[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
INSURANCE HOLDING COMPANY SUPERVISION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 18, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-114
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56-778 PDF WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York SCOTT GARRETT, New Jersey
BRAD SHERMAN, California TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida JOHN CAMPBELL, California
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi BILL POSEY, Florida
CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
C O N T E N T S
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Page
Hearing held on:
March 18, 2010............................................... 1
Appendix:
March 18, 2010............................................... 35
WITNESSES
Thursday, March 18, 2009
Dilweg, Sean, Commissioner, State of Wisconsin, Office of the
Commissioner of Insurance...................................... 10
Frohman, Ann M., Director, Nebraska Department of Insurance...... 11
Gardineer, Grovetta N., Managing Director for Corporate and
International Activities, Office of Thrift Supervision......... 8
Greenlee, Jon D., Associate Director, Division of Banking
Supervision and Regulation, Board of Governors of the Federal
Reserve System................................................. 6
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 36
Dilweg, Sean................................................. 38
Frohman, Ann M............................................... 47
Gardineer, Grovetta N........................................ 61
Greenlee, Jon D.............................................. 71
Additional Material Submitted for the Record
Garrett, Hon. Scott:
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 83
Frohman, Ann M.:
Written responses to questions submitted by Chairman
Kanjorski.................................................. 89
INSURANCE HOLDING
COMPANY SUPERVISION
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Thursday, March 18, 2010
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:07 a.m. in
room 2128 Rayburn House Office Building, Hon. Paul E. Kanjorski
[chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Baca, Scott,
Maloney, Moore of Wisconsin, Perlmutter, Donnelly, Foster,
Adler, Kosmas, Peters; Garrett, Royce, Biggert, Posey, and
Jenkins.
Chairman Kanjorski. Good morning. The subcommittee will
come to order. Without objection, all members' opening
statements will be made a part of the record. First, we will
have our opening statements, beginning with mine, and then we
will hear from our distinguished panel.
We meet today to further examine the issue of insurance
supervision, especially as it relates to holding companies. The
time is right for us to delve into this complicated and
important subject.
The Federal Government's intervention in American
International Group has raised many questions about the
existing oversight of holding companies with insurance
operations. While AIG's insurance companies may not have
directly caused the conglomerate's downfall, the actions of the
holding company and other subsidiaries within AIG certainly
could have led to serious consequences for insurance
policyholders if the government had not stepped in.
During our recent debates in the House on the Wall Street
Reform bill, we also tackled many questions about holding
company oversight. While we already know much about the
supervision of financial, bank and thrift holding companies, we
now need to take the time to learn more about the regulation of
insurance holding companies. I believe that today's hearing
will help us to identify ways that we can further improve the
financial services regulatory reform bill before it becomes
law.
The vast majority of holding companies--some of which are
shells and some of which are complex--are currently regulated
at the State level. Additionally, the Federal Reserve System
and the Office of Thrift Supervision together oversee no less
than 100 entities with insurance operations. Our witnesses will
help us to better understand the current lay of the land when
it comes to consolidated supervision of insurance holding
companies and bank or thrift holding companies with insurance
operations.
The two State commissioners with us today will specifically
explain their dual roles as insurance regulators and insurance
holding company supervisors. Because the failure of an insurer
could affect the health of the insurance holding company, and
because problems within the holding company or its subsidiaries
could affect the insurers within a firm's tangled network, we
need to ensure that State supervisors have strong powers to
protect policyholders and ensure the solvency of any of the
entities that they regulate.
In those instances where a State regulator must oversee an
insurer or insurance holding company with operations outside of
the State, we must also ensure that we have meaningful
cooperation and communication between State regulators.
Moreover, to protect our economy from systemic risk, we must
ensure that there is appropriate consolidated supervision of
complex insurance firms.
When depository institutions and insurers operate under the
umbrella of the same holding company, both State and Federal
regulators have important supervisory roles. In such instances,
State commissioners maintain their role as functional
regulators of any insurers within these complex entities.
Federal regulators have the responsibility for oversight of any
depository institutions and the holding company.
The Federal regulatory representatives with us today will
help us to better appreciate the formal rules of the road as
laid out in statute and regulations about where a Federal
regulator's authority begins and a State regulator's power ends
in these corporate amalgamations. Their testimony may also help
us to discern whether or not we have regulatory overlaps or
gaps, and what steps regulators have taken to address such
situations.
Each of our witnesses will undoubtedly emphasize the
differences between insurers and depository institutions. These
distinctions are important, but they fail to address the
purpose of today's hearing. The recent financial crisis has
taught us that any complex financial company must have an
effective umbrella supervisor who looks comprehensively at the
activities and health of the whole enterprise. This includes
any holding company with insurance activities.
We must further explore whether the Federal banking
regulators are overseeing too few or too many holding companies
with insurance operations, and whether they are appropriately
focused on consolidated oversight issues. We should also ask
whether consolidated supervision is diversified among too many
regulators, such that it has become ineffective or an
afterthought.
In sum, these are difficult policy issues, and the answers
we receive will undoubtedly lead to new questions.
Fortunately, we have already identified a way to examine
these matters after we finish this hearing. One important
provision of the House-passed Wall Street Reform bill, the
Administration's plan, and Senator Dodd's proposals is the
creation of a Federal office to review insurance matters on a
national scope. The Federal Insurance Office, for which I have
advocated for a number of years, should look at these very
questions to advise Congress on these important policy matters
in the future.
Now, the gentleman from New Jersey is recognized for 5
minutes.
Mr. Garrett. I thank the gentleman, and I thank the members
of the panel who are here today.
Insurance holding company supervision obviously is a very
complex topic and I think the hearing today will help members
be able to delve into it and get a better understanding of how
insurance companies are structured, how they're operated, and
how they're regulated. And as I have delved deeper into this
issue and the way that insurers are regulated within holding
companies, either through insurance holding companies,
financial holding companies or thrift holding companies, my
belief that the problems are really more attributed to failures
by regulators as opposed to gaps in regulatory structures
continues to be reinforced.
So while I do agree that there are a number of areas out
there within our insurance regulatory system that do need to be
updated and modernized, I believe we must be really careful and
deliver it in our approach. The insurance industry as a whole,
I think, has performed better than most other parts of the
financial sector during this crisis. And so we must ensure that
we first do no harm in whatever we do.
I know my friend and colleague, who is not here right now,
Mr. Royce, has continually pointed out that the securities
lending problems with the AIG situation highlight the problems
with State-based regulation, and he says it shows the need to
have a larger Federal role in the regulating of the insurance
companies. And I would remind him, while the losses attributed
to securities lending were significant, had it not been for the
cascade of problems with AIG's Financial Products Unit, the FP,
that company would have been able to handle those losses
without the need of taxpayer support.
Now, once the Office the Thrift Supervision had the Federal
regulatory authority over AIG, and they had the power to
oversee AIG's FP leverage, they unfortunately failed to
identify and correct that problem. And this is really a prime
example of the regulator not doing their job; and, it's not
really a problem of a gap in regulation. I would even argue
that if the securities lending operations of the insurers had
been handled by the Federal regulators in this case, things
might actually have been much worse than they were.
I agree that the securities lending by insurance companies,
as I said at the outset, needs additional reforms, and I do
look forward to hearing from the Commissioner and Director
Frohman, as well, Mr. Dilweg and Ms. Frohman on what reforms
have already been made in these areas and other solutions as
well. Now, on another topic, though, I would like to briefly
discuss a major concern I had with Chairman Dodd's recent
release of a financial regulatory reform draft.
The Dodd package has a provision that would require an up-
front tax on any bank holding company with assets greater than
$50 billion. Also, Dodd's plan would tax any financial company,
including insurers, who present an extremely low risk with
greater than $50 billion in assets after any systemic event
occurred. I believe that this tax would simply lead to higher
costs for consumers and additional job losses in the private
sector as well.
I also believe that we greatly increase the moral hazard
within the financial sector. I would like to read a quote from
the recently released White Paper from the Property Casualty
and Insurers Association of America regarding the topic of
using the absolute size of a financial company as the basis for
determining a systemic risk. The paper states, ``Such a
process, if enacted, would create a cross subsidy of
significant magnitude from firms that do not pose a systemic
risk to those firms whose activities are systemically risky. So
the resulting moral hazard would encourage increased risk-
taking, and as such could ultimately defeat the legislation's
intent of reducing the economy's exposure to systemic risk.''
So ultimately, we need a system here in place that can
allow big companies to fail without being bailed out either by
the taxpayer or by the consumer as his proposal would allow. So
while I agree that there are numerous areas of insurance
regulation that need to be addressed and updated and
modernized, I believe that the main problems here really were
with regulators and not the structure of the regulation.
So, once again, I thank my good friend from Pennsylvania
for holding this important hearing, and also for the education
that we're going to get today. And I look forward to hearing
from all the witnesses.
Chairman Kanjorski. Thank you very much, Mr. Garrett. Now
we will hear from Mr. Posey.
Mr. Posey. Thank you very much, Mr. Chairman. To help
protect our citizens in the future, I think we probably need to
glance at least a little bit on some of our previous failures.
And I understand the Office of Thrift Supervision is
responsible for supervising 35 holding companies that include
both thrifts and insurance operating entities. And it has come
to my attention through a news clip actually, just this
morning, some revelations I had not previously been aware of
and we might possibly clarify in some of our testimony this
morning. This was ``Dateline Washington.''
It says, ``Banks weren't the only ones giving big bonuses
in the boom years before the worst financial crisis in
generations. The government was also handing out millions of
dollars to bank regulators rewarding `superior' work, even as
an avalanche of risky mortgages helped create the meltdown. The
payments detailed in the payroll data released to the
Associated Press under the Freedom of Information Act are the
latest evidence of the government's false sense of security
during the go-go days of the financial boom. Just as the bank
executives got bonuses, despite taking on dangerous amounts of
risk, regulators got taxpayer funded bonuses despite missing or
ignoring signs that the system was on the verge of a meltdown.
