Hearing Of The Senate Banking, Housing And Urban Affairs Committee on Perspectives on Modernizing Insurance Regulation

Statement

Hearing Of The Senate Banking, Housing And Urban Affairs Committee

Copyright ©2009 by Federal News Service, Inc., Ste. 500, 1000 Vermont Ave, Washington, DC 20005 USA. Federal News Service is a private firm not affiliated with the federal government. No portion of this transcript may be copied, sold or retransmitted without the written authority of Federal News Service, Inc. Copyright is not claimed as to any part of the original work prepared by a United States government officer or employee as a part of that person's official duties. For information on subscribing to the FNS Internet Service at www.fednews.com, please email Carina Nyberg at cnyberg@fednews.com or call 1-202-216-2706.

SEN. DODD: (In progress) -- colleagues who are here this morning. I thank them for coming out.

The audience is gathered here this morning to hear our hearing on the perspectives on modernizing insurance regulation. Let's just share some opening comments, and then I'll turn to Senator Shelby, and given the fact that we've got just a few members here, I'll ask them if they have any opening comments they'd like to make as well before we get to our witnesses.

I want to thank our witnesses. We've got an extra-long table here for you this morning to accommodate all of you, and I appreciate immensely your willingness to participate in this discussion this morning. It's a critically important one as we go forward.

As I mentioned, this morning the committee will continue the series of hearings that we've been conducting this month on modernizing the regulation of our financial system. Today's focus will be on the vital component of our economy, the insurance industry.

Before we do that, I want to say a few words about the furor surrounding AIG and the hundreds of millions of dollars -- taxpayer dollars -- being paid out in retention bonuses. The American people, as we all understand, are outraged, and they should be. All of us are. The chairman of the Federal Reserve has said that the government's efforts to prevent AIG from failing outright are akin to a neighbor smoking in bed and setting the house on fire. With these bonuses, what we're seeing is the folks responsible for picking the pockets of the firefighters and stealing the hubcaps off of the fire truck. It's outrageous.

This committee wants to hear what steps the Fed is taking to address the situation. We want and expect and immediate and full briefing from the Federal Reserve and the Treasury, and we also want answers regarding where the Fed has been on conditions for these types of bonuses since this rescue effort began back in September.

Secondly, it was in this committee room two weeks ago that we insisted on knowing who the counterparties were that so much of the $170 billion in taxpayer funds were going to. Who, we asked, are we rescuing exactly? Since that time, we have learned who they are, and here again, I am hopeful that we'll have a full and complete accounting of this situation.

The administration wants to explore every legal means to recoup this funding, and I pledge today that if they need the help of this committee to do so, they will get that assistance. At a time when we are both trying to put out the fire so that we can begin the process of rebuilding public dollars -- public confidence and dollars -- we must -- that must be used for one purpose and one purpose alone, and that is the public good.

What happened at AIG should not, in my opinion, be confused with the industry with which it is most closely associated -- that is, the insurance industry itself. But nonetheless, that is what is in the public mind today, and they expect answers and this committee intends to be a part of finding those answers.

More than six weeks ago, the Supreme Court said, and I quote, "Perhaps no modern commercial enterprise directly affects so many persons in all walks of life as does the insurance business. Insurance touches the home, the family and the occupation or the business of almost every person in the United States." The Supreme Court said it exactly right, in so many ways. Insurance is a critical underpinning of our economy, something that every person, every business, depends upon literally every day to provide the certainty we need to live and work in an uncertain world.

Insurance protects families and properties from harm and provides stability to every sector of our economy. Coming from Connecticut, a state with a long and proud history of providing insurance for families and businesses throughout the nation, I'm well aware that a strong and vibrant insurance marketplace is essential to the well- being of our nation, the financial security of the American families, and of course the growth of our economy.

That is why we are very proud that we've been able to bring two insurance experts from my state today, Mr. Houldin and Mr. Berkley, to share their knowledge and experience with the committee to help chart a course forward for the insurance industry, our economy and the nation.

It is almost impossible to imagine a single transaction taking place in our economy today that does not involve insurance in some way, shape or form. When a consumer buys a car or a family purchases a home, they need insurance. When a small-business owner opens a store or a company builds a factory, they need insurance. And when parents seek to protect against unforeseen tragedies and provide their children with financial security, they need insurance, too.

As I said in the committee's hearing on AIG two weeks ago, if credit is the lifeblood of our economy and a healthy banking system is the heart that pumps the blood through that economy, then our insurance companies are the lungs that provide the oxygen. We need to make sure that credit flows. For businesses to function, to create jobs, they need access to insurance to protect their investments, and during a financial crisis in which credit is frozen, the critical role of insurance cannot be overstated.

As this committee has established over many hearings in this Congress and the last, our nation's regulatory structures are outdated and in need of significant overhaul. If we're going to build an economy to compete in the 21st century, then we're going to need a modernized regulatory structure that is rooted in core principles such as consumer protection and sound underwriting. And while the current financial crisis did not have its origins in the insurance sector, its adverse effects have been felt keenly by participants in the insurance marketplace.

Our goal must be to maintain a healthy, viable insurance industry that can and will play a critical role in bringing us out of the recession that is hurting families throughout our country, hurting certainly in each of our respective states. Going forward, we must review how we regulate insurance in this country and carefully work to modernize the regulatory structure as appropriate.

Unlike other sectors in the financial system such as banking and securities, insurance is primarily regulated at the state level. The state-based system has been in place, as most in this room know today, since the 19th century and has been a source of innovation and consumer protection alike. However, in recent decades, the insurance industry has become increasingly national, in fact, international, and some insurance companies have engaged in very complex and sophisticated transactions made possible by modern advance in financial engineering.

In response, many have observed that the regulation of insurance needs to be modernized accordingly. Various approaches have been proposed, and I would hope this hearing this morning will provide an opportunity to better understand and evaluate those approaches and produce a record upon which to determine future committee action as we move forward in the modernization of financial regulations.

Given the importance of insurance to our financial system and our economy, this committee has held hearings in the last Congress to examine the state of the insurance industry and the regulatory framework in which it operates. Insurance regulation has also been the subject of hearings in this committee in previous Congresses, and I commend Senator Shelby for his attention to this important issue in the past as committee chairman.

I also want to take this opportunity to acknowledge the hard work of Senator Tim Johnson, who sits in this chair next to me, who has been a leader in efforts to modernize the regulation of insurance, and we appreciate his efforts.

And finally, I want to thank the witnesses who are here this morning. I look forward to hearing from you. I thank them for their time, their interest in the subject matter, and their suggestions on how we ought to proceed as we evaluate these very difficult set of questions that must be a part of our efforts to modernize the financial regulatory system.

With that, let me turn to Senator Shelby.

SEN. RICHARD C. SHELBY (R-AL): Thank you, Chairman Dodd.

Today the committee will once again consider insurance regulatory reform. The structure of our insurance regulatory system, as Senator Dodd has reminded us, dates back to the 19th century, a time when few insurance companies operated in more than one state, let alone globally.

Even before the start of the present financial crisis, there were legitimate questions about whether our insurance regulatory system was adequate for the 21st century. Recent events, most prominently the stunning collapse of insurance giant AIG, have only further demonstrated the pressing need for a review of our insurance regulatory structure.

Two weeks ago, this committee held a hearing on AIG, which revealed the problems with the company's state-regulated insurance entities and the role they played in the company's collapse. AIG's insurance subsidiaries suffered more than $20 billion in losses from their securities lending operations and had to be recapitalized with a loan from the Federal Reserve.

In addition, this past weekend, AIG disclosed that more than 40 of the 170 billion (dollars) in federal aid was used to pay off counterparties to its securities lending operation. The circumstances that permitted AIG's securities lending operation to potentially threaten the solvency of several of its insurance companies and their counterparties suggest that our regulatory system has not been keeping up with developments in the market.

For example, it appears that AIG sought to conduct its securities lending operations on a nationwide basis by pooling the resources of approximately a dozen separate insurance companies regulated by five different states. Because insurance is still regulated at the state level, it is unclear whether any single state insurance regulator was responsible for overseeing AIG's entire securities lending operation. This, of course, raises some serious questions about the adequacy of state supervision.

Given the importance of insurers in our markets and overall economy, I believe we should at least consider whether additional federal oversight is needed. If insurers are managing risk on a national basis, it may make sense to consider regulating them on a national basis as well.

We also need to examine whether the existing insolvency regime can handle the failure of a large insurer. If insolvency needs to be managed at the national level, then once again a federal insurance regulator may be our only option.

Finally, the collapse of AIG has also raised the question of whether the U.S. needs a federal systemic risk regulator. Attempting to regulate insurers for systemic risk, however, presents now many difficult challenges.

For example, it would likely involved the complex task of ascertaining if and to what extent federal regulation would preempt state insurance regulation. On the other hand, if we establish a systemic risk regulator and leave insurance regulation to the states, what opportunities for regulatory arbitrage would we create and would it actually undermine a systemic risk regulator?

Given the complexity of insurance regulation, the committee, I believe, needs to understand all of the promises and pitfalls of the various approaches to regulator reform before it can begin to craft its own solution.

While we can hope to cover the full -- we cannot hope to cover the full range of issues in one hearing, we can make a good start today, Mr. Chairman. And thank you for scheduling this.

SEN. DODD: Thank you, Senator Shelby. A very good statement, as well.

Let me turn to Senator Brown.

SEN. SHERROD BROWN (D-OH): Thank you, Mr. Chairman. Thank you for your leadership in these key issues associated with modernizing our regulatory system.

Quite understandably, the American people want to know that the insurance industry is well run and well regulated. Families pay insurance premiums year in and year out so that when a crisis hits they will be protected. That's how much of the industry is operated and how it continues to operate.

Columbus, Ohio, in my state is the second largest insurance hub in the country. Ohio has scores of insurance companies that have faithfully and prudently invested the premiums of their policy holders, but over the past few decades the best and the brightest minds on Wall Street have, in a word, belittled this model, this business model as behind the times.

At AIG it was not enough to insure lives or property or health. A largely unregulated corner of the company decided it would make enormous bets on exotic financial arrangements, providing insurance where there were no actuarial tables, almost no actual experience and no government regulation and no oversight.

You would think that such a colossal miscalculation would lead to contrition. In the world of Wall Street, you would be wrong. Americans have a hard time understanding why we need to spend hundreds of billions of dollars to prop up large financial institutions in the first place, paying out hundreds of millions of dollars of bonuses to the employees of a company that is essentially insolvent. It smacks of greed, arrogance and worse.

The federal government, that is, taxpayers, have invested $173 billion in AIG because its collapse would signal disaster for everyday Americans and the global financial system as a whole. We know it's that serious. But we shouldn't be financing one dime of bonuses for AIG employees for executives whose actions took the form of reckless endangerment.

And we need to know was AIG so arrogant that they used taxpayer dollars -- tens of billions of dollars -- to pass through to their customers, rewarding those bad business decisions of both their customers and themselves. Societe Generale, Deutsche Bank, Barclays, Goldman Sachs -- the list is pretty long.

We need tough insurance regulations that promote common sense and prevent Wall Street from building castles in the sand at Main Street's expense. We need to fix the regulatory system that created the AIG monster and let a bubble grow so large that when it burst it took our nation's economic and the world's economic stability with it.

We can design that system if we focus on doing what's best for the America people and the U.S. economy in the long run. That means solid safeguards to prevent another financial meltdown in a regulatory environment defined by zero tolerance for snake oil salesmen. With common-sense rules, we can allow honest brokers literally and figuratively to earn an honest living and we can allow policy holders to have confidence that the policy they bought will be there when they need it.

Thank you, Mr. Chairman.

SEN. DODD: Thank you very much.

Senator Crapo?

SEN. MIKE CRAPO (R-ID): Thank you very much, Mr. Chairman. This is one of those interesting hearings where I find myself in complete agreement so far with every one of my colleagues.

I will not try to repeat everything, but I do want to say that as we approach this hearing, clearly in the context of regulatory reform, many of us are looking far beyond simply the insurance industry but to the entire financial system that we have in our country. And one of the obvious questions is whether we need to create a very broadly empowered systemic risk regulator. If we do need to create such a systemic risk regulator, would that regulator have authority over insurance for systemic risk regulation?

