[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                      SYSTEMIC RISK AND INSURANCE

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



                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 16, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-44



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 16, 2009................................................     1
Appendix:
    June 16, 2009................................................    57

                               WITNESSES
                         Tuesday, June 16, 2009

Baird, Patrick S., Chief Executive Officer, AEGON USA, LLC, on 
  behalf of The American Council of Life Insurers (ACLI).........    20
Bryce, Teresa, President, Radian Guaranty Inc., on behalf of The 
  Mortgage Insurance Companies of America (MICA).................    13
Hill, John T., President and Chief Operating Officer, Magna Carta 
  Companies, on behalf of The National Association of Mutual 
  Insurance Companies (NAMIC)....................................    22
McCarthy, Sean W., President and Chief Operating Officer, 
  Financial Security Assurance Holdings Ltd......................    14
McRaith, Hon. Michael T., Director, Illinois Department of 
  Insurance, on behalf of The National Association of Insurance 
  Commissioners (NAIC)...........................................    11
Nutter, Franklin W., President, Reinsurance Association of 
  America (RAA)..................................................    18
Skinner, Hon. Peter, Member, European Parliament.................     9
Spence, Kenneth F. III, Executive Vice President and General 
  Counsel, The Travelers Companies, Inc..........................    16

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    58
    Garrett, Hon. Scott..........................................    60
    Carson, Hon. Andre...........................................    62
    Baird, Patrick S.............................................    63
    Bryce, Teresa................................................    73
    Hill, John T.................................................    81
    McCarthy, Sean W.............................................    98
    McRaith, Hon. Michael T......................................   104
    Nutter, Franklin W...........................................   120
    Skinner, Hon. Peter..........................................   131
    Spence, Kenneth F............................................   137

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Letter from the CEA, dated June 15, 2009.....................   148
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................   150
Garrett, Hon. Scott:
    Letter to Hon. Lawrence H. Summers from the American 
      Insurance Association (AIA)................................   174


                      SYSTEMIC RISK AND INSURANCE

                              ----------                              


                         Tuesday, June 16, 2009

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Sherman, 
Capuano, Hinojosa, McCarthy of New York, Baca, Lynch, Miller, 
Scott, Bean, Moore, Klein, Perlmutter, Donnelly, Carson, 
Speier, Foster, Adler, Kosmas, Grayson, Himes; Garrett, Price, 
Manzullo, Royce, Biggert, Capito, Hensarling, Neugebauer, 
McCarthy of California, Posey, and Jenkins.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order.
    Pursuant to an agreement with the ranking member, opening 
statements today will be limited to 10 minutes for each side. 
Without objection, all members' opening statements will be made 
a part of the record.
    We meet to continue our discussion of insurance regulation, 
which the Capital Markets Subcommittee has debated in great 
depth for several years. On the eve of the Administration's 
unveiling of its plan to strengthen the oversight of our 
financial markets, it also appears likely that we will soon 
consider reforms aimed at mitigating systemic risk. As such, it 
makes sense for us to drive a bit deeper today into the issue 
of systemic risk and the insurance industry.
    While we have yet to learn much about the specifics of the 
Administration's plan for insurance reform, we have spent 
enough time debating these issues to come to some conclusions. 
For example, I believe that only ostriches can now deny the 
need for establishing a Federal insurance resource center and a 
basic Federal insurance regulatory structure.
    Insurance is a complex and important part of the U.S. 
financial industry, with more than $6.3 trillion in assets 
under management and $1.23 trillion in annual premiums. We need 
to recognize this reality by modernizing the overall regulatory 
treatment of insurance. We also need to protect against the 
risks certain sectors of the industry may pose and address the 
greater sensitivity that some industry segments have to 
external events.
    During this crisis, we saw a company that started out as an 
insurer spread far and wide in its activities and its 
international presence. American International Group, however, 
lacked a Federal regulator with real expertise about its vast 
insurance operations. Rather, the holding company purchased a 
small thrift and chose the Office of Thrift Supervision as its 
supervisor.
    Currently, several other insurance holding companies have a 
Federal banking regulator as their primary supervisor, and more 
than 6 dozen similar entities avoid any form of Federal 
oversight, with selected States instead monitoring them on a 
consolidated basis. Because a number of these businesses could 
pose systemic risk, I believe that the Federal Government 
should directly examine all complex financial holding 
companies, including those whose primary activities involve 
underwriting insurance and those who play with credit default 
swaps.
    In addition, our financial services markets are global and 
complex. Insurance is no exception. In order for effective 
communication and dialogue to take place on the international 
stage, we must have a single point of contact for the United 
States on these matters. Moreover, insurers must have a Federal 
regulatory voice on par with the banking and securities sectors 
in our financial markets so that the industry can communicate 
with its peer regulators at home.
    In short, we can no longer sweep insurance regulation under 
the rug and cross our fingers that nothing will go wrong. We 
tried it before and learned that such an action may hide the 
mess for the short term, but pose greater problems in the long 
term. As such, when the Administration reveals its white paper 
tomorrow, I very strongly hope that it will recognize today's 
market realities and call for the establishment of better 
oversight for insurance holding companies and certain insurance 
activities, especially those most likely to pose systemic risk.
    Moreover, I am confident that this Administration will 
recognize the wisdom of creating a Federal insurance office to 
advise a systemic risk overseer of the risks in the insurance 
sector, provide expertise to the Administration and Congress on 
insurance policy matters, and communicate with foreign 
governments. I have long advocated for such an office by 
introducing and advancing the Insurance Information Act. As 
part of the congressional restructuring of financial services 
regulation, I ask my colleagues to join me in the effort to 
enact this legislation.
    With any luck, the Administration with its white paper will 
also hopefully advance the debate about Federal insurance 
regulation in other ways. Personally, I now believe that the 
Federal Government should actively regulate some specific 
insurance lines, especially those that pose systemic risk or 
which have a national significance. Using these tests, 
federally regulated lines would include bond insurers, mortgage 
insurers, and re-insurers. I also believe that we should 
examine how we can promote greater uniformity in the industry, 
with or without the establishment of a Federal charter. The 
Administration might reach similar conclusions.
    In sum, before the Administration proposes its white paper 
tomorrow, we have many important issues to discuss related to 
regulatory restructuring as it affects the insurance sector 
today. I therefore look forward to the testimony of our 
witnesses and to a vibrant debate in the weeks and months 
ahead.
    I would like to recognize our ranking member, Mr. Garrett, 
for 4 minutes, for his opening statement.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you all to our 
witnesses, as well, especially Mr. Skinner, who I understand 
came all the way across the ocean to be with us today. We have 
a fairly large panel, and wide perspective of different 
opinions on the insurance industry. So I look forward to all of 
your testimony.
    Tomorrow, as you indicate, we expect to hear from the Obama 
Administration on its plan for financial regulatory reform. 
And, from what I can tell, it seems unclear to what extent a 
proposal will address insurance legislation. Different ideas 
have been floated, of course. But within the Administration and 
beyond, it seems that a clear consensus as to what to do in 
insurance has not totally been yet crystalized.
    See, part of the difficulty, I think, in reaching a 
consensus on what to do is related to the difficulty in 
reaching a consensus on what is a systemic risk. And, 
furthermore, how do you identify it, if that's even possible in 
the future? And how should it be addressed if it is identified, 
and how it should be cleaned up, once it has been identified, 
if it's not too late.
    Now, I would add another issue that policymakers should be 
thinking about: How can the policy be put in place so that 
incidences of systemic risk aren't actually encouraged in the 
first place, or exacerbated, or even institutionalized, due to 
government actions or unintended consequences?
    I worry that some of the policies being considered by the 
Administration, and likely to be part of its plan, will 
unfortunately do more harm than good if they are actually 
implemented. You know, a systemic risk regulator, in 
conjunction with a resolution or a bail-out regime will set up 
a situation where certain companies are either implicitly or 
explicitly perceived to fall under this yet another new layer 
of supervision, be seen as too-big-to-fail, gain an unfair 
advantage in the market place, and threaten further taxpayer 
pain.
    Further complicating the resolution authority proposal is a 
question of how to pay for it. If only large firms potentially 
subject to the authority are asked to pay for it, then they 
will fairly explicitly be seen as beneficiaries of that regime. 
But asking a broader swath of the industry to pay for it would 
be not equitable, since smaller firms that have no chance of 
ever benefitting from it would be asked to contribute to a 
system design up there, and prop up their larger competitors.
    Additionally, I don't believe that individual taxpayers 
should be asked to contribute to a fund that is set up to bail 
out a failed large firm and its creditors. And, furthermore, 
such a fund created for the resolution authority would need to 
be very large, and that's very costly for the firms that have 
to contribute to it.
    But, at the same time, it would likely not be large enough 
to deal with an event deemed by regulators as truly 
significant.
    As I said, I would argue that, at the first and foremost, 
we should concentrate on policies that don't encourage future 
bail-outs by promising firms that the government will always 
come to the rescue.
    The Republican plan that was put forward last week 
addresses various policies that put the taxpayer at risk, but 
has no bail-out in the future. And its central unifying goal is 
no more bail-outs.
    Now, returning to the theme of today's hearing, my primary 
questions are, are insurance firms, by their nature, 
systemically insignificant? I am looking forward to hearing 
from different participants on the panel on this question, in 
particular.
    And, certainly, it would be a mistake to view the entire 
industry broadly as a single entity. At today's hearing, the 
breadth of the industry will be on display, as we will be 
hearing from the mortgage insurance industry, the bond 
insurers, life insurers, the re-insurers, as well as from the 
PNC sector, as well.
    And we will also be hearing from the NAIC, which is 
actually in charge of insurance regulation in this country, as 
we speak. I am hopeful that its perspectives on systemic risk, 
how we might address it, and what further actions could be 
done, will be enlightening to everyone here today.
    And finally, Mr. Chairman, as you know, you have introduced 
the Office of Insurance Information bill, the OII bill. And I 
know this legislation will be addressed by several members of 
the panel today. So I am interested to hear from our panel as 
to how this legislation may address deficiencies in our current 
framework. And I am particularly interested in its potential 
impact in regard to markets for the United States companies 
abroad, and related international agreements, as well.
    So, once again, I welcome all the witnesses, and I look 
forward to their testimony. And thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. We 
will now hear from the gentleman from California, Mr. Sherman, 
for one minute.
    Mr. Sherman. In this hearing is the question, what is 
insurance? Derivatives are, at best, insurance. At worst, they 
are a casino bet. AIG sold fire and life insurance through its 
regulated subsidiaries, and those subsidiaries are pretty much 
okay. It sold portfolio insurance through unregulated 
subsidiaries, convincing the world that it wasn't insurance, 
and they took down the company, if not the world economy.
    The fire insurance policy on my house protects my lender in 
case my house burns down. But if my lender wants protection 
from the much greater risk that the value of my house goes 
down, or the value of my mortgage goes down, they also buy 
insurance. They call it a derivative, and it's completely 
unregulated.
    We need to make sure that credit default swaps and similar 
derivatives are classified as insurance, and are subject to 
reserves. I yield back.
    Chairman Kanjorski. Thank you, Mr. Sherman. And now we will 
hear from another gentleman from California, Mr. Royce, for 2 
minutes.
    Mr. Royce. Thank you, Mr. Chairman. And I would like to 
briefly thank Mr. Skinner for making this trip here to testify, 
and also congratulate him on his recent election. He has been a 
leader in the European Union and in Parliament. He has been a 
leader and champion of the Solvency II directive, which 
provides an important yet relevant example of an effort 
underway to create a more efficient regulatory structure.
    And yesterday's op ed in the Washington Post by Larry 
Summers and Tim Geithner noted the importance of international 
coordination among regulators, and reiterated the 
Administration's commitment to leading the effort to improve 
supervision around the world. Unfortunately, with our 
fragmented regulatory regime over insurance, we are lagging at 
this point; we are not leading the rest of the world.
    As Solvency II works to unite the insurance markets in 27 
member countries in the EU, we continue, on the other hand, to 
struggle with a patchwork system of 50-plus State regulators. 
With the implementation of this directive nearing, it is 
becoming more apparent that the framework potentially will be 
at odds with the U.S. regulatory structure. It is unlikely that 
the EU would find the current U.S. State-based regulatory 
structure equivalent.
    This means the ability of our regulatory system to detect 
offshore risks will be weakened, and it also means that many of 
our U.S.-based institutions will be forced to shift significant 
operations overseas if they hope to continue to do business in 
the EU.
    Certainly, an office of insurance information would be a 
logical first step to address this, and to address other 
problems we face in the international insurance market. 
However, an OII would rely heavily on the various State 
insurance commissioners to implement the regulatory policies. 
Without strong pre-emptive authority over the States, the 
ability of an OII to enact policies nationwide--and, 
consequently, the ability of an OII to adequately represent the 
entire U.S. insurance market--would be greatly weakened.
    I remain concerned, however, that an OII will not go far 
enough. Maintaining solvency regulation at the State level will 
limit the effectiveness of a potential systemic risk regulator, 
as well as coordination efforts with foreign regulators.
    Certainly, noting the failure of AIG, once the Nation's 
largest insurer, is relevant, given the focus of today's 
hearing. Dating back to 2006, the Paulson Treasury Department 
noted systemic gaps in the State-based system, which AIG 
exploited. The blame for the collapse of the company should 
start with AIG.
    From a regulatory standpoint, there were failures at both 
the State and Federal level. Using capital from their insurance 
subsidiaries, with the approval of various State regulators, 
the securities lending division, in tandem with the financial 
products unit, put at risk the entire company and the broader 
financial system. Half of this came from the securities lending 
division, the other half from the financial products unit, in 
terms of the overleveraging.
    With more than 250 subsidiaries operating in 14 States and 
more than 100 countries, AIG is the poster child for both the 
need to open up lines of communication among regulators 
worldwide, and the need to establish a domestic insurance 
regulator with the ability to oversee these large and complex 
institutions.
    And again, Mr. Chairman, thank you for holding this 
hearing.
    Chairman Kanjorski. Thank you, Mr. Royce. And now we will 
hear from the gentleman from Georgia, Mr. Scott, for one 
minute.
    Mr. Scott. Thank you very much, Mr. Chairman. I think this, 
of course, is a very important and timely hearing. The issue 
is, of course, I think, what is systemic risk as it relates to 
our insurance industry? And where and how is it best regulated, 
at the State or Federal level?
    But I think that the major model that we are using, AIG, is 
flawed, at its best. Because, as we look back at it, what 
caused the problem at AIG was their Financial Products 
Division, based in London, which again was regulated at the 
Federal level.
    So the question becomes, if we use a Federal charter, or 
regulate insurance at the Federal level, would that have 
prevented the situation at AIG? I think, going forward, we have 
to be very careful to make sure that the points we take into 
consideration are these: that we have the sound consumer 
protections in place; that we also do not deter competition; 
that we do not bring on excessive operating costs; and, in 
fact, in our efforts to do some good, that we do something that 
could very well be dangerous down the road.
    So, the question becomes, do we do it at the Federal level 
or the State level? And, of course, as I say, we have to look 
with a very jaundiced eye, to make sure that we are looking 
right when it comes to the cause of this at AIG. Because if we 
did have Federal intervention there, as we had, and it didn't 
prevent it, what's to say that the Federal charter and Federal 
regulation is the way to go?
    I think there is a lot to be said with making sure that we 
have regulations at the State level that work. Thank you, Mr. 
Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Scott. And now 
we have the gentlelady from Illinois, Mrs. Biggert, for 2 
minutes.
    Mrs. Biggert. Thank you, Chairman Kanjorski. I am pleased 
that we are having a second hearing to examine insurance 
regulation.
    As I mentioned at the previous hearing, this is an 
important part of the conversation, as it relates to systemic 
risk. Fortunately, the insurance industry is in good shape, due 
to sound State regulation. I think State insurance regulators 
are doing a good job.
    And with that, I would also like to thank and welcome to 
today's hearing Illinois Department of Insurance Director Mike 
McRaith, representing NAIC. I am really happy to have something 
really good to say about Illinois. That doesn't happen so much 
these days.
    But it is important that we roll on to the debate on 
systemic risk the role of the Federal regulators when it comes 
to duly regulated entities like AIG. I think OTS dropped the 
ball, and that's why a part of our Republican regulatory reform 
proposal preserves the option for a thrift charter, but rolls 
OTS into the OCC.
    And, in addition, our proposal addresses risky behavior 
that AIG-like entities may engage in, such as with derivatives. 
I think we establish a market stability and capital adequacy 
board, comprised of all Federal regulators and possibly others 
to look at what should be done with regard to the derivatives 
regulation. We recently had a hearing in this committee to 
discuss how over-the-counter derivatives could be put into the 
three buckets of regulation.
    I also think that we need to improve the dialogue among 
regulators and insurance needs to be part of that dialogue. 
That's why I joined Chairman Kanjorski, with his Office of 
Insurance Information bill.
    And, with that, I look forward to hearing from today's 
witnesses, who represent the very diverse insurance industry. I 
also look forward to working with them and my colleagues to 
strike the right balance on this matter. With that, I yield 
back.
    Chairman Kanjorski. Thank you very much, Mrs. Biggert. And 
now we will hear from the other lady from Illinois, Ms. Bean, 
for 3 minutes.
    Ms. Bean. Thank you, Mr. Chairman. Being from Illinois, I 
would also like to give a shout out to Mike McRaith, but to all 
of our witnesses, as well, for joining us today, and sharing 
your expertise.
    Until this year, the role of Federal involvement in the 
insurance industry has centered on whether to establish a 
Federal insurance regulator. I have worked with Congressman 
Royce on legislation to establish a Federal regulator for the 
insurance industry.
    Last Congress, our bill was focused on consumer choice and 
protections, advantages for agents, and industry efficiencies. 
But much has changed in our financial system since the last 
Congress. The collapse of AIG, the world's largest insurer, has 
proven to be one of the most costly and dangerous corporate 
disasters in our Nation's financial history. With nearly $180 
billion of Federal tax dollars committed to AIG, plus $22 
billion to other insurers, the Federal Government has made an 
unprecedented investment in an industry over which it has no 
regulatory authority.
    The need for Federal regulatory oversight has never been 
greater. And having a Federal insurance commissioner who can 
work with the expected systemic risk regulator or council is 
vital to ensure proper oversight of an important pillar of the 
U.S. financial system.
    In April, Congressman Royce and I introduced H.R. 1880, the 
National Insurance Consumer Protection Act. Unlike previous 
legislation, our bill deals with systemic risk. Recognizing 
that Congress will create a systemic risk regulator, it 
subjects all insurance companies, national or State-chartered, 
to a systemic risk review.
    The systemic risk regulator would have the ability to 
gather financial data from insurers and other financial 
services affiliates within a holding company structure to 
monitor for systemic risk. Based on that financial data, the 
systemic risk regulator can make recommendations to appropriate 
regulators for corrective regulatory action, including the 
national insurance commissioner.
    The activities of an insurance company or companies, an 
affiliate of an insurance company, like an AIG financial 
products unit, or any product or service of an insurance 
company, would have serious adverse affects on economic 
conditions or financial stability. In this instance, the 
systemic risk regulator can recommend to the Federal or State 
insurance regulator that an activity, practice, product, or 
service must be restricted or prohibited.
    In instances where a functional regulator refuses to take 
action, the systemic risk regulator would seek approval to 
override the functional regulator from a coordinating council 
of financial regulators established in the bill that consists 
of the current members of the President's Working Group on 
Capital Markets, plus the Federal banking regulators, the 
Federal insurance commissioner, and three State financial 
regulators from the three sectors: insurance; banking; and 
securities.
    Finally, if the systemic risk regulator determines an 
insurance company is systemically significant, it is required 
to consult with the national insurance commissioner to 
determine whether the company should be nationally regulated. I 
believe all financial activity, including that of insurance 
companies, should be subject to review by a systemic risk 
regulator.
    Some suggest the insurance industry does not pose a 
systemic risk to the financial system. But we know from our 
experience at AIG that it did pose a systemic risk, and not 
just through the Financial Products Division, but through the 
securities lending program, which was regulated by the State 
insurance commissioners, and has led to over $40 billion in 
taxpayer money being invested.
    As we move forward in the next few months to establish a 
systemic risk regulator or council, we need to provide this 
regulatory body with all the tools to properly review and 
evaluate the activities of insurance companies. That should 
include a Federal regulator for insurance that can work with a 
system risk regulator in a similar manner as the OCC and SEC do 
for their respective regulated industries.
    Thank you, and I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Ms. Bean. And now, 
our final presenter, Mr. Hensarling of Texas, for 2 minutes.
    Mr. Hensarling. I thank you, Mr. Chairman. Thank you for 
calling this hearing. Obviously, these are very important 
issues for us to consider. There is no doubt each of us knows 
what a critical role the insurance industry plays in our 
economy today.
    However, I am not sold on the belief that any one insurance 
company is necessarily an agent of systemic risk to the entire 
economy. And if I did believe that, I can think of no greater 
self-fulfilling prophecy than to designate a firm as 
systemically risky. Then it becomes systemically risky, and we 
know what happens after that--$173 billion of taxpayer money 
later, AIG has essentially become a conduit for the 
transferring of taxpayer wealth to counterparties, some of 
which include foreign entities.
    Congress has to be very, very careful about introducing 
moral hazard into the equation, even more than already exists. 
We simply cannot enshrine a too-big-to-fail bail-out policy. 
There is a huge difference between the government walking in 
and bailing out an individual institution, and having emergency 
provisions for liquidity and stability aimed at the market as a 
whole.
    We also have to remember that Federal regulation is not a 
panacea. Witness Fannie and Freddie, Wachovia, Citi, Bank of 
America, and the list goes on.
    Finally, with respect to AIG, we had their chief regulator 
here on March 18, 2009. And the regulator said, ``You know 
what? We had the resources, we had the expertise, we had the 
authority. We just simply missed it.'' Sometimes regulators get 
it wrong.
    The ultimate goal here should be not to designate certain 
firms as systemically risky, so that we have more ticking time 
bombs, like Fannie and Freddie throughout the economy that will 
ultimately blow up on the American taxpayer. We don't 
necessarily need more regulation; we need smarter regulation, 
which will help the consumer.
    And with that, Mr. Chairman, I yield back the balance of my 
time.
    Chairman Kanjorski. Thank you very much, Mr. Hensarling.
    And now, we will have the panel. The panel is made up of 
eight members. That is why we contracted some of our 
presentations by the Members. Each of the panelists will be 
allotted 5 minutes. And, without objection, their written 
statements will be made a part of the record.
    First on the panel, we have the Honorable Peter Skinner, a 
member of the European Parliament from the United Kingdom, and 
most recently re-elected--congratulations, Mr. Skinner, we look 
forward to your tenure. Mr. Skinner?

