[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
ADDITIONAL PERSPECTIVES ON THE
NEED FOR INSURANCE REGULATORY REFORM
=======================================================================
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 TENTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-77
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire TOM PRICE, Georgia
KEITH ELLISON, Minnesota GEOFF DAVIS, Kentucky
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
TIM MAHONEY, Florida JOHN CAMPBELL, California
CHARLES A. WILSON, Ohio ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana KENNY MARCHANT, Texas
ROBERT WEXLER, Florida THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia KEVIN McCARTHY, California
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York DEBORAH PRYCE, Ohio
BRAD SHERMAN, California JEB HENSARLING, Texas
GREGORY W. MEEKS, New York RICHARD H. BAKER, Louisiana
DENNIS MOORE, Kansas CHRISTOPHER SHAYS, Connecticut
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina SHELLEY MOORE CAPITO, West
DAVID SCOTT, Georgia Virginia
NYDIA M. VELAZQUEZ, New York ADAM PUTNAM, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee TOM FEENEY, Florida
ALBIO SIRES, New Jersey SCOTT GARRETT, New Jersey
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
C O N T E N T S
----------
Page
Hearing held on:
October 30, 2007............................................. 1
Appendix:
October 30, 2007............................................. 43
WITNESSES
Tuesday, October 30, 2007
Eiland, Hon. Craig, Texas House of Representatives, on behalf of
the National Conference of Insurance Legislators............... 5
Felton, John W., President, Tennessee Brokerage Agency, on behalf
of the National Association of Independent Life Brokerage
Agencies....................................................... 16
Gilliam, Scott, Assistant Vice President and Government Relations
Officer, The Cincinnati Insurance Companies.................... 14
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 9
Iuppa, Alessandro, Senior Vice President, Government and Industry
Affairs, Zurich, on behalf of the Financial Services Roundtable 7
Nutter, Frank, President, Reinsurance Association of America..... 12
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 44
Manzullo, Hon. Donald A...................................... 46
Eiland, Hon. Craig........................................... 48
Felton, John W............................................... 60
Gilliam, Scott............................................... 67
Hunter, J. Robert............................................ 78
Iuppa, Alessandro............................................ 126
Nutter, Frank................................................ 139
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
Statement of the National Association of Insurance and
Financial Advisors......................................... 151
Barrett, Hon. J. Gresham:
Responses to questions submitted to John W. Felton........... 172
Responses to questions submitted to Alessandro Iuppa......... 173
ADDITIONAL PERSPECTIVES ON
THE NEED FOR INSURANCE
REGULATORY REFORM
----------
Tuesday, October 30, 2007
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 notice, at 2:17 p.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Moore of
Kansas, McCarthy, Lynch, Scott, Bean, Davis of Tennessee,
Sires, Klein; Pryce, Hensarling, Baker, Shays, Royce, Barrett,
Gerlach, Price, Davis of Kentucky, Bachmann, and Marchant.
Chairman Kanjorski. The Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises will come to
order.
Without objection, all members' opening statements will be
made a part of the record.
Good afternoon. I would like to thank Ranking Member
Deborah Pryce and members of the Subcommittee on Capital
Markets, Insurance and Government Sponsored Enterprises for
being here for today's hearing on additional perspectives on
the need for insurance regulatory reform. I would also like to
thank Ms. Pryce for joining me in inviting our panel.
Today's hearing is the second in a series on insurance
regulatory reform. It is also the second hearing on the need to
improve insurance regulation. Earlier this month we heard from
key participants of the insurance industry on the need for
reform. At that hearing, regulators, agents, brokers, and
company representatives testified.
Our first hearing reinforced my belief that Congress should
take some action on insurance regulation. I expect today's
witnesses to add to our knowledge base on insurance and help
inform each of us on what Congress should do before we make any
policy decisions in this area. The vast majority of interested
parties in the debate on insurance regulatory modernization
agree that the system is not perfect and needs improvement.
Today we will hear from additional parties, including State
legislators, consumers, and industry representatives on the
need for reform in insurance regulation. These additional
perspectives will add greatly to our discussion, as each will
relay a unique point of view.
Although regulated by the many States, Congress has the
responsibility to oversee the insurance industry. The aftermath
of September 11th taught us all how important insurance is to a
vibrant and thriving economy. We have also heard a lot about
maintaining the competitiveness of the United States capital
markets, including insurance, in an increasingly global
economy.
The importance of insurance to consumers, both large and
small businesses, and individuals in each of our districts is
another area we cannot forget. It is our responsibility as
lawmakers to decide the best course to take on any issue, and
in my view, we should do so in a thoughtful and a deliberative
manner. The current system has been in place for over a
century, and any changes we proffer should consider all
potentially affected constituencies.
In closing, I expect today's testimony will continue to
help guide us into specific areas to review. Even more so, I
would like consensus and bipartisanship to dictate what areas
we choose to focus on. I am optimistic that we can achieve this
goal.
Future hearings will explore policy options for reform. We
will likely review general and broad reform ideas as well as
options targeted on specific areas. Nevertheless, until we
explore options, we will remain focused on why there is a need
for improvement in insurance regulation. Our hearing earlier
this month was a great beginning, and I look forward to another
open dialogue with today's panel.
I now recognize Ranking Member Pryce for 5 minutes for her
opening statement.
Ms. Pryce. Well, thank you, Mr. Chairman. I won't use much
of my time. I just want to thank you for this, the second in a
series of hearings on what is a very important subject for this
committee.
I want to thank you also for agreeing to invite witnesses
on a very bipartisan basis. I think this is reflective of a
shared interest in going forward with reform, which is so very
important in a thoughtful, considerate way. And I for one am
very appreciative of your willingness to share this
responsibility with the minority.
I yield back.
Chairman Kanjorski. Do we have any other members who wish
to make an opening statement? The gentlelady from Illinois, for
3 minutes.
Ms. Bean. Thank you, Chairman Kanjorski, and Ranking Member
Pryce, for holding a second hearing on insurance regulatory
reform. In addition, I would like to thank all of our witnesses
for sharing their expertise with us today. In particular, I
would like to welcome Mr. Alessandro Iuppa, head of government
and industry affairs for general insurance for Zurich North
America, which is headquartered in my district. Welcome.
Most members--and we discussed this in the last hearing--on
this committee do agree that America's economic preeminence in
the world hinges upon the health of our capital markets and our
global leadership in the financial services industry. Earlier
this year, New York City Mayor Michael Bloomberg and U.S.
Senator Charles Schumer commissioned a report on what changes
were needed to keep the United States competitive in the global
marketplace.
One of the report's top recommendations was the creation of
an optional Federal charter for insurance. In July,
Representative Royce and I introduced the National Insurance
Act of 2007 to address issues of competitiveness and consumer
choice. The bill would create an optional Federal charter for
life and property casualty insurers.
Designed to emulate the regulatory structure found in the
dual banking system, the NIA would give insurance providers the
choice of being regulated at the State level or by the new
Federal regulator. The bill gives consumers what they want,
choice and protection. Insurance customers will have more
pricing and product options, driven by a competitive
marketplace freed from State price controls and regulatory
hurdles, without sacrificing consumer protections.
The current State-based regulatory system has hurt the U.S.
insurance industry's ability to compete globally. In 2006
alone, the U.S. insurance services trade deficit totaled $24
billion. The current system, which requires insurers to work
with 51 different State regulators, is burdensome and slows the
new product's time to market, sometimes by years. This
discourages insurance innovation and product development. A
national charter would foster greater industry innovation and
competitive agility.
The insurance industry has changed and evolved dramatically
since 1871 when the National Association of Insurance
Commissioners was established. But for 136 years, the
regulatory system has not significantly changed. It is time to
allow the insurance industry to move into the 21st century so
that it can more effectively compete on the global stage and
provide more pricing and product alternatives to our Nation's
consumers.
As a resident of and representative for Illinois, I have
seen firsthand the benefits to consumer pricing and product
options in a deregulated environment. We can extend those
benefits nationally with this bill.
For years, hearings have been held identifying the problems
inherent in the current State-based system. Insurance reform
needs to happen, and we should start now.
I look forward to your testimony and recommendations for
how we should proceed. Thank you. I yield back.
Chairman Kanjorski. I will recognize the gentleman from
California, Mr. Royce.
Mr. Royce. Thank you very much, Mr. Chairman. I would also
like to thank you, Mr. Chairman, for your continued leadership
on this issue.
This being our second hearing on the need for insurance
regulatory reform in a month, I think we look forward to
investigating this issue further. At the last hearing we held,
we heard from the National Association of Insurance
Commissioners yet again on the progress they claim to have made
in streamlining regulations at the State level. However, at
that time we also heard frustration expressed from other
witnesses, who pointed to the structural flaws in the State-
based system as the major reason why meaningful reforms
continue to elude the NAIC and the insurance sector.
With 50 State insurance commissioners and 99 State
legislative chambers needed to agree upon regulatory models
proposed by the NAIC, it is easy to see why these proposals
fail to garner any type of unanimous support. And quite often
it is the two or three large States with the largest insurance
markets, representing the bulk of the marketplace out there,
that refuse to implement changes that momentarily might be
agreed upon by the other members.
Unfortunately, the only substantive reforms universally
adopted have come about in large part because of Federal
pressure in the past. Uniform solvency standards, that is
because of the Federal pressure. Reciprocal agent licensing
standards, that followed the mandates and threats that came
from Congress.
While this back and forth between Congress and the State
regulators had produced some results, it is time to pursue a
different path. We have yielded to the States for 136 years. We
don't have a national market here. We should. And we have
yielded only to see the fundamental problems remain
unaddressed.
If America's stronghold as the financial capital of the
world was not at risk, the urgency of this matter would not be
as strong. But we are now competing in a global marketplace
where capital flows to the most efficient markets in all
corners of the globe, and it does it at the click of a mouse.
The Bloomberg/Schumer report understood this and explained
it. The U.S. Chamber of Commerce report details this problem.
And I believe the Congress will come to understand that an
optional Federal charter is needed if our insurance industry
and our financial services sector are going to compete globally
in the future.
We need a world-class regulator able to properly oversee
and address issues that arise in that sector. The banking and
securities industries have ample representations when major
policy decisions are formulated in this town. Whether in
responding to a national crisis or formulating tax policy or
negotiating a major trade agreement, the Fed is there. The OCC
is there, the SEC. They all have a seat at the table when the
policy is developed or when we are trying to get into that
foreign market.
I believe the time has come to give the insurance industry
equal representation, able to voice concerns on behalf of the
industry, and able to enact substantive regulatory reforms.
At the previous hearing, the independent insurance agents
highlighted their opposition to an optional Federal charter,
but their support for the National Association of Registered
Agents and Brokers subtitled in Federal legislation in the
Gramm-Leach-Bliley Act, which creates a clearinghouse for
interstate license.
However, the NARAB is intended to do for agents and brokers
what an OFC would do for the entire insurance industry,
streamlining regulation and allowing insurance providers to
better serve their customers is the central theme of an OFC.
Now that there is a virtual consensus that Congress should
act, we must decide which path we should take. I believe
creating an optional Federal charter is the best option. It
will provide insurance consumers, producers, and sellers a
viable alternative to the tangled bureaucratic web currently in
place. And for this and other reasons, including the cost, I
have cosponsored Representative Bean's National Insurance Act,
which would create an OFC for insurance.
In closing, I think it is worth noting that we have our
second former president of the NAIC testifying in favor of
creating an optional Federal charter. I believe serving in this
capacity has given them a unique insight into the difficulties
faced by the NAIC. Mr. McCartney eloquently highlighted the
failures of the NAIC to successfully streamline and modernize
insurance regulation at the last hearing, and I look forward to
Mr. Iuppa's testimony today.
Again, I would like to thank you for holding this hearing,
Chairman Kanjorski, and I look forward to hearing from our
distinguished panel of witnesses here. Thank you.
Chairman Kanjorski. Thank you, Mr. Royce.
We will now move to the panel welcomed before us today.
Thank you for appearing before this subcommittee. Without
objection, your written statements will be made a part of the
record, and you will each be recognized for a 5-minute summary
of your testimony.
First we have the Honorable Craig Eiland, Texas House of
Representatives, testifying on behalf of the National
Conference of Insurance Legislators.
Representative Eiland.
STATEMENT OF THE HONORABLE CRAIG EILAND, TEXAS HOUSE OF
REPRESENTATIVES, TESTIFYING ON BEHALF OF THE NATIONAL
CONFERENCE OF INSURANCE LEGISLATORS
Mr. Eiland. Thank you, Chairman Kanjorski, and Ranking
Member Pryce. It is good to be here today. As noted, I am a
State Representative from Texas, and I am here on behalf of
NCOIL, a group of State legislators from approximately 35
States. Most of us are a member of an insurance committee or
chairman of those committees.
And we do exciting things 3 times a year, like meet for 3
days and discuss insurance and only insurance. We adopt model
bills, and we debate model bills, and we take those bills back
to our representative States and try to get them enacted.
