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51–722 PDF 2009

S. HRG. 111–77 

PERSPECTIVES ON MODERNIZING 

INSURANCE REGULATION 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE STATE OF THE INSURANCE INDUSTRY, REVIEWING 

HOW INSURANCE IS REGULATED AND WORKING TO MODERNIZE THE 

REGULATORY STRUCTURE 

MARCH 17, 2009 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

COLIN MCGINNIS, Acting Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

CHARLES YI, Counsel/Senior Policy Advisor 

AARON KLEIN, Chief Economist 

DREW COLBERT, Legislative Assistant 

MARK OESTERLE, Republican Chief Counsel 

ANDREW OLMEM, Republican Counsel 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, MARCH 17, 2009 

Page 

Opening statement of Senator Dodd ...................................................................... 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Brown .................................................................................................. 5 

Senator Crapo ................................................................................................... 6 

Senator Merkley ............................................................................................... 7 

Senator Tester .................................................................................................. 8 

Prepared statement ................................................................................... 43 

WITNESSES 

Michael T. McRaith, Director, Illinois Department of Financial and Professional Regulation, on behalf of the National Association of Insurance Commissioners ............................................................................................................. 10 

Prepared statement .......................................................................................... 43 

Response to written questions of Senator Crapo ........................................... 126 

Frank Keating, President and CEO, the American Council of Life Insurers ..... 12 

Prepared statement .......................................................................................... 51 

Response to written questions of Senator Crapo ........................................... 129 

William R. Berkley, Chairman and CEO, W.R. berkley Corporation, on behalf 

of the American Insruance Association .............................................................. 14 

Prepared statement .......................................................................................... 54 

Response to written questions of Senator Crapo ........................................... 130 

Spencer M. Houldin, President, Ericson Insurance Services, on behalf of the 

Independent Insurance Agents and Brokers of America .................................. 16 

Prepared statement .......................................................................................... 56 

Response to written questions of Senator Crapo ........................................... 133 

John T. Hill, President and Chief Operating Officer, Magna Carta Companies, 

on behalf of the National Association of Mutual Insurance Companies ......... 17 

Prepared statement .......................................................................................... 62 

Response to written questions of Senator Crapo ........................................... 135 

Franklin W. Nutter, President, The Reinsurance Association of America ......... 19 

Prepared statement .......................................................................................... 73 

Response to written questions of Senator Crapo ........................................... 139 

J. Robert Hunter, Director of Insurance, the Consumer Federation of 

America ................................................................................................................. 21 

Prepared statement .......................................................................................... 79 

Response to written questions of Senator Crapo ........................................... 140 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement of David A. Sampson, President & Chief Executive Officer, Property Casualty Insurers Association of America (PCI) ....................................... 144 

(III)

(1) 

PERSPECTIVES ON MODERNIZING 

INSURANCE REGULATION 

TUESDAY, MARCH 17, 2009 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 9:40 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. Let me welcome our witnesses and colleagues who are here this morning. I 

thank them for coming out. The audience has gathered here this 

morning to hear our hearing on the perspectives on modernizing insurance regulation. I will share some opening comments, and then 

I will turn to Senator Shelby. And given the fact we have got just 

a few members here, I will ask them if they have any opening comments they would like to make as well before we get to our witnesses. 

I want to thank our witnesses. We have got an extra long table 

here for you this morning to accommodate all of you, and I appreciate immensely your willingness to participate in this discussion 

this morning. It is a critically important one as we go forward. 

As I mentioned, this morning the Committee will continue the 

series of hearings that we have been conducting this month on 

modernizing the regulation of our financial system. Today’s focus 

will be on the vital component of our economy: the insurance industry. 

Before we do that, I want to say a few words about the furor surrounding AIG and the hundreds of millions of dollars, taxpayer dollars, being paid out in retention bonuses. The American people, as 

we all understand, are outraged, and they should be. All of us are. 

The Chairman of the Federal Reserve has said that the Government’s efforts to prevent AIG from failing outright are akin to a 

neighbor smoking in bed and setting the house on fire. With these 

bonuses, what we are seeing is the folks responsible for picking the 

pockets of the firefighters and stealing the hubcaps off the fire 

truck. It is outrageous. 

This Committee wants to hear what steps the Fed is taking to 

address this situation. We want and expect an immediate and full 

briefing from the Federal Reserve and the Treasury, and we also 

want answers regarding where the Fed has been on conditions for 

2 

these types of bonuses since this rescue effort began back in September. 

Second, it was in this Committee room 2 weeks ago that we insisted on knowing who the counterparties were that so much of the 

$170 billion in taxpayer funds were going to. Who, we asked, are 

we rescuing, exactly? Since that time, we have learned who they 

are, and here, again, I am hopeful that we will have a full and complete accounting of this situation. 

The administration wants to explore every legal means to recoup 

this funding, and I pledge today that if they need the help of this 

Committee to do so, they will get that assistance. At a time when 

we are both trying to put out the fire so that we can begin the process of rebuilding public confidence, public dollars must be used for 

one purpose and one purpose alone, and that is the public good. 

What happened at AIG should not, in my opinion, be confused with 

the industry with which it is most closely associated—that is, the 

insurance industry itself. But, nonetheless, that is what is in the 

public mind today, and they expect answers, and this Committee 

intends to be a part of finding those answers. 

More than 6 decades ago, the Supreme Court said, and I quote: 

Perhaps no modern commercial enterprise directly affects so many persons 

in all walks of life as does the insurance business. Insurance touches the 

home, the family, and the occupation or the business of almost every person 

in the United States. 

The Supreme Court said it exactly right in so many ways. Insurance is a critical underpinning of our economy, something that 

every person and every business depends upon literally every day 

to provide the certainty we need to live and work in an uncertain 

world. Insurance protects families and properties from harm and 

provides stability to every sector of our economy. 

Coming from Connecticut, a State with a long and proud history 

of providing insurance for families and businesses throughout the 

Nation, I am well aware that a strong and vibrant insurance marketplace is essential to the well-being of our Nation, the financial 

security of American families, and, of course, the growth of our 

economy. 

That is why we are very proud that we have been able to bring 

two insurance experts from my State today, Mr. Houldin and Mr. 

Berkley, to share their knowledge and experience with the Committee to help chart a course forward for the insurance industry, 

our economy, and the Nation. 

It is almost impossible to imagine a single transaction taking 

place in our economy today that does not involve insurance in some 

way, shape, or form. When a consumer buys a car or a family purchases a home, they need insurance. When a small business owner 

opens a store or a company builds a factory, they need insurance. 

And when parents seek to protect against unforeseen tragedies and 

provide their children with financial security, they need insurance, 

too. 

As I said in the Committee’s hearing on AIG 2 weeks ago, if credit is the lifeblood of our economy and a healthy banking system is 

the heart that pumps the blood through that economy, then our insurance companies are the lungs that provide the oxygen we need 

to make sure that credit flows. For businesses to function, to create 

3 

jobs, they need access to insurance to protect their investments. 

And during a financial crisis in which credit is frozen, the critical 

role of insurance cannot be overstated. 

As this Committee has established over many hearings in this 

Congress and the last, our Nation’s regulatory structures are outdated and in need of significant overhaul. If we are going to build 

an economy to compete in the 21st century, then we are going to 

need a modernized regulatory structure that is rooted in core principles, such as consumer protection and sound underwriting. And 

while the current financial crisis did not have its origins in the insurance sector, its adverse effects have been felt keenly by participants in the insurance marketplace. 

Our goal must be to maintain a healthy, viable insurance industry that can and will play a critical role in bringing us out of the 

recession that is hurting families throughout our country, hurting 

them certainly in each of our respective States. Going forward, we 

must review how we regulate insurance in this country and carefully work to modernize the regulatory structure as appropriate. 

Unlike other sectors in the financial system, such as banking and 

securities, insurance is primarily regulated at the State level. The 

State-based system has been in place, as most in this room know 

today, since the 19th century and has been a source of innovation 

and consumer protection alike. 

However, in recent decades, the insurance industry has become 

increasingly national—in fact, international, and some insurance 

companies have engaged in very complex and sophisticated transactions made possible by modern advance in financial engineering. 

In response, many have observed that the regulation of insurance 

needs to be modernized accordingly. Various approaches have been 

proposed, and I would hope this hearing this morning will provide 

an opportunity to better understand and evaluate those approaches 

and produce a record upon which to determine future Committee 

action as we move forward in the modernization of financial regulations. 

Given the importance of insurance to our financial system and 

our economy, this Committee has held hearings in the last Congress to examine the state of the insurance industry and the regulatory framework in which it operates. Insurance regulation has 

also been the subject of hearings of this Committee in previous 

Congresses, and I commend Senator Shelby for his attention to this 

important issue in the past as Committee Chairman. 

I also want to take this opportunity to acknowledge the hard 

work of Senator Tim Johnson, who sits in this chair next to me, 

who has been a leader in efforts to modernize the regulation of insurance, and we appreciate his efforts. 

And, finally, I want to thank the witnesses who are here this 

morning. I look forward to hearing from you. I thank them for their 

time, their interest in the subject matter, and their suggestions on 

how we ought to proceed as we evaluate these very difficult set of 

questions that must be a part of our efforts to modernize the financial regulatory system. 

With that, let me turn to Senator Shelby. 

4 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. 

Today, the Committee will once again consider insurance regulatory reform. The structure of our insurance regulatory system, as 

Senator Dodd has reminded us, dates back to the 19th century, a 

time when few insurance companies operated in one State, let 

alone globally. 

Even before the start of the present financial crisis, there were 

legitimate questions about whether our insurance regulatory system was adequate for the 21st century. Recent events—most prominently, the stunning collapse of insurance giant AIG—have only 

further demonstrated the pressing need for a review of our insurance regulatory structure. 

Two weeks ago, this Committee held a hearing on AIG which revealed the problems with the company’s State-regulated insurance 

entities and the role they played in the company’s collapse. AIG’s 

insurance subsidiaries suffered more than $20 billion in losses from 

their securities lending operations and had to be recapitalized with 

a loan from the Federal Reserve. In addition, this past weekend, 

AIG disclosed that more than $40 billion of the $170 billion in Federal aid was used to pay off counterparties to its securities lending 

operation. 

The circumstances that permitted AIG’s securities lending operation to potentially threaten the solvency of several of its insurance 

companies and their counterparties suggests that our regulatory 

system has not been keeping up with developments in the market. 

For example, it appears that AIG sought to conduct its securities 

lending operations on a nationwide basis by pooling the resources 

of approximately a dozen separate insurance companies regulated 

by five different States. Because insurance is still regulated at the 

State level, it is unclear whether any single State insurance regulator was responsible for overseeing AIG’s entire securities lending 

operation. This, of course, raises some serious questions about the 

adequacy of State supervision. 

Given the importance of insurers in our markets and overall 

economy, I believe we should at least consider whether additional 

Federal oversight is needed. If insurers are managing risk on a national basis, it may make sense to consider regulating them on a 

national basis as well. 

We also need to examine whether the existing insolvency regime 

can handle the failure of a large insurer. If insolvency needs to be 

managed at the national level, then once again a Federal insurance 

regulator may be our only option. 

Finally, the collapse of AIG has also raised the question of 

whether the U.S. needs a Federal systemic risk regulator. Attempting to regulate insurers for systemic risk, however, presents now 

many difficult challenges. For example, it would likely involve the 

complex task of ascertaining if and to what extent Federal regulation would preempt State insurance regulation. On the other hand, 

if we establish a systemic risk regulator and leave insurance regulation to the States, what opportunities for regulatory arbitrage 

would we create? And would it actually undermine a systemic risk 

regulator? 

5 

Given the complexity of insurance regulation, the Committee, I 

believe, needs to understand all of the promises and pitfalls of the 

various approaches to regulatory reform before it can begin to craft 

its own solution. While we cannot hope to cover the full range of 

issues in one hearing, we can make a good start today, Mr. Chairman, and thank you for scheduling this hearing. 

Chairman DODD. Thank you, Senator Shelby. A very good statement as well. 

Let me turn to Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Thank you for your 

leadership on these key issues associated with modernizing our 

regulatory system. Quite understandably, the American people 

want to know if the insurance industry is well run and well regulated. Families pay insurance premiums year in and year out so 

that when a crisis hits, they will be protected. That is how much 

of the industry has operated and how it continues to operate. 

Columbus, Ohio, in my State is the second largest insurance hub 

in the country. Ohio has scores of insurance companies that have 

faithfully and prudently invested the premiums of their policyholders. But over the past few decades, the best and the brightest 

minds on Wall Street have, in a word, belittled this business model 

as behind the times. At AIG, it was not enough to insure lives or 

property or health. A largely unregulated corner of the company 

decided it would make enormous bets on exotic financial arrangements, providing insurance where there were no actuarial tables, 

almost no actual experience, and no Government regulation and no 

oversight. 

You would think that such a colossal miscalculation would lead 

to contrition. In the world of Wall Street, you would be wrong. 

Americans have a hard time understanding why we need to spend 

hundreds of billions of dollars to prop up large financial institutions in the first place. Paying out hundreds of millions of dollars 

of bonuses to the employees of a company that is essentially insolvent smacks of greed, arrogance, and worse. 

The Federal Government—that is, taxpayers—has invested $173 

billion in AIG because its collapse would signal disaster for everyday Americans and the global financial system as a whole. We 

know it is that serious. But we should not be financing one dime 

of bonuses for AIG employees, for executives whose actions took the 

form of reckless endangerment, and we need to know was AIG so 

arrogant that they used taxpayer dollars, tens of billions of dollars, 

to pass through to their customers, rewarding those bad business 

decisions of both their customers and themselves—Societe 

Generale, Deutsche Bank, Barclays, Goldman Sachs. The list is 

pretty long. 

We need tough insurance regulations that promote common 

sense and prevent Wall Street from building castles in the sand at 

Main Street’s expense. We need to fix the regulatory system that 

created the AIG monster and let a bubble grow so large that when 

it burst, it took our Nation’s economic and the world’s economic 

stability with it. 

6 

We can design that system if we focus on doing what is best for 

the American people and the U.S. economy in the long run. That 

means solid safeguards to prevent another financial meltdown in a 

regulatory environment defined by zero tolerance for snake oil 

salesmen. 

With common-sense rules, we can allow honest brokers literally 

and figuratively to earn an honest living, and we can allow policyholders to have confidence that the policy they bought will be there 

when they need it. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very much. 

Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. This is 

one of those interesting hearings where I find myself in complete 

agreement so far with every one of my colleagues. I will not try to 

repeat everything, but I do want to say that as we approach this 

hearing, clearly in the context of regulatory reform, many of us are 

looking far beyond simply the insurance industry but to the entire 

financial system that we have in our country. And one of the obvious questions is whether we need to create a very broadly empowered systemic risk regulator. 

If we do need to create such a systemic risk regulator, would that 

regulator have authority over insurance for systemic risk regulation? If we do have that kind of insurance-covered systemic risk 

regulator with broad powers, how does that regulator coordinate 

with the functional or solvency regulator? And if that regulator is 

not just a single additional Federal regulator, how do we coordinate 

with the 50 States and deal with the kinds of issues that both our 

Chairman and Ranking Member have raised today? 

Those kinds of questions are important for us to answer as we 

move forward in the larger context of what our broad regulatory 

system will be for our financial institutions in this Nation, and I 

look forward to guidance from our witnesses on that today. 

I just want to mention one other item very quickly. I note that 

at least one of our witnesses has raised the possibility that it is not 

likely that there is any single insurer that is too big to fail. Obviously, we thought that AIG was too big to fail, and there are now 

analysts who are starting to question this notion of too big to fail, 

whether it be in the insurance industry or in other parts of our financial system. 

I am interested in that notion. If there are institutions that are 

too big to fail, how do we identify that? How do we define the circumstance where a single company is so systemically significant to 

the rest of our financial circumstances and our economy that we 

must not allow it to fail? And what does ‘‘fail’’ mean? Often, we are, 

in the context of AIG, now talking about whether we should have 

allowed an orderly Chapter 11 bankruptcy proceeding to proceed? 

Is that failure? And is that consequence something that we cannot 

work into our system of dealing with systemic risk and the larger 

questions of how the Federal Government will approach large multinational and systemically significant companies? 

7 

I know that this raises a lot of almost ethereal questions that are 

going to be very difficult for us to answer, but the fact is that 

Americans are increasingly asking themselves why. Why are we 

going down these paths? 

When we first started putting resources into AIG, after the first 

tranche was put in, it was very commonly said by many to us here 

in Congress that, ‘‘Well, this is not just an expenditure of taxpayer 

dollars that are going to be lost. In fact, as we unwind AIG and 

as we liquidate its assets, the taxpayers are going to make a profit.’’ Anybody here hear that? That was the first tranche. 

Now we have gone through number 2, number 3, and number 4. 

Nobody is saying that anymore. And the question that I have is: 

As we move into this, we need to have a better idea of what this 

notion of too big to fail is, what it means in different aspects of our 

industry, and what our proper response to it should be. Should we 

regulate in such a way that we do not get into situations like that? 

Or should we have a regulatory system that contemplates circumstances where we face companies that are too big to fail and 

somehow puts together a rational approach to prop them up, or as 

some say, nationalize them? 

Now, I am very concerned by the implications of this entire question, and I realize we are not going to answer the question in today’s hearing entirely. But I would be interested in the observations of our witnesses on this issue. 

Thank you very much, Mr. Chairman. 

Chairman DODD. Thank you, Senator Crapo. 

Senator Merkley. 

STATEMENT OF SENATOR JEFF MERKLEY 

Senator MERKLEY. Thank you very much, Mr. Chairman, for convening this hearing. The task of modernizing the insurance regulatory system is absolutely essential. Over the past 2 years, the 

American people have been outraged to discover the existence of a 

$50 trillion insurance industry that was entirely unregulated; outraged that this industry could avoid regulation by the New York 

insurance regulators by using the term ‘‘credit default swaps’’ rather than ‘‘credit default insurance’’; outraged that firms within this 

industry went regulator shopping to avoid effective oversight; outraged that the activities of these firms created an asset bubble, the 

collapse of which has left millions of Americans out of work and 

millions more with their life savings obliterated; and absolutely enraged that the very same industry that did all these things is richly rewarding its employees with perks and bonuses funded with 

taxpayer funds. The situation is offensive to me; it is offensive to 

the American people. 

Mr. Chairman, we have a duty and obligation to fix our insurance regulatory system, to address regulatory arbitrage, to address 

systemic risk, to make sure that this situation does not ever arise 

again. 

Thank you. 

Chairman DODD. Thank you very much. 

Senator Corker. 

8 

Senator CORKER. As is my custom, I will wait until the witnesses—out of respect for you, I will wait until you testify. I do look 

forward to that. 

Chairman DODD. Senator Tester. 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. Thank you, Mr. Chairman. Thank you, Ranking 

Member Shelby. 

Before we get into the modernization of our insurance regulatory 

system, I do want to just say a couple things about AIG, specifically about what has transpired over the weekend on the $165 million bonuses. 

It was about 6 months ago that Secretary Paulson came into this 

Committee and said that we need some significant money invested 

in the financial system; otherwise, we will experience a financial 

meltdown. There were a lot of very, very difficult decisions that 

were made over the next few days that many people lost sleep over. 

A lot of taxpayer dollars were doled out. And there was a lot of discussion about additional compensation, particularly bonuses, to 

companies who were led down the wrong path, who were on the 

verge of going bankrupt. 

And now, once again, this weekend we hear of a company—AIG in particular—who has received $173 billion in taxpayer money 

doling out some $165 million in bonuses to their employees because 

supposedly it was the contract. Well, the fact is what would those 

contracts have been if the taxpayers would not have bailed them 

out. That company would have been broke. Those people would be 

part of the 600,000 unemployed that occur in this country a month, 

every month, and they would be on the street. So what do the taxpayers get for thanks for throwing $173 billion 

into a company like AIG? Continued bonuses, the same old way of 

doing business. And what do we hear? We hear, ‘‘Well, these bonuses have to be given out because this is our professional workforce.’’ 

I can tell you that this is incredibly unacceptable, and the fact 

is that these companies going broke, companies like AIG, it makes 

perfect sense to me now. If anybody did business like these folks 

do business, they would be in the same boat. And all I have to say, 

before I get into my brief statement, is that if this is the way Wall 

Street and AIG and all the others continue to do business, we cannot help with any amount of money we put forth to them. This is 

ridiculous. 

And, hopefully—hopefully—we will find some way—I do not care. 

Litigate it in court. This just is not right to be occurring. It is not 

right to be occurring because this company would be out of business, and those people would be on the street. And they need to 

understand that the only reason that they even have a job is because of the taxpayers and their ability to put forth money to this. 

Thank you, Mr. Chairman. I just want to say a few things about 

the modernization. 

I believe that you have put together a great panel of witnesses 

today to help provide perspective on this issue that we are about 

to confront, and that is regulatory reform in the financial sector, 

particularly insurance. And while I believe there is a need to act 

9 

quickly to instill consumer confidence through the regulatory modernization, I believe we also need to be cautious. We do not want 

to overregulate, but we want to do it in a targeted, effective manner. And I feel that insurance regulation may be viewed by some 

as a candidate for wholesale regulatory overhaul where more deliberative measures would be more effective. 

However, I am interested in the spectrum of ideas. I truly do 

look forward to hearing from the witnesses so we can come up with 

some common-sense solutions for regulation in the marketplace. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Tester. And, 

again, we thank our witnesses for being with us this morning. 

I think you have heard as well here from all of us on the AIG 

matter, and one way or another, we are going to try and figure out 

how we are going to get these resources back. 

I would note as well, though, at the same time they were announcing the bonuses, there was a second story, and the second 

story was—my colleagues will recall at this hearing where we 

asked who the counterparties were 2 weeks ago, and there was reluctance, of course, to share with the Committee who the counterparties were, and for obvious—I understand why there was reluctance. But in that story we are discovering that there were companies that were getting as much as $12 billion, dwarfs the $165 million in a sense. And so that story ended up being sort of a secondary story because bonuses obviously attract more attention. But 

I would point out to my colleagues that the counterparty story is 

a much bigger story in many ways. Because the question I asked, 

I think at the outset of the hearing is: Who did we bail out? Who 

in a sense was rescued? And we are now discovering that they were 

companies, including foreign operations, that were receiving billions of dollars at 100 percent value. 

So while we can get angry about, and should, over the bonus 

issue, there is a secondary story that seems to be playing a second 

level that ought to be a source of far more aggressive action on our 

part to determine how that happened, why 100 percent value, why 

the collateral that was left in their hands. There are many other 

questions in addition to the bonus issue that we need to address. 

But I am confident we can come up with—at least we should be 

able to try to come up with an answer on how to get back the 

bonus issue. 

Senator SHELBY. Mr. Chairman, along those lines, if I can just 

make a brief comment. I hope that you as Chairman of the Committee will bring up the Inspector General of TARP, Mr. Barofsky, 

again, as he is doing his work, because I believe the American people want transparency and accountability on where all this TARP 

money went, including AIG, a lot of the money to the auto companies, who is benefiting from it, and so forth. And we just got a little 

of it, and we have had to extract that piece by piece. And I want 

to commend you, Mr. Chairman, for pursuing this. 

I think everybody on this Committee wants to know where this 

money went, who benefited, where it is. We have gotten a little, 

but there is a lot more to come. 

10 

Chairman DODD. That is a good suggestion, Senator, and we will 

follow up with that. Let me welcome our panel here and move on 

to the subject matter in front of us today. 

Michael McRaith is the Director of Insurance for the State of Illinois, and he is testifying on behalf of the National Association of 

Insurance Commissioners, and we thank you very much for being 

with us. 

Second is Frank Keating, who is President and CEO of the 

American Council of Life Insurers, a position that Mr. Keating has 

assumed since 2003, following his service as the Governor of Oklahoma. We thank you very much, Frank, for joining us. 

I mentioned during my remarks Bill Berkley, Chairman and 

CEO of the W.R. Berkley Corporation, and since founding the company in 1967, he has managed its growth into a Fortune 500 property/casualty insurance company headquartered in my State of 

Connecticut. He serves, as well, as Vice Chairman of the Board of 

Trustees of the University of Connecticut. We thank you, Bill, for 

joining us. 

Spencer Houldin is the President of Ericson Insurance Advisers, 

which is headquartered in Washington Depot, Connecticut. We 

thank you for joining us. Mr. Houldin is testifying on behalf of the 

Independent Insurance Agents and Brokers of America, where he 

has served as Chairman of the Government Affairs Committee 

since 2008. 

John Hill is President and Chief Operating Officer of Magna 

Carta Companies, a commercial lines insurance headquartered in 

New York City, and we thank you, Mr. Hill, for being with us. 

Frank Nutter is the President of the Reinsurance Association of 

America, a position he has held since 1991. And, Frank, we thank 

you for being with us. 

Robert Hunter serves as the Director of Insurance for the Consumer Federation of America. I had the pleasure of addressing the 

Consumer Federation of America last week, and, once again, always important to have you at the table when matters like this are 

being discussed. So we thank you for joining us. 

We will begin with you, Mr. McRaith. We are going to try and 

limit you because we have a large panel. Try and keep your remarks to 5 minutes. I will not bang down the gavel, but if I am 

raising it, it means you should wrap it up. 

STATEMENT OF MICHAEL T. MCRAITH, DIRECTOR, ILLINOIS 

DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

INSURANCE COMMISSIONERS 

Mr. MCRAITH. Chairman Dodd, Ranking Member Shelby, members of the Committee, thank you for inviting me to testify. I am 

Michael McRaith, Director of Insurance for the State of Illinois, 

and I speak today on behalf of the National Association of Insurance Commissioners. 

The insurance industry, even in these difficult times, has withstood the collapses that echo through the other financial sectors. 

Today, we may not agree on everything, but we likely do agree 

that insurance regulation must not only serve the industry, but 

most also prioritize U.S. consumers. Consumer protection has been, 

11 

is, and will remain priority one for State regulators. We supervise 

36 percent of the world’s insurance market. Our States include four 

of the top ten, 28 of the top 50 world markets, and alone we surpass two, three, and four combined. With the world’s most competitive market, we, your States, are the gold standard for regulation 

in developing countries. 

Some in the industry take the opportunity of our crisis to clamor 

for the so-called option Federal charter or deregulation. Respectfully, this decade-old rhetoric does not warrant the important time 

of this Committee. 

To be sure, as with any dynamic industry, insurance regulation 

must modernize, and it does. We have worked with producers to 

improve national licensing uniformity and reciprocity. Working 

with producers, we commented in support of a proposal to improve 

how States deal with surplus lines. State regulators adopted a comprehensive reinsurance reform proposal and are presently developing implementation details. The Interstate Compact, a single 

portal for approval of annuity and life products, has been adopted 

by 34 jurisdictions. 

The NAIC maintains the world’s largest insurance financial data 

base, a consumer information resource, licensing for more than 4 

million producers, and other subject matter data. We want to ensure that this information serves Congress and the Federal executive branch. 

The NAIC is active internationally, collaborates regularly with 

our counterparts overseas, serves as technical adviser to the USTR, 

works with the OECD, the Joint Forum, and others. But accepting 

the limits of Article I, Section 10 of the Constitution, we acknowledge the need for a coordinator of Federal policy on international 

insurance matters. For these reasons, we work constructively to 

narrow aspects of preemption and supported creation of the Office 

of Insurance Information. 

With respect to Solvency II, the mythology of this EU directive 

far exceeds its factual merits. Details of the plan remain in dispute 

and incomplete, and agreement among the EU nations is a wilting 

aspiration. 

State regulators do support systemic risk regulation based on the 

principle of integration, but not displacement of functional regulators. State-based insurance regulation and national or international systemic regulation are inherently compatible. Information sharing and confidentiality protocols can be established, and 

coordination among financial regulators can be formalized. 

State regulators know that effective regulation coincides with 

corporate governance and comprehensive risk management, and 

supervisory colleges can require both. Preemption of any functional 

regulator should occur only with material risk to the solvency of 

the enterprise, the demise of which would threaten systemic stability. 

We must be ever vigilant, though, not to preempt the State-based 

consumer protections and solvency standards that serve our public 

so well. While conversation most often centers on industry concerns, in 2008 State regulators replied to over 3 million consumer 

inquiries and complaints. Like you, we know that a single mother 

in a car wreck racing between jobs needs local and prompt assistVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
12 

ance. And we know that an elderly gentleman on a fixed income 

sold an indexed annuity cannot wend his way through a Federal 

bureaucratic morass. 

After every incident, our consumers, your constituents, need to 

know that the company that collected their premiums, often for 

years, has the wherewithal to pay the claim. 

To conclude, we support systemic regulation, pledge our goodfaith interaction, and renew our commitment to engage constructively with this Committee. 

Thank you for your attention, and I look forward to your questions. 

Chairman DODD. That was right on 5 minutes to the second. 

Very good, Mr. McRaith. 

Mr. Keating? 

STATEMENT OF FRANK KEATING, PRESIDENT AND CEO, THE 

AMERICAN COUNCIL OF LIFE INSURERS 

Mr. KEATING. Mr. Chairman, Senator Shelby, Members of the 

Committee, thank you for giving me this opportunity to speak to 

the subject of regulatory modernization. 

The ACLI is the principal trade association for U.S. life insurance companies, and its 340 member companies represent 93 percent of life insurance business and 94 percent of the annuity business in the United States. 

There are three points I would like to emphasize to the Committee this morning. The first is that the life insurance business 

is systemically significant, not only in terms of the protection and 

retirement security it provides to millions of Americans, but also in 

terms of the role it plays in capital formation in our economy. Decisions and initiatives addressing regulatory reform and economic recovery of the financial sector must reflect that fact. 

The second point is that, absent a Federal insurance regulator, 

the ability of Congress to fully and effectively implement whatever 

national financial regulatory policy you establish will be problematic, at best, with respect to insurance. 

And third, as Congress and the administration address the deepening crisis in the financial sector, decisions are being made that 

have a profound effect on the life insurance business. Unfortunately, Mr. Chairman, those decisions are being made without any 

real understanding of how our business operates and without any 

significant input from our regulators. 

Financial regulatory reform is focused at the moment on systemic risk, as we agree it should be. But if reform initiatives do not 

encompass all those segments of financial services that are systemically significant, there will almost certainly be gaps in systemic 

risk regulation. With our financial markets as interlinked as they 

are today, gaps relative to any one sector present an unacceptably 

high likelihood of widespread problems down the road. 

My written statement details the facts demonstrating that life insurance is by any measure a systemically significant component of 

U.S. financial services. Let me touch, though, on a few highlights. 

First, life insurance products provide financial protection for 

some 70 percent of U.S. households. There is over $20 trillion in 

life insurance in force, and our companies hold $2.6 trillion in anVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
13 

nuity reserves. Annually, we pay out almost $60 billion in life insurance benefits, over $70 billion in annuity benefits, and more 

than $7 billion in long-term care insurance benefits. 

We are the backbone of the employee benefits system. More than 

60 percent of all workers in the private sector have employer-sponsored life insurance, and our companies hold over 22 percent of all 

private employer-provided assets. Life insurers are the single largest source of corporate bond financing and hold approximately 18 

percent of total U.S. corporate bonds. 

The last thing this Congress or this administration wants is for 

any one of those critical roles that life insurers play to be jeopardized. Placing the highest priority on measures designed to stabilize 

the payment system is appropriate, but doing so while ignoring 

other systemically significant segments of financial services or 

doing so at the expense of those other segments is not. 

My second point is on policy implementation. Whatever legislation Congress ultimately enacts will reflect your decisions on a 

comprehensive approach to financial regulation. Your policy should 

govern all systemically significant sectors of the financial services 

industry and should apply to all sectors on a uniform basis without 

any gaps that could lead to systemic problems. 

Without a Federal insurance regulator, on an optional basis, and 

without direct jurisdiction over insurance companies, and given 

clear constitutional limitations on the ability of the Federal Government to mandate actions by State insurance regulators, how 

will national regulatory policy be implemented with respect to the 

life insurance industry? 

The situation would appear to be very much analogous to privacy 

under Gramm-Leach-Bliley. Federal bank and securities regulators 

implemented that policy for banking and securities firms, but Congress could not compel insurers to subscribe to the same policies 

and practices on privacy. You could only hope that 50-plus State 

regulators would individually and uniformly decide to follow suit. 

Hope may have been an acceptable tool for implementing privacy 

policy, but it should not be the model for reform of U.S. financial 

regulation. The stakes are simply too high. 

My last point deals with the fact that critical decisions are being 

made in Washington affecting our business, but they are being 

made without any significant import or involvement on the part of 

our regulators. Some examples include the handling of Washington 

Mutual, which resulted in life insurers experiencing substantial 

portfolio losses, the suspension of dividends on the preferred stock 

of Fannie and Freddie, which again significantly damaged our portfolios and directly contributed to the failure of two life companies. 

The badly mistaken belief by some that mark-to-market accounting has no adverse implications for life insurance companies and 

more recently the cramdown provisions in the proposed bankruptcy 

legislation that would result, certainly could result in the unwarranted downgrades to life insurers’ AAA-rated residential mortgage-backed securities investments. 

Those actions were all well intended, but in each instance, they 

occurred with little or no understanding of their effects on life insurance companies. And in each instance, the only voice in Washington raising concern was that of life insurers and their agents. 

