[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
OVER-REGULATION OF AUTOMOBILE INSURANCE:
A LACK OF CONSUMER CHOICE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
AUGUST 1, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-42
_______
U.S. GOVERNMENT PRINTING OFFICE
74-624 WASHINGTON : 2001
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
------
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAY INSLEE, Washington
CHRISTOPHER COX, California JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
August 1, 2001............................................... 1
Appendix:
August 1, 2001............................................... 27
WITNESSES
Wednesday, August 1, 2001
Ahart, Thomas, CPCU, AAI, President, Ahart, Frinzi & Smith
Insurance, on behalf of the Independent Insurance Agents of
America........................................................ 7
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 9
Litan, Robert E., Vice President and Director, Economic Studies,
Brookings Institution.......................................... 4
Snyder, David F., Assistant General Counsel, American Insurance
Association.................................................... 6
Zeman, Robert L., Vice President and Assistant General Counsel,
National Association of Independent Insurers................... 11
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 28
Oxley, Hon. Michael G........................................ 36
Ferguson, Hon. Mike.......................................... 38
Ahart, Thomas................................................ 55
Hunter, J. Robert............................................ 62
Litan, Robert E.............................................. 39
Snyder, David F.............................................. 46
Zeman, Robert L.............................................. 103
Additional Material Submitted for the Record
Kelly, Hon. Sue W.:
``Jersey Way Wrong Way,'' New York Daily News ............... 30
State Rate and Form Law Guide................................ 32
Hunter, J. Robert:
Written response to a question from Hon. Janice D. Schakowsky 90
Alliance of American Insurers, prepared statement................ 125
OVER-REGULATION OF AUTOMOBILE INSURANCE:
A LACK OF CONSUMER CHOICE
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WEDNESDAY, AUGUST 1, 2001
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2220, Rayburn House Office Building, Hon. Sue W. Kelly,
[chairwoman of the subcommittee] presiding.
Present: Chairwoman Kelly; Representatives Tiberi, Inslee,
Schakowsky, Moore, Capuano, Crowley, and Clay.
Also present: Representative Ferguson.
Chairwoman Kelly. First of all, I want to welcome all of
you. This hearing on the Subcommittee on Oversight and
Investigations is going to come to order. Without objection,
all Members' opening statements will be made part of the
record.
This afternoon, we are holding a hearing on the effects of
State over-regulation of automobile insurance on consumer
choice. State insurance commissioners bear a responsibility to
promote a competitive climate in which consumers can choose
from a number of stable and solvent companies at competitive
prices. When that climate is not maintained, there are going to
be warning signs.
Unfortunately, the alarm bells are sounding in New Jersey
and Massachusetts. It is apparent from the exodus of companies
from New Jersey and the refusal of many insurance companies to
do business in Massachusetts that the regulatory climate for
automobile insurance in those States has turned into an
oppressive one.
In New Jersey, over one-half of the 15 largest auto
insurers in the country have either already left or will leave
in the near future. Over one million people in New Jersey will
lose their automobile insurance with a dwindling supply of
alternative companies willing to do business in that State.
Massachusetts might be in even worse shape, with two-thirds
of those same 15 largest insurers either writing little or no
business or refusing to do business at all in the State. Why
are the people of Massachusetts denied the right to do business
with the insurer of their choice? Why do they continue to
tolerate a system that has driven two-thirds of the largest,
most competitive providers out of the State?
Meanwhile, in free-market States such as Illinois and South
Carolina, there are numerous auto insurance companies providing
consumers with real choices at competitive prices without
subsidizing risky drivers with bad records. For instance, in
South Carolina, the number of insurers accessible to consumers
has doubled since the State eliminated artificial price
controls. It is that contrast that we are here to examine
today.
I would note that the New York insurance superintendent has
been watching the events in these States very carefully,
especially across the border in New Jersey, and has drawn the
right conclusion. If there is a problem with high auto
insurance rates, the answer is more competition and sound fraud
enforcement, not just regulation. That is why New York is
pursuing a package of real reform to catch and prevent
insurance fraud, bar drivers who won't pay their insurance from
recovering damages, and allowing more choices and incentives
for lower cost repairs. That sounds like reform, and that will
bring real results for New York's drivers.
I have a recent op-ed, written by the New York Insurance
Superintendent, Greg Serio, that I believe sets out a strong
case for the reforms that they are working on in New York. I am
going to ask unanimous consent to have it made part of the
record.
Hearing no objection, so ordered.
[The information can be found on page 30 in the appendix.]
Chairwoman Kelly. Before us today, we are honored to have a
distinguished panel of auto insurance experts to share their
thoughts and observations with us on these issues. I thank all
of you for taking the time out of your day to be here and to
share your thoughts with us. We need to take a look at how the
regulations in these States are being affected by the State's
regulation and the consumers' needs, and I look forward to
discussing those issues with you.
I also want to inform Members of my subcommittee and their
staff, it is my intention to strictly enforce the 5-minute
rule, and I would appreciate their cooperation in notifying
their Member if their Member decides to appear.
We have been joined today by my friend from New Jersey, Mr.
Ferguson. He is a Member of the Financial Services Committee,
but he is not a Member of this subcommittee. I would ask
unanimous consent to allow him to participate as if he was a
Member of this subcommittee.
Hearing no objection, so ordered.
In addition, we have received a statement from the Alliance
of American Insurers, and I am going to ask unanimous consent
to have that made part of the record.
Hearing no objection, so ordered.
[The prepared statement of the Alliance of American
Insurers can be found on page 125 in the appendix.]
Chairwoman Kelly. I am now going to go to the panel, and I
want to inform the panel that I am not only pleased to have you
here today, but I am also going to ask you to remember that we
have your written statements, therefore, I will ask you to hold
your remarks within the 5 minutes.
I would first like to go to Mr. Ferguson, who has an
opening statement, I believe.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 28 in the appendix.]
Mr. Ferguson. I do have a brief opening statement.
Chairwoman Kelly. Thank you.
Mr. Ferguson. First of all, I thank the chair for your
graciousness in hosting me here today. As a Member of the Full
Committee who certainly has an interest not only in this topic,
but also in today's proceedings, in particular, since we are
talking about, one of the States we are talking about is my
home State. I do have a brief statement, and I appreciate the
opportunity to be with you here today.
Certainly, I know today is not a beat-up session on New
Jersey or Massachusetts, as much as it is a learning process,
looking at some of the things that perhaps we can improve upon
and certainly maybe some things that are not going well in some
of our States.
Automobile insurance in my home State of New Jersey, as we
know, is in dire need of reform. New Jersey has been
overburdened with strict regulations resulting in a reduction
of competition and choice between insurance companies with
equitable rates. I appreciate my presence here today and the
chair for having me here today to attend the hearing and to
focus on this lack of consumer choice in New Jersey and some of
the announced withdrawals of four auto insurers in our State
within the last year.
Specifically, I am interested in discussing with our panel
the challenging regulatory climate in New Jersey and the
benefits of a much more competitive market found in States like
Illinois and South Carolina. The State of New Jersey auto
insurance market has been criticized for being both politicized
and over-regulated, and also we have been criticized for
enacting laws within our State in the last few years which have
crippled the market.
Recently, two of the top five automobile insurers announced
that they were being forced to withdraw from the New Jersey
market, citing the burdensome regulatory system, exceedingly
delayed decisions by our State commissioner and restrictions on
rate adjustments.
In addition, in 1999, the State Commission required a 15-
percent rate reduction to policyholders, forcing insurers to
provide the cut before enacting many of the reforms that would
have enabled insurers to adjust their rates without increased
market volatility. Some insurers have not been able to reduce
by 15 percent the rate reductions within the strict State
regulations and have chosen to exit the State, rather than to
try and work with the State Commission.
Today, New Jerseyans have seen a loss of consumer choice
and an increase in rates without relief from some of the
regulatory burdens, leaving potentially a million drivers
uninsured. It is my hope that today's witnesses will touch upon
this research and the analyses that they have done within the
State and to provide some suggested solutions to the growing
number of uninsured drivers in my home State.
