This statement is submitted on behalf of the members of The Council of Insurance Agents & Brokers ("The Council"). The Council is a national trade association founded in 1913 as the National Association of Casualty and Surety Agents. Since 1913, The Council of Insurance Agents & Brokers has provided industry leadership while representing the largest, most productive and most profitable commercial insurance agencies and brokerage firms in the U.S., and around the globe. Council members operate in over 3,000 locations and place nearly 80% - well over $100 billion - of the U.S. commercial property/casualty premiums. In addition, Council members specialize in a wide range of insurance products and risk management services for business, industry, government and the public. Council members, who operate nationally and internationally, also administer billions of dollars in employee benefits.
I am Robert A. Gleason Jr., Chairman and CEO of The Gleason Agency, Inc., in Johnstown, Pennsylvania. I serve as Chairman of The Council, as well as a member of the Board of Directors of the association, and am past chairman of The Council's Legislative Committee. The Gleason Agency is among the 150 largest insurance brokerages in the United States. We have offices in Pittsburgh, Harrisburg, and Philadelphia. Our corporate headquarters are in Johnstown and we also have account executives in Allentown and Altoona. Our firm provides risk management services, commercial property/casualty insurance products and employee benefit programs -- utilizing both traditional insurance channels and alternative risk-financing options such as captives and self-insurance pools.
Mr. Chairman, on behalf of my firm and the members of our association, we want to express our profound gratitude to you for the essential role you played in the enactment of the National Association of Registered Agents and Brokers (NARAB) provisions of the Gramm-Leach-Bliley Act. Our association began working with the National Association of Insurance Commissioners on the producer licensing uniformity issue in 1939. After decades of effort to improve the producer licensing burden, the passage of NARAB is the assurance that, at long last, these reforms are going to occur. Tens of thousands of agents and brokers around the country will benefit from this legislation, and they have the members of this committee, and especially you, to thank. Support for NARAB was bipartisan and resounding; we also want to express our sincere gratitude to Senator Dodd and his staff for their roles in the development of this legislation.
NARAB's enactment was an essential reform. Insurance agent and broker licensing is much more than a mere hassle that involves redundancies from jurisdiction to jurisdiction. The purpose of the Gramm-Leach-Bliley Act was to modernize our nation's laws to make our domestic industries more efficient, better able to compete globally, and better serve the needs of consumers. With the marketplace convergence that has occurred in the insurance distribution system, it is unacceptable for state licensing laws to serve as barriers to interstate competition. NARAB is a solution to this problem that relies on the existing framework of state insurance regulation.
This is the first hearing since the enactment of the new financial services modernization law on the future of insurance regulation in this new era. NARAB, we believe, is a crucial test for how effectively states can coordinate their regulation in areas where global competition demands it.
As you know, The Council was the major industry proponent of the NARAB provisions that were included in the Gramm-Leach-Bliley Act. Our support for these provisions was rooted in our members' frustration with the current nonresident producer licensing process, which diverts considerable financial and personnel resources from our members' businesses to the task of getting licensed to do business. At the same time that we were working to have NARAB enacted in financial services reform legislation, we also worked with the National Association of Insurance Commissioners (NAIC) to draft the Producer Licensing Model Act (the Model). Although, as a general matter, The Council supports continued state regulation of the business of insurance, it also believes that the needlessly duplicative regulatory requirements that are now imposed on agents and brokers, who seek to do business in more than one state, must be drastically reduced. Now that the NARAB provisions have been enacted, the states have three years to avert the creation of NARAB. We believe that this is more than enough time, given that the NAIC has been working on the non-resident licensing problem for decades already.
It is important to note at the outset that there are two separate ways for the states to avert the creation of NARAB. Within three years, a majority of states must enact either uniform non-resident licensing laws or laws granting reciprocity in non-resident producer licensing. The choice is either uniformity or reciprocity -- not a combination of the two. The legislation is designed to encourage the states to take the requisite steps to avoid the need to create NARAB at all and it authorizes the NAIC to make the initial determination (subject to judicial review) whether the states have been successful in that effort. The states must maintain their compliance with either the uniformity or reciprocity requirements on an ongoing basis or NARAB will come into existence.
The uniformity requirements set out in NARAB are clear. In order for the uniformity requirements to be satisfied under NARAB, a majority of states must:
Enact uniform criteria for licensure, including integrity, personal qualifications, education, training and experience;
Enact uniform continuing education (CE) requirements;
Enact uniform ethics course requirements;
Enact uniform suitability requirements; and
Eliminate any existing statutes and regulations that have the effect of limiting the activities of a non-resident insurance producer because of its place of residence or operations (except for countersignature laws).
