The Regulator 1

Letters to Editor ............................................ 15

The 2000 Market Conduct School ............... 19

Register for New Orleans CDS .................... 23

JANUARY 2000

REGULATORREGULATOR

TH

E

I N S U R A N C E R E G U L A T O R Y E X A M I N E R S S O C I E T Y

What every regulator should knowabout the 1999 financial reform law

also: other REGULATOR features

Banks and Insurance ...................... 3Privacy ............................................. 4Functional Regulation .................... 6Licensing ......................................... 8Reorganizations .............................. 9Foreign Regulator Rights ............. 10Fraud .............................................. 12A Contrary View ............................ 13

“Change is the constant signal for rebirth, the egg of the phoenix.”— Christina Baldwin

The bill formerly known as HR 10 is now a reality. The 144-page document took hundreds of authors more than two decadesto produce. Contrast this with the two weeks it took ThomasJefferson—working alone—to draft the Declaration of Inde-pendence and you’ll understand that either (a) we live inextremely complex times or (b) our democratic process isseriously flawed.

Although no thinking person is likely to confuse theGramm-Leach-Bliley Act (a.k.a, S900) with the Declaration ofIndependence, this new law is sure to have a major impact onall of us. The Act, which takes effect March 2000, breaks downthe barriers that have separated insurance companies, banks andsecurities firms since the Great Depression. In addition, S900 intro-duces scores of new rules and regulations, ranging from the sublime(prohibits “tie-in” sales) to the ridiculous (permits mutual insurers toredomesticate if their home states fail to enact mutual holding com-pany laws).

For this issue of THE REGULATOR, we wanted to focus on thosesections of S900 that would have the greatest impact on IRES mem-bers. We came to the conclusion that long, tedious articles outliningthe major provisions of the law should be avoided. Instead we choseto break down the Act into palatable chunks and then sought out thebest people to explain the core elements of this complicated law.

Some head-in-the-sand regulators may believe that becauseGramm-Leach-Bliley preserves functional regulation it’s business asusual in this nation’s insurance departments. Nothing could befurther from the truth. In the years ahead, state insurance depart-ments will be under the gun to create a more uniform licensingsystem; to approve new, hybrid insurance products; to adapt andenforce privacy statutes; and ultimately to demonstrate that stateregulation still makes sense in a global financial environment.

We hope our authors provide you with some of the tools to beginthis process.

A SPECIAL REPORT

by Wayne CotterEDITOR

Spotlight on the 1999Federal FinancialServices Reform Act

2 The Regulator

COMMITTEE CHAIRS

Executive CommitteePresident ................ Angela K. Ford, NC .............. 919-733-4935President-elect ........ Stephen Martuscello, NY ....... 518-474-9838Vice President ......... Jann Goodpaster, OR ........... 503-246-3715Secretary ............... Paul J. Bicica, VT .................. 802-828-4884Treasurer ............... R. Weldon Hazlewood .......... 804-371-9150Past president ......... Gary W. Meyer, MO ............ 816-889-6207At Large ................. Christel Szczesniak, CO ........ 303-894-7499

IRES Officers & Board of Directors

RATES & FORMS: PROPERTY-CASUALTY

Polly Chan, CIE, California

RATES & FORMS: LIFE-HEALTH

Maryellen Baker, AIE, OHIO

ENFORCEMENT & COMPLIANCE

Susan Ezalarab, CIE, Wisconsin

IRES Section Chairs

Paul J. Bicica, CIE, VermontErnest E. Branch, CIE, LouisianaGary L. Domer, CIE, unaffiliatedPamela Donnewald, CIE, IllinoisGary D. Evans, DelawareDudley B. Ewen, AIE, MarylandAngela K. Ford, CIE, North CarolinaJoseph Fritsch, CIE, New YorkJann Goodpaster, CIE, OregonR. Weldon Hazlewood, CIE, VirginiaRichard T. Kelly, CIE, NevadaScott Laird, TexasHoward L. Magill, CIE, Tennessee

Ed Mailen, CIE, KansasStephen M. Martuscello, CIE, New YorkGary W. Meyer, CIE, MissouriGerald A. Milsky, CIE, VirginiaMichelle M. Muirhead, CIE, NebraskaBruce R. Ramge, CIE, NebraskaJohn H. Reimer, CIE, KansasShirley A. Robertson, AIE, NevadaCynthia E. Smith-Campbell, CIE, MissouriChristel L. Szczesniak, CIE, ColoradoNancy S. Thomas, CIE, DelawareTommy Thompson, CIE, OklahomaShirley H. Williams, CIE, North Carolina

Board of Directors

LEGAL COUNSEL: Craft-Fridkin-Rhyne, Kansas City

MARKET CONDUCT

Kirk Yeager, CIE, Colorado

FINANCIAL

Donald Carbone, CIE, New York

CONSUMER SERVICES & COMPLAINT HANDLING

Paul Bicica, CIE, Vermont

PRODUCER LICENSING & CONTINUING ED

Laurna Landphier, Wisconsin

©2000, All Rights Reserved, by the Insurance Regulatory

Examiners Society

Opinions expressed in this publication are theauthors’ and do not necessarily represent theopinions of the authors’ employers or IRES.

130 N. Cherry, Suite 202 Olathe, KS 66061913-768-4700 FAX 913-768-4900IRES Continuing Education Line: 913-768-NICE

IRES PUBLICATIONS COMMITTEE

Paul J. Bicica, CIE, Vermont, CHAIRWayne Cotter, CIE, New York • Frank Seidel, CIE, Pennsylvania

Scott Laird, Texas • Kathleen McQueen, New York• Jann Goodpaster, CIE, Oregon • Gerald A. Milsky, CIE, Virginia

From the President

www.go-ires.org

Executive ............................. Angela Ford, NC, chair

Accreditation & Ethics .......... Jann Goodpaster, OR, chair

Meetings & Elections ............ Stephen Martuscello, NY, chair

Publications ......................... Paul Bicica, VT, chair

Education ............................ Christel Szczesniak, CO, chair

Membership ........................ Gary W. Meyer, MO, chair

Finance ............................... R. Weldon Hazlewood, VA, chair

Wayne Cotter, Editor

The Regulator

THE REGULATOR is published every other month by the

INSURANCE REGULATORY

EXAMINERS SOCIETY

quepasa@sprintmail.com

David V. Chartrand, executive secretarySusan Morrison, office managerJoy Moore, continuing ed coordinator

Year 2000 CDS ChairMichelle Muirhead, CIE, Nebraska

IRES PRESIDENT

Just when you thought it was safe. . .

I was looking forward to a peacefulholiday season and the new year whensomebody went forth and passed S900.This passage should really make theYear 2000 a very interesting one. It’salready generated more work for me in1999 than I planned to do in 2000.

Most of us (who have been in state regulation for aperiod of time) are accustomed to the status quo. Withthe passage of S900, we find ourselves questioning allaspects of how we do our jobs and the need for possiblechanges. We live in an age wherein efficiency is one ofthe most critical components of any operation. Quite afew of us have participated in the various regulatory re-engineering projects and have had our minds opened tothe fact that things will change.

Gene Reed (Delaware) and Sam Meyer (SouthDakota) are serving as co-chairs of the NAIC’s AgentLicensing Working Group. I think that we should givethese guys a pat on the back. After all, they’ve put upwith comments like: “Not in my state!”, “It will neverhappen.”, “You must be joking.” from quite a few of us(myself included.) These guys maintained calm, placeda smile on their faces, and politely advised us that“We’ve got to change.” I’m sure that they used stron-ger “silent” comments about some of us. Come to thinkof it, these two probably knew that it would take theboth of them to handle all of us!

We would be remiss if we assumed that licensure ofagents would be the only part of the regulatory functionto change. As we head down the S900 road, I believethat we will discuss all aspects of regulation. Hence, tothe Gene Reeds and Sam Meyers that are heading upother working groups, we offer our humble apologiesin advance!

Until the next issue,Happy New Year.

The Regulator 3

Dennis W. Toivonen

continued on page 20

What regulators should know: Banks and insurance

Dennis W. Toivonen is Senior Vice Presidentwith Wachovia Bank, N.A. He also has servedas chief deputy of the Illinois Department ofInsurance and general counsel for the OhioDepartment of Insurance.

Bank/Financial Holding Company PowersFirst and foremost, the Gramm-Leach-Bliley Act gives

banking organizations clear legal authority to underwriteand solicit all lines of insurance in all 50 states, howeverunderwriting of insurance can only be carried out by anewly established entity called a “Financial HoldingCompany” (FHC) and its subsidiaries. The Act givesbanking organizations flexibility to choose what type ofcorporate entity is appropriate for marketing insurance.Agency activities can be carried out by banking subsidiar-ies and subsidiaries of an FHC.

