State-Based Insurance State-Based Insurance Regulatory Reform ConceptsRegulatory Reform Concepts

Rep. Richard Baker (LA) Chairman Mike Oxley (OH)

Financial Services Committee Financial Services Committee Foundation for ReformFoundation for Reform

14 Hearings on insurance regulatory reform in past 3 14 Hearings on insurance regulatory reform in past 3 yearsyears

Hearing entitled “Protecting Consumers: What can Congress do to help financial Hearing entitled “Protecting Consumers: What can Congress do to help financial regulators coordinate efforts to fight fraud?”regulators coordinate efforts to fight fraud?”

Hearing entitled “NARAB & Beyond”Hearing entitled “NARAB & Beyond” Hearing entitled “Insurance Product Approval: The need for modernization”Hearing entitled “Insurance Product Approval: The need for modernization” Hearing entitled “Over-regulation of automobile insurance: a lack of consumer choice”Hearing entitled “Over-regulation of automobile insurance: a lack of consumer choice” Hearing entitled “America’s Insurance Industry: Keeping the promise”Hearing entitled “America’s Insurance Industry: Keeping the promise” Hearing entitled “Retirement Protection: Fighting fraud in the sale of death”Hearing entitled “Retirement Protection: Fighting fraud in the sale of death” Hearing entitled “Insurance Regulation and Competition for the 21Hearing entitled “Insurance Regulation and Competition for the 21 stst Century” (Three Century” (Three

days of hearings)days of hearings) Roundtable discussion on insurance uniformityRoundtable discussion on insurance uniformity Hearing entitled “The effectiveness of state regulation: why some consumers can’t get Hearing entitled “The effectiveness of state regulation: why some consumers can’t get

insurance”insurance” Hearing entitled “Retirement Security: What seniors need to know about protecting their Hearing entitled “Retirement Security: What seniors need to know about protecting their

futures”futures” Hearing entitled “Reforming Insurance Regulation—Making the marketplace more Hearing entitled “Reforming Insurance Regulation—Making the marketplace more

competitive for consumers”competitive for consumers”

Action PlanAction Plan

Our Committee is now Our Committee is now developing a developing a roadmap of goals roadmap of goals and concepts to be and concepts to be discussed with discussed with all the relevant parties. all the relevant parties. This This roadmap will be fleshed out into roadmap will be fleshed out into legislation over the next several legislation over the next several months.months.

We want your input! We want your input!

Strengths of the State SystemStrengths of the State System

ExpertiseExpertiseLaboratory for reformLaboratory for reformAwareness of local problemsAwareness of local problemsResponsiveness to Responsiveness to consumersconsumers

NAIC leadershipNAIC leadership

Weaknesses of the Current Weaknesses of the Current SystemSystem

Significant inefficiencies in an increasingly Significant inefficiencies in an increasingly national market, particularly for:national market, particularly for:

Speed-to-marketSpeed-to-market Agent licensingAgent licensing Company licensingCompany licensing Market conductMarket conduct Price controlsPrice controls Lack of a State partnership to coordinate Lack of a State partnership to coordinate

uniform insurance regulationuniform insurance regulation

Dangers of InactionDangers of Inaction

Consumers lack a competitive Consumers lack a competitive market with adequate and affordable market with adequate and affordable optionsoptions

Problems are getting worseProblems are getting worse Increased competition from other sectors, rising Increased competition from other sectors, rising

loss pressures, inefficient regulatory expenses, loss pressures, inefficient regulatory expenses, higher levels of volatilityhigher levels of volatility

Dangers of InactionDangers of Inaction

NAIC can benefit from NAIC can benefit from Federal support (past Federal support (past

successes resulted successes resulted from Congressional from Congressional

pressure)!pressure)!