The uniformity prong contemplates that states enacting the uniform laws will by default grant reciprocity to non-resident producers, in CE and in all the other areas. After all, those states who adopt the uniform requirements will have the same laws to license resident producers, and there would (theoretically) be no reason to ask non-residents to submit additional information or meet additional requirements for licensure.
In contrast, the reciprocity requirements of NARAB are less intensive. In order to meet the reciprocity requirements, a majority of states must:
Adhere to a uniform procedure for non-resident licensing that includes a request for licensure, submission of the home state application, verification of resident licensure in good standing and submission of the requisite fees;
Accept the fulfillment of home-state continuing education requirements to satisfy the non-resident state's continuing education requirements; and
Eliminate any existing statutes and regulations that have the effect of limiting the activities of a non-resident insurance producer because of its place of residence or operations (except for countersignature laws).
II. NAIC ACTIONS SINCE ENACTMENT OF NARAB
At its winter meeting in December, the members of the NAIC chose to pursue reciprocity in non-resident licensing laws rather than uniformity as a means of avoiding the creation of NARAB. The NAIC has pledged to work on uniformity in non-resident licensing requirements as a longer-term goal. If the NAIC avoids the creation of NARAB through the reciprocity prong rather than the uniformity prong, they will be able to create their own uniform standards rather than following the uniform standards set forth in NARAB.
We believe that the NAIC's response to the enactment of NARAB has been commendable. Clearly, this issue is a high priority to the commissioners, and NAIC President George Nichols (the insurance commissioner from the state of Kentucky) has provided exceptional leadership on all regulatory issues relating to the creation of uniform, national treatment for not only producers, but also the entire industry. We have great confidence, too, in the leadership of Iowa Commissioner Terri Vaughan, who chairs the newly created NAIC panel overseeing the collective efforts of the state departments working to create harmonized producer licensing.
The NAIC undertook a thorough review of its Producer Licensing Model Act after the enactment of the Gramm-Leach-Bliley Act to determine what, if any, changes would need to be made to conform the Model to the reciprocity standards set out in NARAB. As originally drafted, Section 8 of the NAIC Producer Licensing Model Act set out a non-resident licensing procedure that required only that a producer be licensed and in good standing in his/her home state, to submit the Uniform Application, and to pay the requisite fees, which mirrored the NARAB requirements for reciprocity. However, NAIC staff counsel who examined the Model felt that there were some additional areas the needed to be addressed in the Model in order to ensure compliance with the reciprocity provisions of NARAB.
In late January of this year, the NAIC adopted a number of amendments that they believed would bring the Producer Licensing Model Act into full compliance with the NARAB reciprocity standards. These amendments addressed the reciprocal nonresident licensing of surplus lines brokers and limited lines producers. Because surplus lines brokers are included in the NARAB definition of insurance producer, states must not only allow for licensure of non-resident surplus lines brokers but must also grant them reciprocity in non-resident licensure. Similarly, NAIC staff counsel felt that the inclusion of "limited insurance representative" in the definition of insurance producer made necessary the inclusion in the Model of reciprocal non-resident licensing for limited lines producers. As the name suggests, limited lines producers are not licensed to sell a full range of insurance coverages, but rather are licensed to sell only one or two specific coverages, such as funeral expense insurance or credit life insurance. We believe that adoption by the states of the Producer Licensing Model Act (as amended in late January) would bring the reciprocity needed to avert the creation of NARAB.
To date, the NAIC Producer Licensing Model has been introduced in four states - Kentucky, Missouri, New Hampshire and Vermont - and has been passed by the Kentucky Legislature. Kentucky Governor Paul Patton is expected to sign the legislation soon. No negative conclusions should be drawn from the fact that only a handful of states have addressed the Model act - because the Model was adopted by the NAIC only early this year. As a practical matter, the real work will be done next year when most legislatures have their first opportunity to debate the Model. Because of the biannual nature of some states' legislative schedules, some states will have only one opportunity to enact the laws necessary to achieve reciprocity. This increases the importance of industry cooperation with regulators in those states over the next few years to ensure adoption of the Model. In fact, we would say that the regulators today are less of a potential obstacle for meeting the NARAB threshold than the industry itself, on a state-by-state basis.
The adoption and promotion of the Producer Licensing Model Act are not the only steps that the NAIC has taken to avert the creation of NARAB. The NAIC had been working on several initiatives to improve the process of non-resident producer licensing long before Congress considered the Gramm-Leach-Bliley Act.
