[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





                    LEGISLATIVE PROPOSALS TO REFORM
                       DOMESTIC INSURANCE POLICY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 20, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-80





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                 Subcommittee on Housing and Insurance

                   RANDY NEUGEBAUER, Texas, Chairman

BLAINE LUETKEMEYER, Missouri, Vice   MICHAEL E. CAPUANO, Massachusetts, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California           EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia  WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey            CAROLYN McCARTHY, New York
LYNN A. WESTMORELAND, Georgia        BRAD SHERMAN, California
SEAN P. DUFFY, Wisconsin             GWEN MOORE, Wisconsin
ROBERT HURT, Virginia                JOYCE BEATTY, Ohio
STEVE STIVERS, Ohio                  STEVEN HORSFORD, Nevada
DENNIS A. ROSS, Florida

















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 20, 2014.................................................     1
Appendix:
    May 20, 2014.................................................    37

                               WITNESSES
                         Tuesday, May 20, 2014

Carter, Joe E., Vice President, United Educators Insurance.......     8
Hughes, Gary E., Executive Vice President and General Counsel, 
  American Council of Life Insurers (ACLI).......................    10
Karol, Tom, Federal Affairs Counsel, National Association of 
  Mutual Insurance Companies (NAMIC).............................    12
Kohmann, Joseph C., Chief Financial Officer and Treasurer, 
  Westfield Group, on behalf of the Property Casualty Insurers 
  Association of America (PCI)...................................    14
Schwarcz, Daniel, Associate Professor of Law, and Solly Robins 
  Distinguished Research Fellow, University of Minnesota Law 
  School.........................................................    15

                                APPENDIX

Prepared statements:
    Carter, Joe E................................................    38
    Hughes, Gary E...............................................    55
    Karol, Tom...................................................    63
    Kohmann, Joseph C............................................    72
    Schwarcz, Daniel.............................................    80

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Letter from over 50 insurance company CEOs...................    98
    Written statement of the American Insurance Association (AIA)   101
    Written statement of the Financial Services Roundtable.......   112
    Written statement of the Independent Insurance Agents and 
      Brokers of America (IIABA).................................   117
    Written statement of the National Association of Insurance 
      Commissioners (NAIC).......................................   119
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................   121

