2009 0317 - GOV (Senate) - Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)

  • 2009 0317 - GOV (Senate) - Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  ---  [BonkNote]
    • [PDF-160p, VIDEO-Senate] - <mp3, mp4> - R-yes
    • CFA - J. Robert Hunter, Director of Insurance, Consumer Federation of America, Reserve Relief, Guaranty Funds - Testimony - 47p 
    • ACLI - Frank Keating, President and CEO, The American Council of Life Insurers
    • NAIC - Michael McRaith - Illinois Insurance Regulator - 14p
    • Senate - Committee on Banking, Housing and Urban Affairs
  • (p33) - Bob CORKER (R-TN) - You know, there are very few complaints. I mean, life insurance is not what drives complaints at your State Insurance Commissioner’s officer, really, is it? It is just a small percentage, is it not?
  • AIG Bonuses
  • AIG Counterparty Payments - 100%
  • Solvency II
  • (p7) - Jeff MERKLEY (D-OR). The task of modernizing the insurance regulatory system is absolutely essential.
    • Over the past 2 years, the American people have been outraged to discover the existence of a $50 trillion insurance industry that was entirely unregulated; outraged that this industry could avoid regulation by the New York insurance regulators by using the term ‘‘credit default swaps’’ rather than ‘‘credit default insurance’’; outraged that firms within this industry went regulator shopping to avoid effective oversight; outraged that the activities of these firms created an asset bubble, the collapse of which has left millions of Americans out of work and millions more with their life savings obliterated; and absolutely enraged that the very same industry that did all these things is richly rewarding its employees with perks and bonuses funded with taxpayer funds. The situation is offensive to me; it is offensive to the American people.
    • Mr. Chairman, we have a duty and obligation to fix our insurance regulatory system, to address regulatory arbitrage, to address systemic risk, to make sure that this situation does not ever arise again. 
  • (p12) - Frank Keating, ACLI - There are three points I would like to emphasize to the Committee this morning.
    • The first is that the life insurance business is systemically significant, not only in terms of the protection and retirement security it provides to millions of Americans, but also in terms of the role it plays in capital formation in our economy. Decisions and initiatives addressing regulatory reform and economic recovery of the financial sector must reflect that fact. 
  • (p25) - Michael McRaith, NAIC / Illinois Insurance Regulator - So the real question is what is the problem that we are trying to solve, and if the problem is one of consumer protection, it is important to understand, I think, that different States view that differently.
    • Not all of them Mr. Hunter is comfortable with, of course, but what is appropriate for a consumer in the State of Illinois, for example, is going to be different from what is appropriate for a consumer on the coastline in Florida, or in California, for example.
      • There is no secret about that.
    • But that is not to say that one State has more or less protection.
      • It is to say that those States, when determining what is appropriate public policy for their consumers, have made different decisions.
  • (p27) - Senator SHELBY. What does ‘‘relatively’’ mean?
  • Mr. MCRAITH. Well, that means——
  • Senator SHELBY. You say they are in ‘‘relatively’’ good shape.
  • Mr. MCRAITH. First of all, I would never say publicly whether any one company were in trouble, but at the same time, I am not going to mislead you, Senator.
    • The companies that we are regulating, we are comfortable with their financial status.
  • (p28-29) - Senator SHELBY. In recent weeks, and I will pick up on what Senator Dodd was asking a few minutes ago, Federal Reserve Chairman Ben Bernanke has discussed publicly the inadequacy of our insolvency regime for large global financial conglomerates, such as AIG. Chairman Bernanke has called for a new resolution regime that can better manage the insolvencies of systemically important firms while minimizing the risk to taxpayers. Do you agree, sir, with Chairman Bernanke that a new resolution regime is needed in America for companies like AIG?
  • Michael MCRAITH. Well, thankfully, there aren’t a lot of companies like AIG, and we can hope we don’t see another one anytime soon. The Chairman also made the comment that AIG was essentially a hedge fund attached to large stable insurance enterprises. As State regulators, we are proud of the fact that their insurance companies are the primary assets of AIG and its holding company. The solvency regime that we have for insurance companies is solid, and frankly, some of the concerns I have read expressed in testimony submitted today, I think are misplaced.
