<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:29968.wais]
NONADMITTED AND REINSURANCE REFORM
ACT OF 2006
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
H.R. 5637
__________
SEPTEMBER 19, 2006
__________
Serial No. 109-143
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
U.S. GOVERNMENT PRINTING OFFICE
30-968 WASHINGTON : 2006
_____________________________________________________________________________
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
CHRIS CANNON, Utah Chairman
HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin JERROLD NADLER, New York
J. RANDY FORBES, Virginia DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas
Raymond V. Smietanka, Chief Counsel
Susan A. Jensen, Counsel
Brenda Hankins, Counsel
Mike Lenn, Full Committee Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
----------
SEPTEMBER 19, 2006
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Chairman, Subcommittee on Commercial and
Administrative Law............................................. 1
The Honorable Debbie Wasserman Schultz, a Representative in
Congress from the State of Florida, and Member, Subcommittee on
Commercial and Administrative Law.............................. 4
WITNESSES
Scott A. Sinder, Esquire, Counsel, Council of Insurance Agents
and Brokers
Oral Testimony................................................. 7
Prepared Statement............................................. 9
Tracey Laws, Esquire, Senior Vice President and General Counsel,
Reinsurance Association of America
Oral Testimony................................................. 15
Prepared Statement............................................. 17
Mr. Travis Plunkett, Legislative Director, Consumer Federation of
America
Oral Testimony................................................. 20
Prepared Statement............................................. 22
Mr. Alex Soto, President, Independent Insurance Agents & Brokers
of America
Oral Testimony................................................. 29
Prepared Statement............................................. 30
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and
Chairman, Subcommittee on Commercial and Administrative Law.... 2
Prepared Statement of the Honorable Ginny Brown-Waite, a
Representative in Congress from the State of Florida........... 3
NONADMITTED AND REINSURANCE REFORM ACT OF 2006
----------
TUESDAY, SEPTEMBER 19, 2006
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon (Chairman of the Subcommittee) presiding.
Mr. Cannon. Good morning. This hearing of the Subcommittee
on Commercial and Administrative Law will now come to order. We
are here today to consider H.R. 5637, the ``Nonadmitted and
Reinsurance Reform Act of 2006.''
Insurance is a highly regulated industry, but unlike
banking and securities, insurance is regulated mainly at the
State level. The Supreme Court ruled that Congress has the
power to regulate insurance, but in 1945 this power was
delegated to the States in the McCarren-Furguson Act and
specifically reaffirmed in the 1999 Gramm-Leach-Bliley Act.
Every State requires licenses for insurance companies and
regulates both the conduct and the details of the products sold
within the State. This regulation is seen as important for
consumer protection, but also creates barriers to entry in the
insurance market and can reduce the supply of insurance that is
available. Some argue that uniformity in insurance regulation
is desirable, unlike the significant variation in current State
regulations.
H.R. 5637 addresses two areas of the insurance industry.
The first is nonadmitted insurers. There are certain times when
it is not possible for the citizens of one State to find
licensed insurers to cover his or her unique risks. In
situations where consumers are unable to find insurance from
licensed insurers within their State, States do not require
that the consumers go without insurance. Instead, States allow
nonlicensed insurers, known as nonadmitted or surplus line
insurers, to provide insurance. The vast majority of
nonadmitted insurance policies are sold to sophisticated
businesses and cover specialized risks such as terrorism,
catastrophic losses, hazardous materials, natural disasters and
environmental or pollution risks.
Although these insurers do not have a regular State
license, they are not unregulated. The sale of insurance is
still regulated and taxed by the States through requirements
placed on the brokers facilitating the insurance transactions.
States collect premium taxes for nonadmitted insurance
placements, but the tax allocation and remittance formulas and
procedures vary significantly from State to State, and are
often in direct conflict. When a nonadmitted policy involves
multistate risk, it can be difficult to determine how much tax
is owed to each State, and as a result, multiple taxation or
noncompliance may occur.
The second area of the insurance industry that H.R. 5637
addresses is reinsurance. Reinsurance is insurance for
insurance companies. When an insurance company has written a
policy covering a large risk, it will insure part of its risk
through other insurers thereby transferring a portion of its
risk. Reinsurance allows an insurer the ability to increase its
capacity and underwrite more coverage, performing an essential
role in the insurance marketplace by limiting insurers'
liability exposure, adding insurance capacity, and protecting
against large, unexpected losses.
H.R. 5637 was written to affect a narrow area of insurance
reform. It is aimed at addressing inconsistencies of State
regulation in the surplus lines insurance market and
streamlining its procedure. It creates a uniform system for
nonadmitted insurance premium tax payments by making the taxing
authority the home State of the policyholder. Further, it
encourages States to develop a procedural mechanism for uniform
tax allocation through an interstate compact or other method,
and establishes regulatory deference for home insurers as
developed and promulgated by the National Association of
Insurance Commissioners in the Nonadmitted Insurance Model Act.
The bill also applies a single State regulation for
financial solvency and credit reinsurance of reinsurers.
Determinations of tax credits for reinsurance will be
controlled by the home State of the insurer purchasing the
reinsurance. The regulations of the home State of the reinsurer
will control in determinations of solvency of the reinsurer
provided such State is NAIC-accredited or has financial
solvency requirements substantially similar to the requirements
necessary for NAIC accreditation.
I look forward to learning more about H.R. 5637 and to hear
the testimony of our panel.
Without objection, the Chair will be authorized to declare
recess of the hearing at any point. Hearing none, so ordered.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Chairman, Subcommittee on
Commercial and Administrative Law
Good morning, this hearing of the Subcommittee on Commercial and
Administrative Law will now come to order.
We are here today to consider H.R. 5637, the Nonadmitted and
Reinsurance Reform Act of 2006. This bill deals with two different
areas of the insurance industry. The first are is nonadmitted insurers.
Insurance is a highly regulated industry. Unlike banking and
securities, though, Congress, under the McCarren-Furguson Act, has
granted the States the ability to regulate insurance. Every State
requires licenses for insurance companies and regulates both the
company conduct and the details of the products sold within the state.
This regulation is seen as important for consumer protection, but also
creates barriers to entry in the insurance market, and can reduce the
supply of insurance that is available.
There are certain times when it is not possible to find licensed
insurers to cover unique or hard to place risks. In these situations
where consumers are unable to find insurance from licensed insurers,
States do not require that the consumers simply go without insurance.
Instead, States allow non-licensed insurers, known as nonadmitted or
surplus line insurers, to provide insurance in this circumstance. The
vast majority of nonadmitted insurance polices are sold to
sophisticated businesses and cover specialized risks, such as extreme
catastrophic coverage and terrorism, hazardous materials, natural
disasters, and environmental or pollution risks.
Although these insurers do not have a regular state license, they
are not unregulated. The sale of insurance is still regulated and taxed
by the States through requirements placed on the brokers facilitating
the insurance transactions. States collect premium taxes for
nonadmitted insurance placements, but the tax allocation and remittance
formulas and procedures vary significantly from State to State and are
often in direct conflict.
When a nonadmitted policy involves multi-state risk, it can be
extremely difficult to determine how much tax is owed to each State
and, as a result, multiple taxation or noncompliance often results.
The second area of the insurance industry that H.R 5637 addresses
is reinsurance. Reinsurance is insurance for insurance companies. When
an insurance company has written a policy covering a large risk, it
will insure part of its risk through other insurers thereby
transferring a portion of its risk exposure to a reinsurer. Reinsurance
allows an insurer the ability to increase its capacity and underwrite
more coverage, performing an essential role in the insurance
marketplace by limiting insurers' liability exposure on large risks,
adding insurance capacity, and protecting against large unexpected
catastrophes.
H.R. 5637 was written to affect a narrow area of insurance reform.
It is aimed at addressing inconsistencies of state regulation in the
surplus lines insurance market and streamlining its procedure. It
creates a uniform system for nonadmitted insurance premium tax payments
by making the taxing authority the home State of the policyholder.
Further, it encourages States to develop a procedural mechanism for
uniform tax allocation (through an interstate compact or other method),
and establishes regulatory deference for home insurers as developed and
promulgated by the National Association of Insurance Commissioners
(NAIC) in the Nonadmitted Insurance Model Act.
The bill applies a single State regulation for financial solvency
and credit reinsurance of reinsurers. Determinations of tax credits for
reinsurance will be controlled by the home State of the insurer
purchasing the reinsurance. The regulations of the home State of the
reinsurer will control in determinations of solvency of the reinsurer
provided such State is NAIC-accredited or has financial solvency
requirements substantially similar to the requirements necessary for
NAIC accreditation.
I look forward to learning more about the insurance industry and
H.R. 5637, and to hear the testimony of our panel.
Mr. Cannon. I ask unanimous consent to enter into the
record a statement by the sponsor of H.R. 5637, the
representative from Florida, Ms. Brown-Waite, and that Members
have 5 legislative days to submit written statements into the
record. Without objection, so ordered.
[The prepared statement of Ms. Brown-Waite follows:]
Prepared Statement of the Honorable Ginny Brown-Waite, a Representative
in Congress from the State of Florida
Thank you Mr. Chairman for holding this hearing today.
And I want to thank the witnesses for being here today as well.
The House of Representatives has been engaged in overall insurance
reform for several years, and in this endeavor, there are dozens of
issues the Congress must consider. I have introduced H.R. 5637, the
Nonadmitted and Reinsurance Reform Act that will provide solutions to
two aspects of that reform.
Today, the regulation of the surplus lines market is fragmented and
cumbersome. Insurers and brokers who want to provide insurance across
state lines are subject to a myriad of different state tax and
licensing requirements. For instance, if a company in Florida wants to
transport a product, say parts for the space shuttle, to Houston, TX,
the non-admitted insurance company they use must comply with the
regulations of at least five different states. Often times, these
regulations will conflict, making it impossible for one company to
comply with all of them. This situation leaves policyholders
underinsured and with little choice in providers.
Moreover, most of the policyholders that purchase insurance in the
nonadmitted market do so everyday. These ``sophisticated'' commercial
entities have educated risk advisors on staff with a thorough
understanding of the market and their risk exposure. Yet in most
states, these companies are required to shop around the admitted market
and be denied for coverage they know they cannot get before they are
permitted to shop in the surplus lines market. This practice is
needless and cumbersome, and only adds to the cost for the
policyholder.
On another front, in the reinsurance market some state regulators
are taking it upon themselves to throw out arbitration agreements
between reinsurance providers and primary carriers. These are
contractual agreements decided upon by sophisticated parties on both
sides of the transaction to settle disputes without tying up the
courts. If these agreements are valid in a state that is accredited by
the NAIC, they should be valid in all accredited states.
Accordingly, H.R. 5637:
<bullet> Specifies that only the tax policies and licensing
regulations of the state in which the policyholder is domiciled
govern the transaction. States may still enter into tax
allocation and remittance agreements with other states, but
this bill specifies which law will take precedence, thus taking
the guesswork out of the process. Insurance providers therefore
need only comply with those of the policyholders' state in one
transaction.
<bullet> Requires states within two years of bill passage to
participate in the National Association of Insurance
Commissioners' national insurance producer database and adopt
regulations under NAIC's Nonadmitted Insurance Model Act.
<bullet> Allows sophisticated commercial entities direct
access to the surplus lines market.
<bullet> Prohibits states from voiding established,
contractual arbitration agreements between reinsurers and
primary companies.
Obtaining insurance for unique or high-risk products in the
nonadmitted market already has its own obstacles. Adding a quagmire of
inefficient state rules does not help. And with reinsurance rates
rising at an alarming rate, companies should be encouraged to stay out
of the courts and follow their own arbitration agreements.
