SPEAKERS CONTENTS INSERTS
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WORKING WITH STATE REGULATORS TO
INCREASE INSURANCE CHOICES FOR CONSUMERS
Wednesday, March 31, 2004
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 10:07 a.m., in Room 2128, Rayburn House Office Building, Hon. Richard Baker [chairman of the subcommittee] presiding.
Present: Representatives Baker, Ose, Shays, Gillmor, Bachus, Castle, Royce, Oxley (ex officio), Kelly, Shadegg, Ryun, Biggert, Miller of California, Hart, Kennedy, Tiberi, Renzi, Hensarling, Kanjorski, Sherman, Inslee, Ford, Frank (ex officio), Lucas of Kentucky, Clay, McCarthy, Baca, Emanuel and Scott. Also present were Representatives Hensarling, Maloney and Pomeroy.
Chairman BAKER. [Presiding.] I would like to call this meeting of the Capital Markets Subcommittee to order.
Today, the committee meets to hear testimony with regard to the continuing effort of the committee to provide regulatory relief for consumers and the insurance industry in providing services to consumers. As the committee has conducted now 14 meetings in the past 2 years on this subject, there really is little need for a lengthy introduction of the subject matter to committee members.
It is clear—and I think all parties affected agree—that some changes are not only in order but necessary. And the difficulty is in reaching the level of change that should be suggested to ensure market stability and additional choices for consumers.
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It is very clear, at least to me, that as the regulatory structure becomes less burdensome and complicated, there are more providers of product, there is more competition in the relevant market and consumers win by paying lower prices by having many choices. Where we find the reverse structure, there are limited numbers of providers, premiums generally are higher and consumers lose.
This is a mission which all on the committee agree has to be undertaken. And we wish to go as far as we reasonably can go in providing a streamlined market structure that enables it to work effectively.
What has concerned me, to a great extent, in reviewing the financials of this sector of the financial marketplace, the industry does not enjoy a very comparable return on equity, as contrasted with others in the financial marketplace. To some, that would seem to indicate victory in regulating the industry. I look at it slightly differently.
I know that without adequate capital and resources, you cannot provide the needed services. And our economy suffers.
Where the most competitive insurance product is not made available, that ultimately costs us all in lost opportunity. I do believe that Chairman Oxley has directed and we have worked hard to provide a list of recommended reforms which we hope the various stakeholders will find to be warranted and necessary.
Today, we will receive comment from various perspectives on the advisability of moving legislatively in this direction and to receive any recommendations or modifications that may be deemed advisable in light of the current market structure. I am appreciative for those who are here today and willing to participate and want to express my appreciation to all who have worked with the committee over the past months in coming to this hearing today.
This could well be our last hearing before the committee considers adoption of legislation.
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With that, I would like to call on the ranking member, Mr. Kanjorski, for his opening statement.
Mr. KANJORSKI. Thank you, Mr. Chairman. And thank you for the opportunity to offer my thoughts about regulatory reform in the insurance industry before we hear from our distinguished witnesses.
First and foremost, I commend you for continuing to focus our committee on issues of insurance regulation. During the last 3 years, our panel has met on multiple occasions to discuss a wide variety of issues related to the insurance industry.
As a result of these proceedings, we have developed a better understanding of the insurance marketplace. We have additionally begun to form a growing consensus in the Congress about the need to improve insurance regulation in the United States.
In the attempt to advance these efforts, Mr. Chairman, you also recently developed an initial outline for achieving incremental regulatory reform in the insurance industry. This evolving proposal has already sparked considerable debate in the insurance community.
Although it merits receiving our collective attention, I suspect that we will eventually conclude that this reform plan to impose a new federal bureaucratic network over an existing state regulatory structure will produce unintended consequences. Later today, for example, one of our witnesses will detail the shortcomings of this outline, with respect to the protection of consumers and the needs of small businesses.
By inserting the federal government into insurance regulation, this plan will also almost certainly create new unfunded liabilities for our country. Additionally, I suspect that many will conclude that this initial proposal falls considerably short of achieving permanent and genuine reform in the insurance industry.
The outline under consideration today, for instance, envisions a weak federal coordinator with little enforcement authority. Calling for greater uniformity in insurance regulation, but then giving a new federal overseer limited powers, is much like watching an old man trying to eat an apple after removing his false teeth.
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Some have also suggested that the federal regulatory presence envisioned by this proposal could do more to confuse, rather than clarify, regulatory responsibilities. During our previous hearings on insurance reform, we have received extensive testimony from many witnesses advocating the creation of an optional federal charter.
Although the plan before us today does not address this important issue, the consensus for creating an optional federal charter continues to grow. Earlier this year, for instance, the National Association of Insurance and Financial Advisors decided to embrace certain federal initiatives that would work to improve the regulation of insurance, including the development of an optional federal charter.
A study released earlier this week also advanced the idea of creating an optional federal charter. The reform package under consideration today would create a system of joint regulation between the federal and state governments.
Rather than overlaying a federal bureaucracy on top of the State regulation, an optional federal charter would create a separate, streamlined regulatory system. Such dual oversight has worked generally well for the banking industry for many decades. And we should now consider applying it to the insurance industry as well.
Moreover, because of its standardized products in a nationwide marketplace, the life insurance industry, in my view, is particularly ready for the adoption of an optional federal charter.
Mr. Chairman, the devil—as we often say—is in the details. Because much of the proposed regulatory reform outline is currently conceptual, it is difficult this time to anticipate how the legislative language would actually work.
Despite my initial doubts, I want you to know that I am approaching today's hearing with an open mind because I share your goals of making insurance regulation more efficient, uniform and effective for consumers.
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In closing, Mr. Chairman, we have reached a fork in the road and must decide which path to take. Ultimately, we might decide to modify and adopt this concession plan before the 108th Congress completes its work.
We might alternatively decide to create a commission to study these matters. We might also decide to begin the considerable work needed to create an optional federal chartering system in a future session.
These are important discussions for us to have and important matters for us to resolve. Thank you, Mr. Chairman.
[The prepared statement of Hon. Paul E. Kanjorski can be found on page 78 in the appendix.]
Chairman BAKER. Thank the gentleman.
Chairman Oxley?
Mr. OXLEY. Thank you, Mr. Chairman. Let me begin by thanking you and Oversight and Investigation Subcommittee Chairman Sue Kelly for holding, between the both of you, 14 hearings and roundtables over the last 3 years on the need for insurance reform.
Your hard work and commitment to increasing competition and effective oversight for insurance consumers created the foundation we are building on today.
In addition, I want to recognize one of the real leaders of our time: our first witness and president of NAIC, Ernie Csiszar. President Csiszar has served with bipartisan distinction for both Democrat and Republican governors in South Carolina. And he has worked closely with our committee in forging some central goals and concepts for improving insurance regulation.
Too often, the legislative process gets bogged down in turf protection, partisanship and political conflict avoidance. Rare is the leader who can overcome self-interest in the status quo and help create the opportunity for change to achieve a greater good.
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I also want to thank New York Commissioner Greg Serio and past NAIC President Mike Pickens, who have also been of enormous assistance in working together to build a foundation for a consensus, middle-ground approach to reforming insurance regulation.
All three leaders have been steadfast advocates of retaining the strengths of State-based insurance oversight and have helped us think through alternatives to federal regulation as we forge a path towards uniformity.
And Mr. Chairman, I would also like to recognize our former colleague, Mike Kreidler, who of course is the insurance commissioner now in the State of Washington. And it is good to have you back here in Washington, Mike.
Achieving uniformity will not be easy. At the first meeting of the NAIC, the New York insurance commissioner and founder of the NAIC, George W. Miller, stated, ''The commissioners are now fully prepared to go before their various legislative committees with recommendations for a system of insurance law which shall be the same in all states—not reciprocal, but identical; not retaliatory, but uniform.''
That, Mr. Chairman, was in 1871, 6 years after the Civil War ended. And since then, the NAIC has testified before this committee and its predecessors numerous times that we are almost there, that new programs have been developed, new models agreed to. In just a few more years, we will be closer to the illusive goal of uniformity promised back 133 years ago.
As a former state legislator and member of NCOIL, I have been one of the strongest proponents for the NAIC and its efforts. As we have demonstrated through the 14 hearings in this committee over the past 3 years and the numerous hearings held previously in the old Commerce and Banking Committees, the States cannot get the job done by themselves.
The collective action barrier to getting 56 state legislatures and regulators to act in complete unison is—and will always be—insurmountable absent congressional legislation.
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Representatives Kelly, Chairman Baker and other senior members of this committee and I worked together during the Gramm-Leach-Bliley legislation to establish what is now referred to as NARAB, a targeted, State-based reform proposal enacted into law that required a majority of states to adopt reciprocal or uniform licensing regulations.
NARAB has been an enormous success. And all but a handful of states have met the goal.
Agents can now become licensed and sell insurance to their customers nationwide, generally within 1 to 3 months, with greatly reduced red tap and cost. In contrast, company licensing takes a majority of the States over 6 months to review, with 17 percent of the States, according to one study, requiring more than 2 years to complete their reviews.
While the NAIC has tried to create a uniform application form and coordinated process for company licensing, without a congressional mandate, the effort suffers from incomplete participation, numerous deviations and unenforced deadlines. We can do a lot better.
The success of NARAB can be a model for bringing the States closer to fulfilling their own goals. After 3 years and 14 hearings, we need to move from oversight to building legislation.
We are just beginning this process. Chairman Baker and I have offered some goals and general concepts for reform. But these are intended to be a starting point for discussion.
We want to strongly encourage members on both sides of the aisle and our witnesses here today to fully participate and provide input in this early stage of working through a legislative approach. It will not be easy. We have a few issues, such as the role of a state-federal partnership to coordinate uniform insurance policy, that still need to be worked out.
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But we have the opportunity, like President Csiszar and Commissioner Serio, to demonstrate a commitment to leadership and accomplish something meaningful and lasting for consumers. I hope that you will all join us in this effort and that we do not have to wait another 133 years.
