[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
INCREASING THE EFFECTIVENESS
OF STATE CONSUMER PROTECTION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MAY 6, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-25
89-933 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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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 Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
MARK GREEN, Wisconsin DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
VITO FOSSELLA, New York CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas CHARLES A. GONZALEZ, Texas
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
TIM MURPHY, Pennsylvania JIM MATHESON, Utah
GINNY BROWN-WAITE, Florida STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina
C O N T E N T S
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Page
Hearing held on:
May 6, 2003.................................................. 1
Appendix:
May 6, 2003.................................................. 29
WITNESSES
Tuesday, May 6, 2003
Ario, Hon. Joel S., Insurance Administrator, Oregon Insurance
Division, Secretary-Treasurer, National Association of
Insurance Commissioners........................................ 7
Atchinson, Brian K., Executive Director, Insurance Marketplace
Standards Association.......................................... 11
Hillman, Richard J., Director, Financial Markets and Community
Investment, U.S. General Accounting Office..................... 9
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 13
Marema, Lenore S., Vice President, Legal and Regulatory Affairs,
Alliance of American Insurers.................................. 14
Parke, Hon. Terry, Illinois State Representative, Past President,
the National Conference of Insurance Legislators accompanied by
Mr. Robert W. Klein, Ph.D., Associate Professor & Director,
Center for Risk Management and Insurance Research, Georgia
State University............................................... 5
APPENDIX
Prepared Statements:
Kelly, Hon. Sue W............................................ 30
Oxley, Hon. Michael G........................................ 32
Gutierrez, Hon. Luis V....................................... 34
Ario, Hon. Joel S............................................ 36
Atchinson, Brian K........................................... 59
Hillman, Richard J........................................... 64
Hunter, J. Robert............................................ 78
Marema, Lenore S............................................. 88
Parke, Hon. Terry............................................ 102
Additional Material Submitted for the Record
Ario, Hon. Joel S.:..............................................
Written response to questions from Hon. Luis V. Gutierrez.... 110
Hunter, J. Robert:...............................................
Written response to questions from Hon. Luis V. Gutierrez.... 114
National Association of Mutual Insurance Companies, prepared
statement...................................................... 120
INCREASING THE EFFECTIVENESS
OF STATE CONSUMER PROTECTION
----------
Tuesday, May 6, 2003
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 3:04 p.m., in
Room 2128, Rayburn House Office Building, Hon. Sue W. Kelly
[chairman of the subcommittee] presiding.
Present: Representatives Kelly, Hensarling, Garrett,
Murphy, Brown-Waite, Barrett, Renzi, Maloney, and Davis of
Alabama.
Chairwoman Kelly. [Presiding.] This hearing of the
Subcommittee on Oversight and Investigations will come to
order. I just want to say that without objection all members'
opening Statements will be made part of the record.
Subcommittee chairs and ranking minority members will be
recognized for five minutes each. All other members will be
recognized for three minutes each for their opening Statements.
We will alternate between the majority and the minority.
I am going to begin by simply saying that I have called
this hearing today to review an issue that we feel is of utmost
importance to all consumers, and that is the effectiveness of
State insurance market conduct oversight. When it comes to
insurance needs, consumers need to know that they are not being
misled by products and that valid claims will be paid quickly.
It is the responsibility of State insurance commissioners to
efficiently regulate market conduct with the best interests of
the American people in mind.
Consumers need to know, they need to understand, and we
have with us today some people who will testify about what the
current conditions are. We have Joel Ario, the Secretary-
Treasurer of the NAIC and the Insurance Administrator of
Oregon. He is going to testify that protecting consumers is the
first priority of insurance regulation.
Commissioner Ario, I could not agree with you more, and we
are here to make sure that State insurance regulators are up to
the task.
The NAIC first began to look closely at market conduct
regulation in the early 1970s and admittedly has made some
modest improvements since then. Recently, both the NAIC and
NCOIL have been reviewing the need to modernize market conduct
surveillance to better serve consumers. They have come up with
some interesting ideas, particularly after Chairman Oxley
requested a GAO investigation. It is promising that there is a
greater focus on achieving clear and specific guidelines for
proper oversight. However, ideas will only get us so far, and
the American people deserve action and they deserve action now.
Far too often, we have seen State legislatures fail to act
upon good ideas of organizations such as the NAIC and NCOIL. It
is only when Congress pressures the States, for example, with
the NARAB provisions that I fought to include in Gramm-Leach-
Bliley, that consumers finally get to see results. There must
also be considerable coordination between States, as the
varying nature of market conduct regulation from State to State
is quite problematic. Across the country, we have seen
consumers harmed by the current patchwork of State systems that
involve too much duplication, with too few standards and no
systematic approach to detect patterns of improper conduct.
The negative impact on consumers is two-fold.
First, consumers suffer higher prices and less choice due
to overlapping, inefficient, requirements which needlessly
increase the cost of doing business.
Second, consumers are exposed to bad actors who slip
through the regulatory gaps due to improper targeting of
resources. We need to develop a systematic comprehensive
approach, with clear standards that will target resources more
efficiently. Until then, a lack of consistency from State to
State will continue to hurt all Americans by undermining
protections and that drives up costs.
While State regulation of insurance market conduct has not
served consumers well in some respects, I would like to stress
that these inadequacies should not be interpreted as a need for
more regulation, which could further harm consumers. Instead, I
hope that we can, and I feel we must, work together to find an
efficient and effective way to regulate insurance market
conduct without creating more unnecessary burdens on the entire
industry. Simply put, we do not need to pursue more regulation,
but more effective regulation. I would like to thank all of our
witnesses today for appearing before the subcommittee, and I
look forward to hearing from you on how we can accomplish these
goals.
We have been informed that Mr. Gutierrez has just had a new
grandchild, so Mr. Gutierrez will probably not be able to make
today's hearing. We congratulate Mr. Gutierrez, and I hope that
his staff will deliver our congratulations to him. I understand
how that feels, to be a new grandparent. It is a lovely
feeling.
And now I would like to take care of one bit of business.
The Subcommittee on Oversight and Investigations will come to
order. Before we begin our hearing, the chair has one small
piece of housekeeping.
The chair has been informed by the chair of the full
committee that he is in receipt of a letter from the gentleman
from Texas, Mr. Hinojosa, tendering his resignation from the
Subcommittee on Oversight and Investigations. It is the chair's
understanding that the gentleman from Alabama, Mr. Davis, who
is here I believe today, will be elected to fill the
subcommittee's vacancy at the next full committee meeting.
Therefore, pending the action by the full committee, the chair
asks unanimous consent that the gentleman from Alabama be
permitted to participate in hearings held by this subcommittee
as if he had been so elected. Is there any objection? If not,
so ordered.
For further opening Statements, Ms. Maloney.
Ms. Maloney. Thank you, Madam Chair, from the great State
of New York. I thank you for having this important hearing. I
thank the witnesses for appearing today before the subcommittee
to share their views on State regulation of insurance and
consumer protection.
The incredibly diverse and vibrant U.S. insurance market
owes much to the preservation of regulation by the States. In
many ways they act as individual laboratories and allow
experimentation that is not possible on the federal level. The
focus of State insurance regulators on their individual markets
allows them the ability to develop thorough expertise that can
benefit consumers and the industry.
I particularly appreciate the emphasis and the testimony of
the Insurance Administrator of Oregon, which states that the
first priority of State insurance regulation is protecting
consumers. While State regulation has adapted to the changing
insurance market for over 100 years, regulators face new
challenges today to keep up with the new global financial
services environment. Given these market changes, the GAO study
is particularly timely conducted by the GAO, which provides a
snapshot of how market analysis and market conduct regulation
is being conducted in the States.
The GAO testimony acknowledges that the National
Association of Insurance Commissioners is emphasizing the need
for nationwide standards for market analysis and market conduct
examinations to its members.
However, the GAO testimony highlights some major
deficiencies in manner in which the States conduct this
regulation and practice today. The GAO points to a lack of
agreement on standards for examinations and training of
examiners, inconsistent reliance by one State on the work of
another, and an exam scheduled that overly burdens some
companies and fails to adequately examine others. I believe
these are serious fundamental problems that must be resolved to
preserve the effectiveness of State insurance regulation.
While we focus today on market analysis and market conduct
examinations, I look forward to continuing this discussion to
the full range of State insurance regulatory issues. I thank
the chairwoman for calling this hearing, and I look very much
forward to your testimony.
