[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

INSURANCE OVERSIGHT AND
LEGISLATIVE PROPOSALS

=======================================================================

HEARING

BEFORE THE

SUBCOMMITTEE ON
INSURANCE, HOUSING AND
COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

NOVEMBER 16, 2011

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-84

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

Larry C. Lavender, Chief of Staff
Subcommittee on Insurance, Housing and Community Opportunity

JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice LUIS V. GUTIERREZ, Illinois,
Chairman Ranking Member
GARY G. MILLER, California MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin BRAD SHERMAN, California
ROBERT J. DOLD, Illinois MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio

C O N T E N T S

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Page
Hearing held on:
November 16, 2011............................................ 1
Appendix:
November 16, 2011............................................ 29

WITNESSES
Wednesday, November 16, 2011

Lanza, Michael H., Executive Vice President and General Counsel,
Selective Insurance Group, Inc., on behalf of the Property
Casualty Insurers Association of America (PCI)................. 10
Monroe, Steven M., Chief Compliance Officer, U.S. & Canada, for
Marsh, Inc., on behalf of the Council of Insurance Agents &
Brokers........................................................ 11
Schwarcz, Daniel, Associate Professor, University of Minnesota
Law School..................................................... 13
Torti, Joseph III, Deputy Director and Superintendent of
Insurance and Banking, Rhode Island Department of Business
Regulation, on behalf of the National Association of Insurance
Commissioners (NAIC)........................................... 3

APPENDIX

Prepared statements:
Lanza, Michael H............................................. 30
Monroe, Steven M............................................. 37
Schwarcz, Daniel............................................. 53
Torti, Joseph III............................................ 63

Additional Material Submitted for the Record

Biggert, Hon. Judy:
Written statement of the Independent Insurance Agents &
Brokers of America......................................... 89
Letter from the National Association of Mutual Insurance
Companies.................................................. 91
Letter from the National Association of Professional Surplus
Lines Offices, Ltd......................................... 94
Letter from Nationwide Mutual Insurance Company.............. 95
Written statement of the National Conference of Insurance
Guaranty Funds............................................. 96
Letter from the National Conference of Insurance Legislators. 103
Written statement of the National Organization of Life and
Health Insurance Guaranty Association...................... 105
Letter from the Risk and Insurance Management Society, Inc... 123
Dold, Hon. Robert:
Written responses to questions submitted to Joseph Torti..... 125

INSURANCE OVERSIGHT AND
LEGISLATIVE PROPOSALS

----------

Wednesday, November 16, 2011

U.S. House of Representatives,
Subcommittee on Insurance, Housing
and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Judy Biggert
[chairwoman of the subcommittee] presiding.
Members present: Representatives Biggert, Hurt, McHenry,
Westmoreland, Duffy, Stivers; Velazquez, Sherman, and Capuano.
Also present: Representatives Green and Moore.
Chairwoman Biggert. The Subcommittee on Insurance, Housing
and Community Opportunity will come to order. I hope that we
will have some more Members. Maybe it is a rainy day, and it is
taking some time to get here. Without objection, all Members'
opening statements will be made a part of the record, and I
will begin.
Good morning, everyone, and welcome to this hearing. This
is the third in a series. I welcome today's witnesses. Today,
the subcommittee will examine insurance regulation and three
discussion draft legislative proposals. These draft proposals
amend provisions in the Dodd-Frank Act in Titles I, II, and V,
and specifically address: one, the authority of Federal
entities to collect data from insurers; two, the FDIC's Orderly
Liquidation Authority (OLA) as it relates to insurance
companies; and three, the Federal Reserve's authority to
potentially subject some insurers to heightened prudential
standards.
Regulatory uncertainty created by the Dodd-Frank Act has
unnecessarily extended into the U.S. insurance market in ways
that will raise costs for consumers, harm businesses, and
weaken job growth. I say ``unnecessarily'' because as I have
said many times before, for over 150 years the State-based
system of insurance regulation has worked and endured, even
during turbulent economic times. It has allowed the U.S.
insurance industry to become a growing and vibrant source of
financial security for millions of Americans. It has allowed
one sector of our economy to provide 2.3 million wage and
salary jobs. The McCarran-Ferguson Act of 1945 maintained the
States' regulatory authority over insurance unless a Federal
law expressly provides otherwise, such as flood and terrorism
insurance.
Unfortunately, certain provisions of the Dodd-Frank Act
have intentionally or unintentionally upset this well-
functioning, proven system of regulation. This subcommittee has
heard from many witnesses and stakeholders to that end.
Insurers have said that they are not expanding their companies
and creating jobs, consumer costs may rise, and they may become
less competitive abroad.
And finally, I would like to express my sincere
disappointment that representatives from the Federal Reserve
and the FDIC decided not to testify at today's hearing, which
is addressing significant provisions of the Dodd-Frank Act that
their agencies are primarily responsible for implementing.
With that, I welcome input from all members of the
committee on these discussion drafts, and I would yield to
someone on the other side, but they are not here.
Mr. Westmoreland, would you like to give your opening
statement now? You are recognized for 2 minutes.
Mr. Westmoreland. Thank you, Chairwoman Biggert, for
holding this hearing.
Since Dodd-Frank passed, all we have seen is the
uncertainty and the harm this law has brought to working
Americans and small businesses. The proposals before the
committee today are much needed to help insurance companies get
out from under Uncle Sam and allow States to continue their
long-standing insurance regulation.
Like the chairwoman, I, too, have serious concerns that the
FDIC and the Federal Reserve refused to testify at today's
hearing. When Congress asks an agency to testify, I think they
should come, period. So my question to the FDIC and the Federal
Reserve is, what are you hiding or what are you ashamed to
testify to?
I urge the chairwoman to hold another hearing and mandate
the FDIC and the Federal Reserve to attend so that we can find
out what they have to say about this issue, and with that,
Madam Chairwoman, I yield back.
Chairwoman Biggert. The gentleman yields back, and we will
take that under advisement. Thank you. The gentleman from
Virginia, the vice chair, is recognized for 1 minute.
Mr. Hurt. Thank you. Thank you, Madam Chairwoman. I want to
thank you for your leadership on issues relating to the
business of insurance.
Today marks the third in a series of hearings that this
subcommittee has held to assess the impact of the Dodd-Frank
Act on insurers. As we have seen, Dodd-Frank contains a number
of provisions that impose unnecessary duplicative regulatory
burdens on insurers that have the potential to harm both the
industry and consumers. We must be mindful of the cumulative
effect of adding new Federal regulatory requirements to
existing State insurance regulatory schemes. Witnesses at our
previous hearings have demonstrated that excessive and
unnecessary regulation of insurance will only restrict consumer
choice, inhibit the growth of free and open insurance markets,
and drive up costs on consumers in my district, Virginia's
Fifth District, and across the country.
The discussion drafts we are examining today take steps to
alleviate these regulatory burdens by proposing commonsense
reforms that reduce duplication without sacrificing consumer
protection or increasing systemic risk.
Again, I want to thank the Chair for holding this hearing.
I look forward to our witnesses' perspectives on the draft
legislation, and I yield back my time.
Chairwoman Biggert. Thank you. The gentleman from Texas,
Mr. Green, do you have an opening statement?
Mr. Green. Madam Chairwoman, thank you so very much. I will
pass at this time, and I look forward to hearing the testimony.
Thank you.
Chairwoman Biggert. With that, we have two panels today.
For our first panel, we are happy to have Mr. Joseph Torti,
deputy director and superintendent of insurance and banking,
Division of Insurance, Department of Business Regulation, State
of Rhode Island, on behalf of the NAIC, the National
Association of Insurance Commissioners. Thank you so much for
being here.
Without objection, your written statement will be made a
part of the record, and you are now recognized for a 5-minute
summary of your testimony.

