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Tuesday, May 6, 2003
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 3:04 p.m., in Room 2128, Rayburn House Office Building, Hon. Sue W. Kelly [chairman of the subcommittee] presiding.

    Present: Representatives Kelly, Hensarling, Garrett, Murphy, Brown-Waite, Barrett, Renzi, Maloney, and Davis of Alabama.
    Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order. I just want to say that without objection all members' opening Statements will be made part of the record. Subcommittee chairs and ranking minority members will be recognized for five minutes each. All other members will be recognized for three minutes each for their opening Statements. We will alternate between the majority and the minority.
    I am going to begin by simply saying that I have called this hearing today to review an issue that we feel is of utmost importance to all consumers, and that is the effectiveness of State insurance market conduct oversight. When it comes to insurance needs, consumers need to know that they are not being misled by products and that valid claims will be paid quickly. It is the responsibility of State insurance commissioners to efficiently regulate market conduct with the best interests of the American people in mind.
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    Consumers need to know, they need to understand, and we have with us today some people who will testify about what the current conditions are. We have Joel Ario, the Secretary-Treasurer of the NAIC and the Insurance Administrator of Oregon. He is going to testify that protecting consumers is the first priority of insurance regulation.
    Commissioner Ario, I could not agree with you more, and we are here to make sure that State insurance regulators are up to the task.
    The NAIC first began to look closely at market conduct regulation in the early 1970s and admittedly has made some modest improvements since then. Recently, both the NAIC and NCOIL have been reviewing the need to modernize market conduct surveillance to better serve consumers. They have come up with some interesting ideas, particularly after Chairman Oxley requested a GAO investigation. It is promising that there is a greater focus on achieving clear and specific guidelines for proper oversight. However, ideas will only get us so far, and the American people deserve action and they deserve action now.
    Far too often, we have seen State legislatures fail to act upon good ideas of organizations such as the NAIC and NCOIL. It is only when Congress pressures the States, for example, with the NARAB provisions that I fought to include in Gramm-Leach-Bliley, that consumers finally get to see results. There must also be considerable coordination between States, as the varying nature of market conduct regulation from State to State is quite problematic. Across the country, we have seen consumers harmed by the current patchwork of State systems that involve too much duplication, with too few standards and no systematic approach to detect patterns of improper conduct.
    The negative impact on consumers is two-fold.
    First, consumers suffer higher prices and less choice due to overlapping, inefficient, requirements which needlessly increase the cost of doing business.
    Second, consumers are exposed to bad actors who slip through the regulatory gaps due to improper targeting of resources. We need to develop a systematic comprehensive approach, with clear standards that will target resources more efficiently. Until then, a lack of consistency from State to State will continue to hurt all Americans by undermining protections and that drives up costs.
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    While State regulation of insurance market conduct has not served consumers well in some respects, I would like to stress that these inadequacies should not be interpreted as a need for more regulation, which could further harm consumers. Instead, I hope that we can, and I feel we must, work together to find an efficient and effective way to regulate insurance market conduct without creating more unnecessary burdens on the entire industry. Simply put, we do not need to pursue more regulation, but more effective regulation. I would like to thank all of our witnesses today for appearing before the subcommittee, and I look forward to hearing from you on how we can accomplish these goals.
    We have been informed that Mr. Gutierrez has just had a new grandchild, so Mr. Gutierrez will probably not be able to make today's hearing. We congratulate Mr. Gutierrez, and I hope that his staff will deliver our congratulations to him. I understand how that feels, to be a new grandparent. It is a lovely feeling.
    And now I would like to take care of one bit of business. The Subcommittee on Oversight and Investigations will come to order. Before we begin our hearing, the chair has one small piece of housekeeping.
    The chair has been informed by the chair of the full committee that he is in receipt of a letter from the gentleman from Texas, Mr. Hinojosa, tendering his resignation from the Subcommittee on Oversight and Investigations. It is the chair's understanding that the gentleman from Alabama, Mr. Davis, who is here I believe today, will be elected to fill the subcommittee's vacancy at the next full committee meeting. Therefore, pending the action by the full committee, the chair asks unanimous consent that the gentleman from Alabama be permitted to participate in hearings held by this subcommittee as if he had been so elected. Is there any objection? If not, so ordered.
    For further opening Statements, Ms. Maloney.
    Ms. MALONEY. Thank you, Madam Chair, from the great State of New York. I thank you for having this important hearing. I thank the witnesses for appearing today before the subcommittee to share their views on State regulation of insurance and consumer protection.
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    The incredibly diverse and vibrant U.S. insurance market owes much to the preservation of regulation by the States. In many ways they act as individual laboratories and allow experimentation that is not possible on the federal level. The focus of State insurance regulators on their individual markets allows them the ability to develop thorough expertise that can benefit consumers and the industry.
    I particularly appreciate the emphasis and the testimony of the Insurance Administrator of Oregon, which states that the first priority of State insurance regulation is protecting consumers. While State regulation has adapted to the changing insurance market for over 100 years, regulators face new challenges today to keep up with the new global financial services environment. Given these market changes, the GAO study is particularly timely conducted by the GAO, which provides a snapshot of how market analysis and market conduct regulation is being conducted in the States.
    The GAO testimony acknowledges that the National Association of Insurance Commissioners is emphasizing the need for nationwide standards for market analysis and market conduct examinations to its members.
    However, the GAO testimony highlights some major deficiencies in manner in which the States conduct this regulation and practice today. The GAO points to a lack of agreement on standards for examinations and training of examiners, inconsistent reliance by one State on the work of another, and an exam scheduled that overly burdens some companies and fails to adequately examine others. I believe these are serious fundamental problems that must be resolved to preserve the effectiveness of State insurance regulation.
    While we focus today on market analysis and market conduct examinations, I look forward to continuing this discussion to the full range of State insurance regulatory issues. I thank the chairwoman for calling this hearing, and I look very much forward to your testimony.
    Chairwoman KELLY. Thank you, Ms. Maloney.
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    Mr. Barrett? Mr. Davis, have you an opening Statement?
    Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman, and thank you for permitting me to be here today. Before my colleague from New York joined me, I was tempted to say that only in the House can you join a subcommittee and become ranking member on the same day, for at least a day.
    Let me welcome the panel here today. I will not make a very long opening Statement. I would simply say this, one of the consistently vexing issues that we are facing right now as a body and as a committee is the byplay between the States having a lot of leeway to fashion their own regulatory structure, and the practical difficulty in a modern 2003 economy when predictability does not exist across the country. We face that in a host of contexts, from tort reform to preemption, and certainly to the kinds of issues that you are talking about today.
    One of the advantages of being on this committee is that we do have a chance on a fairly regular basis to engage these issues in a somewhat non-confrontational fashion. We do have the advantage on a pretty consistent basis of engaging these issues in a manner that helps us learn, instead of one that automatically polarizes us. So I look forward to hearing your testimony and to being edified by it today.
    Thank you, Madam Chairwoman.
    Chairwoman KELLY. Thank you, Mr. Davis.
    Mr. Hensarling?
    Mr. Renzi?
    Mr. RENZI. Thank you, Madam Chairwoman.
    Thank you to our panel today for your testimony. I look forward to hearing it. I know we are looking at today the effectiveness of our State insurance markets. I particularly am concerned and I am interested in understanding a little bit of how we get away from so much of the patchwork of our regulation. I found as an insurance agent that it leads to what I feel is much more higher prices and less product choice. I would like to see more of an emphasis on regulations that are uniform as it relates to our licensing of agents, as well as kind of signature laws. I am hopeful today that some of your testimony will cover that, and I look forward to it.
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    Thank you.
    Chairwoman KELLY. Thank you, Mr. Renzi.
    Our panel today consists of the Honorable Terry Parke, Illinois State Representative, past President, the National Conference of Insurance Legislators.
    He is accompanied by Mr. Robert W. Klein, Ph.D., Associate Professor and Director, Center for Risk Management and Insurance Research at the Georgia State University.
    Then we have the Honorable Mr. Joel Ario, Insurance Administrator from the Oregon Insurance Division. He is Secretary-Treasurer of the National Association of Insurance Commissioners. We welcome you.
    Mr. Richard Hillman, Director, Financial Markets and community investment at the U.S. GAO. We welcome you.
    Mr. Brian K. Atchinson, Executive Director of the Insurance Marketplace Standards Association. We are glad to have you with us.
    And then we have Mr. J. Robert Hunter, Director of Insurance, Consumer Federation of America. Welcome, Mr. Hunter.
    And then Ms. Lenore Marema, Vice President, Legal and Regulatory Affairs, Alliance of American Insurers.
    Thank you all very much for being here. We begin with you, Mr. Parke.


