Mr. Chairman and members of the Committee, my name is John Biggs, and I am Chairman and
Chief Executive Officer of TIAA-CREF. I am also chairman of the CEO committee of the
American Council of Life Insurance ("ACLI") that deals with policy in the area of financial
services. I am appearing this morning on behalf of not only the ACLI, but also the American
Insurance Association, the Alliance of American Insurers, the National Association of
Independent Insurers, the Reinsurance Association of America, and the National Association of
Mutual Insurance Companies. These associations represent in the aggregate most of the life
insurance, property and casualty insurance, and reinsurance companies domiciled in the United
States. Some lines of insurance may have other, specific concerns which are not treated here.
This statement is intended to reflect the broad consensus of the industry on financial
Insurance companies are substantial stakeholders in the debate over how the laws governing this
country's financial service firms should be revised. While insurers historically have not
supported the concept of permitting affiliations with commercial banks, all of the associations
noted above have reversed their policy in recent years and now endorse the concept - provided it
is implemented by Congress on a rational and fair basis.
As discussed in more detail below, this policy reversal reflects the inevitable and rapidly
accelerating changes occurring within the financial service industry and, more importantly,
illustrates why we believe the status quo is no longer acceptable or defensible. Protectionist laws
ostensibly segmenting the various components of the financial service industry have proved
extremely porous and are being sidestepped or largely ignored by regulators and institutions
alike. This process of deregulation by administrative fiat and marketplace action is often not
grounded in sound regulatory policy. Regulators are increasingly confronted by corporate
arrangements they are ill-equipped to oversee, safety and soundness concerns are growing, and
consumer protections are more and more difficult to assure. Additionally, inappropriate and
unnecessary competitive inequities are arising that threaten the ability of some financial service
firms to position themselves as effectively they must to retain their vitality in the years ahead.
In short, a comprehensive overhaul of the laws governing financial service firms is already long
overdue. The need for prompt action by Congress is critical if financial service firms in this
country are to retain their prominent position in the domestic and global marketplaces. And
only Congress is in a position to balance the interests of all institutions and their regulators in a
way that is effective and fair.
In the following pages, we explain why it is so important for Congress to act on financial
modernization legislation this year. We then discuss those issues that are particularly important
for insurance companies in the context of this legislation.
Why Financial Modernization Legislation Must Be Enacted Now
The Marketplace Has Made Existing Laws Obsolete
What we see in the financial services marketplace today is not a situation where outdated and
restrictive laws are preventing all institutions from pursuing new strategies and organizational
structures. Rather, many institutions, often with the help of their regulators, are simply
circumventing those laws.
Banks' involvement in the insurance business is a good example. Roughly a decade ago,
national banks were limited to selling insurance products out of small town locations and only to
customers in and around those small towns. And there was no thought that banks could
underwrite insurance (other than some credit related products) in any way shape or form. States
had the authority to prohibit banks from selling or underwriting insurance within their borders,
and there was no question that the states could fully regulate those insurance activities in which
national banks were permitted to engage. Today, national banks can, from their small town
locations, sell all types of insurance to customers located anywhere in the country. The Office of
the Comptroller of the Currency ("OCC") has asserted and the courts have agreed that fixed and
variable annuity contracts can be sold without any geographic limitation. The courts also
sustained the OCC's assertion that states can no longer restrict the sale of insurance by national
banks if doing so would prevent or significantly interfere with banks' sales authority. Indeed, the
states' fundamental authority to regulate the insurance activities of national banks has repeatedly
been called into question. More recently, the OCC has adopted controversial rules - as yet
untested by the courts - suggesting that national bank operating subsidiaries might be able to
underwrite insurance products that the bank itself would be prohibited from underwriting.
Again, it is important to keep in mind that all of these significant expansions of banks' insurance
powers have occurred without one word of federal banking law being changed.
