[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
THE EFFECTIVENESS OF STATE REGULATION:
WHY SOME CONSUMERS CAN'T GET
INSURANCE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
APRIL 10, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-22
89-409 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
JIM RYUN, Kansas JOSEPH CROWLEY, New York
VITO FOSSELLA, New York STEVE ISRAEL, New York
JUDY BIGGERT, Illinois MIKE ROSS, Arkansas
MARK GREEN, Wisconsin WM. LACY CLAY, Missouri
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
April 10, 2003............................................... 1
Appendix:
April 10, 2003............................................... 45
WITNESSES
Thursday, April 10, 2003
Csiszar, Hon. Ernst, Director, South Carolina Department of
Insurance.................................................. 12
Hartwig, Robert P., Senior Vice President & Chief Economist,
Insurance Information Institute............................ 7
Juneau, Dan, President, Louisiana Association of Business &
Industry................................................... 9
Marchioni, John, Vice Chairman, New Jersey Coalition for Auto
Insurance Competition...................................... 15
Shapo, Nathaniel, Partner, Sonnenschein Nath & Rosenthal,
Former Director, Illinois Department of Insurance.......... 17
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 46
Clay, Hon. Wm. Lacy.......................................... 48
Gutierrez, Hon. Luis V....................................... 49
Kanjorski, Hon. Paul E....................................... 51
Kelly, Hon. Sue W............................................ 53
LaTourette, Hon. Steven C.................................... 54
Csiszar, Hon. Ernst.......................................... 56
Hartwig, Robert P............................................ 64
Juneau, Dan.................................................. 77
Marchioni, John.............................................. 83
Shapo, Nathaniel............................................. 90
THE EFFECTIVENESS OF STATE REGULATION:
WHY SOME CONSUMERS CAN'T GET
INSURANCE
----------
Thursday, April 10, 2003
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:09 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Shays, Kelly, Ney, Biggert,
Miller of California, Tiberi, Garrett, Kanjorski, Meeks,
Inslee, Lucas of Kentucky, Clay, Baca, Matheson, Miller of
North Carolina, Emanuel and Scott.
Chairman Baker. [Presiding.] We would like to call this
meeting of the Capital Markets Subcommittee to order and
welcome all of those in the hearing room.
Today's hearing is to focus on the causes and factors that
relate to the availability of insurance for the myriad reasons
consumers need to have access to insurance.
It appears that the regulatory environment is a direct
contributor to not only availability but as to affordability of
the insurance product marketplace.
In reviewing many of the witnesses' comments today for the
hearing, it appears that there is almost a direct relationship
between the sophistication of the regulatory environment and
the availability of product. And it is not a good relationship.
It seems the more stringent the regulatory constraints, the
fewer the number of providers, the lesser the number of
consumer choices, and the more expensive those choices become.
However, it is a certainty that a regulatory system is
warranted, but it seems as though some States have adopted
systems which are more conducive to a free market environment
that does in fact aid the consumers directly.
It is my hope that in the course of today's hearing to
understand more fully the current regulatory system, how
improvements might be offered and how we can assure
availability of insurance product to any and all who may need
those services.
At this time I would like to recognize Mr. Kanjorski for
his opening statement.
Mr. Kanjorski. Mr. Chairman, we meet today to examine how
different forms of State regulation in the personal property
and casualty marketplace affect the availability of insurance,
the affordability of policies and the profitability of the
industry. This hearing also represents the first time in the
108th Congress that our subcommittee has met to consider
insurance issues.
Before we hear from our experts, I believe it is important
to make some observations about the insurance industry.
Insurance, as my colleagues already know, is a product that
transfers risk from an individual or business to an insurance
company. Every single American family also has a need for some
form of property and casualty insurance, especially products
like auto and homeowners insurance.
Additionally, according to the National Association of
Insurance Commissioners, more than 3,200 property and casualty
companies helped to meet the insurance needs of American
families and businesses in 2000. A.M. Best also reports that
insurers underwrote $163 billion in personal line premiums in
2001, slightly more than half of the total property and
casualty industry.
In addition, the largest lines of the personal property and
casualty marketplace are auto and homeowners insurance. The
insurance industry underwrote nearly $128 billion in net
premiums in 2001 for private passenger auto insurance, up from
$113 billion in 1997.
The net premiums for homeowners insurance also grew in the
same timeframe from $26.9 billion to more than $35 billion.
Furthermore, insurance differs from most other products in that
insurers must price and sell their policies before knowing the
full cost of the coverage. As a result, insurers often pay out
more in claims than they collect in premiums.
For example, in 2001, insurers paid out $1.16 for every
dollar earned in premiums. One of our witnesses today will also
make the point that property and casualty insurers paid $22
billion more in claims and expenses than they collected in
premiums in 2002.
To compensate for these balance sheet shortfalls, insurance
companies have increasingly relied on income from their
investments. Fortunately, the net investment income of property
and casualty insurance companies has trended upwards since
1980, and this income stream has helped insurers to offset
their annual underwriting losses.
In particularly good years on Wall Street, some have
suggested that the investment income may have also helped to
keep premiums artificially low. I would like our experts today
to address this point.
As you know, Mr. Chairman, the McCarran-Ferguson Act also
authorizes the States to regulate the insurance business, and
Congress recently reaffirmed this system in approving the
Gramm-Leach-Bliley Act. As a result, each State currently has
its own set of statutes and rules governing the insurance
marketplace. Traditionally, the States have highly regulated
the personal property and casualty insurance industry with rate
controls and pre-approval of new products.
In recent years, however, many States have begun to
experiment with their regulatory models. In an effort to
promote greater competition in the marketplace, some States
have even decided to exempt the industry from long-standing
anti-trust protections.
From my perspective, promoting competition through fair and
effective regulation should ultimately result in better and
more affordable insurance products for many customers.
The States, in my view, must also continue to work
proactively to modernize their systems for regulating the
insurance marketplace.
Absent continued advances in these state insurance
regulatory efforts, the Congress may need to consider altering
the statutory arrangements through the creation of an optional
Federal chartering system or the promotion of greater
uniformity in insurance regulation.
In closing, Mr. Chairman, I want to commend you for
bringing these matters to our attention. I believe it is
important that we learn more about the views of the parties
testifying before us today and, if necessary, work to further
reform and improve the legal structures governing our nation's
insurance system.
I yield back.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 51 in the appendix.]
Chairman Baker. I thank the gentleman for his statement.
Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman. I want to thank you
for holding this hearing this morning. It is an important issue
that is of great concern to this committee and to consumers all
across the country.
I strongly believe that Americans deserve to have
affordable insurance. And today, the insurance market faces a
perfect storm--growing losses, lower investment returns, and
inefficient regulation coupled with price controls that have
left many States in a crisis.
It is the responsibilities of these States and their
insurance commissioners to promote competitive climate in which
consumer choice can be achieved.
Unfortunately, some States have chosen to adopt heavily
priced regulated models, that have driven insurers out of the
market and stifled competition. When States determine what
prices insurers are allowed to charge, whether it is in the
form capping premiums, or imposing price controls, we have seen
this over-regulation place a tremendous strain on the system.
Last Congress, I held a hearing in the Oversight and
Investigations Subcommittee on the effects of state over-
regulation of automobile insurance. In the hearing, we touched
on the competition based reforms that South Carolina and
Illinois enacted, two States that are represented here on
today's panel.
As a result of their reforms, both of these States
currently have numerous automobile insurance companies
providing consumers with real choices at competitive prices.
The answer to high auto insurance rates is clear--more
competition is more effective than just more regulation.
I am very happy that when it comes to auto insurance we
have also gotten it right in my home State of New York. But I
am concerned that the price controls in the nearby State of New
Jersey may have a negative impact on other out of state
consumers.
So today we are going to hear from witnesses that I hope
will talk more and lead us more in the direction of
understanding what needs to be done to make sure that price
controls and over regulation does not pull the entire insurance
market.
I thank the witnesses for appearing today, and I look
forward to their testimony.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 53 in the appendix.]
Chairman Baker. Thank you, Ms. Kelly.
Mr. Baca?
Mr. Baca. Thank you very much, Mr. Chairman. Thank you for
hosting this hearing. I am going to be short and brief.
I look forward to getting the information that should be
available in terms of availability of insurance affordability
and then look at home it might impact and what changes may need
to be done as it affects not only our customers, but our
consumers, but also the industry as well.
I look forward to the hearing, and hopefully it can be
productive, and look at changes that need to be done as we deal
with the free market environment, look at reform for
competitive prices as well.
Thank you.
Chairman Baker. I thank the gentleman for his statement.
Mr. Miller?
Mr. Gary Miller of California. Thank you. I applaud you for
holding this hearing. This is an issue of tremendous importance
to me. And specifically with the State of California, I mean,
if you look at what is going on nationally, there just seems to
be a lack of uniformity of laws. I mean, it is become very
difficult or insurance companies to even do business. The
inability to provide new products in a timely fashion with the
insurance industry is very obvious compared to security firms
that can generally provide new opportunity within 90 days in
banks, can virtually do it immediately.
I mean, the process has become a logistical and
administrative nightmare in most States. Dual banking systems
has proved to be highly successful of an approach. I am not
sure that it not be the same success if we looked at a dual
system for insurance. One would be a Federal charter.
Many States have just created the absolute shortage of
opportunity for consumers. I know if you are a business person,
you try to get liability. There is more exclusion with a
liability policy than there are inclusions today. And much of
that is caused by the state's process and what they require.
You cannot mandate a business to lose money. And in many
States, that is just about what they are doing to the insurance
companies. They require them to provide such an extensive list
of coverages instead of allowing them to be competitive and
offering it based on what the market demands. And many States,
you have seen insurance companies, the larger ones, just pull
out of that state or stop writing new policies. And it is not
because business people do not want to provide a product.
It is because businesses will not be mandated to lose
money. And in being involved in areas that States mandate that
they should not otherwise be involved in.
And in closing, Mr. Chairman, I--this is of tremendous
interest to me. I have--if you had asked me 10 years ago I
would never have thought of the concept of a Federal charter.
The more I watch what is going into the industry today, and
what impact is being placed upon consumers, the more I am
becoming to believe that a Federal charter might be a very
viable option, and I would like to hear if anything, reasons
why I am absolutely wrong. And I believe we have individual
States that will try to make that presentation. And I look
forward to hearing it. I yield back.
Thank you.
Chairman Baker. I thank the gentleman for his statement.
Mr. Inslee?
Mr. Inslee. Thank you.
I just want to make a comment, and it may not be exactly on
the topic we have had here today. But I think it is important
to make today.
I was reading in Mr. Hartwig's statement that the 1990s and
these opening few years of the new millennium have been very
difficult for insurers. Natural disasters of unprecedented
frequency and ferocity cost the industry nearly $110 billion
between 1990 and 2002, while September 11th terrorist attacks
produced the largest insured losses in the United States in
world history, amounting to $40 billion.
The reason I note that today is many, many scientists
believe that the rate of natural disasters that your industry
will be exposed to in the coming century, that rate will
increase both as to frequency and ferocity due to global
warming. And changing very, very systemic ways are climate
systems.
And I am very concerned that your industry is going to be
exposed to that over the next century in part because the U.S.
Congress is failing abjectly in dealing with this threat that
is going to expose your industry to losses no matter who your
charter is in. And you know it does not matter who your charter
is in, if these hurricanes become more severe, you are going to
have significant losses. And I just want to appraise you today
that the U.S. House has before it an energy bill. And the
energy bill that will pass will do absolutely nothing
effectively to deal with this threat of global warming.
And I am just advising you of that, because even if we fix
charter problems, whatever they may be, it is not going to
solve this problem of you being exposed to these enormous
losses.
So I will look forward to your comments about that
particular aspect about what light you can shed on that and
your concern in this regard.
And look forward to your testimony. Thank you.
Chairman Baker. I thank the gentleman. I would like to call
on Ms. Biggert at this time to make a particular introduction.
Mrs. Biggert. Thank you very much, Mr. Chairman.
I am absolutely delighted to introduce to the committee
today a good friend and long-time adviser to me in my work in
the Illinois legislature and in Congress.
He is Nat Shapo, who served for four years as the Director
of Insurance for the State of Illinois. As the Insurance
Director, Mr. Shapo consulted with Congress and Federal bank
regulators on the Gramm-Leach-Bliley Act and helped draft the
National Association of Insurance Commissioners or NAIC
statement of intent for the future of insurance regulation.
Mr. Shapo has been a leader in the insurance regulation
field. He was twice elected to a national office at the NAIC--
as Secretary-Treasurer and Vice President--and twice served as
chair of the NAIC mid-western zone.
As a NAIC official, Nat was responsible for inviting me to
visit New Orleans for the first time in my life to address a
NAIC annual meeting. ``Come to New Orleans,'' he said. ``You
will love the big easy.''