I usually sit where you sit, and I prefer sitting there
much better than being down here. But I appreciate Congressman
Marchant, my former House colleague in Texas, being here, and
hope you will have some softball questions for me sooner or
later.
[Laughter]
Mr. Eiland. With that said, I think that when you have a
product that is a national product, you have much more of an
argument for having some type of uniformity. We have recognized
that in the States and we are moving that way specifically for
life insurance, annuities, and those types of products that are
the same no matter where you are. We are doing that with the
compact which was discussed in the last hearing. And we are
doing that with market conduct exam reform, which I will talk
about in a minute.
But what you will find in the difficulty is that if you
have a product where if you live in Dallas, Denver, Des Moines,
or Detroit, it is completely different based upon your coverage
and your price. There is no uniformity there. And that is why
you have difficulty in the property/casualty area trying to
come up with uniform products and rates and forms.
By way of contrast, with life insurance, if you live in
Dallas, Detroit, or Des Moines, and you are a male, 50 years
old, and a nonsmoker, with each company you are going to have
basically the same price quote. And if you move to one of those
other cities, it doesn't change. You still have your life
insurance. You still have your annuity.
Not so if you own a house. Even if you have a trailer house
and you move it from Dallas to Denver, you are going to have
different coverage and a different price. The same with your
auto. And so there are differences that we have to recognize.
I know it was brought out last time in NAIC's testimony,
but it is also important to note that California is the 6th
largest insurance market in the world; New York is the 7th
largest, Florida is the 8th largest, and Texas is the 10th
largest in the world.
I don't think any of those markets are going to give up
their regulatory power or authority, certainly not without a
fight. And I think that what they are doing is they are doing
what they think those markets need to meet local issues--the
wildfires in California, storms along the Gulf Coast, and
snowfall in the Northeast. Those types of things are different,
and that is why the policies and the exposures are different.
I would point out that what we have tried to do on the
State-based regulation is when you all set the Gramm-Leach-
Bliley deadlines, we met them, to institute those reforms. We
have done the compact, like we discussed, for life insurance-
type products.
A couple of years ago we started working on market conduct
exam reforms, and in Texas, I was the first one to pass that.
We now have four States that have passed it. There is some
concern that we are not moving fast enough. I would point out
that on market conduct exam--and this is not sexy stuff. This
is nuts and bolts. If you had a press release on filing a
market conduct exam bill, you are in dire need of more
legislation.
But this is one of those nuts and bolts where we are trying
to attack. The industry didn't even come together on what they
felt was needed until the spring of 2005, and so far, we have
four States that have instituted market conduct exam reform.
And so when you look at what the States have done for
trying to have some rate reforms, especially on the commercial
lines, and then having some type of filing use and the States
moving that direction, you will see that where possible, we are
moving in the right direction with producer licensing. We are
moving in the right direction with uniformity on uniform
products. We are moving in the right direction on market
conduct exams, trying to reduce the number of those exams. And
we are moving in the right direction on rate and modernization
on forms.
And so we certainly stay here hoping to work with you on
the reforms that you all determine are necessary so that we
hope that we can support them and work to help reform this. I
do note that on reinsurance issues, there does need to be a
national debate on what we do with reinsurance issues. We have
been discussing this along with NAIC, and there are very
technical, detailed things that have to happen on a worldwide
basis, not just what we do.
The international accounting standards have to be aligned
so that we are looking at the same issues across the pond as we
are here. And so it is not always as easy as it seems. And I
see my red light says stop, so I will.
[The prepared statement of Mr. Eiland can be found on page
48 of the appendix.]
Chairman Kanjorski. I think you are the first one who has
ever responded to that red light.
[Laughter]
Chairman Kanjorski. Thank you very much, Mr. Eiland.
Next we will hear from Mr. Alessandro Iuppa, senior vice
president for government and industry affairs at Zurich,
testifying on behalf of the Financial Services Roundtable.
Mr. Iuppa?
STATEMENT OF ALESSANDRO IUPPA, SENIOR VICE PRESIDENT,
GOVERNMENT AND INDUSTRY AFFAIRS, ZURICH, TESTIFYING ON BEHALF
OF THE FINANCIAL SERVICES ROUNDTABLE
Mr. Iuppa. Thank you and good afternoon, Chairman
Kanjorski, Ranking Member Pryce, and members of the
subcommittee. My name is Alessandro Iuppa, and I am senior vice
president, government and industry affairs, for Zurich North
America. I appreciate the opportunity to speak with the
committee on behalf of Zurich and the Financial Services
Roundtable on the subject of insurance regulatory reform.
I come to the issue of insurance regulatory reform with a
perspective perhaps somewhat different than the other witnesses
at today's hearing. Prior to joining Zurich in January, I was
an active member of the regulatory community for the past 20
years, serving as deputy commissioner and commissioner for the
State of Nevada, as deputy and superintendent of insurance for
the State of Maine, and in the interim, providing consulting
services exclusively to insurance departments seeking to
rehabilitate financially troubled insurers.
During my 9-plus years as Maine superintendent, I was
engaged on insurance issues nationally and internationally
through the National Association of Insurance Commissioners and
the International Association of Insurance Supervisors. I had
the honor to serve as an NAIC officer from September 2004
through 2006, when I served as president, and from 2004 through
2006, I also served as chair of the IAIS executive committee.
Financial markets in general have undergone extraordinary
growth and structural change in recent decades. Much of this
change is due to developments such as the worldwide integration
of capital markets, the revolution in information technology,
as well as shifting attitudes towards competition and
protection in the financial services area.
Unfortunately, the current U.S. regulatory structure is not
fully equipped to supervise the sophisticated marketplace of
the 21st Century. The need to operate within the State
patchwork of regulation in the United States hinders insurers
with risk issues confronting clients who operate on national
and international bases.
Zurich and the Roundtable are not opposed to the regulation
of insurance. If they were, I would not be here. We do,
however, support prudent, strong, state-of-the-art insurance
regulation that allows insurers to meet the needs of their
policyholders and encourages competitive and thriving markets.
Although the existing structure works for some, it impedes our
ability to achieve those goals.
To their credit, State insurance regulators individually
and through the NAIC have attempted to institute regulatory
reforms, and have made strides towards simplifying and
streamlining regulatory requirements. The reality, however, is
that today's marketplace demands far more dramatic action than
the States alone are able to provide. Competition and
efficiency in the insurance industry lag behind the other
financial services sectors, due in large part to the regulatory
inefficiencies and inconsistencies in the State system.
Over the past several years, I have spent a great deal of
time working on behalf of the U.S. regulatory community with
our foreign colleagues. What I learned is that despite our best
efforts, our effectiveness on the international stage was
limited, not necessarily in the development of policies and
ideas, but in terms of implementing those policies and ideas at
home.
I will give you an example. The IAIS has become the
standard-setting with respect to international insurance
standards. U.S. regulators have been and continue to be active
participants in the development of those standards. But no
matter how much agreement exists among the regulators, the U.S.
representatives cannot bind the U.S. regulatory community or
their States to adopt those standards. The national insurance
commissioner, with the authority to negotiate and perhaps bind
the Federal Government, would add immeasurably to the
effectiveness of our international endeavors.
Let me now mention three areas that can benefit from
Federal regulation: market deficiencies; speed to market; and
commercial policyholder issues. The lack of a sustainable
market for terrorism coverage and coverage shortfalls in some
coastal regions illustrates a deficiency in the U.S.
marketplace. There are many reasons insurers do not cover
terrorism or certain property risks, and we should all be clear
from the beginning that even with a Federal regulator, that
regulator will not solve every problem that arises in the
marketplace.
Regulation, however, can play an important role by helping
markets operate as efficiently as possible by maintaining the
proper equilibrium among suppliers and purchasers. At the other
end of the spectrum, by sustaining each State as an individual
market, we inhibit the ability of insurers to spread that risk
and enhance capacity.
The problems created by mega-catastrophes tend to be
regional in nature and national in nature. A Federal regulator
with the responsibility for a national market will be better
able to respond to regional and national problems.
A number of States still require prior approval or the
filing of rates and policy forms before the products can be
offered for sale. Several States have deregulated the
commercial insurance marketplace for rates and forms. Others,
however, continue to maintain some level of preapproval
requirements.
My experience as the Maine superintendent taught me that of
the approximately 1,000 companies that were licensed to
underwrite insurance products in Maine, few intentionally
sought to introduce products that did not comply with Maine
law. For those products that did require prior approval, the
search for the few problems at the beginning substantially
slowed the pace of product introduction.
It is also important to remember that not all policyholders
are individuals. Commercial entities constitute a very large
segment of the insurance market, and each has specific risk
management criteria. Our company, for example, works with many
of the Fortune Global 100 companies. To serve those clients, we
developed the Zurich multi-national insurance proposition.
With it, our global customers can be confident that their
out-of-territory coverage is aligned with local licensing and
premium tax requirements. For our clients indemnifying risks in
the United States, compliance would be much more simple if
Zurich had a Federal charter. I mention this because compliance
in these areas is an important policyholder protection.
After 20 years as an insurance regulator, I can conclude
that despite recent improvements, the States are not likely to
solve the problems on their own, so I believe congressional
action is necessary. For better or worse, many of the States'
regulatory modernization efforts have been the result of
external pressure, and there is no guarantee that the States
will adopt further meaningful reforms. Building consensus among
regulators is a very difficult thing to do, and at times almost
impossible.
An optional Federal charter would give insurers and
products a choice between a Federal regulator and multiple
State regulators. It will not dismantle the longstanding State
insurance regulatory framework; rather, it will compliment the
State system with the addition of a Federal partner.
It is likely that many insurers and producers, particularly
those who operate in a single State or perhaps a small number
of States, would choose to remain State-licensed. Large
national and international companies, on the other hand, would
more likely opt for a Federal charter, thereby relieving
themselves of the burden of compliance with 56 different
regulatory regimes.
I thank you for your time, and I look forward to your
questions.
[The prepared statement of Mr. Iuppa can be found on page
126 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Iuppa.
Next we will have Mr. J. Robert Hunter, director of
insurance for the Consumer Federation of America.
Mr. Hunter.
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. I even have broader experience than that. I was
a Federal regulator. I ran the Federal Insurance Administration
and the National Flood Insurance program, and I was an
insurance commissioner and served on the executive committee of
the NAIC.
You asked that we focus our oral presentation on the areas
of regulation that needed improvement, and I am going to do
that. There are serious problems that consumers face today.
Here are just a few of them.
First, claims abuses: Hurricane Katrina shows the mess
regulation in the States is in. People are being denied the
money they are entitled from their insurers. The taxpayers are
paying flood claims for wind damage that should have been paid
by the insurers. Beyond Katrina, insurers are systematically
cheating consumers, using computer programs like Colossus to
turn their claims departments into profit centers. Most
regulators have done nothing.
Second, unfair prices: Here are a few examples. If your
education goes up, your rate goes down. If you have a low-
paying job, you will pay more. If you bought the limits of
liability the State requires but didn't buy a lot more, you
will pay more. If you are curious and ask about a hypothetical
claim, your rate goes up even if you don't file the claim. Most
regulators have done nothing.
Third, excessive prices: In 2006, insurers paid out the
lowest percent of their premium dollars in history, 50 cents
per dollar of premium. Despite the major storms, insurance
companies reaped unprecedented profits over the last 3 years,
totaling $500 from every man, woman, and child in America, this
at the same time they had Hurricane Katrina. This is because
insurance companies are increasingly transferring risks and
costs onto consumers and taxpayers. Most regulators stand by
helplessly, doing nothing. Worse, insurers are exempt from
State and Federal antitrust laws and are allowed to collude in
setting prices and other matters that would be criminal if the
played by the same rules as the other businesses in America.
Fourth, even large sophisticated buyers have been cheated.
Elliot Spitzer proved that with his finding of collusion,
hidden kickbacks, and illegal bid rigging.
Fifth, poor information. People don't know what is in their
policies. There are no real plain language policies. There is
no standard coverages.
Sixth, new classes not related to risk are being created,
such as credit scores, destroying the insurance loss prevention
function by disconnecting price from risk, little control
exercised by the regulators.
Seventh, regulation is weak because regulators are not
independent. We know about the revolving door in insurance,
don't we, Al? And also, we know that part-time State
legislators often work for insurance companies.
Eighth, few States have told consumers their rights. Only
Texas requires a bill of rights with every policy. People don't
know their rights for things like cancellation restrictions and
so on.
Ninth, except for California, States have not controlled
expenses that are built into insurer rates, expenses such as
huge sums used to contribute to politicians, or to lobby
Congress, or inappropriate costs like losses of lawsuits and
fines and penalties. These are all passed on to consumers in
almost every State. The regulators are failing.
