U.S. GOVERNMENT PUBLISHING OFFICE

31–382 PDF WASHINGTON : 2018

LEGISLATIVE REVIEW OF H.R. 5059, 

THE STATE INSURANCE REGULATION 

PRESERVATION ACT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

MARCH 7, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–77 

( 


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(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 


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(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

SEAN P. DUFFY, Wisconsin, Chairman 

DENNIS A. ROSS, Florida, Vice Chairman 

EDWARD R. ROYCE, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

KEITH J. ROTHFUS, Pennsylvania 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

THOMAS MACARTHUR, New Jersey 

TED BUDD, North Carolina 

EMANUEL CLEAVER, Missouri, Ranking 

Member 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

JOYCE BEATTY, Ohio 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

RUBEN KIHUEN, Nevada 


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(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 7, 2018 ................................................................................................... 1 

Appendix: 

March 7, 2018 ................................................................................................... 33 

WITNESSES 

WEDNESDAY, MARCH 7, 2018 

Bock, Kurt, Chief Executive Officer, COUNTRY Financial, on behalf of the 

Property Casualty Insurers Association of America ......................................... 7 

Mahaffey, Michael, Chief Strategist and Risk Officer, Nationwide Mutual 

Insurance Company ............................................................................................. 5 

Schwarcz, Daniel, Professor of Law, University of Minnesota Law School ........ 9 

APPENDIX 

Prepared statements: 

Bock, Kurt ......................................................................................................... 34 

Mahaffey, Michael ............................................................................................ 48 

Schwarcz, Daniel .............................................................................................. 58 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Beatty, Hon. Joyce: 

Statement for the record from American Council of Life Insurers .............. 74 

Rothfus, Hon. Keith: 

Statement for the record from National Association of Mutual Insurance 

Companies ..................................................................................................... 75 

Waters, Hon. Maxine: 

Opening statement ........................................................................................... 76 

Schwarz, Daniel: 

Written responses to questions for the record submitted to Representative 

Waters ............................................................................................................ 77 


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(1) 

LEGISLATIVE REVIEW OF H.R. 5059, 

THE STATE INSURANCE REGULATION 

PRESERVATION ACT 

Wednesday, March 7, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING

AND INSURANCE

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Sean Duffy [chairman 

of the subcommittee] presiding. 

Present: Representatives Duffy, Ross, Posey, Luetkemeyer, 

Hultgren, Rothfus, Zeldin, Trott, MacArthur, Cleaver, Velazquez, 

Sherman, Beatty, and Kildee. 

Also present: Representative Green. 

Chairman DUFFY. The Subcommittee on Housing and Insurance 

will come to order. Today’s hearing is entitled, ‘‘Legislative Review 

of H.R. 5059, the State Insurance Regulation Preservation Act.’’ 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. Without objection, all members will 

have 5 legislative days within which to submit extraneous materials to the Chair for inclusion in the record. 

Without objection, members of the full committee who are not 

members of this subcommittee may participate in today’s hearing 

for the purpose of making an opening statement and questioning 

the witnesses. 

The Chair now recognizes himself for 2 minutes for an opening 

statement. 

I want to thank our witnesses for their participation in today’s 

hearing. We will introduce you all in a moment. We are here today 

to review the proper balance of the Federal Reserve’s supervision 

of savings and loan holding companies (SLHCs) primarily engaged 

in the business of insurance. 

Under Title 1 of the Dodd-Frank Act, the Fed was given supervisory rulemaking authority over SLHCs in addition to its new authority to establish enhanced minimum leveraged capital and riskbased capital requirements for insurers under that structure. 

So here is the situation we currently find ourselves in. If you are 

an insurance company that operates in multiple States, you are 

likely organized as an insurance holding company. That insurance 

holding company and its subsidiaries are regulated by the State insurance commissioners. That is easy enough, right? 


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The United States system of State-based insurance regulatory 

model has worked well for over 150 years. Let us say you are an 

insurance holding company and you own a thrift or a bank. Now 

you must register as an SLHC. One reason an insurer may want 

a thrift or a bank is to provide other services to their policyholders. 

Now, keep in mind that the thrift or the bank also has its own 

regulator, the OCC (Office of the Comptroller of the Currency). So 

these two types of entities within the SLHC are already regulated. 

As noted earlier under the Dodd-Frank Act, the Federal Reserve 

now has supervisory authority and access over every subsidiary in 

that SLHC, whether insurance or whether a bank. 

We are now in a system where a company primarily engaged in 

the business of insurance has three supervisors: The Fed, the insurance regulator, and the OCC. This is just for insurance companies with a thrift and/or a bank. I want to note that Nationwide’s 

testimony today that they are subject to various regulatory bodies 

under their structure and that should be duly noted and highlighted. It seems to me we can have a better balance in regard to 

the Fed’s supervision authority over an SLHC that primarily are 

engaged in the business of insurance. 

I want to thank Mr. Rothfus for bringing this bill up and we are 

having a hearing today and a more broad discussion on what the 

proper regulatory structure should be. 

With that, my time has expired. 

And I recognize the Ranking Member, the gentleman from Missouri, Mr. Cleaver, for 3 minutes. 

Mr. CLEAVER. Thank you. Thank you, Mr. Chairman. Thank you 

for the hearing. 

Thank you for being here with us today. 

This bill before us today, H.R. 5059, introduced by 

Congressmembers Rothfus and Beatty would allow certain insurance savings and loan holding companies to be exempted from 

group-wide supervision by the Federal Reserve. Instead, they 

would be primarily supervised on the State level. 

And over the past few years, I, along with others on this subcommittee, have often expressed frustration about duplicative supervision and overburdensome compliance. Federal regulation in 

both the banking and insurance realms should be tailored appropriately. 

However, I do need to express my concern with 5059 as currently 

drafted, because I believe it could go too far in creating some kind 

of a loophole for large banks. And their goal would be, of course, 

to avoid any kind of Federal oversight. 

Additionally thrifts that are insured by the FDIC (Federal Deposit Insurance Corporation) should be subject to adequate Federal 

regulation. Though we are now nearing a decade, believe it or not, 

since the Great Recession, the lessons learned should remain on 

the forefront of our policy discussions. 

Following the 2008 financial crisis and the collapse of AIG, Congress determined that the Federal Reserve would have consolidated 

oversight of thrift holding and bank holding companies, including 

insurance savings and loan holding companies. 

The Fed now supervises insurance companies that have been 

designated as SIFIs (systemically important financial institutions), 


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as well as insurance companies that own thrifts. Congress felt that 

it was important for the Federal Reserve to have the ability to assess the financial stability across all segments of large financial 

firms, including the parent companies and the subsidiaries. 

The goal is to prevent the kind of systematic failures that led to 

the economic meltdown of 2008. The Federal Reserve, though, primarily a bank-centric regulator, has taken steps to understand the 

insurance sector. We know this because of its advanced notice of 

proposed rulemaking for the capital framework for insurance companies under its purview. 

So I am hopeful that the witnesses will share their experiences 

working with the Fed on the insurance capital standards and 

elaborate on potential areas for improvement. 

As this bill has been recently introduced, I plan to use this hearing as a listening session. I am only hoping today that the witnesses can provide enough information that it will expand our appreciation for this legislation. 

Thank you, Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the Vice Chairman of this subcommittee, the gentleman from Florida, Mr. Ross for 1 minute. 

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

today’s hearing on this important proposal to improve oversight of 

the insurance industry by lifting costly and unnecessary regulations and providing our constituents with better financial opportunities at lower cost. 

Mr. Chairman, we talk a lot on this committee about unintended 

consequences. And that is no surprise given that our mandate covers one of the most complicated, interconnected marketplaces ever 

to exist, the U.S. financial system. 

Given this sprawling system, Members of Congress are sometimes liable to say one thing, mean another and ultimately effect 

unintended and undesired results. That seems clearly to be the 

case here throughout Dodd-Frank. 

Congress repeatedly emphasized the primacy of State regulation 

in the insurance industry. The drafters took great pains to applaud 

and preserve the State-based system of regulation, which has 

served the American people well for decades. 

However, as the Dodd-Frank years have worn on, it has become 

increasingly clear that in some cases this Congress has failed to effect its stated intent and instead created laws that undermine the 

benefits and efficacy of our State-based regulatory regime. 

The story of insurance companies that operate or used to operate 

thrift holding subsidiaries is a good example of an unintended casualty of Dodd-Frank regulation. 

Today we will learn from witnesses who have watched firsthand 

as the promise of being left alone transformed into new and unprecedented regulations being placed on their businesses. I want to 

thank Congressman Rothfus and Congresswoman Beatty for their 

working together on H.R. 5059 to help provide relief. 

And I yield back. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the author of 5059, the gentleman 

from Pennsylvania, Mr. Rothfus, for 2 minutes. 


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Mr. ROTHFUS. Thank you, Mr. Chairman. I want to thank you for 

calling today’s hearing on the State insurance regulation preservation act, H.R. 5059. 

I also want to thank my colleague, Representative Joyce Beatty 

for her hard work on this important issue. 

This is commonsense, what I call right regulation. It is a right 

regulation bill that tailors the supervision of insurance-focused savings and loan holding companies. As many of you know, DoddFrank brought savings and loan holding companies under the Federal Reserve’s supervision for the first time. 

Despite the fact that Dodd-Frank also reaffirmed the State-based 

model of insurance regulation, a principle that many of us support, 

the law had the effect of also bringing insurance savings and loan 

holding companies under the Fed’s purview. 

These are companies that are overwhelmingly engaged in the 

business of insurance, but also happen to own thrift subsidiaries. 

These insurance companies are simultaneously regulated by the 

Fed and the States. 

The lack of clarity regarding how Fed supervision of these insurers could complement rather than supplant State regulation has 

led to regulatory inefficiency, duplication of effort, and higher compliance costs. All of this cost and complexity eventually impacts 

consumers through higher prices and reduced access to services. 

We recently heard testimony from Rick Means, the President and 

CEO of Shelter Insurance Company. In Mr. Means’ testimony he 

described how Shelter was ultimately driven to close its small bank 

since Fed supervisory requirements added more than $1 million to 

their compliance burden. 

We will hear a similar account today from Mr. Bock. Means 

wrote that, quote, ‘‘expensive new Federal supervision did nothing 

to protect consumers and instead worked to reduce competition and 

deprive consumers of banking options.’’ 

Our bill addresses this issue by ensuring that insurance savings 

and loan holding companies that meet State and Federal capital 

standards are supervised on a day-to-day basis by their State regulators. The Fed will serve as a backstop regulator, and it will be 

empowered to step in and take a more hands on role if one of these 

companies does not satisfy its capital standards. 

Meanwhile, the Office of the Comptroller of the Currency will retain its authority over thrift subsidiaries. Again, this is a commonsense, targeted, right regulation that will provide greater regulatory clarity and efficiency and reduce unnecessary compliance 

burden. 

I thank the Chairman, and I yield back. 

Chairman DUFFY. The gentleman yields back. 

We now recognize our panel of three witnesses. Our first witness 

today is Mr. Michael Mahaffey, Chief Strategist and Risk Officer 

for Nationwide Mutual Insurance Company. Welcome. 

Our third witness is back for, I believe, a second round and one 

of our frequent presenters, Mr. Daniel Schwarcz, Professor at the 

University of Minnesota Law School. Welcome. 

And for the introduction of Mr. Bock, an Illinois native, I want 

to look to the gentleman from Illinois, Mr. Hultgren, for that introduction. 


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Mr. HULTGREN. Thanks, Chairman. It is a pleasure to welcome 

Kurt Bock, CEO of COUNTRY Financial. He has served as CEO 

for the last 6, 7 years, oversees about 5,000 employees that they 

have there. They meet the needs, financial needs and insurance 

needs of almost a million customers. 

Also grateful for his service; served in our Air Force for 28 years, 

was a colonel, I believe. Is that correct? So Colonel Bock now is 

CEO of COUNTRY. He also is Chairman of the Property Casualty 

Insurance Association of America Board of Governors. So grateful 

for his work there. 

And also was appointed back in November 2015 to the Federal 

Advisory Committee on Insurance by the Director of the Federal 

Insurance Office. 

So Illinois has some challenges. One thing we do well in Illinois 

is insurance, and so I am so grateful for COUNTRY and other companies that are in Illinois as well. But we just want to welcome Mr. 

Bock, Colonel Bock, being with us here today. 

And thank you, Chairman. I yield back. 

Chairman DUFFY. Illinois’ challenges, including football. 

All Right. Our witnesses in a moment will now be recognized for 

5 minutes to give an oral presentation of their written testimony. 

Without objection, the witnesses’ written statements will be made 

part of the record following their oral remarks. 

Once the witnesses have finished presenting their testimony each 

member of the subcommittee will have 5 minutes within which to 

ask the panel questions. 

On your table you will note there are three lights. The green 

means you are a go. The yellow light means that you have 1 

minute remaining. And if the light turns red, that would mean that 

the time is up. The microphones are sensitive to please make sure 

you are speaking directly into them. 

And with that, we will now recognize Mr. Mahaffey for 5 minutes. 

STATEMENT OF MICHAEL MAHAFFEY 

Mr. MAHAFFEY. Thank you. Chairman Duffy, Ranking Member 

Cleaver, and members of the subcommittee, thank you for the opportunity to appear before you today. 

My name is Michael Mahaffey, and I am the Chief Strategy and 

Risk Officer for Nationwide Mutual Insurance Company. I am testifying on behalf of Nationwide, but also represent a diverse group 

of insurers that, like Nationwide, are subject to both State insurance holding company supervision and Federal Reserve holding 

company supervision due to their ownership of a thrift. 

I am here today to testify in support of H.R. 5059 and would like 

to thank the bills’ sponsors, Congressman Rothfus and Congresswoman Beatty. 

As Nationwide’s Chief Strategy and Risk Officer, I am responsible for our business strategy and enterprise risk management 

program. In these capacities I have had the opportunity to engage 

directly with the Ohio Department of Insurance and with the Federal Reserve examination teams on numerous occasions. 

Therefore, I believe I can offer a helpful perspective on the inefficiencies in the supervisory environment faced by Nationwide and 


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other insurance SLHCs and how H.R. 5059 can maximize supervisory efficiency while avoiding gaps in supervision. Nationwide is 

an A+ rated diversified financial services company offering property and casualty insurance, financial services, and banking products and services. We are highly regulated across all aspects of our 

business. Nationwide is registered as an insurance holding company system in the various systems where it is domiciled insurance 

companies with the Ohio Department of Insurance serving as the 

lead State supervisor of the holding company system. 

By virtue of its ownership of Nationwide Bank, a thrift institution representing less than 3 percent of Nationwide’s total assets, 

Nationwide is also registered as an SLHC and subject to an additional layer of holding company supervision by the Federal Reserve. 

We support appropriate levels of supervision and regulation. We 

are not seeking to eliminate the role of the Federal Reserve in ensuring our safety and soundness. 

Rather, we seek to ensure that our supervisory regime: One, provides an appropriate balance between the roles of the Federal Reserve and the State insurance supervisors; two, is proportional and 

tailored to the risk faced by organization; and three, allows us to 

focus on the risks that are most material to our organization given 

our business composition. We believe that H.R. 5059 achieves these 

goals. 

Despite significant supervisory and regulatory cost, Nationwide 

purposefully opted to continue to offer competitively priced, reliable 

banking products. These products and services create additional 

value for the members we serve. 

As an example, Nationwide Bank has created innovative solutions to deliver immediate access to insurance funds for our members in the wake of natural catastrophes. Whether utilizing the 

prepaid claims cards in the aftermath of the Joplin tornadoes or 

supplying emergency debit cards to customers in Northern California wildfires, who had literally lost everything. 

These solutions provide access to critical funds precisely when 

they are needed most. In the 7 years that we have been subject to 

Federal Reserve supervision, we have found Federal Reserve examiners to be dedicated public servants who consistently strive to 

work collaboratively and thoughtfully with us. 

We also appreciate the insurance policy team led by Tom Sullivan at the Federal Reserve Board in Washington, which has provided invaluable expertise on insurance and has been equally open 

and collaborative in working with us. 

However, despite the sincere efforts of these professionals at the 

Federal Reserve, our current supervisory environment remains unnecessarily inefficient in ways that Congress did not intend. As my 

written testimony highlights in greater detail, there are several examples of instances where Federal Reserve holding company supervision has produced unintentional inefficiencies and redundancy 

vis-a`-vis State supervision. 

These include overlapping statutory responsibility to examine the 

operating and financial conditions of the group, duplicative examinations, inconsistent supervisory regimes or regulatory standards, 

overlapping authority to require corrective actions, to name a few. 


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Due to the intensive nature of Federal Reserve supervision, 

Nationwide’s Board of Directors and senior management spend a 

substantial amount of time and resources reviewing, analyzing, 

and implementing Federal Reserve supervisory guidance that was 

designed by bank regulators for banks to manage bank-centric 

risks. 

Further, we devote a substantial amount of time and resources 

responding to examinations and information requests related to 

bank-centric supervisory guidance. 

These resources would be more appropriately devoted to our most 

material and relevant insurance risks, which are directly within 

the purview of the State insurance departments. 

I would like to now turn to our support for H.R. 5059 and the 

appropriateness of this legislative solution. We do not believe that 

in passing Dodd-Frank, Congress intended to force insurance companies to sell their thrifts. 

We also do not believe that Dodd-Frank intended the Federal Reserve to place the same supervisory demands on a $230 billion insurance company with a $7 billion thrift which is already subject 

to extensive State insurance holding company supervision, as on a 

$230 billion bank holding company predominantly engaged in 

banking and other financial activities. 

We greatly appreciate Congress’ longstanding commitment to the 

State system of insurance regulation and the thoughtful, bipartisan 

approach this body has taken on the issues in the past, including 

the passage of the 2014 Insurance Capital Standards Clarification 

Act. 

H.R. 5059 will work in concert with that act by, one, allowing the 

Federal Reserve to monitor solvency at the insurance SLHCs by 

imposing capital standards, two, preserving the Federal Reserve’s 

ability to examine puerile non-regulated entities and to monitor 

and address those risks through its relationships with primary prudential regulators of those insurance holding companies, and three, 

provide the Federal Reserve the ability to step in if reasonably necessary using its emergency authority. 

Mr. Chairman, in closing, I would like to add that it is critically 

important to Nationwide and I know to all members of this subcommittee that the legislation address regulatory inefficiencies 

without creating any regulatory gaps or inequities. 

We believe that a bipartisan solution to this issue is critical. And 

while we support the legislation in its current form we also support 

necessary changes to improve the bill and increase its bipartisan 

support. 

We look forward to providing additional input as the process 

unfolds, and we greatly appreciate the opportunity to testify today. 

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

48 of the Appendix] 

Chairman DUFFY. Thank you, Mr. Mahaffey. 

Mr. Bock, you are now recognized for 5 minutes for your oral 

presentation. 

STATEMENT OF KURT BOCK 

Mr. BOCK. Thank you. Mr. Chairman, Ranking Member and 

members of the subcommittee, my name is Kurt Bock the Chief ExVerDate Sep 11 2014 13:45 Oct 15, 2018 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-03-07 HI HR 5059

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ecutive Officer of COUNTRY Financial. I appreciate the opportunity to testify on behalf of the Property Casualty Insurers (PCI) 

Association of America, which represents 1,000 insurers and reinsurers providing insurance products to families, communities, and 

businesses around the world. 

COUNTRY is a mid-sized financial company from America’s 

heartland that was formed by a group of farmers in 1925 and provides home, auto, business, and life insurance, as well as retirement investments and education funding for our customers. 

COUNTRY Financial has always had an A.M. Best rating of A+ 

or superior. Most importantly, our top priority is always our customers. And we assess any regulatory changes or proposals 

through their lens. 

State-based insurance regulation of COUNTRY effectively oversees all aspects of our insurance operations. To support our customers’ needs for trust, service, and investment management, 

COUNTRY maintains a very small thrift. 

After the Dodd-Frank Act, the Federal Reserve Board assumed 

supervision of our entire insurance holding company based on our 

very small depository institution that accounted for only 0.2 percent of COUNTRY’s total assets and had no transactional deposits 

or loans. 

While the Federal Reserve staff are exceptionally professional, 

the endless discovery questionnaires and onsite visits to oversee 

every corner of our operations consumed roughly 25 percent of our 

risk management, internal audit, and compliance staff time. 

COUNTRY had to engage both inside and outside counsel in responding to requests for information that added layers and layers 

of documentation reporting beyond our current SEC (U.S. Securities and Exchange Commission), FINRA (Financial Industry Regulatory Authority), OCC, and State regulatory requirements. 

The additional layers of regulatory oversight threatened to significantly distract us from serving our customers, even though 

there were no material changes that were required or made as a 

result of what was an enormous amount of red tape with no real 

rationale or benefit to our customers or the broader company. 

We requested deregistration of our savings and loan holding company in 2015 and were released from the Federal Reserve’s supervision in 2017. Even though COUNTRY is no longer subject to Federal Reserve Board oversight, we hope that sharing our experience 

will help Congress right-size Federal involvement in insurance. 

Numerous PCI members have had to divest their small depository institutions that were serving customers and adding synergies 

to their operations because of increased supervisory cost. Quite 

simply, the juice was not worth the squeeze, and that clearly was 

not the intent of Dodd-Frank. 

