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LEGISLATIVE PROPOSALS TO REFORM 

DOMESTIC INSURANCE POLICY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MAY 20, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–80 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

RANDY NEUGEBAUER, Texas, Chairman 

BLAINE LUETKEMEYER, Missouri, Vice 

Chairman 

EDWARD R. ROYCE, California 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

DENNIS A. ROSS, Florida 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

BRAD SHERMAN, California 

GWEN MOORE, Wisconsin 

JOYCE BEATTY, Ohio 

STEVEN HORSFORD, Nevada 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 20, 2014 ..................................................................................................... 1 

Appendix: 

May 20, 2014 ..................................................................................................... 37 

WITNESSES 

TUESDAY, MAY 20, 2014 

Carter, Joe E., Vice President, United Educators Insurance ............................... 8 

Hughes, Gary E., Executive Vice President and General Counsel, American 

Council of Life Insurers (ACLI) .......................................................................... 10 

Karol, Tom, Federal Affairs Counsel, National Association of Mutual Insurance Companies (NAMIC) ................................................................................... 12 

Kohmann, Joseph C., Chief Financial Officer and Treasurer, Westfield Group, 

on behalf of the Property Casualty Insurers Association of America (PCI) .... 14 

Schwarcz, Daniel, Associate Professor of Law, and Solly Robins Distinguished 

Research Fellow, University of Minnesota Law School .................................... 15 

APPENDIX 

Prepared statements: 

Carter, Joe E. .................................................................................................... 38 

Hughes, Gary E. ............................................................................................... 55 

Karol, Tom ........................................................................................................ 63 

Kohmann, Joseph C. ........................................................................................ 72 

Schwarcz, Daniel .............................................................................................. 80 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Neugebauer, Hon. Randy: 

Letter from over 50 insurance company CEOs .............................................. 98 

Written statement of the American Insurance Association (AIA) ................ 101 

Written statement of the Financial Services Roundtable ............................. 112 

Written statement of the Independent Insurance Agents and Brokers 

of America (IIABA) ....................................................................................... 117 

Written statement of the National Association of Insurance Commissioners (NAIC) ............................................................................................... 119 

Written statement of the Property Casualty Insurers Association of 

America (PCI) ................................................................................................ 121 

(1) 

LEGISLATIVE PROPOSALS TO REFORM 

DOMESTIC INSURANCE POLICY 

Tuesday, May 20, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING

AND INSURANCE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Luetkemeyer, 

Royce, Garrett, Duffy, Stivers, Ross; Capuano, Clay, McCarthy of 

New York, Sherman, Beatty, and Horsford. 

Also present: Representative Posey. 

Chairman NEUGEBAUER. This hearing of the Subcommittee on 

Housing and Insurance entitled, ‘‘Legislative Proposals to Reform 

Domestic Insurance Policy,’’ will come to order. 

We will have opening statements, 10 minutes on each side, for 

the Majority and the Minority. 

And there may be Members in attendance who are not assigned 

to the Housing and Insurance Subcommittee. Without objection, 

members of the full Financial Services Committee who are not 

members of this subcommittee may sit on the dais today, but, consistent with our committee policy, they may not be recognized or 

yielded to for any purpose. If they have any written statements, we 

will include them in the hearing. 

At this particular point in time, I will give my opening statement. 

Thank you for being here today. I think this is an important 

hearing. We are going to talk about five legislative proposals to reform the domestic insurance policy in this country. This hearing 

will give many of the stakeholders in this room much-needed respite from our TRIA deliberations. 

And speaking of TRIA, I noticed that in the audience today, 

there are a few people here who may have a little bit of an interest 

in that subject. Just to give you a little bit of an update, we are 

working very hard on that issue. 

Just a couple of weeks ago, as you may know, we sat down with 

some of the Members of the Majority who sit on the committee and 

we laid out a framework for them to review. And we opened up a 

dialogue and a discussion with those Members, and we have been 

getting some very valuable feedback. 

2 

And in the very near future, we plan to, once we make some refinements in that framework, sit down with the Minority, as well. 

Because it is our goal, hopefully sometime in June, to put out a bipartisan—hopefully, it will be a bipartisan bill on TRIA, to move 

out of this committee. And hopefully, we will then put it in the 

hands of leadership and let them determine when we might look 

at passing that on the House Floor. 

But I just wanted to give you a little bit of an update. As many 

of you are seasoned veterans around here, you know it doesn’t always go on schedule, but that is the schedule that we have today. 

But today we turn our attention to some insurance reform legislation that focuses on protecting policyholders, offering more consumer choice for insurance products, and providing regulatory relief to reduce costs to domestic policyholders. 

First, we will examine legislation which ensures that regulations 

intended to rein in certain activities of large complex financial institutions don’t trickle down to insurance companies that are properly regulated at the State level. 

H.R. 4510, which was introduced by Representatives Miller and 

McCarthy, would clarify that application of capital requirements to 

insurance companies that are subject to Fed supervision. This bill 

would simply ensure that capital standards intended for banks are 

not needlessly applied to insurers that own financial institutions. 

H.R. 605, introduced by Mr. Posey, would make certain insurance companies not subject to Federal assessments to pay for the 

orderly liquidation of failed financial institutions, given that State 

insurance laws already govern the process for unwinding failed insurers. 

Second, we will examine the legislation intended to protect insurance policyholders who are customers of a bank-affiliated insurance 

company. H.R. 4557, introduced by Mr. Posey, would allow State 

insurance regulators to intervene to protect the soundness of the 

insurance company affiliate with a failing financial institution. 

This will allow regulators to ring-fence insurance-specific assets so 

that policyholders are protected in the event of insolvency. 

And finally, the subcommittee will examine two draft proposals 

intended to increase consumer choice and to reduce unnecessary 

regulatory burdens. The first, authored by Mr. Ross from Florida, 

would modify the Liability Risk Retention Act to allow self-insured 

liability risk-retention groups to create efficiencies by expanding 

their commercial lines of coverage. The second, authored by Mr. 

Stivers, would lessen the regulatory burdens associated with data 

requests from insurance supervisors. 

I applaud all of the sponsors of these bills that we plan to examine today. And separately, I would like to acknowledge Mr. Duffy 

for all of his hard work he and his staff have done on the MillerMcCarthy capital standards bill. 

I also would like to recognize Mr. Duffy, in that he just recently 

added another member to his family. I believe this is number 

seven. And it was a little girl, as I— 

Mr. CAPUANO. Seven? 

Chairman NEUGEBAUER. Yes. 

Mr. DUFFY. I’m very productive. 

Mr. CAPUANO. A little overproductive. 

3 

Chairman NEUGEBAUER. So, I look forward to a very productive 

hearing. 

And now, I would like to recognize the ranking member of the 

subcommittee, Mr. Capuano, for 21⁄2 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

I want to thank the panel for being here. 

I think there will be some good discussion today. I don’t think 

there is going to be a lot of debate. There may be some basic issues. 

I think most of these issues that are proposed in these bills are 

reasonable and thoughtful. Again, there will be some details, but, 

overall, I am looking forward to some discussion to see if we can 

come up with easy ways to do some easy things without complicating them with unnecessary, extraneous material. 

Thank you very much. 

Chairman NEUGEBAUER. And now, I would like to recognize Mr. 

Duffy for 11⁄2 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman, for holding this very important hearing. 

And I appreciate the panel coming in and dispensing some of 

your wisdom and thoughts on the bills that we are talking about 

today. 

I just want to say a few brief remarks about the Miller-McCarthy 

bill, a great bipartisan proposal, I think, that goes a long way to 

fixing a problem that I don’t really think existed. We know the Fed 

interpreted the Collins Amendment differently than probably most 

everyone else in this room. And so we now have, I think, a bipartisan legislative fix that addresses that Fed interpretation. 

Listen, I don’t think anyone anticipated that we would apply 

bank capital standards to insurance companies. And that was 

never the intent of the Collins Amendment. The Miller-McCarthy 

bill will address that issue, making sure that we treat insurance 

companies very differently than banks in relationship to the capital 

which they are required to hold. 

So, I look forward to your testimony and your views on all of the 

bills, but specifically in regard to Miller-McCarthy. 

And I want to also extend my thank you to Mr. Miller and Mrs. 

McCarthy for their bipartisan effort in bringing out this proposal. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from California, Mr. Sherman, is recognized for 

2 minutes. 

Mr. SHERMAN. Thank you. 

We need to pass the reauthorization of TRIA. That isn’t on the 

agenda today. 

We saw with AIG an excellent case study. That portion of the enterprise that was subject to State insurance regulation remained 

healthy even though the top managers in the company were behaving like drunken sailors. Those parts of the company that were not 

subject to State insurance regulation crashed as if they were being 

run by drunken sailors. 

The other thing this proves is that credit default swaps are insurance and should be treated as such. And we probably would not 

have had a 5-year catastrophe in our economy had we done two 

4 

things: one on the credit rating agencies; and the other is to require that portfolio insurance be called insurance. 

We are dealing with a number of bills today, two that are important and that I am happy to cosponsor. 

One is the Miller-McCarthy provision, summarized by the last 

speaker. And that is that we need to use insurance accounting 

principles to determine the creditworthiness of insurance companies. 

The second, the Policy Protection Act, introduced by Mr. Posey, 

and I guess I am the chief Democrat on it, recognizes that you 

should not invade an insurance company and seize assets in a way 

that endangers its policyholders simply to shore up a related and 

affiliated bank or other depository institution. What the bill does 

is it takes the policyholder provisions that are already in the Bank 

Holding Company Act and puts them also in the Thrift Holding 

Company Act. 

And, with that, my time has expired. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, another gentleman from California, Mr. Royce, is recognized for 21⁄2 minutes. 

Mr. ROYCE. Thank you. Thank you, Mr. Chairman. 

And just a reminder for my friend from California, that the securities lending operation of AIG was regulated at the State level. 

But this hearing on legislative proposals to reform domestic insurance policy confirms a new normal for insurance regulation in 

the United States. It is basically a hybrid model with layered regulation by States and the Federal Government. The age-old debate 

of State versus Federal regulation is aged, is old. The new reality 

involves State regulators, it involves the Federal Reserve, and it involves the Treasury Department, both through the Financial Stability Oversight Council (FSOC) and through the Federal Insurance 

Office (FIO). 

Many of the bills before us today are a response to this hybrid 

model. In particular, H.R. 4510, the Insurance Capital Standards 

Clarification Act, offered by the gentleman from California, Mr. 

Miller, reflects a belief that insurance capital standards set by a 

traditional bank regulator, the Federal Reserve, need not be 

bankcentric and should, in fact, be tailored to reflect the unique 

and specific business model of insurance companies. 

I strongly support this bill. Regulation can take place at the Federal level, but it must be smart and specific to insurance operating 

models. And without changes, the current hybrid insurance regulation structure has the potential to fail consumers miserably. 

A system which produces regulatory confusion, hinders consumer 

choice, and discourages competition is burdensome for all parties 

involved. And I have said this before: It very well may be that the 

system has not failed, but since when has nonfailure been a synonym for success? 

Unlike some of my colleagues, I believe much of the problem is 

lack of uniformity at State levels. Within this hybrid framework, 

we should effectuate uniform domestic regulations. And toward this 

end, yesterday, along with Representative Tammy Duckworth, I introduced the Servicemembers Insurance Relief Act of 2014, a 

5 

straightforward bill to ensure portability of auto insurance for all 

our servicemembers, who often move from State to State. 

