[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS TO REFORM
DOMESTIC INSURANCE POLICY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MAY 20, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-80
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
RANDY NEUGEBAUER, Texas, Chairman
BLAINE LUETKEMEYER, Missouri, Vice MICHAEL E. CAPUANO, Massachusetts,
Chairman Ranking Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey CAROLYN McCARTHY, New York
LYNN A. WESTMORELAND, Georgia BRAD SHERMAN, California
SEAN P. DUFFY, Wisconsin GWEN MOORE, Wisconsin
ROBERT HURT, Virginia JOYCE BEATTY, Ohio
STEVE STIVERS, Ohio STEVEN HORSFORD, Nevada
DENNIS A. ROSS, Florida
C O N T E N T S
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Page
Hearing held on:
May 20, 2014................................................. 1
Appendix:
May 20, 2014................................................. 37
WITNESSES
Tuesday, May 20, 2014
Carter, Joe E., Vice President, United Educators Insurance....... 8
Hughes, Gary E., Executive Vice President and General Counsel,
American Council of Life Insurers (ACLI)....................... 10
Karol, Tom, Federal Affairs Counsel, National Association of
Mutual Insurance Companies (NAMIC)............................. 12
Kohmann, Joseph C., Chief Financial Officer and Treasurer,
Westfield Group, on behalf of the Property Casualty Insurers
Association of America (PCI)................................... 14
Schwarcz, Daniel, Associate Professor of Law, and Solly Robins
Distinguished Research Fellow, University of Minnesota Law
School......................................................... 15
APPENDIX
Prepared statements:
Carter, Joe E................................................ 38
Hughes, Gary E............................................... 55
Karol, Tom................................................... 63
Kohmann, Joseph C............................................ 72
Schwarcz, Daniel............................................. 80
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Letter from over 50 insurance company CEOs................... 98
Written statement of the American Insurance Association (AIA) 101
Written statement of the Financial Services Roundtable....... 112
Written statement of the Independent Insurance Agents and
Brokers of America (IIABA)................................. 117
Written statement of the National Association of Insurance
Commissioners (NAIC)....................................... 119
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 121
LEGISLATIVE PROPOSALS TO REFORM
DOMESTIC INSURANCE POLICY
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Tuesday, May 20, 2014
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Royce, Garrett, Duffy, Stivers, Ross; Capuano, Clay, McCarthy
of New York, Sherman, Beatty, and Horsford.
Also present: Representative Posey.
Chairman Neugebauer. This hearing of the Subcommittee on
Housing and Insurance entitled, ``Legislative Proposals to
Reform Domestic Insurance Policy,'' will come to order.
We will have opening statements, 10 minutes on each side,
for the Majority and the Minority.
And there may be Members in attendance who are not assigned
to the Housing and Insurance Subcommittee. Without objection,
members of the full Financial Services Committee who are not
members of this subcommittee may sit on the dais today, but,
consistent with our committee policy, they may not be
recognized or yielded to for any purpose. If they have any
written statements, we will include them in the hearing.
At this particular point in time, I will give my opening
statement.
Thank you for being here today. I think this is an
important hearing. We are going to talk about five legislative
proposals to reform the domestic insurance policy in this
country. This hearing will give many of the stakeholders in
this room much-needed respite from our TRIA deliberations.
And speaking of TRIA, I noticed that in the audience today,
there are a few people here who may have a little bit of an
interest in that subject. Just to give you a little bit of an
update, we are working very hard on that issue.
Just a couple of weeks ago, as you may know, we sat down
with some of the Members of the Majority who sit on the
committee and we laid out a framework for them to review. And
we opened up a dialogue and a discussion with those Members,
and we have been getting some very valuable feedback.
And in the very near future, we plan to, once we make some
refinements in that framework, sit down with the Minority, as
well. Because it is our goal, hopefully sometime in June, to
put out a bipartisan--hopefully, it will be a bipartisan bill
on TRIA, to move out of this committee. And hopefully, we will
then put it in the hands of leadership and let them determine
when we might look at passing that on the House Floor.
But I just wanted to give you a little bit of an update. As
many of you are seasoned veterans around here, you know it
doesn't always go on schedule, but that is the schedule that we
have today.
But today we turn our attention to some insurance reform
legislation that focuses on protecting policyholders, offering
more consumer choice for insurance products, and providing
regulatory relief to reduce costs to domestic policyholders.
First, we will examine legislation which ensures that
regulations intended to rein in certain activities of large
complex financial institutions don't trickle down to insurance
companies that are properly regulated at the State level.
H.R. 4510, which was introduced by Representatives Miller
and McCarthy, would clarify that application of capital
requirements to insurance companies that are subject to Fed
supervision. This bill would simply ensure that capital
standards intended for banks are not needlessly applied to
insurers that own financial institutions.
H.R. 605, introduced by Mr. Posey, would make certain
insurance companies not subject to Federal assessments to pay
for the orderly liquidation of failed financial institutions,
given that State insurance laws already govern the process for
unwinding failed insurers.
Second, we will examine the legislation intended to protect
insurance policyholders who are customers of a bank-affiliated
insurance company. H.R. 4557, introduced by Mr. Posey, would
allow State insurance regulators to intervene to protect the
soundness of the insurance company affiliate with a failing
financial institution. This will allow regulators to ring-fence
insurance-specific assets so that policyholders are protected
in the event of insolvency.
And finally, the subcommittee will examine two draft
proposals intended to increase consumer choice and to reduce
unnecessary regulatory burdens. The first, authored by Mr. Ross
from Florida, would modify the Liability Risk Retention Act to
allow self-insured liability risk-retention groups to create
efficiencies by expanding their commercial lines of coverage.
The second, authored by Mr. Stivers, would lessen the
regulatory burdens associated with data requests from insurance
supervisors.
I applaud all of the sponsors of these bills that we plan
to examine today. And separately, I would like to acknowledge
Mr. Duffy for all of his hard work he and his staff have done
on the Miller-McCarthy capital standards bill.
I also would like to recognize Mr. Duffy, in that he just
recently added another member to his family. I believe this is
number seven. And it was a little girl, as I--
Mr. Capuano. Seven?
Chairman Neugebauer. Yes.
Mr. Duffy. I'm very productive.
Mr. Capuano. A little overproductive.
Chairman Neugebauer. So, I look forward to a very
productive hearing.
And now, I would like to recognize the ranking member of
the subcommittee, Mr. Capuano, for 2\1/2\ minutes.
Mr. Capuano. Thank you, Mr. Chairman.
I want to thank the panel for being here.
I think there will be some good discussion today. I don't
think there is going to be a lot of debate. There may be some
basic issues. I think most of these issues that are proposed in
these bills are reasonable and thoughtful. Again, there will be
some details, but, overall, I am looking forward to some
discussion to see if we can come up with easy ways to do some
easy things without complicating them with unnecessary,
extraneous material.
Thank you very much.
Chairman Neugebauer. And now, I would like to recognize Mr.
Duffy for 1\1/2\ minutes.
Mr. Duffy. Thank you, Mr. Chairman, for holding this very
important hearing.
And I appreciate the panel coming in and dispensing some of
your wisdom and thoughts on the bills that we are talking about
today.
I just want to say a few brief remarks about the Miller-
McCarthy bill, a great bipartisan proposal, I think, that goes
a long way to fixing a problem that I don't really think
existed. We know the Fed interpreted the Collins Amendment
differently than probably most everyone else in this room. And
so we now have, I think, a bipartisan legislative fix that
addresses that Fed interpretation.
Listen, I don't think anyone anticipated that we would
apply bank capital standards to insurance companies. And that
was never the intent of the Collins Amendment. The Miller-
McCarthy bill will address that issue, making sure that we
treat insurance companies very differently than banks in
relationship to the capital which they are required to hold.
So, I look forward to your testimony and your views on all
of the bills, but specifically in regard to Miller-McCarthy.
And I want to also extend my thank you to Mr. Miller and
Mrs. McCarthy for their bipartisan effort in bringing out this
proposal.
I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from California, Mr. Sherman, is recognized
for 2 minutes.
Mr. Sherman. Thank you.
We need to pass the reauthorization of TRIA. That isn't on
the agenda today.
We saw with AIG an excellent case study. That portion of
the enterprise that was subject to State insurance regulation
remained healthy even though the top managers in the company
were behaving like drunken sailors. Those parts of the company
that were not subject to State insurance regulation crashed as
if they were being run by drunken sailors.
The other thing this proves is that credit default swaps
are insurance and should be treated as such. And we probably
would not have had a 5-year catastrophe in our economy had we
done two things: one on the credit rating agencies; and the
other is to require that portfolio insurance be called
insurance.
We are dealing with a number of bills today, two that are
important and that I am happy to cosponsor.
One is the Miller-McCarthy provision, summarized by the
last speaker. And that is that we need to use insurance
accounting principles to determine the creditworthiness of
insurance companies.
The second, the Policy Protection Act, introduced by Mr.
Posey, and I guess I am the chief Democrat on it, recognizes
that you should not invade an insurance company and seize
assets in a way that endangers its policyholders simply to
shore up a related and affiliated bank or other depository
institution. What the bill does is it takes the policyholder
provisions that are already in the Bank Holding Company Act and
puts them also in the Thrift Holding Company Act.
And, with that, my time has expired.
Chairman Neugebauer. I thank the gentleman.
And now, another gentleman from California, Mr. Royce, is
recognized for 2\1/2\ minutes.
Mr. Royce. Thank you. Thank you, Mr. Chairman.
And just a reminder for my friend from California, that the
securities lending operation of AIG was regulated at the State
level.
But this hearing on legislative proposals to reform
domestic insurance policy confirms a new normal for insurance
regulation in the United States. It is basically a hybrid model
with layered regulation by States and the Federal Government.
The age-old debate of State versus Federal regulation is aged,
is old. The new reality involves State regulators, it involves
the Federal Reserve, and it involves the Treasury Department,
both through the Financial Stability Oversight Council (FSOC)
and through the Federal Insurance Office (FIO).
Many of the bills before us today are a response to this
hybrid model. In particular, H.R. 4510, the Insurance Capital
Standards Clarification Act, offered by the gentleman from
California, Mr. Miller, reflects a belief that insurance
capital standards set by a traditional bank regulator, the
Federal Reserve, need not be bankcentric and should, in fact,
be tailored to reflect the unique and specific business model
of insurance companies.
I strongly support this bill. Regulation can take place at
the Federal level, but it must be smart and specific to
insurance operating models. And without changes, the current
hybrid insurance regulation structure has the potential to fail
consumers miserably.
A system which produces regulatory confusion, hinders
consumer choice, and discourages competition is burdensome for
all parties involved. And I have said this before: It very well
may be that the system has not failed, but since when has
nonfailure been a synonym for success?
Unlike some of my colleagues, I believe much of the problem
is lack of uniformity at State levels. Within this hybrid
framework, we should effectuate uniform domestic regulations.
