tv [untitled] CSPAN June 17, 2009 6:30am-7:00am EDT
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regulation, by the way, that clearly presented systemic risk to the country. >> what you're saying is that only the financial products section@@@@@@@ @ @ a@ @ @ @ @ @ significance or if the event of a terrorist attack. >> well, that's an interesting point. what you're saying is not the scenario we saw with aig, that wouldn't pose the kind of systemic risk you're talking
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about. what you're talking about there is some sort of attack or natural disaster that would impose trillions at least hundreds of billions of dollars potentially talking about for instance, a nuclear blast, on industry. at that point do you think that would be a systemic risk and at that point would that be in effect the least of our worries. >> as i indicated on an aggregated business, those events could be significant db systemically at risk, correct. >> is there anything in a systemic risk regulator could possibly do about that? >> that's a very good question. what systemic risk regulator would do would be to try to ensure that the examination of insurance companies' exposure to natural caps were properly
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managed, whether the grags of risks were managed. there are things to improve the situation, but depending on the situation, you're correct there may not be much that could be done. >> are there particular agencies to watch for a systemic risk in those extreme circumstances? >> we look the on it more of an aggregated basis. >> if your company went broke, who else would go broke? >> we don't have that many counter parties like other insurance companies, so i'm not sure i can really answer that question. >> as far as you know, would any other major entities go broke if your company went broke? >> no, sir. >> what about you mr. barrett? >> you're asking me to use my imagi imagination as to what a systemic risk regulator does. >> i'm asking there are any
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current companies that would pose systemic risk in the sense your company failed so many companies would fail it was a result in the mass destruction of credit in this country or even the world, that's the question? >> if all else were the same, if the reason for the failure did not impact any of the other companies, or can i think of any other single company out there in the life insurance industry, okay, as a reason they were going to fail did not impact any other company, the answer is no? >> and going back to the previous answer, what you're saying there are certain scenarios we would have something like a terrorist attack a mass disaster, those are the scenarios we should be thinking about in terms of systemic risk. >> in the life insurance industry it could be a broad devalation of credit defaults and so forth. >> to me this had been very helpful. if any of you want to supplement
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your comments, i would be grateful to you. my time is up, thank you very much. >> we're going to try another round quickly and those members taking their five minutes if she so desire. she can certainly take less if they so desire. i think i'll hold mine and past over and go to my co-host here, mr. garrett of new jersey for five minutes. >> i don't want to hold up the panel either. mr. mcraith, and i saw mr. skinner -- i shouldn't make comments, maybe disagree with you. my wife always says that. with regard to the aig situation and you were running down the scenario with regard to who's looking at it and raised theish issue, portions of the units were overseas and london
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specifically. i believe i've heard that before, that part of the issue mere is that it was not -- not state regulator necessarily, federal regulators or lack there of, as well as the european arm of it, looking at it, maybe missing it as well. want to chime in on that? >> i think the important point is that regulators need to have formalized structure for information sharing, for communication, not because of the risk because frankly, there are large companies who will present risk. it's to avoid the disruption so that the structure of the stability -- >> i guess what i heard, mr. skinner, you can comment, was there failure, not only on the federal reserve part or federal regulators, was there also a failure from the european regulators looking at this situation and not catching this
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going into it? >> this is very interesting. as i'm listening to this, i gather you believe aig functioned in the united states, they functioned country by country inside of european union. you're overseas and inside the european union in a market and internal narkt, you're going to have to put your hands up and hatever it did, banking and insurance. it just seems to me strange to keep picking london. london was a conduit for training. whether we have a crystal ball and say securitization was bad, i don't think that was true. the reality was what went on was due to the derivatives market. if we're saying aig in the
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united states has to blame what went on in london, i think that's taking it a step too far. we have to say, where was it supervised inside the united states, who had oversight, why didn't if state regulators had such a close relationship with this the country, know about the kind of investments it was making. and what proposition did it make in terms of trying to stop investments with supervision -- >> i appreciate that. i guess a lot of what we do here is make the questions other people, would we have prevented it and it seems in certain indications maybe not. mr. skinner, you talked earlier with regard to equivalency, that's something we need to move to you. you have the oii legislation in the -- as i understand it does not have all of the other regulatory aspect of it, oii,
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office of insurance information, in it, would that bring us to just having that, does that bring us to equivalency alone. >> i would have to say it would not be enough. i think we're looking for -- it's up to you where you go. what we want really is to examine what you bring in terms of regulation and that has to have in international level. >> maybe the last question is, we see with the economy here between the two approaches and the comment was made -- i don't want to put words in his mouth -- sees the needs for regulations with regard to the consumer protection aspect. i think i heard that from him. mr. baird, you could see the problems along mr. price's line
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of thinking, if you don't have consumer aspect on the same level combined -- i know you don't want to get into who regulates what, you could be a problem there indicated, right? >> yes. >> you would also see a problem then -- mr. if i understand,capf you continue those divided between the state and the federal with the consumer protection here on the state regulator and the prudential regulator on the federal regulator, you would see conflicting approaches, is that correct? >> besides the inefficiency one. besides inefficiencies, when we get it right, when we design a product that meets the customers' needs and allows us to be prudent in reasonable in regard to solvency, 20 and 30 years out. we bring together our solvency people and our financial
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reporting people and our pricing people and we have committees in our company that we call, would you want your mother to own a committee? say it would be our equivalent, to make sure the consumer is treated fairly. all those disciplines come together in the same place. to regulate us any differently, i think would fail. if obama comes out and he does nothing, let's say with regard to insurance, that's not out on the table, but he gives it a systemic risk regulator and he also sets over here and over here he has the consumer protection division in some other area and that would be, and either one of those perm tagzs, that would be a division that would not work. if that includes insurance products, you have regulators with different agendas to serve the customer the best way. nor would you have mr. capuano's approach and you would have some up here in the state and some up on the federal level.