There are many other problems I could list. There are
problems waiting to emerge that will be uncovered by lawsuits,
not the regulators, or by the media. Consider life insurance
market conduct abuses of a decade ago. The largest life
insurers told people their premiums would disappear, and
confused them into believing their life insurance was an
investment. It took lawsuits to uncover these problems.
Now, consumers don't care who regulates insurance. We
really don't care if it is Federal or State. But we do care if
it is any good, and it isn't good today.
But consumers are also not clamoring for speed to market.
The collusive and near-simultaneous introduction of the
outlandish anti-concurrent causation clause into homeowners
insurance policies is one example of speed to market that we
don't want. It makes the policies bad. In a very short time, 46
States approved this awful provision, which has caused havoc in
the wake of Hurricane Andrew.
Consumers do not want uniform regulatory systems if it
means gutting the few consumer protections we have to achieve
it. It is hard to believe that the OFC that has been introduced
would make matters worse for consumers. It is almost impossible
to write a bill like that. But they did it. The insurers are
very good at writing bills. Consumers do not want speed to
market of junk insurance products or uniform weak regulation.
We want real protection.
One other myth we should puncture: Tough oversight of the
insurance market is not incompatible with vigorous competition.
The best State regulatory regime is California, from a consumer
perspective, and it achieves both goals. Appropriate regulation
enhances competition, requires insurers to compete fairly and
in a manner that benefits consumers, and results in good
returns for the insurance companies.
Insurer-backed proposals in Congress do nothing to increase
scrutiny of insurer actions that have caused severe harm to
consumers. Indeed, these proposals would harm consumers.
It is possible to create a regulatory system, whether it is
State or federally based, that protects consumers and forces
competition. We proposed a number of detailed measures in our
testimony for this. Repeal of the McCarran-Ferguson Act
antitrust exemption is one of them. Requiring clear disclosure
of the policies is another.
Simply stated, we need a strong, effective consumer
protection in place in the country, not weak regulation. An OFC
guarantees regulatory arbitrage. The drafters admit it. A race
to the bottom. If you really want uniformity, why don't you
propose a Federal bill to take over regulation, and then we can
argue about the level of protections. Have the courage if you
really believe in it. It is not uniform if you have two systems
on top of each other.
The subcommittee has a vital role to play in making sure
that any Federal role increases regulatory standards so that
America's consumers have adequate protections.
[The prepared statement of Mr. Hunter can be found on page
78 of the appendix.]
Chairman Kanjorski. Thank you, Mr. Hunter.
Next we will hear from Mr. Frank Nutter, president of the
Reinsurance Association of America.
Mr. Nutter.
STATEMENT OF FRANK NUTTER, PRESIDENT, REINSURANCE ASSOCIATION
OF AMERICA
Mr. Nutter. Mr. Chairman, thank you very much. I am Frank
Nutter, president of the Reinsurance Association. I would
certainly like to shift gears from Mr. Hunter's presentation to
focus on the role that reinsurance plays in regulation.
I do want to commend Chairman Kanjorski and Ranking Member
Pryce for their continued leadership in this area of insurance
regulatory reform, and I welcome this opportunity to discuss
why the 50-State system for regulating reinsurance in the
marketplace is in need of reform, why the system does not work
well for the sophisticated global marketplace like reinsurance,
and explain the RAA's position in support of an optional
Federal charter.
Reinsurance is a global business. According to the NAIC-
filed annual statements of U.S. insurance companies, in 2006
more than 2,300 foreign reinsurers assumed business from U.S.
ceding companies. Although most insurers principally engaged as
assuming reinsurers are located in a small number of countries,
the 2,300 named reinsurers identified by U.S. ceding companies
were domiciled in more than 95 foreign jurisdictions. Their
share of the U.S. market underwritten directly by foreign-based
reinsurers has grown steadily to 53 percent in 2006, from 38
percent in 1997.
Some foreign reinsurers also establish U.S. subsidiaries.
If the amount of U.S.-based ceded revenue to these foreign-
controlled entities were added to the percentages I quoted
above, the total non-U.S. share would be 85 percent.
These percentages should not be misconstrued. Non-U.S.-
based reinsurers and their U.S. subsidiaries bring much-needed
capital and capacity to support the extraordinary risk exposure
in the United States and to spread that risk throughout the
world's capital and capacity providers.
The United States employs two methods of reinsurance
regulation, direct regulation of licensed U.S. reinsurers, and
indirect regulation of the reinsurance transactions ceded by
U.S. insurers to unauthorized reinsurers. The fundamental
concept underlying the U.S. regulatory system is that a
reinsurer must either be licensed in the United States and
subject to the full spectrum of multi-State reinsurance
solvency regulation, or if not licensed in the United States,
provide collateral to ensure the payment of the reinsurer's
obligation to U.S. ceding companies.
Capital providers to the reinsurance market in recent years
have clearly opted for the latter approach to avoid the multi-
State system of licensing that exists in the United States.
Following the 1992 hurricane season, eight new reinsurers
were formed, reflecting $4 billion of new capital. Following
the events of September 11, 2001, 12 new reinsurers with $10.6
billion in capital were formed. After Hurricane Katrina, at
least 38 new reinsurance entities with $17 billion of new
capital were formed.
Nearly all of the new capital came from the U.S. capital
markets. However, other than the U.S. subsidiaries of some of
these new non-U.S. companies, no new U.S.-domiciled reinsurer
has been formed since at least 1992. For these new non-U.S.
startups, the ease of establishment, capital formation, and
regulatory approvals in non-U.S. jurisdictions contrasted with
the cumbersome and protracted nature of getting a license in
multiple States.
We have identified in our statement three areas of concern
regarding reinsurance regulation:
First, credit for reinsurance laws and regulations based on
the NAIC model has been debated extensively in recent years.
Some have advocated for the reduction of collateral for these
reinsurers that choose not to be subject to U.S. licensing.
However, U.S. primary insurers have largely opposed this
effort, believing that it weakens U.S. regulation and dilutes
the financial security of U.S. insurers and their
policyholders.
Second, collateralization is a surrogate for licensing. It
eliminates a regulator's need to assess the level of regulation
in the non-U.S. reinsurer's domiciliary jurisdiction, or the
financial strength of it. It also reflects the challenges
facing 50 State regulators with resource constraints and
competing regulatory demands.
Unfortunately, it seems that initiatives by some States
suggest that a patchwork of State laws relating to financial
security may be emerging. The RAA believes that it is essential
to maintain a strong but uniform regulatory structure in the
United States. In that regard, the RAA commends the sponsors of
H.R. 3200 for proposing an optional Federal charter.
We have also highlighted the problems associated with
extra-territorial application of State laws. While the NAIC and
State regulators should be applauded for seeking greater
uniformity in laws, this has not prevented the States from
pursing varying and sometimes inconsistent regulatory
approaches. One of the best examples is the extra-territorial
application of State laws, meaning that State law not only
applies to insurers domiciled in that State, but to insurers
domiciled in other States.
We have also highlighted mutual recognition as an issue to
be addressed. The United States imposes a highly structured and
conservative level of regulation upon licensed reinsurers.
However, it has long been recognized that the level of
reinsurance regulation varies in countries throughout the
world, and there are several globally recognized methods of
conducting regulation.
The RAA is encouraged by the inclusion in H.R. 3200 of a
system of mutual recognition among the countries which would
allow reinsurers to conduct business in the United States based
upon their home country's jurisdiction, and allow U.S.
reinsurers to do business in foreign countries based upon U.S.
regulatory requirements.
In conclusion, the core characteristics of an appropriate
reinsurance regulatory structure are a single regulator or
regulatory system for reinsurance with national regulatory
oversight, and the power to prevent conflicting or inconsistent
State laws and regulations in an effective and efficient
manner.
A single regulator's authority should provide for
recognition of substantially equivalent regulatory standards
and enforcement in other competent regulatory jurisdictions.
The regulatory structure should support global capital and risk
management, financial transparency so that the cedents can
assess counter-party risk. And regulators should have access to
all necessary financial information.
We have identified in the statement several options that
can be achieved, including the option of a Federal charter for
reinsurers, which is the one that the RAA strongly supports.
Thank you very much, Mr. Chairman, and we welcome this
opportunity to continue to work with the committee.
[The prepared statement of Mr. Nutter can be found on page
139 of the appendix.]
Chairman Kanjorski. Thank you, Mr. Nutter.
Next we have Mr. Scott Gilliam, assistant vice president
and government relations officer of the Cincinnati Insurance
Companies.
Mr. Gilliam.
STATEMENT OF SCOTT GILLIAM, ASSISTANT VICE PRESIDENT AND
GOVERNMENT RELATIONS OFFICER, THE CINCINNATI INSURANCE
COMPANIES
Mr. Gilliam. Thank you, Chairman Kanjorski, Ranking Member
Pryce--a fellow Buckeye, number one right now--and members of
the subcommittee. My name is Scott Gilliam. I am assistant vice
president and government relations officer for the Cincinnati
Insurance Companies.
Our group of companies market property and casualty
insurance and life insurance in 34 States through independent
insurance agencies. Based on 2006 revenues of $4.5 billion, we
are the 23rd largest publicly traded property and casualty
insurer in the United States. I would also note that we are not
a member of a national trade association, so we come here with
an independent voice today.
In presenting our views on insurance regulatory reform this
afternoon, we have three goals: one, identify the problems we
see with the current system of State regulation; two, emphasize
our support for a continued system of State insurance
regulation; and three, suggest that public policymakers and
interested parties may need to take a fresh approach to
insurance regulation reform and consider alternatives to the
current proposals on the table.
We come to this debate on behalf of hundreds of small and
medium-sized insurers like ourselves who collectively insure
millions of individuals and small businesses across this
country. These insurers value their connection to their State
and local governments, a connection which carries over into the
business of insurance, which by its very nature is uniquely
local.
Consider the decision to purchase insurance, which is
rooted in many local risk factors. Consider the types of
occurrences for which individuals and businesses purchase
insurance, all of which are uniquely local in nature. And also
consider the body of State and local laws that apply when
insurable events occur, including State tort law, contract law,
and social policy law.
It is in this context that the States have been established
as the primary regulator of the business of insurance, and it
is for these reasons that the States should remain the primary
regulator of the business of insurance since the activities and
occurrences which necessitate insurance and its regulation are
not uniform from place to place or State to State.
But there is great consensus that several areas of State-
based insurance regulation are in need of reform. The areas
which seem to attract the most complaints, and which are
sometimes problematic for our company as we endeavor to market
property, casualty, and life insurance products in 34 States
include product regulation, rate regulation, producer
licensing, company licensing, and market conduct examinations.
But I cannot offer any horror stories. Rather, the company
line at Cincinnati Insurance seems to be: State regulation of
insurance is sometimes challenging, but we can live with it.
Nor is the current system of State insurance regulation
grinding our operations to a halt.
But that is not to say that State regulation is without
flaws. The Cincinnati Insurance Companies believe the major
problem with the current system of State regulation is the
needlessly repetitive nature of the system. We simply do not
believe that 34 separate jurisdictions need to regulate each
and every aspect of our business.
In many instances, regulation by an insurer's domiciliary
State would be sufficient to protect all persons or entities
with an interest in an insurance transaction or the operation
of an insurance company. Areas of regulation where this might
work, among others, include product regulation, producer
licensing, company licensing, and financial regulation. These
are the areas of regulation which we view as more
organizational in nature, of which there is no need for every
State jurisdiction to demand its own approval.
At the same time, we acknowledge that there are some
aspects of the business of insurance which need to be regulated
in every jurisdiction in which we conduct business. These
include the areas of regulation which are more transitional or
conduct-related, such as consumer protection, fraud, claims
handling, and possibly market conduct.
We hasten to add, however, that an important aspect of
reforming State regulation is to demand more uniformity in the
procedures the several States would employ to regulate in those
areas of regulation, which would remain subject to multi-State
regulation. And of course, the devil is identifying which
aspects of the business of insurance demand multi-State
jurisdiction and which would be more appropriate for exclusive
regulation by a domiciliary State.
But the idea here has quite a simple premise, one that is
analogous to the full faith and credit of a State-issued
driver's license. I am licensed to drive by the State of Ohio,
but I can drive in any State with that license. But when I
leave Ohio and drive to Wilkes-Barre, I am subject to the
public safety laws of the Commonwealth of Pennsylvania.
Let's apply this analogy to insurance regulation. Why not
let my company's licensure by the State of Ohio serve as a
national license to conduct business of insurance in every
State, while keeping my company subject to the insurance
consumer protection laws in Pennsylvania and every other State.
We therefore suggest that consideration be given to a
modernized State system of insurance regulation that would
reserve certain areas of insurance regulation to a single State
regulator, most likely the insurer's domiciliary State, to the
exclusion of all other States, but allow all States to regulate
in those areas not reserved to a single State regulator.
We realize there may be unintended consequences of an
approach like this, and this may not be the right solution to
what currently ails State regulation. But we feel that it is
this type of outside-the-box thinking that needs to be explored
before we give up on State regulation in favor of anything
Federal.
