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it is the failure to use appropriate controls of managed risk that we believe leads to the problem of systemic risk. on europe's attitude of guaranteed funds, burden sharing and compensation schemes are not necessarily practiced in every state but we are now considering how to change that to introduce it. in conclusion, chairman, if i can say if there is anyone that has been close to this committee's work and what you are going to do, it is i. i look forward if any way to help, to offer to help from the european union and our committee in european parliament to offer fraternal greetings and come up with common approaches to face a global crisis. thank you. >> thank you very much, mr. chairman. now we'll hear from michael mcraith, testifying on behalf of

the national association of insurance commissioners. mr. mcraith. >> chairman, ranking members of the committee, thank you for inviting me to testify. i'm michael mcraith, director of insurance in the state of illinois. i speak today on behalf of the flagsal association of insurance commissioners. the insurance industry, even in these difficult times, has withstood the collapses that echo through other financial sectors. we likely agree insurance regulation must not only serve industry needs but prioritize u.s. consumers. consumer protection has been, is and will remain priority one for state regulators. it bears repeating that we supervise 36% of the world's insurance market. our states, individual states include four of the top ten and 28 of the top 50 world markets.

alone we surpass two, three and four combined. to be sure as with any dynamic industry, insurance regulation must modernize and it does. we worked with your great staff, mr. chairman, to fashion the office of insurance information which if passed would provide a federal focal point for international trade matters and federal data analysis. the naic maintains the world's largest insurance data base, while the states do and will provide data to federal regulatory counterparts, we agree that insurance sector data should be available within the four walls of the federal government. consolidated oversight of holding companies will be enhanced by council of regulators that build on the existing data and expertise of functional regulators. state insurance regulation is, of course, inherently compatible with a systemic stability council.

any financial stability regulators should develop best practices for risk management, required for u.s. insurers, but glaringly lacking in other sectors. information sharing and confidentiality protocols can be established in coordination among regulators formalized. under no circumstance should a viable insurance subsidiary be sacrificed by the benefit of another entity within a corporate family. internationally the development of the national accounting standard board leaves the u.s. and others in the next several years to adopt accounting standards based on the international financial reporting standards. we have undertaken a solvency modernization initiative that will examine areas appropriate for refinement. we work internationally with the

g-20 forum, oacd and others. we work collaboratively with our counterparts to develop and improve international standards. we brought our foreign counterparts to the united states and developed a standardized mou to allow for international information sharing. with the world's most competitive, mature marketplace, we, your states, are the gold standard for regulation in developing countries. through the holding company act we monitor release of capital from an insurer and support our system of multijurisdictional regulation. our expertise can be applied to international cross-border transacti transaction, but all insurers operating in our country must be independently viable. our financial analysis working group coordinates leading financial regulators from multiple states for the purpose of monitoring and analyzing and coordinating action involving major insurers.

internationally with supervisors from other countries we participate in colleges, monitoring berkshire, aig, zurich, swiss re, allianz and others. it is not a source of systemic risk and not one insurer imposes system risk. insurers may be challenged by failure in other sectors as with aig, but the utmost vibrant markets in the world mean the demise of any one insurer will not alter our country's financial stability. also, contrary to misleading alarms, our state guarantee fun system has the wherewithal and creative force to resolve insurance failures, even multiple concurrent failures while protecting consumers. we support systemic regulation, pledge our good faith interaction and renew our commitment to engage constructively with this committee. thank you for your attention. i look forward to your questions and replying to comments made by mr. skinner and others.

>> thank you plmuch, mr. mcrait. next we'll hear from teresa on behalf of the mortgage income companies from america. miss bryce? >> thank you, mr. chairman, ranking member garrett, members of the subcommittee. i appreciate the opportunity today to testify on behalf of the mortgage insurance companies of america, the trade group representing the private mortgage insurance industry. mortgage insurance enables foreigners to responsibly buy homes with less than a 20% down payment. many of these are first-time and lower-income borrowers. since 1957, mortgage insurance has helped over 25 million families purchase homes. today about 10% of all outstanding mortgage loans have

