Creation of the Office of Insurance Information (HR 5840)

Representative Paul Kanjorski (D-PA) held a hearing on Tuesday June 10, 2008, to examine H.R. 5840, the Insurance Information Act of 2008. Congressman Kanjorski introduced H.R. 5840 on April 17th, 2008. The hearing occurred before the Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee of the House Committee on Financial Services, which Congressman Kanjorski chairs.

If enacted into law, H.R. 5840 would create an Office of Insurance Information (OII) within the Department of the Treasury. Key supporters of the Insurance Information Act noted during the hearing that the legislation only empowers the OII to have preemptive regulatory authority over international issues, not domestic insurance matters. Those supporters described the OII as designed to serve as an on-call adviser and information clearinghouse to help address domestic insurance policy concerns.

Because the supporters of H.R. 5840 include an ideological array of Financial Services Members who are influential on insurance reform issues, the Insurance Information Act has a significant chance to advance to the House floor in the months ahead. Those Members include Chairman Kanjorski, Ranking Member and Risk Retention Group reform advocate Deborah Pryce (R-OH), lead sponsor of the state law-oriented NARAB II bill David Scott (D-GA), the OFC bill’s lead sponsor Melissa Bean (D-IL) and lead Republican Ed Royce (R-CA), and lead surplus lines reform sponsor Dennis Moore (D-KS).

The amenable position of the National Association of Insurance Commissioners (NAIC) also will help the cause of H.R. 5840. During the hearing, the NAIC’s witness, Michael McRaith from the Illinois Division of Insurance, testified that the NAIC believes the Insurance Information Act is “on its way” to being acceptable to a critical mass of state insurance commissioners. Progress in the House on the Insurance Information Act would suggest that ideologically-balanced, “middle of the road” insurance reform legislation can find a receptive audience among key players on Capitol Hill. However, it is worth noting that no one in the Senate has introduced companion legislation to H.R. 5840 to this point.

The hearing also enabled some Subcommittee Members, such as Congressman Donald Manzullo (R-IL), to express their opposition to the Insurance Information Act. Congressman Manzullo, among others, views H.R. 5840 as a way for Congress to open the door to full-scale Optional Federal Charter (OFC) legislation at some point in the near future.

Witnesses and Members Present:

Witnesses at the hearing testified in two panels:

Panel One:

• Jeremiah Norton, Deputy Assistant Secretary, U.S. Department of the Treasury
• Michael McRaith, Illinois Division of Insurance, appearing on behalf of the National Association of Insurance Commissioners (NAIC)
• Brian Kennedy, Rhode Island House of Representatives; President, National Conference of Insurance Legislators (NCOIL)

Panel Two:

• Neal Wolin, President and Chief Operating Officer, Property and Casualty Operations, The Hartford Financial Services Group, appearing on behalf of the American Insurance Association
• Stephen Rahn, Vice President and Associate General Counsel, Lincoln Financial Group, appearing on behalf of the American Council of Life Insurers
• Tracey Laws, Senior Vice President and General Counsel, Reinsurance Association of America
• David Sampson, President and Chief Executive Officer, Property Casualty Insurers Association of America

Besides Subcommittee Chairman Kanjorski and Ranking Member Pryce, other Members attending, listed in an approximate order of the degree of their participation, included:

• Edward Royce (R-CA)
• David Scott (D-GA)
• Donald Manzullo (R-IL)
• Brad Sherman (D-CA)
• Michael Capuano (D-MA)
• Geoff Davis (R-KY)
• Tom Feeney (R-FL)
• Melissa Bean (D-IL)
• Ruben Hinojosa (D-TX)
• Carolyn McCarthy (D-NY)
• Chris Murphy (D-CT)
• Ginny Brown-Waite (R-FL)
• Dennis Moore (D-KS)
• Ron Klein (D-FL)
• John Campbell (R-CA)
• Michael Castle (R-DE)
• Joe Donnelly (D-IN)
• Shelly Moore Capito (R-WV)
• Dan Boren (D-OK)

Witness Testimony:

On the first panel, Norton from Treasury expressed strong support for H.R. 5840. Norton indicated that, while the Optional Federal Charter (OFC) debate is “ongoing,” some insurance reform issues were in need of “immediate attention.” McRaith, of Illinois and appearing on behalf of NAIC, pledged to avoid merging the H.R. 5840 debate with the larger OFC discussion, expressed tentative support for an Office of Insurance Information (OII), and promised to make a good faith effort to work with the Subcommittee on the bill.