I thank the chair for your graciousness again for having me
here. I yield back.
[The prepared statement of Hon. Mike Ferguson can be found
on page 38 in the appendix.]
Chairwoman Kelly. Thank you very much. We are delighted to
have you here.
I am going to move now to the panel, since there are no
more opening statements, and we have before us Mr. Robert
Litan, the Vice President and Director of Economic Studies for
the Brookings Institution.
Mr. Litan, I apologize for the fact that we haven't got a
long enough table there. You are really kind of hanging on by
your fingernails, but thank you for hanging on and for being
here.
Mr. Litan worked in two capacities for the Clinton
Administration. He was the Associate Director for the Office of
Budget and Management and the Deputy Assistant Attorney General
for the Antitrust Division of the Department of Justice. I am
going to introduce you as you speak, if you don't mind. I am
not going to introduce the whole panel now. In the interest of
time, I would like to go on with you first, Mr. Litan.
As I said before, we have your written statements. Without
objection, they will be entered as a part of the record. So, if
you would be willing to try to stay within the timeframe, that
would be appreciated. I just want to explain the lighting
system. There is a box here with the lights. The green light
means you have 5 minutes, the amber light means you have 1
minute left, and when the red light comes, it means that you
might just hear me tapping. That means summarize it quickly.
Thank you. It is an important issue. I don't mean to make
light of the issue, but the thing is that we need to hear from
you. So I want to hear from you all, and then we will have some
questions.
So, Mr. Litan, will you please proceed.
STATEMENT OF ROBERT E. LITAN, VICE PRESIDENT AND DIRECTOR,
ECONOMIC STUDIES, BROOKINGS INSTITUTION
Mr. Litan. Thank you very much, Madam Chairwoman. It sounds
like you have already summarized my testimony.
[Laughter.]
Mr. Litan. But what I am going to do here today is
summarize very briefly the major findings of a study that will
be released by the AEI-Brookings Joint Center, which I
codirect. This study was directed by Professor David Cummins of
the University of Pennsylvania. Here are a few key points that
are worth noting:
Number one, academic scholars, including those who
participated in our study, overwhelmingly agree that auto
insurance rates should not be regulated. Insurance is not a
natural monopoly, but instead, over 100 firms typically compete
in most states. Like other firms in our economy, insurers ought
to be free to compete subject to the antitrust laws.
Two, the AEI-Brookings study looked at three States where
auto rates have been regulated: Massachusetts, New Jersey and
California. The findings for Massachusetts and New Jersey are
similar. In both States, rates have been held down which looks
like a good deal for consumers, but is not, on closer
inspection. Artificially low rates discourage entry into the
business and discourage existing insurers from staying, as has
been pointed out. In Massachusetts, for example, in 1982 all
top ten auto insurers in the State were national firms, but by
1998, only three were national. In New Jersey, five of the
Nation's top ten auto insurers do not do business in the State.
The net result is that regulation deprives consumers of choice.
Binding regulation also punishes good drivers by forcing
them to subsidize bad ones. In Massachusetts, for example, some
high-risk drivers receive subsidies as high as 60 percent,
requiring some low-risk drivers to pay 11-percent higher
premiums. In South Carolina, where rates were recently
deregulated in 1999, 42 percent of consumers were forced to buy
in the so-called residual or involuntary market in 1992,
requiring significant subsidies from other drivers. And by
1999, this State residual market facility had a cumulative
deficit of over $2 billion--then South Carolina deregulated.
But the point is that subsidizing high-risk drivers makes
absolutely no economic sense, as it can lead to higher accident
rates and loss costs.
California has been an exception to these patterns, but
only because Proposition 103 turns out not to have been that
binding. Claims costs for insured vehicles in the State, unlike
energy costs, actually fell after 1988, so insurers were not
forced to abandon California, as they were in New Jersey and
Massachusetts. In addition, the most controversial part of
Proposition 103, the 20-percent rollback, was never fully
implemented, for constitutional reasons.
What about States that have deregulated? Well, let us look
to South Carolina. As I said, it deregulated in 1999, and guess
what? Insurers came flooding back to the State, doubling in
number. Meanwhile, South Carolina's residual market has almost
disappeared simply because insurers can now charge according to
risk. What about Illinois? As has been mentioned, there has
been deregulation there for over 3 decades. The result, almost
no residual market. Meanwhile, Illinois consumers have roughly
twice the number of auto insurers to choose from than is true
in New Jersey.
One of my Brookings' colleagues, Cliff Winston, has
documented that in other industries, where prices and entry
have been deregulated, efficiency and productivity have
dramatically improved. Professor Cummins, who led our study,
has documented significant inefficiencies in the insurance
industry that could be rooted out if the forces of competition
were simply unleashed.
So is there any role left for regulation? Yes, there is: To
ensure solvency, number one; to protect consumers from
unscrupulous practices, number two; and, finally, to help
standardize forms for personal lines and small businesses so
that customers can easily compare prices.
State insurance officials should not have to spend their
scarce dollars on collecting rate data and, in some cases,
approving them.
Thank you, and I look forward to your questions, and I beat
the time clock.
[The prepared statement of Robert E. Litan can be found on
page 39 in the appendix.]
Chairwoman Kelly. You did, indeed. Thank you very much, Mr.
Litan.
Next, we move to Mr. David Snyder, the Assistant General
Counsel for the American Insurance Association. Mr. Snyder
previously served in the Pennsylvania Department of Insurance
and has been employed by several major insurers.
Mr. Snyder, thank you very much for appearing today.
STATEMENT OF DAVID F. SNYDER, ASSISTANT GENERAL COUNSEL,
AMERICAN INSURANCE ASSOCIATION
Mr. Snyder. Thank you very much for the opportunity to be
here, distinguished Chairwoman Kelly and members of the
subcommittee.
The association which I represent is composed of member
insurers that not just provide auto insurance in the U.S., but
do so around the globe. The lessons and experience they have
can be applied to the subject of your hearing today. And thank
you for holding this hearing, because the issue of State auto
insurance regulation is an issue that is important to
consumers, public officials, and insurers.
Most States currently have the extraordinary authority to
fix prices on personal auto insurance, something they don't
have for virtually every other product, including absolute
essentials such as food, housing, and even the automobiles
being insured. The damage that can be done with this far-
reaching power is now evident in States such as New Jersey,
which is experiencing the exit of companies that insure 20
percent of the market and Massachusetts, where consumer choices
are very limited, both due to the regulatory system's denial of
needed rates.
State rate regulation harms consumers, when the underlying
costs paid by auto insurance are declining, by retarding the
market's lowering of its prices, as happened in California. But
when the costs of providing insurance are perennially high or
rising, costs such as auto repair, increased litigation,
increased medical costs, rate suppression can cause severe
market dislocations and shortages, as now being felt in New
Jersey.
State rate regulation hurts consumers because they have
fewer choices. It hurts insurers because they have less capital
than they need to operate in the market and even harms the
public officials administering the system by forcing them to
make political decisions on issues they know should be left to
the private economic marketplace.
But State rate regulation has additional negative impacts.
It is often used to mandate hidden subsidies that are not cost-
based. This obviously harms the consumers who are paying those
subsidies, but it also harms the subsidized parties, because it
hides from them and the public the preventable causes of
higher-than-necessary losses, such as too lenient supervision
of beginning drivers, a newly emerging pattern of fraudulent
behavior or hazardous intersections in congested areas. This,
in turn, results in delaying effective measures to prevent
accidents, deaths, and injuries, such as graduated licensing
laws, antifraud measures, and more effective enforcement of the
traffic laws.
If particular subsidies are desirable, they should be
applied through legislation above-board, not, as so often is
the case, through back-door methods, because the regulator can
hold hostage through the rate-approval process a company's
entire financial ability to function in the State.
Finally, rate regulation of the kind embodied in most U.S.
