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INSURANCE HOLDING COMPANY SUPERVISION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 18, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–114 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 18, 2010 ................................................................................................. 1 

Appendix: 

March 18, 2010 ................................................................................................. 35 

WITNESSES 

THURSDAY, MARCH 18, 2009 

Dilweg, Sean, Commissioner, State of Wisconsin, Office of the Commissioner 

of Insurance .......................................................................................................... 10 

Frohman, Ann M., Director, Nebraska Department of Insurance ....................... 11 

Gardineer, Grovetta N., Managing Director for Corporate and International 

Activities, Office of Thrift Supervision ............................................................... 8 

Greenlee, Jon D., Associate Director, Division of Banking Supervision and 

Regulation, Board of Governors of the Federal Reserve System ..................... 6 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 36 

Dilweg, Sean ..................................................................................................... 38 

Frohman, Ann M. ............................................................................................. 47 

Gardineer, Grovetta N. .................................................................................... 61 

Greenlee, Jon D. ............................................................................................... 71 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the Property Casualty Insurers Association of 

America (PCI) ................................................................................................ 83 

Frohman, Ann M.: 

Written responses to questions submitted by Chairman Kanjorski ............. 89 

(1) 

INSURANCE HOLDING 

COMPANY SUPERVISION 

Thursday, March 18, 2010 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:07 a.m. in room 

2128 Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Baca, Scott, Maloney, Moore of Wisconsin, Perlmutter, Donnelly, Foster, Adler, Kosmas, Peters; Garrett, Royce, Biggert, Posey, and Jenkins. 

Chairman KANJORSKI. Good morning. The subcommittee will 

come to order. Without objection, all members’ opening statements 

will be made a part of the record. First, we will have our opening 

statements, beginning with mine, and then we will hear from our 

distinguished panel. 

We meet today to further examine the issue of insurance supervision, especially as it relates to holding companies. The time is 

right for us to delve into this complicated and important subject. 

The Federal Government’s intervention in American International Group has raised many questions about the existing oversight of holding companies with insurance operations. While AIG’s 

insurance companies may not have directly caused the conglomerate’s downfall, the actions of the holding company and other subsidiaries within AIG certainly could have led to serious consequences for insurance policyholders if the government had not 

stepped in. 

During our recent debates in the House on the Wall Street Reform bill, we also tackled many questions about holding company 

oversight. While we already know much about the supervision of 

financial, bank and thrift holding companies, we now need to take 

the time to learn more about the regulation of insurance holding 

companies. I believe that today’s hearing will help us to identify 

ways that we can further improve the financial services regulatory 

reform bill before it becomes law. 

The vast majority of holding companies—some of which are 

shells and some of which are complex—are currently regulated at 

the State level. Additionally, the Federal Reserve System and the 

Office of Thrift Supervision together oversee no less than 100 entities with insurance operations. Our witnesses will help us to better 

2 

understand the current lay of the land when it comes to consolidated supervision of insurance holding companies and bank or 

thrift holding companies with insurance operations. 

The two State commissioners with us today will specifically explain their dual roles as insurance regulators and insurance holding company supervisors. Because the failure of an insurer could 

affect the health of the insurance holding company, and because 

problems within the holding company or its subsidiaries could affect the insurers within a firm’s tangled network, we need to ensure that State supervisors have strong powers to protect policyholders and ensure the solvency of any of the entities that they regulate. 

In those instances where a State regulator must oversee an insurer or insurance holding company with operations outside of the 

State, we must also ensure that we have meaningful cooperation 

and communication between State regulators. Moreover, to protect 

our economy from systemic risk, we must ensure that there is appropriate consolidated supervision of complex insurance firms. 

When depository institutions and insurers operate under the umbrella of the same holding company, both State and Federal regulators have important supervisory roles. In such instances, State 

commissioners maintain their role as functional regulators of any 

insurers within these complex entities. Federal regulators have the 

responsibility for oversight of any depository institutions and the 

holding company. 

The Federal regulatory representatives with us today will help 

us to better appreciate the formal rules of the road as laid out in 

statute and regulations about where a Federal regulator’s authority 

begins and a State regulator’s power ends in these corporate amalgamations. Their testimony may also help us to discern whether or 

not we have regulatory overlaps or gaps, and what steps regulators 

have taken to address such situations. 

Each of our witnesses will undoubtedly emphasize the differences 

between insurers and depository institutions. These distinctions 

are important, but they fail to address the purpose of today’s hearing. The recent financial crisis has taught us that any complex financial company must have an effective umbrella supervisor who 

looks comprehensively at the activities and health of the whole enterprise. This includes any holding company with insurance activities. 

We must further explore whether the Federal banking regulators 

are overseeing too few or too many holding companies with insurance operations, and whether they are appropriately focused on 

consolidated oversight issues. We should also ask whether consolidated supervision is diversified among too many regulators, such 

that it has become ineffective or an afterthought. 

In sum, these are difficult policy issues, and the answers we receive will undoubtedly lead to new questions. 

Fortunately, we have already identified a way to examine these 

matters after we finish this hearing. One important provision of 

the House-passed Wall Street Reform bill, the Administration’s 

plan, and Senator Dodd’s proposals is the creation of a Federal office to review insurance matters on a national scope. The Federal 

Insurance Office, for which I have advocated for a number of years, 

3 

should look at these very questions to advise Congress on these important policy matters in the future. 

Now, the gentleman from New Jersey is recognized for 5 minutes. 

Mr. GARRETT. I thank the gentleman, and I thank the members 

of the panel who are here today. 

Insurance holding company supervision obviously is a very complex topic and I think the hearing today will help members be able 

to delve into it and get a better understanding of how insurance 

companies are structured, how they’re operated, and how they’re 

regulated. And as I have delved deeper into this issue and the way 

that insurers are regulated within holding companies, either 

through insurance holding companies, financial holding companies 

or thrift holding companies, my belief that the problems are really 

more attributed to failures by regulators as opposed to gaps in regulatory structures continues to be reinforced. 

So while I do agree that there are a number of areas out there 

within our insurance regulatory system that do need to be updated 

and modernized, I believe we must be really careful and deliver it 

in our approach. The insurance industry as a whole, I think, has 

performed better than most other parts of the financial sector during this crisis. And so we must ensure that we first do no harm 

in whatever we do. 

I know my friend and colleague, who is not here right now, Mr. 

Royce, has continually pointed out that the securities lending problems with the AIG situation highlight the problems with Statebased regulation, and he says it shows the need to have a larger 

Federal role in the regulating of the insurance companies. And I 

would remind him, while the losses attributed to securities lending 

were significant, had it not been for the cascade of problems with 

AIG’s Financial Products Unit, the FP, that company would have 

been able to handle those losses without the need of taxpayer support. 

Now, once the Office the Thrift Supervision had the Federal regulatory authority over AIG, and they had the power to oversee 

AIG’s FP leverage, they unfortunately failed to identify and correct 

that problem. And this is really a prime example of the regulator 

not doing their job; and, it’s not really a problem of a gap in regulation. I would even argue that if the securities lending operations 

of the insurers had been handled by the Federal regulators in this 

case, things might actually have been much worse than they were. 

I agree that the securities lending by insurance companies, as I 

said at the outset, needs additional reforms, and I do look forward 

to hearing from the Commissioner and Director Frohman, as well, 

Mr. Dilweg and Ms. Frohman on what reforms have already been 

made in these areas and other solutions as well. Now, on another 

topic, though, I would like to briefly discuss a major concern I had 

with Chairman Dodd’s recent release of a financial regulatory reform draft. 

The Dodd package has a provision that would require an up-front 

tax on any bank holding company with assets greater than $50 billion. Also, Dodd’s plan would tax any financial company, including 

insurers, who present an extremely low risk with greater than $50 

billion in assets after any systemic event occurred. I believe that 

4 

this tax would simply lead to higher costs for consumers and additional job losses in the private sector as well. 

I also believe that we greatly increase the moral hazard within 

the financial sector. I would like to read a quote from the recently 

released White Paper from the Property Casualty and Insurers Association of America regarding the topic of using the absolute size 

of a financial company as the basis for determining a systemic risk. 

The paper states, ‘‘Such a process, if enacted, would create a cross 

subsidy of significant magnitude from firms that do not pose a systemic risk to those firms whose activities are systemically risky. So 

the resulting moral hazard would encourage increased risk-taking, 

and as such could ultimately defeat the legislation’s intent of reducing the economy’s exposure to systemic risk.’’ 

So ultimately, we need a system here in place that can allow big 

companies to fail without being bailed out either by the taxpayer 

or by the consumer as his proposal would allow. So while I agree 

that there are numerous areas of insurance regulation that need to 

be addressed and updated and modernized, I believe that the main 

problems here really were with regulators and not the structure of 

the regulation. 

So, once again, I thank my good friend from Pennsylvania for 

holding this important hearing, and also for the education that 

we’re going to get today. And I look forward to hearing from all the 

witnesses. 

Chairman KANJORSKI. Thank you very much, Mr. Garrett. Now 

we will hear from Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. To help protect 

our citizens in the future, I think we probably need to glance at 

least a little bit on some of our previous failures. And I understand 

the Office of Thrift Supervision is responsible for supervising 35 

holding companies that include both thrifts and insurance operating entities. And it has come to my attention through a news clip 

actually, just this morning, some revelations I had not previously 

been aware of and we might possibly clarify in some of our testimony this morning. This was ‘‘Dateline Washington.’’ 

It says, ‘‘Banks weren’t the only ones giving big bonuses in the 

boom years before the worst financial crisis in generations. The 

government was also handing out millions of dollars to bank regulators rewarding ‘superior’ work, even as an avalanche of risky 

mortgages helped create the meltdown. The payments detailed in 

the payroll data released to the Associated Press under the Freedom of Information Act are the latest evidence of the government’s 

false sense of security during the go-go days of the financial boom. 

Just as the bank executives got bonuses, despite taking on dangerous amounts of risk, regulators got taxpayer funded bonuses despite missing or ignoring signs that the system was on the verge 

of a meltdown. 

‘‘The bonuses were part of a program, little known outside the 

government. Some government regulators got tens of thousands of 

dollars in perks, boosting their salaries by almost 25 percent. 

Often, though, rewards amounted to just a few hundred dollars for 

employees who came up with good ideas. During the 2000 306 

boom, the three agencies that supervised most U.S. banks, the Federal Deposit Insurance Corporation, the Office of Thrift SuperVerDate Nov 24 2008 17:58 Jul 14, 2010 Jkt 056778 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\56778.TXT TERRIE
5 

vision, and the Office of the Comptroller of the Currency, gave out 

at least $19 million in bonuses, records show. 