I yield back.
[The prepared statement of Hon. Michael G. Oxley can be found on page 74 in the appendix.]
Chairman BAKER. Thank the chair for his leadership on this issue and for his continuing interest in seeing reform move forward. And the Capital Markets Subcommittee, Mr. Chairman, has actually had 14 meetings in the last couple of years. Ms. Kelly's work has been in addition to that, as well.
So the committee should be fully versed on the controversy at hand. I thank the chair for his participation.
Mr. Scott?
Mr. SCOTT. Thank you very much, Mr. Chairman.
Chairman Baker, Ranking Member Kanjorski, Chairman Oxley, I thank you for holding this important hearing today regarding the effectiveness and efficiency of state insurance regulation. I also want to thank the distinguished panel of witnesses we have before us today for your testimony on this important subject.
While I have not yet seen evidence for the need to create a federal insurance regulator, I understand that efforts to streamline insurance regulation by the States have, indeed, been slow in development. However, since Chairman Oxley and Baker have announced that they are not considering an optional federal charter in the road map for insurance regulation and modernization, I am interested in understanding what targeted areas of reform can be considered for streamlined regulation.
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This committee must balance reforms between streamlined regulations for businesses with consumer protections. I believe that state insurance regulators best know how to respond to consumer complaints.
For example, in my own home state of Georgia, our insurance commissioner, John Oxendine, has helped tens of thousands of Georgia consumers address complaints about their insurance providers. These actions have resulted in over $20 million being returned to those consumers in 2003.
Consumers can call Commissioner Oxendine's Division of Consumer Services from 8:00 a.m. to 7:00 p.m., Monday through Friday. The commissioner also sends field representatives to each of Georgia's 159 counties at least once a month. I cannot imagine a national regulator being able to provide for a local connection or as much access to consumer advocates or investigators.
Today, I look forward to hearing from our panel about practical recommendations to earnestly begin streamlining insurance reform between the States.
Thank you, Mr. Chairman.
Chairman BAKER. I thank the gentleman.
Mr. Shays?
Mr. SHAYS. Thank you, Mr. Chairman. Thirty-second comments to say: one, very important hearing; two, I know you have done and others have done a tremendous amount of work on this issue.
I have an open mind about what needs to happen. But I will be looking at these types of issues. I want to see more competition and more choices.
I would like to see uniformity. I would like to see it easier to enter into the marketplace. And however that can be accomplished, I will be supportive.
Thank you.
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Chairman BAKER. I thank the gentleman for his statement.
Mr. Lucas?
Mr. LUCAS OF KENTUCKY. Mr. Chairman, let us let the hearings begin.
Chairman BAKER. Thank the gentleman very much for his astute insight.
Ms. Kelly?
Mrs. KELLY. I want to thank Chairman Baker for holding the hearing. The hearings that the chairman mentioned, we found many strengths and many weaknesses with the current regulatory system. So it is clear that improvements of some sort need to be made.
There are advantages to the State regulatory system. There is a regulatory expertise that currently exists at the State level. And in addition to that, the States are sometimes more responsive to the needs of the local marketplace and the local consumers.
The committee has located, though, many areas that really need improvement. One is speed to market for the new products. Market conduct reviews are sometimes exhaustive and duplicative.
Price controls are well intended, but sometimes ill-advised and reduce availability in certain markets. The states are still not able to achieve nationwide agent licensing reciprocity that we ask for in NARAB.
We are close. But we need the rest of the States into NARAB.
The insurance commissioners and companies, consumer groups, agents, brokers—we have had a lot of witnesses here. And they have all agreed that there is a need to modernize the current regulatory system.
I think we need to consider reforms to reflect the marketplace changes and allow the institutions to better serve our customers. The greater focus on improving regulation was promising when we passed Gramm-Leach-Bliley.
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But the ideas have only gotten us so far. And I think the American people are in a position now where they really expect and deserve some action on our part.
It is clear that the NAIC will continue to struggle with many of the programs. Unfortunately, consumers continue to suffer because the State legislatures fail to act on the good ideas of both the NAIC and the NCOIL.
It is clear that the time has come, that we have to have some new federal legislation to help the States modernize their own insurance regulation. We need consistency. We need an ease for the people in the business to reach their customers. And we need an ease for the customers to understand what is going on.
Prior to NARAB, the States had been trying to get some kind of a reciprocity with licensing for years. And as the chairman pointed out, the insurance industry itself recommended that that happened way back in the 1870s.
So the success on NARAB is only going to come if we get all of the States in. We have to build on that model in other areas of state insurance regulation. And we have to help the NAIC get their goal of more efficient and more effective regulation.
I look forward to our witnesses today. And I commend Chairman Oxley and Subcommittee Chairman Baker for a lot of hard work and leadership on these issues.
Thank you, Mr. Chairman.
Chairman BAKER. I thank the gentlelady for her statement.
Mr. Sherman?
Mr. SHERMAN. Thank you, Mr. Chairman. As an old tax commissioner, I am thrilled that we are joined today by my distinguished friend from North Dakota, Mr. Pomeroy, a former state insurance commissioner. And if his interest in insurance is such that he would like to switch committees, we will talk.
[Laughter.]
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Mr. Chairman, it seems to me that there are at least four different areas that are grouped together as insurance regulation. The first is getting a product approved so that we know that that product, contract or form is in the best interest of consumers.
The second is the safety and soundness of the company, so that those who are insured know that they will be paid. And that involves both the auditing process and setting standards.
The third is dealing with consumer complaints against an individual company, dealing with how a particular consumer is being treated.
Then the fourth, as the chairman of the full committee mentioned, is professional licensing and enforcement, dealing with the individual agents and brokers. And as the chair pointed out, that is an area where we have had some success.
It appears to me that it is only in the first category that I am told that we really have problems; and that is, getting a product to market. It will be interesting to go through these hearings and see whether there are problems in other areas.
I would hope that, whether it be a federal bureaucracy or better coordination of the State bureaucracies, that we will be able to get products to market quickly so that consumers will have the maximum choice and that choice will be relevant to their needs at the time.
I yield back.
Chairman BAKER. I thank the gentleman.
Mr. Royce, did you have a statement?
Mr. ROYCE. Thank you, Mr. Chairman. I want to just take a moment and commend you and also Chairman Oxley for your leadership on this issue.
Consumers, I think, of insurance products are going to benefit from more efficient regulation. And it is clear to me that the leadership of this committee is trying to help the marketplace for the better.
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But I also have a parochial perspective on this. I am very deeply troubled by the insurance regulatory environment that we have in my home state of California. And I would just like to share with you, Mr. Chairman, the homeowners' insurance market as an example.
The regulatory environment in California, in my view, would make the old socialist, East Bloc, command and control planners proud. Because we have ended up in a situation in California where we have the largest marketplace in the United States. And yet, California homeowners pay some of the highest premiums in the United States.
I think our experience has been that insurance firms are more likely to leave than to expand their businesses in California. And that is because of the price control-based regulatory regime that we have there.
And this means that a bad situation in California has the potential to get worse.
Now California has the largest economy of any state. And it is frankly one of the largest economies in the world.
And I think this committee and this Congress should be deeply concerned about the negative economic effects of California's price controls, as well as their limits on new product innovation. But there is also the global perspective on this because our Byzantine insurance regulatory policy is deterring foreign capital from entering our own markets.
Effectively, if you are an overseas firm and you are looking to do business in the United States, you are not entering one market. You are entering 50 markets. And for this reason, our trade negotiators, when they go in to trade or to negotiate to open up markets overseas, they run into resistance every time they attempt to expand markets for U.S. financial services products abroad because the response is, ''Well, you have 50 markets in the United States.''
So I am a strong supporter of increasing efficiency in our insurance marketplace. I think consumers will be the greatest beneficiaries. But our economy is also going to benefit as a result of that.
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And the last point I would like to make is that enforcement has to go hand-in-hand with reform; otherwise, any positive legislative package will not be implemented in a number of states.
And again, I thank the chairman for his leadership. And I yield back.
Chairman BAKER. I thank the gentleman.
Mr. Emanuel, did you have a statement?
Mr. EMANUEL. I am just going to second Mr. Lucas' recommendation.
Chairman BAKER. Terrific.
Mr. Bachus? Mr. Bachus, did you have a statement, sir?
Mr. BACHUS. Yes, thank you, Mr. Chairman.
And I thank you for holding this hearing. I think this is an important legislative hearing to discuss your Baker-Oxley State-based insurance regulatory concepts, to make state insurance regulation more efficient.
These proposals go a long way to expedite a variety of insurance products to consumers and lower the cost of insurance premiums for small businesses. So I commend you and Chairman Oxley.
As you know, Chairman Baker, Walter Bell, our Alabama insurance commissioner, was appointed by Commission Csiszar. And he is one of our witnesses today. He was appointed to chair the NAIC's Speed to Market Task Force.
And the task force addresses one of the major issues that you are addressing in the Oxley-Baker reform concept; and that is product approval. They have met regularly. And I believe they are making progress toward the goal of national standards in this area.
And I for one would advocate giving them the opportunity to do this and would hope that they would continue to make substantial progress.
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In addition, Mr. Chairman, I want to thank you for your commitment to try to modernize and uniform reinsurance regulation. As you know, the U.S. reinsurance industry competes on a global basis. Reinsurers are sophisticated entities. And they are disadvantaged when trying to compete on a world stage without uniform regulation across all 50 states.
I look forward to working with you on identifying areas that will allow the reinsurance community to compete more effectively on a global basis.
And lastly, I want to take the opportunity to include testimony from the National Association of Insurance and Financial Advisors for the record and would like to do that.
Chairman BAKER. Without objection.
[The following information can be found on page 177 in the appendix.]
Mr. BACHUS. Thank you.
Thank you, Mr. Chairman, again for holding the hearing. I look forward to hearing from the witnesses.
Chairman BAKER. I thank the gentleman.
Ms. McCarthy, did you have a statement?
Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I will hand in my statement. But I do want to welcome Mr. Serio, who originally came from West Hempstead, which is in my district, and has a great deal of respect in New York.
So I appreciate you being here. And I am looking forward to your testimony.
Chairman BAKER. Thank the gentlelady.
Mr. Castle?
Mr. CASTLE. Thank you, Mr. Chairman. I have no statement. I look forward to hearing the witnesses.
Chairman BAKER. Thank you, sir.
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Mr. Inslee?
Mr. INSLEE. Just want to welcome our friend, Mike Kreidler, who has become even wiser after leaving Congress.
[Laughter.]
Chairman BAKER. Ms. Biggert, did you have a statement this morning?
Mrs. BIGGERT. Yes, thank you, Chairman Baker. And thank you for holding this series of hearings on insurance regulation. I think the thoughtful and deliberate hearings that are being held by the subcommittee will more than adequately prepare us for any future course of action that we will be taking.
I did want to thank one of my colleagues from Illinois, Dr. Phil O'Connor, for coming to testify today. He served as our Illinois insurance commissioner for 3 years and for another two as its research director.
He has a wealth of experience in this and many other policy fields. And we did work together on several commissions while I served in the Illinois General Assembly. So I am delighted that he is here.
I do want to take a moment to point out this morning that I believe the open market system for insurance in my home state of Illinois is an example of a system that works well—not just for regulators, not just for insurers, but most importantly, for the consumer.
I understand concerns that some of my colleagues may have about a change from a prior approval to an open market system. But let's look at what this system has produced. Illinois has a very small residual market and significantly more auto and homeowners insurers competing for business than states with stringent price regulation.
Illinois attracts the largest share of operating property and casualty companies of any state in the nation. And that is good for consumers.
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The premiums and loss ratios in Illinois are well below most other states with large populations, high traffic density and urban concentrations. With no rate controls, regulatory resources have been freed up in Illinois, allowing state regulators to initiate other innovative safeguards, such as early warning systems and computerized market conduct exams.
An open market system does not mean a wild or unfettered system; quite the contrary. The Illinois Department of Insurance has oversight authority and is required to monitor the marketplace and report to the General Assembly.
The department plays an important role. But it does not determine rates. Rates are driven by economic demands, not politics.
There are numerous stringent consumer protections in place as well. The benefits of an open market system have been recognized by consumers in Illinois for 30 years, which is why no one has ever tried to change the rate system.
Some of my colleagues may believe that price controls magically lower prices below competitive market levels, while at the same time stimulate an adequate supply of coverage. To me, this is just a myth.
We have seen the reality of price controls in markets like those in New Jersey. A large number of insurers pulled out of New Jersey entirely, citing the unique burdens posed by the State's auto insurance regulatory system.
A regulatory system that drives insurers out of the market is not an ideal regulatory system. An open market system like that in Illinois, in my view, is closer to the ideal.
So putting all parochial interests and personal bias aside, I can objectively state that Illinois has one—if not the most—efficient systems in the country. Illinois has delivered more choice, better prices and a stable market to consumers.
So the open market competition works in Illinois and has worked very well for 30 years. My hope is that Illinois can serve as a model for other states that want to serve consumers better.
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I look forward to the testimony of Dr. O'Connor.
And thank you, Mr. Chairman. Yield back.
Chairman BAKER. I thank the gentlelady for her statement.
The committee has the pleasure today of having two ringers. On the Democrat side, we have the former insurance commissioner, obviously knowledgeable in matters of insurance and is expressing today his deep interest in the subject by attending our hearing.
Welcome, Mr. Pomeroy. Would you care to make an opening statement?
Mr. POMEROY. Mr. Chairman, thank you for allowing me to attend. I look forward to hearing from the witnesses and I will have some thoughts on this matter that I would like to share with the committee at a later time.
But I commend you and Chairman Oxley and Ranking Member Kanjorski for advancing this issue in a very thoughtful and substantive way. I remember being on the witness side of the table in the room when I thought the topic of federal regulation was being advanced in a less thoughtful way. I appreciate the way this issue is proceeding, and I thank you for allowing me to participate.
Chairman BAKER. I thank the gentleman for his interest and participation.
And on the Republican side, we have a member of Financial Services, but not on this subcommittee. We welcome the gentleman from Texas, Mr. Hensarling. Would you care to make an opening statement, sir?
Mr. HENSARLING. Yes, thank you, Mr. Chairman. And thank you for allowing me to attend.
The title of this hearing is ''Increasing Insurance Choices for Consumers.'' As a former student of economics and a small businessman, I understand that when we are talking about increasing choices for consumers, we must of course discuss decreasing the regulatory burden on businesses.
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The best and most effective consumer protection will always be a competitive marketplace. And I believe this committee and Congress can play an important role in ensuring that American consumers have access to the most affordable and most varied insurance products available.
Now I do not trust any single company to make their products affordable and varied. And I do not trust any particular industry to make their products affordable and varied.
I do, however, trust competition in the marketplace to do just that. One only has to look at history to show the possibilities that exist by stripping away excess regulation.
When Congress decided to deregulate the airline industry in 1978, the number of cities served by more than one airline increased by 55 percent. And service was extended to more than 140 additional airports. The impact on airline travelers was estimated at $11 billion in savings.
When Congress deregulated the trucking industry in 1980, the number of carriers doubled, while rates for small shipments decreased by approximately 25 percent.
From airlines to trucking to natural gas—and the list goes on—history has shown us that deregulation can bring down real prices—by 25, 30, even 40 percent over time. Thus, history also shows us, in order to get to a point of effective competition in the insurance industry, we must carefully examine what has been inhibiting choice and driving up costs for consumers.
I believe the most important factors have been the price controls and the large, expensive regulatory burden imposed on the insurance industry by many state governments. The sooner we can move to a more competitive market-based system, where financially sound companies have low barriers of entry and are free to compete with minimal interference, the better off consumers will be.
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I happen to be a homeowner from Texas, the State that the Census Bureau deemed in their last survey to have the highest average premium for homeowner's insurance in the nation. Thus, I understand the negative impact price controls can have on competition and how this can ultimately adversely affect the consumer.
My constituents in Texas are paying, on average, more than double for their homeowner's insurance than what consumers pay in states with limited or no price controls. And they frequently contact me and ask me to help do something to help them find more options for cheaper insurance products.
Recent studies have shown that consumers living in states with minimal or no price controls pay significantly less for most types of insurance than do consumers residing in states with significant price controls.
I look forward to working with you, Chairman Baker and Chairman Oxley, to address the problems that price controls and other government-imposed regulations have had on the insurance industry and the availability of affordable insurance products for consumers.
I thank the chairman and yield back.
Chairman BAKER. I thank the gentleman for his statement and for his interest in the matter and giving his time today to the committee.
Is there any member wishing a further opening statement?
If not, Mr. Kanjorski wishes recognition for a unanimous consent. Mr. Kanjorski?
Mr. KANJORSKI. Mr. Chairman, it seems like insurance—or former insurance—commissioners are falling out of the woodwork. But I would like to offer for the record a statement from the former state insurance commissioner of Nebraska and now the outstanding Senator from Nebraska, Ben Nelson, for purposes of insertion into the record.
[The following information can be found on page 187 in the appendix.]
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Chairman BAKER. Without objection, so ordered.
I thank the gentleman.
At this time, we would wish to proceed to our distinguished panel of witnesses. I have a deep appreciation for the difficulty of the task each of you have undertaken and want to express my true appreciation for the level of work and effort committed to trying to resolve the concerns that many have outlined this morning in their opening statement.
I do believe we have made significant progress. I believe we are on the verge of adopting legislation, which all stakeholders can view as being very constructive and moving in an appropriate direction for the consumers we all serve.
Director Csiszar from the South Carolina Department of Insurance has been steadfast and continued in his leadership. I have great regard for your work.
I also want to welcome the other two gentlemen to the table this morning. Before I proceed though, I think Ms. Kelly from New York has a word she would like to offer at this time.
Ms. Kelly?
Mrs. KELLY. My word to offer is that it is a great pleasure to have Greg Serio back with us. He is the superintendent of insurance from the great State of New York.
Greg was confirmed as New York's 39th superintendent back on May 9, 2001. He served 6 years prior to that as first deputy superintendent and general counsel of the department for 3 years.
In addition to being a very well respected member of the NAIC where he serves in a leadership capacity, Superintendent Serio is a good friend. And we feel he is a great asset for the State of New York.
It is a pleasure to see you here today, sir. And I look forward to hearing from you.
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Thank you, Mr. Chairman.
Chairman BAKER. Thank you, Ms. Kelly.
And also to introduce to the committee formally Mr. Mike Kreidler, from Washington State, who is also a former member. I wish to extend our welcome to you today, sir.
Today, Mr. Csiszar appears not in his capacity as the director of insurance of South Carolina, but in his capacity as spokesperson for the National Association of Insurance Commissioners. Please proceed at your leisure. Your formal statement will be made part of the record.
STATEMENT OF ERNST CSISZAR, DIRECTOR, SOUTH CAROLINA DEPARTMENT OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. CSISZAR. Thank you, Mr. Chairman. It is indeed a pleasure for me and my colleagues—Mike and Greg—to appear before you this morning.
And I can without any hesitation begin this statement by affirming to you that not only are we desirous to become partners in this process, to offer our expertise to the committee in this process. We are eager to do so.
We are eager to participate as we move forward from what you have generously shared with us, this conceptual framework that we currently have in front of us, and moving from that conceptual framework to a more detailed legislative kind of agenda.
So I want to restate and reaffirm the fact that we are also of an open mind. We have a good deal of expertise that I think—all of us and the committee members in particular, we offer it to them—that will help in this process.
We are by nature problem solvers when we deal with our constituents. And we know we have some problems in this regulatory system. And we know, as commissioners, as much as you as members of the committee realize, that reform is needed.
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We are of course particularly pleased that the framework for this reform is not a dual charter of an optional or non-optional type. We are pleased to see that this is the so-called ''federal tools'' approach.