Does Congress really want the Federal Reserve to allocate their 

resources duplicating State oversight of Main Street insurance 

companies, particularly when the track record of insurance solvency in the last several financial crises compares very favorably 

with Federal oversight. 

Last year, consumers suffered perhaps the worst insured loss 

year in U.S. history including record hurricanes, wildfires, earthquakes, and tornadoes, but the insurance industry rose to the chalVerDate Sep 11 2014 13:45 Oct 15, 2018 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-03-07 HI HR 5059

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lenge. Customer satisfaction with homeowners insurers has never 

been higher. And the industry’s financial strength is similarly at 

record highs. 

As insurers we faced our 1-in-100-year crisis and our companies 

and regulatory system emerged with record consumer satisfaction 

and solvency. We fully respect the integrity of the Federal Reserve 

in carrying out its new responsibilities, but we do not believe Congress truly intended to create an additional layer of intensive Federal insurance supervision. 

After years of assurances that that Federal oversight will be proportional, it is clear that further legislative direction is required. 

The legislation by Representatives Rothfus and Beatty clarifies 

the Congressional intent of Dodd-Frank and the growing recognition that Federal Reserve oversight of insurance holding companies 

needs to be coordinated with State insurance regulators and appropriately tailored and limited to the Fed’s unique mission. 

Just as COUNTRY decided that the excessive resource cost of 

Federal oversight did not support our core mission of serving our 

customers, Congress might recognize that requiring the Fed to be 

a duplicative regulator for insurers does not well-serve its core mission. 

H.R. 5059 would go far in eliminating this unproductive duplication and would assure robust and coordinated State and Federal 

regulation that is both effective and efficient. Accordingly, PCI and 

COUNTRY look forward to working with policymakers to finalize 

and enact H.R. 5059. 

I thank you for the opportunity to testify today. 

[The prepared statement of Mr. Bock can be found on page 34 

of the Appendix] 

Chairman DUFFY. Thank you, Mr. Bock. 

The Chair now recognizes Professor Schwarcz for 5 minutes. 

STATEMENT OF DANIEL SCHWARCZ 

Mr. SCHWARCZ. Thank you very much, Chairman Duffy, Ranking 

Member Cleaver, and members of the subcommittee. I am very 

sympathetic to the goals of this bill, which are indeed to reduce 

regulatory compliance burdens on various firms that are already 

well-regulated by the States. 

But I also have a number of substantial concerns about this bill 

that I want to air in my brief oral testimony today and that I also 

go into at some length in my written testimony. 

The first point I want to make in my oral testimony is that the 

bill actually goes way further than many of the statements that 

have been made today. And that is because of how it is drafted. 

The bill creates a new type of financial institution that hasn’t 

been recognized before in regulatory and statutory language and 

that is an insurance savings and loans holding company. It then 

subjects that company to reduced regulation compared to other savings and loans holding companies. 

This inevitably creates the risk of regulatory arbitrage or as one 

of you mentioned earlier, unintended consequences. And I want to 

give you an example of that right now to start off my testimony. 

Under the bill’s language, any bank that wants to avoid Federal 

scrutiny could simply make its top holding company an insurance 


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company. Get a license for that company to write insurance. Once 

it did so, under the bill’s definition, it would be classified as an insurance savings and loan holding company because its top tier 

holding company would, in fact, be an insurance underwriting company under the language of the bill. 

That is clearly not what is intended by the bill, but it is a result 

of how the bill is currently drafted. So I would suggest, one, that 

this should be clarified in the bills’ language, but two, that this 

points to a broader concern with the bill that by creating a new 

type of regulatory entity that is subject to less stringent regulation 

than other types of similarly situated regulatory entities, it inevitably creates the risk of regulatory arbitrage. 

Second, I want to clarify the statements that have been made 

that Dodd-Frank somehow radically changed the regulation that 

insurance savings and loans holding companies face. In fact, while 

it did transfer supervisory authority to the Fed, it was the case before 2008, well before 2008, that any entity that owned a bank was 

subject to Federal supervision. 

And the group level supervisor for entities, including insurance 

companies that held depository institutions, was the OTS (Office of 

Thrift Supervision). It is ironic now that this bill seeks to eliminate 

Federal oversight over such entities, given that a big part, probably 

the primary reason why AIG failed, was OTS’ failure to exercise its 

effective group level oversight. 

That is why Dodd-Frank transferred supervisory authority over 

savings and loan holding companies, all savings and loans holding 

companies, to the Fed in a way that wouldn’t result in regulatory 

arbitrage. Dodd-Frank created a simple and easy rule. 

If you own a bank you will be regulated at the Federal level at 

the holding company level and there is no choice about who your 

regulator will be. This bill undermines that. 

Third, there is a reason why until this point for decades we have 

always maintained that if you own a bank, if you are a financial 

conglomerate that owns any FDIC-insured institution you must be 

regulated at the holding company level. 

That is because if you own an FDIC-insured institution, you have 

a unique privilege, a Federal guarantee of your creditors. That creates unique risks to American taxpayers and to the Federal Government. And a core goal of banking regulation is to manage those 

risks. Banking regulation accomplishes that by regulating both the 

bank and the holding company. 

If you now eliminate Federal oversight of any financial conglomerate that owns a bank, you create the risk that we are now not 

just going to have small FDIC-insured institutions and savings and 

loans holding companies, but that we are going to expose the Insured Depository Fund to heavy losses that are actually a result of 

its non-bank affiliates. 

The final point I want to make is that while it is the case that 

State insurance oversight is generally strong with respect to the individual entity, the core goal of State insurance regulatory oversight is not group regulation. In fact, insurance group regulation 

really, for all intents and purposes, didn’t even exist until 2008. 

So the notion that we are relying on some tried and true regulatory system at the insurance level at the holding company level 


nshattuck on FSR297 with DISTILLER
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is simply false. It is a new regime that has yet to be tested. And 

I think it is a mistake to eliminate Federal oversight on the assumption that it will work well in the next crisis. 

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

58 of the Appendix] 

Chairman DUFFY. The gentleman yields back. 

A little out of order, but one of the authors of this bill, Mrs. 

Beatty from Ohio, had a little traffic on the way in, so I want to 

recognize her for 2 minutes for her opening statement. 

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

but let me first thank you for allowing me this opportunity. And 

my delayed arrival was because, again, a bipartisan event was 

being held. Congresswoman Kathy McMorris Rodgers joined other 

leaders as we saluted leader Pelosi for her gavel and suit going into 

the Smithsonian this morning 

But let me say to our witnesses, thank you for being here. 

And to my colleague Mr. Rothfus, who I had the pleasure to work 

with on a bipartisan basis to advance this bill through the Congress. 

It is always a pleasantry to welcome our witnesses, but today I 

take special honor in having someone here from my district, and 

thank you, Mr. Mahaffey for being here. 

In my opinion, this bill simply seeks to right side the excessive 

burden of regulation placed on insurance savings and loan holding 

companies compared—and this is really important—compared to 

the risk they pose to financial stability. 

None of these companies has ever been designated by the Financial Stability Oversight Council (FSOC) as posing a risk to the financial stability of the United States’ economy, yet they face similar regulations by the Federal Government as if they were, all because of the way they are structured. 

There is no reason, in my opinion, why a smaller insurance company like Ohio-based Westfield Insurance Group should face more 

regulations than some of the larger insurance companies in the 

country due to the fact that they have a small depository institution. For me, it just makes no sense. 

Now, this is a bipartisan bill and I am reasonable so I look forward to hearing from the witnesses on their experiences as insurance savings and loan companies and ways to improve the bill. 

Thank you, and I yield back. 

Chairman DUFFY. The gentlelady yields back. 

The Chair now recognizes himself for 5 minutes. 

I just want to be clear on a couple of things. There has been in 

this committee a lot of debate about Dodd-Frank at different levels, 

but I don’t think anyone says Dodd-Frank is perfect. And I think 

this is a recognition that there could be some tweaks and modifications to make it work better. 

And that is why we have a bipartisan bill to look in and make 

some slight modifications. And I think this is an example of 

thoughtful bipartisan brainstorming. 

And I am sure that both sides are open to good ideas, whether 

it is from the panel or from other members on the committee to 

tweak or modify to make the bill even better. 


nshattuck on FSR297 with DISTILLER
12 

And I would note that the Ranking Member made a comment 

about loopholes for big banks. I don’t think that is the intent of 

anybody on this committee. And if there is an issue with that I 

think we could all work together to address that concern that the 

Ranking Member may have. 

But I want to be clear on the way this bill works, and maybe to 

Mr. Bock? With the bank that is under the holding company, is 

there any entity that would regulate the bank under this bill 5059? 

Mr. BOCK. Well, the bank is regulated by the OCC. 

Chairman DUFFY. It is regulated by the OCC, right, so it is still 

going to be regulated, right? 

Mr. BOCK. Yes, sir. 

Chairman DUFFY. We feel like the OCC is a pretty good regulator? 

Mr. BOCK. OCC has been a very good regulator. 

Chairman DUFFY. I would agree. So let us look at the insurance 

companies that fall underneath the holding company. Would they 

be unregulated under this structure of this bill? 

Mr. BOCK. They remain regulated, as they are today, by our 

State insurance departments. 

Chairman DUFFY. But the State regulators, and so have they 

been pretty effective regulators over the last 150 years? 

Mr. BOCK. They have been very effective and I would add that 

they continue to add to their toolsets and in terms of risk management and being able to look at our own risk. So yes, very effective. 

Chairman DUFFY. And under this bill the Fed would still have 

a role at looking at and regulating the holding company. Is that 

correct? 

Mr. BOCK. Absolutely. The bill continues to provide for that. 

Chairman DUFFY. And so we have three great regulators who are 

taking a piece of the pie, who know how to regulate, have been successful in the regulation, in regulating different pieces of different 

businesses or industries, but it is fair to say we are trying to eliminate duplicative regulation. Is that fair to say, Mr. Mahaffey? 

Mr. MAHAFFEY. Yes, I would concur with that. 

Chairman DUFFY. OK. And so if you heard Professor Schwarcz’s 

testimony and his concerns about it, and I think he always gives 

wise and smart testimony. I don’t always agree with it, but would 

you agree with his assessment on the dangers posed by this bill? 

Mr. MAHAFFEY. Well, I think he raises good points and I share 

your comments and your perspective that there is no intention here 

to create any loophole that would allow for an entity that is unaffected by this to somehow get into this and create a small insurance entity that stands above a big bank. 

So I think anything that can be explored to tighten that loophole 

we would be in support of. That is clearly not the intent of this. 

Chairman DUFFY. Right. 

Mr. MAHAFFEY. And I think you said this well. This is not a matter of us seeking to eliminate the role of Federal supervision. This 

is a matter of sequencing and right-sizing it, recognizing what we 

would consider to be the primary role of the State insurance departments in regulating that insurance entity. 

So I think you summarized it well. At the bank level there would 

be the OCC, who supervises the bank. At the insurance holding 


nshattuck on FSR297 with DISTILLER
13 

company level that is comprehensive and does now include both 

legal entity and consolidated responsibilities for supervision, that 

would fall to the insurance departments. 

And then the Fed would remain in the ability to monitor, receive 

information, receive information from the insurance departments 

as well as the insureds and have the ability to understand whether 

there are any supervisory gaps within that insurance holding company system and reinsert themselves if those were the cases. 

Chairman DUFFY. And I want to be clear on one point because 

I think this was a smart number, but you guys can tell me if you 

think I am wrong, but this is not a new regulatory regime for a 

bank structure that will buy an insurance company held under the 

holding company. You have to have 75 percent of your assets under 

the holding structure in the insurance business. 

Mr. Bock, is that your understanding? 

Mr. BOCK. Absolutely. You would have to buy a lot of insurance 

companies in order to exceed that threshold. 

Chairman DUFFY. And I would just—maybe I will read from page 

2. It says, ‘‘A savings and loan holding company that held 75 percent or more of its total consolidated assets in an insurance underwriting company or insurance underwriting companies.’’ 

And so I think that part was pretty clear. I only have a couple 

of moments left and maybe other people will get to this. I do think 

a point that is usually made is an AIG point in regard to insurance, but I think it is always critical to point out that it was the 

financial products unit at AIG that created a lot of the issues, as 

opposed to the entities that we are talking about under this bill. 

My time has expired. 

The Chair now recognizes the Ranking Member, Mr. Cleaver, for 

5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Let me get right to one of the significant points that this hearing 

must address, I think. And because those who are opposed to this 

legislation are saying that this is a solution in search of a problem, 

a hammer in search of a nail, false teeth in search of food. 

What I need to find out from you is whether you agree with that. 

Do any of you agree with any of the three examples, except the 

teeth? 

Mr. BOCK. I would probably cast it a different way as 5059 is 

something we have been waiting for. We applied for deregistration 

in 2012 but stopped our deregistration process awaiting for legislative relief. So in terms of a hammer looking for a nail, I believe it 

is the appropriate tool that we need now to right-size regulation 

and remove the duplication. 

Mr. CLEAVER. Mr. Schwarcz? 

Mr. SCHWARCZ. Thank you. I want to address that issue, but if 

I may, I just need to turn back some—it is really one of my more 

important points and it goes to questions that Mr. Duffy was raising. So actually I understand that you characterize the intent of 

the bill, but I actually don’t think you accurately characterized the 

effect of the bill. 

So I just want to clarify how it is drafted so that you can re-draft 

it to reflect that intent because the way an insurance savings and 

loans holding company is defined on page 2 of the bill, is any one 


nshattuck on FSR297 with DISTILLER
14 

of three circumstances can be met in order for you to qualify as an 

insurance savings and loans holding company. 

And you quoted from portion two of that definition, which contains a quantitative threshold for your assets. So in order to fall 

under subpoint 2 you would have to have 75 percent of your assets 

in an insurance holding company. 

Subpoint 1 though, defines any entity that has a top tier savings 

and loans holding company that is an insurance underwriting company as an insurance savings and loans holding company irrespective what percentage of its assets are in insurance. 

The effect of that is, and I know this is not your intent, 

JPMorgan tomorrow, if you pass this bill, could have its top tier 

holding company start issuing insurance, fall within an insurance 

savings and loans holding company, and then avoid Federal supervision. 

So this is just an error in the bill that needs to be fixed in my 

view, and I really hope that even if you support the spirit of the 

bill that you fix this. 

To get to—and I apologize but I just really needed to make that 

point—to get to the underlying question, I do believe that there are 

issues here that are important to address. 

I believe that Federal supervision of insurance savings and loans 

holding companies should be tailored to the risks that are posed by 

those entities. And I believe that it shouldn’t be duplicative with 

general oversight that insurance regulators are conducting. 

But my understanding is that the Fed is very open to that. That 

the Fed currently doesn’t engage in oversight of the State licensed 

insurance entities and that its oversight is focused at the group 

level to make sure that broader risk management concerns are 

being addressed. That is actually not the focus of State insurance 

regulation. 

So my view is that right now is maybe there is a problem but 

this is not the solution, at least as it is currently drafted. 

Mr. CLEAVER. Well, thank you. I am taking the devil’s advocate 

position here. I am not—well, let me do it in a—I don’t want to attack the devil, but I am looking for the validity of the legislation— 

how necessary it is. 

And I said it in my opening statement that I am frustrated about 

duplicative or pedantic example, compliance cost, which I think my 

Republican friends and I, we agree on the need to reduce this. 

But I need to understand as clearly as you can in 20-something 

seconds, how this is hurting your business? 

Mr. MAHAFFEY. So if I could? I think the easiest proof is in the 

number of entities that are voluntarily divested or closed their 

banks in response to Federal Reserve supervision. Most of the entities we are talking about being affected by this bill had thrift operations before the financial crisis. They did not enter them post-financial crisis. But a number of entities have voluntarily decided to 

exit these businesses because, in their judgment, the costs simply 

outweighed the benefits. 

Nationwide continues to believe that this provides a valuable 

product and service offering to our members, but the costs are significant. And despite the best intentions of the Federal examiners 

that are on the ground, there is unavoidable duplication. 


nshattuck on FSR297 with DISTILLER
15 

Our holding company, our top tier company is a licensed insurance entity and so there is unavoidable redundancy in terms of 

what gets examined, the standards that are applied to those 

exams. There are over 200 SR (supervision and regulation) letters 

that are applied to us, most of which have equivalent standards 

that are different in the State insurance world. 

So it is a reallocation of significant amounts of resources away 

from those exams to the Federal Reserve Exams. There is a heavy 

dose of education because by and large while the Fed has done a 

lot to come up to speed and staff up, it has required an inordinate 

amount of investment from the companies that are supervised to 

continue to work with them on the differences between insurance. 

And again, I do not fault the Federal examiners. 

Mr. CLEAVER. Time is up. 

Chairman DUFFY. The gentleman’s time has expired. That was 

a very long 20 seconds, but we appreciate the answer. 

The Chair now recognizes the Vice Chairman of the subcommittee, Mr. Ross, the gentleman from Florida, for 5 minutes. 

Mr. ROSS. Thank you, Chairman. 

And then Mr. Bock, you have commented in your testimony on 

the cost and inefficiency of the Federal Reserve supervision and in 

fact, to follow up on Mr. Cleaver’s, the Ranking Member’s questioning, can you cite some examples of regulatory duplication as a 

result of current law? 

Mr. BOCK. So regulatory duplication, the amount of reporting to 

the Federal Reserve is breathtaking. And they took a number of reports. So we actually provide to our own regulator, to the insurance 

regulators, like our own risk self-assessment every— 

Mr. ROSS. And then you turn around and report it to the OCC— 

Mr. BOCK. Absolutely. 

Mr. ROSS. —and the Federal Reserve. Right? 

Mr. BOCK. Absolutely. So the financial reports, et cetera, everything— 

Mr. ROSS. And that inures to your bottom line no doubt. 

Mr. BOCK. Absolutely. Absolutely. So we spent an additional, let 

us say, 25 percent of our time responding to the same issues that 

we always respond to our— 

Mr. ROSS. And this current law is predominantly why Country 

Trust Bank is no longer in existence, correct? 

Mr. BOCK. Well, we are in existence still with trust-only powers, 

so— 

Mr. ROSS. OK. 

Mr. BOCK. —so we deregistered for trust-only powers specifically 

to keep serving our customers but also to reduce the costs which 

had no benefit of Federal oversight. 

Mr. ROSS. Mr. Schwarcz, I appreciate you raising concerns related to regulatory arbitrage, and I appreciate you being here and 

I can assure that I think that we would all agree that the intent 

here is not to provide a creative way for financial services conglomerates to avoid Federal oversight. 

In fact, I believe the bill provides certain safeguards against this 

possibility by using a number of mechanisms, of which you alluded 

to. It defines an insurance savings and loan holding company as a 

savings and loan holding company that holds 75 percent or more 


nshattuck on FSR297 with DISTILLER
16 

of its total assets in an insurance underwriting company or companies, and it requires 75 percent threshold to be met in the most recent four consecutive quarters. 

And it has to also have been a savings and loan holding company 

to have been registered before July 21, 2010. Now, these are some 

pretty significant safeguards. Are you suggesting that these aren’t? 

Mr. SCHWARCZ. Yes. No, I am suggesting they are and you are 

not—and I am suggesting you are actually not reading the bill correctly. If you look at page 2— 

Mr. ROSS. All right. Yes. 

Mr. SCHWARCZ. —line 23, it is an ‘‘or.’’ 

Mr. ROSS. So you suggest we put an ‘‘and’’? 

Mr. SCHWARCZ. Wait, so just let—well, if you put an ‘‘and’’ that 

would definitely— 

Mr. ROSS. That would resolve it? 

Mr. SCHWARCZ. That would resolve it but I think it would create 

other problems because actually several of these companies would 

no longer be an insurance savings and loans holding company. 

Mr. ROSS. Well, but really what other problems would it create? 

It is not a less regulatory scheme as you say. 

Mr. SCHWARCZ. Oh, no, it absolute is. 

Mr. ROSS. On whose part? 

Mr. SCHWARCZ. Well, I don’t understand. If you are saying it is 

not— 

Mr. ROSS. Well, I don’t understand either because, you see, there 

are two regulators here. 

Mr. SCHWARCZ. Right. Wait— 

Mr. ROSS. Well, there are three in the Fed and there is one in 

the State. 

Mr. SCHWARCZ. Yes. No, but let me try to answer, just— 

Mr. ROSS. Oh, please do. 

Mr. SCHWARCZ. Yes, OK, great. Thanks. So just let me be very 

clear. The definition of an insurance savings and loan holding company under the bill allows you to qualify if you meet any one of 

three criteria— 

Mr. ROSS. Which are fairly stringent. 

Mr. SCHWARCZ. No. 

Mr. ROSS. Which will also prevent— 

Mr. SCHWARCZ. No. The— 

Mr. ROSS. Yes, they are. 

Mr. SCHWARCZ. The criteria— 

Mr. ROSS. Are we going to go back in time to July 21st period? 

Mr. SCHWARCZ. The criteria that you own that your top tier savings and loans holding company is an insurance underwriting company can be satisfied if you take your top tier company and you 

get licensed in one State to sell any insurance you qualify. 

Mr. ROSS. And that causes less stringent regulation? 

Mr. SCHWARCZ. Of course. If you— 

Mr. ROSS. To whom? What about the State regulator? Are you 

demeaning the State regulator by saying they don’t require stringent regulation? 