And toward this end, yesterday, along with Representative Tammy
Duckworth, I introduced the Servicemembers Insurance Relief Act
of 2014, a straightforward bill to ensure portability of auto
insurance for all our servicemembers, who often move from State
to State.
This bill is a perfect example of a simple fix to the
insurance regulatory framework that will make a big difference
in the lives of American consumers. And I am hopeful this
committee will move our new system of insurance regulation
forward. We should start with immediate passage of H.R. 4510.
Thank you very much, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
I now recognize the gentlewoman from New York, Mrs.
McCarthy, who is one of the primary authors of H.R. 4510, and
has worked tirelessly on this issue. I thank her for her work.
And she is recognized for 2 minutes.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. I
appreciate you holding this hearing, and I thank my ranking
member.
I want people to know that when we did the Dodd-Frank Act,
the bill that came out of this committee did not bring the
insurance companies in. That was done over on the Senate side.
And Senator Susan Collins of Maine has stated publicly now that
she never intended to have bank capital standards apply to
insurance companies.
Our bill--mine and Mr. Miller's from California, who
unfortunately could not be here today--H.R. 4510, this bill
which I sponsor will help keep insurance products affordable
and available by ensuring the correct capital standards are
applied to insurance companies that fall under the supervision
of the Federal Reserve.
The intention was never to have them involved with this.
This legislation will give the Federal Reserve more flexibility
and help clarify the difference between the business of
insurance and the business of banking.
The legislation starts from the premise that applying the
wrong capital standards, such as bank capital standards, to an
insurance company is ineffective, disruptive both to the
insurance company and its policyholders. In the absence of this
legislation, the Federal Reserve has said it will be obligated
to apply bank capital standards to insurance companies under
its supervision.
Since the insurance business model is so fundamentally
different than the bank business model, those bankcentric
capital standards would be very problematic for insurers and
the many families and retirees who are their policyholders.
As I have mentioned, Senator Collins, the original author
of the amendment, is sponsoring it on the Senate side with the
correction, exactly the same as this legislation is. She will
be cosponsoring it with Senator Brown and Senator Johanns. I am
pleased to support this commonsense legislation which will play
an important role in preventing future financial crises.
And I apologize. I had a root canal this morning, so I am
still a little bit numb.
With that, I yield back.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from New Jersey, the chairman of our
Capital Markets Subcommittee, Mr. Garrett, is recognized for
1\1/2\ minutes.
Mr. Garrett. Thank you.
And, first, I want to begin by thanking the chairman for
holding this important hearing to examine various proposals to
reform the domestic insurance policy. But I would also like to
thank all of our witnesses for serving on today's panel.
July will mark the fourth anniversary of Dodd-Frank. And it
is not surprising that in the nearly 4 years since Dodd-Frank
became law the committee has had to consider a number of fixes
to help clean up the regulatory mess that Dodd-Frank created.
Now, one of the law's most recent messes concerns the Fed's
application of bank-like capital standards to insurance
companies. And under Dodd-Frank, the Federal Reserve is
required to impose minimum capital requirements on the
companies it supervises, including insurance companies that own
savings and loan associations and insurance companies deemed
systemically important.
However, insurers face very different capital structures
than banks, and, as such, it would make sense that the Fed
should not treat insurance companies in the same manner when it
comes to assessing these capital requirements. Unfortunately,
the Fed maintains that Dodd-Frank requires the application of
bank-like standards, even though Congress never intended such a
standard to be applied to these companies under the Fed's
jurisdiction.
So we have the Insurance Capital Standards Clarification
Act now before us, and this would clarify that the Fed is not
required to apply inappropriate standards to insurance
companies that are already subject to appropriate State-based
or foreign capital requirements.
See, at the end of the day, inappropriate regulations hit
our families and small businesses in the pocketbook, so I hope
that this hearing highlights the need for yet another round of
Dodd-Frank cleanup.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now one of our newer members to the committee, Mr.
Horsford from Nevada, is recognized for 2 minutes.
And welcome to the committee.
Mr. Horsford. Thank you very much, Mr. Chairman. And thank
you to Ranking Member Capuano.
If I may take just a moment, I would like to start by
saying that it is an honor and a privilege to serve on the
Housing and Insurance Subcommittee.
During the recession, my home State of Nevada suffered the
highest rate of foreclosures in the Nation. And within my
State, the congressional district that I represent was the
hardest-hit. For my constituents, housing remains a top
priority as we continue down the path to economic and financial
recovery, so I am glad that we are holding a hearing on the
five insurance bills before us today.
But I am also a little disappointed that TRIA is not on
that list. Before coming to this committee, I served on the
Committee on Homeland Security. There I heard firsthand from
businesses and employers on the importance of having access to
affordable terrorism risk insurance. These job creators have
told me that this insurance provides a safety net which allows
them to invest in growth without fear of losing it all due to
an act of terrorism.
Most importantly, terrorism risk insurance reduces taxpayer
exposure by confining most of the costs to the private sector.
Without affordable terrorism insurance, many buildings,
schools, and venues would remain uninsured against terrorist
attacks, meaning that the government likely would pick up 100
percent of the tab for catastrophic losses.
So, I look forward to working with the members of this
subcommittee to move forward on these important issues. And,
again, I am very honored to be joining this committee, and I
look forward to the work ahead.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Florida, Mr. Ross, is recognized for
1\1/2\ minutes.
Mr. Ross. Thank you, Mr. Chairman, and thank you for
holding this hearing.
Thank you, also, to our distinguished panelists for being
here today and for your testimony.
My discussion today is over my draft that aims to modernize
the Liability Risk Retention Act and allows established risk
retention groups, also known as RRGs, with adequate capital and
surplus to offer to their members, and only their members, the
inclusive commercial insurance packages that are the norm in
today's commercial marketplace.
Nationally, more than 25,000 educational, charitable, and
Catholic institutions benefit from commercial liability
coverage through an RRG. In my home State of Florida, more than
127 nonprofit organizations enjoy tailored liability coverage
provided through an RRG, the alliance for nonprofits for
insurance. These community organizations do important work for
our society, and any penny they can save on insurance costs
means one more penny they can spend on their charitable
efforts.
My draft is targeted legislation that would provide these
customers with the convenience of one-stop shopping with an
insurance group they trust and of which they are a member. My
draft seeks to address some of the previous concerns about this
expansion. And I look forward to today's discussions from all
of our witnesses.
In addition, my colleagues today have brought important
bills for our discussion. I was pleased to cosponsor
Representative Gary Miller's bill, which would allow the
Federal Reserve to tailor capital standards to the business
models of insurance companies.
We must ensure that Federal regulation of insurance
companies is properly crafted and does not result in increased
costs for consumers. Floridians already struggle with the cost
of insurance. I want to make sure that the Federal Government
does not worsen that burden.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now, the gentlewoman from Ohio, Mrs. Beatty, is
recognized for 2 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member
Capuano.
And thank you to our witnesses for their testimony here
today.
This afternoon, we meet to discuss a series of legislative
proposals that amend both longstanding and recently passed laws
impacting the operation of insurers in the United States.
However, none of these bills in any way addresses the
expiration of the Terrorism Risk Insurance Act, which is slated
to expire in just over 6 months.
I, and other Members on both sides of the aisle, believe
that it is absolutely critical that we reauthorize this program
in a timely manner so that insurers and insureds can renew
their terrorism policies in a way that prevents lapses in
coverage.
It is clear that failing to do so would risk a complete
pullout from the markets by these property and casualty
insurers, which would be catastrophic for the real estate
recovery and for the ability of companies to provide terrorism
liability coverage for workers' compensation claims, which in
many States is required by law.
A recent study by the RAND Corporation found that premium
increases in workers' compensation insurance may be
insufficient to offset terrorism exposure.
Mr. Chairman, I urge you to work with members of this
subcommittee, as well as members of the full committee and the
House to bring a TRIA reauthorization vehicle through markup to
the House Floor post haste. It is not just a matter of helping
insurers but, more importantly, helping the American economy as
a whole.
Thank you, Mr. Chairman, and I yield back.
Chairman Neugebauer. I thank the gentlewoman.
And we will now hear from our witnesses.
We have five distinguished witnesses today: Mr. Joe Carter,
who is vice president of business development and marketing for
United Educators; Mr. Gary Hughes, executive vice president and
general counsel for the American Council of Life Insurers; Mr.
Tom Karol, Federal affairs counsel for the National Association
of Mutual Insurance Companies; Mr. Joseph Kohmann, chief
financial officer and treasurer of the Westfield Group, on
behalf of the Property Casualty Insurers Association of
America; and Professor Daniel Schwarcz, associate professor of
law at the University of Minnesota Law School.
Your written testimony will be made a part of the record.
We ask you to summarize that in 5 minutes, and then we will
move to the question-and-answer portion of the hearing.
Mr. Carter, you are recognized for 5 minutes.
STATEMENT OF JOE E. CARTER, VICE PRESIDENT, UNITED EDUCATORS
INSURANCE
Mr. Carter. Thank you, Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee. Thank you for this
opportunity to testify in favor of the Risk Retention
Modernization Act of 2014, which will allow established risk
retention groups to offer additional forms of commercial
insurance coverage to their members. We have also submitted a
written statement for the record.
I am Joe Carter, vice president of United Educators
Insurance, a reciprocal risk retention group. And I am
testifying on behalf of United Educators, as well as the
Alliance of Nonprofits for Insurance Risk Retention Group, also
known as ANI, and the National Catholic Risk Retention Group,
Inc. We are pleased that VCIA and RIMS, the leading trade
associations for captives and risk managers also support this
bill.
United Educators, ANI, and National Catholic owe their
existence to the Liability Risk Retention Act of 1986. Congress
was correct in assuming that risk retention groups would add
capital to the insurance market, successfully moderate
insurance pricing, and provide a stable source of insurance
coverage for universities, nonprofits, professionals, and small
businesses.
In the 25-plus years since the 1986 Liability Risk
Retention Act amendments, more than 250 risk retention groups
have aggregated more than $2.5 million in gross written
premium. According to the rating agency A.M. Best, the focused
approach of risk retention groups has resulted in aggregate
operating performances that are ``consistently better than that
of their peer group in a commercial insurance market.''
Many nonprofits, small schools, churches, and small
businesses buy packaged policies that RRGs cannot write today.
Many of these entities are therefore forced to forgo the
coverages and more specifically, to tailor risk management
services that risk retention groups give to buy their policies
outside of risk retention groups.
If RRGs truly were only a response to a crisis and capacity
for liability insurance, the member counts would surely have
shrunk when the insurance industry came back into the market.
Instead, risk retention groups have demonstrated that for
certain types of similar organizations, collectively insuring
each other is superior to relying on the traditional insurance
sector.
