This statement is submitted on behalf of the members of The Council of Insurance Agents & Brokers ("The Council"). The Council is an incorporated national trade association, founded in 1913 as the National Association of Casualty and Surety Agents. The Council of Insurance Agents & Brokers represents 3,000 of the nation's largest commercial property and casualty insurance agencies and brokerage firms. Council members employ more than 120,000 people and annually place some 75 percent - more than $90 billion - of the commercial property/casualty insurance premiums in the United States. In addition, Council members specialize in a wide range of insurance products and risk management services for business, industry, government, and the public.

I am Robert A. Gleason Jr., Chairman and CEO of The Gleason Agency, Inc., in Johnstown, Pennsylvania. I serve as Secretary 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 brokers in the United States. We have offices in Pittsburgh, Harrisburg, Philadelphia; our corporate headquarters in Johnstown and we also have account executives in Allentown and Altoona. Our business 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.

The Council is appearing before you today to comment on the various proposals that this Committee is currently considering that would permit members of the banking, insurance, securities, and commercial entities to affiliate with one another. The Council thanks Chairman Leach for holding these hearings and asking us to testify.

As a general matter, The Council supports legislation designed to remove obstacles that otherwise prohibit members of the financial services industry from providing a full range of services. In order to accomplish this objective while at the same time protecting the interests of consumers and maintaining a consistent regulatory environment, The Council and its members believe that it is essential that each and every financial services provider be subject to the same regulatory controls for each of the activities in which it engages regardless of the institutional category in which that financial services provider may fall. For this reason, The Council supports functional regulation for all members of the financial and insurance industries -- the approach that is taken in several of the proposals currently pending before this Committee. In the insurance context, such an approach would provide that all insurance activities continue to be regulated at the state level. The Council, its members, and all of their agents, brokers, and employees are subject to the full array of state laws and regulations that govern the sale of insurance products. We believe that every other individual and entity that seeks to engage in the same business should be subject to the same governing standards. This would not only ensure a competitive regulatory environment but it also would protect the interests of consumers by leaving the regulation of the business of insurance to those who know it best: the state regulators who have had almost exclusive jurisdiction over the business of insurance for well over a century.

At the same time, financial "modernization" shouldn't affect only the interests of institutions affiliated with commercial banks. There is a growing need for measures designed to enhance the efficiency of state-licensed insurance producers who provide services to customers in multiple jurisdictions, while still preserving the states' rights to license, supervise and discipline those producers. This need stems from the superfluous and duplicative regulatory requirements now imposed on agents and brokers who seek to do business in more than one state. For this reason, The Council supports the creation of a national licensing authority, which would devise uniform licensing requirements based on existing state laws, through which agents and brokers could obtain multiple state licenses.

This statement is divided into three parts: Part I explains why we believe that the functional regulation of the insurance activities of everyone engaged in the business of insurance should be left to the states; Part II discusses the concomitant need for a uniform licensing mechanism through which insurance agents and brokers could apply for licenses to act as insurance producers in each of the states in which they would like to do business; and Part III outlines one approach to implementing such a mechanism.

I. Functional Regulation of the Business of Insurance Should be Left to the States

As an initial matter, this Committee should make it clear that every entity that engages in the underwriting or sale of insurance is bound by state law regulating that activity. Because no insurance licensing and regulatory scheme exists at the federal level, the only available regulators of the participants in the insurance industry are the states themselves. However, national banks appear to believe that they are exempt from at least some of the governing insurance regulations in states in which they are currently engaging in the business of insurance. Although the OCC has recognized that state laws generally apply to national bank sales of insurance, it also has emphasized that national banks need not comply with state laws that "interfere" with their activities. Without the creation of a federal regulatory authority or a reaffirmation of the absolute right of states to regulate all insurance activity, the scope of this "exemption" will remain unsettled and national banks may be free to engage in the business of insurance without clear rules governing their activities.

Any such result would be particularly problematic because permitting some entities -- such as national banks -- to be protected from state regulation in this area, while subjecting all other participants in the business of insurance to the full panoply of state insurance regulation, would create a lopsided marketing environment favoring national bank efforts to make in-roads into the insurance agency arena. Reaffirmation of the right of states to regulate the insurance business is thus necessary to avoid this result as well as to ensure that all entities that engage in the business of insurance are subject to effective consumer protection requirements and to ensure that the insurance-buying public has consistent assurances of quality. Given the sophisticated insurance licensing and regulatory structure developed exclusively at the state level over the past century-plus, it is apparent that such interests are best protected at the state level.

