on behalf of the american council of life insurers.kn#

companies hold $2.6 trillion in annuity reserves. annually we pay out almost $60 billion of life insurance benefits and over $70 billion in annuity benefits and more than $7 billion in long-term care benefits. we are the backbone of the employee benefits system. more than 60% of all workers in the private sector have employer-sponsored life insurance and our companies hold over 22% of all private employer-provided retirement assets. life insurers are the single largest source of corporate bond. financial and hold approximately 18% of total u.s. corporate bonds. i would also note that without financial protection provided by the life insurance companies, american families may very well need to rely on federal government for assistance. that said, we don't believe any individual life insurance company poses systemic risk.

so the question becomes how do you deal with an industry that as a hole is systemically important, but which doesn't have individual companies that poses systemic risk. first, we assume life insurers will be covered in whatever broad systemic risk oversight is made available to the banking and securities industries. beyond that, we believe it is imperative that congress create a federal, functional insurance regulator and make it available to all life companies within the industry on an optional basis. the example justification for  the creation of such a regulator prior to the crisis and there's even more -- the case today is each stronger after the crisis. absent a federal functional insurance regulator, there's a very real question regarding how regulatory approximately see will be implemented vis-a-vis insurance. it will reflect on the decisions of a comprehensive approach to financial regulator. your policies need to govern all

systemically significant sectors of the financial services industry and need to a my to all sectors on the uniform basis and without any gaps that could lead to systemic problems. it's also worth noting that critical decisions are being made in washington affecting our business today, but they're being made without any significant input or involvement on the part of our regulators. some specific examples include the handling of washington mutual which resulted in life insurancers experiencing substantial portfolio losses. the suspension of dividends on the preferred stock of fannie and freddie which again, significantly damaged our portfolios and directly contributed to the failure of two life insurance companies. the mistaken belief by some that mark to market accounting has no adverse implications for life insurance companies and more recently provisions and the proposed bankruptcy legislation that could have resulted in unwarranted downgrades to life insurers and aaa-related

residential mortgage-backed investments. the industry supports a level playing field at an international level as regards to financial reporting and solvency. competition should be about serving customers, operating efficiencies and basically slugging it out every day and improving the business model. competition should not be about capital, accounting or tax arbitrage. yet today we have no regulator there with author they can engage with mr. skinner and other national regulators. i'd also like to make the point that concerns over regulatory arbitrage and the context of the federal ininsurance charter are without merit. the life insurance business is not seeking nor this congress ever consider enacting a federal insurance regulatory system that has weakened consumer protections or solvency oversight. it has consistently advocated that is as strong as if not stronger than the state regulatory systems.

if anything, the optional federal charter would result in the states being which will efrjed to raise standards to meet those of the federal regime. mr. chairman, there are a number of ideas being considered in how to address insurance in the context of overall regulatory reform. we applaud you for reintroducing legislation that would create an office of insurance information within the treasury department while our ultimate goal remains an optional federal charter and an oii would certainly be a step in the right direction. we are representatives bean and roadways for the national insurance consumer protection act which sets forth a framework for an optional charter. we do, however, caution against the so-called federal tools approach to the regulatory reform as detailed in the written statement and the constitutional and practical limitations of this concept make it suited to dhifr the type of reform that would be in the best interest of the insurance industry and its customers. we again, thank you, mr. chairman for holding this hear and pledge to work with you and members of the sub committee to

see that insurance regulatory reform becomes a reality and we'd be happy to answer questions. thank you. >> thank you very much, mr. baird. now we'll have mr. john t. hill, president and chief operating officer of magna carta companies on behalf of the national association of mutual insurance companies. mr. hill? >> thank you, mr. chairman. good morning, chairman kanjorski, ranking member garrett and members of the subcommittee. it is an honor to testify before you today on these important issues. my name is john hill and i am president and chief operating officer of magna carta companies. magna carta was founded in new york in 1925 as a mutual insurance carrier for the taxi cab industry. although we no longer insure taxis, we employ 240 individuals and write in 22 states. we very much remain a small main street mutual insurer with $170 million in direct written premium. i'm here today on behalf of the

national association of mutual insurance companies to present our views on systemic risk. dynamic represents more than 1400 property, casualty insurance companies ranging from non-farm mutual companies to large, national writers. members serve the insurance needs of millions of consumers and businesses in every town and city across america. i service chairman of the services task force which was created specifically to develop the policy response to the financial services crisis. our nation faces uncertain economic times and we comment the committee for holding this hearing to explore the role of systemic risk regulation in the insurance industry. >> the property casualty insurance industry like millions of businesses did not contribute to the current financial crisis, however, we, too, have felt the