14 

Acting without input from an industry’s regulators runs a high risk 

of unintended adverse consequences. And by ‘‘input,’’ I mean day 

in, day out, week in, week out. Insurance is the only segment of 

the financial services industry that finds itself in this unacceptable 

situation, and that must be changed. 

Let me conclude by reiterating that reforming U.S. financial regulation and stabilizing the financial markets must take into account all segments of the financial services industry, including life 

insurers. We urge Congress to recognize the systemic importance 

of our business to the economy and to the retirement and financial 

security of millions of Americans and to tailor reform and stabilization initiatives accordingly. 

We pledge to work closely with this Committee to help craft the 

best possible system for overseeing all segments of our financial 

markets. 

Thanks again, Mr. Chairman and members, for giving us this opportunity to comment on these extraordinarily important matters. 

Chairman DODD. Thank you very much. 

Mr. Berkley. 

STATEMENT OF WILLIAM R. BERKLEY, CHAIRMAN AND CEO, 

W.R. BERKLEY CORPORATION, ON BEHALF OF THE AMERICAN INSURANCE ASSOCIATION 

Mr. BERKLEY. Thank you, Chairman Dodd, Ranking Member 

Shelby, and members of the Committee. I am testifying today not 

just as CEO of W.R. Berkley Corporation, but as Chairman of the 

Board of the American Insurance Association. 

I believe that I bring a unique and broad perspective to this discussion. I have been involved in the insurance business as an investor or manager for over 40 years. I am a leading shareholder of 

insurance and reinsurance companies, and I am also a majority 

shareholder of a nationally chartered community bank. I have witnessed the ebbs and flows of business cycles during that time, with 

the only constants being the existence of risk and the need to manage it. It is that challenge that brings us here today—the imperative of examining, understanding, and measuring risk on an individual and systemic level—and retooling the financial regulatory 

structure to be responsive to that risk. With that context in mind, 

I would like to focus my remarks today on three major themes. 

First, property/casualty insurance is critical to our economy, but 

it does not pose the same types of systemic risk challenges as most 

other financial services sectors. 

Second, because property/casualty insurance is so essential and 

is especially critical in times of crisis and catastrophe, Federal insurance regulation will enhance the industry’s effectiveness, provide for greater consumer protection, and should be included as 

part of any well-constructed Federal program to analyze, manage, 

and minimize systemic risk to our economy. 

Third, given the national and global nature of risk assumed by 

property and casualty insurers, establishment of a Federal insurance regulator is the only effective way of including property/casualty insurance in such a program. 

Property/casualty insurance is essential to the overall well-being 

of the U.S. economy. We purchase close to $270 billion in State and 

15 

municipal bonds, pay almost $250 billion annually in claims, and, 

importantly, employ over 1.5 million hard-working Americans. 

Property/casualty insurance protects individuals and businesses 

against unforeseen risks and enables them to meet their financial 

responsibilities. Insurance allows all businesses to function effectively, Main Street and large businesses alike. 

Property/casualty insurance remains financially strong through 

this current crisis. There are several reasons for that, but importantly, property/casualty insurance operations are generally low-leveraged businesses, with low asset-to-capital ratios. They are more 

conservative investment portfolios and more predictable cash-flows 

that are tied to insurance claims rather than on-demand access to 

assets. 

Yet, despite the industry’s strong financial condition during this 

crisis, there are compelling reasons to establish Federal regulation 

for property/casualty insurance in any regulatory overhaul plans. 

The industry could always face huge, unforeseen, multi-billion-dollar loss events such as another natural disaster or terrorist attack. 

It makes little sense to look at national insurance regulation after 

the event has already occurred, but a lot of sense to put such a 

structure in place before the crisis to help avoid the consequences 

or mitigate those consequences that are unforeseen. However this 

Committee resolves the debate on Federal financial regulatory 

modernization, the only effective way to include property/casualty 

insurance would be to create an independent Federal regulator that 

stands as an equal to the other Federal banking and securities regulators. 

I continue to believe this, with all due respect to the State insurance regulatory community. The State-based insurance regulatory 

structure is fragmented and frequently not well equipped to close 

the regulatory gaps that the current crisis has exposed. Each State 

only has jurisdiction to address those companies under its regulatory control. Even where the States have identical laws, the regulatory outcomes may still be inconsistent because of diverse political environments and regulatory interests. If this crisis has revealed anything, it is the need for regulatory efficiency, coordinated 

regulatory activity and sophisticated market analysis, and the ability to anticipate and deal with potential systemic risk. 

In addition, virtually all foreign countries have national regulators who recognize that industry supervision goes well beyond 

solvency. Effective contemporary regulation also must examine erratic market behavior by companies in competitive markets to ensure that those markets continue to function properly and do not 

either encourage other competitors to follow the lead of irrational 

actors or impede the competitive ability of well-managed enterprises. 

The reality is that no one State can effectively deal with megaevents or cross-border issues that impact multiple States, and no 

State can handle a global crisis. The American Association and its 

members have supported the National Insurance Act sponsored by 

Senator Johnson in the last Congress as the right vehicle for 

smarter, more effective insurance regulation. 

16 

Yet we recognize that even the best legislative vehicle must be 

updated to be responsive to the evolving economic climate and to 

enhance strong consumer protections. 

Let me close by thanking the Committee again for opening the 

dialog on this critical issue. The time is ripe for thoughtful, measured, but decisive action. We stand ready to work with you on a 

regulatory system that restores confidence in our financial system. 

Thank you. 

Chairman DODD. Thank you very much, Mr. Berkley. 

Mr. Houldin. 

STATEMENT OF SPENCER M. HOULDIN, PRESIDENT, ERICSON 

INSURANCE SERVICES, ON BEHALF OF THE INDEPENDENT 

INSURANCE AGENTS AND BROKERS OF AMERICA 

Mr. HOULDIN. Good morning Chairman Dodd, Ranking Member 

Shelby, members of the Committee. My name is Spencer Houldin, 

and I am pleased to be here on behalf of the Independent Insurance Agents and Brokers of America. Thank you for the opportunity to provide our association’s perspective on insurance regulatory modernization. 

The insurance arena is not immune from the effects of the current crisis, but I am happy to report that my business and much 

of the insurance marketplace remains healthy and stable. While 

the insurance business would benefit from greater efficiency and 

uniformity, we should be extremely cautious in the consideration of 

wholesale changes that could have a disruptive effect. We also believe that it is critically important to keep in mind how potential 

regulatory changes could impact small businesses. 

Few have been left unscathed by the recent economic crisis, and 

like most Americans, the property and casualty market has suffered investment losses due to the stock market decline. But the 

property and casualty insurance market is stable and continues to 

serve consumers well. There has not been one property/casualty insurer insolvency in the past year, and not one property/casualty insurer has sought access to TARP funds. 

If there is one thing to take from my testimony today, it is that 

the property and casualty insurance market continues to operate 

very well without the need for the Federal Government to provide 

any type of support. 

Some groups have pointed to the failure of AIG to drive their deregulation agenda, such as through an optional Federal charter. 

AIG is a unique institution in the financial services world and its 

holding company has a Federal regulator—the OTS. AIG is not Exhibit A for day-to-day Federal regulation, especially an OFC. 

Most observers agree that State regulation works effectively to 

protect consumers. State officials continue to be best positioned to 

be responsive to the needs of the local marketplace and local consumers. 

Additionally, it should not be overlooked that the State system 

has an inherent consumer protection advantage in that there are 

multiple regulators overseeing an entity and its products, allowing 

others to notice and rectify potential regulatory mistakes or gaps. 

Providing one regulator with all of these responsibilities could lead 

17 

to more substantial problems where errors of that one regulator 

lead to extensive problems throughout the entire market. 

This crisis also has provoked a discussion of risks to the entire 

financial services system as a whole. While a clear definition of 

‘‘systemic risk’’ has yet to be agreed upon, we believe the crisis has 

demonstrated a need to have special scrutiny of the limited group 

of unique entities that engage in services or provide products that 

could pose systemic risk to the overall financial services market. 

Federal action, therefore, is likely necessary to determine and supervise such systemic risk concerns. 

While State regulation continues to protect consumers and provide market stability, we have long promoted the use of targeted 

measures by Congress to help reform the State system in limited 

areas. By using limited, as-needed Federal legislation, we can improve rather than dismantle the current State-based system. 

For example, to rectify the problem of redundant and costly licensing requirements, we strongly support targeted legislation that 

would immediately create a National Association of Registered 

Agents & Brokers, known as NARAB, to streamline nonresident insurance agent licensing. Given the economic crisis in which we find 

ourselves today, it is somewhat surprising that we have to address 

the issue of an optional Federal charter. We oppose OFC because 

we believe it would worsen the current financial crisis as its theory 

of regulatory arbitrage has been cited as one of the key reasons 

why we find ourselves in the current situation. President Barack 

Obama and Treasury Secretary Geithner have both made comments that we should not allow regulated entities to cherry-pick 

from competing regulators. Does anyone really think that allowing 

AIG to choose where it was regulated would have solved their problems? 

Creating an industry-friendly optional regulator also is at odds 

with one of the primary goals of insurance regulation, which is consumer protection. OFC legislation deregulates several areas currently regulated at the State level, flying in the face of the nearly 

universal call today for stronger and more effective regulation of 

the financial services industry. 

As I previously mentioned today—and it bears repeating one last 

time—we believe that with the exception of a properly crafted systemic risk overseer, targeted modernization is the prudent course 

of action for reform of day-to-day insurance regulation. 

IIABA again appreciates the opportunity to testify, and we remain committed to continuing to work to improve State insurance 

regulation for both the consumers and market participants. 

Chairman DODD. Thank you, Mr. Houldin. 

Mr. Hill, welcome to the Committee. 

STATEMENT OF JOHN T. HILL, PRESIDENT AND CHIEF OPERATING OFFICER, MAGNA CARTA COMPANIES, ON BEHALF OF 

THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Mr. HILL. Thank you, Chairman Dodd. 

Good morning, Chairman Dodd, Ranking Member Shelby, and 

members of the Committee. My name is John Hill, and I am President and COO of Magna Carta Companies. As someone who grew 

18 

up in modest circumstances in rural New Jersey, it is truly an 

honor to testify before you on these important issues at this point 

in our Nation’s history. 

Magna Carta was founded in New York in 1925 as a mutual insurance carrier for the taxicab industry. Today we employ 240 individuals and write in 22 States. We very much remain a small mutual insurer with $170 million in direct written premiums. 

I am here today on behalf of the National Association of Mutual 

Insurance Companies to present our views on insurance regulation. 

NAMIC represents more than 1,400 property and casualty insurance companies ranging from small farm mutual companies to 

State and regional insurance carriers to large national writers. 

NAMIC members serve the insurance needs of millions of consumers and businesses in every town and city across America. 

I also have the privilege of serving as Chairman of NAMIC’s Financial Services Task Force, which was created specifically to develop NAMIC’s policy response to the financial services crisis. Our 

Nation faces an unprecedented financial crisis, and we commend 

the Committee for holding this hearing to explore the role of insurance regulation. 

To begin, it is important to understand the distinction between 

the property and casualty insurance industry and other financial 

services, including life insurance. For one, property/casualty insurers maintain a significantly higher ratio of capital to assets than 

do life insurers and other financial institutions. This means that 

property and casualty insurers are less affected by investment risk. 

Today, as other financial services companies are failing and seeking Government assistance, property and casualty insurers continue to be well capitalized and neither seek nor require Federal 

funding. 

We support a reformed system of State regulation. Property and 

casualty risks are inherently local in nature, and insurance contracts are dependent on State tort and contract law. The industry 

is competitive, solvent, and generally well regulated. 

The hallmarks of insurance regulation are solvency oversight and 

consumer protection. State regulators resolve literally millions of 

consumer inquiries each year. They also actively supervise all aspects of the business of insurance by establishing and enforcing 

strict solvency and investment standards and limiting unrelated 

activities of insurance affiliates. Moreover, in the rare event of an 

insurer insolvency, the State guarantee system provides another 

layer of protection for consumers. 

In 2008, 25 banks failed and an additional 17 have failed already 

this year, demonstrating a weakness in Federal banking solvency 

regulation. Now, contrast that with the property and casualty insurance industry which has had an excellent solvency record in 

2008 in spite of a large drop in investment income and Hurricane 

Ike, the fourth most expensive hurricane in U.S. history. The 

State-based insurance regulatory system has, in fact, proven to be 

one of the few bright spots in our Nation’s regulatory structure. 

We are painfully aware of the extraordinary measures that the 

Federal Government has been forced to take to prevent the collapse 

of AIG. Although it has been described as the insurance giant, AIG 

is, in fact, a financial conglomerate that is not typical of the insurVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
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ance industry as a whole. The extraordinary problems experienced 

by AIG were largely caused by its non-insurance Financial Products unit. AIG’s failure does not provide justification to supplant 

State-based insurance regulation. 

The current crisis demands that Congress act, but Congress must 

act prudently and responsibly, focusing limited resources on the 

most critical issues. We encourage Congress to adopt a measured 

approach to the problems at hand and avoid the inclination to rush 

to wholesale reform. 

As policymakers work to develop long-term solutions to our 

present financial crisis, NAMIC urges Congress to keep in mind 

the dramatic differences between Main Street organizations, continuing to meet the needs of their local markets and those institutions that caused this crisis and have either gone out of business 

or required unprecedented Government financial intervention. 

We recommend the following reforms to strengthen our Nation’s 

financial regulatory system: 

One, address systemic risk by focusing on financial products that 

pose a risk to the entire financial system rather than particular institutions. 

Two, establish an Office of Insurance Information to inform Federal decisionmaking on insurance issues and facilitate international 

agreements. 

And, three, expand the President’s Financial Working Group to 

include State regulators. 

We believe such reforms are measured, appropriate, and timely 

responses to the present crisis. As the process moves forward, we 

stand ready to work with the Committee to address the current 

problems and regulatory gaps while keeping in mind the legitimate 

interests of Main Street businesses and consumers. 

Again, we thank you for the opportunity to speak here today. 

Chairman DODD. Thank you very much, Mr. Hill. 

Mr. Nutter, thank you. 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, THE 

REINSURANCE ASSOCIATION OF AMERICA 

Mr. NUTTER. Chairman Dodd, Ranking Member Shelby, thank 

you for this opportunity and for holding this important hearing. 

Reinsurance is a risk management tool for insurance companies—if you will, the insurance of insurance companies. And as 

such, it is probably the most global of the insurance businesses. My 

statement documents a number of statistics related to that. The 

majority of U.S. premiums ceded are assumed by reinsurers domiciled in ten countries throughout the world, but the entire global 

market is required to bring much needed capital and capacity to 

support the extraordinary risk exposure in the U.S. and to spread 

the risk throughout the world’s capital markets. 

We believe that a streamlined national U.S. regulatory system 

will result in reinsurers conducting business more readily through 

U.S. operations and U.S.-based personnel. Thus, the RAA supports 

the modernization of the current regulatory structure and advocates a single national regulator at the Federal level. Alternatively, 

the RAA seeks Federal legislation that streamlines the current 

State system. 

20 

An informed Federal voice with the authority to establish Federal policy on international issues is critical not only to U.S. reinsurers, which do business globally and spread the risk throughout 

the world, but also to foreign reinsurers, who play an important 

role in assuming risk in the U.S. marketplace. 

The U.S. State regulatory system is an anomaly in the global insurance regulatory world. In our view, the U.S. is disadvantaged by 

the lack of a Federal entity with authority to make decisions for 

the country and to negotiate international insurance agreements. 

International entities, like reinsurers, need an international regulatory framework. A single national regulator with Federal authority could negotiate an agreement with the regulatory systems of 

foreign jurisdictions that can achieve a level of regulatory standards, enforcement, trust, and confidence with their counterparts 

outside the U.S. 

There are several different ways to address meaningful modernization, including a Federal exclusive regulator for reinsurance, 

or Federal legislation that streamlines and modernizes the current 

State system. Although the RAA prefers a Federal regulator, the 

Nonadmitted and Reinsurance Reform Act, also called the ‘‘surplus 

lines and reinsurance bill,’’ twice passed by the House of Representatives, is a good start, but could be augmented by the recent 

NAIC-endorsed reinsurance modernization framework. The RAA 

supports the NAIC proposal to modernize this framework through 

a system of regulatory recognition of foreign jurisdictions, a single 

State regulator for U.S.-licensed reinsurers, and a port of entry for 

non-U.S.-based reinsurers. 

Given the challenges of implementing changes in all 50 States 

and questions of constitutional authority for State action on matters of international trade, the NAIC’s support for Federal legislation to accomplish this proposed framework is encouraging. 

I urge the Congress to move reinsurance regulatory modernization forward regardless of the ongoing debate about a systemic risk 

regulator—the subject of my concluding testimony. 

Various witnesses have addressed this Committee about issues 

associated with a systemic risk regulator. As has been mentioned 

by other witnesses, property/casualty insurers generate little 

counterparty risk, and their liabilities are for the most part independent of economic cycles or systemic failures. While the property/ 

casualty reinsurance industry plays an important role in the financial system, it may not necessarily present a systemic risk. There 

are clear distinctions between risk finance and management products that are relatively new financial tools developed in unregulated markets, and risk transfer products like reinsurance whose 

issuers are regulated and whose business model has existed for 

centuries. 

Those addressing the authority of a systemic risk regulator envision traditional regulatory roles and standards for capital, liquidity, risk management, collection of financial reports, examination 

authority, authority to take regulatory action as necessary and, if 

need be, regulatory action independent of any functional regulator. 

Reinsurers are already regulated in much the same way as is 

being proposed for the systemic risk regulator. Thus, we are concerned the systemic risk regulator envisioned by some would be reVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
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dundant with this system. This raises concerns that, without financial services and insurance regulatory reform, a Federal systemic 

risk regulator would be an additional layer of regulation, with limited added value; could create due process issues for applicable 

firms; and be in regular conflict with the existing multi-State system of regulation. 

Should Congress proceed with broad financial services reform, we 

ask that it be recognized that reinsurance is by its global nature 

different from insurance, and that the Federal Government currently has the requisite constitutional authority, functional agencies, and experience in matters of foreign trade to easily modernize 

reinsurance regulation. 

It is our recommendation that reinsurance be included in any 

meaningful and comprehensive financial services reform through 

the creation of a Federal regulator having exclusive regulatory authority over the reinsurance sector so there is no level of redundancy with State regulation. This should occur whether or not 

there is a systemic risk regulator included in financial services reform. 

Alternatively, Congress should create a single national regulator 

for reinsurance at the Federal level, but retain a choice or option 

for companies to remain in the State system. We recommend that 

any such financial reform incorporate authority for a system of regulatory recognition to facilitate and enforce foreign insurance regulation relationships. 

If Congress should choose not to include reinsurance in broader 

financial services reform, we encourage the enactment of legislation 

along the lines of the NAIC’s reinsurance modernization proposal 

to streamline the State system as it relates to reinsurance by federally authorizing a port of entry for foreign reinsurers and singleState financial oversight for reinsurers licensed in the United 

States. 

Thank you very much. 

Chairman DODD. Thank you very much, Mr. Nutter. 

Mr. Hunter, thank you for being with us. 

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF 

INSURANCE, THE CONSUMER FEDERATION OF AMERICA 

Mr. HUNTER. Thank you, Chairman Dodd, Mr. Shelby, members. 

I am Bob Hunter. I am Director of Insurance for the Consumer 

Federation. I was the Federal Insurance Administrator under 

Presidents Ford and Carter, and Texas Insurance Commissioner 

before. 

CFA is in the midst of a detailed review of our policy positions 

on insurance regulation to reflect the lessons we are learning from 

the economic meltdown. Here are some of our tentative conclusions. 

First, there is a need for an expanded role for the Federal Government in regulating insurance. 

Second, there are significant systemic risk issues associated with 

insurance that require oversight by a Federal systemic risk regulator. An example would be the guarantee associations, post-assessment plans everywhere by New York with no money to pay if an 

insurer goes under. They have to collect it later. 

22 

With several life insurers in trouble today, the life insurance guaranty associations nationwide could muster under $9 billion if 

they were called upon. As I put it in my testimony, that would 

hardly pay the bonuses that these companies are offering. 

It is ironic that State regulators boast about the effectiveness of 

their capital and surplus requirements in stabilizing the insurers 

against systemic risk, even though several States at the individual 

level had to loosen these requirements today. 

Regarding consumer protection and prudential regulation, CFA 

places our focus on quality rather than who does it. At this stage 

of our research, it appears that a Federal office is needed to deal 

with more than just systemic risk, but also to be a repository of insurance expertise, to engage in international issues, and to monitor 

and enforce, if States opt not to, high consumer protection and prudential minimum standards set by Congress. 

The minimum standards to protect consumers must address all 

key consumer issues, such as claims abuses, unfair risk classes, unavailability of needed insurance, et cetera. They must contain, 

among other things, the capacity to regulate rates and classifications. 

Tough, thoughtful regulation, our study shows, is the most effective at protecting consumers while working well for insurers and 

enhancing competition. California has a system that I would encourage you to look at as a standard. 

CFA will oppose any system not based on high standards for consumer protection or which would have the potential to undermine 

the States that are doing a good job. 

Rather than enforcing congressional minimum standards through 

a Federal regulator, a State-based entity might be empowered by 

Congress. That would probably be the NAIC. But we are skeptical 

about the NAIC. If you do that, you need to have standards for the 

NAIC to prevent several problems. They need to have notice, comment rulemaking, on-the-record voting, accurate minutes, rules 

against ex parte communication, et cetera, like a real regulator and 

not like a trade organization, which they act like. 

As Congress attempts to create an agency that has knowledge 

about insurance, it should consider restoration of the ability of the 

FTC to study insurance, too. 

A Federal office should not be granted vague and open-ended 

powers of preemption regarding State laws, but only in areas 

where Congress has explicitly said we want to preempt. Nor should 

preemption apply to needed consumer protections. 

While CFA supports a greater insurance role, we vigorously oppose the optional Federal charter. Such a system cannot control 

systemic risk. It is impossible. It has failed miserably in protecting 

banking consumers. Thirty banks have left the Federal regulatory 

regime, according to a Washington Post article. And it sets up conditions for regulatory arbitrage. Our review determined there are 

regulatory functions that the States can do better than the Federal 

Government, such as complaint handling and other functions that 

would be done more effectively at the Federal level, such as systemic risk. 

The research suggests a role for the States in dealing with direct 

consumer needs while the Federal Government’s role appears best 

23 

addressing macro systemic trends and issues that cross State borders. These differential capacities suggest some sort of hybrid approach. This leads us to conclude that minimum Federal standards 

might be a preferred approach. 

Our research also supports differential treatment for property/ 

casualty insurers compared to life insurers. Property/casualty insurers have local issues like catastrophic risk and legal requirements that are different State by State, versus life insurance, 

which is more national in scope and may lend itself more readily 

to Federal regulatory requirements. 

I emphasize these are our current ideas, and we are still studying it, still under some debate at CFA, and yet to be vetted with 

other consumer organizations, but I wanted to give you the advantage of our early thinking. 

I want to take just one final moment to reflect on what led to 

the situation we are in today. 

Reasonable profits are necessary in a vital insurance industry, 

but over decades, there has been a change in the insurer corporate 

cultures that led from a focus on policyholder interests to one that 

became obsessed with quarterly profits and stock price. Insurance 

professionals were pushed aside by financial gurus. For decades, 

the undoubted champion of insurer greed has been AIG. This is no 

surprise. 

Hank Greenberg, cheered on by Wall Street, maximized profit, 

every penny he could get a hold of, and he was well known on Insurance Street as someone if you had a claim against, you were 

going to be fought so that he could maintain his cash-flow. 

AIG’s arrogance is manifest in partying and bonusing away taxpayer money, but encouraged by rating organizations, trade organizations, and compliant regulators, AIG gleefully did bid-rigging uncovered by Spitzer, did credit swaps and other things, exposing 

their clients constantly to danger to make more money. 

Other insurers have followed suit, seeing the praise and money 

being lavished on AIG. For example, Allstate has maximized its 

profit in part by using computer systems that arbitrarily underpay 

claims, and the leader who brought that innovation is now running 

AIG. So what do you expect? A perfect person to run AIG, and the 

resulting tone deafness that we are now all outraged—I have heard 

the outrage mentioned several times. Why would a party or a 

bonus be an issue if the corporate culture is totally focused on 

greed? It is no issue to them. That is why you see arrogant letters. 

This overarching insurance industry corporate culture of greed 

over policyholder interest is why Congress must look not only at 

the single fruit of greed known as systemic risk, but at the other 

greed that manifests throughout insurance, particularly the willingness to do harm to policyholders. A classic, current iteration of 

greed is the request for optional Federal charters so that insurers 

can flit back and forth to the regulator least interested in protecting people over greed. 

So, please, Mr. Chairman, Ranking Member, protect the policyholders as you work on this issue. We look forward to working with 

you on it. 

24 

Chairman DODD. Thank you very much, Mr. Hunter. Once again, 

you were very compelling in your comments and we thank you for 

being with us this morning. 

I will put the clock on here for about 5 minutes apiece so we can 

get to as many of our members here. And again, it is a strong 

panel. We thank you all for being with us. 

Let me just first of all ask you, I think we would all agree there 

is certainly a lack of expertise at the Federal level in insurance 

issues, generally speaking. Mr. Hunter pointed that out. While 

Congress has created Federal offices to handle specific insurance 

where there is a Federal involvement, including TRIA, flood insurance, obviously examples where there has been a Federal involvement in national programs, there is no central repository of information and analysis on insurance at the Federal level. I wonder if 

you might just express by maybe just even raising your hands how 

many would support creating the Office of Insurance Information 

within the Treasury Department. Is that something you would—we 

will start out with a unanimous position. That is a good start here. 

[Laughter.] 

Chairman DODD. So I thank you for that. But I was going to 

make the point as well, I was just going over last night in preparing for this morning’s hearing, and as someone who comes from 

a State that has a strong national and historic interest in the subject matter of insurance, just for the purposes of information— 

maybe my colleagues were aware of this—I wanted to give you 

some idea. 

According to public information, there are 2,723 property and 

casualty insurance companies in the United States and 1,190 lifehealth insurance companies in the United States. We have a tendency to hear about the large companies we are all aware of, but almost 4,000 insurance companies around, most of which are not national companies or well-known, but to give you some idea of the 

magnitude of the number of companies that are out there. I 

thought you might find that interesting. 

Let me ask you, Mr. Hunter, if I can, I have made the case over 

and over again that I thought if we can get back to the point of 

consumer protection being the basis upon which you begin to look 

at these issues, then you have a totally different perspective, that 

we have bought into this notion, I think, for too long, at least too 

many have, that consumer protection is antithetical to economic 

growth, and you are making the point here that if you begin by 

thinking about the policy holder on this issue, begin thinking about 

the consumer and start from that point of view, that the issues of 

economic growth fall naturally into place. 

Do you believe that Federal regulation is necessarily weaker in 

terms of consumer protection than State regulation? This has been 

the case made over the years with people like the commissioners 

who come before us. My own commissioner has talked to us about 

it, independent agents and others have made the issue to Congress 

over the years that if you, in fact, have a Federal regulator, that 

almost guarantees weaker regulation than if you do it at the State 

level, where people are on the ground, watching it every day, more 

concerned, more sensitive of the consumer interest because they 

are there on the ground, at the level. 

25 

I know you mentioned a hybrid kind of situation, but where do 

you come out on this issue today? And I realize it is an evolving 

issue, but nonetheless, where is the greater protection for consumers? 

Mr. HUNTER. It has been my experience, having served both in 

the Federal and State areas, that it really has a lot to do with the 

laws and the people who are administering them. I think the Federal Government could do a great job. That is why I said earlier 

that consumers care a little less about the locus of regulation than 

the quality of it. And we see within the State system, there are 

some States that are pathetic in terms of protecting consumers and 

there are others that are very good. As I mentioned earlier, there 

are some States, like California, that have very tough regulation, 

but they have the highest Herthandal indices of competition and 

the profits are reasonable for the insurance companies, et cetera. So 

competition can work in a way that protects consumers, be very 

good for the industry, and still be a very competitive system. They 

don’t have to—one does not displace the other. 

I think either the Federal Government or the State could do it. 

The reason I suggested a hybrid is they are seeing some things like 

three million complaints. I can’t imagine a Federal agency would 

be doing a very good job with it. Now, it is possible, but you would 

have to set up a regional system to do that, I think. 

Chairman DODD. How about any other comments on this? Mr. 

McRaith, what is your answer on that? I mean, I appreciate Mr. 

Hunter’s answer, but I think venue does have an impact on whether or not you get good regulation or not. If it just is going to be 

dispersed among 50 jurisdictions, then you are going to end up 

with a spotty system. Some places it works, some places it doesn’t, 

and that is hardly what I think consumers need. So depending on 

where you happen to live, you get good protection or you don’t, as 

opposed to the idea, at least at a national system, you could have 

one strong system of rules that would at least raise the prospect 

of having a stronger set of regulations. 

Mr. MCRAITH. Mr. Chairman, you cited a number of approximately 4,000 companies earlier. The number that we have is actually closer to 7,700 companies, and as I mentioned in my opening 

comments, we are—the United States and the combination of 

States are the largest market in the world. We surpass two, three, 

and four combined. 

So the real question is what is the problem that we are trying 

to solve, and if the problem is one of consumer protection, it is important to understand, I think, that different States view that differently. Not all of them Mr. Hunter is comfortable with, of course, 

but what is appropriate for a consumer in the State of Illinois, for 

example, is going to be different from what is appropriate for a consumer on the coastline in Florida, or in California, for example. 

There is no secret about that. But that is not to say that one State 

has more or less protection. It is to say that those States, when determining what is appropriate public policy for their consumers, 

have made different decisions. 

When it comes to solvency, again, if we ask what is the problem 

or question we are trying to answer, the State system of financial 

solvency is coordinated. Fifty States are looking at national compaVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
26 

nies. You have multiple sets of eyes reviewing the financial status 

of any one company, whether it is a Connecticut-based company, an 

Illinois-based company. We, of course, also have a proud legacy of 

property and casualty insurers in our State. We work with other 

States and it is not one sole regulator who is determining whether 

that status, the financial status of that company is sufficient. It is 

multiple regulators with multiple skill sets evaluating a company 

from top to bottom. 

Chairman DODD. Well, I appreciate your answer on that. 

Let me jump to the systemic risk, and this will be my last question. I am already violating the clock a little bit, but I wanted to 

get to the systemic risk regulator because most of you have advocated a systemic risk regulator. I think, Mr. Nutter, you may be 

the one exception, and that is in the reinsurance industry, at least 

you didn’t speak for one, so I will let you respond to this in a 

minute. 

But let me begin by asking this. Excluding AIG, do any of you 

believe here that there are systemic important insurance or reinsurance companies per se out there at this moment? You mentioned whether it is 7,000 or 4,000. Are we looking at another company out there, aside from AIG, that could pose systemic risk as 

you see them today? Does anyone have a comment on that? Can 

anyone identify a company that we should be aware of? 

My interest in this, and again, if I look at a systemic risk regulator, I am more interested in practices rather than someone declaring themselves to be a certain type of company and then falling 

within a regulator or not. But the kind of practices that company 

engages in, and then on the basis of that, determining whether or 

not those practices pose systemic risk. So there are specific insurance products that are common practices among insurance or reinsurance companies that pose a risk to the financial system. I wonder if you might comment briefly. 

Why don’t we begin with you, Mr. Nutter, because you took the 

position apparently of not necessarily endorsing the idea of a systemic risk regulator. 

Mr. NUTTER. There is a concern that if you have a systemic risk 

regulator as described by Chairman Bernanke of the Fed, you really have a redundant system of regulation and a duplicate system 

for a functional regulator. Our point was, if you are going to do 

that, you really ought to have a Federal regulator for the reinsurance sector that would work with a systemic risk regulator. It 

wasn’t to oppose a systemic risk regulator. 

It is hard for us to see how a systemic risk regulator is going to 

coordinate with a 50-State system of regulation with the complexity 

of that, at least in the area of a global marketplace like reinsurance, where frankly, the most important regulatory relationships 

between a regulator and a systemic risk regulator would be with 

other international regulators in other countries, trading partners, 

if you will. We just see that occurring more effectively at a Federal 

level with a Federal regulator. 

Chairman DODD. Mr. Berkley, do you want to comment on this? 

You have been in the business for 40 years. 

Mr. BERKLEY. I think that, first, one has to understand what 

happened at AIG, and that is the good credit of the insurance busiVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
27 

ness was used to guarantee the performance of other elements of 

the holding company. If there had been a Federal regulator overseeing AIG, they would have said, hey, what you are doing is you 

are suddenly changing the character of the risk and you are putting the good creditworthiness of the insurance company and allowing them to use it, in the case of financial products, to take a substantial risk. But there was no one overseeing it. 

The benefits of some Federal oversight is you get to look at the 

whole picture. It is not that there was particular risk in AIG’s insurance business. Certainly, there is no systemic risk in their property casualty business. Even though they were the largest participant, the industry could have absorbed that business. It is that 

they effectively guaranteed the exposures in the financial products, 

something none of the other competitors did. All of the other big 

banks had independent subsidiaries without cross-guarantees in 

the financial products business. AIG guaranteed the performance of 

the financial products. 