Moreover, any such reaffirmation would not be new or radical. To the contrary, it merely would build upon and clarify a federal policy that has long been in place. Indeed, up until 1944, it was universally understood by everyone (including Congress) that Congress had no constitutional authority to regulate the business of insurance. This changed with a single Supreme Court decision issued that year. Congress responded immediately by enacting the McCarran-Ferguson Act, which "restore[d] the supremacy of the states in the realm of insurance regulation."^/

McCarran's statement of federal policy could not be more clear: "The business of insurance, and every person engaged therein, shall be subject to the laws of the several states which relate to the regulation or taxation of such business."^2/ Given the states' historical expertise in the realm of insurance regulation and the absence of any such expertise at the federal level, there does not appear to be any compelling reason for abandoning this traditional policy approach.

II. The Need for a Uniform Licensing Mechanism

Although, as a general matter, The Council strongly supports continued state regulation of the business of insurance, it also believes that the needlessly duplicative regulatory requirements currently imposed on agents and brokers who seek to do business in more than one state need to be drastically reduced. A 1992 survey of our members revealed that complying with multi-state agent and broker licensing requirements is increasingly difficult and time-consuming. This trend alarms us, particularly in an economic climate that demands better and more efficient service to our clients. We believe that the inefficiencies of the licensing process are diverting valuable resources that should be directed towards providing better service to the customer.

To get a better grip on the costs involved in licensing, which includes administrative expenses as well as fees, we conducted a follow-up survey of our members and asked them to estimate how much they spend a year on licensing. The responses to these questions were, by any measure, astounding. Some of our members reported spending more than $500,000 on administrative costs associated with licensing -- a figure that excludes the licensing fees themselves. Even by way of a rough extrapolation, it is easy to see that the costs of the current system are enormous. At a time when we are all trying desperately to reduce the cost of insurance, these figures should concern policymakers. Not only does the duplication of effort in each state add to our costs, but it also adds to the administrative overhead of every insurance department in the country -- resources that neither we nor the state departments have to waste. The problems that our members have with licensing have nothing to do with standards of professionalism. In all candor, the training and skills necessary to become a licensed insurance agent or broker are not particularly high in comparison to many other areas of professional endeavor. The procedural hoops through which successful multi-state agents and brokers must jump, however, are considerable.

Three years ago, our association created a licensing division as a service to our members who wished to outsource much of the administrative aspects of agent/broker licensing. Currently, our group assists in the procurement of licenses for more than 160 firms - handling approximately 5,000 separate licenses and 5,000 company appointments. It is not unusual for a single insurance producer to be required to obtain 100 licenses or more - particularly if that agent or broker is engaged in forming national insurance programs for specific lines of insurance. Virtually every firm in the membership of our organization offers such national programs. Each of the licenses has its own unique requirements and renewal periods.

The tremendous magnitude of the costs involved stems from the fact that agents and brokers must obtain a variety of credentials in addition to separate licenses to act as insurance agents/brokers in each state in which they want to do business. For example, under current law in most states, independent agents must file for separate agent and broker licenses. Different licenses are often required to sell different lines of insurance. Notification documents (also referred to as "licenses") must be filed in many instances for each company with which the agent does business. This process is then repeated in each state in which they conduct business. Each state has different application forms, statutory requirements (such as bonds, countersignatures, references, fees, and even in a few isolated cases, required personal appearances to be finger-printed), and different expiration periods for the licenses. Each state has its own requirements for company appointments and/or corporate licensing in addition to individual licensing. The continuing education laws are all different and each state has its own forms and regulations, including applications for courses, certificates of attendance, and hours required (anywhere from 6 to 40 hours annually). Credits are earned for mere attendance at continuing education classes, not for passing any examinations.

For many years, the National Association of Insurance Commissioners (NAIC) has formally urged states to be consistent in their licensing practices. In 1991, the NAIC began development of a consolidated system for tracking agent and broker activities. If proper protections are assured, the database could facilitate regulators' efforts in protecting consumers from fraudulent activity. The creation of this system was the culmination of over 15 years of discussions within the NAIC. The NAIC's Producer Information Network promises to allow electronic interface for multi-state applications. This is a big step forward, but the application process accounts for only a part of the multi-state licensing hoops through which insurance agents and brokers must jump. For all the commendable efforts by the NAIC as an organization, the political will does not exist on a state-by-state basis to streamline the process and eliminate protectionist statutes and regulations. In fact, it may be unrealistic and unfair to expect the states to unilaterally treat out-of-state agents and brokers fairly in the absence of a national framework for licensing.

The most unproductive state licensing-related laws have to do with residency. Perhaps the most egregious are state countersignature laws, which require an agent or broker servicing the needs of an out-of-state client to have the policy "countersigned" by a resident agent - and, in some cases, to hand over half of the commission or fee income to that countersigning resident. Some states don't have countersignature statutes, but they have "retaliatory" laws against the agents residing in states that do have countersignature regulations. The Council believes that countersignature laws are anachronistic. These statutes also are unfriendly to consumers because many agents are sharing in commission or fee income without adding value to the insurance product itself. Other states require an out-of-state agent or broker to run advertisements in local newspapers to announce their intent to conduct business in their state. Another state doesn't allow agencies to do business unless the agency fully incorporates under its laws. The list goes on and on.