STATEMENT OF JOSEPH TORTI III, DEPUTY DIRECTOR AND
SUPERINTENDENT OF INSURANCE AND BANKING, RHODE ISLAND
DEPARTMENT OF BUSINESS REGULATION, ON BEHALF OF THE NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

Mr. Torti. Thank you for the opportunity to testify today.
My name is Joseph Torti, and I am superintendent of insurance
for Rhode Island. I present this testimony on behalf of the
NAIC. To be clear, the NAIC has no position on the Dodd-Frank
Act or any current legislative proposals to modify it.
Today, I will cover the unique characteristics of
insurance, an overview of the key aspects of insurance
regulation, and the NAIC's efforts in working with Federal
agencies as they implement Dodd-Frank.
Insurance products are fundamentally different from other
financial products. The very nature of insurance significantly
reduces the potential of a run-on-the-bank scenario.
Importantly, insurance products do not transform short-term
liabilities into longer term assets. A key reason many other
financial firms suffered during the financial crisis was that
the duration of their assets and liabilities were not matched.
The insurance regulatory framework's fundamental tenet is
to protect an insurer's ability to pay policyholder claims.
Regulators have broad authority to identify and address issues
before they become a threat to solvency. The foundation of this
system is the detailed and transparent reporting requirements.
Insurers are required to prepare comprehensive financial
statements using the NAIC's statutory accounting principles, or
SAP. SAP utilizes the framework established by GAAP, but unlike
GAAP, which is primarily designed to provide key information to
investors of public companies, SAP is designed to assist
regulators in monitoring the solvency of an insurer.
Financial statements are filed with the NAIC on a quarterly
and an annual basis. The NAIC serves as the regulators'
centralized repository for this data, and this capability has
been cited by the IMF as world leading. We utilize this
information as part of our intensive financial analysis. The
NAIC also compiles the information to advise us of trends in
the insurance sector and the impact of external events. The
information is also used in our risk-based capital framework.
This framework requires an insurer to hold at least a minimum
amount of capital based on the risks on its balance sheet. The
framework also includes authority for successive levels of
regulatory intervention.
In the unlikely event that an insurer becomes troubled,
State receivership laws provide regulators authorities to
prevent insolvencies and to provide protection to
policyholders. In 2004, we utilized our broad authority in
Rhode Island to place a troubled insurer into rehabilitation,
preventing its insolvency while ensuring full payment to
policyholders.
In an insolvency, State laws give policyholders priority
over most creditors. In cases where the assets of an insurer
are insufficient to pay claims, the States have guaranty funds
to serve as a backstop for most insurance products. Together,
receivership laws and the guarantee funds ensure that
policyholders are protected and troubled insurance companies
are resolved in an orderly manner.
The NAIC has a long history of working closely with the
Federal agencies, and this has continued during Dodd-Frank
implementation. State insurance regulators are represented on
FSOC through John Huff, the Missouri director of insurance. In
the recently released FSOC guidance, we were pleased to see a
commitment to involve regulators of any insurance companies
under consideration early in the process. We are currently
reviewing the guidance and will provide our comments through
Director Huff. We also continue to encourage the FSOC to enable
Director Huff to consult with us regarding other aspects of its
work that could impact insurance.
The NAIC has also been engaged in the implementation of the
FDIC's new resolution authority. We have met with the FDIC and
commented on proposals regarding the circumstances in which the
FDIC can take a lien on insurance company assets. We also
requested that the FDIC allow for the resolution of any mutual
insurance holding companies pursuant to State laws. The NAIC's
coordination with the FDIC will be critical to ensuring that
policyholders are protected.
Our strong relationship with the Federal Reserve has grown
since the passage of Dodd-Frank. Insurance regulators are
meeting with Federal Reserve representatives to exchange
information and to discuss how we will work together as it
implements its new authorities.
The NAIC also continues to engage directly with the FIO as
it takes shape. FIO has a critical role to play in
international matters. The NAIC will continue to serve as the
voice of insurance regulators on these key issues, but the
voice of the U.S. Government is essential, so we look forward
to partnering with the FIO in demonstrating a united front
whenever possible. Dodd-Frank requires the FIO to issue a
report on insurance regulation by January 2012. State insurance
regulation has been subject to Federal scrutiny many times
before, focusing primarily on the perceived costs and
redundancy of the system. Rarely have these issues been weighed
against the strength of our system's checks and balances that
help the insurance sector weather the financial crisis far
better than others. We look forward to meeting directly with
the FIO to encourage a balanced view as it finalizes its study.
In conclusion, the NAIC continues to advocate that the
unique nature of insurance and its strong system of regulation
be recognized. We look forward to continuing to work with you
and our fellow financial regulators. Thank you, and I look
forward to your questions.
[The prepared statement of Superintendent Torti can be
found on page 63 of the appendix.]
Chairwoman Biggert. Thank you so much, and with that we are
going to move to the questions. Members will have 5 minutes
each to ask questions, and I will begin with myself and yield
myself 5 minutes.
Mr. Torti, during the subcommittee's October 25th hearing
with regard to the Federal Insurance Office (FIO) authority
under the Dodd-Frank Act to issue a subpoena to collect data
directly from an insurance company, FIO Director McRaith said
that the possibility of actually issuing a subpoena to collect
information is extremely unlikely.
Can you envision any scenario where the FIO or the Office
of Financial Research would need to issue a subpoena to collect
data directly from an insurance company aside from the data
that can be secured from State regulators, public sources, or
any other entity? What kind of data would the FIO or the OFR
need to collect?
Mr. Torti. What I can say about that is that we, as State
regulators, collect an extensive amount of data on insurance
companies. We have every piece of financial data that is
necessary to regulate these companies, and I can't really
envision a scenario where the Federal regulators may need
something regarding the financial condition of an insurance
company that we don't already have, and we are very happy to
share any of that information. Anytime we have been requested
to provide information to any of the Federal agencies, we have
done so without hesitation.
Chairwoman Biggert. Thank you. And then on page 8 of your
written testimony, you state that regulators have requested
that the FDIC allow for the resolution of any mutual insurance
holding company pursuant to State insurance receivership laws
as the statute is unclear in this regard. The discussion draft
number 2 under consideration by the subcommittee today aims to
provide this clarity with regard to mutual insurance holding
companies.
Do you think that the Dodd-Frank Act lacks clarity about
whether they are covered by the insurance company definition
for purposes of the FDIC's Orderly Liquidation Authority?
Mr. Torti. We do think that the intent of the legislation
is clear and that it is not intended that mutual insurance
holding companies be subject to the resolution authority of the
FDIC, and we have been working with the FDIC, we have had
several conference calls with the FDIC, and we met with them as
recently as early November, just before the recent NAIC meeting
in National Harbor, Maryland. So we have worked very closely
with them, and we are hopeful that any rule that comes out will
clarify that mutual insurance holding companies--
Chairwoman Biggert. Can you elaborate on why State
regulators have requested that the States resolve a failed
mutual insurance holding company?
Mr. Torti. Right now, under the State laws regarding
receivership, mutual insurance holding companies are included
in the receivership estate, so the assets of the mutual
insurance holding company are available for the policyholders
and claimants of that insurance company in that receivership.
So it is important that that holding company be resolved in
accordance with the State insurance receivership laws in order
to protect those policyholders.
Chairwoman Biggert. Okay. So you would say that the States
are better equipped and experienced to be able to resolve the
matter?
Mr. Torti. I would say that the States are well equipped to
resolve insurance company matters.
Chairwoman Biggert. Okay. Then, thirdly, why can't a bank
model for regulation work for insurance companies? Is there a
difference in the way that State insurance regulators establish
leverage and risk-based capital requirements for insurance
companies as compared to the way that the Federal bank
regulators establish leverage and risk?
Mr. Torti. Banking products and insurance products are very
different. Insurance policyholders pay a premium, and insurers
make a promise to pay in the future. It is much different,
especially in the property and casualty area, than a financial
product that might be offered by a banking institution. The
chance of a run-on-the-bank type scenario with an insurance
entity is much less than with a banking entity. The liabilities
and assets are appropriately matched in insurers. If a company
is selling long-term type insurance, they match their assets
with that long-term insurance. That is one of the key things
that insurance companies do and that regulators ensure is done
appropriately, especially in the area of life insurance.
So, they are very different products. There is a very
different regulatory standard, and we believe that we
appropriately regulate insurers.
Chairwoman Biggert. Thank you. My time has expired. The
gentleman from Texas is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman, and I thank the
witness for testifying. As you know, we had great difficulty
