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





                      THE IMPACT OF INTERNATIONAL

                        REGULATORY STANDARDS ON

                      THE COMPETITIVENESS OF U.S.

                           INSURERS, PART II
=======================================================================

                                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

                               __________

                           NOVEMBER 18, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-100
                           
     
                                ________
     
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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. VELAAZQUEZ, 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  RUBEEN 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
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     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. VELAAZQUEZ, New York
GARY G. MILLER, California           EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia  WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey            CAROLYN McCARTHY, New York
LYNN A. WESTMORELAND, Georgia        BRAD SHERMAN, California
SEAN P. DUFFY, Wisconsin             GWEN MOORE, Wisconsin
ROBERT HURT, Virginia                JOYCE BEATTY, Ohio
STEVE STIVERS, Ohio                  STEVEN HORSFORD, Nevada
DENNIS A. ROSS, Florida

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 18, 2014............................................     1
Appendix:
    November 18, 2014............................................    33

                               WITNESSES
                       Tuesday, November 18, 2014

Breslin, Hon. Neil D., Senator, State of New York; and President, 
  National Conference of Insurance Legislators (NCOIL)...........    11
Consedine, Hon. Michael F., Commissioner, Pennsylvania State 
  Insurance Department, on behalf of the National Association of 
  Insurance Commissioners (NAIC).................................     9
McRaith, Michael, Director, Federal Insurance Office, U.S. 
  Department of the Treasury.....................................     6
Sullivan, Thomas, Senior Adviser, Board of Governors of the 
  Federal Reserve System.........................................     7

                                APPENDIX

Prepared statements:
    Breslin, Hon. Neil D.........................................    34
    Consedine, Hon. Michael F....................................    55
    McRaith, Michael.............................................    61
    Sullivan, Thomas.............................................    68

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of the American Academy of Actuaries.......    76
    Written statement of the National Association of Mutual 
      Insurance Companies (NAMIC)................................    79
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................    86
    Study entitled, ``Unnecessary Injury: The Economic Costs of 
      Imposing New Global Capital Requirements On Large U.S. 
      Property and Casualty Insurers,'' by Robert J. Shapiro and 
      Aparna Mathur, dated November 2014.........................    94
Huizenga, Hon. Bill:
    Written responses to questions submitted to Michael McRaith..   132
    Written responses to questions submitted to Thomas Sullivan..   134

 
                      THE IMPACT OF INTERNATIONAL
                      
                        REGULATORY STANDARDS ON

                      THE COMPETITIVENESS OF U.S.

