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




                 INSURANCE HOLDING COMPANY SUPERVISION

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

                                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

                             SECOND SESSION

                               __________

                             MARCH 18, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-114






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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:
    March 18, 2010...............................................     1
Appendix:
    March 18, 2010...............................................    35

                               WITNESSES
                        Thursday, March 18, 2009

Dilweg, Sean, Commissioner, State of Wisconsin, Office of the 
  Commissioner of Insurance......................................    10
Frohman, Ann M., Director, Nebraska Department of Insurance......    11
Gardineer, Grovetta N., Managing Director for Corporate and 
  International Activities, Office of Thrift Supervision.........     8
Greenlee, Jon D., Associate Director, Division of Banking 
  Supervision and Regulation, Board of Governors of the Federal 
  Reserve System.................................................     6

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    36
    Dilweg, Sean.................................................    38
    Frohman, Ann M...............................................    47
    Gardineer, Grovetta N........................................    61
    Greenlee, Jon D..............................................    71

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................    83
Frohman, Ann M.:
    Written responses to questions submitted by Chairman 
      Kanjorski..................................................    89

 
                           INSURANCE HOLDING
                          COMPANY SUPERVISION

                              ----------                              


                        Thursday, March 18, 2010

             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 10:07 a.m. in 
room 2128 Rayburn House Office Building, Hon. Paul E. Kanjorski 
[chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Baca, Scott, 
Maloney, Moore of Wisconsin, Perlmutter, Donnelly, Foster, 
Adler, Kosmas, Peters; Garrett, Royce, Biggert, Posey, and 
Jenkins.
    Chairman Kanjorski. Good morning. The subcommittee will 
come to order. Without objection, all members' opening 
statements will be made a part of the record. First, we will 
have our opening statements, beginning with mine, and then we 
will hear from our distinguished panel.
    We meet today to further examine the issue of insurance 
supervision, especially as it relates to holding companies. The 
time is right for us to delve into this complicated and 
important subject.
    The Federal Government's intervention in American 
International Group has raised many questions about the 
existing oversight of holding companies with insurance 
operations. While AIG's insurance companies may not have 
directly caused the conglomerate's downfall, the actions of the 
holding company and other subsidiaries within AIG certainly 
could have led to serious consequences for insurance 
policyholders if the government had not stepped in.
    During our recent debates in the House on the Wall Street 
Reform bill, we also tackled many questions about holding 
company oversight. While we already know much about the 
supervision of financial, bank and thrift holding companies, we 
now need to take the time to learn more about the regulation of 
insurance holding companies. I believe that today's hearing 
will help us to identify ways that we can further improve the 
financial services regulatory reform bill before it becomes 
law.
    The vast majority of holding companies--some of which are 
shells and some of which are complex--are currently regulated 
at the State level. Additionally, the Federal Reserve System 
and the Office of Thrift Supervision together oversee no less 
than 100 entities with insurance operations. Our witnesses will 
help us to better understand the current lay of the land when 
it comes to consolidated supervision of insurance holding 
companies and bank or thrift holding companies with insurance 
operations.
    The two State commissioners with us today will specifically 
explain their dual roles as insurance regulators and insurance 
holding company supervisors. Because the failure of an insurer 
could affect the health of the insurance holding company, and 
because problems within the holding company or its subsidiaries 
could affect the insurers within a firm's tangled network, we 
need to ensure that State supervisors have strong powers to 
protect policyholders and ensure the solvency of any of the 
entities that they regulate.
    In those instances where a State regulator must oversee an 
insurer or insurance holding company with operations outside of 
the State, we must also ensure that we have meaningful 
cooperation and communication between State regulators. 
Moreover, to protect our economy from systemic risk, we must 
ensure that there is appropriate consolidated supervision of 
complex insurance firms.
    When depository institutions and insurers operate under the 
umbrella of the same holding company, both State and Federal 
regulators have important supervisory roles. In such instances, 
State commissioners maintain their role as functional 
regulators of any insurers within these complex entities. 
Federal regulators have the responsibility for oversight of any 
depository institutions and the holding company.
    The Federal regulatory representatives with us today will 
help us to better appreciate the formal rules of the road as 
laid out in statute and regulations about where a Federal 
regulator's authority begins and a State regulator's power ends 
in these corporate amalgamations. Their testimony may also help 
us to discern whether or not we have regulatory overlaps or 
gaps, and what steps regulators have taken to address such 
situations.
    Each of our witnesses will undoubtedly emphasize the 
differences between insurers and depository institutions. These 
distinctions are important, but they fail to address the 
purpose of today's hearing. The recent financial crisis has 
taught us that any complex financial company must have an 
effective umbrella supervisor who looks comprehensively at the 
activities and health of the whole enterprise. This includes 
any holding company with insurance activities.
    We must further explore whether the Federal banking 
regulators are overseeing too few or too many holding companies 
with insurance operations, and whether they are appropriately 
focused on consolidated oversight issues. We should also ask 
whether consolidated supervision is diversified among too many 
regulators, such that it has become ineffective or an 
afterthought.
    In sum, these are difficult policy issues, and the answers 
we receive will undoubtedly lead to new questions.
    Fortunately, we have already identified a way to examine 
these matters after we finish this hearing. One important 
provision of the House-passed Wall Street Reform bill, the 
Administration's plan, and Senator Dodd's proposals is the 
creation of a Federal office to review insurance matters on a 
national scope. The Federal Insurance Office, for which I have 
advocated for a number of years, should look at these very 
questions to advise Congress on these important policy matters 
in the future.
    Now, the gentleman from New Jersey is recognized for 5 
minutes.
    Mr. Garrett. I thank the gentleman, and I thank the members 
of the panel who are here today.
    Insurance holding company supervision obviously is a very 
complex topic and I think the hearing today will help members 
be able to delve into it and get a better understanding of how 
insurance companies are structured, how they're operated, and 
how they're regulated. And as I have delved deeper into this 
issue and the way that insurers are regulated within holding 
companies, either through insurance holding companies, 
financial holding companies or thrift holding companies, my 
belief that the problems are really more attributed to failures 
by regulators as opposed to gaps in regulatory structures 
continues to be reinforced.
    So while I do agree that there are a number of areas out 
there within our insurance regulatory system that do need to be 
updated and modernized, I believe we must be really careful and 
deliver it in our approach. The insurance industry as a whole, 
I think, has performed better than most other parts of the 
financial sector during this crisis. And so we must ensure that 
we first do no harm in whatever we do.
    I know my friend and colleague, who is not here right now, 
Mr. Royce, has continually pointed out that the securities 
lending problems with the AIG situation highlight the problems 
with State-based regulation, and he says it shows the need to 
have a larger Federal role in the regulating of the insurance 
companies. And I would remind him, while the losses attributed 
to securities lending were significant, had it not been for the 
cascade of problems with AIG's Financial Products Unit, the FP, 
that company would have been able to handle those losses 
without the need of taxpayer support.
    Now, once the Office the Thrift Supervision had the Federal 
regulatory authority over AIG, and they had the power to 
oversee AIG's FP leverage, they unfortunately failed to 
identify and correct that problem. And this is really a prime 
example of the regulator not doing their job; and, it's not 
really a problem of a gap in regulation. I would even argue 
that if the securities lending operations of the insurers had 
been handled by the Federal regulators in this case, things 
might actually have been much worse than they were.
    I agree that the securities lending by insurance companies, 
as I said at the outset, needs additional reforms, and I do 
look forward to hearing from the Commissioner and Director 
Frohman, as well, Mr. Dilweg and Ms. Frohman on what reforms 
have already been made in these areas and other solutions as 
well. Now, on another topic, though, I would like to briefly 
discuss a major concern I had with Chairman Dodd's recent 
release of a financial regulatory reform draft.
    The Dodd package has a provision that would require an up-
front tax on any bank holding company with assets greater than 
$50 billion. Also, Dodd's plan would tax any financial company, 
including insurers, who present an extremely low risk with 
greater than $50 billion in assets after any systemic event 
occurred. I believe that this tax would simply lead to higher 
costs for consumers and additional job losses in the private 
sector as well.
    I also believe that we greatly increase the moral hazard 
within the financial sector. I would like to read a quote from 
the recently released White Paper from the Property Casualty 
and Insurers Association of America regarding the topic of 
using the absolute size of a financial company as the basis for 
determining a systemic risk. The paper states, ``Such a 
process, if enacted, would create a cross subsidy of 
significant magnitude from firms that do not pose a systemic 
risk to those firms whose activities are systemically risky. So 
the resulting moral hazard would encourage increased risk-
taking, and as such could ultimately defeat the legislation's 
intent of reducing the economy's exposure to systemic risk.''
    So ultimately, we need a system here in place that can 
allow big companies to fail without being bailed out either by 
the taxpayer or by the consumer as his proposal would allow. So 
while I agree that there are numerous areas of insurance 
regulation that need to be addressed and updated and 
modernized, I believe that the main problems here really were 
with regulators and not the structure of the regulation.
    So, once again, I thank my good friend from Pennsylvania 
for holding this important hearing, and also for the education 
that we're going to get today. And I look forward to hearing 
from all the witnesses.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. Now 
we will hear from Mr. Posey.
    Mr. Posey. Thank you very much, Mr. Chairman. To help 
protect our citizens in the future, I think we probably need to 
glance at least a little bit on some of our previous failures. 
And I understand the Office of Thrift Supervision is 
responsible for supervising 35 holding companies that include 
both thrifts and insurance operating entities. And it has come 
to my attention through a news clip actually, just this 
morning, some revelations I had not previously been aware of 
and we might possibly clarify in some of our testimony this 
morning. This was ``Dateline Washington.''
    It says, ``Banks weren't the only ones giving big bonuses 
in the boom years before the worst financial crisis in 
generations. The government was also handing out millions of 
dollars to bank regulators rewarding `superior' work, even as 
an avalanche of risky mortgages helped create the meltdown. The 
payments detailed in the payroll data released to the 
Associated Press under the Freedom of Information Act are the 
latest evidence of the government's false sense of security 
during the go-go days of the financial boom. Just as the bank 
executives got bonuses, despite taking on dangerous amounts of 
risk, regulators got taxpayer funded bonuses despite missing or 
ignoring signs that the system was on the verge of a meltdown.
    ``The bonuses were part of a program, little known outside 
the government. Some government regulators got tens of 
thousands of dollars in perks, boosting their salaries by 
almost 25 percent. Often, though, rewards amounted to just a 
few hundred dollars for employees who came up with good ideas. 
During the 2000 306 boom, the three agencies that supervised 
most U.S. banks, the Federal Deposit Insurance Corporation, the 
Office of Thrift Supervision, and the Office of the Comptroller 
of the Currency, gave out at least $19 million in bonuses, 
records show.
    ``Nearly all that money was spent recognizing superior 
performance. The largest share, more than $8.4 million, went to 
financial examiners, those examiners and managers who 
scrutinize internal bank documents and sound first alarms. 
Analysts, auditors, economists, and criminal investigators also 
got rewards. After the meltdown, the government's internal 
investigators surveyed the wreckage of nearly 200 failed banks 
and repeatedly found that those regulators had not done enough.
    ```OTS did not react in a timely or forceful manner to 
certain repeated indications of problems,' the Treasury 
Department's Inspector General said of the Thrift Supervision 
Office following the $2.5 billion collapse of Net Bank, the 
first major bank failure of the economic crisis. `OCC did not 
issue a formal enforcement action in a timely manner and was 
not aggressive enough in the supervision of A&B in light of the 
bank's rapid growth,' the Inspector General said of the 
currency comptroller after the $2.1 billion failure of A&B 
Financial National Association.
    ```In retrospect, a stronger supervisory response at 
earlier examinations may have been prudent,' FDIC's inspector 
general concluded following the $1.8 billion collapse of the 
New Frontier Bank. `OTS examiners did not identify or 
sufficiently address the core weaknesses that ultimately caused 
a thrift to fail until it was too late,' Treasury's Inspector 
General said regarding IndyMac, which in 2008 became one of the 
largest bank failures in history. And they believed their 
supervision was adequate. We disagree.
    ```OCC's supervision of Omni National Bank was inadequate,' 
Treasury investigators concluded following Omni's $956 million 
failure. Most of the bank inspection records are not public and 
the government blacked-out many of the employee names before 
releasing the bonus data. It is impossible to determine how 
many auditors got bonuses, despite working on major banks that 
failed. Regulators say it's unfair to use those missteps seeing 
it's a benefit of hindsight to suggest any bonus isn't 
proper.''
    Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Posey. And 
now, for the roadrunner from--I mean Mr. Royce--from 
California.
    Mr. Royce. Thank you, Mr. Chairman. And I thank you for 
your continued leadership on this issue as well.
    Looking at the regulatory reform package that passed out of 
the House last year, and at the Dodd bill that was recently 
introduced in the Senate, I think a fundamental question should 
have been asked much more often; and, I think that question has 
not been asked at all really, or dealt with. The question is, 
what is the most efficient and effective form of regulation? I 
think if we applied that question to the insurance market, I 
would be hard-pressed to find someone who thought the status 
quo was the most effective and efficient regulatory model.
    We have 51 different regulators, and 51 different sets of 
rules. Frankly, in a vulcanized way, we have 51 separate 
markets, many of which are stymied by bureaucratic red tape, by 
price controls. Europe has developed a very different model to 
deal with this, which is one market for all of Europe, and here 
we are vulcanized. Certainly, the framers of the Constitution 
did not envision this when they threw out the Articles of 
Confederation and included the Commerce Clause. Even the 
framers of the NAIC had a different version and a different 
vision for our insurance market. George Miller, the founder, 
said back in 1871, ``The Commissioners are now fully prepared 
to go before their various legislative committees with 
recommendations for a system of insurance law which shall be 
the same in all States, not reciprocal, but identical; not 
retaliatory, but instead a uniform, one system.''
    Unfortunately, Mr. Miller's words were unheeded, and today 
we are left with an 18th Century regulatory model attempting to 
oversee this vast and complicated marketplace. And that is why 
I have joined Melissa Bean in introducing legislation to create 
a national insurance charter. This approach puts us closer to 
what the founding fathers had envisioned by creating one 
national market.
    Our legislation is no panacea. No form of regulation ever 
is. But it is a drastic improvement over the status quo, which 
is little more than an antiquated beast, frankly. It is 
something that the framers gave up on long ago, and I look 
forward to continuing the discussion on the need to establish a 
competent Federal insurance regulator and bringing our 
regulatory model into the 21st Century.
    Again, I would like to thank the chairman for his continued 
work on this issue, and let's learn from what's happening in 
the rest of the world with liberalized markets and a regulatory 
scheme for one market for all of Europe. We have to compete 
with this, and we are not going to be able to. And, frankly, 
our current system does not work.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Royce. Now, I 
will get to the panel.
    First of all, thank you very much for appearing today, and 
without objection, your written statements will be made a part 
of the record. You will each be recognized for a 5-minute 
summary of your testimony.
    First, we have Mr. Jon Greenlee, Associate Director, 
Division of Banking Supervision and Regulation, Federal Reserve 
Board of Governors. Mr. Greenlee?