If we do have that kind of insurance-covered systemic risk regulator with broad powers, how does that regulator coordinate with the functional or solvency regulator? And if that regulator is not just a single additional federal regulator, how do we coordinate with the 50 states and deal with the kinds of issues that both our chairman and ranking member have raised today?

Those kinds of questions are important for us to answer as we move forward in the larger context of what our broad regulatory system will be for our financial institutions in this nation. And I look forward for guidance from our witnesses on that today.

I just want to mention one other item very quickly. I note that at least one of our witnesses has raised the possibility that there -- that it's not likely that there is any single insurer that is too big to fail. Obviously, we thought that AIG was too big to fail. And there are now analysts who are starting to question this notion of too big to fail, whether it be in the insurance industry or in other parts of our financial system. And I'm interested in that notion.

If there are institutions that are too big to fail, how do we identify that? How do we define the circumstance where a single company is so systemically significant to the rest of our financial circumstances and our economy that we must not allow it to fail?

And what does "fail" mean? Often we're, in the context of AIG, now talking about whether we should have allowed an orderly Chapter 11 bankruptcy proceeding to proceed. Is that failure? And is that consequence something that we cannot work into our system of dealing with systemic risk and the larger questions of how the federal government will approach large, multinational and systemically significant companies.

I know that this raises a lot almost ethereal questions that are going to be very difficult for us to answer, but the fact is that Americans are increasingly asking themselves, why? Why are we going down these paths?

When we first started putting resources into AIG after the first tranche was put in, it was very commonly said by many to us here in Congress that well, this is not just an expenditure of taxpayer dollars that's going to be lost. In fact, as we unwind AIG and as we liquidate its assets the taxpayers are going to make a profit. Anybody here hear that?

That was the first tranche. Now we've gone through number two, number three and number four. Nobody's saying that anymore. And the question that I have is as we move into this, we need to have a better idea of what this notion of too big to fail is -- what it means in different aspects of our industry and what our proper response to it should be.

Should we regulate in such a way that we don't get into situations like that or should we have a regulatory system that contemplates circumstances where we face companies that are too big to fail and somehow puts together a rational approach to prop them up or, as some say, nationalize them?

Now, I'm very concerned by the implications of this entire question. And I realize we aren't going to answer the question in today's hearing entirely, but I would be interested in the observations of our witnesses on this issue.

Thank you very much, Mr. Chairman.

SEN. DODD: Thank you, Senator Crapo.

Senator Merkley?

SEN. JEFF MERKLEY (D-OR): Thank you very much, Mr. Chair, for convening this hearing.

The task of modernizing the insurance regulatory system is absolutely essential. Over the past two years, the American people have been outraged to discover the existence of a $50 trillion insurance industry that was entirely unregulated, outraged that this industry could avoid regulation by New York insurance regulators by using the term "credit default swaps" rather than "credit default insurance," outraged that firms within this industry went regulator shopping to avoid effective oversight, outraged that the activities of these firms created an asset bubble, the collapse of which has left millions of Americans out of work and millions more with their life savings obliterated and absolutely enraged that the very same industry that did all these things is richly rewarding its employees with perks and bonuses funded with taxpayer funds. The situation is offensive to me. It's offensive to the American people.

Mr. Chairman, we have a duty and obligation to fix our insurance regulatory system, to address regulatory arbitrage, to address systemic risk, to make sure that this situation does not ever arise again.

Thank you.

SEN. DODD: Thank you very much.

Senator Tester.

Oh, I'm sorry. Senator Corker.

SEN. BOB CORKER (R-TN): As is my custom, I will wait until the witnesses -- out of respect for you, I'll wait until you testify. I do look forward to that.

SEN. DODD: Senator Tester.

SEN. JON TESTER (D-MT): Thank you, Mr. Chairman.

Thank you, Ranking Member Shelby.

Before we get into the modernization of our insurance regulatory system, I do want to just say a couple of things about AIG, specifically about what has transpired over the weekend on the $165 million bonuses.

It was about six months ago that Secretary Paulson came into this committee and said that we needed some significant money invested in the financial system; otherwise, we will experience a financial meltdown.

There were a lot of very, very difficult decisions that were made over the next few days that many people lost sleep over. A lot of taxpayer dollars were doled out. And there was a lot of discussion about additional compensation, particularly bonuses, to companies who were led down the wrong path who were on the verge of going bankrupt.

And now, once again, this weekend we hear of a company, AIG in particular, who has received $173 billion in taxpayer money doling out some $165 million in bonuses to their employees because supposedly it was the contract. Well, the fact is, is what would those contracts have been if the taxpayers wouldn't have bailed them out? That company would have been broke, those people would be part of the 600,000 unemployed that occur in this country a month, every month, and they would be on the street.

So what do the taxpayers get for thanks for throwing $173 billion into a company like AIG -- continued bonuses, the same old way of doing business. And what do we hear? We hear, well, these bonuses have to be given out because this is our professional work force.

I can tell you that this is incredibly unacceptable and the fact is is that these companies going broke, companies like AIG, it makes perfect sense to me now. If anybody did business like these folks do business, they'd be in the same boat.

And all I have to say is, before I get into my brief statement is, is if this is the way Wall Street and AIG and all the others continue to do business, we can't help them with any amount of money we put forth to them. This is ridiculous. And hopefully -- hopefully they will find some way -- I don't care, litigate it in court. This just isn't right to be occurring. It is not right to be occurring because this company would be out of business and those people would be on the street and they need to understand that the only reason that they even have a job is because of the taxpayers and their ability to put forth money to this.

Thank you, Mr. Chairman.

I just want to say a few things about the modernization. I believe that you've put together a great panel of witnesses today to help provide perspective on this issue that we're about to confront and that's regulatory reform in the financial sector, particularly insurance. And while I believe there's a need to act quickly to instill consumer confidence through the regulatory modernization, I believe we also need to be cautious. We need -- we do not want to over-regulate, but we want to do it in a targeted, effective manner. And I feel that insurance regulation may be viewed by some as a candidate for wholesale regulatory overhaul where more deliberative measures would be more effective.

However, I am interested in the spectrum of ideas. I truly do look forward to hearing from the witnesses so we can come up with some common-sense solutions for regulation in the marketplace.

Thank you, Mr. Chairman.

Thank you, Senator --

SEN. DODD: Thank you very much, Senator Tester.

And, again, we thank our witnesses for being with us this morning. And I think you've heard as well here, from all of us, on the AIG matter. And one way or another we're going to try and figure out how we're going to get these resources back.

I note as well, though, at the same time they were announcing the bonuses, there was a second story. And the second story was, my colleagues will recall, at this hearing we asked who the counterparties were two weeks ago and there was reluctance, of course, to share with the committee who the counterparties were. And for obvious -- I understand why the reluctance. But in that story we're discovering that there were companies that were getting as much as $12 billion -- dwarfs the $165 million in a sense. And so that story ended up being sort of a secondary story because bonuses obviously attract more attention. But I would point out to my colleagues that the counterparty story, I think, is a much bigger story in many way, because the question I asked, I think, at the outset of the hearing was who did we bail out? Who, in a sense, was rescued? And we're now discovering that there were companies, including foreign operations, that were receiving billions of dollars at 100 percent value.

And so, while we can get angry about and should over the bonus issue, there's a secondary story here that seems to be playing a second level that ought to be a source of far more aggressive action on our part to determine how that happened, why 100 percent value, why the collateral was left in their hands. So there's many other questions in addition to the bonus issue that we need to address, but I'm confident we can come up with -- at least we should be able to try to come up with an answer on how to get back the bonus issue.

Yes?

SEN. SHELBY: Chairman, along those lines, if I can just make a brief comment, I hope that you as chairman of the committee will bring up the inspector general of TARP, Mr. Barofsky, again as he's doing his work, because I believe the American people want transparency and accountability on where all this TARP money went, including AIG, a lot of the money to the auto companies, who's benefiting from it and so forth.

And we've just gotten a little of it and we've had to extract that piece by piece, and I want to commend you, Mr. Chairman, for pursuing this. And I think everybody on this committee wants to know where this money went, who benefited, where is it? We've gotten a little, but there's a lot more to come.

SEN. DODD: That's a good suggestion, Senator, and we'll follow up with that.

Let me welcome our panel here and move on to the subject matter in front of us here today.

Michael McRaith is the director of insurance for the state of Illinois and he is testifying on behalf of the National Association of Insurance Commissioners.

And we thank you very much for being with us.

Secondly is Frank Keating, who is president and CEO of the American Council of Life Insurers, a position that Mr. Keating has assumed since 2003 following his service as the governor of Oklahoma.

We thank you very much, Frank, for joining us.

I mentioned during my remarks Bill Berkley is chairman and CEO of the W.R. Berkley Corporation and, since the founding of the company in 1967, has managed its growth into a Fortune 500 property-casualty insurance company headquartered in my state of Connecticut. He serves as well as vice chairman of the Board of Trustees of the University of Connecticut.

And we thank you, Bill, for joining us.

Steve Houldin -- Spencer, excuse me, Houldin, is the president of Ericson Insurance Advisers, which is headquartered here -- or rather, headquartered in Washington Depot, Connecticut.

We thank you for joining us.

Mr. Houldin is testifying on behalf of the Independent Insurance Agents and Brokers of America, where he has served as the chairman of the Government Affairs Committee since 2008.

John Hill is president and chief operating officer of Magna Carta Companies, a commercial lines insurance headquartered in New York City.

And we thank you, Mr. Hill, for being with us.

Frank Nutter is the president of the Reinsurance Association of America, a position he has held since 1991.

And Frank, we thank you for being with us.

Robert Hunter serves as the director of insurance for the Consumer Federation of America, and I had the pleasure of addressing the Consumer Federation of America last week.

And, once again, always important to have to at the table when matters like this are being discussed, so we thank you for joining us.

We'll begin with you, Mr. McRaith. And we're going to try to limit, because we have a large panel, try and keep your remarks to five minutes. I won't bang down the gavel, but if I'm raising it, it means you should wrap it up. (Sounds gavel.) Okay?

MR. MCRAITH: Understood.

Chairman Dodd, Ranking Member Shelby, members of the committee, thank you for inviting me to testify. I'm Michael McRaith, director of insurance for the State of Illinois.

The mike -- it is on. Maybe I need to pull it closer. Forgive me. Is that better?

I'm Michael McRaith, director of insurance for the state of Illinois, and I speak today on behalf of the National Association of Insurance Commissioners. The insurance industry, even in these difficult times, has withstood the collapses that echo through the other financial sectors. Today we may not agree on everything, but we likely do agree that insurance regulation must not only serve the industry but must also prioritize U.S. consumers.

Consumer protection has been, is and will remain priority one for state regulators. We supervise 36 percent of the world's insurance market. Our states include four of the top 10, 28 of the top 50 world markets, and alone we surpass two, three and four combined. With the world's most competitive market, we, your states, are the gold standard for regulation in developing countries.

Some in the industry take the opportunity of our crisis to clamor for the so-called optional federal charter or deregulation. Respectfully, this decade-old rhetoric does not warrant the important time of this committee. To be sure, as with any dynamic industry, insurance regulation must modernize, and it does. We have worked with producers to improve national licensing uniformity and reciprocity. Working with producers we commented in support of a proposal to deal in improved with -- I'm sorry -- to improve how states deal with surplus lines.

State regulators adopted a comprehensive reinsurance reform proposal and are presently developing implementation details. The Interstate Compact, a single portal for approval of annuity and life products, has been adopted by 34 jurisdictions.

The NAIC maintains the world's largest insurance financial database, a consumer information resource, licensing for more than 4 million producers and other subject-matter data. We want to ensure that this information serves Congress and the federal executive branch.

The NAIC is active internationally, collaborates regularly with our counterparts overseas, serves as technical adviser to the USTR, works with the OECD, the Joint Forum and others. But accepting the limits of Article I, Section 10 of the Constitution, we acknowledge the need for a coordinator of federal policies on international insurance matters. For these reasons, we worked constructively to narrow aspects of preemption and supported creation of the Office of Insurance Information.

