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THE IMPACT OF DODD-FRANK’S INSURANCE 

REGULATIONS ON CONSUMERS, JOB CREATORS, 

AND THE ECONOMY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INSURANCE, HOUSING AND 

COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 24, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–150 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

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 

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 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

PATRICK T. MCHENRY, North Carolina 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT J. DOLD, Illinois 

STEVE STIVERS, Ohio 

LUIS V. GUTIERREZ, Illinois, Ranking 

Member 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 24, 2012 ..................................................................................................... 1 

Appendix: 

July 24, 2012 ..................................................................................................... 29 

WITNESSES 

TUESDAY, JULY 24, 2012 

Birnbaum, Birny, Executive Director, Center for Economic Justice ................... 10 

Chamness, Charles M., President and CEO, National Association of Mutual 

Insurance Companies (NAMIC) .......................................................................... 12 

Hartwig, Robert P., Ph.D., President and Economist, Insurance Information 

Institute ................................................................................................................ 8 

Posey, Hon. Bill, a Representative in Congress from the State of Florida ......... 6 

Quaadman, Thomas, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 14 

APPENDIX 

Prepared statements: 

Posey, Hon. Bill ................................................................................................ 30 

Birnbaum, Birny ............................................................................................... 32 

Chamness, Charles M. ..................................................................................... 43 

Hartwig, Robert P. ........................................................................................... 57 

Quaadman, Thomas ......................................................................................... 80 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written statement of the American Council of Life Insurers (ACLI) .......... 88 

Written statement of the Property Casualty Insurers Association of 

America (PCI) ................................................................................................ 91 

Posey, Hon. Bill: 

Insert from October 25, 2011, Housing Subcommittee hearing entitled, 

‘‘Insurance Oversight: Policy Implications for U.S. Consumers, Businesses, and Jobs, Part 2 ............................................................................... 101 

Draft legislation ................................................................................................ 103 

(1) 

THE IMPACT OF DODD-FRANK’S 

INSURANCE REGULATIONS ON 

CONSUMERS, JOB CREATORS, 

AND THE ECONOMY 

Tuesday, July 24, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INSURANCE, HOUSING

AND COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding. 

Members present: Representatives Biggert, Hurt, Miller of California, McHenry, Dold; Gutierrez, Velazquez, and Sherman. 

Chairwoman BIGGERT. This hearing of the Subcommittee on Insurance, Housing and Community Opportunity will come to order. 

We will start with the opening statements. And without objection, all Members’ opening statements will be made a part of the 

record. 

And I will now recognize myself for an opening statement. 

Good afternoon, everyone, and welcome to today’s hearing. I welcome today’s witnesses, including our colleague, Mr. Posey of Florida, who is our only witness on Panel I. 

This is the fifth subcommittee hearing on regulatory developments, domestic and international, that have created uncertainty 

for the insurance sector. The subcommittee continues to explore the 

extent to which this regulatory uncertainty could result in higher 

prices and fewer insurance products for consumers, increased costs 

and foregone opportunities for businesses, and reduced economic 

growth, leading to fewer jobs. 

During these hearings, we heard about a number of Dodd-FrankAct-related matters of concern to life and property/casualty insurance companies of all sizes from across the country—businesses 

that had nothing to do with the financial crisis. 

In November, the subcommittee examined three discussion draft 

legislation proposals to amend the Dodd-Frank Act. The first draft 

addressed the authority of FIO and OFR to collect insurance data 

and maintain its confidentiality, which is now H.R. 3559, the Insurance Data Protection Act, introduced by Mr. Stivers. The second 

draft would exempt insurers from FDIC’s Orderly Liquidation Authority, OLA, and Orderly Liquidation Fund, OLF, a bill Mr. Posey 

is perfecting. The third draft would limit the Federal Reserve’s auVerDate Nov 24 2008 16:34 Dec 10, 2012 Jkt 076121 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\76121.TXT TERRI
2 

thority to regulate insurance or subject insurance companies to 

heightened prudential standards, including additional capital requirements. 

The good news is that the Federal bank regulators—the FDIC, 

Treasury officials, and last week, Federal Reserve Chairman 

Bernanke—have signaled that they do not intend to apply bankcentric regulations to insurance. Federal bank regulators also have 

signaled that the insurance regulation should be left up to the 

States, which, as I have noted many times, the State-based regulatory system for insurance has worked well for over 150 years. 

I am afraid the same can’t be said for banking regulation. Unfortunately, uncertainty remains, and proposed regulations by these 

same regulators don’t reflect specific considerations for insurance. 

Congress and insurers are still uncertain if, for example, the Federal Reserve will impose bank-like capital standards on insurance 

companies that are part of a savings and loan or a thrift holding 

company. 

Today’s hearing, entitled, ‘‘The Impact of Dodd-Frank’s Insurance 

Regulations on Consumers, Job Creators, and the Economy,’’ is 

part of the committee’s continued oversight hearings around the 

second anniversary of the Dodd-Frank Act. We will explore the consequences for insurance companies, consumers, job creators, and 

the economy of unnecessary increased compliance costs as well as 

limitations on investments due to Dodd-Frank. 

Why does Dodd-Frank’s impact on insurance matter to families, 

businesses, and our economy? Why should everyday insurance consumers, workers, municipalities, and other job creators and charities be concerned? Specifically, this hearing will attempt to answer 

those questions and evaluate the effect on insurance companies and 

their customers of the new Dodd-Frank regulations. 

It is important that we get the regulation of insurance right. In Illinois, property and casualty insurers have written over $2.2 billion in premiums, life insurers have written almost $26 billion in 

insurance premiums or annuities, and 114,000 workers are employed by the insurance sector. 

It is important that Congress prevent the unnecessary layering 

of new Dodd-Frank regulations and costs on insurers. We must get 

it right for direct and indirect beneficiaries of insurance: families 

and businesses of all kinds and sizes; cities and towns; and workers 

with jobs in Illinois and across the country. Our economy, business, 

and families cannot afford additional job losses, increased costs for 

products, reduced private-sector investments, or reduced benefits. 

With that, I welcome input from all of the Members on this discussion draft, and I yield to the ranking member of the subcommittee, Ranking Member Gutierrez, for his opening statement. 

Mr. GUTIERREZ. Thank you for yielding, Madam Chairwoman. 

Recent developments such as JPMorgan Chase—they asked me 

for two IDs the last time I went to JPMorgan Chase. I said, ‘‘You 

should be more careful with the billions of dollars you trade than 

with the couple hundred dollars extra I want.’’ At JPMorgan 

Chase, they are so silly, they ask their customers—you want to 

talk about—no, it really is. Because they said, ‘‘Hey, Congressman 

Gutierrez, how are you today? Do you have another ID?’’ I said, 

‘‘No, I don’t. Do you have the $5 billion? Or is it up to $7 billion?’’ 

3 

This kind of attests to the fact that it is a good thing we have 

Frank-Dodd, because they are still losing billions of dollars as I go 

out there. 

And so I know this is going to be a wonderful hearing. But I 

haven’t had any problem; I call up my State Farm agent, and he 

is still there—Tom Rafferty in Hinsdale, Illinois. I think you probably represent him in the Congress. He is still there writing out 

insurance policies and hoping that Luis Gutierrez and his family 

don’t have any car accidents or trees don’t fall on his home. It 

doesn’t seem like there has been a problem. 

But I will tell you, we should remember three simple letters 

when we want—because we all know that the Federal Government 

really doesn’t cover insurance companies. And there are three letters: AIG. So before we start saying, oh, those poor insurance companies, and we really shouldn’t be messing with them and putting 

any layers of—how is it—regulations, they don’t need to be 

watched, let’s just remember three letters, not ‘‘ABC,’’ ‘‘AIG.’’ And 

thanks to the Federal Government, of course, those of us here had 

to go and bail them out and make sure that they stayed afloat because they are important to our economy. 

So before we start talking about—it is like it doesn’t end. I 

turned on CNN, and there was this big bank out there and the 

CEO getting thrown out because they were lying about the LIBOR. 

And they keep telling us we don’t need any regulations. Really? 

And we haven’t even really gotten to the bottom of the LIBOR 

scandal and what it is that banks do. 

I have to tell you, I won’t mention, but if you want, you can probably go check my—what is it—those forms we fill out every year 

and we make sure—the financial disclosure forms. You see, I check 

with Chuck every day, because I want to make sure he didn’t take 

a vacation with my money. Not that he would, but I just want to 

check. And I think most people in America check, and they should, 

because there are still people out there—and you can ask them— 

who are losing money because they put their money into what are 

supposedly safe accounts, only to see the money disappear. 

So to kind of suggest at this particular point that somehow it is 

all over, everything is great, and that the financial industry is 

going to do everything on the up and up, all we have to do is read 

the papers from the last month to realize that it really is an industry that needs us to continue to watch over them in defense of the 

consumers. And I know that is sometimes an ugly word, because 

every time we bring up making sure that the consumers are wellprotected here in the Congress of the United States, they say that 

we are people who are stopping the growth of our economy. 

I am just going to end with this. I won’t take up all of the time. 

But I remember when I sat here in 2008 as our economy became 

unraveled. You want to talk about losing jobs? We lost millions 

upon millions upon millions of jobs between 2007 and 2008, millions and millions, sometimes hundreds of thousands in any given 

month. And for anybody to suggest that we didn’t lose a lot of those 

jobs because of what the banking industry was doing, or not doing, 

and the kinds of things that they were doing in terms of even trading across seas and across the world, I think just doesn’t do justice 

to the fact that we lost those millions of jobs. 

4 

So I also care about jobs. And if we leave them unregulated, we 

know that we can cause this recession to go into a depression. So 

let’s be very mindful that there are those that need watching and 

that the people who sent us here to the Congress of the United 

States sent us here to watch out for their special and very best interests. 

Thank you very much. 

Chairwoman BIGGERT. Thank you. 

The gentleman from California, Mr. Miller, is recognized for 2 

minutes. 

Mr. MILLER OF CALIFORNIA. Thank you. 

I would like to thank you, Chairwoman Biggert, for holding this 

hearing. It is important to our economy that the committee closely 

monitor the implementation of Dodd-Frank Act regulations. 

While the Dodd-Frank Act supposedly exempts the insurance industry from many aspects of the law, we are hearing concerns that 

regulators are extending their rule to include insurance companies, 

where regulators do not have authority. We are hearing concerns 

that the rules being proposed are bank-centric and do not take into 

account the fundamental differences between how banks and insurance companies operate. For example, the Federal Reserve proposed rules on capital standards for savings-and-loan holding companies that are owned by insurance companies that will have major 

impacts on cost and availability of insurance policies for American 

consumers. 

If the Fed rule does not recognize the difference between banks 

and insurance companies in its rules, the bank-centric capital 

standards imposed on the insurance companies will do harm to job 

creators in this country. Since the Federal Reserve has no experience in regulating insurance companies, the Fed needs to be extremely careful and take all the necessary steps to understand the 

industry before imposing rules that could have major economic consequences. 

We are also hearing concerns that a proposal requiring insurers 

to prepare Federal financial statements using Generally Accepted 

Accounting Principles, also known as GAAP—while State regulators require reporting using Statutory Accounting Principles 

(SAP), known as SAP—will increase costs for insurance companies’ 

compliance with regulations. Two different accounting methods to 

report essentially the same information in different ways is unnecessary. This only adds to the cost of doing business for insurance 

companies. Such costs will ultimately be borne by the consumers 

of insurance products. 

Lastly, the Volcker Rule is clearly a major concern for the banking industry. While it was never intended to apply to insurance 

companies, it could have an impact on them because the regulations are failing to see the difference between banks and insurance 

companies. If insurance companies are swept under the Volcker 

Rule, the cost of insurance companies’ ability to hedge risk will be 

increased. In addition, the Volcker Rule could prohibit insurance 

companies from playing the traditional role in debt and equity markets. Congress exempted insurance companies in the statute, and 

regulators needs to follow Congress’ intent. 

5 

In closing, while the regulators aren’t here today, this hearing is 

important for us to hear about the impact of these overreaching 

regulations on the insurance industry and, ultimately, on our economy. I look forward to hearing the testimony today. Hopefully, it 

will be insightful and we can move forward. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

The gentleman from Illinois, Mr. Dold, is recognized for 2 minutes. 

Mr. DOLD. I thank the chairwoman for holding this important 

hearing and for recognizing me. 

Efficient and sound markets obviously require different and customized rules for different industries. Fortunately, Dodd-Frank recognized the inherent differences between the banking industry and 

the insurance industry and tried to ensure that insurance companies don’t fall under an inappropriate regulatory framework. 

Title I of Dodd-Frank requires the Federal Reserve to set new 

capital rules for large banks and bank holding companies to prevent excess leverage and undercapitalization and the consequent 

stability threat. Though well-intentioned, these new risk-based capital rules also apply to insurance companies that take deposits at 

some level in their corporate structure, despite their fundamentally 

different structure and risk profile. 

We need to ensure that these new rules account for the unique 

insurance company business model and don’t create unnecessarily 

costly and otherwise counterproductive burdens for the U.S. insurance industry. If these rules are not customized for the insurance 

company business model, we can expect to see consumers damaged 

by higher insurance costs and diminished product availability, 

along with our economy damaged by fewer jobs, weakened global 

competitiveness, and diminished investment capital availability. 

And I am confident that none of us wants those negative consequences. 

Another critical point is that we must examine these new regulations in their broader context. These rules aren’t being introduced 

on a clean slate. Instead, they will be introduced on top of an elaborate, well-established, and preexisting insurance regulatory framework. And they are being introduced simultaneously with increased 

State regulatory scrutiny, new international requirements, and a 

new Federal insurance monitoring agency. So we can’t consider any 

particular rule in isolation, but instead we must consider the aggregate effect. 

The insurance industry is critical to our economy, not only because it provides millions of Americans with security from everyday 

risks, but also because the industry’s investments in our capital 

markets drive growth and productivity. Insurance companies are 

uniquely capable of maintaining diverse long-term portfolios, promoting stable capital markets, and pooling capital for small-business growth. 

I see my time has expired, Madam Chairwoman, and I yield 

back. 

Chairwoman BIGGERT. Thank you. 

6 

We will now turn to our first panel. Let me just say that, without 

objection, Panel I and Panel II’s statements will be made a part of 

the record. 

And I will now turn to our first witness, Representative Bill 

Posey from Florida. 

We are delighted to have you here. And, of course, you are usually here because you are one of the members of the Financial 

Services Committee. With that, you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE BILL POSEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA 

Mr. POSEY. Thank you, Chairwoman Biggert, Ranking Member 

Gutierrez, and members of the subcommitee. I appreciate the opportunity to speak before the Insurance Subcommittee today. 

And just before I forget, as an asterisk, I would like to just quote 

from the record of an October 25, 2011, subcommittee hearing. This 

was the Director of the Federal Insurance Office, Mr. McRaith: 

‘‘The autopsy has, frankly, shown that it was not the insurers that 

caused the problems for AIG as a holding company.’’ I ask unanimous consent to make it a part of the record. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. POSEY. I devoted a great deal of time to insurance issues as 

a legislator in Florida, insurance of all kinds, not just the type that 

the weather tends to make people discuss in Florida. 

Florida is a large State with many different kinds of insurancerelated challenges to deal with. Last year, premiums that were 

written by property/casualty insurance companies alone totaled 

over $37 billion. Premiums on life and health insurance were over 

$42 billion. Premium taxes paid in Florida were over $667 million 

in 2010. Those are big numbers, but behind the numbers are real 

people, real families. 

I don’t know anyone who likes to pay insurance premiums, let 

alone higher premiums. No one likes to think about the day when 

they might need that policy to be there for their home, their car, 

or to help provide financial security after the passing of a loved 

one. But when insurance functions as it is supposed to, we appreciate its value to help us manage life’s many risks. So it is important that we in Congress get this issue right, because it affects virtually everyone each and every one of us knows or cares about. 

I have our discussion draft bill that addresses the various problems brought to our attention with the new financial regulation 

bill. Madam Chairwoman, I would like to submit for the record the 

latest draft of the bill to address the problem. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. POSEY. Thank you. 

Last November, this subcommittee held a hearing on discussion 

draft legislation that would exempt insurance companies from the 

FDIC’s new Orderly Liquidation Authority and Orderly Liquidation 

Fund for large Wall Street institutions and those determined to be 

systemically important, or, as some say, too-big-to-fail. 

Under Dodd-Frank, the FDIC, the traditional banking regulator 

and insurer of deposits, oversees the new fund for these mega financial companies. Whatever views my colleagues may have regarding bailouts—I personally oppose them—I hope we can correct 

7 

an injustice in Dodd-Frank that impacts insurance companies and 

our constituents. 

Right now, the FDIC has the power to assess fees to create this 

new fund. However, in addition to assessing the big Wall Street 

firms, for which I personally believe the fund was intended, the 

FDIC can force insurance companies to pay into it. This is the case 

even though the insurance companies are not eligible to use the 

fund and they do not need the fund. 

The insurance sector could be footing the bill for failed Wall 

Street firms. Back home, this means our constituents, your constituents, my constituents, all of our constituents, the ones who pay 

the premiums, could have to pay higher rates to cover risk on Wall 

Street. Why should our constituents pay higher rates for life or 

property/casualty insurance premiums for bad decisions made on 

Wall Street? 

This bill would exempt insurance companies from paying into the 

liquidation fund. It is similar to a draft circulated and discussed by 

this subcommittee last November, but I believe it has been improved, with the help of the chairwoman and others interested in 

this issue. 

The insurance industry did not cause the financial meltdown. As 

we debated Dodd-Frank, we seemed to agree that regulation of insurance was generally best left to the States. For decades, Congress has recognized that State authorities have the expertise, 

proximity, track record, and Federalist constitutional authority, for 

that matter, to regulate insurance. Insurance companies pay into 

State guarantee funds to deal with insolvencies. 

Shaking down insurance companies for Wall Street bank failures 

has big economic consequences, considering the insurance sector 

provides millions of jobs and tens of billions in State and Federal 

revenue. Property/casualty and life insurance alone equaled $18 

billion in 2010. Insurance companies invest in the capital markets, 

in the U.S. Government, and municipal, company, county, and 

other bond securities. We may take it for granted, but insurance 

helps us pay for projects like roads and schools. 

In closing, forcing insurance companies to pay twice, into the 

State guarantee funds and into the new Orderly Liquidation Fund 

(OLF), could have widespread repercussions for our constituents 

and for the economy. 

Thank you again for this opportunity to speak today. I hope we 

can work together on a commonsense fix to address this issue. And 

I would be delighted to answer any questions. 

[The prepared statement of Representative Posey can be found 

on page 30 of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Posey. 

Does anyone have any questions? No? Then, I think we will excuse you. But thank you so much for being here, and we look forward to looking at the draft legislation. Thank you. 

Mr. POSEY. Thank you. 

Chairwoman BIGGERT. I think we will move to Panel II so we can 

start with the testimony. As usual in the afternoon, we are having 

votes, and they are scheduled for around 2:30, but you never know 

whether it will go further than that. So if you can take your seats, 

we will get started. 

8 

Welcome, to our second panel. As was stated earlier, your testimony will be submitted for the record. And we will start with—let 

me go through the names: Dr. Robert Hartwig, president, Insurance Information Institute; Birny Birnbaum, executive director, 

Center for Economic Justice; Charles M. Chamness, president and 

CEO, National Association of Mutual Insurance Companies; and 

Thomas Quaadman, vice president, Center for Capital Markets 

Competitiveness, U.S. Chamber of Commerce. 

Welcome to you all. 

We will start with Dr. Hartwig. You are recognized for 5 minutes. 

STATEMENT OF ROBERT P. HARTWIG, PH.D., PRESIDENT AND 

ECONOMIST, INSURANCE INFORMATION INSTITUTE 

Mr. HARTWIG. Thank you, Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee. And good afternoon. My name is Robert Hartwig, and I am president and economist for the Insurance Information Institute, an international property/casualty insurance trade association. 

I have been asked by the committee to provide testimony on the 

role of the insurance industry and the benefits of insurance products and services provided to consumers, job creators, and the economy. I also have been asked to address some concerns associated 

with certain Dodd-Frank provisions affecting insurers that could 

raise compliance costs or adversely affect the structure, capacity, or 

the ability of the insurance industry to absorb risk. 

Insurance is a financial risk management tool that allows individuals and businesses to reduce or avoid risk through the transfer 

of that risk to an insurance company. This simple, efficient, and effective arrangement allows the insured party to be protected 

against a multitude of potentially ruinous losses and instead focus 

on activities that produce or preserve income and wealth and contribute to the creation of jobs by fostering investment, innovation, 

and entrepreneurship. 

Because virtually any risk that can be quantified can be insured, 

the use of insurance has become commonplace. In 2010, worldwide 

combined property/casualty and life insurance premiums totaled 

$4.3 trillion, or about 6.9 percent of global GDP. Collectively, these 

premiums reflect the transfer of hundreds of trillions of dollars of 

risk exposure to insurance companies around the world. No modern 

economy could function as efficiently without the widespread use of 

insurance, and many activities in today’s disaster-prone and highly 

litigious society would be impossible altogether. It is therefore critical that any and all regulations impacting the industry, including 

Dodd-Frank, not in any way diminish the ability of the insurer to 

play the key role it has played for centuries. 

To get a sense of the scale of the insurance industry, in Exhibit 

1 in my testimony you will see that premiums written for the P&C 

and life and annuity segments of the industry totaled $1.1 trillion 

at the end of 2010. Likewise, when we look at the industry in 

terms of its assets, you will see that those totaled $4.5 trillion at 

the end of 2010. 

Now, despite difficult economic times in recent years, the insurance industry’s capital resources are at or near all-time record 

9 

highs and are growing. The strength of the industry is without parallel within the financial services segment, and property/casualty 

and virtually all life insurers, unlike banks, were able to operate 

normally throughout the entirety of the financial crisis and have 

continued to do so since. Consequently, the financial industry regulations adopted in the wake of the crisis must avoid imposing bankcentric regulations on the insurance industry, whose operating 

record and business model are clearly distinct from that of the 

banking sector. 

The insurance industry’s need to maintain large holdings of assets to back claims and satisfy regulatory requirements implies 

that the industry is one of the largest institutional investors in the 

world. Exhibits 5 and 6 in my testimony show the distribution of 

the industry’s $4.5 trillion in investments. Insurers are necessarily 

conservative investors and, as such, concentrate their investments 

in relatively low-risk, highly liquid securities, especially bonds, 

which account for about 70 percent of industrywide assets. 

It is also worth noting that about 44 percent of the P&C insurance industry’s bond portfolio is invested in municipal securities, or 

munies, as you will see in Exhibit 7. In other words, the property/ 

casualty insurance industry alone in 2011 held bonds that served 

to finance some $331 billion in a wide array of projects financing 

schools, roads, bridges, water treatment plants, mass transit, 

healthcare facilities, you name it. 

Now, as noted in Exhibit 10, the insurance industry is also an 

important employer, with about 2.3 million employees across the 

country. Exhibit 11 shows the number of people employed by insurance carriers in 2010, with 100,000 or more workers in 8 States, 

including the chairman’s State and the ranking member’s State of 

Illinois, and at least 50,000 per State in 8 other States. About $200 

billion in wages were paid to employees during 2010, fueling local 

economic growth and supporting millions of secondary jobs. 

Now, in terms of the concerns associated with Dodd-Frank and 

potentially subsequent regulations, P&C insurance, in particular, is 

a large and vital industry in the United States. It is also sound, 

stable, strong, and secure, having earned a reputation for maintaining financial strength even when claim activity is far above expectations, such as in the wake of the September 11th terrorist attacks, or Hurricane Katrina, which produced $41 billion in insured 

losses from claims, establishing a new record that even stands to 

this day. 

Insurers were able to meet these challenges because of longstanding operational philosophy that gives rise to a conservative 

underwriting and investment model. The same philosophy allows 

property/casualty insurers to continue with business as usual even 

during steep economic downturns, including the 2008 financial crisis and the ‘‘Great Recession.’’ Indeed, not a single traditional property/casualty insurer or reinsurer failed as a result of the financial 

crisis, nor did a single legitimate claim go unpaid. In contrast, during the financial crisis and its aftermath, more than 400 banks 

failed, including the largest failures in U.S. history. 

It is important to recognize that in the decade leading up to the 

passage of the Dodd-Frank Act in 2010, the property/casualty insurance industry experienced the worst claim events in its history 

10 

and weathered the worse recession since the Great Depression. The 

industry operated throughout this period without interruption. 

Finally, the evidence that— 

Mr. GUTIERREZ. The time, Madam Chairwoman? 

