[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                      THE IMPACT OF INTERNATIONAL 
                      REGULATORY STANDARDS ON THE 
                    COMPETITIVENESS OF U.S. INSURERS 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 13, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-31

                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                 Subcommittee on Housing and Insurance

                   RANDY NEUGEBAUER, Texas, Chairman

BLAINE LUETKEMEYER, Missouri, Vice   MICHAEL E. CAPUANO, Massachusetts, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California           EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia  WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey            BRAD SHERMAN, California
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             CAROLYN McCARTHY, New York
ROBERT HURT, Virginia                KYRSTEN SINEMA, Arizona
STEVE STIVERS, Ohio                  JOYCE BEATTY, Ohio



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 13, 2013................................................     1
Appendix:
    June 13, 2013................................................    35

                               WITNESSES
                        Thursday, June 13, 2013

McRaith, Michael, Director, Federal Insurance Office, U.S. 
  Department of the Treasury.....................................     5
Nelson, Hon. E. Benjamin, Chief Executive Officer, National 
  Association of Insurance Commissioners (NAIC)..................     7
Woodall, Hon. S. Roy, Jr., member, Financial Stability Oversight 
  Council........................................................     8

                                APPENDIX

Prepared statements:
    Neugebauer, Hon. Randy.......................................    36
    Garrett, Hon. Scott..........................................    39
    McRaith, Michael.............................................    40
    Nelson, Hon. E. Benjamin.....................................    46
    Woodall, Hon. S. Roy, Jr.....................................    52

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of the American Council of Life Insurers 
      (ACLI).....................................................    58
    Written statement of the Financial Services Roundtable.......    60
    Written statement of the National Association of Mutual 
      Insurance Companies (NAMIC)................................    63
Royce, Hon. Ed:
    NAIC travel article entitled, ``Tramp A Perpetual Journey''..    68
    Written responses from Hon. E. Benjamin Nelson to questions 
      submitted for the record...................................    71


                      THE IMPACT OF INTERNATIONAL
                      REGULATORY STANDARDS ON THE
                    COMPETITIVENESS OF U.S. INSURERS

                              ----------                              


                        Thursday, June 13, 2013

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 1:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Royce, Miller, Garrett, Hurt, Stivers, Ross; Capuano, Cleaver, 
Sherman, Himes, and Beatty.
    Ex officio present: Representative Hensarling.
    Also present: Representative Green.
    Chairman Neugebauer. This hearing of the Subcommittee on 
Housing and Insurance will come to order. Today's hearing is 
entitled, ``The Impact of International Regulatory Standards on 
the Competitiveness of U.S. Insurers.'' I ask unanimous consent 
that any Members who aren't on the Housing and Insurance 
Subcommittee be allowed to participate in this hearing as if 
they were a member of the subcommittee.
    Without objection, it is so ordered.
    This is the first hearing that I am aware of where we 
really kind of start to dive into some of the role of the 
Federal Insurance Office (FIO) and its interaction in the 
insurance industry along with other stakeholders, and 
particularly as we begin to examine a range of international 
regulatory standards and how we can balance the need to 
coordinate international regulatory efforts with our duty to 
ensure a globally competitive marketplace for U.S. companies. 
So this will be the first of, I think, many hearings examining 
the international competitiveness of the U.S. insurance 
industry.
    We have three objectives for this hearing: to gain a better 
understanding of the strategic objectives being pursued by our 
insurance supervisors and how they are working together to 
achieve these shared goals; to receive assurances from our 
witnesses that the agenda being pursued is a net positive for 
the domestic policyholders and insurers; and to raise awareness 
of certain international proposals that could undermine our 
system of State-based insurance regulation that has performed 
pretty well for over 150 years.
    Additionally, we want to make sure that better 
international coordination can prevent regulatory gaps and 
promote efficiency. The IAIS is moving away from a regulatory 
coordination to an international standards setter.
    Given the unique nature of our insurance regulatory model, 
the consolidated bank-like model favored by the International 
Association of Insurance Supervisors (IAIS) could 
disproportionately impact U.S. policyholders and insurers. We 
would like to learn more about what the National Association of 
Insurance Commissioners (NAIC) and FIO are doing to prevent the 
importation of European style bank-like regulations into the 
United States.
    Also, we want to learn more about ComFrame. The current 
ComFrame draft would create a one-size-fits-all regulatory 
regime for global insurers, including group-wide capital 
assessments and prescriptive prudential standards. Given the 
unique nature of our regulatory model, this proposal has the 
potential to increase the costs for U.S. insurers, which would 
be borne by the policyholders themselves. I would also like to 
hear how our witnesses view the ComFrame proposal and how they 
believe it would affect our insurance markets.
    Additionally, the IAIS selection method to determine 
designation of systemic insurers or Global Systemically 
Important Financial Institutions (G-SIFIs) lacks transparency 
and reasonableness due to the process of appealing decisions. I 
would also like to hear how our witnesses plan to harmonize our 
efforts to designate Systemically Important Financial 
Institutions (SIFIs) here at home and other efforts overseas. 
So I think this is going to be a very important hearing, and I 
think Members can use this, obviously, as an educational 
opportunity, as some of these things that we are going to be 
discussing today are being played out literally as we go here.
    And with that, I would like to recognize the ranking member 
of the subcommittee, Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    I want to thank all the panel members. I think this may be 
the most distinguished panel I have ever seen. I have had 
distinguished individuals--but the whole panel; you guys are 
pretty heavyweight. I am looking forward to learning a whole 
bunch from you.
    Again, Mr. Chairman, thank you for having this hearing. I 
think this is one of many hearings we are going to have on how 
the whole Federal involvement, whatever limited involvement or 
whatever it might be relative to insurance regulation, it is an 
important issue. It is a very delicate issue. It is a very 
controversial issue, and I think it is important for us to try 
to keep on top of it, but I do want to point out the irony that 
just yesterday, we had a significant hearing, and we passed 
several bills on the Floor, all of which were designed to 
embrace foreign regulations, to say foreign regulations are 
better than our regulations because we like them better, and 
yet here, just the concept of foreign regulations scares some 
people. My answer is that there are some good, and some bad. 
Let's figure out what is good, let's figure out what is bad, 
and adopt the ones that aren't and fight the ones that are.
    But all that being said, I am looking forward to the 
hearing today, and a continuous relationship with all three of 
you gentlemen because each of you holds a very important 
position in this issue to keep us educated and enlightened and 
involved.
    So thank you for being here, and thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Royce, is 
recognized for 2 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I think some historical context is necessary for this 
hearing. The Federal Insurance Office was created to solve a 
problem. Both the Bush Administration's Blueprint and the Obama 
Administration's White Paper called for its creation. Both 
highlighted the need for a lead negotiator in the promotion of 
international insurance policy for the United States, as the 
paper said, and that the lack of a Federal entity with 
responsibility and expertise for insurance has hampered our 
Nation's effectiveness in engaging internationally.
    Dr. Terri Vaughan, a former CEO and president of the NAIC, 
applauded its creation, stating that in a post-FIO world, 
unlike now, there would be a single office capable of 
articulating a global policy considering U.S. interests broadly 
and enforcing the policy. In this increasingly global world, 
that is something the United States can no longer live without, 
she said. The facts are the facts. What was known then is known 
now. State regulators and most certainly the NAIC are 
structurally and constitutionally incapable of representing 
U.S. insurance interests abroad.
    The NAIC lacks the legal standing as a self-proclaimed 
standard-setting and regulatory support organization, while 
State insurance regulators lack the authority under the U.S. 
Constitution to negotiate binding international agreements. 
What was contemplated at the time was not simply adding another 
Federal voice to international discussions regarding insurance 
issues, as Senator Nelson states in his testimony. No. It was 
to create a single voice for the United States on these 
matters, and the problem, as Dr. Vaughan noted at the time, was 
that there was no clear leader for U.S. insurance regulation; 
no single person could articulate a U.S. policy on a global 
stage.
    This hearing should not be about revisionist history, and 
it should not be focused on whether the NAIC is getting along 
with the FIO. We should put U.S. insurance consumers first. 
This committee's oversight should be focused on empowering the 
FIO to encourage healthy competition at home and a level 
playing field for U.S. insurers abroad.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from Ohio, Mrs. Beatty, is recognized for 3 
minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    And certainly I agree with my colleagues, as we are excited 
to hear from this distinguished group of gentlemen. This is an 
area that I am quite interested in, and hopefully when we get 
into the question areas, there will be some questions that I 
could delve into with Basel and TRIA and the uniform 
enforcement of international insurance. We have been looking at 
the international issue as it relates to housing, and now we 
are here in insurance.
    I am from Ohio, and just recently, I have had a couple of 
financial institutions, a credit union give me an example of 
them being engaged with an insurance company that then had some 
financial difficulties, and then, as you can imagine, when they 
went into bankruptcy, what happened to the credit union and all 
of those individuals that they were representing. So, as we 
talk about that further, I would like to hear your opinions on 
that.
    Also, so often, I have people who come in, and they are 
insurers, and they act like a bank, but they are not a bank. 
And then, we have others who are saying they are. So as we look 
at this and the examples of what we are doing internationally, 
I will be really excited to hear some of your responses, and I 
am sure I will have some questions after we hear your 
presentations.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from California, Mr. Miller, is 
recognized for 2 minutes.
    Mr. Miller. Thank you, Chairman Neugebauer. Thank you for 
holding this hearing, and I welcome our guests today.
    I am looking forward to hearing from you. For the past 
century, and through multiple financial crises, the State-based 
insurance regulatory system in the United States has been 
successful and has protected policyholders. However, in the 
response to the financial crisis, global regulators are now 
seeking to set new regulatory standards for all insurers. It is 
essential that Congress fully understand the impact 
international regulatory standards will have on the 
competitiveness of U.S. insurers.
    As negotiations proceed, we must recognize that the U.S., 
EU, and other regions have vastly different regulatory 
structures for the insurance industry and adjust them 
accordingly. While I strongly believe in coordination among 
international regulators, we must resist the tendency of 
pursuing a one-size-fits-all approach. If we subject U.S. 
insurance firms to inappropriate international regulatory 
standards, it will hurt U.S. competitiveness domestically and 
internationally, and it will create an unlevel playing field 
that will hurt U.S. jobs and economic growth.
    Currently, there are proposals in the United States and 
internationally to use bank-centered capital standards for U.S. 
companies. The U.S. insurance model is vastly different from 
both the banking system and the EU insurance model. I don't 
know why regulators keep trying to fit a square peg in a round 
hole, but they need to stop trying. The difference in our 
countries' systems should be recognized and embraced.
    Regulatory coordination efforts should focus on effective 
principles and avoid specific standards. We should be looking 
at effectiveness of regulations, not making them the same. To 
defend and promote the strength of our regulatory system and 
make certain that U.S. insurers can effectively compete 
overseas, the U.S. representatives need to be unified in their 
strategy, and it is imperative that the U.S. representatives 
coordinate to form a unified strategy, because if you fail to 
coordinate, we will all fail to succeed.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    I would now like to recognize the gentleman from Missouri, 
Mr. Cleaver, to make a special introduction.
    Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking 
Member. I appreciate the opportunity to introduce one of our 
panelists.
    I am very proud and pleased to introduce--actually, I guess 
I can't introduce someone who has served with distinction in 
the Senate, but let me introduce to this committee Senator Ben 
Nelson, from my neighboring State of Nebraska.
    There might be a question of, why would somebody in 
Missouri want to introduce someone from Nebraska, particularly 
considering how the University of Nebraska's football team has 
treated Missouri historically? However, I am very pleased that 
Senator Nelson, who actually became involved in the insurance 
industry right out of law school, was the key figure in moving 
the National Association of Insurance Commissioners' national 
office to the downtown area of my congressional district, and 
they have over 450 employees in the downtown area, so we are 
very proud of that.
    As I said earlier, Senator Nelson is a familiar face here 
on Capitol Hill, a two-term Senator, and he also served two 
terms as the Governor of Nebraska. And one of the things I hope 
I can match is during his time, he tried to bridge the gap 
between the urban and the rural parts of Nebraska. And I think 
the more we can bring people together and have one America, the 
better we are.
    So, I am very pleased to welcome Senator Ben Nelson to our 
committee.
    Chairman Neugebauer. I thank the gentleman, and we will now 
recognize our witnesses. Each one of you will be allowed 5 
minutes to give your opening statements. And without objection, 
your full written statements will be made a part of the record.
    The first panelist is Mr. Michael McRaith. He is the 
Director of the Federal Insurance Office, referred to as FIO. 
The second panelist is, of course, former Senator Nelson, who 
was just introduced by Mr. Cleaver. And the third panelist is 
Mr. Roy Woodall, who is an independent member of the Financial 
Stability Oversight Council, with insurance expertise.
    Mr. McRaith, you are recognized for 5 minutes.