And while we are really in no position to comment on the details, because it is all conceptual at this point, as I said, we are very eager to be at the table and to work with you in developing these concepts, flushing out these concepts into what will eventually, presumably, be legislation.
I think the spotlight that this committee, through its hearings, has brought to the issue has been good. I think it has instilled a sense of urgency amongst commissioners, as well as amongst others who have an interest in this, such as our legislatures and our governors.
And I think we welcome just that very process. The congressional oversight, I think, is always welcome. And we are eager, as I said, to continue with this process.
Now let me just review very briefly—I know some of you have heard many of these things before—but let me just reaffirm and review briefly what is in progress at the NAIC and why we think that a State-based system of regulation is, indeed, better than any other form of regulation if the State-based regulation can indeed be reformed with the vision, with the concepts that we have in front of us.
We have not been, as you know, standing still in the years since Gramm-Leach-Bliley. On the speed to market, which Mr. Bachus so kindly mentioned, yes, Walter Bell is indeed in charge. We have a very aggressive agenda.
We have the interstate compact. It is three different issues really: the interstate compact and the implementation of that compact in the States; the development and implementation of standards for the product to go through that compact as the single point of entry; and then of course our electronic filing system, which is an integral part of this as well.
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Let me just briefly give you some updated numbers. As you know, the interstate compact has been endorsed both by NCOIL, the National Conference of Insurance Legislators, as well as by NCSL, the Conference of State Legislators.
Roughly 20 jurisdictions are looking at introducing that compact in their legislative sessions. Two of them have actually passed it—Colorado and Utah. I understand there are two more—Virginia and West Virginia—where the legislation is sitting on the governor's desk, but has not been signed yet.
We are aggressively pursuing the introduction of that compact this year and in the year to come. Very personally, I can tell you in South Carolina, we are going to be introducing that compact in the coming legislative session.
As regards standards, this is again key. The compact is nothing but a skeleton unless you have those standards that apply to the particular products.
We have identified 24 different product categories. These 24 product categories are working their way through this group headed by Walter Bell. Our timetable is that by our December meeting this year—which will be in wonderful Louisiana, in New Orleans—by New Orleans, we are going to have those standards in place.
They will, in essence, flush out the interstate compact. And between the two, there you have your single point of entry. There you have your uniformity and, as I said, aggressively pursue that compact for adoption.
On SERFF, by the way, I can only report that our filings have tripled this year. In fact, in 2004, we expect somewhere around 140,000 to 150,000 filings to come through that electronic system.
The average turnaround date on those, by the way, is 17 days. So I think we have made very, very good progress. And I can assure you, we will continue to make good progress by year end.
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As regards company approval, we have our alert system. We are continuing to work on making that system more user-friendly and developing a more uniform approach to certificates of authority. And I think we have made good progress.
And again, by year-end, I expect to report back to you that we are in good shape on company approval.
On the NARAB issues, here actually you have a clear example where the licensing of agents and brokers is an area where there is in fact some federal help needed. Here is a case where a good many of the difficulties we have had in moving from reciprocity or even inter-reciprocity and from reciprocity to uniformity, where a good deal of the difficulty has arisen because of our inability to tap into the FBI database.
Here is clearly a case where Congress, I think, can help us overcome that. And we will be, I can assure you, in step with you in making progress towards uniformity in this area.
On market conduct, we have most recently proceeded to implement a handbook that is now a standard procedure for market conduct. That has always been one of the problems that different states did things different procedurally, not just substantively.
We are implementing an analysis process. This analysis process will be uniform. We are collaborating between states.
While there is no resolution to this issue, we are actively looking at how the new NCOIL model in market conduct overlaps with our work and to what extent we can make ourselves run in parallel with the NCOIL mode. That is currently under consideration. I cannot report to you a final result yet. But I can assure you, again, that we are making progress in this area.
On the financial side, we realize that on the financial side, which is the crown jewel of what we do, the solvency issues, we know that reform is needed there. We know that we can update, for instance, our risk-based capital figure. We know that we need to move from the traditional post-review, looking back for 3 or 4 or 5 years to a forecasting approach, to a risk-assessment approach, if you will.
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Kevin McCarthy, who is the commissioner in Florida, he and Tom Gallagher are chairing that group. And we are very, very actively making good progress in that area, even on the rating issue, the personal lines rating issue, which is clearly the most contentious issue, I think.
This whole notion of where competition fits in all of this, even here I can report to you that 36 states actually have competitive rating models in place. Fifteen states, however, have a very strict prior approval process.
But that is a contentious issue, has been a contentious issue for the last 100 years and continues to be one today. And it is good to keep in mind that on those issues, Mr. Chairman, we also, regardless of what we as commissioners may think, we also have other constituents to deal with, ranging anywhere from our legislature to our governor to the attorneys general. And in some states, the trial bar has also actively become involved on issues of that kind.
I might also point out that even though we realize that significant reforms are needed, the system has actually worked fairly well. I think it is interesting to note that we have not had the same kinds of problems that we have seen with Tyco and Enron and the others, where directors, auditors, bankers, executives have compromised themselves really through self-dealing, sometimes to the point of criminal activity.
We have not seen that kind of activity in the insurance industry. And I think in many ways state regulation, because it is closer to the market, it is closer to the consumer, to some extent, at least, I think we can attribute that result to the effectiveness of state regulation.
So in summary, rather than going into details, I will leave it open to questions, but in summary, we are with you. We want to be at the table. We will help you. We offer our expertise to you.
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Please take advantage of it. And we will walk step in step with you as we make progress in this entire process, in this entire federal tools approach.
So that is where we stand. Mike and Greg, I think, want to make some brief comments. And I will stop with that.
[The prepared statement of Ernst Csiszar can be found on page 100 in the appendix.]
Chairman BAKER. Please proceed as you choose.
STATEMENT OF MIKE KREIDLER, WASHINGTON STATE INSURANCE COMMISSIONER
Mr. KREIDLER. Thank you, Mr. Chairman. I come in part here because I think I reflect the diversity of what we see in membership of the NAIC. I think it represents the diversity that you have in the Congress, you will also find diversity among the commissioners across this country of ours.
As I look at it, I come from a slightly different perspective. I come from a perspective of not being somebody that has spent their life working in the insurance industry or as a regulator.
And I think I can stand back and look at it from much the same perspective of many of the members who had the opportunity to serve in their state legislatures and view what took place in insurance regulation and the role that states play and then also to take a look at it from the perspective of the problems and challenges that we face.
No one is saying that there are not problems and changes that are necessary and we agree that there are places where the Congress can effectively assist as we go forward in making changes in the system. I would however point out that there are areas where the need is more acute, from the standpoint of the nature of the products then in other areas. The areas that have been identified by the committee certainly are very much recognized by members of the National Association of Insurance Commissioners, are in life insurance products. These very much are products that need a standardization and a uniformity.
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I am proud of the success that we have shown and are exhibiting in the area of an interstate compact. We also have three states currently that are in the process of beginning the process of accepting applications through a memorandum of understanding. And they are three of the largest states that we have.
I would believe that we will wind up having one uniform system for those particular types of products. And we are moving aggressively in that direction.
I would commend the committee for helping to put pressure, so to speak, on the insurance regulators to recognize that these changes are necessary and needed. There are always going to be forces that would like to go slower rather than faster, that change sometimes comes hard.
But the pressure that we feel and the changes that we are bringing about are ones that are very consistent with what you have heard before this committee and what we feel as insurance regulators.
One area where I am particularly concerned as we approach this tools list of various items is: where do the consumers fit into this equation? I really do believe that the issues related to consumer protection are of an acute nature.
Let me give you some idea. We had over 200,000 contacts with my office in the last year from consumers. We have over 700 cases that we are currently working with consumers.
This is an issue where you have a promise by insurance companies to fulfill an obligation that is very different from that of financial services associated with banking. They are changes that need to be approached cautiously.
When we get into some of these areas that we have before us right now in the area of property and casualty, for example, whether it is homeowner's insurance of automobile insurance, there is a great deal of difference between the States—whether it be their tort laws or whether it be because of the kind of urban versus rural distribution; whether it be because of any number of factors that cause the rates to be very different from one locale to another.
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In the area of commercial forms in commercial insurance, I think there are some changes that you could help us with. One of the challenges that we face right now is getting some of the agents that are independent agents in the State of Washington comfortable with deregulation. For example, striking a balance of their needs with the larger agents and brokers and the companies, is being able to strike that bargain as to where does the consumer need protection? And where does an unregulated market take effect?
States would like to go further, but frequently run into resistance because there is a bit of a provincialism here of trying to keep that standard too high. I think that is one place where you could essentially further help us to address that problem by pushing on that issue. But again, do not push it too low.
If you are a business that does not have a professional risk manager on staff, you are not going to be in a position to go into a market that is unregulated and be able to make the sophisticated choices. You are much more like the homeowner or the automobile insurer that is going to be concerned about what your product has and you do not have the sophistication to make a determination. So that threshold of deregulation is important to us.
When it comes to the issues related to agent licensing, Commissioner Csiszar pointed it out. One of the problems that we face there when it comes to agent licensing is that there has been resistance here at the national level to do what we have done in the State of Washington for years, which is to give the insurance regulator the authority to take a look at the FBI database.
In fact, our independent agents aggressively supported to make sure, when the FBI came through and we questioned whether we had direct statutory authority in the State of Washington to access that database, they actively supported us doing so. I can tell you right now that there are out-of-state licenses that have been requested in the State of Washington where you have individuals with felony convictions in the financial services area that are agents in good standing in some states and we quite frankly would not like to see them doing business in our state.
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You could help us by making sure that all states have that kind of access and are doing that kind of FBI fingerprint check on every individual who does business in their state.
These are some places where you can assist us in doing those changes. I would urge caution in the breadth of what is outlined right now in the tools, in no small part because of its impact on consumer protection.
What may be good for the companies may not be good for the consumers. And consumers need a seat at this table that is very strong and making sure that their rights are adequately protected.
