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SYSTEMIC RISK AND INSURANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JUNE 16, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–44 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 16, 2009 .................................................................................................... 1 

Appendix: 

June 16, 2009 .................................................................................................... 57 

WITNESSES 

TUESDAY, JUNE 16, 2009 

Baird, Patrick S., Chief Executive Officer, AEGON USA, LLC, on behalf 

of The American Council of Life Insurers (ACLI) ............................................. 20 

Bryce, Teresa, President, Radian Guaranty Inc., on behalf of The Mortgage 

Insurance Companies of America (MICA) .......................................................... 13 

Hill, John T., President and Chief Operating Officer, Magna Carta Companies, on behalf of The National Association of Mutual Insurance Companies 

(NAMIC) ................................................................................................................ 22 

McCarthy, Sean W., President and Chief Operating Officer, Financial Security Assurance Holdings Ltd. .............................................................................. 14 

McRaith, Hon. Michael T., Director, Illinois Department of Insurance, on 

behalf of The National Association of Insurance Commissioners (NAIC) ....... 11 

Nutter, Franklin W., President, Reinsurance Association of America (RAA) .... 18 

Skinner, Hon. Peter, Member, European Parliament .......................................... 9 

Spence, Kenneth F. III, Executive Vice President and General Counsel, The 

Travelers Companies, Inc. ................................................................................... 16 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 58 

Garrett, Hon. Scott ........................................................................................... 60 

Carson, Hon. Andre .......................................................................................... 62 

Baird, Patrick S. ............................................................................................... 63 

Bryce, Teresa .................................................................................................... 73 

Hill, John T. ...................................................................................................... 81 

McCarthy, Sean W. .......................................................................................... 98 

McRaith, Hon. Michael T. ................................................................................ 104 

Nutter, Franklin W. ......................................................................................... 120 

Skinner, Hon. Peter .......................................................................................... 131 

Spence, Kenneth F. .......................................................................................... 137 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Letter from the CEA, dated June 15, 2009 .................................................... 148 

Written statement of the Property Casualty Insurers Association of 

America (PCI) ................................................................................................ 150 

Garrett, Hon. Scott: 

Letter to Hon. Lawrence H. Summers from the American Insurance 

Association (AIA) .......................................................................................... 174 

(1) 

SYSTEMIC RISK AND INSURANCE 

Tuesday, June 16, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:08 a.m., in room 

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

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Capuano, Hinojosa, McCarthy of New York, Baca, Lynch, Miller, Scott, 

Bean, Moore, Klein, Perlmutter, Donnelly, Carson, Speier, Foster, 

Adler, Kosmas, Grayson, Himes; Garrett, Price, Manzullo, Royce, 

Biggert, Capito, Hensarling, Neugebauer, McCarthy of California, 

Posey, and Jenkins. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

Pursuant to an agreement with the ranking member, opening 

statements today will be limited to 10 minutes for each side. Without objection, all members’ opening statements will be made a part 

of the record. 

We meet to continue our discussion of insurance regulation, 

which the Capital Markets Subcommittee has debated in great 

depth for several years. On the eve of the Administration’s unveiling of its plan to strengthen the oversight of our financial markets, 

it also appears likely that we will soon consider reforms aimed at 

mitigating systemic risk. As such, it makes sense for us to drive 

a bit deeper today into the issue of systemic risk and the insurance 

industry. 

While we have yet to learn much about the specifics of the Administration’s plan for insurance reform, we have spent enough 

time debating these issues to come to some conclusions. For example, I believe that only ostriches can now deny the need for establishing a Federal insurance resource center and a basic Federal insurance regulatory structure. 

Insurance is a complex and important part of the U.S. financial 

industry, with more than $6.3 trillion in assets under management 

and $1.23 trillion in annual premiums. We need to recognize this 

reality by modernizing the overall regulatory treatment of insurance. We also need to protect against the risks certain sectors of 

2 

the industry may pose and address the greater sensitivity that 

some industry segments have to external events. 

During this crisis, we saw a company that started out as an insurer spread far and wide in its activities and its international 

presence. American International Group, however, lacked a Federal 

regulator with real expertise about its vast insurance operations. 

Rather, the holding company purchased a small thrift and chose 

the Office of Thrift Supervision as its supervisor. 

Currently, several other insurance holding companies have a 

Federal banking regulator as their primary supervisor, and more 

than 6 dozen similar entities avoid any form of Federal oversight, 

with selected States instead monitoring them on a consolidated 

basis. Because a number of these businesses could pose systemic 

risk, I believe that the Federal Government should directly examine all complex financial holding companies, including those whose 

primary activities involve underwriting insurance and those who 

play with credit default swaps. 

In addition, our financial services markets are global and complex. Insurance is no exception. In order for effective communication and dialogue to take place on the international stage, we must 

have a single point of contact for the United States on these matters. Moreover, insurers must have a Federal regulatory voice on 

par with the banking and securities sectors in our financial markets so that the industry can communicate with its peer regulators 

at home. 

In short, we can no longer sweep insurance regulation under the 

rug and cross our fingers that nothing will go wrong. We tried it 

before and learned that such an action may hide the mess for the 

short term, but pose greater problems in the long term. As such, 

when the Administration reveals its white paper tomorrow, I very 

strongly hope that it will recognize today’s market realities and call 

for the establishment of better oversight for insurance holding companies and certain insurance activities, especially those most likely 

to pose systemic risk. 

Moreover, I am confident that this Administration will recognize 

the wisdom of creating a Federal insurance office to advise a systemic risk overseer of the risks in the insurance sector, provide expertise to the Administration and Congress on insurance policy 

matters, and communicate with foreign governments. I have long 

advocated for such an office by introducing and advancing the Insurance Information Act. As part of the congressional restructuring 

of financial services regulation, I ask my colleagues to join me in 

the effort to enact this legislation. 

With any luck, the Administration with its white paper will also 

hopefully advance the debate about Federal insurance regulation in 

other ways. Personally, I now believe that the Federal Government 

should actively regulate some specific insurance lines, especially 

those that pose systemic risk or which have a national significance. 

Using these tests, federally regulated lines would include bond insurers, mortgage insurers, and re-insurers. I also believe that we 

should examine how we can promote greater uniformity in the industry, with or without the establishment of a Federal charter. The 

Administration might reach similar conclusions. 

3 

In sum, before the Administration proposes its white paper tomorrow, we have many important issues to discuss related to regulatory restructuring as it affects the insurance sector today. I therefore look forward to the testimony of our witnesses and to a vibrant 

debate in the weeks and months ahead. 

I would like to recognize our ranking member, Mr. Garrett, for 

4 minutes, for his opening statement. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you all to our 

witnesses, as well, especially Mr. Skinner, who I understand came 

all the way across the ocean to be with us today. We have a fairly 

large panel, and wide perspective of different opinions on the insurance industry. So I look forward to all of your testimony. 

Tomorrow, as you indicate, we expect to hear from the Obama 

Administration on its plan for financial regulatory reform. And, 

from what I can tell, it seems unclear to what extent a proposal 

will address insurance legislation. Different ideas have been floated, of course. But within the Administration and beyond, it seems 

that a clear consensus as to what to do in insurance has not totally 

been yet crystalized. 

See, part of the difficulty, I think, in reaching a consensus on 

what to do is related to the difficulty in reaching a consensus on 

what is a systemic risk. And, furthermore, how do you identify it, 

if that’s even possible in the future? And how should it be addressed if it is identified, and how it should be cleaned up, once it 

has been identified, if it’s not too late. 

Now, I would add another issue that policymakers should be 

thinking about: How can the policy be put in place so that 

incidences of systemic risk aren’t actually encouraged in the first 

place, or exacerbated, or even institutionalized, due to government 

actions or unintended consequences? 

I worry that some of the policies being considered by the Administration, and likely to be part of its plan, will unfortunately do 

more harm than good if they are actually implemented. You know, 

a systemic risk regulator, in conjunction with a resolution or a bailout regime will set up a situation where certain companies are either implicitly or explicitly perceived to fall under this yet another 

new layer of supervision, be seen as too-big-to-fail, gain an unfair 

advantage in the market place, and threaten further taxpayer pain. 

Further complicating the resolution authority proposal is a question of how to pay for it. If only large firms potentially subject to 

the authority are asked to pay for it, then they will fairly explicitly 

be seen as beneficiaries of that regime. But asking a broader swath 

of the industry to pay for it would be not equitable, since smaller 

firms that have no chance of ever benefitting from it would be 

asked to contribute to a system design up there, and prop up their 

larger competitors. 

Additionally, I don’t believe that individual taxpayers should be 

asked to contribute to a fund that is set up to bail out a failed large 

firm and its creditors. And, furthermore, such a fund created for 

the resolution authority would need to be very large, and that’s 

very costly for the firms that have to contribute to it. 

But, at the same time, it would likely not be large enough to deal 

with an event deemed by regulators as truly significant. 

4 

As I said, I would argue that, at the first and foremost, we 

should concentrate on policies that don’t encourage future bail-outs 

by promising firms that the government will always come to the 

rescue. 

The Republican plan that was put forward last week addresses 

various policies that put the taxpayer at risk, but has no bail-out 

in the future. And its central unifying goal is no more bail-outs. 

Now, returning to the theme of today’s hearing, my primary 

questions are, are insurance firms, by their nature, systemically insignificant? I am looking forward to hearing from different participants on the panel on this question, in particular. 

And, certainly, it would be a mistake to view the entire industry 

broadly as a single entity. At today’s hearing, the breadth of the 

industry will be on display, as we will be hearing from the mortgage insurance industry, the bond insurers, life insurers, the re-insurers, as well as from the PNC sector, as well. 

And we will also be hearing from the NAIC, which is actually in 

charge of insurance regulation in this country, as we speak. I am 

hopeful that its perspectives on systemic risk, how we might address it, and what further actions could be done, will be enlightening to everyone here today. 

And finally, Mr. Chairman, as you know, you have introduced 

the Office of Insurance Information bill, the OII bill. And I know 

this legislation will be addressed by several members of the panel 

today. So I am interested to hear from our panel as to how this legislation may address deficiencies in our current framework. And I 

am particularly interested in its potential impact in regard to markets for the United States companies abroad, and related international agreements, as well. 

So, once again, I welcome all the witnesses, and I look forward 

to their testimony. And thank you, Mr. Chairman. 

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

will now hear from the gentleman from California, Mr. Sherman, 

for one minute. 

Mr. SHERMAN. In this hearing is the question, what is insurance? 

Derivatives are, at best, insurance. At worst, they are a casino bet. 

AIG sold fire and life insurance through its regulated subsidiaries, 

and those subsidiaries are pretty much okay. It sold portfolio insurance through unregulated subsidiaries, convincing the world that it 

wasn’t insurance, and they took down the company, if not the 

world economy. 

The fire insurance policy on my house protects my lender in case 

my house burns down. But if my lender wants protection from the 

much greater risk that the value of my house goes down, or the 

value of my mortgage goes down, they also buy insurance. They 

call it a derivative, and it’s completely unregulated. 

We need to make sure that credit default swaps and similar derivatives are classified as insurance, and are subject to reserves. I 

yield back. 

Chairman KANJORSKI. Thank you, Mr. Sherman. And now we 

will hear from another gentleman from California, Mr. Royce, for 

2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. And I would like to briefly thank Mr. Skinner for making this trip here to testify, and also 

5 

congratulate him on his recent election. He has been a leader in 

the European Union and in Parliament. He has been a leader and 

champion of the Solvency II directive, which provides an important 

yet relevant example of an effort underway to create a more efficient regulatory structure. 

And yesterday’s op ed in the Washington Post by Larry Summers 

and Tim Geithner noted the importance of international coordination among regulators, and reiterated the Administration’s commitment to leading the effort to improve supervision around the world. 

Unfortunately, with our fragmented regulatory regime over insurance, we are lagging at this point; we are not leading the rest of 

the world. 

As Solvency II works to unite the insurance markets in 27 member countries in the EU, we continue, on the other hand, to struggle with a patchwork system of 50-plus State regulators. With the 

implementation of this directive nearing, it is becoming more apparent that the framework potentially will be at odds with the U.S. 

regulatory structure. It is unlikely that the EU would find the current U.S. State-based regulatory structure equivalent. 

This means the ability of our regulatory system to detect offshore 

risks will be weakened, and it also means that many of our U.S.- 

based institutions will be forced to shift significant operations overseas if they hope to continue to do business in the EU. 

Certainly, an office of insurance information would be a logical 

first step to address this, and to address other problems we face 

in the international insurance market. However, an OII would rely 

heavily on the various State insurance commissioners to implement 

the regulatory policies. Without strong pre-emptive authority over 

the States, the ability of an OII to enact policies nationwide—and, 

consequently, the ability of an OII to adequately represent the entire U.S. insurance market—would be greatly weakened. 

I remain concerned, however, that an OII will not go far enough. 

Maintaining solvency regulation at the State level will limit the effectiveness of a potential systemic risk regulator, as well as coordination efforts with foreign regulators. 

Certainly, noting the failure of AIG, once the Nation’s largest insurer, is relevant, given the focus of today’s hearing. Dating back 

to 2006, the Paulson Treasury Department noted systemic gaps in 

the State-based system, which AIG exploited. The blame for the 

collapse of the company should start with AIG. 

From a regulatory standpoint, there were failures at both the 

State and Federal level. Using capital from their insurance subsidiaries, with the approval of various State regulators, the securities 

lending division, in tandem with the financial products unit, put at 

risk the entire company and the broader financial system. Half of 

this came from the securities lending division, the other half from 

the financial products unit, in terms of the overleveraging. 

With more than 250 subsidiaries operating in 14 States and more 

than 100 countries, AIG is the poster child for both the need to 

open up lines of communication among regulators worldwide, and 

the need to establish a domestic insurance regulator with the ability to oversee these large and complex institutions. 

And again, Mr. Chairman, thank you for holding this hearing. 

6 

Chairman KANJORSKI. Thank you, Mr. Royce. And now we will 

hear from the gentleman from Georgia, Mr. Scott, for one minute. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I think this, 

of course, is a very important and timely hearing. The issue is, of 

course, I think, what is systemic risk as it relates to our insurance 

industry? And where and how is it best regulated, at the State or 

Federal level? 

But I think that the major model that we are using, AIG, is 

flawed, at its best. Because, as we look back at it, what caused the 

problem at AIG was their Financial Products Division, based in 

London, which again was regulated at the Federal level. 

So the question becomes, if we use a Federal charter, or regulate 

insurance at the Federal level, would that have prevented the situation at AIG? I think, going forward, we have to be very careful 

to make sure that the points we take into consideration are these: 

that we have the sound consumer protections in place; that we also 

do not deter competition; that we do not bring on excessive operating costs; and, in fact, in our efforts to do some good, that we do 

something that could very well be dangerous down the road. 

So, the question becomes, do we do it at the Federal level or the 

State level? And, of course, as I say, we have to look with a very 

jaundiced eye, to make sure that we are looking right when it 

comes to the cause of this at AIG. Because if we did have Federal 

intervention there, as we had, and it didn’t prevent it, what’s to 

say that the Federal charter and Federal regulation is the way to 

go? 

I think there is a lot to be said with making sure that we have 

regulations at the State level that work. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Scott. And now 

we have the gentlelady from Illinois, Mrs. Biggert, for 2 minutes. 

Mrs. BIGGERT. Thank you, Chairman Kanjorski. I am pleased 

that we are having a second hearing to examine insurance regulation. 

As I mentioned at the previous hearing, this is an important part 

of the conversation, as it relates to systemic risk. Fortunately, the 

insurance industry is in good shape, due to sound State regulation. 

I think State insurance regulators are doing a good job. 

And with that, I would also like to thank and welcome to today’s 

hearing Illinois Department of Insurance Director Mike McRaith, 

representing NAIC. I am really happy to have something really 

good to say about Illinois. That doesn’t happen so much these days. 

But it is important that we roll on to the debate on systemic risk 

the role of the Federal regulators when it comes to duly regulated 

entities like AIG. I think OTS dropped the ball, and that’s why a 

part of our Republican regulatory reform proposal preserves the option for a thrift charter, but rolls OTS into the OCC. 

And, in addition, our proposal addresses risky behavior that AIGlike entities may engage in, such as with derivatives. I think we 

establish a market stability and capital adequacy board, comprised 

of all Federal regulators and possibly others to look at what should 

be done with regard to the derivatives regulation. We recently had 

a hearing in this committee to discuss how over-the-counter derivatives could be put into the three buckets of regulation. 

7 

I also think that we need to improve the dialogue among regulators and insurance needs to be part of that dialogue. That’s why 

I joined Chairman Kanjorski, with his Office of Insurance Information bill. 

And, with that, I look forward to hearing from today’s witnesses, 

who represent the very diverse insurance industry. I also look forward to working with them and my colleagues to strike the right 

balance on this matter. With that, I yield back. 

Chairman KANJORSKI. Thank you very much, Mrs. Biggert. And 

now we will hear from the other lady from Illinois, Ms. Bean, for 

3 minutes. 

Ms. BEAN. Thank you, Mr. Chairman. Being from Illinois, I 

would also like to give a shout out to Mike McRaith, but to all of 

our witnesses, as well, for joining us today, and sharing your expertise. 

Until this year, the role of Federal involvement in the insurance 

industry has centered on whether to establish a Federal insurance 

regulator. I have worked with Congressman Royce on legislation to 

establish a Federal regulator for the insurance industry. 