Well, I came; it poured. It poured some more and the hotel
swimming pool overflowed into the ballroom during the hurricane
and I never left the hotel once to see the city.
So--but I digress.
I will try to put all parochial interests and personal bias
aside and objectively state that Illinois has one of if not the
most efficient insurance systems in the country. I believe that
Mr. Shapo's experience will be most helpful for the committee.
He will be sorely missed as director of insurance, but he will
continue to share his expertise as a partner in the insurance
regulatory group for the law firm of Ssonnenschien's Chicago
office.
So thank you very much, Mr. Chairman.
Chairman Baker. Thank you, Ms. Biggert. I would observe
that your personal experience with the city of New Orleans in
the rain is not uncommon. In fact, some have observed about
many Louisiana elected officials there seem to be either under
water or under indictment. So it is----
[Laughter.]
----but we would like to invite you back for another
attempt to enjoy our hospitality, I assure you.
Mr. Garrett, did you wish to make an introduction at this
time, sir?
Mr. Garrett. Yes, I would. Thank you.
First of all, Mr. Chairman, let me just say thank you for
having this hearing. You know, as someone who has in the state
legislature for a number of years in New Jersey and has had the
opportunity to chair the banking insurance committee for a
number of years in New Jersey, the auto insurance was one topic
that we grappled with for a long time. We just could never get
our hands around and get the political will to get the job
done. But I appreciate the chance now to see how some other
States are and maybe we can get things moving in the right
direction.
But I am pleased at this point to introduce a gentleman who
I know for some time, John Marchioni, who is now I see the Vice
President and Director of Government Affairs with Selective
Insurance Group. That is in my district. That is in my home
county of Sussex County, New Jersey. And that is actually my
old employer, with Selective Insurance for a number of years
back.
Now John brings to this panel and to this hearing today, I
guess you could say just about all sides of the equation. He
like I and like other past or current residents of New Jersey
bring a consumer side and know exactly what it is like to have
to pay a bill or a high premium for auto insurance in the
state. So we have that perspective there. And then if you go
back in his career, where I first met him, he had the
opportunity to serve as a staff with an assemblyman when I was
in the state legislature, Assemblyman Jerry Zecker. There were
only a couple of us in the entire state legislature who had a
background in insurance. I had it and the other assemblyman
did, being an agent. And so John had the opportunity to work
with the legislature in his office from the legislative, the
public side as far as tackling the issue.
Following that, he went on to bigger and better things, and
worked with the Commerce and Industry Association up in Bergen
County, New Jersey. So he got to work on the private sector,
the commercial side, and again to see what the problems were
there. And to try to lobby and work for changes.
Well, and finally now, it brings us to where he is today,
and that is with my old employer, Selective Risk, the private
industry, the insurance company itself.
You know, Selective always has the policy, I remember over
the years of saying they were going to be an insurance company
that did not proactively lobby, if you will, for changes in
insurance regulation. They would just simply say, we will take
whatever the government dishes out and we will try to make a
buck at it and do the best we can.
And a number of industries tried to do that--companies did
that as well. But I think you will see over time that in New
Jersey, because of the over-regulation, all of the companies
have realized that now it is come to the point that we have to
do something to get out of this deadlock that we are in.
So I am pleased that he is able to represent all
perspectives, but the one that he is most educated in comes
from the private sector as well. And I presume that the
testimony that we will hear from him and the others is that
more competition is part of the answer. Less regulation is part
of the answer. And at the end of the day that we have to
achieve some sort of solution to this problem for our state and
the rest as well.
So thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
If there are no further opening statements by members at
this time, I would like to recognize our first witness here
this morning.
Welcome Dr. Robert Hartwig, Senior Vice President and Chief
Economist for the Insurance Information Institute. Welcome Dr.
Hartwig.
STATEMENT OF ROBERT P. HARTWIG, SENIOR VICE PRESIDENT & CHIEF
ECONOMIST, INSURANCE INFORMATION INSTITUTE
Mr. Hartwig. Thank you, Mr. Chairman and members of the
committee. The committee asked me to testify today regarding
the overall economic performance of the property casualty
insurance industry, the industry's rate of return, and to
contrast that performance to other industries.
As we just heard from Mr. Inslee, the 1990s and these
opening years of the new millennium have indeed been very
difficult for insurers. Natural disasters, terrorist attacks
and tort costs have all taken their toll.
Insurers are also subject to an extraordinarily complex
array of rules and regulations that significantly impair an
insurer's ability to earn an adequate rate return and to
attract and retain the capital needed to cope with these
problems.
Earning an adequate rate of return is a core concern for
all heavily regulated industries. From 1988 through 2002,
profitability in the property casualty insurance industry
displayed in exhibit one under performed the Fortune 500 by an
average 5.3 percentage points.
Return on equity is essentially the rate of return to
investors who put their own money into the business. Exhibit
one clearly indicates that investors in most years would have
done better by investing in other industries or a broadly
diversified portfolio of stocks such as the S&P 500. The
performance gap is even more striking when the high relative
risk of investing in property casualty insurers is taken into
account.
The inevitable consequence of repeatedly disappointing
investors is the diminished ability to attract or retain
capital, shrinking capacity on a global scale, rating agency
downgrades and a loss of investor confidence as manifested by
falling share prices.
Underwriting losses over this same period are displayed in
exhibit two, which represent the amount by which losses and
associated expenses exceed premium income, were also enormous,
totally nearly $350 billion. Focusing on insurers more recent
performance reveals that the period from 1999 through 2002
witnessed four of the six largest underwriting losses in the
history of the industry.
Last year's $22 billion underwriting loss, while a marked
improvement from the terrorism impacted $52 billion loss in
2001, indicates a continued drain on the industry's capital.
In the final analysis, it is investor money that is lost.
Investors observing these losses and low rates of return will
be unlikely to invest in the P&C insurance industry unless they
have a reasonable expectation that financial performance will
improve in the near future.
Not surprisingly, the three most heavily regulated lines of
insurance, auto, homeowners, and workers compensation produced
below average returns in recent years and generated some of the
largest losses. These three products alone account for roughly
60 percent of all premiums earned by insurers. Consequently,
when underlying losses or loss trends shift adversely, pushing
costs up sharply, insurance costs that sell heavily regulated
insurance products are guaranteed to lose money.
Deliberate suppression of rates, delays in the rate
approval process and delays in the approval of new forms and
products invariably cost insurers billions of dollars in
unnecessary losses each year, leading to reduced availability
for customers.
Presently the availability of property-causalty insurance
is shrinking and prices are rising as a result. A sharp drop in
the pool of capital available to underwrite insurance is a
principle factor fueling the rising cost of insurance today.
Capital held by U.S. domiciled property-casualty companies
has plunged by nearly 20 percent or $63 billion since mid-1999.
Foreign capital which is critical to the U.S. insurance market,
is also shrinking.
Globally, capacity fell by an estimated 25 percent or $230
billion over the past two years.
Over the past year, industry critics have attempted to lay
blame for higher insurance prices on so-called reckless
investment strategies by insurers. While earnings from
investments declined as they have for all investors, the P&C
insurance industry still generates significant cash flow from
its investment portfolio, an estimated $39.5 billion in 2002
alone.
Investment earnings are simply returning to their pre-
bubble levels. Two-thirds of the industry's invested assets are
in fact in the form of bonds. About only 20 percent is held in
the form of common stock.
The decline in investment gains over the past several years
merely reflects downward trends in interest rates which now
stand at 40-year lows as well as fewer opportunities to realize
capital gains on the stock portfolio.
Critics of the P&C insurance industry have also asserted
that recent increases in the cost of insurance are unjustified
and that insurers are simply gouging consumers.
The rate of return and underwriting loss figures discussed
earlier clearly suggest otherwise. Moreover, the cost of auto,
home and commercial coverages remains very reasonable by
historical standards.
The cost of homeowners' insurance, for example, relative to
the cost of the home itself, has decreased or remained stable
every year since 1994. Likewise, the cost of managing risk for
businesses relative to revenues is roughly the same today as it
was a decade ago.
Thank you.
[The prepared statement of Robert P. Hartwig can be found
on page 64 in the appendix.]
Chairman Baker. Thank you very much.
A particular pleasure for me to introduce our next witness.
I am pleased that he was able to accept out invitation.
Mr. Dan Juneau, President of the Louisiana Association of
Business and Industry, an organization back home which has been
particularly progressive in addressing the issues of government
regulation. And I might add that Mr. Juneau has been
particularly aggressive as President of that aggressive
organization in helping to assist Louisiana government in
making appropriate changes to its regulatory environment.
So Dan, it is good to have you here. Welcome.
STATEMENT OF DAN JUNEAU, PRESIDENT, LOUISIANA ASSOCIATION OF
BUSINESS & INDUSTRY
Mr. Juneau. Thank you, Mr. Chairman, and warm wishes from
your home district back home.
My organization is a combination of state chamber of
commerce, state manufacturers association. We have 3,500
members in all, all sizes, all different types of business
classifications. We are represented in every parish in
Louisiana that corresponds to your counties.
I am not an insurance expert. I am simply a mirror, Mr.
Chairman. I am a mirror of the concerns of the business
community in the State of Louisiana about this subject and
about this topic.
Every year I enjoy doing something very much. Right before
our legislative session starts, and it just started in
Louisiana, I get to take the month before that and go all
across the State of Louisiana meeting with almost every chamber
of commerce of any size in discussing the issues that are
coming up in the session and hearing from those small business
people.
And this year I think I got the strongest message that I
have ever received from the business community in Louisiana.
And it was about the affordability and the availability of
insurance in our state.
Mr. Chairman, I remember two faces in particular who came
up and talked to me after some of my presentations. One of them
was a small businessman in Louisiana who sells tractors and
tractor parts. And he was telling me that last year his
property and casualty insurance was $145,000 for his premium.
This year when he finally found a writer, it was $560,000, a
385 percent increase in his premium.
I remember another gentleman from south Louisiana who owns
a wrecker service, obviously a small business person. And at
that time his carrier still could not get him a quote for his
liability insurance in the state.
The insurance crisis is hitting hard in Louisiana. Huge
cost increases are inhibiting growth, profitability and
employment levels and bringing some businesses to the edge of
closure.
It is our opinion that the most critical ingredient of that
problem in our state is the declining number of carriers
writing policies. Give you a little example of what I mean by
that.
Let's look at homeowners insurance in the State of
Louisiana. Prior to 1992, that is when Hurricane Andrew hit in
our state, 120 carriers were writing home owner's policies in
Louisiana. Today, only 19 are writing them. And when you get to
I-10 and south of that in the coastal areas, there is less than
that.
Only six carriers are writing new home owner policies in
our state, a real, real crisis. And commercial lines, the
market is tightening for commercial auto insurance very
greatly. My residential contractor members tell me that only A-
rated carrier is writing them in the state. Many of our oil
industry service companies say they also have only one or two
carriers writing. You certainly are not going to get a bargain
when that few people are writing new policies.
Our automobile dealers are down to two carriers who will
write them and are facing such a crisis that they are looking
to self insure, which is a very risky venture in this type of
marketplace.
Interestingly, the crisis in Louisiana, has lead to the
formation of a unique coalition. It is the group called the
coalition to ensure Louisiana. It is composed of retailers,
bankers, automobile dealers, oil field contractors, independent
oilmen and representatives of the insurance industry, which
these business groups often disagreed with quite--you know,
quite often when it came to insurance.
But they realized that more competition is absolutely
critical to stabilizing our market and eventually bringing
prices down in the State of Louisiana.
So what needs to be done in our state to do that? Our
organization and the coalition of others are pursuing reforms
in the current session of our legislature to do several things.
First of all, and I think one of the most important problems we
have is our structure of regulation. We have an insurance
rating commission in Louisiana. Most States allow some form of
free market pricing.
In Louisiana, there has to be prior approval from our
insurance rating commission for any increase to go into effect.
The commission consists of an elected commissioner who chairs
the commission and commission members who are appointed, who
are political appointees of the governor or our state. That is
not a very good system for regulation in our opinion.
Carriers are often delayed and denied when attempting to
get rate increases. In the year 2001 legislation passed in our
state house that would have actually moved to a more free
market approach and reformed the regulatory system.
Unfortunately, that legislation was vetoed. And when that
happened, many more carriers started leaving the state after
that veto.
Legislation has been introduced in this session to allow
increases or decreases of up to 10 percent without prior
approval of the insurance rating commission. It is a step we
believe towards the free market approach that is needed.
Another problem in Louisiana is our residual market, our
market of last resort for numerous lines of insurance. Carriers
writing in Louisiana in the voluntary market are assigned
policies from this residual market pool. It is a very
unprofitable book of business. This is the policies that nobody
wanted to write to begin with.