    Mr. PARKE. Thank you, Representative Kelly, members of the subcommittee.
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    My name is Terry Parke.
    First, I would like to express my appreciation for having the opportunity to speak to you today. It is my privilege to represent the residents of Schaumberg and Hanover Townships in the northwest suburbs of Chicago, in the Illinois General Assembly.
    It is also my privilege to have served as President of the National Council of Insurance Legislators, NCOIL, in 2001. In that capacity, I testified before the modernization of insurance regulation before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. In that testimony, I said an effective market conduct regulation would be essential to overall modernization. That testimony pointed out that strong regulation of conduct in the marketplace would be essential if States move from the present-day prior-approval system to strong regulation targeting actual company misconduct.
    In today's testimony, I will provide you with the content of a preliminary report of the Insurance Legislators Foundation, as an educational and research arm of NCOIL. The primary report was received by the ILF on May 2 and will be the subject of a public hearing at the Hotel Intercontinental in Chicago on June 6. NCOIL is happy to release the document in conjunction with the holding of this hearing.
    The preliminary report identifies fundamental and sweeping changes that would bring insurance market regulation as practiced today into the 21st century. It offers ideas that can bring insurance regulation in line with the reforms and new attitudes that have begun to take shape in the regulation of financial services in the United States and overseas.
    The preliminary report points out that their needs to be a fundamental re-thinking of the philosophy and approach toward market conduct regulation and surveillance. In many respects, regulators have become de-factor quality control auditors for insurers. This is not an effective use of regulatory resources and does not serve the public interest. The present system has become a patchwork in practice, varying from State to State. It is arbitrary and places an excessive burden and uncertainty on insurers. The preliminary report contains ideas that would benefit consumers by eliminating costly regulatory redundancies. These redundancies increase the cost of products and stifle innovation. Such regulatory redundancy can also deter an insurer from entering markets and thereby reducing consumer choice.
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    Representative Kelly, members of the subcommittee, changes in market conduct regulation are essential and indispensable components of improving the efficiency and effectiveness of insurance regulation and insurance markets in America.
    Today's report is part of a second and final phase of a four-year study of market conduct regulation which James Schacht of PricewaterhouseCoopers and Dr. Robert Klein of Georgia State University conducted. The first phase of that study compiled in 2000 found, among other things, widespread disagreement regarding the purpose of market conduct examinations, especially as to whether such examinations should focus on general business practices, or only on specific violations of law, and little coordination of market conduct examination by States, leading to widespread and wasteful redundancies.
    Today's preliminary report responds to those and many other real-world, present-day issues. Critics say that the present market conduct surveillance system fails to acknowledge insurers' compliance programs, self-assessment, and independent assessment activities. The primary report shows how States could establish standards for effective compliance programs.
    Most specifically, we envision a regulatory approach in which the CEOs of each regulated insurer would certify that the company he or she manages has operated in ways that do not harm consumers. In this new system, each CEO would certify to regulators that the company he or she manages has complied with the standards, or in the negative, would identify the standards that the company has not met, along with the steps to remediate the problem. Such self-policing systems would include incentives for insurers self-assessment activities aimed at determining improper market conduct practices.
    In our earlier report, it was noted that 85 percent of the insurers surveyed performed critical analysis or retained independent assessors to detect improper market conduct practices. Self-assessment activities improve compliance, discourage violations and foster corrections.
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    This concept of self-policing is not unique to the insurance industry. Other regulatory agencies are shifting from prescribing specific behavioral controls to articulating principles of guidelines for companies to follow, and then allowing them to develop effective controls meeting them. The recent proposed anti-money laundering requirements for the insurance industry provide a clear example of this shift. The proposed rule for insurance companies concerning section 352 of the PATRIOT Act provides broad discrepancies, but allows insurers to establish specific program elements to achieve the intent of the section of the Act.
    The preliminary report points out that there is often a lack of coordination with regard to multi-State examinations. The preliminary report identifies the need to give the domiciliary State the main responsibility for monitoring the surveillance activities of an insurer and its affiliates. Critics point to a lack of statutory authority with regard to market surveillance. Only two States——
    Chairwoman KELLY. Mr. Parke, I am sorry to interrupt you, but you have five minutes and your five minutes are up. I would like to have you summarize what you are going to say. I want to inform all of our witnesses that your written testimony is in total in the record, and many of us have read your testimony. So we are asking you today to give a summary of what your testimony is. The green light means you have five minutes; yellow means you have one minute to sum up; and red means you are out of time. In the interests of making sure that some of the people who have flown in can get the planes to fly back out, I am going to try to keep this hearing to five minute segments.
    So, Mr. Parke, I let you go over a little bit because in fact we had a little problem here with the lights, but at this point, if you could sum up, I would appreciate it.
    Mr. PARKE. That is fair. I have to catch a plane myself, so I am along with the problem.
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    In essence, we have a report that we are going to make public today that addresses market conduct. We think it will talk about the concerns that this committee has expressed. We think that there needs to be a new approach to market conduct in which insurance companies and insurance regulators can use the resources to make sure that those bad actors are in fact held accountable. That can be done through market conduct. And the rest of the insurance industry that are complying, doing a good job and serving consumers and making a profit are not penalized for those that are not doing a good job. We think this approach is worthwhile and worthy, and we will push it at the NCOIL conference that will be established in a month at our summer meeting that will be in Williamsburg, Virginia.

    [The prepared statement of Hon. Terry Parke can be found on page 102 in the appendix.]

    Chairwoman KELLY. That sounds terrific, and I hope you will put a copy of that report in the hands of the staff here.
    Mr. PARKE. That is already being done. Thank you.
    Chairwoman KELLY. Good. Thank you so much.
    Mr. Ario?