The initial pressures to reform the non-resident licensing process began in the early nineties as a result of then-Energy and Commerce Committee Chairman John Dingell's (D-MI) bill to create a dual chartering system for insurers. A predecessor to the current NARAB was included in that bill, and congressional hearings were held to examine the existing problems in non-resident producer licensing. These legislative efforts really formed the beginning of the NAIC's recent efforts to reform the non-resident licensing process, and led to the creation of the Producer Database and its parent, the Insurance Regulatory Information Network.
The NAIC, through the Insurance Regulatory Information Network (IRIN), is developing the technological means to assist in the nonresident licensing process. The Producer Data Base (PDB) is a centralized electronic database of producer licensing information. States who use the Producer Database can speed up some parts of the non-resident licensing process because the database can be used to verify that the producer is licensed in good standing in his or her home state. There are currently 29 states sending producer licensing information to the PDB, and the NAIC estimates that by the end of 2000, the PDB will contain information on 80 percent of the producers in the United States. A second project is the Producer Information Network (PIN), which is the electronic gateway through which information is transmitted to the PDB. PIN is currently processing initial appointments and terminations in 14 states, and approximately 100 insurers are submitting information to PIN on a regular basis. IRIN, through the Producer Database and Producer Information Network, will have the technological capability to process electronic applications for non-resident producer licenses by September of this year.
While the NAIC was in the process of getting the Producer Database project off the ground, it also was working on an additional initiative to bring more uniformity to the non-resident licensing process. The Declaration of Uniform Treatment sought to bring about the elimination of some of the idiosyncratic licensing requirements used by states. States that sign the Declaration agree that they will not treat resident producers and non-resident producers differently in the licensing process; however, those states may still impose idiosyncratic requirements on all producers. Furthermore, states that sign the Declaration must eliminate all statutes that limit the activities of non-resident producers, such as non-solicitation statutes and restrictive incorporation requirements. To date, 33 states have signed the Declaration of Uniform Treatment.
The NAIC also developed a Uniform Application for Individual Non-Resident Licenses for use by states that signed the Declaration of Uniform Treatment. This application consists of a four-page application form and a matrix of state-specific requirements for licensure. The Uniform Application may be used in states that submit information to the Producer Database, even if those states have not yet signed the Declaration of Uniform Treatment. The Uniform Application is now accepted in 36 states, including three states that have not yet signed the Declaration of Uniform Treatment.
Although the Declaration of Uniform Treatment and the Uniform Application go a long way toward alleviating licensing requirements that discriminate against non-resident agents, they do little to eliminate the state-specific requirements that cause so many problems for non-residents, or to promote uniformity in licensing requirements. Even if a state signs the Declaration of Uniform Treatment, it can impose any requirement it wants on a non-resident producer, so long as the state also imposes that requirement on a resident producer. As a result, there is still little commonality across state lines. Similarly, the Uniform Application devised by the NAIC only contains the basic information required from the states that agree to accept the application. Nearly every state that accepts the Uniform Application also requires the producer to submit additional documentation, ranging from a copy of the producer's high school diploma to a fingerprint card. As you can see, the Uniform Application also does not promote commonality of licensing requirements.
At the NAIC's annual commissioners' retreat in early February of this year, the commissioners asked the Insurance Regulatory Information Network (IRIN) -- the public/private partnership created by the NAIC to run the Producer Database (PDB) and Producer Information Network (PIN) -- to consider the creation of a seamless, one-stop national filing capability for non-resident licenses. IRIN President and North Dakota Insurance Commissioner Glenn Pomeroy sent a letter to NAIC President George Nichols in early March that detailed a vision of a national non-resident producer licensing and appointment process that would be administered by IRIN. The concept described by Commissioner Pomeroy is almost identical to the NARAB licensing clearinghouse enacted as a part of the Gramm-Leach-Bliley Act. The major difference is that the licensing clearinghouse would be operated by IRIN instead of by an independent federal agency, and that states would continue to retain their "authority" to license producers.
Although IRIN will have the technological capability to operate such a clearinghouse by June 2001, the states must also take some actions, including statutory changes, in order for this concept to become a reality. In his letter, Commissioner Pomeroy detailed four steps that the states must take for the centralized non-resident licensing system to become a reality:
All states must endorse the concept and its implementation;
All states must commit to sending data to the Producer Database;
All states must adhere to the minimum national standards outlined in the new Producer Licensing Model Act; and
All states must delegate the ministerial functions of non-resident licensing, appointment and termination to IRIN.