   STATEMENT OF MICHAEL McRAITH, DIRECTOR, FEDERAL INSURANCE 
            OFFICE, U.S. DEPARTMENT OF THE TREASURY

    Mr. McRaith. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for inviting me to 
testify. I am Michael McRaith, Director of the Federal 
Insurance Office at the U.S. Department of the Treasury.
    As you know, we released our first annual report yesterday, 
and we are working to release our modernization report soon. 
FIO's express statutory mandate authorizes our Office to 
monitor all aspects of the industry. The statute also expressly 
authorizes our Office to coordinate Federal efforts and develop 
Federal policy on prudential aspects of international insurance 
matters and to represent the United States at the International 
Association of Insurance Supervisors (IAIS). When I arrived in 
June 2011, in fact 2 years ago to the day, the United States 
faced three primary international issues: one, the IAIS had 
begun work on the designation of global systemically important 
insurers; two, it had begun the development of the common 
framework for the supervision of internationally active 
insurance groups or ComFrame; and three, the threat of a 
unilateral equivalence assessment by the EU of U.S. insurance 
regulation.
    It was important for the Federal voice established by 
Congress to engage in these three areas in order to protect 
U.S. interests, and I will address each of the three.
    FIO serves as a nonvoting member of the U.S. Financial 
Stability Oversight Council, and we also serve on the IAIS 
committee responsible for the G-SII work. The IAIS designation 
process is consensus driven. Our view is that the IAIS process 
should align with that of the FSOC in substance, methodology, 
and timing. We have seen significant improvement in the IAIS 
work, and we look forward to continued engagement on this 
project.
    The second IAIS priority is ComFrame, a regulatory 
framework applicable to international insurance groups. 
Importantly, the IAIS is a standard-setter and not a regulator. 
For this reason, ComFrame will promote comparability and lead 
to improved confidence and trust among regulators from 
different countries. It will have qualitative and quantitative 
elements. Beginning in early 2014, the concepts of ComFrame 
will be field tested directly with insurers. The companies to 
which ComFrame will apply will thereby directly influence its 
standards. The increasing internationalization of the insurance 
market, which we strongly support, makes ComFrame an important 
project in which we should be engaged. I am privileged to serve 
as the Chair of the IAIS committee overseeing ComFrame 
development.
    The facts are that the EU and the U.S. are the world's 
leading insurance jurisdictions, both in terms of premium 
volume and as the home of globally active insurers. Interaction 
between supervisors in the EU and the U.S. is essential to 
industry and consumers. For this reason, we hosted the EU and 
State insurance leadership in January 2012 to launch the EU-
U.S. Insurance Dialogue Project. Through 2012, representatives 
of FIO and State regulators and the EU insurance leaders worked 
to identify commonalities and differences in seven areas, 
including group supervision, capital insolvency, and 
reinsurance.
    Thanks to all the participants, an unprecedented gap 
analysis was released to the public in September 2012. In 
December 2012, the EU and the U.S. agreed on high-level 
objectives to be pursued in the coming years. Areas for 
improved convergence will be identified, as will the areas 
where the gaps are too divergent to reconcile. Importantly, the 
EU and the U.S. share a commitment to this collaborative and 
constructive project.
    So these are three key areas of our international 
involvement, although we have more. Among others, we work with 
State regulators at the Organization for Economic Cooperation 
and Development (OECD), and we formed the first North American 
insurance supervisory forum. Insurance is an enormous 
multifaceted industry, subject to complicated regulatory 
oversight.
    Chairman Neugebauer, I affirm our commitment to work with 
State regulators and to work in support of Congress as you seek 
to further understand insurance sector developments of local, 
national, or international interests. On every issue, our 
priority will remain the best interests of the U.S.-based 
insurance consumers and industry and jobs and prosperity for 
the American people. Thank you for your attention. I am happy 
to answer your questions.
    [The prepared statement of Mr. McRaith can be found on page 
40 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Nelson, you now are recognized for 5 minutes.

STATEMENT OF THE HONORABLE E. BENJAMIN NELSON, CHIEF EXECUTIVE 
OFFICER, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

    Mr. Nelson. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for the opportunity 
to testify today. I am Ben Nelson, CEO of the NAIC.
    In the international arena, U.S. insurance regulators and 
the NAIC have been active at the IAIS in developing ComFrame. 
We believe there is merit in developing a framework for greater 
coordination and cooperation among supervisors for such groups. 
However, we are concerned that the current scope and 
prescriptive nature of ComFrame overshoots those goals and 
overcomplicates what is necessary for effective cross-border 
supervision. Rather, ComFrame should support the work of 
international supervisory colleges which serve as the vehicle 
to achieve these relationships designed to enhance insurance 
activity.
    We are also troubled by related discussions on the need for 
a global capital standard for insurance, which could result in 
a bank-like approach that is not appropriate. We urge Congress 
to be wary of any international prescriptions seeking to impose 
new standards on the United States.
    The NAIC is also involved in the identification of Global 
Systemically Important Insurers, or G-SIIs through IAIS. To the 
extent that an insurer engages in activities which could result 
in that designation, U.S. and international regulators should 
work collaboratively to address these activities and eliminate 
their systemic threat. Thus, we continue to examine the scope 
of our authorities and resources to ensure that systemic risk 
does not emanate from insurance activities or entities within 
our purview.
    Additionally, we have concerns that two tiers of companies 
could reduce market discipline, create competitive distortions, 
and encourage undesirable consolidation and concentration in 
the insurance sector. Therefore, designation should be the 
product of rigorous analysis that reflects a very thorough 
understanding of the insurance business model and regulatory 
system. The domestic and international processes should be 
aligned to the greatest extent possible with appropriate 
deference to domestic authorities. As such, the G-SII list 
should not contain any U.S. insurers that haven't been 
designated Systemically Important Financial Institutions, or 
SIFIs, by the Financial Stability Oversight Council. This would 
also ensure that the impact of any designation of a U.S. firm 
is rooted in clear legal authority and process.
    State insurance regulators have been actively involved as 
well in the U.S.-EU Insurance Dialogue Project, which builds on 
a decade-long bilateral discussion. Last December, a joint 
report and paper were issued outlining a set of common 
objectives and a series of initiatives designed to enhance 
insurance regulatory cooperation. Many of these initiatives are 
already under way or under consideration within the NAIC 
process. While much work still lies ahead, U.S. State insurance 
regulators are working diligently to enhance this transatlantic 
relationship.
    In some of these international areas, we have been working 
with the FIO. The NAIC believes that the FIO adds another 
Federal voice and can enhance existing efforts of the NAIC and 
the insurance regulators. However, the FIO does not speak for 
insurance regulators. Accordingly, we expect the Treasury 
Department to give deference to and be supportive of the views 
of the regulators in forums that focus almost exclusively on 
regulatory issues, such as the IAIS.
    Moreover, it is inappropriate for the FIO or any other 
nonregulator to seek to participate in supervisory colleges 
without an invitation from the regulators.
    In conclusion, U.S. insurance regulators have a strong 
track record of supervision and are committed to coordinating 
with our international counterparts to help ensure open, 
competitive, and stable markets around the world. Congress has 
delegated insurance regulatory authority to the States, so we 
have a continuing obligation to engage internationally in those 
areas that impact the U.S. State-based system, companies, and 
consumers. Uniform global standards are not necessary to 
achieve this compatibility or equivalent results. We appreciate 
international developments. We recognize that we should not 
toss aside our time-tested, State-based system in pursuit of 
untested and overly burdensome approaches, even for the sake of 
diplomacy and collegiality. Thank you, and I look forward to 
your questions.
    [The prepared statement of Senator Nelson can be found on 
page 46 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And finally, Mr. Woodall, you are recognized for 5 minutes.