private mortgage insurance. this morning i would like to make three points. first, we do not cause or contribute to systemic risk. to the contrary, we absorb risk. if a borrower defaults, mortgage insurance pays the lender or investor 20% to 25% of the loan amount plus expenses. the insurance payment plus the proceeds from the sale of the house makes up much of the lender's or investor's loss. in the current crisis since 2007, we have paid over $15 billion in losses, just like we are supposed to do. i would also note that because mortgage insurance companies have their own capital at risk, we have very clear incentives to mitigate our losses by taking action to avoid foreclosures if at all possible. last year mortgage insurers were

able to save almost 100,000 people from losing their homes. my second point is that the industry has adequate capital to continue paying claims on existing loans into the future because our state regulators require us to have sufficient capital capital reserves. the backbone of the industry's financial strength is the state-imposed reserve requirements and specifically the contingency reserve. half of all premium dollar earned goes into the contingency reserve and generally cannot be touched by the mortgage insurer for ten years. this ensures that significant reserves are accumulated good times so that they're able to handle claims in bad times. the history of the mortgage insurance industry illustrates the value of this reserve structure. mortgage insurers paid out millions of claims as a result of regional recessions in the

'80s and the '90s. after each recession we built up capital and were able to meet the next stress period. mortgage insurers and the banks that make the loans face similar mortgage default risk and only mortgage insurers raise capital in this counter cyclical manner. in fact, only now are federal banking regulators working to construct a similar system for banks. my third and final point is that with additional capital we can significantly help the housing recovery by responsibly expanding the number of new homebuyers. as the subcommittee knows the members of mica have requested capital assistance from treasury. as we have explained, we do not need help to meet our obligations to pay projected claims on our exists loans. instead we're asking for assistance in order to increase the number of loans we are able to ensure while maintaining strong capital reserves.

every billion dollars of capital mortgage insurers hold translates into approximately 100 billion of new funding for home purchases, more than 650,000 new mortgage loans. a $10 billion program would increase market capacity by enabling 6.5 million loans to be insured. such a government investment would dramatically benefit the housing market and enable more borrowers to realize the dream of homeownership on terms they can afford and sustain. so the bottom line is that with additional capital, the mortgage insurance companies can ensure more loans. we hope it is forthcoming. in conclusion, i want to thank you for the opportunity to testify today. the private mortgage insurance industry continues to absorb risk just like it is designed to do. mica strongly supports the state regulatory system and believes the structure assures that we

can continue to meet our obligations during these very challenging times. we also would like to contribute still more to the housing recovery. we could do so the day after we receive additional capital. that is the housing recovery program that is ready to go. thank you. >> thank you very much, miss price. next we'll hear from sean mccarthy, chief operatoring officer from national insurance incorporated. mr. mckarth. >> chairman kanjorski, ranking member garrett and members of the subcommittee. my name is sean mckarthy and i'm testifying in my role as president of financial security holdings or fsa and short guaranteed corporation which is expected to complete the acquisition of fsa on july 1st. we appreciate the opportunity to testify at this hearing to improve oversight of the insurance industry and a restructuring of the federal government's role with regard to insurance products.

as mono-heine insurance companies we provide in the case of fsa bond insurance for the u.s. municipal and global infrastructure markets and in the case of assured, bond insurance for u.s. municipal, global infrastructure and structured financings. insurance utilized only in the financial markets is a very different product from that of property casualty, life and health insurance companies. article 69 was enacted by new york state to segregate financial guaranteed insurance from multi-line products and the risks those entail. while it is a good step, it is not strong enough. we believe we will require mandatory regulation that is closer to that of the banks and that being centralized and encompassing all aspects of regulation including required capital. the current decentralized

regulatory regime for money onlines is aimed at preserving their solvency rather than their financial stability. there are no uniform consistent credit, capital and financial strength standards. recognizing this, the new york insurance commissionerer dinallo who recently announced he was leaving has realized the potential need for bond insurers and the monoline industry. importantly, due to the lack of a single regulator, the rating agencies have become the defact on regulators of our industry. while we continue to strive to achieve the highest possible ratings, we believe the rating agency views crept he play too singular a role in the valuation of our financial strength. ratings are based on criteria that vary and include many subjective characteristics and rating agency methodologies are not readily transparent.

