House Financial Services Subcommittee Issues Testimony From Germania Insurance
"Good Morning. My name is
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"Germania strongly supports the state-based system of insurance regulation in
* Business of Insurance Regulatory Reform Act (H.R. 3746)
* International Insurance Standards Act (H.R. 3762)
* Federal Insurance Office Reform Act (H.R. 3861)
"The State-Based System of Insurance Regulation
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"The state-based regulatory system and the corresponding application of the McCarran-Ferguson Act's limited federal antitrust exemption have worked well to promote and maintain a healthy, vibrant, and competitive insurance marketplace for decades. There are nearly 7,800 insurers operating in
"The national system of state regulation has, for more than a century, served consumer and insurer needs well. It has proven to be adaptable, accessible, and effective, with relatively few insolvencies and no taxpayer bailouts. Each state has adopted laws and regulations tailored to the unique needs of its consumers, yet all states also have a common financial solvency system through uniform accreditation requirements. State regulators and legislators consider and respond to marketplace concerns ranging from weather-related risks to specific economic conditions, medical costs, building codes, and consumer preferences. In addition, state regulators respond and adapt to inconsistencies created by various state contract, tort, and reparation laws.
"Property/casualty insurance is inherently local, as opposed to national, in nature. State laws determine coverage and other policy terms. Local incidents of accident, weather, and theft impact pricing. Geographical and demographic differences among states also have a significant impact on property/casualty coverages. Weather conditions - hurricanes, wildfires, earthquakes, tornados, lightening, snow, ice, and hail, etc. - differ significantly from state to state.
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"With the ability to respond to unique local issues, the individual states serve as laboratories for experimentation and a launchpad for reform. State regulators develop expertise on issues particularly relevant to their state. Insurance consumers directly benefit from state regulators' familiarity with the unique circumstances of their state and the development of consumer assistance programs tailored to local needs and concerns. State regulators, whether directly elected or appointed by elected officials, have a strong incentive to ensure that insurers deal fairly and responsibly with consumers, and enforce a variety of consumer protection laws and regulations designed to ensure fairness and competitive equity.
"State insurance regulators frequently interact directly with consumers. Nationwide, commissioners handle and respond to almost 1.8 million consumer inquiries and over 305,000 formal complaints in a single year. Inquiries range from general insurance information to content of policies to the treatment of consumers by insurance companies and agents. Most consumer inquiries and complaints are resolved successfully.
"Public interest objectives are further achieved through review of policy terms and market conduct examinations to ensure effective and appropriate provision of insurance coverages. Regulators also monitor insurers, agents, and brokers to prevent activities prohibited by state unfair trade practices laws and take appropriate enforcement action.
"The most important insurance consumer protection is ensuring the ability of the carrier to pay claims at a future date. Thus, ensuring the solvency and financial integrity of the insurer is a fundamental function of state insurance regulation.
"State insurance regulators actively supervise all aspects of the business of insurance, including review and regulation of solvency and financial condition to guard against market failure and minimize company failure. The laws for financial condition and solvency are significantly similar from state to state as a result of financial accreditation standards set forth by the
"A particularly effective feature of insurance regulation in
"State guaranty associations provide a mechanism for the prompt payment of covered claims of insolvent insurers. In the event of insurer insolvency, the guaranty associations assess other insurers to obtain funds necessary to pay the claims of the insolvent entity. Insurance companies writing property/casualty lines of business covered by a guaranty association are required to be a member of a guaranty association of a particular state as a condition of their authority to transact business in that state. Guaranty associations assess member insurers based upon their proportionate share of premiums written on covered lines of business in that state. Almost all states and territories have created post-assessment guaranty associations1, and separate life and health insurance guaranty association systems also exist.
"Each guaranty association has established detailed procedures for handling assets, filing claims, and making assessments. The guaranty association laws of most states and territories are based on the NAIC's model law. State legislators and regulators have crafted statutes and regulations regarding the creation and operation of the funds based on the needs of policyholders and in coordination with state laws. The funds operate to ensure payment of claims by other industry companies, rather than utilizing state or federal financial backstops. The insurance guaranty system and the state regulatory and oversight structure function well for insurers and consumers. The system avoids catastrophic financial loss to claimants and policyholders and maintains market stability, without governmental financial guarantees. As such, regulation and oversight of the guaranty fund system is appropriate at the state level and federal oversight is unnecessary in the context of the industry-funded, state-based system.
"While the state insurance regulatory system functions very well in many respects, it is not without its shortcomings. State insurance regulation receives justified criticism for overregulation of price and forms, lack of uniformity, and protracted speed-to-market issues. Still, Germania believes that a reformed system of state-based insurance regulation is best suited for the
"The Federal Role in Insurance Regulation
"Germania has significant concerns with the expansion of the federal role in insurance regulation. New federal regulatory activities or authority, whether designed to replace or duplicate the state system, would likely disrupt well-functioning markets, introduce competitive inequities, and generate confusion among consumers. Unfortunately, since the passage of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), we have seen a growing level of costly, duplicative, and often unnecessary activity in
"To that end, Germania urges the
"Federal Insurance Office Reform Act - H.R. 3861
"Dodd-Frank established the Federal Insurance Office (FIO) to provide expertise and information on the insurance industry to policymakers in
"While not speaking for anyone else today, I believe the vast majority of
"In the legislative process that produced the Dodd-Frank Act, the FIO was given a dubious statutory mandate to study the affordability and availability of certain insurance lines in traditionally underserved communities. The office has interpreted this mandate to mean it must attempt to objectively define a subjective concept, a project which will inevitably lead to erroneous conclusions about the state of insurance markets without consideration of the actual costs of providing insurance products. State insurance commissioners across the country are committed to ensuring consumers in their state are protected. That is the role of state regulators, not the FIO. Erroneous conclusions aside, the mere act of even conducting these studies has the negative effect of forcing costs on insurers who must comply with annual data calls to produce them.
