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89–351 PDF 2015

S. HRG. 113–350

FINDING THE RIGHT CAPITAL REGULATIONS FOR

INSURERS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER 

PROTECTION

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

SECOND SESSION

ON

FINDING THE RIGHT CAPITAL REGULATIONS FOR INSURANCE 

COMPANIES UNDER THE DODD-FRANK ACT

MARCH 11, 2014

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director

DAWN RATLIFF, Chief Clerk 

TAYLOR REED, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

SHERROD BROWN, Ohio, Chairman 

PATRICK J. TOOMEY, Pennsylvania, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

ELIZABETH WARREN, Massachusetts 

RICHARD C. SHELBY, Alabama 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

JERRY MORAN, Kansas 

DEAN HELLER, Nevada 

BOB CORKER, Tennessee

GRAHAM STEELE, Subcommittee Staff Director

TONNIE WYBENSINGER, Republican Subcommittee Staff Director

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

TUESDAY, MARCH 11, 2014

Page

Opening statement of Chairman Brown ................................................................ 1

Opening statements, comments, or prepared statements of: 

Senator Toomey ................................................................................................ 2

Senator Johanns ............................................................................................... 3

WITNESSES 

Susan M. Collins, a United States Senator from the State of Maine ................. 4

Gina Wilson, Executive Vice President & Chief Financial Officer, TIAA–

CREF ..................................................................................................................... 7

Prepared statement .......................................................................................... 29

Daniel Schwarcz, Associate Professor and Solly Robins Distinguished Research Fellow, University of Minnesota Law School ......................................... 9

Prepared statement .......................................................................................... 33

H. Rodgin Cohen, Senior Chairman, Sullivan & Cromwell LLP ......................... 11

Prepared statement .......................................................................................... 40

Aaron Klein, Director, Financial Regulatory Reform Initiative, Bipartisan 

Policy Center ........................................................................................................ 12

Prepared statement .......................................................................................... 49

Michael W. Mahaffey, Chief Risk Officer, Nationwide Mutual Insurance Company ....................................................................................................................... 14

Prepared statement .......................................................................................... 55

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from Senator Susan M. Collins ................................................................... 60

Prepared statement of Sheila C. Bair, former Chair, Federal Deposit Insurance Corporation .................................................................................................. 62

Letter from the U.S. Chamber of Commerce ......................................................... 68

Prepared statement of William C. Hines, American Academy of Actuaries ....... 70

Prepared statement of the American Council of Life Insurers (ACLI) ............... 76

Prepared statement of the American Insurance Association ............................... 79

Prepared statement of the Property Casualty Insurers Association of America 

(PCI) ...................................................................................................................... 86

Prepared statement of the Financial Services Roundtable .................................. 89

Prepared statement of the National Association of Insurance Commissioners 

(NAIC) ................................................................................................................... 94

Prepared statement of the National Association of Mutual Insurance Companies (NAMIC) ........................................................................................................ 96

(III)


BANKI-41578DSA with DISTILLER

BANKI-41578DSA with DISTILLER
(1)

FINDING THE RIGHT CAPITAL REGULATIONS 

FOR INSURERS 

TUESDAY, MARCH 11, 2014

U.S. SENATE, SUBCOMMITTEE ON FINANCIAL

INSTITUTIONS AND CONSUMER PROTECTION, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 10:07 a.m. in room SD–538, Dirksen 

Senate Office Building, Hon. Sherrod Brown, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. The Committee will come to order. Thank you 

for joining us, especially Senator Collins, thank you for your leadership on this issue and sharing your ideas for legislation and advice 

for the Fed with the Subcommittee. Thank you for that. 

I want to first thank Chairman Johnson for permitting Senator 

Toomey and me to address this important issue on our Subcommittee and a number of others over the past 3 years. Chairman 

Johnson has allowed us to examine a number of important issues 

and take a more active role than Subcommittees—at least in my 

understanding Subcommittees over the years in Banking have traditionally assumed. And I appreciate very much Tim’s generosity 

and certainly his staff’s work with us. 

I thank Senator Toomey for working with us on this hearing. 

There is across the political spectrum and across party lines broad 

agreement that providing traditional life and property and casualty 

insurance is different from banking. I appreciate particularly Senator Johanns’ efforts on this Committee with Senator Collins and 

others in fixing what we think is a very fixable issue. 

Funding sources are different for insurance and banking. Insurers rely on customer premiums and investment proceeds. The nature of their investments is different. Insurers must match longterm investments with long-term policies, and the risks are different. Insurers are concerned with natural disasters and life 

events. 

While I believe that traditional insurance is distinct business 

from banking, institutions often combine regulated banking and socalled shadow banking activities. Similarly named institutions can 

engage in a wide range of activities from derivatives to repo to securities lending under a range of corporate structures. Dodd-Frank 

Act tried to remedy this problem by creating the FSOC, the Financial Stability Oversight Council, to identify systemic financial firms 

and encourage regulation of risky activities. If any institution enVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\89351.TXT SHERYL

BANKI-41578DSA with DISTILLER
2

gages in activities like securities financing transactions, those activities should absolutely—absolutely—be subject to the same capital rules as banks. 

But I agree with New York’s Banking Commissioner Ben 

Lawsky, who regulates some of the Nation’s largest insurers, that 

applying bank capital standards to insurance is like trying to, as 

he said, ‘‘fit a square peg in a round hole.’’ For that reason, it is 

important that the Federal Reserve delayed applying Basel III and 

Section 165 prudential standards to insurers. The Fed must determine that insurance capital rules are appropriate under the Collins 

amendment. Chairman Dodd and Senator Collins anticipated this 

issue. There is nearly universal agreement that this should not require legislation. 

In 2011, Senator Johanns and I sent a letter with a group of 20 

of our colleagues representing large numbers of colleagues in both 

parties agreeing that Dodd-Frank gives regulators the flexibility to 

treat insurance differently. If the Fed continues to disagree, I am 

committed to working with both of my colleagues, Senator Collins 

and Johanns, to find a legislative solution. 

We are all concerned about creating another AIG, which realized 

45 percent of the losses of all insurers in 2008 and received 55 percent of the Government’s support provided to insurers. Dodd-Frank 

contains a number of provisions to prevent that from happening 

again: one, regulating derivatives to address their credit default 

swap business; second, eliminating the Office of Thrift Supervision 

and moving thrift regulation to the Fed; three, creating nonbank 

systemically important financial institution designations, SIFI designations; and, last, requiring enhanced capital and leverage rules 

for nonbank SIFIs. 

Legislation would not alter these provisions. It would address a 

narrow, specific element of the Collins amendment, allowing the 

Fed to tailor capital rules to the insurance business model. This 

issue is not whether applying bank standards to insurers would require too much capital or too little capital. There is general agreement that institutions must have enough capital to pay for the cost 

of their failures. Capital rules should, must accurately measure 

and address the risks of the businesses to which they are being applied. 

I look forward to Senator Collins’ testimony and to our panel. 

And, Senator Toomey, thank you. 

STATEMENT OF SENATOR PATRICK J. TOOMEY 

Senator TOOMEY. Thanks very much, Mr. Chairman, and thanks 

for having this hearing. I think it is a very important topic. I want 

to thank you and Senator Johanns for the legislation you have introduced which addresses this and which I am a cosponsor of. 

I want to thank Senator Collins for joining us today and for testifying before the Committee. 

I just want to underscore a couple of points. I agree completely 

that the insurance business model is completely different in so 

many ways from a banking model that it would be completely inappropriate to impose a bank-centric, a bank-designed capital regime 

on insurance companies. 


BANKI-41578DSA with DISTILLER
3

I would argue that the same principle applies with asset management. That, too, is completely different and very dissimilar from 

the banking business, and, therefore, a banking capital regime does 

not make sense for asset managers either. 

And I would also point out that, in addition to some danger that 

the Fed may be inclined to go down this road of requiring a banking type capital on insurance companies, I am concerned that there 

is a danger that the Financial Stability Board might also move in 

the direction of imposing European-style insurance capital on an 

American industry that has evolved in a way that is very different 

from the European model and for which that model, I think—that 

capital model is not appropriate. 

So I think this is extremely timely. You pointed out the problems 

with AIG, and I know you know very well it was not their insurance business that caused the problems at AIG. It was activities 

that had nothing to do with insurance. And, in fact, for many, 

many decades, the insurance industry has weathered all kinds of 

storms and volatility and different kinds of markets and circumstances and weathered it quite well, which I think further suggests that this is an industry that has an appropriate set of capital 

requirements. 

So thanks for having the hearing. I look forward to the testimony 

of our colleague. 

Senator BROWN. Thank you, Senator Toomey. 

Senator Johanns. 

STATEMENT OF SENATOR MIKE JOHANNS 

Senator JOHANNS. What I was going to say has basically been 

said, so I am not going to repeat that. We do know the difference 

between the two industries, the banking and the insurance. But I 

do want to make a very important point today. 

First of all, I want to say thank you to the Chairman for his efforts. My point there is that without your engagement, I do not 

think we would be this far along. 

The second point is to Senator Collins. Senator, without you 

grabbing hold of this and trying to wrestle your way through these 

technical, difficulty issues, I think we would be stalled, to be very 

honest with you. I know you feel very passionately about getting 

this right. That is what we want to do. We want to make sure that 

whatever we end up doing with capital standards we have got it 

right—we have got it right for the banking industry, we have got 

it right for the insurance industry. 

And I think this is an opportunity with Dodd-Frank to reflect 

upon what was there, is it working, what can we do to improve it. 

And your engagement I think is critical to get us to the finish line. 

If we can have a breakthrough on this, then I think this is literally a bill we can get passed, we can get done, get to the President for his signature. So I just wanted to devote my time, Senator, 

to just say thank you for being here today and thank you for engaging on this very, very challenging, difficult issue. But I think I 

see a light at the end of the tunnel. 

Thank you. 

Senator BROWN. Thank you, Senator Johanns. 

Senator Tester. 


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Senator TESTER. I am going to break Senate protocol here because everything has been said, I just have not said it, and I am 

not going to say it. So I look forward to Senator Collins’ testimony. 

Senator BROWN. Thank you, Jon. 

Senator Collins, the senior Senator from Maine, welcome. 

STATEMENT OF SUSAN M. COLLINS, A UNITED STATES 

SENATOR FROM THE STATE OF MAINE 

Senator COLLINS. Thank you very much, Mr. Chairman, Ranking 

Member Toomey, Senator Johanns, Senator Tester. It is a great 

pleasure to join you this morning. I wager that this hearing is the 

most technical hearing that is being held on Capitol Hill today, 

perhaps this week, perhaps this year. 

I do thank you for convening this hearing on insurance capital 

standards and for inviting me to come before you today to share 

my views on this important topic. As a former financial regulator 

myself, I appreciate how complex it is to develop proper capital 

standards. For 5 years I headed Maine’s Department of Professional and Financial Regulation and oversaw the Bureau of Banking, the Bureau of Insurance, the Bureau of Consumer Credit Protection, and the Securities Division. 

There are three issues that I would like to touch upon this morning. 

First, I would like to describe why I authored what has become 

to be called ‘‘the Collins capital standards amendment,’’ Section 

171 of Dodd-Frank, and why I feel strongly that it is so important 

that nothing be done to diminish or weaken it. 

Second, I want to emphasize my belief that the Federal Reserve 

is able to take into account and should take into account the differences between insurance and other financial activities when consolidating holding company capital under Section 171. 

And, third, I will comment on how the Federal Reserve’s authority on this point can be clarified, if necessary, through legislation 

that I have recently introduced, Senate bill 2102. I am also very 

aware of the legislation that the Chairman, the Ranking Member, 

and Senator Johanns—Senator Tester may be on it also—have introduced, and I think we are not that far apart. And I hope that 

we can continue to work to reach consensus. 

With regard to my first point, we all recall the circumstances we 

faced 4 years ago as our Nation was emerging from the most serious financial crisis since the Great Depression. That crisis had 

many causes, but among the most important was the fact that 

some of our Nation’s largest financial institutions were dangerously 

undercapitalized while at the same time they held interconnected 

assets and liabilities that could not be disentangled in the midst 

of a crisis. 

I remember the big debate during Dodd-Frank about what financial institutions should be allowed to do. Should they be involved 

in the derivative business? Should they be able to issue credit default swaps? And I kept thinking, from the perspective of the 

former regulator that I once was, that what really was important 

was how much capital they had if they were going to engage in 

riskier transactions. And when I looked at the leverage ratios of, 

for example, Bear Stearns and found that it was 30:1, I once again 


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came to the conclusion that what was important was having adequate capital standards. 

The failure of these overleveraged financial institutions threatened to bring the American economy to its knees. As a consequence, the Federal Government was forced to step in to prop up 

financial institutions that were considered too big to fail. Little has 

angered the American public more than these taxpayer-funded 

bailouts. That is the context in which I offered my capital standards proposal as an amendment to the Dodd-Frank bill. 

Section 171 is aimed at addressing the too-big-to-fail problem at 

the root of the 2008–09 crisis by requiring large financial holding 

companies to maintain a level of capital at least as high as that 

required for our Nation’s community banks, equalizing their minimum capital requirements, and eliminating the incentives for 

banks to become too big to fail. 

Incredibly, prior to the passage of the Collins amendment, the 

capital and risk standards for our Nation’s largest financial institutions were more lax than those that applied to smaller depository 

banks, even though the failure of larger institutions was much 

more likely to trigger the kind of cascade of economic harm that 

we experienced during the financial meltdown. Section 171 gave 

the regulators the tools and the direction to fix this problem. 

Let me now turn to my second point, that Section 171 allows 

Federal regulators to take into account the distinctions that you 

have all discussed between banking and insurance and the implications of these distinctions for capital adequacy. While it is essential 

that insurers subject to the Federal Reserve Board oversight be 

adequately capitalized on a consolidated basis, it would be improper and not in keeping with Congress’ intent for Federal regulators to supplant the prudential State-based insurance regulation 

with a bank-centric capital regime for insurance activities. 

Indeed, nothing in Section 171 alters State capital requirements 

for insurance companies under State regulation nor the State guarantee funds. Section 171 directs the Federal Reserve to establish 

minimum consolidated capital standards with reference to the 

FDIC’s Prompt Corrective Action regulations. But as I have publicly and repeatedly stressed, Section 171 does not direct the regulators to apply bank-centric capital standards to insurance entities 

which are already regulated by the States. And having been in that 

role of overseeing insurance regulation plus State banking regulation, I am keenly aware of the difference and of the regulation at 

the State level with the requirement for adequate reserves and 

with the guarantee fund. 

I have written to the financial regulators on more than one occasion to make this point. For example, in a November 26, 2012, letter, which I would respectfully request be inserted in the record, 

I stressed to financial regulators that while it is essential that insurers subject to the Federal Reserve Board oversight be adequately capitalized on a consolidated basis, it was not Congress’ intent to replace State-based insurance regulation with a bank-centric capital regime. For that reason, I called upon the Federal regulators to acknowledge the distinctions between banking and insurance and to take these distinctions into account in the final rules 

implementing Section 171. 


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While the Federal Reserve has acknowledged the important distinctions between insurance and banking, it has repeatedly suggested that it lacks authority to take those distinctions into account 

when implementing the consolidated capital standards required by 

Section 171. As I have already said, as the author of Section 171, 

I do not agree that the Fed lacks this authority and find its disregard of my clear intent, as the author of Section 171, to be frustrating, to say the least. 

Since I am the author of the Collins amendment, since I am Senator Collins, I think I know what I meant. 

[Laughter.] 

Senator COLLINS. Which brings me to my final point: how the 

Federal Reserve’s authority to recognize the distinctions between 

insurance and banking may be clarified through legislation that I 

have recently introduced, Senate bill 2102. 

My legislation would add language to Section 171 to clarify that 

in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required 

to include insurers so long as the insurers are engaged in activities 

regulated as insurance at the State level. My legislation also provides a mechanism for the Federal Reserve, acting in consultation 

with the appropriate State insurance authority, to provide similar 

treatment for foreign insurance entities within a U.S. holding company where that entity does not itself do business in the United 

States. That was a very difficult issue to try to come up with a solution to. I would encourage you to take a look at that section of 

the bill that I have introduced. We have tried very hard to deal 

with the situation where there is a foreign insurance entity within 

a U.S. holding company when the entity does not do business in 

the United States. I think we have come up with a reasonable approach. 

I should point out that my legislation does not in any way modify 

or supersede any other provision of law upon which the Federal Reserve may rely to set appropriate holding company capital requirements. 

In closing, I want to thank the Committee for holding this hearing. This has been an enormously complex issue to resolve in a way 

that does not undermine the intent of Section 171. I want to especially thank you, Chairman Brown and Senator Johanns, for your 

hard work. Your staff has worked night and day with my staff over 

many months to try to craft language that clarified the Fed’s authority to provide the appropriate treatment for insurer capital. I 

believe that the language that I have introduced should give the 

Fed the clarity it needs to address the legitimate concerns raised 

by insurers that they not have a bank-centric capital regime for 

their insurance activities imposed upon them. 

This is an exceptionally complex area of the law, and I recognize 

that some, including Members of this Committee, may prefer a different approach than the one that I have taken. I am also aware 

that there is an unusual accounting issue here that involves some 

insurers, not all of them, not those that are publicly traded, for example, but on whether there should be generally accepted accounting principles or the SAP approach that is used by insurers. 


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I am, of course, more than willing to continue to work with you 

on a carefully tailored response to address those legitimate concerns, but I would ask that we all be mindful of the fact that we 

must not take action that would diminish the taxpayer protections 

that provided the motivation for my writing the Collins amendment 

and that are provided by the critical reforms in Section 171. 

Thank you very much for allowing me to testify. I realize I went 

over my 5 minutes, but this is a very complex issue, and I appreciate your indulgence. 

Senator BROWN. Thank you, Senator Collins, for your explanation and your leadership and your hard work on this and so 

much else in the Senate. Your letter, without objection, the Collins 

letter, will be inserted in the record. 

Senator BROWN. Thanks for joining us. 

Senator COLLINS. Thank you very much. 

Senator BROWN. We appreciate it. 

Senator Collins said this is the most technical, maybe the most 

technical hearing in the Senate, at least today if not for the last 

few months, and that is why we have five really smart people testifying—including Senator Collins, six really smart people. 

Senator COLLINS. I was just going to take a great exception to 

that. 

[Laughter.] 

Senator COLLINS. Thank you, Mr. Chairman. And good save 

there. 

Senator BROWN. If the witnesses would come forward, I will 

begin the introductions. 

[Pause.] 

Senator BROWN. Thank you to the five of you for joining us, a 

couple of you on pretty short notice, so thank you for that. 

Gina Wilson is Executive Vice President and Chief Financial Officer of TIAA–CREF. Welcome, Ms. Wilson. Thank you for joining 

us. 

Daniel Schwarcz is Associate Professor of Law and Solly Robins 

Distinguished Research Fellow at the University of Minnesota Law 

School. His research primarily focuses on consumer protection and 

regulation and property and casualty and health insurance markets. Thank you for joining us. 

Rodgin Cohen is Senior Chairman of the law firm Sullivan & 

Cromwell. The New York Times described him as the ‘‘Dean of 

Wall Street Lawyers.’’ Welcome, Mr. Cohen. 

Aaron Klein is no stranger to this Committee room, having 

served on the Banking Committee staff for some 8 years. He is now 

Director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative. Welcome back, Mr. Klein. 

And Michael Mahaffey is the Senior Vice President and Chief 

Risk Officer for Nationwide Insurance in Columbus, Ohio. 

Welcome to all of you. Ms. Wilson, would you like to start? 

STATEMENT OF GINA WILSON, EXECUTIVE VICE PRESIDENT & 

CHIEF FINANCIAL OFFICER, TIAA–CREF 

Ms. WILSON. Thank you very much, Chairman Brown, Ranking 

Member Toomey, Members of the Subcommittee. Thank you for 

providing TIAA–CREF with the opportunity——


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Senator BROWN. Microphone? Either you are not speaking into it 

or it is not on. 

Ms. WILSON. Chairman Brown, thank you, also to Ranking Member Toomey, Members of the Subcommittee, thank you for providing TIAA–CREF the opportunity to testify on an important 

issue to us and to the clients we serve. 

My testimony today focuses on the final rules governing capital 

standards and the Basel III accords issued by the Federal Reserve 

Board in conjunction with the Office of the Comptroller of Currency 

and the Federal Deposit Insurance Corporation, which I will collectively refer to as the ‘‘agencies.’’

The final rules issued in July contain several changes from the 

proposed rulemaking. Most notably for TIAA–CREF, it temporarily 

exempted savings and loan holding companies, or SLHCs, substantially engaged in insurance underwriting or commercial activities. 

We are a leading provider of retirement services in the academic, 

research, medical, and cultural fields managing retirement assets 

on behalf of 3.9 million clients with more than 15,000 institutions 

nationwide. 

While we are primarily engaged in the business of insurance, we 

hold a small thrift institution within our structure and as a result 

are registered as an SLHC. This thrift provides us the opportunity 

to offer our clients deposit and lending products integrated with 

our retirement, investment management, and life insurance products and enhances our ability to offer them the chance to attain 

lifelong financial security. 

Our status as an SLHC places us under the purview of the Federal Reserve and consequently subjects us to the proposed capital 

regime the agencies have set forth. TIAA–CREF supports strong 

and appropriate capital standards that consistent with SLHCs’ operating models and the risks inherent in our businesses. To be 

clear, this includes our support for appropriate capital standards 

for banking organizations, and we are not seeking to exempt insurers from the tenets of the Dodd-Frank Act. We do not object to the 

Federal Reserve oversight to enterprise capital standards. We are 

very concerned, however, about how the final standards will be 

fully accounting for the diverse business models under which different financial service organizations operate. In short, we want to 

make sure that the metrics we are measured on appropriately reflect the nature of our business. Applying metrics designed for 

banks to an insurer would be inappropriate and could have negative effects for the economy, our customers, and insurers. 

Bank-centric standards do not effectively recognize the long 

dated nature of both sides of an insurer’s balance sheet and would 

likely encourage insurers to modify certain investment practices 

and strategies that would be detrimental to our core activities. A 

bank’s core business is lending and maturity transformation while 

insurers practice risk pooling and management. As a result, insurers’ investment portfolios involve duration matching of assorted 

longer-term liabilities. That is, we match our long-term liabilities 

with longer-term investments. Imposing a capital framework designed to address maturity mismatch inherent in banking on an insurer would create a challenging insurer investment portfolio consideration where none previously existed. 


BANKI-41578DSA with DISTILLER
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Under the rules, certain long dated investments, which are typically less liquid than shorter-term investments, are discouraged. 

Applying these bank capital standards on insurers would also create a disincentive to invest in the very assets that promote stability 

and solvency best. 

The rules set forth by the agencies, if applied to insurers, would 

have a detrimental effect on the ability to offer affordable financial 

products, which in turn could trickle down to individuals who utilize insurance products to help them build a more secure financial 

future. 

The rules also could have macroeconomic impact, for example, 

creating disincentives for insurers to invest in asset classes that 

promote the long-term economic growth such as long-term corporate bonds, project finance, and infrastructure investments, commercial real estate assets, private equity, and other alternative 

asset classes. 

In our comment letter to the Federal Reserve Board and in our 

subsequent conversations with them, we have proposed alternative 

methodologies for measuring an insurer’s capital that support both 

the policy concerns of the Federal Reserve and ensure a strong capital regime, while also accounting for the business of insurance. We 

hope that they continue to study the issue and that they will find 

a sensible way to integrate a capital standard that is appropriately 

designed for insurers. In the meantime, we ask Congress to explicitly give the agencies the ability to ensure that capital standards 

are appropriately tailored for our business. 

Thank you again for the opportunity to testify. We appreciate the 

Subcommittee’s interest in this issue and affording us another 

venue in which to express our concerns. 

I look forward to answering any questions you may have. 

Senator BROWN. Thank you, Ms. Wilson. 

Professor Schwarcz, welcome. 

STATEMENT OF DANIEL SCHWARCZ, ASSOCIATE PROFESSOR 

AND SOLLY ROBINS DISTINGUISHED RESEARCH FELLOW, 

UNIVERSITY OF MINNESOTA LAW SCHOOL 

Mr. SCHWARCZ. Thank you very much, Chairman Brown, Ranking Member Toomey, Members of the Subcommittee. My comments 

today are going to be focused on what I am going to call ‘‘insurance 

SIFIs.’’ These are nonbank financial holding companies that FSOC 

designates as ‘‘systemically significant’’ and that are predominantly 

engaged in insurance activities. Also, savings and loan holding 

companies that have predominant insurance businesses are covered 

by the Collins amendment. I deal with that in my testimony, but 

I am not going to be talking about that today. 

In starting off talking about insurance SIFIs, I want to note 

where I agree with members of this panel and with many of you. 

