Call to Order and Roll Call
The 3rd meeting of the Interim Joint Committee on Banking and Insurance was held on Wednesday, November 18, 2015, at 12:00 PM, in Room 149 of the Capitol Annex. Representative Jeff Greer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Tom Buford, Co-Chair; Representative Jeff Greer, Co-Chair; Senators Jared Carpenter, Chris Girdler, Christian McDaniel, Morgan McGarvey, Dennis Parrett, Dorsey Ridley, and Albert Robinson; Representatives Will Coursey, Ron Crimm, Mike Denham, Joseph M. Fischer, Jim Gooch Jr., Mike Harmon, Chris Harris, Dennis Horlander, James Kay, Dennis Keene, Adam Koenig, David Meade, Michael Meredith, Russ A. Meyer, Brad Montell, David Osborne, Ruth Ann Palumbo, Ryan Quarles, Jody Richards, Steve Riggs, Bart Rowland, Jonathan Shell, Kevin Sinnette, Fitz Steele, and Wilson Stone.
Guests: Charles Vice, Commissioner, Kentucky Department of Financial Institutions; DJ Wasson, Administrative Coordinator, Kentucky Department of Insurance; Peggy Porter, President, and Mike Johnson, Vice Chair, Independent Insurance Agents of Kentucky.
LRC Staff: Sean Donaldson, Dale Hardy, and Dawn Johnson.
Approval of Minutes
A motion by Senator Buford and second by Representative Horlander to approve the minutes of the September 22, 2015, meeting carried by voice vote.
Discussion of the state of the banking and financial industry in Kentucky
Commissioner Charles Vice, Kentucky Department of Financial Institutions, noted that three Kentucky banks were recognized in American Banker’s 2015 “Best Banks to Work For.” The Commissioner spoke on the condition of the state’s chartered banks. While the number of banks declined from 2011 to 2014, total bank assets and total portfolio saw approximately six percent growth. Commissioner Vice reviewed financial ratios through June 30, 2015. He noted the state’s banking industry employs 11,961 people.
Commissioner Vice reviewed two reports submitted at the September 2015 Community Banking and the 21st Century Conference. The Roisin McCord and Edwards Simpson Prescott records the status of the banking industry from 2007 to 2013. The report reflects a decrease in the number of smaller banks due to increased business costs because of increased regulation while larger banks are becoming more numerous. He noted that banks are also less expensive to buy. Referring to the Marshall Lux and Robert Greene paper, he said community banking assets have declined by 50 percent the last two decades. However, community banks are responsible for 77 percent of agricultural lending and over 50 percent of small business lending. During the recession, community banks reported positive return on average assets and low mortgage default rates.
Discussion of consumer loan legislation the Kentucky Department of Financial Institutions will propose
Commissioner Vice explained that the department will request the same regulatory authority over the consumer loan industry as exists for other industries regulated by the department including banking, payday lenders, mortgage and money transmitters. Currently, the department is limited to examining entities and license revocation if problems are found--the least desirable option. Proposed legislation would allow the authority to fine between $500 to $2,500 per violation; rescission, refund, or disgorgement if a consumer has been harmed, and the ability to either enter into an emergency order or a cease or desist order. The department may also request additional consumer protection provisions such as additional grounds for suspending, revoking or placing conditions on a license; address unfair and deceptive acts or practices; clarification of subpoena powers, and consumer notification and wind-down procedures if a company does cease to operate. Commissioner Vice said the department will not present a bill until differences with the industry have been addressed.
Responding to Representative Riggs’ question Commissioner Vice said the agency does not receive many complaints about the consumer loan industry. The commissioner said any fines collected would go back into the department. Representative Riggs suggested a portion go toward economic education councils for financial education.
Responding to Representative Crimm’s question about what defines a community bank, Commissioner Vice explained that the department considers how the bank operates within their community.
Responding to Representative Meredith’s question the commissioner said for an institution to be fined the maximum proposed $2,500 the offense would have to be repetitive and extremely egregious. In response to Representative Meredith’s concerns about increased oversight, the commissioner noted that the request is in line with the other industries the department regulates.
In response to Representative Denham’s question about a recent Harvard study on increased regulations, Commissioner Vice said the department periodically meets with federal regulators and noted that no state charter banks have failed in Kentucky since 1987. Representative Denham said as a banker he has seen a tremendous impact of increased federal regulation on community banks. The commissioner said he supports “right size regulation” based on the size and business model of an institution.
Discussion of the state of the insurance industry in Kentucky
DJ Wasson, Administrative Coordinator, Kentucky Department of Insurance said the department’s primary goal is to protect consumers by ensuring companies are solvent to pay policy obligations. With an increasing international presence in the insurance industry the department is focusing on specific areas relating to capital insolvency of companies, smoothing out differences in national and international law, and having a better understanding of how international markets work.
Following the financial crisis, states collectively decided to make changes to the solvency model. So far, Kentucky has instituted three of the five recommendations: supervisory colleges for regulators, Own Risk Solvency Assessment for strategic analysis, and addressing reserves dynamically based on risk and products issued. Two other area include reviewing corporate governance of companies that impact solvency of companies and reinsurance collateral.
Ms. Wasson said currently, international companies doing business in the United States must post additional capital which can be a barrier. The industry is considering ways to loosen requirements while still providing needed protections for policy holders.
Ms. Wasson said the department is also monitoring mergers, including those between Aetna and Humana and Anthem and Cigna, cyber insurance and cyber security issues, service products in sharing economies like Uber, Lyft, and Airbnb; price optimization, and health insurance issues that are network related including consumer education. The department is considering whether a separate license is needed for pharmacy benefits managers and other areas so consumers can better understand how pharmacy benefits work.
Ms. Wasson said the department is also working on life insurance suitability standards due to an existing loophole in the non-forfeiture benefit.
Representative Harris expressed concern about insurers requiring patients to purchase prescriptions via mail order from out-of-state pharmacies. Ms. Wasson said the agency has been asked to review this issue under the Any Willing Provider law. Currently, no state law exist to prohibit that type of arrangement. For the 2017 plan year federal regulation will prohibit the requirement.
Representative Meredith also expressed concern and urged an immediate solution. Co-chairman Greer agreed and suggested there would be proposed legislation in the coming legislative session.
Responding to Representative Fischer’s urged maintaining state-based regulation and capital standards while opposing federal and international bank-centric standards being proposed. Ms. Wasson said the department is a proponent of state-based standards and consumer protection.
Discussion of Cyber Security Insurance
Ms. Wasson said the explosion of cyber activity presents a tremendous opportunity for regulatory growth in the insurance and financial sectors. Regulators want to address protection of stored information and identity theft protection. In 2014, the industry created a cybersecurity task force to provide best practices guidelines by assisting consumers when information is compromised, monitoring activities of insurers and producers to protect data, ensuring own databases are secure, and exercising regulatory authority over cybersecurity insurance products sold in the marketplace. Peggy Porter, President, and Mike Johnson, Vice Chairman, Independent Insurance Agents of Kentucky spoke on cybersecurity issues. Mr. Johnson explained that several carriers offer products to help insulate business and individuals from this type of exposure. Because of the newness of the product, there is no standardization that improves an agent’s perspective.
Responding to Representative Fisher’s question Ms. Wasson said the consumer bill of rights dictates the consumer’s right to know how information is protected, consumer rights if a breach occurs, and outline what should happen in the event of a breach.
Ms. Porter explained a program offered by the organization that funds veterans through the licensing process to become insurance agents.
There being no further business, the meeting was adjourned at 1:16 PM.