 STATEMENT OF JON D. GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF 
 BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Mr. Greenlee. Thank you. Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee, thank you for the 
opportunity to discuss the supervision and oversight of 
insurance companies.
    As you are aware, in this country the primary supervision 
and regulation of insurance companies is vested with the 
States. The Federal Reserve does serve as the consolidated 
supervisor of bank holding companies and financial holding 
companies established under the Gramm-Leach-Bliley Act, some of 
which are affiliated with insurance companies.
    The Federal Reserve is also the primary Federal regulator 
of State member banks, many of which are engaged in the sale of 
insurance products. Of the approximately 550 foreign and 
domestic financial holding companies supervised by the Federal 
Reserve, 33 are engaged in insurance underwriting activities. 
As the consolidated supervisor of bank holding companies and 
financial holding companies, the Federal Reserve routinely 
conducts inspections of these organizations to ensure that the 
consolidated organization remains strong and the holding 
company and its non-bank affiliates do not pose a threat to the 
company's insured depository institution subsidiaries.
    To further our supervisory efforts, we issued enhanced 
guidance on consolidated supervisory expectations in 2008 that 
underscored the importance of examiners evaluating firm-wide 
risk exposures. We also reiterated the importance of Federal 
Reserve supervisors working with the primary regulator of a 
bank holding company's insured depository institutions as well 
as State insurance supervisors and other functional regulators.
    Recent experience shows the need for the consolidated 
supervision of bank holding companies in addition to and 
distinct from the supervision of the organization's bank or 
functionally regulated subsidiaries. Large organizations 
increasingly operate and manage their businesses on an 
integrated basis with little regard for the corporate 
boundaries that typically define the jurisdictions of 
individual, functional supervisors.
    Indeed, the crisis has highlighted the financial, 
managerial, operational, and reputational linkages among the 
bank, securities, commodity, insurance, and other units of 
financial firms. With respect to financial holding companies 
engaged in insurance activities, our consolidated supervisory 
framework involves the same principles used for bank holding 
companies more broadly. This begins with an assessment of the 
potential risk insurance activities pose to the consolidated 
organization and its depository affiliates.
    We make appropriate adjustments to our assessment of the 
firm's risk management practices and overall financial 
condition to account for the unique risks and the nature of 
insurance products on underwriting activities. As part of our 
process, we routinely communicate with the appropriate 
insurance regulatory authorities about the nature of and risk 
posed by a firm's insurance activities. To facilitate this 
information sharing, we established memoranda of understanding 
with the insurance regulators in all 50 States, the District of 
Columbia, and Puerto Rico.
    We also communicate with international insurance 
supervisors as appropriate. The Federal Reserve also has taken 
several steps to support our supervisory staff and 
understanding the risk arising from insurance activities. We 
have designed and implemented training programs, and have 
developed a variety of insurance-related examiner tools. We 
also collaborated with the NAIC on three published reports to 
facilitate better communication and understanding of banking 
and insurance regulatory framework risks and capital 
requirements.
    In closing, the current financial crisis has clearly 
demonstrated that risk to the financial system can arise not 
only in the banking sector, but also from the activities of 
other financial firms, such as investment banks or insurance 
companies that traditionally have not been subject to the type 
of regulation and consolidated supervision applicable to bank 
holding companies. As Chairman Bernanke stated yesterday, it is 
important to close this gap in our regulatory structure, and 
legislative action is needed that would subject all 
systemically important financial institutions to the same 
framework for consolidated prudential supervision that 
currently applies to bank holding companies.
    I would like to thank the committee for holding this 
important hearing, and I am happy to answer any questions that 
you may have. Thank you.
    [The prepared statement of Mr. Greenlee can be found on 
page 71 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Greenlee.
    Next, we will hear from Ms. Grovetta Gardineer, Managing 
Director of Corporate and International Activities, Office of 
Thrift Supervision.
    Ms. Gardineer?

   STATEMENT OF GROVETTA N. GARDINEER, MANAGING DIRECTOR FOR 
   CORPORATE AND INTERNATIONAL ACTIVITIES, OFFICE OF THRIFT 
                          SUPERVISION

