at a huge segment of the @@@@@@b hearing. i think this has been an excellent panel and the information you provide has been very helpful. it's important to appreciate that federal regulation of insurance is different than instituting a systemic risk

regulator for insurance, and i think it's important that we keep that in mind and we are sometimes combining apples and oranges here. i want to shift gears a little bit and talk about -- get some response regarding the financial products consumer safety commission that has been bandied about by the administration and it appears to many of us to be a command and control apparatus for different industries including the insurance industry, and i wonder, and i know oftentimes congress and the administration can go too far. that seems to be the order of the day is going too far. i wonder starting with mr. spence, do you have any idea what could be too far for the insurance industry, or what the effect would be for the insurance industry for the product consumer safety commission. thank you, congressman.

we believe the creation of the federal financial services product safety commission that includes insurance raises is two concerns. this would add another cost to their regulation and regulatory delays without gaining any consumer benefit and we're concerned about possibly separating product regulation from solvency regulation which could lead to poor regulatory decision making because the product regulation would lack the information necessary to fully understand the industry. and there could be competing -- >> so there is a line beyond which we go, if we go beyond that results in limiting the ability of you to serve customers and help americans insure themselves in various ways? >> we believe so. >> mr. nutter? >> mr. price, in the re insurance area is strictly a business-to business-transaction. there is no direct legal obligation to the consumer and it tends to focus solvency and prudential regulation. it would appear not to apply to

re insurance contracts, the consumer aspect. >> thank you, mr. baird. >> when we design a product we feel we are making promises to our customers to deliver benefits 20, 30, 40 years into the future. at the point in time when we're designing that product we have to bring in solvency and capital markets people, solvency people, marketing people to make sure we're designing people to make sure somebody values to separate that and have an agency only focused on the consumer side we believe is not complete. if we didn't have the disciplines at the point in time we designed a product, that product would fail. >> what could we do? what would we do? what might we do that would limit your ability to allow americans to have a greater opportunity to insure themselves against challenges? >> believe that obviously the life insurance industry is about

strong consumer safety standards. i believe if it is looked at in a vacuum and not part of a federal functional regulator and insolvency and capital markets risk that their regulation would not be complete and it would slow down the process and you would have regulators that the regulations are bifurcated and that would keep us from designing a product that the customer needs most. >> we represent the property casualty. our rp is mainly property casualty and we see this as more geared to financial products which we really don't -- >> so if we got into your business, that would be bad. is that accurate? >> thank you. i want to switch gears for mr. mcgrath. you mentioned that you wanted to comment on the solvency two framework, and i wonder if you'd had the opportunity to look at the consequences that will have

or may have for states. >> yes. thank you, congressmen. >> first, i do want to commend mr. skinner and his colleagues in the european union for developing solvency to remains and its facent stages, as we heard is not even to be adopted by legislation until 2012. of course, we have 64,000 company years of regulating solvency. so we look forward to working with the eu as they further develop their approach. one report mentioned earlier by mr. skinner is called the dela rosier report and what was interesting about that report is he commented on the need to reflect upon and report the capital standards. you might recall several years ago there was a clamor in washington to give our own banks. the capital freedom for the

european institutions and for that reason, solvency, too, warrants serious scrutiny, but i think it's fair to say, if solvency 2 had been in place during the current crisis, the economic impact would have been worse for those in the united states. >> thank you. >> thank you, mr. chairman. if i may also comment on the solvency 2 matter. if i could actually take a sentence out of mr. skinner's testimony, it seems to me this is the concern the re insurance market has about solvency 2 and the statement from mr. skinner's testimony, since it would have to be made at the country level, this would make it almost impossible to find the usa equivalent under solvency 2 unless changes are made to the regulatory framework in the u.s. the global market and re insurance is one dependent upon