‘‘Nearly all that money was spent recognizing superior perform- ance. The largest share, more than $8.4 million, went to financial 

examiners, those examiners and managers who scrutinize internal 

bank documents and sound first alarms. Analysts, auditors, economists, and criminal investigators also got rewards. After the meltdown, the government’s internal investigators surveyed the wreckage of nearly 200 failed banks and repeatedly found that those regulators had not done enough. 

‘‘‘OTS did not react in a timely or forceful manner to certain repeated indications of problems,’ the Treasury Department’s Inspector General said of the Thrift Supervision Office following the $2.5 

billion collapse of Net Bank, the first major bank failure of the economic crisis. ‘OCC did not issue a formal enforcement action in a 

timely manner and was not aggressive enough in the supervision 

of A&B in light of the bank’s rapid growth,’ the Inspector General 

said of the currency comptroller after the $2.1 billion failure of 

A&B Financial National Association. 

‘‘‘In retrospect, a stronger supervisory response at earlier examinations may have been prudent,’ FDIC’s inspector general concluded following the $1.8 billion collapse of the New Frontier Bank. 

‘OTS examiners did not identify or sufficiently address the core 

weaknesses that ultimately caused a thrift to fail until it was too 

late,’ Treasury’s Inspector General said regarding IndyMac, which 

in 2008 became one of the largest bank failures in history. And 

they believed their supervision was adequate. We disagree. 

‘‘‘OCC’s supervision of Omni National Bank was inadequate,’ Treasury investigators concluded following Omni’s $956 million 

failure. Most of the bank inspection records are not public and the 

government blacked-out many of the employee names before releasing the bonus data. It is impossible to determine how many auditors got bonuses, despite working on major banks that failed. Regulators say it’s unfair to use those missteps seeing it’s a benefit of 

hindsight to suggest any bonus isn’t proper.’’ 

Thank you, Mr. Chairman. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Posey. And 

now, for the roadrunner from—I mean Mr. Royce—from California. 

Mr. ROYCE. Thank you, Mr. Chairman. And I thank you for your 

continued leadership on this issue as well. 

Looking at the regulatory reform package that passed out of the 

House last year, and at the Dodd bill that was recently introduced 

in the Senate, I think a fundamental question should have been 

asked much more often; and, I think that question has not been 

asked at all really, or dealt with. The question is, what is the most 

efficient and effective form of regulation? I think if we applied that 

question to the insurance market, I would be hard-pressed to find 

someone who thought the status quo was the most effective and efficient regulatory model. 

We have 51 different regulators, and 51 different sets of rules. 

Frankly, in a vulcanized way, we have 51 separate markets, many 

of which are stymied by bureaucratic red tape, by price controls. 

Europe has developed a very different model to deal with this, 

which is one market for all of Europe, and here we are vulcanized. 

6 

Certainly, the framers of the Constitution did not envision this 

when they threw out the Articles of Confederation and included the 

Commerce Clause. Even the framers of the NAIC had a different 

version and a different vision for our insurance market. George 

Miller, the founder, said back in 1871, ‘‘The Commissioners are 

now fully prepared to go before their various legislative committees 

with recommendations for a system of insurance law which shall 

be the same in all States, not reciprocal, but identical; not retaliatory, but instead a uniform, one system.’’ 

Unfortunately, Mr. Miller’s words were unheeded, and today we 

are left with an 18th Century regulatory model attempting to oversee this vast and complicated marketplace. And that is why I have 

joined Melissa Bean in introducing legislation to create a national 

insurance charter. This approach puts us closer to what the founding fathers had envisioned by creating one national market. 

Our legislation is no panacea. No form of regulation ever is. But 

it is a drastic improvement over the status quo, which is little more 

than an antiquated beast, frankly. It is something that the framers 

gave up on long ago, and I look forward to continuing the discussion on the need to establish a competent Federal insurance regulator and bringing our regulatory model into the 21st Century. 

Again, I would like to thank the chairman for his continued work 

on this issue, and let’s learn from what’s happening in the rest of 

the world with liberalized markets and a regulatory scheme for one 

market for all of Europe. We have to compete with this, and we are 

not going to be able to. And, frankly, our current system does not 

work. 

I yield back the balance of my time, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Royce. Now, I 

will get to the panel. 

First of all, thank you very much for appearing today, and without objection, your written statements will be made a part of the 

record. You will each be recognized for a 5-minute summary of your 

testimony. 

First, we have Mr. Jon Greenlee, Associate Director, Division of 

Banking Supervision and Regulation, Federal Reserve Board of 

Governors. Mr. Greenlee? 

STATEMENT OF JON D. GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. GREENLEE. Thank you. Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee, thank you for the 

opportunity to discuss the supervision and oversight of insurance 

companies. 

As you are aware, in this country the primary supervision and 

regulation of insurance companies is vested with the States. The 

Federal Reserve does serve as the consolidated supervisor of bank 

holding companies and financial holding companies established 

under the Gramm-Leach-Bliley Act, some of which are affiliated 

with insurance companies. 

The Federal Reserve is also the primary Federal regulator of 

State member banks, many of which are engaged in the sale of insurance products. Of the approximately 550 foreign and domestic 

7 

financial holding companies supervised by the Federal Reserve, 33 

are engaged in insurance underwriting activities. As the consolidated supervisor of bank holding companies and financial holding 

companies, the Federal Reserve routinely conducts inspections of 

these organizations to ensure that the consolidated organization remains strong and the holding company and its non-bank affiliates 

do not pose a threat to the company’s insured depository institution 

subsidiaries. 

To further our supervisory efforts, we issued enhanced guidance 

on consolidated supervisory expectations in 2008 that underscored 

the importance of examiners evaluating firm-wide risk exposures. 

We also reiterated the importance of Federal Reserve supervisors 

working with the primary regulator of a bank holding company’s 

insured depository institutions as well as State insurance supervisors and other functional regulators. 

Recent experience shows the need for the consolidated supervision of bank holding companies in addition to and distinct from 

the supervision of the organization’s bank or functionally regulated 

subsidiaries. Large organizations increasingly operate and manage 

their businesses on an integrated basis with little regard for the 

corporate boundaries that typically define the jurisdictions of individual, functional supervisors. 

Indeed, the crisis has highlighted the financial, managerial, operational, and reputational linkages among the bank, securities, commodity, insurance, and other units of financial firms. With respect 

to financial holding companies engaged in insurance activities, our 

consolidated supervisory framework involves the same principles 

used for bank holding companies more broadly. This begins with an 

assessment of the potential risk insurance activities pose to the 

consolidated organization and its depository affiliates. 

We make appropriate adjustments to our assessment of the 

firm’s risk management practices and overall financial condition to 

account for the unique risks and the nature of insurance products 

on underwriting activities. As part of our process, we routinely 

communicate with the appropriate insurance regulatory authorities 

about the nature of and risk posed by a firm’s insurance activities. 

To facilitate this information sharing, we established memoranda 

of understanding with the insurance regulators in all 50 States, the 

District of Columbia, and Puerto Rico. 

We also communicate with international insurance supervisors 

as appropriate. The Federal Reserve also has taken several steps 

to support our supervisory staff and understanding the risk arising 

from insurance activities. We have designed and implemented 

training programs, and have developed a variety of insurance-related examiner tools. We also collaborated with the NAIC on three 

published reports to facilitate better communication and understanding of banking and insurance regulatory framework risks and 

capital requirements. 

In closing, the current financial crisis has clearly demonstrated 

that risk to the financial system can arise not only in the banking 

sector, but also from the activities of other financial firms, such as 

investment banks or insurance companies that traditionally have 

not been subject to the type of regulation and consolidated supervision applicable to bank holding companies. As Chairman 

8 

Bernanke stated yesterday, it is important to close this gap in our 

regulatory structure, and legislative action is needed that would 

subject all systemically important financial institutions to the same 

framework for consolidated prudential supervision that currently 

applies to bank holding companies. 

I would like to thank the committee for holding this important 

hearing, and I am happy to answer any questions that you may 

have. Thank you. 

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

71 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Greenlee. 

Next, we will hear from Ms. Grovetta Gardineer, Managing Director of Corporate and International Activities, Office of Thrift Supervision. 

Ms. Gardineer? 

STATEMENT OF GROVETTA N. GARDINEER, MANAGING DIRECTOR FOR CORPORATE AND INTERNATIONAL ACTIVITIES, 

OFFICE OF THRIFT SUPERVISION 

Ms. GARDINEER. Good morning, Chairman Kanjorski, Ranking 

Member Garrett, and distinguished members of the subcommittee. 

Thank you for the opportunity to testify on behalf of the Office of 

Thrift Supervision. 

We understand that the subcommittee is interested in hearing 

about the scope of OTS’s authority to supervise insurance savings 

and loan holding companies. In the few moments I have now, I 

would like to summarize our written testimony about OTS’s approach to the supervision of savings and loan holding companies 

that are predominantly insurers, which I will refer to today as insurance holding companies. 

I would also like to present the OTS view of how to enhance the 

supervision of these holding companies. OTS’s role as a consolidated supervisor of an insurance holding company exists because 

the enterprise owns a savings association. The OTS has broad authority to supervise an insurance holding company enterprise, including its affiliates and subsidiaries. 

OTS as a primary Federal regulator of savings and loan insurance holding companies has the authority to examine each insurance holding company including its subsidiaries, subject only to 

certain statutory obligations to coordinate with functional regulators. That said, the statutory regime governing savings and loan 

holding companies is premised primarily on preserving the safety 

and soundness of the subsidiary thrift. OTS supervises 35 insurance holding companies, the majority of which are nationwide in 

scope. 

In addition, OTS regulates holding companies with significant insurance activities that combine securities activities as well. OTS 

also regulates another 39 holding companies that engage in insurance activities to a lesser degree, but are not considered predominantly insurance companies. Once a company acquires or charters 

a thrift institution, it becomes a savings and loan holding company, 

and is subject to regulatory examination and analysis by OTS. 

OTS uses a risk-focused approach that considers the combined 

risk profile of the holding company, its financial health and staVerDate Nov 24 2008 17:58 Jul 14, 2010 Jkt 056778 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\56778.TXT TERRIE
9 

bility, and the interdependence of entities within the structure. 

This approach incorporates the coordination and consultation with 

State insurance regulators in order to gain information about the 

functionally regulated insurance activities. 