Last Congress, our bill was focused on consumer choice and protections, advantages for agents, and industry efficiencies. But much 

has changed in our financial system since the last Congress. The 

collapse of AIG, the world’s largest insurer, has proven to be one 

of the most costly and dangerous corporate disasters in our Nation’s financial history. With nearly $180 billion of Federal tax dollars committed to AIG, plus $22 billion to other insurers, the Federal Government has made an unprecedented investment in an industry over which it has no regulatory authority. 

The need for Federal regulatory oversight has never been greater. And having a Federal insurance commissioner who can work 

with the expected systemic risk regulator or council is vital to ensure proper oversight of an important pillar of the U.S. financial 

system. 

In April, Congressman Royce and I introduced H.R. 1880, the 

National Insurance Consumer Protection Act. Unlike previous legislation, our bill deals with systemic risk. Recognizing that Congress will create a systemic risk regulator, it subjects all insurance 

companies, national or State-chartered, to a systemic risk review. 

The systemic risk regulator would have the ability to gather financial data from insurers and other financial services affiliates 

within a holding company structure to monitor for systemic risk. 

Based on that financial data, the systemic risk regulator can make 

recommendations to appropriate regulators for corrective regulatory action, including the national insurance commissioner. 

The activities of an insurance company or companies, an affiliate 

of an insurance company, like an AIG financial products unit, or 

any product or service of an insurance company, would have serious adverse affects on economic conditions or financial stability. In 

this instance, the systemic risk regulator can recommend to the 

Federal or State insurance regulator that an activity, practice, 

product, or service must be restricted or prohibited. 

In instances where a functional regulator refuses to take action, 

the systemic risk regulator would seek approval to override the 

functional regulator from a coordinating council of financial reguVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
8 

lators established in the bill that consists of the current members 

of the President’s Working Group on Capital Markets, plus the 

Federal banking regulators, the Federal insurance commissioner, 

and three State financial regulators from the three sectors: insurance; banking; and securities. 

Finally, if the systemic risk regulator determines an insurance 

company is systemically significant, it is required to consult with 

the national insurance commissioner to determine whether the 

company should be nationally regulated. I believe all financial activity, including that of insurance companies, should be subject to 

review by a systemic risk regulator. 

Some suggest the insurance industry does not pose a systemic 

risk to the financial system. But we know from our experience at 

AIG that it did pose a systemic risk, and not just through the Financial Products Division, but through the securities lending program, which was regulated by the State insurance commissioners, 

and has led to over $40 billion in taxpayer money being invested. 

As we move forward in the next few months to establish a systemic risk regulator or council, we need to provide this regulatory 

body with all the tools to properly review and evaluate the activities of insurance companies. That should include a Federal regulator for insurance that can work with a system risk regulator in 

a similar manner as the OCC and SEC do for their respective regulated industries. 

Thank you, and I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Ms. Bean. And 

now, our final presenter, Mr. Hensarling of Texas, for 2 minutes. 

Mr. HENSARLING. I thank you, Mr. Chairman. Thank you for calling this hearing. Obviously, these are very important issues for us 

to consider. There is no doubt each of us knows what a critical role 

the insurance industry plays in our economy today. 

However, I am not sold on the belief that any one insurance company is necessarily an agent of systemic risk to the entire economy. 

And if I did believe that, I can think of no greater self-fulfilling 

prophecy than to designate a firm as systemically risky. Then it becomes systemically risky, and we know what happens after that— 

$173 billion of taxpayer money later, AIG has essentially become 

a conduit for the transferring of taxpayer wealth to counterparties, 

some of which include foreign entities. 

Congress has to be very, very careful about introducing moral 

hazard into the equation, even more than already exists. We simply 

cannot enshrine a too-big-to-fail bail-out policy. There is a huge difference between the government walking in and bailing out an individual institution, and having emergency provisions for liquidity 

and stability aimed at the market as a whole. 

We also have to remember that Federal regulation is not a panacea. Witness Fannie and Freddie, Wachovia, Citi, Bank of America, and the list goes on. 

Finally, with respect to AIG, we had their chief regulator here 

on March 18, 2009. And the regulator said, ‘‘You know what? We 

had the resources, we had the expertise, we had the authority. We 

just simply missed it.’’ Sometimes regulators get it wrong. 

The ultimate goal here should be not to designate certain firms 

as systemically risky, so that we have more ticking time bombs, 

9 

like Fannie and Freddie throughout the economy that will ultimately blow up on the American taxpayer. We don’t necessarily 

need more regulation; we need smarter regulation, which will help 

the consumer. 

And with that, Mr. Chairman, I yield back the balance of my 

time. 

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

And now, we will have the panel. The panel is made up of eight 

members. That is why we contracted some of our presentations by 

the Members. Each of the panelists will be allotted 5 minutes. And, 

without objection, their written statements will be made a part of 

the record. 

First on the panel, we have the Honorable Peter Skinner, a member of the European Parliament from the United Kingdom, and 

most recently re-elected—congratulations, Mr. Skinner, we look forward to your tenure. Mr. Skinner? 

STATEMENT OF THE HONORABLE PETER SKINNER, MEMBER, 

EUROPEAN PARLIAMENT 

Mr. SKINNER. Thank you very much, Chairman Kanjorski, Congressman Garrett, and honorable members of the subcommittee, for 

inviting me here today. I know this is a special occasion for me, if 

nothing else, for the fact that I have just been re-elected, but also 

to come here, to know that I am usually sitting on your side of this 

table, rather than here. But it is a great honor to be here, and I 

appreciate that. 

I am Peter Skinner. I have been a member of the European Parliament since 1994. And this month, yes, I was elected for my 

fourth term. I am a member of the economic and monetary affairs 

committee and directly involved in the—what’s known as the transatlantic regulatory dialogue, a discussion between Congressman— 

Shelley Berkley, I believe, chairs this subcommittee with the European Parliament. So we talk regularly about issues like this. 

I was previously sponsor for the bill in the reinsurance directive 

in 2005, and Solvency II, which is now being passed as a law recently in the European Union, and will actually pass into the statute books of individual member countries by 2012. But each country is already moving towards that introduction. 

Let me say I fully understand and respect, from the start, the 

need for each trading block to establish its own sovereign rules and 

practices, and therefore, wish this committee every success in its 

deliberations. 

We have to take into account what I think we have already 

heard, however, that taking divergent approaches during a global 

recession, matched by the kinds of things that we know about 

across the Atlantic and around the globe, will actually lead to the 

wrong conclusions. We need to agree on common approaches, common regulatory structures. But this doesn’t mean we have to say 

exactly the same thing. 

In terms of systemic risk and the insurance industry, it is the 

management of that risk that is important for the European Union. 

It is the chain of events which leads to systemic risks. And this begins with the failure of management and the supervision of such 

risks. The EU’s focus has been to try to eliminate any failure by 

10 

predicting behavior, using reasonable models, and testing against 

them. In fact, we have been having impact assessments which involve American companies inside the European Union giving evidence as to that effect. 

In Europe, a committee led by Jacques de Larosiere—you may 

have heard of him—a former managing director of the International Monetary Fund—has proposed sweeping changes to the 

way the European financial services are regulated. These changes 

would result in the creation of a European systemic risk council, 

an independent body responsible for safeguarding financial stability and conducting macro-prudential supervision at the European level. 

Europe gets its information on the insurance business from the 

27 regulators it has representing all of the individual member 

states of the European Union, and these meet under one body: 

CEIOPS, it’s called, the Committee of European Supervisors. It sits 

in Frankfurt, and agrees common standards which are applied, 

through the Solvency II law, across the European Union. 

In terms of that cross-border oversight, we have developed a system which is coming, again, from the de Larosiere report, which 

highlights the need for greater integrated supervision. The proposal is to bring together the work of the three committees in the 

capital markets and insurance and in banking through the supervision through one financial sector type of regulatory body. 

In terms of developments from abroad which may affect the U.S. 

market—and, again, I come from a European perspective; I can 

only talk really about how our markets are interconnected, and we 

have seen that the near-financial meltdown and has meant that, 

actually, when you get a cough or a cold in California, we feel the 

sneeze effect in London, in Frankfurt, and in Rome. 

Solvency II was set outside of this financial crisis, and was trying 

to look and predict what might go wrong already. It is a radical 

overhaul of the prudential regime for insurers in the European 

Union. The objectives of Solvency II are to deepen integration in 

the EU insurance market, enhance policyholder protection, and improve the international competitiveness of EU insurers and re-insurers. 

International communications amongst regulators can be difficult. And you know, in order to be able to get this move-in, we 

have to try and do something about this. It is difficult if we don’t 

have a single regulatory person to speak to. 

In fact, the United States, I understand, is the only country 

around the world not represented by a single national insurance 

regulator at the International Association of Insurance Supervisors. 

And that’s where it begins on third country equivalents in the context of Solvency II. We will be faced with the same question we always face: Who are we going to talk to? Who speaks for the United 

States, as a whole, on insurance? And I believe, for us, this is a 

question about how we move on. That is up to you. 

But our maintaining the standards and enforcing the rules at the 

European level, I can tell you that, along with the regulators, we 

have the European Commission, which ensures, at the administrative level, that the European directives are sensibly applied in each 

country. And as those laws are applied with American countries 

11 

doing business in Europe and European countries doing business 

across the whole of the European Union, it allows for each country 

to do business, State by State, by member country by member 

country. 

On systemic risk and insurance, just a short comment, if I might. 

During the current crisis, the insurance companies that were most 

likely to be affected—and I have heard it already today—were 

those involved in significant quasi-banking activities. That’s a fact. 

There are second order effects, as well. We are aware of that, and 

I think that we have to appreciate that. But they were not the directly involved facts which may lead to greater systemic risk. It is 

the failure to use appropriate controls and manage risk that we believe leads to the problem of systemic risk. 

On Europe’s attitude to guaranty funds, burden sharing and 

compensation schemes are not necessarily practiced in every member state across the European Union, but we are now considering 

how to change that to introduce it. 

So, in conclusion, Mr. Chairman, if I can say that if there is anyone who has been close to this committee’s work and what you are 

going to do, it is I. And I look forward in any way to help, to offer 

to help, to be a resource in any way from the European Union, and 

through our committee in the European Parliament, to offer fraternal greetings and respect to what you do here to come up with 

common approaches and common deliberations to face a global crisis. Thank you. 

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

131 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Skinner. Next, 

we will hear from the Honorable Michael T. McRaith, director of 

the Illinois Department of Insurance, testifying on behalf of the 

National Association of Insurance Commissioners. Mr. McRaith? 

STATEMENT OF THE HONORABLE MICHAEL T. McRAITH, DIRECTOR, ILLINOIS DEPARTMENT OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) 

Mr. MCRAITH. Chairman Kanjorski, Ranking Member Garrett, 

and members of the committee, thank you for inviting me to testify. I am Michael McRaith, director of insurance for the State of 

Illinois. And, as mentioned, I speak today on behalf of the National 

Association of Insurance Commissioners. 

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

likely agree that insurance regulation must not only serve industry 

needs, but also prioritize U.S. consumers. Consumer protection has 

been, is, and will remain priority one for State regulators. 

It bears repeating that we supervise 36 percent of the world’s insurance market. Our States, individual States, include 4 of the top 

10 and 28 of the top 50 world markets. And alone, we surpass two, 

three, and four, combined. 

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

must modernize, and it does. We worked with your great staff, Mr. 

Chairman, to fashion the office of insurance information, which, if 

12 

passed, would provide a Federal focal point for international trade 

matters and Federal data analysis. 

The NAIC maintains the world’s largest insurance database. 

While the States do and will provide data to Federal regulatory 

counterparts, we agree that insurance sector data should be available within the four walls of the Federal Government. 

Consolidated oversight of holding companies will be enhanced by 

a council of regulators that build on the existing data and expertise 

of functional regulators. State insurance regulation is, of course, inherently compatible with a systemic stability council. Any financial 

stability regulator should develop best practices for risk management, required for U.S. insurers, but glaringly lacking in other sectors. Information sharing and confidentiality protocols can be established, and coordination among regulators formalized. 

Under no circumstance, though, should a viable insurance subsidiary be sacrificed for the benefit of another entity within a corporate family. Internationally, the development of accounting 

standards through the international accounting standards boards 

leads the United States and others within the next several years 

to adopt accounting standards based on international financial reporting standards. 

We have undertaken a solvency modernization initiative that will 

evaluate lessons learned nationally and internationally, and examine areas appropriate for refinement. 

We work internationally with the G20, the joint forum, CEIOPS, 

the Financial Stability Forum, the International Association of Insurance Supervisors, the OECD, and others. We work collaboratively with our international counterparts to develop and improve 

international standards. We brought our foreign counterparts to 

the United States, and developed a standardized MOU to allow for 

international information sharing. With the world’s most competitive, mature marketplace, we, your States, are the gold standard 

for regulation in developing countries. 

Through the Holding Company Act, we monitor release of capital 

from an insurer and support our system of multi-jurisdictional regulation. Our expertise can be applied to international cross-border 

transactions, but all insurers operating in our country must be 

independently viable. 

Our financial analysis working group coordinates leading financial regulators from multiple States for the purpose of monitoring 

and analyzing and coordinating action involving major insurers. 

Internationally, with supervisors from other countries, we participate in colleges, monitoring Berkshire, AIG, Zurich, Swiss, and 

ING, among others. 

Indeed, insurance is not a source of systemic risk, and not one 

insurer imposes systemic risk. Insurers may be challenged by failure in other sectors, as with AIG. But the most vibrant markets 

in the world mean the demise of any one insurer will not alter our 

country’s financial stability. 

Also, contrary to misleading alarms, our State guaranty fund 

system has the wherewithal and the creative force to resolve insurer failures, even multiple concurrent failures, while protecting 

consumers. 

13 

We support systemic regulation, pledge our good faith interaction, and renew our commitment to engage constructively with 

this committee. Thank you for your attention. I look forward to 

your questions, and replying to comments made by Mr. Skinner 

and others. 

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

104 of the appendix.] 

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

next we will hear from Ms. Teresa Bryce, president of Radian 

Guaranty Incorporated, on behalf of the Mortgage Insurance Companies of America. Ms. Bryce? 

STATEMENT OF TERESA BRYCE, PRESIDENT, RADIAN GUARANTY INC., ON BEHALF OF THE MORTGAGE INSURANCE 

COMPANIES OF AMERICA (MICA) 

Ms. BRYCE. Thank you, Mr. Chairman, Ranking Member Garrett, 

and members of the subcommittee. I appreciate the opportunity 

today to testify on behalf of the Mortgage Insurance Companies of 

America, the trade group representing the private mortgage insurance industry. 

Mortgage insurance enables borrowers to responsibly buy homes 

with less than a 20 percent downpayment. Many of these are firsttime and lower-income borrowers. Since 1957, mortgage insurance 

has helped over 25 million families purchase homes. Today, about 

10 percent of all outstanding mortgage loans have private mortgage 

insurance. 

This morning, I would like to make three points. First, we do not 

cause or contribute to systemic risk. To the contrary, we absorb 

risk. If a borrower defaults, mortgage insurance pays the lender or 

investor 20 to 25 percent of the loan amount, plus expenses. The 

insurance payment plus the proceeds from the sale of the house 

makes up much of the lender’s or investor’s loss. 

In the current crisis, since 2007, we have paid over $15 billion 

in losses, just like we are supposed to do. I would also note that, 

because mortgage insurance companies have their own capital at 

risk, we have very clear incentives to mitigate our losses, by taking 

action to avoid foreclosures, if at all possible. Last year, mortgage 

insurers were able to save almost 100,000 people from losing their 

homes. 

My second point is that the industry has adequate capital to continue paying claims on existing loans into the future, because our 

State regulators require us to have sufficient capital reserves. The 

backbone of the industry’s financial strength is the State-imposed 

reserve requirements, and specifically the contingency reserve. Half 

of each premium dollar earned goes into the contingency reserve, 

and generally cannot be touched by the mortgage insurer for 10 

years. This ensures that significant reserves are accumulated during good times, so that they are able to be there to handle claims 

in bad times. 

The history of the mortgage insurance industry illustrates the 

value of this reserve structure. Mortgage insurers paid out millions 

in claims, as a result of regional recessions in the 1980’s and the 

1990’s. After each recession, we built-up capital and were able to 

meet the next stress period. 

14 

Mortgage insurers and the banks that make the loans face similar mortgage default risks. But only mortgage insurers raise capital 

in this countercyclical manner. In fact, only now are Federal banking regulators working to construct a similar system for banks. 

My third and final point is that, with additional capital, we can 

significantly help the housing recovery by responsibly expanding 

the number of new home buyers. As the subcommittee knows, the 

members of MICA have requested capital assistance from Treasury. As I have explained, we do not need help to meet our obligations to pay projected claims on our existing loans. Instead, we are 

asking for assistance in order to increase the number of loans we 

are able to insure, while maintaining strong capital reserves. 

Every billion dollars of capital mortgage insurers hold translates into approximately $100 billion of new funding for home purchases, 

more than 650,000 new mortgage loans. A $10 billion program 

would increase market capacity by enabling 6.5 million loans to be 

insured. Such a government investment would dramatically benefit 

the housing market, and enable more borrowers to realize the 

dream of homeownership on terms they can afford and sustain. 

So the bottom line is that, with additional capital, the mortgage 

insurance companies can insure more loans. We hope it is forthcoming. 

In conclusion, I want to thank you for the opportunity to testify 

today. The private mortgage insurance industry continues to absorb risk, just like it is designed to do. MICA strongly supports the 

State regulatory system, and believes the structure assures that we 

can continue to meet our obligations during these very challenging 

times. 

We also would like to contribute still more to the housing recovery. We could do so the day after we receive additional capital. This 

is a housing recovery program that is ready to go. Thank you. 