My bill provides commonsense solutions to the nonadmitted and
reinsurance market, and I thank the Chairman for holding this hearing
on it today.
Mr. Cannon. I now yield to Ms. Wasserman Schultz, who is
sitting in for Mr. Watt today, for an opening statement.
Ms. Wasserman Schultz. Thank you. Thank you, Mr. Chairman,
for convening today's hearing.
And I especially want to thank Ranking Member Watt in
absentia. It's not all that often that a freshman gets to sit
in this chair, so I think I'll hold onto it for a little bit
and glory in it.
I also want to welcome all of our panelists and extend a
special welcome to my good friend, Alex Soto, current President
of the ``Big I,'' otherwise known as the Independent Insurers &
Brokers of America, but it's actually known as the ``Big I.''
and Alex hails from Miami, and he has been a good friend to me
over the years. We have worked together on many, many issues,
not always on the same side, but on many, many issues; and he
is a tremendous advocate for his industry.
The problem that we're here to talk about today is not only
endemic to Florida, though, in spite of the fact that this is a
bill that's sponsored by a Member from Florida, this is a
problem that is really extremely broad based nationwide. The
economic resonance from disasters like Hurricanes Katrina, Rita
and Wilma, has left an indelible fingerprint on our Nation, and
our country now faces a crisis in its insurance markets the
likes of which we have not witnessed before. And it's not only
price, but availability.
Recent catastrophes have reshaped our Nation's personal and
commercial insurance markets, making it even more difficult for
affected regions to recover. Market perception of exponential
increases in the risk affiliated with catastrophic events has
resulted in precipitous declines in insurance coverage
availability at astronomical cost to policyholders.
In addition to my role on this Committee, I serve on the
House Financial Services Committee, as well, and we have held a
number of hearings on this matter and are considering how best
to resolve this problem. I believe an essential component for
that solution, Mr. Chairman, is the establishment of a national
catastrophe fund. To that end, I've introduced legislation H.R.
5891, the Catastrophic Disaster Risk and Insurance Commission
Act of 2006, which would bring together a few stakeholders to
develop a comprehensive solution to this national problem.
The only way we were able to establish a State catastrophe
fund in Florida following Hurricane Andrew, Mr. Chairman, was
when we brought the stakeholders to the table, had a technical
advisory panel and advised a statewide task force that was
chaired and the members of which were our university
presidents; and they made recommendations to the Florida
legislature, and ultimately we were able to come to agreement
on that issue.
While the bill before us today is only a small piece of the
puzzle, it is an essential first step, which eliminates market
inefficiencies and reduces duplicative and costly filing
burdens. I encourage my colleagues here today to move this
legislation forward.
The surplus lines market serves as a safety valve for the
traditional market. In my home State of Florida both
individuals and commercial entities are seeing astronomical
increases, and I am talking on the order of thousands of
percent increases in their insurance premiums. Under the
existing system of insurance regulation, surplus lines serve an
extraordinarily valuable purpose to hedge against some of these
natural disaster risks. Don't get me wrong, they're not
perfect, but in some instances it is the only way commercial
firms and individuals can get adequate coverage for wind
exposure.
As a original cosponsor of this legislation, I am proud of
the Financial Services Committee's concerted effort to ensure
that concerns from both sides of the aisle were incorporated
into the bill before it was reported unanimously. In its
current form, the legislation includes a number of provisions
inserted at the behest of Financial Services Ranking Member
Barney Frank and Subcommittee Ranking Member Paul Kanjorski;
and these include, Mr. Chairman, provisions to address concerns
raised by the NAIC, the National Association of Insurance
Commissioners, adjustments to the allocation of premium taxes
amongst the States, a clarification to underscore that the bill
does not preempt State laws restricting the placement of
worker's compensation coverage with a nonadmitted insurer, as
well as a handful of technical corrections.
The second title on reinsurance was revised to ensure that
the State with the greatest interest in protecting the
consumer, in this case the primary insurer, makes the
appropriate decisions. The definition of a reinsurer was also
changed to ensure that the domiciliary oversight does not
unfairly advantage their primary insurance business.
And I think it's important to reiterate that this bill only
applies to sophisticated insurance lenders, not individuals.
The Risk and Insurance Management Society, or RIMS, which
represent commercial policyholders fully supports the
legislation.
I encourage my colleagues to support this bill because it
reduces economic inefficiencies and would eliminate hundreds of
billions of dollars in administrative costs. These costs are
currently passed on to consumers. Surplus lines ensure that
companies that otherwise could not get insurance are able to
obtain it, meaning they can also stay in business, provide jobs
and serve communities.
Thank you. I yield the balance of my time.
Mr. Cannon. Thank you.
Please note Mr. Bachus may join us; he is a co-sponsor of
the bill, and I mention it just because he is not a Member of
the Subcommittee, although he's a Member of the Judiciary
Committee; and we have arcane rules, and that requires that if
he--requires that if he asks questions, he has to have time
yielded to him, which we will make sure happens. I just want
you to understand in advance.
Our first witness is Mr. Scott Sinder, who is a member of
the Washington, D.C., law and government relations firm, The
Scott Group, and since 1999 has served as the outside General
Counsel for the Council of Insurance Agents & Brokers. Mr.
Sinder has represented the CIAB on a range of issues in Federal
courts, regulatory agencies, State legislatures and before
Congress.
Well, we have The Scott Group.
Mr. Sinder received his J.D. from the University of
Michigan Law School and his Master's in public policy from the
University of Michigan Institute of Public Policy Studies.
Our second witness is Ms. Tracey Laws, the Senior Vice
President and General Counsel for the Reinsurance Association
of America. Ms. Laws is responsible for establishing and
advocating the RAA's public policy positions. Prior to coming
to the RAA, Ms. Laws was a partner in the law firm of
Chadbourne & Parke, concentrating on reinsurance matters.
She is a member of the AIDA Reinsurance & Insurance
Arbitration Society law committee and the ABA's TIPS Federal
Involvement in Insurance Regulation Modernization task force.
Ms. Laws received her undergraduate degree from the College of
William and Mary and her law degree from the University of
Virginia.
Mr. Travis Plunkett is our third witness. He is the
Legislative Director for the Consumer Federation of America.
Mr. Plunkett's focus is primarily on financial services issues,
including credit reporting, bankruptcy, credit counseling,
consumer privacy and insurance.
Prior to the CFA, Mr. Plunkett served as the New York State
Legislative Representative for the American Association of
Retired Persons and the Associate Legislative Director of the
New York Public Interest Research Group. He received his
bachelor's degree from the University of Denver. Fellow
Westerner. Welcome, Mr. Plunkett.
Our final witness is Mr. Alex Soto, President of the
Independent Insurance Agents & Brokers of America. Mr. Soto is
also the President of InSource, Inc. of Miami, Florida. Mr.
Soto has held numerous positions at the IIABA prior to becoming
President, including Vice President, and the Chairman of the
Communications Committee Branding task force.
Mr. Soto has served as the Chairman and State National
Director of the Florida Association of Insurance Agents and the
Vice Chairman of the Florida Residential Property and Casualty
Joint Underwriting Association. He has also served as a member
of the Governor's Commission on the Florida insurance crisis
and the insurance fraud task force.
Mr. Soto earned a bachelor's degree in international
affairs from Florida State University.
Thank you for being here. I extend to each of you my
appreciation for your willingness to participate in the
hearing. We look forward to your expert testimony on this
important issue.
Because your written statements will be included in the
record, I request that you limit your time to 5 minutes. You
will note that you have a clock, the timer in front of you goes
from green when--until you have 1 minute left; then it goes to
yellow and then it turns red.
I don't want you to cut off your statement because we're
actually not overwhelmed with Members here, but if you can just
recognize that that time, 5-minute time frame, is helpful to
us, we'd appreciate that, and I may tap the gavel. And
certainly we will have a 5-minute questioning period for
Members of the Committee, as well, and I will tap a pencil or
gavel just to remind people the time is up and we will
certainly accommodate further rounds of questioning if Members
would like to do that.
Pursuant to the directive of the Chairman of the Judiciary
Committee, I ask the witnesses to please stand and raise your
right hand to take the oath.
[Witnesses sworn.]
Mr. Cannon. Let the record reflect that each of the
witnesses answered in the affirmative. You may be seated.
And, Mr. Sinder, we'd be pleased to hear your testimony
now.
TESTIMONY OF SCOTT A. SINDER, ESQUIRE, COUNCIL, COUNCIL OF
INSURANCE AGENTS & BROKERS
Mr. Sinder. Thank you, Mr. Chairman. Thank you both for
holding this hearing today and for affording me the opportunity
to testify today. And I'd also like to thank Representative
Wasserman Schultz, both for serving as the Ranking Member today
and for being an original sponsor of what we believe is an
incredibly important piece of legislation.
My comments will focus strictly on title I of the
nonadmitted insurance portion of the legislation.
I am testifying today on behalf of the Council of Insurance
Agents & Brokers. The council represents the top 1 percent of
insurance agencies and brokerage firms of the United States,
who collectively place over 90 percent of all commercial
property and casualty insurance in this country which last year
exceeded over $200 billion in placements. We are testifying in
support of this legislation because it would clean up a very
important area of cumbersome regulatory oversight.
The bill--title I of the bill does not deregulate the
regulation of nonadmitted insurance; it simply imposes a
coherent rule that says that only one set of rules will govern
any single transaction, and that set of rules would be the home
State where the policyholder is based, where the company has
its corporate headquarters.
Nonadmitted insurance, as you noted in your introductory
remarks, Mr. Chairman, is insurance that's purchased primarily
by companies for noncompulsory coverages. It's only in areas
where the State does not require companies or individuals to
have insurance coverage. So, for example, worker's
compensation, which is an area where States require coverage,
is not eligible for primary surplus lines coverage. And the
primary insurance covers the corporate treasury, doesn't cover
the property; the property is just the trigger on when a claim
will be paid out.
But the real beneficiary of that is not a consumer, is not
a claimant; it's the company itself and its corporate treasury,
which otherwise would be solely responsible for covering that
loss.
There are five primary areas of surplus lines regulation
among the States: the premium tax regulation; there is access
to the market, when are you able as a consumer, as a corporate
consumer, to access the surplus lines coverage; with what
carriers you may seek to place the surplus lines coverage;
licensing requirements; and there are other filing and
disclosure requirements. Essentially, all 55 U.S. jurisdictions
have a common set of areas in which they regulate, and they all
regulate in these five areas.
The rules themselves in a substantive basis also do not
differ in any substantive way. The difference is in the
details, and let me give you an example. There is a disclosure
that most States require you to give that says that this
insurance is being placed with a nonadmitted carrier and that
coverage is not therefore placed in the guaranty fund, and
insured by the guaranty fund at the State.
Almost every State has the identical disclosure. Almost
every State requires you to separately provide that disclosure
on the very first page of the policy. Well, if you're placing a
coverage that covers risks in 55 States, that requires 55
disclosures. It's impossible to place all of those on the first
page unless that page is very, very long. And the House
Financial Services Committee, when we testified, I had a stack
of documents next to me that was this high that represented the
tax filings for each of the States in which there was a risk
that was insured, that was covered by that one single policy.
These are incredibly onerous burdens. It's not a burden to
pay the tax, it's not a burden to give the disclosure, it's a
burden to make the filings 55 times, to give 55 disclosures.
The underlying intent of the legislation and what it
actually does is, it dictates that only a single set of rules
apply and that single set of rules are the rules of the State
in which the policyholder maintains its principal place of
business. There are some other provisions there intended to
assist the States in disseminating the premium tax revenue so
that it encourages the States, for example, to adopt an
interstate compact so that after the policyholder pays through
the broker their premium tax to the policyholder State of
residence. The States would then, behind that, share that
premium tax revenue as they deem appropriate. But it would
place the burden of making that final calculation and putting
that mechanism in place on the States and not on the brokers of
the policyholders.
