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





                     THE FEDERAL INSURANCE OFFICE'S
                         REPORT ON MODERNIZING
                          INSURANCE REGULATION

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 4, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-61




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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              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York           PATRICK MURPHY, Florida
STEVE STIVERS, Ohio                  JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana          JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois
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:
    February 4, 2014.............................................     1
Appendix:
    February 4, 2014.............................................    63

                               WITNESSES
                       Tuesday, February 4, 2014

Cimino, Anthony, Acting Head, Government Affairs, the Financial 
  Services Roundtable............................................    39
Ehlert, Paul, President, Germania Insurance, on behalf of the 
  National Association of Mutual Insurance Companies (NAMIC).....    41
Hughes, Gary E., Executive Vice President and General Counsel, 
  the American Council of Life Insurers (ACLI)...................    42
Jensen, Jon, President, Correll Insurance Group, on behalf of the 
  Independent Insurance Agents & Brokers of America (IIABA)......    44
Leonardi, Thomas B., Commissioner, Connecticut Insurance 
  Department.....................................................     9
McRaith, Michael, Director, Federal Insurance Office (FIO), U.S. 
  Department of the Treasury.....................................     8
Nutter, Franklin W., President, Reinsurance Association of 
  America (RAA)..................................................    46
Restrepo, Robert, President, Chairman, and Chief Executive 
  Officer, State Auto Insurance Companies, on behalf of the 
  Property Casualty Insurers Association of America (PCI)........    48
Sinder, Scott, General Counsel, the Council of Insurance Agents & 
  Brokers (The Council)..........................................    49
Zielezienski, J. Stephen ``Stef,'' Senior Vice President and 
  General Counsel, the American Insurance Association (AIA)......    51

                                APPENDIX

Prepared statements:
    Cimino, Anthony..............................................    64
    Ehlert, Paul.................................................    70
    Hughes, Gary E...............................................    85
    Jensen, Jon..................................................    93
    Leonardi, Thomas.............................................   100
    McRaith, Michael.............................................   102
    Nutter, Franklin W...........................................   109
    Restrepo, Robert.............................................   114
    Sinder, Scott................................................   118
    Zielezienski, J. Stephen ``Stef''............................   134

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Written statement of the American Academy of Actuaries.......   179
    Written statement of the Consumer Federation of America......   181
    Written statement of Catherine Weatherford, President and 
      CEO, Insured Retirement Institute (IRI)....................   183
    Written statement of Sean McGovern, Director, Risk 
      Management, and General Counsel, Lloyd's...................   195
    Written statement of the National Association of Professional 
      Surplus Lines Offices (NAPSLO).............................   200
    Written statement of the National Conference of Insurance 
      Legislators (NCOIL)........................................   206
Royce, Hon. Ed:
    Written responses to questions submitted to Gary Hughes......   208
    Written responses to questions submitted to Jon Jensen.......   210
    Written responses to questions submitted to Robert Restrepo..   212
    Written responses to questions submitted to Scott Sinder.....   213
    Written responses to questions submitted to J. Stephen 
      ``Stef'' Zielezienski......................................   215
    Written responses to questions submitted to Thomas Leonardi..   218
Sinema, Hon. Kyrsten:
    Written responses to questions submitted to Thomas Leonardi..   225
    Written responses to questions submitted to Michael McRaith..   269

 
                     THE FEDERAL INSURANCE OFFICE'S
                         REPORT ON MODERNIZING
                          INSURANCE REGULATION

                              ----------                              


                       Tuesday, February 4, 2014

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Royce, Garrett, Duffy, Hurt, Stivers, Ross; Capuano, Velazquez, 
Clay, Sherman, Himes, Sinema, and Beatty.
    Ex officio present: Representatives Hensarling and Waters.
    Also present: Representatives Ellison and Green.
    Chairman Neugebauer. This hearing will come to order. As 
previously agreed, each side will have 10 minutes for opening 
statements. I ask unanimous consent that Representatives 
Ellison and Green, who are not members of the subcommitee, be 
permitted to participate in the hearing. Without objection, it 
is so ordered.
    With that, I will begin with my opening statement.
    First of all, I want to thank you for coming to this 
important hearing examining the Federal Insurance Office (FIO) 
report on modernization and improving insurance regulation in 
the United States. The insurance sector is an extremely vital 
part of the U.S. economy, not only in terms of assets and asset 
protection, but also as a direct source of domestic jobs in 
this country. That is why it is imperative that Congress and 
the State governments work together to promote an insurance 
regulatory system that is efficient, dynamic, innovative, and 
responsive to consumer needs.
    Unfortunately, the absence of uniformity in the State-based 
insurance regulatory system has created some inefficiencies and 
burdens for insurance companies and policyholders. In fact, 
according to the McKinsey & Company, the cost associated with 
these inefficiencies is approaching nearly $13 billion 
annually. This is unacceptable and we must, and can, do better. 
Accordingly, I would also like to thank Director McRaith and 
his staff for putting together a thoughtful report that will 
hopefully restart the insurance regulatory modernization 
debate.
    Moving past arguments about the appropriate role of the FIO 
in these issues and their analysis of State efforts, this 
report goes a long way in educating policymakers about the 
long-standing debates in the insurance marketplace, and will 
hopefully facilitate additional movement by the States towards 
more uniformity.
    On a positive side, FIO makes some recommendations that 
encourage States to improve uniformity, efficiency, and 
consistency in their regulatory system. For example, the report 
identifies the need for more coordinated State market conduct 
exams. It addresses inefficiencies in the State product 
approval process and presents useful arguments against State 
regulation regimes.
    These are examples of regulatory improvements that would be 
very constructive and would save costs for policyholders and 
the insurers. As such, the States must work diligently together 
to address these areas quickly or run the risk of ceding 
relevancy to the modernization debate.
    On the other hand, the FIO report missed the mark in some 
areas. It glossed over many of the statutory requirements of 
the study, such as the feasibility of regulating certain lines 
of insurance at the Federal level.
    And instead of wading into the more tangible issues like 
captive insurance regulation and corporate governance 
standards, the report also lights FIO's ambitions that go way 
beyond its statutory direction by directly advocating for the 
Federal regulation of mortgage insurance and, more alarmingly, 
suggesting that potential for binding Federal standards for 
insurance risk classification methods.
    Further, while I appreciate the hard work of Director 
McRaith and his staff in this report, I am disappointed that it 
failed to provide any clarity on what strategic purpose the 
Federal Insurance Office serves.
    The FIO has been in existence for over 3 years, and it is 
still not clear what value the office brings to the 
policyholders and the domestic industry. Beyond its monitoring 
and consulting duties, the statutory objectives, FIO included 
insisting the SIPI designations for insurance companies 
administering the Terrorist Risk Insurance Program (TRIA), 
coordinating Federal insurance policy overseas, and making 
covered agreement preemption determinations. And yet, the 
initial SIPI determinations were met with strong dissent from 
the Federal insurance experts, and there have been no formal 
comments on TRIA, despite its impending expiration.
    Constructive coordination on international issues is 
largely absent and, to date, there have been no covered 
agreements. I want Director McRaith and his staff to succeed 
accordingly, and I hope 2014 will be the year that we can 
finally see some constructive movement on these issues and that 
the FIO provides some value to the insurance consumers and 
domestic insurers. Thank you.
    With that, I recognize the ranking member of the 
subcommittee, Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman, and I appreciate 
having this hearing. Director McRaith, Commissioner Leonardi, 
and everybody else in the audience--and I am guessing that 
everybody else in the audience is actually on the second panel?
    [laughter]
    Yes. So, that counted people in the hall.
    [laughter]
    This is a an important and a complicated subject that will 
bring out a lot of important issues that I look forward to 
discussing today. In many ways, I do wish that we had had the 
second panel first. Because I think there may be some things 
mentioned that I would personally like to hear Director 
McRaith's responses to; whatever they may be, positive, 
negative, agreement or not, that is not the point. To me, I 
look at this as a discussion, an ongoing discussion, ongoing 
enlightenment for those of us who sit on this side. And also, I 
think an opportunity for self-internal reflection of all the 
people who are in the audience today who are going to testify 
on this.
    So, again, I appreciate today's hearing. I look forward to 
the testimony. And I thank you all for being here.
    Chairman Neugebauer. Now, the vice chairman of the 
subcommittee, Mr. Luetkemeyer, is recognized for 1\1/2\ 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. The regulation of 
insurance has not historically been a topic of much 
conversation in Congress, mainly because insurance has been, 
and remains, regulated by the States. That seems to be 
changing, and the FIO report on modernization speaks to this 
evolution in both productive and troubling ways.
    As I have said in the past, I remain concerned that the way 
the United States has regulated insurance is taking a back seat 
to international proposals. I want to remind our panelists that 
the current model of regulation has, in an overwhelming 
majority of cases, served the American people well.
    We can have efficient and consistent insurance markets 
without turning over the regulatory control to the Federal 
Government. Some modernization should, and I am confident will, 
happen. States should do a better job of coordinating and 
creating a more efficient insurance market.
    But be careful what you wish for. We can see by what is 
going on today in practically every sector of our economy that 
Federal regulation can be burdensome and punitive and, 
therefore, counterproductive. Any modernization needs to be 
focused. It needs to, first and foremost, address the needs of 
the American people and policyholders.
    Modernization efforts also need to bear in mind the 
considerable differences between the insurance industry and 
other financial services industries, and respect the unique 
State regulatory model that we have in place today. I look 
forward to a robust discussion, and thank our witnesses for 
joining us.
    And with that, Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Himes from Connecticut is recognized for 2 minutes.
    Mr. Himes. Thank you, Mr. Chairman. And I join the chairman 
and the ranking member in welcoming the witnesses for what is, 
as the ranking member said, going to be a very, very 
interesting discussion with very difficult issues. So I look 
forward to both getting through the testimony of the panels and 
hearing what you have to say.
    I also wanted to take a moment just to personally introduce 
and welcome my fellow nutmegger, Insurance Commissioner Thomas 
Leonardi of Connecticut. Mr. Leonardi, we are thrilled to have 
you here. Those of you who don't know Commissioner Leonardi--
yes, he has a lengthy career in the insurance industry; 22 
years before he was Commissioner, chairman and CEO of 
Northington Partners. He was chosen by the Treasury Department 
to serve on the FIO Federal Advisory Committee on Insurance. 
And he also serves on the executive committee and technical 
committee of the International Association of Insurance 
Supervisors.
    He has also been part of the team which, in the State of 
Connecticut, while the Federal healthcare.gov Web site was 
challenged, to say the least, helped roll out a spectacular 
insurance exchange which has now signed up 76,000 citizens of 
Connecticut for health insurance. This is in a State of 3\1/2\ 
million people. Many of these 76,000 people never even dreamed 
that they might some day have health insurance. So I thank you, 
Commissioner Leonardi, for your role in that.
    I would also note that Commissioner Leonardi is thoughtful 
and outspoken. He is known for his ``Jerry McGuire'' moment 
with respect to a letter he wrote on the NAIC, a very 
interesting memo. He is forceful, thoughtful, and clear in his 
thinking. Whether you agree or disagree with him, you always 
know where he stands. And Commissioner, I very much look 
forward to hearing your testimony today.
    Thank you. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Royce, one of 
the senior members of the committee, is recognized for 2\1/2\ 
minutes.
    Mr. Royce. Thank you, Mr. Chairman. This does feel like 
deja vu all over again, as they say. We have sat right here 
before. We have received testimony from Treasury on studies on 
how to improve insurance regulation. We have heard from current 
insurance Commissioners. And we have heard from former 
Commissioners, who testified that uniformity was right around 
the corner.
    So in 2001--I went through my notes--2 State Commissioners 
testifying on behalf of the NAIC were asked by then-Chairman 
Oxley if uniformity and product approval was possible in 3 to 4 
years.
    And here is their response: ``We have to meet that kind of 
goal. The current system is not good for consumers, and it is 
not good for insurance companies. If, over the next 2 to 3 
years, you haven't seen significant progress, then I think 
there need to be questions raised about whether we can 
effectively, at the State level, solve the problems.''
    As the FIO's most recent report points out, the process for 
product review and approval still varies by State. And even 
where shortcomings have been addressed in life product 
approval, large markets like California, Florida, and New York 
have opted out. And the scope of the eligible product lines is 
limited.
    So we have promises made, we have the promises that were 
broken and the hearings that have happened over and over and 
the studies that get written. And then, they are forgotten. So 
here is what I would suggest, Mr. Chairman. This committee 
needs to look closely at these recommendations one by one and 
prioritize next steps to make some of them a reality, for once. 
And I, for one, would start with a covered agreement, product 
portability and rate reforms. But we all know that this is not 
a committee of one.
    I challenge this committee to act on behalf of insurance 
consumers to let this study not be an ending point of our 
discussions, but a beginning. Otherwise, I am afraid we are 
going to be right back here again.
    And finally, while I was hopeful that today's hearing would 
focus solely on the recently released modernization report, I 
would say that the timing of Commissioner Leonardi's appearance 
is fortuitous. I do think the Commissioner's recent letter 
caused quite a stir, as it criticized the NAIC's internal 
governance, and it promoted transparency. That was the goal of 
that report. And I think that is a shared goal a lot of us 
would like to explore with the Commissioner today.
    And I thank you again, Mr. Chairman, for holding this 
hearing.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Sherman, is 
recognized for 2 minutes.
    Mr. Sherman. Looking in from the outside, the idea of State 
regulation of insurance looks like we would have a race to the 
lowest common denominator. We have seen that with corporate 
governance laws where, in the absence of the SEC, I am sure one 
of our States would basically abolish shareholder voting and 
install management.
    But we had the best shakedown cruise one could ask for in 
2008. We saw which parts of our regulatory system worked. And 
we saw, particularly with AIG, that those subsidiaries which 
were subject to State regulation remained healthy, and those 
entities under the same management, or overall management 
control which were not subject to State regulation required an 
enormous bailout.
    When we look at credit default swaps, we are basically 
looking at insurance. You are insuring that a portfolio of 
investments won't decline in value. We disguise this by saying, 
well, we won't write you a check if a bad thing happens. We 
will just let you, at any time, swap what is your bad 
portfolio--or that becomes bad--for a good portfolio. I think 
that is absurd. What if we had a fire insurance company that 
didn't want to be regulated and said we don't write a check to 
somebody whose house burns down. We just let you swap for the 
non-burned-down house across the street.
    That is fire insurance. That would be regulated. So I think 
the State system has proven itself to do well. That doesn't 
mean we can't do better with some action at the Federal 
Government. And I look forward to applying that system to 
disguised insurance when--instead of turning to the consumer 
and saying if something bad happens, we write you a check, we 
turn to the consumer and say, if you don't like your burned-
down house, your burned-down portfolio or whatever, you can 
swap it for U.S. Treasury bonds or a non-burned-out house or 
whatever. Going forward, I look forward to building on the 
present system of State regulation.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the chairman of the Capital Markets Subcommittee, 
Mr. Garrett, is recognized for 1 minute.
    Mr. Garrett. Okay. Thank you, Mr. Chairman, for holding 
this hearing for a long-awaited report on how to modernize and 
improve the system of insurance regulation in the United 
States. I would also like to thank the witnesses here, and the 
Director, as well. After reviewing the report, I was 
disappointed to learn that the report only lightly touches on 
many important international regulatory concerns despite being 
the area of their greatest activity behind the scenes. 
Foremost, the FIO report provides little substance, analysis or 
any recommendations concerning existing proposals for insurance 
regulations.
    For example, under the current ComFrame draft proposal, 
U.S. insurers could face international regulatory efforts to 
impose bank-like regulations on U.S.-based insurers. These 
changes could disadvantage U.S. policyholders and U.S. 
insurance companies competing overseas. You see, insurance 
companies maintain very different capital structures from banks 
and, as such, should not be treated in the same manner when it 
comes to assessing capital requirements.
    Unfortunately, international insurance supervisor efforts 
are moving away from a coordinated approach and towards a top-
down prescriptive prudential approach. And this wholesale 
change represents a net negative for U.S. policyholders and 
insurers, especially given the success of the U.S. State-based 
approach, which accomplishes the same type of protections using 
less capital and a different set of regulatory measures.
    Again, I thank the chairman for this hearing, and I look 
forward to the testimony that follows.
    Chairman Neugebauer. I thank the gentleman.
    I now recognize the ranking member of the full Financial 
Services Committee, Ms. Waters from California, for 2 minutes.
    Ms. Waters. I would like to welcome all of our witnesses to 
today's hearing. Today, this committee will discuss the 
insurance industry, a sector critical to our economy and our 
way of life. In fact, the United States has the largest 
national insurance market in the world. In 2012, premiums in 
two critical insurance sectors--life and health; and property 
and casualty--totalled more than $1.1 trillion. That accounts 
for approximately 7 percent of our Nation's gross domestic 
product.
    In addition, the insurance industry plays a significant 
role in our job market, currently employing about 2.3 million 
Americans. We cannot underestimate the significance of changes 
to international insurance regulation. Even small changes can 
have a significant impact on American jobs, consumers, our 
economy, and global presence. With this in mind, Congress 
created the Federal Insurance Office to coordinate Federal 
efforts and develop Federal policy on prudential aspects of 
international insurance matters.
    Among other responsibilities, the Federal Insurance Office 
is tasked with assisting the Treasury Secretary in 
administering the Terrorism Risk Insurance Program (TRIA). 
While not the subject of today's hearing, I want to reiterate 
the widespread support amongst Democratic members of this 
committee for the quick, clean, and long-term reauthorization 
of TRIA. I call on my Republican colleagues to consider the 
impact that unnecessary delays or significant changes to the 
TRIA program will have on U.S. jobs, development, and our 
economy.
    I applaud the Department of the Treasury and particularly 
FIO for the release of this important modernization report. It 
analyzes the current framework for the U.S. insurance 
regulatory system and provides recommendations for improvement 
and modernization. The report notes areas where States can work 
to improve uniformity, and addresses the limitations of State 
law. It also identifies opportunities for a Federal role in 
areas where States cannot make necessary improvements.
    I would especially like to thank the Federal Insurance 
Office for the recommendations on marketplace oversight and 
consumer protections. While there is no question that more can 
be done to improve access in underserved communities, 
particularly minority and low-income communities, I see this 
report as an important first step.
    I know I speak for my colleagues when I say that we are 
ready to work with the Federal Insurance Office, the National 
Association of Insurance Commissioners, and the insurance 
industry to ensure all families benefit from the protections 
and opportunities afforded by insurance.
    I thank you, and I look forward to the testimony of our 
witnesses today. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from Florida, Mr. Ross, is recognized 
for 1\1/2\ minutes.
    Mr. Ross. Thank you, Mr. Chairman. Having formerly served 
as chairman of the Florida House Insurance Committee, I am 
familiar with challenges and complexities inherent in insurance 
regulation. Florida's geographic location and diverse 
population result in a unique marketplace that varies even 
within the State. Over the past few decades, our Office of 
Insurance Regulation has both achieved successes and has 
acknowledged failures. In many cases, we now have set industry 
standards that are modeled by other States.
    Florida's unique marketplace, and the developed regional 
experience enjoyed by our regulators, underline for me the 
importance of State authority in insurance regulation. 
Accordingly, I appreciate FIO's cautious tone. I think 
preserving and maintaining McCarran-Ferguson is very important. 
Unlike the haste of past regulations, we should be certain that 
any actions taken to improve and streamline regulation actually 
do improve and streamline regulation rather than create complex 
and duplicative processes.
    Finally, I hope to have a productive discussion today 
regarding the efforts of the International Association of 
Insurance Supervisors to create a framework for international 
insurance standards. As this process moves forward, it is 
critical that the interests of U.S. domestic insurers are 
adequately represented and their specific business models are 
recognized. I am concerned that not properly addressing these 
separate business models will result in higher premiums for 
American families who are already struggling with the high cost 
of health insurance.
    I look forward to today's testimony, and I yield back.
    Chairman Neugebauer. I thank the gentleman.
    We will now go to our panel. Each of our panel members will 
be recognized for 5 minutes. And without objection, your 
written statements will be made a part of the record.
    Now, it is my pleasure to recognize Mr. Michael McRaith, 
Director of the Federal Insurance Office. Mr. McRaith, welcome, 
and thanks for coming.