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>> that is correct. >> thank you very much. miss beam. five minutes. >> thank you, mr. chairman. during your testimony you highlighted that the neic works actively with the international regulatory bodies and what authorities do the neic have compelling states to comply with any changes and recommendations that the international community would like to see. the value of the process is a coordinated interactive agency to work with our international colleagues. there are 27 countries in the eu. there are many countries around the world who have similar systems. in terms of the preektive authority of the neic, its role is not to preempt the state. it's to supplement and support
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the state in regulation. so in that sense as it develops as internationally they're developed standards and that's the measure by which we'll determine equivalency, by the way is the development in compliance with international standards. so you support the standards and you educate the states, but ultimately you don't have the authority to comply in the same way that the neic for 140 years has tried to drive uniformity across the states domestically and has been unable to get the states to move forward towards agreement on standards as well. >> just quickly. a fair comment, there are differences among the states. i think as your colleagues have mentioned, for example, in illinois, we have a ratings system that works for our state. companies don't need prior approval on property and casualty rates in our state.
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however, that system would not work. i think many legislators would argue in the gulf states or on the pacific coast. so those differences while they might present a system, some of the largest players in the industry would argue is difficult, to provide essential consumer protections to the people that live in the districts or in the states themselves. >> our question for mr. skinner is from the european perspective, how successful is the neic in implementing agreements reached with european counterparts? >> to be honest, on re insurance in particular, where we've had perennial problems on charges, not very successful at all. the european commission holds out that this is entirely discriminatory against companies operating inside the united states with as much as $40 billion worth of collateral held in states across the united states. there has been a move to move
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toward the rating process. that's quite discriminatory with the higher ratings being required for foreign companies and very much. it seems for domestic companies. if you're operating in a global re insurance market, business-to-business doesn't make much sense. i understand the necessity of covering risk and we've just done away with collateral inside the eu. we think it's a blunt instrument. we wonder why that is still a course select here whenever the naic comes to the european union and says this is what we're going to do. we're still shocked by it and we still think it's not a modern approach and a modern technique and we prefer to look at risk management which after all, at the end of day tells you just how the companies are behaving and how they're predicting your risk which is far essential to how much money they have in the bank. >> thank you. my last question is from mr. mccray. in '99 it chose to become a
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delaware corporation at the time the executive vice president said delaware laws were conducive to corporations. why does the naic believe they should be able to choose where to incorporate based on what was in the best interest of the naic, but with insurance companies shouldn't have the option of a federal chart tore streamline their operations to better serve their customers? >> excellent question, congresswoman. let me first comment on the re insurance collateral issue with this very brief anecdote which is the -- my colleagues on the@ t
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is not delivering directly to consumers the products and it is also not a company. so it is not delivering products. it doesn't have solvency requirements. it is not selling complicated insurance policies to people in every state around the country and for that reason companies should be domiciled within the states and subject to the regulation of those states in which they sell products. >> i yield back. thank you. >> thank you very much. >> i have no further questions. >> you have further questions. thank you, mr. chairman i want to thank you for your time and your testimony and your forthrightness especially is
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appreciated. you're right. there has been a big disparity between the requirements for domestic and non-domestic reinsurers. i think just in the last couple of years that we have been so plundered and amused by the reinsurers that have done business to some of the states and all of whom have the exact same rates that you'll see some of the states are dropping those requirements. more than protectionism, the purpose of that was so that if we caught them misbehaving, theoretically, we could put them in jail and hold them accountable if they were domiciled in this country. if they were domiciled in some other place in the world that becomes a little bit more problematic. so that was done more as a matter of accountability than it was protectionism, hopefully. when we talk about a systemic regulator, i wonder, and you've
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come the farthest, mr. skinner, and we might have the best ideals in this. how in the world could we expect a systemic regulator to regulate derivatives, complex derivatives. from a practical application, i've not heard anyone yet explain how somebody could evaluate them and then regulate them. i mean, in theory we say, yeah we need someone to regulate this stuff and make it right, but i haven't heard a practical example given yet on how they would regulate complex derivatives, for example. >> i think that's a good question. one of the things obviously these products went ahead of the regulators who would be regulating them and some on the board of the companies who were actually in charge of these particular products, you also have the combination of chinese
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walls to rate them and then designing products and banks are doing the same. everybody made money in this. it was the wrong incentive for any of these things. so in terms of having oversight, clearly one of the things we've done at the european level with banks if we start off with the derivative, we think you should retain some of that derivative so we can spot if there are problems down the line where it came from. one of the things is there were no originator principle in derivatives and we introduced a law, and the capital requirement in banks to ensure that up to 5% of derivatives that were started have to be many thained and that is something they know has been discussed elsewhere and you probably heard about it already and it is only where that particular time to start and one thing's for sure and we don't need a securitization to build capacity and insurance depends upon that very much as banking and we have to stop the unethical behavior that was clearly behind all of this and