Congressional Congressional inactioninaction will quickly turn into will quickly turn into

overreactionoverreaction when the when the next scandal occursnext scandal occurs

Capacity Squeeze from Long Capacity Squeeze from Long Term Substandard ROE is Term Substandard ROE is

UnsustainableUnsustainable

-5%

0%

5%

10%

15%

20%

25%

93 94 95 96 97 98 99 00 01 02 03*

US P/C Insurers All US Industries Life

Diversified Finl. Comm. Banks

Congress WILL actCongress WILL act““Politics is the Art of the Possible”Politics is the Art of the Possible”

The House Financial Services Committee will:The House Financial Services Committee will:

NOTNOT consider an optional federal charter consider an optional federal charter (OFC)(OFC)

NOTNOT create a federal regulator create a federal regulator

NOTNOT consider a dual Federal—State regulatory consider a dual Federal—State regulatory systemsystem

NOTNOT consider minor incremental reform consider minor incremental reform

Solution: Solution: Targeted State-based ReformTargeted State-based Reform

Coordinate full and effective State participation in key NAIC Coordinate full and effective State participation in key NAIC programsprograms

Promote nationwide uniform standards based on NAIC / Promote nationwide uniform standards based on NAIC / NCOIL modelsNCOIL models

Use appropriate domestic deference for choice-of-law Use appropriate domestic deference for choice-of-law conflictsconflicts

Establish a Establish a non-regulatorynon-regulatory Federal-State Insurance Federal-State Insurance Coordinator evenly co-chaired by State insurance Coordinator evenly co-chaired by State insurance commissioners and key Federal policymakers to coordinate commissioners and key Federal policymakers to coordinate insurance activities among the States and the Federal insurance activities among the States and the Federal GovernmentGovernment

Specific GoalsSpecific GoalsLife (annuities, life insurance, Life (annuities, life insurance,

long-term care, etc.)long-term care, etc.) The states have created the Single Electronic Rate The states have created the Single Electronic Rate

and Form Filing System (SERFF) that allows insurers and Form Filing System (SERFF) that allows insurers to electronically submit their forms to a single to electronically submit their forms to a single computer system used by most States. For life computer system used by most States. For life insurance products, the States have also proposed insurance products, the States have also proposed an Interstate Compact, which was intended to be a an Interstate Compact, which was intended to be a single review process that would grant form single review process that would grant form approval for use in all participating states.approval for use in all participating states.

GOAL:GOAL: Build off of SERFF and a strengthened Build off of SERFF and a strengthened Interstate Compact to achieve single-point filing and Interstate Compact to achieve single-point filing and time-certain review.time-certain review.

Specific GoalsSpecific GoalsProperty-Casualty / Personal Property-Casualty / Personal Forms (auto, homeowners, Forms (auto, homeowners,

etc.)etc.) Beyond SERFF, the States have not been able to Beyond SERFF, the States have not been able to

make significant progress on streamlined review of make significant progress on streamlined review of property-casualty products. States often take well property-casualty products. States often take well over a year to review new products, review over a year to review new products, review standards are not always articulated, and products standards are not always articulated, and products may be denied on the basis of unpublished and may be denied on the basis of unpublished and informal “desk drawer” rules. Even for previously informal “desk drawer” rules. Even for previously approved products that are being reissued with only approved products that are being reissued with only technical changes, the 50 State review process can technical changes, the 50 State review process can take years to complete.take years to complete.

GOAL:GOAL: Single point of filing with expedited review Single point of filing with expedited review based on clear standards.based on clear standards.

Specific GoalsSpecific GoalsProperty—Casualty / Commercial Property—Casualty / Commercial

Forms (commercial property, Forms (commercial property, liability, etc.)liability, etc.)

Insurance policies sold to multi-State businesses Insurance policies sold to multi-State businesses are subject to review and oversight in all the are subject to review and oversight in all the affected States which frequently creates choice-affected States which frequently creates choice-of-law conflicts. Many States have begun to of-law conflicts. Many States have begun to reduce regulatory review altogether for reduce regulatory review altogether for sophisticated commercial policyholders, but there sophisticated commercial policyholders, but there is no nationwide standard to define who is is no nationwide standard to define who is sophisticated.sophisticated.