Expansion of powers is, however, only the tip of the iceberg. Consolidation in all segments of
the financial services marketplace is occurring at a pace far beyond what even the boldest
forecasters of this phenomena predicted. News of another so-called "mega-merger" is almost
routine as we pick up the daily financial press. The American Banker newspaper noted recently
that the RJR/Nabisco deal, once the largest of all business combinations, had been bumped from
the top ten by the spate of financial mergers. Importantly, a number of these mergers have
crossed industry lines, a situation that even the most progressive lawyers would have thought
unimaginable even a few years ago. And there is nothing to suggest that these trends will not
Expansion of powers by administrative action and cross-industry mergers give rise to important
questions regarding the adequacy of the current regulatory structure, including: whether
regulators can do their jobs effectively when dealing with large, diversified financial service
firms; whether these transactions, which seem to be occurring despite laws now on the books
rather than in conformance with them, are consistent with conventional notions of safety and
soundness; and whether consumers are being adequately protected. Clearly, laws that were
enacted 50 or more years ago when the business environment was radically different are
inadequate for the tasks at hand. Marketplace changes have simply rendered many of these laws
ineffective and obsolete.
The Need to Assure Institutional and Consumer Protections
There are two types of protections that are essential if diversified financial service firms are to
prosper: those assuring the safety and soundness of the institutions themselves; and those
assuring that the interests of consumers dealing with these institutions are addressed. Both types
of protection have become problematic given events of the last several years.
As noted above, laws governing the insurance, securities and banking industries were passed at a
time when the separation between these industries was well-defined and clearly understood.
Laws aimed at preserving institutional safety and soundness did not need to take into account the
prospect of banks and insurers being commonly owned. Even more recent laws, such as those
mandating prompt corrective action for depository institutions falling below well-capitalized
levels, did not contemplate, for example, having an insurance company and a bank under
common control. Similarly, the Bank Holding Company Act, including the Fed's so-called
"source-of-strength doctrine," was predicated on the notion of bank holding companies
controlling only banks and banking related businesses. That act did not envision a financial
holding company controlling a bank, an insurer, and a securities firm. If the bank's capital
position is impaired, does source-of-strength or prompt corrective action mandate taking assets
away from nonbanking affiliates that are themselves regulated enterprises? What are the
jurisdictional boundaries for insurance, securities and banking regulators? Can, for example, a
state insurance regulator get enough information on an affiliated depository institution to satisfy
itself that the financial integrity of the insurer will not be adversely affected by potential
problems in the depository institution? Or can a state insurance regulator prevent a federal bank
regulator from pulling assets out of the insurer to enhance the capital position of the bank? If
the OCC permits bank operating subsidiaries to underwrite insurance, could insurance solvency
protections be preempted or ignored? We believe that careful analysis of these questions and
related issues underscores the need for immediate legislative action.
Consumer protections are also in jeopardy. For example, insurance products sold through
conventional distribution channels, including career and independent agents, direct marketing,
and broker/dealers are clearly subject to the comprehensive consumer protection regimen of state
insurance law. In recent years, however, questions have arisen over the extent to which
insurance products sold through national banks are subject to those same laws. Many banks have
argued that state consumer protections provisions are preempted by federal banking law.
The advent of large, diversified financial service firms does not mean that safety and soundness
and consumer protection cannot be achieved. However, current law clearly must be revised to
assure that these protections will continue. Congress should understand that the potential
consequences of ignoring these issues are enormous.
The Need to Assure Competitive Balance Among Segments of the Financial Service
This country has traditionally put a high premium on protecting the integrity of the payments
system. Rigorous regulation of depository institutions, along with the extensive protections of the
federal safety net, have combined to create a system which functions efficiently and in which
depositors have the highest level of trust and confidence. It is truly a model envied by the rest of
the world. This legitimate focus on the security of the payments system, however, has evolved
into a mentality among bank regulators that whatever is done to benefit the financial strength of
banks is in the best interests of the country, notwithstanding what effects those actions may have
on others. To a large degree, it is this "banks-are-the-center-of-the-universe" view that stymied
H.R. 10 for so long in the House and threatens to do so now in the Senate.
Banks are important, and their well-being is vital to our financial markets. But in the context of
modernizing the financial services industry, it would be inappropriate and unwise to establish an
environment in which just one segment of the industry prospers. For financial modernization to
reach its full potential in terms of efficiency and value to consumers and stockholders, all three
segments of the industry, banking, insurance and securities, must be positioned to compete
The mantra continuing to issue from the Treasury is that H.R. 10, which allows banks either
directly or indirectly to engage in every financial activity under the sun, somehow diminishes the
value of the national bank charter. That is a very difficult argument to sustain. A more realistic
assessment is that by allowing broad affiliations between different types of financial service
providers, the bill enhances the value of all financial charters.