additionally, all three rating agencies have different sets of guidelines which present 3 rr@ @

now declined to 6%. certainly there is no question that some financial garantors took concentrated risks that severely underperforms which cause downgrades or failures of five of the seven primary gaurntors. many of the problem attic transaction were rated aaa by the rating agencies at the time of issuance. they're poised to participate in the market. assured and fsa has come to this unprecedented period of turmoil in strong capital positions and despite understandable concerns that the market has expressed about the financial guarantee model, we are confident that investors will continue to see

value in guarantors that combine capital strength with diligent, experienced credit selection skills. in conclusion, we would like to see mandatory, federal oversight of our industry that would provide regulation by design, not by default. we believe that licensing requirements should be stringent and require high, but predictable capital levels. guarantors should provide detailed disclosure of risks to all constituencies and should be subject to an annual stress test that would be applied equally to all companies. this would increase investor confidence and provide much-needed transparency and stability to the capital markets. thank you. i look forward to your questions. >> thank you very much, mr. mccarthy. next we have mr. kenneth spence, executive vice president and

general council at travelers. mr. spence? >> chairman kanjorski, ranking member garrett, subcommittee members, thank you for the opportunity to testify today on systemic risk and insurance. my name is ken spence and i'm executive vice president and general counselor of travelers. travelers offers a wide variety of property, casualty, insurance product and assurity and risk management services to numerous business with individuals and abroad. our products are distributed primarily through the u.s., through independent insurance agents and brokers and the company that's a member of the american insurance association. there appears to be an emerging concensus that there should be systemic risk regulation at the federal level. i will share some of travelers' specific systemic risk regulation recommendations in a moment. however, for any systemic level oversight to be meaningful across financial service sectors, there must be an insurance regulatory presence at

the federal level to ensure that appropriate information is provided and analyzed and to ensure that any systemic level directives are effectively implemented. to that end, the creation of an office of the insurance information as a chairman has proposed in its legislation would bolster the federal government's presence in and understanding of the insurance sector. the oii would bring needed information about the insurance marketplace to washington and to any national systemic regulator and would give the united states a single voice with which to speak on international insurance policy and trade matters. we believe a comprehensive approach to federal financial services modernization would not be complete unless it also includes a broader, federal insurance presence that encompasses federal charting for insurers. this would ensure robust or consistent regulatory oversight. strong consumer protections and a healthy competitive insurance industry. we have been carefully

considering the notion of systemic risk regulation. as an initial matter, we are mindful that the determination as to whether a company is systemically important does not necessarily depend upon its size or industry, but rather to the extent to which its financial condition is potentially so interrelated with other institutions that its failure could cause widespread and substantial economic harm extending beyond those stakeholders who would assume the risk. for example, any unregulated holding company with a strong credit rating from the underlying operations could have underwritten credit default swaps which played an important role in the current financial crisis. in addition, we think it is also relevant to consider the systemic risk that may be presented on an aggregate industry-wide basis. for example, even if a particular community bank or insurance company would not present systemic risk, the widespread failure of community

banks or insurance companies could a natural or man made catastrophic event or series of events, for example, could cause more than an isolated failure of property casualty insurance company which is in turn could be systemically significant. there are two elements in particular that we recommend for your consideration at a reform proposal. mandated, internal enterprise risk through board-level risk committees and substantially enhance requirements related to risk. i must emphasize that our two recommendations are not intended to be a comprehensive solution, but instead we believe any solution should include these two essential elements. first, corporate governance reform should redwyer systemically important companies to assign responsibility for risk oversight to a committee of their board of directors with the management risk officer that reports directly to the board committee on a regular basis. travelers has for many years had a board risk committee and a cro

and the relationship is akin to the auto committee relationship with the internal auditor who reports directly to that committee. a board's risk committee would be responsible for overseeing the company's risk-related controls and procedures and the chief risk officer would be responsible for implementing and managing those controls and procedures. this protocol recognizes the importance of risk management and provides clear responsibility and accountability for the management of risk. second, systemically or potentially systemically important financial institutions should be subject to robust disclosure regime in order to provide regulators, rating agencies and the public with the information necessary to provide a comprehensive understanding of an institution's overall risk profile and to be able to identify those institutions that pose or that could pose a systemic risk to the economy. the market forces would, in turn, help to limit a company's

