DATE:



DATE: NOVEMBER 1, 2007

TO: NCOIL LEGISLATORS

FROM: MIKE HUMPHREYS

NCOIL STATE-FEDERAL RELATIONS DIRECTOR

RE: NCOIL’S REP. EILAND TESTIFIES AT HOUSE REGULATORY REFORM HEARING

Attached is NCOIL testimony presented by Rep. Craig Eiland (TX), NCOIL Past President and current State-Federal Relations Committee chair.

HOUSE HEARING

Additional hearing testimony may be found at:

The U.S. House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held its second hearing examining the effectiveness of the state-based insurance system on October 30. The tone of the hearing was noticeably less adversarial than an October 3 hearing. Members seemed less interested in attacking the state system and more concerned about what Congress can do to ensure uniformity, where appropriate, and how to facilitate greater international competition.

Representatives of NCOIL, Financial Services Roundtable, Consumer Federation of America, Reinsurance Association of America (RAA), The Cincinnati Insurance Companies, and the National Association of Life Brokerage Agencies (NAILBA). Witnesses had mixed reviews of the state system with two, including NCOIL’s Rep. Eiland, arguing for continued—but modernized—state regulation, three advocating for an optional federal charter (OFC), and one calling for “good” regulation, be it state or federal.

OPENING REMARKS

Congressman Paul Kanjorski (D-PA), Subcommittee chair, said that any changes to the state-based regulatory system should reflect all constituencies. He again emphasized his desire to have bipartisan agreement on how to address reform from the federal level. He acknowledged that states maintain direct oversight of the business of insurance but said the ultimate responsibility to address challenges may rest with Congress. Congressman Kanjorski took a stronger stance in promoting the need for Congressional action than he did during the October 3 hearing.

Congresswoman Melissa Bean (D-IL), OFC legislation sponsor, said the State of Illinois has experienced first hand the benefits of a deregulated insurance market and noted than an OFC would provide such benefits on a national scale. She said an OFC would foster greater product innovation.

Congressman Ed Royce (R-CA), OFC legislation co-sponsor, said that all substantive state reforms have been developed in response to threats from Congress and claimed “virtual consensus” among Subcommittee members that Congress should act. He criticized “structural flaws” in the state system, mentioning that the largest states are always the slowest to embrace reform.

PANELISTS & TESTIMONY

OPPOSE AN OFC:

Representative Eiland, while recognizing the need for modernization in certain key areas, pointed out the success of state-based system and noted that several of the largest insurance markets in the world, including California (6th), New York (7th), Florida (8th), and Texas (10th), are located in the U.S. He said that state officials are better able to address local issues and reforms than a federal regulator could, and that states would not readily relinquish authority over insurance markets.

Rep. Eiland said that when insurance companies develop an identical product that can be sold at the same price nationwide an argument can be made for uniform regulation—and credited the Interstate Insurance Product Regulation Commission (IIPRC) with providing a central point of filing for life insurers to reach 30 states. He said that product uniformity does not exist in the property-casualty insurance market.

Scott Gilliam, Assistant Vice President & Government Relations Officer, The Cincinnati Insurance Companies, said that states should retain insurance authority, and noted that smaller insurers value their connection to state officials. He said that reform was needed in product and rate regulation, producer and company licensing, and market conduct. He recommended that Congress consider drafting legislation that would let an insurer be regulated by its home state while offering products nationally. He said that regulatory jurisdiction could be distinguished between authorities reserved for the home state and activities permitted by additional states.

NEUTRAL

Bob Hunter, Director of Insurance, Consumer Federation of America, said that consumers cared about strong protections, not whether states or the federal government regulates insurance, and blasted current OFC legislation as an “insurer-backed proposal” that would “kill” consumer protections. He said that as drafted, an OFC would guarantee a regulatory “race to the bottom.” Hunter said the state system has serious problems, including claims abuses, unfair prices, record surpluses, and poor information. He further noted that even large sophisticated buyers can be cheated under the state system and criticized the NAIC for a “revolving door” between regulators and the insurance industry.

SUPPORT AN OFC

Alessandro Iuppa, immediate NAIC Past President and current Senior Vice President, Government & Industry Affairs, Zurich, representing Financial Services Roundtable, said the financial industry had undergone dramatic change in the past 20 years and that the state system was not sophisticated enough to address the market. He advocated for an OFC and said that it “preserves the state system for those that choose to operate at the state level, but offers a more sophisticated regulatory structure for insurers and producers that operate on a national and international basis in this increasingly global industry.”

Frank Nutter, President, RAA, argued that the reinsurance business has changed and that “the products and services they offer is evolving, and the range and characteristics of their competitors and their clients is expanding.” He described three reform proposals that could help to address the market, including (1) a single-state “passport” system that would allow a license in one state to permit business in all other states; (2) an OFC; or (3) a modified OFC that would combine options (1) and (2) to permit an insurer to choose between a “single federal regulator, a single state regulator or remain in the current 50-state system.”

John Felton, President, Tennessee Brokerage Agency, testifying on behalf of NAILBA, emphasized speed-to-market and said that despite the IIPRC, the state system does not allow new, competitive products to enter the market in a timely manner. He said that an OFC would provide greater speed-to-market for consumers and noted that “the reduction of costs associated with working with one regulator, not fifty, would be reflected in the pricing of products.”

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