Hearing Of The Subcommittee On Capital Markets, Insurance, And Government Sponsored Enterprises Of The House Financial Services Committee; Subject: Systemic Risk And Insurance; Chaired By Representative Paul E. Kanjorski; Witnesses: Peter Skinner, Member, European Parliament; Michael T. McRaith, Director, Illinois Department Of Insurance On Behalf Of The National Association Of Insurance Commissioners; Teresa Bryce, President, Radian Guaranty INC. On Behalf Of The Mortgage Insurance Companies Of America; Sean McCarthy, COO, Financial Security Assurance, INC; Kennith F. Spence, Executive Vice President, Reinsurance Association Of America; Patrick S. Baird, CEO, Aegon USA, LLC On Behalf Of The American Council Of Life Insurers; John T. Hill, President And COO, Magna Carta Companies On Behalf Of The National Association Of Mutual Insurance Companies
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REP. KANJORSKI: The Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will come to order. Pursuant to an agreement with the ranking member, opening statement today will be limited to 10 minutes for each side. Without objection, all members' opening statements will be made 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 to 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 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 six 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 a 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 on the risks of 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 reinsurers.
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.
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 four minutes for his opening statement.
REP. SCOTT GARRETT (R-NJ): 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 insurance industry. So I look forward to all of your testimony.
Tomorrow as you indicate, we are expecting to hear from the Obama administration on its plan for a financial regulatory reform. And from what I can tell, it seems unclear to what extent its 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 crystallized.
The 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. 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 should it 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 "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 marketplace, 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 be fairly explicitly 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 benefiting from it would be asked to contribute to a system designed up there and prop up their larger competitors.
Additionally, I don't believe that individual taxpayer should be asked to contribute to a fund that is set up to bailout a failed large firm and its creditors. And furthermore, such a fund created for the resolution authority would need to be very large and thus very costly for 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.
As I said, I would argue that the first and foremost we should concentrate on policies that don't encourage future bailouts 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 bailouts in the future; and its central unifying goal is no more bailouts.
Now, returning to the theme of today's hearing, my primary questions are, are insurance firms, by their nature, systemically insignificant? I'm 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'll be hearing from the mortgage insurance industry, the bond insurers, life insurers, the reinsurers, as well as from the P & C sector as well.
And we'll 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, what further actions could be done, will be enlightening to everyone here today.
And finally, Mr. Chairman, as you know, you've 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 on regards to markets of 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. Thank you, Mr. Chairman.
REP. KANJORSKI: Thank you very much, Mr. Garrett.
We will now hear from the gentleman from California, Mr. Sherman for one minute.
REP. BRAD SHERMAN (D-CA): Underlying these hearings 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 shows its little 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.
REP. KANJORSKI: Thank you, Mr. Sherman.
And now we will hear from another gentleman from California, Mr. Royce for two minutes.
REP. EDWARD R. ROYCE (R-CA): Thank you, Mr. Chairman, and I would like to briefly thank Mr. Skinner for making this trip here to testify and also 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 EU, we continue on the other hand to struggle with the patchwork system of 50-plus state regulators.
With the implementation of this directive nearing, it is becoming more apparent that the frame work potentially will be at odds with the U.S. regulatory structure. It is unlikely that the EU would find the current balkanized 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 preemptive 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 would 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 stand point there were failures at both the state and federal level.
Using capital for their -- from their insurance subsidiaries, with the approval of various state insurance 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 over leveraging.
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.
REP. KANJORSKI: Thank you, Mr. Royce.
And now we will hear from the gentleman from Georgia, Mr. Scott, for one minute.
REP. DAVID SCOTT (D-GA): 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 does it best regulate, 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 with AIG was their financial products division based in London, which again, was regulated at the federal level. So the question becomes, if we use the 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 clauses, 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 at 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 is to say that the federal charter and federal regulation is the way to go?
I think there is a lot be said with making sure that we have regulations at the state level that works. Thank you, Mr. Chairman.
REP. KANJORSKI: Thank you very much, Mr. Scott.
And now we have the gentle lady from Illinois, Ms. Biggert, for three minutes -- I'm sorry for two minutes.
REP. JUDY BIGGERT (R-IL): 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 and -- representing NAIC.
I'm 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 is why a part of our Republican regulatory reform proposal preserves the option for a thrift charter that rolled OTS into the OCC. And in addition, our proposal addresses risky behavior that AIG-like entities -- like- entities, may engage in such thrift derivatives. And I think we established a market stability and capital adequacy board comprised of our federal regulators, and possibly others, to look at what should be done with regard to derivative 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. I also think that we need to improve the dialog among regulators, and insurance needs to be part of that dialog. That's why I joined the ranking member -- joined Chairman Kanjorski with his -- over 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 would -- I yield back.
REP. KANJORSKI: Thank you very much, Ms. Biggert.
And now, we will hear from the other lady from Illinois, Ms. Bean for three minutes.
REP. MELISSA BEAN (D-IL): Thank you, Mr. Chairman. Being from Illinois, I would also like to give a shout out to Mike McRaith, but to all of our witness as well, for joining us today and sharing your expertise.
Until this year, the role of federal involvement in the insurance industry is centered on whether to establish a federal insurance regulator. I've 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 the AIG, the world's largest insurer has proven to be one of the most costly and dangerous corporate disasters in our nations' financial history, with nearly a $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, Financial 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 structured 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 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 effects 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 regulators established in the bill that consist 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 unit, 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 systemic 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.
REP. KANJORSKI: Thank you very much, Ms. Bean.
And now our final presenter Mr. Hensarling, of Texas, for two minutes.
REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman, thank you for calling this hearing. Obviously very important issues for us to consider. There is no doubt each of us know what a critical role the insurance industry plays in our economy today.
However, I'm 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 prophesy than to designate a firm as systemically risky. Then it becomes systemically risky, and we know what happens after that.
A $173 billion of taxpayer money later, AIG has essentially become a conduit for 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 it already exists. We simply cannot enshrine a too-big-to-fail bailout policy.
Now, 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 the federal regulation is not a panacea. Witness Fannie and Freddie, Wachovia, WaMu, Citi, Bank of America, and the list goes on.
And 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 like Fannie and Freddie throughout the economy that will ultimately blow up on the American taxpayer.
And 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.
REP. KANJORSKI: Thank you very much, Mr. Hensarling.
And now, we will have the panel. The panel is made up of eight members. That's why we contracted some of our presentations by the members. And herein before the subcommittee today, each of the panelists will be allotted five minutes and without objection, their written statements will be made 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 reelected. Congratulations, Mr. Skinner. We look forward to your tenure. Mr. Skinner.
