colleagues to join me in the effort to enact this legislation. clasclass. .

i therefore look forward to the testimony of our witnesses and to a vibrant debate in the weeks and months ahead. i would like to recognize our ranking member mr. garrett for four minutes for his opening statement. >> thank you mr. chairman. thank you to our witnesses as well, especially mr. skinner you understand can of the way across the ocean to be with us today. we have a fairly large panel and white perspective of different opinions on the insurance industry so i look forward to all of your testimony. tomorrow as you indicate we expect to hear from the obama administration on its plan for financial regulatory reform and from what i can tell it seems unclear to what extent the proposal will address insurance legislation for the different ideas have been floated of course that within the administration and beyond it seems a clear consensus as to what to do in insurance is not totally been yet crystallized for the part of the difficulty in reaching a consensus on what to do is related to the difficulty in reaching a consensus on what is a systemic

risk. furthermore, how you identify it? if that is impossible in the future and how should be addressed if it is identified and how should be cleaned up once it has been identified, if it is not too late. another issue policymakers should be thinking about, how can the policy be put in place so that incidences of systemic risk are actually encouraged in the first place or exacerbated or even institutionalized due to government actions or unintended consequences. i worry of some of the policies being considered by the administration will likely be part of its plan will do more harm than good if they are actually implemented. a systemic risk regulator in conjunction with the resolution of the bailout regime was set up a situation where certain companies are either implicitly or explicitly received under this yet another new layer of supervision, be seen as too big to fail, a gain an unfair advantage in the marketplace and threaten further taxpayer pain. further complicating resolution authority proposal is the

question of how to pay for it. its only large firms potentially sensitive the authority or aspect, the naval fairly explicitly seen as beneficiaries of the regime but as the broader swath of the industry to pay for it would be not equitable since small firms that have no chance of benefiting from it would be asked to contribute to a system designed to prop up their larger competitors. additionally, ee individual taxpayers should be asked to contribute to the fund is set up to bailout a failed large firm and its creditors and for the more for the resolution authority when need to be very large and very costly for the firms they have to contribute to but at the same time will likely not be large enough to deal with an event deemed by regulators as truly significant. as i said i would argue the first and foremost to concentrate on policies that encourage future bailouts by promising firms for the government to always come to the rescue. the republican plan put forward last week addresses various policies that put the taxpayer at work but has no bailout in the future.

its unified goal is no more billups. returning to the team had today's hearing my primary questions are, our insurance firms by their nature systemically insignificant and i'm looking for to hearing from this of participants on the panel in particular and certainly would be a mistake to give the entire industry broadly as a single entity. at today's hearing the breadth of the industry will be on display as we will be hearing from the mortgage insurance industry, bond insurers, life insurers and reinsurers as well as from the pnc sector as well and we will also be hearing from the aice which is actually a charge of insurance regulation in this country as we speak. i am hopeful that its perspectives on systemic risk how we might address that and what further actions can be done, will be enlightening to everyone here today. finally mr. chairman as you know you have introduced the office of insurance information bill and i know this legislation will be addressed by several members of the panel today so i'm interested to hear from our

panel as to how this legislation may address deficiencies and our current framework and i am particularly interested in its potential impact on re to market to the united states countries abroad and related agreements as well so once again i welcome all the witnesses and i look forward to their testimony. thank you mr. chairman. >> thank you very much mr. garrett. we will now hear from the gentleman from california, mr. sherman for one minute. >> underlying these hearings is the question, what is insurance? derivatives aren't best insurance, at worst they are casino that. aig sold fire and life insurance through its unregulated subsidiaries and the subsidiaries are pretty much okay. it sold a portfolio insurance through unregulated subsidiaries, convincing the world that it was not have insurance and they took down the company, if not the world economy. the fire insurance policy on my

house for tax my lender in case my house burns down. but if my lender wants protection from the much greater risk that the value of my house goes down or the value of my mortgage goes down, they also buy insurance. they call it a derivative, and it is completely underregulated. we need to make sure that credit default swaps and similar derivatives classified as insurance and are subject to reserves. i yield back. >> thank you mr. chairman and now we will hear from another gentleman from california, mr. royce for two minutes. >> thank you mr. chairman and i would like to briefly thank mr. skinner for making this trip to testify and congratulate him on his recent election. he has been a leader in the european union and in parliament. he has been a leader in championing of the directive which provides an important it relevant example of an effort underway to create a more