I agree that bank-centric capital requirements should not be applied to insurers. I agree that insurance and banking are different 

and that, as a result of that difference, there must be appropriately 

tailored capital requirements. I agree that the Collins amendment 

gives the Fed the authority, very clearly I think—I find the legal 

analysis of my fellow witness Mr. Cohen to be very persuasive that 

the Fed has the authority to implement that. 


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Here is where I disagree. There is a tendency in much of the 

writing and much of the rhetoric to say the fact that we should not 

apply bank-centric capital rules to insurers means that we should 

completely defer to the State-based risk-based capital requirements. That I do not believe is true. 

I believe that Dodd-Frank requires the Fed to craft appropriate 

capital requirements to apply to insurance SIFIs and that those 

rules should differ from the State risk-based capital rules. 

Why is that? What we learned during the crisis is that insurance 

can pose a real systemic risk. I deal with this in my written testimony and much more thoroughly in an article that is referenced in 

the written testimony. 

People like to say, ‘‘Oh, well, AIG, the portion of AIG that got 

AIG into trouble was not about insurance.’’ Well, that is true with 

respect to its credit default swaps. But a major problem at AIG was 

its securities lending business. Its securities lending business involved the lending of insurers’ assets. So insurers’ at AIG were intimately involved in the problem. 

Moreover, if you look at FSOC’s report designating Prudential as 

a SIFI, you will see that FSOC, after looking at the portfolio of 

Prudential quite carefully, says that they are, in fact, potentially 

susceptible to a run. 

Now, I admit and I want to emphasize this risk is different and 

less substantial than the risk of a run in banking. But at the same 

time, it is real. There, in fact, have been runs on insurance companies. Executive Life in 1991 was subject to a run wherein policy 

holders removed from the company $3 billion within the course of 

a single year. 

Why is this significant? It can result in systemic risk not because 

the insurer fails necessarily, but because an insurer facing massive 

liquidity problems can immediately try to dump its portfolio, thereby interfering with broader capital markets. There is emerging research showing that insurers were a big part of the problem in 

their purchase of mortgage-backed securities leading up to the crisis and in triggering a fire sale of mortgage-backed securities when 

they offloaded those assets. 

So the point I want to make is this: Insurance is less systemically risky than banking, but it can be systemically risky. Why 

then does that lead to the conclusion that we need to have distinct 

capital requirements at the Federal level? 

State risk-based capital requirements are not meant to deal with 

systemic risk. They are meant to deal with consumer protection. 

There is no, absolutely no consolidated capital requirement of 

State-based regulation. Therefore, you do not have any sense of 

whether the aggregated insurance business of a company presents 

capital risk. You are not dealing with the possibility of multiple 

gearing. 

State risk-based capital requirements directly and uncritically incorporate rating agencies in terms of assessing capital penalties. A 

core provision of Dodd-Frank says that is a mistake, that can cause 

systemic risk. And yet that is what State regulation does, because 

it is not concerned about systemic risk, it is concerned about consumer protection. 


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State risk-based capital requirements, remarkably, are moving 

toward a system for reserving where life insurers’ reserves are 

going to be determined almost exclusively based on insurers’ private models—the very private internal risk models that got companies in trouble in the years preceding the crisis. 

Here then is the point. I am not saying that State risk-based capital requirements do not work. What I am saying is that they are 

geared toward consumer protection concerns. Yet we know that insurers, at least some insurers, raise systemic risks. And as such, 

we need an appropriate risk-based capital requirement at the Federal level for those conglomerates to protect against that systemic 

risk. 

Thank you very much. 

Senator BROWN. Thank you, Professor Schwarcz. 

Mr. Cohen. 

STATEMENT OF H. RODGIN COHEN, SENIOR CHAIRMAN, 

SULLIVAN & CROMWELL LLP 

Mr. COHEN. Chairman Brown, Ranking Member Toomey, and 

distinguished Members of the Subcommittee, I am honored to appear before you today to discuss the application of the capital 

standards in Section 171 of the Dodd-Frank Act—the Collins 

Amendment—to insurance companies that are savings and loan 

holding companies or have been designated as ‘‘systemically important’’ by the FSOC. Let me begin by commending your leadership 

on this important issue. 

As far as I know, not a single legislator or regulator has expressed the belief that, as a matter of policy, the same capital 

framework should be automatically imposed on two very different 

businesses—banks and insurers. Nor do I know of a single Member 

of Congress who believes that Congress intended such a result. 

This overwhelming agreement on what the right answer is, both in 

terms of sound policy and effecting congressional intent, led to 

Chairman Brown’s suggestion that I focus my remarks this morning on the legal analysis of whether the Fed has the authority 

under Section 171 to reach this answer. 

In my view, the Federal Reserve does have the interpretive authority to differentiate between banking organizations and insurance companies solely on the basis of the language of Section 171. 

This conclusion becomes compelling when one takes into account 

the statutory framework of which Section 171 is a part. 

Section 171 does not require that designated insurers be subject 

to the Bank Capital Framework, but only that the capital standards for these entities not be less than bank standards. Because 

Section 171 is not prescriptive as to how this compatibility analysis 

should be conducted, Supreme Court precedent makes clear that 

the Federal Reserve has the authority to adopt an interpretation 

that implements Congress’ policy objectives. 

Accordingly, even reading Section 171 in isolation, the Federal 

Reserve has the necessary flexibility to apply capital requirements 

to insurance companies that are appropriately tailored for business, 

liability mix, and risk profile. But it is also a fundamental canon 

of statutory interpretation and construction that Section 171 must 

be read in its context. This requires us to consider the other proviVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 S:\DOCS\89351.TXT SHERYL

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sions of Title I of Dodd-Frank, which collectively established the 

enhanced prudential framework for the Federal regulation of both 

systemically important banks and nonbank SIFIs. 

Under the enhanced prudential standards of Section 165, Congress required that there be both robust regulation and differentiated regulation. These two objectives are not inconsistent but mutually reinforcing, because regulation is more effective when directed to the actual risk involved. 

Section 165 is replete with congressional instructions that the 

Federal Reserve apply enhanced prudential standards through a 

differentiated approach. This includes a provision in Section 165 titled ‘‘Tailored Application’’ that expressly authorizes the Federal 

Reserve differentiate among companies by category. 

Another provision requires the Federal Reserve to take into account differences between bank and nonbank SIFIs, including the 

nature of a company’s liability, in particular the reliance on shortterm funding. 

In addition, in Section 169, Congress directed the Federal Reserve to avoid duplicative requirements. Given that insurance companies are already subject to a comprehensive risk-based capital 

framework under State law, superimposing the Bank Capital 

Framework would fail to fulfill that mandate. 

Let me close with two points. 

First, as I detail in my written testimony, there is an interpretive solution that the Federal Reserve could apply without legislation that conforms to the literal language of the statute, the intent 

of Congress, and sound public policy. Key to this solution would be 

the application of the risk-based capital framework, as it may be 

modified, if necessary, to an organization’s insurance operations 

while applying bank capital standards to the remainder. 

Second, if the Federal Reserve is not prepared to act, I would 

urge that Congress do so to prevent a result that is so clearly unwarranted. I recognize the concern that some have about opening 

up Dodd-Frank. But if there were ever to be a revision, this is the 

time and place. An amendment to clarify Section 171 could be both 

surgical and bipartisan; of most importance, it is the right result. 

I would be pleased to answer any questions you may have. 

Thank you. 

Senator BROWN. Thank you, Mr. Cohen. I have never heard ‘‘surgical’’ and ‘‘bipartisan’’ in the same sentence. 

[Laughter.] 

Senator BROWN. Mr. Klein, thank you. 

STATEMENT OF AARON KLEIN, DIRECTOR, FINANCIAL REGULATORY REFORM INITIATIVE, BIPARTISAN POLICY CENTER 

Mr. KLEIN. Thank you very much, Chairman Brown, thank you, 

Ranking Member Toomey, Members of the Subcommittees, and as 

you mentioned, Chairman Brown, due to my service on the Committee staff, allow me to extend a special warm thank you to the 

staff of the Subcommittee and full Committee for all of their excellent work. 

Today I serve as the director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, and I would like to make four 

key points in my testimony this morning. 


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First, the business of insurance is fundamentally different from 

that of banking and, hence, must be subject to appropriate yet different capital standards. 

Second, the Dodd-Frank Act envisions regulators overcoming 

bank centricity and empowers them to do so. 

Third, insurance company regulation is a real test case in whether regulators can overcome their bank-centric approach. 

And, finally, fourth, going forward, a better regulatory structure 

would include a Federal insurance regulator and an optional Federal charter. 

To understand why it is so important that banks and insurance 

companies be subject to different capital regimes, one must first appreciate the differences in their business models. 

At its core the business of insurance is about aggregating risks, 

matching a company’s liabilities to its assets. Aggregating risk, 

paradoxically, makes insurers less risky by avoid adverse selection 

and protecting themselves against statistically unlikely outcomes. 

By contrast, banks are in the business of mitigating risk. For example, banks transfer timing risk by allowing depositors to instantly access their money while making longer-term loans to consumers and businesses. In contrast to insurance companies, banks 

avoid overconcentration of a specific risk. In fact, overconcentration 

is a classic red flag for safety and soundness concerns for bank regulators. 

Mixing insurance and banking has generally not worked for financial services firms. It remains to be seen whether a regulator 

can effectively regulate both businesses. 

Under Dodd-Frank the Federal Reserve is now the regulator for 

a diverse set of insurance companies. It is unclear how broadly appreciated that fact was during consideration of Dodd-Frank. What 

is clear is that Dodd-Frank’s decision to move thrift holding companies along with regulatory responsibility for nonbank SIFIs to the 

Federal Reserve was given along with the ability and responsibility 

for the Fed to develop appropriate capital standards, tailored to 

each entity or separate class of institutions it regulates. This requirement to tailor capital standards is a key theme throughout 

Dodd-Frank. 

Even if the Federal Reserve is unwilling or unable to use a tailored approach, the FSOC could solve this problem. Among the responsibilities granted to FSOC are to make recommendations to 

the Federal Reserve concerning the establishment of heightened 

prudential standards, including capital standards, for nonbank 

companies supervised by the Board. 

My first preference would be for regulators to follow the intent 

of Congress and tailor capital standards for insurance companies. 

My second preference would be for FSOC to use this authority, 

make recommendations which the Board could then adopt. If neither approach is implemented, I would then support a legislative 

solution such as the bipartisan one proposed by Chairman Brown 

and Senator Johanns or possibly the one described this morning by 

Senator Collins. 

This hearing raises the fundamental question of who is best positioned to find the right capital regulatory structure for insurance 

companies. BPC’s Regulatory Architecture Task Force has been exVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\DOCS\89351.TXT SHERYL

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amining the entire financial regulatory structure in a post DoddFrank world. The task force’s full report will be released this 

spring and will contain many recommendations for how we can improve our current regulatory structure. One recommendation will 

be to create a Federal insurance regulator and an optional Federal 

charter. This is particularly important given the ramifications of 

making a mistake by applying the wrong capital standards to a select set of insurers. As Roy Woodall, the independent FSOC member appointed specifically for his expertise in insurance, stated in 

his dissent on whether to designate an insurance company as a 

SIFI, FSOC’s analysis was, and I quote, ‘‘antithetical to a fundamental and seasoned understanding of the business of insurance, 

the insurance regulatory environment, and the State insurance resolution and guaranty fund systems.’’

In conclusion, BPC’s Financial Regulatory Reform Initiative has 

found that Dodd-Frank generally empowered financial regulators 

with substantial authority and flexibility to use their tools to improve regulation and achieve better regulatory outcomes. Treatment of insurance companies is an early and critical test case of 

financial regulators’ ability to adhere in practice to the construct 

created in Dodd-Frank: that financial regulators can overcome 

bank centricity in handling their new-found responsibilities for 

nonbank financial companies. I hope that they are up to the test. 

The stakes are simply too high. 

Thank you very much. I look forward to responding to your questions. 

Senator BROWN. Mr. Klein, thank you. 

Mr. Mahaffey, welcome. Thank you. 

STATEMENT OF MICHAEL W. MAHAFFEY, CHIEF RISK 

OFFICER, NATIONWIDE MUTUAL INSURANCE COMPANY 

Mr. MAHAFFEY. Chairman Brown, Ranking Member Toomey, and 

distinguished Members of the Subcommittee, thank you for the opportunity to appear before you and testify today. 

My name is Michael Mahaffey, and I am the Chief Risk Officer 

for Nationwide Mutual Insurance Company. I am testifying on behalf of Nationwide but will also represent the perspective of a diverse group of insurers that fall under Federal Reserve supervision. 

As Nationwide’s Chief Risk Officer, I am responsible for overseeing the company’s approach to managing its risk profile. A critical part of my role is to ensure that Nationwide meets its internal 

and external capital requirements so the company is always well 

positioned to honor its promises to our policy holders. As such, I 

believe I can offer a helpful perspective on appropriate capital regimes for insurers. 

Nationwide is a Fortune 100 mutual insurance company based in 

Columbus, Ohio. Roughly half of Nationwide’s revenue is derived 

from our property and casualty businesses, and half is derived from 

our life insurance and related businesses. Nationwide also provides 

banking products and services through Nationwide Bank, a Federal 

savings bank insured by the FDIC. While Nationwide bank is critical to our customers and business strategy, it represents less than 

3 percent the total assets of the combined organization. 


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Nationwide is subject to the Collins amendment by virtue of 

being a savings and loan holding company, or SLHC. Nationwide 

Bank is also independently subject to the minimum capital standards in the Collins amendment. We support the application of the 

Basel banking capital standards to Nationwide Bank. Furthermore, 

we are not seeking to lower capital standards for Nationwide Mutual, and we do not oppose utilization of a group-wide capital 

framework. Capital strength is core to our business proposition, 

providing our policy holders financial protection when they need it 

most. We only seek to ensure that any capital standards established by the Federal Reserve are tailored to the business of insurance; we believe this is consistent with congressional intent. 

The Federal Reserve has maintained an interpretation of the 

Collins amendment that constrains their ability to tailor these capital rules. We respectfully disagree with this interpretation, and we 

support Congress passing legislation to clarify that the Federal Reserve can and should establish a separate tailored capital framework for insurers that appropriately reflects the industry’s unique 

business model, risk profile, and asset-liability management practices. 

Specifically, we support S. 1369, legislation that would clarify 

that the Federal Reserve can appropriately tailor those capital 

rules for insurers, but continue to apply banking capital standards 

to depository institutions owned by insurers. 

I would now like to turn to the problems with imposing a bankcentric capital regime on insurers. The Basel III capital regime was 

designed specifically for banks. This framework is focused on the 

asset side of a company’s balance sheet, including the predominant 

banking risks of credit, market, counterparty, and liquidity risks. 

Given this risk profile, systemic economic events can subject 

banks to destabilizing runs and force them to quickly sell assets at 

a loss to meet their demand deposit obligations and funding needs. 

Conversely, the primary risks facing insurers, found on the liability side of the balance sheet, are generally not as sensitive to the 

same systemic economic risks. These liability risks include, for example, weather, mortality, morbidity, and longevity risks, which 

are not as highly correlated with macroeconomic cycles. 

One example of the problem this framework poses for insurers is 

the 100-percent risk weight imposed on corporate bonds, an approach which fails to distinguish bonds based on the credit quality 

of the borrower. This charge overstates the risk associated with 

high-quality assets, particularly when compared to riskier commercial and industrial loans, which receive the same 100-percent risk 

weight. As of year-end 2012, corporate bonds comprised about 48 

percent of insurer general account assets as compared to around 6 

percent for banks. Thus, overstating the risk on such a substantial 

portion of an insurer’s investment portfolio will likely have a significant impact. 

Insurers subject to this regime could decide to take on additional 

credit risk by shifting their investment portfolios to higher yielding, 

lower-quality corporate bonds that receive the same 100-percent 

risk weight. This additional risk taking would appropriately require increased capital under the State RBC framework, but would 

be ignored under Basel III as proposed. 


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In addition, to the issue of corporate credit risk, the Basel framework’s treatment of insurers’ separate account assets is problematic. These separate account assets would potentially receive capital charges for risks not borne by the insurer, resulting in a substantial and unreasonable capital cost. 

In summary, the risk weights applied to insurers in the Basel regime would overcharge for some risks, entirely ignore others, and 

thereby potentially incent poor risk-taking behavior, contribute to 

a contraction in credit, and/or negatively affect availability and affordability of important insurance products. 

In conclusion, I would like to reiterate a few important points. 

First, we are not objecting to group supervision by the Federal 

Reserve. 

Second, we are not objecting to the concept of a comprehensive 

group capital requirement for SLHCs or SIFIs. 

Third, we are not objecting to utilization of a Basel framework 

for our bank. 

And, finally, we are not seeking lower capital standards. Indeed, 

we support strong capitalization as part of our core business proposition. We are simply advocating that there is no one-size-fits-all 

model for assessing risk and by extension no universally applicable 

framework for determining capital requirements. We believe 

strongly that the Federal Reserve should have the latitude to utilize any tool, or combination of tools, necessary to effectively assess 

the risk profile and capital requirements of a holding company, 

taking into account material differences in their business models. 

We appreciate the leadership of Senators Brown, Johanns, and 

Collins on this important issue, and thank the Subcommittee for 

the opportunity to comment. 

Senator BROWN. Thank you, Mr. Mahaffey, and thank you all for 

staying very close to the 5 minutes. 

I am going to ask a series of questions which I would ask of each 

of you. I would like to ask for brief answers, if possible yes or no. 

At 11:30 there will be a series of votes on the floor, so I want everybody on the panel to get a chance to ask questions. So just go work 

from left to right. Ms. Wilson, do you agree that the insurance 

business has a different model from banking and presents different 

risks? Just yes or no from each on the panel. 

Ms. WILSON. Yes. 

Mr. SCHWARCZ. Yes. 

Mr. COHEN. Yes. 

Mr. KLEIN. Yes. 

Mr. MAHAFFEY. Yes. 

Senator BROWN. OK. Do you think, as suggested by Ms. Wilson, 

that applying Basel III to insurers would or could have a negative 

impact on the safety and soundness of these institutions? Probably 

not yes or no there, but brief answers, if you could. Ms. Wilson? 

Ms. WILSON. Yes, I think it could, at least in part because it 

could sway the way that insurers make investment decisions for its 

investment portfolio. 

Senator BROWN. Professor Schwarcz? 

Mr. SCHWARCZ. Yes, I agree that applying mechanistically bank 

capital rules to insurers would not be appropriate. 


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Mr. COHEN. Yes, I would agree. Basel III is not directed to insurers but to banks. 

Mr. KLEIN. Yes. 

Mr. MAHAFFEY. Yes, I would agree. Anytime you have a system 

that under- or over-charges for risks and does not account for the 

nuances of a business model, you run that risk. 

Senator BROWN. Thank you. Third question. Do each of you agree 

that we could address this by regulation without actually going the 

legislative route? Ms. Wilson? 

Ms. WILSON. My lawyers have assured me that their interpretation of the Collins amendment suggests the Federal Reserve does 

have the authority to make accommodations for the other businesses that are incorporated in an insurance holding company. 

Senator BROWN. Mr. Schwarcz? 

Mr. SCHWARCZ. I would frankly just refer you to Mr. Cohen’s 

legal analysis, which I think is superb and I, you know, independently agree with. I think that the language is pretty clear in context that regulation can solve the problem. 

Senator BROWN. Mr. Cohen, would you like to respond to Mr. 

Schwarcz’s assessment of your brilliant legal mind? 

[Laughter.] 

Mr. COHEN. Solely to thank Professor Schwarcz for his accolade. 

Senator BROWN. Mr. Klein? 

Mr. KLEIN. Yes, I think the Federal Reserve can fix the problem. 

I also point out that I think that FSOC could direct the Fed to fix 

the problem as well. 

Senator BROWN. OK. 

Mr. MAHAFFEY. And I would say yes, small asterisk, that I think 

ultimately if the interpretation remains different by the Fed, then 

I think that there has to be the possibility of another legislative action. 

Senator BROWN. Thank you. And understanding that the solution 

that we ask for, whether it is legislative or the Fed, to tailor capital 

rules for SIFI insurers, would the Fed still have ample tools to regulate these institutions in other ways? 

Ms. WILSON. The Fed absolutely has authority to supervise the 

entirety of the consolidated group, and so we think that they would 

be well positioned to carry out their responsibilities. 

Mr. SCHWARCZ. I am not sure I totally understand the question. 

Senator BROWN. If we move forward on legislation or the Fed 

makes this—follows the suggestions of this panel, would they still 

have the ample tools to regulate institutions in other ways? 

Mr. SCHWARCZ. Well, I guess I would answer as follows: I think 

that one important element of what the Fed should do and needs 

to do under Dodd-Frank is to craft their own capital rules for insurance SIFIs. Those rules should not just be bank rules, but nor 

should they just be as, frankly, some of the legislation. And here 

is where I will disagree with Mr. Cohen. Some of his suggestions 

suggest that we should not just completely defer to State riskbased capital rules with respect to insurers. And here I would say 

that is actually quite important that, for entities that have been labeled as ‘‘systemically risky,’’ we have capital requirements that 

are on a consolidated basis, including insurers, that take into acVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\DOCS\89351.TXT SHERYL

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count the specific systemic risks that are identified by FSOC that 

insurers pose. 

So while I would agree that we need different capital rules, I 

would—I think actually it would hinder the Fed’s ability to regulate insurance SIFIs if we mandated, as some of this legislation 

does, I believe, that they completely defer to the State risk-based 

capital rules with respect to the insurance entities. 

Senator BROWN. Mr. Cohen? 

Mr. COHEN. I actually would not disagree with Professor 

Schwarcz, because I do believe that the Federal Reserve has substantial authority, both under Section 165 and for the S&L holding 

companies under the Bank Holding Company Act, to incorporate 

whatever additional requirements it would deem appropriate for an 

insurer. 

Senator BROWN. Mr. Klein? 

Mr. KLEIN. Yes, the Fed does have the authority. Whether they 

have the expertise, capability, and understanding of the differences 

of insurance companies through the regional bank system and the 

Reserve Board is an open question. 

Senator BROWN. Mr. Mahaffey? 

Mr. MAHAFFEY. As to the question of whether they have the appropriate tools, I actually think that S. 1369 actually broadens the 

possible set of tools that they could use at their disposal. I think 

it is their current interpretation of Collins that, in effect, limits the 

toolkit that they are asserting they can use for this. So I would actually suggest that this in no way shape or form—at least 1369 

would not limit them from continuing to, if they chose to do so, and 

I think all panelists would agree that would be a bad idea. 

If they chose to continue to use Basel III as a consolidated framework, even under that bill they could choose to still do so. They are 

simply not required to as they interpret Collins to instruct them 

today. 

Senator BROWN. One last question. I am sorry to go over my time 

a bit. For Mr. Cohen specifically, the Fed has taken regulatory 

steps, as you know, to address unintended consequences presented 

by the text of Dodd-Frank. For example, the text of the Volcker 

rule exempts insurance from the proprietary trading prohibition 

but does not exempt their general account investments from the 

covered funds prohibition. Regulators, including the Fed, have extended this exemption. 

Section 716, the swaps pushout provision, applies to insured depository institutions, but the Fed extended its transition period in 

temporary relief to uninsured branches and branches of foreign 

banks based upon, among other things, legislative history. 

My question is: Do you believe the Fed has the flexibility under 

Collins to deal with any issues that arise? And how do these past 

actions compare to the issue that we are dealing with here? Do 

they strengthen the case for the Fed to act? 

Mr. COHEN. I think those are, in fact, perfect analogies, Senator. 

They show that the Fed has the capacity to act in statutory 

schemes, which are very complex and very technical, as Senator 

Collins testified, to deal with getting to the right solution, even if 

there is ambiguity in the statute. And, frankly, with respect to 171, 


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I do not think there is that much ambiguity as to the Fed’s ability 

to act. 

Senator BROWN. Thank you. 

Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Well, I think that our witnesses today made a pretty bulletproof 

case that the nature of the insurance industry is sufficiently different from the nature of banking to merit a different capital regime. I completely agree. 

Mr. Cohen, I know this is not central to the discussion of the 

hearing, and it is not included in your testimony, but I wonder if 

you would comment on this, which is it strikes me that the asset 

management business is also fundamentally different from banking 

in a variety of very important ways. And given that it, too, is different from banking, do you see problems in trying to apply bankcentric regulations to the asset management business as well? 

Mr. COHEN. I would, Senator Toomey, and I think your analysis 

is correct. And, moreover, Congress explicitly notified the Federal 

Reserve and FSOC that asset managers were to be treated differently. There are two specific references in Section 165 itself to 

asset managers in the context of differentiation. 

Senator TOOMEY. Thank you. 

Does anybody disagree with Mr. Cohen’s assessment there? 

[No response.] 

Senator TOOMEY. Great. Thank you. 

A second question also for Mr. Cohen, and I think this would—

I will ask anyone else to comment as well. But if an insurer is not 

designated as a SIFI, does everybody agree that it is the intent of 

Dodd-Frank that the insurer would then, therefore, be subject only 

to the various States—the State capital regimes? Mr. Cohen first. 

