. But as you said in your initial remarks, we have kind of compressed 150 years into a couple of years. Graham-Leach-Bliley is 4 years old. So there was an education process after GLBA, and the education process including those States representing over 75 percent of the industry, of complying with the NARAB provisions.
 Page 22       PREV PAGE       TOP OF DOC
    So it worked there. The idea that we—if you told me 5 years ago with market conduct, that we could put together a model bill in several months and interact with the NAIC and NCSL, and interact with the industry, and be prepared to come up with that model act—which we think, because we are now educating the whole industry, that the Federal Government is going to do things unless we do them ourselves.
    So I have a much more optimistic view now than I did when GLBA was passed for us to make our own repairs.
    Chairman BAKER. Well, I am not arguing that the experts at the State level ought not be the contributors to the end product. What I am suggesting is we take the product you have developed and make it the model nationally, with a certain time by which the States can voluntarily implement, at the legislative level, or failing to do so in a certain period of time, ala Graham-Leach-Bliley, the Feds come in and do it for you.
    Mr. Pickens, would you want to respond to that, or give me your observations about the advisability or ill-advisability of that?
    Mr. PICKENS. Yes, sir, sure. I must agree with Senator Breslin. I really believe that the NAIC now has a plan. We are on time. We are on target. It has only been 3 to 4 years since Graham-Leach-Bliley was passed. We were busy passing the privacy protection regulations required by GLBA. We were busy solving the producer licensing issue.
    We have made again a great deal of progress there. But I just don't believe at this point we need to consider a Federal option. There may be some point in the future when we should, all together, get together and talk about that. But at this time we have got a plan. We are on time. We are on target.
    If we can get the NAIC reforms enacted in the States working with our legislative partners here, I think we will be in good shape and we will satisfy the expectations of this subcommittee and the committee in general.
 Page 23       PREV PAGE       TOP OF DOC
    Chairman BAKER. Well, does the NAIC view the NCOIL models as products which are supportable? Are you all together on the direction of reform?
    Mr. PICKENS. That is a good question. I think—we have had a great deal of input, as Senator Breslin mentioned, with NCSL and NCOIL. Our relationship has become very close over the last 3 to 4 years.
    In fact, we—NCOIL allowed us to work with them in passing—I am sorry, in drafting their market conduct model that they expect to vote on in Santa Fe. I think it depends on what model you are talking about, to be honest with you, whether or not the NAIC would fully support implementation of all of those models.
    Obviously we prefer the action plan that we put on the table, and feel like that is what we would like legislators back in the States to help us with.
    Chairman BAKER. Let me take the final piece then, because I am getting to near the end of my time. How long do you think it reasonable for Congress to wait? If I had to ask each of you for a clock, and given the fact that you have slightly different perspectives on what the marketplace ought to look like, marketplace regulation ought to look like at some point, what is that point?
    Do we wait another 2 years? Is it another 20? Can you set your own self-imposed clock? We have the responsibility, I think, to make sure consumers get access to product in a responsible manner with State consumer protections. If we agree on that principle, how do we get there, and how long do we wait on the sideline until we say, look, guys, we have given it our best effort, we need to act?
    Mr. PICKENS. That is an excellent and fair question. We have tried to do that in our action plan. I think if you will take a close look at attachment A, Mr. Chairman, we give you an updated status as of November 2003, number one, what our plan is, and, number two, where we are in achieving the plan.
 Page 24       PREV PAGE       TOP OF DOC
    The plan does set deadlines. For certain deadlines those reach out as far as 2008. That is the farthest deadline in the plan. The closest deadlines are December of this year. And many of the things that we have committed to in this action plan we have already done over the course of the last couple of years.
    Chairman BAKER. I will probably come back on the next round. My time has expired. Mr. Kanjorski.
    Mr. KANJORSKI. I know you all represent a special disposition as to the insurance industry, in terms of its State regulatory authority. Now, as a Commissioner you want to keep authority, and as legislators you like to keep it. But do you see any product or insurance activity that really does warrant national licensing or national enforcement?
    Mr. HANNON. What NAIC, NCSL, and NCOIL have done is proposed a compact so that there would be a national plan to deal with the approval of products for life, long-term care, disability and annuities. The thought on that was there was something especially needed, especially after Graham-Leach-Bliley, so that insurance companies could have a speedy time to market for their products, when they would be competing with products from companies that either had a 30- or 60-day approval or no approval required.
    Now, that does not necessarily mean Federal, but it means national. But we have come up with a compact which would be allowable as an agreement among the States, so that there could be a filing with that compact entity, and once approved by that compact entity, that product could be sold in the participating States to the compact.
    That would be an answer affirmatively to your question, and I believe that is a viable way to go. It preserves the State regulatory authority. It gives them an ability to compete in the marketplace.
    Mr. KANJORSKI. But are you guaranteeing all 50 States will be in compliance with that one standard?
 Page 25       PREV PAGE       TOP OF DOC
    Mr. HANNON. No, but you are not guaranteed anything. In this case——
    Mr. KANJORSKI. Well, if we do it by Federal law, it sure will be.
    Mr. HANNON. Well, even the last Federal law in regard to insurance, as I recall, was HIPAA in 1996. And it still doesn't have 50 States in compliance with that. We still have a couple on the east coast and the west coast that haven't opted in.
    So there are different ways of going about it. I think the best way of lawmaking is to get people to go about participating and buying in, whether it is by a Federal statute, whether it is by a compact, whether it is by mutual State statutes. Unless they buy in, you are going to find yourself with a statute that just is not as effective as it might otherwise could be.
    Mr. KANJORSKI. Wouldn't really a compact operation just be a substitute national legislature? All you are doing is creating another arm out there representing the 50 States in the nature of a compact. Isn't that what the Congress is all about, that we are supposed to be the legislature for all of the States?
    Mr. SERIO. There is a significant difference between the compact notion and a national legislator, or national legislation. And it comes down to this, and this has been proved many times in the use of compacts previously. That has been what we have been trying to do as the three groups here, and that is, take in the local environmental factors that you find in an insurance marketplace, in each of the individual States, and bring that into the policy being made.
    What we are trying to establish here is a baseline, and a baseline that can then be used and has the versatility to deal with the local features, local environmental factors, that are unique to the individual States that cannot be wrapped up in one uniform standard.
 Page 26       PREV PAGE       TOP OF DOC
    Mr. KANJORSKI. Commissioner, you put your hand on the very point that I had a hesitancy as to what to do here. I think there is an absolute need to have community touch in the situation, that it shouldn't be removed completely from the average community.
    But I can tell you that I am starting to get the impression that the States want to maintain jurisdiction and authority over all insurance areas that are easy. You know, just think of what has gone into the Federal responsibility over the years.
    Mr. KANJORSKI. Nuclear destruction insurance, flood insurance, catastrophic insurance, terrorism insurance or reinsurance. And now, if you really look at the California wildfires, we are being called upon in the Federal Government to be a very, very large player, not in necessarily writing the policies, but picking up the cost of the losses, the inadequacies of State regulation, that action in California. At some point we might as well take jurisdiction of the insurance industry because we are in it, and we are in it in a very big way. Unfortunately, the Federal Government and the taxpayers are in insurance where we are not getting adequately compensated through premium payments; we are underwriters, if you will, where no one else will tread to bear. Wouldn't it be better if we had catastrophe insurance or casualty insurance that was national in scope, that they would get together and say, gee, we have got to come up with a policy to handle floods? And how they work that, instead of the Federal Government being an underwriter at a tremendous loss of poor planning, poor organization on the part of States and communities—because they are not bearing the responsibility and yet our constituents are, your constituents.
    Mr. SERIO. I think the easy stuff hasn't been left to the States. And trust us when we say we take on any of the challenges that the insurance marketplace may throw at us. I have had this conversation with Mrs. Kelly and members of the full committee on a number of occasions where it has been the daily challenge of, whether it is the commercial liability marketplace, the market conduct in the life insurance marketplace, that the States have taken on and have taken on aggressively and directly.
 Page 27       PREV PAGE       TOP OF DOC
    The impression that may have left, and I think you characterized it correctly, isn't so much the hard stuff but it is the unique risk. But that risk is not limited to a Federal intervention and, as a result, the consequence being why don't we just simply regulate everything from the Federal level. The examples you described are extremely unique and hopefully very rare in their occurrences. In those cases where flood insurance or where the urban insurance was necessary in years past, it has always been done in a framework where the State or the local regulatory operation was largely in control of the management of that program, whether it was the urban crime insurance or even the flood insurance program, which actually turned out to be largely a market-driven program that the carriers wrote under State regulation, under the overall guidance of the Federal Government, but where there wasn't a lot of Federal intervention even in the flood insurance program. But those are unique instances. And I think if we are looking for anything where the Federal Government said, well, this is a place we really need to step in, maybe the question isn't let us find that item; rather, let us look at what the States have done across the spectrum that—is it really speed to market and auto insurance that you want to be involved in? Is it really market conduct that you want to be involved in? They are both very—well, they are all very local issues when you really come down to their impacts.
    Mr. KANJORSKI. We don't have much choice if States decide to lay down conditions that if you don't have auto insurance written in that State. There are still millions of constituents in that State that say they need that coverage, and they come down here for a remedy.
    As I first described myself in the beginning—I know my time is going, Mr. Chairman—I am a person that sort of, I define myself as a Burkean; I don't change for change's sake, I usually only change when it appears that there is no other opportunity to correct the problem or I know what the results, that they will be more positive.
    When I hear the national organization coming forth with an idea that we are going to have to wait until 2008 for a program to be implemented, I think that is just several years too long and too late. I would suggest to you, and honestly coming from a moderate to conservative person for States rights and other protections here, if we can't get something moved along on the State level within the next year to 18 months, I would suggest we are going to have Federal legislation.
 Page 28       PREV PAGE       TOP OF DOC
    Mr. PICKENS. Mr. Chairman, could I just add something here?
    Chairman BAKER. Certainly.
    Mr. PICKENS. When you talk about the flood insurance program or the crop insurance program or the cap programs that are in place at the Federal level, I think we can all agree that those programs are not without their problems, one of which is they really become where they are not insurance because there is no contingency. We know certain areas are going to flood, we know there will be wildfires periodically, we know a hurricane will hit the coastline periodically. And I would just respectfully submit to all of the committee members here today that if government becomes—it is appropriate for government to become the insurer of last resort in certain places. In other words, if the private market can't handle it, you need a safety net there where the government can step in. But the government should never—I think it is very bad for the government to become the insurer of first resort. And I think if you let them in the door a little bit, they will end up taking it over. And I would ask the committee staff maybe to look at what has happened in Japan with the CAMPO program and other places where the government really is squeezing out the private marketplace because there is never—you never have fair competition between a government entity and private entities; the government will always win.
    Mr. KANJORSKI. If I may just respond, Mr. Chairman.
    That would be on your part a very good argument and I would be very sympathetic to it, except there is something here other than just having fire insurance and writing protection. To a large extent, the States and the localities control, for instance, where people build homes, in flood plains or not flood plains, whether or not they build on sides of mountains that periodically burn, whether they are building buildings and factories on faults. You could be lenient or fail to administer good, smart planning out there. What ultimately ends up is the risk, is an insurable risk that lands in the hands of all the taxpayers for the whole country for generally the irresponsibility of a limited number of taxpayers, and I think that is what is getting us involved.
 Page 29       PREV PAGE       TOP OF DOC
    We would know how to encourage better planning, better social policy in this country if we were aware of the inadequacies of some of the protections that are out there and the losses that will occur because of unintelligent planning on the State or municipal bases.
    Chairman BAKER. I need to go to Mrs. Kelly now, if I might.
    Mrs. Kelly.
    Mrs. KELLY. As you can see, we have some bugs in our systems, too.
    I would be remiss if I didn't first thank you, Senator Hannon, for all you have done for the medical safety of the citizens of New York. I am so delighted that you are here testifying on this topic, but also I just wanted to acknowledge the wonderful work that you have done for all of us in New York with regard to our medical problems and our safety.
    I want to just say that it must be obvious to all of you on this panel that we are somewhat concerned that this process has dragged out as long as it has. When they wrote the NARAB bill, we thought 3 years would be a good time, and we were hoping we would get 29 States. Well, we got lots more than 29; we wound up with over 40 who are now involved. But I think it is also very clear, and this is one of the reasons I am glad to see you New Yorkers here today, New York has joined this program. But we still have a few more to go. We have got to have the big 5 in there. We have got to have Texas and we have got to have Florida and we need California. We need those States in. It has to be a 50-State self-regulatory system. If it is not, it will not succeed.