Mr. HARTWIG. Do you have a vote? 

Chairwoman BIGGERT. No, but your time— 

Mr. HARTWIG. I am just winding up. 

Chairwoman BIGGERT. If you would wrap up, please. 

Mr. HARTWIG. Right. Just 30 more seconds. 

There have been a variety of concerns, including the Volcker 

Rule, as we have already heard a few moments ago, and particularly with respect to banks that do have associations with—insurance companies whose primary business is insurance but have associations and affiliations with banks, as well as concerns about 

mission creep associated with the Consumer Financial Protection 

Bureau, the eventual execution of subpoena authority from the 

Federal Insurance Office, among others, as well as the Federal Reserve’s authority associated with Systemically Important Financial 

Institutions (SIFI). 

So, again, thank you for the opportunity to testify before the subcommittee today. And I, as well, would be happy to respond to any 

questions. 

[The prepared statement of Dr. Hartwig can be found on page 57 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Mr. Birnbaum, you are recognized for 5 minutes. 

STATEMENT OF BIRNY BIRNBAUM, EXECUTIVE DIRECTOR, 

CENTER FOR ECONOMIC JUSTICE 

Mr. BIRNBAUM. Thank you very much, Chairwoman Biggert, 

Ranking Member Gutierrez, and members of the subcommittee. 

Thanks for the opportunity to speak on the impact of the DoddFrank Act on insurance consumers, insurers, and the economy. 

To evaluate the impact of Dodd-Frank on insurance consumers 

and insurers, it is necessary to review how the insurance industry 

contributed to and was impacted by the financial crisis starting in 

2007. My experience and observation is that insurers did contribute 

to the financial crisis, and the limitations of State-based insurance 

regulation became apparent as the crisis unfolded. State-based insurance regulation certainly has its strengths, but the Dodd-Frank 

Act has assisted and strengthened State-based insurance regulation. 

On the property/casualty side, we must start with the spectacular collapse of AIG, which resulted in a massive taxpayer bailout. 

AIG certainly contributed to the financial crisis because of its huge 

bets on credit default swaps. While State insurance regulators have 

argued it was the noninsurance subsidiaries of AIG and not AIG 

insurance companies which caused the collapse, the fact remains 

that State insurance regulators were not able to monitor AIG at 

the broader holding company level. 

In addition, State insurance regulators missed risky investment 

activities by AIG involving the lending of securities. AIG loaned out 

securities owned by its insurance company subsidiaries. And with 

the proceeds from these loans, AIG invested $76 billion at its peak 

11 

in long-term subprime residential mortgage-backed securities. 

When the borrowers of the AIG securities returned the securities, 

requesting the return of their cash, AIG did not have the cash because of severe market devaluations of the residential mortgagebacked securities. The Federal Reserve stepped in to provide liquidity. 

There are other types of property/casualty insurers which contributed to and were dramatically impacted by the financial crisis, 

including financial guaranty and mortgage insurance. Financial 

guaranty insurers, also known as bond insurers, mistakenly provided assurance for a variety of asset-backed securities, contributing to the sale of risky and destined-to-fail mortgage-backed securities. 

After years of paying few claims in relation to premium, the bottom fell out starting in 2007. From 2007 to 2011, financial guaranty insurers incurred almost $37 billion in claims, more than 21⁄2

times the premiums they earned during that period. The financial 

guaranty insurance market collapsed, and the weakness and failure of financial guaranty insurers rippled through the economy because the absence of financial guaranty insurance can create great 

difficulties for States and municipalities to issue debt. 

The private mortgage guaranty insurance market also contributed to and was crushed by the financial crisis. Today, the Federal 

Housing Authority is supporting the mortgage market by providing 

increased amounts of mortgage insurance. As with the financial 

guaranty insurance, after years of very low loss ratios, mortgage 

insurers’ poor risk management resulted in massive losses starting 

in 2007. The weak condition of mortgage insurer PMI caused the 

Arizona regulator to order it to stop writing new business last year. 

MGIC has only been able to continue to write new business because its State regulator waived minimum capital requirements. 

Life insurance and annuities: The life insurance industry was 

greatly impacted by the financial crisis. Life insurers sought relief 

from the Federal Government in the form of TARP funds and from 

State regulators in the form of lower claim reserve requirements 

and changed accounting standards. 

The problems experienced by the life insurance industry stem 

from the fact that life insurer products have transformed over time 

from mortality protection to market return protection. The life insurance industry came under stress because, instead of the traditional role of insurers in diversifying risk through the pooling of 

many lives, many vehicles, and many properties, the insurers assumed the rule of guaranteeing market returns. Insurance regulators never identified or examined the potential for systemic risk 

to the financial system associated with insurance companies taking 

on ever-greater promises of consumer returns on market investments. 

The history of insurers and the State regulation leading up to 

and following the financial crisis is essential for evaluating the 

Dodd-Frank Act. And, in my opinion, the Dodd-Frank Act has benefited insurance consumers and improved the capabilities of State 

insurance regulation. 

In terms of the Federal Reserve regulation, the Dodd-Frank Act 

created the Financial Stability Oversight Council (FSOC) and also 

12 

created the Federal Insurance Office (FIO). By doing so, the Federal Reserve or the Federal Insurance Office and the FSOC can 

identify systemically risky insurers, but they can also identify systemically risky products that may not on their own create a problem for one insurer, but if there are a bunch of insurers that are 

writing that product, then it becomes a systemic risk because of the 

product, not just because of an insurer. 

So I see my time is up, and I am happy to answer any questions. 

Thank you. 

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

32 of the appendix.] 

Chairwoman BIGGERT. Thank you very much. 

We have been called for a vote, those pesky votes that always 

come during hearings. So I think we will go and vote. And there 

are only two votes, so we should be back by 3 o’clock at the latest, 

and then we will continue on with the other two witnesses and get 

to the questions. 

Thank you very much. We will be in recess. 

[recess] 

Chairwoman BIGGERT. We hope that some of our other Members 

will arrive back, but I think we will get started. 

And I now recognize Mr. Chamness for 5 minutes. 

STATEMENT OF CHARLES M. CHAMNESS, PRESIDENT AND 

CEO, NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. CHAMNESS. Okay. Thank you. 

Good afternoon, Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee. Thank you for the opportunity to speak to you today. 

My name is Chuck Chamness, and I am the president and chief 

executive officer of the National Association of Mutual Insurance 

Companies. NAMIC represents more than 1,400 property and casualty insurance companies, including small farm mutuals, State 

and regional insurance carriers, and large national writers. NAMIC 

members serve the insurance needs of millions of consumers and 

businesses in every town and city across America. 

I would like to begin by thanking the subcommittee for its diligent oversight and review of the implementation of the Dodd-Frank 

Wall Street Reform Act. Preventing unneeded and damaging interference in well-functioning markets is key to our country’s economic recovery. The committee’s continued focus on this issue is 

critical. 

To begin, it is important to recognize that property/casualty insurance is a fundamental pillar of the U.S. economy. Insurance is 

a mechanism that allows people to take the risks of owning property or starting a new business, and it allows businesses to expand 

with the knowledge that new risks can be managed. In short, insurance is a critical component of the Nation’s economic vitality. 

In terms of the industry’s economic impact, the latest figures 

show there are upwards of 2,700 property/casualty insurance companies currently doing business in the United States, employing 

600,000 people. In 2010, the industry paid $15.8 billion in State 

13 

taxes and invested $307 billion in municipal bonds to aid in the 

construction of various public-sector projects across the country. 

In the wake of the 2008 financial crisis, NAMIC testified before 

Congress on the unique nature of the property/casualty insurance 

industry and urged lawmakers not to sweep the industry into any 

new conflicting and unneeded regulatory regime. Much to Congress’ 

credit, the focus of the Dodd-Frank Act was not on the insurance 

industry, and the bill maintained the State-based regulatory system that performed remarkably well during the crisis. Despite the 

strain on the financial system globally, insurers remained strong 

and able to protect policyholders. 

However, the sheer scope of Dodd-Frank has led to many 

changes in how insurance companies, particularly those that are 

large and diverse, deal with regulation. Despite not being the target of much of the new financial services regulatory regime, DoddFrank has led to an enormous amount of uncertainty for all insurers. Many of these consequences of reform appear to be unintentional—another reason that we are grateful to the subcommittee 

for holding this hearing. 

I would like to highlight a few of our main concerns. 

First, our industry has concerns over the size and scope of the 

new Office of Financial Research and its seemingly unchecked ability to impose expensive new data reporting and recordkeeping burdens on insurance companies and their customers. Although property/casualty insurance was carved out of its jurisdiction, the Consumer Financial Protection Bureau could attempt to bring the 

property/casualty insurance industry under its purview through indirect regulation of products and services, undermining congressional intent. Lastly, even the carefully constructed Federal Insurance Office, with its subpoena and preemption authorities, injects 

the insurance marketplace with new uncertainties about the future. 

Second, another serious concern is the Volcker Rule, created to 

prevent proprietary trading in certain investments by banking entities. While Congress recognized the need to exempt insurers from 

the rule, it is not yet clear that the implementing agencies will also 

exempt insurers from the ban on investments in certain types of 

covered funds, as Congress intended. Allowing insurers to continue 

in their normal ownership of interest in securities is essential to 

appropriately engage in effective long-term investment strategies 

and avoid costly premium increases for policyholders. 

Finally, I would address the role of the Federal Reserve. Before 

the passage of Dodd-Frank, insurance companies that owned depository institutions were regulated at the holding company level by 

the Office of Thrift Supervision (OTS). Dodd-Frank eliminated the 

OTS, and the Federal Reserve was given this responsibility. While 

the Federal Reserve has great experience in supervising and regulating traditional banking operations, it does not have a history of 

insurance company regulation. The Federal Reserve must recognize 

the distinct regulatory approaches required to properly supervise 

insurance companies, which entail different measures for capital, 

financial strength, and stability than banks. In terms of regulation, 

one-size-does-not-fit-all and consequently, the supervision should be 

tailored to this economic reality. Unfortunately, the Federal ReVerDate Nov 24 2008 16:34 Dec 10, 2012 Jkt 076121 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\76121.TXT TERRI
14 

serve has adopted a bank-centric approach, which creates challenges for insurance companies. 

Industry concerns are many and varied but generally fall into 

four categories: one, the rulemaking process, which frequently provides insufficient time to process and respond to comment periods 

for new rules and regulations; two, the lack of expertise in the 

business of insurance and the Fed seeking to impose bank-centric 

models and metrics rather than relying on the functional State regulators; three, the inability or unwillingness to distinguish between 

insurance entities and banks when it comes to systemic risk and 

assessments for resolving failing financial institutions; and, four, 

the Fed’s desire that all financial statements use Generally Accepted Accounting Principles, whereas insurers are required by their 

functional regulators to use Statutory Accounting Principles (SAP). 

As we move forward, NAMIC stands ready to work with Congress to rectify any unintended consequences that inevitably 

emerge from any legislation of the size and scope of Dodd-Frank. 

Again, thank you for the opportunity to speak here today, and I 

look forward to answering any questions you may have. 

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

43 of the appendix.] 

Chairwoman BIGGERT. Thank you very much. 

Mr. Quaadman, you are recognized for 5 minutes. 

STATEMENT OF THOMAS QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE 

Mr. QUAADMAN. Thank you, Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee. 

The insurance industry is the largest investor in the United 

States and the world. Insurers have to carefully match their assets 

with long-term liability, contingent liabilities, and also to meet the 

liquidity needs of their policyholders for the short term and long 

term. Accordingly, insurers are investors in debt and equity markets, government securities, commercial real estate, and residential 

real estate. These investments are executed with strict regulatory 

oversight, with high capital and liquidity ratios. Leverage ratios for 

insurance companies tend to be 3 to 1, versus 9 to 1 for financial 

institutions. The insurance industry is not prone to runs. 

Through these activities, insurers are not only long-term prudent; they are also a stabilizing force within the capital markets 

themselves. The investment activities of insurance companies allow 

them to meet the needs of their policyholders while providing an 

invaluable flow of capital for Main Street businesses, allowing 

them to create jobs and grow. 

Accordingly, the insurance industry as an investor is harmed by 

inefficient capital markets and ineffective oversight of those markets. Post-Sarbanes-Oxley, American capital markets were becoming less efficient through international competition and an ineffective financial regulatory structure. 

Our patchwork financial regulatory structure was created in the 

New Deal, certain aspects of it as far back as the Civil War. At 

best, that antiquated system was trying to regulate a 1975-style financial market in the 21st Century. This led to uneven enforceVerDate Nov 24 2008 16:34 Dec 10, 2012 Jkt 076121 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\76121.TXT TERRI
15 

ment, a lack of understanding of products and markets, and an inability to spot bad actors which drives them out of the marketplace. 

Rather than dealing with these problems, Dodd-Frank instead 

supersizes them. Dodd-Frank preserves the status quo, does not 

streamline regulators, does not allow them to hire the marketbased expertise that they need, and does not allow them to regulate the financial markets in 2025 rather than in 1975. MF Global 

and Peregrine are just some of the latest examples showing that 

the underlying problems have not been dealt with. 

These difficulties continue to impose pressure upon the insurance 

industry and nonfinancial companies’ ability to raise capital. Just 

let me raise two examples in Dodd-Frank itself. 

With the Volcker Rule, the asset liability management practices 

of insurance companies are, by their definition, proprietary trading. 

Congress wisely decided to give an exemption to insurance companies for that. But what Dodd-Frank gives with one hand, it takes 

away with the other. Insurance companies, as with many nonfinancial companies, own banks. They do this to lower transaction 

costs or to provide additional services to their customers. By owning a bank, the insurance companies are brought back into the 

ambit of the Volcker Rule, and that also includes all of the compliance issues that go along with that. 

Additionally, as an investor, the insurance company will have to 

go into the debt and equity markets that are now going to be subject to a potentially subjective trade-by-trade analysis and thumbsup or thumbs-down approval or disapproval by five different regulators. This will force insurance companies to rethink their investment strategies and to possibly forego opportunities that were profitable for both the company and their policyholders themselves. 

Finally, let me also talk about SIFI designations, which, even 

though it impacts only a few companies, will have broader impacts 

upon the insurance industry itself. 

First off, as you have heard from many other people today, this 

will place a unique business model within a bank-centric style of 

regulation. This is no more than putting a square peg into a round 

hole. 

Additionally, we not only have domestic SIFIs designations and 

regulations, we also have this on an international level as well. It 

is unclear as to how any disputes between the domestic and international regulators are going to be resolved. Similarly, if you take 

a look the insurance industry, where you could have a tripartite 

system of regulation, it is unclear how that is all going to work. 

Additionally, as you have also heard a little bit today, there is 

a significant shift in risk of loss for nonfinancial companies that 

come within the ambit of systemic risk regulation. 

So I know my time is about up, and I am happy to answer any 

questions that you may have. 

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

80 of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

We will now turn to Members’ questions for the witnesses, and 

Members will be recognized for 5 minutes each to ask questions. 

And I will yield myself 5 minutes for the first questions. 

16 

Dr. Hartwig, in your published article entitled, ‘‘Bruised, Not 

Crushed,’’ you note a key difference between insurance companies 

and banks, and that is risk appraisal. Can you explain to this committee how risk appraisal is a distinguishing factor between insurance companies and the banks, and how Federal regulators should 

approach regulating the two different industries based on the fundamentals of risk appraisal? 

Mr. HARTWIG. Yes, risk appraisal, risk assessment, risk analysis, 

insurers are expert at assessing risk. And that is how they remain 

in business; they take in premiums that are commensurate with 

the risk. This is a different operating model than the banks have. 

Associated with each particular element of risk that is accepted is 

a particular duration of a liability associated with that. On the 

banking side, for instance in depository institutions, you have the 

ability for those who hold the liability, the depositor, to make an 

immediate demand on that. 

That is just one of many, many differences associated with banks 

and insurance companies. The fact of the matter is that there are 

many reasons why, as I said in my testimony, over 400 banks 

failed during the financial crisis—and, actually, quite frankly, we 

are still counting—and no mainstream or traditional property/casualty insurer failed as a result of the financial crisis. And it has 

a lot to do with risk management. 

And the risk management, the insurers, we heard some testimony earlier about leverage. Insurers were far less leveraged than 

banks. But there is a long tradition in this business. And we heard 

Mr. Chamness, who runs the National Association of Mutual Insurance Companies—I will tell you that the median age of a mutual 

insurance company is 120 years old. Okay? And that tells you a lot 

about risk management and insurers as it differentiates itself from 

the rest of the financial services industry. 

Chairwoman BIGGERT. Thank you. 

Then, Mr. Chamness, on page 8 of your testimony, you mentioned, ‘‘Failure to include an exemption for insurance operations, 

allow investment in covered funds and continue the use of qualified 

subsidiaries will subject these companies to costly and duplicative 

regulation and reporting requirements and thwart the sound investment practices designed to ensure solvency and stability in insurance markets.’’ 

Who should care about costly and duplicate regulations and reporting requirements? Should insurance consumers be concerned, 

or business owners? 

Mr. CHAMNESS. In a word, yes. 

As Dr. Hartwig referred to NAMIC, we are mutual insurance 

companies. In the case of a mutual, the policyholders’ interests are 

aligned with the companies. As Representative Gutierrez talked 

about, our largest member, his insurance company, is effectively 

owned by its policyholders, and it operates for their benefit. So to 

the extent that the insurance company has higher operating costs, 

has to pay more to be in business to serve these policyholders, in 

the case of the mutual insurance company, the policyholder eventually pays. 

I think the genesis of your question was around the Volcker 

Rule’s impact on very large insurance companies that are savingsVerDate Nov 24 2008 16:34 Dec 10, 2012 Jkt 076121 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\76121.TXT TERRI
17 

and-loan holding companies now regulated by the Fed. And we 

think this is an opportunity for Congress to clarify that, as Mr. 

Quaadman mentioned, the Volcker Rule was intended to carve out 

the insurance industry. We think appropriately it would. We think 

that insurance regulation certainly covers this type of covered 

funds trading that is done for the general account of insurance 

companies and is appropriate. 

But, unfortunately, it looks like in at least initial rules from the 

Fed, that will not be the case unless further work is done. So we 

would ask for, in your oversight capacity, if you could work with 

the Fed to encourage them to amend the proposed rule and include 

general account and separate account exemptions for covered fund 

ownership by insurance companies. We think that would go a long 

way toward preventing too much regulation that does create expense. 

Chairwoman BIGGERT. Do you think that there have to be some 

statutory ways to fix this or can it be done just by not having the 

regulations or getting them to change? 

Mr. CHAMNESS. I think the regulatory process would be the first, 

and the easiest, step right now in terms of the Fed’s actions. 

Longer term perhaps legislation could also help clarify it, although 

we think that the language in Dodd-Frank was fairly clear about 

exempting insurance companies from the Volcker Rule. 

Chairwoman BIGGERT. Thank you. My time is almost over, so I 

will yield back. I recognize the ranking member, Mr. Gutierrez, for 

5 minutes. 

Mr. GUTIERREZ. Thank you very much, Madam Chairwoman. 

First of all, I think we should distinguish—most people are going 

to think that it is their car insurance company or their home insurance company that we are really talking about here today in terms 

of who it is we need to be really vigilant about. I don’t particularly 

have a problem. My credit card company, I think I have to watch 

them like a hawk, because they change the rules every day. All 

Americans should watch them, that is why Congress has passed. 

My bank, they love new fees and new connivances. All the time I 

have to watch them. I don’t particularly have to watch my insurance company. If you get in a car accident, you call them up, and 

they fix it. They debit it from your account, they are reliable. I 

don’t have a real problem with them. 

But what we haven’t discussed is, what about AIG? Now everybody says oh, well, that is not us, but it is. It is an insurance company, it is a large insurance company that made a lot of bad bets, 

a large insurance company that we had to put tens of billions of 

dollars into in order to make the markets solvent and calm. And 

it just seems to me that it isn’t only the premiums that we pay to 

our insurance company that covers our car and our home and our 

life. Actually the insurance companies invest that money and when 

you have markets and they invest it in the markets, in capital markets as a matter of fact. I know we have said a lot about them. You 

heard a lot of testimony about how insurance companies invest in 

bonds, and keep our economy going. If you go and you evaluate 

why it is that municipalities are going into bankruptcy, they will 

tell you it is primarily because of the economy, but underwriting 

that economy are the home values and the inability to collect taxes 

18 

on those homes and the high foreclosure rate. So if you buy bonds, 

you want to make sure that our economy is strong, because you are 

a big bond holder, according to the testimony of the three representatives of the insurance companies, that is what it is that you 

buy. So we want to make sure that is there and that our economy 

is strong. We want you guys to have—but we also want to make 

sure that as you—the other thing is it just seems to me that insurance companies sell other products. They sell annuities which are 

directly tied to the capital markets which can fluctuate in value 

and if people make demands. I have another wonderful life insurance company, but if I were to get into trouble I would have to call 

it in and I am sure other people, and even though they have been 

in business for 150 years and they are a mutual, who knows why 

it was people would make demands on that and make a rush on 

that. 

I want to make sure that we have within the scope of our conversation and dialogue today to understand that insurance companies are in the market, they are affected directly by actions of the 

market. And I can certainly see where it is that we might want to 

make some distinctions between insurance companies and other financial institutions. Certainly, that should be something that we 

should take a look at. But let’s make sure that we understand 

there is a correlation and there are—and we still have the AIGs 

of the world that we need to deal with, and we need to make sure 

that we have supervision so that it doesn’t happen again. Illinois 

can’t watch AIG, Connecticut can’t watch it. They can’t watch it. 

We need someone who is going to watch it. 

I would like to just ask Mr. Birnbaum one question, and that is 

the expense, could you talk about what is the expense? There has 

a been a lot of talk here today that this is burdensome and it is 

costing jobs and that it is very expensive, the regulatory apparatus 

we have. Could you speak to that? 

Mr. BIRNBAUM. To some extent, yes, thank you. The cost of regulation is a very small portion of the amount of premium that consumers pay for all sorts of insurance. And I think the other thing 

that is really important to keep in mind is that insurance is really 

a pooling of consumers’ money. What insurance companies do is 

they take consumers’ money and they put that into a risk pool to 

diversify the risk of all those consumers. So when my colleagues on 

the panel say that insurers invest in capital markets, they invest 

in real estate, they buy municipal bonds, it is really policyholders 

who are buying those assets. The insurance companies are the 

intermediaries that are doing that. 

The other thing that insurance companies do with policyholdersupplied funds is they spend it on lobbying and regulatory activities. So in my view, the cost of actual regulation at the State insurance level and now at whatever is left at the Federal level is a relatively small portion of the premiums that consumers pay. It is like 

pennies on the dollar. 

Mr. GUTIERREZ. I guess their argument is, and it is one that I 

think we should take a look at, if you could just answer, should 

they be treated differently than other—than investment banking 

firms and banks? 

19 

Mr. BIRNBAUM. To the extent that insurance companies are doing 

different things than investment banks and commercial banks, 

than other types of financial institutions, they should be treated 

differently. But to the extent that they are doing the same things 

as banks or other types of financial institutions, then it seems reasonable that there would be a consistent set of rules for different 

players doing the same thing. 

Mr. GUTIERREZ. Thank you. 

Chairwoman BIGGERT. It looks like some of the other witnesses 

would like to respond to that, so I will yield you another minute. 

Mr. CHAMNESS. If I could just add one thing, as far as I am 

aware, the one insurance company that at one point in time 

seemed to behave a bit like an investment bank was AIG, and I 

am not aware of any other insurance company at this point, at 

least within our membership, the mutual insurance industry on the 

property casualty insurance side, that exhibits any characteristic 

other than that of home, auto, commercial line insurance that is required for our economy and for the existence of homeownership and 

driving our cars and operating our businesses. 

Mr. GUTIERREZ. I can’t—is that correct? It sounds good to me. 

Mr. BIRNBAUM. As I pointed out in my testimony, the life insurance industry certainly had problems following the financial crisis. 

They not only applied for TARP funds but they also went to insurance regulators seeking capital relief in the form of changed accounting rules and lower reserve requirements. And the property 

casualty insurers certainly made use of those changed accounting 

rules to beef up their capital on paper without actually creating 

new assets to protect consumers. 

Mr. QUAADMAN. If I could just add as well, with AIG you had a 

situation where, number one, the traditional insurance portions of 

business were fine, they were solid. But AIG got involved in selling 

insurance and financial products that quite frankly, the regulators 

didn’t understand. The regulators couldn’t perform the appropriate 

oversight, which is what endangered the company. But with insurance, if there is a problem with the company, the policyholders remain whole, and that was true with AIG as well. 