 
                    LEGISLATIVE PROPOSALS TO REFORM
                       DOMESTIC INSURANCE POLICY

                              ----------                              


                         Tuesday, May 20, 2014

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Royce, Garrett, Duffy, Stivers, Ross; Capuano, Clay, McCarthy 
of New York, Sherman, Beatty, and Horsford.
    Also present: Representative Posey.
    Chairman Neugebauer. This hearing of the Subcommittee on 
Housing and Insurance entitled, ``Legislative Proposals to 
Reform Domestic Insurance Policy,'' will come to order.
    We will have opening statements, 10 minutes on each side, 
for the Majority and the Minority.
    And there may be Members in attendance who are not assigned 
to the Housing and Insurance Subcommittee. Without objection, 
members of the full Financial Services Committee who are not 
members of this subcommittee may sit on the dais today, but, 
consistent with our committee policy, they may not be 
recognized or yielded to for any purpose. If they have any 
written statements, we will include them in the hearing.
    At this particular point in time, I will give my opening 
statement.
    Thank you for being here today. I think this is an 
important hearing. We are going to talk about five legislative 
proposals to reform the domestic insurance policy in this 
country. This hearing will give many of the stakeholders in 
this room much-needed respite from our TRIA deliberations.
    And speaking of TRIA, I noticed that in the audience today, 
there are a few people here who may have a little bit of an 
interest in that subject. Just to give you a little bit of an 
update, we are working very hard on that issue.
    Just a couple of weeks ago, as you may know, we sat down 
with some of the Members of the Majority who sit on the 
committee and we laid out a framework for them to review. And 
we opened up a dialogue and a discussion with those Members, 
and we have been getting some very valuable feedback.
    And in the very near future, we plan to, once we make some 
refinements in that framework, sit down with the Minority, as 
well. Because it is our goal, hopefully sometime in June, to 
put out a bipartisan--hopefully, it will be a bipartisan bill 
on TRIA, to move out of this committee. And hopefully, we will 
then put it in the hands of leadership and let them determine 
when we might look at passing that on the House Floor.
    But I just wanted to give you a little bit of an update. As 
many of you are seasoned veterans around here, you know it 
doesn't always go on schedule, but that is the schedule that we 
have today.
    But today we turn our attention to some insurance reform 
legislation that focuses on protecting policyholders, offering 
more consumer choice for insurance products, and providing 
regulatory relief to reduce costs to domestic policyholders.
    First, we will examine legislation which ensures that 
regulations intended to rein in certain activities of large 
complex financial institutions don't trickle down to insurance 
companies that are properly regulated at the State level.
    H.R. 4510, which was introduced by Representatives Miller 
and McCarthy, would clarify that application of capital 
requirements to insurance companies that are subject to Fed 
supervision. This bill would simply ensure that capital 
standards intended for banks are not needlessly applied to 
insurers that own financial institutions.
    H.R. 605, introduced by Mr. Posey, would make certain 
insurance companies not subject to Federal assessments to pay 
for the orderly liquidation of failed financial institutions, 
given that State insurance laws already govern the process for 
unwinding failed insurers.
    Second, we will examine the legislation intended to protect 
insurance policyholders who are customers of a bank-affiliated 
insurance company. H.R. 4557, introduced by Mr. Posey, would 
allow State insurance regulators to intervene to protect the 
soundness of the insurance company affiliate with a failing 
financial institution. This will allow regulators to ring-fence 
insurance-specific assets so that policyholders are protected 
in the event of insolvency.
    And finally, the subcommittee will examine two draft 
proposals intended to increase consumer choice and to reduce 
unnecessary regulatory burdens. The first, authored by Mr. Ross 
from Florida, would modify the Liability Risk Retention Act to 
allow self-insured liability risk-retention groups to create 
efficiencies by expanding their commercial lines of coverage. 
The second, authored by Mr. Stivers, would lessen the 
regulatory burdens associated with data requests from insurance 
supervisors.
    I applaud all of the sponsors of these bills that we plan 
to examine today. And separately, I would like to acknowledge 
Mr. Duffy for all of his hard work he and his staff have done 
on the Miller-McCarthy capital standards bill.
    I also would like to recognize Mr. Duffy, in that he just 
recently added another member to his family. I believe this is 
number seven. And it was a little girl, as I--
    Mr. Capuano. Seven?
    Chairman Neugebauer. Yes.
    Mr. Duffy. I'm very productive.
    Mr. Capuano. A little overproductive.
    Chairman Neugebauer. So, I look forward to a very 
productive hearing.
    And now, I would like to recognize the ranking member of 
the subcommittee, Mr. Capuano, for 2\1/2\ minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    I want to thank the panel for being here.
    I think there will be some good discussion today. I don't 
think there is going to be a lot of debate. There may be some 
basic issues. I think most of these issues that are proposed in 
these bills are reasonable and thoughtful. Again, there will be 
some details, but, overall, I am looking forward to some 
discussion to see if we can come up with easy ways to do some 
easy things without complicating them with unnecessary, 
extraneous material.
    Thank you very much.
    Chairman Neugebauer. And now, I would like to recognize Mr. 
Duffy for 1\1/2\ minutes.
    Mr. Duffy. Thank you, Mr. Chairman, for holding this very 
important hearing.
    And I appreciate the panel coming in and dispensing some of 
your wisdom and thoughts on the bills that we are talking about 
today.
    I just want to say a few brief remarks about the Miller-
McCarthy bill, a great bipartisan proposal, I think, that goes 
a long way to fixing a problem that I don't really think 
existed. We know the Fed interpreted the Collins Amendment 
differently than probably most everyone else in this room. And 
so we now have, I think, a bipartisan legislative fix that 
addresses that Fed interpretation.
    Listen, I don't think anyone anticipated that we would 
apply bank capital standards to insurance companies. And that 
was never the intent of the Collins Amendment. The Miller-
McCarthy bill will address that issue, making sure that we 
treat insurance companies very differently than banks in 
relationship to the capital which they are required to hold.
    So, I look forward to your testimony and your views on all 
of the bills, but specifically in regard to Miller-McCarthy.
    And I want to also extend my thank you to Mr. Miller and 
Mrs. McCarthy for their bipartisan effort in bringing out this 
proposal.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from California, Mr. Sherman, is recognized 
for 2 minutes.
    Mr. Sherman. Thank you.
    We need to pass the reauthorization of TRIA. That isn't on 
the agenda today.
    We saw with AIG an excellent case study. That portion of 
the enterprise that was subject to State insurance regulation 
remained healthy even though the top managers in the company 
were behaving like drunken sailors. Those parts of the company 
that were not subject to State insurance regulation crashed as 
if they were being run by drunken sailors.
    The other thing this proves is that credit default swaps 
are insurance and should be treated as such. And we probably 
would not have had a 5-year catastrophe in our economy had we 
done two things: one on the credit rating agencies; and the 
other is to require that portfolio insurance be called 
insurance.
    We are dealing with a number of bills today, two that are 
important and that I am happy to cosponsor.
    One is the Miller-McCarthy provision, summarized by the 
last speaker. And that is that we need to use insurance 
accounting principles to determine the creditworthiness of 
insurance companies.
    The second, the Policy Protection Act, introduced by Mr. 
Posey, and I guess I am the chief Democrat on it, recognizes 
that you should not invade an insurance company and seize 
assets in a way that endangers its policyholders simply to 
shore up a related and affiliated bank or other depository 
institution. What the bill does is it takes the policyholder 
provisions that are already in the Bank Holding Company Act and 
puts them also in the Thrift Holding Company Act.
    And, with that, my time has expired.
    Chairman Neugebauer. I thank the gentleman.
    And now, another gentleman from California, Mr. Royce, is 
recognized for 2\1/2\ minutes.
    Mr. Royce. Thank you. Thank you, Mr. Chairman.
    And just a reminder for my friend from California, that the 
securities lending operation of AIG was regulated at the State 
level.
    But this hearing on legislative proposals to reform 
domestic insurance policy confirms a new normal for insurance 
regulation in the United States. It is basically a hybrid model 
with layered regulation by States and the Federal Government. 
The age-old debate of State versus Federal regulation is aged, 
is old. The new reality involves State regulators, it involves 
the Federal Reserve, and it involves the Treasury Department, 
both through the Financial Stability Oversight Council (FSOC) 
and through the Federal Insurance Office (FIO).
    Many of the bills before us today are a response to this 
hybrid model. In particular, H.R. 4510, the Insurance Capital 
Standards Clarification Act, offered by the gentleman from 
California, Mr. Miller, reflects a belief that insurance 
capital standards set by a traditional bank regulator, the 
Federal Reserve, need not be bankcentric and should, in fact, 
be tailored to reflect the unique and specific business model 
of insurance companies.
    I strongly support this bill. Regulation can take place at 
the Federal level, but it must be smart and specific to 
insurance operating models. And without changes, the current 
hybrid insurance regulation structure has the potential to fail 
consumers miserably.
    A system which produces regulatory confusion, hinders 
consumer choice, and discourages competition is burdensome for 
all parties involved. And I have said this before: It very well 
may be that the system has not failed, but since when has 
nonfailure been a synonym for success?
    Unlike some of my colleagues, I believe much of the problem 
is lack of uniformity at State levels. Within this hybrid 
framework, we should effectuate uniform domestic regulations. 
And toward this end, yesterday, along with Representative Tammy 
Duckworth, I introduced the Servicemembers Insurance Relief Act 
of 2014, a straightforward bill to ensure portability of auto 
insurance for all our servicemembers, who often move from State 
to State.
    This bill is a perfect example of a simple fix to the 
insurance regulatory framework that will make a big difference 
in the lives of American consumers. And I am hopeful this 
committee will move our new system of insurance regulation 
forward. We should start with immediate passage of H.R. 4510.
    Thank you very much, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    I now recognize the gentlewoman from New York, Mrs. 
McCarthy, who is one of the primary authors of H.R. 4510, and 
has worked tirelessly on this issue. I thank her for her work. 
And she is recognized for 2 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I 
appreciate you holding this hearing, and I thank my ranking 
member.
    I want people to know that when we did the Dodd-Frank Act, 
the bill that came out of this committee did not bring the 
insurance companies in. That was done over on the Senate side. 
And Senator Susan Collins of Maine has stated publicly now that 
she never intended to have bank capital standards apply to 
insurance companies.
    Our bill--mine and Mr. Miller's from California, who 
unfortunately could not be here today--H.R. 4510, this bill 
which I sponsor will help keep insurance products affordable 
and available by ensuring the correct capital standards are 
applied to insurance companies that fall under the supervision 
of the Federal Reserve.
    The intention was never to have them involved with this. 
This legislation will give the Federal Reserve more flexibility 
and help clarify the difference between the business of 
insurance and the business of banking.
    The legislation starts from the premise that applying the 
wrong capital standards, such as bank capital standards, to an 
insurance company is ineffective, disruptive both to the 
insurance company and its policyholders. In the absence of this 
legislation, the Federal Reserve has said it will be obligated 
to apply bank capital standards to insurance companies under 
its supervision.
    Since the insurance business model is so fundamentally 
different than the bank business model, those bankcentric 
capital standards would be very problematic for insurers and 
the many families and retirees who are their policyholders.
    As I have mentioned, Senator Collins, the original author 
of the amendment, is sponsoring it on the Senate side with the 
correction, exactly the same as this legislation is. She will 
be cosponsoring it with Senator Brown and Senator Johanns. I am 
pleased to support this commonsense legislation which will play 
an important role in preventing future financial crises.
    And I apologize. I had a root canal this morning, so I am 
still a little bit numb.
    With that, I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from New Jersey, the chairman of our 
Capital Markets Subcommittee, Mr. Garrett, is recognized for 
1\1/2\ minutes.
    Mr. Garrett. Thank you.
    And, first, I want to begin by thanking the chairman for 
holding this important hearing to examine various proposals to 
reform the domestic insurance policy. But I would also like to 
thank all of our witnesses for serving on today's panel.
    July will mark the fourth anniversary of Dodd-Frank. And it 
is not surprising that in the nearly 4 years since Dodd-Frank 
became law the committee has had to consider a number of fixes 
to help clean up the regulatory mess that Dodd-Frank created.
    Now, one of the law's most recent messes concerns the Fed's 
application of bank-like capital standards to insurance 
companies. And under Dodd-Frank, the Federal Reserve is 
required to impose minimum capital requirements on the 
companies it supervises, including insurance companies that own 
savings and loan associations and insurance companies deemed 
systemically important.
    However, insurers face very different capital structures 
than banks, and, as such, it would make sense that the Fed 
should not treat insurance companies in the same manner when it 
comes to assessing these capital requirements. Unfortunately, 
the Fed maintains that Dodd-Frank requires the application of 
bank-like standards, even though Congress never intended such a 
standard to be applied to these companies under the Fed's 
jurisdiction.
    So we have the Insurance Capital Standards Clarification 
Act now before us, and this would clarify that the Fed is not 
required to apply inappropriate standards to insurance 
companies that are already subject to appropriate State-based 
or foreign capital requirements.
    See, at the end of the day, inappropriate regulations hit 
our families and small businesses in the pocketbook, so I hope 
that this hearing highlights the need for yet another round of 
Dodd-Frank cleanup.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now one of our newer members to the committee, Mr. 
Horsford from Nevada, is recognized for 2 minutes.
    And welcome to the committee.
    Mr. Horsford. Thank you very much, Mr. Chairman. And thank 
you to Ranking Member Capuano.
    If I may take just a moment, I would like to start by 
saying that it is an honor and a privilege to serve on the 
Housing and Insurance Subcommittee.
    During the recession, my home State of Nevada suffered the 
highest rate of foreclosures in the Nation. And within my 
State, the congressional district that I represent was the 
hardest-hit. For my constituents, housing remains a top 
priority as we continue down the path to economic and financial 
recovery, so I am glad that we are holding a hearing on the 
five insurance bills before us today.
    But I am also a little disappointed that TRIA is not on 
that list. Before coming to this committee, I served on the 
Committee on Homeland Security. There I heard firsthand from 
businesses and employers on the importance of having access to 
affordable terrorism risk insurance. These job creators have 
told me that this insurance provides a safety net which allows 
them to invest in growth without fear of losing it all due to 
an act of terrorism.
    Most importantly, terrorism risk insurance reduces taxpayer 
exposure by confining most of the costs to the private sector. 
Without affordable terrorism insurance, many buildings, 
schools, and venues would remain uninsured against terrorist 
attacks, meaning that the government likely would pick up 100 
percent of the tab for catastrophic losses.
    So, I look forward to working with the members of this 
subcommittee to move forward on these important issues. And, 
again, I am very honored to be joining this committee, and I 
look forward to the work ahead.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Florida, Mr. Ross, is recognized for 
1\1/2\ minutes.
    Mr. Ross. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    Thank you, also, to our distinguished panelists for being 
here today and for your testimony.
    My discussion today is over my draft that aims to modernize 
the Liability Risk Retention Act and allows established risk 
retention groups, also known as RRGs, with adequate capital and 
surplus to offer to their members, and only their members, the 
inclusive commercial insurance packages that are the norm in 
today's commercial marketplace.
    Nationally, more than 25,000 educational, charitable, and 
Catholic institutions benefit from commercial liability 
coverage through an RRG. In my home State of Florida, more than 
127 nonprofit organizations enjoy tailored liability coverage 
provided through an RRG, the alliance for nonprofits for 
insurance. These community organizations do important work for 
our society, and any penny they can save on insurance costs 
means one more penny they can spend on their charitable 
efforts.
    My draft is targeted legislation that would provide these 
customers with the convenience of one-stop shopping with an 
insurance group they trust and of which they are a member. My 
draft seeks to address some of the previous concerns about this 
expansion. And I look forward to today's discussions from all 
of our witnesses.
    In addition, my colleagues today have brought important 
bills for our discussion. I was pleased to cosponsor 
Representative Gary Miller's bill, which would allow the 
Federal Reserve to tailor capital standards to the business 
models of insurance companies.
    We must ensure that Federal regulation of insurance 
companies is properly crafted and does not result in increased 
costs for consumers. Floridians already struggle with the cost 
of insurance. I want to make sure that the Federal Government 
does not worsen that burden.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentlewoman from Ohio, Mrs. Beatty, is 
recognized for 2 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member 
Capuano.
    And thank you to our witnesses for their testimony here 
today.
    This afternoon, we meet to discuss a series of legislative 
proposals that amend both longstanding and recently passed laws 
impacting the operation of insurers in the United States. 
However, none of these bills in any way addresses the 
expiration of the Terrorism Risk Insurance Act, which is slated 
to expire in just over 6 months.
    I, and other Members on both sides of the aisle, believe 
that it is absolutely critical that we reauthorize this program 
in a timely manner so that insurers and insureds can renew 
their terrorism policies in a way that prevents lapses in 
coverage.
    It is clear that failing to do so would risk a complete 
pullout from the markets by these property and casualty 
insurers, which would be catastrophic for the real estate 
recovery and for the ability of companies to provide terrorism 
liability coverage for workers' compensation claims, which in 
many States is required by law.
    A recent study by the RAND Corporation found that premium 
increases in workers' compensation insurance may be 
insufficient to offset terrorism exposure.
    Mr. Chairman, I urge you to work with members of this 
subcommittee, as well as members of the full committee and the 
House to bring a TRIA reauthorization vehicle through markup to 
the House Floor post haste. It is not just a matter of helping 
insurers but, more importantly, helping the American economy as 
a whole.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And we will now hear from our witnesses.
    We have five distinguished witnesses today: Mr. Joe Carter, 
who is vice president of business development and marketing for 
United Educators; Mr. Gary Hughes, executive vice president and 
general counsel for the American Council of Life Insurers; Mr. 
Tom Karol, Federal affairs counsel for the National Association 
of Mutual Insurance Companies; Mr. Joseph Kohmann, chief 
financial officer and treasurer of the Westfield Group, on 
behalf of the Property Casualty Insurers Association of 
America; and Professor Daniel Schwarcz, associate professor of 
law at the University of Minnesota Law School.
    Your written testimony will be made a part of the record. 
We ask you to summarize that in 5 minutes, and then we will 
move to the question-and-answer portion of the hearing.
    Mr. Carter, you are recognized for 5 minutes.

 STATEMENT OF JOE E. CARTER, VICE PRESIDENT, UNITED EDUCATORS 
                           INSURANCE

    Mr. Carter. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. Thank you for this 
opportunity to testify in favor of the Risk Retention 
Modernization Act of 2014, which will allow established risk 
retention groups to offer additional forms of commercial 
insurance coverage to their members. We have also submitted a 
written statement for the record.
    I am Joe Carter, vice president of United Educators 
Insurance, a reciprocal risk retention group. And I am 
testifying on behalf of United Educators, as well as the 
Alliance of Nonprofits for Insurance Risk Retention Group, also 
known as ANI, and the National Catholic Risk Retention Group, 
Inc. We are pleased that VCIA and RIMS, the leading trade 
associations for captives and risk managers also support this 
bill.
    United Educators, ANI, and National Catholic owe their 
existence to the Liability Risk Retention Act of 1986. Congress 
was correct in assuming that risk retention groups would add 
capital to the insurance market, successfully moderate 
insurance pricing, and provide a stable source of insurance 
coverage for universities, nonprofits, professionals, and small 
businesses.
    In the 25-plus years since the 1986 Liability Risk 
Retention Act amendments, more than 250 risk retention groups 
have aggregated more than $2.5 million in gross written 
premium. According to the rating agency A.M. Best, the focused 
approach of risk retention groups has resulted in aggregate 
operating performances that are ``consistently better than that 
of their peer group in a commercial insurance market.''
    Many nonprofits, small schools, churches, and small 
businesses buy packaged policies that RRGs cannot write today. 
Many of these entities are therefore forced to forgo the 
coverages and more specifically, to tailor risk management 
services that risk retention groups give to buy their policies 
outside of risk retention groups.
    If RRGs truly were only a response to a crisis and capacity 
for liability insurance, the member counts would surely have 
shrunk when the insurance industry came back into the market. 
Instead, risk retention groups have demonstrated that for 
certain types of similar organizations, collectively insuring 
each other is superior to relying on the traditional insurance 
sector.
    As member-owned entities, risk retention groups provide 
where they proactively address coverage realities through risk-
based research, actuarial-based pricing, and coverage levels 
that are designed to be sustainable. And any resulting profits 
are passed back to the members who own us, keeping their 
operating expenses down.
    Our bill, which will permit seasoned risk retention groups 
to write other lines of commercial insurance, would bring more 
capital and more purchaser choice to the property and casualty 
market. However, not all risk retention groups could write 
other lines of commercial insurance if this bills becomes law. 
Instead, to write other lines, a risk retention group must be 
seasoned, meaning it must be licensed by the domiciliary State 
regulator and operating as a liability risk retention group for 
5 years. They must also meet a minimum threshold capital 
requirement of $5 million and meet any other requirements that 
their State domiciliary regulator would require. This bill will 
not upend the Risk Liability Retention Act at all.
    Let me tell what you what the Liability Risk Retention Act 
Modernization legislation will not do. It does not authorize 
risk retention groups to offer personal lines of insurance or 
write group health, life, disability, or Workers' Compensation 
insurance. It does not alter any rights of nondomiciliary 
States. And it does not change a risk retention group's 
responsibility to comply with State laws on deceptive practices 
or unfair claims practices.
    In fact, one significant thing has occurred recently to 
strengthen State regulation of risk retention groups since the 
legislation was introduced: RRGs are now subject to the NAIC 
State accreditation standards. Thus, RRGs are now subject to 
the same solvency standards for State accreditation purposes as 
other insurance companies.
    The amendments proposed to the Liability Risk Retention Act 
by this modernization legislation will simply permit risk 
retention groups to offer their members, and only their 
members, the same comprehensive commercial insurance packages 
that are the norm in today's marketplace while benefiting from 
the customized risk management services that we are offering 
today.
    In closing, risk retention groups have dramatically 
improved risk management and provided tailored coverages for 
specialized niches like nonprofits and educational 
institutions. And modernizing this Act would allow us to more 
effectively and efficiently continue this important work, which 
will allow them to continue to focus on the things that they 
are--their mission driven.
    I thank you very much.
    [The prepared statement of Mr. Carter can be found on page 
38 of the appendix.]
    Chairman Neugebauer. Thank you.
    And now, Mr. Hughes is recognized for 5 minutes.

   STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND 
   GENERAL COUNSEL, AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Mr. Hughes. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, I appreciate the opportunity 
to provide you with the views of the American Council of Life 
Insurers on legislative initiatives addressing the way in which 
insurance is regulated in the United States.
    I would like to confine my remarks this afternoon to a 
single issue that is of paramount importance to life insurance 
companies, and that is the need to provide the Federal Reserve 
Board with the flexibility it believes it needs in order to 
apply insurance rather than bank capital standards to those 
insurance groups that now fall under its jurisdiction as a 
result of the Dodd-Frank Act.
    Dodd-Frank requires the Fed to apply consolidated capital 
standards to those insurance companies that are determined by 
FSOC to be systemically important and also to those insurers 
that control savings and loan institutions. Two of ACLI's 
member life insurance companies have been designated as 
systemically important financial institutions (SIFIs), and one 
additional company is under review for possible designation. 
Eleven of our member life companies are affiliated with S&Ls. 
And taken together, these companies account for approximately 
30 percent of the insurance premiums of ACLI's overall 
membership.
    But differently, a very significant segment of the life 
insurance business is now going to have its group capital 
standards set by the Federal Reserve. But beyond having a 
direct effect on these companies, the Fed's determination with 
respect to U.S. insurer group capital standards could very well 
be a precedent against which all insurers are measured, since 
it would affect such a large segment of the market.
    It could also be a bellwether for similar standards being 
developed by international standard-setters. The global 
competitive interests of U.S. insurers demands that every 
effort to be made to harmonize these emerging capital 
standards.
    The good news here is that the Fed appears to recognize 
that applying bank capital standards to a life insurance 
enterprise would be wholly inappropriate and could materially 
disrupt the company's operations. The frustration, as you all 
have mentioned, is that the Fed believes the wording of Section 
171 of Dodd-Frank doesn't give it the latitude it needs to 
apply insurance-based standards.
    Now, to its credit, the Fed has temporarily exempted or 
deferred application of its capital rules to those insurance 
groups, thereby giving Congress time to clarify Section 171. 
But this is only a temporary respite, hence, the urgency for 
congressional action.
    We are very encouraged by the fact that Congressman Miller 
and Congresswoman McCarthy--and, Congresswoman, thank you very 
much for your leadership on this--have sponsored H.R. 4510, the 
Capital Standards Clarification Act of 2014. And we would also 
note and thank the fact that a majority of the members of this 
subcommittee are cosponsors.
    And thanks to you as well, Mr. Chairman, for your support.
    This bill would provide the Fed with the very flexibility 
it needs to craft capital standards suitable in the context of 
an insurance company. Also, as you all have mentioned, Senator 
Collins, the original architect of Section 171, has made it 
clear that she never intended for the Fed to apply bank 
standards to insurers. And she, along with Senators Brown and 
Johanns, are advancing a bill similar to H.R. 4510 in the 
Senate.
    To be clear, the insurance industry is not trying to 
sidestep the application of strong capital standards as 
mandated by Dodd-Frank. We are simply working to ensure that at 
the end of the day, the applicable standards are predicated on 
a framework appropriate for the business of insurance, such as 
the existing insurer risk-based capital system. This is a 
system specifically designed by insurance regulators for 
insurance entities and is a comprehensive and accurate measure 
of these companies' unique risks.
    In summary, Mr. Chairman, ACLI's legislative priority in 
the House is passage of H.R. 4510. We believe it is imperative 
that the Fed be afforded the flexibility to utilize insurance-
oriented capital standards for those insurance groups under its 
supervision. Substituting bankcentric standards would harm the 
affected companies, undermine rather than strengthen the 
supervision of insurers, and would be completely at odds with 
efforts to enhance the stability of the U.S. financial markets.
    We look forward to working with this subcommittee and with 
both Houses of Congress to pass this important piece of 
legislation. Thank you.
    [The prepared statement of Mr. Hughes can be found on page 
55 of the appendix.]
    Chairman Neugebauer. Mr. Karol, you are now recognized for 
5 minutes.

   STATEMENT OF TOM KAROL, FEDERAL AFFAIRS COUNSEL, NATIONAL 
       ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)

    Mr. Karol. Chairman Neugebauer, Ranking Member Capuano, and 
members of the Housing and Insurance Subcommittee. I would like 
to thank you for holding this hearing entitled, ``Legislative 
Proposals to Reform Domestic Insurance Policy.''
    My name is Thomas Karol. I am the Federal affairs counsel 
for the National Association of Mutual Insurance Companies. We 
are the largest property casualty insurance trade association 
in the country, serving regional and local mutual insurance 
companies on Main Streets across America as well as many of the 
country's largest national insurers. The 1,400 NAMIC members' 
companies serve more than 50 percent of the automobile and 
homeowners market and 31 percent of the business insurance 
market.
    We are pleased that the committee is focusing on the issues 
related to property casualty insurance industry, which is 
highly competitive, well-capitalized, and is a key source of 
strength and resilience for the U.S. economy.
    Our industry ensures the property casualty risks of the 
United States businesses and consumers, enabling the U.S. 
economy to thrive. It is imperative that we do not impede this 
well-functioning marketplace. NAMIC appreciates the opportunity 
to offer our comments.
    The most important proposal to NAMIC members is H.R. 4510, 
the Insurance Capital Standards Clarification Act. The Act 
would afford the Federal Reserve greater flexibility to apply 
accurate capital standards for insurers by amending Section 171 
of the Dodd-Frank Act to clarify the application of capital 
requirements to insurance companies subject to the supervision 
of the Federal Reserve Board.
    There is widespread agreement that such flexibility is 
warranted and necessary. Senator Susan Collins of Maine, the 
author of Section 171, has made it clear that she never 
intended to have bank capital standards apply to insurance 
companies. The Senator and a number of Members of the House and 
Senate have urged the Fed to adjust the capital standards for 
insurance companies to align with the business of insurance, 
rather than the business of banking. Despite this, the Fed 
maintains that it is constrained by the language in Section 
171.
    H.R. 4510 resolves this question and acknowledges the fact 
that bank capital standards are not appropriate for insurance 
companies. It also recognizes the importance and 
appropriateness of statutory accounting principles. H.R. 4510 
provides that the Fed may not use Section 171 to require 
insurance companies that are only required to prepare financial 
statements in compliance with State-based statutory accounting 
rules to also prepare financial statements under generally 
accepted accounting principles (GAAP).
    Forcing such companies to prepare additional GAAP 
statements is a labor-intensive, multiple-year project that 
would cost policyholder owners hundreds of millions of dollars 
without adding any benefit in regulating the solvency and 
activities of the companies.
    Similarly, NAMIC supports the Insurance Consumer Protection 
and Solvency Act of 2013, or H.R. 605, which clarifies that the 
FDIC does not have the authority to assess insurance companies 
for the Orderly Liquidation Fund. The existing State-based 
resolution authority for insolvent property casualty insurers 
has a superb track record of protecting insurance claimants and 
policyholders at no cost to the taxpayer. Property/casualty 
companies and mutual companies in particular present almost 
none of the risk factors the FDIC is statutorily required to 
consider.
    All insurance companies already meet guaranty fund 
obligations for the insolvencies in their own industry and 
should not be assessed the cost of failures in other parts of 
the financial services sector.
    Both of these bills recognize that the business of 
insurance is fundamentally different than the business of 
banking, and that applying initial bankcentric regulations is 
inappropriate and damaging to the business of insurance.
    NAMIC also supports the Policy Protection Act of 2014. The 
laws governing thrift holding companies do not provide the same 
procedural protections as the Bank Holding Company Act to ring-
fence the assets of insurance subsidiaries for the protection 
of insurance companies.
    The Policyholder Protection Act of 2014 simply amends the 
Bank Holding Company Act to provide the same protections for 
insurance companies organized as thrift holding companies.
    Tapping the assets of insurance units, particularly without 
the consent of the insurance regulator, would inappropriately 
threaten the financial structure, underpinning the insurance 
operations and undermining consumer confidence in the insurance 
industry. To protect America's insurance consumers, the Bank 
Holding Act protections should be extended to thrift holding 
companies, and NAMIC supports H.R. 4557.
    Finally, NAMIC supports the Insurance Data Protection Act, 
which would elevate the Federal authority to subpoena 
information directly from insurance companies to the Secretary 
of the Treasury, but also strengthen the confidentiality 
protections for the information and require reasonable 
reimbursement for the cost of compliance with the data 
protection. The Insurance Data Protection Act would not deny 
the Federal Insurance Office or the Office of Financial 
Research any relevant information or impede their functions but 
would ensure that they take reasonable steps to prevent 
unnecessary and duplicative reporting by insurance companies. 
In fact, the legislation would afford insurers many of the 
protections recently highlighted in the Administration's big 
data and privacy work group review.
    I want to thank the subcommittee again for holding this 
important hearing and for providing NAMIC with the opportunity 
to discuss these legislative proposals. I look forward to your 
questions.
    [The prepared statement of Mr. Karol can be found on page 
63 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Kohmann, you are now recognized for 5 minutes.