The information gathered through our examination and analysis 

serves as a basis for our findings regarding the insurance holding 

company. The primary objective of a risk-focused examination of an 

insurance holding company is to identify and examine the areas of 

the business that pose the greatest degree of risk to the condition 

of the overall enterprise and to the thrift, with regard to how Congress can enhance the consolidated supervision of insurance holding companies. 

OTS believes that there should be a Federal oversight role for all 

insurance companies, not just those that own a bank or a thrift. 

A holding company that engages predominantly in insurance activities should be supervised by a Federal regulator that concentrates 

on the core business activity of the enterprise. We think it is prudent to align the regulatory authority with the holding company 

enterprise’s primary activities. 

A fundamental requirement for prudent risk management of a 

holding company is effective oversight and enforcement authority 

over the entire organization. A holding company regulator should 

have authority to monitor and exercise full enforcement authority 

over non-functionally regulated affiliates and to implement information sharing arrangements between entities in the holding company and the functional regulators. 

The regulator should have the authority to impose capital requirements, restrict activities, and otherwise regulate the operations of the holding company and the non-functionally regulated 

affiliates. The authority to supervise the consolidated insurance 

holding company could be housed within a Federal insurance regulator, if Congress chose to create one. We believe that at a minimum, a Federal consolidated insurance holding company regulator 

should be established. 

We appreciate the opportunity to share OTS’s recommendations 

for a stronger framework that would accomplish this for insurance 

holding companies. We look forward to working with you on these 

important issues in the future, and I am very happy to respond to 

your questions. 

Thank you. 

[The prepared statement of Ms. Gardineer can be found on page 

61 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Gardineer. 

Now, I turn to my colleague from Wisconsin, Ms. Moore, for the 

next introduction. 

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman, and thank 

you for this indulgence to allow me to introduce our next panelist, 

the distinguished Commissioner of Insurance for the State of Wisconsin who was appointed by his excellency, Governor Jim Doyle, 

on January 1, 2007. 

The Office of the Commissioner of Insurance is responsible for 

examining industry financial practices and market conduct, licensing our agents, reviewing policy forms for compliance with State 

legislation, and investigating consumer complaints. His agency is 

10 

also responsible for administering the State life insurance fund, the 

local government property insurance fund, and the injured patients 

and families compensation fund. 

Mr. Chairman, Mr. Sean Dilweg has had a distinguished career 

in public service and I knew him when I was a member of the 

State senate. I also want to point out that he has tremendous skills 

as a basketball player. That matters here in the Beltway and it 

matters a lot to be a baller, so with much further ado, I would like 

to introduce Commissioner Sean Dilweg. Commissioner? 

STATEMENT OF SEAN DILWEG, COMMISSIONER, STATE OF 

WISCONSIN, OFFICE OF THE COMMISSIONER OF INSURANCE 

Mr. DILWEG. Thank you, Congresswoman Moore, and Chairman 

Kanjorski. I have had the privilege of working with Congresswoman Moore, I have decided, for the last 17 years in and around 

State and Federal Government, so I appreciate those kind words. 

I am here on behalf of the NAIC, and my purpose today is really 

to give some insight into how State regulators assess the financial 

strength of an insurer and describe our unique regulatory working 

groups that assist and improve us in this assessment. Financial 

regulation is the critical component that insures our most important consumer protection, which is solvency. That basic concept 

guarantees that damaged automobiles are repaired and that annuity payments arrive in the mail on time, and that families hit by 

natural disasters can rebuild and recover. 

Through the NAIC, regulators have created three core solvency 

surveillance mechanisms: reporting; analysis; and examination, to 

ensure that these obligations to policyholders, claimants, contract 

holders, and other parties are met both today and in the future. In 

our unique system of State regulation, it is imperative that the regulators around the country have access to these tools, particularly 

when assessing large multi-State insurers. An insurer’s domestic 

State is relied on as the primary solvency regulator; however, any 

State in which a company is licensed to conduct insurance business 

may perform its own monitoring financial examinations and take 

regulatory action as appropriate. There are three NAIC working 

groups that deal with reporting analysis and examination. These 

provide the tools for us as individual State regulators to handle 

these complicated groups of insurance companies and individual insurance companies. 

Today, in my verbal testimony, I will spend time on the financial 

analysis working group better known as FAWG. For over a decade, 

State insurance financial regulators have shared information and 

ideas through the NAIC’s financial analysis working group, or 

FAWG, which exists to identify, discuss, research, and monitor potentially troubled insurers and insurance groups that are of national significance. FAWG leverages the expertise of select chief financial regulators from around the country to provide an additional layer of solvency assessment. 

FAWG also helps identify market trends and emerging financial 

issues in the insurance sector. This council is truly a council of coequal regulators that assesses nationally significant insurers or 

groups. We identify these insurers or groups that exhibit characteristics of trending towards financial trouble. We interact with the 

11 

domestic regulators in lead States in order to assist and advise the 

appropriate regulatory strategies and methods and actions. We encourage, promote, and support coordinated multi-State efforts in 

addressing solvency issues. 

FAWG’s review of companies can be described generally as identifying the companies that are outliers when compared with benchmarks of the industry market segment, develop communications for 

financial staff and the Commissioner of the State, review regulator 

responses on identified issues, follow-up with the domestic regulator, including a presentation by the domestic regulator at many 

of our FAWG meetings, and, also, forming subgroups for some of 

our large, nationally significant insurers. 

Through the FAWG forum, individual States work together to 

support and guide fellow regulators for the benefit of the whole in 

an entirely confidential process. The working group reviews and 

considers trends occurring within the industry. Most recently, we 

have looked at the residential, mortgage-backed security issue and 

taken steps to address that. 

Finally, I wanted to touch briefly upon State insurance interaction with the Federal Government. As alluded to by earlier panelists, many individual State insurance departments in the NAIC 

do interact with our Federal counterparts. This occurs when there 

are solvency issues that affect regulatory interest beyond a particular financial services industry. Many of the same States that 

are FAWG members also interact with Federal agencies because of 

the nature of their domestic insurance market. 

For example, I am the primary regulatory for two large insurers 

that insure municipal bonds and mortgages, respectively. I have 

interacted with the Federal Reserve, the U.S. Treasury, and the 

FHFA in order to share information of common interest on these 

significant companies. In conclusion, as a State-based system of 

regulation, we are keenly aware of our unique structure and have 

developed tools such as accreditation and FAWG to ensure that we 

are effectively and officially maximizing our resources to protect 

consumers and to address the solvency issues of our regulated entities. 

Thank you for the opportunity to testify and I look forward to answering your questions. 

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

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Dilweg. 

Finally, we will hear from Ms. Ann Frohman, director for the Nebraska Department of Insurance. 

Director Frohman? 

STATEMENT OF ANN M. FROHMAN, DIRECTOR, NEBRASKA 

DEPARTMENT OF INSURANCE 

Ms. FROHMAN. Thank you, Chairman Kanjorski, and members of 

the subcommittee. Thank you for inviting me to testify today. 

My name is Ann Frohman and I am the director of insurance for 

the State of Nebraska. I am here today to testify on behalf of the 

National Association of Insurance Commissioners. I am in the 

areas of group supervision of insurance companies. Before delving 

into group supervision, I should note that a cornerstone of our sysVerDate Nov 24 2008 17:58 Jul 14, 2010 Jkt 056778 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\56778.TXT TERRIE
12 

tem, which is critical to the supervising insurance groups, is our 

financial standards and accreditation program. 

The accreditation program is a set of strong baseline standards, 

practices, and required skill sets for effective solvency supervision. 

All 50 States are currently accredited, and to stay accredited, 

States must adopt any changes made to the program by insurance 

regulators. State insurance departments are periodically reviewed 

by a team of their peers to ensure compliance with the 40 specific 

standards and 226 specific elements necessary for accreditation. 

Out of necessity and for the sake of efficiency, the States have 

developed a strong system of cross-border supervision and coordination. Multiple jurisdictions provide peer review for insurance 

groups that contribute to a race-to-the-top approach. There is also 

routine coordination with lead State regulators of insurer groups as 

well as free coordination with other functional regulators when insurers are affiliated with other financial sectors. 

All States and the District of Columbia have adopted the NAIC’s 

Insurance Holding Company System Regulatory Act, designed to 

regulate transactions among insurers and other affiliated entities. 

This Act also regulates mergers and acquisitions, standards for 

transactions, and holding company information. This Holding Company Act requires annual filings regarding the holding company 

systems major transactions. These include such items as material 

changes to reinsurance contracts, major investments, management 

agreements, cost-sharing, and requests for extraordinary dividends. 

The Holding Company Act outlines specific filing requirements 

for persons wishing to acquire control of or merge with a domestic 

insurer. It further requires each insured to give notice of certain 

material affiliated transactions so we may determine if they are 

fair and reasonable to the interest of the insurer. 

Another important feature of the Act is that it also requires insurers to obtain prior regulatory approval for dividend transactions 

meeting certain thresholds in order to monitor the capital flows 

within a holding company system. Recent experience has shown 

that the activities of entities within a broader group with no connection to the insurers can still impact those insurers through contagion and reputation risk. Our system is ensuring the solvency of 

each individual insurance entity within an insurance group to minimize the risk to policyholders posed by these other entities within 

the group. 

State regulators have the ability to wall-off insurers to essentially block the interconnectedness that otherwise allows risk to 

spread unchecked throughout a broader group. In response to the 

recent global financial crisis, however, U.S. regulators and international standard-setting organizations have all taken steps to improve the financial services regulatory system and encourage more 

frequent communications and coordination among supervisors, including State regulators. 

States coordinate frequently and with other functional regulators, our Federal counterparts. We meet periodically with the Fed 

and the OTS prior to our NAIC meetings, as well as engage in discussions of particular companies, which is required as part of our 

financial analysis handbook directives. Fed and OTS representatives often attend NAIC working sessions. Additionally, the States 

13 

have memorandums of understanding agreements with these agencies to share information; however, more can be done to ensure a 

two-way flow of information. 

State insurance regulators participate regularly in supervisory 

colleges for insurance-related entities around the world. This is a 

fairly recent phenomenon for us. For instance, my State of Nebraska, along with Delaware and Maryland, convened a supervisory college of Berkshire Hathaway a year ago. We’ll have an inperson meeting in April here in Washington to gain a common understanding of the risk profile of the group and thereby strengthen 

our solo supervision efforts. 