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 reelected, but also to come here to know that I'm usually sitting 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. I'm directly involved in the, what's known as the Transatlantic Regulatory dialog. I had discussion between congressmen -- Shelley Berkley, I believe, chairs the subcommittee with the European parliament. So we talk regularly about issues like this.
I was previously Rapporteur, and sponsored for the bill, 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 bloc 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've already heard however, about 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 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 predicting behavior using reasonable models and testing against them. In fact, we've been having impacts assessments which involve American companies inside the European Union giving evidence 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 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 over the -- through the supervision through one financial sector-type of regulatory body.
In terms of developments from aboard 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've seen that the near financial meltdown has meant that actually when you get a cough or a cold in California, we feel the sneeze effects in London, in Frankfurt, in Rome.
Solvency II was set outside of this financial crisis, 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 international competitiveness of EU insurers and reinsurers.
International communications amongst regulators can be difficult, and you know, in order to be able to get this moving, 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 U.S., as 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 as work begins on third-country equivalence, in the context of Solvency II, we will be faced with the same question as we always faced. 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 on 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, if you like it at the administrative level that the European directives are sensibly applied in each country.
And as those laws are applied with American companies doing business in Europe and European companies doing business across the whole of the European Union, it allows for a possible scene for each company to do business, state by state, by member country by member country.
On systemic risk and insurance, just a short comment, if I may. During the currant crisis, the insurance companies that were most likely to be affected and I've heard it already today were those involved in significant quasi-banking activities. That is a fact. There are second order effects as well, we are aware of that. And I think that we have to appreciate that, that they were not the directly involved facts which may lead to greater systemic risk.
It is the failure to use appropriate controls, to manage risks, that we believe, leads to the problem of systemic risk. On Europe's attitude to guarantee 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, 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 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.
REP. KANJORSKI: Thank you very, Mr. Skinner.
And next, we will hear from the Honorable Michael T. McRaith, Director of Illinois Department of Insurance testifying on behalf of the National Association of Insurance Commissioners. Mr. McRaith.
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, 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 and is, and will remain priority one, for state regulator.
It bears repeating that we supervise 36 percent of the worlds' insurance market. Our states, individual states, include four of the top ten and 28 of the top 50 world markets. And alone, we surpass two, three, and four combined.
To be sure, as of 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 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 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 glaring lacking in other sectors.
Information sharing and confidentiality protocols can be established in 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 leaves the U.S. and others within the next several years to adopt accounting standards based on the 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 G- 20, 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 Re, ING, Allianz, 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 countries financial stability.
Also, contrary to misleading alarms our state guarantee fund system has the wherewithal and the creative force to resolve insurer failures, even multiple concurrent failures while protecting consumers. 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.
REP. 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.
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 down payment. Many of these are first time and lower-income borrowers. Since 1957, mortgage insurance has helped over 25 million families to 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 a 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, can not 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 of claims as a result of regional recessions in the '80s and the '90s. After each recession, we built up capital and were able to meet the next stress period.
Mortgage insurers and the banks that make the loan face similar mortgage default risks, but only mortgage insurers raise capital in this counter-cyclical 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 reserve.
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 ensure 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 risks 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 that of the housing recovery program that is ready to go. Thank you.
REP. KANJORSKI: Thank you very much, Ms. Bryce.
And next, we'll hear from Mr. Sean McCarthy, chief operating officer, Financial Security Assurance, Incorporated.
MR. MCCARTHY: 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 financing.
Financial guaranty insurance utilized only in the financial markets is a very different product from that of property casualty, life, and health insurance companies. Article 69 was enacted by New York State to segregate financial guaranty insurance from multi-line 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 State Insurance Commissioner Eric Dinallo, who has recently announced that he is leaving, had noted the potential need for Federal regulation of the bond insurers and 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 impossible 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 not -- 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 five months of 2009 has been 13 percent. Letter of credits has now declined to about 6 percent.
Certainty, 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 triple-A 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 guaranty 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 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.
REP. KANJORSKI: Thank you very much, Mr. McCarthy.
Next, we have Mr. Kenneth Spence, executive vice president and general counsel at the Travelers.
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. I am executive vice president and general counsel of Travelers. Travelers offers a wide variety of property casualty insurance products, surety, and risk management services to numerous businesses, organizations, and individuals in the U.S. and abroad.
Our products are distributed primarily through the U.S. -- in the U.S. 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 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 marketplace to Washington and to any systemic -- 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 with other institutions that its failure could cause widespread and substantial economic harm, extending beyond those stakeholders who had assumed the risk.
For example, any unregulated holding company with the 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 instead 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 or 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 robust disclosure regime in order to provide regulators, rating agencies, and the public with the information necessary to provide a comprehensive understanding of an institutions' 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'll be happy to respond to questions you may have.
REP. KANJORSKI: Thank you very much, Mr. Spence.
Next, we have Mr. Franklin Nutter, president of the Reinsurance Association of America.
MR. NUTTER: Mr. Chairman, members of the committee, thank you very much. I am Frank Nutter, president of 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 U.S. 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 ensuring the reinsurers financial solvency with no consumer component.
Because reinsurance is a business-to-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 based on a broader perspective than individual state interest.
We believe that the chairman's Office of Insurance Information legislation is good and timely, and goes a long way towards 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 U.S. 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 action if necessary.
We are concerned that the systemic risk regulator envisioned by some, one without clear, delineated lines of federal authority and strong preemptive powers, would be redundant with the existing stated- based regulatory system. We also note that without reinsurance regulatory reform and a prudential federal reinsurance regulator, a federal systemic 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 affecting -- impacting U.S. reinsurers. The interaction between the U.S. and its foreign counterparts on issues like the European Union's 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 U.S. 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 U.S. is disadvantaged by 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 U.S.
Financial markets are global and interconnected and no sector is more global than reinsurance. Even the NAIC has acknowledged that, quote, "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 in matters of international trade are at best inefficient, pose barriers to global reinsurance transactions, and do not result in greater transparency.
The RAA recommends that reinsurance regulatory modernization be included in any meaningful and comprehensive financial services reform through the creation of a federal regulator and will have exclusive regulatory authority over reinsurers that obtain a federal charter and make clear that there is no redundancy with state regulation.
We further recommend that any such financial reform incorporate authority for a system of regulatory recognition to facilitate cooperation and enforcement with foreign insurance regulators.
Thank you very much.
REP. 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: 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'm 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, there are 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 and 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, they very well need to rely on 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 that which doesn't have any individual companies that poses systemic risk?
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 is ample justification for the creation of such a regulator prior to the crisis and there is even more -- 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 the comprehensive approach to financial regulation. Your policies need to govern all systemic -- 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 that 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' experience in substantial portfolio losses, the suspension of dividends on the preferred stock of Fannie and Freddie, which again significantly damaged our portfolios and directly contributed to the failure of two life insurance companies.