    STATEMENT OF THE HONORABLE S. ROY WOODALL, JR., MEMBER, 
             FINANCIAL STABILITY OVERSIGHT COUNCIL

    Mr. Woodall. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee for inviting me to 
appear before you today.
    I am pleased to be here, along with my friend, Ben Nelson, 
whom I have known for 45 years, since we were both State 
insurance regulators back in the 1960s. I am also pleased to be 
here with Federal colleague Mike McRaith from the Treasury 
Department, where I have really, in a sense, preceded him and 
the FIO in serving as Treasury's Principal Senior Insurance 
Advisor for 8 years under 4 Secretaries of the Treasury and 2 
Administrations.
    My varied background also includes serving Congress itself, 
both at the Congressional Research Service and also at this 
committee back in 2004 as a detailee to assist your staff in 
developing proposed insurance legislation.
    As you said, I am now a voting member of the Financial 
Stability Oversight Council or FSOC--it is a little shorter--in 
the position that was created by Congress in the Dodd-Frank Act 
for ``an independent member having insurance expertise.'' That 
is a direct quote.
    I am joined at the FSOC by the nine voting members, made up 
of the Secretary of the Treasury and members who are Federal 
financial service regulators, as well as the five nonvoting 
members who serve in an advisory capacity, including Mike 
McRaith, in his capacity as the Director of the FIO, and John 
Huff, the Missouri director of insurance representing the State 
insurance regulators.
    As this hearing focuses on international insurance 
developments affecting U.S. insurers, some have asked, why is 
Roy testifying? Why was he invited? That is a good question, 
since I do not lead an agency. I don't have any regulatory or 
supervisory authority. And most of the work that I do at FSOC 
is confidential and thus can't be discussed or commented upon.
    As mentioned in Dodd-Frank, though, it does not specify any 
duties for my position, other than having insurance expertise. 
I am just two lines in the statute, but expertise is never a 
static concept, even after 52 years of involvement in the 
insurance sector. It requires a continuous learning experience 
to keep current on developments and topical issues that may 
come before the FSOC. Thus, I have tried to be guided by the 
duties outlined by Congress for FSOC itself in order to define 
what my own proactive role as a voting member should be.
    Let me briefly cite the duties as they pertain to 
international insurance matters. Section 112 of Dodd-Frank 
lists among the Council duties the monitoring of domestic and 
international financial regulatory proposals and developments, 
including insurance and accounting issues, as well as advising 
Congress and making recommendations in areas that will enhance 
the integrity, efficiency, competitiveness, and stability of 
the United States financial markets.
    Under Section 175 of Dodd-Frank, it is clear that I am also 
to be a consultant to the Treasury Secretary, for it provides 
that the Chairperson of the Council, in consultation with other 
members of the Council, shall regularly consult with the 
financial regulatory entities and other appropriate 
organizations of foreign governments or international 
organizations on matters relating to systemic risk to the 
international financial system.
    As outlined in my written testimony, I have encountered 
some difficulties in trying to be effective and proactive in 
fulfilling what I perceive to be those duties and 
responsibilities as a member of the Council, that is, to 
monitor international insurance proposals and developments and 
thus be able to maintain an optimal level of expertise to 
assist the Chair of the FSOC in making recommendations to the 
subcommittee of Congress on international matters. The 
international forums critically important to the insurance 
right now have been mentioned, the IAIS and the FSB, yet I do 
not believe that their structures have been sufficiently 
updated to allow for the full engagement with all members of 
FSOC, which Congress established as being chiefly responsible 
for the United States in monitoring, identifying, and 
addressing systematic risk as well as responding to threats to 
our financial stability.
    As set forth more fully in my written testimony, efforts 
have been under way at the IAIS to allow me and other Council 
members to attend IAIS member-only meetings as nonvoting 
members. Currently, the FIO, the NAIC, and our State 
commissioners are voting members at the IAIS. The inability for 
me and other Council members to attend the closed meetings of 
IAIS would create a pattern that would be similar to what we 
now have in the role that the FIO plays as a nonvoting member 
of FSOC. Additionally, as discussed in my written testimony, 
greater opportunity for engagement with the FSB is certainly 
worthy of consideration.
    I want to emphasize that my purpose in being here today is 
not to be critical. I do not feel an obligation to--but I do 
feel an obligation to express my concerns over certain 
procedural impediments to the FSOC and its members from working 
more effectively with our State insurance commissioners, the 
NAIC, and the FIO, especially on international matters.
    In conclusion, I have heard Ben and others say that each of 
us needs to stay in our own lane, referring to our statutory 
authorities, and he is right, but even though the lane lines 
can be blurry at times, we need to make sure that we are all on 
the same track, moving in the same direction and at the right 
speed in order to best serve the interests of this country. 
Thank you. I look forward to answering any questions you may 
have.
    [The prepared statement of Mr. Woodall can be found on page 
52 of the appendix.]
    Chairman Neugebauer. Thank you, gentlemen.
    We will now have questions from the Members, and each 
Member will be recognized for 5 minutes for questions. I would 
ask the panelists to be as succinct as they can in answering 
those so that we can get through the questions. One of the 
things we have to remember--I think we are going to have votes 
in the next 10 or 15 minutes. It is my plan to get through as 
many questions as we can, then we will go vote and come back, 
and we will ask the panel's indulgence to allow us to go do 
this Constitutional responsibility that each one of these 
Members has.
    Mr. McRaith, in your testimony, both written and oral, you 
used the words ``to coordinate'' our efforts on an 
international front, and I assume you feel that that is your--
and I think it gives you authority to be one of the 
representatives in this process. So when you are coordinating 
and you are representing viewpoints, for example, in your role 
as the Chair of the technical committee, what efforts are you 
making to make sure you have a consensus that the viewpoints 
and positions you are taking basically have the broad support 
of the stakeholders in the United States?
    Mr. McRaith. Two elements to answer your question: First of 
all, with respect to interested parties other than the State 
regulators, and other than Federal agencies who have an 
interest, we have extensive active outreach and engagement with 
all different industry groups and consumer groups as well. With 
respect to Federal agencies, we speak with them on a regular 
basis and receive their feedback.
    With respect to the State regulators, let me remind you 
what you may already know. I was the insurance commissioner in 
Illinois for over 6 years. In fact, if I were still a 
commissioner, I would be the president of the NAIC next year; I 
would be the president-elect this year. I spent many years 
working before, during, and after the financial crisis, long 
days, late nights, and through the weekends with my colleagues 
from other States. Fantastic people, tremendous professionals, 
many are my friends and will be for the rest of my life.
    Having said that, in terms of our actual coordination, I 
can give you some examples just from recent history. Last week 
in Basel, on the subcommittees, we had State regulators, FIO 
staff; at the OECD meeting, State regulators right alongside 
FIO staff; on Monday, deputy staff from the NAIC and the States 
on a phone call working on the EU and the U.S. project with FIO 
staff; on Tuesday, a telephone call with the Vermont 
commissioner.
    Chairman Neugebauer. Thank you. And so you are saying--let 
me just summarize: you are saying that you believe you are 
bringing everybody along.
    Now, I want to go to Senator Nelson. Senator, do you feel 
that there is a consensus being drawn here on these issues, and 
that the insurance commissioners feel like their positions are 
being put forth in these negotiations?
    Mr. Nelson. Mr. Chairman, I would have to say that a number 
of the commissioners believe that the cooperation is 
intermittent, that at times we have had these conversations; we 
have had meetings as late as May 17th face-to-face. We have had 
discussions, but most times, it seems like the question of the 
position of the Treasury or the FIO on a particular issue is 
unknown and not expressed to us.
    I asked the question in a telephone call about an issue, 
and Director McRaith very courteously said that he couldn't 
communicate the position, and I asked when he would be able to, 
and he couldn't tell me when he might, and this was on a joint 
call with a whole host of commissioners.
    So whether or not there is an effort and we get together, I 
think there is a general belief and a feeling that we don't get 
the kind of information in a timely fashion consistently as we 
should. We believe that the Treasury has deferred and should 
defer to the States on regulatory issues, and we don't feel 
that there is enough communication to complete that 
responsibility.
    Chairman Neugebauer. Thank you.
    Now, Mr. Woodall, you and I had a good conversation the 
other day, and I thank you for that. So, there is kind of an 
interesting relationship here between your office and Mr. 
McRaith in the sense that Mr. McRaith is sitting on a panel 
internationally that may designate a number of U.S. companies, 
U.S. insurance companies as G-SIIs, and you sit on the FSOC, 
which has just recently, I guess, determined that--we don't 
know the number, but some number of U.S. companies, and some of 
those may be insurance companies, would be SIFIs, but neither 
one of you--so the question I have is if, for example, Mr. 
McRaith, their panel decides to put six U.S. companies as G-
SIIs, and the United States only has, say, three U.S. companies 
on there, how are we going to reconcile the difference?
    Mr. Woodall. I operate only as a member of the council, and 
the council is charged with a specific duty, as I said, as to 
what we are supposed to do, and we are supposed to coordinate, 
and I try my best to do that within the boundaries, without 
getting out of my lane. You are right, the two different 
methods may be, they are pretty much in general concept, they 
are after the same thing. They may not be identical as far as 
the process between the IAIS and what the FSOC is doing, but I 
think there is a continuing effort to do that. The members of 
the Financial Stability Board (FSB) who are now looking at 
this, what comes out of the IAIS are the three Federal people I 
mentioned in my testimony--the Fed, the SEC, and they are--and 
the Secretary of the Treasury, and right now, for instance, 
Governor Tarullo chairs the key committee at the FSB that any 
information that flows up through the IAIS goes through that 
committee, and I have spoken with him several times, and I have 
great confidence that he, as much as possible, will make sure 
that these efforts are coordinated.
    Chairman Neugebauer. I thank the gentleman.
    I apologize for going over my time. I now recognize the 
ranking member, Mr. Capuano, for 5 minutes.
    I think that we have changed the batting order here, and 
the gentleman from Missouri, Mr. Cleaver, is recognized for 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I thank the panel, again, for being here. I want to take a 
retro approach to this because I think it would help me. I was 
here--most of us were here--in September 2008, when we bailed 
out AIG, and of course, AIG was regulated in a weird kind of 
way with a variety of regulators, so it is a little unlike what 
you are doing. But was the problem with AIG that it was too-
big-to-fail, or did they have a problem and liquidity crisis 
when they kind of moved away from what most insurance companies 
do and started trading credit derivatives? What happened, and 
should we be concerned about insurance companies' growth? They 
were in 100-plus countries, 130 countries and jurisdictions, I 
think they had over 100,000 employees worldwide. What went 
wrong, and what can you tell me about how we can make sure that 
nothing like that happens again? Senator?
    Mr. Nelson. First of all, I want to thank you for the 
introduction. I appreciate the courtesy of doing that. The NAIC 
is very honored to be located in your district.
    I would say that only perhaps in a misunderstood way is AIG 
looked at as an insurance company problem, because the insurers 
under the holding company were all solvent, were financially 
regulated by various States, and there weren't any problems 
with stability and solvency with the insurance operations, but 
the fact that the holding company became a thrift holding 
company and was subject to other, to jurisdictional regulation 
at the Federal level, which would have been, I suppose, what 
they call group or consolidated supervision, but the insurers 