Thank you, Mr. Chairman.
Chairman BAKER. Thank you very much.
Superintendent Serio?
STATEMENT OF GREGORY SERIO, SUPERINTENDENT, NEW YORK STATE INSURANCE DEPARTMENT
Mr. SERIO. Good morning, Mr. Chairman. And thank you for having us again.
Mr. Kanjorski—and thank you to Ms. Kelly and Ms. McCarthy for the kind introductions earlier.
Let me take a perspective that one of your members took a few minutes ago and amplify that just for a minute; and that is on: what is the end goal of the modernization? We want competition in the marketplace. And I think we share that with you.
We want consumer protection, as Commissioner Kreidler indicated. We want that. And I think we all share that issue as well.
Just to give you a context that this is the right thing to be working on and focusing on, in terms of modernization of the insurance regulatory system, the activities that we have already undertaken, both in partnership with the Congress, as well as individually through the NAIC, have yielded those kinds of consumer protections that we are all benefiting from right now. And this is a context. And this is an objective that I think we are trying to keep in mind as we go forward, working with you, on the concepts of the design and on the design of the details of your conceptual draft.
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And that is that in New York and in other states, we have been able to retask a lot of our insurance resources—scarce state resources. And everybody knows the difficulties the States are having with respect to their budgets.
But by taking on the modernization initiative, largely at the impetus of the House Financial Services Committee in the Gramm-Leach-Bliley bill a few years ago, and then taking on that with the Statement of intent with the NAIC an the restatement that we issued last year, we have been able to make firm inroads into added consumer protections by retasking.
A lot of our human resources at the department, our staffs that used to open up envelopes, handle paper, take phone calls, as opposed to the types of modernizations that we have been able to do, leveraging technology, leveraging uniformity between the States and really making it a more efficient system, we have been able to retask those resources into added consumer service representatives, into added frauds investigators, into added and real-time financial surveillance.
There is an end result here that I think sometimes we miss as we talk about the details and getting through the devils of the details and things of that nature; and that is that is a laudable objective that we subscribe to entirely. Because we, as the managers of the 51 or 54 state regulatory insurance agencies and in the District of Columbia and in Puerto Rico and the Virgin Islands, we know the need to retask and reuse and retool our existing agencies to make them better at what we are asked to do—and that is, protect the consumers and do better in the job of financial surveillance, real-time, market monitoring to make sure that those things that have been filed are being used the way they are supposed to be in the marketplace.
This is one of the things we have already found by the activities we have undertaken at the NAIC, by the uniformity and the reciprocity that NARAB really pushed us to do. And I am very pleased and probably would not have been asked to come if New York had not passed a producer licensing bill, as we did last year. That is having real tangible benefits.
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So as we go forward, and as we create the balance between what is good for the companies, good for the consumers, let's realize at the end of the day that this is also good for the efficacy of the regulatory process because it is allowing us to put our resources where they need to be the most, in terms of protecting those consumers.
Thank you.
Chairman BAKER. Thank you very much.
Commissioner Csiszar, as Superintendent Serio was just outlining in his New York case, where the transition from prior regulatory structure to a more streamlined structure had a couple of benefits to his constituency. Viewing the South Carolina experience, having gone through the regulatory modifications from your view, it appears that there are two different distinguishable changes that have occurred. And I would like you to speak to those.
On the one hand, it seems as though more product is now available for consumers and that the competitive market results in better pricing opportunities for consumers, which is the direct goal we hope would occur. But along the line of limited state resources, it would seem that getting your staff out of a stricter regulatory oversight posture with regard to, say, product approvals and shifting those individuals over to enforcement is the real secondary benefit because it enables you to do the real consumer protection advocacy that you might have had more limited resources in the prior model.
Are either or both of those observations accurate?
Mr. CSISZAR. Well, let me speak first of all as the commissioner of South Carolina in responding to that. Clearly, in South Carolina, we reached the realization that our market is not the same as the California market, for instance.
Companies do not trip over themselves to write in South Carolina; not least because we are a rounding error on an income statement or a balance sheet. So we realized that we had to do something different if we wanted to make our market more attractive.
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And the route we chose, the route the legislature chose—it was not me. The legislature chose the route of, in essence, moving from a prior approval to what is nothing more than a rate man system on the automobile side. And we are trying to replicate that on the homeowner's side this year by actually going through a transition from rate man's into a file and use or use and file system.
Now having said that, a California market may very well be different because if you are a company—a large company in particular—you probably cannot afford not to do business in California, just because of the size of the market. But certainly, what we have seen in South Carolina as the primary benefit is availability, affordability impact—clear availability and affordability impact.
And the second issue, I think again, to some extent, this is driven by Gramm-Leach-Bliley. But to some extent it is also, I think, the realization that when you look at what is it that is essential about the insurance product?
And yes, while there are many things that can be expected from the purchase of the product, the most fundamental thing to be expected is the payment of the claim when a claim comes due. And that claim may come due tomorrow or the day after the purchase or it may come due 25 years from now.
So when you look at fundamentally what is it you have to do to protect the consumer from the standpoint of the company being there when that claim needs to be paid? Solvency, of course, immediately comes to mind.
So we have managed in South Carolina to focus much more on solvency, number one, and at the same time also dealing with consumer complaints. Because as my colleague from Washington stated, we too in a small state like South Carolina, we had 50,000 either inquiries or complaints; 50,000 over the phone.
And that does not count emails. And it does not count mail.
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And by the way, each one of those does get answered. They do not disappear into the cracks.
So it has allowed us to really focus on those two areas. And that has been the benefit in an environment—a state environment—where yes, the budget dollars are scarce these days.
Chairman BAKER. My time is just about expired. But I want to do one follow up. Advocates of optional federal charter rightfully claim that by establishing an alternative federal mechanism for the marketing and sale of insurance product, you have the absolute assurance that you can operate in all states in a similar fashion.
One of the problems in an incremental approach comes on the enforcement side. If you look at the fair degree of success of NARAB, there are still elements that have not yet come into compliance some years after its adoption.
So it gets us to the question of if we are to seriously consider incremental, the appropriateness of some federal enforcement ability to ensure that states participate in a time certain. Is that, given the argument between optional federal charter and incremental, incremental with weaponry maybe, doesn't that seem to make some sense?
If we are really going to move the ball forward in a fixed period of time, to enable legislatures to act, to enable commissioners to conduct their review professionally, you cannot have it immediately. But after some period of time, if states have not adopted what generally all parties have agreed to as an appropriate method of conducting business, do we not have to have some enforcement ability in whatever we do?
Mr. CSISZAR. Let me start by saying that from my standpoint, Mr. Chairman, the dual optional charter is the worst of all possible solutions, really. I would rather at that point say, ''Let the States get out of this business and have the federal government take the whole thing.''
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You have all kinds of complications, from premium taxes to guarantee funds to so on. To me, the dual optional charter really is not the solution.
Forget about bureaucracies now and costs and so on, just from a purely business standpoint. I think I am not an advocate of that approach at all.
Having said that, yes clearly I think you have to make sure that states take this seriously and enforce it. And I can only speak again from my state on this one. I know when Congress speaks in our state or when our congressional delegation speaks, state legislatures listen and the governor listens and the attorney general listens.
So I think the very, very fact that you are engaging in this process and maybe producing a piece of legislation will speak louder than anything.
Chairman BAKER. I thank you. I appreciate your attorney general. I wish I could get another attorney general to listen, but that is another subject.
Mr. Kanjorski?
Mr. KANJORSKI. Thank you, Mr. Chairman. Following along on that question, Mr. Csiszar, is there any reason why, taking just life insurance, that it is not uniform across the country? Is there something distinctive about the people of South Carolina that they are different from California?
Mr. CSISZAR. Quite frankly, Mr. Kanjorski, I think the greatest case, the best case for uniformity can be made by looking at life products.
Mr. KANJORSKI. Okay.
Mr. CSISZAR. There is no question about it.
Mr. KANJORSKI. Well, let's follow that along. I do not have the numbers, but you probably could tell me. What portion of the insurance business written in South Carolina—or nationally, if you know—is represented in the life business?
Mr. CSISZAR. I cannot give you the figure on a national level. But I know in South Carolina, it would be significant, probably equal though with property and casualty, about 50-50 or 60-40.
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Mr. KANJORSKI. Well, it would seem to me that life experience in life insurance is not too dissimilar in all the States. And listening to some of the comments of my colleague before—and yours—that really you are interested in protection of the consumer in the difficult areas.
I do not imagine that there are an awful lot of people that are calling an insurance commissioner about their life insurance policy. Or am I mistaken about that?
Mr. CSISZAR. I disagree there. I mean, for instance, we have had significant cases of churning, for instance, in the life industry. We have essentially market conduct-related types of cases.
I would say the volume on the life side is probably no different than the volume on the property and casualty side.
Mr. KANJORSKI. Okay. That is very interesting. And that is a good observation that I was not aware.
What would you say if the Congress does nothing or if we pass the proposed conceptual proposal, that we do not quite know how it will work yet? If we just do that, when would you think that life insurance would be uniform throughout the 50 states? How fast do you think we are going to get there?
Mr. CSISZAR. Well, I think this is where clearly we are taking the view that we can deliver on that issue. We can deliver. And that we can deliver before 2008 on that.
Mr. KANJORSKI. Am I to understand then that it is your testimony that by 2008, regardless of where you live in the United States, you would be able to get a uniform policy of life insurance?
Mr. CSISZAR. I think between the pressure that you are exerting on us and the effort that we are making to implement the interstate compact and the national standards, under that compact I think we can get it done.
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Mr. KANJORSKI. How do we resolve this question of a global market when we have our trade representative meeting around the world and he is representing 50 sovereign entities with most of them clearly smaller than most of the other nations in the world he is dealing with? How does it get some uniformity there in terms of the impact our trade representative can have on globalization?
Mr. CSISZAR. The answer I would have there is really a question, Mr. Kanjorski. I will be interested to see how the expanded European Union is going to treat that very same question because they are the ones who have been making this argument for uniformity in the 50 states.