Chairwoman BIGGERT. I guess we could go on, this is a very good 

question, but we will move on to Mr. Hurt, the vice chairman of 

the subcommittee. 

Mr. HURT. Thank you, Madam Chairwoman, and thank you for 

holding this hearing. I thank the witnesses for appearing and I 

apologize for not being here for your testimony, but I do thank you 

for your input on this important hearing. I want to follow up on 

something that Mr. Chamness and the Chair were talking about, 

and that is the application of the Volcker Rule and what the effect 

for insurance companies and shareholders as consumers, what the 

effect will be in the event that a final Volcker Rule restricts insurance companies’ ability to invest. I was hoping, Mr. Birnbaum, that 

you could address that issue, and then I would like to hear from 

Mr. Chamness. I would like to hear him expand on what he was 

talking about earlier in terms of what are the potential effects, unintended and intended, in the event that takes place? 

Mr. BIRNBAUM. Sure. Thank you, Congressman. If we look to 

what happened with AIG, even within the insurance companies, 

20 

there was some risky investing on the part of AIG. In my testimony I discussed AIG’s use of security lending, in which they actually loaned out securities that were owned by the insurance companies. And with the cash that they got for loaning those out, they 

invested in risky assets like residential mortgage-backed securities. 

So when the borrowers of those securities came back and said, we 

want our cash back, AIG didn’t have the money, because the residential mortgage-backed securities which were so risky had devalued so much. And at its peak, we are talking about $76 billion 

in securities lending. 

So within the insurance company there was that type of thing 

that went on and regulators didn’t know about it at the time. 

Now, having said that, if AIG was involved in these other activities like credit default swaps, why would we exempt the entire 

group just because AIG had insurance companies? Why would we 

exempt the entire operation from any oversight over these trading 

of risky derivatives? It seems to me that Congress got it exactly 

right when you said that when you are engaged in the business of 

insurance, the Volcker Rule doesn’t apply. When you go outside of 

that, then there is going to be some oversight on the use of derivatives and that kind of trading. 

Mr. HURT. Okay. I would like to hear from Mr. Chamness and 

anybody else who would like to comment in my allotted time, but 

when you are talking about prohibiting a certain source of investments, there are going to be consequences, and I would like to have 

a better understanding from you all what those negative and positive consequences will be. 

Mr. CHAMNESS. Thank you for the question. I think I agree with 

where Mr. Birnbaum ended up, which is that there are two separate rules, Congress got it right. Volcker basically exempts insurers 

from the preemption that was designed for banks. 

The fact is that insurance companies depend on their investment 

income that helps pay—it helps add surplus and increases their capacity to do business and serve policyholders. So to have some kind 

of unintentional restriction on their ability to invest with their own 

accounts was not what Congress intended, and we would like to 

make sure that in the Fed’s regulatory process, that is clarified. 

Further, in terms of large insurance holding companies or savings and loan holding companies that have insurance affiliates, one 

concern is that because they have separate investment affiliates, 

again unintentionally or Congress’ intention was to not prohibit 

these insurance companies from being able to invest in their separate investment affiliates, we are concerned with the way the Fed’s 

regulation has been drafted that could in fact be the outcome, that 

there would be some prohibitions on the savings and loan holding 

companies that are affiliated with insurance companies. And we 

think that through your oversight if you could help urge the Fed 

to let go of that, it would be helpful. 

Mr. HURT. Thank you. Mr. Quaadman? 

Mr. QUAADMAN. Yes, Mr. Hurt, thank you. Just to add two 

things, Federal Reserve Governor Tarullo testified before the committee at this very table on January 18th on the Volcker Rule and 

banning proprietary trading, that the proprietary trading was not 

a cause of the financial crisis. So the rule itself and its application 

21 

on the insurance industry does not deal with the financial crisis 

itself. 

The other issue is that the regulatory complexity of the Volcker 

Rule, and I know Ranking Member Gutierrez raised JPMorgan 

Chase before. I only raise that in the context that you have the 

trade which has been well-publicized now, you have 100 examiners 

embedded within JPMorgan Chase, here we are 3 months after 

that trade was first reported in the press, and those examiners still 

cannot say whether or not those trades were proprietary. The Federal Reserve and the OCC and the SEC and the CFTC and the 

FDIC, how are they going to be able to say, millions of trade a day 

in the marketplace are either proprietary or not. It is just an unworkable system. 

Mr. HURT. Thank you. And my time has expired. I thank the 

Chair, and I yield back. 

Chairwoman BIGGERT. The gentleman’s time has expired. Mr. 

Miller of California is recognized for 5 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, Madam Chairwoman. 

Just so there is no confusion, no one is arguing that there shouldn’t 

be strong capital standards. We argue that there should be appropriate capital standards, and that is where the confusion lies. 

Mr. Chamness and Dr. Hartwig, we have heard concerns that the 

Federal Reserve’s new capital requirements for savings and loan 

holding companies that are owned by insurance companies, can you 

explain why insurance companies and banks currently have different capital standards? And if the Fed chooses a more bank-centric standard as currently imposed, how would that impact the insurance industry? 

Mr. HARTWIG. Maybe I will start, and then I will hand it off to 

Mr. Chamness. I don’t think it comes as any surprise that banks 

and insurance companies have different capital standards today. 

There are also different accounting standards that exist between 

them. It gets back to the very heart of what we were talking about 

originally. These are very, very different enterprises. Insurers historically have always been operated on a very, very conservative 

basis. They have been regulated historically of course by the 

States. The States have developed over time a form of regulation 

that has worked quite well, if we look at the history of 120 years 

of insurance regulation. 

Over the past century or more when we look at banks which 

have had quite frankly a history of volatility, a situation where 

every 15 to 20 years there seems to be some extreme problem in 

the banking sector. The most recent financial crisis is only the 

most recent example of that. So over time we have developed two 

completely different systems, that address two different industries. 

And again, as I mentioned, when we think about the insurance industry we have to think about an industry where we have a particular type of liability which is fundamentally different from the 

sorts of liabilities that we see in a banking operation. And that 

leads to a much more conservative form of operation in the insurance industry than we have seen historically. 

So maybe with that, I might want to turn it over to Mr. 

Chamness. 

22 

Mr. CHAMNESS. Yes, thank you for the question. And it is a good 

issue. Congress authorized the Fed to set capital standards for savings and loan holding companies and we think it is a difficult task. 

But I think the best first step for the Fed would be to basically 

adopt the regulation standards or capital standards that are in 

place right now in the State insurance regulation system. We are 

concerned that there will be a one-size-fits-all approach. As we talk 

about the difference between the banking industry and the insurance industry and their balance sheets, their purposes, their behavior over the decades, there are significant differences, and so we 

don’t think a one-size-fits-all capital approach is appropriate. We 

know that in the hundreds of pages in the Fed’s June 7th riskbased capital proposal, which is intended to implement Basel III, 

there is frankly an inappropriate look at insurance capital requirements, it would redefine capital, eliminating some of the forms of 

capital used by the insurance industry, particularly mutual insurance companies, for more than 100 years, structures like surplus 

notes which are subordinate to regulatory approval, but a form of 

debt that is counted as surplus. We think that is a problem with 

current regulation on the savings and loan holding company capital. 

We were encouraged that last week Chairman Bernanke testified 

that the Fed is at work recognizing the differences between insurance and bank holding companies and that they would recognize 

them and implement based on the differences between the two 

companies. And we think capital standards is surely an area where 

there deserves to be some difference. 

Mr. MILLER OF CALIFORNIA. If he follows up with a statement, 

you would probably would be fine. 

Mr. CHAMNESS. Excuse me? 

Mr. MILLER OF CALIFORNIA. If he follows up with a statement, 

you would probably would be fine. 

Mr. CHAMNESS. Exactly. I will tell you if they continue on the 

one-size-fits-all approach, which we disagree with, they at least 

should have a longer implementation period. Right now, Basel III 

is on track for, I think, January of next year. There is no way insurance companies, these large, newly regulated by the Fed insurance companies, can be in compliance by then. 

Mr. MILLER OF CALIFORNIA. And that wasn’t the direction of Congress either. It was very clear. 

Mr. CHAMNESS. It wasn’t. They would need at least 3 years, but 

we would rather they didn’t have to comply. 

Mr. MILLER OF CALIFORNIA. Mr. Chamness, I have a question. I 

was reading your testimony. You say, ‘‘Potential adverse impacts of 

the Dodd-Frank Act upon the insurance industry’s ability to act as 

an investor will have serious consequences for Main Street businesses.’’ My question has two parts. First, can you explain to the 

committee how regulations stemming from Dodd-Frank could inhibit the insurance and its ability to make critical investments in 

the U.S. economy? And second, is there a domino effect for the 

business and jobs and other sectors of the U.S. economy if they 

take their course? 

Mr. QUAADMAN. Sure, and thank you for the question. I think the 

Volcker Rule is probably the most stark example where we had the 

23 

subjective regulatory approval or disapproval of trades. And if insurance gets wrapped up in proprietary trading, either they have 

to rethink their investment strategies or they actually have to start 

to leave some of the markets because the insurance industry as a 

capital provider with equities but also with debt because the debt 

markets far outweigh the equity markets, is a big provider of capital. So if they feel there are regulatory impediments in going into 

those markets, that becomes problematic. Also, I think it is important to realize that this isn’t happening in a vacuum, particularly 

in the insurance industry. You have Dodd-Frank, you mentioned 

Basel III, you have the rewriting of insurance accounting rules, you 

have solvency too that is being negotiated. Those are also impacts 

that are going to be felt by the insurance industry. But the capital 

impacts on the insurance industry are also subject to other capital 

providers as well. And as they retrench, and I think you have seen 

that a little bit, what will happen is if companies find that it is 

going to be more difficult to raise capital in the debt and equity 

markets, not only is there going to be less capital there, companies 

are going to have to have larger cash reserves. So if you look at 

the United States as traditionally about 14 percent of GDP or $2.2 

trillion, if you start to ramp up to numbers that you see in the EU, 

which is about 21 percent, that is $3.3 trillion, which means that 

is $1.1 trillion that is taken out of a productive means for the economy. 

Mr. MILLER OF CALIFORNIA. Thank you. I yield back. 

Chairwoman BIGGERT. The gentleman yields back. The gentleman from California, Mr. Sherman, is recognized for 5 minutes. 

Mr. SHERMAN. My focus is on insurance that isn’t called insurance. Basically, when we use the insurance industry to shift risk, 

I pay a small fee, and if something bad happens to me, you the industry writes me a big check. We have insurance reserves for that 

and through this great economic crisis the regulated insurance 

companies have done quite well. And if I had an $80 billion portfolio of mortgage-backed securities and I come to you for insurance 

and say please ensure that this portfolio will never be worth less 

than $70 billion, I believe that would be an insurance contract and 

you have to have reserves. But instead we could evade the insurance laws by saying we will do something different. Give me the 

option to put to you my $80 billion portfolio in return for $70 billion of U.S. Treasuries. And that isn’t an insurance contract. If it 

doesn’t have any reserves, it could take the whole economy down, 

and it almost did. 

What do we do so that ‘‘pay a small fee, get a big check if something bad happens’’ contracts are subject to either Federal or State 

insurance regulation and have adequate reserves? 

Why don’t I address that first to Mr. Birnbaum? 

Mr. BIRNBAUM. Thank you, Congressman. I think that is exactly 

the approach in the Dodd-Frank Act, which basically says that insurance is regulated by the States as it has been and to the extent 

that insurance companies are engaged in insurance activities, their 

activities are in fact regulated by the States. When insurance companies start engaging in noninsurance activities, then Federal regulators get involved. And that only makes sense. It was not only— 

24 

Mr. SHERMAN. For these purposes, a credit default swap would 

be classified, I would say misclassified, as a noninsurance activity? 

Mr. BIRNBAUM. That is right. State insurance regulators looked 

at credit default swaps and said they were not insurance. 

Mr. SHERMAN. Looking of course at the legal technicalities rather 

than the economic substance. 

Mr. BIRNBAUM. The bottom line on that was while State insurance regulators were regulating the insurance subsidiaries, the insurance companies of AIG, they weren’t looking at what AIG was 

doing with credit default swaps. So whether you believe that insurance regulators did a great job with the insurance company subsidiaries, they weren’t able to look at the broader picture. 

Mr. SHERMAN. The ship didn’t sink and there was a terrible 

storm. That is my definition of being a good ship builder. So I will 

give them credit for that. 

Let me turn to the three insurance industry representatives 

here. As representatives of the insurance industry, can you at least 

name one aspect of the Wall Street Reform Act that you believe has 

improved the industry? 

Mr. CHAMNESS. I appreciate the question, and I think the derivatives regulation was generally helpful and an improvement postDodd-Frank. 

Mr. SHERMAN. Mr. Quaadman? 

Mr. QUAADMAN. Thank you, Mr. Sherman. First of all, thank you 

for all of your hard work on lease accounting. We greatly appreciate what you did there. I would also say that the clearing of derivatives for financial speculation purposes was a good thing. We 

think there should be an exemption for corporate end users but we 

do think that derivatives clearing was good. 

Mr. HARTWIG. I might just add in addition to the derivatives, the 

fact of the matter is that Dodd-Frank did explicitly recognize the 

unique nature of insurance, by and large. We are here today talking about some residual issues and some issues which I don’t think 

were intended ultimately by the act by Congress, and we are here 

to discuss those today. 

Mr. SHERMAN. Thank you very much. I yield back. 

Chairwoman BIGGERT. The gentleman yields back. The gentleman from North Carolina, Mr. McHenry, is recognized for 5 minutes. 

Mr. MCHENRY. Thank you, Madam Chairwoman. Thank you all 

for your testimony, and thank you for being here today. And Mr. 

Quaadman, in your written testimony, you say potential adverse 

impacts of the Dodd-Frank Act upon the insurance industry’s ability to act as an investor will have serious consequences for Main 

Street businesses. Explain. 

Mr. QUAADMAN. Sure. As I mention in my oral statement as well, 

the insurance industry is the largest investor in the world, both 

globally and within the United States. They are key players in the 

debt and equity markets and are the largest holders of both instruments. So in that context, the insurance industry is a main provider of capital for Main Street businesses, large and small. If 

there are regulatory impediments that start to seep through DoddFrank, and if the insurance industry has to retrench into investment strategies, that will make it more difficult for Main Street 

25 

businesses to tap capital. The other thing that is important to recognize, too, as the insurance industry is a large investor, they have 

to do so through regulatory oversight. So they are not investing in 

junk; they are investing in highly rated products in good companies. 

Mr. MCHENRY. So what happens if they pull out from—you outlined about a trillion dollars of pull out potentially if we look like 

Europe in terms of regulatory structure for insurance. What does 

that mean? Tell me what that means for my constituents. 

Mr. QUAADMAN. What that means is that the person who is going 

to be on Main Street or the businesses that are in your district, 

there is going to be less capital to go around, there is going to be 

less liquidity to go around. 

Mr. MCHENRY. Which means higher rates for what is then available? 

Mr. QUAADMAN. That is correct. 

Mr. MCHENRY. So the availability of credit goes down. 

Mr. QUAADMAN. Yes. 

Mr. MCHENRY. Your access to it goes down even more. 

Mr. QUAADMAN. That is correct. 

Mr. MCHENRY. And that which is available is more costly. 

Mr. QUAADMAN. That is correct. And you also have a different 

distribution of capital. So as other forms of capital have to take the 

place of, let’s say, insurance, that entrepreneur who is in the garage trying to make the next big product isn’t necessarily going to 

have any funds available for him to be successful. 

Mr. MCHENRY. Mr. Birnbaum, do you see it the same way? 

Mr. BIRNBAUM. No, Congressman. No, I don’t really see it that 

way. I am having a hard time following the concept that any restrictions on sort of noninsurance investments by an insurance 

company that is part of a savings and loan holding company will 

somehow result in insurance companies removing a trillion dollars 

from their investment portfolio. It just doesn’t make any sense. Insurance companies gather policyholder funds and put that into a 

risk pool to protect the policyholders. And in doing so, they invest 

that in a variety of things. So why would they at some point decide, 

we are going to go on strike, we are going to put that money in 

cash and not invest it? It just doesn’t make sense to me. 

Mr. MCHENRY. Mr. Quaadman, how does it make any sense? 

Mr. QUAADMAN. As I said before, and this is on a macro level, 

if insurance and other investors are no longer available to be players in the capital markets, companies are going to have to increase 

cash reserves, and that is where we came up, that is why I mentioned before about the $1.1 trillion that is taken out, because companies are going to have to hoard the cash and they are going have 

to also change their borrowing strategies as well. 

To give you one example with a mainline company, their costs 

when they go out and sell commercial paper is 47 basis points. 

When you start to add in the Volcker Rule itself, that probably 

adds in another 50 basis points, but more importantly, if the commercial paper market is shut down for that company’s purposes because of the regulatory scrutiny of the Volcker Rule, which is not 

an unusual circumstance, or may not be an unusual circumstance, 

they then have to access bank lines of credits which are prime plus 

26 

1, or at this point 4.25 percent, almost 10 times the amount. So 

that is among the ways that capital costs will increase for mainline 

businesses. 

Mr. MCHENRY. So in short, regulation inhibits access to credit 

and drives up the cost of credit. 

I have no further questions. I think it is self-evident that the cost 

of Dodd-Frank is real to consumers, and if we don’t get this thing 

right, we are going have an even worse impact on the economy 

than we have already seen. 

With that, I yield back. 

Chairwoman BIGGERT. Thank you, and I will yield myself another round. 

Mr. Quaadman, you note in your written testimony that when reviewing the Dodd-Frank Act, policymakers must take into account 

the impact upon capital formation for nonfinancial industry and 

ameliorate negative impacts. You say that failing to do so will consign the economy to anemic growth and the United States will not 

be able to create the 20 million jobs over 10 years needed for a 

prosperous economy. 

Can you help this committee understand the impact that the insurance industry has on the U.S. economy, specifically with respect 

to prosperous growth and job creation? 

Mr. QUAADMAN. Sure. And thank you very much for that question. As we look at these issues, we look at it from the vantage 

point of if a corporate treasurer has to be to go into the capital 

markets, how does it impact them? And what has happened with 

Dodd-Frank and when Congress looked at Dodd-Frank, I think 

what had happened is that policymakers looked at the financial 

services industry itself and decided to go after the financial services industry but didn’t realize that the industry itself was really 

just a conduit between investors and businesses. So that if you 

start to tinker around with the Volcker Rule, insurance may not be 

exempt from the Volcker Rule. When you start to look at different 

aspects of it like that, when you see the insurance industry as 

being the largest investor in the United States for businesses, those 

regulatory impacts have an impact upon the corporate treasurer’s 

ability to raise capital, both for everyday liquidity needs but also 

for growth opportunities. So if businesses don’t have access to capital and can’t expand, they can’t create jobs. 

Chairwoman BIGGERT. Thank you, and just one more question, 

to you or whoever wants to answer this. You note in your testimony that a quandary for regulators in the insurance industry is 

the designation and regulation of Systemically Important Financial 

Institutions (SIFI). 

How would the designation and regulation of SIFIs under the 

Dodd-Frank Act affect the insurance industry and the U.S. economy? 

Mr. QUAADMAN. I thank you very much for that. I think it has 

effects in two ways. First, as has been said before, the regulations 

with systemic risk and the Orderly Liquidation Authority (OLA) 

are very bank-centric. So you have the Federal Reserve, you have 

the FDIC, they are really looking at it through the traditional lens 

as a bank regulator. The problem is when you start to take a look 

at nonbanks that could be designated. So let’s take insurance as an 

27 

example. You have an industry where you have a long-term 

matchup of asset and liability, which is much different than banks, 

if you take a look at nonfinancial companies, you have Congress actually trying to keep as many of those companies out of it. But 

what has happened is that the Federal Reserve has been looking 

at the implementation of this through very bank-like ways. So they 

have not been willing to create regulations that deal with different 

business models and that is going to cause regulatory mismatches. 

The second way that I think it negatively impacts it is that when 

you take a look at the bank-centric system, the FDIC system of insurance really spreads the cost and the risk as well as the opportunities around the entire industry when a bank goes under. When 

you take a look at nonfinancial companies and insurance companies, if they are going to go under the risk of loss is on management and the shareholders of that company. Now if you start to 

designate insurance companies and nonfinancial companies, they 

are going to be operating under a risk of loss where they are dealing with the assessment system within Title II that means that 

their risk of loss may be different than their competitors, and that 

could have negative impacts on the economy. 

Chairwoman BIGGERT. Thank you. Dr. Hartwig, would you like 

to comment on that? 

Mr. HARTWIG. Sure, just to follow up on that. It is somewhat odd, 

as we currently see under Dodd-Frank, that we would have large 

insurance companies that are not designated as Systemically Important Financial Institutions but pass some sort of threshold of 

say $50 billion or so that ultimately wind up having to clean up 

the pieces for what goes on down at Wall Street. And as I think 

as we just heard we are talking about a situation where insurers 

that are not involved in any of these businesses, that are not even 

designated as Systemically Important Financial Institutions have 

to in effect hold capital aside, particularly if economic times look 

dark, not because of their own particular operations, which could 

be run to the most exacting standards of the States in which they 

are regulated. They could have a top rating, an A-plus rating from 

the ratings agencies like A.M. Best but nevertheless still now have 

to set aside capital in the event that some company over which 

they exercise no control goes under. And that could have the impact of reducing the availability and increasing the cost of insurance to all consumers. 

Chairwoman BIGGERT. Thank you. Mr. Chamness? 

Mr. CHAMNESS. Just one thing. I certainly agree with what has 

been said so far, but I would add one point we haven’t talked about 

yet, which is an unintended consequence, but if you are a property 

casualty insurance company and you are deemed systemically significant, the market may view you as too-big-to-fail; in other words, 

absolutely secure and most likely to pay claims. And we obviously 

would see that as a disruption in the insurance marketplace because it would not be Congress’ intent or the regulators’ intent to 

give a SIFI designation in the insurance industry the role of making that SIFI designated insurer some kind of ‘‘super-sound, toobig-to-fail, most-likely-to-pay claims’’ participant in the market. 

Chairwoman BIGGERT. Thank you. 

28 

And with that, I would like to ask unanimous consent to insert 

the following materials into the record: a June 24, 2012, statement 

from the American Council of Life Insurers; and a June 24, 2012, 

statement from the Property Casualty Insurers Association of 

America. 

Chairwoman BIGGERT. With that, I would like to thank all of the 

witnesses. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in 

writing. Without objection, the hearing record will remain open for 

30 days for Members to submit written questions to these witnesses and to place their responses in the record. 

With that, I would like to thank you all. You have been a wonderful panel and the expertise that you all have, even though you 

may not all agree exactly with each other, but we really appreciate 

the views that you have brought to us today. This has been a very 

important hearing. Thank you very much. 

With that, this hearing is adjourned. 

[Whereupon, at 4:08 p.m., the hearing was adjourned.] 

(29) 

A P P E N D I X 

July 24, 2012 

30 


76121.001

Statement by Rep. Bill Posey (FL-1S) 

Hearing on "The Impact of Dodd-Frank's Insurance Regulations on 

Consumers, Job CI'eators, and the Economy" 

House Subcommittee on Insurance, Housing and Community Opportunity 

July 24, 2012 

Chairwoman Biggert, Ranking Member Gutierrez and colleagues: 

Thank you for the oppOltunity to speak before the Insurance subcommittee today. 

I devoted a great deal of time to insurance issues as a legislator in Floridainsurance ofall kinds, not just the type Florida's weather tends to inspire 

discussions about. 

1 

Florida is a large state, with many different kinds of insurance-related challenges to 

deal with. Last year, premiums written by propelty/casuaIty insurance companies 

in Florida totaled over $37 billion; premiums by life and health insurance in 

Florida totaled over $42 billion. Premium taxes paid in Florida were over $667 

million in 2010. Those are big numbers, but behind the numbers are real people 

and real families. 

I don't know anyone who likes to pay insurance premiums, let alone higher 

premiums. No one likes to think about the day when they might need that policy to 

be there for their home, or car, or to help provide financial security after the 

passing of a loved one. But, when insurance functions as it is supposed to, we 

appreciate its value to help us manage life's many risks. It is important that we in 

Congress get this issue right because it affects virtually everyone we know and 

care about. 

I have our discussion draft bill that would address a problem brought to our 

attention with the new financial regulation bill, Dodd-Frank. Madam Chairwoman, 

I would like to submit for the record the latest draft ofthis bill to address this 

problem. 

