ostriches can now deny the need for establishing a federal insurance resource center and a basic federal insurance regulatory structure. insurance is a complex and important part of the u.s. financial industry with more than $6.3 trillion in assets under management and $1.23 trillion in annual premiums. we need to recognize this realitiy by modernizing the overall regulatory treatment of insurance. we also need to protect against the risks certain sectors of the industry may pose and address the greater sensitivity some industry segments have to external events. during this crisis we saw a company that started out as an insurer spread far and wide in its activities and its international presence. american international group, however, lacked a federal regulator with real expertise about its vast insurance operations. rather, the holding company

purchased a small thrift and shows the office of this supervision as its supervisor. currently several other insurance holding companies have a federal banking@@@@@@')r examine all complex financial holding companies, including those whose primary activities involve underwriting insurance and those who play would credit default swaps. in addition, our financial services markets are global and complex. insurance is no exception. in order for effective communication and dialogue to take place on the international stage, we must have a single point of contact for the united states on these matters.

moreover, insurers must have a federal regulatory voice on par with the banking and security sectors in our financial markets so that the industry can communicate with its peer regulators at home. in short, we can no longer sweep insurance regulation under the rug and cross our fingers that nothing will go wrong. we tried it before and learned that such an action may hide the mess for short term, but pose greater problems in the long term. as such, when the administration reveals its white paper tomorrow, i very strongly hope that it will recognize today's market realities and call for the establishment of better oversight for insurance holding companies and certain insurance activities, especially those most likely to pose systemic risk. moreover, i am confident that this administration will recognize the wisdom of creating a federal insurance office to

advise a systemic risk overseer of the risks of the insurance sector, provide expertise in administration and congress on insurance policy matters, and communicate with foreign governments. i have long advocated for such an office by introducing and advancing the insurance information act. as part of the congressional restructuring of financial services regulation, i ask my colleagues to join me in the efforts to enact this legislation. with any luck, the administration with its white paper will also hopefully advance the debate about federal insurance regulation in other ways. personally, i now believe that the federal government should actively regulate some specific insurance lines, especially those that pose systemic risk or which have a national significance. using these tests, federally regulated lines would include body insurance, mortgage

insurers and reinsurers. and examine how we can promote greater uniformity in the industry with or without the establishment of the federal chart. the administration might reach similar conclusions. in some, before the administration proposes its white paper tomorrow, we have many important issues to discuss related to regulatory restructuring as it affects the insurance sector today. i therefore, look forward to the testimony of our witnesses and to a vibrant debate in the weeks and months ahead. i would like to recognize our ranking member mr. garrett for four minutes for his opening statement. >> thank you, mr. chairman. thank you, all, to our witnesses, as well. especially mr. skinner who i understand came across the ocean to be with us today. we have a fairly large panel and wide perspective of different opinions on the insurance industry so i look forward to all of your testimony. tomorrow, as you indicate, we expect to hear from the obama administration on its plan for financial regulatory reform and

from what i can tell, it seems unclear to what extent the proposal will address insurance legislation. different ideas have been floated of course, but within the administration, and beyond it seems a clear consensus as to what to do with insurance has not totally been crystallized. part of the difficulty reaching a consensus is related to the difficulty reaching a consensus on what is a systemic risk. further more, how do you identify it? is that even possible in the future? how should it be addressed and how should it be cleaned up once it has been identified, if it's not too late? i would add another issue policy makers should think about. how can the policy be put in place so incidents of systemic risk aren't actually encouraged in the first place? or exacerbated or even institutionalized due to government actions or unintended consequence. i worry some of the policies being considered by the administration and likely be part of its plan will unfortunately do more harm than good if they are actually

implemented. systemic risk regulator in conjunction with a bailout regime will set up where certain companies are explicitly perceived to fall under this new layer of supervision, too big to fail, gain an unfair advantage in the marketplace and threaten further taxpayer pain. further complicating the resolution authority proposal is a question how to pay for it. large firms, potentially subject to the authority are asked to pay for it, they will fairly be seen as beneficiaries of that regime. asking a broader swath will not be equitable since smaller firms will have no chance to benefit from it will be asked to prop up their larger competitors. i don't believe individual taxpayers should contribute to a fund set up to bail out a large failed firm and its creditors. such a fund created for the resolution authority would be needed to be very large and very costly to the firms it has to contribute to. would likely not be large enough