Although IRIN does not yet have a specific action plan for making this vision a reality, the basic concept being proposed by Commissioner Pomeroy and the IRIN Board of Directors would likely be sufficient to avert the creation of NARAB. The reciprocity provisions contained in the NAIC Producer Licensing Model Act meet the NARAB requirements for reciprocity. If these provisions are adopted by the states in conjunction with the rest of the IRIN concept, the NAIC could avert the creation of NARAB.
Most importantly, Commissioner Pomeroy emphasizes many times in his letter that in order for this concept to work, all the states must be involved, not just the bare minimum needed to avert the creation of NARAB. He is echoing the message that the industry has been sending since NARAB was enacted: it is not enough for the NAIC to merely avert the creation of NARAB. It is clear that the NAIC leadership realizes that anything less than full participation by the states in non-resident licensing reciprocity will not be acceptable.
III. POSSIBLE OBSTACLES TO MEETING THE NARAB THRESHOLD
The commitment to avoiding the creation of NARAB expressed by the NAIC leadership is commendable. But we are concerned that the very existence of the NARAB threshold (of reciprocity in a majority of states) may result in a situation where states fail to push the reciprocity agenda in the belief that other states should take the lead. This approach is akin to the old line that "everybody wants to go to heaven, but nobody wants to die." Despite the prodding of the NAIC leadership, this may be an unavoidable scenario. As the Chairman well knows, the NAIC was originally created in 1871 to foster increased uniformity among the states in the regulation of insurance. But problems in achieving uniformity do not always originate with insurance regulators. Thus, industry leadership on a state-by-state basis is essential to achieving the goals of harmonization.
Under the NARAB requirements for reciprocity, states must still eliminate statutes that limit a non-resident's ability to transact business in their states, such as non-solicitation statutes and restrictive incorporation laws. While the NAIC's Producer Licensing Model Act does not directly address the issue of requirements that limit a non-resident producer's ability to transact business, the NAIC has made it clear that these requirements must be repealed, or otherwise eliminated, in order to comply with the reciprocity requirements of NARAB. It is not clear that all states will have the political willpower to do so. These types of requirements were originally enacted as a protectionist measure for local agents, and efforts to repeal these requirements will likely face strong opposition from some local and state agent groups.
Additionally, under the NARAB requirements for reciprocity, states must also adhere to a uniform procedure for non-resident licensing. As currently written, the Producer Licensing Model Act satisfies the uniform procedure for non-resident licensing set out by NARAB, including the uniform non-resident licensing application. However, as noted above, the uniform application still includes a listing of state-specific requirements that must be eliminated to comply with the NARAB reciprocity provisions. Like the statutes that restrict a non-resident's ability to do business in a state, many of these add-on requirements were developed over the years as protectionist measures to discourage non-residents from attempting to enter a state. Efforts to eliminate these add-ons may also result in opposition from local and state agent groups.
There is one final issue, dealing with criminal background checks, that has traditionally been a concern of state regulators but that has now become a concern for the insurance industry as well. Many states require criminal background checks for both resident and non-resident producers. However, this requirement, like many other licensing requirements, has not been uniform across the states. In most cases, the background check requires that an applicant for a producer license submit a set of fingerprints, and in some cases, a criminal background report from the state or local law enforcement entity. Because there was little uniformity among the states in the types of criminal background checks performed by states, there was an unwillingness by many states to accept the result of another state's background check. This concern is complicated by the fact that state insurance departments do not have direct access to the federal crimes database. Some insurance departments have agreements with their state law enforcement authorities that would enable them to get this information, but these types of agreements are by no means universal.
Because regulators could only get criminal information on a second-hand basis, it was not very difficult for a producer who ran into trouble in one state to quickly move to another with little repercussions. It was hoped that use of the Producer Database mentioned above would help the states to track these bad actors and prevent them from moving from state to state with impunity. While it has helped to an extent, there are still concerns that such persons can hide a criminal background in a way that states will not be able to uncover the criminal history.
The issue of past criminal activity has become a concern for the insurance industry as a whole since the passage of the Insurance Fraud Prevention Act (18 U.S.C. 1033) in 1994. This Act prevents a person convicted of a felony involving dishonesty or a breach of trust from participating in the business of insurance, and makes it a federal crime to willingly employ such a person. This new imposition of liability on producers as employers of other producers has caused great concern, especially since the federal government has stepped up enforcement of the Act over the past few years.
