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

THE IMPACT OF DODD-FRANK'S INSURANCE
REGULATIONS ON CONSUMERS, JOB CREATORS,
AND THE ECONOMY

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

HEARING

BEFORE THE

SUBCOMMITTEE ON
INSURANCE, HOUSING AND
COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

JULY 24, 2012

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-150

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76-121 WASHINGTON : 2012
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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

James H. Clinger, Staff Director and Chief Counsel
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:
July 24, 2012................................................ 1
Appendix:
July 24, 2012................................................ 29

WITNESSES
Tuesday, July 24, 2012

Birnbaum, Birny, Executive Director, Center for Economic Justice. 10
Chamness, Charles M., President and CEO, National Association of
Mutual Insurance Companies (NAMIC)............................. 12
Hartwig, Robert P., Ph.D., President and Economist, Insurance
Information Institute.......................................... 8
Posey, Hon. Bill, a Representative in Congress from the State of
Florida........................................................ 6
Quaadman, Thomas, Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce...................... 14

APPENDIX

Prepared statements:
Posey, Hon. Bill............................................. 30
Birnbaum, Birny.............................................. 32
Chamness, Charles M.......................................... 43
Hartwig, Robert P............................................ 57
Quaadman, Thomas............................................. 80

Additional Material Submitted for the Record

Biggert, Hon. Judy:
Written statement of the American Council of Life Insurers
(ACLI)..................................................... 88
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 91
Posey, Hon. Bill:
Insert from October 25, 2011, Housing Subcommittee hearing
entitled, ``Insurance Oversight: Policy Implications for
U.S. Consumers, Businesses, and Jobs, Part 2............... 101
Draft legislation............................................ 103

THE IMPACT OF DODD-FRANK'S
INSURANCE REGULATIONS ON
CONSUMERS, JOB CREATORS,
AND THE ECONOMY

----------

Tuesday, July 24, 2012

U.S. House of Representatives,
Subcommittee on Insurance, Housing
and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. Judy Biggert
[chairwoman of the subcommittee] presiding.
Members present: Representatives Biggert, Hurt, Miller of
California, McHenry, Dold; Gutierrez, Velazquez, and Sherman.
Chairwoman Biggert. This hearing of the Subcommittee on
Insurance, Housing and Community Opportunity will come to
order.
We will start with the opening statements. And without
objection, all Members' opening statements will be made a part
of the record.
And I will now recognize myself for an opening statement.
Good afternoon, everyone, and welcome to today's hearing. I
welcome today's witnesses, including our colleague, Mr. Posey
of Florida, who is our only witness on Panel I.
This is the fifth subcommittee hearing on regulatory
developments, domestic and international, that have created
uncertainty for the insurance sector. The subcommittee
continues to explore the extent to which this regulatory
uncertainty could result in higher prices and fewer insurance
products for consumers, increased costs and foregone
opportunities for businesses, and reduced economic growth,
leading to fewer jobs.
During these hearings, we heard about a number of Dodd-
Frank-Act-related matters of concern to life and property/
casualty insurance companies of all sizes from across the
country--businesses that had nothing to do with the financial
crisis.
In November, the subcommittee examined three discussion
draft legislation proposals to amend the Dodd-Frank Act. The
first draft addressed the authority of FIO and OFR to collect
insurance data and maintain its confidentiality, which is now
H.R. 3559, the Insurance Data Protection Act, introduced by Mr.
Stivers. The second draft would exempt insurers from FDIC's
Orderly Liquidation Authority, OLA, and Orderly Liquidation
Fund, OLF, a bill Mr. Posey is perfecting. The third draft
would limit the Federal Reserve's authority to regulate
insurance or subject insurance companies to heightened
prudential standards, including additional capital
requirements.
The good news is that the Federal bank regulators--the
FDIC, Treasury officials, and last week, Federal Reserve
Chairman Bernanke--have signaled that they do not intend to
apply bank-centric regulations to insurance. Federal bank
regulators also have signaled that the insurance regulation
should be left up to the States, which, as I have noted many
times, the State-based regulatory system for insurance has
worked well for over 150 years.
I am afraid the same can't be said for banking regulation.
Unfortunately, uncertainty remains, and proposed regulations by
these same regulators don't reflect specific considerations for
insurance. Congress and insurers are still uncertain if, for
example, the Federal Reserve will impose bank-like capital
standards on insurance companies that are part of a savings and
loan or a thrift holding company.
Today's hearing, entitled, ``The Impact of Dodd-Frank's
Insurance Regulations on Consumers, Job Creators, and the
Economy,'' is part of the committee's continued oversight
hearings around the second anniversary of the Dodd-Frank Act.
We will explore the consequences for insurance companies,
consumers, job creators, and the economy of unnecessary
increased compliance costs as well as limitations on
investments due to Dodd-Frank.
Why does Dodd-Frank's impact on insurance matter to
families, businesses, and our economy? Why should everyday
insurance consumers, workers, municipalities, and other job
creators and charities be concerned? Specifically, this hearing
will attempt to answer those questions and evaluate the effect
on insurance companies and their customers of the new Dodd-
Frank regulations.
It is important that we get the regulation of insurance
right. In Illinois, property and casualty insurers have written
over $2.2 billion in premiums, life insurers have written
almost $26 billion in insurance premiums or annuities, and
114,000 workers are employed by the insurance sector.
It is important that Congress prevent the unnecessary
layering of new Dodd-Frank regulations and costs on insurers.
We must get it right for direct and indirect beneficiaries of
insurance: families and businesses of all kinds and sizes;
cities and towns; and workers with jobs in Illinois and across
the country. Our economy, business, and families cannot afford
additional job losses, increased costs for products, reduced
private-sector investments, or reduced benefits.
With that, I welcome input from all of the Members on this
discussion draft, and I yield to the ranking member of the
subcommittee, Ranking Member Gutierrez, for his opening
statement.
Mr. Gutierrez. Thank you for yielding, Madam Chairwoman.
Recent developments such as JPMorgan Chase--they asked me
for two IDs the last time I went to JPMorgan Chase. I said,
``You should be more careful with the billions of dollars you
trade than with the couple hundred dollars extra I want.'' At
JPMorgan Chase, they are so silly, they ask their customers--
you want to talk about--no, it really is. Because they said,
``Hey, Congressman Gutierrez, how are you today? Do you have
another ID?'' I said, ``No, I don't. Do you have the $5
billion? Or is it up to $7 billion?'' This kind of attests to
the fact that it is a good thing we have Frank-Dodd, because
they are still losing billions of dollars as I go out there.
And so I know this is going to be a wonderful hearing. But
I haven't had any problem; I call up my State Farm agent, and
he is still there--Tom Rafferty in Hinsdale, Illinois. I think
you probably represent him in the Congress. He is still there
writing out insurance policies and hoping that Luis Gutierrez
and his family don't have any car accidents or trees don't fall
on his home. It doesn't seem like there has been a problem.
But I will tell you, we should remember three simple
letters when we want--because we all know that the Federal
Government really doesn't cover insurance companies. And there
are three letters: AIG. So before we start saying, oh, those
poor insurance companies, and we really shouldn't be messing
with them and putting any layers of--how is it--regulations,
they don't need to be watched, let's just remember three
letters, not ``ABC,'' ``AIG.'' And thanks to the Federal
Government, of course, those of us here had to go and bail them
out and make sure that they stayed afloat because they are
important to our economy.
So before we start talking about--it is like it doesn't
end. I turned on CNN, and there was this big bank out there and
the CEO getting thrown out because they were lying about the
LIBOR. And they keep telling us we don't need any regulations.
Really? And we haven't even really gotten to the bottom of the
LIBOR scandal and what it is that banks do.
I have to tell you, I won't mention, but if you want, you
can probably go check my--what is it--those forms we fill out
every year and we make sure--the financial disclosure forms.
You see, I check with Chuck every day, because I want to make
sure he didn't take a vacation with my money. Not that he
would, but I just want to check. And I think most people in
America check, and they should, because there are still people
out there--and you can ask them--who are losing money because
they put their money into what are supposedly safe accounts,
only to see the money disappear.
So to kind of suggest at this particular point that somehow
it is all over, everything is great, and that the financial
industry is going to do everything on the up and up, all we
have to do is read the papers from the last month to realize
that it really is an industry that needs us to continue to
watch over them in defense of the consumers. And I know that is
sometimes an ugly word, because every time we bring up making
sure that the consumers are well-protected here in the Congress
of the United States, they say that we are people who are
stopping the growth of our economy.
I am just going to end with this. I won't take up all of
the time. But I remember when I sat here in 2008 as our economy
became unraveled. You want to talk about losing jobs? We lost
millions upon millions upon millions of jobs between 2007 and
2008, millions and millions, sometimes hundreds of thousands in
any given month. And for anybody to suggest that we didn't lose
a lot of those jobs because of what the banking industry was
doing, or not doing, and the kinds of things that they were
doing in terms of even trading across seas and across the
world, I think just doesn't do justice to the fact that we lost
those millions of jobs.
So I also care about jobs. And if we leave them
unregulated, we know that we can cause this recession to go
into a depression. So let's be very mindful that there are
those that need watching and that the people who sent us here
to the Congress of the United States sent us here to watch out
for their special and very best interests.
Thank you very much.
Chairwoman Biggert. Thank you.
The gentleman from California, Mr. Miller, is recognized
for 2 minutes.
Mr. Miller of California. Thank you.
I would like to thank you, Chairwoman Biggert, for holding
this hearing. It is important to our economy that the committee
closely monitor the implementation of Dodd-Frank Act
regulations.
While the Dodd-Frank Act supposedly exempts the insurance
industry from many aspects of the law, we are hearing concerns
that regulators are extending their rule to include insurance
companies, where regulators do not have authority. We are
hearing concerns that the rules being proposed are bank-centric
and do not take into account the fundamental differences
between how banks and insurance companies operate. For example,
the Federal Reserve proposed rules on capital standards for
savings-and-loan holding companies that are owned by insurance
companies that will have major impacts on cost and availability
of insurance policies for American consumers.
If the Fed rule does not recognize the difference between
banks and insurance companies in its rules, the bank-centric
capital standards imposed on the insurance companies will do
harm to job creators in this country. Since the Federal Reserve
has no experience in regulating insurance companies, the Fed
needs to be extremely careful and take all the necessary steps
to understand the industry before imposing rules that could
have major economic consequences.
We are also hearing concerns that a proposal requiring
insurers to prepare Federal financial statements using
Generally Accepted Accounting Principles, also known as GAAP--
while State regulators require reporting using Statutory
Accounting Principles (SAP), known as SAP--will increase costs
for insurance companies' compliance with regulations. Two
different accounting methods to report essentially the same
information in different ways is unnecessary. This only adds to
the cost of doing business for insurance companies. Such costs
will ultimately be borne by the consumers of insurance
products.
Lastly, the Volcker Rule is clearly a major concern for the
banking industry. While it was never intended to apply to
insurance companies, it could have an impact on them because
the regulations are failing to see the difference between banks
and insurance companies. If insurance companies are swept under
the Volcker Rule, the cost of insurance companies' ability to
hedge risk will be increased. In addition, the Volcker Rule
could prohibit insurance companies from playing the traditional
role in debt and equity markets. Congress exempted insurance
companies in the statute, and regulators needs to follow
Congress' intent.
In closing, while the regulators aren't here today, this
hearing is important for us to hear about the impact of these
overreaching regulations on the insurance industry and,
ultimately, on our economy. I look forward to hearing the
testimony today. Hopefully, it will be insightful and we can
move forward.
Thank you, Madam Chairwoman.
Chairwoman Biggert. Thank you.
The gentleman from Illinois, Mr. Dold, is recognized for 2
minutes.
Mr. Dold. I thank the chairwoman for holding this important
hearing and for recognizing me.
Efficient and sound markets obviously require different and
customized rules for different industries. Fortunately, Dodd-
Frank recognized the inherent differences between the banking
industry and the insurance industry and tried to ensure that
insurance companies don't fall under an inappropriate
regulatory framework.
Title I of Dodd-Frank requires the Federal Reserve to set
new capital rules for large banks and bank holding companies to
prevent excess leverage and undercapitalization and the
consequent stability threat. Though well-intentioned, these new
risk-based capital rules also apply to insurance companies that
take deposits at some level in their corporate structure,
despite their fundamentally different structure and risk
profile.
We need to ensure that these new rules account for the
unique insurance company business model and don't create
unnecessarily costly and otherwise counterproductive burdens
for the U.S. insurance industry. If these rules are not
customized for the insurance company business model, we can
expect to see consumers damaged by higher insurance costs and
diminished product availability, along with our economy damaged
by fewer jobs, weakened global competitiveness, and diminished
investment capital availability. And I am confident that none
of us wants those negative consequences.
Another critical point is that we must examine these new
regulations in their broader context. These rules aren't being
introduced on a clean slate. Instead, they will be introduced
on top of an elaborate, well-established, and preexisting
insurance regulatory framework. And they are being introduced
simultaneously with increased State regulatory scrutiny, new
international requirements, and a new Federal insurance
monitoring agency. So we can't consider any particular rule in
isolation, but instead we must consider the aggregate effect.
The insurance industry is critical to our economy, not only
because it provides millions of Americans with security from
everyday risks, but also because the industry's investments in
our capital markets drive growth and productivity. Insurance
companies are uniquely capable of maintaining diverse long-term
portfolios, promoting stable capital markets, and pooling
capital for small-business growth.
I see my time has expired, Madam Chairwoman, and I yield
back.
Chairwoman Biggert. Thank you.
We will now turn to our first panel. Let me just say that,
without objection, Panel I and Panel II's statements will be
made a part of the record.
And I will now turn to our first witness, Representative
Bill Posey from Florida.
We are delighted to have you here. And, of course, you are
usually here because you are one of the members of the
Financial Services Committee. With that, you are recognized for
5 minutes.