    Mr. ARIO. Thank you, Madam Chair. My name is Joel Ario and I want to join Representative Parke in thanking you for holding this hearing this afternoon. Having read the comments of both Representative Parke and Mr. Hunter, I see there is no divergence there. There is a lot of divergence of opinion on this panel. I am anxious to get to the questions myself, so I will be brief in summarizing my written comments and really focus on four points.
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    First, as you have already mentioned, effective consumer protection, focused on local needs. This is the hallmark of State insurance regulation.
    Second, because of this focus on local needs, this is not an area where one-size-fits-all works. It needs to be adapted to local circumstance.
    Third, effectiveness and efficiency are not mutually exclusive. Effectiveness is most important, but we think there are many ways in which we can make the system more efficient as well.
    And then finally, the foundation of an effective and efficient system is a rigorous market analysis program. I noted several mentions of that in the opening Statements. I think that is the foundation really that we are trying to develop for a program that draws on all the different areas of market regulation, to identify and respond to the real consumer problems in the marketplace.
    Let me take you to those in turn. Gain, the purpose of State insurance regulation, and it has been this way for 125 years, is consumer protection. Insurance is a different kind of product than either banking or securities or really any of the other financial products out there. It is a more complex kind of product. What kind of policy will be offered to the consumer? What will be the price of the policy? What are the specific policy terms and conditions? What is included, what is excluded from the policy? What does the fine print say? Is a claim valid when it is filed? If it is valid, how much is it worth? These are all questions that are very complicated. They often lead to misunderstandings between consumers and insurers and they often lead to consumer complaints to our offices.
    We handle on a national basis 3.5 million consumer complaints a year in the 50 States. That works out to an average of 7,000 complaints in every State. I would venture to guess that is an order of magnitude, or maybe more different than the amount of complaints that come in on the other financial service products. Responding to those consumer concerns, listening carefully to what the consumer says in those complaints, and trying to get to the real issues of those complaints—they are not all valid. There are some complaints that come in that are not, but a number of them, most of them raise important issues. Our job is to follow those complaints and address them in our marketplace and make that marketplace work for consumers at the local level.
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    Second point, this is not an area that one size fits all. There surely are areas where there is commonality. In the life insurance industry, we have recognized as regulators a number of parts of life insurance regulation that ought to be more uniform, and we are taking aggressive action to address those. But you get into some of the other lines of insurance, and the differences are important between the States. Terrorism is a different problem in New York than it is in my State of Oregon. Hurricanes and other kinds of disasters that befall coastal communities make for a much different homeowner market in Southern Florida than a homeowner market in the Midwest.
    If you look at health marketplaces, you will see the way the local provider networks work, the way the hospital networks work, all have a fundamental effect on how the insurance products are delivered in those markets and how the insurance products are put together.
    Some suggest, and Representative Parke just did, I think, that we could have a uniform system across the board for this, and usually it comes with the recommendation that he makes, which is that the State of domicile would be the appropriate State to take the lead. There is a lot of merit in that, and I think the NCOIL study is a good study that will help us move forward. But there are some problems with that kind of model, too.
    Take the terrorism issue. Terrorism is not a big issue in my State. We have not had a lot of quarrels with the insurance companies over their terrorism coverage, their exclusions, and so forth. But I know in your State of New York, it is a much different situation. Superintendent Serio spends a lot of time on that issue. When I call up Greg and say, ''Gee, Greg, now that I have checked into this company that is domiciled here in Oregon and does business in New York''—I do not have a big carrier that fits this, but say I did—and called up Greg, and said, ''I have checked them out, and on a generic basis, they do a good job with their terrorism filings with us, so just trust me, leave it alone, don't worry about what they do in your market,'' he would not be very happy, because he would say his marketplace is dramatically different than mine, and he has a different stance on exclusions. He has a different stance on a number of issues. I understand that. I agree with that. It is a different kind of marketplace. That is the kind of situation I think that we want to work on the problem, but it is not a one-size-fits-all type of situation.
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    Third point, there are efficiencies to be gained. A lot of this I think does and should focus on market conduct exams. One of our major initiatives at the NAIC this year is uniform exam procedures. We have identified four different areas in the examination process where we think there ought to be clear uniformity.
    First is scheduling. If we can schedule in a consistent and uniform basis, we can minimize duplication.
    Second, if we can do pre-exam planning in the same kind of way, we can then deliver to the companies clear expectations of what a market conduct exam is going to be, what is expected of the company, what the regulator will want to see.
    And third, in the examination procedures, if we can do those more uniformly, we can have a more predictable process for everyone. It can be a more efficient process. It can be done more quickly and so forth.
    And then finally, if exam reports are written in a consistent and uniform fashion, we can better understand and compare results.
    I see I am already to the red light, too, so I will skip my last point on market analysis and make just a very quick conclusion. We again welcome this hearing. We will not get the job done that we want to get done by ourselves. You are right that the Congress pushing on us, NCOIL pushed on us, the industry pushing us, Bob Hunter pushing on us; all of those things are important to getting our job done. The worst case, the absolute worst case for us would be an overreaction to the problems and to create a one-size-fits-all federal solution. It just would not work for consumers.
    Finally, the key for all of us is to keep our eye on the ball here, the main objective which is effective consumer protection.
    Thank you.

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    [The prepared statement of Hon. Joel S. Ario can be found on page 36 in the appendix.]

    Chairwoman KELLY. Thank you.
    Mr. Hillman?


    Mr. HILLMAN. Thank you, Madam Chairwoman and members of the subcommittee. I appreciate the opportunity to provide you with GAO's preliminary observations from our work on State insurance regulators' oversight of market activities in the insurance industry.
    My focus today is on, one, the States' use of market analysis and on-site examinations and market regulation; and two, the effectiveness of the National Association of Insurance Commissioners' efforts to improve these oversight tools and encourage the States to use them.
    Regarding our first objective, on the States' use of market analysis and on-site examinations and market regulation, we found that all States do some level of market analysis, but few States have established formal market analysis programs to maintain a systematic and rigorous overview of companies' market behavior and to more effectively identify problem companies for more detailed review. The way State insurance regulators approach and perform market conduct examinations also varied widely across the States.
    While NAIC has developed a handbook for market conduct examiners, States are not required to use it, and we found that it is not consistently applied across States. Moreover, the handbook is not intended to provide guidance for some important aspects of market conduct examinations; for example, how often examinations should be performed or what criteria States should use to select companies to examine.
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    We also found that the number of market conduct examiners differed widely among States and that there were no generally accepted standards for training and certifying examiners. These differences make it difficult for States to depend on other States' oversight of market activities. Most of the States that we visited told us that they felt responsible for regulating the behavior of all companies that sold insurance in their State, regardless of their State of domicile. Thus, even in those States that did market conduct examinations, the effort is often neither efficient nor effective because the pool of companies is too large for any one State to handle.
    Moreover, since most States are not coordinating their examinations with other States, some large companies reported being examined frequently and sometimes simultaneously by multiple States, while other companies were examined infrequently or never.
    Regarding our second objective, to assess NAIC's efforts to improve the States' market conduct programs, we found that since the mid-1970s, NAIC has taken a variety of steps to improve the consistency and quality of market conduct examinations. However, despite the NAIC's longstanding efforts and some limited successes, progress towards a more effective process has been slow.
    Recently, NAIC has increased the emphasis it places on market analysis and market conduct examinations as regulatory tools that could improve States' abilities to oversee market conduct. With more consistent implementation of routine market analysis, States should be better able to use the resources they already have available to target companies requiring immediate attention.
    Also by applying common standards for market conduct examinations, States should be able to rely on regulators in other States for assessments of an insurance company's operations. These improvements should, in turn, increase the efficiency of the examination process and improve consumer protection by reducing or eliminating existing overlaps and gaps in regulatory oversight.
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    However, if NAIC cannot convince the various States to adopt and implement common standards for market analysis and examinations, current efforts to strengthen these important tools for consumer protection are unlikely to result in any fundamental improvement.
    In summary, we support the goal of increasing the effectiveness of market conduct regulation through development and implementation of consistent nationwide standards for market analysis and market conduct examinations across the States, in order to better protect insurance consumers. The emphasis placed on these issues by NAIC has increased substantially over the last three years.
    We believe that NAIC has taken the first step in the first direction, however much work remains as NAIC and the States have not yet fully identified, reached agreement on, and implemented appropriate laws, regulations, processes and resource requirements that will support the goal of an effective uniform market oversight program.
    Madam Chairwoman, this concludes my prepared statement. I would be happy to respond at the appropriate time to questions.

    [The prepared statement of Richard J. Hillman can be found on page 64 in the appendix.]

    Chairwoman KELLY. Thank you, Mr. Hillman. I want to say that I found your report very interesting, very cogent. I hope our other panelists have a chance to read it.
    Mr. Atchinson?