efficient regulatory structure, and yesterday's op-ed in "the washington post" by larry summers and tim geithner noted the importance of international coordination among regulators and reiterated the administration's commitment to leading the effort to improve supervision around the world. unfortunately, with their fragmented regulatory regime over insurance we are lagging at this point. we are not leading the rest of the world. as solvency to work to unite the insurance markets and 27 member countries and the e.u., we continue to struggle with a patchwork system of 50 plus state regulators. with the implementation of this directive nearing, it is becoming more apparent that the framework potentially will be at odds with the u.s. regulatory structure. it is unlikely that the edu would find the current balkanized state based regulatory structure equal this

means the ability of our regulatory system to detect offshore risk will be we can and it also means that many of our u.s.-based institutions will be forced to shift significant operations overseas if they hope to continue to do-- do business in the e.u.. certainly an office of insurance information would be illogical for step to address this and to address other problems we face in the international insurance market. however, in zero i i would rely heavily on the various state insurance commissioners to implement the regulatory policies. without strong pre-emptive authority over the states, the ability for it to enact policies nationwide and consequently the ability to adequately represent the entire u.s. insurance market would be greatly weakened. i remain concerned however that they oii would not go far enough. maintaining solvency regulation of the state level will limit the effectiveness of a potential

systemic risk regulator as well as coordination efforts for the regulators. certainly, noting the failure of aig, once the nation's largest insurer is relevant given the focus of today's hearing. dating back to 2006 the paulson treasury department who noted systemic gaps in the state based system, which aig exploited. the blame for the collapse of the company should start with aig. from a regulatory standpoint, there were failures at both the state and federal level. using capital for their-- further from their insurance subsidiaries with the approval of various state insurance regulators, the securities lending division in tandem with the financial products and it put at risk the entire company and the broader financial system. half of this came from the securities lending division, the other half from the financial

products unit in terms of the overleveraging. with more than 250 subsidiaries operating in 14 states and more than 100 countries aig is the poster child for both the need to open up lines of communication among regulators worldwide in the need to establish a domestic insurance regulator with the ability to oversee these large and complex institutions and again, mr. chairman thank you for holding this hearing. >> thank you mr. always and that we will hear from the gentleman from georgia, mr. scott for one minute. >> thank you very much mr. chairman. i think of course this is a very important timely hearing. the issue is of course, i think, what is systemic risk as it relates to rancher rants industry and where and how is it best regulated that the federal and state level. i think that the major model that we are using, aig is flawed and it's that's because as we look back at it, what caused the problem with aig was their

financial products division based in london, which again, was regulated at the federal level. so the question becomes, if we use a federal charter or regulate insurance at the federal level, where that have prevented the situation and a ig? i think going forward, we have to be very careful to make sure that the points we take into consideration are these, that we have the sound consumer protections in place, that we also do not have the t.a.r.p. competition, that we do not bring on excessive operating costs and in fact, in our efforts to do some good, that we do something that could very well be dangerous down the road. so, the question becomes, do we do it at the federal level or at the state level, and of course as i say, we have to look with a very jaundiced eye to make sure that we are looking right when

it comes to the cause of this said aig because if we did have a federal intervention there, as we had come and it didn't prevent it, what is to say that the federal charter and federal regulation is the way to go? i think there's a lot to be said with making sure that we have regulations that the state level that works. thank you mr. chairman. >> thank you very much and that we have the gentlelady from illinois, ms. biggert for three minutes. i am sorry, for two minutes. >> thank you gemming kanjorski. i am pleased we are having a second hearing to examine insurance regulation was a mention that the previous hearing this is an important part of the conversation as a relates to a systemic risk. fortunately the insurance industry is in good shape due to sound state regulation. i think state insurance regulators are doing a good job, and with that i would also like

to thank and welcome to today's hearing illinois department of insurance director, mike mcraith and representing nia see. i'm happy to have something good to say about illinois and that does not happen so much these days, but it is important that, the role that the regulators when it comes to duly regulated entities like aig. i thank ods drop the ball and that is why part of the republican regulatory reform proposal preserves the option for a thrift charter but rules ods into the occ and in addition to our proposal addresses risky behavior that aig like entities may engage in, such as with derivatives and i think we establish a market stability and capital adequacy board comprised of all federal regulators and possibly others to look at what should be done with regard to

the derivatives regulation. we recently had a hearing in this committee to discuss how over-the-counter derivatives could be put into the three-- of regulation. i also think we need to improve the dialogue among regulators and insurance needs to be part of that dialogue. that is why i joined ranking member, joint chairman kanjorski with his office of the insurance information bill and but that i look forward to hearing from today's witnesses, who represent the very defers insurance industry. i also look forward to working with them and my colleagues to strike the right balance on this matter and with that i yield back. >> thank you very much ms. biggert and now we will hear from the other lady from illinois, ms. bean for three minutes. >> thank you mr. chairman. i would also like to give a shot back to mike mcraith for sharing

your expertise. until this year the role of federal involvement in the insurance industry is centered on whether to establish a federal insurance regulator. i fortwith congressman always on legislation to establish a regulator for the insurance industry. let's congress our bill was focused on consumer choice in protections, advantages for agents and industry efficiencies. but much has changed our financial system since the last congress. the collapse of aig, the world's largest insurer has proven to be one of the most costly and dangerous corporate disasters in our nation's history with nearly 180 billion in federal tax dollars committed to aig plus 22 billion to other insurers, the federal government has made an unprecedented investment in an industry over which it has no regulatory authority. the need for regulatory oversight as never been greater and having a federal insurance commissioner who can work with the expected systemic risk regulator or council is vital to ensure proper oversight of an important pillar of the u.s. financial system.