With the expansion of the union later on this year, they are going to have the similar situation. In fact, our trade representatives will be empowered to ask them that same question.
Mr. KANJORSKI. Well, I am just wondering why? I am not a person that is anxious to get to federal regulation of anything. But it would seem to me, from some of the past testimony that we have heard from particularly the life insurance companies, that there is sort of uniform agreement that there is nothing peculiar about this industry that is not national in scope and subject to a national standard and subject to national uniformity.
If that is the case and as we are moving along this regulatory process, if we singled out the life insurance business and offered an optional federal charter there, why would that not have a positive impact for the various state commissioners, to have more resources to regulate the difficulties that they may have in the other categories of insurance that are more parochially related to the jurisdiction they have control over?
Mr. CSISZAR. I think I go back, first of all, to my earlier comment that you do have the same kinds of problems—consumer issues, for instance—on the life side that will still require treatment at a local level, number one. Number two, I think even though you speak of it as a uniform kind of industry and perhaps the dual charter in response to that uniformity, my response to that, Mr. Kanjorski, is that we can deliver at the State level. And the expertise currently is at the State level.
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If we can come back to you and say we have implemented the interstate compact. We have these standards across the 24 product categories—by the way, those are life product categories that we are speaking of, life products and long-term care products—if we can deliver on those, then there is the solution to the uniformity issue.
Mr. KANJORSKI. Would you feel your association and the majority of the commissioners would be adamantly opposed to a national life optional charter?
Mr. CSISZAR. Very much so. Very much so.
Mr. KANJORSKI. Based on the fact that you are losing some of your jurisdiction? Or it is just the wrong thing to do?
Mr. CSISZAR. Look, I for one, this is the first time I am in public service. I come out of the private sector. I do not have a turf issue.
As I tell people, whether I work in this job or not, my dogs will get fed when I get home at night, you know? So it is not a turf issue.
Mr. KANJORSKI. You are lucky to have dogs.
Mr. CSISZAR. But to me, it really is an issue of where can the best job be done? I have often maintained publicly that the issues we are discussing, we really should not be discussing state versus federal here? We really should be discussing regulation that is outmoded and requires reform and that improved regulation that comes from that reform.
I have called it good regulation versus bad regulation.
Mr. KANJORSKI. The other thing—and I will just take one more—the only observation I want to make is that I heard the chairman of the committee mention those promising words made 133 years ago. And it seems at this point that we are always 3 to 5 or 10 years down the road.
We are already 5 years from H.R. 10. So it has been a long time in coming. And I probably personally now am starting to lose my confidence that the 50 states—all 50 of them—are capable of coming together and resolving some of these problems.
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I wish they would. I wish they had already. But I am not terribly optimistic anymore.
Mr. OSE. [Presiding.] The gentleman from Connecticut?
Mr. SHAYS. Thank you, Mr. Chairman. I would like you gentlemen to outline to me the most serious challenges you think face consumers today because we do not have uniformity.
Mr. CSISZAR. I apologize, Mr. Shays. I only heard part of the question.
Mr. SHAYS. The question was this: I want you to outline to me where the consumer suffers today because we do not have uniformity and we do not have speed to market and so on.
Mr. CSISZAR. I am not sure that suffering is really the right word because when you look at uniformity, the part of the industry that seems to have the greatest need for uniformity really is on the life side. And there seems to be a plethora of products out there on the life side.
Now that is not to say that you cannot find new products and more innovative products and release them into the market quicker, if we speed to market. But we certainly do not see any sign of suffering on the consumer's part.
And that is the side that is driving the uniformity issue. On the property and casualty side, certainly we have availability and affordability issues, as we heard in California for instance, on homeowner's. But uniformity is really more a life issue than a property and casualty issue.
Mr. SHAYS. I served in the State House for 13 years and I understand why we wanted state regulation of banks. I understand why we wanted state regulation of insurance.
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Tell me why the arguments for banking, why insurance would be different than banking? Because state regulation of banking turned out to be a total and complete disaster in New England.
Mr. CSISZAR. I think the nature of the product makes this very different. What we have is, in many ways, insurance is a mandated product. It is treated as a nuisance purchase by consumers. They really do not want it, but they get it because they have to.
They have to because either the law requires it or their mortgage company requires the purchase of the product. When they purchase the product, it is not like they are opening up a bank account or getting a loan in order to buy something desirable like an automobile or a home.
What they are really hoping for is, when they buy the product, is that they never have to use that product. And really, what they are getting from the insurance company, even though it is this 40-page piece of paper, what they are really getting is nothing more than a promise.
And here the issue is then what can the process or what kind of regulatory process can you bring to the table that assures that promise will be fulfilled, as indeed promised? So I think it really is a different kind of product from a banking product. The nature of the purchase, the nature of the buyer's expectations are very different here from a typical banking product.
Mr. SHAYS. I wrestle with this bottom line. And what I wrestle with is that I want consumers to get the latest products as quickly as possible. And I want there to be as much competition as there possibly can be.
And I am struck by the fact that that is not the case under our current system. Why do you think this legislation would resolve that?
Mr. CSISZAR. I think certainly the pressure that you are exerting through this legislation and the fact that we are at work on an interstate compact—well, we have the interstate compact; we need to implement it—the fact that we are working on those standards of uniformity, the fact that we are turning things around through our SERFF system in 17 days and not 2 years, the fact that that message is getting through to the larger states. As Mike said, for instance, we have an MOU now between Texas and California and Florida on some of the life products. That very fact, I think, is going to change things.
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Secondly, if you look at new products and introducing new products, again I go back to the fact that I think the State-based system is much preferable to a federal system because it allows you to experiment without betting the ranch. If you have a new product and an innovative product, you can test that product in a state and see how it works.
Mr. SHAYS. I do not understand the last point. I mean, you could test a product whether or not you had national or not.
Mr. CSISZAR. That is true. But on the other hand, the State-based system allows some flexibility in terms of only introducing it in that state, if it is permissible in that state, and testing it in that state.
No, I understand what you are saying. You are saying you could take and introduce the product anywhere. That is true.
But I really think that there is a flexibility in that State-based system, much as what we have seen with our welfare system, where the ''one size fits all'' does not always fit, where a state has to be allowed to, in essence, do its own thing.
Mr. SHAYS. I thank you. And I likewise will be very curious to see what the EU does as we try to penetrate that market more.
Thank you, Mr. Chairman.
Mr. OSE. The gentleman from Georgia?
Mr. SCOTT. Thank you very much, Mr. Chairman.
Mr. Csiszar, could you tell me how state price controls have harmed small business owners? For example, are consumers restricted in their ability to have auto collision repair in highly regulated states?
Mr. CSISZAR. I do not think I can really answer that question with any hard evidence, other than evidence out of South Carolina again. And I can tell you in South Carolina, it was not even the issue of whether they could get it repaired or not. In South Carolina, we had a real availability issue.
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We had a reinsurance facility that covered both personal automobiles, as well as commercial automobiles. That market, that residual market, that reinsurance facility became the largest insurance company in the State.
And the end result was that, while insurance was available, it was not really competitive because very few other companies wrote in the State because of this large residual market. So we had to solve our problem in South Carolina based on the size of the residual market.
The losses, by the way, from that residual market were charged back to the consumer. So if you are asking how did the consumer suffer? He suffered, either on the personal auto or a commercial auto, by having to pay something called the ''recoupment fee.''
And that recoupment fee, the losses in the facility were at $240 million, $250 million every year. That all got charged back. So that is probably the direct impact that we experienced in South Carolina, at least.
So I can only answer it from that perspective.
Mr. SCOTT. But do you see that this is may be one of those areas where there may be some evidence where the cry for national regulation might have some substance?
Mr. CSISZAR. Again, the problem with national regulation, as we see it in South Carolina, the homeowner and the automobile owner in South Carolina does not want to pay for the losses of that individual in California or in Florida.
Mr. SCOTT. Okay. Are property and casualty insurance inherently state and local issues, in your opinion?
Mr. CSISZAR. Sorry, I missed the last part.
Mr. SCOTT. Are property and casualty insurance inherently state or local issues?
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Mr. CSISZAR. They are inherently state issues, local issues. As Mike said, torts come into the picture. And tort law is on a state basis.
Coverages are very local. For instance, in our state, we only need earthquake coverage in one particular part of the State and that is the Charleston area because it experienced an earthquake in the late 1900s.
Nowhere else in the State do we have that kind of earthquake activity. So there are some peculiarities, both based on geography, also based on population. As Mike said, rural versus urban, for instance. Automobile insurance in an urban area is a different creature from one in a rural area.
Mr. SCOTT. What is the effectiveness of rate controls in the States?
Mr. CSISZAR. Those who have them in place will tell you that they are God's gift. And those who do not have them in place think they have a better market. There is no unanimity on this issue, Mr. Scott.
Mr. SCOTT. Do you think they are holding down rates? Or are they restricting competition?
Mr. CSISZAR. Again, I can only speak for my state. In our case, the reinsurance facility became a method of rate suppression. And hence, we had to get rid of it.
In other states, others tell me, my colleague in North Carolina tells me that his prior approval system is working just fine. And if you look at the statistics, he is somewhere around average always, much like Illinois is.
So it is hard to tell. Different models.
Mr. SCOTT. One final question. What do you think of the idea of creating a self-regulatory organization to oversee insurance matters, similar to the securities industry?
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Mr. CSISZAR. I think the industry would love it. But I do not think it would be the right solution to the problem.
I really think that our regulatory system, Mr. Scott, has worked fairly well. While I am the first one to sit here and admit that God, yes, we do need some reform on the uniformity issue, for instance.
In other respects, it has worked quite well. We have not had a savings and loan fiasco. We have not had a BCCI in this industry.
We have not had the problems that the mutual funds are experiencing. We have not had an Enron in this. So I can go on and on. I think in that sense, we have really served the consumer well.
