INSURANCE OVERSIGHT AND

LEGISLATIVE PROPOSALS

HEARING
BEFORE THE

SUBCOMMITTEE ON
INSURANCE, HOUSING AND
COMMUNITY OPPORTUNITY
OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION

NOVEMBER 16, 2011

Printed for the use of the Committee on Financial Services

Serial No. 11284

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice Chairman
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
DONALD A. MANZULLO, Illinois
WALTER B. JONES, North Carolina
JUDY BIGGERT, Illinois
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
SCOTT GARRETT, New Jersey
RANDY NEUGEBAUER, Texas
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
MICHELE BACHMANN, Minnesota
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
STEVAN PEARCE, New Mexico
BILL POSEY, Florida
MICHAEL G. FITZPATRICK, Pennsylvania
LYNN A. WESTMORELAND, Georgia
BLAINE LUETKEMEYER, Missouri
BILL HUIZENGA, Michigan
SEAN P. DUFFY, Wisconsin
NAN A. S. HAYWORTH, New York
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO QUICO CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

BARNEY FRANK, Massachusetts, Ranking

Member
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
ZQUEZ, New York
NYDIA M. VELA
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
MICHAEL E. CAPUANO, Massachusetts
N HINOJOSA, Texas
RUBE
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
GWEN MOORE, Wisconsin
KEITH ELLISON, Minnesota
ED PERLMUTTER, Colorado
JOE DONNELLY, Indiana
CARSON, Indiana
ANDRE
JAMES A. HIMES, Connecticut
GARY C. PETERS, Michigan
JOHN C. CARNEY, JR., Delaware

LARRY C. LAVENDER, Chief of Staff

(II)

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SUBCOMMITTEE

ON

INSURANCE, HOUSING

AND

COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice Chairman
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
SCOTT GARRETT, New Jersey
PATRICK T. MCHENRY, North Carolina
LYNN A. WESTMORELAND, Georgia
SEAN P. DUFFY, Wisconsin
ROBERT J. DOLD, Illinois
STEVE STIVERS, Ohio

LUIS V. GUTIERREZ, Illinois, Ranking

Member
MAXINE WATERS, California
ZQUEZ, New York
NYDIA M. VELA
EMANUEL CLEAVER, Missouri
WM. LACY CLAY, Missouri
MELVIN L. WATT, North Carolina
BRAD SHERMAN, California
MICHAEL E. CAPUANO, Massachusetts

(III)

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CONTENTS
Page

Hearing held on:

November 16, 2011 ...........................................................................................
Appendix:
November 16, 2011 ...........................................................................................

1
29

WITNESSES
WEDNESDAY, NOVEMBER 16, 2011
Lanza, Michael H., Executive Vice President and General Counsel, Selective
Insurance Group, Inc., on behalf of the Property Casualty Insurers Association of America (PCI) ...........................................................................................
Monroe, Steven M., Chief Compliance Officer, U.S. & Canada, for Marsh,
Inc., on behalf of the Council of Insurance Agents & Brokers .........................
Schwarcz, Daniel, Associate Professor, University of Minnesota Law School ....
Torti, Joseph III, Deputy Director and Superintendent of Insurance and
Banking, Rhode Island Department of Business Regulation, on behalf of
the National Association of Insurance Commissioners (NAIC) ........................

10
11
13
3

APPENDIX
Prepared statements:
Lanza, Michael H. ............................................................................................
Monroe, Steven M. ............................................................................................
Schwarcz, Daniel ..............................................................................................
Torti, Joseph III ................................................................................................
ADDITIONAL MATERIAL SUBMITTED

FOR THE

RECORD

Biggert, Hon. Judy:

Written statement of the Independent Insurance Agents & Brokers of
America ..........................................................................................................
Letter from the National Association of Mutual Insurance Companies ......
Letter from the National Association of Professional Surplus Lines Offices, Ltd. .......................................................................................................
Letter from Nationwide Mutual Insurance Company ...................................
Written statement of the National Conference of Insurance Guaranty
Funds .............................................................................................................
Letter from the National Conference of Insurance Legislators ....................
Written statement of the National Organization of Life and Health Insurance Guaranty Association ...........................................................................
Letter from the Risk and Insurance Management Society, Inc. ...................
Dold, Hon. Robert:
Written responses to questions submitted to Joseph Torti ...........................

(V)

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INSURANCE OVERSIGHT AND

LEGISLATIVE PROPOSALS
Wednesday, November 16, 2011

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INSURANCE, HOUSING
AND COMMUNITY OPPORTUNITY,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:04 a.m., in room
2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding.
Members present: Representatives Biggert, Hurt, McHenry,
Westmoreland, Duffy, Stivers; Velazquez, Sherman, and Capuano.
Also present: Representatives Green and Moore.
Chairwoman BIGGERT. The Subcommittee on Insurance, Housing
and Community Opportunity will come to order. I hope that we will
have some more Members. Maybe it is a rainy day, and it is taking
some time to get here. Without objection, all Members opening
statements will be made a part of the record, and I will begin.
Good morning, everyone, and welcome to this hearing. This is the
third in a series. I welcome todays witnesses. Today, the subcommittee will examine insurance regulation and three discussion
draft legislative proposals. These draft proposals amend provisions
in the Dodd-Frank Act in Titles I, II, and V, and specifically address: one, the authority of Federal entities to collect data from insurers; two, the FDICs Orderly Liquidation Authority (OLA) as it
relates to insurance companies; and three, the Federal Reserves
authority to potentially subject some insurers to heightened prudential standards.
Regulatory uncertainty created by the Dodd-Frank Act has unnecessarily extended into the U.S. insurance market in ways that
will raise costs for consumers, harm businesses, and weaken job
growth. I say unnecessarily because as I have said many times
before, for over 150 years the State-based system of insurance regulation has worked and endured, even during turbulent economic
times. It has allowed the U.S. insurance industry to become a
growing and vibrant source of financial security for millions of
Americans. It has allowed one sector of our economy to provide 2.3
million wage and salary jobs. The McCarran-Ferguson Act of 1945
maintained the States regulatory authority over insurance unless
a Federal law expressly provides otherwise, such as flood and terrorism insurance.
Unfortunately, certain provisions of the Dodd-Frank Act have intentionally or unintentionally upset this well-functioning, proven
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2
system of regulation. This subcommittee has heard from many witnesses and stakeholders to that end. Insurers have said that they
are not expanding their companies and creating jobs, consumer
costs may rise, and they may become less competitive abroad.
And finally, I would like to express my sincere disappointment
that representatives from the Federal Reserve and the FDIC decided not to testify at todays hearing, which is addressing significant provisions of the Dodd-Frank Act that their agencies are primarily responsible for implementing.
With that, I welcome input from all members of the committee
on these discussion drafts, and I would yield to someone on the
other side, but they are not here.
Mr. Westmoreland, would you like to give your opening statement now? You are recognized for 2 minutes.
Mr. WESTMORELAND. Thank you, Chairwoman Biggert, for holding this hearing.
Since Dodd-Frank passed, all we have seen is the uncertainty
and the harm this law has brought to working Americans and
small businesses. The proposals before the committee today are
much needed to help insurance companies get out from under
Uncle Sam and allow States to continue their long-standing insurance regulation.
Like the chairwoman, I, too, have serious concerns that the FDIC
and the Federal Reserve refused to testify at todays hearing. When
Congress asks an agency to testify, I think they should come, period. So my question to the FDIC and the Federal Reserve is, what
are you hiding or what are you ashamed to testify to?
I urge the chairwoman to hold another hearing and mandate the
FDIC and the Federal Reserve to attend so that we can find out
what they have to say about this issue, and with that, Madam
Chairwoman, I yield back.
Chairwoman BIGGERT. The gentleman yields back, and we will
take that under advisement. Thank you. The gentleman from Virginia, the vice chair, is recognized for 1 minute.
Mr. HURT. Thank you. Thank you, Madam Chairwoman. I want
to thank you for your leadership on issues relating to the business
of insurance.
Today marks the third in a series of hearings that this subcommittee has held to assess the impact of the Dodd-Frank Act on
insurers. As we have seen, Dodd-Frank contains a number of provisions that impose unnecessary duplicative regulatory burdens on
insurers that have the potential to harm both the industry and consumers. We must be mindful of the cumulative effect of adding new
Federal regulatory requirements to existing State insurance regulatory schemes. Witnesses at our previous hearings have demonstrated that excessive and unnecessary regulation of insurance
will only restrict consumer choice, inhibit the growth of free and
open insurance markets, and drive up costs on consumers in my
district, Virginias Fifth District, and across the country.
The discussion drafts we are examining today take steps to alleviate these regulatory burdens by proposing commonsense reforms that reduce duplication without sacrificing consumer protection or increasing systemic risk.