Mr. COHEN. Yes, Senator, assuming that it is not a savings and 

loan holding company, you are exactly right. It would be just the 

State insurance regulations. 

Senator TOOMEY. OK. Thank you. 

Yes, go ahead. 

Mr. SCHWARCZ. You just asked if anyone disagreed. 

Senator TOOMEY. Sure. 

Mr. SCHWARCZ. I just want to clarify. I think that it is a more—

there is a difficult issue with respect to savings and loan holding 

companies and bank holding companies that are predominantly engaged in insurance and regulated by the Fed. And I do not think 

it is actually clear that Dodd-Frank would say, well, there is no 

role for the Fed to play there on a consolidated basis, because those 

entities are both insurance companies, but they are also bank holding companies or savings and loan holding companies. They are 

both. 

And so I think that it is actually relatively clear from the text 

of Dodd-Frank that we need a capital regime that is appropriate 

to their insurance side of their business, but we also need a capital 

regime that is appropriate to the fact that they are a bank holding 

company or savings and loan holding company. And I guess that 

gives the analogy, if I am a lawyer, I am not an insurance agent; 

but if I wanted to become an insurance agent, I would need to be 

licensed as a lawyer and licensed as an insurance agent. 


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And so sort of the same thing. If you are doing two things, you 

need to comply with the appropriate regulatory rules with respect 

to both of those regimes. 

Senator TOOMEY. OK. But you are focusing on exclusively those 

that have another charter, another—you know, in this case a savings and loan? 

Mr. SCHWARCZ. Correct. 

Senator TOOMEY. OK. Mr. Klein, a quick question for you, and 

this goes to the point I made in my opening comments. One of the 

things I have a concern about is the Financial Stability Board importing what is essentially a European or international capital approach to the American insurance industry, and I am concerned 

about this in part because it seems to me that the European insurance model is typically quite different from the American model in 

many ways, and so a capital regime that may be suitable over 

there may not be suitable here. And, in addition, the Europeans 

might very well view the role of capital differently than we have 

historically viewed it here. 

Do you share this concern as well? 

Mr. KLEIN. I do, Senator. In my written testimony, I make reference to the fact that one of the things Dodd-Frank did is try to 

create a unified international voice for insurance, which we were 

lacking, frankly, going into the crisis in a pre-Dodd-Frank world. 

And it created the Federal Insurance Office, or FIO, and actually 

specifically empowered FIO with that objective and a seat on the 

proper international board. 

Subsequently, the Federal Reserve has now, to my understanding, applied for a similar seat on that board, which makes 

some amount of sense given the fact that the Fed has these responsibilities. On the other hand, it needs to be clarified—and I urge 

in my written testimony that the regulators do so—that FIO is the 

international voice for the United States on insurance matters, as 

made clear in Dodd-Frank. 

Senator TOOMEY. Thank you very much. 

Thanks, Mr. Chairman. 

Senator BROWN. Thank you, Senator Toomey. 

Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

thank you, panel, for excellent presentations. 

Mr. Cohen, are you aware of any published memoranda by the 

Federal Reserve basically defending their position? 

Mr. COHEN. No, Senator, I am not. This all seems to be in testimony by Governors. 

Senator REED. So it is sort of colloquial, ‘‘We do not think we 

have it,’’ but there is no official documentation you have seen? 

Mr. COHEN. Not that I am aware of, Senator. 

Senator REED. OK. One aspect, I think, that we have dwelled on 

is the difference and the distinct difference between the balance 

sheets and the operations of an insurance company and a bank 

holding company. But there are activities that could be in common, 

particularly on a consolidated basis, and I think Professor 

Schwarcz suggested this, that on a consolidated basis there is probably the issue of systemic risk; and, second, the obligation of the 

Fed to sort of control that risk. And your suggestion is it not be 


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done through Basel III, which I think makes a great deal of sense, 

but it has to be done. Is that a fair approximation? 

Mr. SCHWARCZ. That is exactly right, Senator. The point is that 

we now know that nonbank holding companies that are predominantly engaged in insurance can be systemically risky. We need to 

apply group capital requirements to them, and crucially, we cannot 

just carve out the insurers and say that our group capital requirements only apply to the part of the business that is not regulated 

by States. Because if you look at AIG, one of the big problems there 

was with the interactions among the different components of the 

company. The insurance companies were really used by other portions of the company for the securities lending problems. And there 

are also just many other systemic risks associated with insurance 

particularly. 

Now, again, those are lesser than banks. We need to have a tailored regime for those. But where my concern is is that there is 

slippage. When we all agree—and we all agree in this room, I 

think—that we should not have bank capital requirements applied 

to insurers, there is slippage then to the conclusion that that 

means that the Federal Reserve should not apply its consolidated 

capital requirements to the portions of the insurance SIFI that are 

insurance companies. 

Senator REED. Well, let me ask you all to comment on sort of a 

procedural approach, which seems to make sense to me, that if this 

was to be done, then it typically would be done through a proposal 

of a rule by the Federal Reserve allowing the industry to comment 

in detail about the specific application and also any general points 

they want to make. And that the rule would then be adopted going 

forward. 

Is that a sensible approach that could be undertaken right now 

by the Federal Reserve? We will start with Ms. Wilson. 

Ms. WILSON. It certainly could be, and I think many of the companies that are represented on this panel and in previous hearings 

have actually spent quite a bit of time with the agencies to try to 

help advance discussion about how regulations could be proposed. 

Senator REED. Thank you. 

Professor? 

Mr. SCHWARCZ. Yes, absolutely, I think that the Fed can and 

should under its existing authority do what many of us are suggesting. 

Senator REED. Mr. Cohen? 

Mr. COHEN. Yes, Senator, I think they could do it, and it makes 

good sense to do it. 

Senator REED. Thank you. 

Mr. KLEIN. Yes, Senator, that is a wise and prudent course. 

Senator REED. OK. 

Mr. MAHAFFEY. I would concur. 

Senator REED. Thank you very much. I know when to stop. 

Thank you very much. 

[Laughter.] 

Senator BROWN. Senator Johanns. 

Senator JOHANNS. Thank you all for being here. 

Just listening to your testimony, one of the things that occurs to 

me is how much agreement there is, and, you know, there are difVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 S:\DOCS\89351.TXT SHERYL

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ferent viewpoints on this panel on probably many things, but it 

does strike me how much agreement there is. 

One thing, though, I would like to explore a little further is this 

whole issue of how much authority the Fed has, because here is the 

problem I have as a lawmaker. In every possible way you can think 

of, we have asked the Fed if they have this authority. When Chairman Yellen was going through the confirmation process, tons of 

questions were sent her way, you know: Do you have the authority? 

Very consistently, the Fed has passed. They have said, ‘‘No, we do 

not.’’

And so we are kind of in this situation where we know the easy 

pathway would be for the Fed just to issue regulations that recognize the difference between insurance and banking. But it does not 

look like that is going to happen. 

Under those circumstances would you agree with me—and I will 

just go down the line here—that legislative language is necessary 

then to give the Fed clear direction on this issue? 

Ms. WILSON. I think the legislative approach would definitely 

make it clear that the authority exists in the Federal Reserve to 

do what is needed. 

Senator JOHANNS. Professor? 

Mr. SCHWARCZ. An appropriate legislative course would be wise, 

if that came to fruition. 

Mr. COHEN. Senator, although one would hope that the Fed may 

be willing to reconsider after the unanimity expressed today to 

which you referred is so clear, in the absence of prompt action by 

the Federal Reserve, I fully agree that legislation is the only recourse. 

Mr. KLEIN. Senator, as I mentioned before, I think in addition to 

the Fed having the opportunity to do the right thing, there is a role 

that FSOC could play in helping direct the Fed to do the right 

thing. Absent those two positions, then I would agree that legislation becomes necessary to avoid a problematic policy outcome, and 

that to some degree would be a little bit disappointing as this is 

one of the first areas where regulators are attempting to overcome 

their bank-centric nature in history to extend the provision of 

Dodd-Frank into a nonbank world. 

Mr. MAHAFFEY. And I would agree. I think this has been the 

classic stumbling block, as we have all approached the Fed. I think 

if this issue does not get resolved, it is one thing for all of us to 

be unified in our opinion that the Fed has this discretion and current authority. But if this is not resolved, I think the only prudent 

path is to actually make clear through a legislative solution that 

they do have this authority. And, again, I think that actually 

broadens the toolkit they have at their discretion, and it does not 

remove anything that they have at their discretion today in the 

Collins amendment. So I think that might be the path that needs 

to take place. 

Senator JOHANNS. Let me stay with you a second. One of the 

things that has occurred to me about the potential that bank-centric rules would be applied to insurance companies is that you 

could actually increase the risk that insurance companies are exposing their customers to, if you will. Do you agree with that analysis on my part? 


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Mr. MAHAFFEY. I think generally, yes. Anytime you apply a 

model that attempts to assess risk, and if that model ignores risks, 

underprices risks, or overprices risks relative to the model of the 

company you are trying to measure, then you can unintentionally 

create incentives for them to move the risk portfolio to comport 

with that model. So whenever you try and impose a capital charge 

that does not actually get to the economics underlying the business 

model, whether that is on the assets or liabilities, the answer is 

yes, you can actually have perverse incentives for them to take 

more risk rather than less risk. 

Senator JOHANNS. Exactly. Let me just move down the line. I 

would like comments by others, just very brief comments about 

that. 

Mr. KLEIN. Absolutely, Senator. The hallmark of every financial 

crisis is the mispricing of risk at its core, mixed with leverage. And 

it would seem to me that if one of the defenses against a financial 

crisis is appropriate risk-based capital, then applying inappropriate 

risk-based capital would exacerbate the possibility of a financial 

crisis. 

Senator JOHANNS. Mr. Cohen? 

Mr. COHEN. Senator, when you overprice risk, there is then a 

threat to the consumer as well, because that threatens to drive the 

insurer or any financial institution out of the product or service for 

which risk has been overpriced. 

Senator JOHANNS. Professor? 

Mr. SCHWARCZ. Let me just make one point. We are talking 

about two different sets of entities: insurance SIFIs and then savings and loan holding companies and bank holding companies that 

engage in insurance. 

I actually think we need to disaggregate the analysis. I agree 

completely with respect to insurance SIFIs. With respect to savings 

and loan holding companies and bank holding companies that have 

insurance, they are bank holding companies, they are thrift holding 

companies. And so the question of whether or not they should get 

a special exemption from the rules that normally there is actually, 

I think, much more difficult. 

So I think that it is true that you need absolutely an appropriate 

capital regime for the business you are dealing with, but recognize 

that bank holding companies and thrift holding companies that 

predominantly engage in insurance are bank holding companies 

and thrift holding companies, and we should regulate them as 

such. 

Senator JOHANNS. If you can be very quick, because I am out of 

time, Ms. Wilson. I would like to hear your reaction to that. 

Ms. WILSON. I would like to just echo Mr. Cohen’s comment. The 

mis-assignment of risk to capital and requiring insurers to carry 

more capital than would otherwise be necessary is actually a disadvantage for our policy holders. They would get less attractive returns on their retirement funds with us if we were forced to go to 

a different part of the investment universe to deploy our resources. 

Senator JOHANNS. Thank you. 

Thank you, Mr. Chairman. 

Senator BROWN. Thank you, Senator Johanns. 

Senator Tester. 


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Senator TESTER. Thank you, Mr. Chairman. 

This is a question for Ms. Wilson and Mr. Mahaffey. Assuming 

that Basel capital standards would be applied to your businesses—

and I do not think anybody thinks that should be the case, but assuming they would be, could you tell us about the impact that 

would have on your ability to manage your assets and liabilities? 

You can go first, Ms. Wilson. 

Ms. WILSON. Thank you for the question. We have a fairly sophisticated investment allocation algorithm, and if the risk capital 

charges are different than they currently are, we could potentially 

change the portfolio mix that we use to deliver on decade-long commitments to our policy holders. And that, as I think I just said to 

Senator Johanns, might reduce the amount of investment income 

that they would have to provide for their retirement security. 

Mr. MAHAFFEY. Yes, and I would echo those comments. I would 

also add that it would force you to look at the total capital position. 

Nationwide holds substantially more capital than would be imposed upon us by Basel III, so, again, this is not about aggregate 

capital. But as you subdivide the organization and you get down to 

certain products, you would now be forced to sort of triangulate between an internal economic view of the risk we are taking when 

we write a product, the current State-based regulatory requirements for the risk we are taking in a product, rating agency views, 

and now you would layer in another view, all of those views likely 

resulting in very different answers as to how much capital. 

And so back to the point of if you have the wrong model that 

does not take into account the real risks of the products and the 

assets that you are putting behind those products, then we would 

be forced to probably make modifications either to the price of the 

products or the lines of business that we choose to be in. 

Senator TESTER. OK. Impact on the economy, you talked about 

the impact on potential retired folks. Any other impacts that come 

to mind? Go ahead. 

Ms. WILSON. If I might, one of the important sources of strength 

for the economy during the economic downturn were large insurance companies that actually invested in infrastructure, long dated 

assets, because we did, in fact, have the capital strength to make 

long-term investments. Even when the market was sort of on its 

heels, we had net inflows in many cases. And so we were seen as 

a source of strength to the economy. We make very long term investments in things like bridges and highways and support municipal projects that need funding across the United States right now. 

And so it is not just the investment returns for our participants, 

it is also the macroeconomic impact that many of our investment 

portfolios support. 

Senator TESTER. OK. This is a question for any witness or all 

witnesses that want to respond to it. It goes back to Senator 

Toomey’s question on international efforts. Share your concerns 

about potential inconsistencies in coordination between international regulations and domestic, if you might. 

Mr. COHEN. I would be glad to start, Senator. 

Senator TESTER. Sure. 

Mr. COHEN. I think that this is one of the most significant issues 

confronting the financial system, because we are a global system 


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today, and the more we can do to have concerted action and collaborative action, the better off I think the financial institutions in 

the United States will be and the financial institutions outside the 

United States will be. There is a lot left to be done. 

Senator TESTER. Anybody else want to respond? 

[No response.] 

Senator TESTER. Mr. Cohen, I will stay with you then. What can 

the Federal regulators do to ensure that the international negotiations do not disadvantage American insurers? 

Mr. COHEN. I think it is extremely important that they not sacrifice what is the right solution for consensus. Sometimes there is 

a feeling that in the rush to get to consensus, the desire—which is 

certainly a key objective—that the best interests of the U.S. financial institutions are sacrificed, not in the sense of competitive best 

interests but just in what makes sense. 

Senator TESTER. Go ahead, Mr. Klein. 

Mr. KLEIN. I would add that it is very important when you are 

engaged in an international negotiation that you are able to speak 

with one unified voice, and Dodd-Frank clearly gave that voice to 

the Director of FIO in the Treasury Department, and that he 

should continue to serve that role, and the Fed and NAIC should 

make clear that that is his role in an international context. 

Senator TESTER. OK. Anybody else? 

[No response.] 

Senator TESTER. One last question. This goes back to Ms. Wilson 

and Mr. Mahaffey. Nationwide has a bank, TIAA–CREF has a 

thrift. Can you describe what services your bank and thrift provide 

and why it is important to your ability to serve your policy holders 

and why you would not want to eliminate these offerings? You can 

go ahead and go first, Ms. Wilson. 

Ms. WILSON. We have, as I mentioned in my opening statement, 

3.9 million clients whose retirement funds are deposited with us. 

We believe that we can be much more helpful to them in building 

a life of financial stability if we can offer additional services like 

life insurance, savings accounts, mortgage loans, potentially car 

loans, things that are really retail nature but really speak to the 

needs of the average employee on our institutional clients’ sort of 

workforces. 

Senator TESTER. Good. Mr. Mahaffey, would you like to add to 

that? 

Mr. MAHAFFEY. Sure, I will echo those comments, but I will also 

just give another example on the property/casualty side. So our 

bank, while it is small, it is critically important to our other policy 

holders. An example would be in the wake of a disaster we have 

the ability to issue rather than a bank draft, because of our bank 

we can issue a Nationwide bank debit card that gives our customers immediate relief and access to use those funds anywhere a 

credit card would be served. So we try and integrate it with our 

product portfolio. Our desire is not to build a big stand-alone bank 

but to use it as a way to serve our existing policy holders better. 

Senator TESTER. I appreciate that, and I also appreciate all the 

testimony by all the folks on the panel today. This probably is not 

televised, Mr. Chairman, but it would have been nice if they could 

have seen——


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Senator BROWN. It is in Billings. 

Senator TESTER. It is in Billings? 

[Laughter.] 

Senator TESTER. Thank you. 

Senator BROWN. I made special arrangements because I knew 

you were going to be here. 

Senator TESTER. Thank you very much. But it would have been 

nice to have the Fed, and hopefully they will take a look at the testimony that you guys put forth, because I think it was very good. 

Thank you. 

Senator BROWN. Thank you, Senator Tester. 

There is a series of votes to be called around 11:30, so I will ask 

another couple of questions, and perhaps Senator Johanns if he 

wants, and we will see. 

A follow-up, Mr. Mahaffey, on Senator Tester’s question. Either 

Ms. Howe or somebody from Nationwide told us about what happened in Joplin, Missouri. If you could sort of illustrate more 

graphically your answer to Senator Tester’s question about what 

that only $6 billion out of $180 billion—you are a $180 billion institution, $6 billion in your bank, how that plays out for your policy 

holders? 

Mr. MAHAFFEY. Sure. And as you mentioned, we were an insurer 

that was able to help in the wake of the Joplin disaster. We happened to have a number of insureds that were there, and that was 

a good example of the use of this claims card, we call it, which allows our claims agents to be able to issue these pre-loaded debit 

cards on the spot for someone who suffered a loss in the wake of 

a disaster like Joplin. And that can be very helpful, rather than attempting to get a bank draft when your bank may not actually still 

be standing. 

We have had a phenomenal response and feedback on that program, so it is just another example of a way in which we can provide a very value-added service, be there for our members when 

they need us most, and we view that as our model for the bank 

being integrated with the rest of our insurance organizations, not 

necessarily as a stand-alone bank. 

Senator BROWN. Thank you. Last question. Professor Schwarcz 

raised concerns about systemic risk from insurers. His article highlights two specific activities that AIG engaged in: derivatives dealing and securities lending. Dodd-Frank imposes new regulations on 

derivatives. The CFTC is, as we know, implementing those for securities lending. Dodd-Frank gives FSOC the authority to regulate 

both entities, and activities—activity-based regulation is still in its 

early stages. Governor Tarullo of the Fed has proposed applying 

universal margin requirements to all securities financing transactions. 

So, Mr. Cohen and Mr. Klein and Professor Schwarcz, if you 

would just answer a couple of questions. Does FSOC have the tools 

to address the issues that Professor Schwarcz raised? And, second, 

do you agree with Governor Tarullo’s proposal as far as it goes 

now? And start with Mr. Cohen, then Mr. Klein, then Mr. 

Schwarcz, if you would. 

Mr. COHEN. Senator, I do believe that the tools exist, through 

FSOC, through the Federal Reserve, to regulate on an activity or 


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product basis. Whether or not this should take the form of increased margin requirements, which really is a macroeconomic approach rather than a micro, institution-specific approach, I think 

we just need to see what the Federal Reserve is going to propose 

here. 

Senator BROWN. Mr. Klein? 

Mr. KLEIN. I think, Mr. Chairman, the FSOC does have the tools 

to address it. It is critically important that they do. Activities-based 

regulatory authority was one of the major advancements, in my 

opinion, in Dodd-Frank. There has been a lot of focus spent on regulating institutions. It is what regulators know to do. But activities 

is fundamentally where problems tend to arise before they end up 

in institutions. And so I think they do have the tools. I think they 

ought to use them more. 

I also think Professor Schwarcz was right to point out with AIG, 

during my time looking into their secured lending facility, there 

were significant problems there. It did highlight a weakness in the 

State-based insurance regulatory system, one of the reasons an optional Federal charter may make sense. 

With regard to the point on Governor Tarullo on the margin requirements, I think it is still a little bit too early to tell if that is 

the right approach, but I think he and the Fed ought to be commended for pushing FSOC and going down the activities-based regulatory approach. 

Senator BROWN. Professor Schwarcz, your last word. 

Mr. SCHWARCZ. Sure. Two things. 

The first is I think that the Fed does have the appropriate authority with respect to insurers that are designated as ‘‘systemically risky.’’ I actually believe that there is systemic risk in the insurance industry that may not be captured by that. So, for instance, the recent report of the FIO pointed out mortgage insurers, 

and to me it does not make sense that mortgage insurers are regulated by States. 

I also tend to think that it is true that we need a stronger, more 

robust Federal presence with respect to other systemic risks in the 

industry. I do not think the designation power is enough, and I go 

through that in the article. 

The final thing I just want to say is I am wary—and I just want 

to emphasize this again. We have been conflating the SIFI issue 

and the issue of bank holding companies and savings and loan 

holding companies. Those are bank holding companies and savings 

and loan holding companies. And I do have concern with some of 

the legislative solutions that it could create regulatory arbitrage by 

saying certain bank holding companies or savings and loan holding 

companies can avoid the regulation intended for bank holding companies and savings and loan holding companies if they engage in 

insurance. That could encourage them to increase their insurance 

business, encourage them to create an uneven playing field among 

different types of bank holding companies and savings and loan 

holding companies. 

So while my testimony for the most part was focused on insurance SIFIs, I just want to be clear, I think the issues are different 

for bank holding companies and savings and loan holding compaVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 S:\DOCS\89351.TXT SHERYL

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nies. And I think that some of the legislation, frankly, does not 

deal with that issue as well as I would like it to. 

Senator BROWN. Well, thank you, Professor Schwarcz. Thanks to 

all five of you. If Members of the Subcommittee have questions 

they submit in writing, please answer them within 7 days, get 

them back; or if you want to do any addenda to your testimony or 

your comments, we would appreciate that. 

I have statements submitted from the Property Casualty Insurers Association, the American Council of Life Insurers, the National Association of Mutual Insurance Companies, the American 

Insurance Association, the United States Chamber of Commerce, 

the National Association of Insurance Commissioners, a statement 

by the Financial Services Roundtable, and a letter from former 

Federal Deposit Insurance Corporation Chair, Sheila Bair, and I 

ask unanimous consent that they be entered into the record. 

I thank all of you, Senator Johanns, especially thank all of you 

for joining us today. 

The hearing is adjourned. 

[Whereupon, at 11:34 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow]:


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1 12 CFR Parts 208, 217, and 225. Regulatory Capital Rules: Regulatory Capital, Implementation of Basel II, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-Weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule; Final Rule. 2 As of December 31, 2013. 

3 As of January 31, 2014. 

PREPARED STATEMENT OF GINA WILSON

EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER

TIAA–CREF

MARCH 11, 2014

I. Introduction 

Chairman Brown and Ranking Member Toomey, Members of the Subcommittee, 

thank you for providing TIAA–CREF with the opportunity to testify on a very important issue to both TIAA–CREF and the clients we serve. 

Our testimony today focuses on the final rules governing capital standards and 

the Basel III accords issued by the Federal Reserve Board (‘‘FRB’’) in conjunction 

with the Office of the Comptroller of Currency (‘‘OCC’’), and the Federal Deposit Insurance Corporation (‘‘FDIC’’) (collectively the ‘‘Agencies’’).1 The final rule contained 

a number of changes from the proposed rulemaking, most notably it temporarily exempted bank holding companies subject to the FRB’s Small Bank Holding Company 

Policy Statement and Savings and Loan Holding Companies (‘‘SLHCs’’) substantially 

engaged in insurance underwriting or commercial activities. In statements accompanying the final rule, the FRB indicated that the temporary exemption for insurance SLHCs was provided in recognition of policy concerns expressed regarding the 

imposition of bank capital rules on insurance companies. 

We appreciate the temporary exemption and its acknowledgment that the insurance business model is quite different from the banking model. However, given the 

FRB’s public statements regarding their current interpretation of the Collins 

Amendment, we are concerned that any final rule will impose Basel III on insurance 

companies with only modest and incomplete adjustments from the proposed rule. 

II. Background 

TIAA–CREF is a leading provider of retirement services in the academic, research, medical and cultural fields managing retirement assets on behalf of 3.9 million clients at more than 15,000 institutions nationwide.2 The mission of TIAA–

CREF is ‘‘to aid and strengthen’’ the institutions we serve by providing financial 

products that best meet the needs of these organizations and help their employees 

attain financial well-being. Our retirement plans offer a range of options to help individuals and institutions meet their retirement plan administration and savings 

goals as well as income and wealth protection needs. 