Given the national and increasingly global nature of complex insurance transactions, we believe that many of these state licensing statutes are de facto protectionism. The Council is an active participant in two international associations - one based in Europe, the other based in South America - that bring together brokers from around the world. As we attempt to broaden international opportunities for our own members, we are constantly reminded by our international colleagues that U.S. licensure laws are a considerable trade barrier of our own.

During the past two decades, the number of independent insurance agencies in the nation has fallen over 50 percent, from over 90,000 in 1975 to less than 40,000 independent agencies today. More significantly, the big firms among the survivors are getting bigger, and the small firms are occupying less and less of the marketplace. These numbers have less to do with agents going out of business than they do with consolidation. The volume of interstate insurance transactions has risen proportionately -- if not exponentially -- with this consolidation of agency and brokerage activity. But during these years, steps have not been taken to relieve the needless duplication. As explained in more detail to follow, The Council believes that the time to address these issues is long overdue, but the necessity is particularly evident when viewed against a backdrop of a world in which all members of the financial services industry are free to affiliate with one another. The affiliation proposals that this Committee is currently considering therefore present a unique opportunity to address these concerns and at the same time to alleviate what would otherwise be one of the largest impediments to permitting the modernization of the financial services industry, a modernization that this Committee is seeking to foster through its consideration of the affiliation proposals.

III. An Outline for Implementing a Uniform Licensing Mechanism

The Council believes that the creation of a uniform licensing mechanism administered through a joint state and federal effort -- the National Association of Registered Agents and Brokers (NARAB) -- is the best means through which to standardize the licensing process and to thereby end the inefficient and unnecessary licensing duplication that to date has only hindered, rather than helped, commerce. This section outlines the mechanics of our NARAB proposal and explains how such a body would address the concerns discussed at length previously.

First, we believe that the states should be given the initial opportunity to create their own uniform licensing regime. We believe that providing such an opportunity is appropriate in recognition of the continued primacy of state regulation of all aspects of the business of insurance. Indeed, by supporting the NARAB proposal, we are not advocating the displacement of state law, only the standardization of the licensing components of state law. We also believe that many state regulators strongly support such uniformity. They have the requisite political desire. However, the logistical impediments to negotiating a nationwide compact among fifty states are obviously onerous. Because of this practical limitation, we believe that the opportunity for a majority of the states to create a uniform licensing regime should be limited to three years. As we have argued at length, the need for reducing the duplicative licensing qualification and application requirements is an intense one and, if the political obstacles to a state-created system prove insurmountable, the initiative should be imposed by the body best able to broker the necessary compromises -- the United States Congress. Specifically, states would be deemed to have established the necessary uniformity if a majority of them:

• have established uniform criteria regarding the integrity, personal qualifications, education, training and experience of licensed insurance producers;
• have established uniform continuing education requirements for licensed producers; and
• do not impose any requirement upon any licensed producer that has the effect of limiting or conditioning that producer's activities because of its residence or place of operations.

Second, if it should become necessary for Congress to impose a uniform licensing regime, our association believes that the structure should be a self-regulatory and purely voluntary non-profit organization that would operate under the auspices of a federal commission such as the one proposed in Congresswoman Roukema's draft affiliations bill. We believe that Congresswoman Roukema's suggestion that this commission be composed of regulators familiar with each of the aspects of the financial services industry is a sound one. We suggest that this oversight commission should include one state insurance commissioner to be selected by the NAIC, and one representative from each of the following federal agencies: the Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. While we support the commission proposed by Congresswoman Roukema, we recognize that there could be several other viable venues of oversight.

Third, The Council believes that the purpose of the actual licensing organization should be to provide a mechanism by which state-licensed insurance producers may more efficiently provide multi-state services to policyholders, while preserving the right of states to license, supervise and discipline insurance producers. To this end, agents and brokers who opt to become members of NARAB would still have to obtain licenses to conduct business on a state-by-state basis and would still have to pay the fees mandated by each state to receive those licenses. However, the licenses would be obtained from and the fees would be paid to NARAB, which would then ensure that appropriate licensing applications are filed with, and the requisite fees paid to, each state from which NARAB members seek a license. In addition, NARAB members would be exempt from state countersignature laws, duplicative continuing education requirements, and residency requirements. NARAB would also be empowered to draft additional regulations as necessary under their general rule-making authority. States would then be prohibited from imposing any requirement upon a member of NARAB that is different than the criteria imposed by NARAB. The Commission would be empowered to define by regulation those state laws which have been preempted by the authorizing legislation. NARAB would be fully subject to the supervision of the Commission, but they would be funded solely through membership fees paid by agents and brokers who opt to become NARAB members. The federal government would not fund the organization in any way.

