mutual, which involved life insurers substantial portfolio losses. . .

>> the life insurance business is not seeking nor is this congress ever consider enacting a federal insurance regulatory system that is weak in terms of consumer protections or solvency oversight. indeed they are consistently advocating for federal alternative that is strong as if not stronger than the best state revelatory systems. if anything, a properly constructed optional federal charter would result in the states being challenged to raise their standards to meet those of the federal regime. mr. chairman, there is a number of ideas being considered on how to address insurance and 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

oi i would surely be a step in the right correction. we are also appreciative of being a are introducing the national consumer protection act which sets forth the framework for an federal charter. we do however caution against a so-called federal tools approach to insurance regulatory reform as detailed in my written statement, the constitutional and practical limitations of this concept make it ill-suited to deliver the type of reform that would be in the best interest of the insurance industry and its customers. we began thank you, mr. chairman, to hold hearing and pledge to work with you and the members of the subcommittee to see that insurance regulatory reform becomes a reality and would be happy to answer any questions. thank you. >> thank you very much. and now we will have mr. hill, the president and chief operating officer of magna carta companies on behalf of the national association of mutual insurance companies. mr. health. >> thank you, mr. chairman. good morning, chairman

kanjorski, ranking member dared and members of the subcommittee. it is an honor to testify before you today on these important issues. my name is john hill. i am president and chief operating officer of the magna carta companies. magna carta was founded in new york in 1925 as a mutual insurance carrier for the taxicab industry. although we no longer ensure taxis, we employ 240 individuals and right in 22 states. we very much remained a small mainstreet 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. it represents more than 1400 property and casualty insurance companies ranging from small for mutual companies to state and regional insurance carriers, two large national writers. nami members from the insurance needs of millions of consumers and businesses in every town and

city across america. i serve as chairman of nami task force which was created specifically to develop nami policy response to the financial services crisis. our nation faces uncertain economic times, and we commend 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 americans and businesses, did not contribute to the current financial crisis. however, we also 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 solid, and continue to serve our policyholders the same today as before the economic crisis. if you exclude a very few companies that are linked to financial markets, our analysis

concludes that our industry poses no systemic risk. we disagree with the suggestion that we need to completely rethink the regulation of our industry. the property and casualty market place 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 and casualty insurance industry and others in the financial services sector. the fundamental characteristics of our industry include conservative and liquid investment portfolios, low leverage ratios, strong solvency regulation, and a highly competitive and diverse marketplace make it stand out as unique and worked to insulate the property-casualty insurance industry from posing systemic risk. today, as other financial services companies are failing, and seeking government governmet assistance property-casualty insurers continue to be well-capitalized and neither seek nor require federal

funding. our industry remains one of the well functioning bedrock of our financial structure. the record shows that property and 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 structure of capital and insurers and the nature of their products make them adhere only less horrible than the highly leveraged institutions when financial markets collapsed. additionally, a nationwide state based guaranteed funds system also reduces a systemic impact of any failing property-casualty incher. namic believes that any new oversight of systemic risk should focus on products, activities, and marking oriented 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 systemwide 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 to wholesale reform. namic does believe that congress can strengthen the regulatory process, improve regulatory coordination, and monitor systemic risk by establishing an office of insurance information to inform federal decision-making one 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 caused this crisis. again, thank you for the opportunity to speak here today. and i look forward to answering your questions to. >> thank you very much, mr. hill. thanks to the entire panel. this is interesting testimony. i look forward to my own questions and those of the committee. mr. mcraith, i'm going to put you on the spot for the first question. in pennsylvania, we had a company that in 2001, reliance

of pennsylvania, maybe you're familiar with it, mr. steinberg who took the insurance proceeds of that and that allowed him to play the role of a multimillionaire, speculator, benefactor of the working school and art maker. is that correct? do you recall that transaction? >> i'm certainly familiar with the company. i wasn't familiar with the work and school. >> subsequently that company defaulted on bonds and bank debt your and had chosen a federal regulator of its own choice because it was a holding company. how would you say the affect of what happened there with that particular company, is that a failing of the state regulation, state to state wax would that have occurred if we had a federal regulator in place? do you see any difference?