regulatory interaction and comedy and we would strongly encourage a federal regulator to facilitate that kind of international trade agreement. >> if i may, i can come in and show the question that everybody had something to do with solvency, 2. correct the impression which is that this is want a piece of legislation already. i think they'd like your house that when you had a vote on it, you think of it as law. it would have to go then afterwards is to each member state to have them ratified in the statue look. for once it has been adopted in the european part which it was on the 22nd of april of this year was law. it now has two years to be implemented by the regulators on the ground. we should be absolutely clear on about this so there's no false impression left as to whether it deal with the three principles that we wanted to base our legislation on. i'm want sure by comparing with what was happening in the u.s. and what was happening in the

eu. we went from a risk-based approach and a principal-based approach and an economic-based approach and this has been ten years in development with practically every industry that was to be known in europe and from elsewhere, getting involved in consultations about getting the piecemeal. regulators will be able to introduce this on the ground where we will be guaranteeing and looking after policyholders' interests far more than we ever could have done in the past. not in a peace meal way, but in an absolute harmonized way, and i think we're looking at the best and highest in standards. i think i'm arc trade, i must correct the impress left with you that the solvency 2 standard is what you would expect to apply in the u.s. that's not what we're saying either. what we're saying is we've gone this way in the european union and it matches the development that's happening elsewhere in the world. it's happening with what's happening in the iais with 11 countries choosing to go ahead. the united states, not so.

the danger is and the risk is for policyholders and for companies if they can't be competitive in the global situation that we will want be finding like for like. you have a market which has 85% penetration already with foreign companies. they have 15% left u.s. your gl you have got company that's can do it. i would have to say you have to consider whether or not not changing the laws and moving along with the international global standard will endanger the other companies that have international ambitions. >> thank you, mr. chairman. let's see. >> thank you very much, mr. chairman. i thank you and ranking member garrett for holding this hearing today to discuss systemic risk. treasury will release its regulatory reform proposal

tomorrow, june 17th, which makes this hearing all the more important. i've always supported state regulation of insurance and i will continue to rally behind the regulatory construch, if a failure based and up rating in the united states will generally not impose systemic risk, we need to pursue this claim further and not rush to judgment on the capability of state insurance commissioners to properly and effectively regulate the insurers. furthermore, i cannot support a system in which an insurance company head quartered in one state is given permission to operate in the remaining 49 states based on their home state's insurance regulations. whereas, this might be acceptable in the european

union, i'm not certain comparing sovereign nations to states in the united states is appropriate. we might be comparing apples and oranges. i ask my question and direct it to michael mcraith from illinois department of insurance and if possible to give the, a second opinion from kenneth spence with travelers insurance. what do you like -- what would you like to see in the administration's regulatory reform proposal? >> thank you, congressman. first of all, i think it's important to appreciate the strengths of our current system as you clearly understand. we are a nationally coordinated system of states. we have multiples sets of

experts looking at one company so that it's not a single regulator, it is multiple regulators working together in a coordinated fashion with a national system of sovereignty regulation, a national system for people like mr. nutter and others in his constituency and internationally that there was that national system that can be recognized. in terms of systemic risk, as i mentioned earlier, there needs to be -- there must be a primary role for the functional regulators. in other case, of course, it's the expertise that we have, the information we have and the experience that we have in relation to state insurance regulation. systemic regulation can integrate. state regulation is inherently kpatable with systemic regulation. we need to formalize regulatory

cooperation and enhance communication. the systemic risk management, as i alluded to earlier, as regulators of the insurance industry, we require extensive, exhaustive risk management for any insurance enterprise. we need that at the holding company level and that is systemically significant institutions that's even more true. to limit the circumstance in which the functional regulators can be preempted must be extremely limited only if there is an actual possibility of not just risk but disruption to the system. and those circumstances are very narrow indeed. the primary function and purpose and service that a systemic regulators will provide is to enhance the communication and using aig as the poster child that was not sufficient int

interaction and communication, we support systemic regulation, congressman. >> let me ask mr. spence with travelers insurance. what would you like to see in this reform proposal? >> thank you, congressman. as i indicated, we would support the concept of systemic risk. systemic risk regulator. for a number of years, travelers was part of a financial holding company that was regulated by the fed. the insurance operations were not regulated by the fed but they did soundness and safety reviews of the company, including the insurance operations. and that process during that process it demonstrated the lack of federal knowledge, or knowledge at the federal level, of insurance operations, which is why we think the chairman's