in april congressman always and i introduced h.r. 1880, the national insurance consumer protection act. unlike previous legislation are bill deals was systemic risk recognizing congress cocreated systemic risk regulator instachecks all insurance companies national or state chartered to a systemic review. the systemic risk regulator would have the ability to gather data from insurers and other financial-services affiliates with a holding company structure to monitor for systemic risk. based on the financial data the systemic risk regulator can make recommendations to appropriate regulatory action, including the national insurance commissioner. the activities in the insurance companies and affiliate of an insurance company like an aig financial products unit or any product or service of an insurance company would have serious adverse effects and economic conditions are financial stability. innocences the risk regulator could recommend to the federal estate regulator that an activity, practice, product and

service must be prohibited. in instances where functional regulator refuses to take action this systemic risk regulator would seek approval to override the functional regulator from according council of financial regulators established in the bill that consists of the current members of the president's working group on capital markets plus the federal banking regulators, the federal insurance commissioner and restate financial regulators from the three separate insurance, banking and securities. finally of the regulator determent insurance company is systemically a significant it is required to consult with the national insurance commissioner to determine whether the company should be nationally regulated. i believe all financial activity including that of insurance company should be subject to review by systemic risk regulator because some suggest the insurance industry does not pose a systemic risk to the financial system but we know from our experience and a ig that did pose a systemic risk and not just to the financial products unit what to the securities lending program which is regulated by the state

insurance commissioners and is led to over $40 billion in taxpayer money being invested. as we move forward in the next thing was to establish a systemic risk regulator or council we need to provide this regulatory body with all the tools to properly review and evaluate the activities of insurance companies. that should include a federal regulator for insurance that can work with the systemic risk regulator in a similar manner as the occ and the sec do for their respective regulated industries. thank you and the yield back the balance of my time. >> thank you very much ms. bean in our final presenter, mr. hensarling of texas for two minutes. >> thank you for calling this hearing, obviously important issues for us to consider. there is no dud each of us know what a critical role in the insurance industry plays in our economy today. however i am not sold on the belief that any one insurance company is necessarily an agent of systemic risk to the entire

economy. pandith i did believe that, i can think of no greater self fulfilling prophecy that you designate a firm as systemically risky. we know what happens after that. $173 billion of taxpayer money later, aig essentially becomes a conduit for transferring of taxpayer wealth to counterparties, some which include foreign entities. congress has to be very, very careful about introducing moral hazard into the equation, even more than already exists. we simply cannot enshrine a too big to fail bailout policy. there is a huge difference between the government walking in and bailing out in individual institution and having had emergency provisions for liquidity and stability and that

the market as a whole. we also have to remember the federal regulation is not a panacea. witness fannie in freddie, hua myth, bank of america and the list goes on. finally with respect to aig, we had their chief regulator here on march 18, 2009, and the regulators said, the no what? we have the resources, we have the expertise, we have the authority. we just simply missed it. sometimes regulators get it wrong. the ultimate goal here should be not to designate certain firms as systemically risky, so that we have more ticking time bombs like fannie and freddie throughout the economy that ultimately blow up on the american taxpayer. we don't necessarily need more regulation. we need smarter regulation, which will help the consumer and with that mr. chairman i yield back the balance of my time. >> thank you very much.

now we will have the panel made up of eight members. that is why we contracted some of our presentations by members, and appearing before the subcommittee today on each of the panelists will be allotted five minutes and without objection, they are written statements will be made part of the record. first, on the panel we have the honorable peter skinner, a member of the european parliament from the united kingdom and most recently reelected. congratulations mr. skinner. we look forward to your tenure. >> thank you very much congressman kanjorski, honorable members of the subcommittee for inviting me here today. i know this is a special occasion for me, if nothing else for the fact that i have just been reelected but also to come here, to know that i am usually sitting on your side of this table rather than here, but it is a great honor to be here and