By doing these things you will remove incredible
administrative burdens that apply when you try to access the
surplus lines market, and in doing so, you will enable brokers
and commercial policyholders to try to bridge the gap in the
areas in which you have the greatest efficiencies and coverage
right now, and those are the areas of catastrophic exposures
that Representative Wasserman Schultz noted in her introductory
comments.
Even the National Association of Insurance Commissioners,
in their testimony before the House Financial Services
Committee in June of 2005, noted that this was an area in which
Federal involvement was necessary and welcome. Commissioner
Diane Koken, who at the time was the President of the NAIC and
was the Commissioner from the State of Pennsylvania,
Commonwealth of Pennsylvania noted as follows, and I am quoting
her testimony:
``Federal legislation may be needed at some point to
resolve conflicting State laws regulating multistate
transactions. The area where this will most likely be necessary
is surplus lines premium tax allocation. Federal legislation
might also be one option to consider to enable multistate
property risks to access surplus lines coverage in their home
States under a single policy, subject to a single set of
requirements.''
That's exactly what title I does. It allows multistate
placements to be governed by a single set of rules. Those in
the policyholder's own State, it doesn't deregulate in any way.
Business insurance is also noted that this is exactly the types
of reforms that the Congress should be seeking to implement to
help moderize and rationalize State insurance regulation and
all of the stakeholders in this debate, the surplus lines
cares, the brokers, and even the customers, as you noted,
through RIMS, are very much supportive of title I of the
legislation.
With that, Mr. Chairman, I would be happy to answer your
questions at the conclusion of others' remarks.
Mr. Cannon. Thank you, Mr. Sinder. I note that the green
light is still on. That is a rare occurrence in this business.
Mr. Sinder. Mr. Chairman, the clock started late, and I
didn't feel it was appropriate for me to take advantage of
that.
Mr. Cannon. We'll still give you credit.
Mr. Sinder. Thank you, sir.
[The prepared statement of Mr. Sinder follows:]
Prepared Statement of Scott A. Sinder
Good morning, Chairman Cannon, Ranking Member Watt and members of
the Subcommittee. Thank you for the opportunity to testify before you
today on behalf of the Council of Insurance Agents and Brokers (The
Council) and thanks to Representative Wasserman-Schultz for being an
original sponsor of the Nonadmitted and Reinsurance Reform Act of 2006
(the Reform Act). This Act was approved unanimously and on a bipartisan
basis by the House Financial Services Committee in July. We greatly
appreciate the Judiciary Committee's review of its provisions, and hope
that you will agree that it is a balanced and important reform, worthy
of enactment by the House this year. Commercial insurance regulatory
modernization is essential if we are to have a dynamic commercial
insurance marketplace that addresses the needs of commercial insureds
for the 21st century. The Council believes the proposed legislation
constitutes a significant step toward that end and supports it
wholeheartedly. We were greatly encouraged by the adoption of the
legislation by the House Financial Services Committee, and look forward
to working with you as you consider the proposal.
The Council represents the nation's largest, most productive and
most profitable commercial property and casualty insurance agencies and
brokerage firms. Council members specialize in a wide range of
insurance products and risk management services for business, industry,
government, and the public. Operating both nationally and
internationally, Council members conduct business in more than 3,000
locations, employ more than 120,000 people, and annually place more
than 80 percent--well over $90 billion--of all U.S. insurance products
and services protecting business, industry, government and the public
at-large, and they administer billions of dollars in employee benefits.
Since 1913, The Council has worked in the best interests of its
members, securing innovative solutions and creating new market
opportunities at home and abroad.
My testimony today will focus on insurance sold by non-admitted
insurance carriers, which encompasses ``surplus lines'' products placed
through brokers and ``independently procured insurance'' in which the
coverage is purchased directly by the insured without the aid of a
broker. I will explain what these types of insurance are, describing
the Byzantine State regulatory requirements that currently burden the
surplus lines marketplace, and I will explain that the Reform Act will
address those issues primarily by dictating that only an insured's home
State's laws apply to such a placement, hugely benefiting surplus lines
consumers, the insurance industry and the insurance marketplace as a
whole, without sacrificing one iota of consumer protection.
INTRODUCTION
The members of the Council commend you for holding this hearing and
considering this important legislation. Broad-based insurance
regulatory reform is critical for the long-term health of the industry
and for maintaining a strong, vibrant insurance sector for the benefit
of policyholders. Surplus lines and reinsurance are essential elements
of the insurance marketplace and we support efforts to initiate
insurance regulatory modernization by focusing on these areas.
Although the State insurance regulators, through the National
Association of Insurance Commissioners (NAIC), have attempted to
institute regulatory reforms in surplus lines and other areas of
insurance without federal involvement, the reality is that today's
marketplace demands far more dramatic action than the States alone are
able to provide. The pace of financial services convergence and
globalization are far outstripping the pace of reform efforts by State
regulators and legislatures. Competition and efficiency in the
insurance industry lags behind other financial services sectors due to
the regulatory inefficiencies and inconsistencies in the State
insurance regulatory system, inefficiencies and inconsistencies that
must be addressed if the insurance sector is going to be able to keep
up with the pace of change in the rapidly-evolving global marketplace
and thereby expand the insurance marketplace for the benefit of
insurers, producers and consumers.
The Council regards itself as a pioneer within our industry with
respect to regulatory modernization, though reform is a frustratingly
long process. We formed our first internal committee to address the
problems of interstate insurance producer licensing more than 60 years
ago. Our efforts were finally rewarded, thanks to the leadership of
this committee, with the enactment of the NARAB provisions of the
Gramm-Leach-Bliley Act a few years ago--a first step on the road to
insurance regulatory reform. The Reform Act is the next step on the
road to modernization.
I want to emphasize at the outset that we are not advocating de-
regulation of the non admitted insurance marketplace or any sort of
reduction in consumer protections. What we are advocating--as we did
with NARAB and producer licensing reform--is streamlining the current
burdensome system of regulation, thereby doing away with the
overlapping, conflicting rules that inhibit the non admitted
marketplace and harm consumers. We believe that consolidating
regulatory oversight into a single State--the insured's home State--
makes eminent good sense, as opposed to the current system in which 55
jurisdictions, some with only remote connections to the transaction,
dictate how--and whether--a transaction is completed. The long-term
effects of such reform on the marketplace will ultimately benefit the
consumer. Easing regulatory burdens--without sacrificing protections--
will increase surplus lines insurers' capacity and improve availability
of coverage for hard to insure risks such as national catastrophes and
terrorism.
I. ``NON ADMITTED'' INSURANCE PROVIDES AN ALTERNATIVE TO THE
TRADITIONAL INSURANCE MARKETPLACE BUT CURRENT REGULATORY REQUIREMENTS
ARE PREVENTING THIS MARKETPLACE FROM FULLY REALIZING ITS POTENTIAL.
Non admitted insurance provides coverage for unique, unusual or
very large risks for which insurance is unavailable in the admitted
market. A surplus lines product is an insurance product sold by an
insurance company that is not admitted to do business in the State in
which the risk insured under the policy is located. In essence, the
insured goes to wherever the insurance company is located to purchase
the coverage. The insurer may be in another State, or it may be in the
United Kingdom, Bermuda or elsewhere. Potential insureds can procure
this insurance directly, but they generally do so through their
insurance brokers. In short, ``surplus lines'' are: (1) insurance
products sold by insurance carriers that are not admitted (or licensed)
to do business in a State, (2) to sophisticated commercial
policyholders located in that State, (3) for insurance coverages that
are not available from insurers admitted (or licensed) to do business
in that State.
Although surplus lines is considered to be ``unregulated,'' in
reality the surplus lines marketplace is subject to extensive State
statutory and regulatory requirements that impede the effectiveness of
the market and increase costs to surplus lines consumers. As described
more fully below, updating these regulations and laws and encouraging
use of alternative insurance markets would help to increase options and
decrease costs for insurance consumers.
Surplus lines insurance is universally recognized as an important
component of the commercial property and casualty insurance marketplace
in all States, and commercial property and casualty business is done
increasingly through the surplus lines marketplace. Surplus lines
products tend to be more efficient and a better fit for commercial
coverages because they can be tailored to the specific risk profiles of
insured with specialized needs. This is particularly true during hard
markets, like the one we have experienced for the last several years,
in which high premium rates for property and casualty insurance posed
serious problems for many mid-sized and larger commercial firms. Hard
markets cause availability to decrease and the cost of coverage to
increase. During these periods, insureds--notably sophisticated
commercial insureds--are increasingly drawn to the appeal of
alternatives to the traditional, regulated marketplace to expand their
coverage options and hold down costs. Surplus lines insurance is just
such an alternative.
Although the purchase of surplus lines insurance is perfectly legal
in all States, the regulatory structure governing such coverage is a
morass. When surplus lines activity is limited to a single State,
regulatory issues are minimal. When activity encompasses multiple
States, however, full regulatory compliance is difficult, if not
impossible. And I should note that multi-State surplus lines policies
are the norm rather than the exception because surplus lines coverage
is uniquely able to address the needs of insureds seeking coverage in
more than one State. Thus, the difficulty of complying with the
inconsistent, sometimes conflicting requirements of multiple State laws
is a real problem. Simply keeping track of all the requirements can be
a Herculean task. For example: Maryland and the District of Columbia
require a monthly ``declaration'' of surplus lines business placed, but
only require payment of premium taxes on a semi-annual basis; Virginia,
in contrast, requires that a declaration be filed and taxes be paid
quarterly; New Jersey has 36 pages of instructions for surplus lines
filings, including a page discussing how to number the filings and a
warning not to file a page out of sequence because that would cause a
rejection of the filing and could result in a late filing.
As a general matter, State surplus lines regulation falls into five
categories: (1) taxation; (2) declinations; (3) insurer eligibility;
(4) regulatory filings; and (5) producer licensing and related issues.
1. Taxes: States have inconsistent and sometimes conflicting
approaches regarding the allocation of premium taxes, which can lead to
double taxation and confusion when a surplus lines policy involves
multi-State risks.
<bullet> Single situs approach--100% of the premium tax is
paid to the insured's State of domicile or headquarters State.
This approach is imposed by some States regardless of what
percentage of the premium is associated with risks insured in
the State. Virginia, for example, utilizes this rule.
<bullet> Multi-State approach--Premium tax is paid to multiple
States utilizing some method of allocation and apportionment
based upon the location of the risk(s). Because there is no
coordination among the States on allocation and apportionment,
determination of the amount of tax owed to each State is left
to brokers and insureds. If a policy covers property insured in
a single situs State and in an apportionment State, double
taxation also is unavoidable. A majority of the States utilize
this basic rule but the manner in which it is implemented
(including the allocation formula) can vary wildly.
<bullet> No clear requirement--Nearly a dozen States that
impose surplus lines premium taxes do not have statutory or
regulatory provisions indicating the State's tax allocation
method, leaving it up to the insured and the insured's broker
to determine how to comply with the State law. In such States,
determination as to whether any tax should be paid and whether
the allocation of any such tax is permissible and appropriate
is often based on informal guidance from State insurance
department staff.
In addition to the near-impossibility of determining the correct
allocation for surplus lines premium tax in a way that does not risk
paying too much or too little tax, the differences among the States
with respect to tax rates, tax exemptions, taxing authorities, and the
timing of tax payments impose huge burdens on surplus lines brokers
(who are responsible for paying the taxes if they are involved in the
placement) and on commercial consumers, who must navigate these
requirements on their own for placements that do not involve a broker
and who ultimately bear the costs of not only the tax but the
administrative costs of compliance in any event.