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

Mr. Posey. Thank you, Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommitee. I appreciate the
opportunity to speak before the Insurance Subcommittee today.
And just before I forget, as an asterisk, I would like to
just quote from the record of an October 25, 2011, subcommittee
hearing. This was the Director of the Federal Insurance Office,
Mr. McRaith: ``The autopsy has, frankly, shown that it was not
the insurers that caused the problems for AIG as a holding
company.'' I ask unanimous consent to make it a part of the
record.
Chairwoman Biggert. Without objection, it is so ordered.
Mr. Posey. I devoted a great deal of time to insurance
issues as a legislator in Florida, insurance of all kinds, not
just the type that the weather tends to make people discuss in
Florida.
Florida is a large State with many different kinds of
insurance-related challenges to deal with. Last year, premiums
that were written by property/casualty insurance companies
alone totaled over $37 billion. Premiums on life and health
insurance were over $42 billion. Premium taxes paid in Florida
were over $667 million in 2010. Those are big numbers, but
behind the numbers are real people, real families.
I don't know anyone who likes to pay insurance premiums,
let alone higher premiums. No one likes to think about the day
when they might need that policy to be there for their home,
their car, or to help provide financial security after the
passing of a loved one. But when insurance functions as it is
supposed to, we appreciate its value to help us manage life's
many risks. So it is important that we in Congress get this
issue right, because it affects virtually everyone each and
every one of us knows or cares about.
I have our discussion draft bill that addresses the various
problems brought to our attention with the new financial
regulation bill. Madam Chairwoman, I would like to submit for
the record the latest draft of the bill to address the problem.
Chairwoman Biggert. Without objection, it is so ordered.
Mr. Posey. Thank you.
Last November, this subcommittee held a hearing on
discussion draft legislation that would exempt insurance
companies from the FDIC's new Orderly Liquidation Authority and
Orderly Liquidation Fund for large Wall Street institutions and
those determined to be systemically important, or, as some say,
too-big-to-fail.
Under Dodd-Frank, the FDIC, the traditional banking
regulator and insurer of deposits, oversees the new fund for
these mega financial companies. Whatever views my colleagues
may have regarding bailouts--I personally oppose them--I hope
we can correct an injustice in Dodd-Frank that impacts
insurance companies and our constituents.
Right now, the FDIC has the power to assess fees to create
this new fund. However, in addition to assessing the big Wall
Street firms, for which I personally believe the fund was
intended, the FDIC can force insurance companies to pay into
it. This is the case even though the insurance companies are
not eligible to use the fund and they do not need the fund.
The insurance sector could be footing the bill for failed
Wall Street firms. Back home, this means our constituents, your
constituents, my constituents, all of our constituents, the
ones who pay the premiums, could have to pay higher rates to
cover risk on Wall Street. Why should our constituents pay
higher rates for life or property/casualty insurance premiums
for bad decisions made on Wall Street?
This bill would exempt insurance companies from paying into
the liquidation fund. It is similar to a draft circulated and
discussed by this subcommittee last November, but I believe it
has been improved, with the help of the chairwoman and others
interested in this issue.
The insurance industry did not cause the financial
meltdown. As we debated Dodd-Frank, we seemed to agree that
regulation of insurance was generally best left to the States.
For decades, Congress has recognized that State authorities
have the expertise, proximity, track record, and Federalist
constitutional authority, for that matter, to regulate
insurance. Insurance companies pay into State guarantee funds
to deal with insolvencies.
Shaking down insurance companies for Wall Street bank
failures has big economic consequences, considering the
insurance sector provides millions of jobs and tens of billions
in State and Federal revenue. Property/casualty and life
insurance alone equaled $18 billion in 2010. Insurance
companies invest in the capital markets, in the U.S.
Government, and municipal, company, county, and other bond
securities. We may take it for granted, but insurance helps us
pay for projects like roads and schools.
In closing, forcing insurance companies to pay twice, into
the State guarantee funds and into the new Orderly Liquidation
Fund (OLF), could have widespread repercussions for our
constituents and for the economy.
Thank you again for this opportunity to speak today. I hope
we can work together on a commonsense fix to address this
issue. And I would be delighted to answer any questions.
[The prepared statement of Representative Posey can be
found on page 30 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Posey.
Does anyone have any questions? No? Then, I think we will
excuse you. But thank you so much for being here, and we look
forward to looking at the draft legislation. Thank you.
Mr. Posey. Thank you.
Chairwoman Biggert. I think we will move to Panel II so we
can start with the testimony. As usual in the afternoon, we are
having votes, and they are scheduled for around 2:30, but you
never know whether it will go further than that. So if you can
take your seats, we will get started.
Welcome, to our second panel. As was stated earlier, your
testimony will be submitted for the record. And we will start
with--let me go through the names: Dr. Robert Hartwig,
president, Insurance Information Institute; Birny Birnbaum,
executive director, Center for Economic Justice; Charles M.
Chamness, president and CEO, National Association of Mutual
Insurance Companies; and Thomas Quaadman, vice president,
Center for Capital Markets Competitiveness, U.S. Chamber of
Commerce.
Welcome to you all.
We will start with Dr. Hartwig. You are recognized for 5
minutes.

