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E, s. 1710 WOULD DEPRIVE THE PUBLIC OF THE ADVANTAGES OF STATE INSURANCE
As noted, S. 1710 would, as a practical matter, involve a substantial preemption of state insurance regulation. We believe on the basis of our regulatory experience that the Congress is ill-advised and the federal government ill-prepared to assume a direct role in regulating the insurance business. Despite claims to the contrary, S. 1710 would necessarily invite a system of federal regulation that would reach farther and farther into the regulatory sphere.
In light of the Supreme Court's interpretation of the scope of the commerce clause, few would argue on the basis of judicial precedent that Congress does not have the constitutional authority to regulate insurance as an incident of interstate commerce.“ But, as we broaden the commerce clause constitutionally and concomitantly broaden the powers of Congress, we will ultimately reach a point where there is no subject of legislative concern in which Congress cannot meddle as a matter of right. However, we doubt that most Americans, faced squarely with the proposition of one centralized government, would favor the transference of any and all regulatory authority to Washington. We submit that Congress should pause whenever it has occasion to consider the preemption of a function historically performed by the states.
We are not aware of the circumstances or public policy that would justify an act of Congress designed to wrest insurance regulation from the states or impose a federal guaranty system. On the contrary, most of the proponents of federal insurance involvement of any sort have maintained that state insurance regulation should be left in place. A review of the development and advantages of state insurance regulation should precede any intrusion into this historically state performed activity. 1. Development of State insurance regulation
In part due to Paul v. Virginia (1868) " which held that insurance was not interstate commerce, the regulation of insurance developed at the state level. As a consequence, insurance was not subject to congressional jurisdiction under the commerce clause. However, in the SEUA case (1944)“ the Supreme Court reversed this position. To assure that state insurance regulation was not upended under the commerce clause, Congress determined that state regulation of the business of insurance is in the public interest. Specifically, the McCarran Act (1945) provides :
Congress declares that the continued regulation and taxation by the several states of the business of insurance is in the public interest,
Thus, the regulation of insurance continued to develop at the state level and has done so at an accelerated pace in recent years.
State insurance regulation is dedicated to protecting the public interest by focusing on at least four fundamental regulatory objectives: (a) assuring the financial integrity underlying the security promised, through prevention of insolvency and guaranty funds; (b) quality of the product ; (c) availability of the product; and (d) fairness to the insurance consuming public. To achieve these goals, a broad and detailed state regulatory mechanism has evolved. For example:
(1) Insurers must obtain and continue their licenses in order to do business. This, in turn, requires complying with statutes and regulations pertaining to formation ; financial standards concerning assets, capital and surplus, permissible investments, adequacy of reserves; and qualification as to character of management, experience and knowledge of the business. Licenses may be suspended or revoked for failure to comply with the law or when the public interest so requires.
(2) Insurers must file comprehensible annual and other periodic reports under oath in each state in which they do business. The NAIC annual statement requires detailed information concerning financial condition, underwriting, investments, reserves, etc.
(3) Insurers are subject to comprehensive periodic examination among other things, to ascertain the financial condition of the company, the results of operation, corporate investment and underwriting practices, whether the company is meeting its obligations to its policyholders, etc.
41 0.8. v. South Eastern Underwriters A880ciation, 322 U.S. 533 (1944). 42 75 U.S. (8 Wall) 168 (1968). 43 322 U.S. 533. 44 15 U.S. Sec. 1011.
(4) By virtue of statutory standards on policy content and the commissioners' policy form approval or disapproval power, much of the source of misrepresentations or other unfair practices is deterred in advance.
(5) Control is exercised over the pricing practices of property and liability insurers hy implementing, either through prior approval or subsequent review, the standards that rates shall not be excessive, inadequate nor unfairly discriminatory.
(6) Market practices are controlled by, among other things, laws governing the qualifications and licensing of agents and brokers, prohibitions against certain practices such as false and misleading advertising and representations, defining standards of fair competition, control over policy forms, rate controls in several areas and department investigations of complaints.