For example, State surplus lines premium tax rates range from about
1% to about 6%. In one State, Kentucky, surplus lines taxes are levied
not at the State level but at the municipality level. Aon, a member of
the Council, reports that in order to properly rate taxes in Kentucky,
they have to access electronic maps to determine the city and county in
which a risk is located. There are hundreds of cities and counties in
the State. Some counties charge a tax in lieu of the city tax, some
charge it in addition to the city tax, some charge the difference
between the city and county taxes, and some do not charge a city or
county tax.
The due dates for premium taxes vary even more widely across the
States. Surplus lines premium taxes are due:
<bullet> annually on a date certain in some States; the dates
vary from State to State, but include: January 1, January 31,
February 15, March 1, March 15, April 1 and April 16;
<bullet> semi-annually in some States; again the dates vary,
but include: February 1 and August 1, February 15 and August
15, and March 1 and September 1;
<bullet> quarterly in some States (generally coinciding with
the standard fiscal quarters);
<bullet> monthly in some States; and
<bullet> 60 days after the transaction in some States.
The States also differ with respect to what is subject to the tax,
what is exempt from the tax, whether governmental entities are taxed,
and whether brokers' fees are taxed as part of or separately from the
premium tax (if they are taxed at all). As you can see, determining the
proper surplus lines tax payment for the placement of a multi-State
policy is a daunting task.
2. Declinations: Most States require that an attempt be made to
place coverage with an admitted insurer before turning to the surplus
lines market. Some States specifically require that one or more
licensed insurers decline coverage of a risk before the risk can be
placed in the surplus lines market. If it is determined that a portion
of the risk is available in the admitted market, many States require
that the admitted market be used for that portion of the risk.
State declination requirements are inconsistent and conflicting,
however, and the methods of proving declinations vary tremendously--
from specific requirements of signed affidavits to vague demonstrations
of ``diligent efforts.'' For example, Ohio requires 5 declinations, but
does not require the filing of proof of the declinations. New Mexico
requires 4 declinations and submission to the insurance department of a
signed, sworn affidavit. Hawaii does not require declinations but
prohibits placement of coverage in the surplus lines market if coverage
is available in the admitted market. Further, Hawaii does not require
filing of diligent search results, but requires brokers to make such
information available to inspection without notice by the State
insurance regulator. In California, prima facie evidence of a diligent
search is established if the affidavit States that three admitted
insurers that write the particular line of insurance declined the risk.
In Alabama, the requirement is much more vague. The broker is required
only to demonstrate ``a diligent effort'' but no guidance is provided
suggesting what constitutes such an effort. In Connecticut, the broker
must prove that only the excess over the amount procurable from
authorized insurers was placed in the surplus lines market.
3. Insurer Eligibility: Most States require that a surplus lines
insurer be deemed ``eligible'' by meeting certain financial criteria or
having been designated as ``eligible'' on a State-maintained list.
Although a majority of the States maintain eligibility lists (also
called ``white lists''), in many of the remaining States the surplus
lines broker is held responsible for determining if the non-admitted
insurer meets the State's eligibility criteria. In addition, although
the NAIC maintains a list of eligible alien (non-U.S.) surplus lines
insurers that is referenced by four States, this does not seem to have
any bearing on the uniformity of the eligible lists in the remaining
States. As one would expect, as a result of differing eligibility
criteria from State to State--and changes in individual States from
year to year--the insurers eligible to provide surplus lines coverage
varies from State to State. This can make it exceedingly difficult to
locate a surplus lines insurer that is ``eligible'' in all States in
which placement of a multi-State policy is sought.
The flip side of insurer eligibility is also an issue: that is,
when multi-State surplus lines coverage is placed with an insurer that
is an admitted (not surplus lines) insurer licensed in one of the
States in which part of the risk is located. This is problematic
because surplus lines insurance cannot be placed with a licensed
insurer. In these situations, more than one policy will have to be
used, or the insured will have to use a different surplus lines
carrier--one that is not admitted, but ``eligible'' in all States in
which the covered risks are located.
4. Filings: Most States require one or more filings to be made with
the State insurance department in connection with surplus lines
placements. These may include filings of surplus lines insurer annual
statements, filings regarding diligent searches/declinations, filings
detailing surplus lines transactions, and filings of actual policies
and other informational materials. Some States that do not require the
filing of supporting documentation require brokers to maintain such
information and make it available for inspection by the regulator.
Like other surplus lines requirements, State filing rules vary
widely. Some States require signed, sworn affidavits detailing diligent
search compliance; some require such affidavits to be on legal sized
paper, others do not; some States require electronic filings, others
require paper; some States have specific forms that must be used,
others do not; some States require the filing of supporting
documentation, some do not--although some of those States place the
burden on the broker, who is required to store the information in case
regulatory inspection is required. In addition, although most filings
are required to be submitted to the State insurance regulator, in at
least one State, Kentucky, municipalities also require submission of
surplus lines materials. There are hundreds of cities and counties in
the State and each requires a separate quarterly and annual report by
the licensee. As with the tax situation, this creates a terrible burden
on surplus lines insurers and brokers, and unnecessarily increases
consumer costs.
Depending on the State in question, filings can be required
annually, quarterly, monthly or a combination thereof. For example,
several States require the filing of surplus lines information in the
month following the transaction in question: Colorado requires such
filings by the 15th of the month; and the District of Columbia by the
10th. Other States peg the filing date to the date of the transaction
or the effective date of the policy: Florida requires filing within 21
days of a transaction; Idaho within 30 days; Kansas within 120 days;
Missouri requires filing within 30 days from the policy effective date
and New York 15 days from the effective date; Illinois and Michigan
require semi-annual filings of surplus lines transactions. Although
Illinois does not require filing of affidavits, carriers must maintain
records of at least three declinations from admitted companies for each
risk placed in the surplus lines market. Some States have different
deadlines for different filings. Louisiana, for example, requires
quarterly filings of reports of all surplus lines business transacted,
and ``diligent search'' affidavits within 30 days of policy placement.
North Dakota, in contrast, requires a single annual filing of all
surplus lines transactions, and allows 60 days for the filing of
``diligent search'' affidavits.
In addition, some States treat ``incidental exposures''--generally
relatively small surplus lines coverages--differently from more
substantial coverages with respect to filing requirements. States have
differing definitions of what constitutes incidental exposures and who
has to make required filings for such an exposure: some States require
the broker to make the filings; others the insured; and some require no
filings at all for incidental exposures.
5. Producer Licensing and Related Issues: In addition to the
substantial issues outlined above, there are other vexing regulatory
issues facing the surplus lines marketplace:
<bullet> Producer Licensing: All States require resident and
non-resident surplus lines producers to be licensed, and all
States have reciprocal processes in place for non-resident
licensure. Nevertheless, there remain significant differences
among some States with respect to producer licensing that can
delay the licensure process, particularly for non-residents.
For example, most States require that an individual applying
for a surplus lines broker license be a licensed property and
casualty producer. The States vary, however, as to how long the
applicant must have held the underlying producer license. In
addition, some, but not all, States exempt from licensure
producers placing multi-State coverage where part of the risk
is located in the insured's home State. In States without such
an exemption, the laws require a producer to be licensed even
for such incidental risks.
<bullet> Sophisticated Commercial Policyholders: Some States
exempt ``industrial insureds'' from the diligent search,
disclosure, and/or filing requirements. The definition varies
among the States, but generally industrial insureds are
analogous to the concept of sophisticated commercial insureds.
They are required to have a full time risk manager, minimum
premium requirements for selected lines of coverage, and a
minimum number of employees. If an insured meets a State's
criteria, the insured's surplus lines transaction is exempt
from the surplus lines requirements, as provided for by the
State.
<bullet> Automatic Export: A number of States allow certain
risks to be placed directly in the surplus lines market. This
is called ``automatic export'' because no diligent search is
required before the risk is exported from the admitted market
to the surplus lines market. As with every other surplus lines
requirement, however, the States are not uniform in their
designation of the risks eligible for automatic export.
<bullet> Courtesy Filings: A courtesy filing is the payment of
surplus lines tax in a State by a surplus lines broker who was
not involved in the original procurement of the policy.
Courtesy filings are helpful when a broker places a multi-State
filing that covers an incidental risk in a State in which the
broker is not licensed. The problem is that most States either
prohibit courtesy filings or are silent as to whether they will
be accepted. This uncertainty essentially requires surplus
lines producers to be licensed even in States where they would
otherwise be exempt.
II. CONGRESSIONAL ACTION IS NEEDED TO ADDRESS THE UNNECESSARILY
BURDENSOME AND OVERLAPPING STATE REGULATORY REQUIREMENTS IMPOSED ON THE
SURPLUS LINES MARKETPLACE. THE REFORM ACT ACHIEVES THAT GOAL WITHOUT IN
ANY WAY DIMINISHING CONSUMER PROTECTIONS OR REGULATORY EFFECTIVENESS.
The current surplus lines regulatory structure is not working. The
overlapping, redundant, sometimes inconsistent State regulatory
requirements described above fail to recognize current market
realities--the great majority of surplus lines policies are placed on a
multi-State basis and purchased by sophisticated commercial insureds
who have unique risks that are not readily covered in the admitted
market. The regulatory roadblocks erected by some States do nothing to
improve the availability or affordability of insurance, nor do they
protect surplus lines consumers. Indeed, we believe the current system
causes significant disruptions in the surplus lines marketplace and
increases costs for consumers.
The proposed Reform Act would fix the system. The legislation would
streamline regulation and ease regulatory burdens, but without
sacrificing consumer protections or a financially sound surplus lines
marketplace, which is the most important consumer protection of all.
The proposed legislation would provide an effective resolution to the
current regulatory morass by focusing on the home State of the insured:
all premium taxes would be payable to the insured's home State and
surplus lines insurance transactions would be governed by the rules of
the insured's home State.
This home State focus accomplishes several things:
<bullet> Home State regulation ensures that the insured is
protected by the laws of its home State and the regulator with
the greatest interest in its welfare. It is common sense to
assume that a regulator will spend more time and effort on the
needs of in-State constituents rather than non-residents with
little or no stake in the State or its economy.
<bullet> Home State regulation is logical because the risks
covered in the non-admitted market are generally commercial
lines and are not compulsory. We are not talking about auto or
homeowners or individual life coverage. These are unique risks
that the insured is not required to protect with insurance but
chooses to do so to protect the corporate treasury. The
corporate treasury, in turn, is not located in the multiple
States where the insured has risks, but in the State in which
the insured itself is located--generally its state of domicile.
<bullet> Home State regulation completely does away with the
inconsistent, redundant, burdensome obligations that the
current system imposes in connection with multi-State
placements. All the regulatory issues described above--taxes,
filings, diligent searches, insurer eligibility requirements,
producer licensing and more--will be governed by the rules of a
single State rather than being subject to multiple State rules.
On one level, the effect of this change is significant--it will
eliminate mountains of red-tape and administrative costs, ultimately
saving consumers time and money, and expanding the availability of
coverage for unusual or extreme risks such as natural catastrophes and
terrorism. On another level, however, the change will be minimal. The
Reform Act does not alter the basic elements of State surplus lines
regulation. Indeed, all of the substantive provisions in the proposed
legislation can be found in current State laws and regulations. The
beauty of the proposal is that it enables surplus lines producers to
look to a single standard in a single State for each transaction.
Although the standard may differ from transaction to transaction
depending upon the home State of the insured, each individual
transaction will have a single standard, rather than being subject to
the standards of 55 different jurisdictions. Clearly, this will make
multi-State compliance significantly less daunting.