is a sound proposal. and we think depending on what a systemic risk @@@@@@@ department reviewed and monitored aig's securities lending program, aig securities lending programs invested in mortgage backed securities and took the money from insurance subsidiaries and aig life

insurers suffered 20 billion in losses related to their securities lending operations last year. and, of course, the bottom line, the federal reserve has provided billions now to recap talize aig life insurance companies. we've got a patch work quilt here of regulation. as i said in my opening statement. we had problems with the financial products unit. we have problems with the securities lending unit. and the securities lending program. so we've got a difficulty here. now, at this -- as we've discussed at this subcommittee, there was an implicit belief in the market that should fannie mae and freddie mac get into trouble, they would step in to save them. in part it was that perceived federal lifeline that enabled these firms to borrow cheaply

and take on so much risk. as we discussed reforming our regulatory structure to address firm that are too big to fail, i'm concerned we run the risk of bifurcating our financial system between those we designate as systemically significant and everybody else that's in competition. as our experience with the housing government sponsored enterprises demonstrates, this would be a big mistake. and it would provide competitive advantages to companies in a have implicit backing of the taxpayers and they would be incentivized to engage in higher risk behavior. that's what economists who look at the model tell us when they fret about what we're doing here. in the context of systemic risk regulation, do we run the risk of distorting market by labeling those institutions too big too

fail as such and more effective to focus on potentially high risk activities in the market instead, rather than a set of large financial firms, mr. spence? >> is that directed to me? >> yes,sir. >> we agree with you. we think that systemic risk regulator, not a question of labeling companies too big too fail but determining in advance and preventing companies to become too bill to fail. >> thank you. my last question goes to mr. skinner, because mr. skinner, you've spoken at length on the need to establish a federal presence on insurance in the united states as well as the problems e.u. regulators have run into when trying to negotiate with the various state insurance commissioners. there appears to be a consensus that something should be done in this regard. to what degree remains obviously questionable. when is an office of insurance

information just an office to collect data? if this office is created without strong preemptive authority over the states, weakening the ability of tto ac nationwide, how effective would it be in the long run? >> thank you, very much. mr. royce. i expect that you know the answer partly yourself. in many ways any international level its countries and groups of country that's have to work together in order to get the global rules which will prevent the future systemic risks and those systemic risks as we discussed today are at the root level, the risks it takes and premiums it doesn't charge, et cetera, et cetera, we need something standardized, harmonized that we can agree with. i think the office of insurance information is a great idea, don't get me wrong, i think what

perhaps you'll end up with. i think we still have a fundamental which underlies the exact way in which we approach each other over specific laws. and where there is an absence of that political bridge, there's always going to be a gap. we have to find a way through that. i suspect that behind the imagination, that this company isn't anywhere else to come up with ideas and talk to us. and we should be an open door for you. we're not going to see how you should do it. but we are a compliant group ourselves inside the european union. we wrestle the same issues you wrestle with. we want to work with you to make sure what's best for policyholders and as well as the competitiveness of companies. >> thank you, mr. skipper. thank you, mr. chairman.

>> miss mccarthy. >> thank you, i appreciate it. many of my colleagues have said this has been a very interesting journey that many of us have taken over the last several months. i wanted to ask you as an alternative to federal regulations, some have recommended moving to federal minimum standards that would enforce by the current state insurance regulatory structure. would that solve the regulatory burden in areas such as licensing, market conduct, and speed to market if not, please explain why? >> thank you for the question. we believe it does not. we believe federal minimum standards, many of us run national businesses. we unlike the profit and casualty industry, we price a product one time for all 50

states. our producers are often national. our producers often have customers move from one state to another. so when someone suggests that federal minimum standards is the answer, what that means is those minimum standards will be met but there will be still be 51 different sets of rules and regulations that we must file product approves for and design products around and producers must license for. so we think that that's solves very little, if anything. >> mr. skinner, listening to your reports, when we think about it and you're talking about working with all of the different countries that you're working with, we have to work with all of the states. and i would tend to think working with the states on the same level is like working with a country. and i think that's going to be our -- what we're going to have to solve. obviously, a lot of the insurance companies do want to do global marketing. they are going to be into your -- all of the different