  STATEMENT OF THE HONORABLE PETER SKINNER, MEMBER, EUROPEAN 
                           PARLIAMENT

    Mr. Skinner. Thank you very much, Chairman Kanjorski, 
Congressman Garrett, and honorable members of the subcommittee, 
for inviting me here today. I know this is a special occasion 
for me, if nothing else, for the fact that I have just been re-
elected, but also to come here, to know that I am usually 
sitting on your side of this table, rather than here. But it is 
a great honor to be here, and I appreciate that.
    I am Peter Skinner. I have been a member of the European 
Parliament since 1994. And this month, yes, I was elected for 
my fourth term. I am a member of the economic and monetary 
affairs committee and directly involved in the--what's known as 
the transatlantic regulatory dialogue, a discussion between 
Congressman--Shelley Berkley, I believe, chairs this 
subcommittee with the European Parliament. So we talk regularly 
about issues like this.
    I was previously sponsor for the bill in the reinsurance 
directive in 2005, and Solvency II, which is now being passed 
as a law recently in the European Union, and will actually pass 
into the statute books of individual member countries by 2012. 
But each country is already moving towards that introduction.
    Let me say I fully understand and respect, from the start, 
the need for each trading block to establish its own sovereign 
rules and practices, and therefore, wish this committee every 
success in its deliberations.
    We have to take into account what I think we have already 
heard, however, that taking divergent approaches during a 
global recession, matched by the kinds of things that we know 
about across the Atlantic and around the globe, will actually 
lead to the wrong conclusions. We need to agree on common 
approaches, common regulatory structures. But this doesn't mean 
we have to say exactly the same thing.
    In terms of systemic risk and the insurance industry, it is 
the management of that risk that is important for the European 
Union. It is the chain of events which leads to systemic risks. 
And this begins with the failure of management and the 
supervision of such risks. The EU's focus has been to try to 
eliminate any failure by predicting behavior, using reasonable 
models, and testing against them. In fact, we have been having 
impact assessments which involve American companies inside the 
European Union giving evidence as to that effect.
    In Europe, a committee led by Jacques de Larosiere--you may 
have heard of him--a former managing director of the 
International Monetary Fund--has proposed sweeping changes to 
the way the European financial services are regulated. These 
changes would result in the creation of a European systemic 
risk council, an independent body responsible for safeguarding 
financial stability and conducting macro-prudential supervision 
at the European level.
    Europe gets its information on the insurance business from 
the 27 regulators it has representing all of the individual 
member states of the European Union, and these meet under one 
body: CEIOPS, it's called, the Committee of European 
Supervisors. It sits in Frankfurt, and agrees common standards 
which are applied, through the Solvency II law, across the 
European Union.
    In terms of that cross-border oversight, we have developed 
a system which is coming, again, from the de Larosiere report, 
which highlights the need for greater integrated supervision. 
The proposal is to bring together the work of the three 
committees in the capital markets and insurance and in banking 
through the supervision through one financial sector type of 
regulatory body.
    In terms of developments from abroad which may affect the 
U.S. market--and, again, I come from a European perspective; I 
can only talk really about how our markets are interconnected, 
and we have seen that the near-financial meltdown and has meant 
that, actually, when you get a cough or a cold in California, 
we feel the sneeze effect in London, in Frankfurt, and in Rome.
    Solvency II was set outside of this financial crisis, and 
was trying to look and predict what might go wrong already. It 
is a radical overhaul of the prudential regime for insurers in 
the European Union. The objectives of Solvency II are to deepen 
integration in the EU insurance market, enhance policyholder 
protection, and improve the international competitiveness of EU 
insurers and re-insurers.
    International communications amongst regulators can be 
difficult. And you know, in order to be able to get this move-
in, we have to try and do something about this. It is difficult 
if we don't have a single regulatory person to speak to.
    In fact, the United States, I understand, is the only 
country around the world not represented by a single national 
insurance regulator at the International Association of 
Insurance Supervisors. And that's where it begins on third 
country equivalents in the context of Solvency II. We will be 
faced with the same question we always face: Who are we going 
to talk to? Who speaks for the United States, as a whole, on 
insurance? And I believe, for us, this is a question about how 
we move on. That is up to you.
    But our maintaining the standards and enforcing the rules 
at the European level, I can tell you that, along with the 
regulators, we have the European Commission, which ensures, at 
the administrative level, that the European directives are 
sensibly applied in each country. And as those laws are applied 
with American countries doing business in Europe and European 
countries doing business across the whole of the European 
Union, it allows for each country to do business, State by 
State, by member country by member country.
    On systemic risk and insurance, just a short comment, if I 
might. During the current crisis, the insurance companies that 
were most likely to be affected--and I have heard it already 
today--were those involved in significant quasi-banking 
activities. That's a fact.
    There are second order effects, as well. We are aware of 
that, and I think that we have to appreciate that. But they 
were not the directly involved facts which may lead to greater 
systemic risk. It is the failure to use appropriate controls 
and manage risk that we believe leads to the problem of 
systemic risk.
    On Europe's attitude to guaranty funds, burden sharing and 
compensation schemes are not necessarily practiced in every 
member state across the European Union, but we are now 
considering how to change that to introduce it.
    So, in conclusion, Mr. Chairman, if I can say that if there 
is anyone who has been close to this committee's work and what 
you are going to do, it is I. And I look forward in any way to 
help, to offer to help, to be a resource in any way from the 
European Union, and through our committee in the European 
Parliament, to offer fraternal greetings and respect to what 
you do here to come up with common approaches and common 
deliberations to face a global crisis. Thank you.
    [The prepared statement of Mr. Skinner can be found on page 
131 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Skinner. Next, 
we will hear from the Honorable Michael T. McRaith, director of 
the Illinois Department of Insurance, testifying on behalf of 
the National Association of Insurance Commissioners. Mr. 
McRaith?

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

    Mr. McRaith. Chairman Kanjorski, Ranking Member Garrett, 
and members of the committee, thank you for inviting me to 
testify. I am Michael McRaith, director of insurance for the 
State of Illinois. And, as mentioned, I speak today on behalf 
of the National Association of Insurance Commissioners.
    The insurance industry, even in these difficult times, has 
withstood the collapses that echo through other financial 
sectors. We likely agree that insurance regulation must not 
only serve industry needs, but also prioritize U.S. consumers. 
Consumer protection has been, is, and will remain priority one 
for State regulators.
    It bears repeating that we supervise 36 percent of the 
world's insurance market. Our States, individual States, 
include 4 of the top 10 and 28 of the top 50 world markets. And 
alone, we surpass two, three, and four, combined.
    To be sure, as with any dynamic industry, insurance 
regulation must modernize, and it does. We worked with your 
great staff, Mr. Chairman, to fashion the office of insurance 
information, which, if passed, would provide a Federal focal 
point for international trade matters and Federal data 
analysis.
    The NAIC maintains the world's largest insurance database. 
While the States do and will provide data to Federal regulatory 
counterparts, we agree that insurance sector data should be 
available within the four walls of the Federal Government.
    Consolidated oversight of holding companies will be 
enhanced by a council of regulators that build on the existing 
data and expertise of functional regulators. State insurance 
regulation is, of course, inherently compatible with a systemic 
stability council. Any financial stability regulator should 
develop best practices for risk management, required for U.S. 
insurers, but glaringly lacking in other sectors. Information 
sharing and confidentiality protocols can be established, and 
coordination among regulators formalized.
    Under no circumstance, though, should a viable insurance 
subsidiary be sacrificed for the benefit of another entity 
within a corporate family. Internationally, the development of 
accounting standards through the international accounting 
standards boards leads the United States and others within the 
next several years to adopt accounting standards based on 
international financial reporting standards.
    We have undertaken a solvency modernization initiative that 
will evaluate lessons learned nationally and internationally, 
and examine areas appropriate for refinement.
    We work internationally with the G20, the joint forum, 
CEIOPS, the Financial Stability Forum, the International 
Association of Insurance Supervisors, the OECD, and others. We 
work collaboratively with our international counterparts to 
develop and improve international standards. We brought our 
foreign counterparts to the United States, and developed a 
standardized MOU to allow for international information 
sharing. With the world's most competitive, mature marketplace, 
we, your States, are the gold standard for regulation in 
developing countries.
    Through the Holding Company Act, we monitor release of 
capital from an insurer and support our system of multi-
jurisdictional regulation. Our expertise can be applied to 
international cross-border transactions, but all insurers 
operating in our country must be independently viable.
    Our financial analysis working group coordinates leading 
financial regulators from multiple States for the purpose of 
monitoring and analyzing and coordinating action involving 
major insurers. Internationally, with supervisors from other 
countries, we participate in colleges, monitoring Berkshire, 
AIG, Zurich, Swiss, and ING, among others.
    Indeed, insurance is not a source of systemic risk, and not 
one insurer imposes systemic risk. Insurers may be challenged 
by failure in other sectors, as with AIG. But the most vibrant 
markets in the world mean the demise of any one insurer will 
not alter our country's financial stability.
    Also, contrary to misleading alarms, our State guaranty 
fund system has the wherewithal and the creative force to 
resolve insurer failures, even multiple concurrent failures, 
while protecting consumers.
    We support systemic regulation, pledge our good faith 
interaction, and renew our commitment to engage constructively 
with this committee. Thank you for your attention. I look 
forward to your questions, and replying to comments made by Mr. 
Skinner and others.
    [The prepared statement of Mr. McRaith can be found on page 
104 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. McRaith. And 
next we will hear from Ms. Teresa Bryce, president of Radian 
Guaranty Incorporated, on behalf of the Mortgage Insurance 
Companies of America. Ms. Bryce?

STATEMENT OF TERESA BRYCE, PRESIDENT, RADIAN GUARANTY INC., ON 
  BEHALF OF THE MORTGAGE INSURANCE COMPANIES OF AMERICA (MICA)

    Ms. Bryce. Thank you, Mr. Chairman, Ranking Member Garrett, 
and members of the subcommittee. I appreciate the opportunity 
today to testify on behalf of the Mortgage Insurance Companies 
of America, the trade group representing the private mortgage 
insurance industry.
    Mortgage insurance enables borrowers to responsibly buy 
homes with less than a 20 percent downpayment. Many of these 
are first-time and lower-income borrowers. Since 1957, mortgage 
insurance has helped over 25 million families purchase homes. 
Today, about 10 percent of all outstanding mortgage loans have 
private mortgage insurance.
    This morning, I would like to make three points. First, we 
do not cause or contribute to systemic risk. To the contrary, 
we absorb risk. If a borrower defaults, mortgage insurance pays 
the lender or investor 20 to 25 percent of the loan amount, 
plus expenses. The insurance payment plus the proceeds from the 
sale of the house makes up much of the lender's or investor's 
loss.
    In the current crisis, since 2007, we have paid over $15 
billion in losses, just like we are supposed to do. I would 
also note that, because mortgage insurance companies have their 
own capital at risk, we have very clear incentives to mitigate 
our losses, by taking action to avoid foreclosures, if at all 
possible. Last year, mortgage insurers were able to save almost 
100,000 people from losing their homes.
    My second point is that the industry has adequate capital 
to continue paying claims on existing loans into the future, 
because our State regulators require us to have sufficient 
capital reserves. The backbone of the industry's financial 
strength is the State-imposed reserve requirements, and 
specifically the contingency reserve. Half of each premium 
dollar earned goes into the contingency reserve, and generally 
cannot be touched by the mortgage insurer for 10 years. This 
ensures that significant reserves are accumulated during good 
times, so that they are able to be there to handle claims in 
bad times.
    The history of the mortgage insurance industry illustrates 
the value of this reserve structure. Mortgage insurers paid out 
millions in claims, as a result of regional recessions in the 
1980's and the 1990's. After each recession, we built-up 
capital and were able to meet the next stress period.
    Mortgage insurers and the banks that make the loans face 
similar mortgage default risks. But only mortgage insurers 
raise capital in this countercyclical manner. In fact, only now 
are Federal banking regulators working to construct a similar 
system for banks.
    My third and final point is that, with additional capital, 
we can significantly help the housing recovery by responsibly 
expanding the number of new home buyers. As the subcommittee 
knows, the members of MICA have requested capital assistance 
from Treasury. As I have explained, we do not need help to meet 
our obligations to pay projected claims on our existing loans. 
Instead, we are asking for assistance in order to increase the 
number of loans we are able to insure, while maintaining strong 
capital reserves.
    Every billion dollars of capital mortgage insurers hold 
translates into approximately $100 billion of new funding for 
home purchases, more than 650,000 new mortgage loans. A $10 
billion program would increase market capacity by enabling 6.5 
million loans to be insured. Such a government investment would 
dramatically benefit the housing market, and enable more 
borrowers to realize the dream of homeownership on terms they 
can afford and sustain.
    So the bottom line is that, with additional capital, the 
mortgage insurance companies can insure more loans. We hope it 
is forthcoming.
    In conclusion, I want to thank you for the opportunity to 
testify today. The private mortgage insurance industry 
continues to absorb risk, just like it is designed to do. MICA 
strongly supports the State regulatory system, and believes the 
structure assures that we can continue to meet our obligations 
during these very challenging times.
    We also would like to contribute still more to the housing 
recovery. We could do so the day after we receive additional 
capital. This is a housing recovery program that is ready to 
go. Thank you.
    [The prepared statement of Ms. Bryce can be found on page 
73 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Bryce. And 
next we will hear from Mr. Sean McCarthy, chief operating 
officer of Financial Security Assurance, Incorporated. Mr. 
McCarthy?