i appreciate that. i am peter skinner in a been a member of the european pilar-- since 1994 and was elected for my fourth term. a member of the economic affairs committee and directly involved in what gastone is the transatlantic regulatory dialogue, a discussion between the european parliament so we talk regularly about disease like this. i was previously a sponsor for the bill on the reinsurance in 2005 insolvency two who is then lost the-- past as a lot recently in the european union and passed into the statute books of individual member countries by 2012 but each country is already moving towards that introduction. let me say i fully understand and respect from the start the need for each trading bloc to establish its own sovereign rules and practices and therefore, which this committee

every success in its deliberations. we have to take into account what i think we have already heard however, and that taking divergent approaches during a global recession matched by the kinds of things that we know about across the atlantic and around the globe will actually lead to the wrong conclusions. we need to agree to common approaches, common regulatory structures but this doesn't mean we have to say exactly the same thing. in terms of systemic risk and the insurance industry, it is the management of that risk that is important for the european union. it is the chain of events which leads to systemic risks in this begins with the failure of management and supervision of such risks. the e.u.'s book is has been to try to eliminate any failure by predicting behavior, using reasonable models and testing against them. in fact, we have been having impact assessments which involve american companies inside the european union giving evidence as to that effect.

in europe, a committee led by a former managing director of the international monetary fund has proposed sweeping changes to the way the european financial services are regulated. these changes would result in the creation of the european systemic risk council an independent body responsible for safeguarding financial stability in conducting macroprudential supervision under european level. your gets its information on insurance business from the 27 regulators it has representing all of the individual member states of the european union and these need under one body, the committee of european supervisors. it sits in frankfurt and agrees common standards which are applied to the solvency law across the european union. in terms of that cross-border oversight, we have developed a system which is coming again from the report, which highlights the need for greater

integrated supervision. the proposal is to bring together the work of the three committees and the capital markets and insurance and banking to the supervision, after one financial sector regulatory body. in terms of developments from abroad, which may affect the u.s. market and again i come from a european perspective, i can only talk really about how our markets are interconnected and we seem to be-- seems the near financial meltdown has meant, if you get a colder coughing california, we feel the effects in london, frankfurt and wrong. it was trying to look and predict what might go wrong already. it is a radical overhaul of the prudentialist regime for ensures in the european union. the objectives of solvency ought to deepen integration in the e.u. insurance market, enhance policyholder protection and

improve the international competitiveness of e.u. insurers and reinsurers. international communications amongst regulators can be difficult and in order to be able to get this moving we have to try and do something about this. it is difficult but we don't have a single regulatory person to speak to. in fact, the u.s. i understand is the only country around the world not represented by a single national insurance regulator at the international association of insurance supervisors. what begins in third country equivalence in the context of solvency to cup will be faced with the same question that we'll estes, who are we going to talk to, who speaks for the united states as a hold on insurance and i believe for us this is a question about how we move on. that is up to you, but on maintaining the standards and enforcing the rules that the european level like until you that along with the regulators, we have the european commission, which insures the like

initiative level that the european directors are sensibly applied in each country and as those laws are applied, the american companies doing business in europe and european companies doing business across the union it allows for a possible scene for each company to do business state-by-state, a member country by member country. on systemic risk insurance, just a short comment if i make for good during the current crisis the insurance companies most likely to be effective where those involved in significant quasibanking activities. that is a fact. their second order effects as well. we are aware of that and i think we up to appreciate that they were not directly involved facts which may integrated systemic risk for good is that they use the proper controls or managements that we believe leads to the problem of systemic risk. on europe's attitude, burden sharing and compensation schemes are not necessarily practice in every member state across the

european union that we are now considering how to change that to introduce it. in conclusion mr. chairman if i can say there is anyone who has been close to this committee's work and what you are going to do, it is i. i look forward in any way to help, to offer to help, to be a resource in any way from the european union and to our committee in the european parliament to offer fraternal greetings and respect for what you do here to come up with common approaches in common deliberation to face a global crisis. thank you. >> thank you very much mr. skinner annex we will hear from the honorable michael mcraith director of the insurance, testifying on behalf of the national association of insurance commission's. >> chairman kanjorski, ranking member garrett and members of the committee thank you for inviting me to testify. i am michael mcraith, director-- and i speak on behalf of the national association of insurance commissioners. the insurance industry, even in these difficult times, has a

list of the collapses that echoed through other financial sectors. we likely agree that insurance regulation must not only serve industry needs, but also prioritize u.s. consumers. consumer protection has been, it is and will remain priority one for state regulators. it bears repeating that we supervise 36% of the world insurance market. our states, individual states come include four of the top-10 and 28 of the top 50 world markets, and alone we surpassed two, three and four combined. to be sure, as with any dynamic industry, insurance regulation must modernize, and it does. we work with your great staff mr. jam to fashion the office of insurance information, which if passed, would provide a