Congressional Hearings on Insurance Regulation
Summary of Key Issues at the Senate Hearing:
Not surprisingly, the Senate Banking Committee examined almost all aspects of the Federal insurance reform debate:
Systemic Risk Regulator: All of the hearing’s witnesses, whether they support continued state regulation or federal regulation, agreed there needs to be a systemic risk regulator.
Federal Repository for Insurance Information: All of the panelists agreed there should be some sort of federal information repository for the insurance industry.
Property/Casualty Insurance vs. Life Insurance and Reinsurance: Several witnesses suggested that property casualty insurance should be handled by states while life insurance and reinsurance should be regulated federally. State regulators argued they are better able to protect consumers at the state level, even for life insurance and reinsurance.
International Coordination: Proponents of federal regulation cited insufficient coordination of international issues under the current state-based system. Advocates of state regulation countered that international coordination can be done without federal regulation.
Troubled Assets Relief Program (TARP): There was very little mention of TARP. Banking Committee Ranking Member Richard Shelby (R-AL) mentioned we still need more transparency and accountability with the TARP program. Senator Mark Warner (D-VA) said Treasury should decide what to do with the pending holding company applications made by insurance companies.
Gramm-Leach-Bliley Act (GLBA): Robert Hunter, from the Consumer Federation of America, suggested that if systematic risk cannot be controlled for some entities, Congress should consider revising GLBA. On the other hand, Spencer Houldin, representing the Big I, stressed the benefits of a NARAB-like system to reform the state-by-state licensing regime.
Opening Statements by Members:
Chairman Christopher Dodd (D-CT): Senator Dodd noted a healthy, viable insurance industry will play a key role in bringing us out of the financial crisis. Senator Dodd added the U.S. insurance industry has become national and even international in scope in recent decades, and modernization in some form is necessary. The point of the hearing is to discuss some of the many suggestions for reform, concluded Chairman Dodd.
Ranking Member Richard Shelby (R-AL): Senator Shelby remarked that the structure of our insurance system dates back to a time when insurance companies only operated within one state. The meltdown of AIG underscores the need for modernization, Senator Shelby added. In Senator Shelby’s view, Congress at least should consider if national oversight of the insurance industry, to include a national systemic risk regulator, is necessary.
Senator Michael Crapo (R-ID): Senator Crapo raised issues relating to whether a federal insurance regulator is appropriate, how to best coordinate among the states without such a regulator, and how to define whether a private institution is too large to fail.
Senator Jeff Merkley (D-OR): Senator Merkley noted the Congress has a duty to fix the insurance system and make sure nothing like the AIG debacle ever arises again.
Senator Jon Tester (D-MT): Senator Tester stressed the need to act quickly on insurance reform, while making sure to avoid overregulation in the process.
Testimony:
Mr. Michael McRaith, Director, Illinois Department of Financial and Professional Regulation, on behalf of the National Association of Insurance Commissioners (NAIC): McRaith largely reiterated his testimony from earlier in the year before the House Financial Services Capital Markets Subcommittee. McRaith described the states as the gold standard for regulation, modernizing as needed in the current crisis. McRaith stressed the NAIC supports proposals to deal with surplus lines and other step-by-step reforms. McRaith noted the NAIC agrees supports the creation of a Federal coordinator for international insurance matters. The NAIC also supports systemic risk regulation, according to McRaith.
Honorable Frank Keating, President and Chief Executive Officer, The American Council of Life Insurers (ACLI): Governor Keating stressed three key tenets of the ACLI’s views of insurance reform:
- Life insurance is systemically significant;
- Absent a federal regulator, Congress will find it difficult to enact viable piecemeal reform legislation. Therefore, Congress should enact legislation governing all sectors in a uniform manner, in order to avoid systemic problems;
- Congress is making critical financial services decisions, such as consideration of the “cramdown” legislation, without any discussion with the life insurance industry. Such decisions could have a tremendous impact on the life insurance market.
Mr. William R. Berkley, Chairman and Chief Executive Officer W. R. Berkley Corporation, on behalf of the American Insurance Association (AIA): The AIA believes the time is right for Federal insurance reform to restore confidence in the system, as no one state can handle a global crisis. According to the AIA, any Federal property casualty insurance regulator should be equal in authority to other federal regulators.