 STATEMENT OF SEAN W. McCARTHY, PRESIDENT AND CHIEF OPERATING 
      OFFICER, FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

    Mr. McCarthy. Thank you. Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee, my name is Sean 
McCarthy, and today I am testifying in my role as president of 
Financial Security Assurance Holdings, or FSA, and Assured 
Guaranty Corporation, which is expected to complete the 
acquisition of FSA on July 1st.
    We appreciate the opportunity to testify at this hearing to 
improve oversight of the insurance industry and a restructuring 
of the Federal Government's role with regard to insurance 
products.
    As monoline insurance companies, we provide, in the case of 
FSA, bond insurance for the U.S. municipal and global 
infrastructure markets. And in the case of Assured, bond 
insurance for U.S. municipal, global infrastructure, and 
structured financings. Insurance utilized only in the financial 
markets is a very different product from that of property 
casualty, life, and health insurance companies.
    Article 69 was enacted by New York State to segregate 
financial guaranty insurance from multiline products and the 
risks those entail. While it was a good step, it is not strong 
enough. We believe we require mandatory Federal regulation that 
is closer to that of the banks, and that, being centralized and 
encompassing all aspects of regulation, including required 
capital.
    The current decentralized regulatory regime for monolines 
is aimed at preserving their solvency, rather than their 
financial stability. There are no uniform, consistent credit, 
capital, and financial strength standards. Recognizing this, 
the New York insurance commissioner, Eric Dinallo--who has 
recently announced that he is leaving--had noted the potential 
need for Federal regulation with the bond insurers in the 
monoline industry.
    Importantly, due to the lack of a single regulator, the 
rating agencies have become the de facto regulators of our 
industry. While we continue to strive to achieve the highest 
possible ratings, we believe the rating agency views currently 
play too singular a role in the evaluation of our financial 
strength. Ratings are based on criteria that vary, and include 
many subjective characteristics. And rating agency 
methodologies are not readily transparent.
    Additionally, all three rating agencies have different sets 
of guidelines, which present conflicting goals, and make it 
possible to manage a stable company.
    Though investors cannot easily evaluate rating agency 
conclusions, due to the impact of their ratings on trading 
value of securities that monolines have insured, investors are 
forced to accept the impact that ratings have, with respect to 
financial guarantors.
    The end result of this de facto regulation by rating has 
been to destabilize markets and reduce municipal issuers' cost 
effective access to the capital markets. This has been most 
difficult for small municipal issuers and municipal issuers of 
complex bonds, where bond insurance homogenizes the credits, 
providing market liquidity and market access. The penetration 
of the bond insurance industry for the first 5 months of 2009 
has been 13 credit. The letter of credit has now declined to 
about 6 percent.
    Certainly, there is no question that some financial 
guarantors took large, concentrated risks in mortgage-backed 
securities that severely underperformed, which, in turn, caused 
downgrades, or failures, of five of the seven primary 
guarantors. Notably, many of these now problematic transactions 
were rated AAA by the rating agencies at the time of issuance.
    The financial guaranty industry is now in a rebuilding 
phase, and a number of potential new entrants are poised to 
participate in the market. Assured and FSA have come through 
this unprecedented period of turmoil in strong capital 
positions. And, despite the understandable concerns that the 
market has expressed about the financial guarantee model, we 
are confident that investors will continue to see value in 
guarantors that combine capital strength with diligent 
experienced credit selection skills.
    In conclusion, we would like to see mandatory Federal 
oversight of our industry that would provide regulation by 
design, not by default. We believe that licensing requirements 
should be stringent, and require high but predictable capital 
levels. Guarantors should provide detailed disclosure of risks 
to all constituencies, and should be subject to an annual 
stress test that would be applied equally to all companies. 
This would increase investor confidence, and provide much 
needed transparency and stability to the capital markets.
    Thank you. I look forward to your questions.
    [The prepared statement of Mr. McCarthy can be found on 
page 98 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. McCarthy. 
Next, we have Mr. Kenneth Spence, executive vice president and 
general counsel at the Travelers. Mr. Spence?

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

    Mr. Spence. Chairman Kanjorski, Ranking Member Garrett, and 
subcommittee members, thank you for the opportunity to testify 
today on systemic risk and insurance. My name is Ken Spence, 
and I am executive vice president and general counsel of 
Travelers. Travelers offers a wide variety of property casualty 
insurance products, and surety and risk management services to 
numerous businesses, organizations, and individuals in the 
United States and abroad. Our products are distributed 
primarily in the United States through independent insurance 
agents and brokers. And the company is a member of the American 
Insurance Association.
    There appears to be an emerging consensus that there should 
be systemic risk regulation at the Federal level. I will share 
some of Travelers's specific systemic risk regulation 
recommendations in a moment.
    However, for any systemic level oversight to be meaningful 
across financial service sectors, there must be an insurance 
regulatory presence at the Federal level, to ensure that 
appropriate information is provided and analyzed, and to ensure 
that any systemic-level directives are effectively implemented.
    To that end, the creation of an office of insurance 
information, as the chairman has proposed in his legislation, 
would bolster the Federal Government's presence in, and 
understanding of, the insurance sector. The OII would bring 
needed information about the insurance market place to 
Washington and to any national systemic regulator, and would 
give the United States a single voice with which to speak on 
international insurance policy and trade matters.
    We believe a comprehensive approach to Federal financial 
services modernization will not be complete unless it also 
includes a broader Federal insurance presence that encompasses 
Federal chartering for insurers. This will ensure robust and 
consistent regulatory oversight, strong consumer protections, 
and a healthy competitive insurance industry.
    We have been carefully considering the notion of systemic 
risk regulation. As an initial matter, we are mindful that the 
determination as to whether a company is systemically important 
does not necessarily depend upon its size or industry, but 
rather to the extent to which its financial condition is 
potentially so inter-related with other institutions that its 
failure could cause widespread and substantial economic harm, 
extending beyond those stakeholders who would assume the risk.
    For example, any unregulated holding company with a strong 
credit rating from its underlying operations could have 
underwritten credit default swaps which played an important 
role in the current financial crisis.
    In addition, we think it is also relevant to consider the 
systemic risk that may be presented on an aggregate industry-
wide basis. For example, even if a particular community bank or 
insurance company would not present systemic risk, the 
widespread failure of community banks or insurance companies 
could. A natural or manmade catastrophic event or series of 
events, for example, could cause more than an isolated failure 
of property casualty insurance companies, which in turn, could 
be systemically significant.
    There are two elements in particular that we recommend for 
your consideration in a reform proposal: mandated internal 
enterprise risk oversight through board-level risk committees; 
and substantially enhanced disclosure requirements related to 
risk. I must emphasize at the outset that our two 
recommendations are not intended to be a comprehensive 
solution. But we believe that any such solution should include 
these two essential elements.
    First, corporate governance reform should require 
systemically important companies to assign responsibility for 
risk oversight to a committee of their board of directors with 
a management risk officer that reports directly to the board 
committee on a regular basis. Travelers has, for many years, 
had a board risk committee and a CRO, and the relationship is 
akin to a board audit committee relationship with the company's 
chief internal auditor, who often reports directly to that 
committee.
    A board's risk committee would be responsible for 
overseeing the company's risk-related controls and procedures, 
and the chief risk officer would be responsible for 
implementing and managing those controls and procedures. This 
protocol recognizes the importance of risk management, and 
provides clear responsibility and accountability for the 
management of risk.
    Second, systemically or potentially systemically important 
financial institutions should be subject to a robust disclosure 
regime in order to provide regulators, rating agencies, and the 
public with the information necessary to provide a 
comprehensive understanding of an institution's overall risk 
profile, and to be able to identify those institutions that 
pose--or that could pose--a systemic risk to the economy. 
Market forces would, in turn, help to limit a company's 
incentive to take risks that could potentially undermine its 
own long-term success, and, as a result, the larger economy.
    A more robust disclosure regime should be principles-based 
and flexible, but include additional quantitative disclosure of 
transactions and risks and other factors, including mandated 
stress testing that could cause a systemically important 
company to fail.
    Thank you for affording me the opportunity to testify 
today, and I will be happy to respond to any questions you may 
have.
    [The prepared statement of Mr. Spence can be found on page 
137 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Spence. Next 
we have Mr. Franklin Nutter, president of the Reinsurance 
Association of America. Mr. Nutter?

    STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                  ASSOCIATION OF AMERICA (RAA)

    Mr. Nutter. Mr. Chairman, members of the committee, thank 
you very much. I am Frank Nutter, president of the Reinsurance 
Association of America, representing reinsurance companies 
doing business in the United States.
    Reinsurance is a risk management tool for insurance 
companies to improve their capacity and financial performance, 
enhance financial security, and reduce financial volatility. 
Reinsurance is the most efficient capital management tool 
available to insurers.
    Reinsurance is a global business, and encouraging the 
participation of reinsurers worldwide in the U.S. market is 
essential, because reinsurance provides that much needed 
capacity in the United States for property casualty and life 
risks. Including their U.S. subsidiaries, foreign-owned 
reinsurance companies accounted for nearly 84 percent of 
property casualty premiums ceded on U.S. risk by U.S. insurers.
    Because the reinsurance transaction is between 
sophisticated business parties, the regulation of reinsurance 
focuses almost exclusively on prudential regulation, insuring 
the reinsurer's financial solvency, with no consumer component. 
Because reinsurance is a business, a business transaction 
involving knowledgeable commercial parties, there are no 
reinsurance guaranty funds at the State level, and there is no 
need to create one at the Federal level.
    As this committee is well aware, there is no Federal entity 
with statutory authority or designated responsibility for 
oversight of insurance. Consequently, when an insurance issue 
arises, there is no source of information at the Federal level 
to appropriately advise policymakers.
    At a minimum, there is a need for a Federal entity that can 
utilize information and data from State regulators, but which 
is empowered to conduct its own analysis and provide advice on 
a broader perspective than individual State interests. We 
believe the chairman's office of insurance information 
legislation is good and timely, and goes a long way toward 
addressing this problem.
    Reinsurance is an important part of the risk transfer 
mechanism of modern financial and insurance markets. Yet there 
are clear distinctions between risk, finance, and management 
products that are relatively new financial tools, developed in 
unregulated markets, and risk transfer products like 
reinsurance, whose issuers are regulated by U.S. regulators, or 
by their non-U.S. regulatory domicile, and whose business model 
has existed for centuries.
    In the case of reinsurance, regulatory reform is necessary 
to improve regulatory and market efficiency, and maximize 
capacity in the United States. And that reform should focus on 
licensing, prudential regulation, and international 
coordination and cooperation.
    It has been suggested that the authority of a systemic risk 
regulator should encompass traditional regulatory roles and 
standards for capital, liquidity, risk management, collection 
of financial reports, examination authority, and authority to 
take regulatory action, if necessary. We are concerned that the 
systemic risk regulator envisioned by someone without clear, 
delineated lines of Federal authority and strong preemptive 
powers would be redundant with the existing State-based 
regulatory system.
    We also note that without reinsurance regulatory reform and 
a prudential Federal reinsurance regulator, a Federal systemic 
regulator would be an additional layer of regulation with 
limited added value, create due process issues for applicable 
firms, and be in regular conflict with the existing multi-State 
system of regulation.
    Foreign government officials, not unlike Mr. Skinner today, 
have continued to raise issues associated with having at least 
50 different U.S. regulators, which makes coordination on 
international insurance issues difficult for foreign regulators 
and companies. The time has already arrived when this lack of a 
single voice is adversely impacting U.S. reinsurers. The 
interaction between the United States and its foreign 
counterparts on issues like European Union Solvency II will 
likely impact not only the ability of U.S. companies to conduct 
business abroad, but also the flow of capital to the United 
States.
    The possibility that the entire 50-State system in the 
United States will be deemed equivalent appears questionable, 
at best. Thus, without a Federal involvement by a knowledgeable 
entity tasked with responsibility for international policy 
issues, the U.S. reinsurance industry will continue to be 
disadvantaged in these equivalence discussions.
    The current multi-State U.S. regulatory system is an 
anomaly in the global insurance regulatory world. The United 
States is disadvantaged by a lack of a Federal entity with 
constitutional authority to make decisions for the country, and 
to negotiate international insurance agreements.
    The RAA was encouraged by the inclusion of a system of 
supervisory recognition among countries in the National 
Insurance Act of 2008, S. 40, introduced in the last Congress. 
Supervisory recognition seeks to establish a system where a 
country recognizes the reinsurance regulatory system of other 
countries, and allows reinsurers to conduct business, based 
upon the regulatory requirements of their home jurisdictions.
    A single national regulator with Federal statutory 
authority could negotiate an agreement with regulatory systems 
of foreign jurisdictions that achieve a level of regulatory 
standards, enforcement, trust, and confidence with their 
counterparts in the United States.
    Financial markets are global and interconnected, and no 
sector is more global than reinsurance. Even the NAIC has 
acknowledged that, ``The time is ripe to consider whether a 
different type of regulatory framework for reinsurance in the 
U.S. is warranted.''
    As Congress proceeds with financial services modernization, 
we emphasize that only the Federal Government currently has the 
requisite constitutional authority, functional agencies, and 
experience in matters of foreign trade to easily modernize 
reinsurance regulation. Multi-State regulatory agencies on 
matters of international trade are, at best, inefficient, pose 
barriers to global reinsurance transactions, and do not result 
in greater transparency.
    The RAA recommends that reinsurance regulatory 
modernization be included in any meaningful and comprehensive 
financial services reform, through the creation of a Federal 
regulator, who would have exclusive regulatory authority over 
reinsurers that obtain a Federal charter, and make clear there 
is no redundancy with State regulation.
    We further recommend that any financial reform incorporate 
authority for a system of regulatory recognition to facilitate 
cooperation and enforcement with foreign insurance regulators.
    Thank you very much.
    [The prepared statement of Mr. Nutter can be found on page 
120 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Nutter. Now we 
will hear from Mr. Patrick S. Baird, chief executive officer of 
AEGON USA, on behalf of the American Council of Life Insurers. 
Mr. Baird?

 STATEMENT OF PATRICK S. BAIRD, CHIEF EXECUTIVE OFFICER, AEGON 
 USA, LLC, ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS 
                             (ACLI)

    Mr. Baird. Chairman Kanjorski, Ranking Member Garrett, and 
other members of the subcommittee, I would like to thank you 
for the opportunity to appear today to present the views of the 
life insurance business on systemic risk and its implications 
for financial regulatory reform. I am Pat Baird, CEO of AEGON 
USA. I live and work in Cedar Rapids, Iowa.
    I would like to lead off with the premise that the life 
insurance industry is, by any reasonable measure, systemically 
important. And, from that, it follows that whatever regulatory 
reform package you advance must include the life insurance 
industry in order to assure that the resulting new regulatory 
structure operates as effectively as possible, and minimizes 
the likelihood of a similar crisis occurring again.
    Here are some highlights on the importance of the life 
insurance business. Life insurance products provide financial 
protection for some 70 percent of U.S. households, or over 75 
million families. There is over $20 trillion in life insurance 
in force, and our companies hold $2.6 trillion in annuity 
reserves. Annually, we pay out almost $60 billion in life 
insurance benefits, over $70 billion in annuity benefits, and 
more than $7 billion in long-term care benefits.
    We are the backbone of the employee benefit system. More 
than 60 percent of all workers in the private sector have 
employer-sponsored life insurance, and our companies hold over 
22 percent of all private employer-provided retirement assets.
    Life insurers are the single largest source of corporate 
bond financial, and hold approximately 18 percent of total U.S. 
corporate bonds.
    I would also note that without the financial protection 
provided by the life insurance companies, American families may 
very well need to rely on the Federal Government for 
assistance.
    That said, we don't believe any individual life insurance 
company poses systemic risk. So the question becomes, how do 
you deal with an industry that, as a whole, is systemically 
important, but which doesn't have any individual companies that 
pose systemic risk?
    First, we assume life insurers will be covered in whatever 
broad systemic risk oversight is made applicable to the banking 
and securities industries. Beyond that, we believe it is 
imperative that Congress create a Federal functional insurance 
regulator, and make it available to all life companies within 
the industry on an optional basis. There was ample 
justification for the creation of such a regulator prior to the 
crisis, and the case today is even stronger, after the crisis.
    Absent a Federal functional insurance regulator, there is a 
very real question regarding how national regulatory policy 
will be implemented, vis a vis insurance. Whatever legislation 
this Congress ultimately enacts will reflect your decisions on 
a comprehensive approach to financial regulation. Your policies 
need to govern all systemically significant sectors of the 
financial services industry, and need to apply to all sectors 
on a uniform basis, and without any gaps that could lead to 
systemic problems.
    It's also worth noting that critical decisions are being 
made in Washington affecting our business today, but they are 
being made without any significant input or involvement on the 
part of our regulators.
    Some specific examples include: the handling of Washington 
Mutual, which resulted in life insurers experiencing 
substantial portfolio losses; and the suspension of dividends 
on the preferred stock of Fannie and Freddie, which again 
significantly damaged our portfolios, and directly contributed 
to the failure of two life insurance companies.
    The mistaken belief by some that mark-to-market accounting 
has no adverse implications for life insurance companies, and 
more recently, provisions in the proposed bankruptcy 
legislation that could have resulted in unwarranted downgrades 
to life insurers' AAA-related residential mortgage-backed 
investments.
    The industry also supports a level playing field at an 
international level, as regards financial reporting and 
solvency. Competition should be about serving customers, 
operating efficiencies, and basically slugging it out every day 
and proving your business model. Competition should not be 
about capital accounting or tax arbitrage. But yet, today, we 
have no regulator there with authority that can engage with Mr. 
Skinner and other international regulators.
    I would also like to make the point that concerns over 
regulatory arbitrage in the context of an optional Federal 
insurance charter are without merit. The life insurance 
business is not seeking, nor did this Congress ever consider 
enacting a Federal insurance regulatory system that is weak, in 
terms of consumer protections or solvency oversight. Indeed, 
the ACLI has consistently advocated for a Federal alternative 
that is as strong as, if not stronger than, the best State 
regulatory systems.
    If anything, a properly constructed optional Federal 
charter would result in the States being challenged to raise 
their standards to meet those of the Federal regime.
    Mr. Chairman, there are a number of ideas being considered 
on how to address insurance in the context of overall 
regulatory reform. We applaud you for reintroducing legislation 
that would create an office of insurance information within the 
Treasury Department. While our ultimate goal remains an 
optional Federal charter, an OII would certainly be a step in 
the right direction.
    We are also appreciative of Representatives Bean and Royce 
for introducing the National Insurance Consumer Protection Act, 
which sets forth the framework for an optional Federal 
insurance charter.
    We do, however, caution against a so-called Federal tools 
approach to insurance regulatory reform. As detailed in my 
written statement, the constitutional and practical limitations 
of this concept make it ill-suited to deliver the type of 
reform that would be in the best interests of the insurance 
industry and its customers.
    We again thank you, Mr. Chairman, for holding this hearing, 
and pledge to work with you and the members of the subcommittee 
to see that insurance regulatory reform becomes a reality. And 
we would be happy to answer any questions. Thank you.
    [The prepared statement of Mr. Baird can be found on page 
63 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Baird. And 
now, we will have Mr. John T. Hill, president and chief 
operating officer of Magna Carta Companies, on behalf of the 
National Association of Mutual Insurance Companies. Mr. Hill?