State laws is contrary to international best practices. As more
countries establish their insurance markets, competition for
global insurance capital will intensify. Regulatory systems
which assure solvency, but leave pricing to the market, will
emerge as the most capable of attracting capital.
The U.S. should not be left behind in the global
competition because of a legacy of State price control systems.
So, regardless of your viewpoint, whether as consumers, as
public officials or as insurers, rate regulation, as embodied
in most State laws, is inherently capable of abuse. And when
abused or even used as envisioned, it ultimately harms the very
people who are intended as its beneficiaries.
Thank you, and I would be pleased to answer any questions
you may have.
[The prepared statement of David F. Snyder can be found on
page 46 in the appendix.]
Chairwoman Kelly. Thank you. You, too, went in under the
wire. Thank you very much, Mr. Snyder.
Next, we have Mr. Tom Ahart. Did I pronounce that
correctly?
Mr. Ahart. Ahart.
Chairwoman Kelly. Ahart, pretty good. President of the
Ahart, Frinzi & Smith Insurance firm located in New Jersey, who
is testifying on behalf of the Independent Insurance Agents of
America. Mr. Ahart is a chartered property casualty
underwriter, an accredited adviser of insurance in New Jersey.
Mr. Ahart, thank you very much for being here, and we look
forward to your testimony.
STATEMENT OF THOMAS B. AHART, CPCU, AAI, PRESIDENT, AHART,
FRINZI & SMITH INSURANCE, ON BEHALF OF THE INDEPENDENT
INSURANCE AGENTS OF AMERICA
Mr. Ahart. Thank you very much. Good afternoon, Chairwoman
Kelly and members of the subcommittee.
As mentioned, I do own an insurance agency in New Jersey.
It is a second-generation insurance agency started by my father
in 1950. We currently have half of our business in personal
lines, and I also am an auto insurance buyer in New Jersey,
including three young drivers. So I do have firsthand
knowledge.
[Laughter.]
Mr. Ahart. Also, I will be president of the Independent
Insurance Agents of America in October.
Chairwoman Kelly. Congratulations.
Mr. Ahart. Thank you. Well, maybe, right.
[Laughter.]
Mr. Ahart. One crucial theme you will hear the IIAA say
repeatedly is our desire to identify mechanisms that can be
used to help foster uniformity of the existing State insurance
regulatory systems. At the same time, we recognize that in many
respects insurance remains an inherently local business. And
any system of insurance regulation must be flexible enough to
accommodate differing local, State and regional needs.
The current problems related to the over-regulation of auto
insurance rates in many States implicate both the potential
benefits of greater uniformity and the need to accommodate
different local contexts. Rates that will be viewed as adequate
will, of course, vary from State-to-State with the specific
conditions of the respective marketplaces.
In many States, however, dozens of auto insurance carriers
have withdrawn from the insurance markets over the course of
the last 2 decades because of excessive efforts to account for
such conditions have resulted in approved rates that have been
grossly inadequate. In a competitive economy such as ours,
insurance companies cannot be required to lose money. In some
States, however, the only effective alternative for them, with
respect to auto insurance, has been to abandon the marketplace
completely. And in New Jersey, in order to leave the auto
marketplace, you need to turn in your license and leave in all
lines. And even though they are making money in other lines, it
still is paying some of them to leave New Jersey completely,
just because of the loss in auto insurance.
Consumers suffer because their insurance markets are
underserved and because drivers with better driving records and
those that live in lower exposure areas subsidize other
drivers. Consumers also suffer, because even in times when
approved rates are more than adequate, insurers are reluctant
to reduce prices for fear that they will not be able to raise
them again if cost inflation accelerates. Insurance agents also
suffer because of the lack of markets and fewer products to
sell. The challenges any reform effort in this context must
overcome are thus significant.
I would now like to spend a few moments discussing in more
detail the rate regulatory environment in two States in which
it is particularly onerous, my home State of New Jersey and
Massachusetts.
In New Jersey, new carriers may change premiums without
affirmative approval of the insurance commissioner. We have a
prior approval law, and it generally takes at least 6 to 12
months for the commissioner to make an initial ruling. The
commissioner has not, however, granted a significant rate
increase request in recent memory, and the last several
commissioners have refused to grant any increases at all during
an election year. The futile process is coupled with two
particularly burdensome regulatory requirements:
First, although insurance companies are not guaranteed any
profits, they are prohibited from earning more than 6 percent
in profits from their sales of auto insurance over any 3-year
period. This excess profits law is very difficult for companies
to make any kind of rate of return.
Second, carriers are required to take all comers, meaning
they are required to insure any licensed New Jersey driver that
has less than eight points that applies for coverage. Because
of the difficulty in raising rates under the State's
procedures, drivers with good driving records inevitably
subsidize those with poor records.
In Massachusetts, the maximum auto insurance rates for all
carriers are established globally. In August of each year,
briefs are filed by both industry and Government
representatives, and a full trial-type hearing is then held
that can last 3 to 4 months, during which they have testimony
and all kind of different presentations. At the conclusion of
these proceedings, the insurance commissioner unilaterally sets
the rates that will apply during the next year.
In summary, auto insurance needs to be more uniform, while
respecting the differences within each State. We need to allow
the free marketplace to work by enhancing competition. At the
same time, we need to remove politics from the rate-making
system.
In New Jersey, commercial lines has been deregulated for a
period of time, and the commercial marketplace has blossomed.
Years of company insolvencies and higher premiums have proved
to be wrong in commercial lines. Likewise, States like Illinois
and South Carolina, who have had similar problems like New
Jersey and Massachusetts, have changed to make their laws more
competitive and their marketplace more competitive, and at the
same time their premiums have been reduced.
So, with that, I thank you for the opportunity to present
our testimony and look forward to any questions you may have.
[The prepared statement of Thomas B. Ahart can be found on
page 55 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Ahart.
Next, we have Mr. Robert Hunter, the Director of Insurance
for the Consumer Federation of America. Mr. Hunter served as
the Federal Insurance Administrator under both Presidents Ford
and Carter. Mr. Hunter, we are pleased to have you here today.
Thank you for testifying.
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. Thank you, Madam Chairwoman.
Consumers agree that there needs to be more uniformity and
more efficiency in the regulation of rates and forms. And, in
fact, we participated in a process of developing methods for
more efficient, timely and effective review of rates and forms
through the National Association of Insurance Commissioners
over the last year, including the CARFRA and Improvements to
State-Based Systems Initiatives. We have even proposed ways
which will shorten the time regulation takes to no more, in any
State, than 30 to 45 days.
The assumption, however, that over-regulation of auto
insurance as a major consumer problem in America is not right.
The real problem that we face as consumers is market conduct
abuses that are not caught by the State regulatory regimes in
any State, much less in one or two States. So you have
vanishing premiums, you remember, with Prudential and MetLife
and insurers like that. You have State Farm putting on parts
that were found by courts to be fraudulent and in breach of
contract. You have race-based premiums now recently being
caught and red-lining in minority communities that courts have
ruled against.
These are the issues that are very important to consumers.
They really abuse consumers, and these are the ones that have
national implications. The States have done a poor job in
policing these practices.
There is no groundswell from consumers for faster products
or less review of rates and forms. I have never, out of 27,000
calls I have received in my career that I have estimated, had a
consumer say, you know, we need less look at the insurance
companies or, you know, I can't find some product that I am
looking for that some company wants to get to market.
Some of the new ideas that insurance companies come up with
have potential to downright harm consumers. Congress right now
is looking at the possibility of controlling use of the human
genome by health insurers, for example. That is a potential
problem. Credit scoring is now being used in auto insurance by
93 percent, according to Conning and Company in a study that
just came out today. Some insurers, they say, give more weight
to the type of credit card you own or other elements of your
credit history than to your driving record when establishing
auto insurance prices.
