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Mr. WYDEN. Has it been fully implemented? My understanding is that what we are talking about is full implementation.

Mr. Long. It has been passed by the NAIC and adopted by the NAIC.

Mr. WYDEN. Right, but in all 50 States?

Mr. LONG. Of course now. It has been less than a year since it was actually adopted.

Mr. WYDEN. OK. Then let us have an answer, then, to the question.

I asked you how long would it take to implement it fully, which means all the States. I had read in the press you had said 5 years. Is that your current assessment?

Mr. LONG. No, sir. My current perception is the goal is by January of 1994, which is obviously less than 5 years. Otherwise, sanctions will apply to those States which are not accredited.

Mr. MCCARTNEY. Currently, Mr. Wyden, I think we are picking up—this is in our written testimony, and I cannot remember the exact numbers—but just by having Florida and New York, I think we pick up something like in excess of 80 percent of the written premium, just by companies that are doing business, even though they are not domiciled in those States, they are doing business in those States.

It would be that we may not have every State accredited. It could be that there is some State that has no domestic industry or has no domestic industry operating on an interstate basis. It will not be critical to national regulation-I should not use that term-to uniform national minimum standards, if that State is not accredited.

Mr. DINGELL. That would only be so, once the State had adopted all of the requirements of the NAIC, and was in fact enforcing them; is that right?

Mr. McCARTNEY. That is true, Mr. Chairman.

Mr. WYDEN. You do think that by 1994 you expect full implementation? So in a sense, you are telling people that they ought to wait for 3 years for full implementation of the NAIC solvency accreditation.

Mr. McCARTNEY. I think you will see substantial implementation, substantial material implementation, by January 1 of 1994.

Mr. WYDEN. What does that mean? Does that mean 20 States?

Mr. McCARTNEY. No. I think it implies something in excess of a majority

Mr. WYDEN. So by 1994—that is 3 years from now—we will have 25 or more States that will have fully implemented the NAIC's solvency accreditation program?

Mr. McCARTNEY. I sense that this committee, and the chairman in particular, is not going to have much patience with the States if he does not see that level of commitment.

Mr. DINGELL. We have enjoyed this afternoon so much, I think we are probably going to be having you good gentlemen back.

Mr. McCARTNEY. I was afraid of that, Mr. Chairman.

Mr. DINGELL. Well, gentlemen, we thank you for your assistance to the committee.

The record will, as indicated, remain open. I think the committee will also have a few additional little questions that we might want to hear from you.

So we thank you. We have another panel which we will be hearing. We thank you for coming.

Mr. LONG. Thank you, Mr. Chairman. We appreciate the opportunity to appear, and we will follow up with the items to be included. Thank you.

Mr. DINGELL. The committee will come to order.

The Chair welcomes you gentlemen to assist us in our deliberations today.

The Chair advises you that copies of the rules of the subcommittee, the committee, and the House, are there at the committee table to assist you in your presentation.

The Chair advises you that, in view of the fact that all witnesses who testify here testify under oath, the Chair asks, first of all, gentlemen, do any of you have any objection to testifying under oath, or do any of you desire to be advised by counsel as you testify?

[No response.)

Mr. DINGELL. Gentlemen, you will have to answer yes or no, be cause the Reporter does not have a nod button.

Mr. DOLLAR. No, sir. Mr. GRAHAM. No, sir. (Witnesses sworn.]

Mr. DINGELL. Gentlemen, you may consider yourselves each under oath, and in view of the lateness of the hour, the Chair will insert your statements into the record, and recognize you each for such summary as you choose to give. TESTIMONY OF JOHN R. GRAHAM, CHAIRMAN, SOLVENCY TASK

FORCE, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS, AND ROBY DOLLAR, CHAIRMAN, NATIONAL ASSOCIATION OF LIFE COMPANIES

Mr. GRAHAM. Thank you, Mr. Chairman, members of the subcommittee, ladies and gentlemen.

I am John Graham, from the Kansas Farm Bureau Insurance Companies, and representing the National Association of Independent Insurers.

The National Association of Independent Insurers firmly believes that the best means of providing sound, solvent insurance companies for the consumers of America is the National Association of Insurance Commissioners Solvency Policing Agenda and Certification Program, a program that builds on and upgrades the current system of State insurance regulation.

Imposing Federal regulation or standards on insurance companies would lead to dual Federal-State regulation. This would create enormous financial burdens for the insurance companies, without improving availability or affordability for consumers.

This subcommittee and its chairman are to be commended for their diligent work in identifying existing flaws and for giving a push to the process that we believe will result in an improved and more effective solvency system under State regulation without the need for Federal legislation.

Mr. Chairman, the National Association of Independent Insurers is a trade association representing 560 property and casualty insurance companies that write approximately 25 percent of the property and casualty insurance premium volume in the United States.