Let me close by suggesting that H.R. 1065, legislation
passed unanimously by the House in June and pending in the
Senate, might serve as a template for how a single State/
multi-State system of State regulation might be achieved. We
believe that the approach embodied in H.R. 1065, targeted
Federal legislation identifying specific areas of insurance
regulation reserved to the regulator of an insurer's
domiciliary State, is worth consideration as a means to
implement the single State/multi-State proposal we have
described this afternoon.
That concludes my testimony. I would be happy to answer any
questions.
[The prepared statement of Mr. Gilliam can be found on page
67 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Gilliam.
And last, we will hear from Mr. Felton, president of the
Tennessee Brokerage Agency, testifying on behalf of the
National Association of Independent Life Brokerage Agencies.
Mr. Felton.
STATEMENT OF JOHN W. FELTON, PRESIDENT, TENNESSEE BROKERAGE
AGENCY, TESTIFYING ON BEHALF OF THE NATIONAL ASSOCIATION OF
INDEPENDENT LIFE BROKERAGE AGENCIES
Mr. Felton. Mr. Chairman and members of the subcommittee,
my name is John Felton. I would like to thank you for having me
here this afternoon. I am the current chairman of the National
Association of Independent Life Brokerage Agencies, or NAILBA.
I am also the president of Tennessee Brokerage Agency in
Knoxville, Tennessee.
I am appearing today on behalf of NAILBA, the principal
trade association representing wholesale life brokerage. NAILBA
is a nonprofit trade association with over 350 members in the
United States. We represent 100,000 producers, who deliver over
$1 billion of life premium a year.
A normal NAILBA member agency may employ anywhere from 10
to 30 employees, and operate in an average of 31 States. We are
small businesses, but we represent the fastest growing
distribution of life insurance. Currently, we produce over 60
percent of the life insurance written in the United States
today, and it is projected by the year 2020, we will be writing
over 80 percent.
I appreciate the opportunity to appear before you to
discuss the critical need to streamline and modernize the
insurance regulatory system in the United States. Despite the
best efforts of the National Association of Insurance
Commissioners via the Interstate Compact, the current State-
based system does not enable insurance carriers and agents to
provide new competitive products to consumers throughout the
United States in a timely fashion.
Additionally, the current system lacks uniform and equal
opportunities to every citizen in the United States to access
similar products and protections. For wholesalers that are
licensed in multiple States, the inefficiencies and
inconsistencies within the State system are costly and
potentially harmful to consumers.
I would like to take you inside a typical NAILBA agency so
that you have a greater understanding of why Federal regulation
of insurance would greatly increase insurance distribution
productivity, increase sales, increase consumer satisfaction,
lower consumer and broker confusion, and lower the potential
for errors of omission and other litigation.
All NAILBA member agencies have contracts on an average of
15 to 20 different life insurance carriers. The NAILBA agency
is a wholesaler whose customers are insurance brokers and
agents. These clients in turn market insurance products to the
insurance-buying public.
The insurance carrier will outsource sales, marketing,
agent training, and some underwriting functions to NAILBA
member agencies. By eliminating these functions, it allows a
life insurance company to focus on product manufacturing and
applying the savings to more competitive and consumer-friendly
products.
The insurance agent or broker is served by accessing
product from the NAILBA member agency because the agency is
independent and able to provide unbiased advice to help the
broker select the best company and product to meet the needs of
customers. The consumer is served by a distribution system that
creates a demand for competitive products and increased
efficiency these products deliver.
All NAILBA member agencies have a substantial customer base
of insurance brokers. They may be located in a different State,
or may solicit insurance in multiple States. On average, NAILBA
member agencies are licensed in 31 States and spend nearly
$12,600 per year just to update the proper State regulatory
forms.
The multi-State nature of a NAILBA agency forces us to be
keenly aware of the pitfalls of the current system. In my
written testimony, I provided detailed examples of the maze
that is the current State-based system.
In closing, NAILBA believes an optional Federal charter
approach would provide consumers with increased access to
competitive and market-reflected products more quickly. The
reduction of costs associated with working with 1 regulator,
not 50, would be reflected in the pricing of products. This
would have the effect of reducing costs to the consumer and
providing consistent agency licensing standards and continuing
education requirements.
Centralized control of agent status through a national
database would provide consumers with a higher level of
confidence in those who represent the insurance industry.
NAILBA certainly believes that OFC is an idea whose time has
come. Thank you.
[The prepared statement of Mr. Felton can be found on page
60 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Felton.
I thank the entire panel for your testimony. It has
certainly been interesting, and quite conflicting in its basic
positions.
I guess I would start off with one question, Mr. Eiland,
just a practical question. What kind of complaints do you get
as a State legislator from your constituents in Texas about
insurance? And if you could tell me, what do you do about them?
Mr. Eiland. Yes. The first one a lot of times is about
health insurance, and most of the time we have to tell them, we
can't help you because ERISA preempts it, or something like
that.
The second one is usually about companies pulling out of
areas, companies not wanting to write products, homeowners, in
certain areas. You know, most of the big--Allstate, State Farm,
and Farmers, most of them over this last summer decided they
weren't going to write within an arbitrary--a mile or a half-
mile within a major body of water.
So you have people who say, look, I have been an Allstate
customer for 30 years, I have never had a claim, and now they
are dropping my homeowners insurance. And we say, well, you
know, we can't really do anything at that. So there are those
complaints.
Then there are complaints about pricing, that they are
getting less and less coverage for more and more premium. And
that is a big concern.
Chairman Kanjorski. Well, does the regulator--do you refer
that then to the Texas commissioner of insurance?
Mr. Eiland. Yes.
Chairman Kanjorski. And do they follow up and do they
regulate on those issues?
Mr. Eiland. Yes, they do. The problem is, one of the things
that we have been talking about that we have been doing is
getting away from such heavy regulation on rates and forms. So
we give the insurance companies the ability to change their
coverage and price whatever they want to as long as it is not
excessive in the regulator's eyes.
So even though it goes up--but that is not what the
consumer sees. The consumer sees: I have the same house; I have
the same company; I have no claims; and they want to raise up
my prices by 20 percent. And there has been no storm. So what
is the deal?
Then we find out--several of the companies come in and they
blame it on reinsurance. But it is their own reinsurance. They
have a reinsurance subsidiary which they purchase their
reinsurance through, or at least part of it. They let the
reinsurer raise those prices because we don't have anything to
do with their rates. And then that raises the rates for the
policyholder. And we can only look at the end product, the end
price, to see if it is excessive and unreasonable.
And then we have to--the way our system in Texas, which we
reformed about 6 years ago, the commissioner for one company
recently denied a rate and said, that is excessive. They went
ahead and they are allowed to charge it, and now the
commissioner has to beat them in court to prove that it is
excessive.
And so when you hear all these people talking about how
they want regulatory reform, I do believe I agree with Mr.
Hunter on this. Consumers don't want less regulation. I mean,
they want good quality regulation and to be able to do
something about it. That is what we hear about the most.
Chairman Kanjorski. Speaking of Mr. Hunter, you do not have
a lot of good stuff to say about the insurance industry, Mr.
Hunter.
Mr. Hunter. Oh, there is a lot of good I would say if you
wanted me to list some of the good things. You said, what were
the problems? It is good that they are making money. I mean, I
am not for them going broke or anything. I just think they are
making too much.
But there are a lot of good things about the insurance
industry. It makes a lot of jobs in the Nation. It makes things
happen. When it is working smoothly, it is great. But when it
isn't, then there needs to be intervention.
Chairman Kanjorski. Do you think it is not working smoothly
because of avarice, or a thoughtful intent to deny paying
customers, or attempting to target and only make special monies
in special areas?
Mr. Hunter. I think it is--
Chairman Kanjorski. From the areas that Mr. Eiland is
talking about?
Mr. Hunter. I think it is a fundamental change in corporate
culture over decades, to the point now where, for example,
McKinsey could come in to Allstate and say, we want to turn
your claims operation into a profit center, and here is how you
can basically cheat your customers. And Allstate didn't kick
them out.
When I was a young man in the insurance industry, I think
we would have called the cops if somebody came in and made such
a proposal, and now probably 17 of the top 20 insurers are
using that methodology.
Chairman Kanjorski. Mr. Gilliam, do you agree with Mr.
Hunter that the standards for the insurance industry have
materially changed as a result of culture? Or do you think it
is getting better?
Mr. Gilliam. I am not quite sure how to answer that because
Mr. Hunter and I don't agree on very many things.
Mr. Hunter. I didn't think you would.
Mr. Gilliam. But, you know, we are a major regional
insurer. We have over 4,000 employees. We sell insurance in 34
States. And we think that the current system of regulation
strikes a nice balance between allowing a competitive market,
letting us get our products to market, and also fair consumer
regulation.
I would hold the Ohio Department of Insurance out as
probably one of the best examples in the country of a striking
a fair balance between the consumer and the company and--
Chairman Kanjorski. But you do business in 34 States. How
about some of the other States, for instance, the coastal
States, Texas, Louisiana, Alabama, and Florida?
Mr. Gilliam. Do I have to respond about Florida?
Chairman Kanjorski. We would sure like to know. We hear a
lot about Florida these days.
Mr. Gilliam. Well, you know, the areas where the risks are
the greatest produce the greatest challenges for the industry.
And it is tough. It is tough in the Gulf States where
hurricanes arrive all the time. And this is an issue that I
have been on my soapbox for 11 years in Congress, and we still
believe that if you peeled back the clock 20 years and allowed
risk-based rates, we wouldn't be in the problems we are in the
Gulf States. There has been political suppression of rates for
dozens of years, and we are paying the price today.
Chairman Kanjorski. Well, wouldn't that economically
discriminate against a lot of us who would like to have nice
sunshine and oranges, but we just couldn't afford to live
there?
Mr. Gilliam. If you want the sunshine and oranges, you have
to pay for it. If you want to live in Iowa, it is a different
set of circumstances. But those who choose to live in the risk-
prone areas--
Chairman Kanjorski. So California is going to belong to the
millionaires. Is that acceptable? I don't know.
Mr. Gilliam. Well, you know, there is another dynamic to
this that is just starting to make itself known, and that is
you can't put the cost of insurance on the backs of insurers,
to some extent. There are some people who, no matter what the
circumstances, low and moderate income, they can't afford a
risk-based rate.
An interesting study was released in the last several weeks
by the RAA, and I believe the AIA, talking about the social
side of the problem with catastrophe insurance. For those who
can't afford it, there are thoughts of using some Federal ideas
like home heating oil subsidies and telecommunications because
there is a certain segment of the population who just can't
afford a risk-based rate. That is a social, societal problem.
Chairman Kanjorski. The formula to provide subsidies to a
certain percentage of the income.
Mr. Gilliam. Yes. I read the study rather quickly but that
is, I think, the general idea they are throwing out there, a
new idea for consideration.
Chairman Kanjorski. But some of my friends--and I am not
indicating they are on the right--they may call that a bit of
socialism.
Mr. Gilliam. Well, I am probably as conservative as it
gets, and I don't want to have the Federal Government do
anything. Don't quote me on that.
Chairman Kanjorski. Don't worry. We don't do very much.
Mr. Gilliam. There is a social aspect of this whole problem
with catastrophe insurance. And I think that until we address
it, it is the big elephant sitting over in the corner.
Mr. Nutter. Mr. Kanjorski, can I address this comment about
the socialization issue?
Chairman Kanjorski. Yes, very quickly, because I am robbing
my colleagues of their time.
Mr. Nutter. We published a study with the American
Insurance Association, co-authored by Bob Litan of the
Brookings Institution, largely focused on fixed and low-income
people, and recognizing that many of those people do live in
catastrophe-prone areas. Because of their resource limitations,
perhaps there ought to be some kind of State or Federal program
that really does provide vouchers or something very targeted to
help those people. That was the nature of the study.
Chairman Kanjorski. Very good. Can we get a copy of that?
And Mr. Gilliam, if you could give us a reference on the study
that you recently went through, that would be helpful.
Mr. Gilliam. Sure.
Chairman Kanjorski. Thank you very much.
Ms. Pryce?
Ms. Pryce. Thank you very much, Mr. Chairman.
Mr. Eiland, I was wondering, as you were talking with the
chairman about companies pulling out, do you have an opinion
whether optional Federal chartering would assist in that in our
country?
Mr. Eiland. It would have nothing to do with it.
Ms. Pryce. Nothing to do with it?
Mr. Eiland. No. One of the dichotomies that we have to
recognize in insurance is most corporations, especially
shareholder-held corporations, have a duty to try to maximize
profit. An insurance company theoretically is supposed to
accept risk and spread the risk.
And the way that you maximize profits, one of the things
that was alluded to in other testimony, is not accept the risk,
they avoid the risk. That is one thing I disagree with Mr.
Iuppa on, is that he mentioned that they want--with this
optional Federal charter, they could spread the risk across
State lines, etc.