themselves were all solvent because they were regulated by the 
States. It was the holding company problem that has now, I 
hope, been solved at least in part because the thrift 
regulatory system has been disbanded and moved into another 
operation. So I think that is what you would have to say, that 
it was not an insurance failure in any sense.
    Mr. Cleaver. Mr. Woodall?
    Mr. Woodall. Speaking from a retro type position, too, I 
think it emphasizes what he said, the fact that what triggered 
it was activities going on at financial products in the United 
States.
    Mr. Cleaver. Like credit derivatives?
    Mr. Woodall. Right, right, and it shows really how there is 
a need for international cooperation to make sure that 
something like that is not a gap in the regulatory structure.
    Mr. Cleaver. Thank you very much.
    Their board had threatened to sue. That has nothing to do 
with this hearing. I am just irritated, and this is the only 
chance I get to say it publicly, that the board wanted to sue 
us, sue Congress for bailing them out because they said it 
damaged the investors. I don't want a comment; I just want the 
world to hear me say that. I feel better now.
    I am not going to have time to--I wasted my time on AIG's 
board, so I will yield back the balance of my time, Mr. 
Chairman.
    Chairman Neugebauer. I thank the gentleman, and now the 
gentleman from Missouri, Mr. Luetkemeyer, is recognized for 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. McRaith, in the negotiations with regards to the 
ComFrame work that you are doing, how are you defending the 
American model of insurance that we have, the insurance 
regulatory system that we have here?
    Mr. McRaith. It is probably worth talking about ComFrame, 
very briefly.
    Mr. Luetkemeyer. Very briefly. I only have 5 minutes.
    Mr. McRaith. Very briefly. As I mentioned earlier, the IAIS 
is a standards-setting organization. ComFrame will be a set of 
standards. ComFrame will ultimately facilitate comparability 
among supervisors, enhance confidence and trust between 
supervisors, facilitating growth of U.S.-based insurers in 
other parts of the world. That is why we support ComFrame.
    In terms of defending the system, the IAIS, as a standards 
setter, does not dictate to this country or any country how or 
whether a country should restructure its existing regulatory 
system.
    Mr. Luetkemeyer. Okay. Through this discussion that you are 
having, there is not going to be any delegation of supervisory 
authority whatsoever over our insurance companies to another 
supervisory group of any kind?
    Mr. McRaith. No. In fact, what will happen is there will be 
a set of standards developed for ComFrame, and then the U.S.--
    Mr. Luetkemeyer. Okay, my problem there is when you set the 
set of standards, who is going to enforce the standards?
    Mr. McRaith. It is then left to the jurisdiction. In this 
case, the States or Congress will determine how to implement 
the standards in a way that fits for the United States.
    Mr. Luetkemeyer. Okay, so we are going to have a set of 
international standards that are going to be forced on us that 
we will have to take, or is this something that the insurance 
companies themselves will make a determination as to whether 
they want to accept?
    Mr. McRaith. By design, they are outcomes-based. ComFrame 
will have standards that are outcomes-based, and the question 
then for the State regulators and for Congress will be, how do 
we want to achieve those outcomes? Are there outcomes we 
disagree with? If so, that is where we push back in the 
international context.
    Mr. Luetkemeyer. It seemed that we would have a good model 
here in this country on how to regulate insurance companies 
from the standpoint that the States are doing a good job. If 
you take that model worldwide, allow each jurisdiction to 
continue to oversee it, if you want to have some common 
standards that is fine, but I don't think they need to be 
forced down anybody's throats. This is very concerning to me 
from the standpoint that we have a model that is working. Let's 
not break it--it wasn't a problem in 2008. It is not a problem 
today. So if we go out and do something different, I hesitate 
that we should be making any sort of commitments or tinkering 
with the system. I am sure Senator Nelson would probably feel 
the same way. Would you like to comment, sir?
    Mr. Nelson. I do feel that way. What we should be seeking 
to do is to find the best practices, and the best practices are 
on both sides of the Atlantic, but what we need to avoid is 
having a bank-centric system put in place even with standards 
that are--the business model of banks and insurers, those 
business models are different, and the standards that are being 
primarily discussed by ComFrame as part of solvency II, or 
Basel III, are bank-centric in nature. They are capital, they 
are basically capital requirements even when they say that they 
are not going to have a global capital standard in ComFrame. 
That will be the effect of it. It will be a bank-centric 
approach as opposed to finding the best practices for insurance 
regulation.
    Mr. Luetkemeyer. Have you looked at the cost that would be 
incurred by the policyholders as a result? Now, you can say the 
cost is going to be assessed to the company, but we all know 
that it goes back to the policyholders. So what kind of costs 
will be incurred by the policyholders if these models would be 
imposed on them?
    Mr. Nelson. There is no cost--to my knowledge, there is no 
cost-benefit analysis on the cost of this process.
    Mr. Luetkemeyer. Do you anticipate one being done before we 
approve anything like that?
    Mr. Nelson. Yes.
    Mr. Luetkemeyer. You would hope that would be the case.
    Mr. McRaith, are we definitely going to do that?
    Mr. Nelson. I have been--
    Mr. McRaith. In fact, the plan--I'm sorry, Senator.
    Mr. Nelson. No, go ahead.
    Mr. McRaith. The plan is that ComFrame as a concept will be 
finalized this year. Starting in 2014, for 4 years, there will 
be testing with companies to determine exactly what is the 
cost, what is the benefit, how do we serve the practical 
interests of supervisors and companies as we move forward?
    Mr. Luetkemeyer. How do you anticipate implementing that, 
Senator?
    Mr. Nelson. I am as tight as three coats of paint, so what 
I like to do is I like to know what something is going to cost 
before we engage in testing it to find out, then what it costs 
us to test it to know what it is going to cost to implement it. 
So I have a different idea of that, and I think others do as 
well. I am worried about the cost as well as the application of 
an overburdensome, overly prescriptive--you can say that it is 
not prescriptive, but once you set standards, they are 
prescriptive.
    Mr. Luetkemeyer. Thank you very much. My time is up.
    Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Sherman, is 
recognized for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    And thank you, Mr. Ranking Member, for letting me go in 
this turn. The insurance industry survived the real-life stress 
test of 2008. Virtually all of the State-regulated insurance 
companies survived. AIG was perhaps the best stress test for 
certain of its subsidiaries. That is to say, you had a 
management of the holding company as dedicated to risk 
management as any inebriated gambler in Las Vegas, and in spite 
of that at the very top, the individual insurance companies all 
remained solvent.
    Now, what those drunken gamblers did at the holding company 
level is they sold credit default swaps. That is to say, if 
they had gone--somebody holds a $10 billion portfolio of, say, 
mortgage-backed securities backed by a bunch of subprime loans 
and says, oh, gee, maybe I won't get paid. If they had gone to 
an insurance company and said, please issue me an insurance 
policy that my portfolio won't drop by more than 10 percent, 
there would have to be reserves. The insurance company would be 
limited to the number of policies it could write because if you 
write one such $10 billion policy, you have to have reserves if 
you are going to write another $10 billion policy. And 
certainly, we wouldn't have insurance sold by the unregulated 
parent of a bunch of insurance companies, especially run by 
drunken gamblers.
    But for some reason, we decided that a credit default swap 
wasn't insurance. Is there any practical difference between a 
contract that says if your $10 billion portfolio drops and is 
only worth $9 billion, we will write you a check, we will 
insure you against that risk, that would be insurance, and if 
we go to the same holder of a portfolio and we say, you have 
the right to trade your $10 billion portfolio at anytime you 
want for $9 billion worth of U.S. Government Treasuries, which 
of course you would do only if the value of your $10 billion 
portfolio had dropped by more than 10 percent? Why are we not 
making credit default swaps which are, in essence, an insurance 
policy against the decline in a portfolio of securities, 
subject to insurance regulation at some level?
    Mr. McRaith?
    Mr. McRaith. I would distinguish CDS from other insurance 
products in terms of both the size of the wager and, in many 
cases, the participants. It is not a consumer per se. These are 
highly sophisticated investors--
    Mr. Sherman. If Wal-Mart gets fire insurance on all of 
their stores, they are just as big, they are just as 
sophisticated as somebody with a $10 billion portfolio.
    Mr. McRaith. Right, and as you know, the Dodd-Frank Act has 
looked at oversight and revision of regulation of these types 
of products, as should happen. At one time--
    Mr. Sherman. So you are saying the power of Wall Street has 
prevented Congress from doing what obviously needs to be done?
    Mr. McRaith. Actually, what happened, I remember as a 
commissioner in the midst of the crisis, there were a number of 
commissioners saying that perhaps we should regulate the CDS as 
an insurance product. In fact, I think some of the State 
legislators were suggesting that.
    Mr. Sherman. Okay. I want to go on to Senator Nelson.
    I wonder if you have any comment on this? Is there any 
economic difference between a credit default swap in the 
situation I have outlined and an insurance policy?
    Mr. Nelson. I am one who believes that if you are issuing 
the swaps, you ought to have adequate capital to do that for 
sure. Whether you consider it an insurance product or not, 
there is a risk associated with it that ought to be backed by 
capital, and the problem with AIG was there was no basic cap--
sufficient capital to back the obligations made. Those 
obligations were not incurred by any of the insurers, to my 
knowledge.
    Mr. Sherman. Yes. If it is a regulated insurance product, 
there will be reserves. If it is not, then typically there 
aren't reserves. If I agree to sell a bunch of coal to a 
company at a particular price 10 years from now, I am not a 
regulated company, I may or may not have money now or in 10 
years. But those who sold credit default swaps were providing 
insurance. They insured against the decline in the portfolio. 
They made mistakes. They issued an unlimited number of 
policies, not backed by capital, and what we have done to 
prevent this from happening in the future is nothing.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    We are going to take one more questioner, the gentleman 
from California, Mr. Royce, and after his questions are over, 
we are going to recess. There are two votes, and I ask Members 
to, as soon as votes are over, come back so we can reconvene 
the committee. Mr. Royce, you are recognized for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. Discussions on 
international insurance regulation always bring us back to the 
lack of uniformity in the State-based system. Even on issues 
most of us agree on, such as solvency and producer licensing, 
product approval, NAIC model laws have proven a useful 
exercise, but they have consistently failed to be adopted by 
all States, and even when largely adopted, we end up with 
variant language among the States. The recent individual State 
revisions to the solvency model law stand as yet one more 
example of this. The NAIC has acknowledged that certain 
insurance regulatory topics are appropriate for national 
uniformity, and it has looked into mechanisms for doing so such 
as a draft national insurance supervisory commission proposal. 
This was an idea that may or may not have had merit, but it 
never had a chance to succeed because of the manner in which it 
was developed. It was drafted and discussed extensively behind 
closed doors at an NAIC commissioners fly-in meeting in New 
Castle, New Hampshire. As with 100 percent of all NAIC 
commissioners' conferences, commissioners' roundtables, 
executive committee retreats, officers meetings, and zone 
retreats, this meeting again was closed to the public. The 
topic and the discussion were confidential until the proposal 
was leaked. Only then did NAIC engage in discussions with 
stakeholders, but they had started on the wrong foot. The 
headline of a trade press article was, ``NAIC Uniformity Plan 
Hits Wave of Mistrust'', and State legislators hammered away at 
the proposal, halting any public debate.
    I wonder if the Senator can give his thoughts on the NAIC 
process? When the NAIC membership meets in private to discuss 
matters of public policy, and only discusses the matter 
publicly after a news leak, does this undermine credibility? 
These are public officials, but they are meeting as a group 
under the auspices of a private corporation, the NAIC, with 