to deal with an event deemed by regulators as truly significant. as ied said, i would argue the first and foremost we should concentrate on policies that don't encourage future bailouts by promising firms that government will always come to the rescue. the republican plan addresses various policies that put the taxpayer at risk, but has no bailout in the future. its central unifying goal is no more bailouts. my primary questions are, are insurance frms by their nature systemic insignificant? i look forward to hearing by different participants on this panel, in particular. it would be a mistake to view the entire industry broadly as a single entity. today's hearing the breadth of industry will be on display as we'll be hearing from the mortgage insurance industry, bond insurers, life insurers and pnc and the neic, which is in

charge of regulation in this country, as we speak. i'm hopeful its perspectives on systemic risk, how we might address it will be enlightening to everyone here today. finally, mr. chairman, as you know you introduced the office of insurance information bill, oai bill. i know the legislation will be addressed by several members of the panel today. i'm interested to hear from our panel as to how this legislation may address deficiencies in our current framework. i'm interested in its potential impact on regards to markets of the united states companies abroad and related international agreements, as well. once again, i welcome all the witnesses and i look forward to their testimony. thank you, mr. chairman. >> thank you very much, mr. garrett. we'll now hear from the gentleman from california mr. sherman, for one minute. underlying the hearings is the question what is insurance? derivatives are at best, insurance. at worst, they are a casino bet. aig sold fire and life insurance

through its regulated subsidiaries and those subsidiaries are pretty much okay. it sold portfolio insurance through unregulated subsidiaries convincing the world that it wasn't insurance and they took down the company, if not the world economy. the fire insurance policy on my house protects my lender in case my house burns down. if my lindher wants protection from a much greater risk, that the value of my house goes down or the value of my mortgage goes down, they also buy insurance. they call it a derivative and it's completely unregulated. we need to make sure that credit default swaps, similar derivatives are classified as insurance and are subject to reserves. i yield back. >> thank you, mr. sherman. we'll hear from mr. royce for two minutes.

>> thank you, mr. chairman. i would like to briefly thank mr. skinner for making this trip here to testify and also congratulate him on his recent election. he's been a leader in the european union and in parliament. he's been a leader and champion of the solvency ii directive which provides an important, yet relevant example of an effort under way to create a more efficient regulatory structure. yesterday's op-ed in the "the washington post" by larry summers and tim geithner noted the importance of international coordination among regulators and reiterated the administration's commitment to leading the effort to improve supervision around the world. unfortunately, with our fragmented regulatory regime over insurance, we are lagging at this point, not leading the rest of the world. as solvency ii works to unite the insurance markets in 27 countries and the eu, we continue to struggle with a

patch work system of 50 plus state regulators. with the implementation of this directive nearing, it is becoming more apparent that the framework potentially will be at odds with the u.s. regulatory structure. it is unlikely that the eu would find the current organized u.s. state based regulatory structure equivalent. this means the ability of our regulatory system to detect offshore risks will be weakened and also means that many of our u.s.-based institutions will be forced to shift significant operations overseas if they hope to continue to do business in the eu. certainly an office of insurance information would be a logical first step to address this. and to address other problems we face in the internaingsiale insurance market. however, oii would rely heavily on the various state insurance commissioners to implement the regulatory policies.

without strong preemptive authority over the states, the ability of an oii to enact policies nationwide and consequently the ability of an oii to adequately represent the entire u.s. insurance market would be greatly weakened. i remain concerned that an oii will not go far enough. maintaining solvency regulation at the state level will limit the effectiveness of a potential systemic risk regulator as well as coordination efforts with foreign regulators. certainly noting the failure of aig, once the nation's largest insurer is relevant given the focus of today's hearing. dating back to 2006, the paulson treasury department noted systemic gaps in the state-based system which aig exploited. the blame for the collapse of the company should start with aig. from a regulatory standpoint, there were failures at both the state and federal level.

using capital for their -- from their insurance subsidiaries, with the approval of various state insurance regulators, the securities lending division in tandem with the financial products unit put at risk the entire company and the broader financial system. half of this came from the securities lending division, the other half from the financial products unit in terms of the overleveraging. with more than 250 subsidiaries operating in 14 states and more than 100 countries, aig is the poster child for both the need to open up lines of communication among regulators worldwide and the need to establish a domestic insurance regulator with the ability to oversee these large and complex institutions, and again, mr. chairman, thank you for holding this hearing. >> thank you, mr. royce. we'll hear from the gentleman of georgia mr. scott for one minute. >> thank you very much, mr. chairman. i think this is of course a very important and timely hearing.

