HOUSE PANEL WARNS NAIC TO HURRY UP ON STATE INSURANCE REFORMS.

Members of the House Financial Services capital markets subcommittee Nov. 5 applauded the progress made by states to establish a more uniform, efficient state insurance regulation system - but they warned reforms needed to be speeded up to avoid federal regulation.

"If we can't get something in place within the next year or 18 months, we're going to have to move along," Rep. Paul Kanjorski (D-PA), the committee's ranking member, said in response to the National Association of Insurance Commissioners' action plan calling for states to have integrated regulatory procedures in place by Dec. 31, 2008.

"2008 is several years too late," Kanjorski added.

Mike Pickens, Arkansas Insurance Commissioner and president of the National Association of Insurance Commissioners, said state insurance regulators were "on time and on target to accomplish changes needed to establish an efficient national system of insurance regulation in the United States."

"Even if an alternative federal regulatory system were set up tomorrow, there is no way it could achieve these improvements on a schedule that comes close to the aggressive timetable which state regulators have adopted voluntarily," he said.

Not only did NAIC have an action plan, he said, but it had received commitment from the National Conference of State Legislatures, the National Conference of Insurance Legislators and the Council of State Governments that they would make certain state legislatures approve the necessary regulatory changes.

Kanjorski said he would be sympathetic except states and localities control whether people build on sites that are likely to burn or be flooded and they had shown "unintelligent planning" in how they handled these risks.

"Ultimately, the risk is in the hands of the taxpayers," he said.

Kanjorski had left the hearing room when Pickens clarified the action plan's interstate compact to be implemented by 2008 covered only life insurance, annuities, disability income insurance and long-term care insurance products.

Subcommittee Chairman Richard Baker (R-LA) responded, however, that Kanjorski would be even more adamant about moving ahead with an optional federal charter once he learned the mechanism for developing national product standards covered only the life insurance portion of the insurance industry.

The optional federal charter alternative, which is supported by the American Council of Life Insurers, the American Insurance Association and The Council of Insurance Agents+Brokers, would create a new national insurance entity to regulate insurers who opt for a federal charter, leaving those who opt for a state charter to continue being regulated under the current state regulatory system.

Insurers opting for the federal charter would not be exempt from state insurance laws unless specifically designated by the national insurance commissioner, but they no longer would have the antitrust protection of the McCarran-Ferguson Act.

Pickens took issue with calling the federal charter optional.

"A federal charter may be optional for an insurer choosing it," he said, "but the negative impact of federally-regulated insurers will not be optional for consumers, producers, state-chartered insurers, state governments, and local taxpayers who are affected, even though they have little or no real say in the choice of a federal charter."

He also pointed out federally-chartered insurers would inevitably challenge state consumer protection laws and result in "years of protracted, costly litigation, as well as market and regulatory confusion, that will benefit the legal community rather than the insurance providers and consumers."

New York Sen. Neil Breslin told the subcommittee he had become much more optimistic about the progress states could make in achieving uniformity and efficiency than he was when Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act in 1999.

Breslin, who spoke on behalf of NCOIL, said "the states have taken on the issues and done so aggressively."

He noted NCOIL was "pleased with the NAIC's willingness to work together with us on regulatory modernization - particularly in the area of market conduct reform."

He said states had focused on four areas of insurance regulation that required immediate improvement: insurance producer licensing, speed-to-market for insurance products, company licensing and market conduct regulation.

Of these areas, he said, states were well on their way to fully addressing the first two areas and NCOIL would be working with legislatures to enact a company licensing model in 2004.

Although the problems with the current market conduct regulatory system are "glaring," he said, NCOIL would consider a Market Conduct Surveillance Model Act at its annual meeting in late November.

"State legislators are acutely aware of the forces at work to create an optional federal charter for insurance companies," he said. "Our heads are not in the sand.

"We understand that political and marketplace realities demand that we improve state regulation. We understand that the status quo is not an option."

New York Sen. Kemp Hannon, who spoke on behalf of NCSL, also said state legislators and insurance commissioners were determined to get necessary regulatory changes made while preserving the advantages of the state system.

In July, he said, NCSL unanimously endorsed an interstate insurance product regulation compact for life insurance and annuity products and NAIC had approved the compact later that month without dissent.

He noted NCSL had endorsed model legislation only two other times in its 28-year history, once in 1991 when it approved NAIC's model insurance solvency bill and in 2003 when it endorsed a multistate sales tax agreement.

Because NCSL does not believe a uniform regulatory approach is required for property/casualty insurance, he said, NCSL had adopted a statement of principles for the regulation of property and casualty insurance which encourages states to move toward market-based systems.

He said states had "a wide range of models" to consider in determining how to modernize rate and form regulation, including the NAIC commercial lines modernization model and the NCOIL property/casualty model.

When he said he expected all 50 states to implement producer licensing reciprocity, Rep. Sue Kelly (R-NY) noted Congress had thought only 29 states "was a good number" in 1999 when it mandated in the GLB legislation that 29 states must enact licensing reforms by November 2002 to avoid formation of the National Association of Registered Agents and Brokers.