This bill is a perfect example of a simple fix to the insurance regulatory framework that will make a big difference in the lives of 

American consumers. And I am hopeful this committee will move 

our new system of insurance regulation forward. We should start 

with immediate passage of H.R. 4510. 

Thank you very much, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

I now recognize the gentlewoman from New York, Mrs. McCarthy, who is one of the primary authors of H.R. 4510, and has 

worked tirelessly on this issue. I thank her for her work. And she 

is recognized for 2 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I appreciate you holding this hearing, and I thank my ranking member. 

I want people to know that when we did the Dodd-Frank Act, the 

bill that came out of this committee did not bring the insurance 

companies in. That was done over on the Senate side. And Senator 

Susan Collins of Maine has stated publicly now that she never intended to have bank capital standards apply to insurance companies. 

Our bill—mine and Mr. Miller’s from California, who unfortunately could not be here today—H.R. 4510, this bill which I sponsor 

will help keep insurance products affordable and available by ensuring the correct capital standards are applied to insurance companies that fall under the supervision of the Federal Reserve. 

The intention was never to have them involved with this. This 

legislation will give the Federal Reserve more flexibility and help 

clarify the difference between the business of insurance and the 

business of banking. 

The legislation starts from the premise that applying the wrong 

capital standards, such as bank capital standards, to an insurance 

company is ineffective, disruptive both to the insurance company 

and its policyholders. In the absence of this legislation, the Federal 

Reserve has said it will be obligated to apply bank capital standards to insurance companies under its supervision. 

Since the insurance business model is so fundamentally different 

than the bank business model, those bankcentric capital standards 

would be very problematic for insurers and the many families and 

retirees who are their policyholders. 

As I have mentioned, Senator Collins, the original author of the 

amendment, is sponsoring it on the Senate side with the correction, 

exactly the same as this legislation is. She will be cosponsoring it 

with Senator Brown and Senator Johanns. I am pleased to support 

this commonsense legislation which will play an important role in 

preventing future financial crises. 

And I apologize. I had a root canal this morning, so I am still 

a little bit numb. 

With that, I yield back. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentleman from New Jersey, the chairman of our 

Capital Markets Subcommittee, Mr. Garrett, is recognized for 11⁄2

minutes. 

6 

Mr. GARRETT. Thank you. 

And, first, I want to begin by thanking the chairman for holding 

this important hearing to examine various proposals to reform the 

domestic insurance policy. But I would also like to thank all of our 

witnesses for serving on today’s panel. 

July will mark the fourth anniversary of Dodd-Frank. And it is 

not surprising that in the nearly 4 years since Dodd-Frank became 

law the committee has had to consider a number of fixes to help 

clean up the regulatory mess that Dodd-Frank created. 

Now, one of the law’s most recent messes concerns the Fed’s application of bank-like capital standards to insurance companies. 

And under Dodd-Frank, the Federal Reserve is required to impose 

minimum capital requirements on the companies it supervises, including insurance companies that own savings and loan associations and insurance companies deemed systemically important. 

However, insurers face very different capital structures than 

banks, and, as such, it would make sense that the Fed should not 

treat insurance companies in the same manner when it comes to 

assessing these capital requirements. Unfortunately, the Fed maintains that Dodd-Frank requires the application of bank-like standards, even though Congress never intended such a standard to be 

applied to these companies under the Fed’s jurisdiction. 

So we have the Insurance Capital Standards Clarification Act 

now before us, and this would clarify that the Fed is not required 

to apply inappropriate standards to insurance companies that are 

already subject to appropriate State-based or foreign capital requirements. 

See, at the end of the day, inappropriate regulations hit our families and small businesses in the pocketbook, so I hope that this 

hearing highlights the need for yet another round of Dodd-Frank 

cleanup. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now one of our newer members to the committee, Mr. 

Horsford from Nevada, is recognized for 2 minutes. 

And welcome to the committee. 

Mr. HORSFORD. Thank you very much, Mr. Chairman. And thank 

you to Ranking Member Capuano. 

If I may take just a moment, I would like to start by saying that 

it is an honor and a privilege to serve on the Housing and Insurance Subcommittee. 

During the recession, my home State of Nevada suffered the 

highest rate of foreclosures in the Nation. And within my State, the 

congressional district that I represent was the hardest-hit. For my 

constituents, housing remains a top priority as we continue down 

the path to economic and financial recovery, so I am glad that we 

are holding a hearing on the five insurance bills before us today. 

But I am also a little disappointed that TRIA is not on that list. 

Before coming to this committee, I served on the Committee on 

Homeland Security. There I heard firsthand from businesses and 

employers on the importance of having access to affordable terrorism risk insurance. These job creators have told me that this insurance provides a safety net which allows them to invest in 

growth without fear of losing it all due to an act of terrorism. 

7 

Most importantly, terrorism risk insurance reduces taxpayer exposure by confining most of the costs to the private sector. Without 

affordable terrorism insurance, many buildings, schools, and 

venues would remain uninsured against terrorist attacks, meaning 

that the government likely would pick up 100 percent of the tab 

for catastrophic losses. 

So, I look forward to working with the members of this subcommittee to move forward on these important issues. And, again, 

I am very honored to be joining this committee, and I look forward 

to the work ahead. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Florida, Mr. Ross, is recognized for 11⁄2 minutes. 

Mr. ROSS. Thank you, Mr. Chairman, and thank you for holding 

this hearing. 

Thank you, also, to our distinguished panelists for being here 

today and for your testimony. 

My discussion today is over my draft that aims to modernize the 

Liability Risk Retention Act and allows established risk retention 

groups, also known as RRGs, with adequate capital and surplus to 

offer to their members, and only their members, the inclusive commercial insurance packages that are the norm in today’s commercial marketplace. 

Nationally, more than 25,000 educational, charitable, and Catholic institutions benefit from commercial liability coverage through 

an RRG. In my home State of Florida, more than 127 nonprofit organizations enjoy tailored liability coverage provided through an 

RRG, the alliance for nonprofits for insurance. These community 

organizations do important work for our society, and any penny 

they can save on insurance costs means one more penny they can 

spend on their charitable efforts. 

My draft is targeted legislation that would provide these customers with the convenience of one-stop shopping with an insurance group they trust and of which they are a member. My draft 

seeks to address some of the previous concerns about this expansion. And I look forward to today’s discussions from all of our witnesses. 

In addition, my colleagues today have brought important bills for 

our discussion. I was pleased to cosponsor Representative Gary 

Miller’s bill, which would allow the Federal Reserve to tailor capital standards to the business models of insurance companies. 

We must ensure that Federal regulation of insurance companies 

is properly crafted and does not result in increased costs for consumers. Floridians already struggle with the cost of insurance. I 

want to make sure that the Federal Government does not worsen 

that burden. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentlewoman from Ohio, Mrs. Beatty, is recognized 

for 2 minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman, and Ranking Member 

Capuano. 

And thank you to our witnesses for their testimony here today. 

8 

This afternoon, we meet to discuss a series of legislative proposals that amend both longstanding and recently passed laws impacting the operation of insurers in the United States. However, 

none of these bills in any way addresses the expiration of the Terrorism Risk Insurance Act, which is slated to expire in just over 

6 months. 

I, and other Members on both sides of the aisle, believe that it 

is absolutely critical that we reauthorize this program in a timely 

manner so that insurers and insureds can renew their terrorism 

policies in a way that prevents lapses in coverage. 

It is clear that failing to do so would risk a complete pullout from 

the markets by these property and casualty insurers, which would 

be catastrophic for the real estate recovery and for the ability of 

companies to provide terrorism liability coverage for workers’ compensation claims, which in many States is required by law. 

A recent study by the RAND Corporation found that premium increases in workers’ compensation insurance may be insufficient to 

offset terrorism exposure. 

Mr. Chairman, I urge you to work with members of this subcommittee, as well as members of the full committee and the House 

to bring a TRIA reauthorization vehicle through markup to the 

House Floor post haste. It is not just a matter of helping insurers 

but, more importantly, helping the American economy as a whole. 

Thank you, Mr. Chairman, and I yield back. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And we will now hear from our witnesses. 

We have five distinguished witnesses today: Mr. Joe Carter, who 

is vice president of business development and marketing for United 

Educators; Mr. Gary Hughes, executive vice president and general 

counsel for the American Council of Life Insurers; Mr. Tom Karol, 

Federal affairs counsel for the National Association of Mutual Insurance Companies; Mr. Joseph Kohmann, chief financial officer 

and treasurer of the Westfield Group, on behalf of the Property 

Casualty Insurers Association of America; and Professor Daniel 

Schwarcz, associate professor of law at the University of Minnesota 

Law School. 

Your written testimony will be made a part of the record. We ask 

you to summarize that in 5 minutes, and then we will move to the 

question-and-answer portion of the hearing. 

Mr. Carter, you are recognized for 5 minutes. 

STATEMENT OF JOE E. CARTER, VICE PRESIDENT, UNITED 

EDUCATORS INSURANCE 

Mr. CARTER. Thank you, Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee. Thank you for 

this opportunity to testify in favor of the Risk Retention Modernization Act of 2014, which will allow established risk retention 

groups to offer additional forms of commercial insurance coverage 

to their members. We have also submitted a written statement for 

the record. 

I am Joe Carter, vice president of United Educators Insurance, 

a reciprocal risk retention group. And I am testifying on behalf of 

United Educators, as well as the Alliance of Nonprofits for Insurance Risk Retention Group, also known as ANI, and the National 

9 

Catholic Risk Retention Group, Inc. We are pleased that VCIA and 

RIMS, the leading trade associations for captives and risk managers also support this bill. 

United Educators, ANI, and National Catholic owe their existence to the Liability Risk Retention Act of 1986. Congress was correct in assuming that risk retention groups would add capital to 

the insurance market, successfully moderate insurance pricing, and 

provide a stable source of insurance coverage for universities, nonprofits, professionals, and small businesses. 

In the 25-plus years since the 1986 Liability Risk Retention Act 

amendments, more than 250 risk retention groups have aggregated 

more than $2.5 million in gross written premium. According to the 

rating agency A.M. Best, the focused approach of risk retention 

groups has resulted in aggregate operating performances that are 

‘‘consistently better than that of their peer group in a commercial 

insurance market.’’ 

Many nonprofits, small schools, churches, and small businesses 

buy packaged policies that RRGs cannot write today. Many of these 

entities are therefore forced to forgo the coverages and more specifically, to tailor risk management services that risk retention 

groups give to buy their policies outside of risk retention groups. 

If RRGs truly were only a response to a crisis and capacity for 

liability insurance, the member counts would surely have shrunk 

when the insurance industry came back into the market. Instead, 

risk retention groups have demonstrated that for certain types of 

similar organizations, collectively insuring each other is superior to 

relying on the traditional insurance sector. 

As member-owned entities, risk retention groups provide where 

they proactively address coverage realities through risk-based research, actuarial-based pricing, and coverage levels that are designed to be sustainable. And any resulting profits are passed back 

to the members who own us, keeping their operating expenses 

down. 

Our bill, which will permit seasoned risk retention groups to 

write other lines of commercial insurance, would bring more capital 

and more purchaser choice to the property and casualty market. 

