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



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

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         INSURANCE, HOUSING AND
                         COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-150



                  U.S. GOVERNMENT PRINTING OFFICE
76-121                    WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

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

           James H. Clinger, Staff Director and Chief Counsel
      Subcommittee on Insurance, Housing and Community Opportunity

                    JUDY BIGGERT, Illinois, Chairman

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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 24, 2012................................................     1
Appendix:
    July 24, 2012................................................    29

                               WITNESSES
                         Tuesday, July 24, 2012

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

                                APPENDIX

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

              Additional Material Submitted for the Record

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


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

                              ----------                              


                         Tuesday, July 24, 2012

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

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

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

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

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

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

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

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

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

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

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


                            A P P E N D I X



                             July 24, 2012


[GRAPHIC] [TIFF OMITTED] T6121.001

[GRAPHIC] [TIFF OMITTED] T6121.002

[GRAPHIC] [TIFF OMITTED] T6121.003

[GRAPHIC] [TIFF OMITTED] T6121.004

[GRAPHIC] [TIFF OMITTED] T6121.005

[GRAPHIC] [TIFF OMITTED] T6121.006

[GRAPHIC] [TIFF OMITTED] T6121.007

[GRAPHIC] [TIFF OMITTED] T6121.008

[GRAPHIC] [TIFF OMITTED] T6121.009

[GRAPHIC] [TIFF OMITTED] T6121.010

[GRAPHIC] [TIFF OMITTED] T6121.011

[GRAPHIC] [TIFF OMITTED] T6121.012

[GRAPHIC] [TIFF OMITTED] T6121.013

[GRAPHIC] [TIFF OMITTED] T6121.014

[GRAPHIC] [TIFF OMITTED] T6121.015

[GRAPHIC] [TIFF OMITTED] T6121.016

[GRAPHIC] [TIFF OMITTED] T6121.017

[GRAPHIC] [TIFF OMITTED] T6121.018

[GRAPHIC] [TIFF OMITTED] T6121.019

[GRAPHIC] [TIFF OMITTED] T6121.020

[GRAPHIC] [TIFF OMITTED] T6121.021

[GRAPHIC] [TIFF OMITTED] T6121.022

[GRAPHIC] [TIFF OMITTED] T6121.023

[GRAPHIC] [TIFF OMITTED] T6121.024

[GRAPHIC] [TIFF OMITTED] T6121.025

[GRAPHIC] [TIFF OMITTED] T6121.026

[GRAPHIC] [TIFF OMITTED] T6121.027

[GRAPHIC] [TIFF OMITTED] T6121.028

[GRAPHIC] [TIFF OMITTED] T6121.029

[GRAPHIC] [TIFF OMITTED] T6121.030

[GRAPHIC] [TIFF OMITTED] T6121.031

[GRAPHIC] [TIFF OMITTED] T6121.032

[GRAPHIC] [TIFF OMITTED] T6121.033

[GRAPHIC] [TIFF OMITTED] T6121.034

[GRAPHIC] [TIFF OMITTED] T6121.035

[GRAPHIC] [TIFF OMITTED] T6121.036

[GRAPHIC] [TIFF OMITTED] T6121.037

[GRAPHIC] [TIFF OMITTED] T6121.038

[GRAPHIC] [TIFF OMITTED] T6121.039

[GRAPHIC] [TIFF OMITTED] T6121.040

[GRAPHIC] [TIFF OMITTED] T6121.041

[GRAPHIC] [TIFF OMITTED] T6121.042

[GRAPHIC] [TIFF OMITTED] T6121.043

[GRAPHIC] [TIFF OMITTED] T6121.044

[GRAPHIC] [TIFF OMITTED] T6121.045

[GRAPHIC] [TIFF OMITTED] T6121.046

[GRAPHIC] [TIFF OMITTED] T6121.047

[GRAPHIC] [TIFF OMITTED] T6121.048

[GRAPHIC] [TIFF OMITTED] T6121.049

[GRAPHIC] [TIFF OMITTED] T6121.050

[GRAPHIC] [TIFF OMITTED] T6121.051

[GRAPHIC] [TIFF OMITTED] T6121.052

[GRAPHIC] [TIFF OMITTED] T6121.053

[GRAPHIC] [TIFF OMITTED] T6121.054

[GRAPHIC] [TIFF OMITTED] T6121.055

[GRAPHIC] [TIFF OMITTED] T6121.056

[GRAPHIC] [TIFF OMITTED] T6121.057

[GRAPHIC] [TIFF OMITTED] T6121.058

[GRAPHIC] [TIFF OMITTED] T6121.059

[GRAPHIC] [TIFF OMITTED] T6121.060

[GRAPHIC] [TIFF OMITTED] T6121.061

[GRAPHIC] [TIFF OMITTED] T6121.062

[GRAPHIC] [TIFF OMITTED] T6121.063

[GRAPHIC] [TIFF OMITTED] T6121.064

[GRAPHIC] [TIFF OMITTED] T6121.065

[GRAPHIC] [TIFF OMITTED] T6121.066

[GRAPHIC] [TIFF OMITTED] T6121.067

[GRAPHIC] [TIFF OMITTED] T6121.068

[GRAPHIC] [TIFF OMITTED] T6121.069

[GRAPHIC] [TIFF OMITTED] T6121.070

[GRAPHIC] [TIFF OMITTED] T6121.071

[GRAPHIC] [TIFF OMITTED] T6121.072

[GRAPHIC] [TIFF OMITTED] T6121.073

[GRAPHIC] [TIFF OMITTED] T6121.074

[GRAPHIC] [TIFF OMITTED] T6121.075