Hogwash. They want a rate down to zip code level. That is
why we have credit scoring, not so they can figure out if they
want to transfer risk from Texas to Maine, but so that they can
avoid risk as much as possible within zip codes inside Texas
or--
Ms. Pryce. Does anybody on the panel disagree with that,
that Federal chartering wouldn't make any difference, that
there would still be massive pullouts in high-risk areas?
Mr. Hunter. Not with the drafts I have seen because they
would have no authority to tell the insurance companies, you
need to write everywhere as part of the deal here. If it had
that authority, it could.
Ms. Pryce. Mr. Iuppa?
Mr. Iuppa. Yes, if I may. I mean, one of the things to keep
in mind is the ability to attract new business into the
country, quite frankly. Yes, we have thousands of insurance
companies doing business here. But the reality is, with the
existing system, it is difficult to--there is a barrier in the
sense of coming into the United States because you have to be
licensed State by State by State. So there is that factor
there.
And I think, too, with regard to specifically whether or
not an OFC in and of itself would help in that regard, I think
the answer is yes, that it would help to attract additional
capital into the marketplace, as opposed to other jurisdictions
around the world.
Ms. Pryce. Okay. Let me--somebody else on that? Yes?
Mr. Nutter. Ms. Pryce, the only thing I would add to that
is consistent with Mr. Iuppa's point, a streamlining of the
regulatory process by which companies come into the U.S. market
to be licensed or do business in the U.S. market, even if they
choose not to be licensed, would probably facilitate capital
formation that would serve the risk in the U.S. market.
That would certainly have a valuable effect going down the
line to insurance companies, and presumably then to consumers.
Ms. Pryce. Mr. Felton?
Mr. Felton. Yes. This is--you know, a lot of this is
talking about the property and casualty insurance. But the life
insurance, the way it is priced, it is priced off mortality of
all 50 States. So the OFC obviously would not affect the life
insurance on this end because it is all priced based on the
full mortality.
Ms. Pryce. Well, I think we were talking about property and
casualty.
Mr. Felton. Right. Right.
Ms. Pryce. But let me get to that then and maybe address my
next question to my fellow Buckeye. Mr. Gilliam, one of the
major arguments that you use, and many others, is that the
insurance marketplace isn't uniform from place to place or
State to State, that there are different geographical and
weather influences, floods and tornadoes, whatever. And State
commissioners are better suited to understand the differences
in these markets.
Do you think that level of uniqueness translates to all
insurance products? I guess that bespeaks the testimony Mr.
Felton just attempted to give. Are products that cover
someone's home and their automobile really that different from
one State to the next? And then, Mr. Felton, I will let you
continue with your answer about life insurance.
Mr. Gilliam. I would answer that the products--I
acknowledge the argument of the life industry that their
products are more uniform from State to State, and maybe lend
themselves more to a national or Federal regulator.
Let's take auto insurance, for example. State tort law is
what governs auto insurance because you really don't need your
auto insurance unless you have a claim, and you don't have a
claim unless you have been in an auto accident. There are
uniquenesses in every State on automobile laws.
Sure, in general they are the same, just like the speed
limits are generally the same. But when you are talking about
how do you resolve a claim in Pennsylvania versus New Jersey
versus California, there are tremendous uniquenesses that need
to be taken into account.
And maybe an analogy is, I hear over and over, insurance is
like banking, so why not the optional Federal charter? Well, a
key distinguishing factor is this claims process. You don't
have to go through a claims process to withdraw money from an
ATM. But if you have an auto accident, you can't get your claim
resolved by going to an ATM. You have to talk to a claims
adjuster, who has to look at the laws of that State. There are
just so many things that distinguish especially property/
casualty.
Ms. Pryce. Well, thank you. And Mr. Felton, very briefly,
do you want to continue making your point on life insurance?
Mr. Felton. Yes. The point was that the way the life
insurance companies in the United States price their products,
it is priced off the mortality of the total population.
However, people in certain States--I will give you an example.
In Tennessee, we can buy a guaranteed issue life insurance
product. If we can't get anything else, we can buy that product
in the State of Tennessee.
If we lived in North Carolina, we could not buy that
product because it is not approved in North Carolina. That is
where some of the shortcomings of the NAIC--I think they are
doing a great job with the compact. But unfortunately, it is
not doing enough.
Ms. Pryce. Thank you. Thank you, Mr. Chairman.
Chairman Kanjorski. Mr. Scott?
Mr. Scott. Thank you, Mr. Chairman.
Let me ask you, if each of you would care to comment very
briefly on this issue of some disparity between the competing
products, similar products, between banks and life insurers.
For example, competing with similar bank products, life
insurers have claimed to us that they are at a disadvantage
with their retirement and asset accumulation products.
It is true that banks can introduce new products in a
relatively short period of time, say, a couple of weeks,
whereas the insurers can sometimes take up to 2 years to obtain
all of the necessary approvals for similar products. And that
is a true fact.
What are your thoughts on this and your opinions on ways
that we can improve on this disparity to try to bring some
equalization here and some relief, again making progress on
this in a fair and competitive way without a complete overhaul?
Mr. Felton. I will be glad to take a shot at it. A lot of
the products--I assume the products you are talking about with
banks, you are talking about CDs and IRAs and money market
ACSC's?
Mr. Scott. Yes. Retirement asset accumulation.
Mr. Felton. Because banks do sell a lot of life insurance
these days. And they are selling products that any agent in the
United States can sell as well.
Now, when it comes to CDs, they are able to bring that to
market quicker because they are determining those rates
themselves. If a life insurance company were to try to bring an
annuity product out that would compete with this CD or money
market or whatever it was, it would be a long process to get it
approved in all 50 States, if you could even do that. Right now
it may be approved in one State and not approved in the other.
So there is a little bit of disparity there. And as far as
competitiveness, they are to give products--or put products on
the market that the life insurers can't compete with in a
timely manner. Is that kind of--
Mr. Scott. Yes. Is there anything we can do about that
disparity?
Mr. Felton. Well, it would be nice if we had a little more
speed to market with the products for the life insurance
carriers, and that is kind of what we are pushing for on the
life side. We need to be able to bring a product out, and
rather than just have it approved in 32 States, have it
approved in all 50 States so we can take it to the consumers
and they can take advantage of the better pricing.
Mr. Gilliam. Could I jump in there?
Mr. Scott. Yes, sir.
Mr. Gilliam. One of the things I spoke of is this problem
of 34 jurisdictions demanding approval of the same thing. Now,
there might be, you know, quite a bit of debate on this, and it
might strike fear in the hearts of State insurance
commissioners everywhere.
But I think what needs to be looked at is why couldn't that
product be approved in that insurer's home State and be allowed
to be used nationwide the next day? I think that is what we
really have to look at here. That is the whole linchpin of this
debate. It is about getting your product to market.
We wouldn't be here today if there were delays in getting
products to market. That is what is driving this entire debate.
And until we really get our arms around that, we are going to
be foundering.
Mr. Scott. Do we have any way of--and I will get to you in
a minute--but do we have any way of measuring the impact of
loss to the insurers by not having this disparity addressed?
[No response]
Mr. Gilliam. Sounds like we don't.
Mr. Scott. Would you say it is a significant loss? Is it a
big enough issue for us to wade in on, or is it something that
we just let the market take care of itself, do nothing about?
Mr. Felton. I would venture to say it is a growing loss. As
the banks become more--invest in the selling of financial
products, I think it grows every year. But what that number
is--
Mr. Scott. All right. We have no quantity?
Mr. Felton. Not to my knowledge. There might be. I don't
know it.
Mr. Scott. Yes, sir?
Mr. Eiland. I think one of the things--the question is what
can you all do. One of the things that I think members of this
committee and the subcommittee and the full committee can do is
for those 20-odd States that have not joined the compact, you
can go back to those States and, number one, ask why that
legislature has not joined the compact by passing the bill and/
or the commissioner and/or the governor and encourage them to
do so because then you could accomplish a filing at one single
point for life insurance, annuities, long-term care, and
disability insurance in all 50 States instead of just the 30-
some-odd that you can get done now, once that gets fully
implemented and operational.
Mr. Hunter. I agree with that, that the charter--the NAIC
is recognizing the difference between life and property/
casualty with its compact. And I think that is the short-term
solution to the life insurance kind of thing. Certainly it is
not the State of domicile.
I was a Texas insurance commissioner and I couldn't get a
certain State to take an insurance company down that was
clearly broke because the ex-governor served on the board of
directors and they were afraid. So I had to go into their State
courts and take down the company.
So I think the State of domicile has some political
pressure problems. But the NAIC charter with a multi-State--if
the States would give their good actuaries and good reviewers
of policies to that charter, it can actually quickly do a good
review that would even satisfy consumers.
Mr. Scott. Yes, sir?
Mr. Iuppa. Just a quick point on the quantification. I
think you phrased the question in terms of cost to the
insurers. I think we are losing focus here. It is a loss to
consumers, not the insurers. I mean, they are losing
opportunity cost because products can't get into the
marketplace.
Mr. Scott. Okay. Fine.
Chairman Kanjorski. Thank you very much, Mr. Scott.
Mr. Royce?
Mr. Royce. Thank you very much, Mr. Chairman.
I wanted to go to Mr. Iuppa. Mr. Iuppa, you were a former
president of the National Association of Insurance
Commissioners. And I was going to ask you, do you believe it is
necessary that all lines of insurance, including life
insurance, property/casualty, commercial, personal lines,
should they all be included in an optional Federal charter?
Should Congress go down that path? Should we attempt to create
one national market for insurance in that way?
Mr. Iuppa. Yes. The short answer is yes. I think the
important thing to keep in mind, what we are talking about
under the bill that you and Representative Bean have proposed,
is an optional Federal charter. I think that all the companies
who do business in the United States, regardless of line, ought
to have the opportunity to make that decision, to make that
choice. So the short answer is yes.
Mr. Royce. We face a $24 billion deficit in insurance
services nationwide. We hear that a lot of it has to do with
the Balkanization of the market here. We know that in Europe,
they now have a market. On the other hand, we look at banks and
other financial services. There they have a $28 billion surplus
in terms of our trade overseas.
Do you think that this has an impact, this nature of the
market here in the United States today under this structure?
Mr. Iuppa. Yes. I think it does. I think the thing to keep
in mind is that the United States probably represents the
largest market, certainly, in the world with regard to insured
purchases, whether you are talking about property, life, all
kinds.
Again, the inability to come in through a single point is a
deterrent with regard to capital moving into this country to
create new insurance companies, whether it is at the
reinsurance level, whether it is at the primary carrier.
So I think there is clearly a barrier there, and I can say
with certainty that in my dealings with even my former
colleagues at the E.U., that that was probably one of the most
significant complaints that they would raise, both from the
industry side as well as the regulatory side.
Mr. Royce. Who from the United States currently represents
the collective interests of the sector of insurance at
international conferences, at meetings, at summits, when
regulatory matters are discussed, when it comes to economic
advocacy purposes, when it comes to trying to get into markets
where we are locked out?
Mr. Iuppa. Well, I think it is a multi-faceted approach.
And, I mean, the fact that you don't have a Federal regulator
for, for instance, USTR to go to directly or Commerce directly
to go to--they do go to the States and the NAIC, who represent
the regulatory community.
Mr. Royce. And apparently that hasn't been very effective.
I wanted to go to Mr. Felton with a question because he is
a representative of one of several agent groups--we have agents
for change--that came out in support of the concept of an
optional Federal charter as well.
Now, for the NAILBA, you say the average member does
business in a number of States, probably 31 States, on average.
You said in your testimony, if I got this right, that it costs
each of them about $12,000 to keep up with the separate States
in terms of the redundancy, the bureaucracy.
I think one of the business schools did a study and said
these costs for the consumers translate to $5.7 billion, if you
believe that when you have competition and so forth, that
consumers ultimately pay a price for the regulatory burden
imposed and the costs imposed.
I was going to ask you, how could an optional Federal
charter approach benefit agents, but also benefit producers and
consumers in your mind. And maybe you could provide a specific
example where consumers are adversely impacted by the current
system.
Mr. Felton. Sure. The way it works now is--and the numbers
we gave you were averages. I personally am licensed in 49
States, so I have a person on my staff who is in charge of
keeping up my license in each one of these States. There is a
fee for each State, and those fees are not the same. Some
States are much more expensive than others.
If I do that, an agent has--if he is going to sell in a
different State, he has to have a license in that State as
well. So he has to fill out the paperwork and pay the fees. It
goes all the way up to the insurance companies. If they are
going to sell in a State, they have to pay the licenses in each
State they are in.
Those are costs that the insurance company pays. That will
come out in the pricing because whatever it costs them to
produce a product, and life insurance is a product, it is going
to be borne by the consumer because they are going to have to
pay a price and the insurance company is going to price that
product to where they can make money on it.