Additionally, we have recently enacted special legislation in Nebraska to further enhance group supervision of a major, internationally active insurer operating in the State. Group supervision 

of complex entities is important, but our system also demands robust supervision of individual entities, whether the parent is an insurer or not. Information sharing and supervisory collaboration are 

improving and the NAIC is taking further steps to strengthening 

its Holding Company Act. Taken together, these steps will help ensure the continued stability of the insurance sector. 

Thank you for the opportunity to testify, and I would be happy 

to answer any questions. 

[The prepared statement of Ms. Frohman can be found on page 

47 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Frohman. 

We have heard great testimony, and now it is time for our questioning. I am going to take my few moments, first. The testimony 

was very good, and it did not sound as contentious as it is. But if 

one sits here and listens, I do not think we have agreement at that 

table as to what is being done and what should be done in the future. 

I guess my first question would go to Ms. Gardineer, in that I 

am interested to know whether or not you have instituted any different regulatory reforms of organizations that are associated with 

holding companies and insurance companies, such as AIG. As I understand it, the only regulatory authority exercised over financial 

products of AIG in London was your supervision of the thrift. Is 

that correct? 

Ms. GARDINEER. Congressman, yes, our supervision of the AIG 

Holding Company was geared towards looking at and protecting 

the safety and soundness of the thrift institution. In doing so, we 

did coordinate with our functional regulators to understand what 

was going on in the insurance activities, but we also looked at 

other areas that were not under the purview of the functional regulators. 

Chairman KANJORSKI. Who is the functional regulator? 

Ms. GARDINEER. The State over the insurance activities, the insurance subsidiaries. 

Chairman KANJORSKI. What State handled the insurance subsidiary for financial products in London particularly? 

Ms. GARDINEER. There was no State regulator for the financial 

products. 

Chairman KANJORSKI. Okay. So AIG, by cleverly setting up the 

operation in London, was successful in avoiding any regulatory auVerDate Nov 24 2008 17:58 Jul 14, 2010 Jkt 056778 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\56778.TXT TERRIE
14 

thority whatsoever on the insurance aspect of its business over 

there. Is that correct? 

Ms. GARDINEER. I think that’s correct, Congressman. 

Chairman KANJORSKI. Now, as the regulator of the thrift, did you 

also go in and exercise regulatory authority over the other functions, other than the thrift, on Financial Products in London? 

Ms. GARDINEER. We conducted targeted reviews of the financial 

products operation in the AIG holding company. Our efforts were 

focused domestically, but we did coordinate and have discussions 

with the operations. 

Chairman KANJORSKI. And you found that they were in fact without collateral to support their counterparty positions of $2.8 

trillion; and, you were aware of that at the time? 

Ms. GARDINEER. As we went through the targeted reviews, our 

examiners were able to find discrepancies in the corporate governance with regard to how information was flowing back and forth 

from the Financial Products silo up to the senior managers, and we 

made them aware of those weaknesses based on what we found in 

the Financial Products silo. 

Chairman KANJORSKI. When was this that you made somebody 

aware of that? 

Ms. GARDINEER. I’m sorry? 

Chairman KANJORSKI. When did you make somebody aware of 

weaknesses there? 

Ms. GARDINEER. We communicated to them through our examination process. 

Chairman KANJORSKI. When, though, precisely in time? 

Ms. GARDINEER. I think that was in March of 2008. 

Chairman KANJORSKI. Oh, that was after the beginning of the 

crash. 

Ms. GARDINEER. Prior to that, as part of the regulatory process 

and through the examination process, we did communicate continually with senior management and met with the board of directors. 

Chairman KANJORSKI. Well, was that back in 2007? 2006? When 

did you communicate with— 

Ms. GARDINEER. We began those communications in 2007. They 

culminated in a downgrading of their holding company rating in 

2008. 

Chairman KANJORSKI. And, obviously, no action was taken by 

the supervisor regulator because there was not one. They were beyond regulation on the insurance side. So did you take any action 

to cause them to cease and desist what they were doing? 

Ms. GARDINEER. I think it’s important to remember, Congressman, that in the Financial Products activities sector, these were 

unregulated products by anybody in the United States. 

Chairman KANJORSKI. So if they were awarding assassination 

contracts there, and you ran across that, since it was outside your 

realm of activity, they would have been allowed to go on to continue awarding those assassination contracts? 

Ms. GARDINEER. I also think it’s important to recognize, Congressman, that the activity of creating these credit default swaps 

that were in the financial products, they had stopped the origination prior to our becoming their holding company supervisor. Our 

examiners went in to look at the pipeline of what was left in finanVerDate Nov 24 2008 17:58 Jul 14, 2010 Jkt 056778 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\56778.TXT TERRIE
15 

cial products and then made the senior managers of the company 

aware of the weaknesses that we found. 

Chairman KANJORSKI. But did you follow-through? Did anybody 

stop or take actions as a result of the exercise of your regulatory 

authority? I am not picking on you, Ms. Gardineer, but it just 

seems to me—the facts I know about that case—that an entity established with 400 employees in London without any assets, hard 

assets, only a great name, has been a subsidiary of one of the largest or the largest insurance company in the world. We are out 

there practicing to the tune of placing bets as high as $2.8 trillion, 

and that did not ring anybody’s bell? 

Ms. GARDINEER. We saw the concerns, Congressman, and we 

made our concerns. We were aware of the problems. We made the 

company aware of our concerns with regard to the activities. However, I think one of the things that we recognize is the holding company structure and the statutes that we operate under are designed to primarily protect the safety and soundness of the thrift 

institution. In the situation of AIG— 

Chairman KANJORSKI. I realize that you can make the technical 

argument that we did not have jurisdiction, but obviously you did 

not assume jurisdiction of the larger problem when you saw it. As 

a result, somebody, particularly the American taxpayers, have suffered a $200 billion loss and are on the line for a great deal more 

in losses if there is further failure in that operation. Is that not correct? I am going to add: Have you changed your processes since you 

handled the AIG situation? 

Ms. GARDINEER. One of the things that we have done is we have 

reviewed the processes and what we were doing at AIG. We have 

provided enhanced examiner guidance based on the lessons learned 

through our experience with the consolidated supervision of that 

company. By doing that, we focused on the risk management associations, sharing of information between the non-functionally regulated and functionally regulated areas. So we have taken steps to 

increase our supervision and enhance that supervision through examiner education. 

Chairman KANJORSKI. Okay. I am running over my time, but I 

do want to ask you one more question. Have you sat down, or can 

you sit down, and recommend to this committee or to the Congress 

what has to be done in order to guarantee that the loophole that 

we have just discussed about who has regulatory authority, who 

has supervisory authority, where these lapses are, is vitiated in the 

new statute? We need certainty that one of the regulatory authorities of the United States has the responsibility and the duty to regulate these entities. 

Ms. GARDINEER. Congressman Kanjorski, the Office of Thrift Supervision would be happy to sit down with Members of Congress 

and with you and your committee to share our experiences and try 

to help enhance the supervision of these types of companies. 

Chairman KANJORSKI. I would appreciate it if you do that. I 

hope, though, when we pass regulatory reform, never again do I 

have to sit at a committee hearing and hear regulators saying, 

‘‘Well, we do not cover that, or we do not know about that, or that 

is not our responsibility.’’ We really want to close those loopholes, 

16 

and it seems to me you are the experts. You can tell us where the 

holes are, where the problems are. 

Now, I am not going to excuse my colleagues or myself from not 

necessarily creating those holes in the past, and we may share the 

responsibility. But clearly, now, we know there was a problem. We 

know why that problem existed because of loopholes and gaps. 

Now, we need your help in covering that so that we have passed 

a law that there is absolutely some regulatory authority that is responsible for that entity and those gaps. 

Ms. GARDINEER. And we’re happy to be a part of that discussion, 

Congressman. 

Chairman KANJORSKI. Thank you very much. I wish I could take 

another 5 minutes, but I cannot. Mr. Posey is anxious there, and 

he is going to come at you with his questions. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Chairman, I don’t think any member would mind if you take 

another 5 minutes. This is a good line of questioning, and I think 

everybody here appreciates it. 

Chairman KANJORSKI. Yes. I will pick it up the second round, 

Mr. Posey. 

Mr. POSEY. Thank you, Mr. Chairman. You know, I understood 

that we were here to kind of review how insurance company holding regulation differs from banker thrift-holding regulation, and 

after listening to the testimony, it’s still not really clear to me. 

There are a lot of gaps. It’s kind of like oil and water—it just 

doesn’t look like it’s mixing very well, so I am trying to look at this 

stuff in as small as possible denominators. 

And I think I would like to know, for example, who would regulate an insurance company, whether or not it was part of a holding 

company that would operate under ERISA laws, that is, under the 

Employee Retirement Income Security Act which would be exempt 

for regulation by our State insurance commissioners, what Federal 

agency would oversee that? 

Mr. DILWEG. I guess, Congressman, I can try and comment. Let 

me just use an example, not that it’s a troubled company at all, but 

when I sat down and looked at United’s org chart, United 

Healthcare, it runs about like this. And my concern, you know, the 

nexus for the State regulator is the policyholder, what claims are 

there to be paid in the future. 

My concern when I look at United is, what are the administrative charges flowing between all the different companies, and how 

are they affecting my company in Wisconsin? If we were to see 

their ERISA plan company or see one of their companies go down 

in California, how would that affect what’s happening in Wisconsin? 

We would then interact with all of our fellow State regulators 

and discuss a number of those issues. And just as OTS referenced, 

we have changed a lot of our examination processes to try and capture these potential. 

Mr. POSEY. Well, I think you guys do a pretty good job. My question is, what Federal agency would oversee the people that you’re 

not allowed to regulate? 

Mr. DILWEG. That’s the Department of Labor. 

17 

Mr. POSEY. The Department of Labor? Okay. We had a case in 

Florida where an insurance company in Indiana wrote policies in 

49 States and didn’t pay claims. We had somebody I knew die because they denied their claim, and now the State insurance commissioner said, well, we can’t regulate them. They come under 

ERISA. And I said, well, this is racketeering. I mean, forget the insurance company. It is racketeering. 

And it wasn’t until I threatened to delete 72 of their jobs and 

give it to another department that would go to work, that they followed through gun indictments; and, when they made the bust, 

which involved 13 different State agencies between Florida and Indiana, the guy’s wife was screaming. He said they would never 

come across State lines to get you for this. This was the first case 

in history I understand where State lines were crossed to prosecute 

healthcare fraud; and that’s out and out fraud. We haven’t proven 

fraud in a lot of these other cases yet—some bad intentions—but 

not necessarily out and out fraud. And so I guess we need to focus 

on yet another department entering the arena here that may or 

may not be doing a job that they’re supposed to. 