with some of the ``too-big-to-fail'' institutions when we were
going through the financial crisis. One such institution was
AIG. It had financial components, but there were also many
other things that were contained within the network that AIG
had. In fact, there are some who contend that AIG may have been
the glue that was holding everything together simply because
they were so vast and so pervasive in the institutions that
they covered.
My question to you has to do with Orderly Liquidation
Authority. The Orderly Liquidation Authority that we have in
Dodd-Frank allows the FDIC to intervene and to do what is
necessary under exigent circumstances, I would consider it
exigent circumstances. I think what happened with AIG was under
exigent circumstances. How would this occur differently today
if we had--God forbid, and I would never want it--another AIG
to contend with?
Mr. Torti. I hope I understand your question. Are you
saying as a result of the Dodd-Frank changes that have been
made, what would be done differently?
Mr. Green. How would the States respond to the FDIC
handling exigent circumstances comparable to AIG during the
financial crisis?
Mr. Torti. The traditional way that we would handle that
type of thing is we try to create a wall around the insurance
entity to protect the insurance entity and the insurance
entity's policyholders from those circumstances so that the
insurance policyholders and claimants aren't made to pay for
the problems outside the insurance entity. That is normally the
way that we protect an insurance entity in a receivership
situation. So if there were a holding company issue or a
significant affiliate outside of the insurance entity that had
financial difficulties, we would protect the insurer from those
financial difficulties through the current receivership laws
that we have in all the States.
Mr. Green. In essence, are you saying that you would be
able to work within the confines of Dodd-Frank and with the
FDIC so as to perfect an orderly liquidation?
Mr. Torti. We really hope we don't end up in that situation
again.
Mr. Green. Obviously, yes, I concur.
Mr. Torti. But, yes, we believe we should be able to work
with the FDIC. We are hopeful that we will be able to work with
the FDIC. We have a very good relationship with the FDIC. The
FDIC has acknowledged that protection of the policyholders and
claimants of the insurance entity is of utmost importance to
us, and we believe that we should be able to work with them on
that type of circumstance.
Mr. Green. Are there any technical changes to the draft we
have that you would recommend to help to facilitate this?
Mr. Torti. I can't think of any technical changes that I
would offer to the current draft that you have, no.
Mr. Green. Thank you, Madam Chairwoman. I will yield back.
Chairwoman Biggert. The gentleman from Virginia, Mr. Hurt,
is recognized for 5 minutes.
Mr. Hurt. Thank you for your testimony today. We have heard
from the FIO Director, as you know, and certainly some of the
concerns that come to my mind as we look at the defining role
that office will play, clearly having more information is a
good thing, it seems to me, to help the regulators have a ``big
picture'' view of systemic risk and how that ultimately affects
the taxpayer. I do have some concerns, though, about the
proverbial ``camel's nose under the tent,'' and I was wondering
if you could speak to that. Obviously, I think of it from two
standpoints. One is what is the worst case scenario if we have
this authority and suddenly it grows and grows and grows, and
the next thing you know you have Federal regulations competing,
Federal regulatory structure competing with the State
regulatory structure. It seems by all accounts to be very
successful. I think you have spoken to that. But it is hard for
me to look at the examples we have here in Washington where
Washington has restrained itself. It is very hard to see any
examples of that, and so I guess that is a concern for me. I
was wondering if you could speak to that, and then also maybe
speak to the issue of the data collection because clearly the
State regulators will cooperate fully, and I don't have any
concern about that, but I can see how if there is an additional
burden for data collection put on the insurers that suddenly,
the cumulative effect makes it more and more expensive to do
business, and those costs get passed on to the consumer.
So I was wondering if you could just speak generally to
those two things, and I again thank you for your testimony.
Mr. Torti. Sure, and I thank you all for your support of
the State system and your kind remarks on how well the State
system does work. We are very proud of the system, and we think
it does work well to protect policyholders and claimants.
With respect to the FIO and the ``nose under the tent''
issue, I think Dodd-Frank is very clear that the FIO is not an
insurance regulator, and I think Director McRaith has
acknowledged that the FIO is not an insurance regulator, so I
can't say that I am not worried that eventually someone might
try to, I guess, compete with the State system of regulation,
but I don't--we have not had any indication from the FIO or any
of the other Federal agencies that they would do anything
inconsistent with the State system of regulation or anything
that would in any way interfere with the current regulatory
system the way it is now.
With respect to data collection, we do have very robust
data collection, and we do extensive analysis of that data. It
allows our examiners to do constant financial analysis of every
insurance company out there. The statements are hundreds of
pages. You can get details of any securities that are on the
statements of any insurance company that files an NAIC
statutory blank. There are details on reinsurance that are
extensive. There are details on loss reserves that are
extremely extensive. I cannot think of any information
regarding the individual insurance entities or financial
information that we don't have in our world class database, so
I would hope that it would not be necessary to request any
information at all directly from insurers that we don't have.
It is very clear that we have anything that--over the 150 or so
years that we have regulated insurance, I think we have
developed a system that captures everything you could possibly
need to regulate these entities.
Mr. Hurt. Thank you, and thank you, Madam Chairwoman, I
yield back my time.
Chairwoman Biggert. The Chair recognizes the gentlelady
from New York, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman. Mr. Torti,
regulation of the insurance industry takes place primarily at
the State level, but as we learned from the collapse of AIG,
large firms can become systematically important and accelerate
the collapse of the financial system.
In your opinion, does any one State have the resources to
monitor and protect the whole country from systematically
important insurance companies?
Mr. Torti. Let me just answer that by saying it is hard to
imagine the insurance enterprise, the insurance company itself
posing a systemic risk. Just the way that insurance--
Ms. Velazquez. It is hard to imagine?
Mr. Torti. The insurance business itself. There could be
entities, as we saw in AIG, outside the insurance enterprise
that may pose a systemic risk, but the business of insurance is
a little different than that. It is very hard to imagine that a
single insurance company could pose a systemic risk. What
happens at one insurance company usually does not carry over to
the next insurance company. There is a promise to pay in the
future that an insurer makes, and it is very difficult to
imagine something that could occur.
Ms. Velazquez. So you are telling me that the collapse of
AIG didn't send shock waves throughout the--
Mr. Torti. It absolutely did send shock waves, but that was
the financial services division of AIG that did collapse.
Ms. Velazquez. So you don't see any role for the Federal
Government at all in terms of having to deal again with a
collapse like AIG to prevent a direct effect across-the-board
throughout the insurance system?
Mr. Torti. I did not mean to imply that there was no role
for the Federal Government.
Ms. Velazquez. Okay.
Mr. Torti. What I did mean to say is that insurance
regulators, State insurance regulators are fully capable of
regulating insurance enterprises. There may be--I am sorry.
Ms. Velazquez. Okay, thank you. Mr. Torti, discussion draft
number 2 will prohibit the FDIC from obtaining a lien on a
failed insurance company's assets without the written consent
of the company's State regulator. How are taxpayers and the
public better protected by forcing the FDIC to seek permission
from State regulators during the orderly dissolution of a
failed firm?
Mr. Torti. First of all, I want to make clear the NAIC does
not take a position on any of the pieces of legislation.
However, the job of the State regulator is to ensure that the
policyholders and claimants of that insurance enterprise are
protected, and if we are not able to have any type of say in
what happens to those policyholders and claimants of the
insurance enterprise, and the State scheme of regulation
includes receivership laws that are intended to protect
policyholders of that insurance enterprise, we just need to
preserve that role as the regulator of insurers in order to
protect those policyholders.
Ms. Velazquez. Okay. Thank you, Madam Chairwoman.
Chairwoman Biggert. Thank you. Just for the record, Mr.
Torti, wasn't AIG's holding company a thrift?
Mr. Torti. It was, and it was actually regulated by the
Office of Thrift Supervision, yes. It was not an insurance
entity.
Chairwoman Biggert. Thank you. I see no further questions,
and so we would thank you for your testimony, and thank you for
being here. The Chair notes that some Members may have
additional questions for you which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to you and
to place your responses in the record. Thank you so much.
Mr. Torti. Thank you very much.
Chairwoman Biggert. And with that, I will call up the next
panel. Thank you all for being here.
I would like to welcome the second panel. We have today:
Mr. Michael Lanza, EVP and general counsel, Selective Insurance
Group, on behalf of the Property Casualty Insurers Association
of America; Mr. Daniel Schwarcz, associate professor,
University of Minnesota Law School; and Mr. Steven Monroe,
chief compliance officer, U.S. and Canada, for Marsh,
Incorporated, on behalf of the Council of Insurance Agents and
Brokers.
I seem to have mixed up the names, but we will proceed with
Mr. Michael Lanza. You are recognized for 5 minutes for your
testimony.