Chairman DODD. Let me turn to Senator Shelby, and I will come 

back. We will have a couple of rounds here. 

Senator SHELBY. Thank you, Senator Dodd. 

Mr. McRaith, five AIG insurance companies are regulated by the 

State of Illinois, it is my understanding. Are you aware of any financial problems with any of those insurance companies in Illinois, 

and what steps have you taken to ensure that those insurers are 

prudently managed during this disorderly time for AIG overall, and 

are you aware of any attempt by AIG to pay retention bonuses to 

any employees of its insurance companies, and if so, would State 

insurance regulators have the power to call back such payments? 

First—I will go over it again. Are you aware of any financial 

problems with any of the five insurance, AIG-owned companies 

that are regulated by the State of Illinois? 

Mr. MCRAITH. Senator, the insurance companies that are domiciled in Illinois, we regulate those companies now and we have regulated them as long as they have been domiciled in our State, or, 

for that matter, in other States on a regular basis, quarterly, annually, top to bottom exams on a regular basis, as well. Those companies, like many companies, are encountering the turbulence of the 

current economic time, but as we have heard from other witnesses 

today, the insurance industry, including those companies, Senator, 

are in relatively good shape compared with other financial sectors. 

Senator SHELBY. What does ‘‘relatively’’ mean? 

Mr. MCRAITH. Well, that means—— 

Senator SHELBY. You say they are in ‘‘relatively’’ good shape. 

Mr. MCRAITH. First of all, I would never say publicly whether 

any one company were in trouble, but at the same time, I am not 

going to mislead you, Senator. The companies that we are regulating, we are comfortable with their financial status. 

Senator SHELBY. Are you aware of any attempt by AIG to pay 

retention bonuses to any of these employees? 

Mr. MCRAITH. Senator, I think it is an important question and 

it is important to distinguish that the bonuses that have been publicized recently are those bonuses that would be paid to the Financial Products employees, and we all know the colossal disaster that 

that division of AIG has caused. And frankly, I agree with everyVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
28 

thing that you and your colleagues said, for whatever my humble 

opinion is worth, that those bonuses should not be paid to Financial Products division employees of AIG. However, the insurance 

enterprises of AIG, as you know, are generally solid companies and 

their employees have performed, generally speaking, well. Now, I 

don’t know whether any one employee has received a bonus or not 

within the insurance companies domiciled in our State. 

Senator SHELBY. In recent weeks, and I will pick up on what 

Senator Dodd was asking a few minutes ago, Federal Reserve 

Chairman Ben Bernanke has discussed publicly the inadequacy of 

our insolvency regime for large global financial conglomerates, such 

as AIG. Chairman Bernanke has called for a new resolution regime 

that can better manage the insolvencies of systemically important 

firms while minimizing the risk to taxpayers. Do you agree, sir, 

with Chairman Bernanke that a new resolution regime is needed 

in America for companies like AIG? 

Mr. MCRAITH. Well, thankfully, there aren’t a lot of companies 

like AIG, and we can hope we don’t see another one anytime soon. 

The Chairman also made the comment that AIG was essentially a 

hedge fund attached to large stable insurance enterprises. As State 

regulators, we are proud of the fact that their insurance companies 

are the primary assets of AIG and its holding company. The solvency regime that we have for insurance companies is solid, and 

frankly, some of the concerns I have read expressed in testimony 

submitted today, I think are misplaced. 

Senator SHELBY. Are you—go ahead. 

Mr. MCRAITH. If, for example, one company were to have financial challenge and to be placed into receivership, other companies, 

first of all, can fill the void in the marketplace but can also purchase the policies of that company, and that happens frequently because those policies themselves are viable, strong assets and other 

companies will pick them up right away. So the demands on the 

system will not be as outrageous as some would have us believe 

today. 

Senator SHELBY. Are you telling us that the State insurance 

guaranty system could handle the insolvency of AIG or a similarly 

large company like that, the spread and all kinds of things? 

Mr. MCRAITH. What I am—well, when you say the insolvency of 

AIG, if we were talk—— 

Senator SHELBY. We are talking about AIG as a conglomerate—— 

Mr. MCRAITH. Right. 

Senator SHELBY.——you know, the insurance and otherwise. 

Mr. MCRAITH. Well, there is no system that is built to withstand 

an insolvency the size of the notional value of the credit default 

swaps AIG was invested in, which was, I believe, $2.4 trillion, 

which, of course, exceeds the gross domestic product of France as 

a country. However, their insurance operations, which as we know 

are strong assets of the holding company, if those were to encounter financial trouble, the State guaranty system is designed and 

would allow for an orderly disposition of those claims. But we also 

expect that many of those policies—and this is, again, completely 

hypothetical because those companies are financially strong at this 

point—that other companies would purchase the policies or groups 

29 

of policies within an insurance company because those are assets. 

Other companies would want them. 

Senator SHELBY. But aren’t credit default swaps an insurance 

against default of something? In other words, it is an insurance 

product of some kind. 

Mr. MCRAITH. Well, I would agree with you, Senator, that credit 

default swaps as AIG was involved in those transactions did include a form of financial guaranty. 

Senator SHELBY. Sure. 

Mr. MCRAITH. Unfortunately, OTS, of course, as we know, the 

Office of Thrift Supervision, was the primary regulator for the AIG 

holding company, and let us talk about the reality here, which is 

not whether there is a regulator. It is whether there is an effective 

regulator. And what we see with the AIG insurance companies is 

effective regulation. What we saw at the holding company level was 

a regulator who was not effective. 

Senator SHELBY. Mr. Hunter, do you agree with his statement? 

What is your take on it. 

Mr. HUNTER. I didn’t hear him answer the question. 

Chairman DODD. He did—— 

Mr. HUNTER. I don’t think it could handle—I don’t think the 

guaranty funds could handle it, no. 

Senator SHELBY. Couldn’t handle it—— 

Mr. HUNTER. That was your question, and I don’t think they—— 

Senator SHELBY. It would be too big for them to handle, would 

it not? 

Mr. HUNTER. Of course. Yes. 

Senator SHELBY. I thought so, too. Thank you. 

Governor Keating, the Federal insurance regulation and systemic 

risk, an area you have done a lot of work in, your testimony cast 

doubt upon whether a Federal systemic risk regulator, Governor, 

could be established without a Federal insurance regulator also 

being created. You argue that without a Federal insurance regulator to coordinate and to implement policy with respect to insurers, Federal systemic regulation could be rendered ineffective. 

Along those lines, how should a Federal insurance regulator interact with a Federal systemic risk regulator to ensure that insurers 

are properly supervised for systemic risk as well as for solvency 

and consumer protection, the company itself? 

Mr. KEATING. Well, Senator Shelby—— 

Senator SHELBY. It looks to me like they would be intertwined 

some. 

Mr. KEATING. On a going-forward basis, it is important, as you 

well know, to get this right so we don’t face again the kind of problems that we have faced in the recent past. But if the systemic risk 

regulator is a 30,000- or 40,000-foot entity, is it product specific or 

is it size-specific, and that is something obviously that members of 

this Committee are going to have to resolve. 

It is our view that to have a functioning and efficient system, you 

need to plug all the holes. Systemic could look at, for example, on 

size or on product the credit default swap. I mean, that is allegedly 

an insurance product, and yet there were no reserves. There was 

no ability to play claims, which is stunning to me that the State 

regulatory apparatus as well as the OTS didn’t identify that early. 

30 

Sixty-trillion dollars of those instruments are floating around the 

world. 

But what we would like to see on an optional basis, if you do 

have a functional regulator at the Federal level that would speak 

with one voice to our international and national players that more 

than likely would seek a functional regulator at the Federal level— 

most of our members, by the way, would remain State regulated— 

but we would like to see an ability on the part of somebody to 

break a tie. The systemic regulator would have to be that person 

to break a tie. If he or she sees conduct or activity or an entity that 

simply is threatening the system, it is systemic, then that individual ought to be able to tell the functional regulator what to do, 

or, for that matter, the State regulator what to do. Otherwise, we 

would have a multiplicity of the problems we faced recently. 

Senator SHELBY. Governor, over the past year, our largest bond 

insurers have teetered on the edge of collapse due to imprudent 

bets on the value of mortgage-backed securities. The problems of 

the bond insurers have impacted our national economy as bonds 

they insured have rapidly gone down in value. Although the bond 

insurers played an important role in our overall market, they remain regulated at the State level. If the bond insurers had been 

regulated by a Federal regulator, if you can envision that, do you 

believe that their problems would have been addressed more effectively than what we have today? 

Mr. KEATING. Well, I am in favor as an industry, and we represent the life insurance, annuity, long-term care, and disability income business, a regulator and a regulatory system that works, 

that is effective, that is tough, that is action-oriented. I think Mike 

McRaith is right. It is not particularly always where the regulator 

is housed. What is the regulator doing? Obviously, the OTS appeared to be looking the other way on credit default swaps, and in 

the bond insurance business, obviously somebody was looking the 

other way, and that is simply the antithesis of effective and appropriate regulation. 

Senator SHELBY. Where was the New York Insurance Commission on all this, too? They were the regulator of the insurance part, 

were they not? 

Mr. KEATING. Well, you might want to invite him in and have a 

conversation. 

Senator SHELBY. We have had him in once. We will bring him 

back. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Mr. MCRAITH. I would be happy to answer that question, too. 

Chairman DODD. Yes. Let me get a chance to go to Senator 

Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

Mr. McRaith, AIG has been described as an insurance company 

that had a hedge fund piggy-backed on it. Should the future regime 

basically prevent insurance companies dealing in areas like property insurance and life insurance and so forth from getting into the 

insurance of financial products with instruments like credit default 

swaps? 

31 

Mr. MCRAITH. Senator, the problem with AIG and the challenge 

for this Committee, which I appreciate your wrestling with in a 

substantive manner, is how do you regulate a large enterprise like 

AIG when there are multiple services or products sold by one company, and some people would even say AIG had as many as several 

thousand individual companies or subsidiaries within its larger 

holding company. 

At the insurance company level, again, those insurance companies remain primary assets for the AIG holding company in solid 

financial condition today. So the question is what is the problem 

we are trying to solve? The problem is not the efficacy of State regulation. The problem is how do we integrate all of the different 

functional regulators so that they are coordinated and working together, and in that situation, the State system can work, coalesce 

with the other functional regulators, and to the extent that at some 

point there might be an enterprise whose viability is threatened, 

that the demise of that enterprise would threaten the stability of 

the system, that is when the systemic regulator can take the comprehensive action with respect to the enterprise as a whole. 

Senator MERKLEY. Thank you. If I could reframe what you just 

said, your answer to my question was, no, that the answer is not 

to prevent companies engaged in property life insurance from doing 

hedge fund-style activities, but to simply have a better regulatory 

system. 

Mr. MCRAITH. Let me be more clear. I think we need to be very 

cautious about allowing regulated enterprises that have direct consumer obligations from participating in hedge fund or hedge fundlike transactions. We have seen the risk of that. I think from a consumer protection perspective, we need to revisit and really answer 

the question you are asking, and my answer to your question is absolutely not. 

Senator MERKLEY. Thank you. 

Mr. Hunter, do you have any different perspective on that? Do 

you share that view? 

Mr. HUNTER. No, I don’t have a different perspective. I think the 

Congress should look at GLB again and see whether or not it led 

to some of these problems. 

Senator MERKLEY. GLB? 

Mr. HUNTER. Gramm-Leach-Bliley. 

Senator MERKLEY. Thank you. 

So a broad question to all of you is whether the size and complexity of large firms like AIG basically defies effective regulation 

at the State level. I think in many cases, I understood your testimony to say we do need some Federal coordination, but I just want 

to reclarify that, if anyone wishes to comment on that. 

Mr. BERKLEY. I would like to just comment. I think, first of all, 

large parts of AIG were outside of the realm of State regulation. 

A huge amount of their business was overseas. It was an international business. Lots of other activities were outside of the realm 

of State regulation. 

You know, I think that you only can regulate what is within your 

purview, and part of the problem of AIG is so much was outside 

of the purview, and part of the problem of coming up with a solution were so many other non-U.S. authorities had control over 

32 

pieces of the assets and we had no Federal regulator who could go 

and discuss with those various authorities how to have a solution. 

So in the case of AIG, it was not something that we had within 

our powers to deal with. 

Senator MERKLEY. Thank you. 

Mr. Hunter, before I run out of time, I wanted to ask about one 

aspect of your testimony, in which you noted that the Congress 

should repeal the antitrust exemption of the McCarran-Ferguson 

Act and, quote, ‘‘collusion in pricing should not be allowed.’’ Can 

you expand on your commentary in that case? 

Mr. HUNTER. Sure, and I would refer you to the testimony I gave 

before the Senate Judiciary Committee, too, for a very full explanation, but back when the U.S. Supreme Court ruled for the first 

time that insurance was interstate commerce, and the States therefore were going to lose the regulatory authority, the States ran to 

Washington and got the McCarran-Ferguson Act. Congress debated 

whether or not to apply antitrust laws. In fact, they decided to 

apply antitrust laws after a moratorium. 

If you read the debates at the time, Senator Pepper raised the 

issue, well, this language could possibly be interpreted as being a 

permanent prohibition on applying the antitrust laws. McCarran 

and Ferguson both jumped up and said, ‘‘No, no, that is not what 

we mean.’’ But apparently the Supreme Court never read the legislative history because when it came before the Supreme Court, the 

Supreme Court decided that antitrust laws would not apply to insurance generally, except for coercion, intimidation, and boycott. 

And so we now have a situation where, like baseball, insurance is 

not subject to the antitrust laws. 

Senator MERKLEY. Thank you very much. 

Chairman DODD. Thank you very much, Senator. 

Senator Corker? 

Senator CORKER. Mr. Chairman, thank you, and I thank all of 

you for your testimony. Many of you have been in and out of our 

offices or you have had representatives in and out talking about 

this particular issue. Unlike some of the things we have dealt with 

most recently here on the Committee, and let me set AIG aside. I 

know we are talking about AIG today because of most recent occurrences. This is really not a hearing necessarily about AIG but 

about how we regulate the insurance industry in general. 

This feels not like a big issue for the country as much as it does 

sort of a family squabble, if you will, within the insurance industry 

throughout our country. This is more about competing interests, it 

feels to me, than it does about systemic risk. 

And so I know that everybody—Mr. Nutter agrees with the systemic regulator concept, it seems, or at least that is what everybody seemed to indicate, which might deal with sort of the AIG 

kind of thing. And it seems to me that a solution to this might be 

to have on the reinsurance side and on the life insurance side a 

Federal regulator, and even the guys that represent the insurance 

folks all around our country, the independent insurers that we all 

know and see when we go home on the weekends, even you all 

agree that it is really not about life insurance. It is really about 

property and casualty. I know you are worried about the camel 

33 

nose under the tent, if you will, and if we do that on life insurance, 

we might do it on property and casualty. 

But why wouldn’t we just look at the systemic regulator—except 

for Mr. Nutter—why wouldn’t we just have a Federal regulator for 

reinsurance and life insurance and leave property and casualty like 

it is with State regulators, with the Office of Insurance Information 

that apparently everybody seems to like? Why wouldn’t we just 

deal with this issue in this way and move on to something else? 

Anybody that wants to respond. 

Mr. HOULDIN. If I may, Senator. 

Senator CORKER. OK. 

Mr. HOULDIN. My agency particularly, we work—about 20 percent of our income comes from life insurance. I would like to address that specifically. Down on Main Street, America, the consumer concerns and complaints that we get, we feel are very well 

addressed at the State level. I can call Commissioner Sullivan at 

the Connecticut Insurance Department, or his team, anyway, and 

get immediate reaction to a concern, and with all the baby boomers 

coming up that are going to have life insurance questions in the 

next decade or so, I think keeping the consumer protection at the 

State level is extremely important, and for that reason is why we 

don’t support any Federal—— 

Senator CORKER. You know, there are very few complaints. I 

mean, life insurance is not what drives complaints at your State 

Insurance Commissioner’s officer, really, is it? It is just a small 

percentage, is it not? 

Mr. HOULDIN. Well, certainly the Commissioner can answer that 

better than I can, but the concerns that I get at my firm is you buy 

an insurance product, a life insurance product 30 years prior and 

when it comes up, or your parent passes away and you look at his 

document, you don’t even know who the agent was that sold it. You 

don’t even know who this company is. You don’t even know if it is 

still active. And so I get a lot of questions from my clients saying, 

‘‘I know you didn’t sell me this policy, but can you please help me? 

I have no idea if this is active or if I can collect on it,’’ and those 

types of questions, I think, are asked on a consistent basis. But the 

Commissioner can comment on that. 

Senator CORKER. Yes, sir, Mr. Berkley or somebody? 

Mr. BERKLEY. Well, I think that the part where your view goes 

awry is for large companies. Of those 3,000 insurance companies 

that were referred to by Senator Dodd, probably 2,500 of them 

would exactly fit the bill that you are talking about, but the others 

wouldn’t and those are the larger companies that do business 

across frequently 50 States, frequently in other countries. 

So when I set up a business in Latin America, I had no Federal 

insurance regulator. I had to set up a new company in that country. When I went to the U.K., there were no reciprocal arrangements. There was no way I could license my U.S. company there 

straightforward. There was on dialog, even. I had to set up a new 

company there. The same, in fact, in Australia and—— 

Senator CORKER. This wouldn’t solve that, though. 

Mr. BERKLEY. Yes. A Federal regulator would then open up a dialog, just like the company in the U.K. does business throughout 

the E.U. The national regulators have this dialog to allow you to 

34 

do business in broader areas. I believe if we had a national regulatory policy for the largest companies, we could have a very different dialog and it would be a reciprocal arrangement because the 

large companies overseas have the same desire to do business here, 

and one of their big problems is the licensing State by State is very 

complicated. This is also addressed by Mr. Nutter’s issues for reinsurers overseas. 

Mr. MCRAITH. Senator, if I might reply briefly, life insurance and 

annuity questions come into our offices with great regularity. The 

exact numbers, I don’t know, but we get calls State by State probably in the hundreds, if not thousands, every year on these issues. 

We can’t diminish the importance of each one of those calls. And 

the importance of a senior, for example, as I mentioned in my opening statement, who sold an indexed annuity. Where does that senior turn when they are on a fixed income and that annuity is not 

generating the income they were told they would receive? 

The real challenge for us as we talk about this is in your concept 

probably the largest expansion of Federal regulatory authority in 

the financial sector since the 1930s. As we talk about this, what 

is the question we are trying to answer? What is the problem we 

are trying to solve? 

Senator CORKER. It appears to me like a family squabble we are 

trying to solve—— 

Mr. MCRAITH. But let me explain. As I mentioned—— 

Senator CORKER. Which is not that interesting, candidly, so I 

would like to know what it is we are trying to solve. 

Mr. MCRAITH. Right. Exactly. So if the question is speed to market issues for life companies, they want to be able to introduce 

their products more quickly. Thirty-four jurisdictions have adopted 

the Interstate Compact, which gives a single portal, single approval 

opportunity for product that can then be sold in all 34 of those jurisdictions. Now, as a factual matter, we might need Congressional 

support to require all 50 States to join that Compact. 

When it comes to reinsurance, we have—all States have adopted 

or supported a proposal for comprehensive reinsurance reform. 

Now, we might, as we have adopted that proposal and spent a couple years working through the details, we might need Federal assistance—in fact, I am sure we will need Congressional assistance—in adopting that uniformly throughout the States. These are 

issues that we have addressed, are working to address every day 

in an even better fashion than we do already. 

When it comes to international collaboration, just with respect to 

Mr. Berkley’s comments, the E.U. is far less coordinated than the 

50 States are. We are significantly larger, remember. The State of 

Connecticut is larger than Spain in terms of its insurance marketplace. So as we talk about the E.U. as if it is a panacea, let us look 

at the reality. They not only have 23 different languages, they cannot agree on what exactly even their solvency framework should 

be. 

So yes, we can improve. We are working to improve and we look 

forward to working with you to help accomplish some of the uniformity goals that we all share. 

Mr. HILL. Senator, I would just like to make one other comment. 

At NAMIC, we clearly support your position with respect to propVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
35 

erty casualty. That is where our interest lies, and we do not see 

a role for a Federal charter with respect to property casualty. 

With respect to the international issues, as we have all talked 

about, we fully support the establishment of OII. We think that can 

be an excellent conduit to deal with the international issues and 

the cross-border issues like that. So again, that is our position on 

that. 

Mr. NUTTER. Senator, if I might comment, I wouldn’t want to 

come across as being opposed to a systemic risk regulator, though 

I have been characterized as that. I think the point that we were 

trying to make was that the descriptions of what a systemic risk 

regulator have been seem redundant to us of what a Federal regulator would be and that some assimilation of that may be appropriate. At a Federal regulatory level, you have greater capability of 

achieving that than you do in a system of 50 State regulators and 

trying to overlay that on a global business like reinsurance, where 

many of the major companies are headquartered in trading partner 

countries and you need a constitutionally authorized system of recognition between the United States and those countries to deal effectively with global regulatory issues. 

Mr. HUNTER. I just wanted to say that Congress—there are some 

systemic PC issues that Congress needs to study, including bond 

insurance. Directors and officers insurance is becoming widely unavailable and very high priced for banks. Now, you may try fixing 

the banks, but if they can’t get D&O insurance, what is going to 

happen? That is a question the guaranty associations issue and reinsurance that can actually melt down beyond reinsurance into the 

primary market if reinsurers aren’t there to back up because of a 

‘‘black swan’’ or something with the hurricanes and terrorism all at 

once or something like that. 

Chairman DODD. Very good. Senator Tester? 

Senator TESTER. Thank you, Mr. Chairman. 

A couple of questions to start with. How many folks on this panel 

are in favor of the optional Federal charter? Raise your hands. 

[Show of hands by Mr. Keating, Mr. Berkley, and Mr. Nutter.] 

Senator TESTER. Three. How many of those three are in favor of 

the premium taxes? Since we are talking a little turf here, we will 

talk a little money, the premium taxes staying with the State. 

Raise your hand. 

[Show of hands by Mr. Keating, Mr. Berkley, and Mr. Nutter.] 

Senator TESTER. OK. The question I have for you three is that 

there is an historic issue with the Federal Crop Insurance Corporation. When it was first started out, those premium taxes were supposed to go to the State. A long story short, there was a lawsuit 

that said the State had no reason because they were federally preempted and they no longer could collect those premium taxes anymore. Do you see the same kind of scenario if an optional Federal 

charter was implemented? Do you see a similar situation with 

those premium taxes? Mr. Keating? 

Mr. KEATING. Senator Tester, you know as a former legislator in 

your State, and I think probably many of the States represented 

around this table, premium taxes are a significant part—— 

Senator TESTER. It is $40 million in Montana, which is a lot of 

money in Montana. 

36 

Mr. KEATING. It is a significant part. But to show you how very 

frustrated and even desperate some of these companies are to be 

able to compete on a level playing field with the banks and securities, the companies that we represent are willing to have the premium tax remain in the States. Now, it would be up to the Congress to decide whether or not you someday down the line would 

ever attempt to preempt. Our view would be we are willing to pay 

for the cost of regulation for a variety of reasons, and it appears 

on occasion to be sort of a household spat, but we are an interstate 

and international marketplace. Our products are virtually the same 

from sea to shining sea. 

For us, and here is one example, I think, that you would be interested in, several years ago, one of the real serious black eyes to the 

life insurance industry were military base sales, abusive sales practices on military bases. The NAIC said, we have no jurisdiction 

there to address those, which was horribly frustrating to us because there was no Federal ability to stop it, so we were attempting to do it ad hoc basically industry by industry group, going to 

try to stop these practices. So that is the frustration we face, Senator. 

Senator TESTER. So what you are saying is you believe that the 

premium tax will be able to stay with the State, that it is a legislative prerogative regardless if it is taken to court? 

Mr. KEATING. We certainly concur on that. 

Mr. BERKLEY. We have no reason that it shouldn’t stay there. 

Senator TESTER. OK. 

Mr. NUTTER. And Senator, with respect to the reinsurance, generally the reinsurers share in the cost of premium taxes with the 

underlying ceding company, wherever that tax is paid. 

Senator TESTER. OK. So the next question is, and I will focus 

this back, Mr. Keating, and I would ask you to be a little more concise, but in Montana, and I am sure it is the same way around the 

country, this money goes to fund the Office of the Insurance Commissioner. So if the optional Federal charter was put into place, 

that money would have to come from the general fund of the Federal Government and I assume you would be in support of that, for 

the regulating portion of an optional Federal charter? 

Mr. KEATING. We are willing to pay for our regulation. 

Senator TESTER. OK. So you would be open to it—to another tax 

over and above the premium tax? 

Mr. KEATING. I don’t view that as a tax. I mean—— 

Senator TESTER. No, that is a fee out of—— 

Mr. KEATING.——the cost of regulation, because regulation is important—— 

Senator TESTER. OK. So you would be willing to pay for the additional level of regulation of an optional Federal—is everybody OK 

with that? All right. Sounds good. 

Mr. Hunter, in the questions by Senator Merkley, you had answered a question saying that we may want to revisit parts of 

Gramm-Leach-Bliley—— 

Mr. HUNTER. Yes. 

Senator TESTER.——to see if it led to some of the AIG-related 

problems. That is an interesting point. I want you to expand upon 

it. 

37 

Mr. HUNTER. Well, before GOB, the banks and insurance companies could mix, for example, and securities dealers and insurance 

companies could mix some of the kinds of things that were involved 

there. They wouldn’t have been there. And so I think it is just a 

question of if we join together all these different financial services, 

are we really creating a systemic risk situation that wasn’t there 

before? So I think given the current situation, it might be worth 

another look at the role that GOB played in this. 

Senator TESTER. So the next step would be, do you think it is 

reasonable to, if we are going to take a look at it, to really look at 

splitting them back out? Do you think that that is a reasonable solution in this—— 

Mr. HUNTER. If you find that the systemic risk can’t be controlled 

in a joined-together organization, I think that is what Congress 

should look at, then I think you have to at least consider splitting 

them back out. 

Senator TESTER. All right. I just want to thank all the members 

of the panel. Thank you very much. I wish we had more time, 

which we do, but I don’t, so thank you very much, Mr. Chairman. 

Chairman DODD. Thank you, Senator Tester. 

Senator Warner? 

Senator WARNER. Thank you, Mr. Chairman. This has been very 

helpful education-wise for me. 

I want to go back to where Senator Corker was heading in trying 

to understand—I think I have got the frame of the challenge between the State versus the Federal regulation framing. Tell me if 

anyone on the panel—it does seem that Mr. Nutter’s comments 

about reinsurance being more of a national and international business and less direct involvement on the consumer’s standpoint, 

even if I didn’t go as far as Senator Corker did, just from a first 

impression standpoint, that a Federal regulator at the reinsurance 

standpoint, particularly because of the international nature of a lot 

of this reinsurance, makes some sense to me. Give me a counterargument. 

Mr. MCRAITH. Senator, I think—Mr. Berkley—— 

Mr. BERKLEY. Go ahead. 

Mr. MCRAITH. OK. Senator, I think it is important to understand 

that from a regulatory perspective, the quality of reinsurance, particularly on the P&C side, helps a regulator determine the viability 

or the financial status of a company. So reinsurance involves the 

seeding of risk by a primary carrier. 

Senator WARNER. I understand. 

Mr. MCRAITH. In the event that reinsurance is in any way jeopardized or the status or financial condition of the reinsurer is in 

any way jeopardized, it has a direct impact on consumers. 

Senator WARNER. But that again presupposes that you at the 

State level are going to better be able to assess that national or 

international reinsurer’s ability to pay off that risk than a Federal 

regulator, doesn’t it? 

Mr. MCRAITH. You are asking questions that have been the subject of several years of discussion and overwrought commentary at 

the NAIC and the State regulatory level, and I am happy to report 

that in December, the States adopted a reform proposal and we are 

right now implementing details that we intend to present to your 

38 

colleagues and you to adopt as a national reinsurance standard for 

all the States to adopt. 

Senator WARNER. I will be anxious to see it, but it would still 

seem to me that, at least in this area on reinsurance, because of 

the national and international nature of reinsurance, that a national standard amongst States—you have still got a point to convince me that that is still better than simply repositoring that information or that oversight at a Federal level. 

Mr. Nutter? 

Mr. NUTTER. Senator Warner, if I could address that, to its credit, the NAIC has endorsed a reform proposal that would ask the 

Congress to pass legislation to create a single port of entry for nonU.S.-based reinsurers and a single licensing for U.S.-based reinsurers. The challenge for all of that, which goes to your point, is 

that the constitutional authority to deal with international trading 

partners in the E.U. or other parts of the world really lies with the 

Federal Government, and therefore Federal regulation is clearly 

going to be a preferred way for our country to deal with the global 

nature of the reinsurance marketplace. Alternatively, we would 

support the NAIC’s approach, but we don’t think that is the preferred one. 

Senator WARNER. I have got a couple more questions, but my 

time is about up. Governor Keating, could you share with me one 

of your earlier comments when you described the life insurance industry, and this is a little off topic, but 18 percent of the corporate 

bonds, obviously a lot of other long-term holds in the debt market, 

I have had life insurers come by and because of the uncertainty at 

this point dramatically increasing the cash portions in their balance sheet and not being participants as actively in the marketplace right now because of regulatory and other concern and saying 

that many of the programs initiated by the Treasury and the Fed 

to kind of unlock the credit flows have benefited other areas, but 

we are leaving out one of the largest purchasers of these debt instruments, the life insurance industry, and I would love to hear 

your comments on that and what we should be looking at beyond 

the regulatory standpoint to make sure we get you folks back in 

the marketplace buying. 

Mr. KEATING. Well, Senator Warner, I know metaphors sometimes are tired, but we look upon this really, or should, as a threelegged stool. We have $15 trillion in mutual fund assets, $10 trillion in banking assets, and $5 trillion in life insurance assets. By 

anybody’s definition, that is systemic. The Congress in its wisdom 

put the life insurance industry in the TARP as a result of that very 

systemic belief, and yet when we first met with several of our 

CEOs with then-Secretary Paulson, because we have no Federal 

presence, Secretary Paulson said, well, I cannot—we don’t know 

your industry. I can’t put my arms around your industry. I can’t 

figure out how to do it. 

How about maybe a couple or three insurance commissioners? 

And Mike is a superb insurance commissioner, but the reaction immediately was, well, the other 47 would be mad they are not at the 

table, or 48. Well, that won’t work. So let us make it where you 

all have to buy a thrift. But remember, this is not for the walking 

wounded or for terminal cases. These are for robust companies that 

39 

will use this money to buy bonds to get the wholesale side of the 

economy moving again. We have not heard back, because they still 

can’t understand how to put their arms around this industry. And 

I think for the sake of the country and the growth of the economy, 

that is a real tragedy. 

Senator WARNER. Mr. Chairman, I might add that I think, at 

least in recent press reports, we are still waiting for the Treasury 

to give some guidance in this area and an entity that has such a 

potential stimulative effect in terms of getting the credit markets 

reopened again, we need them at the table participating and the 

sooner we can get that answer from the Department on how or why 

or why not the industry can’t participate in the TARP, I think the 

better for all of us. 

Chairman DODD. I agree with that very much—— 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman DODD.——and know that history very well, Governor, 

and those days. Of course, the irony was in some cases, you had 

some industries actually out looking to actually get TARP money 

to buy the thrift in order to qualify to be at the table. 

Senator WARNER. Mr. Chairman, I have got an entity that went 

through that, bought their S&L and then in the transition kind of 

got left out on the paperwork. It seems a little crazy that they had 

to go through this additional step to try to benefit from this program that we all want you to be involved in to get these credit 

markets open. And again, since you hold these for long, long term, 

these assets that may be not priced very well at this point, but if 

anybody is going to hold them for a long-term maturity, it seems 

to be your industry. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Warner. 

Senator Johnson? 

Senator JOHNSON. Thank you, Senator Dodd. I apologize for coming in late. 

Governor Keating, there seems to be some consensus that part 

of any regulatory modernization proposal must include a systemic 

risk regulator. Is there a regulator that you believe should begin 

this responsibility? What powers would this entail, and what kind 

of sanctions or other tools does this risk regulator need at his disposal? 

Mr. KEATING. Well, Senator Johnson, our insistent message is 

that this industry, this $5 trillion industry benefits to retirees and 

to near-retirees precisely at a time the economy is suffering from 

people with limited savings and life insurance policies are used by 

business partners and staffs for annuitants, to make sure you can 

live in comfort for the rest of your life. These are very, very important pieces of the economy, and to consider these systemic, as I 

said to Senator Shelby, is hugely important, whether you focused 

on individual products that need regulation because of the systemic 

danger to the system or if you look at the size of the company. That 

is, of course, at the Senate and Congress’s discretion. But we just 

need to make sure that the very noisy voice of this hugely significant part of the economy is part of that approach. 

40 

Senator JOHNSON. For all the witnesses, going forward, what is 

the most logical way to regulate holding companies of insurance 

subsidiaries? Mr. McRaith? 