STATEMENT OF ROBERT P. HARTWIG, PH.D., PRESIDENT AND ECONOMIST,
INSURANCE INFORMATION INSTITUTE

Mr. Hartwig. Thank you, Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommittee. And good afternoon.
My name is Robert Hartwig, and I am president and economist for
the Insurance Information Institute, an international property/
casualty insurance trade association.
I have been asked by the committee to provide testimony on
the role of the insurance industry and the benefits of
insurance products and services provided to consumers, job
creators, and the economy. I also have been asked to address
some concerns associated with certain Dodd-Frank provisions
affecting insurers that could raise compliance costs or
adversely affect the structure, capacity, or the ability of the
insurance industry to absorb risk.
Insurance is a financial risk management tool that allows
individuals and businesses to reduce or avoid risk through the
transfer of that risk to an insurance company. This simple,
efficient, and effective arrangement allows the insured party
to be protected against a multitude of potentially ruinous
losses and instead focus on activities that produce or preserve
income and wealth and contribute to the creation of jobs by
fostering investment, innovation, and entrepreneurship.
Because virtually any risk that can be quantified can be
insured, the use of insurance has become commonplace. In 2010,
worldwide combined property/casualty and life insurance
premiums totaled $4.3 trillion, or about 6.9 percent of global
GDP. Collectively, these premiums reflect the transfer of
hundreds of trillions of dollars of risk exposure to insurance
companies around the world. No modern economy could function as
efficiently without the widespread use of insurance, and many
activities in today's disaster-prone and highly litigious
society would be impossible altogether. It is therefore
critical that any and all regulations impacting the industry,
including Dodd-Frank, not in any way diminish the ability of
the insurer to play the key role it has played for centuries.
To get a sense of the scale of the insurance industry, in
Exhibit 1 in my testimony you will see that premiums written
for the P&C and life and annuity segments of the industry
totaled $1.1 trillion at the end of 2010. Likewise, when we
look at the industry in terms of its assets, you will see that
those totaled $4.5 trillion at the end of 2010.
Now, despite difficult economic times in recent years, the
insurance industry's capital resources are at or near all-time
record highs and are growing. The strength of the industry is
without parallel within the financial services segment, and
property/casualty and virtually all life insurers, unlike
banks, were able to operate normally throughout the entirety of
the financial crisis and have continued to do so since.
Consequently, the financial industry regulations adopted in the
wake of the crisis must avoid imposing bank-centric regulations
on the insurance industry, whose operating record and business
model are clearly distinct from that of the banking sector.
The insurance industry's need to maintain large holdings of
assets to back claims and satisfy regulatory requirements
implies that the industry is one of the largest institutional
investors in the world. Exhibits 5 and 6 in my testimony show
the distribution of the industry's $4.5 trillion in
investments. Insurers are necessarily conservative investors
and, as such, concentrate their investments in relatively low-
risk, highly liquid securities, especially bonds, which account
for about 70 percent of industrywide assets.
It is also worth noting that about 44 percent of the P&C
insurance industry's bond portfolio is invested in municipal
securities, or munies, as you will see in Exhibit 7. In other
words, the property/casualty insurance industry alone in 2011
held bonds that served to finance some $331 billion in a wide
array of projects financing schools, roads, bridges, water
treatment plants, mass transit, healthcare facilities, you name
it.
Now, as noted in Exhibit 10, the insurance industry is also
an important employer, with about 2.3 million employees across
the country. Exhibit 11 shows the number of people employed by
insurance carriers in 2010, with 100,000 or more workers in 8
States, including the chairman's State and the ranking member's
State of Illinois, and at least 50,000 per State in 8 other
States. About $200 billion in wages were paid to employees
during 2010, fueling local economic growth and supporting
millions of secondary jobs.
Now, in terms of the concerns associated with Dodd-Frank
and potentially subsequent regulations, P&C insurance, in
particular, is a large and vital industry in the United States.
It is also sound, stable, strong, and secure, having earned a
reputation for maintaining financial strength even when claim
activity is far above expectations, such as in the wake of the
September 11th terrorist attacks, or Hurricane Katrina, which
produced $41 billion in insured losses from claims,
establishing a new record that even stands to this day.
Insurers were able to meet these challenges because of
longstanding operational philosophy that gives rise to a
conservative underwriting and investment model. The same
philosophy allows property/casualty insurers to continue with
business as usual even during steep economic downturns,
including the 2008 financial crisis and the ``Great
Recession.'' Indeed, not a single traditional property/casualty
insurer or reinsurer failed as a result of the financial
crisis, nor did a single legitimate claim go unpaid. In
contrast, during the financial crisis and its aftermath, more
than 400 banks failed, including the largest failures in U.S.
history.
It is important to recognize that in the decade leading up
to the passage of the Dodd-Frank Act in 2010, the property/
casualty insurance industry experienced the worst claim events
in its history and weathered the worse recession since the
Great Depression. The industry operated throughout this period
without interruption.
Finally, the evidence that--
Mr. Gutierrez. The time, Madam Chairwoman?
Mr. Hartwig. Do you have a vote?
Chairwoman Biggert. No, but your time--
Mr. Hartwig. I am just winding up.
Chairwoman Biggert. If you would wrap up, please.
Mr. Hartwig. Right. Just 30 more seconds.
There have been a variety of concerns, including the
Volcker Rule, as we have already heard a few moments ago, and
particularly with respect to banks that do have associations
with--insurance companies whose primary business is insurance
but have associations and affiliations with banks, as well as
concerns about mission creep associated with the Consumer
Financial Protection Bureau, the eventual execution of subpoena
authority from the Federal Insurance Office, among others, as
well as the Federal Reserve's authority associated with
Systemically Important Financial Institutions (SIFI).
So, again, thank you for the opportunity to testify before
the subcommittee today. And I, as well, would be happy to
respond to any questions.
[The prepared statement of Dr. Hartwig can be found on page
57 of the appendix.]
Chairwoman Biggert. Thank you.
Mr. Birnbaum, you are recognized for 5 minutes.

