2011 0914 - GOV (Senate) - Emerging Issues in Insurance Regulation

  • 2011 0914 - GOV (Senate-Banking/SII) - Emerging Issues in Insurance Regulation, Jack Reed (D-RI)  ---  [BonkNote]
    • [PDF-51p,  VIDEO-Senate] 
    • CRS - Baird Webel, Specialist in Financial Economics, Congressional Research Service - 14p
    • NAIC - Therese M. Vaughan, Chief Executive Officer, National Association of Insurance Commissioners
      • Bad Link - testimony_110914_vaughan_insurance_regulation_emerging_issues.pdf
    • Academic - Mary A. Weiss, Deaver Professor of Risk, Insurance, and Healthcare Management, Temple University
    • Legal Scholar - Daniel Schwarcz, Associate Professor, University of Minnesota Law School
    • Senate - Committee on Banking, Housing and Urban Affairs - Subcommittee on Securities, Insurance, and Investment
  • (p2) - Senator Jack Reed (D-RI) - Banking and insurance are related, but the insurance industry is fundamentally different, and our approach toward regulators must consider those differences. 
  • (p9) - Daniel Schwarcz, Associate Professor, University of Minnesota Law School 
    • The failure of State regulators to provide consumers with sufficient information extends to life insurance markets as well.
      • Perhaps the most notable example is that consumers have virtually no means of comparing prices or costs for the cash value life insurance products that different companies offer.
    • When combined with skewed—and nondisclosed—salesperson incentives, this too has produced distressing results.  
    • p12) - Daniel Schwarcz (Associate Professor, University of Minnesota Law School:
      • So, notably, you will see that my testimony was focused on different issues than many of the other witnesses, and that is because it is true that solvency regulation is in many ways the core of insurance regulation.
      • Now, I say this to contrast it with market conduct and other forms of consumer regulation.... 
    • (p13) - Terri Vaughan (NAIC-CEO / IA)
      • The first thing I want to say, I agree with Professor Schwarcz that the level of our collaboration in market regulation is behind the level of collaboration in solvency regulation and that is something we have been working on for a number of years, to try to increase the collaboration.  
    • (p14) - Terri Vaughan - (NAIC, CEO / IA): So what we try to do is educate consumers about the critical importance of this issue.
      • We spend a lot of money on consumer education.
      • We created a Web site, Insure U Web site, for consumers to go to to get information so that they can make some decisions on—they have some understanding of how to look at these issues.
      • We provide some very basic financial information on companies.
      • I think it is a tough one.  ---- There are not any real answers.
        • But educating consumers about the kinds of questions that they can ask, I think, is a start. 
  • (p14) - Mr. WEBEL. I was actually struck in that New York Times article when they talked about the insurance companies themselves setting up captives because that is not what you typically think of.
  • Chairman REED. Right.
  • (p20) - Ms. VAUGHAN. Senator, thanks very much for raising that subject. I have to say that often what we do at the NAIC we do not talk about a lot publicly,
    • and so while there was a lot of public discussion about stress testing in the banking sector and the insurance sector in Europe, this is something that we have done behind the scenes for some time.  
  • (p20) - Chairman Senator Jack Reed (D-RI): That is, in your notion, too, about simplifying, et cetera, the Consumer Financial Protection Bureau, and Professor Schwarcz mentioned this, has now modeled mortgage sort of language. I presume that you are working toward, your comments, sort of model language for disclosures, for transparency. Is that——
  • Terri Vaughan(NAIC CEO / IA):That is what we did in the health insurance side.
  • Chairman REED. Right.
  • Ms. VAUGHAN. And that is—this working group is discussing how to do that.
    • I have to say, my suspicion is it is going to be a little harder in insurance given the variety of the products.
    • It is a little more complex than it is in the mortgage area.
  • Chairman REED. Right.
    • But I think for that reason also it might be even more necessary so that your efforts are appreciated and should be expedited.
  • (p22) - Terri Vaughan (NAIC-CEO):  So I have used the phrase sometimes, you know, there is always a question who watches the regulators, and one of the great strengths of our system is that we watch each other.
    • We call each other on the carpet.
    • And that was very effective during the financial crisis when we had—you know, everyone was concerned about a variety of issues, and it was a way to get the right level of communication and coordination across the States around companies that people had questions about.  

2011 0914 - GOV (Senate-Banking/SII) - Emerging Issues in Insurance Regulation, Senator Jack Reed (D-RI)  ---  [BonkNote]

  • (p23) - Daniel Schwarcz (Professor of Law):  And I just want to emphasize the way to watch the regulators is to have transparent information so that the public can see what they are doing and can call them on the problems.
  • We do not have that transparency in all of the respects that I talk about in my written testimony.
  • And to me that is the fundamental problem.
  • So the way to do is very simple.
    • Require States to—or have the Federal Insurance Office to disclose this information.  

2011 0914 - GOV (Senate-Banking/SII) - Emerging Issues in Insurance Regulation, Senator Jack Reed (D-RI)  ---  [BonkNote]

  • (p23) - Well, I think that—as you said, what happened is they moved from municipal securities into mortgage-backed securities, thinking that since, among other things, housing prices had never gone down in the United States, it should not be a problem.
  • To a large degree it has really been the market response that has taken care of the problem in the sense that people are not really trusting the financial guarantee insurers anymore.
  • I think it is questionable whether the market needs this kind of guarantee insurance or whether it was just sort of a historical accident that it still existed. 