negative impact of this crisis. just like most american citizens and businesses, the property casualty insurance industry has played by the rules. we are solvent and continue to serve our policyholders the same today as before the economic crisis. if you exclude the very few companies that are linked to financial markets. our analysis concludes that there is no systemic risk and we need to completely rethink the regulation of the industry. the property and casualty marketplace is well regulated, highly diverse, very competitive and is open to anyone that is willing to play by the rules. it is important to understand the distinction between the property casualty insurance industry and others in the financial services sector. the fundamental characteristics of our industry including conservative and liquid investment portfolios, low

leverage ratios and strong solvency regulation and highly competitive and diverse marketplace make it stand out as unique and work to insulate the property casualty insurance industry from posing systemic risk. today as other financial services companies are failing and seeking government assistance, property casualty insurers continue to be well capitalized and neither cekanor require federal funding and our industry remains one of the well-functioning bed rocks of our financial structure. the record shows that property casualty insurers played no role in causing the current financial crisis. moreover, it is exceedingly unlikely that property casualty insurers either individually or collectively could cause a financial crisis in the future. for one, the capital structures of property casualty insurers and the nature of their products make them inherently less vulnerable than the highly leveraged institutions when financial markets collapse.

additionally, the nationwide state-based guaranteed funds system also reduces the systemic impact of any failing property casualty insurer. namic believes any new oversight of systemic risk should focus products, activities and market-or yented events and development rather than broad, corporate categories or industries. it should be carefully designed to address the kind of market-oriented problems that have the ability to cause system-wide access. only institutions that offer products or engage in transactions deemed to create systemic risk including insurers, should be subject to systemic risk oversight. the current crisis demands that congress act, but congress must act prudently and responsibly, focusing limited resources on the most critical issues and avoid the inclination to rush the wholesale reform.

namic does believe congress can improve the process, improve regulatory coordination and monitor systemic risk by establishing an office of insurance information to inform federal decision making on insurance issues and facilitate international agreements. we would also recommend expanding the president's financial working group to include insurance regulators. we believe such reforms are measured, appropriate and timely responses to the present crisis. as the process moves forward, we stand ready to work with the committee to address the current problems and regulatory gaps. we urge congress to keep in mind the dramatic differences between main street businesses that have never stopped meeting the needs of local consumers and those institutions that cause this crisis. again, thank you for the opportunity to speak here today, and i look forward to answering your questions. >> thank you very much, mr. hill.

>> thanks to the entire panel. it is interesting testimony. i look forward to my own questions and those of the committee. mr. mccray, i'll put you on the spot for just a minute. in pennsylvania we had a company in 2001, the reliance of pennsylvania. i imagine you're familiar with it. mr. saul steinberg who took the insurance proceeds of that and then that allowed him to play the role of the multiyear speculator benefactor of the wharton school and art patron, is that correct? do you recall that transaction? >> i'm certainly familiar with the company. i wasn't familiar with the wharton school. >> did subsequently that company defaulted on bonds and bank debt

and it had chosen the federal regulator to be of its own choice because it was a holding company. what -- how would you say the effect of what happened there with that particular company, was that a failure of the state regulation, state to state? that would have occurred if we'd had a federal regulator in mace or do you see any difference? t >> the unfortunate reality in any capitalist economy is that companies will fail. companies -- insurance companies led by individuals with ethical or lack of ethics are companies that are more likely to encounter cash flow problems and ultimate he suffer the demise or demise similar to reliant. a federal regulator would not have assisted or prevented that

solution. i'm not familiar with the holding company challenges at reliant. the individual insurance comp y company, those challenges occur and they have occurred for decades in the insurance industry as soon as we learn of them, we place the company into receivership and the policyholders are protected because the capital requirements we impose on companies are so significant, the shortfall at the end of day for the guarantee system is relatively nominal and we -- and that guarantee system is also intended to protect the consumers. >> thank you very much. >> my good friend, mr. skinner, do you believe that the united states companies will have adequate access to the european markets after solvency is in effect and do you believe whether your companies have

adequate access to the u.s. markets? >> that'n@@@@@#h' business inside the european union and there are a few of them who do this very well, they will have to make sure that their regulators in the u.s. are people that can talk to the european union about matching up

these credentials. of course, if they don't get matched up it will be down to each individual member states as has been said, whether it's memorandum around the standings to impose their requirements upon the companies and i don't think we should be this because i don't think there should be discrimination about this. if we get the match to work and we can talk to each other about this dialogue and how it works then i think there should be no discrimination for u.s. companies. in fact, u.s. companies, i believe, as a result will be competitively enhanced by getting access to the market as a passport across all 27 countries. so it would be your conclusion that if anyone opposes a federal regulator here in the united states would be in some way impeding their progress and competition in areas like european union? >> from a commercial point of view, i think most companies would want to make sure they have the fewest number of regulators to have to work with.