As member-owned entities, risk retention groups provide
where they proactively address coverage realities through risk-
based research, actuarial-based pricing, and coverage levels
that are designed to be sustainable. And any resulting profits
are passed back to the members who own us, keeping their
operating expenses down.
Our bill, which will permit seasoned risk retention groups
to write other lines of commercial insurance, would bring more
capital and more purchaser choice to the property and casualty
market. However, not all risk retention groups could write
other lines of commercial insurance if this bills becomes law.
Instead, to write other lines, a risk retention group must be
seasoned, meaning it must be licensed by the domiciliary State
regulator and operating as a liability risk retention group for
5 years. They must also meet a minimum threshold capital
requirement of $5 million and meet any other requirements that
their State domiciliary regulator would require. This bill will
not upend the Risk Liability Retention Act at all.
Let me tell what you what the Liability Risk Retention Act
Modernization legislation will not do. It does not authorize
risk retention groups to offer personal lines of insurance or
write group health, life, disability, or Workers' Compensation
insurance. It does not alter any rights of nondomiciliary
States. And it does not change a risk retention group's
responsibility to comply with State laws on deceptive practices
or unfair claims practices.
In fact, one significant thing has occurred recently to
strengthen State regulation of risk retention groups since the
legislation was introduced: RRGs are now subject to the NAIC
State accreditation standards. Thus, RRGs are now subject to
the same solvency standards for State accreditation purposes as
other insurance companies.
The amendments proposed to the Liability Risk Retention Act
by this modernization legislation will simply permit risk
retention groups to offer their members, and only their
members, the same comprehensive commercial insurance packages
that are the norm in today's marketplace while benefiting from
the customized risk management services that we are offering
today.
In closing, risk retention groups have dramatically
improved risk management and provided tailored coverages for
specialized niches like nonprofits and educational
institutions. And modernizing this Act would allow us to more
effectively and efficiently continue this important work, which
will allow them to continue to focus on the things that they
are--their mission driven.
I thank you very much.
[The prepared statement of Mr. Carter can be found on page
38 of the appendix.]
Chairman Neugebauer. Thank you.
And now, Mr. Hughes is recognized for 5 minutes.
STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, AMERICAN COUNCIL OF LIFE INSURERS (ACLI)
Mr. Hughes. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, I appreciate the opportunity
to provide you with the views of the American Council of Life
Insurers on legislative initiatives addressing the way in which
insurance is regulated in the United States.
I would like to confine my remarks this afternoon to a
single issue that is of paramount importance to life insurance
companies, and that is the need to provide the Federal Reserve
Board with the flexibility it believes it needs in order to
apply insurance rather than bank capital standards to those
insurance groups that now fall under its jurisdiction as a
result of the Dodd-Frank Act.
Dodd-Frank requires the Fed to apply consolidated capital
standards to those insurance companies that are determined by
FSOC to be systemically important and also to those insurers
that control savings and loan institutions. Two of ACLI's
member life insurance companies have been designated as
systemically important financial institutions (SIFIs), and one
additional company is under review for possible designation.
Eleven of our member life companies are affiliated with S&Ls.
And taken together, these companies account for approximately
30 percent of the insurance premiums of ACLI's overall
membership.
But differently, a very significant segment of the life
insurance business is now going to have its group capital
standards set by the Federal Reserve. But beyond having a
direct effect on these companies, the Fed's determination with
respect to U.S. insurer group capital standards could very well
be a precedent against which all insurers are measured, since
it would affect such a large segment of the market.
It could also be a bellwether for similar standards being
developed by international standard-setters. The global
competitive interests of U.S. insurers demands that every
effort to be made to harmonize these emerging capital
standards.
The good news here is that the Fed appears to recognize
that applying bank capital standards to a life insurance
enterprise would be wholly inappropriate and could materially
disrupt the company's operations. The frustration, as you all
have mentioned, is that the Fed believes the wording of Section
171 of Dodd-Frank doesn't give it the latitude it needs to
apply insurance-based standards.
Now, to its credit, the Fed has temporarily exempted or
deferred application of its capital rules to those insurance
groups, thereby giving Congress time to clarify Section 171.
But this is only a temporary respite, hence, the urgency for
congressional action.
We are very encouraged by the fact that Congressman Miller
and Congresswoman McCarthy--and, Congresswoman, thank you very
much for your leadership on this--have sponsored H.R. 4510, the
Capital Standards Clarification Act of 2014. And we would also
note and thank the fact that a majority of the members of this
subcommittee are cosponsors.
And thanks to you as well, Mr. Chairman, for your support.
This bill would provide the Fed with the very flexibility
it needs to craft capital standards suitable in the context of
an insurance company. Also, as you all have mentioned, Senator
Collins, the original architect of Section 171, has made it
clear that she never intended for the Fed to apply bank
standards to insurers. And she, along with Senators Brown and
Johanns, are advancing a bill similar to H.R. 4510 in the
Senate.
To be clear, the insurance industry is not trying to
sidestep the application of strong capital standards as
mandated by Dodd-Frank. We are simply working to ensure that at
the end of the day, the applicable standards are predicated on
a framework appropriate for the business of insurance, such as
the existing insurer risk-based capital system. This is a
system specifically designed by insurance regulators for
insurance entities and is a comprehensive and accurate measure
of these companies' unique risks.
In summary, Mr. Chairman, ACLI's legislative priority in
the House is passage of H.R. 4510. We believe it is imperative
that the Fed be afforded the flexibility to utilize insurance-
oriented capital standards for those insurance groups under its
supervision. Substituting bankcentric standards would harm the
affected companies, undermine rather than strengthen the
supervision of insurers, and would be completely at odds with
efforts to enhance the stability of the U.S. financial markets.
We look forward to working with this subcommittee and with
both Houses of Congress to pass this important piece of
legislation. Thank you.
[The prepared statement of Mr. Hughes can be found on page
55 of the appendix.]
Chairman Neugebauer. Mr. Karol, you are now recognized for
5 minutes.
STATEMENT OF TOM KAROL, FEDERAL AFFAIRS COUNSEL, NATIONAL
ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)
Mr. Karol. Chairman Neugebauer, Ranking Member Capuano, and
members of the Housing and Insurance Subcommittee. I would like
to thank you for holding this hearing entitled, ``Legislative
Proposals to Reform Domestic Insurance Policy.''
My name is Thomas Karol. I am the Federal affairs counsel
for the National Association of Mutual Insurance Companies. We
are the largest property casualty insurance trade association
in the country, serving regional and local mutual insurance
companies on Main Streets across America as well as many of the
country's largest national insurers. The 1,400 NAMIC members'
companies serve more than 50 percent of the automobile and
homeowners market and 31 percent of the business insurance
market.
We are pleased that the committee is focusing on the issues
related to property casualty insurance industry, which is
highly competitive, well-capitalized, and is a key source of
strength and resilience for the U.S. economy.
Our industry ensures the property casualty risks of the
United States businesses and consumers, enabling the U.S.
economy to thrive. It is imperative that we do not impede this
well-functioning marketplace. NAMIC appreciates the opportunity
to offer our comments.
The most important proposal to NAMIC members is H.R. 4510,
the Insurance Capital Standards Clarification Act. The Act
would afford the Federal Reserve greater flexibility to apply
accurate capital standards for insurers by amending Section 171
of the Dodd-Frank Act to clarify the application of capital
requirements to insurance companies subject to the supervision
of the Federal Reserve Board.
There is widespread agreement that such flexibility is
warranted and necessary. Senator Susan Collins of Maine, the
author of Section 171, has made it clear that she never
intended to have bank capital standards apply to insurance
companies. The Senator and a number of Members of the House and
Senate have urged the Fed to adjust the capital standards for
insurance companies to align with the business of insurance,
rather than the business of banking. Despite this, the Fed
maintains that it is constrained by the language in Section
171.
H.R. 4510 resolves this question and acknowledges the fact
that bank capital standards are not appropriate for insurance
companies. It also recognizes the importance and
appropriateness of statutory accounting principles. H.R. 4510
provides that the Fed may not use Section 171 to require
insurance companies that are only required to prepare financial
statements in compliance with State-based statutory accounting
rules to also prepare financial statements under generally
accepted accounting principles (GAAP).
Forcing such companies to prepare additional GAAP
statements is a labor-intensive, multiple-year project that
would cost policyholder owners hundreds of millions of dollars
without adding any benefit in regulating the solvency and
activities of the companies.
Similarly, NAMIC supports the Insurance Consumer Protection
and Solvency Act of 2013, or H.R. 605, which clarifies that the
FDIC does not have the authority to assess insurance companies
for the Orderly Liquidation Fund. The existing State-based
resolution authority for insolvent property casualty insurers
has a superb track record of protecting insurance claimants and
policyholders at no cost to the taxpayer. Property/casualty
companies and mutual companies in particular present almost
none of the risk factors the FDIC is statutorily required to
consider.
All insurance companies already meet guaranty fund
obligations for the insolvencies in their own industry and
should not be assessed the cost of failures in other parts of
the financial services sector.
Both of these bills recognize that the business of
insurance is fundamentally different than the business of
banking, and that applying initial bankcentric regulations is
inappropriate and damaging to the business of insurance.
NAMIC also supports the Policy Protection Act of 2014. The
laws governing thrift holding companies do not provide the same
procedural protections as the Bank Holding Company Act to ring-
fence the assets of insurance subsidiaries for the protection
of insurance companies.
The Policyholder Protection Act of 2014 simply amends the
Bank Holding Company Act to provide the same protections for
insurance companies organized as thrift holding companies.
Tapping the assets of insurance units, particularly without
the consent of the insurance regulator, would inappropriately
threaten the financial structure, underpinning the insurance
operations and undermining consumer confidence in the insurance
industry. To protect America's insurance consumers, the Bank
Holding Act protections should be extended to thrift holding
companies, and NAMIC supports H.R. 4557.
Finally, NAMIC supports the Insurance Data Protection Act,
which would elevate the Federal authority to subpoena
information directly from insurance companies to the Secretary
of the Treasury, but also strengthen the confidentiality
protections for the information and require reasonable
reimbursement for the cost of compliance with the data
protection. The Insurance Data Protection Act would not deny
the Federal Insurance Office or the Office of Financial
Research any relevant information or impede their functions but
would ensure that they take reasonable steps to prevent
unnecessary and duplicative reporting by insurance companies.
In fact, the legislation would afford insurers many of the
protections recently highlighted in the Administration's big
data and privacy work group review.
I want to thank the subcommittee again for holding this
important hearing and for providing NAMIC with the opportunity
to discuss these legislative proposals. I look forward to your
questions.
[The prepared statement of Mr. Karol can be found on page
63 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Kohmann, you are now recognized for 5 minutes.
STATEMENT OF JOSEPH C. KOHMANN, CHIEF FINANCIAL OFFICER AND
TREASURER, WESTFIELD GROUP, ON BEHALF OF THE PROPERTY CASUALTY
INSURERS ASSOCIATION OF AMERICA (PCI)
Mr. Kohmann. Thank you, Mr. Chairman, Ranking Member
Capuano, and members of the subcommittee.