``The bonuses were part of a program, little known outside
the government. Some government regulators got tens of
thousands of dollars in perks, boosting their salaries by
almost 25 percent. Often, though, rewards amounted to just a
few hundred dollars for employees who came up with good ideas.
During the 2000 306 boom, the three agencies that supervised
most U.S. banks, the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision, and the Office of the Comptroller
of the Currency, gave out at least $19 million in bonuses,
records show.
``Nearly all that money was spent recognizing superior
performance. The largest share, more than $8.4 million, went to
financial examiners, those examiners and managers who
scrutinize internal bank documents and sound first alarms.
Analysts, auditors, economists, and criminal investigators also
got rewards. After the meltdown, the government's internal
investigators surveyed the wreckage of nearly 200 failed banks
and repeatedly found that those regulators had not done enough.
```OTS did not react in a timely or forceful manner to
certain repeated indications of problems,' the Treasury
Department's Inspector General said of the Thrift Supervision
Office following the $2.5 billion collapse of Net Bank, the
first major bank failure of the economic crisis. `OCC did not
issue a formal enforcement action in a timely manner and was
not aggressive enough in the supervision of A&B in light of the
bank's rapid growth,' the Inspector General said of the
currency comptroller after the $2.1 billion failure of A&B
Financial National Association.
```In retrospect, a stronger supervisory response at
earlier examinations may have been prudent,' FDIC's inspector
general concluded following the $1.8 billion collapse of the
New Frontier Bank. `OTS examiners did not identify or
sufficiently address the core weaknesses that ultimately caused
a thrift to fail until it was too late,' Treasury's Inspector
General said regarding IndyMac, which in 2008 became one of the
largest bank failures in history. And they believed their
supervision was adequate. We disagree.
```OCC's supervision of Omni National Bank was inadequate,'
Treasury investigators concluded following Omni's $956 million
failure. Most of the bank inspection records are not public and
the government blacked-out many of the employee names before
releasing the bonus data. It is impossible to determine how
many auditors got bonuses, despite working on major banks that
failed. Regulators say it's unfair to use those missteps seeing
it's a benefit of hindsight to suggest any bonus isn't
proper.''
Thank you, Mr. Chairman. I yield back.
Chairman Kanjorski. Thank you very much, Mr. Posey. And
now, for the roadrunner from--I mean Mr. Royce--from
California.
Mr. Royce. Thank you, Mr. Chairman. And I thank you for
your continued leadership on this issue as well.
Looking at the regulatory reform package that passed out of
the House last year, and at the Dodd bill that was recently
introduced in the Senate, I think a fundamental question should
have been asked much more often; and, I think that question has
not been asked at all really, or dealt with. The question is,
what is the most efficient and effective form of regulation? I
think if we applied that question to the insurance market, I
would be hard-pressed to find someone who thought the status
quo was the most effective and efficient regulatory model.
We have 51 different regulators, and 51 different sets of
rules. Frankly, in a vulcanized way, we have 51 separate
markets, many of which are stymied by bureaucratic red tape, by
price controls. Europe has developed a very different model to
deal with this, which is one market for all of Europe, and here
we are vulcanized. Certainly, the framers of the Constitution
did not envision this when they threw out the Articles of
Confederation and included the Commerce Clause. Even the
framers of the NAIC had a different version and a different
vision for our insurance market. George Miller, the founder,
said back in 1871, ``The Commissioners are now fully prepared
to go before their various legislative committees with
recommendations for a system of insurance law which shall be
the same in all States, not reciprocal, but identical; not
retaliatory, but instead a uniform, one system.''
Unfortunately, Mr. Miller's words were unheeded, and today
we are left with an 18th Century regulatory model attempting to
oversee this vast and complicated marketplace. And that is why
I have joined Melissa Bean in introducing legislation to create
a national insurance charter. This approach puts us closer to
what the founding fathers had envisioned by creating one
national market.
Our legislation is no panacea. No form of regulation ever
is. But it is a drastic improvement over the status quo, which
is little more than an antiquated beast, frankly. It is
something that the framers gave up on long ago, and I look
forward to continuing the discussion on the need to establish a
competent Federal insurance regulator and bringing our
regulatory model into the 21st Century.
Again, I would like to thank the chairman for his continued
work on this issue, and let's learn from what's happening in
the rest of the world with liberalized markets and a regulatory
scheme for one market for all of Europe. We have to compete
with this, and we are not going to be able to. And, frankly,
our current system does not work.
I yield back the balance of my time, Mr. Chairman.
Chairman Kanjorski. Thank you very much, Mr. Royce. Now, I
will get to the panel.
First of all, thank you very much for appearing today, and
without objection, your written statements will be made a part
of the record. You will each be recognized for a 5-minute
summary of your testimony.
First, we have Mr. Jon Greenlee, Associate Director,
Division of Banking Supervision and Regulation, Federal Reserve
Board of Governors. Mr. Greenlee?
STATEMENT OF JON D. GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF
BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Mr. Greenlee. Thank you. Chairman Kanjorski, Ranking Member
Garrett, and members of the subcommittee, thank you for the
opportunity to discuss the supervision and oversight of
insurance companies.
As you are aware, in this country the primary supervision
and regulation of insurance companies is vested with the
States. The Federal Reserve does serve as the consolidated
supervisor of bank holding companies and financial holding
companies established under the Gramm-Leach-Bliley Act, some of
which are affiliated with insurance companies.
The Federal Reserve is also the primary Federal regulator
of State member banks, many of which are engaged in the sale of
insurance products. Of the approximately 550 foreign and
domestic financial holding companies supervised by the Federal
Reserve, 33 are engaged in insurance underwriting activities.
As the consolidated supervisor of bank holding companies and
financial holding companies, the Federal Reserve routinely
conducts inspections of these organizations to ensure that the
consolidated organization remains strong and the holding
company and its non-bank affiliates do not pose a threat to the
company's insured depository institution subsidiaries.
To further our supervisory efforts, we issued enhanced
guidance on consolidated supervisory expectations in 2008 that
underscored the importance of examiners evaluating firm-wide
risk exposures. We also reiterated the importance of Federal
Reserve supervisors working with the primary regulator of a
bank holding company's insured depository institutions as well
as State insurance supervisors and other functional regulators.
Recent experience shows the need for the consolidated
supervision of bank holding companies in addition to and
distinct from the supervision of the organization's bank or
functionally regulated subsidiaries. Large organizations
increasingly operate and manage their businesses on an
integrated basis with little regard for the corporate
boundaries that typically define the jurisdictions of
individual, functional supervisors.
Indeed, the crisis has highlighted the financial,
managerial, operational, and reputational linkages among the
bank, securities, commodity, insurance, and other units of
financial firms. With respect to financial holding companies
engaged in insurance activities, our consolidated supervisory
framework involves the same principles used for bank holding
companies more broadly. This begins with an assessment of the
potential risk insurance activities pose to the consolidated
organization and its depository affiliates.
We make appropriate adjustments to our assessment of the
firm's risk management practices and overall financial
condition to account for the unique risks and the nature of
insurance products on underwriting activities. As part of our
process, we routinely communicate with the appropriate
insurance regulatory authorities about the nature of and risk
posed by a firm's insurance activities. To facilitate this
information sharing, we established memoranda of understanding
with the insurance regulators in all 50 States, the District of
Columbia, and Puerto Rico.
We also communicate with international insurance
supervisors as appropriate. The Federal Reserve also has taken
several steps to support our supervisory staff and
understanding the risk arising from insurance activities. We
have designed and implemented training programs, and have
developed a variety of insurance-related examiner tools. We
also collaborated with the NAIC on three published reports to
facilitate better communication and understanding of banking
and insurance regulatory framework risks and capital
requirements.
In closing, the current financial crisis has clearly
demonstrated that risk to the financial system can arise not
only in the banking sector, but also from the activities of
other financial firms, such as investment banks or insurance
companies that traditionally have not been subject to the type
of regulation and consolidated supervision applicable to bank
holding companies. As Chairman Bernanke stated yesterday, it is
important to close this gap in our regulatory structure, and
legislative action is needed that would subject all
systemically important financial institutions to the same
framework for consolidated prudential supervision that
currently applies to bank holding companies.
I would like to thank the committee for holding this
important hearing, and I am happy to answer any questions that
you may have. Thank you.
[The prepared statement of Mr. Greenlee can be found on
page 71 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Greenlee.
Next, we will hear from Ms. Grovetta Gardineer, Managing
Director of Corporate and International Activities, Office of
Thrift Supervision.
Ms. Gardineer?
STATEMENT OF GROVETTA N. GARDINEER, MANAGING DIRECTOR FOR
CORPORATE AND INTERNATIONAL ACTIVITIES, OFFICE OF THRIFT
SUPERVISION
Ms. Gardineer. Good morning, Chairman Kanjorski, Ranking
Member Garrett, and distinguished members of the subcommittee.
Thank you for the opportunity to testify on behalf of the
Office of Thrift Supervision.
We understand that the subcommittee is interested in
hearing about the scope of OTS's authority to supervise
insurance savings and loan holding companies. In the few
moments I have now, I would like to summarize our written
testimony about OTS's approach to the supervision of savings
and loan holding companies that are predominantly insurers,
which I will refer to today as insurance holding companies.
I would also like to present the OTS view of how to enhance
the supervision of these holding companies. OTS's role as a
consolidated supervisor of an insurance holding company exists
because the enterprise owns a savings association. The OTS has
broad authority to supervise an insurance holding company
enterprise, including its affiliates and subsidiaries.
OTS as a primary Federal regulator of savings and loan
insurance holding companies has the authority to examine each
insurance holding company including its subsidiaries, subject
only to certain statutory obligations to coordinate with
functional regulators. That said, the statutory regime
governing savings and loan holding companies is premised
primarily on preserving the safety and soundness of the
subsidiary thrift. OTS supervises 35 insurance holding
companies, the majority of which are nationwide in scope.
In addition, OTS regulates holding companies with
significant insurance activities that combine securities
activities as well. OTS also regulates another 39 holding
companies that engage in insurance activities to a lesser
degree, but are not considered predominantly insurance
companies. Once a company acquires or charters a thrift
institution, it becomes a savings and loan holding company, and
is subject to regulatory examination and analysis by OTS.