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3
Again, I want to thank the Chair for holding this hearing. I look
forward to our witnesses perspectives on the draft legislation, and
I yield back my time.
Chairwoman BIGGERT. Thank you. The gentleman from Texas,
Mr. Green, do you have an opening statement?
Mr. GREEN. Madam Chairwoman, thank you so very much. I will
pass at this time, and I look forward to hearing the testimony.
Thank you.
Chairwoman BIGGERT. With that, we have two panels today. For
our first panel, we are happy to have Mr. Joseph Torti, deputy director and superintendent of insurance and banking, Division of Insurance, Department of Business Regulation, State of Rhode Island, on behalf of the NAIC, the National Association of Insurance
Commissioners. Thank you so much for being here.
Without objection, your written statement will be made a part of
the record, and you are now recognized for a 5-minute summary of
your testimony.
STATEMENT OF JOSEPH TORTI III, DEPUTY DIRECTOR AND
SUPERINTENDENT OF INSURANCE AND BANKING, RHODE
ISLAND DEPARTMENT OF BUSINESS REGULATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

Mr. TORTI. Thank you for the opportunity to testify today. My

name is Joseph Torti, and I am superintendent of insurance for
Rhode Island. I present this testimony on behalf of the NAIC. To
be clear, the NAIC has no position on the Dodd-Frank Act or any
current legislative proposals to modify it.
Today, I will cover the unique characteristics of insurance, an
overview of the key aspects of insurance regulation, and the NAICs
efforts in working with Federal agencies as they implement DoddFrank.
Insurance products are fundamentally different from other financial products. The very nature of insurance significantly reduces
the potential of a run-on-the-bank scenario. Importantly, insurance
products do not transform short-term liabilities into longer term assets. A key reason many other financial firms suffered during the
financial crisis was that the duration of their assets and liabilities
were not matched.
The insurance regulatory frameworks fundamental tenet is to
protect an insurers ability to pay policyholder claims. Regulators
have broad authority to identify and address issues before they become a threat to solvency. The foundation of this system is the detailed and transparent reporting requirements. Insurers are required to prepare comprehensive financial statements using the
NAICs statutory accounting principles, or SAP. SAP utilizes the
framework established by GAAP, but unlike GAAP, which is primarily designed to provide key information to investors of public
companies, SAP is designed to assist regulators in monitoring the
solvency of an insurer.
Financial statements are filed with the NAIC on a quarterly and
an annual basis. The NAIC serves as the regulators centralized repository for this data, and this capability has been cited by the IMF
as world leading. We utilize this information as part of our inten-

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4
sive financial analysis. The NAIC also compiles the information to
advise us of trends in the insurance sector and the impact of external events. The information is also used in our risk-based capital
framework. This framework requires an insurer to hold at least a
minimum amount of capital based on the risks on its balance sheet.
The framework also includes authority for successive levels of regulatory intervention.
In the unlikely event that an insurer becomes troubled, State receivership laws provide regulators authorities to prevent insolvencies and to provide protection to policyholders. In 2004, we utilized
our broad authority in Rhode Island to place a troubled insurer
into rehabilitation, preventing its insolvency while ensuring full
payment to policyholders.
In an insolvency, State laws give policyholders priority over most
creditors. In cases where the assets of an insurer are insufficient
to pay claims, the States have guaranty funds to serve as a backstop for most insurance products. Together, receivership laws and
the guarantee funds ensure that policyholders are protected and
troubled insurance companies are resolved in an orderly manner.
The NAIC has a long history of working closely with the Federal
agencies, and this has continued during Dodd-Frank implementation. State insurance regulators are represented on FSOC through
John Huff, the Missouri director of insurance. In the recently released FSOC guidance, we were pleased to see a commitment to involve regulators of any insurance companies under consideration
early in the process. We are currently reviewing the guidance and
will provide our comments through Director Huff. We also continue
to encourage the FSOC to enable Director Huff to consult with us
regarding other aspects of its work that could impact insurance.
The NAIC has also been engaged in the implementation of the
FDICs new resolution authority. We have met with the FDIC and
commented on proposals regarding the circumstances in which the
FDIC can take a lien on insurance company assets. We also requested that the FDIC allow for the resolution of any mutual insurance holding companies pursuant to State laws. The NAICs coordination with the FDIC will be critical to ensuring that policyholders are protected.
Our strong relationship with the Federal Reserve has grown
since the passage of Dodd-Frank. Insurance regulators are meeting
with Federal Reserve representatives to exchange information and
to discuss how we will work together as it implements its new authorities.
The NAIC also continues to engage directly with the FIO as it
takes shape. FIO has a critical role to play in international matters. The NAIC will continue to serve as the voice of insurance regulators on these key issues, but the voice of the U.S. Government
is essential, so we look forward to partnering with the FIO in demonstrating a united front whenever possible. Dodd-Frank requires
the FIO to issue a report on insurance regulation by January 2012.
State insurance regulation has been subject to Federal scrutiny
many times before, focusing primarily on the perceived costs and
redundancy of the system. Rarely have these issues been weighed
against the strength of our systems checks and balances that help
the insurance sector weather the financial crisis far better than

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others. We look forward to meeting directly with the FIO to encourage a balanced view as it finalizes its study.
In conclusion, the NAIC continues to advocate that the unique
nature of insurance and its strong system of regulation be recognized. We look forward to continuing to work with you and our fellow financial regulators. Thank you, and I look forward to your
questions.
[The prepared statement of Superintendent Torti can be found on
page 63 of the appendix.]
Chairwoman BIGGERT. Thank you so much, and with that we are
going to move to the questions. Members will have 5 minutes each
to ask questions, and I will begin with myself and yield myself 5
minutes.
Mr. Torti, during the subcommittees October 25th hearing with
regard to the Federal Insurance Office (FIO) authority under the
Dodd-Frank Act to issue a subpoena to collect data directly from
an insurance company, FIO Director McRaith said that the possibility of actually issuing a subpoena to collect information is extremely unlikely.
Can you envision any scenario where the FIO or the Office of Financial Research would need to issue a subpoena to collect data directly from an insurance company aside from the data that can be
secured from State regulators, public sources, or any other entity?
What kind of data would the FIO or the OFR need to collect?
Mr. TORTI. What I can say about that is that we, as State regulators, collect an extensive amount of data on insurance companies.
We have every piece of financial data that is necessary to regulate
these companies, and I cant really envision a scenario where the
Federal regulators may need something regarding the financial
condition of an insurance company that we dont already have, and
we are very happy to share any of that information. Anytime we
have been requested to provide information to any of the Federal
agencies, we have done so without hesitation.
Chairwoman BIGGERT. Thank you. And then on page 8 of your
written testimony, you state that regulators have requested that
the FDIC allow for the resolution of any mutual insurance holding
company pursuant to State insurance receivership laws as the statute is unclear in this regard. The discussion draft number 2 under
consideration by the subcommittee today aims to provide this clarity with regard to mutual insurance holding companies.
Do you think that the Dodd-Frank Act lacks clarity about whether they are covered by the insurance company definition for purposes of the FDICs Orderly Liquidation Authority?
Mr. TORTI. We do think that the intent of the legislation is clear
and that it is not intended that mutual insurance holding companies be subject to the resolution authority of the FDIC, and we
have been working with the FDIC, we have had several conference
calls with the FDIC, and we met with them as recently as early
November, just before the recent NAIC meeting in National Harbor, Maryland. So we have worked very closely with them, and we
are hopeful that any rule that comes out will clarify that mutual
insurance holding companies

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Chairwoman BIGGERT. Can you elaborate on why State regulators have requested that the States resolve a failed mutual insurance holding company?
Mr. TORTI. Right now, under the State laws regarding receivership, mutual insurance holding companies are included in the receivership estate, so the assets of the mutual insurance holding
company are available for the policyholders and claimants of that
insurance company in that receivership. So it is important that
that holding company be resolved in accordance with the State insurance receivership laws in order to protect those policyholders.
Chairwoman BIGGERT. Okay. So you would say that the States
are better equipped and experienced to be able to resolve the matter?
Mr. TORTI. I would say that the States are well equipped to resolve insurance company matters.
Chairwoman BIGGERT. Okay. Then, thirdly, why cant a bank
model for regulation work for insurance companies? Is there a difference in the way that State insurance regulators establish leverage and risk-based capital requirements for insurance companies
as compared to the way that the Federal bank regulators establish
leverage and risk?
Mr. TORTI. Banking products and insurance products are very
different. Insurance policyholders pay a premium, and insurers
make a promise to pay in the future. It is much different, especially in the property and casualty area, than a financial product
that might be offered by a banking institution. The chance of a
run-on-the-bank type scenario with an insurance entity is much
less than with a banking entity. The liabilities and assets are appropriately matched in insurers. If a company is selling long-term
type insurance, they match their assets with that long-term insurance. That is one of the key things that insurance companies do
and that regulators ensure is done appropriately, especially in the
area of life insurance.
So, they are very different products. There is a very different regulatory standard, and we believe that we appropriately regulate insurers.
Chairwoman BIGGERT. Thank you. My time has expired. The
gentleman from Texas is recognized for 5 minutes.
Mr. GREEN. Thank you, Madam Chairwoman, and I thank the
witness for testifying. As you know, we had great difficulty with
some of the too-big-to-fail institutions when we were going
through the financial crisis. One such institution was AIG. It had
financial components, but there were also many other things that
were contained within the network that AIG had. In fact, there are
some who contend that AIG may have been the glue that was holding everything together simply because they were so vast and so
pervasive in the institutions that they covered.
My question to you has to do with Orderly Liquidation Authority.
The Orderly Liquidation Authority that we have in Dodd-Frank allows the FDIC to intervene and to do what is necessary under exigent circumstances, I would consider it exigent circumstances. I
think what happened with AIG was under exigent circumstances.
How would this occur differently today if we hadGod forbid, and
I would never want itanother AIG to contend with?