Financial Holding CompaniesWhat is a Financial Holding Company? A “quali-

fied” FHC may acquire or establish companies thatunderwrite, broker and sell insurance and annuities.There are no restrictions on the types of insurance thatan FHC subsidiary can underwrite or market. Gener-ally speaking, a “qualified” FHC is defined as an entitywhose subsidiary depository institutions have had“satisfactory ratings” or better on their most recentCommunity Reinvestment Act (CRA) examinations.

In addition, FHC depository institutions must be“well-managed” and “well-capitalized.” If an FHCdepository institution falls out of CRA compliance, theFHC can continue with current financial activities, butno new acquisitions or authorities are permitted. If anFHC depository institution ceases to be “well-man-aged” or “well-capitalized,” the FHC will be requiredto cure the problem. If the FHC fails to remedy theproblem, the Federal Reserve Board can order theorganization to cease financial activities.

National Banks — SalesCurrent law limits national bank insurance sales to

agencies established in locations with populations ofless than 5,000 (under §92 of the National Bank Act).The Act also provides that a “qualified” national bankmay sell all lines of insurance and annuities through asubsidiary. National banks now can choose a §92agency or incorporate an agency pursuant to the Actthat is unencumbered by various OCC regulatoryrulings (e.g., First Union). There may be certainunintended legal advantages inherent in using §92 ofthe National Bank Act. For example, a national bankwith an unsatisfactory CRA rating would not be“qualified” to establish an agency under the Act, but it

could still establish a §92 insurance agency. (It shouldbe noted that national banks can be subsidiaries ofFinancial Holding Companies)

UnderwritingGenerally, a national bank or a

subsidiary of a national bank may notnow, or under the Act, underwriteinsurance or annuities. This prohibi-tion does not apply to productslawfully provided by national banksprior to January 1, 1999, or to productsauthorized in writing for nationalbanks by the OCC, prior to January 1,1999. Because they have been approved by the OCC,private mortgage insurance, credit insurance, financialguarantee insurance and debt cancellation contracts areproducts that escape the general prohibition on theunderwriting of insurance by national banks.

State Insurance Regulation & “Safe Harbors”The Act reaffirms the McCarran-Ferguson Act and the

primacy of state insurance regulation. It specificallyrequires bank and FHC subsidiaries to be state licensedbefore engaging in insurance sales or underwriting. At thesame time, the Act also protects banking organizationsfrom unfair discrimination by state insurance laws andregulations. State anti-affiliation laws that “prevent orrestrict” the affiliation of banks with insurance companiesand agencies are preempted.

State insurance laws adopted prior to September 3, 1998,that “prevent or significantly interfere” with bank insur-ance sales activities are preempted. State laws adoptedafter September 3, 1998, must pass a two-fold test. Theycannot “prevent or significantly interfere” with bank salesactivities or violate a new statutory non-discriminationstandard that prohibits a state from treating bank insuranceactivities differently than insurance sales activities unre-lated to a bank.

4 The Regulator

Frank Torres

With the passage of the Gramm-Leach-Bliley Act,the financial marketplace is poised to undergo rapidand profound changes, including the consolidation ofindustries. One consequence is that personal financialinformation has become a marketable commodity withbanks, insurance companies and securities firms. Thesefirms know and have the capacity to know more aboutan individual than ever before. Not only is this infor-mation used to market products and services to con-sumers, it can be used to make decisions about the costand availability of those products and services.

Consumers have reason to be concerned abouthow their private financial information is being used,collected, shared and sold. Under the Gramm-Leach-Bliley bill there are no limits on the sharing of informa-tion about consumers’ transactions (including accountbalances), who they write checks to, where they used acredit card and what they purchased, within a financialconglomerate. In most cases sharing a consumer’ssensitive information with a third party is allowed, too.

Here is why the bill fails to protect the privacy ofconsumers:

Limited notice provisions The notice provision merely requires that an

institution provide consumers with their privacy policy.

Financial Privacy Far From a Reality Under New Law

It could simply say “We share your information withaffiliates and third parties,” and satisfy the noticeprovision. Nor does a consumer have to be told howtheir information is being used.

Affiliates free to share personal recordsAffiliates can still share and sell information and

consumers have no ability to stop them. The so-calledprivacy protections in the bill do not apply to affiliates.

Loopholes allow information to be shared with“nonaffiliated third parties”

The bill contains a limited opt-out of third-partysharing. Even if a consumer opts-out, information maystill be shared with third parties offering financialproducts on behalf of or endorsed by the institution orpursuant to a joint agreement between financial institu-tions. Thus, financial institutions can share customers’information without notice to the customer or allowingthat customer to have the ability to opt-out.

No consumer accessThe law does not allow a consumer to have access

to the information collected, or the ability to correcterroneous information.

Here is what consumers should have when itcomes to privacy protections:

NoticeFinancial institutions should inform their custom-

ers in a clear and conspicuous manner when they planto collect, use and/or disclose personally identifiableinformation, and customers should be told the intendedrecipient of the information and the purpose for whichit will be used.

AccessA customer should have access to personally

identifiable information held by the financial institution

What regulators should know: Privacy Concerns

continued on page 21

(Editor’s Note: The following article pertains to personalfinancial information. Existing prohibitions regarding thesharing of personal health and medical data will remain inplace under the new law.)

Frank Torres is Legislative Counselwith Consumer's Union, the nonprofitpublisher of Consumer Reports.

The Regulator 5

C.E. News

N IMore questions? Call us

at 913-768-NICE

Have a wonderful new year!

Allow yourself enough time to complete 15 CE

hours prior to 9/1/2000.

Pick a course/seminar that is at least 51% insur-

ance related to submit for CE credits.

Plan to attend the IRES CDS July 30 – August 1,2000 in New Orleans.

You may request a one-year extension prior to 9/1/2000 to file your CE hours.

Next reporting deadline is October 1, 2000.

Excel computer training courses do not qualify

for CE credit.

Wish you had a NICE reporting form? Check outgo-ires.org on the web.

Yes, NAIC quarterly meetings qualify for CEcredit.

Evidence of completion is required for any courseor seminar submitted for credit.

All designee holders will receive NICE transcripts in May 2000.

Remember that there is no carryover of CE hours from one year to the next.

6 The Regulator

George Nichols

George Nichols III is Kentucky’s

Commissioner of Insurance and the current

President of the National Association of

Insurance Commissioners.

There is an adage about personal rights andresponsibilities that goes: Your rights end where theother fellow’s begin. That adage is alive and well forfederal and state regulators under the Gramm-Leach-Bliley Act, which says that “functional regulation” isnow the law of the land. In addition, the Act reaffirmsthat states will be the functional regulators for allinsurance providers in the United States.

What does “functional regulation” mean forregulators and the industries? The rights andresponsibilities of each regulatory agency will beginand end at a point where the business activity, service

or product by a financialconglomerate crosses overinto the realm of aspecific regulatoryagency.

In most cases, thereshould be little problem in

identifying the appropriate federal or state regulator forthese products and services. Insurance products, forexample, are clearly defined in the Act to include thefamiliar life, health, and property/casualty policieswhich states have been regulating for many years. Thereal challenges for regulators will occur when newlydeveloped financial products overlap the boundaries oftraditional supervisory jurisdictions, or when theimpact of a conglomerate’s activities in one line ofbusiness threatens the safety and soundness of itsaffiliates in another business supervised by a differentagency.

The solution for avoiding potential confusion andregulatory mistakes in this new era of functionalsupervision is cooperation. For state insuranceregulators, that means actively reaching out to federalregulators of banks and securities firms that may nowfreely participate in the insurance business. We share acommon interest in making sure there are no holes inthe regulatory safety net protecting consumers.

Working through the NAIC, state regulators lastyear began establishing a process for cooperating withfederal regulators on examinations, enforcementmatters, and consumer complaints. We knew that suchcooperative agreements were necessary to meet thedemands of a modern marketplace, even if the Gramm-Leach-Bliley Act failed to pass. Moreover, we werepleased that key federal agencies — the FederalReserve Board, the Comptroller of the Currency, and

Functional Regulation is Now the Law of the Land

While the Gramm-Leach-Bliley Act

sets forth an expedited process for

resolving differences between state and

federal regulators, we know from

experience that litigation is the wrong

way to supervise industries in a fast-

moving marketplace.

— George Nichols

What regulators should know: Functional Regulation

The Regulator 7

the Office of Thrift Supervision —expressed a similardesire for working together closely. Now that the Actis law, our mutual cooperation efforts will bestrengthened and expanded.