OTS uses a risk-focused approach that considers the
combined risk profile of the holding company, its financial
health and stability, and the interdependence of entities
within the structure. This approach incorporates the
coordination and consultation with State insurance regulators
in order to gain information about the functionally regulated
insurance activities.
The information gathered through our examination and
analysis serves as a basis for our findings regarding the
insurance holding company. The primary objective of a risk-
focused examination of an insurance holding company is to
identify and examine the areas of the business that pose the
greatest degree of risk to the condition of the overall
enterprise and to the thrift, with regard to how Congress can
enhance the consolidated supervision of insurance holding
companies.
OTS believes that there should be a Federal oversight role
for all insurance companies, not just those that own a bank or
a thrift. A holding company that engages predominantly in
insurance activities should be supervised by a Federal
regulator that concentrates on the core business activity of
the enterprise. We think it is prudent to align the regulatory
authority with the holding company enterprise's primary
activities.
A fundamental requirement for prudent risk management of a
holding company is effective oversight and enforcement
authority over the entire organization. A holding company
regulator should have authority to monitor and exercise full
enforcement authority over non-functionally regulated
affiliates and to implement information sharing arrangements
between entities in the holding company and the functional
regulators.
The regulator should have the authority to impose capital
requirements, restrict activities, and otherwise regulate the
operations of the holding company and the non-functionally
regulated affiliates. The authority to supervise the
consolidated insurance holding company could be housed within a
Federal insurance regulator, if Congress chose to create one.
We believe that at a minimum, a Federal consolidated insurance
holding company regulator should be established.
We appreciate the opportunity to share OTS's
recommendations for a stronger framework that would accomplish
this for insurance holding companies. We look forward to
working with you on these important issues in the future, and I
am very happy to respond to your questions.
Thank you.
[The prepared statement of Ms. Gardineer can be found on
page 61 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Gardineer.
Now, I turn to my colleague from Wisconsin, Ms. Moore, for
the next introduction.
Ms. Moore of Wisconsin. Thank you, Mr. Chairman, and thank
you for this indulgence to allow me to introduce our next
panelist, the distinguished Commissioner of Insurance for the
State of Wisconsin who was appointed by his excellency,
Governor Jim Doyle, on January 1, 2007.
The Office of the Commissioner of Insurance is responsible
for examining industry financial practices and market conduct,
licensing our agents, reviewing policy forms for compliance
with State legislation, and investigating consumer complaints.
His agency is also responsible for administering the State life
insurance fund, the local government property insurance fund,
and the injured patients and families compensation fund.
Mr. Chairman, Mr. Sean Dilweg has had a distinguished
career in public service and I knew him when I was a member of
the State senate. I also want to point out that he has
tremendous skills as a basketball player. That matters here in
the Beltway and it matters a lot to be a baller, so with much
further ado, I would like to introduce Commissioner Sean
Dilweg. Commissioner?
STATEMENT OF SEAN DILWEG, COMMISSIONER, STATE OF WISCONSIN,
OFFICE OF THE COMMISSIONER OF INSURANCE
Mr. Dilweg. Thank you, Congresswoman Moore, and Chairman
Kanjorski. I have had the privilege of working with
Congresswoman Moore, I have decided, for the last 17 years in
and around State and Federal Government, so I appreciate those
kind words.
I am here on behalf of the NAIC, and my purpose today is
really to give some insight into how State regulators assess
the financial strength of an insurer and describe our unique
regulatory working groups that assist and improve us in this
assessment. Financial regulation is the critical component that
insures our most important consumer protection, which is
solvency. That basic concept guarantees that damaged
automobiles are repaired and that annuity payments arrive in
the mail on time, and that families hit by natural disasters
can rebuild and recover.
Through the NAIC, regulators have created three core
solvency surveillance mechanisms: reporting; analysis; and
examination, to ensure that these obligations to policyholders,
claimants, contract holders, and other parties are met both
today and in the future. In our unique system of State
regulation, it is imperative that the regulators around the
country have access to these tools, particularly when assessing
large multi-State insurers. An insurer's domestic State is
relied on as the primary solvency regulator; however, any State
in which a company is licensed to conduct insurance business
may perform its own monitoring financial examinations and take
regulatory action as appropriate. There are three NAIC working
groups that deal with reporting analysis and examination. These
provide the tools for us as individual State regulators to
handle these complicated groups of insurance companies and
individual insurance companies.
Today, in my verbal testimony, I will spend time on the
financial analysis working group better known as FAWG. For over
a decade, State insurance financial regulators have shared
information and ideas through the NAIC's financial analysis
working group, or FAWG, which exists to identify, discuss,
research, and monitor potentially troubled insurers and
insurance groups that are of national significance. FAWG
leverages the expertise of select chief financial regulators
from around the country to provide an additional layer of
solvency assessment.
FAWG also helps identify market trends and emerging
financial issues in the insurance sector. This council is truly
a council of co-equal regulators that assesses nationally
significant insurers or groups. We identify these insurers or
groups that exhibit characteristics of trending towards
financial trouble. We interact with the domestic regulators in
lead States in order to assist and advise the appropriate
regulatory strategies and methods and actions. We encourage,
promote, and support coordinated multi-State efforts in
addressing solvency issues.
FAWG's review of companies can be described generally as
identifying the companies that are outliers when compared with
benchmarks of the industry market segment, develop
communications for financial staff and the Commissioner of the
State, review regulator responses on identified issues, follow-
up with the domestic regulator, including a presentation by the
domestic regulator at many of our FAWG meetings, and, also,
forming subgroups for some of our large, nationally significant
insurers.
Through the FAWG forum, individual States work together to
support and guide fellow regulators for the benefit of the
whole in an entirely confidential process. The working group
reviews and considers trends occurring within the industry.
Most recently, we have looked at the residential, mortgage-
backed security issue and taken steps to address that.
Finally, I wanted to touch briefly upon State insurance
interaction with the Federal Government. As alluded to by
earlier panelists, many individual State insurance departments
in the NAIC do interact with our Federal counterparts. This
occurs when there are solvency issues that affect regulatory
interest beyond a particular financial services industry. Many
of the same States that are FAWG members also interact with
Federal agencies because of the nature of their domestic
insurance market.
For example, I am the primary regulatory for two large
insurers that insure municipal bonds and mortgages,
respectively. I have interacted with the Federal Reserve, the
U.S. Treasury, and the FHFA in order to share information of
common interest on these significant companies. In conclusion,
as a State-based system of regulation, we are keenly aware of
our unique structure and have developed tools such as
accreditation and FAWG to ensure that we are effectively and
officially maximizing our resources to protect consumers and to
address the solvency issues of our regulated entities.
Thank you for the opportunity to testify and I look forward
to answering your questions.
[The prepared statement of Mr. Dilweg can be found on page
38 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Dilweg.
Finally, we will hear from Ms. Ann Frohman, director for
the Nebraska Department of Insurance.
Director Frohman?
STATEMENT OF ANN M. FROHMAN, DIRECTOR, NEBRASKA DEPARTMENT OF
INSURANCE
Ms. Frohman. Thank you, Chairman Kanjorski, and members of
the subcommittee. Thank you for inviting me to testify today.
My name is Ann Frohman and I am the director of insurance
for the State of Nebraska. I am here today to testify on behalf
of the National Association of Insurance Commissioners. I am in
the areas of group supervision of insurance companies. Before
delving into group supervision, I should note that a
cornerstone of our system, which is critical to the supervising
insurance groups, is our financial standards and accreditation
program.
The accreditation program is a set of strong baseline
standards, practices, and required skill sets for effective
solvency supervision. All 50 States are currently accredited,
and to stay accredited, States must adopt any changes made to
the program by insurance regulators. State insurance
departments are periodically reviewed by a team of their peers
to ensure compliance with the 40 specific standards and 226
specific elements necessary for accreditation.
Out of necessity and for the sake of efficiency, the States
have developed a strong system of cross-border supervision and
coordination. Multiple jurisdictions provide peer review for
insurance groups that contribute to a race-to-the-top approach.
There is also routine coordination with lead State regulators
of insurer groups as well as free coordination with other
functional regulators when insurers are affiliated with other
financial sectors.
All States and the District of Columbia have adopted the
NAIC's Insurance Holding Company System Regulatory Act,
designed to regulate transactions among insurers and other
affiliated entities. This Act also regulates mergers and
acquisitions, standards for transactions, and holding company
information. This Holding Company Act requires annual filings
regarding the holding company systems major transactions. These
include such items as material changes to reinsurance
contracts, major investments, management agreements, cost-
sharing, and requests for extraordinary dividends.
The Holding Company Act outlines specific filing
requirements for persons wishing to acquire control of or merge
with a domestic insurer. It further requires each insured to
give notice of certain material affiliated transactions so we
may determine if they are fair and reasonable to the interest
of the insurer.
Another important feature of the Act is that it also
requires insurers to obtain prior regulatory approval for
dividend transactions meeting certain thresholds in order to
monitor the capital flows within a holding company system.
Recent experience has shown that the activities of entities
within a broader group with no connection to the insurers can
still impact those insurers through contagion and reputation
risk. Our system is ensuring the solvency of each individual
insurance entity within an insurance group to minimize the risk
to policyholders posed by these other entities within the
group.
State regulators have the ability to wall-off insurers to
essentially block the interconnectedness that otherwise allows
risk to spread unchecked throughout a broader group. In
response to the recent global financial crisis, however, U.S.
regulators and international standard-setting organizations
have all taken steps to improve the financial services
regulatory system and encourage more frequent communications
and coordination among supervisors, including State regulators.
States coordinate frequently and with other functional
regulators, our Federal counterparts. We meet periodically with
the Fed and the OTS prior to our NAIC meetings, as well as
engage in discussions of particular companies, which is
required as part of our financial analysis handbook directives.
Fed and OTS representatives often attend NAIC working sessions.
Additionally, the States have memorandums of understanding
agreements with these agencies to share information; however,
more can be done to ensure a two-way flow of information.