Chairwoman Kelly. Thank you, Ms. Maloney.
Mr. Barrett? Mr. Davis, have you an opening Statement?
Mr. Davis of Alabama. Thank you, Madam Chairwoman, and
thank you for permitting me to be here today. Before my
colleague from New York joined me, I was tempted to say that
only in the House can you join a subcommittee and become
ranking member on the same day, for at least a day.
Let me welcome the panel here today. I will not make a very
long opening Statement. I would simply say this, one of the
consistently vexing issues that we are facing right now as a
body and as a committee is the byplay between the States having
a lot of leeway to fashion their own regulatory structure, and
the practical difficulty in a modern 2003 economy when
predictability does not exist across the country. We face that
in a host of contexts, from tort reform to preemption, and
certainly to the kinds of issues that you are talking about
today.
One of the advantages of being on this committee is that we
do have a chance on a fairly regular basis to engage these
issues in a somewhat non-confrontational fashion. We do have
the advantage on a pretty consistent basis of engaging these
issues in a manner that helps us learn, instead of one that
automatically polarizes us. So I look forward to hearing your
testimony and to being edified by it today.
Thank you, Madam Chairwoman.
Chairwoman Kelly. Thank you, Mr. Davis.
Mr. Hensarling?
Mr. Renzi?
Mr. Renzi. Thank you, Madam Chairwoman.
Thank you to our panel today for your testimony. I look
forward to hearing it. I know we are looking at today the
effectiveness of our State insurance markets. I particularly am
concerned and I am interested in understanding a little bit of
how we get away from so much of the patchwork of our
regulation. I found as an insurance agent that it leads to what
I feel is much more higher prices and less product choice. I
would like to see more of an emphasis on regulations that are
uniform as it relates to our licensing of agents, as well as
kind of signature laws. I am hopeful today that some of your
testimony will cover that, and I look forward to it.
Thank you.
Chairwoman Kelly. Thank you, Mr. Renzi.
Our panel today consists of the Honorable Terry Parke,
Illinois State Representative, past President, the National
Conference of Insurance Legislators.
He is accompanied by Mr. Robert W. Klein, Ph.D., Associate
Professor and Director, Center for Risk Management and
Insurance Research at the Georgia State University.
Then we have the Honorable Mr. Joel Ario, Insurance
Administrator from the Oregon Insurance Division. He is
Secretary-Treasurer of the National Association of Insurance
Commissioners. We welcome you.
Mr. Richard Hillman, Director, Financial Markets and
community investment at the U.S. GAO. We welcome you.
Mr. Brian K. Atchinson, Executive Director of the Insurance
Marketplace Standards Association. We are glad to have you with
us.
And then we have Mr. J. Robert Hunter, Director of
Insurance, Consumer Federation of America. Welcome, Mr. Hunter.
And then Ms. Lenore Marema, Vice President, Legal and
Regulatory Affairs, Alliance of American Insurers.
Thank you all very much for being here. We begin with you,
Mr. Parke.
STATEMENT OF HON. TERRY PARKE, ILLINOIS STATE REPRESENTATIVE,
PAST PRESIDENT, THE NATIONAL CONFERENCE OF INSURANCE
LEGISLATORS, ACCOMPANIED BY ROBERT W. KLEIN, PH.D., ASSOCIATE
PROFESSOR & DIRECTOR, CENTER FOR RISK MANAGEMENT AND INSURANCE
RESEARCH, GEORGIA STATE UNIVERSITY
Mr. Parke. Thank you, Representative Kelly, members of the
subcommittee.
My name is Terry Parke.
First, I would like to express my appreciation for having
the opportunity to speak to you today. It is my privilege to
represent the residents of Schaumberg and Hanover Townships in
the northwest suburbs of Chicago, in the Illinois General
Assembly.
It is also my privilege to have served as President of the
National Council of Insurance Legislators, NCOIL, in 2001. In
that capacity, I testified before the modernization of
insurance regulation before the Subcommittee on Capital
Markets, Insurance and Government Sponsored Enterprises. In
that testimony, I said an effective market conduct regulation
would be essential to overall modernization. That testimony
pointed out that strong regulation of conduct in the
marketplace would be essential if States move from the present-
day prior-approval system to strong regulation targeting actual
company misconduct.
In today's testimony, I will provide you with the content
of a preliminary report of the Insurance Legislators
Foundation, as an educational and research arm of NCOIL. The
primary report was received by the ILF on May 2 and will be the
subject of a public hearing at the Hotel Intercontinental in
Chicago on June 6. NCOIL is happy to release the document in
conjunction with the holding of this hearing.
The preliminary report identifies fundamental and sweeping
changes that would bring insurance market regulation as
practiced today into the 21st century. It offers ideas that can
bring insurance regulation in line with the reforms and new
attitudes that have begun to take shape in the regulation of
financial services in the United States and overseas.
The preliminary report points out that their needs to be a
fundamental re-thinking of the philosophy and approach toward
market conduct regulation and surveillance. In many respects,
regulators have become de-factor quality control auditors for
insurers. This is not an effective use of regulatory resources
and does not serve the public interest. The present system has
become a patchwork in practice, varying from State to State. It
is arbitrary and places an excessive burden and uncertainty on
insurers. The preliminary report contains ideas that would
benefit consumers by eliminating costly regulatory
redundancies. These redundancies increase the cost of products
and stifle innovation. Such regulatory redundancy can also
deter an insurer from entering markets and thereby reducing
consumer choice.
Representative Kelly, members of the subcommittee, changes
in market conduct regulation are essential and indispensable
components of improving the efficiency and effectiveness of
insurance regulation and insurance markets in America.
Today's report is part of a second and final phase of a
four-year study of market conduct regulation which James
Schacht of PricewaterhouseCoopers and Dr. Robert Klein of
Georgia State University conducted. The first phase of that
study compiled in 2000 found, among other things, widespread
disagreement regarding the purpose of market conduct
examinations, especially as to whether such examinations should
focus on general business practices, or only on specific
violations of law, and little coordination of market conduct
examination by States, leading to widespread and wasteful
redundancies.
Today's preliminary report responds to those and many other
real-world, present-day issues. Critics say that the present
market conduct surveillance system fails to acknowledge
insurers' compliance programs, self-assessment, and independent
assessment activities. The primary report shows how States
could establish standards for effective compliance programs.
Most specifically, we envision a regulatory approach in
which the CEOs of each regulated insurer would certify that the
company he or she manages has operated in ways that do not harm
consumers. In this new system, each CEO would certify to
regulators that the company he or she manages has complied with
the standards, or in the negative, would identify the standards
that the company has not met, along with the steps to remediate
the problem. Such self-policing systems would include
incentives for insurers self-assessment activities aimed at
determining improper market conduct practices.
In our earlier report, it was noted that 85 percent of the
insurers surveyed performed critical analysis or retained
independent assessors to detect improper market conduct
practices. Self-assessment activities improve compliance,
discourage violations and foster corrections.
This concept of self-policing is not unique to the
insurance industry. Other regulatory agencies are shifting from
prescribing specific behavioral controls to articulating
principles of guidelines for companies to follow, and then
allowing them to develop effective controls meeting them. The
recent proposed anti-money laundering requirements for the
insurance industry provide a clear example of this shift. The
proposed rule for insurance companies concerning section 352 of
the PATRIOT Act provides broad discrepancies, but allows
insurers to establish specific program elements to achieve the
intent of the section of the Act.
The preliminary report points out that there is often a
lack of coordination with regard to multi-State examinations.
The preliminary report identifies the need to give the
domiciliary State the main responsibility for monitoring the
surveillance activities of an insurer and its affiliates.
Critics point to a lack of statutory authority with regard to
market surveillance. Only two States----
Chairwoman Kelly. Mr. Parke, I am sorry to interrupt you,
but you have five minutes and your five minutes are up. I would
like to have you summarize what you are going to say. I want to
inform all of our witnesses that your written testimony is in
total in the record, and many of us have read your testimony.
So we are asking you today to give a summary of what your
testimony is. The green light means you have five minutes;
yellow means you have one minute to sum up; and red means you
are out of time. In the interests of making sure that some of
the people who have flown in can get the planes to fly back
out, I am going to try to keep this hearing to five minute
segments.
So, Mr. Parke, I let you go over a little bit because in
fact we had a little problem here with the lights, but at this
point, if you could sum up, I would appreciate it.