Here are some of the areas where the Gramm-Leach-Bliley Act envisions regulatory cooperation ofthe type we have already begun:

√ Affiliations: Under the Act, states willcontinue to review and approve ordisapprove all affiliations andchanges of management controlaffecting insurers, including thoseinvolving banks. These decisionswill be made by the insurer’s stateof domicile, which is consistentwith existing practices. As apractical matter, a state or federalregulator may need to rely uponthe information and findings ofother regulators who may not actuallyhave the final say as to whether a mergeris approved. That will become even truer asmore insurers merge with depository institutions.

√ Market Conduct: The Act specifically preserves anumber of state consumer protections regarding thesale of insurance by banks. It also mandates that federalregulators produce similar protections in consultationwith the states. Beyond that, states cannot discriminateor “significantly interfere” with the insurance activitiesof banks. States will need to coordinate their marketconduct regulations with appropriate federal agenciesto avoid unnecessary litigation concerning the scopeand purpose of state consumer protection rules.

√ Solvency: The Act maintains the authority ofstates to enforce solvency requirements over insureraffiliates of financial conglomerates. However, statescannot require holding companies supervised by theFederal Reserve to produce additional capital. On theother hand, the Federal Reserve Board generally cannotforce a state-regulated insurer affiliate to provide

money to the holding company or its banking affiliates.Obviously, we must all work together because thefinancial health of each affiliate will likely be tied tothe overall condition of the holding company.

√ Consumer Privacy: The Act permits states todevelop and enforce consumer privacy regulationsrelating to the personal financial information ofcustomers held and shared among conglomerates and

their affiliates. The federal regulatorsare required to produce similarprivacy regulations in consultationwith the states, which the statesmay then enforce on insurancematters. Since the regulations aremeant to work together, stateand federal regulators will needto coordinate their rules.

As a final note, let me pointout that regulatory cooperation

among state and federal agencies notonly makes perfect sense from a

practical viewpoint, it also is the key toavoiding wasteful and counter-productive litigation.While the Gramm-Leach-Bliley Act sets forth anexpedited process for resolving differences betweenstate and federal regulators, we know from experiencethat litigation is the wrong way to supervise industriesin a fast-moving marketplace.

The NAIC and state insurance regulators lookforward to implementing the Gramm-Leach-Bliley Actby actively working for solutions with fellow regulatorsas partners in a joint effort that is critically important toall Americans.

Nichols: Cooperation, Now More Than Evercontinued from previous page

Want the Entire Bill?

Need a copy of Gramm-Leach-Bliley? It's

available on www.house.gov/banking/

s900lang.htm. You can also link to the site

via the IRES website, www.go-ires.org.

8 The Regulator

Mr. Crerar is president of the Councilof Insurance Agents & Brokers, basedin Washington, D.C.

What regulators should know: Licensing

Ken A. Crerar

When the National Association of InsuranceCommissioners met for the first time in 1871, NewYork Commissioner George W. Miller proposed avision for insurance regulation in the United States.

“The commissioners are now fully prepared to gobefore their various legislative committees with recom-mendations for a system of insurance law which shallbe the same in all states,” he declared, “not reciprocal,but identical; not retaliatory, but uniform.”

In the 128 years that followed, state insuranceregulation matured into a strong system. But, unfortu-nately, Miller’s vision was never realized. In fact, forcommercial insurance agents and brokers the currentlicensing system is inefficient and expensive, making itdifficult to provide the best insurance products andservices to millions of American consumers.

A single agent or broker often has to hold scores oflicenses with all sorts of duplicative and unnecessaryrequirements that have little or nothing to do withstandards of professionalism. An agent or brokermarketing a national insurance program may routinelyhave to obtain more than 100 licenses – on a line-by-line, class-by-class, state-by-state basis.

Several states require agents or brokers to incorpo-rate their agency inside the state in which they aresoliciting business. Still other states do not allow non-resident brokers to solicit business at all. These require-ments are a significant barrier to interstate commerce,creating costs that are passed to consumers.

That is why The Council of Insurance Agents &Brokers made the passage of NARAB – the NationalAssociation of Registered Agents & Brokers — itshighest legislative priority three years ago whenNARAB was introduced by Rep. Sue Kelly, R-NY, amember of the House Banking and Financial ServicesCommittee. On November 12, 1999, NARAB becamefederal law as part of the Gramm-Leach-Bliley Act(S900).

Many regulators are concerned that NARAB willtotally preempt state insurance laws and allow unregu-

lated sales of insurance products and services. Thereality is just the opposite; NARAB will strengthenstate insurance regulation andensure that it thrives.

Here is how NARAB willwork:

First, the states – through theNAIC – have the power to avertthe creation of NARAB. If amajority of states pass uniformlicensing or reciprocity laws within the next threeyears, NARAB will not come into existence. If thestates do not meet the three-year requirement, theNAIC will be authorized to establish NARAB as anentity controlled by state insurance regulators.

Only if the NAIC does not establish NARABwithin two more years (or if it later becomes unable tooversee NARAB), would NARAB be created as anindependent agency. Even during this two-year “graceperiod,” NARAB would not be formed if a majority ofthe states representing at least 50 percent of the totalU.S. commercial-lines premiums satisfied either theuniformity or reciprocity requirement.

In other words, the states have three to five years toaddress multi-state licensing issues before NARABwould be created.

As a federally chartered agency, a majority ofNARAB’s governing board must be state insurancecommissioners. The NAIC will make recommenda-tions to the President of the United States, who mustchoose a majority of the board members from theNAIC list. The chairperson of NARAB must be a stateinsurance commissioner.

NARAB will not provide a federal license forcontinued on page 21

At Long Last: Uniform Licensing

The Regulator 9

Joseph Belth

What regulators should know: Mergers & Acquisitions

Now that the federal financial services bill hasfinally been enacted, it may be appropriate to ask whowill benefit and who will not benefit from the likelyincrease in merger and acquisition activity in thefinancial services industry. Among the beneficiaries ofsuch activity will be officers and directors of compa-nies that reorganize, investment bankers, consultingactuaries, and attorneys. Consumers, on the other hand,will not be among the beneficiaries of such activity.

Consumers

Consumers do not say anything meaningful one wayor the other on the subject. Some proponents of finan-cial services integration say consumers are demandingone-stop shopping for financial services. That isnonsense. Consumers are not demanding insurancefrom banks or securities firms, or securities from banksor insurance companies, or banking services frominsurance companies or securities firms. Consumers arenot demanding anything other than honest and fairtreatment from the providers of financial services.Those who say financial services integration is in thebest interests of consumers are those who stand tomake money in the integration process.

Officers and Directors

Here is the kind of advice consultants give toofficers and directors of mutual insurance companies:“You should demutualize or create a mutual holdingcompany so that you will be able to use stock asacquisition currency. Everybody is reorganizing, andyou will be left behind if you do not. And by the way,if you reorganize, there will be stock options, stockgrants, and other goodies in it for you.” I heard about aseminar for mutual insurance company officers wherethe first topic on the agenda was how they couldbenefit financially after a reorganization.

Investment Bankers

Investment bankers are paid for giving advice aboutwhy and how insurance companies should reorganize.Investment bankers are paid for preparing opinionsabout the fairness of reorganizations. They are paidwhen insurance companies make initial public offer-ings. They are paid for giving advice to insurance

regulators who approve reorganization plans.

Consulting Actuaries

In a demutualization, consultingactuaries are paid in connection withthe complex formula used toallocate the consideration paid topolicyholders whose ownershipinterests in the insurance companyare terminated, and in connectionwith the development of the closedblock. Even in the case of a reorga-nization involving the creation of amutual holding company, wherepolicyholders get nothing, consulting actuaries are paidin connection with the development of the closedblock. They are paid for providing fairness opinions.They are paid by regulators who approve reorganiza-tion plans. In a demutualization, the regulator needsadvice on both the allocation formula and the closedblock. In the case of a mutual holding company reorga-nization, the regulator needs advice on the closedblock.

Attorneys

Attorneys have to prepare many elaborate legaldocuments that are needed in connection with mergers,acquisitions, and other reorganizations. In addition,there are sometimes significant legal expenses fromlitigation about the reorganizations.

The Provident Mutual Case

An interesting example of the various expenses isthe sad experience of Pennsylvania-domiciled Provi-dent Mutual Life, which recently withdrew its mutualholding company reorganization plan. Provident’sBoard of Directors initially adopted the plan in January

Observations on Financial Services Integration

continued on page 11

Joseph M. Belth, PhD, is the editor of theInsurance Forum, Elletsville, Indiana. Mr. Belth isprofessor emeritus of insurance in the KelleySchool of Business at Indiana University,Bloomington.