    Ms. Gardineer. Good morning, Chairman Kanjorski, Ranking 
Member Garrett, and distinguished members of the subcommittee. 
Thank you for the opportunity to testify on behalf of the 
Office of Thrift Supervision.
    We understand that the subcommittee is interested in 
hearing about the scope of OTS's authority to supervise 
insurance savings and loan holding companies. In the few 
moments I have now, I would like to summarize our written 
testimony about OTS's approach to the supervision of savings 
and loan holding companies that are predominantly insurers, 
which I will refer to today as insurance holding companies.
    I would also like to present the OTS view of how to enhance 
the supervision of these holding companies. OTS's role as a 
consolidated supervisor of an insurance holding company exists 
because the enterprise owns a savings association. The OTS has 
broad authority to supervise an insurance holding company 
enterprise, including its affiliates and subsidiaries.
    OTS as a primary Federal regulator of savings and loan 
insurance holding companies has the authority to examine each 
insurance holding company including its subsidiaries, subject 
only to certain statutory obligations to coordinate with 
functional regulators. That said, the statutory regime 
governing savings and loan holding companies is premised 
primarily on preserving the safety and soundness of the 
subsidiary thrift. OTS supervises 35 insurance holding 
companies, the majority of which are nationwide in scope.
    In addition, OTS regulates holding companies with 
significant insurance activities that combine securities 
activities as well. OTS also regulates another 39 holding 
companies that engage in insurance activities to a lesser 
degree, but are not considered predominantly insurance 
companies. Once a company acquires or charters a thrift 
institution, it becomes a savings and loan holding company, and 
is subject to regulatory examination and analysis by OTS.
    OTS uses a risk-focused approach that considers the 
combined risk profile of the holding company, its financial 
health and stability, and the interdependence of entities 
within the structure. This approach incorporates the 
coordination and consultation with State insurance regulators 
in order to gain information about the functionally regulated 
insurance activities.
    The information gathered through our examination and 
analysis serves as a basis for our findings regarding the 
insurance holding company. The primary objective of a risk-
focused examination of an insurance holding company is to 
identify and examine the areas of the business that pose the 
greatest degree of risk to the condition of the overall 
enterprise and to the thrift, with regard to how Congress can 
enhance the consolidated supervision of insurance holding 
companies.
    OTS believes that there should be a Federal oversight role 
for all insurance companies, not just those that own a bank or 
a thrift. A holding company that engages predominantly in 
insurance activities should be supervised by a Federal 
regulator that concentrates on the core business activity of 
the enterprise. We think it is prudent to align the regulatory 
authority with the holding company enterprise's primary 
activities.
    A fundamental requirement for prudent risk management of a 
holding company is effective oversight and enforcement 
authority over the entire organization. A holding company 
regulator should have authority to monitor and exercise full 
enforcement authority over non-functionally regulated 
affiliates and to implement information sharing arrangements 
between entities in the holding company and the functional 
regulators.
    The regulator should have the authority to impose capital 
requirements, restrict activities, and otherwise regulate the 
operations of the holding company and the non-functionally 
regulated affiliates. The authority to supervise the 
consolidated insurance holding company could be housed within a 
Federal insurance regulator, if Congress chose to create one. 
We believe that at a minimum, a Federal consolidated insurance 
holding company regulator should be established.
    We appreciate the opportunity to share OTS's 
recommendations for a stronger framework that would accomplish 
this for insurance holding companies. We look forward to 
working with you on these important issues in the future, and I 
am very happy to respond to your questions.
    Thank you.
    [The prepared statement of Ms. Gardineer can be found on 
page 61 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Gardineer.
    Now, I turn to my colleague from Wisconsin, Ms. Moore, for 
the next introduction.
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman, and thank 
you for this indulgence to allow me to introduce our next 
panelist, the distinguished Commissioner of Insurance for the 
State of Wisconsin who was appointed by his excellency, 
Governor Jim Doyle, on January 1, 2007.
    The Office of the Commissioner of Insurance is responsible 
for examining industry financial practices and market conduct, 
licensing our agents, reviewing policy forms for compliance 
with State legislation, and investigating consumer complaints. 
His agency is also responsible for administering the State life 
insurance fund, the local government property insurance fund, 
and the injured patients and families compensation fund.
    Mr. Chairman, Mr. Sean Dilweg has had a distinguished 
career in public service and I knew him when I was a member of 
the State senate. I also want to point out that he has 
tremendous skills as a basketball player. That matters here in 
the Beltway and it matters a lot to be a baller, so with much 
further ado, I would like to introduce Commissioner Sean 
Dilweg. Commissioner?

  STATEMENT OF SEAN DILWEG, COMMISSIONER, STATE OF WISCONSIN, 
            OFFICE OF THE COMMISSIONER OF INSURANCE

    Mr. Dilweg. Thank you, Congresswoman Moore, and Chairman 
Kanjorski. I have had the privilege of working with 
Congresswoman Moore, I have decided, for the last 17 years in 
and around State and Federal Government, so I appreciate those 
kind words.
    I am here on behalf of the NAIC, and my purpose today is 
really to give some insight into how State regulators assess 
the financial strength of an insurer and describe our unique 
regulatory working groups that assist and improve us in this 
assessment. Financial regulation is the critical component that 
insures our most important consumer protection, which is 
solvency. That basic concept guarantees that damaged 
automobiles are repaired and that annuity payments arrive in 
the mail on time, and that families hit by natural disasters 
can rebuild and recover.
    Through the NAIC, regulators have created three core 
solvency surveillance mechanisms: reporting; analysis; and 
examination, to ensure that these obligations to policyholders, 
claimants, contract holders, and other parties are met both 
today and in the future. In our unique system of State 
regulation, it is imperative that the regulators around the 
country have access to these tools, particularly when assessing 
large multi-State insurers. An insurer's domestic State is 
relied on as the primary solvency regulator; however, any State 
in which a company is licensed to conduct insurance business 
may perform its own monitoring financial examinations and take 
regulatory action as appropriate. There are three NAIC working 
groups that deal with reporting analysis and examination. These 
provide the tools for us as individual State regulators to 
handle these complicated groups of insurance companies and 
individual insurance companies.
    Today, in my verbal testimony, I will spend time on the 
financial analysis working group better known as FAWG. For over 
a decade, State insurance financial regulators have shared 
information and ideas through the NAIC's financial analysis 
working group, or FAWG, which exists to identify, discuss, 
research, and monitor potentially troubled insurers and 
insurance groups that are of national significance. FAWG 
leverages the expertise of select chief financial regulators 
from around the country to provide an additional layer of 
solvency assessment.
    FAWG also helps identify market trends and emerging 
financial issues in the insurance sector. This council is truly 
a council of co-equal regulators that assesses nationally 
significant insurers or groups. We identify these insurers or 
groups that exhibit characteristics of trending towards 
financial trouble. We interact with the domestic regulators in 
lead States in order to assist and advise the appropriate 
regulatory strategies and methods and actions. We encourage, 
promote, and support coordinated multi-State efforts in 
addressing solvency issues.
    FAWG's review of companies can be described generally as 
identifying the companies that are outliers when compared with 
benchmarks of the industry market segment, develop 
communications for financial staff and the Commissioner of the 
State, review regulator responses on identified issues, follow-
up with the domestic regulator, including a presentation by the 
domestic regulator at many of our FAWG meetings, and, also, 
forming subgroups for some of our large, nationally significant 
insurers.
    Through the FAWG forum, individual States work together to 
support and guide fellow regulators for the benefit of the 
whole in an entirely confidential process. The working group 
reviews and considers trends occurring within the industry. 
Most recently, we have looked at the residential, mortgage-
backed security issue and taken steps to address that.
    Finally, I wanted to touch briefly upon State insurance 
interaction with the Federal Government. As alluded to by 
earlier panelists, many individual State insurance departments 
in the NAIC do interact with our Federal counterparts. This 
occurs when there are solvency issues that affect regulatory 
interest beyond a particular financial services industry. Many 
of the same States that are FAWG members also interact with 
Federal agencies because of the nature of their domestic 
insurance market.
    For example, I am the primary regulatory for two large 
insurers that insure municipal bonds and mortgages, 
respectively. I have interacted with the Federal Reserve, the 
U.S. Treasury, and the FHFA in order to share information of 
common interest on these significant companies. In conclusion, 
as a State-based system of regulation, we are keenly aware of 
our unique structure and have developed tools such as 
accreditation and FAWG to ensure that we are effectively and 
officially maximizing our resources to protect consumers and to 
address the solvency issues of our regulated entities.
    Thank you for the opportunity to testify and I look forward 
to answering your questions.
    [The prepared statement of Mr. Dilweg can be found on page 
38 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Dilweg.
    Finally, we will hear from Ms. Ann Frohman, director for 
the Nebraska Department of Insurance.
    Director Frohman?