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Mr. TORTI. I hope I understand your question. Are you saying as
a result of the Dodd-Frank changes that have been made, what
would be done differently?
Mr. GREEN. How would the States respond to the FDIC handling
exigent circumstances comparable to AIG during the financial crisis?
Mr. TORTI. The traditional way that we would handle that type
of thing is we try to create a wall around the insurance entity to
protect the insurance entity and the insurance entitys policyholders from those circumstances so that the insurance policyholders and claimants arent made to pay for the problems outside
the insurance entity. That is normally the way that we protect an
insurance entity in a receivership situation. So if there were a
holding company issue or a significant affiliate outside of the insurance entity that had financial difficulties, we would protect the insurer from those financial difficulties through the current receivership laws that we have in all the States.
Mr. GREEN. In essence, are you saying that you would be able
to work within the confines of Dodd-Frank and with the FDIC so
as to perfect an orderly liquidation?
Mr. TORTI. We really hope we dont end up in that situation
again.
Mr. GREEN. Obviously, yes, I concur.
Mr. TORTI. But, yes, we believe we should be able to work with
the FDIC. We are hopeful that we will be able to work with the
FDIC. We have a very good relationship with the FDIC. The FDIC
has acknowledged that protection of the policyholders and claimants of the insurance entity is of utmost importance to us, and we
believe that we should be able to work with them on that type of
circumstance.
Mr. GREEN. Are there any technical changes to the draft we have
that you would recommend to help to facilitate this?
Mr. TORTI. I cant think of any technical changes that I would
offer to the current draft that you have, no.
Mr. GREEN. Thank you, Madam Chairwoman. I will yield back.
Chairwoman BIGGERT. The gentleman from Virginia, Mr. Hurt,
is recognized for 5 minutes.
Mr. HURT. Thank you for your testimony today. We have heard
from the FIO Director, as you know, and certainly some of the concerns that come to my mind as we look at the defining role that
office will play, clearly having more information is a good thing, it
seems to me, to help the regulators have a big picture view of
systemic risk and how that ultimately affects the taxpayer. I do
have some concerns, though, about the proverbial camels nose
under the tent, and I was wondering if you could speak to that.
Obviously, I think of it from two standpoints. One is what is the
worst case scenario if we have this authority and suddenly it grows
and grows and grows, and the next thing you know you have Federal regulations competing, Federal regulatory structure competing
with the State regulatory structure. It seems by all accounts to be
very successful. I think you have spoken to that. But it is hard for
me to look at the examples we have here in Washington where
Washington has restrained itself. It is very hard to see any examples of that, and so I guess that is a concern for me. I was won-

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8
dering if you could speak to that, and then also maybe speak to the
issue of the data collection because clearly the State regulators will
cooperate fully, and I dont have any concern about that, but I can
see how if there is an additional burden for data collection put on
the insurers that suddenly, the cumulative effect makes it more
and more expensive to do business, and those costs get passed on
to the consumer.
So I was wondering if you could just speak generally to those two
things, and I again thank you for your testimony.
Mr. TORTI. Sure, and I thank you all for your support of the
State system and your kind remarks on how well the State system
does work. We are very proud of the system, and we think it does
work well to protect policyholders and claimants.
With respect to the FIO and the nose under the tent issue, I
think Dodd-Frank is very clear that the FIO is not an insurance
regulator, and I think Director McRaith has acknowledged that the
FIO is not an insurance regulator, so I cant say that I am not worried that eventually someone might try to, I guess, compete with
the State system of regulation, but I dontwe have not had any
indication from the FIO or any of the other Federal agencies that
they would do anything inconsistent with the State system of regulation or anything that would in any way interfere with the current
regulatory system the way it is now.
With respect to data collection, we do have very robust data collection, and we do extensive analysis of that data. It allows our examiners to do constant financial analysis of every insurance company out there. The statements are hundreds of pages. You can get
details of any securities that are on the statements of any insurance company that files an NAIC statutory blank. There are details
on reinsurance that are extensive. There are details on loss reserves that are extremely extensive. I cannot think of any information regarding the individual insurance entities or financial information that we dont have in our world class database, so I would
hope that it would not be necessary to request any information at
all directly from insurers that we dont have. It is very clear that
we have anything thatover the 150 or so years that we have regulated insurance, I think we have developed a system that captures
everything you could possibly need to regulate these entities.
Mr. HURT. Thank you, and thank you, Madam Chairwoman, I
yield back my time.
Chairwoman BIGGERT. The Chair recognizes the gentlelady from
New York, Ms. Velazquez, for 5 minutes.
Ms. VELAZQUEZ. Thank you, Madam Chairwoman. Mr. Torti, regulation of the insurance industry takes place primarily at the State
level, but as we learned from the collapse of AIG, large firms can
become systematically important and accelerate the collapse of the
financial system.
In your opinion, does any one State have the resources to monitor and protect the whole country from systematically important
insurance companies?
Mr. TORTI. Let me just answer that by saying it is hard to imagine the insurance enterprise, the insurance company itself posing
a systemic risk. Just the way that insurance
Ms. VELAZQUEZ. It is hard to imagine?

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Mr. TORTI. The insurance business itself. There could be entities,
as we saw in AIG, outside the insurance enterprise that may pose
a systemic risk, but the business of insurance is a little different
than that. It is very hard to imagine that a single insurance company could pose a systemic risk. What happens at one insurance
company usually does not carry over to the next insurance company. There is a promise to pay in the future that an insurer
makes, and it is very difficult to imagine something that could
occur.
Ms. VELAZQUEZ. So you are telling me that the collapse of AIG
didnt send shock waves throughout the
Mr. TORTI. It absolutely did send shock waves, but that was the
financial services division of AIG that did collapse.
Ms. VELAZQUEZ. So you dont see any role for the Federal Government at all in terms of having to deal again with a collapse like
AIG to prevent a direct effect across-the-board throughout the insurance system?
Mr. TORTI. I did not mean to imply that there was no role for
the Federal Government.
Ms. VELAZQUEZ. Okay.
Mr. TORTI. What I did mean to say is that insurance regulators,
State insurance regulators are fully capable of regulating insurance
enterprises. There may beI am sorry.
Ms. VELAZQUEZ. Okay, thank you. Mr. Torti, discussion draft
number 2 will prohibit the FDIC from obtaining a lien on a failed
insurance companys assets without the written consent of the companys State regulator. How are taxpayers and the public better
protected by forcing the FDIC to seek permission from State regulators during the orderly dissolution of a failed firm?
Mr. TORTI. First of all, I want to make clear the NAIC does not
take a position on any of the pieces of legislation. However, the job
of the State regulator is to ensure that the policyholders and claimants of that insurance enterprise are protected, and if we are not
able to have any type of say in what happens to those policyholders
and claimants of the insurance enterprise, and the State scheme of
regulation includes receivership laws that are intended to protect
policyholders of that insurance enterprise, we just need to preserve
that role as the regulator of insurers in order to protect those policyholders.
Ms. VELAZQUEZ. Okay. Thank you, Madam Chairwoman.
Chairwoman BIGGERT. Thank you. Just for the record, Mr. Torti,
wasnt AIGs holding company a thrift?
Mr. TORTI. It was, and it was actually regulated by the Office of
Thrift Supervision, yes. It was not an insurance entity.
Chairwoman BIGGERT. Thank you. I see no further questions,
and so we would thank you for your testimony, and thank you for
being here. The Chair notes that some Members may have additional questions for you which they may wish to submit in writing.
Without objection, the hearing record will remain open for 30 days
for Members to submit written questions to you and to place your
responses in the record. Thank you so much.
Mr. TORTI. Thank you very much.
Chairwoman BIGGERT. And with that, I will call up the next
panel. Thank you all for being here.