The Reform Act would fix the current tax allocation problems by
establishing a clear requirement that all surplus lines premium taxes
be paid to the insured's home State. Surplus lines producers would pay
the full amount of premium tax owed on an insurance transaction to the
insured's home State. In addition to the tax, the home State could
require the filing of an allocation report denoting the location of the
covered risks. The States are then free to allocate the premium tax
among themselves as they so determine. The contrast in approaches--from
the convoluted, burdensome approach of the States to the simple
straightforward approach in the Reform Act could hardly be greater.
Finally, the exemption for sophisticated commercial policyholders
is a victory for common sense. The State regulators, in many of their
model rules and regulations, recognize that streamlined processes make
sense for sophisticated commercial policyholders, who have a greater
understanding of their needs and the insurance marketplace than
individual consumers. In addition, sophisticated commercial
policyholders are more likely to have unique or large risks for which
surplus lines coverage is necessary. For these reasons, it only makes
sense to allow such policyholders to access the surplus lines market
without jumping through all the regulatory hoops that are currently
imposed by some States.
The need for surplus lines regulatory reform is widely agreed upon
by all stakeholder, and the Reform Act enjoys broad-based support from
consumers (RIMS???), the insurance industry, and many Members of
Congress, as evidenced by the House Financial Services Committee's
unanimous passage of the bill in July. The bill has seen no opposition.
Indeed, the State insurance regulators have worked with congressional
staff to address technical issues, but did not object substantively to
the proposal.
CONCLUSION
In closing, I would once again like to thank you for taking on this
important, if unglamorous, issue. As my testimony has demonstrated,
reform of the surplus lines insurance regulatory system is badly needed
to maintain a competitive marketplace and, more importantly, to enable
insurers and producers to provide insurance consumers with the
coverages they need to protect themselves and their businesses from the
risks inherent in today's world. The passage of the Act was unanimous
and bipartisan in the House Financial Services Committee, and we look
forward to House passage very soon. As I said at the outset, the Reform
Act will get the job done and the Council looks forward to working with
you to get it enacted into law.
Mr. Cannon. Ms. Laws.
TESTIMONY OF TRACEY LAWS, ESQUIRE, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, REINSURANCE ASSOCIATION OF AMERICA
Ms. Laws. Good morning. I am pleased to testify today on
behalf of the RAA in support of H.R. 5637. My testimony will
highlight the key provisions of the legislation that help to
modernize and make reinsurance regulation more efficient, but
first I will briefly discuss the role that reinsurance plays in
the marketplace and how reinsurance is currently regulated.
Reinsurance is a transaction, as you noted, by which the
reinsurer indemnifies, for a premium, the insurer for all or
part of the loss that the insurer may sustain under an
insurance policy. Described as ``insurance for insurance
companies,'' reinsurance provides reimbursement for the insurer
for losses that are covered by a reinsurance agreement.
Reinsurance agreements are between sophisticated parties.
There is no consumer element to the reinsurance transaction.
Reinsurance is very much a global business; encouraging the
participation of reinsurers worldwide is essential to providing
much-needed capacity in the United States.
The global reinsurance industry has significantly responded
to virtually every major U.S. catastrophe over the past
century. By way of example, it is expected that 60 percent of
the losses from the 2005 hurricanes will be borne by reinsurers
worldwide.
Reinsurance and U.S.-based reinsurers are regulated by the
States. The States utilize two methods of regulation, direct
and indirect. Direct regulation is imposed on reinsurers that
ought to be licensed in a U.S. State. Reinsurers that are
licensed in at least one State are subject to the full spectrum
of laws and regulations to which a primary insurer is subject,
including regulation for financial reporting and solvency.
The exception to this general rule is rates and contracts.
Because reinsurance transactions involve sophisticated parties,
there is no regulation of rates or, for the most part, the
reinsurance agreement.
There is also indirect regulation of the transactions where
a State's credit for reinsurance laws. Credit for reinsurance
is the cornerstone of reinsurance regulation. If an insurer
complies with its domiciliary State's credit for reinsurance
laws, it may reflect the effect of the reinsurance transaction
as an asset or as a reduction in its liabilities on its balance
sheet.
H.R. 5637 helps to modernize reinsurance regulation in
several ways. First, section 201 eliminates the extra
territorial application of State laws. As a result of the
current 50-State system, significant differences have emerged
among the States with respect to reinsurance regulatory
requirements.
The NAIC and State regulators are to be applauded for their
efforts toward greater uniformity by the adoption of model laws
and regulations and the creation of a system of accreditation
for States to meet minimum standards of regulation.
Unfortunately, this has not prevented certain States from
pursuing varying and sometimes inconsistent regulatory
approaches to reinsurance. This has resulted in approximately
14 States applying the laws on an extraterritorial basis. This
means that these States apply their laws to not only insurers
that are some domiciled in their State, but also to insurers
that are domiciled elsewhere but licensed in that State. This
is the case even if the reinsurance contract at issue does not
cover any risks associated with that State.
Because reinsurance contracts are not written on a State-
by-State basis and typically cover risks across many States, it
is inefficient and unnecessary to require the contracting
parties to meet the requirements of multiple jurisdictions for
a single reinsurance transaction. Accordingly, the RAA strongly
supports section 201 which preempts the extraterritorial
application of State law and makes clear the types of laws that
States cannot apply on an extraterritorial basis, including
laws involving critical elements of the reinsurance agreement.
Second, section 201 also streamlines the requirements
pursuant to which an insurer may take credit for reinsurance.
Currently, some States refuse to accept the credit for
reinsurance determinations of an insurer's domiciliary
regulator, causing the insurer's financial statement to vary
from State to State. The act addresses this problem by
requiring that no other State may deny credit for reinsurance
that is recognized by the insurer's domiciliary regulator.
Third, section 202 provides that the reinsurer's State of
domicile shall be solely responsible for regulating the
reinsurer's solvency so long as the domiciliary State is an
NAIC-accredited State or a State that has solvency regulations
substantially similar to the requirements necessary for NAIC
accreditation. This provision keeps strong insurance regulation
intact, but eliminates duplicative regulation. The home State
regulator will still be subject to the stringent NAIC
accreditation standards, thereby protecting against a race to
the bottom. The fundamental elements of reinsurance solvency
regulation that are required by all States will remain in
place.
Finally, H.R. 5637 ensures that all States have access to
financial information of a U.S.-licensed reinsurer, but it
relieves the reinsurer from filing supplemental and, at times,
inconsistent financial information with various States.
Redundant and burdensome regulation may affect where the
reinsurance market chooses to deploy its capital and may
increase the transaction costs for insurers and, ultimately,
consumers.
The RAA applauds and supports the principles set forth in
this act, which serve to streamline reinsurance regulation.
Thank you.
Mr. Cannon. Thank you, Ms. Laws.
[The prepared statement of Ms. Laws follows:]
Prepared Statement of Tracey Laws
My name is Tracey Laws and I am Senior Vice President and General
Counsel of the Reinsurance Association of America. It is an honor to
appear before you on behalf of the RAA. The RAA is a national trade
association representing property and casualty organizations that
specialize in reinsurance. The RAA membership is diverse, including
U.S. companies and U.S. subsidiaries of foreign companies. Together,
RAA members underwrite nearly 2/3 of the gross reinsurance coverage
provided by U.S. property and casualty reinsurers and affiliates.
I am pleased to testify today on ``H.R. 5637, legislation to
streamline the regulation of nonadmitted insurance and reinsurance.''
The RAA supports the principles set forth in the legislation and will
highlight the key provisions that will help modernize and make
reinsurance regulation more efficient. My testimony will address: 1)
the reinsurance role in the marketplace, 2) U.S. reinsurance
regulation, 3) the extra-territorial application of state law
provision, 4) the solvency regulation provision and 5) the credit for
reinsurance provision.
REINSURANCE ROLE IN THE MARKETPLACE:
Reinsurance is a transaction by which one insurance company
indemnifies, for a premium, another insurance company against all or
part of the loss that it may sustain under its policies of insurance.
The insurance company purchasing the reinsurance is known as the ceding
insurer; the company selling reinsurance is known as the assuming
insurer, or, more simply, the reinsurer. Described as insurance for
insurance companies, reinsurance provides reimbursement to the ceding
insurer for losses covered in the reinsurance agreement. Reinsurance is
a contract between sophisticated parties; there is no consumer element
to the reinsurance transaction. The fundamental objective of insurance,
to spread risk so that no single entity finds itself saddled with a
financial burden beyond its ability to pay, is enhanced by reinsurance.
Reinsurance is a key component of the insurance marketplace,
reducing volatility experienced by insurers, and improving insurers'
financial performance and security. It is widely recognized that
reinsurance performs at least four primary functions in the
marketplace: to limit liability on specific risks; to stabilize loss
experience; to protect against catastrophes; and to increase insurance
capacity. Although considerably smaller than the U.S. insurance
industry in premiums and capital, the global reinsurance industry has
significantly responded to virtually every major U.S. catastrophe over
the past century. For natural disasters typically one-third to one-half
of the insured losses are passed on to reinsurers; in the events of
September 11, 2001, two-thirds of the losses were absorbed by the
global reinsurance industry.
U.S. REINSURANCE REGULATION--DIRECT AND INDIRECT
Like insurance, reinsurance and U.S. based reinsurers are regulated
by the states not the Federal government. U.S. states employ two
methods of reinsurance regulation, both direct and indirect regulation.
Direct regulation is imposed on those reinsurers that opt to be
licensed in the U.S. Reinsurers licensed in at least one U.S.
jurisdiction are subject to the full spectrum of laws and regulations
to which a primary insurer is subject, including regulation for
financial reporting and solvency. The exceptions to this general rule
are rates and contracts. Because reinsurance is conducted between
sophisticated parties of essentially equal bargaining power, regulators
do not impose regulatory requirements relating to the rates that can be
charged for reinsurance or, for the most part, the forms that can be
used to evidence the contractual terms.
Recognizing that an insurance marketplace as large as that found in
the U.S. is in need of a substantial amount of reinsurance capacity,
U.S. regulators permit both U.S. and non-U.S. reinsurers to assume
business on risks located in the U.S.
The states have developed a system of indirect regulation where the
reinsurance transaction is regulated through the credit for reinsurance
mechanism. Credit for reinsurance is the financial statement accounting
effect given to a ceding insurer if cessions are ceded in accordance
with prescribed state criteria. If the criteria are met, the ceding
insurer may record as an asset or a reduction in insurance liabilities
for the effect of the reinsurance transaction. The fundamental concept
underlying the U.S. regulatory view is that a reinsurer must either be
licensed in a U.S. state and subject to a full spectrum of reinsurance
regulation or, in lieu of regulation, provide security to ensure the
payment of the reinsurer's obligations to ceding insurers. Credit for
reinsurance is the cornerstone of reinsurance regulation.
EXTRATERRITORIAL APPLICATION OF LAW
The RAA applauds Representatives Brown-Waite and Moore for
addressing a key improvement in the efficiency of regulation of
reinsurers: the elimination of the extraterritorial application of
state laws. As a result of our 50-state system of regulation,
significant differences have emerged among the states with respect to
reinsurance regulatory requirements. The NAIC and state regulators are
to be applauded for their efforts toward greater uniformity in the
adoption of model laws and regulations and the creation of a system of
accreditation for states to meet minimum standards for regulation.
Unfortunately, this has not prevented states from pursuing varying and
sometimes inconsistent regulatory approaches to reinsurance. One of the
best examples of this phenomenon is the extraterritorial application of
state laws.