Back to my opening statement about some of the bonuses that 

were paid, in your department, Ms. Gardineer, or your agency, has 

anyone been terminated because of their failure to perform their 

job properly? 

Ms. GARDINEER. Congressman, I don’t have any information on 

the human resources information at the agency, but I would be 

happy to look into that and get back to you. But I don’t have that 

information with me today. 

Mr. POSEY. Okay. If possible, I would appreciate it if you would 

respond in writing, if it’s acceptable to the Chair and to members 

of this committee, about my opening comments about the bonuses 

that were paid out, many to people who obviously weren’t doing 

their jobs correctly. I would be interested in knowing how many 

people had been terminated, furloughed, demoted, or reprimanded 

in the department for allowing that meltdown to occur. 

Ms. GARDINEER. I will look into that and gather the information. 

And we will respond to you in writing. 

Mr. POSEY. Thank you. Thank you, Mr. Chairman. 

Mr. PERLMUTTER. [presiding] The Chair now recognizes Mr. Foster from Illinois for 5 minutes. 

Mr. FOSTER. Thank you, and thank you all for appearing today. 

First, I was wondering if anyone is aware of any documented 

benefits of diversification, that is, studies where people have looked 

to see if the customer actually gets a better price from horizontally 

or vertically diversified corporations in terms of just getting a better price for insurance. And if you’re aware of this, it’s one of the 

things we’re struggling with as to what are the benefits for AIGlike structures compared to self-contained smaller units. And if 

you’re aware of any of this or could respond afterwards, if you become aware of it, I would appreciate it. 

Ms. FROHMAN. I am aware of situations where in the homeowners market, in the auto market, that by pursuing coverages 

under one umbrella of a group, there are discounts that are available to two individuals, and so they can price competitively and 

take advantage of that. 

18 

Mr. FOSTER. Okay. Let’s see. Another question I had, I guess, to 

Commissioner Dilweg and Director Frohman, does that standardization of State legislation lead to standardization of software systems to report and analyze the financial status? Is there a lot of 

collaboration among the States? 

Mr. DILWEG. I’ll start, Congressman. I think it is important to 

note that as we compare the data that we have compared to our 

European and even Federal regulators, we are very data rich. Our 

NAIC really houses a lot of our data that then allows me as an individual regulator not to have to duplicate on the financial solvency 

side the work that my counterpart in Nebraska would have done 

on her companies. 

And so we just have thousands upon thousands of datapoints 

that we pull in and then utilize various tools to stress test the companies and look at, for instance, recently looking at the residential 

mortgage-backed securities and how those are stressed and how 

those are affecting the bottom line issues, the assets of the companies and their risk-based capital charges, things like that. 

Mr. FOSTER. I was getting at whether there was sufficient sharing between the different States. 

Mr. DILWEG. Oh. Yes, I would say it’s very vibrant. I mean we 

could put it in much more detail for you if you would like. 

Mr. FOSTER. One of the concepts in a lot of the regulatory reform 

is the idea of a living will, that if a holding company gets in trouble, we chop it up into little pieces. That seems like it in principle 

fits pretty well with the idea of State-based operating units, and 

I was wondering if that’s a correct impression of mine that it would 

actually be better to have independent business units in each State 

when it comes time to chop the companies up into little pieces and 

sell them off. Or the counter argument against that is that actually 

operations like AIG share IT infrastructure and all this sort of stuff 

in ways that make it really very difficult to chop up their business 

units. I was wondering which one is closest to reality. 

Ms. FROHMAN. We found in our experience in receiverships 

where we have a holding company sitting at the top of an insurance group that we work very well, even in the event that the holding company may be in bankruptcy to work out sharing payment 

systems and master coordination. So it does create an issue, but it 

hasn’t been a problem in the resolution of the insurance enterprises. We jump on that right away. 

Mr. FOSTER. Okay. Another one of the concepts that we are looking at is that of contingent capital in the capital structure of giant 

firms; and, I guess this is for Mr. Greenlee, perhaps. Whether you 

see that as a valid concept to apply to insurance holding companies, to basically give a market-based signal for the holding companies that the market views as running shaky operations and provide a first line of defense against the too-big-to-fail and keep the 

taxpayer off-the-hook when one of these gets in trouble. 

Mr. GREENLEE. Thank you for the question. I think it’s worth 

considering; we’re doing a lot of work at the Federal Reserve and 

with our international and domestic colleagues to look at how that 

would work. It is my assessment that contingent capital would be 

available when certain triggers were hit and it would help improve 

the capital base and the resiliency of these firms. 

19 

Mr. FOSTER. And so your view would be that one of the jobs of 

the Federal Reserve would be to administer the stress test that 

would trigger the contingent capital conversion, or are there other 

schemes that you’re looking at? 

Mr. GREENLEE. It could be a stress test. It could be some sort of 

financial performance indicator. There are a lot of things that are 

being looked at right now. My understanding is this discussion, 

looking at financial performance triggers, goes on internationally. 

If you hit a certain capital level, if you have a certain type of market indicator, this would prompt the conversion of the capital instrument. It would not necessarily entail regulators doing a stress 

test and providing the results, although that could be a possibility 

as well. 

Mr. FOSTER. Okay. Thank you. I guess I am out of time and I 

yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Foster. 

Now, we will hear from Mr. Royce of California. 

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

Mr. Garrett’s opening comments, I have never argued that AIG’s 

securities lending losses are a reason for Federal regulation. What 

I have said, and what I’ll say again, is that the State insurance 

commissioners had the ability to prevent those losses and they did 

not. There is a lot of blame to go around in the case of AIG, but 

to say the various State insurance commissioners are not to be included in that group is a failure to look at the facts. 

AIG’s Securities Lending Division used capital directly from the 

insurance subsidiaries. To date, the losses derived from the Securities Lending Division amount to over $40 billion. Mr. Garrett mentioned that AIG would have been okay, despite these losses. I think 

$40 billion would cripple any institution. Further, there are at least 

seven State-regulated insurance subsidiaries that were participating in AIG’s Securities Lending Division that would have been 

insolvent but for the American taxpayers. 

I would like to ask the insurance commissioners, I understand 

that every State has an insurance company, holding company law, 

and that those laws give the insurance regulator the authority to 

examine the activities of the holding company or other affiliates to 

ensure the ongoing health of the insurer itself. With regard to AIG, 

how were those holding company laws and the authority they 

granted to insurance commissioners used prior to the time the AIG 

crisis came t a head? 

Ms. FROHMAN. Although I did not have an AIG company domesticated in my State, I can speak to the terms of what the holding 

company framework requires; and in terms of agreements involving 

U.S.-based AIG companies that are insurance operating entities, 

we have a number of requirements we’re dealing with affiliated 

agreements and material transactions that would have touched the 

insurance company or involved the insurance company’s operations. 

We would have required prior review of those agreements to the 

extent that they had a material threshold. 

Mr. ROYCE. Any other commentary there? 

Ms. FROHMAN. I guess in terms of where we have been with securities lending, we have in the lessons learned imposed a risk capital charge. We have also enhanced our disclosures, and prior to 

20 

the credit crisis, we were well aware of the issue and the insurance 

regulators had required a reduction I think by 50 percent in the 

securities lending activity. 

Mr. ROYCE. What transpired at the time, though, in this case, is 

that we did not have commissioners who took a look at the health 

of this holding company, and, given its very varied non-insurance 

holdings and the fact that its financial position could harm the insurance company in the system, this turned out to be problematic, 

especially, when you consider that the Securities Lending Division, 

which has taken up roughly half of the tax dollars that have been 

pumped into AIG was using money directly from the AIG insurance 

subsidiaries, and all of those were State-regulated. 

So I would ask Ms. Gardineer. Would you care to comment? Certainly, OTS had some authority over AIG. Do you agree that the 

various State insurance commissioners could have taken steps 

early on to prevent some of the damage caused by AIG? 

Ms. GARDINEER. Congressman, I do recognize that with the speed 

that AIG Financial Products collapsed, and then ultimately the 

problem surfaced with regard to the securities lending subsidiaries, 

there were problems, as you indicated earlier, across all parts of 

the organization of those that are functionally regulated by the 

State commissioners as well as the parts that were not functionally 

regulated and fell to OTS for examination. It imposes a very interesting dynamic as far as all of the complexities of a company of 

that size when you have so many regulators who are looking into 

trying to figure out very complex structures of unregulated products. 

Mr. ROYCE. That is my concern. 

Ms. GARDINEER. I think that all of us worked as we cooperated. 

We talked with each other, but the events overtook us quite quickly, and there are a lot of lessons to be learned from both the Federal as well as the State side. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Royce. 

Mr. Perlmutter? 

Mr. PERLMUTTER. Thank you, Mr. Chairman, and I appreciate 

the panel being here today. Let me see if I, let’s say, we have AIG. 

AIG is selling off big chunks of its portfolio even as we speak. So 

it’s sold to some other insurance company or some other organization. Who watches that? Who is now in charge if AIG sells off its 

‘‘something’’ division for $15 billion, and helps pay some of the tax 

dollars back? Does Nebraska take any interest in that? 

Mr. DILWEG. I will give you a different example. We had QBE 

out of Australia buy a large company that affected 25 States, and 

General Casualty, Wisconsin, took the lead on that acquisition, coordinated with all the other States to get all the other State regulators involved and look at the questions that they may have surrounding such an acquisition. It would be very similar. 

Neither of us have AIG subsidiaries, but it would be very similar 

in the scenario that you’re laying out. So in reality, there becomes 

a lead State that will coordinate the acquisition and feed questions 

and detailed financial questions through to the company, so you’re 

not getting hit by seven or eight different regulators. 

21 

Mr. PERLMUTTER. So then the acquisition occurs. Everybody said, 

‘‘Okay. This is okay.’’ Does your State remain the lead State to 

kind of watch this thing? 

Mr. DILWEG. Where it is domiciled, we would remain the lead 

State, so in my example, we remain the lead State on that issue. 

Mr. PERLMUTTER. All right. If there was a thrift in this deal, 

would you be talking to the OTS at the same time? 

Mr. DILWEG. Through a process like this, we would be coordinating with our Federal regulators. We have coordinated with FSA 

in London on issues. We coordinate with our Australian regulators. 