Mr. SCHWARCZ. Let me answer— 

Mr. ROSS. I don’t think you do. I think what we are doing is we 

are allowing the consumers to have the benefit of what has been 


nshattuck on FSR297 with DISTILLER
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probably the most efficient, effective and cost effective regulatory 

environment out there, and that is the State. 

Mr. SCHWARCZ. I think it is interesting— 

Mr. ROSS. Your testimony is incorrect. It doesn’t require this law 

to come into effect to allow for less stringent regulation, just the 

opposite. 

Mr. SCHWARCZ. I think it is really funny that you are saying that 

it is not stringent regulation but there are all— 

Mr. ROSS. Well, you said it wasn’t stringent regulation. You said 

this bill will lead to less stringent regulation and I— 

Mr. SCHWARCZ. Of course it will. 

Mr. ROSS. —take you to task to that. 

Mr. SCHWARCZ. Because the— 

Mr. ROSS. In the academic world yes, but maybe not in the real 

world. 

Mr. SCHWARCZ. The Fed is not regulating you at the holding company level unless certain— 

Mr. ROSS. But you are going to regulate— 

Mr. SCHWARCZ. —criteria are met. 

Mr. ROSS. —them at a State level. 

Mr. SCHWARCZ. Yes, that is less stringent regulation. 

Mr. ROSS. Correct. And that is not stringent. State level is less 

stringent? 

Mr. SCHWARCZ. OK. 

Mr. ROSS. The best consumer protections we have out there in 

any type of regulatory environment in this world and you are saying it is less stringent? The most significant, that is closer to the 

consumer, you are saying is less stringent? 

Mr. SCHWARCZ. Can I answer or are you just going to talk to me? 

Mr. ROSS. —you are saying less stringent? 

Mr. SCHWARCZ. Well, I will answer if you want. 

Mr. ROSS. I think you already have answered. 

Mr. SCHWARCZ. Well, I don’t— 

Mr. ROSS. Go ahead. 

Mr. SCHWARCZ. OK, sure. It is less stringent yes. That is precisely why there is less cost if you, in fact, avoid the regulation. 

Mr. ROSS. And less cost is bad? 

Mr. SCHWARCZ. No, it is good, but it is also— 

Mr. ROSS. Thank you. 

Mr. SCHWARCZ. —relates to there being less regulation. I don’t 

understand how you can simultaneously say— 

Mr. ROSS. It is because of— 

Mr. SCHWARCZ. —we are reducing the regulatory burden but we 

are not reducing regulation. The two go hand-in-hand. 

Mr. ROSS. Well, you already have duplicative regulatory burden 

that has been in existence since Dodd-Frank. We are trying to remedy that and that is what this does and still allows for stringent 

regulation on behalf of the States. 

Mr. SCHWARCZ. Whether or not it is appropriate we can debate 

about that. It does reduce the amount of regulation. OK? 

Mr. ROSS. It is duplicative regulation. 

Mr. SCHWARCZ. It may reduce duplicative— 

Mr. ROSS. And that is a bad thing? That in and of itself is indicative of why we have a difference here. 


nshattuck on FSR297 with DISTILLER
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Mr. SCHWARCZ. If you create a—it is a bad— 

Mr. ROSS. I think we need less regulation when it burdens the 

consumers. 

Mr. SCHWARCZ. OK. 

Mr. ROSS. I yield back. 

Chairman DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the co-author of this bill, the 

gentlelady from Ohio, Mrs. Beatty, for 5 minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman and Ranking 

Member. I have a series of questions so I am going to ask you for 

shorter answers. 

But first, Mr. Chairman and Ranking Member, I would like to 

enter this statement for the record. It is a letter from the American 

Council of Life Insurers supporting this bill. 

Chairman DUFFY. Without objection. 

Mrs. BEATTY. Again, let me thank all of the witnesses here and 

say how much respect I have for all three of you. And at any time 

in my career that I have read something from all three of you, here 

is a good answer: I have agreed with all of you on some things. 

So we are going to take it down a little notch here and first let 

me say to you, Professor Schwarcz, that I appreciate your comments. And you would be happy to know that we are already in 

some discussions about making some changes which are no doubt 

important. 

But after hearing Mr. Bock’s story about COUNTRY Financial, 

Professor Schwarcz, do you believe that spending 25 percent of a 

company’s compliance cost on a subsidiary that accounts for only 

0.2 percent of a company’s total assets is excessive and burdensome? And a quick answer. 

Mr. SCHWARCZ. Yes, it may well be. I do think that there is a 

very important goal here of reducing regulatory costs. I just think 

we need to do so appropriately. 

Mrs. BEATTY. OK. So let me say to all three of you that we have 

three members from the great State of Ohio here so to my good 

friends from Nationwide, I know I speak on behalf of my other two 

colleagues and you may later tell my two Republicans that I spoke 

for them today, in thanking you. 

But also beyond this I want to thank you for running an outstanding business and that you have been a true partner to the 

community to help Columbus and central Ohio to keep us moving 

forward. 

Mr. Mahaffey, this question is for you. Nationwide is subject to 

group-wide supervision by the Ohio Department of Insurance. Is 

that correct? 

Mr. MAHAFFEY. That is correct. 

Mrs. BEATTY. In addition to being regulated by the State of Ohio, 

are you not also subject to financial condition supervision and regulation in Arizona, California, Iowa, Michigan, New Jersey, New 

York, Texas, as well as subject to insurance regulations in all 50 

States and the District of Columbia? 

Mr. MAHAFFEY. Yes. 

Mrs. BEATTY. And on the Federal level are you regulated by 

FINRA, the OCC, SEC, Department of Labor, IRS, and subject to 

group-wide supervision by the Federal Reserve? 


nshattuck on FSR297 with DISTILLER
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Mr. MAHAFFEY. Yes, that is also correct. 

Mrs. BEATTY. Seems like a lot of regulations to me. Are you 

aware of any other class of financial institutions that have dual 

holding company supervision by the Federal Reserve and another 

prudential regulator? 

Mr. MAHAFFEY. No, not in the U.S. 

Mrs. BEATTY. Are insurance savings and loan holding companies 

regulated on a group-wide basis by two regulators because they are 

the biggest and most complex insurance company if they were to 

fail that would bring down the U.S. economy? 

Mr. MAHAFFEY. No. 

Mrs. BEATTY. And who has had more experience and more expertise in regulating insurance companies, such as Nationwide, the 

Ohio Department of Insurance or the Federal Reserve? 

Mr. MAHAFFEY. Cleary the State departments. 

Mrs. BEATTY. If this bill were to become law would you still be 

regulated by the Ohio Department of Insurance and all other 

States you do business in? 

Mr. MAHAFFEY. Yes. 

Mrs. BEATTY. Your depository institution will still be regulated 

by OCC. Is that correct? 

Mr. MAHAFFEY. That is correct. 

Mrs. BEATTY. And you will still have to comply with the Federal 

Reserve’s insurance capital requirement, submit various reports to 

them and be subject to direct supervision if the Federal Reserve believed that your company was in material distress. Is that correct? 

Mr. MAHAFFEY. That is correct. And I would include in those capital standards prospective stress testing as another requirement. 

Mrs. BEATTY. OK. Can you explain the benefits Nationwide’s depository institution provides to your business, your customers, and 

why you have made a decision to not get rid of it? 

Mr. MAHAFFEY. Sure, and I will—being as brief as possible, one 

benefit we have as a mutual insurance organization is the benefit 

of diversification of our risk portfolio. That is the benefit of anybody buying insurance is diversified risk. 

The bank gives us another business with uncorrelated risks to 

the rest of our business. More directly to our members, to those 

people we exist to serve, it provides additional products and services that we can uniquely tailor to their needs that work in concert 

with the other products and services we offer. 

The examples I gave in my testimony of prepaid claims cards and 

emergency debit cards for folks in the wake of natural catastrophes 

are perfect examples of that. 

Mrs. BEATTY. And last, do you not believe that the State-based 

insurance system that has governed this country’s insurance system for almost 150 years is effective and time-tested? 

Mr. MAHAFFEY. Yes. 

Mrs. BEATTY. Thank you, Mr. Chairman. And I yield back. 

Chairman DUFFY. The gentlelady yields back. 

The Chair now recognizes another author of this bill, the gentleman from Pennsylvania, Mr. Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Chairman, and again, I want to thank 

my colleague, Mrs. Beatty, for her work on this legislation. She introduced a letter from the ACLI. I would like to offer for the record 


nshattuck on FSR297 with DISTILLER
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letters of support from the Property Casualty Insurers Association 

of America, as well as the National Association of Mutual Insurance Companies for the record. 

Mr. Chairman? 

Chairman DUFFY. You had— 

Mr. ROTHFUS. Yes, I wanted to offer for the record a couple of 

letters of support, one from the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies. 

Chairman DUFFY. Well, without objection. 

Mr. ROTHFUS. I want to talk a little bit about the Ranking Member raised this issue. Is this a solution in search of a problem? 

So if I can go to you, Mr. Mahaffey? And again, we have heard 

from Mr. Bock about their compliance costs. Can you elaborate on 

how Fed supervision has affected compliance costs in Nationwide’s 

business of operations and compliance costs? 

Mr. MAHAFFEY. Yes 

Mr. ROTHFUS. OK. Can you quantify it at— 

Mr. MAHAFFEY. We have similar experiences. It is a reallocation 

of finite resources. And to be clear, we have added resources to 

comply with those Fed standards and regulations and examinations. 

I think the estimate of 25 percent to 30 percent of, for example, 

my team’s time in enterprise risk or in the compliance function as 

an example, being reallocated to these is a reasonable estimate. 

But I would also argue that those costs that are very difficult to 

quantify go well beyond just those dedicated teams that have direct 

responsibility for the relationship in conducting the exams. 

It is a prominent focus all the way from the board through senior 

management to direct frontline associates given the extensive nature of the supervision and the ongoing presence of examinations. 

So the costs are material and there are specific examples where we 

have had to incur very specific costs to stand up programs that 

comply with Federal Reserve expectations. 

Mr. ROTHFUS. Can you tell us what aspects of Fed supervision 

are inappropriate for an insurance company? 

Mr. MAHAFFEY. I would start by highlighting the differences in 

the nature of their supervisory frameworks that they bring to bear, 

as we have all said in our testimony they come with a banking-developed toolkit. So the basis from which they engage and— 

Mr. ROTHFUS. Notwithstanding that they were supposed to be 

getting some expertise in insurance. You still find this to be a problem? 

Mr. MAHAFFEY. And I would say yes, we do still find it to be a 

problem and I will still give them credit for working with us, for 

example, on the Capital Standards Clarification Act and the capital 

standards in the wake of that. We found them to be very willing 

partners, but you are talking about an immense body of knowledge 

that has been developed over decades exclusively with the banking 

arena. 

And porting that over into an insurance world has inherent inefficiencies. And when you apply that at the group level, redundancy 

and duplication is unavoidable. 


nshattuck on FSR297 with DISTILLER
21 

Mr. ROTHFUS. Mr. Bock, we have heard from Mr. Mahaffey about 

how Nationwide used it as S&L. Can you elaborate on what role 

the former S&L played for COUNTRY? 

Mr. BOCK. It is still our trust bank. It houses our wealth management business, so it still exists. It was a grandfathered unitary 

savings and loan holding company that was under OTS from 

Gramm-Leach-Bliley. 

But we wished to hold ourselves with that status through conversion into being regulated by the Federal Reserve, but found, as we 

have said, the costs were way too high for the benefit that it was 

providing to our policyholders. 

Mr. ROTHFUS. What kind of consumer impacts would you see as 

a result of this action for your customers? 

Mr. BOCK. This action that we took? 

Mr. ROTHFUS. Yes. 

Mr. BOCK. It obviously reduced our costs. We now spend our time 

focused on those risks and those things that are most beneficial to 

our policyholders. And it allows us to let our regulators play the 

role that they should play, the State regulators regulating us, OCC, 

et cetera. 

Mr. ROTHFUS. Mr. Mahaffey, is Fed supervision as it is currently 

conducted necessary to protect against systemic risk? Or is it possible to achieve the same goal more efficiently with respect to Nationwide? 

Mr. MAHAFFEY. We definitely think it is possible to achieve the 

same goal more efficiently. And you mentioned systemic risk. I will 

note that the Fed has said publicly on many occasions that these 

ISLHCs that we are talking about do not pose systemic risks. 

And this bill does not touch the authority of the FSOC to designate anybody who would pose a future systemic risk to come back 

into Federal Reserve supervision. 

As it is currently conducted, there are definitely opportunities. 

We think this bill addresses that opportunity. 

Mr. ROTHFUS. In working on this legislation, I wanted to ensure 

that this bill solves the problem we have identified while guaranteeing that vital information gets to the appropriate regulator. 

Again, this is about right regulating, not deregulating. 

Mr. Mahaffey, can you please talk a bit about how this bill would 

change which reports you provide to which regulators and why that 

deconfliction is important? 

Mr. MAHAFFEY. Yes. So the way I would describe this is this 

would respect the primacy of the department of insurance in the 

State of Ohio as the primary day-to-day supervisor and examiner 

of Nationwide. 

The Federal Reserve would have access through the State department of insurance for all of the information that they would 

garner from Nationwide in the same way that all of the other 

States that play a supervisory role for Nationwide patriate and cooperate with Ohio for that information. 

It would also provide them with direct access to a lot of individual information on financial reporting, holding company structure, legal entity structure, business structure, and all of the necessary requirements for their capital standards. 


nshattuck on FSR297 with DISTILLER
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So they would have direct access for the important information 

necessary to monitor that system. We think that construct provides 

a ton of efficiency for Nationwide by removing that day-to-day duplicative examination burden that really requires that inordinate 

amount of time that I described and Mr. Bock described. 

Mr. ROTHFUS. Thank you. My time has expired. 

Chairman DUFFY. The gentleman’s has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Bock, there are currently 12 insurance savings and loans 

holding companies that fall under Federal supervision due to the 

fact that they own a depository institution. Can you give us a description of these companies? What business are they in? What 

type of products do they offer? What is the risk profile? 

Mr. BOCK. I can—thank you. I can give you just a quick thought 

as they range from companies that are very multidimensional like 

Nationwide, that serve a broad range of customers, all the way 

down to companies such as Westfield, which serves a regional market, the same thing, its customers. 

And so the banks are therefore focusing on customer products 

and diversification, as Mr. Mahaffey said. So in terms of their risk, 

it is absolutely limited because of the current supervisory structures that they had prior to Dodd-Frank. 

Ms. VELAZQUEZ. OK. So what does owning a thrift allow these 

companies to do that they otherwise wouldn’t be able? 

Mr. BOCK. In today’s world, obviously financial security is important for every home, every customer, and it allows insurance companies to focus on the needs of protection as well as preservation 

of assets. And so it serves a broader range of protection, but also 

protection for great retirements, et cetera. So that is— 

Ms. VELAZQUEZ. Thank you. 

Mr. BOCK. —that is my personal view. 

Ms. VELAZQUEZ. Thank you. 

Mr. Mahaffey, same question to you. What does owning a thrift 

allow Nationwide to do that otherwise would not be able to? 

Mr. MAHAFFEY. So the purpose of our thrift institution is not to 

create a large independent bank that serves non-member customers for Nationwide. And it is quite the opposite. 

Our owning of a thrift is designed to create products and services 

that augment our existing insurance and financial services products in ways that we think create convenience and other sources 

of value for our members, like those post-catastrophe claims cards 

and debit cards, things that would be very difficult to execute if we 

were doing with a third-party partnership because they would have 

a different interest in how— 

Ms. VELAZQUEZ. Thank you. 

Mr. MAHAFFEY. —they serve our members. 

Ms. VELAZQUEZ. Professor, would you care to comment on it? 

Mr. SCHWARCZ. Yes, so I think that it varies, and I think that 

in certain contexts, like Nationwide the bank may be very small. 

For other insurance savings and loans holding companies the bank 

actually can be a substantial portion of the company. 


nshattuck on FSR297 with DISTILLER
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So just for instance, USAA, I think their bank has $80 billion in 

assets. TIAA just acquired EverBank, which I think had many, 

many billions of dollars in assets and used to operate as a freestanding banks. 

The other point I would just make is, banks allow you to serve 

your customers in unique ways. They also do create unique risks 

and that is because they are Federally insured. They are unique in 

that respect. And that is why banking regulation is different than 

other types of regulation and it is also why it has to occur both at 

the level of the individual bank and at the holding company level. 

If you only have bank regulation at the individual level of the 

bank then there is a substantial risk that that bank can actually 

be either exploited by its non-bank affiliates or can actually be destabilized by those entities. 

Ms. VELAZQUEZ. Thank you. 

Mr. Mahaffey, I am very concerned about bifurcated regulation, 

and I am concerned about the regulatory regime this bill creates. 

I was here in 2008 and witnessed the near collapse of AIG and how 

it and other firms like it nearly destroyed the financial system and 

world economy. 

Please tell me how H.R. 5059 can both relieve the duplicative 

regulation that you spoke to and yet guarantee the public that we 

are not ushering in another AIG. 

Mr. MAHAFFEY. Thank you for the question. I think it is important to note that this does not remove the role of Federal supervision from the group level. It simply delineates it from the role of 

the State and in my opinion sequences it so that it has a complementary role not a redundant role. 

So what we are seeking to do, and I think Chairman Duffy described it very well, as it related to our bank we have an OCC-dedicated regulator that would be full-time. We have a group consolidated supervisor at the State level and the Fed would still remain 

responsible for the holding company with review authority for all 

of the information and ensuring the completeness of coverage of 

regulators within the holdco with the ability to step back in if we 

fail certain tests, like the capital standards. 

Ms. VELAZQUEZ. Thank you. 

Professor, your take on this question? 

Mr. SCHWARCZ. So first, I agree that a very important element 

of this bill is that it doesn’t restrict FSOC’s ability to designate 

firms like AIG as systemic, so I do think that that is an important 

point and one reason why it is not as dangerous a bill as it very 

much otherwise could be. 

So I don’t think we are talking about systemic risk concerns. I 

think what we are talking about instead is the concern that American taxpayers will end up having to incur the costs associated with 

bailing out a bank that failed because of its non-bank affiliates. 

Ms. VELAZQUEZ. Thank you. 

Mr. SCHWARCZ. Yes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. I yield back. 

Chairman DUFFY. The gentlelady’s time has expired. 

The Chair now recognizes the gentleman from Missouri, the 

Chair of the Subcommittee on Financial Institutions, Mr. 

Luetkemeyer, for 5 minutes. 


nshattuck on FSR297 with DISTILLER
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Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

And welcome to our guests. And I want to thank Mr. Rothfus for 

his common sense legislation here that I think Mr. Mahaffey, you 

just really did a good job of summarizing what we are trying to do 

here is not to deregulate but to find a way to not have this burden—this extra layer of regulation there that could cause us costs 

and confusion, so appreciate that. 

Also I appreciate Professor Schwarcz’s comment a little bit ago 

with regards to tailoring regulations to risk. I think that is extremely important. 

I think we are trying to do that as a committee on a lot of levels 

to try and find ways to make sure that the regulations are not 

there to be more punitive than necessary and continue to allow the 

freedom of businesses to do their job but at the same time making 

sure there is a box within which they operate. And you have to tailor the regulations to make sure that you protect that—box. And 

I appreciate that comment from the professor. 

Mr. Mahaffey, you have been very articulate with regards to how 

your company is working through this and I just have one more 

question for you with regards to the relationship with the Federal 

Reserve and your ability to do your job. 

If the Federal Reserve is overly cumbersome how does it really 

affect your business to assess and do your job with regards to insurance risk? 

Mr. MAHAFFEY. To the extent we are allocating scarce time and 

energy amongst my staff or other risk-related staff within the organization, if we are doing so in a duplicative manner that probably 

actually results in less time for other material risks that could otherwise use that time. 

And I would point to the fact that because there are inherent differences in the risk profile of insurance entities versus banking entities, that by and large has meant we are pulling time away from 

what I would consider to be potentially more material risks on the 

insurance side on natural catastrophes, mortality, morbidity. These 

are not risks that exist in a banking construct. 

So all of our time and energy is spent competing for where we 

allocate that time to manage these risks. This would reduce duplication and allow us, I think, to be more efficient in the allocation 

of risk management time, which, by the way, coincides with the 

ability to protect policyholders and depositors. 

Mr. LUETKEMEYER. I think, Mr. Bock, a while ago you mentioned 

something about the regulators using bank standards to regulate 

insurance companies? I believe you made a comment to that effect? 

I am sure you didn’t mean that, but I am curious as to what was 

going on with that comment, because it raised some— 

Mr. BOCK. Our experience. Yes, thank you. Thank you. Our experience was that the standards they use, the SR that Mr. Mahaffey 

referred to, were the same ones that came from the banking experiences. So yes, we were hoping for tailored or appropriate— 

Mr. LUETKEMEYER. So they really were using and really inaccurate standards in your judgment? 

Because you have two separate business models here, the banks 

and the insurance companies have two completely different business models and really you need to have two separate tailored 


nshattuck on FSR297 with DISTILLER
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rules for those folks. And yet the regulators were using more of a 

bank standard to analyze the insurance part of this? Is that what 

you are saying? 

Mr. BOCK. I would say so not necessarily bank capital standard, 

but they were using their SRs, their bank checklists, to go through 

things like cyber-security risk, enterprise risk, et cetera. So they 

were not tailored to us as an insurer to our size as a— 

Mr. LUETKEMEYER. OK. You are using the word were. Have they 

changed this now? Are they doing a better job? 