State insurance regulators participate regularly in
supervisory colleges for insurance-related entities around the
world. This is a fairly recent phenomenon for us. For instance,
my State of Nebraska, along with Delaware and Maryland,
convened a supervisory college of Berkshire Hathaway a year
ago. We'll have an in-person meeting in April here in
Washington to gain a common understanding of the risk profile
of the group and thereby strengthen our solo supervision
efforts.
Additionally, we have recently enacted special legislation
in Nebraska to further enhance group supervision of a major,
internationally active insurer operating in the State. Group
supervision of complex entities is important, but our system
also demands robust supervision of individual entities, whether
the parent is an insurer or not. Information sharing and
supervisory collaboration are improving and the NAIC is taking
further steps to strengthening its Holding Company Act. Taken
together, these steps will help ensure the continued stability
of the insurance sector.
Thank you for the opportunity to testify, and I would be
happy to answer any questions.
[The prepared statement of Ms. Frohman can be found on page
47 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Frohman.
We have heard great testimony, and now it is time for our
questioning. I am going to take my few moments, first. The
testimony was very good, and it did not sound as contentious as
it is. But if one sits here and listens, I do not think we have
agreement at that table as to what is being done and what
should be done in the future.
I guess my first question would go to Ms. Gardineer, in
that I am interested to know whether or not you have instituted
any different regulatory reforms of organizations that are
associated with holding companies and insurance companies, such
as AIG. As I understand it, the only regulatory authority
exercised over financial products of AIG in London was your
supervision of the thrift. Is that correct?
Ms. Gardineer. Congressman, yes, our supervision of the AIG
Holding Company was geared towards looking at and protecting
the safety and soundness of the thrift institution. In doing
so, we did coordinate with our functional regulators to
understand what was going on in the insurance activities, but
we also looked at other areas that were not under the purview
of the functional regulators.
Chairman Kanjorski. Who is the functional regulator?
Ms. Gardineer. The State over the insurance activities, the
insurance subsidiaries.
Chairman Kanjorski. What State handled the insurance
subsidiary for financial products in London particularly?
Ms. Gardineer. There was no State regulator for the
financial products.
Chairman Kanjorski. Okay. So AIG, by cleverly setting up
the operation in London, was successful in avoiding any
regulatory authority whatsoever on the insurance aspect of its
business over there. Is that correct?
Ms. Gardineer. I think that's correct, Congressman.
Chairman Kanjorski. Now, as the regulator of the thrift,
did you also go in and exercise regulatory authority over the
other functions, other than the thrift, on Financial Products
in London?
Ms. Gardineer. We conducted targeted reviews of the
financial products operation in the AIG holding company. Our
efforts were focused domestically, but we did coordinate and
have discussions with the operations.
Chairman Kanjorski. And you found that they were in fact
without collateral to support their counterparty positions of
$2.8 trillion; and, you were aware of that at the time?
Ms. Gardineer. As we went through the targeted reviews, our
examiners were able to find discrepancies in the corporate
governance with regard to how information was flowing back and
forth from the Financial Products silo up to the senior
managers, and we made them aware of those weaknesses based on
what we found in the Financial Products silo.
Chairman Kanjorski. When was this that you made somebody
aware of that?
Ms. Gardineer. I'm sorry?
Chairman Kanjorski. When did you make somebody aware of
weaknesses there?
Ms. Gardineer. We communicated to them through our
examination process.
Chairman Kanjorski. When, though, precisely in time?
Ms. Gardineer. I think that was in March of 2008.
Chairman Kanjorski. Oh, that was after the beginning of the
crash.
Ms. Gardineer. Prior to that, as part of the regulatory
process and through the examination process, we did communicate
continually with senior management and met with the board of
directors.
Chairman Kanjorski. Well, was that back in 2007? 2006? When
did you communicate with--
Ms. Gardineer. We began those communications in 2007. They
culminated in a downgrading of their holding company rating in
2008.
Chairman Kanjorski. And, obviously, no action was taken by
the supervisor regulator because there was not one. They were
beyond regulation on the insurance side. So did you take any
action to cause them to cease and desist what they were doing?
Ms. Gardineer. I think it's important to remember,
Congressman, that in the Financial Products activities sector,
these were unregulated products by anybody in the United
States.
Chairman Kanjorski. So if they were awarding assassination
contracts there, and you ran across that, since it was outside
your realm of activity, they would have been allowed to go on
to continue awarding those assassination contracts?
Ms. Gardineer. I also think it's important to recognize,
Congressman, that the activity of creating these credit default
swaps that were in the financial products, they had stopped the
origination prior to our becoming their holding company
supervisor. Our examiners went in to look at the pipeline of
what was left in financial products and then made the senior
managers of the company aware of the weaknesses that we found.
Chairman Kanjorski. But did you follow-through? Did anybody
stop or take actions as a result of the exercise of your
regulatory authority? I am not picking on you, Ms. Gardineer,
but it just seems to me--the facts I know about that case--that
an entity established with 400 employees in London without any
assets, hard assets, only a great name, has been a subsidiary
of one of the largest or the largest insurance company in the
world. We are out there practicing to the tune of placing bets
as high as $2.8 trillion, and that did not ring anybody's bell?
Ms. Gardineer. We saw the concerns, Congressman, and we
made our concerns. We were aware of the problems. We made the
company aware of our concerns with regard to the activities.
However, I think one of the things that we recognize is the
holding company structure and the statutes that we operate
under are designed to primarily protect the safety and
soundness of the thrift institution. In the situation of AIG--
Chairman Kanjorski. I realize that you can make the
technical argument that we did not have jurisdiction, but
obviously you did not assume jurisdiction of the larger problem
when you saw it. As a result, somebody, particularly the
American taxpayers, have suffered a $200 billion loss and are
on the line for a great deal more in losses if there is further
failure in that operation. Is that not correct? I am going to
add: Have you changed your processes since you handled the AIG
situation?
Ms. Gardineer. One of the things that we have done is we
have reviewed the processes and what we were doing at AIG. We
have provided enhanced examiner guidance based on the lessons
learned through our experience with the consolidated
supervision of that company. By doing that, we focused on the
risk management associations, sharing of information between
the non-functionally regulated and functionally regulated
areas. So we have taken steps to increase our supervision and
enhance that supervision through examiner education.
Chairman Kanjorski. Okay. I am running over my time, but I
do want to ask you one more question. Have you sat down, or can
you sit down, and recommend to this committee or to the
Congress what has to be done in order to guarantee that the
loophole that we have just discussed about who has regulatory
authority, who has supervisory authority, where these lapses
are, is vitiated in the new statute? We need certainty that one
of the regulatory authorities of the United States has the
responsibility and the duty to regulate these entities.
Ms. Gardineer. Congressman Kanjorski, the Office of Thrift
Supervision would be happy to sit down with Members of Congress
and with you and your committee to share our experiences and
try to help enhance the supervision of these types of
companies.
Chairman Kanjorski. I would appreciate it if you do that. I
hope, though, when we pass regulatory reform, never again do I
have to sit at a committee hearing and hear regulators saying,
``Well, we do not cover that, or we do not know about that, or
that is not our responsibility.'' We really want to close those
loopholes, and it seems to me you are the experts. You can tell
us where the holes are, where the problems are.
Now, I am not going to excuse my colleagues or myself from
not necessarily creating those holes in the past, and we may
share the responsibility. But clearly, now, we know there was a
problem. We know why that problem existed because of loopholes
and gaps. Now, we need your help in covering that so that we
have passed a law that there is absolutely some regulatory
authority that is responsible for that entity and those gaps.
Ms. Gardineer. And we're happy to be a part of that
discussion, Congressman.
Chairman Kanjorski. Thank you very much. I wish I could
take another 5 minutes, but I cannot. Mr. Posey is anxious
there, and he is going to come at you with his questions.
Mr. Posey. Thank you, Mr. Chairman.
Mr. Chairman, I don't think any member would mind if you
take another 5 minutes. This is a good line of questioning, and
I think everybody here appreciates it.
Chairman Kanjorski. Yes. I will pick it up the second
round, Mr. Posey.
Mr. Posey. Thank you, Mr. Chairman. You know, I understood
that we were here to kind of review how insurance company
holding regulation differs from banker thrift-holding
regulation, and after listening to the testimony, it's still
not really clear to me. There are a lot of gaps. It's kind of
like oil and water--it just doesn't look like it's mixing very
well, so I am trying to look at this stuff in as small as
possible denominators.
And I think I would like to know, for example, who would
regulate an insurance company, whether or not it was part of a
holding company that would operate under ERISA laws, that is,
under the Employee Retirement Income Security Act which would
be exempt for regulation by our State insurance commissioners,
what Federal agency would oversee that?
Mr. Dilweg. I guess, Congressman, I can try and comment.
Let me just use an example, not that it's a troubled company at
all, but when I sat down and looked at United's org chart,
United Healthcare, it runs about like this. And my concern, you
know, the nexus for the State regulator is the policyholder,
what claims are there to be paid in the future.
My concern when I look at United is, what are the
administrative charges flowing between all the different
companies, and how are they affecting my company in Wisconsin?
If we were to see their ERISA plan company or see one of their
companies go down in California, how would that affect what's
happening in Wisconsin?
We would then interact with all of our fellow State
regulators and discuss a number of those issues. And just as
OTS referenced, we have changed a lot of our examination
processes to try and capture these potential.
Mr. Posey. Well, I think you guys do a pretty good job. My
question is, what Federal agency would oversee the people that
you're not allowed to regulate?
Mr. Dilweg. That's the Department of Labor.
Mr. Posey. The Department of Labor? Okay. We had a case in
Florida where an insurance company in Indiana wrote policies in
49 States and didn't pay claims. We had somebody I knew die
because they denied their claim, and now the State insurance
commissioner said, well, we can't regulate them. They come
under ERISA. And I said, well, this is racketeering. I mean,
forget the insurance company. It is racketeering.