GOAL:GOAL: Single choice-of-law for large multi-State Single choice-of-law for large multi-State commercial policyholders; limited review for commercial policyholders; limited review for sophisticated commercial policyholders. sophisticated commercial policyholders.

Specific GoalsSpecific GoalsProperty-Casualty / Price Property-Casualty / Price

ControlsControls States with free-market competition among States with free-market competition among

insurers have consistently achieved more insurers have consistently achieved more choices and better prices for consumers in choices and better prices for consumers in the long term than States that have the long term than States that have attempted to restrict choices by imposing attempted to restrict choices by imposing price controls on the marketplace.price controls on the marketplace.

GOAL:GOAL: Illinois-style free-market competition Illinois-style free-market competition (like all other financial products)(like all other financial products)

Specific GoalsSpecific GoalsCompany LicensingCompany Licensing

The NAIC has established the Accelerated Licensure The NAIC has established the Accelerated Licensure Evaluation and Review Techniques (ALERT), which Evaluation and Review Techniques (ALERT), which is intended to create a single point-of-entry for is intended to create a single point-of-entry for company licensing with time deadlines for all States company licensing with time deadlines for all States to complete their reviews. As with other NAIC to complete their reviews. As with other NAIC programs, ALERT has failed because not all States programs, ALERT has failed because not all States are participating and there is no enforcement are participating and there is no enforcement mechanism for ALERT’s deadlines.mechanism for ALERT’s deadlines.

GOAL:GOAL: Single point-of-entry for company licensing Single point-of-entry for company licensing based on adequate standards.based on adequate standards.

Specific GoalsSpecific GoalsAgent LicensingAgent Licensing

The States were required by GLBA to The States were required by GLBA to achieve reciprocal licensing in a majority achieve reciprocal licensing in a majority of jurisdictions within a set time frame or of jurisdictions within a set time frame or else an SRO would be established. Over else an SRO would be established. Over 40 States have now achieved this goal, but 40 States have now achieved this goal, but many big States (ie. CA and FL) have not.many big States (ie. CA and FL) have not.

GOAL:GOAL: Nationwide reciprocal licensing Nationwide reciprocal licensing with movement towards uniformity.with movement towards uniformity.

Specific GoalsSpecific GoalsMarket ConductMarket Conduct

The Committee investigated and criticized the States market The Committee investigated and criticized the States market conduct efforts for lacking standards, being unnecessarily conduct efforts for lacking standards, being unnecessarily duplicative and expensive, and too often resulting in political duplicative and expensive, and too often resulting in political fishing trips for “gotcha” fines. NCOIL and the NAIC have fishing trips for “gotcha” fines. NCOIL and the NAIC have quickly responded by working towards a model law that quickly responded by working towards a model law that would require the States to use a coordinated system of would require the States to use a coordinated system of standardized market conduct review based on performing standardized market conduct review based on performing market analysis to identify patterns of abuse and on-site market analysis to identify patterns of abuse and on-site review of company systems and controls. NCOIL has just review of company systems and controls. NCOIL has just adopted this model law and the NAIC may adopt the same adopted this model law and the NAIC may adopt the same model verbatim shortly. model verbatim shortly.

GOAL:GOAL: Ensure nationwide and uniform adoption of Ensure nationwide and uniform adoption of a consensus market conduct law.a consensus market conduct law.