   STATEMENT OF JOHN T. HILL, PRESIDENT AND CHIEF OPERATING 
   OFFICER, MAGNA CARTA COMPANIES, ON BEHALF OF THE NATIONAL 
       ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)

    Mr. Hill. Thank you, Mr. Chairman. Good morning, Chairman 
Kanjorski, Ranking Member Garrett, and members of the 
subcommittee. It is an honor to testify before you today on 
these important issues. My name is John Hill, and I am 
president and chief operating officer of Magna Carta Companies.
    Magna Carta was founded in New York in 1925 as a mutual 
insurance carrier for the taxi cab industry. Although we no 
longer insure taxis, we employ 240 individuals and write in 22 
States. We very much remain a small, Main Street mutual insurer 
with $170 million in direct-written premium.
    I am here today on behalf of the National Association of 
Mutual Insurance Companies, to present our views on systemic 
risk. NAMIC represents more than 1,400 property and casualty 
insurance companies, ranging from small farm mutual companies 
to State and regional insurance carriers to large, national 
writers. NAMIC members serve the insurance needs of millions of 
consumers and businesses in every town and city across America. 
I serve as chairman of NAMIC's financial services task force, 
which was created specifically to develop NAMIC's policy 
response to the financial services crisis.
    Our Nation faces uncertain economic times, and we commend 
the subcommittee for holding this hearing to explore the role 
of systemic risk regulation in the insurance industry.
    The property casualty insurance industry, like millions of 
Americans and businesses, did not contribute to the current 
financial crisis. However, we too have felt the negative impact 
of this crisis. Just like most American citizens and 
businesses, the property casualty insurance industry has played 
by the rules. We are solvent, and continue to serve our 
policyholders the same today as before the economic crisis. If 
you exclude a very few companies that are linked to financial 
markets, our analysis concludes that our industry poses no 
systemic risk.
    We disagree with the suggestion that we need to completely 
rethink the regulation of our industry. The property and 
casualty market place is well-regulated, highly diverse, very 
competitive, and is open to anyone that is willing to play by 
the rules.
    It is important to understand the distinction between the 
property and casualty insurance industry and others in the 
financial services sector. The fundamental characteristics of 
our industry, including conservative and liquid investment 
portfolios, low leverage ratios, strong solvency regulation, 
and a highly competitive and diverse market place, make it 
stand out as unique, and work to insulate the property casualty 
insurance industry from posing systemic risk.
    Today, as other financial services companies are failing 
and seeking government assistance, property and casualty 
insurers continue to be well capitalized and neither seek nor 
require Federal funding. Our industry remains one of the well-
functioning bedrocks of our financial structure. The record 
shows that property and casualty insurers played no role in 
causing the current financial crisis.
    Moreover, it is exceedingly unlikely that property casualty 
insurers, either individually or collectively, could cause a 
financial crisis in the future. For one, the capital structures 
of property and casualty insurers and the nature of their 
products make them inherently less vulnerable than the highly 
leveraged institutions when financial markets collapse.
    Additionally, the nationwide State-based guaranty funds 
system also reduces the systemic impact of any failing property 
casualty insurer.
    NAMIC believes that any new oversight of systemic risk 
should focus on products, activities, and market-oriented 
events and developments, rather than broad corporate categories 
or industries. It should be carefully designed to address the 
kind of market-oriented problems that have the ability to cause 
systemwide access.
    Only institutions that offer products, or engage in 
transactions deemed to create systemic risk, including 
insurers, should be subject to systemic risk oversight. The 
current crisis demands that Congress act. But Congress must act 
prudently and responsibly, focusing limited resources on the 
most critical issues, and avoid the inclination to rush to 
wholesale reform.
    NAMIC does believe that Congress can strengthen the 
regulatory process, improve regulatory coordination, and 
monitor systemic risk by establishing an office of insurance 
information to inform Federal decisionmaking on insurance 
issues, and facilitate international agreements.
    We would also recommend expanding the President's Financial 
Working Group to include insurance regulators. We believe such 
reforms are measured, appropriate, and timely responses to the 
present crisis.
    As the process moves forward, we stand ready to work with 
the committee to address the current problems and regulatory 
gaps. We urge Congress to keep in mind the dramatic differences 
between Main Street businesses that have never stopped meeting 
the needs of local consumers, and those institutions that 
caused this crisis.
    Again, thank you for the opportunity to speak here today, 
and I look forward to answering your questions.
    [The prepared statement of Mr. Hill can be found on page 81 
of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Hill, and 
thanks to the entire panel. This is interesting testimony. I 
look forward to my own questions, and those of the 
subcommittee.
    Mr. McRaith, I am going to put you on the spot for the 
first question. In 2001, an insurance holding company called 
Reliance--I imagine you are familiar with it--was owned by Mr. 
Saul Steinberg, who took the underlying insurance proceeds, and 
then that allowed him to play the role of a multi-millionaire 
speculator, benefactor of the Wharton School, and art patron. 
Is that correct? Do you recall that transaction, or those 
transactions?
    Mr. McRaith. I am certainly familiar with the company. I 
wasn't familiar with the Wharton School.
    Chairman Kanjorski. Subsequently, that holding company 
defaulted on bonds and bank debt.
    How would you rate the effect of what happened there with 
that particular company? Is that a failing of the State 
regulation, State-to-State? Would that have occurred if we had 
a Federal regulator in place? Or do you see any difference?
    Mr. McRaith. The unfortunate reality in any capitalist 
economy is that companies will fail. Companies, insurance 
companies, led by individuals with ethical--or a lack of ethics 
are companies that are more likely to encounter cash flow 
problems, and ultimately suffer the demise--or a demise similar 
to Reliance.
    A Federal regulator would not have assisted or prevented 
that solution. I am not familiar with the holding company 
challenges at Reliance. The individual insurance company, those 
challenges occur--and they have occurred for decades in the 
insurance industry.
    As soon as we learn of them, we place the company into 
receivership. The policyholders are protected. Because the 
capital requirements we impose on companies are so significant, 
the shortfall at the end of the day for the guaranty system is 
relatively nominal. And we--and that guaranty system is also 
intended to protect the consumers.
    Chairman Kanjorski. I thank you very much, Mr. McRaith. My 
good friend, Mr. Skinner, do you believe that the United States 
companies will have adequate access to the European markets 
after Solvency II is in effect?
    And do you believe European companies have adequate access 
to the U.S. markets?
    Mr. Skinner. It's an interesting question, Mr. Chairman. 
The law comes into being in 2012. What it is dependent upon is 
something called equivalence. And I think, as I said when I 
started, that equivalence from a European perspective is 
looking for something that can match the deeds and the purpose 
of the legislation, the final outcomes of that legislation, 
certainly not the letter on the dot and the T and the cross, 
but something which does the same thing. For that, we need to 
find a single voice to talk at the U.S. level from an EU level, 
because we are actually only permitted to get agreements, 
country by country, at an EU level. There is no sense in 
beating around the bush on this.
    So, for U.S. companies to do business inside the European 
Union--and there are a few of them who do this very well--they 
will have to make sure that their regulators in the United 
States are people who can talk to the European Union about 
matching up these credentials.
    The thing is, of course, if they don't get matched up, it 
will be down to each individual member State, therefore, as has 
been said, where there is memoranda of understanding or 
whatever, to impose their own requirements upon those 
companies.
    And we don't really want to be there, because I don't think 
there should be any discrimination about this. If we get the 
match to work--and we can talk to each other about this 
dialogue and how it works--then I think there should be no 
discrimination for U.S. companies. In fact, U.S. companies, I 
believe, as a result, will be competitively enhanced by getting 
access to the market as a passport across all 27 countries.
    Chairman Kanjorski. So it is your conclusion that anyone 
who opposes a Federal regulator here in the United States would 
be in some way impeding their progress in competition in areas 
like the European Union?
    Mr. Skinner. From a commercial point of view, I think that 
most companies would want to make sure that they had the fewest 
number of regulators to have to work with. I think that's 
almost a common sense statement.
    I think, from a U.S. perspective, I think this is something 
you're grappling with, like we have grappled with. We still 
have multi-jurisdictional, multi-legal personalities, in terms 
of the countries we have at European level. They have their own 
laws, their own regulations, their own standards. We have just 
introduced Solvency II, and it has actually just changed the 
whole thing. It has harmonized it, it has brought the standards 
up in countries where it wasn't competent and you didn't have 
the capacity.
    As a result, we want to make sure that they are maintained 
for companies coming into the European Union. And I think that 
you would want the same inside the United States, as well.
    Chairman Kanjorski. I see my time has expired. We will now 
hear from Mr. Garrett from New Jersey.
    Mr. Garrett. Thank you, Mr. Chairman. And I begin there, 
with Mr. Skinner. Thanks for coming on over. You heard a number 
of people on the panel testify here from the PNC side, and 
others as well, that the problem that we had in this country 
was not caused by--they would argue--problems in the insurance 
industry. We have heard that from other panels, as well.
    I note in your testimony you said that the legislation 
you're talking about was going to go into effect in 2012, 
right? If we were having a panel like this back overseas, would 
that be the same testimony that we would hear over there, as 
well, that the problems in the marketplace and everything 
that's going on in Europe was due in no large part from the 
insurance industry, as well?
    Mr. Skinner. Yes, I think in many ways we would hear the 
same discussion. You would be pleased to hear that we are 
almost twinned. There is an economic and financial services 
committee that I am involved in and represent today. We would 
be talking about the same issues, and classically, we would be 
talking about derivatives, you know, and we would be talking 
about the effects that they have had.
    But I think, as one of your honorable colleagues said 
already, the securitization issue--
    Mr. Garrett. Right.
    Mr. Skinner. --is actually a kind of a reinsurance in 
itself, isn't it? It's the spread of risk.
    Mr. Garrett. Right.
    Mr. Skinner. So, the insurance industry, as a whole, is not 
immune from systemic risks, as such. We believe it's about the 
management of that risk, and having--
    Mr. Garrett. Well, coming up to this point in time, would 
you agree with some others who have said here that you can't 
point to this company or that company as being the systemic 
problem, which is what some of the members of the panel would 
be arguing for, as far as this country is concerned?
    Mr. Skinner. Yes, I think that it's true to say that you 
can--you probably have to put to one side the individual 
certain companies--
    Mr. Garrett. Sure, sure.
    Mr. Skinner. --and you have to start talking about the 
industry, as a whole.
    Mr. Garrett. Thank you. And I will run down the row as much 
as I can.
    Mr. McRaith, you were making your case along the way with 
regard to the OII, and some of the benefits, and the upside 
that would bring about, as far as the sharing of information. 
But then, as you get near the end of your testimony, you seem 
to be--if I heard you right--talking about some of the great 
things you all have been doing, as an organization in these 
areas already--if I heard you right.
    Mr. McRaith. That's correct.
    Mr. Garrett. So, I almost heard it like, ``Well, gee, we're 
already doing that,'' on the one hand.
    Mr. McRaith. Right.
    Mr. Garrett. So why do you then take the other side at the 
beginning your testimony, saying that we still need this help 
out there?
    Mr. McRaith. Well, listening to at least one of the 
panelists today would imply that the State regulators are not 
engaged in international discussions. We are engaged in 
developing standards, working with our international 
counterparts on every continent, in multiple forums.
    My testimony, Congressman, regarding the office of 
insurance information, reflected the reality we know, which is 
not a question of standards or supervision or regulation; it's 
a question of international trade agreements. And we are aware 
of the limitations of Article 1, Section 10 of the United 
States Constitution, which says that a State cannot 
independently enter into a treaty with a foreign government.
    So we supported Chairman Kanjorski, in that initiative 
without the preemptive impact. But we do engage--and always 
consistently engaged--internationally with our foreign 
counterparts. And at some point in time, I would be happy to 
talk about solvency, too, but I will hold off on that.
    Mr. Garrett. All right. Let me just jump down to Mr. Baird. 
You know, in your testimony, you stated that the life insurance 
industry is either systemically significant or systemically 
important--one of those terms, at the beginning of your 
testimony. Mr. McRaith said in his comments that the industry 
is--or, rather, that the too-big-to-fail concept does not apply 
to insurance, per se.
    Mr. McRaith. I'm sorry, not to any one company. The sector, 
of course, is significant.
    Mr. Garrett. Okay. So maybe that answers the question.
    Mr. McRaith. Same thing--
    Mr. Garrett. I was going to go to you, Mr. Baird, to 
address that concern, but maybe he addressed it already. Do you 
want to speak on that, Mr. Baird?
    Mr. Baird. Other than I would say this is one of those 
instances where Director McRaith and I agree.
    Mr. Garrett. Okay.
    Mr. Baird. We think the entire industry is of systemic 
importance, but no one company is.
    Mr. Garrett. All right. Okay. For anyone on the panel, one 
of the proposals coming out of the White House seems to be that 
we're going to need a systemic risk regulator, and it very well 
could go into the Federal Reserve, which a lot of us disagree 
with.
    But assume that happens, and you put it into the Federal 
Reserve. And assume, for the sake of argument, that it also has 
an insurance component. Does anyone on the panel have a concern 
that you may have a bank regulator who has no past experience, 
or what have you, dealing with the insurance industry to be 
basically your supervisor or regulator in this area? Mr. Hill?
    Mr. Hill. That would be one of our concerns, Congressman 
Garrett, that you would have someone regulating insurance who 
really has no real insurance background.
    And, again, I would reiterate that I think our position is 
that the best way to look at systemic risk is to look at 
market-oriented products, and any firm that's engaging those 
products should fall under the purview of the systemic risk 
regulator. But to just isolate a particular industry group, and 
just say that the systemic risk regulator is just going to 
oversee that, that could potentially miss something that's 
occurring elsewhere in our global economy.
    So, our recommendation is to be more product and market 
oriented.
    Mr. McCarthy. As financial guarantors, we actually think 
that the Fed might be a logical place to oversee our industry, 
primarily because the service that they provide to the banking 
industry would parallel the kinds of financial activity that we 
have in the capital markets. So we would think that perhaps--
    Mr. Garrett. You're a little bit different, then, from some 
of the other--
    Mr. McCarthy. That's right, because again, financial 
guaranty, we only do--we have, you know, one nail, and we're 
trying to hit it.
    Mr. Garrett. Yes.
    Mr. McCarthy. The multi-lines have a lot of different kinds 
of risks that they're taking. And, really, not just our 
solvency, but really our financial stability, as an industry, 
is what is critical.
    Mr. Garrett. Thanks a lot.
    Mr. Baird. Oh--
    Mr. Garrett. It's up to him.
    Chairman Kanjorski. Go ahead.
    Mr. Garrett. Go ahead, Mr. Baird.
    Mr. Baird. No, I just wanted to add, to directly address 
your question, I think that is a concern to the life insurance 
industry, However, it is resolved if the Congress creates a 
Federal functional regulator, which then--presumably, the two 
Federal agencies would cooperate with one another.
    We think the creation of a Federal functional regulator 
would give a Federal agency, then, the expertise to properly 
regulate the life insurance industry, and cooperate and give 
information to the systemic regulator.
    Mr. Garrett. But absent that?
    Mr. Baird. Absent that, then that is a concern.
    Mr. Garrett. Okay.
    Mr. Baird. And we think it's incomplete.
    Mr. Garrett. All right.
    Mr. McRaith. And, Congressman, if I could also just--Mr. 
Chairman, if I might add just very briefly?
    That is, of course, a very serious concern for State 
insurance regulators. The regulation of the insurance industry 
is significantly different from the bank industry. So we do--as 
the regulators now have expertise that can be integrated with 
systemic risk regulation, but should not be displaced.
    So, one of the priorities for any systemic regulator is to 
recognize and value the expertise of the functional regulator, 
facilitate communication among those regulators, and prevent 
the systemic disruption that we have experienced.
    Mr. Garrett. Thank you, panel, I appreciate it.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. Now, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Thank you for being 
here.
    It's interesting. I heard pretty much everybody say that 
the insurance industry doesn't threaten the system. I am just 
curious. Are any of you familiar with the acronym TRIA? TRIA is 
the one that the U.S. Government had to pass after 9/11, when 
the insurance companies were all going bankrupt, and everybody 
was afraid that they were going to take down the economy at 
that time.
    Did anybody here who now thinks that the insurance industry 
somehow doesn't provide risk, did you come up and tell us that 
we should not do TRIA because everything was fine? I don't 
think you did.
    Ms. Bryce. Actually, the mortgage insurance companies did. 
But our business is such a different business than, you know, 
most--
    Mr. Capuano. So you don't think we should have passed TRIA?
    Ms. Bryce. That was our position at the time.
    Mr. Capuano. Good for you.
    Ms. Bryce. I'm sorry--we got ourselves exempted. I 
apologize.
    Mr. Capuano. I know you got yourself exempted. I know that. 
But the question is, do you think we should have passed the 
TRIA Act? Does anybody think we should not have, I guess is the 
better question?
    [no response]
    Mr. Capuano. So we should have. And I agree.
    Mr. McRaith. Congressman? Excuse me. The issue with 
terrorism is the absolute impossibility of predicting the risk. 
What TRIA does is facilitate the property and casualty market. 
It would not exist--Manhattan, Chicago, major urban areas would 
not have access to coverage for terrorism events in the--
    Mr. Capuano. I understand.
    Mr. McRaith. --as companies can exclude--
    Mr. Capuano. The inability to ascertain the risk, similar 
to the inability to ascertain the risk on CDOs and CDSs. The 
inability to ascertain risk is the same.
    Mr. McRaith. That's--
    Mr. Capuano. The items are different.
    Mr. McRaith. That's--
    Mr. Capuano. So we should have passed TRIA. But everybody 
here thinks that there is one company that somehow provides 