When I was Texas Insurance Commissioner, I first heard of
the use of credit scoring when a woman told me she was being
surcharged for her insurance because she had declared
bankruptcy 7 years earlier. I asked what kind of insurance it
was, and she said ``auto insurance,'' and I almost fell over,
because I couldn't understand the connection between the fact
that she had filed bankruptcy a few years ago and her driving
ability. But I really got mad when she told me she never went
bankrupt, that she, as a single mother, got a second job,
pulled herself out and withdrew the bankruptcy, but it was
still being used to up-rate her by the insurance company. I
think Government needs to look at those kinds of things and see
if those are proper to use.
Progressive Insurance Company in Texas is now using Global
Positioning Satellites to follow cars around so that they track
where you are, where you are going, what time you drive, and so
on in cars they insure. I think Government needs to look at
that. That is an incredible invasion of privacy, in my view.
Regarding New Jersey and Massachusetts, these two States,
over the last 5 years, had rates of return, New Jersey of 8.3
percent, compared to 10.8 in the Nation, and in Massachusetts,
8 percent. They are slightly below the national average, but
there is no crisis of profitability in these States. The
traffic density in New Jersey is 2.67 times the national
average, and in Massachusetts, it is 2.19 times the national
average, and therefore their rates are going to be high, and
particularly in New Jersey, where you have one of the richest
benefit systems in the entire country, Mr. Ferguson. It is very
rich. That obviously costs money.
Can companies succeed in New Jersey? Absolutely. New Jersey
Manufacturers is a classic example, and Plymouth Rock in
Massachusetts is another example of a very successful company
competing in that State. The market share in New Jersey of New
Jersey Manufacturers has gone from 9.8 percent in 1994 to 12.7
percent in 1999. They have the lowest complaint ratio in the
State. They have paid dividends to policyholders every year
since 1918--$1.4 billion in dividends in the last 10 years
alone to policyholders. Therefore, you can succeed in New
Jersey. You have to be efficient. Maybe why companies are
withdrawing is they are not competitive.
Consumers have looked at California's auto insurance
regulatory system, and we find California to be the best
practices in the country.
I would conclude here because I see the red light is on.
[The prepared statement of J. Robert Hunter can be found on
page 62 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Hunter.
Finally, we are going to hear from Mr. Robert Zeman. He is
the Vice President and the Assistant General Counsel for the
National Association of Independent Insurers. Mr. Zeman directs
the State Government relations activities for the NAII. Mr.
Zeman, we appreciate having you here today and look forward to
your testimony.
STATEMENT OF ROBERT L. ZEMAN, VICE PRESIDENT AND ASSISTANT
GENERAL COUNSEL, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS
Mr. Zeman. Thank you. Good afternoon, Madam Chairwoman,
Members of the subcommittee.
NAII represents over 690 property/casualty insurance
companies. We are the largest property casualty trade
association. Our perspective on this issue is that, indeed,
some States have excessive regulation and that impedes the
ability of consumers to have a wide array of choices in the
marketplace. The good news, however, is that other States do
take a more competitive approach, with clear benefits for
consumers, more choices for consumers, and these competitive
States provide the road map for State-based reform that can be
accomplished in the more troubling States.
Yes, in the view of our members, New Jersey is a State
where excessive regulation has restricted competition, and thus
had a negative impact on consumers. We recently conducted a
specific analysis of the problems in the automobile insurance
regulatory system in New Jersey, and the results confirmed the
concerns that have been expressed by our members for some time
and the points that have been made by other panelists today.
New Jersey has a highly politicized and volatile regulatory
system that makes it very difficult for insurance companies to
compete, contrary to Mr. Hunter's assertion. The culmination of
these regulatory factors and restrictions has hurt the
marketplace and hurt New Jersey's consumers, and it is clearly
evidenced by the companies that have made their independent
decisions to withdraw from the State.
Other witnesses have given details about the problems in
New Jersey, and they are detailed in our written statement. But
first and foremost, would be the onerous rate regulatory system
that was outlined by the agent representative. Other problems
include restrictions on rate adjustments in the involuntary, as
well as the voluntary market, and all of this is of critical
importance to our members.
The results of our analysis were confirmed by an
independent study conducted by Professor John Worrall of
Rutgers University. And basically he concluded that all of the
problems in New Jersey have indeed resulted in fewer firms
writing business in the State and fewer choices for consumers.
And the 1999 rate rollback was mentioned, where the rollback
was implemented, but the cost-saving measures were never really
fully implemented.
Now, some of the reforms recently implemented in New Jersey
at least have elements of steps in the right direction, but
major additional reform is needed, and the details of our
suggested reforms are in our statement.
Now, in Massachusetts as well, as you have heard, we see
similar problems. There is unequivocal evidence in the
marketplace that the strict regulatory environment, the strict
regulation of rates, and forms, and underwriting has led
directly to a decrease in the choices available to consumers.
And by law, as was noted, the commissioner actually sets the
rates in Massachusetts. That is a result of the legislative
system that is in place. It is that legislative, regulatory
structure which needs to be reformed. All of this has a
tremendous adverse impact on consumers in Massachusetts.
But as I said at the outset, there is good news in other
States, and a few of them have been mentioned, but you need to
be aware that there are actually several States out there that
take a more competitive approach, and a wide array of academic
studies, our own surveys and our own studies with our members
have confirmed the same thing; that in the States with the more
competitive environments, consumers have a better choice. They
have more choices in terms of coverages and insurers from which
they can get coverages. There is less subsidies, there is more
accurate pricing. These are all clear benefits for consumers in
the more competitive environments.
It is most important to note that some States like
Illinois, where I come from, and Wisconsin, have used the more
competitive system for years. But the best news of all was
mentioned regarding South Carolina, which went from a
restrictive regulatory environment to a more competitive
approach. And very quickly the number of companies doing
business there doubled, rates fell, the residual market
population fell. There are a number of solid indicators of the
progress that was made in South Carolina, and it gives us hope
for other States.
Some Insurance Departments across the country are
implementing operational reforms that have been proposed by the
National Association of Insurance Commissioners. But in
addition to those operational efficiencies, we need better
public policy, legislative changes in the more restrictive
States. We are also pleased that the National Conference of
Insurance Legislators just produced a model bill which would
help truly enhance competition, but that model, or elements of
it, must be enacted by the States.
NAII has continued to believe, and we will continue to
support State regulation, we believe the State-based system can
work. We totally reject any assertion by Mr. Hunter or anyone
else that the California system is better for consumers. Their
study was completely flawed, ignoring the fact that the
reduction in premiums have been due to a reduction in losses.
The prior approval system in California has hurt consumers.
Other academics have said that if not for the prior approval
system in California, rates probably would have gone lower.
But, because of the prior approval system, companies, even when
they saw loss costs going down, felt somewhat reluctant,
perhaps, to increase rates or to lower rates as far as they
could for fear of inability to raise them down the road.
Proposition 103 has been a bad deal for consumers in
California. Clearly, when you look at the total landscape
across the country, the total academic evidence, the experience
of our members countrywide is that in the more competitive
States there are better choices for consumers, less subsidies,
and those States provide the road map for State-based reform.
I have gone over time--my apologies.
[The prepared statement of Robert L. Zeman can be found on
page 103 in the appendix.]
Chairwoman Kelly. I have been clocking exactly the number
of seconds. You are not that far over, but thank you very much.
I appreciate the testimony of all of you today. I have a
few questions.
I, first of all, want to say, Mr. Snyder, for a tired
Congresswoman, it was nice to read your testimony. You sure
summed it up and made it easy for me to read, and I thank you
very much. I appreciate that.
We have been joined now by several other members. I am
going to start the questioning here. I just want to welcome the
people who have come in--Ms. Schakowsky, Mr. Moore, Mr. Clay.
I am going to just ask one question, and I would like an
answer from all of you. New York insurance costs have been
rising, in large part because of $1 billion in fraud that is
committed annually. But instead of imposing price controls, the
governor is fighting the fraud head on. New York is cutting the
reporting and processing time for medical claims. It is letting
consumers pick preapproved doctors and repair shops in exchange
for lower rates. It is barring uninsured drivers from filing
claims, raising the penalties for fraud and making the attorney
general a special prosecutor for insurance fraud.