  STATEMENT OF JOSEPH C. KOHMANN, CHIEF FINANCIAL OFFICER AND 
TREASURER, WESTFIELD GROUP, ON BEHALF OF THE PROPERTY CASUALTY 
             INSURERS ASSOCIATION OF AMERICA (PCI)

    Mr. Kohmann. Thank you, Mr. Chairman, Ranking Member 
Capuano, and members of the subcommittee.
    I am testifying on behalf of the Property Casualty Insurers 
Association of America (PCI), which is composed of nearly 40 
percent of the Nation's home, auto, and business insurers. My 
name is Joseph Kohmann, and I am the chief financial officer 
and treasurer of the Westfield Group.
    Westfield as midsized insurance company that has been in 
business for over 166 years with an A or higher A.M. Best 
rating for the past 75 years. We provide over 2,200 direct jobs 
in 31 States, partner with thousands of independent insurance 
agents to serve our customers, and are one of the top writers 
of farm business in the United States.
    Westfield also owns a community bank that originates 
roughly $300 million in loans annually, predominantly to owner-
operated small businesses and individuals. We are not a Wall 
Street institution, but a very important regional provider of 
insurance and banking services to middle America.
    Both PCI and Westfield support strong regulation. But our 
growth is being restrained by unintended consequences stemming 
from an expansion of banking regulation in the Dodd-Frank Act 
that conflicts with State insurance regulation. For example, 
the Dodd-Frank Act requires the Federal Reserve Board to impose 
the strictest bank capital standards on insurance holding 
companies with a depository affiliate, even just a small 
community bank.
    Westfield's business activities are primarily insurance. 
The measurements used to determine capital and leverage ratios 
for banking are completely different than those used to govern 
auto insurance or farm insurance.
    A strict application of bank capital requirements to our 
insurance activities just does not make sense.
    The Federal Reserve Board agrees. They recognize that 
insurance and banking operate with completely different 
business models. They have delayed implementation of the 
requirement until Congress can act. But not for long. Dozens of 
Members of Congress, including Senator Collins, who authored 
the original legislative requirement, have written to the 
Federal Reserve Board saying that this application of bank 
regulation to insurance is inappropriate.
    Fed Chair Yellen testified under questioning that this is 
an unintended consequence of the Act. Yet, the Board says they 
do not have the statutory flexibility to provide relief unless 
Congress acts.
    Please pass H.R. 4510 to help Senator Collins clarify the 
intent of her original amendment and to allow the Federal 
Reserve Board to apply appropriate capital standards to 
insurance companies.
    PCI strongly supports the other bills before the committee 
as well. H.R. 605 ensures that resolution of insurance 
companies and their assets is conducted by insurance 
regulators, not by a Federal banking agency. It would also 
prevent the FDIC, which is primarily responsibile for bank 
resolutions, from using insurance assets to support failing 
banks. Insurers are already responsible for resolving their own 
failures and pay for guaranty funds in every State to protect 
consumers. Do not let insurance policyholder protection funds 
be used to support risky investment firms and banks.
    H.R. 4557 requires Federal bank regulators, before 
transferring assets of insurance companies to banks, to ask the 
insurance regulator to determine if the transfer would harm the 
insurer. This seems like another commonsense clarification to 
limit a regulatory conflict of interest and to avoid harming 
insurance policyholders to support a bank.
    The proposed Insurance Data Protection Act would provide 
additional protections for confidential proprietary data shared 
among insurance companies and government entities and limit 
rather extraordinary regulatory subpoena power given to 
nonregulators. This will prevent potentially costly data calls 
by entities which neither supervise our companies nor are 
responsible for their solvency.
    The theme of all of these bills is that insurance and 
banking are fundamentally different. Congress has the 
opportunity to clarify that regulation of insurance companies 
and their activities should be conducted using insurance 
standards and by their supervisors.
    Thank you for the opportunity to testify today. And I am 
happy to answer any questions the committee may have.
    [The prepared statement of Mr. Kohmann can be found on page 
72 of the appendix.]
    Chairman Neugebauer. Thank you, Mr. Kohmann.
    And finally, Professor Schwarcz, you are recognized for 5 
minutes.

 STATEMENT OF DANIEL SCHWARCZ, ASSOCIATE PROFESSOR OF LAW, AND 
   SOLLY ROBINS DISTINGUISHED RESEARCH FELLOW, UNIVERSITY OF 
                      MINNESOTA LAW SCHOOL