The mistaken belief by some that market-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 regard to financial reporting and solvency. Competition should be about serving customers, operating efficiencies, and basically slugging it out every day improving 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 is 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 will create an Office of Insurance Information within the Treasury Department while our ultimate goal remains an optional federal charter, and OII would certainly be a step in the right direction.
We're also appreciative of Representatives Bean and Royce for introducing the national insurance consumer protection act which sets forth a 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. We pledge to work with you and members of the subcommittee to see that insurance regulatory reform becomes a reality and we would be happy to answer any questions. Thank you.
REP. KANJORSKI: Thank you very much, Mr. Baird.
And now, we'll 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: 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. 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 taxicab 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'm 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 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 committee 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 rule. We are solvent and continue to serve our policyholders the same today as before the economic crisis.
If you exclude 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 marketplace is well regulated, highly diverse, very competitive, and is open to anyone that is willing to play by the rule. 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 portfolio, 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 insurance continue to be well-capitalized and neither seeks nor require federal funding. Our industry remains one of the well-functioning bedrock of our financial structure.
The record shows that property and casualty insurance 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 structure of property and casual 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 fund system also reduces the systemic impact of any failing property/casualty insurer.
NAMIC believe that any new oversight a systemic risk should focus on products, activities, and market-oriented events and development 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 system-wide access.
Only institutions that offer products or engage in transaction 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 into 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 decision-making on insurance issues and facilitate international agreement.
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 gap.
We urge Congress to keep in mind the dramatic differences between main street businesses that have never stopped meeting the leads -- the needs of local consumers and those institutions that causes crisis. Again, thank you for the opportunity to speak here today. And I look forward to answering your questions.
REP. KANJORSKI: Thank you very much, Mr. Hill.
And thanks to the entire panel. It's interesting testimony. I look forward to my own questions and those of the committee.
Mr. McRaith, I'm going to put you on the spot for the first question. In Pennsylvania, we had a company in 2001 Reliance of Pennsylvania -- imagine you are all familiar with it. Mr. Saul Steinberg who took the insurance proceeds of that 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? You recall that transaction or those transactions --
MR. MCRAITH: I'm certainly familiar with the company; I wasn't familiar with the Wharton School.
REP. KANJORSKI: Did -- subsequently that company defaulted on bonds and bank debt. And it had chosen its federal regulator to be of its own choice, because it was a holding company. What -- how would you say the effect of what happened there with that particular company? Is that a failing of the state regulation state-to-state? Would that have occurred if we've 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 lack of ethics are companies that are more likely to encounter cash flow problems and ultimately suffer the demise similar to Reliance.
A federal regulator would not have assisted or prevented that solution. I'm 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 that 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.
REP. KANJORSKI: Well, thank you very much, Mr. McRaith.
My good friend, Mr. Skinner, do you believe that the United States companies will have adequate access to European markets after Solvency II is in effect? And do you believe whether European companies have adequate access to the U.S. market?
MR. SKINNER: It's an interesting question, Chairman. The law comes into being in 2012, what its dependant upon is something called equivalence. And I think as I said when I started, that equivalence from a European perspective is looking for some -- something that can match the deeds and the purpose of the legislation, the final outcomes of that legislation. Certainly, not the letter on the dotting the t and -- (inaudible) -- but something which does the same thing.
For that we need to find a single voice to talk to the -- at the U.S. level from an EU level. We are actually only permitted to get agreements country by country at the 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 U.S. are people who can talk to the European Union about matching of these credentials.
Now 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, whether it's memorandum of understandings 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 dialog and how it works, then I think there should be no discrimination to 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.
REP. KANJORSKI: So it would be 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 commonsense statement. I think -- from a U.S. perspective, I think this is something you are grappling with like we've grappled with.
We still have multi-jurisdictional, multi-legal personality in terms of the countries we have at European level. They have their own laws, their own regulations, their own standards, we've just introduced Solvency II, and it's actually just changed the whole thing.
It has harmonized it, it's brought the standards up in countries where it wasn't competent, it 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'd want the same inside the U.S. as well.
REP. KANJORSKI: I see my time has expired.
Now, we'll hear from Mr. Garrett from New Jersey.
REP. GARRETT: Thank you, Mr. Chairman.
And I'll begin there where you ended, 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've been had in this country was not caused by, as they would argue, by problems in the insurance industry? And we've heard that from other panels as well.
I know, in your testimony you said that the legislation you're talking about is 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 to in no part -- in no large part from the insurance industry as well?
MR. SKINNER: Yeah, I think in many ways we will hear the same discussion. You'd be pleased to hear that we're almost twins. There is an economic and financial services committee that I'm involved in, and represent today. We will be talking about the same issues. And classically, we'd be talking about derivatives, you know, and we would be talking about the effects they've had. But I think, as one of your honorable colleagues said already, the securitization issued --
REP. GARRETT: Right.
MR. SKINNER: -- is actually a kind of reinsurance in itself, isn't it, the spread of risk. 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 --
REP. 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: Yeah, I think that it's true to say that you can probably have to put to one side the individual identify certain companies --
REP. GARRETT: Sure.
MR. SKINNER: -- and you have to start talking about the industry as a whole.
REP. GARRETT: Thank you. And now running down the road, Mr. McRaith, you were making your case along the way with regard to the OII and some of the benefits of the upside that would bring about as far as sharing information. But then as you're getting near the end of your testimony you seemed 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.
REP. GARRETT: So I don't want to refer to that -- but here, we're already doing that on the one hand.
MR. MCRAITH: Right.
REP. GARRETT: So why do you then take the other side at the beginning of 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 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.
So we supported Chairman Kanjorski in that initiative with its -- without the preemptive impact. But we do engage and I was consistently engaged internationally with our foreign counterparts. And at some point in time, I'd be happy to talk about Solvency II, but I'll hold off on that.
REP. GARRETT: All right.
Let me just come down to Mr. Baird. You know, in your testimony you stated that the life insurance industry in either significant -- 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 the too-big-to-fail concept does not apply to insurance per se. And --
MR. MCRAITH: I'm sorry, not to any one company. The sector, of course, is significant.
REP. GARRETT: Okay. So maybe that answer is the question --
MR. MCRAITH: It's the same thing.
REP. GARRETT: I'll go to you, Mr. Baird, to address that concern, but maybe you addressed it already. 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.
REP. GARRETT: Okay.
MR. BAIRD: We think the entire industry is systemic of systemic importance, but no one company is.
REP. GARRETT: All right.
Okay, for anyone on the panel. One of the proposals coming out of the White House seem 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, it would be basically your supervisor or regulator in this area, Mr. Hill?