                           INSURERS, PART II

                              ----------                              


                       Tuesday, November 18, 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 2:01 p.m., in 
room 2167, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Royce, Garrett, Duffy, Hurt, Stivers, Ross; McCarthy of New 
York, Sherman, and Beatty.
    Also present: Representatives Huizenga and Green.
    Chairman Neugebauer. Good afternoon, and we will call this 
hearing to order. The title of this hearing is, ``The Impact of 
International Regulatory Standards on the Competitiveness of 
U.S. Insurers, Part II.''
    I would mention that our folks on the other side of the 
aisle--this is the time of the year, as some of you may have 
heard, where people are trying to see if they are going to keep 
their job or get a new job, get a new committee. And that 
process is going on with our colleagues on the Democratic side. 
I talked to Mr. Capuano, and he is going to try to attend later 
on today.
    So what we are going to do is, we are going to give the 
opening statements on our side, and then we will have our 
witnesses give their testimony. And we will kind of proceed 
with the question-and-answer period. Then, when Mr. Capuano and 
some of our Democratic colleagues show up, we may pause and let 
some of them do an opening statement. And then, we will put 
them back into the queue for the question-and-answer period.
    So with that, I will begin with my opening statement.
    Thank you all for attending this important hearing which 
will examine a range of international regulatory standards 
being proposed by the International Association of Insurance 
Supervisors (IAIS). Through this hearing, our members hope to 
get a better understanding of how our insurance supervisors are 
balancing the need to coordinate regulatory efforts overseas 
with their responsibility to promote a global marketplace that 
benefits domestic policyholders and insurers.
    We have somebody here I think is going to--
    [Audio problem.]
    I think it is kind of ironic. We are getting an upgrade in 
the sound system in our old committee room and, hopefully, it 
will be--aha, okay.
    The IAIS represents insurance regulators and supervisors in 
nearly 140 countries. It is tasked with coordinating global 
insurance policy and promoting globally consistent regulations. 
Overall, this committee does see the benefit of better 
international coordination in terms of preventing regulatory 
gaps and promoting efficiency; however, I am concerned that the 
IAIS' role has evolved from being an international coordinator 
to that of an international promulgator.
    The IAIS' most recent proposal to harmonize insurance 
regulation--commonly referred to as ComFrame--would create a 
one-size-fits-all regime for global insurers, including 
burdensome group-wide capital assessments and prescriptive 
prudential standards.
    Members of this committee have expressed concerns with the 
prescriptive nature of the ComFrame proposal, but many are 
equally concerned that it seems to be a mechanism for the EU to 
export its consolidated, bank-like approach to regulating 
insurance here in the United States. While this system might 
work well for our allies across the Atlantic, it is 
inconsistent with our system of insurance regulation and I 
don't believe it is in the best interest of U.S. consumers and 
insurers.
    It is not just the substance of the workstream coming out 
of the IAIS that worries our members, but also the apparent 
lack of transparency of the organization. For example, U.S. 
firms that have been designated systemically important have 
complained about the opacity of the selection methodology by 
the IAIS and the Financial Stability Board (FSB), and the lack 
of due process to appeal such decisions. And more recently, the 
IAIS, with the support of the FIO, decided to eliminate the 
``observer status,'' which was the only avenue for U.S. 
insurers and consumers to present their views before the 
organization.
    So if I understand international developments correctly, we 
are on the verge of importing the European model of insurance 
regulation here at home and exporting the non-transparent FSOC 
model to our trading partners at the IAIS.
    With that being said, I am beginning to receive positive 
feedback about our insurance regulators and supervisors 
becoming more unified. In particular, I would like to commend 
our witnesses for vigorously pushing back against global 
standards that would include ``market-based accounting'' for 
insured assets. I am optimistic that we can continue this 
momentum and change the direction at the IAIS. I want to thank 
our witnesses for participating today, and I look forward to 
hearing how we can work together to achieve beneficial outcomes 
for our domestic policyholders and insurers.
    We will now go to the opening statements of our other 
Members. And the gentleman from California, Mr. Royce, is 
recognized for 3 minutes.
    Mr. Royce. I want to thank you, Mr. Chairman, for your 
willingness to hold a hearing looking at the governance and 
oversight of the National Association of Insurance 
Commissioners (NAIC). I want to thank our panel, and I am 
hopeful we can schedule a hearing in the future dedicated to 
that topic.
    There is a clear intersection with the hearing today. The 
committee's review of international regulatory standards should 