Mr. BOCK. We left Federal supervision in— 

Mr. LUETKEMEYER. OK. 

Mr. BOCK. —in 2017. 

Mr. LUETKEMEYER. OK. You had a buzzword there that is important to me. We are going to have a data security, cyber-security 

hearing this afternoon, and I have a bill that we are working on 

to try and address some issues there with data security. 

And so one of the questions that is going to come up this afternoon is the duplicative nature of all of the different rules and regulations with regards to data security and cyber-security notification 

across the country. 

You have 50 States and you have anywhere from 40 to 50 different standards on things. Do you see some duplicative problems 

here with the way cyber is looked at with the Fed and State examiners? 

Mr. BOCK. There is some duplication. I would say that the State 

insurance departments, the NAIC are looking to coordinate to ensure we have a common and a very thoughtful— 

Mr. LUETKEMEYER. Do they work collaboratively on this? 

Mr. BOCK. Excuse me? 

Mr. LUETKEMEYER. Do they work together on this to make sure 

there is— 

Mr. BOCK. I would say— 

Mr. LUETKEMEYER. —no overlapping problem? 

Mr. BOCK. I would say that it is emerging right now because the 

New York Department of Financial Services has been very vocal 

about how to improve cyber-security, how to improve cyber-security 

reporting. 

Mr. LUETKEMEYER. I don’t have much time left, so I will be very 

brief here. 

I think Mr. Mahaffey you made a great comment a minute ago 

with regards to the OCC is one regulator, the State’s one regulator 

and the Fed regulates your holding company. I am not sure if some 

people understand the relationship between the bank that you 

have, the insurance company that you have and then the holding 

company. 

Could you just use a few minutes here, with the indulgence of 

the Chairman, to give that relationship so people understand why 

that is there and what the purpose of it is and how it is regulated? 

Mr. MAHAFFEY. Sure. So in our case our top tier holding company is a licensed insurance operating company, which means everything underneath that holding company is subject to State supervision. One of the entities within that then— 

Mr. LUETKEMEYER. So the holding company actually owns both 

entities and then the Fed is examining that entity. Is that correct? 


nshattuck on FSR297 with DISTILLER
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Mr. MAHAFFEY. The State and the Fed examine the holding company, which includes all of— 

Mr. LUETKEMEYER. OK. 

Mr. MAHAFFEY. —Nationwide’s subsidiary entities and that holding company is a licensed insurance entity as well. 

Mr. LUETKEMEYER. OK, thank you very much. 

Appreciate your indulgence, Mr. Chairman. 

Chairman DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 5 minutes. 

Mr. SHERMAN. Mr. Bock, in your oral testimony you spoke positively about State regulation. Perhaps you could drill down into the 

specifics and help the committee better understand what processes 

State regulators use to ensure that consumers are protected? 

Mr. BOCK. Thank you. The State regulators maintain a continuous discussion with us every day. They have the gold standard in 

financial reporting. The development over the last 5 years of onerous self-assessment, enterprise risk management tools, et cetera, 

reports to them, really safeguard the customer. 

And so what I would say is their regulation and oversight is continuous. They know us. They’ve known us for the last 92 years. 

Mr. SHERMAN. Thank you. 

Professor Schwarcz, we have to protect the depository institution 

in large part because it is federally insured. The management and 

directors of such an institution could make a number of mistakes 

in making bad loans. They could pay dividends and stock buybacks 

to deplete their capital. 

So if we are looking at the entity itself, the banking entity, why 

should we be more concerned if its ownership is affiliated with an 

insurance company than we should be about the entity itself if it 

isn’t affiliated with an insurance company, but its board of directors may just not want to keep too much capital around? 

Mr. SCHWARCZ. It has actually been a principle of banking regulation for 70 years I would say that we have to regulate both the 

entity and the holding companies. The Bank Holding Company Act 

established that in the 1950’s. 

And it has been the case for savings and loans holding companies 

before Dodd-Frank. I think that is a really important point. Before 

Dodd-Frank savings and loans holding companies are regulated at 

the holding company level. 

The reason is because failures of the non-bank affiliates can end 

up affecting the bank. It can end up being the case you get preferential loans to the non-bank holding company. It can end up 

being the case that there is no capital to be made. 

In other words, it can end up being a source of weakness, and 

we saw this with AIG. AIG’s insurance companies were endangered 

by the fact that we had other entities that were not insurance entities that were in jeopardy. The same thing could happen with 

banks. 

Mr. SHERMAN. Well, the big problem there is that, and we have 

talked about this, is that we allowed AIG’s unregulated entity to 

sell credit default swaps, which, at least I believed, to be portfolio 

insurance. 


nshattuck on FSR297 with DISTILLER
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Mr. SCHWARCZ. Right. I would just not forget about the securities 

lending operations as well, which were under the supervision of the 

insurance regulators. So there were issues on multiple levels with 

AIG. 

Mr. SHERMAN. Well, OK. To what extent can the—Professor 

Schwarcz, can the Federal Reserve further tailor its supervisions of 

insurance savings and loan holding companies in a responsible 

manner? What can we do? I know you don’t want to go as far as 

the legislation before us. What can we do to limit the— 

Mr. SCHWARCZ. Well, no— 

Mr. SHERMAN. —regulatory burden? 

Mr. SCHWARCZ. —I think that is a really important question and 

I guess that is where I would focus if I were you, and that is where 

I would focus the injury. I would ask that question, how do we 

change it? I think the answer is you have less stringent supervision 

depending upon the size of your bank and depending upon the complexity of your organization. 

My concern is that this bill doesn’t tailor because it actually cuts 

off the Fed’s authority to regulate at the holding company level unless one of several clear triggers are hit. There is a capital deficiency or there is a determination that it is in material financial 

distress. 

And so my concern is that actually rather than tailoring you are 

actually going in the opposite direction of cutting off the Fed’s ability to tailor. I have no qualms with the idea that perhaps the Fed— 

perhaps, I don’t know—the Fed may need to better tailor its supervision— 

Mr. SHERMAN. I want to hear from Mr. Bock on that same issue. 

Mr. BOCK. I think the bill does a very thoughtful way of still retaining the Federal Reserve’s ability to step in to take action so it 

doesn’t diminish the Fed’s ability in any sense of at least the language in the bill. 

Mr. SHERMAN. I will yield back. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you all for being here. We appreciate your 

testimony and your work. 

I am going to address the first questions to Colonel Bock if I 

could? Again, thank you for your service. Also I know out of the 

5,000 plus employees that you have, 3,600, I think, are in Illinois. 

So we are grateful for that, the big impact on our State and tons 

of customers as well. So grateful for that. 

I did want to just—and we have talked about this but I wanted 

to go into a little bit more specifics. In your testimony you noted 

that country Financial maintained a savings and loan holding company up until recently and then you made the decision to de-register it because the regulatory burden greatly outweighed the value 

to the company and your policyholders. 

I wonder if you can think of any other example in insurance or 

banking regulation where something that is 0.2 percent of your 

overall assets accounts for 25 percent of the hold—the company’s 

total compliance staff resources? It seems obvious to me that ConVerDate Sep 11 2014 13:45 Oct 15, 2018 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-03-07 HI HR 5059

nshattuck on FSR297 with DISTILLER
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gress needs to revisit this duplicative regulation, but wondered if 

you could talk a little bit more about that? 

Mr. BOCK. Yes, thank you. Obviously we kept registered, awaiting for regulatory relief, and we have been told that your supervision by the Federal Reserve is just your price of admission. But 

quite frankly, we were already at the movie. We were already at 

the movie and the admission cost went up. 

We sat and reviewed, just like Mr. Mahaffey did, to where we 

were spending an inordinate amount of time on something that 

was adding no value to our policyholders. And so really for the benefit of our policyholders it was a decision we had to make. 

Mr. HULTGREN. I wonder if you could talk a little bit about the 

strength of State regulation? Could you be more specific about how 

State regulators supervise a company like yours and why is this 

regulation as good or better than Federal regulation could be? 

Mr. BOCK. Well, I think this one gives a clear and thoughtful 

way of a division of responsibility, the division of labor. Our State 

regulators obviously get our financial reports consistently. They 

have the ability and the number of tools to be able to intervene and 

to question and to ask. 

So we also, at this point in time, are going through our 5-year 

financial exam, and that is an exam that lasts for at least a year 

or a year and a half. So there is nothing that our State regulators 

don’t know about how we conduct business and they have market 

conduct evaluations, et cetera. So they have a huge toolbox with 

which to regulate us and which to interact with us. 

Mr. HULTGREN. I know you have talked about this briefly, but 

wonder if you can go into just a little bit more detail of explaining 

why a change in law is necessary in order to have a State-based 

regulation as the primary approach? 

Mr. BOCK. Well, obviously, we are strong supporters of 

McCarran-Ferguson because the State-based approach has consistently and continuously worked. When the Federal Reserve came to 

us, when we talk about regulation, it was duplication to a massive 

extent and with no benefits. 

So if I take a look at this legislation it actually does thoughtfully 

give a division of labor. It also has some safeguards, but it certainly doesn’t allow someone—now, I can’t imagine someone like 

JPMorgan Chase trying to become an insurance company and having the Federal Reserve Board allow that or having a bank buy an 

insurance company and the capital requirements or have an insurance company buy a bank and the capital requirements that it is 

required. 

So some of the things that sound like gaps are not gaps. They 

have absolutely been filled by our current regulatory scheme. 

Mr. HULTGREN. That is helpful, thank you. 

Mr. Mahaffey, I have just a minute and a half or so left. The 

number of companies that would be considered insurance savings 

and loan holding companies under this bill has decreased significantly since the enactment of Dodd-Frank as firms have eliminated 

their thrift subsidiaries. 

Why would an insurance company maintain a thrift subsidiary 

and how has maintaining a thrift benefited Nationwide and its policyholders? 


nshattuck on FSR297 with DISTILLER
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Mr. MAHAFFEY. Well, again, we, like Mr. Bock, have been hopeful 

for regulatory relief and fixes, and we would again applaud the Fed 

for their ability within the confines of the current construct, the 

current regulatory regime, to be flexible where they can. But we do 

think that this bill goes further and actually changes the very construct in which both the State and the Fed need to operate to align 

them better. 

Without this it does raise questions amongst most of those institutions about whether the cost justifies the benefits to the holding 

company. In Nationwide’s case we have continued to own and operate our bank precisely because we continue to see the potential for 

massive benefit to our policyholders to continue to offer these products and services. 

Mr. HULTGREN. Thanks. In just the last few seconds, I wonder 

if you could talk a little bit about how this bill, H.R. 5059, would 

reduce its compliance cost for Nationwide? 

Mr. MAHAFFEY. It would dramatically reduce compliance costs 

and I would say allow us to redirect our resources to what we 

would consider to be the more material risk profile of an insurance 

organization because it would sequence and it wouldn’t eliminate 

the role of the Fed, but it would keep them in a monitoring mode 

to ensure sufficient coverage by the State regulators and other regulators within the holding company and only to step in and then 

subject us to examinations in the bevy of SR letters we have referred to in the event we fail capital standards, stress test or there 

is an entity within our holdco that is not functionally supervised. 

So it would be exception-based. 

Mr. HULTGREN. Thank you very much. My time is up. 

I yield back. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

MacArthur for 5 minutes. 

Mr. MACARTHUR. Well, thank you. Good morning and thanks for 

being here. 

Mr. Mahaffey and Mr. Bock, if your thrift had gotten into trouble 

and you needed to move assets to help it, would you be able to do 

that from your insurance company holdings without approval from 

State regulators? 

Mr. BOCK. No. 

Mr. MAHAFFEY. No, and I would simply add the caveat, however, 

that as a mutual insurance organization we target having sufficient 

levels of capital, very conservative levels of capital by most measures because all of our entities within our organization share the 

same brand. 

And so it would be in our consolidated interest to make sure that 

all of our entities, including the holding company, have sufficient 

capital to weather all of those sources of risk within the holding 

company. 

Mr. MACARTHUR. So it would be fair to say then that there would 

be no material risk to your policyholders because of problems at the 

thrift? 

Mr. MAHAFFEY. Speaking for Nationwide Bank, it has roughly $7 

billion in assets and is part of a holding company with $230 billion 


nshattuck on FSR297 with DISTILLER
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in assets, so I would suggest to you that the risk posed within our 

depository relative to our overall holding companies is de minimis. 

Mr. BOCK. I would say the same. Our life insurance company 

owns the bank. The life insurance company has $1.2 billion of surplus. Our bank assets are about $25 million and so in terms of a 

material risk to the life company, no. And I would also add that 

the State insurance regulators review carefully ownership of affiliates. 

Mr. MACARTHUR. Sure. I will come back to the exceptions with 

Professor Schwarcz, because you have mentioned them, but it 

makes me feel like if I have this glass of water and I put a drop 

of lemonade in it I haven’t turned it—or a drop of lemon juice I 

haven’t turned it into lemonade. It is still a glass of water. 

And an insurance company that has a thrift it doesn’t turn it 

into a bank. It is still what it was. It just has a thrift. 

Professor Schwarcz, you implied in your opening statement that 

a company, a bank, if it wanted to avoid Federal oversight could 

simply declare itself an insurance company and skirt the rules. Are 

you aware of any State that allows an insurance company to be 

formed without achieving certain capital requirements? 

Mr. SCHWARCZ. No. Every State you have to be licensed and you 

have to meet certain capital requirements. But under the bill, if 

you could convince one State to license your top tier affiliate and 

you could put capital in there, then you would actually not be subject to routine Federal oversight. So that is the issue. 

Mr. MACARTHUR. Well, you would not be subject to oversight in 

one construct but you still would be subject to bank oversight from 

the OCC and insurance oversight from insurance regulators. 

Mr. SCHWARCZ. But you would be able to escape bank holding 

company regulation, which is essential for large banks. 

Mr. MACARTHUR. Well, and you didn’t say this, but I inferred it 

from your comments that you are concerned that insurance regulators might not have the capacity and the expertise to regulate a 

bank holding company, right, or a company engaged in banking? Is 

that fair? 

Mr. SCHWARCZ. Well, that is fair and then also just an important 

related point, Federal funds are on the line with the bank because 

they are Federally insured. So if you have a Federally insured institution you want Federal regulation to match that source of liability. 

Mr. MACARTHUR. Can you tell me what percentage of Federally 

insured bank assets have actually been put at risk in any given 

year? 

Mr. SCHWARCZ. Well, that question needs to be unpacked. It depends a lot on what— 

Mr. MACARTHUR. I get it. But it— 

Mr. SCHWARCZ. —by. 

Mr. MACARTHUR. —but you are wanting the tail to wag the dog, 

it seems to me. 

Mr. SCHWARCZ. Well— 

Mr. MACARTHUR. But let me just ask this. If insurance regulators are not really the best regulator for banks, what makes you 

think that the Fed is the bet regulator for an insurance company? 


nshattuck on FSR297 with DISTILLER
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Mr. SCHWARCZ. Oh, no, I certainly don’t. And to be clear, current 

regime doesn’t envision, and my understanding is that the Fed 

doesn’t actually go and supervise the insurance companies. That is 

not what the Fed is doing. What the Fed is doing is supervising 

the holding company and at a group level. 

Mr. MACARTHUR. Well— 

Mr. SCHWARCZ. So they are not actually—there is not— 

Mr. MACARTHUR. Just one follow up on that, you had mentioned 

AIG as an example numerous times. If this bill had been law in 

2007—well, that is not fair. If this had been law and SIFI designations were also in play, so that would be after 2007, would AIG be 

able to skirt or any company be able to skirt? 

Mr. SCHWARCZ. Well, it depends a lot on whether or not they 

were appropriately designated as a SIFI, which, of course, is itself 

an authority that is not being exercised. But absolutely there would 

be a concern about that. 

And I would just point out again because I do think it is really 

important. Even before 2008 savings and loans holding companies 

that were predominantly engaged in insurance had a Federal umbrella regulator. This isn’t just going back to 2008. This is changing 

the regime that has been in place for decades and decades. 

Mr. MACARTHUR. I have to yield back, but I would just end by 

saying there is still regulation of the bank operation here through 

the OCC. Your belt and suspenders approach comes at a cost, a 

cost to customers, a cost to shareholders and that is what we have 

to weigh. It comes at a real cost. 

I yield back. 

Chairman DUFFY. The gentleman yields back. 

I want to thank our witnesses for their testimony today. I think 

it was insightful, thoughtful, and you have all given us some more 

information to think about, which is the purpose of an evidentiary 

hearing like this. So we appreciate your testimony and insight. 

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

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

Without objection, this hearing is now adjourned. 

[Whereupon, at 11:35 a.m., the subcommittee was adjourned.] 


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(33) 

A P P E N D I X 

March 7, 2018 


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Testimony of Kurt Bock 

Chief Executive Officer of COUNTRY Financial 

On Behalf of PCI 

Before the United States House of Representatives Financial Services Committee 

Subcommittee on Housing and Insurance 

Hearing on H.R. SOS9, the "State Insurance Regulation Preservation Act" 

Mr. Chairman, Ranking Member, and members of the Subcommittee, my name is Kurt Bock, Chief 

Executive Officer of COUNTRY Financial. I appreciate the opportunity to testify today on behalf of 

the Property Casualty Insurers Association of America (PCI), which represents 1,000 insurers and 

reinsurers with combined annual premiums of $220 billion. PCI member insurers and reinsurers 

represent a vast diversity of size and business models and provide insurance coverage critical to 

families, communities and businesses throughout the U.S. and the world. 

COUNTRY is a mid-sized financial company from America's heartland that has had an A+ rating for 

over 75 years. We were formed by a group of farmers in 1925 and now provide home, auto, 

business and life insurance, as well as retirement investments and education funding, to 

individuals, families, and Main Street businesses. COUNTRY Financial has always had an A.M. Best 

rating of A+ or superior. We are one of only ten life companies and sixty property casualty 

companies in the U.S. that has been rated A or better for over 75 years. COUNTRY Financial's top 

priority is always our customers, and we assess any regulatory changes or proposals through the 

lens of our policyholders. 

State-based insurance regulation of COUNTRY effectively oversees all aspects of our insurance 

operations. COUNTRY previously maintained a very small savings and loan association that 

accounted for only 0.2% of COUNTRY's total assets. Last year, COUNTRY de registered our 

COUNTRY Trust Bank because regulation of our Savings and Loan Holding Company by the 

Federal Reserve Board expanded to include regulation of the entire COUNTRY insurance 

enterprise, consuming 25% of our holding company's total compliance staff resources. The 

Federal Reserve staff are exceptionally bright and professional. But neither they, nor COUNTRY, 

nor our economy have been well served by wasting extensive government and company staff 

attention to financial activities that are systemically 
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insignificant and largely irrelevant to their core missions. This kind of inefficiency benefits no one-

-not our company, not our regulators and most importantly, not our customers. Even though 

COUNTRY is no longer subject to Federal Reserve Board oversight, we hope that sharing our 

experience will help Congress right-size federal involvement in insurance and make Federal 

Reserve Board oversight more proportional, tailored, and refocused on their core mission. 

The Current U.S. State-Based Insurance Regulatory System 

The U.S. has the largest and most diverse insurance market in the world, with a 150-year track 

record of comprehensive state solvency regulation protecting consumers. I am particularly proud 

of the role that our industry and COUNTRY Financial have played in helping to bring about safer 

homes, workplaces, and highways-- efforts that have saved countless lives and prevented the 

waste of huge amounts of resources. And I am equally proud that our financial investment in 

America's future through the municipal bonds that we buy helps build critical infrastructure that 

leads to a higher quality of life. 

Last year, United States consumers suffered record losses from historic natural disastershurricanes, wildfires, earthquakes, and tornadoes. The insurance industry rose to the challenge, 

communicating closely with our policyholders, working with federal and state disaster crews and 

regulators, and speeding claims payments to families and businesses suffering losses. Despite 

these tremendous challenges, industry solvency and financial strength have remained at record 

highs. At the same time, overall customer satisfaction among homeowners with property 

insurance claims has reached a new all-time high as reported in a recent J.D. Power survey 

(Appendix 1). The U.S. insurance industry cares about serving its policyholders and giving people a 

helping hand up. It is already very extensively regulated by nearly 11,000 regulatory staff in state 

insurance departments, without need for additional layers of federal supervision (Appendices 2 

and 3). 

Private sector insurance availability and competition are better than ever for consumers 

(Appendix 4) and government residual markets have been steadily declining as the private sector 

has dramatically improved insurance availability to address consumer needs. Compared to 
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federally regulated banks, state regulated property-casualty insurers fared relatively well during 

the last financial crisis (Appendix 5), with significantly fewer insurance insolvencies as compared 

to banks. The decline during the crisis in the stock valuations of publicly-held property-casualty 

insurers was not only far less than for banks but also less than the decline of the New York Stock 

Exchange composite index (Appendix 6). Property-casualty insurers also continue to be far Jess 

leveraged than banks, nor are property-casualty failures correlated with broader economic cycles. 

The local focus of our state-based insurance regulatory system supports responsive propertycasualty insurance markets that address regional needs as well as the specific needs of local 

insurance customers. Simply put, insurance is different than banking, and bank regulation is not a 

good fit for insurance holding companies. 