With respect to Solvency II, the mythology of this EU directive far exceeds its factual merits. Details of the plan remain in dispute and incomplete, and agreement among the EU nations is a wilting aspiration.

State regulators do support systemic risk regulation based on the principle of integration but not displacement of functional regulators. State-based insurance regulation and national or international systemic regulation are inherently compatible. Information sharing and confidentiality protocols can be established, and coordination among financial regulators can be formalized.

State regulators know that effective regulation coincides with corporate governance and comprehensive risk management, and supervisory colleges can require both. Preemption of any functional regulator should occur only with material risk to the solvency of the enterprise, the demise of which would threaten systemic stability.

We must be ever vigilant, though, not to preempt the state-based consumer protections and solvency standards that serve our public so well. While conversation most often centers on industry concerns, in 2008 state regulators replied to over 3 million consumer inquiries and complaints.

Like you, we know that a single mother in a car wreck racing between jobs needs local and prompt assistance. We know that an elderly gentleman on a fixed income, sold an indexed annuity, cannot wend his way through a federal bureaucratic morass. After every incident, our consumers, your constituents, need to know that the company that collected their premiums, often for years, has the wherewithal to pay the claim.

To conclude, we support systemic regulation, pledge our good- faith interaction and renew our commitment to engage constructively with this committee. Thank you for your attention and I'll look forward to your questions.

SEN. DODD: That was right on five minutes, to the second. Very good, Mr. McRaith.

Mr. Keating?

MR. KEATING: Mr. Chairman, Senator Shelby, members of the committee, thank you for giving me this opportunity to speak to the subject of regulatory modernization. The ACLI is the principal trade association for U.S. life insurance companies and its 340 member companies representing 93 percent of life insurance business and 94 percent of the annuity business in the United States.

There are three points I'd like to emphasize to the committee this morning. The first is that the life insurance business is systemically significant, not only in terms of the protection and retirement security it provides to millions of Americans but also in terms of the role it plays in capital formation in our economy. Decisions and initiatives addressing regulatory reform and economic recovery of the financial sector must reflect that fact.

The second point is that, absent a federal insurance regulator, the ability of Congress to fully and effectively implement whatever national financial regulatory policy you establish will be problematic at best, with respect to insurance.

And third, as Congress and the administration address the deepening crisis in the financial sector, decisions are being made that have a profound effect on the life insurance business. And unfortunately, Mr. Chairman, those decisions are being made without any real understanding of how our business operates and without any significant input from our regulators.

Financial regulatory reform is focused at the moment on systemic risk as we agree it should be. But if reform initiatives don't encompass all those segments of financial services that are systemically significant, there will almost certainly be gaps in systemic risk regulation.

With our financial markets as interlinked as they are today, gaps relative to any one sector present an unacceptably high likelihood of widespread problems down the road.

My written statement details the facts demonstrating that life insurance is by any measure a systemically significant component of U.S. financial services. Let me touch, though, on a few highlights. First, life insurance products provide financial protection for some 70 percent of U.S. households. That is over ($)20 trillion in life insurance in force, and our companies hold $2.6 trillion in annuity reserves. Annually we pay out almost $60 billion in life insurance benefits, over ($)70 billion in annuity benefits and more than $7 billion in long-term care insurance benefits.

We are the backbone of the employee benefits system. More than 60 percent of all workers in the private sector have employer- sponsored life insurance, and our companies hold over 22 percent of all private employer-provided assets. Life insurers are the single largest source of corporate bond financing and hold approximately 18 percent of total U.S. corporate bonds.

The last thing this Congress or this administration wants is for any one of those critical roles that life insurers play to be jeopardized. Placing the highest priority on measures designed to stabilize the payment system is appropriate, but doing so while ignoring other systemically significant segments of financial services or doing so at the expense of those other segments is not.

My second point is on policy implementation. Whatever legislation Congress ultimately enacts will reflect your decisions on a comprehensive approach to financial regulation. Your policy should govern all systemically significant sectors of the financial services industry and should apply to all sectors on a uniform basis, without any gaps that could lead to systemic problems.

Without a federal insurance regulator, on an optional basis, and without direct jurisdiction over insurance companies and given clear constitutional limitations on the ability of the federal government to mandate actions by state insurance regulators, how will national regulatory policy be implemented with respect to the life insurance industry?

The situation would appear to be very much analogous to privacy under Gramm-Leach-Bliley. Federal bank and securities regulators implemented that policy for banking and securities firms, but Congress couldn't compel insurers to subscribe to the same policies and practices on privacy. You could only hope that 50-plus state regulators would individually and uniformly decide to follow suit.

Hope may have been an acceptable tool for implementing privacy policy, but it should not be the model for reform of U.S. financial regulation. The stakes are simply too high.

My last point deals with the fact that critical decisions are being made in Washington affecting our business, but they are being made without any significant input or involvement on the part of our regulators.

Some examples include the handling of Washington Mutual, which resulted in life insurers experiencing substantial portfolio losses, the suspension of dividends on the preferred stock of Fannie and Freddie, which again significantly damaged our portfolios and directly contributed to the failure of two life companies; the badly mistaken belief by some that mark-to-market accounting has no adverse implications for life insurance companies, and more recently the cram- down provisions in the proposed bankruptcy legislation that would result, certainly could result, in the unwarranted downgrades to life insurers' AAA-rated residential mortgage-backed securities investments.

Those actions were all well intended, but in each instance they occurred with little or no understanding of their effects on life insurance companies. And in each instance, the only voice in Washington raising concern was that of life insurers and their agents. Acting without input from an industry's regulators runs a high risk of unintended, adverse consequences. And by input I mean day in, day out, week in, week out, insurance is the only segment in the financial services industry that finds itself in this unacceptable situation, and that must be changed.

Let me conclude by reiterating that reforming U.S. financial regulation and stabilizing the financial markets must take into account all segments of the financial services industries, including life insurers. We urge Congress to recognize the systemic importance of our business to the economy and to the retirement and financial security of millions of American and to tailor reform and stabilization initiatives accordingly.

We pledge to work closely with this committee to help craft the best possible system for overseeing all segments of our financial markets.

Thanks again, Mr. Chairman and members, for giving us this opportunity to comment on these extraordinarily important matters.

MR. BERKLEY: Thank you --

SEN. DODD: Mr. Berkley. I'm sorry.

MR. BERKLEY: Thank you, Chairman Dodd, Ranking Member Shelby, and members of the committee. I'm testifying today not as -- just as CEO of W.R. Berkley Corporation but as chairman of the board of the American Insurance Association. I believe that I bring a unique and broad perspective to this discussion. I've been involved in the insurance business as an investor or manager for over 40 years. I'm a leading shareholder of insurance and reinsurance companies and I'm also a majority shareholder of a nationally chartered community bank.

I have witnessed the ebbs and flows of business cycles during that time with the only constant being the existence of risk and the need to manage it. It is that challenge that brings us here today: the imperative of examining, understanding and measuring risk on an individual and systemic level and retooling the financial regulatory structures to be responsive to that risk.

With that context in mind, I'd like to focus my remarks today on three major themes.

First, property-casualty insurance is critical to our economy, but it does not pose the same types of systemic risk challenges as most other financial service sectors.

Second, because property-casualty insurance is so essential and is especially critical in times of crisis and catastrophe, federal regulation will enhance the industry's effectiveness, provide for greater consumer protection and should be included as part of any well-constructed federal program to analyze, manage and minimize systemic risk to our economy.

Third, given the national and global nature of risk assumed by property-casualty insurers, establishment of a federal insurance regulator is the only effective way of including property-casualty insurance in such a program.

Property-casualty insurance is essential to the overall well- being of the U.S. economy. We purchase close to ($)270 billion in state and municipal bonds, pay almost $250 billion annually in claims and, importantly, employ over 1.5 million hardworking Americans.

Property-casualty insurance protects individuals and businesses against unforeseen risks and enables them to meet their financial responsibilities. Insurance allows all businesses to function effectively, Main Street and large businesses alike.

Property-casualty insurance plays remains financially strong through this current crisis. There are several reasons for that, but importantly, property-casualty insurance operations are generally low- leveraged businesses, with low asset-to-capital ratios. They are more conservative investment portfolios and more predictable cash flows that are tied to insurance claims rather than on-demand access to assets.

Yet, despite the industry's strong financial condition during this crisis, there are compelling reasons to establish federal regulation for property-casualty insurance in any regulatory overhaul plans. The industry could always face huge, unforeseen, multibillion dollar loss events such as another natural disaster or terrorist attack.

It makes little sense to look at national insurance regulation after the event has already occurred but a lot of sense to put such a structure in place before the crisis to help avoid the consequence or mitigate those consequences that are unforeseen.

However this committee resolves the debate on federal financial regulatory modernization, the only effective way to include property- casualty insurance would be to create an independent federal regulator that stands as an equal to the other federal banking and securities regulators.

I continue to believe this, with all due respect to the state insurance regulatory community, the state-based insurance regulatory structure is fragmented and frequently not well equipped to close the regulatory gaps that the current crisis has exposed. Each state only has jurisdiction to address those companies under its regulatory control.

Even where the states have identical laws, the regulatory outcomes may still be inconsistent because of diverse political environments and regulatory interests. If this crisis has revealed anything, it is the need for regulatory efficiency, coordinated regulatory activity, and sophisticated market analysis and the ability to anticipate and deal with potential systemic risk.

In addition, virtually all foreign countries have national regulators who recognize that industry supervision goes well beyond solvency. Effective contemporary regulation also must examine erratic market behavior by companies in competitive markets to ensure that those markets continue to function properly and do not either encourage other competitors to follow the lead of irrational actors or impede the competitive ability of well-managed enterprises.

The reality is that no one state can effectively deal with mega- events or cross-border issues that impact multiple states, and no state can handle a global crisis.

The American Insurance Association and its members have supported the National Insurance Act sponsored by Senator Johnson in the last Congress as the right vehicle for smarter, more effective insurance regulation. Yet we recognize that even the best legislative vehicle must be updated to be responsive to the evolving economic climate and to enhance strong consumer protections.

Let me close by thanking the committee again for opening the dialogue on this critical issue. The time is right for thoughtful, measured but decisive action. We stand ready to work with you on a regulatory system that restores confidence in our financial system.

Thank you.

SEN. DODD: Thank you very much, Mr. Berkley.

Mr. Houldin?

MR. HOULDIN: Good morning, Chairman Dodd, Ranking Member Shelby, members of the committee. My name is Spencer Houldin and I'm pleased to be here on behalf of the Independent Insurance Agents and Brokers of America. Thank you for the opportunity to provide our association's perspective on insurance regulatory modernization.

The insurance arena is certainly not immune from the effects of the current crisis, but I am happy to report that my business and much of the insurance marketplace remains healthy and stable.

While the insurance business would benefit from greater efficiency and uniformity, we should be extremely cautious in the consideration of wholesale changes that could have a disruptive effect.

We also believe that it is critically important to keep in mind how potential regulatory changes could impact small businesses. Few have been left unscathed by the recent economic crisis, and like most Americans, the property and casualty market has suffered investment losses due to stock market decline. But the property and casualty insurance market is stable and continues to serve consumers well. There has not been one property and casualty insurance insolvency the past year and not one property and casualty insurer has sought access to TARP funds.

If there is one thing to take from my testimony today, it's that property and casualty insurance market continues to operate very well without the need for the federal government to provide any type of support.

Some groups have pointed to the failure of AIG to drive their deregulation agenda such as through an optional federal charter. AIG is a unique institution in the financial services world and its holding company has a federal regulator, the OTS. AIG is not Exhibit A for a day-to-day federal regulation, especially an OFC.

Most observers agree that that state regulation works effectively to protect consumers. State officials continue to be best positioned to be responsive to the needs of the local marketplace and local consumers. Additionally, it should not be overlooked that the state system has inherent consumer protection advantage in that there are multiple regulators overseeing an entity and its products, allowing others to notice and rectify potential regulatory mistakes or gaps.