also examine the transparency and accountability of the bodies 
making regulatory decisions. As Commissioner Consedine put it 
in his opening statement--and I will quote him here: ``The 
process of standard-setting should be done in an open and 
inclusive forum.''
    And transparency is a key element of effective regulation. 
The IAIS has clearly failed to meet this mark, but so too has 
the NAIC. Last October, the NAIC sent me a letter stating that 
its policy statement on open meetings ``applies to all meetings 
of NAIC committees, subcommittees, task forces, working groups, 
and that any guidance by any of these bodies is taken in open 
session.'' Well, none of that is true. The executive committee 
holds day-long closed-door meetings during commissioner-only 
junkets, where it sets the NAIC policy agenda. NAIC efforts to 
remake international regulatory policy have been veiled, as 
well.
    According to NAIC minutes this year, the group solvency 
issues working group was given directions on international 
regulatory policy regarding issues which were outlined in a 
``regulator-only memorandum.'' Another memo on group solvency 
stated that, ``The NAIC executive committee directs the working 
group to use the Pennsylvania Insurance Holding Company Act as 
the starting point for this work.'' Well, my staff has found no 
record of this policy directive being decided in open session. 
In fact, NAIC minutes and trade press accounts strongly suggest 
just the opposite.
    Just one day after taking these committee actions on group 
solvency, the NAIC amended its open meetings policy, exempting 
consideration of strategic planning issues relating to 
international regulatory matters from its scope, resulting in 
even less transparency.
    So, let me be clear. I support pushing back against closed-
door meetings at the IAIS. But shouldn't the NAIC be opening, 
rather than closing, its own meetings, to build credibility on 
this subject? Frankly, I am concerned about the NAIC's role as 
a private corporation, and about its arrogant response to 
oversight.
    I hope the panel can respond to this criticism and answer 
whether you too are concerned that the NAIC's conflicting 
statements and actions demonstrate inadequate concern about 
transparency and policymaking. And, Mr. Chairman, I would also 
like to hear from Director McRaith regarding any progress made 
on moving forward with a covered agreement on reinsurance 
collateral and other potential issues, such as group 
supervision. The FIO has said previously that it would take 
initial steps toward a covered agreement by the end of 2014.
    Finally, on the issue of equivalence, or temporary 
equivalence, over Europe's Solvency II regime, I am hoping the 
panel can expound on whether they think a formal request to the 
European Commission is needed to start the evaluation process 
for the United States. And, if so, when should we expect such a 
request to be made and by whom?
    And I thank you again, Mr. Chairman, for this hearing.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from Ohio, Mrs. Beatty, is recognized for 3 
minutes.
    Mrs. Beatty. Thank you, Mr. Chairman. And thank you to our 
witnesses for being here today.
    As you know, today's hearing continues a dialogue this 
subcommittee started last June, when we heard testimony from 
international insurance supervisory authorities on the 
development of policy standards. This is a very important 
hearing today, and I look forward to our discussion about the 
reauthorization of terrorism risk insurance, uniform 
enforcement of international insurance regulations, and 
supervisory authority at the Federal Reserve.
    Given the recent crises, which hurt American families, and 
certainly sent our Nation into a recession and crippled some of 
the largest banks in the country, it is critical to clarify and 
review the regulations of the financial industry. The insurance 
industry and the banking sectors are separate, but intimately 
integrated, sectors of our economy. And our job here is to 
ensure that when there are similarities, regulations make sense 
and are not duplicative, and protect the American consumer.
    We must also recognize that we live in an ever-changing, 
rapidly-growing global economy, but that uniqueness of the 
United States insurance market requires open communication and 
transparency with our foreign partners.
    In today's hearing, I look forward to finding ways to 
ensure domestic and international insurance regulations do not 
just have strong guarantee funds but, in fact, have the 
required regulatory structures to prevent failures in the first 
place.
    Also, Mr. Chairman and to our witnesses, I represent the 
great State of Ohio--specifically, central Ohio--home to one of 
the Nation's largest insurers in addition to at least three 
other large insurance companies. And so, I have a great concern 
in talking to my home district folks and various other 
insurance trade associations, that I want to hear more about 
the need for a reauthorization of TRIA prior to its expiration 
at the end of this year.
    Thank you, and I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now, the chairman of our Capital Markets Subcommittee, 
the gentleman from New Jersey, Mr. Garrett, is recognized for 2 
minutes.
    Mr. Garrett. Thank you, Mr. Chairman. I appreciate the 
chairman holding this follow-up hearing on the impact of 