Approximately 14 states apply their laws on an extraterritorial
basis, meaning that the state law not only applies to insurers
domiciled in that state but to insurers domiciled in other states if
the extraterritorial state has granted a license to the insurer. For
example, if a reinsurer domiciled in Ohio were entering into a contract
with an insurance company domiciled in Massachusetts and either or both
were licensed in other states, the reinsurer and insurer would abide by
the Ohio and Massachusetts reinsurance requirements, but also to the
reinsurance requirements of all other states that apply their laws on
an extraterritorial basis. This is the case even if the contract
between the reinsurer and ceding insurer does not have any risks
associated with that particular state. Because reinsurance contracts
are customarily written on a multi-state basis, it is inefficient and
unnecessary to require the contracting parties to meet the legal
regulatory and peculiarities of multiple jurisdictions for a single
reinsurance transaction.
The RAA strongly supports the principle set forth in Title II,
Section 201 that addresses these inefficiencies. This provision retains
the ability of state insurance regulators to regulate their domestic
insurers and reinsurers and the reinsurance transactions of their
domestic insurance companies. The Act simply preempts the
extraterritorial application of state law and articulates the types of
laws that states cannot apply on an extraterritorial basis, including
critical elements of the reinsurance transaction, such as dispute
resolution, governing law and requiring specific contract provisions.
This provision will remove the burdensome and redundant requirements on
the reinsurance transaction and will greatly improve efficiency.
CREDIT FOR REINSURANCE
Section 201 of the Act also assists in streamlining the
requirements pursuant to which a ceding insurer may take credit for
reinsurance on its financial statements. The NAIC'S accreditation
system and model credit for reinsurance law seek to achieve uniformity
in the ceding insurer's financial statement. However, some states
refuse to accept the ceding insurer's domiciliary regulator's findings,
causing a ceding insurer's financial statement to vary from state to
state. The Act addresses this problem by requiring that no other state
may deny credit for reinsurance recognized by the ceding insurer's
domiciliary regulator.
REINSURANCE SOLVENCY REGULATION
The RAA supports the principles set forth in Title II, Section 202
that provide that the state of domicile of a reinsurer shall be solely
responsible for regulating the financial solvency of the reinsurer if
the state is an NAIC accredited state or a state that has financial
solvency regulations substantially similar to the requirements
necessary for NAIC accreditation. The financial integrity and solvency
of a reinsurer is a key factor in determining whether a ceding insurer
should receive credit for reinsurance on its' financial statement.
Redundant and burdensome solvency regulation may affect where the
reinsurance market deploys its capital and increase the transaction
costs for insurers, and ultimately consumers. The Act eliminates
duplicative solvency regulation of reinsurers by placing sole
responsibility for solvency regulation on the reinsurers home state
regulator. The Act protects against a ``race to the bottom'' for
solvency regulation by requiring that the home state meet the
accreditation standards set out by the NAIC.
Reinsurance is a global marketplace. Allowing the state of domicile
of the reinsurance company to be the single regulator for solvency will
help streamline reinsurance regulation significantly and will add to
the value of a U.S. license. The home state of the reinsurer will still
be subject to the stringent NAIC accreditation standards for solvency
regulation. Because the NAIC requires that accreditation laws be
``substantially similar,'' all accredited states have the same basic
solvency protections and laws in place even if they may differ in some
of the details.
The elements of reinsurance solvency regulation that all states
require will stay in place under the proposed legislation and include:
conservative statutory accounting rules, minimum reserve standards,
annual actuarial opinion requirements, detailed financial reporting on
the annual statement and quarterly statement blanks, annual certified
public accounting audit reports, minimum capital requirements per the
NAIC risk-based capital formula, state investment laws that provide
minimum diversification and limits on investments, holding company laws
for extraordinary dividends and intergroup transactions, and many other
model laws that are required for accreditation. The NAIC accreditation
system will still require the home state regulator to demonstrate that
the state effectively enforces its solvency regulation standards. This
includes how well the state regulator performs desk audits and
examinations, whether they take timely action when needed and whether
they have qualified staff and other review requirements.
Strong reinsurance solvency regulation is critical to the health of
the insurance marketplace. This legislation keeps reinsurance solvency
regulation intact. It does relieve the reinsurer from having to file
supplemental and at times inconsistent financial information in as many
as 50 states. Yet, it provides all states with access to financial
information on a U.S. licensed reinsurer. This streamlined regulation
will allow U.S. reinsurers to compete more effectively without
compromising solvency regulation.
Mr. Cannon. Mr. Plunkett, you're recognized for 5 minutes.
TESTIMONY OF TRAVIS PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Good morning, Chairman Cannon and
Representative Wasserman Schultz. My name is Travis Plunkett,
and I am the Legislative Director of the Consumer Federation of
America. I applaud you for holding this hearing today.
CFA is very concerned about the effect of the Nonadmitted
and Reinsurance Reform Act of 2006 on the insurance market and
consumers. In an effort to make regulation of nonadmitted
insurance lines and reinsurance more uniform, a goal that CFA
supports if responsible regulation is not sacrificed, the bill
would establish a feeble and complex oversight regime. It will
likely provoke States to compete against each other to weaken
oversight in some cases. It would also leave consumers who have
been harmed by insured companies vulnerable in the event of a
company's insolvency.
In addition, there are some vague, contradictory and
incomplete requirements in the bill that do raise legal and, as
I just mentioned, policy questions. I'll touch on four specific
concerns.
First, contrary to the stated intent of legislation,
section 107 appears to open the door to the increased sale of
poorly regulated, nonadmitted personal lines of insurance like
auto insurance to individual consumers, not just commercial
insurance sold to sophisticated corporations.
Moreover, the bill does not appear to exclude nonadmitted
personal lines of insurance from its provisions. If this bill
fosters a sharp growth in underregulated nonadmitted insurance,
it could seriously harm consumers who buy this insurance.
Second, great regulatory confusion and ineptitude would
likely result when the State of domicile for an insured party
regulates all parts of that entity's insurance transaction. For
example, Michigan regulators overseeing General Motors'
insurance transactions probably know very little about dealing
with earthquake risk in California or hurricane risk in Florida
in pricing insurance policies or in handling claims resulting
from such weather events if GM's cars are damaged.
Moreover, since Michigan is a no-fault State for auto
insurance regulators, they would likely know very little about
how tort laws in other States and how pricing and claims should
be handled. How can 50 regulators each become experts in the
laws of 50 States? This is regulatory supercomplexity, not
simplification.
Third, the bill is based--and this is a significant concern
for us--it's based on an incorrect assumption that the domicile
State of an insured party or a reinsurance company will provide
adequate oversight; and there are a number of ways that the
bill handcuffs States that would have a legitimate interest in
regulating both.
For example, if residents have been harmed by clearly
abusive insurance practices. Suppose a nonadmitted insurer for
a company like GM acts in bad faith and refuses to pay
legitimate claims regarding unsafe automobiles that harm
drivers in other States. These States would have no ability to
investigate or sanction that insurance company, while the State
of Michigan, with limited resources and very little in-State
impact, would have much less of an incentive to get to the
bottom of the problem.
Moreover, a home-State regulator--this is the downside to
home-State regulation. A home-State regulator has the greatest
interest in pleasing a large insured party, or in the case of
reinsurance, a large insurance company and employer based in
that State. This could lead the regulator to lower insurance
standards that protect residents and consumers who use that
company's products and services across the country.
The bill also specifically prohibits States from requiring
that insurers seek coverage from admitted carriers before
turning to nonadmitted insurers. It is not in the public
interest to foster the growth of a segment of the market that
does not have to meet State standards unless admitted insurance
is truly not available.
For example, guaranty associations in all States do not
cover claims for surplus lines insurers from other States when
an insurer or insured entity becomes insolvent. This may be a
minor problem for the defunct policyholder and defunct insurer,
but it's certainly a major problem for the people that the
policyholder may have injured who are left without guaranty
association protection.
Final concern--and I mention this in greater depth in our
testimony--there's another incorrect assumption; and the
investigations by New York Attorney General Eliot Spitzer show
this to be true. Large sophisticated corporations were
victimized by insurers and brokers through bid-rigging,
kickbacks, hidden commissions and blatant conflicts of
interests. So it's simply not true that large, sophisticated
consumers don't need some of the protections that this law
would do away with.
In closing, let me say this: It's very clear that the
drafters of this proposal have not thoroughly considered the
harmful effects the bill could have on the insurance market,
those who buy products or services from companies that purchase
surplus lines or reinsurance, or even on State revenues, not to
mention certain legal concerns. The bill should require the
execution of a thorough GAO study on all of these issues as
opposed to the incomplete study mandated in section 106 before
any of these provisions are enacted.
Thank you very much.
Mr. Cannon. Thank you, Mr. Plunkett.
[The prepared statement of Mr. Plunkett follows:]
Prepared Statement of Travis Plunkett
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Mr. Cannon. Mr. Soto.
TESTIMONY OF ALEX SOTO, PRESIDENT, INDEPENDENT INSURANCE AGENTS
& BROKERS OF AMERICA
Mr. Soto. Thank you. Good morning, Chairman Cannon, and
good morning, Congresswoman Wasserman Schultz. It's nice to see
you again.
Indeed, my name is Alex Soto, and I am the President of the
Independent Insurance Agents & Brokers of America. We are the
largest and the oldest trade organization representing
independent agents. We have over 300,000 agents, brokers and
their employees in every State of the Nation, in every big city
and every small town; and what makes us unique is, as
independent agents, we are not employees of any single company,
but rather we represent multiple companies, and through that
methodology, we try to do the very best for our clients in
selecting coverage for them.
How I earn my living is as an independent agent in south
Florida. I am President of InSource Inc., which is indeed one
of the largest privately held insurance agencies in south
Florida. We have our main office in Miami, and we have an
office in Broward County.
What we do is, we sell a broad array of insurance products
to individuals, as well as commercial clients. And we transact
business primarily in the State of Florida, but we also
transact business--when our clients have locations in other
States, we transact business in other States. And consequently,
we do have a great deal of out-of-State licenses.
I personally hold licenses, nonresident licenses, in about
10 to 15 States and, collectively, the agents in my office hold
more than 25 licenses. One of my partners has a surplus lines
license, which allows us to provide coverage for unique and
hard-to-place risk, predominantly in commercial lines.
Congresswoman Wasserman Schultz was correct that,
unfortunately, we are having to use this mechanism more in the
State of Florida because of the crisis that we have in
windstorm property coverage.
We also work very closely with a number of surplus lines
brokers in order to expand and broaden our market access and
better serve our clients--which is what we are all about.
The challenges of the current State-by-State system has
already been mentioned. Each State regulation is different.
Surplus lines licenses must be held in every State that you do
business. Some States require--some States require due
diligence steps, and other States do not. Some States require a
paper trail; others, you can apply to them electronically. The
surplus lines taxes vary from State to State and the allocation
methodology, and the interpretation by them is quite confusing.
All of these spell out inefficiency, more cost and less
time that we can take to serve our clients and advise them as
to what they should secure in terms of coverage. The
legislation before us solves many of the problems. Thus, our
trade association, the ``Big I,'' support H.R. 5637.
The legislation would make the insured home State, as was
mentioned before, to be the source of regulation. For
sophisticated consumers it waives the requirement of due
diligence: The payment of taxes to one location, and then, by
compact, the different States organize themselves to divvy that
up.
So we support the specific reforms of this bill RIMS
supported, that are the users of this methodology
predominantly. We also, more importantly, support the approach
that the bill takes, which is basically legislation to preserve
the State system of insurance regulation.
I happen to believe that regulation closer to home is the
best regulation. The best role of the Federal Government, in
our opinion, is pragmatic, pragmatic reform that utilizes
targeted Federal action to improve State regulation.
It is our hope that the next step that is taken by the
Congress is modernization and reformation of the producer and
insurance company licensing.