However, not all risk retention groups could write other lines of 

commercial insurance if this bills becomes law. Instead, to write 

other lines, a risk retention group must be seasoned, meaning it 

must be licensed by the domiciliary State regulator and operating 

as a liability risk retention group for 5 years. They must also meet 

a minimum threshold capital requirement of $5 million and meet 

any other requirements that their State domiciliary regulator 

would require. This bill will not upend the Risk Liability Retention 

Act at all. 

Let me tell what you what the Liability Risk Retention Act Modernization legislation will not do. It does not authorize risk retention groups to offer personal lines of insurance or write group 

health, life, disability, or Workers’ Compensation insurance. It does 

not alter any rights of nondomiciliary States. And it does not 

change a risk retention group’s responsibility to comply with State 

laws on deceptive practices or unfair claims practices. 

In fact, one significant thing has occurred recently to strengthen 

State regulation of risk retention groups since the legislation was 

10 

introduced: RRGs are now subject to the NAIC State accreditation 

standards. Thus, RRGs are now subject to the same solvency standards for State accreditation purposes as other insurance companies. 

The amendments proposed to the Liability Risk Retention Act by 

this modernization legislation will simply permit risk retention 

groups to offer their members, and only their members, the same 

comprehensive commercial insurance packages that are the norm 

in today’s marketplace while benefiting from the customized risk 

management services that we are offering today. 

In closing, risk retention groups have dramatically improved risk 

management and provided tailored coverages for specialized niches 

like nonprofits and educational institutions. And modernizing this 

Act would allow us to more effectively and efficiently continue this 

important work, which will allow them to continue to focus on the 

things that they are—their mission driven. 

I thank you very much. 

[The prepared statement of Mr. Carter can be found on page 38 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

And now, Mr. Hughes is recognized for 5 minutes. 

STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AMERICAN COUNCIL OF 

LIFE INSURERS (ACLI) 

Mr. HUGHES. Chairman Neugebauer, Ranking Member Capuano, 

and members of the subcommittee, I appreciate the opportunity to 

provide you with the views of the American Council of Life Insurers on legislative initiatives addressing the way in which insurance 

is regulated in the United States. 

I would like to confine my remarks this afternoon to a single 

issue that is of paramount importance to life insurance companies, 

and that is the need to provide the Federal Reserve Board with the 

flexibility it believes it needs in order to apply insurance rather 

than bank capital standards to those insurance groups that now 

fall under its jurisdiction as a result of the Dodd-Frank Act. 

Dodd-Frank requires the Fed to apply consolidated capital standards to those insurance companies that are determined by FSOC 

to be systemically important and also to those insurers that control 

savings and loan institutions. Two of ACLI’s member life insurance 

companies have been designated as systemically important financial institutions (SIFIs), and one additional company is under review for possible designation. Eleven of our member life companies 

are affiliated with S&Ls. And taken together, these companies account for approximately 30 percent of the insurance premiums of 

ACLI’s overall membership. 

But differently, a very significant segment of the life insurance 

business is now going to have its group capital standards set by the 

Federal Reserve. But beyond having a direct effect on these companies, the Fed’s determination with respect to U.S. insurer group 

capital standards could very well be a precedent against which all 

insurers are measured, since it would affect such a large segment 

of the market. 

It could also be a bellwether for similar standards being developed by international standard-setters. The global competitive inVerDate Nov 24 2008 16:14 Oct 16, 2014 Jkt 088542 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\88542.TXT TERRI
11 

terests of U.S. insurers demands that every effort to be made to 

harmonize these emerging capital standards. 

The good news here is that the Fed appears to recognize that applying bank capital standards to a life insurance enterprise would 

be wholly inappropriate and could materially disrupt the company’s 

operations. The frustration, as you all have mentioned, is that the 

Fed believes the wording of Section 171 of Dodd-Frank doesn’t give 

it the latitude it needs to apply insurance-based standards. 

Now, to its credit, the Fed has temporarily exempted or deferred 

application of its capital rules to those insurance groups, thereby 

giving Congress time to clarify Section 171. But this is only a temporary respite, hence, the urgency for congressional action. 

We are very encouraged by the fact that Congressman Miller and 

Congresswoman McCarthy—and, Congresswoman, thank you very 

much for your leadership on this—have sponsored H.R. 4510, the 

Capital Standards Clarification Act of 2014. And we would also 

note and thank the fact that a majority of the members of this subcommittee are cosponsors. 

And thanks to you as well, Mr. Chairman, for your support. 

This bill would provide the Fed with the very flexibility it needs 

to craft capital standards suitable in the context of an insurance 

company. Also, as you all have mentioned, Senator Collins, the 

original architect of Section 171, has made it clear that she never 

intended for the Fed to apply bank standards to insurers. And she, 

along with Senators Brown and Johanns, are advancing a bill similar to H.R. 4510 in the Senate. 

To be clear, the insurance industry is not trying to sidestep the 

application of strong capital standards as mandated by DoddFrank. We are simply working to ensure that at the end of the day, 

the applicable standards are predicated on a framework appropriate for the business of insurance, such as the existing insurer 

risk-based capital system. This is a system specifically designed by 

insurance regulators for insurance entities and is a comprehensive 

and accurate measure of these companies’ unique risks. 

In summary, Mr. Chairman, ACLI’s legislative priority in the 

House is passage of H.R. 4510. We believe it is imperative that the 

Fed be afforded the flexibility to utilize insurance-oriented capital 

standards for those insurance groups under its supervision. Substituting bankcentric standards would harm the affected companies, undermine rather than strengthen the supervision of insurers, and would be completely at odds with efforts to enhance the 

stability of the U.S. financial markets. 

We look forward to working with this subcommittee and with 

both Houses of Congress to pass this important piece of legislation. 

Thank you. 

[The prepared statement of Mr. Hughes can be found on page 55 

of the appendix.] 

Chairman NEUGEBAUER. Mr. Karol, you are now recognized for 

5 minutes. 

12 

STATEMENT OF TOM KAROL, FEDERAL AFFAIRS COUNSEL, 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. KAROL. Chairman Neugebauer, Ranking Member Capuano, 

and members of the Housing and Insurance Subcommittee. I would 

like to thank you for holding this hearing entitled, ‘‘Legislative Proposals to Reform Domestic Insurance Policy.’’ 

My name is Thomas Karol. I am the Federal affairs counsel for 

the National Association of Mutual Insurance Companies. We are 

the largest property casualty insurance trade association in the 

country, serving regional and local mutual insurance companies on 

Main Streets across America as well as many of the country’s largest national insurers. The 1,400 NAMIC members’ companies serve 

more than 50 percent of the automobile and homeowners market 

and 31 percent of the business insurance market. 

We are pleased that the committee is focusing on the issues related to property casualty insurance industry, which is highly competitive, well-capitalized, and is a key source of strength and resilience for the U.S. economy. 

Our industry ensures the property casualty risks of the United 

States businesses and consumers, enabling the U.S. economy to 

thrive. It is imperative that we do not impede this well-functioning 

marketplace. NAMIC appreciates the opportunity to offer our comments. 

The most important proposal to NAMIC members is H.R. 4510, 

the Insurance Capital Standards Clarification Act. The Act would 

afford the Federal Reserve greater flexibility to apply accurate capital standards for insurers by amending Section 171 of the DoddFrank Act to clarify the application of capital requirements to insurance companies subject to the supervision of the Federal Reserve Board. 

There is widespread agreement that such flexibility is warranted 

and necessary. Senator Susan Collins of Maine, the author of Section 171, has made it clear that she never intended to have bank 

capital standards apply to insurance companies. The Senator and 

a number of Members of the House and Senate have urged the Fed 

to adjust the capital standards for insurance companies to align 

with the business of insurance, rather than the business of banking. Despite this, the Fed maintains that it is constrained by the 

language in Section 171. 

H.R. 4510 resolves this question and acknowledges the fact that 

bank capital standards are not appropriate for insurance companies. It also recognizes the importance and appropriateness of statutory accounting principles. H.R. 4510 provides that the Fed may 

not use Section 171 to require insurance companies that are only 

required to prepare financial statements in compliance with Statebased statutory accounting rules to also prepare financial statements under generally accepted accounting principles (GAAP). 

Forcing such companies to prepare additional GAAP statements 

is a labor-intensive, multiple-year project that would cost policyholder owners hundreds of millions of dollars without adding any 

benefit in regulating the solvency and activities of the companies. 

Similarly, NAMIC supports the Insurance Consumer Protection 

and Solvency Act of 2013, or H.R. 605, which clarifies that the 

13 

FDIC does not have the authority to assess insurance companies 

for the Orderly Liquidation Fund. The existing State-based resolution authority for insolvent property casualty insurers has a superb 

track record of protecting insurance claimants and policyholders at 

no cost to the taxpayer. Property/casualty companies and mutual 

companies in particular present almost none of the risk factors the 

FDIC is statutorily required to consider. 

All insurance companies already meet guaranty fund obligations 

for the insolvencies in their own industry and should not be assessed the cost of failures in other parts of the financial services 

sector. 

Both of these bills recognize that the business of insurance is 

fundamentally different than the business of banking, and that applying initial bankcentric regulations is inappropriate and damaging to the business of insurance. 

NAMIC also supports the Policy Protection Act of 2014. The laws 

governing thrift holding companies do not provide the same procedural protections as the Bank Holding Company Act to ring-fence 

the assets of insurance subsidiaries for the protection of insurance 

companies. 

The Policyholder Protection Act of 2014 simply amends the Bank 

Holding Company Act to provide the same protections for insurance 

companies organized as thrift holding companies. 

Tapping the assets of insurance units, particularly without the 

consent of the insurance regulator, would inappropriately threaten 

the financial structure, underpinning the insurance operations and 

undermining consumer confidence in the insurance industry. To 

protect America’s insurance consumers, the Bank Holding Act protections should be extended to thrift holding companies, and 

NAMIC supports H.R. 4557. 

Finally, NAMIC supports the Insurance Data Protection Act, 

which would elevate the Federal authority to subpoena information 

directly from insurance companies to the Secretary of the Treasury, 

but also strengthen the confidentiality protections for the information and require reasonable reimbursement for the cost of compliance with the data protection. The Insurance Data Protection Act 

would not deny the Federal Insurance Office or the Office of Financial Research any relevant information or impede their functions 

but would ensure that they take reasonable steps to prevent unnecessary and duplicative reporting by insurance companies. In fact, 

the legislation would afford insurers many of the protections recently highlighted in the Administration’s big data and privacy 

work group review. 

I want to thank the subcommittee again for holding this important hearing and for providing NAMIC with the opportunity to discuss these legislative proposals. I look forward to your questions. 

[The prepared statement of Mr. Karol can be found on page 63 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Kohmann, you are now recognized for 5 minutes. 

14 

STATEMENT OF JOSEPH C. KOHMANN, CHIEF FINANCIAL OFFICER AND TREASURER, WESTFIELD GROUP, ON BEHALF OF 

THE PROPERTY CASUALTY INSURERS ASSOCIATION OF 

AMERICA (PCI) 

Mr. KOHMANN. Thank you, Mr. Chairman, Ranking Member 

Capuano, and members of the subcommittee. 

I am testifying on behalf of the Property Casualty Insurers Association of America (PCI), which is composed of nearly 40 percent 

of the Nation’s home, auto, and business insurers. My name is Joseph Kohmann, and I am the chief financial officer and treasurer 

of the Westfield Group. 