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certainly some of the greed which has been unleashed in the markets. >> congressman, may i address? >> i think you're asking the multibillion-dollar question. i think the mercantile exchange if i can be parochial had an excellent proposal and that is to have an electronic platform and a clearing function so that there is pricing transparency and counter-party centery and those two things in conjunction would have prohibited or limited the impact of the crisis that we've seen until now. >> mr. posey, i want to come back to your re insurance comment and i'll be glad to defer to your comment about credit fault swaps. i would like to make one point. the critical part of a regulator, and we think perhaps the fed is to analyze the
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instruments themselves. the difficulty with credit default swaps with aig was leverage and the huge number of transactions that they did and the leverage that was embedded in each one. it's critical and it would be interesting to see what mr. mcgrath would say about this and the amount of staff that it takes to analyze the financial instruments to regulate them and to see which things are permissible or not we think is more akin to what the fed does than what eric dinallo or one of the state regulators would be able to do with staff and being able to stay on top of that particular kind of financial instrument. >> does anyone think that the people that are putting these together are highly valued making tremendous sums of money. does anyone have the slightest notion that we would be able to hire those people and that they
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would want to work for the government in evaluating the profitability derivatives throughout the world? i mean, i don't believe in the tooth fairy or the easter bunny and i don't believe we're going to create anything like that either. if i'm wrong, somebody tell me, why that is a practical idea that they'll be able to have the complex derivatives that is throughout the financial markets and that they'll be able to work for the government and tell us which ones are smart and which are dumb and which are risky and not risky and that is an absolute absurdity to think that could happen. >> the one public sector employ owe this panel, i'd like to offer this perspective that there are many smart, bright, committed regulators who sacrificed short-term compensation so that they could provide a contribution to the greater society.
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>> well, and we're going into new water here now. i think with what we've discussed with what we saw with the sec and what we saw with the agencies that failed to investigate and failed to prosecute, enron is probably one that we could see and for every enron, someone that put them in jail. to start from scratch the new bureaucracy that will solve these problems i think is an unrealistic expectation. i'm not saying there aren't good people that work for government. i'm saying the level of expertise that's required here that the person could have his own independent evaluation for the rest of the world and maybe serve a greater good than trying to have the government do it and there's certainly nothing wrong with having a data base. we've talked about that before we thought about that before that, you know, if you have a derivative, you filed a derivative and you lift every
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component of the derivative and you put that on the index that everyone can see online just for transparency and the world is, while we're registered with this and there's an implied value to that that an unwary consumer who we're trying to look out for may not understand and thank you. i think you gave me extra time, chairman. i appreciate it. >> mr. chairman, if i might comment on mr. boaz's comment. one of the reasons we support a regulator at the federal level is because much of the insurance market is a non-u.s.-based market and the lack of expertise and capability as well as the lack of a legal framework between countries that are major trading partners with the united states is the reason that we think is appropriate to have a federal regulator. mr. mcray commented earlier that the lack of constitutional authority for states that enter into state agreements with other countries is an impediment to dealing with that. i would disagree with your
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characterization of the re insurance market and it's contributed an enormous amount of money to refinancing after 9/11, after hurricanes katrina and wilma. after the hurricanes last year it's been a very responsible market in paying its claims. >> mr. chairman, i didn't say they weren't responsible, and i didn't say they didn't pay claims. i said they all had the same rate in my state which seemed coincidental. >> thank you very much. the chair notes some members may have additional questions for this panel which they may wish to submit in writing. without object the record will remain open for 30 days for members to submit written questions to these witnesses and place their responses in the record. before we adjourn, the following written statements will be made part of the record of this hearing. the center for insurance research, the property casualty
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association of america and the cea, a trade association of european insurers. without objection, it is so ordered. i want to thank this panel for their contribution today and taking all the -- we did it in three hours which is pretty good. maybe next time we can keep it for five. there will be another opportunity to visit with mr. skinner. we called him over here to enjoy that. i think that we gained a lot from the international exposure of having mr. skinner, but all of the participants on the panel were extraordinarily contributed today, and i think even the greatest doubters on the committee may tend to say that we moved the ball down the field further with the result of this hearing. i want to thank you again for being part of it. i look forward to future
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hearings on this very subject and now the panel is dismissed and this hearing -- >> before you adjourn, just to enter something in the record. from the ai alert of june 5th to larry summers. >> didn't mean you hold up an extra 30 seconds, but i did want to make it into the official record. thank you. >> thank you, mr. chairman. >> thank you.
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