 STATEMENT OF ANN M. FROHMAN, DIRECTOR, NEBRASKA DEPARTMENT OF 
                           INSURANCE

    Ms. Frohman. Thank you, Chairman Kanjorski, and members of 
the subcommittee. Thank you for inviting me to testify today.
    My name is Ann Frohman and I am the director of insurance 
for the State of Nebraska. I am here today to testify on behalf 
of the National Association of Insurance Commissioners. I am in 
the areas of group supervision of insurance companies. Before 
delving into group supervision, I should note that a 
cornerstone of our system, which is critical to the supervising 
insurance groups, is our financial standards and accreditation 
program.
    The accreditation program is a set of strong baseline 
standards, practices, and required skill sets for effective 
solvency supervision. All 50 States are currently accredited, 
and to stay accredited, States must adopt any changes made to 
the program by insurance regulators. State insurance 
departments are periodically reviewed by a team of their peers 
to ensure compliance with the 40 specific standards and 226 
specific elements necessary for accreditation.
    Out of necessity and for the sake of efficiency, the States 
have developed a strong system of cross-border supervision and 
coordination. Multiple jurisdictions provide peer review for 
insurance groups that contribute to a race-to-the-top approach. 
There is also routine coordination with lead State regulators 
of insurer groups as well as free coordination with other 
functional regulators when insurers are affiliated with other 
financial sectors.
    All States and the District of Columbia have adopted the 
NAIC's Insurance Holding Company System Regulatory Act, 
designed to regulate transactions among insurers and other 
affiliated entities. This Act also regulates mergers and 
acquisitions, standards for transactions, and holding company 
information. This Holding Company Act requires annual filings 
regarding the holding company systems major transactions. These 
include such items as material changes to reinsurance 
contracts, major investments, management agreements, cost-
sharing, and requests for extraordinary dividends.
    The Holding Company Act outlines specific filing 
requirements for persons wishing to acquire control of or merge 
with a domestic insurer. It further requires each insured to 
give notice of certain material affiliated transactions so we 
may determine if they are fair and reasonable to the interest 
of the insurer.
    Another important feature of the Act is that it also 
requires insurers to obtain prior regulatory approval for 
dividend transactions meeting certain thresholds in order to 
monitor the capital flows within a holding company system. 
Recent experience has shown that the activities of entities 
within a broader group with no connection to the insurers can 
still impact those insurers through contagion and reputation 
risk. Our system is ensuring the solvency of each individual 
insurance entity within an insurance group to minimize the risk 
to policyholders posed by these other entities within the 
group.
    State regulators have the ability to wall-off insurers to 
essentially block the interconnectedness that otherwise allows 
risk to spread unchecked throughout a broader group. In 
response to the recent global financial crisis, however, U.S. 
regulators and international standard-setting organizations 
have all taken steps to improve the financial services 
regulatory system and encourage more frequent communications 
and coordination among supervisors, including State regulators.
    States coordinate frequently and with other functional 
regulators, our Federal counterparts. We meet periodically with 
the Fed and the OTS prior to our NAIC meetings, as well as 
engage in discussions of particular companies, which is 
required as part of our financial analysis handbook directives. 
Fed and OTS representatives often attend NAIC working sessions. 
Additionally, the States have memorandums of understanding 
agreements with these agencies to share information; however, 
more can be done to ensure a two-way flow of information.
    State insurance regulators participate regularly in 
supervisory colleges for insurance-related entities around the 
world. This is a fairly recent phenomenon for us. For instance, 
my State of Nebraska, along with Delaware and Maryland, 
convened a supervisory college of Berkshire Hathaway a year 
ago. We'll have an in-person meeting in April here in 
Washington to gain a common understanding of the risk profile 
of the group and thereby strengthen our solo supervision 
efforts.
    Additionally, we have recently enacted special legislation 
in Nebraska to further enhance group supervision of a major, 
internationally active insurer operating in the State. Group 
supervision of complex entities is important, but our system 
also demands robust supervision of individual entities, whether 
the parent is an insurer or not. Information sharing and 
supervisory collaboration are improving and the NAIC is taking 
further steps to strengthening its Holding Company Act. Taken 
together, these steps will help ensure the continued stability 
of the insurance sector.
    Thank you for the opportunity to testify, and I would be 
happy to answer any questions.
    [The prepared statement of Ms. Frohman can be found on page 
47 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Frohman.
    We have heard great testimony, and now it is time for our 
questioning. I am going to take my few moments, first. The 
testimony was very good, and it did not sound as contentious as 
it is. But if one sits here and listens, I do not think we have 
agreement at that table as to what is being done and what 
should be done in the future.
    I guess my first question would go to Ms. Gardineer, in 
that I am interested to know whether or not you have instituted 
any different regulatory reforms of organizations that are 
associated with holding companies and insurance companies, such 
as AIG. As I understand it, the only regulatory authority 
exercised over financial products of AIG in London was your 
supervision of the thrift. Is that correct?
    Ms. Gardineer. Congressman, yes, our supervision of the AIG 
Holding Company was geared towards looking at and protecting 
the safety and soundness of the thrift institution. In doing 
so, we did coordinate with our functional regulators to 
understand what was going on in the insurance activities, but 
we also looked at other areas that were not under the purview 
of the functional regulators.
    Chairman Kanjorski. Who is the functional regulator?
    Ms. Gardineer. The State over the insurance activities, the 
insurance subsidiaries.
    Chairman Kanjorski. What State handled the insurance 
subsidiary for financial products in London particularly?
    Ms. Gardineer. There was no State regulator for the 
financial products.
    Chairman Kanjorski. Okay. So AIG, by cleverly setting up 
the operation in London, was successful in avoiding any 
regulatory authority whatsoever on the insurance aspect of its 
business over there. Is that correct?
    Ms. Gardineer. I think that's correct, Congressman.
    Chairman Kanjorski. Now, as the regulator of the thrift, 
did you also go in and exercise regulatory authority over the 
other functions, other than the thrift, on Financial Products 
in London?
    Ms. Gardineer. We conducted targeted reviews of the 
financial products operation in the AIG holding company. Our 
efforts were focused domestically, but we did coordinate and 
have discussions with the operations.
    Chairman Kanjorski. And you found that they were in fact 
without collateral to support their counterparty positions of 
$2.8 trillion; and, you were aware of that at the time?
    Ms. Gardineer. As we went through the targeted reviews, our 
examiners were able to find discrepancies in the corporate 
governance with regard to how information was flowing back and 
forth from the Financial Products silo up to the senior 
managers, and we made them aware of those weaknesses based on 
what we found in the Financial Products silo.
    Chairman Kanjorski. When was this that you made somebody 
aware of that?
    Ms. Gardineer. I'm sorry?
    Chairman Kanjorski. When did you make somebody aware of 
weaknesses there?
    Ms. Gardineer. We communicated to them through our 
examination process.
    Chairman Kanjorski. When, though, precisely in time?
    Ms. Gardineer. I think that was in March of 2008.
    Chairman Kanjorski. Oh, that was after the beginning of the 
crash.
    Ms. Gardineer. Prior to that, as part of the regulatory 
process and through the examination process, we did communicate 
continually with senior management and met with the board of 
directors.
    Chairman Kanjorski. Well, was that back in 2007? 2006? When 
did you communicate with--
    Ms. Gardineer. We began those communications in 2007. They 
culminated in a downgrading of their holding company rating in 
2008.
    Chairman Kanjorski. And, obviously, no action was taken by 
the supervisor regulator because there was not one. They were 
beyond regulation on the insurance side. So did you take any 
action to cause them to cease and desist what they were doing?
    Ms. Gardineer. I think it's important to remember, 
Congressman, that in the Financial Products activities sector, 
these were unregulated products by anybody in the United 
States.
    Chairman Kanjorski. So if they were awarding assassination 
contracts there, and you ran across that, since it was outside 
your realm of activity, they would have been allowed to go on 
to continue awarding those assassination contracts?
    Ms. Gardineer. I also think it's important to recognize, 
Congressman, that the activity of creating these credit default 
swaps that were in the financial products, they had stopped the 
origination prior to our becoming their holding company 
supervisor. Our examiners went in to look at the pipeline of 
what was left in financial products and then made the senior 
managers of the company aware of the weaknesses that we found.
    Chairman Kanjorski. But did you follow-through? Did anybody 
stop or take actions as a result of the exercise of your 
regulatory authority? I am not picking on you, Ms. Gardineer, 
but it just seems to me--the facts I know about that case--that 
an entity established with 400 employees in London without any 
assets, hard assets, only a great name, has been a subsidiary 
of one of the largest or the largest insurance company in the 
world. We are out there practicing to the tune of placing bets 
as high as $2.8 trillion, and that did not ring anybody's bell?
    Ms. Gardineer. We saw the concerns, Congressman, and we 
made our concerns. We were aware of the problems. We made the 
company aware of our concerns with regard to the activities. 
However, I think one of the things that we recognize is the 
holding company structure and the statutes that we operate 
under are designed to primarily protect the safety and 
soundness of the thrift institution. In the situation of AIG--
    Chairman Kanjorski. I realize that you can make the 
technical argument that we did not have jurisdiction, but 
obviously you did not assume jurisdiction of the larger problem 
when you saw it. As a result, somebody, particularly the 
American taxpayers, have suffered a $200 billion loss and are 
on the line for a great deal more in losses if there is further 
failure in that operation. Is that not correct? I am going to 
add: Have you changed your processes since you handled the AIG 
situation?
    Ms. Gardineer. One of the things that we have done is we 
have reviewed the processes and what we were doing at AIG. We 
have provided enhanced examiner guidance based on the lessons 
learned through our experience with the consolidated 
supervision of that company. By doing that, we focused on the 
risk management associations, sharing of information between 
the non-functionally regulated and functionally regulated 
areas. So we have taken steps to increase our supervision and 
enhance that supervision through examiner education.
    Chairman Kanjorski. Okay. I am running over my time, but I 
do want to ask you one more question. Have you sat down, or can 
you sit down, and recommend to this committee or to the 
Congress what has to be done in order to guarantee that the 
loophole that we have just discussed about who has regulatory 
authority, who has supervisory authority, where these lapses 
are, is vitiated in the new statute? We need certainty that one 
of the regulatory authorities of the United States has the 
responsibility and the duty to regulate these entities.
    Ms. Gardineer. Congressman Kanjorski, the Office of Thrift 
Supervision would be happy to sit down with Members of Congress 
and with you and your committee to share our experiences and 
try to help enhance the supervision of these types of 
companies.
    Chairman Kanjorski. I would appreciate it if you do that. I 
hope, though, when we pass regulatory reform, never again do I 
have to sit at a committee hearing and hear regulators saying, 
``Well, we do not cover that, or we do not know about that, or 
that is not our responsibility.'' We really want to close those 
loopholes, and it seems to me you are the experts. You can tell 
us where the holes are, where the problems are.
    Now, I am not going to excuse my colleagues or myself from 
not necessarily creating those holes in the past, and we may 
share the responsibility. But clearly, now, we know there was a 