Mr. SCOTT. Our Ranking Member Kanjorski, as I understand his opinions on this, is not necessarily clear that the States can handle this and that we may have to look at a national reform, a national regulator. Could you tell us, in your own opinions, what damage a national regulator would do?
Mr. CSISZAR. It will eviscerate the State system. You might as well start from scratch. And I feel that there is such expertise at the State level. And I think there is such good response to the consumer at the State level, that that step is not necessary.
Now I will agree with Mr. Kanjorski that the proof will be in the pudding. We better deliver on this one. I would be the first one to say that if I come before this committee 2, 3 years from now—God forbid I should still be in this position—but if I do come before this committee 2 or 3 years from now, you can hammer me over the head because we do need to deliver.
But I think the timing is such that we can deliver. And we want to be given the chance to be able to deliver, to prove to you.
So we welcome the oversight. I welcome the pressure that this exerts because it instills a sense of urgency in us to do this and to get it done.
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Mr. OSE. The gentleman's time has expired.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. OSE. The gentlelady from New York?
Mrs. KELLY. Thank you, Mr. Chairman.
I chaired a hearing on market conduct oversight in the Oversight Subcommittee last May. And I was amazed at some of the requirements that contribute to the cost of doing business in some of these states.
Like I am going to just give a few examples. Massachusetts has a checklist for their speed to market initiative that is 230 pages long. Wisconsin requires companies to put a slash through all zeros on policy form transmittal, which requires going over the form by hand to put the slash in.
Nevada requires their filing fee document to be on the top page. Arizona requires insurance company names to be fully spelled out. There are no abbreviations.
Colorado requires an original signature on every state form. Missouri requires a stamp of an insurance company's name on each attachment of a rate filing.
Nevada requires pink paper to be used when submitting the filing fee document page—pink paper. It is Nevada. Kentucky has requirements for stapling. But if you file in Kentucky and in Ohio, you have to pull the staples out because Ohio does not allow paper clips or staples in their filing.
Now this is ridiculous. And it is a cost-consuming kind of thing to have this kind of stuff going on.
So my question is: if Congress required a nationwide uniform documentation and market conduct review, would the consumers benefit in the immediate future? I am asking all of you that question.
Mr. CSISZAR. I will begin and I will let Greg take over as well. But I will add another one to you. It took me about 3 or 4 years to find out that we were not accepting parentheses in our documents because somebody 20 years ago decided that that is the way to slip in things into an insurance policy, by putting it into parentheses.
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It is embarrassing when I listen to something, to that litany, it is absolutely embarrassing to me that we sit here to even have to discuss this sort of thing. This is sheer, utter nonsense—utter nonsense. And I do not think you will get any disagreement from the commissioners on this.
Part of the problem has always been the bureaucracy. You know, as I said, it took me 3 years to find out we were not accepting parentheses.
Part of it I think is the bureaucracy and driving that change through the bureaucracy. Part of it I think has to do with the fact that you have these desk drawer rules.
So I think the market conduct process, as we envision it now, whether it be ultimately through a model we are developing or in the midst of developing or through the adoption of the NCOIL model, will specifically avoid that sort of thing, plus the fact that fact that you have SERFF in place now. And it is a common filing through SERFF. You do not have all these added little rules, unless you file on a state-by-state basis without using SERFF.
But we now have what, 50 states? All states are on SERFF. So I think a lot of this will go away. But I have heard these things. And I blush and I am embarrassed when I hear about them.
Mrs. KELLY. Well, my basic question is: do you think the consumers would benefit in the immediate future if we require a uniform documentation? SERFF may be the answer to that, but is that going to help consumers? I am really looking at how this is going to help folks.
Mr. SERIO. Yeah, I think it will. Whether you do the uniformity approach or we do it through the interstate compact and other initiatives and get out of the paper business altogether. It cannot be overstated the importance of SERFF, both for the States and for the companies to together be a part of this.
We have to balance this out. And you heard all the horror stories in market conduct. And we were enforcing the law of pink paper against the companies.
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At the same time though, you have the balancing of the incomplete applications, the applications that had things in parentheses because they were trying to do something else other than what the product was purported to be. Getting to uniform standards, getting to uniform mechanics of filing and approving these products cannot do anything but help the consumer, from a couple of perspectives.
Number one, the cost that is built into the product of designing the product and getting the product approved, right off the bat, that is a built-in cost of the product.
Second of all, it is the cost to the consumer as taxpayers, not just of the insurance department where we are largely funded by assessments on the industry, but it is all the other apparatus in state and federal governments—the consumer protection boards, the attorneys general, the others who will undoubtedly get into the middle of this consumer issue—where the taxpayer is paying for this several times over.
Bringing uniformity, bringing clarity—maybe that is almost a better word for it—bringing clarity of the process and the requirements on each side, what is required of the departments, as well as what is required of the companies, I think that clarity can only help the consumer.
When Governor Pataki was first elected in 1995, his second executive order was to shed all of our regulations of the type of things that you just spoke about: get rid of the desk drawer rules; get rid of the commas and the paper clips and all those other issues that did not bring any value added or any added value to the protection of the consumer and the delivery of the business in the State of New York.
And other states have done this. Other governors have done the same thing.
That is really what has to happen in terms of this wholesale approach to clarity. And I think the electronic processing certainly goes a long way to getting that.
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Mrs. KELLY. Thank you very much.
Mr. OSE. We have heard a lot about Kentucky. Now we are going to hear from the gentleman from Kentucky.
Mr. LUCAS. Thank you, Mr. Ose.
I am an old life guy. And I come from those prejudices. And I admit those upfront. But after 31 years of frustration with getting product to market, that is sort of in my craw.
And I guess one of the things, when I came to Congress, I thought there was a lot more knowledge here with the body corporate of insurance matters, both P&C and life. And I was surprised to find out there was not a lot of knowledge.
Mr. David Woods in his NAIFA testimony brought out one thing that I thought showed the lack of understanding here in this body about life insurance in particular. In the victims' compensation settlement after 9/11, we passed a law that people who provided for their families with life insurance—and really, for the price of a set of golf clubs, you could have bought a couple of boatloads of insurance to protect your family.
But the victims' compensation did not take into account stocks, bonds, savings accounts, inheritances. But if you had life insurance, then that was subtracted from your settlement, from people who were responsible about their families.
That has always bothered me a whole lot. That does not have anything to do with anything here, but I feel better about having said that.
[Laughter.]
And also, the other thing, we talked about 1861 and it is 2004. And according to my math, that is 144 years instead of 134 years, but what is 10 years? It is like a nanosecond when it comes to insurance regulation, right?
But you know, I have been for the optional federal charter. And I stated that. And it is probably the most astounding thing I have said since I have been here in Congress, the reaction I got.
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But basically, I think what we need to do is to level the playing field. And frankly, I do not care how we do it. Just let's do it.
And, I mean, for all the duplication there is in the 50 states about the same duplicitous things that people go through. It might take a couple of years to approve a product when in fact the banks—and I have been involved with banks and mutual funds, I have been involved with those too—you know, they can go have a product right away and the life insurance company takes forever. That is not right.
And so all I am suggesting that we need to do is let's just do something. And let us level this playing field.
And my thought is, if we do not do something about it, we might do something up here that you may not like. And so let's move.
And I do not know that I have a question. And I might state too that the Kentucky Insurance Commission modernized back in the 1950s and went to paper clips. So I want you to know that we are moving right along.
[Laughter.]
Mr. OSE. The chair recognizes the progress in Kentucky.
The gentleman from Alabama?
Mr. BACHUS. Thank you, Mr. Ose, for recognizing me.
I would start with Mr. Serio. Mr. Serio, do you think that properly targeted federal legislation may either assist or encourage or push certain states to coordinate and achieve more full participation in some of the key NAIC programs that you all have?
Mr. SERIO. Yes. I do not think there is a question about it. I think we saw it with NARAB. And I think you were very helpful with that.
I think we have seen the States acknowledging that the partnership that they have with the federal government and with the Congress as the policymaking body specifically, where we dealt with it in the Fair Credit Reporting Act reauthorization and the preemption in that case because in that case, that was the best way to go. But I think that, again coming back to the old line of the devil is in the details, we want to make sure that whatever we work on together makes sense back at that local level.
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Because so much of this business—and I will even go so far as to say even with the discussion we have had so far today, that even life insurance, while uniform in terms of its product design—and that is why the NAIC has been focusing on life products in the interstate compact standards as the first place to go—it is still largely a locally distributed product. So I think that balance between federal policy, state implementation, state regulation, is a good balance that I think we have seen the success of that formula several times over.
Mr. BACHUS. And let me ask you and Mr. Csiszar both, Walter Bell's committee is working, other committees, is it possible for you all to actually, if you run into a road block, to actually recommend to us some specifically-targeted federal legislation that might actually you may find needed to break through on some of these?
Mr. SERIO. I think that is part of the ongoing dialogue. I can tell you that the NAIC and the individual states have had what has been an unprecedented level of involvement, cooperation and partnership particularly with the House Financial Services Committee.
So I think before we can come in and advise the committee that there is a problem, I think the committee will know it because of the ongoing dialogue that we are having and because the chairs have made themselves available to come to the NAIC and speak to the commissioners directly and because the NAIC has been expending as many resources as it has to have New York, South Carolina, Washington and other commissioners—Delaware is here today—come to Washington and pursue this dialogue. I think it will almost become unspoken that when you see if there is some difficulty, you will see that as a recognition that we can probably use some assistance in terms of moving forward on what has been the uniform goal of uniformity, both between the States and the federal government.
Mr. BACHUS. All right.
Anybody else?
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Mr. KREIDLER. If I could just offer a quick comment relative to Commissioner Walter Bell's work on speed to market? One of the real challenges was to be able to come up with product standards for life and annuity products. They have done a commendable job.
And we are in the process of approving those product standards by the NAIC. And it is a critical part of moving forward with the interstate compact.
Because once you have product standards, you have something that state legislators can take a look at and say, ''We are not going to disadvantage consumers if we go to these particular product standards. Therefore, we are willing to step into an interstate compact.''