STATEMENT OF BIRNY BIRNBAUM, EXECUTIVE DIRECTOR, CENTER FOR
ECONOMIC JUSTICE

Mr. Birnbaum. Thank you very much, Chairwoman Biggert,
Ranking Member Gutierrez, and members of the subcommittee.
Thanks for the opportunity to speak on the impact of the Dodd-
Frank Act on insurance consumers, insurers, and the economy.
To evaluate the impact of Dodd-Frank on insurance consumers
and insurers, it is necessary to review how the insurance
industry contributed to and was impacted by the financial
crisis starting in 2007. My experience and observation is that
insurers did contribute to the financial crisis, and the
limitations of State-based insurance regulation became apparent
as the crisis unfolded. State-based insurance regulation
certainly has its strengths, but the Dodd-Frank Act has
assisted and strengthened State-based insurance regulation.
On the property/casualty side, we must start with the
spectacular collapse of AIG, which resulted in a massive
taxpayer bailout. AIG certainly contributed to the financial
crisis because of its huge bets on credit default swaps. While
State insurance regulators have argued it was the noninsurance
subsidiaries of AIG and not AIG insurance companies which
caused the collapse, the fact remains that State insurance
regulators were not able to monitor AIG at the broader holding
company level.
In addition, State insurance regulators missed risky
investment activities by AIG involving the lending of
securities. AIG loaned out securities owned by its insurance
company subsidiaries. And with the proceeds from these loans,
AIG invested $76 billion at its peak in long-term subprime
residential mortgage-backed securities. When the borrowers of
the AIG securities returned the securities, requesting the
return of their cash, AIG did not have the cash because of
severe market devaluations of the residential mortgage-backed
securities. The Federal Reserve stepped in to provide
liquidity.
There are other types of property/casualty insurers which
contributed to and were dramatically impacted by the financial
crisis, including financial guaranty and mortgage insurance.
Financial guaranty insurers, also known as bond insurers,
mistakenly provided assurance for a variety of asset-backed
securities, contributing to the sale of risky and destined-to-
fail mortgage-backed securities.
After years of paying few claims in relation to premium,
the bottom fell out starting in 2007. From 2007 to 2011,
financial guaranty insurers incurred almost $37 billion in
claims, more than 2\1/2\ times the premiums they earned during
that period. The financial guaranty insurance market collapsed,
and the weakness and failure of financial guaranty insurers
rippled through the economy because the absence of financial
guaranty insurance can create great difficulties for States and
municipalities to issue debt.
The private mortgage guaranty insurance market also
contributed to and was crushed by the financial crisis. Today,
the Federal Housing Authority is supporting the mortgage market
by providing increased amounts of mortgage insurance. As with
the financial guaranty insurance, after years of very low loss
ratios, mortgage insurers' poor risk management resulted in
massive losses starting in 2007. The weak condition of mortgage
insurer PMI caused the Arizona regulator to order it to stop
writing new business last year. MGIC has only been able to
continue to write new business because its State regulator
waived minimum capital requirements.
Life insurance and annuities: The life insurance industry
was greatly impacted by the financial crisis. Life insurers
sought relief from the Federal Government in the form of TARP
funds and from State regulators in the form of lower claim
reserve requirements and changed accounting standards.
The problems experienced by the life insurance industry
stem from the fact that life insurer products have transformed
over time from mortality protection to market return
protection. The life insurance industry came under stress
because, instead of the traditional role of insurers in
diversifying risk through the pooling of many lives, many
vehicles, and many properties, the insurers assumed the rule of
guaranteeing market returns. Insurance regulators never
identified or examined the potential for systemic risk to the
financial system associated with insurance companies taking on
ever-greater promises of consumer returns on market
investments.
The history of insurers and the State regulation leading up
to and following the financial crisis is essential for
evaluating the Dodd-Frank Act. And, in my opinion, the Dodd-
Frank Act has benefited insurance consumers and improved the
capabilities of State insurance regulation.
In terms of the Federal Reserve regulation, the Dodd-Frank
Act created the Financial Stability Oversight Council (FSOC)
and also created the Federal Insurance Office (FIO). By doing
so, the Federal Reserve or the Federal Insurance Office and the
FSOC can identify systemically risky insurers, but they can
also identify systemically risky products that may not on their
own create a problem for one insurer, but if there are a bunch
of insurers that are writing that product, then it becomes a
systemic risk because of the product, not just because of an
insurer.
So I see my time is up, and I am happy to answer any
questions. Thank you.
[The prepared statement of Mr. Birnbaum can be found on
page 32 of the appendix.]
Chairwoman Biggert. Thank you very much.
We have been called for a vote, those pesky votes that
always come during hearings. So I think we will go and vote.
And there are only two votes, so we should be back by 3 o'clock
at the latest, and then we will continue on with the other two
witnesses and get to the questions.
Thank you very much. We will be in recess.
[recess]
Chairwoman Biggert. We hope that some of our other Members
will arrive back, but I think we will get started.
And I now recognize Mr. Chamness for 5 minutes.

STATEMENT OF CHARLES M. CHAMNESS, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)

Mr. Chamness. Okay. Thank you.
Good afternoon, Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommittee. Thank you for the
opportunity to speak to you today.
My name is Chuck Chamness, and I am the president and chief
executive officer of the National Association of Mutual
Insurance Companies. NAMIC represents more than 1,400 property
and casualty insurance companies, including small farm mutuals,
State and regional insurance carriers, and large national
writers. NAMIC members serve the insurance needs of millions of
consumers and businesses in every town and city across America.
I would like to begin by thanking the subcommittee for its
diligent oversight and review of the implementation of the
Dodd-Frank Wall Street Reform Act. Preventing unneeded and
damaging interference in well-functioning markets is key to our
country's economic recovery. The committee's continued focus on
this issue is critical.
To begin, it is important to recognize that property/
casualty insurance is a fundamental pillar of the U.S. economy.
Insurance is a mechanism that allows people to take the risks
of owning property or starting a new business, and it allows
businesses to expand with the knowledge that new risks can be
managed. In short, insurance is a critical component of the
Nation's economic vitality.
In terms of the industry's economic impact, the latest
figures show there are upwards of 2,700 property/casualty
insurance companies currently doing business in the United
States, employing 600,000 people. In 2010, the industry paid
$15.8 billion in State taxes and invested $307 billion in
municipal bonds to aid in the construction of various public-
sector projects across the country.
In the wake of the 2008 financial crisis, NAMIC testified
before Congress on the unique nature of the property/casualty
insurance industry and urged lawmakers not to sweep the
industry into any new conflicting and unneeded regulatory
regime. Much to Congress' credit, the focus of the Dodd-Frank
Act was not on the insurance industry, and the bill maintained
the State-based regulatory system that performed remarkably
well during the crisis. Despite the strain on the financial
system globally, insurers remained strong and able to protect
policyholders.
However, the sheer scope of Dodd-Frank has led to many
changes in how insurance companies, particularly those that are
large and diverse, deal with regulation. Despite not being the
target of much of the new financial services regulatory regime,
Dodd-Frank has led to an enormous amount of uncertainty for all
insurers. Many of these consequences of reform appear to be
unintentional--another reason that we are grateful to the
subcommittee for holding this hearing.
I would like to highlight a few of our main concerns.
First, our industry has concerns over the size and scope of
the new Office of Financial Research and its seemingly
unchecked ability to impose expensive new data reporting and
recordkeeping burdens on insurance companies and their
customers. Although property/casualty insurance was carved out
of its jurisdiction, the Consumer Financial Protection Bureau
could attempt to bring the property/casualty insurance industry
under its purview through indirect regulation of products and
services, undermining congressional intent. Lastly, even the
carefully constructed Federal Insurance Office, with its
subpoena and preemption authorities, injects the insurance
marketplace with new uncertainties about the future.
Second, another serious concern is the Volcker Rule,
created to prevent proprietary trading in certain investments
by banking entities. While Congress recognized the need to
exempt insurers from the rule, it is not yet clear that the
implementing agencies will also exempt insurers from the ban on
investments in certain types of covered funds, as Congress
intended. Allowing insurers to continue in their normal
ownership of interest in securities is essential to
appropriately engage in effective long-term investment
strategies and avoid costly premium increases for
policyholders.
Finally, I would address the role of the Federal Reserve.
Before the passage of Dodd-Frank, insurance companies that
owned depository institutions were regulated at the holding
company level by the Office of Thrift Supervision (OTS). Dodd-
Frank eliminated the OTS, and the Federal Reserve was given
this responsibility. While the Federal Reserve has great
experience in supervising and regulating traditional banking
operations, it does not have a history of insurance company
regulation. The Federal Reserve must recognize the distinct
regulatory approaches required to properly supervise insurance
companies, which entail different measures for capital,
financial strength, and stability than banks. In terms of
regulation, one-size-does-not-fit-all and consequently, the
supervision should be tailored to this economic reality.
Unfortunately, the Federal Reserve has adopted a bank-centric
approach, which creates challenges for insurance companies.
Industry concerns are many and varied but generally fall
into four categories: one, the rulemaking process, which
frequently provides insufficient time to process and respond to
comment periods for new rules and regulations; two, the lack of
expertise in the business of insurance and the Fed seeking to
impose bank-centric models and metrics rather than relying on
the functional State regulators; three, the inability or
unwillingness to distinguish between insurance entities and
banks when it comes to systemic risk and assessments for
resolving failing financial institutions; and, four, the Fed's
desire that all financial statements use Generally Accepted
Accounting Principles, whereas insurers are required by their
functional regulators to use Statutory Accounting Principles
(SAP).
As we move forward, NAMIC stands ready to work with
Congress to rectify any unintended consequences that inevitably
emerge from any legislation of the size and scope of Dodd-
Frank. Again, thank you for the opportunity to speak here
today, and I look forward to answering any questions you may
have.
[The prepared statement of Mr. Chamness can be found on
page 43 of the appendix.]
Chairwoman Biggert. Thank you very much.
Mr. Quaadman, you are recognized for 5 minutes.