I am testifying on behalf of the Property Casualty Insurers
Association of America (PCI), which is composed of nearly 40
percent of the Nation's home, auto, and business insurers. My
name is Joseph Kohmann, and I am the chief financial officer
and treasurer of the Westfield Group.
Westfield as midsized insurance company that has been in
business for over 166 years with an A or higher A.M. Best
rating for the past 75 years. We provide over 2,200 direct jobs
in 31 States, partner with thousands of independent insurance
agents to serve our customers, and are one of the top writers
of farm business in the United States.
Westfield also owns a community bank that originates
roughly $300 million in loans annually, predominantly to owner-
operated small businesses and individuals. We are not a Wall
Street institution, but a very important regional provider of
insurance and banking services to middle America.
Both PCI and Westfield support strong regulation. But our
growth is being restrained by unintended consequences stemming
from an expansion of banking regulation in the Dodd-Frank Act
that conflicts with State insurance regulation. For example,
the Dodd-Frank Act requires the Federal Reserve Board to impose
the strictest bank capital standards on insurance holding
companies with a depository affiliate, even just a small
community bank.
Westfield's business activities are primarily insurance.
The measurements used to determine capital and leverage ratios
for banking are completely different than those used to govern
auto insurance or farm insurance.
A strict application of bank capital requirements to our
insurance activities just does not make sense.
The Federal Reserve Board agrees. They recognize that
insurance and banking operate with completely different
business models. They have delayed implementation of the
requirement until Congress can act. But not for long. Dozens of
Members of Congress, including Senator Collins, who authored
the original legislative requirement, have written to the
Federal Reserve Board saying that this application of bank
regulation to insurance is inappropriate.
Fed Chair Yellen testified under questioning that this is
an unintended consequence of the Act. Yet, the Board says they
do not have the statutory flexibility to provide relief unless
Congress acts.
Please pass H.R. 4510 to help Senator Collins clarify the
intent of her original amendment and to allow the Federal
Reserve Board to apply appropriate capital standards to
insurance companies.
PCI strongly supports the other bills before the committee
as well. H.R. 605 ensures that resolution of insurance
companies and their assets is conducted by insurance
regulators, not by a Federal banking agency. It would also
prevent the FDIC, which is primarily responsibile for bank
resolutions, from using insurance assets to support failing
banks. Insurers are already responsible for resolving their own
failures and pay for guaranty funds in every State to protect
consumers. Do not let insurance policyholder protection funds
be used to support risky investment firms and banks.
H.R. 4557 requires Federal bank regulators, before
transferring assets of insurance companies to banks, to ask the
insurance regulator to determine if the transfer would harm the
insurer. This seems like another commonsense clarification to
limit a regulatory conflict of interest and to avoid harming
insurance policyholders to support a bank.
The proposed Insurance Data Protection Act would provide
additional protections for confidential proprietary data shared
among insurance companies and government entities and limit
rather extraordinary regulatory subpoena power given to
nonregulators. This will prevent potentially costly data calls
by entities which neither supervise our companies nor are
responsible for their solvency.
The theme of all of these bills is that insurance and
banking are fundamentally different. Congress has the
opportunity to clarify that regulation of insurance companies
and their activities should be conducted using insurance
standards and by their supervisors.
Thank you for the opportunity to testify today. And I am
happy to answer any questions the committee may have.
[The prepared statement of Mr. Kohmann can be found on page
72 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Kohmann.
And finally, Professor Schwarcz, you are recognized for 5
minutes.
STATEMENT OF DANIEL SCHWARCZ, ASSOCIATE PROFESSOR OF LAW, AND
SOLLY ROBINS DISTINGUISHED RESEARCH FELLOW, UNIVERSITY OF
MINNESOTA LAW SCHOOL
Mr. Schwarcz. Thank you very much, Chairman Neugebauer,
Ranking Member Capuano, and members of the subcommittee for
inviting me to testify.
I am going to spend most of my oral testimony talking about
several of the legislative proposals. But before I do that, I
think it is important to foreground my remarks in certain facts
that I think have gotten lost in this discussion. Those facts
include that AIG securities lending program was at the heart of
AIG's problems, in addition to its credit default swap
portfolio. And that securities lending program, as mentioned
earlier by one of the Members, was indeed subject to State
regulation. Those facts include the fact that financial
guaranty insurers, monoline insurers, contributed mightily to
the crisis, and they were regulated by State insurance
regulators.
Those facts include that life insurers that had issued
long-term guarantys, via annuities mostly, suffered severe
capital shortfalls during the crisis that led several of them
to apply for bailout funds and to receive bailout funds.
The point I am making is this: I agree with everyone that
insurance is different than banking, and it must be regulated
in a manner that is different than banking. At the same time,
insurance does raise systemic risks that warrant a robust
Federal involvement in the industry.
We cannot simply defer to State regulators when issues of
systemic stability are in play. With that in mind, I want to
talk about several of the proposed legislative initiatives.
First, the Capital Standards Clarification Act. I support
the vast majority of that bill. I agree that the Federal
Reserve should not mechanistically apply bankcentric capital
rules to insurance companies because insurance companies
present different risks. And so for that reason, I agree that
the Congress should clarify that the Fed has the discretion to
tailor capital rules.
Moreover, I think that it is a virtue of the bill that it
allows and affords the Fed the discretion not simply to move
away from simply mandating bank capital rules but also to
tailor capital rules so that they don't simply replicate State
risk-based capital rules but actually respond to the fact that
while State risk-based capital rules are about policyholder
protection, Federal capital rules are by and large about
something different: They are about systemic stability. And for
that reason, appropriate capital rules for federally-regulated
insurance companies may depart in important ways from State
risk-based capital rules. The legislation, the bill, as I read
it, affords the Feds that discretion.
What I am concerned about, though, is the last provision in
the bill that would prohibit, as I understand the language, the
Fed from demanding information from regulated insurance
companies that is not included in SAP reports.
One thing that we have to take away from the financial
crisis is that systemic risk arises in unpredictable ways. And
a regulator must have the capacity to adapt to new
circumstances, to gather information in a way that allows it to
see the full panoply of risks.
There are ways in which SAP may not allow the Fed to do
that. The most important and most clearly recognized is that
SAP is an entity-centric accounting approach. It is not
designed to reflect the risks of an entire conglomerate. It is
designed to reflect the risks of individual insurance entities.
It is very difficult, if not impossible, to get a sense of an
entire insurance holding company simply using SAP. For that
reason, it very well may be appropriate for the Fed to require
either GAAP reporting or something different than either SAP or
GAAP. Maybe something that is referred to as ``GAAP-like.''
Whatever it is, the Fed has to have the discretion if it is
going to regulate insurers appropriately to demand the
information it needs to adjust to the demands of systemic risk
regulation.
I am concerned that the provision in this bill that seeks
simply to prevent duplicative accounting will actually be
interpreted to limit the Fed's authority to demand relevant and
necessary information from the entities that it regulates that
is not captured in SAP accounting standards.
I am also concerned about the Data Protection Act. The Data
Protection Act may indeed retain the FIOs and OFR subpoena
powers. But it has a provision that is virtually unprecedented
as far as I am aware. That provision requires either the
Treasury or the OFR to reimburse companies to the extent that
they have to comply with a subpoena. The reason that we have
the FIO and OFR monitoring insurance companies is because they
raise certain systemic risks. Because they raise those risks,
we need to make sure that those risks don't come to fruition.
The costs associated with that should be borne by the
company. If we force FIO and OFR to bear those costs, then we
will politicize the subpoena process and will make it very
difficult for that process for move forward in a way that is
predictable.
Thank you very much.
[The prepared statement of Professor Schwarcz can be found
on page 80 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
We will now begin the questioning. Each Member will have 5
minutes.
The Chair recognizes himself for 5 minutes.
Mr. Hughes, in your written testimony you mentioned that
this bankcentric standard would harm the ability of life
insurers to perform their fundamental business. We have thrown
around a lot of terms here, ``bankcentric,'' ``capital
standards,'' et cetera. But I think one of the things we
sometimes have to do is we have to boil this down to the people
that we are really trying to help here and to protect, and that
is your policyholders and my constituents.
Talk to me about, if the Fed were to move forward, if we
didn't correct this, the young family out there in America, how
could this impact them? Because I think that is the real issue
here.
Mr. Hughes. Mr. Chairman, I will give one easy example to
maybe address that question. To address the needs of that
family, life insurance companies often issue protection
products that have promises that will extend 20, 30 years out.
We back up those promises of those long-term liabilities with
long-term assets. Typically, these are fixed-income securities,
generally high-quality corporate bonds.
So in our world of insurance and insurance regulation, our
regulators like to see that 30-year promise to the family
backed up by a 30-year high-quality bond. And the matching of
the asset and liability lowers the risk of the enterprise.
You take the same portfolio security, that same long-term
bond in the portfolio of a bank, which has demand deposit
obligations, very short-term obligations, and Federal bank
regulators say, quite correctly, well, that creates a risk
mismatch for the bank. They have short-term obligations. You
don't want to back that up with an illiquid long-term bond.
So the Fed would say the capital weight you give that bond,
it has a very high capital requirement because it is highly
risky in the hands of a bank.
They basically would be forced to do the same thing for an
insurance company. And I can't imagine a scenario where the
promise we make to that family, that 30-year promise, is backed
up by short-term Treasuries. I don't know the risk of not being
able to meet a promise of 10, 20, 30 years out would be much
higher. So that is an example of the same security in the hands
of an insurance company as in the hands of a bank.
And H.R. 4510 would enable the Fed to say, okay, it is a
totally different balance sheet. Let's look at assets
differently for an insurance company than we would for a bank.
Chairman Neugebauer. And so that additional liquidity and
capital would relate to higher premiums for the product that
you have been offering?
Mr. Hughes. Absolutely.
Chairman Neugebauer. In other words, ultimately, the
policyholders are going to pay for this mismatch in policy if
the Fed were to continue.
Mr. Karol, would you agree with that statement?
Mr. Karol. I agree with that completely. The liabilities
that a bank focuses on are subject to different risks than
insurance, particularly property casualty insurance. The bank
has credit risk, the bank has inflation risk, the bank has
market risk. Where with a property casualty insurance company,
it is basically the risk of the damage to the property or the
underlying risk. It is basically a completely different
business.
Chairman Neugebauer. Mr. Kohmann, do you want to comment on
that?
Mr. Kohmann. No. I would agree with both Mr. Hughes and Mr.
Karol. The core issue here is that the businesses are
fundamentally different. It would increase costs and
potentially create capital that would be addressing asset risk
rather than liability risks. So, in my view, it would be no
more appropriate to apply risk-based capital rules to a banking
entity, which would create potential adverse motives for the
wrong risks.