    Mr. Schwarcz. Thank you very much, Chairman Neugebauer, 
Ranking Member Capuano, and members of the subcommittee for 
inviting me to testify.
    I am going to spend most of my oral testimony talking about 
several of the legislative proposals. But before I do that, I 
think it is important to foreground my remarks in certain facts 
that I think have gotten lost in this discussion. Those facts 
include that AIG securities lending program was at the heart of 
AIG's problems, in addition to its credit default swap 
portfolio. And that securities lending program, as mentioned 
earlier by one of the Members, was indeed subject to State 
regulation. Those facts include the fact that financial 
guaranty insurers, monoline insurers, contributed mightily to 
the crisis, and they were regulated by State insurance 
regulators.
    Those facts include that life insurers that had issued 
long-term guarantys, via annuities mostly, suffered severe 
capital shortfalls during the crisis that led several of them 
to apply for bailout funds and to receive bailout funds.
    The point I am making is this: I agree with everyone that 
insurance is different than banking, and it must be regulated 
in a manner that is different than banking. At the same time, 
insurance does raise systemic risks that warrant a robust 
Federal involvement in the industry.
    We cannot simply defer to State regulators when issues of 
systemic stability are in play. With that in mind, I want to 
talk about several of the proposed legislative initiatives.
    First, the Capital Standards Clarification Act. I support 
the vast majority of that bill. I agree that the Federal 
Reserve should not mechanistically apply bankcentric capital 
rules to insurance companies because insurance companies 
present different risks. And so for that reason, I agree that 
the Congress should clarify that the Fed has the discretion to 
tailor capital rules.
    Moreover, I think that it is a virtue of the bill that it 
allows and affords the Fed the discretion not simply to move 
away from simply mandating bank capital rules but also to 
tailor capital rules so that they don't simply replicate State 
risk-based capital rules but actually respond to the fact that 
while State risk-based capital rules are about policyholder 
protection, Federal capital rules are by and large about 
something different: They are about systemic stability. And for 
that reason, appropriate capital rules for federally-regulated 
insurance companies may depart in important ways from State 
risk-based capital rules. The legislation, the bill, as I read 
it, affords the Feds that discretion.
    What I am concerned about, though, is the last provision in 
the bill that would prohibit, as I understand the language, the 
Fed from demanding information from regulated insurance 
companies that is not included in SAP reports.
    One thing that we have to take away from the financial 
crisis is that systemic risk arises in unpredictable ways. And 
a regulator must have the capacity to adapt to new 
circumstances, to gather information in a way that allows it to 
see the full panoply of risks.
    There are ways in which SAP may not allow the Fed to do 
that. The most important and most clearly recognized is that 
SAP is an entity-centric accounting approach. It is not 
designed to reflect the risks of an entire conglomerate. It is 
designed to reflect the risks of individual insurance entities. 
It is very difficult, if not impossible, to get a sense of an 
entire insurance holding company simply using SAP. For that 
reason, it very well may be appropriate for the Fed to require 
either GAAP reporting or something different than either SAP or 
GAAP. Maybe something that is referred to as ``GAAP-like.'' 
Whatever it is, the Fed has to have the discretion if it is 
going to regulate insurers appropriately to demand the 
information it needs to adjust to the demands of systemic risk 
regulation.
    I am concerned that the provision in this bill that seeks 
simply to prevent duplicative accounting will actually be 
interpreted to limit the Fed's authority to demand relevant and 
necessary information from the entities that it regulates that 
is not captured in SAP accounting standards.
    I am also concerned about the Data Protection Act. The Data 
Protection Act may indeed retain the FIOs and OFR subpoena 
powers. But it has a provision that is virtually unprecedented 
as far as I am aware. That provision requires either the 
Treasury or the OFR to reimburse companies to the extent that 
they have to comply with a subpoena. The reason that we have 
the FIO and OFR monitoring insurance companies is because they 
raise certain systemic risks. Because they raise those risks, 
we need to make sure that those risks don't come to fruition.
    The costs associated with that should be borne by the 
company. If we force FIO and OFR to bear those costs, then we 
will politicize the subpoena process and will make it very 
difficult for that process for move forward in a way that is 
predictable.
    Thank you very much.
    [The prepared statement of Professor Schwarcz can be found 
on page 80 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    We will now begin the questioning. Each Member will have 5 
minutes.
    The Chair recognizes himself for 5 minutes.
    Mr. Hughes, in your written testimony you mentioned that 
this bankcentric standard would harm the ability of life 
insurers to perform their fundamental business. We have thrown 
around a lot of terms here, ``bankcentric,'' ``capital 
standards,'' et cetera. But I think one of the things we 
sometimes have to do is we have to boil this down to the people 
that we are really trying to help here and to protect, and that 
is your policyholders and my constituents.
    Talk to me about, if the Fed were to move forward, if we 
didn't correct this, the young family out there in America, how 
could this impact them? Because I think that is the real issue 
here.
    Mr. Hughes. Mr. Chairman, I will give one easy example to 
maybe address that question. To address the needs of that 
family, life insurance companies often issue protection 
products that have promises that will extend 20, 30 years out. 
We back up those promises of those long-term liabilities with 
long-term assets. Typically, these are fixed-income securities, 
generally high-quality corporate bonds.
    So in our world of insurance and insurance regulation, our 
regulators like to see that 30-year promise to the family 
backed up by a 30-year high-quality bond. And the matching of 
the asset and liability lowers the risk of the enterprise.
    You take the same portfolio security, that same long-term 
bond in the portfolio of a bank, which has demand deposit 
obligations, very short-term obligations, and Federal bank 
regulators say, quite correctly, well, that creates a risk 
mismatch for the bank. They have short-term obligations. You 
don't want to back that up with an illiquid long-term bond.
    So the Fed would say the capital weight you give that bond, 
it has a very high capital requirement because it is highly 
risky in the hands of a bank.
    They basically would be forced to do the same thing for an 
insurance company. And I can't imagine a scenario where the 
promise we make to that family, that 30-year promise, is backed 
up by short-term Treasuries. I don't know the risk of not being 
able to meet a promise of 10, 20, 30 years out would be much 
higher. So that is an example of the same security in the hands 
of an insurance company as in the hands of a bank.
    And H.R. 4510 would enable the Fed to say, okay, it is a 
totally different balance sheet. Let's look at assets 
differently for an insurance company than we would for a bank.
    Chairman Neugebauer. And so that additional liquidity and 
capital would relate to higher premiums for the product that 
you have been offering?
    Mr. Hughes. Absolutely.
    Chairman Neugebauer. In other words, ultimately, the 
policyholders are going to pay for this mismatch in policy if 
the Fed were to continue.
    Mr. Karol, would you agree with that statement?
    Mr. Karol. I agree with that completely. The liabilities 
that a bank focuses on are subject to different risks than 
insurance, particularly property casualty insurance. The bank 
has credit risk, the bank has inflation risk, the bank has 
market risk. Where with a property casualty insurance company, 
it is basically the risk of the damage to the property or the 
underlying risk. It is basically a completely different 
business.
    Chairman Neugebauer. Mr. Kohmann, do you want to comment on 
that?
    Mr. Kohmann. No. I would agree with both Mr. Hughes and Mr. 
Karol. The core issue here is that the businesses are 
fundamentally different. It would increase costs and 
potentially create capital that would be addressing asset risk 
rather than liability risks. So, in my view, it would be no 
more appropriate to apply risk-based capital rules to a banking 
entity, which would create potential adverse motives for the 
wrong risks.
    Chairman Neugebauer. Thank you.
    Mr. Carter, who would benefit most from the Modernizing the 
Liability Risk Retention Act as proposed by Mr. Ross? Who are 
the beneficiaries?
    Mr. Carter. Mr. Chairman, I think that is a great question. 
And as we think about providing additional services, additional 
coverages to our members, we think about the smaller to 
midsized businesses. In our world, it is educational 
institutions that don't necessarily currently have a staff, 
don't have a staff for all of the training needs, all of their 
risk management, and risk management needs.
    And so when we think about actually offering property 
packages, property coverage offerings in our packages, we are 
thinking about ways to help them manage those risks in an 
additional--at a higher level than they do today. In a way, 
that also helps them maintain their budgets, not necessarily 
have to--we are giving them support, in other words, whether it 
is White Papers, whether it is online training, whether it is 
onsite visits, any number of Webinars and seminars. We are 
giving them a lot of support through the risk retention group 
model.
    And that is not only for United Educators, but also our 
risk retention group peers. We are only owned by them, and we 
are delivering more than just insurance to them. So this 
expansion would be very important to them.
    Chairman Neugebauer. I thank the gentleman.
    And now the ranking member, Mr. Capuano, is recognized for 
5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    And again, I think we have heard many of the items that 
relatively are noncontroversial. And to be perfectly honest, 
maybe I am wrong, but I think that the capital standards issue 
could be put on a suspension calendar and passed 
overwhelmingly.
    With a question about the GAAP versus SAP, I am not sure 
how I feel about it yet. I have some questions, but I will come 
back to it, because I don't know how much time I am going to 
have. I want to talk about the things that are more concerning 
in some of the other bills.
    And again, all of these bills have things which are easy to 
support, and some have questions. In particular, in H.R. 605, 
why--Mr. Karol, I think I am right that you testified in 
support of that. Why would we have to get rid of the orderly 
liquidation as a final backup opportunity? It is not the 
primary backup opportunity, not the primary process, as I 
understand it. But if everything else fails, why should we get 
rid of that? What does it hurt to have one final backstop in 
case, God forbid, we get into a situation where it is 
necessary? How does it hurt the industry? If I am wrong--I 
thought you were the one who testified in favor of that.
    Mr. Karol. Our position is that the Orderly Liquidation 
Authority should not apply, that the State-based system is 
adequate at this point, and that requiring duplicative payment 
by insurance companies is not fair, that there is sufficient 
backup by the State--
    Mr. Capuano. So it is the up-front payment that you are 
concerned with?
    Mr. Karol. If the insurance companies are paying into the 
State authority, which is adequate, our feeling is that if the 
other banks and other financial institutions aren't paying into 
that as a backup to them, we shouldn't have to pay into the 
Orderly Liquidation Authority.
    Mr. Capuano. Again, I really have to go back to Mr. 
Schwarcz's comments. I have no problem with the concept of 
State-based regulation. AIG was regulated at the State level. 
We keep forgetting that. And I understand full well that the 
State regulators said that they don't do CDOs, which, of 
course, is lack of State regulation.
    So if that doesn't concern you, if that doesn't kind of 
ring a red bell, I am happy to look the other ways. Because I 
am not looking to impose it.
    I just look at the orderly liquidation when it comes to 
insurance companies as something that hopefully, God forbid, we 
will never need. But I would have a hard time saying, after 
what we just went through, I don't want to go through that 
again. And that is what the whole orderly liquidation is all 
about, is to try to prevent us from ever having to do that 
again.
    And again, if it doesn't work here for insurance companies, 
I am more than happy to discuss it. But to just throw it out I 
think is raising a risk that is potentially repetitive. Now, if 
it is overly burdensome, I am more than happy to talk about it. 
I would like to have some discussions at a later time, maybe 
not now, but to walk me through how we can maybe rebalance 
that. Again, I am not trying to hurt anybody.
    Mr. Karol. I would be happy to talk about it.
    Mr. Capuano. I guess I also want to talk about the 
reimbursement aspect. Again, on FIO, limiting their subpoena 
power, that is fine by me. They have never used a subpoena, to 
my knowledge, and I am not looking--I totally agree that they 
should ask everybody before they get the subpoena.
    Why in the world would we want them to--if they have to get 
to the point where they ever have to use a subpoena, why would 
we want to force a reimbursement? We don't do it to ourselves. 
Congress asks every single agency in the world for document 
upon document upon thousands of documents.
    Mr. Neugebauer and I were part of an oversight committee a 
few years ago. We got reams of documents. We didn't ask for 
reimbursement. Because asking for reimbursement is de facto a 
punishment. And in this case, it would for all intents and 
purposes say, how dare you ask for it? Why do we need a 
reimbursement aspect if you actually think that at some point 
FIO would ever need it?
    Does anybody support the reimbursement provision?
    Mr. Karol. My understanding of both the OFR and FIO is that 
they are not enforcement entities; they are basically entities 
that exist to determine what is going on in the market to 
predict what is happening--
    Mr. Capuano. Information gathering. That is correct.
    Mr. Karol. And to get that. The amount of information that 
is available to them through the States and through the 
companies is extensive. We really don't know what--
    Mr. Capuano. Which is why they have never used the subpoena 
power. They have never had to use it. And the likelihood of 
them ever using it is minimal.
    Mr. Karol. And everything we can think is that if such a 
request came through, it would be so extraordinary that, one, 
it should go through the Secretary of the Treasury--
    Mr. Capuano. I have no problem with that.
    Mr. Karol. And that if it is that far outside of the normal 
business of the insurers, it would be fair to have that--that 
be reimbursed--