Kennedy, of Rhode Island and appearing on behalf of NCOIL, criticized the H.R. 5840 approach as a foot in the door towards comprehensive federal insurance regulation. Kennedy’s testimony included analogies to the movie Field of Dreams, saying that if OII was “built,” then OFC would “come.”

On the second panel, witnesses generally indicated what improvements they would like to see in the bill. Wolin of AIA and Rahn of ACLI wanted to see the Federal Trade Commission (FTC) removed from the advisory board because of the FTC’s longstanding lack of involvement in insurance issues. Rahn also sought limitations on the situations in which OII could request information, and a reduced role for the NAIC. Ms. Laws of RAA sought broader authority and more streamlined procedures for the OII to preempt state laws. Sampson of PCIAA was skeptical of the bill, and specifically sought less comprehensive preemption provisions and reforms to the data collection process.

Members Supporting the Insurance Information Act:

Six key Members expressed support for the bill. Of the cosponsors, Representatives Kanjorski, Pryce, Royce, and Bean warmly supported H.R. 5840. In addition, Representatives Scott and Murphy suggested that they would support the legislation. Representative Scott’s support is key, given his lead sponsorship of the more “states’ rights”-oriented H.R. 5611 “NARAB II” bill. Congressman Scott discussed the importance of reaching a “consensus” on the Insurance Information Act and voiced support for some kind of “regulatory reform” that created a federal presence in the insurance industry.

Congressman Murphy asked the witnesses on the second panel to offer anecdotes to explain the need for an OII to the audience. Representative Murphy asked Wolin to illustrate some of the barriers within Treasury, and called on the whole panel to elaborate on how an OII might change the Solvency II negotiations at the EU level or improve future international efforts.

Members Opposing the Insurance Information Act:

Only two Members expressed unvarnished opposition to any portion of the bill. Representative Manzullo articulated strong “misgivings regarding federal intervention” – either through an OFC bill or through the supposedly less comprehensive H.R. 5840. Congressman Manzullo wholeheartedly endorsed Kennedy’s “if you build it, they will come” reasoning, calling Kennedy the only witness on the first panel who “made any sense.” Manzullo was particularly skeptical of the need for federal preemption, given that no witness could list a specific state law that actually conflicted with international agreements

Congressman Manzullo also praised the Illinois insurance market as a means of illustrating his perceived lack of need for federal involvement. “[Illinois has] the lowest rates because we have no regulation,” Manzullo explained, although McRaith responded that Illinois insurers “do have regulation in Illinois, just not rate regulation.”

Representative Sherman, while supportive of the information gathering provisions in H.R. 5840, was equally skeptical of the bill’s preemption provisions. Congressman Sherman badgered Treasury’s Norton to provide a specific example of a state law that would conflict with international agreements. Congressman Sherman appeared unconvinced by Norton’s mention of reinsurance collateral and the Solvency II discussions with the European Union (EU). Sherman indicated that he did not want international agreements to preempt laws fostering consumer protection, as he noted had happened in the environmental and product safety arenas.

Members Expressing Uncertainty About the Insurance Information Act:

A number of Members indicated that they were either unsure about support for the bill, or only cautiously supportive. For example, Congressman Hinojosa said he was “not taking a position.”

Congressman Capuano said he was “not sure yet.” Representative Capuano pushed Norton, the Treasury witness, on how the OII might respond to potential conflicts that do not involve international agreements. Capuano crafted a hypothetical where a single state enacted a regulation that the industry, OII, and other states all agreed was “bad” and then asked Norton what OII could do about it. Norton reiterated that the office would have “absolutely no authority” to preempt that state law, but OII would be able to talk to state officials and try to rectify the situation.

