Yesterday, the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the House Committee of Financial Services held a hearing entitled “Insurance Holding Company Supervision.” The purpose of the hearing was to examine the roles of state and federal insurance regulators over holding companies with insurance operations in an effort to further improveproposed financial regulatory reform legislation. The oversight and supervision of the insurance industry has received particular scrutiny in light of the federal bailout of American International Group Inc. (AIG).
Testifying before the Subcommittee were:
- Jon D. Greenlee, Associate Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System
- Grovetta N. Gardineer, Managing Director for Corporate International Activities, Office of Thrift Supervision
- Sean Dilweg, Commissioner, State of Wisconsin Office of the Commissioner of Insurance
- Ann M. Frohman, Director of Insurance, State of Nebraska
Subcommittee Chairman Paul E. Kanjorski opened the hearing by referencing the federal government’s intervention with AIG and the various supervisory roles played by state and federal regulatory agencies over depository institutions and insurers operating within the same enterprise. Chairman Kanjorski emphasized that, while there are differences between insurers and depository institutions, “[t]he recent financial crisis has taught us that any complex financial company must have an effective umbrella supervisor who looks comprehensively at the activities and health of the whole enterprise.”
Mr. Greenlee described the types of insurance activities that may be conducted by banking organizations supervised by the Federal Reserve and the Federal Reserve’s approach to supervising bank holding companies (BHCs), including financial holding companies (FHCs), and state member banks, both generally and with respect to insurance activities conducted by these organizations. Mr. Greenlee noted that, as of September 30, 2009, 33 FHCs reported engaging in an aggregate of $551 billion of insurance-related underwriting activities, which represents 3.4% of total FHC assets of $16.1 trillion. For BHCs and FHCs conducting insurance activities, Mr. Greenlee stated that the Federal Reserve focuses on assessing the potential risk such activities may pose to depository affiliates and the consolidated financial condition of each BHC or FHC. In the case of state member banks engaged in insurance activities, Mr. Greenlee explained that the Federal Reserve focuses primarily on assessing and limiting risk and ensuring compliance with the consumer protections for bank sales of insurance products established by the Gramm-Leach-Bliley Act.
Ms. Gardineer focused on the OTS’ supervision of savings and loan holding companies engaged predominantly in insurance activities. She noted the diversity of OTS-supervised insurance holding companies, which include “some of the largest publicly held insurance companies in the United States, large and small mutual insurance companies, privately held companies and fraternal organizations.” Ms. Gardineer stated that the primary objective of an OTS risk-focused examination of an insurance holding company is “to identify and examine the areas of the business thrift that pose the greatest degree of risk to the condition of the overall enterprise and to the thrift.” Ms. Gardineer also recommended a new regulatory structure for insurance holding companies, including the creation of a federal insurance regulator or the establishment of a federal insurance office with authority over insurance holding companies.
Commissioner Dilweg, a member of the National Association of Insurance Commissions (NAIC), offered testimony on the NAIC’s behalf. He highlighted the role of the NAIC’s Financial Analysis Working Group (FAWG) in assisting state insurance regulators with the assessment of the financial strength of an insurer and described the NAIC’s accreditation program called the Financial Standards and Accreditation Program. Finally, he described the roles of the three NAIC working groups that assist states with core solvency surveillance mechanisms – the FAWG, the Financial Analysis Research and Development Working Group, and the Financial Analysis Handbook Working Group.
Ms. Frohman, also testifying on behalf of the NAIC, described the NAIC’s Insurance Holding Company System Regulatory Act, which has been substantially adopted by all 50 states and the District of Columbia. That legislation is designed to regulate transactions among issuers and other affiliated entities, mergers and acquisitions, standards for transactions, and holding company information. Ms. Frohman recommended specific enhancements to group supervision efforts, including improved communication among regulators, participation in supervisory colleges, improved access to and collection of information, clear enforcement measures, group capital assessment requirements and accreditation.