Mr. Spencer Houldin, President Ericson Insurance Services, on behalf of the Independent Insurance Agents and Brokers of America (the Big I): In the view of the Big I, much of the insurance marketplace remains healthy. Congress needs to be cautious of wholesale changes that could have unintended consequences. Houldin added the property casualty insurance market is stable, with no insolvency and no TARP funds to the industry. Houldin remarked the state-based system has inherent consumer protections in place, but it can be improved, including through a NARAB-like national association to streamline non-resident licensing.
Mr. John Hill, President and Chief Operating Officer, Magna Carta Companies, on behalf of the National Association of Mutual Insurance Companies (NAMIC): Hill emphasized that property casualty insurers are solvent, despite the drop in investment income. Hill characterized the industry as a bright spot in nation’s regulatory culture. Hill noted that AIG was a conglomerate and its failures were not in the insurance sector. Hill made three suggestions:
- Address systemic risk by focusing on financial products,
- Establish a Federal Office of Insurance Information, and
- Expand the President’s working group on financial services reform to include state regulators.
Mr. Frank Nutter, President, The Reinsurance Association of America (RAA): The RAA supports a single national regulator at national level, particularly because state regulators are an anomaly in an international market. Still, the RAA asks for reinsurance to be regulated federally even if the rest of the industry is not, given the unique nature of the reinsurance market.
Mr. Robert Hunter, Director of Insurance, The Consumer Federation of America (CFA): Hunter called for an expanded role in federal oversight, including a federal systemic risk regulator and an office of insurance information. CFA believes a state-based organization like the NAIC must act more like a regulatory body and less like a trade association in order to be truly effective. CFA opposes a mandatory federal charter as an insufficient form of protection from systemic risk. Instead, minimum federal standards, with state-based implementation, might be the most effective regulatory approach.
Question and Answer Period:
Chairman Dodd: Senator Dodd confirmed that all panelists supposed a Federal office of insurance information. Hunter told Senator Dodd that Federal or state regulation matters less than the quality of that regulation, but McRaith countered that a consumer in California simply has different needs than a consumer in Illinois. Nutter told Chairman Dodd it would not make sense to have a systemic risk regulator without also having a federal reinsurance regulator as well. Berkley asserted that a federal insurance regulator overseeing AIG would have caught the company by noticing the rest of the company taking advantage of the creditworthiness of AIG’s insurance arm.
Ranking Member Shelby: McRaith informed Senator Shelby that the five AIG insurance companies regulated in Illinois are in relatively good shape compared to other industries. AIG’s bonuses are in its financial products division. McRaith added there is no regulator that could handle the systemic risk posed by a company as large as AIG. Governor Keating told Senator Shelby of ACLI’s desire for a systemic regulator to be able to instruct a federal insurance regulator when insurance industry actions threaten to undermine the entire financial system. Berkely added that a large part of AIG was immune to state regulation, given its international scope, and no federal regulator could discuss the issue with international counterparts. In response to a question from Senator Merkley, Hunter said the McCarran-Ferguson antitrust exemption is out of date, if it ever were appropriate to begin with.
Senator Bob Corker (R-TN) asked about having a federal regulator solely for life insurance and reinsurance, keeping regulation of property and casualty insurance at the state level. Berkeley said large property and casualty companies, the ones that do business across states and in other countries, would remain hamstrung under the current system. McRaith informed Senator Corker that the European Union (EU) is much less coordinated than the U.S. on insurance matters The U.S. improve its coordination on international matters still further with greater state-by-state uniformity.
Senator Tester asked who would handle premium taxes under an OFC. Keating responded that premium taxes could remain governed by the states.
Senator Warner remarked that regulating reinsurance at the Federal level makes a lot of sense. However, McRaith responded that the states have adopted a reform proposal for a national reinsurance standard. Senator Warner agreed with Keating that life insurance companies should be able to participate in the TARP program.
House Financial Services Committee - Full Committee Hearing
Perspectives on Regulation of Systemic Risk in the Financial Services Industry
Witness List:
- The Honorable Steve Bartlett, President & Chief Executive Officer, Financial Services Roundtable
- The Honorable T. Timothy Ryan Jr., President and Chief Executive Officer, Securities Industry and Financial Markets Association
- The Honorable Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute
- Ms. Terry J. Jorde, President and Chief Executive Officer, Country Bank USA on behalf of Independent Community Bankers of America
- Mr. Travis Plunkett, Legislative Director, Consumer Federation of America
- Mr. Damon Silver, Associate General Counsel, AFL-CIO
- Mr. Edward L. Yingling, President and Chief Executive Officer, American Bankers Association
In his opening statement, Chairman Frank indicated that he hopes to begin drafting related legislation in early May.