So it kind of runs downhill. If they are paying more to be
in all 50 States than they would to have one national license,
that cost will be borne by the consumers. And if nothing else,
in money and man-hours, it is a real hassle.
Mr. Royce. Thank you, Mr. Felton. Thank you, Mr. Chairman.
Chairman Kanjorski. Ms. Bean?
Ms. Bean. Thank you, Mr. Chairman.
I also have a question for Mr. Iuppa. There is ample
evidence to suggest that States that have imposed price
controls in the interest of consumers have often gotten results
that don't benefit those consumers, and that in other States,
like mine in Illinois, or States like New Jersey who have had a
market-based approach, there have been benefits in terms of
price and product options to consumers.
Do you have any examples of either the positive or the
negative effects based on a regulated or deregulated
environment?
Mr. Iuppa. Yes. And for that, to respond to that, I will go
back to my tenure as a superintendent in Maine.
The health insurance market in Maine, like most States, is
divided into three markets, the individual, the small group,
and the large group. And in the State of Maine, the most
heavily regulated is the individual market, then followed by
the small group, and then the large group, which is basically
experience rated.
But what has effectively happened in the Maine marketplace
is that the market in the most turmoil is the individual
market. The effect of the oversight that has been put in place
there has effectively killed the market. There are maybe four
carriers left who will write business in Maine when it comes to
health insurance.
So I think that is an example of where good balance and
equilibrium hasn't necessarily worked well.
Ms. Bean. Do you have any converse, the other side, by
chance?
Mr. Iuppa. Well, certainly Illinois is an area that, with
its market-based approach, has been rather positive. Certainly,
again drawing on my experience previously, looking at things
like auto insurance rates, Illinois was always favorable
compared to some of the other States.
I do know in New Jersey, where they effectively had no
market for auto insurance just a few short years ago, with the
changes they have made there companies have now come back into
the market. So I think there are some positive examples, too.
Ms. Bean. Some more consumer options. Thank you. I have a
little more time. so I would like to ask you one other
question, based on your experience as a regulator. Most of us
on this committee would agree that it would be a desirable
objective to increase capital flows into the United States and
minimize capital from flowing offshore, particularly if it is
in reaction to a regulatory environment.
Do you have any comments on the impact our current
regulatory system has towards that objective?
Mr. Iuppa. Sure. The first thing I want to do is point out
that with regard to capital inflows, that Zurich started
capital inflows into the United States back in 1912. We were
the first foreign insurance company to become active here in
this market.
But I think that again, we have to look at this in the
context of that this is very much a global marketplace that we
are operating in now. Yes, risks can be local. But for a
carrier like Zurich, where we do business in 170 different
countries, we have the ability to spread that risk around.
And capital is the essence of an insurance company's
ability to write business. Absent capital coming in, creating
the surplus within the companies to write business, it is just
not going to happen.
We certainly saw--after September 11th is a good example.
There was a tremendous amount of capital that actually came
into the insurance marketplace, something like $18 or $20
billion. Most of that went to companies being formed in
Bermuda.
And the primary reason that I was hearing at the time, and
being told when I was asking about it, was because we just do
not want to have to put up with the hassle of becoming licensed
in all the States. It is too time-consuming. It can take us a
year or 2 years to get through the entire process. Whereas
other jurisdictions, they were able to bring that capital in
and they were able to form the companies, and they have been
underwriting risk here in the United States ever since.
Ms. Bean. Thank you, and I yield back.
Chairman Kanjorski. The gentleman from Kentucky, Mr. Davis.
Mr. Davis of Kentucky. Thank you, Chairman Kanjorski. I
apologize to the witnesses for missing some of the earlier
testimony. I was finishing some meetings back at the office.
But this is the second hearing that we have had on
insurance regulatory reform in Congress. It is evident from the
panel today that there is, to put it mildly, a diversity of
opinion on how we need to tackle this. I don't see why we can't
move forward in absence of agreement with perhaps a focused,
targeted modernization, with measures that are going to
directly benefit consumers.
My question at this point in the committee's discussion of
the issue is for any of the witnesses who support a Federal
regulator. And I would like to frame it like this: Have you
fundamentally decided your organization can't work with those
in the industry who oppose a Federal regulator as a means to
find common ground or to build consensus on key parts of the
overall debate of regulatory modernization?
Mr. Felton. I think on behalf of NAILBA, we are willing to
work with anyone that is going to improve the life insurance
arena for the consumer. That is--you know, we are willing to
move it forward. We want to be able to speed the product,
improve the way we license our agencies, and just make it
easier to do business. So that is kind of where we stand.
Mr. Davis of Kentucky. Anybody else? Mr. Nutter?
Mr. Nutter. If I might comment. I represent the reinsurance
market. It is probably the one area where there is increasing
support around the idea of streamlining the current system.
Even the NAIC has a proposal before it that would facilitate a
single State as a port of entry for reinsurers being licensed
in the United States, and a system of mutual recognition for
reinsurers doing business from outside the United States into
the United States.
So even the State regulators recognize that the global
nature of the reinsurance market lends itself most readily to a
single regulator, national or Federal.
Mr. Davis of Kentucky. Anybody else?
Mr. Iuppa. Yes. You know, like the prior two speakers, I
mean, we are certainly interested in moving the agenda of an
OFC forward. And I think--again I go back to a comment I think
I may have made while you were not with us, Representative.
But it is an optional, what we are talking about. We are
not talking about scrapping the State system. We are not
talking about making an either/or in terms of the proposal that
is out there at this point.
So I think that at the end of the day there are certain
things, certain structures that come into play depending on a
company's business model. For a company that does business in
only one or two States, they may not be interested at all in an
optional Federal charter, whereas a company that I work for,
that does business in 170 different countries, all the States
and territories, there is a much greater likelihood that we
would be interested in that and are interested in that.
And one of the driving factors is that many of our
customers do business on a national and international basis. We
are basically a commercial writer, so we have a different
clientele, if you will, within the company.
So there are different needs, I think, that are out there.
And I think what we are all looking for is to try and strike
the right balance and have good legislation come forward.
Mr. Davis of Kentucky. Go ahead.
Mr. Hunter. In support--I am representing consumers, mostly
individual type consumers. And I believe, and you weren't here,
we are agnostic about whether it is federally or State-based.
If it is excellent, we will be for it, whatever is the best. So
if we had a very strong Federal system, we could be for that.
We don't like optional. We don't like choice going back and
forth for the insurers. We think that sets up a regulatory
arbitrage.
Mr. Gilliam. A brief comment on that? Even though I am not
a supporter of the OFC, the point I want to make bears on this
tremendously. Here is our biggest concern: The word
``optional'' is a red herring because if Congress decides to go
with an optional Federal charter and they close the books on
insurance regulation, you are done. You are not going to do
anything to try and help reform the State system.
Then we are going to have two unlevel systems. And those
who use the simple Federal system are going to have a
tremendous competitive advantage over the rest of us who still
have the State system that, while good in its basis, needs
modernization.
Mr. Davis of Kentucky. Yes. I would suggest just one thing.
In retrospect and perspectives, I have never seen anything the
Federal Government has done that seemed helpful other than--
taking the analogy, it is like swallowing a polar bear trap. It
may seem good going down, but when it springs on you, you
suddenly find out it is holding onto you from the inside.
And I suppose the question having come out of a
professional background dealing with systems integration, you
know, in the high tech world, much of the problem--the
legislative challenges that we face, depending on how it is
done, could create a vast market advantage for one side or the
other, depending on how you do this.
But when I get below the symptom level and I begin looking
at root causes, the root causes are very common. There is a
lack of information standardization, lack of best practices
among the States, and from the standpoint of creating common
standards for interchange between the States would seem like a
way to begin this process, to establish this common ground on
what those critical data entry points are before creating a new
Federal bureaucracy that isn't necessarily going to have the
interests of the States in mind. And particularly for the small
insurance brokers and small companies, this could create some
challenge in multi-State.
You know, on the flip side, I understand as a business
owner the challenges of trying to write insurance when you have
to deal with someone licensed in seven different States to try
to get the same health insurance policy done. It is a nightmare
for the insurer, for the person out at the tip of the spear,
but also for the small business owner as well.
And I think having seen this as a consumer and as an
integrator, one of the places to start is with this common
ground rather than create something and then find a way to fit
the States or the Federal Government into it.
And with that, I yield back, Mr. Chairman.
Chairman Kanjorski. The gentleman from Berks County,
Pennsylvania, Mr. Gerlach.
Mr. Gerlach. Thank you, Mr. Chairman. Really following up
on Representative Davis's comment there, and some of your
comments and prior conversations on this whole issue of an
optional Federal charter, I wonder, with the existence of this
compact--and I am not even sure how many States have formally
entered into this compact--I wonder, when you look at the issue
of Federal charter and you look at the benefits that it
proposes, as well as the concern on the other side that you are
creating a new Federal bureaucracy, and what it looks like in
year one may be totally different from what it looks like in
year ten and beyond, has there been an effort within the
industry overall, and perhaps Congress can be part of the
effort, to first see if there can be established a uniform
insurance code that would be accepted by States?
Perhaps, you said, a minimum number of States, that if
accepted then creates a nationwide system where you have
uniform definitions. You have uniform product issues defined.
You have a process for approval that is standard. You have a
standard licensing and review process.
So that on the one hand, you have created that uniformity
that many seek, and on the other hand, you still retain the
ability of States to regulate that uniform code without having
to create a new Federal bureaucracy to do that.
If for some reason a minimum number of States do not adopt
a uniform insurance code by a certain date, then you certainly
have perhaps Congress giving the ability to then move into an
optional Federal charter because you have given the States the
ability to adopt that and they have failed to do so and correct
the problems that you describe.
So is there any thought on taking an interim step before
you move to an optional Federal charter, at least for some
lines of insurance like life or property, where you establish a
model uniform insurance code and then you set the process to
move forward from there, and if 80 percent of the States adopt
it within a certain period of time, all 50 States then must
comply, and if there is not an ability to get 80 percent within
a certain time period, you move to an optional Federal charter
type program.
Any thought given to that, or what is your comment on
something like that?
Mr. Hunter. We have had that. I see Mr. Baker here. He
introduced that, basically, in the SMART Act, which we happened
to oppose and other people supported. So I think we have had
that debate, and it obviously can always be reintroduced. It is
not a new idea.
Mr. Iuppa. I guess, if I can, just a couple quick comments
on that. One is going back to Gramm-Leach-Bliley and the NARAP
proposal or provisions in that law which effectively looked to
put together or require a uniform producer licensing code or
law. And it had to have a certain number of States, 27, I think
it was, or maybe 26, which would trigger it. The reality is,
and I think we would hear from Mr. Felton, that we don't have a
uniform licensing system in the United States even with that
provision in the law.
The other thing I just would mention is that--well, the
other thing to keep in mind is that since--and I had the
opportunity to look back at some of the early minutes of the
NAIC just in the last couple of years. And really, what you
have just articulated is one of the goals of the NAIC.
There is some debate as to which commissioner it was who
actually came forward first, but New York generally gets
credit, to try and bring the commissioners together back in the
1870's and come up with uniform financial reporting in
particular at that point in time, but also more uniformity
amongst the different aspects of the oversight.
I think the reality is what you have is the same kind of--
you know, one of the strengths of our country is the State
system in the sense that we have it as a means of using it for
experimentation. It is one of the strengths that we have, I
think, as a country.
But that also brings into it an awful lot of opportunity
for creating diversity, even when uniformity would be better
off than diversity. And certainly in some areas relative to
insurance regulation, we would be better off with uniformity.
And again, as I mentioned earlier, I think that the optional
Federal charter would provide that for those companies that are
looking for a uniform policy of regulation and supervision. And
then you would also have the ability for companies like Mr.
Gilliam's to be able to continue to be supervised at the State
level.
Mr. Eiland. I think you have the tools out there right now.
What we need to do is make sure they work better. With the
compact in place, up and running at least for 30-some-odd
States, you have the framework to work from there for the most
logical lines.
I don't know if you were here, but my comment earlier was
that until you have a product that is the same price and form
in Dallas, Denver, Des Moines, and Detroit, if it is different
in each of those places, you are going to have a tremendous
problem trying to get uniformity because it is not uniform by
its very nature.
The four products that we have in the interstate compact
commission--life, disability, long-term care, and annuities--it
doesn't matter if you live in Dallas, Denver, or Detroit. And
if you move, it goes with you, and the premium doesn't change.
And so that makes sense. Let's work on that first. We have that
framework.
If there is licensing and producer licensing tweaks and
reform that needs to be done, we have the basis there. We have
done it before on Gramm-Leach-Bliley. If we need to enhance
that, make it better, we can do that, and we can do that on the
State level.
And so those two are there for those products. And those
are the most logical ones at least to start with. If you try to
do a nationwide insurance code, we will all be gone, I think,
by the time that gets done.