private travel paid for by yet another group, NAIC-Newco. On 
this point, I would also like to submit for the record a recent 
article that details the travel and cost of travel of NAIC 
officials.
    Senator Nelson, if you have seen this article, does it 
raise legitimate concerns about NAIC's influence over its 
members when it pays for vacation-quality travel for 
commissioners while at the same time selling its services to 
those public officials as a private vendor? And if you could 
also respond to questions about the open meeting policy? The 
floor is yours. Thank you.
    Mr. Nelson. Thank you, Congressman.
    I think that the NAIC continues to improve the openness and 
the transparency of the committee, subcommittee, working group 
process. There may have been times when it was less robust than 
it is today, but I think that there is a greater interest in 
transparency than I saw 30 years ago when I held this same 
position, and so I think there is more of an opportunity to 
have consideration time and again because it goes through the 
process.
    Typically, it starts at a working group, goes to a 
subcommittee, then to the full committee, to the executive 
committee, and to the plenary session. So there are numerous 
opportunities for any proposal to have consideration, and, for 
example, in terms of acceptance by the States of uniform 
regulations or uniform laws, right now the reinsurance, model 
reinsurance bill has been adopted by about 12, or about 45 
percent of the total market. By the end of next year, it is 
anticipated that it will cover 75 percent of the reinsurance 
ceded market in the United States. So it is--whether you count 
the number of States or whether you look at the size of the 
market that is affected, I think there is substantial 
compliance to get model legislation wherever possible.
    But one of the benefits of State regulation is that State 
regulation is based on the needs of folks back home. We are 
talking about international issues here today. But really what 
this is about is the folks back in your district.
    Mr. Royce. It is. But, again, I raise that question over 
influence over its members while at the same time selling its 
services to those public officials as a private vendor, if you 
could later give me a response on that? And the bottom line is, 
will the policy be changed in terms of everything is private in 
terms of these closed-door meetings. Nothing is public in terms 
of these proposals. And that is a concern.
    Chairman Neugebauer. The time of the gentleman has expired.
    We will now recess the hearing, and as soon as votes are 
over, we will reconvene.
    [recess]
    Chairman Neugebauer. The committee will come to order. I 
now recognize the gentleman from California, Mr. Miller, for 5 
minutes.
    Mr. Miller. Thank you, Mr. Chairman. I really enjoyed the 
testimony. I heard there had been open and vocal disagreements 
in international meetings and--in front of each other and I 
really enjoyed the testimony. And I guess I recommend a 
marriage counselor because people need to start talking.
    When we had Secretary Geithner and Chairman Bernanke in 
here, I asked a specific question. I said, ``Do you believe 
that banks should be regulated the same way insurance companies 
are or vice versa, or should insurance companies have different 
regulations than banks?'' And they both agreed they thought 
that was appropriate. They don't think it is appropriate to 
have both of them being regulated by the same rules. And I 
guess I just--I understand that the IAIS believes it is an 
obligation to adopt some global capital standard for all 
insurers. So I just want to come out and ask a direct question.
    Senator Nelson, do you think bank-centric capital standards 
are appropriate to apply to U.S. insurance models?
    Mr. Nelson. Let me answer it this way. I have respect for 
both Chairman Bernanke and Secretary Geithner. I might 
respectfully disagree that they need--
    Mr. Miller. So you think they should be regulated the same?
    Mr. Nelson. Differently. Did should--did they say they 
should be regulated--
    Mr. Miller. They should be regulated differently.
    Mr. Nelson. Yes.
    Mr. Miller. You were scaring me. Because I had really 
listened.
    Mr. Nelson. No, no, no.
    Mr. Miller. And I thought, I am really getting old, or I 
need to have my ears inspected instead of my eyes. Because I 
had heard you say you thought they were completely different 
and you thought applicable regulations to both would be 
inappropriate. And I think it would be--we went through a huge 
financial crisis.
    Mr. Nelson. Now that you clarified--
    Mr. Miller. That sector was not impacted. AIG, which is a 
different issue.
    Okay. Mr. McRaith, do you agree with Senator Nelson?
    Mr. McRaith. I absolutely agree that the insurance industry 
should not be subject to bank capital standards.
    Mr. Miller. Mr. Chairman, I am loving these guys all of a 
sudden. Because it seems like we had all kinds of questions all 
day and discussion and a lot of people out there were believing 
that somebody was thinking that we should regulate them both 
the same. And I know there are a lot of insurance companies out 
there. Some you talk about, Senator Nelson, that had a very 
minor bank holding company that just did it as a courtesy to 
their organization and stuff, and they have just sold them off 
because they were panicked that those standards were going to 
apply. And I am glad that you both have--you made me feel a lot 
better, you really did, because I introduced legislation to 
stop this. Because we heard it was starting again, the concept 
of doing this. And then I had heard the problem with vocal 
disagreements. And I am not--I didn't mean to be critical. We 
need to talk.
    Chairman Neugebauer and I, if we disagree on something, we 
will go in a room, private, and we will have a discussion. And 
we will both voice--I don't think we have ever had that kind of 
discussion. We might have a difference of opinion on certain 
things. We have never come out here publicly and gotten in a 
brouhaha in front of everybody over an issue. We might ask 
different questions and maybe we would both like different 
responses.
    But that answer was extremely important to me. Because we 
have--I have heard both of you make your presentations, and I 
appreciated both of them. But then, I had heard about the vocal 
disagreements and such. So it is niceto have it out there.
    Now, if we all would sit there, Mr. Woodall, everybody 
agree that we all agree, and we will fight those people who 
believe that one-size-fits-all internationally. And that is 
good for the United States, which I don't agree with--I think 
it would be a huge mistake. I think I--when I was at the State, 
I got to chair the insurance committee for a while, and I 
really enjoyed that. I believe in optional Federal charters for 
insurance, even. I would like banks--to give them an 
opportunity if they want to do that. If they want to, yes; if 
they don't want to, fine. But to have some other body 
determining how we should regulate our specific industries is 
very scary because they don't understand our model. If you go 
to the EU, it is a different model than we have here. Ours is 
specific to the United States, and I think it has worked very 
well.
    But in recent months, I have had more meetings with people 
from the insurance industry who are very, very concerned, more 
so than they need to be, now that I have heard what you both 
believe.
    So if I have Mr. McRaith and Senator Nelson, and I have 
Secretary Geithner and Chairman Bernanke all saying that is a 
very bad idea, we need to record this meeting, Mr. Chairman, 
and we need to replay it. Every time somebody brings this issue 
up, we need to say, no, nobody believes it is going to happen. 
And it is kind of like my opening statement, because I really 
only asked one question, but I would really encourage all of 
you to start talking about this publicly and letting other 
people know that you believe this, and you are going to make 
sure that you do everything possible to make sure this happens. 
And then, there are a lot of us on the committee who would be 
much more at ease knowing that was a sentiment, and we are all 
in unison here, agreeing that, for our country, this is wrong; 
for our business sector and the insurance industry, it is 
wrong, and for our economy, it would be a disaster. So I am not 
going to ask all these other stupid questions because they 
don't really apply anymore. You gave me the answers I wanted to 
hear, that you both think they are different, and they should 
be regulated differently and treated differently.
    And based on that, I yield back my time. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Florida, Mr. Ross, is recognized 
for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask some questions and to follow up with Mr. 
Miller.
    I come from a State, Florida, that has been used more as a 
bad example for an insurance market than anything, but a demand 
that is uncompromising to some of the other jurisdictions out 
there. And yet, our regulatory environment under our insurance 
commissioner has worked, despite some of the natural 
catastrophes we have had.
    Mr. Woodall, the Financial Stability Board has charged, of 
course, IAIS with the responsibility of identifying the G-SIIs, 
or the G-SIFIs, however you want to do that.
    My concern with that is that if they find a U.S. or 
domestic insurer to be one of those G-SIIs, what due process 
or--at least with the SIFI, we have due process. The nonbank 
financial institutions that have been identified in the last 
week at least now have an appeal process. Is there any such due 
process under the G-SIIs?
    Mr. Woodall. Congressman, I think we discussed this a 
little earlier as far as what happens if a G-SII is named by 
the FSB. And the efforts that are going on to try to coordinate 
that. Obviously, the systems are not identical. There are some 
differences. There are some weighting factors that they use.
    Mr. Ross. Couldn't the identification of a G-SII, a 
domestic, a U.S. domestic insurer taint the designation as an 
SIFI under our current standard here. In other words, it would 
seem to me that if you are going to have a G-SII of a domestic 
insurer, they would also then almost axiomatically be a SIFI 
under our--our system under Dodd-Frank.
    Mr. Woodall. Not necessarily. I think that certainly the 
FSOC would take note of that because that is a very important 
factor.
    Mr. Ross. Yes.
    Mr. Woodall. To take note of it. But they would not be 
bound, because this Congress has set what we are supposed to 
determine it on at FSOC. And we use the metrics and the 
procedures that Congress set out for such determinations as a 
SIFI in this country.
    Mr. Ross. Again, that is why I am glad you are on FSOC. And 
I am glad you are a voting member. Now, be that as it may, I 
understand the IAIS is setting these standards for G-SIIs. Why 
aren't you on that? Why aren't you a part of the designation 
committee for G-SIIs?
    Mr. Woodall. Congressman, I did cover that in my written 
testimony, because I had mentioned the fact that I did feel 
like that since we have a comparable situation, when we look 
at--
    Mr. Ross. I have confidence in you, I just want you to know 
that. I would like to see you there, because I think it is a 
two-way street. Not only do we have to protect our insurers, 
domestics that are doing business here, but we have to protect 
our domestics that are doing business there.
    Mr. Woodall. I would like to be in the room, too, when Mike 
McRaith is there, because I think it is important. I would like 
to help him. I don't think that it is any sort of a conflict. I 
think the more boots on the ground, the better, and I don't 
think there can be too many eyes and ears in a meeting like 
that to try to come up with a right consensus plan.
    Mr. Ross. I couldn't agree more. And the lack of that--a 
lack of your presence being there gives the suggestion that 
maybe we are not putting forth the best effort on behalf of our 
domestic insurers in dealing with international regulatory 
rules and reform.
    Mr. McRaith, you have been the Director of the FIO since 
its inception; is that correct?
    Mr. McRaith. I started 2 years ago. So approximately a year 
after the Dodd-Frank Act passed.
    Mr. Ross. And under FIO, we have charged them 
responsibility for issuing some reports. Yesterday, we received 
our report, at least I had a chance to look at the executive 
summary. You talked about the modernization one. There have 
been several that missed deadlines, including the market with 
regard to reinsurance. Reinsurance is really important to my 
jurisdiction. It becomes a villainized industry when we are 
doing ratemaking processes at the OIR in Florida.
    I know it has been 18 months since these reports should 
have been issued. How are we coming along? Are we able to get a 
draft report? Can we get a sense of what might be out there and 
when you think these reports might finally be issued and 
submitted to Congress?
    Mr. McRaith. Absolutely. First of all, I want to recognize 
the importance of the reinsurance market to the State of 
Florida and, frankly, for the entire country.
    Mr. Ross. Yes.
    Mr. McRaith. The annual report is the first in line, first 
in the queue, so to speak. We will be releasing our 
modernization report, as I mentioned, soon.
    Mr. Ross. Soon.
    Mr. McRaith. And our hope is this summer.
    Mr. Ross. Good.
    Mr. McRaith. We are aware of the need to release the 
reinsurance report. We will have a report on natural 
