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Federal Document Clearing House
Congressional Testimony
September 19, 2000, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 8294 words
COMMITTEE:
HOUSE COMMERCE
SUBCOMMITTEE: ENERGY
AND POWER
HEADLINE: TESTIMONY INSURCES REGULAYION
TESTIMONY-BY: J. LEE COVINGTON , CHAIRMAN
BODY:
September 19, 2000 Prepare d Statement of The
Honorable J. Lee Covington Director Ohio Department of Insurance Summary of
Testimony by Lee Covington - As described by NAIC President George Nichols at
the Subcommittee's July hearing, the National Association of Insurance
Commissioners (NAIC) and State insurance regulators are on track to implement
all provisions of the Gramm-Leach-Bliley Act (GLBA) as intended by Congress:
a)We are actively coordinating and cooperating with Federal functional
regulators through cooperation agreements, personal contacts, and information
exchanges among State and Federal supervision staff. b)We have developed model
privacy rules similar to the Federal privacy regulations that can be quickly
adopted by States to assure compliance with GLBA. c)We are establishing a
one-stop national licensing system for insurance agents and brokers that will
fully satisfy the NARAB provisions in GLBA by achieving reciprocity among States
while we develop and implement a uniform 50-state system. - The NAIC is
spearheading a bold set of national initiatives, as outlined in the "Statement
of Intent--The Future of Insurance Regulation" and signed by all State Insurance
Commissioners, that will move State insurance regulation beyond GLBA by
achieving uniformity and greater efficiency for agent licensing, establishing
national treatment of companies, speeding up the process for introducing
insurance products to market, and facilitating e-commerce. - Ohio is leading the
way in modernizing State insurance regulation by being the first State to adopt
reciprocity for agent licensing, implementing a state-of-the-art internet
licensing system, piloting the National Insurance Producer Registry allowing
one-stop licensing for non-resident agents, adopting regulations to speed the
time for insurance product approvals, and chairing NAIC committees with the goal
of facilitating the use of e-commerce and improving the State-based insurance
product approval process. Testimony of Lee Covington Ohio Director of Insurance
Introduction Chairman Oxley and members of the Subcommittee, my name is Lee
Covington. I am the Director of Insurance in state of Ohio and serve as Chair of
the National Association of Insurance Commissioners' (NAIC) Regulatory
Re-engineering Task Force, the Electronic Commerce & Regulation Working
Group, and the Improvements in State-Based Systems Subgroup of the Speed to
Market Working Group. Thank you for inviting me to testify regarding the efforts
of Ohio and other State insurance regulators, in our own States and through our
work as members of the NAIC, to implement the Gramm- Leach-Bliley Act (GLBA) and
modernize State insurance regulation. I am especially pleased to be here because
Ohio is a leading State in modernizing our regulatory system to fully meet the
expectations of insurance consumers and the financial services industry. Mr.
Chairman and members of the Committee, I thank you for your leadership in
working to enact GLBA in the face of changing consumer demands and a financial
services industry marked by globalization, convergence, consolidation, and
technological innovation. I join my colleagues in thanking you and this
committee for your support of functional regulation of insurance by the States
when enacting GLBA, for your continued support of State insurance regulation,
and for your support of our efforts to make real progress in our regulatory
modernization initiatives. During the Subcommittee's hearing on July 20, 2000,
Chairman Oxley noted that insurance commissioners, through their "Statement of
Intent", "have demonstrated now that they can "talk the talk"; if they can also
"walk the walk", then insurance consumers and producers can fully benefit from
uniformity without the need for a new federal system." Chairman Oxley also
requested an update "to assess what progress has been made and whether there is
a sufficient continuing commitment to uniformity." Further, Chairman Oxley "hope
d that the NAIC working groups would not only be able to come up with specific
proposals for achieving their goals, but to attach specific time frames to
implement those proposals in the 50 States." I am excited to report that State
insurance regulators remain strongly committed to our modernization initiatives
with unprecedented consensus, and after a series of meetings leading to our most
recent National Meeting, we have accomplished just what you had hoped to
see--specific proposals with specific time frames. I applaud the outstanding
leadership of NAIC President George Nichols over the past 1 0 months and the
intense work and commitment of each State insurance commissioner as we have
moved forward on each of our initiatives. Today, I would like to make three
points about where State regulators stand in implementing GLBA and achieving our
modernization goals - - First, the NAIC and State insurance regulators are on
track to implement all provisions of GLBA, and move beyond its requirements with
our own plan to achieve national uniformity and efficiency for agent licensing.