Congressman Capuano indicated that he would really like Treasury to have the authority to make a “strong public statement” in such a case. Norton suggested that the OII’s annual report might serve that function, and Capuano said he wanted to see even more. Capuano then endorsed the information gathering provisions of the bill. He also wondered if there might be lessons for the insurance industry from some of the recent problems in the private equity industry. If anything, Congressman Capuano appears to view the Insurance Information Act as too mild of an initial Congressional step on insurance reform.

Representative Hinojosa said that he was concerned that OII legislation would open the door to preempting “virtually all” state regulation. At the same time, Hinojosa wondered if Norton could explain how the Insurance Information Act might affect or improve the ongoing trade negotiations with Panama, Colombia, and South Korea. Norton promised a written response. After Hinojosa finished his questions, Kanjorski assured him that they are working on improving the preemption language. Hinojosa told the Chairman that if appropriate changes were made, he might be able to support the bill.
Representative McCarthy asked Kennedy to explain how state law deals with international issues. Kennedy responded that it rarely does. Then Congresswoman McCarthy pressed Norton to explain what exactly the legislation would preempt. Norton tried to focus attention on discriminatory state laws, which placed additional barriers in front of foreign competitors. McCarthy then turned to the idea that if state law is more protective of consumer interest than federal law, then traditionally federal law will not preempt state law.

Representative Brown-Waite (who was a co-sponsor of, and with whom the AAMGA worked in passing the Non-Admitted & Reinsurance Reform Act (HR 1065) legislation in the House of Representatives) did not question the witnesses, but gave a brief opening statement. Congresswoman Brown-Waite said “the OII may be needed, but we must be leery of efforts to preempt state law.” The Congresswoman suggested fellow Subcommittee members “tread lightly” in this area.

Congressman Davis spoke entirely about the H.R. 5611 “NARAB II” bill, on which he is the lead Republican sponsor. Congressman Feeney also talked about his own legislation, H.R 6213, the Reinsurance International Solvency Standards Evaluation Board Act. Representative Feeney also said that, although he was unsure about OFC-based approaches more generally, he thought that OFC might make a lot of sense in the context of the reinsurance market, particularly in light of Florida’s recent experiences.

Potential Insurance Information Act Compromises and Amendments:

Chairman Kanjorski, along with some of the other Members, pressed witnesses to indicate what potential compromises might be available to foster additional support for the Insurance Information Act:

• Larger NCOIL Role: Congressman Kanjorski and Congressman Manzullo both asked Kennedy whether a position for NCOIL on the OII’s advisory board would leave the organization more comfortable with the legislation. Kennedy said that change would be a start, but that the organization had other substantive concerns as well.
• Amenable NAIC Position: Members asked McRaith what changes the NAIC would need to see in order to support a final bill. In response, McRaith told Representatives Kanjorski, Pryce, Bean, and Royce that the bill was “on its way” to being acceptable. The information gathering provisions were strong. The NAIC agrees with the advisory board having a robust role. However, the NAIC still views the preemption provisions as troubling. McRaith spoke repeatedly of “good faith” efforts to work with the Subcommittee on a compromise.
• Degree of Preemption: Chairman Kanjorski asked the industry panel what the Subcommittee could do to cut through the preemption “quagmire” surrounding the Insurance Information Act. Ms. Laws indicated that the RAA wanted the preemption provisions “strengthened.” At the very least, some preemption needed to stay in H.R. 5840 for the RAA to support it. Congressman Kanjorski agreed, calling a bill without preemption provisions “toothpicks.” Sampson said the PCIAA was very concerned about preemption, but would be happy to work with Representative Kanjorski on acceptable changes.
• FTC Involvement: Congressman Royce questioned Wolin from AIA and Rahn from ACLI about why they did not want the FTC involved in the advisory board. Both said that the FTC is unfamiliar with the insurance industry. If the Subcommittee wanted a “consumer protection voice” there would be other, better sources for that role. Representative Royce seemed satisfied with that answer, but other, consumer-oriented Members may well press for a continued FTC role.
• Definition of “Agreement”: Several witnesses emphasized the need to define “international agreement” within the bill. Congressman Sherman sought examples of the type of state law that might need to be preempted. Norton emphasized Treasury’s belief that the bill would apply only to “regulatory equivalence agreements,” but Sherman called for further clarification. Several of the industry witness also mentioned the need for a clear definition of “agreements.”