catastrophes as well, also an issue of interest to the State of 
Florida.
    Mr. Ross. I hope we dont have any new data for you in the 
next 3 months for it, either.
    Mr. McRaith. Yes. We are all hoping for that. But you 
should expect to see all of those in the near term. The first 
one is out. We have the process in place. And we are looking 
forward to providing you with those reports.
    Mr. Ross. Thank you. I yield back.
    Chairman Neugebauer. I now yield to the ranking member, Mr. 
Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Director McRaith, the ComFrame, the IAS stuff, this is not 
going to be mandatory in the United States; is that correct?
    Mr. McRaith. That is correct.
    Mr. Capuano. So it is advisory with kind of a best, as they 
see it--a best practices type of thing.
    Mr. McRaith. Their best practices for the United States to 
adopt in a way that works for the United States.
    Mr. Capuano. Fair enough.
    Senator, in your--you have been involved with the insurance 
industry for a long time in various capacities. And in my 
previous life, I was a little bit involved in insurance as 
well. And I remember that there used to be--all the 
commissioners would get together and they would come up with 
model legislation that different States would participate in 
and they would adopt or not adopt. Am I right about this? Is my 
memory serving me correctly?
    Mr. Nelson. That was, and still is, the process.
    Mr. Capuano. And that is a similar thing. It is a 
suggestion, for all intents and purposes, best practices as the 
group sees it that each commission or each State could then 
make a determination whether it would adopt or not adopt or 
adopt some of it or amend it or whatever. Do I have that right?
    Mr. Nelson. That is correct.
    Mr. Capuano. So it is just like on a State-By-State level 
exactly what IAIS is suggesting on a country-by-country basis. 
That there is no--there is no power to enforce it. There is no 
requirement that it be done. It is how they see it. The same 
thing in this case how the association would see it. So, 
therefore, I--though I understand fully well, and I totally 
agree, we should never give up our regulatory scheme to any 
other country, which, by the way, we just did yesterday on the 
Floor of the House. That is a different issue. But we 
shouldn't. But we should look at different countries to see 
maybe they do something that we should do, or whatever.
    Mr. Nelson. Absolutely.
    Mr. Capuano. So I think from what I see at the moment, 
especially as I understand the ComFrame, there is no intention 
of adopting or enacting any of this until 2018, anyway. So 
there is a lot of time to come up with the right answer, to 
react to it, to say we like Section 1, we don't like Section 2. 
And to have that open, public, honest discussion between 
States, between countries, and to make that--again, do I have 
my timeframe right, Mr. Director?
    Mr. McRaith. That is correct, absolutely.
    Mr. Capuano. Which, to me, again, without drawing a 
conclusion on the individual proposals, I think that seems to 
be the right way to go, to have the open discussion in a 
debate. Some people will agree, and some people won't. What is 
best? How do you work within an international framework? It is 
actually what we are doing on every aspect of financial 
services across the world, trying to figure out, is Basel II, 
Basel III, whatever it might be for banks and insurance 
companies and anybody who does international business, we are 
trying to figure out how to do all that in a coordinated 
manner. So I--honestly, this whole process seems to me to be 
something that is quite normal. And we are not at the point yet 
where we should be pulling our hair out--not that I have much 
left, but whatever is left--and worrying about it. Though, I do 
think it is appropriate to raise those issues.
    Yes, Senator? Go ahead. Jump in.
    Mr. Nelson. If I might respond to that, the NAIC, the 
commissioners are not opposed to developing a common frame or a 
ComFrame. As a matter of fact, we are putting together a 
proposal that embraces those parts of ComFrame that we think 
are appropriate, most appropriate to avoid having the 
prescriptive nature of it. And, in addition, we are going to 
identify those areas where we think the language in the 140-
page document is difficult to understand, and won't work. But 
the biggest concern is that what ComFrame seems to be doing is 
being based on a bank-centric approach. That is our biggest 
concern.
    Mr. Capuano. I understand.
    Mr. Nelson. Not about this little piece or that piece.
    Mr. Capuano. That is exactly what we went through with 
FSOC. As a matter of fact, I had a lot of insurance companies 
coming in on the exact same thing relative to FSOC. I think 
those are fair and reasonable concerns. And I think, as we play 
out over time, you will find a lot of friends here with--maybe 
not the same conclusions, but the same concerns. And I for one 
am happy to listen.
    Mr. Woodall, have you asked either Treasury or the Fed if 
you could maybe go on staff one day a month or something and 
kind of sit in the room under a different hat or something? It 
seems ridiculous that you can't get in the room and participate 
in the discussion. That just doesn't seem like the right answer 
to me.
    Mr. Woodall. In other words, a detail. I was a detail to 
this committee for about 10 years.
    Mr. Capuano. Yes. Why can't we find a way again--
    Mr. Woodall. I think we can find a way. There are always 
different ways to get something done. I can be invited in the 
room under the bylaws of--if someone invites me in. If I am at 
the meeting, it is just the fact that if I am at the meeting 
and they say, we are going into executive session, and I leave 
the room and I look back there and there are IMF employees and 
employees from Treasury, but I can't get in the room. That is 
the frustrating thing.
    Mr. Capuano. Actually, this panel is a classic example. 
There is no one person or no one entity as far as I am 
concerned that I want to give every ounce of power to. I want 
there to be an open discussion. I want there to be an open 
debate so we can get this done as best we can. And, therefore, 
again, I don't even know what you think on these issues. But 
you clearly hold an important position. And you should at 
least, if nothing else, be aware of the discussions, even if 
they don't want to listen to you, which is fine. And as far as 
I am concerned, as one Member, certainly if I can do anything 
to help get to these details, I am more than happy to do so for 
the sake of trying to get all the right players in the same 
rooms at the same time so we can have these discussions sooner 
rather than later. So if there is anything we can do, please--
    Mr. Woodall. It is a consensus process, just the way this 
committee and this Congress works on consensus, I think I agree 
with you that is the way it should be done.
    Mr. Capuano. Thank you.
    Thank you, Mr. Chairman. Thank you for your indulgence.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Virginia, Mr. Hurt, is recognized for 5 
minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    I thank the panelists for being here this afternoon. I want 
to direct my first question to Mr. McRaith, and then maybe have 
comments from the other gentlemen.
    I think that, generally speaking, people believe the U.S. 
insurance regulatory structure is a fine one, is a good one. 
And I guess what I would ask is, do you agree with that in 
whole, Mr. McRaith, and if you do, can you talk about how you 
defend that when you are talking to your EU counterparts? How 
do you defend that? And then I guess the second thing is, can 
you talk about the U.S. regulatory structure and its 
effectiveness in the context of competitiveness, the 
competitiveness issue that U.S. insurers face as a consequence 
of the decisions that will be made by these bodies?
    Mr. McRaith. Sir, let me try to take your three questions 
in order.
    The first question you asked is whether the system in the 
United States is fine, from my perspective. And I think I 
probably share the view of this committee, which is that the 
regulatory system worked generally well through the crisis. It 
has served our country generally well for decades. As with any 
regulatory system, it needs to be evaluated factually, and gaps 
and issues need to be identified if they exist. That is in the 
best interest of our country, of our economy, of the industry, 
and of consumers. So, that is my view of our system.
    In terms of, how do I defend that in the international 
fora, as you asked, I think it is important to remember that 
first of all, we can't stomp our feet and say no and walk out 
of the room. The conversations will continue in our absence.
    Our view is we have an important role. The United States is 
a leading insurance jurisdiction. And we need to do the best we 
can to influence the outcome of international discussions so 
that you, as Members of Congress, can make decisions about 
whether and, if so, how our system needs to be reformed. That 
is in the best interests of our industry, and that, in our view 
by advocating our view, working with our international 
counterparts and the State regulators, we can develop a 
platform that supports the growth internationally that the U.S. 
insurance-based industry wants to see. We want to support that 
industry, and participating in the standard-setting is one 
important way to do that.
    Mr. Hurt. Along the same lines, how do you evaluate the 
concerns that--in any way jeopardizing our current U.S. 
regulatory structure or giving up our sovereignty, if you will, 
as it relates to those issues, how does that play into the 
competitiveness of our companies?
    Mr. McRaith. Starting with some ineluctable realities, the 
insurance industry in the United States, if it wants organic 
growth, is mostly seeing that in the emerging markets. That 
puts additional pressure and stress on having international 
standards that make sense and support the growth that our 
companies want, and what we want from our industry. That is 
exactly what we want to see and that is why we are engaged in 
the international processes. We want to support an 
international platform that allows for competitiveness 
overseas.
    Mr. Hurt. Thank you.
    Mr. Nelson, would you care to comment on that?
    Mr. Nelson. Sure, Mr. Congressman. I would concur with what 
Director McRaith has said.
    I would add that in terms of working with our international 
friends, we want to make sure that the standards that are 
developed are appropriate for the insurance business, not bank-
centric. A global capital standard applied to all across-the-
board might work well for banking, but it is inappropriate for 
insurance. So the commissioners and the NAIC, in working with 
our international counterparts, want to make certain that kind 
of a mistake is not made, and we will raise our voices against 
that. We are not going to stomp and walk out of the room, but 
we are going to raise our voices.
    I think what I said earlier really applies. We are putting 
together those pieces of ComFrame we agree with, that we think 
work for insurers, and work on either side of the Atlantic, and 
around the rest of the world. And we are pointing out those 
areas and standards that we don't think are appropriate.
    Mr. Hurt. Thank you.
    I believe my time has expired. Thank you all.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Ohio, Mr. Stivers, is recognized 
for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    And I would like to thank all of the witnesses for being 
here.
    Mr. McRaith, of the eight duties that are specifically 
mandated to you under Dodd-Frank, one of them we have talked a 
lot about is your involvement with the IAIS. Another is 
consulting with insurance regulators on matters of national and 
international importance. And I guess I want to open the floor 
to both you and Senator Nelson to find out how that 
consultation is going, whether the NAIC feels comfortable that 
it is going okay, and how you feel like that is going.
    Mr. Nelson. I said earlier that I think there are 
intermittent times when there is a consultation. But they are 
not sufficient in terms of the amount or the nature of what 
Treasury's position might be with respect to certain issues 
such as market-consistent valuation, or about other issues. So 
we were in a position of very often not knowing. Now, I talked 
to Director McRaith about it, and he has been very clear that 
in some instances, the bureaucracy of the Treasury is like any 
other bureaucracy; he might not know, and he doesn't know when 
he is going to know. So this is not an effort to try to deal 
with this other than straight up. We have to have a clearer 
understanding of the positions of the Treasury Department and 
the FIO, particularly as they relate to State regulation. 
Outside of State regulation, we are not insisting to know.
    Mr. McRaith. I am not sure, Congressman, whether you were 
here when I mentioned earlier in response to the chairman's 
question, after 6 years and 3 months as a State commissioner, 
if I had remained a State commissioner, I would be the 
president of the NAIC.
    Mr. Hurt. Yes.
    Mr. McRaith. And, yes, we can do things better. As you 
know, we are a new office. We are learning. We want to learn. 
We want to do things as well as we can to serve the interests 
of our country. I think it is wrong or inaccurate to suggest 
that we are not working together. And I could go through the 
litany of things.
    Mr. Hurt. That's great. You have answered the question.
    Mr. McRaith. Yesterday--