    So toward that end, I would like to ask you if you feel—and anyone on this panel can answer that—that there might be a need for us to come back with some legislation that looks as though that we expect a full 50-State reciprocity and uniformity in licensing. Anyone of you can answer that.
    Mr. SERIO. To have a 50-State requirement, I think—I guess the bottom line is that I don't think we are going to have to or that the committee or subcommittee is going to have to feel compelled to act. I think—and the action that has been taken already, and frankly getting New York over the hurdle was a very big effort, but it was done without doing any violence to the basic model act. And getting the other big States and the large markets involved, I think we are now on the other side of that hill. And it has been, I know it has been a focus of the committee to focus on the large market share States, and appropriately so. But now with New York and getting the other States involved, I think we are now getting there. But I think the perspective really had to be broadened out a bit to include, what are the other things that we are looking for in terms of benchmarks, producer licensing being one. I don't think we are going to be having that discussion again. But on speed to market and other issues like that, I think a critical element with any of these discussions is, what the other side brings to the table with respect to their contributions to these modernization efforts.
 Page 30       PREV PAGE       TOP OF DOC
    On the producer licensing, the agent community was extremely helpful not only in getting the bill passed in New York but in other States, but in having the legislatures who are asked to pass on this to understand what this really does in the marketplace.
    Now, compare that or contrast that with speed to market. We have been talking to the legislators from the NCOIL and from the NCSL for a long time on speed to market. New York has spent a lot of time as with Pennsylvania, Ohio, former Director Lee Covington very—a major presence in the improvement to State-based systems, yet I cannot get the property casualty industry in New York to go beyond—my numbers are somewhere in the neighborhood of 10 to 12 percent of the filings to be done on a speed to market basis. Can't get them. Don't know why. Tried it, hasn't worked.
    The life insurance industry on the other hand—and it is curious that they would be asking for Federal intervention on speed to market. They are using the New York system for 50 percent of all of their filings right now; yet the property and casualty industry can't get passed 10 percent in terms of their products being filed on a speed to market basis. I think what will happen, we will be back before this subcommittee, but it is going to be a question of who has brought what to the table and how have they executed on that. That has been part of the process. When we talk about 2008, we are talking about this being done, but it really is a constant work in progress. It is a process non-event, as my predecessor liked to say. And the fact of the matter is that we may be talking about speed to market, we may be talking about market conduct, but it has to be in context of what all the various parties are bringing to the table. Because right now some of those modernizations are done, and speed to market has largely been accomplished except for the fact of the buy-in, whether it is to serve the individual States' speed to market systems or any other process, and the leveraging of technology that I think the government side has done extraordinarily well. When government has a past reputation of being stingy on technology, it actually—this modernization has actually been driven through the leveraging of technology from the government side where our customers in the industry are trying to figure out how can they match that leveraging so that they can get into these modernization systems that we have already been.
 Page 31       PREV PAGE       TOP OF DOC
    Mrs. KELLY. Mr. Pickens, you wanted to say something?
    Mr. PICKENS. Yes, ma'am. I just wanted to place the comment Superintendent Serio made in a national context.
    What Greg is talking about is our system for electronic write and form filing, a nationwide filing system. 50 States and the District of Columbia and Puerto Rico are on board with this.
    Last month, or as of last month we had accepted nationwide nearly 45,000 forms; we expect 75,000 forms through that nationwide filing system by the end of December. The average turnaround time on those filings is 17 days. 17 days. That is speed to market. And on the producer licensing side, we have a technological initiative called NIPR, NIPR, the National Insurance Producers Registry. Anybody can participate in that, companies can appoint their agents, they can terminate their agents, they can do everything they need to do. They can file forms electronically, do the whole shooting match. And one thing that is holding us up there is that we don't have access with the big States, Mrs. Kelly. One of the things that is holding us up is the fact that we don't have access to the FBI fingerprint database, and New York and California and Florida and other States really believe that we need that access so that we make sure we are not licensing felons out in the State.
    So H.R. 1408 was on the table a couple of years ago. I am not sure where it is in the process now, but that is one thing Congress could affirmatively do to help us, is give us access to that fingerprint database, and I think you would see 100 speed to market for—or not speed to market, but producer licensing ASAP.
    Mrs. KELLY. Anybody else want to address that?
    Thank you very much.
    Chairman BAKER. Thank you, Mrs. Kelly.
    Mr. Pickens, just for the record, to make sure, you referred me to your addendum in your testimony, which is the compact. And the 2008 deadline you referred to, does that include uniformity with regard to property and casualty? Or is the 2008 date only the life insurance piece?
 Page 32       PREV PAGE       TOP OF DOC
    Mr. PICKENS. Yes, sir. That is only the piece by which we have committed to get the compact passed in 30 States, or States comprising 60 percent of the premium volume for the products involving the compact.
    Chairman BAKER. But that is life insurance?
    Mr. PICKENS. Yes, sir. That is life insurance.
    Chairman BAKER. Mr. Kanjorski departed before we got that piece of news. I think he was thinking it was 2008 to do the whole thing. So I just want to make the record clear.
    Mr. Lucas.
    Mr. LUCAS OF KENTUCKY. Thank you, Mr. Chairman.
    One of the things that has been brought to my attention recently is that we have some States where insurance companies have pulled out because their auto insurance—because the State set the rates and they quit writing automobile insurance. But they also, if they couldn't write auto insurance, they couldn't—there are other lines they couldn't, life, health, and other things, they were not allowed to sell those.
    It seems to me that, you know, we have such as sophisticated society population today, people get on the Internet and they check out air fares, hotel rates, and they obviously would do that on the insurance as well. Why would we not let competition set rates versus the States and politicians setting the rates? Who wants to answer that?
    Mr. PICKENS. I will be happy to take a shot at it.
    Representative, you are singing our song at the NAIC. We are a pro-competitive marketplace. The key is there. In order for rates to be a prime or to be self-regulating, you have to have a competitive marketplace. And at times you can have certain market conditions arise where you don't have a competitive marketplace in individual locales. Arkansas' homeowners market, even throughout a very hard market the last 4 to 5 years has been highly competitive, remains highly competitive. But some States have had trouble in that regard.
 Page 33       PREV PAGE       TOP OF DOC
    So that is another area where you really need that local touch, that local control that Representative Kanjorski was talking about, because one size does not fit all when it comes to auto rates. What goes into the price of an automobile insurance product has happened in Massachusetts and New Jersey, and I commend the committee for throwing the spotlight on the market problems that were caused really by too much State governmental interference into the private marketplace.
    So we are all for a balance, looking at just the right amount of government intervention into the private market, but we agree with you that prices can and should be self-regulating in a competitive market.
    Mr. SERIO. Let me add to that, if I may. I think your characterization about the auto market and the way the regulators kind of approached it in terms of threatening to stop someone's homeowner writings if they want to get out of auto, things like that. The Northeast was the poster child for that philosophy for a long time. And I think as Commissioner Pickens said, Massachusetts, New Jersey, and New York included, and some other States in the Northeast used to adhere to that philosophy pretty ardently and they used to use that as their leverage when companies decided they weren't making money in the auto insurance business.
    Now, in New York we had a very successful competitive rating or quasi-competitive rating called flex rating in our market which allowed rates to go up or down. But the one cautionary note I would say about any competitive rating system, and in fact any company would have to come before this subcommittee and acknowledge this. Sometimes the marketplace gets overheated and it gets too competitive and they start charging rates they can't sustain over the long term. A lot of the rate increases you saw in the markets that were not being allowed, and as a consequence of it being that companies were leaving certain States, was the result of overheated competition where the rates went too far down, they could not sustain the type of risks that they were taking on for those rates.
 Page 34       PREV PAGE       TOP OF DOC
    If you balance that out—and we are all for competitive rating of automobile insurance and using the competitive market pressures to their best and highest use. You just have to be careful that to allow a completely open and competitive market without some responsibility on the other side where they don't drill it down to a rate inadequacy situation and suddenly the regulator, whether a State regulator or a Federal regulator, is being asked the question the following year: I need a 30 percent rate increase. It is an untenable situation to put any regulator in if that is now the price of admission for a company to stay in that marketplace, because those kinds of rate swings don't do you any good, don't do us any good, and certainly don't do our constituents any good. So you need to balance that out.
    But competitive rating, we have had great success in the Northeast by having a competitive or quasi-competitive rating system that has worked for the benefit of the consumers.
    Mr. LUCAS OF KENTUCKY. Thank you.
    Mr. PICKENS. May I add something very quickly? The competitive rating model that the chairman referred to allows for the market to set rates when it is competitive, but it also takes care of the problem that Mr. Serio talked about, because it says the regulator still has to monitor the rates to make sure that they are not excessive, too high, inadequate, too low, or unfairly discriminatory against similar risks. And this is the Illinois model, Mr. Emanuel. It is a very successful model, and if we could get that enacted across the entire country our rating problems would be taken care of, I believe.
    Mr. LUCAS OF KENTUCKY. Thank you.
    Chairman BAKER. Thank you, Mr. Lucas. I just want to jump in right there and say I think we could do that.
    Mr. LUCAS OF KENTUCKY. Okay. Going to a little different subject, the banking system has a dual system where banks can have a State or Federal charter. That looks like a great business model for insurance companies. What is wrong with having an optional—let us don't call it a Federal charter, let us call it a national charter, if that Federal bothers somebody. Who would like to take a whack at that? If the business model suits you better as a company, you go to the Federal.
 Page 35       PREV PAGE       TOP OF DOC
    Mr. HANNON. May I take a whack at that, Representative?
    Mr. HANNON. A couple different things in regard to a, quote, optional national charter. First of all, it is not totally optional because the Federal Government isn't an equal partner. You have, rightfully so, the power of preemption for your statutes so that when you come in you totally exclude. So it is really not an option.
    The second, as we have watched the optional charter for banks, we have watched the virtual disappearance of State chartered banks compared to what they were 20 years ago. The charters, it has been very attractive. The regulatory scheme has been made by the Office of the Controller of the Currency very attractive for banks to opt for the national charter; consequently, we do not have many left at the State.
    If you are going to go to a national charter, you might as well say, wait a minute, we want that as a proposal. Veiling it with the thought of it being optional I think is just masking what really is the intent.
    Mr. LUCAS OF KENTUCKY. Somebody correct me if I am wrong. I thought we had a lot more State chartered banks than Federal nationwide.
    Mr. HANNON. I used compared to 20 years ago, where most of the major banks have now moved to Federal charter. And coming from New York, believe me, we have seen a lot of our banks opt for Federal charter.
    Mr. LUCAS OF KENTUCKY. That could be in New York, but I think there is 70 percent State charters versus about 30 percent national charters.
    My time is probably up, but I would like to discuss this further with the next panel.
    Chairman BAKER. Thank you, Mr. Lucas.
    Mr. Shays.
 Page 36       PREV PAGE       TOP OF DOC
    Mr. SHAYS. Thank you, Mr. Chairman. Thank you for your interest in this issue.
    I am going through thinking as we try to compete on an international basis, the EU is trying to find ways to have uniformity, and we are asking our corporations to compete in 50 marketplaces and then compete with the rest of the world. I am having a hard time understanding why it is in our best interests, the United States, to wait until 2009, 6 years from now and 9 years after this process began, to try to bring some uniformity to it on the State level. And I want someone to give me their best argument. Why should we wait until 2009?
    Mr. PICKENS. Mr. Shays, I will start with a very practical argument. If you passed an optional Federal charter bill tomorrow, it would take the Federal Government a long, long time to get up to speed. I would venture to say probably, if not 2008, beyond 2008 to regulate 3.5 million insurance agents, producers out there and the 5,000 or so companies, many of whom don't even do business in every State. In fact, I will defer to Mr. Serio on those numbers in just a second. But that is a very practical reason. The Federal Government could not get up and running that quickly on such a complex issue as insurance.
    The second practical reason is the insurance industry is entirely divided over what an optional Federal charter looks like. Three of the four P&C trades are in favor of State regulation. The sole property and casualty trade that is in favor of Federal regulation can't agree with the life and health industry what a Federal charter bill looks like, and the life and health industry is divided somewhat. Life and health is more aligned with bankers, but then you have got all these other divisions out there. So the primary interest groups and the consumer groups—I must throw them in there, Mr. Hunter, others that you have heard from—they have a totally different idea about what the Federal regulator should look like. So I just don't think as a practical matter, number one, you could do it from a technical standpoint, number two, from a political standpoint you could get everybody on the same page.
 Page 37       PREV PAGE       TOP OF DOC
    Mr. SHAYS. Anybody else?