countries for you. keep saying u.k. -- e.u. as we follow through. if you could follow through with what you were saying before. go a little bit further on how you could possibly see all of us. this is going to be difficult. each state, we all represent -- we represent our districts but we actually represent our state. so what goes on in the state will come to us and then they will put the issues in front of us as we fight for the regulations that are going to come down. they are going to come down. anyone that thinks that they are not is not awake in the real world. we cannot allow or afford what has gone on in the last year and a half, two years to happen again. if you could follow through with that. >> thank you, very much. i actually think, we're all dealing with multijurisdictional countries and states, you're

right. how do we harmonize and get the rules with the best safety and help companies expand capacity to areas where they haven't been offering insurance before and at lower rates. how do we get efficiencicies into the area without running against risk. all of these things have to be based upon what is financially sound and what is hopefully subject to risk management. those things are the clues that we went through in terms of over ten years in trying to sew together 700 countries and not everyone had the same level of competence. this is a serious issue. thank you for recognizing me as coming from the u.k., london, i like to think it is the head of the world, along with new york in financial regulation, we can all catch a cold from what happens. we have to be alert and what comes across our borders are some things we don't expect and can be beyond our control. so when we talk about systemic risk, we're talking about control over groups.

groups that can cross borders and have branches and subsidiaries, i want the same rules to every regulator at a maximum level so we know the consumers in malta and london can have the same kmekt tagss about the policies being in good order when it comes to have them paid off. most of all, just as well, that they can afford them. as i know in terms of an economic crisis, many people are turning their bank on insurance and thinking, do i have to pay the insurance bill for my house. the consequences could be enormous in terms of the social impacts as well. it's capacity and competence which has driven us to make sure we have one market in insurance. >> i appreciate what your nouts thoughts on that. i do believe people when they are cutting back and the same thing is happening in this country, they are looking where they can cut back to survive by paying mortgagor whatever and if

they can get away with car insurance, letting it lapse, hoping they don't get caught, health care insurance, obviously we're dealing with that -- i'm sorry, my time is up. thank you, mr. chairman. >> and now we'll hear from miss bigger. >> thank you, mr. chairman. mr. baird, if respond to dr. price's question, you basically said the functional regulator in charge of regulating the safety of a financial institution should also be the regulator in charge of regulations related to consumer products and practices. why is that and why should it be the same regulator that looks to safety and soundness as well as consumer related product? >> thank you for the question.

i certainly didn't want to get into the shoes of congress and determine who reports to whom. the remarks i made and i want to make this very clear, we thing they have to be together in the clab ra tif or perhaps one does report to another, you'll decide that, not us. you cannot separate and bifurcate standards from solvency regulation. >> thank you. then director mcraith, what sort of coordination took place among the regulators following the aig debacle? >> thank you. congresswoman, at the national level, there was coordination within the days and weeks, of course there's coordination constantly. but we were as we learned about the holding company problems, the aig financial products

division in london, we learned that the holding company challenges could have implications for the insurance subsidiaries. and immediately nationally the regulators worked collectively daily, multiple calls, meetings, visits, regulators from around the country, because, of course, policyholders are based in every state of the country with aig. in addition to that, led by the new york department the state regulators led national -- i'm sorry international conference calls giving our colleagues from the e.u. an all continent, the opportunity to participate in the discussion to determine the root cause of the problem is not

a u.s. insurance company problem, and those conversations still continue to this day. >> well, it appears that the insurance sector has fared better than the banking and the securities counter parts in the current economic crisis. what are the reasons for that and what are some of the elements of the state insurance regulatory system that could be instructive to federal policy makers in setting up a systemic risk regulatory system? >> first, i understand that the e.u. is working to bring together 27 different countries and plan to implement solvency within a few years. i commend that effort. it's a significant achievement. as the state we have been working together kol lab