(7) The insurance commissioner may, for a variety of causes (e.g., insolvency, refusal to comply with orders, failure to remove officers, etc.), apply for a court order of liquidation, rehabilitation or conservation.
(8) Among the sanctions available for enforcement of the insurance laws are criminal and civil penalties; cease and desist orders; injunctions; removal of officers and directors; fines; and revocation (or refusal to renew) licenses of agents, adjusters, brokers, and insurers. These express powers and sanctions, plus the informal powers, sanctions and alternative modes of relief stemming therefrom, extend far beyond the authority contemplated in S. 1710.
Supplementing the efforts of the individual states has been the NAIC, organized in 1871 and consisting of the insurance commissioners of the several states. The NAIC has sought to promote uniformity where appropriate, develop model laws and regulations for use in various states and has conducted various types of studies and research projects. The NAIC, as a whole, meets twice a year. Various committees meet during the interim. In addition, a central research office has been established. Thus, the NAIC provides a flexible and timely facility to develop and implement change. In short, the NAIC has served as a mechanism to improve regulation and has provided impetus for change.
This discussion is not intended to be comprehensive but rather simply highlights the comprehensive nature of insurance regulation as it continually evolves to meet changing needs. 2. The fundamental concept of federalism
The dispersion of power between the state and federal governments is advantageous and in the public interest. This constitutional tenet is rooted in sound public policy. Undisciplined power tends to become unresponsive at best and corrupt at worst. Effective implementation of the concept of federalism is fundamental to the exercise of such discipline. This concept requires a dispersion in ultimate decision making power and responsibility, and not merely superimposing a federal regulatory agency on top of that of the states. Enactment of S. 1710 would severely challenge the concept of federalism by ignoring the inherent advantages of state regulation. We urge you to recognize the myriad reasons for maintaining state regul on prior to serious consideration of this bill. 3. Advantages of State insurance regulation
Among the advantages of state insurance regulation are (a) its existence, (b) pluralism, (c) threat of a federal alternative, and (d) regulation closer to the people. Let us deal briefly with each of these areas which should receive your deliberate attention before concluding that the national interest requires Congress to wrest insurance regulation from the states.
(a) Eristence.—The state insurance regulatory system already exists. It utilizes over 50 offices (at least one in each state and multiple offices in several states), employs over 5,100 persons with combined budgets of approximately $92 million.
As a general proposition, it is more effective and less expensive to improve upon and add to existing institutions than to start new ones. This is particularly true with respect to institutions, such as the state insurance regulatory mechanism, which have demonstrated a willingness and facility to change where appropriate and whose goals in affording protection to the public are consistent with the type of objectives expressed for S. 1710. Assumption of regulatory power by the federal government could sweep away much of the experience and expertise existing in state insurance departments. Such a shift would throw into doubt for years many of the rules under which the business has been accustomed to function. From the customers' viewpoint, the known local points for applying citizen pressure would be removed, dispersed, or obscured. Furthermore, there is no assurance that the resulting quality of federal regulation will justify the dislocations incident to the change in locus of regulatory authority.
The history of several federal agencies does not give rise to overconfidence. Nothing is so unsure as predicting the full range of consequences of a major change in a complex system. Thus, the fact that the state insurance regulatory mechanism already exists is in itself a powerful argument for its continuance.
(b) Pluralism, experimentation and vitality.-A second advantage to state regulation is the pluralism and diversity within the system. It involves regulatory agencies of limited size. It seems clear that the economies of scale taper off as size increases beyond some point while problems of bureaucracy become proportionately worse.
The field of government regulation is imperfectly understood. This lends support to utilizing a number of agencies rather than just one. Such a system is conducive to experimentation and will confine the impact of an experiment until it has been tested. The dispersion of decisional responsibility and power tends to restrict the gravity of the impact of mistakes or miscalculation to a limited area and segment of the population. On the other hand, a dramatic and effective innovation by a particular state is apt to be adopted elsewhere after a period of time and testing.