Mr. PERLMUTTER. Do you, in this process, ever come up with a 

situation similar to the AIG situation Mr. Royce was just asking 

about, where they got some part of a business? Let’s say, they own 

hotels or they own casinos, or they do credit default swaps. Do you, 

in that process, as the lead State say, whoa, there’s some stuff here 

that we don’t understand or we can’t reach those products. 

Mr. DILWEG. I think one important point going back to Congressman Royce’s question is, should we have seen it coming sooner? 

Should we have done something on securities lending? You are 

stuck looking at securities that are rated triple A. Now, once they 

all collapsed, all the various regulators were coordinating basically 

through New York, Pennsylvania, and Texas on the AIG side from 

the insurance side. 

Mr. PERLMUTTER. And I’m not looking for blame on that one. 

Mr. DILWEG. Right. 

Mr. PERLMUTTER. My question is more if the insurance company 

is also involved in other areas of commerce that aren’t really insurance types. One of the things we’re dealing with in this big regulatory bill is do we go back to a Glass-Steagall kind of an approach 

where we separate insurance companies from the stockbrokers, 

from the commercial banks, from whatever. Financial companies 

stay financial and we don’t try to bring them all together. Do you 

worry in this process when you see insurance companies delving 

into other parts of commerce? 

Mr. DILWEG. We reach out directly through confidentiality agreements with the OTS, with the Federal Reserve, with Treasury, for 

FHFA, with all of our Federal counterparts if something like this 

were occurring to walk through all the issues we see. 

Mr. PERLMUTTER. Do you flag it for your partners or your other 

States, or for any of the Fed or the OTS if it’s unregulated? Let’s 

say it’s a hotel. They own a hotel. It has nothing to do with financial services or insurance. What do you do? 

Ms. FROHMAN. Let me try to answer that. What we do in terms 

of insurance regulation that I think works fairly well, and we saw 

that in this instance, is that while off the insurance enterprise, 

such that there are capital needs for the hotel on the other side of 

the balance sheet, we are not interested in hotels going down, or 

whatever. We are not interested in throwing good capital after bad, 

per se. But we analyze to make sure that the capital within the insurance company is sufficient to pay policyholder claims and remain solvent. 

So from that perspective, we don’t necessarily look at the enterprises that are not regulated, but in the lessons learned what we 

hope to accomplish is a more optical approach where we can have 

22 

in addition to what we are already doing that we think works really well on the insurance side is to have a better view, more optics 

upstream so that we can maybe look for trends in contagion and 

that sort of thing. And those are activities that are going on right 

now at the NAIC. 

Mr. PERLMUTTER. Okay. Thank you. Thank you, Mr. Chairman. 

Chairman KANJORSKI. I will now recognize Mr. Garrett from 

New Jersey. 

Mr. GARRETT. Again, I thank the panel for your testimony, so upto-date. 

Mr. Greenlee, in your testimony you mentioned that the Fed 

must rely on the examination reports of the State insurance authorities to the fullest extent possible. Can you describe any situations in which the Fed was concerned about the information reviewed in any of the examinations? And are you aware of any cases 

in which the Fed determined that the information was perhaps not 

sufficient or inadequate for the purposes of carrying out its financial holding company supervisory responsibilities? 

Mr. GREENLEE. Thank you for your question. 

Mr. GARRETT. Sure. 

Mr. GREENLEE. What we follow is what is outlined in the 

Gramm-Leach-Bliley Act. 

Mr. GARRETT. I’m sorry? 

Mr. GREENLEE. We follow what’s outlined in the Gramm-LeachBliley Act, which compels us to rely to the fullest extent possible 

on primary bank regulators or functional regulators. We will get information at times that will cause us to go back and ask more 

questions. If there are concerns, we can always go to the audit 

function of the bank and find out what they think. 

We always have the right to go ahead and do our own review and 

look into it under the law. The burden is on us to say why we think 

this is a threat to the depository; and, at times we will do that if 

we are sufficiently concerned. 

Mr. GARRETT. Okay. You get the information, you review it, if it’s 

adequate, fine. If it’s not adequate, you proceed to go back and seek 

all the information that you need. So you have not experienced a 

situation where there’s just a dearth or a lack of information that 

you can’t get at the end of the day, because you have that ability 

to go back. 

Mr. GREENLEE. That’s correct. And we don’t just rely on what we 

get from the functional regulators. As the consolidated supervisor, 

we would have a view of all the company’s major lines of businesses and its risk management practices. We are aware of broader 

things going on in the marketplace. We pull all that together to 

make the assessments of the risk in the organization. 

Mr. GARRETT. Okay. You also mentioned in your testimony that 

the Federal Reserve supervisory approach also recognizes the additional risk arising from the underwriting of life insurance policies 

and property and casualty insurance policies. I guess, in a nutshell, 

since time is limited here, can you explain for us some of what you 

mean by that? 

Mr. GREENLEE. Our traditional approach and our capital rules 

are really aimed at asset quality, credit quality, liquidity risk, market risk, those operational risks. 

23 

Mr. GARRETT. Right. 

Mr. GREENLEE. When companies affiliate themselves with an insurance underwriter, there are different kinds of risks that aren’t 

captured under those definitions, such as actuarial risks or risks 

from property and casualty businesses. And what we do with that 

is we work with the NAIC on producing a paper that explored 

those differences so that our supervisors can understand that and 

factor that into our overall assessment of capital adequacy at a 

holding company. 

Mr. GARRETT. Okay. That’s on the supervisory side. I think my 

last question as far as time goes, you make the assertion with the 

issue that’s always dear to me in dealing with the systemic risk 

issues, and you assert that the risk of the financial system is not 

just from the banking sector. It’s from the insurance sector as well. 

We are all familiar with the AIG situation and how that plays 

out. Can you explain, though, specifically within the insurance sector, where the systemic risk problems are that you’re specifically 

concerned about? 

Mr. GREENLEE. Well, I think it’s— 

Mr. GARRETT. Outside of the AIG type of— 

Mr. GREENLEE. Sure. 

Mr. GARRETT. Yes. 

Mr. GREENLEE. It is a concern more broadly about any firm that 

is large, complex, and has a lot of interconnections with other players in the financial system and in the marketplace. So an insurance company may have securities activities or engage in—not like 

AIG—derivative activity that would have some connections with 

other financial firms and could be a source of contagion to the rest 

of the finance system if there was a problem there. 

Mr. GARRETT. So it’s interconnected to this issue that we heard 

about a year ago, that is the underlying problem as opposed to 

their own? 

Mr. GREENLEE. I would say it’s both. The one thing that makes 

people systemically important, like AIG, is you have a lot of connections to other financial firms so that if that firm goes bankrupt 

or can’t meet its obligations, it has a cascading effect across other 

financial organizations. So we would worry about the individual 

firm. 

Of course that’s how we traditionally supervise. But we are also 

trying to focus a lot more on these interconnections. 

Mr. GARRETT. Okay. And I guess he’s not watching. But that aspect is as far as the carrier themselves, the insurance company 

themselves, are what the folks to my right, your left—well, the two 

folks on the end—is where your responsibilities lie. And some 

would argue have been doing an adequate job in those areas. Correct? 

Mr. DILWEG. I would agree with that statement, Congressman. 

Mr. GARRETT. Okay. Do you have anything to add, Mr. Dilweg? 

Mr. DILWEG. I think it is important we do correspond typically 

with the New York Fed on some of the issues you’re describing. We 

have a good back-and-forth on any issues surrounding various insurance companies, so they get informed on what they need to 

know. 

24 

Mr. GARRETT. And so what I take from this, and I heard some 

of the testimony from the rest of you earlier on, is this all sort of 

supports my opening statement, which is good at the end of the 

day, right, is that it’s not a gap situation here and I appreciate 

your testimony on this. There’s not a gap in the structure of what 

we have here. It sounds like you all are talking to each other doing 

the oversight in that responsibility; obviously, we have some concerns. 

I don’t know where you were specifically at the time, but folks 

who had the responsibility at that time at OTS in this areas, so 

it sounds like the overall structure is there. So it’s not a gap issue. 

And it sounds as though that since the problems weren’t on the insurance side, per se, it’s really something that we need to come 

back with and we need to do this in a whole bunch of other areas. 

We haven’t had any hearings on the SEC, and I know that’s not 

your bailiwick. But we have to go back on a whole bunch of these 

other areas just to make sure that the actual execution or implementation of what’s already out there, whether it’s the SEC or 

whether it’s you folks at the Fed. Or whether it’s you folks on the 

State level, or, just actually implementing it in each case to the 

highest degree possible to try to avoid what we have in this past 

situation. Does that sound right? 

Mr. GREENLEE. I would just add one other comment from the 

Federal Reserve’s perspective where we do consolidated supervision. We have a couple of things that are very important to us 

as the consolidated supervisor, and one of them is setting and establishing consolidated capital requirements for the firm as a 

whole. We think that’s an important thing to make sure that the 

consolidated organization and all its subsidiaries are adequately 

capitalized and have a sound financial footing. 

Mr. GARRETT. My last question—thank you for your forbearance—do you folks have a question or comment on that? 

Mr. DILWEG. I guess my only concern on that approach is I would 

hate to see the policyholder dollars in one of the companies under 

the umbrella being used to bail out a financial services piece of 

that. 

Mr. GARRETT. That’s a good point. How do you avoid that? 

Mr. GREENLEE. Well, from our perspective, we have a couple of 

ways we do that and one is we have laws that restrict intercompany transactions with depository affiliates. 

Mr. GARRETT. Okay. 

Mr. GREENLEE. The second thing is under our supervision of the 

holding company, which is the parent organization, we do expect 

them to maintain adequate capital and we also expect all their subsidiaries in the State, Federal, whomever their regulator may be, 

will meet their capital requirements and satisfy their regulator’s 

needs in terms of capital adequacy. And then we also look at it 

through how it builds up and the consolidated capital needed for 

the risk that may not be captured by all those regimes or capital 

you may need to hold for intercompany exposure or exposures that 

cut across an organization that may get different treatment. 

Mr. GARRETT. Okay. I thank the Chair. Thanks to the witnesses. 

Chairman KANJORSKI. Thank you very much, Mr. Garrett. 

25 

If it is all right with everybody here, there are only three of us 

left here, but I would like to ask some additional questions. 

Mr. GARRETT. I’m going to object. 

Chairman KANJORSKI. You are going to object? 

Mr. GARRETT. Well, no. Okay. 