[The prepared statement of Ms. Bryce can be found on page 73 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Bryce. And 

next we will hear from Mr. Sean McCarthy, chief operating officer 

of Financial Security Assurance, Incorporated. Mr. McCarthy? 

STATEMENT OF SEAN W. McCARTHY, PRESIDENT AND CHIEF 

OPERATING OFFICER, FINANCIAL SECURITY ASSURANCE 

HOLDINGS LTD. 

Mr. MCCARTHY. Thank you. Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee, my name is Sean 

McCarthy, and today I am testifying in my role as president of Financial Security Assurance Holdings, or FSA, and Assured Guaranty Corporation, which is expected to complete the acquisition of 

FSA on July 1st. 

We appreciate the opportunity to testify at this hearing to improve oversight of the insurance industry and a restructuring of 

the Federal Government’s role with regard to insurance products. 

As monoline insurance companies, we provide, in the case of 

FSA, bond insurance for the U.S. municipal and global infrastructure markets. And in the case of Assured, bond insurance for U.S. 

municipal, global infrastructure, and structured financings. Insurance utilized only in the financial markets is a very different prodVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
15 

uct from that of property casualty, life, and health insurance companies. 

Article 69 was enacted by New York State to segregate financial 

guaranty insurance from multiline products and the risks those entail. While it was a good step, it is not strong enough. We believe 

we require mandatory Federal regulation that is closer to that of 

the banks, and that, being centralized and encompassing all aspects of regulation, including required capital. 

The current decentralized regulatory regime for monolines is 

aimed at preserving their solvency, rather than their financial stability. There are no uniform, consistent credit, capital, and financial strength standards. Recognizing this, the New York insurance 

commissioner, Eric Dinallo—who has recently announced that he is 

leaving—had noted the potential need for Federal regulation with 

the bond insurers in the monoline industry. 

Importantly, due to the lack of a single regulator, the rating 

agencies have become the de facto regulators of our industry. While 

we continue to strive to achieve the highest possible ratings, we believe the rating agency views currently play too singular a role in 

the evaluation of our financial strength. Ratings are based on criteria that vary, and include many subjective characteristics. And 

rating agency methodologies are not readily transparent. 

Additionally, all three rating agencies have different sets of 

guidelines, which present conflicting goals, and make it possible to 

manage a stable company. 

Though investors cannot easily evaluate rating agency conclusions, due to the impact of their ratings on trading value of securities that monolines have insured, investors are forced to accept the 

impact that ratings have, with respect to financial guarantors. 

The end result of this de facto regulation by rating has been to 

destabilize markets and reduce municipal issuers’ cost effective access to the capital markets. This has been most difficult for small 

municipal issuers and municipal issuers of complex bonds, where 

bond insurance homogenizes the credits, providing market liquidity 

and market access. The penetration of the bond insurance industry 

for the first 5 months of 2009 has been 13 credit. The letter of credit has now declined to about 6 percent. 

Certainly, there is no question that some financial guarantors 

took large, concentrated risks in mortgage-backed securities that 

severely underperformed, which, in turn, caused downgrades, or 

failures, of five of the seven primary guarantors. Notably, many of 

these now problematic transactions were rated AAA by the rating 

agencies at the time of issuance. 

The financial guaranty industry is now in a rebuilding phase, 

and a number of potential new entrants are poised to participate 

in the market. Assured and FSA have come through this unprecedented period of turmoil in strong capital positions. And, despite 

the understandable concerns that the market has expressed about 

the financial guarantee model, we are confident that investors will 

continue to see value in guarantors that combine capital strength 

with diligent experienced credit selection skills. 

In conclusion, we would like to see mandatory Federal oversight 

of our industry that would provide regulation by design, not by default. We believe that licensing requirements should be stringent, 

16 

and require high but predictable capital levels. Guarantors should 

provide detailed disclosure of risks to all constituencies, and should 

be subject to an annual stress test that would be applied equally 

to all companies. This would increase investor confidence, and provide much needed transparency and stability to the capital markets. 

Thank you. I look forward to your questions. 

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

98 of the appendix.] 

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

Next, we have Mr. Kenneth Spence, executive vice president and 

general counsel at the Travelers. Mr. Spence? 

STATEMENT OF KENNETH F. SPENCE, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, THE TRAVELERS COMPANIES, INC. 

Mr. SPENCE. Chairman Kanjorski, Ranking Member Garrett, and 

subcommittee members, thank you for the opportunity to testify 

today on systemic risk and insurance. My name is Ken Spence, and 

I am executive vice president and general counsel of Travelers. 

Travelers offers a wide variety of property casualty insurance products, and surety and risk management services to numerous businesses, organizations, and individuals in the United States and 

abroad. Our products are distributed primarily in the United 

States through independent insurance agents and brokers. And the 

company is a member of the American Insurance Association. 

There appears to be an emerging consensus that there should be 

systemic risk regulation at the Federal level. I will share some of 

Travelers’s specific systemic risk regulation recommendations in a 

moment. 

However, for any systemic level oversight to be meaningful 

across financial service sectors, there must be an insurance regulatory presence at the Federal level, to ensure that appropriate information is provided and analyzed, and to ensure that any systemic-level directives are effectively implemented. 

To that end, the creation of an office of insurance information, 

as the chairman has proposed in his legislation, would bolster the 

Federal Government’s presence in, and understanding of, the insurance sector. The OII would bring needed information about the insurance market place to Washington and to any national systemic 

regulator, and would give the United States a single voice with 

which to speak on international insurance policy and trade matters. 

We believe a comprehensive approach to Federal financial services modernization will not be complete unless it also includes a 

broader Federal insurance presence that encompasses Federal 

chartering for insurers. This will ensure robust and consistent regulatory oversight, strong consumer protections, and a healthy competitive insurance industry. 

We have been carefully considering the notion of systemic risk 

regulation. As an initial matter, we are mindful that the determination as to whether a company is systemically important does 

not necessarily depend upon its size or industry, but rather to the 

extent to which its financial condition is potentially so inter-related 

17 

with other institutions that its failure could cause widespread and 

substantial economic harm, extending beyond those stakeholders 

who would assume the risk. 

For example, any unregulated holding company with a strong 

credit rating from its underlying operations could have underwritten credit default swaps which played an important role in the 

current financial crisis. 

In addition, we think it is also relevant to consider the systemic 

risk that may be presented on an aggregate industry-wide basis. 

For example, even if a particular community bank or insurance 

company would not present systemic risk, the widespread failure of 

community banks or insurance companies could. A natural or manmade catastrophic event or series of events, for example, could 

cause more than an isolated failure of property casualty insurance 

companies, which in turn, could be systemically significant. 

There are two elements in particular that we recommend for 

your consideration in a reform proposal: mandated internal enterprise risk oversight through board-level risk committees; and substantially enhanced disclosure requirements related to risk. I must 

emphasize at the outset that our two recommendations are not intended to be a comprehensive solution. But we believe that any 

such solution should include these two essential elements. 

First, corporate governance reform should require systemically 

important companies to assign responsibility for risk oversight to 

a committee of their board of directors with a management risk officer that reports directly to the board committee on a regular 

basis. Travelers has, for many years, had a board risk committee 

and a CRO, and the relationship is akin to a board audit committee 

relationship with the company’s chief internal auditor, who often 

reports directly to that committee. 

A board’s risk committee would be responsible for overseeing the 

company’s risk-related controls and procedures, and the chief risk 

officer would be responsible for implementing and managing those 

controls and procedures. This protocol recognizes the importance of 

risk management, and provides clear responsibility and accountability for the management of risk. 

Second, systemically or potentially systemically important financial institutions should be subject to a robust disclosure regime in 

order to provide regulators, rating agencies, and the public with 

the information necessary to provide a comprehensive understanding of an institution’s overall risk profile, and to be able to 

identify those institutions that pose—or that could pose—a systemic risk to the economy. Market forces would, in turn, help to 

limit a company’s incentive to take risks that could potentially undermine its own long-term success, and, as a result, the larger 

economy. 

A more robust disclosure regime should be principles-based and 

flexible, but include additional quantitative disclosure of transactions and risks and other factors, including mandated stress testing that could cause a systemically important company to fail. 

Thank you for affording me the opportunity to testify today, and 

I will be happy to respond to any questions you may have. 

[The prepared statement of Mr. Spence can be found on page 137 

of the appendix.] 

18 

Chairman KANJORSKI. Thank you very much, Mr. Spence. Next 

we have Mr. Franklin Nutter, president of the Reinsurance Association of America. Mr. Nutter? 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA (RAA) 

Mr. NUTTER. Mr. Chairman, members of the committee, thank 

you very much. I am Frank Nutter, president of the Reinsurance 

Association of America, representing reinsurance companies doing 

business in the United States. 

Reinsurance is a risk management tool for insurance companies 

to improve their capacity and financial performance, enhance financial security, and reduce financial volatility. Reinsurance is the 

most efficient capital management tool available to insurers. 

Reinsurance is a global business, and encouraging the participation of reinsurers worldwide in the U.S. market is essential, because reinsurance provides that much needed capacity in the 

United States for property casualty and life risks. Including their 

U.S. subsidiaries, foreign-owned reinsurance companies accounted 

for nearly 84 percent of property casualty premiums ceded on U.S. 

risk by U.S. insurers. 

Because the reinsurance transaction is between sophisticated 

business parties, the regulation of reinsurance focuses almost exclusively on prudential regulation, insuring the reinsurer’s financial solvency, with no consumer component. Because reinsurance is 

a business, a business transaction involving knowledgeable commercial parties, there are no reinsurance guaranty funds at the 

State level, and there is no need to create one at the Federal level. 

As this committee is well aware, there is no Federal entity with 

statutory authority or designated responsibility for oversight of insurance. Consequently, when an insurance issue arises, there is no 

source of information at the Federal level to appropriately advise 

policymakers. 

At a minimum, there is a need for a Federal entity that can utilize information and data from State regulators, but which is empowered to conduct its own analysis and provide advice on a broader perspective than individual State interests. We believe the chairman’s office of insurance information legislation is good and timely, 

and goes a long way toward addressing this problem. 

Reinsurance is an important part of the risk transfer mechanism 

of modern financial and insurance markets. Yet there are clear distinctions between risk, finance, and management products that are 

relatively new financial tools, developed in unregulated markets, 

and risk transfer products like reinsurance, whose issuers are regulated by U.S. regulators, or by their non-U.S. regulatory domicile, 

and whose business model has existed for centuries. 

In the case of reinsurance, regulatory reform is necessary to improve regulatory and market efficiency, and maximize capacity in 

the United States. And that reform should focus on licensing, prudential regulation, and international coordination and cooperation. 

It has been suggested that the authority of a systemic risk regulator should encompass traditional regulatory roles and standards 

for capital, liquidity, risk management, collection of financial reports, examination authority, and authority to take regulatory acVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
19 

tion, if necessary. We are concerned that the systemic risk regulator envisioned by someone without clear, delineated lines of Federal authority and strong preemptive powers would be redundant 

with the existing State-based regulatory system. 

We also note that without reinsurance regulatory reform and a 

prudential Federal reinsurance regulator, a Federal systemic regulator would be an additional layer of regulation with limited added 

value, create due process issues for applicable firms, and be in regular conflict with the existing multi-State system of regulation. 

Foreign government officials, not unlike Mr. Skinner today, have 

continued to raise issues associated with having at least 50 different U.S. regulators, which makes coordination on international 

insurance issues difficult for foreign regulators and companies. The 

time has already arrived when this lack of a single voice is adversely impacting U.S. reinsurers. The interaction between the 

United States and its foreign counterparts on issues like European 

Union Solvency II will likely impact not only the ability of U.S. 

companies to conduct business abroad, but also the flow of capital 

to the United States. 

The possibility that the entire 50-State system in the United 

States will be deemed equivalent appears questionable, at best. 

Thus, without a Federal involvement by a knowledgeable entity 

tasked with responsibility for international policy issues, the U.S. 

reinsurance industry will continue to be disadvantaged in these 

equivalence discussions. 

The current multi-State U.S. regulatory system is an anomaly in 

the global insurance regulatory world. The United States is disadvantaged by a lack of a Federal entity with constitutional authority to make decisions for the country, and to negotiate international insurance agreements. 

The RAA was encouraged by the inclusion of a system of supervisory recognition among countries in the National Insurance Act 

of 2008, S. 40, introduced in the last Congress. Supervisory recognition seeks to establish a system where a country recognizes the reinsurance regulatory system of other countries, and allows reinsurers to conduct business, based upon the regulatory requirements 

of their home jurisdictions. 

A single national regulator with Federal statutory authority 

could negotiate an agreement with regulatory systems of foreign jurisdictions that achieve a level of regulatory standards, enforcement, trust, and confidence with their counterparts in the United 

States. 

Financial markets are global and interconnected, and no sector 

is more global than reinsurance. Even the NAIC has acknowledged 

that, ‘‘The time is ripe to consider whether a different type of regulatory framework for reinsurance in the U.S. is warranted.’’ 

As Congress proceeds with financial services modernization, we 

emphasize that only the Federal Government currently has the 

requisite constitutional authority, functional agencies, and experience in matters of foreign trade to easily modernize reinsurance 

regulation. Multi-State regulatory agencies on matters of international trade are, at best, inefficient, pose barriers to global reinsurance transactions, and do not result in greater transparency. 

20 

The RAA recommends that reinsurance regulatory modernization 

be included in any meaningful and comprehensive financial services reform, through the creation of a Federal regulator, who would 

have exclusive regulatory authority over reinsurers that obtain a 

Federal charter, and make clear there is no redundancy with State 

regulation. 

We further recommend that any financial reform incorporate authority for a system of regulatory recognition to facilitate cooperation and enforcement with foreign insurance regulators. 

Thank you very much. 

[The prepared statement of Mr. Nutter can be found on page 120 

of the appendix.] 

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

we will hear from Mr. Patrick S. Baird, chief executive officer of 

AEGON USA, on behalf of the American Council of Life Insurers. 

Mr. Baird? 

STATEMENT OF PATRICK S. BAIRD, CHIEF EXECUTIVE OFFICER, AEGON USA, LLC, ON BEHALF OF THE AMERICAN 

COUNCIL OF LIFE INSURERS (ACLI) 

Mr. BAIRD. Chairman Kanjorski, Ranking Member Garrett, and 

other members of the subcommittee, I would like to thank you for 

the opportunity to appear today to present the views of the life insurance business on systemic risk and its implications for financial 

regulatory reform. I am Pat Baird, CEO of AEGON USA. I live and 

work in Cedar Rapids, Iowa. 

I would like to lead off with the premise that the life insurance 

industry is, by any reasonable measure, systemically important. 

And, from that, it follows that whatever regulatory reform package 

you advance must include the life insurance industry in order to 

assure that the resulting new regulatory structure operates as effectively as possible, and minimizes the likelihood of a similar crisis occurring again. 

Here are some highlights on the importance of the life insurance 

business. Life insurance products provide financial protection for 

some 70 percent of U.S. households, or over 75 million families. 

There is over $20 trillion in life insurance in force, and our companies hold $2.6 trillion in annuity reserves. Annually, we pay out almost $60 billion in life insurance benefits, over $70 billion in annuity benefits, and more than $7 billion in long-term care benefits. 

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

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

private employer-provided retirement assets. 

Life insurers are the single largest source of corporate bond financial, and hold approximately 18 percent of total U.S. corporate 

bonds. 

I would also note that without the financial protection provided 

by the life insurance companies, American families may very well 

need to rely on the Federal Government for assistance. 

That said, we don’t believe any individual life insurance company 

poses systemic risk. So the question becomes, how do you deal with 

an industry that, as a whole, is systemically important, but which 

doesn’t have any individual companies that pose systemic risk? 

21 

First, we assume life insurers will be covered in whatever broad 

systemic risk oversight is made applicable to the banking and securities industries. Beyond that, we believe it is imperative that Congress create a Federal functional insurance regulator, and make it 

available to all life companies within the industry on an optional 

basis. There was ample justification for the creation of such a regulator prior to the crisis, and the case today is even stronger, after 

the crisis. 

Absent a Federal functional insurance regulator, there is a very 

real question regarding how national regulatory policy will be implemented, vis a vis insurance. Whatever legislation this Congress 

ultimately enacts will reflect your decisions on a comprehensive approach to financial regulation. Your policies need to govern all systemically significant sectors of the financial services industry, and 

need to apply to all sectors on a uniform basis, and without any 

gaps that could lead to systemic problems. 

It’s also worth noting that critical decisions are being made in 

Washington affecting our business today, but they are being made 

without any significant input or involvement on the part of our regulators. 

Some specific examples include: the handling of Washington Mutual, which resulted in life insurers experiencing substantial portfolio losses; and the suspension of dividends on the preferred stock 

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

companies. 

The mistaken belief by some that mark-to-market accounting has 

no adverse implications for life insurance companies, and more recently, provisions in the proposed bankruptcy legislation that could 

have resulted in unwarranted downgrades to life insurers’ AAA-related residential mortgage-backed investments. 

The industry also supports a level playing field at an international level, as regards financial reporting and solvency. Competition should be about serving customers, operating efficiencies, 

and basically slugging it out every day and proving your business 

model. Competition should not be about capital accounting or tax 

arbitrage. But yet, today, we have no regulator there with authority that can engage with Mr. Skinner and other international regulators. 

I would also like to make the point that concerns over regulatory 

arbitrage in the context of an optional Federal insurance charter 

are without merit. The life insurance business is not seeking, nor 

did this Congress ever consider enacting a Federal insurance regulatory system that is weak, in terms of consumer protections or solvency oversight. Indeed, the ACLI has consistently advocated for a 

Federal alternative that is as strong as, if not stronger than, the 

best State regulatory systems. 