Mr. MCRAITH. Thank you, Senator. I think prior to your arrival, 

there was some discussion. Senator Merkley asked a similar question and I want to pick up on a comment made by Mr. Hunter, and 

that relates to Gramm-Leach-Bliley, which I know you are familiar 

with. I think it is important to go back to 1932 and the GlassSteagall Act, which established those firewalls that served our 

country so well by separating commercial banks and investment 

banks insurance companies. And as we look at regulating holding 

companies with insurance subsidiaries, I think we need to revisit 

the deterioration of those firewalls that Gramm-Leach-Bliley 

caused and I think we need to really answer the question of how 

to best protect consumers and at the same time allow our financial 

services to grow. There needs to be better regulation at the holding 

company level and we can be a part of that. 

Senator JOHNSON. Governor Keating? 

Mr. KEATING. I want to say that during the course of this conversation this morning, Mr. McRaith and I have disagreed on a 

number of subjects, but on this one we agree, so it is a good way 

to end our conversation. 

Senator JOHNSON. Mr. Berkley? 

Mr. BERKLEY. I think that—obviously, I think we need some kind 

of oversight of holding companies because part of the problem is, 

and starting with AIG, with sophisticated financial tools, many of 

those old regulations have disappeared in their effectiveness. So, in 

fact, what we saw at AIG is the guaranty and the crosscollateralization from the industry companies to their other vehicles created substantial problems. So I think old legislation had the 

right idea, but I think we would need much more contemporary 

regulation, which is why we think Federal legislation is really required, because it is a much more sophisticated world we live in 

today. It is not just corporations under a holding company. It is 

legal obligations that cross one to another. 

Senator JOHNSON. Mr. Houldin? 

Mr. HOULDIN. Senator, I certainly think that an overseer is necessary as long as they don’t get involved with the day-to-day regulation of insurance. More of a treetop approach certainly makes 

sense in light of what we have seen. 

Senator JOHNSON. Mr. Hill? 

Mr. HILL. Yes, Senator Johnson. We think part of the solution 

would be the establishment of the systemic regulator because we 

believe by focusing more product-based as opposed to institutionbased, that regulator will then be able to foresee the problems that 

will occur with these various products. I mean, if we look at the 

sophistication of the credit default swaps, I think having someone 

with the expertise to regulate those products and products of that 

nature, that is the solution as opposed to looking to just target a 

holding company structure per se. 

Senator JOHNSON. Mr. Nutter? 

Mr. NUTTER. Senator Johnson, the reinsurance sector is probably 

the most global of the insurance sectors. We have testified that you 

really do need a Federal regulatory regime that has authority to 

41 

enter into agreements with non-U.S.-based regulators in other 

countries in order to achieve what you are talking about, that is 

the ability to look at a company holistically, both in the U.S. and 

outside the U.S. 

Senator JOHNSON. Mr. Hunter? 

Mr. HUNTER. Thank you, Senator. It is part of the systemic risk. 

I think the systemic regulator would have to monitor set standards 

and then be able to bring down a company so that a company 

would never be too big to fail. Now, that would include the holding 

company and we think the logical approach is that financial institutions would have capital standards put on them based upon an 

analysis of their risk and not by just size, but other kinds of 

things—the type of activities, the interconnection to other financial 

markets, et cetera, and then that would obviously sweep in a holding company if it was part of another arrangement. 

Senator Johnson. 

[Presiding.] My time has expired. Mr. Shelby, do you have anything? 

Senator SHELBY. I have no other questions, Mr. Chairman. I 

think we had a distinguished panel here today and I think everybody knows what our challenges are. In other words, how do we 

deal with problems in a new 21st century financial market, is so 

intertwined. Obviously, when AIG got in real, real trouble, the 

Feds got problems in dealing with it. The Chairman has said that. 

The States couldn’t really deal with it. There is blame everywhere, 

but how do we prevent this from happening in the future? I think 

that’s one of our problems, but I think that as we hold more hearings, we are going to see that this is very complex. We know that. 

And we have got to do this, and whatever we do, we do it right, 

because I think we are going down the road of looking at a very 

comprehensive regulator for all our financial system. I can see it 

coming down, and maybe we can make it happen this year. I hope 

we can. 

Mr. Hunter, you look like you want to comment on something. 

Mr. HUNTER. Oh, no, no. I was just enrapt. 

Senator SHELBY. OK. 

[Laughter.] 

Senator SHELBY. I don’t think you are in rapture of anything, but 

Mr. Hunter, do you agree with that, that that is our challenge, and 

our goal is there—— 

Mr. HUNTER. Yes. I think you have said it exactly right, Senator. 

Senator SHELBY. In other words, we are dealing in the 21st century now. 

Mr. HUNTER. Yes. 

Senator SHELBY. And we are dealing with all kinds of new products. People think them up. A lot of them have not been approved, 

so to speak. A lot of people didn’t realize the risk out there to our 

whole financial system. But the risk is real. We are feeling it every 

day. The taxpayer feels it big today as we speak. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Senator Merkley, do you have anything else? 

Senator MERKLEY. No. Thank you. 

Chairman DODD. With that, I thank you for coming and this 

hearing is adjourned. 

42 

[Whereupon, at 11:50 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

43 

PREPARED STATEMENT OF SENATOR JON TESTER 

Thank you, Mr. Chairman, for holding this important hearing. I am pleased to 

be a member of this Committee as we begin the discussion about the next transportation reauthorization bill. 

In Montana, transit—buses especially—are critically important for transportation 

across the State. When we lose Essential Air Service, or a large air provider pulls 

out of an airport, it’s generally intercity bus service that takes its place to move people hundreds and hundreds of miles across the State. 

There’s no doubt about it—you cannot have economic development without a 

smart, effective transportation system. And transit is a key part of that, even in 

rural America. Five years ago, a significant increase in transit spending allowed 

rural States like Montana to expand intercity bus service, as well as local transit 

services, to almost all of our counties. It is critical that we maintain this important 

funding that has helped safely connect folks in isolated areas to commerce, medical 

care, and family members. However, there is still more to do. For instance, we must 

ensure that all paratransit vehicles are wheelchair accessible, and that transportation for veterans is also accessible for vets with disabilities. 

In Montana, we also have a high fatality rate for drivers on rural roads. I’d like 

to see—in the very least—students and elderly folks have access to a safe transit 

option to get to school, medical appointments, and local meetings. 

I appreciate you all coming today. As the Senate begins to look forward to the 

upcoming transportation reauthorization bill, I am hopeful that our Committee will 

be able to craft a transit portion that is fair to small and rural communities, where 

transit ridership has increased dramatically, even as the economy has gone into a 

downturn. I look forward to working with the new Secretary of Transportation, Secretary LaHood, the Chairman and this Committee to ensure a strong rural component to future transit and transportation infrastructure legislation. 

PREPARED STATEMENT OF MICHAEL T. MCRAITH 

DIRECTOR OF INSURANCE, ILLINOIS DEPARTMENT OF FINANCIAL AND

PROFESSIONAL REGULATION, ON BEHALF OF THE NATIONAL ASSOCIATION

OF INSURANCE COMMISSIONERS

MARCH 17, 2009 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank 

you for inviting me. My name is Michael McRaith. I am the Director of Insurance 

for the State of Illinois, and I testify on behalf of the National Association of Insurance Commissioners (NAIC). I am pleased to discuss efforts to modernize the Statebased structure of insurance supervision and to offer a regulator’s description of the 

fit for that system within the broader context of financial regulatory reform. 

Having regulated the U.S. insurance industry for over 135 years, State insurance 

officials have a demonstrable record of successful consumer protection and industry 

oversight. Consumer protection has been, is and will remain priority one for State 

insurance officials. Each day our responsibilities focus on ensuring that the insurance safety net remains available when individuals, families and businesses are in 

need. We advocate for insurance consumers and objectively regulate the U.S. insurance market, relying upon the strength of local, accountable oversight and national 

collaboration. 

With continually modernized financial solvency regulation, State insurance regulators supervise the world’s most competitive insurance markets. Twenty-eight (28) 

of the world’s fifty (50) largest insurance markets are individual States within our 

nation. As a whole, the U.S. insurance market surpasses the combined size of the 

second, third and fourth next largest markets. More than 2,000 insurers have been 

formed since 1995—leading to a total of more than 7,661 in the United States—with 

combined premiums or more than $1.6 trillion. States derive $17.5 billion in taxes 

and fees from insurers, with approximately 8 percent (8 percent) used to support 

regulation and the remainder supporting State general funds. With this proud 

record of success, State insurance regulation constantly evolves, innovates and improves to meet the needs of consumers and industry. My testimony today will focus 

on the prominent place for State-based insurance regulation within systemic risk 

regulation and discuss continuing State efforts to improve functional insurance regulation. 

Insurance companies are integral capital market participants and are not immune 

from the unprecedented global economic turmoil. However, insurers have not caused 

the turmoil and, as a whole, the industry is a source of calm in an otherwise turbuVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
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1See Financial Reform, A Framework for Financial Stability, Group of Thirty, January 15, 

2009, p. 19. 

lent time. Vigilant, engaged and effective prudential supervision by the States fosters this insurance marketplace stability, and we urge caution in any Federal initiative that may jeopardize the State-based platform for such oversight. 

To be clear, any reforms to functional insurance regulation should start and end 

with the States. Federal assistance may be necessary if targeted to streamline insurance regulator interaction and coordination with other functional regulators, but 

that initiative should not supplant or displace the State regulatory system. The insurance industry, even in these difficult times, has withstood the collapses that echo 

through other financial sectors. 

States Oversee a Vibrant, Competitive Insurance Marketplace 

In addition to consumer protection, State insurance officials are adept stewards 

of a vibrant, competitive insurance marketplace which, in turn, provides tremendous 

economic benefits for the States. When State insurance markets are compared to 

other national insurance markets around the globe, the size and scope of those 

States’ markets—and therefore the responsibility of State regulators—typically 

dwarfs the markets of whole nations. For example, the insurance market in Connecticut is larger than the insurance markets in Brazil or Sweden. Likewise, the 

markets in California, New York and Florida are each larger than the markets in 

Canada, China or Spain, and the markets in Ohio and Michigan are each larger 

than the markets in India, Ireland or South Africa. Each of these markets demands 

a local, accountable and responsive regulator. 

Systemic Risk: State/Federal Partnership 

State insurance regulators support Federal initiatives to identify and manage national and global systemic risk. When defining a ‘‘systemically significant’’ institution, empirical or data-driven factors aid but do not conclude an analysis. As described in the Group of Thirty (G30) report released on January 15, 2009, State insurance regulators agree that four considerations are essential: (1) size, (2) leverage, 

(3) scale of interconnectedness, and (4) the systemic significance of infrastructure 

services.1

Insurance is one part of a far larger financial services economic sector. Insurance 

companies are not likely to be the catalyst of systemic risk but, rather, the unfortunate recipient of risk imposed by other financial sectors, as exemplified by the 

American International Group (AIG). 

Given that the U.S. has the world’s most vibrant and competitive insurance marketplace, it is unlikely that any one insurer is ‘‘too big to fail.’’ If an insurer were 

to fail, regardless of size, State-based guaranty funds would protect existing policyholders and pay claims. As history demonstrates, competition and capacity allow 

other insurers to fill marketplace voids left by the failed insurer. States also operate 

residual markets to cover those unable to obtain an offer of insurance in the conventional market. Therefore, even a major insurer failure, while traumatic in terms of 

job displacement and, perhaps, for shareholders, will generally not impose systemic 

risk. 

Insurance risk management differs from risk in the banking sector because insurers are generally less leveraged than banks. Less leverage allows insurers to better 

withstand financial stress. State insurance regulators impose strict rules on the 

type, quality and amount of capital in which an insurer can invest. Also, insurer 

liabilities are generally independent of economic cycles in that the ripeness of a 

claim is not a function of economic conditions. This long-term reality reduces the 

likelihood an insurer will have to liquidate assets to satisfy short-term obligations. 

An insurance business having special interconnectedness to capital markets may 

be capable of generating systemic risk, however. The financial and mortgage guaranty lines, for example, have encountered difficulty because of mortgage-related securities which, in turn, have adversely impacted public sector and mortgage loan financing. 

Even strict accounting and investment standards do not inoculate insurers from 

the risks of recent systemic failures. A wholesale collapse of the stock market (to 

a greater degree than what we have recently seen) or the bond market would have 

a dire effect on insurance companies and could lead to insurance company failures. 

A collapse of the dollar and rampant inflation would increase claims costs for property and casualty insurers. A mixture of high inflation and a declining economy 

(stagflation) and low investment returns could create a perfect storm for all aspects 

of the economy. Regulation, of course, cannot ensure that insolvencies will not occur 

in extreme circumstances. 

45 

Systemic Risk: Functional Regulators Work Together 

Unmanaged risk in one sector can deleteriously affect the viability of other sectors. The current financial crisis illuminates the need for a collaborative approach 

to regulation of financial conglomerates, or those enterprises of such magnitude that 

a failure would jeopardize the financial stability of an economy, or a segment of an 

economy. Cooperation and communication among the functional financial services 

regulators should be formalized in order to harmonize regulatory dialog and efficacy. 

State insurance regulators support Federal initiatives to ensure or enhance financial stability, while preserving State-based insurance regulation. Functional regulators can work and coalesce in a manner that protects consumers and promotes financial stability. State regulators support financial stability regulation that incorporates the following principles: 

(1) Primary Role for States in Insurance Regulation: For systemically significant 

enterprises, the establishment of a Federal financial stability regulator, e.g., 

the Federal Reserve, will integrate but not displace State-based regulation of 

the business of insurance. Consumer access to State-based, local regulatory officials will remain the bulwark of consumer protection. A Federal financial 

stability regulator will share information and collaborate formally with other 

Federal and State financial services regulators. Appropriate information sharing authority and confidentiality protocols should be established between all 

Federal and State financial services regulators, perhaps including law enforcement. 

(2) Formalization of Regulatory Cooperation and Communication: Federal financial stability regulation should ensure effective coordination, collaboration and 

communication among the various and relevant State and Federal financial 

regulators. A Federal financial stability regulator should work with functional 

regulators and develop best practices for enterprise-wide and systemic risk 

management. A fundamental aspiration for any supervisory oversight should 

include the preservation of functional regulation of the business being transacted by each independent entity. 

(3) Systemic Risk Management: Preemption of functional regulatory authority, if 

any, should be limited to extraordinary circumstances that present a material 

risk to the continued solvency of the holding company, or ‘‘enterprise,’’ the demise of which would threaten the stability of a financial system. With the experience of decades of an evolving practice, State regulators know that effective regulation inevitably coincides with comprehensive risk management. 

‘‘Supervisory colleges’’ can be utilized to understand the risks within a holding 

company structure, and can be comprised of regulators from each financial 

services sector represented within the enterprise. The financial stability regulator should operate in a transparent, accountable and collaborative manner, 

and should defer to the functional regulator in proposing, recommending or requiring any action related to a regulated entity’s capital, reserves or solvency. 

One company within a holding company structure should not be compromised 

for the benefit of another company within another sector. 

American International Group (AIG) exemplifies the circumstance in which systemic stability regulation must be bolstered. All reasonable minds accept as fact 

that AIG’s State regulated insurance businesses did not cause AIG’s problems. AIG’s 

Financial Products subsidiaries, though, embraced risks that threaten not only the 

AIG parent company but also may cause reputational harm to AIG’s insurers. AIG’s 

insurance companies were not immune from the ripple effects created by the Financial Products division, as the subsequent downgrade of AIG due to credit default 

swap exposure put pressure on the insurers’ securities lending practices when 

counterparties attempted to unilaterally terminate those transactions. Despite these 

challenges and others, AIG’s commercial insurance lines—its core insurance businesses—generated significant underwriting profit during 2008. 

Subject to State regulatory oversight, insurance companies have weathered these 

extraordinary economic times relatively well while coping with both natural catastrophes (e.g., Hurricane Dolly, California fires) and challenging marketplace conditions. State regulators caution that partnership with Federal and other functional 

regulators is not acquiescence to Federal preemption. On the contrary, State insurance regulators have risk management, accounting standards and investment allocation expertise that can inform any Federal initiative. 

Office Of Insurance Information (OII) 

The most effective way to anticipate and mitigate systemic risk, both within a 

holding company and within an economy, is to understand where, and to what extent, that risk exists. The Federal Government does need relevant information and 

46 

2 Currently, 34 jurisdictions have joined the Interstate Insurance Product Regulation Commission (IIPRC). Compacting members are Alaska, Colorado, Georgia, Hawaii, Idaho, Indiana, Iowa, 

Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto 

Rico, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, 

West Virginia, Wisconsin and Wyoming. 

financial data on insurance to facilitate that effort. In its final form during the last 

Congress, the NAIC supported House legislation creating a Federal Office of Insurance Information (H.R. 5840 from the 110th Congress). The OII would construct an 

insurance data base within the Department of Treasury and be available to provide 

directly to the Congress and Federal agencies the encyclopedic insurance-related 

data and information presently compiled by the States. State regulators worked constructively to narrow the preemption aspects of the initial proposal. 

We agree that, as a key component of financial stability, insurance must be 

factored into an all-inclusive view of the financial system at the Federal level. This 

shared objective can, of course, be achieved without a Federal insurance regulator 

and without preempting State authority over the fundamental consumer protections, 

including solvency standards. 

Modernization Proposals: Optional Federal Charter—A Misguided Solution 

While contemplating perspectives on insurance regulatory reform, a group of the 

world’s largest insurers continue to advocate for parallel Federal and State regulation. For more than 10 years, insurance industry lobbyists have called for the creation of a massive new Federal bureaucracy known as an optional Federal charter 

(‘‘OFC’’). The current climate of instability and insolvency in the banking sector illustrates this concept cannot work. An optional system where the regulated enterprise chooses the regulator with the lightest touch—as evidenced by AIG—leads to 

regulatory arbitrage, gaps in supervision, ineffective risk management and disastrous failures. 

Through the OFC, some of the largest insurers seek to unravel basic consumer 

protections and the essential solvency requirements that have nurtured the world’s 

largest and most competitive insurance markets. The State-based system benefits 

both consumers and industry participants. The facts do not support the need for an 

OFC—it is a solution in search of a problem. 

Modernization Proposals: OFC Alternative—Interstate Insurance Compact 

Life insurers argue that life insurance provides wealth protection and, as a product, competes against banking products. This, in turn, warrants a streamlined approval process for entry into the national marketplace. While agreeing with the 

premise, insurance regulators know that such streamlined regulatory approval cannot come at the cost of consumer protection and solvency regulation. Insurance regulators have worked successfully to bring more cost-effective and sound insurance 

products to the market more quickly. Central to this effort has been the Interstate 

Insurance Compact (‘‘the Compact’’) for filing and regulatory review of life, annuities, long-term care and disability insurance products. The States heard the call for 

a more competitive framework in the life insurance sector, and have responded. 

The Compact is a key State-based initiative that modernizes insurance regulation 

to keep pace with global demands, while upholding strong consumer protections. 

Under the Compact, insurers file one product under one set of rules resulting in one 

approval in less than sixty days that is valid in all Compact Member jurisdictions. 

This example of State-based reform allows insurers to quickly bring new products 

to market according to strong uniform product standards. At the same time, the 

Compact preserves a State’s ability to address front-line problems related to claims 

settlement, consumer complaints, and unfair and deceptive trade practices. 

States have overwhelmingly embraced the Compact, as to date 33 States and 

Puerto Rico have joined by passing enabling legislation.2 Over one-half of U.S. nationwide premium volume has joined the Compact. More States are expected to 

come on board in the near future, with legislation pending in Connecticut, New 

York, New Mexico, and New Jersey. 

Modernization Proposals: Producer Licensing Reform 

By developing and utilizing electronic applications and data bases, State insurance officials have created much greater efficiencies in licensing insurance producers. Nevertheless, State insurance officials continue efforts to achieve greater 

uniformity in the producer licensing process. 

The National Insurance Producer Registry (NIPR) is a non-profit affiliate of the 

NAIC that assists regulators and insurers when reviewing an agent or broker liVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
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cense. With information on more than 4 million producers, NIPR also provides an 

electronic format for non-resident producer licensing. 

In 2008 State insurance regulators worked with the Independent Insurance 

Agents and Brokers of America (the ‘‘Big I’’), and others, to offer refinements on 

H.R. 5611 (‘‘NARAB 2’’) designed to achieve the non-resident licensing uniformity 

goals of the 1999 Gramm-Leach-Bliley Act (‘‘GLB’’). While States were in compliance 

with nearly every aspect of GLB, State regulators continue to work to improve the 

system and efficiency of producer licensing. The NAIC supported the compromise 

legislation and continues working with the Big I to address the Constitutional concerns raised by the Department of Justice. Producer licensing is a topic that would 

benefit from uniformity nationwide, and State regulators are not averse to Federal 

Government involvement to achieve such uniformity. Our good faith, constructive efforts demonstrate our commitment to achieve the best possible insurance regulatory 

system. 

Modernization Proposals: Surplus Lines and Reinsurance Reform 

In both the 109th and 110th Congress, a bill known as the ‘‘Non-admitted and 

Reinsurance Reform Act’’ (the ‘‘Act’’) was introduced and passed the House of Representatives. Title I of the proposed Act refers to ‘‘Non-admitted Insurance.’’ State 

insurance regulators, through the NAIC, testified publicly in support of uniformity 

and modernization of surplus lines multi-State placement and recognize the need to 

improve uniformity for tax collection, form filing and non-admitted carrier eligibility. Working collectively, in April, 2008, State insurance regulators also submitted 

proposed improvements to Title I of the Act to Senator Jack Reed, Chairman Dodd, 

and others. 

Title II of the Act refers to ‘‘Reinsurance’’ and contains provisions wholly opposed 

by State regulators. While espousing principles in support of reinsurance reform, 

the NAIC opposed the Title II provisions as overtly threatening the solvency and 

other financial standards for ceding carriers. Consumer protection cannot be sacrificed to ease the industry’s financial standards. Through the NAIC, State insurance regulators adopted a framework to modernize the regulation of reinsurance in 

the United States, and are drafting a specific legislative proposal to implement the 

reforms. State insurance regulators have publicly stated that implementation of the 

reform will necessarily include Congressional involvement. 

Consumer Protections: Strong Prudential Supervision 

As the current financial crisis graphically illustrates, effective solvency supervision is the ultimate consumer protection. The concepts of prudential supervision 

and consumer protection are not severable because the core obligation of an insurer 

is a promise to pay. Since 1989, when the NAIC adopted a solvency agenda designed 

to enhance the ability of State regulators to protect insurance consumers from the 

financial trauma of insurer insolvencies, State insurance departments have continually improved this most elemental consumer protection. At the very core of those 

improvements is the NAIC’s accreditation program, which requires each State to 

have statutory accounting, investment, capital and surplus requirements embedded 

in State law to further strengthen the solvency of the industry. Many of these laws 

increase regulators’ ability to identify and act when a company’s financial condition 

has weakened. These laws further benefit from the coordinated activity of the 

States. 

Financial Analysis Working Group 

The NAIC’s Financial Analysis Working Group (‘‘FAWG’’) is a confidential, closeddoor forum that allows financial regulators to assess nationally significant insurers 

and insurer groups that exhibit characteristics of trending toward financial trouble. 

FAWG evaluates whether appropriate supervisory action is being taken. 

Through FAWG and other standing committees and reporting mechanisms, States 

work together and form a complex network of ‘‘checks and balances,’’ ensuring that 

even basic judgments of one primary financial regulator are subject to the oversight 

of a similarly skilled colleague from another State. These improvements have allowed regulators to identify more easily when insurers are potentially troubled and 

react more quickly to protect policyholders and consumers. 

Solvency II 

The myth of the ‘‘Solvency II’’ directive, currently under consideration by the European Union, has been touted as the beacon of global insurance regulatory reform. 

In fact, Solvency II would lower reserve requirements—appealing to a large insurer, 

of course—that would threaten the independent solvency standards of U.S.-based insurers. At this moment in our nation’s history, given that the paradigm of financial 

institutions appropriately pricing and managing risk has largely unraveled, a reducVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
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tion in reserve requirements for insurers would not serve the interest of the consumer or the investing public. Today’s headlines illustrate that an industry motivated by profit and market pressures does not always have the consumer’s best interests at heart. 

Solvency II is years away from implementation. Under the current timetable, the 

Directive is not scheduled to be implemented by the various member countries until 

2012. However, at this time, even the previously agreed upon standards are being 

re-evaluated and many will likely be disposed of entirely. Several smaller EU States 

have expressed reservations about its effect on their resident insurance consumers. 

Solvency II is far from a reality, even where it originated, and has a lore that far 

outshines its factual merits. 

State regulators are carefully evaluating aspects of Solvency II and principlesbased regulation for potential application within the State-based system. We urge 

careful analysis of any proposal to achieve modernization of insurance supervision 

in the United States by applying global standards. Even well intended and seemingly benign ‘‘equivalence’’ standards can have a substantial adverse impact on existing State protections for insurance consumers. 

Consumer Protections: Local, Personal Response in the States 

Consumer protection has been, is, and will remain priority one for State insurance 

regulators. State insurance supervision has a long history of aggressive consumer 

protection, and is well-suited to the local nature of risk and the unique services offered by the insurance industry. State regulators live and work in the communities 

they serve, and respond accordingly. In a year, we resolve 400,000 formal complaints and respond to nearly 3 million consumer inquiries. This kind of consumeroriented local response is the essential hallmark of State insurance supervision. 

Insurance is a uniquely personal and complex product that differs fundamentally 

from other financial services, such as banking and securities. Unlike banking products, which provide individuals credit to obtain a mortgage or make purchases, or 

securities, which offer investors a share of a tangible asset, insurance products require policyholders to pay premiums in exchange for a legal promise. Insurance 

transfers risk while investments and even deposits are an assumption of risk. 

Insurance is a financial guarantee to pay benefits, often years into the future, in 

the event of unexpected or unavoidable loss that can cripple the lives of individuals, 

families and businesses. The cost to insurers to provide those benefits is based on 

a number of factors, many of which are prospective assumptions, making it difficult 

for consumers to understand or anticipate a reasonable price. Unlike most banking 

and securities products, consumers are often required to purchase insurance both 

for personal financial responsibility and for economic stability for lenders, creditors 

and other individuals. Most consumers find themselves concerned with their insurance coverage, or lack thereof, only in times of critical personal vulnerability—such 

as illness, death, accident or catastrophe. State officials have responded quickly and 

fashioned effective remedies to respond to local conditions in the areas of claims 

handling, underwriting, pricing and market practices. 

State insurance regulators encourage consumers to be aggressive, informed shoppers. Through the NAIC, State regulators have proactively developed the latest and 

best tools to educate consumers on important insurance issues. These have included 

outreach campaigns, public service announcements and media toolkits. With its 

landmark Insure U—Get Smart about Insurance public education program, 

(www.insureuonline.org), the NAIC has demonstrated its deep commitment to educating the public about insurance and consumer protection issues. Insure U’s educational curriculum helps consumers evaluate insurance options to meet different 

life stage needs. Available in English and Spanish, the Insure U Web site covers 

basic information on the major types of insurance—life, health, auto and homeowners/renters insurance. Insure U also offers tips for saving money and selecting 

coverage for young singles, young families, established families, seniors/empty nesters, domestic partners, single parents, grandparents raising grandchildren and 

members of the military. 

Conclusion 

State insurance regulators, working together through the NAIC, are partners with 

Congress and the Obama Administration, sharing jointly in pursuit of improvement 

to the financial regulatory system and, ultimately, improving consumer protections. 

The State-based insurance regulatory system includes critical checks and balances, 

eliminating the perils of a single point of failure and opaque or omnipotent decisionmaking. With a fundamental priority of consumer protection, and with a system 

that has fostered the world’s largest, most competitive insurance market, State insurance regulators embrace this opportunity to build on our proven regime. 

49 

The NAIC and its members—representing the citizens, taxpayers, and governments of all fifty States, the District of Columbia and U.S. territories—commit to 

share our expertise with Congress and to work with members of this Committee, 

and others. We welcome Congressional interest in our modernization efforts. We 

look forward to working with you. 

Thank you for this opportunity to testify, and I look forward to your questions. 


31709-1.eps
50 


31709-2.eps
51 

PREPARED STATEMENT OF FRANK KEATING 

PRESIDENT AND CEO, AMERICAN COUNCIL OF LIFE INSURERS

MARCH 17, 2009 

Mr. Chairman and members of the Committee, my name is Frank Keating, and 

I am President and CEO of the American Council of Life Insurers. The ACLI is the 

principal trade association for U.S. life insurance companies. Its 340 member companies account for 93 percent of total life insurance company assets, 94 percent of 

the life insurance premiums, and 94 percent of annuity considerations in the United 

States. 

All sectors of U.S. financial services are at a critical juncture given the current 

state of the domestic and global markets. I appreciate the opportunity to discuss 

with you today the views of the life insurance industry on how insurance regulation 

can be modified to improve the current structure and how insurance regulation can 

be integrated most effectively with that of other segments of the financial services 

industry as well as with overall systemic risk regulation. 

Addressing systemic risk in the financial markets—both domestically and globally—has emerged as the driving force behind regulatory reform efforts. My comments today reflect that perspective and begin with the premise that the life insurance business is, by any measure, systemically significant. 

The Life Insurance Industry Is Systemically Significant 

Life insurance companies play a critically important role in the capital markets 

and in the provision of protection and retirement security for millions of Americans. 

Life insurers provide products and services differing significantly from other financial intermediaries. Our products protect millions of individuals, families and businesses through guaranteed lifetime income, life insurance, long-term care and disability income insurance. The long-term nature of these products requires that we 

match our long term liabilities with assets of a longer duration than those of other 

types of financial companies. 

Life insurers are the single largest U.S. source of corporate bond financing and 

hold approximately 18 percent of total U.S. corporate bonds. Over 42 percent of corporate bonds purchased by life insurers have maturities in excess of 20 years at the 

time of purchase. The average maturity at purchase for all corporate bonds held by 

life insurers is approximately 17 years. As Congress and the Administration continue efforts to stabilize the capital markets and increase the availability of credit, 

the role life insurers play as providers of institutional credit through our fixed income investments cannot be overemphasized. We are significant investors in bank 

bonds and consequently are an important factor in helping banks return to their 

more traditional levels of lending. 

Life insurers are also the backbone of the employee benefit system. More than 50 

percent of all workers in the private sector have life insurance made available by 

their employers. Life insurers hold approximately 22 percent of all private employerprovided retirement assets. 

Our companies employ about 2.2 million people, and the annual revenue from insurance premiums alone was $600 billion in 2007, an amount equal to 4.4 percent 

of U.S. GDP. Some 75 million American families—nearly 70 percent of households— 

depend on our products to protect their financial and retirement security. There is 

over $20 trillion of life insurance coverage in force today, and life insurers hold $2.6 

trillion in annuity reserves. In 2007 life insurers paid $58 billion to life insurance 

beneficiaries, $72 billion in annuity benefits and $7.2 billion in long-term-care benefits. 

Individual Company Systemic Risk 

We do not presume to suggest to Congress any definitive standard for determining 

which, if any, life insurance companies have the potential to pose systemic risk. We 

assume, however, that relevant factors for Congress to consider in this regard would 

include: the extent to which the failure of an institution could threaten the viability 

of its creditors and counterparties; the number and size of financial institutions that 

are seen by investors or counterparties as similarly situated to a failing institution; 

whether the institution is sufficiently important to the overall financial and economic system that a disorderly failure would cause major disruptions to credit markets or the payment and settlement systems; whether an institution commands a 

particularly significant market share; and the extent and probability of the institution’s ability to access alternative sources of capital and liquidity. 

We do offer three general observations in this regard. First, moral hazard and the 

potential risk of competitive imbalances can be minimized by avoiding a public, 

bright-line definition of systemic risk and by keeping confidential any role a sysVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
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temic risk regulator plays with respect to an individual company. Second, systemic 

risk regulation should have as its goal the identification and marginalization of 

risks that might jeopardize the overall financial system and not the preservation of 

institutions deemed ‘‘too big to fail.’’ And third, and specific to life insurance, systemic risk regulation must not result in the separation of those elements of life insurance regulation that together constitute effective solvency oversight (e.g., capital 

and surplus, reserving, underwriting, risk classification, nonforfeiture, product regulation). Having different regulators assume responsibility for any of these aspects 

of insurance regulation would result in an increase in systemic risk, not a reduction 

of it. 

Structural Considerations 

Without a clear indication of how Congress intends to address systemic risk regulation, we make two fundamental assumptions for purposes of this testimony. The 

first is that the role of a systemic risk regulator will focus on industry-wide issues 

and on holding company oversight but will not extend to direct functional (solvency) 

oversight of regulated financial service operating companies (e.g., insurers, depository institutions and securities firms). The second is that the systemic regulator will 

be tasked with coordinating closely with functional (solvency) regulators and will facilitate the overall coordination of all regulators involved with the oversight of a systemically significant firm. 

The absence of a Federal functional insurance regulator gives rise to several important structural questions regarding how systemic regulation can be fully and effectively implemented vis-a-vis insurance. We urge Congress to keep these questions 

in mind as regulatory reform legislation is developed. 

Policy Implementation 

The first question involves the implementation of national financial regulatory 

policy. Whatever legislation Congress ultimately enacts will reflect your decisions on 

a comprehensive approach to financial regulation. Your policies should strongly govern all systemically significant sectors of the financial services industry and should 

apply to all sectors on a uniform basis without any gaps that could lead to systemic 

problems. 