STATEMENT OF MICHAEL H. LANZA, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, SELECTIVE INSURANCE GROUP, INC., ON BEHALF OF
THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

Mr. Lanza. Thank you. Chairwoman Biggert, and subcommittee
members, thank you for the invitation to testify. I am Michael
Lanza, executive vice president and general counsel of
Selective Insurance Group. Selective is an insurance holding
company with seven property and casualty insurance
subsidiaries. I am also testifying on behalf of the Property
Casualty Insurers Association of America, which has over a
thousand members and the broadest membership of any national
insurance trade association.
Selective and PCI strongly support the discussion drafts
you are considering to clarify the treatment of insurers under
various provisions of the Dodd-Frank Act. Home, auto, and
business insurers did not cause the financial crisis and are
not systemically important to the financial markets.
There are five key reasons why P/C insurers are not
systemically risky: one, they have low financial leverage; two,
they are not highly connected with other financial firms;
three, they are in a highly competitive market with low
individual company market penetration; four, they have low
failure rates and, through State guaranty funds, have their own
effective resolution authority; and five, and most importantly,
P/C insurers do not sell products that can result in a run on
the bank.
In Dodd-Frank, Congress generally recognized the
distinctions between non-risky P/C insurers and other types of
financial firms that can pose systemic risk. Some fine tuning
needs to be done to make those distinctions even clearer. That
is why Selective and PCI support the proposed amendments. We do
not believe that the proposals in any way scale back any powers
that Dodd-Frank granted Federal agencies to regulate the types
of risky activities that gave rise to the financial crisis.
The discussion drafts propose technical amendments that
clarify Dodd-Frank's application to insurers. These changes
will reduce the potential for unintended intrusions on State
regulatory authority and other unintended consequences.
I want to comment in particular on four areas that the
discussion drafts address. First, we are concerned that Dodd-
Frank's provisions ensure the confidentiality of nonpublic
information provided to the Federal Insurance Office, but they
may not protect that information when the FIO shares it with
other agencies such as the Office of Financial Research or the
Financial Stability Oversight Council. The discussion drafts
tightens those provisions so information will not lose its
confidentiality when it is shared with various agencies and
regulators.
Second, Dodd-Frank gave the FIO subpoena powers that are
much broader than those of other Treasury agencies. Typically,
Federal agencies have subpoena power to further their primary
regulatory role in conducting formal administrative proceedings
or civil, criminal or Inspector General investigations. FIO,
however, does not have a primary regulatory role. That remains
with the States. FIO does not need subpoena power when State
regulators already have that power.
Moreover, Dodd-Frank requires the FIO to get information
from State regulators. We believe State regulators and the FIO
can and will work together cooperatively and successfully to
obtain needed information. By giving FIO, a non-regulator,
subpoena powers duplicating the principal State regulators,
there is a significant likelihood of redundant, costly, and
burdensome data calls, and those costs will ultimately be borne
by consumers.
Third, Dodd-Frank gives Federal regulators the power to
resolve failing financial companies. P/C insurers, however, are
already subject to State insolvency mechanisms, including
guaranty funds that protect the consumers. Dodd-Frank permits
the FDIC to take a lien on the assets of financial companies,
but it does not exempt insurance companies. The discussion
drafts requires the written consent of the insurer's
domiciliary regulator before the FDIC can place a lien on
insurer assets. This ensures that insurer assets cannot be used
to shore up non-insurance affiliates, only policyholders. Dodd-
Frank also gives the FDIC the ability to assess insurers for
the resolution costs of non-insurance financial firms. This
provision creates inequity between insurers and non-insurers
and leads to the possibility that insurers could be doubly
assessed. The discussion draft addresses this inequity.
Finally, Dodd-Frank gives the Federal Reserve the power to
impose heightened prudential standards on firms that are found
to be systemically important. The discussion draft requires the
Federal Reserve to take into account State insurance regulatory
and accounting procedures, including risk-based capital, and
prevents regulatory conflicts between the Fed and the States.
For these reasons, we strongly urge that these discussion
drafts be introduced and adopted. Thank you.
[The prepared statement of Mr. Lanza can be found on page
30 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Lanza. Mr. Monroe, you
are recognized for 5 minutes.

STATEMENT OF STEVEN M. MONROE, CHIEF COMPLIANCE OFFICER, U.S. &
CANADA, FOR MARSH, INC., ON BEHALF OF THE COUNCIL OF INSURANCE
AGENTS & BROKERS

Mr. Monroe. Good morning. I am Steve Monroe, chief
compliance officer for Marsh in the U.S. and Canada, on behalf
of the Council of Insurance Agents and Brokers, which
represents the Nation's leading insurance agencies and brokers,
including Marsh. I would like to thank you for the opportunity
to address the implementation of the insurance provisions of
Dodd-Frank.
Council members employ more than 120,000 people and
annually place more than 80 percent, over $200 billion, of all
U.S. products and services. Marsh, a unit of Marsh & McLennan
Companies, is the world's leading insurance broker and risk
adviser, with over 25,000 employees in over 100 countries. My
written statement has addressed why the Council supports the
legislation that will clarify the intent of Congress in
enacting Dodd-Frank, but excluding the insurance sector from
the FDIC resolution authority and from the so-called Volcker
Rule.
I will focus the remainder of my statement on the States'
implementation of the Dodd-Frank reforms known as the
Nonadmitted and Reinsurance Reform Act, or NRRA, and address
three issues that are most problematic right now.
The first major concern is the vastly different approaches
States have taken to tax surplus lines transactions. The NRRA's
taxation provisions are based on the concept of home State
rule. Only the home State of the insured has the ability to tax
surplus lines premiums. The Federal law permits but does not
require States to allocate taxes amongst themselves in
accordance with a multi-State agreement or compact.
The States are currently taking five different approaches.
A number of States are taxing and keeping 100 percent of the
taxes based on their own tax rate. This is the preferred
approach of Council members. Some States are taxing a surplus
lines transaction based on proportion of the insured exposure
in each State, based on each State's tax rates, but they keep
100 percent of the tax. Other States have taken no action at
all, which means they are only taxing that portion of the risk
in their State. Other States have chosen to allocate, using one
of the two methods, either NIMA or SLIMPACT. However, neither
agreement is operational yet, leaving it to the brokers to
figure out how to calculate, collect, and pay the taxes
applicable in those States.
The second major concern is that on January 1, 2012, at
least 11 States will require brokers to use the unworkable NIMA
allocation formula. It requires allocation of all casualty
lines, including lines for which brokers have no information
regarding the location of the risk. However, there is an
alternative that was adopted by the SLIMPACT States which takes
a more rational approach for casualty and property lines.
The third cause of concern is the potential for double
taxation of international risks under the surplus lines policy.
Since the enactment of the NRRA, a number of States are
considering taxing non-U.S. risks. And at least two
jurisdictions have already enacted practices to do just that.
This goes against the letter and the spirit of the NRRA and
could subject policyholders to double taxation, which may
violate the Due Process Clause of the U.S. Constitution.
Moreover, the collection of taxes on non-U.S. risks has the
potential to unfairly expose insurance producers and
professionals to liability claims from insureds who, after
being told by the producer to pay premium taxes to their home
State based on 100 percent of the exposure anywhere in the
world, are informed by a foreign jurisdiction that such
payments are insufficient to satisfy their tax liabilities.
In conclusion, despite congressional intent, the States
have not devised a single uniform approach to the collection
and allocation of premium taxes for non-admitted insurance.
Instead, the States have gone beyond and devised multiple
approaches that are confusing and cause compliance headaches.
We hope the situation will improve, but once again the States
have demonstrated they will not modernize insurance regulation
without Federal pressure, and even then they will not do it
easily.
Thank you for taking my testimony and thank you for your
continued interest in our industry.
[The prepared statement of Mr. Monroe can be found on page
37 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Monroe.
Mr. Schwarcz, you are recognized for 5 minutes.