Pluralism also affords a more fertile environment for greater vitality than does a single national agency. The scope for top creative leadership is greater in a system having several tops. The work of one or more vigorous agencies is contagious. It tends to be imitated, competed with and used as a standard in other states. The problem of keeping regulatory agencies, whether state or federal, imbued with the sense of vitality, capable of self-renewal and change is now and, certainly in the future, a graver public concern than an occasional awkwardness of a multi-state regulatory system.
(c) The threat of a Federal alternative.-An extremely important and unique advantage to state regulation is that the threat of a national alternative always hangs over it. State insurance regulatory agencies are subject to review, investigation and embarrassment by Congress which admittedly has the power to abolish the system if it so chooses. As one former insurance commissioner said, “This concentrates the mind wonderfully.” Such congressional oversight no doubt stimulates state regulators to do a better job.
In contrast, if a national regulatory agency becomes involved, it would not be as skeptically watched or credibly menaced. Congressional oversight of federal regulatory agencies has not been demonstratively better than state legislative oversight of state agencies. In other words, Congressional oversight of federal agencies has yielded fewer benefits and more adverse side effects than Congressional oversight of state insurance regulation.
(d) Regulation closer to the people.-It is an old cliche that the states are closer to the people than is the federal government. The individual member of the public possesses more readily available means to seek redress, to answer inquiries and to apply pressure at the state level. For example, an insurance commissioner and top members of his staff are more accessible than comparable members of the President's cabinet. Furthermore, there are over fifty commissioners, contrasted to one cabinet secretary, to whom resort can be had. State legislators, who can and do make forcefully known to the commissioner of insurance problems of their constituents, are also more accessible and tend to be more responsive to an individual's problems. When ultimate responsibility is vested in Washington, the response tends to be more sluggish and less attuned to the individual's needs and demands.
To the extent that S. 1710 would adversely affect the state insurance regulatory mechanism, we believe it is contrary to the public interest, contrary to a viable implementation of the concept of federalism which is a keystone of our system of government, and should not be enacted.
IV. SUMMARY Although S. 1710 is proposed as a measure to improve solvency regulation and enhance public protections when insolvencies occur, passage of the bill would, contrary to its intent diminish policyholder protections. Congressional reform or elimination of the state system should, and indeed must if you are to fulfill your responsibility to the public, proceed on a rational course starting with documentation of state inadequacies. Through S. 1710, it is alleged that states are not adequately regulating for solvency or providing necessary protections to the public. This bill is the verdict and apparently it is proposed that the indictment and its proof be dispensed with.
We submit to you that S. 1710 meets no demonstrated need and fills no critical regulatory vacuum. The magnitude of the potential insolvency problem for the insurance industry, even for the very difficult years of 1974–1975, has been grossly overstated. Even during these years, the industry made money. No domino effect occurred. The amount of guaranty fund assessments are miniscule in relation to the size of the industry. In short, actual experience contradicts the handwringing speculation of some insurers and industry observers. A comprehensive system of insolvency protection for the insurance consuming publicboth regulation and state guaranty funds-is in place and it works. Furthermore, despite their commendable performance to date, state efforts are not static. The system is under continuous review for possible improvements. Some are in the works now, others are being considered.
Dividing regulatory responsibility between the states and the federal government and fragmenting the base over which insolvencies are spread will not improve public protections but rather will jeopardize the existing, viable state regulatory and guaranty fund mechanisms. In addition, there is little need to apply the federal antitrust law to the insurance industry since the impact on competition would at best be quite minimal.
Not only is there a lack of demonstrated need for S. 1710 but also its enactment would pose serious adverse ramifications for the insurance consuming public. We have touched on some examples in this statement.
(1) State insurance regulators are in a better position to foster and preserve competition in the insurance industry than are the federal antitrust enforcement agencies.
(2) Some aspects of antitrust laws as applied to certain joint activities (e.g., pooling statistics, providing pooled coverages) would reduce competition and preclude the availability of insurance coverages for certain types of risks.
(3) The preemption of state rate authority not only could weaken insolvency prevention efforts with respect to individual insurers (which is an inherent contradiction in S. 1710), but also create a regulatory vacuum in those markets which are not competitive thereby leaving the insurance buyer vulnerable to excessive rates.
