Re: U.S. Senate Banking Committee Holds Hearing On

DATE: MARCH 17, 2009

TO: NCOIL LEGISLATORS

FROM: SUSAN NOLAN, NCOIL

RE: U.S. SENATE BANKING COMMITTEE HOLDS HEARING ON INSURANCE REGULATION

Attached is an article entitled AIG Debacle Sparks Fresh Look at Insurance Regulatio n (3/17 Congressional Quarterly Midday Update)

Hearing testimony and video may be found at: http://banking.senate.gov/public/index.cfm? FuseAction=Hearings.Hearing&Hearing_ID=ef3eba4d-5ebb-4c50-910f-68bbbab688e2

This morning, the U.S. Senate Banking, Housing and Urban Affairs Committee held a hearing on modernizing insurance regulation. The hearing was held to determine what—not if—federal action could improve insurance oversight and included a discussion of an optional federal charter (OFC). Witnesses representing consumers, regulators, life and property-casualty (p-c) insurers, and the agent community participated. Also this morning, the U.S. House Committee on Financial Services held the first of several hearings on systemic risk regulation (an alert will follow).

OPENING REMARKS Chairman Christopher Dodd (D-CT) called the insurance regulatory system “outdated and in need of significant overhaul” and said that in recent decades the insurance industry has become increasingly national and international. He emphasized the importance of the insurance industry and said that the goal of any additional regulation must be to maintain a healthy industry. He also stated that “What happened at AIG should not, in my opinion, be confused with the industry with which it is most closely associated.”

Ranking Member Richard Shelby (R-AL) said that AIG insurance subsidiaries suffered more than $20 billion in losses due to securities lending operations and noted that more than $40 billion of AIG’s $170 billion bailout has gone to pay off counterparties of those operations. He said that Congress must:  consider if additional federal regulation is needed  examine whether the state insolvency regime could handle the failure of a large insurer  determine the scope of a proposed systemic risk regulator

ORAL TESTIMONY ANTI-OFC Director Michael McRaith (IL), on behalf of the NAIC, praised state insurance regulation and said that the U.S. regulatory system is the gold standard for developing nations. He said that pro- OFC calls represented “decade-old rhetoric that doesn’t warrant the important time of this Committee.” He said that systemic regulation should not replace state-based regulation and that any preemption of functional regulation should be limited.

Spencer Houldin, on behalf of the Independent Insurance Agents & Brokers of America (“Big I”) said the p-c industry continues to operate “very well” without a need for any federal government support. He said that state officials are best equipped to address local markets and to protect consumers. He expressed support for targeted federal legislation, such as a National Association of Registered Agents & Brokers (NARAB) bill. John Hill, on behalf of the National Association of Mutual Insurance Companies (NAMIC), supported a reformed system of state regulation. He said that Congress should address systemic risk by focusing on products, not institutions; create an Office of Insurance Information (OII); and expand the President’s Working Group (PWG) to include state insurance regulators.

Mr. Hunter of the Consumer Federation of America (CFA), while strongly opposing an OFC, said that an expanded federal role in insurance regulation in needed. He said that Congress could develop minimum federal standards that all states must meet or could empower a state- based entity, such as the NAIC, to regulate insurance. He said that if Congress empowered the NAIC, it would need significant reform to act “like a regulator, not a trade association.”

PRO-OFC Frank Keating of the American Council of Life Insurers (ACLI) said the life insurance industry is, and should be considered, systemically significant. He argued that absent a federal insurance regulator, Congress’ ability to implement national financial regulatory policy would be problematic. He stated that decisions are being made in Washington that impact the insurance industry without a fundamental understanding of how the industry operates and without significant representation by insurance regulators.

William Berkley, on behalf of the American Insurance Association (AIA), said the p-c industry is critical to the U.S. economy, but does not pose systemic risk. He said that federal regulation would enhance the effectiveness of insurance oversight, and noted that given the global nature of risk, a federal regulator is the only way to accommodate the p-c industry.

Frank Nutter of the Reinsurance Association of America (RAA) said that Congress should create a regulatory scheme for reinsurance. Absent federal insurance regulation, he said that RAA supports targeted federal reinsurance legislation that could be complemented by a new NAIC regulatory framework.

QUESTION & ANSWER Noteworthy questions, comments, and exchanges include:  All witnesses supported the creation of an OII at the U.S. Treasury Department and some form of a systemic risk regulator.  Sen. Shelby continued to attack state regulation and the New York State Insurance Department specifically, for failures in regulating AIG and the bond insurance market.  Sen. Bob Corker (R-TN) expressed support for federal regulation of the reinsurance and life insurance industries.  Sen. Jon Tester (D-MT) expressed concern that insurance premium taxes may not remain with the states if an OFC is enacted.  Regarding state versus federal consumer protections, Mr. Hunter said that some states are very good and others are “pathetic.” He noted that it would be hard to envision the federal government addressing 3 million complaints, and suggested that some form of hybrid regulation could be effective.  Mr. Hunter supported repealing parts of the McCarran-Ferguson Act to subject insurers to antitrust laws.  Director McRaith said the state system can handle the failure of a large insurer.  Director McRaith said that Congressional legislation may be needed to get all states to join the Interstate Insurance Product Regulation Compact.

Feel free to contact me by reply e-mail or at 202-220-3014 should you have any questions.