Chairman KANJORSKI. Does anybody know how many holding 

companies there are that own insurance subsidiaries in the country? 

Ms. FROHMAN. We don’t track the information that way given the 

way we wall-off insurance companies, but in light of all the data 

that we do have, it’s something that we could probably pull together fairly easily and get you that information. 

Chairman KANJORSKI. But we do not know what kind of a problem this is, whether it is a minimal problem or whether it is really 

a great problem. Nobody really knows here. Now, if we had a Federal regulator, we would know that answer immediately. Correct? 

Every holding company that has anything to do with insurance 

would be identified, and categorized, and readily available. Is that 

correct? 

Mr. DILWEG. Well, what I think is important is we talk about 

holding companies, Congressman. You know, there could be an insurance holding company and then above that a more umbrella-like 

holding company. 

Chairman KANJORSKI. I understand. I am talking now about a 

holding company on top that is not an insurance company itself. 

Mr. DILWEG. Okay. 

Chairman KANJORSKI. Just as a holding company, and they own 

an insurance company, either an overwhelming majority of the 

stock or all of the stock, and then they own some hotels out here. 

The question I have in mind is, what do they pay in premiums for 

their hotels to their insurance company that they own, and who 

checks on that rate, whether it is an acceptable rate to cover the 

estimated risk? Do you all rush in there and do that? 

Ms. FROHMAN. It depends on whether it’s a material issue. 

Chairman KANJORSKI. But it is not a material issue. It is that 

the insurance executives are over here that are part of the holding 

company. They build a hundred hotels, and they insure them with 

ABC insurance company. Who looks into the relationship of what 

the rate is and whether the rate set by the insurance company for 

the hotels that they own is the same that the regular market pays? 

Ms. FROHMAN. That would be the insurance departments. Yes, 

we would look at regardless of who owns the hotels, the marketplace. 

Chairman KANJORSKI. So you check out every insurance policy to 

see that it is properly rated and charged, or do you only check out 

insurance companies where you get a complaint that there is an 

overcharge? 

Mr. DILWEG. The rates have to be actuarially sound. They have 

to fit—have the capital there to pay potential claims. 

Chairman KANJORSKI. No. No, I understand that. I am talking 

about the premium that is going to have to be paid on the hotel. 

Who is going to decide if they go to their own insurance company 

that is owned by a large holding company which has a hundred hotels that are worth a million dollars apiece, and they go to their 

26 

own ABC insurance company, and they say, ‘‘Well, we would like 

to insure all our hotels, but we only want to pay a rate of half of 

that on $50 million.’’ Who does the checking about that? 

Mr. DILWEG. That instance you lay out would probably come up 

more through a complaint process. 

Chairman KANJORSKI. So if nobody complained? 

Mr. DILWEG. Well, a competitor would probably complain. 

Chairman KANJORSKI. How would a competitor know? 

Ms. FROHMAN. We also engage in risk focus exams, and so in the 

examination process, we look at affiliate transactions and that very 

sort of thing. 

Chairman KANJORSKI. But you do not have any authority to go 

up to that top holding company to find out what those transactions 

are, do you? 

Ms. FROHMAN. We don’t have the authority to go to the holding 

company, but we can do it from the insurance company. 

Mr. DILWEG. So in a different scenario, Congressman, where 

you’re simply paying for IT or services, administrative services. 

You can’t have the holding company overcharging the insurance 

company just to make money as far as business operations, underwriting, things like that. 

Chairman KANJORSKI. I am not talking about overcharging. I am 

talking about undercharging. It is certainly advantageous for a 

holding company that owns subsidiaries that are in different businesses, one being an insurance company, and others being office 

buildings, hotels, or anything else, to make it known that we want 

to do business within our own family, and, two, we want you to get 

favored rates because we make a profit on it. 

Ms. FROHMAN. We did have that scenario happen in our State 

about 15 years ago with a business that wasn’t satisfied with the 

premium and decided it would attempt to acquire the insurance 

company to lower its rate. We issued a cease and desist on that, 

and ultimately through the State court process as well as the circuit court, said ‘‘No,’’ and they divested themselves. So we do stay 

on top of those and I do think through our risk-focused exam and 

the types of inquiries that we make, we reach out and look for 

those sorts of issues. 

Chairman KANJORSKI. How many holding companies are there in 

the State of Nebraska? 

Ms. FROHMAN. We have about 76 or 77 significant insurance 

companies and those all would have holding companies, I believe. 

Chairman KANJORSKI. Okay. Those are insurance holding companies. How about holding companies that own insurance companies 

as subsidiaries? 

Ms. FROHMAN. Probably most of them. 

Chairman KANJORSKI. They are both holding companies as an insurance company and holding companies that own subsidiaries that 

are insurance companies? 

Ms. FROHMAN. Both. 

Chairman KANJORSKI. Both. Do you have an exact number on 

that? 

Ms. FROHMAN. Again, I don’t. The way we regulate doesn’t make 

it quite as relevant. 

27 

Chairman KANJORSKI. Recognizing you have a lot of work to do, 

even within just the single State of Nebraska to get all this done, 

how can you also police this interrelationship that occurs between 

companies that are familiarly related? 

Ms. FROHMAN. We have folks on staff, and that is all they do. 

And they require through our Holding Company Act, there’s a process for filing these agreements, these cost-sharing agreements, 

service agreements. And so any time there’s an interaffiliate transaction of a material significance, they’re going to come in. We’re 

going to analyze that to determine whether that’s fair and reasonable to the insurance company. 

Chairman KANJORSKI. How do you, if I am the holding company, 

not an insurance holding company but just a holding company incorporated in the State of Delaware, and I have an insurance company in Nebraska, how do you come over and examine? What authority do you have under the law as it presently exists to come 

over to Delaware to examine my corporate records or whatever you 

want to examine? 

Ms. FROHMAN. We do have that authority and can exercise that 

authority, in particular as it relates to the insurance enterprise. 

Chairman KANJORSKI. But the insurance enterprise is in Nebraska. You can go to Nebraska and examine the insurance company, but how can you come and examine the holding company on 

top that is located in Delaware? 

Ms. FROHMAN. We don’t examine the holding company, per se, 

but we look at the books and records as they relate to the insurance company anywhere in the country or outside. 

Chairman KANJORSKI. How would you know whether that holding company in Delaware owned hotels in Florida? 

Ms. FROHMAN. We do require as part of our holding company system now a registration statement on an annual basis that requires 

disclosure of the holding company structure. 

Chairman KANJORSKI. But the holding company is not in Nebraska, so the holding company is not subject to Nebraska law. It 

is subject to Delaware law. 

Ms. FROHMAN. It’s through an indirect approach. We require that 

the insurance enterprise file all the information of their holding 

company system with us. 

Chairman KANJORSKI. Okay, and if they own 54 percent of the 

stock? And the insurance company owns 54 percent of the stock in 

the insurance company in Nebraska, what happens if they own 40 

percent? 

Ms. FROHMAN. We have a definition of control that triggers the 

holding company system review. 

Chairman KANJORSKI. What is your method? 

Ms. FROHMAN. And that’s at 10 percent at a presumption? 

Chairman KANJORSKI. Anything over 10 percent is presumed to 

be controlled by the local corporation? 

Ms. FROHMAN. Yes, it is. 

Chairman KANJORSKI. What did I do? Did I go over my time? Do 

I have to recognize the gentleman from California? He is not running yet. Oh, there he is, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. I have a question for Mr. 

Dilweg. Something you said really got my attention. When you 

28 

said, well, on these triple-A rated securities, the credit rating agency has given us this assessment. And I just wondered, do you always just outsource to the credit rating agencies these questions? 

That clearly was a mistake in my view, and another aspect of 

that, the bond rating agencies or the bond insurance industry. Let 

me ask you this. Would you like to comment on the failure of the 

bond insurance industry, especially given that so much of that was 

in Wisconsin? And what has changed on each of these fronts? 

You have State regulation on both fronts, bond insurance as well, 

and we had a failure here to uncover this. Give me your observation on what has changed. 

Mr. DILWEG. Let me address both points, Congressman. I think, 

when I came into this position, we had inherited a heavy reliance 

on rating agencies, as I think the Federal Government did as well. 

We have spent the last 3 years trying to look at dialing back our 

reliance on rating agencies. 

Just recently, we did our own due diligence, brought in a vendor, 

PIMCO, to look at how we rate and value residential mortgagebacked securities. So this is an ongoing process. But, at that snapshot in time, we were built to see that triple A was triple A. And 

so that was the nature of that comment. I think on the bond insurance, that’s unique to Wisconsin. When I look back—and I still 

have people on staff—where you had a piano company, Baldwin 

United, go bankrupt in the early 1980’s, what spun-off from Baldwin United was AMBAC, a bond insurer that they owned, MGIC, 

a very large mortgage insurer that they owned. 

And that is one reason that Wisconsin is heavily involved in 

these issues, but that was a role of how companies owned insurance companies back then that failed. We look very closely and 

have with AMBAC, at the capital that they have, and we are working very closely with the company and our independent advisors on 

their position and how they struggle with stresses of this economy. 

Mr. ROYCE. Let me ask you lastly, Mr. Greenlee, a question. If 

price controls were putting the solvency of a given insurance subsidiary at risk, would the Fed or the OTS have the authority to intervene and remove the price-fixing requirement on that subsidiary? 

Mr. GREENLEE. I think, under the current statute, we need to 

defer to the primary functional regulator, which would be the State 

insurance regulator. If they were to set that in place, we would 

probably not take action on that. 

Mr. ROYCE. What about if the holding company was funneling 

money into a subsidiary that was not able to charge actuarially 

sound rates? Could you prevent that transfer if it was weakening 

the broader company? 

Mr. GREENLEE. Yes, we could. 

Mr. ROYCE. I see. Thank you. 

Mr. Chairman, I am going to yield back. 

Chairman KANJORSKI. The gentlelady from Illinois, Ms. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. My first question is for 

Mr. Dilweg. 

You mentioned that any State in which a company is licensed to 

conduct an insurance business may conduct its own regulatory 

oversight, and that’s not just the company’s State of domicile. So 

29 

do the States communicate with each other whenever they’re engaged in such oversight, and what systems are in place to ensure 

against replication and duplication or inefficiency in such cases? 

Mr. DILWEG. The typical thing that I have seen, Congresswoman, 

as it relates to, you know, as you’re wrestling with asset valuation, 

what they’re filing with each State, a different State may view assets differently, we try and reconcile that at a national level. You 

do not typically see. We are all accredited, all 51 jurisdictions, so 

there is a lot of communication if something like this were to occur. 