    Mr. SERIO. Thank you. Let me just jump in with this observation. I suppose that this always just becomes the grass is always greener on the other side type of observation. Judging from my experience as the chairman of the Holocaust Task Force for the NAIC, and having interacted with a number of European companies who have had to navigate through their own multi-leveled regulatory systems in Europe, not just the EU but the individual countries and the individual States within those countries all regulate certain portions of the insurance business over there as well. So while there may be a unified EU market, when you drill down to some of those local companies and some of that local impact, they are dealing with a lot of the same issues that we are dealing with here.
    Number two, when you have almost half of all the companies that are licensed in the U.S. operating in a single State, that State suddenly becomes more important as a focal point for those companies in terms of a regulatory objective.
    Mr. SHAYS. But the EU is working to come find more common ground in uniformity. I am having a hard time understanding why I would want my American businesses to have to compete and have different rules and regulations and, you know, so many different entities. I honestly don't see the logic of why I want to do that.
    Mr. SERIO. The second observation on this was that as the EU tries to sort through their own regulatory constructs, that is happening at the EU level, in the U.K. With the FSA and in Japan and in other major countries, are all sorting through what their regulatory structure should look like and we are all talking to one another.
    So going back to your original question of why should we wait that long, is it really prudent to wait that long, it is happening right now. And I think what you are going to find is a certain amount of synergy between the EU's ultimate construct and the U.K.'s ultimate construct and the U.S.'s ultimate construct, between the uniformity that we can achieve on a nationalized or a federalized basis while retaining the jurisdiction at the local level, so that half of the companies that just write in a single State can continue to operate on a State regulatory structure.
 Page 38       PREV PAGE       TOP OF DOC
    One of the challenging questions—and this goes back, I think, to the Chair's question originally—what is it that the Federal Government should be focused on then? You know, is it speed to market, is it global reinsurance, or something in between that really is the proper venue or proper subject for the Federal venue? And that is still an open question. And so it may not be so much a question of will there ever be or not be Federal regulation or Federal policy with respect to insurance, but it is really other things we are talking about today, talking about the day in and day out business of regulating insurance that we have done at the State level that the individual countries of the EU have done on their levels and in their own States over the years. What we are really talking about is another set of issues: How do we deal with international trade and international reinsurance as opposed to speed to market products and agent licensing?
    Mr. SHAYS. Thank you.
    I would just close, Mr. Chairman, by saying I find the answers of both of you helpful and certainly giving me a perspective. But I have a tough hurdle, and that is I don't want my American businesses to have to compete so much within the United States, to have so many different rules and regulations, and then have to compete worldwide. And so we need to find a solution to that, and this appears to be the best but with some limits, and it may in fact take longer than I would like. And I thank you both.
    Chairman BAKER. I thank the gentleman.
    Mr. Emanuel.
    Mr. EMANUEL. Thank you, and I would like to thank the Chairman for holding this hearing.
    The whole concept of going to a national or optional Federal charter, and using Illinois, which I think is a good competitive system as a model, I want to make sure that we are not actually deregulating in the process.
 Page 39       PREV PAGE       TOP OF DOC
    Because when you get down to it, looking today at what has happened after the repeal of Glass-Steagall and what's occurring in the commercial banking area, you have really got three major banks that are lending and they are holding corporations over the head here in a way that nobody previously envisioned. So, I want to be sure that if we end up legislating rules, we aren't really just national deregulating under the rubric of modernization. It is what some mean by modernization that worries me. And if we do address national charter issues, in my view we have to include, property and casualty, not just life insurance.
    So, we need to avoid deregulation in the name of modernization, and any solution must strongly consider the interests of consumers and ''mom and pop'' insurance firms.
    Mr. PICKENS. Mr. Emanuel, that is an excellent question. It is one that we have struggled with——
    It is one that we have struggled with at the NAIC, frankly. You have got some sectors of the industry that I think many of us believe their ultimate goal is total deregulation, and that is something that causes Commissioners concern. Then you have got other sectors of interested parties. For example, the consumer groups. Mr. Hunter I know has testified here before. He wants something totally different than deregulation; he wants something on the other far extreme, which is total regulation and strict price controls at the Federal level and things of that nature. And I think many of us are concerned that both of those things would be bad.
    What you are looking for is something like the chairman talked about, I believe, competitive rating in the marketplace. In my State we have a competitive rating law, as Illinois does. It works well. I promise you if every State in the country could have as competitive an insurance marketplace as Illinois has, every consumer in the country would be much better off, and you all are not deregulated.
    Mr. EMANUEL. In Illinois, we have a number of insurance companies competing in the marketplace. How do we do that at the national level, so we don't end up like the situation in commercial banking, where only three major banks are really doing the lending? How do you find the combination that unlocks the marketplace so you get competition without——
 Page 40       PREV PAGE       TOP OF DOC
    Mr. PICKENS. Yes, sir. A quick comment, and then I will defer. I don't think you do. I think you are exactly right. That is what could happen. And it could be worse, I think, in the insurance industry. Insurance is a different business than banking in many, many ways. And I think if you end up with three or four companies, what you end up with is what we had prior to the passage of McCarran-Ferguson in the 1940s, where you had large insurance trusts that were effectively setting rates and violating antitrust laws, and that is why you ended up with State regulation that you have now.
    Mr. BRESLIN. I think, too, your statement was essentially the reason that we sit here and talk about State regulation, because one size doesn't fit all, and it is what has happened in Illinois because of the competitive structures there, the companies that are there, it has fit well. But translate that to another State under the same set of circumstances, and you could have what you don't want, one or two companies controlling the marketplace.
    Mr. EMANUEL. The only thing I will say again is the observation that about 10 or 15 years ago on this subject all those who are now calling for a national charter of some capacity all wanted only state regulation. And sometimes I feel in these hearings lately, on this and a number of other subjects, it is like an out of body experience, because everybody that used to be for States are now for national standards, and everybody who used to be for national standards is now for State rules. So I am properly confused.
    Thank you very much for being here.
    Chairman BAKER. Thank you, Mr. Emanuel.
    Mr. Bachus.
    Mr. BACHUS. I thank you, Mr. Chairman.
    Let me—I will do like some of the other members and start out just with a statement.
 Page 41       PREV PAGE       TOP OF DOC
    I see an optional Federal charter is almost undoable from a practical and a political standpoint. I guess it is helpful to continue to discuss it. And I am not making any judgments as to what we ought to do, but I think as opposed to that, a much more practical approach is to identify some areas where we can have Federal uniform standards similar to what we have done on other legislation. And whether we pick those off, maybe speed to market, but I am not sure that we can do more than one at a time even, you know, market conduct, examinations licensing, and gradually take that approach.
    But to me—and I read Mr. Fitts' testimony from Progressive on the second panel, and I would like—I mean, at least my impression is the same as his impression, that the idea of going to dual charter or creating a Federal insurance commission and assimilating all this is more than this Congress with other issues facing us is going to want to do. And from a State standpoint, I think that as a realistic matter it is just not something that is a burning issue.
    Having said that, I am going to switch gears totally and just ask, Mr. Pickens, ask you about something quite different. Up here we have certain issues that people sometimes try to characterize as a trade issue. And one of those in the reinsurance business is your foreign reinsurers have argued to the U.S. Trade Representatives they weren't successful, that the collateral requirements that they had to put up, that that was a trade issue and not a solvency issue. And my concern is that I think it is definitely a solvency issue, and that they should have to—I know right now 100 percent collateral or either a State license.
    And I would just like your comments on that. And I know that at this time the U.S. Trade Representative has ruled against Prudential, and which I think obviously is a correct ruling. But would you like to comment on that?
    Mr. PICKENS. Sure, Mr. Bachus. I would be happy to. And first I commend you on really knowing about a fairly esoteric issue. You almost sound like an insurance regulator, and I mean that as a compliment, not a criticism.
 Page 42       PREV PAGE       TOP OF DOC
    Mr. BACHUS. A State or Federal insurance regulator?
    Mr. PICKENS. No. State. State all the way, sir. But that is an important issue to us. It may be esoteric, but it is important. And what the Europeans are asking in essence is that they be allowed to create a special list that would have—I mean, it would be based supposedly on reinsurers that had the strongest financial stability, and they want to be able then to give Commissioners in the States the discretion to say, okay, Mister European Reinsurer, you don't have to have 100 percent collateral, you can have less than that.
    There are some problems with that that we are working through at the NAIC even though we are under a lot of pressure from the Europeans to make a decision quickly, and we have resisted that because we think it would be wrong to do so.
    Number one, this is a solvency issue primarily; it is not a trade issue. Could it impact trade and have ramifications? Ultimately, it could, but it is certainly more a consumer protection and solvency issue than it is a trade issue.
    Number two, the three significant concerns we really have are, number one, the lack of international accounting standards. It is difficult to look at the balance sheet on this side of the ocean and compare it with that side of the ocean and determine the financial stability of a European reinsurer. We also have a problem in many European countries with enforcing United States' judgments against European reinsurers in those foreign courts. We get a judgment in a U.S. court, take it to some jurisdictions, you can't get it enforced. And the biggest concern really we have, Mr. Bachus, is A.M. Best and other rating agencies already have told the regulators that this will result in a greatly increased credit risk for our American insurance companies and American reinsurers, all of whom, by the way, are opposed. This is one thing they all agree on, they are opposed to reducing the collateral requirements right now. They think—the rating agencies say if we increase the credit risk that they will have to downgrade some of these insurers probably. At least that is something that would be taken into consideration.
 Page 43       PREV PAGE       TOP OF DOC
    So it is a major concern for us, and we can't make a decision prematurely. We really need to look at all these issues.
    Mr. BACHUS. Thank you.
    I thank the Chairman.
    Mr. BRESLIN. I might also add, Congressman, that that has been—many of the issues that Commissioner Pickens discussed we have been discussing on an ongoing basis at NCOIL. And it isn't an either/or issue; as Mike Pickens said, it is one country might be very good in enforcing judgments and another might be a country that will never enforce a judgment of the accounting standards of the company. And it is just one that although we can pick out—we could all sit here and pick out a company in a country where it should be different, but it can't be an either/or situation.
    Mr. BACHUS. I thank you.
    Chairman BAKER. Thank you, Mr. Bachus.
    Mr. Scott?
    Mr. SCOTT. Thank you very much, Mr. Chairman.
    While I agree that there are problems with the current regulatory system, I must say that, to each of you dealing at the State level, that there is one area in which I believe that the States have done an excellent job, and that is in consumer protection. I think at the end of the day that, to me, is the number one top priority.
    State insurance Commissioners have done an excellent job in insuring that disputed claims are paid to policyholders. I worry that a distant regulator here in Washington, a Federal regulator here would not be as sensitive to consumers' needs as would a State or local insurance Commissioner. I have a fear that a Federal regulator who is dependent on the fees that carriers pay into the system would be more sensitive to the needs of the carriers than they would be to the consumers. Similar to the OCC, I could see an insurance regulator taking the side of companies over the consumers.
 Page 44       PREV PAGE       TOP OF DOC
    While I say all of that, this problem still remains: Largely as a result of September 11th, our tax cross-sector competition, increased loss costs, dwindling investments have indeed put the insurance companies in a bind. Issues still remain, albeit the protections that you give at the State level, which I support. But these issues still remain of the concerns of the insurance companies, because clearly the consumer wouldn't—there would be no need for the protections if the insurance companies weren't there to provide the products and the services and the coverage.
    But how do we modernize the insurance regulation? How do we secure your State-based reform? And the fundamental question: How do we increase the efficiency and uniformity of regulation and market conduct and oversight product approval and all of those things with 50 different States?
    That is the sort of the bind that I am in here. While you do an extraordinary job of consumer protection, we still have these other issues of uniformity and regulatory efficiency that calls for us taking a look at this Federal regulator. How do you address those other concerns that would keep us away from the Federal regulator?
    Mr. BRESLIN. I think we would first of all say that we are working on those concerns, producer licensing, speed to market, market conduct. And I think you are correct. We were chatting before that in our offices in the States, and we frequently ask this question, what kinds of calls do we get from our constituents—because we represent people in local areas—our constituents about problems with their insurance, whether it be homeowners or life, renter's insurance, car insurance. We don't get the calls, which is evidence that they are okay and they are being treated well, and that the insurance department in our State, represented by Superintendent Serio, does a great job. I don't think the Federal Government would be able do that kind of a job. And we are working on the other side to make sure that we satisfy the needs of the insurers.
 Page 45       PREV PAGE       TOP OF DOC
    Mr. PICKENS. Mr. Scott, in Georgia you really do have a very active consumer protector in Commissioner John Oxendine. We all know John, and he works with us.
    Mr. SCOTT. Let John know I spoke highly of him and I called his name.
    Mr. PICKENS. I will do that.
    Mr. SCOTT. Because he is doing an extraordinary job. And as you can imagine, we did have a conversation beforehand. But I really think you are doing a great job on protecting.