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    Mr. ATCHINSON. Good afternoon, Madam Chairwoman and members of the subcommittee. Thank you for the opportunity to speak with you today on this important topic.
    I am Brian Atchinson, Executive Director of the Insurance Marketplace Standards Association. IMSA is an independent nonprofit organization created in 1996 to strengthen consumer trust and confidence in the life insurance industry through a commitment to high ethical market conduct standards. IMSA member companies comprise more than 200 of the nation's top life insurance companies, representing approximately 65 percent of the overall market share for individually sold life insurance, annuities and long-term care insurance products.
    From 1992 to 1996, I previously served as Superintendent of the Maine Bureau of Insurance, and in 1996 as President of the NAIC. Prior to joining IMSA, I served as an executive officer in the life insurance industry. As a former regulator and company person, my views on market conduct regulation come from a number of different vantage points. Insurance regulation is intended to ensure a healthy competitive marketplace and to protect consumers.
    We have come a long way since the first market conduct exams in the 1970s. Unfortunately, the current State-based system of market conduct regulation presents challenges that even some in the regulatory community acknowledge is in need of improvement. There is little uniformity in the manner in which individual States conduct market conduct exams. State market conduct exams have been described as being like snowflakes: no two are alike.
    Insurance companies often are subject to simultaneous or overlapping market conduct exams from different States applying different laws and regulations. This lack of uniformity results in significant cost and human resource burdens on insurance companies that translate into higher costs ultimately passed on to consumers in the form of higher prices for their products. The challenge for regulators and for the industry is to create a uniform system of market conduct oversight that creates greater efficiencies for the insurance industry, while maintaining appropriate consumer protections.
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    The NAIC has been working toward uniform regulation for some time, but the pace of change has been slow and has prompted more efficient and effective alternatives. Regulators could improve the current system of market conduct regulation in several ways. For instance, today's market conduct exams tend to focus on identifying technical violations that may have little actual impact on consumers. Perhaps the focus should shift to exploring whether a company has a comprehensive system of policies and procedures in place to address market conduct compliance issues.
    Also, State insurance departments should not view market conduct exam activity as a source of revenue or general fund subsidy. Rather, departments should be determining whether a company has a system in place to detect and remedy market conduct improprieties before they become widespread. This practice would allow market conduct regulation to better serve consumer interests.
    IMSA's mission, the Insurance Marketplace Standards Association, is primarily to strengthen trust and confidence in the life insurance industry through high ethical standards. IMSA qualification also provides a consistent, uniform template of market conduct compliance policies and procedures. To meet IMSA standards, a company must have in place a comprehensive system of compliance throughout the organization, undergo an external assessment, and then undergo a new assessment every three years. Companies that qualify for IMSA devote considerable resources to maintaining those standards, and are well-positioned to respond quickly to State regulatory inquiries or to comply swiftly with new State legislative requirements.
    The U.S. PATRIOT Act offers a prime example. As you know, this law gives federal authorities much wider latitude to monitor potential money laundering activity. Recently, the media reported that terrorists, drug dealers and other criminals may be using life insurance products to launder money. With an infrastructure of policies and procedures in place to detect and cure questionable sales practices based on IMSA's principles, an IMSA-qualified company is already in a good position to comply with the intent of federal anti-money laundering efforts.
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    In the last two years, IMSA has gained greater acceptance by regulators and rating agencies. In fact, a small but growing number of State insurance departments use IMSA membership and qualification as an informational tool as they plan and conduct market conduct exams. We applaud these efforts. With State insurance department budgets under tremendous pressure, we encourage regulators to pursue all available means to leverage increasingly limited resources. IMSA can serve as a valuable resource towards that end.
    Neither regulators or companies alone can ensure that the marketplace is always operating in a fair and appropriate manner at all times. Organizations like IMSA, working in conjunction with regulators, can offer invaluable support to reform market conduct regulation and may even offer a blueprint for reform solutions.
    In conclusion, IMSA believes the market conduct regulations should be more uniform and efficient, and we will continue to work with you, the NAIC and State and insurance departments to explore ways to improve market conduct regulation for the benefit of consumers, regulators and insurers alike.
    Thank you very much, Madam Chair, for the opportunity to participate in this hearing and to address this important topic. Thank you.

    [The prepared statement of Brian K. Atchinson can be found on page 59 in the appendix.]

    Chairwoman KELLY. Thank you very much. You are my hero because you stayed within the five-minute line.
    Mr. Hunter?

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    Mr. HUNTER. Good afternoon, Madam Chair, members of the committee. I am Bob Hunter, Director of Insurance for Consumer Federation, a former Texas Insurance Commissioner, and Federal Insurance Administrator under Presidents Ford and Carter.
    No one could deny that State insurance commissioners have a poor record when it comes to market conduct oversight of the insurance industry, and consumers have been abused as a result. We could go through many examples. The lack of excellence is particularly concerning in an era where less regulation of products is done at the time they are introduced, exposing consumers to greater risk of damage by bad insurance policies not reviewed by anyone at the State insurance department level.
    The NAIC itself has Stated that greater, more aggressive consumer protections are needed in this new era, and we agree. The unique nature of insurance policies, which are complex legal documents not easily understood by consumers, and insurance companies that are granted antitrust exemption by the federal Congress, requires more extensive consumer protection than other consumer commodities. State systems should be designed to promote beneficial competition such as price competition, loss mitigation efforts, but to deter destructive competition such as selection competition, redlining in the cities and so on, reverse competition such as credit insurance where prices are driven up by high commissions and other unfair sales practices.
    We believe that the following items are important to consider as you look for ways to upgrade the State market conduct oversight capacity. First, there should be minimum standards for market conduct examinations. That would be good for consumers. We have supported them on the national NAIC level and we would support them at the federal level, but we are very concerned about weak uniform standards. We are very concerned that that would lead to abuse.
    The accreditation type of approach was very successful in upgrading State financial examinations might be used to achieve these kinds of goals. There must be enforcement criteria in the standards. There must be private causes of action as an important complement to market conduct examinations, because market conduct examinations are only prospective, and cannot grant restitution to already-harmed consumers, and consumers do not at this point trust the track record of the States.
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    Consumers oppose self-certification programs in the form that some have proposed, and specifically we oppose the NCOIL proposal that we have heard today. Self-certification in the post-Enron era is problematic at best. That is not to say self-certification could not be part of what a State looks at in determining whether an insurer is meeting State standards.
    However, if a State relies on such information, it must be made public and the tests made by self-certification groups must be transparent. Consumer feedback should be used after policy terminations, claims denial and other actions by insurance companies. There ought to be a way of finding out not just complaints, but some kind of interview process periodically used by the States. There should be suitability rules in place, particularly for cash-value life insurance policies to assure that sales of proper products are made.
    The NAIC should be requiring certain data to be collected, some of it for market shares, entries and exits and so on, but also zip code data to see if redlining is occurring; underwriting guidelines to determine how insurers decide what to write and how to price; and claims handling guidelines to determine the rules for claims processing. While there has been progress by the NAIC in details of how exams are to be done, they have not achieved effective or efficient examinations. Consumers want effective examinations. We also agree that efficient examinations is a good goal and we think that it can be improved without giving up effectiveness.
    We need a thorough examination of what has gone wrong in previous market conduct exams that have missed a lot of really bad situations. It is hard to fix a system that has not been analyzed.
    I would be happy to respond to your questions at an appropriate time.

    [The prepared statement of J. Robert Hunter can be found on page 78 in the appendix.]
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    Chairwoman KELLY. Thank you, Mr. Hunter.
    Ms. Marema?


