PIA National opposes federal charters and the dual regulatory system they would require. PROFESSIONAL INSURANCE AGENTS

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1 PIA National opposes federal charters and the dual regulatory system they would require. PROFESSIONAL INSURANCE AGENTS 25 CHAMBERLAIN ST. P. O. BOX 997 GLENMONT, NY / FAX: 888/ WEB: Issue-at-a-glance: Federal charters for insurers. PIA opposes a federal-chartering system for insurers, even an optional one. PIA is working for continuing reform of functional state regulation through creation and adoption of federal standards. PIA supports the road map approach as proposed by Rep. Michael Oxley (R-Oh.) as the basis for legislation in the House. Creating a conflicting, competing federal-state insurance regulatory system is unneeded and counter-productive to effective oversight of the insurance industry. The state-based regulatory system has been moving rapidly toward the goal of uniformity following the Gramm-Leach-Bliley Act and the goals it set. What s happening right now: The House. Some legislative activity on the issue appears likely this year. On March 14, 2004, Michael Oxley (R-Oh.), chairman of the House Financial Services Committee presented a road map to state-based insurance regulatory reform to state insurance regulators. Oxley ruled out optional federal chartering or any type of dual insurance regulatory system, but said new federal regulations to create greater uniformity among state-level insurance marketplaces are necessary. Oxley outlined the plan in an address to the NAIC s spring meeting. His plan would set up a Federal-State Advisory Council to coordinate future discussions over insurance tax policy and uniformity. He said the goal would be to build on the work already done by the NAIC to create a more uniform, efficient and market-based insurance regulatory system. Oxley told the NAIC his proposal would focus on creating a federal-state partnership structure rather than assuming federal control. It would include appointment of the Council (which would be run by state insurance commissioners and federal entities involved with national insurance programs), plus another federal appointee whose job would be to approve or disapprove recommendations of the Council. However, the federal appointee would have no direct regulatory authority rather, state regulators would maintain authority over the business of insurance. Oxley cited six key areas as critical weaknesses in the current insurance structure that would be targeted for reform: (1) a more efficient way to review insurance products and get them to market more quickly; (2) continued improvement in agent licensing procedures; (3) streamlining insurer licensing by moving toward a single point of entry; (4) creating more effective, coordinated market conduct oversight; (5) eliminating price controls ( competitive rating ) and commercial lines deregulation; and (6) creating an improved federal-state partnership to coordinate insurance-related public policy and promote uniformity. The roadmap was developed after considering testimony presented at 14 hearings conducted on the subject by a subcommittee of the Financial Services Committee. The hearings were held over the past three years by the Capital Markets, Insurance and Government-Sponsored Enterprises Subcommittee, chaired by Richard Baker (R-La.)

2 Rep. Oxley set the first hearing on the roadmap proposal for March 31. Some type of draft bill is expected following the hearings. What s happening right now: The Senate. The Senate s thinking on the federal/state regulatory issue is less clear. Senator Chuck Schumer (D-NY), originally a proponent of federal charters, has never followed through on his plan to introduce a bill. Hollings bill. On July 8, 2003, Senator Ernest Fritz Hollings (D-South Carolina) introduced legislation (S. 1373) that would create federal regulation of insurance. Hollings bill, The Insurance Consumer Protection Act of 2003, would create in the Commerce Department a fivemember Federal Insurance Regulatory Commission (IRC) that would establish standards, regulate rates and policy forms on a prior-approval basis, investigate market conduct and oversee solvency. The IRC would hear challenges from consumers on rate hikes and have authority over licensing standards. The existing antitrust exemption under the McCarran-Ferguson Act would be repealed by S.1373, and the new system would NOT be optional. Only carriers doing business solely in the state they are domiciled would continue to be state-regulated. The new Federal Insurance Commission would regulate all lines of insurance. S has been referred to the Senate Committee on Commerce, Science and Transportation. The Committee held a public hearing Oct. 2, 2003 on the bill but took no further action. PIA came out strongly against this bill. This is probably one of the worst insurance regulatory proposals advanced thus far, declared PIA s Pat Borowski. As a consequence, PIA is opposed to S and will vigorously oppose it. As a Democrat, Sen. Hollings is in the Senate Minority, and he is not planning to seek reelection this fall. NAIC involvement. Ernst Csiszar, president of NAIC, has been on the defensive after consumer groups charged in early March that he and NAIC have a radical deregulation agenda which would be accomplished by ceding regulatory authority to the federal government. Csiszar, the commissioner in South Carolina, vehemently denied the charge, saying he and NAIC are firmly behind continued state regulation. Other than state/federal relations, which is his top issue, Csiszar has identified three objectives. They are: (1) progress on speed-to-market; (2) market conduct examinations; and (3) solvency improving the NAIC s risk-based capital system. The NAIC in recent activity has made considerable progress toward achieving uniformity and speed-to-market goals. These include: Interstate Compact. This proposal is geared to speed-to-market for life insurance products. A NAIC working group is developing bylaws and standards for the approval of products. States would sign on to join the compact by passing model legislation. A few smaller states already are on board, but there is some disappointment at the slow pace of state legislative action on joining the compact to date perhaps because bylaws and product standards are not yet in place. The compact bill has been introduced in Connecticut (where it has had a public hearing), New York and New Hampshire, and is expected to be introduced in New Jersey this spring. Licensing. The NAIC has made great progress toward creating a uniform licensing system. Over 40 states have passed a version of the NAIC model producer licensing act. The NAIC has adopted a National Insurance Producer Registry and Producer Data Base that greatly facilitates licensing and appointments in multiple states. Market Conduct. The NAIC and NCOIL (National Conference of Insurance Legislators) are in the final stages of working out a model law that would simplify market conduct regulation.