    You do not think that, to answer these other things on uniformity of efficiency and those things that we are asking for the Federal regulator to take a look at, that consumer protections would go down with the Federal regulator?
    Mr. PICKENS. I think there is a danger they could go down if it was not handled correctly, and that is what we have been struggling with at the NAIC, and exactly how the chairman framed the committee hearing today, and that is that it is important to have strong consumer protection but you also have to facilitate business development and commerce in the marketplace. And I agree that the two notions are not mutually exclusive, and I believe all our members agree.
    And just to answer your question though, Mr. Scott, I would point to the document that is attachment A. We have got a plan. This is our plan. We believe this plan takes care of consumers and also takes care of the legitimate concerns that the industry has raised.
    Mr. SCOTT. What plan is that?
    Mr. PICKENS. This is our reinforced commitment regulatory modernization action plan, attachment A. And it goes through all the five or six primary areas that I mentioned in my opening remarks and lets you know exactly what we are doing, what our deadlines are, where we are in accomplishing those deadlines. And, again, I would go back, Mr. Chairman. We appreciate the oversight, the attention you all are giving us, we appreciate the pressure. I think it is a positive thing; you have heard me say that before.
 Page 46       PREV PAGE       TOP OF DOC
    But one thing you could really help us with is putting some pressure on the industry to come play ball. We have built this surf stadium. Everybody hasn't come to play in it yet. We have got the National Insurance Producer Registry. Everybody is not willing to play. I wonder why that is. Maybe it is because they think they can get a better deal somewhere else. But if you help us hold their feet to the fire, I think we can make progress even quicker than we have made it so far.
    Mr. SCOTT. Can you give us some examples of how you feel consumer protections would go down if we went to the Federal regulator?
    Mr. PICKENS. Sure. For example, and all of our States have laws that say you have to have certain provisions in an insurance policy. We have got a law in my State that says you can't cancel or non-renew somebody based solely upon the occurrence of a natural catastrophe or natural event like a tornado or hurricane. We passed that because we had a series of tornadoes sweep from the southwest part of the State through the central part of the State all the way up to the Northeast, and the next thing we knew we had insurance companies saying, hey, it is time to cancel these policies. They pay that claim, and then the next thing the consumer got was a non-renewal notice. That is an individual problem we had in my little State that our legislature had to address. And if we had a Federal regulator, I don't think they would have been as attentive to passing a law like that that deals with such a specific concern. That is a legitimate concern. This law doesn't hurt the companies, they can operate just fine with it. But now they have to find legitimate reasons to cancel or non-renew a policyholder rather than just saying, sorry, you had a big claim we had to pay and now we are going to cancel you. So I think that is a concrete example.
    Mr. SCOTT. Do you think timeliness is another, the timing of the responses?
    Chairman BAKER. And that will be the gentleman's last question, his time has expired. But please respond.
 Page 47       PREV PAGE       TOP OF DOC
    Mr. PICKENS. Yes, sir, I do. I think it is very important. And we all have laws, prompt payment laws with health insurance that relate to all lines of insurance that say a company has to pay claims within a certain period of time. And also the regulators are there to help work out any differences between the consumer and the insurance company, which I think is—you can't put a dollar value on that, which I think—that is that personal touch again.
    Mr. SERIO. If I could finish a comment on this. There is almost a good analogy on this, and it actually would go back to Mr. Kanjorski's question earlier, and that analogy is how we respond to disasters or after a disaster, the FEMA and local emergency managers, how they coordinate. We don't leave it to FEMA to do the work on the ground even though the Federal Government provides a lot of the money in the aftermath of a disaster. But the way that the emergency structure is set up, it is still left to the local emergency manager down to the local government or State government to really deal with those local issues. And that is what we do, and we do that best. And we are able to understand what the implications are, whether big disasters or small, big issues or small issues. But to get down to that localized level and having it closer to Main Street really gives an added value to the local constituents. And it really is that same kind of a setup where, just because the Federal Government does provide the resources, it is still left to serve the locals with the local managers, whether they are insurance Commissioners or emergency managers or any other type of analogy like that. And that has worked very well, and I think we are suggesting the same thing.
    Mr. SCOTT. Thank you.
    Thank you for extending my time, Mr. Chairman.
    Chairman BAKER. Yes, sir, Mr. Scott.
    Mr. Miller.
    Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman.
 Page 48       PREV PAGE       TOP OF DOC
    To begin with, I want to say I don't support government getting in the insurance business. I don't think we should do that. I don't believe in total deregulation. But a lot of what I am going to say, you are probably not going to agree with. My favorite committee when I was in the State legislature years ago was the Insurance Company Committee, and 10 years ago I would never have thought a Federal charter was something that was needed. But I have somewhat changed my mind watching the way things have gone. Some of the comments arguing against that is, well, you could see a decline of State charters. Like banks, that could be true, but that doesn't make it bad. That just could be a reality.
    One other comment was, well, it would probably take a long time to develop regulations for a Federal charter, and it is going to take some time, but NAIC has set up uniformed agent licensing regulations nationwide every year for 132 years, and it still hasn't happened. So I think we can beat that time frame right off the bat. I think that is something that is doable.
    Another thing that I caught, we were talking about changing the system and the words we used, if we can get a reform—if we can get the reforms enacted by the States. But the operative word that stands out is ''if.'' and that just doesn't seem to happen, because herding State legislators is like herding cats. I mean, to get all these different States going in the same direction is very, very difficult. And insurance companies just have this incredible patchwork of regulatory filings and approvals, and that really impacts the bottom line in the services and its cost based on delays, because equally important, it dictates the pace of developing new products. And that is something I think we need to be very, very careful of.
    Even efforts to regulate uniformity consistently failed. I have not seen anything that makes me believe that if we don't have an optional Federal charter—and I say optional, because nobody is mandated to do it. But more than 3 years ago NAIC unveiled—you called it a new modernization effort designed to improve State insurance regulations. But even then it wasn't new, because you have been talking about that same process since 1871, and the effort has yet really to prove to be successful. And I am not trying to be critical. Please don't take it that way. But I did read all your paperwork, and I have been looking at this issue very seriously for the last probably 4 or 5 years and I think it is time that we look at an optional Federal charter, because, Mr. Chairman, I don't think we really have much of an option but to do that.
 Page 49       PREV PAGE       TOP OF DOC
    By your own account, NAIC does not believe you can fully implement a compact—I read here on interstate compact attempts—until January 2009, and then there was a qualifier, at earliest. And that is your paperwork, not my paperwork. I think we can do a Federal charter by then, an optional Federal charter. I really do.
    Chairman BAKER. Will your gentleman yield for one moment, just to make the observation. I had to go back and clarify, but that is with regard to life only. That doesn't include the broader insurance industry.
    Mr. MILLER OF CALIFORNIA. So we are going to really get farther out, the time. I was giving them the benefit of the doubt there. We are getting farther out when we consider everything that is not even being considered right now.
    Chairman BAKER. I just wanted to be helpful.
    Mr. MILLER OF CALIFORNIA. Well, Mr. Chairman, I would really like to sit down and—we talked about this before. And I am from California, and I watch some of these States—and I am not trying to impugn the States, because everybody has the right to do what they want to. But they call them consumer friendly bills. And all it does is attempt to regulate the insurance industry, which is fine. But understand, any time you place a mandate on business, that cost is passed on to consumers. And some States for some reason don't realize that when they continually mandate that insurance companies must provide more and more and more and more and more, the people are going to have to pay for it, because you cannot mandate that businesses lose money. They are not going to do it. They are going to leave the marketplace. I mean State Farm Insurance almost pulled—they aren't writing any new policies in California, and they have about 20 percent of the policies.
    This is a very serious issue. And I applaud all of you, because you have a real tough job. I mean, it is a nightmare. I can't imagine doing what you are trying to do and you have to do. But even when you come up with a concept that you believe will work, you have got to hope everybody agrees. And if they don't, there is really not much that can be done about it. At least with an optional Federal charter we can do something about it. And if we are wrong, if it is not good, people are not going to use companies that are using the optional Federal charters; they will use the companies that are a State charter. If the State charters can provide a better service, better rates, and the consumers are happier, they are going to stick with that. But if some of us are right and an optional Federal charter can come in with a program and they can do it quickly and rapidly and they can come in with new procedures and new programs that benefit consumers rapidly, instead of spending 18 months, 2 years as they try to implement throughout the States—if that proves to be right, consumers are going to benefit, and if it is not right consumers will continue with the State charter.
 Page 50       PREV PAGE       TOP OF DOC
    So it doesn't eliminate options, and the part I am having difficulty understanding is what is wrong with creating another option? If competition is usually proved to be good, those who compete the best and provide the best tend to succeed. And years ago the Japanese auto industry proved that to our industry. You know, Chrysler and Ford and GM all took it for granted that everybody is going to buy American, and they created junk, and nobody bought it. And then when they had to compete, they created a product that people wanted.
    Well, I think we are trying to create competition here, and you are kind of hamstrung in many fashions because you are asking States to do what you think is good and they can just turn their back and decide to do what they want to do and you really don't have any teeth.
    So I am not trying to criticize you, I applaud you. I think you are trying to do the right thing. But I just think, you know, like in the time when they talked about optional Federal charters for banks, I am sure there is a lot of people saying, oh, it is a bad idea. I think it proved to be a pretty good idea, and yet there are still State banks out there operating today that can compete if they want to. And, yes, there has probably been a decline because you have seen Federal charters do a pretty good job.
    And with that, Mr. Chairman, I thank you.
    Mr. LUCAS OF KENTUCKY. Mr. Chairman.
    Chairman BAKER. Mr. Lucas.
    Mr. LUCAS OF KENTUCKY. I may be out of order, but I would like to completely associate with my colleague from California. I agree with everything you say, Mr. Miller.
    Mr. MILLER. Lord love you. Thank you.
    Chairman BAKER. Pass the collection plate.
    Mr. Sherman.
 Page 51       PREV PAGE       TOP OF DOC
    Mr. SHERMAN. Ken, you don't know him like I know him.
    Mr. HANNON. Mr. Chairman, can I make a comment?
    Chairman BAKER. Certainly, Senator.
    Mr. HANNON. You, both you and Representative Miller have rightfully referred to some comments in the NAIC testimony apparently about 2009. Having been part of the leadership of trying to get this compact together—and believe me, herding cats would have been easier—I do think that this committee needs to take note of the major achievement in doing that and the fact that it was only really adopted this summer. And legislatures have not been in session since then, so they have not even had a chance to have the bills introduced much less entertain them for action. It would be like someone asking you on December 1 why aren't you acting on the 2004 budget? It is not the right time yet. So I think there is a need to recognize that.
    Second, NCSL has not put any deadline of 2009. We are looking to try to get immediate action and try to get people to address these issues. I would hope that we might—you have taken great leadership in these issues. I hope we might enlist you in that because of getting this adopted. There is a need. There is a need if you keep talking about other options, of people will say those other options are more viable and the compact is not. I believe this compact offers some major good governmental policy. And so I just wanted to say, A, 2009 is not the NCSL number; and, second, we could use your help.
    Chairman BAKER. And just a brief response, Mr. Miller. I would say that we are not in any way belittling the compact effort. We are appreciative of progress in any form or direction.
    Mr. MILLER OF CALIFORNIA. Mr. Chairman, if you would allow me. I in no way intended to impugn anybody's effort. I think you are doing a wonderful job. I want to make that very, very clear.
 Page 52       PREV PAGE       TOP OF DOC
    Chairman BAKER. I think you did, sir. And all we are suggesting, I believe, is that whatever the deadline might be today in the agreed-upon, discussed, internal view of the various organizations, there is—and by way of record, Mr. Emanuel referred to our second hearing this year. We have had 11 in the last 3 years. We have been pretty busy on the topic. And it is symptomatic of members' interest to have some material progress demonstrated that affects rates at the consumer level. And whatever that time constraint is, that is really one of the issues that I raised at the outset is how long is enough time to get an appropriate response. I think Mr. Kanjorski's view in learning of the date of the compact was a bit surprised, and I think Mr. Miller's view basically is that it may be too long. And we are trying to be helpful here in saying that we can understand the clock is running and progress has been made, but we are trying to help speed it up a bit, is really the point.
    And I am sorry, Mr. Sherman. You are recognized.