   STATEMENT OF MICHAEL MCRAITH, DIRECTOR, FEDERAL INSURANCE 
         OFFICE (FIO), 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 Treasury's Federal 
Insurance Office, or FIO.
    Title V of the Dodd-Frank Act established FIO and directed 
the office to study and report on how to modernize and improve 
the system of insurance regulation in the United States. The 
report was issued in December and can be found on the Treasury 
Web site.
    In drafting the report, our seminal premise was to evaluate 
the U.S. regulatory system as it is--not as it was or as one 
might wish it were. We learned that in 1904, President Theodore 
Roosevelt called for the establishment of a Federal insurance 
regulator.
    Since that time, calls for needed reform have been framed 
in the same binary debate of State or Federal oversight. 
However, this notion of either/or, one or the other, is a relic 
of a bygone era. The insurance sector in the United States is 
vast, enormous, and diverse. A critical asset protection tool 
for American consumers, insurance is an essential component of 
the U.S. capital markets and financial system. The sector 
includes complex internationally active insurance groups that 
will continue to pursue growth in non-U.S. markets.
    In the not too distant future, some flagship U.S. firms 
hope to generate more than half of net revenue from outside of 
our country. Insurance is increasingly connected with other 
aspects of the national and global economies, and our 
modernization report is grounded in this fact.
    As noted in the report, State regulators perform well the 
essential functions of localized consumer protection, including 
solvency oversight of individually licensed insurance entities. 
State regulators have worked to enhance multi-State 
collaboration, and the report reflects our respect for the work 
of State regulators around the country.
    At the same time, the inherent limits of State authority 
have resulted in prominent Federal supervisory roles. For 
example, the Federal Reserve supervises insurers at our savings 
and loan holding companies and those insurance firms designated 
by the Financial Stability Oversight Council (FSOC). The SEC 
reviews hundreds of indexed annuity products every year.
    And, of course, the FIO statutory mandate addresses gaps in 
insurance oversight, including key turning with respect to an 
insurer under Title II of the Dodd-Frank Act, the authority to 
monitor all aspects of the insurance industry, including its 
regulation, and the authority to represent the United States on 
prudential aspects of international insurance matters.
    We also note that supporters of State regulation, even 
State regulators and NAIC staff, recognize the need for Federal 
involvement to deal with issues of multi-State inefficiency, as 
evidenced by their support for NARAB II, a Federal solution to 
a multi-State problem.
    In addition, the Federal Government provides support for 
private insurance markets. To name a few you are familiar with: 
the Federal Crop Insurance Program; the National Flood 
Insurance Program; the Terrorism Risk Insurance Program; and 
many others. Long-standing problems with State insurance 
regulation need to be addressed.
    Some are issues of inconsistency or unnecessary burden, 
like multi-State licensing or oversight of reinsurance 
captives. Others involve the national interest, and a direct 
Federal role is needed. For example, the private mortgage 
insurance industry is an essential feature of the national 
housing finance system, and warrants Federal standards and 
supervision. Fragmented approaches to solvency oversight do not 
serve homeowners, the industry, or the national economy.
    Our hybrid framework, a factual reflection of the system as 
it is, calls for targeted Federal intervention to resolve both 
the challenges of inefficiency and concerns of national 
interest. FIO will build on our outreach efforts to consumers 
and industry and to our State and Federal partners as we move 
to effectuate the recommendations of the report. We will report 
publicly on State and Federal progress to address the areas 
identified for improvement, and we will work with Congress and 
this committee to determine whether, and when, the time for 
Federal action has arrived.
    We will continue with our work to modernize and improve the 
U.S. system of insurance regulation at every point. Our 
priorities will be the best interests of the American 
consumers, the U.S.-based industry, and the best interests of 
the U.S. economy.
    Thank you for your attention. I look forward to your 
questions.
    [The prepared statement of Director McRaith can be found on 
page 102 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And now, Commissioner Thomas Leonardi, from the Connecticut 
Insurance Department. Commissioner, welcome. Thanks for coming.

