"This Committee has a responsibility to consider the current state of the insurance industry and the regulatory framework within which it operates... The Committee also has a responsibility to consider proposals intended to modernize and improve the regulation of insurance."

With this introduction, Senator Christopher Dodd (D. CT), chairman of the Senate Committee on Banking, Housing and Urban Affairs, convened a Hearing on the "State of the Insurance Industry: Examining the Current Regulatory and Oversight Structure," yesterday on Capitol Hill, at which the AAMGA and other insurance industry representatives were present. While not specific to any pending or proposed legislation, the informational Hearing addressed a wide array of insurance-related issues. These included: the filing and payment of surplus lines taxes and other needed reforms; the bond market; the proposal to create an Optional Federal Charter; reinsurance reform; the life insurance market; the European Union's "Solvency 2" initiative and the ability of the US to integrate into the effort of the capital adequacy regime for the European insurance industry without a single federal regulatory framework and regulator; NARAB II; the advisability of continuing regulation of the insurance market by the states; the increasingly global nature of risk sharing; claim adjustment processes and the need for coordinated and consistent regulatory uniformity.

Several speakers advocated the Committee to adopt a sense of "creative federalism," by not segregating and passing individual reform initiatives (like the Nonadmitted and Reinsurance Reform Act) but, rather, to engage in a comprehensive initiative to achieve industry-wide reform (as set forth by the Optional Federal Charter, the creation of the Office of Insurance Information and other initiatives).

The general theme that wove its way through the questions from the six members of the Committee present during the course of the Hearing appeared to be focused on what Chairman Dodd called the "Three Pillars of Insurance Reform and Modernization," and what became a fourth. These were, as Senator Dodd articulated:

• "Strong consumer protection. Purchasers must understand what they are buying, they must be treated fairly and without deception, and they must know that the company insuring them will be there down the road when they have a claim"
• "Our regulatory structure must promote competition in the marketplace, which will drive innovation and growth," and
• "Regulation must be efficient, and not place unnecessary burdens on those being regulated"

The fourth objective that arose during the course of the day was centered on the Committee's concern to prevent a "failure" or "collapse" of a large insurer or several in the industry that would leave policyholders without the ability to be indemnified and held harmless for valid claims submitted to their insurers. Senators Shelby and Johnson both related their discomfort on the current inability of Congress to prevent a situation similar to what recently occurred in the banking and investment industry that would necessitate a federal bail-out. (This weekend Congress passed, and President George Bush signed into law today, the Housing and Economic Recovery Act of 2008 (HR 3221), to provide assistance to homeowners facing foreclosure by their banks and lending institutions).

Further, as it related to surplus lines, Senator Dodd questioned the ability of a policyholder to be made whole after the failure of an excess and surplus lines insurer, given the fact that the state guaranty funds do not provide benefit to the E&S market and their respective policyholders. However, this fear can be easily allayed by several facts:

1. a sizable majority of E&S policies are written on commercial versus personal risk exposures with larger limits and prospective losses than the average maximum of $300,000 per claim that a state guaranty fund might pay;
2. as noted in the Annual A.M. Best Special Report "US Surplus Lines - Market Review," there had been no impairment of a surplus lines carrier between 2004 through the first half of 2007 - compared to 47 impairments during the same period for admitted companies;
3. E&S insurers are required to maintain a greater percentage of statutory surplus than standard markets thereby adding to the strength of their solvency and capital adequacy;
4. the admitted market does not offer the same unique and creative solutions as surplus lines insurers and, also, unlike the E&S market, is unable to bring new products and services to market with the capacity, degree of urgency and experience that is so often required; and
5. the operating performance and combined ratios of domestic surplus lines insurers continue to outperform the results of the standard/admitted carriers.

It is clear the issue of insurance regulatory reform and modernization will remain on the agenda of Congress going forward. Given the short period of time remaining in the lifespan of 110th Congress this election year, it will be interesting to follow the activity of insurance related measures.

Status of the Nonadmitted & Reinsurance Reform Act of 2008

There is good news to report. Senator Dodd noted the "consensus" that has developed on the issues surrounding reform and modernization of the surplus lines market and, especially, in respect of Senate Bill 929, the "Nonadmitted & Reinsurance Reform Act." Senator Mel Martinez (R. FL), who jointly introduced the Bill with colleague Senator Bill Nelson (D. FL) following its unanimous passage this year and in 2007 in the House of Representatives, also stated during the Hearing that the legislation would "boost the vitality of surplus lines and provide coverage for and protection of consumers," especially in coastal states. Click here for a full copy of S. 929.

Among all panelists yesterday, only the representative from the Consumer Federation of America voiced opposition to S 929. Others were either fully or mostly in support of the measures to, among other things, modernize the filing and payment of multi-state surplus lines premium taxes in the home state of the insured, provide more immediate access to surplus lines coverages, eligibility requirements, and elimination of the extra-territorial provisions in reinsurance treaties. Those not fully supportive responded to Senator Dodd's questions that there were some "tweaks" they would like to see in the legislation.

This left the Committee Chairman to remark prior to the conclusion of the Hearing that he "would like to move forward on a reform measure that is narrow in scope and on which there is consensus." Admitting he had not surveyed his colleagues on the Committee to ascertain whether there was support for such an effort - including voting S 929 out of Committee - he said he would be doing so in the hope that "something can be done before we adjourn" for this year.

Meeting with Senate staff and other industry representatives after the Hearing, the AAMGA will be working on supplementary remarks, data and a broad-based, grassroots effort to move this important legislation forward. Notwithstanding the absence of any formal hearing on just the Bill, the Senate could adopt the measure by unanimous consent, thus foreclosing the necessity of a full debate and vote on the Senate floor. Given the unanimous passage of the Bill by the US House of Representatives in each of the last two years, there is a better than even opportunity for us to achieve the benefits provided by the measure. We will keep all AAMGA members advised of developments and the progress made.

Copies of the prepared remarks of Senator Dodd and Senator Tim Johnson (D. SD), as well as others who testified can be downloaded by clicking on the hyperlinks below.

Member Statements

Senator Christopher J. Dodd

Senator Tim Johnson

Witness Testimony
 
Honorable Steven M. Goldman, Commissioner, New Jersey Department of Banking and Insurance, on behalf of the National Association of Insurance Commissioners.

Mr. Travis B. Plunkett, Legislative Director, Consumer Federation of America.

Mr. Alessandro Iuppa, Senior Vice President, Zurich North America, on behalf of the American Insurance Association.

Mr. John L. Pearson, Chairman, President, and Chief Executive Officer, The Baltimore Life Insurance Company, on behalf of the American Council of Life Insurers.

Mr. George A. Steadman, President and Chief Operating Officer, Rutherfoord Inc., on behalf of the Council of Insurance Agents & Brokers.

Mr. Thomas Minkler, President, Clark-Mortenson Agency, Inc., on behalf of the Independent Insurance Agents & Brokers of America.

Mr. Franklin Nutter, President, Reinsurance
Association of America.

Mr. Richard Bouhan, Executive Director, National Association of Professional Surplus Lines Offices.