10 The Regulator

Bonnie SteingartRegulators of Non-domestic Insurers Impeded by New Act

What regulators should know: Foreign Regulators’ Rights

The popular perception of the Gramm-Leach-Bliley Act of 1999 (the “Act”) is that it removesmany federal and state law obstacles to affiliationsamong banks, insurers, securities firms and otherkinds of financial service companies. While doing so,

however, the Act explicitly pre-empts, inter alia, a broad body ofstate insurance laws whichauthorized non-domiciliaryregulators to conduct a substan-tive review of demutualizationsand other change of controltransactions of licensed insurers.

Although lip service is paidto the notion of functional

regulation, in addition to absolute pre-emption ofstate regulation in a number of areas (e.g., bank salesof insurance products, affiliations, etc), the Act hasfederalized the power to decide which states willhave a voice where state regulation ostensibly hasbeen preserved (i.e., “selective pre-emption”).

In exercising this policy of selective pre-emption,

the Act has disenfranchised non-domiciliary stateinsurance regulators — and thereby the consumerssuch regulators protect — from the demutualizationprocess. In Section 306 the Act expressly prohibitsany state other than the domiciliary state fromreviewing or approving or disapproving a mutualinsurer’s plan to demutualize. The pre-emptionapplies regardless of whether the process involvesfull demutualization or the formation of mutualholding companies. Moreover, the pre-emption is notlimited to circumstances where the demutualizinginsurer becomes or is affiliated with a Bank HoldingCompany or a Financial Holding Company as thoseterms are defined in the Act.

Similarly, non-domiciliary state regulators areselectively pre-empted from exercising authority toreview and are selectively pre-empted from takingany steps including approval or disapproval ofchanges of control of licensed insurers affiliatingwith depository institutions or affiliates of depositoryinstitutions (see Sections 104, 306).

Thus, while a non-domiciliary state may collectinformation, it is pre-empted from requestingchanges in the structure of the transaction, theprotections afforded to policyholders, the plan ofoperation or any other aspect of the change-of-control transaction regardless of the non-domiciliaryregulator’s view of the impact of the transaction onits state’s policyholders as well as on all companypolicyholders. Lastly, given the broad language ofSections 104 and 306 of the Act, it is unclear whetherthere is any vitality remaining to state laws governingthe conduct of and transactions among companies ina holding company system.

Absent this selective pre-emption, the New York

What is a closed block? As part of the planof demutualization of a mutual life insurancecompany, a “closed block” is established by theinsurer to protect existing individual policyhold-ers once the company has converted to stockform. A mutual life insurer would typically setaside funds in the closed block to support the“reasonable dividend expectations” of holdersof certain individual particpating life insurancepolicies and annuity contracts. The proposedfunding for the closed block is calculated by theinsurer’s actuaries, and the adequacy of thatfunding is reviewed and certified by actuariesappointed by the insurance department in theinsurer’s state of domicile prior to the approvalof the plan of demutualization. – The Editors

continued on next page

Bonnie Steingart, a former general counsel forthe New York State Insurance Department, is apartner with the law firm of Fried, Frank,Harris, Shriver & Jacobson in Manhattan

The Regulator 11

SteingartBelthcontinued from page 9 continued from page 10

Insurance Law and that in a number of other statesauthorized the Insurance Superintendent to (1)require foreign companies to conduct business in amanner substantially similar to that required ofdomestic insurers and (2) conduct his/her ownindependent evaluation of the fairness to policyhold-ers of demutualizations, including formation ofmutual holding companies. In essence, this meantthat a regulator, other than the domestic regulator,provided a second set of eyes, ears and experts toreview the overall fairness of a transaction from apolicyholder perspective.

Before the Act, there was no indication that sucha review was anything but advantageous to policy-holders (although some might have thought it to beburdensome to the companies). The vast majority ofpolicyholders, in most cases, are not resident in thedomiciliary state. In addition, the domiciliary regula-tor often is torn between competing constituenciesespecially if the demutualizing insurer is a majoremployer, owner of real estate, and politicallyinfluential. In both change-of-control and conversiontransactions, non-domiciliary regulators in stateswhere significant percentages of insurers reside canfocus more exclusively on issues of policyholdersecurity, consideration, and closed block sufficiency.

For example, the New York Insurance Depart-ment has over the years entered into stipulations withinsurers that are in the process of converting to amutual holding company structure (e.g., PrincipalMutual and National Life of Vermont) to ensure thatNew York has a voice in protecting policyholdervalue in subsequent transactions.

Ultimately the impact of the selective pre-emption of substantive review by non-domiciliarystates will be most acute in states where there islimited sophistication, staff and resources available toreview the change-of-control and/or demutalizationtransactions. Those risks are heightened in thecontext of mutual holding company transactionsbecause of the continuing issues presented by undis-tributed policyholder value, the lack of voting controlby policyholders and the insulation of the officersand directors from accountability to and oversight bypolicyholders.

1998. In April 1998, the Pennsylvania insurancedepartment held a so-called public informationalhearing on the plan. Among the witnesses were repre-sentatives of Morgan Stanley Dean Witter, whichprovided investment banking advice to Provident andhad the inside track to handle any initial public offer-ing, PricewaterhouseCoopers, which provided actuarialadvice to Provident about the closed block, andTillinghast, which provided actuarial advice to thePennsylvania department about the closed block.

In October 1998, at the suggestion of the Pennsylva-nia department, Provident amended the plan. In No-vember 1998, the department approved the plan. InDecember 1998, Provident sent out its policyholderinformation statement and asked policyholders to voteon the plan. In February 1999, Provident held a specialpolicyholders’ meeting. The company said about 21percent of the eligible policyholders voted. Of thosevoting, about 89 percent voted for the plan, and about11 percent voted against the plan.

Two days after the special policyholders’ meeting, aPennsylvania judge issued a preliminary injunctionhalting implemention of the plan. In September 1999,he made the injunction permanent. Eight policyholdershad filed a lawsuit seeking the injunction. The judgesaid that the policyholder information statement did notdisclose adequately the implications of the reorganiza-tion, and that the vote of the policyholders was not aninformed vote. When Provident commented on thepermanent injunction, the company defended thepolicyholder information statement by saying thedocument had been reviewed by “no fewer than fourprominent law firms.”

In October 1999, Provident withdrew the plan.According to an article in The Philadelphia Inquirer,Provident spent $5 million on its unsuccessful effort toreorganize. Even that figure, which may significantlyunderstate the total cost, is a big one for a company ofProvident’s size.

Conclusion

The enactment of the financial services bill and thediscussion of the subject make it look as though there isa consensus that financial services integration is in thebest interests of consumers. However, that apparentconsensus may be nothing more than agreement amongpeople with a powerful financial interest in the integra-tion process.

12 The Regulator

Dennis JayA New Weapon to Help Regulators Combat Fraud?

The recently enacted federal financial moderniza-tion legislation may hold a new arrow to place intothe quiver of state regulators in their effort to fightfraud. The last provision added to the bill prior to itsapproval by Congress (Section 740 of the Gramm-Leach-Bliley Act) allows state “financial institution”regulators to gain access togrand jury information,including information fromongoing investigations.

The provision amendsthe federal criminal code(Section 3322(b) of Title 18,United States Code) byadding state financialinstitution regulators aseligible recipients ofinformation from a grandjury in relation to a banking law violation. As such,the Act gives state regulators parity with federalregulators with respect to gaining access to specifiedfederal grand jury proceedings.

Because the amended statute specifies “financialinstitution” regulatory agencies, it is somewhatunclear to what degree this measure would aidinsurance fraud investigations. It is possible, forexample, that an insurance company subsidiary of abank may be defined as a financial institution solelybecause its parent is a financial institution, thusopening the door for a state regulator to obtaininformation from the grand jury.

The key is that it opens the door; whether itallows insurance regulators to walk through the doorstill remains to be seen.

It should be noted that the provisions that wereamended by Section 740 are provisions of federal lawand the grand juries referred to are federal grandjuries. The provisions therefore may be a tool to usein investigative efforts against those individuals andcompanies that the federal government suspects ofdefrauding investors, consumers or other companies.

Section 740 is only six lines of a 144-page law,yet it could have positive ramifications that will helpminimize the economic damage caused by lootingand fraud inside insurance companies. Regulatorsshould closely examine this provision to see how itcan be utilized in the ongoing fight against insurancefraud.

What regulators should know: Fraud and Grand Juries

• 2000 — New Orleans. July 30-Aug. 1Hyatt Regency

• 2001 — Baltimore. Aug. 5-7 HyattRegency Inner Harbor

• 2002 – San Antonio. July 28-30 HyattRegency

IRES CDS: Next Up

Dennnis Jay is the Executive Director of

the Coalition Against Insurance Fraud,

in Washington, D.C.