Without a Federal insurance regulator, and without direct jurisdiction over insurance companies, and given clear constitutional limitations on the ability of the Federal Government to mandate actions by State insurance regulators, how will national regulatory policies be implemented with respect to the insurance industry? 

The situation would appear to be very much analogous to the implementation of 

congressional policy on privacy reflected in the Gramm-Leach-Bliley Act. Federal 

bank and securities regulators implemented that policy for banking and securities 

firms, but there was no way for Congress to compel insurers to subscribe to the 

same policies and practices. Congress could only hope that 50+ State insurance regulators would individually and uniformly decide to follow suit. Hope may have been 

an acceptable tool for implementing privacy policy, but it should not be the model 

for reform of U.S. financial regulation. The stakes are much too high. 

Coordination of Systemic and Functional Regulators 

As noted above, we assume that one aspect of effective systemic risk regulation 

will be close coordination between the systemic risk regulator and the functional 

(solvency) regulator(s) of a systemically significant firm. Moreover, we assume that 

the systemic regulator will be called upon to interact with the functional regulators 

of all financial service industry sectors to address sector risks as well as risks across 

sector lines. For firms deemed systemically significant, we also assume there will 

be a Federal functional regulator with whom the Federal systemic regulator will coordinate. 

If there are insurance firms that are deemed systemically significant, the question 

arises as to how the Federal systemic risk regulator will be able to coordinate effectively with multiple State insurance regulators? How will Federal policy decisions 

be effectively coordinated with State regulators who need not adhere to those policy 

decisions and who may differ amongst themselves regarding the standards under 

which insurance companies should be regulated? 

International Regulation and Coordination 

Today’s markets are global, as are the operations of a great many financial service 

firms. Consequently, systemic risk regulation necessarily involves both domestic and 

global elements. While State insurance regulators are certainly involved in discussions with financial regulators from other countries, they do not have the authority 

to set U.S. policy on insurance regulation nor do they have the authority to negotiate and enter into treaties, mutual recognition agreements or other binding agreeVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
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ments with their foreign regulatory counterparts in order to address financial regulatory issues on a global basis. How can multinational insurance companies be effectively regulated and how can U.S. policy on financial regulation—systemic or otherwise—be coordinated and harmonized as necessary with other countries around the 

globe? 

Regulators, central governmental economic policymakers and legislators in Europe, Japan, Canada and many other developed and developing markets point to the 

lack of a comprehensive Federal-level U.S. regulatory authority for financial services 

as one factor that led to the current instability of at least one of the largest U.S. 

financial institutions. Discussions at the upcoming G20 meetings in London will 

focus on the need to coordinate a global response to the economic crisis will include 

representatives of the comprehensive financial services regulators of 19 nations, 

with the only exception being the U.S. because of its lack of a Federal regulator for 

insurance. 

The G20 work plan includes mandates for two working groups. The first is tasked 

with monitoring implementation of actions already identified and making further 

recommendations to strengthen international standards in the areas of accounting 

and disclosure, prudential oversight and risk management. It will also develop policy recommendations to dampen cyclical forces in the financial system and address 

issues involving the scope and consistency of regulatory regimes. The second working group will monitor actions and develop proposals to enhance international cooperation in the regulation and oversight of international institutions and financial 

markets, strengthen the management and resolution of cross-border financial crises, 

protect the global financial system from illicit activities and non-cooperative jurisdictions, strengthen collaboration between international bodies, and monitor expansion of their membership. 

We believe Congress needs to fill this systemic regulatory gap through the creation of a Federal insurance regulatory authority like every other member of the 

G20. This Federal authority is necessary so there can be a comprehensive approach 

to systemic risk allowing U.S. regulators to respond to a crisis nimbly and in coordination with other major global regulators. Only in this way will policymakers and 

regulators have confidence in the equivalency of supervision, and the authority to 

share sensitive regulatory information and the ability to provide mutual recognition 

as appropriate. 

Monitoring the U.S. Financial System 

A significant aspect of the mission statement of the Treasury Department is ensuring the safety, soundness and security of the U.S. and international financial 

systems. Long before the advent of the current economic crisis, the Treasury Department found it difficult to derive a clear and concise picture of the health of the insurance industry. In considering steps that might be taken to enhance the ability 

of Treasury to carry out these objectives—which now appear far more important 

than in the past—one must ask how, absent a Federal functional regulator with an 

in-depth understanding of the industry, vital information on the insurance industry 

can be effectively collected and analyzed? 

The Effects of Federal Decisions on a State Regulated Industry 

As Congress considers how to address systemic risk regulation and how it might 

be applied to the insurance industry, it is important to take into account the ramifications of recent Federal actions on the industry. Crisis-related decisions at the 

Federal level have too often produced significant adverse effects on life insurers. Examples include: the handling of Washington Mutual which resulted in life insurers, 

as major bond holders, experiencing material portfolio losses; the suspension of dividends on the preferred stock of Fannie Mae and Freddie Mac and the fact life insurers were not afforded the same tax treatment on losses as banks, which again significantly damaged the portfolios of many life insurance companies and directly contributed to the failure of two life companies; the badly mistaken belief on the part 

of some Federal policymakers that mark-to-market accounting has no adverse implications for life insurance companies when in fact its effects on these companies can 

be more severe than for most other financial institutions; and more recently the 

cramdown provisions in the proposed bankruptcy legislation that could potentially 

trigger significant downgrades to life insurers’ Triple-A rated residential mortgagebacked investments. 

These actions were all advanced with the best of intentions, but in each instance 

they occurred with little or no understanding of their effects on life insurers. And 

in each instance the only voice in Washington raising concerns was that of the industry itself. In this stressed market environment, legislators or policymakers can 

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understanding of, an important financial industry sector. Actions taken without substantial input from an industry’s regulators carry with them a much higher likelihood of unintended and adverse consequences. Insurance is the only segment of the 

financial services industry that finds itself in this untenable position as decisions 

critical to our franchise are debated and decided in Washington. 

Conclusion 

There is no question that assuring the stability of our payment system is of paramount concern. However, reforming U.S. financial regulation and advancing initiatives designed to stabilize the economy must take into account the interests and the 

needs of all segments of financial services, including life insurance. Unfortunately, 

the absence of a Federal insurance regulator all too often means that we are afterthought as these important matters are advanced. We urge Congress to recognize 

the systemic importance of our industry to the economy and to the retirement and 

financial security of millions of consumers and tailor reform and stabilization initiatives accordingly. Failure to do so runs the very real risk of doing grave harm to 

both. We pledge to work closely with this Committee and with others in Congress 

to provide you with factual, objective information on the life insurance business 

along with our best ideas on how a comprehensive and effective approach to regulatory reform can be implemented. I am sure we all share the goals of maintaining 

confidence and strength in the life insurance business and restoring stability to the 

entire spectrum of U.S. financial services. 

PREPARED STATEMENT OF WILLIAM R. BERKLEY 

CEO OF W.R. BERKLEY CORPORATION, ON BEHALF OF

THE AMERICAN INSURANCE ASSOCIATION

MARCH 17, 2009 

Thank you, Chairman Dodd, Ranking Member Shelby, and members of the Committee. My name is Bill Berkley. I am the CEO of W.R. Berkley Corporation, a 

multi-billion dollar commercial lines property-casualty insurance and reinsurance 

group that I founded in 1967, which is headquartered, Mr. Chairman, in Greenwich, 

Connecticut. I am testifying today not just as CEO of W.R. Berkley, but as Chairman of the Board of the American Insurance Association. I appreciate the opportunity to be here to discuss issues of great importance during this time of economic 

upheaval and to participate in the important work of reshaping our regulatory landscape to confront future challenges and protect insureds. 

I believe that I bring a unique and broad perspective to this discussion. I have 

been involved in the insurance business as an investor or manager for over 40 years. 

I am a leading shareholder of insurance companies that protect U.S. businesses of 

all sizes from the risk of loss and that provide reinsurance, but I am also a majority 

shareholder of a nationally chartered community bank. I have witnessed the ebbs 

and flows of business cycles during that time, with the only constants being the existence of risk and the need to manage it. It is that challenge that brings us here 

today—the imperative of examining, understanding and measuring risk on an individual and systemic level—and retooling the financial regulatory structure to be responsive to that risk, recognizing that you cannot forecast every problem. 

With that context in mind, I would like to focus my remarks today on three major 

themes: 

1. Property-casualty insurance is critical to our economy, but it does not pose the 

same types of systemic risk challenges as most other financial services sectors. 

2. Nonetheless, because property-casualty insurance is so essential to the functioning of the economy and is especially critical in times of crisis and catastrophe, functional Federal insurance regulation will enhance the industry’s effectiveness and thus should be included as part of any well-constructed Federal 

program to analyze, manage and minimize systemic risk. 

3. Given the national and global nature of risk assumed by property and casualty 

insurers, establishment of an independent Federal insurance regulator is the 

only effective way of including property-casualty insurance in such a program. 

Property-casualty insurance is essential to the overall well-being of the U.S. economy. Insurance contributes 2.4 percent to the annual GDP, with property-casualty 

insurance accounting for more than $535 billion in capital, purchasing close to $370 

billion in State and municipal bonds, paying almost $250 billion annually in claims 

and, importantly, directly or indirectly employing 1.5 million hard-working Americans. Because property-casualty insurance protects individuals and businesses 

55 

against unforeseen risks and enables them to meet financial demands in the face 

of adversity, it is the engine that propels commerce and innovation. Without the 

critical coverage provided by property-casualty insurance, capital markets would 

grind to a halt: Main Street and large businesses alike. 

While property-casualty insurance plays an essential role in our economy, it has 

been successfully weathering the current crisis. It has had to carefully navigate 

through some heavy turbulence to do so, but the sector remains strong overall, 

today. There are several reasons for that, but importantly property-casualty insurance operations are generally low-leveraged businesses, with lower asset-to-capital 

ratios than other financial institutions, more conservative investment portfolios, and 

more predictable cash outflows that are tied to insurance claims rather than ‘‘ondemand’’ access to assets. 

Yet, despite the industry’s relative stability in this crisis, there are compelling 

reasons to establish Federal functional regulation for property-casualty insurance in 

any regulatory overhaul plans even though it has not presented systemic risk. The 

industry could always face huge, unforeseen, multi-billion dollar loss events such as 

a widespread natural disaster or another terrorist attack on U.S. soil. It makes little 

sense to look at national insurance regulation after the event has already occurred, 

but all the sense in the world to put such a structure in place to help either avoid 

the consequences of an unforeseen event altogether or to temper them through appropriate Federal mechanisms, ultimately minimizing potential industry disruption. 

However this Committee resolves the debate on Federal systemic risk oversight, 

the only effective way to include property-casualty insurance would be to create an 

independent Federal functional insurance regulator that stands as an equal to the 

other Federal banking and securities regulators. 

I continue to believe this after much deliberation and with great respect for the 

State insurance regulatory community. The State-based insurance regulatory structure is inevitably fragmented and frequently not well-equipped to close the regulatory gaps that the current crisis has exposed. Each State only has jurisdiction to 

address those companies under its regulatory control, and only to the extent of that 

control. Even where the States have identical insurance codes or regulations, the 

regulatory outcomes may still be inconsistent because of diverse political environments and regulatory interests. If this crisis has revealed anything, it is the need 

for more—not less—regulatory efficiency, coordinated activity or tracking, sophisticated analysis of market trends and the ability to anticipate and deal with potential 

systemic risk before the crisis is at hand. 

In addition, virtually all foreign countries have national regulators who recognize 

that industry supervision goes well beyond a focus on solvency. Effective contemporary regulation also must examine erratic market behavior by companies in competitive markets to ensure that those markets continue to function properly and do 

not either encourage other competitors to follow the lead of irrational actors or impede the competitive ability of well-managed enterprises. Further, the U.S. Constitution prevents the States from exercising the foreign affairs and foreign commerce powers. Therefore, if we are to coordinate with other nations and their financial regulators to address global crises like the current one, we need a single insurance voice at the Federal level to do so. In sharing these observations, I want to 

be clear: This is not a criticism of State regulators; it is a conclusion about the inevitable limitations and gaps inherent in separate State regulation from one who has 

been in the business for decades. 

Equally important, functional Federal insurance regulation allows a single agency 

to be well-informed about all of the activities within the insurance sector, including 

those types of unforeseen mega-events that could affect other sectors of the economy. It also provides the foundation for equitable regulatory action in times of crisis 

and when the insurance sector is functioning normally. As even-handed as every 

State regulator may try to be, without the broadest responsibility exercised by a national regulator, we cannot expect to get that treatment where issues affect more 

than one State. The reality is that no one State can effectively deal with megaevents or cross-border issues equally, and among multiple States, the ability to deal 

with such events or issues on a global level declines dramatically. 

A centralized regulator at the Federal level would also have authority to examine 

the related issue of mathematical models. The methods of examining and measuring 

risk have undergone significant evolution during my 40-plus years in the insurance 

business. I believe there has been a growing and unhealthy over-reliance on numbers-driven models in the assumption of risk, and to the use of these models to the 

exclusion of common sense and underwriting experience. Although such models have 

an important role in insurance like they do in other financial services industries, 

risk evaluation and management inevitably suffer where such models are used in 

a vacuum. 

56 

The AIA and its members have long supported the National Insurance Act sponsored by Senator Johnson as the right vehicle for smarter, more effective functional 

Federal insurance regulation. That bill already focuses on safety and soundness supervision, financial regulation, and rigorous market conduct oversight as core consumer protections. It even requires the national insurance commissioner to conduct 

an enterprise-wide review of financial data when examining national insurers. 

This—in and of itself—importantly distinguishes the National Insurance Act from 

current State regulation. 

Yet, we recognize that even the best legislative vehicle must be updated to be responsive to the evolving economic climate and to enhance strong consumer protections. As a result, we support amending the legislation to prevent even the theoretical ability of insurers to ‘‘arbitrage’’ the Federal and State regulatory systems 

by switching back-and-forth to try and escape enforcement actions. 

Let me close by thanking the Committee again for opening the dialog on this critical subject. The time is ripe for thoughtful, measured, but decisive action. We stand 

ready to work with you on a regulatory system that restores confidence in our financial system. 

PREPARED STATEMENT OF SPENCER M. HOULDIN 

ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA

MARCH 17, 2009 

Good morning Chairman Dodd, Ranking Member Shelby, and Members of the 

Committee. My name is Spencer M. Houldin, and I am pleased to be here today on 

behalf of the Independent Insurance Agents and Brokers of America (IIABA). Thank 

you for the opportunity to provide our association’s perspective on insurance regulatory modernization. I serve as Chairman of the IIABA Government Affairs Committee as well as the Connecticut representative on the IIABA Board of Directors. 

I am also President of Ericson Insurance, a Connecticut-based independent agency 

that offers a broad array of insurance products to consumers and commercial clients 

across the country. 

IIABA is the nation’s oldest and largest trade association of independent insurance agents and brokers, and we represent a network of more than 300,000 agents, 

brokers, and employees nationwide. IIABA represents small, medium, and large 

businesses that offer consumers a choice of policies from a variety of insurance companies. Independent agents and brokers offer a broad range of personal and commercial insurance products. Specifically regarding commercial property-casualty insurance, and some may be surprised to learn this, independent agents and brokers 

are responsible for over 80 percent of this market segment. 

Introduction 

Over the past several months, we have endured and continue to experience a financial crisis that few of us could ever have envisioned. We have seen the Federal 

Government take unprecedented action and spend hundreds of billions of dollars in 

attempts to rectify the problems and right our country’s economic ship. And, unfortunately, we all know that our troubles are not over. We must carefully examine 

the causes of the current crisis, and determine how or if regulatory policy should 

change to ensure we do not repeat the mistakes of the past. It is a daunting task, 

and as a small businessman who must conduct business in the regulatory environment of the future, I implore policymakers to act judiciously and make sure that 

when you act, you get it right. Change for change’s sake may result in regulations 

that do not further protect consumers, help to promote solvency or successfully address systemic threats. 

It is too soon to gauge the effectiveness of the substantial Federal actions of the 

past year, but policymakers must remain mindful of the moral hazard implications 

of such significant Federal intervention. We should strive for a system that promotes market discipline and protects taxpayers in the future. Much has gone wrong 

in the recent past, but there is still much which is very good in the current regulatory framework. I ask you to keep this in mind as you move forward. 

For a variety of reasons that I will outline in the course of my testimony, the insurance sector (and the property-casualty industry in particular) is weathering the 

financial storm with greater success than the banking, securities, and other elements of the financial services world. The insurance arena is certainly not immune 

from the effects of the current crisis, but I am happy to report that my business 

and much of the insurance marketplace remains healthy and stable. Accordingly, as 

you consider how to address this financial crisis in the short-term and begin the 

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ture, I urge the Committee to be mindful of the differences between the recent experiences of the insurance industry and the other financial sectors and to be judicious 

and precise in your actions. While the insurance business would unquestionably 

benefit from greater efficiency and uniformity in regulation, we should be extremely 

cautious in the consideration of wholesale changes that could have an unnecessarily 

disruptive effect on the industry. Unlike other financial services markets, the insurance market, particularly property-casualty, is stable and does not need risky indiscriminate change of its current regulatory system. IIABA also believes that it is 

critically important to keep in mind how potential regulatory changes could impact 

small businesses. We want to ensure that there are no unintended consequences to 

main street businesses from regulatory reform, especially in light of the fact that 

a lot of attention and discussion of this crisis and reform has centered on large financial institutions. 

Some of my industry colleagues believe that now is the time to pursue deregulatory proposals and to establish a new and untested functional Federal regulator for 

the insurance industry. IIABA has long believed that the establishment of an optional Federal charter (OFC) system is misguided and will result in regulatory arbitrage, with companies choosing how and where they are regulated thereby pitting 

one regulatory system against the other in a race to the bottom. Such a proposal, 

which turns its back on over a century of successful consumer protection and solvency regulation at the State level, seems to make little practical sense in this current market environment. Some industry proponents are trying to use the failure 

of American International Group (AIG) to promote OFC and its deregulation of the 

insurance market. While AIG’s troubles may strengthen the call for systemic risk 

oversight at the Federal level, we believe that the health of AIG’s property-casualty 

insurance units, which were and are heavily regulated at the State level, point to 

the stability of the property-casualty marketplace. Improvements can certainly be 

made to insurance regulation (and are perhaps overdue), but State regulators have 

done and continue to do a solid job of ensuring that insurance consumers are protected and receive the insurance coverage they need. 

Today, I would like to provide IIABA’s perspective on the financial services crisis, 

paying particular attention to the stability of the property-casualty insurance market in comparison to other financial services sectors. Central to the health of this 

market is the success of State regulation and its strong consumer protections—the 

primary goal of insurance regulation. I will therefore discuss the dangers of making 

blanket regulatory changes that could disrupt this system that works well to protect 

consumers and ensure market stability. With that said, though, no regulatory system is perfect, so I also will discuss methods that can be used to modernize and 

improve State insurance regulation. I will also provide IIABA’s opinions on how best 

to address the issue of systemic risk and how to provide the insurance market with 

both a Federal and international voice without altering the day-to-day regulation of 

insurance. 

Financial Services Crisis 

Healthy Property-Casualty Market 

The recent economic crisis has impacted nearly every sector of the financial services industry, from small local financial institutions to the largest financial services 

conglomerate in the world. Few have been left unscathed, and it is clear that all 

participants in this broad market, regardless of responsibility, must work together 

to pull us out of this mess and make sure that we take precautions to prevent this 

from happening again. While IIABA is committed to helping improve the system, 

it is worth noting that relative to other segments of the financial services industry, 

the property-casualty insurance market has remained solid and vibrant. Even 

though, like most Americans, the property-casualty market has suffered investment 

losses due to the stock market decline, earlier this month A.M. Best reported that 

the outlook for the U.S. commercial and personal lines insurance markets remains 

stable. As we continue to endure almost daily bad news regarding some of our largest and most complex financial institutions, the property-casualty insurance market 

continues healthy operations and has not been a part of the overall crisis. In fact, 

while approximately 40 banks have failed since the beginning of 2008, there has not 

been one property-casualty insurer insolvency during this time. Additionally, since 

the implementation of the Troubled Assets Relief Program (TARP) late last year, 

not one property-casualty insurer has sought access to these Federal funds. In 

short, the property-casualty insurance industry continues to operate without the need for the Federal Government to step in to provide any type of 

support. 

Along with being financially sound, it is also widely acknowledged that the property-casualty insurance industry today is intensely competitive and has sufficient 

58 

capital to pay potential claims. In 2007, there were over 2,700 property-casualty insurance companies operating in the United States. Policy surpluses are at solid levels and credit ratings have remained stable with actually more property-casualty 

upgrades than downgrades in ratings during the past year. IIABA therefore believes 

that given the current health of the property-casualty market, policymakers should 

resist any temptation to enact measures that could unbalance this competitive environment and jeopardize the level of solvency regulation and consumer protection 

currently being provided. 

AIG 

While property-casualty insurers are financially healthy, some groups have pointed to the failure of AIG and the Federal Government’s commitment of over $180 

billion to this conglomerate to somehow suggest that the insurance industry is unstable and in need of sweeping regulatory restructuring. Others have used the problems of AIG to justify and resuscitate imprudent proposals, such as measures to establish an OFC for the insurance market or to mandate day-to-day Federal regulation of insurance. It is important to remember that AIG’s property-casualty insurance subsidiaries have been, and continue to be, healthy and stable and were not 

the cause of its failure. 

AIG is a unique institution in the financial services world and an anomaly in the 

insurance industry. Only approximately 1/3 of its subsidiaries were insurance-related, and it played heavily in exotic investments and made gigantic unhedged bets 

on credit default swaps (CDSs), which are unregulated at the Federal and State 

level. The catalyst of AIG’s downfall was problems with its London-based Financial 

Products division (the main AIG player in CDSs), the collateral calls on those CDS 

transactions, and the rush of others to separate themselves from the company once 

its credit ratings were downgraded. These factors created a liquidity crunch for AIG 

and led to the Federal Government’s decision to step in and attempt to save this 

company. It is true that AIG experienced significant losses with its securities lending operations related to its life insurance subsidiaries. However, these losses became a Federal concern because of the larger problems facing the company. Quite 

simply, AIG is not Exhibit A for a functional Federal insurance regulator, because 

there is no reason to believe that such a Federal regulator would have handled 

AIG’s issues in a more effective manner that would have averted its collapse. It certainly does not make the case for an optional Federal charter, where AIG could have 

chosen where it was regulated. In fact, the Office of Thrift Supervision admitted in 

testimony in front of this Committee just twelve days ago that it was the consolidated supervisor of AIG and, by extension, the operations of AIG’s Financial Products division. Clearly then, just the fact that an entity is federally regulated does 

not mean that it is effectively and responsibly regulated. Despite the fact that AIG’s 

property-casualty insurance subsidiaries were sufficiently capitalized and likely had 

substantial assets that would have more than covered claim obligations if the overall company had failed, one of the lessons you can take from AIG is that systemic 

risk oversight may be necessary to prevent this from happening in the future. 

State Insurance Regulation Protects Consumers 

Policymakers have made it clear that financial services regulatory reform—including a debate over how to address systemic risk—is at the top of the agenda for this 

year and rightfully so. But as we undertake a review of current regulations in place 

and consider strengthening existing laws or adding additional ones, we must ensure 

that we do not simply toss out regulatory systems that work in an effort essentially 

to wipe the slate clean and start over. Unlike some Federal regulators of other financial industries, State regulators have done a commendable job in the area of financial and solvency regulation, which ensures that companies meet their obligations to consumers, and IIABA is concerned that direct Federal regulation of insurance would not provide the same level of protection. Insurance regulators’ responsibilities have grown in scope and complexity as the industry has evolved, and State 

regulatory personnel now number approximately 13,000 individuals. Most observers 

agree that State regulation works effectively to protect consumers, which has been 

proven once again during this crisis. 

State officials also continue to be best-positioned to be responsive to the needs of 

the local marketplace and local consumers. Unlike most other financial products, 

which are highly commoditized, the purchaser of an insurance policy enters into a 

complex contractual relationship with a contingent promise of future performance. 

Therefore, the consumer will not be able to determine fully the value of the product 

purchased until after a claim is presented—when it is too late to decide that a different insurer or a different product might have been a better choice. When an insured event does occur, consumers often face many challenging issues and perVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
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plexing questions; as a result, they must have quick and efficient resolution of any 

problems. If one believes that a Federal regulator would better handle consumer 

issues, consider that according to the most recent annual numbers, the Office of the 

Comptroller of the Currency (OCC) received more than 90,000 calls, compared to 

just the New York State Insurance Department alone that responded to 200,000 

calls (nationally there are over 3,000,000 consumer inquiries and complaints annually). 

Unlike banking and securities, insurance policies are inextricably bound to the 

separate legal systems of each State, and the policies themselves are contracts written and interpreted under the laws of each State. Consequently, the constitutions 

and statute books of every State are thick with language laying out the rights and 

responsibilities of insurers, agents, policyholders, and claimants. State courts have 

more than 100 years of experience interpreting and applying these State laws and 

judgments. The diversity of underlying State reparations laws, varying consumer 

needs from one region to another, and differing public expectations about the proper 

role of insurance regulation require officials who understand these local complexities. What would happen to this body of law if insurance contracts suddenly became 

subject to Federal law? How could Federal courts replicate the expertise that State 

courts have developed? How would Federal bureaucrats be able to quickly develop 

knowledge of regional differences that are embedded in State insurance laws? These 

are some of the extremely difficult issues that could be posed by direct Federal insurance regulation. 

Protecting policyholders against excessive insurer insolvency risk is one of the primary goals of State insurance regulation. If insurers do not remain solvent, they 

cannot meet their obligations to pay claims. State insurance regulation gets very 

high marks for the financial regulation of insurance underwriters. State regulators 

protect policyholders’ interests by requiring insurers to meet certain financial standards and to act prudently in managing their affairs. The States modernized financial oversight in the 1990s and have a proven track record of solvency regulation. 

When insolvencies do occur, a State safety net is employed: the State guaranty fund 

system. If the worst case scenario does occur and an insurer does fail, other companies are well positioned to fill the gap as the marketplace is very competitive with 

many insurers competing for business. Additionally, it should not be overlooked that 

the State system has an inherent consumer-protection advantage in that there are 

multiple regulators overseeing an entity and its products, allowing others to notice 

and rectify potential regulatory mistakes or gaps. Providing one regulator with all 

of these responsibilities, consolidating regulatory risk and essentially going against 

the very nature of insurance of spreading risk, could lead to more substantial problems where errors of that one regulator lead to extensive problems throughout the 

entire market. 

Systemic Risk Oversight 

Along with the discussion of AIG and other financial services conglomerates that 

have been considered ‘‘too big to fail’’ or ‘‘too interconnected to fail’’ is the consideration of risks to the entire financial services system as a whole. While a clear definition of systemic risk has yet to be agreed upon, IIABA believes the crisis has demonstrated a need to have special scrutiny of the limited group of unique entities that 

engage in services or provide products that could pose systemic risk to the overall 

financial services market. Federal action therefore is likely necessary to determine 

and supervise such systemic risk concerns. 

Coupled with the stability of the insurance markets and the strength of State regulation, though, is the fact that few, if any, participants in the property-casualty 

market and few, if any, lines of property-casualty insurance, save for financial guaranty insurance, raise systemic risk issues. Again, the regulatory structure in place 

at the State level, specifically the State guaranty fund mechanism, and the general 

nature of the insurance business make it unlikely that a systemic risk to the financial services industry could emanate from property-casualty insurance markets. 

Therefore, while there may be a need to have some form of limited systemic risk 

oversight for a certain class of unique financial services entities at the holding company level, such oversight should not displace or interfere with the competent and 

effective level of functional insurance regulation being provided today. To avoid mission creep, any systemic risk regulator should have carefully defined powers and operate under a tight definition of what entities or activities are systemically significant. Such an entity should have the authority to receive data, analyze risk and at 

all times work through existing State regulators if problems are identified, but 

should not engage in day-to-day insurance regulation. 

As mentioned above, States already have strong financial and market regulations 

in place for insurers and effective solvency regulations to protect consumers. IIABA 

60 

is concerned that the insurance market could be grouped with other financial services industries under a systemic risk umbrella that could include insurer solvency 

regulation. While IIABA is not in the position to assess whether other financial 

services industries need more effective solvency regulation at the Federal level, insurance solvency regulation, especially for the property-casualty segment, should remain the province of the functional regulators—the States. 

In the discussion of systemic risk and the need for more Federal insurance expertise, IIABA also believes that consideration should be given to establishing an Office 

of Insurance Information. This office could fill the void of insurance expertise at the 

Federal level and help solve the problems faced by insurance industry participants 

in the global economy. This legislation also is an example of the type of Federal reforms that are needed for the insurance market—Federal legislation that mandates 

uniformity where needed and when necessary via preemption and national standards without creating a Federal regulator. 

Targeted Insurance Regulatory Reform 

While State regulation continues to protect consumers and provide market stability, IIABA has long promoted the use of targeted measures by the Federal Government to help reform the State system in limited areas. However, Congress 

should only modernize the components of the State system that are working inefficiently and no actions should be taken that in any way jeopardize the protection 

of the insurance consumer. We believe that the best method for addressing the deficiencies in the current system continues to be a pragmatic approach that utilizes 

targeted legislation to establish greater interstate consistency in key areas and to 

streamline oversight. By using limited Federal legislation on an as-needed basis to 

overcome the structural impediments to reform at the State level, we can improve 

rather than dismantle or seriously impair the current State-based system and in the 

process produce a more efficient and effective regulatory framework. Especially 

given today’s tough economic environment, such an approach would not jeopardize 

or undermine the knowledge, skills, and experience of State regulators by implanting an unproven new regulatory structure. Unlike other ideas, such as OFC, this 

approach does not threaten to remove a substantial portion of the insurance industry from local supervision. 

The most serious regulatory challenges facing insurance producers (agents and 

brokers) are the redundant, costly, and sometimes contradictory requirements that 

arise when seeking licenses on a multi-State basis, and the root cause of these problems is the fact that many States do not issue licenses on a consistent or truly reciprocal basis. State law requires insurance agents and brokers to be licensed in every 

jurisdiction in which they conduct business, which forces most producers today to 

comply with varying and inconsistent standards and duplicative licensing processes. 

These requirements are costly, burdensome, and time consuming, and they hinder 

the ability of insurance agents and brokers to effectively address the needs of consumers. 

To rectify this problem, IIABA strongly supports targeted legislation that would 

immediately create a National Association of Registered Agents & Brokers 

(NARAB), as first proposed in the Gramm Leach Bliley Act in 1999, to streamline 

nonresident insurance agent licensing. This approach would be deferential to States’ 

rights as day-to-day State insurance statutes and regulations, such as laws regarding consumer protection, would not be preempted. By employing the NARAB framework already passed by Congress and utilizing the experiences and insights obtained over recent years to modernize this concept, Congress can help policyholders 

by increasing marketplace competition and consumer choice through enabling insurance producers to more quickly and responsively serve the needs of consumers. Such 

reform would eliminate barriers faced by the increasing number of agents who operate in multiple States, establish licensing reciprocity, and create a one-stop facility 

for those producers who require nonresident licenses. The NARAB Reform Act, 

which passed the House last year with broad industry and bipartisan congressional 

support, incorporates these principles and accomplishes the goal of agency licensing 

reform, and IIABA strongly supports this legislation. 

IIABA also supports targeted legislation to apply single-State regulation and uniform standards to the nonadmitted (surplus lines) and reinsurance marketplaces. As 

with the admitted market, surplus lines agents and brokers engaging in transactions that involve multi-State risks currently must obtain and maintain general 

agent or broker licenses and surplus lines licenses in many if not every jurisdiction 

in which the exposures are located. Some States require that these agents and brokers obtain and maintain corporate licenses as well. This means that a surplus lines 

broker or agent could potentially be required to obtain and maintain up to 100 separate licenses in order to handle a single multi-State surplus lines transaction. These 

61 

duplicative licensing requirements cause administrative burdens which impede the 

ability of agents and brokers to effectively and efficiently service their customers’ 

policies. Perhaps most importantly, these onerous licensing requirements create expenses which ultimately impact policyholders. The Nonadmitted Insurance and Reinsurance Reform Act alleviates the burdens of duplicative licensing requirements 

by relying on the insured’s home State for licensing. IIABA is a strong supporter 

of this targeted Federal legislative reform. 

Optional Federal Charter 

I am actually quite surprised that, given the economic crisis in which we find ourselves today, I have to address the issue of an optional Federal charter for insurance. Most policy leaders seem to be in agreement that regulated entities should not 

be able to engage in regulatory arbitrage, where one regulator is pitted against another in a race for the regulated institution. An OFC would set up a system that 

would allow just that scenario to occur—under OFC a company like AIG could have 

avoided strong regulation by choosing where it was regulated. This clearly would 

only have exacerbated problems, not solved them. OFC legislation also would deregulate several areas currently regulated at the State level, flying in the face of 

the nearly universal call today for stronger or more effective regulation of the financial services industry. IIABA therefore continues to oppose this illogical call for a 

regulatory system that has the potential to negatively impact a market relatively 

unaffected by the recent crisis. 