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

Mr. Quaadman. Thank you, Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommittee.
The insurance industry is the largest investor in the
United States and the world. Insurers have to carefully match
their assets with long-term liability, contingent liabilities,
and also to meet the liquidity needs of their policyholders for
the short term and long term. Accordingly, insurers are
investors in debt and equity markets, government securities,
commercial real estate, and residential real estate. These
investments are executed with strict regulatory oversight, with
high capital and liquidity ratios. Leverage ratios for
insurance companies tend to be 3 to 1, versus 9 to 1 for
financial institutions. The insurance industry is not prone to
runs.
Through these activities, insurers are not only long-term
prudent; they are also a stabilizing force within the capital
markets themselves. The investment activities of insurance
companies allow them to meet the needs of their policyholders
while providing an invaluable flow of capital for Main Street
businesses, allowing them to create jobs and grow.
Accordingly, the insurance industry as an investor is
harmed by inefficient capital markets and ineffective oversight
of those markets. Post-Sarbanes-Oxley, American capital markets
were becoming less efficient through international competition
and an ineffective financial regulatory structure.
Our patchwork financial regulatory structure was created in
the New Deal, certain aspects of it as far back as the Civil
War. At best, that antiquated system was trying to regulate a
1975-style financial market in the 21st Century. This led to
uneven enforcement, a lack of understanding of products and
markets, and an inability to spot bad actors which drives them
out of the marketplace.
Rather than dealing with these problems, Dodd-Frank instead
supersizes them. Dodd-Frank preserves the status quo, does not
streamline regulators, does not allow them to hire the market-
based expertise that they need, and does not allow them to
regulate the financial markets in 2025 rather than in 1975. MF
Global and Peregrine are just some of the latest examples
showing that the underlying problems have not been dealt with.
These difficulties continue to impose pressure upon the
insurance industry and nonfinancial companies' ability to raise
capital. Just let me raise two examples in Dodd-Frank itself.
With the Volcker Rule, the asset liability management
practices of insurance companies are, by their definition,
proprietary trading. Congress wisely decided to give an
exemption to insurance companies for that. But what Dodd-Frank
gives with one hand, it takes away with the other. Insurance
companies, as with many nonfinancial companies, own banks. They
do this to lower transaction costs or to provide additional
services to their customers. By owning a bank, the insurance
companies are brought back into the ambit of the Volcker Rule,
and that also includes all of the compliance issues that go
along with that.
Additionally, as an investor, the insurance company will
have to go into the debt and equity markets that are now going
to be subject to a potentially subjective trade-by-trade
analysis and thumbs-up or thumbs-down approval or disapproval
by five different regulators. This will force insurance
companies to rethink their investment strategies and to
possibly forego opportunities that were profitable for both the
company and their policyholders themselves.
Finally, let me also talk about SIFI designations, which,
even though it impacts only a few companies, will have broader
impacts upon the insurance industry itself.
First off, as you have heard from many other people today,
this will place a unique business model within a bank-centric
style of regulation. This is no more than putting a square peg
into a round hole.
Additionally, we not only have domestic SIFIs designations
and regulations, we also have this on an international level as
well. It is unclear as to how any disputes between the domestic
and international regulators are going to be resolved.
Similarly, if you take a look the insurance industry, where you
could have a tripartite system of regulation, it is unclear how
that is all going to work.
Additionally, as you have also heard a little bit today,
there is a significant shift in risk of loss for nonfinancial
companies that come within the ambit of systemic risk
regulation.
So I know my time is about up, and I am happy to answer any
questions that you may have.
[The prepared statement of Mr. Quaadman can be found on
page 80 of the appendix.]
Chairwoman Biggert. Thank you so much.
We will now turn to Members' questions for the witnesses,
and Members will be recognized for 5 minutes each to ask
questions. And I will yield myself 5 minutes for the first
questions.
Dr. Hartwig, in your published article entitled, ``Bruised,
Not Crushed,'' you note a key difference between insurance
companies and banks, and that is risk appraisal. Can you
explain to this committee how risk appraisal is a
distinguishing factor between insurance companies and the
banks, and how Federal regulators should approach regulating
the two different industries based on the fundamentals of risk
appraisal?
Mr. Hartwig. Yes, risk appraisal, risk assessment, risk
analysis, insurers are expert at assessing risk. And that is
how they remain in business; they take in premiums that are
commensurate with the risk. This is a different operating model
than the banks have. Associated with each particular element of
risk that is accepted is a particular duration of a liability
associated with that. On the banking side, for instance in
depository institutions, you have the ability for those who
hold the liability, the depositor, to make an immediate demand
on that.
That is just one of many, many differences associated with
banks and insurance companies. The fact of the matter is that
there are many reasons why, as I said in my testimony, over 400
banks failed during the financial crisis--and, actually, quite
frankly, we are still counting--and no mainstream or
traditional property/casualty insurer failed as a result of the
financial crisis. And it has a lot to do with risk management.
And the risk management, the insurers, we heard some
testimony earlier about leverage. Insurers were far less
leveraged than banks. But there is a long tradition in this
business. And we heard Mr. Chamness, who runs the National
Association of Mutual Insurance Companies--I will tell you that
the median age of a mutual insurance company is 120 years old.
Okay? And that tells you a lot about risk management and
insurers as it differentiates itself from the rest of the
financial services industry.
Chairwoman Biggert. Thank you.
Then, Mr. Chamness, on page 8 of your testimony, you
mentioned, ``Failure to include an exemption for insurance
operations, allow investment in covered funds and continue the
use of qualified subsidiaries will subject these companies to
costly and duplicative regulation and reporting requirements
and thwart the sound investment practices designed to ensure
solvency and stability in insurance markets.''
Who should care about costly and duplicate regulations and
reporting requirements? Should insurance consumers be
concerned, or business owners?
Mr. Chamness. In a word, yes.
As Dr. Hartwig referred to NAMIC, we are mutual insurance
companies. In the case of a mutual, the policyholders'
interests are aligned with the companies. As Representative
Gutierrez talked about, our largest member, his insurance
company, is effectively owned by its policyholders, and it
operates for their benefit. So to the extent that the insurance
company has higher operating costs, has to pay more to be in
business to serve these policyholders, in the case of the
mutual insurance company, the policyholder eventually pays.
I think the genesis of your question was around the Volcker
Rule's impact on very large insurance companies that are
savings-and-loan holding companies now regulated by the Fed.
And we think this is an opportunity for Congress to clarify
that, as Mr. Quaadman mentioned, the Volcker Rule was intended
to carve out the insurance industry. We think appropriately it
would. We think that insurance regulation certainly covers this
type of covered funds trading that is done for the general
account of insurance companies and is appropriate.
But, unfortunately, it looks like in at least initial rules
from the Fed, that will not be the case unless further work is
done. So we would ask for, in your oversight capacity, if you
could work with the Fed to encourage them to amend the proposed
rule and include general account and separate account
exemptions for covered fund ownership by insurance companies.
We think that would go a long way toward preventing too much
regulation that does create expense.
Chairwoman Biggert. Do you think that there have to be some
statutory ways to fix this or can it be done just by not having
the regulations or getting them to change?
Mr. Chamness. I think the regulatory process would be the
first, and the easiest, step right now in terms of the Fed's
actions. Longer term perhaps legislation could also help
clarify it, although we think that the language in Dodd-Frank
was fairly clear about exempting insurance companies from the
Volcker Rule.
Chairwoman Biggert. Thank you. My time is almost over, so I
will yield back. I recognize the ranking member, Mr. Gutierrez,
for 5 minutes.
Mr. Gutierrez. Thank you very much, Madam Chairwoman. First
of all, I think we should distinguish--most people are going to
think that it is their car insurance company or their home
insurance company that we are really talking about here today
in terms of who it is we need to be really vigilant about. I
don't particularly have a problem. My credit card company, I
think I have to watch them like a hawk, because they change the
rules every day. All Americans should watch them, that is why
Congress has passed. My bank, they love new fees and new
connivances. All the time I have to watch them. I don't
particularly have to watch my insurance company. If you get in
a car accident, you call them up, and they fix it. They debit
it from your account, they are reliable. I don't have a real
problem with them.
But what we haven't discussed is, what about AIG? Now
everybody says oh, well, that is not us, but it is. It is an
insurance company, it is a large insurance company that made a
lot of bad bets, a large insurance company that we had to put
tens of billions of dollars into in order to make the markets
solvent and calm. And it just seems to me that it isn't only
the premiums that we pay to our insurance company that covers
our car and our home and our life. Actually the insurance
companies invest that money and when you have markets and they
invest it in the markets, in capital markets as a matter of
fact. I know we have said a lot about them. You heard a lot of
testimony about how insurance companies invest in bonds, and