One side-effect of functional regulation is that no segment of the financial service industry will
enjoy a regulatory advantage over any other segment or have any incentive to try to encroach on
another segment's product line. That may come as a disappointment to the OCC, which has
enjoyed bestowing nonbanking powers unilaterally on national banks, but it hardly can be
characterized as diminishing the value of the national bank charter. If H.R. 10 is enacted, a
national bank charter will continue to be highly valuable to those who want to be in the banking
business. To those who want to be in the insurance or securities businesses, an insurance or
securities charter will be the answer. If a single corporate enterprise desires to control all three
charters and their respective benefits, it may do so. Whatever legislation is ultimately adopted,
however, should not favor one segment over another.
The Essential Role of Congress Is Being Usurped
When the House passed H.R. 10 last month, it marked almost ten years since either body had
attempted to enact financial restructuring legislation. As noted above, despite this inertia on the
part of Congress, the financial landscape has changed dramatically over this period, with a
handful of regulators and the courts making all the key decisions with predictable bias and self-interest. The perils of this ad hoc approach to changing the structure of financial services may be
temporarily obscured by a strong economy. Sooner or later, however, the pitfalls of such
parochial initiatives are going to be felt. Congress is running out of time to establish sound
policy to protect both consumers and competitiveness in financial markets.
Regulators focusing narrowly on one industry segment simply cannot be objective on these
issues, and no one expects them to be. That is why it is so critical for Congress, with its broader
perspective, to balance the interests of the affected parties and move the process forward. H. R.
10 represents such a balance. It is not perfect and provides only one possible approach to
financial modernization, but it has achieved the broadest consensus yet on how to deal with this
vital and complex issue. Congress would be well-advised to seize this opportunity to modernize
the financial laws which were designed to address problems in a world far less complex than the
one in which we find ourselves today.
Some Senators have expressed reservations about advancing legislation of this importance
without having more time to examine the relevant issues. We would observe, however, that this
issue was fully aired in the Senate throughout the 1980s. Twice, reform bills passed the Senate
but were not taken up by the House. The core issues have not changed, nor has the basic
ingredient for achieving balance and fairness - functional regulation. The principal difference
between now and 1988, when the Senate last sent such a financial modernization bill to the
House, is that banks now enjoy a regulatory advantage which some are reluctant to give up in
exchange for a bill which is merely fair.
More time will not make the hard political choices any easier. As for the prospect of the Senate
taking this legislation up in the next Congress, we would urge members of this Committee to
confer with their colleagues on the House Banking and Commerce Committees, who look back
on their two-year experience of producing a bill with the same fondness as Russians do the Siege
of Leningrad. In this case, more is not necessarily better.
Further, if this opportunity is missed, Congress may well have passed on its last real chance to be
relevant in the context of national financial policy for the foreseeable future. Several things are
important in this regard: First, moving H.R. 10 through the House was a bruising process which
Members will not soon forget and which they certainly will not want to repeat next year. Second,
without legislation this year, there will undoubtedly be a proliferation of applications for unitary
thrift charters, which will, when granted, further complicate the banking and commerce issue and
make it that much more difficult to balance industry interests down the road. Third, the OCC is
likely to further muddy the waters by extending new authority to national banks, thus increasing
litigation and uncertainty as well as adding to the present competitive imbalance.
In short, this is the best and perhaps the last opportunity for Congress to do take this important
step. More time is not the answer. And in any event, passage of H.R. 10 this year should not be
considered the last word on this broad subject. Subsequent Congresses will have ample
opportunity of revisit the policy decisions reflected in H.R. 10 as additional developments in the
marketplace continue to unfold.
While much of the debate has focused on domestic pressures to revamp our financial markets,
the threat which inaction poses from an international perspective is often overlooked. This
danger arises from two distinct, but related, causes.