    Ms. MAREMA. Thank you. I am delighted to be here to represent the views of the Alliance of American Insurers. We are a national property-casualty trade association. We have 340 property-casualty insurance companies as our members, and our members range in all sizes, from the smallest to the very large companies.
    What I thought I would do here in my five minutes is share some of our members' experiences with you about the current State market conduct examination system. Our members would share three concerns they have about the system with you. We would have three ways in which we think it can be improved. Then I would like to talk a little bit about how we think we need to proceed.
    If our members had one overriding concern about the current market conduct examination system, it would be that States need to better target companies for examination. They need to target companies with problems. Many times our members really do not see among the States a rational basis for triggering an examination. I do not think I could State this better than one of the consumer groups did at a recent NAIC meeting when they said that the States really need to focus on the biggest problems, not the biggest companies.
    Secondly, States need to better coordinate market conduct examinations. In the current system, each State can call an examination with little regard or any regard for what any other State is doing. It is not uncommon for a very large insurance company to have a dozen or more market conduct examinations pending at any given time.
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    Thirdly, there is a lack of consistency in examination procedures. The NAIC has a market conduct examination handbook that tells States how to do it, but there is a variety of different ways that States have implemented it. Just to give you on example, the handbook requires that companies get notified of the exam. The notice that a company could get can vary from six minutes to six days to sixteen days to sixty days, and it can be specific or it can be very general and so forth.
    So those would be the three problems that I would cite from our members' perspective in the current system. What to do about that? Much has been made about the differences in State laws and regulations. I think if you are talking about market conduct examinations, I think we are talking more not about differences in laws and regulations, but difference in the 50 States' processes and 50 States' implementation of that. The lack of coordination leads to duplication and overlapping. Really, the inconsistent State procedures are the real problem.
    Having said that, I think the groundwork is in place to change that. If you look at the NAIC's testimony, Superintendent Ario has listed a wide variety of market conduct activities that the NAIC has under way to correct some of these problems. But there are three of those NAIC initiatives that we think will produce real-time change in the current system.
    The one is the market conduct analysis that they intend to develop. We think there is a wealth of information that already exists in the State insurance departments to help them better target companies for examination: consumer complaints, reports that companies do on major changes that they have made in their companies, and so forth. The appeal that this market conduct analysis has to us, it is something based on data that all States have; it is something they can all do; they can all do it now; the data that they have is applicable to all lines, all companies. I think it would bring States up to a certain bar that they would all be doing analysis on the same data in a consistent manner. That is a work in progress at the NAIC. It is going to take some doing to put together.
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    Secondly, they are doing an exam tracking system, the ETS. That is going to be an electronic system where there will be a centralized system of scheduling. That, to us, gives the States really the vehicle that they need to better coordinate an exam. When a State wants to call an exam, they will be able to look at the ETS and see what other States are doing with regard to that particular company.
    And last, certainly, is the uniformity effort that the NAIC has going on, in particular some of the items in that. I would cite the standard data call. The NAIC has developed really the basic information that all States should need to do an exam in, and in the same format. That, from our companies' perspectives, those three items are going to be very, very helpful.
    How would we proceed? The key here is going to be State implementation. I will say in my remaining time, from the Alliance perspective, real change is change in behavior in the State insurance departments that conduct market conduct exams. For example, it is a good thing for the NAIC to develop a standard analysis, but from our perspective success is when all States actually use it. It is good for them to develop an examination tracking system; that is really needed. But the success is when all States input their data into it. It is really good for them to develop uniformity in procedures for examinations, but the real key to success is when our members see an examiner coming through the door who utilizes those procedures.
    My organization supports State insurance regulation. We think that it has served consumers best over time because it responds to local needs. We think the States can fix these problems. I think the NAIC has laid the groundwork and more importantly, we see a strong commitment from the NAIC leadership to do this. So we are operating from the presumption that the problem is going to be fixed at the State level and it will get done.
    Thank you.

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    [The prepared statement of Lenore S. Marema can be found on page 88 in the appendix.]