i think that's almost a common sense statement. i think from a u.s. perspective, i think this is something you're grappling with like we grappled with. we still have multi-jurisdictional and multi-level companies like the european level that have their own laws, their own regulations and their own standards and we just introduced solvency, too, and it's changed the whole thing. it's harmonized things and brought standards up in countries that didn't have capacity and as a result we need to make sure they maintain the companies coming into the european union and i think you'd want the same inside the u.s. as well. >> i see my time has expired. >> thanks for coming on over. you heard a number of people on the panel testify here from the pnc side and others as well that the problem that we've been had in this country was not caused

by problems in the insurance industry. and we've heard that from other panels as well. i know in your testimony you said the legislation you're talking about will go into effect in 2012, right? if we were having a panel like this back overseas, would that be the same testimony that we would hear over this as well that the problems in the marketplace and everything that's going on in europe was due in no part and in no large part from the insurance industry as well? >> yeah, i think in many ways we hear the same discussion. you'd be pleased to hear it is an economic and financial services committee that i'm involved in today, we would be talking about the same issues and classically we would be talking about derivatives and the effects they've had. i think as one of your honorable colleagues said already, the securitization issue is actually a kind of a re insurance in itself, isn't it? the spread of risk. so the insurance industry as a whole is not immune from

systemic risks as such. we believe it's about the management of the risk and having -- >> coming up to this point in time, would you agree with some others who have said here that you can't point at this company or that company as being a systemic problem as some of the members of the panel would be arguing for as far as this country is concerned. it's true to say that you have to put to one side. the individual identifies certain companies and you have to start talking about the industry as a whole. >> thank you. i'll run down the road. mr. mcgrath, you were making your case along the way in regard to the oi, and the upside that would bring about as far as sharing information, but as we get near the end of your testimony, you seem to be, if i heard you right, changing what you're doing as an organization in the areas already, if i heard you right. >> that's correct. >> gee, we're already doing that

so why take the other side in the testimony saying we still need the help out there. >> well, listening to at least one of the panelists today would imply that the state regulators are not engaged in international discussions. we are engaged developing standards and working with our international counterparts on every continent in multiple forums. my testimony, congressmen, regarding the office of insurance information reflected the reality we know which is not a question of standards or supervision or regulation. it's a question of international trade agreements and we are aware of the limitations of article 1, section 10 of the united states constitution which said that a state cannot independently enter into a treat wet foreign government. so we supported chairman kanjorski in that initiative without the preemptive impact, but we do engage and always

consistently engage international he with our foreign counterparts and at some point in time i'd be happy to talk about solvency, too, but i'll hold off on that. >> let me jump down to mr. baird. in your testimony you stated that the life insurance industry is either significant, systemically significant or systemically important in one of those terms at the beginning of your testimony. mr. mcgrath, that the industry -- that the too big to fail concept does not apply to insurance per se. >> i'm sorry. not to any one company. the sector, of course, is significant. okay. so maybe that answers the question. >> it's the same thing. >> i'll go to you, mr. baird, to address that concern and maybe address it already. >> you want to speak to that, mr. baird? >> other than i would say this is one of those instances where the director and i agree. we think the entire industry is

systemic importance and no one company is. >> for anyone on panel. one of the proposals coming out of the white house seems to be a systemic risk regulator and it could go into the federal reserve which a lot of us disagree with and assume that happens and you put into the federal reserve and assume for the sake of argument that it also has an insurance component. does anyone on the pan vel a concern that you may have a bank regulator who has no past experience or what have you dealing with the insurance industry to be basically -- your supervisor in this area. >> that would be one of our concerns, congressman garet that you would have someone regulating insurance that really has no real insurance background and again, i would reiterate they think our position is that the best way to look at systemic risk is to look at market-oriented products and any firm that's engaging those