If anything, a properly constructed optional Federal charter 

would result in the States being challenged to raise their standards 

to meet those of the Federal regime. 

Mr. Chairman, there are a number of ideas being considered on 

how to address insurance in the context of overall regulatory reform. We applaud you for reintroducing legislation that would create an office of insurance information within the Treasury DepartVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
22 

ment. While our ultimate goal remains an optional Federal charter, 

an OII would certainly be a step in the right direction. 

We are also appreciative of Representatives Bean and Royce for 

introducing the National Insurance Consumer Protection Act, 

which sets forth the framework for an optional Federal insurance 

charter. 

We do, however, caution against a so-called Federal tools approach to insurance regulatory reform. As detailed in my written 

statement, the constitutional and practical limitations of this concept make it ill-suited to deliver the type of reform that would be 

in the best interests of the insurance industry and its customers. 

We again thank you, Mr. Chairman, for holding this hearing, and 

pledge to work with you and the members of the subcommittee to 

see that insurance regulatory reform becomes a reality. And we 

would be happy to answer any questions. Thank you. 

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

of the appendix.] 

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

now, we will have Mr. John T. Hill, president and chief operating 

officer of Magna Carta Companies, on behalf of the National Association of Mutual Insurance Companies. Mr. Hill? 

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

THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. HILL. Thank you, Mr. Chairman. Good morning, Chairman 

Kanjorski, Ranking Member Garrett, and members of the subcommittee. It is an honor to testify before you today on these important issues. My name is John Hill, and I am president and chief 

operating officer of Magna Carta Companies. 

Magna Carta was founded in New York in 1925 as a mutual insurance carrier for the taxi cab industry. Although we no longer insure taxis, we employ 240 individuals and write in 22 States. We 

very much remain a small, Main Street mutual insurer with $170 

million in direct-written premium. 

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

Insurance Companies, to present our views on systemic risk. 

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

State and regional insurance carriers to large, national writers. 

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

serve as chairman of NAMIC’s financial services task force, which 

was created specifically to develop NAMIC’s policy response to the 

financial services crisis. 

Our Nation faces uncertain economic times, and we commend the 

subcommittee for holding this hearing to explore the role of systemic risk regulation in the insurance industry. 

The property casualty insurance industry, like millions of Americans and businesses, did not contribute to the current financial crisis. However, we too have felt the negative impact of this crisis. 

Just like most American citizens and businesses, the property casualty insurance industry has played by the rules. We are solvent, 

23 

and continue to serve our policyholders the same today as before 

the economic crisis. If you exclude a very few companies that are 

linked to financial markets, our analysis concludes that our industry poses no systemic risk. 

We disagree with the suggestion that we need to completely 

rethink the regulation of our industry. The property and casualty 

market place is well-regulated, highly diverse, very competitive, 

and is open to anyone that is willing to play by the rules. 

It is important to understand the distinction between the property and casualty insurance industry and others in the financial 

services sector. The fundamental characteristics of our industry, including conservative and liquid investment portfolios, low leverage 

ratios, strong solvency regulation, and a highly competitive and diverse market place, make it stand out as unique, and work to insulate the property casualty insurance industry from posing systemic 

risk. 

Today, as other financial services companies are failing and seeking government assistance, property and casualty insurers continue 

to be well capitalized and neither seek nor require Federal funding. 

Our industry remains one of the well-functioning bedrocks of our 

financial structure. The record shows that property and casualty 

insurers played no role in causing the current financial crisis. 

Moreover, it is exceedingly unlikely that property casualty insurers, either individually or collectively, could cause a financial crisis 

in the future. For one, the capital structures of property and casualty insurers and the nature of their products make them inherently less vulnerable than the highly leveraged institutions when 

financial markets collapse. 

Additionally, the nationwide State-based guaranty funds system 

also reduces the systemic impact of any failing property casualty 

insurer. 

NAMIC believes that any new oversight of systemic risk should 

focus on products, activities, and market-oriented events and developments, rather than broad corporate categories or industries. It 

should be carefully designed to address the kind of market-oriented 

problems that have the ability to cause systemwide access. 

Only institutions that offer products, or engage in transactions 

deemed to create systemic risk, including insurers, should be subject to systemic risk oversight. The current crisis demands that 

Congress act. But Congress must act prudently and responsibly, focusing limited resources on the most critical issues, and avoid the 

inclination to rush to wholesale reform. 

NAMIC does believe that Congress can strengthen the regulatory 

process, improve regulatory coordination, and monitor systemic 

risk by establishing an office of insurance information to inform 

Federal decisionmaking on insurance issues, and facilitate international agreements. 

We would also recommend expanding the President’s Financial 

Working Group to include insurance regulators. We believe such 

reforms are measured, appropriate, and timely responses to the 

present crisis. 

As the process moves forward, we stand ready to work with the 

committee to address the current problems and regulatory gaps. 

We urge Congress to keep in mind the dramatic differences beVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
24 

tween Main Street businesses that have never stopped meeting the 

needs of local consumers, and those institutions that caused this 

crisis. 

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

look forward to answering your questions. 

[The prepared statement of Mr. Hill can be found on page 81 of 

the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Hill, and 

thanks to the entire panel. This is interesting testimony. I look forward to my own questions, and those of the subcommittee. 

Mr. McRaith, I am going to put you on the spot for the first question. In 2001, an insurance holding company called Reliance—I 

imagine you are familiar with it—was owned by Mr. Saul Steinberg, who took the underlying insurance proceeds, and then that 

allowed him to play the role of a multi-millionaire speculator, benefactor of the Wharton School, and art patron. Is that correct? Do 

you recall that transaction, or those transactions? 

Mr. MCRAITH. I am certainly familiar with the company. I wasn’t 

familiar with the Wharton School. 

Chairman KANJORSKI. Subsequently, that holding company defaulted on bonds and bank debt. 

How would you rate the effect of what happened there with that 

particular company? Is that a failing of the State regulation, Stateto-State? Would that have occurred if we had a Federal regulator 

in place? Or do you see any difference? 

Mr. MCRAITH. The unfortunate reality in any capitalist economy 

is that companies will fail. Companies, insurance companies, led by 

individuals with ethical—or a lack of ethics are companies that are 

more likely to encounter cash flow problems, and ultimately suffer 

the demise—or a demise similar to Reliance. 

A Federal regulator would not have assisted or prevented that 

solution. I am not familiar with the holding company challenges at 

Reliance. The individual insurance company, those challenges 

occur—and they have occurred for decades in the insurance industry. 

As soon as we learn of them, we place the company into receivership. The policyholders are protected. Because the capital requirements we impose on companies are so significant, the shortfall at 

the end of the day for the guaranty system is relatively nominal. 

And we—and that guaranty system is also intended to protect the 

consumers. 

Chairman KANJORSKI. I thank you very much, Mr. McRaith. My 

good friend, Mr. Skinner, do you believe that the United States 

companies will have adequate access to the European markets 

after Solvency II is in effect? 

And do you believe European companies have adequate access to 

the U.S. markets? 

Mr. SKINNER. It’s an interesting question, Mr. Chairman. The 

law comes into being in 2012. What it is dependent upon is something called equivalence. And I think, as I said when I started, that 

equivalence from a European perspective is looking for something 

that can match the deeds and the purpose of the legislation, the 

final outcomes of that legislation, certainly not the letter on the dot 

and the T and the cross, but something which does the same thing. 

25 

For that, we need to find a single voice to talk at the U.S. level 

from an EU level, because we are actually only permitted to get 

agreements, country by country, at an EU level. There is no sense 

in beating around the bush on this. 

So, for U.S. companies to do business inside the European 

Union—and there are a few of them who do this very well—they 

will have to make sure that their regulators in the United States 

are people who can talk to the European Union about matching up 

these credentials. 

The thing is, of course, if they don’t get matched up, it will be 

down to each individual member State, therefore, as has been said, 

where there is memoranda of understanding or whatever, to impose their own requirements upon those companies. 

And we don’t really want to be there, because I don’t think there 

should be any discrimination about this. If we get the match to 

work—and we can talk to each other about this dialogue and how 

it works—then I think there should be no discrimination for U.S. 

companies. In fact, U.S. companies, I believe, as a result, will be 

competitively enhanced by getting access to the market as a passport across all 27 countries. 

Chairman KANJORSKI. So it is your conclusion that anyone who 

opposes a Federal regulator here in the United States would be in 

some way impeding their progress in competition in areas like the 

European Union? 

Mr. SKINNER. From a commercial point of view, I think that most 

companies would want to make sure that they had the fewest number of regulators to have to work with. I think that’s almost a common sense statement. 

I think, from a U.S. perspective, I think this is something you’re 

grappling with, like we have grappled with. We still have multi-jurisdictional, multi-legal personalities, in terms of the countries we 

have at European level. They have their own laws, their own regulations, their own standards. We have just introduced Solvency II, 

and it has actually just changed the whole thing. It has harmonized it, it has brought the standards up in countries where it 

wasn’t competent and you didn’t have the capacity. 

As a result, we want to make sure that they are maintained for 

companies coming into the European Union. And I think that you 

would want the same inside the United States, as well. 

Chairman KANJORSKI. I see my time has expired. We will now 

hear from Mr. Garrett from New Jersey. 

Mr. GARRETT. Thank you, Mr. Chairman. And I begin there, with 

Mr. Skinner. Thanks for coming on over. You heard a number of 

people on the panel testify here from the PNC side, and others as 

well, that the problem that we had in this country was not caused 

by—they would argue—problems in the insurance industry. We 

have heard that from other panels, as well. 

I note in your testimony you said that the legislation you’re talking about was going to go into effect in 2012, right? If we were having a panel like this back overseas, would that be the same testimony that we would hear over there, as well, that the problems in 

the marketplace and everything that’s going on in Europe was due 

in no large part from the insurance industry, as well? 

26 

Mr. SKINNER. Yes, I think in many ways we would hear the same 

discussion. You would be pleased to hear that we are almost 

twinned. There is an economic and financial services committee 

that I am involved in and represent today. We would be talking 

about the same issues, and classically, we would be talking about 

derivatives, you know, and we would be talking about the effects 

that they have had. 

But I think, as one of your honorable colleagues said already, the 

securitization issue— 

Mr. GARRETT. Right. 

Mr. SKINNER. —is actually a kind of a reinsurance in itself, isn’t 

it? It’s the spread of risk. 

Mr. GARRETT. Right. 

Mr. SKINNER. So, the insurance industry, as a whole, is not immune from systemic risks, as such. We believe it’s about the management of that risk, and having— 

Mr. GARRETT. Well, coming up to this point in time, would you 

agree with some others who have said here that you can’t point to 

this company or that company as being the systemic problem, 

which is what some of the members of the panel would be arguing 

for, as far as this country is concerned? 

Mr. SKINNER. Yes, I think that it’s true to say that you can—you 

probably have to put to one side the individual certain companies— 

Mr. GARRETT. Sure, sure. 

Mr. SKINNER. —and you have to start talking about the industry, 

as a whole. 

Mr. GARRETT. Thank you. And I will run down the row as much 

as I can. 

Mr. McRaith, you were making your case along the way with regard to the OII, and some of the benefits, and the upside that 

would bring about, as far as the sharing of information. But then, 

as you get near the end of your testimony, you seem to be—if I 

heard you right—talking about some of the great things you all 

have been doing, as an organization in these areas already—if I 

heard you right. 

Mr. MCRAITH. That’s correct. 

Mr. GARRETT. So, I almost heard it like, ‘‘Well, gee, we’re already 

doing that,’’ on the one hand. 

Mr. MCRAITH. Right. 

Mr. GARRETT. So why do you then take the other side at the beginning your testimony, saying that we still need this help out 

there? 

Mr. MCRAITH. Well, listening to at least one of the panelists 

today would imply that the State regulators are not engaged in 

international discussions. We are engaged in developing standards, 

working with our international counterparts on every continent, in 

multiple forums. 

My testimony, Congressman, regarding the office of insurance information, reflected the reality we know, which is not a question 

of standards or supervision or regulation; it’s a question of international trade agreements. And we are aware of the limitations of 

Article 1, Section 10 of the United States Constitution, which says 

that a State cannot independently enter into a treaty with a foreign government. 

27 

So we supported Chairman Kanjorski, in that initiative without 

the preemptive impact. But we do engage—and always consistently 

engaged—internationally with our foreign counterparts. And at 

some point in time, I would be happy to talk about solvency, too, 

but I will hold off on that. 

Mr. GARRETT. All right. Let me just jump down to Mr. Baird. You 

know, in your testimony, you stated that the life insurance industry is either systemically significant or systemically important—one 

of those terms, at the beginning of your testimony. Mr. McRaith 

said in his comments that the industry is—or, rather, that the toobig-to-fail concept does not apply to insurance, per se. 

Mr. MCRAITH. I’m sorry, not to any one company. The sector, of 

course, is significant. 

Mr. GARRETT. Okay. So maybe that answers the question. 

Mr. MCRAITH. Same thing— 

Mr. GARRETT. I was going to go to you, Mr. Baird, to address that 

concern, but maybe he addressed it already. Do you want to speak 

on that, Mr. Baird? 

Mr. BAIRD. Other than I would say this is one of those instances 

where Director McRaith and I agree. 

Mr. GARRETT. Okay. 

Mr. BAIRD. We think the entire industry is of systemic importance, but no one company is. 

Mr. GARRETT. All right. Okay. For anyone on the panel, one of 

the proposals coming out of the White House seems to be that 

we’re going to need a systemic risk regulator, and it very well could 

go into the Federal Reserve, which a lot of us disagree with. 

But assume that happens, and you put it into the Federal Reserve. And assume, for the sake of argument, that it also has an 

insurance component. Does anyone on the panel have a concern 

that you may have a bank regulator who has no past experience, 

or what have you, dealing with the insurance industry to be basically your supervisor or regulator in this area? Mr. Hill? 

Mr. HILL. That would be one of our concerns, Congressman Garrett, that you would have someone regulating insurance who really 

has no real insurance background. 

And, again, I would reiterate that I think our position is that the 

best way to look at systemic risk is to look at market-oriented products, and any firm that’s engaging those products should fall under 

the purview of the systemic risk regulator. But to just isolate a 

particular industry group, and just say that the systemic risk regulator is just going to oversee that, that could potentially miss something that’s occurring elsewhere in our global economy. 

So, our recommendation is to be more product and market oriented. 

Mr. MCCARTHY. As financial guarantors, we actually think that 

the Fed might be a logical place to oversee our industry, primarily 

because the service that they provide to the banking industry 

would parallel the kinds of financial activity that we have in the 

capital markets. So we would think that perhaps— 

Mr. GARRETT. You’re a little bit different, then, from some of the 

other— 

28 

Mr. MCCARTHY. That’s right, because again, financial guaranty, 

we only do—we have, you know, one nail, and we’re trying to hit 

it. 

Mr. GARRETT. Yes. 

Mr. MCCARTHY. The multi-lines have a lot of different kinds of 

risks that they’re taking. And, really, not just our solvency, but 

really our financial stability, as an industry, is what is critical. 

Mr. GARRETT. Thanks a lot. 

Mr. BAIRD. Oh— 

Mr. GARRETT. It’s up to him. 

Chairman KANJORSKI. Go ahead. 

Mr. GARRETT. Go ahead, Mr. Baird. 

Mr. BAIRD. No, I just wanted to add, to directly address your 

question, I think that is a concern to the life insurance industry, 

However, it is resolved if the Congress creates a Federal functional 

regulator, which then—presumably, the two Federal agencies 

would cooperate with one another. 

We think the creation of a Federal functional regulator would 

give a Federal agency, then, the expertise to properly regulate the 

life insurance industry, and cooperate and give information to the 

systemic regulator. 

Mr. GARRETT. But absent that? 

Mr. BAIRD. Absent that, then that is a concern. 

Mr. GARRETT. Okay. 

Mr. BAIRD. And we think it’s incomplete. 

Mr. GARRETT. All right. 

Mr. MCRAITH. And, Congressman, if I could also just—Mr. Chairman, if I might add just very briefly? 

That is, of course, a very serious concern for State insurance regulators. The regulation of the insurance industry is significantly 

different from the bank industry. So we do—as the regulators now 

have expertise that can be integrated with systemic risk regulation, 

but should not be displaced. 

So, one of the priorities for any systemic regulator is to recognize 

and value the expertise of the functional regulator, facilitate communication among those regulators, and prevent the systemic disruption that we have experienced. 

Mr. GARRETT. Thank you, panel, I appreciate it. 

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

Mr. Capuano, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Thank you for being 

here. 

It’s interesting. I heard pretty much everybody say that the insurance industry doesn’t threaten the system. I am just curious. 

Are any of you familiar with the acronym TRIA? TRIA is the one 

that the U.S. Government had to pass after 9/11, when the insurance companies were all going bankrupt, and everybody was afraid 

that they were going to take down the economy at that time. 

Did anybody here who now thinks that the insurance industry 

somehow doesn’t provide risk, did you come up and tell us that we 

should not do TRIA because everything was fine? I don’t think you 

did. 

Ms. BRYCE. Actually, the mortgage insurance companies did. But 

our business is such a different business than, you know, most— 

29 

Mr. CAPUANO. So you don’t think we should have passed TRIA? 

Ms. BRYCE. That was our position at the time. 

Mr. CAPUANO. Good for you. 

Ms. BRYCE. I’m sorry—we got ourselves exempted. I apologize. 

Mr. CAPUANO. I know you got yourself exempted. I know that. 