We share your goals. We share your goal of a financially-sound insurance industry because it is very, very important that we meet our promises to our insurance customers if we are going to have a private insurance industry that has the public's confidence.

We also share your goal of effective solvency regulation. That, too, is out of enlightened self-interest. We pay the cost, as you have acknowledged with earlier witnesses today, and it is very important to use that we have an effective system of solvency regulation.

The NAIC has played an important role in trying to seek improvements in solvency regulation for many, many years. In fact, our organization was formed in 1945 based on trying to develop more effective State regulation, and we have continuously been involved in this process.

Before this committee began its deliberations, we had one boardlevel task force that, in April of 1989, after a year-long study, issued a report entitled “Insurer Solvency: Public Policy Recommendations for Improvement."

That report had 26 specific recommendations for the improvement of the State system for insurer solvency regulation.

We are pleased to report that many of those have been incorpo rated into the minimum financial regulation standards of NAIC, and we are also very pleased with the flurry of activity, as you have characterized it, that has occurred in seeking approval of standards at the State level.

In July of 1990, our association formed another board-level task force because of proposals for structural change in solvency regulation, and it is that task force's efforts that lead to most of the comments that I will make today, and I think, in light of the hour, Mr. Chairman, and since you have put our statement in the record, I am just going to highlight a few quick points.

Early in our deliberations, we decided that we needed criteria by which to evaluate any proposals for structural change, and basically, we concluded with goals that are outlined on page three of our statement.

The two overriding goals that we think should drive an effective system of insurance regulation are, first, a goal that provides protection to insurance consumers by making sure that the essential benefits of an insurance contractor are met when an insurer does become insolvent.

Second, we feel like we need a system of regulation that reduces the cost associated with insurer insolvencies.

We also recognize that any system of regulation has inherent costs, and it is a challenge to you all, it is a challenge to the States, it is certain a challenge to those of us in the industry to try to develop a system where the benefits and the costs are reasonably balanced.

We feel like it is very, very important that we not create such a structured regulatory system that we create barriers to entry that raise prices and reduce the diversity of products available to insurance consumers, but we sure realize the risks on the other end, too, and that is where the balance has become such a challenge.

We support State regulation not out of blind faith. We have evaluated other alternatives to the current regulatory scheme. We have looked at other industries and how they are regulated, and we feel very strongly that the NAIC program has the potential to work.

We feel like the first overall goal that we identified a moment ago of protecting the public can be met through the property and casualty guarantee fund system, and I would just point out to you, since there have been several comments about the life-insurance guarantee fund system, the property and casualty guarantee fund system is somewhat different.

There are property and casualty guarantee funds in all 50 States plus Puerto Rico and the District of Columbia. We think the property and casualty guarantee fund system has not been perfect, but it has performed well and has protected insurance consumers.

We would also comment that, from time to time, others suggest that maybe there is not adequate capacity in the property and casualty guarantee fund system.

We would just simply point out that even with the acknowledged increases in the numbers of insolvencies, the total assessments from the property and casualty guarantee fund system over the last 20 years are approximately $372 billion.

The annual assessment capacity of the entire property and casualty guarantee fund system is approximately $4 billion, the annual capacity.

Second, we acknowledge the goal of reducing the cost of insurance insolvencies. We think the NAIC program has a reasonable chance for success if you balance cost and benefits.

We readily acknowledge that the system is far from perfect, and that is why we are working to try to improve that system.

One observer suggested that perhaps perfection is not the lot of mankind. I think, perhaps we have seen that in regulation, at the State level, in other industries, at the Federal level, and certainly in dual regulatory systems.

Mr. Chairman, I will conclude my comments very quickly by just saying, we do think the statement can be made to work. We also think there is a very important role for the Federal Government. Part of that role you are playing right now, and we commend you for that effort.

We are absolutely convinced that much of the progress that has been made today is a result of the efforts of this committee. We would also point out that, back in the 1960's, the Dodd Hearings led to the guarantee fund system, as it exists today. We do think that is an important role you can play.

We also think it is very important that, at some point in time, we recognize that all financial institutions, in the financial services industry, are suffering from the excesses of the 1980's. All effective regulation can do is address symptoms and outcomes.

At some point, we have got to address the fundamental problems that are leading to insolvency challenges in the insurance industry. We think there is an important role the Federal Government can play there. There is a role the Federal Government has created in causing these problems, and we think only the Federal Government can help solve those problems.

Those problems range all the way from the tax system to superfund to potential earthquake liability. If time permits, in questioning, we would be glad to address those further.

Thank you, Mr. Chairman.
[Testimony resumes on p. 315.]
[The prepared statement of Mr. Graham follows:)

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