    Chairwoman KELLY. We thank you. I thank all of you for your testimony. In particular, I would like to go back to you, Mr. Parke, just for a minute, and talk to you. You mentioned the Illinois model in your testimony. Do you think that Illinois' system of insurance regulation focuses on less regulation on the front end and more on the back end? Do you think that that targets the insurance department resources in the areas that will most benefit the consumers, like the market conduct oversight? Do you think that that has worked well?
    Mr. PARKE. As a matter of fact, the State of Illinois is one of the most competitive States in the union. We have some of the largest amount of insurance companies selling insurance in the State of Illinois. That is because the free market system works. Competition works. They regulate each other because competition requires that. The consumer is not left alone. The insurance department uses market conduct. It also regulates solvency and also takes a good look at consumer complaints.
    In the State of Illinois, we find that there is an awful lot of members that have diverse thinking. I have been in the General Assembly 19 years and I have never really heard a whole lot of legislators pushing to change the current system that is there. And there are a lot of different points of view. We have some members that are very pro-consumer, and yet we do not see a cry from Illinois legislators to change the current system. Competition works when you leave it alone and let it function.
    Chairwoman KELLY. What kind of coordination is going on between NCOIL and the NAIC to improve the market regulation?
    Mr. PARKE. Well, the report that we have is going to be presented. We are going to review it on June 6 in Chicago, and then we are going to look at the next three meetings of NCOIL, starting with our Williamsburg program, to try to see what kind of model legislation can be derived from this report.
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    We believe that the model legislation that will be used by various legislators to be taken to the State capitals to be refined based on what the needs of that State's needs for market conduct would be, I think there is a strong cry to change the current system of market conduct, and I think that Illinois will be one of those, if I have anything to say about it, that will be presenting a new approach to market conduct. I believe progressive legislators in the other various States will do the same.
    Chairwoman KELLY. Since you brought up the model legislation, what do you think the chances are of the model legislation actually getting there, and how long do you think it is going to take the majority of the States to pass the legislation in some kind of a uniform manner and with some sort of uniform implementation? As we have heard today, that is critical. I am asking this question because I authored the NARAB legislation and we are still working on it. So I am wondering how long you think it will take you to get this done.
    Mr. PARKE. I think NARAB is a fine example, and I am glad you brought it up. Quite frankly, the goal was 29 States. We exceed that. We are at 42 States. Yes, there are two or three major States that have not done it, but quite frankly those States have internal questions and they have issues that are unique to those States, and I think that they are struggling and working through it. Eventually, I think that will come about and will happen.
    As far as legislators, we believe in the next 12 months that we will present at NCOIL, probably sooner than that, a model bill that the legislators can take back to the various States. Again, fine-tune it based on what that State's needs are and what the consumers' needs are, and I think you will find that a great majority of the States will move forward with some kind of uniform market conduct program.
    Chairwoman KELLY. Thank you.
    Mr. Ario, you testified that it may make sense to shift some of the focus from the front end, review through the rate and form review process, to a combination of self-certification and back-end view through desk exams or other approaches. I wonder if you would talk to us a minute about that, just expand on that a little bit.
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    Mr. ARIO. Madam Chair, I would be happy to. I think the Illinois case is a good example. There is a competitive market there with more of a back-end approach. We are looking at this in Oregon. We are shifting some of our rates and forms analysts who currently spend all of their time looking at filings as they come through the front door, and still doing some of that.
    I think Mr. Hunter makes some very good points about the need to look at some products, anyway, on the front end because of the complexity and the difficulty consumers have with those products. We are shifting some of that resource towards the back end and relying on self-certification, the kind of things that Brian Atchinson talked about. We have check-lists now on our web page that companies fill out to show exactly what their form does and does not contain. If we send a message to the companies that we are going to take them at their word on those things, as a starting point, but trust and then verify.
    We are going to then go out and spot check on the back end whether those forms actually do comply in the way that they are certified to comply. We are probably going to have to catch some people doing it wrong, but if we do catch them and make examples of them, I think companies will get the idea, and I think it will improve the filings on the front end, frankly. A lot of the filings that come in now, since they know we are going to review them on the front end, some of the filings come in as kind of an opportunity to discuss; let's just throw it at the regulator and see what they think. If we have a self-certification and hold them accountable and then spot-check on the back end, I think that that system is workable, not for all products, but for some products.
    Chairwoman KELLY. Thank you.
    I am out of time. Ms. Maloney?
    Ms. MALONEY. Thank you.
    Mr. Hillman, my first question is for you. You indicated in your testimony that some States have some insurers that face multiple examinations from different States. Specifically, you described a situation in your written testimony where over a three-year period, three companies in your study of large companies were examined 17 times or more over three years, while six were examined between one and five times. I guess my question is, do you have any suggestions to correct this type of different treatment for different insurers?
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    Mr. HILLMAN. There is a wide variety of steps that the State insurance regulators could take to improve the efficiency and effectiveness of their market conduct examination programs. Perhaps one of the most important things would be the development of consistent standards for market analysis and market conduct examinations, so that one State can rely on the activities of another State in conducting those analyses and examinations.
    Right now, because things are so inconsistent, there is no reliance on State activities and one State insurance department regulator believes they must look at all the insurance companies within their State—those that are domiciled and those that sell insurance, but domiciled in another State—rather than relying on the form of State insurance regulation.
    In addition to consistent standards, we also believe that there needs to be more consistent laws, more consistent regulations, more consistent processes, and the development of resources with appropriate expertise to conduct market examinations.
    Ms. MALONEY. Mr. Ario, would your organization be the one to come forward with these consistent standards?
    Mr. ARIO. Ms. Representative, that is correct, yes. The one point that I would make on the exam——
    Ms. MALONEY. Are you working on them?
    Mr. ARIO. Yes. We are working on uniform standards for examinations and we are working on a uniform analysis system. I think Mr. Hillman is correct that those processes will help improve this sort of situation.
    The one other comment I would make, though, is that without knowing exactly which companies we are talking about, in the property and casualty market, for instance, there are three large insurers that are the three largest insurers in almost all 50 States. They represent almost half the market. Given that there are different situations in different States, there may be reasons why different States would want to examine them. It should not be over the same issues. We need to solve that problem. But if States have different kinds of issues with the same company, you still may have a number of exams of the same company. It should not happen with small companies; it should not happen with companies that are only engaged in a few different States, but it will sometimes happen with larger companies.
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    Ms. MALONEY. First of all, I want to thank you for your testimony and for highlighting the incredibly complex situation facing insurance companies operating in New York City and State, the State and city that I represent, and their efforts to offer terrorism insurance. I agree that this situation poses very unique problems that demands the local expertise of New York regulators. But given the Statements by GAO and yours also confirming the findings of duplication of examination and varying levels of training for examiners, can you give the subcommittee any kind of specific date when you believe that the NAIC standards that you are working on will come forward? A year? Two years?
    Mr. ARIO. Representative, I wish I could promise you a date certain for the whole nine yards here. What I can tell is that on the uniform exam procedures, which is the project that is furthest along for us, we have already 40 States self-certifying compliance with at least two of the four areas of uniformity. Our goal this year, which I think we will achieve, is more than 40 States self-certifying to all four areas.
    The next step will be, again, trust but verify. We expect it of ourselves, too. We are asking the companies and Lenore and her crew to give us complaints when States certify and then in practice are not doing what they certified to. So there will be some implementation there, but that project will be more or less completed this year.
    Market analysis; that is going to take maybe a couple of years, and to build the collaborative models, to build the trust among the States and the consistent reliance, that I would probably ball park at a three-to five-year time frame. This is not easy stuff. Insurance is complicated, as you suggest, with terrorism, and there are examples like that all across the board. I think the key, if I were in your shoes, would be to look at, is there steady progress, not so much is it done by a date certain, but next year if we have a hearing or when you are looking at what we are doing, have we made consistent, steady progress. That would be the way I would measure what is happening.
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    Ms. MALONEY. Just as a follow up, Mr. Hunter and the other witnesses, do you think that the self-regulation works, and the initiatives that are detailed, will they be successful in combating the existing inefficiencies in insurance market regulation?
    Mr. HUNTER. Well, we are very skeptical, but if self-regulation is transparent and the States rely on it and we can see exactly what is going on, then we can trust it. But if it is a black box, then we are very afraid of it because we do not believe that certain companies are going to tell the truth. We know some companies are doing some bad things to consumers, and we cannot trust a black box system of self-certification.
    Chairwoman KELLY. Thank you very much, Ms. Maloney.
    Ms. MALONEY. Thank you.
    Chairwoman KELLY. Mr. Barrett? Sorry.
    Mr. Hensarling? No.
    Mr. RENZI. Mr. Renzi?