international regulatory standards and also on the global 
competitiveness of the U.S. insurance companies. And I would 
like to thank all our witnesses who are here, as well.
    Today, U.S. insurers are facing a critical time, as 
international regulatory efforts threaten to impose bank-like 
regulations on U.S.-based insurers. We have seen that 
international insurance supervisory efforts are moving away 
from a coordinated approach--instead, towards a top-down 
prescriptive standard. Because insurance companies maintain 
very different capital structures from banks, these 
institutions should not be treated in the same manner when it 
comes to assessing capital requirements. And while a move 
towards a top-down standard is certainly a concern to all of 
us, I am equally troubled that this increased international 
regulation is taking place against what you would call a 
backdrop of less transparency.
    For example, the International Association of Insurance 
Supervisors is looking at whether to hold what they call 
``closed door meetings,'' which close all of its workings, the 
president's and task force meetings to the public, beginning in 
just a few months, on January 1, 2015. I, for one, cannot see 
how pulling the curtain over the activities of international 
regulators will help U.S. consumers or insurers. Unfortunately, 
we have seen this same type of transparency concerns right here 
at home in the United States, with both the Federal Reserve and 
the Financial Stability Oversight Council (FSOC).
    With this tidal wave of regulation under the Dodd-Frank 
Act, I think, Mr. Chairman, that we need to be moving in the 
direction of more transparency both here at home and abroad as 
well, and not less. And so, Mr. Chairman, I look forward to 
hearing from our witnesses on all of these important issues.
    And with that, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    I now recognize the gentleman from Wisconsin, Mr. Duffy, 
who has taken a great deal of interest in this issue and who 
has been very vocal and very supportive in looking at some 
policy that would make this a better process.
    So I recognize the gentleman for 2 minutes.
    Mr. Duffy. Thank you, Mr. Chairman. And I appreciate the 
witnesses for being here today. Many of you may not know, but 
Wisconsin is the fourth-largest home to insurance in the United 
States. I know you are all surprised; a little trivia fact for 
you. And those insurers, and our State regulators and 
policyholders, have been contacting me, concerned over some of 
the proposals coming out of the International Association of 
Insurance Supervisors. These proposals could force European-
style regulation on our State-regulated system that, as we all 
know, has developed over the past 200 years.
    The fact is, unlike Europe, our State insurance regulators 
seek to protect the policyholder: the family with a homeowner, 
or the life insurance policy, not the insurance company 
providing the policy. The Treasury and the Federal Reserve are 
supposed to represent that philosophy on the IAIS. But I, like 
many others, don't necessarily think that they are doing that.
    They are not listening to the insurers, the policyholders, 
the State regulators, and the lawmakers who are voicing their 
concerns and offering expertise because a conduit for these 
stakeholders doesn't exist. While the Federal Insurance Office 
has established an advisory committee on insurance, and 
Wisconsin's own commissioner, Ted Nickel, serves as a member, 
it doesn't provide advice on international insurance-related 
matters.
    Additionally, I believe Congress should be kept apprised 
during the entire negotiation process of international 
insurance agreements just like we are during the Federal Trade 
Commission negotiations. During that time, the FTC must do 
economic assessments on the affected industries and consumers, 
providing that information to all of us here in Congress. I 
believe Treasury and the Fed should be required to do the same. 
For these reasons, I have been developing and working on 
legislation that would require Treasury and the Fed to report 
to Congress throughout the negotiation process, while also 
providing economic assessments just like the FTC does.
    And my legislation would strengthen FIO's Federal advisory 
committee on insurance so that they could influence Treasury 
and the Fed on all international insurance negotiations, as 
well as domestic insurance issues. This is an important issue. 
As Mr. Garrett mentioned, transparency--especially with some 
recent comments that were made--is key.
    And with that, Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman. And we will now 
hear from our panel. We again thank the panel for their 
testimony today, and remind each of you that you will have 5 
minutes to summarize your testimony, but your full testimony 
will be made a part of the record.
    Our panel today consists of: Mr. Michael McRaith, Director 
of the Federal Insurance Office, U.S. Department of the 
Treasury; Mr. Thomas Sullivan, Senior Adviser, Board of 
Governors of the Federal Reserve System; the Honorable Michael 
F. Consedine, Commissioner, Pennsylvania State insurance 
commission; and the Honorable Neil Breslin, State Senator, New 
York, and ranking member of the New York State Insurance 
Committee. Welcome, gentlemen.
    And with that, Mr. McRaith, you are recognized for 5 
minutes.