Providing one regulator with all these responsibilities could lead to more substantial problems where errors of that one regulator lead to extensive problems throughout the entire market.

This crisis also has provoked a discussion of risks to the entire financial services system as a whole. While a clear definition of systemic risk has yet to be agreed upon, we believe the crisis has demonstrated a need to have special scrutiny of the limited group of unique entities that engage in services or provide products that could pose systemic risks to the overall financial services market.

Federal action, therefore, is likely necessary to determine and supervise such systemic-risk concerns. While state regulation continues to protect consumers and provide market stability, we have long promoted the use of targeted measures by Congress to help reform the state system in limited areas.

By using limited as-needed federal legislation, we can improve rather than dismantle the current state-based system. For example, to rectify the problem of redundant and costly licensing requirements, we strongly support targeted legislation that would immediately create the National Association of Registered Agents and Brokers, known as NARAB, to streamline nonresident insurance agent licensing.

Given the economic crisis in which we find ourselves today, it is somewhat surprising that we have to address the issue of optional federal charter. We oppose OFC because we believe it would worsen the current financial crisis as its theory of regulatory arbitrage has been cited as one of the key reasons why we find ourselves in the current situation.

President Obama and Treasury Secretary Geithner have both made comments that we should not allow regulated entities to cherry-pick from competing regulators. Does anyone really thing that allowing AIG to choose where it was regulated would have solved their problems?

Creating an industry-friendly optional regulator also is at odds with one of the primary goals of insurance regulation, which is consumer protection. OFC legislation deregulates several areas currently regulated at the state level, flying in the face of the nearly universal call today for stronger and more effective regulation of the financial services industry.

As I previously mentioned today, and it bears repeating one last time, we believe that with the exception of a properly crafted systemic risk overseer, targeted modernization is the prudent course of action for reform of day-to-day insurance regulation.

IIABA, again, appreciates the opportunity to testify, and we remain committed to continuing to work to improve state insurance regulation for both the consumer and market participants.

SEN. DODD: Thank you, Mr. Houldin.

Mr. Hill, welcome to the committee.

MR. HILL: Thank you, Chairman Dodd.

Good morning, Chairman Dodd, Ranking Member Shelby and members of the committee.

My name is John Hill and I am president and COO of Magna Carta Companies. As someone who grew up in modest circumstances in rural New Jersey, it is truly an honor to testify before you on these important issues at this point in our nation's history.

Magna Carta was founded in New York in 1925 as a mutual insurance carrier for the taxi cab industry. Today we employ 240 individuals and write in 22 states. We very much remain a small mutual insurer with $170 million in direct written premiums.

I'm here today on behalf of the National Association of Mutual Insurance Companies to present our views on insurance regulations. NAMIC represents more than 1,400 property and casualty insurance companies, ranging from small farm mutual companies to state and regional insurance carriers to large national writers. NAMIC members serve the insurance needs of millions of consumers and businesses in every town and city across America.

I also have the privilege of serving as chairman of NAMIC's Financial Services Task Force, which was created specifically to develop NAMIC's policy response to the financial services crisis. Our nation faces an unprecedented financial crisis and we commend the committee for holding this hearing to explore the role of insurance regulation.

To begin, it is important to understand the distinction between the property and casualty insurance industry and other financial services, including life insurance. For one, property casualty insurers maintain significantly higher ratio of capital to assets than do life insurers and other financial institutions. This means that property and casualty insurers are less affected by investment risk. Today, as other financial services companies are failing and seeking government assistance, property and casualty insurers continue to be well capitalized and neither seek nor require federal funding.

We support a reform system of state regulation. Property and casualty risk are inherently local in nature, and insurance contracts are dependent on state tort and contract law. The industry is competitive, solvent and generally well regulated. The hallmarks of insurance regulation are solvency oversight and consumer protection. State regulators resolve literally millions of consumer inquiries each year. They also actively supervise all aspects of the business of insurance by establishing and enforcing strict solvency and investment standards and limiting unrelated activities of insurance affiliates. Moreover, in the rare event of an insurer insolvency, the state guaranty system provides another layer of protection for consumers.

In 2008, 25 banks failed and an additional 17 have failed already this year, demonstrating a weakness in federal banking solvency regulation. Now, contrast that with the property and casualty insurance industry, which has had an excellent solvency record in 2008 in spite of a large drop in investment income and Hurricane Ike, the fourth most expensive hurricane in U.S. history. The state-based insurance regulatory system has, in fact, proven to be one of the few bright spots in our nation's regulatory structure.

We are all painfully aware of the extraordinary measures that the federal government has been forced to take to prevent the collapse of AIG. Although it has been described as the insurance giant, AIG is, in fact, a financial conglomerate that is not typical of the insurance industry as a whole. The extraordinary problems experienced by AIG were largely caused by its non-insurance financial products unit. AIG's failures do not provide justification to supplant state-based insurance regulation.

The current crisis demands that Congress act. But Congress must act prudently and responsibly, focusing limited resources on the most critical issues. We encourage Congress to adopt a measured approach to the problems at hand and avoid the inclination to rush to wholesale reform. As policymakers work to develop long-term solutions to our present financial crisis, NAMIC urges Congress to keep in mind the dramatic differences between Main Street organizations continuing to meet the needs of their local markets and those institutions that caused this crisis and have either gone out of business or required unprecedented government financial intervention.

We recommend the following reforms to strengthen our nation's financial regulatory system: one, address systemic risk by focusing on financial products that pose a risk to the entire financial system rather than particular institutions; two, establish an office of insurance information to inform federal decision making on insurance issues that facilitate international agreements; and third, expand the president's financial working group to include state regulators.

We believe such reforms are measured, appropriate and timely responses to the present crisis. As the process moves forward, we stand ready to work with the committee to address the current problems and regulatory gaps while keeping in mind the legitimate interests of Main Street businesses and consumers.

Again, we thank you for the opportunity to speak here today.

SEN. DODD: Thank you very much, Mr. Hill.

Mr. Nutter, thank you.

MR. NUTTER: Chairman Dodd, Ranking Member Shelby, I thank you for this opportunity and for holding this important hearing.

Reinsurance is a risk management tool for insurance companies -- if you will, the insurance of insurance companies. And, as such, it is probably the most global of the insurance businesses. My statement documents a number of statistics related to that, but suffice it to say that the majority of U.S. premiums ceded are assumed by reinsurers domiciled in 10 countries throughout the world, but the entire global market is required to bring much-needed capital and capacity to support the extraordinary risk exposure in the U.S. and to spread the risk throughout the world's capital markets.

We believe that a streamlined national U.S. regulatory system will result in reinsurers conducting business more readily through U.S. operations and U.S.-based personnel. Thus, the RAA supports the modernization of the current regulatory structure and advocates a single national regulator at the federal level.

Alternatively, the RAA seeks federal legislation that streamlines the current state system. An informed federal voice with the authority to establish federal policy on international issues is critical not only to U.S. reinsurers which do business globally and spread the risk throughout the world but also to foreign reinsurers who play an important role in assuming risk in the U.S. marketplace.

The U.S. state regulatory system is an anomaly in the global insurance regulatory world. In our view, the U.S. is disadvantaged by a lack of a federal entity with authority to make decisions for the country and to negotiate international insurance agreements. International entities, like reinsurers, need an international regulatory framework. A single national regulator with federal authority could negotiate an agreement with the regulatory systems of foreign jurisdictions that can achieve a level of regulatory standards, enforcement, trust and confidence with their counterparts outside the U.S.

There are several different ways to address meaningful modernization, including a federal exclusive regulator for reinsurance or federal legislation that streamlines and modernizes the current state system. Although the RAA prefers a federal regulator, the Nonadmitted and Reinsurance Reform Act, also called the surplus lines and reinsurance bill, twice passed by the House of Representatives, is a good start but could be augmented by the recent NAIC-endorsed reinsurance modernization framework. The RAA supports the NAIC proposal to modernize this framework through a system of regulatory recognition of foreign jurisdictions, a single state regulator for U.S.-licensed reinsurers and a port of entry for non-U.S.-based reinsurers.

Given the challenges of implementing changes in all 50 states and questions of constitutional authority for state action on matters of international trade, the NAIC support for federal legislation to accomplish this proposed framework is encouraging. I urge the Congress to move reinsurance regulatory modernization forward regardless of the ongoing debate about a systemic risk regulator, the subject of my concluding testimony.

Various witnesses have addressed this committee about issues associated with a systemic risk regulator.

As has been mentioned by other witnesses, property-casualty insurers generate little counterparty risk and their liabilities are, for the most part, independent of economic cycles or systemic failures.

While the property-casualty reinsurance industry plays an important role in the financial system, it may not necessarily present a systemic risk. There are clear distinctions between risk, finance and management products that are relatively new financial tools developed in unregulated markets and risk transfer products like reinsurance whose issuers are regulated and whose business models existed for centuries. Those addressing the authority of a systemic risk regulator envision traditional regulatory roles and standards for capital liquidity, risk management, collection of financial reports, examination authority, authority to take regulatory action as necessary, and, and if need be, regulatory action independent of any functional regulator.

Reinsurance companies are already regulated in much the same way as is being proposed for this systemic risk regulator. Thus, we are concerned the systemic risk regulator envisioned by some would be redundant with this system. This raises concerns that without financial services and insurance regulatory reform, a federal systemic risk regulator would be an additional layer of regulation with limited added value, could create due process issues for applicable firms and be in regular conflict with the existing multistate system of regulation.

Should Congress proceed with broad financial services reform, we ask that it be recognized that reinsurance is, by its global nature, different from insurance and that the federal government currently has the requisite constitutional authority, functional agencies and experience in matters of foreign trade to easily modernize reinsurance regulation.

It is our recommendation that reinsurance be included in any meaningful and comprehensive financial services reform through the creation of a federal regulator having exclusive regulatory authority over the reinsurance sector so there is no redundancy with state regulation. This should occur whether or not there is a systemic risk regulator included in financial services reform. Alternatively, Congress should create a single national regulator for reinsurance at the federal level but retain a choice or option for companies to remain in the state system.

We recommend that any such financial reform incorporate authority for a system of regulatory recognition to facilitate and enforce foreign insurance regulation relationships. If Congress should choose not to include reinsurance in broader financial services reform, we encourage the enactment of legislation along the lines of the NAIC's reinsurance modernization proposal to streamline the state system as it relates to reinsurance by federally authorizing a port of entry for foreign reinsurers and single-state financial oversight for reinsurance license in the United States.

Thank you very much.

SEN. DODD: Thank you very much, Mr. Nutter.

Mr. Hunter, thank you for being with us.

MR. HUNTER: Thank you, Chairman Dodd, Mr. Shelby, members. I'm Bob Hunter. I'm director of insurance for the Consumer Federation. I was the federal insurance administrator under Presidents Ford and Carter and Texas insurance commissioner before.

CFA is in the midst of a detailed review of our policy positions on insurance regulations to reflect the lessons we're learning from the economic meltdown. Here are some of our tentative conclusions.

First, there is a need for an expanded role for the federal government in regulating insurance. Second, there are significant systemic-risk issues associated with insurance that require oversight by a federal systemic risk regulator. An example would be the guaranty associations -- post-assessment plans everywhere but New York with no money to pay if an insurer goes under; they have to collect it later. With several life insurers in trouble today, the life insurance guaranty associations nationwide could muster under $9 billion if they were called upon. As I put in my testimony, that would hardly pay the bonuses that these companies are offering.

It's ironic that state regulators boast about the effectiveness of their capital and surplus requirements in stabilizing the insurers against systemic risk even as several states act at the individual state level to loosen these requirements today.

Regarding consumer protection and prudential regulation, CFA places our focus on quality rather than who does it. At this stage of our research, it appears that a federal office is needed to deal with more than just systemic risk but also to be a repository of insurance expertise, to engage in international issues and to monitor and enforce, if states opt not to, high consumer protection and prudential minimum standards set by Congress.