Westfield as midsized insurance company that has been in business for over 166 years with an A or higher A.M. Best rating for 

the past 75 years. We provide over 2,200 direct jobs in 31 States, 

partner with thousands of independent insurance agents to serve 

our customers, and are one of the top writers of farm business in 

the United States. 

Westfield also owns a community bank that originates roughly $300 million in loans annually, predominantly to owner-operated 

small businesses and individuals. We are not a Wall Street institution, but a very important regional provider of insurance and banking services to middle America. 

Both PCI and Westfield support strong regulation. But our 

growth is being restrained by unintended consequences stemming 

from an expansion of banking regulation in the Dodd-Frank Act 

that conflicts with State insurance regulation. For example, the 

Dodd-Frank Act requires the Federal Reserve Board to impose the 

strictest bank capital standards on insurance holding companies 

with a depository affiliate, even just a small community bank. 

Westfield’s business activities are primarily insurance. The measurements used to determine capital and leverage ratios for banking 

are completely different than those used to govern auto insurance 

or farm insurance. 

A strict application of bank capital requirements to our insurance 

activities just does not make sense. 

The Federal Reserve Board agrees. They recognize that insurance and banking operate with completely different business models. They have delayed implementation of the requirement until 

Congress can act. But not for long. Dozens of Members of Congress, 

including Senator Collins, who authored the original legislative requirement, have written to the Federal Reserve Board saying that 

this application of bank regulation to insurance is inappropriate. 

Fed Chair Yellen testified under questioning that this is an unintended consequence of the Act. Yet, the Board says they do not 

have the statutory flexibility to provide relief unless Congress acts. 

Please pass H.R. 4510 to help Senator Collins clarify the intent 

of her original amendment and to allow the Federal Reserve Board 

to apply appropriate capital standards to insurance companies. 

PCI strongly supports the other bills before the committee as 

well. H.R. 605 ensures that resolution of insurance companies and 

their assets is conducted by insurance regulators, not by a Federal 

banking agency. It would also prevent the FDIC, which is primarily 

responsibile for bank resolutions, from using insurance assets to 

support failing banks. Insurers are already responsible for resolvVerDate Nov 24 2008 16:14 Oct 16, 2014 Jkt 088542 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\88542.TXT TERRI
15 

ing their own failures and pay for guaranty funds in every State 

to protect consumers. Do not let insurance policyholder protection 

funds be used to support risky investment firms and banks. 

H.R. 4557 requires Federal bank regulators, before transferring 

assets of insurance companies to banks, to ask the insurance regulator to determine if the transfer would harm the insurer. This 

seems like another commonsense clarification to limit a regulatory 

conflict of interest and to avoid harming insurance policyholders to 

support a bank. 

The proposed Insurance Data Protection Act would provide additional protections for confidential proprietary data shared among 

insurance companies and government entities and limit rather extraordinary regulatory subpoena power given to nonregulators. 

This will prevent potentially costly data calls by entities which neither supervise our companies nor are responsible for their solvency. 

The theme of all of these bills is that insurance and banking are 

fundamentally different. Congress has the opportunity to clarify 

that regulation of insurance companies and their activities should 

be conducted using insurance standards and by their supervisors. 

Thank you for the opportunity to testify today. And I am happy 

to answer any questions the committee may have. 

[The prepared statement of Mr. Kohmann can be found on page 

72 of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Kohmann. 

And finally, Professor Schwarcz, you are recognized for 5 minutes. 

STATEMENT OF DANIEL SCHWARCZ, ASSOCIATE PROFESSOR 

OF LAW, AND SOLLY ROBINS DISTINGUISHED RESEARCH 

FELLOW, UNIVERSITY OF MINNESOTA LAW SCHOOL 

Mr. SCHWARCZ. Thank you very much, Chairman Neugebauer, 

Ranking Member Capuano, and members of the subcommittee for 

inviting me to testify. 

I am going to spend most of my oral testimony talking about several of the legislative proposals. But before I do that, I think it is 

important to foreground my remarks in certain facts that I think 

have gotten lost in this discussion. Those facts include that AIG securities lending program was at the heart of AIG’s problems, in addition to its credit default swap portfolio. And that securities lending program, as mentioned earlier by one of the Members, was indeed subject to State regulation. Those facts include the fact that 

financial guaranty insurers, monoline insurers, contributed mightily to the crisis, and they were regulated by State insurance regulators. 

Those facts include that life insurers that had issued long-term 

guarantys, via annuities mostly, suffered severe capital shortfalls 

during the crisis that led several of them to apply for bailout funds 

and to receive bailout funds. 

The point I am making is this: I agree with everyone that insurance is different than banking, and it must be regulated in a manner that is different than banking. At the same time, insurance 

does raise systemic risks that warrant a robust Federal involvement in the industry. 

16 

We cannot simply defer to State regulators when issues of systemic stability are in play. With that in mind, I want to talk about 

several of the proposed legislative initiatives. 

First, the Capital Standards Clarification Act. I support the vast 

majority of that bill. I agree that the Federal Reserve should not 

mechanistically apply bankcentric capital rules to insurance companies because insurance companies present different risks. And so 

for that reason, I agree that the Congress should clarify that the 

Fed has the discretion to tailor capital rules. 

Moreover, I think that it is a virtue of the bill that it allows and 

affords the Fed the discretion not simply to move away from simply 

mandating bank capital rules but also to tailor capital rules so that 

they don’t simply replicate State risk-based capital rules but actually respond to the fact that while State risk-based capital rules 

are about policyholder protection, Federal capital rules are by and 

large about something different: They are about systemic stability. 

And for that reason, appropriate capital rules for federally-regulated insurance companies may depart in important ways from 

State risk-based capital rules. The legislation, the bill, as I read it, 

affords the Feds that discretion. 

What I am concerned about, though, is the last provision in the 

bill that would prohibit, as I understand the language, the Fed 

from demanding information from regulated insurance companies 

that is not included in SAP reports. 

One thing that we have to take away from the financial crisis is 

that systemic risk arises in unpredictable ways. And a regulator 

must have the capacity to adapt to new circumstances, to gather 

information in a way that allows it to see the full panoply of risks. 

There are ways in which SAP may not allow the Fed to do that. 

The most important and most clearly recognized is that SAP is an 

entity-centric accounting approach. It is not designed to reflect the 

risks of an entire conglomerate. It is designed to reflect the risks 

of individual insurance entities. It is very difficult, if not impossible, to get a sense of an entire insurance holding company simply 

using SAP. For that reason, it very well may be appropriate for the 

Fed to require either GAAP reporting or something different than 

either SAP or GAAP. Maybe something that is referred to as 

‘‘GAAP-like.’’ Whatever it is, the Fed has to have the discretion if 

it is going to regulate insurers appropriately to demand the information it needs to adjust to the demands of systemic risk regulation. 

I am concerned that the provision in this bill that seeks simply 

to prevent duplicative accounting will actually be interpreted to 

limit the Fed’s authority to demand relevant and necessary information from the entities that it regulates that is not captured in 

SAP accounting standards. 

I am also concerned about the Data Protection Act. The Data 

Protection Act may indeed retain the FIOs and OFR subpoena powers. But it has a provision that is virtually unprecedented as far 

as I am aware. That provision requires either the Treasury or the 

OFR to reimburse companies to the extent that they have to comply with a subpoena. The reason that we have the FIO and OFR 

monitoring insurance companies is because they raise certain sysVerDate Nov 24 2008 16:14 Oct 16, 2014 Jkt 088542 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\88542.TXT TERRI
17 

temic risks. Because they raise those risks, we need to make sure 

that those risks don’t come to fruition. 

The costs associated with that should be borne by the company. 

If we force FIO and OFR to bear those costs, then we will politicize 

the subpoena process and will make it very difficult for that process for move forward in a way that is predictable. 

Thank you very much. 

[The prepared statement of Professor Schwarcz can be found on 

page 80 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

We will now begin the questioning. Each Member will have 5 

minutes. 

The Chair recognizes himself for 5 minutes. 

Mr. Hughes, in your written testimony you mentioned that this 

bankcentric standard would harm the ability of life insurers to perform their fundamental business. We have thrown around a lot of 

terms here, ‘‘bankcentric,’’ ‘‘capital standards,’’ et cetera. But I 

think one of the things we sometimes have to do is we have to boil 

this down to the people that we are really trying to help here and 

to protect, and that is your policyholders and my constituents. 

Talk to me about, if the Fed were to move forward, if we didn’t 

correct this, the young family out there in America, how could this 

impact them? Because I think that is the real issue here. 

Mr. HUGHES. Mr. Chairman, I will give one easy example to 

maybe address that question. To address the needs of that family, 

life insurance companies often issue protection products that have 

promises that will extend 20, 30 years out. We back up those promises of those long-term liabilities with long-term assets. Typically, 

these are fixed-income securities, generally high-quality corporate 

bonds. 

So in our world of insurance and insurance regulation, our regulators like to see that 30-year promise to the family backed up by 

a 30-year high-quality bond. And the matching of the asset and liability lowers the risk of the enterprise. 

You take the same portfolio security, that same long-term bond 

in the portfolio of a bank, which has demand deposit obligations, 

very short-term obligations, and Federal bank regulators say, quite 

correctly, well, that creates a risk mismatch for the bank. They 

have short-term obligations. You don’t want to back that up with 

an illiquid long-term bond. 

So the Fed would say the capital weight you give that bond, it 

has a very high capital requirement because it is highly risky in 

the hands of a bank. 

They basically would be forced to do the same thing for an insurance company. And I can’t imagine a scenario where the promise 

we make to that family, that 30-year promise, is backed up by 

short-term Treasuries. I don’t know the risk of not being able to 

meet a promise of 10, 20, 30 years out would be much higher. So 

that is an example of the same security in the hands of an insurance company as in the hands of a bank. 

And H.R. 4510 would enable the Fed to say, okay, it is a totally 

different balance sheet. Let’s look at assets differently for an insurance company than we would for a bank. 

18 

Chairman NEUGEBAUER. And so that additional liquidity and 

capital would relate to higher premiums for the product that you 

have been offering? 

Mr. HUGHES. Absolutely. 

Chairman NEUGEBAUER. In other words, ultimately, the policyholders are going to pay for this mismatch in policy if the Fed were 

to continue. 

Mr. Karol, would you agree with that statement? 

Mr. KAROL. I agree with that completely. The liabilities that a 

bank focuses on are subject to different risks than insurance, particularly property casualty insurance. The bank has credit risk, the 

bank has inflation risk, the bank has market risk. Where with a 

property casualty insurance company, it is basically the risk of the 

damage to the property or the underlying risk. It is basically a 

completely different business. 

Chairman NEUGEBAUER. Mr. Kohmann, do you want to comment 

on that? 

Mr. KOHMANN. No. I would agree with both Mr. Hughes and Mr. 

Karol. The core issue here is that the businesses are fundamentally 

different. It would increase costs and potentially create capital that 

would be addressing asset risk rather than liability risks. So, in my 

view, it would be no more appropriate to apply risk-based capital 

rules to a banking entity, which would create potential adverse motives for the wrong risks. 

Chairman NEUGEBAUER. Thank you. 

Mr. Carter, who would benefit most from the Modernizing the Liability Risk Retention Act as proposed by Mr. Ross? Who are the 

beneficiaries? 