It is clear that neither insurance regulators nor the insurance industry want to have bad actors participating in the business of insurance. We believe that giving the state regulators access to the information on the federal criminal database through the Producer Database would help to enhance state regulation by helping to ensure that bad actors will not slip through the cracks. It could also help to alleviate regulator concerns about the quality of background checks that are performed and increase the speed of adoption of reciprocal licensing laws.
Although the NAIC would have the ability to create NARAB after the initial three-year period has passed (and a majority of states have reached neither the uniformity nor reciprocity thresholds), we would prefer that simplification and streamlining of the non-resident licensing system occur sooner rather than later. In 1993, during a hearing on the precursor to NARAB in then-Energy & Commerce Committee Chairman John Dingell's federal insurance regulation legislation, Congressman Jim Slattery (D-KS) asked how long it would take for the industry and states to reach a standardized licensing system. The answer was five years. It's now been longer than five years, and the non-resident licensing system is not much easier to navigate. In many ways, the pace of reform has been outstripped by the accelerating pace of marketplace convergence (and corresponding interstate transactions).
We applaud the NAIC for working on a long-term goal of uniformity in tandem with a short-term goal of reciprocity to simplify and streamline the nonresident licensing process. We would like to emphasize again that in order for the NAIC to reach these goals there must be participation by all the states. There has been much discussion about the threshold number of states that must meet the reciprocity requirements of NARAB in order to avert its creation. It is not enough for only a majority of states to meet the reciprocity threshold; rather, the NAIC must ensure that all states are taking part in reciprocity on non-resident producer licensing. Anything less than full participation will not represent progress by the NAIC on this issue, nor would it be consistent with the spirit behind establishing NARAB.
IV. NARAB AS A LICENSING CLEARINGHOUSE
Council members realize all too clearly the need to move this process forward. We commend the NAIC and its leadership for their efforts over the past several months and look forward to working with them to simplify and streamline the non-resident producer licensing process as quickly as possible.
In order to create the political impetus necessary to achieve the reciprocity goals, though, the NAIC has cast NARAB itself - as a licensing clearinghouse - in a negative light. Throughout the history of the NAIC, there has been a great reluctance to request or support initiatives that would "empower" the organization itself with any degree of preemptory authority. Commissioners are understandably wary of taking on responsibilities that include the preemption of any states' laws.
While the commissioners work diligently to meet uniformity goals without preemptive tools, we must point out that uniformity was the founding goal of the NAIC. Indeed, as Chairman Grams pointed out during Conference Committee debate on the financial modernization bill, the original chairman of the NAIC predicted in 1871 that the commissioners would rapidly achieve full regulatory uniformity. While the NAIC has been sincerely devoted to the producer licensing reform issue for many years, we firmly believe that the passage of NARAB is essential to meeting these goals. Also, we believe the NAIC should view NARAB as an opportunity to attain its original goal.
But the appeal of the NARAB provisions goes beyond incentives alone. We believe that the nation's agents and brokers are in a "win-win" situation. If the NAIC's goals of reciprocity are met, that's clearly a boon for producers. Producers also stand to benefit from the creation of NARAB as a licensing clearinghouse. Members of Congress who crafted NARAB included many provisions to ensure that NARAB enhanced functional state insurance regulation, rather than subtract from it. A member of NARAB would meet professional requirements that exceed the highest requirements that currently exist in any state. States would continue to fully collect their licensing fees, and the costs of NARAB would be borne fully by its members.
The preemptive effect of NARAB is extremely narrow - and aimed at laws that discriminate against out-of-state agents and brokers. In this era of financial services convergence and global competition, this limited preemption is wholly justified.
In the aftermath of the enactment of the Gramm-Leach-Bliley Act, many have speculated about the future of state insurance regulation. The NARAB threshold is a critical test of the ability of states to continue to effectively regulate this industry. Some in our industry will favor a full federal regulatory option for insurers; others will fight for pure state control. NARAB provides a model for giving states targeted regulatory tools to achieve the agenda of efficient regulation that all in our industry seek. While the NAIC today is rightfully striving to avert the creation of NARAB, we believe that ultimately, the regulators may find that NARAB is the kind of platform needed for states to ward off federal incursions into their historic turf. We commend the members of Congress who have had the foresight to include NARAB as a critical reform element of the new financial services regulatory regime.
The Council appreciates the opportunity to testify and present these views, and would be happy to provide any assistance that the members of this Committee believe may be beneficial as the Committee moves forward with its consideration of these issues.
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