The minimum standards to protect consumers must address all key consumer issues such as claims abuses, unfair risk classes, unavailability of needed insurance, et cetera. They must contain, among other things, the capacity to regulate rates and classifications. Tough, thoughtful regulation, our study shows, is the most effective at protecting consumers while working well for insurers and enhancing competition. California has a system that I would encourage you to look at as a standard.

CFA will oppose any system not based on high standards for consumer protection or which would have the potential to undermine the states that are doing a good job.

Rather than enforcing congressional minimum standards through a federal regulator, a state-based entity might be empowered by Congress. That would probably be the NAIC. But we're skeptical about the NAIC. But we're skeptical about the NAIC. If you do that, you need to empower -- you need to have standards for the NAIC to prevent several problems. They have -- they need to have notice, (comment ?) rulemaking, on-the-record voting, accurate minutes, rules against ex parte communication, et cetera, like a real regulator and not like a trade organization, which they act like.

As Congress attempts to create an agency that has knowledge about insurance, it should consider restoration of the ability of the FTC to study insurance too.

A federal office should not be granted vague and open-ended powers of preemption regarding state laws but only in areas where Congress has explicitly said we want to preempt. Nor should the preemption apply to needed consumer protections.

While CFA supports a greater insurance role, we vigorously oppose the optional federal charter. Such a system cannot control systemic risk. It's impossible. It has failed miserably in protecting banking consumers -- banks have left the federal regulatory regime, according to a Washington Post article -- and sets up conditions for regulatory arbitrage.

Our review determined there are regulatory functions that the states can do better than the federal government, such as compliant handling and other functions that would be done more effectively at the federal level, such as systemic risk. The research suggests a role for the states in dealing with direct consumer needs while the federal government's role appears best addressing macro systemic trends and issues that cross state borders. These differential capacities suggest some sort of hybrid approach. This leads us to conclude that minimum federal standards might be a preferred approach.

Our research also supports differential treatment for property- casualty insurers compared to life insurers. Property-casualty insurers have local issues, like catastrophic risk and legal requirements, that are different state-by-state, versus life insurance, which is more national and scope and may lend itself more readily to federal regulatory requirements.

I emphasize these are our current ideas and we're still studying it, still under some debate at the CFA and yet to be vetted with other consumer organizations. But I wanted to give you the advantage of our early thinking.

I want to take just one final moment to reflect on what led to this situation we're in today. Reasonable profits are necessary in a vital insurance industry, but over decades there's been a change in the insurer corporate cultures from a -- that led from a focus on policy-holder interests to one that became obsessed with quarterly profits and stock price.

Insurance professionals were pushed aside by financial gurus. For decades, the undoubted champion of insurer greed has been AIG. This is no surprise. Hank Greenberg, cheered on by Wall Street, maximized profit every penny he could get a hold of. And he was well known on his insurance (street ?) as someone, if you had a claim against, you were going to be fought so that he could maintain his cash flow.

AIG's arrogance is manifest in partying and bonusing-away taxpayer money. But encouraged by rating organizations, trade organizations and compliant regulators, AIG briefly did bid rigging uncovered by Spitzer. It did credit swaps and other things, exposing their clients constantly to danger, to make more money.

Other insurers have followed suit, seeing the praise and money being lavished on AIG. For example, Allstate has maximized its profit in part by using computer systems that arbitrarily underpay claims. And the leader who brought that innovation is now running AIG, so what do you expect? A perfect person to run AIG and the resulting tone deafness that we're now all outraged -- I've heard the outrage mentioned several times. Why would a party or a bonus be an issue if the corporate culture is totally focused on greed? It's no issue to them. That's why you see arrogant letters.

This overarching insurance industry corporate culture greed over policyholder interests is why Congress must look not only at the single fruit of greed known as systemic risk but at the other greed that manifests throughout insurance, particularly the willingness to do harm to policyholders. A classic, current iteration of greed is the request for optional federal charter, so the insurers can flip back and forth to the regulator least interested in protecting people over greed.

So please, Mr. Chairman, Ranking Member, protect the policyholders as you work on this issue. We look forward to working with you on it.

SEN. DODD: Thank you very much, Mr. Hunter. Once again, always very compelling in your comments, and we thank you for being with us this morning.

I'll put the clock on here for about five minutes apiece so we can get to as many of our members here. And again, as a strong panel we thank you all for being with us.

Let me just first of all ask -- I think we'd all agree there's certainly a lack of expertise at the federal level on insurance issues, generally speaking. Mr. Hunter pointed that out. While Congress has created federal offices to handle specific insurance where there is a federal involvement, including TRIA, flood insurance, obviously examples where there's been a federal involvement in national programs, there is no central repository of information and analysis on insurance at the federal level.

I wonder if you might just express by maybe just even raising your hands how many would support creating the office of insurance information within the Treasury Department. Is that something -- we'll start off with a unanimous position. That's a good start here. (Laughter.) So I thank you for that.

I was going to make the point as well -- I was just going over last night in preparing for this morning's hearing and I -- and as someone who comes from a state that has a strong national and historic interest in this subject matter of insurance, just for the purpose of information, maybe my colleagues are aware of this -- give you some idea: according to public information, there are 2,723 property and casualty insurance companies in the United States and 1,190 life- health insurance companies in the United States.

We have a tendency to hear about the large companies we're all aware of, but almost 4,000 insurance companies around -- most of which are not national companies who are well known, but to give you some idea of the magnitude of the number of companies that are out there, I thought you might find that interesting.

Let me ask you, Mr. Hunter, if I can -- I've made the case over and over again that I thought if we can get back to the point of consumer protection, being the basis upon which you begin to look at these issues, then you have a totally different perspective that we've bought into this notion, I think, for too long -- too many have -- that consumer protection is antithetical to economic growth. And you're making the point here that if you begin by thinking about the policyholder on this issue, begin thinking about the consumer and start from that point of view, that the issues of economic growth fall naturally into place.

Do you believe that federal regulation is necessarily weaker in terms of consumer protections and state regulation? This has been the case made over the years with people like the commissioners who come before us. My own commissioners talked to us about it. Independent agents and others have made the case before Congress over the years that if you, in fact, have a federal regulator, that almost guarantees weaker regulation than if you do at that state level, where people are on the ground watching it every day, more concerned, more sensitive to the consumer interest because they're there on the ground, at the level.

And I know you mentioned a hybrid kind of situation, but where do you come out on this issue today? And I realize it's an evolving issue, but nonetheless, where is the greater protection for consumers?

MR. HUNTER: It's been my experience, having served both in the federal and state areas, that it really has a lot to do with the laws and the people who are administering them. I think the federal government could do a great job. And that's why I said earlier the consumers care a little less about the locus of regulation than the quality of it.

And we see within the state system, there are some states that are pathetic in terms of protecting consumers and there are others that are very good. As I mentioned earlier, there are some states, like California, that have very tough regulation but they have the highest Herfindahl indices of competition and the profits are reasonable for the insurance companies, et cetera. So competition can work in a way that protects consumers, be very good for the industry and still be a very competitive system. They don't have to -- one does not displace the other.

I think either the federal government or the state could do it. The reason I suggested hybrid is they're seeing something like 3 million complaints. I can't imagine a federal agency doing a very good job with it. Now, it's possible, but you'd have to set up a regional system to do that.

SEN. DODD: I (want to hear ?) the comments on this. Mr. McRaith, what is your answer on that? I mean, I appreciate Mr. Hunter's answer, but I think venue does have an impact on whether or not you get good regulation or not. If it just is going to be dispersed among 50 jurisdictions, then you're going to end up with a spotty system, some places it works, some places it doesn't. And that's hardly what I think consumers are depending upon: where you happen to live, you get good protection or you don't, as opposed to the idea, at least in a national system, you could have one strong system of rules that would at least raise the prospect of having a stronger set of regulations.

MR. MCRAITH: Mr. Chairman, the -- you cited a number of approximately 4,000 companies earlier. The number that we have is actually to 7,700 companies. And as I mentioned in my opening comments, we are -- the United States and the combination of states -- are the largest market in the world. We surpass two, three and four combined.

So the real question is, what's the problem that we're trying to solve? And if the problem is one of consumer protection, it's important to understand, I think, that different states view that differently. Not all of them Mr. Hunter is comfortable with, of course. But what's appropriate for a consumer in the state of Illinois, for example, is going to be different from what's appropriate for a consumer on the coast line in Florida or in California, for example. There's no secret about that. But that's not to say that one state has more or less protection. It's to say that those states, when determining what's appropriate public policy for their consumers, have made different decisions.

When it comes to solvency, again, if we ask what is the problem or question we're trying to answer, the state system of financial solvency is coordinated. Fifty states are looking at national companies. You have multiple sets of eyes reviewing the financial status of any one company, whether it's a Connecticut-based company, an Illinois-based company -- we, of course, also have a proud legacy of property and casualty insurers in our state.

We work with other states and it is not one sole regulator who is determining whether that status, the financial status, of that company is sufficient. It's multiple regulators with multiple skill sets evaluating a company from top to bottom.

SEN. DODD: Well, I appreciate your answer on that.

Let me jump to the systemic risk. And this will be my last question, so -- I'm already violating the clock a little bit. But I wanted to get to the systemic risk regulator, because most of you have advocated a systemic risk regulator.

I think, Mr. Nutter, you may be the one exception and that is in the reinsurance industry -- at least didn't speak for one, so I'll let you respond to this in a minute.

But excluding -- let me begin by asking this: Excluding AIG, do any of you believe here that there are systemically important insurance or reinsurance companies, per se, out there at this moment? We mentioned whether it's 7,000 or 4,000 -- are we looking at another company out there, aside from AIG, that could pose systemic risk as you see them today? Anyone have a comment on that? Can anyone identify a company that we should be aware of?

My interest in this -- and again, if I look at a systemic-risk regulator, I'm more interested in practices, rather than someone declaring themselves to be a certain type of company and then falling within a regulator or not, but the kind of practices that company engages in and then, on the basis of that, determining whether or not those practices deserve to be systemically -- pose systemic risk.

So there are specific insurance products or common practices among insurance and reinsurance companies that pose a risk to the financial system. And I wonder if you might comment briefly.

Why don't we begin with you, Mr. Nutter, because you took the position, apparently, of not necessarily endorsing the idea of a systemic-risk regulator?

MR. NUTTER: The nature of the statement was that there's a concern that if you have a systemic-risk regulator as described by, perhaps, Chairman Bernanke of the Fed, you really have a redundant system of regulation and a duplicate system for a functional regulator. Our point was if you're going to do that, you really ought to have a federal regulator for the reinsurance sector that would work with a systemic risk regulator. It wasn't to oppose a systemic risk regulator.

It's hard for us to see how a systemic risk regulator is going to coordinate with a 50-state system of regulation with a complexity of all of that, at least in the area of a global marketplace like reinsurance, where, frankly, the most important regulatory relationships between a regulator and a systemic risk regulator would be with other international regulators in other countries, trading partners, if you will. We just see that as occurring more effectively at a federal level with a federal regulator.

SEN. DODD: Mr. Berkley, do you want to comment on this? You've been in business for 40 years.

MR. BERKLEY: I think that the -- first, one has to understand what happened at AIG and that is, the good credit of the insurance business was used to guarantee the performance of other elements of the holding company. If there had been a federal regulator overseeing AIG, they would have said, "Hey, what you're doing is you're suddenly changing the character of the risk and you're putting the good creditworthiness of the insurance company and allowing them to use it, in the case of financial products, to take substantial risk." But there was no one overseeing it.

The benefits of some federal oversight is you get to look at the whole picture. It's not that there was particular risk in AIG's insurance business. Certainly there was no systemic risk in their property-casualty business. Even though they were the largest participant, the industry could have absorbed that business. It's that they effectively guaranteed the exposures in the financial products, something none of the other competitors did. All the other big banks had independent subsidiaries, without cross-guarantees in the financial products business. AIG guaranteed the performance of the financial products.

SEN. DODD: Let me turn to Senator Shelby and I'll come back. We'll have a couple rounds here.

SEN. SHELBY: Thank you, Senator Dodd.

Mr. "McRath" -- is that the way you pronounce your name?

MR. MCRAITH: "McRaith."

SEN. SHELBY: McRaith.