Mr. CARTER. Mr. Chairman, I think that is a great question. And 

as we think about providing additional services, additional coverages to our members, we think about the smaller to midsized 

businesses. In our world, it is educational institutions that don’t 

necessarily currently have a staff, don’t have a staff for all of the 

training needs, all of their risk management, and risk management 

needs. 

And so when we think about actually offering property packages, 

property coverage offerings in our packages, we are thinking about 

ways to help them manage those risks in an additional—at a higher level than they do today. In a way, that also helps them maintain their budgets, not necessarily have to—we are giving them 

support, in other words, whether it is White Papers, whether it is 

online training, whether it is onsite visits, any number of Webinars 

and seminars. We are giving them a lot of support through the risk 

retention group model. 

And that is not only for United Educators, but also our risk retention group peers. We are only owned by them, and we are delivering more than just insurance to them. So this expansion would 

be very important to them. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the ranking member, Mr. Capuano, is recognized for 5 

minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

And again, I think we have heard many of the items that relatively are noncontroversial. And to be perfectly honest, maybe I 

19 

am wrong, but I think that the capital standards issue could be put 

on a suspension calendar and passed overwhelmingly. 

With a question about the GAAP versus SAP, I am not sure how 

I feel about it yet. I have some questions, but I will come back to 

it, because I don’t know how much time I am going to have. I want 

to talk about the things that are more concerning in some of the 

other bills. 

And again, all of these bills have things which are easy to support, and some have questions. In particular, in H.R. 605, why— 

Mr. Karol, I think I am right that you testified in support of that. 

Why would we have to get rid of the orderly liquidation as a final 

backup opportunity? It is not the primary backup opportunity, not 

the primary process, as I understand it. But if everything else fails, 

why should we get rid of that? What does it hurt to have one final 

backstop in case, God forbid, we get into a situation where it is 

necessary? How does it hurt the industry? If I am wrong—I 

thought you were the one who testified in favor of that. 

Mr. KAROL. Our position is that the Orderly Liquidation Authority should not apply, that the State-based system is adequate at 

this point, and that requiring duplicative payment by insurance 

companies is not fair, that there is sufficient backup by the State— 

Mr. CAPUANO. So it is the up-front payment that you are concerned with? 

Mr. KAROL. If the insurance companies are paying into the State 

authority, which is adequate, our feeling is that if the other banks 

and other financial institutions aren’t paying into that as a backup 

to them, we shouldn’t have to pay into the Orderly Liquidation Authority. 

Mr. CAPUANO. Again, I really have to go back to Mr. Schwarcz’s 

comments. I have no problem with the concept of State-based regulation. AIG was regulated at the State level. We keep forgetting 

that. And I understand full well that the State regulators said that 

they don’t do CDOs, which, of course, is lack of State regulation. 

So if that doesn’t concern you, if that doesn’t kind of ring a red 

bell, I am happy to look the other ways. Because I am not looking 

to impose it. 

I just look at the orderly liquidation when it comes to insurance 

companies as something that hopefully, God forbid, we will never 

need. But I would have a hard time saying, after what we just 

went through, I don’t want to go through that again. And that is 

what the whole orderly liquidation is all about, is to try to prevent 

us from ever having to do that again. 

And again, if it doesn’t work here for insurance companies, I am 

more than happy to discuss it. But to just throw it out I think is 

raising a risk that is potentially repetitive. Now, if it is overly burdensome, I am more than happy to talk about it. I would like to 

have some discussions at a later time, maybe not now, but to walk 

me through how we can maybe rebalance that. Again, I am not trying to hurt anybody. 

Mr. KAROL. I would be happy to talk about it. 

Mr. CAPUANO. I guess I also want to talk about the reimbursement aspect. Again, on FIO, limiting their subpoena power, that is 

fine by me. They have never used a subpoena, to my knowledge, 

20 

and I am not looking—I totally agree that they should ask everybody before they get the subpoena. 

Why in the world would we want them to—if they have to get 

to the point where they ever have to use a subpoena, why would 

we want to force a reimbursement? We don’t do it to ourselves. 

Congress asks every single agency in the world for document upon 

document upon thousands of documents. 

Mr. Neugebauer and I were part of an oversight committee a few 

years ago. We got reams of documents. We didn’t ask for reimbursement. Because asking for reimbursement is de facto a punishment. And in this case, it would for all intents and purposes say, 

how dare you ask for it? Why do we need a reimbursement aspect 

if you actually think that at some point FIO would ever need it? 

Does anybody support the reimbursement provision? 

Mr. KAROL. My understanding of both the OFR and FIO is that 

they are not enforcement entities; they are basically entities that 

exist to determine what is going on in the market to predict what 

is happening— 

Mr. CAPUANO. Information gathering. That is correct. 

Mr. KAROL. And to get that. The amount of information that is 

available to them through the States and through the companies 

is extensive. We really don’t know what— 

Mr. CAPUANO. Which is why they have never used the subpoena 

power. They have never had to use it. And the likelihood of them 

ever using it is minimal. 

Mr. KAROL. And everything we can think is that if such a request came through, it would be so extraordinary that, one, it 

should go through the Secretary of the Treasury— 

Mr. CAPUANO. I have no problem with that. 

Mr. KAROL. And that if it is that far outside of the normal business of the insurers, it would be fair to have that—that be reimbursed— 

Mr. CAPUANO. But all that basically does is if it is so far out 

there, again, I guess it depends, I would actually think if it is so 

far out there, maybe there is a real problem that they are not getting answers to; that is the last step before a subpoena. 

And, again, I have no problem having the Secretary of the Treasury sign off. But it just says to me, basically, we are not giving it 

to you, period, end of issue. And if you do, you have to pay us for 

it. And, by the way, it is going to be an extraordinary amount of 

money, because these things do cost a lot of money. 

Hopefully, just having the subpoena power there is really what 

gets cooperation. This committee has done it relative to HUD. We 

have worked out between ourselves, not issuing a subpoena, having 

HUD come up with certain documents that we worked out in an 

agreement after some pressure was put on. It just strikes me as 

a problem. 

I guess my last 14 seconds is, with today’s world, GAAP and 

SAP, it really doesn’t matter to me. GAAP, SAP, FAAP, BLAAP, 

it doesn’t matter. Pick one accounting standard. I don’t care which 

one. Why would we not want to have one uniform accounting 

standard so we can compare apples to apples? 

Now, I understand the transition from any accounting standard 

to another one is always problematic. Why would we want to have 

21 

2 or 3 or 4 or 10? Why not just one? And it doesn’t matter which 

one to me. Pick one. 

Chairman NEUGEBAUER. I thank the gentleman. And now— 

Mr. CAPUANO. I will get to that later. 

Chairman NEUGEBAUER. I am sure that if you would like— 

Mr. CAPUANO. No, no, no. It was a rhetorical question. 

Chairman NEUGEBAUER. The Chair now recognizes the vice 

chairman of the subcommittee, Mr. Luetkemeyer from Missouri. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Interesting discussion today. We had a discussion earlier today 

with regards to systemically important institutions and had the 

whole discussion about capital requirements, Basel implications, 

international standards being applied to our companies. It is like, 

holy cow, this is like subcommittee repeat 2.0 here. 

But it is great to be with you, and thank you for your testimony. 

It reinforces a lot of what we heard this morning. 

Mr. Kohmann, I would like to start with you. Your company, as 

I understand it, not only is an insurance company, but also owns 

a bank. Is that correct? 

Mr. KOHMANN. That is correct. 

Mr. LUETKEMEYER. So you understand firsthand the difference 

between the two, and that the capital requirements for each one 

are completely different. They are two completely different business 

entities with two completely different business models. What do 

you think about the capital requirements of banks being applied to 

insurance companies? 

Mr. KOHMANN. Thanks for the question. As we said earlier, I 

think they are fundamentally, as you said, different businesses, 

and accordingly, applying capital standards to them in the same 

way would be inappropriate and perhaps risky. 

Mr. LUETKEMEYER. Okay, how do you define ‘‘risky’’ here? Would 

these standards affect safety and soundness of the bank and/or the 

insurance company? How is it going to affect costs to your clients 

or the insurance clients, the bank clients? Can you give us a little 

synopsis. 

Mr. KOHMANN. Sure. I think, first off, you have the potential by 

applying an asset-based capital model to insurance companies 

would not appropriately address the risk of an insurance company, 

particularly a property casualty company like Westfield, where the 

majority of the risks are underwriting and reserve risks. So that 

capital approach could be misguided and put policyholders at risk 

by not adequately addressing the main risk of an insurance company. 

The alternative would be true if you had tried to apply an insurance-centric approach to a bank. We are not talking about that, but 

trying to think about the other way helps lend clarity to how inappropriate it would be to apply those rules to an insurance company, 

and I think there is a potential in doing that to certainly add costs 

to policyholders and consumers in the event that you come up with 

an inappropriate capital amount and/or more complexity. 

Mr. LUETKEMEYER. Mr. Karol, your group deals with lots of different sizes of insurance companies. Would this—how is it going to 

affect the small ones in your group versus the large ones in your 

group? 

22 

Mr. KAROL. I think these types of standards would affect the 

smaller companies much more. They have less ability to adjust to 

the— 

Mr. LUETKEMEYER. Would it drive them out of business? 

Mr. KAROL. It could. 

Mr. LUETKEMEYER. What do you think the potential is for, say, 

the smallest 25 percent of your companies, how many of them 

would you think— 

Mr. KAROL. We have members who write in a single county. We 

have members who write in very small areas, and to apply these 

types of standards or the potential for applying these types of 

standards to them could put them out of business. 

Mr. LUETKEMEYER. They don’t have the ability to raise the kind 

of capital it is going to take to make this all work, is that what 

you are saying? 

Mr. KAROL. Yes. 

Mr. LUETKEMEYER. Okay. Mr. Hughes, you deal with life insurance folks. What kind of costs do you think would be pushed on to 

your clients if some of these standards were implemented? Do you 

have a different business model, a little bit different business 

model than P&C guys? 

Mr. HUGHES. Yes, it is. For us, it is the cost of capital. If we have 

to have inordinate capital charges because of the long-term securities we are holding to match long-term liabilities, as the chairman 

noted, it is going to force companies to pass on those costs to policyholders, which will raise the costs of insurance. 

Mr. LUETKEMEYER. How many of your companies went out of 

business in 2008 as a result, a direct result of the downturn? 

Mr. HUGHES. We had two very small companies that went out of 

business ironically because they had an inordinate amount of their 

reserves in Fannie Mae preferred, both of them. 

Mr. LUETKEMEYER. So it wasn’t management of the company, it 

was investments that they made? Is that right? 

Mr. HUGHES. Precisely, yes. 

Mr. LUETKEMEYER. Okay. So, out of all that turmoil, you lost two 

small companies, and now you are being impacted in a very negative way with these cumbersome and overzealous regulations. 

Thank you for your comments. 

I yield back, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now the gentlewoman from New York, Mrs. McCarthy, is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Professor, when you were talking, something hit my mind that 

when we were writing the bill, so I just want to see, to clarify to 

see if this satisfies you. When you were making points about SAP 

and GAAP, and I agree with my ranking member, our bill says an 

insurance company that is not federally-traded and is already regulated by the State level is not required to prepare a GAAP statement, but that doesn’t stop the Fed from asking for additional information because we were concerned about that because I happen 

to think most insurance companies are good players, but we wanted to make sure that we could keep them to be good players. So 

23 

I hope—and if you have any questions we would be more than 

happy to sit down with you and talk about it. 