Under The Council's proposal, all state-licensed agents and brokers would be eligible for membership, but NARAB would have the ability to establish other reasonable membership criteria. Smaller agencies may not be unfairly limited in their access. NARAB would have the power to establish different categories of membership with separate membership criteria geared to the particular level of education, training and experience required by different agent and broker duties. Membership would be renewed annually, and NARAB would have the authority to bring disciplinary actions to deny, suspend, revoke or decline renewal of membership. The membership criteria for any NARAB member must meet and exceed the highest professional requirements that currently exist among the states. NARAB would levy and collect assessments from members to cover administrative expenses, and would be run by a seven-member board representing the producers who are members.

NARAB would be given the authority to:

• Create a clearinghouse for processing insurance producer licenses, which would avoid duplication of paperwork and efforts state-by-state;
• Issue uniform insurance producer applications and renewal applications that may be used to apply for the issuance or renewal of state licenses, while preserving the ability of each state to impose some conditions on the issuance or renewal of a license;
• Develop uniform continuing education standards and/or establish a reciprocity process for continuing education credits;
• Create a national licensing exam process; and
• Utilize a national database for the collection of regulatory information concerning the activities of insurance producers.

We believe that the governing board of NARAB should be composed of at least seven members, and at least 50 percent of the board should be composed of state insurance commissioners.

In reviewing this proposal, it is important to recognize the extent to which the states' regulatory control of the business of insurance will remain undisturbed. In the licensing context, the creation of a NARAB-type structure would not preempt state licensing fees in any way so long as those fees do not discriminate against NARAB members relative to non-NARAB members. States would be the actual net beneficiaries of NARAB creation because they would collect fees without having to perform the administrative function of licensing. Moreover, outside of the licensing context, NARAB would not affect any of the state laws and regulations that govern the business of insurance including, for example, those that govern the manner in which insurance must be solicited and sold, those that dictate the requisite contents of different categories of insurance policies, and those that bear more directly on insurer qualifications and licensure to do business. The overriding objective of NARAB would be to provide a uniform licensing scheme that ensures that high qualification standards and integrity are pervasive in the industry.

If a NARAB-type regime were put into place, state laws would not be preempted except in the following situations:

• No state could take action against a producer solely because he or she was a member of NARAB.
• No state could impose any requirements on NARAB members that have the effect of limiting activities because of residency or place of operations including any requirement that a licensed producer be a resident of a particular state or comply with the conditions of a countersignature law.
• No state could impose a requirement upon a NARAB member that deviates from a criterion for NARAB membership.
• No state could implement the procedures of its producer licensing system in a manner that is inconsistent with NARAB authority.

As might be apparent, NARAB is modeled on the National Association of Securities Dealers ("NASD"), an organization that was established pursuant to the Securities and Exchange Act of 1934. The NASD has primary regulatory responsibility for the day-to-day functioning of the over-the-counter securities market and for disciplining members in cases of misconduct. It also has the authority to inspect members and examine their books and records, as well as to prohibit fraudulent, misleading, deceptive and false advertising. For major transgressions, NASD has become a mechanism for feeding information about securities dealers to the SEC, which has the main responsibility for taking enforcement action.

Clearly, there are limitations to the parallels that may be drawn between the insurance and securities industries and between insurance producers and securities dealers. On the other hand, the references may be instructive. Since 1934, Congress, the SEC, the NASD, state regulators and private industry groups have worked together to identify and correct weaknesses in the securities markets. Through the creation and operation of NARAB, a similar arrangement could be developed for the insurance arena. Moreover, because NARAB would have the authority to set the membership criteria for the personal qualifications, education, training, and experience of its members and because those criteria may be focused and differentiated based on the particular duties that different types of agents and brokers perform, the creation of NARAB could help better assure policyholders that the agents and brokers with whom they may conduct business are well-qualified for the job.

The Council urges this Committee to both reaffirm that the primary regulation of the business of insurance for all entities who engage in that business should be left with the states. At the same time, The Council asks that this Committee take steps to assure that such regulation not unnecessarily result in fragmented and onerous regulation which benefits neither consumers nor agents and brokers. Such uniformity fostered by NARAB would be beneficial for many of the affiliated entities that any financial services modernization legislation would be designed to foster - by creating a body that would be responsible for establishing and operating a uniform licensing regime.

The Council appreciates the opportunity to testify and present these views, and would be happy to provide any assistance that any members of this Committee believes would be beneficial as the Committee moves forward with its consideration of these issues.