problem. We know why that problem existed because of loopholes 
and gaps. Now, we need your help in covering that so that we 
have passed a law that there is absolutely some regulatory 
authority that is responsible for that entity and those gaps.
    Ms. Gardineer. And we're happy to be a part of that 
discussion, Congressman.
    Chairman Kanjorski. Thank you very much. I wish I could 
take another 5 minutes, but I cannot. Mr. Posey is anxious 
there, and he is going to come at you with his questions.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Chairman, I don't think any member would mind if you 
take another 5 minutes. This is a good line of questioning, and 
I think everybody here appreciates it.
    Chairman Kanjorski. Yes. I will pick it up the second 
round, Mr. Posey.
    Mr. Posey. Thank you, Mr. Chairman. You know, I understood 
that we were here to kind of review how insurance company 
holding regulation differs from banker thrift-holding 
regulation, and after listening to the testimony, it's still 
not really clear to me. There are a lot of gaps. It's kind of 
like oil and water--it just doesn't look like it's mixing very 
well, so I am trying to look at this stuff in as small as 
possible denominators.
    And I think I would like to know, for example, who would 
regulate an insurance company, whether or not it was part of a 
holding company that would operate under ERISA laws, that is, 
under the Employee Retirement Income Security Act which would 
be exempt for regulation by our State insurance commissioners, 
what Federal agency would oversee that?
    Mr. Dilweg. I guess, Congressman, I can try and comment. 
Let me just use an example, not that it's a troubled company at 
all, but when I sat down and looked at United's org chart, 
United Healthcare, it runs about like this. And my concern, you 
know, the nexus for the State regulator is the policyholder, 
what claims are there to be paid in the future.
    My concern when I look at United is, what are the 
administrative charges flowing between all the different 
companies, and how are they affecting my company in Wisconsin? 
If we were to see their ERISA plan company or see one of their 
companies go down in California, how would that affect what's 
happening in Wisconsin?
    We would then interact with all of our fellow State 
regulators and discuss a number of those issues. And just as 
OTS referenced, we have changed a lot of our examination 
processes to try and capture these potential.
    Mr. Posey. Well, I think you guys do a pretty good job. My 
question is, what Federal agency would oversee the people that 
you're not allowed to regulate?
    Mr. Dilweg. That's the Department of Labor.
    Mr. Posey. The Department of Labor? Okay. We had a case in 
Florida where an insurance company in Indiana wrote policies in 
49 States and didn't pay claims. We had somebody I knew die 
because they denied their claim, and now the State insurance 
commissioner said, well, we can't regulate them. They come 
under ERISA. And I said, well, this is racketeering. I mean, 
forget the insurance company. It is racketeering.
    And it wasn't until I threatened to delete 72 of their jobs 
and give it to another department that would go to work, that 
they followed through gun indictments; and, when they made the 
bust, which involved 13 different State agencies between 
Florida and Indiana, the guy's wife was screaming. He said they 
would never come across State lines to get you for this. This 
was the first case in history I understand where State lines 
were crossed to prosecute healthcare fraud; and that's out and 
out fraud. We haven't proven fraud in a lot of these other 
cases yet--some bad intentions--but not necessarily out and out 
fraud. And so I guess we need to focus on yet another 
department entering the arena here that may or may not be doing 
a job that they're supposed to.
    Back to my opening statement about some of the bonuses that 
were paid, in your department, Ms. Gardineer, or your agency, 
has anyone been terminated because of their failure to perform 
their job properly?
    Ms. Gardineer. Congressman, I don't have any information on 
the human resources information at the agency, but I would be 
happy to look into that and get back to you. But I don't have 
that information with me today.
    Mr. Posey. Okay. If possible, I would appreciate it if you 
would respond in writing, if it's acceptable to the Chair and 
to members of this committee, about my opening comments about 
the bonuses that were paid out, many to people who obviously 
weren't doing their jobs correctly. I would be interested in 
knowing how many people had been terminated, furloughed, 
demoted, or reprimanded in the department for allowing that 
meltdown to occur.
    Ms. Gardineer. I will look into that and gather the 
information. And we will respond to you in writing.
    Mr. Posey. Thank you. Thank you, Mr. Chairman.
    Mr. Perlmutter. [presiding] The Chair now recognizes Mr. 
Foster from Illinois for 5 minutes.
    Mr. Foster. Thank you, and thank you all for appearing 
today.
    First, I was wondering if anyone is aware of any documented 
benefits of diversification, that is, studies where people have 
looked to see if the customer actually gets a better price from 
horizontally or vertically diversified corporations in terms of 
just getting a better price for insurance. And if you're aware 
of this, it's one of the things we're struggling with as to 
what are the benefits for AIG-like structures compared to self-
contained smaller units. And if you're aware of any of this or 
could respond afterwards, if you become aware of it, I would 
appreciate it.
    Ms. Frohman. I am aware of situations where in the 
homeowners market, in the auto market, that by pursuing 
coverages under one umbrella of a group, there are discounts 
that are available to two individuals, and so they can price 
competitively and take advantage of that.
    Mr. Foster. Okay. Let's see. Another question I had, I 
guess, to Commissioner Dilweg and Director Frohman, does that 
standardization of State legislation lead to standardization of 
software systems to report and analyze the financial status? Is 
there a lot of collaboration among the States?
    Mr. Dilweg. I'll start, Congressman. I think it is 
important to note that as we compare the data that we have 
compared to our European and even Federal regulators, we are 
very data rich. Our NAIC really houses a lot of our data that 
then allows me as an individual regulator not to have to 
duplicate on the financial solvency side the work that my 
counterpart in Nebraska would have done on her companies.
    And so we just have thousands upon thousands of datapoints 
that we pull in and then utilize various tools to stress test 
the companies and look at, for instance, recently looking at 
the residential mortgage-backed securities and how those are 
stressed and how those are affecting the bottom line issues, 
the assets of the companies and their risk-based capital 
charges, things like that.
    Mr. Foster. I was getting at whether there was sufficient 
sharing between the different States.
    Mr. Dilweg. Oh. Yes, I would say it's very vibrant. I mean 
we could put it in much more detail for you if you would like.
    Mr. Foster. One of the concepts in a lot of the regulatory 
reform is the idea of a living will, that if a holding company 
gets in trouble, we chop it up into little pieces. That seems 
like it in principle fits pretty well with the idea of State-
based operating units, and I was wondering if that's a correct 
impression of mine that it would actually be better to have 
independent business units in each State when it comes time to 
chop the companies up into little pieces and sell them off. Or 
the counter argument against that is that actually operations 
like AIG share IT infrastructure and all this sort of stuff in 
ways that make it really very difficult to chop up their 
business units. I was wondering which one is closest to 
reality.
    Ms. Frohman. We found in our experience in receiverships 
where we have a holding company sitting at the top of an 
insurance group that we work very well, even in the event that 
the holding company may be in bankruptcy to work out sharing 
payment systems and master coordination. So it does create an 
issue, but it hasn't been a problem in the resolution of the 
insurance enterprises. We jump on that right away.
    Mr. Foster. Okay. Another one of the concepts that we are 
looking at is that of contingent capital in the capital 
structure of giant firms; and, I guess this is for Mr. 
Greenlee, perhaps. Whether you see that as a valid concept to 
apply to insurance holding companies, to basically give a 
market-based signal for the holding companies that the market 
views as running shaky operations and provide a first line of 
defense against the too-big-to-fail and keep the taxpayer off-
the-hook when one of these gets in trouble.
    Mr. Greenlee. Thank you for the question. I think it's 
worth considering; we're doing a lot of work at the Federal 
Reserve and with our international and domestic colleagues to 
look at how that would work. It is my assessment that 
contingent capital would be available when certain triggers 
were hit and it would help improve the capital base and the 
resiliency of these firms.
    Mr. Foster. And so your view would be that one of the jobs 
of the Federal Reserve would be to administer the stress test 
that would trigger the contingent capital conversion, or are 
there other schemes that you're looking at?
    Mr. Greenlee. It could be a stress test. It could be some 
sort of financial performance indicator. There are a lot of 
things that are being looked at right now. My understanding is 
this discussion, looking at financial performance triggers, 
goes on internationally. If you hit a certain capital level, if 
you have a certain type of market indicator, this would prompt 
the conversion of the capital instrument. It would not 
necessarily entail regulators doing a stress test and providing 
the results, although that could be a possibility as well.
    Mr. Foster. Okay. Thank you. I guess I am out of time and I 
yield back.
    Chairman Kanjorski. Thank you very much, Mr. Foster.
    Now, we will hear from Mr. Royce of California.
    Mr. Royce. Thank you, Mr. Chairman. Mr. Chairman, despite 
Mr. Garrett's opening comments, I have never argued that AIG's 
securities lending losses are a reason for Federal regulation. 
What I have said, and what I'll say again, is that the State 
insurance commissioners had the ability to prevent those losses 
and they did not. There is a lot of blame to go around in the 
case of AIG, but to say the various State insurance 
commissioners are not to be included in that group is a failure 
to look at the facts.
    AIG's Securities Lending Division used capital directly 
from the insurance subsidiaries. To date, the losses derived 
from the Securities Lending Division amount to over $40 
billion. Mr. Garrett mentioned that AIG would have been okay, 
despite these losses. I think $40 billion would cripple any 
institution. Further, there are at least seven State-regulated 
insurance subsidiaries that were participating in AIG's 
Securities Lending Division that would have been insolvent but 
for the American taxpayers.
    I would like to ask the insurance commissioners, I 
understand that every State has an insurance company, holding 
company law, and that those laws give the insurance regulator 
the authority to examine the activities of the holding company 
or other affiliates to ensure the ongoing health of the insurer 
itself. With regard to AIG, how were those holding company laws 
and the authority they granted to insurance commissioners used 
prior to the time the AIG crisis came t a head?
    Ms. Frohman. Although I did not have an AIG company 
domesticated in my State, I can speak to the terms of what the 
holding company framework requires; and in terms of agreements 
involving U.S.-based AIG companies that are insurance operating 
entities, we have a number of requirements we're dealing with 
affiliated agreements and material transactions that would have 
touched the insurance company or involved the insurance 
company's operations. We would have required prior review of 
those agreements to the extent that they had a material 
threshold.
    Mr. Royce. Any other commentary there?
    Ms. Frohman. I guess in terms of where we have been with 
securities lending, we have in the lessons learned imposed a 
risk capital charge. We have also enhanced our disclosures, and 
prior to the credit crisis, we were well aware of the issue and 
the insurance regulators had required a reduction I think by 50 
percent in the securities lending activity.
    Mr. Royce. What transpired at the time, though, in this 
case, is that we did not have commissioners who took a look at 
the health of this holding company, and, given its very varied 
non-insurance holdings and the fact that its financial position 
could harm the insurance company in the system, this turned out 
to be problematic, especially, when you consider that the 
Securities Lending Division, which has taken up roughly half of 
the tax dollars that have been pumped into AIG was using money 
directly from the AIG insurance subsidiaries, and all of those 
were State-regulated.
    So I would ask Ms. Gardineer. Would you care to comment? 
Certainly, OTS had some authority over AIG. Do you agree that 