MR. HILL: That would be our -- that would be one of our concerns, Congressman Garrett, that you would have someone regulating insurance that 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 that to be more product and market oriented.
REP. GARRETT: We would --
MR. MCCARTHY: As the 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 think that perhaps --
REP. GARRETT: You're a little bit different than from some of the other --
MR. MCCARTHY: That's right because -- again, financial guarantee we only do -- we have -- we got one nail and we're trying to hit it.
REP. GARRETT: Yeah.
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's critical.
REP. GARRETT: Got you. Thanks a lot.
Yeah, Mr. Baird.
MR. BAIRD: 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.
But we think the creation of the federal functional regulator would give a federal agency than the expertise to properly regulate the life insurance industry and cooperate and give information to the systemic regulator.
REP. GARRETT: But absent that?
MR. BAIRD: Absent that, then that is a concern, and we think it's incomplete.
REP. GARRETT: Okay. Got you.
MR. MCRAITH: And, Congressman, if I could also just say?
Mr. Chairman, if I might add just very briefly that 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, prevent the systemic disruption that we have experienced.
REP. GARRETT: Got you.
Thank you, panel, I appreciate it.
REP. KANJORSKI: Thank you very much, Mr. Garrett.
Now, Mr. Capuano.
REP. MICHAEL E. CAPUANO (D-MA): Thank you, Mr. Chairman.
Ladies and gentleman, thank you for being here. It's interesting that I heard pretty much everybody say that the insurance industry doesn't threaten the system. I'm just curious, is anyone familiar with the acronym TRIA? TRIA was 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 it was going to take down the economy at that time.
Did anybody here who now thinks that the insurance industries somehow doesn't provide a risk, did you come up and tell us that we should not do TRIA because everything was fine. I don't think it did.
MS. BRYCE: Actually the mortgage insurance companies did, but our business is such a different business than, you know, --
REP. CAPUANO: So you don't think that we should have passed TRIA?
MS. BRYCE: That was our position at the time.
REP. CAPUANO: Good for you.
MS. BRYCE: I'm sorry. We got ourselves exempted, I apologize.
REP. 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 a better question. So we should have, and I agree.
MR. MCRAITH: Congressman --
REP. CAPUANO: Go right ahead.
MR. MCRAITH: The issue with terrorism is the absolute impossibility of predicting the risk. What TRIA does is facilitate the property and casualty market that would not exist. Manhattan, Chicago as major urban areas would not have access to coverage for terrorism and events in the --
REP. CAPUANO: I understand.
MR. MCRAITH: -- companies can exclude that --
REP. CAPUANO: It was 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, the items are different. So we should have passed TRIA.
Now, everybody here thinks that there is no one company that somehow provides systematic risk. That's what I heard. I don't think I heard anybody saying 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's 71 --
REP. CAPUANO: Excuse me, Mr. McRaith, excuse me. The idea is it is an insurance company that does different --
MR. MCRAITH: -- claim their policy.
REP. 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 state collectively said, we don't need to look at what AIG is doing. We'll only look at this slice, this slice, and this slice. That's all and then 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 --
REP. CAPUANO: Bingo.
MR. MCRAITH: -- there was a complete lack of regulation at the holding company level what should happen --
REP. CAPUANO: Well, the problem is --
MR. MCRAITH: -- professional regulators of all those --
REP. CAPUANO: The problem is that you were looking at the relationship between the policy holders 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're 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 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 that 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 receipt 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'm wrong.
MR. MCRAITH: The answer is, no.
REP. CAPUANO: That's why we're 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 even like the word regulator, I think that implies over activity -- at least a systemic monitor maybe a regulator to review what's going on. And if I -- does anybody disagree with that?
Thank you, Mr. Chairman. I yield back.
REP. KANJORSKI: I know you don't get very emotional.
REP. CAPUANO: My money.
REP. KANJORSKI: The gentleman from Georgia, Mr. Price.
REP. TOM PRICE (R-GA): 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've provided has been very, very helpful. I think it's 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're 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 appears 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 could 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 leave to poor regulatory decision making because the product regulation would lack the information necessary to fully understand the industry. And it could be competing --
REP. 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.
REP. 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.
REP. PRICE: Thank you.
MR. BAIRD: When we design a product, we feel we're 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.
REP. PRICE: But what would -- 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: You know, I believe that, you know, obviously the life insurance industry is about the strong consumer safety standards. I believe if it is looked at in a vacuum and not part of a federal functional regulator and solvency in capital markets risks, that their regulation would not be complete and would therefore slow down the process and you would have regulators -- regulations bifurcated. You'd have regulators with different standards and different agendas and that would keep us from designing the product that the customer needs more.
REP. PRICE: Mr. Hill?
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 --
REP. PRICE: So if we got into your business that would be bad. That I guess --
MR. HILL: Yes.
REP. PRICE: Thank you.
I want to switch gears to Mr. McRaith. You've mentioned that you wanted to comment on the Solvency II framework. And I wondered if you've had an opportunity to look at the consequences that 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 nascent 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. On a 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 Basel II capital standards. You might recall several years ago, there was a clamor in Washington to give our own banks the capital freedom that Basel 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.
REP. PRICE: Thank you.
Thank you, Mr. Chairman.
MR. SPENCE: Mr. Price, may I? This is -- if I many 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.
And the 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 and reinsurance is one, dependent upon regulatory interaction and comity. And we would strongly encourage a federal regulator to facilitate that kind of international trade agreement.
MR. SKINNER: If I may, can I comment on just -- I'm sure the question was directed to everybody who had something to do with Solvency II. Correct the impression which is that this is another piece of legislation already. I rather think that like your House that when you had the votes on it, you had to rethink if it is law, what it therefore has to go to then afterwards is to each member states to have them ratified in the statute book.
Solvency II therefore once it has been adopted, in the European parliament which it was on the 22nd of April, this year was law. It now has two years to be implemented by the regulators on the 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's happening with the U.S. to what was happening in the EU. So we went for a risk-based approach, a principle-based approach, and an economic-based approach.
And this has been 10 years into 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 the implementing processes where the regulators will be allowed to introduce this on the ground where we will be guaranty 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're looking at the best and the highest of standards. I think I'm afraid, you know, I must correct the impression that it's left with you that Solvency II standards is anything that we expect to necessarily to apply in the U.S. That's not what we're saying either.
What we're saying is we've gone all this way in the European Union and it matches the development that's 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 policy holders 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. That means you have 15 percent left U.S. companies. In terms of your global reach, you have got companies that can do it. I would say you have to consider whether or not, not changing the rules, not moving along with the international global standard, is going to endanger many of those other companies that you have with international ambitions.
REP. KANJORSKI: Thank you, Mr. Skinner.