STATEMENT OF DANIEL SCHWARCZ, ASSOCIATE PROFESSOR, UNIVERSITY
OF MINNESOTA LAW SCHOOL

Mr. Schwarcz. Thank you very much for the opportunity to
testify to this subcommittee. I want to make four points in my
oral testimony today that are based on my written comments.
The first point I want to make is that one of the core
lessons I think we learned from the global financial crisis is
that we don't always know what we don't know. We have heard
lots of stories today about why it is that insurance is not
systemically risky, and I will be the first to admit that it is
certainly true that insurance is less systemically risky than
banking and that there are fewer concerns. That being said, we
should all be skeptical of people who claim to have a complete
understanding of insurance, who say things like, it is hard to
imagine that. It was hard to imagine 2008 before it was 2008.
So one of the lessons I think we take from the global
financial crisis, then, is that we need an adaptive regulatory
regime that focuses on systemic risk. We need a regime that has
all of the information at its fingertips and that can assess
risk across holding company structures, across legal entities
quickly and efficiently. That is not what this legislation
does. What this legislation does is it ensconces a particular
view of systemic risk based on what we now think and even based
upon the fact and even ignoring the fact that there are real
systemic risks within insurance companies.
We have heard that insurers do not threaten the risk of a
run-on-the-bank scenario, but that is not true. In fact, a run-
on-the-bank scenario in life insurance is perfectly possible
because many life insurance products allow policyholders to
withdraw funds, to borrow against their policies. So, you
certainly could have a run-on-the-bank scenario in life
insurance.
We heard that with the AIG crisis, it was only the non-
insurance entities that were problematic. Not true. There was a
lot of instability within the insurance companies of AIG,
particularly with respect to their securities lending program,
and there was, in particular, a substantial amount of risk
created by the interaction of the insurance companies and the
non-insurance companies. The reason the insurance companies of
AIG got into so much trouble with their securities lending
program is because of the fact that their financial products
unit jeopardized their liquidity. We have heard that guaranty
funds provide a fail-safe. Not necessarily true. Guaranty funds
at the State level are not prefunded. There is not a single
dollar in a guaranty fund. They rely on the assumption that
large insurers will be able to cover the risk if other insurers
fail. That is fine and good until you have some sort of
systemic event.
So the assumptions upon which this legislation rests, I
think, are problematic.
The second point I would like to make is actually a point
that Mr. Monroe made himself, that the States will not
modernize until and unless there is Federal pressure. That is
exactly true. If you look at the history of State insurance
regulation, virtually every single thing that they do well,
they do well because there was a threat at the Federal level to
take over. This legislation ignores that lesson. It creates a
domain in which State regulators are exempt from scrutiny,
where they can give as much information as they want, where
they don't have anyone looking over the threat of systemic risk
that they create.
The third point I want to make is we have heard State
regulators have all the information that is necessary for the
FIO and the OFR to do their job. I would submit: one, that is
not true; and two, even if I didn't know one way or another
that it wasn't true, you couldn't either. We don't know what
the future will demand in terms of the necessity to gather
information. What I can tell you, for instance, is that State
regulators did not have information about the contracts and
pooling relationships between AIG's insurance subsidiaries and
its non-insurance subsidiaries. That was obviously crucial
information at the time. If we were to think that State
regulators had all of the information that could ever be wanted
by a systemic risk regulator, that should not have occurred. In
fact, recently I learned that State regulators don't even have
copies of the products of the contracts that insurers sell to
their policyholders, so to say that they have all of the
information is simply not right.
Finally, I am sympathetic to the view that regulatory
uncertainty is problematic and we need to balance the risk and
harms of regulatory uncertainty against the necessity of
regulation. That is clearly true. But I would submit to you
that this legislation targets areas that really don't create
very much uncertainty. The subpoena power is very limited. Why
is it then valuable? It is valuable as a threat. It is valuable
because it will allow States and the FIO and the OFR to
leverage that threat to collect data that they need.
So with that I will conclude, and I will be happy to answer
any questions.
[The prepared statement of Professor Schwarcz can be found
on page 53 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Schwarcz, and for all of
you, your entire written statements will be made a part of the
record. With that, I will turn to Member questions, and I will
recognize myself first.
I almost hate to ask this question, but I would like the
three of you just to briefly tell me what are the primary
differences between banks and insurance companies? We will
start with you, Mr. Lanza.
Mr. Lanza. Madam Chairwoman, I am not an expert on banks. I
know insurance companies and how they are regulated, and I
couldn't really explain the banking industry to you.
With regard to the financial products, P and C companies
sell property, casualty, and policies, and we do not sell
products that are tied to other financial events or models.
Chairwoman Biggert. Okay, thank you. Mr. Monroe?
Mr. Monroe. I will keep this simple. I think there are
several key differences between banks and insurance companies.
In the insurance industry, I don't think there is really a risk
of a contagion. If there is a problem in one insurance company,
it really doesn't spread to another insurance company, there
isn't going to be a run on the bank, and despite what Mr.
Schwarcz said, with the hundreds of years we have had life
insurance, there has never been a run on life insurance, and I
don't see one happening, and it didn't happen during the
financial crisis. Traditional P and C companies are very
heavily regulated at the State level. The quality of their
investments are very high, and the call on an insurance policy
is based on an occurrence that happens. If there is an auto
accident in California, it does not impact my ability to call
on my auto policy in New York, so there are a lot of
differences between insurance and banking, and there are
liquidity issues, and the ability for the States to actually do
an orderly runoff of insurance companies has been proven to be
very successful.
Take Reliance, for example, that failed in the 1990s. They
didn't have an impact upon other companies. In fact, it is so
competitive in the insurance industry that other companies are
very ready, willing, and able to step in and absorb those
customers.
Chairwoman Biggert. Thank you. And then briefly, Mr.
Schwarcz, since you did speak of this before?
Mr. Schwarcz. Thank you. There are obviously a lot of
differences. I will highlight just a few. The first is that
there is group supervision of banks. There is not group
supervision of insurance companies under State law right now,
so that is a major difference. Another difference is that it is
true that banks are certainly more susceptible to runs than
insurers, but particularly with life insurers, it is also very
true that the obligations can be called. Most life insurance
products do allow for borrowing against the policy, do allow
for surrenders of policies, and we have seen runs of individual
insurers. Now, we have not seen a run on the life insurance
industry generally, but I think it is hard to say whether or
not that would or would not have happened if we didn't have the
Federal intervention we had in the global financial crisis.
The third point I would make is that they are not backed by
the Federal Government in terms of guarantees. It is a State
guaranty system. That State guaranty system is much, much less
reliable than a Federal guaranty system.
Chairwoman Biggert. Has that guarantee ever failed?
Mr. Schwarcz. That guaranty system has not failed, but we
have not had multiple concurrent insolvencies of large
companies, so I think it is true that it has worked, and it is
true that historically the system has worked, but I think that
it is not true that we can be assured that it will always work
in the future.
Chairwoman Biggert. Okay, thank you. Mr. Lanza, under the
draft legislation number one which is under consideration
today, and that is to protect confidential insurance data as it
is shared among Federal and State regulators, why do they need
exclusive language in the law to protect confidential insurance
data?
Mr. Lanza. Under the Model Holding Company Act, where we
provide State regulators a lot of detailed information about
our business plans and other things, we are sure that the
information is confidential. The concern here is that, if we
are providing that same kind of information to the Federal
Insurance Office, the way the language is written, we are not
sure that confidentiality is retained, so this is just to
clarify that anything we submit retains its confidentiality.
Chairwoman Biggert. Thank you. And then Mr. Monroe, is a
mutual insurance holding company an insurance company?
Mr. Monroe. I am not familiar with each State's regulations
of mutual insurance holding companies. If a mutual insurance
holding company actually holds risk, it would be an insurance
company, and very often they do hold risk, and then to the
extent that they do hold risk, I think they should be subjected
to the State regulation.
Chairwoman Biggert. Okay. Then in your opinion, does the
law need clarification to exclude mutual insurance holding
companies like other insurance companies from the FDIC's
Orderly Liquidation Authority?
Mr. Monroe. Again, to the extent that they hold risk like a
normal insurance company would, I think that clarification
would be needed.
Chairwoman Biggert. Thank you. My time has expired. The
gentleman from Massachusetts, Mr. Capuano, is recognized for 5
minutes.
Mr. Capuano. Thank you, Madam Chairwoman. Mr. Monroe, I am
just curious, has your group taken a position on an optional
Federal charter for insurance companies?
Mr. Monroe. I think we would like to have an optional