    Mr. Capuano. But all that basically does is if it is so far 
out there, again, I guess it depends, I would actually think if 
it is so far out there, maybe there is a real problem that they 
are not getting answers to; that is the last step before a 
subpoena.
    And, again, I have no problem having the Secretary of the 
Treasury sign off. But it just says to me, basically, we are 
not giving it to you, period, end of issue. And if you do, you 
have to pay us for it. And, by the way, it is going to be an 
extraordinary amount of money, because these things do cost a 
lot of money.
    Hopefully, just having the subpoena power there is really 
what gets cooperation. This committee has done it relative to 
HUD. We have worked out between ourselves, not issuing a 
subpoena, having HUD come up with certain documents that we 
worked out in an agreement after some pressure was put on. It 
just strikes me as a problem.
    I guess my last 14 seconds is, with today's world, GAAP and 
SAP, it really doesn't matter to me. GAAP, SAP, FAAP, BLAAP, it 
doesn't matter. Pick one accounting standard. I don't care 
which one. Why would we not want to have one uniform accounting 
standard so we can compare apples to apples?
    Now, I understand the transition from any accounting 
standard to another one is always problematic. Why would we 
want to have 2 or 3 or 4 or 10? Why not just one? And it 
doesn't matter which one to me. Pick one.
    Chairman Neugebauer. I thank the gentleman. And now--
    Mr. Capuano. I will get to that later.
    Chairman Neugebauer. I am sure that if you would like--
    Mr. Capuano. No, no, no. It was a rhetorical question.
    Chairman Neugebauer. The Chair now recognizes the vice 
chairman of the subcommittee, Mr. Luetkemeyer from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Interesting discussion today. We had a discussion earlier 
today with regards to systemically important institutions and 
had the whole discussion about capital requirements, Basel 
implications, international standards being applied to our 
companies. It is like, holy cow, this is like subcommittee 
repeat 2.0 here.
    But it is great to be with you, and thank you for your 
testimony. It reinforces a lot of what we heard this morning.
    Mr. Kohmann, I would like to start with you. Your company, 
as I understand it, not only is an insurance company, but also 
owns a bank. Is that correct?
    Mr. Kohmann. That is correct.
    Mr. Luetkemeyer. So you understand firsthand the difference 
between the two, and that the capital requirements for each one 
are completely different. They are two completely different 
business entities with two completely different business 
models. What do you think about the capital requirements of 
banks being applied to insurance companies?
    Mr. Kohmann. Thanks for the question. As we said earlier, I 
think they are fundamentally, as you said, different 
businesses, and accordingly, applying capital standards to them 
in the same way would be inappropriate and perhaps risky.
    Mr. Luetkemeyer. Okay, how do you define ``risky'' here? 
Would these standards affect safety and soundness of the bank 
and/or the insurance company? How is it going to affect costs 
to your clients or the insurance clients, the bank clients? Can 
you give us a little synopsis.
    Mr. Kohmann. Sure. I think, first off, you have the 
potential by applying an asset-based capital model to insurance 
companies would not appropriately address the risk of an 
insurance company, particularly a property casualty company 
like Westfield, where the majority of the risks are 
underwriting and reserve risks. So that capital approach could 
be misguided and put policyholders at risk by not adequately 
addressing the main risk of an insurance company.
    The alternative would be true if you had tried to apply an 
insurance-centric approach to a bank. We are not talking about 
that, but trying to think about the other way helps lend 
clarity to how inappropriate it would be to apply those rules 
to an insurance company, and I think there is a potential in 
doing that to certainly add costs to policyholders and 
consumers in the event that you come up with an inappropriate 
capital amount and/or more complexity.
    Mr. Luetkemeyer. Mr. Karol, your group deals with lots of 
different sizes of insurance companies. Would this--how is it 
going to affect the small ones in your group versus the large 
ones in your group?
    Mr. Karol. I think these types of standards would affect 
the smaller companies much more. They have less ability to 
adjust to the--
    Mr. Luetkemeyer. Would it drive them out of business?
    Mr. Karol. It could.
    Mr. Luetkemeyer. What do you think the potential is for, 
say, the smallest 25 percent of your companies, how many of 
them would you think--
    Mr. Karol. We have members who write in a single county. We 
have members who write in very small areas, and to apply these 
types of standards or the potential for applying these types of 
standards to them could put them out of business.
    Mr. Luetkemeyer. They don't have the ability to raise the 
kind of capital it is going to take to make this all work, is 
that what you are saying?
    Mr. Karol. Yes.
    Mr. Luetkemeyer. Okay. Mr. Hughes, you deal with life 
insurance folks. What kind of costs do you think would be 
pushed on to your clients if some of these standards were 
implemented? Do you have a different business model, a little 
bit different business model than P&C guys?
    Mr. Hughes. Yes, it is. For us, it is the cost of capital. 
If we have to have inordinate capital charges because of the 
long-term securities we are holding to match long-term 
liabilities, as the chairman noted, it is going to force 
companies to pass on those costs to policyholders, which will 
raise the costs of insurance.
    Mr. Luetkemeyer. How many of your companies went out of 
business in 2008 as a result, a direct result of the downturn?
    Mr. Hughes. We had two very small companies that went out 
of business ironically because they had an inordinate amount of 
their reserves in Fannie Mae preferred, both of them.
    Mr. Luetkemeyer. So it wasn't management of the company, it 
was investments that they made? Is that right?
    Mr. Hughes. Precisely, yes.
    Mr. Luetkemeyer. Okay. So, out of all that turmoil, you 
lost two small companies, and now you are being impacted in a 
very negative way with these cumbersome and overzealous 
regulations. Thank you for your comments.
    I yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentlewoman from New York, Mrs. McCarthy, is 
recognized for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman.
    Professor, when you were talking, something hit my mind 
that when we were writing the bill, so I just want to see, to 
clarify to see if this satisfies you. When you were making 
points about SAP and GAAP, and I agree with my ranking member, 
our bill says an insurance company that is not federally-traded 
and is already regulated by the State level is not required to 
prepare a GAAP statement, but that doesn't stop the Fed from 
asking for additional information because we were concerned 
about that because I happen to think most insurance companies 
are good players, but we wanted to make sure that we could keep 
them to be good players. So I hope--and if you have any 
questions we would be more than happy to sit down with you and 
talk about it.
    Mr. Schwarcz. Sure. Two quick points: The first one is that 
it may be necessary for certain insurers in order to arrive at 
a consolidated sense of how risky the company as a whole is to 
have GAAP reporting, and that is because SAP reporting is 
inherently entity-centric. It doesn't allow for the positioning 
of all assets and liabilities on a single balance sheet in a 
way that is simple, okay? And so the Fed, I know, right now is 
investigating how they can take SAP and leverage it to get at a 
sort of holistic perspective on a group, but from my 
understanding, this is very difficult, if not impossible.
    The second point, though, is I am concerned with the 
current language that if the Fed, for instance, said, look, we 
don't need you to go, to give us a full GAAP reporting, but 
what we do need is lines, is, say, line 5 of a GAAP report on 
this or whatever it is, we would like you to provide that to 
us. The company could come back and, under the language as I 
read it, say, ``No, we are not required to provide you anything 
above and beyond what SAP requires,'' and so to the extent the 
information you are seeking is not encompassed within SAP, you 
are overstepping your bounds, and the way, the reason I see 
that is because otherwise, it is very hard to understand how 
you could effectuate this principle, right? Because what if 
they ask for five items on the GAAP report or 10? At some 
point, it becomes the full GAAP report. So I think there needs 
to be clarification about the Fed's capacity to get individual 
pieces of information, and I also think that there may be 
circumstances in which it would be, in fact, appropriate to 
have full GAAP reporting if it is necessary to, if such 
reporting is necessary, to arrive at a holistic sense of the 
risk that an insurance group poses.
    Mrs. McCarthy of New York. As I said, we will follow 
through with that, and certainly, we will talk to Congressman 
Miller because we have the intentions that there would be a 
stopgap there to be able to have the Fed ask questions if they 
felt that there was something reasonable there. But thank you, 
and we believe that we covered it, but we will take a second 
look at it.
    As far as the others, I know everybody in Congress, or I 
should say the American people, the majority of us actually do 
work well together. We sit together. We try to work out things 
that we know are going to affect us back home in our States and 
certainly our businesses. So I think this is a perfect 
opportunity that you can see what we do, and we have worked on 
this committee bipartisanly. It doesn't always work, but this 
time around, it truly has.
    So, with that, from the testimony that I heard and I 
appreciate everybody coming in to give their opinions on it, I 
think all the questions that I would have asked have already 
been asked, so I am not going to ask them again. The testimony 
has actually been very excellent, and I think it just shows 
that we can work together. But I will say, during Dodd-Frank, 
and I actually like to call it Frank-Dodd, we spent a year and 
a half working on that bill together, all of us, and we all had 
questions. Unfortunately, when it went over to the Senate, they 
had a very short period of time to work on it and didn't look 
at the consequences on some of the language that they put in 
there. I will say that Barney Frank took one section, and even 
when we went to the second section, we went back to the first 
section to see if we were countering each other, but as this 
place has never passed a perfect bill, it will never pass a 
perfect bill, but that doesn't mean we can't make technical 
changes, and that is what we are doing today.
    With that, I yield back the balance of my time, sir.
    Mr. Luetkemeyer [presiding]. Thank you.
    With that, we go to the gentleman from Wisconsin, Mr. 
Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman. Whether Dodd-Frank or 
Frank-Dodd or sometimes we call it by other names as well, but 
we won't say that here, I do appreciate the bipartisanship that 
has gone on in regard to some of the bills that were proposed 
today.
    Maybe the panel could help me a little bit with some 
history. Is it fair to say that we have a pretty long and deep 
history of banking in America and some crises that come from 
the banking sector? Does banking sometimes create risk 
throughout our history for the larger economy? Anybody? You 
guys all agree with that, right? I am not crazy? Banking 
creates risk? Isn't that kind of why we all come together and 
we get really freaked out in banking crises?
    And what also freaks us out is when the taxpayer bails out 
banks. We don't like that. We want banks to have sound capital 
standards so those investors in banks will bear the risk and 
the loss and not the taxpayer, and I think a lot of us feel the 
same way about the insurance sector.
    Do we have the same kind of history in the insurance sector 
with creating systemic risk similar to that of the banking 
sector? Mr. Carter, do you know? Mr. Hughes? Anyone? You can 
jump in, chime in.
    Mr. Carter. I don't personally believe so. I think that the 
business models, as we have heard before, are very different, 
and the way they run their businesses are very different, and I 
think if you look at the history of failures, of institutional 
failures, I think there is a difference. I don't know the exact 
numbers, but that would be my statement on it.
    Mr. Duffy. Maybe I will throw it out a different way, if 
you look at it from the Great Depression to the Great 
Recession, oftentimes we have had banks that have caused some 
of these crises and runs on banks. Is there another historical 
example that you can give me where a crisis in America has been 
caused by the insurance sector?
    Mr. Schwarcz. Yes. Let's not forget about 2008, right? This 
is a pretty important salient example, and again, I think it is 
really important to remember that the AIG securities lending 
program, monoline financial guaranty insurers, life insurers, 
all of those involved State insurance regulation and involved 
crises.
    Mr. Duffy. And we will get to that.
    Mr. Schwarcz. Okay.
    Mr. Duffy. Besides AIG, any other example you can give me?
    Mr. Schwarcz. Yes. There has been historical precedence of 
a run on a life insurer; on Executive Life, there was a run.
    Mr. Duffy. But systemic risk--
    Mr. Schwarcz. It depends on--
    Mr. Duffy. --by insurance companies.
    Mr. Schwarcz. Right, I would say that it depends--the other 
example, ironically enough, would be the 1980s liability 
crisis. The Risk Retention Act was initially passed because 
there was a crisis of lack of availability of liability 
insurance.
    Mr. Duffy. Was that systemic risk however?
    Mr. Schwarcz. It depends how you define systemic risk. It 
was significant enough that it was on the front page of 
magazines, and Congress acted to pass--
    Mr. Duffy. But it wasn't going to take down the whole 
economy like what the theory was in 2008 or the Great 
Depression?
    Mr. Schwarcz. I think that is right; it was different.
    Mr. Duffy. Besides Mr. Schwarcz, because I have heard many 
argue that as you look at the crisis of 2008 and you look at 
AIG's role, many will say it was the financial products 
division that was regulated by the OTS that caused the risk in 
AIG, and it wasn't the traditional insurance arm that was 
regulated by the State that really caused the risk in AIG. Do 
you guys agree with that assessment, outside of Mr. Schwarcz?
    I know what your opinion is on this one.
    Mr. Hughes. I think I would strongly disagree with Mr. 
Schwarcz's analysis. I don't think you can point to AIG and 
say, that equals the whole insurance industry. It doesn't. I 
think all financial intermediaries discovered during the crisis 
that their risk modeling probably didn't go far enough out, and 
that worst case was a whole lot worse than they had 
anticipated. But if you look at the way the insurance industry 
came through the crisis, both the life segment and the property 
casualty segment, I think, without question, we came through 
that crisis in better shape than any other segment of financial 
services.
    So, yes, AIG was a problem. Yes, there were companies that 
were under severe stress. But the entire financial system, not 