Thank you, Mr. Chairman.
Mr. Cannon. Thank you Mr. Soto.
[The prepared statement of Mr. Soto follows:]
Prepared Statement of Alex Soto
Good morning Chairman Cannon, Ranking Member Watt, and Members of
the Subcommittee. My name is Alex Soto, and I am pleased to be here
today on behalf of the Independent Insurance Agents & Brokers of
America (IIABA) and to provide my association's perspective on the
surplus lines/reinsurance legislation that is the focus of this
hearing. I am the current President of IIABA, and I am also President
of InSource, which is a company that was formed from a merger of three
of Miami's oldest insurance agencies. Through our practice specialties,
InSource has had and continues to have a long-term and total commitment
to our South Florida community.
IIABA is the nation's oldest and largest trade association of
independent insurance agents and brokers, and we represent a nationwide
network of more than 300,000 agents, brokers, and employees. IIABA
represents independent insurance agents and brokers who present
consumers with a choice of policy options from a variety of different
insurance companies. These small, medium, and large businesses offer
all lines of insurance--property, casualty, life, health, employee
benefit plans, and retirement products.
IIABA COMMENDS H.R. 5637 AS THE RIGHT APPROACH
Chairman Cannon and Ranking Member Watt, I want to thank you for
your attention to this matter, which is important to members of the
IIABA. I also want to commend the House Financial Services Committee
for passing this legislation through a bipartisan voice vote. Special
recognition should be extended to Congresswoman Ginny Brown-Waite of
Florida, Congressman Dennis Moore of Kansas, and Capital Markets
Subcommittee Chairman Richard Baker who drafted this legislation. We
believe that overall the bill is the right approach to modernize
insurance regulation, and we are happy to support it. We look forward
to working with this Subcommittee and Committee during your review of
the legislation.
In particular, this legislation preserves the state system of
insurance regulation while achieving much-needed uniformity. Virtually
every sector--insurers, producers, consumers and even regulators
themselves--has voiced significant concerns with the inefficient
patchwork of different laws and regulations that characterize the
current regulatory system. Although we also believe that the current
state-based insurance regulatory system is in need of greater
efficiency and uniformity, IIABA opposes constructing a completely new
regulatory scheme at the federal level through mandatory or optional
federal regulation. A new, federal insurance regulatory system would
dismantle the inherent strengths of state regulation, namely diversity,
geographical uniqueness, innovation and responsiveness to consumers.
IIABA believes the best use of federal legislative authority is to
help make the existing state system more efficient and uniform through
a mix of national standards with state enforcement and uniformity
achieved through both incentives and preemption of certain state laws.
This approach offers the best solution because it will promote more
uniform standards and streamlined procedures from state to state;
protect consumers and enhance marketplace responsiveness; and emphasize
that oversight can best be met by improving the state-based system. The
result for all stakeholders would be a more efficient, modern and
workable system of state regulation.
The Nonadmitted and Reinsurance Reform Act of 2006 singles out two
areas--surplus lines regulation and reinsurance supervision--where
there is general consensus for early action. We support this step-by-
step approach to achieve reform. While IIABA is eager also to have
Congress address the need for uniformity and streamlining in producer
licensing as well as other reform areas, we strongly support the
general approach taken in H.R. 5637.
ROLE OF AGENTS & BROKERS IN THE NONADMITTED INSURANCE MARKET
Nonadmitted, or surplus lines, insurance provides coverage for
unique or hard to place property and casualty risks when unavailable or
unaffordable in the traditional, licensed or ``admitted'' insurance
market. The role of independent insurance agents and brokers in the
nonadmitted market is just as important as their role in the overall
insurance market. Independent insurance agents and brokers invest
substantial effort to identify policyholders' wants and needs;
understand the complex terms of policies available; assess the products
available and present choices to the consumer about coverage, price,
service, and financial strength of carriers; and remain available to
assist with any questions and changes as needed.
IIABA believes that continued state supervision of this market is
necessary to ensure that the nonadmitted marketplace continues to
function as the ``safety-valve'' for the overall insurance market for
hard-to-place risks. Nevertheless, the current state-based regulatory
scheme is burdened by inefficiencies that disrupt the non-admitted
marketplace with respect to the allocation and remittance of premium
taxes, licensing of nonresident surplus lines brokers, and duplicative
regulation of the nonadmitted market generally.
NEED FOR UNIFORMITY IN PREMIUM TAX ALLOCATION AND REMITTANCE
Premium tax allocation and remittance schedules vary significantly
from state to state. Surplus lines brokers are responsible for
determining which state's allocation formula governs a transaction
involving a multi-state surplus lines risk. State surplus lines laws
require that a licensed surplus lines agent or broker placing coverage
remit taxes to the state on the portion of premium allocated to that
state. State laws do not, however, contain mechanisms for the
remittance of premium taxes to other states. Moreover, nonresident
surplus lines agents and brokers have no guidance on which state
surplus lines laws govern multi-state surplus lines transactions. As a
result of the lack of a universally applicable allocation formula for
multi-state risks and sufficient guidance on which state's laws govern
a multi-state surplus lines transaction, surplus lines agents and
brokers attempting to comply with lawful requirements of the various
states often are caught between conflicting rules and claims on premium
tax revenues. The confusion and conflicts result in inefficiencies and
expenses which ultimately affect policyholders in addition to the
producing agents and brokers.
IIABA supports the Nonadmitted Insurance and Reinsurance Reform Act
of 2006 because it eliminates this confusion. Under the bill, a surplus
licenses licensee (the broker accessing the nonadmitted market) need
only remit premium taxes to the home state of the insured, and if
requested, a report of the location and insured values of properties
and risks by states covered under the policy being placed. The states
then determine how the taxes will be allocated, either by compact or by
other procedures developed by the states, and in each case using the
allocation information provided by the surplus lines broker.
FIRST STEP IN UNIFORMITY IN PRODUCER LICENSING
Surplus lines agents and brokers engaging in transactions that
involve multi-state risks currently must obtain and maintain general
agent or broker licenses and surplus lines licenses in many if not
every jurisdiction in which the exposures are located. Some states
require that these agents and brokers obtain and maintain corporate
licenses as well. This means that a surplus lines broker or agent could
potentially be required to obtain and maintain up to 100 separate
licenses in order to handle a single multi-state surplus lines
transaction. Moreover, each state has different licensing requirements
and renewal schedules. These duplicative licensing requirements cause
administrative burdens which impede the ability of agents and brokers
to effectively and efficiently service their customers' policies.
Perhaps most importantly, these onerous licensing requirements create
expenses which ultimately impact policyholders. The Nonadmitted
Insurance and Reinsurance Reform Act alleviates the burdens of
duplicative licensing requirements by relying on the insured's home
state for licensing and encouraging states to participate in a national
insurance producer database without diminishing the quality and
expertise of the surplus lines insurance distribution channel.
UNIFORMITY IN SURPLUS LINES REGULATION
Surplus lines agents and brokers must typically comply with the
laws and regulations of multiple states with respect to coverage for
multi-state risks. As a result of the lack of sufficient guidance on
which state law governs a multi-state surplus lines placement, agents
and brokers who have obtained nonresident surplus lines licenses find
themselves attempting to comply with the surplus lines laws of every
applicable state. These agents and brokers are subject to multiple tax
filings, multiple diligent search requirements (which vary from state
to state), multiple regulatory filings, and multiple information
notices on the declarations page or policy, among other duplicative
regulatory requirements.
The Nonadmitted Insurance and Reinsurance Reform Act effectively
streamlines surplus lines regulation by making the insured's home state
the source of regulation for individual surplus lines transactions. In
addition, the Act streamlines access to the surplus lines market by
waiving state due diligence requirements for the sophisticated
commercial entities that constitute a significant portion of
policyholders in this market.
The bill also has a second title that would, in much the same way
as the nonadmitted insurance title, seek to reduce overlapping,
multiple-state regulation of both reinsurer financial condition and
credit-for-reinsurance on the balance sheets of ceding insurers. While,
IIABA is less directly concerned with this title, except to the extent
some of our members serve as brokers of outward reinsurance programs,
we nevertheless note and applaud that this reinsurance title also seeks
to retain and improve state regulation rather than create a federal
regulator.
CONCLUSION
The IIABA supports the Nonadmitted and Reinsurance Reform Act of
2006. We appreciate the interest of this Committee in this issue and
applaud the bipartisan actions of the House Financial Services in
passage of the legislation. We urge this Subcommittee and Committee
also to promptly act on this bill. IIABA believes that this legislation
is an excellent example of a pragmatic reform approach that utilizes
targeted, federal tools to improve the state-based regulatory system.
We are also hopeful that this approach will be used in the near future
to facilitate additional reforms in the state-based system of insurance
regulation. Thank you again for the opportunity to testify.
Mr. Cannon. We're going to go to the Ranking Member to
begin the questioning.
Ms. Wasserman Schultz.
Ms. Wasserman Schultz. Thank you, Mr. Chairman.
Mr. Soto, thank you very much for joining us. And I am
particularly pleased that the ``Big I'' is currently chaired by
a Floridian.
You mention that you prefer regulation closer to home, and
if you would, expand on that.
Mr. Soto. Sure.
Ms. Wasserman Schultz. That would be helpful.
Mr. Soto. Well, my experience over the years has been that,
indeed, regulation closer to home will be more nimble and
better to react. Let me give you a couple of examples.
After Hurricane Andrew, a few insurance companies started
nonrenewing and canceling policies of affected policyholders.
We got ahold of our insurance commissioner, and he, within 24
hours, put a stop to that and basically said, until a home is
repaired or you're fully compensated, you cannot nonrenew.
Where am I going to go with a home with no roof to try to
place the insurance? Try to imagine with a Federal regulator,
how long it would take to react would be absolutely awful.
We're having a serious property crisis right now in
Florida, and our cabinet, our governor, organized themselves to
create a residual market. Within 4 weeks we've gone from not
having it to now we're beginning to get it.
The last comment I would make, in 1983 to '85, I was part
of a group that came up to Washington with a goal of reforming
flood insurance; and we quickly realized that the reform that
they were looking for was just administrative reform because
the thought process was that it would take an act of Congress
to make any significant changes.
We recommended that--there is a huge gap in the Federal
flood program, and that is the lack of business interruption
and additional living expense. Nothing was enacted. Twenty-five
years later we're finding the Katrina victims, many of them are
going out of business because they have no business
interruption or no additional living expenses.
So I think local regulation is better for my clients and
for the people that I represent.
Ms. Wasserman Schultz. Thank you. And since we're here, can
you talk about what other steps you think need to be taken in
addition to this? This will take us a few steps down the road,
but what else could----
Mr. Soto. Well, this I think will expand the marketplace.
It's not a magic pill for the problems that the coastal areas
have, but anything that expands the marketplace a little bit is
good. When insurance companies compete for my clients'
business, the client wins, coverage is better and premiums go
down.
I happen to support what you mentioned earlier, the bill
which is what we need ultimately, a Federal reinsurance
program. Natural disasters are a national phenomenon, and we
need to address that in order to shore up our coastal problem;
and we have two ways to do it. Air Force One gets up in the
air, and we start shoving FEMA money out the back; or we do it
front end, logically, systemically, and people pay actuarially
sound premiums for that.
Ms. Wasserman Schultz. Mr. Chairman, I have just a couple
more questions.
But, you know, I am someone who has prided myself, in 14
years in public office, on being somewhat of a consumer
champion. And, you know, Mr. Plunkett has raised some concerns;
and I am wondering if you could address those concerns. Because
my understanding is that RIMS, which is the organization that
essentially is the consumer representative of the companies
that are interested in this type of insurance, is supportive of
this legislation.