Mr. Felton. Yes. I think in my opening comments I stated
that, you know, NAILBA says that the NAIC's compact was a good
idea. At this point, I think, as has been said, we have 30-
some-odd States involved. Unfortunately, there is no
enforcement. If a State chooses not to take part in that
compact, I don't know who--what is the downfall for them? I
don't think there is any.
Mr. Gerlach. Please.
Mr. Gilliam. Be careful what you ask for when you ask for a
Federal insurance code. But I will say that the idea is
somewhat intriguing since it would reserve the ultimate
regulatory authority to the States for this reason. As Mr.
Iuppa said, the reason the NAIC came into existence was to try
to create a set of uniform laws across the States for
insurance.
And those of us who attend the NAIC meetings four times a
year see that with great fanfare they pass a model law, and
then we all start placing bets on how many States will actually
adopt it, and then of those, how many will tweak it their own
little way. So there is no model law. There are model ideas,
but they never turn into model laws. So it is an intriguing
concept.
Mr. Gerlach. Thank you. Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you, Mr. Gerlach.
The gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman.
Mr. Iuppa, I want to review with you and get your opinion
concerning the actions the Congress has taken so far in the
context of our stated regulatory reform goal. And I say this as
a fellow who has spent some time in this effort with Mr. Hunter
and others over decades, it seems.
State catastrophe funds where the State injects itself as a
risk-taker, prices policies below what a normal business
venture would say is the actuarial risk, subsidizing it from
maybe center-of-the-State consumers who are supporting the on-
the-beach consumer with a lower rate. Does that system and any
incentives given to promote a State net cat program diminish
the enthusiasm of a company like yours of attempting to enter
the market?
Mr. Iuppa. Well, I think--I mean, from our perspective, and
I think that history generally will bear this out, that when it
comes to natural catastrophes, that the industry has sufficient
capital. It has sufficient expertise to underwrite those risks
and pay the claims when they do come in. I think history is a
pretty good indicator of that.
I think that there is a danger when the--whether it is the
Federal Government or the State government begins to interject
itself into how the market actually works, that there are going
to be problems.
Mr. Baker. Well, let me move on to another one. We have
considered flood insurance, this Congress, which I would note
for the record, even though I am from Louisiana and we have
significant interest in the matter, that the reason why we had
the wind versus water snafu in the first place is because of
the Federal intervention in the flood market.
If a lender is going to make a loan in a flood-prone area
and there were no flood insurance program, I assure you there
would be a flood insurance market in the private sector that
would price that risk appropriately.
But the remedy that we adopted in this community was not to
reform a program which has an $18 billion debt and an actuarial
inability to pay that debt off, but merely to add the wind
program at an estimated $100 billion a year exposure with no
increase in premiums.
From a market perspective, does that appear to be on a
sound financial basis?
Mr. Iuppa. From a taxpayer perspective, I think the answer
is no.
Mr. Baker. Well, let me move on to terrorism. Maybe we got
it right there. You know, we extended the term. We mandated the
nuclear/biological/chemical/radiological. We included group
life. We lowered the amount the industry has to put into the
game. And we increased the potential liability of the taxpayer
with a perhaps as long as 15-year exposure; it could be a 10-
year.
What does that look like from a market perspective? Are we
on sound actuarial footing there?
Mr. Iuppa. Well, I think that with regard to terrorism,
unlike natural catastrophes, we don't know when the terrorist
attacks are going to occur. We knew the full magnitude--
Mr. Baker. But you are going to have to offer the NBCR.
Mr. Iuppa. Yes. Well--
Mr. Baker. And how are you going to price that, I wonder?
Mr. Iuppa. Well, we can still price it from an actuarial
perspective. We take into account all the various factors that
will go into the products that we put into the marketplace.
Mr. Baker. Yes. But do you have an extensive actuarial
database for terrorism?
Mr. Iuppa. For terrorism, there is no--
Mr. Baker. So it is somewhat of an operational problem?
Mr. Iuppa. Well, it is an assumption of risk.
Mr. Baker. In our pursuit to simplify insurance regulatory
regimes, we have a record already this year which is looking a
little on the thin side, wouldn't you say?
Mr. Hunter. Are you running for the Senate?
Mr. Baker. Don't do that to me.
[Laughter]
Mr. Baker. No. Up until a few minutes ago, my reputation
was in good standing.
No. I merely point out that this is going to--if we are
about reform, we are going to have to get by a lot of the
various stakeholders in the marketplace who have various
reasons for the current regulatory regime. And we also have to
recognize the consequence of untenable losses in this industry,
which, by the way, has the lowest rate of return on equity of
any sector in the financial marketplace, contrary to many
people's thoughts.
People are going to withhold their investment and go
elsewhere--London, Dubai, Hong Kong, who knows. I think the
facts demonstrate that there is already a flight of capital
from this country. And the principal reason why this industry
will suffer more than any other is this ham-handed kind of
regulatory approach, as opposed to--and I know there are
differences of opinion on this matter--allowing markets to
function and people to price risk based on their actuarial view
of that property in the near term for which the policy contract
is obligated.
And all of the governmental intervention to the contrary
has not served people well. It has only ensured that private
risk-takers are less likely to go into those markets, and
therefore less competition, therefore higher prices--unless, of
course, the State is arbitrarily subsidizing the rates, further
complicating the matter.
And I know it wasn't a question, but I felt like I needed
to get that off my chest. Thank you.
Chairman Kanjorski. Thank you.
Mr. Gilliam. Could I jump in there? Could I go back to
point one, State cat funds? I couldn't let that one go.
As a company who is looking at entering a new market or
staying in an existing market, the presence of a State cat fund
is an economic red flag to us because our belief is that if
risk-based rates were followed, you would never need a State
cat fund.
So to us, it is always, look carefully before you enter a
market like that because it suggests market dislocation,
disruption, and not letting the economic forces of the business
of insurance operate the way they were intended to.
Chairman Kanjorski. Thank you, Mr. Baker. Do you think we
are any further along this year than we were 5 years ago?
Mr. Baker. Well, the only thing I can tell you, Mr.
Chairman, is I know what won't work, if that helps you.
[Laughter]
Chairman Kanjorski. In some of the comments from the panel,
you talked about the relative dysfunction of the existing State
system. I think it may have been you, Mr. Gilliam, who talked
about that. Do you consider the State system, as it presently
exists, to be dysfunctional?
Mr. Gilliam. It is functioning. It needs some help. And I
will go back to this idea, and I think this is what is driving
the optional Federal charter proponents, is that they have to
wait 2 years to get their product improved. If a home State
could approve the product and the next day it is open for
business nationwide, kind of like the driver's license, I think
that there would be a tremendous meeting on common ground.
Now, when that idea is out there, people will say, that is
very dangerous because then you are going to have people going
to the State where they think they have the worst regulation,
the easiest regulation, they can slip by. So that is the other
side of the coin.
But I think until--you know, we hear about this
globalization. But let's talk about globally within the United
States. There is no reason why, if we didn't put our heads
together, why can't you have a product approved in your home
State and use it immediately, as opposed to waiting 2 years for
34 States to follow suit?
I think that is the linchpin of this entire debate, in many
areas of regulation.
Chairman Kanjorski. Well, I am not an expert in insurance.
But I am impressed with the fact there are what, 20 States that
don't belong to the compact and have no intent. And they are
usually the large States--California and Texas, I believe.
Mr. Eiland. We are in.
Chairman Kanjorski. You are in now?
Mr. Eiland. We are in. We were one of the first. We were
the first big State to be in.
Chairman Kanjorski. Very good. Is New York in?
Mr. Eiland. Not yet. But just on that issue, as you well
know, being a legislator, oftentimes when a new idea comes
along, you want to take a look at it. And it doesn't always
make it through the full session the first time. And so that is
one thing that is happening, I mean, that--
Chairman Kanjorski. Well, how long has this new idea been a
new idea?
Mr. Gilliam. Since 1870.
Chairman Kanjorski. 1870?
Mr. Eiland. I would say that the model legislation for the
interstate compact was completed around 2003 or so.
Chairman Kanjorski. I think that was only in reaction to
some of the hearings we were beginning to have here in Congress
and, you know, a recognition that we actually may act, and
almost did.
And then they moved along and everyone pulled back,
including Mr. Baker, and we said, let's give them a chance. I
remember attending several of their conferences. I was highly
unimpressed or impressed. I am not sure. I knew they wanted to
do something, but I didn't get that sense they were going to
accomplish it.
Yes?
Mr. Iuppa. I just wanted to follow on to Mr. Gilliam's
comment on the speed to market. I mean, speed to market is
important, but it is not the only issue moving some of us
towards an optional Federal charter. I think we really are
taking at it from a more holistic view--the kinds of businesses
that we market products to; our footprint, whether it is
regional, local, national, international, also comes into play
as well.
Chairman Kanjorski. Do you believe if we did an optional
Federal charter, we could have State-by-State enforcement, or
would we have to have Federal enforcement?
Mr. Iuppa. Well, I think if we had an optional Federal
charter and we had a Federal chartering system for those
entities that chose to incorporate or establish themselves
through that Federal charter, that the Federal court system
would be the natural place for enforcement actions with regard
to--
Chairman Kanjorski. Well, I am talking more about the
regulator now. Why can't we just reverse and say that the
attorney general or whomever would be the enforcement officer
of the various States, even though it is a Federal charter and
it is a violation of the Federal charter or a contended
violation, that we expect the attorney general of the State in
which it occurred to be the enforcement officer? Do you see a
problem with that?
Mr. Iuppa. Well, I am not an attorney, but I would imagine
there may be some constitutional issues there. And I will defer
to the constitutional experts with regard to that.
Chairman Kanjorski. Is Ann Coulter in the courtroom?
Mr. Iuppa. But I think you are going to end up with the
same kind of disparity amongst the States because you will have
different levels of enforcement based on that particular
individual and that State, even though you may have a uniform
product that is--you know, that crosses State lines and so
forth. I think that would--I would not suggest necessarily
going in that direction, I guess.
Chairman Kanjorski. Well, you were a former active person
with the NAIC. What is your value and judgment of where they
have come so far?
Mr. Iuppa. Well, I think, as I said in my testimony, I
think tremendous strides have been made in efforts to try and
streamline, try and move the ball forward. I think in some
areas there has been more success than there has been in
others.
With regard to financial oversight, we heard about
standardized data. Well, there is an annual statement that has
over 500,000 standardized data elements in nit.
But in other areas, when it comes to things like the
product approval, rate approval, the market conduct activities
have been very laborious. And I can tell you, speaking
firsthand as an active member of that organization, to drive or
arrive at a consensus on almost any issue is incredibly
difficult, and in some cases impossible.
And then even when you do get to that consensus, as others
have said, and I think you will also hear--insurance
commissioners to a certain degree even say, you know, we get a
model passed at the NAIC. Now we have to go back and deal with
our State legislatures.
And with all due respect to my panel mate here and a
gentleman that I consider a friend--we have known each other
for a number of years now--each State likes to put its own
little twist on the model laws.
You look at the financial accreditation program. I was here
back in 1988 when that program was being conceived. When that
was first conceived, there were actually going to be punitive
measures against States that were not accredited. For instance,
their financial exams that they did on their Democrat companies
were not going to be accepted by the other States.
Well, as time went on and you had fewer and fewer States
who were unaccredited, the punitive nature of that program
became a significant issue, to the point where ultimately there
are no punitive measures per se against a State that is not
accredited.
So, I mean, you have some examples where I think it has
worked well. I think as a practical matter, we need to
recognize that it is now the 21st Century. Things have changed.
You know, I joined this regulatory community as a regulator 20
years ago, and it is a very different industry today than it
was even 20 years ago.
I think with the pace of change, the fact that this is a
financial sector industry, that it is dependent upon capital
and capital flows as well as the customer base, that we need to
modernize that system for those companies that are operating in
that more global national environment.
And I think that improvements still need to be made to the
State system even for those companies and entities that want to
be regulated at the State level or are comfortable with it.
Chairman Kanjorski. Thank you. I think I have taken my
time.
Ms. Bachmann, now are you going to join us?
Ms. Bachmann. Thank you, Mr. Chairman. I appreciate the
opportunity to be able to ask a question. And I apologize, too,
for not being able to hear all of your remarks, although I
appreciate having them in written form.
I want to thank you for all of the various views that you
have been able to present this afternoon. I have heard from a
number of organizations. Last Friday I was back in my district,
and I met with a large insurance corporation there and heard
their views on a Federal charter. And I met with all of my
smaller--not all, but I met with many of my smaller insurance
companies as well and their views against this.
And the issue that I ask each one of them, and the issue
that I would ask you to comment on in a general way, would be
regarding the issues of competitiveness and prosperity. After
all, that is really what we are after. We want to make sure
that you succeed wildly. You are a very important part, each
one of you, of the financial services industry. We want you to
be successful. The large, the small, we want you all to be.