First, within the U.S. market, foreign financial competitors face the same limitations on activities
as their U.S. counterparts. But, because of their current ability to affiliate abroad, they are getting
a valuable head start with regard to consolidating and managing multi-faceted financial
conglomerates, merging customer lists, devising cross-marketing strategies, and acquiring and
allocating capital between and among divisions. In addition, they are already acquiring U.S.
firms in anticipation of an eventual change in our financial laws. The net result is that when our
laws do change, these foreign competitors will have a meaningful advantage over U.S.
companies within our domestic market.
Second, in emerging markets in Europe, Asia and elsewhere, foreign competitors with broader
financial authority are making inroads that threaten the historic dominant position of U.S.
financial intermediaries in the world economy. This situation will only worsen over time.
U.S. financial institutions are the strongest in the world and our financial markets the most
stable, but they must adapt to changing conditions in international finance if they are to remain
so. We are already behind foreign competition in our efforts to modernize financial services.
Further delay will damage our ability to compete internationally for years to come.
Key Issues for Insurance Companies
As insurance companies set out to formulate a legislative strategy in the House almost two years
ago, we elected to pursue a minimalist approach to the provisions we sought in a bill. By and
large, we were willing to give banks the one insurance power they have not gotten (and might
never get) through regulatory and court decisions - and that is insurance underwriting. In return,
insurers have asked for functional regulation. That is, if banks wish to diversify into insurance,
they should be generally subject to the same regulatory requirements to which we are subject.
We have no interest in preserving or gaining any competitive advantage over banks through the
legislative process, and we do not believe this process should preserve or afford banks any
regulatory advantage over us.
We have heard complaints from some quarters that insurance companies got everything they
wanted in H.R. 10 and that they must therefore give up some of their gains in the Senate -
presumably to make the legislation more "fair" to banks. We are not rigidly wedded to the exact
language of most of the insurance provisions in H.R. 10. We would emphasize, however, that
each of the provisions in H.R. 10 that are important to insurance companies and summarized in
this section of our statement are central to assuring a fundamentally equitable and balanced bill
for all financial service firms - not just insurers. Functional regulation, properly crafted,
permits banks, insurers and securities firms reasonable access to one another's businesses while
at the same time assuring essential regulatory oversight.
While we are open to discussing different approaches for implementing functional regulation,
each of the four elements of that concept - a definition of insurance, a balancing of the interests
of state and federal regulators, elimination of judicial deference accorded federal regulators in
certain narrow circumstances, and protection of the safety and soundness of insurance companies
when they are under common ownership with a bank - are essential from our perspective. We
believe each of these elements is reasonable, and we believe each is necessary and fully
consistent with the idea of broad financial services modernization. Each of these elements is
Definition of Insurance - Since the mid-1980s, a principal tool of the OCC in granting banks
expanded insurance powers without changes in law is what might be called definitional sleight-of-hand. The OCC has repeatedly asserted that products that have historically been viewed as
part of the business of insurance and regulated by the states as such are, when sold or otherwise
dealt with by national bank, not insurance at all but part of, or incidental to, the business of
banking. Indeed, in the view of the OCC legal staff, literally every aspect of the business of an
insurance company could be categorized as part of, or incidental to, the business of banking. The
OCC's definitional gambit has been applied to variable and fixed annuities, credit insurance,
municipal bond guaranty insurance, mortgage completion insurance, and crop insurance to name
but a few examples. When coupled with judicial deference enjoyed by the OCC in federal
courts, the practice of relabeling insurance products as banking has been very productive for the
OCC and those it regulates.
If there are to be functional "rules of the road" for diversified financial service firms, the
mischief of relabeling products to gain regulatory or marketplace advantages must be curtailed.
H.R. 10 gives banks full authority to sell insurance products and underwrite insurance through
affiliates. The insurance rules of the road laid down by Congress must govern these activities.