    Mr. SHERMAN. Thank you. Mr. Chairman, my own experience is shaped by the Northridge earthquakes, since I represent Northridge. Some of you will remember that some of our consumers were not paid, that our State regulator found it unnecessary to impose fines on those insurance companies that made voluntary contributions to his foundation, when this led to that foundation putting on all these God awful commercials with this guy's face on them telling us that he believed in consumer protection and then his unceremonious departure from State government. This illustrates a few things. First, that you need regulation. Second, that State regulation doesn't always work all that well. It also illustrates the fact that whether it is tornadoes in Arkansas or earthquakes in California, when it comes to property and casualty there is a special sensitivity to different types of natural disasters, and that any regulator in Washington would have to be imbued with that sensitivity or defer to the States involved, although I guess we ought to have good tornado insurance provisions and rules in California notwithstanding the absence of any tornadoes.
 Page 53       PREV PAGE       TOP OF DOC
    Mr. Bachus brought up the idea that maybe we could have a Federal role take place in one area of insurance or another rather than try to do the whole package, and I am trying to understand what the different pieces might be that could be dealt with more or less separately.
    It occurs to me that you have got the chartering of an insurance company which invariably involves dechartering them if they abuse consumers. You have got rating the solvency of that insurance company, which plugs again into their charter. You have got approval of different products, and life and annuity being the area where you have the least local input. That is to say, we have earthquakes, you have tornadoes, but, you know, we have got heart attacks in both States. But you have got product approval, and then finally you have got agent regulation.
    Are there other pieces in this puzzle that I haven't identified? Perhaps the Commissioner from Arkansas could tell me if I have left something out.
    Mr. PICKENS. No, I think you have identified practically all of them, and I would refer you to our modernization plan that I think in great detail sets out our plan in great detail and, again, addresses each and every one of the points.
    Mr. SHERMAN. Now, as far as agent regulation, I don't detect any push to have the Federal Government take that over, but I am less involved in this—I guess I am not supposed to ask the Chairman questions—but is there much effort here in our subcommittee to get involved in agent regulation, or is it more the company——
    Mr. OSE. If the gentleman would yield, I think the principal thing is as much uniformity on all fronts as is practicable. Many agents now do so multi-state, and the more flexibility we provide—the traditional Republican response, the less bureaucracy we can have, the better.
    Mr. SHERMAN. So that is an issue we need to look at. Is there general agreement that the life and annuity area is the area where there has been the most problems or disadvantages of having to go to each of the 50 States to get approval every time somebody comes up with some nifty new product to allow investors to avoid income taxes by investing in insurance?
 Page 54       PREV PAGE       TOP OF DOC
    Mr. PICKENS. To directly answer your question on that point, the pressure I guess from our own State insurance regulators from the industry is primarily aimed at the life insurance product approval process.
    Mr. SHERMAN. That includes the annuity process?
    Mr. PICKENS. Yes, sir.
    Mr. SHERMAN. I might add, annuity should be called life insurance and life insurance should be called death insurance, but I never took a marketing course.
    Mr. PICKENS. And the wait there. And the other issue is producer licensing, speed to market and producer licensing, and I would add a third——
    Mr. SHERMAN. Producer licensing, is that agent——
    Mr. PICKENS. Yes, sir, same thing. That includes agents, brokers and all involved, producers.
    And then market conduct reform where we monitor and take action where necessary, the relationship between the insured and the insurer, and this goes back a little bit to your question, but you mentioned what I would characterize as kind of the politization of insurance in California from time to time. I mean, you have had some diametrically opposed theories of regulation in California, you really have. You have got Prop 103 that, you know, is at least a model that some of the nationwide consumer representatives like Mr. Hunter point to as being the model. I respectfully disagree with him on that point, because it wouldn't work in my State. But what would you have if you had a Federal regulator? The politics involved in insurance aren't going away, because, you know, we all need health insurance, we all need life insurance, we need our auto insurance and homeowners. Folks are still going to be mad if their rates go up. They are still going to want to call somebody and get those problems taken care of. And I think you risk further politicizing the insurance business, which I think is a bad thing. I think that is a bad thing. I think you need to take politics out of regulation as much as you can.
 Page 55       PREV PAGE       TOP OF DOC
    Mr. SHERMAN. On the other hand, the idea of 50 different—doing a job 50 different times. Of course, there is not a lot of efficiency here in Congress where each of 435 offices does the same thing, but the idea that the same product needs to go through 50 different processes, as part of government that drives me crazy.
    Mr. PICKENS. We agree with you. It shouldn't have to do that.
    Mr. SHERMAN. And I was not here earlier, but I gather that the idea of this compact, should all the cats be herded, is to go through just one process for approving product or——
    Mr. PICKENS. Yes, sir. We have got a single point of filing up and running right now, SERFF, System for Electronic Rate and Form Filing. Companies can file electronically. The average turnaround time right now through SERFF is 17 days, and we estimate 75,000 filings coming through that process this year.
    That is currently available to——
    Mr. SHERMAN. So we could just have hearings and pound the table and not ever do anything, and then inspire you folks to get your act together and be of great service.
    Mr. OSE. And that is the gentleman's last question. His time is expired, too.
    Mr. PICKENS. It has proven to be helpful, as the Chairman pointed out, yes, sir.
    Mr. OSE. So you are doing good work, Mr. Sherman.
    Mr. Inslee.
    Mr. INSLEE. Thank you. You probably are pretty fortunate to be here this week when we had a demonstration of one of the most feckless regulatory performances in Federal Government history from the SEC. So you have come at the right time to talk about this issue. You are a bit fortuitous.
 Page 56       PREV PAGE       TOP OF DOC
    Our experience in Washington—we have got a great Commissioner, Mike is doing some great work. He has done great work on trying to protect consumers from predatory single-premium credit insurance, and it has really been rapacious in some circumstances. So we are kind of jealous of protecting that.
    But I want to ask you as far as this effort, what should be the first goal of trying to have a more nationally uniform system? And what is the most difficult one to achieve that and still maintain State charter? That is a broad question.
    Mr. SERIO. I suppose the goal is to come up with a system—and I think we have—that allows for uniformity across the States, like I think we have had based upon an agreement as to what that baseline should be and then allowing where a company wants to go into a particular jurisdiction and operate in that market, give them the most expedient way to operate in that marketplace where that marketplace may have some unique rules.
    What has been the concern—and I will let the industry speak for itself—hasn't so much been that there is not uniformity, but there is not even a baseline in most cases between—from one State to the next to the next for those that operate on a multi-state platform. But creating that baseline, creating that foundation of uniformity across the spectrum, and then going to the legislators and to the unique needs of New York or Washington or any other State, making it as effortless as possible for a company to operate within that market, where they clearly know what those specific rules are, not wide and varying deviations but those things that are just unique to that environment, giving them a pathway to do it in the most expeditious manner.
    And that is the thing we have been focusing on in New York between leveraging technology, making it easy, transparency of process so that the companies know that they are not going to get questions at the end of the day, the so-called desk drawer rules or unwritten rules of regulation, and all the things that they used to complain about with respect to State regulation.
 Page 57       PREV PAGE       TOP OF DOC
    One of the curiosities in this entire discussion, both today and in the previous proceedings, has been that the things they complain about today have nothing—are different, and completely different than what they complained about 5 years ago. They complain about unwritten rules, desk drawer rules, 5 years ago and how they can't understand what is required of them in an individual State. So we lay it out, put it on our Web site, tell them follow these rules and you will get a product. And to this day, we cannot get the companies to follow those rules and get a product. They will not follow the rules that we lay out for them, that we will not deviate from, and that has been part of the frustration for us.
    But I think the baseline, creating that uniform system of getting to product approval, getting to producer licensing, I think is the first step, and then we can go and talk about the individual and unique needs of the individual States.
    Mr. INSLEE. What do you think, from what many in the industry would want to achieve, is the most difficult to do without a Federal charter?
    Mr. SERIO. I think the most difficult thing to do without a Federal charter is—from their perspective—I think is that they want a rule to apply to all jurisdictions. And that is the challenge that I think comes back both to the subcommittee and to the committee and to the Congress as a whole: How do you change the rules? Do you do it by a matter of process where you simply say, okay, they can have a Federal license? Or do you have to affirmatively change the rules that they are currently operating under?
    One of the challenges for us has been to work through the differences between the major markets. Florida, California, New York, Texas, Illinois have been the biggest market shares in the country, and we also happen to have among the strongest and most stringent rules with respect to this.
    They would say, well, we want to get away from that, and then I think the biggest challenge would be how does the Congress then say the rule is going to be something less than they are already in the major markets where they are operating, and I think that is what they are asking for.
 Page 58       PREV PAGE       TOP OF DOC
    Mr. INSLEE. Thank you.
    Mr. OSE. I thank the gentleman.
    Mr. Royce, do you have questions?
    Mr. ROYCE. Yes. Thank you, Mr. Chairman.
    I wanted to ask Commissioner Pickens, first of all, in your opening remarks you mentioned that we should ask our constituents what they think about the Federal regulation of insurance, and I think that is a good idea. I frequently talk to constituents in my district, and they are concerned, because many of them have a very difficult time getting new homeowners policies because of excessive regulation in California, and major insurance companies just can't do business there right now. And I would ask, what is your solution for that regulatory problem in California?
    Mr. PICKENS. Good question, Mr. Royce. Tell you what; California is a different market than the Arkansas market. I think that is one thing to point out. And it is difficult for me to sit here and say what would work in California just because it works in my State, because you all have particular problems that we don't; and, again, I think that points to one of the strengths of State regulation.
    Californians to date, I mean, California passed Proposition 103. It was passed by a majority of the consumers out there, and from my standpoint—again, I know there are others, in our organization probably, and I know Mr. Germandi would disagree with this, but I think Prop 103 has resulted in a distortion of that marketplace, and that is a lot of the problem that was—but that is what people wanted at that level, and I just don't know how—if you passed a Federal law that is going to make Californians more happy.
    Mr. ROYCE. Well, let me ask another question of our panel of witnesses here, and that goes to another aspect of this, and that is the fact that in business, firms like to have as much certainty for returns as possible before they go through the process of investing in new products. And in the current regulatory structure, why would insurance companies want to allocate capital to develop new products and then go through the process of hiring more salespeople or spend money on marketing if they can't sell those products on a national scale? It seems to me that is fundamental.
 Page 59       PREV PAGE       TOP OF DOC
    We are asking insurance companies to wait until 2009 for an interstate compact. However, they still do not have any guarantees that if they show that kind of patience they are going to be rewarded in 6 years with the ability to go through and market on that.
    And so how is this process helpful for purchasers of insurance products, given the time line?
    Mr. PICKENS. You mean the——
    Mr. HANNON. If I could answer it, having done just from the NCSL standpoint, the compact, we did not put any impediment towards that compact being adopted sooner. We would hope it would. We recognize, especially when it comes to annuities—now that the market for annuities is recovering after a lull of 2 years, we would recognize that people need to have all of the elements that you rightfully outlined of certainty and being able to calculate their rate of return on investment, et cetera.
    If you have a compact with a central filing, an ability to file at one place in product approval, then once gain that approval, sell in any of the States that are part of the compact, we feel it would be quicker than any other mechanism that could be adopted.
    Someone estimated that just based I guess on their watching the States, it could be as late as 2009. That is not a view I share. I think that with an appropriate presentation, with the fact that the NAIC, in order to give people a sense of what the compact would be like, has established a working committee to come up with proposed rules, suggested rules, so people can take a look at it and not just buy a compact per se, but buy a fully fleshed out entity, something like that could be implemented much sooner.
    Mr. ROYCE. Any other observations?
    Mr. SERIO. Mr. Royce, you asked a great question, and I think you hit the nail on the head. That is really what we are faced with, whether we are talking about homeowners insurance or New York commercial liability after 9/11 or earthquake insurance or anything else.
 Page 60       PREV PAGE       TOP OF DOC
    You pretty much have summed it up like this. This is a question of how are they going to invest their assets, commit their assets to a particular State, when each of those States have differing challenges.
    Part of the problem has been that a lot of insurance regulation had been built upon what you call rate regulation rather than cost regulation. We have said many times over, rate will follow the cost. You keep the costs of insurance down and the costs of the risks down, the rate will follow. But for many years that had always been rate regulation that we are going to keep the rates artificially low. Companies say I can't get enough of return, my capital costs too much, so I can't possibly operate in your jurisdiction.
    I think we have gotten away from that. We have talked about competitive rating systems. So long as we keep an eye on the costs, unreasonable rules that increase the costs of insurance or the costs of covering those risks really is where the focal point should be.
    As you have said, if you keep those costs under control, the capital will come in, because the companies are always trying to figure out where are they going to invest their assets next. We have a rule in New York pertaining to construction that is—that most companies won't even get into, because it is an absolute liability-type of standard. I am not saying yea or nay on that issue itself, but the answer we got from the companies was how could I possibly commit scarce capital to an absolute liability line of insurance?