MR. MCRAITH: Close enough, yes.

SEN. SHELBY: Mr. McRaith, five AIG insurance companies are regulated by the state of Illinois, is my understanding. Are you aware of any financial problems with any of those insurance companies in Illinois? And what steps have you taken to ensure that those insurers are prudently managed during this disorderly time for AIG overall? And are you aware of any attempt by AIG to pay retention bonuses to any employees of its insurance companies? And if so, what state -- would you state insurance regulators have the power to call back such payments?

First -- I'll go over it again -- are you aware of any financial problems with any of the five insurance AIG-owned companies that are regulated by the state of Illinois?

MR. MCRAITH: Senator, the insurance companies that we -- that are domiciled in Illinois, we regulate those companies now and we have regulated them as long as they've been domiciled in our state, or, for that matter, in other states, on a regular basis -- quarterly, annually, top to bottom exams on a regular basis as well.

Those companies, like many companies, are encountering the turbulence of the current economic time, but as we've heard from other witnesses today, the insurance industry, including those companies, Senator, are in relatively good shape compared with other financial sectors.

SEN. SHELBY: What does "relatively" mean?

MR. MCRAITH: Well, that means, first of all --

SEN. SHELBY: You say they're in relatively good shape.

MR. MCRAITH: -- I would never say publicly whether one company were in trouble, but at the same time I'm not going to mislead you, Senator. The companies that we are regulating are -- we are comfortable with their financial status.

SEN. SHELBY: Are you aware of any attempt by AIG to pay retention bonuses to any of these employees?

MR. MCRAITH: Senator, I think it's important -- it's an important question and it's important to distinguish that the bonuses that have been publicized recently are those bonuses that would be paid to the financial products employees. And we all know the colossal disaster that that division of AIG has caused.

And frankly, I agree with everything that you and your colleagues said, for whatever my humble opinion is worth, that those bonuses should not be paid to financial products division employees of AIG. However, the insurance enterprises of AIG, as you know, are generally solid companies and their employees have performed, generally speaking, well. Now, I don't know whether any one employee has received a bonus or not within the insurance companies domiciled in our state.

SEN. SHELBY: In recent weeks -- I'll pick up on what Senator Dodd was asking a few minutes ago -- Federal Reserve Chairman Ben Bernanke has discussed publicly -- publicly -- the inadequacy of our insolvency regime for a large global financial conglomerates such as AIG. Chairman Bernanke has called for a new resolution regime that can better manage the insolvencies of systemically important firms while minimizing the risk to taxpayers.

Do you agree, sir, with Chairman Bernanke, that a new resolution regime is needed in America for companies like AIG?

MR. MCRAITH: Well, thankfully there aren't a lot of companies like AIG. And we can hope we don't see another one any time soon. The chairman also made the comment that AIG was essentially a hedge fund attached to large stable insurance enterprises. As state regulators, we're proud of the fact that their insurance companies are the primary assets of AIG and its holding company.

The solvency regime that we have for insurance companies is solid. And frankly, some of the concerns I've read expressed in testimony submitted today I think are misplaced.

SEN. SHELBY: Are you -- go ahead.

MR. MCRAITH: If, for example, one company were to have financial challenge and to be placed into receivership, other companies, first of all, can fill the void in the marketplace but can also purchase the policies of those -- of that company. And that happens frequently, because those policies themselves are viable, strong assets and other companies will pick them up right away. So the demands on the system will not be as outrageous as some would have us believe today.

SEN. SHELBY: Are you telling us that the state insurance guarantee system could handle the insolvency of AIG or a similarly large company like that, that's spread, you know, into all kinds of things?

MR. MCRAITH: Well, when you say the insolvency of AIG, if we were to talk -- and understand --

SEN. SHELBY: We're talking about AIG as a conglomerate, you know, the insurance and otherwise.

MR. MCRAITH: Right. Well, there is no system that's built to withstand an insolvency the size of the notional value of the credit default swaps AIG was invested in, which was, I believe, $2.4 trillion, which of course, exceeds the gross domestic product of France as a country. However, their insurance operations, which, as we know, are strong assets of the holding company, if those were to encounter financial trouble, the state guarantee system is designed and would allow for an orderly disposition of those claims.

But we also expect that many of those policies -- this is again, completely hypothetical because those companies are financially strong at this point -- that other companies would purchase the policies or groups of policies within an insurance company, because those are assets, other companies would want them.

SEN. SHELBY: But aren't credit default swaps an insurance against default of something? In other words, it's an insurance product of some kind.

MR. MCRAITH: Well, I would agree with you, Senator, that credit default swaps as AIG was involved in those transactions did include a form of financial guarantee.

SEN. SHELBY: Sure.

MR. MCRAITH: Unfortunately, OTS, of course, as we know, the Office of Thrift Supervision, was the primary regulator for the AIG holding company. And let's talk about the reality here, which is it's not whether there is a regulator, it's whether there is an effective regulator. And what we see with the AIG insurance companies is effective regulation. What we saw at the holding company level was a regulator who was not effective.

SEN. SHELBY: Mr. Hunter, do you agree with his statement? What's your take on --

MR. HUNTER: I didn't hear him answer the question. I don't think --

SEN. SHELBY: He (did ?) answer my question.

MR. HUNTER: I don't think the guarantee funds could handle it, no.

SEN. SHELBY: Couldn't handle at all --

MR. HUNTER: If that was your question, then I don't think they could --

SEN. SHELBY: It would be too big for them to handle, would it not?

MR. HUNTER: Of course, yes.

SEN. SHELBY: I thought so too. Thank you.

Governor Keating, the federal insurance regulation and systemic risk, an area that you've done a lot of work in, your testimony casts doubt upon whether a federal systemic risk regulator, Governor, could be established without a federal insurance regulator also being created. You argue that without a federal insurance regulator to coordinate and to implement policy, with respect to insurers, federal systemic regulation could be rendered ineffective.

Along those lines, how should a federal insurance regulator interact with a federal systemic-risk regulator to ensure that insurers are properly supervised for systemic risk, as well as for solvency and consumer protection -- the company itself? It looks to me like they'd be intertwined, so --

MR. KEATING: On a going-forward basis, it is important, as you well know, to get this right so we don't face again the kind of problems that we have faced in the recent past. But if the systemic risk regulator is a 30,000- or 40,000-foot entity, is it product specific or is it size specific? And that's something obviously that members of this committee are going to have to resolve.

It's our view that to have a functioning and efficient system, you need to plug all the holes. Systemic could look at, for example, on size or on product, the credit default swap market. I mean, how -- that is allegedly an insurance product and yet, there were no reserves. There was no ability to pay claims, which is stunning to me the state regulatory apparatus, as well as the OTS, didn't identify that early. Sixty trillion dollars of those instruments are floating around the world.

But what we would like to see on an optional basis, if you do have a functional regulator at the federal level that would speak with one voice to our international and national players, it more than likely would seek a functional regulator at the federal level. Most of our members, by the way, would remain state regulated.

But we would like to see an ability on the part of somebody to break a tie. The systemic regulator would have to be that person to break a tie. If he or she sees conduct or activity or an entity that simply is threatening the system, it is systemic, then that individual ought to be able to tell the functional regulator what to do or, for that matter, the state regulator what to do. Otherwise, we would have a multiplicity of the problems we've faced recently.

SEN. SHELBY: Governor, over the past year, our largest bond insurers have teetered on the edge of collapse due to imprudent bets on the value of mortgage-backed securities. The problems of the bond insurers have impacted our national economy as bonds they insured have rapidly, you know, gone down in value.

Although the bond insurers played an important role in our overall market, they remain regulated at the state level. If the bond insurers had been regulated by a federal regulator, if you can envision that, do you believe that their problems would have been addressed more effectively than what we have today?

MR. KEATING: Well, I'm in favor, as an industry, and we represent a life insurance annuity, the long-term care and disability income business. A regulator in a regulatory system that works, that's effective, that's tough, that is action-oriented -- I think Mike McRaith is right -- it's not particularly always where the regulator is housed; what is the regulator doing?

And obviously the OTS appear to be looking the other way on credit default swaps, and in the bond insurance business obviously somebody was looking the other way, and that is simply the antithesis of effective and appropriate regulation.

SEN. SHELBY: Where was the New York insurance commissioner on all this, too? They were the regulator of the insurance part, were they not?

MR. KEATING: Well, you might want to invite him in and have a conversation.

SEN. SHELBY: We've had him in once. We'll bring him back.

Thank you, Mr. Chairman.

SEN. DODD: Thank you, Senator.

MR. MCRAITH: I'd be happy to answer that question, too.

SEN. DODD: Yeah.

Let me get a chance to go to Senator Merkley.

SEN. MERKLEY: Thank you very much, Mr. Chair.

Mr. McRaith, AIG has been described as an insurance company that had a hedge fund piggy-backed on it. Should the future regime basically prevent insurance companies dealing in areas like property insurance and life insurance and so forth from getting into the insurance of financial products with instruments like credit default swaps?

MR. MCRAITH: Senator, the problem with AIG and the challenge for this committee, which I appreciate you're wrestling with in a substantive manner, is how do you regulate a large enterprise like AIG, and when there are multiple services or products sold by one company, and some people would even say AIG had as many as several thousand individual companies or subsidiaries within its larger holding company.

At the insurance company level, again, those insurance companies remain primary assets for the AIG holding company, in solid financial condition today. So the question is what's the problem we're trying to solve?

The problem is not the efficacy of state regulation. The problem is how do we integrate all of the different functional regulators so that they are coordinated and working together? And in that situation the state system can work, coalesce with the other functional regulators, and to the extent that at some point that it might be an enterprise whose viability is threatened, that the demise of that enterprise would threaten the stability of the system, that's when the systemic regulator can take the comprehensive action with respect to the enterprise as a whole.

SEN. MERKLEY: Thank you.

If I could re-frame what you just said, your answer to my question was no, that the answer is not to prevent companies engaged in property and life insurance from doing hedge fund-style activities but to simply have a better regulatory system.

MR. MCRAITH: Let me be more clear. I think we need to be very cautious about allowing regulated enterprises that have direct consumer obligations from participating in hedge fund or hedge fund- like transactions. We've seen the risk of that.

I think from a consumer protection perspective we need to revisit and really answer the question you're asking. And my answer to your question is absolutely not.

SEN. MERKLEY: Thank you.

Mr. Hunter, do you have any different perspective on that? Do you share that view?

MR. HUNTER: No, I don't have a different perspective. I think that Congress should look at GLB again and see whether or not it led to some of these problems.

SEN. MERKLEY: GOB (sic)?

MR. HUNTER: Gramm-Leach-Bliley.

SEN. MERKLEY: Thank you.

So a broad question to all of you is whether the size and complexity of large firms like AIG basically defies effective regulation at the state level. I think in many cases I understood your testimony to say we do need some federal coordination, but I just want to re-clarify that, if anyone wishes to comment on that.

MR. BERKLEY: I'd like to just comment. I think first of all, large parts of AIG were outside of the realm of state regulation. A huge amount of their business was overseas, was in international business. Lots of other activities were outside of the realm of state regulation.

You know, I think that you only can regulate what's within your purview, and part of the problem of AIG is so much was outside of the purview, and part of the problem of coming up with a solution where so many other non-U.S. authorities had control over pieces of the assets, and we had no federal regulator who could go and discuss with those various authorities how to have a solution. So in the case of AIG, it was not something that we had within our powers to deal with.

SEN. MERKLEY: Thank you.

Mr. Hunter, before I run out of time I wanted to ask about one aspect of your testimony in which you noted that the Congress should repeal the anti-trust exemption of the McCarran-Ferguson Act and, quote, "Collusion in pricing should not be allowed," unquote. Can you expand on your commentary on that case?

MR. HUNTER: Sure, and I would refer you to the testimony I gave before the Senate Judiciary Committee too for a very full explanation.

Back when the U.S. Supreme Court ruled for the first time that insurance was interstate commerce and the states therefore were going to lose the regulatory authority, the states went into Washington and got the McCarran-Ferguson Act.