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

    Mr. McRaith. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for inviting me to 
testify today. I am Michael McRaith, Director of the Federal 
Insurance Office at Treasury, or FIO. We released our second 
annual report on the insurance industry in September. The 
report cited 2013 data showing that the U.S. industry's 
reported surplus reached a record level of approximately $990 
billion. Non-health insurers collected more than $1.1 trillion 
in premiums in 2013, or nearly 7 percent of U.S. GDP.
    The report also cites data showing that private market 
volume is increasing dramatically in developing countries. For 
example, China's private insurance market increased by more 
than $137 billion in the last 5 years; South Korea by nearly 
$50 billion in that same period; and Brazil by more than $41 
billion in that time period. These facts illustrate 
globalization of the insurance marketplace, and explain the 
increased focus on global standards. For this reason, among 
others, FIO has a statutory role to correct and develop Federal 
policy on prudential aspects of international insurance 
matters, including representing the United States at the IAIS.
    In this work, we collaborate extensively with our 
colleagues at the Federal Reserve, and the U.S. State 
regulators, including my two colleagues on this panel. 
International insurance standards are not new. The IAIS was 
formed in 1994, and U.S. State regulators were among the 
founding members.
    International standards reflect best practices based on 
collective analysis and judgment of the participants. 
Importantly, nothing about international standards is self-
executing in the United States. Federal and State authorities 
will study, test, and analyze the potential value and impact of 
any international standard prior to implementation.
    The United States has the most diverse and competitive 
insurance market in the world, with insurers that operate in 
one part of one State and insurers that are multinational and 
engaged in a variety of financial services. With this in mind, 
we work with our international counterparts to build a global 
consensus that makes sense for the United States. Simply put, 
international standards must, when implemented, serve the 
interests of U.S. consumers and industry and the national 
economy.
    The IAIS is also mid-stream in structural reform. These 
proposed changes will eliminate the previous pay-for-play 
dynamic and increase the IAIS' transparency and independence. 
No longer will the IAIS depend upon the $20,400 annual fee paid 
by observers. Now, open meetings and the Web site will be 
accessible to all stakeholders, not just those who can afford 
to pay the annual fee. Consultation with stakeholders will be 
more rigorous, including a more rigorous process for 
publication of materials and requests for comment. 
Nevertheless, the proposed stakeholder engagement at the IAIS 
can be improved through a second public consultation process 
that began just yesterday.
    At FIO, building on our experience will increase the number 
of opportunities for stakeholders to meet in one place with all 
U.S. IAIS participants. In 2014, we continued the EU-US 
insurance project. The E.U. and the U.S. are two important 
insurance jurisdictions both as markets and as homes for 
insurers. With the collaboration of State regulators, we have 
worked with our E.U. counterparts to improve compatibility, 
understanding, and, where appropriate, consistency. One 
identified objective in the project is a covered agreement. Not 
a trade agreement, a covered agreement is an agreement between 
the United States and another country involving prudential 
insurance measures.
    Indeed, the U.S. market and its oversight are unique. 
Through effective collaboration at home and abroad, U.S. 
authorities will continue to provide leadership that 
complements our shared interest in a vibrant, well-regulated 
market that promotes competition and financial stability and 
protects consumers. Finally, in all of our work internationally 
and domestically, Treasury priorities, FIO priorities will 
remain the best interests of U.S. consumers and industry, the 
U.S. economy, and jobs for the American people.
    Thank you for your attention, and I look forward to your 
questions.
    [The prepared statement of Mr. McRaith can be found on page 
61 of the appendix.]
    Chairman Neugebauer. Thank you.
    Mr. Sullivan, you are recognized for 5 minutes.