Chairman Neugebauer. Thank you.
Mr. Carter, who would benefit most from the Modernizing the
Liability Risk Retention Act as proposed by Mr. Ross? Who are
the beneficiaries?
Mr. Carter. Mr. Chairman, I think that is a great question.
And as we think about providing additional services, additional
coverages to our members, we think about the smaller to
midsized businesses. In our world, it is educational
institutions that don't necessarily currently have a staff,
don't have a staff for all of the training needs, all of their
risk management, and risk management needs.
And so when we think about actually offering property
packages, property coverage offerings in our packages, we are
thinking about ways to help them manage those risks in an
additional--at a higher level than they do today. In a way,
that also helps them maintain their budgets, not necessarily
have to--we are giving them support, in other words, whether it
is White Papers, whether it is online training, whether it is
onsite visits, any number of Webinars and seminars. We are
giving them a lot of support through the risk retention group
model.
And that is not only for United Educators, but also our
risk retention group peers. We are only owned by them, and we
are delivering more than just insurance to them. So this
expansion would be very important to them.
Chairman Neugebauer. I thank the gentleman.
And now the ranking member, Mr. Capuano, is recognized for
5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
And again, I think we have heard many of the items that
relatively are noncontroversial. And to be perfectly honest,
maybe I am wrong, but I think that the capital standards issue
could be put on a suspension calendar and passed
overwhelmingly.
With a question about the GAAP versus SAP, I am not sure
how I feel about it yet. I have some questions, but I will come
back to it, because I don't know how much time I am going to
have. I want to talk about the things that are more concerning
in some of the other bills.
And again, all of these bills have things which are easy to
support, and some have questions. In particular, in H.R. 605,
why--Mr. Karol, I think I am right that you testified in
support of that. Why would we have to get rid of the orderly
liquidation as a final backup opportunity? It is not the
primary backup opportunity, not the primary process, as I
understand it. But if everything else fails, why should we get
rid of that? What does it hurt to have one final backstop in
case, God forbid, we get into a situation where it is
necessary? How does it hurt the industry? If I am wrong--I
thought you were the one who testified in favor of that.
Mr. Karol. Our position is that the Orderly Liquidation
Authority should not apply, that the State-based system is
adequate at this point, and that requiring duplicative payment
by insurance companies is not fair, that there is sufficient
backup by the State--
Mr. Capuano. So it is the up-front payment that you are
concerned with?
Mr. Karol. If the insurance companies are paying into the
State authority, which is adequate, our feeling is that if the
other banks and other financial institutions aren't paying into
that as a backup to them, we shouldn't have to pay into the
Orderly Liquidation Authority.
Mr. Capuano. Again, I really have to go back to Mr.
Schwarcz's comments. I have no problem with the concept of
State-based regulation. AIG was regulated at the State level.
We keep forgetting that. And I understand full well that the
State regulators said that they don't do CDOs, which, of
course, is lack of State regulation.
So if that doesn't concern you, if that doesn't kind of
ring a red bell, I am happy to look the other ways. Because I
am not looking to impose it.
I just look at the orderly liquidation when it comes to
insurance companies as something that hopefully, God forbid, we
will never need. But I would have a hard time saying, after
what we just went through, I don't want to go through that
again. And that is what the whole orderly liquidation is all
about, is to try to prevent us from ever having to do that
again.
And again, if it doesn't work here for insurance companies,
I am more than happy to discuss it. But to just throw it out I
think is raising a risk that is potentially repetitive. Now, if
it is overly burdensome, I am more than happy to talk about it.
I would like to have some discussions at a later time, maybe
not now, but to walk me through how we can maybe rebalance
that. Again, I am not trying to hurt anybody.
Mr. Karol. I would be happy to talk about it.
Mr. Capuano. I guess I also want to talk about the
reimbursement aspect. Again, on FIO, limiting their subpoena
power, that is fine by me. They have never used a subpoena, to
my knowledge, and I am not looking--I totally agree that they
should ask everybody before they get the subpoena.
Why in the world would we want them to--if they have to get
to the point where they ever have to use a subpoena, why would
we want to force a reimbursement? We don't do it to ourselves.
Congress asks every single agency in the world for document
upon document upon thousands of documents.
Mr. Neugebauer and I were part of an oversight committee a
few years ago. We got reams of documents. We didn't ask for
reimbursement. Because asking for reimbursement is de facto a
punishment. And in this case, it would for all intents and
purposes say, how dare you ask for it? Why do we need a
reimbursement aspect if you actually think that at some point
FIO would ever need it?
Does anybody support the reimbursement provision?
Mr. Karol. My understanding of both the OFR and FIO is that
they are not enforcement entities; they are basically entities
that exist to determine what is going on in the market to
predict what is happening--
Mr. Capuano. Information gathering. That is correct.
Mr. Karol. And to get that. The amount of information that
is available to them through the States and through the
companies is extensive. We really don't know what--
Mr. Capuano. Which is why they have never used the subpoena
power. They have never had to use it. And the likelihood of
them ever using it is minimal.
Mr. Karol. And everything we can think is that if such a
request came through, it would be so extraordinary that, one,
it should go through the Secretary of the Treasury--
Mr. Capuano. I have no problem with that.
Mr. Karol. And that if it is that far outside of the normal
business of the insurers, it would be fair to have that--that
be reimbursed--
Mr. Capuano. But all that basically does is if it is so far
out there, again, I guess it depends, I would actually think if
it is so far out there, maybe there is a real problem that they
are not getting answers to; that is the last step before a
subpoena.
And, again, I have no problem having the Secretary of the
Treasury sign off. But it just says to me, basically, we are
not giving it to you, period, end of issue. And if you do, you
have to pay us for it. And, by the way, it is going to be an
extraordinary amount of money, because these things do cost a
lot of money.
Hopefully, just having the subpoena power there is really
what gets cooperation. This committee has done it relative to
HUD. We have worked out between ourselves, not issuing a
subpoena, having HUD come up with certain documents that we
worked out in an agreement after some pressure was put on. It
just strikes me as a problem.
I guess my last 14 seconds is, with today's world, GAAP and
SAP, it really doesn't matter to me. GAAP, SAP, FAAP, BLAAP, it
doesn't matter. Pick one accounting standard. I don't care
which one. Why would we not want to have one uniform accounting
standard so we can compare apples to apples?
Now, I understand the transition from any accounting
standard to another one is always problematic. Why would we
want to have 2 or 3 or 4 or 10? Why not just one? And it
doesn't matter which one to me. Pick one.
Chairman Neugebauer. I thank the gentleman. And now--
Mr. Capuano. I will get to that later.
Chairman Neugebauer. I am sure that if you would like--
Mr. Capuano. No, no, no. It was a rhetorical question.
Chairman Neugebauer. The Chair now recognizes the vice
chairman of the subcommittee, Mr. Luetkemeyer from Missouri.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Interesting discussion today. We had a discussion earlier
today with regards to systemically important institutions and
had the whole discussion about capital requirements, Basel
implications, international standards being applied to our
companies. It is like, holy cow, this is like subcommittee
repeat 2.0 here.
But it is great to be with you, and thank you for your
testimony. It reinforces a lot of what we heard this morning.
Mr. Kohmann, I would like to start with you. Your company,
as I understand it, not only is an insurance company, but also
owns a bank. Is that correct?
Mr. Kohmann. That is correct.
Mr. Luetkemeyer. So you understand firsthand the difference
between the two, and that the capital requirements for each one
are completely different. They are two completely different
business entities with two completely different business
models. What do you think about the capital requirements of
banks being applied to insurance companies?
Mr. Kohmann. Thanks for the question. As we said earlier, I
think they are fundamentally, as you said, different
businesses, and accordingly, applying capital standards to them
in the same way would be inappropriate and perhaps risky.
Mr. Luetkemeyer. Okay, how do you define ``risky'' here?
Would these standards affect safety and soundness of the bank
and/or the insurance company? How is it going to affect costs
to your clients or the insurance clients, the bank clients? Can
you give us a little synopsis.
Mr. Kohmann. Sure. I think, first off, you have the
potential by applying an asset-based capital model to insurance
companies would not appropriately address the risk of an
insurance company, particularly a property casualty company
like Westfield, where the majority of the risks are
underwriting and reserve risks. So that capital approach could
be misguided and put policyholders at risk by not adequately
addressing the main risk of an insurance company.
The alternative would be true if you had tried to apply an
insurance-centric approach to a bank. We are not talking about
that, but trying to think about the other way helps lend
clarity to how inappropriate it would be to apply those rules
to an insurance company, and I think there is a potential in
doing that to certainly add costs to policyholders and
consumers in the event that you come up with an inappropriate
capital amount and/or more complexity.
Mr. Luetkemeyer. Mr. Karol, your group deals with lots of
different sizes of insurance companies. Would this--how is it
going to affect the small ones in your group versus the large
ones in your group?
Mr. Karol. I think these types of standards would affect
the smaller companies much more. They have less ability to
adjust to the--
Mr. Luetkemeyer. Would it drive them out of business?
Mr. Karol. It could.
Mr. Luetkemeyer. What do you think the potential is for,
say, the smallest 25 percent of your companies, how many of
them would you think--
Mr. Karol. We have members who write in a single county. We
have members who write in very small areas, and to apply these
types of standards or the potential for applying these types of
standards to them could put them out of business.
Mr. Luetkemeyer. They don't have the ability to raise the
kind of capital it is going to take to make this all work, is
that what you are saying?
Mr. Karol. Yes.
Mr. Luetkemeyer. Okay. Mr. Hughes, you deal with life
insurance folks. What kind of costs do you think would be
pushed on to your clients if some of these standards were
implemented? Do you have a different business model, a little
bit different business model than P&C guys?
Mr. Hughes. Yes, it is. For us, it is the cost of capital.
If we have to have inordinate capital charges because of the
long-term securities we are holding to match long-term
liabilities, as the chairman noted, it is going to force
companies to pass on those costs to policyholders, which will
raise the costs of insurance.
Mr. Luetkemeyer. How many of your companies went out of
business in 2008 as a result, a direct result of the downturn?
Mr. Hughes. We had two very small companies that went out
of business ironically because they had an inordinate amount of
their reserves in Fannie Mae preferred, both of them.
Mr. Luetkemeyer. So it wasn't management of the company, it
was investments that they made? Is that right?
Mr. Hughes. Precisely, yes.
Mr. Luetkemeyer. Okay. So, out of all that turmoil, you
lost two small companies, and now you are being impacted in a
very negative way with these cumbersome and overzealous
regulations. Thank you for your comments.
I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
Now the gentlewoman from New York, Mrs. McCarthy, is
recognized for 5 minutes.
Mrs. McCarthy of New York. Thank you, Mr. Chairman.