Mr. Parke. That is fair. I have to catch a plane myself, so
I am along with the problem.
In essence, we have a report that we are going to make
public today that addresses market conduct. We think it will
talk about the concerns that this committee has expressed. We
think that there needs to be a new approach to market conduct
in which insurance companies and insurance regulators can use
the resources to make sure that those bad actors are in fact
held accountable. That can be done through market conduct. And
the rest of the insurance industry that are complying, doing a
good job and serving consumers and making a profit are not
penalized for those that are not doing a good job. We think
this approach is worthwhile and worthy, and we will push it at
the NCOIL conference that will be established in a month at our
summer meeting that will be in Williamsburg, Virginia.
[The prepared statement of Hon. Terry Parke can be found on
page 102 in the appendix.]
Chairwoman Kelly. That sounds terrific, and I hope you will
put a copy of that report in the hands of the staff here.
Mr. Parke. That is already being done. Thank you.
Chairwoman Kelly. Good. Thank you so much.
Mr. Ario?
STATEMENT OF HON. JOEL S. ARIO, INSURANCE ADMINISTRATOR, OREGON
INSURANCE DIVISION, SECRETARY-TREASURER, NATIONAL ASSOCIATION
OF INSURANCE COMMISSIONERS
Mr. Ario. Thank you, Madam Chair. My name is Joel Ario and
I want to join Representative Parke in thanking you for holding
this hearing this afternoon. Having read the comments of both
Representative Parke and Mr. Hunter, I see there is no
divergence there. There is a lot of divergence of opinion on
this panel. I am anxious to get to the questions myself, so I
will be brief in summarizing my written comments and really
focus on four points.
First, as you have already mentioned, effective consumer
protection, focused on local needs. This is the hallmark of
State insurance regulation.
Second, because of this focus on local needs, this is not
an area where one-size-fits-all works. It needs to be adapted
to local circumstance.
Third, effectiveness and efficiency are not mutually
exclusive. Effectiveness is most important, but we think there
are many ways in which we can make the system more efficient as
well.
And then finally, the foundation of an effective and
efficient system is a rigorous market analysis program. I noted
several mentions of that in the opening Statements. I think
that is the foundation really that we are trying to develop for
a program that draws on all the different areas of market
regulation, to identify and respond to the real consumer
problems in the marketplace.
Let me take you to those in turn. Gain, the purpose of
State insurance regulation, and it has been this way for 125
years, is consumer protection. Insurance is a different kind of
product than either banking or securities or really any of the
other financial products out there. It is a more complex kind
of product. What kind of policy will be offered to the
consumer? What will be the price of the policy? What are the
specific policy terms and conditions? What is included, what is
excluded from the policy? What does the fine print say? Is a
claim valid when it is filed? If it is valid, how much is it
worth? These are all questions that are very complicated. They
often lead to misunderstandings between consumers and insurers
and they often lead to consumer complaints to our offices.
We handle on a national basis 3.5 million consumer
complaints a year in the 50 States. That works out to an
average of 7,000 complaints in every State. I would venture to
guess that is an order of magnitude, or maybe more different
than the amount of complaints that come in on the other
financial service products. Responding to those consumer
concerns, listening carefully to what the consumer says in
those complaints, and trying to get to the real issues of those
complaints--they are not all valid. There are some complaints
that come in that are not, but a number of them, most of them
raise important issues. Our job is to follow those complaints
and address them in our marketplace and make that marketplace
work for consumers at the local level.
Second point, this is not an area that one size fits all.
There surely are areas where there is commonality. In the life
insurance industry, we have recognized as regulators a number
of parts of life insurance regulation that ought to be more
uniform, and we are taking aggressive action to address those.
But you get into some of the other lines of insurance, and the
differences are important between the States. Terrorism is a
different problem in New York than it is in my State of Oregon.
Hurricanes and other kinds of disasters that befall coastal
communities make for a much different homeowner market in
Southern Florida than a homeowner market in the Midwest.
If you look at health marketplaces, you will see the way
the local provider networks work, the way the hospital networks
work, all have a fundamental effect on how the insurance
products are delivered in those markets and how the insurance
products are put together.
Some suggest, and Representative Parke just did, I think,
that we could have a uniform system across the board for this,
and usually it comes with the recommendation that he makes,
which is that the State of domicile would be the appropriate
State to take the lead. There is a lot of merit in that, and I
think the NCOIL study is a good study that will help us move
forward. But there are some problems with that kind of model,
too.
Take the terrorism issue. Terrorism is not a big issue in
my State. We have not had a lot of quarrels with the insurance
companies over their terrorism coverage, their exclusions, and
so forth. But I know in your State of New York, it is a much
different situation. Superintendent Serio spends a lot of time
on that issue. When I call up Greg and say, ``Gee, Greg, now
that I have checked into this company that is domiciled here in
Oregon and does business in New York''--I do not have a big
carrier that fits this, but say I did--and called up Greg, and
said, ``I have checked them out, and on a generic basis, they
do a good job with their terrorism filings with us, so just
trust me, leave it alone, don't worry about what they do in
your market,'' he would not be very happy, because he would say
his marketplace is dramatically different than mine, and he has
a different stance on exclusions. He has a different stance on
a number of issues. I understand that. I agree with that. It is
a different kind of marketplace. That is the kind of situation
I think that we want to work on the problem, but it is not a
one-size-fits-all type of situation.
Third point, there are efficiencies to be gained. A lot of
this I think does and should focus on market conduct exams. One
of our major initiatives at the NAIC this year is uniform exam
procedures. We have identified four different areas in the
examination process where we think there ought to be clear
uniformity.
First is scheduling. If we can schedule in a consistent and
uniform basis, we can minimize duplication.
Second, if we can do pre-exam planning in the same kind of
way, we can then deliver to the companies clear expectations of
what a market conduct exam is going to be, what is expected of
the company, what the regulator will want to see.
And third, in the examination procedures, if we can do
those more uniformly, we can have a more predictable process
for everyone. It can be a more efficient process. It can be
done more quickly and so forth.
And then finally, if exam reports are written in a
consistent and uniform fashion, we can better understand and
compare results.
I see I am already to the red light, too, so I will skip my
last point on market analysis and make just a very quick
conclusion. We again welcome this hearing. We will not get the
job done that we want to get done by ourselves. You are right
that the Congress pushing on us, NCOIL pushed on us, the
industry pushing us, Bob Hunter pushing on us; all of those
things are important to getting our job done. The worst case,
the absolute worst case for us would be an overreaction to the
problems and to create a one-size-fits-all federal solution. It
just would not work for consumers.
Finally, the key for all of us is to keep our eye on the
ball here, the main objective which is effective consumer
protection.
Thank you.
[The prepared statement of Hon. Joel S. Ario can be found
on page 36 in the appendix.]
Chairwoman Kelly. Thank you.
Mr. Hillman?
STATEMENT OF RICHARD J. HILLMAN, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, U.S. GENERAL ACCOUNTING OFFICE
Mr. Hillman. Thank you, Madam Chairwoman and members of the
subcommittee. I appreciate the opportunity to provide you with
GAO's preliminary observations from our work on State insurance
regulators' oversight of market activities in the insurance
industry.
My focus today is on, one, the States' use of market
analysis and on-site examinations and market regulation; and
two, the effectiveness of the National Association of Insurance
Commissioners' efforts to improve these oversight tools and
encourage the States to use them.
Regarding our first objective, on the States' use of market
analysis and on-site examinations and market regulation, we
found that all States do some level of market analysis, but few
States have established formal market analysis programs to
maintain a systematic and rigorous overview of companies'
market behavior and to more effectively identify problem
companies for more detailed review. The way State insurance
regulators approach and perform market conduct examinations
also varied widely across the States.
While NAIC has developed a handbook for market conduct
examiners, States are not required to use it, and we found that
it is not consistently applied across States. Moreover, the
handbook is not intended to provide guidance for some important
aspects of market conduct examinations; for example, how often
examinations should be performed or what criteria States should
use to select companies to examine.
We also found that the number of market conduct examiners
differed widely among States and that there were no generally
accepted standards for training and certifying examiners. These
differences make it difficult for States to depend on other
States' oversight of market activities. Most of the States that
we visited told us that they felt responsible for regulating
the behavior of all companies that sold insurance in their
State, regardless of their State of domicile. Thus, even in
those States that did market conduct examinations, the effort
is often neither efficient nor effective because the pool of
companies is too large for any one State to handle.