Federal charter for insurance companies.
Mr. Capuano. Honestly, as I was listening to your testimony
and reading it this morning, it certainly seems to be heading
that way.
Mr. Monroe. Yes.
Mr. Capuano. Okay. That would obviously address your
concerns. Is that a fair statement?
Mr. Monroe. Yes, it is.
Mr. Capuano. That is fair enough. Thank you. Mr. Lanza,
reading your testimony, and listening, you make several points
on why property casualty companies are different, but I am just
curious. You have one here that is a highly competitive market
with low individual company market penetration, I agree that is
a statement of fact. Is there any law that you know of, Federal
or State, that would prohibit consolidation within the
industry?
Mr. Lanza. Only with regard to the process of acquiring
insurance companies. Under State law, there is a process
generally known as a Form A, and the States require information
regarding market penetration and other items under something
known as a Form E, but that is the only--
Mr. Capuano. Right. But there is no prohibition on it, they
just want to oversee it?
Mr. Lanza. That is correct.
Mr. Capuano. So the consolidation could happen like it has
happened in a thousand other industries before; there is no
prohibition?
Mr. Lanza. Yes, subject to standard antitrust review.
Mr. Capuano. They are not highly interconnected with other
financial firms. Again, is there any law that prohibits them
from being interconnected with other firms, like AIG was?
Mr. Lanza. Not that I am aware of.
Mr. Capuano. So it is an industry practice, not a
requirement or a limitation?
Mr. Lanza. Correct.
Mr. Capuano. The last one is the low financial leverage.
Again, all these statements I agree with as of today, I think
they are all factually accurate, I am not arguing at all, but
again, is there any law that prohibits or limits the amount of
leverage an insurance company might have?
Mr. Lanza. Yes, there is, related to--not only from a
regulated side but from a ratings standpoint in terms of the
amount of debt and other things you have, you are governed by
the rating agencies in addition to the regulators who are
concerned about various--
Mr. Capuano. I wouldn't associate myself too much with the
rating agencies after what they did the last couple of years.
They have gotten better, but my faith is not restored just yet.
I would like to see anything it limits, because I am not
aware of any Federal law that limits the leverage. Again, I
agree that it is an industry practice at the moment, that you
are not a highly levered industry, but I don't know of anything
that prohibits you from being that. If there is one, I would
like to see it and I would appreciate your forwarding it to us
as you go along.
But I have to say, and I also agree with the statement that
you made that says, ``there is little likelihood that one
failed PCA insurer requires other financial institutions to
fail.'' I agree with that. I think that is a fair statement. My
concern is that everything else after this, including that, is
all what it is now, not what it could be tomorrow.
And, you made some good points on confidentiality. I
totally agree with you if there are holes. I would like to work
with you in filling those holes. There is no sense there.
But everything else is--you are concerned with yes, they
may not coordinate with States. And if they don't, I agree with
you that we should work on that. That was the whole idea, that
they would coordinate with States. But, again, something that
may happen, my concern is that what may happen is that we end
up with one big huge P/C company that is overleveraged and
unregulated.
I don't expect that is going to happen tomorrow, but it is
my concern that it may happen. And the whole concept of what we
did in the insurance industry was simply to gather information
so that we could hopefully be ahead of the curve the next time
in case this situation starts setting itself up. And, again, I
am not arguing one iota that under today's situation, property
casualty companies are anything other than safe and secure.
From everything I know, I agree with you.
I am not concerned about today; I am concerned about
tomorrow and the idea being that if we don't have information
gathered with someone, some neutral people looking and asking
questions confidentially, I totally agree with that, that we
put ourselves at risk. Again, not for the good players, it is
never the good players I am worried about. Regulations are not
there for people who want to live by the rules and the
standards of the industry.
Regulations are always there for the outliers, for the
people who drag an entire industry down or drag an entire
economy down. So I will argue very clearly that, again, the
details of confidentiality--I am happy to work with you--but
exempting, pretending that because we have a situation today,
it will never change, I think is really shortsighted, and I
think it really opens the door to true problems tomorrow.
And I say that only because I have absolute total faith
that the insurance industry is a lot smarter than government.
You will come up with ways around anything we do, as you
should. That is the nature of private industry.
My concern is not that, and I am not trying to take anybody
down, not call anybody a bad player. I agree with you on the
comments you make about current and past history on property
casualty. But to pretend that a major industry or player, a
major financial player, will never, ever put us in a difficult
situation I think ignores the facts of 2008 and pretends that
nothing will ever change. And, again, for the details of what
is going on, especially since even you agreeing to testimony
that FSOC basically said you are not a risky player.
That is pretty much what they said. That is what you said
in your testimony, and I agree with that. That is pretty much
what they said. But to then say that because I have already
done it, that they will never be allowed to do it, simply says
we want to go back on the same footing as we had before. And I
apologize, I guess my time is over. I didn't think I would take
the whole 5 minutes, but I apologize. So I will represent
details as far as making sure that the rules that we have are
right, but I think it is a mistake to pretend that what is will
always be.
Chairwoman Biggert. The gentleman's time has expired.
Mr. Capuano. I apologize.
Chairwoman Biggert. That is fine.
The gentleman from Virginia, Mr. Hurt, is recognized for 5
minutes.
Mr. Hurt. I thank each of you for your testimony. And, Mr.
Schwarcz, I was interested in your testimony and I appreciate
the fact that you seem to recognize that there should be a
cost-benefit analysis that goes with every regulatory
structure. And you spoke of balance, and I appreciate that.
But I guess I have two questions. One deals with the State
regulatory structure and what I think everybody agrees, it
seems like even you agree that we have evidence of successful
regulation by the States of these companies. And I guess my
question for you is, if you have that evidence, you can say we
don't know what we don't know, but I am not sure how that
guides us as policymakers in trying to game out every
possibility despite the overwhelming evidence to the contrary.
I think that when the legislature does that, when we try to
base policy on what we think could possibly happen in the
future, I think that you will always wind up with unintended
consequences. The answer to every problem here in Washington
seems to be, we will just regulate it, and I think that at
least as I travel across the Fifth District of Virginia where I
represent people who recognize that is not a good formula for
encouraging job growth and prosperity and freedom, and maybe
you could speak to that.
Mr. Schwarcz. Absolutely, thank you for the question. Let
me just first address your point of how do we, as policymakers,
respond to the fact that we don't know what we don't know. To
me, this is really a fundamental point, and I think it goes to
what systemic risk regulators need to do, because we all have
to admit that this is complex stuff that none of us fully
understand, and we are learning about it as we go.
The answer is, you build regulatory systems that are
adaptive, that are flexible, that can learn and that limit
uncertainty, but at the same time, you don't hamstring them by
precommitting them to visions about what is and is not
systemically risky.
So my concern with this legislation is it is based--and it
encapsulates this view about what systemic risk is and is not
that we can't be sure is right.
And so I admit we need to make that balancing, but to me
the costs of uncertainty that are being addressed here are just
so limited. Subpoena power? Why is that valuable? It is
valuable because it allows for the threat to get information
quickly, and it allows for the FIO to be able to criticize the
States without worrying that States are going to say, then, I
am not going to give you information.
Mr. Hurt. Thank you, because that was my next question, and
that deals with the data collection. It seems to me that a
prudent policy to come from Congress would be that we will rely
on the State regulators who demonstrated that they can regulate
successfully and that they have the data necessary for the FIO
to be able to make the judgments that it needs to make, so then
why don't we allow that system to work. Let's try that, and
then if it doesn't work, if the FIO comes back to this
committee and comes back to Congress and says, hey, we are not
getting your information we need from the States, then let's
fix it. It seems to me that is a more prudent approach
consistent with what you just said.
Mr. Schwarcz. It is very hard--as I am sure you know much
better than me--to change the law, right, it is very hard to
say, have the FIO come and change the law and it is very hard
to get, so I think what you need is you need a system that can
adapt more quickly than that.
And the other point I would make is we keep saying, State
regulations work reasonably well. I would say that State
regulations did not work particularly well in the case of AIG.
I think that there was a real failure to appreciate among State
regulators the fact that non-insurance companies within holding
companies can have real risks for the insurance companies.
There was a lack of an appreciation at the interconnectedness
among the different entities and there was the lack of
information about the nature of that interconnectiveness.
We keep saying AIG didn't fail and insurance companies are
safe. What was bailed out? We don't know what would have
happened to the insurance companies if there hadn't been a
bailout.
So my claim is not that State regulation isn't working at