Last November, this Subcommittee had a hearing on discussion draft legislation 

that would except insurance companies from the FDIC's new "Orderly Liquidation 

Authority" and "Orderly Liquidation Fund" for large Wall Street institutions, and 

those detennined to be systematically important, or as some say, "Too Big To 

Fail." 
31 


76121.002

2 

Under Dodd-Frank, the FDIC, the traditional banking regulator and insurer of 

deposits, oversees the new fund for these mega-financial companies. Whatever 

views my colleagues may have regarding bailouts - and I oppose them - I hope we 

can correct an injustice in Dodd-Frank that impacts insurance companies and our 

constituents. 

Right now, the FDIC has the power to assess fees to create this new fund. 

However, in addition to assessing big Wall Street firms, for which the fund is 

intended, the FDIC can force insurance companies to pay into it. This is the case 

even though they are not eligible to use and do not need the fund. The insurance 

sector could be footing the bill for failed Wall Street firms. Back home, this means 

our constituents, the ones who pay the premiums, will have to pay higher insurance 

rates to cover tisks on Wall Street. Why should our constituents pay higher life or 

propeliy/casualty insurance premiums for bad decisions on Wall Street? 

This draft bill would exempt insurance companies from paying into the liquidation 

fund. It is similar to a draft circulated and discussed by this Subcommittee last 

November, but I believe it has been improved with the help ofthc Chaitwoman 

and others interested in this issue. 

The insurance industJy did not cause the financial crisis. As we debated DoddFrank, we seemed to agree that regulation of insurance was generally best left to 

the states. For decades Congress has recognized that state authorities have the 

expeliise, proximity, track record, and federalist Constitutional authority to 

regulate insurance. Insurance companies pay into state guaranty funds to deal with 

insolvencies. 

Shaking down insurance companies for Wall Street failures has big economic 

consequences, considering the insurance sector provides millions of jobs and tens 

of billions of dollars in state and federal revenue (propeliy-casualty and life $18 

billion in 2010). Insurance companies invest in the capital markets: in U.S. 

government, municipal and other bonds and securities. We may take it for granted, 

but insurance helps pay for projects like roads and schools. 

In closing, forcing insurance companies to pay twice, into the state guaranty funds 

and the new federal liquidation fund, could have widespread repercussions for our 

constituents and the economy. Thank you again for the 0ppOliunity to speak today. 

I hop~ we can work together on a common sense fix to address this issue. 
32 


76121.003

Statement of Birny Birnbaum 

Executive Director 

Center for Economic Justice 

Before the 

Subcommittee on Insurance, Housing and Community Opportunity 

Committee on Financial Services 

U.S. House of Representatives 

"The Impact of Dodd-Frank's Insurance Regulations 

on Consumers, Job Creators, and the Economy" 

July 24, 2012 

Chairman Biggert, Ranking Member Gutierrez and Members of the Subcommittee, thank 

you for the opportunity to speak on the impact of the Dodd Frank Act (DF A) on insurance 

consumers, insurers and the economy. My name is Birny Birnbaum and I am Executive Director 

of the Center for Economic Justice (CEJ). CEJ is a non-profit organization advocating on behalf 

of consumers on insurance, credit and utility issues. I have been intimately involved in insurance 

regulatory policy issues for over 20 years as a regulator and as a consumer representative. I have 

been an active participant at the National Association of Insurance Commissions (NAlC) and the 

National Conference of Insurance Legislators (NCOIL) for many years. 

To evaluate the impact of the DFA on insurance consumers and insurer, it is necessary to 

review how the insurance industry contributed to, and was impacted by, the financial crisis 

starting in 2007. Representatives of the insurance industry have argued that the property 

casualty industry was not responsible for the economic crisis and poses negligible risk to the 

financial system.1 Industry has also testified that state-based insurance regulation has been 

adaptable, effective and responsive to local and regional markets.2 

My experience and observation is that insurers did contribute to the financial crisis and 

the limitations of state-based insurance regulation became apparent as the crisis unfolded. Statebased insurance regulation certainly has its strengths, but the DF A has assisted and strengthened 

state-based insurance regulation. 

J Andrew Furgatch on behalf of National Association of Mutual Insurance Companies before the Subcommittee on 

Insurance, Housing and Community Opportunity, July 28 201. 

2 Andrew Furgatch, July 28, 2011 
33 


76121.004

Statement of Bimy Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

On the property casualty side, we must start with the spectacular collapse of AIG, which 

resulted in a massive taxpayer bailout. AIG certainly contributed to the financial crisis because 

of its huge bets on credit default swaps. While state insurance regulators have argued that it was 

the non-insurance subsidiaries of AIG and not the insurance companies of AIG which caused the 

collapse of AIG, the fact remains that state insurance regulators were not able to monitor AIG at 

the broader holding company level. State insurance regulators had, and have, limited expertise 

with the non-insurance aspects of a holding company with significant insurance operations. 

In addition, state insurance regulators missed risky investment activities by AIG insurers 

involving the lending of securities. An NAIC Capital Markets Special Report3 describes how 

insurer investments contributed to the failure of AIG: 

As we analyze securities lending within the insurance industry, one incident that proved 

to be an invaluable lesson was with American International Group (AIG). Firm-wide risk 

management inefficiencies are believed to have played a significant role in AIG's overall 

financial stress. Although it is most known for the significant losses to AIG Financial 

Products' (AIGFP) credit default swap (CDS) portfolio, the onset of an overwhelming 

demand for returned cash by AIG's securities lending counterparties compounded the 

overall firm's liquidity constraints. 

Through its securities lending program, AIG generally loaned out securities owned by its 

insurance company subsidiaries. Between 2005 and 2007, rather than invest the cash 

collateral it received from the borrowers in conservative, short-term securities, AIG 

changed the direction of its investment strategy (without disclosing such change in its 

notes or to the U.S. state regulators) and mostly invested the cash in long-term subprime 

residential mortgage-backed securities (RMBS). AIG's securities lending portfolio had 

not been included on the company's balance sheet due to a liberal interpretation of the 

accounting requirements; therefore, there was no transparency with regard to how AIG 

had invested the borrowers' posted cash collateral. U.S. regulators became aware of this 

change in investment strategy during a financial examination in early 2007. Investing in 

the RMBS resulted in an asset/liability maturity mismatch, and, as it is common 

knowledge, these securities experienced significant market value declines as the financial 

crisis emerged. Due in part to the financial distress brought about by AIGFP's CDS 

portfolio losses, the borrowers in AIG's securities lending portfolio began to return the 

borrowed securities, requesting the return of their cash, to reduce their exposure to A I G 

as a firm. AIG was unable to meet the growing demands for cash by its securities 

borrowers; to do so meant that they would have to sell the subprime RMBS collateral that 

was now illiquid due to severe market devaluations. Liquidity constraints that developed 

due to losses on its CDS portfolio were made worse, therefore, by those developing 

within AIG's securities lending business. 

3 http://www.naic.orgicapital markets archivell10708.htm 

2 
34 


76121.005

Statement ofBirny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24,2012 

At its peak, AIG's securities lending program had reached approximately $76 billion of 

borrowings outstanding. With the assistance of regulators, AIG was able to reduce this 

exposure to approximately $59 billion before the U.S. government bailout. In November 

2008, the Federal Reserve Board and U.S. Treasury announced a restructuring of the U.S. 

government's financial support to ArG. Consequently, the Federal Reserve Bank of New 

York created Maiden Lane II LLC (ML II) in November 2008 to "alleviate capital and 

liquidity pressures on ArG associated with the securities lending portfolio of several 

regulated U.S. insurance subsidiaries of AIG". Funds provided by ML II were used to 

purchase RMBS from AIG's securities lending portfolio to help raise cash to return to the 

securities lending borrowers. As of year-end 2008, ML II had an estimated fair value of 

$20.5 billion (or $39.3 billion par value). 

While ArG's losses stemming from its securities lending program did not directly cause 

the changes in treatment of securities lending by the insurance industry, it did highlight a 

lack of transparency and varying interprctations of the accounting language relatcd to 

these investments. 

Financial Guaranty Insurance 

There were other types of property casualty insurers which contributed to and were 

dramatically impacted by the financial crisis, including financial guaranty and mortgage 

insurance. Financial guaranty insurers - also known as bond insurers mistakenly provided 

assurance for a variety of asset-backed securities, contributing to the sale of risky and destinedto-fail mortgage-backed securities. The table below shows the premiums and losses for financial 

guaranty insurers from 2001 through 201].4 After years of paying few claims in relation to 

premium, the bottom fell out starting in 2007. From 2001 through 2006, financial guaranty 

insurers earned about $13.6 billion in premium while paying out just 9.2% in claims. From 2007 

to 20 II, financial guaranty insurers incurred almost $37 billion in claims - more than 2.5 times 

the premium earned. 

The financial guaranty insurance market has collapsed. In 2006, financial guaranty 

insurers wrote about $3.4 billion of premium. By 20 II, the remaining financial guaranty 

insurers still pennitted to write new business wrote only $1.1 billion in premium. Further, the 

weakness and failure of financial guaranty insurers ripple through the economy because the 

absence of financial guaranty insurance can create great difficulties for states and municipalities 

to issue debt. State insurance regulators have tried to help a large, weak financial guaranty 

insurer by splitting off the municipal bond insurance portion of the business from the assetbacked security part of the business. 

4 Data for 200 I to 20 I 0 from NArC Market Share Reports for Property/Casualty Groups ond Companies, various 

years. Data for 2011 from Annual Statement State Page data compiled by CEJ. 

3 
35 


76121.006

Statement ofBirny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

Table 1: Financial Guaranty Insurance, 2001-11 

Earned Incurred 

Premium Losses 

Year ($ Millions) ($ Millions) Loss Ratio 

2001 $1,422 $41 2,9% 

2002 $1,867 $133 7.1% 

2003 $2,389 $182 7.6% 

2004 $2,474 $392 15.8% 

2005 $2,686 $297 11.0% 

2006 $2,725 $200 7.3% 

2007 $3,023 $3,949 130.6% 

2008 $4,011 $19,239 479.6% 

2009 $2,663 $6,669 250.4% 

2010 $2,332 $4,186 179.5% 

2011 $2,084 $2,846 136.6% 

2001-06 $13,564 $1,244 9.2% 

2007-11 $14,113 $36,889 261.4% 

2001-11 $27,677 $38,133 137.8% 

Mortgage Guaranl.Y Insurance 

The private mortgage guaranty insurance market also contributed to and was crushed by 

the financial crisis. Today, the Federal Housing Authority is supporting the mortgage market by 

providing increased amounts of mortgage insurance. Table 2 shows the performance of private 

mortgage insurers from 200 I to 2011.5 As with financial guaranty insurance, after years of very 

low loss ratios, mortgage insurers' poor risk management resulted in massive losses starting in 

2007. The weak financial condition of mortgage insurers PMI caused the Arizona insurance 

regulator to order the company stop writing new business in October 2011. MGIC received a 

waiver of minimum capital requirements in order to continue writing new business in 2009 and a 

second waiver was granted two years later by the Wisconsin insurance regulator.6 

5 Data for 200 I to 2010 from NAIC Market Share Reports Jar Property/Casualty Groups and Companies, various 

years. Data for 2011 from Annual Statement State Page data compiled by CEl. 

6 "State Regulators Approve New Waivers for MIs," Insider Mortgage Finance, January 25, 2012 at 

http://www.insidemortgagefinance.com/blogs/Mls-Obtain-New-Waivers-J000018864-J.html 

4 
36 


76121.007

Statement of Bimy Birnbaum 

The Impact ofthe Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

Table 2: Primate Mortgage Insurance, 2001-2011 

Eamed Incurred 

Premium Losses 

Year ($ Millions) ($ Millions) Loss Ratio 

2001 $4,131 $1,064 25.8% 

2002 $4,572 $1,321 28.9% 

2003 $4,904 $1,876 38.3% 

2004 $5,040 $2,008 39.8% 

2005 $5.,105 $1,833 35.9% 

2006 $5,362 $2,210 41.2% 

2007 $5,877 $5,503 93.6% 

2008 $6,384 $13,586 212.8% 

2009 $5,632 $12,014 213.3% 

2010 $4,901 $7,838 159.9% 

2011 $4,490 $8,737 194.6% 

2001-06 $29,1l4 $10,311 35.4% 

2007-11 $27,285 $47,677 174.7% 

2001-11 $56,399 $57,988 102.8% 

Title Insurance 

Title insurers also contributed to the financial crisis by facilitating dangerous and risky 

home mortgages. The third largest title insurers, with 20% national market share failed. In all 

but one state, there is no guaranty fund for failed title insurers. If a title insurer fails, the title 

insurance policies - which are supposed to remain in force as long as the lender has the insured 

loan in place and as long as the borrower owns the property - cease to exist and borrowers would 

be required to purchase new title insurance policies for lenders. In the case of the LandAmerica 

failure, the failed insurer was taken over by another insurer thereby avoiding an insolvency that 

would have roiled mortgage markets and borrowers. The title insurance market now features 

four large national insurers writing over 85% of all title insurance? 

7 Based on First Quarter 2012 countrywide market share. 

5 
37 


76121.008

Statement of Birny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

Force-Placed Insurance 

A discussion of the property casualty insurance and the financial crisis is not complete 

without mention of force-placed home insurance, As part of their mortgage agreements, 

borrowers agree to maintain insurance on the property serving as collateral for the mortgage 

loan. If the borrower fails to maintain the required insurance, the mortgage servicer force-places 

insurance on the property and charges the borrower for that force-placed policy. Table 3 shows 

the growth in high-cost force-placed home insurance (FPI). Despite significantly less coverage 

and fewer expenses than a regulator homeowners policy,S the average cost of a FPI policy is 

much greater than a homeowners policy. In Florida, the average LP[ premium for one of the two 

large insurers writing nearly all the LPI business was over $6,500 from the period July 2008 

through June 2009.9 For consumers experiencing financial stress, the imposition of a hugely 

expensive FPI policy can make the task of staying or getting current on the loan insurmountable. 

Regulators in New York, Florida and California have begun to take action this year to address 

excessive rates, but for many years, insurance regulators took no action to address the high rates 

of FPI and the large sums paid directly or indirectly to mortgage servicers by the FPI insurers. 

Table 3: Force-Place Home Insurance, 2004-2011 10 

Net Written 

Premium 

Year ($ Millions) Loss Ratio 

2004 $796 33.1% 

2005 $919 53.5% 

2006 $1,074 29.0% 

2007 $1,647 20.5% 

2008 $2,209 23.3% 

2009 $3,049 20.7% 

2010 $3,223 17.3% 

2011 $3,450 24.7% 

2004-2011 $16,368 24.2% 

, FPI does not include coverage for contents, liability or additional living expense following a catastrophic event. 

9 CEl Testimony Regarding Praetorian Insurance Company Rate Filing for Force-Placed Insurance before the 

Florida Office ofInsurance Regulation, Taole 4, based on data presented by the insurer in its rate filing. 

10 Data source is Credit Insurance Experience Exhibit data from the creditor-placed home columns of part 4 plus the 

experience ofQBE Insurance Corp and QBE Specialty reported in part 5 Other.. compiled by CEl. 

6 
38 


76121.009

Statement of Birny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

Life Insurance and Annuities 

The life insurance industry was greatly impacted by the financial crisis. Life insurers 

sought reI ief from the federal government in the fonn of T ARP funds and from state insurance 

regulators in the fonn of lower claims reserve requirements and changed accounting standards to 

indicate greater capital with no change in the amount of funds available to protect consumers. 

The problems experienced by the life insurance industry stem from the fact that life 

insurer products have been transfonned over time from mortality protection to market return 

protection. Instead of selling products that simply pay claims in the event of death or long life, 

life insurers' products began to guarantee market returns, News articles from 2009 describe the 

situation: 

Many life-insurance companies, like others in the financial sector, got caught carrying too 

much risk when the financial crisis hit. Some were hurt by their variable-annuity 

businesses, under which they sold products often linked to equity markets that promised 

minimum payouts even if markets fell. Insurers also lost money on investments in bonds, 

real estate and other assets that back their policies, 

The life-insurance industry is a Iynchpin of the financial system, providing millions of 

Americans with a safety net, and is an important source of savings and wealth 

management. An erosion of confidence in the industry could cause customers to redeem 

policies and create a cash crunch for some companies. Insurers also are big sources of 

capital throughout the economy, as they invest the premiums they receive from customers 

into bonds, real estate and other assets. Access to federal aid should help life insurers 

avoid further credit-rating downgrades and the need to raise capital under onerous tenns. 

On Thursday, an industry trade association hailed the news. "By extending funds to 

certain insurers, Treasury is taking the right step toward helping restore lending and 

liquidity to the marketplace," said Frank Keating, President and CEO of the American 

Council of Life Insurers, II 

The news will come as a relief to a number of iconic American companies that have 

suffered big losses made worse by generous promises to buyers of some investment 

products, Shares of life insurers have fallen more than 40% this year. Their troubles led 

to a string of rating-agency downgrades that, in a vicious cycle, made if more difficult for 

some insurers to raise funds. 

11 Wall Street Journal, "u.s, Slates $$ Billion for Insurers from TARP," May 15,2009. 

7 
39 


76121.010

Statement of Birny Birnbaum 

The Impact ofthe Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

The life-insurance industry is an important piece of the U.S. financial system. Millions 

of Americans have entrusted their families' financial safety to these companies, so 

keeping them on solid footing is crucial to maintaining confidence. If massive numbers 

of customers sought to redeem their policies, it could cause a cash crunch for some 

companies. And because insurers invest the premiums they receive from customers into 

bonds, real estate and other investments, they are major holders of securities. If they 

needed to sell off holdings to raise cash, it could cause markets to tumble. 

Life insurers had for a time seemed to be somewhat immune from the credit crisis, since 

they tend to invest in relatively safe assets in order to match their liabilities. These 

companies got into trouble for two main reasons, both tied to the weak financial markets. 

First, many of the roughly two dozen insurers that dominate the variable-annuity business 

made aggressive promises on these popular retirement-income products, guaranteeing 

minimum returns, no matter what happened to the stock market. With the market's 

decline, the issuers are on the hook for big payouts, though most of the payments won't 

come due for 10 or more years. Second, the insurers also have lost money on the 

investments in bonds and real estate that back their policies. 12 

The life insurance industry came under financial stress because instead of the traditional 

role of insurers in diversifying risk through pooling of many lives, many vehicles or many 

properties, the insurers assumed the role of guaranteeing market returns. Insurance regulators 

never identified or examined the potential for systemic risk to the financial system associated 

with insurance companies taking on ever greater promises of consumers' return on market 

investments. 

NATC Capital Relieffor Insurers 

In November, 2008, the life insurers went to state insurance regulators and the NAIC 

seeking "capital relief." The insurers asked for lower reserve requirements and changes to 

accounting rules. The changes to accounting rules were intended to increase the amount of 

assets recognized by state insurance regulators as acceptable for meeting capital requirements. 

The principal change was a greater recognition of deferred tax assets. With this change, insurers 

were able to state greater amounts of capital while, in reality, no additional funds were available 

to protect policyholders. 

The NAIC appointed a working group, which worked quickly to recommend NAIC 

adoption of most of the insurer requests. But, in January 2009, under strenuous protests from 

consumer organizations, the NAIC voted not to adopt the capital relief measures and to examine 

the proposals more carefully. NAIC President Roger Sevigny stated "Simply put, the industry 

has not made a credible case for why we need to make changes on an emergency basis, and why 

those changes should be limited to the specific proposals made by the industry.,,13 

12 Wall Street Journal, "U.S. to Offer Aid to Life Insurers," April 8, 2009 

13 NAIC News Release, "Regulators Deny Industry'S Request to Lower Capital, Surplus Standards," January 29, 

2009. 

8 
40 


76121.011

Statement of Birny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 20 J 2 

At that point, several states granted the capital relief by allowing their domestic insurers 

to deviate from the insurance accounting rules through state exceptions, These actions created a 

crisis for state insurance regulation as states which had not granted the capital relief to their 

domestic insurers had to choose between accepting and rejecting the other states' actions, The 

remaining states, through the NAIC, were eventually forced to adopt the capital relief proposals 

to maintain something close to consistent solvency regulation across the states, 

The Dodd Frank Act Has Benefitted Insurance Consumers and State Insurance Regulation 

This history of insurers and state insurance regulation leading up to and following the 

financial crisis is essential for evaluating the costs and benefits of the DF A on insurance 

consumers and insurance companies, The DFA has been very beneficial to insurance consumers 

and has improved the capabilities of state insurance regulation. 

Federal Reserve Regulation 

The DFA created the Financial Stability Oversight Council (FSOC) with the authority to 

designate a financial firm as systemically important and subject to supervision by the Federal 

Reserve. In addition, insurance companies that are part of a holding company with a bank or a 

savings and loan are subject to holding company supervision by the Federal Reserve. Given the 

history of failed oversight at the holding company level of AIG, these provisions of the DFA are 

reasonable and necessary. While the NAIC has attempted to improve its tools for supervision of 

holding companies with insurance subsidiaries, it is unclear what expertise insurance regulators 

have regarding the non-insurance activities of these holding companies. In addition to assigning 

the Federal Reserve the responsibility to bank and savings and loan holding companies with 

insurance operation, the DFA provided institutions to assist and inform the Federal Reserve in its 

efforts, including the Federal Insurance Office (FlO) and a member ofFSOC with insurance 

expertise. As stated in the 2012 FSOC Annual Report, the Federal Reserve recognizes the risks 

and characteristics of insurers and the need to coordinate with state insurance regulators: 

In addition to its existing responsibility for supervision of a BHC that is a major life 

insurance company, on July 21, 2011, the Federal Reserve assumed responsibility for 

over 25 SLHCs that engage in significant volumes of life, property and casualty, or title 

insurance underwriting. The unique aspects of the insurance industry are addressed in 

various regulations that have been published for the BHC and SLHC populations. The 

Federal Reserve developed and implemented a spccialized supervisory approach and 

customized supervisory guidance that reflects the risks and characteristics of the industry. 

This approach includes communications and coordination with state insurance regulators, 

In addition, the DFA, by creating the FlO, provides the federal government with a subject 

matter expert on insurance to help FSOC identify systemically risky firms. The identification of 

systemic risk posed by insurance companies and cooperative supervision of holding companies 

remains vitally important, The need is illustrated by state insurance regulators recent actions 

with a relatively new product offered by life insurers the contingent deferred annuity (CDA). 

9 
41 


76121.012

Statement of Birny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

The COA is a derivative sold to investors whieh guarantees lifetime benefits if the 

investor's portfolio is depleted before the investor dies. Unlike an annuity sold by the insurance 

company for which the investor transfers the assets to the insurance company, the COA is a 

stand-alone guarantee. Instead of proceeding with caution on this new product given the 

problems insurers encountered with market-guaranty products in 2008 and 2009, the regulators 

are doubling down on the risky products. State regulators review of this product did not include 

an analysis of the potential for systemic risk posed by a product guaranteeing benefits after 

investments have been depleted from millions of retirees who would need the product in the 

same general time period in the event of a major market downturn. The existence of the FlO to 

provide broader analysis and the FSOC to address systemic risk is a huge benefit for insurance 

consumers from the OFA and fills a major gap in state insurance regulation. 

Resolution Authority 

The OFA gives the FOIC orderly resolution authority over a non-bank financial company 

under certain circumstance and if the failure would have serious adverse impacts on the financial 

stability of the country. This is another common-sense component of the OFA. To the extent 

that the state guaranty fund system is able to deal with the insolvencies of insurers, the FOIC's 

authority would not be required. But the state guaranty fund system is not comprehensive. As 

mentioned above, title insurers - whose product is necessary for mortgages to be sold are not 

covered by guaranty funds. With two title insurers controlling two-thirds of the market and four 

title insurers controlling over 85% of the market, a failure by a top title insurer could pose 

systemic risk. 

Volcker Rule 

The OF A includes a provision - the Voleker Rule - that limits certain proprietary trading 

and speculative investments in derivatives. The OF A provides an explicit exemption from the 

Voleker Rule for investment activity of insurers. To the extent insurers engage in these 

investments for hedging purposes and are subject to state regulatory oversight, the Volcker rule 

would not apply. However, to the extent that insurers engage in proprietary trading for purposes 

other than the business of insurance, it is reasonable and necessary for this activity to be subject 

to the Volcker rule. 

Federal Insurance Office 

The creation of the FlO by the OFA is a great benefit to insurance consumers, the 

insurance industry and state insurance regulators. In addition to serving as the federal 

governemnt's insurance subject matter expert and assisting with the identification of 

systemically risky products and institutions, the FlO creates a true federal representative to 

participate in international insurance trade and regulatory issues in coordination with state 

insurance regulators. The interests of the insurance industry are better represented than before 

the FlO was created. Prior to the OF A, individual states and the NAIC entered in regulatory 

agreements with other countries and the NAlC was the voice of the United States in international 

regulatory issues. The OF A, through the FlO, strengthens the ability of state insurance 

regulators on international issues. 