The Regulator 13

For all the attention being paid to the new financialservices reform bill, there’s a contrarian view thatCongress has been a follower, not a leader — and thatthe bill’s impact will be minimal.

After all, Citigroup was created out of a bank-insurer merger that seriously predated passage of thelegislation.

Gordon Stewart, the thoughtful president of theInsurance Information Institute (I.I.I.), agrees thatwe’re in the midst of massive change — a cycle thatbegan several years ago and has another decade ormore before it plays itself out. But he downplays theimpact of S900.

“There are broad currents of change underway,”Stewart said. “But they’re not significantly precipitatedby this legislation.

“The news,” he added, “isthat the impact of technology overtime will be greater than theimpact of financial servicesreform.

“First of all, the currentsthat led to the reform

legislation have alreadybeen operating forsome time —

Citigroup is the mostobvious example. The

financial services legislation sort ofmakes it legal.

“The marriage has already happened; they justwent to a preacher.”

I.I.I. focuses on the property-casualty side of theindustry, and Stewart admits that there may be greatercommonality of interest between banks, brokeragehouses and life companies. But he definitely sees noserious changes in store for P&C insurers.

Discounting the trendThis is not to say that the legislation will have no

impact at all.“It will obviously have an effect,” Stewart said.

“But it’s been somewhat discounted by trends that havealready been moving forward — with affiliationsbetween insurance agencies and banks, affinity agree-ments of one kind or another which will probablyincrease somewhat.

“In and of itself, I don’t think it’s such a transform-ing event. In a way, it’s more a recognition of thingsthat are already happening.”

On the issue of state vs. federalregulation, he agrees that the trend,with or without S900, seems to bein the direction of an enhancedfederal role.

If Stewart seems a little blaséabout the impact of S900, he getsall worked up about the impact oftechnological change.

“Technology changes things, regardless of whatthey are,” he said.

“The automobile, the telephone, the airplane,nuclear weapons. These things change behaviors.”

And when masses of consumers change theirbehavior, the companies that survive by selling themgoods and services had better pay attention. For in oureconomy, at least, it’s the marketplace that runs theshow.

And, Stewart adds, “there are no loopholes inbehavior.”

Government action matters, but it’s more tomoderate and influence the way businesses operate, notto tell them what to sell and how to sell it.

Historically, regulation reacts to changes in con-sumer behavior, and to the corporate response to thatbehavior — rather than predicting where things aregoing and getting ahead of the tide.

Take television, the last really big technological

Technology, not Legislation, is Transformingthe Global Financial Services Marketplace

Gordon Stewart

by Scott HooberSpecial to THE REGULATOR

continued on next page

14 The Regulator

change. The Federal Communications Commissionmay nibble at the edges of the way TV stations operate,but it’s the mass market and the advertisers that havealways dictated the shape of the medium, from I LoveLucy to color TV to cable.

“I don’t think financial services reform changes thebehavior of masses of people,” Stewart said. “Itchanges perhaps the behavior of a small group ofexecutives, whereas technology changes what peoplelike you and I do.

“Technology has amore profound effectthat anything else. Itforces change in a waythat system reformsdon’t.”

Or, as LarryDownes and ChunkMui put it in theirrecent book, Unleash-ing the Killer App,social, political andeconomic systemschange incrementally,but technology changesexponentially.

Regulatory wranglingYet change,

whether brought on bytechnology or by legislation, will necessarily meanreaction on the part of regulators. Demutualization andthe end of state-by-state licensing of agents and brokershave been mentioned as two of the many possibilities.

“That’s going to have to be sorted out,” Stewartsaid.

“There’s still going to be lots of regulatory wran-gling and jurisdictional squabbling taking place, butwhy should the effect of that be much greater than thekinds of squabbling that are already going on?”

But, he insists, it won’t be the result of “suddenlyunleashing a sort of dammed up demand on the part offinancial-services conglomerates.”

Stewart wouldn’t be surprised to see some addi-

tional mergers involving life insurers and other finan-cial services firms.

“It’s an easier product for banks to get involved in,and vice versa,” he said.

“The things that life companies do are all the kindof things that bankers can get hold of. But property-casualty is a complex world, and it’s a separate world.It’s not as easily merged and it’s yet to be demonstratedthat selling one thing leads to selling another.

“Aegon, for example, has no intention of being inthe P&C business in the United States, but they could

very well be in the lifebusiness. This is what a lotof foreign financial entitiesare already used to.”

When it comes todoubting the synergy that’sat the root of financialservices reform, Stewartisn’t alone.

Joe Sponholz, head ofChase.com, the new on-linearm of the banking con-glomerate, also sees tech-nology making possiblewhat legislation cannot.

“The dream of anintegrated consumerfinancial relationship thatmany of us have aspired to

create for decades looks like it will be solved by thenet, not by current suppliers,” Sponholz said recently.

In the brokerage arena, Charles Schwab has foundthat selling over the Web doesn’t integrate all that wellwith its existing bricks-and-mortar model, so it’s beenmoving toward storefronts that support on-line custom-ers — couches, tickers, hand-holding — but that do nothouse its traditional brokers.

Insurers have been reluctant to move wholeheart-edly into online selling, out of concern for their corpsof agents.

But one way or another, the popularity of the Webis going to change that, and has already begun to

Technology, not Congress, is changing the marketplace

continued on page 18

In and of itself, I don’t think it

(the legislation) is such a trans-

forming event. In a way, it’s

more a recognition of things

that are already happening.

— Gordon Stewart,Insurance Information Institute

continued from preceding page

The Regulator 15

From the readers

John Reiersen’s piece in the NovemberREGULATOR was one of the most insightful andprovocative articles I’ve read on the subject. As aformer Deputy Superintendent of the New YorkInsurance Department who has returned toprivate industry, I believe one of the mostdisturbing trends in state regulation today is theoutsourcing of the regulatory functions associatedwith the standard financial and market conductexams.

I believe, as Mr. Reiersen does, that anexamination conducted by insurance departmentstaff produces a more coordinated, comprehensiveevaluation of an insurer’s financial condition thanone outsourced to a consultant with a variedassortment of clients, previous employers andbiases. The fact that more and more states areturning to less committed, less independentoutside auditors does not bode well for stateregulation.

His observations regarding the politicization ofthe decision-making process were also right ontarget.

During my 15 years in the industry, I havenoticed an increasing, somewhat insidiousinfilitration by political forces in the regulator’sdaily decision-making process. The external forcesthat threaten the objectivity of the state regulatorshould be condemned by both industry andregulators as the greatest true threat to effectivestate regulation.

— Mark Gardner

Mr. Gardner is an attorney with General Re inStamford, Conn., and previously served as a deputysuperintendent for the New York State InsuranceDepartment.

I read with interest the various comments putforth relative to the question,“Is State InsuranceRegulation Dead?” (November REGULATOR) Afterthirty-four years in the regulatory arena, I have aperspective on that question.

The question is if one were to establish a regula-tory structure from scratch, would anyone come upwith the current system? I doubt it. That’s becausethe goals of our current system have not beenadequately defined. Therefore, no one has a firmgrasp of what the system is supposed to do except in

Mr. Carus, a former Chief of the New York InsuranceDepartment’s Life Bureau, worked on both property/casualty and life issues during his 34 years with theDepartment. He is currently employed by the AmericanInternational Group.

very rhetorical and nebulous terms like “regulate forsolvency” or “protect consumers.”

In general the free market system works bestwhen there is no dominance by either consumers orinsurers. However, left unfettered, free market-places generally do not stay in relative balance forvery long. Accordingly, dislocations occur on bothsides of the marketplace. Often, such dislocationsare painful and costly, reflecting the inefficiencies ofa free market. Therefore, the aim of a marketplaceoversight system (which I believe is a better way tothink of a system as opposed to a “regulatory”system) should be to maintain as much balance aspossible to minimize the dislocations.

Basic to an efficient marketplace is creatingbalance among participants. Consumer education isa key element towards creating that balance. Thecurrent marketplace really reflects that consumers,especially at the personal level, are not being edu-cated in risk recognition, mitigation, management oramelioration. The result is a regulatory systemdevised to protect the uneducated from harm. Bydefinition, this results in a complicated regulatoryscheme due to the multitude of potential “harms.”

Once a marketplace oversight system is given afirm mission (i.e., making sure there is as littledominance as possible), a system that accomplishesthat goal is more easily devised. It’s not so much a“federal vs. state” question as it is determining whatneeds to be done and then selecting from the bestthat currently exists, or inventing a new mode tomeet the goal.

Mr. Reiersen sets forth the key element underly-ing any effective marketplace oversight system—“anadequate supply of well-trained, independent insur-ance examiners.” I think Mr. Reiersen would permitme to extend that notion to all insurance regulatoryprofessionals (e.g., actuarial, investment, legal,etc.). It would be nice if such a system paid theseprofessionals well too.