But the question is, do you think we should have passed the TRIA 

Act? Does anybody think we should not have, I guess is the better 

question? 

[no response] 

Mr. CAPUANO. So we should have. And I agree. 

Mr. MCRAITH. Congressman? Excuse me. The issue with terrorism is the absolute impossibility of predicting the risk. What 

TRIA does is facilitate the property and casualty market. It would 

not exist—Manhattan, Chicago, major urban areas would not have 

access to coverage for terrorism events in the— 

Mr. CAPUANO. I understand. 

Mr. MCRAITH. —as companies can exclude— 

Mr. CAPUANO. The inability to ascertain the risk, similar to the 

inability to ascertain the risk on CDOs and CDSs. The inability to 

ascertain risk is the same. 

Mr. MCRAITH. That’s— 

Mr. CAPUANO. The items are different. 

Mr. MCRAITH. That’s— 

Mr. CAPUANO. So we should have passed TRIA. But everybody 

here thinks that there is one company that somehow provides systemic risk. That’s what I heard. I don’t think I heard anybody say 

anything different. 

Has anybody here heard of the company AIG? I know it hasn’t 

been in the news lately. 

Mr. MCRAITH. But, Congressman, to be clear, AIG is kind of 

colloquially referred to as the world’s largest insurance company. 

But it is 71— 

Mr. CAPUANO. Well, excuse me, Mr.— 

Mr. MCRAITH. It is 71 insurance— 

Mr. CAPUANO. Excuse me. The idea is it is an insurance company— 

Mr. MCRAITH. —met all claims— 

Mr. CAPUANO. —that does different lines. 

Mr. MCRAITH. Their policy— 

Mr. CAPUANO. And the problem that I have with it is that it is 

one company that was into so many things that the State regulators chose not to regulate. The Federal Government didn’t have 

anybody to regulate, and the States collectively said, ‘‘We don’t 

need to look at what AIG is doing. We will only look at this slice, 

this slice, and this slice.’’ 

Mr. MCRAITH. That— 

Mr. CAPUANO. That’s all. And those slices worked fine. 

Mr. MCRAITH. Actually, Congressman, the insurance regulators 

looked at the insurance subsidiaries. The problem was—and this is 

why we support systemic regulation— 

Mr. CAPUANO. Bingo. 

Mr. MCRAITH. —there was a complete lack of regulation at the 

holding company level. What should happen is— 

Mr. CAPUANO. Well, the problem is— 

30 

Mr. MCRAITH. —regulators of all those— 

Mr. CAPUANO. —you are looking at the relationship between 

the— 

Mr. MCRAITH. —work together— 

Mr. CAPUANO. —between the policyholders and the company. No 

one was looking at what was happening with the money coming in, 

how they were investing it. The States didn’t do it, and that’s 

where the systemic regulator comes in. So one company, depending 

on what they do, depending on who looks at them, I guess can 

shake the system up just a little bit. 

So, therefore, I don’t quite—I mean, though I appreciate this 

hearing—I’m not quite sure what we are talking about, except a 

unanimous opinion that there is some need for some generic national oversight of what’s happening in the insurance industry, understanding fully well that the Federal Government should not and 

need not be doing things that some of the States are doing very 

well, particularly that aspect between the company and the customer. I agree totally. The Federal Government doesn’t need to do 

that; States are doing that great. That’s the consumer side. But on 

the investment side, no one is looking at it. 

One company has and could again tomorrow—did I miss something? Has anybody on any level today, up until this point, said 

that there could not be another AIG tomorrow? The Travelers, if 

they chose to, couldn’t choose to invest all of their receipts into 

credit default swaps, if they chose? I don’t mean to pick on Travelers, you just happen to be here today. Or any other company? 

The answer is no, I think, but go ahead and correct me if I am 

wrong. 

Mr. SPENCE. The answer is no. 

Mr. CAPUANO. That’s why we are here, is to try to say, okay, we 

all screwed up by not looking at a huge segment of the business, 

the side where people invest, where the companies invest. We need 

to correct that. States cannot do it on an individual level. 

We need a systemic regulator—I don’t like the word ‘‘regulator,’’ 

because I think that implies overactivity—at least a systemic monitor, maybe a regulator, to review what’s going on. If I—does anybody disagree with that? 

[no response] 

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

Chairman KANJORSKI. I know you do not get very emotional 

about these things. 

Mr. CAPUANO. It’s my mood. 

Chairman KANJORSKI. The gentleman from Georgia, Mr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. I want to—and I appreciate the opportunity for this hearing. I think this has been an excellent panel, and the information that you have provided has been 

very, very helpful. 

I think it is important to appreciate that Federal regulation of 

insurance is different than instituting a systemic risk regulator for 

insurance, and I think it’s important that we keep that in mind. 

And we are kind of sometimes combining apples and oranges here. 

I want to shift gears a little bit and talk about and get some response regarding the financial products consumer safety commission that has been bandied about by the Administration. And it apVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
31 

pears to many of us to be a kind of a command and control apparatus for different industries, including the insurance industry. 

And I wonder—and I know oftentimes Congress and the Administration can go too far; in fact, that seems to be the order of the 

day, is going too far—I wonder if, starting with Mr. Spence and 

kind of heading on down the table, do you have any thoughts about 

what would be too far for the insurance industry, or what the effect 

of this would be on the insurance industry for a products consumer 

safety commission? 

Mr. SPENCE. Thank you, Congressman. We believe the creation 

of a Federal financial services product safety commission that includes insurance raises two concerns. Insurance products are already regulated, so this would add another costly layer of regulation, and regulatory delays without gaining any consumer benefit. 

And we’re concerned about possibly separating product regulation from solvency regulation, which could lead to poor regulatory 

decisionmaking, because the product regulation would lack the information necessary to fully understand the industry. And there 

could be competing— 

Mr. PRICE. So there is a line beyond which we go—if we go beyond—that results in limiting the ability of you to serve customers 

and help Americans insure themselves in various ways? 

Mr. SPENCE. We believe so. 

Mr. PRICE. Mr. Nutter? 

Mr. NUTTER. Mr. Price, in the reinsurance area, it’s strictly a 

business-to-business transaction. There is no direct legal obligation 

to the consumer. And, therefore, reinsurance regulation tends to 

focus on solvency, prudential regulation. It would appear not to 

apply to reinsurance contracts, the consumer aspect. 

Mr. PRICE. Thank you. Mr. Baird? 

Mr. BAIRD. When we design a product, we feel we are making 

promises to our customers to deliver benefits 20, 30, 40 years into 

the future. At the point in time when we’re designing that product, 

we have to bring in solvency, capital markets people, solvency people, marketing people, to make sure we’re designing something that 

somebody values. 

To separate that, and have an agency only focused on the consumer side, we believe, is not complete. If we didn’t have all of our 

pieces, if we didn’t have all of our disciplines at the point in time 

we designed a product, that product would fail. 

Mr. PRICE. Well, what could we do, or what would we do, what 

might we do that would limit your ability to allow Americans to 

have a greater opportunity to insure themselves against challenges? 

Mr. BAIRD. Yes, I believe that, you know, obviously, the life insurance industry is about strong consumer safety standards. 

I believe if it is looked at in a vacuum, and not part of a Federal 

functional regulatory and solvency and capital markets risks, that 

regulation would not be complete, and would therefore slow down 

the process, and you would have regulators—if regulation was bifurcated, you would have regulators with different standards and 

different agendas, and that would keep us from designing a product 

that the customer needs most. 

Mr. PRICE. Mr. Hill? 

32 

Mr. HILL. Congressman Price, we represent the property casualty. Our membership is mainly property casualty. And we see 

this as more geared towards financial products, of which we really 

don’t— 

Mr. PRICE. So if we got into your business, that would be bad. 

Is that accurate? 

Mr. HILL. Yes. 

Mr. PRICE. Thank you. I want to switch gears to Mr. McRaith. 

You mentioned that you wanted to comment on the Solvency II 

framework, and I wondered if you have had an opportunity to look 

at the consequences that will have, or may have, for States. 

Mr. MCRAITH. Yes. Thank you, Congressman. First of all, I do 

want to commend Mr. Skinner and his colleagues in the European 

Union for developing Solvency II. It remains in its ancient stages, 

as we heard—it’s not even to be adopted by legislation until 2012— 

of course at the States, you know, we have 64,000 company years 

of regulating solvency, so we look forward to working with the EU, 

as they further develop their approach. 

One report mentioned earlier by Mr. Skinner was what’s called 

the de Larosiere report. And what was interesting about that report is that he commented on the need to reflect upon and improve 

the BASIL II capital standards. You might recall several years ago 

there was a clamor in Washington to give our own banks the capital freedom that BASIL II allowed for European institutions. And 

for that reason, Solvency II, I think, warrants some serious scrutiny. 

But I think it’s fair to say, if Solvency II had been in place during the current crisis, the economic impact would have been significantly worse for companies and consumers in the United States. 

Mr. PRICE. Thank you. Thank you, Mr. Chairman. 

Mr. NUTTER. Mr. Price, may I—if I may also comment on the Solvency II matter? If I could actually take a sentence out of Mr. Skinner’s testimony, it seems to me this is the concern the reinsurance 

market has about Solvency II. 

This statement from Mr. Skinner’s testimony is, ‘‘Since equivalence decisions will have to be made at the country level, this fact 

alone will make it almost impossible to find the USA equivalent 

under Solvency II, unless changes are made to the current insurance regulatory framework in the U.S.’’ 

The global market is dependent upon regulatory interaction. We 

would strongly encourage a Federal regulator to facilitate that kind 

of international trade agreement. 

Mr. SKINNER. If I may, can I come in just—I’m sure the question 

was directed as much to everybody who had something to do with 

Solvency II. 

Correct the impression, which is that this is not a piece of legislation already. I rather think that, like your House, that when you 

have had a vote on it, you effectively think of it as law. Where it, 

therefore, has to go then afterwards is to each Member’s State, to 

have them ratify it in the statute book. 

Substitute, therefore, ‘‘once it has been adopted in the European 

Parliament,’’ which it was on the 22nd of April of this year. It was 

law. It now has 2 years to be implemented by the regulators on the 

33 

ground. I think we should be absolutely clear about this, so there 

is no false impression left as to whether or not this is legislation. 

Secondly, it deals with the three principles that we wanted to 

base our legislation on. So I’m not so sure where we go by comparing what is happening with the United States with what was 

happening in the EU. We went for a risk-based approach, a principle-based approach, and an economics-based approach. 

And this has been 10 years in development with practically every 

industry that there was to be known in insurance in Europe and 

from elsewhere, getting involved in consultations about getting the 

piecemeal issues involved and out of the way beforehand. 

Now we have implementing processes, where the regulators 

would be allowed to introduce this on the ground, where we will 

be guaranteeing and looking after policyholders’ interests far more 

than we ever could have done in the past, not in a piecemeal way, 

but in an absolute harmonized way. And I think we are looking at 

the best and the highest of standards. 

I think I am afraid, you know, I must correct the impression that 

it has left with you that the Solvency II standards are anything 

that we expect you necessarily to apply in the United States. That’s 

not what we’re saying, either. What we’re saying is we have gone 

all this way in the European Union, and it matches the development that is happening elsewhere in the world. 

It’s happening—what’s happening in the IAIS, with 11 countries 

choosing to go ahead, the United States not so. The danger is, and 

the risk is, for policyholders and for companies, if they can’t be 

competitive in that global situation, that we will not be finding like 

for like. 

You have a market which has 85 percent penetration already 

with foreign companies. So that means you have 15 percent left 

U.S. companies. In terms of your global reach, you have companies 

that can do it. I would say you have to consider whether not changing the rules, not moving along with an international global standard is going to endanger many of those other companies that you 

have with international ambitions. 

Chairman KANJORSKI. Thank you, Mr. Skinner. Mr. Hinojosa? 

Mr. HINOJOSA. Thank you very much, Mr. Chairman. I thank 

you and Ranking Member Garrett for holding this hearing today to 

discuss systemic risk. 

The Treasury will release its regulatory reform proposal tomorrow, June 17th, which makes this hearing all the more important. 

I have always supported State regulation of insurance, and I will 

continue to rally behind that regulatory construct. 

If the National Association of Insurance Commissioners is correct, that even the failure of a major insurance entity based and 

operating in the United States will generally not impose systemic 

risk, we need to pursue this claim further, and not rush to judgement on the capability of State insurance commissioners to properly and effectively regulate the insurers. 

Furthermore, I cannot support a system in which an insurance 

company headquartered in one State is given permission to operate 

in the remaining 49 States, based on their home State’s insurance 

regulations. Whereas this might be accepted and feasible in the European Union, I am not certain that comparing sovereign nations 

34 

to States in the United States is appropriate. We might be comparing apples and oranges. 

So I ask my question and direct it to Michael McRaith, from the 

Illinois Department of Insurance and, if possible, to give me a second opinion from Kenneth Spence, with Travelers Insurance. 

What do you like, or what would you like to see in the Administration’s regulatory reform proposal? 

Mr. MCRAITH. Thank you, Congressman. First of all, I think it’s 

important to appreciate the strengths of our current system, as you 

clearly understand. We are a nationally-coordinated system of 

States. We have multiple sets of eyes, multiple sets of experts looking at one company, so that it’s not a single regulator, it is multiple 

regulators working together in a coordinated fashion with a national system of solvency regulation, a national system for people 

like Mr. Nutter and others in his constituency and internationally. 

There is that national system that can be recognized. 

In terms of systemic risk, as I mentioned earlier, there needs to 

be—there must be—a primary role for the functional regulators. In 

our case, of course, it’s the expertise that we have, the information 

we have, and the experience that we have in relation to State insurance regulation. Systemic regulation can integrate. It is inherently—State regulation is inherently compatible with systemic regulation. We need to formalize regulatory cooperation, reduce barriers, enhance communication. 

The systemic risk management—as I alluded to earlier, as regulators of the insurance industry, we require extensive exhaustive 

risk management for any insurance enterprise. We need that at the 

holding company level, and of course at systemically significant institutions, that is even more true. 

And then limit the circumstances in which the functional regulator can be preempted—must be extremely narrow and extremely 

limited. Only if there is an actual possibility of not just risk, but 

disruption to the system. And those circumstances are very narrow, 

indeed. The primary function and purpose and service that a systemic regulator will provide is to enhance the communication. 

And using AIG as the poster child, there was not sufficient interaction and communication among the functional regulators. We 

support systemic regulation, Congressman. 

Mr. HINOJOSA. Let me ask Mr. Spence, with Travelers Insurance, 

how do you all see it, as an insurance company? What would you 

like to see in this reform proposal? 

Mr. SPENCE. Thank you, Congressman. As I indicated, we would 

support the concept of a systemic risk regulator. 

For a number of years, Travelers was part of a financial holding 

company that was regulated by the Fed. The insurance operations 

were not regulated by the Fed, but they did soundness and safety 

reviews of the company, including the insurance operations. 

And that process demonstrated the lack of Federal knowledge or 

knowledge at the Federal level of insurance operations, which is 

why we think the chairman’s OII is a sound proposal. And we 

think that, depending on what a systemic risk oversight regulator 

would do it would likely require the need for a functional regulator 

to implement whatever directives the systemic risk regulator might 

choose to implement. 

35 

And then, as I indicated, whatever the regime is, we think the 

two key components are mandated risk committees and enhanced 

disclosure. 

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

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

Royce of California for 5 minutes. 

Mr. ROYCE. Yes. Thank you, Mr. Chairman. I will pick up on Mr. 

Spence’s point. 

Insurance operations were not regulated by the Fed. The New 

York Insurance Department reviewed and monitored AIG’s securities lending program. AIG’s securities lending program heavily invested in long-term mortgage-backed securities, as a matter of fact, 

took that money from the insurance subsidiaries. AIG Life insurers 

suffered $20 billion in losses related to their securities lending operations last year. And of course, the bottom line, the Federal Reserve has provided billions now to recapitalize AIG Life Insurance 

companies. 

So, you know, we have a patchwork quilt here of regulation. We 

had—as I said in my opening statement, we had problems with the 

Financial Products unit, we had problems with the Securities Lending unit and the Securities Lending program. So we have a difficulty here. 

Now, at this—as we have discussed at this subcommittee, there 

was an implicit belief in the market that, should Fannie Mae and 

Freddie Mac get into trouble, the Federal Government would step 

in to save them. In part, it was that perceived Federal lifeline that 

enabled these firms to borrow cheaply and take on so much risk. 

As we discuss reforming our regulatory structure to address 

firms that are too-big-to-fail, I am concerned that we run the risk 

of bifurcating our financial system between those that we designate 

as systemically significant and everybody else that is in competition. 

As our experience with the housing Government-Sponsored Enterprises demonstrates, this would be a big mistake. And it would 

provide competitive advantages to companies that have the implicit 

backing of the taxpayers, and they would be incentivized to engage 

in higher-risk behavior. That’s what economists who look at this 

model tell us when they fret about what we’re doing here. 

So, in the context of systemic risk regulation, do we run the risk 

of distorting the market by labeling those institutions that are toobig-to-fail as such? And would it be more effective for a systemic 

risk regulator to focus on potentially high-risk activities in the 

market, instead, rather than a set of large financial firms? Mr. 

Spence? 

Mr. SPENCE. Is that directed to me? 

Mr. ROYCE. Yes, sir. 

Mr. SPENCE. Thank you. We agree with you. We think that the 

systemic risk regulator, it’s not a question of labeling companies 

that are too-big-to-fail, but it is determining in advance, and preventing companies to become too-big-to-fail. 

Mr. ROYCE. Thank you. And then, my last question goes to Mr. 