And it wasn't until I threatened to delete 72 of their jobs
and give it to another department that would go to work, that
they followed through gun indictments; and, when they made the
bust, which involved 13 different State agencies between
Florida and Indiana, the guy's wife was screaming. He said they
would never come across State lines to get you for this. This
was the first case in history I understand where State lines
were crossed to prosecute healthcare fraud; and that's out and
out fraud. We haven't proven fraud in a lot of these other
cases yet--some bad intentions--but not necessarily out and out
fraud. And so I guess we need to focus on yet another
department entering the arena here that may or may not be doing
a job that they're supposed to.
Back to my opening statement about some of the bonuses that
were paid, in your department, Ms. Gardineer, or your agency,
has anyone been terminated because of their failure to perform
their job properly?
Ms. Gardineer. Congressman, I don't have any information on
the human resources information at the agency, but I would be
happy to look into that and get back to you. But I don't have
that information with me today.
Mr. Posey. Okay. If possible, I would appreciate it if you
would respond in writing, if it's acceptable to the Chair and
to members of this committee, about my opening comments about
the bonuses that were paid out, many to people who obviously
weren't doing their jobs correctly. I would be interested in
knowing how many people had been terminated, furloughed,
demoted, or reprimanded in the department for allowing that
meltdown to occur.
Ms. Gardineer. I will look into that and gather the
information. And we will respond to you in writing.
Mr. Posey. Thank you. Thank you, Mr. Chairman.
Mr. Perlmutter. [presiding] The Chair now recognizes Mr.
Foster from Illinois for 5 minutes.
Mr. Foster. Thank you, and thank you all for appearing
today.
First, I was wondering if anyone is aware of any documented
benefits of diversification, that is, studies where people have
looked to see if the customer actually gets a better price from
horizontally or vertically diversified corporations in terms of
just getting a better price for insurance. And if you're aware
of this, it's one of the things we're struggling with as to
what are the benefits for AIG-like structures compared to self-
contained smaller units. And if you're aware of any of this or
could respond afterwards, if you become aware of it, I would
appreciate it.
Ms. Frohman. I am aware of situations where in the
homeowners market, in the auto market, that by pursuing
coverages under one umbrella of a group, there are discounts
that are available to two individuals, and so they can price
competitively and take advantage of that.
Mr. Foster. Okay. Let's see. Another question I had, I
guess, to Commissioner Dilweg and Director Frohman, does that
standardization of State legislation lead to standardization of
software systems to report and analyze the financial status? Is
there a lot of collaboration among the States?
Mr. Dilweg. I'll start, Congressman. I think it is
important to note that as we compare the data that we have
compared to our European and even Federal regulators, we are
very data rich. Our NAIC really houses a lot of our data that
then allows me as an individual regulator not to have to
duplicate on the financial solvency side the work that my
counterpart in Nebraska would have done on her companies.
And so we just have thousands upon thousands of datapoints
that we pull in and then utilize various tools to stress test
the companies and look at, for instance, recently looking at
the residential mortgage-backed securities and how those are
stressed and how those are affecting the bottom line issues,
the assets of the companies and their risk-based capital
charges, things like that.
Mr. Foster. I was getting at whether there was sufficient
sharing between the different States.
Mr. Dilweg. Oh. Yes, I would say it's very vibrant. I mean
we could put it in much more detail for you if you would like.
Mr. Foster. One of the concepts in a lot of the regulatory
reform is the idea of a living will, that if a holding company
gets in trouble, we chop it up into little pieces. That seems
like it in principle fits pretty well with the idea of State-
based operating units, and I was wondering if that's a correct
impression of mine that it would actually be better to have
independent business units in each State when it comes time to
chop the companies up into little pieces and sell them off. Or
the counter argument against that is that actually operations
like AIG share IT infrastructure and all this sort of stuff in
ways that make it really very difficult to chop up their
business units. I was wondering which one is closest to
reality.
Ms. Frohman. We found in our experience in receiverships
where we have a holding company sitting at the top of an
insurance group that we work very well, even in the event that
the holding company may be in bankruptcy to work out sharing
payment systems and master coordination. So it does create an
issue, but it hasn't been a problem in the resolution of the
insurance enterprises. We jump on that right away.
Mr. Foster. Okay. Another one of the concepts that we are
looking at is that of contingent capital in the capital
structure of giant firms; and, I guess this is for Mr.
Greenlee, perhaps. Whether you see that as a valid concept to
apply to insurance holding companies, to basically give a
market-based signal for the holding companies that the market
views as running shaky operations and provide a first line of
defense against the too-big-to-fail and keep the taxpayer off-
the-hook when one of these gets in trouble.
Mr. Greenlee. Thank you for the question. I think it's
worth considering; we're doing a lot of work at the Federal
Reserve and with our international and domestic colleagues to
look at how that would work. It is my assessment that
contingent capital would be available when certain triggers
were hit and it would help improve the capital base and the
resiliency of these firms.
Mr. Foster. And so your view would be that one of the jobs
of the Federal Reserve would be to administer the stress test
that would trigger the contingent capital conversion, or are
there other schemes that you're looking at?
Mr. Greenlee. It could be a stress test. It could be some
sort of financial performance indicator. There are a lot of
things that are being looked at right now. My understanding is
this discussion, looking at financial performance triggers,
goes on internationally. If you hit a certain capital level, if
you have a certain type of market indicator, this would prompt
the conversion of the capital instrument. It would not
necessarily entail regulators doing a stress test and providing
the results, although that could be a possibility as well.
Mr. Foster. Okay. Thank you. I guess I am out of time and I
yield back.
Chairman Kanjorski. Thank you very much, Mr. Foster.
Now, we will hear from Mr. Royce of California.
Mr. Royce. Thank you, Mr. Chairman. Mr. Chairman, despite
Mr. Garrett's opening comments, I have never argued that AIG's
securities lending losses are a reason for Federal regulation.
What I have said, and what I'll say again, is that the State
insurance commissioners had the ability to prevent those losses
and they did not. There is a lot of blame to go around in the
case of AIG, but to say the various State insurance
commissioners are not to be included in that group is a failure
to look at the facts.
AIG's Securities Lending Division used capital directly
from the insurance subsidiaries. To date, the losses derived
from the Securities Lending Division amount to over $40
billion. Mr. Garrett mentioned that AIG would have been okay,
despite these losses. I think $40 billion would cripple any
institution. Further, there are at least seven State-regulated
insurance subsidiaries that were participating in AIG's
Securities Lending Division that would have been insolvent but
for the American taxpayers.
I would like to ask the insurance commissioners, I
understand that every State has an insurance company, holding
company law, and that those laws give the insurance regulator
the authority to examine the activities of the holding company
or other affiliates to ensure the ongoing health of the insurer
itself. With regard to AIG, how were those holding company laws
and the authority they granted to insurance commissioners used
prior to the time the AIG crisis came t a head?
Ms. Frohman. Although I did not have an AIG company
domesticated in my State, I can speak to the terms of what the
holding company framework requires; and in terms of agreements
involving U.S.-based AIG companies that are insurance operating
entities, we have a number of requirements we're dealing with
affiliated agreements and material transactions that would have
touched the insurance company or involved the insurance
company's operations. We would have required prior review of
those agreements to the extent that they had a material
threshold.
Mr. Royce. Any other commentary there?
Ms. Frohman. I guess in terms of where we have been with
securities lending, we have in the lessons learned imposed a
risk capital charge. We have also enhanced our disclosures, and
prior to the credit crisis, we were well aware of the issue and
the insurance regulators had required a reduction I think by 50
percent in the securities lending activity.
Mr. Royce. What transpired at the time, though, in this
case, is that we did not have commissioners who took a look at
the health of this holding company, and, given its very varied
non-insurance holdings and the fact that its financial position
could harm the insurance company in the system, this turned out
to be problematic, especially, when you consider that the
Securities Lending Division, which has taken up roughly half of
the tax dollars that have been pumped into AIG was using money
directly from the AIG insurance subsidiaries, and all of those
were State-regulated.
So I would ask Ms. Gardineer. Would you care to comment?
Certainly, OTS had some authority over AIG. Do you agree that
the various State insurance commissioners could have taken
steps early on to prevent some of the damage caused by AIG?
Ms. Gardineer. Congressman, I do recognize that with the
speed that AIG Financial Products collapsed, and then
ultimately the problem surfaced with regard to the securities
lending subsidiaries, there were problems, as you indicated
earlier, across all parts of the organization of those that are
functionally regulated by the State commissioners as well as
the parts that were not functionally regulated and fell to OTS
for examination. It imposes a very interesting dynamic as far
as all of the complexities of a company of that size when you
have so many regulators who are looking into trying to figure
out very complex structures of unregulated products.
Mr. Royce. That is my concern.
Ms. Gardineer. I think that all of us worked as we
cooperated. We talked with each other, but the events overtook
us quite quickly, and there are a lot of lessons to be learned
from both the Federal as well as the State side.
Mr. Royce. Thank you very much, Mr. Chairman.
Chairman Kanjorski. Thank you, Mr. Royce.
Mr. Perlmutter?
Mr. Perlmutter. Thank you, Mr. Chairman, and I appreciate
the panel being here today. Let me see if I, let's say, we have
AIG. AIG is selling off big chunks of its portfolio even as we
speak. So it's sold to some other insurance company or some
other organization. Who watches that? Who is now in charge if
AIG sells off its ``something'' division for $15 billion, and
helps pay some of the tax dollars back? Does Nebraska take any
interest in that?
Mr. Dilweg. I will give you a different example. We had QBE
out of Australia buy a large company that affected 25 States,
and General Casualty, Wisconsin, took the lead on that
acquisition, coordinated with all the other States to get all
the other State regulators involved and look at the questions
that they may have surrounding such an acquisition. It would be
very similar.
Neither of us have AIG subsidiaries, but it would be very
similar in the scenario that you're laying out. So in reality,
there becomes a lead State that will coordinate the acquisition
and feed questions and detailed financial questions through to
the company, so you're not getting hit by seven or eight
different regulators.
Mr. Perlmutter. So then the acquisition occurs. Everybody
said, ``Okay. This is okay.'' Does your State remain the lead
State to kind of watch this thing?