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I would like to welcome the second panel. We have today: Mr.
Michael Lanza, EVP and general counsel, Selective Insurance
Group, on behalf of the Property Casualty Insurers Association of
America; Mr. Daniel Schwarcz, associate professor, University of
Minnesota Law School; and Mr. Steven Monroe, chief compliance
officer, U.S. and Canada, for Marsh, Incorporated, on behalf of the
Council of Insurance Agents and Brokers.
I seem to have mixed up the names, but we will proceed with Mr.
Michael Lanza. You are recognized for 5 minutes for your testimony.
STATEMENT OF MICHAEL H. LANZA, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, SELECTIVE INSURANCE
GROUP, INC., ON BEHALF OF THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

Mr. LANZA. Thank you. Chairwoman Biggert, and subcommittee

members, thank you for the invitation to testify. I am Michael
Lanza, executive vice president and general counsel of Selective Insurance Group. Selective is an insurance holding company with
seven property and casualty insurance subsidiaries. I am also testifying on behalf of the Property Casualty Insurers Association of
America, which has over a thousand members and the broadest
membership of any national insurance trade association.
Selective and PCI strongly support the discussion drafts you are
considering to clarify the treatment of insurers under various provisions of the Dodd-Frank Act. Home, auto, and business insurers
did not cause the financial crisis and are not systemically important to the financial markets.
There are five key reasons why P/C insurers are not systemically
risky: one, they have low financial leverage; two, they are not highly connected with other financial firms; three, they are in a highly
competitive market with low individual company market penetration; four, they have low failure rates and, through State guaranty
funds, have their own effective resolution authority; and five, and
most importantly, P/C insurers do not sell products that can result
in a run on the bank.
In Dodd-Frank, Congress generally recognized the distinctions
between non-risky P/C insurers and other types of financial firms
that can pose systemic risk. Some fine tuning needs to be done to
make those distinctions even clearer. That is why Selective and
PCI support the proposed amendments. We do not believe that the
proposals in any way scale back any powers that Dodd-Frank
granted Federal agencies to regulate the types of risky activities
that gave rise to the financial crisis.
The discussion drafts propose technical amendments that clarify
Dodd-Franks application to insurers. These changes will reduce
the potential for unintended intrusions on State regulatory authority and other unintended consequences.
I want to comment in particular on four areas that the discussion
drafts address. First, we are concerned that Dodd-Franks provisions ensure the confidentiality of nonpublic information provided
to the Federal Insurance Office, but they may not protect that information when the FIO shares it with other agencies such as the
Office of Financial Research or the Financial Stability Oversight

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Council. The discussion drafts tightens those provisions so information will not lose its confidentiality when it is shared with various
agencies and regulators.
Second, Dodd-Frank gave the FIO subpoena powers that are
much broader than those of other Treasury agencies. Typically,
Federal agencies have subpoena power to further their primary
regulatory role in conducting formal administrative proceedings or
civil, criminal or Inspector General investigations. FIO, however,
does not have a primary regulatory role. That remains with the
States. FIO does not need subpoena power when State regulators
already have that power.
Moreover, Dodd-Frank requires the FIO to get information from
State regulators. We believe State regulators and the FIO can and
will work together cooperatively and successfully to obtain needed
information. By giving FIO, a non-regulator, subpoena powers duplicating the principal State regulators, there is a significant likelihood of redundant, costly, and burdensome data calls, and those
costs will ultimately be borne by consumers.
Third, Dodd-Frank gives Federal regulators the power to resolve
failing financial companies. P/C insurers, however, are already subject to State insolvency mechanisms, including guaranty funds that
protect the consumers. Dodd-Frank permits the FDIC to take a lien
on the assets of financial companies, but it does not exempt insurance companies. The discussion drafts requires the written consent
of the insurers domiciliary regulator before the FDIC can place a
lien on insurer assets. This ensures that insurer assets cannot be
used to shore up non-insurance affiliates, only policyholders. DoddFrank also gives the FDIC the ability to assess insurers for the resolution costs of non-insurance financial firms. This provision creates inequity between insurers and non-insurers and leads to the
possibility that insurers could be doubly assessed. The discussion
draft addresses this inequity.
Finally, Dodd-Frank gives the Federal Reserve the power to impose heightened prudential standards on firms that are found to be
systemically important. The discussion draft requires the Federal
Reserve to take into account State insurance regulatory and accounting procedures, including risk-based capital, and prevents regulatory conflicts between the Fed and the States.
For these reasons, we strongly urge that these discussion drafts
be introduced and adopted. Thank you.
[The prepared statement of Mr. Lanza can be found on page 30
of the appendix.]
Chairwoman BIGGERT. Thank you, Mr. Lanza. Mr. Monroe, you
are recognized for 5 minutes.
STATEMENT OF STEVEN M. MONROE, CHIEF COMPLIANCE OFFICER, U.S. & CANADA, FOR MARSH, INC., ON BEHALF OF
THE COUNCIL OF INSURANCE AGENTS & BROKERS

Mr. MONROE. Good morning. I am Steve Monroe, chief compliance officer for Marsh in the U.S. and Canada, on behalf of the
Council of Insurance Agents and Brokers, which represents the Nations leading insurance agencies and brokers, including Marsh. I
would like to thank you for the opportunity to address the implementation of the insurance provisions of Dodd-Frank.

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Council members employ more than 120,000 people and annually
place more than 80 percent, over $200 billion, of all U.S. products
and services. Marsh, a unit of Marsh & McLennan Companies, is
the worlds leading insurance broker and risk adviser, with over
25,000 employees in over 100 countries. My written statement has
addressed why the Council supports the legislation that will clarify
the intent of Congress in enacting Dodd-Frank, but excluding the
insurance sector from the FDIC resolution authority and from the
so-called Volcker Rule.
I will focus the remainder of my statement on the States implementation of the Dodd-Frank reforms known as the Nonadmitted
and Reinsurance Reform Act, or NRRA, and address three issues
that are most problematic right now.
The first major concern is the vastly different approaches States
have taken to tax surplus lines transactions. The NRRAs taxation
provisions are based on the concept of home State rule. Only the
home State of the insured has the ability to tax surplus lines premiums. The Federal law permits but does not require States to allocate taxes amongst themselves in accordance with a multi-State
agreement or compact.
The States are currently taking five different approaches. A
number of States are taxing and keeping 100 percent of the taxes
based on their own tax rate. This is the preferred approach of
Council members. Some States are taxing a surplus lines transaction based on proportion of the insured exposure in each State,
based on each States tax rates, but they keep 100 percent of the
tax. Other States have taken no action at all, which means they
are only taxing that portion of the risk in their State. Other States
have chosen to allocate, using one of the two methods, either NIMA
or SLIMPACT. However, neither agreement is operational yet,
leaving it to the brokers to figure out how to calculate, collect, and
pay the taxes applicable in those States.
The second major concern is that on January 1, 2012, at least 11
States will require brokers to use the unworkable NIMA allocation
formula. It requires allocation of all casualty lines, including lines
for which brokers have no information regarding the location of the
risk. However, there is an alternative that was adopted by the
SLIMPACT States which takes a more rational approach for casualty and property lines.
The third cause of concern is the potential for double taxation of
international risks under the surplus lines policy. Since the enactment of the NRRA, a number of States are considering taxing nonU.S. risks. And at least two jurisdictions have already enacted
practices to do just that. This goes against the letter and the spirit
of the NRRA and could subject policyholders to double taxation,
which may violate the Due Process Clause of the U.S. Constitution.
Moreover, the collection of taxes on non-U.S. risks has the potential
to unfairly expose insurance producers and professionals to liability
claims from insureds who, after being told by the producer to pay
premium taxes to their home State based on 100 percent of the exposure anywhere in the world, are informed by a foreign jurisdiction that such payments are insufficient to satisfy their tax liabilities.