Dodd-Frank and the Federal Reserve Board 

In Dodd-Frank, Congress repeatedly recognized the primacy of state regulation but also abolished 

the Office of Thrift Supervision (OTS) and, in the process, gave the Federal Reserve new authority 

over insurance holding companies with thrift subsidiaries. 

Although Congress preserved the Home Owners loan Act and a distinct holding company 

structure to govern savings and loan holding companies differentiating them from bank holding 

companies, the Federal Reserve has continuously strived to fit insurance groups with depository 

institutions into its bank holding company regulatory system. In this effort they have had to 

consider how to balance the conflicting pressures of banking regulation- focused on macroeconomic stability, holding company source of strength for depositors and federal deposit 

insurance fund protection- with a completely different insurance business model that does not 

contribute to systemic risk and is focused on legal entity regulation for consumer protection. 

Recent statements from the leadership of the Federal Reserve Board clearly indicate that they 

understand the necessity, and share the goal, of "tailoring" their regulatory activities to the 

subject of those activities. However, without changes in the statute, Federal Reserve officials are 

limited as to the amount of deference they can provide to state-based insurance regulation of 

insurance companies with savings and loan subsidiaries. 
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Federal Reserve Supervision of Insurance SLHCs 

Until2011, savings and loan holding companies (SLHCs) were regulated by the OTS. In 2011, 

pursuant to the Dodd-Frank Act, the supervisory responsibilities of the OTS were transferred to 

the Federal Reserve, and savings and loan holding companies were subjected to the Board's 

holding company supervision. That supervision was applied not just to the thrifts or banks within 

the group, but also across the entire group including its insurance operations with a focus on the 

SLHCs internal controls and corporate governance, as well as risk identification, measurement, 

and management. The Federal Reserve also has supervisory authority over entities designed by 

the FSOC as systemically important. 

In congressional hearings and public forums leading to the enactment of the Insurance Capital 

Standards Clarification Act of 2014, an oft-repeated theme was that regulators should avoid using 

a one-size-fits-all approach to setting capital rules for financial companies under its jurisdiction. 

This was most typically reflected in the view that insurance companies should not be regulated 

like banks and subject to rules designed for banking. We agree with this approach; but 

recommend that supervision should not only be tailored to reflect the unique risk-based 

attributes of each sector, banking versus insurance, but also the unique attributes of the diverse 

range of business models and product lines within the insurance sector. 

While the Federal Reserve has authority with respect to SLHCs and designated systemically 

important companies, it is important to note that there are distinct differences in these two 

categories of companies. SLHCs are subject to Federal Reserve jurisdiction because of the 

presence of a depository institution and because Congress abolished the OTS, not because the 

companies have been designated by the Financial Stability Oversight Council as potentially posing 

systemic risk to the U.S. financial system. 

Congress passed with overwhelming support the Insurance Capital Standards Clarification Act of 

2014, which allowed the Federal Reserve to avoid imposing on insurers capital standards 

designed for bank holding companies. The Federal Reserve is now trying to ramp up its 

understanding of insurance to evaluate various domestic and international proposals regarding 

4 
38 


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how it should supervise insurance holding companies under its jurisdiction. Federal staff have 

spent considerable time and effort examining insurers, asking questions not only about their 

depository institutions and potential risks to the federal deposit insurance fund, but about many 

unrelated insurance and commercial activities as well. They are just doing their job, but the 

question for Congress is whether it is worthwhile for the Federal Reserve to be focused on 

examining well-capitalized and well-regulated insurance SLHCs. COUNTRY's experience suggests it 

is not. 

We do not believe that Congress truly intended to create an additional layer of intensive Federal 

Reserve supervision of insurance for Main Street insurance operations. We fully respect the 

integrity of the Federal Reserve in carrying out its new responsibilities but would suggest that 

additional clarity from Congress regarding its intent under the Dodd-Frank Act could be helpful. 

To the extent that the Federal Reserve imposes supervisory requirements on insurance holding 

companies under its jurisdiction, the Federal Reserve should focus on the holding company 

banking activities and risks and rely to the extent possible on state regulatory standards and 

oversite with respect to the insurance operations of the group. By doing so, the Federal Reserve 

would not need to try to replicate decades of sector-specific regulatory experience. Changing the 

Federal Reserve's focus, however, will require specific congressional direction and amendments 

to existing law. 

State Insurance Regulation Preservation Act- H.R. 5059 

COUNTRY applauds Representatives Keith Rothfus and Joyce Beatty for introducing H.R. 5059, the 

State Insurance Regulation Preservation Act. The bill would provide clear legal authority and 

guidance to assure that regulation of insurance savings and loan holding companies is 

appropriately tailored and gives due recognition to proven effective state-based insurance 

regulation. At the same time, it would provide emergency supervisory authority to the Federal 

Reserve if all else fails. 
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Scope 

The bill would not impact the way the Federal Reserve regulates banks and thrifts that are not 

affiliated with insurers. Its purpose is only to curtail duplicative federal regulation of holding 

companies that are primarily insurance underwriters. The bill's definitions, in combination, would 

assure that only insurance savings and loan holding companies that are intensively regulated by 

the states are covered -- not all or even most savings and loan holding companies. 

Tailored Regulation 

The bill would provide important provisions to prevent duplicative reporting. For example, if a 

holding company is within the scope of the bill (i.e., it is an insurance SLHC), the Federal Reserve 

could require companies to report on core regulatory information such as the group's corporate 

structure, transactions between the company and its affiliates, financial reports, and capital 

holdings. That is sufficient to establish whether a company meets required capital levels. The 

Federal Reserve Board must have developed the examination framework in consultation with 

state regulators and must tailor examinations to the risk and activities of the business of 

insurance. If the insurance SLHC meets both applicable state and Federal Reserve capital 

standards, the Board would rely on state insurance regulators and would neither examine nor 

apply supervisory guidance to the SLHC. Federal Reserve supervision and exam authority would 

appropriately be limited to insurance SLHCs not meeting minimum capital requirements and 

material unregulated non-insurance subsidiaries, whose activities could possibly put the 

depository institution at risk. 

Corrective Actions 

Under the bill, if an insurance SLHC fails to maintain its minimum required capital, the Board 

would be required to provide a notice of noncompliance and require the company to submit, 

within 45 days, a plan to restore that capital. If the company fails to do so, the Board could then 

impose its supervisory and regulatory authority to the insurance SLHC. 

Emergency Supervisory Authority 

The bill would provide an additional Federal Reserve regulatory safety net in emergencies. The 

Board, after consultation with the state insurance regulators, would retain the ability to apply 

more intensive regulation, where the operations and activities of the insurance SLHC pose a 

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serious and imminent risk to the financial safety and soundness of the subsidiary saving 

association. 

Conclusion 

H.R. 5059 embodies the Congressional intent of Dodd-Frank and the growing consensus that 

Federal Reserve Board regulation of insurance SLHCs should be better coordinated with, and 

governed by, proven effective state-based insurance regulation. At the same time, however, the 

bill would assure that the Federal Reserve Board has emergency powers to intervene to protect 

saving associations if all else fails. 

We hope that COUNTRY's experience with Federal Reserve Board oversight is informative to 

policymakers. The Fed has an enormously important role to play in restraining inflation, 

promoting job growth, and monitoring broader macroeconomic financial stability. Having the Fed 

divert its resources to duplicating the oversight of state insurance regulation is truly suboptimal 

and inefficient. Let the states do their job, leave the Fed with emergency powers to fill in if there 

is a real threat to the federal bank deposit insurance fund, and let property-casualty insurers 

focus on serving our customers and maintaining our record levels of consumer satisfaction. 

Accordingly, we look forward to working with Congress to enact this important, balanced and 

effective legislation. 

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lJJJt!IIUIX .l. 

--------------------------------------------

P&C Insurance Customer Satisfaction Driven by Good Communication, Not Speed, J.D. Power Finds 

Record Catastrophic Losses Place P&C Insurer Focus Squarely on Management of Customer fumgctation> 

COSTA MESA, Calif.: 22 Feb. 2018- Overall customer satisfaction among homeowners filing property 

insurance claims has reached a new all-time high, despite record-high property losses following a spate of 

hurricanes, earthquakes and fires in North America. That's according to the J.D. Power 2018 U.S. Property 

Claims Satisfaction Study,sM released today, which finds that insurers that have achieved the highest levels 

of customer satisfaction have also been the most effective at managing customer expectations for the time 

it will take to settle claims. 

"The last two years of record catastrophic losses have put P&C insurers to the test, and many have risen to 

the occasion, driving overall customer satisfaction levels to new highs," said David Pieffer, Property & 

Casualty Insurance Practice Lead at J.D. Power. "While that overall performance is a positive for the 

industry, there is wide variability in the ranges of performance among insurers in different regions of the 

country and between different service attributes. Particularly noteworthy, customer satisfaction in Texas 

and Florida-two of the areas hardest hit by hurricanes-show below-average results, spotlighting areas 

where there is still room for improvement among insurers." 

Following are some of the key findings of the 2018 study: 

Overall customer satisfaction reaches record high: Overall satisfaction for property claims has 

reached an all-time high of 860 (on a 1,000-point scale) at the same time the personal lines segment 

has experienced record claims. This is the second consecutive year that property claims satisfaction 

levels are in line with auto claims satisfaction scores, which had historically trended higher. The 

bulk of this year's improvement is driven by non-weather-related claims, primarily related to water 

damage. 

Managing time expectations becomes key driver of satisfaction: The time it took to settle a 

claim is the single lowest-rated attribute in the study, with 1 in 7 respondents indicating that the 

claim took longer than expected. However, when time frames are properly managed, even groups 

that experience the longest time-to-settlement still rate their experience above the industry 

average of 8.15 (on a 10-point scale). Time-to-settle satisfaction ratings are 1.9 points lower when 

insurers miss customer timing expectations, even when the time frame is relatively short. 

Areas hit hardest hy weather events show declining satisfaction: Texas and Florida show 

declining customer satisfaction scores in the immediate aftermath of major weather events. In hoth 

cases, the time required to estimate the damages is particularly affected. Claims related to hail 

storms in Texas, and high winds or storms in Florida, see this time nearly double to 10 days 

compared with five days for claims in these states not related to weather. 
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Outsourcing takes a toll: The use of independent appraisers, which typically spikes when large 

catastrophic events occur, is associated with significantly lower customer satisfaction scores. 

However, interactions with the appraisers are not driving the lower scores; rather, insurance 

companies are not effectively incorporating appraisers into the claim process workflow as 

customers are most critical of key claim experience attributes such as time-to-settle; kept informed 

on claim; and thorough explanation of settlement. 

Study Rankings 

Arnica Mutual ranks highest in property insurance claims experience for a seventh consecutive year, 

achieving a score of 895. Chubb ranks second with a score of 887, followed by Erie Insurance with a score 

of884. 

The U.S. Property Claims Satisfaction Study measures satisfaction with the property claims experience 

among insurance customers who have filed a claim for damages by examining five factors (listed in order of 

importance): settlement; claim servicing; first notice of loss; estimation process; and repair process. It is 

based on 6,572 responses from homeowners' insurance customers and was fielded between January and 

November 2017. 

For more information about the U.S. Property Claims Satisfaction Study, visit 

http: II www. jdpower.com I resource I us-property-claims -sa tis facti an -s..tllil.Y. 

See the online press release athttp://WW\v.jdpower.c.Q.!l11pr-id/20Hl_020. 

J.D. Power is a global leader in consumer insights, advisory services and data and analytics. These 

capabilities enable J.D. Power to help its clients drive customer satisfaction, growth and profitability. 

Established in 1968, J.D. Power is headquartered in Costa Mesa, Calif., and has offices serving North/South 

America, Asia Pacific and Europe. J.D. Power is a portfolio company ofXIO Group, a global alternative 

investments and private equity firm headquartered in London, and is led by its four founders: Athene Li, 

joseph Pacini, Murphy Qiao and Carsten Geyer. 

Media Relations Contacts 

Geno Effler; Costa Mesa, Calif.; 714-621-6224; megia.relat[ons@jdJliliQJD. 

john Roderick; St. james, N.Y.; 631-584-2200; john@jroderick.corn 

About J,D. Power and Advertising/Promotional Rules www.jdpower.comlabout-uslpress-release-info 

### 

NOTE: Two charts follow. 

9 
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J.D. Power 

Overall Customer Satisfaction Index Ranking 

(Based on a 1,000-point scale} 

Travelers 

Nationwide 868 

Metlife 866 

Encompass 862 

Safeco 862 

The Hartford 862 

Industry Average 860 

Allstate 855 

JDPower.com 

Power Circle Ratings TM 

for consumers: 

10 
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J.D. Power 

2018 U.S. Property Claims Satisfaction Study5

M 

Award-Eligible Insurance Companies Included in the Study 

Company CEO Company location 

AIG Brian Duperreault New York, N.Y. 

Allstate Thomas Wilson II Northbrook, Ill. 

American Family Jack Salzwedel Madison, Wis. 

Arnica Mutual Robert DiMuccio Lincoln, R.I. 

Auto Club of Southern California Insurance John Boyle Los Angeles, Calif. 

Group 

Automobile Club Group Joe Richardson, Jr. Dearborn, Mich. 

Auto-Owners Insurance Jeffrey 5. Tagsold Lansing, Mich. 

Chubb Evan G. Greenberg New York, N.Y. 

COUNTRY Financial Kurt Bock Bloomington, Ill. 

CSAA Insurance Group Paula Downey Walnut Creek, Calif. 

Encompass Thomas Wilson II Northbrook, Ill. 

Erie Insurance Timothy NeCastro Erie, Pa. 

Farmers Jeffrey Dailey Woodland Hills, Calif. 

Homesite Fabian Fondriest Boston, Mass. 

Uberty Mutual David H. Long Boston, Mass. 

Metlife Steven Kandarian New York, N.Y. 

Nationwide Stephen Rasmussen Columbus, Ohio 

Safeco David H. Long Boston, Mass. 

State Farm Michael Tipsord Bloomington, Ill. 

The Hanover John C. Roche Worcester, Mass. 

The Hartford Christopher Swift Hartford, Conn. 

Travelers Alan D. Schnitzer New York, N.Y. 

Charts and graphs extracted from this press release for use by the media must be accompanied by a statement identifying 

J.D, Power as the publisher and the study from wh1ch it originated as the source. Rankings are based on numerical scores, 

11 
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Appendix2 

Property Casualty Industry Policyholders' Surplus ($M) 

$800,000 

$700,000 

$600,000 

$500,000 

$400,000 

$300,000 

$200,000 

"' ..... "' ~ a '""' N m .,. "' "' ..... 00 "' ;:: '""' N M ;'; :::l "' "' "' ~ a a 0 0 a a a 0 a a '""' '""' '""' '""' ~ ~ ~ a i'l i'l a i'l a a 0 i'l a i'l i'l i'l a i'l a a N N N N N N N N N 

PHS Chart Source: S&P Global Market Intelligence 

Appendix3 

P-C Surplus to Premium Ratio Trend 

1996-2016 PHS/NPW 

1.4 

1.3 

1.2 

1.1 

1.0 

0.9 

0.8 

0.7 

"' ..... 00 "' a '""' N 8 .,. "' "' ..... 00 "' ;:: '""' N m ;'; :::l ~ "' "' "' "' a a 0 0 0 0 0 a 0 '""' '""' '""' ~ ~ ~ ~ i'l i'l i'l 0 0 0 0 0 i'l 0 i'l i'l i'l 0 i'l 0 0 N N N N N N N N N 

PHS/NPW Chart Source: S&P Global Market Intelligence 

12 
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Appendix4 

PROPERTY CASUALTY Market Concentration Analysis 

DOJ Considers Score of 1500- 2500 to Be Moderately Concentrated, But Almost All Insurers Fall 

Well Below 

Herfindahi-Hirschman Index (HHI) based on 2016 U.S. Total (all states and DC) 

~~-

Line 

Homeowners 

Personal Auto 

Commercial Multi-Peril 

Workers Compensation 

Medical Prof. liability 

Notes: 

The HHI takes into account the relative size and distribution of the firms in a market and 

approaches zero when a market consists of a large number of firms of relatively equal size. The 

HHI increases both as the number of firms in the market decreases and as the disparity in size 

between those firms increases. 

Markets in which the HHI is between 1500 and 2500 points are considered to be moderately 

concentrated, and those in which the HHI is in excess of 2500 points are considered to be 

concentrated. 

Source: NAIC Annual Statement Database via S&P Global Market Intelligence 

13 
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Appendix5 

Many Bank Failures vs. Few P/C Insurer Impairments 

2007-2014 

180 

160 

.140 

120 

100 

80 

60 

40 

20 

0 

2007 2008 2009 2010 2011 2012 

-PIC Impairments --Bank Failures 

Source: A.M. Best data & research 

Appendix6 

lifo l!lld PIC lndoxt>ll closing lol'<!lo 

1,800 ,..... __ ....., 

1,800 

2013 2014 2015 

NYSE lndt!< clooing llwel 

12,000 

2.001) 

14 
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TESTIMONY OF MICHAEL MAHAFFEY 

Chief Strategy & Risk Officer of Nationwide Mutual Insurance Company 

On Behalf of Nationwide Mutual Insurance Company and the Insurance Coalition 

Before the United States House of Representatives Financial Services Committee 

Subcommittee on Housing and Insurance 

Hearing on H.R. 5059, t.he "State Insurance Regulation Preservation Act" 

Chairman Duffy, Ranking Member Cleaver, and Members of the Subcommittee, thank you for 

the opportunity to appear before you today. My name is Michael Mahaffey and I am the Chief 

Strategy & Risk Ofiicer of Nationwide Mutual Insurance Company and its subsidiaries and 

affiliates (collectively, "Nationwide"). I am testifying on behalf of Nationwide but also 

represent the Insurance Coalition, a diverse group of insurers that are subject to both state 

insurance holding company supervision and Federal Reserve Board ("Federal Reserve") holding 

company supervision as savings and loan holding companies (SLHCs) due to their ownership of 

a thrift institution. I am here today to testify in support ofH.R. 5059, and I would like to thank 

the bill's sponsors, Congressman Rothfus and Congresswoman Beatty who, along with 

Congressman Stivers, is one of our hometown Representatives. 

As Nationwide's Chief Strategy Officer, I am responsible for facilitating the development and 

maintenance of a clearly articulated enterprise strategy that is consistent with Nationwide's 

vision and mission. As Nationwide's Chief Risk Officer, I am responsible for the establishment 

and maintenance of an enterprise risk management framework and function with the 

responsibility to identify, assess, monitor and manage all material and relevant risks within the 

Nationwide organization. In these capacities, I have had the opportunity to have continuous 

discussions and participate in numerous examinations with both Nationwide's lead-state 

supervisor, the Ohio Department oflnsurance, and the Federal Reserve and its day-to-day 

examination teams at the Federal Reserve Banks. Therefore, I believe I can offer a helpful 

perspective on the inefficiencies in the supervisory environment faced by Nationwide and other 

insurance SLHCs, and how H.R. 5059 can maximize supervisory efficiency while avoiding gaps 

in supervision. 

About Nationwide and its Supervisory and Regulatory Environment 

Based in Columbus, Ohio, Nationwide is a Fortune I 00 diversified financial services 

organization offering a wide range of insurance, annuity, investment and banking products and 

services. Of note, Nationwide is a highly-regulated financial institution across all aspects of its 

business. 

Nationwide Mutual Insurance Company ("Nationwide Mutual") and its property and casualty 

insurance subsidiaries primarily underwrite personal automobile, homeowners and commercial 

insurance products. Nationwide Financial Services, Inc. ("Nationwide Financial"), an indirect 

subsidiary of Nationwide Mutual, develops and sells a diverse range of products, including 

individual annuities, private and public sector retirement plans and other investment products 
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sold to institutions, life insurance and advisory services. In addition, Nationwide Financial 

provides banking products and services throngh Nationwide Bank, a federal savings bank and 

member FDIC. 

Nationwide Mutual is the ultimate controlling parent of all entities in the Nationwide gronp of 

companies. As the ultimate controlling parent, Nationwide Mutual is registered as an insurance 

holding company system in the various states where it has domiciled insurance companies, with 

the Ohio Department oflnsnrance serving as the lead-state supervisor of the holding company 

systcm. 1 

By virtue of its ownership ofNationwide Bank, a thrift institntion representing less than 3% of 

Nationwide's total asset size, Nationwide is also registered as an SLHC pursuant to Section 10 of 

the Home Owners' Loan Act of 1933 ("HOLA") thereby subjecting it an additional layer of 

holding company supervision by the Federal Reserve2 

In addition to the dual layers of state and federal holding company supervision noted above, 

Nationwide is subject to extensive supervision and regulation from various other regulatory 

bodies, including but not limited to the OCC, SEC, FINRA, Department of Labor, Internal 

Revenue Service, to name a few. 

We support appropriate levels of supervision and regulation that protect our policyholders and 

the economy. We are not seeking to eliminate the role of the Federal Reserve in ensuring our 

safety and soundness. As a mutual organization, financial and operational strength is core to our 

business proposition providing our policyholders with protection when they need it the most. 

Rather, we seek to ensure that our supervisory and regulatory regime provides an appropriate 

balance between the roles of the Federal Reserve and the state insurance supervisors, is 

proportional to the risks faced by our organization, and allows us to focus on the risks that are 

most material to our organization given our business composition. We believe that H.R. 5059 

achieves this goal, and we strongly support this legislation. 