  STATEMENT OF THOMAS B. LEONARDI, COMMISSIONER, CONNECTICUT 
                      INSURANCE DEPARTMENT

    Mr. Leonardi. Thank you. Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee, good morning. 
My name is Thomas Leonardi. I would like to first thank the 
subcommittee for providing me with the opportunity to appear 
before you this morning. I know that you had a pool of 56 
Commissioners to choose from, and the fact that you selected me 
is both an honor and a privilege, which I greatly appreciate. I 
would also be remiss if I didn't take a brief moment to thank 
my boss, Dan Malloy, the Governor of the State of Connecticut, 
for his unfailing support for me and my department, and for 
appointing me as his insurance Commissioner, a job that has 
been the most demanding and rewarding in my 35-year career; and 
lastly for his vocal commitment to our national State-based 
system of insurance regulation.
    Hartford, Connecticut, has fondly been known as the 
insurance capitol of the world for over 2 centuries. We 
regulate the largest life insurance industry in the country and 
the second-largest when counting all insurance lines of 
business. In fact, Connecticut would rank as one of the 10 
largest regulatory authorities in the world if it were a 
separate country. The industry represents nearly 10 percent of 
the State's gross domestic product, and is part of a huge 
financial services industry that employees more than one out of 
every five of our citizens.
    Clearly, Governor Malloy and the citizens of the State of 
Connecticut have a great interest in the issues before this 
committee today. I also want to thank Senator Ben Nelson, the 
NAIC CEO, for joining me. While I am here today to offer solely 
my views and those of the State of Connecticut, the FIO report 
impacts all of my fellow State regulators. At the outset, I 
want to note that the Dodd-Frank Act did not task FIO to 
provide a broad and balanced evaluation of insurance 
regulation. Rather, it was specifically tasked with identifying 
areas where it believed improvement was needed.
    Nevertheless, the FIO report, much like last summer's GAO 
report, and the Financial Stability Board's peer review, 
acknowledges that State regulators have developed an effective 
system of oversight that satisfies the most fundamental 
regulatory objectives: insurance industry solvency, and 
policyholder protection. We at the insurance department in 
Connecticut pride ourselves on meeting this objective every 
day. But to retain this pride, we must constantly be willing to 
improve and evolve to meet the next crisis or innovation.
    The FIO report contains several recommendations for near 
term reform by the States, as well as a few suggestions for 
direct Federal involvement in regulation. As you might imagine, 
every year State regulators, legislators, and even governors 
receive suggestions on various insurance regulatory issues from 
Federal agencies, international bodies, the consumers we 
protect, and the industry we regulate. All suggestions on any 
issue deserve serious and thoughtful consideration. In this 
case, State regulators are still in the process of evaluating 
the FIO report recommendations. And we will be meeting to 
discuss them later this month and in the months ahead.
    But I will offer a few initial observations. It is worth 
noting that we are already addressing many of the items 
identified in the report. In particular, transitions to 
principal-based reserving, the own-risk solvency assessment, 
strengthening of capital adequacy regimes, implementation of 
the Solvency Modernization Initiative, and discussions about 
improving our efforts on corporate governance and marketplace 
regulation are all ongoing. State regulation is not, and never 
has been, static.
    We have made significant enhancements to our system in the 
last several years, and the FIO report highlights several areas 
where that work continues. There are recommendations, however, 
that give me serious pause. For example, I oppose and I believe 
most other State regulators oppose the idea that FIO should be 
allowed to participate in supervisory colleges. These are 
designed to be meetings of prudential regulators to share 
confidential, company-specific information. The presence of a 
nonregulator, even as well-intentioned as Treasury, would 
threaten the objective independence not just of State 
regulators, but regulators at the Federal and international 
levels, as well as the other participants in the college.
    In addition to this issue, State regulators also strongly 
disagree with FIO's call for the Federal oversight of mortgage 
insurance. A strong regulatory framework is already in place, 
and efforts are underway to strengthen it. The financial crisis 
dramatically illustrated that simply federalizing regulation is 
no guarantee of better results.
    I appreciate FIO's efforts and all the work that went into 
the report. I look forward to working alongside my State 
regulator colleagues, as well as State legislators and 
governors as we consider these suggestions.
    I would close by offering that the ultimate assessment of 
State regulation occurs not on paper, but in the outcomes we 
provide to policyholders and the industry. State insurance 
regulators oversee the broadest, deepest, and most stable 
insurance market in the world. And those markets weathered the 
worst financial crisis in generations extremely well.
    And they remain stable, competitive, and a solid 
cornerstone of the U.S. economy. Thank you again for the 
opportunity to be here today.
    [The prepared statement of Commissioner Leonardi can be 
found on page 100 of the appendix.]
    Chairman Neugebauer. Thank you, gentlemen. We will now go 
to questions for the panel. Each Member will be recognized for 
5 minutes. The chairman recognizes himself for the first 
question. The identification of nonbanks and systemically 
important firms is a serious exercise that has serious 
implications for competitiveness in the insurance sector and 
the stability of our financial markets.
    And as you know, recently FSOC designated Prudential 
Financial as a nonbank SIFI that was to be subject to an 
enhanced prudential standard. Interesting enough though, this 
was over the strong objection of all of the voting members who 
have any insurance expertise.
    One of those members, Director John Huff, a State insurance 
Commissioner from Missouri recently stated, ``FSOC's misguided 
overreliance on banking concepts is nowhere more apparent than 
in FSOC's basis for the designation of Prudential Financial.'' 
He went on to say that the basis for the designation was 
grounded in implausible, even absurd scenarios.
    Commissioner Leonardi, what are your views on FSOC's 
designation of Prudential Financial?
    Mr. Leonardi. Congressman, let me start by saying that we 
in Connecticut regulate two very large subsidiaries of 
Prudential so we know the company quite well. And I completely 
agree with Roy Woodall and John Huff in their dissents.
    I thought the dissents were very compelling and very well 
written. I have said publicly that I do not believe Prudential 
is systemic. I would also note that the lead regulator, 
Commissioner Kobylowski of New Jersey, has also made this same 
point.
    It is based on an assumption of a banking model where there 
could be a run on the bank and Prudential might have to sell a 
trillion dollars of assets the next day. And that is just--with 
one very rare exception--not a likely scenario on which to base 
a systemic designation.
    Chairman Neugebauer. Director McRaith, do you agree with 
that assessment?
    Mr. McRaith. The FSOC process is a lengthy, detailed, 
highly technical process that involves many engagements with 
the individual firm. The voting members of the FSOC made the 
decision that Prudential should be designated. Those are 
tremendously accomplished, bright, hard-working people 
supported by tremendously accomplished, bright, hard-working 
staff.
    The decision by the Council stands. Whether Roy Woodall or 
Director Huff disagree is fundamentally of interest to the 
Council. Council members did not find their views persuasive.
    Chairman Neugebauer. I think the concerning thing to me is 
that the voting members who had expertise in the insurance 
industry and had expertise in the regulatory structure voted 
against that.
    And is that basically the way the structure of FSOC is now, 
that as we begin to move forward with some of these other 
insurance companies, this is going to be a trend in that the 
people who have expertise in that area are going to be 
overridden by the people who want to impose some more bank-like 
regulatory structure on these entities?
    Mr. McRaith. The FSOC process is a thorough process that 
involves, again, many very smart people with different 
perspectives--
    Chairman Neugebauer. I know. You said that before. But I am 
not interested in your opinion of whether those people are 
smart or not. I am really interested in your opinion of, do you 
think this is a troubling scenario that the people who know 
something about--or does that trouble you; that is a yes-or-no 
question. Yes, it troubles you, or no, it doesn't.
    Mr. McRaith. It doesn't trouble me because smart people can 
disagree.
    Chairman Neugebauer. Director McRaith or I guess 
Commissioner Leonardi, I may go back to this. As somebody who 
is heavily involved in regulatory development overseas, the 
IAIS is working on a conferring proposal. While there are over 
140 countries involved in the IAIS, the United States 
represents a staggering 40 percent of the premium volume.
    So I would imagine we are the de facto leader on these 
issues. Yet, the Common Framework for the Supervision of 
Internationally Active Insurance Groups (ComFrame) seems to be 
European-driven, a one-size-fits-all regulatory regime, which 
includes bank-like capital assessments. What are your opinions 
on the direction that we seem to be going where we seem to be 
trying to model our regulatory structure after what the 
Europeans want to do?
    Mr. Leonardi. Congressman, not surprisingly, I have been 
very outspoken on this issue as well. ComFrame has been out 
there for the entire time I have been Commissioner. It has been 
worked on and a lot of effort has gone into it. It has had 
several drafts. One of the most recent drafts was over 150 
pages. The new one, I am happy to say, is down to about 110 
pages. It is going in the right direction.
    But we have long expressed our concern as State regulators 
that it is prescriptive, it is check-the-box, it is a one-size-
fits-all. In terms of the capital standards, I think that is a 
broader question, but let me take a moment to talk about that, 
because we have been opposed, whether they be bank-like or not, 
there is a significant point there, that a global capital 
standard may not be appropriate right now, but it is being 
forced on the IAIS by the Financial Stability Board.
    And the concern is, what is the problem we are trying to 
solve? We don't have a global accounting standard in insurance, 
like we do in banks. There has never been a global accounting 
standard for insurance companies. We have different solvency 
regimes throughout the world.
    And some of those are not fully implemented yet. So, my 
concern is that we are going to impose a global capital 
standard and we are going to actually do three capital 
standards right now. The IAIS is working on a back stock of 
simple capital standard that has to be done this year, followed 
by a higher loss absorbency capital standard, which is supposed 
to be in place next year for systemic companies. That will be 
tested by the ComFrame field testing test, and then the 
following year, the global capital standard.
    So we are talking about implementing three capital 
standards on very large, internationally active insurance 
groups where there is no global accounting standard. And we are 
rushing to do them all in 3 years, in a timeframe that I 
personally believe is reckless.
    Chairman Neugebauer. Thank you. A quick follow-up here: Mr. 
McRaith, some people have said that this is a solution trying 
to find a problem. Can you quickly--and my time is already up--
identify the problem that you think they are trying to address 
by changing these capital standards?
    Mr. McRaith. Two issues are driving the international work: 
one is from the financial crisis, we learned that financial 
firms that are large, complex, and international are connected 
and have impacts on local economies; and two, the international 
insurance marketplace is changing dramatically so that 
developing economies are seeing explosive premium volume growth 
every year.
    So our companies, U.S. companies, are pushing into new 
markets all the time. Those markets, those jurisdictions, want 
to know how is this company being supervised, can we trust its 
capital--that it is capitalized adequately.
    Chairman Neugebauer. Shouldn't they be trying to copy us 
rather than us copy them?
    Mr. McRaith. Yes, so the objective through the standard-
setting work is to bring together people with different views, 
different perspectives, and different needs to talk about 
approaches in their respective jurisdictions' identified best 
practices that are ultimately implemented--not added to, but 
implemented--as part of the native jurisdiction regulatory 
approach.
    Chairman Neugebauer. Thank you. I now recognize Ms. 
Velazquez for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Director McRaith, 
the FIO report implies that increasing Federal involvement will 
provide uniformity in insurance regulation and reduce costs for 
U.S. insurers and consumers. The report cites a McKinsey and 
Company analysis from 5 years ago, which estimated that up to 
$13 billion could be saved annually. Do you have a more recent 
estimate of the dollar amount savings, or if not, do you plan 
to update those numbers?
    Mr. McRaith. We do not have a more recent number than that. 
We are not aware of another independent study that has been 
used to evaluate the cost impact. It is a continuing important 
conversation for us to have, whether we will do an independent 
study or monitor the friction costs of individual reform items 
that we outline in our report. I can't be sure at this point, 
Congresswoman.
    Ms. Velazquez. Okay, according to the FIO report, there is 
a disparity between the qualifying collateral requirements for 
U.S. versus international reinsurers. FIO has recommended that 
Treasury and USTR pursue a covered agreement for reinsurance 
collateral requirements based on the NIC model collateral law. 
What is the timeline for pursing such an agreement and when 
will you be notifying Congress of your plans as required by 
Dodd-Frank?
    Mr. McRaith. Thank you for that question, Congresswoman. As 
you well know, a covered agreement is a very serious 
undertaking. The authority that is vested in Treasury and the 
Federal Insurance Office in that context is a very serious 
responsibility.
    We have never done it before. We are sorting through the 
process, the initial steps, and look forward to notifying 
Congress once we have our own ducks, internally, in a row. We 
will be in front of Congress and we look forward to working 
with you in that effort.
    Ms. Velazquez. Do you have a timeline?
    Mr. McRaith. We look forward to moving forward as quickly 
as possible.
    Ms. Velazquez. Commissioner Leonardi, large-scale natural 
catastrophes are becoming the norm in the United States. 
Unfortunately, my district can attest to this firsthand. We saw 
millions of dollars in damage done to homes and businesses 
during Superstorm Sandy.
    Non-flood related property and casualty claims from the 
storm already top $6 billion in New York. The FIO modernization 
report recommends that States identify and implement best 
practices to mitigate losses from natural disaster. Can you 
kindly explain to us how Connecticut and other States are 
working to improve insurance practices for catastrophic events 
like Sandy?
    Mr. Leonardi. Thank you, Congresswoman. I think it is 
important to point out first that as an insurance Commissioner, 
there is a statutory authority that I have in terms of building 
codes and all of those kinds of things which are impacting the 
issues you are talking about.
    I play one very small piece in that. So if it is a 
suggestion by FIO that the States, as a whole, at the governor 
level, that is something above my pay grade, so to speak, but I 
do know that as your next-door neighbor, the Sandy and Irene 
storms have taught all of us in the northeast an important 
lesson.
    For example, our property casualty Director, George 
Bradner, has been involved in the Shoreline Recovery Task 
Force, which is a legislative task force within Connecticut's 
legislature, along with the Administration, to work on these 
very kinds of issues.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentlewoman, and now the 
gentleman from Missouri, Mr. Luetkemeyer is recognized for 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Mr. McRaith, in 
your report you say that it is not whether insurance 
regulations should be State or Federal, but whether there are 
areas in which Federal involvement in regulation of the State 
database is warranted. Can you give me a definition of 
``warranted?'' Where do you feel it is warranted for the 
Federal Government to step in?
    Mr. McRaith. The report identifies a number of substantive 
areas where reform is appropriate if the States are unable to 
impose the uniformity--
    Mr. Luetkemeyer. Okay, my question is what do you believe 
is the criteria for the Federal Government to be warranted to 
intervene?
    Mr. McRaith. I would say there is an equation where we have 
to balance the consumer protection of disparate approaches 
State-to-State and the benefits of uniformity for the industry. 
We balance those two and arrive at a decision of what is 
warranted.
    Mr. Luetkemeyer. Do you work with the NAIC at all?
    Mr. McRaith. I speak with insurance Commissioners from 
around the country on a regular basis, with the officers of the 
NAIC--
    Mr. Luetkemeyer. It would seem to me that one of the 
criteria for something being warranted is if they brought you 
the issue and said, hey, we have a problem with this. And yet, 
you didn't mention that.
    Mr. McRaith. You might remember that I was insurance 
Commissioner in Illinois for 6\1/2\ years before taking this 
job. So many of the issues, as Commissioner Leonardi mentioned 
in his comments, the States have been dealing with, in some 
cases for years, and even, in some cases, for decades.
    So there is a recognized need for uniformity by the States 
on many of these issues and we hope to work with them to help 
solve the problems of the lack of uniformity.
    Mr. Luetkemeyer. Okay. In your report, you have 27 specific 
reforms, and basically only one of them deals with something of 
an international basis. All the rest of them deal with 
something going on in this country. In our last discussion--the 
last time you were here, the main impetus for your agency was 
to make sure that there was a relationship and a coordinated 
effort with regards to international insurance laws, 
regulations, and activities that would not be harming us in a 
negative way--that you could be working with them to preempt 
some of this stuff and yet, there is only one recommendation 
out of 27 here. It seems like our scope has changed. Am I 
missing the point here?
    Mr. McRaith. The focus of the report is how to modernize 
and improve the U.S. system of insurance regulation. We were 
not tasked with modernizing and improving the international 
standard setting activities. Our focus internationally is to 
represent the best interests of the United States in the 
standard-setting forums at the IAIS, working with our State and 
other Federal colleagues, and that is exactly what we are 
doing.
    Mr. Luetkemeyer. Mr. Leonardi, in your opening testimony, 
you made the comment that you are not really happy with one of 
the recommendations the FIO report makes mention of with 
regards to overset of mortgage insurance. Would you like to 
elaborate on that just a little bit?
    Mr. Leonardi. I would be happy to, Congressman. As I 
mentioned, there are strong regulations in place. The States 
have a lot of experienced personnel. I think if the Federal 
Government feels there is a role to play, in my view, it would 
be to look at the poor credit underwriting and lending 
practices that existed in the lending and banking industry that 
led to these problems in the first place.
    The other thing I would mention is that there is a 
reference to permitted practices in mortgage insurance and I 
think it is referred to in annuities as well. And I think it is 
important to note that the permitted practices are being 
allowed in cases of really financial distress of a company, 
where much like in the financial crisis, the Federal Government 
took all sorts of extraordinary actions to help companies that 
would not have perhaps, made it through, get through.
    So these permitted practices were an alternative to pulling 
the plug. You have very experienced financial regulators 
working with industry to try to help these companies make it 
through to the other side. And in most cases, they did.
    Mr. Luetkemeyer. Okay, so I guess my question would be, 
where is the problem that Federal oversight would be more 
important and beneficial than allowing the States to address 
this in their own way?
    Mr. Leonardi. I don't believe that it would be, 
Congressman.
    Mr. Luetkemeyer. My time is about up. I will yield back. 
Thank you, Mr. Chairman.
    Chairman Neugebauer. Thank you. Now, the gentleman from 
California, Mr. Sherman, is recognized for 5 minutes.
    Mr. Sherman. Thank you. Mr. McRaith, as you know, TRIA is 
expiring at the end of this year. If TRIA expires without 
reauthorization, it would have an adverse impact on consumers 
and the marketplace in general. Are you working with the 
Presidential working group on TRIA? Does the Administration 
have an official position on TRIA and will they have one before 
the bill of the program expires?
    Mr. McRaith. We are working with the President's working 
group on financial markets to produce a report. It should be 
forthcoming in the near future. My expectation is sometime this 
month. We are certainly working hard to get that done. That is 
not a promise, but that is certainly our aspiration. With 
respect--
    Mr. Sherman. We will put that in the record. It is a 
promise that it will be available by the 28th of February.
    [laughter]
    Mr. McRaith. No, no, please--I must learn to qualify my 
comments.
    Mr. Sherman. I am going to move on to the next question. 
Mr. Leonardi, the report says that regulatory costs are about 
6.8 times greater for an insurer operating in the United States 
than for one operating in the United Kingdom. Is moving from 
State to Federal regulation the solution? Is separate State 
regulation the cause of that 6.8? Is that 6.8 accurate?
    Mr. Leonardi. I don't know because I don't know where the 
numbers came from. I would be happy to look into that and I 
think the same applies to the McKinsey report that was referred 
to earlier. As someone who came out of the investment world, 
$13 billion gets my attention. It is a lot of money, certainly.
    But I guess I would really appreciate the opportunity to 
see those numbers; and as to the McKenzie report, to see the 
assumptions and talk to the authors of the report to better 
understand. And I think that there may be low-hanging fruit 
that we could accomplish some savings without a lot of pain. 
And we should certainly do that if we can. But without seeing 
the report and seeing the assumptions underlying it, I don't 
know.
    But there are two things--
    Mr. Sherman. I would hope you look at that report, and get 
a chance to talk to those who put it together and be able to 
provide for this subcommittee an analysis because--and I guess 
one thing we are assuming is that the United Kingdom regulation 
is the gold standard. And it could very well be that it is 6.8 
times cheaper in the United Kingdom because they don't do 
anything.
    Mr. Leonardi. If I could address that--I think it is 
important to note that, as I mentioned, we regulate the second-
largest industry in the country. We have a market of 3.5 
million citizens. And we do it--our costs are 79 cents for 
every $1,000 worth of premium. So, that is one thing that I 
think puts it in perspective.
    I think the more important thing is, we always tend to look 
at expense, and we sometimes fail to look at what is the 
alternative. And if you look at the financial crisis--
    Mr. Sherman. I--
    Mr. Leonardi. This is an industry where regulation has done 
well and where failure is an exception, not the rule. And we 
are still living--
    Mr. Sherman. I--
    Mr. Leonardi. --with the after-effects of the banking--
    Mr. Sherman. --hear your point. I do want to go on to one 
other question, and that is, the report talks about the 
``failure of the mortgage insurance industry.'' We had a 
circumstance where the bad actors in mortgages created a market 
in which any good actor would also lose a lot of money.
    If you invested in 100 pristine perfect mortgages, or 
insured 100, underwritten by the angels themselves--some people 
lose their job, more in 2009 than at other times. There are 
divorces, there are deaths, there are disabilities. And given 
what happened to the real estate market, you are going to lose 
money, even if you selected these--the mortgage insurance 
industry has been able to raise new capital. It is paying the 
claims on existing liabilities. It hasn't needed a Federal 
bailout.
    You have some broad suggestion that the Federal Government 
should step in with regard to mortgage insurers. What is the 
basis for this insurance? And could any--look, the ship took on 
a little bit of water, but it faced the most enormous storm and 
hasn't needed a Federal bailout. Why do you think that--what is 
the basis for your assertion?
    Mr. Leonardi. Congressman, nearly half of the industry 
failed through the mortgage--through the financial crisis. The 
industry, in fact, was entirely displaced by the GSEs following 
the crisis. That there are some companies with several hundred 
millions of dollars now in the market is encouraging. But what 
we need to know is that the housing finance system that is so 
important to our national economy supports the private mortgage 
insurance industry, replaces taxpayer exposure, supports the 
housing market. One standard implemented uniformly across the 
country by one agency is the best possible result for our 
country.
    Mr. Sherman. I would point out it is not just the mortgage 
insurance industry that was displaced by Fannie and Freddie. 
Basically, all lending for many years went through Fannie Mae 
and Freddie Mac. And I don't think we have decided that all the 
major banks in the country failed.
    I believe my time has expired. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentleman from California, Mr. Royce, is 
recognized for 5 minutes.
    Mr. Royce. Thank you again, Mr. Chairman.
    Let's see. I would like to start with Mr. McRaith, if I 
could ask you a question.
    As you say in the conclusion of your report, any reform 
proposal must also account for the threshold issue of how that 
reform will be achieved. And with that in mind, I was going to 
ask you about steps that might be taken on the following reform 
ideas. One was allowing auto insurance portability for military 
personnel. I am working on draft legislation to sort of create 
that portability for policies across State lines. And I was 
going to ask you about that. And also ask you, and maybe the 
Commissioner, about working on this. But that would be one.
    Improving rate freedom was another issue that you raised. 
And I would like to get your feedback on that.
    Mr. McRaith. Great. First of all, with respect to members 
of the military who are serving on military bases, it is our 
understanding that they are ordered to move bases every 18 to 
24 months.
    Mr. Royce. Correct.
    Mr. McRaith. I expect you know more about this than I do. 
When people like that in the service of our country are 
following their orders, we should make it as easy for them as 
possible to obtain necessary personal auto insurance coverage. 
We will bring together, as we say in the report, leadership 
from the industry, from the regulatory community, and from 
consumer and military service member advocates to arrive at the 
right solution.
    With respect to rate freedom or rate regulation, it is our 
view that competition benefits consumers. It is our view that 
rate freedom supports competition in many personal lines 
insurance markets. We want to see more of that around the 
country. We intend to work with regulators, and with industry 
to identify pilot projects. We would like to move on that as 
quickly as possible.
    Mr. Royce. Thank you.
    I will ask Commissioner Leonardi the same question.
    After our last hearing, the NAIC took 4 months to answer my 
questions for the record, stating that it needed more time to 
make sure that the answers they gave us were accurate and 
complete. However, the answers we did get after 4 months were 
incomplete.
    The NAIC provided agendas for some closed meetings. But the 
dozens of handouts referenced in the agendas, which would 
reveal the extent of those closed-door policy-making meetings 
were not provided. And, as you know, this is an issue.
    Commissioner, I hope you will help convince the NAIC to 
provide the handouts for the closed policy-making meetings in 
question.
    The NAIC's answers were inaccurate. They claimed any 
guidance by any NAIC committee or subcommittee or task force or 
working group is taken in open session, as required under the 
open meetings policy. That is clearly false, as people know. 
The agendas show that NAIC's executive committee routinely 
deliberates in private about policy issues. And a massive 
regulatory modernization plan, the issues over health 
insurance, producer licensing--all of that was done in private.
    And just last October 25th, 4 days before its letter, NAIC 
abruptly closed a crucial executive committee meeting on the 
death masterfile for an hour of secret deliberations before 
returning to announce no action on it.
    So, the question I would ask you is, they claim to 
faithfully follow the policy statement on open meetings, which 
promises that the NAIC will conduct its business ``openly,'' in 
their words. Is it true that all NAIC committees and 
subcommittees conduct their business in open meetings? That 
would be my first question to you.
    Mr. Leonardi. Thank you, Congressman, for the question.
    I want to start by saying that--and I am here as the 
Connecticut Commissioner. I have been asked to be here as the 
Connecticut Commissioner, as opposed to a representative of the 
NAIC today.
    I obviously take these issues very seriously. Governor 
Malloy and I are very firm believers in transparency and 
openness. You may know that there was a recent revision to the 
statement on meetings at the NAIC. I think we have gotten very 
positive feedback from industry on this.
    I would like to give Louisiana Commissioner and former 
president Jim Donelon a lot of credit for being the driving 
force behind pursuing this this past year.
    So, I do think that those are moving in the right 
direction. Exactly where we are with that, I can't answer the 
specifics.
    I do think it is important for regulators to be able to set 
aside some time for candid discussions that are not necessarily 
open. And I think it is right--reaching the correct balance.
    Mr. Royce. Right, but the issues I am talking about are, in 
fact, policy issues. And so, because we are talking about the 
executive committee meetings being done against the policy of 
the NAIC, done privately, on important policy issues, these are 
not the types of issues that you would exempt from the open-
meeting rules. And--
    Chairman Neugebauer. Sorry, but the time of the gentleman 
has expired. I appreciate his questions.
    We will now recognize the gentleman from Missouri, Mr. 
Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman, and I thank the 
witnesses for being here today.
    Let me start with Director McRaith.
    As your report notes, insurance premiums in the life and 
health and property and casualty insurance sectors totalled 
more than $1.1 trillion in 2012, or approximately 7 percent of 
gross domestic product.
    For several years, we have debated generally whether a 
State-based system can answer the regulatory demands of such a 
national and increasingly global insurance market. You have 
identified several areas in your report where if the States 
themselves cannot improve, a Federal role is warranted.
    Can you provide a brief explanation as to how we can judge 
whether the States have taken matters to regulate effectively, 
and with sufficient uniformity?
    Mr. McRaith. The challenges of uniformity are described in 
the report. The industry is vastly different today than it was 
5 years ago. It will be increasingly different in 5 years time.
    We will report, as I mentioned, publicly to this committee 
and otherwise on progress made to implement the reforms in the 
report. It is up to this committee and other interested parties 
to decide when is it appropriate for the Federal Government to 
be involved to impose uniformity and necessary efficiency 
improvements.
    Mr. Clay. As I look through the report, I don't see any 
reference to the topic of steering and red-lining within the 
insurance industry. And I would be naive to think that red-
lining has been completely eliminated in the industry.
    Is there a way for the FIO to take a look into this area 
and report back to this committee?
    Mr. McRaith. Congressman, one of our explicit statutory 
responsibilities is to monitor the affordability and 
accessibility of insurance to traditionally underserved 
communities.
    We take that statutory responsibility very seriously. And 
we are moving forward consistent with the reforms described in 
the report.
    I should add, with respect to your state, the State 
department of insurance does collect information, and that is 
one of the few States that collects data on zip code and 
pricing, et cetera. And that information, I know, is publicly 
available.
    Mr. Clay. And do you have any national data on--I guess on 
different regions or metropolitan areas?
    Mr. McRaith. At this point, we do not have any independent 
analysis on that subject. We would rely on external sources for 
information on that subject.
    Mr. Clay. Okay. Thank you.
    Mr. Leonardi, as the insurance Commissioner for the State 
of Connecticut, you can speak very knowledgeably on the 
important insurance issues facing your State.
    However, you, of course, don't represent other States.
    Some States, like your own, conduct a large amount of 
insurance business, while others conduct very little.
    Isn't this one of the reasons that there has been some 
difficulty in obtaining uniformity at the State level on many 
of the issues raised in the report, most of which, it seems, 
are not new?
    Mr. Leonardi. I guess, if I could speak to the basis 
premise, because the report talks an awful lot about uniformity 
and lack thereof, and a race to the bottom.
    And the bottom line is, we have--I don't think we do a very 
good job of explaining what we do and how well we do it. But we 
have a very rigorous accreditation program at the NAIC. And 
right now, every State is accredited.
    But when a State gets in trouble, when it has a review--and 
I was the vice chair of the accreditation committee for the 
past 2 years, so I speak with some knowledge about this. We 
have had States that have been brought in, much like a 
regulator brings a company management in when it is concerned 
about issues.
    And we brought the States in before a group of 
Commissioners, and said, here are the issues, whether it is 
staffing, whether it is technical expertise, whether it is 
sloppy practices. These are the things we have found. These are 
the things you need to fix. Here is the timeframe within which 
you must fix them. And if you don't, you are going to get 
your--you are going to be on probation and possibly have your 
accreditation pulled.
    So there are some very, very good floor standards, which 
everybody has to meet. And then there are States that do 
perhaps a much better job because there is a need because of 
the size of their industry.
    But I don't think we have any States--and there is also an 
issue that maybe people think, maybe it is too easy because you 
have every State that is accredited.
    It isn't easy. And I think we should celebrate the fact 
that we have managed to get to that level, where all the States 
are accredited.
    Just as a brief story, back in the early 1990s when the 
accreditation program was formed, Connecticut, the insurance 
capital itself, was told, you are going to lose your 
accreditation. You don't have enough people.
    And the then-Commissioner, I think it was Commissioner Bob 
Guggens went to the legislature and went into the gold dome and 
kicked some chairs around and said, ``We need to hire people. 
We need to do it right away.''
    The legislature responded. And we have been off and running 
ever since.
    But that is the way the process works.
    Mr. Clay. Thank you so much for your response.
    Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from New Jersey, Mr. Garrett, is 
recognized for 5 minutes.
    Mr. Garrett. I thank the chairman.
    And I thank the panel.
    So what we are talking about here, as with a lot of what we 
do in this committee, is somewhat technical and it is somewhat 
hard to relate back down to the consumer.
    Some of the topics we have talked about so far include 
Basel III capital standards and their application, and, as the 
chairman was talking about, a one-size-fits-all approach to 
that.
    Now, the second panel does talk about that, if you looked 
at some of their testimony. I think they get into what this 
could mean, one-size-fit-alls applying in Basel III.
    If you look at some of their testimony, this approach would 
create some disruption for insurance companies' balance sheets, 
it could affect policyholders. It could affect long-term 
guarantees, guarantees that carriers have made to families, to 
savers, to retirees.
    And with that background, that is why I said at the outset 
that I was concerned that the report doesn't really dig into 
this whole area like I would hope to.
    So, briefly, Director McRaith, can you tell us how you are 
going to convey this significant information and impact to the 
Fed going forward, since we really just haven't seen it either 
in the report or today?
    Mr. McRaith. As you well know, the decisions of how to 
implement Sections 165 and 171 of Title I of the Dodd-Frank 
Act, those are specifically within the province of the Federal 
Reserve.
    Mr. Garrett. Right.
    Mr. McRaith. Our role, one of the reasons we were 
established, was to create a source of insurance expertise in 
the Federal Government. We work with the Federal Reserve 
through the FSOC context. We offer our views. But it is 
fundamentally a decision for--
    Mr. Garrett. But I guess the point--
    Mr. McRaith. --the Federal Reserve.
    Mr. Garrett. I get that. And I will skew on to the next 
question. I guess the point is is that this is a crucial area, 
this is an area that can directly impact my constituents back 
at home, if this were to be done, and we really didn't see it.
    I get the point that you are supposed to be conveying this 
information. But we didn't see it here.
    And playing off of something the gentleman from California 
was saying, he was talking about TRIA, but if you look into the 
statute, as to what you all are supposed to be doing, you have 
three or four different statutory obligations. Assisting with 
SIFI designations for insurance companies. Administering--
assisting with information with regard to TRIA. As he pointed 
out, coordinating Federal insurance policy oversees. Making 
covered agreement preemptive determinations that you had talked 
about.
    And, as also indicated, the initial SIFI designation had 
significant impact--significant pushback from the industry. 
That was already indicated.
    And, of course, to come out with a report. And this report, 
as we know, is somewhat overdue, a couple of years overdue.
    So I guess the question again is, briefly, how do you 
characterize what these three or four major areas that are your 
statutory obligations and three or four areas that really 
haven't been met to date on a timely basis, how do you give us 
a strategic purpose to actually say that we are going to get 
these things done in time?
    And then, again, to inure to the benefit of the consumer?
    Mr. McRaith. We have done an excellent job in fulfilling 
our statutory mandate, Congressman.
    One reason we were created was to reflect the importance of 
the insurance sector in systemic risk--
    Mr. Garrett. This report was late, though, right?
    Mr. McRaith. Yes, Congressman, the report was late.
    Mr. Garrett. By how much?
    Mr. McRaith. The report by statute was due in January of 
2012.
    Mr. Garrett. Right. So, it can't be an ``excellent.'' 
``Excellent'' would be an A-plus or something like that, if we 
would have met the deadline or came in on time.
    ``Excellent'' would be if you hit--we wouldn't be--the 
gentleman from California wouldn't be asking about a TRIA 
determination. Excellent, it wouldn't be if these other areas, 
which are the statutory obligations had been met within the 
timeframe.
    So I just beg to differ with the classification.
    Let me go down a different road altogether and deal with 
something that you are familiar with: disparate impact.
    I can go into more of this, but you are familiar with 
disparate impact. How will you monitor underserved groups, 
because I know you say that you are going to be doing that in 
your report?
    Can you briefly talk about that, in 40 seconds or less?
    Mr. McRaith. One thing we are committed to not doing is 
repeating what has been done already.
    And, as you well know, Congressman, this debate about 
disparate impact, risk classification, insurance scores, is one 
that has been written about for 10, 15 years or more by many 
people from many different perspectives.
    We intend to talk to the industry, talk to consumers, as we 
have, to move the conversation forward in a way that is 
responsible, not--
    Mr. Garrett. Very briefly, in 10 seconds, Mr. Leonardi, 
have the States not done an adequate job themselves in dealing 
with this issue?
    Mr. Leonardi. I can only speak for Connecticut, but I think 
we have done a very good job. And we constantly do outreach on 
social media and education to reach the communities that we are 
trying to target.
    Mr. Garrett. And do you need the Federal Government to 
assist you to get the job done?
    Mr. Leonardi. Absolutely not.
    Mr. Garrett. Okay.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentlewoman from Ohio, Mrs. Beatty, is 
recognized for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and ranking members.
    Let me, certainly, join my colleagues in welcoming the 
witnesses on this first panel today. I am from Ohio, the 3rd 
Congressional District, and in Columbus, Ohio, a part of my 
district, we are the home to many insurers of all sizes and 
types.
    Let me shift the question to talk about terrorism risk 
insurance. When I reflect back on Boston and how traumatic and 
bad that was, although it wasn't at the level enough to warrant 
being certified, I wanted to pose the question, and certainly 
you are aware that without congressional action, the terrorism 
risk insurance will expire at the end of this year.
    This program creates a catastrophic government backstop for 
certified acts of terrorism in the United States. And many 
insurers have stated that they will not renew their terrorism 
risk policies unless the program is reauthorized.
    The modernization report that was released last year does 
not address terrorism or TRIA, but in footnote 77, it explains 
that the President's working group on financial markets is 
studying it, and will issue a report on TRIA.
    Director, do you know how long it will be before this 
report will be released? And has your office looked at 
terrorism risk insurance?
    Mr. McRaith. Congresswoman, the expectation is that report 
will be released soon. By virtue of the fact that it is a 
President's working group, that means there are four agencies 
involved with the discussion. And that process is moving 
forward. Thoughtful people are looking at every word of a 
document.
    We expect that to be released soon.
    We, in our office, as you know, have the statutory 
responsibility of assisting the Secretary with administering 
the Terrorism Risk Insurance Program. We are very well-versed 
on it, very well-versed on the issues.
    I think the expectation is that we will continue to be 
engaged on this issue. The Administration is likely to offer a 
policy view. Secretary Lew has previously acknowledged to the 
Senate and House committees his recognition of the importance 
of the program.
    Mrs. Beatty. Okay.
    Being from Columbus, Ohio, where we have one of the largest 
universities in the country, the Ohio State University, which 
is the home of the fifth largest stadium in this country. And, 
as you can imagine, the cost of insurance coverage for both 
liability and property in the event of a terrorist attack is 
extremely high.
    In speaking with the financial department at the 
university, they estimate that if they were forced to purchase 