    STATEMENT OF THOMAS SULLIVAN, SENIOR ADVISER, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Sullivan. Chairman Neugebauer, and members of the 
subcommittee, thank you for inviting me here on behalf of the 
Federal Reserve. The Federal Reserve welcomes the opportunity 
to participate in today's hearing, and is pleased to be joined 
by our colleagues from the U.S. Treasury Federal Insurance 
Office, the National Association of Insurance Commissioners, 
and the National Conference of Insurance Legislators.
    And while we each have our own unique authority and mission 
to carry out, we remain committed to working collaboratively on 
a wide range of insurance, supervisory and regulatory issues, 
including the subject of today's hearing: international 
insurance regulation.
    My written statement provides details about the work of the 
Federal Reserve with respect to international insurance issues, 
but I would like to highlight a few key areas for you.
    The Federal Reserve assumed responsibility as a 
consolidated supervisor of certain insurance holding companies 
as a result of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010. Insurance holding companies for which 
the Federal Reserve is the consolidated supervisor hold 
approximately one-third of U.S. industry assets. The Federal 
Reserve supervisory teams for the insurance holding companies 
are a combination of Federal Reserve staff as well as newly-
hired insurance experts.
    We are committed to tailoring our supervisory framework to 
specific business lines and risk profiles of the insurance 
holding companies that we do oversee. Our supervisory efforts 
to date have focused on strengthening the firm's risk 
identification, risk measurement and management, internal 
controls, and corporate governance.
    Some of the insurance holding companies subject to Federal 
Reserve supervision are internationally active firms which 
compete with other global insurers to provide insurance 
products to businesses and consumers around the world. Last 
year, the Federal Reserve joined our State insurance 
supervisory colleagues and the FIO as a member of the IAIS.
    The Federal Reserve has been, and will continue to be, 
engaged in the development of global standards for regulating 
and supervising internationally active insurers. As a general 
proposition, we believe in the utility of having effective 
global standards for regulation of supervising internationally 
active financial firms. When implemented consistently across 
global jurisdictions, such standards help to provide a level 
playing field for global financial institutions. Further, 
consistent global regulatory standards can help limit 
regulatory arbitrage, jurisdiction shopping, and promote 
broader financial stability.
    The IAIS Common Framework Initiative, or ComFrame, includes 
the development of a global consolidated capital standard for 
large, complex international insurance companies. For the 
largest, most active global insurers, the Federal Reserve 
supports group-wide consolidated capital standards, which are 
well-tailored. Such standards must be deliberately developed 
through a transparent process, and properly calibrated. It is 
important to note that any standards adopted by the IAIS are 
not binding on the Federal Reserve, the FIO, State insurance 
regulators, or any U.S. company. During the development of 
global standards for insurance firms by the IAIS, the Federal 
Reserve will work to ensure that the standards do not conflict 
with U.S. law and are appropriate for U.S. insurance markets 
and U.S. insurers.
    Moreover, the Federal Reserve will only adopt IAIS 
regulatory standards after following the well-established 
rulemaking protocols under U.S. law, which include a 
transparent process for proposal issuance, solicitation of 
public comments, and rule finalization.
    The Federal Reserve, along with the FIO and the NAIC, 
continues to actively engage with U.S. insurance companies on 
the development of global regulatory standards for U.S. firms. 
Recently, the FIO hosted a session with the Federal Reserve, 
the NAIC, and State insurance regulators, along with U.S. 
firms, to talk about these very issues and understand what 
their concerns were around some of these developments.
    The Federal Reserve is committed to continuing this 
dialogue and our work with the FIO and State and international 
insurance regulators to develop standards for global insurance 
firms that are consistent across countries and appropriate for 
internationally active U.S. insurers.
    Nothing in ComFrame, including the development of a group 
capital requirement, seeks to lessen the critical role of the 
individual insurance legal entity supervision conducted by the 
U.S. States and foreign countries. Rather, group-wide 
consolidated supervision and consolidated capital requirements 
supplement this approach with a perspective that considers the 
risks across the entire firm, including risks that emanate from 
non-insurance subsidiaries and entities within the group.
    The Federal Reserve is a consolidated holding company 
supervisor that focuses on identifying and evaluating risks, 
capital and liquidity adequacy, governance and controls across 
its supervised organization. U.S. insurers with a global 
footprint or global aspirations stand to benefit considerably 
from a level global regulatory framework that is strong, but 
pragmatic. Reasonably consistent global insurance standards for 
internationally active insurers and international cooperation 
among global regulators provide the means to that end.
    The Federal Reserve has acted on the international 
insurance stage in an engaged partnership with our colleagues 
from the FIO, the State insurance commissioners, and the NAIC.
    Our multi-party dialogue, while respectful of our 
individual authorities, strives to develop a central team USA 
position on these most critical issues. Mr. Chairman, thank you 
for inviting me here today, and I look forward to an active 
dialogue with the subcommittee.
    [The prepared statement of Mr. Sullivan can be found on 
page 68 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Consedine, you are recognized for 5 minutes.