Do you think this is a better approach to reducing the
costs and increasing the choices for the consumers, instead of
imposing a sort of a stop-gap price control that is only going
to probably worsen the problems in the long run?
I would be glad to have any of you answer this. I would
like to hear especially from you, Mr. Litan.
Mr. Litan. There is an old saying in economics that if you
have a problem, you want to have a solution that directly
attacks it, and you have outlined that if the problem is fraud,
you attack it directly, not indirectly.
Now, Mr. Hunter raised in his testimony some legitimate
points about market misconduct. He said, and I think it is true
that if you look across the country, insurance departments have
scarce resources. Many of them are underfunded. They have
difficulties getting revenue from their State legislatures. But
wouldn't it make a lot more sense to get them out of the
business of doing rate regulation, which as I said makes no
economic sense, and use those resources to attack the market
misconduct, which includes, by the way, not just misconduct by
insurance companies, but also misconduct by insured, fraudulent
claims?
So I think it makes all of the sense in the world to attack
the problem directly.
Chairwoman Kelly. Does anyone else want to--Mr. Hunter,
would you like to speak?
Mr. Hunter. Yes. Well, you know, New York has been, for
decades, viewed as the State to look to by the rest of the
country kind of for leadership in a lot of issues. That is
probably why they have prior approval for their auto insurance.
Chairwoman Kelly. So you think New York is a pretty good
State?
Mr. Hunter. It is a very good State on regulation, I mean,
historically, anyway. I don't know how currently, but actually
it does have prior approval of auto insurance rates. So, if the
PIP rates are going up because of fraud, they still have to
come forward to the Department and say we want to raise the
rate and get the approval of the Department, and I think that
is appropriate. And I do think that the direct attack on the
PIP fraud is the right approach in any State that has a problem
with fraud in PIP.
Chairwoman Kelly. Apparently, I have just been advised by
counsel. New York has flex rating, not prior approval, for
private passengers.
Mr. Hunter. That is not true.
Chairwoman Kelly. Well, that is what we have here.
Mr. Zeman. They have flex rating for private passenger
automobiles.
Chairwoman Kelly. We do have flex rating in New York.
Mr. Snyder. Madam Chairwoman.
Chairwoman Kelly. Yes?
Mr. Snyder. If I might add further to the comments, New
York is at a juncture at this point, a very important juncture.
It has a fundamentally good no-fault system of reparations
benefits, but a growing fraud problem has exerted significant
cost pressures all across the system and has resulted in, for
example, a residual market plan growing alarmingly over the
past few years.
The State administration, as I understand it, is proposing
really a twofold approach: The first is to address the
underlying fraud problems by something called Regulation 68,
which would require prompt notification of claims, among other
factors, and would increase penalties and increase resources to
fight the fraud that is broken out there. That is clearly
something that needs to be done.
The second thing is, the Administration is proposing the
continuation of important free-market elements that have been
added to the New York system, without which the market could
very well go the way New Jersey has. That includes the flex
rating process--the idea that, at least for some slight amount
of rate increase, it is something the companies can get when
they really need it. If that is not continued by the
legislature, and there is opposition in the legislature, it
could well be that we would have the same kinds of problems in
New York State that we do elsewhere. So, the Administration is
trying to address both the maintenance of the private
enterprise elements in what is otherwise a very strict
regulatory system and to address the underlying problems.
Thank you.
Chairwoman Kelly. Thank you very much.
Mr. Zeman, you have something you would like to say?
Mr. Zeman. Just briefly. I agree with what Mr. Snyder has
said. From our indications, clearly, fraud is the major problem
in New York right now. And, clearly, the package that you
outlined before the State legislature is clearly directed at
that problem and can go a long way toward resolving issues in
New York. New York does have flex rating now. It does sunset
frequently. And down the road in New York, New York might want
to look at either making that permanent or considering
additional, more competitive regulatory systems.
But, clearly, for now, you are absolutely right, Madam
Chairwoman, the package that is oriented toward fraud in the
legislature would be a major step toward reform, for the
benefit of consumers.
Chairwoman Kelly. Thank you very much.
I wanted to say that, according to the State Rate and Form
Law Guide of the American Insurance Association, they say that
New York does have private passenger flex rating.
Mr. Hunter. That may be correct. I may have been thinking
back a couple of years.
Chairwoman Kelly. Your comment, Mr. Zeman, is about the
sunset problems with it.
Mr. Zeman. Yes.
Chairwoman Kelly. Something that we may need to discuss
with our New York colleagues in the State Assembly and Senate.
In the meantime, I am going to turn now to Mr. Clay. We
welcome you, Mr. Clay, and thank you very much for being here.
Mr. Clay. Thank you very much. Just a few questions.
Mr. Snyder, you testified that over-regulation by States
such as New Jersey and Massachusetts not only penalizes good
drivers to subsidize bad ones, but also forces citizens in the
rest of the country to subsidize high-risk drivers in those
States. Can you elaborate how this negative subsidization
occurs.
Mr. Snyder. Yes, sir, I can.
Problems in the auto market in New Jersey can be spread to
all other lines of property and casualty insurance, through
something that is phrased a ``lock-in law.'' In other words, in
order to exit from the auto market, you have to give up the
ability to do all other lines of property and casualty
business. So you start with a spot problem in automobile
insurance, and pretty soon you have a problem that affects
homeowners and commercial property and casualty insurance.
Then, if the company involved is part of a larger national
company, the shortfalls in New Jersey have to be made up from
somewhere, and they are made up from capital that has been
contributed to the company by policyholders in other States. So
you have even an interstate subsidy issue going on with respect
to New Jersey.
Mr. Clay. OK. Along those same lines, say in States where
there is no regulation--I represent Missouri--and you know
rates vary according to zip codes and other factors, do you
ever take into consideration drivers' records, good drivers, no
claims ever filed? Do you ever take that into consideration
when you set premiums and rates?
Mr. Snyder. The driving experience of the drivers?
Mr. Clay. Yes.
Mr. Snyder. It is one of the many factors, one of the
principal factors that are used--the driving experience also.
The conditions under which the driving occurs, is it driving to
and from work, which are the highest accident times. All of
those factors are considered, as is the make and model of the
motor vehicle, because we know there is very different loss and
theft experience with respect to motor vehicles. So there are
many, many factors that are used to determine as accurate a
rate as possible. There is a strong market incentive for that,
to be as accurate as possible in rating.
Mr. Clay. Just to be clear, you are advocating today
against over-regulation by the States of New Jersey and
Massachusetts, correct?
Mr. Snyder. That is correct.
Mr. Clay. You don't think there should be Rate Commissions
and all of that?
Mr. Snyder. We think there is a proper role for regulation,
principally in the solvency area, because that is ultimately
the promise that the insurance company makes, that it is going
to be there when you have a claim. We also believe that
regulations should be pro-competitive.
Mr. Clay. Yes.
Mr. Snyder. And, unfortunately, rate regulation, which was
well-intended, can have a very, very adverse impact on
consumers, generally, in terms of creating shortages that
didn't have to exist.
Mr. Clay. What factors prompted the New Jersey and
Massachusetts statutes?
Mr. Snyder. Both States are high-cost states. They are
perennially high-cost States. They have prior approval systems
of regulation. In fact, in Massachusetts, it goes beyond that
to the State directly, doing what it calls fixing and
establishing the rates. Once a determination is made that the
market isn't competitive, and that is routinely made, despite
evidence to the contrary.
So, when you get the combination of high costs and a rate
approval system, a rate regulatory system that gives the State
the authority to set prices, you have a very volatile situation
with the results that you have got in Massachusetts and New
Jersey, which means that ultimately consumers aren't benefited
because shortages are unnecessarily created.
Mr. Clay. Mr. Litan, let me ask you, you know, some States,
I guess most States now, mandate auto insurance. Do you know of
any associations who oppose that initiative in any State? Most
of them don't, do they?