- Second, consistent with the "Statement of Intent--The Future of Insurance
Regulation" signed by all state Insurance Commissioners in March of this year,
the NAIC and State regulators are working with the insurance industry and
consumers on several fronts to develop specific programs with specific time
frames for implementation that will substantially improve the insurance
supervision process while creating regulatory efficiencies and reducing costs
for insurance companies and agents. - Third, I am proud to report that our
experience in Ohio provides a good example of the substantial progress being
made toward modernizing State insurance regulation. State Regulators Are on
Track Implementing GILBA At the Subcommittee's hearing on July 20, 2000, NAIC
President George Nichols gave a detailed summary of the steps being taken by
NAIC and State regulators to implement GLBA. He concluded: "The NAIC and State
insurance regulators are well on the way to implementing the provisions of GLBA
as intended by Congress." His statement remains true. The NAIC completed several
additional steps of our GLBA implementation at meetings held in Kansas City and
Dallas after President Nichols testified. My testimony today provides an update
concerning State regulatory efforts to implement the three basic GLBA mandates
identified by President Nichols - a)Coordinating and cooperating with Federal
functional regulatory agencies that supervise banks and securities firms;
b)Issuing privacy rules to protect the non-public financial information given by
consumers to insurance providers; and c)Establishing a national licensing system
for insurance agents and brokers in order to avoid the creation of the National
Association of Registered Agents and Brokers (NARAB). I will also update you on
two additional areas - national treatment of insurers and speeding insurance
products to market - where State regulators are moving beyond the requirements
of GLBA to modernize our regulatory system. Cooperating with Federal Regulators
under GLBA The NAIC continues to believe that establishing sound working
relationships with Federal regulators is absolutely essential for State
insurance departments under GLBA. Long-standing efforts to work closely with our
Federal counterparts are now consolidated under the NAIC's Coordinating with
Federal Regulators Working Group, which has been given broad responsibility to
stimulate cooperation at all levels. The NAIC's first priority for establishing
regulatory cooperation is to negotiate and sign written agreements between
Federal and State agencies laying out the ground rules for sharing information
and keeping it confidential when necessary. When signed by individual State
insurance departments and Federal agencies, these comprehensive agreements will
permit information to be shared regarding financial condition, market conduct,
and regulatory enforcement matters. At present, NAIC is negotiating model
regulatory cooperation agreements with Federal banking agencies as follows -
Federal Reserve Board - After four months of joint effort, NAIC has recently
received the latest version of a draft agreement from the Federal Reserve staff.
This agreement was distributed last week to members of the Coordinating with
Federal Regulators Working Group for review and comment. We expect to reach
final agreement on a model by the end of the year. Office of Thrift Supervision
- NAIC approved a comprehensive model regulatory agreement with OTS in June of
this year. So far, the agreement has been signed by 23 States. This number will
rise as more States direct their attention to completing Federal cooperation
agreements. Comptroller of the Currency - The OCC says it will soon deliver to
NAIC a comprehensive draft agreement based upon the OTS model. When NAIC
receives it, we will distribute it to Working Group members for review and
comment. Currently, 28 States have signed a more narrow consumer complaint
sharing agreement with OCC that was approved by NAIC in 1999. Federal Deposit
Insurance Corporation - FDIC is working on a draft agreement, and will be
sending it to NAIC in the near future. The second priority for effective
cooperation is to establish personal contacts at Federal agencies that will
foster open communication, mutual understanding, and practical cooperation on
monitoring and enforcement matters. The process of establishing such personal
contacts between State and Federal regulators is going very well. While we have
good initial working relationships with all the banking regulators, our contacts
with the Federal Reserve and OCC are the most advanced due to the immediate
demands of handling the Citigroup merger and increased insurance activities by
national banks. Relations with the OCC are a good example of how we are
proceeding. During the past year, the Coordinating with Federal Regulators
Working Group conducted a series of day-long meetings with senior OCC
supervision officials and State insurance experts to exchange views and explore
general supervision methods. Now, relations are moving forward to resolving the
important details of developing examination procedures that address proper
supervision of insurance activities by national banks. Through these efforts and
continue cooperation and communication, we expect to develop an efficient and
effective framework for implementing functional regulation as required by GLBA.