the same coverage in surplus lines market, like through Lloyd's 
of London, that cost would be 2 to 3 times what they currently 
pay. How can we, as lawmakers, work to ensure that the long-
term development of the robust terrorism risk insurance 
market--with limited government involvement--does not make it 
too prohibitive for them to purchase it? Do you have any 
thoughts on that?
    Mr. McRaith. I don't want to offer specific policy thoughts 
at this time, because the Administration has not offered a view 
on that subject yet. However, what we see is that the terrorism 
risk insurance market right now functions well with the 
existence of the Terrorism Risk Insurance Program. The 
expectation is that if there are modifications or changes to 
that program, they should be thoughtful, with the objective of 
preserving an affordable and accessible terrorism risk 
insurance product.
    Mrs. Beatty. Okay. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. Okay. I thank the gentlewoman. That 
issue of TRIA has been brought up a number of times, Mr. 
McRaith. And you have used the word ``soon'' on that report. 
You and I have had some conversations about report dates, and 
``soon'' turned out to be later, rather than sooner. So I would 
say that if the Administration intends to have some input into 
this process, sooner would be better here. Because we are 
already beginning to put some policy together to address that. 
So, you might pass that along to the working group. That is, if 
they have some ideas, they probably need to be sending those 
over sooner, rather than later.
    I now recognize another Ohioan, Mr. Stivers.
    Mr. Stivers. Thank you, Mr. Chairman, I appreciate that. 
And thank you, Director McRaith and Commissioner Leonarid, for 
being here. I appreciate your work on behalf of the U.S. 
regulatory system of insurance. And I want to ask Director 
McRaith the first question. How does the FIO coordinate with 
the Fed and the SEC and State regulators? And by that, I don't 
want you to tell me that you have a great relationship with so-
and-so, or you talk to so-and-so. I am curious what the process 
for that coordination is, if there is one? Is there a formal 
process for that coordination with State regulators, as well as 
the Fed and the SEC?
    Mr. McRaith. Let me take those on separately. With the 
States, we have a variety of issues. And for domestic issues, 
we deal with them by speaking with NAIC officers, or going 
directly to the Commissioner responsible for--
    Mr. Stivers. So, no formal process, other than--
    Mr. McRaith. We have a formal--last year we spoke--we had a 
regularly scheduled call, or discussion every 2 weeks. This 
year for international matters, because the Fed is also a 
participant at the IAIS now, for every meeting scheduled 
through the end of this calendar year, we have calls scheduled 
with the States and the Fed so all three parties will be on one 
call in advance of each meeting. And those calls are scheduled 
through the end of the year. The expectation is we will build 
on that, we will learn. Do we need to do more? Should we have 
meetings in person? But we will build on that.
    Mr. Stivers. I will say, it troubles me that the Fed, with 
no insurance regulation experience, is now representing us in 
the international forum. I would rather have seen another State 
insurance Commissioner who has expertise. That is a personal 
opinion. And frankly, you have a role there, but I am bothered 
personally that the Fed, with no experience, is sitting at the 
table. We don't need an empty suit at the table. I appreciate 
the Fed for many things, but I am not sure they add a lot of 
value at that table. I am not asking you to comment on that; 
that is a statement.
    The second question I have for you is, can you talk a 
little bit about the IAIS and transparency? I am really 
concerned that there is really not a lot of open access to the 
meetings. They won't let observer members come into the 
meetings. They close a lot of information down. I just think 
that opaque nature makes it really hard for folks who are the 
dominant players in insurance in many of those jurisdictions.
    Mr. McRaith. The precise and appropriate level of 
engagement with interested parties is always a question. I 
heard it as a Commissioner at the NAIC. I heard it in--and we 
hear this now at the IAIS. I think the model we want is one 
where the industry, the interested parties are heard. Their 
views are respected. They are integrated where appropriate. And 
then standards are developed based on that information. Now, 
the process of doing that, the mechanics of that process, we 
need to work through. Because what we don't want to do is, we 
don't want to send people around the world to meetings where we 
repeat what we talked about months before and rehash the 
argument. So we need to make the meetings efficient, but we 
need to integrate importantly, the views of interested parties.
    Mr. Stivers. Thank you. One last question for Director 
McRaith, and then I hope to ask the Commissioner one question. 
What has the FIO done to advance the competitive position of 
the United States insurance industry since its inception? Have 
you--is that a focus for you at all to make sure that U.S. 
companies are competitive in foreign jurisdictions and--
    Mr. McRaith. Absolutely, that is a priority for us. The 
standard-setting activities, if developed and implemented 
appropriately, will promote competition and fair competition in 
the developing economies where our companies want to grow.
    Mr. Stivers. Okay, that is a great transition to my 
question for the Commissioner. The United States has about 40 
percent of the premium volume. The ComFrame appears to be very 
Eurocentric in my opinion, and I am just curious, what value 
does the ComFrame add to domestic policyholders, and domestic 
insurers? Commissioner, can you give me your opinions on those 
things?
    Mr. Leonardi. I would be happy to, Congressman. I think the 
concern I have had with ComFrame, in addition to what I said 
earlier, is that we have policymakers debating policy in large 
documents. And then we have people who are in the field, 
actually managing supervisory colleges. If you look at the 
United States--when I became Commissioner, I looked at the 
Financial Sector Assessment Program (FSAP) the IMF did, and it 
pointed out one of the few areas of weakness in the U.S. 
insurance regulatory system was the use of colleges and group 
supervision, which goes right back to the heart of the 
financial crisis. And when I joined the Connecticut department, 
we had participated in three colleges: ING; Swiss Re; and 
Berkshire Hathaway. We led none.
    Today, we are involved in 16 colleges, and we lead six. We 
are the North American lead for three international companies, 
for a total of nine. We are working closely and collaboratively 
with, not only our State regulators, but regulators throughout 
the world. We are hosting regulators from the Swiss Financial 
Market Supervisory Authority (FINMA), and regulators from 
Taiwan and Saudi Arabia. We are coming to learn how we regulate 
companies. So I think what we need to do is step back and say 
again, what is the problem we are trying to solve with this 
very complex structure?
    Mr. Stivers. Thank you. I yield back the negative balance 
of my time.
    Chairman Neugebauer. Now, the gentleman from Texas, Mr. 
Green is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank you and the 
ranking member for allowing me to interlope today, and I am 
honored to have this opportunity to ask a few questions. I 
thank the witnesses for appearing. I would like to visit with 
you briefly, Mr. Director, on the question of arbitrage. With 
the different standards, and you have a multiplicity of 
jurisdictions, the opportunity for arbitrage exists and the 
report addresses this. Could you elaborate for just a moment on 
some of your concerns associated with arbitrage?
    Mr. McRaith. With 56 jurisdictions, the 50 States, the 
District of Columbia and five territories, there are different 
laws, regulations that are--even if adopted verbatim, are 
implemented differently. It is important, and our report 
emphasizes the importance of uniformity, not only of standards 
but of implementation and enforcement. An example of this is in 
the subject of reinsurance captives. Where while some might 
suggest it is an issue of the industry, our view is that it is 
less an issue of the industry, which is adhering to State laws, 
and far more an issue for the State regulators.
    States are competing against one another. Ultimately the 
transparency, the accountability, the capital supporting those 
captives remains a mystery in many circumstances. We need to do 
better as a country.
    Mr. Green. Thank you. And for edification purposes, for 
those who are not a part of the industry and don't understand 
all of the jargon, would you just give a brief definition of 
``arbitrage?'' The type that you are talking about, as it 
relates to the industry, please?
    Mr. McRaith. When I use the term ``arbitrage'' in this 
context, it is the pursuit of a lower level--the choice of a 
lower degree--of regulation or supervision as an alternative to 
a higher level of supervision.
    Mr. Green. The report recommends some 20 actions that 
should take place. And I am curious as to whether or not you 
think there are some things that Congress can do to assist in 
this effort? If so, could you kindly give us a few things that 
you might have us do?
    Mr. McRaith. Eventually--first, we want to keep you 
informed. We want you to be able to make determinations about, 
what are the issues of greatest interest to you? And when 
should Congress be involved in the immediate term?
    Our view is, Congress should look at two issues of 
particular importance. One is mortgage insurance. Housing 
finance is an issue this committee has dealt with, and with 
which Congress is dealing. The mortgage insurance industry 
should be subject to uniform standards implemented by a Federal 
regulator.
    Secondly, NARAB II, a bill this committee has considered, 
passed. The Senate has dealt with that issue. Multi-State 
licensing for agents and brokers is an issue in need of a 
national solution.
    Mr. Green. Final question, let's talk about AIG for just a 
moment.
    As you know, AIG nearly collapsed. And my concern, or 
question, really goes to, with a functioning entity oversight, 
could AIG have been properly regulated such that the 
derivatives and all of these other exotic products would not 
have created the economic circumstance that caused us to have 
to go in and provide assistance?
    Mr. McRaith. It is hard to give a definitive answer to know 
whether a consolidated supervisor could have prevented all of 
the risk that the AIG financial products unit subjected to the 
entire economy, indeed to the global economy. What we do know 
is that we would have had a much better chance of identifying 
the problem earlier, stifling it much earlier, reducing or 
mitigating the damage much earlier than we ultimately were able 
to learn under the system we had in place at the time of the 
crisis.
    Mr. Green. I will leave you with my speculation. My 
speculation is this: With a functioning entity, there would 
have been many who would have said that you should back off of 
AIG, that AIG was serving a specific role that was meaningful 
and that it would be inappropriate to have regulated AIG to any 
great extent.
    I am sure there would have been many voices who would have 
screamed, lay off AIG. I think that this work you are doing is 
vitally important to the stability of our economy and possibly 
to the global economy.
    I thank you for your service.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Virginia, Mr. Hurt, is recognized for 5 
minutes.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank both of 
you gentlemen for appearing before us today on this important 
hearing.
    I represent a rural district in Virginia. We obviously have 
a lot of policyholders who benefit from the products that are 
generated through the insurance industry.
    One of the things that I hear as I travel around the 
district, though, especially as it relates to Dodd-Frank and 
access to capital on Main Streets all across our district, is 
that while there is often, as it relates to Dodd-Frank, a 
negligible, if any benefit to some of the rules that have been 
adopted, there is also a great cost.
    And that cost, when it outweighs the benefits, results in 
higher costs for consumers and fewer choices.
    So, I wonder about this report, and I recognize that there 
are several things in your report, Mr. McRaith, that you set 
out for direct Federal regulation, I guess my question is, is 
as you look at the--not getting into the possible things in the 
future, but the things that you all think that there really 
should be some direct Federal involvement in, to what extent 
have you all been able to analyze the sort of the costs and the 
benefits as it relates to having Federal involvement in 
mortgage insurance or any of the other items that you have laid 
out?
    And what has guided you and what is your--what do you 
report?
    Mr. McRaith. With respect to mortgage insurance, let's be 
clear: Nearly half of the industry failed in the financial 
crisis. The proposal is a uniform standard implemented at the 
Federal level through a Federal supervisor.
    That will benefit homeowners and policyholders who have 
uniform capital standards implemented and enforced by a 
regulator at the Federal level.
    In the report, we look at a couple of options to promote 
product availability and to reduce price. First, how do we get 
products approved more quickly? We talk about the interstate 
insurance product review compact that promotes the more 
efficient approval of life products. We want to see more States 
participate in that compact.
    Second, rate regulation, as we talked about earlier, if we 
can restrict it in certain areas, if we can promote market 
competition by reducing rate oversight, consumers--both 
families and individuals, and commercial consumers--will see 
more products available at less cost.
    Mr. Hurt. Okay.
    And I think that every regulation that comes out of 
Washington is always, I am sure, very well-intended, and it is 
hoped, I guess, that the cost will outweigh the benefits.
    What are the costs that need to be looked--that you should 
be aware of? What are the costs? What are the risks that are 
associated with this, in your mind?
    And then I would like to hear from--in my time, which is 
diminishing, Mr. Leonardi, if he has any comments.
    So if you could just quickly--
    Mr. McRaith. I will be brief, Congressman. To be clear, in 
our report we do not call for the Federal Government to take 
over these issues.
    What we call for is the States to implement uniformity in a 
way they have been unable to do thus far and at a point that 
you will be involved with when their Federal action is needed, 
we will have a cost-benefit analysis for you, we will be able 
to to determine if some Federal role is the best alternative at 
this--
    Mr. Hurt. Okay. And of course, Dodd-Frank requires that 
cost-benefit analysis, statutorily.
    Mr. McRaith. Required or not, we would do that.
    Mr. Hurt. All right.
    Mr. Leonardi, do you have any comments? A response to that?
    Mr. Leonardi. I want to go back to the arbitrage question 
and AIG. As I mentioned in the accreditation issue, there are 
very strong accreditation processes in place.
    As to AIG, there is no question there were serious 
regulatory failures. What I think seems to be forgotten is 
those regulatory failures were Federal regulatory failures.
    In spite of the glossing over of the Office of Thrift 
Supervision's role, it was the consolidated regulator. And if 
there was a lesson to be learned, it was that if there were 
supervisory colleges, if the Model Holding Company Act had been 
in place, if we had a group of all of the regulators at the 
table, including the Office of Thrift Supervision and the 
company, and somebody put the company on the block and said, 
what is the growth in this business and financial products in 
London, what does that mean, what are the risks associated with 
it, which is what colleges do. They want to understand 
management's view of the risks that are being addressed by the 
management for what the company is writing.
    There would be far more confidence in a group of very smart 
people who are regulating pieces of the business, looking 
carefully at the company as a whole and that might have--I am 
not saying it would have, but it might have had a much better 
opportunity to stop that train wreck than by just depending on 
one consolidated regulator who has admitted in subsequent 
testimony that they didn't understand what they had, and that 
it was a much, much bigger task and a much more complicated 
entity than any one regulator could have controlled.
    Mr. Hurt. Thank you, Mr. Leonardi.
    My time has expired.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Minnesota, Mr. Ellison, is 
recognized for 5 minutes.
    Mr. Ellison. Let me thank the chairman and also thank 
Ranking Member Waters for your consideration. I am very 
grateful.
    Mr. Leonardi, I just want to ask you a quick follow-up 
because I didn't quite catch what you said. It sounded like you 
said that there was a Federal regulatory failure.
    With regard to the whole financial crash of 2008 and after, 
I agree. But I also agree it is a multisystem failure. And with 
respect to insurance, and in particular AIG was mentioned, do 
you say that was exclusively a Federal failure?
    Or do you think that the fact that we do insurance 50 
different ways at least was partially at fault as well?
    Mr. Leonardi. This may surprise you, Congressman, but I do 
believe that. I believe that it was a failure at the Federal 
level. If you look at the operating companies, those companies 
that the State regulators were regulating, they did extremely--
when in fact Superintendent Dinallo in New York had approved an 
extraordinary dividend of $20 billion from the operating 
companies that he regulated that could go up to the holding 
company to help some of those problems in financial products 
group.
    So the other thing I think that needs--
    Mr. Ellison. You know what? I do appreciate--maybe we could 
talk more later--
    Mr. Leonardi. Sure.
    Mr. Ellison. Five minutes, you know how it is.
    Mr. Leonardi. Sure.
    Mr. Ellison. But I just wanted to get clear on how you felt 
about that. Let me just ask--
    Mr. Leonardi. Could I mention just one other quick thing, 
very quickly?
    Mr. Ellison. Okay, yes, please quick, because--
    Mr. Leonardi. I appreciate it. The Commodities 
Modernization Act of 2000 prohibited and prevented and 
preempted the States from regulating financial products, like 
derivatives.
    Mr. Ellison. Okay, I get your point. And I thank you for 
making it clear. Director McRaith, I just want to get right to 
the heart of a question that has been in front of this 
committee, and that has to do with title insurance. As I 
reviewed your report, I noticed that title insurance wasn't 
included in the report.
    I want to know, did you guys look into it? Some people on 
our committee might claim that--or their view would be that the 
affiliations are solely for efficiency. And others might argue 
that the affiliations hide hidden referral fees that cause 
customers to pay more. I actually am of the second school of 
thought.
    Did you all look into this? And what are your views on the 
topic?
    Mr. McRaith. Title insurance is an important issue, an 
important consideration. We did not cover the entire waterfront 
of potential areas for reform. There are many areas we heard 
about and learned about that we did not include in the report. 
That does not mean it is not important.
    Mr. Ellison. Okay.
    Mr. McRaith. So we--
    Mr. Ellison. You don't plan on touching on the issue?
    Mr. McRaith. We appreciate your admonition, and it is 
consistent with our own understanding of the importance of that 
subject. And I don't want to comment too much on all of what we 
might do, but I think it is fair to say an issue like that is 
on our radar screen.
    Mr. Ellison. I will just say for the record that it would 
be great to know what you all think about it as soon as you 
come up with a position.
    Mr. McRaith. Absolutely.
    Mr. Ellison. And then, next, I think I have a map that I 
would like to put up, if it is available. I have a lot of 
constituents, as all of us do, from diverse backgrounds. Many 
of my constituents are same-sex couples. And one of the issues 
that has come to our attention is discrimination in insurance 
against same-sex couples. As you see, this is addressed on page 
48, box 6.
    And as we know, same-sex couples face legal discrimination 
in 33 States, all the pink States. And then on the screen, 
there is a map showing 17 States where same-sex couples have 
equal rights. So I guess my question is, why is marital status 
considered in underwriting decisions? Has the insurance 
industry done any studies of the risk levels of same-sex 
couples? And what does your report recommend to eliminate the 
discrimination in insurance?
    Mr. McRaith. Sir, I am not aware of whether the insurance 
industry has studied whether same-sex couples compare to 
different-sex couples with respect to marital status as a 
rating factor. We do know that marital status is a 
consideration on personal lines insurance policies, that the 
impact on auto insurance, for example, could be anywhere from 4 
percent to 15 percent to 20 percent, depending on the 
individual and other characteristics. There are many variables 
that go in.
    And recently, we have learned that at least one 
standardized advisory organization is proposing rates for 
nonmarried people above the age of 30, which is a new 
development. Not a significant increase or adjustment, but a 
meaningful indication of change.
    Our report calls the question, asks the States, is it fair 
for same-sex couples to be lawfully married in one State, then 
prohibited from being married in another State, and then 
charged more by an insurance company for what they are 
prohibited from doing?
    Mr. Ellison. But would do if they could do.
    Mr. McRaith. Would do if they could. So it is fundamentally 
a question of fairness, and the report calls upon the States to 
examine this issue and explore the fundamental fairness issue 
of using marital status against a same-sex couple.
    Mr. Ellison. I want to thank you gentlemen. And I yield 
back the time I do not have.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Wisconsin, Mr. Duffy, is 
recognized for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    Just quickly, Mr. McRaith, what is FIO's budget for 2011, 
2012, and 2013?
    Mr. McRaith. I don't know the numbers. Our budget is part 
of the larger departmental offices at Treasury, so I don't know 
the--
    Mr. Duffy. How many full-time employees do you have?
    Mr. McRaith. We presently have 13 full-time employees.
    Mr. Duffy. Okay. So you don't know what that line item 
would be and how much FIO spends per year?
    Mr. McRaith. I don't personally know that number off the 
top of my head, no.
    Mr. Duffy. All right. Because I am concerned, as we look 
at--10 reports were to be submitted, as required by Dodd-Frank, 
and some were never submitted to Congress. Others were a little 
bit late, or a lot late. The one we are talking about today was 
almost 2 years late. And one report was submitted on time.
    I think earlier you said one of the main goals that you 
have is to be responsive: ``We want to keep Congress 
informed.'' That was your quote. When you don't submit reports 
to Congress as directed by Dodd-Frank, it is pretty hard to 
keep us informed.
    So if there is an issue with your staffing, if there is an 
issue with resources that is prohibiting you from providing 
these reports--I haven't seen a letter that you have submitted 
that I have been cc'd on. I don't know if you have sent a 
letter to the chairman.
    But if we are asking for reports from FIO, we expect to get 
them, and get them on time. I would just leave that point out 
there. And maybe another point I would ask is, do you deem 
these reports necessary, number one? Number two, is FIO 
incompetent in drafting these reports and sending them to 
Congress? Or do you not have the staff? Which is it?
    Mr. McRaith. The reports are important. Congress has asked 
for them. They are important subjects, and it is appropriate 
for the Treasury's Federal Insurance Office to offer them to 
the country, to Congress, and ultimately to the international 
community, to understand the views of the Federal Insurance 
Office on the subjects to be addressed.
    Mr. Duffy. We agree on that. Why haven't they been 
submitted?
    Mr. McRaith. It is not a--excuse me?
    Mr. Duffy. Why haven't they been submitted or been 
submitted late?
    Mr. McRaith. I think the important reality for us is that 
we submit a report to you that is of appropriate quality, of 
appropriate depth and insight. And while we regret that--
    Mr. Duffy. What--
    Mr. McRaith. -- the modernization report was not provided 
in January 2012, we are pleased with the quality and importance 
of the report.
    Mr. Duffy. What we expect is a quality report as asked for 
by Congress and on time. And that is not what you have done. So 
I will leave that point alone, but I think it is disrespectful 
to the elected body to not provide those reports as required.
    I want to move to mortgage insurance. You have indicated we 
have had failure in the mortgage insurance space, and it is 
your opinion that we should have a Federal regulator in the 
mortgage insurance space. Is that right?
    Mr. McRaith. That is the recommendation in our report.
    Mr. Duffy. And some of those failures came during our Great 
Recession. So if the Federal regulator model works so well, can 
you point to me other regulators, Federal regulators, that 
performed well during the Great Recession, during the financial 
crisis, that didn't have any failures, that you can point to 
and say, listen, the State model doesn't work, but the Federal 
regulating model does work, look at this agency that did so 
well, in insurance or in the financial sector? Because I think 
they have all had issues. What makes you think that you can do 
it any better than everyone else, leading up to the crisis?
    Mr. McRaith. I think the point of the recommendation is 
that there was failure throughout the mortgage insurance 
industry. We had to learn from that experience, learn from the 
crisis, learn, is there a better way to do that? That is why 
this committee and others in the House and Senate have dealt 
with reforming the housing finance system. As part of that, it 
is appropriate to have a federally-supervised private mortgage 
insurance industry.
    Mr. Duffy. Sure. And I guess those recommendations would be 
taken far more seriously if you could provide high-quality 
reports in a timely manner. One other issue that I want to 
bring up--and I guess I am concerned about the role of the 
Federal Government in our insurance space, if you can't tell 
that. And Dodd-Frank was pretty clear that you are here to 
monitor it.
    But in Treasury's press release that came out recently, 
they said that you were proposing a hybrid Federal-State 
regulatory system. Does it say that in Dodd-Frank? Does it give 
that authority in Dodd-Frank? Where in that press release--
where is that coming from, this hybrid model?
    Mr. McRaith. Fundamentally, Congressman, that is what we 
have today. We have convened Federal agencies involved with the 
insurance sector, either operating a program or involved with 
supervision. We have over 35 agencies attending a meeting like 
that. So as I mentioned in my opening comments, the Federal 
Reserve is involved, the SEC, the Department of Labor, the 
Department of Agriculture, the Department of Energy, and the 
Department of Housing and Urban Development all have some role 
in the insurance sector.
    So the report really doesn't call for a Federal regulator, 
as you appreciate. What the report says is, we need to deal 
with real problems that are longstanding in the U.S. system of 
insurance regulation, and some of those will require Federal 
involvement, much like, for example, NARAB II, multi-State 
agent licensing. How do we solve a problem of a multi-State 
inefficiency? Congress passes a law.
    Mr. Duffy. Thank you. And my time is up. I was hoping to 
ask some questions in regard to your view, Mr. Leonardi, on the 
expanded role of the Federal Government in our State insurance 
space, but my time has expired, and I will yield back to the 
Chair.
    Chairman Neugebauer. I thank the gentleman.
    And now the ranking member of the full Financial Services 
Committee, Ms. Waters, is recognized for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I welcome our panel here this morning. And let me just say 
that I recognize that Mr. McRaith came into this position 
almost a year after we passed Dodd-Frank, I believe. So I am 
sympathetic to any reports that were not released on time, as 
it was described by my colleague, and certainly I would not 
expect that you would have responsibility for that entirely. So 
I appreciate the work that you are doing and what it takes to 
do the work.
    Some of my colleagues here today have talked about some of 
the issues that I am concerned about. Mr. Clay asked about red-
lining. Representative Hurt talked about costs versus benefits. 
And these are some of the areas that I am certainly interested 
in.
    I was a member of the California State Assembly for 14 
years, and I worked on red-lining for almost all of those 
years. And, of course, having come from St. Louis, Missouri, in 
a low-income community, I learned a lot about insurance 
products and what was being pushed in the communities in my 
neighborhood. And I think a lot of that has been cured, but I 
am still concerned about what is happening in underserved 
communities.
    Now, as I understand it, part of FIO's mission is to 
monitor the extent to which traditionally underserved 
communities and consumers, minorities, and low- and moderate-
income persons have access to affordable insurance products. 
What have you done? And how did you do it?
    Mr. McRaith. The statutory responsibility to monitor 
affordability and accessibility is very important to our 
office. We have compiled data from external sources and are 
evaluating the best ways to measure affordability and 
accessibility.
    Our report identifies the subject of risk classification. 
How do companies go about pricing insurance products? The 
fundamental reality is that the data-mining technology 
available today is so much more powerful than even a few years 
ago. The data that any one of us could find out about any one 
individual is so much greater in volume than it ever used to 
be.
    We want to have a conversation about--and do--first of all, 
research and report on and discuss, what are the appropriate 
boundaries of the use of that now expansive world of personal 
information that is available about any individual, not just 
for insurance companies, although that is our area of interest, 
but really throughout the world?
    The data-mining technology is so much more powerful than it 
ever used to be. Individual products are sometimes priced with 
hundreds or more different factors, considerations about any 
one individual. We need to know, what are those factors? Do the 
States understand them? And then, thirdly, what are the 
boundaries that are appropriate on the use of all of that 
information?
    Ms. Waters. I am very interested in keeping up with what 
kind of information you are putting together and how it is 
going to impact the underserved communities and what we can do 
to make sure that there is fair access.
    Let me just ask Mr. Leonardi, do you think that there has 
been significant improvement over the years in serving the 
underserved populations and minorities and our consumers in 
general, even in the rural communities that Mr. Hurt referred 
to?
    Mr. Leonardi. I can only speak as the Commissioner from 
Connecticut on this issue, although I did, before I was 
Commissioner of Connecticut, live in a very, very rural part of 
upstate New York. But I will say that one of the things that 
Director McRaith just mentioned that I agree with is, there was 
a time when you might have 6 to 10 risk characteristics that 
the companies would look at, and now they are looking at 50 to 
75. So there is a huge amount of data that they have access to, 
a lot of computing power to slice and dice that, and what we do 
is--and I think we are one of the few States that requires it, 
we require that they provide their guidelines so that we can 
see what those results will lead to.
    And it may look fine on the surface, but if below the 
surface, if the conclusion is--of the data is that there is the 
potential to be red-lining--for example, some group, then we 
don't allow that. And we are very strict about that.
    Ms. Waters. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from Florida, Mr. Ross, is recognized 
for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Director McRaith, since 1945 the McCarran-Ferguson Act has 
been the foundation upon which we have had strong consumer 
protections because of good and sometimes bad State regulation, 
but I think a good market for consumers. You have alluded to--
and I agree with you--that what we have in this country now is 
a hybrid market, and you have given some examples of that, 
TRIA, NFIP, and even the Affordable Care Act are involvements 
of the Federal Government in the regulation of insurance 
markets in this country.
    And my concern is, is that based on your report, the FIO 
report, and your recommendations, if those recommendations are 
not met, what would you anticipate FIO to do?
    Mr. McRaith. The first thing we are going to do is bring 
people together to try to solve the problem. We are doing that 
already. If we get to a point where the problem is not solved, 
then there needs to be--hopefully we can present a solution--
    Mr. Ross. And that is where my next question goes to, that 
solution. Do you anticipate coming back to Congress asking for 
regulatory authority?
    Mr. McRaith. No, my expectation is this--the report, as you 
note, does not call for a Federal regulator, to the surprise--
    Mr. Ross. I appreciate that.
    Mr. McRaith. --of some. What we say is we need to solve the 
problem. And rather than focus on, should we develop some 
structure that implements something one way or another, our 
objective is, solve the problem. So, for example, I cited NARAB 
II, something that this committee has supported. That is an 
example of a Federal role to impose uniformity where needed.
    Mr. Ross. So you don't anticipate seeking any regulatory 
authority for FIO in any time in the future or at all?
    Mr. McRaith. What I anticipate is working hard to fulfill 
our current statutory mandate.
    Mr. Ross. And having been an insurance Commissioner for 6 
years--in fact, I think you and I were on a panel years ago in 
Illinois--
    Mr. McRaith. That is right.
    Mr. Ross. --you have been very familiar with McCarran-
Ferguson. Let me ask you directly: Do you think that the 
McCarran-Ferguson Act as it exists today should either be 
upheld and left alone, modified, or repealed, and why?
    Mr. McRaith. I don't have an opinion on the McCarran-
Ferguson Act. The bottom line is, we need to move away from the 
State versus Federal debate, because it has stifled solutions 
to problems that in some cases have been around for decades.
    We need as a country to provide better and more efficient 
regulation for consumers. In many cases, the States can do 
this. In some cases, it is going to require Federal help.
    Mr. Ross. And you have acknowledged, I think in your 
report, that consumer protections have been handled better by 
way of State regulation. Would you agree with that?
    Mr. McRaith. Generally speaking, that is true. And the 
reason is exactly the reason you stated in your opening 
comments, which is, in the P&C industry in particular, there 
are very localized needs. Sometimes, within a State, one county 
is different from another.
    Mr. Ross. Exactly. Risks are not homogeneous. They are 
heterogeneous, essentially.
    Mr. McRaith. That is correct.
    Mr. Ross. We see that on all types of geographic locations. 
Speaking in terms of our domestic insurers and their 
protections, we are losing market share, we are losing premium 
to foreign and especially European carriers. My concern is 
Solvency II. My concern is the backdoor of ComFrame. What 
guarantees or assurances can you give us that our domestic 
carriers can be protected, especially in light of different 
standards of capital requirements there may be as a result of 
Solvency II?
    Mr. McRaith. Importantly, the international activity is the 
development of standards. It is the development of best 
practices for companies around--for supervisors and companies 
that are operating around the world. Before those standards are 
implemented, it will require some action by the States or the 
Federal Government to implement those--
    Mr. Ross. And then that is where FIO plays a role, to sort 
of be the spokesperson in those negotiations?
    Mr. McRaith. Our view is, we should assert on behalf of the 
United States leadership in these conversations, work to 
develop consensus with our international counterparts, but 
provide the leadership that the United States justifiably 
should provide.
    Mr. Ross. And protect--thank you.
    Mr. Leonardi, quickly, I have only 45 seconds left. Talk to 
me about mitigation and its importance.
    Mr. Leonardi. Mitigation, in terms of catastrophe?
    Mr. Ross. Yes.
    Mr. Leonardi. I think it is extremely important. I think 
that a number of the insurance companies, the large property, 
casualty, and reinsurance companies have recognized the need 
for mitigation. I think the issue is getting those provisions 
passed through legislatures, whether it be shutters for 
windstorms or fixing the shoreline, moving back from the 
shoreline and rebuilding, and things like that.
    Mr. Ross. Thank you. And one really quick last question, 
Mr. Leonardi, is there anything that you would propose to allow 
for the investment of private insurance for flood insurance 
purposes in your State? Any changes to the law today?
    Mr. Leonardi. We actually have just allowed a private 
insurer or a private insurer of flood insurance to sell, along 
with about 15 other States just in the last 3 weeks. So we 
would--
    Mr. Ross. It is out there. Capacity is out there, in your 
opinion?
    Mr. Leonardi. Yes.
    Mr. Ross. Thank you. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Now the ranking member of the subcommittee, Mr. Capuano, is 
recognized for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Thank you, gentlemen, for I think a thoughtful and 
insightful discussion. Mr. Leonardi, I think you have advocated 
for a while now very effectively a very strong States' rights 
approach towards insurance regulation, and I respect that. And 
I agree with some of it. I am not sure I agree with all of it.
    But I want to be sure that I understand how vehement you 
might be. Do you agree that some reasonable, thoughtful people 
might disagree with the absolute ban on any Federal involvement 
in overseeing any part of the insurance industry?
    Mr. Leonardi. I am not sure if I--I don't want to answer 
that in the negative. The answer is, yes, I obviously--as the 
Director has pointed out on several occasions here this 
morning--that the Federal Government has a role in a number of 
areas, flood insurance, whether that is a good or bad thing, 
TRIA, health insurance, and so on.
    So, it is what it is. I guess what I wouldn't want is to 
use the fact that we have these in place for specific reasons 
to open the floodgates of saying, we don't need State 
regulation anymore. We really need to have the Federal 
Government come in and do things, again, fixing what is not 
broken, I guess is what--
    Mr. Capuano. Right. I am not aware--there must be 
somebody--of anybody that I have talked to who would advocate 
such a wholesale, immediate transition. But there are those of 
us who think that some companies--never mind the individuals--
may be tired of dealing with potentially 91 different 
regulators, 56 on the State and regional level and 35 Federal 
agencies. Some people might want to reduce that number and deal 
with only 30 or whatever the number might be, number one.
    Number two is--I have been involved with financial services 
for a long time, mostly in the banking end of it, and I will 
tell you that I remember very clearly it wasn't long ago that 
banks had to be incorporated in a State, and it was a big 
brouhaha about interstate banking. Today, nobody would think 
twice about that, and actually some people in this room 
probably don't even remember that. Not many. A lot of you are 
at least as old as I am.
    But things change. The insurance industry has clearly and 
unequivocally changed over the years, as you have said 
yourself, and become much more complicated. And by the way, as 
far as all those rating factors go, there is still red-lining 
going on, in my opinion. It may not be the old-fashioned, evil 
intended red-lining, but the effect is still the same. Even 
with all those rating factors, I know people whose auto 
insurance is significantly different simply by living one 
street away; because they live in a different ZIP Code, their 
insurance is half as much, and ZIP Codes do relate to certain 
red-lining-related issues. But that is a different discussion.
    I don't have much to add to this discussion at the moment. 
I think the Director has thrown a lot of issues on the table, 
rightfully so, obviously not all of them, but a lot of them for 
discussion. And I think that your participation in this 
discussion is very important. I think it has been very 
thoughtful, very enlightening, and I just want to say thank you 
very much.
    Because this is a very difficult area where I think it is 
inevitable that we will slowly move towards more Federal 
involvement, simply because of the complexity and difficulty 
and the internationalization of all businesses, not just 
insurance. So I think that is inevitable, but I also think that 
it should not be done quickly. It should not be done simply by 
throwing out a system that has worked relatively well up until 
this time.
    And I do think that it requires the engagement and the 
involvement of everybody at the table, and I just want to thank 
the Director for your thoughtful and insightful report that 
raises a lot of questions. And, Mr. Leonardi, yours and NAIC's 
involvement with your views of the world, too, that I actually 
think some of them are very valuable. Some of them we may have 
disagreements on, but they are professional disagreements, and 
not esoteric ones for me.
    So I just want to say thank you very much for your 
participation today.
    Chairman Neugebauer. I thank the gentleman. And I think 
that is all of the Members who have questions. Mr. McRaith, I 
want to thank you again for your support for NARAB II. We are 
hopeful to get that across the line. We think that is a 
positive step for the industry.
    Mr. Leonardi, thank you, again, for your attendance. And 
this panel is now dismissed.
    The second panel is a fairly large panel, so as one group 
leaves, if the other group could get in place, and we will try 
to get started here as quickly as we can. Again, thank you for 
your service.
    So, we will get started. If those of you who would like to 
have a sidebar conversation would do that outside, we would 
appreciate that, so we can close the doors, and get started.
    As it has been alluded to, we have a large, but very 
distinguished second panel. And the reason that the panel is 
the size it is, is that it has been the commitment of this 
chairman and our subcommittee to be as transparent and open and 
give people an opportunity to express themselves, and this is 
kind of new territory for the Federal Government to be in this 
role of FIO, a new organization. It has an impact on the 
industry, has an impact on consumers, and so we wanted to give 
the industry and other interested parties an opportunity to 
make their comments on this very first report.
    And so, we have Mr. Anthony Cimino, vice president of 
insurance and trade for the Financial Services Roundtable. 
Welcome. He is a former Hill staffer; he served on the staff of 
this committee, I believe, in the past.
    Mr. Paul Ehlert, president, Germania Farm Insurance, on 
behalf of the National Association of Mutual Insurance 
Companies. I might mention that Paul is from Texas. It is good 
to have you here.
    Mr. Gary Hughes, general counsel for the American Council 
of Life Insurers. It is good to have you here.
    Jon Jensen, president, Correll Insurance Group, on behalf 
of the Independent Insurance Agents & Brokers of America.
    Mr. Frank Nutter, president, Reinsurance Association of 
America.
    Mr. Robert Restrepo, president, chairman, and CEO of the 
State Auto Insurance Companies, on behalf of the Property 
Casualty Insurers Association of America.
    Mr. Scott Sinder, partner, Steptoe and Johnson, on behalf 
of the Council of Insurance Agents & Brokers.
    And Mr. Stef Zielezienski is general counsel for the 
American Insurance Association. I thank all of you for being 
here.
    And with that, we will recognize Mr. Cimino for 5 minutes.
    I will remind each one of you that without objection, your 
written statements will be made a part of the record, as well.