It would be unusual for an individual State to do it without talking 

to the domestic regulator, and, really, try not to duplicate on the 

financial side of the ledger. 

Mrs. BIGGERT. But it really depends on the communication to 

make sure that they do communicate? 

Mr. DILWEG. Correct. And we feel through the NAIC we have 

really laid the groundwork, especially on the financial side for 

these communications to be facilitated. 

Mrs. BIGGERT. Okay. Thank you. And then, Ms. Frohman, you 

cite in your testimony that the sharing and collection of information between the regulators is important to protect the policyholders. What type of time requirements should be put in place for 

this information sharing and who should make that determination? 

And should a Federal entity preempt an State insurance regulator 

when it comes to collecting insurance information? 

Ms. FROHMAN. Thank you. With respect to the first question, I 

don’t think it’s necessary that we put time requirements on it, because the information that we’re sharing under the authority of our 

MOUs happens in real time, and it’s a very fact and circumstancesbased for the most part in addition to our routine; you know, 

50,000 feet communications that we engage on a regular basis. 

With respect to your second question, which was? 

Mrs. BIGGERT. Should a Federal entity preempt an insurance 

regulator when it comes to collecting insurance information? 

Ms. FROHMAN. I don’t think it’s necessary, given that we have all 

the information, as Commissioner Dilweg mentioned. We are dataintensive, and we can communicate and coordinate and provide 

that information. So I don’t see the necessity for preemption, because I do think you want to have the expert that understands it 

explaining it. 

Mrs. BIGGERT. Okay. Thank you. Then does NAIC monoline provide authority for State insurance regulators to examine the financial information of holding companies affiliates to understand if 

they would have a negative impact on the insurance company? 

Ms. FROHMAN. We do have some authority now to go upstream, 

and as it relates to the insurance company. But an exercise we are 

taking on through the group solvency issues working group at the 

NAIC is to enhance that ability. So it’s something that’s under way 

we think we can always improve, and we’re looking to come up 

with some tools to do that. 

Mrs. BIGGERT. Okay. And my last question is, are the State 

banking regulators currently represented on that council and would 

that be helpful, if State insurance regulators had an explicit role 

on a Federal body to better coordinate with the Federal regulators? 

30 

Mr. DILWEG. I think any body that you bring together to coordinate on the Federal side, we would be interested in participating 

in. I think you also have to recognize some of our insurance commissioners are also banking regulators. We have duplication as it 

relates to Vermont, the District, here. So you’re going to have some 

overlap just by the nature of how some of the States structure their 

banking and insurance departments. 

Mrs. BIGGERT. Good. Thank you very much. I yield back. 

Chairman KANJORSKI. If you do not mind, I am going to go with 

another set of questions. 

Mr. GARRETT. Well, I just have two quick things. 

Chairman KANJORSKI. Two quick things? 

Mr. GARRETT. Yes. 

Chairman KANJORSKI. I yield to you. 

Mr. GARRETT. One, I seek unanimous consent to enter into the 

record the testimony of the Property Casualty Insurance Association and their March 18, 2010, comments. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. GARRETT. And, secondly, Ms. Frohman, you had stated something with regard to your participating in a supervisor college exercise dealing with domestic and foreign regulators. The chairman 

and I were over in Europe in August or September and that was 

one of the broader issues as far as harmonization and what’s going 

on over there and what’s going on over here. Can you spend just 

a minute or 30 seconds, whatever, to what extent issues you’ll be 

dealing with there and what extent you’ll be interacting with foreign regulators? 

Ms. FROHMAN. Yes. Thank you for asking. We convened the supervisory college about a year ago in conjunction with our counterparts at the FSA in the Balkans and Germany, as well as the Australian regulatory authority, began conversations on the Berkshire 

Hathaway Group. And we have had probably four to five phone 

calls, and getting started we kind of started at a high level. And 

as we’re forging through, I think what we’re finding is we’re learning about each other’s regulatory systems. We’re learning about the 

details of that company’s operations, as well, but, we’re finding at 

the end of the day we do have a lot of common focuses that in essence, I guess I didn’t know what to expect and had not formed an 

impression in the beginning. But our questions on enterprise risk 

management corporate governance are going to be the things that 

will focus on, and looking at, is there financial contagion? Is there 

reputation risk that is something that can be measured and 

watched with respect to this group? So it’s a new exercise for us, 

but we are spending time with our regulators and do find now that 

once we forged these relationships that we’re benefiting from them 

in other dimensions. So the dialogue has begun and it is definitely 

enhancing our tools. 

Mr. GARRETT. Okay. Again, thank you to the panel. 

Chairman KANJORSKI. Thank you very much. For the State regulators, if I may. Do you feel that all forms of insurance should be 

regulated on a State level or are there exceptional insurance products that should be elevated to Federal regulatory authority? That 

is a loaded question, because I want you to give me a particular 

answer, but you all pick your answers. 

31 

Mr. DILWEG. I guess I would turn to a middle ground, Congressman, being vice chair of our compact that relates to life insurance 

products. I have found that has worked very well as it relates with 

the 36 States that are now a part of that, and as you know the 

compacting process is a State-based process. So my concern on raising insurance to a Federal level is frankly a lax concern of not having enough strength there, enough capital there, enough requirements there to protect the policyholder, so. 

Ms. FROHMAN. I would agree with that and simply add that to 

the extent we are talking about insurance products, where at the 

end of the day your question is geared towards a promise today to 

pay into the future, I think that consistently belongs with the 

States and that we can engage. And it does take a dialogue. It does 

take a global analysis. 

Chairman KANJORSKI. Should we repeal Federal depository insurance? 

Ms. FROHMAN. I’m sorry? 

Chairman KANJORSKI. Should we repeal Federal depository insurance, FDIC? Insurance that Federal banks or the banks of the 

United States are required to have. Ms. Gardineer’s thrifts are required to take Federal insurance out and it is regulated by the regulators, Federal insurance. Do you think we should repeal that and 

open it up to insurance companies that are regulated by the 

States? 

Ms. FROHMAN. That isn’t something I have given any thought to; 

it is an interesting concept. 

Chairman KANJORSKI. Give us some real thought, if you can, 

now. Do you know that there are deposits of private individuals in 

the United States in depository entities that are insured by private 

insurance companies and only regulated by State insurers, would 

that surprise you? 

Mr. DILWEG. I think the concern there, Congressman, would be 

the banking regulation sits at the Federal level and it would be difficult to move such a policy back down to the State level where the 

States would really— 

Chairman KANJORSKI. These are State-chartered institutions, 

and by the existence in the famous loopholes we were talking 

about, they can go out and get private insurance to insure their deposits; in fact, they do so. Do you think that State insurance commissioners are sufficiently competent to regulate that type of insurance product? 

Mr. DILWEG. I guess it’s something that I haven’t spent much 

time on. 

Chairman KANJORSKI. But if I want to go to Wisconsin and open 

up a depository insurance organization, you do not feel that there 

should be any inhibition to my coming to your office and submitting the application? 

Mr. DILWEG. We take all applications. 

Chairman KANJORSKI. What should we do with something like 

that? Because we are going to have to face it. We have depository 

institutions in this country that are not regulated by federally established institutions, and you do not run into any problem with 

them until a recession or a depression occurs when they begin to 

fail. Then, the question is, who backs them up? Then, you discover 

32 

nobody backs them up, particularly States that are almost bankrupt themselves will not come in and back them up. So the Congress gets faced with the proposition: do we just allow all these institutions to fail, and all their depositors, who for all their lives 

have been told if you deposit money in a depository institution you 

have the United States Government behind you, and they find out 

they do not. What do we do? 

We have that actual question facing us right now; not that they 

are insolvent. Do you see what the problem is? If somebody found 

out how to make money by offering insurance in good times on deposits—the argument has been made now—particularly in good 

times before the recession started, that we should look at repealing 

requirements at the Federal Deposit Insurance. 

If the private sector can do it much cheaper and much better, the 

only problem is they do not have to forfeit credit with the United 

States Government standing by. Do you think we should encourage 

that type of insurance to be regulated at a State level? That is my 

question. 

Ms. FROHMAN. I simply don’t have an answer for you. I’m sorry. 

I wish I could help, but I have not given it enough thought. 

Chairman KANJORSKI. And you are going to duck out of it too, 

right? 

Mr. DILWEG. It’s not something I have thought about, Congressman. It’s unique because I think that’s one issue that I found— 

you’re talking about insuring entities where there could be a run 

on the bank—and when we face the AIG issue, you had long-term 

contracts that were in place. And it’s a different type of nature of 

insurance, so those entities where there’s a run on a bank, I think 

it’s a very pertinent question and I would be happy to spend more 

time. 

Chairman KANJORSKI. If you do not mind, I would really like 

your thoughts after you have some time to think about it. 

Mr. DILWEG. That would be great. 

Chairman KANJORSKI. We ought to be consistent, logically consistent on this. 

If the private sector of insurance is so good and manageable entirely at the State level, then we should reexamine whether we 

should stay in the Federal Deposit Insurance business or create an 

alternative organization. We have the authority to say that no depository institutions should be allowed to be in the private sector 

and be regulated only at the State level. I think we should start 

choosing the alternatives because our problem is that, as in the 

S&L crisis, we had to go in and bail out three or four States that 

allowed that to happen and did not have the resources to pay on 

their insurance. 

As a result, we were faced with a terrible situation. There could 

be another situation where depositors would be entirely wiped out 

of their life savings because somebody felt that: one, the State had 

the authority and the expertise to be the regulator of that type of 

insurance company; and two, they never thought there would be a 

recession or a depression, or that they would be at risk. But it happened once before. 

My question is, what do we do about it? Nonetheless, thank you 

very much for your testimony today. Ms. Gardineer, you have been 

33 

a good sport. I really jumped on you a little bit there, and I purposely did that because those questions are out there, and we get 

asked those questions. I thought you did a commendable job in the 

advocacy for the group, so I am going to award you an ‘‘A.’’ 

The Federal Reserve, they are used to getting jumped on, so 

thank you very much. We have to note that some members may 

have additional questions for this panel which they may wish to 

submit in writing. Without objection, the record will remain open 

for 30 days for members to submit written questions to today’s participants and to place their responses in the record. 

Without objection, it is so ordered. The panel is dismissed and 

this meeting is adjourned. Thank you. 

[Whereupon, at 11:58 a.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

March 18, 2010 

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