We hope to avoid Federal preemption of State insurance laws wherever possible.
NAIC expects this natural evolution from general policy discussions to
coordinating supervision details will serve as the model for establishing sound
working relationships with each of the Federal banking agencies during the
coming year. Meeting GLBA Consumer Privacy Requirements Members of the NAIC have
been discussing and addressing the privacy of personal information, including
health information, for more than 20 years. In 1980, the NAIC adopted the
Insurance Information and Privacy Protection Model Act, which generally requires
insurers to receive authorization from individuals ("opt- in") to disclose
personal information. In September 1998, NAIC adopted the Health
Information Privacy Model Act because of the special issues surrounding
health information. This model treats personal health information as a different
type of information that receives a higher level of privacy protection. NAIC
records indicate that 17 States have adopted all or part of the 1980 model,
while the 1998 health model has not yet been adopted by any State. The NAIC
believes State privacy regulations based upon the 1980 and 1998 NAIC models will
exceed GLBA requirements, which means they will remain in force under Section
507 of that law. To meet the recent challenge of specific GLBA privacy
requirements, the NAIC's Privacy Issues Working Group moved swiftly to construct
model insurance consumer privacy regulations that will serve as guidance for
States that do not presently have regulations satisfying the Title V privacy
provisions in GLBA. The purpose of these regulations is to help State insurance
authorities Comply with the minimum requirements of GLBA quickly while State
Insurance Commissioners consider whether additional privacy protections are
needed across-the-board for all consumers of financial services, including
insurance. After six months of public comment and hearings on four separate
drafts, the Working Group approved a final model privacy regulation last week at
the NAIC's Dallas National Meeting. Upon approval by the full NAIC membership,
which is expected during the next month, this model will move to the States for
consideration. States adopting this model will be assured that they meet the
minimum requirements of GLBA. In drafting the model regulation, the Working
Group sought to strike a good overall balance between achieving uniformity with
Federal privacy rules and adequately protecting personal information more
commonly associated with insurance products. The NAIC model also tracks the
November 13, 2000, effective date and July 1, 2001, compliance deadline set
forth in the Federal regulations. Some departures from the Federal rules were
necessary to reflect the special nature of the insurance business and its impact
on consumers 1.In the NAIC model regulation, "consumers" include not only
individuals who have a direct relationship with an insurer, but also other
individuals such as claimants, beneficiaries, and persons entitled to coverage
under group plans, employee benefit plans, and workers' compensation plans.
2.Because insurance providers typically collect much greater amounts of health
information than banks, the NAIC model includes provisions that protect personal
health information. The health provisions of the model regulation give health
information a higher level of privacy protection than financial information
receives under GLBA. In general, insurers are prohibited from sharing protected
health information with any other party - affiliate or non-affiliate - without
the express consent of the consumer to which the information applies (opt in).
The 1980 NAIC Model adopted by 17 states contains this same general rule, and
therefore, insurers in those states are already complying with these provisions.
Finally, to promote uniformity and implementation of privacy protections, the
health provisions of the draft model regulation will not apply to insurers who
are in compliance with the health information privacy
regulations promulgated by the Department of Health and Human Services (HHS)
pursuant to the Health Insurance Portability and Accountability Act (HIPAA).