Could you answer for me in a very general way--and in many
forms, you have been doing this throughout our great discussion
this afternoon--but in a general way, could you respond to me
how your opinion on this issue would contribute to prosperity
and to the issue of competitiveness in the United States?
Mr. Felton. I will be glad to tackle that from the life
insurance perspective because that is really what I am here to
talk about.
Life insurance, unlike these other products, is a product
that has to be sold. People buy property and casualty
insurance. They buy their home insurance. They know they have
to have it. And they buy their car insurance.
You have to sell life insurance. And if you are in a State
that doesn't have a product as competitive as your neighboring
State, you are at a disadvantage and you are not going to
prosper as much as you might if you were able to sell a
different product.
So it is tough to make a living in life insurance, and the
optional Federal charter would give the agents a chance to sell
the same products nationwide. Because right now they can't do
that, and that puts them at a competitive disadvantage.
Mr. Nutter. I would answer with respect to the reinsurance
market. I represent the reinsurance, much of which is written
by companies that are offshore, not in the United States, or
have U.S. subsidiaries that are offshore.
There is no question that the 50-State system is a
cumbersome system, if you will, for a company that is managing
its capital on a global basis, seeking to write coverage in the
United States, often on a multi-State basis.
So for our sector of the industry, a single regulator,
national or Federal, that would streamline the process of
approval, licensing, and solvency oversight, would be a much
more efficient system for providing capital, and that capital
will help make it a more competitive industry for the insurers
and their consumers.
Mr. Hunter. I represent consumers, and when you talk about
competitiveness and making the insurance industry profitable,
we want that. We don't want insolvent insurance companies. But
we do not want excessive profits for the property/casualty
industry.
For example, it is heading for its fourth record in a row,
even with Katrina and all those losses. It is clear that what
they are paying back to consumers is now down to 50 cents out
of every dollar. It has become a very inefficient system.
They are making too much money right now. And the market is
softening up, so we are going toward now down the slide down
the other side of the cycle. But that economic cycle has
nothing to do with regulation.
Ms. Bachmann. Could I ask as well if you could comment on
the argument I hear from the littler guys who say, we don't
want the burden of answering to two masters?
Mr. Hunter. Well, I don't think they would have to if they
were a little guy. They can be State-regulated or Federal-
regulated. Under an optional Federal charter, they could choose
who to be--they may have to pay for both because you are going
to have two systems, one on top of the other.
Ms. Bachmann. And again, I am not advocating any particular
position here. But one of the arguments that I am getting with
the idea of answering to two masters is that the smaller guys
are saying, inevitably they will have to answer to two masters.
It won't be just one. And if you would just comment.
Mr. Hunter. Inevitably, if there is an optional Federal
charter, there will only be Federal regulation.
Mr. Gilliam. I will jump in as a smaller guy. I don't know
if you were here a little earlier, but one of the comments I
made is we are a regional insurer. We are in 34 States. We are
not across the country. I will put ourselves in the medium
category.
If we pass an optional Federal charter and leave the
current State system unmodernized, it will create a tremendous
unlevel playing field because those of us who are familiar and
want to stay in the State system will stay in the broken State
system, while the big companies go to the Federal system. And
it will be so unlevel, at some point we will feel like, well,
gosh, do we have to change to a Federal company?
And then we will get the game of people jumping back and
forth. You know, they will have one company that is Federal and
one State, and it is going to be a morass of people jumping
back and forth and playing the system. And a lot of companies
our size can't afford the cost of jumping back and forth like
that.
Mr. Iuppa. Yes. I want to go back to your first question
about the competitiveness and so forth, and perhaps give you
even a different look at it. And I am looking at it from the
competitiveness of this country globally. I mentioned earlier
that, I mean, we are basically the largest insurance market in
the world. Depending on how you tally up the figures, it is
either us or the E.U. or Japan.
But there are an awful lot of other countries out there
right now who are going to be competing for the capital that in
the past would necessarily have come into the United States
that others are now beating a path to that capital. And that
capital is beginning to flow into the emerging markets.
I have had the opportunity to work with regulators from
emerging markets for several years. And when you talk to these
people, one of the first things they look to do is set up an
insurance market because they know that you can't grow
prosperity, you can't grow a middle class, unless you have an
insurance marketplace.
As people begin to acquire assets, whether they be
commercial assets for small businesses or their personal
assets--homes, property, and so forth--where you begin to
develop an insurable interest, that is what contributes to the
middle class and the prosperity.
And I think that we need to have a regulatory system here
in the United States that recognizes that there are a variety
of players in the insurance marketplace that go down to the
single State entities, and in some cases that may only write
business as a county mutual, to large multinational companies
that do business throughout the world. The needs are going to
be different.
We want to be sure that capital continues to flow into this
market. We want to be sure that the capital that is here has
the ability to be used in innovative and creative ways, and
provide additional products into the marketplace.
And the other thing, as I said, we are now competing with
other parts of the world where for the last century, at least
for the first three-quarters of it, we weren't. I think that is
a dynamic that we can't lose sight of.
Mr. Eiland. From a State legislature and legislator
perspective, what can we do, I think is your question, on
ensuring competitiveness. We can make sure that we have, where
we can, a streamlined and efficient regulatory scheme in this
country. But by the same token, we can't force uniformity where
there is none.
And in certain product lines especially, you are going to
have wide-ranging products and coverages across the country.
And simply having a Federal regulator try to regulate that from
Washington, D.C., is not going to work because you are going to
have to have Federal regulators in Washington State and in
Oregon State and in Rhode Island and everywhere else so that
they can see how that particular market is functioning.
So the main thing is to make sure that you have an
efficient regulatory scheme. By the same token, we also have
responsibilities for consumers, to make sure that they get good
value for what they are buying, and can afford it in many
instances.
Ms. Bachmann. Thank you.
Chairman Kanjorski. Thank you very much, Ms. Bachmann.
The gentleman from Georgia, Mr. Scott. You had additional
questions?
Mr. Scott. Yes. Thank you. We have such a distinguished
panel that I did not want to let another question that is on my
mind go by. And I would like to get your take on this.
We are faced with a world view here of our financial
services industry. And we are having budget deficits. We are
having trade deficits. We are borrowing over $2 trillion from a
handful of nations around the world. Our debt is--the sky is
the limit. And now I understand we are running deficits with
our financial services products in the world.
And I would like to ask you two questions about this, if
you would care to comment. Why do you believe the United States
has consistently run a deficit in insurance services with the
rest of the world? That is the first part of the question. If
we can get a response as to why is this happening from your
point of view.
Which leads to the second part of the question, which is--
and I am beginning to get worried that the growing
internationalization of our financial services industry may
mean that these governments may find it difficult, in isolation
from other nations and other jurisdictions, to find a way to
deal with their regulatory reform in isolation as opposed to
being with other countries and other nations and other
international developments.
In other words, what I am saying is that we are now an
international player. I mean, we have always been, but in a
much bigger way. Our indebtedness and our deficits give us an
Achilles heel. And I am just wondering, why is this happening,
number one? And number two, is it something for us to be
worried about in the growing internationalization of the
financial services industries, and in terms of these countries
finding it difficult to deal with their own regulatory reform
in isolation from other countries, other jurisdictions, and
other international developments?
Mr. Eiland. I will take the first stab at that. It seems to
me that the reason we have a trade balance on insurance
services is because other countries, the insurers in other
countries, especially reinsurers and Lloyds of London, like our
regulatory system here. It is predictive. They can come in
here. They can insure. They know the system. And then can make
money, and have for hundreds of years. And so that is the
first.
The second is many of our own insurance companies may be
reluctant to go to other undeveloped or underdeveloped
countries where their system is not as well-established, where
their risks may be greater, where they have risks that we are
not used to like terrorism. And so there is plenty to do here
at home, so they stay here at home.
Mr. Scott. I see. Yes?
Mr. Iuppa. Yes. I am not sure I can really respond to the
first part of your question. But I did want to talk a little
bit about sort of these other countries and operating in
isolation and so forth.
I think one thing to keep in mind is that, as I mentioned
in response to some of the earlier questioning, was that there
are an awful lot of emerging markets now that have come into
being with newly acquired independence and whatever the case
may be. And they are all putting together regulatory schemes
when it comes to financial services.
One of the things that I was able to engage in because of
my prior position was I would often hear from some of these
countries and ask, why do you have a State system? Why don't
you have a single regulator, a Federal regulator? And again,
part of it is historical. It is the system we have.
But when you look to these countries--and they don't just
send people here to the United States to look at our system.
They send them to Europe. They send them to Japan, the other
developed countries. And they all seem to be going towards a
model that is Federal in nature, and even moreso than here,
they are increasingly consolidated regulators where you have an
entity analogous to the FSA in the U.K., which is a model that
has been pointed to and a model that is being moved towards in
a lot of these emerging markets. So I think that there is a
growing move in that direction.
And just with regard to the isolation piece, through the
International Association of Insurance Supervisors, it has
effectively become the de facto international standard-setter
for insurance supervision in the world. It is analogous and on
par with the Basel Committee for banking supervision as well as
IOSCO for the securities marketplace.
There are standards that are being developed there for use
in an international basis, and you are beginning to see those
standards come out. You are beginning to see those standards be
put into effect in various jurisdictions. And the emerging
markets in particular are very hungry to adopt those
international standards because they see that as a means of
legitimizing their economy, legitimizing their regulatory
approach.
So it goes back to my earlier response to the question on
competitiveness. I mean, we are really competing not only
amongst ourselves commercially, but we are competing against
many other countries in the world today that we didn't have to
before.
Mr. Nutter. If I could supplement that, if your time
permits. I represent the reinsurance market. All of our
companies are licensed in the United States. They are probably
all licensed in all 50 States. And yet much of the reinsurance
is written by companies that have U.S. subsidiaries but are
foreign-owned, foreign-domiciled, or written directly offshore.
That is exactly what you would want for a country of the
risk that this country has, catastrophe risk and other kinds of
risk. You do want to spread it throughout the world's capital
markets. That is the real function of reinsurance.
Depending on the timeframe you look at, there probably is a
net inflow of reinsurance payments into the United States
largely because of the catastrophe events of 2001, 2004, and
2005, notwithstanding the profitable years of 2006 and probably
2007.
Secondly, to Mr. Iuppa's point, we would probably say that
a number of other jurisdictions have taken on a more
progressive role with respect to regulation of the reinsurance
market. The E.U. has created a passport system that is not
unlike what we have endorsed. And the sponsors of H.R. 3200
have included a mutual recognition piece that would allow the
United States to recognize other countries that have
satisfactory regulatory regimes so that U.S. companies can do
business in their countries and companies in their countries
can do business here on a mutually recognized basis based upon
their home country's regulation of those markets.
So it is not all bad, if you will, that there may be trade
imbalances between countries in our area because it depends on
the loss experience of the companies doing business here.
Mr. Scott. Thank you. Thank you, Mr. Chairman.
Chairman Kanjorski. Mr. Baker?
Mr. Baker. Just a couple of quick questions, Mr. Chairman.
Thank you.
Mr. Iuppa, speaking as a Zurich official, what would you
guesstimate annually is the number of filings for new product
approvals that a company of the size of Zurich would engage in
on an annual basis in the various insurance domestic
jurisdictions?
Mr. Iuppa. I am going to imagine that is certainly into the
hundreds, and perhaps thousands. And, I mean, as an example, we
have a commercial auto policy where the policy itself is
probably about 15 or 20 pages long. But along with the basic
policy, there is probably about 500 pages of amendatory
language in order to take into account all the filings in all
the States.
Mr. Baker. But is it safe to say that it is several hundred
a year from one single company perspective?
Mr. Iuppa. Easily. Easily.
Mr. Baker. Mr. Eiland, I want to acknowledge the
correspondence that the NAIC forwarded to the OFC. I do
appreciate it. And just make note of one element of the content
of that correspondence with my office, Mr. Chairman.
In a prior meeting, I inquired as to the new compact
approval process for new product and how was it progressing.
And at the time, there was uncertainty about the number of
products. In the correspondence, it indicates there were eight
filings that were approved.
I just wish for the record, Mr. Chairman, to establish that
Zurich only has several hundreds of filings annually in the
domestic marketplace. One can only imagine it must be literally
in the thousands, if not tens of thousands, for the entire
industry.
And to hold that number up in contrast with the current
compact approval process, I think, points to the continuing
disparities between where we want to go and where we seem to
be.
I yield back. I thank you.
Chairman Kanjorski. Thank you very much, Mr. Baker.
To the panel, I want to thank you all very much. I found it
very interesting and very diverse, to say the least.
The Chair notes that some of the members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
to these witnesses and to place their responses in the record.
Before we adjourn, the written statement of the National
Association of Insurance and Financial Advisors will be made
part of the record of this hearing. Without objection, it is so
ordered.
Chairman Kanjorski. The panel is dismissed, and this
hearing is adjourned. Thank you.
[Whereupon, at 4:29 p.m., the hearing was adjourned.]
A P P E N D I X
October 30, 2007
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