TIAA–CREF is comprised of several distinct corporate entities. Teachers Insurance and Annuity Association of America (‘‘TIAA’’), founded in 1918, is a life insurance company domiciled in the State of New York operating on a nonprofit basis 

with net admitted general account assets of $232 billion.3 TIAA is a wholly owned 

subsidiary of the TIAA Board of Overseers, a special purpose New York not-for-profit corporation. The College Retirement Equities Fund (‘‘CREF’’) issues variable annuities and is an investment company registered with the Securities and Exchange 

Commission (‘‘SEC’’) under the Investment Company Act of 1940. TIAA–CREF also 

sponsors a family of equity and fixed-income mutual funds. 

While we are primarily engaged in the business of insurance, TIAA and the Board 

of Overseers hold a small thrift institution within their structure and as a result 

are registered as SLHCs. This thrift provides TIAA–CREF with the ability to offer 

our clients deposit and lending products integrated with our retirement, investment 

management and life insurance products and enhances our ability to help them attain lifelong financial well-being. 

Our status as a SLHC places us under the purview of the FRB and consequently 

subjects us to the proposed regulatory capital regime the Agencies have set forth. 

TIAA–CREF supports ongoing progressive financial regulation, including strong and 

appropriate capital standards that are consistent with SLHCs’ operating models and 

the risks inherent in their business. It is equally important, however, to ensure the 

standards ultimately implemented by the Agencies fully account for the diverse 

business models under which different financial services organizations operate. In 

our analysis of the rules through the prism of a firm predominantly engaged in insurance, we have found the Agencies have taken a bank-centric approach with the 

final rule. Consequently, this approach does not account for the significant difVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 S:\DOCS\89351.TXT SHERYL

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4 Comment letter on Regulatory Capital Rules: 1 77 F.R. 52792 (Aug. 30, 2012); 77 F.R. 52888 

(Aug. 30, 2012); 77 F.R. 52978 (Aug. 30, 2012), Submitted by Chief Financial Officers of Country 

Financial, Mutual of Omaha, Nationwide Mutual Insurance Company, Principal Financial 

Group, Prudential, TIAA–CREF, USAA, Westfield Group, October 22, 2012. 

5Senate Report 111–176 at footnote 161 (April30, 2010)—discussion of Section 616 amending 

HOLA to clarify the FRB’s authority to issue capital regulations for SLHCs where the Committee specifically notes:

It is the intent of the Committee that in issuing regulations relating to capital requirements 

of bank holding companies and savings and loan holding companies under this section, the Federal Reserve should take into account the regulatory accounting practices and procedures applicable to, and capital structure of, holding companies that are insurance companies (including 

mutuals and fraternals), or have subsidiaries that are insurance companies.’’ [emphasis added]. 6 Section 619(d)(1)(F) of the DFA. 7 ‘‘Dodd-Frank Amps Insurers for Banking Exit,’’ SNL Financial (July 11, 2012). 

ferences between insurers who hold thrifts, but maintain the overwhelming majority 

of their business in insurance products (‘‘insurance-centric SLHCs’’), and those firms 

that are primarily banking entities. 

To be clear, we support appropriate capital regulations for banking organizations 

and are not seeking to exempt insurers from the tenets of the Dodd-Frank Act 

(‘‘DFA’’). Nevertheless, applying metrics designed for banks to an insurer would be 

inappropriate and could have a number of negative effects for insurers, customers, 

and the economy as a whole. TIAA–CREF is particularly concerned about the effects 

of the rule on our ability to continue providing our clients with a full menu of appropriate and reasonably priced financial services products. 

The FRB can use the flexibility permitted by the DFA to tailor capital standards 

for the insurers that they oversee, which is key to resolving most of the potential 

negative repercussions that may result from imposing a bank-focused capital regime 

on insurance companies. 

The FRB has taken the position that Section 171 of DFA (the ‘‘Collins Amendment’’), which requires regulators to establish risk-based capital standards for banking organizations, prohibits the FRB from treating insurance assets differently from 

banking assets. We, as well as many of our peers, do not share this legal interpretation and instead believe the Collins Amendment provides banking regulators with 

the necessary flexibility to account for and integrate the existing U.S. insurance regulatory capital regime when developing their new model.4

III. Congressional Intent and the Collins Amendment 

Congress clearly demonstrated throughout the DFA legislative process, and in the 

text of various provisions within DFA, its intent to allow insurance-centric SLHCs 

to continue to own thrifts and offer their customers banking products and services. 

During consideration of the DFA, Congress affirmed the importance of the SLHC 

structure by maintaining the thrift charter, ensuring SLHCs would not need to become Bank Holding Companies (‘‘BHCs’’), and maintaining the Gramm-Leach-Bliley 

(‘‘GLB’’) grandfather provisions for nonbank activities of certain SLHCs and the 

qualified thrift lender (‘‘QTL’’) test for SLHCs. Congress went so far as to instruct 

the FRB to:

. . . take into account the regulatory accounting practices and procedures 

applicable to, and capital structure of, holding companies that are insurance companies (including mutuals and fraternals), or have subsidiaries 

that are insurance companies’’ in determining SLHC capital standards.5

Indeed, as demonstrated by the original Volcker Rule provisions in the DFA that 

created a number of insurance exemptions, Congress expected insurance companies 

to continue to own thrifts.6 By taking these steps, Congress also confirmed that the 

public is entitled to more, not less, competition in the banking industry. Unfortunately, the application of the Basel III Capital Rules would make continued ownership of thrifts by insurance organizations economically prohibitive, effectively accomplishing through regulation what Congress not only did not intend to do by statute,7 but what Congress specifically directed the FRB to avoid doing. 

The Collins Amendment requires banking regulators to establish minimum riskbased and leverage capital requirements on a consolidated basis for insured depository institutions, depository institution holding companies and nonbank financial 

companies supervised by the FRB (collectively, ‘‘Covered Companies’’). However, nowhere in the language of the Collins Amendment is there a directive to ignore the 

differences between insurance companies and banks. Rather, the language only requires that the risk-based and leverage capital requirements applicable to covered 

companies shall not be:


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8Section 171(b)(1) of the DFA.

9Letter to Agencies regarding proposed rulemaking for capital standards from Senator Susan 

Collins (R–ME), November 26, 2012. 10 U.S. Senate Committee on Banking, Housing and Urban Affairs, ‘‘Oversight of Basel III: 

Impact of Proposed Capital Rules,’’ Statement of Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, November 

14, 2012. 11See Appendix A. Comment letter to Agencies on Regulatory Capital Rules, Brandon Becker, 

Executive Vice President and Chief Legal Officer, TIAA–CREF, October 22, 2012. 12See Appendix B. Comment Letter and Cover to Agencies on Regulatory Capital Rules, 

Signed by attorneys specializing in regulatory advice to insurance companies from Arnold & Porter LLP, Gibson, Dunn & Crutcher, Venable, Wachtell, Lipton, Rosen & Katz, Winston & 

Strawn LLP, Shearman & Sterling, LLP, Dechert LLP, Debevoise & Plimpton LLP, and Paul 

Hasting LLP, March 20, 2013. 

1) Less than the generally applicable risk-based capital and leverage capital requirements, which shall serve as a floor for any capital requirements that the 

Agencies may require (‘‘Bank Standard’’); or

2) Quantitatively lower than the generally applicable risk-based capital and leverage capital requirements that were in effect for insured depository institutions 

as of the date of enactment of the DFA (‘‘2010 Regulations’’).8

The Collins Amendment did not intend for banking regulators to ignore the differences between banks and insurance companies in formulating the capital standards for banking entities, nor for the standards applicable to other Covered Companies. In a letter to the Agencies on the proposed rules implementing capital standards, Senator Susan Collins (R–ME) stated, ‘‘it was not Congress’s intent that Federal regulators supplant prudential State-based insurance regulation with a bankcentric capital regime.’’9 Rather, the Bank Standard outlined in Section 171(a)(2) of 

the Collins Amendment, which sets a floor for SLHC risk-based capital standards, 

allows the FRB to specifically address insurance activities. The requirement of Section 171(b)(2) sets the ‘‘generally applicable risk-based capital requirements’’ floor 

and does not require an asset-by-asset testing of risk-weights.10 Instead, the requirement speaks to a ‘‘numerator’’ of capital, a ‘‘denominator’’ of risk-weighted assets and a ratio of the two. The Collins Amendment also does not require asset-byasset or exposure-by-exposure minimum requirements, but instead calls for holistic 

floors. The second requirement that the standards not be quantitatively lower than 

the 2010 Regulations can be satisfied by either following the terms of the 2010 Regulations or through a holistic quantitative analysis of equivalence with appropriate 

capital standards, which would meet the ‘‘not less than’’ language of the statute. 

The FRB has stated publicly before the Committee and others that the business 

of insurance is different than that of banking, but the Collins Amendment ties their 

hands in addressing these differences. They believe the language imposes a consistent set of asset specific risk-weights for all covered companies. We have expressed to the FRB, both in person and in our comment letter (see Appendix A),11

our view that the language of the Collins Amendment provides adequate flexibility 

to interpret the statute in a way that permits them to account for the differences 

between banking and insurance. This point of view is validated by nine leading law 

firms, which sent a letter to the Agencies concurring with our interpretation of the 

Collins Amendment (see Appendix B).12

Consequently, we support and applaud the efforts of Senators Sherrod Brown (D–

OH) and Mike Johanns (R–NE) in introducing S. 1369 (Brown-Johanns), legislation 

to address the potential imposition of banking capital rules on insurance companies 

under the Collins Amendment. The Brown-Johann’s bill would clarify that the Collins Amendment does not require the FRB to impose a banking capital regime by 

exempting insurers from the Collins Amendment, while leaving intact the FRB’s 

other sources of legal authority to impose robust capital standards on federally supervised insurance companies. In addition, under Brown-Johanns, Basel III bankcentric capital standards would appropriately apply to any depository institutions 

owned by an insurance company. We strongly support this legislation and look forward to being part of the dialogue as the bill makes its way through the Senate. 

IV. Macro-economic effects of the application of the Basel III standards on 

insurers 

Bank-centric capital standards, which do not effectively recognize the long dated 

nature of insurance activities, would likely encourage insurers to modify certain 

practices and strategies that would be detrimental to their core activities. Fundamentally, banks’ core business is lending and maturity transformation. As a result, insurers’ investment portfolios involve duration matching of assorted longer 

term liabilities. That is, insurers match their long-term liabilities with long-term inVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 S:\DOCS\89351.TXT SHERYL

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vestments. There are a number of distinct features that differentiate banks from insurers, including:

1) Stable illiquid liabilities. The stability of life insurance liabilities and their relative illiquidity is a fundamental difference from banking deposit liabilities.

2) Long-term savings and asset protection products. Insurance products serve 

long-term savings and asset protection goals, which are fundamentally different from the objectives of bank depositors.

3) Long duration assets. Based on the long-term nature of their liability structure, 

insurance companies invest for a longer duration than banks.

4) Adverse Deviation. The business of insurance is built on sound, well tested and 

proven actuarial science. Reserves are based on assumptions that are reasonably conservative and include provisions for the risk of unfavorable deviation 

from such assumptions (i.e., mortality, interest rates, withdrawals, and expenses). Insurers apply this discipline to a large range of uncertain events in 

their long dated portfolios.

5) Source of long-term funding for the economy. Insurance companies are a significant source of long-term, stable funding for the corporate, real estate, and governmental sectors of the economy, while banks are primarily a source of shortterm financing to these sectors.

Imposing a capital framework designed to address the maturity mismatch inherent to banking on an insurer would create an investment portfolio construction challenge where none previously existed. Under the Rules, certain long-term investments, which are typically less liquid than shorter-term investments, are discouraged. Because the Basel III capital framework focuses substantially on assets, rather than taking a holistic approach, it does not consider the importance of matching 

the duration of assets and liabilities. To ignore the fundamental importance of this 

concept challenges an insurer’s ability to properly consider one of the most important elements of insurer risk management. The application of enhanced bank-focused standards as outlined in the Rules, without considering the existing strict capital rules to which insurers already adhere, would have a number of negative effects 

for TIAA–CREF and other insurance-centric SLHCs including:

1) Adherence to two regulatory reporting structures which have very different incentives surrounding liquidity and consumer protection;

2) Greater costs for insurance products;

3) Pressures on insurance reserve conservatism to meet bank definitions of capital; and

4) Recording unrealized gains/losses causing short term strategic capital management incentives.

Simply put, applying bank capital standards to an insurer would create a disincentive to invest in the very assets that most promote stability and solvency. 

V. Conclusion 

The Rules set forth by the Agencies, if applied to insurers, would have a detrimental effect on the insurers’ ability to offer affordable financial products, which 

would in turn trickle down to individuals who utilize insurance products to help 

them build a secure financial future. The Rules also could have macroeconomic implications that, for example, would create disincentives for insurers to invest in 

asset classes that promote long-term economic growth such as long-term corporate 

bonds, project finance and infrastructure investments, commercial real estate loans, 

private equity and other alternative asset classes. 

Strong capital standards are vital to strengthening the overall structure of the 

U.S. financial system. The existing capital regime under which insurers operate has 

served the industry well and proved extremely effective when put to the test during 

the recent financial crisis. We are confident the FRB can develop alternative proposals to ensure a strong capital regime that also accounts for the business of insurance. Indeed, in our comment letter to the FRB and in our subsequent conversations 

with them, we have proposed alternative methodologies for measuring an insurer’s 

capital that support both the policy goals of the FRB and ensure a strong capital 

regime, while also accounting for the business of insurance. We hope as they continue to study the issue, regulators will find a sensible way to integrate a capital 

structure appropriately designed for insurers. In the meantime, we ask Congress to 

explicitly give the Agencies the ability to ensure capital standards are appropriately 

tailored for insurers. 


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1See Daniel Schwarcz & Steven L. Schwarcz, Regulating Systemic Risk in Insurance (March 

4, 2014), available at http://ssrn.com/abstract=2404492 (arguing that systemic risk in insurance can arise due to correlations among individual insurers with respect to both their interconnections with the larger financial system and their vulnerabilities to failure, and that the 

Federal Insurance Office should consequently be empowered to supplement or preempt State 

law when States have failed to satisfactorily address gaps or deficiencies in insurance regulation 

that could contribute to systemic risk). 2 Additionally, two holding companies principally engaged in the business of insurance received Federal funding in the midst of the financial crisis though the U.S. Department of the 

Treasury’s Troubled Asset Relief Program. The Hartford Financial Services Group received $3.4 

billion and Lincoln National Corporation received $950 million. Government Accountability Office, Insurance Markets: Impacts of and Regulatory Response to the 2007–2009 Financial Crisis 

(June 2013). 3The Geneva Association, Cross Industry Analysis, 28 G–Sibs Vs. 28 Insurers, Comparison 

of Systemic Risk Indicators (Dec. 11, 2012). 4 A substantial contributor to AIG’s woes was its securities lending program, which, while coordinated by a noninsurer affiliate of AIG, exploited securities owned by AIG’s insurers. See William K. Sjostrom, Jr, The AIG Bailout, 66 Wash. & Lee L. Rev. 943 (2009). 5Federal Insurance Office, How to Modernize and Improve the System of Insurance Regulation in the United States, (December 2013) (suggesting the need for Federal regulation of the 

mortgage insurance industry). 6See J. David Cummins & Mary A. Weiss, Systemic Risk and the U.S. Insurance Sector 

(2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstractlid=1725512.

Thank you again for the opportunity to testify. Given the potential affect the 

Rules could have on our business and our clients, we have been very active in our 

efforts to educate policymakers about our concerns and will continue to leverage all 

opportunities made available to us. We appreciate the Subcommittee taking an interest in this issue and having afforded us another venue in which to discuss our 

concerns. 

PREPARED STATEMENT OF DANIEL SCHWARCZ

ASSOCIATE PROFESSOR AND SOLLY ROBINS DISTINGUISHED RESEARCH FELLOW

UNIVERSITY OF MINNESOTA LAW SCHOOL

MARCH 11, 2014

Chairman Brown, Ranking Member Crapo, and Members of the Subcommittee, 

thank you very much for this opportunity to discuss the appropriate capital standards to be applied to firms that are predominantly engaged in the business of insurance and subject to Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’). I hope to make three primary points in this 

testimony, which draws substantially on a co-authored draft article, Regulating Systemic Risk in Insurance.1 First, I will emphasize that the business of insurance can 

create important systemic risks to the larger financial system. The specific contours 

and magnitudes of these systemic risks are constantly evolving based on shifts in 

the insurance industry and its regulation. Second, I will suggest that, as contemplated by Dodd-Frank, these risks warrant the application of federally designed 

capital standards to nonbank financial companies primarily engaged in the business 

of insurance that the Financial Stability Oversight Council (‘‘FSOC’’) designates as 

systemically risky (‘‘Insurance SIFIs’’). Unlike State risk-based capital rules, which 

focus primarily on consumer protection, these Federal capital standards should 

focus on the distinctive ways in which Insurance SIFIs can pose systemic risk to 

the larger financial system. This approach is perfectly consistent with Section 171. 

Third, I will caution against exempting bank/thrift holding companies from Section 

171 simply because they or a large number of their subsidiaries are subject to State 

insurance capital requirements. 

(1) Systemic Risk in Insurance 

As exemplified by the dramatic failures of American Insurance Group (‘‘AIG’’) and 

various financial guarantee insurers, insurance companies and their affiliates 

played a central role in the 2008 Global Financial Crisis.2 It is now generally accepted that insurers and their affiliates that effectively provide insurance against the 

default of financial instruments—whether through formal insurance policies (as in 

the case of financial guarantee insurers) or through derivatives such as credit default swaps (as in the case of AIG)—can contribute to systemic risk.3 Other ‘‘nontraditional’’ insurance activities, such as extensive use of securities lending (as in 

the case of AIG),4 or mortgage guarantee insurance 5 can also prove systemically 

risky.6


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7Government Accountability Office, Insurance Markets: Impacts of and Regulatory Response 

to the 2007–2009 Financial Crisis (June 2013). 8See American International Group: Examining What Went Wrong, Government Intervention, 

and Implications for Future Regulation: 110th Cong. (2009) (Statement of Eric Dinallo, Superintendent New York State Insurance Department). 9This is much more true of the life insurance industry than the property/casualty insurance 

industry. Accordingly, commentators are likely correct that the former poses more systemic risk 

than the latter. See, e.g., Steven Weisbart & Robert P. Hartwig, 2011, Property/Casualty Insurance and Systemic Risk (2011). 10 Craig Merrill, Taylor D. Nadauld, & Philip Strahan, Final Demand for Structured Finance 

Securities, (Working Paper, January 17, 2014) available at http://ssrn.com/abstract=2380859.

For evidence that insurers can play a similar role in misallocating credit in corporate bond markets, see Bo Becker, & Victoria Ivashina, Reaching for Yield in the Bond Market, Journal of Finance (forthcoming), available at http://www.hbs.edu/faculty/Publication%20Files/12-

103lc2425c59-1647-42df-8d1b-7b8ed433fb76.pdf. 11Facing substantial demand to originate mortgages so that they could be packaged together 

and securitized, banks and other mortgage originators increasingly loosened credit standards, 

allowing more and more people to buy houses with loans they ultimately could not afford. See

Kathleen Engel & Patricia McCoy, the Subprime Virus: Reckless Credit, Regulatory Failure, and 

Next Steps (2011). 

But in the last several years, a narrative has emerged suggesting that these risks 

are vanishingly small. This argument emphasizes that very few traditional insurers 

actually failed during the financial crisis.7 It also stresses that AIG Financial Products—the division of AIG that was principally responsible for writing the credit default swaps that were the primary (though not sole) source of the company’s problems—was not regulated as an insurance company, in large part due to Federal 

law.8 Finally, it argues that insurers, unlike banks, do not have a mismatch in their 

assets and liabilities. 

This narrative, however, ignores important linkages between the insurance industry and the rest of the financial system as well as insurers’ potential vulnerabilities 

to catastrophic events. Although the insurance industry is indeed less systemically 

risky than the banking and shadow banking sectors, it is also structurally capable 

of posing a variety of systemic risks to the larger financial system. Perhaps even 

more importantly, the magnitude and character of these risks are themselves constantly evolving and shifting. A decade ago, the notion that a company within an 

insurance group could threaten the global financial system through its portfolio of 

credit default swaps would have been viewed—perhaps accurately, at the time—as 

preposterous. The lesson is that the regulation of systemic risk in insurance must 

be designed to proactively identify, assess, and manage new potential sources of systemic risk in the industry. With this in mind, consider several specific ways in 

which insurers could potentially threaten the stability of the broader financial system. 

Demand for Assets that Spread Systemic Risk: Insurers are among the largest and 

most important institutional investors domestically and internationally.9 They own 

approximately one-third of all investment-grade bonds and, collectively, own almost 

twice as much in foreign, corporate, and municipal bonds than do banks. Their holdings of corporate and foreign bonds exceed those of mutual funds and pension funds 

combined. 

Insurers’ massive role as investors in financial instruments does not just mean 

that they can be passive victims of financial instability. Financial markets, as with 

all markets, are impacted both by supply side forces and demand-side forces. Thus, 

when insurers collectively demand certain types of financial assets, the amount supplied and prices of these assets will increase. In fact, recent evidence shows the insurance industry played a major role in stoking demand for mortgage-backed securities and related instruments in the years leading up to the financial crisis.10 By 

2007, life insurers held approximately $470 billion in these securities, accounting for 

about 25 percent of the total market. Their demand for these securities skyrocketed 

in the years preceding the crisis, in large part due to unrealized losses in variable 

annuity products and State capital standards that treated highly rated structured 

securities as very low risk. 

Insurers were thus substantially responsible for fueling the demand for structured 

finance securities. And, of course, the explosion in these instruments has been 

blamed for indirectly helping to fuel the pre-crisis housing bubble.11 Notably, insurers’ contribution to systemic risk in this example occurred even though the terms 

of their assets and liabilities were well matched and most of them ultimately avoided failure. 

Asset Fire Sales: Insurers’ massive role as institutional investors also means that 

they can pose systemic risks by triggering or exacerbating a ‘‘fire sale’’ of specific 


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12 Andrew Ellul, Chotibhak Jotikasthira, & Christian T. Lundblad, Regulatory Pressure and 

Fire Sales in the Corporate Bond Market, 101 J. Financial Econ. 596 (2011). 13 Craig B. Merrill, Taylor D. Nadauld, Rene M. Stulz, & Shane Sherlund, Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities?, NBER Working Paper No. 18270 (Aug. 2012), available at http://www.nber.org/papers/

w18270; Andrew Ellul, Pab Jotikasthira, Christian T. Lundblad, Yihui Wang et al., Is Historical 

Cost Accounting a Panacea? Market Stress, Incentives Distortions, and Gains Trading (NYU 

Working Paper, 2012), available at http://ssrn.com/abstract=1972027. 14 National Commission on the Causes of the Financial and Economic Crisis in the United 

States, the Financial Crisis Inquiry Report (2011). 15Of course, there are also cases in which an insurance company’s failure does not result in 

an immediate need for the company or its receiver to liquidate much of its portfolio. See Insurance Oversight and Legislative Proposals: Testimony Before H. Fin. Subcomm. on Ins., Hous. and 

Cmty. Opportunity, 112th Cong. 9 (2011) (Statement of Peter Gallanis, National Organization 

of Life and Health Insurance Guaranty Associations) available at https://www.nolhga.com/

pressroom/articles/HFSCnolhgaTestimonyNov15l2011.pdf. 16For instance, in 1991 six major life insurers, each with over $4 billion in assets, failed as 

a result of their common exposures to commercial real estate and junk bonds. See Scott Harrington, Policyholder Runs, Life Insurance Company Failures, and Insurance Solvency Regulation, 15 Regulation 27 (1992). 17 Although the massive losses that insurers incurred in connection with 9/11 did not substantially destabilize the industry, insurers’ sudden and dramatic shift in their willingness to provide this coverage suggests that they might well have had events transpired differently or had 

they occurred at the same time as preexisting financial instability. 

securities or types of securities.12 Emerging evidence suggests that insurers did 

stoke fire sales in mortgage-backed securities and related instruments in 2008, 

when many insurers attempted to sell these securities in response to regulatory, rating agency, and market pressures.13 In offloading these securities in a coordinated 

fashion, insurers contributed to the sudden illiquidity of these instruments, causing 

unrelated financial institutions holding these or similar assets to face tremendous 

liquidity pressures. Indeed, the inability of firms to sell or price such ‘‘toxic assets’’ 

was the key reason for the failure or near failure of numerous banks and investment banks, including Lehman Brothers.14

As above, insurers’ seeming role in contributing to fire sales of mortgage-backed 

securities occurred notwithstanding the matching of their assets and liabilities or 

their ultimate avoidance of failure. Ironically, insurers’ very success in limiting their 

exposure to ‘‘toxic assets’’ in the early stages of the crisis, and thus safeguarding 

their own financial strength, may have actually exacerbated the liquidity troubles 

of unrelated firms. But just like the first people in line during a run on a bank, 

while insurers may have gotten through the financial crisis relatively unscathed, 

that does not mean that they were not instrumental in causing the crisis in the first 

place. 