--  Baird Webel. CRS, Specialist in Financial Economics, Congressional Research Service 

2011 0914 - GOV (Senate-Banking/SII) - Emerging Issues in Insurance Regulation - Senator Jack Reed (D-RI) --- [BonkNote]  

  • (p25) - Mary A. Weiss, Deaver Professor of Risk, Insurance, and Healthcare Management, Temple University   One other comment I might make is that it seems that when Dr. Vaughan and Mr. Schwarcz were talking about consumer affairs, it occurred to me that the conversation that was going on was at two different levels.
  • Daniel Schwarcz
    • (p10) - In sum, State insurance regulation has generally failed at a core task of consumer protection regulation—making complex markets comprehensible to consumers and broadly transparent to those who may act on their behalf.
      • Why can’t I compare cash value products and have some sense of what is going on in the marketplace?
    • (p26) - Because the notion—I mean, it really is a problem, and it is a problem that is under addressed because everyone is so focused on solvency that they forget all these other important regulatory issues. 

VIDEO

  • 48:00 - Schwarz- failed
  • 57: - Schwarz - Regulators - Motivation, Lack of Transparency, see the policy before buying, Emphasis on Solvency
  • Senator Reed:  esoteric, who is a good company, 
  • 59:00 - Schwarcz -  Disclosure financial ratings, focus on Products
  • 1:00 - Vaughan - Market Regulation is behind Solvency (Solidity) Regulation, "it's a tough thing,"  Ratings, Consumer Education, Educating Consumers on the kind of questions they can ask.
  • 1:04 - Reed - AIG is why we are here.  Securities Lending. 
  • 1:05 - Weiss - AIG could have been avoid by different regulators working with each other, more eyes at NAIC - Strength, Regulatory Arbitrage, Captives newspaper article, Leverage <Contagion>, Life Insurance Company Investments are Illiquid, Statutory Accounting very conservative, 
  • 1:11 - Reed:
    • Office of Financial Research (OFR) , Work with NAIC
    • to Scharcz - buy Insurance based on 2 things: 1) Brand 2) Little league Coach. Conflicts of Interest - Mortgage brokerage business, Steering, "Role of Agents - Do they know enough?"
  • 1:12 - Schwarcz - No public info.  Independent Agents - Don't have concrete information.  Don't have expertise.  Commissions.  Dynamics aren't clear.  Elliot Spitzer/ AON - lots of regulations enacted for Commercial Market, but not for consumers. 
  • 1:15:50 - Vaughan - Consumers are the frontline, InsureU, Complaint Database, Consumer Guides - home, auto, Transparency and Readability Working Group - Comparison Shopping, 
  • 1:17 - Reed:  Agents are good people, except for when it comes to commissions.
  • 1:18:30 - Vaughan - Producers Licensing Task Force
  • 1:18:50 - Reed:  Federal Charter, issues are coming at us fast. 
  • 1:19 -  Vaughan - Congress should keep pressure on us.  It makes us up our game.
  • 1:20: - Vaughan - Disclosure more difficult in insurance
  • 1:21 - Reed: liquidity, help from the Feds, Stress Testing in Europe.  Help us predict what companies are going to need help.  
  • 1:22 - Vaughan - We don't publicly talk a lot about what we do at the NAIC.  Cash Flows, Life Insurance, Interest Rate Scenarios, Leverage Issues, more complicated ways for companies to take risk, Holding Company Model Regulation, ERM, Group Capital Assessment, Stress-testing is not a new tool - we just haven't been as vocal about it.
  • 1:36 - Vaughn - IAIS - international
  • 1:37 - Weiss - Schwarcz and Vaughan are talking about 2 things.
  • 1:38 - Schwarcz - Disclosure.  Provide consumers with information  that they can compare.  CFPB, Mortgage Form.  "Empowering Consumers is Hard."  NAIC - Motivation - "after the pressure."
    • Why Can't I compare Cash Value products......
  • (p4) - Statement of Baird Webel, Specialist In Financial Economics, Congressional Research Service (CRS)
    • The first has to do with the oversight of insurers, particularly from a systemic risk perspective.
    • Historically, insurers have always been seen as presenting very low systemic risk, and the regulatory system reflected that.
    • The financial crisis, however, very much challenged this view both with the specific failure of AIG and the failures of the smaller bond insurers.
    • And the question that we really faced since then is:
      • Were these failures one-off events that were caused by a specific characteristic of the insurers?
      • Or should these failures really cause us to challenge our previous view that insurers did not present systemic risk? 
    • The other issue I think I would like to highlight is what I have termed ‘‘the convergence of financial products,’’...
      • If you look at the economic characteristics of these things, they are pretty similar.
        • But one is produced largely by securities firms, or at least as a securities product under securities rules.
        • The other is an insurance product, and it is regulated by States.
      • The content of that regulation can be very different, and when you look at it in the crisis, I think the outcome can be very different between this different content of regulation.
        • This has happened in several other areas as well.