    Mr. Hurt. Because of limited time, I will cut you off 
there. But I would ask you to work harder to get them the 
information they need. We have a State-based regulation system 
under McCarran-Ferguson that predates that. It is a 150-year 
tradition in the United States, and you know it. You were the 
Indiana or Illinois commissioner. Please do what you can to get 
that interconnectedness inside of Treasury where you can.
    I do want to follow up on a question Mr. Ross asked 
earlier. He mentioned reinsurance, but he didn't talk about 
nonadmitted carriers that are also in that study. I just wanted 
to quickly mention that they are an important part of making 
our markets work really well, too. And I know that both you and 
Mr. Ross mentioned half of that study, but I hope you do the 
whole study, including nonadmitted carriers.
    Mr. McRaith. Absolutely.
    Mr. Stivers. The next thing I wanted to talk about is to 
follow up on one of the questions that you have heard a lot 
about, and I don't recall whether Basel standards have come up 
specifically, but you answered Mr. Miller's question, both of 
you, about this. But the Basel standards are really created for 
banks. And I hope you will resist their imposition on our 
insurance industry.
    So I guess I won't ask you to comment on that. But I will 
urge you to make sure that they use appropriate standards, not 
just ones that were created for banks.
    The next question I have is a follow up on something that 
Mr. Hurt was talking a little bit about. So, the ComFrame 
initiative has really become focused on technical details and 
standards rather than just establishing a consensus or a set of 
principles. And I am curious if--Mr. McRaith, could you address 
this concern, and what you are doing to make it move more 
toward principles as opposed to prescriptive standards?
    Mr. McRaith. Congressman, I became the chair of the 
committee that oversees development of ComFrame in October of 
2011. I can't attest to or vouch for the work product preceding 
that other than to say very smart people from around the world 
worked together to get to that point. We have heard frequently 
and with great emphasis from the industry that those provisions 
of ComFrame that apply to the industry should be principles-
based. When the next version of ComFrame is released, which 
will probably be in late September, early October of this year, 
you will see a much more principles-based document. It will be 
focused on outcomes. It will have guidance for supervisors and 
companies, and ideas for those supervisors and companies on how 
best to achieve those outcomes. But we are moving in that 
principles-based direction.
    Mr. Stivers. Great. I will yield back the balance of my 
time and hope for a second round, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman. The chairman of 
the Capital Markets Subcommittee, Mr. Garrett from New Jersey, 
is recognized for 5 minutes.
    Mr. Garrett. Thanks. And I may not use the whole 5 minutes.
    This sort of plays off, Mr. McRaith, some of the questions 
and answers that you have given already. So what I understand 
from everything I am hearing here, you are moving--not you, 
ComFrame is moving off from the coordinated, regulated 
coordination approach to standard-setting. Okay.
    But if that is done, does that mean that when we have 
jurisdictional differences here versus there in the area of 
solvency, which is one of my pet issues as previously being 
on--chairing the insurance committee back on the State level, 
which I always said the only issue that a regulator should 
really focus on is solvency, everything else becomes secondary 
after that. Solvency, accounting, capital requirements, 
corporate governance. They will be what? If you said it was 
going to be an outcome-based system, so therefore the standard-
setting in your understanding would not be particular on all 
those four or five areas that I just ran down?
    Mr. McRaith. I would answer--let me try to answer your 
question as precisely as I can without getting into too much of 
the technical details.
    Mr. Garrett. Okay.
    Mr. McRaith. Generally speaking, the ComFrame provisions 
that apply to the companies, the risk management, corporate 
governance, those will move in a much more principles-based 
direction. The objective of ComFrame is to allow for the 
supervisors from countries around the world. We want our 
companies expanding, growing into all these emerging markets. 
Those supervisors want to know, what is this company we are 
looking at? And how is it capitalized? What is its financial 
condition?
    So, ComFrame will establish a common vocabulary. But it is 
not going to be a solvency assessment, per se. It will be a 
common method, a simple basic formula, how do we evaluate the 
financial status of the company?
    Now, the best part about it is that what we will see at the 
end of this year is a concept and a proposal. And it will be 4 
years of testing with the companies to get their direct 
feedback.
    Mr. Garrett. I appreciate you not getting too much in the 
weeds. So let's take something like the capital standards or 
what have you, so they will come up with a terminology term and 
that sort of thing. I get you, I think, on that.
    Mr. McRaith. Yes.
    Mr. Garrett. But what pops into my head is another analogy 
where we talk in these committees on setting of standards in 
education and then, of course, their--what is the expression 
they always use? We are going to teach to the test, then, 
which, basically, you are teaching to the standards, right? So 
if you have these core requirements, if you will, which would 
be the standards here, does that then implicitly, if not 
explicitly, then, say to the company, to the carrier, this is 
how your capital standards will have to be met in order to be 
satisfied, in order to satisfy these standards, as opposed to 
just saying, you have a standard--and I am not alluding to the 
whole banking issue.
    Mr. McRaith. Right.
    Mr. Garrett. That is a valid argument, as well.
    Mr. McRaith. In fact, I think, on the contrary, what it 
allows the supervisors of these companies--and, as you know, 
some of the U.S.-based companies are in 40, 50, 100 or more 
countries. That is great. That is what we want. And what we 
want to see is those supervisors be able to understand what is 
the financial strength of the company. It is not setting a 
standard; it is allowing them to communicate in a way that 
builds confidence and trust.
    Mr. Garrett. All right. Just two other questions. If the 
company is designated as a global systemically important 
insurer by the IAIS and the Financial Stability Board, what 
will the consequences be, then, for that U.S. company group?
    Mr. McRaith. It is important to know--and I was, by the 
way, pleased to hear Roy talk about this, because our 
situations with him, obviously, have informed him very well. 
The FSB, the IAIS will make a recommendation to the FSB, which 
will make its determination. That is not self-executing. There 
is no legal effect of that in the United States. Any 
determination at the FSB level for any country--for any company 
would be referred to the domestic authority, the domestic risk-
analysis process. And in the United States, that is the 
Financial Stability Oversight Council. No aspect of the FSOC is 
going to be abrogated, altered, modified, or reduced because of 
the international process.
    Mr. Garrett. We will see.
    My last questions are on the FIO, they are responsible as 
far as reports under Dodd-Frank. I don't know whether someone 
else has asked you this, about the fact that I guess there are, 
all together, one, two, three, four, five reports. Two of them 
are done. There are three of them whose timeline has come and 
passed, January of last year, September 30th. Can you tell me 
why are they late, and when should we anticipate them?
    Mr. McRaith. I can tell you that the reports--we released 
our first annual report yesterday. We are pleased to have that 
out. We look forward to feedback from you and other members of 
the committee on that report. It is our first effort. That is 
the first in our queue. We are working to produce additional 
reports. You will see our modernization report, which, as you 
might know, Congressman, I think is the one of interest to many 
people. That will be out in the near future.
    Mr. Garrett. That was due back in January of last year, 
right?
    Mr. McRaith. That is right.
    Mr. Garrett. So shouldn't we have that?
    Mr. McRaith. We recognize that it is not on schedule. We 
haven't delivered it as punctually as we would like. But we 
want to provide this committee with a meaningful, thoughtful 
report. That is what you will get from us.
    Mr. Garrett. I would think--with the chairman's 
permission--that sort of information would be information that 
you would want to have in hand as you are negotiating or 
discussing the aspect of defending our system vis-a-vis the 
international system. And we are a year-and-a-half behind 
there. That would be problematic, I would think.
    Mr. McRaith. More importantly, we want you to have that 
information as well.
    Mr. Garrett. Thank you.
    Mr. McRaith. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from Ohio, Mrs. Beatty, is recognized for 5 
minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    I will try to be brief, and I am going to combine two 
questions. As you heard earlier, I am from the great State of 
Ohio. And we have one of the Nation's largest insurance 
companies in my district. We also have the largest single 
campus in my district. And in talking with some of the 
financial managers at the Ohio State University, one of the 
questions came up about terrorist insurance, risk insurance. 
And with the backstop here in the U.S. Government, the 
university is paying thousands and thousands of dollars. And so 
they wanted to know--to obtain coverage for a terrorist attack, 
without TRIA, will the cost be prohibitive? Will it be 
impossible to get the insurance? Or do you think they will have 
to go through surplus lines outside of the United States? 
Briefly, please?
    Mr. McRaith. Briefly, as you know, TRIA, as a program, is 
set to expire at the end of 2014. These are exactly the issues 
that we will be studying, considering, and evaluating over the 
next 18 months. And we look forward to hearing the views of 
your constituents, the industry, and others, of course, 
regulators, as we make that evaluation.
    Mrs. Beatty. Okay. Thank you. The second question is, as we 
look at insurance companies who own banks and then insurance 
companies, as someone earlier said, that are designated as 
systemically important financial institutions, if each of these 
companies are wholly domestic, will they be subject to an 
international agreement on capital rules?
    Mr. McRaith. Congresswoman, if I understand the question, 
it is whether a bank or savings and loan holding company in the 
United States would be subject to international capital rules. 
I think those determinations are made by the lead supervisor of 
the bank holding company or savings and loan holding company. 
And in our case, that would be the Federal Reserve.
    Mrs. Beatty. Okay. Thank you. I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    Mr. McRaith, in your discussions with European officials, 
does the Treasury have any specific concerns with the proposed 
Solvency II standards for insurance companies operating in 
Europe and their potential impact on the U.S. insurers?
    Mr. McRaith. We have--first of all, Solvency II is not a 
final document. So the exact terms and provisions of Solvency 
II are unclear at this point. We have certainly heard from 
industry, both in the EU and the U.S., about Solvency II's 
impact. Our primary concern was the threat of a unilateral 
equivalence assessment of U.S. regulation by the EU. And our 
work with the State regulators and our EU counterparts that has 
been a constructive, good faith effort now for 18 months, has 
removed that equivalence threat from the supervisory 
relationship, and we have worked to improve, as I mentioned 
earlier, our understanding, our analysis of both systems.
    Chairman Neugebauer. Would you support then--is it your 
position that the United States should adopt Solvency II 
standards?
    Mr. McRaith. Absolutely not. I think we have a system here; 
you are well-versed in it. Our system works for the United 
States. Whether it should be changed or not is in the purview 
of this body. Solvency II is a system that can work well for 
the EU. It has some very good ideas. And very smart people have 
developed that approach. It has, in fact, been adopted in part 
in Mexico, China, South Africa, and other countries around the 
world. We shouldn't turn our back on it. And we wish our best 
to our EU counterparts. But as a system, it is not one that 
would work for the United States.
    Chairman Neugebauer. My next question is about something 
that was I think in the New York Times yesterday about captive 
insurance companies. I think it was a New York attorney general 
who mentioned that there should be some additional 
investigation of that--I guess since we have State regulations, 
you are involved in monitoring what is going on, do we feel 
that the States have a handle on captive insurance companies? 
And I will start with Mr. McRaith and go across the panel.
    Mr. McRaith. Yesterday's action by the New York Department 
of Financial Services, which includes their insurance 
regulators, illustrates, I think, that this is an issue of 
importance. It is an issue in which the States are engaged, and 
there are opinions on both ends of the spectrum on this issue.