The key issues discussed during the hearing include: (1) systemic risk regulation; (2) the role of the Federal Reserve; (3) risk retention; and (4) international coordination and preparation for the upcoming G20 meeting.
(1) Systemic Risk Regulation.
Ranking Member Bachus (R-AL) argued that Congress must extricate itself from multi-billion dollar bailouts. The Ranking Member does not believe a systemic risk regulator should have the power to commit billions of dollars in taxpayer money to bailing out “too big to fail institutions.” In the event one of these institutions fails, Ranking Member Bachus suggested that a systemic risk regulator should advance an orderly resolution. Further, the Ranking Member indicated that the problem with a systemic risk regulator is that only large institutions will receive assistance - the notion of “too small to save” strikes the Ranking Member as unfair. He went on to note that a systemic risk regulator could create an incentive to take-on additional risk – giving the perception that a government agency will guarantee an institution does not fail. The Ranking Member is concerned about such an implicit guarantee.
Rep. Kanjorski (D-PA) cautioned against the overly speedy creation of a systemic risk regulator, suggesting there are numerous details to be considered. Specifically, how far should the federal government go in empowering a systemic risk regulator? The witness panel responded as follows: Mr. Silver indicated that (1) if we are serious about watching systemic risk across the financial system, then there needs to be a comprehensive writ of authority; (2) though not sufficient, much of the problem in shadow markets comes from not giving routine regulators the ability to follow the action; and (3) it is one thing to give oversight and surveillance power, it is another to give the systemic risk regulator authority to override day-to-day regulators – this is particularly true in the case of investor/consumer protection. Mr. Yingling suggested that the systemic risk regulator should have somewhat limited authority, operating primarily as an information gathering entity, with some ability to suggest coordination. He also noted the need for a method to resolve systemic failures in the future - this resolution mechanism needs to be put in place in advance. Mr. Wallison indicated that systemic risk is highly theoretical, arguing the financial system around the world is troubled, not because of the failure of a particular company, but because of a bad product - bad mortgages. Regulation did not prevent this from happening, and a single company did not cause the issue. Therefore, before Congress acts on the question of systemic risk, there needs to be a better understanding of what is meant by systemic risk - Congress should not hand over a blank check to a government agency. Ms. Jorde indicated that systemic risk is becoming more problematic as banking and commerce continue to mix.
Rep. Neugebauer (R-TX) indicated a need to be cautious in implementing a systemic risk regulator. He questioned whether the existence of a systemic risk regulator will actually create more systemic risk by suggesting a federal government backstop – a federal guarantee. Rather, Rep. Neugebauer wants those institutions deemed a systemic risk to be seen as falling on a punitive list. Rep. Neugebauer questioned whether safety and soundness should require large/complex institutions to meet additional capital/leverage requirements. Mr. Bartlett agreed with the Congressman’s sentiments. Mr. Ryan indicated that a systemic risk regulator is needed as current regulators are restricted by charter or geography. Mr. Wallison suggested that, while an organization “looking over” the entire economy is agreeable to him, he has concerns with that entity’s ability to regulate.
Rep. Campbell (R-CA) questioned the appropriate extent of power afforded a systemic risk regulator. Further, he questioned the role of anti-trust law to intervene in the creation of systemic risk.
Rep. Himes (D-CT) suggested that a systemic risk regulator have the flexibility to adapt to the federal landscape. He would like such a regulator to act similar to an entrepreneur. In response, Mr. Bartlett argued for a broad mandate – targeting systems not individual firms. Mr. Ryan suggested the need for information on all interconnected systemic institutions.
Rep. Perlmutter (D-CO) expressed the need for “reasonable regulation.” The product mix and the size of the institution must be considered. Currently, there are too many gaps in the regulatory system – the system must be considered as a whole. In response, Mr. Ryan argued that restricting the size of financial institutions will affect improvements in technology and efficiency.
Rep. Price (R-GA) expressed concern with the idea of a systemic risk regulator, noting that a market-based economy allows entities to fail for valid reasons.