The H.R. 5611 “NARAB II” Bill:

Representatives Scott and Davis devoted almost all of their time to promoting their bill, H.R. 5611, which would provide a reciprocal licensing scheme for insurance agents and brokers. Both very strongly emphasized that they expected the bill to be included in any markup package on insurance reform. Congressman Scott asked all of the witnesses individually if they supported the legislation. All said “yes,” but none elaborated further.

Other Themes in the Hearing:

Several other topics discussed during the hearing deserve mention:

• Comparisons between Insurance and Other Financial Services Markets: Frequent analogies were made between the insurance industry and other financial services products. Opponents of the Insurance Information Act’s increased federal role emphasized that state solvency laws had protected the insurance markets, even as the partially federally-regulated banking industry has been racked by crises over the last twenty years. Supporters of H.R. 5840 pointed to the trade deficit in the insurance market, in contrast to trade surpluses in other financial services areas, to push for the bill.
• Genocide Beneficiaries: Representative Sherman’s opening statement chastised domestic insurance companies who are “affiliated” with foreign insurance companies that refuse to publish the names of Armenian genocide and Holocaust-era beneficiaries who have not claimed their life insurance policies.
• Political Appointments in OII: Chairman Kanjorski and Norton discussed the need for the political independence provisions in the Insurance Information Act. Norton was skeptical, but Congressman Kanjorski insisted they were important to keep state law preemption from becoming a partisan issue. Under the terms of H.R. 5840, the head of the OII is designed to be a civil servant, not a political appointee.
• Degree of OII’s Informational Authority: At one point, an industry witness expressed concern about OII seeking information from insurers that was not otherwise publicly available. Subcommittee Members did not follow up on this point, but it seemed of interest to the other industry witnesses.
• Increased Congressional “interest” in the regulatory aspects of the insurance industry: As noted above, and as we have seen since the inquiries into issues arising out of Hurricanes Katrina, Rita and Wilma, the sub-prime mortgage crisis, and insurance matters generally, federal regulators are becoming increasingly interested in the regulatory aspects of insurance products and services as well as other financial services generally. The AAMGA’s Governmental Affairs Committee has drafted legislative positions and principles, and is prepared to provide further education to legislators as to the “freedom of rate and form” aspects of surplus lines insurance, and the integral position and relationships of the insurance wholesale marketplace to the American consumer. We expect insurance issues to be woven in to all future hearings – regardless of their titles and agendas – as legislators seek to advance their respective interests.

Conclusion:

The Insurance Information Act, H.R. 5840, has a significant chance to advance through the House Financial Services Committee and onto the House floor in the next several months. We will continue to monitor and inform you about the progress of H.R. 5840 and any Senate companion measure that is introduced, as well as other insurance reform legislation that Congress considers.

Non-Admitted & Reinsurance Reform Act (S. 929): Status Report

On Friday, June 13, 2008, the AAMGA met with Ahmad Thomas, Legislative Assistant to Senator Diane Feinstein (D. CA). A brief explanation about the AAMGA and the importance of S. 929 to the industry were provided. Representatives of NAPSLO were also present. The current state of the market regarding the nature and extent of premium tax payments on multi-state commercial surplus lines risks were also reviewed.

Mr. Thomas raised questions concerning the role of the California DOI to deal with surplus line carriers who do not deal fairly with California insureds or meet eligibility requirements under the proposed legislation. Additional information was provided, along with a report on the efforts of several state stamping and surplus line offices on drafting and advancing an interstate compact (SLIMPACT), which will facilitate the ability of states to accurately receive and document the proper amount of premium taxes which are due.

Hearings on S. 929 are still expected this session, and we will keep all AAMGA members advised of further developments as they materialize. Please contact us directly in the event you have any questions or require additional information at this time at 610.225.1999, or via e-mail: bernie@aamga.org.