Let's see, Mr. Hinojosa.
REP. RUBEN HINOJOSA (D-TX): Thank you very much, Mr. Chairman. I thank you and Ranking Member Garrett for holding this hearing today to discuss systemic risk.
Treasury will realize its regulatory reform proposal tomorrow, June 17th, which makes this hearing all the more important. Now, I've always supported state regulation of insurance and I will continue to rally behind the regulatory construct.
If the National Association of Insurance Commissioners is correct that even the failure of a major insurance entity based in operating in the United States will generally not impose systemic risk, we need to pursue this claim further and not rush to judgment 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'm not certain that comparing sovereign nations 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 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, of 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's even more true.
And then the limit -- the circumstance 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.
REP. HINOJOSA: Okay. 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 systemic risk, or 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 our -- of the company including the insurance operations. And that process, during that process it 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 would do, even calls for the need for a functional regulator to implement whatever directives the systemic risk regulator might choose to implement. And then as I indicated, whatever the regime is, we think the two key components are mandated risk committees and enhanced disclosure.
REP. HINOJOSA: Thank you, Mr. Chairman, I yield back.
REP. KANJORSKI: Thank you very much, Mr. Hinojosa.
Mr. Royce of California for five minutes.
REP. ROYCE: Yes, thank you Mr. Chairman. To pick up on Mr. Spence' point, insurance operations were not regulated by the Fed. The New York insurance department reviewed and monitored AIG's securities lending program, AIG securities lending program heavily invested in long-term mortgage backed securities.
As a matter of fact, took that money from 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 Company.
So you know, we've got a patchwork quilt here of regulation. We had, as I said in my opening statement, we had problems with the financial products unit. We have problems with the securities lending unit and with the securities lending program. So we've got a difficulty here.
Now, at this -- as we 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'm concerned that we run the risk of bifurcating our financial system, between those that we designate as systemically significantly and everybody else that's 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 implicit backing of the taxpayers and they would be incentivized to engage in higher risk behavior. That's what economists that look at this model tell us when they fret about what we are 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 too- big-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: Is that directed to me?
REP. 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's determining in advance and preventing companies to become too-big-to-fail.
REP. ROYCE: Thank you. And then my last question goes to Mr. Skinner. Because, Mr. Skinner, you've spoken at length on the need to establish a federal presence on insurance in the United 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 the 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 the 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 probably yourself. But 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 would prevent future systemic risks.
And those systemic risks, as we've discussed today, are at the root level. The company management process is the risks it takes, the premiums it doesn't charge et cetera, et cetera. 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's what perhaps, you know, we'll 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've got to find a way through that.
Now, I suspect that it is really beyond the width of imagination of this committee but I could -- isn't anywhere else to come up with ideas and to talk to us about that should happen. And we should be an open door for you. You know, we are 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 develop what is best for policy holders as well as the international competitiveness of companies. And as I say, those demand future modernization and new approaches to regulation.
REP. ROYCE: Thank you. Thank you, Mr. Skinner.
Thank you, Mr. Chairman.
REP. KANJORSKI: The gentle lady from New York, Ms. McCarthy.
REP. MCCARTHY: Thank you, Mr. Chairman. And 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 now 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 be enforced by the current state insurance regulatory structure. Would that solve the regulatory burden 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.
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 that solves very little, if anything.
REP. MCCARTHY: Mr. Skinner, when listening to your remarks, when we think about it and you are talking about you know, working with all the different countries that you are 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 are 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 your -- all the different countries for the -- I keeping saying U.K., EU.
So as we follow through it, if you could follow through with what you were saying before, but 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 are -- you know -- we represent are 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 that thinks that they are not is not awake in the real world. We cannot allow or afford what has gone on in the last year and a half, two years to happen again.
If you could follow through with that?
MR. SKINNER: Thank you very much. I too think that we were dealing with multi jurisdictional districts, regions, countries, states and you are right. It's -- how do we harmonize, how do we get the rules that will give the best safety to consumers. How we help companies expand capacity into 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 about what is prudentially sound, what is economically beneficial and sound, and what is hopefully, subject to risk management. And those things are the clues that we went through in terms of over 10 years in trying to sew together 27 countries of 500 million people in. And not everyone had the same level of competence.
I mean, this is the serious issue. And thank you for recognizing me as coming from the U.K., 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 from what happened. So we will have to be alert and what comes across our borders are some things that we don't expect and be -- can be beyond our control.
So when we talk about systemic risk, we are talking about control over groups; groups that can cross borders and 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 that we know that consumers in Lithuania, Latvia, Malta, and London can have the same kinds of expectations about their policies being in good order when they finally -- time come to have them paid up.
And most of all perhaps just as well that they can afford to. And as I know that in terms of an economic crisis that we're facing at the moment, many people are turning their back on insurance and thinking well, do I have to pay that insurance bill for my health. The consequences of that could be enormous in terms of the social impacts 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.
REP. MCCARTHY: I appreciate your thoughts on that because I actually do believe that people, when they are cutting 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, hoping they don't get caught, health care insurance, obviously, we're dealing with that. So we are fitting with that. I'm sorry my time is up.
Thank you, Mr. Chairman.
REP. KANJORSKI: Thank you, Ms. McCarthy.
And now, we'll hear from the gentle lady from Illinois, Ms. Biggert.
REP. 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 that looks at safety and soundness as well as consumer related products.
MR. BAIRD: Yeah. 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'll decide that not us. Like, you cannot separate and bifurcate consumer standards, consumer safety standards from solvency regulation.
REP. BIGGERT: 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 that 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, policy holders 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 the discussion, to understand really the root cause of this problem is in the financial products division based in London. It is not a U.S. insurance company problem and those conversations still continue to this day.
REP. 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 policy makers 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 is a significant achievement. As 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, and New York and Pennsylvania and 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.
REP. BIGGERT: If I can just get in one more question with my time.
MR. MCRAITH: Sure.
REP. BIGGERT: 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 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, who would be the head that entity to be involved in that?
MR. MCRAITH: Unequivocally, Congresswoman, a state regulator should be in that conversation with the council absolutely.
REP. BIGGERT: And should it be rotating or should -- could be use the Office of Insurance Information?
MR. MCRAITH: That's right. We -- 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.
REP. BIGGERT: Thank you very much. I yield back.
REP. KANJORSKI: Thank you very much. Ms. Biggert.
Now, we'll hear from Mr. Scott
REP. 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 regulated 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've got 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 narrow perspective in the industry. The first words that 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 -- or companies would have the ability to gravitate towards wherever they think the most liberal, or the most friendly for what their particular pursuits would be.
A mandatory federal that would accomplish -- all the 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 a 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, the requirements for them, 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'd say that you know, federal mandatory sort of, applies to everybody, no possibility for arbitrage, was important.