Moreover, since most States are not coordinating their
examinations with other States, some large companies reported
being examined frequently and sometimes simultaneously by
multiple States, while other companies were examined
infrequently or never.
Regarding our second objective, to assess NAIC's efforts to
improve the States' market conduct programs, we found that
since the mid-1970s, NAIC has taken a variety of steps to
improve the consistency and quality of market conduct
examinations. However, despite the NAIC's longstanding efforts
and some limited successes, progress towards a more effective
process has been slow.
Recently, NAIC has increased the emphasis it places on
market analysis and market conduct examinations as regulatory
tools that could improve States' abilities to oversee market
conduct. With more consistent implementation of routine market
analysis, States should be better able to use the resources
they already have available to target companies requiring
immediate attention.
Also by applying common standards for market conduct
examinations, States should be able to rely on regulators in
other States for assessments of an insurance company's
operations. These improvements should, in turn, increase the
efficiency of the examination process and improve consumer
protection by reducing or eliminating existing overlaps and
gaps in regulatory oversight.
However, if NAIC cannot convince the various States to
adopt and implement common standards for market analysis and
examinations, current efforts to strengthen these important
tools for consumer protection are unlikely to result in any
fundamental improvement.
In summary, we support the goal of increasing the
effectiveness of market conduct regulation through development
and implementation of consistent nationwide standards for
market analysis and market conduct examinations across the
States, in order to better protect insurance consumers. The
emphasis placed on these issues by NAIC has increased
substantially over the last three years.
We believe that NAIC has taken the first step in the first
direction, however much work remains as NAIC and the States
have not yet fully identified, reached agreement on, and
implemented appropriate laws, regulations, processes and
resource requirements that will support the goal of an
effective uniform market oversight program.
Madam Chairwoman, this concludes my prepared statement. I
would be happy to respond at the appropriate time to questions.
[The prepared statement of Richard J. Hillman can be found
on page 64 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Hillman. I want to say
that I found your report very interesting, very cogent. I hope
our other panelists have a chance to read it.
Mr. Atchinson?
STATEMENT OF BRIAN K. ATCHINSON, EXECUTIVE DIRECTOR, INSURANCE
MARKETPLACE STANDARDS ASSOCIATION
Mr. Atchinson. Good afternoon, Madam Chairwoman and members
of the subcommittee. Thank you for the opportunity to speak
with you today on this important topic.
I am Brian Atchinson, Executive Director of the Insurance
Marketplace Standards Association. IMSA is an independent
nonprofit organization created in 1996 to strengthen consumer
trust and confidence in the life insurance industry through a
commitment to high ethical market conduct standards. IMSA
member companies comprise more than 200 of the nation's top
life insurance companies, representing approximately 65 percent
of the overall market share for individually sold life
insurance, annuities and long-term care insurance products.
From 1992 to 1996, I previously served as Superintendent of
the Maine Bureau of Insurance, and in 1996 as President of the
NAIC. Prior to joining IMSA, I served as an executive officer
in the life insurance industry. As a former regulator and
company person, my views on market conduct regulation come from
a number of different vantage points. Insurance regulation is
intended to ensure a healthy competitive marketplace and to
protect consumers.
We have come a long way since the first market conduct
exams in the 1970s. Unfortunately, the current State-based
system of market conduct regulation presents challenges that
even some in the regulatory community acknowledge is in need of
improvement. There is little uniformity in the manner in which
individual States conduct market conduct exams. State market
conduct exams have been described as being like snowflakes: no
two are alike.
Insurance companies often are subject to simultaneous or
overlapping market conduct exams from different States applying
different laws and regulations. This lack of uniformity results
in significant cost and human resource burdens on insurance
companies that translate into higher costs ultimately passed on
to consumers in the form of higher prices for their products.
The challenge for regulators and for the industry is to create
a uniform system of market conduct oversight that creates
greater efficiencies for the insurance industry, while
maintaining appropriate consumer protections.
The NAIC has been working toward uniform regulation for
some time, but the pace of change has been slow and has
prompted more efficient and effective alternatives. Regulators
could improve the current system of market conduct regulation
in several ways. For instance, today's market conduct exams
tend to focus on identifying technical violations that may have
little actual impact on consumers. Perhaps the focus should
shift to exploring whether a company has a comprehensive system
of policies and procedures in place to address market conduct
compliance issues.
Also, State insurance departments should not view market
conduct exam activity as a source of revenue or general fund
subsidy. Rather, departments should be determining whether a
company has a system in place to detect and remedy market
conduct improprieties before they become widespread. This
practice would allow market conduct regulation to better serve
consumer interests.
IMSA's mission, the Insurance Marketplace Standards
Association, is primarily to strengthen trust and confidence in
the life insurance industry through high ethical standards.
IMSA qualification also provides a consistent, uniform template
of market conduct compliance policies and procedures. To meet
IMSA standards, a company must have in place a comprehensive
system of compliance throughout the organization, undergo an
external assessment, and then undergo a new assessment every
three years. Companies that qualify for IMSA devote
considerable resources to maintaining those standards, and are
well-positioned to respond quickly to State regulatory
inquiries or to comply swiftly with new State legislative
requirements.
The U.S. PATRIOT Act offers a prime example. As you know,
this law gives federal authorities much wider latitude to
monitor potential money laundering activity. Recently, the
media reported that terrorists, drug dealers and other
criminals may be using life insurance products to launder
money. With an infrastructure of policies and procedures in
place to detect and cure questionable sales practices based on
IMSA's principles, an IMSA-qualified company is already in a
good position to comply with the intent of federal anti-money
laundering efforts.
In the last two years, IMSA has gained greater acceptance
by regulators and rating agencies. In fact, a small but growing
number of State insurance departments use IMSA membership and
qualification as an informational tool as they plan and conduct
market conduct exams. We applaud these efforts. With State
insurance department budgets under tremendous pressure, we
encourage regulators to pursue all available means to leverage
increasingly limited resources. IMSA can serve as a valuable
resource towards that end.
Neither regulators or companies alone can ensure that the
marketplace is always operating in a fair and appropriate
manner at all times. Organizations like IMSA, working in
conjunction with regulators, can offer invaluable support to
reform market conduct regulation and may even offer a blueprint
for reform solutions.
In conclusion, IMSA believes the market conduct regulations
should be more uniform and efficient, and we will continue to
work with you, the NAIC and State and insurance departments to
explore ways to improve market conduct regulation for the
benefit of consumers, regulators and insurers alike.
Thank you very much, Madam Chair, for the opportunity to
participate in this hearing and to address this important
topic. Thank you.
[The prepared statement of Brian K. Atchinson can be found
on page 59 in the appendix.]
Chairwoman Kelly. Thank you very much. You are my hero
because you stayed within the five-minute line.
Mr. Hunter?
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. Good afternoon, Madam Chair, members of the
committee. I am Bob Hunter, Director of Insurance for Consumer
Federation, a former Texas Insurance Commissioner, and Federal
Insurance Administrator under Presidents Ford and Carter.
No one could deny that State insurance commissioners have a
poor record when it comes to market conduct oversight of the
insurance industry, and consumers have been abused as a result.
We could go through many examples. The lack of excellence is
particularly concerning in an era where less regulation of
products is done at the time they are introduced, exposing
consumers to greater risk of damage by bad insurance policies
not reviewed by anyone at the State insurance department level.
The NAIC itself has Stated that greater, more aggressive
consumer protections are needed in this new era, and we agree.
The unique nature of insurance policies, which are complex
legal documents not easily understood by consumers, and
insurance companies that are granted antitrust exemption by the
federal Congress, requires more extensive consumer protection
than other consumer commodities. State systems should be
designed to promote beneficial competition such as price
competition, loss mitigation efforts, but to deter destructive
competition such as selection competition, redlining in the
cities and so on, reverse competition such as credit insurance
where prices are driven up by high commissions and other unfair
sales practices.
We believe that the following items are important to
consider as you look for ways to upgrade the State market
conduct oversight capacity. First, there should be minimum
standards for market conduct examinations. That would be good
for consumers. We have supported them on the national NAIC
level and we would support them at the federal level, but we
are very concerned about weak uniform standards. We are very
concerned that that would lead to abuse.
The accreditation type of approach was very successful in
upgrading State financial examinations might be used to achieve
these kinds of goals. There must be enforcement criteria in the
standards. There must be private causes of action as an
important complement to market conduct examinations, because
market conduct examinations are only prospective, and cannot
grant restitution to already-harmed consumers, and consumers do
not at this point trust the track record of the States.