Specific GoalsSpecific GoalsEnforcement / Federal-State Enforcement / Federal-State Coordination of Insurance Coordination of Insurance

PolicyPolicy Any effort to promote more uniform insurance standards will require an Any effort to promote more uniform insurance standards will require an

enforcement mechanism. Many of the groups opposed to a Federal enforcement mechanism. Many of the groups opposed to a Federal insurance regulator have recognized the need for a Federal-State insurance insurance regulator have recognized the need for a Federal-State insurance coordinator to mediate disputes and ensure coordination of insurance coordinator to mediate disputes and ensure coordination of insurance policy among State and Federal entities. At the same time, many of the policy among State and Federal entities. At the same time, many of the groups adamantly in favor of a Federal insurance regulator have groups adamantly in favor of a Federal insurance regulator have recognized that a Federal advocate can be created to monitor policy and recognized that a Federal advocate can be created to monitor policy and budget issues without necessitating a new Federal K-Street bureaucracy. budget issues without necessitating a new Federal K-Street bureaucracy. Both groups want to ensure that any Federal nexus created has appropriate Both groups want to ensure that any Federal nexus created has appropriate protections to prevent abuse of political power.protections to prevent abuse of political power.

GOAL:GOAL: Create an evenly divided Federal-State insurance coordination Create an evenly divided Federal-State insurance coordination council without regulatory authority that could help resolve conflicts council without regulatory authority that could help resolve conflicts between State and Federal policy under this Act and other Federal laws between State and Federal policy under this Act and other Federal laws affecting insurance and advise the President and Congress on insurance tax affecting insurance and advise the President and Congress on insurance tax policy. A Presidential appointee would additionally be created without any policy. A Presidential appointee would additionally be created without any regulatory or licensing power for the sole purpose of approving or regulatory or licensing power for the sole purpose of approving or disapproving the coordination recommendations of the council.disapproving the coordination recommendations of the council.

Additional IssuesAdditional IssuesSeeking InputSeeking Input

Reinsurance Reinsurance streamlining uniformity and choice-of-law streamlining uniformity and choice-of-law

conflictsconflicts

Health Insurance Health Insurance overlap between life and health insurance overlap between life and health insurance

regulationregulation

Surplus lines insurance Surplus lines insurance streamlining efficienciesstreamlining efficiencies

ConclusionsConclusions

The House Financial Services Committee The House Financial Services Committee WILL ACT!WILL ACT!

We have worked closely with lead regulators and We have worked closely with lead regulators and policyholder representatives in developing the goalspolicyholder representatives in developing the goals

The goals are supported by all of the agent/broker groups The goals are supported by all of the agent/broker groups and the majority of the major p/c and life insurersand the majority of the major p/c and life insurers

The approaches are focused on making the State systems The approaches are focused on making the State systems work without necessitating a Federal regulatorwork without necessitating a Federal regulator

We want State insurance regulators and the NAIC to be full We want State insurance regulators and the NAIC to be full partners in this processpartners in this process

We Want Your SupportWe Want Your Support

Shared GoalsShared Goals The House Financial Services Committee has and will continue to work in The House Financial Services Committee has and will continue to work in

close partnership with State commissioners and the National Association of close partnership with State commissioners and the National Association of Insurance Commissioners to improve the efficiency of insurance markets.Insurance Commissioners to improve the efficiency of insurance markets.

Our goal is to ensure that all types of insurance are available as widely as Our goal is to ensure that all types of insurance are available as widely as possible throughout the country and that consumers are given the benefit possible throughout the country and that consumers are given the benefit of as many competitive and meaningful choices as possible. We have just of as many competitive and meaningful choices as possible. We have just been through the marketplace crisis caused by 9/11 and we need to see been through the marketplace crisis caused by 9/11 and we need to see insurance capacity and coverage availability expand, not contract.insurance capacity and coverage availability expand, not contract.

Our goal is for the State regulators to work together in a uniform and Our goal is for the State regulators to work together in a uniform and coordinated system to ensure that consumers are effectively protected coordinated system to ensure that consumers are effectively protected from fraud.from fraud.

Our goal is to retain the State-based system of regulation and to improve Our goal is to retain the State-based system of regulation and to improve that system for the future.that system for the future.

We share the same goals, and I want to commit to you that with We share the same goals, and I want to commit to you that with your support and cooperation, State insurance regulators and the your support and cooperation, State insurance regulators and the

NAIC will be full partners in this process towards reform.NAIC will be full partners in this process towards reform.