The losses in that book of business are not generally
alleviated by greatly increasing the premiums on those people
getting that insurance. It has been primarily by--or often
cases by assessments on the carriers. So what this has led to
in Louisiana is carriers trying to shuck their voluntary book
of business because of that growing assessment that is being
placed on them coming out of that residual market.
This is something that is absolutely going to have to be
cleared up we think if we are going to get more carriers to
write in Louisiana.
We are a direct action state. Only two States, Wisconsin
and Louisiana, allow a lawsuit to be filed directly against an
insurance company. When that happens, obviously the presence of
insurance is known. And in Louisiana, through the discovery
process, you get to very quickly find out what the policy
limits are. This often results in higher awards we believe,
since the amount of insurance present is overshadowed by the
merits--overshadows the merits of the lawsuit in hand.
We also have a collateral source rule. Some States have a
ban on plaintiffs getting multiple recoveries from various
insurance sources when they file a lawsuit. In Louisiana, there
is no such ban. Most States allow collateral payments, medical
insurance, workers comp, disability et cetera, to be introduced
into evidence at our trial. We do not allow that also in
Louisiana.
Jury trial threshold also is another problem that is being
worked on in Louisiana. Most States give defendants an
unfettered right to a trial by jury. Louisiana limits a
defendants right to a jury trial to suits involving $50,000 or
more.
So in conclusion, Mr. Chairman, our organization is working
with the coalition and others to enact reforms to return
competition to the insurance marketplace in Louisiana. High
premiums and reduced coverages are negatively impacting jobs
and economic development. And we believe that competition
fostered by free market principles is the key to recovery.
High premiums are one thing, but when insurance companies
refuse to take your money, you know you have a problem.
And that is a problem we are facing in Louisiana today.
Thank you.
[The prepared statement of Dan Juneau can be found on page
77 in the appendix.]
Chairman Baker. Thank you, Dan. We appreciate your
participation here today.
Our next witness is the Director of the South Carolina
Department of Insurance, the Honorable Ernest Csiszar. Welcome,
sir.
Did I get that right?
STATEMENT OF HON. ERNST CSISZAR, DIRECTOR, SOUTH CAROLINA
DEPARTMENT OF INSURANCE
Mr. Csiszar. Absolutely, Mr. Chairman.
Chairman Baker. Okay, thank you.
Mr. Csiszar. Thank you, Mr. Chairman, distinguished members
of the subcommittee. I am the Director of the South Carolina
Department of Insurance and this is clearly a topic that is
dear to my heart. So I welcome the opportunity to appear before
this committee and share what I hope you will agree is a
success story.
I can quite affirmatively state here today that our
consumers, particularly when it comes to personal lines, are
not experiencing an availability problem. I can also state
categorically that 5 or 10 years ago that was not the case. And
if I were to look to the one cause of how this change came
about, that cause I can only attribute to the fact that South
Carolina moved from what was a very stringent intrusive
regulatory, prior approval type of process to what I can only
describe as a more market driven competition driven, if you
will, approach to the entire regulatory process.
In South Carolina, we have on the automobile side, we
passed reform legislation in 1997 which through a transition
period of two, two-and-a-half years, is now entirely in place.
We have significant, as I will share with you in a moment,
significant numbers of companies have come into the state, in
the hundreds in the thousands. And they continue to come into
the state to write insurance.
In our commercial lines, we have deregulated that process.
There are no--there is no rate review. There are no policy
review, no product review, if you will. There are DEEMER
provisions in place. And there are no restrictions on premium
or anything. So we have deregulated in essence, the commercial
market. And this is particularly beneficial when you have small
business owners who are looking for the right kinds of
coverages.
I can also say that as a next step this year, hopefully
within the next week, we will be introducing legislation in
South Carolina that will deregulate the homeowners' market. We
are slightly--we have a slightly different situation there from
the automobile side, not the least because we have hurricane
exposures and earthquake exposures in South Carolina. So we are
going about it a little differently, but the ultimate aim I can
only describe as is to implement the type of market-drive
regulatory process that Illinois now has in place.
So these are the three prongs on which we are proceeding.
And again, I attribute the fact that we do not have an
availability problem in our personal lines or our commercial
line largely because of this market-driven process.
Now to give you a little bit of history of where we were,
and I will try to be brief on this because it is a rather
sordid history. We in South Carolina had a rate making process
that was driven by politics. The actuaries had nothing to do
with the process really. Supply and demand did not have
anything to do with it. IT was driven by politics.
And the end result was that it was rate suppression. And
not only was their rate suppression, there was what I would
call a peanut buttering of rates. So that the good driver
really did not get much credit for driving well, and the poor
driver really did not get punished for being a very poor
driver. The end result is that quite apart from the rate
suppression there was also the wrong signal being sent to the
consumers. Why improve your behavior, your driving behavior is
you are not going to get much credit for.
We had a residual facility. It was called the South
Carolina Reinsurance Facility, and I can tell you from personal
experience, that you can always judge how well a market works
by looking at the residual market and seeing how many are
covered through the residual market.
In South Carolina's case there residual market which was
designed to be the market of last resort, became the market of
first resort. It had the lowest premium in essence, and those
premiums were never raised because of politics once again.
So the end result was that we had over 40 percent, actually
close to 43 percent at one point, at one point 2 million
policies going through our reinsurance facility at an annual
deficit of over $200 million. It varied of course from year to
year, but at its highest, it was $200 million.
That deficit was recovered by a recoupment fee. Who paid
for that? Well, everyone paid for that. The good driver paid
for that, and the lousy drivers paid for that as well.
And again, the wrong signals to the market.
We--in 1997, finally things came to a head. And through a
bipartisan effort, this was not the Democrats or not the
Republicans. This was truly a bipartisan effort--South Carolina
passed automobile reform legislation.
We did away with a mandate to write. We did away with the
pre-approval process by way of implementing a flex rating type
of system at plus or minus 7 percent. We did away with what
were rather stringent underwriting restrictions. That actually
probably chaffed more than the rate restrictions, a fact that
you really could not underwrite a bad risk appropriately, or a
good risk for that matter.
So we did away with the entire scheme, if you will. We
replaced the reinsurance facility with a joint underwriting
facility which is not an assigned risk facility. And I can only
tell you that the true measure of successes in this is that
having gone from 1.2 million policies at one point in the
facility, we now have less than 350 policies. I repeat that--
350 policies in the residual pool.
It is proof that the private market works if you let the
private market work. So we are very much in favor of a market-
drive type of regulatory system.
Now to give you some indications on the rates, certainly we
have improved. If you look at averages, for instance, we look
at--we have improved. But quite frankly, the averages do not
tell us a lot. I would rather see a scheme where a rate of $500
premium is averaged out with a $3,500 premium than have two
premiums at $2,000 each because again, the signal to the market
here is important in terms of improved driving.
We are still a lousy state when it comes to fatalities for
instance. We still have too many DUI fatalities. The only way
you can send a signal to the market or to the driver is by
charging them an appropriate rate. So this is where I think
where the prime accomplishment really comes in when you look at
the rate differentials.
We have now in our market, we have attracted and we
actively go out to recruit companies. We have, I believe, the
number is somewhere around 170, 180 companies and I cannot keep
track of it, actually because every week we have new companies
coming in. And by the way, when they come in to write
automobile insurance, many of them also write homeowners
insurance.
And that is a welcome mark in South Carolina, where we
always deal with capacity constraints along the coast because
of hurricane exposures.
So it brings success in other markets as well, I think.
We certainly are--complaints, we do not hear about rates.
The best way I can describe it, Mr. Chairman, is the Chairman
of our Insurance Committee in the House probably put it best.
His name is Harry Cato and he said to me quite recently said,
``You know, for the first time in years,'' 10 years I think he
used, ``I can go to the barber on Saturday and get a haircut
and not have to listen to bitch and moaning about automobile
rates and homeowners rates.
So that is probably the best indication that something good
has happened here. As I said, we are replicated this on
commercial lines, and we are about to replicate it on the
homeowners line.
I will conclude on this point, and the point very simply is
that the market indeed does work, and South Carolina is a good
example of it.
Thank you.
[The prepared statement of Hon. Ernst Csiszar can be found
on page 56 in the appendix.]
Chairman Baker. Thank you, sir.
And I need to get that barber's number when we are done
here today.
[Laughter.]
Our next witness is Mr. John Marchioni who is Vice Chairman
of the New Jersey Coalition for Auto Insurance Competition.
Welcome, sir.
STATEMENT OF JOHN MARCHIONI, VICE CHAIRMAN, NEW JERSEY
COALITION FOR AUTO INSURANCE COMPETITION
Mr. Marchioni. Thank you. Good morning, Mr. Chairman, and
distinguished members of the committee.
My name is John Marchioni, and I am Vice President and
Director of Government Affairs and compliance for Selective
Insurance Group, a New Jersey-based property and casualty
insurer.
This morning I am testifying in my role as Vice Chairman of
the Coalition for Auto Insurance Competition, a coalition
consisting of insurance companies, insurance trade
associations, business groups and over 20,000 consumers who are
rallying to the cause of restoring competition to New Jersey's
auto insurance marketplace.
New Jersey residents face an auto insurance availability
crisis of unprecedented proportions. During the past decade,
over 20 insurers have left New Jersey, seven companies having
left or filed plans to leave within the last year alone.
When State Farm, the state's largest carrier completes its
withdrawal, five of the six largest writers in the nation will
not be going business in New Jersey.
As we speak, over 4,000 motorists each month receive notice
that their insurer is leaving the state having to scramble for
coverage. One million drivers could ultimately be impacted if
significant reforms are not achieved.
The disaster that is facing drivers in New Jersey is
neither a natural disaster or an accident. It is a disaster of
the state's own making. It is the result of a politicized auto
insurance regulatory system.
New Jersey operates arguably the most strictly regulated
system in the nation and consumers are paying a heavy price.
Virtually every aspect of the auto insurance business is
controlled by statute and or regulation. The state dictates how
much coverage must be provided and who companies must insure.
They control the prices, they determine whether an insurer
can come into the state, and when an insurer can leave.
And if a company can successfully manage to navigate this
complex regulatory scheme and earn a profit, the state tells
you how much you may keep and how much you must return.
However, unlike the state's cap on profits, the amount of
losses an insurer can be forced to absorb is unlimited. The
result of this regulator morass is that insurers have headed
for the exits. There are a third fewer carriers in New Jersey
than in neighboring States, despite having a population with
one of the highest per capita incomes in the nation.
As carriers leave, consumers lose coverage.
Numerous newspapers reports document that replacement
coverage is increasingly hard to come by because many of the
remaining insurers simply do not have the capacity nor the
capital to take on additional business.
New capital has not been invested in the state because many
insurers do not want to do business in this highly politicized
overly burdensome regulatory climate.
Adding to this lack in capitalization is the fact that the
majority of the state's largest insurers, including four of the
top five, write their business in single state subsidiaries in
an attempt to insulate their parent company from this turbulent
market.
That is the bad news. The good news is that progress has
been made towards reversing this decades-old problem. To solve
the capacity and availability crisis, additional capital must
be invested by the private sector in New Jersey's auto
insurance market. The private sector, however, is unlikely to
do that until the many regulatory barriers to competition are
dismantled. Reforms must give existing insurers confidence they
can generate a competitive rate of return and attract
additional insurers to the market place.
Insurers must know that regulatory decisions will be made
fairly and will not be the result of political manipulation.
Fortunately, the legislation that is moving in Trenton goes a
long way towards restoring competition to the state's auto
insurance system.
By restoring a competitive insurance market, New Jersey
drivers will reap the benefit through increased availability
and choices.
Senate bill 63 has passed the state senate and we
anticipate the state assembly will take it up in May. Called
the New Jersey Auto Insurance Competition Choice Act, it is
backed by Governor McGreevy and a bipartisan group of
legislators in both houses.
While not a panacea, we believe it will ease the
availability crisis and if fully implemented lead to long-term
stability in this troubled market. S. 63 phases out the take
all comers law, expedites the rate setting process, eases the
excess profits law and streamlines withdrawal restrictions.
Again, this bill is not a panacea, but it is an important
and positive first step. It is only a first step because after
the bill is enacted the administration must fully implement the
various regulatory components of this reform package.
New Jersey has a checkered past in this regard as well. It
took four years to implement an expedited rating law passed by
the legislature in 1997. The redrawing of a 50-year old
territorial rate map dictated by statute in 1998 has still not
been implemented.
If S.63 becomes law, the administration must act quickly
and they have committed to doing so on the regulatory changes
called for on expedited and prior approval rating, withdrawal,
excess profits, and territorial rating.
The current reform effort could be a significant step to
move New Jersey into the mainstream of state insurance
regulation. It took decades to create this dysfunctional
system, so dramatic results are not likely to occur over night.