Simultaneous Failure of Several Large Insurers: Although insurers need not fail 

in order to contribute to systemic risk, the converse is not true: substantial failures 

of several large insurers could well disrupt the financial system as a result of insurers’ status as massive investors. In certain cases, an insurance company could be 

required to quickly liquidate a substantial portion of its portfolio.15 This might occur 

if it failed due to a catastrophic event triggering an unmanageable numbers of 

claims, a failure of a reinsurer, or a ‘‘run’’ on products that permitted policyholders 

to withdraw funds or take out loans against their policy. If many insurers simultaneously experienced this type of distress, this could trigger, or exacerbate, the types 

of distortions in capital markets that were witnessed in 2008. 

The failure of several large insurers is hardly unimaginable.16 Insurers are potentially subject to a wide array of catastrophe risks that could trigger a wave of claims 

across numerous insurers within a short timeframe. And while insurers attempt to 

safeguard against such risks through policy exclusions, reinsurance, and other riskmanagement techniques, these efforts are hardly fail-safe. For instance, prior to 9/

11, commercial property insurance policies did not contain any explicit exclusion for 

terrorism insurance and insurers did not even include this risk in their calculations 

of premiums. After 9/11, insurers insisted that terrorism risk was so large and incalculable that they could not provide coverage at all, at least without an explicit Federal backstop.17 Similarly, life insurers face potentially massive exposure to a global 

pandemic such as the Flu of 1918, which killed between 20 and 40 million people 

within a single year. 

Interconnectedness through Reinsurance: Although insurers attempt to manage catastrophe risk through reinsurance arrangements, the reinsurance industry itself is 

potentially subject to catastrophe risk. The reinsurance industry is extremely concentrated in a few massive firms, such as Swiss Re, Munich Re, and Berkshire 

Hathaway. In 2009, for instance, five reinsurance groups provided approximately 60 


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18 International Association Of Insurance Supervisors, Reinsurance And Financial Stability 

(July 2012). 19See J. David Cummins & Mary A. Weiss, Systemic Risk and the U.S. Insurance Sector

(2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstractlid=1725512 (‘‘Reinsurance is the primary source of interconnectedness within the insurance industry.’’). 20Group of Thirty, Reinsurance and International Markets (2006). 21See FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding Prudential Financial Inc. (Sept. 19, 2013). The most substantial policyholder run on a 

U.S. insurance company involved Executive Life, where policyholder cash surrenders exceeded 

over $3 billion in the year prior to its failure. Although this run was more a product of Executive 

Life’s tenuous financial position than the cause of its tenuous position, it did indeed have the 

effect of forcing Executive Life to liquidate a substantial percentage of its portfolio. See Scott 

Harrington, Policyholder Runs, Life Insurance Company Failures, and Insurance Solvency Regulation, 15 Regulation 27 (1992). 22See Texas Department of Insurance, Retained Asset Accounts Survey (2011), available at 

http://www.tdi.texas.gov/reports/life/documents/raareport.pdf (finding in a survey of 160 life 

insurers open retained asset accounts totaling $2.3 billion with respect to policyholders living 

in Texas). 23See Financial Research Advisory Committee Research Subcommittee, OFR Study on the Insurance Sector Recommendation, available at http://www.treasury.gov/initiatives/ofr/about/

Documents/FRAC%20Research%20OFR%20Study%20on%20the%20Insurance%20Sector%20

Recommendation.pdf. 24See NY Department of Financial Services, Shining a Light on Shadow Insurance (June 

2013). Traditionally, captive insurance was simply a way for a traditional noninsurance company, such as Coca Cola or GM, to self-insure its risks rather than purchase conventional insurance. But life insurers realized that they could exploit the rules governing captive insurers to 

avoid what they deemed to be ‘‘excessive’’ reserve requirements. To do this, the life insurer 

transfers some of its risk to the captive insurer via a reinsurance transaction. This transaction 

can reduce reserves because insurers do not need to reserve against risks that are transferred 

to reinsurers (even if they are affiliated). Meanwhile, captive insurers are subject to a much 

looser set of solvency rules than ordinary insurers and can generally choose their regulator 

among any of the States. According to the New York Attorney General, ‘‘shadow insurance . . . 

puts the stability of the broader financial system at greater risk.’’ See Benjamin M. Lawsky, 

N.Y. Superintendent of Fin. Serv., Remarks at the 22nd Annual Hyman P. Minsky Conference 

percent of the world’s reinsurance capacity.18 This concentration creates deep interconnections among insurers, such that the failure of one or two major reinsurers 

could simultaneously impact a substantial segment of the insurance industry at 

once.19 This risk is exacerbated by the fact that reinsurer financial strength is itself 

highly opaque, and reinsurers often reinsure risks with one another, creating the 

possibility that one reinsurer’s failure could have a domino effect on other reinsurers.20

Exposure to Policyholder Runs: Despite their frequent protestations to the contrary, life insurers are also not immune to the possibility of a run on their products. 

While this is certainly much less likely for life insurers than banks, a significant 

number of many life insurers’ policies are subject to early withdrawal and include 

a significant cash surrender value.21 Growing competition from life-settlement companies—which offer policyholders the option of selling their policies for cash—will 

likely increasingly pressure life insurers to allow policyholders to cash out of their 

policies with smaller penalties. This, in turn, may make life insurers more susceptible to the possibility of a policyholder run. So too might the increasing trend 

among life insurers to make payouts through ‘‘retained asset accounts’’ that function 

almost identically to bank accounts.22 The risk of a policyholder run is exacerbated 

by the fact that State insurance guarantee funds do not generally fully guarantee 

the value of most insurance policies, cannot be spread among companies or policies 

to increase limits (unlike FDIC insurance), and are much less financially credible 

than FDIC insurance as they are not pre-funded or explicitly backstopped by the 

Federal Government. 

Systematic Under-Reserving: There is a real risk that insurers may systematically 

underestimate reserves for certain types of policies or losses. Indeed, a recent proposal by a subcommittee of the Financial Research Advisory Committee noted that 

the ‘‘cyclicality of the insurance industry’s profits between hard and soft markets 

implies specific periods during which underpricing of risk becomes an industry-wide 

phenomenon.’’23 In the past, such systematic errors in reserving have been limited 

in the life insurance domain, because life insurers have historically faced rigid and 

conservative reserving rules for their products. 

However, two recent, and related, developments suggest that this longstanding 

history of conservative reserving in life insurance may not extend into the future. 

First, in the last decade or so, life insurers have increasingly used captive insurance 

companies to escape regulatory rules governing reserve setting, a process that some 

have referred to as ‘‘shadow insurance.’’24 Recent estimates conclude that ‘‘shadow 


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on the State of the U.S. and World Economies in New York City (April 18, 2013) available at 

http://www.dfs.ny.gov/about/speechesltestimony/sp130418.htm. 25See Ralph S.J. Koijen and Motohiro Yogo, Shadow Insurance (NBER Working Paper No. 

19568, (2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstractlid=2320921. 26Federal Insurance Office, How to Modernize and Improve the System of Insurance Regulation in the United States, (December 2013). 27See Scott Harrington, The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation, 76 J. Risk & Ins. 785 (2009). 28Monica Billioa, Mila Getmanskyb, Andrew W. Loc, & Loriana Pelizzona, Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors 104 J Fin. Econ. 

535 (2012); Faisal Balucha, Stanley Mutengab & Chris Parsons Baluch, Insurance, Systemic 

Risk and the Financial Crisis, 36 The Geneva Papers 126 (2011); Viral Acharya, Lasse Heje Pedersen, Thomas Philippon, & Matthew P. Richardson, Measuring Systemic Risk (2010), available 

at http://papers.ssrn.com/sol3/papers.cfm?abstractlid=1573171. 29 Nonbank financial companies predominantly engaged in the business of insurance and designated as systemically significant by FSOC—which I label as Insurance SIFIs—are not necessarily the only insurers who may pose systemic risks. For instance, mortgage insurers may 

post systemic risks because of their prominent role in the housing market. See Federal Insurance Office, How to Modernize and Improve the System of Insurance Regulation in the United 

States, (December 2013). Additionally, as I have argued elsewhere, entire segments of the insurance industry may pose systemic risks because of correlations among individual insurance companies with respect to both their interconnections with the larger financial system and their 

vulnerabilities to failure. For this reason, I believe that a broader Federal role in regulating the 

insurance industry beyond that established in Dodd-Frank is appropriate. See Daniel Schwarcz 

& Steven L. Schwarcz, Regulating Systemic Risk in Insurance (March 4, 2014), available at 

http://ssrn.com/abstract=2404492. But because Federal regulation in these domains is not authorized by current law and is not the subject of this hearing, I do not discuss these issues further in the body of my testimony. 30Wallace E. Oates, Fiscal Federalism (1972). 31Thus, in a Report of the NAIC and the Federal Reserve Joint Subgroup on Risk-Based Capital and Regulatory Arbitrage (2002), a working group of insurance and banking regulators explained the core differences between risk-based capital rules in insurance and banking by noting 

that ‘‘Insurance company regulators place particular emphasis on consumer (policyholder) protection’’ while ‘‘banking regulators focus on depositor protection and the financial stability of 

regulated entities on a going concern basis.’’

insurance reduces risk-based capital by 53 percentage points (or 3 rating notches) 

and raises impairment probabilities by a factor of four.’’25 Second, State insurance 

regulation is currently embarking on a fundamental change to its regulatory approach, which would grant insurers broad discretion to use internal models to set 

reserve levels. The extensively documented inability of Federal regulators to fully 

understand financial firms’ internal risk models suggests that large scale errors in 

life insurer reserving could be a problem in the future. This is particularly so given 

that State regulators currently lack sufficient technical expertise or resources to undertake a reasonable evaluation of these models on a firm-by-firm basis.26

Ultimately, it is surely true that the insurance industry currently poses less systemic risk than the banking sector or the shadow-banking sector, as many commentators have emphasized.27 At the same time, however, the insurance industry 

is a crucial and dynamic component of the American and international financial system, a fact that has been documented by various studies quantifying the connections 

between insurers and the rest of the financial system based on historical stock 

prices and similar metrics.28 As such, the insurance industry can indeed present a 

meaningful source of systemic risk that cannot be easily limited to a pre-defined set 

of activities. 

(2) Appropriate Capital Requirements for Insurance SIFIs 

As contemplated by Dodd-Frank, Federal regulators should design, implement, 

and regularly reassess distinct capital and leverage standards for insurers that are 

particularly likely to pose systemic risk, including Insurance SIFIs.29 A central 

tenet of federalism is that regulatory responsibilities should be assigned, at least in 

part, to the unit of government that best internalizes the full costs of the underlying 

regulated activity.30 The rationale for this principle is that government entities will 

only have optimal incentives to take into account the full costs and benefits of their 

regulatory decisions if the impacts of those decisions are felt entirely within their 

jurisdictions. Given that systemic risk in insurance is a negative externality whose 

effects are inherently felt nationally and internationally, national and international 

regulatory bodies should play a role in regulating insurance SIFIs. 

Federal involvement in designing capital requirements for Insurance SIFIs is particularly important because State risk-based capital rules are focused predominantly 

on consumer protection rather than systemic stability.31 But the regulatory objective 

of a risk-based capital regime has important implications for how that regime 

should be constructed. In other words, capital regimes focused on systemic risk can, 


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32See Elizabeth F. Brown, The New Laws and Regulations for Financial Conglomerates: Will 

They Better Manage the Risks than the Previous Ones?, 60 AM. U. L. REV. 1339 (2011). 33 Bank for Int’l Settlements, Principles for the Supervision of Financial Conglomerates Consultative Document (2011). Double or multiple gearing involves scenarios in which the same capital is used as a buffer against risk by two entities at the same time, such that the ‘‘net’’ solvency of the group is less than the sum of the capital of the group’s individual entities. 34 Although State insurance regulation has limited its reliance on private rating agencies in 

assessing structured finance vehicles, it still relies enormously on private rating agencies to assess the quality of insurers’ assets. See John Patrick Hunt, Credit Ratings in Insurance Regulation: The Missing Piece of Financial Reform, 68 Wash. & Lee L. Rev. 1667 (2011). 35 Credit for Reinsurance Model Law, § 2(b)–(c), adopted Nov. 6, 2011, available at http://

www.naic.org/documents/committeeslelreinsurancelrelatedldocslprefaceladoptedlexl

plenaryl111106.pdf. 36Dodd-Frank Act § 939A. 

and should, be designed differently than capital regimes focused on consumer protection. Consider several examples of this important point. 

First, while a risk-based capital regime designed to address systemic risk should 

focus on aggregate capital levels of an entire holding company, a capital regime oriented toward consumer protection can rely on entity-level capital regulation with 

strong ring-fencing rules. Because of its consumer protection orientation, State insurance regulation embraces the latter model: capital requirements are imposed 

solely on individual legal entities, and regulators attempt to protect these entities 

from affiliate or holding company risk. By contrast, a capital regime focused on systemic risk demands group-wide capital requirements. This is because risk-management, investment and business strategies are all generally determined at the holding company level.32 Group capital rules can also limit the prospect of other problems that may have systemic consequences, such as double or multiple gearing.33

Second, a capital regime that is focused on systemic risk might well be less dependent on credit-rating agencies in setting capital charges for assets than would 

a capital regime focused on consumer protection. Currently, State insurance regulation relies substantially on rating agencies in determining capital charges for individual assets.34 Recent changes in State rules regarding credit for reinsurance also 

place a renewed regulatory emphasis on rating agencies’ assessments of reinsurers’ 

financial strength.35 But as has now been widely recognized, regulatory reliance on 

rating agencies can increase systemic risk for a variety of reasons. It can lead to 

the systematic underpricing of risk, dull the incentives of rating agencies to correctly assess risk, and play a role in triggering fire sales by producing coordinated 

investment decisions across a wide number of firms. For these reasons, Dodd-Frank 

substantially limited reliance on credit ratings by all Federal (but not State) regulators.36

Third, a capital regime focused on systemic risk must be sensitive to the possibility that it might inadvertently contribute to financial instability. As described 

above, emerging evidence suggests that State regulatory capital rules may have 

played a role in encouraging insurers to both invest in mortgage-backed securities 

and to offload them when they were downgraded (or when such downgrades were 

anticipated). Although the literature on how, and when, capital rules and related 

accounting standards can have inadvertent adverse effects on systemic risk is still 

developing, systemic risk regulators must pay acute attention to this issue. 

Group-wide capital rules that limit their dependence on credit-rating agencies and 

reduce distortions in firm behavior are thus crucial for any capital regime that is 

principally oriented toward guarding against systemic risk. But various more specific rules might well be appropriate for capital regimes that are designed to guard 

against systemic risk associated with insurance. For instance, such a regime might 

well impose higher capital charges on long-term assets with short-term volatility or 

deep illiquidity relative to an insurance capital regime oriented only toward consumer protection. This is because a central concern from the perspective of systemic 

risk is that a systemically risky insurer could face sudden liquidity demands for a 

variety of reasons notwithstanding insurers’ usual matching of the duration of their 

assets and liabilities. Such liquidity pressures could stem from collateral calls associated with derivatives activities or securities lending, mass policyholder withdrawals, a sharp increase in claims due to catastrophe, or the failure of a reinsurer. 

Similarly, a capital regime designed to guard against systemic risk related to insurance might well resist some of the recent developments that could weaken life 

insurer reserve practices. Thus, such a regime could reject principles-based reserving in favor of the traditional approach to setting life insurers’ reserves, given the 

prominent role that reliance on financial firms’ own internal models for purposes of 

setting capital played in triggering the 2008 financial crisis. Or, it might restrict the 


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37Letter from Members of Congress to Ben Bernanke, Chairman of the Board of Governors 

of the Federal Reserve System (Dec. 11, 2012). 38Letter from H. Rodgin Cohen to Ricardo Anzaldua, Executive Vice President and General 

Counsel of MetLife Inc., (May 20, 2013), available at http://www.federalreserve.gov/SECRS/

2013/May/20130523/R-1438/R-1438l052313l111291l554506713029l1.pdf.; Letter from 

Members of Congress to Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System (Dec. 11, 2012). 39 An additional concern I have with proposed S. 1369 is that it could have the effect of exempting a company from Section 171 on the basis of activities that are not subject to State insurance capital requirements. S. 1369 incorporates the definition of ‘‘business of insurance’’ in 

Dodd-Frank: ‘‘the writing of insurance or the reinsuring of risks by an insurer, including all acts 

Continued

credit that insurers can receive by using ‘‘shadow insurance’’ to reduce their liabilities. 

To be sure, capital requirements for Insurance SIFIs need not—and, indeed, 

should not—mechanistically mirror the capital rules that are applied to other types 

of financial firms. As emphasized in a recent letter of Members of Congress, ‘‘Strong 

capital standards need to be consistent with the business models of the industry to 

which they are applicable.’’37 The systemic risks posed by Insurance SIFIs are both 

different than, and likely less severe than, those posed by large bank holding companies, and an appropriate capital regime for Insurance SIFIs should reflect these 

facts. At the same time, an appropriate capital regime for Insurance SIFIs should 

also reflect the fact that the central goal of imposing capital requirements on these 

entities at the Federal level is different than the goal of State capital requirements. 

As such, the Federal capital regime applicable to Insurance SIFIs cannot merely 

replicate or defer to the consumer protection oriented State capital regime. Capital 

regimes should be designed not only according to the industry to which they apply, 

but also to the regulatory goal that they seek to achieve. 

My understanding of Section 171—based on publicly available legal analysis of 

the provision and several letters from Members of Congress—is that it advances 

these goals. The provision gives the Board of Governors of the Federal Reserve System (‘‘Fed’’) substantial flexibility in determining how to calculate Insurance SIFIs’ 

risk-based capital and leverage limits so as to account for the particular risks that 

these entities present.38 At the same time, it appropriately seeks to ensure that, 

however these calculations are performed, they do not fall below minimum levels. 

(3) Appropriate Capital Requirements for Bank/Thrift Holding Companies 

that Substantially Engage in the Business of Insurance 

Bank and thrift holding companies have long been subject to Federal capital and 

leverage requirements because of the unique risks associated with owning an FDIC 

insured institution. Section 171 requires the Fed to ensure that these requirements 

are no less than those applicable to ordinary small banks. This, in turn, helps to 

ensure that holding companies of banks and thrifts do indeed serve as a source of 

strength for their FDIC insured subsidiaries, as has long been intended by the larger Federal banking regime. Proposed S. 1369 would exempt bank/thrift holding companies from the Section 171 floor if they directly, or through their subsidiaries, derive a substantial percentage of their consolidated revenues from the business of insurance. This would be a mistake. 

As discussed above, State insurance capital rules and bank/thrift capital rules 

have fundamentally different regulatory objectives. While the former focuses on protecting policyholders, the latter aims principally to limit the exposure of taxpayers 

to bank failures and minimize the prospect of systemic risk. And, as described 

above, these different orientations have important implications for how the corresponding capital regimes are, and should be, structured. 

For these reasons, the fact that a holding company of a depository institution is 

itself subject to State insurance capital requirements or derives a substantial 

amount of its revenue from State-regulated insurers does not mean that it should 

be exempted from the minimum floors required by Section 171. Such an entity 

raises both the consumer protection concerns that motivate State insurance regulation and the systemic risk/taxpayer protection concerns that motivate the need for 

capital/leverage rules for bank/thrift holding companies. It therefore stands to reason that it should be subject to both sets of capital rules, as well as to the Section 

171 floor. Establishing a special rule allowing certain bank/thrift holding companies 

to avoid Section 171 would not only create an uneven playing field, but it could encourage regulatory arbitrage by allowing holding companies of FDIC insured institutions to avoid regulatory requirements by increasing their ownership of insurance 

entities or their own insurance activities.39 This, in turn, could have the effect of 

increasing the size of bank/thrift holding companies. 


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necessary to such writing or reinsuring and the activities relating to the writing of insurance 

or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, 

or employees of insurers or who are other persons authorized to act on behalf of such persons.’’ 

Dodd-Frank § 1002. This definition is not explicitly tethered to State insurance regulation, as 

is the proffered rationale for exempting bank/thrift holding companies predominantly engaged 

in insurance from Section 171. It therefore may be possible under proposed S. 1369 for a bank/

thrift holding company to avoid Section 171 on the basis of activities that fall within this broad 

definition of insurance, but are not subject to State capital requirements. 40 In the case of a bank/thrift holding company that was itself regulated as an insurance company, State capital rules would apply to the holding company entity. However, such regulation 

would still not account for the distinctive risks associated with owning an FDIC insured institution. 1Pub. L. No. 111–203 (2010). 

2Section 171 is codified at 12 U.S.C. § 5371. 3Sullivan & Cromwell represents Covered Insurance Companies and other insurance companies. 4Letter to Ben. S. Bernanke, Martin J. Gruenberg and Thomas J. Curry from Twenty-Four 

U.S. Senators (Oct. 17, 2012) (the ‘‘October 17, 2012 Letter’’). See also, a December 11, 2012 letter (the ‘‘December 11, 2012 Letter’’) from Thirty-Three Members of Congress of both parties to 

former Chairman Bernanke which explained (in the context of the Federal banking agencies’ 

proposed rule to apply the Bank Capital Framework to insurance companies) that ‘‘[t]he bankcentric approach of the proposed rules is inconsistent with the unique nature of insurance and 

contradicts the intent of Congress.’’

Exempting from Section 171 bank/thrift holding companies that derive a substantial percentage of their revenue from insurance operations but are not themselves 

regulated as insurance companies would be particularly bad policy.40 As described 

above, the State insurance capital regime does not apply to holding companies of 

insurance entities. A bank/thrift holding company that derived a substantial percentage of its revenue from the insurance operations of its subsidiaries, but was not 

itself an operating insurance company, would therefore not face any capital requirements at the holding company level under State insurance law. There is consequently no justification for providing such entities with a special exemption from 

Section 171. 

PREPARED STATEMENT OF H. RODGIN COHEN

SENIOR CHAIRMAN, SULLIVAN & CROMWELL LLP

MARCH 11, 2014

I. Introduction 

Chairman Brown and Ranking Member Toomey, and distinguished Members of 

the Subcommittee, I am honored to be with you today to discuss the application of 

the capital standards in Section 171 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (‘‘Dodd-Frank’’)1 to a subset of insurance companies.2 Let 

me begin by commending you for the leadership you have shown and for your efforts 

and attention to this important issue. 

Section 171, which is commonly known as the ‘‘Collins Amendment’’, after its primary sponsor, Senator Collins, establishes certain capital standards for designated 

financial institutions. It is a part of Title I, Subtitle C of Dodd-Frank, which includes enhanced prudential standards and differentiation mandates in its principal 

provision, Section 165. The insurance companies subject to Section 171, which I will 

refer to as ‘‘Covered Insurance Companies’’, are either savings and loan holding companies (‘‘SLHCs’’) or have been designated by the Financial Stability Oversight 

Council (‘‘FSOC’’) for supervision by the Board of Governors of the Federal Reserve 

System (‘‘Federal Reserve’’) pursuant to Section 113 of Dodd-Frank.3

Stated simply, the core question raised by the application of Section 171 to Covered Insurance Companies is whether they should be subject to the same capital 

framework as that which applies to banks (which I will refer as the ‘‘Bank Capital 

Framework’’). 

What is most striking about this question is that I do not know of a single legislator or regulator, including the Federal Reserve, who believes that, as a matter of 

policy, the Bank Capital Framework should be automatically imposed on insurance 

companies. Nor do I know of a single Member of Congress who maintains that Congress actually intended to impose the identical capital regime on these two very different businesses. As twenty-four Senators from both parties wrote to the heads of 

the three Federal banking agencies on October 17, 2012: ‘‘Congress did not intend 

for the Federal regulators to discard the State risk-based capital system in favor of 

a banking capital regime’’.4


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5Letter to Ben S. Bernanke, Martin J. Gruenberg and Thomas J. Curry from Senator Susan 

Collins (Nov. 26, 2012). 6 Id.

7Section 165 does not expressly apply to SLHCs. As discussed in note 16 infra, however, the 

Federal Reserve has, in effect, made the enhanced prudential standards applicable to SLHCs 

with total consolidated assets of $50 billion or more and a significant depository subsidiary, as 

well as to other SLHCs as determined by the Federal Reserve. 8See, e.g., Letter to Jennifer J. Johnson from MetLife, Inc. (April 30, 2012); Letter to Ben S. 

Bernanke, Martin J. Gruenberg and Thomas J. Curry from MetLife, Inc. (Oct. 22, 2012); Letter 

to the Office of the Comptroller of the Currency, Jennifer J. Johnson and Robert E. Feldman 

from Prudential Financial, Inc. (Oct. 22, 2013); and Letter to Jennifer J. Johnson, Thomas J. 

Curry and Robert E. Feldman from State Farm Insurance Companies (Oct. 19, 2012). 