Mr. Litan. Most States do mandate auto insurance.
Mr. Clay. Yes, right.
Mr. Litan. Yes.
Mr. Clay. But do you know of any insurance associations
that ever opposed mandating auto insurance?
Mr. Litan. Some people are shaking their heads. I don't,
but there are other people here----
Mr. Clay. Mr. Snyder, would you answer?
Mr. Snyder. Yes, sir. We have traditionally opposed
mandatory insurance, but recognize that it has some appeal, and
we have tried to work within the system accordingly. But we do,
as a policy position, oppose mandatory insurance.
Mr. Clay. I see.
Mr. Zeman. And the same for our organization. For the
record, we have opposed it. It is another example of over-
regulation.
The States, when they mandate, they don't always mandate
just the fact that you have insurance, but having a specific
amount that allegedly is right for everyone. We think it should
be a matter of consumer choice, a matter of consumers selecting
the right benefit levels for themselves.
Mr. Clay. Mr. Zeman, let me ask you about choices, and
premiums, and pricing for insurance. I represent an urban area
in Missouri, and the rates vary so widely throughout my State.
Now, I realize that there are factors that set your rates, but
let us take, for instance, a 70-year-old retired woman parks
her car in a garage, never had a moving violation, never an
accident, and never filed a claim, but she pays the same rate
as, say, a younger driver who has had moving violations, who
has filed claims.
What causes that?
Mr. Zeman. First of all, I would like to know more details
about whatever this case is. But, second, Missouri, we
generally hear, has a positive environment. There are a number
of companies doing business there and giving consumers other
opportunities and other choices. So, if any individual feels
that he or she is not paying the right amount of premium, one
thing that we recommend is they shop around to other companies.
The companies, as Mr. Snyder and others indicated, use a number
of factors to determine insurance rates. It is not a one-size-
fits-all, and that needs to be considered as well.
Mr. Clay. OK.
Mr. Hunter. Mr. Clay, actuarially, the older person
typically does pay less than the younger person, and people
with accidents, everything else being equal, do pay more than
people that don't have accidents.
Mr. Clay. Except for in Missouri. See, I am a consumer in
Missouri, and I shop around for my auto insurance. As a member
of the State legislature, I was able to use an address in the
State capital, which is in a rural setting. Legally, I can do
that. And my premiums were a lot less than what I pay now in
the City of St. Louis because that is now my legal residence. I
don't have any moving violations. I haven't filed any claims. I
have a garage, park my car in it.
Mr. Hunter. The other factor is territory. They do charge
differential rates based upon where you live, and the cities do
pay more. There is no question.
Mr. Clay. Based upon zip codes or what factors are related
there?
Mr. Hunter. Some companies do use zip codes.
Mr. Hunter. It depends on the State, but some companies use
zip codes and some companies don't, but there is definitely a
territorial aspect to the rating.
Mr. Zeman. Different companies definitely use different
rating plans. And you know what? It is another example of
competition and how companies find different market niches, and
ultimately we think that benefits consumers.
Mr. Clay. And now I heard Mr. Hunter say that you don't
have a crisis of profitability.
Chairwoman Kelly. Mr. Clay, I am sorry, but you have gone
well over your 5-minute limit.
Mr. Clay. Perhaps someone on this side would like to share
their 5 minutes with me.
Chairwoman Kelly. Perhaps they would.
Mr. Clay. Perhaps.
[Laughter.]
Chairwoman Kelly. Perhaps they would, but right now I am
asking you--I am saying that everyone----
Mr. Clay. OK. I will stop now, and perhaps they can get
back around to me.
Thank you, gentlemen.
Chairwoman Kelly. Thank you. Yes, if we want, we can have a
second round. Thank you.
We will move now to Ms. Schakowsky.
Ms. Schakowsky. Thank you, Madam Chairwoman.
I have to tell you that as a person who self-identifies as
a consumer advocate, I always find it somewhat difficult to
swallow when industry people come in and tell us what is really
good for the consumer, and then the person representing the
consumer advocacy organization is opposed, in general, to the
proposals. What is a consumer to do? How are we to understand
what is really in our interest?
My background is, as I say, dealing with consumer
organizations and then in the State legislature, where we dealt
with problems in Illinois, by the way, of insurance red-lining,
various kinds of discrimination, particularly based on
neighborhood. And I have to tell you that in all of my
experience, never once has a consumer come to me and said, ``I
am so sick of all of these regulations. I am really wanting to
see this industry more deregulated.''
So, perhaps, and I do apologize for coming in late, but I
am trying to understand how exactly the consumer--well, let me
ask a threshold question. Why are we here? Are you seeking
national actin on auto insurance regulation; are any of you?
Mr. Snyder, what do you hope to get from us?
Mr. Snyder. Madam Congresswoman, I think the first thing is
that as the Congress looks at insurance issues, and
particularly the Financial Services Committee, more than had
been the case in the past, it is important to understand the
functioning of it, so that important decisions that you will
have to make in the future you can make on the basis of that
information.
Ms. Schakowsky. And what might we be looking at, in terms
of auto insurance? Just single that----
Mr. Snyder. We are looking at a record of----
Ms. Schakowsky. No, for potential action in the future.
Mr. Snyder. We support an approach that would return the
auto insurance market and all other property and casualty
markets to a free enterprise model, rather than a model in
which the State or Federal Government or anyone else has the
authority to fix prices, has the authority to make all kinds of
market-based determinations that ultimately, in the end,
results in unnecessary shortages, and disruption. And New
Jersey is a classic example, absolute chaos in the market that
benefits no one.
Ms. Schakowsky. So we are focusing just on rates here.
Mr. Snyder. We are focusing on rate regulation and over-
regulation, in general, by the States today.
Ms. Schakowsky. Yes, Mr. Zeman.
Mr. Zeman. If I may, one of the reasons why you don't hear
consumers in Illinois complaining is because we hold Illinois
up as the model for other States.
Ms. Schakowsky. Oh, I know, I know, I know. But we do have
a good deal of regulation. We do have a good deal of
regulation.
Mr. Zeman. That is true. It is true. Illinois is not
without regulation.
Ms. Schakowsky. And we are not without regulation.
Mr. Zeman. That is right.
Ms. Schakowsky. And, in fact, some of us would like to
think that there ought to be a little bit more regulation. So
what I am not hearing is we love it, because the insurance
industry is so great, and in fact we would like a little less
regulation to make it even better. This has never come up in
conversation.
Mr. Hunter, did you want to comment?
Mr. Zeman. Can I add one more?
Mr. Hunter. I just wanted to say that the reason the
insurance companies want hearings like this is to pressurize
the States to try to deregulate and take away consumer
protections.
Ms. Schakowsky. And what would those be?
Mr. Hunter. They are pushing very hard. The National
Association of Insurance Commissioners has moved very fast to
try to simplify regulation, to try to make it quicker, to make
it more effective, and to even promise that in any State, even
with the toughest regulation, that within 30 to 45 days, there
will be a final answer on any filing. They have done all of
that. That is not enough for the insurers. Now they want to
deregulate auto insurance. The insurance companies came back to
the NAIC and started pressurizing them late last year, early
this year. They are starting to look at it again, and that is
what is going on.
Ms. Schakowsky. Well, you heard Mr. Snyder's summary of why
this is bad for consumers, why the current regulatory system is
bad for consumers. Can you summarize then why you disagree with
that.
Mr. Hunter. Well, every State has a slightly different
regulatory regime. No State has no regulation. Even Illinois
has regulation of forms, for example. You can't put a policy
out in Illinois without getting approval. So every State has a
slightly different regime. The legislatures of the State make
their mind up, and quite frequently it has to do with how much
urbanization there is, and there has been red-lining in a lot
of the big cities.
Ms. Schakowsky. Including mine.
Mr. Hunter. There have been serious problems. And so the
States, over the years, have moved to tougher regulation in
those situations. In the more rural areas, they have not moved
that tough. That is historic.