>> the unfortunate reality in any capitalist economy is that companies will fail. companies, insurance companies led by individuals with ethical or a lack of ethics are companies that are more likely to encounter cash flow problems, and ultimately suffer the demise, or he denies demise of similar to alliance. a federal regulator would not have assisted or prevented that solution. i'm not a lawyer with a holding company challenges at reliance. the individual insurance compa company, those challenges occur and they have occurred for decades in the insurance industry. as soon as we learn of them, we placed the company into receivership, that policyholders

are protected, because the capital requirements we impose on companies are so significant, the shortfall at the end of the day for the guaranteed system is relatively nominal. and in that guarantee system is also intended to protect the consumers. >> thank you very much, mr. mcraith. my good friend mr. skinner. do you believe the united states companies will have adequate access to the european markets after solvency to is in effect, and you believe what are your copies have adequate access to the u.s. markets? >> interesting question, chairman. in 2012, what is dependent upon is equivalent and i think as i said when i started that equivalence from a european is to looking for something that can match the deeds and the purpose of the legislation, the final outcomes of that legislation. certainly not the latter on the

dot and a t. and the cross of the eyes, which doesn't say a thing. for that we need to find a single voice to talk to at the u.s. level from an eu level because we are actually only permitted to get agreements, country by country at an eu level. there is no sense beating around the bush on this. for u.s. businesses to do business inside the european union, and there are few of them do this very well, they will have to make sure that there regulators in the u.s. are people who can talk to the european union about matching up these credentials. thing is of course if they don't get matched up, it will be for each of state before or whatever, to impose their own requirements upon those companies. and we don't really want to be there because i don't think there should be any discrimination about this. if we get the match to work and we can talk to each other about this, and 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 anyone opposes a federal regulator here in the united states would be in some way impeding their progress and competition in areas like the european? >> from a commercial point of view i think that most companies would want to make sure that they had the fewest number of regulators to have to work with. i think that's almost a commonsense statement. i think from a u.s. perspective i think this is something you are grappling with like we have grappled with. we still have multijurisdictional, multivehicle personalities in terms of the countries we have at european level, they have their own laws, regulations, standards. we just introduced solvency to, and it's actually just change the whole thing. it has harmonized it, and it

didn't have capacity. as a result we want to make sure that they maintain companies come into the european union. i think that you would want the same inside the u.s. as well. >> i see my time has expired. and now we'll hear from mr. garrett from new jersey. >> thank you, mr. chairman. and i begin their, thanks for coming on over. there are a number of people on the test of panel testify here on the dnc site and others from well that the problem we have had in this country was not caused by problems in the insurance industry. and we have heard that from other panels as well. i know in your testimony you said the legislation you were talking about is going to go in effect in 2012, right? and if we were having a panel like this back overseas, would that be the same testimony that we would hear over there as well, that the problems in the marketplace and everything that's going on in europe was

due and no large part from the insurance industry as well? >> yeah, i think in many ways we hear the same discussion that you will be pleased to hear what are involved in a representative today, we'll be talking about the same issues and classically we would talk about, you know, it would talk about the effects that they had. but i think as one of your honorable colleagues said already, the securitization issue, is actually a kind of reinsurance in itself, isn't it. that's quite a risk. to the insurance industry as a whole is not immune from systemic risk as such. we believe it's about the management of that risk and having -- >> coming up to this point in time, would you agree with some others who have said here today you can't point to this company or this company as being a systemic problem which is what some of the mentors numbers of the panels would be arguing for as far as this country is concerned. >> yeah, i think it's true to say you probably have to put to one side the individual, certain

companies and you have to start talking about the industry as a whole. >> and i will run down the row. you were making your case along the way with regard to the oi i and some of the benefits, the upside that would bring about as far as the sharing information. but then as you get near the end of your testimony you seem to be become a fighter dry, talking about some of the great things you all have been doing as an organization in these areas already. if i heard you right. >> that's correct. >> so g., we're already doing that on the one hand, so why do you take the other side at the beginning of your test say we still need his 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 working with our international counterparts on every continent, in multiple forums.