10 
42 


76121.013

Statement ofBirny Birnbaum 

The Impact of the Dodd Frank Act's Insurance Regulations on Consumers, Job Creators and the Economy 

July 24, 2012 

The DFA also authorized the FlO to examine issues of insurance availability and 

afrordability in traditionally underscrved areas. Insurance has long been recognized as essential 

for individual and community economic development and access to affordable insurance is 

necessary for individual to build and protect assets. Most state insurance regulators individually 

and the NAIC as an organization have, for decades, refused to examine and analyze availability 

issues. In particular, state insurance regulators have consistently refused to collect the detailed 

data necessary to even assess the state insurance availability and affordability in low-income and 

minority communities, The DFA gives the FlO authority to collect data from insurance 

companies, if and only if, those data are not otherwise available and not collected by state 

insurance regulators. 

The Consumer Financial Protection Bureau 

The most important part of the DF A for consumer protection was the creation of the 

CFPB. Although the CFPB has no jurisdiction over insurance products, the CFPB has and will 

continue to help insurance consumers as well as consumers of other financial products. The 

CFPB will work to ensure that financial products sold arc transparent to consumers and, by doing 

so, will enable markets to operate more effectively to prevent the sale of dangerous and abusive 

financial products. The financial system is safer because of the CFPB. 

In addition, the CFPB, with other federal regulators, will help fill the gaps created by 

insurance products sold in connection with loans - like payment protection and force-placed 

insurance. The CFPB recently took action to stop unfair and deceptive sales of payment 

protection products. which are the banking analog to consumer credit insurance regulated by 

state insurance regulators. The CFPB's action to stop unfair sales of payment protection stands 

in contrast to the limited activity of state insurance regulators regarding sales of consumer credit 

insurance. The CFPB and other federal regulators have taken steps to improve the performance 

of mortgage servicers, including servicer standards for force-placed insurance. In the void left 

by state insurance regulators, the CFPB has helped protect the insurance consumers 

Conclusion 

The DF A has produced solid benefits for insurance consumers, the insurance industry 

and state-based insurance regulation. 

11 
43 


76121.014

~IVIIC ;® 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Statement 

of 

National Association of Mutual Insurance Companies 

to the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Insurance, Housing and Community Opportunity 

Hearing on 

Dodd-Frank: The Cost to Insurance Consumers and Investments in 

Business and the Economy 

July 24, 2012 
44 


76121.015

Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24,2012 

Page 2 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to offer 

comments to the House Financial Services Subcommittee on Insurance, Housing and 

Community Opportunity. 

We are 1,400 property/casualty insurance companies serving more than 135 million 

auto, home and business policyholders, with more than $196 billion in premiums 

accounting for 50 percent of the automobile/homeowners market and 31 percent of the 

commercial insurance market. We are the largest and most diverse property/casualty 

trade association in the country, with regional and local mutual insurance companies on 

main streets across America joining many of the country's largest national insurers who 

also call NAMIC their home. More than 200,000 people are employed by NAMIC 

members. 

Property/casualty insurance is a fundamental pillar of the United States economy. Its 

continued functioning is critical to our ability to return the country to robust growth, and it 

is imperative that we carefully consider any action that might impair the insurance 

industry's ability to protect individuals and businesses. 

To their credit, in crafting the Dodd-Frank Wall Street Reform and Consumer Protection 

Act ("DFA") 1, legislators recognized that the business of property/casualty insurance 

was not the cause of the recent financial crisis and that it is unique within the financial 

services sector. As a result, the industry was not the focus of the new financial 

regulations that were put in place and was specifically excluded from the purview of the 

Consumer Financial Protection Bureau. However, the scope of the DFA has led to 

many changes in how insurance companies - particularly those that are large and 

diverse - deal with regulation by the federal government. Despite not being the target 

of much of the new financial services regulatory regime, the DFA has led to an 

enormous amount of uncertainty for insurers. 

We commend the committee for its diligent oversight and review of the DFA and urge 

Congress to continue its oversight of the federal institutions responsible for 

implementing the Act. As we move forward, we also urge Congress to move 

expeditiously to rectify the unintended consequences that are inevitable in any 

legislative initiative of this size and scope and to hold the agencies accountable for strict 

adherence to the letter and spirit of the legislation. For the insurance industry, the focus 

should remain on preventing unneeded and damaging interference in a well-functioning 

system. 

We thank the committee for the opportunity to discuss the critical role property/casualty 

insurance plays in our markets and share some of our ongoing concerns in a number of 

specific areas. 

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat 1376 

(2010). ("Dodd-Frank") 
45 


76121.016

Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

The Importance of Insurance 

Page 3 

Any assessment of the impact of the DFA on the property/casualty insurance industry 

must begin from an understanding of how the industry interacts with the broader 

economy as a whole. The constituents of our industry include policyholders (individuals 

and businesses), taxpayers, insurance companies, agents, and others affected by the 

insurance underwriting process. All would be impacted by market distortions caused by 

ill-conceived regulation. 

Insurance is simply the transfer of a risk of a loss, from one person or entity to another, 

in order to protect oneself, one's property, or one's business from potential future 

events. Without the protection offered by NAMIC members and others, the incidence of 

business failure and personal financial ruin due to natural catastrophe or lawsuit would 

be dramatically higher, leading to far fewer start-ups and less economic growth. 

Insurance is the mechanism that has allowed people to take the risks of owning 

property or starting a business that is critical to the nation's economic vitality. 

In addition to assisting in the management of risk,the property/casualty insurance 

industry plays a key role in the economy through its operations and investments. Latest 

figures show there are 2,689 property/casualty insurance companies currently doing 

business in the United States. According to the Insurance Information Institute, the 

property/casualty insurance industry employs upwards of 600,000 people not including 

agents and brokers. 2 

The importance of the industry in the economic wellbeing of states and local 

communities can be demonstrated in three major ways. First, insurers are required to 

pay premium taxes (usually 2 percent of their total direct written premiums) to state 

treasuries. In 2010, this amounted to $15.8 billion for the entire insurance industry, or 

$51 for every person in the country. This figure represents 2.2 percent of all state 

taxes. 

Property/casualty insurance companies had $1.3 trillion in cash and invested assets on 

hand in 2010. Much of this amount is invested in highly liquid securities (stocks and 

bonds) that allow insurers to quickly turn the securities into cash if they are suddenly 

faced with paying claims as a result of a catastrophic event. Through a significant 

portion of these investments, insurance companies help fund the construction of 

schools, roads, and health care facilities, and a variety of other public sector projects 

through municipal loans and bonds. The property/casualty insurance industry invested 

$331billion in such bonds in 20103 

A final way that insurers contribute to their local communities is through their charitable 

giving. In 2010, property/casualty insurance companies contributed a total of $500 

2 http://www.iii.orgifacts statisticsicareers-and-employment.htrnl 

J Board of Governors of the Federal Reserve System, June 7, 2012 
46 


76121.017

Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

Page 4 

million to charities, 80 percent of which came through direct cash contributions. The 

remainder represented employee cash donations and volunteer hours. About a third of 

the money went to support educational endeavors. 

Over the last several years the property/casualty insurance industry has withstood the 

challenges of the financial crisis and weak economic recovery, as well as severe 

catastrophe losses. Last year ranked as the fifth most expensive year recorded for 

insured catastrophe losses, totaling $33.5 billion in the United States alone. 4 Profits 

dropped by about one half for the industry between 2010 and 2011 simply from the 

underwriting losses experienced. 

Despite all that, the property/casualty insurance market remains highly competitive and 

well-capitalized with surpluses exceeding pre-financial crisis highs. Even amid severe 

financial turmoil, there were no major failures of property/casualty insurers and the 

industry as a whole greatly outperformed other financial services sectors. The 

sustainability and resiliency of our industry stems from the regulatory system in place, 

the unique nature of property/casualty insurance, the industry's low leverage ratios, its 

relatively liquid assets, the lack of concentrations in the marketplace and the 

conservative business models adopted by the industry. 

As an example of such a business model, one of the common threads that bind NAMIC 

members together is our mutuality. The mutual philosophy is grounded in the belief that 

people and organizations can achieve great things when they work in concert toward 

common interests. The guiding purpose of a mutual company has always been to serve 

its policyholders. As mutuals, we exist solely for the benefit of our members there are 

no shareholders. Premiums are paid into a common fund to cover policyholders' claims 

and the company takes a long view toward protecting their communities rather than 

their quarterly earnings report. 

Uncertainty in the Insurance Market 

The state-based system of insurance regulation was left largely intact by the DFA. 

Entirely new regimes were not created to focus on the property/casualty insurance 

industry. Yet that did not prevent the legislation from creating uncertainty regarding the 

future regulatory environment. 

Office of Financial Research 

The DFA created the Office of Financial Research ("OFR") within the Department of the 

Treasury and charged it with conducting financial analysis in support of the FSOC, 

looking at ways to standardize financial reporting requirements, developing a reference 

database, making financial data efficient and secure, and producing regular reports to 

Congress on threats to the financial system and its key research and findings. 

4 hltp:llwww.iii.orglarticles/2011-year-end-results.html 
47 


76121.018

Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

Page 5 

The jurisdiction of the OFR is vague and there is potential for the office to grow beyond 

its scope as an information clearinghouse. In addition, the OFR has almost unlimited 

power to subpoena financial companies including insurers - for information. The OFR 

raises concerns for insurers regarding duplicative calls for information, standardization 

and presentation of data, and confidentiality of information. Insurers have additional 

concerns regarding the type of information to be presented in the "publicly accessible 

database." Without context, this type of public information could be misleading and 

could pose concerns regarding confidentiality and proprietary information .. 

Insurers, like other financial institutions, will also be assessed new fees to fund the work 

of the OFR. There is legitimate concern that the assessment base used will not 

appreciate the difference in financial structure between banks and insurance entities 

and assessments will not apply fairly between all financial institutions. 

Insurers have concems over the size and scope of the OFR and the unchecked ability 

to expand and impose additional regulatory and expense burdens on insurance 

companies and their customers. NAMIC believes that sufficient, high quality information 

on the insurance industry is collected, analyzed and maintained by state regulators and 

that additional information collection, analysis and dissemination by the OFR is 

unnecessary. 

Consumer Financial Protection Bureau 

In the legislative language of the DFA, all lines of property/casualty insurance were 

expressly excluded from the jurisdiction of the Consumer Financial Protection Bureau. 

To date the bureau has worked within that jurisdiction. For example, NAMIC raised 

concerns with the construction of the complaint database and requested that insurance 

related complaints be excluded. We are pleased that the CFPB accepted our 

recommendations and constructed the online complaint database to direct anyone with 

an insurance complaint directly to the corresponding state regulator. 

However, we remain concerned there are multiple avenues that the CFPB might pursue 

which would needlessly sweep the property/casualty industry under its regulations. 

NAMIC is concerned that the CFPB could seek to assert supervisory control over 

insurance company operations - which were explicitly excluded from its jurisdiction - by 

redefining insurance companies as other types of financial operators. Such an outcome 

is inconsistent with congressional intent and would disrupt the functional regulatory 

balance. 

Federal Insurance Office 

Although the Federal Insurance Office ("FlO") is meant to be a source of information 

and expertise and not a regulator, it was granted the authority to subpoena insurance 

companies for information as well as preempt state law for the purposes of complying 
48 


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Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

Page 6 

with international trade agreernents. While it may be a rare occurrence when the FlO 

utilizes either of these powers, the fact rernains that the office has them and it leads to 

further uncertainty about future regulation and compliance. NAMIC commends the 

committee for continuing to seek reassurances that FlO understands that its role is to 

monitor the insurance industry, not to regulate it, and to resist efforts to expand the 

authority of the office to supervisory functions. We also continue to urge FlO Director 

Michael McRaith to utilize his office to monitor the work of federal financial regulatory 

agencies and educate these agencies about the differences between insurance and 

banking, ensuring that federal regulatory proposals properly respect the authority of the 

states to regulate the business of insurance. 

Volcker Rule 

Section 619(a) of the DFA prohibits banking entities from engaging in proprietary trading 

and from investing in or sponsoring hedge funds and private equity funds. Congress 

recognized the importance of appropriately accommodating the business of insurance 

and provided an exemption from the Volcker Rule for an insurance company acting on 

behalf of its general account. Section 619(d)(1 )(F) provides that, notwithstanding the 

prohibitions of Section 619(a), investing in "securities and other instruments described 

in subsection (h)(4) by a regulated insurance company directly engaged in the business 

of insurance for the general account of the company and by any affiliate of such 

regulated insurance company" is a permitted activity. 

Further, Dodd-Frank mandated that the Financial Stability Oversight Council ("FSOC") 

study and make recommendations on implementing the Volcker Rule to "appropriately 

accommodate the business of insurance within an insurance company, subject to 

regulation in accordance with the relevant insurance company investment laws, while 

protecting the safety and soundness of any banking entity with which such insurance 

company is affiliated and of the United States financial system." 

Despite this clear direction, the complexity of legislative language and the absence of a 

final rule have generated unnecessary uncertainty about whether investment limitations 

will in fact be imposed upon property/casualty insurers affiliated with an insured 

depository institution. Straying from the legislative intent to accommodate insurers 

would have the unintended consequence of severely restricting investment options, 

including ones that involve minimal risk. Allowing insurers to continue in their nomnal 

regulated investment activity from their general account, including engaging in 

proprietary trading and owning private equity and hedge funds, is essential to allow 

insurers to appropriately engage in effective investment strategies, including matching 

investment portfolios to anticipated liabilities. 

A number of changes will be necessary in the proposed rules to ensure that the 

application does not jeopardize insurance company operations, including investments in 
49 


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Comments of the National Association of Mutual Insurance Companies Page 7 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

covered funds, the use of separate subsidiaries and participation in compliance 

programs. 

With respect to covered funds, there is a concern as to whether the insurance company 

exemptions for proprietary trading apply to such investments. Covered funds include 

traditional hedge funds, private equity funds, and other funds such as certain foreign 

funds and commodity pools. The legislative history of Dodd-Frank shows that Congress 

clearly intended to exclude insurance company activities from the scope of the Volker 

Rule prohibitions on investments in covered funds. 

Insurance companies invest in covered funds for the same reasons they invest in other 

types of assets - to ensure a sound investment strategy that will facilitate policy 

performance over the long-term, to effectively diversify portfolio holdings, and potentially 

eam higher returns. The ability to diversify an insurance company's investments is 

important to creating a balanced portfolio. Covered funds, provide a means by which 

companies can reduce correlation risk as they are less highly correlated with traditional 

stock and bond investments because of their short-term trading strategies. Investment 

in covered funds permits insurance companies to properly align both income streams 

and asset class durations with liabilities. The ability to engage in such investment is 

critical for insurance companies with long-tail policies in which the liability for coverage 

may not arise for a significant period of time. Lastly, covered funds provide insurance 

companies with access to high quality assets with potentially higher rates of retum than 

other traditional assets. 

Restricting the ability of insurance companies to utilize these investment asset classes 

would frustrate prudent long-term investment planning and introduce competitive 

disadvantages for insurance companies affiliated with depository institutions. It would 

be economically punitive for insurers if their investment trading were restricted so that 

they could no longer utilize their long-established basic business models. Therefore, in 

compliance with congressional intent and to protect the financial stability of insurance 

companies it is essential that the agencies amend the proposed rule to include General 

Account and Separate Account Exemptions for acquisition or retention of ownership 

interest in a covered fund by a covered banking entity that is an insurance company. 

In addition to investing in covered funds, various state insurance laws allow an 

insurance company to invest in, or organize subsidiaries which may invest in, 

instruments on behalf of the parent insurance company. Under Section 13(d)(1)(F), 

affiliates of regulated insurance companies are permitted to purchase, sell, acquire, or 

dispose of assets for the general account of the regulated insurance company. 

Because such investment activities are specifically permitted, it would be inconsistent to 

deem the affiliate a covered fund sponsored by the insurance company, an activity 

prohibited under the Volcker Rule. Insurance companies should be allowed to organize 

or invest in wholly-owned subsidiaries or affiliates for the purpose of making 

investments, as permitted under applicable state insurance law, without that subsidiary 

being deemed a covered fund. Also, insurance company subsidiaries established under 

state insurance law should be specifically excluded from the definition of "covered fund." 

Such exemptions are consistent with the logic of the proprietary trading exemption and 
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Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24,2012 

Page 8 

the legislative intent of Dodd-Frank that the agencies accommodate the business of 

insurance. 

Lastly, the proposed implementation of the Volcker Rule requires compliance with 

detailed reporting and recordkeeping requirements. These reporting and recordkeeping 

requirements are unnecessary in the context of insurance companies. State regulated 

insurance companies comply with strict investment laws that specify which types of 

assets domestic insurers may hold. Many of these state laws also prescribe limits on 

the amounts of each type of asset that an insurer may hold, as well as limits on the 

amount of investments in a single issuer that an insurer may hold. Additional state laws 

typically require the adoption of a written investment plan, including standards for the 

acquisition and retention of investments by the insurance company and oversight by its 

Board of Directors. State insurance laws also ensure that investments are valued 

correctly. The National Association of Insurance Commissioners' (UNAIC") accreditation 

standards, require that securities be valued according to the rules of the NAIC's 

Securities Valuation Office5 and that other invested assets be valued according to the 

rules of the NAIC's Financial Condition (E) Committee. 

In addition, state insurance regulators provide effective enforcement of the stringent 

financial and investment requirements. The NAIC's Model Law on Examinations, 

adopted in essence by nearly every state, requires each state's insurance department 

to conduct an on-site examination of each company domiciled in that state every three 

(in older versions of the law) or five years. Full- scope examinations are extremely 

thorough and include review of management and internal controls, corporate records, 

accounts, financial statements, and asset quality. 

Dodd-Frank recognizes the validity of state insurance law and regulation unless the 

Federal banking agencies make a showing otherwise. Based on the breadth and 

quality of the state reporting and examination process and the statutory recognition of 

the state regulatory system, it is appropriate to exempt insurers from reporting and 

record keeping requirements of the Volcker Rule, including the compliance program 

requirements. 

Failure to include an exemption for insurance operations, allow investment in covered 

funds and continue the use of qualified subsidiaries will subject these companies to 

costly and duplicative regulation and reporting requirements and thwart the sound 

investment practices designed to ensure solvency and stability in insurance markets. 

Our view is supported by the recent statement of the House Appropriations Committee 

that "the Committee believes that the traditional investment activities of state-regulated 

insurance companies for their general accounts, including investing in both sponsored 

and third-party funds, are preserved by the law without constraint." We urge the House 

Finance Service Committee, as well as the Appropriations Committee, to ensure that 

the revised regulations fulfill Congressional intent. 

5 The SVO is a NAIC staff office that assigns asset quality designations (NAIC-1 for the highest quality, 

through NAIC-6 for obligations in default) and valuations. 
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Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

The Federal Reserve 

Page 9 

Before the passage of the DFA, insurance companies that owned thrifts and were 

organized as Savings and Loan Holding Companies ("SLHCs") were regulated at the 

holding company level by the Office of Thrift Supervision ("OTS"). The OTS was 

eliminated in the DFA and the Federal Reserve Board (the "Federal Reserve") was 

given responsibility for holding company regulation. While the Federal Reserve has 

experience and expertise in supervising and regulating traditional banking operations, it 

does not have a history of insurance company regulation. To successfully incorporate 

insurance-connected SLHCs into its supervisory regime, it is imperative that the Federal 

Reserve recognize the striking differences between the activities of many of the bank 

holding companies ("BHCs") traditionally regulated by the Federal Reserve and a 

number of insurance-connected SLHCs that will be supervised in the future. 

These distinctions include significantly different financial reporting, accounting 

standards, capital requirements, and other operational activities. The information and 

standards that are critical to supervising a SLHC which is overwhelmingly engaged in 

insurance activities is fundamentally different than the information and standards critical 

to regulating traditional BHCs. The risk and exposure of insurance companies and the 

nature and utilization of their assets and liabilities can be significantly different from 

banks. 

The Federal Reserve should fully recognize the distinct regulatory approaches required 

to properly supervise banks and insurance companies which entail different measures 

for capital, financial strength, and stability. In other words, it is not appropriate to 

mandate an accounting practice that is akin to fitting a square peg of information into a 

round regulatory hole. One size does not fit all, and consequently, the system of 

supervision should be tailored to this economic reality. 

Unfortunately, notwithstanding a genuine effort to understand the business of insurance, 

the Federal Reserve continues to take a bank-centric approach to regulation making 

little allowance for insurance specific standards. For entities new to the Federal 

Reserve regulatory process that are still trying to interpret the meaning of bank-centric 

requirements, there is frequently insufficient time to process and respond to comment 

periods for new rules and regulations. Frequently, there are real and significant 

concerns that need to be addressed. The practical result of some regulations may not 

be immediately apparent and the Congress should urge the Fed to go slow and work 

closely with the insurance companies it now oversees. Furthermore, rather than 

working with state regulators and relying on the professional expertise of the functional 

regulators, the Federal Reserve is engaging in detailed investigations into insurance 

company operations. Such activities are duplicative, time-consuming, and costly for 

both the government and the insurance company, and could lead to conflicting 

determinations between regulators and inappropriate decisions. 
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Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24,2012 

Capital Standards 

Page 10 

One of the greatest challenges some of our companies face today are proposed capital 

standards for SLHCs engaged predominantly in the business of insurance. The capital 

structures and regulatory treatment of bank and insurer capital are markedly different 

because their respective business models are different. In simplest terms, banks take 

deposits and lend those deposits to others in the form of loans. Since depositors 

always have the right to call in their deposits, banking capital regulation is focused on 

asset quality and liquidity to meet depositor demands. In contrast, an insurance 

consumer pays premiums for a contractual promise to pay for a covered loss-such as 

an automobile accident. The insurer does not lend out those premiums, but uses them 

to pay claims and invests them to match expected liabilities. Insurance regulation is 

focused on liabilities, ability to pay claims as they come due, and regulating capital in 

manner that matches assets to liabilities. Naturally, banking regulation has developed 

and evolved around entities engaged predominantly in the business of banking-with 

recognition in recent years that some banks may also have a relatively small insurance 

operation. 

While Congress authorized the Federal Reserve to set capital rules for SLHCs, the 

requirement for capital rules and consistent standards doesn't change the fact that 

many SLHCs are very different than BHCs. 

We understand that the Federal Reserve has an extraordinarily difficult task in 

developing multiple rules under DFA and in addressing areas and companies not 

previously under their jurisdiction. We appreciate the difficulty of the task ahead; 

however, the desire for expediency should not overshadow the fundamental differences 

inherent in the business structures. 

As such we are particularly concerned that in trying to fulfill their obligations, particularly 

as it related to international banking standards under Basel III, the Federal Reserve 

proposed new capital rules for all banks, BHCs, and SLHCs. The June 7th proposed 

rules represent a one-size fits all approach that simply does not make sense for an 

SLHC engaged predominantly in the business of insurance. 

The application of these capital requirements to mutual insurance SLHCs will have 

many Significant consequences. It will require many mutual insurers to adopt new 

accounting practices. It will not fully recognize forms of capital that state insurance 

regulators have recognized for more than a century, like surplus notes. It will result in 

unintended and unwarranted differentiation between stock and mutual insurers who own 

banking organizations. And it will result in significant disruption in business functions in 

advance of the 2013 effective date of the rules. This is obviously not a consequence 

that Congress intended. 
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Comments of the National Association of Mutual Insurance Companies Page 11 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

Under DFA, as passed by Congress, more time for the transition for SLHCs could have 

been provided, but the Federal Reserve chose to start the implementation process for 

all banking organizations in 2013. In comparison, when Basel I capital requirements 

were initially proposed in 1989, banks and their holding companies, who were already 

subject to Federal Reserve capital requirements and already under GAAP accounting, 

were given three years to comply with the new capital structure. 

We will urge the Federal Reserve to consider accepting equivalence of the capital 

standards required by state regulators. If they must have a one-size-fits-all capital 

process then at a minimum they should allow the full three years for insuranceconnected SLHCs to adopt new accounting practices and adjust to the new bank-centric 

requirements. At a bare minimum the Federal Reserve needs to provide more time for 

all interested parties to assess the proposed capital requirements and provide wellresearched comments applicable to the proposed rule. 