Mr. Dilweg. Where it is domiciled, we would remain the lead
State, so in my example, we remain the lead State on that
issue.
Mr. Perlmutter. All right. If there was a thrift in this
deal, would you be talking to the OTS at the same time?
Mr. Dilweg. Through a process like this, we would be
coordinating with our Federal regulators. We have coordinated
with FSA in London on issues. We coordinate with our Australian
regulators.
Mr. Perlmutter. Do you, in this process, ever come up with
a situation similar to the AIG situation Mr. Royce was just
asking about, where they got some part of a business? Let's
say, they own hotels or they own casinos, or they do credit
default swaps. Do you, in that process, as the lead State say,
whoa, there's some stuff here that we don't understand or we
can't reach those products.
Mr. Dilweg. I think one important point going back to
Congressman Royce's question is, should we have seen it coming
sooner? Should we have done something on securities lending?
You are stuck looking at securities that are rated triple A.
Now, once they all collapsed, all the various regulators were
coordinating basically through New York, Pennsylvania, and
Texas on the AIG side from the insurance side.
Mr. Perlmutter. And I'm not looking for blame on that one.
Mr. Dilweg. Right.
Mr. Perlmutter. My question is more if the insurance
company is also involved in other areas of commerce that aren't
really insurance types. One of the things we're dealing with in
this big regulatory bill is do we go back to a Glass-Steagall
kind of an approach where we separate insurance companies from
the stockbrokers, from the commercial banks, from whatever.
Financial companies stay financial and we don't try to bring
them all together. Do you worry in this process when you see
insurance companies delving into other parts of commerce?
Mr. Dilweg. We reach out directly through confidentiality
agreements with the OTS, with the Federal Reserve, with
Treasury, for FHFA, with all of our Federal counterparts if
something like this were occurring to walk through all the
issues we see.
Mr. Perlmutter. Do you flag it for your partners or your
other States, or for any of the Fed or the OTS if it's
unregulated? Let's say it's a hotel. They own a hotel. It has
nothing to do with financial services or insurance. What do you
do?
Ms. Frohman. Let me try to answer that. What we do in terms
of insurance regulation that I think works fairly well, and we
saw that in this instance, is that while off the insurance
enterprise, such that there are capital needs for the hotel on
the other side of the balance sheet, we are not interested in
hotels going down, or whatever. We are not interested in
throwing good capital after bad, per se. But we analyze to make
sure that the capital within the insurance company is
sufficient to pay policyholder claims and remain solvent.
So from that perspective, we don't necessarily look at the
enterprises that are not regulated, but in the lessons learned
what we hope to accomplish is a more optical approach where we
can have in addition to what we are already doing that we think
works really well on the insurance side is to have a better
view, more optics upstream so that we can maybe look for trends
in contagion and that sort of thing. And those are activities
that are going on right now at the NAIC.
Mr. Perlmutter. Okay. Thank you. Thank you, Mr. Chairman.
Chairman Kanjorski. I will now recognize Mr. Garrett from
New Jersey.
Mr. Garrett. Again, I thank the panel for your testimony,
so up-to-date.
Mr. Greenlee, in your testimony you mentioned that the Fed
must rely on the examination reports of the State insurance
authorities to the fullest extent possible. Can you describe
any situations in which the Fed was concerned about the
information reviewed in any of the examinations? And are you
aware of any cases in which the Fed determined that the
information was perhaps not sufficient or inadequate for the
purposes of carrying out its financial holding company
supervisory responsibilities?
Mr. Greenlee. Thank you for your question.
Mr. Garrett. Sure.
Mr. Greenlee. What we follow is what is outlined in the
Gramm-Leach-Bliley Act.
Mr. Garrett. I'm sorry?
Mr. Greenlee. We follow what's outlined in the Gramm-Leach-
Bliley Act, which compels us to rely to the fullest extent
possible on primary bank regulators or functional regulators.
We will get information at times that will cause us to go back
and ask more questions. If there are concerns, we can always go
to the audit function of the bank and find out what they think.
We always have the right to go ahead and do our own review
and look into it under the law. The burden is on us to say why
we think this is a threat to the depository; and, at times we
will do that if we are sufficiently concerned.
Mr. Garrett. Okay. You get the information, you review it,
if it's adequate, fine. If it's not adequate, you proceed to go
back and seek all the information that you need. So you have
not experienced a situation where there's just a dearth or a
lack of information that you can't get at the end of the day,
because you have that ability to go back.
Mr. Greenlee. That's correct. And we don't just rely on
what we get from the functional regulators. As the consolidated
supervisor, we would have a view of all the company's major
lines of businesses and its risk management practices. We are
aware of broader things going on in the marketplace. We pull
all that together to make the assessments of the risk in the
organization.
Mr. Garrett. Okay. You also mentioned in your testimony
that the Federal Reserve supervisory approach also recognizes
the additional risk arising from the underwriting of life
insurance policies and property and casualty insurance
policies. I guess, in a nutshell, since time is limited here,
can you explain for us some of what you mean by that?
Mr. Greenlee. Our traditional approach and our capital
rules are really aimed at asset quality, credit quality,
liquidity risk, market risk, those operational risks.
Mr. Garrett. Right.
Mr. Greenlee. When companies affiliate themselves with an
insurance underwriter, there are different kinds of risks that
aren't captured under those definitions, such as actuarial
risks or risks from property and casualty businesses. And what
we do with that is we work with the NAIC on producing a paper
that explored those differences so that our supervisors can
understand that and factor that into our overall assessment of
capital adequacy at a holding company.
Mr. Garrett. Okay. That's on the supervisory side. I think
my last question as far as time goes, you make the assertion
with the issue that's always dear to me in dealing with the
systemic risk issues, and you assert that the risk of the
financial system is not just from the banking sector. It's from
the insurance sector as well.
We are all familiar with the AIG situation and how that
plays out. Can you explain, though, specifically within the
insurance sector, where the systemic risk problems are that
you're specifically concerned about?
Mr. Greenlee. Well, I think it's--
Mr. Garrett. Outside of the AIG type of--
Mr. Greenlee. Sure.
Mr. Garrett. Yes.
Mr. Greenlee. It is a concern more broadly about any firm
that is large, complex, and has a lot of interconnections with
other players in the financial system and in the marketplace.
So an insurance company may have securities activities or
engage in--not like AIG--derivative activity that would have
some connections with other financial firms and could be a
source of contagion to the rest of the finance system if there
was a problem there.
Mr. Garrett. So it's interconnected to this issue that we
heard about a year ago, that is the underlying problem as
opposed to their own?
Mr. Greenlee. I would say it's both. The one thing that
makes people systemically important, like AIG, is you have a
lot of connections to other financial firms so that if that
firm goes bankrupt or can't meet its obligations, it has a
cascading effect across other financial organizations. So we
would worry about the individual firm.
Of course that's how we traditionally supervise. But we are
also trying to focus a lot more on these interconnections.
Mr. Garrett. Okay. And I guess he's not watching. But that
aspect is as far as the carrier themselves, the insurance
company themselves, are what the folks to my right, your left--
well, the two folks on the end--is where your responsibilities
lie. And some would argue have been doing an adequate job in
those areas. Correct?
Mr. Dilweg. I would agree with that statement, Congressman.
Mr. Garrett. Okay. Do you have anything to add, Mr. Dilweg?
Mr. Dilweg. I think it is important we do correspond
typically with the New York Fed on some of the issues you're
describing. We have a good back-and-forth on any issues
surrounding various insurance companies, so they get informed
on what they need to know.
Mr. Garrett. And so what I take from this, and I heard some
of the testimony from the rest of you earlier on, is this all
sort of supports my opening statement, which is good at the end
of the day, right, is that it's not a gap situation here and I
appreciate your testimony on this. There's not a gap in the
structure of what we have here. It sounds like you all are
talking to each other doing the oversight in that
responsibility; obviously, we have some concerns.
I don't know where you were specifically at the time, but
folks who had the responsibility at that time at OTS in this
areas, so it sounds like the overall structure is there. So
it's not a gap issue. And it sounds as though that since the
problems weren't on the insurance side, per se, it's really
something that we need to come back with and we need to do this
in a whole bunch of other areas. We haven't had any hearings on
the SEC, and I know that's not your bailiwick. But we have to
go back on a whole bunch of these other areas just to make sure
that the actual execution or implementation of what's already
out there, whether it's the SEC or whether it's you folks at
the Fed. Or whether it's you folks on the State level, or, just
actually implementing it in each case to the highest degree
possible to try to avoid what we have in this past situation.
Does that sound right?
Mr. Greenlee. I would just add one other comment from the
Federal Reserve's perspective where we do consolidated
supervision. We have a couple of things that are very important
to us as the consolidated supervisor, and one of them is
setting and establishing consolidated capital requirements for
the firm as a whole. We think that's an important thing to make
sure that the consolidated organization and all its
subsidiaries are adequately capitalized and have a sound
financial footing.
Mr. Garrett. My last question--thank you for your
forbearance--do you folks have a question or comment on that?
Mr. Dilweg. I guess my only concern on that approach is I
would hate to see the policyholder dollars in one of the
companies under the umbrella being used to bail out a financial
services piece of that.
Mr. Garrett. That's a good point. How do you avoid that?
Mr. Greenlee. Well, from our perspective, we have a couple
of ways we do that and one is we have laws that restrict
intercompany transactions with depository affiliates.
Mr. Garrett. Okay.
Mr. Greenlee. The second thing is under our supervision of
the holding company, which is the parent organization, we do
expect them to maintain adequate capital and we also expect all
their subsidiaries in the State, Federal, whomever their
regulator may be, will meet their capital requirements and
satisfy their regulator's needs in terms of capital adequacy.
And then we also look at it through how it builds up and the
consolidated capital needed for the risk that may not be
captured by all those regimes or capital you may need to hold
for intercompany exposure or exposures that cut across an
organization that may get different treatment.
Mr. Garrett. Okay. I thank the Chair. Thanks to the
witnesses.
Chairman Kanjorski. Thank you very much, Mr. Garrett.
If it is all right with everybody here, there are only
three of us left here, but I would like to ask some additional
questions.