    It is a fair question. It has nothing to do with speed to market. It has nothing to do with producer licensing, but goes down to the very essence of whether a company can and will want to operate, whether it is in my State or any other State.
    And that is what this really comes down to. If we make it competitive and profitable within reason for them, they will come in and they will operate in New York or any other State. And that is really the bottom line to this.
    Mr. OSE. The gentleman's time has expired.
 Page 61       PREV PAGE       TOP OF DOC
    Mr. ROYCE. Thank you, Mr. Chairman.
    Mr. OSE. Thank you, Mr. Royce.
    Gentlemen, we do appreciate your participation in the hearing today. It has been most helpful. Our message is still pretty clear. I know we are making progress, but hurry up. Thank you very much.
    I would like to ask our second panel to come up, and while you are coming to the witness table, make sort of an unfortunate advisory. I have been given notice by those managing the process on the floor that we can expect a series of votes probably beginning shortly after 5 o'clock that will be of some duration.
    My request is—I know this flies in the face of fairness, having taken so long with the first panel—is that to the extent practicable, that if you can minimize your statement to a goal of perhaps 3 minutes as opposed to the traditional 5, we can get through everyone's testimony and actually proceed with committee questioning before we are interrupted.
    It would be my intent that when the votes are finally announced, that the committee would conclude its work, because we are likely to be on the floor for about an hour, and I would not want to withhold each of you from your important business for an hour waiting on us to come back.
    So with that advisory in mind, let me welcome Mr. John T. Fitts, Deputy General Counsel, Progressive Insurance Company.
    Also state that everyone's written testimony, of course, will be made part of the record. And please proceed at your leisure.
    Mr. FITTS. Thank you, Mr. Chairman, members of the committee. In light of the circumstances, I will certainly try to be brief and direct you to my written testimony which I think certainly lays out the essence of our position.
 Page 62       PREV PAGE       TOP OF DOC
    I talk to you from the perspective of a national group of companies that writes automobile insurance in 48 States. We are collectively the third largest writer of automobile insurance. We support the need for regulatory reform. Our concerns today primarily relate to the cost of the variance in State-by-State regulation, our ability to get product to market on a timely basis and adequately priced, and making the market conduct and financial examination processes more efficient.
    If I can leave you with one thought, it is this: that insurance companies spend millions and millions of dollars dealing with regulatory and compliance issues, and most of that money is spent dealing with the variance that we find in State-to-State regulation. And so for national companies like Progressive, the notion of uniformity and consistency is absolutely appealing.
    So this leads us to the question of can the State regulatory system deliver a uniform national regulatory policy that will help us cut costs out of our system and that will help us hold down the price of our product?
    And much as we are supportive of State regulation and believe that it has a vital role to play in things like solvency and consumer protection, believe that it has value in being close to the marketplace and being able to help to address the periodic stresses that come upon our industry, we have great reservations about the ability of the State regulatory system to deliver consistency and uniformity on a 50-State basis. And primarily that arises from many of the comments that have been made earlier; that in the end, the NAIC or NCOIL or NESL can recommend positions to States, but they really do not have the power to force States to adopt them.
    And so we, like other companies, think about whether there are Federal solutions to this issue. We are not a proponent of optional Federal chartering, nor are we a proponent of federalizing the insurance marketplace, but we do see real opportunity in the use of Federal standards, which would preempt the field, not a floor but a floor and a ceiling both, which would be interpreted by the Federal courts, which would preserve the benefits of State regulation but at the same time provide the uniformity and consistency which I think will benefit consumers and will benefit our industry.
 Page 63       PREV PAGE       TOP OF DOC
    We are concerned that if we continue down the current path and the NAIC and the States are not successful, in 2 or 3 years there may be no stopping an optional Federal charter. It may be the only thing that—there may be consensus among at least the larger companies, the national companies and the regional companies, that this is the only approach that will really work. So we would encourage Congress to consider optional Federal standards.
    In our testimony we raise agent and company licensing or producer and company licensing, market conduct and speed to market. I think that is a quick rendition of my testimony, and I will respond to questions later if you have any.
    Mr. OSE. Thank you very much for your courtesy, sir.
    [The prepared statement of John T. Fitts can be found on page 79 in the appendix.]
    Mr. OSE. Mr. Jaxon A. White, Chairman and CEO, Medmarc Insurance Company Group. Welcome, sir.
    Mr. WHITE. Good afternoon, Chairman Baker and members of the subcommittee. I am the Chairman and CEO of the Medmarc Insurance Group. This is a position I have held for the last 19 years. We are a small insurance company, 60 employees. We will have about $75 million in written premium this year.
    My objective in the following comments is designed to educate and inform about the lack of uniformity among State regulatory mechanisms and how that really impacts a small property and casualty insurance company.
    I would like to make some quick points about company licensing, rate and form filing and market conduct, because in my view the inconsistency of regulatory requirements from State to State is more than a distraction. It is a competitive barrier that disadvantages small insurers much more than large insurers.
 Page 64       PREV PAGE       TOP OF DOC
    We entered business in 1979 by partnering with a large insurer in numerous States. That large insurer issued the policies and they dealt with the regulatory compliance matters. For our part, we supplied that large insurer with underwriting and rating decisions. This is sometimes referred to in the industry as a ''fronting'' relationship.
    That business relationship was far from ideal, but it was expedient, and it was necessary in view of the company licensing laws that existed in 1979 and are largely unchanged today.
    Now, that is a perilous business situation, because we are a mutual insurance company, and we were wholly dependent on that large insurer for the benefit of their State licenses and their willingness to continue in business with us on a year-to-year basis. To become a completely independent company, we had to obtain our own licenses in all 50 States and the District of Columbia.
    When we looked at the situation in 1993, it became so obvious to us that the State insurance company licensing system was a de facto barrier to small property and casualty insurers, and we needed a nationwide business opportunity, because our policyholders, both current and prospective, are found in all 50 States.
    We were looking at a 5-year process to get licensed in all States. So we made a very important business decision. We decided that the only option for us at that point was to purchase an insurance company shell. We spent $3.6 million for the purchase of that shell, and that consumed about 10 percent of our net worth in 1995. That was necessary because we had to get into the marketplace on a national basis, and we understood from the very beginning that we have no disagreement with State company licensing laws. It is just a matter of are they consistently applied for large and small insurers alike.
    Subsequent to purchase of that company, we found that we had difficulties in filing rates and forms. We use a form of coverage known as claims-made. Many insurance departments don't like that form of coverage. So we have had to manage to come up with several different variations on that. That makes our pricing, rating decisions difficult. It also impacts our profit planning.
 Page 65       PREV PAGE       TOP OF DOC
    In order to get around that issue, that is, to provide our policyholders where we find them in all 50 States with an option to buy coverage from us, we purchased another shell insurance company, in this case a surplus lines insurance company, which is then allowed in all States to have rates and forms without formal filing approvals. The purchase price there was $3.5 million. So now we are up to $7 million over about a 5-year period in order to acquire a national platform. Again, I don't quarrel against State sovereignty in insurance company licensing and in rate and form filing, but we sell a very unique commercial casualty product, and our policyholders are sued in all 50 States, but yet we have to deal with company licensing in all 50 States as well as rate and form. There is an inconsistency there.
    Finally, I would stress on the market conduct area, we have found that there are enormous inconsistencies in market conduct. Large States and small States can be quite different in the way they approach the issue, and our concern here is that perhaps there might be one area—and we are proponents of Federal standards—I can't describe them for you, and I am sure members of the company cannot enunciate them right now, but it may well be that Federal standards could help us with one principal area to start with, market conduct or perhaps with insurance company licensing.
    That is a very quick summary of some written testimony that I have supplied to the committee, and I would be happy to respond to your questions.
    Mr. OSE. Thank you very much, Mr. White.
    [The prepared statement of Jaxon A. White can be found on page 159 in the appendix.]
    Mr. OSE. Mr. William B. Fisher, Vice President and Associate General Counsel, Massachusetts Mutual Life Insurance Company. Welcome, Mr. Fisher.
 Page 66       PREV PAGE       TOP OF DOC
    Mr. FISHER. Thank you, Mr. Chairman and members of the subcommittee. I offer my testimony today from the perspective of one of the largest life insurers in the country marketing national products on a nationwide basis.
    Modernization of insurance regulation is one of the most critical issues facing both Mass Mutual and the entire life insurance industry. Increasingly, we compete with competitors who operate under far more efficient regulatory systems. The inefficiency and the lack of uniformity permeates virtually all aspects of insurance regulation, with the most pressing concerns being the issues discussed earlier.
    Our customers ultimately bear the cost of inefficient regulation. When we are not able to offer the latest and least expensive version of a product because a State has not approved it, our customers lose. Inefficiency also translates into lost opportunities and duplicative effort.
    For 2002 alone, we estimate that we lost up to $60 million in sales as measured by premium, due to our inability to bring products to market in a timely manner. Due to differing State requirements and interpretations, it is common for us to have anywhere from 30 to 40 versions of a given product in the States.
    Further, in the past 5 years, Mass Mutual has undergone 14 separate State market conduct examinations, which is 13 too many.
    Mass Mutual commends the State regulators and legislators for their very good-faith commitment and dedication of extensive effort toward regulatory modernization, as evidenced by the original NAIC statement of intent in March of 2002 and their more recently released action plan.
    The action plan sets forth a very ambitious agenda to modernize State insurance regulation. Given the basic nature of a 50-State regulatory system, however, we doubt the ability of the States to accomplish the comprehensive uniformity and regulatory efficiency that is sorely needed.
 Page 67       PREV PAGE       TOP OF DOC
    In our 50-State system where each State is responsible for protecting its residents, there will undoubtedly continue to be differences among the States on how best to accomplish that job, thereby undermining the unprecedented collaboration in home State deference called for in the action plan.
    The action plan also calls for enactment of legislation in the States, which introduces yet another level of political complexity. On what is perhaps our most pressing issue, inefficient and disparate regulation of product, the action plan falls far short of the mark, with a goal of only having 30 States by year-end 2008.
    Mass Mutual supports congressional enactment of optional Federal charter legislation for insurers. This legislation will provide strong consumer protection by establishment of requirements as strong as those found in the States, including adoption of continued regulation of life insurance products. Optional Federal charter also represents the most immediate and best means of accomplishing comprehensive uniformity and efficiency, since it calls for a single regulator and a single set of standards for Federally chartered carriers.
    Finally, an optional Federal charter will provide the needed Federal insurance regulatory presence in Washington that again was discussed earlier.
    I appreciate this opportunity to testify before you.
    Mr. OSE. Thank you very much, Mr. Fisher.
    [The prepared statement of William B. Fisher can be found on page 68 in the appendix.]
    Mr. OSE. Next witness is Mr. Tom Ahart, President, Ahart, Frinzi & Smith Insurance Agency. Welcome, sir.
    Mr. AHART. Thank you very much. I would first like to say that Ron Tubertini was supposed to testify originally as an agent from Mississippi. I am a good friend, have worked with him with the testimony. Unfortunately he couldn't get out of Mississippi on his flight today. They were all canceled. So I was called and drove down from New Jersey because I worked with Ronnie on this. So the testimony we submitted would be my testimony as well, and I will give a summary on that right now.
 Page 68       PREV PAGE       TOP OF DOC
    I am President of an insurance agency in New Jersey. I am currently licensed in seven States, and I think in all of the testimonies that I have heard today and in other days, there has really been agreement that there have been a couple major problems in the current regulation—State regulation. And number one would be the licensing issues; number two, the speed-to-market issues. And we would agree with that—with everyone else that there are major problems right now that need to be addressed.
    I think when I look at the ways they can be handled, I hear people say we could continue to be State regulated or we should shift completely to some kind of Federal regulation or optional Federal charter, and I would like to talk about both of those for a minute and then give my own ideas of the different way.
    First, on maintaining State regulation, I have been—always been a big proponent of State regulation, mainly with consumer issues. I think being an agent gives us a pretty good perspective to talk about these things. I work with insurance companies all the time. I know the problems that they get into, the problems that it causes us. I know the problems that as agents we have from day to day, and I know our consumer problems and what they complain about.
    So I think we have a pretty good perspective, being down in the trenches, of exactly what is happening out in the marketplace. And I would say that I have worked very closely with the NAIC, and I would commend them on their new action plan. However, on one side as I commend them, you know, I think they are trying—and I think in the last 5 years especially, they have made big improvements as to where they have come in being able to get some things done; but the fact of the matter is that things like producer licensing, for instance, they—even though they might have 41 States currently complied with Gramm-Leech-Bliley, that doesn't help me with the other 9 States and it also doesn't help me that on paper they are complied with, but yet when I try to get a license it doesn't work quite as easily as they have said.