keep our economy going. If you go and you evaluate why it is
that municipalities are going into bankruptcy, they will tell
you it is primarily because of the economy, but underwriting
that economy are the home values and the inability to collect
taxes on those homes and the high foreclosure rate. So if you
buy bonds, you want to make sure that our economy is strong,
because you are a big bond holder, according to the testimony
of the three representatives of the insurance companies, that
is what it is that you buy. So we want to make sure that is
there and that our economy is strong. We want you guys to
have--but we also want to make sure that as you--the other
thing is it just seems to me that insurance companies sell
other products. They sell annuities which are directly tied to
the capital markets which can fluctuate in value and if people
make demands. I have another wonderful life insurance company,
but if I were to get into trouble I would have to call it in
and I am sure other people, and even though they have been in
business for 150 years and they are a mutual, who knows why it
was people would make demands on that and make a rush on that.
I want to make sure that we have within the scope of our
conversation and dialogue today to understand that insurance
companies are in the market, they are affected directly by
actions of the market. And I can certainly see where it is that
we might want to make some distinctions between insurance
companies and other financial institutions. Certainly, that
should be something that we should take a look at. But let's
make sure that we understand there is a correlation and there
are--and we still have the AIGs of the world that we need to
deal with, and we need to make sure that we have supervision so
that it doesn't happen again. Illinois can't watch AIG,
Connecticut can't watch it. They can't watch it. We need
someone who is going to watch it.
I would like to just ask Mr. Birnbaum one question, and
that is the expense, could you talk about what is the expense?
There has a been a lot of talk here today that this is
burdensome and it is costing jobs and that it is very
expensive, the regulatory apparatus we have. Could you speak to
that?
Mr. Birnbaum. To some extent, yes, thank you. The cost of
regulation is a very small portion of the amount of premium
that consumers pay for all sorts of insurance. And I think the
other thing that is really important to keep in mind is that
insurance is really a pooling of consumers' money. What
insurance companies do is they take consumers' money and they
put that into a risk pool to diversify the risk of all those
consumers. So when my colleagues on the panel say that insurers
invest in capital markets, they invest in real estate, they buy
municipal bonds, it is really policyholders who are buying
those assets. The insurance companies are the intermediaries
that are doing that.
The other thing that insurance companies do with
policyholder-supplied funds is they spend it on lobbying and
regulatory activities. So in my view, the cost of actual
regulation at the State insurance level and now at whatever is
left at the Federal level is a relatively small portion of the
premiums that consumers pay. It is like pennies on the dollar.
Mr. Gutierrez. I guess their argument is, and it is one
that I think we should take a look at, if you could just
answer, should they be treated differently than other--than
investment banking firms and banks?
Mr. Birnbaum. To the extent that insurance companies are
doing different things than investment banks and commercial
banks, than other types of financial institutions, they should
be treated differently. But to the extent that they are doing
the same things as banks or other types of financial
institutions, then it seems reasonable that there would be a
consistent set of rules for different players doing the same
thing.
Mr. Gutierrez. Thank you.
Chairwoman Biggert. It looks like some of the other
witnesses would like to respond to that, so I will yield you
another minute.
Mr. Chamness. If I could just add one thing, as far as I am
aware, the one insurance company that at one point in time
seemed to behave a bit like an investment bank was AIG, and I
am not aware of any other insurance company at this point, at
least within our membership, the mutual insurance industry on
the property casualty insurance side, that exhibits any
characteristic other than that of home, auto, commercial line
insurance that is required for our economy and for the
existence of homeownership and driving our cars and operating
our businesses.
Mr. Gutierrez. I can't--is that correct? It sounds good to
me.
Mr. Birnbaum. As I pointed out in my testimony, the life
insurance industry certainly had problems following the
financial crisis. They not only applied for TARP funds but they
also went to insurance regulators seeking capital relief in the
form of changed accounting rules and lower reserve
requirements. And the property casualty insurers certainly made
use of those changed accounting rules to beef up their capital
on paper without actually creating new assets to protect
consumers.
Mr. Quaadman. If I could just add as well, with AIG you had
a situation where, number one, the traditional insurance
portions of business were fine, they were solid. But AIG got
involved in selling insurance and financial products that quite
frankly, the regulators didn't understand. The regulators
couldn't perform the appropriate oversight, which is what
endangered the company. But with insurance, if there is a
problem with the company, the policyholders remain whole, and
that was true with AIG as well.
Chairwoman Biggert. I guess we could go on, this is a very
good question, but we will move on to Mr. Hurt, the vice
chairman of the subcommittee.
Mr. Hurt. Thank you, Madam Chairwoman, and thank you for
holding this hearing. I thank the witnesses for appearing and I
apologize for not being here for your testimony, but I do thank
you for your input on this important hearing. I want to follow
up on something that Mr. Chamness and the Chair were talking
about, and that is the application of the Volcker Rule and what
the effect for insurance companies and shareholders as
consumers, what the effect will be in the event that a final
Volcker Rule restricts insurance companies' ability to invest.
I was hoping, Mr. Birnbaum, that you could address that issue,
and then I would like to hear from Mr. Chamness. I would like
to hear him expand on what he was talking about earlier in
terms of what are the potential effects, unintended and
intended, in the event that takes place?
Mr. Birnbaum. Sure. Thank you, Congressman. If we look to
what happened with AIG, even within the insurance companies,
there was some risky investing on the part of AIG. In my
testimony I discussed AIG's use of security lending, in which
they actually loaned out securities that were owned by the
insurance companies. And with the cash that they got for
loaning those out, they invested in risky assets like
residential mortgage-backed securities. So when the borrowers
of those securities came back and said, we want our cash back,
AIG didn't have the money, because the residential mortgage-
backed securities which were so risky had devalued so much. And
at its peak, we are talking about $76 billion in securities
lending.
So within the insurance company there was that type of
thing that went on and regulators didn't know about it at the
time.
Now, having said that, if AIG was involved in these other
activities like credit default swaps, why would we exempt the
entire group just because AIG had insurance companies? Why
would we exempt the entire operation from any oversight over
these trading of risky derivatives? It seems to me that
Congress got it exactly right when you said that when you are
engaged in the business of insurance, the Volcker Rule doesn't
apply. When you go outside of that, then there is going to be
some oversight on the use of derivatives and that kind of
trading.
Mr. Hurt. Okay. I would like to hear from Mr. Chamness and
anybody else who would like to comment in my allotted time, but
when you are talking about prohibiting a certain source of
investments, there are going to be consequences, and I would
like to have a better understanding from you all what those
negative and positive consequences will be.
Mr. Chamness. Thank you for the question. I think I agree
with where Mr. Birnbaum ended up, which is that there are two
separate rules, Congress got it right. Volcker basically
exempts insurers from the preemption that was designed for
banks.
The fact is that insurance companies depend on their
investment income that helps pay--it helps add surplus and
increases their capacity to do business and serve
policyholders. So to have some kind of unintentional
restriction on their ability to invest with their own accounts
was not what Congress intended, and we would like to make sure
that in the Fed's regulatory process, that is clarified.
Further, in terms of large insurance holding companies or
savings and loan holding companies that have insurance
affiliates, one concern is that because they have separate
investment affiliates, again unintentionally or Congress'
intention was to not prohibit these insurance companies from
being able to invest in their separate investment affiliates,
we are concerned with the way the Fed's regulation has been
drafted that could in fact be the outcome, that there would be
some prohibitions on the savings and loan holding companies
that are affiliated with insurance companies. And we think that
through your oversight if you could help urge the Fed to let go
of that, it would be helpful.
Mr. Hurt. Thank you. Mr. Quaadman?
Mr. Quaadman. Yes, Mr. Hurt, thank you. Just to add two
things, Federal Reserve Governor Tarullo testified before the
committee at this very table on January 18th on the Volcker
Rule and banning proprietary trading, that the proprietary
trading was not a cause of the financial crisis. So the rule
itself and its application on the insurance industry does not
deal with the financial crisis itself.
The other issue is that the regulatory complexity of the
Volcker Rule, and I know Ranking Member Gutierrez raised
JPMorgan Chase before. I only raise that in the context that
you have the trade which has been well-publicized now, you have
100 examiners embedded within JPMorgan Chase, here we are 3
months after that trade was first reported in the press, and
those examiners still cannot say whether or not those trades
were proprietary. The Federal Reserve and the OCC and the SEC
and the CFTC and the FDIC, how are they going to be able to
say, millions of trade a day in the marketplace are either
proprietary or not. It is just an unworkable system.
Mr. Hurt. Thank you. And my time has expired. I thank the
Chair, and I yield back.
Chairwoman Biggert. The gentleman's time has expired. Mr.
Miller of California is recognized for 5 minutes.
Mr. Miller of California. Thank you, Madam Chairwoman. Just
so there is no confusion, no one is arguing that there
