INSURANCE COMPANY REGULATION

WEDNESDAY, MAY 22, 1991

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room 2123, Rayburn House Office Building, Hon. John D. Dingell (chairman) presiding.

Mr. DINGELL. The subcommittee will come to order.

Today the Subcommittee on Oversight and Investigations will hear testimony regarding the national solvency program proposed by the National Association of Insurance Commissioners, the NAIC, as well as the capability of that institution, to implement such a program successfully. The committee acts pursuant to rules 10 and 11 of the Rules of the House of Representatives. Under this rule the subcommittee has jurisdiction and authority to inquire into the adequacy of solvency regulation for insurance companies as well as compliance by publicly owned insurance companies with the requirements of Federal securities laws.

Today the hearing is both timely and significant. When the subcommittee commenced this insurance and solvency investigation 3 years ago, few in Congress or elsewhere seemed interested in the cause and effect of insolvencies that obscure companies with unfamiliar names, like Mission and Transit Casualty. Yet, we soon discovered that two such unknown companies could cost the public at least $5 billion, and that the State regulatory system was illequipped to prevent and punish the gross mismanagement, opportunism, and fraudulent activities which led to such insolvencies. The subcommittee summarized its findings and concerns in a report in February 1990, which was entitled "Failed Promises."

This subcommittee is no longer alone in its concerns about insurance company insolvencies. Other subcommittees, both in this body and elsewhere are concerned with these same matters. Now, while this subcommittee has continued its investigations in hearings about solvency problems as mentioned at least two other committees of the House of Representatives and four committees in the Senate have commenced similar inquiries into similar matters. A major question now before the Congress is, is there a need to establish a Federal regulatory process to assure that policyholders in the United States are adequately and properly protected, and is our current system of State regulation sufficient to assure that protection.

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The State insurance regulators have responded to the problems by developing their own proposals for improved solvency regulations through the NAIC. Although that institution is a private voluntary association of State insurance commissioners, the NAIC is presently the only group that considers solvency issues on a national basis.

The NAIC has worked hard to develop a national solvency program for its members. But the success of that effort is hampered by lack of legal authority to compel individual States to act collectively and harmoniously in the national interest.

Efforts to address this problem are also hampered by the fact that certain State regulators and insurance industry participants are not happy that this subcommittee has conducted a vigorous and bipartisan investigation of their activities. An appreciation of legitimate Congressional interests in assuring a financially sound insurance market for all Americans is needed before we can work together to correct obvious and disturbing weaknesses in the existing regulatory system.

Today, we will hear from the General Accounting Office regarding its evaluation of the NAIC's solvency program, as well as the capabilities of NAIC and the various States to implement that program. The General Accounting Office is testifying in response to a request by this subcommittee to perform the first independent evaluation of the NAIC in history.

The NAIC will present its solvency program and plan of implementation to the subcommittee. The NAIC will also respond to the GAO's findings as presented here and as discussed in numerous meetings between the GAO and the NAIC over the past few months.

Finally, we will hear from the National Association of Independent Insurers and the National Association of Life Companies, two trade groups representing primarily small and medium-sized insurance companies.

The Chair is now going to ask the gentleman from Oregon to take the Chair briefly while the Chair excuses himself to attend to an important matter.

Mr. WYDEN [presiding]. The Chair is going to recognize our colleagues for their opening statement. Let me recognize the gentleman from Michigan next, Mr. Upton.

Mr. UPTON. Thank you, Mr. Chairman, and I am pleased that this subcommittee is looking into this situation. I want to thank Chairman Dingell and also our ranking member, Mr. Bliley for their efforts.

As a new member of this subcommittee I have read "Failed Promises" from last year's hearing and it is apparent to me that the States do not have the ability to fully regulate their insurance industry. My constituents are increasingly afraid that their insurance will be lost due to the inadequacy of regulation in their State. In fact, in recent weeks Michigan residents have been losing out due to insurance companies in both Virginia, as well as, California. They fear that when they need insurance the most, when disaster strikes, they will not be able to get what is due to them. Especially when I learned of the scams in reinsurance in the Caribbean Basin and the ability of scam artists to repeatedly defraud people out of

their hard earned dollars for bogus insurance premiums-I realized something needs to be done.

Congress is here to protect the public interests and I intend to learn from this hearing to forge practical solutions to the problems that exist.

Thank you, Mr. Chairman.

Mr. WYDEN. The Chair thanks the gentleman from Michigan. The Chair is going to recognize himself for a brief statement and then all our colleagues in the order of their appearance.