A Brief History of Federal Reserve Supervision of Insurance SLHCs 

Before I discuss H.R. 5059 specifically, I believe it would be helpful to explain the history of 

Nationwide's structure and supervisory environment and why we view this legislation as both 

necessary and a narrowly tailored solution to address a signiticant supervisory inefficiency. 

Nationwide, as is the case with every other insurance SLHC, owned a thrift institution before the 

2008 Financial Crisis. Like every other business in the U.S., we were atTected by the crisis, and 

saw the devastating effects on families and businesses across the country. Nonetheless, 

Nationwide weathered the storm in a strong financial position, and we are proud of our ability to 

1 While the Ohio Department oflnsurancc serves as the lead-state supervisor of the Nationwide insurance holding 

company system, Nationwide also has insurance company subsidiaries that are subject to financial condition 

supervision and regulation in the following states of domicile: Arizona, California, Iowa, Michigan, New Jersey, 

New York and Texas. In addition, Nationwide is subject to state insurance regulation in all 50 states and the District 

of Columbia where its insurance companies are licensed to do business. 2 Nationwide technically has four registered SLHCs: Nationwide Mutual Insurance Company, Nationwide Mutual 

Fire Insurance Company, Nationwide Corporation and Nationwide Financial Services. 

2 
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continue to serve our policyholders in any economic environment. Nationwide neither sought 

nor accepted govemment funds during the crisis, and, to the best of our knowledge, we have 

never been viewed by any regulator as posing systemic risk to the U.S. financial system. 

In response to the economic crisis, Congress enacted the Dodd-Frank Wall Street Reform and 

Consumer Protection Act of2010 ("Dodd-Frank"). Dodd-Frank eliminated the Office of Thrift 

Supervision and brought Nationwide Bank under OCC supervision. Dodd-Frank also brought 

insurance SLHCs like Nationwide under Federal Reserve supervision. Since July 21,2011, 

Nationwide has been supervised on a group-wide basis by both the Ohio Department of 

Insurance and the Federal Reserve. 

Despite significant supervisory and regulatory costs, Nationwide has purposefully opted to 

continue to offer competitively priced, reliable banking products. Nationwide's online bank 

represents a way to supplement the insurance services we provide to our life and property 

casualty members. These banking products and services augment our core insurance and 

financial products and services, creating additional value for our members. As an example. 

Nationwide Bank has created itmovative solutions to deliver immediate access to insurance funds 

for our members in the wake of natural catastrophes, often at times when their access to a brickand-mortar bank may be impaired. Whether utilizing the pre-paid claims cards in the aftermath 

of the Joplin tomados or supplying emergency debit cards to customers in the Northern 

Califomia wildfires who had lost everything, these solutions provide access to critical funds 

precisely when they are needed most. Some insurers have divested their banks in light of the 

increased supervisory and regulatory costs associated with Federal Reserve supetvision; 

however, we believe strongly that it is in the best interest of our customers (and indeed the 

banking system) to have access to affordable retail banking products from the strong insurance 

companies they trust. 

We have consistently found Federal Reserve officials and Federal Reserve Bank examiners to be 

dedicated public servants who consistently strive to work collaboratively and thoughtfully with 

us. In addition to our appreciation of the Federal Reserve examiners, we also appreciate and 

have benefited from the addition of an insurance policy team at the Federal Reserve Board in 

Washington. Tom Sullivan, as the head of that team, and his entire staff have provided 

invaluable expertise on insurance and have been open and collaborative on issues facing us as an 

insurance SLHC. 

However, despite the sincere efforts of a dedicated group of public servants at the Federal 

Reserve, we believe that our current supervisory environment is highly inefficient in a way that 

Congress did not intend. Specifically, we have leamed a great deal since 2011 regarding how, in 

our view, the division of labor between the Federal Reserve and the States could function much 

more efficiently and in a manner more appropriately tailored to the risk profile of an insurer like 

Nationwide, while at the same time ensuring that the Federal Reserve can fulfill its statutory 

mandates to ensure that insurance SLHCs operate in a safe and sound manner and can serve as a 

source of strength to their depository institution subsidiaries. We believe that H.R. 5059 

provides a means to that end. 

3 
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Duplicative and Inefficient Holding Company Supervision and Regulation of Nationwide 

I would first like to highlight that state insurance supervision and regulation is not limited to the 

individual insurance legal entities, and state insurance supervisors analyze and examine the 

financial condition and risk position of the holding company system as a whole. As I will 

describe in greater detail below, state insurance holding company system oversight is a welldeveloped area of prudential supervision focused on both individual insurance companies and the 

group. 

Moreover, the States' emphasis on, and improvements to, their t,rroup-wide supervisory 

frameworks greatly intensified in the wake of the 2008 Financial Crisis in the same way that the 

Federal Reserve and other banking regulators re-evaluated the effectiveness of their group-wide 

supervisory frameworks during the same time-period. 

I would also like to highlight that insurance SLHCs are the only Federal Reserve-supervised 

institutions that face dual holding company supervision by the Federal Reserve and another 

prudential regulator. \Vhile bank holding companies have regulators in addition to the Federal 

Reserve for their banking institutions, such as the OCC and the FDIC, only insurance SLHCs are 

subject to dual holding company supervision in addition to regulation of their thrift institutions 

by the OCC. 

As both a state-supervised insurance holding company system and a Federal Reserve-supervised 

insurance SLHC, Nationwide has had to navigate the evolution of financial services supervision 

and regulation and, more specifically, group-wide holding company supervision over the past 

decade. This has put us in the unique position of being able to highlight where Federal Reserve 

holding company supervision is unintentionally inefficient and not appropriately tailored to the 

risks presented by an insurance holding company system. 

Highlighted below are several instances where Federal Reserve holding company supervision 

has produced unintentional inefficiencies vis-a-vis state insurance holding company supervision: 

Prudential Financial Examinations. State insurance supervisors and the Federal Reserve have 

overlapping statutory responsibility to examine the operating and financial condition of 

insurance groups, including enterprise risks posed by any entity in the organization. State 

insurance holding company laws provide the departments of insurance with the authority and 

responsibility to conduct examinations to ascertain the financial condition, including enterprise 

risk to the insurer, by the ultimate holding company, any entity or combination of entities in the 

insurance holding company system, and the insurance company on a consolidated basis 3 

Likewise, the Federal Reserve has the same authority and responsibility to conduct examinations 

to monitor the operating and financial condition oflnsurance SLHCs and their subsidiaries, and 

to monitor risks (and systems for controlling risks) oflnsurance SLHCs that pose a threat to (i) 

the safety and soundness of the SLHC and its thrift institution, or (ii) financial stability of the 

U.S4 Here, the authority and responsibility for state insurance supervisors and Federal Reserve 

3 See e.g., Ohio Revised Code*§ 390l.35(A)(l) and 3901.07. 4 See 12 U.S.C. § 1467a(b)(4). 

4 
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to conduct examinations are almost entirely duplicative, both allowing for the consideration of 

any entity in the organization and the organization on a consolidated basis. 

Risk-Focused Approach to Examinatiom~ State insurance supervisors and the Federal Reserve 

have adopted nearly identical risk-focused supervisory frameworks that both begin with the 

identification of the inherent risks of the group, then an evaluation of controls in place to 

mitigate those risks, and finally, a supervisory plan to address residual risks5 Further, the 

Federal Reserve has developed a consolidated supervisory framework for larger financial 

institutions with supervisory expectations focused on capital and liquidity planning and 

positions, corporate governance, (:nterprise risk management, internal audit and internal controls, 

and business recovery and resiliency6 At the same time, state insurance departments have 

various laws, regulations, reporting requirements and financial analysis and examination 

procedures to monitor and assess the insurance group's corporate governance, enterprise risk 

management and solvency, internal audit function, financial reporting controls, related-party 

transactions and business continuity planning7 Again, there is significant overlap here. 

Heightened Focus on Information Technology (IT) and Cybersecurity. As part of their 

financial conditions examinations, state insurance departments conduct intensive examinations of 

IT and cybersecurity risk and the systems and controls in place to manage those risks8 In 

addition, the States have developed a multitude oflaws and regulations regarding data security, 

safeguarding customer information, cybersccurity and data breach notification. At the same 

time, the Federal Reserve has placed a heightened focus on IT and cybcrsecurity and is 

conducting continuous examinations across the industry using its distinct examination manuals 

and assessment tools that are duplicative and potentially inconsistent with state laws9 Today, we 

are subjected to numerous duplicative and costly federal and state cyber examinations on an 

annual basis from various regulators (state insurance departments, Federal Reserve, OCC, 

FINRA, SEC). 

Ability to Require Corrective Actions. Both the state insurance departments and the Federal 

Reserve have the ability to require insurance holding companies to take corrective actions to 

address perceived corporate governance deficiencies, risk management deficiencies and internal 

control deficiencies. Among other actions, state insurance departments have the ability to 

require insurance companies to increase capital and surplus, suspend dividends, correct corporate 

'See Supervision and Regulation (SR) 97-24, Risk-Focused Frameworkfor Supervision ofl.arge Complex 

Institutions, October 27, 1997, and the National Association of Insurance Commissioner (NAIC) Financial 

Condition Examiners, Section 2, "Risk-Focused Examination Process". 6 See Supervision and Regulation (SR) 12-17, Consolidated Supervision Framework for Large Financial 

Institutions, December 17, 2012. 7 See the NAJC Corporate Governance Annual Disclosure Model Act (#305) and Model Regulation (11306); Risk 

Management and 0""' Risk and Solvency Model Act (#505); Annual Financial Reporting Model Regulation (#205); 

Insurance Holding Company System Model Regulatory Act (#440) and Model Regulation (~-450); and the NAlC 

Financial Condition Examiners Handbook and Financial Analysis Handbook. 8 See the NAIC Financial Condition Examiners Handbook. Exhibit C "Evaluation of Controls in Information 

Technology". 

9 See Federal Financial Institution Examination Council (F"F!EC) IT Examination Handbook and Cybersecurity 

Assessment Tool. . . 

5 
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governance deficiencies in a manner acceptable to the commissioner and withdraw from certain 

investments and investment practices. 10 In a similar manner, the Federal Reserve utilizes 

informal supervisory findings referred to as Matters Requiring Attention (MRAs) or Matters 

Requiring Immediate Attention (MRIAs) to drive institutions to correct perceived deficiencies 

and align with Federal Reserve supervisory guidance. 

The Need for a Tailored Supervisory Approach 

In addition to the overlap noted above, it has been our experience, and the experience of 

similarly situated insurance SLHCs, that the Federal Reserve has not appropriately tailored its 

supervisory framework for these institutions to account for the fact that they are already subject 

to extensive group-wide supervision by the state insurance departments. Further, because these 

institutions are predominantly insurance organizations, the application of a supervisory 

framework on them imported from bank holding company supervision results in a substantial 

amount of board of directors and management time and resources devoted to educating the 

Federal Reserve and Federal Reserve Bank examiners on the differences between insurance and 

banking, and how applying their supervisory framework to insurance activities is often a poor tit. 

Highlighted below are various ways in which we believe the Federal Reserve supervisory 

approach is not proportional to safety and soundness risks at insurance SLHCs: 

Treatment of Insurance SLHCs as Large Banking Organizations. The Federal Reserve treats 

insurance SLHCs with over $50 billion in assets as "Large Banking Organizations" and subjects 

them to a heightened consolidated supervisory framework that utilizes a multitude of discovery 

reviews, targeted inspections, enhanced continuous monitoring activities, and an annual 

supervisory ratings assessment. 11 These activities occur throughout an annual supervisory cycle, 

such that insurance SLHCs are continuously subject to some level of Federal Reserve 

examination activity in addition to concurrent state insurance department financial analysis 

requests and financial condition examinations. 

We believe it is inappropriate to treat insurance SLHCs as "Large Banking Organizations" and 

subject them to the same level of oversight as similarly-situated bank holding companies. Unlike 

bank holding companies, insurance SLHCs arc already subject to an extensive system of groupwide supervision by the state insurance departments. 

To illustrate the issne, Nationwide had $236 billion in total consolidated assets as of year-end 

2017 with Nationwide's thrift activities representing just 3% of the organizations assets. 

Nevertheless, the Federal Reserve supervisory regime treats Nationwide in the same manner as a 

similarly-sized bank holding company despite the Ohio Department of Insurance already 

performing extensive group-wide supervisory analysis and activities and the fact that Nationwide 

is predominantly an insurance organization (not a banking organization). 

10 See NA!C Model Regulation To Deline Standards And Commissioner's Authority For Companies Deemed To Be 

ln Hazardous Financial Condition (11385). 11 Supervision and Regulation Letter (SR) 12-17, Consolidated Supen•ision Framework for Large Financial 

Institutions, December 17, 2012. 

6 
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Bank-centric Supervisory Guidance: Because Nationwide is predominantly an insurance 

organization, we arc understandably focused on managing insurance-related risks as they are 

most material to our organization. As one of the country's largest property and casualty 

insurance companies, we have extensive experience and capabilities to manage property and 

casualty business risks, including catastrophe risk, underwriting risk, and product pricing risk. In 

addition, as one of the country's largest providers oflife insurance and annuity products, we 

have extensive experience and capabilities to manage life insurance business risks, such as 

mortality risk, morbidity risk and longevity risk. Further, because we invest policyholder 

premiums to match the liabilities associated with both our property and casualty and life 

insurance and annuity products, we have extensive experience and capabilities to manage 

investments risks, such as credit and equity risk. Moreover, our primary insurance holding 

company supervisor, the Ohio Department of Insurance, has extensive experience analyzing, 

assessing and examining our risk management and control systems for these risks. Thus, it is 

critical to Nationwide that we are able to devote the appropriate amount of time and resources to 

managing these risks, including investing in people and capabilities that make us a stronger 

insurance organization- this is where we will truly benefit our policyholders while at the same 

time enhancing our ability to serve as a source of strength to our thri tl institution. 

The Federal Reserve and its examiners, on the other hand, have historically been banking 

regulators with extensive experience analyzing bank-specific risks, such as liquidity risk 

associated with a "nm on the bank scenario", interest rate risk associated with sizeable 

residential or commercial lending portfolios, payment systems risk associated with being a 

financial intermediary, among others. Therefore, the supervisory guidance and expectations that 

the Federal Reserve has developed for managing these risks contemplate how they would impact 

and be applied to a banking organization. To date, the Federal Reserve has extended nearly 200 

pieces of supervisory guidance to SLHCs, including insurance SLHCs, but has not provided any 

clear indication that it would apply this !o'llidance to the business of insurance in an appropriately 

tailored manner, or how it would evaluate insurance SLHCs using this guidance in consultation 

and coordination with the state departments of insurance. 

Due to the intensive nature of Federal Reserve supervision and examinations, Nationwide's 

board of directors, senior management and all other associates spend a substantial amount of 

time and resources reviewing, analyzing and implementing Federal Reserve supervisory 

guidance that was designed by bank regulators, for banks, to manage bank-centric risks. Further, 

we devote a substantial amount of time and resources responding to examinations and 

information requests related to bank-centric supervisory guidance. Because the state insurance 

departments already appropriately manage the risks associated with operating a substantial 

insurance organization through various forms of supervision, regulation and examination, this 

Federal Reserve overlay of bank-centric supervisory expectations results in an efficient use of 

time and resources without further contributing to our safety and soundness. In fact, these 

resources would be more appropriately devoted to continuing to manage our most material and 

relevant risks; that is, insurance risks which are directly within the purview of the state insurance 

departments. This would further the Federal Reserve's interest in ensuring our safety and 

soundness while protecting policyholders. 

7 
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We do not object to appropriate levels of supervision and regulation; however, we seek to ensure 

that any supervision and regulation is fit for the purpose for which it was designed, and is 

appropriately tailored and scaled to the activity being supervised and regulated. We believe that 

Pederal Reserve supervision is not appropriately tailored to the risks posed by insurance SLHCs 

in light of the extensive state insurance supervision already faced by these institutions, which 

supervision has been designed over many years to address the risks associated with managing a 

significant insurance holding company system. Moreover, we believe that the overlay of Federal 

Reserve supervision docs not further contribute to our safety and soundness in a manner that 

justifies the significant amount of time and resources needed to navigate bank-centric holding 

company supervision. 

Support for a H.R. 5059 and the Need for a Legislative Solution 

We do not believe that in passing Dodd-Frank, Congress intended to force insurance companies 

to sell their thrifts. We also do not believe that Dodd-Frank intended for the Federal Reserve 

Board to place the same supervisory demands on a S230 billion insurance company with a small 

thrift, which is already subject to extensive state insurance holding company supervision, as 

$230 billion bank holding company predominantly engaged in banking and other financial 

activities. 

We greatly appreciate Congress' longstanding commitment to the state system of insurance 

regulation, and the thoughtful, bipartisan approach this body has taken on this issue in the past. 

We very much appreciate Congress' action on the 2014 Insurance Capital Standards Clarification 

Act (the "2014 Act"), which passed the House and the Senate unanimously. H.R. 5059 would 

work in concert with the 2014 Act because it helps to ensure that any capital standards 

promulgated by the Federal Reserve for insurance SL!-!Cs are appropriately tailored to the 

business of insurance. H.R. 5059 does not in any way affect the Federal Reserve's authority to 

establish capital requirements tor ~ationwidc or any other insurance SL!-!Cs. Rather, the bill 

addresses a very distinct concern the inetlicient, disproportionate, and inappropriately tailored 

nature of day-to-day supervision of insurance SLHCs in light of the fact that these institutions 

already face extensive group-wide supervision and regulation from the state insurance 

departments. 

I've summarized below how H.R. 5059 addresses this issue while preserving the ability of the 

Federal Reserve to carry out its statutory mandates: 

H.R. 5059 preserves the role of the state insurance department as the primary regulator of 

insurance SLHCs and, provided the insurance SLHC continues to meet state capital 

standards and any group capital standards promulgated by the Federal Reserve pursuant 

to the 2014 Act, it would direct the Federal Reserve to rely exclusively on the state 

insurance departments for routine examinations and information requests related to 

insurance SLHCs. The Federal Reserve would be expected to rely on its broad 

information-sharing abilities with the state insurance supervisors, the OCC, the SEC and 

other prudential regulators to continue to monitor the operations of the insurance group. 

8 
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• Importantly, H.R. 5059 provides the Federal Reserve with authority to step-back in as the 

day-to-day supervisor if an insurance SLHC fails to continue to satisfy state capital 

standards and any group capital standards promulgated by the Federal Reserve pursuant 

to the 2014 Act. Further, it provides the Federal Reserve with emergency authority to 

resume its role as a day-to-day supervisor of an insurance SLHC, even if capital 

standards arc being satisfied, if the Federal Reserve reasonably determines that the 

activities of the insurance SLHC pose a serious and imminent risk to the financial safety 

and soundness or stability of the thrift institution. 

• Additionally, H.R. 5059 leaves intact the Federal Reserve's direct examination authority 

over material subsidiaries that do not have a primary prudential regulator. This would 

serve to prevent regulatory arbitrage by allowing the Federal Reserve to fill any potential 

gaps in supervision. Moreover, it will serve to avoid another AIG Financial Products 

situation because any material subsidiary that is engaged in risky financial activities will 

be able to be easily identified and the Federal Reserve will continue to have direct 

examination authority over that entity. 

• Insurance SLI-!Cs would also be expected to file certain regulatory reports with the 

Federal Reserve so they can monitor organizational changes, identifY material 

subsidiaries, monitor transactions between the thrift and its affiliates, and detennine 

compliance with Federal Reserve capital standards. Because they will be developed by 

the Federal Reserve, these regulatory reports will be able to demonstrate to the Federal 

Reserve continued compliance with its required group capital standards. In addition, 

these reports will provide the Federal Reserve with a holistic view of the enterprise, and 

they can be used in conjunction with the Federal Reserve's relationships and infonnationsharing abilities with other functional regulators. 

In short, H.R. 5059 allows the Federal Reserve to monitor solvency at insurance SLHCs by 

imposing capital standards; however, it preserves the role of the state insurance department to 

serve as the day-to-day supervisor. Further, it preserves the ability of the Federal Reserve to 

monitor and address other risks and concerns through its relationships and information-sharing 

abilities with the primary prudential regulators of these insurance holding companies. In 

addition, it would provide the Federal Reserve the ability to step-in if reasonably necessary using 

its emergency authority. 

We believe this legislation strikes an appropriate balance between the Federal Reserve's 

statutory duty to ensure the safety and soundness of an insurance SUIC while leveraging the 

extensive work already performed by the state insurance supervisors as holding company 

supervisors. In addition, 1-!.R. 5059 continues to preserve the primacy of the States as the 

regulators of insurance under the McCarran-Fcrguson Act. 

Conclusion 

Mr. Chairman, in closing, I would like to add that we recognize that any legislation that attempts 

to solve one regulatory issue may create unintended consequences. It is critically important to 

9 
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Nationwide, and I know to all the members of this subcommittee, that this legislation address 

regulatory inefficiencies without creating any regulatory gaps or inequities. We believe that a 

bipartisan solution to this issue is critical, and while we support the legislation in its current 

form, we also support necessary changes to improve the bill and increase its bipartisan support. 

We look forward to providing additional input as this process unfolds, and we greatly appreciate 

the opportunity to testify today. 

