State-Based Insurance Regulatory Reform Concepts Rep. Richard Baker (LA) Chairman Mike Oxley (OH)

Financial Services Committee Foundation for Reform 14 Hearings on insurance regulatory reform in past 3 years  Hearing entitled “Protecting Consumers: What can Congress do to help financial regulators coordinate efforts to fight fraud?”  Hearing entitled “NARAB & Beyond”  Hearing entitled “Insurance Product Approval: The need for modernization”  Hearing entitled “Over-regulation of automobile insurance: a lack of consumer choice”  Hearing entitled “America’s Insurance Industry: Keeping the promise”  Hearing entitled “Retirement Protection: Fighting fraud in the sale of death”  Hearing entitled “Insurance Regulation and Competition for the 21 st Century” (Three days of hearings)  Roundtable discussion on insurance uniformity  Hearing entitled “The effectiveness of state regulation: why some consumers can’t get insurance”  Hearing entitled “Retirement Security: What seniors need to know about protecting their futures”  Hearing entitled “Reforming Insurance Regulation—Making the marketplace more competitive for consumers”

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

Strengths of the State System Expertise Expertise Laboratory for reform Laboratory for reform Awareness of local problems Awareness of local problems Responsiveness to consumers Responsiveness to consumers NAIC leadership NAIC leadership

Weaknesses of the Current System Significant inefficiencies in an increasingly national market, particularly for:  Speed-to-market  Agent licensing  Company licensing  Market conduct  Price controls  Lack of a State partnership to coordinate uniform insurance regulation

Dangers of Inaction Consumers lack a competitive market with adequate and affordable options Consumers lack a competitive market with adequate and affordable options Problems are getting worse Problems are getting worse Increased competition from other sectors, rising loss pressures, inefficient regulatory expenses, higher levels of volatility Increased competition from other sectors, rising loss pressures, inefficient regulatory expenses, higher levels of volatility

Dangers of Inaction NAIC can benefit from Federal support (past successes resulted from Congressional pressure)! Congressional inaction will quickly turn into overreaction when the next scandal occurs

Capacity Squeeze from Long Term Substandard ROE is Unsustainable

Congress WILL act “ Politics is the Art of the Possible” The House Financial Services Committee will: NOT consider an optional federal charter (OFC) NOT consider an optional federal charter (OFC) NOT create a federal regulator NOT create a federal regulator NOT consider a dual Federal—State regulatory system NOT consider a dual Federal—State regulatory system NOT consider minor incremental reform NOT consider minor incremental reform

Solution: Targeted State-based Reform Coordinate full and effective State participation in key NAIC programs Coordinate full and effective State participation in key NAIC programs Promote nationwide uniform standards based on NAIC / NCOIL models Promote nationwide uniform standards based on NAIC / NCOIL models Use appropriate domestic deference for choice-of-law conflicts Use appropriate domestic deference for choice-of-law conflicts Establish a non-regulatory Federal-State Insurance Coordinator evenly co-chaired by State insurance commissioners and key Federal policymakers to coordinate insurance activities among the States and the Federal Government Establish a non-regulatory Federal-State Insurance Coordinator evenly co-chaired by State insurance commissioners and key Federal policymakers to coordinate insurance activities among the States and the Federal Government

Specific Goals Life (annuities, life insurance, long- term care, etc.) The states have created the Single Electronic Rate and Form Filing System (SERFF) that allows insurers to electronically submit their forms to a single computer system used by most States. For life insurance products, the States have also proposed an Interstate Compact, which was intended to be a single review process that would grant form approval for use in all participating states. The states have created the Single Electronic Rate and Form Filing System (SERFF) that allows insurers to electronically submit their forms to a single computer system used by most States. For life insurance products, the States have also proposed an Interstate Compact, which was intended to be a single review process that would grant form approval for use in all participating states. GOAL: Build off of SERFF and a strengthened Interstate Compact to achieve single-point filing and time-certain review.

Specific Goals Property-Casualty / Personal Forms (auto, homeowners, etc.) Beyond SERFF, the States have not been able to make significant progress on streamlined review of property- casualty products. States often take well over a year to review new products, review standards are not always articulated, and products may be denied on the basis of unpublished and informal “desk drawer” rules. Even for previously approved products that are being reissued with only technical changes, the 50 State review process can take years to complete. Beyond SERFF, the States have not been able to make significant progress on streamlined review of property- casualty products. States often take well over a year to review new products, review standards are not always articulated, and products may be denied on the basis of unpublished and informal “desk drawer” rules. Even for previously approved products that are being reissued with only technical changes, the 50 State review process can take years to complete. GOAL: Single point of filing with expedited review based on clear standards.