Professor, when you were talking, something hit my mind
that when we were writing the bill, so I just want to see, to
clarify to see if this satisfies you. When you were making
points about SAP and GAAP, and I agree with my ranking member,
our bill says an insurance company that is not federally-traded
and is already regulated by the State level is not required to
prepare a GAAP statement, but that doesn't stop the Fed from
asking for additional information because we were concerned
about that because I happen to think most insurance companies
are good players, but we wanted to make sure that we could keep
them to be good players. So I hope--and if you have any
questions we would be more than happy to sit down with you and
talk about it.
Mr. Schwarcz. Sure. Two quick points: The first one is that
it may be necessary for certain insurers in order to arrive at
a consolidated sense of how risky the company as a whole is to
have GAAP reporting, and that is because SAP reporting is
inherently entity-centric. It doesn't allow for the positioning
of all assets and liabilities on a single balance sheet in a
way that is simple, okay? And so the Fed, I know, right now is
investigating how they can take SAP and leverage it to get at a
sort of holistic perspective on a group, but from my
understanding, this is very difficult, if not impossible.
The second point, though, is I am concerned with the
current language that if the Fed, for instance, said, look, we
don't need you to go, to give us a full GAAP reporting, but
what we do need is lines, is, say, line 5 of a GAAP report on
this or whatever it is, we would like you to provide that to
us. The company could come back and, under the language as I
read it, say, ``No, we are not required to provide you anything
above and beyond what SAP requires,'' and so to the extent the
information you are seeking is not encompassed within SAP, you
are overstepping your bounds, and the way, the reason I see
that is because otherwise, it is very hard to understand how
you could effectuate this principle, right? Because what if
they ask for five items on the GAAP report or 10? At some
point, it becomes the full GAAP report. So I think there needs
to be clarification about the Fed's capacity to get individual
pieces of information, and I also think that there may be
circumstances in which it would be, in fact, appropriate to
have full GAAP reporting if it is necessary to, if such
reporting is necessary, to arrive at a holistic sense of the
risk that an insurance group poses.
Mrs. McCarthy of New York. As I said, we will follow
through with that, and certainly, we will talk to Congressman
Miller because we have the intentions that there would be a
stopgap there to be able to have the Fed ask questions if they
felt that there was something reasonable there. But thank you,
and we believe that we covered it, but we will take a second
look at it.
As far as the others, I know everybody in Congress, or I
should say the American people, the majority of us actually do
work well together. We sit together. We try to work out things
that we know are going to affect us back home in our States and
certainly our businesses. So I think this is a perfect
opportunity that you can see what we do, and we have worked on
this committee bipartisanly. It doesn't always work, but this
time around, it truly has.
So, with that, from the testimony that I heard and I
appreciate everybody coming in to give their opinions on it, I
think all the questions that I would have asked have already
been asked, so I am not going to ask them again. The testimony
has actually been very excellent, and I think it just shows
that we can work together. But I will say, during Dodd-Frank,
and I actually like to call it Frank-Dodd, we spent a year and
a half working on that bill together, all of us, and we all had
questions. Unfortunately, when it went over to the Senate, they
had a very short period of time to work on it and didn't look
at the consequences on some of the language that they put in
there. I will say that Barney Frank took one section, and even
when we went to the second section, we went back to the first
section to see if we were countering each other, but as this
place has never passed a perfect bill, it will never pass a
perfect bill, but that doesn't mean we can't make technical
changes, and that is what we are doing today.
With that, I yield back the balance of my time, sir.
Mr. Luetkemeyer [presiding]. Thank you.
With that, we go to the gentleman from Wisconsin, Mr.
Duffy, for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman. Whether Dodd-Frank or
Frank-Dodd or sometimes we call it by other names as well, but
we won't say that here, I do appreciate the bipartisanship that
has gone on in regard to some of the bills that were proposed
today.
Maybe the panel could help me a little bit with some
history. Is it fair to say that we have a pretty long and deep
history of banking in America and some crises that come from
the banking sector? Does banking sometimes create risk
throughout our history for the larger economy? Anybody? You
guys all agree with that, right? I am not crazy? Banking
creates risk? Isn't that kind of why we all come together and
we get really freaked out in banking crises?
And what also freaks us out is when the taxpayer bails out
banks. We don't like that. We want banks to have sound capital
standards so those investors in banks will bear the risk and
the loss and not the taxpayer, and I think a lot of us feel the
same way about the insurance sector.
Do we have the same kind of history in the insurance sector
with creating systemic risk similar to that of the banking
sector? Mr. Carter, do you know? Mr. Hughes? Anyone? You can
jump in, chime in.
Mr. Carter. I don't personally believe so. I think that the
business models, as we have heard before, are very different,
and the way they run their businesses are very different, and I
think if you look at the history of failures, of institutional
failures, I think there is a difference. I don't know the exact
numbers, but that would be my statement on it.
Mr. Duffy. Maybe I will throw it out a different way, if
you look at it from the Great Depression to the Great
Recession, oftentimes we have had banks that have caused some
of these crises and runs on banks. Is there another historical
example that you can give me where a crisis in America has been
caused by the insurance sector?
Mr. Schwarcz. Yes. Let's not forget about 2008, right? This
is a pretty important salient example, and again, I think it is
really important to remember that the AIG securities lending
program, monoline financial guaranty insurers, life insurers,
all of those involved State insurance regulation and involved
crises.
Mr. Duffy. And we will get to that.
Mr. Schwarcz. Okay.
Mr. Duffy. Besides AIG, any other example you can give me?
Mr. Schwarcz. Yes. There has been historical precedence of
a run on a life insurer; on Executive Life, there was a run.
Mr. Duffy. But systemic risk--
Mr. Schwarcz. It depends on--
Mr. Duffy. --by insurance companies.
Mr. Schwarcz. Right, I would say that it depends--the other
example, ironically enough, would be the 1980s liability
crisis. The Risk Retention Act was initially passed because
there was a crisis of lack of availability of liability
insurance.
Mr. Duffy. Was that systemic risk however?
Mr. Schwarcz. It depends how you define systemic risk. It
was significant enough that it was on the front page of
magazines, and Congress acted to pass--
Mr. Duffy. But it wasn't going to take down the whole
economy like what the theory was in 2008 or the Great
Depression?
Mr. Schwarcz. I think that is right; it was different.
Mr. Duffy. Besides Mr. Schwarcz, because I have heard many
argue that as you look at the crisis of 2008 and you look at
AIG's role, many will say it was the financial products
division that was regulated by the OTS that caused the risk in
AIG, and it wasn't the traditional insurance arm that was
regulated by the State that really caused the risk in AIG. Do
you guys agree with that assessment, outside of Mr. Schwarcz?
I know what your opinion is on this one.
Mr. Hughes. I think I would strongly disagree with Mr.
Schwarcz's analysis. I don't think you can point to AIG and
say, that equals the whole insurance industry. It doesn't. I
think all financial intermediaries discovered during the crisis
that their risk modeling probably didn't go far enough out, and
that worst case was a whole lot worse than they had
anticipated. But if you look at the way the insurance industry
came through the crisis, both the life segment and the property
casualty segment, I think, without question, we came through
that crisis in better shape than any other segment of financial
services.
So, yes, AIG was a problem. Yes, there were companies that
were under severe stress. But the entire financial system, not
only in the United States but globally, was under severe
stress, and I think the industry acquitted itself quite well in
the crisis.
Mr. Duffy. As we look at FSOC, they are there to identify
risk to financial stability, and we just recently had
Prudential that was designated as an SIFI. What concerns me,
though, is how the vote on making Prudential a SIFI, you have
the OCC, the FDIC, credit unions, the Fed, Treasury, and the
CFPB--which has its own problems--all voting to designate an
insurance company as an SIFI, but you have the President's
designee who was approved by the Senate voting ``no'' as well
as Mr. DeMarco from the FHFA. And I think as I finish off here,
the quote is pretty powerful from Mr. Woodall, who said, ``The
underlying analysis utilizes scenarios that are antithetical to
a fundamental and seasoned understanding of the business of
insurance, the insurance regulatory environment, and the State
insurance company resolution and guaranty funds system.'' You
have bankers and credit unions designating Prudential as an
SIFI, and those who know insurance best are voting ``no,'' and
saying these other guys don't understand it. I think that is
pretty powerful as we analyze how FSOC is looking at insurance.
I yield back the time I do not have, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentlewoman from Ohio, Mrs. Beatty, is
recognized for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member, and like my colleague from New York, many of my
questions have already been asked, but I would like to pick up
where Ranking Member Capuano left off. It seems like, as we
have been working through Section 171, we have come to a pretty
good technical fix to this, but it seems like there were still
some discrepancies in which accounting standards should be
used, and I think that is where Mr. Capuano was going, and it
looked like Mr. Kohmann and Mr. Hughes and Mr. Carter were
getting ready to jump in there.
So let me pose the question to any one of you in this
fashion: Would you explain how the application of, let's say,
statutory accounting principles versus general accepted
accounting principles could result in a different compliance
expectation?
Mr. Hughes. I think this is one of the more intriguing
questions with this legislation, and I read Mr. Schwarcz's
testimony, and it caused me to go back and read your
legislation and what it actually says. There isn't any question
that GAAP accounting and statutory accounting have
fundamentally different purposes. GAAP is overseen by the SEC.
It is intended to ensure fairness in the marketplace, maybe
protection of investors. Statutory accounting, as Mr. Schwarcz
noted, is really to protect, to make sure that the solvency of
the company is sufficient to protect the policyholders.
Now, whether the Federal Reserve Board at the end of the
day, given the latitude that your bill would give them, would
just say, fine, we are happy with statutory accounting, I am
not sure that they would. We had begun a discussion with the
Fed early on to say, it is not that hard to come up with some
mechanical analogue to consolidated GAAP financials, it is not
audited GAAP, but if you need certain information, it is not
that hard to come up with some sort of analogue that would give
you what you want.
Now, those discussions stopped because the Fed said that
under Section 171, we can't get there anyway. Even if you gave
us that information, we couldn't rely on it. So your
legislation would do two things: one, it would enable to us
restart that conversation with the Fed; and two, if we did come
up with a workable analogue, cost-effective, not audited GAAP
for a mutual, it would enable the Fed to rely on that as they
comply with their statutory mandate. So as we read your
legislation the way it reads now, we think it adequately
addresses the accounting issue.
Mr. Karol. There is no reluctance whatsoever to provide the
information. I think the question is to require insurance
companies who use statutory accounting, which is a more
conservative system, based on the interests of the solvency of
the company, to have them adopt an entirely different set of
reporting standards that are based, again, as they said, for
shareholder or investor reasons, under the Financial Accounting
Standards Board would impose a burden upon our members for a
purpose that may or may not be important to the Fed.
Mr. Schwarcz. The concern I have is that if the solution is
that we need something in between SAP and GAAP accounting,
okay? We need you to use GAAP accounting in this respect or SAP
accounting in this respect. We need SAP accounting plus.