shouldn't be strong capital standards. We argue that there
should be appropriate capital standards, and that is where the
confusion lies.
Mr. Chamness and Dr. Hartwig, we have heard concerns that
the Federal Reserve's new capital requirements for savings and
loan holding companies that are owned by insurance companies,
can you explain why insurance companies and banks currently
have different capital standards? And if the Fed chooses a more
bank-centric standard as currently imposed, how would that
impact the insurance industry?
Mr. Hartwig. Maybe I will start, and then I will hand it
off to Mr. Chamness. I don't think it comes as any surprise
that banks and insurance companies have different capital
standards today. There are also different accounting standards
that exist between them. It gets back to the very heart of what
we were talking about originally. These are very, very
different enterprises. Insurers historically have always been
operated on a very, very conservative basis. They have been
regulated historically of course by the States. The States have
developed over time a form of regulation that has worked quite
well, if we look at the history of 120 years of insurance
regulation.
Over the past century or more when we look at banks which
have had quite frankly a history of volatility, a situation
where every 15 to 20 years there seems to be some extreme
problem in the banking sector. The most recent financial crisis
is only the most recent example of that. So over time we have
developed two completely different systems, that address two
different industries. And again, as I mentioned, when we think
about the insurance industry we have to think about an industry
where we have a particular type of liability which is
fundamentally different from the sorts of liabilities that we
see in a banking operation. And that leads to a much more
conservative form of operation in the insurance industry than
we have seen historically.
So maybe with that, I might want to turn it over to Mr.
Chamness.
Mr. Chamness. Yes, thank you for the question. And it is a
good issue. Congress authorized the Fed to set capital
standards for savings and loan holding companies and we think
it is a difficult task. But I think the best first step for the
Fed would be to basically adopt the regulation standards or
capital standards that are in place right now in the State
insurance regulation system. We are concerned that there will
be a one-size-fits-all approach. As we talk about the
difference between the banking industry and the insurance
industry and their balance sheets, their purposes, their
behavior over the decades, there are significant differences,
and so we don't think a one-size-fits-all capital approach is
appropriate. We know that in the hundreds of pages in the Fed's
June 7th risk-based capital proposal, which is intended to
implement Basel III, there is frankly an inappropriate look at
insurance capital requirements, it would redefine capital,
eliminating some of the forms of capital used by the insurance
industry, particularly mutual insurance companies, for more
than 100 years, structures like surplus notes which are
subordinate to regulatory approval, but a form of debt that is
counted as surplus. We think that is a problem with current
regulation on the savings and loan holding company capital.
We were encouraged that last week Chairman Bernanke
testified that the Fed is at work recognizing the differences
between insurance and bank holding companies and that they
would recognize them and implement based on the differences
between the two companies. And we think capital standards is
surely an area where there deserves to be some difference.
Mr. Miller of California. If he follows up with a
statement, you would probably would be fine.
Mr. Chamness. Excuse me?
Mr. Miller of California. If he follows up with a
statement, you would probably would be fine.
Mr. Chamness. Exactly. I will tell you if they continue on
the one-size-fits-all approach, which we disagree with, they at
least should have a longer implementation period. Right now,
Basel III is on track for, I think, January of next year. There
is no way insurance companies, these large, newly regulated by
the Fed insurance companies, can be in compliance by then.
Mr. Miller of California. And that wasn't the direction of
Congress either. It was very clear.
Mr. Chamness. It wasn't. They would need at least 3 years,
but we would rather they didn't have to comply.
Mr. Miller of California. Mr. Chamness, I have a question.
I was reading your testimony. You say, ``Potential adverse
impacts of the Dodd-Frank Act upon the insurance industry's
ability to act as an investor will have serious consequences
for Main Street businesses.'' My question has two parts. First,
can you explain to the committee how regulations stemming from
Dodd-Frank could inhibit the insurance and its ability to make
critical investments in the U.S. economy? And second, is there
a domino effect for the business and jobs and other sectors of
the U.S. economy if they take their course?
Mr. Quaadman. Sure, and thank you for the question. I think
the Volcker Rule is probably the most stark example where we
had the subjective regulatory approval or disapproval of
trades. And if insurance gets wrapped up in proprietary
trading, either they have to rethink their investment
strategies or they actually have to start to leave some of the
markets because the insurance industry as a capital provider
with equities but also with debt because the debt markets far
outweigh the equity markets, is a big provider of capital. So
if they feel there are regulatory impediments in going into
those markets, that becomes problematic. Also, I think it is
important to realize that this isn't happening in a vacuum,
particularly in the insurance industry. You have Dodd-Frank,
you mentioned Basel III, you have the rewriting of insurance
accounting rules, you have solvency too that is being
negotiated. Those are also impacts that are going to be felt by
the insurance industry. But the capital impacts on the
insurance industry are also subject to other capital providers
as well. And as they retrench, and I think you have seen that a
little bit, what will happen is if companies find that it is
going to be more difficult to raise capital in the debt and
equity markets, not only is there going to be less capital
there, companies are going to have to have larger cash
reserves. So if you look at the United States as traditionally
about 14 percent of GDP or $2.2 trillion, if you start to ramp
up to numbers that you see in the EU, which is about 21
percent, that is $3.3 trillion, which means that is $1.1
trillion that is taken out of a productive means for the
economy.
Mr. Miller of California. Thank you. I yield back.
Chairwoman Biggert. The gentleman yields back. The
gentleman from California, Mr. Sherman, is recognized for 5
minutes.
Mr. Sherman. My focus is on insurance that isn't called
insurance. Basically, when we use the insurance industry to
shift risk, I pay a small fee, and if something bad happens to
me, you the industry writes me a big check. We have insurance
reserves for that and through this great economic crisis the
regulated insurance companies have done quite well. And if I
had an $80 billion portfolio of mortgage-backed securities and
I come to you for insurance and say please ensure that this
portfolio will never be worth less than $70 billion, I believe
that would be an insurance contract and you have to have
reserves. But instead we could evade the insurance laws by
saying we will do something different. Give me the option to
put to you my $80 billion portfolio in return for $70 billion
of U.S. Treasuries. And that isn't an insurance contract. If it
doesn't have any reserves, it could take the whole economy
down, and it almost did.
What do we do so that ``pay a small fee, get a big check if
something bad happens'' contracts are subject to either Federal
or State insurance regulation and have adequate reserves?
Why don't I address that first to Mr. Birnbaum?
Mr. Birnbaum. Thank you, Congressman. I think that is
exactly the approach in the Dodd-Frank Act, which basically
says that insurance is regulated by the States as it has been
and to the extent that insurance companies are engaged in
insurance activities, their activities are in fact regulated by
the States. When insurance companies start engaging in
noninsurance activities, then Federal regulators get involved.
And that only makes sense. It was not only--
Mr. Sherman. For these purposes, a credit default swap
would be classified, I would say misclassified, as a
noninsurance activity?
Mr. Birnbaum. That is right. State insurance regulators
looked at credit default swaps and said they were not
insurance.
Mr. Sherman. Looking of course at the legal technicalities
rather than the economic substance.
Mr. Birnbaum. The bottom line on that was while State
insurance regulators were regulating the insurance
subsidiaries, the insurance companies of AIG, they weren't
looking at what AIG was doing with credit default swaps. So
whether you believe that insurance regulators did a great job
with the insurance company subsidiaries, they weren't able to
look at the broader picture.
Mr. Sherman. The ship didn't sink and there was a terrible
storm. That is my definition of being a good ship builder. So I
will give them credit for that.
Let me turn to the three insurance industry representatives
here. As representatives of the insurance industry, can you at
least name one aspect of the Wall Street Reform Act that you
believe has improved the industry?
Mr. Chamness. I appreciate the question, and I think the
derivatives regulation was generally helpful and an improvement
post-Dodd-Frank.
Mr. Sherman. Mr. Quaadman?
Mr. Quaadman. Thank you, Mr. Sherman. First of all, thank
you for all of your hard work on lease accounting. We greatly
appreciate what you did there. I would also say that the
clearing of derivatives for financial speculation purposes was
a good thing. We think there should be an exemption for
corporate end users but we do think that derivatives clearing
was good.
Mr. Hartwig. I might just add in addition to the
derivatives, the fact of the matter is that Dodd-Frank did
explicitly recognize the unique nature of insurance, by and
large. We are here today talking about some residual issues and
some issues which I don't think were intended ultimately by the
act by Congress, and we are here to discuss those today.
Mr. Sherman. Thank you very much. I yield back.
Chairwoman Biggert. The gentleman yields back. The
gentleman from North Carolina, Mr. McHenry, is recognized for 5
minutes.
Mr. McHenry. Thank you, Madam Chairwoman. Thank you all for
your testimony, and thank you for being here today. And Mr.
Quaadman, in your written testimony, you say potential adverse
impacts of the Dodd-Frank Act upon the insurance industry's
ability to act as an investor will have serious consequences
for Main Street businesses. Explain.