3 Background. Since the 1960s, we have seen sporadic proposals to repeal the McCarran Ferguson Act. This law delegates to the states the regulation of the insurance business, and exempts the business of insurance from federal antitrust provisions to the extent it is regulated by the states. PIA has consistently opposed these repeal bills, and has strongly supported state regulation. Part of the Gramm-Leach-Bliley Act (which permitted integration of the banking and insurance industries) established goals of uniformity and reciprocity in insurance licensing. States met their initial goals within the GLB time frames. But promoters of federal regulation have not been satisfied with the GLB targets. They want an optional federal-chartering system for insurers. Gramm-Leach-Bliley established the functional regulation approach, which PIA supports. This approach means that an entity s insurance operations are subject to state regulation, regardless of the nature of the entity (i.e. bank, brokerage, insurer, insurance agent, etc.). PIA also supports a national standards approach as illustrated by Gramm-Leach-Bliley s uniformity and reciprocity goals for producer licensing. By agreeing to support national standards, PIA recognizes the need for some national uniformity in standards implemented by the several states. Pushing the federal-chartering concept are some major insurance company trade associations, including the American Insurance Association (AIA), the American Council of Life Insurers (ACLI) and the Council of Insurance Agents & Brokers (CIAB). Opposing federal chartering are some other major trade associations, including the Property Casualty Insurers Association of America (PCI) and the National Association of Mutual Insurance Companies (NAMIC), as well as PIA and the Independent Insurance Agents and Brokers of America (IIABA). So, the industry is far from united on this issue. New York Sen. Charles Schumer announced in 2001 that he was drafting a bill to provide an optional federal charter. This bill went through numerous drafts but has never been introduced. On the House side, former Rep. John LaFalce (D-N.Y.), in 2002 introduced H.R. 3766, the Insurance Industry Modernization and Consumer Protection Act. The LaFalce bill, like the current Hollings bill, was not necessarily supported by the insurance trade groups that want federal chartering. The Schumer draft and the LaFalce bill would have created a federal insurance regulator within the Treasury Department; established a new category of national insurance company requiring a federal license; provided consumer protections against unfair or deceptive practices, unfair discrimination, unlawful inducements and fraud (the LaFalce bill would have added strong antiredlining provisions); and allowed for pre-emption of state laws under certain conditions. The bills generally exempted national insurance companies from state laws, with certain exceptions. ASSURE. PIA National supports ASSURE, the Alliance for Sound State Uniform Regulatory Efficiency. ASSURE is a nonprofit coalition made up of regulators, consumers, legislators, industry groups and business leaders who believe that state governments are best equipped to regulate the insurance industry. ASSURE s mission is to improve and defend state insurance regulation by supporting greater efficiency and uniformity in regulatory practices while proactively and aggressively maintaining vital consumer protections and education initiatives, as well as promoting streamlined national standards that recognize a unique and evolving statebased marketplace. A participant in ASSURE from the outset, PIA National sees this effort as supporting the outcomes that PIA members need now and in the future in improving functional insurance oversight.

4 Talking points: Direct federal regulation would create a new, duplicative bureaucracy. States are closer to the individual situation and market issues within their borders. Due to the wide divergence of market issues among states, it is important for regulation to remain in the hands of state policymakers, since no one-size-fits-all approach could work. Agents are wary that, while federal charters would be optional for insurers, agents would be forced to get a federal license, or would otherwise fall under federal regulation, in order to do business with a federally chartered company. Agents are prepared to use their significant political clout to achieve uniformity in the important points of state regulation, working with the National Association of Insurance Commissioners and the National Conference of Insurance Legislators to achieve this goal. Committee jurisdiction: House Financial Services (primary), House Judiciary, House Ways & Means; Senate Banking (primary); Senate Judiciary; Senate Finance (These charts show the Chairman, the ranking Democrat and the members from New York, New Jersey, Connecticut and New Hampshire.) House Financial Services, Mike Oxley, R-Ohio, Chairman: Sue Kelly, N.Y. (Vice Chair) Barney Frank, Mass. (Ranking member) Pete King, N.Y. Carolyn Maloney, N.Y. Chris Shays, Conn. Nydia Velazquez, N.Y. Vito Fossella, N.Y. Gary Ackerman, N.Y. Scott Garrett, N.J. Gregory Meeks, N.Y. Joseph Crowley, N.Y. Steve Israel, N.Y. Carolyn McCarthy, N.Y. House Judiciary, F. James Sensenbrenner (R-Wis.), Chairman no members from our four states John Conyers, MI (Ranking member) Jarrold Nadler, N.Y. Anthony David Weiner, N.Y. House Ways & Means, Bill Thomas (R-Calif.), Chairman Nancy Johnson, Conn. Charles Rangel, N.Y. (Ranking member) Amo Houghton, N.Y. Mike McNulty, N.Y. Senate Commerce, Science and Transportation Committee, John McCain (R-Az.), Chairman John E. Sununu, N.H. Frank Lautenberg, N.J. Senate Banking, Housing & Urban Affairs Committee, Richard Shelby (R-Al), Chairman Republican (Majority) members: Democratic (Minority) members: John E. Sununu, N.H. Paul Sarbanes, Md. (Ranking member) Chris Dodd, Conn. Charles Schumer, N.Y. Jon Corzine, N.J.

5 Senate Judiciary, Orin Hatch (R-Utah), Chairman no members from our four states Patrick Leahy, Vt. (Ranking member) Charles Schumer, N.Y. Senate Finance, Charles Grassley (R-Iowa), Chairman no members from our four states Max Baucus, Mt. (Ranking member) no members from our four states 3/25/04