Senator Collins herself has made clear that it was not the intent of Congress to 

‘‘supplant prudential State-based insurance regulation with a bank-centric capital 

regime’’.5 Instead, Senator Collins explained, ‘‘consideration should be given to the 

distinctions between banks and insurance companies. I believe it is consistent with 

my amendment that these distinctions be recognized in the final rule.’’6

Accordingly, we are not debating what the result should be. Both as a matter of 

policy and in terms of carrying out Congressional intent, there should be tailored 

and differentiated capital requirements for insurance companies. Instead, the question is how best to achieve that result under Section 171. 

My testimony today is divided into four parts. First, I will summarize the terms 

of Section 171. Second, I will outline the relevant policy issues. Third, I will attempt 

to explain why I believe that, as a legal matter, the Federal Reserve already has 

sufficient authority to deal appropriately with these issues. Fourth, in the event 

that the Federal Reserve elects not to exercise that discretion, I will explain briefly 

why Congressional action to deal with this matter is both necessary and appropriate. 

II. Section 171

Section 171 of Dodd-Frank does not prescribe specific capital requirements, but 

provides two general mandates for both risk-based and leverage capital requirements. First, the capital requirements applied to companies subject to Section 171 

may not be ‘‘less than’’ the capital requirements applied to banks now or in the future. Second, those requirements may not be ‘‘quantitatively lower’’ than the bank 

capital requirements in place as of the date of the enactment of Dodd-Frank. Presumably, the first mandate incorporates the so-called Basel III capital framework, 

as implemented by the Federal banking agencies, and the second mandate incorporates the Basel I capital framework, as previously implemented by the agencies. 

Section 171 is a part of Subtitle C of Title I of Dodd-Frank, entitled ‘‘Additional 

Board of Governors Authority for Certain Nonbank Financial Companies and Bank 

Holding Companies’’. The key operative provision of Subtitle C is Section 165, which 

establishes ‘‘enhanced prudential standards’’ for ‘‘systemically important financial 

institutions’’, i.e., bank holding companies with total consolidated assets of $50 billion or more (‘‘BHC SIFIs’’) and nonbank financial companies designated by FSOC 

under Section 113 of Dodd-Frank for supervision by the Federal Reserve (‘‘Nonbank 

SIFIs’’).7

III. Policy Issues 

At the outset, it is seemingly inconceivable that Congress, or any regulator, could 

conclude that the same capital requirements should logically or appropriately apply 

to all financial services companies that are deemed systemically important. Various 

types of financial services companies have different business purposes and asset and 

liability structures, and they are exposed to different types of risk. As explained in 

the December 11, 2012 Letter from 33 Members of Congress, ‘‘[s]trong capital standards need to be consistent with the business models of the industry to which they 

are applicable’’. Nonetheless, some have read Section 171, in isolation, to require the 

Federal Reserve to apply automatically the same capital framework applicable to 

banking organizations to all the Covered Insurance Companies, as well as all other 

Nonbank SIFIs. 

It is important to stress that the policy issue is not about the need for robust capital requirements for Covered Insurance Companies. The conclusion that such requirements are essential should be beyond disagreement. Indeed, the insurers themselves, in comment letters to the Federal Reserve and other banking agencies, have 

supported strong capital requirements for the industry.8

The real policy question is how best to implement robust capital requirements for 

Covered Insurance Companies. Is it preferable to import the Bank Capital Framework into the regulatory regime for Covered Insurance Companies or instead to rely 


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9See, e.g., Letter to Ben S. Bernanke, Martin J. Gruenberg and Thomas J. Curry from Senator 

Susan Collins (Nov. 26, 2012) and the December 11, 2012 Letter. 10Mitigating Systemic Financial Risk: Hearing Before the S. Banking, Housing and Urban Affairs Comm., 113th Cong. (July 11, 2013) (testimony of Daniel K. Tarullo). 11Monetary Policy and State of the Economy: Hearing Before the H. Financial Services 

Comm., 113th Cong. (Feb. 11, 2014) (testimony of Janet L. Yellen). 

principally upon substantive regulation under State insurance law, including, most 

pertinently, the risk-based capital requirements developed pursuant to the National 

Association of Insurance Commissioners’ Risk-Based Capital (‘‘RBC’’) framework? 

The application of the Bank Capital Framework to Covered Insurance Companies 

would be inappropriate, redundant and punitive, not only because it is a second capital regime (in addition to the RBC framework), but because the Bank Capital 

Framework was not designed to, and does not, take into account the critically significant differences between the business of banking and the business of insurance. 

This essential point is reflected in comment letters to the Federal Reserve by many 

Members of Congress, including Senator Collins and Members of the Senate Banking Committee.9

Let me summarize the fundamental difference between the balance sheets and 

business models of banks and insurance companies and why that difference compels 

the conclusion that the Bank Capital Framework is not the appropriate framework 

to govern insurance company capital. 

Banks perform the crucial role in our economy of maturity transformation, in 

which deposits and other short-term liabilities are invested in longer-term loans and 

other assets. This essential role, however, creates the potential for a loss of liquidity 

at banks in the event of a loss of this short-term funding. Consequently, in addition 

to enhanced liquidity requirements, the current regulatory framework for banks includes a substantially enhanced set of capital requirements (and related stress tests) 

that are designed to create a high level of loss-absorbing capital to help ensure that 

banks can withstand losses on assets and resultant strains on liquidity. 

In contrast, insurance companies do not engage in maturity transformation and, 

generally, have long-term liabilities. Moreover, historical experience, and the nature, 

structure and design of insurance products, indicate that there is no meaningful risk 

of ‘‘policyholder runs’’. Among other factors, even if an insurance policy can contractually be surrendered, the policyholder may find that a comparable policy is not 

readily available (for example, because of age, health, etc.), and the switch could be 

time-consuming and will involve ‘‘breakage’’ costs—all in contrast to the ease of 

switching a bank deposit. As a result, capital requirements tailored for banks that 

are funded, in large part, through short-term liabilities do not constitute an appropriate framework for the businesses of insurers, which are liability-driven and have 

longer-term assets and liabilities. 

This fundamental difference between the business models and liability mixes of 

banks and insurers, and the consequences for capital requirements, was thoughtfully articulated by Federal Reserve Governor Daniel Tarullo in testimony before 

the Senate Banking Committee:

The problem here, Mr. Chairman, comes I think on the liability side of the 

balance sheet. Bank-centered capital requirements are developed with an 

eye to the business model of banks and the challenge that the FDIC would 

have in resolving a bank, or now a systemically important banking organization that would be in deep trouble.

The more or less rapid liquidation of a lot of those claims and the runs on 

a lot of the funding of that institution, lie behind the setting of the capital 

ratio. But the liability side of an insurance compan[y’s] balance sheet, a 

true insurance company [like] somebody selling life insurance for example, 

is very different. There’s not a way to accelerate the runs of those, of that 

funding.10

Likewise, Federal Reserve Chair Janet Yellen testified before the House Committee 

on Financial Services that ‘‘[w]e understand that the risk profiles of insurance companies really are materially different . . .’’.11

It is highly relevant that Congress explicitly recognized that the evaluation of the 

risk of assets could not be separated from consideration of the method by which 

those assets are funded. Section 165(b)(3)(A) of Dodd-Frank expressly requires the 

Federal Reserve to consider differences between Nonbank SIFIs and BHC SIFIs 

and, in particular (through incorporation of Section 113(a)), the nature of the institution’s assets and liabilities, including its reliance on short-term funding. Likewise, 

former Federal Reserve Chairman Bernanke testified that ‘‘insurance companies 


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12Monetary Policy and the State of the Economy: Hearing Before the H. Fin. Services Comm., 

112th Cong. (July 18, 2012) (testimony of Ben S. Bernanke). 

have both a different composition of assets and a different set of liabilities, and appropriate regulation needs to take that into account.’’12

In Appendix A to this testimony, I have described three specific examples of issues 

that would arise from trying to force Covered Insurance Companies into a bank-centric capital regime. These examples are intended to be illustrative of the fundamental problem I have just described, but should not be taken to suggest there is 

a finite list of issues that if ‘‘fixed’’ would eliminate all the negative consequences 

that would result from applying the Bank Capital Framework, even on a ‘‘retrofitted’’ basis. These are merely symptomatic of the larger issue of applying the Bank 

Capital Framework to insurance companies for which it was never intended or designed. 

The examples do illustrate how the application of the Bank Capital Framework 

would require Covered Insurance Companies to hold capital that is not correlated 

to the risk profile of their underlying liabilities and assets. The result would be to 

impose upon Covered Insurance Companies lower returns on equity, both in absolute terms and in relation to their peer firms (both domestic and international), as 

well as unnecessary regulatory costs. Because lower returns do not constitute a viable strategy for Covered Insurance Companies (or their investors), their only option 

to retain marketplace vitality would be to increase the costs for their insurance 

products and services and cease offering some products altogether because of the uneconomic capital charge. Not only is such an approach obviously antithetical to the 

best interests of consumers and other customers, but it would also create a substantial competitive disadvantage for Covered Insurance Companies. As set forth in the 

October 17, 2012 Letter from twenty-four Senators, ‘‘applying a bank-focused regime 

to insurance companies could undermine potential supervision and unintentionally 

harm insurance policyholders, savers and retirees’’. 

Let me deal briefly with three arguments made against differentiation. The first 

is that we need simplicity in our capital rules, and, once we start distinguishing 

among financial institutions, it will not be possible to stop. Simplicity is a legitimate 

goal, but it should not degenerate into simplemindedness if it produces illogic, inequity and redundancy. And we are not talking about fine distinctions, but an obvious and palpable dichotomy. As the December 11, 2012 Letter argues persuasively, 

‘‘it is not workable to have one uniform capital standards regulation to apply across 

the whole spectrum of financial services companies . . . [I]nsurers have a completely different business model and capital requirements than banks, which must 

be appropriate recognized in the [capital rules applied to Covered Insurance Companies]’’. 

The second argument is that an asset should receive the same capital charge irrespective of the type of financial services company that holds the asset. Although this 

argument may have an appealing simplicity, it results in a divorce of capital from 

risk because it fails to take into account both sides of the balance sheet. It fails to 

consider either the purpose for which the asset is held or the institution’s ability, 

due to its liability structure, to hold the asset in times of stress. As I just discussed, 

the risk weighting developed for bank assets was not designed to reflect that purpose or capability in the context of insurance companies. 

Third, some may argue that any concern about the application of the Bank Capital Framework to Covered Insurance Companies is misplaced because ‘‘more capital 

is always better’’. That argument can only be valid, however, if a company’s appeal 

to investors is, contrary to all evidence, divorced from return on equity and its pricing of a product is likewise divorced from the capital assigned to it. To the contrary, 

capital requirements that are higher because they are not correlated to risk, produce 

marketplace and competitive distortions. Such uncorrelated capital requirements 

can increase the cost of financial products and services and even reduce the availability of lower-margin products and services. Once again, the debate is not about 

whether we should have robust capital requirements for all participants in the financial services industry—2008 should have resolved that debate once and for all. 

Instead, the only legitimate debate is whether the same capital framework should 

be artificially imposed without regard to the nature of the financial services company. 

IV. The Federal Reserve’s Authority To Tailor the Application of Section 

171

As discussed, there has been an extraordinary ‘‘meeting of the minds’’ among 

Members of Congress, regulators and the insurance industry that, as a policy matter, the Bank Capital Framework should not be applied to Covered Insurance ComVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 S:\DOCS\89351.TXT SHERYL

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13For example, although in recent testimony before the Senate Banking Committee, Federal 

Reserve Chair Janet Yellen recognized the ‘‘very significant differences between the business 

models of insurance companies and banks,’’ she continued that ‘‘the Collins Amendment does 

restrict what is possible for the Federal Reserve’’. (Semiannual Monetary Policy Report to the 

Congress: Hearing Before the S. Banking, Housing and Urban Affairs Comm., 113th Cong. (Feb. 

27, 2013) (testimony of Janet L. Yellen)). 14 Nat’l Cable & Telecommunications Ass’n, Inc. v. Gulf Power Co., 534 U.S. 327, 339 (2002). 15FDA v. Brown & Williamson Tobacco Corp, 529 U.S. 120, 133 (2000) (citations omitted) (‘‘It 

is a ‘fundamental canon of statutory construction that words of a statute must be read in their 

context and with a view to their place in the overall statutory scheme.’ . . . A court must therefore interpret the statute ‘as a symmetrical and coherent regulatory scheme’ . . . and ‘fit, if pospanies. To date, however, the Federal Reserve has expressed a concern that the language of Section 171 significantly constrains its interpretative ability.13

The Federal Reserve may be reluctant to be seen as usurping a Congressional prerogative and intervening in an area where Congress has legislated. It is also understandable that an administrative agency would take the position that, if there is an 

ambiguity or error in what Congress has drafted, the agency should not act until 

Congress has had the opportunity to resolve the issue. Nonetheless, as I have previously written in a letter available on the Federal Reserve’s Web site, I believe that 

there is sufficient flexibility in the statutory language of Dodd-Frank for the Federal 

Reserve to determine that Covered Insurance Companies should not be bound by 

the same capital regime that applies to banking organizations. 

I will now explain why the Federal Reserve has this interpretative authority, and 

can exercise that authority while at the same time maintaining fidelity to the plain 

language of Dodd-Frank and to Congressional intent. The analysis of the issue can 

be best understood by dividing it into three parts: the specific language of Section 

171; the broader context of the Dodd-Frank Act as a whole, in particular, Section 

165; and what I believe to be the most direct approach the Federal Reserve could 

take to resolve this issue. 

A. Section 171 Language 

As noted earlier, Section 171 does not prescribe specific capital requirements, but 

provides that the capital requirements applied to companies subject to Section 171 

be (i) not ‘‘less than’’ the capital requirements applied to banks now or in the future 

nor (ii) ‘‘quantitatively lower’’ than the bank capital requirements in place as of the 

date of the enactment of Dodd-Frank. 

What is striking about the language of Section 171 is the absence of a precise and 

simple statement that Nonbank SIFIs should be subject to the Bank Capital Framework. If that were what Congress intended, it would have been a simple matter for 

Congress to have said so. Rather, the language of Section 171 calls for a comparability analysis between the capital regime imposed by the Federal Reserve on 

Covered Insurance Companies and the Bank Capital Framework, and provides only 

broad guidance as to how the Federal Reserve is to conduct this analysis. 

Because Section 171 is not prescriptive as to how the Federal Reserve is to conduct the comparability analysis, the Federal Reserve is authorized to adopt a reasonable interpretation of Section 171 to fill in these gaps. As the Supreme Court 

has made clear, in circumstances where ‘‘the subject matter . . . is technical, complex, and dynamic . . . as a general rule, agencies have authority to fill gaps where 

statutes are silent.’’14 This fundamental principle of regulatory authority applies 

with full force here. It is presumably beyond debate that Section 171 is ‘‘technical’’ 

and ‘‘complex’’. It is likewise ‘‘dynamic’’ because the bank capital rules will continue 

to evolve, as will the assessment of ‘‘comparability’’. In dealing with subject matter 

of this nature, it was not error, but logical, for Congress to grant significant discretion to the Federal Reserve in implementing Section 171. 

Indeed, in a demonstration of this discretionary latitude, the Federal Reserve and 

the other Federal banking agencies have appropriately exercised this discretion in 

at least one case. In the agencies’ rules implementing Basel III, the agencies provided that the assets in separate accounts that are not guaranteed would generally 

receive a risk weight of 0 percent. 

Accordingly, even reading Section 171 in isolation, the Federal Reserve has flexibility to apply capital requirements to Covered Insurance Companies that are appropriately tailored for the business and risk profile of these institutions. 

B. Section 171 in the Broader Context of Subtitle C of Title I of Dodd-Frank 

This conclusion is even more compelling when Section 171 is read in context with 

the overall statutory scheme of which it is a part. It is a fundamental canon of statutory construction, mandated by the Supreme Court, that individual provisions of 

a statute must be read in the context of the overall statutory scheme.15 Accordingly, 


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sible, all parts into an harmonious whole . . . ’ ’’). See also Conroy v. Aniskoff, 507 U.S. 511, 

515 (1993) (Looking to the ‘‘text and structure of the [statute] as a whole’’ and following ‘‘the 

cardinal rule that a statute is to be read as a whole . . . since the meaning of statutory language, 

plain or not, depends on context.’’ (internal quotations omitted)). 16Section 165 applies, by its terms, only to BHC SIFIs and Nonbank SIFIs. It does not expressly apply to SLHCs. As a result, one could argue that, as a technical matter, Section 165 

is inapposite to the application of Section 171 to SLHCs. In its recent rulemaking implementing 

the enhanced prudential requirements of Section 165, however, the Federal Reserve, relying on 

its general authority under the Home Owners’ Loan Act to regulate SLHCs, indicated that it 

would expect to apply enhanced prudential requirements to any SLHC that has both $50 billion 

or more in total consolidated assets and a significant depository subsidiary. The Federal Reserve 

indicated that it would also apply enhanced prudential requirements to any other SLHC as the 

Federal Reserve considers appropriate. As a result of this Federal Reserve position, any argument based on the statutory language that Section 165 cannot be read to inform Section 171 

with respect to insurance-based SLHC is not viable. 17Section 165(b)(3)(A), as applicable to Covered Insurance Companies, incorporates Section 

113(a), which lists the considerations FSOC must take into account when determining whether 

to designate an institution as a Nonbank SIFI.

Section 171 must be read as part of the entirety of Subtitle C of Title I of DoddFrank, which establishes a new, comprehensive framework for the Federal supervision of BHC SIFIs and Nonbank SIFIs in order to address the risks posed by such 

institutions to financial stability. 

A central tenet of Subtitle C is that there must be both robust regulation and differentiated regulation. Not only are these two objectives not inconsistent, but they 

are mutually reinforcing because regulation that is directed to the actual risk involved is inherently more robust than regulation divorced from risk. Therefore, 

when Section 171 is read in the context of the other provisions of Subtitle C, it must 

be interpreted consistently with Congress’s intent that the capital and other requirements for Covered Insurance Companies, and other Nonbank SIFIs, be applied in 

a tailored and flexible manner. 

The cornerstone of Subtitle C’s regulatory framework is the ‘‘enhanced prudential 

standards’’ in Section 165. Section 165 gives the Federal Reserve broad authority 

to apply these standards to Nonbank SIFIs, including Covered Insurance Companies,16 in a tailored manner. Indeed, differentiated application is not merely acceptable but required. 

In requiring the Federal Reserve to develop enhanced prudential standards for 

Nonbank SIFIs, Section 165 is replete with instructions that the Federal Reserve 

apply these standards through a differentiated approach that takes into account the 

nature of the institutions and the risks they present. Section 165(a)(2)(A) is titled 

‘‘Tailored Application’’, and it expressly authorizes the Federal Reserve to ‘‘differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity . . . and any other risk-related 

factors that the [Federal Reserve] deems appropriate’’. 

Three other provisions of Section 165 reinforce this differentiation approach.

• First, Subsection 165(b)(3)(A) requires the Federal Reserve, in applying enhanced prudential standards, to take into account differences between Nonbank 

SIFIs and BHC SIFIs, including the following factors:

• whether the institution is already regulated by a primary financial regulator;

• the nature and mix of the institution’s activities;

• the amount and nature of the institution’s liabilities, including the degree of 

reliance on short-term funding; and

• other appropriate risk-related factors, as determined by the Federal Reserve.17

• Second, Section 165(b)(3)(D) explicitly requires the Federal Reserve to ‘‘adapt 

the required standards as appropriate in light of any predominant line of business’’.

• Third, Section 165(b)(4), as applicable to Covered Insurance Companies, requires the Federal Reserve to consult with the insurance commissioner representative on the FSOC prior to implementing enhanced prudential requirements under Section 165 to the extent those requirements are likely to have 

a significant impact on Covered Insurance Companies.

These multiple provisions of Section 165 make clear that Congress expected the 

Federal Reserve to tailor its enhanced prudential standards to the particular circumstances of insurance companies (and other Nonbank SIFIs), including with respect to capital requirements. 


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18See note 15 supra. See also Watt v. Alaska, 451 U.S. 259, 266–67 (1981) (‘‘[W]e decline to 

read the statutes as being in irreconcilable conflict without seeking to ascertain the actual intent of Congress . . . We must read the statutes to give effect to each if we can do so while 

preserving their sense and purpose.’’) (citations omitted). 19 76 Fed. Reg. 37,620, 37,626 (June 28, 2011). 20 12 U.S.C.§ 1844(c)(3)(A). 21 12 U.S.C. § 1012(b). 

In addition to Section 165, Section 169, which applies independently to modify 

both Section 165 and Section 171, requires the Federal Reserve to ‘‘take any action’’ 

that it ‘‘deems appropriate’’ to avoid imposing requirements that are duplicative of 

requirements already imposed on institutions by other provisions of law. It is difficult to imagine a clearer instruction, a broader grant of discretion to a Federal 

banking regulator or a provision that more directly applies to the treatment of Covered Insurance Companies under Section 171. Given that Covered Insurance Companies are already subject to the comprehensive RBC framework under State insurance law, imposing the Bank Capital Framework on Covered Insurance Companies 

would be not merely duplicative of, but would be at odds with, the State law capital 

requirements. Accordingly, even if Section 171 could otherwise be read to require 

the application of the Bank Capital Framework to Covered Insurance Companies 

(which, as noted, I believe it should not), Section 169 is such a clear and broad grant 

of authority that it would override any such requirement and would require the 

Federal Reserve to take action to avoid imposing the Bank Capital Framework on 

Covered Insurance Companies. 

Another fundamental canon of statutory construction that is directly relevant to 

this analysis is that different statutory provisions must be read consistently rather 

than in conflict.18 Indeed, the Federal Reserve and the other banking agencies have 

acknowledged that ‘‘the relationship between the requirements of section 171 and 

other aspects of [Dodd-Frank], including section 165, must be considered carefully 

and . . . all aspects of [Dodd-Frank] should be implemented so as to avoid imposing 

conflicting or inconsistent regulatory capital requirements’’.19 It is seemingly incontrovertible that reading Section 171 to preclude differentiation would conflict with 

the basic mandate in Section 165 to require differentiation. Likewise, such a reading 

of Section 171 would conflict with the Section 169 requirement to avoid duplication. 

Moreover, there is no indication in Section 171 itself, or elsewhere in Subtitle C, 

that Section 171 was intended to ‘‘override’’ Congress’s basic instructions in Sections 

165 and 169 for the development and application of capital and other prudential 

standards for Covered Insurance Companies in a tailored, flexible and nonduplicative manner. Sections 165, 169 and 171 can only be reconciled if Section 171 is interpreted to require a comparable capital regime as opposed to an identical capital 

regime. This approach would fulfill the objectives of all three provisions, whereas 

any more prescriptive reading of Section 171 would undermine the Section 165 requirements of tailoring and differentiation and the Section 169 restrictions on duplication. Any more prescriptive reading is also illogical. It would imply that Section 

171 imposed more stringent capital requirements on Covered Insurance Companies 

than Section 165, even though Section 165 is the key provision that is supposed to 

impose enhanced (i.e., more stringent) capital and other requirements than those 

generally applied under Section 171. 

There is one other issue of statutory consistency. Both Section 5(c)(3) of the Bank 

Holding Company Act 20 and the McCarran-Ferguson Act of 1945 21 codify the longstanding Federal policy that State laws are to regulate the business of insurance. 

A reading of Section 171 that overrides this policy would create a conflict that is 

not necessary. 

Thus, upon analyzing Section 171 in context of Subtitle C as a whole, in particular, Sections 165 and 169, and other statutory schemes, the Federal Reserve is 

clearly authorized to apply the requirements of Section 171 to Covered Insurance 

Companies in a tailored, flexible and nonduplicative manner that recognizes and accounts for the differences between Covered Insurance Companies and banks. 

C. A Solution Consistent with the Plain Language of Section 171 and Subtitle C 

The Federal Reserve may have several options to interpret Section 171 in a way 

that is both consistent with its terms and maintains fidelity to Subtitle C as a 

whole. The solution, however, that I will now describe may be the most direct and 

consistent approach. There are two steps. 

First, the Federal Reserve would make a determination that the RBC framework 

that already applies to the insurance operations of Covered Insurance Companies 

is comparable to the Bank Capital Framework. If, however, the Federal Reserve 

were to conclude, after consultation with insurance regulators, that the existing 


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22 156 Cong. Rec. S3459, 3460 (daily ed. May 10, 2010). 23 As the Federal banking agencies have recognized, Congress did not forbid the agencies from 

modifying, over time or in response to changes in circumstances, the calculation of the components of the numerical ratios in the bank capital requirements. See 77 Fed. Reg. 52,888, 52,892 

(Aug. 30, 2012). 

minimum capital levels required under the RBC framework are not sufficiently 

stringent for ‘‘enhanced prudential standards’’, the answer is not to substitute an 

entirely different capital framework. Rather, the Federal Reserve can simply require 

that Covered Insurance Companies maintain some percentage greater than 100 percent of the RBC framework’s required capital levels to achieve a level of stringency 

deemed appropriate to support such operations. 