Mr. SCHWARCZ. Sure. Two quick points: The first one is that it 

may be necessary for certain insurers in order to arrive at a consolidated sense of how risky the company as a whole is to have 

GAAP reporting, and that is because SAP reporting is inherently 

entity-centric. It doesn’t allow for the positioning of all assets and 

liabilities on a single balance sheet in a way that is simple, okay? 

And so the Fed, I know, right now is investigating how they can 

take SAP and leverage it to get at a sort of holistic perspective on 

a group, but from my understanding, this is very difficult, if not 

impossible. 

The second point, though, is I am concerned with the current 

language that if the Fed, for instance, said, look, we don’t need you 

to go, to give us a full GAAP reporting, but what we do need is 

lines, is, say, line 5 of a GAAP report on this or whatever it is, we 

would like you to provide that to us. The company could come back 

and, under the language as I read it, say, ‘‘No, we are not required 

to provide you anything above and beyond what SAP requires,’’ and 

so to the extent the information you are seeking is not encompassed within SAP, you are overstepping your bounds, and the 

way, the reason I see that is because otherwise, it is very hard to 

understand how you could effectuate this principle, right? Because 

what if they ask for five items on the GAAP report or 10? At some 

point, it becomes the full GAAP report. So I think there needs to 

be clarification about the Fed’s capacity to get individual pieces of 

information, and I also think that there may be circumstances in 

which it would be, in fact, appropriate to have full GAAP reporting 

if it is necessary to, if such reporting is necessary, to arrive at a 

holistic sense of the risk that an insurance group poses. 

Mrs. MCCARTHY OF NEW YORK. As I said, we will follow through 

with that, and certainly, we will talk to Congressman Miller because we have the intentions that there would be a stopgap there 

to be able to have the Fed ask questions if they felt that there was 

something reasonable there. But thank you, and we believe that we 

covered it, but we will take a second look at it. 

As far as the others, I know everybody in Congress, or I should 

say the American people, the majority of us actually do work well 

together. We sit together. We try to work out things that we know 

are going to affect us back home in our States and certainly our 

businesses. So I think this is a perfect opportunity that you can see 

what we do, and we have worked on this committee bipartisanly. 

It doesn’t always work, but this time around, it truly has. 

So, with that, from the testimony that I heard and I appreciate 

everybody coming in to give their opinions on it, I think all the 

questions that I would have asked have already been asked, so I 

am not going to ask them again. The testimony has actually been 

very excellent, and I think it just shows that we can work together. 

But I will say, during Dodd-Frank, and I actually like to call it 

Frank-Dodd, we spent a year and a half working on that bill together, all of us, and we all had questions. Unfortunately, when it 

went over to the Senate, they had a very short period of time to 

work on it and didn’t look at the consequences on some of the language that they put in there. I will say that Barney Frank took one 

24 

section, and even when we went to the second section, we went 

back to the first section to see if we were countering each other, 

but as this place has never passed a perfect bill, it will never pass 

a perfect bill, but that doesn’t mean we can’t make technical 

changes, and that is what we are doing today. 

With that, I yield back the balance of my time, sir. 

Mr. LUETKEMEYER [presiding]. Thank you. 

With that, we go to the gentleman from Wisconsin, Mr. Duffy, for 

5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. Whether Dodd-Frank or 

Frank-Dodd or sometimes we call it by other names as well, but 

we won’t say that here, I do appreciate the bipartisanship that has 

gone on in regard to some of the bills that were proposed today. 

Maybe the panel could help me a little bit with some history. Is 

it fair to say that we have a pretty long and deep history of banking in America and some crises that come from the banking sector? 

Does banking sometimes create risk throughout our history for the 

larger economy? Anybody? You guys all agree with that, right? I 

am not crazy? Banking creates risk? Isn’t that kind of why we all 

come together and we get really freaked out in banking crises? 

And what also freaks us out is when the taxpayer bails out 

banks. We don’t like that. We want banks to have sound capital 

standards so those investors in banks will bear the risk and the 

loss and not the taxpayer, and I think a lot of us feel the same way 

about the insurance sector. 

Do we have the same kind of history in the insurance sector with 

creating systemic risk similar to that of the banking sector? Mr. 

Carter, do you know? Mr. Hughes? Anyone? You can jump in, 

chime in. 

Mr. CARTER. I don’t personally believe so. I think that the business models, as we have heard before, are very different, and the 

way they run their businesses are very different, and I think if you 

look at the history of failures, of institutional failures, I think there 

is a difference. I don’t know the exact numbers, but that would be 

my statement on it. 

Mr. DUFFY. Maybe I will throw it out a different way, if you look 

at it from the Great Depression to the Great Recession, oftentimes 

we have had banks that have caused some of these crises and runs 

on banks. Is there another historical example that you can give me 

where a crisis in America has been caused by the insurance sector? 

Mr. SCHWARCZ. Yes. Let’s not forget about 2008, right? This is 

a pretty important salient example, and again, I think it is really 

important to remember that the AIG securities lending program, 

monoline financial guaranty insurers, life insurers, all of those involved State insurance regulation and involved crises. 

Mr. DUFFY. And we will get to that. 

Mr. SCHWARCZ. Okay. 

Mr. DUFFY. Besides AIG, any other example you can give me? 

Mr. SCHWARCZ. Yes. There has been historical precedence of a 

run on a life insurer; on Executive Life, there was a run. 

Mr. DUFFY. But systemic risk— 

Mr. SCHWARCZ. It depends on— 

Mr. DUFFY. —by insurance companies. 

25 

Mr. SCHWARCZ. Right, I would say that it depends—the other example, ironically enough, would be the 1980s liability crisis. The 

Risk Retention Act was initially passed because there was a crisis 

of lack of availability of liability insurance. 

Mr. DUFFY. Was that systemic risk however? 

Mr. SCHWARCZ. It depends how you define systemic risk. It was 

significant enough that it was on the front page of magazines, and 

Congress acted to pass— 

Mr. DUFFY. But it wasn’t going to take down the whole economy 

like what the theory was in 2008 or the Great Depression? 

Mr. SCHWARCZ. I think that is right; it was different. 

Mr. DUFFY. Besides Mr. Schwarcz, because I have heard many 

argue that as you look at the crisis of 2008 and you look at AIG’s 

role, many will say it was the financial products division that was 

regulated by the OTS that caused the risk in AIG, and it wasn’t 

the traditional insurance arm that was regulated by the State that 

really caused the risk in AIG. Do you guys agree with that assessment, outside of Mr. Schwarcz? 

I know what your opinion is on this one. 

Mr. HUGHES. I think I would strongly disagree with Mr. 

Schwarcz’s analysis. I don’t think you can point to AIG and say, 

that equals the whole insurance industry. It doesn’t. I think all financial intermediaries discovered during the crisis that their risk 

modeling probably didn’t go far enough out, and that worst case 

was a whole lot worse than they had anticipated. But if you look 

at the way the insurance industry came through the crisis, both 

the life segment and the property casualty segment, I think, without question, we came through that crisis in better shape than any 

other segment of financial services. 

So, yes, AIG was a problem. Yes, there were companies that were 

under severe stress. But the entire financial system, not only in the 

United States but globally, was under severe stress, and I think 

the industry acquitted itself quite well in the crisis. 

Mr. DUFFY. As we look at FSOC, they are there to identify risk 

to financial stability, and we just recently had Prudential that was 

designated as an SIFI. What concerns me, though, is how the vote 

on making Prudential a SIFI, you have the OCC, the FDIC, credit 

unions, the Fed, Treasury, and the CFPB—which has its own problems—all voting to designate an insurance company as an SIFI, 

but you have the President’s designee who was approved by the 

Senate voting ‘‘no’’ as well as Mr. DeMarco from the FHFA. And 

I think as I finish off here, the quote is pretty powerful from Mr. 

Woodall, who said, ‘‘The underlying analysis utilizes scenarios that 

are antithetical to a fundamental and seasoned understanding of 

the business of insurance, the insurance regulatory environment, 

and the State insurance company resolution and guaranty funds 

system.’’ You have bankers and credit unions designating Prudential as an SIFI, and those who know insurance best are voting ‘‘no,’’ 

and saying these other guys don’t understand it. I think that is 

pretty powerful as we analyze how FSOC is looking at insurance. 

I yield back the time I do not have, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentlewoman from Ohio, Mrs. Beatty, is recognized 

for 5 minutes. 

26 

Mrs. BEATTY. Thank you, Mr. Chairman, and Mr. Ranking Member, and like my colleague from New York, many of my questions 

have already been asked, but I would like to pick up where Ranking Member Capuano left off. It seems like, as we have been working through Section 171, we have come to a pretty good technical 

fix to this, but it seems like there were still some discrepancies in 

which accounting standards should be used, and I think that is 

where Mr. Capuano was going, and it looked like Mr. Kohmann 

and Mr. Hughes and Mr. Carter were getting ready to jump in 

there. 

So let me pose the question to any one of you in this fashion: 

Would you explain how the application of, let’s say, statutory accounting principles versus general accepted accounting principles 

could result in a different compliance expectation? 

Mr. HUGHES. I think this is one of the more intriguing questions 

with this legislation, and I read Mr. Schwarcz’s testimony, and it 

caused me to go back and read your legislation and what it actually 

says. There isn’t any question that GAAP accounting and statutory 

accounting have fundamentally different purposes. GAAP is overseen by the SEC. It is intended to ensure fairness in the marketplace, maybe protection of investors. Statutory accounting, as Mr. 

Schwarcz noted, is really to protect, to make sure that the solvency 

of the company is sufficient to protect the policyholders. 

Now, whether the Federal Reserve Board at the end of the day, 

given the latitude that your bill would give them, would just say, 

fine, we are happy with statutory accounting, I am not sure that 

they would. We had begun a discussion with the Fed early on to 

say, it is not that hard to come up with some mechanical analogue 

to consolidated GAAP financials, it is not audited GAAP, but if you 

need certain information, it is not that hard to come up with some 

sort of analogue that would give you what you want. 

Now, those discussions stopped because the Fed said that under 

Section 171, we can’t get there anyway. Even if you gave us that 

information, we couldn’t rely on it. So your legislation would do two 

things: one, it would enable to us restart that conversation with the 

Fed; and two, if we did come up with a workable analogue, costeffective, not audited GAAP for a mutual, it would enable the Fed 

to rely on that as they comply with their statutory mandate. So as 

we read your legislation the way it reads now, we think it adequately addresses the accounting issue. 

Mr. KAROL. There is no reluctance whatsoever to provide the information. I think the question is to require insurance companies 

who use statutory accounting, which is a more conservative system, 

based on the interests of the solvency of the company, to have them 

adopt an entirely different set of reporting standards that are 

based, again, as they said, for shareholder or investor reasons, 

under the Financial Accounting Standards Board would impose a 

burden upon our members for a purpose that may or may not be 

important to the Fed. 

Mr. SCHWARCZ. The concern I have is that if the solution is that 

we need something in between SAP and GAAP accounting, okay? 

We need you to use GAAP accounting in this respect or SAP accounting in this respect. We need SAP accounting plus. 