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In conclusion, despite congressional intent, the States have not
devised a single uniform approach to the collection and allocation
of premium taxes for non-admitted insurance. Instead, the States
have gone beyond and devised multiple approaches that are confusing and cause compliance headaches. We hope the situation will
improve, but once again the States have demonstrated they will not
modernize insurance regulation without Federal pressure, and even
then they will not do it easily.
Thank you for taking my testimony and thank you for your continued interest in our industry.
[The prepared statement of Mr. Monroe can be found on page 37
of the appendix.]
Chairwoman BIGGERT. Thank you, Mr. Monroe.
Mr. Schwarcz, you are recognized for 5 minutes.
STATEMENT OF DANIEL SCHWARCZ, ASSOCIATE PROFESSOR,
UNIVERSITY OF MINNESOTA LAW SCHOOL

Mr. SCHWARCZ. Thank you very much for the opportunity to testify to this subcommittee. I want to make four points in my oral
testimony today that are based on my written comments.
The first point I want to make is that one of the core lessons I
think we learned from the global financial crisis is that we dont
always know what we dont know. We have heard lots of stories
today about why it is that insurance is not systemically risky, and
I will be the first to admit that it is certainly true that insurance
is less systemically risky than banking and that there are fewer
concerns. That being said, we should all be skeptical of people who
claim to have a complete understanding of insurance, who say
things like, it is hard to imagine that. It was hard to imagine 2008
before it was 2008.
So one of the lessons I think we take from the global financial
crisis, then, is that we need an adaptive regulatory regime that focuses on systemic risk. We need a regime that has all of the information at its fingertips and that can assess risk across holding
company structures, across legal entities quickly and efficiently.
That is not what this legislation does. What this legislation does
is it ensconces a particular view of systemic risk based on what we
now think and even based upon the fact and even ignoring the fact
that there are real systemic risks within insurance companies.
We have heard that insurers do not threaten the risk of a runon-the-bank scenario, but that is not true. In fact, a run-on-thebank scenario in life insurance is perfectly possible because many
life insurance products allow policyholders to withdraw funds, to
borrow against their policies. So, you certainly could have a runon-the-bank scenario in life insurance.
We heard that with the AIG crisis, it was only the non-insurance
entities that were problematic. Not true. There was a lot of instability within the insurance companies of AIG, particularly with respect to their securities lending program, and there was, in particular, a substantial amount of risk created by the interaction of
the insurance companies and the non-insurance companies. The
reason the insurance companies of AIG got into so much trouble
with their securities lending program is because of the fact that
their financial products unit jeopardized their liquidity. We have

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heard that guaranty funds provide a fail-safe. Not necessarily true.
Guaranty funds at the State level are not prefunded. There is not
a single dollar in a guaranty fund. They rely on the assumption
that large insurers will be able to cover the risk if other insurers
fail. That is fine and good until you have some sort of systemic
event.
So the assumptions upon which this legislation rests, I think, are
problematic.
The second point I would like to make is actually a point that
Mr. Monroe made himself, that the States will not modernize until
and unless there is Federal pressure. That is exactly true. If you
look at the history of State insurance regulation, virtually every
single thing that they do well, they do well because there was a
threat at the Federal level to take over. This legislation ignores
that lesson. It creates a domain in which State regulators are exempt from scrutiny, where they can give as much information as
they want, where they dont have anyone looking over the threat
of systemic risk that they create.
The third point I want to make is we have heard State regulators
have all the information that is necessary for the FIO and the OFR
to do their job. I would submit: one, that is not true; and two, even
if I didnt know one way or another that it wasnt true, you couldnt
either. We dont know what the future will demand in terms of the
necessity to gather information. What I can tell you, for instance,
is that State regulators did not have information about the contracts and pooling relationships between AIGs insurance subsidiaries and its non-insurance subsidiaries. That was obviously crucial
information at the time. If we were to think that State regulators
had all of the information that could ever be wanted by a systemic
risk regulator, that should not have occurred. In fact, recently I
learned that State regulators dont even have copies of the products
of the contracts that insurers sell to their policyholders, so to say
that they have all of the information is simply not right.
Finally, I am sympathetic to the view that regulatory uncertainty
is problematic and we need to balance the risk and harms of regulatory uncertainty against the necessity of regulation. That is clearly true. But I would submit to you that this legislation targets
areas that really dont create very much uncertainty. The subpoena
power is very limited. Why is it then valuable? It is valuable as a
threat. It is valuable because it will allow States and the FIO and
the OFR to leverage that threat to collect data that they need.
So with that I will conclude, and I will be happy to answer any
questions.
[The prepared statement of Professor Schwarcz can be found on
page 53 of the appendix.]
Chairwoman BIGGERT. Thank you, Mr. Schwarcz, and for all of
you, your entire written statements will be made a part of the
record. With that, I will turn to Member questions, and I will recognize myself first.
I almost hate to ask this question, but I would like the three of
you just to briefly tell me what are the primary differences between
banks and insurance companies? We will start with you, Mr.
Lanza.

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Mr. LANZA. Madam Chairwoman, I am not an expert on banks.
I know insurance companies and how they are regulated, and I
couldnt really explain the banking industry to you.
With regard to the financial products, P and C companies sell
property, casualty, and policies, and we do not sell products that
are tied to other financial events or models.
Chairwoman BIGGERT. Okay, thank you. Mr. Monroe?
Mr. MONROE. I will keep this simple. I think there are several
key differences between banks and insurance companies. In the insurance industry, I dont think there is really a risk of a contagion.
If there is a problem in one insurance company, it really doesnt
spread to another insurance company, there isnt going to be a run
on the bank, and despite what Mr. Schwarcz said, with the hundreds of years we have had life insurance, there has never been a
run on life insurance, and I dont see one happening, and it didnt
happen during the financial crisis. Traditional P and C companies
are very heavily regulated at the State level. The quality of their
investments are very high, and the call on an insurance policy is
based on an occurrence that happens. If there is an auto accident
in California, it does not impact my ability to call on my auto policy
in New York, so there are a lot of differences between insurance
and banking, and there are liquidity issues, and the ability for the
States to actually do an orderly runoff of insurance companies has
been proven to be very successful.
Take Reliance, for example, that failed in the 1990s. They didnt
have an impact upon other companies. In fact, it is so competitive
in the insurance industry that other companies are very ready,
willing, and able to step in and absorb those customers.
Chairwoman BIGGERT. Thank you. And then briefly, Mr.
Schwarcz, since you did speak of this before?
Mr. SCHWARCZ. Thank you. There are obviously a lot of differences. I will highlight just a few. The first is that there is group
supervision of banks. There is not group supervision of insurance
companies under State law right now, so that is a major difference.
Another difference is that it is true that banks are certainly more
susceptible to runs than insurers, but particularly with life insurers, it is also very true that the obligations can be called. Most life
insurance products do allow for borrowing against the policy, do
allow for surrenders of policies, and we have seen runs of individual insurers. Now, we have not seen a run on the life insurance
industry generally, but I think it is hard to say whether or not that
would or would not have happened if we didnt have the Federal
intervention we had in the global financial crisis.
The third point I would make is that they are not backed by the
Federal Government in terms of guarantees. It is a State guaranty
system. That State guaranty system is much, much less reliable
than a Federal guaranty system.
Chairwoman BIGGERT. Has that guarantee ever failed?
Mr. SCHWARCZ. That guaranty system has not failed, but we
have not had multiple concurrent insolvencies of large companies,
so I think it is true that it has worked, and it is true that historically the system has worked, but I think that it is not true that
we can be assured that it will always work in the future.

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Chairwoman BIGGERT. Okay, thank you. Mr. Lanza, under the
draft legislation number one which is under consideration today,
and that is to protect confidential insurance data as it is shared
among Federal and State regulators, why do they need exclusive
language in the law to protect confidential insurance data?
Mr. LANZA. Under the Model Holding Company Act, where we
provide State regulators a lot of detailed information about our
business plans and other things, we are sure that the information
is confidential. The concern here is that, if we are providing that
same kind of information to the Federal Insurance Office, the way
the language is written, we are not sure that confidentiality is retained, so this is just to clarify that anything we submit retains its
confidentiality.
Chairwoman BIGGERT. Thank you. And then Mr. Monroe, is a
mutual insurance holding company an insurance company?
Mr. MONROE. I am not familiar with each States regulations of
mutual insurance holding companies. If a mutual insurance holding company actually holds risk, it would be an insurance company,
and very often they do hold risk, and then to the extent that they
do hold risk, I think they should be subjected to the State regulation.
Chairwoman BIGGERT. Okay. Then in your opinion, does the law
need clarification to exclude mutual insurance holding companies
like other insurance companies from the FDICs Orderly Liquidation Authority?
Mr. MONROE. Again, to the extent that they hold risk like a normal insurance company would, I think that clarification would be
needed.
Chairwoman BIGGERT. Thank you. My time has expired. The
gentleman from Massachusetts, Mr. Capuano, is recognized for 5
minutes.
Mr. CAPUANO. Thank you, Madam Chairwoman. Mr. Monroe, I
am just curious, has your group taken a position on an optional
Federal charter for insurance companies?
Mr. MONROE. I think we would like to have an optional Federal
charter for insurance companies.
Mr. CAPUANO. Honestly, as I was listening to your testimony and
reading it this morning, it certainly seems to be heading that way.
Mr. MONROE. Yes.
Mr. CAPUANO. Okay. That would obviously address your concerns. Is that a fair statement?
Mr. MONROE. Yes, it is.
Mr. CAPUANO. That is fair enough. Thank you. Mr. Lanza, reading your testimony, and listening, you make several points on why
property casualty companies are different, but I am just curious.
You have one here that is a highly competitive market with low individual company market penetration, I agree that is a statement
of fact. Is there any law that you know of, Federal or State, that
would prohibit consolidation within the industry?
Mr. LANZA. Only with regard to the process of acquiring insurance companies. Under State law, there is a process generally
known as a Form A, and the States require information regarding
market penetration and other items under something known as a
Form E, but that is the only