Consumers oppose self-certification programs in the form
that some have proposed, and specifically we oppose the NCOIL
proposal that we have heard today. Self-certification in the
post-Enron era is problematic at best. That is not to say self-
certification could not be part of what a State looks at in
determining whether an insurer is meeting State standards.
However, if a State relies on such information, it must be
made public and the tests made by self-certification groups
must be transparent. Consumer feedback should be used after
policy terminations, claims denial and other actions by
insurance companies. There ought to be a way of finding out not
just complaints, but some kind of interview process
periodically used by the States. There should be suitability
rules in place, particularly for cash-value life insurance
policies to assure that sales of proper products are made.
The NAIC should be requiring certain data to be collected,
some of it for market shares, entries and exits and so on, but
also zip code data to see if redlining is occurring;
underwriting guidelines to determine how insurers decide what
to write and how to price; and claims handling guidelines to
determine the rules for claims processing. While there has been
progress by the NAIC in details of how exams are to be done,
they have not achieved effective or efficient examinations.
Consumers want effective examinations. We also agree that
efficient examinations is a good goal and we think that it can
be improved without giving up effectiveness.
We need a thorough examination of what has gone wrong in
previous market conduct exams that have missed a lot of really
bad situations. It is hard to fix a system that has not been
analyzed.
I would be happy to respond to your questions at an
appropriate time.
[The prepared statement of J. Robert Hunter can be found on
page 78 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Hunter.
Ms. Marema?
STATEMENT OF LENORE S. MAREMA, VICE PRESIDENT, LEGAL AND
REGULATORY AFFAIRS, ALLIANCE OF AMERICAN INSURERS
Ms. Marema. Thank you. I am delighted to be here to
represent the views of the Alliance of American Insurers. We
are a national property-casualty trade association. We have 340
property-casualty insurance companies as our members, and our
members range in all sizes, from the smallest to the very large
companies.
What I thought I would do here in my five minutes is share
some of our members' experiences with you about the current
State market conduct examination system. Our members would
share three concerns they have about the system with you. We
would have three ways in which we think it can be improved.
Then I would like to talk a little bit about how we think we
need to proceed.
If our members had one overriding concern about the current
market conduct examination system, it would be that States need
to better target companies for examination. They need to target
companies with problems. Many times our members really do not
see among the States a rational basis for triggering an
examination. I do not think I could State this better than one
of the consumer groups did at a recent NAIC meeting when they
said that the States really need to focus on the biggest
problems, not the biggest companies.
Secondly, States need to better coordinate market conduct
examinations. In the current system, each State can call an
examination with little regard or any regard for what any other
State is doing. It is not uncommon for a very large insurance
company to have a dozen or more market conduct examinations
pending at any given time.
Thirdly, there is a lack of consistency in examination
procedures. The NAIC has a market conduct examination handbook
that tells States how to do it, but there is a variety of
different ways that States have implemented it. Just to give
you on example, the handbook requires that companies get
notified of the exam. The notice that a company could get can
vary from six minutes to six days to sixteen days to sixty
days, and it can be specific or it can be very general and so
forth.
So those would be the three problems that I would cite from
our members' perspective in the current system. What to do
about that? Much has been made about the differences in State
laws and regulations. I think if you are talking about market
conduct examinations, I think we are talking more not about
differences in laws and regulations, but difference in the 50
States' processes and 50 States' implementation of that. The
lack of coordination leads to duplication and overlapping.
Really, the inconsistent State procedures are the real problem.
Having said that, I think the groundwork is in place to
change that. If you look at the NAIC's testimony,
Superintendent Ario has listed a wide variety of market conduct
activities that the NAIC has under way to correct some of these
problems. But there are three of those NAIC initiatives that we
think will produce real-time change in the current system.
The one is the market conduct analysis that they intend to
develop. We think there is a wealth of information that already
exists in the State insurance departments to help them better
target companies for examination: consumer complaints, reports
that companies do on major changes that they have made in their
companies, and so forth. The appeal that this market conduct
analysis has to us, it is something based on data that all
States have; it is something they can all do; they can all do
it now; the data that they have is applicable to all lines, all
companies. I think it would bring States up to a certain bar
that they would all be doing analysis on the same data in a
consistent manner. That is a work in progress at the NAIC. It
is going to take some doing to put together.
Secondly, they are doing an exam tracking system, the ETS.
That is going to be an electronic system where there will be a
centralized system of scheduling. That, to us, gives the States
really the vehicle that they need to better coordinate an exam.
When a State wants to call an exam, they will be able to look
at the ETS and see what other States are doing with regard to
that particular company.
And last, certainly, is the uniformity effort that the NAIC
has going on, in particular some of the items in that. I would
cite the standard data call. The NAIC has developed really the
basic information that all States should need to do an exam in,
and in the same format. That, from our companies' perspectives,
those three items are going to be very, very helpful.
How would we proceed? The key here is going to be State
implementation. I will say in my remaining time, from the
Alliance perspective, real change is change in behavior in the
State insurance departments that conduct market conduct exams.
For example, it is a good thing for the NAIC to develop a
standard analysis, but from our perspective success is when all
States actually use it. It is good for them to develop an
examination tracking system; that is really needed. But the
success is when all States input their data into it. It is
really good for them to develop uniformity in procedures for
examinations, but the real key to success is when our members
see an examiner coming through the door who utilizes those
procedures.
My organization supports State insurance regulation. We
think that it has served consumers best over time because it
responds to local needs. We think the States can fix these
problems. I think the NAIC has laid the groundwork and more
importantly, we see a strong commitment from the NAIC
leadership to do this. So we are operating from the presumption
that the problem is going to be fixed at the State level and it
will get done.
Thank you.
[The prepared statement of Lenore S. Marema can be found on
page 88 in the appendix.]
Chairwoman Kelly. We thank you. I thank all of you for your
testimony. In particular, I would like to go back to you, Mr.
Parke, just for a minute, and talk to you. You mentioned the
Illinois model in your testimony. Do you think that Illinois'
system of insurance regulation focuses on less regulation on
the front end and more on the back end? Do you think that that
targets the insurance department resources in the areas that
will most benefit the consumers, like the market conduct
oversight? Do you think that that has worked well?
Mr. Parke. As a matter of fact, the State of Illinois is
one of the most competitive States in the union. We have some
of the largest amount of insurance companies selling insurance
in the State of Illinois. That is because the free market
system works. Competition works. They regulate each other
because competition requires that. The consumer is not left
alone. The insurance department uses market conduct. It also
regulates solvency and also takes a good look at consumer
complaints.
In the State of Illinois, we find that there is an awful
lot of members that have diverse thinking. I have been in the
General Assembly 19 years and I have never really heard a whole
lot of legislators pushing to change the current system that is
there. And there are a lot of different points of view. We have
some members that are very pro-consumer, and yet we do not see
a cry from Illinois legislators to change the current system.
Competition works when you leave it alone and let it function.
Chairwoman Kelly. What kind of coordination is going on
between NCOIL and the NAIC to improve the market regulation?
Mr. Parke. Well, the report that we have is going to be
presented. We are going to review it on June 6 in Chicago, and
then we are going to look at the next three meetings of NCOIL,
starting with our Williamsburg program, to try to see what kind
of model legislation can be derived from this report.
We believe that the model legislation that will be used by
various legislators to be taken to the State capitals to be
refined based on what the needs of that State's needs for
market conduct would be, I think there is a strong cry to
change the current system of market conduct, and I think that
Illinois will be one of those, if I have anything to say about
it, that will be presenting a new approach to market conduct. I
believe progressive legislators in the other various States
will do the same.
Chairwoman Kelly. Since you brought up the model
legislation, what do you think the chances are of the model
legislation actually getting there, and how long do you think
it is going to take the majority of the States to pass the
legislation in some kind of a uniform manner and with some sort
of uniform implementation? As we have heard today, that is
critical. I am asking this question because I authored the
NARAB legislation and we are still working on it. So I am
wondering how long you think it will take you to get this done.
Mr. Parke. I think NARAB is a fine example, and I am glad
you brought it up. Quite frankly, the goal was 29 States. We
exceed that. We are at 42 States. Yes, there are two or three
major States that have not done it, but quite frankly those
States have internal questions and they have issues that are
unique to those States, and I think that they are struggling
and working through it. Eventually, I think that will come
about and will happen.