Second, the Federal Reserve would apply the Bank Capital Framework on a consolidated basis to the top-tier holding company of a Covered Insurance Company, 

but with what is in effect an adjustment for the insurance operations. Any assets 

of the top-tier holding company held in an insurance company that complies with 

the RBC framework (as it may be modified by the Federal Reserve) would receive 

a risk weight of 0 percent and the RBC capital attributable to those insurance company assets would be deducted from total capital. Under this approach, the holding 

company’s noninsurance assets and activities (including parent company only assets), i.e., those not regulated under the RBC framework, would continue to be subject to the existing Bank Capital Framework and would require separate and appropriate levels of capital to support such activities. A similar approach could be applied to the leverage requirements. 

This approach would not only assure robust and differentiated capital requirements and reconcile the various relevant provisions of Subtitle C, but also would 

have several other advantages. First, it would apply the Bank Capital Framework 

to the parent company entity on a consolidated basis, which conforms with Section 

171. This result also addresses directly the concern that Senator Collins and former 

FDIC Chairman Bair identified as an impetus for Section 171—that, in the financial 

crisis, holding companies were a source of weakness, rather than strength, to their 

operating subsidiaries.22 Second, it would be grounded in the Federal Reserve’s existing authority, which the Federal Reserve has exercised previously,23 to modify 

risk weights in the existing Bank Capital Framework in order to tailor those requirements for insurance company assets. Third, it would satisfy the not ‘‘less than’’ 

and not ‘‘quantitatively lower than’’ requirements in Section 171 by leaving in place 

the numerical ratios underlying the Bank Capital Framework (that is, the numerical ratio requirements under Basel I and Basel III). Fourth, it would build on the 

existing RBC framework tailored to Covered Insurance Companies, and thereby satisfy the mandate in Section 169 for the Federal Reserve to take action to avoid imposing duplicative requirements on Covered Insurance Companies. 

This suggested approach would also give effect to Congressional intent, as evidenced both in the comments of Senator Collins and in the December 11, 2012 Letter in which thirty-three Members of Congress asked the Federal banking agencies 

to ensure that the capital requirements for Covered Insurance Companies ‘‘consistently reflect congressional intent by incorporating the State risk-based capital system and applying capital standards that accommodate the existing framework for 

companies engaged in the business of insurance’’. 

Finally, this approach could be implemented by relying solely on the flexibility inherent in the language of Section 171. That is, by applying the numerical ratios in 

the Bank Capital Framework, the Federal Reserve would be quite literally imposing 

capital requirements that are not ‘‘less than’’ nor ‘‘quantitatively lower than’’ the 

bank capital requirements referred to in Section 171. This approach becomes even 

more compelling when considered in the context of the broader statutory scheme in 

Subtitle C, where tailoring and avoiding duplication are the repeated and unambiguous instructions from Congress. 

V. Congressional Action 

Even though, as just discussed, I believe the Federal Reserve has the authority 

to resolve this issue, and there are solutions available to the Federal Reserve in the 

exercise of that authority, there is obviously a distinction between having the authority to take an action and having a statutory requirement to do so. Moreover, 

in the Federal Reserve’s recent promulgation of its rules under Section 165, it postponed a decision on the capital requirements applicable to Covered Insurance Companies to further study the issue. I hope that during this additional period of study, 

and in view of the firm Congressional support for resolution of the issue, the Federal Reserve will move expeditiously to find an interpretative solution to the problem, whether in the way I have suggested or in some other way. 


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If, however, the Federal Reserve is not prepared to act promptly, I would strongly 

urge Congress to act to prevent a result that is so clearly unwarranted and potentially so damaging. The legislation previously proposed by Senators Brown and 

Johanns, and today by Senator Collins, represents a sound basis for moving forward. In asking for Congress to act in this matter, I realize that it may seem a 

‘‘heavy lift’’, not because of the substance, but because of a reluctance to permit any 

amendment to the Dodd-Frank Act. The concern is apparently that any amendment 

would open the door to further amendments that are much more controversial and 

divisive. 

But certainly Dodd-Frank is not such a perfect piece of legislation that any and 

all amendments should be resisted for all time. When the absence of an amendment 

would result in perpetuating an adverse result that Congress has clearly stated, on 

a bipartisan basis, it did not intend, Congress should not be irrevocably barred. Indeed, Congress would be departing from its own fundamental principles if it sought 

to bind future Congresses from absolutely any reconsideration of what was legislated by its predecessors. 

I do recognize the concern about ‘‘opening up’’ Dodd-Frank when there has not 

been sufficient time to evaluate its impact. But, if there were ever to be any change, 

this is the time and place to do so. An amendment to clarify Section 171 would be 

both surgical and noncontroversial; of most importance, it is the right result. 

VI. Conclusion 

In summary, given the virtually unanimous support for finding a solution to the 

policy issue raised by Section 171, and the flexibility the Federal Reserve has under 

the terms of Section 171 and Subtitle C, the Federal Reserve can, and should, act 

to avoid the negative consequences of applying the Bank Capital Framework to Covered Insurance Companies. In the absence of prompt Federal Reserve action, I urge 

Congress to act. 

Appendix A 

1. Policy Loans: 

As a service to its customers, an insurance company may loan a life insurance 

policyholder up to the existing cash surrender value of his or her policy, secured by 

the cash surrender value of the policy. The cash surrender value of the policy is a 

liability on the insurance company’s balance sheet. In this way, the loan is fully 

collateralized, but unlike a collateralized bank loan, the insurance company is not 

subject to the risk that the collateral will not cover its exposure under the loan. If 

the policyholder defaults, the insurance company will reduce the benefits it pays to 

the policyholder, which will result in the insurer reducing the liability it records for 

the policy. An insurance company can always recoup a $100 policy loan default by 

reducing its liability to the customer under the policy by $100. 

Despite the fact that the policy loan never exposes the insurance company to credit or market risk, under the Bank Capital Framework—with the mindset of a traditional collateralized bank loan—would require an insurance company to hold Tier 

1 capital against the loan at a risk weight of 20 percent. 

2. Guaranteed Separate Accounts: 

Many insurance companies offer an insurance product that allows a customer to 

place funds with an insurance company to be invested and managed by the insurance company, separately from its general assets, with the goal of providing the customer with the income stream from the investments, often upon retirement. These 

so-called ‘‘separate accounts’’ may be in guaranteed or nonguaranteed form and have 

varying features and conditions. The basic concept is that, with a guaranteed account, the insurance company guarantees the customer a fixed income stream, with 

the insurance company exposed if the value of assets in the account drops below 

a guaranteed amount at the end of the investment period. Annuities are frequently 

in the form of a guaranteed separate account. 

In the banking context, a guarantee is viewed as a contingent liability that may 

become fully due at any time. In the insurance context, the separate account products such as annuities are typically structured in such a way that the full liability 

is not all due at once; the period over which the guaranty payment is made is both 

long (often 15–20 years) and requires a long waiting period (often 10 years) before 

any payment is made. This contractual protection substantially eliminates the liquidity concern that the insurance company would need to draw on its own assets 

to make up for the full amount of the shortfall all at once. 

The Bank Capital Framework includes no tailoring for insurance company guaranteed accounts with these protective features. Moreover, because U.S. generally accepted accounting principles require a provision to be made on the insurance comVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 S:\DOCS\89351.TXT SHERYL

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pany’s books to reflect the amount of the insurance company’s exposure for the 

guarantee, requiring additional capital be held against not just the exposure but the 

entire account results in double-counting. 

3. Corporate Bonds:

The Bank Capital Framework is, in a number of respects, tailored for the types 

of assets held by banks in relatively large amounts. For example, there are different, tailored risk weights for mortgage loans (based on the quality of the loan), 

sovereign debt (based on categories for various countries), exposures to other U.S. 

depository institutions and credit unions and exposures to U.S. public sector obligations (based on whether the obligation is general or revenue). 

Insurance companies generally hold a significant portion of their assets in corporate bonds—and a greater portion than do banks because bond maturities better 

fit the insurance company’s asset-liability matching and investment needs. Yet, the 

Bank Capital Framework is not tailored for corporate debt, so, unlike the RBC 

framework, there is no distinction between higher and lower quality bonds (as there 

is for mortgage loans and sovereign debt under both the Bank Capital Framework 

and the RBC framework), subjecting all corporate bonds to a 100 percent risk 

weight. This relatively crude approach is understandable when corporate bonds represent only a small portion of the assets that banks hold, but not when they represent a much larger portion at insurance companies. This exemplifies how the 

Bank Capital Framework simply was not designed to be applied to insurance companies. 

PREPARED STATEMENT OF AARON KLEIN

DIRECTOR, FINANCIAL REGULATORY REFORM INITIATIVE

BIPARTISAN POLICY CENTER

MARCH 11, 2014

Chairman Brown, Ranking Member Toomey, Members of the Subcommittee, 

thank you very much for the opportunity to testify at this hearing of the Subcommittee on Financial Institutions and Consumer Protection. I have tremendous 

respect for the critical role this Committee plays in shaping the financial regulatory 

and economic policies that have an enormous effect on the lives of all Americans. 

I am especially honored to appear before you, having served for over 8 years on the 

professional staff of the Committee on Banking, Housing, and Urban Affairs, mostly 

as Chief Economist for former Chairmen Sarbanes and Dodd. 

Bipartisan Policy Center Financial Regulatory Reform Initiative (FRRI) 

I serve as the Director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center. Founded in 2007 by former Senate Majority Leaders Howard 

Baker, Tom Daschle, Bob Dole, and George Mitchell, BPC is a Washington-based 

think tank that actively seeks bipartisan solutions to some of the most complex policy issues facing our country. In addition to financial regulatory reform, BPC has 

ongoing projects in housing, immigration, and the Federal budget. The Financial 

Regulatory Reform Initiative’s overarching objective is to promote policies that balance financial stability, economic growth, and consumer protection. Finding the 

right capital regulations for insurance companies under the Dodd-Frank Act is a 

critically important issue. I commend you for focusing the Committee’s attention on 

the issue. My testimony will focus on the following four key points:

1. The business of insurance is fundamentally different from that of banking and 

hence must be subject to appropriate yet different capital standards.

2. Regulators need to overcome their ‘‘bank-centric’’ approach when regulating insurance companies.

3. The Dodd-Frank Act envisions regulators overcoming bank-centricity and empowers them to do so.

4. A more optimal regulatory approach should include a Federal insurance regulator and optional Federal charter. The benefits of such a regulator grow if the 

Federal Reserve is unable to adjust its bank-centric approach to insurance 

companies. 

Insurance and Banking are Fundamentally Different Businesses, With Different Balance Sheets, Business Models, and Risk Profiles 

To understand why it is so important that insurance companies be subject to insurance-based capital regimes, not bank-based capital regimes, one must first appreVerDate 0ct 09 2002 20:45 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 S:\DOCS\89351.TXT SHERYL

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1 John F. Bovenzi, Randall D. Guynn, and Thomas H. Jackson, ‘‘Too Big to Fail: The Path 

to a Solution,’’ Bipartisan Policy Center, May 2013, p. 17. Available at: http://

bipartisanpolicy.org/sites/default/files/TooBigToFail.pdf. 2 Yvette D. Kantrow and Liz Moyer, ‘‘Citi, Travelers: A Global Leader Takes Shape,’’ American 

Banker, April 7, 1998. Available at: http://www.americanbanker.com/175/citi-travelers-a-global-leader-takes-shape-1041890-1.html. 3See Tempkin Group, Net Promoter Score Benchmark Study, 2012, October 2012. Available 

at http://www.temkingroup.com/research-reports/net-promoter-score-benchmark-study-2012/.

ciate the fundamental differences in their business models, balance sheets, and risk 

profiles. 

The Business of Insurance 

At its core the business of insurance is about aggregating risks and matching assets to liabilities. Insurance companies are in the business of taking on risk of different tenures and matching assets and reserves against this risk. The precise approach varies tremendously by the type of insurance product. A company that provides auto insurance, usually on a 6- or 12-month basis, has to have a different 

asset and liquidity structure than a company that provides life insurance, which is 

often issued on a multi-decade contract. 

Aggregating risk avoids adverse selection by offering highly competitive products 

that attract broad market share and a large pool of customers to minimize risks. 

Insurance companies that are able to capture more of a given market are able to 

more accurately protect themselves against adverse selection and statistically unlikely outcomes. By accumulating and pooling risk, insurance companies allow people to transfer the financial risk of getting into a car accident, losing a loved one, 

or outliving their assets to a broad risk pool. Aggregating appropriate risk thus 

paradoxically makes insurance companies safer. 

The Business of Banking 

Unlike insurance companies, which agglomerate and manage risk, banks are in 

the business of mitigating risk. Over-concentration in a specific business line is a 

classic ‘‘red flag’’ for regulators of safety and soundness problems. A key purpose of 

banks is to transfer timing risk; banks allow depositors to instantly access their 

funds, while using deposits to make longer-term loans to consumers and businesses. 

This process is often referred to as maturity transformation. As the Bipartisan Policy Center’s Failure Resolution Task Force found, ‘‘maturity transformation is the 

socially beneficial process by which financial institutions fund themselves with 

short-term borrowings and use these funds to make longer-term loans or investments in other illiquid assets. Without maturity transformation, our modern economy would grind to a halt.’’1

Can Banking and Insurance Coexist? 

Some economists and policymakers have argued that there are economies of scale 

in mixing the provision of banking and insurance services. This theory was prominent in the 1990s and was one of the driving forces behind the Gramm-Leach-Bliley 

Act, which repealed the prohibition on the mixing of banking and insurance. The 

theory was tested more than 15 years ago on a large scale with the merger of 

Citicorp and Travelers Group. Many commentators at the time expected more mergers and the creation of ‘‘financial supermarkets’’ to provide both services. At the 

time, Travelers CEO Sanford Weill said that the merger would create ‘‘a model of 

the financial services company of the future,’’ a sentiment shared by others in the 

industry.2

As an empirical economist, I check to see how well reality has matched theory. 

In the case of the proposed value of combining banking and insurance businesses, 

the expected benefits have not materialized. With one important exception, which 

I will discuss in a moment, there are no examples in the United States of mixing 

banking and insurance on any significant commercial scale, although there are examples of successful acquisitions of smaller banks and thrifts. The Citi-Travelers 

merger has been unwound and, in the absence of other similar mergers, it seems 

as if these businesses do not mix, even without regulatory barriers. 

A model exception has been the successful provision of banking and insurance 

services by USAA. What is interesting about USAA is that it operates its business 

on a field-of-membership basis, more analogous to a credit union than to a bank. 

Technically, USAA has a thrift regulated by the Office of the Comptroller of the 

Currency (OCC) and a thrift holding company regulated by the Federal Reserve. 

The membership requirement involves family military service. The reputation of the 

company providing both services is also extremely high,3 although I would not know 

firsthand, as I am not eligible for its insurance or for its bank lending activity. 


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See also David Rohde, ‘‘In the Era of Greed, Meet America’s Good Bank: USAA,’’ The Atlantic,

January 27, 2012. Available at http://www.theatlantic.com/business/archive/2012/01/in-theera-of-greed-meet-americas-good-bank-usaa/252161/. 4 12 U.S.C. § 5412 (b)(2)(B) and 12 U.S.C. § 5412 (b)(1)(A). 5 12 U.S.C. § 5365(a)(2)(A). 6 Christopher Payne, ‘‘Basel Capital Rules May Hinder U.S. Insurers,’’ Bloomberg Brief: Financial Regulation, April 26, 2013. Available at: http://www.bloombergbriefs.com/files/FinanciallRegulationl042613lp1.pdf.

Can Regulators Overcome Bank-Centricity To Properly Regulate Insurance 

Companies? 

Dodd-Frank Empowers the Federal Reserve To Provide Capital Regulation for Insur- ers 

Dodd-Frank decided to treat thrifts and thrift holding companies nearly the same 

way it treats banks and bank holding companies, moving their supervision to the 

OCC for thrifts and the Federal Reserve at the holding company level.4 Whether 

the continued bifurcation of regulation between holding company and insured depository is a wise decision is beyond the scope of this hearing, but is something that 

the Bipartisan Policy Center’s Regulatory Architecture Task Force is examining and 

will discuss in a report to be released this spring. 

The Federal Reserve is the regulator for a diverse set of insurance companies 

under Dodd-Frank. It is unclear how broadly appreciated that was during consideration of all of the aspects of Dodd-Frank, including the adoption of the Collins 

Amendment. What is clear is that Dodd-Frank’s decision to move the regulatory responsibility for thrift holding companies and nonbank SIFIs to the Federal Reserve 

was given along with the ability and responsibility for the Federal Reserve to recognize differences between these entities and develop appropriate capital structures, 

tailored to each entity or separate class of institutions. The broad authority to tailor 

was codified in Title I, Subtitle C of the Dodd-Frank Act.5

The Importance of Tailoring Capital Standards for Insurance 

The economic rationale for capital regulation and for tailoring is clear but bears 

repeating. Capital regulation is necessary for many purposes, including, to ensure 

the safety and soundness of financial institutions so that customers can use these 

products efficiently and effectively. There are two main approaches to quantifying 

capital regulation for any financial institution. The first is a nonrisk-sensitive approach, the leverage ratio, which creates a ceiling on total risk-taking. However, 

using the leverage ratio alone can have the perverse effect of encouraging institutions to take on more risk by treating all liabilities as equally risky and requiring 

the same amount of capital. Thus, a risk-based method of capital regulation is required to quantify risk levels for various assets and liabilities and require appropriate capital. 

The financial crisis demonstrated the problems inherent with over-reliance on risk 

modeling. The mispricing of risk is one of the hallmarks of financial crises. Institutions, regulators, markets, and models are all susceptible to this mistake. I cannot 

predict in which area we will misprice and incorrectly evaluate risk in the future, 

but I am certain that it will happen again. 

The fundamental question is now how to develop appropriate metrics for both leverage and risk-based capital as it applies to insurance companies. Insurance companies differ fundamentally from banks in how one measures risk and leverage; 

thus a different capital system, specifically tailored for insurance companies, is necessary. A Bloomberg Government report studying this question concluded that: ‘‘the 

risks that insurers face are different from banks, and that regulating insurers as 

if they are banks may be inappropriate and unfair to insurance companies.’’6

Did Regulators Draw the Right Lessons from the Crisis for Insurers? 

An example of the difference in regulatory mindset necessary for insurance companies can be seen by the treatment of separate accounts. Regulators made a key 

mistake in the run-up to the financial crisis by allowing banks to keep structured 

investment vehicles (SIVs) off their balance sheets, exempting SIVs from capital reserve requirements. The SIVs were ‘‘canaries in the coal mine’’ before the last financial crisis. Assets that were supposed to be low risk were in fact risky and required 

banks to raise significant capital during stressed periods—just at the moment that 

capital was especially costly. Post financial crisis, regulators have altered their approach, allowing fewer SIVs to be classified as ‘‘off balance sheet.’’ For this, regulators should be commended. 

Regulators, particularly the Federal Reserve, have also seen their post-crisis 

power broadly expanded. The Federal Reserve Board now has supervisory authority 


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7Office of Financial Research, ‘‘Asset Management and Financial Stability,’’ September 2013. 

Available at: http://www.treasury.gov/initiatives/ofr/research/Documents/OFRlAMFSl FINAL.pdf. 8 Victoria Craig, ‘‘Janet Yellen Talks Disappointing Data, Weather on Capitol Hill,’’ Fox Busi- ness, February 27, 2014. Available at: http://www.foxbusiness.com/economy-policy/2014/02/

27/janet-yellen-talks-dissapointing-data-weather-on-captiol-hill/. 9 12 U.S.C. § 112 (a)(2)(I); 12 U.S.C. § 120 (b)(2)(B); 12 U.S.C. § 165 (b)(1)(A)(i); 12 U.S.C. 

§ 165 (b)(1)(B)(i); 12 U.S.C. § 165 (c)(1); 12 U.S.C. § 616 (d)(b). 10 U.S. Committee on Banking, Housing, and Urban Affairs, ‘‘Johnson and Crapo Urge Regulators to Address Concerns on Basel III,’’ February 13, 2013. Available at: http://

www.banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord

lid=f321c69d-e901-e0ee-14eb-2ae6b730ee91&IsPrint=1.

over many insurance companies as well as all SIFIs. As the Board’s authority expands, it is encountering new products that banks don’t offer and are accounted for 

differently, such as separate accounts. As defined by the Office of Financial Research (OFR), separate accounts are those ‘‘in which an asset manager selects assets 

on behalf of large institutional investors or high net-worth individuals under mandates defined in an investment management agreement. Clients retain direct and 

sole ownership of assets under management.’’7

Insurance companies use these separate accounts for products such as variable 

annuities. The question is whether these accounts are treated as ‘‘on’’ or ‘‘off’’ balance sheet for regulatory purposes. To answer this, regulators must consider the 

risks separate accounts carry for insurance companies. Historically, insurance has 

been regulated by the States, which have recognized that funds in separate accounts 

are more analogous to stock market accounts. Stock brokers are not required to hold 

capital against their clients’ accounts since the assets in those accounts do not belong to the broker. Banks, on the other hand, must retain capital against deposits, 

since the deposits are liabilities for banks, and are subject to runs. 

A question remains as to whether Federal regulators such as OFR, the Federal 

Reserve, and the Financial Stability Oversight Council (FSOC) will draw the appropriate line with respect to separate accounts. If the regulators discover that a 

nonbank is putting its own solvency at risk and not accounting for separate accounts properly that would merit new regulatory treatment. So far, data from OFR 

and from the States’ historical experience regulating insurance companies does not 

support that conclusion. Instead, it raises concerns that bank regulators are 

misapplying bank-centric lessons into a nonbank world without a clear understanding of the different risks, balance sheets, revenue streams, and business models. 

The Right Way to Think About Capital Standards 

Good regulatory structures involve both minimum capital requirements through 

leverage limits and more sophisticated risk-based capital structures. Both need to 

be targeted and tailored to the business that they are regulating. As we have seen, 

insurance and banking are fundamentally different businesses with different risk 

profiles. Therefore, they require different capital regulatory and supervisory structures. The Dodd-Frank Act anticipated this and provided the Board with the necessary flexibility to tailor prudential standards accordingly to different businesses. 

There is broad agreement that tailoring is the right approach. Federal Reserve 

Board Chair Janet Yellen said it best: ‘‘[T]here are very significant differences between the business models of insurance companies and the banks that we supervise 

and we are taking the time that is necessary to understand those differences and 

to attempt to craft a set of capital and liquidity requirements that will be appropriate to the business models of insurance companies.’’8 The question is whether the 

Board will follow through on Chair Yellen’s wise words with carefully considered, 

differentiated capital standards for insurers that recognize they are not banks. 

Dodd-Frank Envisions and Empowers Regulators To Overcome Bank-Centricity 

Dodd-Frank made clear in several of its provisions the importance and need for 

Federal regulators to develop and implement nonbank capital regimes for regulated 

nonbank entities, and the ability for them to do so. These provisions can be found, 

for example, in sections 112, 120, 165, and 616.9 These themes were reiterated to 

regulators by Chairman Johnson (D–SD) and Ranking Member Crapo (R–ID) in 

their letter to regulators last year: ‘‘In setting the new capital rules for the United 

States institutions, your agencies face a formidable task to carefully tailor the new 

rules to the unique risks of institutions while neither hampering lending nor undermining the strength of our financial system.’’10


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11 12 U.S.C. § 5322 (a) (2). 12The National Insurance Act of 2007, S. 49, 110th Congress, 2007. 13The Department of the Treasury, ‘‘Blueprint for a Modernized Financial Regulatory Structure.’’ March 2008. Available at: http://www.treasury.gov/press-center/press-releases/Documents/Blueprint.pdf. 14The Department of the Treasury, ‘‘Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,’’ June 17, 2009. Available at: http://

www.treasury.gov/initiatives/Documents/FinalReportlweb.pdf. 15S. Roy Woodall, Jr., dissent to the FSOC’s designation of Prudential, Inc. delivered to Council members, September 19, 2013, pp. 1, 7–8. Available at: http://www.treasury.gov/initiatives/

fsoc/council-meetings/Documents/September%2019%202013%20Notational%20Vote.pdf.

I am not an attorney and will not venture an opinion on how the Federal Reserve 

should interpret these provisions as they relate to section 171, often referred to as 

the Collins Amendment. I will point out however, that there is broad support, with 

which I concur, that capital standards should be tailored for different business models with different risk profiles. This was the clear intention of Dodd-Frank. 

Even if individual bank regulators are unable or unwilling to use a tailored approach, the FSOC could solve this problem without additional legislation. Among 

the duties imposed upon the FSOC in section 112 is the duty to make recommendations to: (1) member agencies on general supervisory priorities and principals that 

reflect the outcome of discussions among the member agencies; (2) the Board concerning the establishment of heightened prudential standards, including capital 

standards, for nonbank financial companies supervised by the Board; and (3) primary financial regulators to apply new or heightened standards and safeguards for 

financial activities or practices that could create or increase risks of significant liquidity, credit, or other problems spreading among bank holding companies, 

nonbank financial companies, and U.S. financial markets.11

If these two preferred approaches are not implemented—the following of the intention of Congress by the Federal Reserve, or the use of FSOC’s authority to make 

recommendations that the Fed could then adopt—I would then support a legislative 

solution to this problem such as the one proposed by Senators Brown and Johanns 

in S. 1369. 