We consider it a good sign that while testifying before Congress last week, Chairman 

Ben Bernanke indicated that the Federal Reserve would work to recognize the 

differences between insurance and banking holding companies. In this light, we believe 

the Federal Reserve should recognize state risk-based capital models as providing a 

foundation that can be deemed sufficient to satisfy the minimum risk-based capital and 

leverage requirements of the Collins Amendment. 

Systemic Risk 

Throughout the debate on regulatory reform, we have consistently pOinted out that 

traditional property/casualty insurance products and services do not pose systemic risk 

and the legislative history of the DFA is unambiguous that Congress agreed with us on 

this point. However, we continue to face challenges from federal regulatory agencies 

attempting to establish bank-centric standards and thresholds, which could 

inappropriately result in the designation of an insurer as systemically significant. 

The DFA tasks the Financial Stability Oversight Council ("FSOC") with identifying those 

financial institutions that might pose a systemic risk to the U.S. economy. Any company 

- including non-bank financial institutions such as insurance companies - that is 

designated by the FSOC as a Systemically Important Financial Institution ("SIFI") will be 

subject to heightened capital standards and regulation by the Federal Reserve. NAMIC 

worked with the FSOC to ensure that the six-category analytical framework - size, 

interconnectedness, lack of substitutes, leverage, liquidity risk and maturity mismatch, 

and existing regulatory scrutiny - takes into account insurance specific standards and 

regulatory structures. While we were generally pleased with the final criteria, we note 

that the FSOC rejected an industry wide exception for insurance companies. 

However, the Federal Reserve recently proposed a regulation to apply those same SIFI 

standards to any banking organization with over $50 billion in assets and with 

substantial banking activities, regardless of FSOC designation. NAMIC believes that 

this arbitrary numerical threshold set by the Federal Reserve is contrary to 

congressional intent and ignores the unique nature of certain financial products, 
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Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24, 2012 

Page 12 

including property/casualty insurance. The application of heightened capital standards 

- again, designed with banks in mind - to insurance companies would be unnecessary 

and inappropriate. 

We are concerned also about the confidentiality of information submitted during the 

designation process. The final rule indicates that information collected, from whatever 

source, during FSOC's analysis is subject to the Freedom of Information Act (FOIA), 

including its exceptions. The rule further states that submission of privileged materials 

to the FSOC does not waive any applicable privilege, but we remain concerned, absent 

statutory support, that this may not provide adequate protection. For example, the 

Federal Deposit Insurance Act provides for such protection for materials provided to 

enumerated federal bank regulatory agencies. The FSOC, however, is not among 

those enumerated entities. The CFPB recently attempted to address concerns by 

promulgation of a rule asserting its ability to protect information it receives. In addition, 

NAMIC is concerned that members of the FSOC may share information among 

themselves that is derived from their respective agencies and elsewhere. Although the 

protection from public disclosure of such materials is intended to travel with the 

materials, the FSOC members may share the information with their own agencies for 

enforcement or other purposes, thus expanding the use of such materials for other 

purposes. NAMIC supports passage of H.R. 4014/S. 2099 to ensure that information 

submitted to the CFPB remains privileged under both the attorney-client and work 

product privileges as well as other protections that would guarantee that materials are 

used only for the intended regulatory purpose, not released and that the documents 

retain their attorney-client and work product privileges. 

Resolution Authority 

The state-based resolution authority for insolvent property/casualty insurers is a 

thoughtful, methodical process with a superb track record of protecting insurance 

claimants and policyholders. The state-based guaranty fund system is designed first 

and foremost to protect policyholder and third-party claimant interests. Each state 

provides for priority of these claims over other unsecured general creditor claims. In 

addition, unlike federal resolutions of banking interests, insurance company resolutions 

require adjustment of property/casualty insurance claims dependent on state law and 

requiring detailed and specialized knowledge. 

Subjecting insurance companies, including mutual insurance holding companies, to 

federal resolution would disrupt this well-functioning system. Overlaying federal 

resolution would needlessly complicate the process and likely disadvantage 

policyholders and claimants. NAMIC is pleased that the Federal Deposit Insurance 

Corporation recognized the strength of the state-based resolution system and clarified 

that insurance operations will be resolved under state insolvency laws. Further, NAMIC 

believes that the FDIC properly recognizes mutual insurance holding companies as 

insurance companies. Such treatment is consistent with legislative intent and best 

serves insurance policyholders and claimants. The proposed criteria are appropriate to 

identify a bona fide mutual insurance holding company and consistent with the goal of 
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Comments of the National Association of Mutual Insurance Companies Page 13 

Dodd-Frank: The Cost to Insurance Consumers 

July 24,2012 

conforming state resolution authority for insurance companies with the resolution 

authority of the holding company. 

There is still significant concern that any company above $50 billion in assets -

including mutual holding companies or SLHCs could be subjected to an assessment in 

the event that a federal bailout is needed to unwind a SIFI after failure, This also raises 

the concern about the appropriate assessment base. Any base used for all financial 

institutions will need to address the differences in financial structure between banks and 

insurance entities. More fundamentally, subjecting insurance companies to an 

assessment to pay for a mechanism that they will not need or likely ever make use of 

would be inherently unfair. 

Accounting Standards 

Of particular concern to insurers is the ability to prepare financial statements in 

accordance with Statutory Accounting Principles ("SAP"). State regulators - and 

previously the OTS - accept and use SAP financial statements as opposed to requiring 

such statements be prepared using Generally Accepted Accounting Principles ("GMP") 

for both subsidiary and holding company reporting purposes. Switching the type of 

reporting from SAP to GAAP for those holding companies regulated by the Federal 

Reserve either because of bank-oriented reporting forms or due to international 

pressure is simply not justified by the resulting costs and burdens that would be 

imposed on companies. 

All insurance companies in the United States are required for state regulatory purposes 

to report based on SAP (publicly held insurers are also required to report on a GMP 

basis). The important difference between GMP and SAP is the purpose of each 

system. One of the primary objectives of GMP accounting is to provide important 

financial information to the investing community to make informed decisions on a going 

concern basis regarding whether to invest in publicly traded companies. In contrast, 

SAP reporting was designed from the outset with a solvency focus and regulatory 

purposes in mind (monitoring for solvency and financial soundness) and has a long 

history of highly effective use in the insurance sector. It provides appropriately 

conservative measures of insurance assets and liabilities. The use of SAP is codified in 

all states because its more conservative approach in assessing an insurance 

company's solvency and ability to pay claims, and meet its obligations is the very 

foundation of financial entity regulation. SAP is also well recognized within the 

accounting profession as an Other Comprehensive Basis of Accounting ("OCBOA") and 

like GMP, also allows for audited financial statements. 

Most important from our perspective is that numerous non-publicly traded insurers, such 

as mutual insurance companies, use SAP exclusively or use GMP only on a limited 

basis. Consequently, if the Federal Reserve requires the application of consolidated 

GMP-based accounting solely for purposes of reporting on the FR Y-9, the transitional 

costs will be extraordinary, requiring changes in accounting systems, internal control 

systems, and training of personnel, thereby creating Significant burdens without 
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Comments of the National Association of Mutual Insurance Companies 

Dodd-Frank: The Cost to Insurance Consumers 

July 24,2012 

Page 14 

providing any appreciable benefit in meeting the regulatory goals of safety, soundness, 

and identifying risks in the holding company. Furthermore, although the burdens are 

significant for both small and large insurers, they would be particularly acute in 

instances where the thrift is a relatively small component of the larger insurance holding 

company and further amplified in large insurance companies with relatively small thrifts. 

Finally, the significant costs associated with implementing GAAP solely for SLHC 

reporting purposes, would not obviate the need to continue preparing reports on a SAP 

basis, which would have to be continued for state regulatory purposes. 

Given these considerations, NAMIC does not believe any perceived benefits to the 

Federal Reserve or to companies in mandating the use of GAAP are justified by the 

costs. Furthermore, a SAP based reporting requirement would better align with the 

needs and stated purpose of the Federal Reserve to determine the safety and 

soundness of the insurance-connected SLHC. The burdens associated with requiring 

GAAP-based reporting on SLHC's not otherwise required to produce consolidated 

GAAP statements would be significant and could have adverse consequences, 

particularly in instances in which very large insurance operating companies own 

relatively small thrifts. 

Conclusion 

It is clear that the property/casualty insurance industry plays a key role in the economy 

and every effort should be made to ensure that its markets are functioning. 

Unfortunately, even though the industry was not directly targeted, the DFA has created 

a large amount of potential market turmoil and uncertainty for insurers. NAMIC again 

thanks the committee for its careful attention to our concerns and for its continued 

scrutiny of the implementation of the DFA. As we move forward, we would urge 

Congress to rectify the unintended consequences that are inevitable in any legislative 

initiative of this size and scope. The focus should remain on preventing unneeded and 

damaging interference in a well-functioning system. 
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76121.028

The Impact of Dodd-Frank's 

Insurance Regulations on Consumers, 

Job Creators and the Economy 

House Financial Services Subcommittee on 

Insurance, Housing and Community 

Opportunity 

Testimony of 

Robert P. Hartwig, Ph.D., CPCU 

President & Economist 

Insurance Information Institute 

NewYork,NY 

July 24,2012 

Washington, DC 
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76121.029

Thank you, Representative Biggert, Ranking Member Gutierrez and members of the 

Committee. 

Good afternoon. My name is Robert Hartwig and I am President and Economist for the 

Insurance Information Institute, an international property/casualty insurance trade 

association based in New York City.' I am also a Chartered Property Casualty 

Underwriter (CPCU) and have worked on a wide variety of insurance issues during my 

19 years in the property/casualty insurance and reinsurance industries, including many 

related to the industry's financial performance, capital requirements and structure. The 

Institute's members account for nearly 70 percent of all property/casualty insurance 

premiums written in the United States. Its primary mission is to improve understanding 

of the insurance industry and the key role it plays in the global economy. 

I have been asked by the Committee to provide testimony on the role of the insurance 

industry and the benefits that insurance products and services provide to consumers, job 

creators and the economy. I've also been asked to address concerns associated with 

certain Dodd-Frank provisions affecting insurers that could raise compliance costs or 

adversely affect the structure, capacity or ability of the insurance industry to absorb risk. 

The Role ofInsurance in the Economy 

Insurance is a financial risk management tool that allows individuals and businesses to 

reduce or avoid risk through the transfer, pooling or sharing of risk to a third party. 

While various risk-sharing arrangements have been in existence for millennia, in modem 

times that risk is usually contractually transferred (via an insurance policy) to and 

absorbed by an insurance company. In return for a payment (i.e., the premium), the 

insurer assumes the risks-that is, obligates itself to pay the losses--of all policyholders. 

This simple, efficient and effective arrangement allows the insured party to be protected 

against a multitude of potentially ruinous losses and instead focus on activities that 

produce or prescrve income and wealth and contribute to the creation of jobs by fostering 

investment, innovation and entrepreneurship. 

1 Contact information: Tel: (212) 346-5520; Email: bobhliViii.org. 

2 
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Because virtually any risk that can be quantified can be insured-the use of insurance 

has, over time, become commonplace in most advanced economies. In 20 I 0, worldwide 

combined property-casualty and nonlife insurance premiums totaled $4.3 trillion 

representing 6.9 percent of global Gross Domestic Product (GDP). Collectively, these 

premiums reflect the transfer of hundreds of trillions of dollars in risk exposure to 

insurance companies around the world. Consequently, the welfare enhancing benefits of 

insurance are ubiquitous throughout the economy and society as a whole. No modern 

economy could function as efficiently without widespread use of insurance and many 

activities in today's disaster-prone and heavily litigious society would be impossible 

altogether. 

Scale and Scope of the Insurance Industry in the United States 

The essential nature of insurance has given rise to a very large and dynamic industry in 

the United States with more than a $1 trillion in annual premium income, $4.5 trillion in 

assets and some 2.2 million employees. Below are some facts that summarize some key 

statistics related to the insurance industry in the United States: 

• The U.S. insurance industry's net premiums written exceeded $1.0 trillion in 

2010, with premiums recorded by Iifelannuity (LI A) insurers accounting for 58 

percent and premiums by propertylcasualty (PIC) insurers accounting for 42 

percent, according to SNL Financial. 

• There were 2,689 PIC insurance companies and 1,061 LI A and health insurance 

companies in the United States in 2010. 

• Insurance carriers (including health insurers) and related activities accounted for 

$404 billion, or 2.8 percent of U.S. gross domestic product in 2009. 

• The U.S. insurance industry employed 2.2 million people in 2010. Of those. 1.4 

million worked for insurance companies. including life, health and medical 

insurers (807,300 workers), PIC insurers (533,100 workers) and reinsurers 

(27,100 workers). The remaining 870,500 people worked for insurance agencies. 

brokers and other insurance-related enterprises. 

• Total PIC cash and invested assets were $1.3 trillion in 2010. LlA cash and 

invested assets totaled $3.2 trillion in 2010. 

3 
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• The majority of insurance industry assets are held as bonds (66 percent of PIC 

assets and 76 percent ofLiA assets). 

• PIC and LlA insurance companies paid $15.8 billion in premium taxes in 2010. or 

$51 for every person living in the United States. accounting for 2.2 percent of all 

state tax revenue. 

• PIC insurers paid out $32.3 billion in property losses related to catastrophes in 

2011, the fifth highest year on record. 

• Propertylcasualty insurance companies contributed $500 million to charities in 

2010, benefiting communities in which they operate throughout the United States. 

Exhibit I shows premiums written for the property-casualty and lifelannuity segments of 

the insurance industry. With nearly $1.1 trillion in annual premium income, the industry 

is an important segment of the American economy by virtue of its sheer size. But size 

alone conveys only one dimension of the industry's importance. The benefits that accrue 

to individuals, businesses, the economy and society as a whole are many and varied in 

nature. 

Benefits ofInsurance: Property/Casualty and Life/Annuity 

As discussed previously, insurance allow individuals and businesses to avoid or reduce 

many types of risk by transferring that risk to an insurance company. In the sections that 

follow, some of the more common types of insurance are discussed along with a brief 

description of the benefits to policyholders and the broader economy. 

Property/Casualty Insurance 

Propertylcasualty insurers provide protection in the form of monetary indemnification 

against a wide variety of situations in which a policyholder could suffer a financial loss. 

Auto and home insurance are two types of insurance that most people are familiar with 

and that together account for nearly half of all property/casualty insurance premiums 

written. In a typical year, auto and home insurers pay between $150 billion and $200 

billion to hundreds of thousands of policyholders whose vehicles or homes were damaged 

or destroyed in accidents or by natural disasters as well as to individuals who suffered 

bodily injuries as the result ofliability losses covered by these policies. A similar sum is 

4 
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paid each year to business owners for claims arising from a wide spectrum of property 

and liability claims. including injuries suffered by workers in occupational settings (via 

worker compensation insurance policies). 

Life/Annuity Insurance 

Life insurance provides individuals and families (beneficiaries) with financial protection 

against the possibility of loss of income due to death to an insured individual. An 

annuity. in its simplest form, is a contract between an individual and a life insurance 

company specifying a future stream or series of payments that will be made in exchange 

for a payment made to that insurance company today. The annuity arrangement allows 

the purchaser of the annuity to transfer to the insurer the risk associated with outliving 

one's assets. 

Life and annuity insurers wrote a near-record $624 billion in premiums in 2011, the 

second highest total in history (see Exhibit I). Recent gro'W1h is attributable to increased 

demand associated with mounting uncertainty over the adequacy of retirement income, as 

corporate pension plans become less common and concerns over the Social Security 

program continue to rise. 

Risk Assumption, Insurer Strength and the Accumulation of Financial Resources 

Because insurers assume trillions of dollars of exposure in exchange for premiums 

received from millions of policyholders each year, insurers necessarily hold assets large 

enough to pay any reasonable-and even highly improbable-levels of claim activity. 

The industry's assets must also be large enough to pay claims in times when asset values 

fluctuate as underlying market conditions shift due to developments in the financial 

markets and/or broader economy. Regulations, including Dodd-Frank, can also have an 

effect on the required quantity and composition of assets held. 

As displayed in Exhibit 2, the combined assets of the property/casualty and life/annuity 

segments of the insurance industry totaled $4.51 trillion as of year-end 2010, up nearly 

$300 billion from $4.22 trillion at year-end 2008. 

5 
62 


76121.033

Likewise, the policyholder surplus of both propelty/casualty and life/annuity insurers is at 

all-time record highs (see Exhibit 3 and Exhibit 4, respectively). Policyholder surplus is 

effectively the net worth of the industry and reflects claims paying capacity and is a 

proxy for the supply of insurance available in the market. 

The bottom line is that the insurance industry's capital resources are at or near all-time 

record highs and are growing. The strength of the industry is without parallel within the 

financial services segment. Property/casualty and virtually all life insurers, unlike banks, 

were able to operate nonnally throughout the entirety of the financial crisis and have 

continued to do so since that time. Consequently, financial industry regulations adopted 

in the wake of the crisis must avoid imposing bank-centric regulations on the insurance 

industry, whose operating record and business model are distinct from that of the banking 

sector. 

Insurers: Among the Largest of All Institutional Investors 

The insurance industry's need to maintain large holdings of assets to back claims and 

satisfy regulator and ratings agency requirements implies that the industry is one of the 

largest institutional investors in world. Indeed, the industry is usually ranked among the 

top three institutional investors across a broad range of asset categories. Exhibit 5 shows 

the distribution of the $1.3 trillion in investments held by property/casualty insurers as of 

year-end 2010. Exhibit 6 displays the same infonnation for $3.3 trillion in invested 

assets held by life/annuity insurers. 

Insurers are necessarily conservative investors and as such concentrate their investments 

in relatively low risk, highly liquid securities, especially bonds. The industry's 

conservative portfolio allocation is immediately obvious, with property/casualty insurers 

holding two-thirds of their invested assets in the fonn of bonds (Exhibit 5) with 

life/annuity insurers holding three-quarters of their portfolio in fixed income securities. 

The sheer size of the industry's invcstment portfolio suggests that its role as an 

institutional investor is important on many levels. It is worth noting, for example, that 44 

percent of the property/casualty insurance industry's bond portfolio is invested in 

municipal securities ("munis") issued by all fifty states and thousands of counties, cities 

6 
63 


76121.034

and towns all across the United States (see Exhibit 7). In other words, property/casualty 

insurers alone in 2011 held bonds that served to finance some $331 billion in a wide array 

of projects such as schools, roads, bridges, mass transit initiatives and health care 

facilities. Life and annuity insurers held approximately 11 percent of their portfolio in 

such investments last year (Exhibit 8), translating into a $123 billion stake in state and 

local government financing (Exhibit 9). Hence collectively, the insurance industry has 

investments in state and local projects and initiatives that now exceed $450 billion. 

Insurers as Employers 

The insurance industry is an important employer in the United States. Exhibit 10 shows 

employment as of May 2012 across all segments of the insurance industry. Collectively, 

the industry employs nearly 2.3 million people. These figures include not only 

employees of insurance carriers themselves (which account for about 1.4 million or 61 

percent of jobs in the industry), but also agents/brokers, third-party administrators and 

others. Exhibit II shows the number of people employed by insurance carriers (and 

related activities) by state in 2010. Insurers employ more than 100,000 people in seven 

states: California, Texas, New York, Florida, Pennsylvania, lllinois and Ohio-and at 

least 50,000 in an additional eight states. The wages and salaries paid to insurance 

industry employees totaled $196 billion in 20 I 0, fueling local economic growth and 

supporting millions of secondary jobs across the country (see Exhibit 12). 

Concerns Related to Financial Services Regulation: Dodd-Frank and Beyond 

Property/casualty insurance is a large and vital industry in the United States. It is also a 

sound, stable, strong and secure industry, having earned a reputation for maintaining 

financial strength even when claim activity is far above expectations. The September 11, 

2001, terrorist attacks, for example, resulted in $32.5 billion in insured losses (and more 

than one million claims paid)--then the most expensive event in global insurance history. 

In 2005, Hurricane Katrina produced $41.1 billion in claims-establishing a new record 

for insured losses from a single event that still stands to this day. 

Insurers were able to meet the challenges of 9/11 and Hurricane Katrina (and a multitude 

of others) because of a long-standing operational philosophy that gives rise to a 

7 
64 


76121.035

conservative underwriting and investment model. This same philosophy allows 

property/casualty insurers to continue with "business as usual" even during steep 

economic downturns, including the 2008 financial crisis and ensuing "Great Recession." 

Indeed, not a single traditional property/casualty insurer or reinsurer failed as a result of 

the financial crisis nor did a single legitimate claim go unpaid. In contrast, during the 

financial crisis and its aftermath, more than 400 banks failed. 

It is important to recognize that in the decade leading up to the passage of the DoddFrank Act (DFA) in 2010, the property/casualty insurance industry experienced its largest 

claim events in history and weathered the worst recession since the Great Depression. 

The industry operated throughout this period without interruption and without undue 

concerns over insolvencies. 

The evidence from that eventful decade was definitive proof that insurers are 

fundamentally different from banks. Indeed, Congress explicitly recognized this fact by 

largely leaving intact the existing system of state-based regulation under DF A. 

Although Congress recognized the distinct nature of insurance in the drafting of DFA, 

that recognition is not complete. There is concern that several provisions of Dodd-Frank 

could ultimately reduce the ability of insurers to mitigate risk on their own books or 

adversely impact the amount of capital available for underwriting risk. For example, 

although DFA provides insurers with an exemption from the Volcker Rule, there is 

concern that financial institutions whose primary business is insurance but who have an 

affiliation with a bank could be adversely impacted by the Rule. The Volcker Rule 

effectively prohibits a bank (or institution that owns a bank) from engaging in proprietary 

trading that is not directed by or at the behest of its customers or from owning or 

investing in hedge funds or private equity funds. Because the Volcker Rule and its 

implementation with respect to insurers is still subject to study by the Financial Stability 

Oversight Council (FSOC) and the complexity of the Rule overall, there remains some 

uncertainty as to how the rule will be applied to property/casualty insurers that are 

affiliated with banks. 

8 
65 


76121.036

Other concerns voiced by some insurers include the possibility of "mission creep" by the 

newly created Consumer Financial Protection Bureau (CFPB), the eventual execution of 

subpoena authority granted to the new Federal Insurance Office, powers granted to the 

Federal Reserve following a Systemically Important Financial Institution (SIFI) 

designation, or expanded requirements for GAAP accounting in lieu of Statutory 

Accounting Principles (SAP). 

Summary 

Insurance is a very large, dynamic and essential component of the American economy 

and is important segment of the financial services industry. Property/casualty and 

life/annuity insurers operating in the United States today generate more than a $1 trillion 

in annual premium income, hold more than $4.5 trillion in assets and employ some 2.3 

million people. It is an industry that is financial strong. stable, sound and secure-and 

remained as such during some of the most trying periods in economic and insurance 

history. 

The Dodd-Frank Act in 2010 explicitly recognized the unique nature of insurance and 

that the business of insurance was not the cause of the financial crisis that began in 2008. 

Consequently, insurance was not the focus of the DFA and insurers were carved out or 

exempted from much of the regulation to which banks and other financial institutions 

were subjected. However, a number of provisions of Dodd-Frank, when fully 

implemented or because of potential misinterpretations of the Act's intent, could reduce 

the ability of insurers to accumulate capital or mitigate risk and there negatively impact 

the economy overall. These issues remain of concern to many insurers today. 

Thank you for you for the opportunity to testify before the Committee today. I would be 

happy to respond to any questions you may have. 

9 

76121.037

Billions 

$1,200 $1,000 

$800 $600 $400 $200 

$0 

III Life/Annuity 

III Property/Casualty 

INSU

INFO

INST

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20

Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute. 

76121.038

Exhibit 2 

I I INSUR

INFOR

INSTIT

Billions II Life/Annuity 

$5,000 ] • Property/Casualty 

$4,500 $4,223.7 $4,332.3 $4,510.8 

$4,000 $3,500 $3,000 $2,500 $2,000 

$1,500 $1,000 

$500 

$0 

2008 2009 2010 

Sources: Insurance Information Institute, 2012 Insurance Fact Book, via SNL Financial. 

76121.039

Exhibit 3 

I 

2006: _,...--L., 

.....;;-.--. ........... ...... 

($ Billions) 

$580 $560 $540 

$520 

$500 

$480 $460 $440 $420 $400 

2006 2007 2008 

Sources: ISO, A.M .Best; Insurance Information Institute. 

2009 2010 2011 

INSUR

INFOR

INSTIT

$570

2012

76121.040

Billions I II C&S II AVR* I 

$350 $300 

$250 

$200 

$150 

0 

.... 