As far as legislators, we believe in the next 12 months
that we will present at NCOIL, probably sooner than that, a
model bill that the legislators can take back to the various
States. Again, fine-tune it based on what that State's needs
are and what the consumers' needs are, and I think you will
find that a great majority of the States will move forward with
some kind of uniform market conduct program.
Chairwoman Kelly. Thank you.
Mr. Ario, you testified that it may make sense to shift
some of the focus from the front end, review through the rate
and form review process, to a combination of self-certification
and back-end view through desk exams or other approaches. I
wonder if you would talk to us a minute about that, just expand
on that a little bit.
Mr. Ario. Madam Chair, I would be happy to. I think the
Illinois case is a good example. There is a competitive market
there with more of a back-end approach. We are looking at this
in Oregon. We are shifting some of our rates and forms analysts
who currently spend all of their time looking at filings as
they come through the front door, and still doing some of that.
I think Mr. Hunter makes some very good points about the
need to look at some products, anyway, on the front end because
of the complexity and the difficulty consumers have with those
products. We are shifting some of that resource towards the
back end and relying on self-certification, the kind of things
that Brian Atchinson talked about. We have check-lists now on
our web page that companies fill out to show exactly what their
form does and does not contain. If we send a message to the
companies that we are going to take them at their word on those
things, as a starting point, but trust and then verify.
We are going to then go out and spot check on the back end
whether those forms actually do comply in the way that they are
certified to comply. We are probably going to have to catch
some people doing it wrong, but if we do catch them and make
examples of them, I think companies will get the idea, and I
think it will improve the filings on the front end, frankly. A
lot of the filings that come in now, since they know we are
going to review them on the front end, some of the filings come
in as kind of an opportunity to discuss; let's just throw it at
the regulator and see what they think. If we have a self-
certification and hold them accountable and then spot-check on
the back end, I think that that system is workable, not for all
products, but for some products.
Chairwoman Kelly. Thank you.
I am out of time. Ms. Maloney?
Ms. Maloney. Thank you.
Mr. Hillman, my first question is for you. You indicated in
your testimony that some States have some insurers that face
multiple examinations from different States. Specifically, you
described a situation in your written testimony where over a
three-year period, three companies in your study of large
companies were examined 17 times or more over three years,
while six were examined between one and five times. I guess my
question is, do you have any suggestions to correct this type
of different treatment for different insurers?
Mr. Hillman. There is a wide variety of steps that the
State insurance regulators could take to improve the efficiency
and effectiveness of their market conduct examination programs.
Perhaps one of the most important things would be the
development of consistent standards for market analysis and
market conduct examinations, so that one State can rely on the
activities of another State in conducting those analyses and
examinations.
Right now, because things are so inconsistent, there is no
reliance on State activities and one State insurance department
regulator believes they must look at all the insurance
companies within their State--those that are domiciled and
those that sell insurance, but domiciled in another State--
rather than relying on the form of State insurance regulation.
In addition to consistent standards, we also believe that
there needs to be more consistent laws, more consistent
regulations, more consistent processes, and the development of
resources with appropriate expertise to conduct market
examinations.
Ms. Maloney. Mr. Ario, would your organization be the one
to come forward with these consistent standards?
Mr. Ario. Ms. Representative, that is correct, yes. The one
point that I would make on the exam----
Ms. Maloney. Are you working on them?
Mr. Ario. Yes. We are working on uniform standards for
examinations and we are working on a uniform analysis system. I
think Mr. Hillman is correct that those processes will help
improve this sort of situation.
The one other comment I would make, though, is that without
knowing exactly which companies we are talking about, in the
property and casualty market, for instance, there are three
large insurers that are the three largest insurers in almost
all 50 States. They represent almost half the market. Given
that there are different situations in different States, there
may be reasons why different States would want to examine them.
It should not be over the same issues. We need to solve that
problem. But if States have different kinds of issues with the
same company, you still may have a number of exams of the same
company. It should not happen with small companies; it should
not happen with companies that are only engaged in a few
different States, but it will sometimes happen with larger
companies.
Ms. Maloney. First of all, I want to thank you for your
testimony and for highlighting the incredibly complex situation
facing insurance companies operating in New York City and
State, the State and city that I represent, and their efforts
to offer terrorism insurance. I agree that this situation poses
very unique problems that demands the local expertise of New
York regulators. But given the Statements by GAO and yours also
confirming the findings of duplication of examination and
varying levels of training for examiners, can you give the
subcommittee any kind of specific date when you believe that
the NAIC standards that you are working on will come forward? A
year? Two years?
Mr. Ario. Representative, I wish I could promise you a date
certain for the whole nine yards here. What I can tell is that
on the uniform exam procedures, which is the project that is
furthest along for us, we have already 40 States self-
certifying compliance with at least two of the four areas of
uniformity. Our goal this year, which I think we will achieve,
is more than 40 States self-certifying to all four areas.
The next step will be, again, trust but verify. We expect
it of ourselves, too. We are asking the companies and Lenore
and her crew to give us complaints when States certify and then
in practice are not doing what they certified to. So there will
be some implementation there, but that project will be more or
less completed this year.
Market analysis; that is going to take maybe a couple of
years, and to build the collaborative models, to build the
trust among the States and the consistent reliance, that I
would probably ball park at a three-to five-year time frame.
This is not easy stuff. Insurance is complicated, as you
suggest, with terrorism, and there are examples like that all
across the board. I think the key, if I were in your shoes,
would be to look at, is there steady progress, not so much is
it done by a date certain, but next year if we have a hearing
or when you are looking at what we are doing, have we made
consistent, steady progress. That would be the way I would
measure what is happening.
Ms. Maloney. Just as a follow up, Mr. Hunter and the other
witnesses, do you think that the self-regulation works, and the
initiatives that are detailed, will they be successful in
combating the existing inefficiencies in insurance market
regulation?
Mr. Hunter. Well, we are very skeptical, but if self-
regulation is transparent and the States rely on it and we can
see exactly what is going on, then we can trust it. But if it
is a black box, then we are very afraid of it because we do not
believe that certain companies are going to tell the truth. We
know some companies are doing some bad things to consumers, and
we cannot trust a black box system of self-certification.
Chairwoman Kelly. Thank you very much, Ms. Maloney.
Ms. Maloney. Thank you.
Chairwoman Kelly. Mr. Barrett? Sorry.
Mr. Hensarling? No.
Mr. Renzi. Mr. Renzi?
[Laughter.]
Chairwoman Kelly. Mr. Murphy, were you here before Mr.
Garrett?
Mr. Renzi?
Mr. Renzi. Yes, ma'am?
Chairwoman Kelly. You were here before either one of these
two? I am just taking people in order. You are here, okay.
Mr. Renzi. Thank you, Madam Chairwoman. Thank you so much.
Gentlemen and ma'am, thank you so much for your testimony.
I wanted to move to the subject matter of agent licensing
reform. I know, Mr. Hunter, you are experienced in this field.
I want to ask you, I know that with the 56 jurisdictions that
we have under NARAB, I think Mr. Parke you spoke to the fact
that you were proud of the fact that 49 of them----
Mr. Parke. Forty-two.
Mr. Renzi. Forty-two have some sort of reciprocity as it
relates. Is that also to agent licensing?
Mr. Parke. It is basically agent licensing.
Mr. Renzi. Okay. As it relates to that, is there a
uniformity there that has been established yet, so that an
agent can go on, submit one application, one set of
requirements, and then pay the individual fees by State?
Mr. Parke. The answer is there are 38 States that are doing
that now.
Mr. Renzi. Okay. So we have uniformity, not just
reciprocity, but uniformity with 38 States, so that one
application merges with all 38 States.
Chairwoman Kelly. Mr. Ario, do you want to answer that?
Mr. Renzi. Thank you.
Mr. Ario. Yes. We are working hard on uniformity, but the
question really is, I think, if I have a license in one State,
if I am a resident agent, can I get into the other 49 States
very easily? The answer to that is yes.
Another one of the hats that I wear is the President and
CEO of a group called the National Insurance Producer Registry,
which operates an electronic gateway. So I am an agent now in
any one of the States. I can go up on that gateway and enter my
information showing that I am an agent in good standing, and be
licensed.
I think there are 15 States now that are on that electronic
gateway, and there will be all 50 probably by the end of next
year would be my guess. So although for resident agent purposes
there may be differences in the laws, it does not really matter
to the individual agent because they only want one resident
license. They just want to be able to then, once they have
that, to get into all the other States. That is what we are
very close to achieving.