Assuming S.63 is signed into law, the required regulatory
changes are swiftly enacted and the reforms are allowed to take
root without political interference, New Jersey could become a
more attractive market for insurers, and the ultimate
beneficiaries will be the state's consumers.
Thank you, Mr. Chairman, and that concludes my remarks.
[The prepared statement of John Marchioni can be found on
page 83 in the appendix.]
Chairman Baker. Thank you very much, sir.
Our next witness is Mr. Nathaniel Shapo, who is a Partner
in Sconnenschein Nath and Rosenthal and former Director of the
Illinois Department of Insurance.
Welcome, sir.
STATEMENT OF NATHANIEL SHAPO, PARTNER, SONNENSCHEIN NATH &
ROSENTHAL, FORMER DIRECTOR, ILLINOIS DEPARTMENT OF INSURANCE
Mr. Shapo. Thank you, Mr. Chairman and good morning to you.
It is a pleasure to see you again. I enjoyed working with you
when I was at the NAIC. It is a great opportunity to be here
today before you and our Ranking Member, Kanjorski and
Representative Biggert who was very kind in her introduction of
me earlier.
Mr. Chairman, in Illinois, the government does not regulate
the price of insurance. Rather supply and demand and the anti-
trust laws do. This is sufficient and consumers are well
protected.
Since insurance is not a monopolist product, it is strange
that this model is viewed as an usual approach. Well settled
public policy holds that in a market with many sellers, supply
and demand and the anti-trust laws, true competition, should
regulate price.
Insurance is such a non-monopolistic product. It is sold by
hundreds of carriers who aggressively challenge consumers to
compare their prices against their competitors. Consumers
routinely shop for coverage and price through conversations
with agents, calls to toll-free numbers, and by surfing the
Internet.
If I described any other business this way, one would be
surprised at the notion that price controls were necessary or
appropriate.
Yet government rate regulation is commonly used in
insurance to keep prices down. Price controls, which were put
on the table to deal with unique but now completely absolute
conditions in the market have not gone away. State rate
regulation has historical, legal and policy roots not in
ensuring affordability, but in ensuring solvency.
The purpose of price controls was to facilitate the
propping up not the suppression of rates.
Because in the 1800s and the early 1900s insurers were
prone to severe underpricing and insolvency, for decades they
were encouraged not to compete but rather to cooperate on
prices. Rating bureaus produced recommended rates and States
having encouraged the practice, regulated the resulting anti-
competitive prices through prior approval requirements as they
usually do with monopolies.
In fact, 89 years ago, the Supreme Court invalidating the
constitutionality of insurance price controls in the case of
German Alliance v. Lewis, explicitly cited the quote, the
monopolistic character, unquote of the insurance marketplace as
the basis for its decision.
Since prices were not regulated by what the court called
quote, the higgling of the market, unquote, that is to say
competition, they should be regulated by the state.
The cooperative rate making allowed by the Supreme Court
was essentially encouraged by Congress in the McCarran--
Ferguson Act, which provides an anti-trust exemption for
insurers if States occupied the field with rate regulation. But
the market has changed dramatically since Congress passed
McCarran in 1945. Solvency regulation has drastically improved
beyond the point of needing to rely on a rate regulation.
Bureaus no longer produce rates and companies develop their
prices independently.
Monopolistic practices have been replaced by competition.
But the create regulation used to control the monopolistic
market endures as a tool not to protect solvency, but
affordability.
Studies show however, that prior approval of insurance
rates does not in the long run produce prices lower than
competition. Furthermore, since price controls deter supply,
they often spur availability crisis characterized by large
residual markets as Director Csiszar just testified.
In Illinois, competition benefits insurance consumers as it
does throughout the rest of the economy. Illinois has the
highest number of carriers writing homeowners policies in the
country. This ample supply produces a marketplace which by
statistical analysis is competitive and non-concentrated. The
residual market is infinitesimal. The uninsured rate is below
the national average. And rates are or below national norms,
27th highest in auto and 39th in homeowners.
In short, consumers are well protected. They are protected
in the following ways. First, rates are regulated. They are
regulated by supply and demand. They are also regulated by the
anti-trust laws because since the state does not regulate
rates, McCarran's anti-trust exemption does not apply.
Furthermore, Illinois has added an additional safeguard,
the Cost Containment Act, which requires the Department to
collect data from insurers, analyze that information using
recognized statistical indexes and report to the legislature to
confirm the competitiveness of the market.
The Department does not proactively regulate rates because
empowered consumers can and do utilize supply and demand by
shopping for price.
Consumers cannot protect themselves in all aspects of their
transactions though, so Illinois funnels its scarce regulatory
resources toward vigorous solvency, market conduct, policy
forum and consumer complaints regulation. The market cannot
regulate these activities itself, so the government must. For
instance, since consumers cannot be expected to understand the
balance sheet of the company, the Department actively regulates
solvency.
Illinois' success in solvency and market conduct regulation
is renowned. It originated many of the model laws at the heart
of the National Association of Insurance Commissioners'
accreditation program. And it is had three winners, the most of
any State of the NAIC's Robert Denine award, the association's
highest honor for professional regulators.
Insurance is infused with the public good. As Chairman
Oxley said, it is the glue that holds our economy together. For
that reason, insurance is and should be a heavily regulated
industry.
I think that Illinois's experience indicates that as one
would expect in a market with many competitors, proactive
government regulation is best focused on areas where unlike
with respect to price, only the state can protect consumers.
I believe Illinois' experience demonstrates that the same
rules for price regulation that apply throughout the economy
should also be considered by policy makers in this vital but no
longer unique insurance marketplace.
I have used up my time, and I thank you for your
indulgence, Mr. Chairman.
[The prepared statement of Nathaniel Shapo can be found on
page 90 in the appendix.]
Chairman Baker. Thank you, Mr. Shapo.
It is rare in this committee's jurisdiction where we have
an issue that the resolution of it seems to be so clear cut. I
want to thank each of you for your testimony and for the rather
dramatic differences in your presentation between those who
have relied on the competitive model and those who are
struggling to reform the regulatory model.
It--at least for me and others may have differing opinions,
it is dramatically clear what would be in the consumer's best
interest. And I had intended to spend more time in trying to
heighten those differences to make the public case stronger,
but I do not think given your testimony, that is really
necessary.
Rather, I will jump ahead a little bit. As you all know we
have been discussing in this committee now for almost two years
the advisability of some national system to help expedite the
competitive model adoption.
And let me add a quick caveat, I see and will constantly
maintain support for the state regulatory model as to consumer
affairs and to the capital adequacy of the companies which may
be domiciled within your state. So there will always be a
strong need for a state regulatory model in that regard. But
with particular focus on the question of product availability,
and the need now to go to 50 differing state systems to apply
for permission, given the impact of your testimony and where
less regulatory inhibition has resulted in more product
availability at lower cost, am I making a leap that is
inappropriate to assume that if companies--let's just take for
example, were able to get licensed in five or six States, to
sell a particular product in a particular line, then it would
be automatically acceptable for them to move into all other
States.
Or is there value in having a 50 stop review in order to be
able to sell your product on a national scale, which also lends
to the question is there an advantage in having a company have
the access to a national market to enable them to even further
reduce price? As I am interpreting your comments, it seems as
though when you got rate makers out of the way, and let the
market work, prices came down because the competition would
undercut you and take more of the market if you did not.
It is just really an open question to the panel. Somebody
help me here. Mr. Csiszar, your testimony was great. Anybody
who can go from 1.2 million policies, to 350 needs to be heard.
Mr. Csiszar. I think--let me add one--just one word of
caution for perspective. There--it is not entirely always the
case of the competitive model versus the regulatory model and
that one works and the other one does not work. I mean, I use
our neighbor to our north for instance, North Carolina, which
very much is in the mode of applying a regulatory model, but
has a very stable and a very good market.
I think there is a lot of difference in how the model is
actually applied. It is the--the model itself is probably a
neutral tool whether it is the competitive or the regulatory
model. It is how you go applying it and the intrusiveness of it
and the minutia that you get into.
So I think it is--there is that gray area as to markets in
which there is a regulatory model that actually does work. Now
having said that, clearly in South Carolina's case, we felt
that in order to change things and to change them for the
better, we had to move away from that regulatory model
entirely.
And it was not so much a philosophical discussion. It was a
very, very practical decision that was made. We had drivers who
were upset by their recoupment fee that they were being charged
and the politicians heard about it.
From the standpoint of how this fits into a national kind
of market, I think--I am a state regulator and I am a believer
in State regulation. Truly, truly am. And I think there is a
difference first of all between the life market and the
property and casualty market.
I think on the property and causality market, there is less
of a national market, less of a national market than there is
on the life side, looking just at South Carolina for instance.
I have Charleston that sits on a earthquake fault. Nowhere else
in the state do we have that problem.
We have a coast that has hurricane exposures. We have an
inland part that has hail and tornado, but does not have
hurricane exposure. We have of course, our own individual torte
laws state by state.
So I think there are enough state differences to warrant a
state-based system. Does that mean the system should remain as
is in terms of applying in 50 States? No. I agree with you. It
has to be modernized. And I think the NAIC is making an effort
and a good effort in that respect. Is it as fast as some of us
would like to see it? Probably not, but on the other hand, we
are making progress in that respect.
So I think that--I think that the hearings like this help.
They clearly help because they bring out best practices, I
think. And if we take a best practices approach to a state by
state approach, I think it can be made to work.
Chairman Baker. I will come back to that. I do not want to
go beyond my allotted time. We will just wait for another round
to come back and investigate that more.
Mr. Kanjorski?
Mr. Kanjorski. Thank you, Mr. Chairman.
I am wondering whether the panel is avoiding the other side
of the question, because you all sounded so uniformly satisfied
that we can get to a very stable insurance market without any
problems. There must be some problem out there.
I am trying to think of one of them. One could be if this
model has worked so well, for instance in South Carolina, how
has it applied to the health insurance industry? Do you have
steady and uninterrupted markets for health insurance down
there? Very competitive?
Mr. Csiszar. I wish I could say that. No, we do not.
Mr. Kanjorski. Why?
Mr. Csiszar. In large part because we also have the Federal
government to deal with. Give you an example. We have a small
group market that I would describe as highly dysfunctional at
this point. We have very few companies left writing in that--
one to 15 employees kind of market.
Mr. Kanjorski. What does the Federal government do to
affect the health insurance marketplace?
Mr. Csiszar. The HIPAA, the HIPAA imposes guaranteed issue
and reissue requirements. And when you talk to our companies,
we have had over 100 companies exit our state on this small
group health insurance policy. And when we speak to them and
when we to an exit interview each time, what we get back is,
``No, it is not the state mandates. No it is not the rate bands
that States impose on us. It is the guaranteed issue and
reissue mandated by HIPAA. That is the real problem with it.''
So you have got this mix of state and Federal in the health
insurance side that you really do not see prevailing the
property and causality or the life side.
Mr. Kanjorski. In the auto, property and causality
industry, you can refuse coverage at will on the part of the
company?
Mr. Csiszar. That is correct, and you have the residual
market to go to if you are refused. Now if----
Mr. Kanjorski. Why don't you just adopt that regulatory
system on the health side?
Mr. Csiszar. Because we cannot. It is a Federal law that--
--
Mr. Kanjorski. Okay.
Mr. Csiszar. ----states----
Mr. Kanjorski. But if we did, you do not think that going
to the residual market would bankrupt the state?
I mean, if everybody is losing money in health insurance
coverage and they pull out of the state and say go to the state
fund to get covered, how can the state cover the costs? They
are obviously not leaving because they could make money. They
are leaving because they could lose money and are losing money
generally.
Mr. Csiszar. Right, right.
Mr. Kanjorski. So, they want to extricate themselves from
the loss of the market, and put it on the residual market. Can
the state support that burden?
Mr. Csiszar. The way we--the way we resolved that on the
property and casualty side is to make sure that the rate
charged at the residual level, is in fact an adequate rate, an
actuarially sound rate.
I think if you were to do that on the health side, you
would at least have a partial solution to it. We do not do it
on the health side. And we cannot do it on the health side
right now, again because we also have Federal mandates out
there.
Mr. Kanjorski. A lot of the reform that has been talked
about here, particularly in auto insurance, is a capping of
recovery elements, going after multi-policies and everything
else.
That is not a form of regulation and control in the
reverse? You are lessening the opportunity for the victim or
for the individual that is injured to seek out a recovery, and
obtain a potential recovery. You are getting into a very
controlled area, one policy to go against, whatever the limits
of that policy are, that is your cap.
Mr. Juneau. Well, my understanding of insurance is it is
there to make the insured party whole. And you know, I guess
maybe you could say that is form of a cap. I just think it is a
logical if someone is--if you allow multiple recoveries from
various different policies maybe owned by the individual or
owned by other people who are the employer or whatever else,
and those multiple recoveries have to have an impact in cost
not just in one line of insurance but in other lines as well.