all; it is that we need to be cognizant to the fact that there
are limitations, that there is not a proven track record on
group regulation and respond accordingly.
Mr. Hurt. Thank you, Mr. Schwarcz. Thank you, Madam
Chairwoman, I yield back my time.
Chairwoman Biggert. The gentleman from Ohio, Mr. Stivers,
is recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman. I appreciate the
hearing on this matter.
And the first question I have is for Mr. Lanza. Do you
believe we have an effective State-based regulation system in
America?
Mr. Lanza. Yes.
Mr. Stivers. Great answer, quick answer.
The second question I have is for Mr. Schwarcz. I am just
curious what you think is wrong with the Federal Office of
Insurance being required to work with existing regulators, and
I want to quote from the actual discussion draft and help you
explain to me what you have a problem with on page 3 where it
says, ``before data collection from a nonbank financial company
that is an insurer or their affiliate of an insurer pursuant to
title II, a financial regulator shall coordinate with each
relevant Federal agency, State insurance regulator or other
relevant State and Federal regulator, agency, in the case of an
affiliate or insurer, and any publicly available sources that
determine if the information can be collected is available and
may be obtained in a timely manner by that State or Federal
agency or through publicly available sources.''
What is the problem with that?
Mr. Schwarcz. I don't have any particular problem with that
language. That language actually is already basically in Dodd-
Frank. That is one thing that I don't really understand. You
are changing Dodd-Frank to do what Dodd-Frank already does.
But the problem I have with respect to that draft bill is
the lack of subpoena power, because then, if that information
is not available, you have no capacity to go out and get it.
And, moreover, it is not that I think subpoenas are going to be
issued all the time so, as I said, the threat of a subpoena
changes the dynamic. It allows you to get information, and it
allows the FIO to do so without having to be completely
beholden to State regulators.
Mr. Stivers. Right. Mr. Schwarcz, you are a law professor,
correct?
Mr. Schwarcz. That is correct.
Mr. Stivers. So isn't there essentially a regulatory
unwritten rule that those that get subpoena power are also
those that regulate? Isn't that historically the way we have
regulated?
Mr. Schwarcz. I would think that unwritten rules are not a
good way to operate.
Mr. Stivers. But isn't that a good system? Shouldn't people
only have subpoena power when they can regulate?
Mr. Schwarcz. No. The entire point of the FIO is to--the
mission of the FIO is to monitor the insurance market, and to
potentially recommend changes. So you are going to task an
agency to monitor a market and to potentially suggest changes
to a State-based system, but then to have it beholden to the
State-based system in getting information?
That means that the only information they have is the
information that regulators have, and it might be that the
reason you need to modernize regulation is because regulators
aren't capturing all the relevant information.
Mr. Stivers. Did you take a look at the discussion draft on
page 4 where it basically covers how the regulators can request
information if they feel that information is either not
publicly available or not, will not be available in a timely
way, Mr. Schwarcz?
Mr. Schwarcz. Yes, and I continue to believe that is not
sufficient because, again, one of the potential roles of the
FIO is to suggest how State regulations are insufficient, the
problems that exist there. Now, if I am going to be the person
who is going to sit there and be critical of, and you say here
are the ways in which you need to change, the best way of
making sure that I don't do that very effectively is to say in
this--and you can ask the person who you are criticizing for
information--and there is an unwritten rule that they might
have to give it to you but no actual rule and no subpoena
authority.
And then what you are going to say is, sure, I will give
you this information, but only so long as you make me look
good. And if you don't make me look good, I am not sure if I am
going to give it to you or not, so you need that threat.
Mr. Stivers. Are you familiar with the costs related to
data collection in some cases that have been particularly
burdensome, and would you favor some type of system to ensure
that there is a cost-benefit analysis on the cost of the data
collected versus the actual benefit of the data, because I
think that is the concern that led to this draft. So can you
maybe help us with your thoughts on that?
Mr. Schwarcz. Yes. Absolutely, I think the FIO needs to
think about the costs of any data call versus the benefits. And
so does the Office of Financial Research and, again, I am
certainly not completely unsympathetic to the view that
regulation is costly and getting data is costly; we just need
to balance it. So I agree with that principle, but to me, that
is not what is encapsulated here because the legislation sort
of is predetermined about how that cost benefit analysis--
Mr. Stivers. Sure. I do want to quickly, because I have
about 30 seconds left, it seems to me that it is hard to
construct a circumstance where there would be some mass run on
people borrowing on their life insurance accounts. Can you help
us, as a committee, understand your thought process there and
what you were trying to build, because it really seems like the
banking system would have to have collapsed or something out of
that, and it just seems difficult to imagine.
Mr. Schwarcz. Sure. No, people wouldn't be doing that
because they didn't have money from banks. What would happen is
that there would be a massive loss of confidence in a
particular life insurer say, several life insurers. All of a
sudden, big news stories broke about how they weren't, they
didn't have money to pay claims. People would then worry, I am
not going to get anything, I better start going and taking out
my cash to the extent I can from this life insurer, and then
that would be exacerbated by the fact--again, this is a
potential calamitous scenario, but we need to think about it--
that State guarantee funds wouldn't potentially cover all of
the exposure out there. So that is how it could occur.
Mr. Stivers. My time has expired, Madam Chairwoman. Thank
you.
Chairwoman Biggert. Thank you, Mr. Stivers. The gentlelady
from Wisconsin, Ms. Moore, is recognized for 5 minutes, and
thank you for joining our subcommittee today.
Ms. Moore. Thank you so much, Chairwoman Biggert, for
allowing me to come discuss your discussion drafts. I am
specifically interested in discussion draft number 2, which is
to exclude insurance companies from the FDIC's Orderly
Liquidation Authority and, Madam Chairwoman, I guess I would
like to yield to you before I address our distinguished panel,
because I am just seeking clarification.
In the original Dodd-Frank bill, there was an amendment
offered by me and Ms. Speier which, in fact, excluded--let me
see, I have the amendment here, it amended section 203, and we
inserted part E, which an insurance company that is covered, if
it is a covered financial company or a subsidiary or affiliate
of a covered financial company, the liquidation or
rehabilitation of such insurance company and any subsidiary or
affiliate of such insurance company that is not accepted under
paragraph 2 shall be conducted as provided under applicable
State law.
Our intent with this amendment was to distinguish that
insurance companies and, indeed, mutual insurance companies,
were not subject to FDIC resolution because they didn't provide
systemic risk.
So I want to yield to you, Madam Chairwoman, because my
question is, do you think that perhaps discussion draft bill 2
may be duplicative? I understand and I agree with what you are
trying to do, but I believe we have already done this through
Dodd-Frank.
Chairwoman Biggert. Actually, this part of the legislation
is based on your amendment to the Dodd-Frank bill. So I think
it was to make explicit clarification of that amendment.
Ms. Moore. Okay, because the thing that I think that--the
extent to which there was any exposure--maybe I can ask you
gentlemen now--to the extent that there was any discussion of
bringing the insurance industry into it was because AIG was
systemically risky in terms of it being a threat and being an
insurance company and having all of these various activities. I
guess I want you all to respond of what your understanding of
discussion draft 2 is.
This would not--we are not talking about limiting the
FDIC's ability to resolve or interfere with a systemically
risky firm that has--insurance company that has a financial
institution connected with it. Is that your understanding of
this draft as well?
Mr. Lanza. Yes. The concern we have is the fact that an
insurance company, which is governed by statutory accounting
rules, which is the liquidation value, would have assets go to
areas other than the policyholders. So the concern is that we
would like the insurance regulator to approve any assets going
for anyone other than the policyholder.
Ms. Moore. So you think that this discussion draft is
necessary because you are concerned that assets may go to
someone other than the policyholder. Are these investors? What
are the other entities that you anticipate?
Mr. Lanza. The purpose of the State regulatory system is to
have the assets of the insurance company available to pay just
the policyholders. And if you can put a lien on those assets to
resolve another organization other than the insurance company,
that is problematic if there were policyholders at risk. So we
believe that the discussion draft solves the problem of having
any assets go anywhere beyond the policyholder.
Ms. Moore. Would anyone else like to respond to that?
Mr. Schwarcz?
Mr. Schwarcz. Actually, my understanding was the draft bill
didn't change very much in Dodd-Frank.
Ms. Moore. It did?
Mr. Schwarcz. It did not change very much. Dodd-Frank
already reflected the fact that insurers would be resolved by
State entities, and it allowed the FDIC to intervene if the
State regulators were not, in fact, operating. And I am not--I
would need to study this a little bit further to understand
whether that authority is removed or not. I would think that
authority is important, again, to create the leverage the State
regulators are not acting, but I do think it is a matter of
sort of--it makes sense at first to have State regulators
resolving insurance companies.
Ms. Moore. Thank you so much. And thank you, again, Mrs.
Biggert for allowing me to attend this meeting.
Chairwoman Biggert. Thank you.