Skinner, because, Mr. Skinner, you have spoken at length on the 

need to establish a Federal presence on insurance in the United 

36 

States, as well as the problems EU regulators have run into when 

trying to negotiate with the various State insurance commissioners. 

There appears to be a consensus that something should be done 

in this regard. But to what degree remains, obviously, a question. 

When is an office of insurance information just an office to collect 

data? If this office is created without strong preemptive authority 

over the States, weakening the ability of an office of insurance information to enact agreements nationwide, how effective would it 

be, in the long run? 

Mr. SKINNER. Thank you very much, Mr. Royce. I suspect that 

you know the answer partly, yourself, that in many ways, at any 

international level, it’s countries and groups of countries that have 

to work together in order to get the global rules which will prevent 

future systemic risks. 

And those systemic risks, as we have discussed today, are at the 

root level: the company management processes; the risks it takes; 

the premiums it doesn’t charge, etc., etc. So we need something 

that is standardized, harmonized, that we can agree with. 

I think the office of insurance information is a great idea. Don’t 

get me wrong. I think that is what perhaps, you know, you will end 

up with. But I think we still have a fundamental which underlies 

the exact way in which we will approach each other over specific 

laws, and the ways we will apply laws. And where there is an absence of that particular bridge, you know, there is always going to 

be a gap. So we have to find a way through that. 

Now, I suspect that this committee will come up with ideas and 

talk to us about that, and we should be an open door for you. You 

know, we’re not going to say how you should do it. But we are a 

compliant group ourselves, inside the European Union. The European Parliament wrestles with the same issues that you wrestle 

with. We just want to work with you, to make sure that you can 

figure out what’s best for policyholders, as well as the international 

competitiveness of companies. And, as I say, those demand future 

modernization and new approaches to regulation. 

Mr. ROYCE. Thank you. Thank you, Mr. Skinner. Thank you, Mr. 

Chairman. 

Chairman KANJORSKI. The gentlelady from New York, Ms. 

McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I appreciate it. I think many of my colleagues have said that this has 

actually been a very interesting journey that many of us have 

taken on this committee over the last several months. 

But, Mr. Baird, I wanted to ask you, as an alternative to Federal 

regulations, some have recommended moving to Federal minimum 

standards that would enforce by the current State insurance regulatory structure. Would that solve the regulatory burden in areas 

such as licensing, market conduct, and speed to market? If not, 

please explain why. 

Mr. BAIRD. Thank you for the question. We believe it does not. 

We believe Federal minimum standards—many of us run national 

businesses. We, unlike the property and casualty industry, we price 

a product one time for all 50 States. Our producers are often national. Our producers often have their customers move from one 

State to another. 

37 

So, when someone suggests that Federal minimum standards is 

the answer, what that means is those minimum standards will be 

met, but there will still be 51 different sets of rules and regulations 

that we must file product approvals for, design products around, 

and producers must license for. So we think that solves very little, 

if anything. 

Mrs. MCCARTHY OF NEW YORK. Mr. Skinner, listening to your remarks, when we think about it—and you’re talking about, you 

know, working with all the different countries that you’re working 

with—we have to work with all the States. And I would tend to 

think working with the States on the same level is like working 

with a country. And I think that’s going to be our—what we’re 

going to have to solve. Because, obviously, a lot of the insurance 

companies do want to do global marketing, they are going to be 

into all the different countries for the—I keep saying UK—EU. 

So, as we follow through, if you could, follow through with what 

you were saying before. Just go a little bit further on how you 

could possibly see all of us—because this is going to be difficult, 

each State, we all represent our—you know, we represent our districts, but we actually represent our State. So what goes on in the 

State is going to come to us, and then they will put the issues in 

front of us, as we fight for the regulations that are going to come 

down. 

I mean, they are going to come down. Anyone who thinks that 

they’re not is not awake in the real world. We cannot allow or afford what has gone on in the last year-and-a-half, 2 years, to happen again. If you could, follow through with that. 

Mr. SKINNER. Thank you very much. I actually think that we’re 

all dealing with multi-jurisdictional districts, regions, countries, 

States. And you’re right, it is how do we harmonize, how do we get 

the rules that will give the best safety for consumers? How will we 

help companies expand capacity to areas where they haven’t been 

offering insurance before, and at lower rates? How do we get efficiencies into the industry without running against risk? 

All these things have to be based upon what is prudentially 

sound, what is economically beneficial and sound, and what is, 

hopefully, subject to risk management. Now, those things are the 

clues that we went through, in terms of over 10 years, in trying 

to sew together 27 countries with 500 million people in. 

And not everyone had the same level of competence. I mean, this 

is a serious issue. And thank you for recognizing me coming from 

the UK. It’s true. I mean, London likes to think that it is ahead 

of the world in many ways, along with New York, in financial regulation. But the truth is actually, you know, we can all catch a cold 

on what happens. So we all have to be alert. And what comes 

across our borders are some things that we don’t expect, and can 

be beyond our control. 

So, when we talk about systemic risk, we’re talking about control 

over groups, groups that can cross borders, have branches and subsidiaries. So I want the same rules and the same powers and the 

same tools to every regulator at a maximum level, so that they can 

be enhanced in the job that they do, and we know that consumers 

in Lithuania, Latvia, Malta, and London can have the same kinds 

38 

of expectations about their policies being in good order when they 

finally come to have them paid out. 

And, most of all, perhaps just as well, that they can afford them. 

And as I know, in terms of an economic crisis as we’re facing at 

the moment, many people are turning their back on insurance and 

thinking, ‘‘Well, do I have to pay the insurance bill for my house?’’ 

The consequences of that could be enormous, in terms of the social 

impact, as well. So I don’t want to price people out of the market. 

So it’s capacity and competence which has driven us to make 

sure that we have one market in insurance. 

Mrs. MCCARTHY OF NEW YORK. I appreciate your thoughts on 

that, because I actually do believe that people, when they are coming back—and the same thing is happening here in this country— 

they are looking where they can cut back, just to survive, by paying 

their mortgage or whatever. And if they can get away with— 

whether it’s car insurance, letting it lapse and hoping they don’t 

get caught, health care insurance—obviously, we’re dealing with 

that, so—oh, I’m sorry, my time is up. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Ms. McCarthy. And now we 

will hear from the gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Mr. Baird, in response 

to Dr. Price’s question, you basically said that the functional regulator in charge of regulating the safety and soundness of a financial 

institution should also be the regulator in charge of regulations related to consumer products and practices. 

Why is that? And why should it be the same regulator who looks 

at safety and soundness, as well as consumer-related products? 

Mr. BAIRD. Yes, thank you for the question. I certainly didn’t 

want to get into the shoes of Congress and determine who reports 

to whom. The remarks I made—and I want to make this very 

clear—we think that they have to be together in a collaborative or 

cooperative—or perhaps one does report to another; you will decide 

that, not us. 

But you cannot separate and bifurcate consumer standards, consumer safety standards, from solvency regulation. 

Mrs. BIGGERT. Thank you, thank you. Then, Director McRaith, 

what sort of coordination took place among the regulators following 

the AIG debacle? 

Mr. MCRAITH. Thank you, Congresswoman. At the national level, 

there was coordination within the days and weeks—of course there 

is coordination constantly. But we were—as we learned about the 

holding company problems, the AIG Financial Products Division in 

London, we learned that the holding company challenges could 

have implications for the insurance subsidiaries, and immediately 

nationally, the regulators worked collectively daily, multiple calls, 

meetings, visits, regulators from around the country—because, of 

course, policyholders are based in every State of the country with 

AIG. 

In addition to that, led by the New York department, the State 

regulators led national—or, I’m sorry, international—conference 

calls, giving our colleagues from the EU and all continents the opportunity to participate in a discussion to understand, really, the 

root cause of this problem isn’t the financial products division 

39 

based in London, it is not a U.S. insurance company problem. And 

those conversations still continue to this day. 

Mrs. BIGGERT. Okay. Well, it appears that the insurance sector 

has fared better than the banking and the securities counterparts 

in the current economic crisis. What are the reasons for that, and 

what are some of the elements of the State insurance regulatory 

system that could be instructive to Federal policymakers in setting 

up a systemic risk regulatory system? 

Mr. MCRAITH. First, I understand the EU is working to bring together 27 different countries, and they intend to implement Solvency II within a few years. And, again, I commend that effort, it’s 

a significant achievement. 

As for the States, we have been working together collaboratively 

for over 100 years. We have, as I mentioned earlier, 64,000 years 

combined of company regulation. We understand the importance of 

working together, so that the consumers in Illinois understand the 

impact of an AIG challenge, for example, that the regulators in Illinois collaborate with AIG in New York, and Pennsylvania, all the 

other States. 

So, the primary and essential systemic—let me back up. One 

other key component of insurance regulation that was raised by 

Congressman Capuano, we restrict not only what types of investments insurance companies can have, but how much any one company can invest in any one type of investment. That type of conservative capital and accounting requirement prevents the crisis in 

the insurance industry that we have seen in the banking and other 

sectors. So— 

Mrs. BIGGERT. Okay, if I could just get in one more question— 

Mr. MCRAITH. Sure, I’m sorry. 

Mrs. BIGGERT. —when my time—if we were to have the Federal 

market stability and capital adequacy board—that was what I 

mentioned before, it’s where—comprised of all of the Federal regulators and maybe some outside experts and others, to look at what 

could be done with regard to the derivative regulations, should an 

insurance representative or representatives be at the table? And 

who should be at the table? 

Should it be a rotating State regulator, or should it—we set up 

the office of insurance information—if we set that up, it would be 

the head of that entity, to be involved in that? 

Mr. MCRAITH. Unequivocally, Congresswoman, a State regulator 

should be in that conversation with the council, absolutely. 

Mrs. BIGGERT. And should it be rotating, or could we use the office of insurance information? 

Mr. MCRAITH. That’s right. It should—I expect it would be rotating. I think there is value in having that diversity of opinion, although a consistent standard message, but diversity of perspective. 

Absolutely. 

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

Chairman KANJORSKI. Thank you very much, Mrs. Biggert. Now 

we will hear from Mr. Scott, from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. Let me ask—we are here, 

debating this largely because of actions that stemmed from the 

problems at AIG, with excessive trading and credit default swaps 

out of their Financial Products unit in London that was not reguVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
40 

lated by State commissioners, but by the Federal Government, the 

Office of Thrift Supervision. 

However, some are using the collapse of AIG to argue for the creation of an optional Federal charter for the insurance industry. 

And, as I said in my opening statement, this is somewhat problematic, because here we have an entity that had the Federal oversight. 

So, the question has to be asked, would an optional Federal charter, had it been in place, would it have prevented the collapse of 

AIG, which, again, is already federally regulated? May I get your 

point? 

Mr. MCCARTHY. I think it’s a good question. And, again, we look 

at it from our sort of narrow perspective in the industry. 

The first word you used ‘‘optional,’’ is where the trouble is, I 

think, in that an optional charter would leave itself open to arbitrage, meaning that people would—companies would have the ability to gravitate towards wherever they think the most liberal or the 

most friendly for their particular pursuits would be. A mandatory 

Federal, that would encompass all companies, whether it’s just the 

monolines or whether it’s a broader class of companies, would address that. 

The second issue is that if there was Federal regulation, whether 

it was—and it was focused on products, one of the ways to look at 

perhaps the AIG issue, is their participation in credit default 

swaps. But inside those credit default swaps there are requirements for them to post collateral, which really was the reason why 

they ended up collapsing. It’s the product itself, and the nature of 

the terms that are inside that product. So, I would say that, you 

know, Federal mandatory sort of applies to everybody, no possibility for arbitrage is important. 

But second, had it been in place, and had they focused on what 

were the terms in the product, that would be the case. And that’s 

why we think, in a financially driven company such as ourselves, 

that really looks more like something that the Fed would do for 

banks, in terms of permissible kinds of business that they’re in. 

Mr. SCOTT. All right. Thank you very much. Another part of my 

question is that—and let’s move to the State regulation, because, 

in the final analysis in this whole reform issue, I want to do what’s 

best for the Nation, but certainly I want to do what’s best for Georgia. 

We are comprised of 50 States, 50 different States. And I believe 

that State regulation over the insurance industry is a legitimate 

regulatory entity, because States are able to make their own rules 

to comply with what that State deems important for their own population. We are one Nation, but we are 50 different States with 50 

different kinds of constituencies, industries, geography, climate, all 

of the things that make the great diversity of the nation. 

And so, I believe we have to have room for States to deem what 

is most important for their own populations, that they would have 

the independence to grow in their own way and their own time, 

and most importantly, ensure consumer protections for that kind of 

constituency, and ensure competition within the industry. Am I not 

right about this? Is this not—should this not be the case, Ms. 

Bryce? 

41 

Ms. BRYCE. Well, I would agree with that. I believe that what we 

have found is that the State insurance structure has been a real 

asset, we believe, to our industry. 

If you can imagine, we are obviously participating in a mortgage 

market, where we are subject not only to some of the issues of, you 

know, loans that were originated, but also to a lot of macroeconomic issues that we can’t control, like unemployment, etc. And 

yet, we are in a position to be able to continue paying our claims, 

because of the structure of the reserve system that we have with 

the States. 

And what we have found is that has been a structure that has 

helped us really survive through this challenging time. At the same 

time, it has been very clear that the regulators themselves have 

been talking to each other and coordinating, as well as, in our case, 

sharing information with the FHFA. 

And so, you know, we believe that that structure is working and 

will continue to work. 

Mr. SCOTT. Thank you. 

Mr. NUTTER. Mr. Scott, may I just add a comment to that? 

Mr. SCOTT. Yes, sir, please. 

Mr. NUTTER. I represent the reinsurance industry. Going back to 

the chairman’s opening statement, there are certain—aspects of insurance, some lines of insurance—in our case, reinsurance—where 

a Federal prudential regulator would, in fact, enhance the kind of 

relationship at that consumer level that you want. The lack of a 

Federal prudential regulator indeed cries out for, the problems associated with international agreements focused on international insurers and reinsurers doing business in this country. 

So, I would suggest that even accepting your premise about the 

consumer concerns, there are still aspects of regulation where a 

prudential Federal regulator would enhance that. 

Mr. SCOTT. Okay. 

Mr. MCRAITH. However— 

Mr. SCOTT. Yes, sir? 

Mr. MCRAITH. May I add to that? The ultimate consumer protection, Congressman, is when your constituent pays a premium and 

doesn’t have a claim for several years, that the company is not only 

around to answer the telephone, but is able financially to pay the 

claim. Reinsurance is an essential part of solvency, and solvency is 

the core mission, core purpose, of consumer protection in each 

State. And for that reason, it is appropriately a subject for Statebased regulation. 

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

Chairman KANJORSKI. Thank you, Mr. Scott. And now the gentleman from Florida, Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. We have really 

heard about two issues today: one is international harmony; and 

the other is about regulation. I won’t go into the harmony, because 

there is just not time. And besides the EU, we know what happens 

when Asia gets in and South America gets in. I mean, it’s really 

too large even to discuss too far here today. 

But as you have heard most of our colleagues discuss today, 

many of us believe clearly that the regulation of insurance is a 

42 

State’s right. That’s purely and simply a State’s right. It’s reserved 

under the States. 

And the biggest violation of consumers that I have seen, quite 

frankly, has been by companies that write health insurance, for example, under ERISA. They will do business in 49 States, every 

State except the State in which they reside, collect premiums, and 

don’t pay claims, because the Federal Government does nothing 

about it. And it wasn’t until a consortium of States got together 

just several years ago and crossed State lines for the first time in 

history to prosecute health insurance fraud. If we left it to the Federal Government, they would still be plundering people in 49 

States, unfortunately. 

It is clear that if your testimony today was true, very few of you 

need any more useless bureaucratic regulation. And who would 

have ever thought that, after the S&L crisis, so relatively shortly 

after the S&L crisis, with all the additional regulation that was put 

in place following the crisis, that we would again find ourselves in 

this hole of a financial crisis. 

I mean, if regulation would have solved the problem, we wouldn’t 

be here today, because brighter minds, creative lawmakers threw 

a bunch of regulation into the S&L crisis, and obviously it didn’t 

do anything. And why we would think that we could be successful 

in trying to advance, out-think a creative risk-taker, kind of defies 

logic. 

I think the answer is to hold people who harm people accountable. You know, we pretty much, I think, agree that the cause of 

the crisis that we’re in now has been caused by greed. We have 

greedy executives—and it apparently is not illegal—who put the 

long-term best interests of the financial—fiduciary relationship 

that they have with their customers, their clients, their stockholders, behind their personal ambition for short-term gains and 

grossly exorbitant bonuses. And that’s why we’re in the problem 

that we’re in now. I think everybody pretty much agrees with that. 

And I don’t think that you are going to be able to ever craft a 

law that is going to outwit these creative—I hate to use the term— 

geniuses. Some of the schemes that they come up with seem pretty 

good for the short term, to improve their own lot. I think the only 

answer is going to be if you hold the people responsible who violate 

these fiduciary relationships, like they do in some industries. 

And for that, I realize there is not enough time for all of you to 

respond. I don’t expect all of you to agree with that. But I would 

appreciate it if you would respond with your thoughts in writing 

to the chairman—and he can see that the rest of us would get a 

copy of it—what your thoughts would be, where you would draw 

the bar, what kind of boundaries you would recommend to legislate 

better accountability for these people who have plundered this Nation. They have plundered the world, so to speak. 

And, I mean, if regulation would take care of it, the SEC’s 1,100 

attorneys would have prosecuted Bernard Madoff 10 years ago 

when his scheme was exposed to them, and they refused to take 

any action. 