— Martin F. Carus

Dear Editor,

Dear Editor,

Letters to the Editor can be sent to Wayne Cotter atquepasa@sprintmail.com or ireshq@aol.com

16 The Regulator

REGULATORY ROUNDUPBy

Shaun O’Brien&

Thomas Major

FLORIDA — Increased Oversight of ViaticalIndustry Leads to Indictments Several months ago,the Florida Department of Insurance announced itsongoing efforts to focus more closely on the viaticalindustry. Its efforts, along with those of other stateauthorities, have finally begun to pay off. On October26, 1999, a Florida grand jury handed out the firstindictments resulting from the state’s criminal probe.The indictments charged two officers of Justus ViaticalGroup, in Pompano Beach, with organized fraud, grandtheft and insurance fraud. Allegations include with-holding information concerning policyholders’ medicalconditions in order to obtain life insurance and the saleof over $2 million in such fraudulently obtained lifepolicies. While more than a dozen viatical providers orbrokers are currently under investigation by the insur-ance department, these criminal charges were the firstto result from the criminal probe.

INDIANA — Indiana Supreme Court Upholdsthe Use of In-House CounselIn a decision sure to be read closely in other states, theIndiana Supreme Court recently upheld an insurancecompany’s decision to appoint its in-house counsel torepresent policyholders in third party actions. TheCourt held that an insurance company’s use of an in-house attorney to represent an insured in a third partylawsuit does not create an inherent conflict of interestas long as the arrangement is properly disclosed.Further, the employment of in-house counsel to repre-sent its insureds is not considered to be the unautho-rized practice of law. The Court did hold that use of alaw-firm-like name to describe in-house lawyersviolates the professional rules of conduct because itmisleadingly suggests that they are outside counsel.See Cincinnati Insurance Company v. Wills, 717 N.E.2d 151 (Ind. 1999)

LOUISIANA — Reduced Waiting Period for Pre-Existing Coverage Applies to Individual Certificates ofHealth Insurance Issued on or after January 1, 1993In 1992, the Louisiana Legislature passed legislationthat restricts a health insurer’s ability to deny coveragefor losses incurred due to pre-existing coverage limita-tions contained in the health insurance policy. Theprovisions of La. Rev. Stat. 22:215.12 apply generallyto health policies issued on or after January 1, 1993.Recently, the Louisiana Supreme Court had occasion toconsider whether such restrictions applied to individualhealth certificates issued to enrollees whose effectivedate was on or after January 1, 1993 even though thegoverning group policy was issued prior to that time.Finding that La.Rev.Stat. 22:215.12 was meant toconfer significant benefits to the insured/consumer byreducing certain gaps in coverage that existed previ-ously because of the broad exclusions for pre-existingcoverage, the Louisiana Supreme Court reversed theCourt of Appeals and held that the restrictions ofLa.Rev.Stat. 22:215.12 apply to new enrollees whoseindividual certificates of insurance were issued on orafter January 1, 1993, regardless of when the governinggroup policy was issued. See In re The Matter ofLouisiana Health Service and Indemnity Company (dbaBlue Cross Blue Shield of Louisiana), 98-3034(La. 10/19/99), 1999 WL 955490.

MASSACHUSETTS — Insurance DepartmentGranted Insolvency Authority Over HMOsIn an effort to protect members of financially troubledHMOs, Massachusetts has adopted a law granting the

Shaun O’Brien and Thomas Major are insurance regula-tory attorneys with the law firm Baker & Daniels inIndianapolis. Shaun and Thomas are guest writingREGULATORY ROUNDUP for Dee Dee Gowan who is celebrat-ing the birth of a beautiful baby boy, David Reid Gowan,born Nov 14.

The Regulator 17

state’s Division of Insurance the same administrativesupervision, rehabilitation and liquidation authority thatit possesses with respect to other insurance companies.Key provisions of the law for members of insolventHMOs include a “hold harmless” provision preventingprovider recourse against members, and a ban ondenials or limits of replacement coverage by newcarriers on the basis of “pre-existing” medical condi-tions that had been previously covered by the insolventHMO. The law takes Massachusetts off of a short listof states that do not have laws giving HMO insolvencyauthority to the domestic insurance department. Formore information, you can find the law on the Web atwww.state.ma.us/legis/laws/seslaw99/s1990143.htm.

NEW YORK— Electronic CommerceHits the Insurance IndustryOn November 4, 1999, the New York State InsuranceDepartment issued a release notifying the state’sinsurance industry of the state legislature’s recentenactment of the Electronic Signatures and RecordsAct, effective March 26, 2000, which allows generalbusiness transactions, including certain insurancetransactions, to be conducted entirely through elec-tronic means. The Act does not require companies toconduct business through electronic means but supportsthe use of such and confirms that such transactions arelegally binding. Noting that insurers should refer to thespecific Code provisions when integrating electroniccommerce into their business operations, CircularLetter No. 33 provides insurers with the Department’sinterpretation of the effect of the Act on certain provi-sions found generally throughout New York InsuranceLaw. The Department also takes this opportunity totemper its journey into the “brave new world” of e-commerce with words of caution, reminding theindustry that many emerging issues — especiallyprivacy, security and jurisdiction — will be resolvedonly with the passage of time as a result of court andlegislative action. For more information, see State ofNew York Circular Letter No. 33 (11/4/99), availablethrough the New York State Insurance Department’sweb site, www.ins.state.ny.us.

TEXAS — Arbitration Is BindingDespite Right-to-Sue ProvisionsArbitration conducted pursuant to an arbitration clausein an insurance policy that requires application of therules of the American Arbitration Association isbinding, notwithstanding a separate provision in thepolicy that contemplates litigation by the policyholders.That was the conclusion of the federal district court forthe Southern District of Texas in Duke v. GrowersInsurance, Inc., 1999 WL 1009702 (S.D. Tex. 1999).In Duke, the plaintiff/policyholder sought to overturnan arbitrator’s decision relating to a disputed cropinsurance claim. The underlying policy contained botha right-to-sue provision and an arbitration clause thatmandated that AAA rules apply. The court held thatreference to the AAA rules in the insurance policycreated a requirement that the arbitration be bindingupon the parties — even though the insurance policycontained a separate right-to-sue provision.

WASHINGTON — New Regulations Require Griev-ance Procedures for Denials in Health CoverageThe Washington State Insurance Commissioneradopted regulations that require certain health carriersto create and use procedures that will give coveredpatients the opportunity for full, impartial review ofgrievances over denials or reductions of coverage. Theregulations place time requirements on a carrier’sresponse to patient grievances, and call for expeditedreview and response in cases where delay has beendetermined to be potentially life-threatening. Theregulations also address coverage decisions made ontreatments deemed “experimental” by carriers, andrequire carriers to include specific information on thepersons and processes involved in the adverse coveragedecision. For more information, see Washington StateInsurance Commissioner Matter No. R98-17, orwww.insurance.wa.gov/tableofcontents/newrules/98-17103.htm.

If you have any suggestions for topics from your

state for the next newsletter, or if you have

questions or want additional information about

any of the above news items, please call Shaun

O’Brien at (317) 237-1204 or Thomas Major at

(317) 237-1087 or send an e-mail to

shobrien@bakerd.com or tmajor@bakerd.com.

18 The Regulator

change that: Most online services started out sellingonly existing products, but some have now moved tounderwriting their own policies. In the meantime, somebanks have begun emulating the Web model and areplanning to offer competitors’ products.

In the insurance arena, all eyes are on Allstate,which has announced a big push onto the World WideWeb. What does this all mean for regulators?One thing for sure: It’s no time to becaught napping.

GlobalizationHow about globalization?

Surely we’ll see more multina-tional insurers as the result ofS900, and that’s got to have abig impact on the way theindustry functions.

“Over 25% of themembership of the AIA(American Insurance Asso-ciation) is already foreign-owned,” said the Institute’sStewart, so once again we’relooking at a trend that’s been underwayfor some time.

The legislation will certainly make a difference,says Stewart, “by removing an impediment to some-thing that’s already happening — that’s been growing.

“The AXA Group isn’t going to be any differenttoday than it was yesterday, but the legislation removesa potential impediment, and to that extent, it allows acurrent to continue that’s already underway. But again,is that going to mean a dam breaking and all of asudden you’re going to see this new flood of foreignparticipants? No.”

And S900 will have no effect at all on Americancompanies buying overseas. “All the American compa-nies that are in a position to make significant overseasinvestments are already making them,” Stewart said.

So what’s the bottom line? No change at all related

to the new financial services reform bill?Not at all, just no cataclysmic change. S.900,

coupled with the millennium, may have caught thepublic’s attention, but both events seem to have comealong at a time when change was happening anyway.