Mr. Garrett. I'm going to object.
Chairman Kanjorski. You are going to object?
Mr. Garrett. Well, no. Okay.
Chairman Kanjorski. Does anybody know how many holding
companies there are that own insurance subsidiaries in the
country?
Ms. Frohman. We don't track the information that way given
the way we wall-off insurance companies, but in light of all
the data that we do have, it's something that we could probably
pull together fairly easily and get you that information.
Chairman Kanjorski. But we do not know what kind of a
problem this is, whether it is a minimal problem or whether it
is really a great problem. Nobody really knows here. Now, if we
had a Federal regulator, we would know that answer immediately.
Correct? Every holding company that has anything to do with
insurance would be identified, and categorized, and readily
available. Is that correct?
Mr. Dilweg. Well, what I think is important is we talk
about holding companies, Congressman. You know, there could be
an insurance holding company and then above that a more
umbrella-like holding company.
Chairman Kanjorski. I understand. I am talking now about a
holding company on top that is not an insurance company itself.
Mr. Dilweg. Okay.
Chairman Kanjorski. Just as a holding company, and they own
an insurance company, either an overwhelming majority of the
stock or all of the stock, and then they own some hotels out
here. The question I have in mind is, what do they pay in
premiums for their hotels to their insurance company that they
own, and who checks on that rate, whether it is an acceptable
rate to cover the estimated risk? Do you all rush in there and
do that?
Ms. Frohman. It depends on whether it's a material issue.
Chairman Kanjorski. But it is not a material issue. It is
that the insurance executives are over here that are part of
the holding company. They build a hundred hotels, and they
insure them with ABC insurance company. Who looks into the
relationship of what the rate is and whether the rate set by
the insurance company for the hotels that they own is the same
that the regular market pays?
Ms. Frohman. That would be the insurance departments. Yes,
we would look at regardless of who owns the hotels, the
marketplace.
Chairman Kanjorski. So you check out every insurance policy
to see that it is properly rated and charged, or do you only
check out insurance companies where you get a complaint that
there is an overcharge?
Mr. Dilweg. The rates have to be actuarially sound. They
have to fit--have the capital there to pay potential claims.
Chairman Kanjorski. No. No, I understand that. I am talking
about the premium that is going to have to be paid on the
hotel. Who is going to decide if they go to their own insurance
company that is owned by a large holding company which has a
hundred hotels that are worth a million dollars apiece, and
they go to their own ABC insurance company, and they say,
``Well, we would like to insure all our hotels, but we only
want to pay a rate of half of that on $50 million.'' Who does
the checking about that?
Mr. Dilweg. That instance you lay out would probably come
up more through a complaint process.
Chairman Kanjorski. So if nobody complained?
Mr. Dilweg. Well, a competitor would probably complain.
Chairman Kanjorski. How would a competitor know?
Ms. Frohman. We also engage in risk focus exams, and so in
the examination process, we look at affiliate transactions and
that very sort of thing.
Chairman Kanjorski. But you do not have any authority to go
up to that top holding company to find out what those
transactions are, do you?
Ms. Frohman. We don't have the authority to go to the
holding company, but we can do it from the insurance company.
Mr. Dilweg. So in a different scenario, Congressman, where
you're simply paying for IT or services, administrative
services. You can't have the holding company overcharging the
insurance company just to make money as far as business
operations, underwriting, things like that.
Chairman Kanjorski. I am not talking about overcharging. I
am talking about undercharging. It is certainly advantageous
for a holding company that owns subsidiaries that are in
different businesses, one being an insurance company, and
others being office buildings, hotels, or anything else, to
make it known that we want to do business within our own
family, and, two, we want you to get favored rates because we
make a profit on it.
Ms. Frohman. We did have that scenario happen in our State
about 15 years ago with a business that wasn't satisfied with
the premium and decided it would attempt to acquire the
insurance company to lower its rate. We issued a cease and
desist on that, and ultimately through the State court process
as well as the circuit court, said ``No,'' and they divested
themselves. So we do stay on top of those and I do think
through our risk-focused exam and the types of inquiries that
we make, we reach out and look for those sorts of issues.
Chairman Kanjorski. How many holding companies are there in
the State of Nebraska?
Ms. Frohman. We have about 76 or 77 significant insurance
companies and those all would have holding companies, I
believe.
Chairman Kanjorski. Okay. Those are insurance holding
companies. How about holding companies that own insurance
companies as subsidiaries?
Ms. Frohman. Probably most of them.
Chairman Kanjorski. They are both holding companies as an
insurance company and holding companies that own subsidiaries
that are insurance companies?
Ms. Frohman. Both.
Chairman Kanjorski. Both. Do you have an exact number on
that?
Ms. Frohman. Again, I don't. The way we regulate doesn't
make it quite as relevant.
Chairman Kanjorski. Recognizing you have a lot of work to
do, even within just the single State of Nebraska to get all
this done, how can you also police this interrelationship that
occurs between companies that are familiarly related?
Ms. Frohman. We have folks on staff, and that is all they
do. And they require through our Holding Company Act, there's a
process for filing these agreements, these cost-sharing
agreements, service agreements. And so any time there's an
interaffiliate transaction of a material significance, they're
going to come in. We're going to analyze that to determine
whether that's fair and reasonable to the insurance company.
Chairman Kanjorski. How do you, if I am the holding
company, not an insurance holding company but just a holding
company incorporated in the State of Delaware, and I have an
insurance company in Nebraska, how do you come over and
examine? What authority do you have under the law as it
presently exists to come over to Delaware to examine my
corporate records or whatever you want to examine?
Ms. Frohman. We do have that authority and can exercise
that authority, in particular as it relates to the insurance
enterprise.
Chairman Kanjorski. But the insurance enterprise is in
Nebraska. You can go to Nebraska and examine the insurance
company, but how can you come and examine the holding company
on top that is located in Delaware?
Ms. Frohman. We don't examine the holding company, per se,
but we look at the books and records as they relate to the
insurance company anywhere in the country or outside.
Chairman Kanjorski. How would you know whether that holding
company in Delaware owned hotels in Florida?
Ms. Frohman. We do require as part of our holding company
system now a registration statement on an annual basis that
requires disclosure of the holding company structure.
Chairman Kanjorski. But the holding company is not in
Nebraska, so the holding company is not subject to Nebraska
law. It is subject to Delaware law.
Ms. Frohman. It's through an indirect approach. We require
that the insurance enterprise file all the information of their
holding company system with us.
Chairman Kanjorski. Okay, and if they own 54 percent of the
stock? And the insurance company owns 54 percent of the stock
in the insurance company in Nebraska, what happens if they own
40 percent?
Ms. Frohman. We have a definition of control that triggers
the holding company system review.
Chairman Kanjorski. What is your method?
Ms. Frohman. And that's at 10 percent at a presumption?
Chairman Kanjorski. Anything over 10 percent is presumed to
be controlled by the local corporation?
Ms. Frohman. Yes, it is.
Chairman Kanjorski. What did I do? Did I go over my time?
Do I have to recognize the gentleman from California? He is not
running yet. Oh, there he is, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I have a question for
Mr. Dilweg. Something you said really got my attention. When
you said, well, on these triple-A rated securities, the credit
rating agency has given us this assessment. And I just
wondered, do you always just outsource to the credit rating
agencies these questions?
That clearly was a mistake in my view, and another aspect
of that, the bond rating agencies or the bond insurance
industry. Let me ask you this. Would you like to comment on the
failure of the bond insurance industry, especially given that
so much of that was in Wisconsin? And what has changed on each
of these fronts?
You have State regulation on both fronts, bond insurance as
well, and we had a failure here to uncover this. Give me your
observation on what has changed.
Mr. Dilweg. Let me address both points, Congressman. I
think, when I came into this position, we had inherited a heavy
reliance on rating agencies, as I think the Federal Government
did as well. We have spent the last 3 years trying to look at
dialing back our reliance on rating agencies.
Just recently, we did our own due diligence, brought in a
vendor, PIMCO, to look at how we rate and value residential
mortgage-backed securities. So this is an ongoing process. But,
at that snapshot in time, we were built to see that triple A
was triple A. And so that was the nature of that comment. I
think on the bond insurance, that's unique to Wisconsin. When I
look back--and I still have people on staff--where you had a
piano company, Baldwin United, go bankrupt in the early 1980's,
what spun-off from Baldwin United was AMBAC, a bond insurer
that they owned, MGIC, a very large mortgage insurer that they
owned.
And that is one reason that Wisconsin is heavily involved
in these issues, but that was a role of how companies owned
insurance companies back then that failed. We look very closely
and have with AMBAC, at the capital that they have, and we are
working very closely with the company and our independent
advisors on their position and how they struggle with stresses
of this economy.
Mr. Royce. Let me ask you lastly, Mr. Greenlee, a question.
If price controls were putting the solvency of a given
insurance subsidiary at risk, would the Fed or the OTS have the
authority to intervene and remove the price-fixing requirement
on that subsidiary?
Mr. Greenlee. I think, under the current statute, we need
to defer to the primary functional regulator, which would be
the State insurance regulator. If they were to set that in
place, we would probably not take action on that.
Mr. Royce. What about if the holding company was funneling
money into a subsidiary that was not able to charge actuarially
sound rates? Could you prevent that transfer if it was
weakening the broader company?
Mr. Greenlee. Yes, we could.
Mr. Royce. I see. Thank you.
Mr. Chairman, I am going to yield back.
Chairman Kanjorski. The gentlelady from Illinois, Ms.
Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. My first question is
for Mr. Dilweg.
You mentioned that any State in which a company is licensed
to conduct an insurance business may conduct its own regulatory
oversight, and that's not just the company's State of domicile.
So do the States communicate with each other whenever they're
engaged in such oversight, and what systems are in place to
ensure against replication and duplication or inefficiency in
such cases?
Mr. Dilweg. The typical thing that I have seen,
Congresswoman, as it relates to, you know, as you're wrestling
with asset valuation, what they're filing with each State, a
different State may view assets differently, we try and
reconcile that at a national level. You do not typically see.