The language, as I read it, is quite ambiguous with respect
to the question of whether or not the Fed could demand it, and
I think just on the technically statutory interpretation as an
attorney, one could make a very good argument, if one were so
inclined, that the companies are not required to provide
anything in addition to SAP or, alternatively, anything in
addition to SAP that could be construed as being required by
GAAP. And the key point I want to make is the Fed as the
regulator of these entities needs the flexibility to be able to
see these entities on a holistic basis and to prescribe
accounting standards that facilitate that.
Mrs. Beatty. Mr. Kohmann?
Mr. Kohmann. I would just add and agree with Ranking Member
Capuano that if we could get to one standard, wonderful, but we
are not going to do away with statutory accounting for
insurance purposes, and I think, with all due respect,
Professor Schwarcz, the Fed in their examination process and
otherwise I think certainly has the ability to request any and
all information that they want, and I think most companies
would do their best to accommodate those requests.
I think at the heart of the SAP versus GAAP is the
systematic reporting required to the Fed through their
reporting system. There is really no way to only provide one
set of financial data. So I think the requests that you are
talking about that are more from an examination perspective
certainly would be accommodated. I think it is a systematic
approach to accounting that is troublesome because it does
create significant additional cost and complexity to do that
reporting, which certainly adds costs to policyholders and
depositors.
Mrs. Beatty. Thank you.
Mr. Schwarcz. Could I just add one thing? I don't want to
overstep my bounds. I just want to respond quickly.
Mrs. Beatty. Okay. I didn't know if--
Mr. Schwarcz. Quickly, okay. To be clear, what I am talking
about is that the Fed might decide, ``We systematically, every
quarter, want you to report to us items that are not required
by SAP because we want to take those into account, say, in your
capital standards. So, every quarter, we want you to report to
us X, Y, Z that are not covered by SAP because we think they
are important in terms of us monitoring you on a persistent
basis, in terms of us coming up with capital standards.'' That
is what I am talking about, and it seems to me that the
statutory language would not permit that.
Chairman Neugebauer. I thank the gentlewoman.
Now the gentleman, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
recognizing me, and I appreciate you holding this hearing on
these important bills.
Before I start, I typically have an aversion to opening
statements, so I don't request to do them, but I do want to
make sure everybody in the room understands the unique
background of my fellow Buckeye, Mr. Kohmann, who not only is a
CPA, he was a CPA at Ernst & Young, and he has been a CFO for a
bank and for an insurance company, so he is in a unique
position with regard to the capital standards clarification
bill that we have talked about recently through the gentlelady
from Ohio as well as Mr. Capuano from Massachusetts and others
on the committee. I think almost everyone has talked about that
bill.
But, Mr. Kohmann, from your position, having been a CFO at
a bank and understanding how banks work and now being at a
property and casualty company, can you tell me, do you think a
bank and an insurance company are exactly the same and the same
exact capital standards would work for the two different
business models?
Mr. Kohmann. Thank you, Congressman.
No, absolutely, as I stated before, they are different. But
I would add that having been a CFO for both entities, both I
and Westfield would be supportive of strong capital standards
for both types of institutions, so I believe that strong and
prudent capital standards for banks are necessary and as well
as strong and prudent and appropriate capital standards for
insurance companies. The problem herein lies that one or the
other is not appropriate for both so we need unique capital
standards.
Mr. Stivers. Is there anybody on the panel who believes
that the McCarran-Ferguson model for regulating insurance is
not working?
I would note that no one shook their head ``no.''
The State-based standards for capital work very well, and I
know that the gentleman from Wisconsin talked earlier about the
fact that State-based regulated entities had no problem through
the entire financial crisis. And the capital standards that the
States are imposing under the McCarran-Ferguson law, which has
been working for 70 years, is still working and working very
well.
You talked a little bit through the gentlelady from Ohio's
questions about the issues with statutory accounting versus
GAAP accounting. Is there anything, Mr. Kohmann, that didn't
come out in that discussion that would cause additional expense
to insurance companies, whether they be mutual insurance
companies or nonmutuals?
Mr. Kohmann. No, I think what came out of the dialogue was
appropriate. I think there is no question that the requirement
to provide GAAP statements in addition to statutory statements
would be an additional burden, which would basically create
expense and complexity, which ultimately would cost
policyholders more in premiums.
Mr. Stivers. Has your company put a price on what that
would cost your policyholders?
Mr. Kohmann. We have not specifically, no.
Mr. Stivers. Can you tell me, would it be in the thousands
or the millions of dollars for a company the size of Westfield?
Mr. Kohmann. It would be more than a million.
Mr. Stivers. So, for medium to large insurance companies,
you are talking about six-, seven-, eight-digit costs, tens of
millions potentially in some companies?
Mr. Kohmann. I can't speak for other companies
specifically, but that would be my suspicion, yes.
Mr. Stivers. Thank you. I appreciate that.
The other bill I want to talk a little bit about is the
Data Protection Act that I have a discussion draft out on. It
is a bill that has changed from a bill we did last year, and I
know there has been some discussion in the committee by the
ranking member of the fact that Congress doesn't reimburse, but
Congress is usually subpoenaing other government agencies, so
it is government agency to government agency, but in Title 18
of the U.S. Code, Section 2706 there is a similar provision to
what we are talking about that deals with law enforcement, and
when they subpoena commercial or other folks and they reimburse
the cost, and I know that Mr. Schwarcz, I am not sure if you
said it was unprecedented, but I wanted to make sure you knew
the precedent of Title 18, Section 2706. Are you familiar with
that section?
Mr. Schwarcz. Yes. My understanding is that there is not
another precedent for a monitoring agency or an agency that is
meant to assess risk to a marketplace having to pay for that,
and I would also say that even in the context of subpoenaing--
Mr. Stivers. I am running out of time, but those are
regulatory agencies, and that is why, and so the State-based
regulators regulate, we already talked about that, under
McCarran-Ferguson, regulate insurance companies, but this is
additional, this is much more akin to the law enforcement model
because these are not regulators.
So thank you for the time, Mr. Chairman. I know I am out of
time. I appreciate the witnesses' cooperation, and thanks for
being here. I appreciate your information.
Chairman Neugebauer. I thank the gentleman.
Now the gentleman from Florida, Mr. Ross, is recognized for
5 minutes.
Mr. Ross. Thank you, Mr. Chairman.
Professor Schwarcz hinted earlier about a 1986 crisis in
insurance that I think led to what resulted in the liability
risk retention amendments that I think have done very well. In
fact, Mr. Carter, if it were not for the risk retention groups,
what would your members avail themselves of in terms of a
market for liability coverage and, in this particular case, in
my draft, property insurance coverage?
Mr. Carter. Thank you for the question. I think during the
times of a crisis, when most of the traditional insurance
markets do not feel that they can continue to offer the
coverage, it is very, very difficult for the businesses to find
the coverages that they are going to need, whatever that be.
Mr. Ross. You have a unique risk, too, don't you? Your
members have a unique risk that you don't find in a commercial
line's product. Would that not be the case?
Mr. Carter. I think, to the extent that there is liability,
obviously there is liability inside of our industries as well
as others. However, you are correct that the industries, the
specific industries that turn to risk retention groups and
tended to gravitate to them, nonprofits, educational
institutions, many of those were difficult to cover for those
traditional insurance markets. So we were formed during that
time, and what makes the model really work is during very
difficult times, over the course of the years since that time,
there has been at least one event that has changed the market,
created a market cycle, I should say. Risk retention groups
tend to grow quite a bit because of our commitment to those
members, so we are not looking to grow outside or we can't grow
outside of that.
Mr. Ross. Correct. You can't offer your product to somebody
else outside your membership?
Mr. Carter. We cannot offer it; that is correct.
Mr. Ross. You are not in the business of being an insurance
company. You are in the business of providing a particular
service, in most cases a nonprofit or charitable service for
which you have a unique risk. Now, if you didn't have the risk
retention groups, is there a residual market for coverage?
Mr. Carter. Not that I know of.
Mr. Ross. And if there was such a market, wouldn't it have
to be most likely provided by a government?
Mr. Carter. That is correct.
Mr. Ross. Such as an assigned risk pool?
Mr. Carter. That is correct.
Mr. Ross. Such as what we saw in Florida and what we have
seen in other States? So if we don't have affordable coverage
for your members, then they can't provide their service, and if
they can't provide their service, which is a nonprofit
charitable service, then: one, where does the client go, and
two, who insures that risk? Just because the services aren't
being provided by your organization doesn't mean the risk for
those services is not going to still be out there because
somebody, most likely a government, will provide those
services.
Mr. Carter. That is correct.
Mr. Ross. Now, with regard to capital standards, and I just
want to ask Professor Schwarcz this particular question. I
understand, I just want to make sure, you are not suggesting
that FIO now have regulatory authority, are you?
Mr. Schwarcz. No.
Mr. Ross. Okay. And when you consider the cost of
compliance as well as the cost of increased capital having to
be held, would that not play into any cost-benefit analysis as
to whether a regulation should be implemented or not?
Mr. Schwarcz. Yes.
Mr. Ross. And in this particular case, if we are not clear
on the Collins Amendment and that we don't have bankcentric
capital standards apply to insurance companies, we may very
well have a situation where the cost of compliance may outweigh
the affordability of the product?
Mr. Schwarcz. Yes, I am in agreement that the language
making it clear that the Fed has discretion to tailor capital
rules to insurers is a good idea, and I agree that the risk,
the cost-benefit analysis is relatively clear on that.
Mr. Ross. And I would assume as well, Mr. Kohmann and Mr.
Karol?
Mr. Karol. Yes.
Mr. Hughes. Yes.
Mr. Ross. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from New Jersey, Mr. Garrett, is
recognized for 5 minutes.
Mr. Garrett. Great. So, I thank the panel again.
Going back, I will start from the right. Professor
Schwarcz, you made the comment--and I want to see where you are
going on this--before that there were a number of insurance
companies who had problems and failed regulations, and you
referenced AIG and a couple of other ones, and for that reason,
we should have, in your words, turned some of this over to
Federal regulation in this area. I am paraphrasing.
Mr. Schwarcz. Yes. The basic argument is that we saw that
insurance can be systemically risky in more limited
circumstances than banks.
Mr. Garrett. Right.
Mr. Schwarcz. For that reason, we need a Federal layer of
oversight and protection.
Mr. Garrett. Protection, right.
Mr. Hughes, I think somebody asked you about how many
carriers, insurance companies failed, and I think you alluded
to only a handful, and that a couple of them actually failed
not because of their own doing but because of Federal
regulation because they were encouraged to buy trusts secured
in Fannie Mae and Freddie Mac. So this is where I am sort of
confused, Professor.
If you look at the numbers, the number of insurance
companies that failed is on one and a half hands, it is AIG and
a couple of other ones, and actually, weren't the two major
companies that failed actually also regulated by the Federal
Government at the same time?