* $100 

$50 

(I) 

o 

co 

.... 

iRINS

INFO

INST

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 

'Prior to 1992, this was the Mandatory Securities Valuation Reserve (MSVR) 

Sources: ACLI 2011 Ufe Insurance Fact Book; Insurance Information Institute. 

76121.041

Exhibit 5 

Distribution of 

Invested ,</NM ____ _

Other, 

Cash and 

Short-Term Securities, 

Sources: Insurance Information Institute, 2012 Insurance Fact Book, via SNL Financial. 

Insurer INS

INF

INS

Property/casualty 

industry assets a

year-end 2010 

totaled $1.3 trillion

76121.042

Exhibit 6 

Distribution 

w{Genera 

Short-term 

securities & 

Cash,3.0% 

Sources: ACLI Life Insurers Fact Book 2011, p. 11; 1.1. 

Other, 4.5% 

INSUR

INFOII

INSTIT

Total general 

account invested 

assets at year-end 

2010 were $3.3 

trillion. 

Long-Term 

Bonds, 75.9% 

76121.043

100% 

90% 80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

1 2 

Sources: NAIC, via SNL Financial; 1.1.1. 

4 

Other 

INSU

INFO

INST

Foreign Gov

III US Govt III Other State 

Municipal Municipal Sp

Revenue 

Industrial 

76121.044

Exhibit 8 

Composition of PllPQi 

Insurer General Aceo 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

1 2 

Sources: NAIC, via SNL Financial; 1.1.1. 

3 4 5 

INSUINFO

INST

i 

I l1li Foreign Gov

IlliUS Govt 

Municipal S

Revenue 

Industrial 

" 

____ 

76121.045

Exhibit 9 

Insurance 

2007 .. 2011 

Billions l1li PIC l1li LlA 

$500 $400 $300 $200 $100 

$0 

2007 2008 2009 

Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute. 

s, 

2010 2011 

INSU

INFO

INST

76121.046

Insurance Subsector April 2012 

Employment 

May 2012 

Employment 

'Data are through May 2012 and are preliminary (Le., subject to later revision); not seasonally adjusted. 

'ffi INSU

y t INFO

INST

Change 

76121.047

Exhibit 11, Page 1 

Insurance Carriers 

210,000 

180,000 150,000 

120,000 

.... 

CIO 

0> 

.... '<I' 

o II) ('oj CIO 

• II) 

CIO <D 

<D <D 

.... • 0> 

N 

T"" ,..: N r.... 

crt S; Q) 

........ . 

.... .., 0 

.... '<I' 

Q) T"" 

INSUR

INFORINSTI

90,000 

60,000 

30,000 

o . . .. . . .1.ii.liil.i.I.I.I.i.lii.i.i.i « x « > z u 0 Z Z «> 0 0 U U Z - 0 v > U ::iE - Z ::iE - > U ::iE W 

(1) The estimates for Alaska and Wyoming are not shown to avoid disclosure of confidential information .. 

Note: Does not match data shown elsewhere due to the use of different surveys. Data as of September, 2011, based on revised estimat

2008-2010. 

Source: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce. 

76121.048

Exhibit 11, Page 2 

Insurance Carriers 

1/) 

CD .... 

30,000 

27,000 

24,000 21,000 

18,000 15,000 12,000 

0) co "t"'" Ol M '" M ..... 0 co """"'«t'r"' .............. 

9,000 

6,000 

3,000 

• '<I' M .... 

N '<t 

.... 

N 

0 

'" M. 

CD CD 

.... 

.... ... M 

M "!. CD M M ... 0 

.... 1/). '<t 

.... ... 

... .... 

'" 0 "'. M .... 0 CD .... .... CD ... '<I' "!. 1/) 1/) '" '" M. ... co rt:i '<I' M '" '<I' .... "!. 

... ... 

1/) 0 CD o ... CD 

"": It) 

... ... ui 

INSURINFOR

INSTIT

1/) '<I' 

'" N 

M M 

,1,1 o 

W W < W W > ? c c c w U Z 0 0 Z < Z - Z W Z C > C 

(1) The estimates for Alaska and Wyoming are not shown to avoid disclosure of confidential information. 

Note: Does not match data shown elsewhere due to the use of different surveys. Data as of September, 2011, based on revised estimat

2008-2010. 

Source: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce. 

76121.049

Exhibit 12, Page 1 

Insurance INSU

INFOINST

Compensation bv States 

($ Millions) 

$22,000 N N $20,000 mCD .... '" .... 

$18,000 ...:- .... 

$16,000 C'? CD 'It. 

$14,000 C'? .... '" CD 

.... co CD 

$12,000 r-:. o . Lt) '" 0 $10,000 I rtf C't """ .. M $8,000 IUIiHhs $6,000 $4,000 

$2,000 

$0 

> x d : c z § u a z ; 0 Z a > Z u a Z - u 

(1) The estimates for Alaska and Wyoming are not shown to avoid disclosure of confidential information .. 

Source: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce. 

76121.050

Exhibit 12, Page 2 

ranee Carriers INSUR

INFOR

INSTI

pensation 

($ Millions) 

IJ) 0 $2 CDIJ)CD 2, 00 m N .., N "0> ..... 

$2,000 I i 

$1,800 • -

$1,600 0 CD .., .., 

$1,400 yoo" " IJ) 

$1,200 

.... co 

.... '<I" 

$1,000 N '<I" 0> :;g :;:; :g 

$800 co ..... ..... 0 CD 

CD ..... 0> N '<I" 

$600 ;n g or-$400 · · · ii $200 

$0 

u w w w > w w c u c c W 0 Z 0 Z < Z C Z - C W Z 

(1) The estimates for Alaska and Wyoming are not shown to avoid disclosure of confidential information .. 

Source: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce. 
80 


76121.051

100 Years Standing Up for American Enterprise 

U.S. CHAMBER OF COMMERCE 

Statement 

of the 

U.S. Chamber 

of Commerce 

ON: "The Impact of Dodd-l'rank's Insurance Regulations on Consumers,job 

Creators, and the Economy" 

TO: The Subcommittee on Insurance, Housing and Community Opportunity 

DATE: July 24, 2012 

The C:hambcr"s mi%ion is to :1dV;ll1Cl' human 

political and ~ocial system ba,:ed 

incc1ltiw, inin.lti\c, opportunity ~lld responsibility. 
81 


76121.052

The U.S. Chamber of Commerce is the world's largest business federation, 

representing the interests of more than 3 million businesses of all sizes, sectors, and 

regions, as well as state and local chambers and industry associations. 

More than 96 percent of the Chamber's members are small businesses with 

100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, 

virtually all of the nation's largest companies are also active members. We are 

particularly cognizant of the problems of smaller businesses, as well as issues facing 

the business community at large. 

Besides representing a cross-section of the American business community in 

terms of number of employees, the Chamber represents a wide management spectrum 

by type of business and location. Each major classification of American business --

manufacturing, retailing, services, construction, wholesaling, and finance is 

represented. Also, the Chamber has substantial membership in all 50 states. 

The Chamber's international reach is substantial as well. It believes that global 

interdependence provides an opportunity, not a threat. In addition to the 

U.S. Chamber of Commerce's 115 American Chambers of Commerce abroad, an 

increasing number of members are engaged in the export and import of both goods 

and services and have ongoing investment activities. The Chamber favors 

strengthened international competitiveness and opposes artificial U.S. and foreign 

barriers to international business. 

Positions on national issues are developed by a cross-section of Chamber 

members serving on committees, subcommittees, and task forces. More than 1,000 

business people participate in this process. 

2 
82 


76121.053

Chairman Biggert, Ranking Member Gutierrez, and members of the Insurance, 

Housing and Community Opportunity Subcommittee, I am Thomas Quaadman, vice 

president of the Center for Capital Markets Competitiveness at the U.S. Chamber of 

Commerce. The Chamber is the world's largest business federation, representing the 

interests of more than three million businesses and organizations of every size, sector 

and region. I appreciate the opportunity to testify before the Subcommittee today on 

behalf of the businesses that the Chamber represents. 

The series of hearings this month, by the Financial Services Committee and its 

Subcommittees, on the second anniversary of the enactment of the Dodd-Frank Wall 

Street Refonn and Consumer Protection Act ("Dodd-Frank J\ct"), provide us with an 

opportunity to take stock of d1e framework and progress of this landmark legislation. 

Much of the testimony provided during these hearings has focused on what the 

Dodd-Frank Act does or intends to do. While I will get to the impacts of the DoddFrank Act particularly upon the insurance and business community in a minute, I do 

want to spend some time discussing what the Dodd-Frank Act does not do. 

The need for financial regulatory reform was apparent before the 2008 fmancial 

crisis. Over d1e last decade it became evident to many observers that the U.S. capital 

markets, the deepest and most efficient in world history, were slowly but consistendy 

losing their edge. This was making it more difficult and expensive for businesses to 

raise the capital needed to grow and create jobs. In 2006, the Chamber fonned a bipartisan commission headed by Bill Daley and A.B. Culvahouse to research the 

problem. After a year, they came back with two conclusions: 1) that our international 

competitors were competing using our game plan-not a bad thing; and 2) that our 

financial regulatory structure, which dates from the New Deal and in some cases as 

far back as the Civil War, was ineffective, overly complicated, and inadequate to deal 

with a 21 st century economy. Od1ers, from Mayor Michael Bloomberg and Senator 

Charles Schumer to Harvard Professor Hal Scott, reached similar conclusions at 

around the same time. 

Such an antiquated, static system froze regulators' capabilities at the time they 

were created or endowed with their powers. At best, regulators were trying to 

regulate 2007 markets with 1975 regulatory tools. As a result, regulators had not kept 

pace with and did not understand the markets or products that they were trying to 

regulate. This led to confusion amongst regulators, turf batdes, regulatory gaps and 

dead-zones, layering of rules, and a difficulty for regulators to deal with cross-border 

issues on an international basis. As was evidenced by the Madoff and Stanford cases, 

regulators could not spot the bad guys and drive them out of the markets. 

3 
83 


76121.054

In short, businesses did not have clear rules of the road, regulators were 

inconsistent in enforcing those rules, and bad actors were not found or punished. 

This was not a formula for success. 

Common sense solutions-streamlining the number of regulators, hiring the 

expertise needed to understand the markets, making the regulators accountable, 

forward looking regulation-were not considered in the Dodd-Frank debate. Instead, 

Dodd-Frank creates more regulators, exponentially increases layering and overlap, and 

does not hold regulators accountable. The Dodd-Frank Act adds more floors to a 

building sitting on a crumbling foundation. 

In a sense, the Dodd-Frank Act tries to super-size the 1975 system while the 

regulators should be thinking on how the markets will look in 2020. 

MF Global and Peregrine are just the latest indicators that dle underlying 

foundational issues remain. Because of the failure to address these underlying issues 

and the regulatory explosion under the Dodd-Frank, our fl11ancial regulatory structure 

is in danger of becoming even more inefficient, while constraining the ability of nonfinancial businesses to grow and thrive. Simply, we may be in danger of jumping 

from crisis to crisis with a sluggish economy to boot. 

The financial services industry is a conduit to provide a transfer of capital from 

investors to businesses. Unreasonably restricting that conduit affects the ability of 

businesses to tap the capital they need to operate and grow. Our economy is in fact a 

rich and diverse mosaic with no one part being the same as another. 

The insurance industry is a unique and important part of that mosaic. 

The insurance industry is one of the largest investors in the world. Insurance 

companies can be direct investors in companies through the purchase of bonds or 

equity instruments, or they can invest in entities that support businesses, such as 

commercial real estate. Furthermore, because of the insurance industry's need to 

match its investment portfolio to the very long-term nature of many of its products, it 

is by nature and necessity a long-term investor committed to the long-term growth 

and productivity of the companies or products in its asset portfolio. As a result, it is 

in the best interests of insurers to be extremely prudent in their risk taking. 

Therefore, insurers, besides the risk management services they provide to their 

customers, are a critical piece of the capital markets. Insurers are a key provider of 

capital for the long-term. Consequendy, the potential adverse impacts of the Dodd4 
84 


76121.055

Frank Act upon the insurance industry's ability to act as an investor \vill have serious 

consequences for Main Street businesses. 

Dodd-Frank also has consequences unique to the insurance industry. Asset 

liability management for insurers is by its very nature a form of proprietary trading. 

While this trading is done for the benefit of the insurance company, the ultimate 

beneficiaries are the policy holders who will receive the benefits of coverage should 

the underlying circumstances-a car accident, home fire, loss of income due to death 

or disability-arise. Congress recognized this issue and wisely provided insurance 

companies with an exemption from the VoIcker Rule. 

However, as Dodd-Frank gives with one hand it also takes away with the other. 

Insurers that own banks are not exempt from the VoIcker Rule. Insurance 

companies may own a bank for a variety of reasons-like lowering transaction costs 

or providing additional services to customers. Several insurance companies have 

already spun off their banks to avoid being entrapped in the V oIcker Rule. So while 

these insurance companies do not engage in the type of proprietary trading envisioned 

by the VoIcker Rule and were intended to be exempted by Congress, they are still 

forced to make business decisions based upon regulatory intelpretations that make 

them less efficient. 

Even if insurance companies are completely exempt from the VoIcker Rule, the 

subjective trade by trade regulatory scrutiny of market making and underwriting 

practices may make it more difficult for insurance companies to play their traditional 

role in the debt and equity markets. This will make risk management more difficult 

for insurance, while reducing the capital formation opportunities and increasing the 

costs for non-financial companies. This is not an unfounded fear. Federal Reserve 

Governor Daniel Tarullo testified before the House Financial Services Committee on 

January 18, 2012, months after the VoIcker Rule regulations were proposed, and said 

that the regulators do not understand what normal market making and underwriting 

practices are. 

If regulators don't know what they are regulating, how can they write a 

regulation? Therefore, through enforcement or by decision, market participants such 

as insurance companies may be shut out of traditional investment opportunities or 

face higher costs and regulatory scrutiny. 

Another quandary for regulators and the insurance industry is the designation 

and regulation of Systemically Important Financial Institutions (SIFIs). 

5 
85 


76121.056

While the vast majority of insurance companies \\@ not fall within the scope of 

systemic risk regulation and orderly liquidation authority in Title I and Title II, it is 

worth noting that such a designation would be problematic for insurance companies. 

The Federal Stability Oversight Council has finalized regulations laying out the 

process for designation of nonbank SIFIs. While these regulations provide some 

insight into the process of being designated as a SIFI, they provide no clarity on the 

impact of that designation in the marketplace. The Treasury and the Federal Reserve 

continue to offer no assurance or insight on the market impact on the companies 

designated as SIFIs, and maybe more significantly, the impact on those companies not 

designated. 

What is clear is that designation brings significant new regulation and 

supervision of nonbank SIFls by the Federal Reserve. SIFI regulation and Orderly 

Liquidation Authority are bank-centric and fail to take into account the different 

business models that exist within the non-bank world and the insurance industry 

specifically. For instance, because insurers' liabilities are contingent, runs on capital 

are not possible, making insurance a major stabilizing force in times of economic 

distress. Moreover, insurers are typically leveraged at a ratio of around 3-to-1, much 

lower than that of the banks upon which the rules were formulated. The imposition 

of bank-centric regulation could cause regulatory mismatches that may conflict \vith 

insurance regulations that have been developed for well over 150 years. Regulatory 

conflicts of this nature will increase risk within the industry rather than temper it. 

The Federal Reserve should propose and adopt regulations that are specifically 

written for the supervision of nonbank fl11ancial companies that are designated as 

SIFIs, including insurance companies. Its current approach of simply applying the 

same Enhanced Prudential Standards and "tailoring" tl1C application of those rules 

during the supervision process is unwise and insufficient. It creates unnecessary 

uncertainty for the regulated entities and potential market distortions. The Federal 

Reserve can avoid these problems by taking the time to understand how the business 

models and operations of insurance companies and other nonbank fmancial 

companies differ from banks and issuing regulations with the opportunity for public 

input that reflects these differences. This is too important not to get right at the start. 

Through its use of assessments, Orderly Liquidation l\UthOrity will spread the 

risk of a systemically risky company going out of business upon all designated 

companies. This is the traditional means of dealing with a bank failure, part of which 

also allows the merger or combination of a failed bank with a solvent bank. So while 

banks bear the costs, they also have the potential for opportunities that may be 

profitable. 

6 
86 


76121.057

Traditionally with non-financial companies and insurance, it is the owners of 

the companies that bear the risk of loss. If those owners and managers no longer 

solely hold that risk, ",111 a systemic risk designation make them more willing to 

engage in risky behavior placing their competitors at a disadvantage? This is a known 

unknown at this point, but one that may be terribly harmful when the answer presents 

itself in the future. 

"\.1so, systemic risk regulation is being implemented globally as well as 

domestically, in two separate and uncoordinated processes, following different 

standards with potentially different outcomes. An insurer deemed not systemically 

risky under the domestic process may still find itself designated under the 

international process. Moreover, if domestic and international designations carry with 

them conflicting systemic risk rules, which regulatory regime prevails? Insurance 

companies designated as systemically risky will bear the brunt of the state regulatory 

system, domestic systemic risk regulation and international systemic risk regulation. 

This is not only burdensome and expensive, but it may lead to irresolvable dilemmas 

that place the company at lega.i and financial risk. 

It should also be understood that these Dodd-Frank regulatory changes and 

consequences are not happening in a vacuum. The insurance industry is also facing 

other major regulatory changes including possible new domestic and international 

accounting standards, the imposition of bank-centric capital levels under Basel III, 

and the negotiation of Solvency II. Regulators have not taken into consideration the 

cumulative impacts of all of these initiatives, yet it is their interconnected nature that 

\"ill determine how the insurance industry and economy will operate. 

Failing to get this right will harm the insurance industry and American capital 

markets for the next generation. 

Finally, the Chamber has supported the creation of the Federal Insurance 

Office. This allows the American insurance industry to have a unified governmental 

entity in the negotiation of international agreements. 

The drafters of the Dodd-Frank Act sought to reduce risk following the 2008 

financial crisis. However, risk, like energy, cannot be destroyed -- it can only be 

transferred. Reasonable risk taking is at the heart of our free enterprise system and to 

eliminate risk will also eliminate the entrepreneurial spirit that allows our economy to 

constantly renew itself and dynamically create wea.ith and jobs. Blindly transferring 

risk, without the requisite streamlining and reform of the antiquated 19th and 20th 

century financia.i regulatory structure, is merely fighting the last battle of the last war 

and planting the seeds for the next crisis. 

7 
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In reviewing the Dodd-Frank Act two years later, policy makers must take into 

account the impacts upon the capital formation for the non-financial industry and 

ameliorate negative impacts. Failing to do so will consign the economy to anemic 

growth and the United States will not be able to create the 20 million jobs over ten 

years needed for a prosperous economy. 

To date, nearly 10 different regulatory bodies have issued almost 9,000 pages of 

regulations, and that only completes 30 percent of the regulations mandated by the 

Act. No one knows the full implications of these new regulations on our economy. 

However, there can be little doubt that the burden and uncertainty of these new 

regulations will be a drag on our economy and job growth for years. 

Thank you and I "will be happy to take any questions that you may have. 

8 
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ffACLI 

Financial Security .. .for life. 

American Council of Life Insurers (ACLI) Statement for the Record 

House Financial Services Committee 

Subcommittee on Insurance, Housing, and Community Opportunity 

Hearing entitled "The Impact of the Dodd-Frank's Insurance Regulations on Consumers, Job 

Creators, and the Economy" 

July 24,2012 

The American Council of Life Insurers (ACLI) is pleased to submit this statement for the hearing 

record expressing the concerns of the life insurance industry about implementation of certain 

provisions of the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). 

The American Council of Life Insurers is a Washington, D.C.-based trade association with more than 

300 legal reserve life insurer and fraternal benefit society member companies operating in the 

United States. ACLI advocates in federal, state and international forums. Its members 

represent more than 90 percent of the assets and premiums of the U. S. life insurance and annuity 

industry. In addition to life insurance, annuities and other workplace and individual retirement plans, 

ACLI members offer long-term care and disability income insurance, and reinsurance. Its public 

website can be accessed at www.acILcom. 

Federal Reserve Board Supervision & the Collins Amendment 

Through authorities provided in the Dodd-Frank Act, the Federal Reserve Board (FRB) regulates at 

the holding company level a number of companies that are primarily life insurers. The Dodd-Frank 

Act granted the Federal Reserve Board (FRB) new supervisory authority over savings and loan 

holding companies (SLHC's), many of which are, or own, life insurers. The FRB recently exercised 

these new authorities, issuing three proposed rules on June 7 which collectively implement Basel 3 

capital standards and Section 171 of the Dodd-Frank Act (the Collins Amendment). The ACLI is very 

troubled by the June 7 rulemaking, which applies bank-centric standards and methodologies to 

insurance companies. 

Life insurance companies, including those organized as savings and loan holding companies, are 

vastly different than banks. ACLI believes that any capital standards established under section 171 

must recognize the fundamental differences between life insurance companies and banking 

organizations. Capital standards appropriate for banks are not appropriate for life insurers. Insurer 

risk-based capital (RBC) requirements are the appropriate prudential standards to apply to an 

insurance company. 
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2 

Unlike banks, life insurers assume extensively underwritten long-term risks and acquire an asset mix 

intended to reflect the characteristics of those risks. In other words, the nature of the liabilities 

drives the nature of the assets purchased in support of those liabilities. A large portion of life insurer 

liabilities do not have an immediate call capability by the contract holder (or have protection features 

built into the contract), making it very unlikely that an insurer would experience a "run on the bank" 

liquidity scenario in times of stress. 

State insurance regulators have long recognized the difference in business models between banks 

and insurers. Life insurers' investment portfolios are extensively regulated and are governed by state 

insurance law to ensure that investments are proper for the business of life insurance. Life insurer 

risk-based capital (RBC) charges are designed to measure asset default risk over extended periods 

of time for the types of investments that insurers own. These laws and regulations have been 

specifically designed for life insurers to ensure that the liabilities that have been assumed by the 

insurer will be covered by adequate assets when they come due. 

Designation of Nonbank Anancial Companies as Systemically Important 

The Dodd-Frank Act also authorized the FRB to supervise nonbank financial companies designated 

as systemically important by the Financial Stability Oversight Council (FSOC). The FRB is authorized 

to establish enhanced prudential standards for these companies, some of which could be insurance 

companies. 

The ACLI believes that the traditional activities of life insurance companies do not present a systemic 

risk to the financial stability of the United States. As noted above, life insurers do not depend on 

short-term, on-demand funding and are less susceptible to runs on their liabilities in times of 

distress. Furthermore, life insurance activities do not give rise to high interconnectedness with other 

financial institutions. Finally, the insurance regulatory system provides an established process for the 

orderly rehabilitation or wind-down of impaired life insurers that prevents "fire sale" liquidations. 

In the event that the FSOC designates one or more life insurance companies as systemically 

important ACLI believes. as stated above. that bank-centric capital and prudential standards are 

unworkable for insurers. Section 165 of the Dodd-Frank Act specifically requires the FRB to adapt 

prudential standards to the predominant line of business of a nonbank financial company. ACLI is 

very disappointed that the FRB proposed rule establishing enhanced prudential standards did not 

provide the industry specific tailoring required by the statute. ACLI encourages Congress to continue 

to exercise its oversight authority over the prudential regulators to ensure that the tailoring stipulated 

by Congress is implemented. 

The Business of Insurance Exclusion to the Volcker Rule Should be Preserved in Full 

Congress recognized the unique nature of insurance companies in the Dodd-Frank Act by 

establishing the "business of insurance" exclusion to the Volcker Rule. Unlike nearly ali other 

financial institutions, insurers are predominantly focused on the long term. Insurers must manage 

the policy premiums and investments entrusted to them by their customers to meet obligations to 

those customers over multiple decades. The fundamental business model of an insurance company 

does not involve engaging in high risk or short term profit seeking. 
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3 

Insurance company investment activities are subject to rigorous oversight and examination by state 

insurance regulators. State insurance regulators establish conservative limits on the percentage of 

assets that an insurer may invest in equities and generally require further limitations on investments 

in non-exchange traded equity investments. State regulators have comprehensive regulatory and 

reporting regimes for examining an insurer's investment activities and guarding against excessive 

risk in their investment portfolios. 

If prudential regulators circumscribe the insurance exclusion by disallowing investments in covered 

funds. it would limit insurers' ability to earn the investment returns that support the guarantees 

made to policyholders. ACLI believes that any final rulemaking must follow Congressional intent and 

preserve in full the business of insurance exclusion to the Volcker Rule. 