But second, had it been in place and had they focused on what were the terms in the products that would be the case, and that's why we think in -- in a financially driven company such as ourselves that that really -- it looks more like something that the Fed would do for banks in terms of permissible kinds of business that we are in.
REP. SCOTT: All right, thank you very much. The 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've got 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 that just be the case?
MS. BRYCE: Well, I would agree with that. I believe that what we 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 loans that were originated, but also to a lot of macro economic issues that we can't control like unemployment et cetera.
REP. SCOTT: Uh-huh.
MS. BRYCE: And yet, we are in a position to be able to continue paying our claims because of the structure of the reserved system that we have with the states. And what we found is that that has been a structure that has helped us really survive through this challenging time.
At the same time it's 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.
REP. SCOTT: Thank you.
MR. SPENCE: Mr. Scott, may I add. Just add a comment to that?
REP. SCOTT: Yeah, sure.
MR. SPENCE: It represents the reinsurance industry. Going back to the chairman's opening statement, there are certain -- some aspects of insurance, some lines of insurance. And in our case reinsurance, where the federal prudential regulator would, in fact, enhance the kind of relationship at that consumer level that you want that the lack of the federal prudential regulator indeed cries out for the problems associated with international agreements, focus on international insurers and reinsurers doing business in the 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.
REP. SCOTT: Okay.
MR. SPENCE: However --
REP. SCOTT: Yes.
MR. SPENCE: 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 able to -- is not only around to answer the telephone but 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's appropriately a subject for state-based regulation.
REP. SCOTT: Thank you very much, Mr. Chairman.
REP. KANJORSKI: Thank you, Mr. Scott.
And now the gentleman from Florida, Mr. Posey.
REP. POSEY: Thank you very much, Mr. Chairman.
We've really heard about two issues today. One is international harmony and the other is about regulation. And I won't go into the harmony because there is just not time besides EU knowing what happens when Asia gets in and South America gets in. I mean, it really too large to even discuss too far here today.
But as you've heard, most of our colleagues discuss today, many of us believe clearly that the regulation of insurance is a state's right that purely and simply it's a state's right. It's reserved under the state and the biggest violation of consumers that I have seen quite frankly, has been by companies that write health insurance for example under ERISA.
Now, they'll 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'd still be plundering people in 49 states, unfortunately.
It's clear that if your testimony is in any ways true, very few of you need anymore 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 were to solve the problem, we wouldn't be here today because brighter minds, creative lawmakers, threw a bunch of regulation at the end of 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 outthink 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 are 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, with their clients, their stockholders, behind their personal ambition for short term gains and grossly exorbitant bonuses. And that's why we are in the problem that we are in now.
I think everybody pretty much agree to 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 word 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 that have plundered this nation, they've, and I know, they've 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.
REP. KANJORSKI: Thank you very much.
If the panel wishes to send that response in we will make sure that the members of the committee receive it.
The gentle lady from Illinois, Ms. Bean.
REP. BEAN: Thank you, Mr. Chairman. I'd 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.
REP. KANJORSKI: Without objection, so ordered.
REP. BEAN: Thank you. And I'd also like to acknowledge some of the testimony in response to some of my colleagues' questions that no one is advocating for a national insurance charter in anyway 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 that 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 policy holders at risk. And also the testimony that you mentioned of the 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 bailout money, how prepared were the state regulators and reserved funds to deal with the fallout? How would the states have come up with the $44 billion of federal tax dollars that had gone to shore up AIG Life Insurance subsidiaries who took risky bets through their securities lending programs that notably were approved by the state commissioners?
And a follow up question to that. What resources have been put in place subsequently by you and other state commissioners to oversee insurance subsidiary security funding program?
MR. MCRAITH: Right, thank you for that question because securities lending has come up and other comments as well. It's important to understand that the problem, first of all, that the New York department of insurance was working to reduce the level of securities lending in the AIG subsidiaries before the crisis.
The crisis, remember, was a result of the essentially, a collateral call on the AIG holding company resulting from the credit default swaps. This would not have been a problem, but for the CDS bill and it's also important to remember that the securities which were involved were AAA rated securities at the time. So it points to the need for better regulation of the credit default swap market. The --
REP. BEAN: So where would the ($)44 billion have come from?
MR. MCRAITH: Well, let me answer that. I'm going to get to that but I wanted -- 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 ($)44 billion, it's important to understand that each insurer, of course, has significant capital requirements to begin with. Their assets cannot be used to satisfy the debts of the holding company. Even if these subsidiaries, I think it's an open question also Congresswoman, whether if the -- without the ($)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 in cash immediately.
Insurance in the guaranty fund system essentially replace the contract. They don't have to -- in the coverage, they don't have to generate cash immediately. Because, of course, not every one 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 -- it would have protected the consumers, the policyholders first.
REP. 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 the policyholders. And again, it is those who oppose legislation to move towards a national charter who suggests 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.
REP. KANJORSKI: Thank you very much, Ms. Bean.
And now, the gentleman from Illinois, Mr. Manzullo.
REP. DONALD A. MANZULLO (R-IL): Thank you. I find it interesting that some of you there think that you can ask the federal government for so much and then in your own wisdom stop it. And then you'd be in a position later on, where you are 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 mean, 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, 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. Congress -- every state has adopted what we call the Holding Company Act. The Holding Company Act, along with our other financial regulations, requires each 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 that insurer, the life insurers for example, cannot release capital to the holding company to support the holding company without regulator approval.
REP. 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. The AIG financial -- the 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 and the jet company leasing -- 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.
REP. MANZULLO: So the life insurance side of AIG has always been sound in terms of -- you'd have to have all the insured, life insured 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.
REP. MANZULLO: Well, then why would anybody want to regulate the life insurance company on a federal level? How could it done any different, any better than what's been done in 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 and -- 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 misconduct of its principle, whether SEC didn't discover the misconduct of Mr. Madoff either. At the same --
REP. MANZULLO: And if I could stop you right there. That's my point. The SEC -- we had the man who -- the whistleblower, I can't think of his name right now. Markopolos testified that he had been screaming at SEC for five, six, seven years, and no one would listen. So the authority and the regulators were in place, they just failed to get rid of Madoff, and the same thing with the Federal Reserve.
Now you said, Mr. McRaith, that quote, "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 butt 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.
I mean, I find that astonishing. And Mr. Capuano has given you how 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 are 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 stop the 228 and 327 and making sure that people who took out loans could afford to buy them.
Now, we're expected to sit here and have a federal insurance regulator. Why? I mean, AOI, I am looking at your testimony here. You plead the Tenth Amendment on certain areas, and I can understand what you are 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 to answer, but if you want to hammer it, go ahead.