    Chairwoman KELLY. Mr. Murphy, were you here before Mr. Garrett?
    Mr. Renzi?
    Mr. RENZI. Yes, ma'am?
    Chairwoman KELLY. You were here before either one of these two? I am just taking people in order. You are here, okay.
    Mr. RENZI. Thank you, Madam Chairwoman. Thank you so much.
    Gentlemen and ma'am, thank you so much for your testimony. I wanted to move to the subject matter of agent licensing reform. I know, Mr. Hunter, you are experienced in this field. I want to ask you, I know that with the 56 jurisdictions that we have under NARAB, I think Mr. Parke you spoke to the fact that you were proud of the fact that 49 of them——
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    Mr. PARKE. Forty-two.
    Mr. RENZI. Forty-two have some sort of reciprocity as it relates. Is that also to agent licensing?
    Mr. PARKE. It is basically agent licensing.
    Mr. RENZI. Okay. As it relates to that, is there a uniformity there that has been established yet, so that an agent can go on, submit one application, one set of requirements, and then pay the individual fees by State?
    Mr. PARKE. The answer is there are 38 States that are doing that now.
    Mr. RENZI. Okay. So we have uniformity, not just reciprocity, but uniformity with 38 States, so that one application merges with all 38 States.
    Chairwoman KELLY. Mr. Ario, do you want to answer that?
    Mr. RENZI. Thank you.
    Mr. ARIO. Yes. We are working hard on uniformity, but the question really is, I think, if I have a license in one State, if I am a resident agent, can I get into the other 49 States very easily? The answer to that is yes.
    Another one of the hats that I wear is the President and CEO of a group called the National Insurance Producer Registry, which operates an electronic gateway. So I am an agent now in any one of the States. I can go up on that gateway and enter my information showing that I am an agent in good standing, and be licensed.
    I think there are 15 States now that are on that electronic gateway, and there will be all 50 probably by the end of next year would be my guess. So although for resident agent purposes there may be differences in the laws, it does not really matter to the individual agent because they only want one resident license. They just want to be able to then, once they have that, to get into all the other States. That is what we are very close to achieving.
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    Mr. RENZI. So under your model, sir, an agent would be able to go online, fill out one application, provide maybe a photograph or fingerprints, and then pay individual fees by jurisdiction. I think we have 56 jurisdictions. And then you would be able to be quickly licensed. We have agents in my State who have waited months and months.
    In one case, we got testimony in my State of an agency who provides an insurance product for nursing homes, very needed in the property-casualty field. And to maintain their licenses alone, they are paying probably close to $100,000 a year, if you look at the labor costs and everything else involved, never mind the time frame and the different requirements they are having to jump through to get it done. So under your model, you are saying that this will be accomplished within a year?
    Mr. ARIO. I am not sure, Representative Renzi. I do not know which State you are from, but if it is not Oregon, you ought to come to Oregon because——
    Mr. RENZI. Well, it does not matter what State I am from. What I am saying to you is, if I am a licensed agent in any State, will I be able to have not just the reciprocity, but the uniformity of a simple application, one application with individual fees, or is that not going to be in the future?
    Mr. ARIO. Representative, for resident licensing, there still will be a need to go to the individual State where you are a resident and get that license.
    Mr. RENZI. I understand that.
    Mr. ARIO. But once you have that primary license, when within a year I think we will be at a situation, we are already at 15 States, I think we will be close to all 50 States a year from now. Once you have that license, you will be able to get licensed as a nonresident in all of the other States through an electronic licensing process.
    Mr. RENZI. With uniformity, sir?
    Mr. ARIO. It is not even really uniformity. It would simply be, all you have to do is say, I am a resident in good standing in X State. With that and your fee—we are still working on the fingerprint issue—but a few little things like that there would not even be another full application. We are trying to get the system close to driver's licenses. If you have a good driver's license in one State, you can basically drive in the other States. That is the system we are trying to get.
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    Mr. RENZI. Where are we headed on the idea of counter-signature laws as it relates to that kind of——
    Mr. ARIO. I think counter-signature laws ought to be eliminated. It was one of the safe harbors in the NARAB provisions.
    Mr. RENZI. Thank you.
    Mr. Hunter, is there a harm to eliminating counter-signature laws?
    Mr. HUNTER. Not from a consumer perspective, no.
    Mr. RENZI. Okay. Can I ask the panel, anyone with the expertise, where are we on uniformity as far as advertising on the Internet? Is it the domicile State that controls the laws as it relates to insurance agents who advertise on the Internet and what content? Mr. Parke?
    Mr. PARKE. Quite frankly, I would defer to the NAIC.
    Mr. ARIO. Representative, advertising is I think a good example of an area that fits something that Mr. Atchinson said earlier, which is we used to spend a lot of time in our market conduct exams focused on fairly technical issues. Many of those were in the advertising area.
    I know in our department, we used to spend maybe one-third of our examination time on advertising issues, pretty narrow advertising issues, that kind of question of exactly, is this an Oregon ad or was it done from some other States. We do not do advertising hardly ever in our market conduct examinations anymore, and we have not had any up-tick in consumer complaints. So I think that is an area where there is not a lot of consumer abuse. Mr. Hunter will give you some examples, there are some areas with the elderly and so forth, but by and large, I have not heard people worry too much about that issue.
    Mr. RENZI. Thank you.
    Thank you, Madam Chair.
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    Chairwoman KELLY. Thank you, Mr. Renzi.
    Mr. Davis, welcome to our committee, and your first question period.
    Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman.
    Mr. Hunter, let me direct my first set of questions to you. You were probably the most persistent critic of a multi-State regulatory framework. I want to ask you about a couple of premises behind that. I would imagine that the people on the committee who disagree with you would say that there might be very strong arguments for consistency with respect to, say, life insurance. There is not likely to be a lot of variation from State to State, by and large, in that area.
    However, it would seem that there might be significant variation when it came to two other classes of insurance: property-casualty losses, given varying threats from weather in different parts of the country; and the second one, of course, just being general health insurance, where there certainly is a real sparsity of health care in some areas, and very good and abundant health care in other areas. How do you address, briefly, those two sets of concerns, that if we try to craft a more nationalized system, it will not be able to account for those last two classes of insurance?
    Mr. HUNTER. Well, it will be more difficult, obviously. We have not opposed trying to craft multi-State approaches, as long as consumer protection is high and people are protected. We do get concerned about whether or not a consumer from State X that is harmed. Who is accountable? Who do they go to? That becomes a little bit of a problematic question, absent a federal approach where the government here is doing that.
    But we think it is possible to craft multi-State approaches. We do not oppose them. What we really want to make sure is that consumers are protected, whatever the approach, whether it is a local approach or a national approach. If the protections are good, we are happy with it, as long as there are ways to observe how it is doing; there is transparency in the process.
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    Mr. DAVIS OF ALABAMA. Give me an example of a multi-State approach, for example, that would address weather differences in States that face some high-risk of weather adversity. I am trying to get some vision of what a multi-State approach would look like that was not national in character.
    Mr. HUNTER. Well, you could have multi-States along the east coast and gulf coast of the United States dealing with the hurricane risk. There are multi-State approaches being used. In fact, one State, Florida, has taken some leadership, but most stakes look to Florida, for example, to certify that the models being used to project hurricane losses are fair and reasonable, so the other States rely. So I would call that sort of a multi-State approach on a very specific type of loss that is unique to certain parts of the country.
    Mr. DAVIS OF ALABAMA. How do they handle causes of action that cross multi-State lines?
    Mr. HUNTER. Well, the local State cause of action would apply, so that would be different. If a consumer was harmed and brought an action, it would be different, depending on the State even under a multi-State regulatory approach.
    Mr. DAVIS OF ALABAMA. Mr. Ario, let me ask you the next set of questions. From your perspective, obviously your premise is you defend the multi-State patterns that the States do a consistently good and effective job of policing consumer violations. Having said that, I think we would all probably agree with Mr. Hunter's assertion that there have been numerous instances where for whatever reason States have failed and various companies have done a number of things that we would certainly frown upon.
    To the extent that States are not able to do a more effective job, what is the reason for that? Is there some particular aspect of the States having to do their own enforcement that prevents them from being as effective as a national system might be?
    Mr. ARIO. Representative, I think there has been in the past a lack of focus on the question of market analysis. In a lot of situations, I think, as has been testified by other members here, the question of who gets examined and when is one that is not clear and done in a rigorous way.
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    So that is why in our work we put a great deal of emphasis on the concept of analysis. We have a rich continuum of data that we get at the State level—3.5 million consumer complaints, hundreds of thousands, literally, or Braden form product filings, producer actions, investigations—all of which tell us a lot about what is going on in our marketplace. I think we need to put more rigor into taking that information, and in a more rigorous modeling kind of way, look at it, identify key data points, identify outliers on those data points, and then address them.
    Market analysis, as the GAO report points out, is a relatively new concept. Everybody did it in one form or another, but it was not very rigorous and it was not a separate discipline. It is evolving now as a separate discipline. I think that frankly holds a lot of the key to addressing both the concerns of the industry and the consumers. On the industry side, we get away from the trivial problems and focus on the real problems. On the consumer side, we do not miss the problems; we identify the problems and get to them earlier. We are never going to find everything. Crooks are always clever, but we will find a lot more through market analysis.
    Mr. DAVIS OF ALABAMA. I think my time has expired, Madam Chairwoman.