(2) Role of the Federal Reserve
Rep. Royce (R-CA) noted that, if the Federal Reserve acts as the systemic risk regulator, their regulation could be called into question. He argued for the Presidential/Presidential Committee appointment of all of the Federal Reserve’s regulators. Additionally, he suggested that the Federal Reserve respond with receiverships, not bailouts.
Rep. Sherman (D-CA) questioned whether it makes sense to have the Federal Reserve act as the regulator who will “make mistakes,” while also acting as the agency that may rescue institutions and “sweep the mistakes under the rug.”
Rep. Castle (R-DE) noted that numerous entities at both the federal and state-level regulate financial institutions. He then questioned whether there should be some consolidation of these entities. Rep. Castle expressed concern that the Federal Reserve will have regulatory responsibilities while, at the same time, maintaining responsibility over economic policy. He questioned whether the Federal Reserve should relinquish certain powers. In response, Mr. Bartlett suggested a “basic reformulation,” with the implementation of consistent standards. He suggested that the Federal Reserve is best equipped (though not perfect), and acting as a systemic risk regulator is consistent with monetary policy. Mr. Bartlett suggested that State chartered banks should be moved to the bank regulator, while bank holding companies should stay at the Federal Reserve. Mr. Yingling suggested using the current regulatory system to solve problems, while identifying gaps. He also argued that the Federal Reserve could relinquish holding company regulation of small banks. Mr. Wallison argued that the Federal Reserve is a poor choice for a systemic regulator, suggesting the Federal Reserve will compound the problem by giving the appearance that designated institutions have a federal government guarantee not to fail.
Rep. Watt (D-NC) expressed concern with the Federal Reserve acting as the systemic risk regulator due to its day-to-day regulatory authority. He believes that the Federal Reserve acting as a systemic risk regulator would compromise monetary policy, as well as the Federal Reserve’s consumer protection responsibilities. Mr. Bartlett indicated that the Federal Reserve’s day-to-day regulatory responsibilities should be removed, but he views monetary policy as consistent with systemic risk regulation. Mr. Bartlett rejects the notion that there should be a list of systemic companies – he rejects a size criterion. Rather, the focus should be on activities spanning the financial sector.
(3) Risk Retention
Chairman Frank suggested the difficulty in recovering from numerous bad decisions made at the outset. He noted that the ability to securitize 100% of loans appears part of the problem and questioned whether Congress should explore some limitation on the ability to securitize - should there be some risk retention requirement. The witness panel responded as follows: Mr. Bartlett indicated that there should be risk retention of some kind. Mr. Ryan suggested that it is practical to have a certain amount of risk retention. Mr. Wallison argued that someone should bear the risk at every-level. Ms. Jorde questioned the affect on the community banking industry in terms of servicing, for example. Mr. Plunkett supports additional risk retention requirements for securitization. Mr. Silver suggested the need to “retain some skin in the game,” but not just for the originator. Mr. Yingling pointed to accounting issues, but suggested that risk retention is worth considering.
Rep. Watt (D-NC) expressed hesitancy with retention of risk.
(4) International Coordination and Preparation for G20
Rep. Maloney (D-NY) expressed a concern with bailing out foreign banks. She questioned whether foreign banks are a systemic risk to the U.S. economy. Mr. Wallison suggested that all banks are interconnected, and a systemic regulator with the power to bail out U.S. banks will ultimately bail out all banks.
Rep. Meeks (D-NY) questioned whether there is a need for a global regulator and how the U.S. can lead in that arena. Mr. Silver noted the upcoming G20 meeting, suggesting that Europeans will offer a need for transparency. Mr. Silver also suggested the need for coordinated international action. Mr. Bartlett argued against the need for a global regulator, but suggested a need to harmonize international systems.
Rep. Cleaver (D-MO) noted that the E.U. is considering the establishment of an E.U. systemic risk council. He questioned how the U.S. should coordinate its role in addressing international systemic risk. In response, Mr. Ryan expressed the need for strong global coordination, noting the U.S.’s unique authority to lead in this effort.
We will continue to provide you with updates on these Hearings, so we can be adequately prepared to discuss the best way forward for the Committee’s activities at Committee Day in June. In the meantime, I will move this to the AAMGA’s website on the Governmental Affairs Committee page for the benefit of our members.