I mean, we all know that interstate compacts have not been warmly received by a number of states as a general concept, particularly if they are going to be a depository for nuclear waste or something of that nature. But in this case, we have product standards.
And it is the work of Commissioner Bell through speed to market, where we have those now. And I think you are going to see states moving aggressively now to join the interstate compact because they have something in hand now. They have these product standards. And that means speed to market.
And so I am very optimistic right now we are going to see a lot of progress. And Commissioner Bell from your state has played an incredibly important part of making that happen.
Mr. BACHUS. Okay. And my next question to any of you all that care to answer: does it make sense to have some sort of a state-federal council to help coordinate certain areas of insurance policy or to speak for the industry? I will give you an example.
Now we have the federal government regulates insurance in a number of fields, like the terrorist insurance. On legislation, we had flood insurance, health insurance.
And I often hear that there is nobody at the table representing the insurance industry, say in trade talks. You know, there is someone that speaks for the financial industry. But there is no one at the table for the insurance industry.
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Does some sort of federal-state council, I mean, if we could establish that with your input, would that be something you would be willing to pursue?
Mr. CSISZAR. Let me take that question and my colleagues may want to comment on it as well. A couple of things about that.
I think one of the reasons why we are even discussing this issue of representation at the federal level has to do with the fact that—blame us. In years past, not until very recently, the NAIC has not been at the table.
There has not been anyone really here in Washington; and I think deliberately so. When you look at the Gramm-Leach-Bliley process, for instance, we did not get involved until the very end. You know, by then, the train had left the station.
So I think the first comment I would make is I do not think you are going to have as many of these representation issues as we did in the past because we are here now and the industry is here and the consumers are here as well. That is number one.
Number two, the fear that I have about setting up any kind of separate federal body is that it becomes the prototype for something like what we have with the OCC. And quite frankly, as you know, there are a great many of the problems, most recently this preemption of predatory lending laws, stemming from the fact that you have had someone like the OCC representing the banks here.
What I would propose to do and what I have proposed to the industry—and in fact, the industry approached us. I should not say the industry—the ACLI and I have had discussions. Many of these representation issues come down to tax issues.
Why don't we form a joint NAIC industry group to address these tax issues in Washington? We are here for you. We have the expertise. I think that representation can come as a natural part of that.
So rather than having this risk of an OCC confusion between what does that coordinator do? And where does coordination stop and regulation begin, for instance? Rather than having that take place, my suggestion would be that the industry and the NAIC get together and do this themselves.
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Everybody else does it the same way, really. I mean, you do not see a manufacturer represented by an OCC on a tax issue, for instance. So I think we can——
Mr. BACHUS. But of course, you have the Department of Commerce with manufacturers. With the financial institutions, you have the Treasury, the Fed. There is no one.
Mr. OSE. The gentleman's time has expired.
Mr. BACHUS. Okay. Could I change subjects and ask one more question?
Mr. OSE. The gentleman asks unanimous consent for one further question.
Mr. BACHUS. And I am just making this almost more of a statement to preserve time. I mentioned in my opening statement the reinsurers. You know, reinsurers contract with insurance companies, not with consumers.
So I would simply say—and I hope you agree—that it could meet, the States could meet more uniformity in how they treat the reinsurers and that you do not have the consumer component.
Mr. OSE. The gentleman's time has expired.
Mr. BACHUS. And they are all nodding their heads in agreement, I think.
[Laughter.]
Mr. OSE. Let the record show.
The gentleman from Washington?
Mr. INSLEE. Thank you. I wonder if you can talk, just sort of from the consumer's side of the coin for a minute, about the prospects of specifics on protecting consumer's rights if we do have legislation? Just one idea, there are numerous ones I suppose could be considered, but this issue of privacy.
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You know, we are outsourcing a lot of functions overseas now of a lot of back room operations. And there have been concerns expressed about maintaining consumer privacy. There are 1,000 other things that we might incorporate in a consumer bill of rights or a consumer's kind of interest specifically.
Is that something that we ought to at least think about if there is legislation? If so, how should we think about it?
General question for the wisdom of the panel.
Mr. KREIDLER. Mr. Inslee, I would say that having some statement here of assurances that changes are put forward by the Congress to make sure that consumers, with these changes, are not disadvantaged, that they have protections under the current state system. And as changes are being advocated, hopefully on a very targeted basis.
But even with those changes, if you could make sure that there are not compromises made for consumers. I think that is an important part of making sure that what might be good for the sellers of insurance is also good for the people who purchase them and that their rights are adequately protected.
Mr. INSLEE. I think I missed some of your testimony. You talked about access to FBI files or at least fingerprints.
Could you give us an example of why that may be important?
Mr. KREIDLER. We had a very good example—actually, many of them, but one of them in particular—where had an individual who was in good standing in one state that does not require a fingerprinting background check as a part of being licensed as an agent or a broker in their state, that applied for a non-resident license in the State of Washington from that state. And when we did the background check—this is a person who completed the form and said they had no felony convictions in their history.
And when it came back, I believe the number was nine felony convictions, several of which were in the financial services area. This is somebody that obviously never responded when we pointed this out to them, so they did not attempt to get licensed in our state. But in that state where they are a resident and are an agent in good standing, they continue to do business.
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I think that is one reason why I think that there should be uniformity in order to achieve that producer or the agent licensing standard uniformity across the country. This is one of the things that, quite frankly, should be there in order to make sure that we do not have some bad actors out there that are going to cause some real problems for consumers.
Mr. INSLEE. Thank you.
Mr. OSE. The gentleman yields back.
The gentleman from California?
Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. This is an issue that I have great passion about. I used to be on the legislature in California and the insurance commission. And we have talked about things. And I think you have been very articulate talking about insurance regulations and the need for more efficiency and uniformity and basically to become more effective to consumers.
And in the past 5 years, I have grown more passionate about the concept of an optional federal charter. And I know you disagree with that.
So talking in the direction you are about coming up with some form of uniformity, although it seems like legislatures have been a barrier to that in a past, and effort toward a system that is more systematic in reforms and regulatory uniformity from state to state to accomplish what you are talking about, sounds good. But I have a letter from John Giramendi in California. And he is not interested in this.
So in order to have some form of national uniformity in the industry, you have to have an agreement that everybody is going to be willing to participate. Now in an optional federal charter, it is optional.
If an insurance company wants to be an optional federally chartered insurance firm, like banks are, they can. If they want to be a state, they can.
But how do you expect to achieve any kind of uniformity based on what you said in your opening comments? And I applaud you for your concept. I do not disagree.
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But how do you expect to have any form of uniformity when states like California, with large populations, have already announced their opposition to this concept?
Mr. KREIDLER. One thing I would point out is that several of the very large states are already in the process of considering an interstate compact. And I think it is only a matter of time—shortly—of being able to convince their legislatures to participate, particularly now that we have the product standards.
It has been introduced in the State of New York. It is going to be introduced in Florida and Texas.
I think we are going to see a number of those larger states coming in. At some point, there may be a need to address the problem federally to make sure that some of the outliers come in, if in fact that happens.
Mr. MILLER OF CALIFORNIA. So you are acknowledging that there might be a little more requirement of a federal participation in this process as it goes along?
Mr. KRIEDLER. I think if you get to the point where you have that almost near unanimous already, it may be necessary. There are always legislatures that can be a little bit more cantankerous in addressing uniformity than others. They had the same kind of problems that the Congress has among its members in trying to get unanimity on complex issues.
But if I might just say about the issue of an optional federal charter, we have a good example of what happens when you have the ability to effectively forum shop for regulation. In the State of Washington, there is currently—and it has been written about in the New York Times—a large company that deals with financial services, that was going to be put out of business a decade ago in the State of Washington and really reigned in. That company made the jump to a federal regulator by being listed on one of the major exchanges and then coming out from underneath the State regulation.
They are currently, just recently within the last year, have gone into federal bankruptcy court. The major asset of that corporation is a life insurance company, which I now have in receivership.
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This did not need to happen. It would have stopped way back 10 years ago if you did not have the chance to effectively shop from one forum to another.
Mr. MILLER OF CALIFORNIA. But on that vein, I will give you a great current example in California—worker's compensation insurance. And you have businesses lining up to move out of California. This is one example of one state, that their insurance commissioner said they do not like the approach we are taking today in this hearing.
And you have other states that are not having a problem with it. Yet even though it is recognized that it is costing us jobs, it is killing businesses in California, you have state legislators that are in a mindset that they are just not willing to change because they do not want to change.
And you have insurance commissioners who like having total control over what goes on in their state and legislators who want to have total control and do not want anybody outside influencing or dictating to them what they are going to do. How do you change that in reality, in the way you are proposing to go, when it is very optional on their part?
Mr. KREIDLER. Well, one item I can point to right now, California is participating in a memorandum of understanding with Texas and with Florida. And from the standpoint of premium volume nationally, it is a very large percentage, where you can make one filing on a life product and you will be able to be approved in three states at one time.
So they are showing progress in that——
Mr. MILLER OF CALIFORNIA. Life products are much simpler. But that is a good start.
Mr. KREIDLER. Life products is where we have the biggest issue relative to uniformity across the country. Property and casualty are much more regional and state driven.
But I believe that you are going to wind up with some states, as I said, that are, just because they take a very provincial interest, who may need a nudge in order to finally get them——
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Mr. MILLER OF CALIFORNIA. Or a gun.
Mr. KREIDLER. But I would not be surprised to see California, quite frankly, join the interstate compact.
Mr. MILLER OF CALIFORNIA. I am anxious to see this process as it proceeds. I applaud Chairman Baker and Oxley for starting these hearings because I have come to believe strongly in the past 5 years. Ten years ago, I did not believe it. But 5 years ago, I started to believe there was a need for an optional federal charter.
Maybe this is an option to that. And I am anxious to watch us go through the process because I believe there is a very severe problem out there nationally in this industry.
I think we need to do everything we can to help t