the various State insurance commissioners could have taken 
steps early on to prevent some of the damage caused by AIG?
    Ms. Gardineer. Congressman, I do recognize that with the 
speed that AIG Financial Products collapsed, and then 
ultimately the problem surfaced with regard to the securities 
lending subsidiaries, there were problems, as you indicated 
earlier, across all parts of the organization of those that are 
functionally regulated by the State commissioners as well as 
the parts that were not functionally regulated and fell to OTS 
for examination. It imposes a very interesting dynamic as far 
as all of the complexities of a company of that size when you 
have so many regulators who are looking into trying to figure 
out very complex structures of unregulated products.
    Mr. Royce. That is my concern.
    Ms. Gardineer. I think that all of us worked as we 
cooperated. We talked with each other, but the events overtook 
us quite quickly, and there are a lot of lessons to be learned 
from both the Federal as well as the State side.
    Mr. Royce. Thank you very much, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Royce.
    Mr. Perlmutter?
    Mr. Perlmutter. Thank you, Mr. Chairman, and I appreciate 
the panel being here today. Let me see if I, let's say, we have 
AIG. AIG is selling off big chunks of its portfolio even as we 
speak. So it's sold to some other insurance company or some 
other organization. Who watches that? Who is now in charge if 
AIG sells off its ``something'' division for $15 billion, and 
helps pay some of the tax dollars back? Does Nebraska take any 
interest in that?
    Mr. Dilweg. I will give you a different example. We had QBE 
out of Australia buy a large company that affected 25 States, 
and General Casualty, Wisconsin, took the lead on that 
acquisition, coordinated with all the other States to get all 
the other State regulators involved and look at the questions 
that they may have surrounding such an acquisition. It would be 
very similar.
    Neither of us have AIG subsidiaries, but it would be very 
similar in the scenario that you're laying out. So in reality, 
there becomes a lead State that will coordinate the acquisition 
and feed questions and detailed financial questions through to 
the company, so you're not getting hit by seven or eight 
different regulators.
    Mr. Perlmutter. So then the acquisition occurs. Everybody 
said, ``Okay. This is okay.'' Does your State remain the lead 
State to kind of watch this thing?
    Mr. Dilweg. Where it is domiciled, we would remain the lead 
State, so in my example, we remain the lead State on that 
issue.
    Mr. Perlmutter. All right. If there was a thrift in this 
deal, would you be talking to the OTS at the same time?
    Mr. Dilweg. Through a process like this, we would be 
coordinating with our Federal regulators. We have coordinated 
with FSA in London on issues. We coordinate with our Australian 
regulators.
    Mr. Perlmutter. Do you, in this process, ever come up with 
a situation similar to the AIG situation Mr. Royce was just 
asking about, where they got some part of a business? Let's 
say, they own hotels or they own casinos, or they do credit 
default swaps. Do you, in that process, as the lead State say, 
whoa, there's some stuff here that we don't understand or we 
can't reach those products.
    Mr. Dilweg. I think one important point going back to 
Congressman Royce's question is, should we have seen it coming 
sooner? Should we have done something on securities lending? 
You are stuck looking at securities that are rated triple A. 
Now, once they all collapsed, all the various regulators were 
coordinating basically through New York, Pennsylvania, and 
Texas on the AIG side from the insurance side.
    Mr. Perlmutter. And I'm not looking for blame on that one.
    Mr. Dilweg. Right.
    Mr. Perlmutter. My question is more if the insurance 
company is also involved in other areas of commerce that aren't 
really insurance types. One of the things we're dealing with in 
this big regulatory bill is do we go back to a Glass-Steagall 
kind of an approach where we separate insurance companies from 
the stockbrokers, from the commercial banks, from whatever. 
Financial companies stay financial and we don't try to bring 
them all together. Do you worry in this process when you see 
insurance companies delving into other parts of commerce?
    Mr. Dilweg. We reach out directly through confidentiality 
agreements with the OTS, with the Federal Reserve, with 
Treasury, for FHFA, with all of our Federal counterparts if 
something like this were occurring to walk through all the 
issues we see.
    Mr. Perlmutter. Do you flag it for your partners or your 
other States, or for any of the Fed or the OTS if it's 
unregulated? Let's say it's a hotel. They own a hotel. It has 
nothing to do with financial services or insurance. What do you 
do?
    Ms. Frohman. Let me try to answer that. What we do in terms 
of insurance regulation that I think works fairly well, and we 
saw that in this instance, is that while off the insurance 
enterprise, such that there are capital needs for the hotel on 
the other side of the balance sheet, we are not interested in 
hotels going down, or whatever. We are not interested in 
throwing good capital after bad, per se. But we analyze to make 
sure that the capital within the insurance company is 
sufficient to pay policyholder claims and remain solvent.
    So from that perspective, we don't necessarily look at the 
enterprises that are not regulated, but in the lessons learned 
what we hope to accomplish is a more optical approach where we 
can have in addition to what we are already doing that we think 
works really well on the insurance side is to have a better 
view, more optics upstream so that we can maybe look for trends 
in contagion and that sort of thing. And those are activities 
that are going on right now at the NAIC.
    Mr. Perlmutter. Okay. Thank you. Thank you, Mr. Chairman.
    Chairman Kanjorski. I will now recognize Mr. Garrett from 
New Jersey.
    Mr. Garrett. Again, I thank the panel for your testimony, 
so up-to-date.
    Mr. Greenlee, in your testimony you mentioned that the Fed 
must rely on the examination reports of the State insurance 
authorities to the fullest extent possible. Can you describe 
any situations in which the Fed was concerned about the 
information reviewed in any of the examinations? And are you 
aware of any cases in which the Fed determined that the 
information was perhaps not sufficient or inadequate for the 
purposes of carrying out its financial holding company 
supervisory responsibilities?
    Mr. Greenlee. Thank you for your question.
    Mr. Garrett. Sure.
    Mr. Greenlee. What we follow is what is outlined in the 
Gramm-Leach-Bliley Act.
    Mr. Garrett. I'm sorry?
    Mr. Greenlee. We follow what's outlined in the Gramm-Leach-
Bliley Act, which compels us to rely to the fullest extent 
possible on primary bank regulators or functional regulators. 
We will get information at times that will cause us to go back 
and ask more questions. If there are concerns, we can always go 
to the audit function of the bank and find out what they think.
    We always have the right to go ahead and do our own review 
and look into it under the law. The burden is on us to say why 
we think this is a threat to the depository; and, at times we 
will do that if we are sufficiently concerned.
    Mr. Garrett. Okay. You get the information, you review it, 
if it's adequate, fine. If it's not adequate, you proceed to go 
back and seek all the information that you need. So you have 
not experienced a situation where there's just a dearth or a 
lack of information that you can't get at the end of the day, 
because you have that ability to go back.
    Mr. Greenlee. That's correct. And we don't just rely on 
what we get from the functional regulators. As the consolidated 
supervisor, we would have a view of all the company's major 
lines of businesses and its risk management practices. We are 
aware of broader things going on in the marketplace. We pull 
all that together to make the assessments of the risk in the 
organization.
    Mr. Garrett. Okay. You also mentioned in your testimony 
that the Federal Reserve supervisory approach also recognizes 
the additional risk arising from the underwriting of life 
insurance policies and property and casualty insurance 
policies. I guess, in a nutshell, since time is limited here, 
can you explain for us some of what you mean by that?
    Mr. Greenlee. Our traditional approach and our capital 
rules are really aimed at asset quality, credit quality, 
liquidity risk, market risk, those operational risks.
    Mr. Garrett. Right.
    Mr. Greenlee. When companies affiliate themselves with an 
insurance underwriter, there are different kinds of risks that 
aren't captured under those definitions, such as actuarial 
risks or risks from property and casualty businesses. And what 
we do with that is we work with the NAIC on producing a paper 
that explored those differences so that our supervisors can 
understand that and factor that into our overall assessment of 
capital adequacy at a holding company.
    Mr. Garrett. Okay. That's on the supervisory side. I think 
my last question as far as time goes, you make the assertion 
with the issue that's always dear to me in dealing with the 
systemic risk issues, and you assert that the risk of the 
financial system is not just from the banking sector. It's from 
the insurance sector as well.
    We are all familiar with the AIG situation and how that 
plays out. Can you explain, though, specifically within the 
insurance sector, where the systemic risk problems are that 
you're specifically concerned about?
    Mr. Greenlee. Well, I think it's--
    Mr. Garrett. Outside of the AIG type of--
    Mr. Greenlee. Sure.
    Mr. Garrett. Yes.
    Mr. Greenlee. It is a concern more broadly about any firm 
that is large, complex, and has a lot of interconnections with 
other players in the financial system and in the marketplace. 
So an insurance company may have securities activities or 
engage in--not like AIG--derivative activity that would have 
some connections with other financial firms and could be a 
source of contagion to the rest of the finance system if there 
was a problem there.
    Mr. Garrett. So it's interconnected to this issue that we 
heard about a year ago, that is the underlying problem as 
opposed to their own?
    Mr. Greenlee. I would say it's both. The one thing that 
makes people systemically important, like AIG, is you have a 
lot of connections to other financial firms so that if that 
firm goes bankrupt or can't meet its obligations, it has a 
cascading effect across other financial organizations. So we 
would worry about the individual firm.
    Of course that's how we traditionally supervise. But we are 
also trying to focus a lot more on these interconnections.
    Mr. Garrett. Okay. And I guess he's not watching. But that 
aspect is as far as the carrier themselves, the insurance 
company themselves, are what the folks to my right, your left--
well, the two folks on the end--is where your responsibilities 
lie. And some would argue have been doing an adequate job in 
those areas. Correct?
    Mr. Dilweg. I would agree with that statement, Congressman.
    Mr. Garrett. Okay. Do you have anything to add, Mr. Dilweg?
    Mr. Dilweg. I think it is important we do correspond 
typically with the New York Fed on some of the issues you're 
describing. We have a good back-and-forth on any issues 
surrounding various insurance companies, so they get informed 
on what they need to know.
    Mr. Garrett. And so what I take from this, and I heard some 
of the testimony from the rest of you earlier on, is this all 
sort of supports my opening statement, which is good at the end 
of the day, right, is that it's not a gap situation here and I 
appreciate your testimony on this. There's not a gap in the 
structure of what we have here. It sounds like you all are 
talking to each other doing the oversight in that 
responsibility; obviously, we have some concerns.
    I don't know where you were specifically at the time, but 
folks who had the responsibility at that time at OTS in this 
areas, so it sounds like the overall structure is there. So 
it's not a gap issue. And it sounds as though that since the 
problems weren't on the insurance side, per se, it's really 
something that we need to come back with and we need to do this 
in a whole bunch of other areas. We haven't had any hearings on 
the SEC, and I know that's not your bailiwick. But we have to 
go back on a whole bunch of these other areas just to make sure 
that the actual execution or implementation of what's already 
out there, whether it's the SEC or whether it's you folks at 
the Fed. Or whether it's you folks on the State level, or, just 
actually implementing it in each case to the highest degree 
possible to try to avoid what we have in this past situation. 
Does that sound right?
    Mr. Greenlee. I would just add one other comment from the 
Federal Reserve's perspective where we do consolidated 
supervision. We have a couple of things that are very important 
to us as the consolidated supervisor, and one of them is 
setting and establishing consolidated capital requirements for 
the firm as a whole. We think that's an important thing to make 
sure that the consolidated organization and all its 
subsidiaries are adequately capitalized and have a sound 
financial footing.