systemic risk. That's what I heard. I don't think I heard 
anybody say anything different.
    Has anybody here heard of the company AIG? I know it hasn't 
been in the news lately.
    Mr. McRaith. But, Congressman, to be clear, AIG is kind of 
colloquially referred to as the world's largest insurance 
company. But it is 71--
    Mr. Capuano. Well, excuse me, Mr.--
    Mr. McRaith. It is 71 insurance--
    Mr. Capuano. Excuse me. The idea is it is an insurance 
company--
    Mr. McRaith. --met all claims--
    Mr. Capuano. --that does different lines.
    Mr. McRaith. Their policy--
    Mr. Capuano. And the problem that I have with it is that it 
is one company that was into so many things that the State 
regulators chose not to regulate. The Federal Government didn't 
have anybody to regulate, and the States collectively said, 
``We don't need to look at what AIG is doing. We will only look 
at this slice, this slice, and this slice.''
    Mr. McRaith. That--
    Mr. Capuano. That's all. And those slices worked fine.
    Mr. McRaith. Actually, Congressman, the insurance 
regulators looked at the insurance subsidiaries. The problem 
was--and this is why we support systemic regulation--
    Mr. Capuano. Bingo.
    Mr. McRaith. --there was a complete lack of regulation at 
the holding company level. What should happen is--
    Mr. Capuano. Well, the problem is--
    Mr. McRaith. --regulators of all those--
    Mr. Capuano. --you are looking at the relationship between 
the--
    Mr. McRaith. --work together--
    Mr. Capuano. --between the policyholders and the company. 
No one was looking at what was happening with the money coming 
in, how they were investing it. The States didn't do it, and 
that's where the systemic regulator comes in. So one company, 
depending on what they do, depending on who looks at them, I 
guess can shake the system up just a little bit.
    So, therefore, I don't quite--I mean, though I appreciate 
this hearing--I'm not quite sure what we are talking about, 
except a unanimous opinion that there is some need for some 
generic national oversight of what's happening in the insurance 
industry, understanding fully well that the Federal Government 
should not and need not be doing things that some of the States 
are doing very well, particularly that aspect between the 
company and the customer. I agree totally. The Federal 
Government doesn't need to do that; States are doing that 
great. That's the consumer side. But on the investment side, no 
one is looking at it.
    One company has and could again tomorrow--did I miss 
something? Has anybody on any level today, up until this point, 
said that there could not be another AIG tomorrow? The 
Travelers, if they chose to, couldn't choose to invest all of 
their receipts into credit default swaps, if they chose? I 
don't mean to pick on Travelers, you just happen to be here 
today. Or any other company?
    The answer is no, I think, but go ahead and correct me if I 
am wrong.
    Mr. Spence. The answer is no.
    Mr. Capuano. That's why we are here, is to try to say, 
okay, we all screwed up by not looking at a huge segment of the 
business, the side where people invest, where the companies 
invest. We need to correct that. States cannot do it on an 
individual level.
    We need a systemic regulator--I don't like the word 
``regulator,'' because I think that implies overactivity--at 
least a systemic monitor, maybe a regulator, to review what's 
going on. If I--does anybody disagree with that?
    [no response]
    Mr. Capuano. Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. I know you do not get very emotional 
about these things.
    Mr. Capuano. It's my mood.
    Chairman Kanjorski. The gentleman from Georgia, Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. I want to--and I 
appreciate the opportunity for this hearing. I think this has 
been an excellent panel, and the information that you have 
provided has been very, very helpful.
    I think it is important to appreciate that Federal 
regulation of insurance is different than instituting a 
systemic risk regulator for insurance, and I think it's 
important that we keep that in mind. And we are kind of 
sometimes combining apples and oranges here.
    I want to shift gears a little bit and talk about and get 
some response regarding the financial products consumer safety 
commission that has been bandied about by the Administration. 
And it appears to many of us to be a kind of a command and 
control apparatus for different industries, including the 
insurance industry.
    And I wonder--and I know oftentimes Congress and the 
Administration can go too far; in fact, that seems to be the 
order of the day, is going too far--I wonder if, starting with 
Mr. Spence and kind of heading on down the table, do you have 
any thoughts about what would be too far for the insurance 
industry, or what the effect of this would be on the insurance 
industry for a products consumer safety commission?
    Mr. Spence. Thank you, Congressman. We believe the creation 
of a Federal financial services product safety commission that 
includes insurance raises two concerns. Insurance products are 
already regulated, so this would add another costly layer of 
regulation, and regulatory delays without gaining any consumer 
benefit.
    And we're concerned about possibly separating product 
regulation from solvency regulation, which could lead to poor 
regulatory decisionmaking, because the product regulation would 
lack the information necessary to fully understand the 
industry. And there could be competing--
    Mr. Price. So there is a line beyond which we go--if we go 
beyond--that results in limiting the ability of you to serve 
customers and help Americans insure themselves in various ways?
    Mr. Spence. We believe so.
    Mr. Price. Mr. Nutter?
    Mr. Nutter. Mr. Price, in the reinsurance area, it's 
strictly a business-to-business transaction. There is no direct 
legal obligation to the consumer. And, therefore, reinsurance 
regulation tends to focus on solvency, prudential regulation. 
It would appear not to apply to reinsurance contracts, the 
consumer aspect.
    Mr. Price. Thank you. Mr. Baird?
    Mr. Baird. When we design a product, we feel we are making 
promises to our customers to deliver benefits 20, 30, 40 years 
into the future. At the point in time when we're designing that 
product, we have to bring in solvency, capital markets people, 
solvency people, marketing people, to make sure we're designing 
something that somebody values.
    To separate that, and have an agency only focused on the 
consumer side, we believe, is not complete. If we didn't have 
all of our pieces, if we didn't have all of our disciplines at 
the point in time we designed a product, that product would 
fail.
    Mr. Price. Well, what could we do, or what would we do, 
what might we do that would limit your ability to allow 
Americans to have a greater opportunity to insure themselves 
against challenges?
    Mr. Baird. Yes, I believe that, you know, obviously, the 
life insurance industry is about strong consumer safety 
standards.
    I believe if it is looked at in a vacuum, and not part of a 
Federal functional regulatory and solvency and capital markets 
risks, that regulation would not be complete, and would 
therefore slow down the process, and you would have 
regulators--if regulation was bifurcated, you would have 
regulators with different standards and different agendas, and 
that would keep us from designing a product that the customer 
needs most.
    Mr. Price. Mr. Hill?
    Mr. Hill. Congressman Price, we represent the property 
casualty. Our membership is mainly property casualty. And we 
see this as more geared towards financial products, of which we 
really don't--
    Mr. Price. So if we got into your business, that would be 
bad. Is that accurate?
    Mr. Hill. Yes.
    Mr. Price. Thank you. I want to switch gears to Mr. 
McRaith. You mentioned that you wanted to comment on the 
Solvency II framework, and I wondered if you have had an 
opportunity to look at the consequences that will have, or may 
have, for States.
    Mr. McRaith. Yes. Thank you, Congressman. First of all, I 
do want to commend Mr. Skinner and his colleagues in the 
European Union for developing Solvency II. It remains in its 
ancient stages, as we heard--it's not even to be adopted by 
legislation until 2012--of course at the States, you know, we 
have 64,000 company years of regulating solvency, so we look 
forward to working with the EU, as they further develop their 
approach.
    One report mentioned earlier by Mr. Skinner was what's 
called the de Larosiere report. And what was interesting about 
that report is that he commented on the need to reflect upon 
and improve the BASIL II capital standards. You might recall 
several years ago there was a clamor in Washington to give our 
own banks the capital freedom that BASIL II allowed for 
European institutions. And for that reason, Solvency II, I 
think, warrants some serious scrutiny.
    But I think it's fair to say, if Solvency II had been in 
place during the current crisis, the economic impact would have 
been significantly worse for companies and consumers in the 
United States.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Nutter. Mr. Price, may I--if I may also comment on the 
Solvency II matter? If I could actually take a sentence out of 
Mr. Skinner's testimony, it seems to me this is the concern the 
reinsurance market has about Solvency II.
    This statement from Mr. Skinner's testimony is, ``Since 
equivalence decisions will have to be made at the country 
level, this fact alone will make it almost impossible to find 
the USA equivalent under Solvency II, unless changes are made 
to the current insurance regulatory framework in the U.S.''
    The global market is dependent upon regulatory interaction. 
We would strongly encourage a Federal regulator to facilitate 
that kind of international trade agreement.
    Mr. Skinner. If I may, can I come in just--I'm sure the 
question was directed as much to everybody who had something to 
do with Solvency II.
    Correct the impression, which is that this is not a piece 
of legislation already. I rather think that, like your House, 
that when you have had a vote on it, you effectively think of 
it as law. Where it, therefore, has to go then afterwards is to 
each Member's State, to have them ratify it in the statute 
book.
    Substitute, therefore, ``once it has been adopted in the 
European Parliament,'' which it was on the 22nd of April of 
this year. It was law. It now has 2 years to be implemented by 
the regulators on the ground. I think we should be absolutely 
clear about this, so there is no false impression left as to 
whether or not this is legislation.
    Secondly, it deals with the three principles that we wanted 
to base our legislation on. So I'm not so sure where we go by 
comparing what is happening with the United States with what 
was happening in the EU. We went for a risk-based approach, a 
principle-based approach, and an economics-based approach.
    And this has been 10 years in development with practically 
every industry that there was to be known in insurance in 
Europe and from elsewhere, getting involved in consultations 
about getting the piecemeal issues involved and out of the way 
beforehand.
    Now we have implementing processes, where the regulators 
would be allowed to introduce this on the ground, where we will 
be guaranteeing and looking after policyholders' interests far 
more than we ever could have done in the past, not in a 
piecemeal way, but in an absolute harmonized way. And I think 
we are looking at the best and the highest of standards.
    I think I am afraid, you know, I must correct the 
impression that it has left with you that the Solvency II 
standards are anything that we expect you necessarily to apply 
in the United States. That's not what we're saying, either. 
What we're saying is we have gone all this way in the European 
Union, and it matches the development that is happening 
elsewhere in the world.
    It's happening--what's happening in the IAIS, with 11 
countries choosing to go ahead, the United States not so. The 
danger is, and the risk is, for policyholders and for 
companies, if they can't be competitive in that global 
situation, that we will not be finding like for like.
    You have a market which has 85 percent penetration already 
with foreign companies. So that means you have 15 percent left 
U.S. companies. In terms of your global reach, you have 
companies that can do it. I would say you have to consider 
whether not changing the rules, not moving along with an 
international global standard is going to endanger many of 
those other companies that you have with international 
ambitions.
    Chairman Kanjorski. Thank you, Mr. Skinner. Mr. Hinojosa?
    Mr. Hinojosa. Thank you very much, Mr. Chairman. I thank 
you and Ranking Member Garrett for holding this hearing today 
to discuss systemic risk.
    The Treasury will release its regulatory reform proposal 
tomorrow, June 17th, which makes this hearing all the more 
important. I have always supported State regulation of 
insurance, and I will continue to rally behind that regulatory 
construct.
    If the National Association of Insurance Commissioners is 
correct, that even the failure of a major insurance entity 
based and operating in the United States will generally not 
impose systemic risk, we need to pursue this claim further, and 
not rush to judgement on the capability of State insurance 
commissioners to properly and effectively regulate the 
insurers.
    Furthermore, I cannot support a system in which an 
insurance company headquartered in one State is given 
permission to operate in the remaining 49 States, based on 
their home State's insurance regulations. Whereas this might be 
accepted and feasible in the European Union, I am not certain 
that comparing sovereign nations to States in the United States 
is appropriate. We might be comparing apples and oranges.
    So I ask my question and direct it to Michael McRaith, from 
the Illinois Department of Insurance and, if possible, to give 
me a second opinion from Kenneth Spence, with Travelers 
Insurance.
    What do you like, or what would you like to see in the 
Administration's regulatory reform proposal?
    Mr. McRaith. Thank you, Congressman. First of all, I think 
it's important to appreciate the strengths of our current 
system, as you clearly understand. We are a nationally-
coordinated system of States. We have multiple sets of eyes, 
multiple sets of experts looking at one company, so that it's 
not a single regulator, it is multiple regulators working 
together in a coordinated fashion with a national system of 
solvency regulation, a national system for people like Mr. 
Nutter and others in his constituency and internationally. 
There is that national system that can be recognized.
    In terms of systemic risk, as I mentioned earlier, there 
needs to be--there must be--a primary role for the functional 
regulators. In our case, of course, it's the expertise that we 
have, the information we have, and the experience that we have 
in relation to State insurance regulation. Systemic regulation 
can integrate. It is inherently--State regulation is inherently 
compatible with systemic regulation. We need to formalize 
regulatory cooperation, reduce barriers, enhance communication.
    The systemic risk management--as I alluded to earlier, as 
regulators of the insurance industry, we require extensive 
exhaustive risk management for any insurance enterprise. We 
need that at the holding company level, and of course at 
systemically significant institutions, that is even more true.
    And then limit the circumstances in which the functional 
regulator can be preempted--must be extremely narrow and 
extremely limited. Only if there is an actual possibility of 
not just risk, but disruption to the system. And those 
circumstances are very narrow, indeed. The primary function and 
purpose and service that a systemic regulator will provide is 
to enhance the communication.
    And using AIG as the poster child, there was not sufficient 
interaction and communication among the functional regulators. 
We support systemic regulation, Congressman.
    Mr. Hinojosa. Let me ask Mr. Spence, with Travelers 
Insurance, how do you all see it, as an insurance company? What 
would you like to see in this reform proposal?
    Mr. Spence. Thank you, Congressman. As I indicated, we 
would support the concept of a systemic risk regulator.
    For a number of years, Travelers was part of a financial 
holding company that was regulated by the Fed. The insurance 
operations were not regulated by the Fed, but they did 
soundness and safety reviews of the company, including the 
insurance operations.
    And that process demonstrated the lack of Federal knowledge 
or knowledge at the Federal level of insurance operations, 
which is why we think the chairman's OII is a sound proposal. 
And we think that, depending on what a systemic risk oversight 
regulator would do it would likely require the need for a 
functional regulator to implement whatever directives the 
systemic risk regulator might choose to implement.
    And then, as I indicated, whatever the regime is, we think 
the two key components are mandated risk committees and 
enhanced disclosure.
    Mr. Hinojosa. Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Hinojosa. Mr. 
Royce of California for 5 minutes.
    Mr. Royce. Yes. Thank you, Mr. Chairman. I will pick up on 
Mr. Spence's point.
    Insurance operations were not regulated by the Fed. The New 
York Insurance Department reviewed and monitored AIG's 
securities lending program. AIG's securities lending program 
heavily invested in long-term mortgage-backed securities, as a 
matter of fact, took that money from the insurance 
subsidiaries. AIG Life insurers suffered $20 billion in losses 
related to their securities lending operations last year. And 
of course, the bottom line, the Federal Reserve has provided 
billions now to recapitalize AIG Life Insurance companies.
    So, you know, we have a patchwork quilt here of regulation. 
We had--as I said in my opening statement, we had problems with 
the Financial Products unit, we had problems with the 
Securities Lending unit and the Securities Lending program. So 
we have a difficulty here.
    Now, at this--as we have discussed at this subcommittee, 
there was an implicit belief in the market that, should Fannie 
Mae and Freddie Mac get into trouble, the Federal Government 
would step in to save them. In part, it was that perceived 
Federal lifeline that enabled these firms to borrow cheaply and 
take on so much risk.
    As we discuss reforming our regulatory structure to address 
firms that are too-big-to-fail, I am concerned that we run the 
risk of bifurcating our financial system between those that we 
designate as systemically significant and everybody else that 
is in competition.
    As our experience with the housing Government-Sponsored 
Enterprises demonstrates, this would be a big mistake. And it 
would provide competitive advantages to companies that have the 
implicit backing of the taxpayers, and they would be 
incentivized to engage in higher-risk behavior. That's what 
economists who look at this model tell us when they fret about 
what we're doing here.
    So, in the context of systemic risk regulation, do we run 
the risk of distorting the market by labeling those 
institutions that are too-big-to-fail as such? And would it be 
more effective for a systemic risk regulator to focus on 
potentially high-risk activities in the market, instead, rather 
than a set of large financial firms? Mr. Spence?
    Mr. Spence. Is that directed to me?
    Mr. Royce. Yes, sir.
    Mr. Spence. Thank you. We agree with you. We think that the 
systemic risk regulator, it's not a question of labeling 
companies that are too-big-to-fail, but it is determining in 
advance, and preventing companies to become too-big-to-fail.
    Mr. Royce. Thank you. And then, my last question goes to 
Mr. Skinner, because, Mr. Skinner, you have spoken at length on 
the need to establish a Federal presence on insurance in the 
United States, as well as the problems EU regulators have run 
into when trying to negotiate with the various State insurance 
commissioners.
    There appears to be a consensus that something should be 
done in this regard. But to what degree remains, obviously, a 
question. When is an office of insurance information just an 
office to collect data? If this office is created without 
strong preemptive authority over the States, weakening the 
ability of an office of insurance information to enact 
agreements nationwide, how effective would it be, in the long 
run?
    Mr. Skinner. Thank you very much, Mr. Royce. I suspect that 
you know the answer partly, yourself, that in many ways, at any 
international level, it's countries and groups of countries 
that have to work together in order to get the global rules 
which will prevent future systemic risks.
    And those systemic risks, as we have discussed today, are 