"The FIO further encroached on the state regulators' consumer protection function when it issued its
"Even in its chief role as an insurance information resource the FIO has added only cost and duplication. The Terrorism Risk Insurance Act reauthorization bill passed in 2015 mandated that the FIO study the terrorism insurance marketplace and identify data to be collected to do so. Under the law, the FIO is required to work to obtain this information from relevant state, federal, or other public sources (31
"Ultimately, while we would support a full repeal of the statutory language establishing FIO, legislation designed to reform and refocus the office such as H.R. 3861, the Federal Insurance Office Reform Act, recently introduced by Representatives
"As a part of the effort to refocus and right-size the FIO, the legislation moves the office under the
"International Insurance Standards Act - H.R. 3762
"Over the last several years, the Financial Stability Board (FSB) has become an increasingly important and influential regulatory organization for the global financial services sector. Re-established in 2009 in the wake of the financial crisis, the FSB's core mission is to promote regulatory standards that ensure the stability and soundness of the world's financial system. Pre-crisis, a precursor organization, the
"The overreach of a group of mostly foreign policymakers exerting their vision of regulation on our banking system is particularly troubling for the
"Multilateral organizations like the FSB have always been intended to promote and foster economic growth while maintaining financial stability, not to regulate financial services markets everywhere in the world. Over the last decade, the movement toward more formulaic, prescriptive, and intrusive standard development has accelerated at an alarming rate. FSB decisions are especially impaired in the insurance arena as its membership does not include
"There are also significant concerns with the FSB's review and guidance of the policy development work of the
"As an example, in 2013 - without warning or clear reasons - the FSB met with IAIS leadership and informed them that IAIGs should adhere to a global consolidated capital requirement similar to the Basel II and III requirements for banks. The IAIS was ordered to design, field test, and adopt such global capital requirements for the IAIGs by 2016. The pace of this edict was unreasonable and unworkable, but IAIS leaders indicated they had no choice but to comply.
"Since the FSB's mandate, the IAIS Executive Committee has made numerous decisions regarding the structure and design of the International Capital Standard (ICS) for the IAIGs without actually stating the problem the FSB was trying to solve, and without explaining why the decisions were made. The most troublesome of these decisions include:
* the insistence on a highly detailed, prescriptive formula for the ICS that would be applied to all countries;
* the requirement that all countries use the same valuation/balance sheet without regard to the costs and implications; and
* the insistence that the capital resources that companies use to meet the obligation be identical even when the capital instruments available to companies vary across countries.
"Despite the goal of the IAIS to achieve a comparable ICS for all IAIGs around the globe, the application of the same capital standard to unique companies that come from very different regulatory environments with very different economic and political objectives will not produce comparable indicators of capital adequacy or solvency. Every country has a unique regulatory system with features that influence the solvency of the companies doing business in that regulatory environment. Similarly, every insurance group has unique characteristics that cannot be fully captured by a single, one-size-fits-all formula. In their zeal to achieve comparability, the FSB - through the IAIS - will succeed only in generating unnecessary costs to governments and insurers.
"Germania believes that a successful global effort should not create unnecessary competitive asymmetries among companies domiciled in different, but equally well-supervised, jurisdictions. Instead, what is needed is a flexible and dynamic capital assessment that would recognize and improve understanding of diverse, successful approaches to solvency regulation. Such an approach would be principle-based and outcomes-focused. Under this approach, supervisors could achieve the desired goals of policyholder protection and insurer solvency without the costs of implementing new global systems in nearly every country in the world.
"To be clear, we believe that American insurers should be positioned to compete in the international insurance market if they so choose. That means participating in international discussions on insurance and insurance regulation, and where appropriate, communication and coordination between international regulatory authorities. Working together will improve understanding of differing regulatory systems and may well result in shared best practices. However, while cooperation and coordination on the regulatory front is a positive thing, it should not result in abdication of regulatory authority to foreign jurisdictions or quasi-governmental bodies. Ultimately,
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"Business of Insurance Regulatory Reform Act - H.R. 3746
"The Dodd-Frank Act also created the
"Unfortunately, the Bureau has demonstrated its willingness to "tip toe" into insurance regulation and explore the extent of its powers in an open-ended and sometimes confusing manner. For example, the Bureau is willing to keep the door open to regulate a loan to an insurance policyholder arising out of a policyholder's own life insurance policy even though state insurance regulators aggressively occupy the field and consider this the business of insurance. While the probability of such action by the Bureau is likely low, it illustrates that the Bureau reserves the ability to revisit the issue at its convenience.
"State insurance commissioners have a strong focus on consumer protection, but they must also balance insurers' solvency needs. Allowing the Bureau to attempt to expand the federal government's role in regulating insurance products would be counter-productive and ultimately could result in the bureau's regulations conflicting with the directives of the functional state regulators. Rather than allow this issue to build and create unintended consequences, we believe it is better to clarify the issue upfront.
"To prevent such an eventuality, Germania strongly supports H.R. 3746, the Business of Insurance Regulatory Reform Act. This bipartisan legislation - introduced by Reps.
"Conclusion
"Germania strongly supports the state-based system of insurance regulation in
"We would urge the Committee to swiftly consider and pass the Federal Insurance Office Reform Act (H.R. 3861), the International Insurance Standards Act (H.R. 3762), and the Business of Insurance Regulatory Reform Act (H.R. 3746). I appreciate the opportunity to testify and look forward to working with the committee going forward."
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Footnote:
1With the exception of
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