(4) The fragmentation of the guaranty fund system would greatly and perhaps fatally weaken the state system due to the federal government "creaming" the larger and more financially sound insurers.
(5) Regardless of allegations to the contrary, S. 1710 would (a) involve both immediate and long range massive federal insurance regulatory involvement which meets no demonstrated need; (b) essentially duplicate existing state authority; (c) establish the likelihood of wasteful state-federal regulatory conflict and weaken state controls even over nonfederally chartered companies. As a result, the states' ability to respond to public needs will be impaired thereby undermining, not strengthening, insurance regulatory protection.
(6) Furthermore, such federal regulation undermines the fundamental concept of federalism and deprives the public of the inherent advantages of state insurance regulation.
(7) The creation of a new expensive regulatory bureaucracy for insurance must be paid for with tax dollars, creating a new unnecessary and unjustified drain on public resources.
(8) S. 1710 is said to provide an alternative regulatory system which would be available to individual insurers at their option. Obviously, insurers will forum shop to obtain regulation which has the least impact upon its operations, Dual regulation of insurers could set the stage for regulatory competition in laxity, giving the advantage of broad jurisdictional scope to the system attracting and maintaining the largest number of insurers. In a sense, the regulated would be overseeing the regulators rather than vice versa. This process encourages regulation in which the public interest gets lost in the shuffle-a very questionable public policy indeed. For these reasons, among others, we strongly urge you to reject this proposed legislation.
The CHAIRMAN. Thank you very much, Mr. Kinder.
STATEMENT OF RICHARD L. MATHIAS, DIRECTOR OF INSURANCE,
STATE OF ILLINOIS, ACCOMPANIED BY MICHAEL HASTEN, CHIEF COUNSEL
Mr. MATHIAS. Mr. Chairman and members of the committee, my name is Richard Mathias and I am the director of the Department of Insurance of the State of Illinois.
I have reviewed S. 1710 and understand it to do several things, most significantly:
(1) To establish a Federal Insurance Commission;
(3) To create the option of federally chartered insurance companies. The proposed Federal Insurance Act of 1977 would drastically alter the existing regulatory scheme of the business of insurance as it is presently understood. Traditionally and by sufferance of Congress, I suppose, the regulation of the insurance industry in the United States has rested with individual States. I should say at this point that I do not unilaterally oppose such a shift of regulatory emphasis as such. Nor do I oppose the concept of Federal regulation of the business of insurance if it will better serve the public interest. In the process of reviewing the proposed legislation, I read with interest Senator Brooke's remarks of Thursday, June 16, 1977 which appears in the Congressional Record.
I noted with interest his keen concern for the financial condition of the property and casualty insurance business in the United States. I too am extremely concerned as to the financial condition of not only the property and casualty insurance companies, but also life, accident, and health companies as that is my primary job. I am, I suppose, primarily responsible for the financial health and well being of those insurance companies which do business in the State of Illinois. Some would say this is the primary responsibility of any regulation of the business of insurance. This acute concern for the financial stability of those companies engaged in the business of insurance is due primarily to the nature of the relationship between insurer and insured. A relationship which is based on a promise to pay in the future, the basis of which is, of course, the ability to pay in the future-or future financial stability. It is my own regulatory philosophy, if you will, that prompts at least a primary emphasis being placed on the financial solvency of any insurance company doing business in Illinois. In my judgment, and although other regulatory actions appear to be more touched with the public interest, the solvency of an insurance company is the very basis upon which regulation should take shape.
I share Senator Brooke's concern; however, I do not necessarily believe that financial solvency of insurance companies will be best regulated, or even better regulated, by the Federal Government. A review of the proposed legislation prompts two questions which, after what I consider careful analysis of the proposed Federal Insurance Act of 1977, still remain. These questions are: Is this type of regulation necessary? And what will it cost? How does it affect the existing pattern of State regulation? And then the technical concerns as to the language of the proposed legislation.