STATEMENT OF THE HONORABLE MICHAEL F. CONSEDINE, COMMISSIONER, 
   PENNSYLVANIA STATE INSURANCE DEPARTMENT, ON BEHALF OF THE 
     NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

    Mr. Consedine. Thank you, Mr. Chairman, and thank you all 
for the opportunity to testify today. U.S. insurance consumers 
benefit from some of the most dynamic and competitive insurance 
markets in the world. Taken individually, U.S. States make up 
24 of the world's 50 largest insurance markets. Pennsylvania, 
for example, is the 14th largest insurance jurisdiction 
worldwide, with over $95 billion in written premium. The NAIC 
has long been committed to providing leadership on global 
insurance issues, with a focus on ensuring policyholder 
protections and maintaining stable and competitive insurance 
markets.
    The NAIC, as mentioned, was a founding member of the IAIS, 
recognizing that while insurance is a local product, it is a 
global business. For over 2 decades, U.S. State insurance 
regulators have been extensively engaged with our international 
counterparts in developing the elements of a stronger 
international insurance regulatory framework. All along, our 
focus has been to ensure that any international standards are 
adaptable to our markets and benefit our consumers. Standards 
developed at the FSB and the IAIS are not binding, but can 
serve as a guide for regulators to encourage a degree of 
consistency in approach, if not necessarily in structure or 
execution.
    If these standards collectively elevate the quality of 
insurance regulation around the globe, it is a positive thing 
for U.S. insurers and consumers. However, any international 
standards must be flexible enough to deal with existing 
structural and legal differences to avoid putting U.S. insurers 
and consumers at a disadvantage in one market relative to 
another. Where the Federal Reserve and the Treasury Department 
engage at the IAIS, we are committed to cooperating and sharing 
our perspectives with them. Recognizing that we each have 
distinct responsibilities, it is up to each of us to contribute 
and commit to international standards to the extent we feel is 
appropriate and have the authority to do so.
    However, it is difficult to reach consensus around 
standards without the input of those most impacted, in 
particular the consumers we protect and the companies we 
supervise. Transparency does not require that regulators hand 
over the power of the pen to those we regulate. It simply 
requires that the process of standard-setting be done in an 
inclusive form. That is a fundamental aspect of our democratic 
system in the United States, and that is why State insurance 
regulators vigorously opposed efforts at the IAIS to limit 
stakeholder engagement and why we remain committed to a 
transparent process here at home.
    The NAIC has long provided forums for significant 
engagement by all stakeholders, while preserving a capacity for 
regulators to meet confidentiality on sensitive matters. In 
fact, as I speak, my colleagues are holding meetings with 
stakeholders right here in D.C. to discuss a host of 
initiatives being undertaken by the States, including our work 
at the IAIS.
    The IAIS is developing three capital standards targeted for 
different purposes, including an insurance capital standard for 
internationally active insurance groups. Although State 
insurance regulators have concern with the pace of the work, 
and it is not yet fully understood what benefit these standards 
will bring to U.S. policyholders, the IAIS is moving forward.
    Insurance regulators therefore have an obligation to be at 
the table on behalf of our consumers and our marketplace to 
seek an outcome that works for our system and doesn't stagnate 
growth, jobs, and innovation. If tailored for our system, there 
is value in understanding the capital adequacy of insurance 
groups, particularly when part of a larger conglomerate. But 
that value only exists if it wraps around our existing legal 
entity standards. We also remain concerned with the more 
volatile market valuation accounting approach as an 
international standard which represents a short-term focus 
rather than a long-term view.
    In our view, taking a homogeneous approach that treats 
insurers more like banks may actually encourage new risk-taking 
in the insurance industry. The IAIS must also recognize that a 
system with existing safeguards for the movement of capital 
within a group may take a different approach than jurisdictions 
without similar requirements. The IAIS' objectives on capital 
standards are not easily achievable and will require 
significant commitment of resources over many years to ensure 
that they are compatible with the U.S. system of insurance 
regulation.
    In conclusion, as international standard-setting continues, 
the NAIC will remain directly engaged to determine whether the 
concepts under discussion make sense and add real benefit for 
U.S. policyholders. We are committed to working with our 
Federal colleagues where appropriate and sharing our views with 
Congress and our State legislatures on these important matters. 
The NAIC is pleased to work closely with this committee to 
ensure that the long-standing strengths of our State-based 
system are preserved, that U.S. policyholders remain well-
protected, and that insurance markets remain stable and 
competitive.
    And again, thank you for the opportunity to testify today.
    [The prepared statement of Mr. Consedine can be found on 
page 55 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Senator Breslin, you are recognized for 5 minutes.