I mean, again, I thought the purpose was to make the party
whole, not to stack up many, many layers of recoveries.
Mr. Kanjorski. Well, when they are recovering, they are not
recovering above and beyond their damages. They are just
recovering from several sources to contribute for the payment
of proved lost damages.
Mr. Juneau. Not in my state.
Mr. Kanjorski. Are they not?
Mr. Juneau. In my state, they can very easily recover
beyond their level of damages.
Mr. Kanjorski. Well, that would be in the particular facts
of a case, and of course we cannot go into that.
How do we protect consumers? I am open to a competitive
market, except I worry about how we protect individual people
without weight in the marketplace to be assured that they can
get coverage and that they do not get taken advantage of?
In your markets, if I have a home on the same street as
another person, and ABC company underwrites a neighbor's policy
for $200,000 casualty insurance at X number of dollars, and I
have a home within that rate, can I go to that company and get
a guarantee that I am going to pay the same price? Or is there
a differential?
Mr. Marchioni. If I can just respond to that. I think
clearly in a healthy and competitive marketplace, one of the
primary roles for a regulator is to ensure that consumers have
appropriate and adequate information as to what is available to
them out there.
So I think when you have sophisticated buyers that are
capable of doing that by themselves----
Mr. Kanjorski. Well, I am not talking about sophisticated
buyers. I am talking about unsophisticated buyers.
Mr. Marchioni. And I think it is appropriate for regulators
and I believe most of them do, post rate comparisons and do a
lot of the leg work in terms of the price of the product.
Mr. Kanjorski. So, you do it by rate comparison, but am I
not guaranteed if I live next to my neighbor to get the same
price from the same company as he got?
Mr. Marchioni. Well, that is where the various or the
individual loss characteristics of a particular risk come into
play. I think the base rates would be no different, but the
risk characteristics of that given exposure would come into
play in determining whether that rate would differentiate.
Mr. Kanjorski. Well, that is nothing to worry about. In
other words, there is no guarantee that I am going to get it.
It depends on how it is rated out by the company. It is a one-
on-one negotiation between the insured and the insurer.
We had the same situation when we deregulated the
telecommunications industry. There was a bonanza in savings for
huge companies. They were able to go in and negotiate telephone
service prices with major providers down to darn near nothing,
but unsophisticated buyers have literally been rapped over the
last several years.
I mean there are some people still paying 20 cents a minute
for long distance when you could probably in the competitive
field get it for a nickel.
Mr. Marchioni. Well, and the response to that is when you
look at the competitive market places, those regulators whop
are not spending the vast majority of their time pouring over
rate filings, could really focus their attention on unfair
business practices and market conduct examination processes to
do the back end regulation that provides the consumer
protection that I think it is--that you are looking to. And I
think it is absolutely appropriate.
But again, if the regulator is forced to spend their time
handling prior approval of rate and forms, they probably do not
have adequate staffing or resources to dedicate to the business
practice review that it is that they are responsible for.
Mr. Kanjorski. So, you want to get them out of the
regulation business and get them out of the competition
business, but get them into the policing business that they
comply with good practices?
Is that what happens in Illinois?
Mr. Shapo. Yes, sir. That is what I was trying to get at in
my testimony is that there are certainly aspects to the
business where consumers cannot protect themselves. And that is
what the department of insurance should be for.
You cannot expect a consumer to understand the balance
sheet of a company whether it is financially stable or not.
That is what our financial examiners are for.
You cannot expect a consumer to understand the ins and outs
of claims practices. That is what market conduct examiners
would be for to deal with that on a global method. And
individual consumer complaints as well, thousands and thousands
a year.
The department would serve as an ombudsman to help
consumers and that would include perhaps a case where a
consumer felt they were not getting the same price and the same
coverage offered to them by a company of someone of the same
risk characteristics.
But I think when you are talking about say, telecom, I
think the insurance business is different. Insurance is just
a--has no monopolistic characteristics at this point and it has
not for decades. You would expect that that bargaining going
back and forth between the consumer and the company
particularly because it is being driven on a global scale by
millions would produce the right results.
Mr. Kanjorski. All of your testimony is so compelling. I
have got to ask this last question. If you have such great
things happen in places like Illinois and South Carolina, how
is it that some insurers came up to the Congress and asked for
catastrophic insurance coverage to cover hurricanes? If you are
so able to price out and cover these catastrophic occurrences,
why did they come up and ask the Congress to underwrite those
losses when they occur?
No, no, no, I am not talking about terrorism insurance. I
am talking about when they came up here and noted that in the
State of Florida, all of the insurance companies were leaving
because they had such huge losses after Hugo, was it? Hurricane
Hugo or whatever it was. They were leaving Florida unless the
Federal government stepped in and became the reinsurer of the
high-risk factor.
If the private market is working so well, we should not be
involved in it.
Mr. Csiszar. I would agree with you that the government
should not be involved in it from that standpoint.
And in Florida, as it turns out, I do not think--I do not
think the Federal government ever became the market of last
resort other----
Mr. Kanjorski. No----
Mr. Csiszar. ----than the floor insurance program.
Mr. Kanjorski. Only because some of us had faith in the
private market and kept the Congress from passing a stupid act.
[Laughter.]
And the private market has----
Mr. Csiszar. I commend you for that.
[Laughter.]
Mr. Kanjorski. ----provided insurance.
I take that responsibility for my side of the aisle rather
than my colleagues----
Chairman Baker. And I comment my colleague for his defense
of free enterprise.
[Laughter.]
Ms. Kelly?
Mrs. Kelly. Thanks.
I have a question for Mr. Shapiro--I mean, Shapo. I am
sorry.
Did I pronounce that right?
Mr. Shapo. Shapo.
Mrs. Kelly. Shapo. I will get there. Mr. Shapo, if New
Jersey and Louisiana impose price controls on insurance, does
not that force the insurance companies to raise prices in the
other parts of the country to make up for the shortfall until
they can get out of places like New Jersey and Louisiana?
Mr. Shapo. I think it essentially has that effect,
Representative. Some of the--some States will have laws that on
paper prohibit that kind of subsidy, but when you are talking
about a national company, the fact of the mater is that company
has got to back up the risk in each state with appropriate
amounts of surplus. And that the surplus used there is surplus
ultimately comes out of the hides of policyholders in other
States.
And in fact, as you alluded to, this--the dynamics there
can be so bad that companies will have to in order to prevent
that from happening, and in order to do the responsible thing
to their owners and policy holders, throughout the county, they
will in essence have to quarantine the risk by doing business
in a tough state through a subsidiary a single state
subsidiary. And the dynamics there are that that subsidiary is
not as well capitalized. It cannot take on as much risk. And it
eventually will face the risk of insolvency if capital is not
able to earn an adequate rate of return.
And then of course, that company will have to take steps to
withdraw from the market.
Mrs. Kelly. So basically, if I understand it putting it
down into a very simple formula, what is happening is that it
is forcing in the short run, those States are really forcing
out of state consumers to subsidize the risk.
Is that right?
Mr. Shapo. I believe it has that effect in the end, because
the surplus; the capital that will have to come in to support
the risk because premiums are not adequately supporting the
risk, more capital will have to come in from out of state. And
that is surplus that is coming out the hide of other consumers.
So yes, consumers in other States will end up subsidizing
consumers in States where companies cannot earn an adequate
rate of return.
Mrs. Kelly. Thank you. Mr. Csiszar, since we are discussing
the effectiveness of State regulation, I want to touch on
something that is rather close to my heart and that is NARAB.
It is a section of the Gramm-Leach-Bliley bill. We tried to hit
at the heart of burdensome, inefficient over regulation with an
NARAB section in that bill. And I wonder if you are familiar
enough with the issue, if you could give me your thoughts on
where NARAB is now. And whether or not we can help you in any
way get some effective control there with NARAB.
Mr. Csiszar. I think you will find that there has been good
progress with NARAB in so far as implementation is concerned. I
know in South Carolina, for instance, we are one of the States
that passed the Uniform Model Producer Act.
I think what you will find is a couple of things, and let's
be very fair and practical about this, States are to some
extent passing them with some individual variation. So the
entire uniformity that perhaps was anticipated is not quite
there. But it is being passed and overall, I think a majority
of States--I would have to check--but it is close to--38
States. I thought the number was 38--38 States have passed it.
Some of the larger States are balking at it and I think
again where you can help us is by making your voices heard that
those States are also included in this NARAB process.
We have not quite reached a reciprocity stage or we have
reached a reciprocity stage but we have not reach a uniformity
state I should say.
So we are a good way a long the way, but not quite there
yet. Even thought we have fulfilled I think the letter of the
law, if you will.
Mrs. Kelly. Thank you very much.
I yield back the balance of my time.
Chairman Baker. Thank you, Ms. Kelly.
Mr. Scott?
Mr. Scott. Yes. Mr. Shapo, you testified that the Illinois
model of regulation could serve as a successful model for other
States, that it could produce a healthy market and provide
necessary consumer protections in virtually any state in
America.
In your opinion, is there any reason why we could not make
the Illinois law the national model? Do you believe it is time
for us to give that serious consideration?
Mr. Shapo. Whether Congress should mandate that?
Mr. Scott. Right. Make the Illinois law national law?
Mr. Shapo. Through congressional action?
Mr. Scott. Yes, yes.
Mr. Shapo. My belief is that there is nothing about
insurance as I just described at length in my testimony, that
would make it so that this product could not be regulated in
that competitive fashion to the benefit of consumers
essentially in any state.
My view while I was Commissioner, and it remains so today,
is that this state system is--deserves the opportunity to work
and without creating a Federal regulator. And I think--
Representative Kelly talked about NARAB before. And I think
Congress is right to be trying to think of methods by which it
can bring about change and use its authority to help the States
help themselves.
I mean, you have a classic collective action problem in
insurance regulation. And that is--and Congress was of course
formed to help the States deal with their collective action
problems by being a national instrument for facilitating
interstate commerce.
At some point I think that Federal preemption is the only
way for States to help themselves. And in fact can help the
state system--can save the state system. You can have limited
Federal preemption as Mr. Scott is suggesting, that allows--
that does not create a Federal regulator but certainly simply
puts certain mandates on the States.
And I think that depending on how urgent the problem
Congress thinks it is, that if the States have not been able to
do it themselves, individually through the NAIC or through an
NARAB type model, that at some point the most severe problems
in the regulatory system particularly those that impede capital
investment and that impede the globalization of the business
for the benefit of consumers, I think that that that
reluctantly I think that may be necessary at some point.
And again, I think eventually that becomes a benefit to the
state system because it allows you to keep the state system in
place while not creating a Federal regulator by simply
smoothing out the rough edges through congressional mandate.
Mr. Scott. It just seems to me that in listening the
testimony that New Jersey and Louisiana are suffering in large
measure because they are not doing some of the things that
Illinois and South Carolina are doing.
Let me go to South Carolina for a moment. Mr. Csiszar is
it?
Sorry about that. Hope I did not do your name too bad.
You testified that by moving from a strict prior approval
process to a more open market process, that you have been
better able to focus on what is essential to insurance
regulation. Could you tell us how this reallocation of
resources better protects the consumer?
Mr. Csiszar. It does it in a number of ways. And some are
really a byproduct. Let me start with the byproduct. The
byproduct is that is also allows the legislature to focus more
on what is essential for instance. When you look at the cost
structure of insurance, by in large the cost structure, yes,
there are expenses. But it is made up of claims.
And it is a fact that you have poor drivers, or you have
accidents and so forth.
In our case, it is allowed our legislature to really focus
on DUI laws for instance, seat belt laws, helmet laws, things
that we did not have, even highway safety--the dividers on a
highway.
And that is where the true impact on the cost structure, I
think, can be had.
So one benefit comes from the legislative focus. In the
case of our Department, we are doing very much what Nat
described a moment ago. We are focusing very much on the
financial side, the solvency side of things. And we are
focusing very much on the market conduct side to avoid the
kinds of problems that Mr. Kanjorski, for instance mentioned.
The market conduct side has become much much more active
than we ever were I think within the last few years.
We focus on discrimination, the redlining. You know, these
are things that in the past we talked about. We just did not
have the resources to do them with. So it is a different
process, and I think a more effective process.
Mr. Scott. If I may--because I just want to go over to
Louisiana for a second.
Chairman Baker. Take all of the time you need.
Mr. Scott. Thank you. I wanted to just talk because there
is this dichotomy. It is like they are doing what is right, and
maybe if you all did some of these it might solve some of that
problem. But and each state is unique. And in my State of
Georgia has its concerns on this issue as well.