Satisfying the NARAB Provisions in GLBA Following passage of GLBA, the NAIC
moved quickly to amend its Producer Licensing Model Act to comply fully with the
NARAB provisions in GLBA, and earlier this month, the NAIC launched a pilot of
the National Insurance Producer Registry (NIPR). The model act is the vehicle
for States to satisfy the GLBA statutory requirements because it fully
implements the requirements for licensing reciprocity and uniformity among
States. Adoption of the model by a majority of States by November 2002 will
assure that NARAB will not be created. Although our immediate goal is minimum
compliance with GLBA, our ultimate goal is for all 50 States to be operating
under a national system of unified standards and procedures. The NAIC is taking
several additional steps to improve agent licensing. In partnership with the
National Insurance Producer Registry (NIPR), a non-profit affiliate of the NAIC,
we have been aggressively investing over the past three years in modernizing our
technical infrastructure to develop a more centralized producer licensing
processing center. As stated previously, earlier this month, NIPR began a pilot
project with four states participating, including Ohio, and we expect to have
all states operational in 2001. Through NIPR, non-resident agents will be
eligible to receive a license on a reciprocal basis within 24 hours of
submitting an electronic application. At present, the NAIC maintains a
regulatory network and centralized database of 2.6 million of the Nation's 3
million producers. This information is available to regulators and insurance
companies over the Internet, and is updated daily by automated processes at the
State insurance departments. Currently, 32 States are online with the Producer
Database and the target is to have all 50 States contributing to PDB between
December 2000 and June 2001. Because PDB is a mirror of the State licensing
database, NIPR is creating a single system to automatically process
appointments, terminations, and uniform non- resident license applications on
behalf of individual State insurance departments against data in PDB within 24
hours of receiving the electronic data from an insurance company or producer.
Approximately 1 1 0,000 producer appointments and terminations are being
processed by 24 States through NIPR monthly right now, and we expect to have the
entire system operational and all 50 States participating in 2001. The next key
step in this process will be the implementation of a single electronic licensing
application. These system improvements will bring about regulatory efficiencies
that far exceed the expectations in NARAB and set the stage for national
uniformity. Going Beyond GLBA and Modernizing Regulation- National Treatment of
Insurers One key area where State regulators are moving beyond the requirements
of GLBA is national treatment of insurers doing business in multiple
jurisdictions. This year, the NAIC established the National Treatment of
Companies Working Group, and gave it responsibility for identifying regulatory
procedures that will treat eligible insurance companies the same across the
Nation. One such procedure involves the licensing process for an insurer to
obtain a certificate of authority to conduct business in a State. Already, 29
states are participating in the NAIC's Uniform Certificate of Authority
Application (UCAA), and one more is in transition. The Working Group's goal is
to have all 50 states and the District of Columbia using the UCAA by December
2000. Another goal is standardizing the licensing review process. While the UCAA
provides a uniform application, the Working Group is looking to expand this
effort to also include standardized review criteria nationwide. NAIC plans to
develop a streamlined operating structure that would give certain companies
"national treatment" for regulatory procedures related to company licensing,
solvency monitoring, holding company supervision, approval of mergers and
acquisitions, market conduct reviews, and corporate re-organizations. At NAIC's
National Meeting in Dallas last week, the National Treatment of Companies
Working Group discussed these regulatory efficiency goals, and set forth a
timeline for achieving them in four progressive steps - 1.Obtain commitments
from all NAIC members to participate in the ALERT program, using the UCAA, by
December 2000, and to achieve active participation by all NAIC members by June
2001. ALERT stands for "Accelerated License Evaluation Review Techniques", a
program that streamlines regulation by promoting the single license application
process, including the application form and review timelines, which is accepted
in all participating States. 2.Develop "best practices" for reviewing
significant holding company transactions and company licensing applications by
December 2000 and June 2001, respectively, and encourage all States and the
District of Columbia to administer such reviews on a consistent and uniform
basis. 3.Implement the national treatment process through a memorandum agreement
between June 2001 and June 2002, and continue to examine whether additional
legislative action is need to fully implement the national treatment initiative.