my testimony, congressman, 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 here and we are aware of the limitations of article one, section 10 of the united states constitution which says that a state cannot independently with a foreign government. so we supported chairman kanjorski in that initiative without the preemptive impact, but we do engage and always consistently engage internationally with our foreign counterparts. and at some point in time i would be happy to talk about solvency to but i will hold off on that. >> let me just jump down, and your testimony you stated that the life insurance industry is either significant systemically significant or systemically important, one of those terms at the beginning of your testimony.

mr. mcraith said in his comments that the industry, or rather that the two big tail 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. i will go to you, mr. bear to address and maybe you address it already. do you want a dress that? >> o that i would say this is one of those instances where mr. mcraith and i agree. we think of it is a systemic importance but no one company. >> for anyone on the panel, one of the proposals coming out of the white house seems to be where going to be a systemic risk regular and it could very well go into the federal reserve which a lot of us disagree with, but assume that happens and you put it into the federal reserve and assume for sake of argument that it also had as an

interesting blogger does anyone on the panel have a concern that you may have a bank regulator who has no past experience or what have you dealing with the insurance industry to basically be your supervisor or regulator in this area. mr. hill? >> that would be one of our concerns, congressman garrett. you would have someone regulating insurance that really has no real insurance background. again, i would reiterate that i think our position is that the best way to look at systemic risk is to look at market oriented products, and any firm that is engaging those products should fall under the purview of systemic risk of regulator. but to just isolate a particular industry group and to say that systemic risk regulator issues going to oversee that, that could potentially miss something that's occurring elsewhere in our global economy. so our recommendation is to be more product and market orient

oriented. >> as financial guarantors we actually think that 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 the capital markets. so i think perhaps -- >> you're different than from some of the others? >> yes, again because financial, we have one male and we are trying to hit it. the multi-lines have a lot of different kinds of risk that they are taking, and really not just our solvency but really our financial stability as an industry is what's critical. >> gotcha. thanks a lot. >> it's up to him. >> i just wanted to add to directly address your question. i think that is a concern to life insurance industry. however, it is resolved if the congress creates a federal function of regulator which then

presumably the two federal agencies would cooperate with one another, would give a federal agency in the expertise to properly regulate the life insurance industry and whopper and give information to the systemic regular. >> but absent that that is a concern. we think it's incomplete. and congressman, if i could also. >> mr. chairman, if i can add very briefly, that that is of course a very serious concern for state insurance regulators. the regulation of the insurance industry is significantly different from the bank industry. so we do as the regulators now have expertise, that can be integrated with systemic risk regulation but should not be displaced. so one of the priorities for any systemic regulator is to recognize and value the expertise of the functional regulator, facilitate communication among those regulators, prevent the systemic disruption that we've experienced. >> gotcha. thank you, panel.

i appreciate. >> thank you very much, mr. gary. >> thank you, mr. chairman. thank you for being here. it's interesting that i heard pretty much everybody say that the insurance industry doesn't threaten the system. i'm just curious, are any of you familiar with acronym treo? trio was the one that the u.s. government had passed after 9/11 when it should come as were all going bankrupt and everybody was afraid that they were going to take any economy at that time. did anybody here who now thinks the injured industry somehow doesn't provide a risk, did you come up and tell us that we should not do trea because everything was fine? i don't think he did. >> actually the mortgage insurance companies did, but our business is such a different business. >> so you don't think we should have passed trea? >> that was our position. >> good for you. >> i'm sorry. we got ourselves exempted. i'm sorry. >> i know that.