I want to talk to you about the negative effect of price
controls on availability. You testified that the problem in
Louisiana comes down to one critical point, that insurance
carriers continue to leave your market. And as the insurers
disappear, the availability shrinks. Could you please explain
how the State of Louisiana's use of price controls have caused
the insurer flight in Louisiana.
Mr. Juneau. Well, if they cannot get the premium increases
that they deem necessary to price their product in our
marketplace, they are faced with a choice of just continuing to
face losses which you know--I am not an insurance expert, but
Representative Kelly was talking about if they are losing money
in Louisiana do they have to make it up somewhere else. And I
guess to the extent that they can, they try to do that.
But they either have to continue to build losses in to
their operations or they try to not write as much as possible.
They really increase their underwriting standards. They judge
risk much more carefully in a state where they are operating
like that, which means they chose not to write policies to a
lot of people. Or if when it comes down to the final analysis,
they leave. We have had a lot of them that have left,
particularly in automobile insurance, property and casualty.
Some of the health lines in Louisiana, these carriers have just
up and left.
You know, are there ancillary things that impact that? Yes.
I will mention some that exist in our law. But I do think that
the primary thing to focus on in Louisiana to begin to change
the situation is our regulatory scheme that we have in the
state. I mean, when you politically appointed people and an
elected commissioner sitting on the commission and they are
looking at will people look badly upon them if they grant a 10
or 15 percent rate increase?
The tendency of them is to not--to deny or delay. They will
just keep telling the people well come back or we will give you
2 percent, but you cannot--it sounds like bargaining in a
bazaar somewhere sometimes. You know, the people come in with
their book with their actuarial data and they put it down and
they say, ``Here is what our costs are and we would like to
recoup those costs and make a reasonable profit.''
So I do think that the structure that we have, the prior
approval structure has lead to the out-migration of a lot of
those carriers in the State of Louisiana.
Mr. Scott. Could you tell the committee how severe is this
insurance crisis? What impact is it having on jobs? Or does it,
and economic development in Louisiana?
Chairman Baker. And that would have to be the gentleman's
last question, please.
Mr. Juneau. Yes, sir. I will mention a couple of anecdotal
things in my testimony of companies facing some severe
problems. This is rampant through the State. But basically,
when you are faced--there are two main problems. When you are
faced with a sizable increase and I mean a really sizable
increase in your liability insurance as a company, it affects
your profitability. It affects your ability to expand. It
affects your ability to hire people. It affects your ability to
buy machinery and equipment that you need in your business. And
those have repercussions that operate throughout the business.
The other main thing is that if your coverages are reduced,
if exclusions are put in your policy, if you simply cannot get
it and have to go bare, then one instance where you have a loss
or a claim can really put you out of business. And some
companies have just stopped doing certain operations because of
fear of liability exposure because either they could not get
the insurance or they got it at very reduced coverages which
increase their exposure. And so they stopped certain types of
operations.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Scott. Just on a personal
note, my homeowner's insurance carrier withdrew last November.
And I had to scramble around in December, and try to find that.
For all of the agents, I have coverage in effect.
[Laughter.]
But it happens to everybody.
Mr. Gary Miller?
Mr. Gary Miller of California. Thank you, Mr. Chairman.
You talked about liability insurance, and often on the
Housing Subcommittee, we debate the impact of government and
the regulatory process and how that impacts affordable housing.
And I know specifically in California, liability insurance
for builders is almost impossible any more. And if you do buy a
policy, it does not cover attached product which by in large is
entry level in most areas. It includes also subsidies and it
goes on and on to where when you get through with the policy,
there is very little that in fact it does cover.
And that puts a builder in a very difficult situation
because without adequate coverage, lenders are not going to
provide loans, because they know they are going to be liable.
And it goes on and on to subcontractors.
And State regulation has been criticized as imposing
enormous cost and restricting rather than facilitating
competition.
Is it Mr. Shapo? I did that correctly?
I know that in Chicago like Los Angeles, is a large densely
populated city. Yet insurance is much easier to achieve in
Chicago than it is in Los Angeles. Could you address that?
Mr. Shapo. Well, I can address the Chicago part of that
probably easier than----
Mr. Gary Miller of California. Please.
Mr. Shapo. ----the Los Angeles part.
Illinois is a State that--it is a large State. It has urban
and rural. It has all kinds of different weather problems. It
has hail, ice, tornadoes, et cetera. So I think it serves as a
example to virtually any state because of its very conditions.
And it is comparable to any state's--any other state's large
cities.
And the--what we--what we found is by focusing on
encouraging capital it benefits the consumers because in the
first place you avoid the availability crisis that you get.
Often what will happen is the price controls and trying to keep
prices down will simply in the end cause a major availability
crisis. And by focusing on availability in Illinois, going the
opposite way. In the first place you have the availability, the
residual markets are tiny. They are virtually non-existent
which means that people can find coverage through the regular
insured market.
And in the second place, it has the effect in the end of
keeping rates affordable. So by focusing more on availability
up front, you end up avoiding the crisis, where people cannot
get coverage. And you end up producing more like the price
controls we are trying to get which is affordable coverage.
Mr. Gary Miller of California. There has been discussion
about NARAB and a lack of uniformity in application. Would
somebody contrast the benefit of NARAB versus a possible
Federal charter as it applies to opportunity and price?
Mr. Csiszar. I wonder if you could clarify that question,
because I am a bit confused.
Mr. Gary Miller of California. Well, NARAB was intended to
serve a specific purpose. And yet applications not uniform from
state to state, which is somewhat self-defeating in and of
itself, you are looking at various States that over regulate
the industry. And in the industry is fleeing those States. And
you look at some insurance companies that might provide some
sort of a policy for builders for improvements of a subdivision
or whatever, that if you apply that over 30 States, every state
is different. One state allows a third party insurer, and
another state does not allow a third party insurer.
And many of these companies are smaller companies that
provide that type of an insurance. And it is becoming
increasingly difficult in this country, except for a few States
obviously, to acquire insurance and for business people to
acquire liability policies which is in some fashion hampering
the economy from growing as it should.
If we had a, let's say reasonable applied Federal charter,
that was similar to what we have for banks. You know, a bank
can go from state to state, can get a business. Yet there are
state laws that apply that banks fall with under. But it does
not take you two years to have an a new approach applied
equally throughout the United States if it can do something
that did that much more rapidly and was much more consistent,
and somewhat eliminated much of this paperwork process they are
having to go through from state to state. It is almost like an
industry in and of itself filling out forms.
If we had a reasonable Federal charter, compared to
something like NARAB that is not being implemented uniformly,
do think there would be a benefit to that?
Mr. Shapo. Mr. Representative, could I suggest as a matter
of public policy, that there is at least one step in between
NARAB and a Federal charter.
Mr. Gary Miller of California. I am talking about the
option of Federal charter, not a mandatory----
Mr. Shapo. Understand.
Mr. Gary Miller of California. It can go either way.
Mr. Shapo. I understand, but I would suggest----
Mr. Gary Miller of California. What would that step be?
Mr. Shapo. I would like to suggest that there is at least
one step in between which----
Mr. Gary Miller of California. Such as?
Mr. Shapo. ----is just pure Federal mandates and
preemption, which is--the step that you did not get to in NARAB
because the States achieve the hurdle of----
Mr. Gary Miller of California. So an absolute Federal
mandate rather than an optional Federal mandate be applied
rather than an optional Federal charter or allowing state
option?
Mr. Shapo. Well, what I was going to suggest in terms of if
you are assessing policy options, that there is at least one
policy option between NARAB and the optional Federal charter,
which is limited Federal preemption, but pure Federal
preemption in certain cases but that is preemption of certain
state practices, without creating a Federal regulator.
So instead of going, hopping all of the way to creating a
Federal regulator and allowing that as an option, you could go,
you could stop, make one stop before that and say, and in
certain areas where we have discussed and believe it is
necessary, we would have limited preemption. We would tell the
States that you simply cannot do X or you simply cannot do Y.
We are not going to Federalize the implementation of the
regulation, but we are going to tell the States that because of
the collective action problem and because we have not been able
to fix it either the States voluntarily or through an NARAB
type of approach, you just simply tell the States you cannot--
you cannot apply this type of a law or so forth.
Mr. Gary Miller of California. Well, quickly, in closing,
is there agreement on this panel with that approach?
Mr. Csiszar. Clearly that is an option that you have. I
would add one other thing to it as you move--since you had
bought up the Federal charter. My fear with respect to even an
optional Federal charter would not be that no, you are not
going to cure some of these problems. Clearly you would cure
some of the problems if you go with the Federal charter.
But you are introducing other risks. By that I mean a new
Federal bureaucracy for instance. I am an immigrant to this
country, and I have had the distinct pleasure of dealing both
with the IRS and the INS.
Mr. Gary Miller of California. Are you not lucky.
[Laughter.]
Mr. Csiszar. And quite frankly, my fear would be that you
are--by the way, the IRS is downright customer friendly by
comparison.
Mr. Gary Miller of California. Well, the chairman will
never approach that direction of even complimenting the IRS or
these other agencies.
[Laughter.]
So thank you, Mr. Chairman, for your patience on that.
Chairman Baker. Certainly. I think the gentleman's point as
I was generally understanding it was that produce uniformity is
a distinctly different issue from consumer advocacy, and that
the 50-state consumer advocacy approach is something I believe
everybody is in defense of. It is simply trying to figure out
how to get product across state lines with the least amount of
encumbrance.
Mr. Brad Miller?
Mr. Brad Miller of North Carolina. Thank you, Mr. Chairman.
I am not entirely used to the idea that I should come into a
committee meeting an hour and 15 minutes late and immediately
begin to ask questions. But let me do it nonetheless.
There was just one set of questions that did not appear to
be answered, and I suppose the best person to direct it to
would be Mr. Csiszar?
Yes. How much regulation--I know the bulk of the testimony
and questions have been about rate regulation. But how much
regulation is there of policy forms in South Carolina and other
States that you may know about?
Mr. Csiszar. Again, we were in a situation where everything
was prior approval five, 10 years ago. And we have within the
last few years moved away from that. We are now on the
commercial side. For instance, we are no longer reviewing
policy forms, just property and casualty.
On the life side, we used to review everything from a very
simple whole life policy, to the most sophisticated indexed
annuity that you might find. What we are doing now is we are
exempting clients from review when there clearly is no plain
vanilla kind of policies for instance, where there is no need
to review. So we have a selective review process on the life
side based on the sophistication of the product, a judgment on
how sophisticated the product really is or how complex. Maybe
sophistication is not the word. Complexity in a better word,
how complex the product is. Whereas, on the commercial side, it
is an open market entirely in South Carolina.
Let me make one exception to that, our malpractice, medical
malpractice forms for instance are still regulated on that
side, as is our credit products. I apologize. We do make those
two exceptions.
Mr. Brad Miller of North Carolina. Well, basic coverage is
like automobile liability and homeowners. Is there a standard
form that applies to every insurer offering that?
Mr. Csiszar. We have standard forms of course. And there
are minimum mandated coverages for instance, for automobile.
There are different--right now as I said we are still on the
personal line side. We are still reviewing products to make
sure that the consumer actually gets the appropriate coverages.
Mr. Brad Miller of North Carolina. Okay. And are you
familiar with other States? Is that the case in----
Mr. Csiszar. Other States I think with rate exceptions are
also prior approval. I think Colorado might be an exception.
Nat, you might remember. I do not think they review products.
But I think most States have the prior approval process in
place.
Mr. Brad Miller of North Carolina. Okay. Mr. Juneau, are
you familiar with Louisiana in that respect?
Mr. Juneau. I am not an expert on insurance and all of that
in Louisiana. I represent a trade association, so a business
association, a state chamber of commerce in Louisiana. So I
mean, I do not know that I could help----
Chairman Baker. Let me jump in to help Mr. Juneau a little
bit. Yes, there is significant prior approval. We have one of
the longest delay times from application----
Mr. Brad Miller of North Carolina. You are talking about--
--
Chairman Baker. ----to the entry into market for new
product, typically averaging 180 days, but it can go up to a
year.
Mr. Brad Miller of North Carolina. Well, then that--can I
continue to address my question about Louisiana to the chair?
[Laughter.]
Mr. Juneau. I think he still votes there.
[Laughter.]
Mr. Brad Miller of North Carolina. Are there standard form
policies basically every insurer in the State offering
automobile liability insurance has the same standard form?
Chairman Baker. Yes, yes.
Mr. Brad Miller of North Carolina. And the same is true of
homeowners?
Chairman Baker. Correct for a minimum policy. There are
minimum levels, and there is standardization.
Mr. Brad Miller of North Carolina. All right, and as to the
forms that allow insurers to giveth or taketh away, are those
standardized as well?
Chairman Baker. Yes.
Mr. Brad Miller of North Carolina. Thank you.