4.Develop enabling State legislation, if necessary, to provide state insurance
regulators with the legal authority to implement a national treatment system by
June 2003. The Working Group also discussed possible legal options for
implementing national treatment. Using a model law, memorandum agreement,
interstate compact, and Federal involvement were all considered. The use of a
memorandum of understanding was considered to be an appropriate vehicle for
accomplishing the initial implementation of the national treatment process in
Goal 3. For the long-term, an interstate compact was considered as a possible
vehicle for implementing national treatment if necessary from a legal and
implementation standpoint. Speeding Up the Product Approval Process The Speed to
Market Working Group is responsible for identifying one-stop filing procedures
and a more efficient process for State regulatory approval of insurance products
marketed to consumers. State regulators recognize that under the current
50-state system, it takes far too long to introduce a new insurance product.
This is not good for consumers or the insurance industry. In Dallas, this
Working Group appointed two subgroups to focus its efforts on speeding up the
product approval process. The Coordinated Advertising, Rate, and Form Review
Authority (CARFRA) Subgroup will develop the details for single-point product
filing. CARFRA is a proposal that will assist insurance regulators in reviewing
and approving rate, form, and advertising filings by creating a new centralized
organization specifically tasked with that goal for participating States. It
will provide insurers with a single point of contact and uniform standards for
eligible products. For consumers, it will speed beneficial insurance products to
market while preserving high quality regulatory review and effective consumer
safeguards. At the Dallas national meeting, the Speed to Market Working Group
announced that a limited launch of CARFRA will occur within the first quarter of
2001, and assigned the subgroup the responsibility for developing the
operational procedures necessary to implement CARFRA. A second subgroup, the
Improvements in State-Based Systems Subgroup, which I chair, will evaluate
various suggestions for improving State-based systems. It will review a list of
suggestions that include, but are not limited to: - Implementation of the System
for Electronic Rate and Form Filings (SERFF) in all states. SERFF uses a
point-to-point electronic communication tool where filings are sent from
insurers over the Internet and routed to a State from a central server; -
Agreement on a uniform approach to filing exemptions for products sold to large
commercial policyholders; - Staffing and training of rate, form, and advertising
review units to ensure quality reviews and prompt turnaround time for filings; -
Elimination of any requirements that are not published in statutes, regulations,
bulletins or guidelines; - Evaluation of prior approval requirements and
movement toward market-based regulation; - Improvements to the Market Conduct
Examination process; and - Improvements in consumer education. The Speed to
Market Working Group tasked the Improvements in State-Based Systems Subgroup
with the responsibility for developing specific proposals by the December 2000
NAIC national meeting. The Working Group also heard comments from interested
parties during its meeting in Dallas. Representatives from consumer interests
and various sectors of the insurance industry provided input and guidance to
shape the CARFRA proposal and encourage improvements to State regulatory
processes. The Subgroups have planned a series of meetings during September and
October, and the entire working group plans to hold another meeting in November
2000. Facilitating the Use of E-Commerce The NAIC E-Commerce and Regulation
Working Group, which I chair, developed a resolution adopted by the NAIC earlier
this year endorsing the Uniform Electronic Transactions Act and issued a
self-assessment guide for use by the states to identify ten (1 0) potential
barriers to the use of e-commerce. Within the next few weeks, the Working Group
expects to adopt a Model Bulletin for use by the States to implement many of the
recommendations set forth in the self-assessment guide. The NAIC has been
progressive in its work to facilitate the use of e-commerce, recognizing that
both consumers and insurers want the cost savings and convenience of using the
internet to purchase insurance. Ohio is a Leader in Modernizing State Insurance
Regulation am proud to report that the State of Ohio has become a leader in
implementing the policies necessary to implement GLBA and modernize state
insurance regulation. In Ohio, we are committed to fostering a competitive
marketplace for the benefit of consumers and the insurance industry, and
focusing our regulatory resources in priority areas that add the most value to
our work of protecting Ohio consumers. Through our independent efforts and by
implementing the NAIC initiatives, we are seeing real progress as we continually
work to carry out these objectives. With respect to GLBA implementation, Ohio
currently has in place privacy laws that exceed the requirements of GLBA, and we
plan to introduce legislation in the near future to make minor procedural
changes to the law to fully comply with GLBA. We have also established good
working relationships with each of our Federal agency counterparts through
personal meetings involving regional heads of the respective Federal agencies.