only in the United States but globally, was under severe 
stress, and I think the industry acquitted itself quite well in 
the crisis.
    Mr. Duffy. As we look at FSOC, they are there to identify 
risk to financial stability, and we just recently had 
Prudential that was designated as an SIFI. What concerns me, 
though, is how the vote on making Prudential a SIFI, you have 
the OCC, the FDIC, credit unions, the Fed, Treasury, and the 
CFPB--which has its own problems--all voting to designate an 
insurance company as an SIFI, but you have the President's 
designee who was approved by the Senate voting ``no'' as well 
as Mr. DeMarco from the FHFA. And I think as I finish off here, 
the quote is pretty powerful from Mr. Woodall, who said, ``The 
underlying analysis utilizes scenarios that are antithetical to 
a fundamental and seasoned understanding of the business of 
insurance, the insurance regulatory environment, and the State 
insurance company resolution and guaranty funds system.'' You 
have bankers and credit unions designating Prudential as an 
SIFI, and those who know insurance best are voting ``no,'' and 
saying these other guys don't understand it. I think that is 
pretty powerful as we analyze how FSOC is looking at insurance.
    I yield back the time I do not have, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlewoman from Ohio, Mrs. Beatty, is 
recognized for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member, and like my colleague from New York, many of my 
questions have already been asked, but I would like to pick up 
where Ranking Member Capuano left off. It seems like, as we 
have been working through Section 171, we have come to a pretty 
good technical fix to this, but it seems like there were still 
some discrepancies in which accounting standards should be 
used, and I think that is where Mr. Capuano was going, and it 
looked like Mr. Kohmann and Mr. Hughes and Mr. Carter were 
getting ready to jump in there.
    So let me pose the question to any one of you in this 
fashion: Would you explain how the application of, let's say, 
statutory accounting principles versus general accepted 
accounting principles could result in a different compliance 
expectation?
    Mr. Hughes. I think this is one of the more intriguing 
questions with this legislation, and I read Mr. Schwarcz's 
testimony, and it caused me to go back and read your 
legislation and what it actually says. There isn't any question 
that GAAP accounting and statutory accounting have 
fundamentally different purposes. GAAP is overseen by the SEC. 
It is intended to ensure fairness in the marketplace, maybe 
protection of investors. Statutory accounting, as Mr. Schwarcz 
noted, is really to protect, to make sure that the solvency of 
the company is sufficient to protect the policyholders.
    Now, whether the Federal Reserve Board at the end of the 
day, given the latitude that your bill would give them, would 
just say, fine, we are happy with statutory accounting, I am 
not sure that they would. We had begun a discussion with the 
Fed early on to say, it is not that hard to come up with some 
mechanical analogue to consolidated GAAP financials, it is not 
audited GAAP, but if you need certain information, it is not 
that hard to come up with some sort of analogue that would give 
you what you want.
    Now, those discussions stopped because the Fed said that 
under Section 171, we can't get there anyway. Even if you gave 
us that information, we couldn't rely on it. So your 
legislation would do two things: one, it would enable to us 
restart that conversation with the Fed; and two, if we did come 
up with a workable analogue, cost-effective, not audited GAAP 
for a mutual, it would enable the Fed to rely on that as they 
comply with their statutory mandate. So as we read your 
legislation the way it reads now, we think it adequately 
addresses the accounting issue.
    Mr. Karol. There is no reluctance whatsoever to provide the 
information. I think the question is to require insurance 
companies who use statutory accounting, which is a more 
conservative system, based on the interests of the solvency of 
the company, to have them adopt an entirely different set of 
reporting standards that are based, again, as they said, for 
shareholder or investor reasons, under the Financial Accounting 
Standards Board would impose a burden upon our members for a 
purpose that may or may not be important to the Fed.
    Mr. Schwarcz. The concern I have is that if the solution is 
that we need something in between SAP and GAAP accounting, 
okay? We need you to use GAAP accounting in this respect or SAP 
accounting in this respect. We need SAP accounting plus.
    The language, as I read it, is quite ambiguous with respect 
to the question of whether or not the Fed could demand it, and 
I think just on the technically statutory interpretation as an 
attorney, one could make a very good argument, if one were so 
inclined, that the companies are not required to provide 
anything in addition to SAP or, alternatively, anything in 
addition to SAP that could be construed as being required by 
GAAP. And the key point I want to make is the Fed as the 
regulator of these entities needs the flexibility to be able to 
see these entities on a holistic basis and to prescribe 
accounting standards that facilitate that.
    Mrs. Beatty. Mr. Kohmann?
    Mr. Kohmann. I would just add and agree with Ranking Member 
Capuano that if we could get to one standard, wonderful, but we 
are not going to do away with statutory accounting for 
insurance purposes, and I think, with all due respect, 
Professor Schwarcz, the Fed in their examination process and 
otherwise I think certainly has the ability to request any and 
all information that they want, and I think most companies 
would do their best to accommodate those requests.
    I think at the heart of the SAP versus GAAP is the 
systematic reporting required to the Fed through their 
reporting system. There is really no way to only provide one 
set of financial data. So I think the requests that you are 
talking about that are more from an examination perspective 
certainly would be accommodated. I think it is a systematic 
approach to accounting that is troublesome because it does 
create significant additional cost and complexity to do that 
reporting, which certainly adds costs to policyholders and 
depositors.
    Mrs. Beatty. Thank you.
    Mr. Schwarcz. Could I just add one thing? I don't want to 
overstep my bounds. I just want to respond quickly.
    Mrs. Beatty. Okay. I didn't know if--
    Mr. Schwarcz. Quickly, okay. To be clear, what I am talking 
about is that the Fed might decide, ``We systematically, every 
quarter, want you to report to us items that are not required 
by SAP because we want to take those into account, say, in your 
capital standards. So, every quarter, we want you to report to 
us X, Y, Z that are not covered by SAP because we think they 
are important in terms of us monitoring you on a persistent 
basis, in terms of us coming up with capital standards.'' That 
is what I am talking about, and it seems to me that the 
statutory language would not permit that.
    Chairman Neugebauer. I thank the gentlewoman.
    Now the gentleman, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
recognizing me, and I appreciate you holding this hearing on 
these important bills.
    Before I start, I typically have an aversion to opening 
statements, so I don't request to do them, but I do want to 
make sure everybody in the room understands the unique 
background of my fellow Buckeye, Mr. Kohmann, who not only is a 
CPA, he was a CPA at Ernst & Young, and he has been a CFO for a 
bank and for an insurance company, so he is in a unique 
position with regard to the capital standards clarification 
bill that we have talked about recently through the gentlelady 
from Ohio as well as Mr. Capuano from Massachusetts and others 
on the committee. I think almost everyone has talked about that 
bill.
    But, Mr. Kohmann, from your position, having been a CFO at 
a bank and understanding how banks work and now being at a 
property and casualty company, can you tell me, do you think a 
bank and an insurance company are exactly the same and the same 
exact capital standards would work for the two different 
business models?
    Mr. Kohmann. Thank you, Congressman.
    No, absolutely, as I stated before, they are different. But 
I would add that having been a CFO for both entities, both I 
and Westfield would be supportive of strong capital standards 
for both types of institutions, so I believe that strong and 
prudent capital standards for banks are necessary and as well 
as strong and prudent and appropriate capital standards for 
insurance companies. The problem herein lies that one or the 
other is not appropriate for both so we need unique capital 
standards.
    Mr. Stivers. Is there anybody on the panel who believes 
that the McCarran-Ferguson model for regulating insurance is 
not working?
    I would note that no one shook their head ``no.''
    The State-based standards for capital work very well, and I 
know that the gentleman from Wisconsin talked earlier about the 
fact that State-based regulated entities had no problem through 
the entire financial crisis. And the capital standards that the 
States are imposing under the McCarran-Ferguson law, which has 
been working for 70 years, is still working and working very 
well.
    You talked a little bit through the gentlelady from Ohio's 
questions about the issues with statutory accounting versus 
GAAP accounting. Is there anything, Mr. Kohmann, that didn't 
come out in that discussion that would cause additional expense 
to insurance companies, whether they be mutual insurance 
companies or nonmutuals?
    Mr. Kohmann. No, I think what came out of the dialogue was 
appropriate. I think there is no question that the requirement 
to provide GAAP statements in addition to statutory statements 
would be an additional burden, which would basically create 
expense and complexity, which ultimately would cost 
policyholders more in premiums.
    Mr. Stivers. Has your company put a price on what that 
would cost your policyholders?
    Mr. Kohmann. We have not specifically, no.
    Mr. Stivers. Can you tell me, would it be in the thousands 
or the millions of dollars for a company the size of Westfield?
    Mr. Kohmann. It would be more than a million.
    Mr. Stivers. So, for medium to large insurance companies, 
you are talking about six-, seven-, eight-digit costs, tens of 
millions potentially in some companies?
    Mr. Kohmann. I can't speak for other companies 
specifically, but that would be my suspicion, yes.
    Mr. Stivers. Thank you. I appreciate that.
    The other bill I want to talk a little bit about is the 
Data Protection Act that I have a discussion draft out on. It 
is a bill that has changed from a bill we did last year, and I 
know there has been some discussion in the committee by the 
ranking member of the fact that Congress doesn't reimburse, but 
Congress is usually subpoenaing other government agencies, so 
it is government agency to government agency, but in Title 18 
of the U.S. Code, Section 2706 there is a similar provision to 
what we are talking about that deals with law enforcement, and 
when they subpoena commercial or other folks and they reimburse 
the cost, and I know that Mr. Schwarcz, I am not sure if you 
said it was unprecedented, but I wanted to make sure you knew 
the precedent of Title 18, Section 2706. Are you familiar with 
that section?
    Mr. Schwarcz. Yes. My understanding is that there is not 
another precedent for a monitoring agency or an agency that is 
meant to assess risk to a marketplace having to pay for that, 
and I would also say that even in the context of subpoenaing--
    Mr. Stivers. I am running out of time, but those are 
regulatory agencies, and that is why, and so the State-based 
regulators regulate, we already talked about that, under 
McCarran-Ferguson, regulate insurance companies, but this is 
additional, this is much more akin to the law enforcement model 
because these are not regulators.
    So thank you for the time, Mr. Chairman. I know I am out of 
time. I appreciate the witnesses' cooperation, and thanks for 
being here. I appreciate your information.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Florida, Mr. Ross, is recognized for 
5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Professor Schwarcz hinted earlier about a 1986 crisis in 
insurance that I think led to what resulted in the liability 
risk retention amendments that I think have done very well. In 
fact, Mr. Carter, if it were not for the risk retention groups, 
what would your members avail themselves of in terms of a 
market for liability coverage and, in this particular case, in 
my draft, property insurance coverage?
    Mr. Carter. Thank you for the question. I think during the 
times of a crisis, when most of the traditional insurance 
markets do not feel that they can continue to offer the 
coverage, it is very, very difficult for the businesses to find 
the coverages that they are going to need, whatever that be.
    Mr. Ross. You have a unique risk, too, don't you? Your 
members have a unique risk that you don't find in a commercial 
line's product. Would that not be the case?
    Mr. Carter. I think, to the extent that there is liability, 
obviously there is liability inside of our industries as well 
as others. However, you are correct that the industries, the 
specific industries that turn to risk retention groups and 
tended to gravitate to them, nonprofits, educational 
institutions, many of those were difficult to cover for those 
traditional insurance markets. So we were formed during that 
time, and what makes the model really work is during very 
difficult times, over the course of the years since that time, 
there has been at least one event that has changed the market, 
created a market cycle, I should say. Risk retention groups 
tend to grow quite a bit because of our commitment to those 
members, so we are not looking to grow outside or we can't grow 
outside of that.
    Mr. Ross. Correct. You can't offer your product to somebody 
else outside your membership?
    Mr. Carter. We cannot offer it; that is correct.
    Mr. Ross. You are not in the business of being an insurance 
company. You are in the business of providing a particular 
service, in most cases a nonprofit or charitable service for 
which you have a unique risk. Now, if you didn't have the risk 
retention groups, is there a residual market for coverage?
    Mr. Carter. Not that I know of.
    Mr. Ross. And if there was such a market, wouldn't it have 
to be most likely provided by a government?
    Mr. Carter. That is correct.
    Mr. Ross. Such as an assigned risk pool?
    Mr. Carter. That is correct.
    Mr. Ross. Such as what we saw in Florida and what we have 
seen in other States? So if we don't have affordable coverage 
for your members, then they can't provide their service, and if 
they can't provide their service, which is a nonprofit 
charitable service, then: one, where does the client go, and 
two, who insures that risk? Just because the services aren't 
being provided by your organization doesn't mean the risk for 
those services is not going to still be out there because 
somebody, most likely a government, will provide those 
services.
    Mr. Carter. That is correct.
    Mr. Ross. Now, with regard to capital standards, and I just 
want to ask Professor Schwarcz this particular question. I 
understand, I just want to make sure, you are not suggesting 
that FIO now have regulatory authority, are you?
    Mr. Schwarcz. No.
    Mr. Ross. Okay. And when you consider the cost of 