 STATEMENT OF ANTHONY CIMINO, ACTING HEAD, GOVERNMENT AFFAIRS, 
               THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Cimino. Thank you. Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee, thank you for the 
opportunity to testimony before you today.
    My name is Anthony Cimino, and I am the acting Director of 
Federal affairs at the Financial Services Roundtable (FSR). My 
testimony today is going to focus on four key points. I will 
detail the need for a strong and effective Federal Insurance 
Office. I will identify the principles FSR believes should 
underpin insurance regulatory modernization. I will address 
certain report recommendations in greater detail. And I will 
urge Congress and the FIO and the NAIC to develop an action 
plan to improve the insurance regulatory system.
    To start, FSR shares the view of many that the insurance 
regulatory system can be improved. To advance reforms, FIO must 
be a strong, effective force which will allow it to examine 
insurance reform on a broad national scale, interacting with 
State regulators on a consistent basis and objectively 
measuring progress.
    In addition, FIO should serve as an educational resource to 
the Federal Government. The Federal Reserve, for instance, will 
oversee certain insurers that have banking operations or have 
been designated as SIFIs. Consequently, the Fed must now 
develop expertise in the insurance sector, which has vastly 
different risk, capital, and business models than banking 
institutions. FIO has a clear role in serving as that 
educational resource to the Fed and other Federal agencies.
    Further, international forums and standard-setting efforts 
are influencing U.S. regulation. FIO must be a strong voice 
representing the U.S. interests, coordinating effectively with 
other stakeholders, including USTR, the Federal Reserve, and 
the NAIC.
    Now, as to the principles of reform, FSR urges policymakers 
to use the following principles to underpin any modernization 
efforts. First, reform should establish uniform regulatory 
standards. Uniformity is a critical aspect of effective 
insurance regulation. Different standards and treatment across 
States increase compliance costs that ultimately drive up 
prices for consumers and, in some cases, restrict product 
offerings. FIO should elaborate on uniform standards that will 
bring greater efficiency to consumers and the carriers.
    Second, reforms should facilitate open and competitive 
markets. Regulatory policy should encourage innovation and 
product offerings and spur healthy price competition. Consumers 
benefit from competition and the ability to choose products and 
services that suit their needs and that are priced 
appropriately because of competitive market pressures.
    Third, reforms should establish effective and streamlined 
regulations. FSR supports improved regulations. We caution that 
the model articulated in the report could lead to increased 
dual regulation, which may result in duplicative and consistent 
or possibly even conflicting demands. It will be important that 
we make sure to avoid those pitfalls.
    Now, as to specific recommendations contained in the 
report, FSR supports many and has questions on a couple. With 
respect to capital standards, FIO notes in its report the 
different business model and risk profile of insurance 
companies compared to banking institutions and, as a result, 
the need to craft different and more appropriate tailored 
standards for insurers as they hold capital. FSR represents 
both banks and insurance companies and is uniquely positioned 
to understand the difference between these two models and the 
need to apply a more tailored capital approach to insurance 
companies. FSR supports efforts to do so.
    Second, FSR agrees with FIO's recommendations on the 
improvement of the product approval process. We also urge 
Congress to adopt NARAB II. And we understand the need to 
identify and implement natural catastrophe mitigation 
standards.
    There are, however, issues where we look forward to further 
information regarding FIO's plans. For instance, the report 
recommends States examine the impact of different rate 
regulation regimes and that FIO work with the States to 
establish a pilot program for rate regulation to maximize 
insurers in the marketplace.
    FSR believes that an environment that increases competition 
ultimately drives down prices and serves consumers better. We 
look forward to more guidance on FIO, on how to--on how it 
might advance this objective.
    Second, the report recommends that Treasury and USTR pursue 
a covered agreement on reinsurance collateral requirements to 
achieve national uniform treatment of reinsurers. FIO's desire 
to achieve this uniform treatment is welcome, but at this time, 
the contours of such an agreement are unknown, and FSR requests 
the ability to work with FIO and other stakeholders to ensure 
that we have our input heard.
    Perhaps most importantly, we have to discuss the path 
forward. For the next steps, FSR urges FIO to work with 
Congress and the NAIC to identify this path. We see this FIO 
report as the first step, not an ending in and of itself or the 
end of the discussion, so it is going to be critical that we 
put in place these next steps and an action plan that moves us 
forward to advance insurance regulatory reform. To the extent 
that Congress agrees with certain recommendations or has its 
own reforms to advance, FSR recommends it work with FIO and 
NAIC to do so.
    We look forward to being a part of this process, and we 
appreciate the opportunity to testify today. Thank you. I am 
happy to answer any of your questions.
    [The prepared statement of Mr. Cimino can be found on page 
64 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And now Mr. Ehlert, you are recognized for 5 minutes.