MR. BAIRD: Well, I'd like to try.
REP. MANZULLO: I owe that to you, go ahead.
MR. BAIRD: And I appreciate it.
REP. MANZULLO: If I could have some more time, Mr. Chairman.
MR. BAIRD: I'll take anything I think.
REP. MANZULLO: Thank you.
MR. BAIRD: I'll try to keep this in the context of the purpose of the hearing, which is systemic risk. If the chairman would indulge me, except (ph) for 30 seconds. I've been coming up here for seven or eight years long before AIG became the household name and long before there is 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. And 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've been talking about today is whether it's federal or whether it's state. In the past there had been failures of regulators on both sides.
And what I think the purpose of this hearing is, is to try to make it better, and is try to improve, and is trying to bring all of the risk on the entire financial services industry together to keep this from happening again, which given the amount of sleep that I've lost in the last eight 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.
REP. MANZULLO: That's a good answer. I appreciate that.
MR. BAIRD: Thank you.
REP. MANZULLO: Thank you. I did have another question, but I know I'm past my five minutes.
REP. KANJORSKI: Well, we will start another round and see if we can get another five minutes.
REP. MANZULLO: Okay, that'd be fine.
REP. KANJORSKI: Okay, the gentleman from Florida, Mr. Grayson.
REP. ALAN GRAYSON (D-FL): 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 systemic risk.
You're a panel of members that are here to represent the insurance industry, and I'd 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, I'll 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've provided.
REP. 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.
REP. GRAYSON: As a group do they pose systemic risk?
MR. MCRAITH: As a holding company, it's financial products division, which -- 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.
REP. GRAYSON: So what you're saying is that only the financial products section of AIG posed any systemic risk, not any of the insurance operations. And the financial products section was not an insurance operation in your view, is that correct?
MR. MCRAITH: According to the definition you provided of systemic risk, yes.
REP. 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. I think that on an aggregated basis, the insurance companies as a whole in the U.S. could if there were a natural catastrophe of significance or if -- in the event of a terrorist attack.
REP. GRAYSON: Well, that's an interesting point. So what you're saying it is not the scenario we saw with AIG, that wouldn't pose the kind of systemic risk you are talking about. What you are 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 are lost 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, the insurance companies in those events could be systemically at risk, correct.
REP. 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 to natural cats (ph) were appropriately managed, whether the aggregation of risks in urban areas were properly managed.
There's things they could try to do to improve the situation. But you are correct. It would -- depending on the situation there may not be much that could be done.
REP. 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've looked at it more in an aggregated basis.
REP. GRAYSON: All right. And I don't know if you 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.
REP. GRAYSON: As far as you know, would any other major entities go broke if your company went broke?
MR. SPENCE: No, sir.
REP. 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've thought about that a lot.
REP. GRAYSON: Well, no. What I'm asking you is are there any current companies in existence, including your own, that you believe pose systemic risk in a 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.
REP. GRAYSON: Okay. And going back to the previous answer, what you are 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 -- (cross talk) -- impact all companies.
REP. GRAYSON: Okay. 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.
REP. KANJORSKI: Thank you very much, Mr. Grayson.
We are going to try another round quickly, and those members who take their five minutes if they so desire, but they can certainly take less if they so desire.
I think I'll hold mine and pass over and go to my co-host here, Mr. Garret, New Jersey, for five minutes.
REP. GARRETT: And I'll just run quickly through because I don't want to hold 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 -- maybe disagree with you. Yeah, and my wife always says that. With regard to the AIG situation -- and you were running down this scenario with regard to who is looking at it. And of course, -- and Mr. Manzullo raised the issue, and Mr. McRaith, you made the comment, portions of the unit were overseas, in London specifically, right?
And I believe I've 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 was making, you are raising one as well as far as the European arm of it -- or looking at it, or maybe missing it as well. Just want to chime in on that?
MR. MCRAITH: I think the important point is that regulators need to have a formalized structure for information sharing, for communication, not because of the risk, because frankly, there are large companies who will present risk.
REP. GARRETT: Right.
MR. MCRAITH: It's to avoid the disruption. So the structure of the stability --
REP. GARRETT: Okay. But I guess and what I heard -- and Mr. Skinner, you can comment on that -- is -- was there failure also not only on the Federal Reserve part, not only on the federal regulators looking at AIG situation, but it 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'm 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 are inside the European Union in a market, an internal market.
You are now going to have to put your hands up and say, you are a group. If they had been a group, we will 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 ah, securitization was bad. I don't think that's true.
It's not rational either. So the reality is actually what went on was due to the derivatives market, and we know why, and indeed why it went bad in derivatives markets. But don't need to go there.
But if we're saying that AIG in the United States has to blame what went on in London for the failure of supervision, then I think that's taking a step too far. I think what we've got 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 propositions did it make in terms of trying to stop those investments with the Office of Thrift Supervision, who by the way rejected --
REP. GRAYSON: I appreciate that. I guess a lot of what we do here is to make the questions that other people have said, had we had different regulations in place, would we have prevented it -- the situation, and it would seem as though in certain cases maybe not.
And Mr. McRaith or Mr. Skinner, one rather quickly. You've 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'll call it the barebones, the basic OII legislation which does not have, as far as -- as I understand it, all the other regulatory aspect of it, basically just in OII, Office of Information -- Insurance and Information, and as far as 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 a moment from what I know, just a collection of information itself would not be enough.
REP. GARRETT: Okay. Thanks.
MR. SKINNER: I think what we are looking for is this to be the platform for further discussions and deliberations, and it's up to you where you go on this of course. What we want really is to examine what you are bringing in in terms of regulation, and then it has to have some bite at the national level.
REP. GARRETT: And I guess maybe the last question is, we see the dichotomy here between the two approaches. Mr. Capuano made the comment, I think, that he -- I don't want to put words in his mouth -- sort of sees the need for 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 can see a problem there indicative, right.
MR. BAIRD: Yes.
REP. GARRETT: So you would also see a problem then if Mr. -- if I understand Ms. Capuano, if you continue the -- those divided between the state and the federal. That with a 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 a -- or conflicting approaches of interests there, correct?
MR. BAIRD: That is correct too and besides the --
REP. 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 want your mother to own a committee.
They 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.
REP. GARRETT: So if we do -- if Obama comes out and he does nothing, let's say, with regard to insurance, if it's not on the table. But he does give us a systemic risk regulator, perhaps in the Federal Reserve let's say, and he also -- that's over here. And over here he has the consumer protection division in some other area. That would be -- and neither one of those permutations without -- that would be the division that would not work.
MR. BAIRD: If that includes insurance --
REP. GARRETT: Yes.