27 

The language, as I read it, is quite ambiguous with respect to the 

question of whether or not the Fed could demand it, and I think 

just on the technically statutory interpretation as an attorney, one 

could make a very good argument, if one were so inclined, that the 

companies are not required to provide anything in addition to SAP 

or, alternatively, anything in addition to SAP that could be construed as being required by GAAP. And the key point I want to 

make is the Fed as the regulator of these entities needs the flexibility to be able to see these entities on a holistic basis and to prescribe accounting standards that facilitate that. 

Mrs. BEATTY. Mr. Kohmann? 

Mr. KOHMANN. I would just add and agree with Ranking Member 

Capuano that if we could get to one standard, wonderful, but we 

are not going to do away with statutory accounting for insurance 

purposes, and I think, with all due respect, Professor Schwarcz, the 

Fed in their examination process and otherwise I think certainly 

has the ability to request any and all information that they want, 

and I think most companies would do their best to accommodate 

those requests. 

I think at the heart of the SAP versus GAAP is the systematic 

reporting required to the Fed through their reporting system. 

There is really no way to only provide one set of financial data. So 

I think the requests that you are talking about that are more from 

an examination perspective certainly would be accommodated. I 

think it is a systematic approach to accounting that is troublesome 

because it does create significant additional cost and complexity to 

do that reporting, which certainly adds costs to policyholders and 

depositors. 

Mrs. BEATTY. Thank you. 

Mr. SCHWARCZ. Could I just add one thing? I don’t want to 

overstep my bounds. I just want to respond quickly. 

Mrs. BEATTY. Okay. I didn’t know if— 

Mr. SCHWARCZ. Quickly, okay. To be clear, what I am talking 

about is that the Fed might decide, ‘‘We systematically, every quarter, want you to report to us items that are not required by SAP 

because we want to take those into account, say, in your capital 

standards. So, every quarter, we want you to report to us X, Y, Z 

that are not covered by SAP because we think they are important 

in terms of us monitoring you on a persistent basis, in terms of us 

coming up with capital standards.’’ That is what I am talking 

about, and it seems to me that the statutory language would not 

permit that. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

Now the gentleman, Mr. Stivers, is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you recognizing me, and I appreciate you holding this hearing on these important bills. 

Before I start, I typically have an aversion to opening statements, so I don’t request to do them, but I do want to make sure 

everybody in the room understands the unique background of my 

fellow Buckeye, Mr. Kohmann, who not only is a CPA, he was a 

CPA at Ernst & Young, and he has been a CFO for a bank and 

for an insurance company, so he is in a unique position with regard 

to the capital standards clarification bill that we have talked about 

28 

recently through the gentlelady from Ohio as well as Mr. Capuano 

from Massachusetts and others on the committee. I think almost 

everyone has talked about that bill. 

But, Mr. Kohmann, from your position, having been a CFO at a 

bank and understanding how banks work and now being at a property and casualty company, can you tell me, do you think a bank 

and an insurance company are exactly the same and the same 

exact capital standards would work for the two different business 

models? 

Mr. KOHMANN. Thank you, Congressman. 

No, absolutely, as I stated before, they are different. But I would 

add that having been a CFO for both entities, both I and Westfield 

would be supportive of strong capital standards for both types of 

institutions, so I believe that strong and prudent capital standards 

for banks are necessary and as well as strong and prudent and appropriate capital standards for insurance companies. The problem 

herein lies that one or the other is not appropriate for both so we 

need unique capital standards. 

Mr. STIVERS. Is there anybody on the panel who believes that the 

McCarran-Ferguson model for regulating insurance is not working? 

I would note that no one shook their head ‘‘no.’’ 

The State-based standards for capital work very well, and I know 

that the gentleman from Wisconsin talked earlier about the fact 

that State-based regulated entities had no problem through the entire financial crisis. And the capital standards that the States are 

imposing under the McCarran-Ferguson law, which has been working for 70 years, is still working and working very well. 

You talked a little bit through the gentlelady from Ohio’s questions about the issues with statutory accounting versus GAAP accounting. Is there anything, Mr. Kohmann, that didn’t come out in 

that discussion that would cause additional expense to insurance 

companies, whether they be mutual insurance companies or 

nonmutuals? 

Mr. KOHMANN. No, I think what came out of the dialogue was 

appropriate. I think there is no question that the requirement to 

provide GAAP statements in addition to statutory statements 

would be an additional burden, which would basically create expense and complexity, which ultimately would cost policyholders 

more in premiums. 

Mr. STIVERS. Has your company put a price on what that would 

cost your policyholders? 

Mr. KOHMANN. We have not specifically, no. 

Mr. STIVERS. Can you tell me, would it be in the thousands or 

the millions of dollars for a company the size of Westfield? 

Mr. KOHMANN. It would be more than a million. 

Mr. STIVERS. So, for medium to large insurance companies, you 

are talking about six-, seven-, eight-digit costs, tens of millions potentially in some companies? 

Mr. KOHMANN. I can’t speak for other companies specifically, but 

that would be my suspicion, yes. 

Mr. STIVERS. Thank you. I appreciate that. 

The other bill I want to talk a little bit about is the Data Protection Act that I have a discussion draft out on. It is a bill that has 

changed from a bill we did last year, and I know there has been 

29 

some discussion in the committee by the ranking member of the 

fact that Congress doesn’t reimburse, but Congress is usually subpoenaing other government agencies, so it is government agency to 

government agency, but in Title 18 of the U.S. Code, Section 2706 

there is a similar provision to what we are talking about that deals 

with law enforcement, and when they subpoena commercial or 

other folks and they reimburse the cost, and I know that Mr. 

Schwarcz, I am not sure if you said it was unprecedented, but I 

wanted to make sure you knew the precedent of Title 18, Section 

2706. Are you familiar with that section? 

Mr. SCHWARCZ. Yes. My understanding is that there is not another precedent for a monitoring agency or an agency that is meant 

to assess risk to a marketplace having to pay for that, and I would 

also say that even in the context of subpoenaing— 

Mr. STIVERS. I am running out of time, but those are regulatory 

agencies, and that is why, and so the State-based regulators regulate, we already talked about that, under McCarran-Ferguson, regulate insurance companies, but this is additional, this is much 

more akin to the law enforcement model because these are not regulators. 

So thank you for the time, Mr. Chairman. I know I am out of 

time. I appreciate the witnesses’ cooperation, and thanks for being 

here. I appreciate your information. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now the gentleman from Florida, Mr. Ross, is recognized for 5 

minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Professor Schwarcz hinted earlier about a 1986 crisis in insurance that I think led to what resulted in the liability risk retention 

amendments that I think have done very well. In fact, Mr. Carter, 

if it were not for the risk retention groups, what would your members avail themselves of in terms of a market for liability coverage 

and, in this particular case, in my draft, property insurance coverage? 

Mr. CARTER. Thank you for the question. I think during the 

times of a crisis, when most of the traditional insurance markets 

do not feel that they can continue to offer the coverage, it is very, 

very difficult for the businesses to find the coverages that they are 

going to need, whatever that be. 

Mr. ROSS. You have a unique risk, too, don’t you? Your members 

have a unique risk that you don’t find in a commercial line’s product. Would that not be the case? 

Mr. CARTER. I think, to the extent that there is liability, obviously there is liability inside of our industries as well as others. 

However, you are correct that the industries, the specific industries 

that turn to risk retention groups and tended to gravitate to them, 

nonprofits, educational institutions, many of those were difficult to 

cover for those traditional insurance markets. So we were formed 

during that time, and what makes the model really work is during 

very difficult times, over the course of the years since that time, 

there has been at least one event that has changed the market, created a market cycle, I should say. Risk retention groups tend to 

grow quite a bit because of our commitment to those members, so 

we are not looking to grow outside or we can’t grow outside of that. 

30 

Mr. ROSS. Correct. You can’t offer your product to somebody else 

outside your membership? 

Mr. CARTER. We cannot offer it; that is correct. 

Mr. ROSS. You are not in the business of being an insurance company. You are in the business of providing a particular service, in 

most cases a nonprofit or charitable service for which you have a 

unique risk. Now, if you didn’t have the risk retention groups, is 

there a residual market for coverage? 

Mr. CARTER. Not that I know of. 

Mr. ROSS. And if there was such a market, wouldn’t it have to 

be most likely provided by a government? 

Mr. CARTER. That is correct. 

Mr. ROSS. Such as an assigned risk pool? 

Mr. CARTER. That is correct. 

Mr. ROSS. Such as what we saw in Florida and what we have 

seen in other States? So if we don’t have affordable coverage for 

your members, then they can’t provide their service, and if they 

can’t provide their service, which is a nonprofit charitable service, 

then: one, where does the client go, and two, who insures that risk? 

Just because the services aren’t being provided by your organization doesn’t mean the risk for those services is not going to still be 

out there because somebody, most likely a government, will provide 

those services. 

Mr. CARTER. That is correct. 

Mr. ROSS. Now, with regard to capital standards, and I just want 

to ask Professor Schwarcz this particular question. I understand, 

I just want to make sure, you are not suggesting that FIO now 

have regulatory authority, are you? 

Mr. SCHWARCZ. No. 

Mr. ROSS. Okay. And when you consider the cost of compliance 

as well as the cost of increased capital having to be held, would 

that not play into any cost-benefit analysis as to whether a regulation should be implemented or not? 

Mr. SCHWARCZ. Yes. 

Mr. ROSS. And in this particular case, if we are not clear on the 

Collins Amendment and that we don’t have bankcentric capital 

standards apply to insurance companies, we may very well have a 

situation where the cost of compliance may outweigh the affordability of the product? 

Mr. SCHWARCZ. Yes, I am in agreement that the language making it clear that the Fed has discretion to tailor capital rules to insurers is a good idea, and I agree that the risk, the cost-benefit 

analysis is relatively clear on that. 

Mr. ROSS. And I would assume as well, Mr. Kohmann and Mr. 

Karol? 

Mr. KAROL. Yes. 

Mr. HUGHES. Yes. 

Mr. ROSS. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from New Jersey, Mr. Garrett, is recognized for 5 minutes. 

Mr. GARRETT. Great. So, I thank the panel again. 

Going back, I will start from the right. Professor Schwarcz, you 

made the comment—and I want to see where you are going on 

31 

this—before that there were a number of insurance companies who 

had problems and failed regulations, and you referenced AIG and 

a couple of other ones, and for that reason, we should have, in your 

words, turned some of this over to Federal regulation in this area. 

I am paraphrasing. 

Mr. SCHWARCZ. Yes. The basic argument is that we saw that insurance can be systemically risky in more limited circumstances 

than banks. 

Mr. GARRETT. Right. 

Mr. SCHWARCZ. For that reason, we need a Federal layer of oversight and protection. 

Mr. GARRETT. Protection, right. 

Mr. Hughes, I think somebody asked you about how many carriers, insurance companies failed, and I think you alluded to only 

a handful, and that a couple of them actually failed not because of 

their own doing but because of Federal regulation because they 

were encouraged to buy trusts secured in Fannie Mae and Freddie 

Mac. So this is where I am sort of confused, Professor. 

If you look at the numbers, the number of insurance companies 

that failed is on one and a half hands, it is AIG and a couple of 

other ones, and actually, weren’t the two major companies that 

failed actually also regulated by the Federal Government at the 

same time? 

Mr. SCHWARCZ. So, to be clear, there were several insurance companies that received TARP bailout funds. 