Chairman Baker. The gentleman has no further questions. Mr.
Garrett?
Mr. Garrett. Thank you.
You know, New Jersey is proud to be number one in a number
of things, in a number of different areas. I think the length
of time, we exceed yours as far as approval. So besides having
the highest rates in the nation, we also take the longest times
to approve them--the forms.
It seems a consensus of this panel is that the regulatory
side is part of the equation as far as where the reform is
necessary. And a question from a member from the other side of
the aisle that is still here that raised an interesting--and
the answer that we got from it--raised an interesting question.
It is done a little different here, but this was brought up.
And that was if things are working along the way, they are in a
couple of States where they are, without the intrusiveness of
excessive regulation, the question was raised, ``Well, then how
come it is not working in the health side?'' And the answer
was, ``Well, that is because the Federal government got its
finger into it and started messing things up.''
So would it help for those States that have made the
conscious decisions to allow their local citizens decide what
level of coverage you have which varies from state to state.
And that will be my follow up question in the insurance on the
auto side, how does that differ?
Would it help for those States to have on the health side
of the equation to have exemptions or waivers from the Federal
preemption on the health side to give the States the
opportunity where they so chose to run on the health systems
and provide their consumer with the exact type of health
coverage that they want to have?
Mr. Csiszar. My answer to that would be a resounding yes
that clearly there is room, if nothing else, for States to opt
out of some of these. There ought to be some room for States to
opt out of some of the Federal mandates particularly when it
comes to for instance small group health where you have a
particular group of employees. You do not have any cancer
problems. Well, why do you need cancer coverage for instance?
So there ought to be some room to opt out of the Federal
mandates. And it would be helpful. Overall, I think the health
insurance is a classic example of being over regulated whether
it is the privacy issue which we are now going through, whether
its the rate making issue. Believe me, I do not blame entirely
the Federal government for this. We have done our fair share at
the state side.
We have rate bands in place. We have state-based mandates
in place. Some very onerous ones, fertility mandates for
instance, very onerous mandates.
And so we have also done our fair share. But ultimately I
can tell you at least from my experience as I talk to companies
exiting these lines of business, the uniform reply that we get
that ``Yes, there are problems. These state-based things are
problems, but the real, real problem lies with HIPAA and the
guaranteed issue.'' That is the answer we are getting.
Mr. Garrett. Maybe it is because, and I speak as a former
state legislator who is now in Congress, maybe it is because we
have so many former state legislators who saw the attributes of
regulating on the state level, that now that we are here we
say, ``We just cannot give up this idea of passing mandates on
the States.'' Maybe this is where this comes from.
But I would be glad to explore that possibility of seeing
what we can do in that area.
The question along that lien then is, is it possible though
for why we see such a divergence of costs and why we see such a
divergence of success in these areas, in part due to what the
citizens or the legislature in the States have opted to say,
``This is what we want for our insurers.''
Now in New Jersey we have some reform, and then you can
comment in a moment if you would as to what reform is not being
done, but you would like to see. And maybe some of the other
States that are represented here could say it is in part that
you are not requiring mandatory coverages that other States
such as New Jersey is requiring?
If New Jersey wants to start, if John wants to start.
Mr. Marchioni. In terms of the mandates and the coverage
levels that are dictated by individual state legislatures, that
is really a public policy issue that state legislative bodies
should be making along with the insurance departments. The
issue here is whether or not the market who serves that product
has the ability to adequately price the product. From a public
policy standpoint, a state legislature decides that certain
levels of first party medical benefits and certain minimum
levels of liability coverage are what should be provided as a
minimum to every consumer in the state.
That is fine. But the private market has got to be able to
price that product. And the problem you run into is when we
dictate very high levels of mandatory coverages, it generates a
very high cost product, which then attracts political interest
amongst the voters and them obviously amongst the legislature
which leads to price controls.
So it becomes at the start they are separate issues, but
then they become intertwined once the cost of the product rises
to the level in fact the mandatory benefit is too high.
Mr. Shapo. Also, representative I think that is as matter
of public policy, that is what some of us are testifying is
that the desires as you described it, for the legislature to
quite appropriately say, ``This is what we want for our
consumers here,'' that what ends up happening is that these
methods that are used to try to get there end up having the
opposite effect.
And that by saying, we want lower prices for our consumers,
what you are--using the tool of heavy rate regulation and rate
roll backs and things like that, what happens in the end is
that the goal of trying to get more affordable or available
coverage for consumers, the result is quite the opposite. By
focusing so much on price, you end up withering supply. Capital
does not come into the market. So then you have an availability
crisis, and then in the end rates have not gone down.
Chairman Baker. Thank you, Mr. Garrett.
Mr. Clay?
Mr. Clay. Thank you Chairman Baker.
Dr. Hartwig, if reforms are not enacted to address this
availability crisis, and the States continue to impose
artificially low rates while losses continue rising, will
things get better or worse for consumers? Is this a cyclical or
long term problem for consumers?
Mr. Hartwig. What we have today here for consumers under
the current regulatory environment is a long term problem. It
is not something that is going to go away on its own. It is not
cyclical. It is here to stay.
Now we have heard testimony from New Jersey, for example.
This is a problem that has lasted at least a quarter century.
That is far more than cyclical.
In the end what is going to happen is that you have a
situation where more capital will drain from the system over
time. Invariably that means there will be less insurance
available. What insurance is available will be available on
more restrictive terms and at higher costs. That is precisely
what is happening today. And to the extent that there is any
acceleration in the exiting of that capital from the industry,
or there are more stresses put on this industry, say from
another terrorist attack, or from anything like this, you have
a situation where you have an acceleration in terms of the
pricing and a decrease in availability.
Mr. Clay. Well, does that force us to mandate less
coverage? I mean, if that is the way you are going with the
argument.
Mr. Hartwig. I think that what we are looking at or what we
need is an environment where customers determine what they need
in terms of how much coverage and what types of coverage they
want. It is that way on the commercial side in a number of
sectors. It is not that way in the personal lines side in very
many States today.
And so I think we can allow customers who are today are
more knowledgeable than ever by the way, in terms of finding
out not only about the price, but what is included in a
product. There is more information available. We can allow them
to take some of that into their own hands as they do when they
buy just about any other product out there today.
Mr. Clay. Thank you.
Mr. Juneau, you testified that you believe competition is
the best regulator of rates. Why do you believe this?
Mr. Juneau. Well, from our experience right now in
Louisiana, when you have so few carriers available to write to
businesses in the various lines, I mean there is no shopping.
There is not bargaining. There is no playing one company
against the other. You are just kind of over a barrel. The
companies that remain and are writing, you know, it is just a
very, very difficult situation.
There is no impetus to bring prices down. I mean, quite
often the regulatory scheme does not allow them to raise their
prices very fast, so they simply continue to disappear. They
continue to simply not write certain types of insurance so you
have to simply exclude a lot of different coverages that you
need in running your business.
And just to me, it has been a picture of a real failure of
the market to work in the State of Louisiana. The gentleman
next to me talks about the companies that are moving into South
Carolina to write, and when they do they often write in more
than one line of insurance. I do not know any lien of insurance
in Louisiana in which we have companies in to write.
I know about every lien of insurance and we have companies
leaving the state. Part of it may be some things in our law
which I touched on, but part of it is the fact that they think
that we have a very strange regime for regulating the market.
And like I said before, when actuarily they go before a
commission and state, ``Here is what we raised in premiums,
here is what our costs are. Here is the book, look at the book.
Check and see what the loses are. We need premium increases to
continue to write.'' And they are told come back in--you know,
next month. Of come back in three months, or we will give you 3
percent, but not 145 percent.
It is just not a market they want to write in, sir.
Mr. Clay. Okay, thank you. Mr. Csiszar, you talked about
how you all had been able to confront redlining in your state.
Can you elaborate for me? How do you actually focus on that
issue? What measures do you take to discourage that? And when
you do find incidents of redlining, what measures do you take
against those companies?
Mr. Csiszar. Interestingly enough, when the other reform
legislation passed, one of the objections by consumer groups to
that legislation had to do with the fact that the legislation
specifically permitted zip code rating. And the argument was
that that only calls for redlining.
Well, as it turns out when companies rate by zip code as
most of them do, that is one of the best ways to determine
whether any redlining is going on. Because you have the data
siting in front of you. And my point very simply was that I can
now devote resources to that issue. And we have had cases that
we have actively investigated for redlining. I can now devote
the resources to that to me which is more important than the
rate making process when I have 200 companies competing with
each other to write the business.
We have a very active consumer outreach program now which
we did not have before. We make sure we go out into
communities. Churches--I have got one man on staff who just
goes out into the low country in South Carolina, for instance
and speaks to groups and informs them of how insurance works.
Goes to high schools, for instance, Rotarian clubs. These are
things that we just did not do before because we were shuffling
all of this paper around. You know, it is become like a--my
actuary, by the way who is sitting behind me, some years back
said to me, ``You know when we moved to this system, it is like
a breath of fresh air.'' And it really is.
Mr. Clay. You have become more proactive with the----
Mr. Csiszar. Yes.
Mr. Clay. ----with consumers. When you find an incident of
redlining, I guess a number of variables and factors come into
play? Do you look at an insurer's driving record and say it is
impeccable, do you then make a determination that that is
redlining?
Mr. Csiszar. Oh, yes. Actually if there is no redlining if
nothing else, we have a very active consumer assistance
program. We pull them out of that company and find another
company to write for him.
Now we are still going to pursue the redlining issue as a
matter of discrimination as an issue of law, but we are not
going to let them sit with that company. We are going to place
them with another company.
Chairman Baker. Thank you, Mr. Clay.
I want to try again to see if I can get agreement as to the
observation I was making earlier to distinguish access of
product from consumer advocacy.
Mr. Csiszar, you just made a very persuasive argument that
in South Carolina, that when once relieved of the product
approval and paper shuffling responsibilities, it released the
ability of your employees to go out and actually help consumers
proactively.
That is exactly what I am contemplating if we were to act
on a national basis to have every state's insurance regulatory
aimed at helping and informing consumers while getting out of
the product approval process.
That is a very simplistic explanation, but the current
system of 50 state approval processes, rate setting systems,
form setting requirements, counter-signatory requirements
serves no consumer interest.
I mean, there is nothing inherent to that process which
automatically insures that a homeowner in south Louisiana is
going to get property and casualty insurance.
But if you take the barriers down and let all of the folks
roam where they may, I would suspect that there would be people
to come to me and offer a myriad of products where frankly I
have few choices today. When some one told me the final four
was in New Orleans, I thought, my God, that is the end of the
insurance world.
You know, I did not know what they were talking about.
[Laughter.]
If you take the fences down and let people offer product on
terms and conditions as they seem fit, what is it that i hear
and not to characterize any particular person, but among the
NAIC membership, is the concern about that national structure?
If we are not building a 13 story building on K Street, if we
are merely talking about the way in which product get to the
market?
Can you respond to that, because I hear concerns that we
are moving too far too fast if we contemplate that methodology?
Do you want to respond? All right.
Mr. Csiszar. I will give you my first cynical response.
[Laughter.]
Rates and forms are a way of exercising power, and if
nothing else you are touching upon a power base that has been
traditionally the territory of commissioners. And that is just
the reality whether we like to hear that or not. That is just
the fact.
I will tell you my own personal view, and I will speak as
director of South Carolina here. That I think it is excellent
or insurance commissioner to hear what you have to say on this
topic, because there is no doubt in my mind that change is
needed.
Even where we are in South Carolina, we have got a long way
to go still. While insurance is somewhat of a unique product in
a sense that you pay now and have to wait for the benefits to
see them later.
There is a regulatory process that is needed. No one is
talking about taking a libertarian approach here and doing away
entirely with regulation. No, there is clear room for
regulation.
And it needs to be changed. So I would welcome, I welcome
your interest in this and your pursing this issue because I
come out of an investment banking environment for instance. We
did not have these problems. What we went after was disclosure
and transparency, for instance.
Well, there is a lot of need for transparency in this
industry still. These are the things that we really ought to be
pursuing.
But it is not a uniform view amongst commissioners at this
point.
Chairman Baker. Oh, I--that is clearly understood.
I thank you, sir, for your comment.
Mr. Shapo, assuming that you may generally agree with the
gentleman's comments, how long is it--I have been asking this
question now for a decade--how long do we set the clock and ask
States through the NAIC structure to adopt some not just
reciprocity, but real uniformity at least with regard to
product? Or is it advisable to help by having the Congress say
do it by such and such a date certain or a Federal action is
taken?
What is your response to that?
Mr. Shapo. My chair just got very warm.
[Laughter.]
The--I think as policy makers, you have to gauge yourself
just how tough to get at what point. But clearly, I believe
that--I will say it again. This is the active collective action
problem with the States. And it is up to a certain point to the
extent that deviations are allowed and not specifically
preempted, they will exist. That will always happen.