at the root level: the company management processes; the risks 
it takes; the premiums it doesn't charge, etc., etc. So we need 
something that is standardized, harmonized, that we can agree 
with.
    I think the office of insurance information is a great 
idea. Don't get me wrong. I think that is what perhaps, you 
know, you will end up with. But I think we still have a 
fundamental which underlies the exact way in which we will 
approach each other over specific laws, and the ways we will 
apply laws. And where there is an absence of that particular 
bridge, you know, there is always going to be a gap. So we have 
to find a way through that.
    Now, I suspect that this committee will come up with ideas 
and talk to us about that, and we should be an open door for 
you. You know, we're not going to say how you should do it. But 
we are a compliant group ourselves, inside the European Union. 
The European Parliament wrestles with the same issues that you 
wrestle with. We just want to work with you, to make sure that 
you can figure out what's best for policyholders, as well as 
the international competitiveness of companies. And, as I say, 
those demand future modernization and new approaches to 
regulation.
    Mr. Royce. Thank you. Thank you, Mr. Skinner. Thank you, 
Mr. Chairman.
    Chairman Kanjorski. The gentlelady from New York, Ms. 
McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I 
appreciate it. I think many of my colleagues have said that 
this has actually been a very interesting journey that many of 
us have taken on this committee over the last several months.
    But, Mr. Baird, I wanted to ask you, as an alternative to 
Federal regulations, some have recommended moving to Federal 
minimum standards that would enforce by the current State 
insurance regulatory structure. Would that solve the regulatory 
burden in areas such as licensing, market conduct, and speed to 
market? If not, please explain why.
    Mr. Baird. Thank you for the question. We believe it does 
not. We believe Federal minimum standards--many of us run 
national businesses. We, unlike the property and casualty 
industry, we price a product one time for all 50 States. Our 
producers are often national. Our producers often have their 
customers move from one State to another.
    So, when someone suggests that Federal minimum standards is 
the answer, what that means is those minimum standards will be 
met, but there will still be 51 different sets of rules and 
regulations that we must file product approvals for, design 
products around, and producers must license for. So we think 
that solves very little, if anything.
    Mrs. McCarthy of New York. Mr. Skinner, listening to your 
remarks, when we think about it--and you're talking about, you 
know, working with all the different countries that you're 
working with--we have to work with all the States. And I would 
tend to think working with the States on the same level is like 
working with a country. And I think that's going to be our--
what we're going to have to solve. Because, obviously, a lot of 
the insurance companies do want to do global marketing, they 
are going to be into all the different countries for the--I 
keep saying UK--EU.
    So, as we follow through, if you could, follow through with 
what you were saying before. Just go a little bit further on 
how you could possibly see all of us--because this is going to 
be difficult, each State, we all represent our--you know, we 
represent our districts, but we actually represent our State. 
So what goes on in the State is going to come to us, and then 
they will put the issues in front of us, as we fight for the 
regulations that are going to come down.
    I mean, they are going to come down. Anyone who thinks that 
they're not is not awake in the real world. We cannot allow or 
afford what has gone on in the last year-and-a-half, 2 years, 
to happen again. If you could, follow through with that.
    Mr. Skinner. Thank you very much. I actually think that 
we're all dealing with multi-jurisdictional districts, regions, 
countries, States. And you're right, it is how do we harmonize, 
how do we get the rules that will give the best safety for 
consumers? How will we help companies expand capacity to areas 
where they haven't been offering insurance before, and at lower 
rates? How do we get efficiencies into the industry without 
running against risk?
    All these things have to be based upon what is prudentially 
sound, what is economically beneficial and sound, and what is, 
hopefully, subject to risk management. Now, those things are 
the clues that we went through, in terms of over 10 years, in 
trying to sew together 27 countries with 500 million people in.
    And not everyone had the same level of competence. I mean, 
this is a serious issue. And thank you for recognizing me 
coming from the UK. It's true. I mean, London likes to think 
that it is ahead of the world in many ways, along with New 
York, in financial regulation. But the truth is actually, you 
know, we can all catch a cold on what happens. So we all have 
to be alert. And what comes across our borders are some things 
that we don't expect, and can be beyond our control.
    So, when we talk about systemic risk, we're talking about 
control over groups, groups that can cross borders, have 
branches and subsidiaries. So I want the same rules and the 
same powers and the same tools to every regulator at a maximum 
level, so that they can be enhanced in the job that they do, 
and we know that consumers in Lithuania, Latvia, Malta, and 
London can have the same kinds of expectations about their 
policies being in good order when they finally come to have 
them paid out.
    And, most of all, perhaps just as well, that they can 
afford them. And as I know, in terms of an economic crisis as 
we're facing at the moment, many people are turning their back 
on insurance and thinking, ``Well, do I have to pay the 
insurance bill for my house?'' The consequences of that could 
be enormous, in terms of the social impact, as well. So I don't 
want to price people out of the market.
    So it's capacity and competence which has driven us to make 
sure that we have one market in insurance.
    Mrs. McCarthy of New York. I appreciate your thoughts on 
that, because I actually do believe that people, when they are 
coming back--and the same thing is happening here in this 
country--they are looking where they can cut back, just to 
survive, by paying their mortgage or whatever. And if they can 
get away with--whether it's car insurance, letting it lapse and 
hoping they don't get caught, health care insurance--obviously, 
we're dealing with that, so--oh, I'm sorry, my time is up. 
Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Ms. McCarthy. And now we 
will hear from the gentlelady from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. Mr. Baird, in 
response to Dr. Price's question, you basically said that the 
functional regulator in charge of regulating the safety and 
soundness of a financial institution should also be the 
regulator in charge of regulations related to consumer products 
and practices.
    Why is that? And why should it be the same regulator who 
looks at safety and soundness, as well as consumer-related 
products?
    Mr. Baird. Yes, thank you for the question. I certainly 
didn't want to get into the shoes of Congress and determine who 
reports to whom. The remarks I made--and I want to make this 
very clear--we think that they have to be together in a 
collaborative or cooperative--or perhaps one does report to 
another; you will decide that, not us.
    But you cannot separate and bifurcate consumer standards, 
consumer safety standards, from solvency regulation.
    Mrs. Biggert. Thank you, thank you. Then, Director McRaith, 
what sort of coordination took place among the regulators 
following the AIG debacle?
    Mr. McRaith. Thank you, Congresswoman. At the national 
level, there was coordination within the days and weeks--of 
course there is coordination constantly. But we were--as we 
learned about the holding company problems, the AIG Financial 
Products Division in London, we learned that the holding 
company challenges could have implications for the insurance 
subsidiaries, and immediately nationally, the regulators worked 
collectively daily, multiple calls, meetings, visits, 
regulators from around the country--because, of course, 
policyholders are based in every State of the country with AIG.
    In addition to that, led by the New York department, the 
State regulators led national--or, I'm sorry, international--
conference calls, giving our colleagues from the EU and all 
continents the opportunity to participate in a discussion to 
understand, really, the root cause of this problem isn't the 
financial products division based in London, it is not a U.S. 
insurance company problem. And those conversations still 
continue to this day.
    Mrs. Biggert. Okay. Well, it appears that the insurance 
sector has fared better than the banking and the securities 
counterparts in the current economic crisis. What are the 
reasons for that, and what are some of the elements of the 
State insurance regulatory system that could be instructive to 
Federal policymakers in setting up a systemic risk regulatory 
system?
    Mr. McRaith. First, I understand the EU is working to bring 
together 27 different countries, and they intend to implement 
Solvency II within a few years. And, again, I commend that 
effort, it's a significant achievement.
    As for the States, we have been working together 
collaboratively for over 100 years. We have, as I mentioned 
earlier, 64,000 years combined of company regulation. We 
understand the importance of working together, so that the 
consumers in Illinois understand the impact of an AIG 
challenge, for example, that the regulators in Illinois 
collaborate with AIG in New York, and Pennsylvania, all the 
other States.
    So, the primary and essential systemic--let me back up. One 
other key component of insurance regulation that was raised by 
Congressman Capuano, we restrict not only what types of 
investments insurance companies can have, but how much any one 
company can invest in any one type of investment. That type of 
conservative capital and accounting requirement prevents the 
crisis in the insurance industry that we have seen in the 
banking and other sectors. So--
    Mrs. Biggert. Okay, if I could just get in one more 
question--
    Mr. McRaith. Sure, I'm sorry.
    Mrs. Biggert. --when my time--if we were to have the 
Federal market stability and capital adequacy board--that was 
what I mentioned before, it's where--comprised of all of the 
Federal regulators and maybe some outside experts and others, 
to look at what could be done with regard to the derivative 
regulations, should an insurance representative or 
representatives be at the table? And who should be at the 
table?
    Should it be a rotating State regulator, or should it--we 
set up the office of insurance information--if we set that up, 
it would be the head of that entity, to be involved in that?
    Mr. McRaith. Unequivocally, Congresswoman, a State 
regulator should be in that conversation with the council, 
absolutely.
    Mrs. Biggert. And should it be rotating, or could we use 
the office of insurance information?
    Mr. McRaith. That's right. It should--I expect it would be 
rotating. I think there is value in having that diversity of 
opinion, although a consistent standard message, but diversity 
of perspective. Absolutely.
    Mrs. Biggert. Thank you very much. I yield back.
    Chairman Kanjorski. Thank you very much, Mrs. Biggert. Now 
we will hear from Mr. Scott, from Georgia.
    Mr. Scott. Thank you, Mr. Chairman. Let me ask--we are 
here, debating this largely because of actions that stemmed 
from the problems at AIG, with excessive trading and credit 
default swaps out of their Financial Products unit in London 
that was not regulated by State commissioners, but by the 
Federal Government, the Office of Thrift Supervision.
    However, some are using the collapse of AIG to argue for 
the creation of an optional Federal charter for the insurance 
industry. And, as I said in my opening statement, this is 
somewhat problematic, because here we have an entity that had 
the Federal oversight.
    So, the question has to be asked, would an optional Federal 
charter, had it been in place, would it have prevented the 
collapse of AIG, which, again, is already federally regulated? 
May I get your point?
    Mr. McCarthy. I think it's a good question. And, again, we 
look at it from our sort of narrow perspective in the industry.
    The first word you used ``optional,'' is where the trouble 
is, I think, in that an optional charter would leave itself 
open to arbitrage, meaning that people would--companies would 
have the ability to gravitate towards wherever they think the 
most liberal or the most friendly for their particular pursuits 
would be. A mandatory Federal, that would encompass all 
companies, whether it's just the monolines or whether it's a 
broader class of companies, would address that.
    The second issue is that if there was Federal regulation, 
whether it was--and it was focused on products, one of the ways 
to look at perhaps the AIG issue, is their participation in 
credit default swaps. But inside those credit default swaps 
there are requirements for them to post collateral, which 
really was the reason why they ended up collapsing. It's the 
product itself, and the nature of the terms that are inside 
that product. So, I would say that, you know, Federal mandatory 
sort of applies to everybody, no possibility for arbitrage is 
important.
    But second, had it been in place, and had they focused on 
what were the terms in the product, that would be the case. And 
that's why we think, in a financially driven company such as 
ourselves, that really looks more like something that the Fed 
would do for banks, in terms of permissible kinds of business 
that they're in.
    Mr. Scott. All right. Thank you very much. Another part of 
my question is that--and let's move to the State regulation, 
because, in the final analysis in this whole reform issue, I 
want to do what's best for the Nation, but certainly I want to 
do what's best for Georgia.
    We are comprised of 50 States, 50 different States. And I 
believe that State regulation over the insurance industry is a 
legitimate regulatory entity, because States are able to make 
their own rules to comply with what that State deems important 
for their own population. We are one Nation, but we are 50 
different States with 50 different kinds of constituencies, 
industries, geography, climate, all of the things that make the 
great diversity of the nation.
    And so, I believe we have to have room for States to deem 
what is most important for their own populations, that they 
would have the independence to grow in their own way and their 
own time, and most importantly, ensure consumer protections for 
that kind of constituency, and ensure competition within the 
industry. Am I not right about this? Is this not--should this 
not be the case, Ms. Bryce?
    Ms. Bryce. Well, I would agree with that. I believe that 
what we have found is that the State insurance structure has 
been a real asset, we believe, to our industry.
    If you can imagine, we are obviously participating in a 
mortgage market, where we are subject not only to some of the 
issues of, you know, loans that were originated, but also to a 
lot of macroeconomic issues that we can't control, like 
unemployment, etc. And yet, we are in a position to be able to 
continue paying our claims, because of the structure of the 
reserve system that we have with the States.
    And what we have found is that has been a structure that 
has helped us really survive through this challenging time. At 
the same time, it has been very clear that the regulators 
themselves have been talking to each other and coordinating, as 
well as, in our case, sharing information with the FHFA.
    And so, you know, we believe that that structure is working 
and will continue to work.
    Mr. Scott. Thank you.
    Mr. Nutter. Mr. Scott, may I just add a comment to that?
    Mr. Scott. Yes, sir, please.
    Mr. Nutter. I represent the reinsurance industry. Going 
back to the chairman's opening statement, there are certain--
aspects of insurance, some lines of insurance--in our case, 
reinsurance--where a Federal prudential regulator would, in 
fact, enhance the kind of relationship at that consumer level 
that you want. The lack of a Federal prudential regulator 
indeed cries out for, the problems associated with 
international agreements focused on international insurers and 
reinsurers doing business in this country.
    So, I would suggest that even accepting your premise about 
the consumer concerns, there are still aspects of regulation 
where a prudential Federal regulator would enhance that.
    Mr. Scott. Okay.
    Mr. McRaith. However--
    Mr. Scott. Yes, sir?
    Mr. McRaith. May I add to that? The ultimate consumer 
protection, Congressman, is when your constituent pays a 
premium and doesn't have a claim for several years, that the 
company is not only around to answer the telephone, but is able 
financially to pay the claim. Reinsurance is an essential part 
of solvency, and solvency is the core mission, core purpose, of 
consumer protection in each State. And for that reason, it is 
appropriately a subject for State-based regulation.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Scott. And now the 
gentleman from Florida, Mr. Posey.
    Mr. Posey. Thank you very much, Mr. Chairman. We have 
really heard about two issues today: one is international 
harmony; and the other is about regulation. I won't go into the 
harmony, because there is just not time. And besides the EU, we 
know what happens when Asia gets in and South America gets in. 
I mean, it's really too large even to discuss too far here 
today.
    But as you have heard most of our colleagues discuss today, 
many of us believe clearly that the regulation of insurance is 
a State's right. That's purely and simply a State's right. It's 
reserved under the States.
    And the biggest violation of consumers that I have seen, 
quite frankly, has been by companies that write health 
insurance, for example, under ERISA. They will do business in 
49 States, every State except the State in which they reside, 
collect premiums, and don't pay claims, because the Federal 
Government does nothing about it. And it wasn't until a 
consortium of States got together just several years ago and 
crossed State lines for the first time in history to prosecute 
health insurance fraud. If we left it to the Federal 
Government, they would still be plundering people in 49 States, 
unfortunately.
    It is clear that if your testimony today was true, very few 
of you need any more useless bureaucratic regulation. And who 
would have ever thought that, after the S&L crisis, so 
relatively shortly after the S&L crisis, with all the 
additional regulation that was put in place following the 
crisis, that we would again find ourselves in this hole of a 
financial crisis.
    I mean, if regulation would have solved the problem, we 
wouldn't be here today, because brighter minds, creative 
lawmakers threw a bunch of regulation into the S&L crisis, and 
obviously it didn't do anything. And why we would think that we 
could be successful in trying to advance, out-think a creative 
risk-taker, kind of defies logic.
    I think the answer is to hold people who harm people 
accountable. You know, we pretty much, I think, agree that the 
cause of the crisis that we're in now has been caused by greed. 
We have greedy executives--and it apparently is not illegal--
who put the long-term best interests of the financial--
fiduciary relationship that they have with their customers, 
their clients, their stockholders, behind their personal 
ambition for short-term gains and grossly exorbitant bonuses. 
And that's why we're in the problem that we're in now. I think 
everybody pretty much agrees with that.
    And I don't think that you are going to be able to ever 
craft a law that is going to outwit these creative--I hate to 
use the term--geniuses. Some of the schemes that they come up 
with seem pretty good for the short term, to improve their own 
lot. I think the only answer is going to be if you hold the 
people responsible who violate these fiduciary relationships, 
like they do in some industries.
    And for that, I realize there is not enough time for all of 
you to respond. I don't expect all of you to agree with that. 
But I would appreciate it if you would respond with your 
thoughts in writing to the chairman--and he can see that the 
rest of us would get a copy of it--what your thoughts would be, 
where you would draw the bar, what kind of boundaries you would 
recommend to legislate better accountability for these people 
who have plundered this Nation. They have plundered the world, 
so to speak.
    And, I mean, if regulation would take care of it, the SEC's 
1,100 attorneys would have prosecuted Bernard Madoff 10 years 
ago when his scheme was exposed to them, and they refused to 