    Mr. Garrett. My last question--thank you for your 
forbearance--do you folks have a question or comment on that?
    Mr. Dilweg. I guess my only concern on that approach is I 
would hate to see the policyholder dollars in one of the 
companies under the umbrella being used to bail out a financial 
services piece of that.
    Mr. Garrett. That's a good point. How do you avoid that?
    Mr. Greenlee. Well, from our perspective, we have a couple 
of ways we do that and one is we have laws that restrict 
intercompany transactions with depository affiliates.
    Mr. Garrett. Okay.
    Mr. Greenlee. The second thing is under our supervision of 
the holding company, which is the parent organization, we do 
expect them to maintain adequate capital and we also expect all 
their subsidiaries in the State, Federal, whomever their 
regulator may be, will meet their capital requirements and 
satisfy their regulator's needs in terms of capital adequacy. 
And then we also look at it through how it builds up and the 
consolidated capital needed for the risk that may not be 
captured by all those regimes or capital you may need to hold 
for intercompany exposure or exposures that cut across an 
organization that may get different treatment.
    Mr. Garrett. Okay. I thank the Chair. Thanks to the 
witnesses.
    Chairman Kanjorski. Thank you very much, Mr. Garrett.
    If it is all right with everybody here, there are only 
three of us left here, but I would like to ask some additional 
questions.
    Mr. Garrett. I'm going to object.
    Chairman Kanjorski. You are going to object?
    Mr. Garrett. Well, no. Okay.
    Chairman Kanjorski. Does anybody know how many holding 
companies there are that own insurance subsidiaries in the 
country?
    Ms. Frohman. We don't track the information that way given 
the way we wall-off insurance companies, but in light of all 
the data that we do have, it's something that we could probably 
pull together fairly easily and get you that information.
    Chairman Kanjorski. But we do not know what kind of a 
problem this is, whether it is a minimal problem or whether it 
is really a great problem. Nobody really knows here. Now, if we 
had a Federal regulator, we would know that answer immediately. 
Correct? Every holding company that has anything to do with 
insurance would be identified, and categorized, and readily 
available. Is that correct?
    Mr. Dilweg. Well, what I think is important is we talk 
about holding companies, Congressman. You know, there could be 
an insurance holding company and then above that a more 
umbrella-like holding company.
    Chairman Kanjorski. I understand. I am talking now about a 
holding company on top that is not an insurance company itself.
    Mr. Dilweg. Okay.
    Chairman Kanjorski. Just as a holding company, and they own 
an insurance company, either an overwhelming majority of the 
stock or all of the stock, and then they own some hotels out 
here. The question I have in mind is, what do they pay in 
premiums for their hotels to their insurance company that they 
own, and who checks on that rate, whether it is an acceptable 
rate to cover the estimated risk? Do you all rush in there and 
do that?
    Ms. Frohman. It depends on whether it's a material issue.
    Chairman Kanjorski. But it is not a material issue. It is 
that the insurance executives are over here that are part of 
the holding company. They build a hundred hotels, and they 
insure them with ABC insurance company. Who looks into the 
relationship of what the rate is and whether the rate set by 
the insurance company for the hotels that they own is the same 
that the regular market pays?
    Ms. Frohman. That would be the insurance departments. Yes, 
we would look at regardless of who owns the hotels, the 
marketplace.
    Chairman Kanjorski. So you check out every insurance policy 
to see that it is properly rated and charged, or do you only 
check out insurance companies where you get a complaint that 
there is an overcharge?
    Mr. Dilweg. The rates have to be actuarially sound. They 
have to fit--have the capital there to pay potential claims.
    Chairman Kanjorski. No. No, I understand that. I am talking 
about the premium that is going to have to be paid on the 
hotel. Who is going to decide if they go to their own insurance 
company that is owned by a large holding company which has a 
hundred hotels that are worth a million dollars apiece, and 
they go to their own ABC insurance company, and they say, 
``Well, we would like to insure all our hotels, but we only 
want to pay a rate of half of that on $50 million.'' Who does 
the checking about that?
    Mr. Dilweg. That instance you lay out would probably come 
up more through a complaint process.
    Chairman Kanjorski. So if nobody complained?
    Mr. Dilweg. Well, a competitor would probably complain.
    Chairman Kanjorski. How would a competitor know?
    Ms. Frohman. We also engage in risk focus exams, and so in 
the examination process, we look at affiliate transactions and 
that very sort of thing.
    Chairman Kanjorski. But you do not have any authority to go 
up to that top holding company to find out what those 
transactions are, do you?
    Ms. Frohman. We don't have the authority to go to the 
holding company, but we can do it from the insurance company.
    Mr. Dilweg. So in a different scenario, Congressman, where 
you're simply paying for IT or services, administrative 
services. You can't have the holding company overcharging the 
insurance company just to make money as far as business 
operations, underwriting, things like that.
    Chairman Kanjorski. I am not talking about overcharging. I 
am talking about undercharging. It is certainly advantageous 
for a holding company that owns subsidiaries that are in 
different businesses, one being an insurance company, and 
others being office buildings, hotels, or anything else, to 
make it known that we want to do business within our own 
family, and, two, we want you to get favored rates because we 
make a profit on it.
    Ms. Frohman. We did have that scenario happen in our State 
about 15 years ago with a business that wasn't satisfied with 
the premium and decided it would attempt to acquire the 
insurance company to lower its rate. We issued a cease and 
desist on that, and ultimately through the State court process 
as well as the circuit court, said ``No,'' and they divested 
themselves. So we do stay on top of those and I do think 
through our risk-focused exam and the types of inquiries that 
we make, we reach out and look for those sorts of issues.
    Chairman Kanjorski. How many holding companies are there in 
the State of Nebraska?
    Ms. Frohman. We have about 76 or 77 significant insurance 
companies and those all would have holding companies, I 
believe.
    Chairman Kanjorski. Okay. Those are insurance holding 
companies. How about holding companies that own insurance 
companies as subsidiaries?
    Ms. Frohman. Probably most of them.
    Chairman Kanjorski. They are both holding companies as an 
insurance company and holding companies that own subsidiaries 
that are insurance companies?
    Ms. Frohman. Both.
    Chairman Kanjorski. Both. Do you have an exact number on 
that?
    Ms. Frohman. Again, I don't. The way we regulate doesn't 
make it quite as relevant.
    Chairman Kanjorski. Recognizing you have a lot of work to 
do, even within just the single State of Nebraska to get all 
this done, how can you also police this interrelationship that 
occurs between companies that are familiarly related?
    Ms. Frohman. We have folks on staff, and that is all they 
do. And they require through our Holding Company Act, there's a 
process for filing these agreements, these cost-sharing 
agreements, service agreements. And so any time there's an 
interaffiliate transaction of a material significance, they're 
going to come in. We're going to analyze that to determine 
whether that's fair and reasonable to the insurance company.
    Chairman Kanjorski. How do you, if I am the holding 
company, not an insurance holding company but just a holding 
company incorporated in the State of Delaware, and I have an 
insurance company in Nebraska, how do you come over and 
examine? What authority do you have under the law as it 
presently exists to come over to Delaware to examine my 
corporate records or whatever you want to examine?
    Ms. Frohman. We do have that authority and can exercise 
that authority, in particular as it relates to the insurance 
enterprise.
    Chairman Kanjorski. But the insurance enterprise is in 
Nebraska. You can go to Nebraska and examine the insurance 
company, but how can you come and examine the holding company 
on top that is located in Delaware?
    Ms. Frohman. We don't examine the holding company, per se, 
but we look at the books and records as they relate to the 
insurance company anywhere in the country or outside.
    Chairman Kanjorski. How would you know whether that holding 
company in Delaware owned hotels in Florida?
    Ms. Frohman. We do require as part of our holding company 
system now a registration statement on an annual basis that 
requires disclosure of the holding company structure.
    Chairman Kanjorski. But the holding company is not in 
Nebraska, so the holding company is not subject to Nebraska 
law. It is subject to Delaware law.
    Ms. Frohman. It's through an indirect approach. We require 
that the insurance enterprise file all the information of their 
holding company system with us.
    Chairman Kanjorski. Okay, and if they own 54 percent of the 
stock? And the insurance company owns 54 percent of the stock 
in the insurance company in Nebraska, what happens if they own 
40 percent?
    Ms. Frohman. We have a definition of control that triggers 
the holding company system review.
    Chairman Kanjorski. What is your method?
    Ms. Frohman. And that's at 10 percent at a presumption?
    Chairman Kanjorski. Anything over 10 percent is presumed to 
be controlled by the local corporation?
    Ms. Frohman. Yes, it is.
    Chairman Kanjorski. What did I do? Did I go over my time? 
Do I have to recognize the gentleman from California? He is not 
running yet. Oh, there he is, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman. I have a question for 
Mr. Dilweg. Something you said really got my attention. When 
you said, well, on these triple-A rated securities, the credit 
rating agency has given us this assessment. And I just 
wondered, do you always just outsource to the credit rating 
agencies these questions?
    That clearly was a mistake in my view, and another aspect 
of that, the bond rating agencies or the bond insurance 
industry. Let me ask you this. Would you like to comment on the 
failure of the bond insurance industry, especially given that 
so much of that was in Wisconsin? And what has changed on each 
of these fronts?
    You have State regulation on both fronts, bond insurance as 
well, and we had a failure here to uncover this. Give me your 
observation on what has changed.
    Mr. Dilweg. Let me address both points, Congressman. I 
think, when I came into this position, we had inherited a heavy 
reliance on rating agencies, as I think the Federal Government 
did as well. We have spent the last 3 years trying to look at 
dialing back our reliance on rating agencies.
    Just recently, we did our own due diligence, brought in a 
vendor, PIMCO, to look at how we rate and value residential 
mortgage-backed securities. So this is an ongoing process. But, 
at that snapshot in time, we were built to see that triple A 
was triple A. And so that was the nature of that comment. I 
think on the bond insurance, that's unique to Wisconsin. When I 
look back--and I still have people on staff--where you had a 
piano company, Baldwin United, go bankrupt in the early 1980's, 
what spun-off from Baldwin United was AMBAC, a bond insurer 
that they owned, MGIC, a very large mortgage insurer that they 
owned.
    And that is one reason that Wisconsin is heavily involved 
in these issues, but that was a role of how companies owned 
insurance companies back then that failed. We look very closely 
and have with AMBAC, at the capital that they have, and we are 
working very closely with the company and our independent 
advisors on their position and how they struggle with stresses 
of this economy.
    Mr. Royce. Let me ask you lastly, Mr. Greenlee, a question. 
If price controls were putting the solvency of a given 
insurance subsidiary at risk, would the Fed or the OTS have the 
authority to intervene and remove the price-fixing requirement 
on that subsidiary?
    Mr. Greenlee. I think, under the current statute, we need 
to defer to the primary functional regulator, which would be 
the State insurance regulator. If they were to set that in 
place, we would probably not take action on that.
    Mr. Royce. What about if the holding company was funneling 
money into a subsidiary that was not able to charge actuarially 
sound rates? Could you prevent that transfer if it was 
weakening the broader company?
    Mr. Greenlee. Yes, we could.
    Mr. Royce. I see. Thank you.
    Mr. Chairman, I am going to yield back.
    Chairman Kanjorski. The gentlelady from Illinois, Ms. 
Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. My first question is 
for Mr. Dilweg.
    You mentioned that any State in which a company is licensed 
to conduct an insurance business may conduct its own regulatory 
oversight, and that's not just the company's State of domicile. 