the issue is, of course, i think what is the systemic risk as relates to our insurance industry. and where and how is it best regulated at state or federal level? but i think that the major mod thael we are using, aig, is flawed at its best because as we look back at it, what caused the problem with aig was their financial products division based in london, which again was regulated at the federal level. so the question becomes, if we use a federal charter or regulate insurance at the federal level, would that have prevented the situation at aig? i think going forward we have to be very careful to make sure that the points we take into consideration are these. that we have the sound consumer protections in place. that we also do not deter competition. that we do not bring on ulation

is the way to go? i think there's a lot to be said with making sure that we have regulations at the state level that works. thank you, mr. chairman. >> thank you very much, mr. scott. now we have the gentle lady from illinois, miss digger for two minutes. >> thank you, chairman. i'm pleased we are having a

second hearing to examine insurance regulation. as i mentioned at the previous hearing, this is an important part of the conversation as it relates to systemic risk. fortunately the insurance industry is in good shape due to sound state regulation. i think state regulators are doing a good job. with that i would like to thank and welcome to today's hearing illinois department of insurance director michael mcraith representing aic. i'm happy to have something good to say about illinois. that doesn't happen so much these days. it is important that we roll on to the debate on systemic risk, the role of the federal regulators when it comes to duly regulated entities like aig. i think otc dropped the ball. part of our republican regulatory reform proposal preserves the option of a swift

charter roll into the otc. in addition, our proposal addresses risky behavior that aig-like entities make engage in such as with derivatives. i think we established a market stability and capital adequacy board comprised of all federal regulators and possibly others to look at what should be done with regard to derivatives regulation. we recently had a hearing in this committee to discuss how over-the-counter derivatives could be put into the three buckets of regulation. i also think we need to improve the dialogue among regulators and insurance needs to be part of that dialogue. that's why i joined ranking member or joined the chairman with his office of insurance information bill. with that, i look forward to hearing from today's witnesses who represent the very diverse insurance industry.

also look forward to working with them and my colleagues to strike the right balance on this matter. i would yield back. >> thank you very much, miss biggert. now we'll hear from the other lady of illinois. >> thank you, mr. chairman. i would like to give a shout out to michael mcraith and all our witnesses. until this year the role of federal involvement in the insurance industry is centered on whether to establish a federal insurance regulator. i worked with congressman royce on legislation to establish a federal regulator for the insurance industry. last congress our bill was focused on consumer choice and protections, advantages for agents and industry efficiencies. much has changed in our financial system since the last congress. the collapse of aig, the world's largest insurer has proven to be one of the most costly and dangerous corporate disasters in our nation's financial history, with nearly $180 billion of federal tax dollars committed to aig, plus $22 billion to other

insurers. the federal government has made an unprecedented investment in an industry over which it has no regulatory authority. the need for federal regulatory oversight has never been greater. having a federal insurance commissioner who can work with the expected systemic risk regulator or council is vital to insurance proper oversight of an important pillar of the u.s. financial system. in april, congressman royce and i introduced hr-1880, the national insurance consumer protection act. unlike previous legislation, our bill deals with systemic risk, recognizing that congress will create a systemic risk regulator it subjects all insurance companies national or state charter to a systemic risk review. the systemic risk regulator would have the ability to gather financial data from insurers and other financial services affiliate within holding company structure to monitor for systemic risk. based on that financial data, the system risk regulator can make relations for corrective regulatory action, including the

national insurance commissioner. the activities of the insurance companies, an affiliate of an insurance company like aig financial products unit or any product or service of an insurance company would have serious adverse effects on financial conditions or stability. we can recommend an activity practice product work service must be restricted or prohibited. where a functional regulator refuses to take action, the systemic risk regulator would seek approval to override the functional regulator by a coordinating council established in the bill that consists of the current members of the president's working group on capital market, plus the federal banking regulators, the federal insurance commissioner and three state financial regulators from the three sectors, insurance, banking and security. finally, the systemic risk regulator determines if it is systemically significant, it determines whether the company should be nationally regulated.

i believe all financial activity including that of insurance companies should be subject to review by systemic risk regulators, some suggest the insurance industry does not pose a systemic risk to the financial system. we know from our experience at aig that it did pose a systemic risk and not just through the financial products unit, but through the securities lending program which was regulated by the state insurance commissioners and led to over $40 billion in taxpayer money being invested. as we move forward in the next few months to establish a systemic risk regular urltor or council, we need to provide this regulatory body with all the tools to properly review and evaluate the activities of insurance companies. that should include a federal regulator for insurance that can work with a systemic risk regulator similar to the occ and s.e.c. do for their regulated industries. i yield back the balance of my time. >> thank you. now our final presenter from