Getting New York "over the hurdle" of implementing state licensing reciprocity was a "big problem," he said, "but now we're on the other side of the hill, we're getting there."

Both Hannon and New York Insurance Superintendent Gregory Serio, however, said it was difficult to get all parties from the five states with the largest property/casualty insurance business - New York, California, Florida, Illinois and Texas - sitting down together at the table to negotiate uniform national standards.

Rep. Gary Miller (R-CA) said he had a problem with leaving enactment up to the states because getting a uniform model law was then dependent upon whether every state passed it.

Although he applauded the work being done by the members of the panel, he said he would support establishing an optional federal charter alternative if he decided it would make the marketplace more competitive. When Pickens said the Illinois model law had resulted in a very competitive marketplace and he would like to see it "enacted across the board," Baker quickly interrupted, "I think we could do that."

Pickens responded, "One size doesn't fit all. The Illinois model is good but it might not work all over."

An insurance policy, he said, was a unique product, "inextricably bound to the separate legal systems of each state" and "a contract written and interpreted under the laws of each state.

"There is no way the federal government could possibly replicate the specific expertise of state legislatures, regulators and courts to successfully interpret the contractual and tort laws of 50 states and the District of Columbia."

Hannon called any federal legislation in the area of insurance regulation "a tremendous mistake," which would "endanger effective state regulation, threaten the creation of a vast new federal bureaucracy, risk state consumer protections, jeopardize insurer solvency and endanger the strength and stability of the insurance marketplace."

John Fitts, deputy general counsel of Progressive Casualty Insurance Co., told the subcommittee he was not a proponent of an optional federal charter nor the federalization of insurance regulation, but he would favor federal legislation promulgating uniform national regulatory standards to be enforced by the existing state regulatory system.

Obtaining meaningful reform at the state level, he said, was dependent on all 50 state legislatures acting uniformly and he doubted all 50 would do so.

Tom Ahart, former president of the Independent Insurance Agents & Brokers of America and president of Ahart, Frinzi & Smith Insurance Agency in Phillipsburg, NJ, made a similar suggestion, that Congress correct the problems with the current state regulatory system "through federal legislation, not federal regulation."

Jaxon A. White, chairman and CEO of Medmarc Insurance Group composed of three property and casualty insurance companies domiciled in Virginia, said his company supports state regulation of insurance but thinks "it should become more rational to accommodate and sustain small insurance companies."

He said his company had no competitor of similar size, with all competitors being "very large insurers with much different economies of scale in dealing with state regulators and their varying requirements."

But no matter what size the company, he said, federal standards "would promote common interpretations of compliance, licensing and other key parts of the state regulatory system."

Spokesmen for two larger insurers, The Hartford and Massachusetts Mutual Life Insurance Co., said their companies supported optional federal insurance charter legislation.

William B. Fisher, vice president and associate general counsel for Massachusetts Mutual, said NAIC's action plan calls for the interstate compact for life insurance to be operational in at least 30 states or states representing 60 percent of the national premium volume by December 31, 2008.

"Even if this goal is achieved, it would fall far short of achieving comprehensive, uniform and efficient product regulation," he said, adding, "a life insurer such as MassMutual that is facing increased competitive pressures does not have the luxury of waiting to see how successful the state modernization efforts will be."

Neal S. Wolin, executive vice president and general counsel for The Hartford Financial Services Group, said his property/casualty and life insurance company believes "the solution that best provides value to consumers and the economy is one that grants national insurers the level of federal oversight offered to other large financial institutions."

Markham McKnight, president and CEO of Wright and Percy Insurance of Baton Rouge, LA, and chair of The Council's government affairs committee, urged the subcommittee to immediately pass producer licensing and speed-to-market reforms as well as increasing access to alternative markets while continuing to work on the more long-term optional federal charter legislation.

He said "Florida has enacted licensing reform that in no way resembles the Producer Licensing Model Act" and California, the largest of states in terms of insurance premiums written, has enacted no licensing reciprocity legislation.

He said the only reason Florida had stopped barring non-residents from being licensed to sell surplus lines products to Florida residents and requiring them to pay a resident agent a mandated countersignature fee was because The Council had filed a lawsuit and was granted summary judgment.

He said Florida had opted not to appeal the ruling, but said The Council should not have to resort to lawsuits "to defeat these protectionist laws and to put ourselves in a position to serve our clients and to do so in an efficient manner."

He noted Nevada, South Dakota and West Virginia had similar countersignature laws.

He said he doubted NAIC could force a dissenting state to adhere to any standard it set but those states would have no choice if Congress mandated they enact uniform licensure laws or laws permitting an agent or broker licensed in one state to be licensed in all other states on a reciprocal basis.

He too singled out Illinois for praise for coming up with a successful model for eliminating prior approval of rates and policy forms.