Ms. Moore. I just wanted to seek that clarification. Thank
you. I yield back.
Chairwoman Biggert. The gentleman from Wisconsin, Mr.
Duffy, is recognized for 5 minutes.
Mr. Duffy. Thank you, Madam Chairwoman. It appears there is
somewhat of a disagreement on the panel as to how we should
move forward. And I don't know, Mr. Lanza or Mr. Monroe, if you
had a chance to read over Mr. Schwarcz's statement before you
came here, but you have had a chance to hear it. Now that you
have heard his position or his take on the drafts, do you agree
with them?
Mr. Lanza. No. In particular, on the subpoena power, my
company has seven subsidiaries in addition to all of the
quarterly and annual statements we have to file, we average
about 840 data calls a year. Now those data calls, some of them
are very easy for us to respond to because it is financial
information that we track in evaluating the profitability and
other performance factors of our business, but some of those
data calls are information we may not have. And the cost of
finding that information in some cases can get complicated
because we don't have the systems in place in order to capture
it.
So the issue we have around the whole thing is that if the
FIO was to study the industry as a whole, it makes sense for
them to go to the State regulators to study the industry as a
whole before they come to the individual companies.
Mr. Duffy. Mr. Monroe?
Mr. Monroe. I didn't get a chance to read Mr. Schwarcz's
testimony before I got here, and the counsel always supports
efforts to improve insurance regulations. We supported the NRRA
because of the disparate treatment of surplus lines taxes
across the United States. So to the extent that there are gaps
in State regulation that the Federal regulation can help
improve, we would certainly be willing to look at that and
support it to the extent that it will improve the insurance
industry.
Mr. Duffy. Okay. And Mr. Schwarcz, quickly, how many of our
property and casualty insurers currently pose a systemic risk?
If you know?
Mr. Schwarcz. I am not sure. I think that we can't be
perfectly sure. My understanding is that based on the recently
proposed regulations by FSOC, essentially zero. I think it is
pretty clear zero property casualty insurers are going to fall
under that. I think my point would be that we need to plan for
the future and sort of allow for that flexibility.
Mr. Duffy. What kind of risk do they pose today?
Mr. Schwarcz. What type of risk do property--today?
Mr. Duffy. Yes.
Mr. Schwarcz. I think that today, as far as we know, they
pose little systemic risk.
Mr. Duffy. And if we look at the potential of a systemic
risk that you are trying to be a visionary here and look into
the future, if we give a little more authority for oversight on
the Federal side, will that very much lessen the systemic risk
for the future?
Mr. Schwarcz. So, two things. First, I am not trying to be
a visionary; what I am trying to do is actually say that you
are not visionaries either. We don't know.
And that is why we need to adjust the system, take into
account that none of us are visionaries, none of us predicted
2008, and that is why we need a flexible regime that is not
hamstrung by preordained conclusions.
Mr. Duffy. But I would say that with property and casualty
insurance you are saying, listen, there is a potential for
systemic risk in the future and, therefore, you want to head
that off at the pass today. So in a way, I would say you are
acting as a visionary.
Mr. Schwarcz. I will leave it to others to decide whether
or not I am either a visionary or attempting to be one. But
what I would say is that I don't perceive much systemic risk in
the property casualty realm right now right now. I perceive it
more in the life realm, but I think that we don't want
regulatory assistance that ensconces that viewpoint and doesn't
consider the possibility that it might be wrong.
Mr. Duffy. Thank you. And I wanted to take the remainder of
my time and yield it to Mr. Stivers.
Mr. Stivers. Thank you to the gentleman from Wisconsin. I
have a quick question for Mr. Monroe and Mr. Lanza.
In the scenario that Mr. Schwarcz gave earlier about a run
on life insurance companies, wouldn't the State regulatory
scheme under McCarran-Ferguson have to essentially completely
collapse and fail and the State regulators not do their jobs?
Mr. Lanza. I believe so.
Mr. Monroe. I would have to agree with that. I can't
imagine a scenario where it would be a contagion from life
insurance company to life insurance company. In fact, given the
competitiveness of the insurance market, I think if there was a
run on one, others would quickly step in.
Mr. Stivers. And the last question, I guess, for Mr.
Schwarcz, given our discussion earlier about subpoena power, is
there any requirement now for the FIO to do any cost-benefit
analysis before they would issue a subpoena?
Mr. Schwarcz. I don't have Dodd-Frank before me right now,
but I think the answer is no.
Mr. Stivers. I yield back--or to the gentleman from
Wisconsin.
Mr. Duffy. No, I yield back.
Chairwoman Biggert. I thank the gentleman. The gentleman
from California, Mr. Sherman, is recognized for 5 minutes.
Mr. Sherman. Thank you. Mr. Lanza, you said the
confidentiality provisions of Dodd-Frank are insufficient to
protect insured data. Perhaps you could enlighten us on that a
bit.
Mr. Lanza. Our concern is over the transfer of that
information from the FIO to the other agencies, and we just
want to make sure that it is clear that any information we
submit, wherever it goes, is confidential so that we don't lose
that. Some of the information we submit is highly proprietary,
and that is the concern.
Mr. Sherman. Could the relevant agency simply adopt
confidentiality policies? Would they need to be formal
regulations? Do we need a statute? What do we need to do to
protect the confidentiality?
Mr. Lanza. Our suggestion is that you do it through the
discussion draft. And that is what we support. We think it is
the cleanest way to ensure it because of the nature of the data
and its competitiveness.
Mr. Sherman. Mr. Schwarcz, one of the concerns of my
constituents is that they are going to outlive their savings.
The life insurance and annuity industry has created a product
called longevity insurance. They might have called it life
insurance, but that name had already been taken. And this is an
annuity that starts paying you when you reach age 70, 80, 90,
whatever it is, but none of them have been able to find it
inflation adjusted.
I have talked to the insurance folks, and they have said,
we don't want to take the risk of inflation, and I wondered why
we have insurance companies if risk taking is not pretty much
the job they are supposed to do.
What policy changes do we make so that in addition to
Social Security, which is an inflation-adjusted longevity
insurance that starts at age 65, what do we do to cause the
annuity and life insurance industry to offer what people want,
indeed, they may not focus on it with the technical terms, but
an inflation-adjusted annuity that begins at an advanced stage?
Mr. Schwarcz. Thank you. This is something I can't offer
definitive thoughts on right now. I would need to think about
it.
Frankly, I am a little cautious about the idea of trying to
say, people want this, therefore, we should try to sort of
adopt some policy to encourage carriers to provide it. I think
if people wanted it enough, carriers will provide it. They just
probably don't want it enough and that people won't pay for it.
Mr. Sherman. They speak somewhat vaguely about it.
Mr. Schwarcz. Right. There are--
Mr. Sherman. I had a career in the financial world and one
in politics and kind of focused on trying to take what people
are saying about finance and translate it in a language that
you would speak.
Mr. Schwarcz. Right.
Mr. Sherman. They are afraid of outliving their savings.
Mr. Schwarcz. Sure.
Mr. Sherman. They might buy a longevity policy. They would
be making a mistake in that they would be fully insured except
for inflation.
Mr. Schwarcz. Right.
Mr. Sherman. So maybe you could add to the record anything
that you think could help people know that they need an
inflation-adjusted longevity policy and/or let the companies
know that they ought to be offering it.
Let me return to Mr. Lanza.
I am intrigued with your suggestion that Dodd-Frank asks
insurers to help pay the resolution costs for other failing
financial companies, but the other companies don't help to pay
for insurance resolution costs, chiefly because there are State
funds that do that. This doesn't exactly seem fair.
Can you tell us more about the State resolution system and
why Dodd-Frank seems to recreate this inequity?
Mr. Lanza. The State resolution systems, through the
guarantee funds, have the ability to only assess the industry,
and that is the specific insurance industry, so it is property
and casualty related, property and casualty failures. And so if
you have the FDIC involved in any related company, the concern
is that we would wind up paying guaranteed fund assessments and
also be assessed for whatever additional amounts the FDIC wants
to assess.
Mr. Sherman. I thank you for your answer, and some will
remember I fought in this room successfully to leave companies
under, I believe it is $75 billion, out of the main assessment
program in Dodd-Frank. And I think my time has expired.
Chairwoman Biggert. I thank the gentleman for his
questions.
I would now ask unanimous consent to insert the following
material into the record: a November 15, 2011, letter from the
National Association of Professional Surplus Lines Offices,
Ltd.; November 15, 2011, testimony from the National
Organization of Life and Health Insurance Guaranty
Associations; November 15, 2011, testimony from the National
Conference of Insurance Guaranty Funds; November 15, 2011,
testimony from the Independent Insurance Agents & Brokers of
America; a November 14, 2011, letter from the National
Association of Mutual Insurance Companies; a November 14, 2011,
letter from the Risk and Insurance Management Society; a
November 13, 2011, letter from the Nationwide Mutual Insurance
Company; and a November 9, 2011, letter from the National
Conference of Insurance Legislators.
Without objection, it is so ordered.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to these
witnesses and to place their responses in the record.
And I would like to thank the panel so much for being here
and for your testimony. I really appreciate all the important
information that you have given us today. Again, thank you so
much.
With that, this hearing is adjourned.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]

A P P E N D I X

November 16, 2011

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