    So uniformity and reciprocity has been a problem, and my problem with some of these issues being solved at the NAIC level is that they really don't have the power to make all the States comply, so they really can't guarantee uniformity. And I think, for example, it is an issue that needs to be done anymore with changes in the global marketplace, increases in technology. I have a lot of insureds that all of a sudden, instead of just having a business in New Jersey, they have a sales office in Georgia or in Maryland or in Massachusetts or Arizona or wherever it might be, and that is not unusual anymore to have that. And as soon as that happens, I have to be licensed in every one of those States in order to get them the proper coverage for those offices. And what I found is it is not nearly as easy as people say. In the last 6 months, as a matter of fact, we have had to be licensed in three additional States.
 Page 69       PREV PAGE       TOP OF DOC
    One State, I can say it worked great. They used the national database. We filled out a form on the Internet, and within 2 weeks we got our nonresidence license. Another State, it took 6 months and was just constant paperwork, constantly sending stuff back to us, and our insureds were upset because we couldn't help them. I had to make them get a different agent in a different State which they didn't like.
    So there clearly are problems. I don't see how the NAIC, no matter what kind of plan they came up with, can change that if they can't mandate all their States to act.
    As far as Federal regulation goes, my problem with that is that it is complete overkill. In all the issues I have heard, it mainly is involved with licensing. It is mainly involved with speed-to-market issues. And the problem—and we can correct those problems in other ways without changing the whole State regulation system. And, you know, it has been mentioned that consumer protection is a great big plus for State regulation. Well, why would we go to something that is completely unknown in order to change that?
    So Federal regulation it will be—I have worked for 20 years as an independent agent and have been very involved in the association, the Independent Insurance Agents and Brokers of America, and they have come up with a proposal that I think is a middle-ground, pragmatic approach which allows us to keep State regulation and all the good things that they do; and in those issues that can't be helped by State regulation, like speed-to-market licensing, we use Federal legislation, not regulation, but Federal legislation to pass laws that would actually create standards that States would have to comply with, not minimum standards.
    I mean, some people misconstrue, I think, what the bill is about, but it would be actual standards that States would have to comply with and it would create uniformity and reciprocity. And that could be handled as issues come up on an as-needed basis and not create all the problems with having a new Federal bureaucracy that has things that is completely unknown.
    So from our—from my proposal, I would just say that, you know, I believe in State regulation; but in those areas where it didn't work, we should use Federal legislation and preempt State laws.
 Page 70       PREV PAGE       TOP OF DOC
    Mr. OSE. Thank you, Mr. Ahart.
    [The prepared statement of Ronnie Tubertini who was represented by Tom Ahart can be found on page 148 in the appendix.]
    Mr. BAKER. Our next witness is Mr. Neal S. Wolin, Executive Vice President and General Counsel for the Hartford. Welcome, sir.
    Mr. WOLIN. Mr. Chairman, thank you very much. Members of the subcommittee, it is a great pleasure to have been asked to provide some views on how Congress might reform insurance regulation.
    As you know, insurance has become a multibillion-dollar industry, and it is our view that the present structure of regulation adds unnecessary costs to insurance products and restricts our ability to meet consumer preferences.
    There are really three areas that seem most critical—most critically in need of modernization: forms, rates and solvency.
    With respect to forms, insurance companies must file forms for each of the product lines for which they seek to operate and in each of those jurisdictions in which they seek to operate. And for us as a national carrier, that means filing forms in each of the 50 States and the District of Columbia. And each of those jurisdictions have different standards for form approval.
    For us, for example, on the property and casualty side we file 5,500 forms a year, and on the life side another 2,500 forms. This elaborate process is an enormous burden on us and on the rest of our industry, but most importantly, we think has negative effects on our ability to serve consumers.
    First of all, consumers ultimately pay the cost of our compliance with this regulatory burden. In addition, the complexity of the process interferes with our ability to bring new and better products to market.
 Page 71       PREV PAGE       TOP OF DOC
    With respect to rates, the insurance industry is marked by robust competition, competition which we think should and can establish prices at the most consumer-friendly levels. Government price controls often distort the connection between risk and price and often ultimately hurt the consumer or lead insurers to withdraw from the market. Our view is that price controls should be used as a regulatory tool only as a last resort and only after market-based efforts have failed.
    With respect to capital adequacy, addressing rate and form concerns obviously doesn't mean ending all regulation. Strict solvency regulation is also needed to protect consumers from underpricing by companies willing to collect premiums now and avoid paying claims later by declaring bankruptcy. When States force companies to remain in markets and sell products at artificially low prices, companies flounder, State guarantee funds are forced to pick up the pieces and pass on costs to consumers, taxpayers and, more specifically, to insurance policyholders.
    Nearly 20 years ago, Mr. Chairman, a predecessor of this committee investigated the ability of State regulators to perform the twin missions of company solvency and consumer protection. The subsequent report and hearings produced headlines on deficiencies in both areas.
    Since then, the NAIC and many active individual Commissioners have strived in good faith to improve consistency, quality, efficiency and speed. Notwithstanding their good faith, however, the actual reforms have been too slow in coming. In fact, the NAIC's new action plan adopted less than 2 months ago echoes many of the initiatives announced and pursued over the past two decades. The plan strives for greater standardization and speed, but leaves the State structure and its multiplicity of rules still in place.
    At this committee's initiative, the GAO recently studied efforts of the States and the NAIC to streamline and modernize market conduct. The GAO study cautioned that it was uncertain not only when, but even whether the NAIC and the States could accomplish this goal. We share that concern and believe that any plan which lacks uniformity and consistency will not produce the modernization necessary for our consumers.
 Page 72       PREV PAGE       TOP OF DOC
    The Hartford believes that the solution that best provides value to consumers and the economy overall is one that grants national insurers the level of Federal oversight offered to other large financial institutions. We believe that Congress should develop legislation permitting companies the option to be chartered and regulated at the Federal level. Policyholders, claimants, and taxpayers will all be well served by regulation that is standardized, efficient, and time sensitive.
    And the key word here is optional, Mr. Chairman. If some State, regional, or national insurers believe that their customers in the marketplace will be better served by State regulation, they should have that choice.
    Thank you again for the opportunity to appear today, and I would be delighted to answer any questions.
    Mr. BAKER. Thank you very much, sir.
    [The prepared statement of Neal S. Wolin can be found on page 164 in the appendix.]
    Mr. OSE. The next participant is Mr. Markham McKnight, President, Wright and Percy Insurance, but, more importantly, my constituent. Welcome, Mr. McKnight. Good to see you, sir. Hope you are happy and things are well.
    Mr. MCKNIGHT. Things are well. It is good to see you as well. Thank you.
    Thank you, Mr. Chairman, for this opportunity and for your hard work on these issues. I am President of Wright and Percy Insurance in Baton Rouge. We are one of the largest insurance brokerage firms in Louisiana, providing an array of products to corporate individual customers.
 Page 73       PREV PAGE       TOP OF DOC
    Earlier this year my firm was purchased by BancorpSouth, a large financial institution based in Mississippi which currently operates insurance agencies in three States. This marriage is a reflection of the huge consolidation and convergence of the financial services industry, not only nationally but internationally as well, particularly on the insurance agency brokerage side.
    Today, more than 80 percent of all business insurance premiums placed in the country are brokered by 250 firms. There was a time when those in my ranks fought bank insurance affiliations, but as a result of the reforms that Congress created through Gramm-Leach-Bliley, today we are finding we have a more competitive and a fair marketplace for the sale of financial products.
    I want to associate my remarks with Mr. Fisher and Mr. Wolin with respect to urging you to look toward the dual banking regulatory option as a model for treatment of the insurance industry. While no system is perfect, it is clear to almost everyone in the banking industry that their system has created a healthy competition among regulators and has enabled banks to operate across jurisdictions and introduce products in a far more streamlined way than our insurance system. And I don't believe there is any evidence to suggest that 90-some-odd regional offices of the OCC are any less responsive to consumers than the 50 State-chartered regulators.
    I believe that it is critical to the long-term viability of the insurance industry that Congress pass legislation creating the optional charter. There is also a more immediate need, though, for forms that can't wait for the resolution of the Federal charter debate.
    NARAB is an excellent template for Federal intervention and has had very good results. For decades NAIC has attempted to streamline the agent-broker licensing system with only modest achievements, results that were frankly outstripped by the pace of interstate and international convergence.
 Page 74       PREV PAGE       TOP OF DOC
    The NARAB provisions gave the States 3 years to create licensing reciprocity and threatened a national license clearinghouse if they failed to do so. Many States responded positively to the threat of NARAB, and today the majority of the States have passed the model producer licensing statute, New York being the latest. Yet the NAIC's testimony here today does not even mention NARAB as the reason for these advances.
    Additionally, a Federal court has recently ruled that the countersignature laws, one of the last vestiges of protectionism in the States, are unconstitutional.
    The task on agent-broker licensing reform is unfinished, and we think that the goal should be 50-State reciprocity or uniformity. Nine States, including two of the largest, do not have reciprocity. Additionally, NARAB only addresses individual licensing and not agency licensing. We would encourage you to take the next step to that end, and we don't think this goal can possibly be met without Federal intervention.
    There are some other problems that deserve immediate attention that could also be stepping stones to the path towards the optional charter. Some studies have shown that it can take as much as 2 years for a new product to be approved for sale on a nationwide basis. Banking and security firms by contrast can get a new product into the national marketplace in 30 days or less.
    Congress should address these problems by establishing some sort of NARAB-like incentives to encourage States to bring their speed-to-market initiatives into harmony.
    In conclusion, I strongly agree with your statements that Congress needs to consider short-term and long-term solutions. With need State-based reforms. We need continued Federal oversight and pressure to reach uniformity in State laws, and we need you to continue laying the foundation for an optional Federal charter.
    I urge this subcommittee to begin work now on those reforms that are easily attainable in the short term, such as further producer licensing reforms, speed to market, and increased access to alternative markets as well as the long-term reforms that may require fuller examination and debate before enactment. Thank you.
 Page 75       PREV PAGE       TOP OF DOC
    Mr. OSE. Thank you very much, Mr. McKnight.
    [The prepared statement of Markham McKnight can be found on page 99 in the appendix.]
    Mr. OSE. Thank all of you. That was a stellar performance to give those six statements in that record time. For what it is worth among the members still here, that scores a few points.
    Let me start with what I consider to be obvious low-hanging opportunities for some improvement. If we are to assume that a new Federal building on K Street filled with employees may take a while, it seems that NAIC and their compact and NCOIL with its models have, at least at the national professional level, adopted some platform of enhancements which experts in the field agree are responsible. Their difficulty is they cannot unilaterally impose those recommendations on their membership, and they are then reliant on State legislatures to act in accordance with those practical recommendations.
    If we were to take the models of NCOIL, the elements of the compact, put it together in a sack and give a clock by which those improvements must be considered adopted at the State level to establish basically uniformity without a national charter consideration, is that a significant enough improvement from the various perspectives at the desk to warrant the effort to do that? And I will make the obvious caveat. There are some who feel that if we act at all, that then the inertia to move further goes away for a while.
    Other members can speak to that, but from my perspective, I think this is going to be a continual ongoing effort for some years to come. I don't think we can get a bill done in a short period of time that is a universal solution. I do believe we can get to a universal solution, but I think we have to demonstrate that the elements that many proponents of the national charter indicate can be validated by taking progressive steps.
    Now, whoever wants to jump in, please do. Yes, sir.
 Page 76       PREV PAGE       TOP OF DOC
    Mr. WOLIN. Mr. Chairman, it is, clearly, from our perspective, not and all-or-nothing question. We have been working with the NAIC and will continue to do so on reforms.
    I think that the goals that you have mentioned, the compact and other things, are certainly laudable goals, and if implemented as expressed would be meaningfully better than the current circumstance.
    Having said that, I think that it is going to be a long time in coming, some of these things, and even if the Congress were to put a clock on it as you suggest, it still leaves the possibility, maybe even the likelihood, that you will have 51 different jurisdictions interpreting a Federal law in all kinds of ways.
    I would note that for NARAB, for example, 3 years on, we still have at least a third of the marketplace not affected, and also a number of States still with different rules, slightly different rules, but nonetheless creating a burden for those of us who want to operate in all of the jurisdictions of the United States.
    So I guess my bottom-line answer is that we would want to continue to work with Congress and with your subcommittee, as well as with the NAIC and others, but I think we are skeptical that those kinds of sort of partial solutions will really get to a place where we will be operating with the effectiveness and the efficiency on behalf of our customers that we would like to be at.
    Mr. OSE. Mr. Ahart.