Now, in my testimony I put forth that California has the
best system in the country because it combines both regulation,
as a backstop, with real competition; that is, they apply the
antitrust laws, they get rid of the antigroup, and antirebate
laws. They allow the companies to really fight and have to
operate at arm's length, unlike in most States where there is
an antitrust exemption, even with no regulation.
So I think, if you want to look to a best-practices model,
look at California. Since Proposition 103, the rates have
fallen by 12 percent; whereas, the typical State has gone up by
37 percent. The assigned risk plan has almost disappeared, the
uninsured motorist has fallen about in half, and the insurance
companies made the most profits. The biggest complaint, as you
have heard again today is, ``Oh, we made too much money in
California. It is terrible for consumers.'' Well, we like it
that way, when rates are falling, and they are making money.
Chairwoman Kelly. Thank you very much, Ms. Schakowsky. I am
sorry you are over time here.
We are going to move to Mr. Moore.
Mr. Moore. Thank you, Madam Chairwomanperson. I appreciate
the testimony of the witnesses here.
Mr. Snyder, if I understood your testimony, basically, it
was that the insurance companies would like less regulation,
more competition or opportunity for the market to work. Is that
essentially correct?
Mr. Snyder. That is correct.
Mr. Moore. What do you say to Mr. Hunter and what he just
said and some of his concerns about consumers and the way that
insurance companies affect consumers?
Mr. Snyder. Well, let me start by saying this: There are
probably a million consumers in New Jersey right now that are
wondering how effective their regulatory system really is as
they are cast out into a market without some of the very
players that are major players in virtually every other State.
And it is the insurance regulatory system, with its element of
price control, which is truly extraordinary in this day and
age, for any product anywhere in the United States, indeed,
anywhere in the world, for the Government to be able to
directly set prices, as it can in virtually every State. When
that authority is exercised in an environment with otherwise
high costs, significant market shortages can occur which, in
turn, benefits no one, certainly consumers most of all.
So the issue today is, as this subcommittee looks at the
largest line of property and casualty insurance, almost $120
billion is this line of insurance in the United States. So it
is appropriate for this subcommittee to look at its dynamics
and its regulatory system and what is the best way to deliver
those products to consumers. It needs to look at the different
models that are out there.
Now, Mr. Hunter mentioned California. Fortunately, for the
drafters of Prop 103, it was put in place at a time in which
other factors were dramatically driving down costs. The Supreme
Court there reversed what is called a third-party bad-faith
doctrine, which allows two actions to be brought in every
automobile accident case. That reversal dramatically cut costs.
In addition, highway safety measures and antifraud measures
occurred at the time when Prop 103 came in, in California.
Now, because those costs were going down, the rate
regulator didn't need to force the premiums down because they
were going down on their own. In fact, the evidence seems to be
that the premiums would have gone down even more dramatically
if the companies functioned under a system where if they needed
to adjust to market conditions by raising rates, they could do
that. Compare that with the absolute disaster in New Jersey and
Massachusetts, where there are few national players, where
consumers do not have the choices they do elsewhere.
Mr. Moore. Thank you, Mr. Snyder.
Mr. Snyder. That is how we prevent that kind of thing from
happening. It is what we are focusing on.
Mr. Moore. Mr. Zeman, I believe you testified that levels
of insurance should not be mandated; is that correct, sir?
Mr. Zeman. That is the position of our association, that it
should be up to each individual and their family to make the
choice as to what level is right for them.
Mr. Moore. Should there be minimum levels of insurance by
people who drive cars?
Mr. Zeman. That largely reflects what many States have
right now--you know, a minimum level. In some States, it varies
from State-to-State.
Mr. Moore. Do you agree with that, that there should be
minimum levels and that States should be able to set minimum
levels?
Mr. Zeman. Again, actually, our position is that it is bad
public policy for the States to mandate the purchase of
insurance and mandate the specific levels as well. There have
been tremendous problems in enforcing this, since compulsory
was tried back in the 1920s.
Mr. Moore. So you are saying or your association would be
taking the position that people could drive automobiles without
any insurance if they chose to do that?
Mr. Zeman. No. Well, our position is that people should be
adequately insured, and that includes making sure they have
underinsured motorist coverage to protect themselves if they
are hit by an uninsured motorist.
Mr. Moore. Well, how do you do----
Mr. Zeman. We do recognize that the vast majority of States
have adopted compulsory provisions, so we work with our members
in helping them implement in those States.
Mr. Moore. But you disagree with a requirement or a mandate
for minimum levels of insurance?
Mr. Zeman. Philosophically, yes, because of the mandate.
Mr. Moore. We are talking about the real world here. I am
not talking philosophy.
Mr. Zeman. Once again, the position of our members is that
the specific levels should not be mandated by the States.
Mr. Moore. Not even a minimum level.
Mr. Zeman. Not even a minimum level.
Chairwoman Kelly. Thank you very much. Mr. Moore, have you
finished? Do you want one more question?
Mr. Moore. I think my time is up.
Chairwoman Kelly. Just about.
Mr. Moore. Thank you very much.
Chairwoman Kelly. OK. Thank you.
I turn now to Mr. Capuano. Oh, I am sorry. We have Mr.
Tiberi. Mr. Tiberi, do you have questions?
Mr. Tiberi. Yes, but I will defer to the----
Chairwoman Kelly. I will take you first.
You two can fight it out over there, just let us go.
[Laughter.]
Mr. Tiberi. Thank you, Madam Chairwoman. I apologize. I was
at a markup actually.
Just a couple of observations and then maybe a question, an
open-ended question to everyone on the subcommittee.
First, Mr. Hunter, you mentioned about State legislatures
making the law. I am from Ohio, and we have a court that likes
to make the law in Ohio. So I would take exception to your
statement, specifically with respect to auto insurance, by the
way.
We had, in Ohio, a few years back, a bill that was
introduced dealing with no fault insurance. And through
testimony in the Insurance Committee, both positive and
negative, it became clear that, at least from Ohio's
perspective, no fault would have a detrimental effect to
consumers, ultimately, Ohio, because of a lack of competition
because insurers wouldn't be writing there, at least in Ohio,
which I think is considered a competitive State for the
industry.
There are two Ohio companies that are large companies,
national companies, that do not write in either Massachusetts
or New Jersey. I don't know if anyone here is an expert at
least on what would the reasons be that a national company not
write in New Jersey and Massachusetts.
Mr. Ahart. As an agent in New Jersey, we have had quite a
few national companies not participate in New Jersey, and it is
pretty simple. It is just because they don't believe they can
make money in New Jersey.
Mr. Tiberi. And companies that are writing in New Jersey,
what reason is it that they continue to write there?
Mr. Ahart. Some of them have large books of other lines of
business other than auto, and some are making money in auto
insurance. You know, efficiency clearly is a key to that, but
the simple fact is, again, there wouldn't be so many leaving if
they could actually make money. And the fact is that so many
are leaving right now, it is really starting to put a burden on
a lot of the others that can't even absorb the 25-percent
market share that is going to be missing once those companies
leave.
Mr. Tiberi. In Ohio, with this most recent court decision,
there have been several companies that have already pulled out
of writing in Ohio. Are there other States where an example
could be used or either a legislature or the court has
regulated, has gone farther, in terms of regulating the
industry, where there has been a significant pullout of
carriers? Can anyone point to that?
Mr. Hunter. Not really. Usually, there are threats, but
they usually don't follow through. There were threats, for
example, as Proposition 103 was being debated, that if that
happens, we are going to pull out, but they didn't. In fact,
17-percent more company groups are writing now in California
than before.
Mr. Litan. But we discussed earlier in the testimony the
flip side, and that is South Carolina deregulated, it went the
other direction, and the number of insurers doubled within the
space of a little more than a year.
Mr. Hunter. I might comment on that too.