Today's hearing is an especially important one. Our Nation is faced with the prospect of bicoastal insurance failures leaving thousands of policyholders with their lives devastated. The evidence indicates that the State guarantee system for protecting consumers from these wipe outs is riddled with holes. Many State regulators permit the insurers to engage in accounting flim flam, many lack actuaries who can determine the financial health of an insurance company and all are powerless against the offshore holding companies that offer illusory coverage.

Most importantly there is overwhelming evidence that the States do not intervene early enough to help the consumer. Even when there had been clear definitive signs of trouble such as in First Executive, Mission Insurance, Anglo American, Transit Casualty and other cases, the regulators have dawdled and they have delayed.

Now, we're told by many of the State regulators and the National Association of Insurance Commissioners that they have everything under control. They tell us that the Federal Government should let them go their merry way and that all will be well. They have claimed specifically that the Federal Government didn't handle the savings and loan fiasco well, and that Federal involvement in insurance regulation would be more of the same.

There is no quarrel here that the Federal Government's performance during the S&L mess was less than sterling, but it's also clear that one major Federal shortcoming in regulating the S&L's was a failure to ride herd aggressively on the State chartered thrift institutions. The General Accounting Office found that of the 220 thrift institutions that had to be bailed out in 1988 the State chartered thrifts represented well over half of the estimated $33 billion in losses or approximately $23 billion.

I'm of the view that the Federal Government had better set down minimum Federal solvency standards for insurers to avert another example of financial history repeating itself.

The National Association of Insurance Commissioners certainly seems to mean well. And over the years Mr. Pomeroy, in particular, has been very responsive, but this association clearly lacks the political muscle and the legal clout to force all the States to adopt the necessary consumer protections. And we will learn today of evidence that indicates the NAIC has understated the number of insolvencies and actually castigated regulators for trying to move early on First Executive.

We look forward to our witnesses moving ahead with legislation to protect consumers and I note that the chairman of the full committee has returned. I wish to return the gavel to its rightful pos

sessor.

Mr. DINGELL. Finish your statement.

Mr. WYDEN. I was just going to recognize the gentleman from Virginia, Mr. Bliley, for his opening statement.

Mr. BLILEY. Thank you. Mr. Chairman, today we resume our public hearings on insurance company insolvencies and the adequacy of existing State solvency regulation. A topic which has been receiving increased attention in recent weeks. While others are only now beginning to focus on these subjects our subcommittee has been looking into this matters on a bipartisan basis for fully 3 years.

In fact, the "Failed Promises" report adopted by the subcommittee on a unanimous vote in February 1990 sparked a vigorous debate on these issues, a debate which continues and long over due action in some cases. When we first began this inquiry we focused on case studies of the three largest insolvencies of the 1980's which involved failed companies in far away places like California and Missouri.

In recent weeks, however, the solvency issue has come close to home. Virginia regulators seized Fidelity Bankers Life Insurance Company a subsidiary of California based First Capital Holdings located in my district and the third largest life insurer in my State. Fidelity had $4 billion in assets and over 200,000 life insurance policies and almost 100,000 annuitants. Its parent, First Capital like First Executive, shortly before it, fell victim to the crash in junk bonds. While its holdings of such investments were much larger than the typical life insurer we need to ask why these atypical companies did not receive atypical attention.

Let me emphasize that I continue to hope that Fidelity Bankers Life and other insurers taken over by State regulators in recent weeks will be put back on their feet. Let me also emphasize that there is no evidence of a broad based solvency crisis affecting any segment of the insurance industry. However, we cannot ignore the fact that the number and size of insurance insolvencies has been on the rise. Industry assessments for State guarantee funds were only $400 million from 1969 through 1984, some 15 years, yet mushroomed to $3 billion for the 4 year period 1985 to 1989.

Just last month Standard and Poors released its insurance solvency review of over 2,000 companies. One quarter of those rated were given a below average rating. While those companies are 5 percent of the industry they represent $20 billion in premiums, a sobering statistic. To its credit the National Association of Insurance Commissioners has responded to the subcommittee's concerns with its financial regulation standards and State certification program. The issue we consider today is whether this effort is working. We enlisted the General Accounting Office to help us and we appreciate their dedicated work in this regard.

Congress has largely delegated the regulation of insurance to the States and accordingly we have the task of overseeing that delegation. We need to determine whether the NAIC's standards are adequate and whether its review process is comprehensive. The flurry of legislative activity in State capitals to pass elements of the NAIC standards is a good sign.

I have corresponded with Virginia Commissioner Steve Foster to inquire about developments in my own State. Finally I expect that