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Mr. CAPUANO. Right. But there is no prohibition on it, they just
want to oversee it?
Mr. LANZA. That is correct.
Mr. CAPUANO. So the consolidation could happen like it has happened in a thousand other industries before; there is no prohibition?
Mr. LANZA. Yes, subject to standard antitrust review.
Mr. CAPUANO. They are not highly interconnected with other financial firms. Again, is there any law that prohibits them from
being interconnected with other firms, like AIG was?
Mr. LANZA. Not that I am aware of.
Mr. CAPUANO. So it is an industry practice, not a requirement or
a limitation?
Mr. LANZA. Correct.
Mr. CAPUANO. The last one is the low financial leverage. Again,
all these statements I agree with as of today, I think they are all
factually accurate, I am not arguing at all, but again, is there any
law that prohibits or limits the amount of leverage an insurance
company might have?
Mr. LANZA. Yes, there is, related tonot only from a regulated
side but from a ratings standpoint in terms of the amount of debt
and other things you have, you are governed by the rating agencies
in addition to the regulators who are concerned about various
Mr. CAPUANO. I wouldnt associate myself too much with the rating agencies after what they did the last couple of years. They have
gotten better, but my faith is not restored just yet.
I would like to see anything it limits, because I am not aware
of any Federal law that limits the leverage. Again, I agree that it
is an industry practice at the moment, that you are not a highly
levered industry, but I dont know of anything that prohibits you
from being that. If there is one, I would like to see it and I would
appreciate your forwarding it to us as you go along.
But I have to say, and I also agree with the statement that you
made that says, there is little likelihood that one failed PCA insurer requires other financial institutions to fail. I agree with
that. I think that is a fair statement. My concern is that everything
else after this, including that, is all what it is now, not what it
could be tomorrow.
And, you made some good points on confidentiality. I totally
agree with you if there are holes. I would like to work with you
in filling those holes. There is no sense there.
But everything else isyou are concerned with yes, they may not
coordinate with States. And if they dont, I agree with you that we
should work on that. That was the whole idea, that they would coordinate with States. But, again, something that may happen, my
concern is that what may happen is that we end up with one big
huge P/C company that is overleveraged and unregulated.
I dont expect that is going to happen tomorrow, but it is my concern that it may happen. And the whole concept of what we did in
the insurance industry was simply to gather information so that we
could hopefully be ahead of the curve the next time in case this situation starts setting itself up. And, again, I am not arguing one
iota that under todays situation, property casualty companies are

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anything other than safe and secure. From everything I know, I
agree with you.
I am not concerned about today; I am concerned about tomorrow
and the idea being that if we dont have information gathered with
someone, some neutral people looking and asking questions confidentially, I totally agree with that, that we put ourselves at risk.
Again, not for the good players, it is never the good players I am
worried about. Regulations are not there for people who want to
live by the rules and the standards of the industry.
Regulations are always there for the outliers, for the people who
drag an entire industry down or drag an entire economy down. So
I will argue very clearly that, again, the details of confidentiality
I am happy to work with youbut exempting, pretending that because we have a situation today, it will never change, I think is
really shortsighted, and I think it really opens the door to true
problems tomorrow.
And I say that only because I have absolute total faith that the
insurance industry is a lot smarter than government. You will
come up with ways around anything we do, as you should. That is
the nature of private industry.
My concern is not that, and I am not trying to take anybody
down, not call anybody a bad player. I agree with you on the comments you make about current and past history on property casualty. But to pretend that a major industry or player, a major financial player, will never, ever put us in a difficult situation I
think ignores the facts of 2008 and pretends that nothing will ever
change. And, again, for the details of what is going on, especially
since even you agreeing to testimony that FSOC basically said you
are not a risky player.
That is pretty much what they said. That is what you said in
your testimony, and I agree with that. That is pretty much what
they said. But to then say that because I have already done it, that
they will never be allowed to do it, simply says we want to go back
on the same footing as we had before. And I apologize, I guess my
time is over. I didnt think I would take the whole 5 minutes, but
I apologize. So I will represent details as far as making sure that
the rules that we have are right, but I think it is a mistake to pretend that what is will always be.
Chairwoman BIGGERT. The gentlemans time has expired.
Mr. CAPUANO. I apologize.
Chairwoman BIGGERT. That is fine.
The gentleman from Virginia, Mr. Hurt, is recognized for 5 minutes.
Mr. HURT. I thank each of you for your testimony. And, Mr.
Schwarcz, I was interested in your testimony and I appreciate the
fact that you seem to recognize that there should be a cost-benefit
analysis that goes with every regulatory structure. And you spoke
of balance, and I appreciate that.
But I guess I have two questions. One deals with the State regulatory structure and what I think everybody agrees, it seems like
even you agree that we have evidence of successful regulation by
the States of these companies. And I guess my question for you is,
if you have that evidence, you can say we dont know what we dont
know, but I am not sure how that guides us as policymakers in try-

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ing to game out every possibility despite the overwhelming evidence to the contrary.
I think that when the legislature does that, when we try to base
policy on what we think could possibly happen in the future, I
think that you will always wind up with unintended consequences.
The answer to every problem here in Washington seems to be, we
will just regulate it, and I think that at least as I travel across the
Fifth District of Virginia where I represent people who recognize
that is not a good formula for encouraging job growth and prosperity and freedom, and maybe you could speak to that.
Mr. SCHWARCZ. Absolutely, thank you for the question. Let me
just first address your point of how do we, as policymakers, respond to the fact that we dont know what we dont know. To me,
this is really a fundamental point, and I think it goes to what systemic risk regulators need to do, because we all have to admit that
this is complex stuff that none of us fully understand, and we are
learning about it as we go.
The answer is, you build regulatory systems that are adaptive,
that are flexible, that can learn and that limit uncertainty, but at
the same time, you dont hamstring them by precommitting them
to visions about what is and is not systemically risky.
So my concern with this legislation is it is basedand it encapsulates this view about what systemic risk is and is not that we
cant be sure is right.
And so I admit we need to make that balancing, but to me the
costs of uncertainty that are being addressed here are just so limited. Subpoena power? Why is that valuable? It is valuable because
it allows for the threat to get information quickly, and it allows for
the FIO to be able to criticize the States without worrying that
States are going to say, then, I am not going to give you information.
Mr. HURT. Thank you, because that was my next question, and
that deals with the data collection. It seems to me that a prudent
policy to come from Congress would be that we will rely on the
State regulators who demonstrated that they can regulate successfully and that they have the data necessary for the FIO to be able
to make the judgments that it needs to make, so then why dont
we allow that system to work. Lets try that, and then if it doesnt
work, if the FIO comes back to this committee and comes back to
Congress and says, hey, we are not getting your information we
need from the States, then lets fix it. It seems to me that is a more
prudent approach consistent with what you just said.
Mr. SCHWARCZ. It is very hardas I am sure you know much
better than meto change the law, right, it is very hard to say,
have the FIO come and change the law and it is very hard to get,
so I think what you need is you need a system that can adapt more
quickly than that.
And the other point I would make is we keep saying, State regulations work reasonably well. I would say that State regulations
did not work particularly well in the case of AIG. I think that there
was a real failure to appreciate among State regulators the fact
that non-insurance companies within holding companies can have
real risks for the insurance companies. There was a lack of an appreciation at the interconnectedness among the different entities