Besides technological change, there’s the massiveshift in U.S. demographics, from the aging of thepostwar baby boomers to the growth of immigrantpopulations. And the impact of all these trends on the

industry — and the regulation ofthat industry — will be great,Stewart feels.

“It’s all part of the historicalnarrative of the United States,and that’s profound and impor-tant,” he says.

“Where individual datesfall is meaningless,” he said.“And financial services reformis kind of a landmark recogni-tion that these currents are

already happening.“Everything is reciprocal and

impacts everything else. So what willreally make a difference is the actual

experience of those financial entities that takeadvantage of these trends. And if their experience turnsout to be very successful, then the consequences willturn out to be wider.”

Those experiences, in turn, will lead to renewedcycles of state and federal legislation.

The impact on insurance regulation of all thesechanges — S900, technology, demographics, consumerpreferences — will be significant indeed. The hard partis predicting which way they’ll go.

“It’s hard to know what the regulatory end of it allwill be,” Stewart said, “The only prediction I’mabsolutely certain of is that the computer will affectmass behavioral change, and I have no hedging on that.Exactly how it will affect it is ludicrous to say.”

continued from page 14

‘The marriage already happened; they just went to a preacher.’

The Regulator 19

Market conduct school opens April 7The 7th annual special market conduct school for industry

To register call 913-768-4700Or e-check out our web site at www.ires-Foundation.org

The 7th Annual IRES Foundation MarketRegulation School is set for April 2-4, 2000 in SanDiego. The site of this year’s two-day school andregulator/industry networking event will be at theincredible Loew’s Hotel on Coronado Island. Ourprevious and very popular west coast site has been theDel Coronado Hotel. However, the Del is undergoingextensive renovation for the next five years. If youenjoyed the Del, you will love the Loews.

NAIC President and Kentucky CommissionerGeorge Nichols will deliver a keynoteaddress as will Texas CommissionerJose Montemayor. Also planning toprovide an exciting keynote will be theHon. Jackie Speier of the CaliforniaLegislature. Senator Speier has been anactivist and outspoken commentator onthe insurance industry. Special guesthumorist Rex Havens will provide someprovocative and very funny perspectivesat the Tuesday outdoor luncheon by theHarbor.

This year’s theme of “MarketConduct Regulation — Focus on theFuture” could not be more appropriateas we head into year 2000. Along with the programfundamentals of market conduct regulation by eachstate, special sessions will focus on banking, privacyand confidentiality, and electronic commerce. Thirdparty bad faith, the after-effect of the after market partslitigation and the real meaning of The FinancialModernization Act of 1999 will be explored by leadingexperts. These are all issues that pose challenges forinsurers, regulators, agents and consumers alike.

We expect an unprecedented turnout to arrive earlyfor the networking golf event and to stay throughWednesday. Tuesday night will feature the third annualnetworking beach party sponsored by California-basedSonnenschien, Nath & Rosenthal. This special eventwill be right on the ocean with music, refreshments andsand in your toes. You will be sorry if you leave early.

As an extra reason to stay through Tuesday night, theIRES Foundation will be awarding one fortunateattendee a brand new state-of-the-art laptop computer.Everyone has an equal chance to win but you must bepresent Tuesday at the schools close to win. The laptopis just one way of thanking the attendees and markingthe end of this century’s emphasis on communication.We expect some other very interesting and nice gifts tobe awarded as well. Make your travel plans and hotelreservation now.

The IRES Foundation schoolshave been a prime opportunity forthe Foundation to raise funds forinsurance regulator educationprograms. Accordingly, many finecompanies have found the school tobe an excellent vehicle for theircharitable and educational donations.If your company is interested insponsoring this school in some way,just call the IRES office. We makedonating easy! Sponsors aregenerously recognized for theirsupport of the IRES Foundation andits educational mission.

A few logistical notes for thoseattending. A rental car is the best way to travel. SanDiego Airport is very close to the city and to CoronadoIsland. Driving is very easy. The Loews sits off byitself as a resort so you cannot just walk downtown.But once you are there, with all the shops andrestaurants and entertainment, there is no real reason toleave.

Premier Ride Limousine Service offers exceptionalTown Car Service from the airport for about $30.00.Just call 800-556-7433 to arrange a ride. Taxi service isanother option but slightly more expensive. Registernow and make your room reservation with the Loewsbefore March 1 by calling 619-424-4000. Availabilitymay be limited. Mention the IRES Foundation toreceive the lowest room rate of $225.00 a night. All therooms are superior and offer luxury accommodations.

20 The Regulator

Toivonencontinued from page 3

The Act permits the adoption of

13 categories of state insurance sales

laws that treat bank insurance sales

differently than non-bank related in-

surance sales.

The Act permits the adoption of 13 categories of stateinsurance sales laws that treat bank insurance sales differ-ently than non-bank related insurance sales. These 13 so-called “safe harbors” permit states to adopt laws like anti-tying regulations and regulatory disclosure requirements.

Federal Banking Agency Sales Practice RegulationsWithin 12 months of the Act’s effective date, bankingagencies must promulgate rules governing bank insurancesales practices. These rules will include:

• A prohibition on tying and coercion.• Disclosures informing customers that insurance products

are not FDIC insured and may carry investment risk.• Insurance sales must be separated from teller windows.

Current Operations – Expanded/RestructuredMost banks currently are engagedin some kind of insurance sales orinsurance underwriting activity.Commonly, they have creditinsurance companies and insur-ance agencies that market creditlife insurance, life insurance andannuities. Most national bankshave established an insuranceagency pursuant to §92 of theNational Bank Act. The follow-ing describes how a hypotheticalmid-sized bank holding company(XYZ Corporation) mightcapitalize on, or restructure its insurance subsidiaries.

Doors Open to Expand UnderwritingWhen the XYZ Corporation elects to be a FHC, it

will be able to acquire or incorporate de nova insur-ance and reinsurance companies. Permitted activitiesinclude underwriting of life and health insurance,annuities, property-casualty insurance, title insuranceand miscellaneous coverages. Being able to underwriteinsurance as a primary carrier or as a reinsurer opensup the possibility of creating proprietary products withthe opportunity to share in underwriting profit. TheXYZ Corporation could establish or acquire a reinsur-ance company and reinsure a portion of the risk onprimary insurance marketed by their agents.

Existing Underwriting Activities – Continued/ExpandedThe XYZ Corporation has a subsidiary national bank

that is prohibited from underwriting insurance unlessthose activities are “grandfathered” by the Act’sstatutory exceptions. This National Bank is fortunate.It’s Mortgage Reinsurance Company and Credit

Property Insurance Company will both be able tocontinue underwriting activities under the new lawbecause the OCC had authorized the underwriting ofprivate mortgage insurance and credit propertyinsurance prior to Jan. 1, 1999.

The XYZ Corporation also has a credit life reinsur-ance company and, pursuant to a special provision inthe Bank Holding Act, a life insurance company thatunderwrites annuities for XYZ employee pensions.Because both of these companies are subsidiaries of aFHC, they can continue underwriting activities. In fact,both companies could expand their underwriting toinclude life insurance and market these productsthrough their agency force.

SalesThe XYZ Corporation and its national bank will beable to restructure existing agency operations. Itsnational bank will no longer be required to continue

agency activities in aplace of less than5,000. The XYZCorporation subsidiarycredit life agency willnow be able to sell alllines of insurance,rather than just credit-related insurance.

Because the new lawauthorizes banks andFHCs to marketinsurance in all

jurisdictions, it is now possible for the XYZ Corpora-tion and XYZ bank subsidiaries to market insurance inall 50 states. Under current law, the XYZ bank hasonly been authorized to market insurance in 45 states.

Summary

This voluminous, complicated legislation will besubject to interpretation and litigationfor years tocome. For example, regulators are concerned that theanti-discrimination sections in the Act may impedetheir efforts to protect consumers. while bank insur-ance executives are worried that interpretations of the13 regulatory “safe harbors” may permit regulatoryofficials to treat bank sales activities unfairly.The current regulatory environment has been un-stable, slow to respond to changing economic condi-tions and highly litigious. With the enactment ofGramm-Leach-Bliley, we look to the future withcautious optimism.

The Regulator 21

insurance sales. Rather, it will serve as a clearinghousefor multi-state licensing so that services may be moreefficiently provided to policyholders. NARAB will becharged with imposing licensing and professionalqualification requirements that exceed the standards ofany current state law. It will have the authority toreduce duplicative regulatory requirements that arenow imposed on agents and brokers who do business inmore than one state.