compliance as well as the cost of increased capital having to 
be held, would that not play into any cost-benefit analysis as 
to whether a regulation should be implemented or not?
    Mr. Schwarcz. Yes.
    Mr. Ross. And in this particular case, if we are not clear 
on the Collins Amendment and that we don't have bankcentric 
capital standards apply to insurance companies, we may very 
well have a situation where the cost of compliance may outweigh 
the affordability of the product?
    Mr. Schwarcz. Yes, I am in agreement that the language 
making it clear that the Fed has discretion to tailor capital 
rules to insurers is a good idea, and I agree that the risk, 
the cost-benefit analysis is relatively clear on that.
    Mr. Ross. And I would assume as well, Mr. Kohmann and Mr. 
Karol?
    Mr. Karol. Yes.
    Mr. Hughes. Yes.
    Mr. Ross. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from New Jersey, Mr. Garrett, is 
recognized for 5 minutes.
    Mr. Garrett. Great. So, I thank the panel again.
    Going back, I will start from the right. Professor 
Schwarcz, you made the comment--and I want to see where you are 
going on this--before that there were a number of insurance 
companies who had problems and failed regulations, and you 
referenced AIG and a couple of other ones, and for that reason, 
we should have, in your words, turned some of this over to 
Federal regulation in this area. I am paraphrasing.
    Mr. Schwarcz. Yes. The basic argument is that we saw that 
insurance can be systemically risky in more limited 
circumstances than banks.
    Mr. Garrett. Right.
    Mr. Schwarcz. For that reason, we need a Federal layer of 
oversight and protection.
    Mr. Garrett. Protection, right.
    Mr. Hughes, I think somebody asked you about how many 
carriers, insurance companies failed, and I think you alluded 
to only a handful, and that a couple of them actually failed 
not because of their own doing but because of Federal 
regulation because they were encouraged to buy trusts secured 
in Fannie Mae and Freddie Mac. So this is where I am sort of 
confused, Professor.
    If you look at the numbers, the number of insurance 
companies that failed is on one and a half hands, it is AIG and 
a couple of other ones, and actually, weren't the two major 
companies that failed actually also regulated by the Federal 
Government at the same time?
    Mr. Schwarcz. So, to be clear, there were several insurance 
companies that received TARP bailout funds.
    Mr. Garrett. Right.
    Mr. Schwarcz. Many more than applied, okay? So, there were 
many. And there were many insurers that contributed to the 
crisis without necessarily failing. One important point to 
recognize--
    Mr. Garrett. The important point is that, by and large, 
they didn't fail or they didn't actually have to get government 
backstop or support except for a couple.
    Mr. Schwarcz. Several--
    Mr. Garrett. And the ones that did get the support actually 
were regulated. AIG, which was probably bailed out the most of 
all of them--the Office of Thrift Supervision, they were 
supposed to be doing it. The other one at the very top that got 
it was a bank holding company, and who would that--wasn't 
Hartford a bank holding--
    Mr. Schwarcz. Hartford was a recipient.
    Mr. Garrett. Not a bank holding company?
    Mr. Schwarcz. I do not believe it was.
    Mr. Garrett. So AIG would have been the top; they were 
government-supervised. So it seems as though the ones that got 
the most money also had a Federal regulator that failed, and if 
you look at most businesses or financial institutions that 
failed, they would be on the other side of the ledger. They 
would not be insurance companies. They would be the banks, and 
weren't the banks regulated by the Fed?
    Mr. Schwarcz. It is funny, we all keep talking about the 
banks, a lot of the crisis was caused by an unprecedented 
expansion of shadow banking. So the point is this--
    Mr. Garrett. I know, the point--
    Mr. Schwarcz. That was new. And the point is you can't just 
say, oh, well, banks are the problem so banks are going to be 
the problem in the future. Systemic risk arises in new ways.
    Mr. Garrett. Right, and that is why we need to have 
regulators to do the job, but apparently--
    Mr. Schwarcz. Right, monitors and regulators who have the 
powers to do the job.
    Mr. Garrett. But the regulators didn't do their job. We had 
Secretary Geithner here back in 2009, and he was answering a 
question--I was just seeing this from earlier--and he said that 
in 2009, after he had just left the New York Fed, that, in his 
words, ``I just want to correct one thing, I have never been a 
regulator for better or worse.'' So here is a guy, one of the 
regulators that we are supposed to be turning all this control 
over to, being paid $400,000 a year, being in the job of 
heading the New York Fed testifying to Congress that, ``I am 
not a regulator.'' Is this exactly where we should be in 
turning over the authority to when, as Mr. Hughes and others on 
the panel have testified to, we don't really see the problem on 
the State level? We see the failed regulation at the Fed, at 
the New York Fed, at the Office of Thrift Supervision, and on 
other issues outside of the realm of this panel, such as the 
SEC, with other areas as well. It seems as though it is endemic 
as the problem is where the Federal regulators have gotten 
involved and failed to do their job with the authority that 
they had at the time, and as a matter of fact, we go all the 
way back, we asked the regulators when they came in right after 
the crisis of 2008, did you need additional authority or power 
at the time, and they said, ``No, we just didn't see what was 
happening here.''
    And what we are trying--so to go forward, your suggestion 
is we just need to give the regulators even more authority and 
more information, but would you agree that there is some limit 
that we should impose on the information that they should be 
able to acquire?
    Mr. Schwarcz. Of course. I think that the information 
should be--whether or not they request information should be 
based on a prudent judgment of the need, but I would also--the 
point.
    Mr. Garrett. Correct me if I am wrong, Dodd-Frank gives the 
FIO subpoena authority, correct?
    Mr. Schwarcz. It only allows them to use that subpoena 
authority if they have made a determination that they cannot 
receive the information from any other source, State or 
Federal.
    Mr. Garrett. Right. But isn't that unusual? Can we cite any 
other case where you have subpoena authority where it is not a 
criminal or an administrative position?
    Mr. Schwarcz. One of the things Dodd-Frank did to address 
the fact that systemic risk is always changing is create 
institutions like OFR and like FIO that are meant to try to 
anticipate these. Are they going to work all the time? Of 
course not. But the answer is--
    Mr. Garrett. But is there any other institution that has 
that authority right now and is not in a criminal or 
administrative position?
    Mr. Schwarcz. I think they are a unique organization, but I 
think on the scale of regulation versus crime enforcement, they 
are a whole lot closer to regulation than crime enforcement, 
and they are doing a job that is monitoring systemic risk which 
is in a sense much closer.
    Mr. Garrett. I yield back. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Sherman, is 
recognized for 5 minutes.
    Mr. Sherman. I thank the chairman. I notice in talking 
about the risk retention draft, there is a noted absence of 
necessary speed with which to take this up, I assume because 
there may not be a push from the groups really pushing that 
effort forward. I wonder who would want to comment about the 
speed of dealing with the risk retention draft?
    Mr. Carter. That would be my area, but I am not quite sure 
I understand the question. Would you mind repeating it? I 
didn't hear the first part.
    Mr. Sherman. You know what? I think I am going to go on. 
Who can comment on why we wouldn't regulate credit default 
swaps as an insurance product?
    Mr. Hughes?
    Mr. Hughes. Personal opinion, it is a form of financial 
guaranty insurance. I think it probably should have been in a 
monoline company and not part of a multiline company.
    Mr. Sherman. You are saying it should be part of a monoline 
company, but a regulated insurance company?
    Mr. Hughes. That would be my personal opinion, yes.
    Mr. Sherman. If I had decided that I wanted to be in the 
fire protection business, but my deal was this, if your house 
burns down, I don't write you a check; that would make me an 
insurance company. Instead, if your house burns down, you can 
trade your house for a U.S. Government bond, would I be a fire 
insurance company, or could I evade all fire insurance company 
regulation?
    Mr. Schwarcz. You would be an insurance company.
    Mr. Sherman. What?
    Mr. Schwarcz. You would be an insurance company.
    Mr. Sherman. I would be an insurance company if I did a 
burned home for credit for a bond swap, but if, instead, of 
your home burns down you can trade it for a U.S. Government 
bond, that would make me an insurance company, but if your 
portfolio burns down, you can trade it for a U.S. Government 
bond, I am not an insurance company, or at least I am not 
defined as one under U.S. law?
    Mr. Schwarcz. That is exactly, yes, the boundaries and the 
fact that we have regulatory arbitrage and we have insurance 
companies engaging in many of the types of activities that 
banks and shadow banks engage in is exactly why we can't ignore 
the systemic risk of insurance companies, we can't simply say, 
the States are doing a fine job, so we are going to leave them 
alone.
    Mr. Sherman. Wait a minute. That credit default swap that I 
just described is not, cannot be done by a regulated insurance 
company, correct?
    Mr. Schwarcz. Correct, but monoline insurers, financial 
guaranty insurers did the exact same thing, and they failed 
miserably as well. State regulated insurance companies issuing 
financial guaranty insurers, they failed just as dramatically.
    Mr. Sherman. They failed to the point where they had to be 
bailed out?
    Mr. Schwarcz. They didn't--they failed to the point of 
insolvency, to the point of contributing mightily to the 
crisis, yes, because what happened is, all of a sudden, the 
financial guaranty insurers were providing--their classic 
business was to provide insurance against the default of local 
bonds and State bonds. When they failed and became insolvent to 
the point that no one had any faith in them, the entire bond 
market seized up because there was no financial guaranty--
    Mr. Sherman. But we in Congress didn't have to bail them 
out?
    Mr. Schwarcz. I don't believe that any of them received 
bailout funds.
    Mr. Sherman. Okay. Has anybody put forth an argument 
against the Policyholder Protection Act simply making it clear 
that you can't raid the insurance company to support the 
depository institution? We have a whole panel here. Somebody 
raise your hand if you have an argument against the bill. Wow, 
passed it unanimously. Thank you.
    Okay. I am going to amaze my colleagues and yield back 46 
seconds.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Florida, Mr. Posey, who has a 
couple of bills that we have been considering today, is 
recognized for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman, and thank you for 
today's hearing on legislation that is very important to the 
insurance industry, and for allowing me the opportunity to 
speak today.
    A question for Mr. Kohmann: Dodd-Frank requires insurance 
companies can be made to serve as a source of strength for 
affiliated depository institutions. State insurance regulators 
wall off assets of insurers from other affiliated companies 
because insurance assets are supposed to be available to ensure 
an insurer can meet its obligations to policyholders. But if an 
insurer is expected to serve as a source of strength to 
noninsurance firms, couldn't that harm the insurer's 
policyholders? Why would we favor protecting consumers, banks, 
and other risky financial firms over protecting innocent 
insurance policyholders? They are the most innocent potential 
possible victims. It seems like we want to focus--Mr. Schwarcz 
wants to focus on protecting the investors of these 
institutions that can't keep themselves in business rather than 
worry about the victims when they are forced to go out of 
business. I would just like your thoughts.
    Mr. Kohmann. I think the answer to your question is we 
shouldn't jeopardize the policyholders of an insurance company 
that is State-regulated in order to use those assets to divert 
those to support banks in a bailout.
    Mr. Posey. And I realize health insurance is different. 
Every insurance is unique, but they all have something in 
common, and that is people buy insurance to reduce risk.
    Mr. Kohmann. Right.
    Mr. Posey. They don't buy insurance to increase risk, and 
if you start stealing from Peter to pay Paul, what you may have 
is instead of one guy going out of business, you get two, and I 
don't know how that is better for anybody, but my experience 
with Federal regulators in the insurance business--I don't 
know, Mr. Schwarcz, if you have ever heard of TRG, but it is a 
health insurance company that wrote insurance policies in 48 
States, darn near every State but their own, which was in 
Indiana. Everything was fine except they didn't pay any claims, 
and they bluffed most of the State insurance commissioners into 
thinking they couldn't go after them because they were under 
the Federal ERISA program.
    Mr. Schwarcz. To be clear, I support, I also support--
    Mr. Posey. And finally, one State said, if the Federal 
Government is not going to do anything, maybe we will, and 13 
State agencies from different States cooperated to bust those 
dirtbags and put the principals in prison. To this day, the 
Federal regulators have done absolutely nothing. They have 
brought no charges. They are just paralyzed with inactivity. So 
when I hear somebody kind of insinuating that State regulators 
are bad and Federal regulators are good, my experience has been 
just the opposite, and while we all believe, I think, probably, 
most of the people here have come up through various levels of 
government, and they know that the government closest to the 
people is usually the best, the most responsive, the most 
efficient, the most effective, the most cost-effective, and 
certainly the most accessible, and I think that goes for 
regulators, too. I think that goes for law enforcement, too. I 
think all services that are regulated more closely now. I see 
nothing wrong with cooperation from the Federal Government, 
unlike what they did in the TRG case, to facilitate enforcement 
across State lines, but I think the State regulators are, 
fortunately for most consumers, the best line of defense 
against innocent victims.
    Mr. Chairman, I want to thank you again for bringing these 
up. They are very important issues. I yield back.
    Chairman Neugebauer. If there are no other Members seeking 
recognition, I would like to thank each of our witnesses again 
for their testimony today. Without objection, I would like to 
submit the following statements for the record: the Independent 
Insurance Agents and Brokers of America; the American Insurance 
Association; the Financial Services Roundtable; the National 
Association of Insurance Commissioners; and a letter from over 
50 CEOs regarding the Miller-McCarthy bill.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 3:52 p.m., the hearing was adjourned.]








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