FDIC Orderly Liquidation Authority Legislation 

The ACLI supports legislation which would exclude insurance companies from the Federal Deposit 

Insurance Corporation's "orderly liquidation authority." As noted above, state guaranty associations 

already have in place effective rehabilitation and liquidation processes for insurance companies that 

are designed to protect policyholders and minimize impacts on creditors. Life insurance companies 

are required to belong to the state guaranty associations in the states where they do business and 

may be assessed by those associations to meet the needs of policyholders in the event of another 

company's insolvency. 

Thank you for convening this important hearing and for your consideration of the views of ACLI and 

its member companies. 
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Testimony of the Property Casualty Insurers Association of America (PCI) 

The Impact of Dodd-Frank's Insurance Regulations on Consumers, Job Creators 

and the Economy 

Subcommittee on Insurance, Housing and Community Development 

Committee on Financial Services 

United States House of Representatives 

July 24, 2012 

The Property Casualty Insurers Association of America (PCI) commends the 

Subcommittee for holding this important hearing to examine the impact ofthc Dodd-Frank Act 

(OF A) on the insurance industry. PCI appreciates the opportunity to provide our thoughts on the 

Act's impact on the property casualty insurance industry in particular. PCI is composed of more 

than 1,000 member companies, representing the broadest cross-section of insurers of any 

national trade association. PCI members write over $189 billion in annual premium, 39.2 percent 

of the nation's property casualty insurance. Member companies write 45.5 percent of the U.S. 

automobile insurance market, 32 percent of the homeowners market, 37.3 percent of the 

commercial property and liability market, and 40.6 percent of the private workers compensation 

market. 

Extensive post-crisis analysis by international and national insurance regulators and 

policy experts have consistently found that traditional insurance activities do not create systemic 

risk, did not cause the recent economic crisis, and that the U.S. industry generally has been and 

continues to be regulated successfully for solvency at the state level. Even after paying for two of 

the highest catastrophe loss years in history and suffering the greatest market crash in half a 

century, there were very few property casualty (PIC) insolvencies. The industry's credit ratings 

have remained stable and insurers' underwriting obligations are backed by historically strong 

surplus and surplus to premium ratios. 
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Home, auto, and business insurers generally present relatively low systemie risk because 

they generate relatively little counterparty risk and their liabilities in almost all cases are 

independent of economic cycles or other potential systemic failures. With respect to liabilities, 

PIC products tend to be mandatory with inelastic demand, so PIC revenues are relatively 

unaffected by outside systemic impacts. Recessions or third party failures do not significantly 

increase auto accidents, workers' injuries, or house fires. Insurance contracts are not typically 

subject to further hedging or risk arbitrage (unlike mortgage underwriting or financial guarantees 

that may be subjected to numerous cycles of securitization and further third party financial 

guarantees or risk betting). While some portions of primary risks are passed on to reinsurers, the 

risks are not further multiplied or leveraged, and the primary company almost always remains 

obligated and retains a portion of the underlying risk. 

With respect to assets, PIC insurers do not hold other people's money, so there is no 

vulnerability towards a "run on the bank." Moreover, their underwriting obligations are 

supported by their own assets (unlike depository institutions, investment funds, or retirement 

accounts) as regulators permit less leveraging than for other insurance or financial companies. 

Ultimately, while the economy is highly dependent on the PIC industry, the industry'S risks are 

independent and relatively walled off from systemic impairments. 

For these reasons, DFA largely focused on other financial firms that pose far more 

systemic risk than insurers. Nevertheless, DFA did have some significant impacts on insurers, 

some of which were positive but some for which PCI recommends that the Subcommittee 

consider legislative remedies. 

The Subcommittee should monitor carefully all DF A regulatory developments affecting 

insurers (as indeed it is doing through this hearing) to avoid unjustified, costly, and duplicative 

insurance regulatory requirements. It is important to remember that regulation carries costs -

costs to government and costs to industries that must comply with government regulations. 

Average regulatory compliance costs grew 36% for small insurers from 2008-2010. By the third 

quarter of 20 II, there were nearly 11,000 bills affecting insurers and 18,850 insurance statutes, 

regulations, and bulletins. With over 8000 pages of new regulations from DF A alone, insurers, 

2 
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like other financial finns, are struggling to monitor, understand, and work towards compliance 

with all the new government mandates. For example, PCI has numerous insurance members with 

small thrifts that just received several hundred pages of proposed capital rules from the federal 

banking agencies. Just the management and legal staff required to understand these new rules is 

taking significant unmeasured time and resources away from new business and development and 

growth. These industry costs will inevitably have an impact on the cost of products for 

consumers and could also have a negative impact on employment in the insurance industry as 

well. Especially at this time, when our nation faces significant economic challenges and 

unacceptably high levels of unemployment, the Federal government should not increase 

economic burdens on consumers by imposing new financial regulatory burdens without 

demonstrating significant need or gaps. 

Systemic Risk Determinations 

DF A gave the Federal Reserve Board the power to impose heightened prudential 

standards on finns that the Financial Stability Oversight Council (FSOC) finds to be systemically 

risky. Because it is now well-established that traditional property casualty insurance activities are 

not systemically risky, Dodd-Frank should exempt such activities from federal systemic risk 

regulation. Nevertheless, we are pleased that the FSOC's final rule governing systemic risk 

detenninations makes it relatively unlikely that companies predominantly engaged in the 

property casualty insurance business will be so designated. We are hopeful that the FSOC will 

continue to recognize the wisdom of that approach over time, but continue to believe that the 

statute should not grant FSOC the power to impose heightened prudential standards on stateregulated insurers. Again, the imposition of unnecessary and duplicative federal solvency 

regulations on insurers serves no useful purpose and threatens to drive up the cost of insurance 

for consumers. 

State Insurer Resolution Authority 

The Dodd-Frank Act grants federal regulators the authority to resolve failing financial 

companies. However, insurance companies are already subject to existing state solvency 

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76121.065

guaranty funds that protect consumers. In the last 40 years, our property-casualty guaranty 

system has paid out roughly $21 billion to consumer/policyholders on behalf of insolvent 

insurers - a clear indication that the current state-based system works to protect insurance 

consumers. While Dodd-Frank properly reserved to the states the authority to resolve failing 

insurance companies, the Act needs tightening in several ways to ensure that federal regulators 

do not have the power to intrude improperly on state authority to resolve insurers. 

Insurer Assessments. Dodd-Frank also unfairly asks certain insurers to help defray the 

costs of federal resolutions of other non-insurer financial firms. As noted above, insurers are 

already required to pay into state insurance resolution funds to help ensure that policyholders of 

other failed insurers are honored. The imposition of federal resolution assessments on insurers 

imposes the potential for double assessments on insurers. Because insurers already pay at thc 

state level for resolution costs within the insurance sector, they should not pay a second time at 

the federal level for resolution costs outside of the insurance sector. Doing so creates inequity, as 

the Act does not require non-insurance entities to pay for insurer resolution costs. Dodd-Frank 

does require the FDIC to use a risk-matrix in determining how to assess financial companies, and 

that matrix does include consideration of an insurer's payments of assessments into state 

guaranty funds. The matrix, however, does not prevent the FDIC (a federal bank regulator) from 

imposing a double resolution assessment on state-regulated insurers. The most unfair impact of 

double assessments would be on small businesses and individual insurance consumers, who 

would ultimately bear a high portion of the cost. PCI therefore recommends that the 

Subcommittee consider legislation that would expressly bar the FDIC from imposing 

assessments on insurers to pay for the resolution of systemically important firms. 

Liens on Insurer Assets. Section 204(d)(4) of the Act permits the Federal Deposit 

Insurance Corporation (FDIC) to take a lien on the assets of a covered financial company or its 

subsidiaries, but fails to exclude companies and subsidiaries that are insurance companies. This 

creates the potential for the FDIC to take a lien against insurance company assets to help shore 

up an affiliated non-insuranee company. State insurance regulators comprehensively regulate 

insurer investments to ensure that adequate capital and surplus is available to keep the insurer 

solvent and able to pay claims to policyholders. By giving the FDIC authority to take a lien 

4 
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against insurer assets without even consulting with state insurance regulators, the Act creates the 

potential for federal regulators to imperil the ability of insurers to honor claims to policyholders, 

giving priority to claimants who are not policyholders. PCI recommends that the Subcommittee 

consider remedial legislation to eliminate this threat to insurance consumers. 

Volcker Rule 

While the DFA's Volcker rule was intended to restrict the ability of banks to engage in 

proprietary trading, the statutory language applies to all affiliates within a holding company that 

includes a depository institution. Absent an insurer exemption, this would preclude insurers 

affiliated with a depository institution within a holding company from carrying out common 

investment activities. 

Congress recognized that insurer investment activities are already heavily regulated and 

closely supervised by state insurance regulators, whose job it is to ensure that insurers licensed in 

their states remain solvent and able to pay claims. These strict state insurance investment laws 

prohibit insurers from making investments that are detrimental to the interests of policyholders. 

Congress therefore included in the Volcker Rule an exemption for investments by a regulated 

insurance company or its affiliates for the general account of the insurance company. The 

exemption is predicated on a requirement that the investments be in compliance with all 

applicable state insurance investment laws and regulations, and that the federal banking agencies 

do not jointly determine that the existing state investment laws and regulations are insufficient to 

protect the safety and soundness of the banking entity or the nation's financial stability. The 

exemption does not extend, however, to an insurer's non-insurance affiliates. 

The Federal Reserve Board and other agencies charged with promulgating the Volcker 

Rule have crafted a proposed rule that, with one exception, appropriately allows insurers to 

continue their state regulated investment activities. The exception relates to insurer investments 

in hedge funds and private equity funds ("covered funds" under DFA). While the DFA statutory 

language in no way limits the insurance carve-out for covered funds investment, the proposed 

VoIcker rule fails to include the insurance exemption in the covered funds restrictions, creating a 

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significant ambiguity between the statute and proposed rule and the possibility that insurers 

could be prohibited from making such investments or be subjcct to federal capital requirements if 

they do. 

Federal Insurance Office (FlO) 

Dodd-Frank created, for the first time, a federal office in the U.S. government charged 

with the responsibility of monitoring the insurance industry and making recommendations to 

Congress. PCI supported the creation of the Federal Insurance Office (FlO) with an appropriately 

focused mission. FlO has a highly qualified director in Michael McRaith, who is assembling an 

experienced and knowledgeable staff. PCI has worked cooperatively and constructively with FlO 

as it seeks to discharge its duties, but we do urge the Subcommittee to monitor FlO's activities 

closely over time to guard against tendencies toward "mission creep" that might tempt future 

leaders of that office to stray from 1210's statutorily assigned tasks. 

International Focns. One of FlO's most important statutory roles is in coordinating the 

federal government's policy on international insurance matters, including U.S. representation in 

the International Association ofInsurance Supervisors (IAIS) and other international fora. The 

insurance marketplace, and its regulation, are becoming increasingly global. FlO's new 

international role, if exercised in careful coordination with state regulators and insurers, can now 

help the U.S. speak with a single strong voice in international fora. We see this as the area in 

which the FlO can make its greatest impact and contribution. 

One of the greatest challenges to the insurance marketplace is the unprecedented 

proliferation of international discussions on insurance regulatory standards, including those 

engaged in by the 0-20, the Financial Stability Board (FSB) and the lAIS, as well as increasingly 

important trade negotiations with individual countries and international organizations such as the 

Organization for Economic Cooperation and Development (OECD). There is an increasingly 

strong movement to standardize insurance supervision throughout the globe. PCI supports 

consideration of international prudential standards where convergence helps consumers and 

strengthens the competitiveness of the marketplace. However, the insurance international 

6 
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standard-setting this process is currently being driven largely by non-U .S. regulatory staff that in 

some cases want to export their regulatory inefficiencies, forcing the U.S. to converge toward 

their systems and standards without proper regard for the needs and culture of the U.S. market. 

FlO's new strong voice in thcse discussions can now help to ensure that the strengths and 

differences of the U.S. insurance market will be recognized. 

Subpoena Power. PCI is also concerned about the Dodd-Frank Act's grant of subpoena 

power to the FrO. Dodd-Frank gave FlO exceedingly broad subpoena powers that are 

inappropriate for a non-regulator. In fact, the powers are much broader than those most other 

Treasury agencies have. Treasury's usual subpoena powers generally fall into three categories: 

(\) formal administrative proceedings; (2) criminal or civil investigations and enforcement of 

laws/regulations; and (3) Inspector General investigative powers. I The subpoena power granted 

in 31 U.S.C. Section 313(e)(6) does not fit into any of these categories, thereby establishing a 

troubling precedent for government information demands. 

Although Dodd-Frank Section 3 13 (e)(4) instructs FlO to coordinate with state and other 

federal agencies before seeking data from insurers, FlO's subpoena power is not otherwise 

constrained beyond a requirement that FlO must believe that the information it wants is relevant 

to its mission. No suspicion of criminal or civil violations of a law or regulation is required. No 

formal administrative proceeding must be initiated. Because FlO is not a regulator, FlO cannot 

issue a subpoena in furtherance of a regulatory function, such as a financial examination. The 

state insurance departments, however, are regulators and already have the legal power to obtain 

information and data from insurers, either by subpoena or otherwise (See, e.g., NAlC Model Law 

on Examinations, NAlC Insurer Receivership Model Act; NArC Unfair Trade Practices Model 

Act). In addition to subpoena power, state regulators have an even bigger stick to get information 

- the ability to withhold or revoke licenses or to take other disciplinary action against 

uncooperative insurers. 

PCI's concern is that future FlO directors may not always coordinate with the state 

insurance regulators and could subpoena information that insurers arc providing or have already 

I U. S. Department of Justice, Office of Legal Policy, Report to Congress on the Use a/Administrative Subpoena 

Authorities by Executive Branch Agencies and Entities, (200l). 

7 
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provided to the state insurance regulators and significantly increase our administrative expenses 

and burdens. In addition, because the Office of Financial Research (OFR) is required to obtain 

any information it needs on insurers from FlO, PCI is concerned that a lack of coordination 

could further exacerbate marketplace administrative expenses and burdens. The best process for 

getting federal agencies information about the insurance industry and specific companies is for 

FlO to use the power already given to it by Dodd-Frank to request it from the states (and then 

share it with OFR) and take advantage ofthe inherent regulatory authority the states have to 

compel production. Taking this approach would in no way inhibit FlO's ability to fulfill its 

functions. To help ensure that this more constructive approach is utilized, and to avoid 

unnecessary and costly subpoenas on insurers, PCI urges the Subcommittee to consider 

legislation that would remove FlO's subpoena power. 

Confidentiality. Dodd-Frank gave FlO the authority to monitor all aspects of the 

insurancc industry, including the ability to gather information about the industry consistent with 

FlO's statutory functions. However, the Act, did not adequately acknowledge the role that state 

regulators play in regulating individual companies and the industry. 

The Act included a very well-intentioned provision meant to ensure that the 

confidentiality of non-publicly available data submitted to the FlO would be protected. PCI is 

concerned, however, that a provision protecting privileged information submitted to the FlO 

might not be tight enough to ensure that this information will continue to enjoy privilege if FlO 

were to share it with other federal agencies, such as the OFR or the FSOC, or with state 

insurance regulators. In addition, there is no guarantee that privileged information submitted to 

state regulators would retain that privilege when state regulators share it with FlO. PCl 

recommends that the Subcommittee consider legislation that would tighten these confidentiality 

protections and clarify that all privileged information flowing to or from FlO regarding insurers 

will not lose its privilege merely because it is being legitimately shared among various agencies 

and regulators. This is similar in concept to provisions of the National Association of Insurance 

Commissioners' (NAIC) Insurance Holding Company Model Act, which provides that privileged 

information shared by state insurance regulators with other state, federal or international 

regulators does not lose confidentiality protections. 

8 
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Source of Strength Rnle 

OF A also requires insurers to serve as a source of strength for affiliated banks. This runs 

counter to the general requirement state regulators observe that insurers existing in a holding 

company should be "walled off' from non-insurer affiliates to ensure that regulatory capital 

required to support the underwriting obligations of the insurer cannot be compromised. It is 

unfortunate that the Congress failed to address this concern adequately in OFA, and we urge the 

Committee to monitor this issue closely and to consider remedial legislation to prevent the 

exercise of OF A powers that could threaten insurers and their consumers. 

Lender Placed Insurance 

OFA also created the new Bureau of Consumer Financial Protection (CFPB), which 

poses some potential threats to insurers. Although the business of insurance is generally outside 

of the CFPB's jurisdiction, agency activities have appeared increasingly hostile to lender-placed 

insurance, which is coverage purchased by lenders to cover (usually temporarily) properties for 

which owners have failed to maintain property insurance required by their mortgages. Lenderplaced coverage is a critical element of commercial and residential lending and thus to the real 

estate market. Unwarranted regulatory and legal hostility towards it can threaten to undennine 

the much-needed recovery of the U.S. real estate markets. OF A includes new amendments to the 

Real Estate Settlement Procedures Act (RESP A) providing strict new procedures under which 

lender-placed coverage can be utilized, but expressly states that the CFPB has no authority to 

regulate lender-placed insurance rates. 

PCI is concerned that some state and federal regulators have taken an overly hostile view 

towards lender-placed insurance. Given that product's importance to healthy credit markets and 

to the recovery of the housing market, regulators must be careful not to delay that recovery by 

taking imprudent actions on lender-placed insurance issues. PCI member companies are working 

cooperatively and constructively with regulators to address consumer concerns in that market, 

but regulators must keep a level head to avoid doing further damage to the nation's fragile 

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housing market. PCI recommends that the Subcommittee monitor developments in this area 

carefully to ensure that this critical insurance market is not unduly hindered. 

Nonadmitted and Reinsurance Reform Act 

DF A included bi-partisan and industry supported provisions for the modernization of the 

regulatory system of the nonadmitted insurance market, commonly referred to as surplus lines. 

Through the NRRA, a national framework was established to bring about greater consistency and 

efficiency to the taxation and regulation of surplus lines insurance that would bring benefit to 

insurance consumers, insurers, and brokers alike. However, to fully achieve the benefits of the 

NRRA, individual state legislatures and regulators must consistently adopt and implement the 

letter and spirit of the law. PCI recommends that the Subcommittee monitor developments in this 

matter to ensure that this critical insurance market fully realizes the intended changes, including 

consistent implementation ofunifonn standards for surplus lines eligibility. 

* * * 

Again, PCI appreciates the opportunity to share our views and we stand ready to assist 

the Subcommittee as it fulfills its responsibility to address issues related to implementation of the 

Dodd-Frank Act and its impact on insurers. 

10 
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INSURANCE OVERSIGHT: POLICY 

IMPLICATIONS FOR U.S. CONSUMERS, 

BUSINESSES, AND JOBS, PART 2 

HEARING 

BEFORE 'rUE 

SUBCOMl\UTTEE ON 

INSURA1\fCE, HOUSING Ai\fD 

COMMUNI'!'Y OPPORTUNrl'Y 

OF THE 

COMMITTEE ON FINA1~CIAL SERVICES 

U.S, HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 25, 2011 

Plinted for the use of the Committee on Financial Services 

72--618 PDF 

Serial No. 112-77 

U.S. GOVERNMENT PRINTING OFFICE 

WASHINGTON! 2012 

Far ,s,ale by the Superintendent of ll$euments. U.s. (}o.\"ffllnltnt Printing Office 

Intem.t, bookstore,llP<',gov Phon.: toll lh. (866)512-1800; DC area (202) 612-1800 

'Fax: (202) 512--2104 M.il: Stop IDec, W .. hington, DC 20402-(1001 
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15 

the professionals who serve in departments around the country. In 

evPJ.'y State in this country. consumers are well served by very ca- pable, hardworking, ethical regulatory professionals. The traditional PNC life insurers did fare well going through the crisis. 

Mr. STIVERS. And as a follow-up to that, was it the regulated in- surance products of AIG or the unregulated derivatives·-and you have kind of already answered this-that helped lead to the downfaU of the AIG and the collapse of the financial markets? 

Mr. McRAITH. The autopsy has, fl'ankly, shown that it was not 

the insUl'ers that caused problems for AIG as a holding company. 

Mr. STIVERS. Great. Thank you. 

'fhe FlO is charged with doing a study of whether any additional-I won't use the word regulation-coordination is needed in 

the Federal office fat' insurance markets. What are you doing to 

make sure that the bias of YOUl' agency-basically, you are getting 

to answer the question, do I need to do more? What are you doing 

to make sure that there is not a bias toward additional Fedeml involvement in insurance? 

Mr. McRAITH. Congressman, let me be clear about AIG. We 

should not use that as an example, and we should 110t use the re- cent crisis as a reason not to examine or explore whether we can heUer regulate the insurance sector. Are there inefficiencies? Are 

there inadequacies in the system? For purposes of the modernization in improvement report that we are required to publish, we will 

study all challenges and problems within-or potential gaps within 

the existing insurance system. 

Mr. STIVERS, And that is gl'eat. Are you doing anything to ensure that the bias doesn't come back that automatically says, I am the one deciding and I think I should do more? That is my question. 

Mr. McRAITH. I think you just asked me if I still agreed with my 

statement from 2008. J think I gave you a direct answer on that. 

Mr. STIVERS. Yes. 

Mr. McRAITH. And I would say that the bias is framed by the 

statute. The statute requires us to study these issues, gave us con- siderations-six considerations, six factors. We will study those fnctors and considerations, we will consider comments we receive, and we will report back as required by the statute. 

Mr. STIVERS. That is f.,'Teat. That is a good answer. On subpoena authority, there seems to be a principle of regu- latory law that usually it is only a regulator that has enforcement 

authority, that has subpoena power, but you have been given subpoena power. Do you expect to use that subpoena powel' or do you 

expect to work through State regulators? I think you have already 

answered this question, but I would just like to hear you kind of answer it directly. 

Mr. McRAITH. The subpoena power as framed by the statute 

would be used only in the event we cannot, for whatever reason, 

receive data from a State regulator, a Federal regulator, the Office 

of Financial Research, or we ask a business of insurance participant to produce information which they then refuse to produce. We 

then have to write findings in support of our subpoena and then 

issue the subpoena. 

So the possibility of actually issuing a subpoena to collect information is extremely unlikely and would only be necessary, in my 
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F:\PCc\112FS\DFINSUR_OO I ,XML 

[DISCUSSION DRAFT] 

112TH CONGRESS H R 

2n SESSION 

• • 

To exclude insurance cOlllJlanies from the Fedcral Dejlositor.v Insunlllcc 

Corporation's "orderly liquidation authority", 

IN THE HOUSE OF REPRESEN'rA'l'IVES 

f,fr. POSlSY introduccd the following bill; which was referrcd to the Committee on ____________ _ 

A BILL 

To exclude insurance companies from the li"ederal Depository 

Insurance Corporation's "orderly liquidation authority". 

Be it enacted by the Senate and House of Repl'esenta2 ti-ves of the United States of America in Cong1'ess assembled, 

3 SECTION 1, SHORT TITLE. 

4 This Act may bc cited as the " ___ _ Act 

5 of 2012". 

6 SEC. 2. LIQUIDATION AUTHORITY. 

7 (a) DEFINITION OF FINANCIAL CmIPA"TY.-Clause 

8 (iii) of sect.ion 201(a)(1l)(B) of t.he Dodd-Frank Wall 

9 Street Reform and Consumer Protection Act {12 U,S,C. 

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2 

1 5381(a)(1l)(B)(iii» is amended by inserting "an insul'-

2 ance company or" after "other than". 

3 (b) rl'REATl\IENT OF INSURANCE COMPANIES AND 

4 SUBSIDIARIES.-Subseetioll (e) of section 203 of the 

5 Dodd-Frank Wall Street Rcform and Consumer Pl'otcc6 tion Act (12 U.S.C. 5383(e» is amcnded7 (1) in paragraph (1)-

8 (A) by striking "if an insurance company 

9 is a eovcred financial company Qt' a subsidiary 

10 or affiliate of a covet'eel financial company,"; 

11 and 

12 (B) by striking "such insnrancc" and i11-

13 serting "an insurancc"; and 

14 (2) by striking paragraph (3). 

15 (c) ASSESSMENTs.-ParagTaph (1) of section 210(0) 

16 of the Dodd-Frank Wall Street Reform and Consumer 

17 Protection Aet (12 U.S.C. 5390(0)(1)) is amcnded by il1-

18 serting ", excluding an insurance eompany subject to as19 sessment pursuant to applicable State law to eover (or 1'C20 imburse paymcnts made to cover) the costs of rehabilita21 tion, liquidation, or other State insolvency proceeding with 

22 t"espeet to 1 or 1110re insurance companies," after 

23 "$50,000,000,000" each place such term appears. 

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