Most importantly, we oppose OFC because it would worsen the current financial 

crisis as its theory of regulatory arbitrage has been cited as one of the key reasons 

why we find ourselves in the current situation. In announcing his seven principles 

for financial services regulatory reform on February 25th, President Barack Obama 

said his sixth principle is that ‘‘we must make sure our system of regulations covers 

appropriate institutions and markets, and is comprehensive and free of gaps, and 

prevents those being regulated from cherry-picking among competing regulators.’’ 

And just last Thursday, Treasury Secretary Timothy Geithner said one of the problems with the current financial regulatory system is that financial institutions were 

allowed to choose their regulators and create products in a way so as to avoid regulation. He said it is important to create a new regulatory structure that prevents 

‘‘this kind of regulatory arbitrage.’’ can’t say it any better than they have, but I will 

just pose this one question, does anyone really think that allowing AIG to choose 

where it was regulated, the Federal or State level, would have solved their problems? 

Creating an industry-friendly optional regulator, as OFC legislation is expected to 

provide, also is at odds with one of the primary goals of insurance regulation, which, 

as discussed earlier, is consumer protection. The best characteristics of the current 

State system from the consumer perspective would be lost if some insurers were 

able to escape State regulation completely in favor of wholesale Federal regulation. 

As insurance agents and brokers, we serve on the front lines and deal with our customers on a face-to-face basis. Currently, when my customers are having difficulties 

with claims or policies, it is very easy for me to contact a local official within the 

State insurance department to remedy any problems. If insurance regulation is 

shifted to the Federal Government, I would not be as effective in protecting my customers. I am very concerned that some Federal bureaucrat will not be as responsive 

to a consumer’s needs as the local cop, the State insurance regulator. 

Even though it is commonly known as ‘‘optional,’’ the establishment of a Federal 

insurance charter would not be optional for agents. Independent agents represent 

multiple companies, and, under this proposal, presumably some insurers would 

choose State regulation and others would choose Federal regulation. In order to field 

questions and properly represent consumers, independent agents would have to 

know how to navigate both State and Federal systems, making them subject to the 

Federal regulation of insurance—meaning OFC would not in any way be optional 

for insurance producers. Even more importantly, ‘‘optional’’ Federal charter would 

not be optional for insurance consumers. The insurance company, not the insurance 

consumer, would make that determination. 

Over the past several years, OFC supporters have pointed to the dual banking 

system as an example of how regulatory competition could work. But this is a comparison that should raise many concerns, not the least of which being the current 

State of Federal financial services regulation. Additionally, there are fundamental 

differences between banking and insurance. The banking industry has no distribution force like the insurance industry, nothing similar to the claims process exists 

in the banking industry, and unlike many insurance products, banking products are 

commoditized and national in scope. However, even as recently as earlier this 

month, in the face of the failure of several banks and Federal Government support 

62 

of numerous others, OFC supporters continue to stress that the insurance industry 

needs the equivalent of an OCC. But, as we have seen in recent years with the 

OCC’s forceful assertion of preemption, Federal regulatory schemes can do grave 

harm to State consumer protection regulations. IIABA therefore believes it would 

be unwise to subject insurance consumers to a similar potential fate. 

Prior OFC proposals also would create a confusing patchwork of solvency/guaranty regulation, the crux of insurance regulation and consumer protection. This dual 

structure proposed could have disastrous implications for solvency regulation by 

largely bifurcating this key regulatory function from guaranty fund protection. The 

States would not be able to regulate insurers on the front end to keep them from 

going insolvent, but would be responsible for insurer failures on the back end 

through the guaranty fund mechanism. With the recent failures in Federal financial 

oversight, this is a tremendous risk to take. In essence, these proposals would create 

an insurance version of the OCC without the integration of an FDIC into that supervisory system. Such proposals cherry-pick the features from several of these Federal banking laws to come up with a model which lacks the consumer protections 

found in any one of them and ignores the problems it would create for State insurers, guaranty funds, and their citizens. The equally unacceptable alternative would 

be to attempt to create a new Federal guaranty fund mechanism from scratch, and 

even if this initially was financed by industry, it ultimately would be guaranteed 

by taxpayers raising a whole host of additional concerns. 

Conclusion 

It is indisputable that our country, this Congress, and the new Administration 

have a lot of challenges ahead and difficult decisions to make in working to stabilize 

our economy and put us back on the road to growth and prosperity. Every participant in the financial services market must pitch in to help get us back on the right 

track, and IIABA stands ready to assist in any way possible. With the discussion 

of reforming financial services regulation, IIABA believes that such consideration 

presents a good opportunity to improve and modernize the State system of insurance regulation. But, as I’ve mentioned often today and it bears repeating one last 

time, IIABA believes that, with the possible exception of a properly crafted systemic 

risk overseer at the Federal level, targeted modernization is the prudent course of 

action for reform of insurance regulation. Therefore, any efforts to use this crisis 

and the failure of AIG as an opportunity to promote misguided measures that would 

allow a regulated insurance entity to choose its own regulator should be summarily 

dismissed as unacceptable in today’s financial environment. Additionally, because 

the foremost goal of insurance regulation is consumer protection, any proposals that 

have the potential to disrupt the strong consumer protections in place at the State 

level should be rejected. Even though we have historically opposed measures such 

as OFC in the best of economic times, it is even more clear in these difficult times 

that the solution is not to displace effective regulation with an unproven regime 

harmful to consumers that could have the unfortunate effect of adding to, not solving, our country’s financial problems. IIABA again appreciates the opportunity to 

testify today, and we remain committed to continuing to work to improve State insurance regulation for both consumers and market participants. 

PREPARED STATEMENT OF JOHN T. HILL 

PRESIDENT AND CHIEF OPERATING OFFICER, 

MAGNA CARTA COMPANIES, ON BEHALF OF THE

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES

MARCH 17, 2009 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to 

offer comments to the Senate Banking, Housing, and Urban Affairs Committee on 

insurance regulatory reform. 

My name is John T. Hill. I address the Committee in my capacity as chairmanelect of NAMIC and as the president and chief operating officer of the Magna Carta 

Companies. I also chaired NAMIC’s board-appointed task force on Financial Regulatory Reform, which completed its work earlier this year. The views I will share 

with the Committee are based on my own 28 years experience in the property/casualty insurance industry and the perspective of more than 1,400 NAMIC members. 

Founded in 1895, NAMIC is the largest full-service national trade association 

serving the property/casualty insurance industry. NAMIC members are small farm 

mutual companies, State and regional insurance companies, and large national writers. The breadth of association members gives us an excellent perspective on the 

63 

relationship between the recent financial crisis and the property/casualty insurance 

business. Our companies share a belief that competition and market-oriented regulation is in the best interest of the industry and the customers they serve. As mutual insurance companies, it is this goal of competitive markets that informs and 

shapes our views on insurance regulatory reform. 

Magna Carta Companies was founded in New York City in 1925 as a mutual insurance carrier for the taxicab industry. Throughout the decades, we have continuously expanded our product offering and underwriting territory. Today, Magna 

Carta specializes in underwriting the commercial real estate industry, and we are 

one of the largest mutual carriers of commercial business in America. 

Let me make clear upfront that NAMIC is a property/casualty insurance trade association. The products of the property/casualty insurance business are different 

than those of the other two major components of the insurance business, life and 

health. We believe that our products have played little or no role in the present crisis, that they are well regulated at the State level for solvency, and that any Federal systemic risk regulatory scheme should build on the strength of the State-based 

system and not supplant it. My testimony goes into detail on how the State system 

works, and makes suggestions for how Congress might structure a systemic risk 

regulator and encourage regulatory coordination and cooperation and information 

exchange. 

As the Committee contemplates reform of the nation’s financial services sector, it 

is essential to consider what is the best structure for all constituents, including consumers, taxpayers, insurance companies, agents, and others affected by the insurance underwriting process. NAMIC’s conclusion, reached through years of member 

involvement and research, is that the best construct is a reformed system of State 

insurance regulation, in which State officials coordinate and cooperate with other 

functional, prudential regulators and State governments and Congress exercise an 

appropriate oversight role. It is the closeness of these State regulators that is the 

essential ingredient to understanding unique regional property/casualty insurance 

markets. 

Prudential Insurance Regulation 

The first requisite of a good financial regulatory system is a prudential financial 

regulator, one that assures the safety and soundness of the institutions it regulates. 

For insurers, those regulators are the State insurance departments. This system is 

the direct result of Federal legislation. 

Following the Supreme Court decision in United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944), that insurance was interstate commerce 

and subject to regulation by the Federal Government, Congress, in 1945, enacted 

the McCarran-Ferguson Act (15 USC 1011, et seq.). The McCarran-Ferguson Act recognizes the local nature of insurance and provides for the continued regulation of 

insurance by the States coupled with a narrow exemption from the general Federal 

antitrust laws. 

The State-based functional regulatory system and the corresponding application 

of the McCarran-Ferguson Act limited Federal antitrust exemption have worked 

well for decades to promote and maintain a healthy, vibrant, and competitive insurance marketplace. There are more than 7,000 insurers operating in the United 

States, the majority of which are relatively small. A number of studies over the 

years, including those conducted by the U.S. Department of Justice, State insurance 

departments, and respected economists and academics, have consistently concluded 

that the insurance industry is very competitive under classic economic tests. 

The national system of State regulation has for more than a century served consumer and insurer needs well, particularly in relation to the property/casualty insurance business. The State-based insurance regulatory system has proven to be 

adaptable, accessible, and effective, with rare insolvencies and no taxpayer bailouts. 

Each State has adopted specific programs and policies tailored to the unique needs 

of its consumers. State regulators and legislators consider and respond to marketplace concerns ranging from risks related to weather, specific economic conditions, 

medical costs, building codes, and consumer preferences. In addition, State regulators are able to respond and adapt to inconsistencies created by various State contract, tort, and reparation laws. 

Property/casualty insurance is inherently local in nature. The United States has 

54 well-defined jurisdictions, each with its own set of laws and courts. The U.S. system of contract law is deeply developed and, with respect to insurance policies, is 

based on more than a century of policy interpretations by State courts. The tort system, which governs many of the types of contingencies at the heart of insurance 

claims, particularly those covered by liability insurance, is also deeply based in 

State law including, for example, the law of defamation, professional malpractice, 

64 

premises liability, State corporation law, and products liability. State and local laws 

determine coverage and other policy terms. Reparation laws affect claims. Local accident and theft rates impact pricing. Geographical and demographic differences 

among States also have a significant impact on property/casualty coverages. Climate—hurricanes, earthquakes, etc.—differs significantly from State to State. 

With the ability to respond to unique local issues, the individual States serve as 

a laboratory for experimentation and a launch pad for reform. State-based regulators develop expertise on issues particularly relevant to their State. Insurance consumers directly benefit from State regulators’ familiarity with the unique circumstances of their State and the development of consumer assistance programs tailored to local needs and concerns. State regulators, whether directly elected or appointed by elected officials, have a strong incentive to deal fairly and responsibly 

with consumers. 

The State insurance regulatory system, however, is not without its shortcomings. 

State insurance regulation receives justified criticism for overregulation of price and 

forms, lack of uniformity, and protracted speed-to-market issues. NAMIC continues 

to work with State legislators and regulators to address outdated, redundant, and 

conflicting regulatory policies and procedures and to modernize the insurance regulatory system to meet the needs of a 21st century marketplace. 

Consumer Protection 

The hallmarks of insurance regulation are solvency oversight and consumer protection. In the case of property/casualty insurance, State insurance officials and attorneys general play complementary and mutually supportive roles in consumer protection. The current regulatory structure works well to address consumer protection 

issues. State officials are keenly attuned to the needs of their residents and are accountable and accessible, both geographically and politically, to their consumers. 

The most important insurance consumer protection is ensuring the ability of the 

carrier to provide the promised coverage or service at a future date. Thus, ensuring 

the solvency and financial integrity of the financial service provider is the fundamental consumer protection. In addition, States enforce a variety of other consumer 

protection laws and regulations designed to ensure disclosure, fairness, and competitive equity. 

State insurance regulators actively supervise all aspects of the business of insurance, including review and regulation of solvency and financial condition to guard 

against market failure. Public interest objectives are achieved through review of policy terms and market conduct examinations to ensure effective and appropriate provision of insurance coverages. Regulators also monitor insurers, agents, and brokers 

to prevent and punish activities prohibited by State antitrust and unfair trade practices laws and take appropriate enforcement action. 

Insurers are subject to comprehensive review of all facets of their operation, including business dealings with customers, consumers, and claimants. The examination process allows regulators to monitor compliance with State insurance laws and 

regulations, ensure fair treatment of consumers, provide for consistent application 

of the insurance laws, educate insurers on the interpretation and application of insurance laws, and deter bad practices. Comprehensive examinations generally cover 

seven areas of investigation, including insurance company operations and management, complaint handling, marketing and sales, producer licensing, policyholder 

services, underwriting and rating, and claims practices. 

State insurance regulators also interact directly with consumers. As an example, 

nationwide, State insurance regulators handle and respond to more than 3.7 million 

consumer inquiries and complaints in a single year. Inquiries range from general 

insurance information to content of policies to the treatment of consumers by insurance companies and agents. Most consumer inquiries are resolved successfully. 

Guaranty Funds 

Although solvency and financial integrity are essential in the regulation of all financial services industries, the level and degree of regulation of financial institutions with explicit government guarantees differs from that of financial institutions 

without the same governmental financial responsibility. Unlike banking and pension 

interests, insurance products carry no Federal guarantee, but are backed by other 

insurance companies through the guaranty fund system. 

State guaranty associations provide a mechanism for the prompt payment of covered claims of insolvent insurers. All States and territories, with the exception of 

New York, have created post-assessment guaranty associations. In the event of insurer insolvency, the guaranty associations assess other insurers to obtain funds 

necessary to pay the claims of the insolvent entity. In the case of New York, the 

65 

New York Security Fund and certain funds that cover only workers’ compensation 

utilize a pre-assessment mechanism. 

Insurance companies writing property/casualty lines of business covered by a 

guaranty association are required to be a member of a guaranty association of a particular State as a condition of their authority to transact business in that State. 

Guaranty associations assess member insurers based upon their proportionate share 

of premiums written on covered lines of business in that State. Separate life and 

health insurance guaranty association systems also exist. 

Each guaranty association has established detailed procedures for handling of assets, filing of claims, and making assessments. With the exception of California, 

Michigan, New York, and Wisconsin, the guaranty association acts of the States and 

territories are based on, and are similar in most respects to, the National Association of Insurance Commissioners (NAIC) Model Act. State legislators and regulators 

have crafted statutes and regulations regarding the creation and operation of the 

funds based on the specific needs of policyholders and in coordination with State 

laws. The funds operate to ensure payment of claims by other industry companies, 

rather than utilize State or Federal financial backstops. The insurance guaranty 

system and the State regulatory and oversight structure function well for insurers 

and consumers. The current system avoids catastrophic financial loss to certain 

claimants and policyholders and maintains market stability, without governmental 

financial guarantees. As such, regulation and oversight of the guaranty fund system 

is appropriate at the State level and Federal oversight is unnecessary in the context 

of the industry-funded State-based system. 

Risk Regulation in the Property/Casualty Insurance Industry 

The heart of insurance is risk management. Insurers manage their individual risk 

through a variety of techniques including risk diversification, reinsurance, and 

securitization. Carriers avoid concentration of risk, assist policyholders in risk mitigation, invest in diversified investment portfolios, and carry adequate reinsurance 

coverage, among other techniques to ensure that they are not overly exposed to any 

particular risk and have adequate resources to meet their financial obligations. In 

addition to risk management practiced by individual companies, State regulators 

oversee risk within the industry. 

Risks to the health of the insurance industry as a whole include the financial stability of individual market players and the level of market concentration. To address 

these risks, State regulators subject insurers to strict financial and market regulation. State statutes give insurance regulators authority to supervise and regulate 

the financial condition of insurers licensed to do business in their State and to review market practices. Almost all States have adopted, either through statute or 

regulation, the financial regulation requirements in the NAIC Financial Accreditation Standards program, including the NAIC’s annual and quarterly financial statements, accounting manual, auditing and actuarial requirements, and risk-based capital and examination model laws. 

Accounting standards for insurers are generally more conservative than other financial institutions. Statutory Accounting Principles (SAP) focus on solvency and, 

as a general rule, recognize liabilities earlier and/or at a higher value and recognize 

assets later and/or at a lower value than traditional Generally Accepted Accounting 

Principles (GAAP). 

In addition to more conservative accounting standards, insurers must maintain 

minimum levels of capital and surplus. In the early 1990s, the NAIC developed a 

system that prescribes capital requirements corresponding to the level of risk of the 

company’s various activities. The risk-based capital (RBC) formulas apply separate 

charges for an insurer’s asset risk in affiliates, asset risk in other investments, credit risk, underwriting risk, and business risk, and each formula recognizes the correlation between various types of risk. The Risk-Based Capital Model Law also establishes levels of required company and/or regulatory action, ranging from company corrective action to termination of the entity. While the RBC system is intended to prescribe minimum capital levels, more and more, it is also regarded as 

an early warning system. 

The NAIC’s financial solvency tools (FAST), including the insurance regulatory information system (IRIS), provides another early warning system to regulators on the 

financial condition of insurers. Based on specific company information, regulators 

examine a series of ratios designed to focus on critical financial conditions, including 

capital adequacy, changes in business patterns, underwriting results, reserve inadequacy, asset liquidity, cash-flows and leverage, profitability, asset quality, investment yield, affiliate investments, reserves, and reinsurance. 

State solvency regulation also includes model investment laws specifying the 

types of permitted investments, expectations regarding how insurer portfolios are 

66 

selected, and limitations on what assets receive regulatory credit. A separate division of the NAIC, the Securities Valuation Office, provides warnings on suspect securities and advice to State financial examiners. States also uniformly impose requirements for professional actuarial review of reserve liabilities, require reporting 

of audited financial statements, and establish guidelines for selection of auditors. 

In addition, the State regulators participate in the NAIC Financial Analysis 

Working Group. This group of regulators and NAIC staff focus on the financial condition of nationally significant insurers. This process, which is confidential, provides 

regulatory peer review of the actions domiciliary regulators take to improve the financial condition of larger insurers. During quarterly calls with Federal regulators, 

State regulators routinely discuss the financial condition of the industry and specific 

players. 

Systemic Risk 

Traditional financial risk has focused on risks within the financial system; systemic risk focuses on risks to the financial system. Systemic risk refers to the risk 

or probability of breakdowns in an entire system, as opposed to breakdowns in individual parts or components. The precise meaning of systemic risk, however, is ambiguous; it means different things to different people, but must not be used to define 

the downturns resulting from normal market fluctuations. 

Some define systemic risk as the probability that the failure of one financial market participant to meet its contractual obligations will cause other participants to 

default on their obligations leading to a chain of defaults that spreads throughout 

the entire financial system and, eventually, to the nonfinancial economy. This conception of systemic risk is likened to the risk of a chain reaction of falling dominoes. 

Others conceive systemic risk as the risk of a major external event, or 

‘‘macroshock,’’ that produces nearly simultaneous, large, adverse effects on most or 

all of the financial system rather than just one or a few institutions such that the 

entire economy is adversely affected. In this conception of systemic risk, the threat 

to the system is a market-oriented crisis rather than an institution-oriented crisis. 

Market-oriented crises tend to begin with a large change—usually a decline—in the 

price of a particular asset; the change then becomes self-sustaining over time. 

The domino theory definition has little relevance to the current situation, as the 

crisis was not caused by a single institution producing a contagion effect that spread 

to otherwise healthy interconnected institutions. The macroshock definition comes 

much closer to describing what has happened. Investors around the world suddenly 

realized that certain types of asset-backed securities and credit derivatives might 

not have been as safe as their ratings implied because of their often-hidden exposure to risky subprime mortgages. This sudden realization among investors was the 

large external shock that led to systemic failure, as the market for asset-backed securities suddenly dried up and intermediaries holding these securities were forced 

to sell them at distressed prices, leading to massive write downs and the freezing 

of the world’s credit markets. 

Inasmuch as the current crisis was caused not by the risky behavior of a single 

institution or even a small group of institutions, but rather by an exogenous event— 

a shock to the system—it is difficult to imagine how similar crises could be avoided 

in the future by focusing regulation on particular institutions that are presumed ex 

ante by regulators to be systemically significant, as opposed to potentially significant events in the market. 

It must be noted that such market-oriented events could come from any number 

of sources. In the present crisis, while public attention has focused on the spectacular deterioration of certain large financial institutions, it was a common shock that 

led to their demise—a rapidly deflating housing bubble combined with a failure on 

the part of investors, intermediaries, and rating agencies to accurately assess 

subprime mortgage risk. That failure was facilitated in part by the growth of the 

‘‘originate to distribute’’ model of mortgage lending, which served to create a disconnect between the ultimate bearer of risk and the initiator of credit, thus reducing 

the incentive to understand and monitor risk. 

Future crises are likely to arise from other types of asset bubbles, or other instances of widespread failure by market participants in evaluating certain types of 

risk. Past financial crises also suggest that market-oriented systemic risk is of 

greater concern than risk associated with supposedly systemically significant institutions. For example, the 1987 stock market crash was not precipitated by any particular institution or group of institutions, nor was it the proximate cause of the failure of any large bank. Instead, it was a market-oriented crisis that was viewed— 

at the time and since—as an event with potentially systemic consequences that warranted official-sector intervention. In addition to the 1987 stock market crash, examples of such crises might include the widening of interest rate spreads and decline 

67 

in liquidity following the collapse of Long-Term Capital Management in 1998 and 

the collapse of the junk bond market in 1989–90. 

Creating a systemic risk regulator focused on particular institutions designated 

as systemically significant would do little to prevent a recurrence of the type of market-oriented systemic breakdown that has led to the current crisis, and which is 

likely to be the cause of future crises. Moreover, such an approach could have harmful side effects, particularly for the property/casualty insurance industry and its consumers if certain property/casualty insurance companies are deemed systemically 

significant and are regulated as such. 

The majority of the entities under scrutiny for systemic risk are regulated by one 

or more Federal or State regulators. The underlying operations of these entities are 

complex, and regulatory supervision requires a high level of expertise in the specific 

business. As such, it is imperative that any regulatory model both fill in existing 

gaps in the regulation of specific products and coordinate and complement the existing supervisory bodies. 

Systemic Risk in the Insurance Industry 

In the wake of problems facing the financial services industry, there have been 

calls for the creation of a Federal or international systemic risk regulatory body. As 

a trade association that represents property/casualty insurers, NAMIC’s primary 

concern is the potential impact of institution-oriented systemic risk regulation on 

our member companies and the consumers they serve. 

The six primary factors that affect the probability that a financial institution will 

create or facilitate systemic risk are leverage, liquidity, correlation, concentration, 

sensitivities, and connectedness. NAMIC believes that an examination of these factors will demonstrate that there is no basis for regulating property/casualty insurance companies for systemic risk because, simply, they don’t present such a risk. 

Again, let me emphasize that I am addressing only property/casualty insurance 

products, which are far different, in particular, from life insurance products that 

may offer investment features quite similar to bank and securities products and, as 

such, may warrant a different regulatory structure. 

• Leverage 

Very few property/casualty insurers use commercial paper, short-term debt, or 

other instruments that may be used to leverage their capital structures, a fact that 

makes them less vulnerable than highly leveraged institutions when financial markets collapse. Because of their basic business model and strict capital requirements 

imposed by State regulators, property/casualty insurers are much more heavily capitalized in terms of their asset-to-liabilities ratios than banks and hedge funds. For 

these reasons alone, the banking system’s perennial moral hazard of being ‘‘too big 

to fail’’ has no equivalent in the insurance industry. This, of course, is a completely 

different model than the banking world where leverage is a central component of 

the enterprise. 

• Liquidity 

Unlike most other types of financial institutions, the nature of the products that 

property/casualty insurers provide makes them inherently less vulnerable to 

disintermediation risk. While banks are exposed to the risk that customer withdrawals can exceed available liquidity, the risk of a liquidity shortfall is minimal 

for insurance companies. Insurance companies are financed by premiums paid in advance, and payments are subject to the occurrence of insured events. Insurance policies are also in force for a contracted period of time, the terms of which are agreed 

to by both parties. If an insurance customer cancels a policy before the end of the 

contract, the premium is refunded on a pro rata basis and coverage is canceled. 

Whereas bank liabilities are short term and assets are long term, insurance has liquid assets but longer-term liabilities. Thus, for both business and regulatory reasons 

property/casualty insurers carry a liquid investment portfolio. As long as the insurance company has built up reserves and its investments are calibrated to match the 

statistically anticipated claims payments, there is no liquidity risk and no possibility 

of a ‘‘run-on-the-bank’’ scenario. 

• Correlation 

Property/casualty insurers use underwriting tools specifically designed to identify 

and control certain types of correlation, including market concentration, in order to 

control catastrophe and underwriting exposures. Identifying and managing risks are 

at the core of insurance and these tools allow insurers to accurately price and underwrite risk. The side benefit of rigorous underwriting is a reduction in systemic 

risk exposure. It is also important to note the difference between asset-backed secuVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6621 S:\DOCS\51722.TXT SHERYL
68 

rities and other derivative products, where the underlying risk is financial or market (such as credit, price, interest rate, or exchange rate), and property/casualty insurance, where the underlying risk is a real event, such as an automobile accident, 

fire, or theft. While the former risks are likely to be correlated in that they will be 

affected by similar cyclical economic or financial factors, the latter are largely individual, non-cyclical idiosyncratic risks. Banking risks are often highly correlated, 

particularly in economic downturns. Traditional insurance, in contrast, pools 

uncorrelated idiosyncratic risks, and is not subject to systemic crises in the same 

way as banks. 

• Connectedness/Sensitivities/Concentration 

Property/casualty insurers manage concentrations of investments and have regulatory limitations on both the type and concentrations of the assets in which they 

invest. These realities have the effect of reducing the property/casualty insurance 

industry’s connectedness and sensitivity to the actions and conditions of other sectors of the financial services industry. The one possible exception to this rule is the 

small subset of monoline financial guaranty insurers that offer specialized products 

such as bond and mortgage insurance. Because financial guaranty insurance is by 

definition directly connected to financial products, it is conceivable that these specialty insurers could play a role in propagating systemic risk. 

The atypical business model of financial guaranty insurers, however, hardly provides justification for subjecting mainstream property/casualty insurers to systemic 

risk regulation. While property/casualty insurers, like virtually all investors, have 

suffered investment losses, no financial contagion has spread throughout the industry or to other financial markets. Even when a property/casualty insurer is held by 

a holding company that also holds other types of financial services companies, regulatory restrictions designed to protect policyholders operate to isolate the property/ 

casualty insurer’s capital and protect it from incursions caused by any problems of 

the other subsidiaries. Unlike the obligations of lightly regulated financial institutions such as investment banks and hedge funds, most of the obligations of property/ 

casualty insurers are protected by the insurance guaranty fund system. This nationwide system, financed by the property/casualty insurers of each State, reduces the 

systemic impact of any failing property/casualty insurer by providing most customers or claimants with assurance that the insurer’s obligations will be satisfied 

on a timely basis. 

Potential Adverse Consequences of Institution-Oriented Systemic Risk Regulation: How a Too-Big-to-Fail Regime of Regulation Would Create 

Moral Hazards and Unfair Competition that Could Lead to a Replication of the Problems with Government-Sponsored Entities 

Systemic risk regulation and oversight focused on particular institutions based on 

size, nature of business or perceived significance may well miss market-oriented 

events and trends that are the true sources of systemic risk. Some commentators 

have suggested that systemic risk regulation should focus on particular financial institutions that are considered to be ‘‘systemically significant.’’ While the criteria for 

determining which companies are systemically significant are unclear at this point, 

most proponents of this approach seem to have in mind companies that are thought 

to be ‘‘too big to fail’’ or ‘‘too interconnected to fail.’’ 

The act of identifying and regulating ‘‘systemically significant institutions’’ is likely to have unintended negative consequences, particularly if property/casualty insurance companies are among the institutions designated as systemically significant. 

If an insurance company is deemed, or suspected to be, systemically significant, investors and consumers will see it as an official declaration that the company will 

not be allowed to fail. This is because the whole purpose of regulating systemically 

important insurers is to prevent them from failing, because their failure would have 

an adverse systemic impact on the financial system or the economy generally. 

It seems quite likely that insurers designated as systemically important would 

gain a competitive advantage over other insurers. Companies carrying the official 

‘‘systemically significant’’ designation would be able to attract more customers and 

investment capital than their rivals thanks to the perception that ‘‘systemically significant’’ insurers will be backed by the Federal Government. Moreover, the implicit 

guarantee of a government backing for systemically significant insurers would create a moral hazard that could manifest itself in regulatory arbitrage, which is a 

strategy of identifying and exploiting loopholes in the systemic risk regulatory apparatus that would enable the company to engage in riskier, but potentially more profitable, underwriting or investment practices. 

To counteract the moral hazard produced by the ‘‘systemically significant’’ designation, the systemic risk regulator might err on the side of caution by preventing 

69 

systemically significant insurers from engaging in any business practice that, in its 

view, could even remotely contribute to systemic risk. Overly restrictive regulation 

of this kind could decrease the availability of insurance coverage while increasing 

its cost. While systemic risk poses economic costs, so does regulation. The costs, both 

direct and indirect, of a systemic regulatory system could be high and care must 

be taken to avoid situations in which the costs outweigh the benefits. In addition 

to the direct costs of additional regulation, Congress must be wary of the moral hazard and disruption of the efficient evolution of markets that can result from inappropriate regulatory intervention. 

Options for Reform 

Single Financial Regulator 

The 2008 Treasury Blueprint for Financial Services Reform (‘‘Blueprint’’) proposed 

the creation of a single Prudential Financial Regulatory Agency (‘‘PFRA’’). Citing 

the experience of international trading partners, other proposals have advocated the 

consolidation of existing Federal functional regulators as well as the expansion of 

Federal authority to include insurance regulation. 

A single financial market regulator would prove more problematic in the United 

States than in other countries. Unlike the majority of countries that utilize a unitary legal system, the United States has 54 well-defined jurisdictions, each with its 

own set of laws and courts. As noted, the U.S. system of contract law is deeply developed, and with respect to insurance policies, is based on more than a century of 

policy interpretations by State courts. The tort system, which governs many of the 

types of contingencies at the heart of insurance claims particularly those covered 

by liability insurance, is also deeply based in State law. 

There are also significant differences between property/casualty insurance and 

other insurance and financial service products that necessitate different specific regulatory treatment. Geographical and demographic differences among States would 

similarly pose additional difficulties for a single financial market regulator. NAMIC 

believes that attempts to establish a single financial regulator would threaten the 

fundamental underpinnings of the property/casualty marketplace. 

Federal Insurance Charter 

Proposals for a Federal insurance charter raise serious design and implementation questions. Enacting and implementing comprehensive insurance regulatory reform such as a Federal charter opens the door to numerous unanticipated problems 

and pitfalls. Inadvertent failure to properly act in any of a number of critical areas 

could damage the nation’s insurance market by reducing competition and harming 

consumers. Numerous specific concerns arise when considering Federal regulation of insurance. Specifically: 

• Insurance inherently differs from other financial products and services in that 

it is a promise of future financial protection, making solvency and consumer 

protection paramount. Federal regulation has proven no better than State regulation in addressing market failures or protecting consumer interests. Unlike 

State regulatory failures, Federal regulatory mistakes can have disastrous economy-wide consequences. The current high-profile failures of 25 federally regulated banks in 2008 and 16 more already this year have shown weaknesses in 

Federal solvency regulation. Contrast this with the property/casualty insurance 

industry which had an excellent solvency record in 2008 in spite of a large drop 

in investment income and the fourth most expensive natural disaster in U.S. 

history. The State guaranty system continues to work well to protect consumers 

without taxpayer bailouts and State regulators respond to thousands of consumer inquiries each year. In addition an optional Federal charter (OFC) system that establishes a national solvency fund for federally chartered companies 

or permits insurers operating under different financial regulatory standards to 

participate in State guaranty funds could impair the current guaranty system. 

• Regulatory competition between State and Federal regulators could create an 

unlevel playing field favoring large national writers or specific lines of insurance. Despite assurances that all players could choose the regulatory system 

best matching their business model and consumer needs, the reality is that 

transaction costs as well as retooling and retraining expenses would effectively 

lock smaller and mid-size insurers into their original choice of regulator. 

• As previously noted, the property/casualty insurance business is highly dependent on State and regional differences. These differences are particularly critical 

for personal lines property/casualty coverages (auto, homeowners, personal liability) making ‘‘national’’ products and regulation difficult. 

70 

• A Federal regulatory system that results in overlapping, dual or conflicting regulation would create regulatory confusion and significantly increase the cost of 

doing business for all insurers. It is foreseeable that insurers, even those opting 

for State regulation, would find themselves subject to a plethora of new Federal 

rules and regulations. The health insurance market is a vivid example of the 

pitfalls and confusion of dual regulation for consumers and insurers. This dual 

regulatory system must be avoided for the property/casualty insurance industry. 