I mean, to the States, I think virtually every state
insurance department in the country does a good solid job of
regulating insurance. They know their jobs. They do it well.
They have experience and so forth.
But if the test is not, are they competent and trustworthy
to their job, if their test is will they have the right
policies and or uniform policies, the States at some level are
ultimately going to fail that test.
I mean, it is just impossible with 51 equally sovereign
actors to expect them all to achieve uniformity on their own.
So I think that to the extent that I do not want to get into
the business of publicly offering advice on this, that the
thing to do is to very directly state the goal that you want
and say these are the options on the table, a NARAB type of
approach which is preemption, but it is preemption that could
be preempted. Right, the NAIC preempted the NARAB preemption by
reaching the goal, the 29 jurisdiction goal which allowed
several key States to not join up.
So you could say, well, there is another step down the road
which could be just an outright preemption saying you can prior
approve or if you prior approve, you have to have a DEEMER or
whatever would be. And you could say that that is the next
option, and the option after that is the mother lode, you know
the 13 story building in K Street. And I think you directly lay
out those options and you pick, you know, a reasonable
timetable probably in consultation with the key players,
including NAIC officers on it. And then you just publicly state
these are the goals. And at some point those last two, a direct
Federal mandate that cannot be preempted by States and or a
Federal charter. Those we will actively pursue those. And I
plan to sponsor those on a certain date.
And you know, I think that the date on the first one of
those, the plain mandate probably should not be too far in the
future. I mean, my experience as a public administrator, as a
public policy maker was that you need to in order to get people
to do things, you have to have the hammer, you know, visible.
It cannot be little dot on the horizon.
Chairman Baker. Well, I hope folks can at least hear
footsteps. I mean, they do not need to see us, but they at
least need to hear us. I mean, we have been talking about this
for so long.
Mr. Kanjorski?
Mr. Kanjorski. You know, we have been talking for about two
hours, and I am starting to conclude that I have not really
heard anybody. When you really think about what we are arguing
here, we are saying we want to provide coverage for the
business community and the consumer community. We are obviously
not discussing that you are being inhibited or that the
insurance industry is being inhibited from cutting their rates.
Is that what I am supposed to gather from today? Or am I
correct that what you are really all talking about is there has
to be an increase in rates? We are all talking about how we go
about doing that, whether we get to do away with rate
regulation or policy content control. More money has to flow
into the insurance industry to give the coverage that is
requested to meet the claims that are out there and
underwritten.
Is that not about the simplest way to summarize what we are
talking about?
Mr. Hartwig. I think so, sir, and it is definitely the case
that the issue of changing rates in the insurance industry is
not symmetrical. No one stops you from lowering them very
frequently. But you are very frequently prevented from raising
them.
Mr. Kanjorski. Right.
Mr. Hartwig. And that creates a problem----
Mr. Kanjorski. That is what we are talking about then. The
insurance industry needs higher rates, and how are we going to
do it and how will you make it look nice.
I am not opposed to an efficient insurance marketplace. I
want to go to Louisiana's problem because it is a problem. I
have been sort of an obstacle in Congress to providing
catastrophic insurance. You raise the question, Mr. Juneau,
that you are losing companies in the southern part of
Louisiana. That fact does not surprise me and it does not
necessarily mean it is because of rate regulation or content
regulation, or product regulation.
Louisiana is subject to hurricanes. Under every forecast I
have heard, it is reasonable to assume within the next 20 or 30
years, a class-one hurricane is going to hit New Orleans and
cause great decimation. There is not any property and casualty
company that wants to be insuring that risk without some
protective cover from the Federal government or the ability to
spread that risk loss across the country to a very large base.
But I do not care what kind of a product it is, you know
what the rates are, the risk of writing casualty insurance in
New Orleans in Miami Beach--I will not single out only
Louisiana is higher. We have identified about 13 major
population centers in the United States that are at extreme
risk for higher losses of property and causality insurance. In
a way, everybody is trying to find a way to allow these
communities to continue to exist at the same insurance rates
they are paying now. Continued growth however, means greater
exposure to be picked up in the case of a loss.
I think that if Hurrican Andrew had come 25 miles north of
where it hit and if it came today the insured losses would be
$75 billion. That point has always been my argument. Why should
the guy in Idaho underwrite someone who wants to build a
building on Miami Beach? Part of the risk of building a
building in Miami Beach or New Orleans is the fact that you
have got a chance, a much higher chance, of catastrophic loss.
The marketplace should reflect that risk with higher costs in
that particular marketplace.
I am in favor of that principle. Unfortunately, I do not
think you are going to get an awful lot of economic development
started in a higher risk area because your rates are going to
be extraordinary compared to all of the rest of the country.
If you are sitting on top of a volcano or if you are
sitting on top of a fault in California, you have got a
problem. All of us are trying to find some way to subsidize or
ameliorate that problem. If we go to a real free market economy
model and we say the rates should reflect the exposure, the
potential exposed loss that is going to come through natural
circumstances, you are not going to have a very positive
economic development future in southern Louisiana or in Florida
or in California along the coastline.
It is just not going to happen. I, for one, representing
the State of Pennsylvania say, ``Hey, why should we give a rate
guarantee or underwriting advantage regardless of how you do
it, whether it is through the Federal government of whether you
spread it the base across the country, the rate, why should we
encourage capital to flow artificially by being subsidized by
other areas of the country or by the Federal government to go
into higher risk areas?
Clearly, if you are going to spend $10 million on a
building, and if you build in Kokomo, Indiana, your
appreciation is likely not going to be that great. If you put
it in Miami Beach however, it is going to appreciate
significantly over the next five or 10 years. So if you can
just meet the period of time where the loss does not occur, the
exposure does not occur, your investment is going to appreciate
a great deal.
But the reason it is appreciating a great deal is because
they are getting an artificially low insurance rate to cover
the potential loss or cost that is there.
Maybe your argument should be, let's let the marketplace
handle that. I am for that. But it is going to be very
disadvantageous to some of the high growth areas of this
country if they adopt that policy. I am, however, for it as
long as we can find, I think, a uniform product.
I think Mr. Miller brought that point up and that is very
important. I mean, I do not want to read that insurance policy
or hire an insurance lawyer to figure out what I am covered for
and what I am not covered for, as we discussed up here on the
dias when some of you were talking. I cannot think of many
people other than business people, executives specifically
hired to study insurance policies, that spend the time reading
their policies. They call up their insurance companies and say,
``I am buying an automobile, give me automobile coverage.''
Assume you get a good policy from the company. I could not
tell you what it excludes or includes. I only find that out
after they do not want to pay for the damages that I have had
after an accident or after something happens. That is when I
read my policy, and find out what they do not cover and what I
thought they did.
The homeowners policy has the same problem.
Now as far as I am concerned, if we can get some balance
either on the state level or across the country for a uniform
product that people do not have to hire a Philadelphia
insurance lawyer to interpret their policy every time they file
a claim, and if we go to the natural market driven rate, I am
of the opinion that we may favor some of the more disadvantaged
economic areas of the country that have been subsidizing the
economic growth areas of the country for a long time,
particularly in the private market through insurance by having
companies go in there and suffer huge losses in Florida and
Louisiana and having to pick up those losses in other States or
get out of the business.
Now the one other thing that bothers me is that I feel
someone could interfere with the insurance business. Let me ask
you this. I like the idea that we have small insurance
companies. I am not sure that if we get into this market-driven
system we are not just putting such favoritism to huge, well
capitalized companies and eventually forcing the smaller
companies out of business that just cannot write because they
have such a limited base or pool to write on.
What is the panel's thinking on that point? Are we going to
materially shrink the number of companies that are engaged in
the business?
Mr. Hartwig. I might start first here. Already in virtually
in every state and those that are competitive of course, like
Illinois, and like South Carolina, you have the presence of
major insurers who have a significant market share. But for
decades you have had them competing with very small insurance
companies who might only write within that state or within that
region. They might only write a single line within a single
state.
The obituary of small insurance companies has been written
many, many times and always prematurely. And so these companies
have been able to demonstrate their ability to compete with
large insurance companies in the current environment and I
would expect that to be the case under any regulatory scheme.
Mr. Kanjorski. In Illinois we changed the system. Will they
be able to continue to exist, we are not going to disadvantage
small companies?
Mr. Hartwig. What I am saying is that yes, small companies
now compete with large companies under all regulatory schemes
today.
Mr. Kanjorski. Yes.
Mr. Shapo. In Illinois, Representative, we have the highest
number of companies competing in the homeowner's market. So I
think it would have the opposite effect. I think it enables
small companies to be able to compete it. And I think that
makes sense if the regulatory system is very burdensome,
probably a larger company with more surplus would be able to
afford the--those transactional costs than a smaller company
would.
And if I could make one quick comment on when you said
earlier as kind of a bottom line, when you were talking about
rates being too low or too high, I think it is--I do not think
we can say that it is just what this is all about is the
insurance company needing higher rates. I think what we are
saying is that insurance companies need to be able to raise and
lower rates quickly. And in accordance with market driven
decisions, as opposed to driven by regulatory considerations
and a long delay. And that has to do with not only raising but
also lowering rates.
And it is also not just----
Mr. Kanjorski. Well, that is true in a measured area, but
as the doctor said, the industry is undercapitalized. It has to
attract more capital.
Mr. Shapo. Right.
Mr. Kanjorski. That means more profit. That means higher
rates.
Mr. Shapo. Well, but it also means that companies need to
be able that they can charge higher rates when they need to.
I think what is happening in a lot of States, with the
tighter regulatory systems, because companies are concerned
that their capital will be subject to government capture, they
do not invest it in the first place. Not necessarily because
they might need a higher rate right away but because conditions
might change and the industry needs to be able to charge the
right premium to deal with those changing conditions. If they
cannot do that, they will not subject their capital to
government capture, and that is why they would be
undercapitalized.
Mr. Marchioni. If I could just respond to your original
question. I think you could probably make a pretty strong
argument that the strict rate regulatory environments are more
difficult on the small comapnies than would be a competitive
rating market. And the reason I say that is when you have a
competitive rating law when a small company realizes they need
to make an adjustment either in their pricing structure or
their underwriting structure, they can do that rather quickly.
Whereas, in a prior approval system, when we used the
example of a state where it takes 18 months to get a prior
approval filing done, if a small company realizes they need to
make an adjustment and it takes then 18 months to get there,
that 18 months may put them out of business.
So I think--you know, you could probably make a pretty
strong argument that just the opposite would apply if in fact
we were to go to a competitive rating law on a national basis.
Mr. Csiszar. If I could just pick up on that point that Nat
picked up on a moment ago on a point that you made, Mr.
Kanjorski, is that what it really means is higher rates fro
some and lower rates for others. On average of course, I think
we are talking about an increase in rate. The other comment
that I would make on some of the subsidizing that you were
mentioning that make on currently. I mean when you look at one
of the most dysfunctional programs when it comes to subsiding,
is the Federal flood insurance program.
Mr. Kanjorski. Yes, I was going to raise that with you.
Mr. Csiszar. Yes. Where people are rebuilding in that same
flooded location through----
Mr. Kanjorski. So, you agree with many members of Congress
that South Carolina's people have got to start paying the real
rates for damages, and South Carolina has a responsibility to
exercise zoning and control development laws along that coast.
Mr. Csiszar. And enforcing building codes. Yes, indeed, I
do.
Mr. Kanjorski. Well, why have you not just on a state basis
pursued that policy?
We do not have to enact anything up here for you to say,
``Whoa, citizens of South Carolina, the rich northerners are
coming down from the Cold Belt. Stop building your million-
dollar homes on areas we know are going to flood every 10
years.''
Mr. Csiszar. Well, there is always the question of
political will, I suppose.
Mr. Kanjorski. You mean South Carolina does not have the
political will?
Mr. Csiszar. Well, our commissioner previously did not. He
had political ambitions.
[Laughter.]
Chairman Baker. Nothing further, Mr. Kanjorski?
I want to express my appreciation to all of our witnesses.
This has been, I think, a particularly informative hearing for
the committee. We obviously are not poised to take any
immediate action but your recommendations are certainly helpful
in dictating the course of these discussions.
And it is my hope that we can find some manner of mechanism
to facilitate increased affordability and accessibility to
insurance products for more Americans. It is clear that the
current system from a national perspective at least, is in a
difficult state and that some modifications are in order.
Exactly what those modifications might look like are yet to
be determined, but we do appreciate your comments and
observations in this effort to bring about reform.
We have votes pending on the floor so our meeting is now
adjourned.
Thank you very much.
[Whereupon, at 12:18 p.m., the subcommittee was adjourned.]
A P P E N D I X
April 10, 2003
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