MR. BAIRD: If that includes insurance products --
REP. GARRETT: But it doesn't.
MR. BAIRD: -- in my opinion, and you have regulators with different agendas does not allow us to bring it together to serve the customer the best way.
REP. GARRETT: Nor will it work if you have, in your opinion of Mr. Capuano's approach, if we keep some level down here in the state and some up here on the federal.
MR. BAIRD: That's correct.
REP. GARRETT: Okay, thanks a lot.
REP. KANJORSKI: Thank you very much, Mr. Garrett.
Ms. Bean, five minutes.
REP. 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 the NAIC asks for 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's to supplement and support the state regulation.
So in that sense, as it develops -- as internationally they develop the standards, we support the development of those standards. And that's the measure by which we'll determine equivalency, by the way, is the development and compliance with international standards.
REP. 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 tried to drive uniformity across the states domestically, and has been unable to get all of the 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, though -- 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.
However, that system would not work, I think many legislatures would argue, in the Gulf States or on the Pacific Coast. So those differences, while they might present a system that the -- 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.
REP. BEAN: All right, I think 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've had some perennial problems on the 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, with as much as $40 billion worth of collateral held in states across the United States.
There has been a move to move towards the rating process. But that rating process in itself seems quite discriminatory with the higher ratings being required, very higher rating required for foreign companies and very much less, and so it seems, for domestic companies which we -- if you are operating in a global reinsurance market, business to business doesn't make much sense.
Obviously, I understand the necessity of covering risk. But we've just done away with collateral inside the EU, we think it's a blunt instrument. We now wonder why, you know, that that is still a cause célèbre here. Whenever the NAIC comes to the European Union and says this is what we are 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 are behaving and how they are predicting their risks, which is far more essential than how much money they have in the bank.
REP. BEAN: Thank you.
And my last question is for Mr. McRaith. In '99, NAIC chose to become a Delaware corporation. And at the time, the executive vice president of the NAIC, Cathy 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 the -- my colleagues on the panel to my left almost uniformly would oppose the release of collateral on reinsurance transaction.
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 products. 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.
REP. BEAN: I appreciate your response, and I yield back. Thank you.
REP. KANJORSKI: Thank you very much, Ms. Bean. You have no further questions.
You have further questions, Mr. Posey.
REP. 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. I appreciate it.
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, we have been so plundered and abused by the reinsurers that have done business in some of our states all of whom hadn't had the exact same rates that you'll see some of the states are dropping those requirements.
More than protection, I assume 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 in 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've come the furthest Mr. Skinner and might have the best idea of one though, how in the world, could we expect a systemic regulator to regulate derivatives, complex derivatives?
I mean, from a practical application, I've not heard anyone yet explain how somebody could evaluate them and then regulate them. I mean, in theory we say, yeah, 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 that was 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 specific products.
You also have the combination of Chinese rules 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 that we've done at European level, certainly amongst banks, is we've 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.
One of the things was that there was no originator principle on derivatives. So we just introduced the law, the credit, capital requirements that is -- in banks, to ensure that up to five 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.
And you probably have heard about it already, that it 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 got 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 in the market.
REP. POSEY: Okay.
MR. MCRAITH: Congressman, may I --
REP. POSEY: Mr. McRaith.
MR. MCRAITH: Yes, I think you are asking the million dollar more than -- the multibillion 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've seen and are suffering through now.
MR. BAIRD: Mr. Posey, may I?
REP. POSEY: Yeah, please.
MR. BAIRD: I actually wanted to come back to your reinsurance comment, but I'll be glad to defer to someone if they were responding to your comment about credit default swaps first.
REP. POSEY: Thank you.
MR. MCCARTHY: I'd just like to make one point. 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 the leverage. And the huge number of transactions that they did and the leverage that was embedded in each one.
It's critical and it would be interesting to see what 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 -- the more it came to what the Fed does than what Eric Dinallo or one of the state regulator would be able to do with staff analysis, and be able to stand on top of that particular kind of financial instrument.
REP. POSEY: So does anyone think that the people that 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 that --
I mean, I don't believe in the Tooth Fairy or the Easter Bunny, and I don't believe we are going to create something like that either. I mean, if I'm wrong, somebody tell me why you think that's really a practical idea that we are going to get somebody that's that expertise that they are going to be able to evaluate the derivatives, the complex derivatives that are throughout the financial markets.
Then -- and they are going to work for the government, they are going to be able to tell us, which are smart, and which are dumb, and which are going to 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 that can happen.
MR. MCRAITH: Congressman, as the one public sector employee on this panel, I'd like to offer this perspective that there are many very smart, bright, committed regulators who sacrifice short-term compensation so that they can provide a contribution to the greater society.
REP. POSEY: Well, and I -- we are going into new order here now. And I think with what we've already discussed that 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, is the best example I can think of.
But to start this from scratch, this new bureaucracy that's going to solve all these problems, I think, is just an unrealistic expectation.
I'm not saying that there is not good people that work for government. I'm saying that the level of expertise that's 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've talked about that before. We've thought about that before that, you know, if you have a derivative, you file the 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's an implied value to that that an unwary consumer who is -- who we are trying to look out for might not understand.
And thank you for -- I think you gave some extra time, Mr. Chairman. I appreciate it.
MR. SPENCE: Mr. Chairman, if I might comment -- 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's contributed an enormous amount of money through refinancing after 9/11, after Hurricanes Katrina and Wilma, after the hurricanes last year. Really it's been a very responsible market in paying its claims.
REP. 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 rates in my state, which seemed a little coincidental.
REP. 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 the members to submit written questions to these witnesses and place their responses in the record.
Before we adjourn, the following written statements will be made part of the record of this hearing, the Center for Insurance Research, the Property Casualty Insurance Association of America, and the CEA, a trade Association of European insurers. Without objection it is so ordered. (Sounds gavel.)
I want to thank this panel for their contribution today. And thanking all the -- we did it in three hours. It was pretty good and maybe next time we can keep this for five.
It will be another opportunity to visit with Mr. Skinner. We'll call him over here, we'll enjoy that. I think that we gained a lot from the international exposure of having Mr. Skinner's part of panel, but all of the participants on the panel were -- extraordinarily contributed today.
And I think even the greatest doubters on this 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 --
REP. GARRETT: Well, before you adjourn, just to enter something into the record.
REP. KANJORSKI: All right.
REP. GARRETT: Okay. From the AIA letter of June 5th to Larry Summers.
REP. KANJORSKI: So ordered.
REP. GARRETT: (Cross talk) -- didn't mean to hold you up for the extra 30 seconds, but I did want to make sure that that gets into the official record as well, thank you.
MR. : Thank you, Mr. Chairman.
REP. KANJORSKI: Thank you. (Sounds gavel.)