The Case for Federal Insurance Regulation in a Post-Dodd-Frank World 

BPC’s Regulatory Architecture Task Force has been examining the entire financial regulatory structure, as it exists in a post Dodd-Frank world. The task force’s 

report will be released next month and will contain many recommendations for how 

we can improve our current regulatory structure. One of those recommendations 

will be to create a Federal insurance regulator and an optional Federal charter. This 

recommendation follows previous bipartisan calls for a Federal insurance regulator, 

including legislation introduced by now Chairman Tim Johnson (D–SD) and then 

Senator John Sununu (R–NH),12 as well as the comprehensive regulatory restructuring plan issued by the Treasury Department under Secretary Henry ‘‘Hank’’ 

Paulson, Jr.13 It is also consistent with the framework proposed by Secretary Timothy Geithner in the 2009 Treasury White Paper, ‘‘Financial Regulatory Reform, A 

New Foundation: Rebuilding Financial Supervision and Regulation.’’14

Dodd-Frank did not follow those calls, but did create a new Federal Insurance Office (FIO) within the Treasury Department in order to build Federal expertise in 

insurance. The FSOC was given the authority to designate any insurance company 

as a SIFI and hence transfer regulatory authority to the FRB. An independent voting member was also created for the FSOC with the requirement that s/he have insurance expertise. 

How has this worked so far? We have limited data as Dodd-Frank is not yet 4-

years old, but the data we do have indicates disagreement and a lack of consistency. 

The only public disagreement so far in the designation process among FSOC members was in the designation of Prudential, Inc. Roy Woodall, the independent commissioner with insurance expertise, dissented on the vote to designate Prudential 

and was joined by the acting FHFA director. In his dissent, Commissioner Woodall 

said that the FSOC’s analysis underlying the decision to designate Prudential was, 

‘‘antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the State insurance resolution and 

guaranty fund systems,’’ and that the designation, ‘‘will ultimately lead to the imposition of requirements that are by all indications ill-suited for insurance companies.’’15

The upcoming report from BPC’s Systemic Risk Task Force will analyze the FSOC 

process, focusing particularly on questions regarding the FSOC’s authority and its 

desire to regulate entities and institutions as compared to the regulation of activities. As long as designation of entities remains the main tool at the FSOC’s disposal, 


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16 12 U.S.C. § 313 (c)(1)(E). 17 U.S. Department of the Treasury, ‘‘About: Domestic Finance—Federal Insurance Office.’’ 

Available at: http://www.treasury.gov/about/organizational-structure/offices/Pages/Federal-Insurance.aspx.

it would be reasonable to expect a continued focus on designation. To a person with 

a hammer in his hand, problems tend to look like nails. 

Has Dodd-Frank Created a Unified Voice for the United States on an International 

Basis? 

One of the major goals in creating the FIO was to establish a unified Federal 

voice on insurance for international regulatory purposes. Dodd-Frank gave the FIO 

the authority ‘‘to coordinate Federal efforts and develop Federal policy on prudential 

aspects of international insurance matters, including representing the United 

States, as appropriate, in the International Association of Insurance Supervisors 

[IAIS].’’16 The Treasury Department echoes this, stating that a goal of the FIO is 

‘‘to represent the United States on prudential aspects of international insurance 

matters, including at the International Association of Insurance Supervisors.’’17

However, the Federal Reserve, citing its newly acquired regulatory responsibilities 

over many insurance companies, recently applied for a seat on the IAIS. The Board’s 

decision to request a seat is understandable given its desire to acquire additional 

knowledge and expertise on insurance. However, it also sends an unclear signal to 

the international community as to who speaks for the United States between the 

chair of the Federal Reserve Board, the director of FIO, or the NAIC, which represents State insurance commissioners, the functional regulators for insurance companies today. The Federal Reserve should publicly affirm that the FIO is the lead 

representative for the United States on the IAIS. This remains an example of the 

effect of the duplicative and unclear delegation of authority over regulation of insurance companies. 

Conclusion 

BPC’s Financial Regulatory Reform Initiative has found that Dodd-Frank empowered financial regulators with substantial authority and flexibility to use their tools 

to improve regulation and achieve better regulatory outcomes for both financial 

services providers and end users of those financial services. We have seen multiple 

examples of regulators doing just that, ranging from the Federal Deposit Insurance 

Corporation’s Single Point of Entry approach to the Consumer Financial Protection 

Bureau’s use of an open and transparent rulemaking process. We have also found 

multiple instances where regulators could have taken a better approach, such as the 

Volcker Rule. And, we have found several instances where additional statutory 

changes are required, including the need to add a chapter to the Bankruptcy Code 

to complement Title II of Dodd-Frank, and the desirability of an independent inspector general for the CFPB. However, our work has shown that regulators have significant tools at their disposal to get things right. 

It is clear that banks and insurance companies are fundamentally different businesses, which require substantially different capital regimes. In my opinion, DoddFrank gave the Federal Reserve Board the necessary authority to the tailor its capital rules for insurance companies. The law clearly supports a tailored approach for 

insurance companies as well as all nonbank SIFIs. Dodd-Frank envisions a less 

bank-centric regulatory approach to the nonbanks the Board regulates after FSOC 

designation. It also empowers the FSOC as it relates to authorities as well as institutions. And, it empowers the Federal Reserve and FSOC as it relates to capital 

rules for nonbanks such as insurers. 

If the Federal Reserve Board is unwilling, or unable, to implement the tailoring 

regime required in Dodd-Frank to insurance companies, I would support a legislative solution such as S. 1369 as introduced by Senators Brown and Johanns. This 

would be a prominent example of the inability of regulators to adhere in practice 

to the construct created in Dodd-Frank. Whether this signals an isolated instance 

or a larger problem remains to be seen. It would add credence to the already strong 

argument in favor of some form of dedicated Federal insurance regulation that recognizes and understands the uniqueness of the insurance industry and its importance to our economy. 


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PREPARED STATEMENT OF MICHAEL W. MAHAFFEY

CHIEF RISK OFFICER, NATIONWIDE MUTUAL INSURANCE COMPANY

MARCH 11, 2014

Chairman Brown, Ranking Member Toomey, and Members of the Subcommittee, 

thank you for the opportunity to appear before you to discuss the critical issue of 

the appropriate capital framework for insurers supervised by the Federal Reserve. 

My name is Michael Mahaffey and I am the Chief Risk Officer for Nationwide Mutual Insurance Company (Nationwide). I am testifying on behalf of Nationwide but 

will also represent the perspective of a diverse group of insurers that fall under Federal Reserve supervision. Those insurers include both insurance savings and loan 

holding companies (SLHCs) and insurance companies that have been or may be designated by the Financial Stability Oversight Council (FSOC) as systemically important financial institutions (SIFIs). 

As Nationwide’s Chief Risk Officer, I am responsible for overseeing the company’s 

approach to managing its risk profile, including the key functions of Stress Testing 

and Enterprise Risk and Capital Modeling, Measurement and Management. A critical part of my role is to ensure that Nationwide meets its internal and external 

capital requirements so the company is always well positioned to honor its promises 

to our policyholders. In my capacity as Nationwide’s Chief Risk Officer, I believe I 

can offer a helpful perspective on appropriate capital regimes for insurers and the 

consequences of imposing bank-centric capital rules on companies like Nationwide. 

About Nationwide 

Nationwide is a Fortune 100 mutual insurance company based in Columbus, Ohio. 

For almost 100 years Nationwide has been helping our policyholder members protect what is most important to them through our property and casualty and life insurance businesses. 

Roughly half of Nationwide’s revenue is derived from our property and casualty 

businesses, and half is derived from our life insurance and related businesses. As 

a result, Nationwide is representative of both the property and casualty and the life 

insurance industries. Nationwide Mutual and its property and casualty insurance 

subsidiaries primarily provide personal auto, homeowners, and commercial insurance products to households and businesses all across the country. In addition, Nationwide Life Insurance Company, a subsidiary of Nationwide Mutual, primarily 

provides life insurance, individual annuities, and private and public-sector retirement plans. Nationwide also provides banking products and services through Nationwide Bank, a Federal savings bank insured by the FDIC. As of December 31, 2013, Nationwide had approximately $183 billion in combined assets, while Nationwide Bank had approximately $6 billion in assets. While Nationwide Bank is critical to our customers and our business strategy, it is important 

to note that it represents less than 3 percent of the total assets of the combined 

organization. 

Notwithstanding the bank’s de minimis relative size, by virtue of its ownership 

of Nationwide Bank, Nationwide is registered as an SLHC. As an SLHC, Nationwide is now subject to Federal Reserve supervision and regulation pursuant to the 

Dodd-Frank Act, including new prudential requirements designed to enhance the 

safety and soundness of banking organizations. These include the Collins Amendment’s consolidated capital requirements, capital stress-testing requirements, and 

the Volcker Rule. 

The Applicability of the Collins Amendment to Insurers 

Pursuant to the Dodd-Frank Act, two categories of insurance companies came 

under Federal Reserve supervision—insurers that own depository institutions (and 

are thus SLHCs) and insurers that are designated by the FSOC as nonbank SIFIs. 

The Dodd-Frank Act conferred authority on the Federal Reserve to establish group 

capital requirements for both categories of companies. Section 616 of Dodd-Frank 

granted the Federal Reserve the authority under the Home Owners’ Loan Act 

(HOLA) to establish group capital requirements for insurance SLHCs. Likewise, 

Section 165 of the Dodd-Frank Act provided the Federal Reserve authority to establish group capital requirements for insurance SIFIs. 

Insurance SLHCs and insurance SIFIs are also subject to the minimum group 

capital requirements as set forth in the Collins Amendment. The Collins Amendment establishes a ‘‘generally applicable’’ minimum capital floor that is no lower 

than that which was in effect for banks at the time Dodd-Frank was enacted. 

As an SLHC, Nationwide is subject to the Collins Amendment. In addition, our 

depository institution, Nationwide Bank, is also independently subject to the minimum capital standards in the Collins Amendment. We support the application of 


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1Letter from Senator Susan Collins to the Federal Reserve, the Federal Deposit Insurance 

Corporation, and the Office of the Comptroller of the Currency, November 26, 2012. 

the Basel banking capital standards to Nationwide Bank and we are not seeking 

to exempt Nationwide Bank from the Collins Amendment or in any way alter the 

capital requirements as applied to Nationwide Bank. 

Furthermore, we do not oppose utilization of a group-wide capital framework for 

insurance SLHCs and insurance SIFIs. Capital strength is core to our business 

proposition—providing our policyholders with financial protection when they need it 

the most. 

However, it is critically important that any capital framework established by the 

Federal Reserve for insurance SIFIs and insurance SLHCs utilize the appropriate 

tools. These institutions are predominantly insurance organizations and it would be 

inappropriate to measure their capital needs using a tool that is designed for banks. 

By way of analogy, it would be wholly inappropriate to apply an insurance-centric 

capital framework on a group-wide basis to bank holding companies, bank SIFIs like 

JP Morgan or Wells Fargo, or to banks that each happened to own small insurance 

operations. 

The Statutory Construction Issue 

As you know, the purpose of the Collins Amendment is to ensure that certain financial institutions are subject to a minimum capital requirement. The economic 

crisis underscored the need to ensure that financial institutions hold enough capital 

to weather severe economic stress. We wholeheartedly support strong capital rules, 

which protect financial institutions, the broader economy, and everyday Americans. 

Again, we are not seeking lower capital requirements for insurers or their depository institution subsidiaries. We only seek to ensure that any capital standards established by the Federal Reserve utilize appropriate methodologies and accurately 

reflect the risks inherent in the business of insurance, which we believe is consistent with Congress’ intent in adopting the Collins Amendment. 

We also believe that the plain language of the Collins Amendment permits the 

Federal Reserve to establish a separate, tailored, group capital framework for insurance SLHCs and insurance SIFIs. However, the Federal Reserve has maintained an 

interpretation of the Collins Amendment that constrains their ability to tailor the 

rules and would require the imposition of bank-centric Basel capital rules on insurance SLHCs and insurance SIFIs. Despite this interpretation, Federal Reserve officials have repeatedly agreed with policymakers and industry officials that a onesize-fits-all approach is undesirable. 

We respectfully, but strongly, disagree with an interpretation of the Collins 

Amendment that would prevent the Federal Reserve from establishing a separate 

capital framework that is appropriately tailored to the risks inherent in the business of insurance. Our company and trade association comment letters articulate 

this view in detail, as do several comment letters from respected attorneys who are 

experts in the field. Of prominent note, the author of the Collins Amendment, Senator Susan Collins, has stated that ‘‘it was not Congress’s intent that Federal regulators supplant prudential State-based insurance regulation with a bank-centric capital regime . . . [C]onsideration should be given to the distinction between banks 

and insurance companies . . . I believe it is consistent with my amendment that 

these distinctions be recognized in the final rules.’’1 We are pleased that the Federal 

Reserve is still examining this issue carefully and are hopeful that the agency will 

ultimately agree that the existing statutory language provides sufficient flexibility 

to establish a capital framework for insurance SLHCs and insurance SIFIs that 

more accurately accounts for the unique risk and capital profiles of insurers. 

Support for a Legislative Solution 

However, we are cognizant that if the Federal Reserve continues to hold the view 

that the Collins Amendment prevents the agency from establishing a tailored capital framework for insurance SLHCs and insurance SIFIs, the result will be the application of bank standards on insurers. This could have unintended negative consequences for consumers, the insurance market, and the economy. For these reasons, we support Congress passing legislation to clarify that the Federal Reserve, 

consistent with the original intent of the Collins Amendment, can and should establish a separate, tailored capital regime for insurers that appropriately reflects the 

industry’s unique business model, risk profile, and asset-liability management practices. 

Specifically, we support S. 1369, legislation introduced by Senators Brown and 

Johanns last year which has a broad, bipartisan group of cosponsors. S. 1369 would 

clarify that the Federal Reserve is not required to impose a bank regime on insurers 


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by exempting insurers from the Collins Amendment. The bill would leave intact Sections 616 and 165 of the Dodd-Frank Act, which are the Federal Reserve’s two other 

sources of legal authority to impose robust capital standards on insurers supervised 

by the Federal Reserve. In addition, under the Brown-Johanns bill, Basel III banking standards would continue to appropriately apply to depository institutions 

owned by an insurance company. Simply put, the Brown-Johanns bill would not affect the Federal Reserve’s ability to impose group capital requirements on insurers; 

it would only clarify that the agency has the authority to tailor those standards to 

insurers’ business models by utilizing the appropriate tools. 

We strongly support this legislation and applaud the bill’s sponsors for their leadership on this issue. We also greatly appreciate the helpful involvement of Sen. Collins in the legislative effort. We look forward to being part of any sensible solution 

that protects policyholders without subjecting our companies to a capital framework 

that was designed for banks and which is inappropriate for our business model. 

The Role of Nationwide Bank in Nationwide Enterprise 

As an SLHC, Nationwide is subject to the Collins Amendment by virtue of its 

ownership of Nationwide Bank. The same is true for the other SLHCs, including 

TIAA–CREF, who is also testifying today. 

As an insurance SLHC, Nationwide has opted to continue to offer competitively 

priced, reliable banking products despite the obvious regulatory costs. Nationwide’s 

online bank represents a way to supplement the insurance services we provide to 

our life and property casualty members. 

As an example, Nationwide Bank played a critical role in the aftermath of the 

tornado that devastated Joplin, Missouri in 2011. Nationwide was able to quickly 

make insurance claims payments through Nationwide Bank debit cards issued to its 

policyholders who did not have access to bricks-and-mortar banks and who desperately needed these insurance payments in the wake of the disaster. The ability 

to offer this type of product through Nationwide Bank helps our policyholders get 

back on their feet sooner during a difficult situation. 

Other insurance SLHCs have similar stories—we are not striving to become large 

commercial banks, but rather, to provide important complementary products to our 

insurance customers. Some insurers have divested their banks; however, we believe 

strongly that it is in the best interest of our customers (and indeed the banking system) to have access to affordable retail banking products from the strong insurance 

companies they trust. 

The Bank-centric Basel III Framework is Inappropriate for Insurers 

I’d now like to turn to why imposing a bank-centric capital regime on insurers 

is inappropriate for assessing their capital adequacy. 

The Basel Committee on Banking Supervision developed the Basel banking capital regime, including its most recent iteration, Basel III, specifically for banks and 

not insurers. At a very high level, the Basel framework is almost entirely focused 

on the asset side of a company’s balance sheet, because in the banking industry, 

that is primarily where risk resides. The predominant risks facing a banking organization include credit risk, market risk, counterparty risk and liquidity risk. As a result, an asset-based capital framework that is primarily focused on a these risk 

types is suitable for assessing capital for a banking organization. 

However, Basel III, as implemented in the United States does not provide for 

critically important differences in company liability structures, liquidity profiles, or 

asset-liability management requirements. Consequently, such banking frameworks 

are not appropriate for insurers because they do not capture important liability 

based insurance risks (and associated risk management practices) that must be considered when determining capital requirements for such companies. 

Relative to insurers, banking organizations tend to hold riskier assets that are 

funded by short-term liabilities, making the traditional banking model more sensitive to changes in asset prices and vulnerable to a risk of runs on deposits and 

a pull-back from short-term creditors in a very short period of time. Consequently, 

systemic economic events can subject banks to destabilizing ‘‘runs’’ and force them 

to quickly sell assets at a loss to meet their demand deposit obligations and funding 

needs. Furthermore, without a sufficient level of loss-absorbing capital, these banks 

would likely be unable to act as a source of credit to the U.S. economy. Without an 

appropriate level of capital, the fire sale of assets and pull-back of credit could have 

further systemic implications. This occurred during the most recent financial crisis 

due to the interconnectedness of the banking industry with the rest of the financial 

system. 

Conversely, the primary risks facing insurers, found on the liability side of the 

balance sheet, are generally not as sensitive to the same systemic economic risks. 


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These insurer liability risks include, for example, weather risk, mortality risk and 

morbidity risk. Both life and property and casualty insurers invest upfront premium 

payments in assets to satisfy liabilities that, by their nature, are generally longerterm and typically dependent upon the occurrence of uncertain events that are not 

highly correlated to macroeconomic cycles. 

While insurers are subject to asset risks based on the investments held to meet 

long-dated liabilities, these risks do not expose insurance companies to the same 

‘‘run’’ scenarios as found in banking. These asset risks manifest themselves in different ways for insurance companies due to the nature of the insurance liabilities 

and asset liability management practices which include accepting premiums up 

front and investing them to meet future liabilities. 

Again, property and casualty and life insurance policies are typically payable only 

upon the occurrence of a certain idiosyncratic trigger event not tied to economic cycles. While premature surrenders of life insurance policies can occur, significant 

penalties discourage this behavior and mitigate its impact. As a result, insurance 

policies are not prone to sudden and widespread ‘‘withdrawals’’ as bank deposits can 

be and, therefore, insurer liability and asset risks do not pose the same systemic 

risk implications that are found in the business of banking. 

Imposing the Basel III Banking Framework Would be Potentially Harmful 

to both the Insurance Industry and the Economy 

In addition to being inappropriate for insurers, the Basel regime is potentially 

harmful when applied to these companies because of their distinct business models. 

Insurers hold longer duration assets than banks. Insurers are significantly less reliant than banks on borrowed debt, especially short-term debt, and do not require the 

same level of liquidity as banks. However, insurance companies must engage in 

careful asset-liability management to ensure policyholder are protected, a business 

need the Basel regime also ignores. 

One salient example of the inappropriateness of the Basel III capital framework 

as applied to insurers is its 100 percent risk weight to all corporate exposures, 

which fails to distinguish corporate exposures based on the credit quality of the borrower. As has been raised in comment letters, a 100 percent risk weight for investment-grade corporate bonds held by insurers overstates the risk associated with 

these assets, particularly when compared to a bank’s commercial and industrial 

loans, which are materially more risky but which receive the same 100 percent risk 

weight. The insurance industry writ large has substantially larger holdings of corporate bonds than banking, and is, in fact, the largest investor in corporate bonds 

in the entire U.S economy. As of year-end 2012, corporate bonds comprised about 

48 percent of life insurer general account assets as compared to around 6 percent 

for banks. Corporate bonds can provide an effective investment for meeting a longdated policyholder obligation. Thus, overstating the risk on such a substantial portion of an insurer’s investment portfolio will have a significant impact on insurance 

SLHCs and insurance SIFIs. These companies would be required to hold more capital for these high-quality investments, which could in turn impact the affordability 

and availability of insurance products with long-term liabilities. 

As an alternative to incurring high capital charges for investment-grade corporate 

bond holdings, insurers subject to a Basel regime could decide to take on additional 

credit risk by shifting their investment portfolios to higher-yielding, lower-quality 

corporate bonds that would receive the same 100 percent risk weight under the 

Basel III final rule. Taking on additional credit risk would, as one would expect, 

worsen the insurer’s capital position under the State risk-based capital framework, 

even though the insurer’s capital adequacy would be unchanged under the Basel III 

framework. 

Simply put, the Basel III framework’s 100 percent, ‘‘one-size fits all’’ risk weight 

for corporate exposures provides a clear example of a framework that was designed 

for banks, which do not invest heavily in corporate bonds, and which is inappropriate for assessing the capital needs of an insurance company. 

The risk-weight for corporate bonds is just one example of why the Basel regime 

is inappropriate and harmful as applied to insurers. There are many others, including the regime’s treatment of insurer separate accounts, which we believe receive 

inappropriate treatment under the Basel regime. These separate account assets 

would potentially receive capital charges for risk not borne by the insurer, resulting 

in a substantial and unreasonable capital cost which likely would impact insurers’ 

ability to offer these important products. Furthermore, the risk weights applied in 

the Basel regime would over-charge for some risks, entirely ignore others and potentially incent the wrong risk measurement and therefore the wrong risk taking behavior. In total, it is likely some insurers would be forced to hold excessive capital 


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that could cause a contraction in credit, and negatively affect availability and affordability of many insurance products. 

The State Risk-Based Capital Regime 

The regulatory cornerstones to any discussion of group-wide insurance capital requirements are the State risk-based capital (RBC) models. Insurance is already 

heavily regulated by State law. Shortly after the United States adopted the Basel 

I framework for banks in 1989, insurers became subject to the State RBC regime. 

The State RBC framework actually consists of three distinct capital models, each 

tailored to the unique risk profiles of life, property and casualty, and health insurers 

separately. Each model determines the amount of risk-based capital required by an 

insurance company given its investment portfolio, business activities, and the liability risks it has assumed. Regardless of what regime the Federal Reserve imposes 

on insurers that are federally supervised, we will also continue to be subject to State 

RBC requirements. We strongly support the RBC regime and the appropriate capital standards it requires for each of the life, property and casualty, and health insurance business models. 

The RBC system places particular emphasis on policyholder protection and the 

important differences between insurance business risks. The purpose of the RBC regime is to provide customers and regulators with a high degree of confidence that 

an insurer can pay all claims over the entire duration of its insurance contracts in 

force. 

Under the State RBC system, insurers hold capital to appropriately reflect the 

risks of their assets and their liabilities (and indeed potential mismatches between 

the two). The value of certain insurance company liabilities (current and future 

claims) are measured by the probability and severity of likely claims over a given 

period of time. While insurance companies are in the business of managing risk, and 

most do an excellent job of it, any capital regime such as Basel III that does not 

properly reflect insurer liabilities and the insurance business model has the potential to increase risk, not contain it. 

Conclusion 

Again, thank you for the opportunity to appear before you to discuss our views 

on the appropriate capital regime for insurers. In conclusion, I would like to reiterate a few important points. First, we are not objecting to group supervision by the 

Federal Reserve. Second, we are not objecting to the concept of comprehensive group 

capital requirements for SLHCs or insurance SIFIs. Third, we are not objecting to 

utilization of the Basel III framework for our bank. Finally, we are not seeking 

lower capital standards—indeed we support strong capitalization as part of our core 

business proposition. We are simply advocating that there is no ‘‘one size fits all’’ 

model for assessing risk and by extension no universally applicable framework for 

determining capital requirements, that can be effectively applied regardless of business model. We believe strongly that the Federal Reserve should have the latitude 

to utilize any tool (or combination of tools) necessary to effectively assess the risk 

profile, and therefore capital requirements, of a holding company, taking into account material differences in their business models. Therefore, we strongly urge the 

passage of legislation that clarifies that the Federal Reserve has the flexibility to 

tailor capital rules to insurance companies under the agency’s supervision. We 

thank you for the opportunity to comment, and look forward to being part of a bipartisan policy solution to this important issue.


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