There is no point in enacting legislation requiring banks engaged in insurance to follow the
insurance rules of the road if bank regulators can circumvent those requirements simply by
asserting that a product or activity is really not insurance but rather part of the business of
The definition of insurance is one provision in H.R. 10 that we would urge the Senate to leave
unchanged. It is the product of extensive negotiations with the banking industry and represents a
evenhanded approach to defining our business as well as protecting the business of banking from
overreaching by state regulators. Existing banking and insurance products would retain their
present character and remain subject to their present regulatory regimes, so there would be no
risk of products now in the marketplace being shifted from the insurance to the banking side of
the ledger or vice versa. For products developed in the future, the definition of insurance would
be tied to the Internal Revenue Code. If a new product is entitled to insurance tax treatment
under federal tax law, it would be insurance. If the product is not entitled to insurance tax
treatment, even if it is first issued (underwritten) by an insurer, it could be issued by a bank
subject to the exclusive jurisdiction of bank regulators. By tying the definition of insurance for
new products to the federal tax code, there is no opportunity for any party - regulator or regulated
- to play games with the system. We believe this definition is necessary to assure that functional
regulation will in fact remain the foundation of our financial services system.
Judicial Deference - The issue of judicial deference involves a doctrine articulated by the
Supreme Court to deal with increasingly crowded court dockets. In a 1984 case (Chevron U.S.A.
Inc. v. Natural Resources Defense Council, Inc.), the Court held that if a statute is not clear on its
face, and if a federal agency's interpretation of that statute is reasonable, the federal agency's
judgment is afforded "controlling weight," and the reviewing court need not address the case on
its merits. It is clear for several reasons that judicial deference as established by Chevron is
inappropriate in the context of a "modernized" financial services environment.
First, judicial deference, like definitional sleight-of-hand, has been a useful tool for the OCC and
national banks in gaining expanded insurance powers. However, since H.R. 10 or whatever
financial modernization legislation Congress ultimately passes will explicitly give banks directly
or indirectly all insurance powers, judicial deference will no longer be necessary in this context.
Second, banks have argued that any constraints on Chevron would damage the national bank
charter. Quite simply Chevron is not, and has never been, a facet of the national bank charter.
The case dealt with an oil company, an environmental group, and a ruling by the Environmental
Protection Agency. While it is true that the OCC and national banks have benefitted greatly
from courts sustaining OCC actions based on Chevron, that does not magically transform judicial
deference into an integral part of the national bank charter.
Third, H.R. 10 addresses the judicial deference issue quite narrowly. It eliminates deference
only where legitimate disputes arise between federal bank regulators and state insurance
regulators. Chevron would remain in full force and effect for any insurance dispute involving
private litigants (i.e., insurers, banks, agents) and would be unaffected in its application to any
other matters not involving insurance and bank regulators.
Fourth, in this limited context all the elimination of deference does is require a reviewing court to
decide a disagreement between state and federal regulators on its merits. It does not in any way
prejudice a case against the OCC or any other bank regulator. Regulatory disputes would simply
be decided without any special or controlling weight given to state or federal regulators. Is the
OCC that fearful that its interpretations would be struck down if they are considered on their
merits? Or does the agency simply want to preserve an unfair advantage in the courts to further
its own interests? The answer seems obvious.
Balancing Regulatory Interests - Over the years, substantial distrust has characterized the
relationship between the insurance and banking industries. Insurers distrust the OCC because of
repeated power grabs through regulatory action, and banks fear that the states will hamper their
ability and authority to engage in insurance activities, particularly insurance sales. In all fairness,
concerns on both sides have a degree of merit.
H.R. 10 attempts to balance the interests of federal bank and state insurance regulators in a way
that imposes some constraints on each but essentially preserves these regulators' fundamental
and legitimate roles. The states would be prevented from preventing or significantly interfering
with the insurance sales and cross-marketing activities of banks. Further, the states would be
required to treat insurance underwriters affiliated with banks exactly the same as they treat
unaffiliated underwriters. The OCC would, on the other hand, be precluded from preempting
actions by the states that are consistent with the above limitations and would no longer be able to
assert that insurance products are really not insurance but part of the business of banking. On
balance, each regulator would retain all the authority necessary to carry out its statutory
The language in H.R. 10 attempting to strike this balance may not be perfect and may benefit
from additional refinement. But the concept is essential if disparate regulatory agendas are to be
balanced in this legislation.
Preservation of Institutional Safety and Soundness - In a diversified financial service firm,
each functional regulator needs to have the tools and the jurisdiction necessary to assure that
nothing in the operation of the overall enterprise will jeopardize the safety and soundness of the
piece of the pie it regulates. One essential tool is the ability to acquire financial information from
other functional regulators or affiliated institutions. For example, the OCC and the Federal
Reserve should have the ability to accurately evaluate the financial condition of an insurance
underwriter affiliated with a bank. Likewise, the states should have adequate means of assessing
the financial condition of a depository institution affiliated with an insurer.