So, I think it’s going to have to be a matter of criminal and civil 

accountability on a personal level if we are going to change the 

course of the future in this regard. Thank you, Mr. Chairman. 

43 

Chairman KANJORSKI. Thank you very much, Mr. Posey. If the 

panel wishes to send that response in, we will make sure that the 

members of the subcommittee receive it. The gentlelady from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Mr. Chairman. I would first like to ask 

unanimous consent to enter the written statement of the Honorable 

Steve Bartlett, president and CEO of the Financial Services Roundtable, into the record. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Ms. BEAN. Thank you. And I would also like to acknowledge 

some of the testimony in response to some of my colleague’s questions that no one that is advocating for a national insurance charter in any way is suggesting that we lower consumer protections. 

And, in fact, we are starting at the baseline of the NAIC models, 

and only improving by adding a systemic risk regulator, by adding 

a national insurance commissioner who would have oversight of 

holding company information, both for insurance and non-insurance subsidiaries, like AIG Financial, who could prohibit activities 

by non-insurance companies that put those companies or their policyholders at risk. And also the testimony that you mentioned of 

a Federal prudential regulator only again enhances consumer protections. 

My question is for Mr. McRaith: If the Federal Government had 

not stepped in to provide AIG bail-out money, how prepared were 

the State regulators and the reserve funds to deal with the fall-out? 

How would the States have come up with the $44 billion of Federal 

tax dollars that had gone to shore up AIG Life Insurance subsidiaries who took risky bets through their securities lending programs 

that, notably, were approved by the State commissioners? 

And a follow-up question to that, what resources have been put 

in place subsequently by you and other State commissioners to 

oversee an insurance subsidiary’s securities lending program? 

Mr. MCRAITH. Right. Thank you for that question, because securities lending has come up in other comments, as well. It is important to understand that the problem—first of all, that the New 

York Department of Insurance was working to reduce the level of 

securities lending in the AIG subsidiaries before the crisis. The crisis, remember, was a result of the—essentially, a collateral call on 

the AIG holding company, resulting from the credit default swaps. 

This would not have been a problem, but for the CDS failure. 

And it is also important to remember that the securities which 

were involved were AAA-rated securities at the time. So it points 

to the need for better regulation of the credit default swap market. 

The— 

Ms. BEAN. So where would the $44 billion have come from? 

Mr. MCRAITH. Well, let me answer that. I am going to get to 

that, but I want to—you also asked about reforms that have been 

undertaken. 

We have increased capital requirements if companies are engaged in securities lending, enhanced reporting, and we are looking 

at how to revise our accounting standards, and that last improvement is ongoing. In terms of $44 billion, it is important to understand that each insurer, of course, has significant capital requireVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
44 

ments, to begin with. Their assets cannot be used to satisfy the 

debts of the holding company. 

Even if these subsidiaries—I think it’s an open question, also Congresswoman, whether if the—without the $44 billion, whether 

these companies would have actually become insolvent. Many financial regulators will argue that they would not have been insolvent without the $44 billion, that they would have been okay. However, if there had been a question of solvency, then the companies 

would have been placed into receivership. 

And insurance is not like the FDIC, for example, where you need 

liquidity and cash immediately. Insurance, in the guaranty fund 

system, essentially replaces the contract. They don’t have to—and 

the coverage. They don’t have to generate cash immediately, because, of course, not everyone dies—God forbid, everyone dies—on 

the same day, or everyone has a car accident on the same day. And, for this reason, $44 billion would not have been needed immediately if, hypothetically, it would have been needed at all. It 

would have been managed over a period of many years, if not decades. And this is what happens—and does happen—through the 

course of State-based receiverships of insurance companies. The 

State-based system would have been able to handle it, and it would 

have been, again, a—protected the consumers, the policyholders, 

first. 

Ms. BEAN. I appreciate your testimony on what has been done by 

the NAIC since that time to address the gaps that exist in the current system to protect policyholders. And again, it is those who oppose legislation to move towards a national charter who suggest 

that there be any weakening of consumer protections, who refuse 

to acknowledge the $13 billion of savings to the industry that could 

get passed on to consumers from the redundancies of a 50-State 

system. Thank you, and I yield back. 

Chairman KANJORSKI. Thank you very much, Ms. Bean. And 

now, the gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you. I found it interesting that some of 

you there think that you can ask the Federal Government for so 

much, but in your own wisdom stop it, and then you will be in a 

position later on, when you’re complaining, that the Federal Government went too far. 

And I think Mr. Royce, in his own questions, went beyond his 

own bill on setting up an office of information, insurance information. And then his question was—and this is Ms. Bean’s bill, also— 

is what good does it do to have the information if you have no authority to act upon it? 

I come from Illinois, and one of the things that we do right in 

that State is regulate insurance. We have the cheapest insurance 

rates, probably, in the country. 

Mr. McRaith, my understanding—and correct me if I’m wrong— 

is that AIG was in five pieces, five separate entities, call it what 

you want, and that the life insurance aspect was cordoned off by 

some firewalls from the investment side that went sour. Is that correct? 

Mr. MCRAITH. That is correct, Congressman. Every State has 

adopted what we call the Holding Company Act. The Holding Company Act, along with our other financial regulations, requires each 

45 

insurer to be financially independently viable. And we have very 

strict capital and accounting and investment requirements. 

One function of the Holding Company Act is that insurers—the 

life insurers, for example—cannot release capital to the holding 

company to support the holding company without regulator approval. 

Mr. MANZULLO. So the investments that were made by the AIG 

Life Insurance section were separate from the investment arm that 

went sour, is that correct? 

Mr. MCRAITH. That is correct. AIG Financial—AIG, in our conservative estimate, had 247 different companies; 71 of those were 

U.S.-based insurance companies. Each one of those was independently financially viable. 

The financial products in the jet leasing company, those were 

regulated in other ways by other agencies in which the insurance 

companies—and the insurance companies were not threatened by 

those operations. 

Mr. MANZULLO. So the life insurance side of AIG has always 

been sound, in terms of—you would have to have all the insureds, 

life insureds, die in one day or in a week in order to threaten the 

solvency of the insurance end. 

Mr. MCRAITH. It is—some very smart, experienced financial regulators in this country would say exactly that. 

Mr. MANZULLO. Well then, why would anybody want to regulate 

the life insurance company on a Federal level? How could it be 

done any differently, any better, than what has been done at the 

State level? 

Mr. MCRAITH. Well, our position, of course, Congressman, is that 

it cannot be. And I think that your colleagues have pointed out numerous examples of why that would not be the case. 

I think Chairman Kanjorski asked me earlier about Reliance 

Company, and would a Federal regulator have discovered the misconduct of its principal. Well, if—the SEC didn’t discover the misconduct of Mr. Madoff, either, at the— 

Mr. MANZULLO. And if I could stop you right there, that is my 

point. The man who is the whistleblower—I can’t think of his name 

right now—oh, Mr. Makopoulous—testified that he had been 

screaming at the SEC for 5, 6, 7 years, and no one would listen. 

So the authority and the regulators were in place, they just failed 

with Madoff. And the same thing with the Federal Reserve. 

Now, you said, Mr. McRaith that, ‘‘We restrict the nature and extent of the investments of insurance companies.’’ And the Federal 

Reserve has jurisdiction to restrict the nature and extent of mortgage instruments and underwriting standards. And they sat on 

their butts and did nothing. In fact, Chairman Bernanke testified 

here in October of 2008 that it wasn’t until December of 2007 that 

the Fed ever got involved in the whole subprime housing market. 

And I find that astonishing. 

And Mr. Capuano is giving you hell that—he said where were 

the States when this went down the tube, but it was the Federal 

agency with direct jurisdiction that did absolutely nothing. 

And now we’re talking about using that standard, the SEC 

standard that blew it with Madoff, the Federal Reserve standard 

that blew it with doing nothing on governing these instruments to 

46 

stop the 2/28s and 3/27s, and making sure that people who took 

loans could afford to buy them, and now we’re expected to sit here 

and have a Federal insurance regulator. Why? 

I mean, I’m looking at your testimony here. You plead the Tenth 

Amendment on some certain areas, and I could understand what 

you’re trying to do. The problem is, how do you think you can stop 

the Fed from going only as far as you want them to go, and then 

not going beyond the area where you don’t want them to go? 

That’s a tough question, Patrick, but if you want to handle it, go 

ahead. 

Mr. BAIRD. Well, I would like to try. 

Mr. MANZULLO. I will leave it to you. If I could have some time, 

Mr. Kanjorski? 

Mr. BAIRD. I will take anything I can get. 

Mr. MANZULLO. Thank you. 

Mr. BAIRD. I will try to keep this in the context of the purpose 

of the hearing, which is systemic risk. If the chairman will indulge 

me for 30 seconds, I have been coming up here for 7 or 8 years, 

long before AIG became the household name, and long before there 

was a financial crisis. And we were up here, advocating for an optional Federal charter, because we thought we could serve our customers—those of us who do business on a national basis, which is 

much of the life insurance business—better. 

As Congresswoman Bean suggested—and you had a bigger number than I would have in my pocket, but there are billions of dollars of annual operating expenses that would be saved if we had 

a single regulator, rather than the 51 regulators that ultimately 

gets passed on to the customers. 

Now, in the context of systemic risk, what we have been talking 

about today is, whether it’s Federal or whether it’s State in the 

past, there have been failures of regulators on both sides. And I 

think the purpose of this hearing is to try to make it better, it is 

to try to improve, and it’s trying to bring all of the risks from the 

entire financial services industry together to keep this from happening again, which, given the amount of sleep that I have lost in 

the last 8 months, I am all about. 

So, if we are indeed here to talk about a Federal systemic overseer or regulator, we don’t think that you can regulate just systemic risk of the life insurance industry without having the expertise, collaboration, and cooperation of a Federal functional regulator. And that, to me, is how we bring all this together. 

Mr. MANZULLO. That’s a good answer. I appreciate that. 

Mr. BAIRD. Thank you. 

Mr. MANZULLO. Thank you. I do have another question, but I 

know I’m past my 5 minutes. 

Chairman KANJORSKI. Let me start another round, and we will 

see if we can get another 5 minutes. 

Mr. MANZULLO. Okay, that will be fine. 

Chairman KANJORSKI. Okay. The gentleman from Florida, Mr. 

Grayson. 

Mr. GRAYSON. Thank you, Mr. Chairman. I don’t want to talk to 

you all or ask you any questions today about whether we should 

have a Federal regulator versus State regulators for insurance. I 

do want to talk to you and ask you questions about the subject of 

47 

systemic risk. You are a panel of members who are here to represent the insurance industry. And I would like to start with a very 

simple question. 

Assume that systemic risk reflects the idea that the failure of 

one particular company would cause its creditors to also fail to go 

bankrupt, and reverberate throughout the financial system to the 

point where there is a dry-up of credit nationwide, or even worldwide. 

The first question I want to ask you—we will start with Mr. 

McRaith—is which companies does that describe? In other words, 

which existing companies pose systemic risk if they fail? 

Mr. MCRAITH. Not one insurance company based in the United 

States presents systemic risk, according to the definition you have 

provided. 

Mr. GRAYSON. What about AIG? 

Mr. MCRAITH. AIG’s 71 U.S.-based insurance subsidiaries were 

financially strong, remain financially strong. Not one of those companies independently ever presented any systemic risk. 

Mr. GRAYSON. As a group do they pose systemic risk? 

Mr. MCRAITH. As a holding company, its Financial Products Division out of London, which was not appropriately regulated—but not 

a matter of State insurance regulation, by the way—that clearly 

presented systemic risk to the country. 

Mr. GRAYSON. So what you’re saying is that only the Financial 

Products Division of AIG posed any systemic risk, not any of the 

insurance operations, and the Financial Products Division was not 

an insurance operation, in your view. Is that correct? 

Mr. MCRAITH. According to the definition you have provided of 

systemic risk, yes. 

Mr. GRAYSON. Good. Let’s go on to Mr. Spence. Which insurance 

entities today pose systemic risk to the system? 

Mr. SPENCE. Thank you, Congressman. As we detailed in our testimony, I essentially agree with Mr. McRaith. However, I think 

that, on an aggregated basis, the insurance companies, as a whole 

in the United States, could, if there were a natural catastrophe of 

significance, or if—in the event of a terrorist attack pose a systemic 

risk. 

Mr. GRAYSON. Well, that’s an interesting point. So what you’re 

saying is not the scenario we saw with AIG, that wouldn’t pose the 

kind of systemic risk you’re talking about. What you’re talking 

about there is some sort of attack or natural disaster that would 

impose trillions—well, or at least hundreds of billions of dollars, potentially—I’m talking about, for instance, a nuclear blast—hundreds of billions or trillions of dollars of loss on the industry. 

At that point, do you think that would be a systemic risk? And 

at that point would that be, in effect, the least of our worries? 

Mr. SPENCE. As I indicated, we think that, on an aggregated 

basis, insurance companies in those events could be systemically at 

risk, correct. 

Mr. GRAYSON. All right. Is there anything that a systemic risk 

regulator could possibly do about that? 

Mr. SPENCE. That’s a very good question. What the systemic risk 

regulator could do would be to try to ensure that examination of 

insurance companies’ exposure was properly managed, whether the 

48 

aggregation of risks in urban areas were properly managed. There 

are things they could try to do to improve the situation. 

But you are correct. Depending on the situation, there may not 

be much that could be done. 

Mr. GRAYSON. Are there any particular entities that you would 

identify as being the ones to watch if we wanted to avoid a systemic risk in those extreme circumstances? 

Mr. SPENCE. Again, we have looked at it more on an aggregated 

basis. 

Mr. GRAYSON. All right. And I don’t know if you will regard this 

question as fair or not, but if your company went broke, who else 

would go broke? 

Mr. SPENCE. We don’t have that many counterparties, like other 

insurance companies. So I’m not sure I can really answer that 

question. 

Mr. GRAYSON. As far as you know, would any other major entities go broke if your company went broke? 

Mr. SPENCE. No, sir. No, sir. 

Mr. GRAYSON. All right. What about you, Mr. Baird? 

Mr. BAIRD. You’re asking me to use my imagination as to what 

a systemic risk regulator does, because I have thought about that 

a lot. 

Mr. GRAYSON. Well, no. What I am asking you is, are there any 

current companies in existence, including your own, that you believe pose systemic risk, in the sense that if your company failed 

so many other companies would fail that it would result, in effect, 

in the mass destruction of credit in this country, or even the world. 

That’s the question. 

Mr. BAIRD. Okay. If all else were the same, if the reason for our 

failure did not impact any of the other companies, or—can I think 

of any other single company out there in the life insurance industry, okay, if the reason they were going to fail did not impact any 

other company, the answer is no. 

Mr. GRAYSON. Okay. And going back to the previous answer, 

what you’re saying is there are certain scenarios where we would 

have something resembling systemic risk, something like a terrorist attack, a mass disaster. Those are the kind of scenarios that 

we should be thinking about in the context of systemic risk. Is that 

correct? 

Mr. BAIRD. In the property and casualty industry, yes. In the life 

insurance industry, it could be a broad devaluation of equity markets, credit defaults, and so forth. 

Mr. GRAYSON. Okay. 

Mr. BAIRD. It would impact all companies. 

Mr. GRAYSON. All right. To me, this has been very helpful. If any 

of you want to supplement your comments with addressing these 

specific issues, I would certainly be grateful to you. My time is up. 

Thank you very much. 

Chairman KANJORSKI. Thank you very much, Mr. Grayson. We 

are going to try another round quickly, and those members can 

take their full 5 minutes if they so desire, but they can certainly 

take less. 

I will hold mine and pass over and go to my co-host here, Mr. 

Garrett of New Jersey, for 5 minutes. 

49 

Mr. GARRETT. And I will just run quickly through, because I 

don’t want to hold the panel up, either. They may be anxious to— 

but I appreciate the panel being here. 

Mr. McRaith—and I saw Mr. Skinner—well, I shouldn’t make 

comments—maybe disagree with you—yes, and my wife always 

says that—with regard to the AIG situation. And you were running 

down the scenario with regard to who is looking at it, and of course 

Mr. Manzullo raised the issue and Mr. McRaith, you made the 

comment, portions of the units were overseas. And in London, specifically, right? 

And I believe I have heard that before, that part of the issue 

here is that it was not the State regulator, necessarily, to some extent. Federal regulators, or lack thereof, as Mr. Manzullo is making—you’re raising one, as well, as far as the European arm of it, 

or are looking at it, as maybe of missing it as well. Just want to 

chime in on that? 

Mr. MCRAITH. I think the important point is that regulators need 

to have formalized structure for information sharing, for communication, not because of the risks, because frankly, there are large 

companies who will present risk. It’s to avoid the disruption. So the 

structure of— 

Mr. GARRETT. Okay. 

Mr. MCRAITH. —the stability— 

Mr. GARRETT. But I guess what I heard—and Mr. Skinner can 

comment on it—is was there a failure also not only on the Federal 

Reserve part, not only on the Federal regulators looking at the AIG 

situation, but was also a failure from the European regulators, as 

well, looking at this situation and not catching this going into it? 

Mr. SKINNER. This is very interesting. As I am listening to this, 

I gather that you believe AIG functioned as it did in the United 

States. In fact, AIG functioned, country by country, inside the European Union. 

And Solvency II challenged AIG, and said, ‘‘You’ve got to now behave as a group. You’re overseas, and you’re inside the European 

Union, in the market, in an internal market. You’re now going to 

have to put your hands up and say you’re a group.’’ If they had 

been a group, we would be able to administer and supervise that 

group in its entirety, whatever it did, banking and insurance. 