Congress debated whether or not to apply antitrust laws, and in fact they decided to apply antitrust laws after a moratorium. If you read the debates at the time, Senator Pepper raised the issue -- well, this language could possibly be interpreted as being a permanent prohibition of applying the antitrust laws.

McCarran and Ferguson both jumped up and said, "No, no, no, that's not what we mean," but apparently the Supreme Court never read the legislative history because when it came before the Supreme Court the Supreme Court decided that antitrust laws would not apply to insurance, generally, except for coercion, intimidation and boycott. And so we now have a situation where, like baseball, insurance is not subject to the antitrust laws.

SEN. MERKLEY: Thank you very much.

SEN. DODD: (Off mike.)

SEN. CORKER: Mr. Chairman, thank you.

And thank all of you for your testimony. And many of you have been in and out of our offices or you've had representatives in and out talking about this particular issue.

Unlike some of the things we've dealt with most recently here on the committee -- and let me set AIG aside; I know we're talking about AIG today because of most recent occurrences. This is really not a hearing necessarily about AIG but about how we regulate the insurance industry in general.

This feels not like a big issue for the country as much as it does sort of a family squabble, if you will, within the insurance industry throughout our country. This is more about competing interests, it feels to me, than it does about systemic risk, and so, you know, I know that everybody (but ?) Mr. Nutter agrees with the systemic regulator concept, it seems, or at least that's what everybody seemed to indicate, which might deal with sort of the AIG kind of thing.

And it seems to me that, you know, a solution to this might be to have, on the reinsurance side and on the life insurance side, a federal regulator. And even the guys that represent the insurance folks all around our country, the independent insurers that we all know and see when we go home on the weekends, even you all agree that it's really not about life insurance, it's really about property and casualty.

And I know that you're worried about the camel nose under the tent, if you will, and if we do that on life insurance we might do it on property and casualty, but why wouldn't we just look at the systemic regulator -- except for Mr. Nutter? Why wouldn't we just have a federal regulator for reinsurance and life insurance and leave property and casualty like it is, with state regulators -- them, of course, ultimate -- with the Office of Insurance Information that apparently everybody seems to like? Why wouldn't we just deal with this issue in this way and move on to something else? Anybody that wants to respond.

MR. HOULDIN: If I may, Senator?

SEN. CORKER: Okay.

MR. HOULDIN: My agency particularly, we work -- about 20 percent of our income comes from life insurance, so I'd like to address that specifically.

Down on Main Street America the consumer concerns and complaints that we get we feel are very well addressed at the state level. I can call Commissioner Sullivan at the Connecticut Insurance Department, or his team anyway, and get immediate reaction to a concern.

And with all the baby boomers coming up that are going to have life insurance questions in the next decade or so, I think keeping the consumer protection at the state level is extremely important. And for that reason is why we don't support any federal --

SEN. CORKER: There are very few complaints, though, at the -- I mean, life insurance is not what drives complaints at your local -- at your state insurance commissioner's office, really, is it? It's just a small percentage, is it not?

MR. HOULDIN: Well, certainly the commissioner can answer that better than I can, but the concerns that I get at my firm is you buy an insurance product, a life insurance product 30 years prior, and when it comes up or your parent passes away and you look at this document, you don't even know who the agent was that sold it, you don't even know who this company is, you don't even know if it's still active.

And so I get a lot of questions from my clients, saying I know you didn't sell me this policy but can you please help me? I have no idea if this is active or if I can collect on it. And those types of questions, I think, are asked on a consistent basis, but the commissioner can comment on that.

SEN. CORKER: Okay.

Yes, Mr. Berkley or somebody?

MR. BERKLEY: Well, I think that the part where your view goes awry is for large companies. Of those 3,000 insurance companies that were referred to by Senator Dodd, probably 2,500 of them would exactly fit the bill that you're talking about, but the others wouldn't. And those are the larger companies that do business across frequently 50 states, frequently in other countries.

So when I set up a business in Latin America I had no federal insurance regulator. I had to set up a new company in that country. When I went to the U.K., there were no reciprocal arrangements. There was no way I could license my U.S. company there on a straightforward, even-handed basis. There was no dialogue, even. I had to set up a new company there.

The same, in fact, in Australia, and --

SEN. CORKER: This wouldn't solve that, though.

MR. BERKLEY: Yes, a federal regulator would then open up a dialogue, just like the company in the U.K. does business throughout the EU. The national regulators have this dialogue to allow you to do business in broader areas.

I believe if we had a national regulatory policy for the largest companies, we could have a very different dialogue and it would be a reciprocal arrangement because the large companies overseas have the same desire to do business here and one of their big problems is the licensing state by state is very complicated.

This is also addressed by Mr. Nutter's issues for reinsurers overseas.

MR. MCRAITH: Senator, if I might reply briefly.

Life insurance and annuity questions come into our offices with great regularity. The exact numbers I don't know, but we get calls, state by state, probably in the hundreds if not thousands every year on these issues.

We can't diminish the importance of each one of those calls. And the importance of a senior, for example, as I mentioned in my opening statement, who sold an indexed annuity -- where does that senior turn when they're on a fixed income and that annuity is not generating the income they were told they'd receive?

The real challenge for us is, as we talk about this, as in your concept probably the largest expansion of federal regulatory authority in the financial sector since the 1930s, as we talk about this, what's the question we're trying to answer? What's the problem we're trying to solve?

SEN. CORKER: It appears to me like a family squabble we're trying to solve. That's why --

MR. MCRAITH: Well, but let me explain. As I --

SEN. CORKER: Which is not that interesting, candidly, so I would like to know what it is we're trying to solve.

MR. MCRAITH: Right, exactly. So if the question is speed to market issues for life companies, they want to be able to introduce their products more quickly. Thirty-four jurisdictions have adopted the interstate compact, which gives a single portal, single approval opportunity for a product that can then be sold in all 34 of those jurisdictions.

Now, as a factual matter we might need congressional support to require all 50 states to join that compact. When it comes to reinsurance, all states have adopted or supported a proposal for comprehensive reinsurance reform.

Now, as we have adopted that proposal and spent a couple years working through the details, we might need federal assistance -- in fact, I'm sure we'll need congressional assistance -- in adopting that uniformly throughout the states.

These are issues that we have addressed, are working to address every day in an even better fashion than we do already. When it comes to international collaboration, just with respect to Mr. Berkley's comments, the EU is far less coordinated than the 50 states are. We're significantly larger, remember. The state of Connecticut is larger than Spain in terms of its insurance marketplace.

So as we talk about the EU as if it's a panacea, let's look at the reality. They not only have 23 different languages, they cannot agree on what exactly even their solvency framework should be.

So yes, we can improve, we're working to improve, and we look forward to working with you to help accomplish some of the uniformity goals that we all share.

MR. HILL: Senator, I'd just like to make one other comment.

At NAMIC we clearly support your position with respect to property-casualty. That's where our interest lies, and we do not see a role for a federal charter with respect to property-casualty.

With respect to the international issues, as we've all talked about, we fully support the establishment of OII. We think that can be an excellent conduit to deal with the international issues and the cross-border issues like that. So again, that's our position on that.

MR. NUTTER: Senator, if I might comment.

I wouldn't want to come across as being opposed to a systemic- risk regulator, though I have been characterized as that. I think the point that we were trying to make was that the descriptions of what a systemic risk regulator have been seem redundant to us of what a federal regulator would be and that some assimilation of that may be appropriate.

But at a federal regulatory level you have greater capability of achieving that than you do in a system of 50 state regulators and trying to overlay that on a global business like reinsurance, where many of the major companies are headquartered in trading partner countries and you need a system of -- constitutionally, an authorized system of recognition between the United States and those countries to deal effectively with global regulatory issues.

MR. HUNTER: I just wanted to say that Congress -- there are some systemic PC issues you have that Congress needs to study, including bond insurance. Directors and offices insurance is becoming wildly unavailable and very high priced for banks.

Now, you may try fixing the banks, but if they can't get D&O insurance, what's going to happen? That's the question -- the guaranty associations issues, and reinsurance that can actually melt down beyond reinsurance into the primary market if reinsurers aren't there to back up because of a black swan or something with hurricanes and terrorism all at once or something like that.

SEN. DODD: Very good.

Senator Tester.

SEN. TESTER: Thank you, Mr. Chairman.

Couple of questions to start out with: How many folks on this panel are in favor of the optional federal charter, raise your hands -- three. How many of those three are in favor of the premium taxes -- since we're talking a little turf here, we'll talk a little money -- the premium taxes staying with the state? Raise your hand. Okay.

The question I have for you three is that there's an historic issue with the Federal Crop Insurance Corporation. When it was first started out, those premium taxes were supposed to go to the state.

Long story short, there was a lawsuit that said the state had no reason because they were federally preempted and they no longer could collect those premium taxes anymore. Do you see the same kind of scenario if an optional federal charter was implemented? Do you see a similar situation with those premium taxes?

Mr. Keating?

MR. KEATING: Senator Tester, you know, as a former legislator, in your state and I think probably many of the states represented around this table, premium tax is a significant part --

SEN. TESTER: It's 40 million bucks in Montana, which is a lot of money in Montana.

MR. KEATING: (Off mike) -- a significant part of -- (off mike). But just to show you how very frustrated and even desperate some of these companies are to be able to compete on a level playing field with the banks and securities -- (off mike) -- the companies that we represent are willing to have the premium tax remain in the states. Now, it would be up to the Congress to decide whether or not you, someday down the line, would ever attempt to preempt. Our view would be we're willing to pay for the cost of regulation for a variety of reasons, and it appears, I know, on occasion to be some kind of household spat, but we're an interstate and international marketplace. Our products are virtually the same from sea to shining sea.

For us, and here's one example I think that you'd be interested in -- several years ago one of the real serious black eyes to the life insurance industry were military base sales -- abusive sales practices on military bases. The NAIC said, "We have no jurisdiction there to address those," which was horribly frustrating to us because there was no federal ability to stop it. So we were attempting to do it ad hoc basically industry by industry group, going to try to stop these practices.

So, you know, this is the frustration we face, Senator.

SEN. TESTER: So what you're saying is you believe that the premium tax will be able to stay with the state, that it's a legislative prerogative regardless if it's taken to court.

MR. KEATING: Yeah, we certainly concur in that.

MR. BERKLEY: We have no reason that it shouldn't stay.

SEN. TESTER: Okay.

MR. NUTTER: And Senator, with respect to the reinsurance, generally the reinsurers share in the cost of premium taxes with the underlying ceding company wherever that tax is paid.

SEN. TESTER: Okay, so the next question is -- and I'll focus this back on Mr. Keating and I'd ask you to be a little more concise -- but in Montana, and I'm sure it's the same way around the country, this money goes to fund the office of the insurance commissioner.

So if the option of a federal charter was put into place, that money would have to come from the general fund of the federal government and I assume you'd be in support of that for the regulating portion of an optional federal charter.

MR. KEATING: We are willing to pay for our regulation.

SEN. TESTER: Okay, so you'd be open --

MR. KEATING: Like the banks.

SEN. TESTER: You'd be open to another tax over and above the premium tax?

MR. KEATING: I don't view that as a tax. I mean, it's --

SEN. TESTER: But no, that's a fee; it doesn't matter.

MR. KEATING: -- the cost of regulation, because regulation is important --

SEN. TESTER: Okay, so you'd be willing to pay for the additional level of regulation of an optional federal -- everybody okay with that?

MR. : Yes.

SEN. TESTER: All right, sounds good.

Mr. Hunter, you had -- in the questions by Senator Merkley, you had answered a question saying that you wanted -- we may want to revisit parts of Gramm-Leach-Bliley to see if it led to some of the AIG-related problems. That's an interesting point. I want you to expand upon it.

MR. HUNTER: Well, before GLB, the banks and insurance companies couldn't mix, for example, and securities dealers and insurance companies couldn't mix, so some of the kinds of things that were involved there wouldn't have been there.

And so I think it's just a question of if we join together all these different financial services, are we really creating a systemic-risk situation that wasn't there before?

So I think given the current situation it might be worth another look at the role that GLB played in this.