Relatedly, each functional regulator should have the authority to take whatever steps it deems
necessary to protect the safety and soundness of the financial firm for which it is responsible.
Federal and state bank regulators should be in a position to prevent state insurance or state and
federal securities regulators from taking any actions that would threaten the financial position of
a bank. And state insurance regulators must be in a position to prevent bank regulators from
weakening an insurer to bolster the capital position of an affiliated bank.
Given the intensely competitive environment in which financial service firms find themselves
competing, it is essential that insurers, banks, and securities firms have the same competitive
opportunities. If banks are to be permitted to affiliate with insurance companies, insurance
companies must be permitted to affiliate with full service banks. As explained at the outset, one
of the key reasons why insurance companies dropped their opposition to affiliations with banks
was concern over competitive equality. We did not want to see the OCC succeed in permitting
national banks to own insurance underwriters through the operating subsidiary loophole while
insurers remained prohibited from owning national banks. While most insurers are not intent on
acquiring banks at the present time, the ability to do so if circumstances warrant is viewed as
essential. If affiliations with banks prove to be a strategic necessity, insurers must be in a
position to react accordingly.
Redomestication of Mutual Insurance Companies
Mutual insurance companies are organized in cooperative form and have no stockholders, only
policyholders. A mutual company may own the stock of a downstream subsidiary, but, having
no shareholders, it cannot itself be the subsidiary of an upstream holding company. Accordingly,
absent special legislation, a mutual insurance company is confined to a downstream structure for
purposes of diversification. This structure imposes serious limitations on the ability of a mutual
company to make significant acquisitions. These limitations include, among other things,
quantitative investment limits and risk-based capital constraints. In addition, a mutual insurer
cannot sell stock in the capital markets, thereby limiting its ability to raise capital for
diversification purposes. Taken together, these factors place mutual insurers at a substantial
disadvantage in an affiliated environment.
A number of states have now enacted legislation addressing this problem. These states permit
their domiciled mutual insurers to reorganize into "mutual holding companies" with stock
insurance company subsidiaries and one or more intermediate stock holding companies. A
number of other states are considering such legislation. These mutual holding companies may
then raise capital by selling portions of the stock of their intermediate holding companies.
Moreover, like any acquisition made at the holding company level, an intermediate stock holding
company of a mutual holding company could acquire a bank without encountering the limitations
noted above that apply to downstream acquisitions.
Mutual insurers are now encouraged that the mutual holding company mechanism would place
them in a better competitive position once insurer/bank affiliations are permitted under federal
law. However, a number of mutual companies are domiciled in states that do not permit
reorganization into mutual holding company form, leaving these companies at a distinct
While state laws generally permit insurers to change their state of domicile, states are capable of
imposing significant practical barriers to such redomestication. We do not believe that a mutual
insurer's ability to participate fully in an affiliated financial services environment should depend
solely on its state of domicile.
For these reasons, we support the language in Sections 311-316 of H.R. 10. These provisions
enable a mutual insurance company domiciled in a state that does not have a mutual holding
company law to redomesticate to another state that does in order to reorganize into mutual
holding company form. Any company seeking to redomesticate for this purpose would have to
meet all the regulatory requirements of the prospective state of domicile relative to such a
transaction. We believe that the redomestication provision in an important and necessary
element in any modernization legislation because it will enable mutual insurers to participate
more meaningfully in a restructured financial service marketplace.
Appropriate Corporate Structure
Umbrella Regulator -- Functional regulation requires a rationalization of state insurance
regulation with the roles of other regulators in an affiliated environment. Just as state insurance
regulators have the obligation to protect insurer solvency and the interests of policyholders, the
SEC is responsible for ensuring that brokerage firms maintain adequate capital levels. The OCC
is responsible for assuring the safety and soundness of national banks, and state bank supervisors
have similar obligations for state-chartered institutions. The OTS oversees thrifts, while the
FDIC is charged with protecting the deposit insurance funds. Lastly, the Federal Reserve has
extensive regulatory authority under the Bank Holding Company Act to protect insured
institutions and the payments system. The challenge of financial restructuring is to permit all of
the entities regulated under these differing regimes to exist under common ownership, making
certain that each regulator can continue to carry out its statutory responsibilities effectively.