  STATEMENT OF PAUL EHLERT, PRESIDENT, GERMANIA INSURANCE, ON 
    BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE 
                       COMPANIES (NAMIC)

    Mr. Ehlert. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for this opportunity 
to speak to you today. My name is Paul Ehlert, and I am 
president of the Germania Insurance Companies, a group of 
property and casualty companies that operate in Brenham, Texas.
    Germania only operates across the State of Texas. We employ 
335 people, and we protect 200,000 families and individuals, as 
well as a few small businesses within the State. We have been 
proudly serving our member policyholders and our State for 118 
years.
    I also serve on the board of Directors of the National 
Association of Mutual Insurance Companies (NAMIC). NAMIC 
represents more than 1,400 property and casualty insurance 
companies, including small farm mutuals, State and regional 
carriers, and large national writers. NAMIC members write half 
of all personal, property, and casualty lines and one-third of 
the commercial business in the United States.
    NAMIC believes the FIO report represents a series of 
conversation starters for potential next steps in insurance 
regulatory reform, and we appreciate the subcommittee calling 
this hearing today. To begin, the current State-based insurance 
regulatory system is robust and well-positioned to meet the 
needs of the Nation's insurance marketplace. However, it is not 
perfect.
    The FIO report correctly observes that regulation can be 
too costly and often too complex. And we wholeheartedly share 
the twin goals of maximizing efficiency and uniformity.
    NAMIC appreciates the fact that the FIO report attempted to 
rise above the traditional debate of State versus Federal 
regulation. While it points to the increased costs of State-
based insurance regulatory system, it also acknowledges the 
local nature of many insurance products and the cost and 
complexity of starting up a Federal regulatory system.
    FIO concludes that the proper balance is maintenance of the 
State system with Federal involvement in areas where warranted, 
a hybrid approach. In a few targeted areas, this model could 
work. NAMIC supports NARAB II, for example. However, Congress 
should do everything in its power to avoid creating an additive 
system that simply layers Federal regulation on top of existing 
State regulation.
    The report contains the implicit, but pervasive view that 
Federal involvement will automatically translate into increased 
regulatory efficiency and efficacy. The report suggests that, 
``if States fail to accomplish the necessary modernizations in 
the near term, Congress should strongly consider direct Federal 
involvement.''
    With all due respect, it is not at all clear that Federal 
Government involvement will be a cure for all insurance 
regulatory ills. In general, the report did not go far enough 
in recognizing some of the limitations and potential negative 
consequences of increased Federal involvement.
    One area which does not warrant Federal involvement, 
contrary to the report, is the development of binding, uniform 
Federal standards to restrict insurers' use of risk 
classification factors that are already extensively regulated 
in the States.
    Federal regulation of insurer underwriting practices would 
simply substitute Congress' judgment on these matters for those 
of the State. NAMIC believes that FIO's focus should remain 
firmly on the actions and initiatives at the international 
level. It is our position that cooperation and coordination 
internationally is a positive thing, but should not result in 
abdication of regulatory authority to foreign jurisdictions and 
quasi-governmental bodies.
    Too much focus on regulatory equivalence with other nations 
could result in significant and costly changes in the U.S. 
insurance regulatory system. Our system is strong and time-
tested. Many of the international regulatory principles are 
theoretical and have never been implemented, as in the case of 
Solvency II. Yet, the E.U. is using these principles as a 
benchmark against which to compare other countries.
    We believe that the FIO should be a strong advocate for the 
U.S. system. After all, less than 1 percent of the 2,800 U.S. 
property and casualty insurance companies are internationally 
active. We urge FIO to coordinate with State regulators to 
advocate for international standards that are consistent with 
the sound U.S. insurance regulatory approaches and that add 
value to our member policyholders.
    At a minimum, any international standards must not impose 
unnecessary burdens for U.S. companies, especially the domestic 
foreign mutuals like my own. As we move forward, NAMIC stands 
ready to work with Congress on these issues. I again thank you 
for this opportunity to speak, and I look forward to answering 
your questions.
    [The prepared statement of Mr. Ehlert can be found on page 
70 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Hughes, you are recognized for 5 minutes.

   STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND 
 GENERAL COUNSEL, THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Mr. Hughes. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, I appreciate the opportunity 
to provide you with the views of the American Council of Life 
Insurers on the FIO report.
    Overall, we believe the report presents a fair and balanced 
picture of our State-based system of regulation and the various 
challenges it faces. I would like to focus my remarks today on 
two issues: first, global initiatives affecting the regulation 
of U.S. life insurance companies; and second, capital standards 
that the Federal Reserve is now required to impose on certain 
life insurance groups.
    The regulatory landscape for U.S. life insurers is changing 
dramatically. Dodd-Frank now gives the Federal Reserve a 
significant regulatory role with respect to those insurers that 
are designated as systemically important. Two of the ACLI's 
member companies have received that designation, and one 
additional company is under review for possible designation. 
Dodd-Frank also gives the Federal Reserve jurisdiction over 
another 12 of our member companies that control savings and 
loan institutions.
    At the same time, the Financial Stability Board is 
directing the International Association of Insurance 
Supervisors to develop group capital and group supervisory 
standards applicable to internationally active insurance 
groups. We estimate that at least 18 of our member companies 
fall into this category.
    Taken together, the initiatives of the Federal Reserve and 
the IAIS will directly affect companies comprising 
approximately 60 percent of the premiums of ACLI's overall 
membership. Let me put that in different terms. In the very 
near future, a major segment of the U.S. insurance business 
will have material aspects of its capital structure dictated or 
influenced by someone other than a State insurance regulator.
    In addition, 55 of our member companies conduct significant 
business in the United States, but have their ultimate parent 
located in another country, mostly within the European Union. 
And the E.U. is modernizing its insurance capital standards 
through Solvency II.
    The point here is that life insurance regulation in the 
United States can no longer be viewed as a purely domestic 
matter. And if the capital standards of the States, the Federal 
Reserve, the IAIS, and the E.U. are not generally consistent, 
the resulting competitive disparities--mainly involving the 
relative cost of capital--will significantly disrupt the U.S. 
and the global life insurance markets. That is why we believe 
it is imperative for all of our U.S. Representatives to work on 
a unified and constructive basis with the FSB and other 
international standard-setting bodies.
    Various Federal regulatory agencies are now directly 
involved in matters going to the very heart of a life insurer's 
financial structure. And while the Federal Reserve and other 
agencies are making a concerted effort to enhance their 
understanding of our business, there is still a significant 
knowledge gap. We believe the FIO can be invaluable in helping 
fill this gap, given its mission of being the Federal 
repository of information on insurance and its regulation.
    The office is also well-positioned to interact with the 
NAIC, the States, the FSB, the IAIS, and the E.U., as global 
capital and supervisory standards evolve. It is critical for 
that evolution to occur on a rational and consistent basis, and 
that will not happen absent strong advocacy by the FIO and the 
States, all working in concert and working toward common goals.
    The second issue I want to address involves the holding 
company capital standards Dodd-Frank requires the Federal 
Reserve to impose on insurers that are designated as SIFIs or 
that own savings and loan associations.
    Any holding company capital requirements made applicable to 
a life insurer must be compatible with the company's basic 
business model. Unfortunately, the scenario we face due to the 
Federal Reserve's interpretation of Dodd-Frank is one of 
applying a bank-centric regulatory regime to a life insurer.
    The life insurance business is fundamentally different than 
the business of banking. Assets, liabilities, reserves, 
capital, accounting, products--each of these elements of 
insurance structure and regulation differs significantly from 
those of commercial banks.
    The issue here is not whether these life insurers should be 
subject to holding company capital standards. They have 
accepted the fact they will be. The issue is making certain 
those standards actually work for a life insurer.
    The whole purpose of these provisions of Dodd-Frank is to 
stabilize the U.S. financial system. Disrupting the operations 
of well-run insurance companies by applying ill-fitting 
standards is fundamentally at odds with that purpose and 
shouldn't occur under any circumstances.
    I would like to express our appreciation to Congressman 
Miller and Congresswoman McCarthy for introducing H.R. 2140. 
This measure would enable the Federal Reserve to apply 
appropriate insurance-based capital standards to those life 
insurers under its jurisdiction. Similar legislation has been 
introduced in the Senate, and we look forward to working with 
both houses of Congress to see this important legislation 
enacted.
    Mr. Chairman, thank you for holding this hearing, and I 
would be glad to answer any questions.
    [The prepared statement of Mr. Hughes can be found on page 
85 of the appendix.]
    Mr. Luetkemeyer [presiding]. Thank you, Mr. Hughes.
    Mr. Jensen, you are next. And I would again advise all of 
the panelists today to be sure and pull the microphone as close 
to you as possible. Just take a bite out of it. That is how 
close it needs to be, really, because the acoustics in here are 
very poor, and we want to make sure everybody in the audience 
has a chance to hear, as well.
    So, thank you very much. Mr. Jensen, you may proceed.

STATEMENT OF JON JENSEN, PRESIDENT, CORRELL INSURANCE GROUP, ON 
BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA 
                            (IIABA)

    Mr. Jensen. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. My name is Jon 
Jensen, and I am president of Correll Insurance Group, which 
has 185 employees and is headquartered in South Carolina. I am 
also chairman of the Government Affairs Committee for the 
Independent Agents & Brokers of America, also known as the 
``Big I.''
    The Federal Insurance Office was charged with a massive 
assignment, and the Big I commends Director McRaith and his 
staff for producing a comprehensive and largely balanced 
assessment of the insurance regulatory system. The report has 
generated well-deserved attention and analysis and identifies 
and recommends several areas of reform.
    The recommendations offered in the report suggest that the 
insurance regulatory system is functioning at a high level and 
does not require significant overhaul and restructuring. The 
Big I agrees strongly with this assessment and several of the 
recommendations in the report, including FIO's call for the 
adoption of the NARAB II agent licensing legislation.
    While many of the recommendations are worthy of discussion 
and review, I would like today to highlight four of the broader 
themes the Big I found in the report. First, the report reminds 
us that insurance regulations, as with any system of regulatory 
oversight, are imperfect and can always be enhanced. However, 
State insurance regulation has a strong and successful record 
and has performed particularly well when compared to other 
financial sectors, especially in recent years. The report 
reminds us of the success, but also that the system must 
continue to evolve and improve.
    Second, the Big I believes that the report observes that 
the establishment of a full-blown Federal regulatory framework 
is not a prudent or viable option. While some expected this 
recommendation from FIO, the report instead indicates, ``the 
proper formulation for the debate at present is not whether 
insurance regulation should be State or Federal, but whether 
there are areas in which Federal involvement in regulation 
under the State-based system is warranted.''
    Third, the recommendations in the report are noticeably 
modest. They reaffirm the relative health of State insurance 
regulation and indicate that sweeping and wholesale changes are 
unnecessary and unwarranted. The report recognizes that State 
officials have identified and are working to remedy certain 
flaws within the existing system, and many of FIO's suggestions 
encourage States to continue their pursuit of existing efforts 
and note that FIO intends to simply monitor their progress.
    Fourth, the report recommends the use of targeted Federal 
intervention should be limited to those instances where 
demonstrated deficiencies exist and where States are unable as 
a result of practical hurdles or collective action issues to 
resolve the challenges themselves.
    The report states, ``In all events, Federal involvement 
should be targeted to areas in which that involvement would 
solve problems resulting from the legal and practical 
limitations of regulations by States, such as the need for 
uniformity or the need for a Federal voice in U.S. interactions 
with international authorities.''
    One specific example of such targeted Federal intervention 
that the report recommends is the NARAB II legislation to 
reform agent licensing. Specifically, FIO discusses the need 
for agent licensing reform at length, and we greatly 
acknowledge and appreciate the emphasis given to this issue in 
this report.
    We are equally appreciative of the leadership of the 
chairman, and of Representative David Scott, who have been 
steadfast supporters of this legislation over the past several 
years. In fact, last June the NARAB II legislation passed the 
full House by a vote of 397-6, and we are also pleased that the 
measure was approved by the full Senate last week.
    The NARAB II proposal is a textbook example of how targeted 
action at the Federal level can enhance and improve State 
regulation without Federal regulation. The Big I is pleased 
that the NARAB II continues its progress through the 
legislative process, and the agent and broker community is 
optimistic that this much-anticipated measure will be enacted 
into law in the near future.
    I thank the subcommittee for this opportunity to testify 
today, and I look forward to a continued discussion regarding 
the issues addressed in my testimony.
    [The prepared statement of Mr. Jensen can be found on page 
93 of the appendix.]
    Mr. Luetkemeyer. Thank you, Mr. Jensen.
    Mr. Nutter, you are next. Please proceed.

    STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                  ASSOCIATION OF AMERICA (RAA)

    Mr. Nutter. Mr. Chairman, and members of the subcommittee, 
I am Franklin Nutter, president of the Reinsurance Association 
of America (RAA). The RAA is the national trade association 
representing reinsurance companies doing business in the United 
States. RAA members consist of both U.S.- and non-U.S.-based 
companies with an interest in the regulatory environment in 
which they operate, including solvency in financial oversight, 
as well as market access.
    The RAA supported the provision in the Dodd-Frank Act that 
authorizes the Federal Insurance Office, working with the U.S. 
Trade Representative to enter into covered agreements. This 
gives those governmental entities the authority--indeed, we 
believe the mandate--to pursue bilateral or multilateral 
agreements regarding prudential measures with respect to the 
business of insurance or reinsurance between the United States 
and one or more foreign governments. These covered agreements 
will provide uniform regulatory criteria for transactions 
between U.S. and non-U.S. insurers and reinsurance.
    Insurance is widely regarded as facilitating economic 
activity, and reinsurance provides insurers with capital 
support, diversification of risk, and risk transfer for extreme 
loss events. Covered agreements will facilitate the provision 
of global capital and risk-taking capacity and, therefore will 
benefit economic activity in the United States and in other 
countries.
    We envision these covered agreements to provide the 
regulatory framework for U.S. reinsurers in foreign countries 
and non-U.S.-reinsurers in the United States. We do not see 
this as a new layer of regulation, but rather as a federally-
authorized tool that would be applied in the context of their 
State regulatory system.
    We are pleased to see the Federal Insurance Office report 
endorse the pursuit of covered agreements. The FIO report 
defines its interest in the context of financial security 
provided by unauthorized reinsurers based on the NAIC's 
recently revised model law and credit for reinsurance. The RAA 
supports the recent NAIC model law revisions and has worked 
vigorously to see them enacted in various States.
    It is clear, however, that it will take many years for 
these changes to be adopted by all the States. The NAIC model 
law process as applied to this model law also assumes the 
States individually, based on an NAIC-approved list of 
qualified jurisdictions, will make a determination of the 
equivalence of a foreign country's reinsurance regulation.
    The RAA believes covered agreements, based on Federal 
statutory and constitutional authority between the United 
States and countries or governmental entities representing 
major reinsurance trading partners, provide the preferred 
approach for addressing the basis of regulatory equivalence and 
appropriate regulatory security.
    It is clear that the statutory authority in Dodd-Frank does 
not limit covered agreements to matters related to collateral 
for unauthorized reinsurance. There are a host of Federal 
prudential issues that could be addressed in a covered 
agreement as the basis upon which companies from one 
jurisdiction do business in the other jurisdiction.
    We recognize the use of this authority beyond collateral 
may concern some. However, the statute requires a process of 
review by four congressional committees, including this one, 
the likely involvement of the States with FIO and the USTR in 
negotiating any such agreement, and, finally, implementation 
within the State regulatory system, not a new Federal system. 
We think these protections should allay those concerns.
    We believe the European Union under its reinsurance 
directive and Solvency II when implemented has the authority to 
enter into covered agreements. In addition, regulatory and 
trade officials in countries that host major insurance and 
reinsurance trading partners, including the U.K., Bermuda, 
Germany, France, Italy, Australia, Japan, and Switzerland have 
all expressed interest in resolving the issue of cross-border 
reinsurance relationships.
    The United States is a major attractive market for the 
global reinsurance industry. The United States is also the home 
jurisdiction for several major reinsurers that operate on a 
global basis and provide financial security for worldwide 
insurance markets. A covered agreement should and could be 
tailored to be of mutual value to both of these interests.
    We encourage the committee to insist that USTR and Treasury 
move forward on negotiation of one or more covered agreements. 
This committee originated the idea and was right to do so, and 
we look forward to working with the committee, FIO, and USTR to 
implement this valuable tool. Thank you very much, Mr. 
Chairman.
    [The prepared statement of Mr. Nutter can be found on page 
109 of the appendix.]
    Mr. Luetkemeyer. The next witness is Mr. Restrepo. I think 
Mrs. Beatty wants to provide the introduction, so, Mrs. Beatty, 
you are up.
    Mrs. Beatty. Thank you so much, Mr. Chairman and Mr. 
Ranking Member. It is certainly an honor for me to not only 
serve on the House Financial Services Committee, but it is not 
often that you get a constituent who has done so much in the 
area of insurance in your district, so it gives me great 
pleasure to not only introduce, but to welcome Mr. Robert 
Restrepo to the committee, and I look forward to hearing his 
testimony today.
    Mr. Luetkemeyer. Thank you. Mr. Restrepo, you may proceed.

 STATEMENT OF ROBERT RESTREPO, PRESIDENT, CHAIRMAN, AND CHIEF 
EXECUTIVE OFFICER, STATE AUTO INSURANCE COMPANIES, ON BEHALF OF 
  THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

    Mr. Restrepo. Thank you, Mr. Chairman and Mr. Ranking 
Member, for inviting PCI to testify today. My name is Bob 
Restrepo, and I am president, chairman, and CEO of the State 
Auto Insurance Companies and chairman of PCI. For nearly a 
century, State Auto has provided a wide range of protection for 
consumers and businesses through independent agents and 
brokers, and we employ 2,500 people across the country.
    PCI has more than 1,000 member companies that account for 
39 percent of the premium for the United States home, auto, and 
business insurance marketplace. My written testimony discusses 
the current regulatory system and how it could be improved. 
There are four key points, though, that I would like to 
highlight for the committee today.
    The U.S. property and casualty insurance market is the 
largest and most diverse in the world. Our market weathered the 
financial crisis of 2008 better than most federally-regulated 
sectors, and is financially sound, highly competitive, and 
comprehensively regulated, with a strong consumer focus.
    State regulators are able to respond quickly to local needs 
and realities. Property casualty financial strength and 
capitalization is at a record high, and our regulation and 
marketplace is constantly evolving to meet consumer needs and 
underserved markets.
    PCI welcomes a better Federal understanding of the 
challenges our marketplace faces, which were described in the 
FIO report. PCI has analyzed each recommendation based on our 
mission. And we asked ourselves, does it promote and protect 
the viability of a competitive private insurance marketplace 
for the benefit of consumers and insurers?
    Several FIO recommendations could potentially improve our 
current insurance regulatory system. Among these are its calls 
for more free-market competition in pricing, better coordinated 
market conduct exams, streamlining of commercial lines 
regulation, better disaster risk mitigation, congressional 
enactment of NARAB II, and more standardization of surplus 
lines rules.
    Recommendations that could harm our market and consumers 
include a federalization of insurance rating factors and 
pressure to adopt bank-like global standards that have not been 
proven to benefit domestic home, auto, and business insurance 
consumers or our marketplace.
    While the FIO report is an insightful compilation of 
current regulatory challenges, there are two particular areas 
where FIO's leadership would be helpful and consistent with the 
Dodd-Frank Act statutory priorities. First, FIO should play a 
greater role in establishing meaningful ongoing coordination 
among all Federal and State governmental and private voices in 
international discussions.
    Second, we need FIO to be a strong advocate for 
transparency, due process, and cost-benefit analysis in all 
regulatory forums on behalf of our marketplace and our 
consumers.
    In conclusion, I would like to suggest that Congress can 
consider this report in two different ways. If the goal is 
primarily to encourage the States towards greater efficiency, 
consistency, and coordination, domestically and 
internationally, then it should serve a useful purpose, 
considering each recommendation separately.
    To the extent the report becomes a foundation for piecemeal 
hybrid, Federal-State regulation policy, then the policymakers 
need to be careful of just adding additional layers of 
supervision, keeping in mind the oath that two of my brothers 
took as doctors of medicine, ``First, do no harm.''
    Thank you for the opportunity.
    [The prepared statement of Mr. Restrepo can be found on 
page 114 of the appendix.]
    Mr. Luetkemeyer. Thank you, Mr. Restrepo.
    And Mr. Sinder, you are next. You may proceed. Thank you, 
and welcome.

  STATEMENT OF SCOTT SINDER, GENERAL COUNSEL, THE COUNCIL OF 
            INSURANCE AGENTS & BROKERS (THE COUNCIL)

    Mr. Sinder. Thank you, Mr. Chairman, Ranking Member 
Capuano, and members of the subcommittee. My name is Scott 
Sinder. I am a partner at the law firm of Steptoe and Johnson, 
where I chair the government affairs and public policy group, 
and I also serve as the general counsel for the Council of 
Insurance Agents & Brokers, on whose behalf I testify today.
    The Council has about 240 members. They sell or place about 
85 percent of all commercial business insurance in the United 
States, as well as billions of dollars of benefits work, and 
they also do business abroad. Forty of their members are 
located abroad, but most of their members do work 
internationally.
    Today, the business of insurance is no longer a local 
business. It is a Statewide business. It is a national 
business. It is an international business. And that is true on 
at least three levels. It is true for our members who do work 
in all those areas. It is true for their clients who have 
exposures on all those levels. And it is also true from the 
regulatory perspective as they are subject to regulations at 
all those levels, both here and abroad.
    Chairman Neugebauer began the hearing by asking what role 
FIO is to play and was sort of critical of the report for not 
clarifying that. I think you have heard a lot of answers to 
that, but I would answer it directly by saying that I think 
that the role of FIO falls into three buckets. There is the 
leadership on the international level on the policymaking side. 
There is the oversight of the State system in an effort to spur 
them to modernize and rationalize and harmonize the regulatory 
structures. And there is the repository of insurance expertise 
at the Federal level, which we have never had before, and I 
think is a welcome addition. And in some respects, the report 
does touch on all three of those areas.
    As the report says, it is not so much the question of 
Federal versus State authority, but what are the best ways to 
rationalize and harmonize regulatory oversight of insurance. 
Mr. Royce commented that he went back and looked at his notes 
from 2001, and he commented on the pace of reform. There is a 
quote on page 11 of the report, of which I am particularly 
fond, that is a quote from the very first meeting of the NAIC 
in 1871, where they said that the entire purpose of the NAIC is 
to create a system of uniform national insurance regulations.
    I would argue that absent Federal oversight and prodding, 
there has been very little progress on that. Even the 
accreditation project and system that Commissioner Leonardi 
discussed was the outgrowth of the Dingell oversight 
proceedings in the early 1990s, when there was an insolvency 
crisis in the industry that was also cited in the report. And 
so, we think that FIO can play a very important role in doing 
that prodding.
    On the international level, we welcome this point of entry 
and effort to try to coalesce around a single voice for the 
United States. We think it is a welcome addition. There is 
something that is not mentioned in the report that we are very 
focused on as an industry at the moment, and that is the 
Foreign Account Tax Compliance Act (FATCA). I think that is a 
place where the international requirements of the office meet 
its informational role. FACTA is an act that the IRS is 
intending to apply to the property and casualty industry. It is 
an act that is designed to spur reporting of cash value 
accounts that are maintained by U.S. citizens living abroad.
    By applying it to us, you have a tremendous additional 
compliance cost with, I would argue, no regulatory bang for 
your buck. And so we are working--and we hope that you will 
work with us--to try to get that limited so FACTA does not 
apply to the reporting of property and casualty insurance 
premiums, which really are completely unrelated to the regime.
    On the domestic side, we would note three things. First of 
all, many of you commented on TRIA, which is only mentioned in 
the footnote in the report. Ranking Member Waters said that she 
is looking for a quick, clean, and long-term resolution to the 
TRIA issues and that time is of the essence. We couldn't agree 
more.
    From a policyholder perspective, what is really important 
is that we have the capacity in the market to cover terrorism 
risks. We think that TRIA offers that. Already in the market, 
you are seeing renewals that have riders which say that the 
terrorism portion of the coverage will expire on December 31st, 
absent extension of the program.
    With respect to surplus lines reform, Dodd-Frank included 
the NRRA provisions. We agree with what Director McRaith and 
FIO said in the report about the pace of reform there. We, too, 
are disappointed that some States are not complying with the 
same rules as the rest of the States, and we would argue that a 
single State taxation regime that most of the States have 
adopted is the right way to go. It is the most efficient. And 
it is the best, I think, both from a regulatory perspective, as 
well as the regulatee perspective.
    Finally, several folks have mentioned NARAB II. It did pass 
the Senate last week. We thank Chairman Neugebauer and 
Representative Scott for their leadership in the House on this. 
This is a bill that has passed the House 3 times. It would, I 
think, both raise the standard of regulation of insurance 
licensure for multi-State licensing and make it much more 
efficient. Rather than going through 56 relatively low bars to 
get a license, there would just be 2, your home State 
regulation and the admission to NARAB, which would require a 
higher level of standards to be satisfied in order to be 
licensed.
    NARAB II has been included in the flood bill in the Senate. 
We urge you to include it as you consider the flood bill when 
it moves back through the House. I am happy to answer any 
questions, and I thank you again for the opportunity to 
testify.
    [The prepared statement of Mr. Sinder can be found on page 
118 of the appendix.]
    Mr. Luetkemeyer. Thank you, Mr. Sinder.
    And finally, Mr. Zielezienski, you may proceed.

  STATEMENT OF J. STEPHEN ``STEF'' ZIELEZIENSKI, SENIOR VICE 
     PRESIDENT AND GENERAL COUNSEL, THE AMERICAN INSURANCE 
                       ASSOCIATION (AIA)