    Chairwoman KELLY. Thank you very much.
    Mr. Garrett?
    Mr. GARRETT. Thank you and good afternoon, everyone. It is good to see somebody on the panel that I used to associate with when I was in my former days as a legislator myself. Good to see you again.
    I will throw the first question out to you, Representative, and this is a little bit off the mark of the others, but it is something we were working on in New Jersey, and that is the standards on life insurance and the speed of proposals with regard to approval forms and what have you. NAIC had proposed interState compacts for speed of market reform of life insurance products. Can you tell us a little bit about where that is? Whether NCOIL, if you know, has endorsed that compact yet?
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    Mr. PARKE. We have not endorsed it formally. We are looking at it. The concept has just been out nine months or so, and they have proposed it. We are reviewing it at our meetings and talking about the pros and cons.
    A concept like this is not an easy product to try and approach to doing something. There are members that have expressed strong opposition to this, and we have members that think that this is a direction that we have to go in for speed to market, to allow the financial services industry to be able to compete in a world marketplace. I think that is a driving factor that may ultimately pass that, but NCOIL has not taken a formal position on that issue.
    Mr. GARRETT. Okay, thanks.
    As someone who has been involved, not necessarily directly involved, with market conduct studies, but at least in the next room while they were going on, and seeing how they can impact upon the industry, on the company, I guess my question that I will throw out to the panel, if that is okay, and I think some of the testimony may have been along this line as well, is that the focus so much by the regulator is on the minutiae of it, and for those in the industry that are on the front line with the consumer would never say that it is the most important aspect of it.
    Some may view the word as the technical side of the equation instead, as opposed to the other end of the equation where if you work for the department, you know that it is easy to see where the problems are and it is easy to see which ones of the companies are the problem companies, because those are the ones that are getting all the complaints to the department. How do we address that? Is that really more not just simply an issue of simply solving this by coming up with a uniformity standard, because at the end of the day you may still get a system that you already sign onto as the appropriate system and is uniform across the board.
    Mr. Hunter would agree that it addresses consumer complaints at the end of the day, but is it a problem locally with the local department, the State department, the one that is enforcing it, still going after the minutiae as opposed to the overall end-game, which is to provide better service to the consumer?
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    Mr. ATCHINSON. If I might comment, certainly congressman, I think you touch on an issue I think that is becoming more prominent among most of us that have been studying this issue, which is how does one make sure that everyone is focusing on the forest and not just on the trees.
    I think the PATRIOT Act was one recent example of looking to ensure that financial service companies have an infrastructure in place that will, as a matter of course, require ongoing tracking and checking and monitoring and ensuring that there is self-corrective action taken when in fact problems are identified, as opposed to waiting three or four or five years until the market conduct exam is conducted, and only then discovering something that if there was an infrastructure in place might have been self-identified and self-corrected early on. That is not to say that in every instance some of these technical violations may not warrant attention, but the experience has been that all too often there is such an obsession with checking the minutiae, that oftentimes some of the larger systemic issues are not identified or given the priority that they warrant.
    The organization I am with, IMSA, is just one example of how those sorts of infrastructures can be supported and encouraged, and if anything can complement the work of the regulators.
    Mr. GARRETT. I would suggest a couple of things that could help us focus on the bigger picture would be if the States would do some interviewing of some of the consumers that complain in more depth, and try to bring that together and look for commonalities; and some interviews of agents. Agents quite frequently on front line in knowing when something is going wrong in a company or many consumers are getting hurt; and also monitoring these lawsuit discoveries. There is a lot of documents that come out that are incredible gold mines of abusive behavior that should be somehow routinely looked at by the States.
    Mr. PARKE. I would like to point out an observation in listening to the discussion. Because of the federal chartering of insurance is an issue that is underpinning a lot of the discussion, there is no guarantee, ladies and gentlemen, that you are going to solve the problems if you go to a federal charter. You are still going to have the underlying problems. That is not going to get solved just because you change from one venue to another. The other problem is the establishment of the huge bureaucracy that is going to be needed to take care of it. That system is being done in the various States.
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    The old analogy, do you want to deal with 50 monkeys or one big gorilla I think is an issue that you have to ask yourself. Do you want to deal with this issue? We believe that we deal well on insurance. Is it perfect? No. Are there flaws? Yes. Can we solve them? Yes. You are giving us direction. GLBA was a fine start to give us direction. I think we have shown the ability to perform, to do things, to take care of those issues that are brought to our attention.
    Whatever you decide by virtue of your hearings to ask the States to comply with, I believe that we will make a good-faith effort and probably not only achieve, but exceed, as we have done with NARAL.
    The other question that you have to ask yourself is, there is a $10 billion premium tax issue. The States will lose that if you go to a federal program. That is something that we cannot easily accept either. You are going to have to review what will you do with this $10 billion that States will lose if you move in that direction. So as a subcommittee, you have other questions on using market conduct as a basis.
    I think nobody up here is complaining that market conduct is not an effective tool. It can be a lot better. We are going to move in that direction, and I appreciate having the opportunity to testify today before you.
    Mr. GARRETT. If I can ask one more?
    Chairwoman KELLY. Your three minutes over time and you did not get any testimony from Ms. Marema, so perhaps you would like to have her testify.
    Ms. MAREMA. I just wanted to echo the need for market conduct analysis, better analysis, better targeting of companies. Of course, if you are not sure why you are there in the first place, it is easy to focus on minutiae. I think some of the reforms that we see the NAIC doing and that we think are the key ones, once States are better able to target companies, they are going to know why they are there. It is going to be easier to focus on the companies' general business practices and so forth.
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    Chairwoman KELLY. Mr. Garrett, if you want to ask another question, please do. There is no one else here and we have these witnesses. As long as we have the experts before us, the purpose of this hearing is to find out information so we can help get this running smoothly.
    Mr. GARRETT. Well, and I do not want to delay anything, but that is the picture that appeared in my mind when you made the reference to the 50 monkeys out there, and I am not sure which department of insurance you are referring to among those 50 monkeys.
    Mr. PARKE. It was an analogy. It was not directed at anybody.
    Mr. GARRETT. So my question is not a flippant one, but just I guess falls on the lines that you were saying, and you as well, and that is, at the end of the day, the hearings that we hold today hopefully drive home the effort to achieve the appropriate uniformity with regard to the market studies that are done.
    The question is, as we leave here, do we have a role, then, on the federal level in having the federal government take a preemptive step with regard to the market studies themselves, or is it appropriate for your analogy of the 500-pound gorilla to step into that role as far as conducting them? Or is our role here simply to try to facilitate and get to the optimum level of uniformity as far as the studies that are being done?
    Mr. PARKE. If I could address the, I will tell you that the message that you send today is heard and understood, and I take it back to legislators from the various States at our meetings. I tell them, they mean business; they expect changes; they expect uniformity; they expect reciprocity; and they expect market conduct to be more effective and efficient. That is the message I am taking back, and I think we hear your message loud and clear that there is pressure on you to try and make a difference, and the consumer ultimately is the goal that we all have to protect and make sure that they have a competitive product to solve the problem that will come from insurance.
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    Chairwoman KELLY. Mr. Parke, I think there is no one on this committee that would object to your taking that message back and disseminating it to the 50 monkeys.
    Mr. PARKE. You got it. You got it.
    Mr. ARIO. Terry has analogized this to monkeys. I will analogize this to my nine-year-old son, as State regulators. My nine-year-old son, he needs to be encouraged and pushed and cajoled into doing the right thing, but I have to let him get it done himself, and usually if I try to force the issue beyond a certain point, it is counterproductive.
    I think that is basically where we are on this issue. We need to be pushed and pushed hard to do the right thing, but to try to force us at this point into anything through some federal legislation I think would end up being counterproductive.
    At some point, if it does not happen, I think you have to look at other options. But at this point, I think you have got receptive ears out here, so I think these kinds of hearings are the kind of means that ought to be used.
    Chairwoman KELLY. Mr. Atchinson, do you want to add something there?
    Mr. ATCHINSON. I just wanted to add my voice to that last point, because I certainly think that there is a lot of good work being done, but I think the role that this subcommittee and the committee can play is to help focus and prompt the sort of action that is being considered and contemplated. I refer to my tenure as a regulator going back 10 years ago, and while there are a lot of good intentions, some of the initiatives launched then to reengineer regulation are still under way today. I do think that deadlines have a way of focusing most any of us, and that would apply to the organizations participating in this hearing.
    Thank you.
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    Chairwoman KELLY. Thank you, Mr. Atchinson.
    The chair notes that some members may have additional questions for this panel and they may wish to submit those in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to the witnesses and to place their responses in the record. This hearing has been very interesting and I hope it is moving us along in the right direction. We gratefully thank you for spending as much time as you have.
    This hearing is adjourned.
    [Whereupon, at 4:30 p.m., the subcommittee was adjourned.]