In addition, Ohio participates on the NAIC team that regularly meets with
representatives of the Federal Reserve Board in Washington D.C. Most notably, in
the area of agent licensing, Ohio has led the country. Ohio was the first State
that enacted reciprocal licensing for non-resident agents, and therefore, was
the first State to comply with GLBA's NARAB provisions. In addition, last year,
Ohio implemented a state-of-the-art internet agent licensing system that is
regarded as one of the best in the country, if not the best. Using this system,
an agent can submit an application on-line, pay the application fee on-line,
complete the fingerprinting and background check using an electronic system,
schedule a test on-line, take the test using a state-of- the art system, receive
the exam results immediately after the test, walk out with a license if
successful, and obtain a company appointment on the same day using our internet
appointment process, all of which takes less than 7 days. Because of this work,
Ohio was selected to be one of the four pilot states for the National Insurance
Producer Registry, which was launched earlier this month. As stated previously,
NIPR will allow one- stop licensing for non-resident agents in all 50 States.
With regard to insurance regulatory modernization initiatives, Ohio is also a
leader. Just yesterday, I signed two regulatory bulletins that will allow 81 %
of all property and casualty insurance products to be submitted on "file and
use" basis. I plan to seek legislation that will move our product filing system
to a file and use system for all appropriate products and exempt certain
products and rates from the filing requirement altogether where appropriate. For
example, just yesterday, I signed a bulletin that exempted from the filing
requirements all Special Filings and Excess Rate Consent Filings. To support
these initiatives, Ohio was among the first - and was the fastest - to introduce
the NAIC-sponsored System for Electronic Rate and Form Filing (SERFF). SERFF
will be a vital tool for implementation of CARFRA and improving the filing and
approval process for products not selected for the CARFRA process. Ohio has
already received 165 property and casualty filings since March 2000, and we
believe the new web-based version of SERFF, scheduled for release in October
2000, will open the door to widespread use among the industry and all of the
States. As noted earlier in my testimony, as Director of Ohio Department of
Insurance, I chair the NAIC's E-Commerce and Regulation Working Group, the goal
of which is to facilitate the use of e- commerce, and the Improvements to
State-Based Systems Working Group, the goal of which is to improve the
State-based insurance product approval process. We look forward to the continued
positive impact these initiatives will have on our work to protect consumers
through an efficient and effective regulatory system. Congress Can Help Improve
State Regulation Improvements in several Federal laws affecting State insurance
regulation would help give us all the tools we need to meet the challenges of
the modem marketplace. During Congressional consideration of GLBA, the NAIC
suggested several amendments to Federal laws that would be useful. The primary
benefit of making the following changes to Federal laws is to achieve uniform
regulatory procedures and national enforcement quickly by using the existing
system of State regulation. The NAIC proposes that Congress - - Provide State
insurance regulators with access to the national criminal information database
(NCIC) through the NAIC or its affiliates for regulatory purposes and for
checking criminal histories as required by the Federal Insurance Fraud
Prevention Act. (18 USC 1033) - Grant Federal immunity from liability for NAIC
and NIPR database activities related to creating a national licensing and
enforcement system. - Protect the confidentiality of regulatory communications
among NAIC, State regulators, and Federal agencies. NAIC and its members will be
pleased to provide additional information and assist Congress in adopting
Federal legislation to achieve these goals. Conclusion - State Regulators Are
Meeting the GLBA and Modernization Challenge Working together through the NAIC,
Ohio and other State insurance regulators are well on the way to implementing
the provisions of GLBA as intended by Congress. More importantly, we have shown
real progress in our efforts to do far more than Congress or industry
representatives have asked us to do regarding uniformity, efficiency, and
modernization. We look forward to working with Congress, our Governors and
legislatures, and all other interested parties as we continue to develop and
implement the GLBA required regulations and legislation, and our State insurance
regulation modernization initiatives.
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