It just seems to me strange to keep picking on London. London 

was a conduit for trading. It was appropriately regulated at the 

time. Whether we now will have a crystal ball and we look back 

and we say, ‘‘Oh, securitization was bad,’’ I do not think that’s true. 

It’s not rational, either. 

But the reality is, actually, what went on was due to the derivatives market—and we know why, indeed, why it went bad in the 

derivatives market, so we don’t need to go there. But if we are saying that AIG and the United States has to blame what went on on 

London for the failure of supervision, then I think that’s taking it 

a step too far. 

I think what we have to say is, where was it supervised inside 

the United States, who had oversight of it, why didn’t, if State regulators had such a close relationship with this company, know 

about the kinds of investments it was making, and what propoVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
50 

sition did it make, in terms of trying to stop those investments 

with the Office of Thrift Supervision who, by the way, rejected— 

Mr. GARRETT. I appreciate that. I guess a lot of what we do here 

is make the questions to other people. I said had we had different 

regulations in place, would we have prevented the situation, and 

it would seem as though, in certain cases, maybe not. 

And Mr. Skinner, one other one quickly. You talked earlier in 

your testimony with regard to equivalency, and that’s something 

we need to move to, right? You have the OII legislation that’s out 

there. In the—I will call it the bare bones, the basic OII legislation, 

which does not have—sorry, as I understand it—all of the other 

regulatory aspects of it, it’s basically just an OII office of insurance 

information, a collection of information. 

Would that bring us to—just having that, does that bring us to 

equivalency alone? 

Mr. SKINNER. I can only say at the moment, from what I know, 

just a collection of information in itself would not be enough, I hate 

to say. 

Mr. GARRETT. Okay. 

Mr. SKINNER. I think what we’re looking for is for this to be the 

platform for whatever discussions and deliberations— 

Mr. GARRETT. Right. 

Mr. SKINNER. —and it’s up to you where you go on this, of 

course. But what we want, really, is to examine what you’re bringing, in terms of regulation, and it has to have some— 

Mr. GARRETT. Yes, and I guess maybe the last question is we see 

the dichotomy here between the two approaches. And Mr. Capuano 

made the comment, I think, that he—and I don’t want to put words 

in his mouth—sort of sees the need for the State regulations with 

regard to the consumer protection aspect. I think I heard that from 

him. 

Mr. Baird, though, you could see the problems, however, along 

Mr. Price’s line of thinking, of if you have—if you don’t have the 

consumer protection aspect on the same level, or combined—and I 

know you don’t want to get into who regulates what—combined 

with the prudential regulator, you could see a problem there indicated, right? 

Mr. BAIRD. Yes. 

Mr. GARRETT. So you would also see a problem, then, if Mr.—if 

I understand Mr. Capuano—if you continue the—those divided between the State and the Federal, with the consumer protection 

here on the State level, exclusively, as he seems to be supportive 

of, and the prudential regulator here on the Federal regulator, you 

would see a diversion of—or kind of conflicting of approaches or interests there, correct? 

Mr. BAIRD. That is correct. When— 

Mr. GARRETT. Besides the efficiency one. 

Mr. BAIRD. Besides the inefficiencies, when we get it right, when 

we design a product that meets the customer’s needs and allows us 

to be prudent and reasonable as regards solvency, so that we can 

deliver on promises 20 and 30 years out, we bring together our solvency people, our financial reporting people, our pricing people, and 

our—we have committees in our company that we call, ‘‘Would you 

51 

want your mother to own it committees.’’ That would be our equivalent of making sure that the consumer is treated fairly. 

When we get it right, all those different disciplines come together 

in the same place. To regulate us any differently, I think, would 

fail. 

Mr. GARRETT. So if we do—if President Obama comes out and he 

does nothing, let’s say, with regard to insurance, that’s just not on 

the table, but he does give us a systemic risk regulator, perhaps 

in the Federal Reserve let’s say, and he also—so that’s over here— 

and over here he has a consumer protection division in some other 

area, that would be—either one of those permutations without— 

that would be the vision that would not work. 

Mr. BAIRD. If that includes insurance. If that includes insurance 

products— 

Mr. GARRETT. But it doesn’t— 

Mr. BAIRD. In my opinion, if you have regulators with different 

agendas, it does not allow us to bring it together to serve the customer the best way. 

Mr. GARRETT. Nor will it work if you have, in your opinion of Mr. 

Capuano’s approach, where you keep some level down here in the 

State and some up here on the Federal? 

Mr. BAIRD. That is correct. 

Mr. GARRETT. Okay. Thanks a lot. I appreciate it. 

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

Bean, for 5 minutes. 

Ms. BEAN. Thank you, Mr. Chairman. Mr. McRaith, during your 

testimony, you highlighted that the NAIC works actively with 

international regulatory bodies. What authority does the NAIC 

have in actually compelling States to comply with any changes or 

recommendations that the international community would like to 

see? 

Mr. MCRAITH. Well, the first value that the NAIC adds to that 

process is a coordinated interactive agency to work with our international colleagues. There are 27 countries in the EU. There are 

many countries around the world who have similar systems. 

In terms of the preemptive authority of the NAIC, its role is not 

to preempt the States, it is to supplement and support the State 

regulation. So, in that sense, as it develops—as internationally 

there are developed standards, we support the development of 

those standards. And that is the measure by which we will determine equivalency, by the way, is the development and compliance 

with international standards. 

Ms. BEAN. So you support the standards and you educate the 

States, but ultimately you don’t have the authority to compel them 

to comply in the same way that the NAIC, for 140 years, has tired 

to drive uniformity across the States domestically, and has been 

unable to get all States to move forward towards agreement on 

standards, as well? 

Mr. MCRAITH. Well, just quickly, I think that’s a fair comment. 

There are differences among the States. I think, as your colleagues 

have mentioned—you know, for example, in Illinois, we have a rating system where—that works for our State. Companies don’t need 

prior approval on property and casualty rates in our State. HowVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
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ever, that system would not work—I think many legislators would 

argue—in the Gulf States, or on the Pacific Coast. 

So, those differences, while they might present a system that 

some of the largest players in the industry would argue is difficult, 

provide essential consumer protections to the people who actually 

live in the districts and in the States themselves. 

Ms. BEAN. All right, thank you. My question for Mr. Skinner is, 

from the European perspective, how successful is the NAIC in implementing agreements reached with European counterparts? 

Mr. SKINNER. To be honest, on reinsurance in particular, where 

we have had some perennial problems on collateral charges, not 

very successful at all. 

The European Commission holds out that this is entirely discriminatory against European companies operating inside the 

United States, where there is as much as $40 billion worth of collateral held in States across the United States. There has been a 

move to move towards a rating process. 

That rating process, in itself, seems quite discriminatory, with 

the higher ratings being required—very high ratings required for 

foreign companies—and very much less, or so it seems, for domestic 

companies, which we—if you’re operating in a global reinsurance 

market, business-to-business, it doesn’t make much sense. 

Obviously, I understand the necessity of covering risk, but we 

have just done away with collateral inside the EU. We think it’s 

a blunt instrument. We wonder why, you know, that it is still a 

cause celebre here. Whenever the NAIC comes to the European 

Union and says, ‘‘This is what we’re going to do,’’ we’re still 

shocked by it, we still think it’s not a very modern approach, or a 

very modern technique, and we prefer to look at risk management 

which, after all, at the end of the day, tells you just what those 

companies are doing, how they’re behaving, and how they’re predicting their risks, which is far more essential than how much 

money they have in the bank. 

Ms. BEAN. Thank you. One last question for Mr. McRaith. In 

1999, the NAIC chose to become a Delaware corporation. And, at 

the time, the executive vice president of the NAIC, Kathy Weatherford, explained that Delaware laws were conducive to corporations. 

Why does the NAIC believe they should be able to choose where 

to incorporate, based on what was in the best interest of the NAIC, 

but insurance companies with nationwide offerings shouldn’t have 

the option of a Federal charter to streamline their operations and 

better serve their customers? 

Mr. MCRAITH. Well, excellent question, Congresswoman. Let me 

first comment on the reinsurance collateral issue with this very 

brief anecdote, which is that my colleagues on the panel to my left 

almost uniformly would oppose the release of collateral on reinsurance transactions, so it’s interesting to have this diversity of opinion on this one panel, although I appreciate the EU’s perspective. 

In terms of the Delaware incorporation by the NAIC, I don’t 

think it’s a mystery to anyone in the country that Delaware is a 

home place for corporations to incorporate. 

The NAIC, as you alluded to earlier, is not, in and of itself, a regulator. And, in that sense, it is not delivering directly to consumers 

the products—it’s also not a company, so it is not delivering prodVerDate Nov 24 2008 12:51 Nov 02, 2009 Jkt 052400 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\52400.TXT TERRIE
53 

ucts. It doesn’t have solvency requirements. It’s not selling complicated insurance policies to people in every State around the 

country. And, for that reason, companies should be domiciled within States and subject to the regulation of those States in which 

they sell products. 

Ms. BEAN. I appreciate your response, and I yield back. Thank 

you. 

Chairman KANJORSKI. Thank you very much, Ms. Bean. Do you 

have any further questions, Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. I want to thank each and 

every one of you for your time and your testimony. And your forthrightness, especially, is appreciated. 

Mr. Skinner, you are right. There has been a big disparity between the requirements for domestic and non-domestic reinsurers. 

And I think just in the last couple of years, though, we have been 

so plundered and abused by the reinsurers that have done business 

in some of our States—all of whom happen to have the exact same 

rates—that you will see some of those States are dropping those requirements. 

More than protectionism, the purpose of that was so that if we 

caught them misbehaving, theoretically we could put them in jail 

and hold them accountable if they were domiciled in this country. 

If they were domiciled some other place in the world, that becomes 

a little bit more problematic. So that was done more as a matter 

of accountability than it was protectionism, hopefully. 

When we talk about a systemic regulator, I wonder—and you 

have come the farthest, Mr. Skinner, and might have the best ideas 

on this—how in the world could we expect a systemic regulator to 

regulate derivatives, complex derivatives? I mean, from a practical 

application, I have not heard anyone yet explain how somebody 

could evaluate them and then regulate them. 

I mean, in theory, we say, ‘‘Yes, we need somebody to regulate 

this stuff and make it right,’’ but I haven’t heard a practical example given yet of how they would regulate complex derivatives, for 

example. 

Mr. SKINNER. I think that’s a good question. I mean, one of the 

things, obviously, these products went ahead of some of the regulators who were meant to be regulating them. And some of even 

the boards of the companies who were actually in charge of these 

particular products—you also had the combination of Chinese walls 

between agencies who were meant to rate them, and then were also 

designing products, and banks doing the same. Everybody made 

money in this. It was the wrong incentive for any of these things. 

So, in terms of having oversight, well, clearly, one of the things 

we have done at the European level, certainly amongst banks, is 

we have said, ‘‘If you start off with a derivative, we think that you 

should retain some of that derivative, so that we can spot if there 

is any problems, down the line, where it came from.’’ And one of 

the things was that there was no originator principle in derivatives. 

So, we have just introduced a law, the capital requirements directives in banks, to ensure that up to 5 percent of all such derivatives that are started have to be maintained with—inside those 

banks. That is something I know that is being discussed elsewhere, 

54 

and you probably have heard about it already. But clearly, from 

our perspective, it is only with that particular type of start that we 

can hope to look at this market. 

But one thing is for sure. We quite clearly need a securitization 

industry if we are to build capacity. And insurance depends upon 

that, just as much as banking. But we just have to stop the unethical behavior that was clearly behind a lot of this, and certainly 

some of the greed which led to the most uncertain derivatives being 

unleashed on the markets. 

Mr. MCRAITH. Congressman— 

Mr. POSEY. Mr. McRaith? 

Mr. MCRAITH. Yes. I think you are asking the multi-billion-dollar 

question. But I think the Chicago Mercantile Exchange—if I can be 

a little bit parochial—had an excellent proposal, and that is to have 

an electronic trading platform and a clearing function, so that 

there is pricing transparency and counterparty certainty. And those 

two things, in conjunction, would have prohibited or limited the impact of the crisis we have seen and are suffering through now. 

Mr. NUTTER. Mr. Posey? 

Mr. POSEY. Yes, please. 

Mr. NUTTER. I actually wanted to come back to your reinsurance 

comment, but I will be glad to defer to someone, if they are responding to your comment about credit default swaps first. 

Mr. MCCARTHY. I would just like to make one point. Credit—the 

critical part of a regulator—and, again, we think perhaps the Fed— 

is to analyze the instruments themselves. The difficulty with credit 

default swaps with AIG was leverage and the huge number of 

transactions that they did, and the leverage that was embedded in 

each one. 

It is critical, and it would be interesting to see what the—Mr. 

McRaith would say about this. But the amount of staff that it takes 

to analyze these financial instruments, to regulate them and to try 

to make sure which things are permissible or not, we think is more 

akin to what the Fed does than what Eric Dinallo or one of the 

State regulators would be able to do with staff analysis, and be 

able to stay on top of that particular kind of financial instrument. 

Mr. POSEY. So does anyone think that—the people who are putting these together are highly valued, making tremendous sums of 

money—does anyone have the slightest notion that we would be 

able to afford to hire those people, and that they would want to 

work for the government at evaluating the profitability of these derivatives throughout the world? 

I don’t believe in the Tooth Fairy or the Easter Bunny, and I 

don’t believe we’re going to create somebody like that, either. I 

mean, if I’m wrong, somebody tell me why you think that’s really 

a practical idea, that we’re going to get somebody who is going to 

be able to evaluate the derivatives, the complex derivatives that 

are throughout the financial markets, and they’re going to work for 

the government, and they’re going to be able to tell us which are 

smart and which are dumb and which are going to make money 

and which aren’t, and which are risky and which aren’t risky. I 

mean, I just think that’s an absolute absurdity, just to think that 

could happen. 

55 

Mr. MCRAITH. Congressman, as the one public sector employee 

on this panel, I would like to offer this perspective, that there are 

many very smart, bright, committed regulators who sacrifice shortterm compensation so that they can provide a contribution to the 

greater society. 

Mr. POSEY. Well, we are going into new water here now. And I 

think with what we have already discussed, what we saw with the 

SEC, what we saw with all the agencies that failed to investigate, 

failed to prosecute—Enron is probably one of the only ones that we 

can see, and for every Enron, I can show you a State regulator that 

put somebody in jail, TRG for example, the best example I can 

think of—but to start from scratch this new bureaucracy that is 

going to solve all these problems, I think, is just an unrealistic expectation. 

I am not saying that there are not good people who work for government. I am saying that the level of expertise that is required 

here—that the person could have his own independent evaluation 

for the rest of the world and maybe serve a greater good than trying to have the government do it. 

And there is nothing wrong, certainly nothing wrong, with having a database. We have talked about that before. We have thought 

about that before, that, you know, if you have a derivative, you file 

a derivative, you list every component of the derivative, and you 

put that on an index that you can get online, that anybody can go 

see online, just for a transparency. 

But then, of course, the word is, ‘‘Well, we are registered with 

this,’’ and there is an implied value to that, that an unwary consumer who we’re trying to look out for might not understand. 

And thank you. I think you gave me some extra time, Mr. Chairman. I appreciate it. 

Mr. NUTTER. Mr. Chairman, if I might comment on Mr. Posey’s 

comment about reinsurance. One of the reasons that we support a 

prudential regulator at the Federal level is, in fact, that much of 

the reinsurance market is a non-U.S.-based market. And the lack 

of expertise and capability, as well as the lack of a legal framework 

between countries that are major trading partners with the United 

States, is the reason that we think it’s appropriate to have a Federal regulator. Mr. McRaith commented earlier that the lack of 

Constitutional authority for States to enter into trade agreements 

with other countries is an impediment to dealing with that. 

I would also disagree with your characterization of the reinsurance market. In fact, it has contributed an enormous amount of 

money to refinancing after 9/11, after Hurricanes Katrina and 

Wilma, after the hurricanes last year. It really has been a very responsible market in paying its claims. 

Mr. POSEY. Mr. Chairman, just—I didn’t say they weren’t responsible, and I didn’t say they didn’t pay claims. I said they all had 

the same rate, in my State, which seems a little coincidental. 

Chairman KANJORSKI. Thank you very much. The Chair notes 

that some members may have additional questions for this panel, 

which they may wish to submit in writing. Without objection, the 

hearing record will remain open for 30 days for members to submit 

written questions to these witnesses, and to place their responses 

in the record. 

56 

Before we adjourn, the following written statements will be made 

a part of the record of this hearing: The Center for Insurance Research; The Proper Casualty Insurance Association of America; and 

the CEA, a trade association of European insurers. Without objection, it is so ordered. 

I want to thank this panel for their contribution today. We did 

it in 3 hours, which is pretty good. And maybe next time, we can 

keep you for 5 hours. 

It would be another opportunity to visit with Mr. Skinner, if we 

call him over here. We would enjoy that. I think that we gained 

a lot from the international exposure of having Mr. Skinner as part 

of the panel, but all of the participants on the panel were extraordinarily contributive today. 

And I think even the greatest doubters on the committee may 

tend to say that we moved the ball down the field a little further, 

with the result of this hearing. 

I want to thank you again for being part of it. I look forward to 

some future hearings on this very subject. And now the panel is 

dismissed, and this hearing is— 

Mr. GARRETT. Just to enter something into the record, from the 

AIA, a letter of June 5th. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. GARRETT. I didn’t mean to hold you up an extra 30 seconds, 

but I did want to make sure that gets into the official record as 

well. Thank you. 

Chairman KANJORSKI. Thank you. 

[Whereupon, at 1:07 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

June 16, 2009 

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