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and there was the lack of information about the nature of that
interconnectiveness.
We keep saying AIG didnt fail and insurance companies are
safe. What was bailed out? We dont know what would have happened to the insurance companies if there hadnt been a bailout.
So my claim is not that State regulation isnt working at all; it
is that we need to be cognizant to the fact that there are limitations, that there is not a proven track record on group regulation
and respond accordingly.
Mr. HURT. Thank you, Mr. Schwarcz. Thank you, Madam Chairwoman, I yield back my time.
Chairwoman BIGGERT. The gentleman from Ohio, Mr. Stivers, is
recognized for 5 minutes.
Mr. STIVERS. Thank you, Madam Chairwoman. I appreciate the
hearing on this matter.
And the first question I have is for Mr. Lanza. Do you believe
we have an effective State-based regulation system in America?
Mr. LANZA. Yes.
Mr. STIVERS. Great answer, quick answer.
The second question I have is for Mr. Schwarcz. I am just curious
what you think is wrong with the Federal Office of Insurance being
required to work with existing regulators, and I want to quote from
the actual discussion draft and help you explain to me what you
have a problem with on page 3 where it says, before data collection from a nonbank financial company that is an insurer or their
affiliate of an insurer pursuant to title II, a financial regulator
shall coordinate with each relevant Federal agency, State insurance regulator or other relevant State and Federal regulator, agency, in the case of an affiliate or insurer, and any publicly available
sources that determine if the information can be collected is available and may be obtained in a timely manner by that State or Federal agency or through publicly available sources.
What is the problem with that?
Mr. SCHWARCZ. I dont have any particular problem with that
language. That language actually is already basically in DoddFrank. That is one thing that I dont really understand. You are
changing Dodd-Frank to do what Dodd-Frank already does.
But the problem I have with respect to that draft bill is the lack
of subpoena power, because then, if that information is not available, you have no capacity to go out and get it. And, moreover, it
is not that I think subpoenas are going to be issued all the time
so, as I said, the threat of a subpoena changes the dynamic. It allows you to get information, and it allows the FIO to do so without
having to be completely beholden to State regulators.
Mr. STIVERS. Right. Mr. Schwarcz, you are a law professor, correct?
Mr. SCHWARCZ. That is correct.
Mr. STIVERS. So isnt there essentially a regulatory unwritten
rule that those that get subpoena power are also those that regulate? Isnt that historically the way we have regulated?
Mr. SCHWARCZ. I would think that unwritten rules are not a good
way to operate.
Mr. STIVERS. But isnt that a good system? Shouldnt people only
have subpoena power when they can regulate?

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Mr. SCHWARCZ. No. The entire point of the FIO is tothe mission of the FIO is to monitor the insurance market, and to potentially recommend changes. So you are going to task an agency to
monitor a market and to potentially suggest changes to a Statebased system, but then to have it beholden to the State-based system in getting information?
That means that the only information they have is the information that regulators have, and it might be that the reason you need
to modernize regulation is because regulators arent capturing all
the relevant information.
Mr. STIVERS. Did you take a look at the discussion draft on page
4 where it basically covers how the regulators can request information if they feel that information is either not publicly available or
not, will not be available in a timely way, Mr. Schwarcz?
Mr. SCHWARCZ. Yes, and I continue to believe that is not sufficient because, again, one of the potential roles of the FIO is to suggest how State regulations are insufficient, the problems that exist
there. Now, if I am going to be the person who is going to sit there
and be critical of, and you say here are the ways in which you need
to change, the best way of making sure that I dont do that very
effectively is to say in thisand you can ask the person who you
are criticizing for informationand there is an unwritten rule that
they might have to give it to you but no actual rule and no subpoena authority.
And then what you are going to say is, sure, I will give you this
information, but only so long as you make me look good. And if you
dont make me look good, I am not sure if I am going to give it to
you or not, so you need that threat.
Mr. STIVERS. Are you familiar with the costs related to data collection in some cases that have been particularly burdensome, and
would you favor some type of system to ensure that there is a costbenefit analysis on the cost of the data collected versus the actual
benefit of the data, because I think that is the concern that led to
this draft. So can you maybe help us with your thoughts on that?
Mr. SCHWARCZ. Yes. Absolutely, I think the FIO needs to think
about the costs of any data call versus the benefits. And so does
the Office of Financial Research and, again, I am certainly not completely unsympathetic to the view that regulation is costly and getting data is costly; we just need to balance it. So I agree with that
principle, but to me, that is not what is encapsulated here because
the legislation sort of is predetermined about how that cost benefit
analysis
Mr. STIVERS. Sure. I do want to quickly, because I have about 30
seconds left, it seems to me that it is hard to construct a circumstance where there would be some mass run on people borrowing on their life insurance accounts. Can you help us, as a committee, understand your thought process there and what you were
trying to build, because it really seems like the banking system
would have to have collapsed or something out of that, and it just
seems difficult to imagine.
Mr. SCHWARCZ. Sure. No, people wouldnt be doing that because
they didnt have money from banks. What would happen is that
there would be a massive loss of confidence in a particular life insurer say, several life insurers. All of a sudden, big news stories

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broke about how they werent, they didnt have money to pay
claims. People would then worry, I am not going to get anything,
I better start going and taking out my cash to the extent I can from
this life insurer, and then that would be exacerbated by the fact
again, this is a potential calamitous scenario, but we need to think
about itthat State guarantee funds wouldnt potentially cover all
of the exposure out there. So that is how it could occur.
Mr. STIVERS. My time has expired, Madam Chairwoman. Thank
you.
Chairwoman BIGGERT. Thank you, Mr. Stivers. The gentlelady
from Wisconsin, Ms. Moore, is recognized for 5 minutes, and thank
you for joining our subcommittee today.
Ms. MOORE. Thank you so much, Chairwoman Biggert, for allowing me to come discuss your discussion drafts. I am specifically interested in discussion draft number 2, which is to exclude insurance companies from the FDICs Orderly Liquidation Authority
and, Madam Chairwoman, I guess I would like to yield to you before I address our distinguished panel, because I am just seeking
clarification.
In the original Dodd-Frank bill, there was an amendment offered
by me and Ms. Speier which, in fact, excludedlet me see, I have
the amendment here, it amended section 203, and we inserted part
E, which an insurance company that is covered, if it is a covered
financial company or a subsidiary or affiliate of a covered financial
company, the liquidation or rehabilitation of such insurance company and any subsidiary or affiliate of such insurance company
that is not accepted under paragraph 2 shall be conducted as provided under applicable State law.
Our intent with this amendment was to distinguish that insurance companies and, indeed, mutual insurance companies, were not
subject to FDIC resolution because they didnt provide systemic
risk.
So I want to yield to you, Madam Chairwoman, because my question is, do you think that perhaps discussion draft bill 2 may be
duplicative? I understand and I agree with what you are trying to
do, but I believe we have already done this through Dodd-Frank.
Chairwoman BIGGERT. Actually, this part of the legislation is
based on your amendment to the Dodd-Frank bill. So I think it was
to make explicit clarification of that amendment.
Ms. MOORE. Okay, because the thing that I think thatthe extent to which there was any exposuremaybe I can ask you gentlemen nowto the extent that there was any discussion of bringing
the insurance industry into it was because AIG was systemically
risky in terms of it being a threat and being an insurance company
and having all of these various activities. I guess I want you all to
respond of what your understanding of discussion draft 2 is.
This would notwe are not talking about limiting the FDICs
ability to resolve or interfere with a systemically risky firm that
hasinsurance company that has a financial institution connected
with it. Is that your understanding of this draft as well?
Mr. LANZA. Yes. The concern we have is the fact that an insurance company, which is governed by statutory accounting rules,
which is the liquidation value, would have assets go to areas other
than the policyholders. So the concern is that we would like the in-

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surance regulator to approve any assets going for anyone other
than the policyholder.
Ms. MOORE. So you think that this discussion draft is necessary
because you are concerned that assets may go to someone other
than the policyholder. Are these investors? What are the other entities that you anticipate?
Mr. LANZA. The purpose of the State regulatory system is to have
the assets of the insurance company available to pay just the policyholders. And if you can put a lien on those assets to resolve another organization other than the insurance company, that is problematic if there were policyholders at risk. So we believe that the
discussion draft solves the problem of having any assets go anywhere beyond the policyholder.
Ms. MOORE. Would anyone else like to respond to that?
Mr. Schwarcz?
Mr. SCHWARCZ. Actually, my understanding was the draft bill
didnt change very much in Dodd-Frank.
Ms. MOORE. It did?
Mr. SCHWARCZ. It did not change very much. Dodd-Frank already
reflected the fact that insurers would be resolved by State entities,
and it allowed the FDIC to intervene if the State regulators were
not, in fact, operating. And I am notI would need to study this
a little bit further to understand whether that authority is removed
or not. I would think that authority is important, again, to create
the leverage the State regulators are not acting, but I do think it
is a matter of sort ofit makes sense at first to have State regulators resolving insurance companies.
Ms. MOORE. Thank you so much. And thank you, again, Mrs.
Biggert for allowing me to attend this meeting.
Chairwoman BIGGERT. Thank you.
Ms. MOORE. I just wanted to seek that clarification. Thank you.
I yield back.
Chairwoman BIGGERT. The gentleman from Wisconsin, Mr.
Duffy, is recognized for 5 minutes.
Mr. DUFFY. Thank you, Madam Chairwoman. It appears there is
somewhat of a disagreement on the panel as to how we should
move forward. And I dont know, Mr. Lanza or Mr. Monroe, if you
had a chance to read over Mr. Schwarczs statement before you
came here, but you have had a chance to hear it. Now that you
have heard his position or his take on the drafts, do you agree with
them?
Mr. LANZA. No. In particular, on the subpoena power, my company has seven subsidiaries in addition to all of the quarterly and
annual statements we have to file, we average about 840 data calls
a year. Now those data calls, some of them are very easy for us to
respond to because it is financial information that we track in evaluating the profitability and other performance factors of our business, but some of those data calls are information we may not
have. And the cost of finding that information in some cases can
get complicated because we dont have the systems in place in
order to capture it.
So the issue we have around the whole thing is that if the FIO
was to study the industry as a whole, it makes sense for them to