Office of Insurance Information 

In April 2008, Rep. Paul Kanjorski, D-Penn., chairman of the House Financial 

Services Subcommittee on Capital Markets, Insurance and Government Sponsored 

Enterprises, introduced H.R. 5840, the Insurance Information Act of 2008. The legislation would create an Office of Insurance Information (OII) within the U.S. Department of the Treasury with jurisdiction for all lines of insurance, except for health 

insurance, to provide advice and counsel regarding domestic and international policy 

issues. 

The OII would be empowered and directed to collect, analyze and disseminate information and data; establish and enforce international insurance policy; and coordinate with the States with respect to insurance-related issues. 

NAMIC worked closely with Chairman Kanjorski and the Committee to resolve 

concerns related to the scope and authority of the OII, the confidentiality of the 

data, and the composition of the Advisory Group, and supported passage of the 

amended legislation. 

The establishment of a properly crafted OII within the Department of Treasury 

could play a vital role in the effort to streamline and modernize the State-based insurance regulatory system and provide essential information to Congress and the 

Federal Government. 

Federal Standards 

Uniformity is beneficial and achievable when State needs are similar and unnecessary regulatory differences significantly impede effective competition within the 

existing functional regulatory framework. Solvency regulation, for example, is basically uniform among the States. Financial reporting standards and financial examination standards do not suffer from inconsistencies and vagaries among the States. 

In recent years, insurers, regulators and legislators have turned their attention to 

promoting greater coordination and uniformity in other aspects of insurance regulation beyond financial reporting and solvency. While NAMIC opposes an OFC and 

consolidation of insurance regulation under a single Federal financial regulator, we 

believe Congress could play a role in achieving specific targeted reforms to achieve 

national uniformity and consistency. 

This approach has been adopted by the House in its approval of ‘‘The Nonadmitted and Reinsurance Reform Act of 2007,’’ which streamlines regulation for 

nonadmitted insurance and reinsurance carriers and surplus lines companies. Similar uniformity would be achieved by adoption of the ‘‘National Association of Registered Agents and Brokers Reform Act of 2008’’ (‘‘NARAB II’’), which would establish licensing reciprocity for insurance producers that operate in multiple States. 

The approach embodied in these bills allows Congress a meaningful role in modernizing the insurance regulatory system while leaving the day-to-day regulatory control at the State level. NAMIC supports NARAB II and the Nonadmitted and Reinsurance Reform Act and urges Congress to approve the bills in the 111th Congress. 

As Congress considers insurance regulatory reform proposals, NAMIC urges lawmakers to identify specific areas of reform that lend themselves to national standards. In addition to nonadmitted and surplus lines regulation and agent and broker 

licensing, NAMIC encourages Congress to consider Federal standards prohibiting 

States from limiting property/casualty insurers’ (1) ability to set prices for insurance 

products, except when the insurance commissioner can provide credible evidence 

that a rate would be inadequate to protect against insolvency and (2) use of underwriting variables and techniques, except when the insurance commissioner can provide credible evidence that a challenged variable or technique bears no relationship 

to the risk of future loss. Targeted Federal legislation, such as the outlined proposals, could be more easily achieved and with less government interference, which 

would lead to more expeditious insurance regulatory reform. 

Interstate Compacts, Domiciliary Deference and Model Laws 

Interstate compacts are contracts between States that allow States to cooperate 

on multi-State or national issues while retaining State control. Interstate compacts 

have a deep history dating from their specific mention in the U.S. Constitution. 

There are more than 200 interstate compacts and the average State participates in 

25 separate contracts. As such, interstate compacts offer one method for resolving 

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differences in State insurance regulation. Thirty-three States have adopted the 

Interstate Insurance Product Regulation Compact to develop uniform national product standards; establish a central point of filing for these insurance products; and 

review product filings and make regulatory decisions related to life insurance, annuities, disability income, and long-term-care insurance. Interstate compacts have also 

been suggested for natural disaster risks. 

Domiciliary deference vests responsibility with the regulator of an insurer’s State 

of domicile to take the lead role in specified regulatory functions. In financial regulation, States focus on their domestic insurers and rely on the State of domicile to 

monitor the solvency and financial condition of foreign insurers doing business in 

their State. States also utilize the concept of domiciliary deference in other examinations, agreeing to forego routine or comprehensive exams and relying on the home 

State while retaining the right to examine targeted issues. The concept could be expanded to streamline regulatory processes and avoid redundant examinations and 

document productions. 

Model laws and regulations serve to increase uniformity and reduce inconsistencies among regulatory jurisdictions. Model laws and regulations have encountered 

difficulties in obtaining approval in a critical number of States; however, there are 

examples of the success of model laws. The NCOIL Credit-Based Insurance Scoring 

Model Act is an example of the effective use of model language. To date, laws or 

regulations in 27 States are based on the model. 

Effective Regulation 

NAMIC believes that the fundamental and significant differences among the wide 

variety of financial services and products argues against consolidation of financial 

services regulation for all industries and products under an umbrella supervisory 

body. Prudential regulation, particularly in the case of property/casualty insurance, 

continues to work well to meet consumer needs and should be preserved. Correspondingly, NAMIC believes that any effective regulatory reform proposal must 

sustain and enhance the regulatory strengths of the existing system of prudential 

regulation, including industry specific expertise, experience and focus. 

The current crisis demands that Congress act, but Congress must act prudently 

and responsibly, focusing limited resources on the most critical issues. We encourage 

Congress to focus with laser precision on the problems at hand and avoid the inclination to rush to wholesale reform. We believe there are a number of finite and concrete reforms that Congress could undertake to strengthen our nation’s financial 

regulatory system, including enhanced regulatory coordination, improved international information sharing, creation of an Office of Insurance Information, adoption of selected national standards, and targeted, national focus on identifying, analyzing and addressing systemic risk. 

Likewise the national system of State-based insurance regulation is appropriate 

and well-suited to effectively regulate products and services that are local in nature, 

such as property/casualty coverages. There is no evidence that a Federal regulator 

would prove more effective in improving insurance solvency regulation, would have 

any greater operational knowledge than State regulators with respect to financial 

oversight, or be more responsive to consumers. NAMIC opposes the creation of a 

Federal charter for property/casualty insurers and cautions Congress against disrupting a fundamental bedrock of the financial fabric of our country, particularly 

during a period of economic crisis. 

NAMIC recognizes the interconnectedness of the industry segments within the financial industry and of the U.S. and international financial communities. We acknowledge the need for greater coordination and cooperation among and between 

U.S. prudential regulators and foreign regulatory bodies. We believe, however, that 

it is not necessary to replace the current functional regulatory framework to successfully achieve Federal interests in these areas. NAMIC believes Congress must 

maintain the State-based insurance regulatory system; however, we recognize that 

improvements can and should be made. Specifically, NAMIC supports: 

• Formalized coordination between functional prudential regulators. A 

closer and more formalized working relationship between State regulators and 

their Federal counterparts is essential to ensure timely and effective information exchange and coordination of regulatory actions. Expansion of the President’s Financial Working Group to include participation by State regulators, 

coupled with enhanced information sharing between and among the participants would provide a unique forum to integrate and coordinate financial services regulation, while preserving the benefits of prudential regulation. 

• Enhanced international regulatory cooperation and coordination. Enhanced cooperation and coordination among the various global financial services 

72 

regulatory bodies is needed. However, such cooperation and coordination should 

not come at the cost of abrogation of regulatory authority to foreign jurisdictions 

or quasi-governmental bodies. 

Movement of capital that is intended for risk or insurance generally flows freely 

at the present. Coordination of reporting or presentation standards to permit review 

and evaluation help to foster greater regulatory transparency and encourage competition. Present cooperation between the European Union and U.S. provide a sound 

basis for further collaborative efforts. 

U.S. insurance regulators through the NAIC participate in the International Association of Insurance Supervisors (IAIS). The IAIS develops international standards 

for insurance supervision, provides training to its members, and fosters cooperation 

between insurance regulators, as well as forging dialog between insurance regulators and regulators in other financial and international sectors. Regulators and 

staff participate in the work of the IAIS on a variety of issues, including international solvency supervision, accounting standards, reinsurance regulation and 

other issues of regulation of the business of insurance. 

• Creation of an Office of Insurance Information. Legislation introduced by 

Rep. Paul Kanjorski in the 110th Congress would have also provided greater 

autonomy to the Department of the Treasury through a newly created Office of 

Insurance Information (OII) to engage with foreign jurisdictions on insurance 

matters. NAMIC supports greater coordination and limited preemptory authority over international insurance issues. 

Similarly, NAMIC acknowledges the need for increased insurance industry information at the Federal level. Rep. Kanjorski’s legislation would also have authorized 

the OII to collect and analyze insurance industry information and make recommendations to Congress. NAMIC supports the creation of an OII with proper protections for the privilege and confidentiality of company data. 

• Targeted Product-Focused Systemic Risk Regulation. With respect to systemic risk, NAMIC believes that regulators should work to identify, monitor, 

and address systemic risk. However, a systemic risk regulator should complement existing regulatory resources. Furthermore, NAMIC does not believe 

that the business or legal characterization of any institutions should be used 

as a basis for assessing systemic risk. Oversight and regulation of systemic risk 

should focus on the impact of products or transactions used by financial intermediaries. 

Attempting to define and regulate ‘‘systemically significant institutions’’ on the 

basis of size, business line, or legal classification—such as including all property/casualty insurers—would do little to prevent future financial crises. Indeed, a regime 

of systemic risk regulation that is institution-oriented rather than focused on specific financial products and services could divert attention and resources from where 

they are most needed, while at the same time producing distortions in insurance 

markets that would be harmful to consumers. 

However, at this time there is no evidence that the property/casualty insurance 

industry contributes any substantial amount of systemic risk to the global financial 

system. A new systemic risk regulator should not be tasked with supervising property/casualty insurers that are arbitrarily presumed to be ‘‘systemically significant.’’ 

Instead, any new systemic regulatory system should be given the flexibility to adapt 

to changing developments in the marketplace, and to anticipate events that could 

potentially cause a cataclysmic shock to the financial system and the broader economy. 

The classic rationale for regulation of financial institutions is that it should serve 

the public interest by efficiently mitigating market failures. For regulation to 

achieve this objective, however, there should be substantial evidence showing that 

existing or proposed regulatory interventions will efficiently address the failure. In 

other words, efficient regulation necessarily involves matching the appropriate regulatory tool to the specific market failure. Moreover, the benefits of regulation should 

outweigh its direct and indirect costs. This is particularly true as Congress debates 

fundamental reform of the nation’s financial services industry. 

Conclusion 

NAMIC supports a strong, transparent, market economy. We encourage the Committee to fully explore all options for addressing the various challenges, including 

systemic risk, confronting the nation’s economy. As the Committee and Congress 

evaluate solutions, NAMIC, on behalf of our member companies and their customers, encourages members to carefully weigh the costs and benefits of proposed 

regulatory processes. It is critical that any solution address real regulatory gaps, 

73 

1 Reinsurance Association of America (RAA), Offshore Reinsurance in the U.S. Market 2007 

Data (2008). 

without implementing duplicative and ineffective new regulations where none are 

needed. 

As policymakers work to develop long-term successful solutions to our present financial crisis, NAMIC urges Congress to keep in mind the dramatic differences between main street organizations continuing to meet the needs of their local markets, 

and those institutions that have caused this crisis and have required unprecedented 

government financial intervention. 

PREPARED STATEMENT OF FRANKLIN W. NUTTER 

PRESIDENT, REINSURANCE ASSOCIATION OF AMERICA

MARCH 17, 2009 

My name is Frank Nutter and I am President of the Reinsurance Association of 

America (RAA). The RAA is a national trade association representing property and 

casualty companies that specialize in assuming reinsurance. 

I am pleased to appear before you today to provide the reinsurance industry’s perspective on regulatory reform. I commend Chairman Dodd and Ranking Member 

Shelby for holding this important hearing and welcome the opportunity to address 

the Committee about the current system for regulating the marketplace in light of 

recent developments in the financial markets. My testimony will highlight the function of risk management; how reinsurers doing business in the United States are 

regulated; why the current State-based insurance regulatory system does not work 

well for the sophisticated global reinsurance marketplace; the RAA’s position in support of a single national regulator at the Federal level for the reinsurance industry, 

or alternatively, Federal legislation that streamlines the current State-based system; and the concept of a systemic risk regulator. 

I. BACKGROUND ON REINSURANCE 

a. The U.S. Reinsurance Market 

Reinsurance is critical to the insurance marketplace. It is a risk management tool 

for insurance companies to reduce the volatility in their portfolios and improve their 

financial performance and security. It is widely recognized that reinsurance performs at least four primary functions in the marketplace: to limit liability on specific 

risks; to stabilize loss experience; to provide transfer for insurers of major natural 

and man-made catastrophe risk; and to increase insurance capacity. 

Reinsurers have assisted in the recovery from every major U.S. catastrophe over 

the past century. By way of example, 60 percent of the losses related to the events 

of September 11 were absorbed by the global reinsurance industry, and in 2005, 61 

percent of Hurricanes Katrina, Rita and Wilma losses were ultimately borne by reinsurers. 

Reinsurance is a global business. Encouraging the participation of reinsurers 

worldwide is essential to providing the much needed capacity in the U.S. for both 

property and casualty risks. This can be best illustrated by the number of reinsurers 

assuming risk from U.S. ceding insurers. In 2007, more than 2,500 foreign reinsurers assumed business from U.S. ceding insurers. Those 2,500 reinsurers were 

domiciled in more than 70 foreign jurisdictions.1 Although the majority of U.S. premiums ceded offshore is assumed by reinsurers domiciled in ten countries, the entire market is required to bring much needed capital and capacity to support the 

extraordinary risk exposure in the U.S. and to spread the risk throughout the 

world’s financial markets. Foreign reinsurers now account for 56 percent of the U.S. 

premium ceded directly to unaffiliated reinsurers; a figure that has grown steadily 

from 38 percent in 1997. 

b. U.S. Reinsurance Regulation—Direct and Indirect 

U.S. reinsurers are currently regulated on a multi-State basis. While the current 

State-based insurance regulatory system is primarily focused on solvency regulation 

with significant emphasis on regulating market conduct, contract terms, rates and 

consumer protection, reinsurance regulation focuses almost exclusively on ensuring 

the reinsurer’s financial solvency so that it can meet its obligations to ceding insurers. 

Reinsurance is regulated by the States utilizing two different methods: direct regulation of U.S.-licensed reinsurers and indirect regulation of reinsurance transactions. States directly regulate reinsurers that are domiciled in their State, as well 

74 

as those U.S. reinsurers that are simply licensed in their State, even if domiciled 

in another State. These reinsurers are subject to the full spectrum of solvency laws 

and regulations to which an insurer is subject, including: minimum capital and surplus requirements, risk-based capital requirements, investment restrictions, required disclosure of material transactions, licensing, asset valuation requirements, 

examinations, mandated disclosures, unfair trade practices laws, Annual Statement 

requirements and actuarial-certified loss reserve opinion requirements. Because the 

reinsurance transaction is between two sophisticated parties, there are no regulatory requirements relating to the rates that are negotiated between the parties or 

the forms used to evidence contractual terms. 

There is also indirect regulation of reinsurance transactions through the credit for 

reinsurance mechanism, which is the financial statement accounting effect given to 

an insurer if the reinsurance it has purchased meets certain prescribed criteria. If 

these criteria are met, the insurer may record a reduction in its insurance liabilities 

for the effect of its reinsurance transactions. One of the most widely discussed criteria is the ‘‘collateral’’ requirement that a non-licensed reinsurer must either establish a U.S. trust fund or other security in the U.S., such as a clean, irrevocable and 

unconditional letter of credit issued by an acceptable institution, to cover its potential liabilities to the insurer. This provision is based on the historic premise that 

State regulators do not have the regulatory capability or resources to assess the financial strength or claims paying ability of reinsurers that are not authorized or 

licensed in that State. 

For several reasons, including the cumbersome nature of a multi-State licensing 

system, capital providers to the reinsurance market have in recent years opted for 

establishing a reinsurance platform outside the U.S. and conducting business 

through a U.S. subsidiary or by providing financial security through a trust or with 

collateral. Following the events of September 11, 2001, 12 new reinsurers with $10.6 

billion capital were formed. After Hurricane Katrina, at least 38 new reinsurance 

entities with $17 billion of new capital were formed. Nearly all of this new capital 

came from U.S. capital markets, yet no new reinsurer was formed in the United 

States. Other than the U.S. subsidiaries of some of these new companies, not one 

U.S.-domiciled reinsurer has been formed since 1989. For these startups, the ease 

of establishment, capital formation, and regulatory approvals in non-U.S. jurisdictions contrasts with the cumbersome and protracted nature of obtaining licenses in 

multiple U.S. States. We believe that a streamlined national U.S. regulatory system 

will result in reinsurers conducting business more readily through U.S. operations 

and U.S.-based personnel. 

II. KEY ISSUES FOR THE U.S. REINSURANCE INDUSTRY 

The RAA seeks to modernize the current regulatory structure and advocates a single national regulator at the Federal level. Alternatively, the RAA seeks Federal legislation that streamlines the current State-based system. There are a number of key 

problems and inefficiencies with the current State-based framework for reinsurance 

regulation. 

a. The Need for a Single Federal Role 

As has been noted by a variety of commentators, as well as the 2008 U.S. Treasury Blueprint for Financial Regulatory Reform (‘‘the Treasury Blueprint’’), the U.S. 

State-based insurance regulatory system creates increasing tensions in the global 

marketplace, both in the ability of U.S.-based firms to compete abroad and in the 

allowance of greater participation of foreign firms in the U.S. market. Foreign government officials have continued to raise trade barrier issues associated with dealing with 50 different U.S. insurance regulators, which makes coordination on international insurance issues difficult for foreign regulators and companies. 

An informed Federal voice with the authority to establish Federal policy on international issues is critical not only to U.S. reinsurers, which do business globally and 

spread risk around the world, but also to foreign reinsurers, who play an important 

role in assuming risk in the U.S. marketplace. 

The fragmented U.S. regulatory system is an anomaly in the global insurance regulatory world. As the rest of the world continues to work toward global regulatory 

harmonization and international standards, the U.S. is disadvantaged by the lack 

of a Federal entity with authority to make decisions for the country and to negotiate 

international insurance agreements, or alternatively, the lack of Federal-enabling 

legislation which empowers a single State regulator to do so. 

b. Mutual Recognition 

U.S. States impose a highly structured and conservative level of regulation on licensed reinsurers. However, it has long been recognized that there are several globally recognized methods of conducting reinsurance regulation. 

75 

The RAA was encouraged by the inclusion of a system of mutual recognition 

among countries in ‘‘The National Insurance Act of 2008’’ (S. 40), introduced in the 

last Congress. Mutual recognition seeks to establish a system where a country recognizes the reinsurance regulatory system of other countries and allows reinsurers 

to conduct business based on the regulatory requirements of its home jurisdiction. 

If such a system were established, European reinsurers would be permitted, for example, to assume reinsurance risk from the U.S. without having to obtain a U.S. 

license and without having a requirement in law to provide collateral for their liabilities to U.S. ceding insurers. In return, such a system would allow U.S. reinsurers 

to conduct business in the mutually recognized country based on U.S. regulatory 

oversight. 

A single national regulator with Federal statutory authority could negotiate an 

agreement with the regulatory systems of foreign jurisdictions that can achieve a 

level of regulatory standards, enforcement, trust, and confidence with their counterparts in the U.S. 

c. Extra-Territorial Application of Law 

The RAA also believes there is a need for greater efficiency in the regulation of 

reinsurance in the U.S. As a result of our 50-State system of regulation, significant 

differences have emerged among the States with respect to reinsurance regulatory 

requirements. Multi-State systems add extra costs to transactions. These costs are 

ultimately reflected in the premiums paid by consumers. The NAIC and State regulators are to be applauded for their efforts toward greater uniformity in the adoption 

of model laws and regulations and the creation of the accreditation system; yet, this 

has not prevented some States from pursuing varying and sometimes inconsistent 

regulatory approaches. One of the best examples of this is the extra-territorial application of State laws. 

Thirteen States apply at least some of their regulatory laws on an extra-territorial 

basis, meaning that the State law not only applies to the insurers domiciled in that 

State, but to insurers domiciled in other States if the extra-territorial State has 

granted a license to the insurer. For example, an insurer domiciled in a State other 

than New York, but licensed in New York, will find that New York asserts that its 

laws apply to the way it conducts its business nationwide. Since most U.S.-based 

reinsurers are licensed in all 50 States, this extra-territorial application of State law 

results in inconsistencies among State laws. 

As Congress proceeds to review the current regulatory structure and consider a 

new one for the future, we encourage the Committee to focus on streamlining reinsurance regulation to allow U.S. reinsurers to be more competitive in the global 

marketplace, maximize capacity in the United States, and make us a more attractive place for companies to locate their business. Any structure that is adopted 

should eliminate duplicative and inconsistent regulation like that which is caused 

by the extra-territorial application of State laws. Such a provision was included in 

the House-passed Nonadmitted and Reinsurance Reform Act of 2008, although it 

lacked the necessary enforcement authority. 

III. GOALS OF EFFECTIVE REINSURANCE REGULATION AND CORE 

CHARACTERISTICS OF A REINSURANCE REGULATORY REGIME 

As we move forward with modernization efforts, the goals of effective reinsurance 

regulation in the United States should be to promote: 

1. Financially secure reinsurance recoverables and capacity that protects the solvency of U.S. ceding insurers. 

2. A competitive and healthy reinsurance market that provides sufficient capacity 

to meet ceding insurers’ risk management needs. 

3. Effective and efficient national reinsurance regulation. 

The core characteristics of an appropriate reinsurance regulatory structure that 

would assist in achieving these goals should include: 

1. A single Federal regulator or regulatory system for reinsurance with national 

regulatory oversight and the power to preempt conflicting or inconsistent State 

laws and regulations in an effective and efficient manner. 

2. The single regulator’s authority should provide for the recognition of substantially equivalent regulatory standards and enforcement in other competent regulatory jurisdictions. 

3. The regulatory structure should support global capital and risk management, 

taking into account capital adequacy, assessment of internal controls, recognition of qualified internal capital models and effective corporate governance. 

76 

4. The regulatory structure should provide for financial transparency that encourages and supports the cedents’ ability to assess counter-party credit risk, including information regarding the reinsurer’s financial condition and the reinsurer’s performance in paying covered claims. 

5. Regulators should have access to all necessary financial information with appropriate provision for the confidentiality of that information, as currently provided for under State law and regulatory practice. 

6. The regulatory structure should have an effective transition mechanism between the current system and any future regime that is consistent with these 

core characteristics. Absent mutual agreement of the parties, any reduction in 

existing collateral requirements should only apply prospectively. 

7. The regulatory structure should utilize principles-based regulation where appropriate. 

There are several different ways to address meaningful modernization. Changes 

to the current reinsurance regulatory structure to achieve these goals and core characteristics include, but are not limited to: (1) a Federal regulator for reinsurance, 

or (2) Federal legislation that streamlines and modernizes the current State system. 

Although the RAA prefers a Federal regulator, the Nonadmitted and Reinsurance 

Reform Act, also called the surplus lines and reinsurance bill, passed twice by the 

House, is a good start, but could be augmented by the recent NAIC-endorsed reinsurance modernization framework. The RAA supports the NAIC proposal to modernize the U.S. reinsurance regulatory system through a system of regulatory recognition of foreign jurisdictions, a single State regulator for U.S. licensed reinsurers, 

and a port of entry State for non-U.S. based reinsurers. 

The NAIC has acknowledged that ‘‘in light of the evolving international marketplace, the time is ripe to consider the question of whether a different type of regulatory framework for reinsurance in the United States is warranted.’’ The proposed 

NAIC framework, if implemented appropriately, would, in the words of the NAIC, 

‘‘facilitate cross-border transactions and enhance competition within the U.S. market, while ensuring the U.S. insurers and policyholders are adequately protected.’’ 

Given the challenges of implementing changes in all 50 States and questions of constitutional authority for State action on matters of international trade, the NAIC’s 

support for Federal legislation to accomplish this proposed framework is encouraging. 

IV. THE NEED FOR A SYSTEMIC RISK REGULATOR? 

I urge Congress to move reinsurance regulatory modernization forward regardless 

of the ongoing debate about a systemic risk regulator—the subject of my concluding 

testimony. 

If, as House Financial Services Committee Chairman Barney Frank indicated during a February 3 press conference, there is a preference for systemic risk regulation 

‘‘covering all forms of financial activity,’’ significant issues about a systemic risk regulator remain unanswered, including, but not limited to: 

1. What are the criteria for defining entities or markets that present a systemic 

risk? 

2. How broad will this regulator’s authority be? 

3. How will this regulator’s powers interact with those of the prudential regulator? 

4. To what extent will the systemic risk regulator present duplicative regulation? 

5. How will U.S. companies that are part of an international group headquartered 

outside the United States be treated? 

6. How will the systemic risk regulator coordinate with the other international 

regulators? 

In general, property casualty insurers generate little counterparty risk and their 

liabilities are, for the most part, independent of economic cycles or other systemic 

failures. Even during the current financial turmoil, rating agency A.M. Best continues to maintain a stable outlook for the global reinsurance sector based on its 

sound underlying operating earnings generated over the most recent timeframe, 

strong underwriting discipline, and capital adequacy. While the reinsurance industry plays an important role in the financial system, it may not necessarily present 

a systemic risk. In its 2006 report, ‘‘Reinsurance and International Financial Markets,’’ the Group of 30 found ‘‘no evidence’’ that the failure of a reinsurer ‘‘has given 

rise to a significant episode of systemic risk.’’ 

Reinsurance is an important part of the risk transfer mechanism of modern financial and insurance markets. Yet, there are clear distinctions between risk finance 

77 

and management products that are relatively new financial tools developed in unregulated markets, and risk transfer products like reinsurance whose issuers are 

regulated and whose business model has existed for centuries. In the case of reinsurance, regulatory reform is necessary to improve its regulatory and market efficiency and maximize capacity in the United States, but not to address the fundamental risk transfer characteristics of the product. 

Those addressing the authority of a systemic risk regulator envision traditional 

regulatory roles and standards for capital, liquidity, risk management, collection of 

financial reports, examination authority, authority to take regulatory action as necessary and, if need be, regulatory action independent of any functional regulator. 

At a speech before the Council of Foreign Relations last week, Federal Reserve 

Board Chairman Ben Bernanke acknowledged that such a systemic regulator should 

work as seamlessly as possible with other regulators, but that ‘‘simply relying on 

existing structures likely would be insufficient.’’ 

As I noted earlier in my testimony, the purpose of reinsurance regulation is primarily to ensure the collectability of reinsurance recoverables and to maintain a 

method of accurate reporting of financial information that can be relied upon by regulators, insurers and investors. Because reinsurance is exclusively a sophisticated 

business-to-business relationship, reinsurance regulation is functionally different 

from insurance, and has other critically different characteristics: no rate or form 

regulation and no consumer protection because there is no legal relationship to insurance consumers. Reinsurance companies are already regulated in much the same 

way as is being proposed for the systemic risk regulator—financial reporting, riskbased capital analysis, examination, and regulatory authority to take action to address financial issues. If licensed in the United States, reinsurers are regulated in 

this way by the various States. If domiciled in a non-U.S. jurisdiction, reinsurers 

are similarly regulated in their home country. We are concerned the systemic risk 

regulator envisioned by some would be redundant with this system. This raises concerns that, without financial services and insurance regulatory reform, a Federal 

systemic risk regulator would: (1) be an additional layer of regulation with limited 

added value; (2) create due process issues for applicable firms; and (3) be in regular 

conflict with the existing multi-State system of regulation. 

V. FINANCIAL REGULATORY MODERNIZATION 

Most, if not all participants in the dialog about financial services modernization, 

acknowledge that most financial markets are global and interconnected. Federal Reserve Chairman Bernanke noted that the global nature of finance makes it abundantly clear that any reform in the financial services sector must be coordinated 

internationally. Among the financial services providers, no sector is more global in 

nature than reinsurance. 

Should Congress proceed with broad financial services modernization, we ask that 

it be recognized that reinsurance is by its global nature different from insurance, 

and that the Federal Government currently has the requisite constitutional authority, functional agencies and experience in matters of foreign trade to easily modernize reinsurance regulation. We believe that multiple State regulatory agencies in 

matters of international trade are at best inefficient, pose barriers to global reinsurance transactions, and do not result in greater transparency. 

It is the recommendation of the Reinsurance Association of America that reinsurance regulatory modernization be included in any meaningful and comprehensive financial services reform through the creation of a Federal regulator having exclusive 

regulatory authority over the reinsurance sector so there is no level of redundancy 

with State regulation. This should occur whether or not a systemic risk regulator 

is included in financial services reform. 

Alternatively, Congress should create a single exclusive national regulator for reinsurance at the Federal level, but retain a choice or option for companies to remain 

in the State system. We recommend further that any such financial reform incorporate authority for a system of regulatory recognition to facilitate cooperation and 

enforcement with foreign insurance regulators. 

If the Congress should choose not to include reinsurance in broader financial services reform, we encourage the enactment of legislation along the lines of the NAIC’s 

reinsurance modernization proposal to streamline the State system as it relates to 

reinsurance by federally authorizing a port of entry for foreign reinsurers and single-state financial oversight for reinsurers licensed in the United States. 

Should Congress proceed first with a systemic risk regulator and defer financial 

services modernization, we encourage the Committee to provide a road map for addressing reinsurance regulatory reform along the lines described in this testimony. 

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The RAA thanks Chairman Dodd, Ranking Member Shelby and members of the 

Committee for this opportunity to comment on regulation, and we look forward to 

working with all members of the Committee as it considers this most important 

issue. 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MICHAEL T. MCRAITH 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

A.1. The creation of a Federal systemic risk regulator is distinct 

from an examination of the effectiveness of functional regulation 

for large firms like AIG. As you know, AIG’s 71 U.S.-based insurers 

subject to State-coordinated oversight have met all obligations to 

policyholders and claimants. From an insurance regulator’s perspective, our functional regulation proved a key element in preserving the value in the AIG insurance subsidiaries and protecting 

AIG’s insurance consumers. With conservative but reasonable capital requirements, solvency standards and accounting principles, 

State insurance regulators ensured that the AIG insurance companies were, and remain, healthy enterprises within the larger corporate structure. Greater functional regulatory coordination is necessary to understand fully the risks posed by all sectors of a financial conglomerate, and to guard against threats to one subsidiary 

due to the demise of another. 

State-based and State-coordinated insurance regulation is inherently compatible with systemic regulation. State insurance regulators support Congressional initiatives to enhance financial stability through systemic risk regulation provided that such proposals preserve State-based insurance regulation. Working with the 

myriad functional regulators, the Federal Government should have 

fingertip access to information and the requisite authority to supervise or undertake corrective action, if necessary. Of course, such 

corrective action by a financial stability regulator should be undertaken only to prevent or minimize the risk of a financial conglomerate imposing undue burden on the larger financial system. Preemptive authority, though, should be limited to extreme instances 

of systemic risk and not displace State insurance regulation or 

other functional regulation. 

State insurance regulators, through the NAIC, recognize areas 

for improvement within the functional regulation of insurance at 

the State level. To that end, we are implementing and developing 

proposals to enhance regulatory efficiency. 

Also, our regulatory expertise and experience can be relied upon 

to improve financial regulation more broadly, protect consumers. 

We welcome the opportunity to partner with other functional regulators. Supervisory colleges comprised of functional regulators may 

prove useful if not essential in understanding the potential areas 

and impacts of systemic risk within an individual enterprise. 

To discard the expertise and demonstrable success of State insurance regulators would be a grave mistake, especially if based on 

misconceptions about the efficacy of State regulators to respond to 

a financial crisis. Insurance companies have generally fared better 

than other financial institutions. Of course, insurers encounter 

127 

challenges based on the overall economy, but the vast majority are 

withstanding the stress better than other financial service sectors. 

Some large life insurers attempt to use the current economic stress 

in other financial sectors as support for an optional Federal charter 

or other broad regulatory reform. However, any such attempt to 

blame State insurance regulators for the overall downturn in the 

capital markets should be understood as transparently misplaced, 

particularly when the same companies have repeatedly criticized 

State regulation as too conservative. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

A.2. Without critiquing the merits of each of the above approaches, 

State insurance regulators refer the Committee to our regulatory 

modernization principles. Our principles recognize the need for 

greater collaboration among financial services regulators at the 

State and Federal level while also preserving, securing and maintaining expertise through effective functional regulation. This can 

be achieved through enhanced regulation at the holding company 

level, possibly through the introduction of supervisory colleges comprised of functional regulators. 

However, supervisory colleges should not be utilized to override 

functional regulators. Rather, supervisory colleges can—and 

should—be effectively utilized to understand the risks within the 

holding company structure. Functional regulatory expertise, as exemplified by State insurance regulators, has proved a key mitigating factor in averting an even larger financial crisis. Accordingly, preemption of functional regulatory authority, if any, should 

be limited to extraordinary circumstances that present a material 

risk to the continued solvency of a systemically significant holding 

company, or a risk that threatens the stability of a financial system. 