Insurers believe that the holding company model provides the most appropriate means to
facilitate functional regulation in an affiliated environment. Solvency and other substantive
regulatory requirements should be imposed largely at the institutional level, with umbrella
oversight by the Federal Reserve limited largely to regulatory coordination, information
gathering and the monitoring of affiliate activities. If the operations of affiliates pose risks to an
insurer, insurance regulators should be able to deal with the threat by directing additional
requirements at the insurer - not the insurer's affiliates. The same should be true for other
functional regulators dealing with the entities over which they have primary authority.
In our view, H.R. 10 as passed by the House affords the Fed broader authority at the holding
company level than is necessary to protect the integrity of the payments system. However, our
concerns in that regard have been lessened by the inclusion of so-called "Fed-lite" provisions and
limitations on the ability of the Fed to impose capital requirements on insurers beyond those
approved by state regulators. As a result, we support the regulatory structure for holding
companies as contained in H.R. 10.
Operating Subsidiaries -- Another key structural consideration is where to locate insurance
underwriting activities in an entity that includes a bank. The Treasury maintains that
convenience and flexibility dictate that such activities be permitted either in a direct operating
subsidiary of a bank or in a holding company affiliate of the bank. We strongly oppose the use of
bank operating subsidiaries for insurance underwriting for the following reasons:
Unlike bank failures which are covered by the FDIC, the obligations of a failed insurance
company must be picked up by other insurance companies as part of a state-operated, post-failure
assessment guaranty system. The insurance industry will strongly oppose any financial
modernization legislation that positions insurance companies as a buffer between capital-impaired banks and the federal deposit insurance funds.
There is every incentive for the OCC to utilize insurance company assets in this manner, since
the subsequently-depleted insurer will be a problem for the states, policyholders and other
insurance companies, not the federal government and federal taxpayers. Bank capital problems
caused by poor banking practices or inadequate bank regulatory judgements should not be
remedied by the insurance industry and its policyholders.
The Treasury's argument that the operating subsidiary alternative for owning insurance
underwriters is necessary for the flexibility and convenience of national banks does not outweigh
any of the above concerns individually and certainly does not outweigh them collectively. In fact,
the lack of substantive underpinnings for Treasury's push for expanded operating subsidiary
authority for national banks only serves to highlight the obvious conclusion that most observers
have already drawn - that this is simply a fight between the Treasury and the Fed over
The time has come for Congress to make some hard decisions about how our financial markets
will be structured and regulated. We can no longer afford to leave these decisions to unelected
regulators with narrow, parochial interests. H.R. 10 as passed by the House provides a good basic
structure for financial modernization, although it is by no means the only possible answer to the
complex issues which this subject presents.
Insurance companies have supported financial modernization legislation primarily as a means of
assuring equal competitive opportunities and to make certain that banks diversifying into our
business do not have regulatory or marketplace advantages resulting from unilateral decisions by
federal regulators or the courts. Our guiding principle in pursuing legislation has been
straightforward and reasonable - banks engaged in insurance activities should generally be
subject to the same laws and regulations that are imposed on insurers who are not affiliated with
banks. While Congress may conclude that some additional requirements are appropriate for
insurance sales, a simple nondiscrimination standard is fully adequate for insurance
We have supported H.R. 10 because it embodies these principles and is otherwise fair to every
segment of the financial services industry. It lets every player compete without creating or
perpetuating unfair advantages for some.
For years Congress has pleaded with the various groups within the financial services industry to
come up with an approach that all could support. H.R. 10 is as close to a consensus as is possible
in that regard. Virtually the entire insurance and securities industries and a significant segment of
the banking industry is behind it. Without trying to be over-dramatic, there is no guarantee, given
further regulatory decisions and developments in the marketplace, that the stars will ever align
like this again. It has taken more than sixty years to get to this point. If Congress does not take
this opportunity to rationalize the financial markets, it may be lost for many years to come.
For all these reasons, we strongly urge the members of this Committee to make every effort to
bring H.R. 10, or something like it, to the Senate floor this year.
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