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TESTIMONY OF DANIEL SCHW ARCZ 

Professor of Law, University of Minnesota Law School 

before the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Housing and Insurance 

regarding "Legislative Review of H.R. 5059, The State Insurance Regulation 

Preservation Act" 

March 7, 2018 

Chairman Duffy, Ranking Member Cleaver, and members of the Subcommittee, 

thank you very much for this opportunity to discuss The State Insurance Regulation 

Preservation Act. The Bill is motivated by the sensible and important goal of reducing 

regulatory overlap and unnecessary compliance burdens for U.S. insurers. However, I 

have substantial concerns that the Bill's ultimate impact would be to undermine the 

interests of American taxpayers and increase the prospect of future financial instability. 

In my testimony today, I will explain this concern in four parts. First, I will 

suggest that H.R. 5059 violates the core principle that the owners of federally-insured 

banks must be subject to effective consolidated oversight at the federal level. If a 

financial conglomerate chooses to benefit from the unique privileges that come along 

with owning a federally-insured depository institution, then it must be subject to umbrella 

supervision at the federal level to ensure that this privilege is not exploited. 

Second, my testimony will emphasize that H.R. 5059 is premised on the flawed 

assumption that state insurance regulators' supervision of financial conglomerates is 
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effective and time-tested. In fact, deficiencies in state insurance regulators' group level 

supervision helped contribute to the 2008 crisis. And though state insurance rel,>ulators 

have indeed made important improvements in their umbrella oversight of insurance 

groups, these recent reforms remain largely untested and importantly limited. 

Third, I will show how H.R. 5059 creates the prospect for exactly the same type 

of regulatory arbitrage that helped cause the 2008 financial crisis. For instance, as 

currently drafted, the Bill would allow any large bank or thrift holding company to 

completely avoid federal oversight simply by causing its top tier holding company to 

acquire a license from a single state to sell insurance. 

Finally, I will suggest that H.R. 5059 is legislation in search of a problem. In 

particular, I have seen limited evidence that the Federal Reserve's supervision of 

insurance-focused Savings and Loan Holding Companies ("SLHC"s) interferes with 

traditional state insurance regulation or imposes excessive compliance burdens on firms. 

(I) H.R. 5059 violates the fundamental principle that bank owners must be subject to 

effective consolidated oversight at the federal leveL 

Federally insured depository institutions such as commercial banks and thrifts 

("banks") enjoy a unique federal guarantee that protects their primary creditors 

(depositors) against default risk. This explicit federal safety net both undermines 

ordinary market discipline for banks and creates the risk that the financial consequences 

of their incaution will ultimately be borne by the federal government, and therefore U.S. 

taxpayers. A central goal ofbank supervision and regulation is to mitigate this inevitable 

moral hazard of federal deposit insurance. 

To accomplish this objective, banking oversight must meet two basic principles. 

First, it must substantially involve federal supervisors. Such federal oversight of banks is 

2 
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necessary because the federal government bears the underlying risk of banks' failure. 

Only federally-accountable actors have the appropriate incentives to monitor and mitigate 

that risk. Consistent with this principle, state-chartered depository institutions are 

supervised both by their chartering state and by a federal regulator. 

Second, effective oversight of banks requires umbrella supervision of their 

holding companies and affiliates. The risks faced by any individual bank are inherently 

linked to the stability and health of the financial conglomerate within which it is 

situated. 1 This follows naturally from the fact that financial conglomerates generally 

manage risk on an enterprise-wide basis. 2 Perhaps even more importantly, banks arc 

naturally susceptible to the reputational troubles of their affiliates. Uninsured depositors 

that become nervous about the financial health of a bank's affiliates are prone to 

immediately withdraw their deposits. In this way, even apparent problems experienced by 

a bank's affiliates or holding companies can undennine the financial stability of the bank 

itself 3 

These two principles of regulatory design have, at least tbnnally, been a part of 

U.S. financial regulation since the mid-Twentieth Century. But in the years leading up to 

the 2008 financial crisis, these principles were violated in practice, contributing directly 

to the failure of American International Group ("AIG''). During this time, AIG was a 

SLHC and therefore formally subject to group supervision by the federal Office of Thrift 

1 See International Association oflnsurance Supervisors (IAIS) Core Principles 23 (describing as a core 

principle of insurance regulation that "[t]he supervisor supervises insurers on a legal entity and group-wide 

basis."). 

2 For recent evidence of the importance of such group-wide risk management among life insurers, see Greg 

Niehaus, Managing Capital Via Internal Capital Market Transactions: The Case of Life Insurers, 85 J. 

RISK& INS. 69 (2018). 3 Umbrella supervision of banks' holding companies and affiliates is important for an independent reason. 

Because banks enjoy federal insurance, they operate as a cheap source of funding that holding companies 

and affiliates may improperly exploit. 

3 
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Supervision ("OTS"). Unfortunately. OTS was a notoriously lax regulator that focused 

its supervisory efforts almost exclusively on individual thrifts within SLHCs, rather than 

on group-wide risks 4 A central explanation for OTS's lax regulatory approach was that 

banks could easily "shop" for their preferred regulator by altering their charter. It is for 

precisely this reason that Dodd-Frank eliminated OTS and transferred responsibility for 

supervision ofSLHCs to the Federal Reserve. 

H.R. 5059 would not only undo the progress made in Dodd-Frank, but it would 

make matters worse by formally eliminating federal group-level supervision of certain 

bank holding companies. In particular, H.R. 5059 would exempt "insurance savings and 

loan holding companies" ("lSLf-IC's) 5 fi·om group-wide supervision by the Federal 

Reserve so long as they met certain capital requirements. As a result, the Federal 

Reserve would no longer assess lSLHCs' group-level risk management, corporate 

governance, and internal controls. The bill would also strip the Federal Reserve of its 

authority to require ISLHCs to regularly report their consolidated financial information to 

the agency. 

In the place of such umbrella oversight by the Federal Reserve, ISLHCs would be 

regulated almost exclusively by state insurance departments. As discussed in the next 

4 See Gov't Accountability Office, Agencies Engaged in Consolidated Supervision Can Strengthen 

Performance Measurement and Collaboration (2007) (describing the OTS's relative lack of expertise in 

supervising financial activities that did not involve activities traditionally engaged in by thrifts, such as 

credit default swaps); Causes of the Recent Financial and Economic Crisis, Before the Fin. Crisis Inquiry 

Comm'n, (Sept. 2, 2010) (statement of Chairman Ben S. Bernanke) (noting that OTS's supervision of 

AlG's derivatives activities in its financial-products unit was extremely limited in practice). 5 TI1e Bill defines an ISLHC as "(i) a top-tier savings and loan holding company that is an insurance 

underwriting company'' or "(ii) a savings and loan holding company that held 75 percent or more of its 

total consolidated assets in an insurance underwriting company or insumnce underwriting companies, other 

than assets associated with insurance for credit risk, during the 4 most recent consecutive quarters ... " ln an 

apparent effort to include one specific company as an ISL!IC even if it does not meet the above criteria, the 

definition also categorizes as an ISLHC a "(iii) a top-tier savings and loan holding company that-· (I) was 

registered as a savings and loan holding company before July 3 21, 201 0; and II) is a New York not-forprofit corporation formed for the purpose of holding the stock of a New York insurance company." 

4 
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section, there are good reasons to be skeptical about the effectiveness of state insurance 

regulators' group supervisory processes. But even assuming for the moment that state 

insurance departments are generally effective group-level supervisors, such supervision is 

fundamentally ill-suited to protect federally-insured depository institutions. State 

insurance departments simply do not have the appropriate incentives to protect banks 

from group level risk, as they do not bear the consequences of losses to the Deposit 

Insurance Fund. It is the federal government, not the states, that backs the Deposit 

Insurance Fund and that must make whole the insured depositors of a failed bank. 

Nor do state insurance regulators have any expertise or experience with 

understanding how instability within a holding company can impact banks, as opposed to 

insurance companies. For instance, reputational risk is unlikely to quickly spread to the 

insurance frrms of a financial conglomerate, as most policyholders cannot withdraw their 

funds on demand. Insurance group supervision is theref(:Jie naturally focused largely on 

transactions between individual insurers and their affiliates or holding companies. By 

contrast, the asset-liability mismatch inherent in banking means that ~orroup level 

supervision must pay particular attention to reputational risk, which can infect an 

otherwise healthy affiliate bank quickly and dramatically. 

As state insurance regulators often emphasize, the regulation of insurance 

companies is, in many ways, f\mdamentally different than the regulation ofbanks. For 

this very reason, insurance-focused firms that choose to own banks cannot be regulated 

effectively at the group level solely by state insurance regulators. Yet this is exactly what 

H.R. 5059 would accomplish. 

5 
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The provisions in H.R. 5059 reinstating the Federal Reserve's authority over 

lSLHCs that drop below specified capital standards do little to address these concerns. 6 

Although group capital requirements are an essential component of effective group-wide 

regulation, they are well understood to be a lagging indicator of financial distress. 

Indeed, many of the banking entities that failed or nearly failed in the 2008 crisis reported 

healthy levels of capital just months before the crisis hit. There are a variety of reasons 

why capital is a lagging indicator of financial distress, including the fact that many assets 

are difficult to value and managers often have strong incentives to delay recognizing 

losses. 7 Whatever the explanation, though. the implications for H.R. 5059's backstop arc 

clear: by the time this backstop were triggered, the underlying ISLHC's problems would 

already be substantial and pose potential losses to the Deposit Insurance Fund. 

(2) State Insurance Regulators' Group Supervisory Processes arc Limited and 

Untested 

As suggested by the name ofH.R. 5059 "The State Insurance Regulation 

Preservation Act" the Bill is premised on the idea that state insurance regulators 

adequately regulate ISLHCs. Historically, however, state insurance regulation has been 

directed almost exclusively at individual insurance entities within a larger financial 

conglomerate, rather than their holding companies or affiliates. Indeed, every core 

element of state insurance regulation- including risk-based capital rules, reserve 

requirements, licensing requirements, investment restrictions, and financial monitoring -

6 The Federal Reserve's supervision of the ISLHC can also be reinstated if the agency finds that the ISLHC 

poses "a serious and imminent risk to the financial safety and soundness or stability of the [lSLHC's] 

subsidiary saving association.'' But it is nearly impossible to understand how the Federal Reserve could 

invoke this "emergency supervisory authority" on a timely basis when it is not actively supervising the 

ISLHC and the ISLHC's reported capital levels appear sufficient. 7 Daniel K. Tarullo, Banking on Basel: The Future of International Financial Regulation 171-72 (2008). 

6 
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is applied solely to individual operating insurers, and not to their broader financial 

conglomerates. 8 

In fact, the absence of effective group-level supervision by state insurance 

regulators was partially responsible for AIG's collapse in 2008. 9 AIG's failure was 

attributable to two core clements of its operations: (1) its Credit Default Swaps ('"CDS"s) 

business and (2) its securities lending operations. AIG's CDS operations were conducted 

out of a non-insurance affiliate, AIG Financial Products, and involved products that were 

not classified as insurance and arguably could not have been so classified as a result of 

federal law. 10 AIG also conducted its ill-fated securities lending program through several 

non-insurance affiliates. But in contrast to its CDS operations, AIG's securities lending 

programs directly implicated the company's insurers, whose securities were lent to 

outside firms. Had the federal government declined to bail out AIG, there is a good 

'See Daniel Schwarcz, A Critical Take an Group Regulation ()(Insurers in the United States, 5 U. CAL. 

IRVINE L. REV. 537 (2015); Patricia A. McCoy, Systemic Risk Oversight and the Shifting Balance of State 

and Federal Authority Over Insurance, 5 U. CAL. IRVINE L. REV. 1389 (2015); Kenneth Abraham & Daniel 

Schwarcz, Insurance Law and Regulation: Cases and Materials (6th ed. 2015). To illustrate, at the end of 

2014, Met Life included 359 subsidiaries in 50 diiferent countries. Many of these subsidiaries operated 

within the United States, and only a subset of these subsidiaries were licensed insurance companies that 

were subject to state insurance regulation. These individual insurance entities, moreover, were regulated by 

numerous different states, including New York, Connecticut, Delaware, Rhode Island, and Missouri. All of 

the traditional tools of state solvency regulation were independently directed at each of these insurance 

entities, rather than the consolidated MetLife enterprise. See Fin. Stability Oversight Council, Basis for the 

Financial Stability Oversight Council's Final Determination Regarding MetLife, Inc. (Dee. 18, 2014). 9 As discussed above, the OTS also lililed in its efforts to prevent AIG's collapse. 10 1be Commodities Futures Modernization Act of2010 limited the authority of the SEC and CFTC to 

regulate CDSs. Whether it also limited states· powers to regulate these instruments, to the extent that they 

constituted insurance, was less clear. In fact, in the midst of the 2008 crisis, New York proposed regulating 

certain CDSs- where the purchaser owned the underlying instrument as insurance products. Sec 

Testimony of Eric Dinallo, New York State Insurance Commissioner, before the House Agriculture 

Committee, Nov. 23, 2008 (testifYing "the insurance regulator for New York is a relevant authority on 

credit default swaps,"' because "[w]e believe .. [they are] insurance."). New York eventually withdrew the 

proposal as it became clearer that a more comprehensive solution was being contemplated at the federal 

level. 

7 
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chance that its insurers would have directly felt the consequences of these risky securities 

lending transactions. II 

State insurance regulators' failure to prevent AIG's collapse revealed two very 

different limitations in their group supervisory processes. First, it demonstrated that a 

basic assumption of state insurance regulation that an insurer's financial health could be 

isolated from its non-insurance affiliates and parent companies- was incorrect. It was 

based on this assumption that state ref;ulators had historically ignored group regulation. 

Yet there is little doubt that the failure of AIG Financial Products- a foreign noninsurance affiliate- ended up jeopardizing the financial stability of the company's 

insurers. Indeed, before the federal government bailed out AIG, various proposals 

contemplated the possibility that the assets of AIG's insurers might be used to support its 

troubled parent company and non-insurance subsidiaries.I 2 

Second, and perhaps even more importantly, AIG's collapse revealed deficiencies 

in state insurance regulators' capacity to conduct effective umbrella oversight even when 

they were attempting to do so. In contrast to AIG's CDS operations- which were clearly 

beyond the intended regulatory scope of state insurance regulators - AIG 's securities 

lending operations were ostensibly being overseen by state re&>ulators in the years leading 

up to the crisis. This is hardly surprising: unlike CDSs, securities lending operations are 

common among life insurers, and deeply intertwined with the broader nature oflife 

insurance operations, which generally require insurers to own long-term securities that 

can profitably be lent out to other actors within the financial system. 

n See Anna Paulson & Robert McDonald, AIG in Hindsight, 29 J. ECON. PERSP. 81 (2015). 12 See American International Group: Examining What Went Wrong, Government Intervention, and 

Implications for Future Regulation, Hearing before the Senate Committee on Banking, Housing and Urban 

Affairs, !lith Cong, 1st Sess. 56--59 (2009)(statement of Eric Dinallo. Superintendent, New York State 

Insurance Department). 

8 
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State insurance regulators nonetheless failed to fully appreciate or mitigate the 

risks of AJG's securities lending operations until it was too late. As the non-partisan U.S. 

Government Accountability Office found, "prior to mid-2007, state regulators had not 

identified losses in the securities lending program and the lead life insurance regulator 

had reviewed the program without major concerns." 13 State insurance regulators failed to 

diagnose these problems with AIG's securities lending program in a timely fashion due to 

deficiencies in their group-oversight processes. Because AIG operated this program 

through its non-insurer affiliates, no individual insurance regulator took primary 

responsibility for carefully scrutinizing it. 14 Just as importantly, state regulators failed to 

appreciate the magnitude of the securities lending issues they discovered at AIG because 

they did not link them to the firm's CDS operations, which also exposed AIG to massive 

risks linked to mortgage-backed securities. 15 

To be sure, state insurance regulators have not ignored the deficiencies in their 

group oversight that were laid bare in the 2008 crisis. In recent years, state insurance 

regulators have made substantial and meaningful efforts to shore up their efforts at t,rroup 

supervision. Perhaps most importantly, the NAIC developed a new Model Holding 

Company Act that seeks to extend state regulators' purview to insurers' holding 

13 U.S. Gov't Accountability Office, GAO-l 1-616, Financial Crisis: Review of Federal Reserve System 

Financial Assistance to American International Group, Inc. I 3 (Sept. 20 II); See also Congressional 

Oversight Panel, The AIG Rescue, Its Impact on Markets, and the Government's Exit Strategy 45-46 ("In 

mid-2007, as part of its examination process, Texas, the lead regulator for the firm's life insurance 

subsidiaries, discovered that AIG was purchasing RMBS with its securities lending collateral (a practice 

that began in late 2005)."). 14 See Daniel Schwarcz, A Critical Take on Group Regulation of Insurers in the United States, 5 U. CAL. 

IRV!~E L. REV. 537 (2015); 1he Role of Derivatives in the Financial Crisis: Hearing Before the Fin. Crisis 

Inquiry Commission, l I I <h C:ong. 206 (2010) (testimony of Eric R. Dinallo, Former Superintendent, N.Y. 

State Ins. Dep't) (admitting that AIG's securities-lending operations "le[d) to ... regulatory assignment 

questions"); Federal Insurance Office, How to Modernize and Improve the System of Insurance Regulation 

in the United States 40 (2013) (noting that the "inability of[state regulators' solo entity focus) to account 

for consolidated supervision was evident during the financial crisis, particularly in the case of AIG''). 15 See Daniel Schwarcz, A Critical Take on Group Regulation oflnsurers in the United States, 5 U. CAL 

IRVINE L. REV. 537 (20!5). 

9 
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companies and non-insurance affiliates. State insurance ree,rulators have also begun 

implementation of the Own Risk and Solvency Assessment (ORSA), which sizable 

insurance groups must file with their lead state regulator. 

Despite these advances, state supervision of insurance groups is still in its infancy, 

and continues to face various important practical and legal challenges. First, states' legal 

authority to conduct effective group supervision remains questionable. Although state 

law on this issue varies, many state insurance departments have limited direct authority 

over non-insurance affiliates or insurance holding companics. 16 For instance, most state 

insurance departments can generally only compel insurance entities, but not parent 

companies or non-insurance at1iliates, to submit regular periodic reports. 17 Perhaps even 

more importantly, states generally have no authority to tine or otherwise sanction noninsurer affiliates, and they can only sanction executives of a holding company system for 

fraud or for involvement in certain improper transactions within the holding company 

system. 18 Finally, states' examination authority over non-insurance affiliates is expressly 

limited to analyzing whether these entities pose enterprise risk to state licensed insurance 

companies, rather than to non-insurance affiliates (such as thrifts) within the holding 

company. 19 

16 The National Association oflnsurance Commissioners has amended its model holding company law 

twice in recent years: in 2010 and 2014. Only some states have adopted the 2014 revisions. 17 1bere are two primary exceptions to this general principle. First, states can indeed demand that parent 

companies file an enterprise risk report. See NAIC Model #440, Insurance Holding Company System 

Regulatory Act§ 4L. Second. states can require large and medium size insurers to tile an Own Risk 

Solvency Assessment. See NAIC Model #505, Risk Management and Own Risk and Solvency Assessment 

Model Act. But in neither case do state insurance regulators have any enforcement authority over the parent 

itself. for these reasons, insurance subsidiaries must rely on the kindness of their parent companies and 

affiliates to obtain information about transactions and exposures through the group. See id. 

" NAIC, Model #440, Insurance Holding Company System Regulatory Act § 11. 19 See NAIC, Model #440, Insurance Holding Company System Regulatory Act§ 6(a). 

10 
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Second, many state insurance regulators lack the expertise, budget, and staff to 

effectively conduct group-wide supervision of complex insurance groups.20 Here too, 

states vary substantially in their capacities. Whereas states like New York employ 

hundreds of financial examiners and analysts, other states have less than a dozen of these 

employees. Even New Jersey- which is the lead group regulator for one of the largest 

and most complicated domestic insurance groups- employs fewer than fifty such 

financial supervisors. 21 

Finally, state actors' local political accountability also limits their incentives to 

effectively regulate insurers at the group level. The core problem is that state insurance 

regulators are either directly or indirectly politically accountable only to the constituents 

in their jurisdictions. But the benefits of regulating across a large insurance conglomerate 

with far-flung cross-border operations are felt almost entirely outside of the boundaries of 

any individual state. 

In light of these considerations, it is hardly surprising that both international and 

domestic assessments ofU.S. insurance regulation have repeatedly expressed concern 

about state insurance regulators' group supervision. For instance, a peer review of the 

U.S. state-based system of insurance regulation by the Financial Stability Board 

concluded "that while the state-based regulatory system was effective in assuring 

policyholder protection and the soundness of individual insurance companies, it lacked a 

systemic focus and the capacity to exercise group-wide ovcrsight."22 Similarly, a report 

20 See Jeremy Kress, Prudential's Flawed Case for SIFI De-Designation (draft). For one apt comparison of 

what happens when nnder-rcsourced and outmatched regulators are asked to supervise large and complex 

financial conglomerates, consider the SEC's disastrous consolidated supervision program over large 

investment banks. See Steven M. Davidoff & David Zaring, Regulation by Deal: The Government's 

Response to the Financial Crisis, 61 ADMIN. L. REV. 463, 494 (2009). 21 See NAIC, 2016 Insurance Department Resources Report. 22 Financial Stability Board, Peer Review of the United States 32 (20 13). 