Mr. GARRETT. Right. 

Mr. SCHWARCZ. Many more than applied, okay? So, there were 

many. And there were many insurers that contributed to the crisis 

without necessarily failing. One important point to recognize— 

Mr. GARRETT. The important point is that, by and large, they 

didn’t fail or they didn’t actually have to get government backstop 

or support except for a couple. 

Mr. SCHWARCZ. Several— 

Mr. GARRETT. And the ones that did get the support actually 

were regulated. AIG, which was probably bailed out the most of all 

of them—the Office of Thrift Supervision, they were supposed to be 

doing it. The other one at the very top that got it was a bank holding company, and who would that—wasn’t Hartford a bank holding— 

Mr. SCHWARCZ. Hartford was a recipient. 

Mr. GARRETT. Not a bank holding company? 

Mr. SCHWARCZ. I do not believe it was. 

Mr. GARRETT. So AIG would have been the top; they were government-supervised. So it seems as though the ones that got the 

most money also had a Federal regulator that failed, and if you 

look at most businesses or financial institutions that failed, they 

would be on the other side of the ledger. They would not be insurance companies. They would be the banks, and weren’t the banks 

regulated by the Fed? 

Mr. SCHWARCZ. It is funny, we all keep talking about the banks, 

a lot of the crisis was caused by an unprecedented expansion of 

shadow banking. So the point is this— 

Mr. GARRETT. I know, the point— 

32 

Mr. SCHWARCZ. That was new. And the point is you can’t just 

say, oh, well, banks are the problem so banks are going to be the 

problem in the future. Systemic risk arises in new ways. 

Mr. GARRETT. Right, and that is why we need to have regulators 

to do the job, but apparently— 

Mr. SCHWARCZ. Right, monitors and regulators who have the 

powers to do the job. 

Mr. GARRETT. But the regulators didn’t do their job. We had Secretary Geithner here back in 2009, and he was answering a question—I was just seeing this from earlier—and he said that in 2009, 

after he had just left the New York Fed, that, in his words, ‘‘I just 

want to correct one thing, I have never been a regulator for better 

or worse.’’ So here is a guy, one of the regulators that we are supposed to be turning all this control over to, being paid $400,000 a 

year, being in the job of heading the New York Fed testifying to 

Congress that, ‘‘I am not a regulator.’’ Is this exactly where we 

should be in turning over the authority to when, as Mr. Hughes 

and others on the panel have testified to, we don’t really see the 

problem on the State level? We see the failed regulation at the Fed, 

at the New York Fed, at the Office of Thrift Supervision, and on 

other issues outside of the realm of this panel, such as the SEC, 

with other areas as well. It seems as though it is endemic as the 

problem is where the Federal regulators have gotten involved and 

failed to do their job with the authority that they had at the time, 

and as a matter of fact, we go all the way back, we asked the regulators when they came in right after the crisis of 2008, did you 

need additional authority or power at the time, and they said, ‘‘No, 

we just didn’t see what was happening here.’’ 

And what we are trying—so to go forward, your suggestion is we 

just need to give the regulators even more authority and more information, but would you agree that there is some limit that we 

should impose on the information that they should be able to acquire? 

Mr. SCHWARCZ. Of course. I think that the information should 

be—whether or not they request information should be based on a 

prudent judgment of the need, but I would also—the point. 

Mr. GARRETT. Correct me if I am wrong, Dodd-Frank gives the 

FIO subpoena authority, correct? 

Mr. SCHWARCZ. It only allows them to use that subpoena authority if they have made a determination that they cannot receive the 

information from any other source, State or Federal. 

Mr. GARRETT. Right. But isn’t that unusual? Can we cite any 

other case where you have subpoena authority where it is not a 

criminal or an administrative position? 

Mr. SCHWARCZ. One of the things Dodd-Frank did to address the 

fact that systemic risk is always changing is create institutions like 

OFR and like FIO that are meant to try to anticipate these. Are 

they going to work all the time? Of course not. But the answer is— 

Mr. GARRETT. But is there any other institution that has that authority right now and is not in a criminal or administrative position? 

Mr. SCHWARCZ. I think they are a unique organization, but I 

think on the scale of regulation versus crime enforcement, they are 

a whole lot closer to regulation than crime enforcement, and they 

33 

are doing a job that is monitoring systemic risk which is in a sense 

much closer. 

Mr. GARRETT. I yield back. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from California, Mr. Sherman, is recognized for 5 minutes. 

Mr. SHERMAN. I thank the chairman. I notice in talking about 

the risk retention draft, there is a noted absence of necessary speed 

with which to take this up, I assume because there may not be a 

push from the groups really pushing that effort forward. I wonder 

who would want to comment about the speed of dealing with the 

risk retention draft? 

Mr. CARTER. That would be my area, but I am not quite sure I 

understand the question. Would you mind repeating it? I didn’t 

hear the first part. 

Mr. SHERMAN. You know what? I think I am going to go on. Who 

can comment on why we wouldn’t regulate credit default swaps as 

an insurance product? 

Mr. Hughes? 

Mr. HUGHES. Personal opinion, it is a form of financial guaranty 

insurance. I think it probably should have been in a monoline company and not part of a multiline company. 

Mr. SHERMAN. You are saying it should be part of a monoline 

company, but a regulated insurance company? 

Mr. HUGHES. That would be my personal opinion, yes. 

Mr. SHERMAN. If I had decided that I wanted to be in the fire 

protection business, but my deal was this, if your house burns 

down, I don’t write you a check; that would make me an insurance 

company. Instead, if your house burns down, you can trade your 

house for a U.S. Government bond, would I be a fire insurance 

company, or could I evade all fire insurance company regulation? 

Mr. SCHWARCZ. You would be an insurance company. 

Mr. SHERMAN. What? 

Mr. SCHWARCZ. You would be an insurance company. 

Mr. SHERMAN. I would be an insurance company if I did a burned 

home for credit for a bond swap, but if, instead, of your home burns 

down you can trade it for a U.S. Government bond, that would 

make me an insurance company, but if your portfolio burns down, 

you can trade it for a U.S. Government bond, I am not an insurance company, or at least I am not defined as one under U.S. law? 

Mr. SCHWARCZ. That is exactly, yes, the boundaries and the fact 

that we have regulatory arbitrage and we have insurance companies engaging in many of the types of activities that banks and 

shadow banks engage in is exactly why we can’t ignore the systemic risk of insurance companies, we can’t simply say, the States 

are doing a fine job, so we are going to leave them alone. 

Mr. SHERMAN. Wait a minute. That credit default swap that I 

just described is not, cannot be done by a regulated insurance company, correct? 

Mr. SCHWARCZ. Correct, but monoline insurers, financial guaranty insurers did the exact same thing, and they failed miserably 

as well. State regulated insurance companies issuing financial 

guaranty insurers, they failed just as dramatically. 

34 

Mr. SHERMAN. They failed to the point where they had to be 

bailed out? 

Mr. SCHWARCZ. They didn’t—they failed to the point of insolvency, to the point of contributing mightily to the crisis, yes, because what happened is, all of a sudden, the financial guaranty insurers were providing—their classic business was to provide insurance against the default of local bonds and State bonds. When they 

failed and became insolvent to the point that no one had any faith 

in them, the entire bond market seized up because there was no 

financial guaranty— 

Mr. SHERMAN. But we in Congress didn’t have to bail them out? 

Mr. SCHWARCZ. I don’t believe that any of them received bailout 

funds. 

Mr. SHERMAN. Okay. Has anybody put forth an argument against 

the Policyholder Protection Act simply making it clear that you 

can’t raid the insurance company to support the depository institution? We have a whole panel here. Somebody raise your hand if you 

have an argument against the bill. Wow, passed it unanimously. 

Thank you. 

Okay. I am going to amaze my colleagues and yield back 46 seconds. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Florida, Mr. Posey, who has a couple of bills that we have been considering today, is recognized for 

5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman, and thank you for today’s 

hearing on legislation that is very important to the insurance industry, and for allowing me the opportunity to speak today. 

A question for Mr. Kohmann: Dodd-Frank requires insurance 

companies can be made to serve as a source of strength for affiliated depository institutions. State insurance regulators wall off assets of insurers from other affiliated companies because insurance 

assets are supposed to be available to ensure an insurer can meet 

its obligations to policyholders. But if an insurer is expected to 

serve as a source of strength to noninsurance firms, couldn’t that 

harm the insurer’s policyholders? Why would we favor protecting 

consumers, banks, and other risky financial firms over protecting 

innocent insurance policyholders? They are the most innocent potential possible victims. It seems like we want to focus—Mr. 

Schwarcz wants to focus on protecting the investors of these institutions that can’t keep themselves in business rather than worry 

about the victims when they are forced to go out of business. I 

would just like your thoughts. 

Mr. KOHMANN. I think the answer to your question is we 

shouldn’t jeopardize the policyholders of an insurance company 

that is State-regulated in order to use those assets to divert those 

to support banks in a bailout. 

Mr. POSEY. And I realize health insurance is different. Every insurance is unique, but they all have something in common, and 

that is people buy insurance to reduce risk. 

Mr. KOHMANN. Right. 

Mr. POSEY. They don’t buy insurance to increase risk, and if you 

start stealing from Peter to pay Paul, what you may have is instead of one guy going out of business, you get two, and I don’t 

35 

know how that is better for anybody, but my experience with Federal regulators in the insurance business—I don’t know, Mr. 

Schwarcz, if you have ever heard of TRG, but it is a health insurance company that wrote insurance policies in 48 States, darn near 

every State but their own, which was in Indiana. Everything was 

fine except they didn’t pay any claims, and they bluffed most of the 

State insurance commissioners into thinking they couldn’t go after 

them because they were under the Federal ERISA program. 

Mr. SCHWARCZ. To be clear, I support, I also support— 

Mr. POSEY. And finally, one State said, if the Federal Government is not going to do anything, maybe we will, and 13 State 

agencies from different States cooperated to bust those dirtbags 

and put the principals in prison. To this day, the Federal regulators have done absolutely nothing. They have brought no charges. 

They are just paralyzed with inactivity. So when I hear somebody 

kind of insinuating that State regulators are bad and Federal regulators are good, my experience has been just the opposite, and 

while we all believe, I think, probably, most of the people here have 

come up through various levels of government, and they know that 

the government closest to the people is usually the best, the most 

responsive, the most efficient, the most effective, the most cost-effective, and certainly the most accessible, and I think that goes for 

regulators, too. I think that goes for law enforcement, too. I think 

all services that are regulated more closely now. I see nothing 

wrong with cooperation from the Federal Government, unlike what 

they did in the TRG case, to facilitate enforcement across State 

lines, but I think the State regulators are, fortunately for most consumers, the best line of defense against innocent victims. 

Mr. Chairman, I want to thank you again for bringing these up. 

They are very important issues. I yield back. 

Chairman NEUGEBAUER. If there are no other Members seeking 

recognition, I would like to thank each of our witnesses again for 

their testimony today. Without objection, I would like to submit the 

following statements for the record: the Independent Insurance 

Agents and Brokers of America; the American Insurance Association; the Financial Services Roundtable; the National Association of 

Insurance Commissioners; and a letter from over 50 CEOs regarding the Miller-McCarthy bill. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is adjourned. 

[Whereupon, at 3:52 p.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

May 20, 2014 

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