    Mr. Zielezienski. Thank you, Mr. Chairman, Ranking Member 
Capuano, and members of the subcommittee. My name is Stef 
Zielezienski, and I am senior vice president and general 
counsel of the American Insurance Association.
    AIA members write property and casualty insurance across 
the country and around the world. Our membership is diverse and 
includes U.S. insurers that write insurance only within the 
United States, U.S. insurers that write inside and outside the 
United States, and insurers that are U.S. subsidiaries of 
multinational insurers. As a result, while our focus is on the 
property and casualty lines of business, our perspective is 
grounded in our diversity.
    AIA strongly supported the establishment of FIO and worked 
with the Congress to create it. We continue to support its 
mission, particularly in helping to promote regulatory advances 
at home and abroad that will improve competitive markets.
    As FIO prepared its report, AIA submitted extensive 
comments that recommended: first, that FIO study the extent to 
which State rate and form regulation undermines competition, 
decreases consumer choice, and detracts from the goals of 
financial solvency oversight; second, that FIO use the report 
as an opportunity to identify and facilitate uniformity of 
State regulation; third, that FIO vigorously implement its 
Dodd-Frank responsibilities, take a leadership role for the 
United States on international regulatory modernization 
initiatives and work with States, the NAIC, and Federal 
financial regulators to present a single, unified U.S. voice to 
preserve U.S. competitiveness and to promote sound regulatory 
policy.
    We are pleased that the report advances our three 
recommendations. With regard to rate regulation, FIO 
acknowledges the evidence that personal lines rate regulation 
has been counterproductive and calls for the States to identify 
rate regulatory practices that best foster competitive markets.
    At the same time, however, the report contemplates the 
adoption of uniform Federal standards for use of risk 
assessment tools. Further regulation of a company's use of risk 
classification assessment is nothing more than rate regulation 
by another name. If insurance rate regulation is harmful, it 
should be jettisoned in favor of competitive pricing and not be 
reintroduced in the form of national risk classification 
standards.
    On the issue of government product regulation, AIA concurs 
with FIO's call to the States to ``streamline and improve the 
regulation of commercial products.'' Establishing or broadening 
the interstate compact to encompass commercial lines policy 
forms is a recommendation worth exploring, particularly if it 
leads to a shorter timeline for the introduction of new 
commercial policy forms into the marketplace.
    AIA also supports FIO's call for increased uniformity in 
State market conduct examination standards and for establishing 
requirements for contract examiners, assuming, of course, that 
the standards themselves recognize the benefits of diverse 
business plans among insurers.
    Finally, it is critically important that FIO carry out its 
important Dodd-Frank mission for enhancing the prudential 
supervision of insurers internationally and to work together 
with the NAIC, States, and Federal financial services agencies 
to present a unified U.S. perspective.
    While FIO has a clear role on international prudential 
matters and initiatives, it also participates domestically with 
the State regulatory representative as an adviser to the 
Financial Stability Oversight Council and makes recommendations 
regarding potential insurer designations to the Council.
    It is therefore imperative that the U.S. contingent 
coordinate both here and abroad on policy matters that may 
shape the future of U.S. insurance regulation. Our perspective 
is grounded in the recent financial crisis and the ongoing 
implementation of Dodd-Frank. As a result of these events, 
insurers must manage their businesses in a turbulent, 
tripartite environment involving the States, the Federal 
Government, and our international trade partners.
    Capital standards for insurers, systemic risk oversight, 
accounting principles, and group-wide supervision are the tip 
of the iceberg, but hardly the whole iceberg itself. In 
carrying out these discussions in each of the three regulatory 
environments, FIO must be careful to advance a consistent and 
balanced position that removes barriers to U.S. 
competitiveness, while at the same time preserving the domestic 
laws and regulations that currently work for insurers and 
consumers.
    That is certainly easier said than done due to the existing 
statutory limitations that apply to FIO's role in developing, 
negotiating, and implementing any new rules. But FIO's role is 
no less crucial even with those limitations in place. The 
stakes are high, and we must all pull in the same direction to 
get it right.
    Thank you very much.
    [The prepared statement of Mr. Zielezienski can be found on 
page 134 of the appendix.]
    Mr. Luetkemeyer. Thank you, Mr. Zielezienski. I appreciate 
your testimony.
    We have votes called, I understand, about 1:10. So with 
that in mind, I am going to defer my questions to the end. I 
think Mr. Capuano has done the same. And we are going to go to 
Mr. Stivers, the gentlemen from Ohio, to begin the questions.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate that.
    My first question is for Mr. Hughes. It was alluded to in 
Director McRaith's report, but can you talk about the benefit 
of the interstate compact to life and health companies that 
happen to have homogenous risk, as far as benefit to customers 
of products being able to make it to market sooner and things 
like that?
    Mr. Hughes. I would be glad to. The compact has certainly 
been a very positive step forward for State regulators. One of 
the frustrations that we have had over the years is in product 
approval. The timing really works against us. We have been a 
big supporter of the compact, but a bit frustrated that large 
States like New York and California, after a number of years, 
still haven't gotten on board with it.
    Mr. Stivers. That is unfortunate. I was the sponsor in 
Ohio. We are proud to be members of it. But some of the big 
States have not joined.
    Mr. Hughes. They have not.
    Mr. Stivers. And that is one of the problems, but it 
certainly has streamlined things and made life easier for your 
customers and people who want to buy life insurance. Is that 
correct?
    Mr. Hughes. It has, indeed.
    Mr. Stivers. Great. My follow-up to that is for Mr. 
Restrepo. So given that property and casualty insurance does 
not have homogenous risk--in fact, it has very heterogeneous 
risk--are there things that can be done where the States come 
together, much like they did in the interstate compact for life 
and health? Because certainly I live in Ohio, like you do. And, 
by the way, your company is in Joyce Beatty's district now, but 
you were in my district for a couple of years, and it is a 
great company, but you guys insure a lot of very different 
risks.
    I don't want our customers in Ohio paying for coastal 
exposure in Florida. So are there other things we can do inside 
property and casualty, inside the State-based system that might 
benefit customers in the way that the compact has for--or for 
life and health?
    Mr. Restrepo. Both as an industry and as a company, we 
continue to work with the local State regulators to have 
pricing and products in place that recognize the realities of 
those local marketplaces. And as you say, Ohio is very 
different than Florida and requires different solutions, and 
Florida requires different solutions.
    So working within the existing system, we have 
significantly improved our pricing precision, with much more 
sophisticated pricing. When I started in the business 40 years 
ago, there were just a couple of price options for homeowners. 
Now, there are thousands. And there are probably more price 
points for auto insurance in this country than there are 
drivers.
    Mr. Stivers. And markets like Ohio and--
    Mr. Restrepo. Much more sophisticated.
    Mr. Stivers. --Illinois that allow you to price your 
product in what--
    Mr. Restrepo. The regulatory system in Illinois really 
promotes competition. New carriers want to be there, want to 
compete. It is a very competitive marketplace.
    Mr. Stivers. Thank you. The follow-up I have to that is, 
since now all of you are regulated by--or could be regulated by 
Federal entities, the Fed and others, from your perspective--
and anybody can answer this--I asked Director McRaith whether 
there was true coordination between the FIO, the Fed, and the 
SEC, with regard to having a singular voice both domestically 
and internationally. He does a few conference calls, which I 
certainly appreciate, but I am not sure I feel comfortable that 
there is a process in place to really create a singular voice, 
because when there is a disagreement, who wins? And I don't 
think we know that yet.
    Does anybody have an opinion on that? And I only have a 
minute and 22 seconds left, so I will take it to volunteers. 
Mr. Nutter?
    Mr. Nutter. Mr. Stivers, a comment that we would make is 
that with the introduction of the Federal Reserve into this 
process and the driver being the Financial Stability Board at 
the IAIS, I must admit, for many of us, it has become much more 
opaque about how you engage those regulators or whether or not 
at the Financial Stability Board there is really insurance 
expertise that is represented there. So there is--
    Mr. Stivers. Clearly not as a voting member. And you make 
that point very well. And I think that--let me ask just a yes-
or-no question. Are there any of you who believe that we would 
benefit from a much more clear process as to how we create a 
singular voice, both domestically and internationally? Do you 
think we would benefit from a better process? Raise your hand 
if you think so.
    Mr. Hughes. Absolutely, yes.
    Mr. Stivers. Does anybody disagree with that statement? 
Great, thank you. I think that is really the heart of where I 
think we need to go, because several of you made this point 
very, very well about how overlapping and conflicting 
regulation could really hurt our competitiveness. I am also 
very worried that a lot of the Europeans and international 
folks have a singular voice and we do not. And we also have a 
dominant share of the insurance market, and it could really put 
our American companies that want to do business internationally 
at a huge competitive disadvantage, if the structure is built 
around a foreign model.
    And so, thank you for being here. Thanks for what you guys 
do. I had a very brief time to ask questions, but I appreciate 
those of you who responded. Thanks for being here, Mr. 
Restrepo.
    Mr. Luetkemeyer. I thank the gentleman. We will now go to 
the gentlelady from Ohio, Mrs. Beatty.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member. We have heard a lot about capital standards this 
afternoon. Mr. Hughes, if our goal is to have the best 
prudential supervision and the most effective regulation of the 
financial services industry, does it make sense to apply bank 
capital standards to insurance companies? And would it make 
more sense to apply insurance-based standards to insurance 
companies?
    Mr. Hughes. We feel very strongly that the only standards 
that ought to be applied to an insurance enterprise are 
insurance-based standards. And that has been our great 
frustration at the moment with the Federal Reserve's 
interpretation of Dodd-Frank, which is sending us in the other 
direction. I know you have had discussions with some of your 
constituents on that point, and we are working very hard with 
this body and the Senate to see if we can correct that.
    Mrs. Beatty. Thank you. Let me ask one other question. As I 
was reading, Mr. Restrepo, in your testimony, let me, first, 
thank you for the statement about the questions that we should 
be asking, best standards for good regulation and good 
regulators, and where can the current system be improved. That 
is a great starting point, I think, for me. What is it that we 
can do?
    So hearing your testimony from all of you today is very 
helpful. But my question to you, Mr. Restrepo, is, if the 
Federal Reserve proposes a bank capital standard for insurance 
companies under supervision, while the State insurance 
regulators enforce an insurance standard, are you concerned 
about any confusion and uncertainty that could result from 
that?
    Mr. Restrepo. I am very much concerned. You could rapidly 
go from a hybrid structure to a hydra structure, with multiple 
heads you are dealing with, and multiple heads will certainly 
confuse the marketplace.
    We are a very strong industry and really don't need the 
kind of standards--certainly the single standards that are 
being talked about. It is a diverse industry. We all have 
different risk profiles, different capital requirements, and 
those solutions--or those issues are best addressed locally.
    Mrs. Beatty. With that--and from hybrid to hydra--is it 
plausible that there could arise a situation in which two 
different regulators are trying to enforce two different 
incompatible standards on the same company?
    Mr. Restrepo. No question.
    Mrs. Beatty. Okay.
    Mr. Restrepo. In fact, that is bound to happen.
    Mrs. Beatty. Thank you. That was very helpful. And I yield 
back my time, Mr. Chairman.
    Mr. Luetkemeyer. Okay. Next, we have the ranking member of 
the subcommittee, the gentleman from Massachusetts, the Boston 
Red Sox's greatest fan here in the Capitol, Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    While the gentlelady from Ohio is here, based on your early 
questions, I do--there are some misinformed people in America 
who wouldn't mind if Ohio State's football program shut down. I 
am not one of them, of course, but there are those who might 
be--not, of course--
    Mrs. Beatty. Am I supposed to say thank you to that or am I 
supposed to pause, Mr. Chairman?
    Mr. Luetkemeyer. Remember, he is the ranking member.
    Mrs. Beatty. Then, thank you.
    Mr. Capuano. Yes, big job.
    First of all, gentlemen, thank you all very much for being 
here and putting up with all this. And, by the way, is there 
anybody in the audience who has not testified who would like 
to, because--as I said earlier, this is an interesting 
discussion. And I am tempted--I don't--I didn't hear anybody 
who actually said that you would rather have the Fed doing this 
than FIO. I just want to be clear that I didn't hear anybody 
say that. Did you? Good, because this was part of the 
discussion we had when we did Dodd-Frank. If we didn't do 
something like this, the Fed or somebody in the banking 
industry would step in and do it. It was either something like 
this or banking regulators doing it.
    And I think all of us agree that banking regulators are 
fine and wonderful people in banking issues. And they may have 
some interest in some of the things that some of you companies 
do, but in general, insurance is a different animal and 
deserves different treatment. And that is what this was all 
about.
    I am tempted, to be perfectly honest, to ask each of you 
whether you think that any individual company who wished to 
have an optional Federal charter should be able to do so, but 
because I respect you all and don't want to position you too 
much, I won't do that. But that is a discussion for another 
time.
    I think that a lot of the things that you have said and 
others have said argue strongly in favor of allowing a 
company--if they so choose--and allowing companies to choose 
not to, to do it--again, similar to what banking does. There 
are banks that have chosen to do State charters, and there are 
banks that have chosen to do Federal charters, but that is a 
different issue.
    I am, however, interested, because we will have this 
discussion. There are some of my colleagues here who hate the 
concept that FIO even exists. They hate the concept of them 
even asking questions and trying to put a focus on this 
discussion. And for my purposes, I would like to ask each of 
you, if you had a choice, if I made you emperor of the 
universe, and you could unilaterally make this decision, now, 
you only have two choices here. I am not going to give you 
multiple choices, because that gets too complicated, and I 
don't have that choice. I get to vote red or green, so you may 
as well vote red or green.
    If your choice was to keep FIO as it is, pretty much with 
its authority or limited authority as it is, to have these 
discussions, would you repeal it outright? Would you repeal it? 
Or would you keep it as is? And, Mr. Cimino, I may as well 
start with you.
    Mr. Cimino. Yes, we would support a strong, effective FIO 
as it currently stands.
    Mr. Capuano. Mr. Ehlert?
    Mr. Ehlert. I think FIO definitely has a role in the 
international market. And we would support FIO in that market, 
as well.
    Mr. Capuano. Mr. Hughes?
    Mr. Hughes. We absolutely support FIO.
    Mr. Capuano. Mr. Jensen?
    Mr. Jensen. FIO as it stands.
    Mr. Capuano. Mr. Nutter?
    Mr. Nutter. FIO, yes, with the authority they have for 
covered agreements in particular.
    Mr. Capuano. Mr. Restrepo?
    Mr. Restrepo. FIO as it is.
    Mr. Capuano. Mr. Sinder?
    Mr. Sinder. We have been big supporters of FIO since day 
one.
    Mr. Capuano. Mr. Zielezienski?
    Mr. Zielezienski. Yes, we support FIO, and believe it has a 
crucial international role.
    Mr. Capuano. That is all I wanted to hear, because to be 
perfectly honest, we will continue this discussion about how--
because, again, as I said earlier--I am sure you all hear me--I 
do believe that slowly but surely over time we are going to 
come to a more federalized system. I don't think we will ever 
get to a fully federalized system. I don't even think I really 
want that.
    But I think we are going to go that way. We have already 
started. You know that as well as I do. It is inevitable, and 
with your help, we will be able to get there in a thoughtful 
way as opposed to a fits and starts way.
    My hope is that it gets done absent the financial crisis. 
We all know that financial crises--and there will be another 
one someday, hopefully not in my lifetime, but there will be--
don't always result in the best reaction by Congress. I think 
things are better done in a thoughtful manner, and my hope is 
that FIO allows us or encourages us to have this discussion as 
we move forward, and I hope that you all participate in that. 
And again, thank you for what you have done here today.
    Mr. Luetkemeyer. I thank the gentleman. And you notice 
today so far that our panel has had some softball questions 
from us. We recognize you have us outnumbered, so we are going 
to behave ourselves.
    And with that, we go to the gentleman from California, if 
he is ready, Mr. Royce.
    Mr. Royce. I want to thank Mr. Sinder for his statement on 
the IRS move to issue supplemental regulations, implementing 
FATCA. Non-cash-value insurance products are not vehicles for 
tax evasion and should not be treated as such. I have mentioned 
this issue to the FIO and to the Treasury. And I would like to 
work with you to ensure that the reporting requirements do not 
apply to these products.
    But I am sure many of you attend NAIC meetings on a regular 
basis, and I did want to ask you a question, Mr. Hughes. I was 
hoping you could comment on whether NAIC committees and 
subcommittees all always follow the open meetings policy 
mentioned in my questioning to the first panel, and 
specifically, if you or a member of your trade participated in 
the executive committee meeting via conference call on October 
25th regarding the master death file, and do you feel that 
meeting was open? And I would ask if any others would care to 
comment?
    Mr. Hughes. You put your finger on an issue that is 
significant to us. The role of the NAIC has grown substantially 
over the years, and governance has not kept pace with it. So we 
are very strong believers that the NAIC needs to have due 
process and accountability. The things it is doing today, 
whether you are talking about open meetings or pushing for 
accreditation standards that essentially have the force and 
effect of law, we think it is imperative that the NAIC do 
something along the lines of what you would have in any State, 
which is your administrative due process statute. So we are 
very strong proponents of engaging the NAIC in a constructive 
discussion on how to improve governance.
    Mr. Royce. I think transparency is important and it is done 
at the State level. And it is not done here. The other 
question, Mr. Hughes, and I would ask you and others if you 
could please outline in your view what the costs are to 
consumers of the lack of uniformity in State insurance 
regulation, because I remember well the original quote by the 
original NAIC Commissioner back in the late 1800s about the 
ideal of having for the consumer--having uniform regulation 
everywhere.
    That was the original goal. That goal has never been 
achieved. What about the costs to the consumer as a 
consequence?
    Mr. Hughes. From our perspective, the costs are 
significant, and they are passed along in our pricing to 
consumers. You may recall that former FDIC Chair Sheila Bair 
did a study some years ago that analyzed this, and reached the 
same conclusion that McKinsey did, that there are substantial 
cost savings that could be realized if the system were uniform 
from one jurisdiction to another.
    Mr. Royce. Let me ask Mr. Sinder that same question, should 
he want to comment on it.
    Mr. Sinder. I agree completely. One of the issues is, at 
some level, the NAIC is a confederacy. No one is bound by the 
model rules that they issue. And so without the Federal 
pressure, it is harder for them to achieve a harmonious, 
uniform result.
    Mr. Royce. Mr. Cimino, would you like to comment on that, 
as well?
    Mr. Cimino. Yes, I would be happy to. Thank you for the 
question. Given the patchwork system we have in place here, we 
ultimately have companies that aren't able to necessarily offer 
products throughout the Nation. And so even though there might 
be model laws in place, States may adopt them in some form of 
derivative, so ultimately it raises barriers and increases 
costs.
    So not only are consumers not able to necessarily purchase 
the products that might suit their needs, but it ultimately 
raises barriers, which forces out competitors in the 
marketplace. And it is that competitive pressure that lowers 
the prices and ultimately serves those consumers.
    Mr. Royce. So, you have both factors. Would you hazard a 
guess in terms of what the costs are to the consumer, in terms 
of the first aspect of the lack of uniformity?
    Mr. Cimino. I don't know if I could quantify that cost for 
you, sir.
    Mr. Royce. Yes, sir?
    Mr. Zielezienski. There are certainly costs of non-
uniformity. But I would like to point out that even if it is 
uniform, there is inconsistent application. And let's just talk 
about product review for a minute.
    I remember doing an internal survey of AIA member companies 
probably about a decade ago to try to determine how long it 
took to get a product to market. And what I learned was there 
are costs associated with such a lengthy product approval delay 
that the product never made it to market.
    So not only are there costs to consumers, but there are 
costs to consumers of not having the product option even 
available because the time it takes to review it and approve it 
at the State level is not worth the investment for the company.
    Mr. Royce. It is interesting. If you go back to the 
McCarran-Ferguson decision, the decision also said that 
insurance is interstate commerce, right? It is part of the 
decision. And if you go back to the original reason we gave up 
on the Articles of Confederation, maybe some of the 
confederates in Congress would still argue this point, but the 
reason we have an interstate commerce clause is because of what 
was happening between the States with respect to barriers of 
entry.
    And it became very clear to the architects of this republic 
that the reason it didn't work was because we hadn't created a 
national market. Instead, we had these tariffs, these barriers 
to entry at every State border, and the consumers were the 
losers for it.
    So the concept behind our system of federalism was that we 
would establish one market in the United States, and we are 
still struggling with the fact that, with respect to insurance, 
we have built in a great disadvantage for our consumers because 
of these barrier to entry problems which create then something 
of a lack of competition on one hand. You don't have the 
efficiencies that would come from a national market driving 
down prices. And it is time we, I think, have a paradigm shift 
in terms of how we view this and how we come together in order 
to get some of these economies of scale and a more competitive 
market for insurance to benefit our consumers.
    Thank you very much, Mr. Chairman. I appreciate the time.
    Mr. Luetkemeyer. Thank you. We have a few statements that 
we need to add to the record here: the National Conference of 
Insurance Legislators; the American Academy of Actuaries; the 
National Association of Professional Surplus Lines Offices; 
Lloyds of London; and the Insured Retirement Institute.
    Without objection, it is so ordered.
    And let me just wrap up here with a few remarks and a 
couple of questions. I think that we have--from the discussion 
today--seen that FIO's role is still one of evolving into 
something that we hope will be a benefit to the industry. All 
of you have made comments with respect to, we would like to see 
them in their role of protecting our interest internationally, 
of staying in that role.
    And I would just add that you all are in a position to 
really push the agenda and push back on things. And I would 
hope that you would encourage them to be leading when it comes 
time to do something on the international level, from the 
standpoint--we are the big boys on the block. Why do we have to 
follow what Europe does or whoever else? Let them follow us. We 
need to be leading this situation and not allow our industries 
and our markets to be harmed by something internationally, if 
we don't like it, then they can conform to us. That would be my 
suggestion.
    From the standpoint of what goes on within our own country 
here, it has been said most of you don't like the capital 
standard suggestion from the international folks. A couple of 
you have made mention of the fact that you--the risk 
classification standards are something that they need to stay 
away from.
    And I guess my question would be, what is your plan of 
action against pushing back on areas where you believe that 
they don't need to be involved, or they seem to make 
suggestions that they may get involved in? Do you have a plan 
of action to do that, Mr. Cimino?
    Mr. Cimino. I think it goes to the question that Mr. 
Stivers was talking a bit about, which is, how do we better 
coordinate this to make sure we have a unified voice? And I 
think that most of the folks up on this panel are working 
hard--
    Mr. Luetkemeyer. It is a pretty unified voice from where I 
am sitting here, with all of you today. I am just--there needs 
to be some sort of a coordinated plan. I hope that there is one 
there. There is this sense I get that you are coordinated, that 
you are unified, and that you will work with these folks and 
push back on areas where you believe that they will be 
encroaching.
    Mr. Hughes in particular, you have some interesting areas 
where you like what they do, and other areas where you are very 
concerned about some of the things they do.
    Mr. Hughes. Yes, and I think that the watchword for us is 
really ``consistency.''
    Mr. Luetkemeyer. Yes.
    Mr. Hughes. And I think it is incumbent upon the United 
States--if the world would coalesce around us, I think that 
would be wonderful. We did weather the crises well, but I think 
what we have to do is have the FIO, the States, the Federal 
Reserve, and anybody else that is a stakeholder in this, 
advocating on the same page with the same message with these 
international bodies. At the end of the day, we hope that we 
have that consistency globally that we need and that it doesn't 
upset our system of regulation.
    Mr. Luetkemeyer. As somebody who was in the business for 35 
years, it always gives me some trepidation when I see the 
Federal Government start to get their nose in the tent. Seeing 
what has happened here over the last several years, it seems 
like once the nose is in the tent, the Federal Government never 
goes away. You have to put up with it from then on.
    Mr. Sinder, you had a couple of comments with regards to 
TRIA that I was kind of curious about. Your group deals with it 
probably more than the rest of these folks, and I was curious, 
has the fact that we haven't addressed TRIA as a Congress yet 
started to affect your members and their ability to not only 
sell their product, but their clients and their ability to do 
their business?
    Mr. Sinder. Yes, sir, it has. It affects their clients. We 
are already seeing--for renewals that are coming up now that 
aren't aligned with the calendar year, there are riders on the 
policies that say the terrorism coverage will expire on 
December 31st absent extension of the TRIA program. So we are 
already seeing it. You have policyholders who are buying 
partial coverage because they can't get the rest.
    Mr. Luetkemeyer. And, Mr. Hughes, you talked about covered 
agreements. That is where--I want to go to, I think, Mr. 
Nutter. Can you give me just a little background on that really 
quick, exactly what you are talking about and how FIO can be 
impactful for you?
    Mr. Nutter. You asked a question a minute ago about a plan 
in dealing with concerns about European-driven capital 
standards. The Congress included in the Dodd-Frank Act the 
authority for FIO to enter into covered agreements, so think of 
them as treaties, not subject to Senate approval, but subject 
to a whole host of checks and balances, including review by 
this committee, the House Ways and Means Committee, and the 
Senate Banking and Senate Finance Committees, both when they 
are initiated during the course of them, and then when they are 
concluded, as well as the involvement of the NAIC or the 
Commissioners in that process.
    It clearly is a way to deal with the mutuality that you 
would want between regulatory officials both in the E.U., in 
Bermuda and Switzerland, and other major trading partners. So 
it does seem to be the one operating authority that FIO has 
that can deal with issues beyond the narrow issue that is often 
characterized as dealing with collateral or security on 
reinsurance transactions.
    Mr. Luetkemeyer. Very good. With that, I am finished with 
my questions. I think the panel is also finished. I would like 
to thank each of you for being here today. I appreciate your 
testimony. It has been very insightful. While we didn't have, 
perhaps, as many people here as you may have thought, your 
testimony is extremely important from the standpoint of drawing 
conclusions from what your industry believes is important, what 
you want us to focus on, and your priorities so that we can 
work with you to try and come up with some good solutions here.
    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.
    And without objection, this hearing is adjourned.
    [Whereupon, at 1:14 p.m., the hearing was adjourned.]





                            A P P E N D I X



                            February 4, 2014




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