So if you could address some of the things that--items you
have raised; and anyone else who wants to address those, as
well.
Mr. Soto. To a great extent, he's right, that there could
be some situations where there is some abuse. I don't believe
that you ought to take an entire system and stop the
reformation of a system because there are going to be a few
pockets of possible abuse.
The fact of the matter is that the ratio between commercial
lines and personal lines on a national basis is about 33-to-1.
In other words, it's a $33 billion industry of which $1 billion
is personal lines.
So while he's right, you ought not to legislate on the
basis of the exception being the cure.
Mr. Sinder. With all due respect to someone whom I very
much respect, I do not think he's right, and I'd like to
address it specifically.
Basically, there are two things that are interwoven in the
critiques that were made. One is that the alternative to the
nonadmitted marketplace is the admitted marketplace. Well,
that's not so. As you are seeing in Florida with the
catastrophic risk, the alternative to the nonadmitted
marketplace is no coverage at all. So I think you have to
return to the idea, this is not compulsory coverage, you don't
have to have it. So what you are insuring is the corporate
treasury which, with all due respect, allows the corporation to
continue to do business and employ people and serve the public
in its own way.
The other great confusion that is interwoven in the
critiques is the idea that, somehow, if you identify the
particular State that's going to be charged with the
regulation, you are going to interfere with the rate-and-form
regulation of the policy whether or not the torts are covered,
because they're different from one State to the other, whether
or not the Michigan regulator is adequate to evaluate
earthquake exposure or hurricane exposure.
Well, the fallacy there is there is no rate-and-form
regulation in the nonadmitted marketplace. The only regulation
of the nonadmitted market--and there's no claim regulation
either in terms of the carriers making payments.
There is no regulation of the carrier at all in the
nonadmitted marketplace; the regulation is of the broker. It
governs when they can access the market, whether they're
licensed to access the market, with whom they can place
coverage by different criteria, or white lists, that are
established by the National Association of Insurance
Commissioners; and then, most importantly for many States, how
they get their piece in terms of the premium tax payment.
There is no regulation of the policy itself or the claims
payment process. And so those critiques may be very fair in
another context; they are not fair with respect to the
nonadmitted insurance piece covered by title I.
Ms. Laws. Representative Wasserman Schultz, could I also
respond?
Mr. Cannon. The gentlelady's time has expired, but if you
would like to respond, I think Mr. Plunkett would also like to
respond. So we'll have you respond and then he may respond.
Ms. Laws. I'll be brief.
One of Mr. Plunkett's assumptions, he questioned the
assumption as to whether the domiciliary regulator had the
incentive to provide adequate oversight to the reinsurance
transaction, and he questioned the impact on the consumer.
First of all, I would reiterate that there is no consumer
aspect to the actual reinsurance transaction itself. But more
importantly, I would say that the States have absolutely no
incentive in not regulating the financial solvency of a
reinsurer, which can have adverse impacts on the insurer and
consumer ultimately. Every State regulator has every incentive
to make sure that those insurers are going to be financially
solvent, as demonstrated by the fact that reinsurers are paying
such large parts of the catastrophe losses.
Thank you.
Mr. Plunkett. Well, it's a long list here.
Let's start with what Mr. Soto had to say. $1 billion in
personal lines; it's just under, he's correct. Our concern is
that given the intent of the legislation that that number would
grow significantly.
I mean, it's one issue if a sophisticated corporation is
buying commercial insurance; it's another issue if the
nonadmitted market for personal lines grows. Why not just
exclude personal lines? Why not make it very clear in the
legislation that it's not covered?
The next item, I'm not saying that in all cases the
alternative to the nonadmitted market is the admitted market.
We know that in some cases we're talking--in many cases we're
talking about unusual risks that have to be covered, or risks
that are not available in the admitted market, but this bill
forbids States from requiring brokers to do what they have to
do now, which is to do a search of the admitted market before
placing somebody with nonadmitted insurance. So we're very
concerned that nonadmitted lines could grow significantly, and
especially concerned about the impact on personal lines.
I disagree that there's no consumer impact when it comes to
regulation of reinsurance. If one State--entities in that State
say that the domicile State is 1 percent of the reinsurance
coverage and in another State it is 75 percent, but that State
is not the domiciled State, why not allow that State, in some
circumstances, some regulatory authority here?
Thank you very much.
Mr. Cannon. Thank you.
Mr. Sinder, it looked like you had wanted to respond there.
Mr. Sinder. To the point about access to the market, the
legislation requires that you're governed there by the home
State of the company, and there their rules govern. And every
State says you have to evaluate whether or not the coverage is
available in the marketplace. That rule would continue; the
difference is the documentation of the availability.
Right now, some States say you need five affidavits; other
States say you need to document your own file your own way;
other States say you need three letters for carriers. That gets
to be a pretty thick file for single placement for multistate
exposure.
So it's not that the rule goes away. It's just that it gets
reduced to whatever the requirement is in the insured's home
State.
Mr. Cannon. Thank you, Mr. Sinder.
Let me explain why we're here. This is the Subcommittee on
Administrative and Commercial Law, and we oversee interstate
transactions, regulations that interfere with commerce and also
interstate compacts. So NAIC is a compact that we--that we
oversee. And what I'm hearing here is there is clearly a bunch
of activity by the individual States that affects the
smoothness with which commerce should happen.
But I'm intrigued by the discussion that we're having here,
and we've been talking about this--Mr. Plunkett initially
talked about auto insurance where--I suspect there are not many
States that don't have a lot of auto insurance policies.
Another area that is a little different is in health
savings accounts, where many States don't have much in the way
of offerings. I think Utah has two or three health savings
accounts; those are recent and they're not of very general
applicability.
Is it possible in an area of--consumer area, as opposed to
a sophisticated business that we might move into insurance
health savings accounts or other kinds of personal insurance
with nonadmitted insurers if this blows past, Mr. Sinder?
Mr. Sinder. Right now the nonadmitted insurance marketplace
is a property and casualty insurance marketplace, not a
benefits insurance marketplace. So this legislation would have
no direct effect on things like health savings accounts, which
are really securities products that are tied to the
availability of--if you purchase a certain type of health
coverage.
On the auto, in most States, maintenance of auto insurance
is compulsory, and so you have to have the auto insurance in
order to maintain either an individual or a commercial license.
When insurance is compulsory, it's not just that you're
required to maintain insurance; you're also required to
maintain insurance from an admitted carrier regulated by that
State. So if you are, for example, General Motors and you have
drivers in all the States, each of those States requires you to
maintain insurance coverage for those drivers with carriers
admitted in those States. So it really isn't a type of coverage
that's amenable to a surplus lines product that's only for
noncompulsory insurance.
Now, to the extent for those same drivers or for your
driver pool, you would like to purchase some top-end coverage,
that very well may be a product that's amenable to surplus
lines coverage, and it could be purchased in that marketplace.
But, again, it's something you are purchasing as extra
protection, not coverage that's required by the State.
Mr. Cannon. Mr. Plunkett, you were concerned that the one
billion of the 33 billion could grow dramatically. What areas
would that grow in?
Mr. Plunkett. Excuse me. Currently, we have nonadmitted
lines for personal insurance sold in any area you can think of.
I mention auto insurance and property coverage for brush fires
out West. It tracks normal personal lines in many ways, so
we're concerned on property casualty insurance, as was
mentioned, about the growth of these personal lines of
nonadmitted insurance.
Mr. Cannon. Mr. Sinder.
Mr. Sinder. Mr. Chairman, it's true that you can purchase
auto insurance in the nonadmitted marketplace, but not for your
collision coverage and not for your basic, required auto
insurance coverage. What you purchase it for is, if you have a
very specialized automobile, a classic antique car that your
normal admitted carriers won't cover the collision on the auto
itself, so you purchase a slice of coverage. And you may do it
through the nonadmitted marketplace, but it if you are a
consumer, you are an individual, the State in which you reside,
they regulate that transaction. And so you still have all the
normal regulatory rules applied; it's just that for certain
slices of noncompulsory insurance, you may indeed access that
nonadmitted marketplace.
But the other thing I would like to point out is the brush
fire example. The reason you may need to do so for that type of
exposure is because you can't get that coverage in the admitted
marketplace, so this marketplace really fills a gap. I don't
believe that for most consumers who reside in a single State,
this will have any effect at all on the way in which their
insurance transactions are regulated.
Mr. Cannon. I don't know if any of you can actually answer
this question clearly, but we may guess: What effect is this
legislation going to have on NAIC as an institution and on
individual commissioners or individual States if it's passed? I
take it there would be a significant amount of work to put it
in place, but I suspect there would actually be less work and
more clarity on revenues, at least for those States.
Mr. Sinder. Yes. I think that at the front end there is
some work to put a compact together to effectuate the tax-
sharing provisions, and the NAIC has already begun that process
at their last meeting. This has kind of reinvigorated their
efforts on this. They had been making efforts to do a surplus
lines compact for over 20 years and those efforts had stalled,
so this has reinvigorated those. But once the compact is in
place, the bulk of the surplus lines transactions are for
single-State placements.
This legislation has absolutely no effect on the regulatory
control or efforts related to those placements. The place where
it will--you will see some savings is, you won't see for the
multistate transactions the duplicative filings from State to
State, so there should be some administrative savings for all
insurance departments.
Mr. Cannon. Will there be a shift of revenues to States
that have more corporations based in those States and away from
States where you have branch offices? And will that be
significant? You, Mr. Sinder or anyone else.
Mr. Sinder. Well, the CBO did a study on this and they
predicted a small amount of tax shifting. It's an incredibly
difficult calculation to make.
Mr. Cannon. Is that Federal tax by the CBO or is that
intrastate?
Mr. Sinder. They evaluated both. They saw some intrastate
tax shifting. But there's a couple points here. First of all,
the expectation is that the overall tax revenue to the States
will actually increase because there is a sense that there is
some--it's difficult to comply with the rules, so some don't--
no members of the council, of course, but others who may be out
there who are playing in this area.
Mr. Cannon. And you may just not know.
Mr. Sinder. No one has told me. That's definitely true. I'm
sorry, I lost my train of thought.
Mr. Cannon. No members are not paying, so there should be
net--with the noncompliance removed, there should be a net
benefit or a net gain.
Mr. Sinder. There should be a net benefit. But initially
some thought that the large States would be beneficiaries of
this. But at the House Financial Services hearings there was
concern that some small States where you have--large
corporations that reside would actually be the big
beneficiaries because they wouldn't pay the tax based on their
nationwide exposure.
The truth of the matter is that once the compact is in
place, it should be a much fairer, more efficient tax-sharing
mechanism, and in the interim it's very difficult to predict
the tax impact because some companies that are large--and the
example used at the House Financial Services Committee was Wal-
Mart--they may be in the surplus lines marketplace, but they
may self-insure for the bulk of these risks, as well; and by
removing the regulatory impediments, what you may do is shift
them back to using more traditional, nonadmitted carriers to
satisfy the risk exposure.
Mr. Cannon. Thank you. I've gone over my time here, but so
did the Ranking Member slightly. So let me just wrap up by
saying, it makes an enormous amount of sense, Mr. Soto, as you
suggested, to have regulation at the lowest level. As you point
out, can you imagine FEMA responding the way the--the way the
Florida commissioner of insurance responded? It is beyond
conception.
That's why I think this is really a cool Committee, and we
welcome Ms. Wasserman Schultz, however temporarily, to the
Ranking Member's seat.
Do you have other questions?
We would like to thank the panelists for being here today.
I think it has been very informative, and we look forward to
helping move this legislation forward. Thank you very much.
[Whereupon, at 11 a.m., the Subcommittee was adjourned.]
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