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go to the State regulators to study the industry as a whole before
they come to the individual companies.
Mr. DUFFY. Mr. Monroe?
Mr. MONROE. I didnt get a chance to read Mr. Schwarczs testimony before I got here, and the counsel always supports efforts to
improve insurance regulations. We supported the NRRA because of
the disparate treatment of surplus lines taxes across the United
States. So to the extent that there are gaps in State regulation that
the Federal regulation can help improve, we would certainly be
willing to look at that and support it to the extent that it will improve the insurance industry.
Mr. DUFFY. Okay. And Mr. Schwarcz, quickly, how many of our
property and casualty insurers currently pose a systemic risk? If
you know?
Mr. SCHWARCZ. I am not sure. I think that we cant be perfectly
sure. My understanding is that based on the recently proposed regulations by FSOC, essentially zero. I think it is pretty clear zero
property casualty insurers are going to fall under that. I think my
point would be that we need to plan for the future and sort of allow
for that flexibility.
Mr. DUFFY. What kind of risk do they pose today?
Mr. SCHWARCZ. What type of risk do propertytoday?
Mr. DUFFY. Yes.
Mr. SCHWARCZ. I think that today, as far as we know, they pose
little systemic risk.
Mr. DUFFY. And if we look at the potential of a systemic risk that
you are trying to be a visionary here and look into the future, if
we give a little more authority for oversight on the Federal side,
will that very much lessen the systemic risk for the future?
Mr. SCHWARCZ. So, two things. First, I am not trying to be a visionary; what I am trying to do is actually say that you are not visionaries either. We dont know.
And that is why we need to adjust the system, take into account
that none of us are visionaries, none of us predicted 2008, and that
is why we need a flexible regime that is not hamstrung by preordained conclusions.
Mr. DUFFY. But I would say that with property and casualty insurance you are saying, listen, there is a potential for systemic risk
in the future and, therefore, you want to head that off at the pass
today. So in a way, I would say you are acting as a visionary.
Mr. SCHWARCZ. I will leave it to others to decide whether or not
I am either a visionary or attempting to be one. But what I would
say is that I dont perceive much systemic risk in the property casualty realm right now right now. I perceive it more in the life
realm, but I think that we dont want regulatory assistance that
ensconces that viewpoint and doesnt consider the possibility that
it might be wrong.
Mr. DUFFY. Thank you. And I wanted to take the remainder of
my time and yield it to Mr. Stivers.
Mr. STIVERS. Thank you to the gentleman from Wisconsin. I have
a quick question for Mr. Monroe and Mr. Lanza.
In the scenario that Mr. Schwarcz gave earlier about a run on
life insurance companies, wouldnt the State regulatory scheme

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under McCarran-Ferguson have to essentially completely collapse
and fail and the State regulators not do their jobs?
Mr. LANZA. I believe so.
Mr. MONROE. I would have to agree with that. I cant imagine
a scenario where it would be a contagion from life insurance company to life insurance company. In fact, given the competitiveness
of the insurance market, I think if there was a run on one, others
would quickly step in.
Mr. STIVERS. And the last question, I guess, for Mr. Schwarcz,
given our discussion earlier about subpoena power, is there any requirement now for the FIO to do any cost-benefit analysis before
they would issue a subpoena?
Mr. SCHWARCZ. I dont have Dodd-Frank before me right now,
but I think the answer is no.
Mr. STIVERS. I yield backor to the gentleman from Wisconsin.
Mr. DUFFY. No, I yield back.
Chairwoman BIGGERT. I thank the gentleman. The gentleman
from California, Mr. Sherman, is recognized for 5 minutes.
Mr. SHERMAN. Thank you. Mr. Lanza, you said the confidentiality provisions of Dodd-Frank are insufficient to protect insured
data. Perhaps you could enlighten us on that a bit.
Mr. LANZA. Our concern is over the transfer of that information
from the FIO to the other agencies, and we just want to make sure
that it is clear that any information we submit, wherever it goes,
is confidential so that we dont lose that. Some of the information
we submit is highly proprietary, and that is the concern.
Mr. SHERMAN. Could the relevant agency simply adopt confidentiality policies? Would they need to be formal regulations? Do we
need a statute? What do we need to do to protect the confidentiality?
Mr. LANZA. Our suggestion is that you do it through the discussion draft. And that is what we support. We think it is the cleanest
way to ensure it because of the nature of the data and its competitiveness.
Mr. SHERMAN. Mr. Schwarcz, one of the concerns of my constituents is that they are going to outlive their savings. The life insurance and annuity industry has created a product called longevity
insurance. They might have called it life insurance, but that name
had already been taken. And this is an annuity that starts paying
you when you reach age 70, 80, 90, whatever it is, but none of
them have been able to find it inflation adjusted.
I have talked to the insurance folks, and they have said, we dont
want to take the risk of inflation, and I wondered why we have insurance companies if risk taking is not pretty much the job they
are supposed to do.
What policy changes do we make so that in addition to Social Security, which is an inflation-adjusted longevity insurance that
starts at age 65, what do we do to cause the annuity and life insurance industry to offer what people want, indeed, they may not
focus on it with the technical terms, but an inflation-adjusted annuity that begins at an advanced stage?
Mr. SCHWARCZ. Thank you. This is something I cant offer definitive thoughts on right now. I would need to think about it.

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Frankly, I am a little cautious about the idea of trying to say,
people want this, therefore, we should try to sort of adopt some policy to encourage carriers to provide it. I think if people wanted it
enough, carriers will provide it. They just probably dont want it
enough and that people wont pay for it.
Mr. SHERMAN. They speak somewhat vaguely about it.
Mr. SCHWARCZ. Right. There are
Mr. SHERMAN. I had a career in the financial world and one in
politics and kind of focused on trying to take what people are saying about finance and translate it in a language that you would
speak.
Mr. SCHWARCZ. Right.
Mr. SHERMAN. They are afraid of outliving their savings.
Mr. SCHWARCZ. Sure.
Mr. SHERMAN. They might buy a longevity policy. They would be
making a mistake in that they would be fully insured except for inflation.
Mr. SCHWARCZ. Right.
Mr. SHERMAN. So maybe you could add to the record anything
that you think could help people know that they need an inflationadjusted longevity policy and/or let the companies know that they
ought to be offering it.
Let me return to Mr. Lanza.
I am intrigued with your suggestion that Dodd-Frank asks insurers to help pay the resolution costs for other failing financial companies, but the other companies dont help to pay for insurance resolution costs, chiefly because there are State funds that do that.
This doesnt exactly seem fair.
Can you tell us more about the State resolution system and why
Dodd-Frank seems to recreate this inequity?
Mr. LANZA. The State resolution systems, through the guarantee
funds, have the ability to only assess the industry, and that is the
specific insurance industry, so it is property and casualty related,
property and casualty failures. And so if you have the FDIC involved in any related company, the concern is that we would wind
up paying guaranteed fund assessments and also be assessed for
whatever additional amounts the FDIC wants to assess.
Mr. SHERMAN. I thank you for your answer, and some will remember I fought in this room successfully to leave companies
under, I believe it is $75 billion, out of the main assessment program in Dodd-Frank. And I think my time has expired.
Chairwoman BIGGERT. I thank the gentleman for his questions.
I would now ask unanimous consent to insert the following material into the record: a November 15, 2011, letter from the National
Association of Professional Surplus Lines Offices, Ltd.; November
15, 2011, testimony from the National Organization of Life and
Health Insurance Guaranty Associations; November 15, 2011, testimony from the National Conference of Insurance Guaranty Funds;
November 15, 2011, testimony from the Independent Insurance
Agents & Brokers of America; a November 14, 2011, letter from the
National Association of Mutual Insurance Companies; a November
14, 2011, letter from the Risk and Insurance Management Society;
a November 13, 2011, letter from the Nationwide Mutual Insurance

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Company; and a November 9, 2011, letter from the National Conference of Insurance Legislators.
Without objection, it is so ordered.
The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 30 days
for Members to submit written questions to these witnesses and to
place their responses in the record.
And I would like to thank the panel so much for being here and
for your testimony. I really appreciate all the important information that you have given us today. Again, thank you so much.
With that, this hearing is adjourned.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]

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APPENDIX

November 16, 2011

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