So do the States communicate with each other whenever they're 
engaged in such oversight, and what systems are in place to 
ensure against replication and duplication or inefficiency in 
such cases?
    Mr. Dilweg. The typical thing that I have seen, 
Congresswoman, as it relates to, you know, as you're wrestling 
with asset valuation, what they're filing with each State, a 
different State may view assets differently, we try and 
reconcile that at a national level. You do not typically see. 
We are all accredited, all 51 jurisdictions, so there is a lot 
of communication if something like this were to occur. It would 
be unusual for an individual State to do it without talking to 
the domestic regulator, and, really, try not to duplicate on 
the financial side of the ledger.
    Mrs. Biggert. But it really depends on the communication to 
make sure that they do communicate?
    Mr. Dilweg. Correct. And we feel through the NAIC we have 
really laid the groundwork, especially on the financial side 
for these communications to be facilitated.
    Mrs. Biggert. Okay. Thank you. And then, Ms. Frohman, you 
cite in your testimony that the sharing and collection of 
information between the regulators is important to protect the 
policyholders. What type of time requirements should be put in 
place for this information sharing and who should make that 
determination? And should a Federal entity preempt an State 
insurance regulator when it comes to collecting insurance 
information?
    Ms. Frohman. Thank you. With respect to the first question, 
I don't think it's necessary that we put time requirements on 
it, because the information that we're sharing under the 
authority of our MOUs happens in real time, and it's a very 
fact and circumstances-based for the most part in addition to 
our routine; you know, 50,000 feet communications that we 
engage on a regular basis.
    With respect to your second question, which was?
    Mrs. Biggert. Should a Federal entity preempt an insurance 
regulator when it comes to collecting insurance information?
    Ms. Frohman. I don't think it's necessary, given that we 
have all the information, as Commissioner Dilweg mentioned. We 
are data-intensive, and we can communicate and coordinate and 
provide that information. So I don't see the necessity for 
preemption, because I do think you want to have the expert that 
understands it explaining it.
    Mrs. Biggert. Okay. Thank you. Then does NAIC monoline 
provide authority for State insurance regulators to examine the 
financial information of holding companies affiliates to 
understand if they would have a negative impact on the 
insurance company?
    Ms. Frohman. We do have some authority now to go upstream, 
and as it relates to the insurance company. But an exercise we 
are taking on through the group solvency issues working group 
at the NAIC is to enhance that ability. So it's something 
that's under way we think we can always improve, and we're 
looking to come up with some tools to do that.
    Mrs. Biggert. Okay. And my last question is, are the State 
banking regulators currently represented on that council and 
would that be helpful, if State insurance regulators had an 
explicit role on a Federal body to better coordinate with the 
Federal regulators?
    Mr. Dilweg. I think any body that you bring together to 
coordinate on the Federal side, we would be interested in 
participating in. I think you also have to recognize some of 
our insurance commissioners are also banking regulators. We 
have duplication as it relates to Vermont, the District, here. 
So you're going to have some overlap just by the nature of how 
some of the States structure their banking and insurance 
departments.
    Mrs. Biggert. Good. Thank you very much. I yield back.
    Chairman Kanjorski. If you do not mind, I am going to go 
with another set of questions.
    Mr. Garrett. Well, I just have two quick things.
    Chairman Kanjorski. Two quick things?
    Mr. Garrett. Yes.
    Chairman Kanjorski. I yield to you.
    Mr. Garrett. One, I seek unanimous consent to enter into 
the record the testimony of the Property Casualty Insurance 
Association and their March 18, 2010, comments.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Garrett. And, secondly, Ms. Frohman, you had stated 
something with regard to your participating in a supervisor 
college exercise dealing with domestic and foreign regulators. 
The chairman and I were over in Europe in August or September 
and that was one of the broader issues as far as harmonization 
and what's going on over there and what's going on over here. 
Can you spend just a minute or 30 seconds, whatever, to what 
extent issues you'll be dealing with there and what extent 
you'll be interacting with foreign regulators?
    Ms. Frohman. Yes. Thank you for asking. We convened the 
supervisory college about a year ago in conjunction with our 
counterparts at the FSA in the Balkans and Germany, as well as 
the Australian regulatory authority, began conversations on the 
Berkshire Hathaway Group. And we have had probably four to five 
phone calls, and getting started we kind of started at a high 
level. And as we're forging through, I think what we're finding 
is we're learning about each other's regulatory systems. We're 
learning about the details of that company's operations, as 
well, but, we're finding at the end of the day we do have a lot 
of common focuses that in essence, I guess I didn't know what 
to expect and had not formed an impression in the beginning. 
But our questions on enterprise risk management corporate 
governance are going to be the things that will focus on, and 
looking at, is there financial contagion? Is there reputation 
risk that is something that can be measured and watched with 
respect to this group? So it's a new exercise for us, but we 
are spending time with our regulators and do find now that once 
we forged these relationships that we're benefiting from them 
in other dimensions. So the dialogue has begun and it is 
definitely enhancing our tools.
    Mr. Garrett. Okay. Again, thank you to the panel.
    Chairman Kanjorski. Thank you very much. For the State 
regulators, if I may. Do you feel that all forms of insurance 
should be regulated on a State level or are there exceptional 
insurance products that should be elevated to Federal 
regulatory authority? That is a loaded question, because I want 
you to give me a particular answer, but you all pick your 
answers.
    Mr. Dilweg. I guess I would turn to a middle ground, 
Congressman, being vice chair of our compact that relates to 
life insurance products. I have found that has worked very well 
as it relates with the 36 States that are now a part of that, 
and as you know the compacting process is a State-based 
process. So my concern on raising insurance to a Federal level 
is frankly a lax concern of not having enough strength there, 
enough capital there, enough requirements there to protect the 
policyholder, so.
    Ms. Frohman. I would agree with that and simply add that to 
the extent we are talking about insurance products, where at 
the end of the day your question is geared towards a promise 
today to pay into the future, I think that consistently belongs 
with the States and that we can engage. And it does take a 
dialogue. It does take a global analysis.
    Chairman Kanjorski. Should we repeal Federal depository 
insurance?
    Ms. Frohman. I'm sorry?
    Chairman Kanjorski. Should we repeal Federal depository 
insurance, FDIC? Insurance that Federal banks or the banks of 
the United States are required to have. Ms. Gardineer's thrifts 
are required to take Federal insurance out and it is regulated 
by the regulators, Federal insurance. Do you think we should 
repeal that and open it up to insurance companies that are 
regulated by the States?
    Ms. Frohman. That isn't something I have given any thought 
to; it is an interesting concept.
    Chairman Kanjorski. Give us some real thought, if you can, 
now. Do you know that there are deposits of private individuals 
in the United States in depository entities that are insured by 
private insurance companies and only regulated by State 
insurers, would that surprise you?
    Mr. Dilweg. I think the concern there, Congressman, would 
be the banking regulation sits at the Federal level and it 
would be difficult to move such a policy back down to the State 
level where the States would really--
    Chairman Kanjorski. These are State-chartered institutions, 
and by the existence in the famous loopholes we were talking 
about, they can go out and get private insurance to insure 
their deposits; in fact, they do so. Do you think that State 
insurance commissioners are sufficiently competent to regulate 
that type of insurance product?
    Mr. Dilweg. I guess it's something that I haven't spent 
much time on.
    Chairman Kanjorski. But if I want to go to Wisconsin and 
open up a depository insurance organization, you do not feel 
that there should be any inhibition to my coming to your office 
and submitting the application?
    Mr. Dilweg. We take all applications.
    Chairman Kanjorski. What should we do with something like 
that? Because we are going to have to face it. We have 
depository institutions in this country that are not regulated 
by federally established institutions, and you do not run into 
any problem with them until a recession or a depression occurs 
when they begin to fail. Then, the question is, who backs them 
up? Then, you discover nobody backs them up, particularly 
States that are almost bankrupt themselves will not come in and 
back them up. So the Congress gets faced with the proposition: 
do we just allow all these institutions to fail, and all their 
depositors, who for all their lives have been told if you 
deposit money in a depository institution you have the United 
States Government behind you, and they find out they do not. 
What do we do?
    We have that actual question facing us right now; not that 
they are insolvent. Do you see what the problem is? If somebody 
found out how to make money by offering insurance in good times 
on deposits--the argument has been made now--particularly in 
good times before the recession started, that we should look at 
repealing requirements at the Federal Deposit Insurance.
    If the private sector can do it much cheaper and much 
better, the only problem is they do not have to forfeit credit 
with the United States Government standing by. Do you think we 
should encourage that type of insurance to be regulated at a 
State level? That is my question.
    Ms. Frohman. I simply don't have an answer for you. I'm 
sorry. I wish I could help, but I have not given it enough 
thought.
    Chairman Kanjorski. And you are going to duck out of it 
too, right?
    Mr. Dilweg. It's not something I have thought about, 
Congressman. It's unique because I think that's one issue that 
I found--you're talking about insuring entities where there 
could be a run on the bank--and when we face the AIG issue, you 
had long-term contracts that were in place. And it's a 
different type of nature of insurance, so those entities where 
there's a run on a bank, I think it's a very pertinent question 
and I would be happy to spend more time.
    Chairman Kanjorski. If you do not mind, I would really like 
your thoughts after you have some time to think about it.
    Mr. Dilweg. That would be great.
    Chairman Kanjorski. We ought to be consistent, logically 
consistent on this.
    If the private sector of insurance is so good and 
manageable entirely at the State level, then we should 
reexamine whether we should stay in the Federal Deposit 
Insurance business or create an alternative organization. We 
have the authority to say that no depository institutions 
should be allowed to be in the private sector and be regulated 
only at the State level. I think we should start choosing the 
alternatives because our problem is that, as in the S&L crisis, 
we had to go in and bail out three or four States that allowed 
that to happen and did not have the resources to pay on their 
insurance.
    As a result, we were faced with a terrible situation. There 
could be another situation where depositors would be entirely 
wiped out of their life savings because somebody felt that: 
one, the State had the authority and the expertise to be the 
regulator of that type of insurance company; and two, they 
never thought there would be a recession or a depression, or 
that they would be at risk. But it happened once before.
    My question is, what do we do about it? Nonetheless, thank 
you very much for your testimony today. Ms. Gardineer, you have 
been a good sport. I really jumped on you a little bit there, 
and I purposely did that because those questions are out there, 
and we get asked those questions. I thought you did a 
commendable job in the advocacy for the group, so I am going to 
award you an ``A.''
    The Federal Reserve, they are used to getting jumped on, so 
thank you very much. We have to note that some members may have 
additional questions for this panel which they may wish to 
submit in writing. Without objection, the record will remain 
open for 30 days for members to submit written questions to 
today's participants and to place their responses in the 
record.
    Without objection, it is so ordered. The panel is dismissed 
and this meeting is adjourned. Thank you.
    [Whereupon, at 11:58 a.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 18, 2010

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