Mr. Renzi. So under your model, sir, an agent would be able
to go online, fill out one application, provide maybe a
photograph or fingerprints, and then pay individual fees by
jurisdiction. I think we have 56 jurisdictions. And then you
would be able to be quickly licensed. We have agents in my
State who have waited months and months.
In one case, we got testimony in my State of an agency who
provides an insurance product for nursing homes, very needed in
the property-casualty field. And to maintain their licenses
alone, they are paying probably close to $100,000 a year, if
you look at the labor costs and everything else involved, never
mind the time frame and the different requirements they are
having to jump through to get it done. So under your model, you
are saying that this will be accomplished within a year?
Mr. Ario. I am not sure, Representative Renzi. I do not
know which State you are from, but if it is not Oregon, you
ought to come to Oregon because----
Mr. Renzi. Well, it does not matter what State I am from.
What I am saying to you is, if I am a licensed agent in any
State, will I be able to have not just the reciprocity, but the
uniformity of a simple application, one application with
individual fees, or is that not going to be in the future?
Mr. Ario. Representative, for resident licensing, there
still will be a need to go to the individual State where you
are a resident and get that license.
Mr. Renzi. I understand that.
Mr. Ario. But once you have that primary license, when
within a year I think we will be at a situation, we are already
at 15 States, I think we will be close to all 50 States a year
from now. Once you have that license, you will be able to get
licensed as a nonresident in all of the other States through an
electronic licensing process.
Mr. Renzi. With uniformity, sir?
Mr. Ario. It is not even really uniformity. It would simply
be, all you have to do is say, I am a resident in good standing
in X State. With that and your fee--we are still working on the
fingerprint issue--but a few little things like that there
would not even be another full application. We are trying to
get the system close to driver's licenses. If you have a good
driver's license in one State, you can basically drive in the
other States. That is the system we are trying to get.
Mr. Renzi. Where are we headed on the idea of counter-
signature laws as it relates to that kind of----
Mr. Ario. I think counter-signature laws ought to be
eliminated. It was one of the safe harbors in the NARAB
provisions.
Mr. Renzi. Thank you.
Mr. Hunter, is there a harm to eliminating counter-
signature laws?
Mr. Hunter. Not from a consumer perspective, no.
Mr. Renzi. Okay. Can I ask the panel, anyone with the
expertise, where are we on uniformity as far as advertising on
the Internet? Is it the domicile State that controls the laws
as it relates to insurance agents who advertise on the Internet
and what content? Mr. Parke?
Mr. Parke. Quite frankly, I would defer to the NAIC.
Mr. Ario. Representative, advertising is I think a good
example of an area that fits something that Mr. Atchinson said
earlier, which is we used to spend a lot of time in our market
conduct exams focused on fairly technical issues. Many of those
were in the advertising area.
I know in our department, we used to spend maybe one-third
of our examination time on advertising issues, pretty narrow
advertising issues, that kind of question of exactly, is this
an Oregon ad or was it done from some other States. We do not
do advertising hardly ever in our market conduct examinations
anymore, and we have not had any up-tick in consumer
complaints. So I think that is an area where there is not a lot
of consumer abuse. Mr. Hunter will give you some examples,
there are some areas with the elderly and so forth, but by and
large, I have not heard people worry too much about that issue.
Mr. Renzi. Thank you.
Thank you, Madam Chair.
Chairwoman Kelly. Thank you, Mr. Renzi.
Mr. Davis, welcome to our committee, and your first
question period.
Mr. Davis of Alabama. Thank you, Madam Chairwoman.
Mr. Hunter, let me direct my first set of questions to you.
You were probably the most persistent critic of a multi-State
regulatory framework. I want to ask you about a couple of
premises behind that. I would imagine that the people on the
committee who disagree with you would say that there might be
very strong arguments for consistency with respect to, say,
life insurance. There is not likely to be a lot of variation
from State to State, by and large, in that area.
However, it would seem that there might be significant
variation when it came to two other classes of insurance:
property-casualty losses, given varying threats from weather in
different parts of the country; and the second one, of course,
just being general health insurance, where there certainly is a
real sparsity of health care in some areas, and very good and
abundant health care in other areas. How do you address,
briefly, those two sets of concerns, that if we try to craft a
more nationalized system, it will not be able to account for
those last two classes of insurance?
Mr. Hunter. Well, it will be more difficult, obviously. We
have not opposed trying to craft multi-State approaches, as
long as consumer protection is high and people are protected.
We do get concerned about whether or not a consumer from State
X that is harmed. Who is accountable? Who do they go to? That
becomes a little bit of a problematic question, absent a
federal approach where the government here is doing that.
But we think it is possible to craft multi-State
approaches. We do not oppose them. What we really want to make
sure is that consumers are protected, whatever the approach,
whether it is a local approach or a national approach. If the
protections are good, we are happy with it, as long as there
are ways to observe how it is doing; there is transparency in
the process.
Mr. Davis of Alabama. Give me an example of a multi-State
approach, for example, that would address weather differences
in States that face some high-risk of weather adversity. I am
trying to get some vision of what a multi-State approach would
look like that was not national in character.
Mr. Hunter. Well, you could have multi-States along the
east coast and gulf coast of the United States dealing with the
hurricane risk. There are multi-State approaches being used. In
fact, one State, Florida, has taken some leadership, but most
stakes look to Florida, for example, to certify that the models
being used to project hurricane losses are fair and reasonable,
so the other States rely. So I would call that sort of a multi-
State approach on a very specific type of loss that is unique
to certain parts of the country.
Mr. Davis of Alabama. How do they handle causes of action
that cross multi-State lines?
Mr. Hunter. Well, the local State cause of action would
apply, so that would be different. If a consumer was harmed and
brought an action, it would be different, depending on the
State even under a multi-State regulatory approach.
Mr. Davis of Alabama. Mr. Ario, let me ask you the next set
of questions. From your perspective, obviously your premise is
you defend the multi-State patterns that the States do a
consistently good and effective job of policing consumer
violations. Having said that, I think we would all probably
agree with Mr. Hunter's assertion that there have been numerous
instances where for whatever reason States have failed and
various companies have done a number of things that we would
certainly frown upon.
To the extent that States are not able to do a more
effective job, what is the reason for that? Is there some
particular aspect of the States having to do their own
enforcement that prevents them from being as effective as a
national system might be?
Mr. Ario. Representative, I think there has been in the
past a lack of focus on the question of market analysis. In a
lot of situations, I think, as has been testified by other
members here, the question of who gets examined and when is one
that is not clear and done in a rigorous way.
So that is why in our work we put a great deal of emphasis
on the concept of analysis. We have a rich continuum of data
that we get at the State level--3.5 million consumer
complaints, hundreds of thousands, literally, or Braden form
product filings, producer actions, investigations--all of which
tell us a lot about what is going on in our marketplace. I
think we need to put more rigor into taking that information,
and in a more rigorous modeling kind of way, look at it,
identify key data points, identify outliers on those data
points, and then address them.
Market analysis, as the GAO report points out, is a
relatively new concept. Everybody did it in one form or
another, but it was not very rigorous and it was not a separate
discipline. It is evolving now as a separate discipline. I
think that frankly holds a lot of the key to addressing both
the concerns of the industry and the consumers. On the industry
side, we get away from the trivial problems and focus on the
real problems. On the consumer side, we do not miss the
problems; we identify the problems and get to them earlier. We
are never going to find everything. Crooks are always clever,
but we will find a lot more through market analysis.
Mr. Davis of Alabama. I think my time has expired, Madam
Chairwoman.
Chairwoman Kelly. Thank you very much.
Mr. Garrett?
Mr. Garrett. Thank you and good afternoon, everyone. It is
good to see somebody on the panel that I used to associate with
when I was in my former days as a legislator myself. Good to
see you again.
I will throw the first question out to you, Representative,
and this is a little bit off the mark of the others, but it is
something we were working on in New Jersey, and that is the
standards on life insurance and the speed of proposals with
regard to approval forms and what have you. NAIC had proposed
interState compacts for speed of market reform of life
insurance products. Can you tell us a little bit about where
that is? Whether NCOIL, if you know, has endorsed that compact
yet?
Mr. Parke. We have not endorsed it formally. We are looking
at it. The concept has just been out nine months or so, and
they have proposed it. We are reviewing it at our meetings and
talking about the pros and cons.