Mr. Schwarcz. So, to be clear, there were several insurance
companies that received TARP bailout funds.
Mr. Garrett. Right.
Mr. Schwarcz. Many more than applied, okay? So, there were
many. And there were many insurers that contributed to the
crisis without necessarily failing. One important point to
recognize--
Mr. Garrett. The important point is that, by and large,
they didn't fail or they didn't actually have to get government
backstop or support except for a couple.
Mr. Schwarcz. Several--
Mr. Garrett. And the ones that did get the support actually
were regulated. AIG, which was probably bailed out the most of
all of them--the Office of Thrift Supervision, they were
supposed to be doing it. The other one at the very top that got
it was a bank holding company, and who would that--wasn't
Hartford a bank holding--
Mr. Schwarcz. Hartford was a recipient.
Mr. Garrett. Not a bank holding company?
Mr. Schwarcz. I do not believe it was.
Mr. Garrett. So AIG would have been the top; they were
government-supervised. So it seems as though the ones that got
the most money also had a Federal regulator that failed, and if
you look at most businesses or financial institutions that
failed, they would be on the other side of the ledger. They
would not be insurance companies. They would be the banks, and
weren't the banks regulated by the Fed?
Mr. Schwarcz. It is funny, we all keep talking about the
banks, a lot of the crisis was caused by an unprecedented
expansion of shadow banking. So the point is this--
Mr. Garrett. I know, the point--
Mr. Schwarcz. That was new. And the point is you can't just
say, oh, well, banks are the problem so banks are going to be
the problem in the future. Systemic risk arises in new ways.
Mr. Garrett. Right, and that is why we need to have
regulators to do the job, but apparently--
Mr. Schwarcz. Right, monitors and regulators who have the
powers to do the job.
Mr. Garrett. But the regulators didn't do their job. We had
Secretary Geithner here back in 2009, and he was answering a
question--I was just seeing this from earlier--and he said that
in 2009, after he had just left the New York Fed, that, in his
words, ``I just want to correct one thing, I have never been a
regulator for better or worse.'' So here is a guy, one of the
regulators that we are supposed to be turning all this control
over to, being paid $400,000 a year, being in the job of
heading the New York Fed testifying to Congress that, ``I am
not a regulator.'' Is this exactly where we should be in
turning over the authority to when, as Mr. Hughes and others on
the panel have testified to, we don't really see the problem on
the State level? We see the failed regulation at the Fed, at
the New York Fed, at the Office of Thrift Supervision, and on
other issues outside of the realm of this panel, such as the
SEC, with other areas as well. It seems as though it is endemic
as the problem is where the Federal regulators have gotten
involved and failed to do their job with the authority that
they had at the time, and as a matter of fact, we go all the
way back, we asked the regulators when they came in right after
the crisis of 2008, did you need additional authority or power
at the time, and they said, ``No, we just didn't see what was
happening here.''
And what we are trying--so to go forward, your suggestion
is we just need to give the regulators even more authority and
more information, but would you agree that there is some limit
that we should impose on the information that they should be
able to acquire?
Mr. Schwarcz. Of course. I think that the information
should be--whether or not they request information should be
based on a prudent judgment of the need, but I would also--the
point.
Mr. Garrett. Correct me if I am wrong, Dodd-Frank gives the
FIO subpoena authority, correct?
Mr. Schwarcz. It only allows them to use that subpoena
authority if they have made a determination that they cannot
receive the information from any other source, State or
Federal.
Mr. Garrett. Right. But isn't that unusual? Can we cite any
other case where you have subpoena authority where it is not a
criminal or an administrative position?
Mr. Schwarcz. One of the things Dodd-Frank did to address
the fact that systemic risk is always changing is create
institutions like OFR and like FIO that are meant to try to
anticipate these. Are they going to work all the time? Of
course not. But the answer is--
Mr. Garrett. But is there any other institution that has
that authority right now and is not in a criminal or
administrative position?
Mr. Schwarcz. I think they are a unique organization, but I
think on the scale of regulation versus crime enforcement, they
are a whole lot closer to regulation than crime enforcement,
and they are doing a job that is monitoring systemic risk which
is in a sense much closer.
Mr. Garrett. I yield back. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Sherman, is
recognized for 5 minutes.
Mr. Sherman. I thank the chairman. I notice in talking
about the risk retention draft, there is a noted absence of
necessary speed with which to take this up, I assume because
there may not be a push from the groups really pushing that
effort forward. I wonder who would want to comment about the
speed of dealing with the risk retention draft?
Mr. Carter. That would be my area, but I am not quite sure
I understand the question. Would you mind repeating it? I
didn't hear the first part.
Mr. Sherman. You know what? I think I am going to go on.
Who can comment on why we wouldn't regulate credit default
swaps as an insurance product?
Mr. Hughes?
Mr. Hughes. Personal opinion, it is a form of financial
guaranty insurance. I think it probably should have been in a
monoline company and not part of a multiline company.
Mr. Sherman. You are saying it should be part of a monoline
company, but a regulated insurance company?
Mr. Hughes. That would be my personal opinion, yes.
Mr. Sherman. If I had decided that I wanted to be in the
fire protection business, but my deal was this, if your house
burns down, I don't write you a check; that would make me an
insurance company. Instead, if your house burns down, you can
trade your house for a U.S. Government bond, would I be a fire
insurance company, or could I evade all fire insurance company
regulation?
Mr. Schwarcz. You would be an insurance company.
Mr. Sherman. What?
Mr. Schwarcz. You would be an insurance company.
Mr. Sherman. I would be an insurance company if I did a
burned home for credit for a bond swap, but if, instead, of
your home burns down you can trade it for a U.S. Government
bond, that would make me an insurance company, but if your
portfolio burns down, you can trade it for a U.S. Government
bond, I am not an insurance company, or at least I am not
defined as one under U.S. law?
Mr. Schwarcz. That is exactly, yes, the boundaries and the
fact that we have regulatory arbitrage and we have insurance
companies engaging in many of the types of activities that
banks and shadow banks engage in is exactly why we can't ignore
the systemic risk of insurance companies, we can't simply say,
the States are doing a fine job, so we are going to leave them
alone.
Mr. Sherman. Wait a minute. That credit default swap that I
just described is not, cannot be done by a regulated insurance
company, correct?
Mr. Schwarcz. Correct, but monoline insurers, financial
guaranty insurers did the exact same thing, and they failed
miserably as well. State regulated insurance companies issuing
financial guaranty insurers, they failed just as dramatically.
Mr. Sherman. They failed to the point where they had to be
bailed out?
Mr. Schwarcz. They didn't--they failed to the point of
insolvency, to the point of contributing mightily to the
crisis, yes, because what happened is, all of a sudden, the
financial guaranty insurers were providing--their classic
business was to provide insurance against the default of local
bonds and State bonds. When they failed and became insolvent to
the point that no one had any faith in them, the entire bond
market seized up because there was no financial guaranty--
Mr. Sherman. But we in Congress didn't have to bail them
out?
Mr. Schwarcz. I don't believe that any of them received
bailout funds.
Mr. Sherman. Okay. Has anybody put forth an argument
against the Policyholder Protection Act simply making it clear
that you can't raid the insurance company to support the
depository institution? We have a whole panel here. Somebody
raise your hand if you have an argument against the bill. Wow,
passed it unanimously. Thank you.
Okay. I am going to amaze my colleagues and yield back 46
seconds.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Florida, Mr. Posey, who has a
couple of bills that we have been considering today, is
recognized for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman, and thank you for
today's hearing on legislation that is very important to the
insurance industry, and for allowing me the opportunity to
speak today.
A question for Mr. Kohmann: Dodd-Frank requires insurance
companies can be made to serve as a source of strength for
affiliated depository institutions. State insurance regulators
wall off assets of insurers from other affiliated companies
because insurance assets are supposed to be available to ensure
an insurer can meet its obligations to policyholders. But if an
insurer is expected to serve as a source of strength to
noninsurance firms, couldn't that harm the insurer's
policyholders? Why would we favor protecting consumers, banks,
and other risky financial firms over protecting innocent
insurance policyholders? They are the most innocent potential
possible victims. It seems like we want to focus--Mr. Schwarcz
wants to focus on protecting the investors of these
institutions that can't keep themselves in business rather than
worry about the victims when they are forced to go out of
business. I would just like your thoughts.
Mr. Kohmann. I think the answer to your question is we
shouldn't jeopardize the policyholders of an insurance company
that is State-regulated in order to use those assets to divert
those to support banks in a bailout.
Mr. Posey. And I realize health insurance is different.
Every insurance is unique, but they all have something in
common, and that is people buy insurance to reduce risk.
Mr. Kohmann. Right.
Mr. Posey. They don't buy insurance to increase risk, and
if you start stealing from Peter to pay Paul, what you may have
is instead of one guy going out of business, you get two, and I
don't know how that is better for anybody, but my experience
with Federal regulators in the insurance business--I don't
know, Mr. Schwarcz, if you have ever heard of TRG, but it is a
health insurance company that wrote insurance policies in 48
States, darn near every State but their own, which was in
Indiana. Everything was fine except they didn't pay any claims,
and they bluffed most of the State insurance commissioners into
thinking they couldn't go after them because they were under
the Federal ERISA program.
Mr. Schwarcz. To be clear, I support, I also support--
Mr. Posey. And finally, one State said, if the Federal
Government is not going to do anything, maybe we will, and 13
State agencies from different States cooperated to bust those
dirtbags and put the principals in prison. To this day, the
Federal regulators have done absolutely nothing. They have
brought no charges. They are just paralyzed with inactivity. So
when I hear somebody kind of insinuating that State regulators
are bad and Federal regulators are good, my experience has been
just the opposite, and while we all believe, I think, probably,
most of the people here have come up through various levels of
government, and they know that the government closest to the
people is usually the best, the most responsive, the most
efficient, the most effective, the most cost-effective, and
certainly the most accessible, and I think that goes for
regulators, too. I think that goes for law enforcement, too. I
think all services that are regulated more closely now. I see
nothing wrong with cooperation from the Federal Government,
unlike what they did in the TRG case, to facilitate enforcement
across State lines, but I think the State regulators are,
fortunately for most consumers, the best line of defense
against innocent victims.
Mr. Chairman, I want to thank you again for bringing these
up. They are very important issues. I yield back.
Chairman Neugebauer. If there are no other Members seeking
recognition, I would like to thank each of our witnesses again
for their testimony today. Without objection, I would like to
submit the following statements for the record: the Independent
Insurance Agents and Brokers of America; the American Insurance
Association; the Financial Services Roundtable; the National
Association of Insurance Commissioners; and a letter from over
50 CEOs regarding the Miller-McCarthy bill.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is adjourned.
[Whereupon, at 3:52 p.m., the hearing was adjourned.]
A P P E N D I X
May 20, 2014
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