11 
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of the International Monetary Fund noted that international regulatory regimes have 

increasingly "been supplementing their strong solo company focus with financial and 

other requirements and more supervisory focus applied at the group level and U.S. 

supervisors should do the same." 23 And a 2013 report of the Federal Insurance Office 

emphasized the "shortcomings of solo entity supervision'' by state insurance 

departments. 24 

(3) H.R. 5059 creates the prospect of regulatory arbitrage Qy financial conglomerates 

seeking to avoid federal regulation. 

One of the primary lessons of the 2008 financial crisis is that effective regulatory 

supervision is immensely difficult when firms are allowed to select among competing 

regulators. A central goal of Dodd-Frank was to eliminate this regulatory architecture by 

dissolving OTS and transferring to the Fed consolidated supervision for all 

conglomerates that own a federally-insured depository institution. I have substantial 

concerns that the definition of an ISHLC in H.R. 5059 could undermine these advances 

by allowing any entity that owns a thrift to restructure itself at limited cost so as to avoid 

consolidated regulation by the Fed. 

Under the Bill's current language, a SLHC could avoid federal oversight by 

structuring its top-tier holding company as an "insurance underwriting company." This is 

because the Bill defines an "insurance underwriting company"' as a company that is 

"engaged in the business of insurance," "subject to regulation by a state regulator," and 

"covered by a State law that is designed to specifically deal with the rehabilitation, 

liquidation, or insolvency of an insurance company." Pursuant to this definition, a large 

23 International Monetary Fund, United States: Publication of Financial Sector Assessment Program 

Documentation-··Detailed Assessment of Observance of!AIS Insurance Core Principles (2010). 74 See Federal Insurance Office, How to Modernize and Improve the System of Insurance Regulation in the 

United States (2013). 

12 
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SLHC would qualify as an ISLHC and thus escape oversight by the Federal Reserve 

simply by convincing a single state insurance regulator to grant its top-tier holding 

company a license to sell insurance, and then selling a small amount of that coverage. 

This is plainly not the intent ofH.R. 5059. The problem can likely be avoided by 

eliminating from the definition of an ISLHC a "top tier savings and loan holding 

company that is an insurance underwriting company,'' unless it also meets the 

quantitative test contained in K(2). Alternatively, the problem could be avoided by only 

including within the definition of an ISLHC a "top tier savings and loan holding 

company'' that was an insurance unden~Titing company at the time of enactment, thus 

paralleling the drafting technique in provision K(3). 

Consider a second example of how the Bill could induce damaging regulatory 

arbitrage. The Bill apparently recognizes the risk that an ISLHC- freed from 

supervision by the Fed or any other federal actor- could use a non-insurer affiliate to 

engage in large and risky financial transactions. This, of course, is exactly what AIG did 

when it issued massive amounts of Credit Default Swaps out of its Financial Products 

entity. To address this risk, H.R. 5059 preserves the Federal Reserve's authority to 

investigate and require certain reports of a "material subsidiary" within an ISLHC. Such 

subsidiaries are defined by reference to various quantitative tests designed to identify 

large entities within the holding company system. But a motivated ISLHC could avoid 

this safeguard simply by spreading out financially-risky transactions across numerous 

relatively small subsidiaries. 

Whether or not these specific regulatory arbitrage concerns are addressed in 

subsequent versions of the Bill, they point to a broader concern I have about H.R. 5059. 

13 
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By creating a new category of financial institution that is subject to different regulatory 

rules than other similarly situated institutions, the Bill introduces an inevitable risk of 

unintended consequences and regulatory arbitrage. 

Dodd-Frank was designed to avoid such game-playing by financial institutions. It 

did so by creating a simple rule: fmns that own banks are subject to umbrella supervision 

by the Federal Reserve. H.R. 5059 unde1mines this solution, recreating the very same 

types of deficiencies in re~o'lllatory architecture that resulted in the AIG debacle and 

contributed to the 2008 financial crisis. 

(4) The Federal Reserve's current supervision of insurance-focused SLHCs does not 

interfere with state insurance regulation or impose undue burdens on these 

financial conglomerate§., 

H.R. 5059 is motivated by perceived problems that have not been substantiated 

and that, in any case, are best dealt with by agency, rather than legislative, action. First, 

the Bill's name- the State Insurance Regulation Preservation Act wrongly suggests 

that the F edcral Reserve's oversight of insurance-focused S LH Cs somehow interferes 

with traditional state insurance regulation. Y ct federal agencies have at least ostensibly 

exercised such oversight for d(~cadcs. As described above, even before passage of DoddFrank, the OTS was the group supervisor of insurance-focused conglomerates that owned 

thrifts. Although OTS clearly failed in discharging this responsibility effectively, the 

relevant point here is that traditional state insurance regulation has persisted for decades 

alongside federal oversight of holding company systems that include federally-insured 

banks. 

I have seen no evidence that the Federal Reserve's implementation of such longstanding federal supervision interferes with traditional state insurance regulation. To the 

contrary, the most public indication of the Fed's supervisory approach to these firms 

14 
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clearly and explicitly defers to state insurance regulation with respect to state-licensed 

insurers. In an Advance Notice of Proposed Rulemaking, the Fed proposed rules that 

would completely defer to state regulators' capital calculations for state-licensed insurers 

when it comes to non-systemic, insurance-focused SLHCs. This "building block" 

approach to consolidated capital rules is consistent with Fed officials' public statements 

that their supervisory review docs not encompass state-licensed insurance companies, and 

instead focuses on the broader group's corporate governance, risk-management, and 

internal controls. None of these fonns of supervision interfere with traditional statebased insurance regulation. 

Although I have less direct knowledge ahout the compliance costs experienced by 

insurance-focused SLHCs, I have seen limited evidence that these costs arc inappropriate. 

All supervisory regimes inevitably impose compliance costs on supervised frrms. Any 

company that chooses to acquire a federally-insured depository institution whether it is 

engaged in insurance or in selling tractors must bear those compliance costs. Insurance 

companies are not in any way special in this respect. 

To be sure, it is certainly possible for a supervisory regime to impose excessive 

and unwarranted compliance costs on firms. But the Federal Reserve's supervisory 

approach is cognizant of minimizing these costs to the extent possible. For instance, the 

Federal Reserve explicitly tailors the intensity of its supervision to the size and 

complexity of the underlying firm. Small and regional SLHCs are subject to much less 

searching scrutiny than large and complex companies. 

To the extent that the intensity of the Federal Reserve's regulation is not well 

calibrated to the risks and complexity of the holding company systems they oversee, the 

15 
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appropriate remedy is not to eliminate appropriate federal oversight of companies that 

own federally-insured depository institutions. Instead, it is to adjust the scope and 

intensity of federal supervision. 

16 
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Statement for the Record 

House Committee on Financial Services 

Subcommittee on Housing & Insurance 

Hearing titled "Legislative Review of H.R. 5059, the State Insurance Regulation Preservation 

Act" 

March 7, 2018 

The American Council of Life Insurers (ACLI) is pleased to submit this statement expressing 

support for the State Insurance Regulation Preservation Act, H.R. 5059. ACLI thanks 

Representatives Keith Rothfus (R·PA) and Joyce Beatty (D-OH) for their leadership on this 

issue. ACLI also thanks House Financial Services Housing and Insurance Chairman Sean 

Duffy (R-WI) and Ranking Member Emanuel Cleaver (D-MO) for holding this important 

hearing. 

The ACLI is a Washington, D.C.-based trade association with approximately 290 member 

companies operating in the United States and abroad. ACLI advocates in state, federal, and 

international forums for public policy that supports the industry marketplace and the 75 

million American families that rely on life insurers' products for financial and retirement 

security. ACLI members offer life insurance, annuities, retirement plans, long-term care and 

disability income insurance, and reinsurance, representing 95 percent of industry assets, 93 

percent of life insurance premiums, and 98 percent of annuity considerations in the United 

States. 

ACLI believes any Federal Reserve Board oversight of a savings and loan holding company 

that contains insurance entities must take into consideration the unique aspects of the 

business of insurance and the state-based insurance regulatory system. This legislation is 

flexible, and "right sizes" federal regulation of savings and loan holding companies with 

insurance entities, without precluding federal regulation in prescribed circumstances. 

Thank you for convening this important hearing and for your consideration of the views of 

ACLI and its member companies. 

American Council of Life Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

www.acll.com 
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March 7, 2018 

The Honorable Keith Rothfus 

United States House of Representative 

1205 Longworth House Office Building 

Washington, DC 20515 

Dear Representatives Rothfus and Beatty, 

The Honorable Joyce Beatty 

United States House of Representatives 

133 Cannon House Office Building 

Washington, DC 20515 

The National Association ofMutuallnsurance Companies writes in strong support ofH.R. 5059, the State 

Insurance Rq,>ulation Preservation Act, which provides much-needed clarity to the Federal Reserve Board 

of Governors on their group-level oversight of savings and loan holding companies primarily engaged in 

the business of insurance. 

One of the authorities the Federal Reserve was given in the Dodd-Frank Wall Street Reform and 

Consumer Protection Act was that of supervising Systemically Important Financial Institutions, bank 

holding companies, and savings and loan holding companies which includes insurance companies 

which own thrift institutions. While supervision and capital requirements for the consolidated group are 

now the purview of the Federal Reserve, H.R. 5059 would simply make clear that the examination and 

oversight of the individual insurance companies within the group would be conducted by state insurance 

regulators unless failing to meet those capital requirements. This clarity would help to reduce regulatory 

inefficiency, duplication of effort, and unnecessarily higher compliance costs. 

It is very important to ensure that the Federal Reserve Board's oversight complement, rather than 

supplant, the state-based system of insurance regulation which has worked well in the U.S. for over !50 

years. We believe that your legislation strikes the right balance by keeping the day-to-day regulation in 

the hands of the state insurance departments, while also ensuring that the Board would retain the authority 

to monitor the organizational structure of insurance savings and loan holding companies, material 

financial subsidiaries, and compliance with Board-imposed, group-level capital standards. The clarity 

provided by the bill will lead to more efficient and effective regulation for those companies subject to the 

Federal Reserve Board's supervision. 

NAMIC thanks you both for your leadership in this area and will be strongly urging further consideration 

and passage ofH.R. 5059. 

Sincerely, 

Jonathan Bergner 

Assistant Vice President, Federal Affairs 

National Association of Mutual Insurance Companies 
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Opening Statement for Ranking Member Waters 

Housing and Insurance Hearing entitled, "Legislative Review of H.R. 5059, the State 

Insurance Regulation Preservation Act" 

Wednesday, March 7, 2018 at !O:OOam 

Thank you, Mr. Chainnan and welcome to all of our witnesses. We arc here today to 

discuss H.R. 5059, the State Insurance Regulation Preservation Act, a bill that seeks to address 

the current system of supervision for insurers that own depository institutions such as thrifts. 

Ever since the Dodd-Frank WaH Street Refonn and Consumer Protection Act was signed 

into law, these insurers have been subject to consolidated supervision by the Federal Reserve. In 

drafting Dodd-Frank, Democrats were not only attempting to stabilize the financial system in the 

wake of the worst financial crisis since the Great Depression, but also make sure our regulators 

had the tools necessary to prevent the next crisis from ever occurring. Ensuring that there is a 

strong consolidated supervisor for firms that own deposit-taking banks is critical to that 

regulatory toolbox. 

Of course we don't need to engage in hypotheticals to understand the follies of lax 

oversight for subsidiaries of an insurance firm because one needs to look no further than the case 

of AIG, which cost taxpayers $182 billion. 

AIG, which was principally an insurer, also conducted other business through its many 

subsidiaries. Now, as an insurance company, AIG was subject to the state-based system of 

insurance regulation but as the owner of a thrift, it was also regulated by the now defunct Office 

of Thrift Supervision. The main problem was that each regulator was silocd and there was no 

consolidated supervision looking across this vast and diversified firm. In that absence, AIG 

exploited a huge gap in oversight and that is what informed us when drafting the provisions of 

law under discussion today. 

It is with AIG in mind that I review H.R. 5059, which I believe must be considered very 

carefully and very thoughtfully. I look forward to hearing from the witnesses today to gain a 

better understanding of why this legislation is necessary and how it can be improved to ensure 

that we are not opening the door for the next AIG. 

Thank you, and I yield back. 

1 
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Daniel Schwarcz's Answers to Questions for the Record for HI legislative Hearing entitled, 

legislative Review of HR 5059, the State Insurance Regulation Preservation Act 

March 7, 2018 

1. H.R. 5059 provides specific exemptions for a non-material subsidiary. What is your 

understanding of the limits of that exemption? For example, could there be an infinite 

number of non-materials subsidiaries that are each exempt from supervision but taken 

together could pose a risk to the holding company? In your opinion, when is a subsidiary 

material? Should that ever include off-balance sheet activities, particularly at the levels 

seen in this bill of $5 billion? 

As I note in my written testimony, a motivated ISLHC could avoid owning a "material subsidiary" 

simply by spreading out financially-risky transactions across numerous relatively small 

subsidiaries. Moreover, I am not convinced that the definition of the term "material" in the 

statute accurately captures what it ought to: the prospect that a subsidiary could pose a 

"material" risk to the federally insured depository institution within the ISLHC or to the broader 

enterprise. Attempting to define this risk through relatively arbitrary quantitative thresholds, as 

H.R. 5059 currently does, seems to be an inherently impassible task. This is precisely why 

consolidated regulation involves a combination af quantitative and qualitative factors to assess 

the risks posed by individual subsidiaries to the insured depository institution and larger holding 

company system. 

2. H.R. 5059 defines an insurance savings and loan holding company as one that has a toptier savings and loan holding company that is an insurance underwriting company, or a 

savings and loan holding company that held 75 percent or more of its total consolidated 

assets in an insurance underwriting company, or be registered as a savings and loan 

holding company before July 21, 2010 and be a New York not-for-profit corporation. 

This means that a company only needs to qualify for one of the three definitions created 

in this bill to be eligible for relief. Is that your reading of the bill as well? If this bill were 

enacted, what would prevent a company from simply restructuring to game the system 

and obtain the relief provided for in this bill? Even if the bill were modified so that only 

companies that meet the definition now would be eligible, is that really good public 

policy? If we agree that this legislation is necessary now then why shouldn't future 

companies be eligible as well? 

As I emphasized both in my written and oral testimony, I do indeed agree with this 

interpretation of the bill. Moreover, I am indeed very worried that the Bill would create 
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substantial opportunities for regulatory arbitrage, by allowing large financial conglomerates to 

escape consolidated regulation by the Federal reserve simply by having an insurance company 

become their top-tier holding company. Although I proposed in my written testimony that one 

option for fixing this problem might indeed be to limit the Bill's applicability to firms that 

currently meet the definition of an ISLHC, I agree with the concern that this is a somewhat 

arbitrary solution to the underlying problem. Indeed, it would potentially create an unbalanced 

competitive landscape, by benefitting incumbents at the expense of new or emerging firms. 

3. Our state-based system of insurance regulation is often credited with its policyholdercentric focus. But when we discuss financial stability, isn't a narrow albeit wellintentioned focus on policyholder protection missing the point? In fact, the Federal 

Reserve is explicitly tasked with reducing risks to financial stability. What are the 

possible negative consequences of effectively removing the Fed as the consolidated 

supervisor for insurance savings and loan holding companies as this bill would do? 

As I have emphasized in prior written testimony to the Committee- particularly in my testimony 

before the Subcommittee on Housing and Insurance regarding "The Federal Government's Role 

in the Insurance Industry" on October 24, 2017-1 absolutely agree that the state system of 

insurance regulation is focused predominantly on policyholder protection rather than promoting 

financial stability. Moreover, I continue to believe that there are structural reasons why states 

simply are not the appropriate repository of a regulatory mission that focuses on promoting 

financial stability. Although H.R. 5059 applies only to insurance-focused firms that are 

regulated by the Fed because they own a depository institution, rather than those-insurance 

focused firms that are regulated by the Fed because they have been deemed systemically 

significant, I still think that the larger point about the limited goals of state insurance regulation 

is important. The reason that firms which own federally insured depository institutions are 

regulated by the Fed is because there are unique risks that come along with owning a bank. 

Firms that awn a bank may exploit federal deposit insurance by causing those banks to enter 

into transactions that benefit their holding company. Meanwhile, firms that own banks may 

end up undermining those banks' financial strength by operating as a source of weakness, 

rather than strength, for those institutions. Just as states do not focus on financial stability, 

they also do not focus on protecting the federal insurance depository fund. This is why federal 

regulation in this arena remains essential. 

4. The Dodd-Frank Act tasked the Federal Reserve with serving as the consolidated 

supervisor of insurance companies that own depository institutions. In this role, how 

does the Federal Reserve's view of the companies it supervises differ from that of the 

states' view? Why is that distinction important? 
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State insurance regulation is focused almost exclusively on individual operating insurance 

companies. Although state regulators have been developing new approaches to extend their 

regulatory scrutiny to the holding company level, these techniques and capabilities are both 

new and untested. By contrast, regulation by the Fed is focused exclusively on the forger 

financial conglomerate. This is an area of expertise that the Fed has developed for many 

decades, and is a fundamentally different type of supervisory oversight than occurs at the 

individual/ega/ entity level. Reflecting this distinction, the Fed does not directly supervise any of 

the insurance companies within the holding company system that are regulated by the states. 

Instead, the Fed evaluates issues that cross-cut the larger financial conglomerate, such as 

whether it has appropriate risk management and corporate governance strategies in place. 

5. To the extent that the Federal Reserve can further tailor its supervision of insurance 

savings and loan holding companies in a responsible manner, do you have suggestions 

for how to more narrowly focus those efforts? Do you agree that this would be a better 

approach than the approach in H.R. 5059? 

I believe that the Fed should continue to work with state regulators in understanding the scope 

of the issues that are already covered by those regulators in documents like the Own Risk 

Solvency Assessment {ORSA). I very much agree that continuing to encourage the Fed to work 

with state insurance regulators is a much better approach to appropriately reducing the 

regulatory burden on small and well run ISHLCs than the approach reflected in H.R. 5059. 

6. AIG famously collapsed and nearly brought down our economy. The exemptions allowed 

for under this bill are eerily close to many of the risky activities that allowed for the 

failure of AIG such as the lack of oversight over off-balance sheet activities and the lack 

of a consolidated supervisor monitoring the entire financial firm for financial stability 

and safety and soundness. What are your thoughts? Do you have thoughts on how the 

bill could be improved to ensure that there is an entity with tools to constantly monitor 

for early warning signs of the next AIG? 

AIG very clearly exposed the limits of state insurance regulation when it comes to the 

consolidated oversight of large financial conglomerates. AIG's failure in 2008 was just as much a 

failure of the firm's insurance operations as its derivatives business. A major cause of AIG's 

collapse was the company's ill-fated securities lending program, under which it lent out the 

assets of its insurers to large financial institutions in exchange for cash collateral, which it then 

invested in mortgage backed securities. These securities lending contracts were very shortterm, thus allowing spooked counterparties to quickly demand a return of their cash collateral. 

Despite the risks that these operations posed to AIG, state insurance regulators had not 

identified these operations as a problem until mid-2007. State insurance regulators failed to 
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diagnose these problems with AIG's securities lending program any earlier because the program 

was operated by non-insurer affiliates of the company. As a result, no individual insurance 

regulator took primary responsibility for carefully scrutinizing that program. Just as 

importantly, state insurance regulators' focus on individual insurance entities also caused them 

to miss the key fact that the risks associated with AIG's securities lending program were the 

exact same risks being taken by the company's financial products subsidiary. 

The Bill only indirectly implicates these issues, because it does not purport to impact the Fed's 

regulation of nonbank firms that are deemed systemically significant by the Financial Stability 

Oversight Council. But one major way that the next AIG might arise is through a nonbank 

financial firm's exploitation of the credit-benefits associated with owning a federally-insured 

depository institution. Ownership of such an institution can allow a non-bank to substantially 

increase its borrowing, and thus its capacity to pose risks to the larger financial system. 

7. The bill sets a fairly high threshold for off-balance activities that could still leave a 

holding company with several supposedly non-material subsidiaries that would escape 

federal supervision. Is there any reason that these firms, particularly the smaller-sized 

and regionally-focused firms would need or want off-balance sheet activities at $5 

billion when the consolidated assets of many of the firms that would qualify as ISLHCs 

are far less? Can you please describe the types of off-balance sheet activities your firms 

might engage in? Do you feel a $5 billion threshold makes sense for firms of all sizes and 

structures? 

I believe that the primary off-balance sheet activities that a material subsidiary is likely to 

engage in include derivatives operations and other types of contingent financial guarantees. As 

indicated above, I do not believe that any arbitrary quantitative definition can properly identify 

the types of off-balance sheet activities within a subsidiary that are likely ta place a holding 

company or its federally-insured depository institution at risk. 

(8) The definition of "material subsidiary" in the bill seems to direct regulators to tailor 

their examinations to the business of insurance even if the subsidiary is not an 

insurance firm. Is this a drafting oversight or something you feel is needed for the 

insurance industry? Please explain. 

This does indeed seem like a drafting error to me. Financial firms should be regulated on the 

basis of the activities they engage in, rather than the firms with which they are affiliated.