take any action.
    So, I think it's going to have to be a matter of criminal 
and civil accountability on a personal level if we are going to 
change the course of the future in this regard. Thank you, Mr. 
Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Posey. If the 
panel wishes to send that response in, we will make sure that 
the members of the subcommittee receive it. The gentlelady from 
Illinois, Ms. Bean.
    Ms. Bean. Thank you, Mr. Chairman. I would first like to 
ask unanimous consent to enter the written statement of the 
Honorable Steve Bartlett, president and CEO of the Financial 
Services Roundtable, into the record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Ms. Bean. Thank you. And I would also like to acknowledge 
some of the testimony in response to some of my colleague's 
questions that no one that is advocating for a national 
insurance charter in any way is suggesting that we lower 
consumer protections.
    And, in fact, we are starting at the baseline of the NAIC 
models, and only improving by adding a systemic risk regulator, 
by adding a national insurance commissioner who would have 
oversight of holding company information, both for insurance 
and non-insurance subsidiaries, like AIG Financial, who could 
prohibit activities by non-insurance companies that put those 
companies or their policyholders at risk. And also the 
testimony that you mentioned of a Federal prudential regulator 
only again enhances consumer protections.
    My question is for Mr. McRaith: If the Federal Government 
had not stepped in to provide AIG bail-out money, how prepared 
were the State regulators and the reserve funds to deal with 
the fall-out? How would the States have come up with the $44 
billion of Federal tax dollars that had gone to shore up AIG 
Life Insurance subsidiaries who took risky bets through their 
securities lending programs that, notably, were approved by the 
State commissioners?
    And a follow-up question to that, what resources have been 
put in place subsequently by you and other State commissioners 
to oversee an insurance subsidiary's securities lending 
program?
    Mr. McRaith. Right. Thank you for that question, because 
securities lending has come up in other comments, as well. It 
is important to understand that the problem--first of all, that 
the New York Department of Insurance was working to reduce the 
level of securities lending in the AIG subsidiaries before the 
crisis. The crisis, remember, was a result of the--essentially, 
a collateral call on the AIG holding company, resulting from 
the credit default swaps. This would not have been a problem, 
but for the CDS failure.
    And it is also important to remember that the securities 
which were involved were AAA-rated securities at the time. So 
it points to the need for better regulation of the credit 
default swap market. The--
    Ms. Bean. So where would the $44 billion have come from?
    Mr. McRaith. Well, let me answer that. I am going to get to 
that, but I want to--you also asked about reforms that have 
been undertaken.
    We have increased capital requirements if companies are 
engaged in securities lending, enhanced reporting, and we are 
looking at how to revise our accounting standards, and that 
last improvement is ongoing. In terms of $44 billion, it is 
important to understand that each insurer, of course, has 
significant capital requirements, to begin with. Their assets 
cannot be used to satisfy the debts of the holding company.
    Even if these subsidiaries--I think it's an open question, 
also Congresswoman, whether if the--without the $44 billion, 
whether these companies would have actually become insolvent. 
Many financial regulators will argue that they would not have 
been insolvent without the $44 billion, that they would have 
been okay. However, if there had been a question of solvency, 
then the companies would have been placed into receivership.
    And insurance is not like the FDIC, for example, where you 
need liquidity and cash immediately. Insurance, in the guaranty 
fund system, essentially replaces the contract. They don't have 
to--and the coverage. They don't have to generate cash 
immediately, because, of course, not everyone dies--God forbid, 
everyone dies--on the same day, or everyone has a car accident 
on the same day.
    And, for this reason, $44 billion would not have been 
needed immediately if, hypothetically, it would have been 
needed at all. It would have been managed over a period of many 
years, if not decades. And this is what happens--and does 
happen--through the course of State-based receiverships of 
insurance companies. The State-based system would have been 
able to handle it, and it would have been, again, a--protected 
the consumers, the policyholders, first.
    Ms. Bean. I appreciate your testimony on what has been done 
by the NAIC since that time to address the gaps that exist in 
the current system to protect policyholders. And again, it is 
those who oppose legislation to move towards a national charter 
who suggest that there be any weakening of consumer 
protections, who refuse to acknowledge the $13 billion of 
savings to the industry that could get passed on to consumers 
from the redundancies of a 50-State system. Thank you, and I 
yield back.
    Chairman Kanjorski. Thank you very much, Ms. Bean. And now, 
the gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you. I found it interesting that some 
of you there think that you can ask the Federal Government for 
so much, but in your own wisdom stop it, and then you will be 
in a position later on, when you're complaining, that the 
Federal Government went too far.
    And I think Mr. Royce, in his own questions, went beyond 
his own bill on setting up an office of information, insurance 
information. And then his question was--and this is Ms. Bean's 
bill, also--is what good does it do to have the information if 
you have no authority to act upon it?
    I come from Illinois, and one of the things that we do 
right in that State is regulate insurance. We have the cheapest 
insurance rates, probably, in the country.
    Mr. McRaith, my understanding--and correct me if I'm 
wrong--is that AIG was in five pieces, five separate entities, 
call it what you want, and that the life insurance aspect was 
cordoned off by some firewalls from the investment side that 
went sour. Is that correct?
    Mr. McRaith. That is correct, Congressman. Every State has 
adopted what we call the Holding Company Act. The Holding 
Company Act, along with our other financial regulations, 
requires each insurer to be financially independently viable. 
And we have very strict capital and accounting and investment 
requirements.
    One function of the Holding Company Act is that insurers--
the life insurers, for example--cannot release capital to the 
holding company to support the holding company without 
regulator approval.
    Mr. Manzullo. So the investments that were made by the AIG 
Life Insurance section were separate from the investment arm 
that went sour, is that correct?
    Mr. McRaith. That is correct. AIG Financial--AIG, in our 
conservative estimate, had 247 different companies; 71 of those 
were U.S.-based insurance companies. Each one of those was 
independently financially viable.
    The financial products in the jet leasing company, those 
were regulated in other ways by other agencies in which the 
insurance companies--and the insurance companies were not 
threatened by those operations.
    Mr. Manzullo. So the life insurance side of AIG has always 
been sound, in terms of--you would have to have all the 
insureds, life insureds, die in one day or in a week in order 
to threaten the solvency of the insurance end.
    Mr. McRaith. It is--some very smart, experienced financial 
regulators in this country would say exactly that.
    Mr. Manzullo. Well then, why would anybody want to regulate 
the life insurance company on a Federal level? How could it be 
done any differently, any better, than what has been done at 
the State level?
    Mr. McRaith. Well, our position, of course, Congressman, is 
that it cannot be. And I think that your colleagues have 
pointed out numerous examples of why that would not be the 
case.
    I think Chairman Kanjorski asked me earlier about Reliance 
Company, and would a Federal regulator have discovered the 
misconduct of its principal. Well, if--the SEC didn't discover 
the misconduct of Mr. Madoff, either, at the--
    Mr. Manzullo. And if I could stop you right there, that is 
my point. The man who is the whistleblower--I can't think of 
his name right now--oh, Mr. Makopoulous--testified that he had 
been screaming at the SEC for 5, 6, 7 years, and no one would 
listen. So the authority and the regulators were in place, they 
just failed with Madoff. And the same thing with the Federal 
Reserve.
    Now, you said, Mr. McRaith that, ``We restrict the nature 
and extent of the investments of insurance companies.'' And the 
Federal Reserve has jurisdiction to restrict the nature and 
extent of mortgage instruments and underwriting standards. And 
they sat on their butts and did nothing. In fact, Chairman 
Bernanke testified here in October of 2008 that it wasn't until 
December of 2007 that the Fed ever got involved in the whole 
subprime housing market. And I find that astonishing.
    And Mr. Capuano is giving you hell that--he said where were 
the States when this went down the tube, but it was the Federal 
agency with direct jurisdiction that did absolutely nothing.
    And now we're talking about using that standard, the SEC 
standard that blew it with Madoff, the Federal Reserve standard 
that blew it with doing nothing on governing these instruments 
to stop the 2/28s and 3/27s, and making sure that people who 
took loans could afford to buy them, and now we're expected to 
sit here and have a Federal insurance regulator. Why?
    I mean, I'm looking at your testimony here. You plead the 
Tenth Amendment on some certain areas, and I could understand 
what you're trying to do. The problem is, how do you think you 
can stop the Fed from going only as far as you want them to go, 
and then not going beyond the area where you don't want them to 
go?
    That's a tough question, Patrick, but if you want to handle 
it, go ahead.
    Mr. Baird. Well, I would like to try.
    Mr. Manzullo. I will leave it to you. If I could have some 
time, Mr. Kanjorski?
    Mr. Baird. I will take anything I can get.
    Mr. Manzullo. Thank you.
    Mr. Baird. I will try to keep this in the context of the 
purpose of the hearing, which is systemic risk. If the chairman 
will indulge me for 30 seconds, I have been coming up here for 
7 or 8 years, long before AIG became the household name, and 
long before there was a financial crisis. And we were up here, 
advocating for an optional Federal charter, because we thought 
we could serve our customers--those of us who do business on a 
national basis, which is much of the life insurance business--
better.
    As Congresswoman Bean suggested--and you had a bigger 
number than I would have in my pocket, but there are billions 
of dollars of annual operating expenses that would be saved if 
we had a single regulator, rather than the 51 regulators that 
ultimately gets passed on to the customers.
    Now, in the context of systemic risk, what we have been 
talking about today is, whether it's Federal or whether it's 
State in the past, there have been failures of regulators on 
both sides. And I think the purpose of this hearing is to try 
to make it better, it is to try to improve, and it's trying to 
bring all of the risks from the entire financial services 
industry together to keep this from happening again, which, 
given the amount of sleep that I have lost in the last 8 
months, I am all about.
    So, if we are indeed here to talk about a Federal systemic 
overseer or regulator, we don't think that you can regulate 
just systemic risk of the life insurance industry without 
having the expertise, collaboration, and cooperation of a 
Federal functional regulator. And that, to me, is how we bring 
all this together.
    Mr. Manzullo. That's a good answer. I appreciate that.
    Mr. Baird. Thank you.
    Mr. Manzullo. Thank you. I do have another question, but I 
know I'm past my 5 minutes.
    Chairman Kanjorski. Let me start another round, and we will 
see if we can get another 5 minutes.
    Mr. Manzullo. Okay, that will be fine.
    Chairman Kanjorski. Okay. The gentleman from Florida, Mr. 
Grayson.
    Mr. Grayson. Thank you, Mr. Chairman. I don't want to talk 
to you all or ask you any questions today about whether we 
should have a Federal regulator versus State regulators for 
insurance. I do want to talk to you and ask you questions about 
the subject of systemic risk. You are a panel of members who 
are here to represent the insurance industry. And I would like 
to start with a very simple question.
    Assume that systemic risk reflects the idea that the 
failure of one particular company would cause its creditors to 
also fail to go bankrupt, and reverberate throughout the 
financial system to the point where there is a dry-up of credit 
nationwide, or even worldwide.
    The first question I want to ask you--we will start with 
Mr. McRaith--is which companies does that describe? In other 
words, which existing companies pose systemic risk if they 
fail?
    Mr. McRaith. Not one insurance company based in the United 
States presents systemic risk, according to the definition you 
have provided.
    Mr. Grayson. What about AIG?
    Mr. McRaith. AIG's 71 U.S.-based insurance subsidiaries 
were financially strong, remain financially strong. Not one of 
those companies independently ever presented any systemic risk.
    Mr. Grayson. As a group do they pose systemic risk?
    Mr. McRaith. As a holding company, its Financial Products 
Division out of London, which was not appropriately regulated--
but not a matter of State insurance regulation, by the way--
that clearly presented systemic risk to the country.
    Mr. Grayson. So what you're saying is that only the 
Financial Products Division of AIG posed any systemic risk, not 
any of the insurance operations, and the Financial Products 
Division was not an insurance operation, in your view. Is that 
correct?
    Mr. McRaith. According to the definition you have provided 
of systemic risk, yes.
    Mr. Grayson. Good. Let's go on to Mr. Spence. Which 
insurance entities today pose systemic risk to the system?
    Mr. Spence. Thank you, Congressman. As we detailed in our 
testimony, I essentially agree with Mr. McRaith. However, I 
think that, on an aggregated basis, the insurance companies, as 
a whole in the United States, could, if there were a natural 
catastrophe of significance, or if--in the event of a terrorist 
attack pose a systemic risk.
    Mr. Grayson. Well, that's an interesting point. So what 
you're saying is not the scenario we saw with AIG, that 
wouldn't pose the kind of systemic risk you're talking about. 
What you're talking about there is some sort of attack or 
natural disaster that would impose trillions--well, or at least 
hundreds of billions of dollars, potentially--I'm talking 
about, for instance, a nuclear blast--hundreds of billions or 
trillions of dollars of loss on the industry.
    At that point, do you think that would be a systemic risk? 
And at that point would that be, in effect, the least of our 
worries?
    Mr. Spence. As I indicated, we think that, on an aggregated 
basis, insurance companies in those events could be 
systemically at risk, correct.
    Mr. Grayson. All right. Is there anything that a systemic 
risk regulator could possibly do about that?
    Mr. Spence. That's a very good question. What the systemic 
risk regulator could do would be to try to ensure that 
examination of insurance companies' exposure was properly 
managed, whether the aggregation of risks in urban areas were 
properly managed. There are things they could try to do to 
improve the situation.
    But you are correct. Depending on the situation, there may 
not be much that could be done.
    Mr. Grayson. Are there any particular entities that you 
would identify as being the ones to watch if we wanted to avoid 
a systemic risk in those extreme circumstances?
    Mr. Spence. Again, we have looked at it more on an 
aggregated basis.
    Mr. Grayson. All right. And I don't know if you will regard 
this question as fair or not, but if your company went broke, 
who else would go broke?
    Mr. Spence. We don't have that many counterparties, like 
other insurance companies. So I'm not sure I can really answer 
that question.
    Mr. Grayson. As far as you know, would any other major 
entities go broke if your company went broke?
    Mr. Spence. No, sir. No, sir.
    Mr. Grayson. All right. What about you, Mr. Baird?
    Mr. Baird. You're asking me to use my imagination as to 
what a systemic risk regulator does, because I have thought 
about that a lot.
    Mr. Grayson. Well, no. What I am asking you is, are there 
any current companies in existence, including your own, that 
you believe pose systemic risk, in the sense that if your 
company failed so many other companies would fail that it would 
result, in effect, in the mass destruction of credit in this 
country, or even the world. That's the question.
    Mr. Baird. Okay. If all else were the same, if the reason 
for our failure did not impact any of the other companies, or--
can I think of any other single company out there in the life 
insurance industry, okay, if the reason they were going to fail 
did not impact any other company, the answer is no.
    Mr. Grayson. Okay. And going back to the previous answer, 
what you're saying is there are certain scenarios where we 
would have something resembling systemic risk, something like a 
terrorist attack, a mass disaster. Those are the kind of 
scenarios that we should be thinking about in the context of 
systemic risk. Is that correct?
    Mr. Baird. In the property and casualty industry, yes. In 
the life insurance industry, it could be a broad devaluation of 
equity markets, credit defaults, and so forth.
    Mr. Grayson. Okay.
    Mr. Baird. It would impact all companies.
    Mr. Grayson. All right. To me, this has been very helpful. 
If any of you want to supplement your comments with addressing 
these specific issues, I would certainly be grateful to you. My 
time is up. Thank you very much.
    Chairman Kanjorski. Thank you very much, Mr. Grayson. We 
are going to try another round quickly, and those members can 
take their full 5 minutes if they so desire, but they can 
certainly take less.
    I will hold mine and pass over and go to my co-host here, 
Mr. Garrett of New Jersey, for 5 minutes.
    Mr. Garrett. And I will just run quickly through, because I 
don't want to hold the panel up, either. They may be anxious 
to--but I appreciate the panel being here.
    Mr. McRaith--and I saw Mr. Skinner--well, I shouldn't make 
comments--maybe disagree with you--yes, and my wife always says 
that--with regard to the AIG situation. And you were running 
down the scenario with regard to who is looking at it, and of 
course Mr. Manzullo raised the issue and Mr. McRaith, you made 
the comment, portions of the units were overseas. And in 
London, specifically, right?
    And I believe I have heard that before, that part of the 
issue here is that it was not the State regulator, necessarily, 
to some extent. Federal regulators, or lack thereof, as Mr. 
Manzullo is making--you're raising one, as well, as far as the 
European arm of it, or are looking at it, as maybe of missing 
it as well. Just want to chime in on that?
    Mr. McRaith. I think the important point is that regulators 
need to have formalized structure for information sharing, for 
communication, not because of the risks, because frankly, there 
are large companies who will present risk. It's to avoid the 
disruption. So the structure of--
    Mr. Garrett. Okay.
    Mr. McRaith. --the stability--
    Mr. Garrett. But I guess what I heard--and Mr. Skinner can 
comment on it--is was there a failure also not only on the 
Federal Reserve part, not only on the Federal regulators 
looking at the AIG situation, but was also a failure from the 
European regulators, as well, looking at this situation and not 
catching this going into it?
    Mr. Skinner. This is very interesting. As I am listening to 
this, I gather that you believe AIG functioned as it did in the 
United States. In fact, AIG functioned, country by country, 
inside the European Union.
    And Solvency II challenged AIG, and said, ``You've got to 
now behave as a group. You're overseas, and you're inside the 
European Union, in the market, in an internal market. You're 
now going to have to put your hands up and say you're a 
group.'' If they had been a group, we would be able to 
administer and supervise that group in its entirety, whatever 
it did, banking and insurance.
    It just seems to me strange to keep picking on London. 
London was a conduit for trading. It was appropriately 
regulated at the time. Whether we now will have a crystal ball 
and we look back and we say, ``Oh, securitization was bad,'' I 