    My understanding from the regulators, and we are monitoring 
the activity, is that they are working on an appropriate and 
professional way to bring some uniformity, some resolution to 
this issue. And I think as well that the industry is very 
professionally engaged, working to bring some closure on this 
issue.
    Chairman Neugebauer. Senator Nelson?
    Mr. Nelson. I would agree with Director McRaith on that 
assessment of what the NAIC is doing. One of the efforts that 
is under way is to develop principles-based reserving so that 
the reserves, the assets being held to protect against the 
liabilities are matched sufficiently and appropriately. If that 
occurs, I think you probably will see less use of any captive, 
and even in the use of a captive, there is a question of 
whether or not risk has been transferred. So this is an area 
that is being closely scrutinized. I think there will be a way 
to harmonize it between the various different points of view. 
But principles-based reserving will be one of the most 
important points. Because one of the reasons that you have the 
captive situation is that there is a belief among some within 
the industry that the reserving requirements, which are based 
on a formula, create redundant reserves, over-reserving, 
unnecessarily over-reserving, not seeking to under-reserve 
necessarily, but over-reserving. Those are the arguments that 
are being made. Let's get this reserving system right, and then 
I think some of these mechanisms will be unnecessary.
    Chairman Neugebauer. And so should policyholders--is your 
message to them today, ``We have it covered?''
    Mr. Nelson. We want the policyholders to know that when a 
promise is made to them, the promise will be kept. It matters 
to your folks back home. It matters to the people all over the 
United States. We want to make sure that things are done right. 
And matching reserving requirements to actual needs and capital 
support is critical to regulation of insurance solvency. And 
you can be sure that the commissioners are working hard to 
resolve this.
    Chairman Neugebauer. Mr. Woodall?
    Mr. Woodall. I would say in my capacity as a member of 
FSOC, and trying to keep my insurance expertise up to date, 
this has been an issue that I have been looking at. I have met 
with companies that use captives for their reserves. I have met 
with companies that oppose that. I had a consultation with 
Superintendent Lawsky on this issue. And I think that if the 
council, FSOC, decides to make some sort of recommendation, it 
will. In the meantime, I think it is with the regulators, where 
it should be. If they could come up with something--it is very 
typical that when you get the industry divided on an issue, it 
is pretty hard to come to a consensus. But I think this is a 
very good faith effort under way to do so.
    Chairman Neugebauer. Thank you.
    I recognize the gentlewoman from Ohio again, Mrs. Beatty.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    I think I had a part two of that question. And I kind of 
left it in the air, so let me take a stab at it again and ask, 
even if those companies are wholly domestic, they will be 
subject to the international agreement on the rules. But when 
we look at Basel III, which is a banking regime, and the 
Federal Reserve has stated under Dodd-Frank, it must be subject 
to federally-supervised insurance companies to this banking 
regime, do you feel that is appropriate?
    Mr. Nelson. Congresswoman, the way I would respond to that 
is that we already have developed what we call supervisory 
colleges that do the examination and the oversight of globally 
active insurance operations. And that consists of not only the 
home State supervisor, the domestic State supervisor, but other 
affected States, as well as international regulators, included 
within that supervisory college working together with the 
collaborating, communicating, cooperating and jointly and group 
supervision already--already be engaged in that supervision, 
even when a company is not designated as an SIFI or a G-SII 
company.
    So I think you are going to see a lot of cooperation. It is 
already in place. I don't remember, but there are more than 15 
of these college supervisory groups that have met, are meeting 
and continue to work together, cooperatively, across borders, 
across transatlantic, wherever the regulator of a jurisdiction 
needs to be involved, can be involved.
    Mrs. Beatty. Thank you. I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    The gentleman from California, Mr. Royce, is recognized for 
5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    Director McRaith, you reference in yesterday's FIO annual 
report, State-level reinsurance collateral requirements have 
been a thorny issue between the United States and Europe for 
several years. You have observed that. We have observed that. 
But the conference report on Dodd-Frank noted that Treasury and 
USTR's authority to negotiate covered agreements going forward 
will assure uniform national application of prudential 
measures, such as reinsurance collateral requirements. That 
quote is from the legislation.
    As covered agreements are intended to be the mechanism to 
resolve this issue, can you tell me the status of FIO's efforts 
to seek such an agreement?
    Mr. McRaith. Congressman, there are a couple of 
considerations. First of all, we are, as mentioned earlier, in 
close contact with the State regulators in the EU through our 
project, our dialogue, and project. And we have identified 
reinsurance collateral as an important question to be resolved 
between the two jurisdictions.
    We have monitored very closely the work of the NAIC and the 
States on this issue.
    We are aware of the law in Dodd-Frank, Title V, what its 
authority is. And we are evaluating the facts, and we are 
evaluating whether those facts justify the pursuit of a covered 
agreement.
    Mr. Royce. We will, going forward, have EU/U.S. trade talks 
on this subject of a trade agreement. Could that be used to 
institutionalize, maybe, this discussion with Europe? I just 
bring it up as a thought. You don't have to give me a response 
on it. But conceptually, it might be a way to drive this issue 
for a while and get it resolved. If we have a seat at that 
table, and it is raised to that level, we might be able to get 
this behind us, but I want to thank all three of the witnesses 
for their testimony here today, Mr. Chairman.
    Mr. McRaith. Thank you, Congressman.
    Mr. Royce. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Ohio, Mr. Stivers, is recognized 
for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman, for this second round 
of questions.
    My first question is for Mr. McRaith. We talked a little 
bit about how you think the ComFrame is going to hopefully 
transform back to a more principles-based approach. In the 
current 138-page proposal, it details a description of how 
assets and liabilities should be calculated that don't 
currently match the U.S. system. And I am just curious whether 
you are working to fix that, and what the status of that piece 
of it is, if you can say.
    Mr. McRaith. Sir, and again, I don't want to get into too 
much of the technical detail. But to answer your question as 
well as I can in a meaningful way, the most recent draft of 
ComFrame is July of 2012. There have been various proposals, 
additions, edits, and changes that have been part of a 
circulating draft. The next formal draft of ComFrame will be 
released in late September or early October. Now, are there 
issues in terms of a quantitative assessment, a quantitative 
element of ComFrame that raise questions about the intersection 
of the U.S. approach versus other approaches? Absolutely. And 
that is the conversation that we are having at the IAIS.
    Mr. Stivers. And the point there is if we can't figure out 
how to calculate our assets and liabilities similarly, it is 
going to be really complicated as we try to figure out how to 
regulate folks.
    Mr. McRaith. I completely agree with you. It is an 
incredible challenge. What we do know, though, is that 
insurance groups operating internationally do this all the 
time. And we also know that the credit rating agencies that 
evaluate the capital or financial position of those same groups 
do it all the time.
    Mr. Stivers. And here is my bigger question and concern 
under ComFrame. Because it imposes a new additional layer of 
regulation, especially on large U.S. companies competing in 
foreign markets against more domestic players that in some 
cases would not be subject to ComFrame. What are you doing to 
prevent the creation of an unlevel playing field or a 
competitive disadvantage for our U.S. insurers?
    Mr. McRaith. So, first, let me say and repeat that our 
priority is to establish a level playing field to support.
    Mr. Stivers. You said that earlier about international. I 
just want to know what you are doing to make sure that happens.
    Mr. McRaith. Leading the discussion, participating 
actively, engaging in the important and difficult questions 
will allow us to shape the outcome of ComFrame. It is important 
to know--the premise of your question--I am sorry.
    Mr. Stivers. Do you think we are put at a competitive 
disadvantage by the structure? Maybe several of our State 
insurance commissioners from States that are as big as 
countries in Europe should be at the table.
    Mr. McRaith. And they are. The NAIC--
    Mr. Stivers. They are there through Mr. Nelson. But how 
many votes does our NAIC get?
    Mr. McRaith. There are five votes at the Executive 
Committee for North America. And three of those are for the 
United States. One is for--
    Mr. Stivers. So take out Canada and Mexico for--
    Mr. McRaith. Three for the United States.
    Mr. Stivers. I am elected to the United States Congress.
    Mr. McRaith. There are three for the United States. One is 
the Federal Insurance Office; the other two are the States.
    Mr. Stivers. Those are votes from North America. How many 
from Europe?
    Mr. McRaith. I don't know. I know that there is regional 
balance. And I don't know the exact number, but I would be 
happy to let you know.
    Mr. Stivers. I guess the point is, maybe the structure is 
something that we should take a serious look at. And I don't 
want to walk away, but I just want to make sure that our 
regulatory structure is not at a competitive disadvantage just 
because of the structure of this international organization 
that makes our big insurance companies have to be at a 
competitive disadvantage when they try to do business in Europe 
or in Asia or anywhere in the world.
    Mr. McRaith. I absolutely appreciate that concern.
    I would say that is one advantage of having the Federal 
Insurance Office as Chair of the committee that is developing 
ComFrame. And all the more reason for us to collaborate, and 
coordinate with the State regulators.
    Mr. Stivers. And I do appreciate that you are doing that. 
We have about 30 seconds left. Is there anything that you want 
to talk about in that time? Mr. Nelson or Mr. Woodall? Senator 
Nelson, I'm sorry.
    Mr. Nelson. I think, Congressman, you have hit on one of 
the most important parts of the concerns about ComFrame, about 
getting it right for the State-based system in the United 
States.
    And when you look to the number of votes, there is a 
concern that we could be voted down and the ComFrame could go 
through. It is supposed to be a collaborative process. And in 
some respects, maybe it is. But I can tell you that many of the 
commissioners who participate at the ComFrame level question 
whether or not our positions in our requirements are being 
heard, or are being heard but not being listened to.
    Mr. Stivers. I guess I would just propose a quick--and I 
know I am out of time--alternative. Maybe we should look at the 
total asset size of our industries compared to other folks and 
have a proportion of voting share that way.
    I yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman. I ask unanimous 
consent that the testimony from NAMIC, a letter from ACLI, and 
a letter from FSR be made a part of this record. Without 
objection, it is so ordered.
    I will close by saying I think this has been a good 
hearing. I appreciate the Members' questions. I appreciate the 
witnesses' candid answers. I think what I would say to you, to 
this panel, is there is a lot of expertise here at the table 
today on this issue.
    This is an important issue to our country. Our American 
insurance industry is one of the crown jewels of our country. 
And we have a bunch of really fine companies here that create a 
lot of jobs. And they create a lot of GDP for our Nation. So if 
there are ways that the three of you can figure out how to work 
better together, I think that is important.
    If I can figure out a way to get Mr. Woodall more engaged 
in those activities, he obviously brings some things to the 
table, and he brings a perspective from a table that neither 
one of you sit at, as well. So I think the collaboration is an 
important part of the process, and particularly one--such an 
important one is making sure that we have a level playing field 
and we also, more importantly, in the end, making sure that 
these promises that these entities have made to their customers 
they will be able to keep.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    So, with that, this hearing is adjourned.
    [Whereupon, at 3:28 p.m., the hearing was adjourned.]



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                             June 13, 2013

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