products should fall under the purview of the systemic risk regulator, but to just isolate a particular industry group and just say that the systemic risk regulator is just going to oversee that. that could potentially miss something that's occurring elsewhere in our global economy. so our recommendation is there could be more product and market oriented. >> as the financial guarantors we think the fed might be a logical place to oversee our industry primarily because the service that they provide to the banking industry would parallel the kinds of financial activity that we have in a capital markets. so we think that perhaps -- >> you're a little bit different from some of the other -- >> that's right. >> again, financial guarantee, we have one nail and we're trying to hit it. >> right. >> the multilines have a lot of different kinds of risks that they're taking and really not just our solvency, but really

our financial stability as an industry is what's critical. >> got you. thanks a lot. >> i just wanted to directly address your question. i think that is a concern to the life insurance industry however it is resolved if the congress creates a federal functional regulator which presumably the two federal agencies that cooperate with one another to thank the creation of the federal functional regulator would give the federal agency and the pecks per tees to regulate the insurance industry and cooperate and give information to the systemic regulator. >> but absent that? >> absent that, that is a concern and i think it's incomplete. >> congressman, mr. chairman, if i might add briefly there is a concern for the regulators. the regulation of the insurance industry is the bank industry. so the regulators have expert e

expertise, but should want be displaced. one of the priorities of any systemic regulator is to recognize and value the expertise and functional regulator, facilitate communication among those regulators and prevent the systemic disruption that we've experienced. >> thank you, panel. appreciate it. >> thank you very much, mr. garrett. thank you, mr. chairman. it is interesting that i heard pretty much everyone say that the insurance industry doesn't threaten the system. i'm just curious, are you familiar with the acronym tria? tria was the one that that the insurance company had a pass and everyone was afraid they would take down the economy at that time. did anybody here who now thinks that the insurance industry

somehow doesn't provide risk, did you come up and tell us that we should not do tria because everything was fine? i don't think it did. >> actually the mortgage insurance companies did. >> so you don't think we should have passed tria? >> that was our position at the time. >> good for you. >> i'm sorry. we got ourselves exempted. i apologize. >> know you got yourselves exempted. i know that. but the question is do you think we should have passed the tria act? >> does anybody think we should not have, i guess is a better question? >> so we should have. >> and i agree. >> go right ahead. the issue with terrorism is the absolute impossibility of predicting the risk. what tria does is facilitate the property and casualty market that would not exist, manhattan, chicago as major urban areas would not have access to coverage for terrorism and

events in the -- companies can exclude that. >> it was the ability to ascertain the risks similar to the ability to ascertain the risk on cdo the ability to ascertain risks is same. they're different. so we should have passed tria. everybody here thinks there's no one company that somehow provides systematic risk. that's what i heard. i don't think we've heard them say anything different. has anybody here heard of the company aig? >> i know it hasn't been in the news lately. >> but congressman, to be clear, aig is cloak wally referred to as the world's largest insurance company. >> 71 -- >> excuse me. the idea is, it is an insurance company that does different lines and the problem that i have with it is that it is one company that was into so many things that the state regulators chose not to regulate. the federal government didn't have anybody to regulate and the

states collectively said we don't need to look at what aig's doing. we only look at this slice, this slice and this slice. that's all and when those slices worked fine. >> actually, congressman, the insurance regulators looked at the insurance subsidiaries. the problem was, and this is why we support systemic regulation -- >> bingo. >> there was a complete lack of regulation at the holding company level which should happen -- >> well, the problem is -- >> you were looking at the relationship between the policyholders and the companies. no one was looking at what was happening with the money coming in, how they were vesting it. the state didn't do it and that's where the systemic regulator comes in. so one company, depending on what they do, depending on who looks at them, i guess, so therefore, though i appreciate this hearing, i'm not quite sure what we're talking about except

a unanimous opinion that there is some need for some generic national oversight, understanding fully well that the federal government should not and need not do what the states are doing very well. particularly the aspect between the company and the custom upon i agree the federal government doesn't need to do that. great. that's the consumer side, but on the investment side, no one is looking at it. one company has and could again. has anybody on any level today up to this point said that there could not be another aig tomorrow that travelers if they chose to, couldn't afford to invest all of their receipts into credit default swaps if they chose. i don't mean to pick on travelers, you just happen to be here today, or any other company, the answer is no, i think, but go ahead and correct me if i'm wrong. >> the answer is no. >> that's why we're here is to try to say, okay. we all