We are all accredited, all 51 jurisdictions, so there is a lot
of communication if something like this were to occur. It would
be unusual for an individual State to do it without talking to
the domestic regulator, and, really, try not to duplicate on
the financial side of the ledger.
Mrs. Biggert. But it really depends on the communication to
make sure that they do communicate?
Mr. Dilweg. Correct. And we feel through the NAIC we have
really laid the groundwork, especially on the financial side
for these communications to be facilitated.
Mrs. Biggert. Okay. Thank you. And then, Ms. Frohman, you
cite in your testimony that the sharing and collection of
information between the regulators is important to protect the
policyholders. What type of time requirements should be put in
place for this information sharing and who should make that
determination? And should a Federal entity preempt an State
insurance regulator when it comes to collecting insurance
information?
Ms. Frohman. Thank you. With respect to the first question,
I don't think it's necessary that we put time requirements on
it, because the information that we're sharing under the
authority of our MOUs happens in real time, and it's a very
fact and circumstances-based for the most part in addition to
our routine; you know, 50,000 feet communications that we
engage on a regular basis.
With respect to your second question, which was?
Mrs. Biggert. Should a Federal entity preempt an insurance
regulator when it comes to collecting insurance information?
Ms. Frohman. I don't think it's necessary, given that we
have all the information, as Commissioner Dilweg mentioned. We
are data-intensive, and we can communicate and coordinate and
provide that information. So I don't see the necessity for
preemption, because I do think you want to have the expert that
understands it explaining it.
Mrs. Biggert. Okay. Thank you. Then does NAIC monoline
provide authority for State insurance regulators to examine the
financial information of holding companies affiliates to
understand if they would have a negative impact on the
insurance company?
Ms. Frohman. We do have some authority now to go upstream,
and as it relates to the insurance company. But an exercise we
are taking on through the group solvency issues working group
at the NAIC is to enhance that ability. So it's something
that's under way we think we can always improve, and we're
looking to come up with some tools to do that.
Mrs. Biggert. Okay. And my last question is, are the State
banking regulators currently represented on that council and
would that be helpful, if State insurance regulators had an
explicit role on a Federal body to better coordinate with the
Federal regulators?
Mr. Dilweg. I think any body that you bring together to
coordinate on the Federal side, we would be interested in
participating in. I think you also have to recognize some of
our insurance commissioners are also banking regulators. We
have duplication as it relates to Vermont, the District, here.
So you're going to have some overlap just by the nature of how
some of the States structure their banking and insurance
departments.
Mrs. Biggert. Good. Thank you very much. I yield back.
Chairman Kanjorski. If you do not mind, I am going to go
with another set of questions.
Mr. Garrett. Well, I just have two quick things.
Chairman Kanjorski. Two quick things?
Mr. Garrett. Yes.
Chairman Kanjorski. I yield to you.
Mr. Garrett. One, I seek unanimous consent to enter into
the record the testimony of the Property Casualty Insurance
Association and their March 18, 2010, comments.
Chairman Kanjorski. Without objection, it is so ordered.
Mr. Garrett. And, secondly, Ms. Frohman, you had stated
something with regard to your participating in a supervisor
college exercise dealing with domestic and foreign regulators.
The chairman and I were over in Europe in August or September
and that was one of the broader issues as far as harmonization
and what's going on over there and what's going on over here.
Can you spend just a minute or 30 seconds, whatever, to what
extent issues you'll be dealing with there and what extent
you'll be interacting with foreign regulators?
Ms. Frohman. Yes. Thank you for asking. We convened the
supervisory college about a year ago in conjunction with our
counterparts at the FSA in the Balkans and Germany, as well as
the Australian regulatory authority, began conversations on the
Berkshire Hathaway Group. And we have had probably four to five
phone calls, and getting started we kind of started at a high
level. And as we're forging through, I think what we're finding
is we're learning about each other's regulatory systems. We're
learning about the details of that company's operations, as
well, but, we're finding at the end of the day we do have a lot
of common focuses that in essence, I guess I didn't know what
to expect and had not formed an impression in the beginning.
But our questions on enterprise risk management corporate
governance are going to be the things that will focus on, and
looking at, is there financial contagion? Is there reputation
risk that is something that can be measured and watched with
respect to this group? So it's a new exercise for us, but we
are spending time with our regulators and do find now that once
we forged these relationships that we're benefiting from them
in other dimensions. So the dialogue has begun and it is
definitely enhancing our tools.
Mr. Garrett. Okay. Again, thank you to the panel.
Chairman Kanjorski. Thank you very much. For the State
regulators, if I may. Do you feel that all forms of insurance
should be regulated on a State level or are there exceptional
insurance products that should be elevated to Federal
regulatory authority? That is a loaded question, because I want
you to give me a particular answer, but you all pick your
answers.
Mr. Dilweg. I guess I would turn to a middle ground,
Congressman, being vice chair of our compact that relates to
life insurance products. I have found that has worked very well
as it relates with the 36 States that are now a part of that,
and as you know the compacting process is a State-based
process. So my concern on raising insurance to a Federal level
is frankly a lax concern of not having enough strength there,
enough capital there, enough requirements there to protect the
policyholder, so.
Ms. Frohman. I would agree with that and simply add that to
the extent we are talking about insurance products, where at
the end of the day your question is geared towards a promise
today to pay into the future, I think that consistently belongs
with the States and that we can engage. And it does take a
dialogue. It does take a global analysis.
Chairman Kanjorski. Should we repeal Federal depository
insurance?
Ms. Frohman. I'm sorry?
Chairman Kanjorski. Should we repeal Federal depository
insurance, FDIC? Insurance that Federal banks or the banks of
the United States are required to have. Ms. Gardineer's thrifts
are required to take Federal insurance out and it is regulated
by the regulators, Federal insurance. Do you think we should
repeal that and open it up to insurance companies that are
regulated by the States?
Ms. Frohman. That isn't something I have given any thought
to; it is an interesting concept.
Chairman Kanjorski. Give us some real thought, if you can,
now. Do you know that there are deposits of private individuals
in the United States in depository entities that are insured by
private insurance companies and only regulated by State
insurers, would that surprise you?
Mr. Dilweg. I think the concern there, Congressman, would
be the banking regulation sits at the Federal level and it
would be difficult to move such a policy back down to the State
level where the States would really--
Chairman Kanjorski. These are State-chartered institutions,
and by the existence in the famous loopholes we were talking
about, they can go out and get private insurance to insure
their deposits; in fact, they do so. Do you think that State
insurance commissioners are sufficiently competent to regulate
that type of insurance product?
Mr. Dilweg. I guess it's something that I haven't spent
much time on.
Chairman Kanjorski. But if I want to go to Wisconsin and
open up a depository insurance organization, you do not feel
that there should be any inhibition to my coming to your office
and submitting the application?
Mr. Dilweg. We take all applications.
Chairman Kanjorski. What should we do with something like
that? Because we are going to have to face it. We have
depository institutions in this country that are not regulated
by federally established institutions, and you do not run into
any problem with them until a recession or a depression occurs
when they begin to fail. Then, the question is, who backs them
up? Then, you discover nobody backs them up, particularly
States that are almost bankrupt themselves will not come in and
back them up. So the Congress gets faced with the proposition:
do we just allow all these institutions to fail, and all their
depositors, who for all their lives have been told if you
deposit money in a depository institution you have the United
States Government behind you, and they find out they do not.
What do we do?
We have that actual question facing us right now; not that
they are insolvent. Do you see what the problem is? If somebody
found out how to make money by offering insurance in good times
on deposits--the argument has been made now--particularly in
good times before the recession started, that we should look at
repealing requirements at the Federal Deposit Insurance.
If the private sector can do it much cheaper and much
better, the only problem is they do not have to forfeit credit
with the United States Government standing by. Do you think we
should encourage that type of insurance to be regulated at a
State level? That is my question.
Ms. Frohman. I simply don't have an answer for you. I'm
sorry. I wish I could help, but I have not given it enough
thought.
Chairman Kanjorski. And you are going to duck out of it
too, right?
Mr. Dilweg. It's not something I have thought about,
Congressman. It's unique because I think that's one issue that
I found--you're talking about insuring entities where there
could be a run on the bank--and when we face the AIG issue, you
had long-term contracts that were in place. And it's a
different type of nature of insurance, so those entities where
there's a run on a bank, I think it's a very pertinent question
and I would be happy to spend more time.
Chairman Kanjorski. If you do not mind, I would really like
your thoughts after you have some time to think about it.
Mr. Dilweg. That would be great.
Chairman Kanjorski. We ought to be consistent, logically
consistent on this.
If the private sector of insurance is so good and
manageable entirely at the State level, then we should
reexamine whether we should stay in the Federal Deposit
Insurance business or create an alternative organization. We
have the authority to say that no depository institutions
should be allowed to be in the private sector and be regulated
only at the State level. I think we should start choosing the
alternatives because our problem is that, as in the S&L crisis,
we had to go in and bail out three or four States that allowed
that to happen and did not have the resources to pay on their
insurance.
As a result, we were faced with a terrible situation. There
could be another situation where depositors would be entirely
wiped out of their life savings because somebody felt that:
one, the State had the authority and the expertise to be the
regulator of that type of insurance company; and two, they
never thought there would be a recession or a depression, or
that they would be at risk. But it happened once before.
My question is, what do we do about it? Nonetheless, thank
you very much for your testimony today. Ms. Gardineer, you have
been a good sport. I really jumped on you a little bit there,
and I purposely did that because those questions are out there,
and we get asked those questions. I thought you did a
commendable job in the advocacy for the group, so I am going to
award you an ``A.''
The Federal Reserve, they are used to getting jumped on, so
thank you very much. We have to note that some members may have
additional questions for this panel which they may wish to
submit in writing. Without objection, the record will remain
open for 30 days for members to submit written questions to
today's participants and to place their responses in the
record.
Without objection, it is so ordered. The panel is dismissed
and this meeting is adjourned. Thank you.
[Whereupon, at 11:58 a.m., the hearing was adjourned.]
A P P E N D I X
March 18, 2010
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