The numbers of insurers doubled, and I have done a little
bit of research. I only got the testimony notice yesterday, but
I made a couple of phone calls. The doubling of companies in
South Carolina is almost exclusively within groups that are
already in the State, when they have added very high-cost,
nonstandard companies, which I have great difficulty finding a
great consumer benefit out of this sudden inrushing of very
high-priced companies into South Carolina.
Mr. Zeman. If I may, rates have fallen for consumers in
South Carolina--let me finish, please--and the residual market
population has gone down as well. So there are a number of
factors, indisputable, that the South Carolina deregulation has
been a success story.
Mr. Hunter. Unfortunately, as I pointed out in my
testimony, the South Carolina data that you are relying on is
wrong. The NAIC left the recoupment charges out of the data.
Mr. Zeman. Once again, Mr. Hunter, you are talking about
rates, and I stand by what I said about rates, in terms of the
companies there and the residual market population has
decreased--no dispute there.
Mr. Litan. It went from, roughly, a million people in the
assigned market to only about 50,000 today.
Mr. Hunter. There was no assigned market in South Carolina.
Mr. Litan. Residual market.
Mr. Tiberi. I know my time is about to expire. Can I ask
the other two witnesses who haven't spoken yet if they have any
clue?
Mr. Snyder. Thank you very much, Congressman. I think the
issue here is to apply the lessons in every other product and
market to insurance, and it really functions according to the
same rules.
What occurs in States where costs are high, and in Ohio,
you are right, there were some very adverse court decisions,
but the legislature dealt with that, and that law was signed
yesterday.
But in States where those costs continue to rise
unaddressed, and there is price regulation which is imposed on
insurance companies, just as if it were imposed on food
producers or anyone else, the result would be to create
scarcity in the market. Because a company, when unable by
Government fiat to earn what it needs to cover its costs, will
try to reduce the number of products that it is selling in that
market.
And we have that case in both Massachusetts and New Jersey,
where major national writers, including writers which are based
in your State, as you mentioned, are simply unable to do
business because of the economics imposed upon them through
Government regulation.
The fundamental point today is apply the same lessons that
we know from every other product to insurance, and you will
find that it will function the same way. Reduce or eliminate
the price regulation, allow the prices to go where they need
to, work with insurance companies, and consumer groups, and
highway safety groups, and law enforcement to continue to
address the underlying problems, deal with those court cases
that are completely outliers, and you'll have a very, very
positive system, one that costs less for consumers and one in
which consumers have a maximum amount of choice. And they are
being denied that because of the over-regulation principally
resulting from rate regulation.
Now, let me add one other thing. This does not imply that
abuses that insurers may engage in cannot be addressed by the
Government. Clearly, the antidiscrimination laws, clearly,
other laws continue to apply to insurance companies. Laws that
apply to businesses, generally, would apply to insurance
companies. And we have said that if optional Federal chartering
is adopted, we are willing to give up totally with the
antitrust exemption, but let us leave that aside.
The reality is that the abuses can be addressed, but the
automobile insurance market can be made healthy again and be
assured to be healthy in every State if we simply apply the
lessons to that product that we do to every other product.
Thank you.
Chairwoman Kelly. Thank you very much.
We are going to go to Mr. Capuano.
Mr. Capuano. Thank you, Madam Chairwoman.
I am from Massachusetts, gentlemen.
First of all, I would echo Ms. Schakowsky's question, why
are you here? The Massachusetts legislature is in session, they
are working on their budget. Go tell them. Why are you telling
us? I mean, I appreciate it.
Chairwoman Kelly. Because I am running this hearing, Mr.
Capuano.
[Laughter.]
Mr. Capuano. Fair enough. That is a fair answer.
Mr. Litan. They asked us to come.
Mr. Capuano. That is a good answer.
[Laughter.]
Mr. Capuano. Well, thank you very much. It was very
interesting.
[Laughter.]
Mr. Capuano. I guess I want to make one statement, because
in some of the stuff I was reading before I got here, I noticed
there were some quotes from some executives from Liberty Mutual
that may be pulling out of the auto insurance business in
Massachusetts. And just as a footnote, last I knew, Liberty
Mutual was adamantly opposed to Federal charters. Now, they may
have changed their tune since in the last week or two, but as
of 2 weeks ago, they were adamantly opposed to it. Now, they
may or may not be part of the industry, and I know that that
will be a discussion.
But just as another footnote, a subfootnote to that, if and
when you get Federal charters, please recognize that there will
be many of us who will then try to hold you to other Federal
laws that you don't want to be held to--many little things like
fair housing standards when the insurance comes to us. Another
argument for another day, but you can't just get Federal
charters without getting Federal requirements as well, at
least--you might be able to, but not from me.
[Laughter.]
Mr. Capuano. The third comment I want to make is when I
hear deregulation, lately, I get a little nervous. It didn't
work so well in energy. It didn't work so well in airlines.
Every day I read the paper, I went to a hearing just yesterday,
it is not working so great in the stock market right now. We
have got analysts who are getting questioned. Deregulation is
not the panacea of business. And as we all know, there is
regulation in the insurance industry. Even in those States who
have allegedly ``deregulated,'' they still have regulation.
I guess the other point I want to make is, for those of you
who don't know, Massachusetts has had three governors now who
have each been vehement proponents of little or no Government
regulation on anything, and it is the governor in Massachusetts
who appoints the rate setters. So, if there is a rating problem
in Massachusetts, the first stop you should make is to the
governor of Massachusetts, the last three of whom have run on
antiregulation. So, if there is a problem, see them.
I also want to make another comment. Very clearly, I don't
like the Massachusetts auto insurance system. It is terrible.
It is horrendous. It is archaic. It does subsidize bad drivers
at the expense of good drivers. Being a good driver, I am one
of them. It is also, in my opinion, incredibly discriminatory.
I believe, in my heart, that it is unconstitutional because of
rating territories. In Massachusetts, I don't know other
States, rating territories almost uniformly conform to where
racial minorities and economically deprived people live. It is
almost a perfect overlap. That is discrimination, gentlemen, in
my opinion. An argument for another day in a State court, more
than likely.
All that being said, the fact that companies have withdrawn
from Massachusetts, you are right, and again I agree with you.
The Massachusetts system needs to be overhauled. There are ways
to do it that don't jeopardize some of the fundamental concerns
we have in consumer fairness, minimum coverage, because I would
respectfully disagree that I believe strongly in minimum
coverage requirements because I know plenty of people,
personally, who without that minimum coverage would be in
serious trouble today.
All of that being said, though, I am glad you came, and I
am glad the chairlady asked you to come, and I am glad you
respected her wishes.
[Laughter.]
Mr. Capuano. I would respectfully request, unless you want
to come and ask for a Federal charter, which if you do, fine, I
will tell you right now, I am going to start talking about
other things as well. I don't have any opposition to Federal
charter, but you are not going to just get on a silver platter,
I hope, just the Federal charter without the Federal
requirements. And for me, when it comes to auto insurance, we
will talk a lot about auto insurance discrimination when it
comes to my constituents and whatever Federal plan there will
be.
But other than that, I do thank you for coming today, and
enlightening me and educating me a little bit anyway.
Chairwoman Kelly. Thank you very much, Mr. Capuano.
There is a vote on the floor. We have all had a period of
time in which to ask some questions of you.
I am going to enter into the record the State Rate and Form
Law Guide that I mentioned earlier from the American Insurance
Association, making that a part of the record. And hearing no
objection, so ordered.
[The State Rate and Form Law Guide can be found on page 32
in the appendix.]
Chairwoman Kelly. I, also, want to say that there are no
more questions. I am sure there are questions, but since we
have a vote on the floor, I know that these additional
questions members may want to submit to you in writing.
So, without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
With that, I want to say thank you very much, gentlemen.
This was a very interesting hearing. I appreciate your being
here. It, obviously, is something that we need to continue to
explore until we come up with some right or at least
illuminating answers on the topic.
The panel is excused with our great thanks and appreciation
for your time. The hearing is adjourned.
[Whereupon, at 3:20 p.m., the hearing was adjourned.]
A P P E N D I X
August 1, 2001
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