SEN. TESTER: And the next step would be do you think it's reasonable to -- if we're going to take a look at it, to really look at splitting them back out? Do you think that that's a reasonable solution and this --

MR. HUNTER: If you find that the systemic risk can't be controlled in a joined-together organization -- I think that's what Congress should look at -- then I think you have to at least consider splitting them back up.

SEN. TESTER: All right.

Well, I just want to thank all of the members of the panel. Thank you very much. I wish we had more time, which we do, but I don't.

So thank you very much, Mr. Chairman. (Laughs.)

SEN. DODD: Thank you, Senator Tester.

Senator Warner.

SEN. MARK WARNER (D-VT): Thank you, Mr. Chairman. This has been very helpful, education-wise, for me.

I want to go back to where Senator Corker was heading in trying to understand. I think I've got the frame of the challenge between the state versus the federal regulation framing.

Tell me if anyone on the panel -- it does seem that Mr. Nutter's comments about reinsurance being more of a national and international business and less direct involvement on the consumer standpoint, even if I didn't go as far as life, as Senator Corker did, that just from a first-impressions standpoint that a federal regulator at the reinsurance standpoint, particularly because of the international nature of a lot of this reinsurance, makes some sense to me.

Somebody give me a counter-argument.

MR. MCRAITH: Senator, I think -- Mr. Berkley?

MR. BERKLEY: No, go ahead.

MR. MCRAITH: Okay.

Senator, I think it's important to understand that from a regulatory perspective, the quality of reinsurance, particularly on the P&C side, helps a regulator determine the viability or the financial status of a company.

So reinsurance involves the ceding of risk by a primary carrier.

SEN. WARNER: I understand.

MR. MCRAITH: In the event that reinsurance is in any way jeopardized or the status or financial condition of the reinsurer is in any way jeopardized, it has a direct impact on consumers.

SEN. WARNER: Right, but that again presupposes that you at the state level are going to better be able to assess that national or international reinsurer's ability to pay off that risk than a federal regulator, doesn't it?

MR. MCRAITH: You're asking questions that have been the subject of several years of discussion and overwrought commentary at the NAIC and the state regulatory level, and I'm happy to report that in December the states adopted a reform proposal and we are right now implementing details that we intend to present to your colleagues and you to adopt as a national reinsurance standard for all the states to adopt.

SEN. WARNER: I'll be anxious to see it, but it would still seem to me that at least in this area, on reinsurance, because of the national and international nature of reinsurance, that a national standard amongst states -- you've still got a point to convince me that that's still better than simply "repositorying" that information or that oversight at a federal level.

Mr. Nutter?

MR. NUTTER: Senator Warner, if I could address that. To its credit, the NAIC has endorsed a reform proposal that would ask the Congress to pass legislation to create a single port of entry for non- U.S.-based reinsurers and a single licensing for U.S.-based reinsurers.

The challenge for all of that, which goes to your point, is that the constitutional authority to deal with international trading partners in the EU or other parts of the world really lies with the federal government, and therefore federal regulation is clearly going to be a preferred way for our country to deal with the global nature of the reinsurance marketplace.

Alternatively we would support the NAIC's approach, but we don't think that's the preferred one.

SEN. WARNER: I've got a couple more questions, but my time's about -- let me -- Governor Keating, could you share with me one of your earlier comments, when you described the life insurance industry -- and this is a little off topic, but 18 percent of the corporate bonds, obviously a lot of other long-term holds in the debt market.

I've had life insurers come by and because of the uncertainty at this point dramatically increasing the cash portions in their balance sheet not being participants as actively in the marketplace right now because of regulatory and other concerns, and saying that many of the programs initiated by the Treasury and the Fed to kind of unlock the credit flows have benefited other areas, but we're leaving out one of the largest purchasers of these debt instruments, the life insurance industry.

And I'd love to hear your comments on that and what we should be looking at beyond the regulatory standpoint to make sure we get you folks back in the marketplace, buying.

MR. KEATING: Well, Senator Warner, I know metaphors sometimes are tired, but we look upon this, really, or should, as a three-legged stool. We have $15 trillion in mutual fund assets, ($)10 trillion in banking assets, and ($)5 trillion in life insurance assets. By anybody's definition, that is systemic.

The Congress, in its wisdom, put the life insurance industry in the TARP as a result of that very systemic belief, and yet when we first met with several of our CEOs with then-Secretary Paulson, because we have no federal presence, Secretary Paulson said, well, I cannot -- we don't know your industry, I can't put my arms around your industry, I can't figure out how to do it; how about maybe a couple or three insurance commissioners?

And Mike's a superb insurance commissioner, but the reaction immediately was, well, the other 47 would be mad they're not at the table -- or 48. Well, that won't work, so let's make it where you all have to buy a thrift. But remember, this is not for the walking wounded or for terminal cases; these are for robust companies that will use this money to buy bonds, to get the wholesale side of the economy moving again.

We have not heard back, because they still can't understand how to put their arms around this industry. And I think for the sake of the country and the growth of the economy, that's a real tragedy.

MR. BERKLEY: Mr. Chairman, I might add that we -- I think at least in the recent press reports -- we're still waiting for the Treasury to give some guidance in this area. And it's an entity that has such a potential stimulative effect in terms of getting the credit markets reopened again.

We need them at the table participating, and the sooner we can get that answer from the department on how or why or why not the industry can't participate in the TARP, I think the better for all of us.

SEN. DODD: I agree with that very much.

SEN. WARNER: Thank you, Mr. Chairman.

SEN. DODD: I know that history very well, Governor, in those days. And of course the irony was in some cases you had some industries actually out looking to actually get TARP money to buy the thrift in order to qualify to be at the table.

SEN. WARNER: Mr. Chairman, I've got an entity that went through that -- bought their S&L and then in the transition kind of got left out on the paperwork. I mean, it seems a little crazy that they had to go through this additional step to try to benefit from this program that we all want you to be involved in to get these credit markets open.

And again, since you hold these for a long, long term, these assets, that may be not priced very well at this point, but if anybody's going to hold them for a long-term maturity it seems to be your industry.

SEN. DODD: Thank you very much, Senator Warner.

Senator Johnson.

SEN. TIM JOHNSON (D-SD): Thank you, Senator Dodd. I apologize for coming in late.

Governor Keating, there seems to be some consensus that part of any regulatory modernization proposal must include a systemic-risk regulator. Is there an already-existing regulator that you believe should be given this responsibility? What powers would this entail, and what kind of sanctions or other tools would a systemic risk regulator need at his disposal?

MR. KEATING: Well, Senator Johnson, our consistent message is that this industry, this $5 billion industry -- (off mike) -- to retirees and to near-retirees, especially in the kind of economy as we are suffering from -- (off mike) -- savings and life insurance policies -- (off mike) -- to make sure you can live in comfort for the rest of your life, these are very, very important pieces of the economy.

And to consider -- (off mike) -- systemic, as I said to Senator Shelby, is hugely important, whether you're focused on individual products and need regulation because of the systemic danger to the system or if you look at the size of the company as, of course, is the Senate and Congress's discretion. But we just need to make sure that the very noisy voice of this hugely significant part of the economy is part of that equation.

SEN. JOHNSON: For all the witnesses, going forward, what is the most logical way to regulate holding companies of insurance subsidiaries?

Mr. McRaith?

MR. MCRAITH: Thank you, Senator.

I think prior to your arrival there was some discussion. Senator Merkley asked a similar question and I want to pick up on a comment made by Mr. Hunter, and that relates to Gramm-Leach-Bliley, which I know you're familiar with.

And I think it's important to go back to 1932 and the Glass- Steagall Act, which established those firewalls that served our country so well by separating commercial banks and investment banks and insurance companies.

And as we look at regulating holding companies with insurance subsidiaries, I think we need to revisit the deterioration of those firewalls that Gramm-Leach-Bliley caused, and I think we need to really answer the question of how to best protect consumers and at the same time allow our financial services to grow. There needs to be better regulation at the holding company level, and we can be a part of that.

SEN. JOHNSON: Governor Keating?

MR. KEATING: I want to say that during the course of this conversation this morning, Mr. McRaith and I have disagreed on a number of subjects. On this one, we agree, so it's -- (off mike) -- conversation.

SEN. JOHNSON: Yeah.

Mr. Berkley?

MR. BERKLEY: I think that -- obviously, I think -- (off mike) -- to be some kind of oversight of holding companies, but part of the problem is -- and you saw it at AIG -- with sophisticated financial tools, many of those old -- (off mike) -- I'm sorry.

With sophisticated financial tools, many of those old regulations have disappeared in their effectiveness. So in fact, what we saw at AIG is the guarantee and the cross-collateralization from the insurance companies to the other vehicles created substantial problems.

So I think old legislation had the right idea, but I think we would need much more contemporary regulation, which is why we think a federal legislation is really required, because it's a much more sophisticated world we live in today. It's not just corporations under a holding company, it's legal obligations that cross one to another.

SEN. JOHNSON: Mr. Houldin?

MR. HOULDIN: Senator, I certainly think that an overseer is necessary, as long as they don't get involved with the day-to-day regulation of insurance. More of a treetop approach certainly makes sense in light of what we've seen.

SEN. JOHNSON: Mr. Hill?

MR. HILL: Yes, Senator Johnson.

We think part of the solution would be the establishment of the systemic regulator because we believe by focusing more product base as opposed to institution base, that regulator will then be able to foresee the problems that would occur with these various products.

I mean, if we look at the sophistication of the credit default swaps, I think having someone with the expertise to regulate those products and products of that nature, that is the solution as opposed to looking to just target a holding company's structure, per se.

SEN. JOHNSON: Mr. Nutter?

MR. NUTTER: Senator Johnson, the reinsurance sector is probably the most global of the insurance sectors. We have testified that you really do need a federal regulatory regime that has authority to enter into agreements with non-U.S.-based regulators in other countries in order to achieve what you're talking about -- that is, the ability to look at a company holistically both in the U.S. and outside the U.S.

SEN. JOHNSON: Mr. Hunter.

MR. HUNTER: Thank you, Senator.

It's part of the systemic risk. I think you need to -- the systemic regulator would have to monitor, set standards and then be able to bring down a company so that a company would never be too big to fail.

Now, that would include the holding company and we think the logical approach is that financial institutions would have capital standards put on them based upon an analysis of their risk and not by just size but other kinds of things -- the type of activities, the interconnection to other financial markets, et cetera -- and then that would obviously sweep in a holding company if it was part of another arrangement.

SEN. JOHNSON: My time is expired.

Mr. Shelby, do you have --

SEN. SHELBY: I have no other questions, Mr. Chairman.

I think we've had a distinguished panel here today and I think everybody knows what our challenges -- (inaudible) -- how do we deal with problems in a new, 21st-century financial market that is so intertwined.

Obviously when AIG got in real, real trouble, the feds got problems in dealing with it; the chairman has said that. The states couldn't really deal with it. There's blame everywhere, but how do we prevent this from happening in the future? I think that's one of our problems.

But I think that as we hold more hearings we're going to see that this is very complex, we know that. And we've got to do this, and whatever we do, we do it right because I think we are going down the road of looking at a very comprehensive regulator for all our financial system.

I can see it coming down and maybe we can make it happen this year. I hope we can.

Mr. Hunter, you look like you want to comment on something.

MR. HUNTER: Oh, no, no, I was just rapt.

SEN. SHELBY: Okay. Okay, rapt. (Laughter.) I don't think you're in rapture of anything, but Mr. Hunter, do you agree with that? That's our challenge and our goal is there?

MR. HUNTER: Yeah, I think you've said it exactly right, Senator.

SEN. SHELBY: In other words, we're dealing in the 21st century now, and we're dealing with all kinds of new products. People think them up; a lot of them have not been approved, so to speak. A lot of people didn't realize the risk out there and to our whole financial system. But the risk is real; we're feeling it every day; the taxpayer feels it today, as we speak.

Thank you, Mr. Chairman. I have no other questions. Thank you.

SEN. JOHNSON: Senator (sic) Berkley, do you have anything else?

With that, I thank you for coming, and this hearing is adjourned. (Sounds gavel.)

Source