by the question is do you think we should have passed the trea act? does anybody think we should not have i guess is a better question. >> so we should have. and i agree. >> congressman, the issue with terrorism is the absolute impossibility of predicting the risk. what trea does is facilitate the property and casually market that would not exist, manhattan, chicago, as major urban areas would not have access to coverage for terrorism in the event as companies can exclude. >> similar to the inability to ascertain the risk on cbo's and cbs is. the inability to ascertain risk is the same. the item is different. so we should have passed trea. that everybody here thinks there is no one company that somehow provide systematic risk. that's what i heard.

i don't think i heard anyone say anything different. has anyone here heard the company aig? i know it hasn't been in the news lately. >> congressman, to be clear, aig is kind of colloquial referred to as the world largest insurance company, but it 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 is doing. we will only look at this slice, this slice and a slice. that's all, and those slices worked fine. >> actually, congressman, the insurance regulators look at the insurance subsidiaries. the problem was, and this is why we support systemic regulation, there was a complete lack of regulation at the holding

company level. what should happen, -- the problem is you are 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 investing it. the state didn't do it, and that's where the systemic regulator comes in. so one company, detaining him what to do, to anyone who looks at them, i guess can shake the system up just a little bit. so therefore i don't quite, although i appreciate his hearing, i'm not quite sure what we are talking about except a unanimous opinion that there is some need for some generic national oversight of what's happening in the insurance industry. understanding fully well the federal government should not and need not be doing things that some of the states are doing very well. particularly that aspect between the company and customer. i agree totally the federal government doesn't need to do that. states are doing a great. that's the consumer side. but on the investment side, no one is looking at it.

one company has and could begin tomorrow, did i miss something, has anybody on any level today up until this point said that there could not be another aig tomorrow? if they chose to, couldn't choose to invest all of their receipts into credit default swaps if they chose. i don't mean to pick on travelers pick you just happen to be here today. or any other question. the answer is no, i think. but go ahead and correct me if i'm wrong. >> the answer is no. >> that's why we are here is to try to say okay, we all screwed up by not looking at a huge segment of the business. the side where people invest, where companies invest. we need to correct that. states cannot do it but at an individual level. we need a systemic regulator. i don't even like the word regulator because i think that implies overactivity. at least a systemic monitor may be regulator. to review what's going on.

does anybody disagree with that? thank you, mr. chairman. i yield back. >> i know you don't get very emotional about this. >> it's my money. >> the gentleman from georgia, esther franks. >> thank you, mr. chairman. i appreciate the opportunity for the searing. i think this has been an excellent panel and the information you provided has been very, very helpful. i think it's important to appreciate the federal regulation of insurance is different than instituting a systemic risk regulator. for insurance. and i think it's born that we keep that in mind, and we 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 kind of a command and control

apparatus for different industries and the insurance industry. and i wonder, and i know oftentimes congress and the administration can go too far. in fact, that seems to be the order of the day is going to far. i wonder if, starting with mr. stanton heading on down the table, do you have any thoughts about what would be too far for the insurance industry or what the effect of this would be on the insurance industry for a products consumer safety commission? >> naked, congressman. we believe the creation of a federal financial services product safety commission that includes insurance raises two concerns. insurance products are already regulated so this would add another cost to the regulation. and regulatory delays without gaining any consumer benefit. and we are concerned about possibly separating product regulation from solvency regulation which could lead to poor regulatory decision-making

because the product regulation would lack information necessary to fully understand the industry. and it could be competing. >> so there is a line if we go beyond results in limiting the ability of you to serve customers and help americans injure themselves in various ways. >> we believe so. >> mr. nutter. >> in the reinsurance area is a strictly business-to-business and action. there is no direct legal obligation to the consumer and therefore reinsurance regulation tends to focus on solvency prudential revelation. it would appear not to apply to reinsurance contracts, the consumer aspect. >> mr. baird. >> when we design a product, we feel we are making promises to our customers to deliver benefits 20, 30, 40 years in the future. at the point in time when we are designing a product, we have to bring in solvency, capital markets