    Mr. AHART. I mean, I would agree, Chairman, with you completely, except I would say have no clock. I believe in reciprocity and uniformity completely, and I think that it needs to be established where States just have to do it. And, you know, the argument that, you know, States are going to interpret it differently or anything like that, we have 50 different States right now, and they interpret a lot of things differently that the government does. But that all gets done, and so I don't think this would be any different.
 Page 77       PREV PAGE       TOP OF DOC
    Mr. OSE. Yes, sir.
    Mr. MCKNIGHT. I would like to add that—kind of put it back in your terms, that if we put all these things in a sack and shook them around I would suggest, all due respect to the NAIC, being the hard—the NAIC and the hard work and effort that they have put in the last several years—nothing has come about with the NAIC unless there has been Federal intervention at this point in time.
    I would suggest that the compact would be a bottom line, nothing more than a confederacy of States, with no one being held accountable at any point, place, or time.
    If you want to look at some of the direct issues—and you said pinpoint some issues that you would approach—I would approach the uniformity and the licensing in the 50 States. That effort very frankly—because they have 41 States—that effort is complete by the NAIC. It is complete, but it is not a win. Although we have 41 in compliance, the remaining jurisdictions have a significant percentage of the property casualty premiums out there mainly coming to California and Florida.
    So the 3-year time period with the incentives that were in place with NARAB seem to work pretty well, and I don't see why there couldn't be a follow-up with like-kind incentives and put a 3-year time period on it and push through the reciprocity, address the speed-to-market issues by possibly limiting the preapproval systems that are in place in the States. And at the same time, I would also push for the alternative market solutions.
    Mr. OSE. Well, I appreciate that, and I am tending more toward uniformity than just reciprocity. Reciprocity still presents redundancy problems in meeting this 3-States' requirement or that 3-States' requirement. I think if we don't shoot for uniformity, we are going to wind up with a significant remaining hodgepodge at the end of the day if we make progress.
    Mr. MCKNIGHT. I agree with that a hundred percent.
 Page 78       PREV PAGE       TOP OF DOC
    Mr. OSE. Mr. Fisher.
    Mr. FISHER. A few comments on that. I worked very hard on the interstate compact with the NAIC, and also testified three times before Senator Hannon's committee at the NCSL. I am pretty familiar with it.
    I think there are a number of things we have to look at with respect to the compact. First of all, it is, as Senator Hannon indicated, a compromise document. That being the case, for example, a State may join the compact by enacting legislation, but it still retains within the right—within its rights within the compact the right to opt out of product standards on an individual basis.
    We basically said, okay, we can go along with that on the theory that everybody is going to be operating in good faith, and we hopefully will not see too much of that.
    I think a more subtle concern has to do with the provisions of the compact that supersede conflicting State law. After a very long political process, those provisions were limited only to product content requirements, and that seems like it is the logical thing to do, but it is very difficult. And the NAIC is seeing this in connection with the standards which are being set right now, that it is very difficult to discretely excise a piece of State regulation in the product arena away from some of your market conduct laws, because the two are very heavily interdependent.
    So there are a number of challenges, but more importantly, I think I would just make the observation that from my company's perspective, we are really looking for comprehensive uniformity and efficiency of regulation, not on an incremental basis; and in our view, the Federal charter is really the only way of getting there in an efficient fashion. And we have—I testified 2 years—over 2 years ago before this subcommittee, and we are now—what we have is a failed CARFRA, an interstate compact that hopefully will be passed in the States, but the NAIC says it may only be 30 by the end of 2008.
 Page 79       PREV PAGE       TOP OF DOC
    Mr. OSE. Mr. White.
    Mr. WHITE. In 1981, Mr. Chairman, this Congress passed the Products Liability Risk Retention Act. It further strengthened that law in 1986, and it did that so that it was a market-based solution, that being that one State could then control the fortunes of an enterprise that wanted to sell its products in 50 States.
    There was a certain amount of resistance among State insurance Commissioners, but you could see as that process unfolded that there was a Federal mandate there, that there was a law in place that they could consult, and although the NAIC did a nice job in coming up with handbooks and interpretive works, it still was a bit of a challenge over time to overcome the State's right philosophy. Yet the Federal Government knew in its full justification that that law had a specific purpose to solve a specific market-driven opportunity, and many of those organizations exist today and satisfy a variety of product needs and consumer needs. And yet they are not regulated by 50 States.
    So it is just an illustration I would bring to your attention.
    Mr. OSE. Thank you.
    Mr. Fitts, did you——
    Mr. FITTS. Yes. I might as well jump in. Everybody else has commented.
    As a property casualty company, we really have no opinion on the compact. You started out, though, with an example where we bundle up a group of NCOIL model acts and we throw them out to the States and say you have got X number of years to act on these.
    I have a couple of comments about that. I don't think what you are saying is the same as NARAB and NCOIL—excuse me, NARAB and GLB. That didn't work for a couple of reasons, one of which you really put your finger on, and that is that it didn't really press the uniformity. And in the end uniformity is where we are ultimately going to gain the cost gains that are going to be able to make us more competitive.
 Page 80       PREV PAGE       TOP OF DOC
    I am also a little bit concerned about the notion of just wrapping together model laws from NCOIL or the NAIC. I think that it might make some sense to slow down, for Congress to identify the areas which it wants to address and then reengage both regulators, consumers,and insurance companies in determining what might be the best model, the optimal model, for insurance regulation as opposed to taking something that may have been done 2 or 3 years ago, that was never done as a national standard, and give us an opportunity to be a part of the deliberative process.
    But I do agree that we need to be careful, to move slowly so there are no unintended consequences and so we do this right.
    Mr. OSE. If I may, I am going to recognize Mr. Lucas, and if Mr. Shays wants to get in before we have to go vote.
    Mr. LUCAS. I will be brief, Mr. Chairman.
    I listened to all the testimony today, and, you know, I can understand why property and casualty people would want to be held at the State level and regulated. I understand that totally. But as being in the insurance business for 30 some years and going through the frustrations of trying to deal in three States and more at times, again, the speed to market was really a major, major issue. I can appreciate the fact that the people from the States, you know, there are some jurisdiction protections. We understand that fully here in Congress about protecting our jurisdictions, but I really have a difficult time seeing why the optional Federal charter does not work well where people choose to utilize that.
    You know, the consumer wins because, let's face it, any new additional cost always goes to the bottom line, and in a competitive situation—and our insurance companies are all going to be competitive—who is going to win here? It is going to be the consumer. And I think we need to look out for that.
    So I really don't have any questions other than I am still not convinced that having the ability for an optional Federal charter, particularly for the life companies, isn't the way to go. Thank you.
 Page 81       PREV PAGE       TOP OF DOC
    Mr. OSE. Thank you, Mr. Lucas. Mr. Shays.
    Mr. SHAYS. This is not a hearing that—I only have had 3 hours of sleep, given that I was watching elections last night back in my district and not liking the results.
    But I am wrestling with the bottom-line fact that I feel that the message is if you really want proper oversight—I mean, in the whole hearing—it has got to be done by States, because the Federal Government can't do the oversight. It is going to take a long time either way, and I think that it is impossible ultimately to be a competitive industry if you have got to work with 50 States.
    And so I would like to know how I can see quick action that enables our companies to be competitive internationally and not having to have so much stupid paperwork throughout the country. I mean, it doesn't make sense to me ultimately. It seems to me like it is just a practice that existed for a long time.
    So I understand, you know, as we look at it, three or four Federal, a dual system, and all of you would like some Federal action. But I guess the question I want to ask is why does it have to be this way? Why do we have to have this kind of bait? Why does it take so long? Why does it have to be this way in this day and age?
    Mr. MCKNIGHT. I don't think it has to take that long. During the first panel's testimony by Commissioner Pickens, he referred to the nationwide filing and how that was going to solve a lot of the problems, being able to file at one point and move forward. And while those filing efforts may be more efficient, it still does nothing to speed the preapproval processes that go on in every State.
    So I agree with your comments in that regard and I don't think that is being properly addressed in the compact that is being put forward. I think that does have to—I think that is a stepping stone. When you address speed to market, it is a stepping stone to Federal chartering.
 Page 82       PREV PAGE       TOP OF DOC
    Mr. AHART. I would just like to say that I think there is an easier way to do it, and that is to use the Federal laws approach, the Federal tools approach, to handle speed-to-market issues. For instance, you could have a Federal law where, you know, forms are filed and used in 30 days. They are approved after 30 days. If they are not——
    Mr. SHAYS. Even under a State-chartered system?
    Mr. AHART. Yeah, because I think what is happening is you are doing Federal laws which the States would have to comply with. So right now you have a political system in 50 different States where they don't all listen to the NAIC, and for their own political reasons they do certain things, but for the most part the State regulation works very well.
    So those areas where it doesn't work well, like in speed-to-market issues or in licensing for one reason or another, you pass a Federal law where they have to comply, and it takes it out of the political arena at the State level. Yet the States could still actually regulate it and make sure that it is complied with.
    Mr. SHAYS. Give me the best argument against that.
    Mr. FISHER. Perhaps I can help there.
    First of all, on the light side at least, a lot of States have those so-called ''deemer laws'' and they have not worked all that well, partly because companies are not all that willing to take a so-called ''deemer approval'' if they have not heard from the State within 30 days.
    In many cases, the regulators view the deemer approval as not being real approvals and feel they can talk to you after the 30 days are up.
    I can give you an example for my company and my industry in my home State many years ago. Our deemer law has been in effect as long as I have been with Mass Mutual, which is over 30 years. We had a Commissioner who had a pet peeve on something.
    Mr. SHAYS. A what?
 Page 83       PREV PAGE       TOP OF DOC
    Mr. FISHER. A pet peeve. I do not remember what his issue was.
    For a year and a half every product filed was automatically disapproved as being in violation of the law. That was it. No company could get any product approved in that State.
    So I am not sure the deemer laws really go far enough, but more importantly, they also do not achieve uniformity. They really go to the process of filing, not to the substance of the contract.
    Mr. SHAYS. Yes, sir.
    Mr. AHART. The filing use was an example; it could be whatever the Federal law deemed to be done to be the best law possible. So, you know, I would say the one problem with the argument, you know, about how it is done in certain States right now is, if you had a Federal regulator, which was the State he was talking about, and then they disapproved everything for everybody, you would be in a lot worst case. There is nothing to show that the Federal regulator would be any worse or any better than the State regulator, so instead of creating another level of Federal bureaucracy, you are determining what the best possible solution is and then creating uniformity by passing that and making all comply.
    Mr. SHAYS. Thank you, Mr. Chairman.
    Chairman BAKER. Thank you, Mr. Shays.
    Let me make a request for a slightly early Christmas present, and let me restate my initial observation and not just the NAIC compact, but the NCOIL models that they outlined—even the one they hadn't yet adopted, if that is publicly available.
    You bundle all of that, can each of you from your various perspectives, if you choose to comment, give us something which indicates where those generally agreed-upon reform principles are deficient from your perspective? And what other additional reforms might you consider if we were to consider within the Congress the adoption of a proposal that would have immediate operative effect?
 Page 84       PREV PAGE       TOP OF DOC
    Take that for what it is. It is a request for you to analyze what the State leadership has come up with their offer; and we, as a committee, need to understand where that State offer is deficient if, in fact, it would be by combining them all.
    It would seem to be in just making a public debate here with NAIC and the NCOIL folks, and my question to that panel in fairness was: Why can't we do what you recognize nationally instead of waiting on the legislative bodies to act voluntarily; and the response wasn't particularly strong, and I got the response, no Federal action was the goal.
    I am suggesting that Federal action might be appropriate, but if we use the recommendations the State professional organizations have contemplated themselves—if they are, in fact, reasonable—that would seem to be persuasive with many members of the committee.
    But I would like to request, you know, by the middle of December perhaps, you know, take a month, if you could get something back to the committee for us to consider as a response to that, it might be helpful. And then for those who are advocates of the national Federal charter, which I recognize, please give us the reasons why you think that approach is not responsive. And we'd be happy to get that.
    I am reaching no conclusions here. I am just asking for professional help to analyze what is out there on the table from the various perspectives, to see if we cannot get the committee to come forward with something in the next session of the Congress, whatever that might look like, making no judgments, making no proclamations.
    I am not suggesting we have a bill. I am just talking to my friends in private, so—which, of course, you will read about tomorrow.
    And let me express my appreciation to you. We are down to just a few minutes remaining on this vote. As I indicated, we have a series of votes that will keep us about an hour. I wish we had more time; I regret this has happened, but at this time I have to state, our committee hearing is now adjourned.
 Page 85       PREV PAGE       TOP OF DOC
    Thank you, gentlemen.
    [Whereupon, at 5:32 p.m., the subcommittee was adjourned.]