do not think that's true. It's not rational, either.
    But the reality is, actually, what went on was due to the 
derivatives market--and we know why, indeed, why it went bad in 
the derivatives market, so we don't need to go there. But if we 
are saying that AIG and the United States has to blame what 
went on on London for the failure of supervision, then I think 
that's taking it a step too far.
    I think what we have to say is, where was it supervised 
inside the United States, who had oversight of it, why didn't, 
if State regulators had such a close relationship with this 
company, know about the kinds of investments it was making, and 
what proposition did it make, in terms of trying to stop those 
investments with the Office of Thrift Supervision who, by the 
way, rejected--
    Mr. Garrett. I appreciate that. I guess a lot of what we do 
here is make the questions to other people. I said had we had 
different regulations in place, would we have prevented the 
situation, and it would seem as though, in certain cases, maybe 
not.
    And Mr. Skinner, one other one quickly. You talked earlier 
in your testimony with regard to equivalency, and that's 
something we need to move to, right? You have the OII 
legislation that's out there. In the--I will call it the bare 
bones, the basic OII legislation, which does not have--sorry, 
as I understand it--all of the other regulatory aspects of it, 
it's basically just an OII office of insurance information, a 
collection of information.
    Would that bring us to--just having that, does that bring 
us to equivalency alone?
    Mr. Skinner. I can only say at the moment, from what I 
know, just a collection of information in itself would not be 
enough, I hate to say.
    Mr. Garrett. Okay.
    Mr. Skinner. I think what we're looking for is for this to 
be the platform for whatever discussions and deliberations--
    Mr. Garrett. Right.
    Mr. Skinner. --and it's up to you where you go on this, of 
course. But what we want, really, is to examine what you're 
bringing, in terms of regulation, and it has to have some--
    Mr. Garrett. Yes, and I guess maybe the last question is we 
see the dichotomy here between the two approaches. And Mr. 
Capuano made the comment, I think, that he--and I don't want to 
put words in his mouth--sort of sees the need for the State 
regulations with regard to the consumer protection aspect. I 
think I heard that from him.
    Mr. Baird, though, you could see the problems, however, 
along Mr. Price's line of thinking, of if you have--if you 
don't have the consumer protection aspect on the same level, or 
combined--and I know you don't want to get into who regulates 
what--combined with the prudential regulator, you could see a 
problem there indicated, right?
    Mr. Baird. Yes.
    Mr. Garrett. So you would also see a problem, then, if 
Mr.--if I understand Mr. Capuano--if you continue the--those 
divided between the State and the Federal, with the consumer 
protection here on the State level, exclusively, as he seems to 
be supportive of, and the prudential regulator here on the 
Federal regulator, you would see a diversion of--or kind of 
conflicting of approaches or interests there, correct?
    Mr. Baird. That is correct. When--
    Mr. Garrett. Besides the efficiency one.
    Mr. Baird. Besides the inefficiencies, when we get it 
right, when we design a product that meets the customer's needs 
and allows us to be prudent and reasonable as regards solvency, 
so that we can deliver on promises 20 and 30 years out, we 
bring together our solvency people, our financial reporting 
people, our pricing people, and our--we have committees in our 
company that we call, ``Would you want your mother to own it 
committees.'' That would be our equivalent of making sure that 
the consumer is treated fairly.
    When we get it right, all those different disciplines come 
together in the same place. To regulate us any differently, I 
think, would fail.
    Mr. Garrett. So if we do--if President Obama comes out and 
he does nothing, let's say, with regard to insurance, that's 
just not on the table, but he does give us a systemic risk 
regulator, perhaps in the Federal Reserve let's say, and he 
also--so that's over here--and over here he has a consumer 
protection division in some other area, that would be--either 
one of those permutations without--that would be the vision 
that would not work.
    Mr. Baird. If that includes insurance. If that includes 
insurance products--
    Mr. Garrett. But it doesn't--
    Mr. Baird. In my opinion, if you have regulators with 
different agendas, it does not allow us to bring it together to 
serve the customer the best way.
    Mr. Garrett. Nor will it work if you have, in your opinion 
of Mr. Capuano's approach, where you keep some level down here 
in the State and some up here on the Federal?
    Mr. Baird. That is correct.
    Mr. Garrett. Okay. Thanks a lot. I appreciate it.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. Ms. 
Bean, for 5 minutes.
    Ms. Bean. Thank you, Mr. Chairman. Mr. McRaith, during your 
testimony, you highlighted that the NAIC works actively with 
international regulatory bodies. What authority does the NAIC 
have in actually compelling States to comply with any changes 
or recommendations that the international community would like 
to see?
    Mr. McRaith. Well, the first value that the NAIC adds to 
that process is a coordinated interactive agency to work with 
our international colleagues. There are 27 countries in the EU. 
There are many countries around the world who have similar 
systems.
    In terms of the preemptive authority of the NAIC, its role 
is not to preempt the States, it is to supplement and support 
the State regulation. So, in that sense, as it develops--as 
internationally there are developed standards, we support the 
development of those standards. And that is the measure by 
which we will determine equivalency, by the way, is the 
development and compliance with international standards.
    Ms. Bean. So you support the standards and you educate the 
States, but ultimately you don't have the authority to compel 
them to comply in the same way that the NAIC, for 140 years, 
has tired to drive uniformity across the States domestically, 
and has been unable to get all States to move forward towards 
agreement on standards, as well?
    Mr. McRaith. Well, just quickly, I think that's a fair 
comment. There are differences among the States. I think, as 
your colleagues have mentioned--you know, for example, in 
Illinois, we have a rating system where--that works for our 
State. Companies don't need prior approval on property and 
casualty rates in our State. However, that system would not 
work--I think many legislators would argue--in the Gulf States, 
or on the Pacific Coast.
    So, those differences, while they might present a system 
that some of the largest players in the industry would argue is 
difficult, provide essential consumer protections to the people 
who actually live in the districts and in the States 
themselves.
    Ms. Bean. All right, thank you. My question for Mr. Skinner 
is, from the European perspective, how successful is the NAIC 
in implementing agreements reached with European counterparts?
    Mr. Skinner. To be honest, on reinsurance in particular, 
where we have had some perennial problems on collateral 
charges, not very successful at all.
    The European Commission holds out that this is entirely 
discriminatory against European companies operating inside the 
United States, where there is as much as $40 billion worth of 
collateral held in States across the United States. There has 
been a move to move towards a rating process.
    That rating process, in itself, seems quite discriminatory, 
with the higher ratings being required--very high ratings 
required for foreign companies--and very much less, or so it 
seems, for domestic companies, which we--if you're operating in 
a global reinsurance market, business-to-business, it doesn't 
make much sense.
    Obviously, I understand the necessity of covering risk, but 
we have just done away with collateral inside the EU. We think 
it's a blunt instrument. We wonder why, you know, that it is 
still a cause celebre here. Whenever the NAIC comes to the 
European Union and says, ``This is what we're going to do,'' 
we're still shocked by it, we still think it's not a very 
modern approach, or a very modern technique, and we prefer to 
look at risk management which, after all, at the end of the 
day, tells you just what those companies are doing, how they're 
behaving, and how they're predicting their risks, which is far 
more essential than how much money they have in the bank.
    Ms. Bean. Thank you. One last question for Mr. McRaith. In 
1999, the NAIC chose to become a Delaware corporation. And, at 
the time, the executive vice president of the NAIC, Kathy 
Weatherford, explained that Delaware laws were conducive to 
corporations.
    Why does the NAIC believe they should be able to choose 
where to incorporate, based on what was in the best interest of 
the NAIC, but insurance companies with nationwide offerings 
shouldn't have the option of a Federal charter to streamline 
their operations and better serve their customers?
    Mr. McRaith. Well, excellent question, Congresswoman. Let 
me first comment on the reinsurance collateral issue with this 
very brief anecdote, which is that my colleagues on the panel 
to my left almost uniformly would oppose the release of 
collateral on reinsurance transactions, so it's interesting to 
have this diversity of opinion on this one panel, although I 
appreciate the EU's perspective.
    In terms of the Delaware incorporation by the NAIC, I don't 
think it's a mystery to anyone in the country that Delaware is 
a home place for corporations to incorporate.
    The NAIC, as you alluded to earlier, is not, in and of 
itself, a regulator. And, in that sense, it is not delivering 
directly to consumers the products--it's also not a company, so 
it is not delivering products. It doesn't have solvency 
requirements. It's not selling complicated insurance policies 
to people in every State around the country. And, for that 
reason, companies should be domiciled within States and subject 
to the regulation of those States in which they sell products.
    Ms. Bean. I appreciate your response, and I yield back. 
Thank you.
    Chairman Kanjorski. Thank you very much, Ms. Bean. Do you 
have any further questions, Mr. Posey?
    Mr. Posey. Thank you, Mr. Chairman. I want to thank each 
and every one of you for your time and your testimony. And your 
forthrightness, especially, is appreciated.
    Mr. Skinner, you are right. There has been a big disparity 
between the requirements for domestic and non-domestic 
reinsurers. And I think just in the last couple of years, 
though, we have been so plundered and abused by the reinsurers 
that have done business in some of our States--all of whom 
happen to have the exact same rates--that you will see some of 
those States are dropping those requirements.
    More than protectionism, the purpose of that was so that if 
we caught them misbehaving, theoretically we could put them in 
jail and hold them accountable if they were domiciled in this 
country. If they were domiciled some other place in the world, 
that becomes a little bit more problematic. So that was done 
more as a matter of accountability than it was protectionism, 
hopefully.
    When we talk about a systemic regulator, I wonder--and you 
have come the farthest, Mr. Skinner, and might have the best 
ideas on this--how in the world could we expect a systemic 
regulator to regulate derivatives, complex derivatives? I mean, 
from a practical application, I have not heard anyone yet 
explain how somebody could evaluate them and then regulate 
them.
    I mean, in theory, we say, ``Yes, we need somebody to 
regulate this stuff and make it right,'' but I haven't heard a 
practical example given yet of how they would regulate complex 
derivatives, for example.
    Mr. Skinner. I think that's a good question. I mean, one of 
the things, obviously, these products went ahead of some of the 
regulators who were meant to be regulating them. And some of 
even the boards of the companies who were actually in charge of 
these particular products--you also had the combination of 
Chinese walls between agencies who were meant to rate them, and 
then were also designing products, and banks doing the same. 
Everybody made money in this. It was the wrong incentive for 
any of these things.
    So, in terms of having oversight, well, clearly, one of the 
things we have done at the European level, certainly amongst 
banks, is we have said, ``If you start off with a derivative, 
we think that you should retain some of that derivative, so 
that we can spot if there is any problems, down the line, where 
it came from.'' And one of the things was that there was no 
originator principle in derivatives.
    So, we have just introduced a law, the capital requirements 
directives in banks, to ensure that up to 5 percent of all such 
derivatives that are started have to be maintained with--inside 
those banks. That is something I know that is being discussed 
elsewhere, and you probably have heard about it already. But 
clearly, from our perspective, it is only with that particular 
type of start that we can hope to look at this market.
    But one thing is for sure. We quite clearly need a 
securitization industry if we are to build capacity. And 
insurance depends upon that, just as much as banking. But we 
just have to stop the unethical behavior that was clearly 
behind a lot of this, and certainly some of the greed which led 
to the most uncertain derivatives being unleashed on the 
markets.
    Mr. McRaith. Congressman--
    Mr. Posey. Mr. McRaith?
    Mr. McRaith. Yes. I think you are asking the multi-billion-
dollar question. But I think the Chicago Mercantile Exchange--
if I can be a little bit parochial--had an excellent proposal, 
and that is to have an electronic trading platform and a 
clearing function, so that there is pricing transparency and 
counterparty certainty. And those two things, in conjunction, 
would have prohibited or limited the impact of the crisis we 
have seen and are suffering through now.
    Mr. Nutter. Mr. Posey?
    Mr. Posey. Yes, please.
    Mr. Nutter. I actually wanted to come back to your 
reinsurance comment, but I will be glad to defer to someone, if 
they are responding to your comment about credit default swaps 
first.
    Mr. McCarthy. I would just like to make one point. Credit--
the critical part of a regulator--and, again, we think perhaps 
the Fed--is to analyze the instruments themselves. The 
difficulty with credit default swaps with AIG was leverage and 
the huge number of transactions that they did, and the leverage 
that was embedded in each one.
    It is critical, and it would be interesting to see what 
the--Mr. McRaith would say about this. But the amount of staff 
that it takes to analyze these financial instruments, to 
regulate them and to try to make sure which things are 
permissible or not, we think is more akin to what the Fed does 
than what Eric Dinallo or one of the State regulators would be 
able to do with staff analysis, and be able to stay on top of 
that particular kind of financial instrument.
    Mr. Posey. So does anyone think that--the people who are 
putting these together are highly valued, making tremendous 
sums of money--does anyone have the slightest notion that we 
would be able to afford to hire those people, and that they 
would want to work for the government at evaluating the 
profitability of these derivatives throughout the world?
    I don't believe in the Tooth Fairy or the Easter Bunny, and 
I don't believe we're going to create somebody like that, 
either. I mean, if I'm wrong, somebody tell me why you think 
that's really a practical idea, that we're going to get 
somebody who is going to be able to evaluate the derivatives, 
the complex derivatives that are throughout the financial 
markets, and they're going to work for the government, and 
they're going to be able to tell us which are smart and which 
are dumb and which are going to make money and which aren't, 
and which are risky and which aren't risky. I mean, I just 
think that's an absolute absurdity, just to think that could 
happen.
    Mr. McRaith. Congressman, as the one public sector employee 
on this panel, I would like to offer this perspective, that 
there are many very smart, bright, committed regulators who 
sacrifice short-term compensation so that they can provide a 
contribution to the greater society.
    Mr. Posey. Well, we are going into new water here now. And 
I think with what we have already discussed, what we saw with 
the SEC, what we saw with all the agencies that failed to 
investigate, failed to prosecute--Enron is probably one of the 
only ones that we can see, and for every Enron, I can show you 
a State regulator that put somebody in jail, TRG for example, 
the best example I can think of--but to start from scratch this 
new bureaucracy that is going to solve all these problems, I 
think, is just an unrealistic expectation.
    I am not saying that there are not good people who work for 
government. I am saying that the level of expertise that is 
required here--that the person could have his own independent 
evaluation for the rest of the world and maybe serve a greater 
good than trying to have the government do it.
    And there is nothing wrong, certainly nothing wrong, with 
having a database. We have talked about that before. We have 
thought about that before, that, you know, if you have a 
derivative, you file a derivative, you list every component of 
the derivative, and you put that on an index that you can get 
online, that anybody can go see online, just for a 
transparency.
    But then, of course, the word is, ``Well, we are registered 
with this,'' and there is an implied value to that, that an 
unwary consumer who we're trying to look out for might not 
understand.
    And thank you. I think you gave me some extra time, Mr. 
Chairman. I appreciate it.
    Mr. Nutter. Mr. Chairman, if I might comment on Mr. Posey's 
comment about reinsurance. One of the reasons that we support a 
prudential regulator at the Federal level is, in fact, that 
much of the reinsurance market is a non-U.S.-based market. And 
the lack of expertise and capability, as well as the lack of a 
legal framework between countries that are major trading 
partners with the United States, is the reason that we think 
it's appropriate to have a Federal regulator. Mr. McRaith 
commented earlier that the lack of Constitutional authority for 
States to enter into trade agreements with other countries is 
an impediment to dealing with that.
    I would also disagree with your characterization of the 
reinsurance market. In fact, it has contributed an enormous 
amount of money to refinancing after 9/11, after Hurricanes 
Katrina and Wilma, after the hurricanes last year. It really 
has been a very responsible market in paying its claims.
    Mr. Posey. Mr. Chairman, just--I didn't say they weren't 
responsible, and I didn't say they didn't pay claims. I said 
they all had the same rate, in my State, which seems a little 
coincidental.
    Chairman Kanjorski. Thank you very much. The Chair notes 
that some members may have additional questions for this panel, 
which they may wish to submit in writing. Without objection, 
the hearing record will remain open for 30 days for members to 
submit written questions to these witnesses, and to place their 
responses in the record.
    Before we adjourn, the following written statements will be 
made a part of the record of this hearing: The Center for 
Insurance Research; The Proper Casualty Insurance Association 
of America; and the CEA, a trade association of European 
insurers. Without objection, it is so ordered.
    I want to thank this panel for their contribution today. We 
did it in 3 hours, which is pretty good. And maybe next time, 
we can keep you for 5 hours.
    It would be another opportunity to visit with Mr. Skinner, 
if we call him over here. We would enjoy that. I think that we 
gained a lot from the international exposure of having Mr. 
Skinner as part of the panel, but all of the participants on 
the panel were extraordinarily contributive today.
    And I think even the greatest doubters on the committee may 
tend to say that we moved the ball down the field a little 
further, with the result of this hearing.
    I want to thank you again for being part of it. I look 
forward to some future hearings on this very subject. And now 
the panel is dismissed, and this hearing is--
    Mr. Garrett. Just to enter something into the record, from 
the AIA, a letter of June 5th.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Garrett. I didn't mean to hold you up an extra 30 
seconds, but I did want to make sure that gets into the 
official record as well. Thank you.
    Chairman Kanjorski. Thank you.
    [Whereupon, at 1:07 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             June 16, 2009

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