Any proposal should avoid the dual regulatory regimes that 

present the concurrent risks of both regulatory consolidation and 

regulatory arbitrage. A single consolidated regulator presents inherent risk. Simply put, regulators make mistakes. With only a 

single regulator, or a single perspective associated with a large, integrated conglomerate, the consequences of regulatory failure expand proportionately and become potentially systemic and catastrophic. Large complex institutions that have the potential for systemic failure need additional scrutiny, not less. Existing regulatory 

resources should be leveraged. As the State insurance regulatory 

model has shown, having coordinated oversight of multiple regulators reduces the likelihood of an industry push toward the regulator with the ‘‘lightest touch.’’ This collaborative model has proved 

effective in the case of State insurance regulation, through which 

128 

many States coordinate the regulation of any one company, and 

could be applied to larger-scale functional regulatory collaboration. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. For State insurance regulators, the issue involves managing 

risk within the larger financial system rather than refuting assumptions about particular companies. The regulatory modernization principles of State insurance regulators support systemic risk 

oversight and the utilization of supervisory colleges within a framework that preserves and enhances functional regulation. 

Of course, insurance is premised upon insurance companies assuming or receiving risk not creating risk. This principle also applies to systemic risk, which provides ample motivation for policymakers to move toward elimination of regulatory gaps in order to 

encourage greater financial stability. Insurers’ exposure to systemic 

risk, though, typically results from linkages to the capital markets. 

Insurance also illustrates the difference between systemic risk 

and the risk of large failures. Most lines of insurance have numerous market participants and ample capacity to absorb the failure 

of even the biggest market participant. For example, if the largest 

auto insurer in the U.S. were to fail, its policyholders could be 

quickly absorbed by other insurers, and that insurer would be further supported by the State guaranty fund system. This scenario 

does not pose systemic risk since the impact is isolated, does not 

ripple to other financial sectors, and does not require extraordinary 

intervention to mitigate. Also, the State-based insurer guaranty 

fund system rewards policyholders and claimants as a priority in 

the event of an insolvency. Any system of financial stability regulation should focus on truly systemic risk, and not create redundant 

mechanisms for dealing with isolated disruptions. 

Q.4. Last week the WSJ had an article titled, The Next Big Bailout 

Decision: Insurers. It mentions the fact that a dozen life insurers 

have pending applications for aid from the government’s $700 billion Troubled Asset Relief Program. What is the market-wide risk 

of life insurance and property and casualty insurance? 

A.4. The nature of life insurance and property and casualty insurance is to assume, pool, and spread existing risk, not create new 

sources of risk. Aside from a handful of mono-line financial guaranty and mortgage guaranty insurers, insurers’ normal business 

operations have generally not been exposed to the larger financial 

crisis. As a result, insurance does not contribute to market-wide or 

systemic risk. Even where insurers are directly exposed to capital 

markets through direct investments and securities lending programs, State insurance regulators impose systems and controls 

that are constantly improved. As a result, economic downturns can 

be managed and policyholder dollars remain secure. Insurers play 

an important role in the capital markets, particularly in the area 

of long-term investments, such as corporate bonds and commercial 

and residential mortgages, but State insurance regulators balance 

a company’s desire for increased participation in the capital markets with underlying policyholder obligations. 

129 

Insurers’ investment portfolios have been exposed to the same 

market forces as those of other investors. Unlike other investors, 

though, insurer exposure to market turmoil is reduced by State insurance laws that limit the percentage of assets an insurer can invest in particular asset classes. These investment limitations are 

one aspect of the conservative but reasonable State solvency regime 

that aids insurers with preservation of the critical ability to meet 

obligations to policyholders and claimants. While a handful of life 

insurance companies may have applications pending for TARP 

funds, State insurance regulators believe such applications stem 

from the inherent risk for any investor rather than shortcomings 

in any insurer’s core life insurance operations. To be sure, insurers 

remain significant participants in capital markets. Insurer participation in the TARP program, therefore, may be consistent with the 

intent of the Emergency Economic Stabilization Act and may contribute to the strengthening of the economy. 

Capital investments by the Department of the Treasury through 

the Capital Purchase Program (CPP), as accessed by insurers with 

bank holding company status, indicate insurance sector strength. 

CPP is not a bailout and Treasury has been clear that participation 

in CPP is reserved for healthy, viable institutions. State insurance 

regulators agree with the positive implications of insurer participation in CPP to the extent that such participation relieves liquidity 

concerns and alleviates consumer concern about the financial 

health of specific insurance companies and the insurance industry. 

Please do not hesitate to contact me if you have more questions, 

or if you would like additional information in relation to this or any 

other topic. Thank you again for the opportunity to present to your 

Committee. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM FRANK KEATING 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

A.1. Although we understand the interest of Congress in considering the establishment of a systemic risk regulator, the ACLI has 

no position on that approach as a solution to the economy’s current 

situation. However we do believe that, should a systemic risk regulator be created and should that office have authority over insurers, it will be important for that office to have constant access to 

a regulatory office that understands the fundamentals of the insurance industry, and we don’t think the Federal Government will 

have that resource without the creation of a Federal functional regulator. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

130 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

A.2. Although the ACLI has not done an analysis of one of these 

approaches over the other, we do feel strongly that whichever approach is taken to reform and modernize financial service reform 

regulation must include the establishment of a Federal insurance 

regulator. Not doing so would result in the continuation of a 19th 

century regulatory system being applied to a critical part of the financial services industry. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. The ACLI has not done the in-depth analysis needed to adequately reply to this question. 

Q.4. Last week the WSJ had an article titled, ‘‘The Next Big Bailout Decision: Insurers.’’ It mentions the fact that a dozen life insurers have pending applications for aid from the government’s $700 

billion Troubled Asset Relief Program. What is the market-wide 

risk of life insurance and property and casualty insurance? 

A.4. The ACLI can only respond with regard to the life insurance 

industry. Life insurers play a vital role in our nation’s credit markets. We are the nation’s largest holder of corporate bonds, and we 

have substantial investments in commercial real estate and other 

areas. If the county’s credit markets are going to begin functioning 

normally again, lending by life insurance companies must be a part 

of that. So to the degree life insurers receive funds intended to 

unfreeze the credit markets, it is a totally appropriate action. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM WILLIAM R. BERKLEY 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

A.1. The lessons of AIG—and indeed the broader financial crisis— 

have further underscored the fact that Congress must reevaluate 

the weaknesses of the current regulatory structure. Thus, as Congress considers the creation of a systemic risk regulator to ‘‘fill in 

the gaps,’’ it must address the lack of an effective and efficient Federal insurance regulator. As I stated in my testimony, the only effective way to include property-casualty insurance under a systemic 

risk regulator would be to create ‘‘an independent Federal funcVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
131 

tional insurance regulator that stands as an equal to the other Federal banking and securities regulators.’’ 

While stricter financial regulatory standards may have helped 

preserve the capital value of AIG’s property and casualty subsidiaries, the fragmented State-by-State regulatory structure did not 

prevent the collapse of AIG as an enterprise and it has not stopped 

AIG’s insurance subsidiaries from experiencing significant property 

and casualty underwriting losses, as well as historic losses in its 

life insurance operations from securities lending. With respect to 

the enterprise, the State regulatory system made it impossible for 

any one regulator to exercise comprehensive authority or supervision of the company across State lines, let alone across U.S. borders. Even if each State regulator did an outstanding job supervising entities in their jurisdiction, their inability to see transactions in the aggregate with companies outside their jurisdiction 

presents a challenge. Thus, no State could intercede to address an 

enterprise-wide problem because of limited nature of this regulatory jurisdiction. Moreover, this structure prevents risk evaluation on a regional, national, or global scale, something that we now 

know is imperative in the wake of the financial crisis. 

If a Federal insurance regulator is established, regulation should 

be comprehensive, not divided. For example, creation of a Federal 

solvency regulator while keeping the existing prudential regulation 

of insurance at the State level would lead to bifurcated, ineffective 

regulation and significant unintended consequences. 

If this crisis has revealed anything, it is the need for more—not 

less—regulatory efficiency, coordinated activity or tracking, sophisticated analysis of market trends and the ability to understand and 

anticipate as well as deal with potential systemic risk before the 

crisis is at hand. Yet, establishing systemic risk oversight without 

addressing the structural problems that exist in the current State 

insurance regulatory system will only defer those problems until 

the next crisis. To solve such as crisis there must be knowledge and 

expertise at the Federal level. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

A.2. As a practical matter, it might currently be impossible to put 

in place an entirely new financial services regulatory structure for 

the United States. At the same time, the serious regulatory flaws 

revealed during this crisis need to be addressed in a way that positions U.S. financial services companies—including property and 

casualty insurers—to compete effectively at home and abroad, 

while ensuring a healthy and vibrant financial services marketplace that works to the benefit of U.S. consumers. The 2008 Department of the Treasury Blueprint for a Modernized Financial 

132 

Regulatory Structure and the Group of Thirty Framework for Financial Stability are both very serious and thoughtful discussions 

regarding a more efficient and more effective structure for financial 

regulation. The Treasury Blueprint calls for specific reforms in the 

way banking and securities are regulated at the Federal level, including the creation of an optional Federal charter regulatory regime to oversee insurers. The Group of Thirty report is designed 

to discuss financial regulation in broad concepts that can be applied to any country that has recently experienced financial disruption. 

Both the Treasury Blueprint and the Group of Thirty report explicitly recommend the ‘‘establishment of a Federal insurance regulatory structure’’ and a ‘‘framework for national level consolidated 

prudential regulation and supervision over large internationally active insurance companies.’’ Such a modern regulatory regime for insurance would benefit consumers and protect taxpayers by ensuring uniform rules and regulations, allow new products to quickly 

be brought to market, and enhance international competitiveness of 

American insurance companies. Moreover, a national regulatory 

structure supervising insurance companies would most certainly fill 

the gaps that exist under the current system. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. It is more important for a regulator to understand risk and to 

set clear rules to mitigate risk in financial services conglomerates 

than it is to simply look exclusively at the size of a company. In 

the example of AIG, the good credit standing of the insurance business was used to guarantee the performance of the holding company. Thus the guarantee from the insurance company created 

intercompany exposure which was not clearly considered. A Federal 

regulator for insurance should be in place to oversee companies 

that fail to manage risk responsibly, and, for the reasons discussed 

above, should be available to others who need the expertise for risk 

oversight. 

The widely discussed concept of ‘‘too big to fail’’ is subjective in 

my view. Regulators should not be monitoring or regulating only 

the size of a company but rather regulating the practices, conduct 

and activities in which it engages. The level of a company’s 

interconnectivity in the financial system doesn’t necessarily correlate to one’s size; the more important principle is to understand 

a company’s transactions and its counterparties. Rather than monitoring a company for size, it would seem to be far more effective 

to take steps to encourage transparency so a regulator can monitor 

and detect risk by better understanding a company’s business activities. 

Q.4. Last week the WSJ had an article titled, ‘‘The Next Big Bailout Decision: Insurers.’’ It mentions the fact that a dozen life insurers have pending applications for aid from the government’s $700 

billion Troubled Asset Relief Program. What is the market-wide 

risk of life insurance and property and casualty insurance? 

A.4. The property and casualty insurance industry has managed its 

risks well and is financially stable. Ours are generally low-leverVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00136 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
133 

aged businesses with conservative investment portfolios. The industry is systemically important in that huge, unforeseen multi-billion-dollar losses could occur with events such as another natural 

disaster or terrorist attack. No single State can effectively deal 

with such mega events, thus a Federal insurance regulator would 

be a smarter, more effective way to understand and manage risk 

in the industry. 

My expertise and experience is in the property and casualty industry so my comments will mostly be confined to that particular 

sector. However, it is instructive to the debate over regulatory reform that the dozen life insurers which applied for TARP funds 

were told by the Treasury Department that they needed to purchase thrifts—putting them under the regulatory oversight of the 

Office of Thrift Supervision—in order to be eligible for these capital 

injections. That condition was imposed apparently because Treasury did not feel comfortable providing significant capital to companies that are not under Federal supervision and that the Federal 

Government knows very little about. This would seem to be another compelling argument for national oversight of insurance. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM SPENCER HOULDIN 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

A.1. The idea of a single entity to oversee systemic risk at the Federal level might make sense for the market, but specifically regarding insurance, it must collaborate and rely upon State insurance 

regulation, which is doing an excellent job of regulating day-to-day 

insurance operations of companies and producers. IIABA believes 

the financial services crisis may have demonstrated such a need to 

have special scrutiny of the limited group of unique entities that 

engage in services or provide products that could pose systemic risk 

to the overall financial services market. IIABA therefore believes 

that while limited systemic risk oversight should be considered, 

this should not displace or interfere with the competent and effective level of day-to-day State insurance regulation provided today. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

134 

A.2. Speaking only on the insurance industry, IIABA believes that 

the current State regulatory structure has many positive elements 

that should not be disregarded, including expertise and resources 

in place from decades of regulatory experience, and strongly opposes consolidating functional regulation in one Federal regulator. 

The State insurance regulatory system has an inherent consumerprotection advantage in that there are multiple regulators overseeing an entity and its products, allowing others to notice and rectify potential regulatory mistakes or gaps. Providing one day-to-day 

regulator with all of these responsibilities, consolidating regulatory 

risk, could lead to more substantial problems where the errors of 

that one regulator lead to extensive problems throughout the entire 

market. IIABA believes insurance regulation should be modernized 

but strongly opposes day-to-day Federal regulation of insurance, 

whether through a mandatory consolidated regulator or through establishing an optional Federal charter for insurance, as proposed in 

the Treasury Blueprint. IIABA also opposes efforts to federally regulate segments of the property-casualty market, such as commercial or large commercial property-casualty. Along with its belief 

that limited Federal systemic risk oversight may be necessary for 

large financial services entities, IIABA also believes that consideration should be given to legislation that would create an Office of 

Insurance Information (OII) at the Federal level. However, such an 

office should not portend the creation of a Federal insurance regulator, because an OII would help fill the void of insurance expertise 

in the Federal government and help solve the problems faced by insurers in the global economy without day-to-day regulation of insurance at the Federal level. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. II ABA believes that Federal systemic risk oversight may be 

necessary to prevent an AIG-type collapse and resulting government bailout from happening in the future. Entities that engage in 

services or provide products that could pose systemic risk to the 

overall financial services market likely need Federal oversight at 

the holding company level. 

Q.4. Last week the WSJ had an article titled, ‘‘The Next Big Bailout Decision: Insurers.’’ It mentions the fact that a dozen life insurers have pending applications for aid from the government’s $700 

billion Troubled Asset Relief Program. What is the market-wide 

risk of life insurance and property and casualty insurance? 

A.4. Speaking only of the property-casualty market, of which our 

members are primarily engaged, IIABA believes that few, if any, 

participants or lines in this insurance market raise systemic or 

market-wide risk issues. 

135 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JOHN T. HILL 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

A.1. The passage of the Gramm-Leach-Bliley Act (GLBA), financial 

services modernization legislation, eliminated Glass-Stegall’s firewall and opened the door for greater integration within the financial services industry and convergence of products and services. Despite the projections for significant integration between other financial services firms—e.g., banks, securities firms—and insurers prior 

to the passage of GLBA there has not been widespread integration 

or convergence of products within the property and casualty sector. 

A few large insurers under holding company structures have noninsurance financial affiliates; however, the large majority of the 

more than 3,000 property and casualty insurers are not involved in 

the convergence of financial products and services. Joint marketing 

agreements and affinity projects are evidenced, but large acquisitions or mergers have generally not occurred. 

GLBA properly maintained functional regulation for the separate 

financial functions. Functional regulation provides the specialized 

expertise necessary to regulate highly complex, unique financial 

products and services. However, greater cooperation and coordination among all applicable regulators, including State insurance regulators, should have been formalized to ensure full regulatory supervision for large complex financial institutions. Proper, well coordinated regulatory oversight by functional regulators working cooperatively would identify regulatory gaps, expose weaknesses and 

provide a complete picture of the activities of integrated, multi-layered enterprises, while maintaining the expertise and concentrated 

focus of specific substantive regulation. 

NAMIC believes a closer and more formalized working relationship between State regulators and their Federal counterparts is essential to ensure timely and effective information exchange and coordination of regulatory actions. Expansion of the President’s Financial Working Group to include participation by State regulators, 

coupled with enhanced information sharing between and among 

the participants would provide a unique forum to integrate and coordinate financial services regulation, while preserving the benefits 

of prudential regulation. Similarly, enhanced cooperation and coordination among the various global financial services regulatory 

bodies would improve regulation of multi-national entities. However, such cooperation and coordination should not come at the cost 

of abrogation of regulatory authority to foreign jurisdictions or 

quasi-governmental bodies. 

With respect to systemic risk oversight, NAMIC believes that 

regulators should work to identify, monitor, and address systemic 

risk. However, a systemic risk regulator should complement, rather 

than duplicate or supersede, existing regulatory resources. FurtherVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00139 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
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more, NAMIC does not believe that the business or legal characterization of any institutions should be used as a basis for assessing 

systemic risk. 

Oversight and regulation of systemic risk should focus on the impact of products or transactions used by financial intermediaries. 

Attempting to define and regulate ‘‘systemically significant institutions’’ on the basis of size, business line, or legal classification— 

such as including all property/casualty insurers—would do little to 

prevent future financial crises. Indeed, a regime of systemic risk 

regulation that is institution-oriented rather than focused on specific financial products and services could divert attention and resources from where they are most needed, while at the same time 

producing distortions in insurance markets that would be harmful 

to consumers. 

NAMIC member companies understand that Federal policymakers must have better information about the insurance industry, 

and confidence in the financial health of property/casualty insurers. 

To that end, NAMIC has supported the creation of a Federal Office 

of Insurance Information. That measure, coupled with effective systemic risk regulation, could accomplish important policy objectives 

that are not currently being met. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

A.2. A single consolidated financial market regulator would prove 

more problematic in the United States than in other countries. Unlike the majority of countries which utilize a unitary legal system, 

the United States has 54 well-defined jurisdictions each with its 

own set of laws and courts. As noted, the U.S. system of contract 

law is deeply developed, and with respect to insurance policies is 

based on more than a century of policy interpretations by State 

courts. The tort system, which governs many of the types of contingencies at the heart of insurance claims, particularly those covered 

by liability insurance, is also deeply based in State law. 

There are also significant differences between insurance and 

other financial services and products which necessitate specific regulatory treatment. Geographical and demographic differences 

among States would similarly pose additional difficulties for a single financial market regulator. 

Another option for reform that has been proposed is a transition 

to principles-based regulation. The current legal and regulatory 

system in the United States is primarily ‘‘rules-based.’’ Recent attempts to adopt ‘‘principles-based’’ approaches have been to add to, 

rather than replace existing ‘‘rules-based’’ regulations. NAMIC supports efforts to streamline the regulatory process and provide 

greater flexibility to respond to rapidly changing economic and 

137 

market conditions. However, as regulators evaluate ‘‘principlesbased’’ regulation careful attention must be given to legal and operational issues. Regulatory or accounting decisions based on principles, however, may not always be transparent or consistent with 

one another, and this can have significant competitive effects. 

Legal certainty is also a serious consideration when developing 

and implementing principles-based regulation. Whether a particular way of doing business conforms to the principle involved can 

be a matter of a particular regulator’s opinion, and as regulators 

and circumstances change, so do interpretations. In addition, civil 

liability concerns must also be addressed if principles-based regulation is adopted. In the United States companies are subject to liability in private class actions in both Federal and State courts, 

civil rule enforcement by Federal and State regulators, and criminal enforcement by both the U.S. Justice Department and State attorneys general. Lack of legal certainty could create extreme vulnerability for regulated firms if not properly addressed in conjunction with such a shift in the regulatory paradigm. NAMIC urges 

regulators and lawmakers to carefully weigh all issues, including 

ensuring proper legal protection and regulatory transparency and 

avoiding arbitrary regulator conduct. 

The recent G30 Report urges international adoption of enhanced 

regulatory supervision to eliminate gaps and increase transparency. NAMIC agrees with the goals; however, our members oppose the recommendation for national level regulation of internationally active insurers. A dual regulatory structure in which 

some insurers are regulated at the State level and some at the national level would lead to competitive inequities and cause consumer confusion. Property and casualty insurance is inherently 

local in nature and State regulation remains appropriate. 

Regulatory processes must be flexible and dynamic to meet the 

changing market conditions and strong enough to avoid abrogation 

to the courts. Regulatory reform efforts should concentrate on targeting regulatory activities and maximizing existing resources. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. State insurance regulators actively supervise all aspects of the 

business of insurance, including review and regulation of solvency 

and financial condition to ensure against market failure. Public interest objectives are achieved through review of policy terms and 

market conduct examinations to ensure effective and appropriate 

provision of insurance coverages. Regulators also monitor insurers, 

agents, and brokers to prevent and punish activities prohibited by 

State antitrust and unfair trade practices laws and take appropriate enforcement action, where appropriate. 

Specifically, insurers are subject to systematic, comprehensive review of all the facets of their operation in their business dealings 

with customers, consumers, and claimants. The examination process allows regulators to monitor compliance with State insurance 

laws and regulations, ensure fair treatment of consumers, provide 

for consistent application of the insurance laws, educate insurers 

on the interpretation and application of insurance laws, and deter 

138 

bad practices. Comprehensive examinations generally cover seven 

areas of investigation, including insurance company operations and 

management, complaint handling, marketing and sales, producer 

licensing, policyholder services, underwriting and rating, and claim 

practices. 

Coordination among regulators is essential to effective regulation. To effectively evaluate the financial condition of national insurers, State regulators participate in the NAIC Financial Analysis 

Working Group. This confidential process provides regulatory peer 

review of the actions domiciliary regulators take to improve the financial condition of larger insurers. Expansion of such regulatory 

coordination between other financial services regulators would improve oversight of consolidated firms. 

The guaranty fund system also provides effective protection for 

insurance consumers against catastrophic disruptions from a single 

entity. A centerpiece of the State insurance regulatory system is 

the existence and operation of State guaranty associations. State 

guaranty associations provide a mechanism for the prompt payment of covered claims of an insolvent insurer. In the event of an 

insurer insolvency the guaranty associations assess other insurers 

to obtain funds necessary to pay the claims of the insolvent entity. 

Q.4. Last week the WSJ had an article titled, ‘‘The Next Big Bailout Decision: Insurers.’’ It mentions the fact that a dozen life insurers have pending applications for aid from the government’s $700 

billion Troubled Asset Relief Program. What is the market-wide 

risk of life insurance and property and casualty insurance? 

A.4. There is little market wide risk within the property/casualty 

industry. A recent survey conducted of the NAMIC membership indicated that members are confident in their ability to pay claims 

and overwhelmingly do not need and are not interested in receiving 

Federal money under TARP. As an industry, property/casualty insurance companies, particularly the nation’s mutual insurance 

companies, are well capitalized and have adequate reserves to pay 

claims. Prudent management and the State-based regulatory systems under which these companies operate include strict solvency 

requirements that effectively build a protective barrier around 

their assets and, ultimately, their customers. Even the property/ 

casualty subsidiaries of AIG are solvent and remain fiscally strong. 

Very few property/casualty insurers use commercial paper, shortterm debt or other leverage instruments in their capital structures, 

a fact that makes them less vulnerable than highly leveraged institutions when financial markets collapse. Likewise, the nature of 

the products that property/casualty insurers provide makes them 

inherently less vulnerable to disintermediation risk. For business 

and regulatory reasons property/casualty insurers carry a liquid investment portfolio. Because property/casualty insurance companies 

have built up required reserves and their investments are calibrated to match the statistically anticipated claims payments, 

there is little liquidity risk and virtually no possibility of a ‘‘run on 

the bank’’ scenario. 

Some life insurers have been particularly hard hit by this downturn in the markets because their products, solvency regulations, 

and practices differ so dramatically from property/casualty insurVerDate Nov 24 2008 12:07 Nov 10, 2009 Jkt 000000 PO 00000 Frm 00142 Fmt 6633 Sfmt 6601 S:\DOCS\51722.TXT SHERYL
139 

ers. Weak balance sheets have led to the credit ratings of many 

struggling life insurance companies being downgraded. This, in 

turn, makes it more difficult for the companies to raise cash, further weakening their balance sheets. The injection of Federal 

money directly into these companies will help them avoid further 

downgrades and alleviate the need to raise capital under onerous 

terms. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM FRANK NUTTER 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

A.1. It has been suggested that the authority of a systemic risk 

regulator should encompass traditional regulatory roles and standards for capital, liquidity, risk management, collection of financial 

reports, examination authority, authority to take regulatory action 

as necessary and, if need be, regulatory action independent of any 

functional regulator. At a recent speech before the Council of Foreign Relations, for example, Federal Reserve Board Chairman Ben 

Bernanke acknowledged that such a systemic regulator should 

work as seamlessly as possible with other regulators, but that 

‘‘simply relying on existing structures likely would be insufficient.’’ 

The purpose of reinsurance regulation is primarily to ensure the 

collectability of reinsurance recoverables and reporting of financial 

information for use by regulators, insurers and investors. Because 

reinsurance is exclusively a sophisticated business-to-business relationship, reinsurance regulation should be focused on prudential or 

solvency regulation. The RAA is concerned the systemic risk regulator envisioned by some—one without clear, delineated lines of 

Federal authority and strong preemptive powers—would be redundant with the existing stated-based regulatory system. We also 

note that without reinsurance regulatory reform and a prudential 

Federal reinsurance regulator, a Federal systemic risk regulator 

would: (1) be an additional layer of regulation with limited added 

value; (2) create due process issues for applicable firms; and (3) be 

in regular conflict with the existing multi-State system of regulation. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

140 

A.2. As regards regulation of reinsurance, the RAA seeks to minimize duplicative regulation while ensuring continued strong solvency regulation. The current 50-State system of regulating reinsurance is inefficient and does not adequately address the needs of 

a global business. An informed Federal voice with the authority to 

establish Federal policy on international issues is critical not only 

to U.S. reinsurers, who do business globally and spread risk around 

the world, but also to foreign reinsurers, who play an important 

role in assuming risk in the U.S. marketplace. The current multiState U.S. regulatory system is an anomaly in the global insurance 

regulatory world. Following the recent financial crisis, the rest of 

the world continues to work towards global regulatory harmonization and international standards. The U.S. is disadvantaged by 

the lack of a Federal entity with Constitutional authority to make 

decisions for the country and to negotiate international insurance 

agreements. In the area of reinsurance, there is a need for a process for assessing the equivalence and recognition on a reciprocal 

basis of non-U.S. regulatory regimes. This process would assist 

non-U.S. reinsurers that supply significant reinsurance capacity to 

the U.S. insurance market by facilitating cross-border transactions 

through binding and enforceable international supervisory arrangements. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. Any change to the current regulatory structure should minimize duplication while ensuring the application of strong, uniform 

regulatory standards. It will be important to ensure that any grant 

of regulatory authority is fully utilized and that there is structured 

coordination and communication among applicable regulators so 

that a company’s corporate structure, its role in the marketplace 

and its products are fully understood so as to contain potential systemic risk. 

Q.4. Last week the WSJ had an article titled, ‘‘The Next Big Bailout Decision: Insurers.’’ It mentions the fact that a dozen life insurers have pending applications for aid from the government’s $700 

billion Troubled Asset Relief Program. What is the market-wide 

risk of life insurance and property and casualty insurance? 

A.4. No property casualty reinsurers have applied for TARP funds. 

The industry is conservatively invested and therefore would not appear to be of concern regarding a ‘‘bailout.’’ 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM ROBERT HUNTER 

Q.1. The convergence of financial services providers and financial 

products has increased over the past decade. Financial products 

and companies may have insurance, banking, securities, and futures components. One example of this convergence is AIG. Is the 

creation of a systemic risk regulator the best method to fill in the 

gaps and weaknesses that AIG has exposed, or does Congress need 

to reevaluate the weaknesses of Federal and State functional regulation for large, interconnected, and large firms like AIG? 

141 

A.1. Systemic risk regulation, while a useful supplement to function regulation, does not address all concerns. We believe improved 

functional regulation is essential. That should include closing regulatory gaps that allow certain products, institutions, and markets 

to operate outside the system of prudential regulation. It was AIG’s 

involvement in the sale of unregulated credit default swaps and 

other structured finance vehicles that caused its downfall and led 

regulators to conclude that Federal intervention was necessary to 

prevent even further economic repercussions. Also, as the GAO 

study on regulatory oversight revealed, the quality of risk management oversight provided by the regulatory agencies was severely 

lacking. The attached testimony, which CFA Legislative Director 

Travis Plunkett presented to the House Financial Services Committee, provides greater detail on our views about the primary importance of strengthening functional regulation in enhancing the 

quality of financial oversight and the stability of financial markets. 

Q.2. Recently there have been several proposals to consider for financial services conglomerates. One approach would be to move 

away from functional regulation to some type of single consolidated 

regulator like the Financial Services Authority model. Another approach is to follow the Group of 30 Report which attempts to modernize functional regulation and limit activities to address gaps and 

weaknesses. An in-between approach would be to move to an objectives-based regulation system suggested in the Treasury Blueprint. 

What are some of the pluses and minuses of these three approaches? 

A.2. CFA does not believe that our regulatory failures were primarily structural in nature—with the notable exception of the 

banking arena where the ability to charter shop exerted a strong, 

downward pressure on regulatory protections. It is worth noting 

that the FSA model proved no more effective than the U.S.’s 

‘‘patchwork’’ system in preventing abuses or addressing problems 

once they arose. We have attached our detailed critique of the 

Treasury Blueprint and a study CFA recently issued on regulatory 

reform more generally. 

Q.3. What is the most effective way to update our rules and regulations to refute the assumption that any insurer or financial services company is too big to fail? 

A.3. CFA strongly believes that we must restore the potential for 

failure for capitalism to work. Part of the approach is to create disincentives designed to discourage companies from becoming too big 

or too interconnected to fail—by significantly increasing capital requirements, for example, as companies increase in size or complexity. This method could also be used to discourage companies 

from adopting other practices that increase their risk of failure, 

such as taking on excessive leverage. Capital requirements for 

products traded away from an exchange could be set significantly 

higher than capital requirements for similar products traded on the 

exchange to reflect the heightened risk associated with this practice. In addition, we need to create a mechanism to allow for the 

orderly failure of non-bank financial institutions. One reason for 

the ad hoc nature of the current rescue efforts has been that lack 

of resolution authority for companies like AIG, Bear Stearns, and 

142 

Lehman Brothers that got into financial difficulties. Providing that 

mechanism would give regulators more tools to use—and a more 

consistent basis for dealing with—insurers, investment banks, or 

others whose failure might otherwise destabilize the financial system and economy as a whole. 

Q.4. Last week the WSJ had an article titled, ‘‘The Next Big Bailout Decision: Insurers.’’ It mentions the fact that a dozen life insurers have pending applications for aid from the government’s $700 

billion Troubled Asset Relief Program. What is the market-wide 

risk of life insurance and property and casualty insurance? 

A.4. The systemic risk of insurance companies is relatively low, 

particularly for property/casualty insurance companies. Now there 

are some significant exceptions to this low risk requiring investigation as discussed in my testimony. For instance, Congress should 

study the potential systemic risk of: 

• Bond insurance. 

• Reinsurance and retrocession spread risk around the world in 

ways that normally lower risk but could, in certain circumstances, cause massive failure if a series of major impacts 

were to be felt at once—(i.e., a ‘‘black swan’’ could cause great 

failure worldwide if reinsurance failed to deliver in its secondary market function). Major storms, earthquakes, terrorism 

attacks and other catastrophes could occur at about the same 

time that might bankrupt some of these significantly inter-connected secondary-market systems, for instance. 

• Periodic ‘‘hard markets’’ that significantly impact a specific 

area of the economy, such as the periodic medical malpractice 

insurance shortages related to the economic cycle of property/ 

casualty insurers. Another example currently is that banks are 

paying double last year’s rates for directors and officers’ coverage, if they can get it at all. If the degree of unavailability 

grows, Congress should study just what are the systemic implications if banks cannot hire officers or get directors to serve 

due to the lack of D&O coverage. Would the recovery of a bank 

be retarded by the flight of directors and officers from the institution if no insurance protection was available to protect 

them from shareholder or consumer suits? 

• Some State regulators themselves have recently introduced an 

element of systemic risk because of their willingness to cut 

consumer protections for life insurance by slashing reserves 

and other dollars of policyholder cushion at this time of great 

risk. Their theory seems to be that when consumers do not 

need to worry about the soundness of insurers they will keep 

high cushions of protection, but when policyholders most need 

this protection, they will change accounting standards at the 

request of insurers. Several States have lowered capital and reserve requirements for life insurers despite the fact that the 

NAIC ultimately refused to do so. NAIC acknowledged that it 

had not done the due diligence necessary to determine if the 

proposed changes would weaken insurers excessively. 

• Eliminating post-assessment guaranty funds could also lower 

insurance systemic risk and replacing them by State directed, 

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nationally based, pre-assessment funds, or by a Federal insurance guaranty agency modeled on the FDIC. For instance, the 

current life insurance solvency crisis is backed by State guarantee funds with no money on hand and the capacity to generate a mere $9 billion in the entire country should the dominoes fall. 

• Insurance systemic risk that could be generated by insurers 

being owned by other businesses or vice-versa could be lowered 

by repealing provisions of the Gramm-Leach-Bliley Act that 

allow firms to sell insurance in conjunction with other financial 

services, particularly credit and securities products. 

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