incentive to take risk that could potentially undermine its own long-term success and as a result, the larger economy. a more robust disclosure regime would be principles based and flexible, but include quantitative disclosure of transactions and risks and other factors including mandated stress testing that could cause a systemically important company to fail. thank you for affording me the opportunity to testify today and i'll be happy to respond to questions you may have. >> thank you very much mr. spence, next we have mr. franklin nutter, president of the re insurance association of america. mr. nutter? >> mr. chairman, members of the committee. thank you very much. i am frank nutter, president of the re insurance association of america representing re insurance companies doing business in the united states. re insurance is a risk management tool for insurance companies to improve their capacity and financial performance, enhanced financial security and reduce financial

volatility. it is the most efficient capital management tool available to insurers. re insurance is a global business and encouraging the participation of reinsurers worldwide in the u.s. market is essential because re insurance provides that much needed capacity in the u.s. for property, casualty and life risks. including their u.s. subsidiaries, foreign-owned insurance companies accounted for nearly 84% of property casualty premiums seated on u.s. risks by u.s. insurers. because the re insurance transactions between sophisticated business parties, the regulation of re insurance focused almost exclusively on regulation insuring the financial solvence we no consumer component. because re insurance is a business to business transaction involving knowledgeable parties, there are no re insurance guarantee funds at the state level and there's no need to create one at the federal level. there is no federal entity with

federal authority or designated responsibility for oversight of insurance. there is no source of information at the federal level to appropriately advise policymakers. at a minimum, there is a need for federal entity that can utilize information and data from state regulators, but is empowered to conduct its own analysis and provide a broader perspective than individual state interest. we believe the chairman's office of insurance information legislation is good and timely and goes a long way toward addressing this problem. re insurance is an important part of the transfer of mechanism for the modern, financial and insurance markets. there are clear distinctions between risk, finance and products that are relative he new financial tools developed in unregulated markets and risk transfer products like re insurance whose regulators are by u.s. regulatory domicile and the business model has existed for centuries. in a case of re insurance, regulatory reform is necessary

to improve regulatory and market efficiency and maximize capacity in the u.s. and that reform should focus licensing, prudential regulation and international coordination. it has been suggested that the authority of a systemic risk regulator should encompass traditional regulatory roles and standards for capital liquidity, risk management, collection of financial report, examination of authority and an a authority to take regulatory action if necessary. we are concerned that the systemic risk regulator envisioned by some, one without cheer, delineated lines of authority and strong, preemptive powers would be redundant with the existing state-based regulatory system. we also note that without regulatory reform and a prudential federal re insurance regulator, a federal systemic regulator would be an additional layer with limited added will have and you create issues with applicable tomorrows and be in conflict with the multi-state system of regulation. foreign government officials not

unlike in skinner today have continued to raise issues associated with having on different u.s. regulator which is makes coordination on international insurance issues difficult for foreign regulators and dumps. the time has already arrived when this lack of a single voice is adversely affecting, impacting u.s. reinsurers. the impact on issues like european union solvency, too, will likely impact not only theablist u.s. companies to conduct business abroad also the flow of capital to the united states. the possibility that the entire 50-state system in the u.s. would be deemed equivalent appears questionable at best. thus, without a federal involvement with an entity for international policy issues, the insurance industry will continue to be disadvantaged in these equivalent discussions. the crept multi-state is an anomaly in the regulatory world. it is regulated with

constitutional authority to make decisions for the country and to negotiate international insurance agreements. it was inchoo encouraged by supervisory recognition in the national insurance act of 2008, s-40 introduced in the last congress. supervisory recognition seems to establish a system where it recognizes other countries and allows reinsurers to conduct business based upon their home jurisdictions. a single national regulator could negotiate an agreement with regulatory systems of foreign jurisdictions that achieve a level of regulatory standards, enforcement, trust and confidence with their counterparts in the u.s. financial markets are global and interconnected and no sector is more global than re insurance. even the naic has acknowledged that, quote, the time is right to consider a framework for re insurance in the u.s. is warranted. as congress proceeds with financial services

modernization, we emphasize that only the federal government has the reckless and constitutional authority, functional agencies and experience of matters in foreign trade to easily modernize re insurance regulation. multistate regulatory agencies and matters of international trade are at best, inefficient post barriers to global re insurance transactions and do not result in greater transparenc transparency. the modernization be included in any meaningful and comprehensive services reform through the creation of this federal regulator. they ob taken a federal charter. we further recommend that any financial reform incorporate authority for regulatory recognition to facilitate cooperation and enforcement with regulators. thank you very much. >> thank you very much, now we'll hear from mr. patrick s. baird, chief