A concept like this is not an easy product to try and
approach to doing something. There are members that have
expressed strong opposition to this, and we have members that
think that this is a direction that we have to go in for speed
to market, to allow the financial services industry to be able
to compete in a world marketplace. I think that is a driving
factor that may ultimately pass that, but NCOIL has not taken a
formal position on that issue.
Mr. Garrett. Okay, thanks.
As someone who has been involved, not necessarily directly
involved, with market conduct studies, but at least in the next
room while they were going on, and seeing how they can impact
upon the industry, on the company, I guess my question that I
will throw out to the panel, if that is okay, and I think some
of the testimony may have been along this line as well, is that
the focus so much by the regulator is on the minutiae of it,
and for those in the industry that are on the front line with
the consumer would never say that it is the most important
aspect of it.
Some may view the word as the technical side of the
equation instead, as opposed to the other end of the equation
where if you work for the department, you know that it is easy
to see where the problems are and it is easy to see which ones
of the companies are the problem companies, because those are
the ones that are getting all the complaints to the department.
How do we address that? Is that really more not just simply an
issue of simply solving this by coming up with a uniformity
standard, because at the end of the day you may still get a
system that you already sign onto as the appropriate system and
is uniform across the board.
Mr. Hunter would agree that it addresses consumer
complaints at the end of the day, but is it a problem locally
with the local department, the State department, the one that
is enforcing it, still going after the minutiae as opposed to
the overall end-game, which is to provide better service to the
consumer?
Mr. Atchinson. If I might comment, certainly congressman, I
think you touch on an issue I think that is becoming more
prominent among most of us that have been studying this issue,
which is how does one make sure that everyone is focusing on
the forest and not just on the trees.
I think the PATRIOT Act was one recent example of looking
to ensure that financial service companies have an
infrastructure in place that will, as a matter of course,
require ongoing tracking and checking and monitoring and
ensuring that there is self-corrective action taken when in
fact problems are identified, as opposed to waiting three or
four or five years until the market conduct exam is conducted,
and only then discovering something that if there was an
infrastructure in place might have been self-identified and
self-corrected early on. That is not to say that in every
instance some of these technical violations may not warrant
attention, but the experience has been that all too often there
is such an obsession with checking the minutiae, that
oftentimes some of the larger systemic issues are not
identified or given the priority that they warrant.
The organization I am with, IMSA, is just one example of
how those sorts of infrastructures can be supported and
encouraged, and if anything can complement the work of the
regulators.
Mr. Garrett. I would suggest a couple of things that could
help us focus on the bigger picture would be if the States
would do some interviewing of some of the consumers that
complain in more depth, and try to bring that together and look
for commonalities; and some interviews of agents. Agents quite
frequently on front line in knowing when something is going
wrong in a company or many consumers are getting hurt; and also
monitoring these lawsuit discoveries. There is a lot of
documents that come out that are incredible gold mines of
abusive behavior that should be somehow routinely looked at by
the States.
Mr. Parke. I would like to point out an observation in
listening to the discussion. Because of the federal chartering
of insurance is an issue that is underpinning a lot of the
discussion, there is no guarantee, ladies and gentlemen, that
you are going to solve the problems if you go to a federal
charter. You are still going to have the underlying problems.
That is not going to get solved just because you change from
one venue to another. The other problem is the establishment of
the huge bureaucracy that is going to be needed to take care of
it. That system is being done in the various States.
The old analogy, do you want to deal with 50 monkeys or one
big gorilla I think is an issue that you have to ask yourself.
Do you want to deal with this issue? We believe that we deal
well on insurance. Is it perfect? No. Are there flaws? Yes. Can
we solve them? Yes. You are giving us direction. GLBA was a
fine start to give us direction. I think we have shown the
ability to perform, to do things, to take care of those issues
that are brought to our attention.
Whatever you decide by virtue of your hearings to ask the
States to comply with, I believe that we will make a good-faith
effort and probably not only achieve, but exceed, as we have
done with NARAL.
The other question that you have to ask yourself is, there
is a $10 billion premium tax issue. The States will lose that
if you go to a federal program. That is something that we
cannot easily accept either. You are going to have to review
what will you do with this $10 billion that States will lose if
you move in that direction. So as a subcommittee, you have
other questions on using market conduct as a basis.
I think nobody up here is complaining that market conduct
is not an effective tool. It can be a lot better. We are going
to move in that direction, and I appreciate having the
opportunity to testify today before you.
Mr. Garrett. If I can ask one more?
Chairwoman Kelly. Your three minutes over time and you did
not get any testimony from Ms. Marema, so perhaps you would
like to have her testify.
Ms. Marema. I just wanted to echo the need for market
conduct analysis, better analysis, better targeting of
companies. Of course, if you are not sure why you are there in
the first place, it is easy to focus on minutiae. I think some
of the reforms that we see the NAIC doing and that we think are
the key ones, once States are better able to target companies,
they are going to know why they are there. It is going to be
easier to focus on the companies' general business practices
and so forth.
Chairwoman Kelly. Mr. Garrett, if you want to ask another
question, please do. There is no one else here and we have
these witnesses. As long as we have the experts before us, the
purpose of this hearing is to find out information so we can
help get this running smoothly.
Mr. Garrett. Well, and I do not want to delay anything, but
that is the picture that appeared in my mind when you made the
reference to the 50 monkeys out there, and I am not sure which
department of insurance you are referring to among those 50
monkeys.
[Laughter.]
Mr. Parke. It was an analogy. It was not directed at
anybody.
Mr. Garrett. So my question is not a flippant one, but just
I guess falls on the lines that you were saying, and you as
well, and that is, at the end of the day, the hearings that we
hold today hopefully drive home the effort to achieve the
appropriate uniformity with regard to the market studies that
are done.
The question is, as we leave here, do we have a role, then,
on the federal level in having the federal government take a
preemptive step with regard to the market studies themselves,
or is it appropriate for your analogy of the 500-pound gorilla
to step into that role as far as conducting them? Or is our
role here simply to try to facilitate and get to the optimum
level of uniformity as far as the studies that are being done?
Mr. Parke. If I could address the, I will tell you that the
message that you send today is heard and understood, and I take
it back to legislators from the various States at our meetings.
I tell them, they mean business; they expect changes; they
expect uniformity; they expect reciprocity; and they expect
market conduct to be more effective and efficient. That is the
message I am taking back, and I think we hear your message loud
and clear that there is pressure on you to try and make a
difference, and the consumer ultimately is the goal that we all
have to protect and make sure that they have a competitive
product to solve the problem that will come from insurance.
Chairwoman Kelly. Mr. Parke, I think there is no one on
this committee that would object to your taking that message
back and disseminating it to the 50 monkeys.
[Laughter.]
Mr. Parke. You got it. You got it.
Mr. Ario. Terry has analogized this to monkeys. I will
analogize this to my nine-year-old son, as State regulators. My
nine-year-old son, he needs to be encouraged and pushed and
cajoled into doing the right thing, but I have to let him get
it done himself, and usually if I try to force the issue beyond
a certain point, it is counterproductive.
I think that is basically where we are on this issue. We
need to be pushed and pushed hard to do the right thing, but to
try to force us at this point into anything through some
federal legislation I think would end up being
counterproductive.
At some point, if it does not happen, I think you have to
look at other options. But at this point, I think you have got
receptive ears out here, so I think these kinds of hearings are
the kind of means that ought to be used.
Chairwoman Kelly. Mr. Atchinson, do you want to add
something there?
Mr. Atchinson. I just wanted to add my voice to that last
point, because I certainly think that there is a lot of good
work being done, but I think the role that this subcommittee
and the committee can play is to help focus and prompt the sort
of action that is being considered and contemplated. I refer to
my tenure as a regulator going back 10 years ago, and while
there are a lot of good intentions, some of the initiatives
launched then to reengineer regulation are still under way
today. I do think that deadlines have a way of focusing most
any of us, and that would apply to the organizations
participating in this hearing.
Thank you.
Chairwoman Kelly. Thank you, Mr. Atchinson.
The chair notes that some members may have additional
questions for this panel and they may wish to submit those in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to the
witnesses and to place their responses in the record. This
hearing has been very interesting and I hope it is moving us
along in the right direction. We gratefully thank you for
spending as much time as you have.
This hearing is adjourned.
[Whereupon, at 4:30 p.m., the subcommittee was adjourned.]
A P P E N D I X
May 6, 2003
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