  • Senator SHELBY. Are you—go ahead.
  • Mr. MCRAITH. If, for example, one company were to have financial challenge and to be placed into receivership, other companies, first of all, can fill the void in the marketplace but can also purchase the policies of that company, and that happens frequently because those policies themselves are viable, strong assets and other companies will pick them up right away. So the demands on the system will not be as outrageous as some would have us believe today.
  • Senator SHELBY. Are you telling us that the State insurance guaranty system could handle the insolvency of AIG or a similarly large company like that, the spread and all kinds of things?
  • Mr. MCRAITH. What I am—well, when you say the insolvency of AIG, if we were talk——
  • Senator SHELBY. We are talking about AIG as a conglomerate——
  • Mr. MCRAITH. Right.
  • Senator SHELBY.——you know, the insurance and otherwise. 
  • Mr. MCRAITH. Well, there is no system that is built to withstand an insolvency the size of the notional value of the credit default swaps AIG was invested in, which was, I believe, $2.4 trillion, which, of course, exceeds the gross domestic product of France as a country. However, their insurance operations, which as we know are strong assets of the holding company, if those were to encounter financial trouble, the State guaranty system is designed and would allow for an orderly disposition of those claims. But we also expect that many of those policies—and this is, again, completely hypothetical because those companies are financially strong at this point—that other companies would purchase the policies or groups of policies within an insurance company because those are assets. Other companies would want them.
  • Senator SHELBY. But aren’t credit default swaps an insurance against default of something? In other words, it is an insurance product of some kind.
  • Mr. MCRAITH. Well, I would agree with you, Senator, that credit default swaps as AIG was involved in those transactions did include a form of financial guaranty.
  • Senator SHELBY. Sure.
  • Mr. MCRAITH. Unfortunately, OTS, of course, as we know, the Office of Thrift Supervision, was the primary regulator for the AIG holding company, and let us talk about the reality here, which is not whether there is a regulator. It is whether there is an effective regulator. And what we see with the AIG insurance companies is effective regulation. What we saw at the holding company level was a regulator who was not effective.
  • (p29) - Senator Richard SHELBY (R-AL).  Mr. Hunter, do you agree with his statement? [Bonk: His = Michael McRaith (NAIC / Illinois Insurance Commissioner]
    • What is your take on it.
  •  J. Robert HUNTER (CFA).  I didn’t hear him answer the question.
  • Chairman Chris DODD (D-CT). He did——
  • Mr. HUNTER. I don’t think it could handle—I don’t think the guaranty funds could handle it, no.
  • Senator SHELBY. Couldn’t handle it——
  • Mr. HUNTER. That was your question, and I don’t think they——
  • Senator SHELBY. It would be too big for them to handle, would it not?
  • Mr. HUNTER. Of course. Yes.
  • Senator SHELBY. I thought so, too. Thank you.
  • Senator SHELBY. Governor, over the past year, our largest bond insurers have teetered on the edge of collapse due to imprudent bets on the value of mortgage-backed securities. The problems of the bond insurers have impacted our national economy as bonds they insured have rapidly gone down in value. Although the bond insurers played an important role in our overall market, they remain regulated at the State level. If the bond insurers had been regulated by a Federal regulator, if you can envision that, do you believe that their problems would have been addressed more effectively than what we have today?
  • Mr. KEATING. Well, I am in favor as an industry, and we represent the life insurance, annuity, long-term care, and disability income business, a regulator and a regulatory system that works, that is effective, that is tough, that is action-oriented. I think Mike McRaith is right. It is not particularly always where the regulator is housed. What is the regulator doing? Obviously, the OTS appeared to be looking the other way on credit default swaps, and in the bond insurance business, obviously somebody was looking the other way, and that is simply the antithesis of effective and appropriate regulation.
  • Senator SHELBY. Where was the New York Insurance Commission on all this, too? They were the regulator of the insurance part,
    were they not?
  • Mr. KEATING. Well, you might want to invite him in and have a conversation.
  • Senator SHELBY. We have had him in once. We will bring him back. 
  • ...
  • Mr. MCRAITH. I would be happy to answer that question, too.