texas for two minutes. >> thank you, mr. chairman. thank you for calling this hearing. obviously very important issues for us to consider. there is no doubt each of us know what a critical role the insurance industry plays in our economy today. however, i am not sold on the belief that any one insurance company is necessarily an agent of systemic risk to the entire economy. if i did believe that, i can think of no greater self-fulfilling prophecy than to designate a firm systemically risky. then it becomes systemically risky and we know what happens after that. $173 billion of taxpayer money later, aig has essentially become a conduit of transferring taxpayer wealth into counterparties. congress has to be very, very careful about introducing moral hazard into the equation, even

more than it already exists. we simply cannot enshrine a too big to fail bailout policy. there is a huge difference between the government walking in and bailing out an individual institution and having emergency provisions for liquidity, instability aimed at the market as a whole. we also have to remember the federal regulation is not a panacea. witness fannie, freddie, wachovia, wamu, citi and bank of america and the list goes on. with aig we had their chief regulator here march 18, 2009. the regulator said, you know what? we had the resources, the expertise, we had the authority, we just simply missed it. sometimes regulators get it wrong. the ultimate goal here should be not to designate certain firms as systemically risky so that we

have more ticking time bombs like fannie and freddie throughout the economy that will ultimately blow up on the american taxpayer. we don't necessarily need more regulation. we need smarter regulation, which will help the consumer. with that, mr. chairman, i yield back the balance of my time. >> thank you very much. now we'll have the panel. panel is made up of eight members. that's why we infracted some of our presentation by members. each of the panelists will be a lotted five minutes. without objection, their written statements will be made part of the record. first on the panel we have the honorable peter skinner, a member of the european parliament from the united kingdom and most recently re-elected -- congratulations, mr. skinner, look forward to

your tenure. mr. skinner. >> thank you very much, chairman, congressmen and honorable members of the subcommittee inviting me here today. this is a special occasion for me if nothing else for the fact i have just been re-elected, but also to come here to know that i'm usually sitting your side of this table rather than here. it's a great honor to be here and i appreciate that. i'm peter skinner. i've been a member of the european parliament since 1994. this month i was elected for my fourth term. i'm a member of the economic and monetary affairs committee and directly involved in what's known as the transatlantic regulatory dialogue. i had a discussion between congressman berkeley. we talk regularly about issues like this. i was previously sponsor of the bill of reinsurance directive in 2005 and sovereigncy ii that

will pass into law and pass into the countries by 2012. each country is moving towards that introduction. i fully understand and respect from the start the need for each trading block to insurance its own sovereign rules and practices. therefore, wish this committee every success in its deliberations. we have to take into account what i think we already heard, however. that taking divergent approaches during a global recession matched by the kinds of things we know about across the atlantic and around the globe will actually lead to the wrong conclusions. we need to agree common approaches, common regulatory structures, but this doesn't mean we have to say exactly the same thing. in terms of systemic risk and the insurance industry, it is the management of that risk that is important for the european union. it's the chain of events which leads to systemic risks. it begins with the failure of

management and the supervision of such risks. the eu's focus has been to try to eliminate any failure by predicting behavior, using reasonable models and testing against them. in fact, we've been having impact assessments which involve american companies inside the european union giving evidence as to that effect. in europe, a committee led by a former managing director of the international monetary firm proposed sweeping changes to the way the european financial services are regulated. these changes would result in a european systemic risk council, an independent body responsible for safeguarding financial stability and conducting macroconsideration supervision level. europe gets its insurance on insurance business from the 27 regulators it has representing all the individual member states

of the european union. these meet under one body the committee of european supervisors. it sits in frankfurt and agrees common standards applied through the sovereigncy ii law across the european. in terms of that crossborder oversight, we have developed a system which is coming, again, from the della rosier report. the proposal is to bring together the work of the three committees, insurance of banking through the supervision through one financial sector type regulatory body. in terms of developments from abroad which may affect the u.s. market, and again i come from a european perspective, i can only talk really about how our markets are interconnected. we've seen the near financial meltdown has meant actually when you get a cough or cold in california, we feel the sneeze effect in london in frankfurt in

rome. sovereigncy ii was trying to predict what might go wrong already. it was a radical overhaul for the insurance regime in the european union. it is to deepen the integration in the eu insurance market enhance, policy holder protection and improve the competitiveness of eu insurance and reinsurance. international communication amongst regulators can be difficult. to be able to get this movement, we have to do something about this. it's difficult if we don't have a single regulatory person to speak to. in fact, the u.s. is the only country around the world not represented by a single national insurance regulator at the international association of insurance supervisors. as work begins on third country equivalence in the context of solvency ii we'll be