Specific Goals Property—Casualty / Commercial Forms (commercial property, liability, etc.) Insurance policies sold to multi-State businesses are subject to review and oversight in all the affected States which frequently creates choice-of-law conflicts. Many States have begun to reduce regulatory review altogether for sophisticated commercial policyholders, but there is no nationwide standard to define who is sophisticated. Insurance policies sold to multi-State businesses are subject to review and oversight in all the affected States which frequently creates choice-of-law conflicts. Many States have begun to reduce regulatory review altogether for sophisticated commercial policyholders, but there is no nationwide standard to define who is sophisticated. GOAL: Single choice-of-law for large multi-State commercial policyholders; limited review for sophisticated commercial policyholders.

Specific Goals Property-Casualty / Price Controls States with free-market competition among insurers have consistently achieved more choices and better prices for consumers in the long term than States that have attempted to restrict choices by imposing price controls on the marketplace. States with free-market competition among insurers have consistently achieved more choices and better prices for consumers in the long term than States that have attempted to restrict choices by imposing price controls on the marketplace. GOAL: Illinois-style free-market competition (like all other financial products)

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

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

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

Specific Goals Enforcement / Federal-State Coordination of Insurance Policy Any effort to promote more uniform insurance standards will require an enforcement mechanism. Many of the groups opposed to a Federal insurance regulator have recognized the need for a Federal-State insurance coordinator to mediate disputes and ensure coordination of insurance policy among State and Federal entities. At the same time, many of the groups adamantly in favor of a Federal insurance regulator have recognized that a Federal advocate can be created to monitor policy and budget issues without necessitating a new Federal K-Street bureaucracy. Both groups want to ensure that any Federal nexus created has appropriate protections to prevent abuse of political power. Any effort to promote more uniform insurance standards will require an enforcement mechanism. Many of the groups opposed to a Federal insurance regulator have recognized the need for a Federal-State insurance coordinator to mediate disputes and ensure coordination of insurance policy among State and Federal entities. At the same time, many of the groups adamantly in favor of a Federal insurance regulator have recognized that a Federal advocate can be created to monitor policy and budget issues without necessitating a new Federal K-Street bureaucracy. Both groups want to ensure that any Federal nexus created has appropriate protections to prevent abuse of political power. GOAL: Create an evenly divided Federal-State insurance coordination council without regulatory authority that could help resolve conflicts between State and Federal policy under this Act and other Federal laws affecting insurance and advise the President and Congress on insurance tax policy. A Presidential appointee would additionally be created without any regulatory or licensing power for the sole purpose of approving or disapproving the coordination recommendations of the council.

Additional Issues Seeking Input Reinsurance Reinsurance streamlining uniformity and choice-of-law conflicts streamlining uniformity and choice-of-law conflicts Health Insurance Health Insurance overlap between life and health insurance regulation overlap between life and health insurance regulation Surplus lines insurance Surplus lines insurance streamlining efficiencies streamlining efficiencies

Conclusions The House Financial Services Committee WILL ACT! We have worked closely with lead regulators and policyholder representatives in developing the goals We have worked closely with lead regulators and policyholder representatives in developing the goals The goals are supported by all of the agent/broker groups and the majority of the major p/c and life insurers The goals are supported by all of the agent/broker groups and the majority of the major p/c and life insurers The approaches are focused on making the State systems work without necessitating a Federal regulator The approaches are focused on making the State systems work without necessitating a Federal regulator We want State insurance regulators and the NAIC to be full partners in this process We want State insurance regulators and the NAIC to be full partners in this process We Want Your Support

Shared Goals The House Financial Services Committee has and will continue to work in close partnership with State commissioners and the National Association of Insurance Commissioners to improve the efficiency of insurance markets. The House Financial Services Committee has and will continue to work in close partnership with State commissioners and the National Association of Insurance Commissioners to improve the efficiency of insurance markets. 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 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 insurance capacity and coverage availability expand, not contract. 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 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 insurance capacity and coverage availability expand, not contract. Our goal is for the State regulators to work together in a uniform and coordinated system to ensure that consumers are effectively protected from fraud. Our goal is for the State regulators to work together in a uniform and coordinated system to ensure that consumers are effectively protected from fraud. Our goal is to retain the State-based system of regulation and to improve that system for the future. Our goal is to retain the State-based system of regulation and to improve that system for the future. We share the same goals, and I want to commit to you that with your support and cooperation, State insurance regulators and the NAIC will be full partners in this process towards reform.