Mr. Quaadman. Sure. As I mention in my oral statement as
well, the insurance industry is the largest investor in the
world, both globally and within the United States. They are key
players in the debt and equity markets and are the largest
holders of both instruments. So in that context, the insurance
industry is a main provider of capital for Main Street
businesses, large and small. If there are regulatory
impediments that start to seep through Dodd-Frank, and if the
insurance industry has to retrench into investment strategies,
that will make it more difficult for Main Street businesses to
tap capital. The other thing that is important to recognize,
too, as the insurance industry is a large investor, they have
to do so through regulatory oversight. So they are not
investing in junk; they are investing in highly rated products
in good companies.
Mr. McHenry. So what happens if they pull out from--you
outlined about a trillion dollars of pull out potentially if we
look like Europe in terms of regulatory structure for
insurance. What does that mean? Tell me what that means for my
constituents.
Mr. Quaadman. What that means is that the person who is
going to be on Main Street or the businesses that are in your
district, there is going to be less capital to go around, there
is going to be less liquidity to go around.
Mr. McHenry. Which means higher rates for what is then
available?
Mr. Quaadman. That is correct.
Mr. McHenry. So the availability of credit goes down.
Mr. Quaadman. Yes.
Mr. McHenry. Your access to it goes down even more.
Mr. Quaadman. That is correct.
Mr. McHenry. And that which is available is more costly.
Mr. Quaadman. That is correct. And you also have a
different distribution of capital. So as other forms of capital
have to take the place of, let's say, insurance, that
entrepreneur who is in the garage trying to make the next big
product isn't necessarily going to have any funds available for
him to be successful.
Mr. McHenry. Mr. Birnbaum, do you see it the same way?
Mr. Birnbaum. No, Congressman. No, I don't really see it
that way. I am having a hard time following the concept that
any restrictions on sort of noninsurance investments by an
insurance company that is part of a savings and loan holding
company will somehow result in insurance companies removing a
trillion dollars from their investment portfolio. It just
doesn't make any sense. Insurance companies gather policyholder
funds and put that into a risk pool to protect the
policyholders. And in doing so, they invest that in a variety
of things. So why would they at some point decide, we are going
to go on strike, we are going to put that money in cash and not
invest it? It just doesn't make sense to me.
Mr. McHenry. Mr. Quaadman, how does it make any sense?
Mr. Quaadman. As I said before, and this is on a macro
level, if insurance and other investors are no longer available
to be players in the capital markets, companies are going to
have to increase cash reserves, and that is where we came up,
that is why I mentioned before about the $1.1 trillion that is
taken out, because companies are going to have to hoard the
cash and they are going have to also change their borrowing
strategies as well.
To give you one example with a mainline company, their
costs when they go out and sell commercial paper is 47 basis
points. When you start to add in the Volcker Rule itself, that
probably adds in another 50 basis points, but more importantly,
if the commercial paper market is shut down for that company's
purposes because of the regulatory scrutiny of the Volcker
Rule, which is not an unusual circumstance, or may not be an
unusual circumstance, they then have to access bank lines of
credits which are prime plus 1, or at this point 4.25 percent,
almost 10 times the amount. So that is among the ways that
capital costs will increase for mainline businesses.
Mr. McHenry. So in short, regulation inhibits access to
credit and drives up the cost of credit.
I have no further questions. I think it is self-evident
that the cost of Dodd-Frank is real to consumers, and if we
don't get this thing right, we are going have an even worse
impact on the economy than we have already seen.
With that, I yield back.
Chairwoman Biggert. Thank you, and I will yield myself
another round.
Mr. Quaadman, you note in your written testimony that when
reviewing the Dodd-Frank Act, policymakers must take into
account the impact upon capital formation for nonfinancial
industry and ameliorate negative impacts. You say that failing
to do so will consign the economy to anemic growth and the
United States will not be able to create the 20 million jobs
over 10 years needed for a prosperous economy.
Can you help this committee understand the impact that the
insurance industry has on the U.S. economy, specifically with
respect to prosperous growth and job creation?
Mr. Quaadman. Sure. And thank you very much for that
question. As we look at these issues, we look at it from the
vantage point of if a corporate treasurer has to be to go into
the capital markets, how does it impact them? And what has
happened with Dodd-Frank and when Congress looked at Dodd-
Frank, I think what had happened is that policymakers looked at
the financial services industry itself and decided to go after
the financial services industry but didn't realize that the
industry itself was really just a conduit between investors and
businesses. So that if you start to tinker around with the
Volcker Rule, insurance may not be exempt from the Volcker
Rule. When you start to look at different aspects of it like
that, when you see the insurance industry as being the largest
investor in the United States for businesses, those regulatory
impacts have an impact upon the corporate treasurer's ability
to raise capital, both for everyday liquidity needs but also
for growth opportunities. So if businesses don't have access to
capital and can't expand, they can't create jobs.
Chairwoman Biggert. Thank you, and just one more question,
to you or whoever wants to answer this. You note in your
testimony that a quandary for regulators in the insurance
industry is the designation and regulation of Systemically
Important Financial Institutions (SIFI).
How would the designation and regulation of SIFIs under the
Dodd-Frank Act affect the insurance industry and the U.S.
economy?
Mr. Quaadman. I thank you very much for that. I think it
has effects in two ways. First, as has been said before, the
regulations with systemic risk and the Orderly Liquidation
Authority (OLA) are very bank-centric. So you have the Federal
Reserve, you have the FDIC, they are really looking at it
through the traditional lens as a bank regulator. The problem
is when you start to take a look at nonbanks that could be
designated. So let's take insurance as an example. You have an
industry where you have a long-term matchup of asset and
liability, which is much different than banks, if you take a
look at nonfinancial companies, you have Congress actually
trying to keep as many of those companies out of it. But what
has happened is that the Federal Reserve has been looking at
the implementation of this through very bank-like ways. So they
have not been willing to create regulations that deal with
different business models and that is going to cause regulatory
mismatches.
The second way that I think it negatively impacts it is
that when you take a look at the bank-centric system, the FDIC
system of insurance really spreads the cost and the risk as
well as the opportunities around the entire industry when a
bank goes under. When you take a look at nonfinancial companies
and insurance companies, if they are going to go under the risk
of loss is on management and the shareholders of that company.
Now if you start to designate insurance companies and
nonfinancial companies, they are going to be operating under a
risk of loss where they are dealing with the assessment system
within Title II that means that their risk of loss may be
different than their competitors, and that could have negative
impacts on the economy.
Chairwoman Biggert. Thank you. Dr. Hartwig, would you like
to comment on that?
Mr. Hartwig. Sure, just to follow up on that. It is
somewhat odd, as we currently see under Dodd-Frank, that we
would have large insurance companies that are not designated as
Systemically Important Financial Institutions but pass some
sort of threshold of say $50 billion or so that ultimately wind
up having to clean up the pieces for what goes on down at Wall
Street. And as I think as we just heard we are talking about a
situation where insurers that are not involved in any of these
businesses, that are not even designated as Systemically
Important Financial Institutions have to in effect hold capital
aside, particularly if economic times look dark, not because of
their own particular operations, which could be run to the most
exacting standards of the States in which they are regulated.
They could have a top rating, an A-plus rating from the ratings
agencies like A.M. Best but nevertheless still now have to set
aside capital in the event that some company over which they
exercise no control goes under. And that could have the impact
of reducing the availability and increasing the cost of
insurance to all consumers.
Chairwoman Biggert. Thank you. Mr. Chamness?
Mr. Chamness. Just one thing. I certainly agree with what
has been said so far, but I would add one point we haven't
talked about yet, which is an unintended consequence, but if
you are a property casualty insurance company and you are
deemed systemically significant, the market may view you as
too-big-to-fail; in other words, absolutely secure and most
likely to pay claims. And we obviously would see that as a
disruption in the insurance marketplace because it would not be
Congress' intent or the regulators' intent to give a SIFI
designation in the insurance industry the role of making that
SIFI designated insurer some kind of ``super-sound, too-big-to-
fail, most-likely-to-pay claims'' participant in the market.
Chairwoman Biggert. Thank you.
And with that, I would like to ask unanimous consent to
insert the following materials into the record: a June 24,
2012, statement from the American Council of Life Insurers; and
a June 24, 2012, statement from the Property Casualty Insurers
Association of America.
Chairwoman Biggert. With that, I would like to thank all of
the witnesses. The Chair notes that some Members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for Members to submit written questions
to these witnesses and to place their responses in the record.
With that, I would like to thank you all. You have been a
wonderful panel and the expertise that you all have, even
though you may not all agree exactly with each other, but we
really appreciate the views that you have brought to us today.
This has been a very important hearing. Thank you very much.
With that, this hearing is adjourned.
[Whereupon, at 4:08 p.m., the hearing was adjourned.]

A P P E N D I X

July 24, 2012

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