States will continue to collectlicensing fees, regulate insuranceagents and brokers, and keep theability to discipline producers andrevoke licenses. No unfair tradepractices acts will be preempted.And NARAB will complement,not preempt, the NAIC’s Pro-ducer Information Network(PIN) and the Producer Database(PDB).

However, NARAB memberswill get the benefit of one-stopshopping for licensing. Once thelicensing criteria are satisfied underNARAB regulations, the agent or brokercan check off the states in which he or she wishes to belicensed, with no additional requirements.

Membership in NARAB will be purely voluntary,open to all state-licensed insurance producers. Andbecause it is designed to be a privately financed andmanaged company, taxpayers will not cover any ofNARAB’s operating expenses. The entire NARABbudget will be funded by its member insurance produc-ers through fees and assessments. This concept is notnew; it is purposefully modeled after the NationalAssociation of Securities Dealers.

In sum, NARAB will help improve state insuranceregulation, either by leading the states to make changeson their own over the next three years, or as a newentity. Either way, it will play a vital role in helping thecountry realize George Miller’s original vision of anefficient, uniform system.

As we enter the 21st Century —a fast-changingworld of integrated and global financial services – wehave no other choice.

Ken Crerar

to make sure it is accurate and complete, and customersshould have the ability to correct erroneous informa-tion.

Consent A financial institution should receiveprior affirmative consent of the customer before it usesand/or discloses that customer’s information for anyother purpose than for which it was originally given.

No customer should be denied any product orservice by a financial institution for refus-

ing to give consent to the disclosure ofthe customer’s personal information

except where necessary to deter-mine eligibility for a specificfinancial product or service.

Consumers should havethe right to be fully and mean-ingfully informed about aninstitution’s practices. Consum-

ers should be able to choose tosay “no” to the sharing or use of

their information for purposes otherthan for what the information was

originally provided. Consumers should haveaccess to the information collected about them and begiven a reasonable opportunity to correct it if it iswrong. In addition to full notice, access, and control, astrong enforcement provision is needed to ensure thatprivacy protections are provided.

Passage of this bill does not mean the end of thedebate over financial privacy. Lawmakers on CapitalHill have already introduced legislation to plug theloopholes in the modernization bill and provide mean-ingful privacy protections for consumers. And theGramm-Leach-Bliley bill allows states to pass strongerfinancial privacy protections. Such an approach couldlead to a patchwork of different state laws that would inall likelihood prove to be unworkable for the financialservices industry.

Torrescontinued from page 4continued from page 8

22 The Regulator

The Al Greer Award was conceived in 1997 and will annually honor an examiner who not only embodies the dedication,knowledge and tenacity of a professional regulator, but exceeds those standards.Current members of IRES Board of Directors are not eligible for nomination.

A. Basic requirements for nominees include the following:(1) Five (5) years as an IRES regulator member and a current member(2) Ten (10) years regulatory experience

B. Nomination procedure requirements:(1) Completed nomination form(2) Validation of nomination must be signed by at least three (3) current IRES regulatory members(3) Attach a nomination letter of not fewer than 50 words or more than 100 words(4) Send completed form and nomination letter to IRES by no later than April 30, 2000.

NOMINEE INFORMATION:

Name: _________________________________________________________________

Address: _______________________________________________________________Telephone: Work: ________________Home: ______________________

FAX: ___________________

Education / Designations: _______________________________________________

Insurance Regulatory Examination Experience:______________________________________________________________________________________________________________________________________________Current Position and Employer:(make note if nominee is a contract examiner and give jurisdiction currently contracted with)

___________________________________________________________________

NOMINATION VALIDATION:(signature/name of three current members making nomination)

________________________________Signature/Name

________________________________Signature/Name

Selection ProcessNominations will be accepted from the date the nomination

form is placed in The Regulator through April 30. All nominationsmust be postmarked no later than April 30 prior to the next IRESCareer Development Seminar.

The Al Greer Achievement Award Sub-committee will thendetermine nominees who meet the basic requirements andnomination requirements.

Nominees making it through the sub-committee process will bevoted on by the members of the Membership and BenefitsCommittee with the nominee receiving the most votes being therecipient of the award. In case of a tie the entire Board ofDirectors will vote to determine the winner. (In either instance,only one vote per committee member or board member.)

The counting of votes will be conducted by the chair and vice-chair of the Membership and Benefits Committee along with theexecutive secretary of IRES. The winner will be kept confidentialuntil announced at the next CDS.

Please return completed form andnomination letter by no later than April 30,2000 to: IRES (Al Greer AchievementAward), 130 N. Cherry, Suite 202, Olathe,KS 66061

Al Greer Achievement AwardNomination Form

Signature/Name ________________________________

The Regulator 23

IRES Member (regulator) ......... $225

Industry Sustaining Member ... $375

Non-Member Regulator .......... $325

Retired IRES Member ................. $90

Industry, Non-Sustaining Member ............................. $650

Spouse/guest meal fee ............. $70

Yes! Sign me up for the Year 2000 IRES Career DevelopmentSeminar. My check payable to IRES is enclosed.

Name

Title First name for Badge

Insurance department or organization

Your mailing address Indicate: Home Business

City, State, ZIP

Area code and phone Amount enclosed

$

Fill out and mail to The Insurance Regulatory Examiners Society130 N. Cherry, Suite 202, Olathe, KS 66061

JULY 30-AUG. 1, 2000 NEW ORLEANSHYATT REGENCY NEW ORLEANS

If registering after July 1,add $40.00. No registrationis guaranteed until pay-ment is received by IRES.

Seminar Fees(includes lunch, cont. breakfastand snack breaks for both days)

Check box that applies

Spouse/Guest name

Official Registration Form

SPECIAL NEEDS: If you have special needs addressed by theAmericans with Disabilities Act, please notify us at 913-768-4700 at least five working days before the seminar.The Bally’s facilities comply with all ADA requirements.

SPECIAL DIETS: If you have special dietary needs, pleasecircle: Diabetic Kosher Low salt Vegetarian

IRES 2000 Career Development Seminar

Hotel Rooms: You must book your hotel roomdirectly with the Hyatt Regency. The room rate forIRES attendees is $120 per night for single-doublerooms. Please call group reservations at 800-233-1234 or 504-561-1234. The IRES convention rate isavailable until July 9, 2000 and on a space-available basis thereafter.

CANCELLATIONS AND REFUNDS

Your registration fee can be refunded if we receivewritten notice before July 1, 2000. No refunds will begiven after that date. However, your registration feemay be transferred to another qualifying registrant.Refund checks will be processed after Aug. 20, 2000.

Seating for all events is limited. IRES reservesthe right to decline registration for late regis-trants due to seating limitations.

Call for more details:913-768-4700. Or see IRESweb site: www.go-ires.org

Insu

rance Regulatory

Exami ners Socie

ty

Orlando

24 The Regulator

FIRST CLASS MAILUS POSTAGE PAIDSHAWNEE MISSION KS

PERMIT NO. 588

BULLETIN BOARD

www.go-ires.org

REGULATORREGULATOR®

Published by theInsurance Regulatory Examiners Society130 N. Cherry, Suite 202, Olathe, Kansas 66061

√ Welcome new IRES members: Nancy L.Barnes, Washington, James M. Boggs, III, Texas;Sharon Burton, Kentucky; Todd P. Cioni, Mary-land; Mark J. Duffy, Connecticut; Pamela Farmer,Kentucky; William P. Hobert, CIE, Arizona: Joe B.Johnson, N. Carolina; Susan T. Stead, Ohio; DeeAnn Teseneer, AIE, Alaska; Ray Tsang, Alaska.Correction from November- Douglas R. Hartmanis with Alaska Dept.

√ CORRECTION: In the November issue,Kathleen McQueen, Frank Seidel and JannGoodpaster were inadvertenly omitted from the listof members of the Publication Committee thatappears on page two.

√ Year 2000 dues notices have been sent out. Infact you should have received one by now. If youhave changed address lately, call us right away.To maintain your AIE/CIE designation, You mustkeep your membership dues current and complywith the Society’s continuing education program.

TH

E

What you need to knowabout the 1999 federalfinancial servicesreform act

A SPECIAL REPORT

√ Arthur Andersen LLP, a leading internationalprofessional service firm, is seeking experiencedinsurance examiners to perform financial andmarket conduct examinations of insurancecompanies. The position requires travel and norelocation is necessary. Requirements include aBachelors degree, Accredited/Certified Financialor Insurance Examiner designation and three plusyears of financial or market conduct examination,public accounting or other insurance auditexperience. CPA designation a plus. Significantopportunity for advancement. Salarycommensurate with experience. Please submityour resume along with salary history andrequirements to: Arthur Andersen LLP, Director ofHuman Resources, One Financial Plaza, Hartford,CT 06103. We are an Equal Opportunity/Affirmative Action Employer.