 STATEMENT OF THE HONORABLE NEIL D. BRESLIN, SENATOR, STATE OF 
   NEW YORK; AND PRESIDENT, NATIONAL CONFERENCE OF INSURANCE 
                      LEGISLATORS (NCOIL)

    Mr. Breslin. Good afternoon, Mr. Chairman, and members of 
the subcommittee. Thank you for inviting me here today to 
discuss the regulatory standards and their impacts on the U.S. 
insurance industry. My name is Neil Breslin. I am a State 
Senator from New York and also the president of the National 
Conference of Insurance Legislators.
    I think, to all of us, it is clear that regulation of 
insurance in the United States is under attack. Our more than 
150 years of effective oversight, which strikes a balance 
between the needs of the consumers and those of committed 
markets, is under fire. Our system, which came through the 
financial crisis relatively unscathed, is being second-guessed 
by officials from countries that had a far different 
experience. My colleagues at NCOIL and I believe strongly that 
global insurance discussions must be open and allow for broad 
comment during development of proposed standards; must do no 
harm to State regulation; and absolutely must include a vehicle 
for State legislators, as well as regulators, to weigh in.
    Transparency and open deliberations are a foundation of 
U.S. State legislatures and are critical if State lawmakers who 
enact insurance laws in the United States are to be confident 
in regulations they are asked to consider, including those that 
start overseas. We assert that State lawmakers would find it 
difficult to support proposals that have not benefited from 
those guiding principles. Failure to allow due process and to 
require accountability can have negative consequences for 
insurers large and small and for the consumers who rely on 
them. We at NCOIL are troubled by discussions outside the 
United States that do not parallel the tenets or our own United 
States regulation.
    In particular, we have a concern that the International 
Association of Insurance Supervisors, IAIS, while probably 
well-meaning in its efforts to develop global standards, has 
moved to limit the ability of interested parties to access and 
to comment during its deliberations. The growing urgency of the 
organization's efforts, particularly related to capital 
standards, group supervision and corporate government demands a 
more, not less, open approach.
    It is very important that officials who represent the 
United States overseas understand and stand together when it 
comes to any initiative affecting U.S. insurers and, 
ultimately, consumers. There must be clear understanding that 
insurance companies do not operate like banks, and that bank-
centric proposals would make it more difficult for U.S. 
companies to remain strong, healthy, and competitive.
    In other words, regulation that works in the banking 
industry may be entirely inappropriate for insurance, and 
probably is. NCOIL, through an international issues task force 
that I have the honor of chairing, is working with the National 
Association of Insurance Commissioners and other advocates of 
State oversight to ensure that Federal entities, particularly 
those involved at the IAIS and at the Financial Stability 
Board, the FSB, stand up for the U.S. system and challenge any 
attempt to disregard its principles. We have reached out to the 
FIO at the Department of the Treasury, the SEC, the Federal 
Reserve and the IAIS, the FSB and others. We have pressed for 
coordination and cooperation, open dialogue, and for a better 
understanding of the U.S. system.
    We are committed to making sure there is a meaningful way 
for State legislators who are in direct contact with the 
consumers, who are the ultimate winners and losers in dialogues 
over insurance, to participate. The absence of a legislative 
voice may present inadvertent danger to U.S. insurance markets 
and to consumers and businesses they serve.
    There must a formal way for State lawmakers to participate. 
And though we appreciate statements of interest in working with 
State legislators, we look for a more official role. In that 
regard, we are pleased that the FIO recently included, for the 
first time, a legislator on its Federal advisory committee. And 
in particular, that individual, George Kaiser, a North Dakota 
legislator, and a past president of NCOIL, was the legislator 
chosen for membership.
    As some in the room may know, NCOIL has been concerned that 
as created under the Dodd-Frank Act, the FIO is subject to 
mission creep, both domestically and internationally. And so 
with the critical time in insurance regulation, we especially 
welcome a legislative seat at the table.
    I am here to say that while State regulation is not 
perfect, State legislators and regulators are always working to 
enhance areas where reform is needed, and NCOIL and the NAIC 
have worked strongly together over the years to effect such 
change. The United States has a long history of protecting 
consumers, and promoting strong markets in both good and trying 
financial times. And there is real harm in international 
insurance discussions that would unravel a U.S. system that may 
be different from other insurance regulation across the world. 
But it works.
    I and my colleagues at NCOIL are committed to ensuring that 
State-based regulation is not compromised, and we look forward 
to working with you to that end.
    Thank you again, and I look forward to the questions.
    [The prepared statement of Senator Breslin can be found on 
page 34 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    I now recognize Members for questions, reminding Members 
they each have 5 minutes. Before I ask my first question, I 
think in this issue--and we have heard in some of the testimony 
today--is the statement, don't worry about these standards 
being talked about, that they have to ultimately be adopted by 
the States. Now, when you get to the point where your hair is 
the same color as mine, and you have raised two teenaged sons, 
and somebody starts saying, don't worry, you know that is the 
time to start worrying. Because I think there are two points 
here. One is, why would we be at the table participating in 
these if we didn't think, in some way, these standards were 
going to be a part of U.S. policy?
    So I think it is disingenuous to say, don't worry about 
that. I think people are worried about it. And we heard 
testimony about that today. I think the other part is, is I 
think there will be some assumption with the people that we are 
negotiating with across the pond here that we are going to 
adopt some of these. And that if we don't adopt them, that 
somehow our domestic companies could be penalized in 
participating in overseas markets if these standards that are 
being proposed are not adopted by that.
    So I think for some folks to say, don't worry about this, 
is disingenuous. I think there is concern here, and that is one 
of the reasons that we are having this hearing today. Because I 
think there are some concerns about that process.
    Mr. Sullivan, I am a little concerned about the Fed's 
involvement in this IAIS process. Because from the Fed's 
perspective, you are solvency regulators for SIFIs, savings and 
loan, holding companies. And so your participation in this 
process, developing capital standards for these globally 
significant companies, how are you going to differentiate your 
thoughts on how we look at these SIFIs? And then how we look at 
these companies that are not a part, that aren't globally 
significant? And how do we--you are going to think--thinking 
for different capital standards for those SIFIs based on 
different capital standards for these other companies.
    But as you are at that table, do your thoughts on the SIFIs 
spill over into what your thoughts are on what the capital 
standards should be for the non-SIFIs?
    Mr. Sullivan. Thank you, Mr. Chairman. There are, as 
Commissioner Consedine pointed out in his testimony, three 
capital standards that are being considered by the IAIS. The 
first was the recently published basic capital requirement, 
which would then have a high loss absorbency, or HLA, applied 
to it. And that is to apply to the GSIIs, the globally systemic 
insurers. The other thing we talked about was the Insurance 
Capital Standard, the ICS. That is intended to only apply to 
internationally active insurance groups. So there is a 
distinction upon where a particular insurer fits and what 
capital standard would apply.
    Chairman Neugebauer. How do you begin to reconcile that, 
considering that a lot of these European countries have a 
different regulatory structure than the U.S. structure? And so 
when you begin to try to apply those in a global way, how do 
you reconcile those differences?
    Mr. Sullivan. Referring again back to my testimony, and you 
heard from Director McRaith as well, once those standards are 
set, they would have to be brought back to the United States 
and adopted through our rulemaking process. It would only mean 
something if we adopt it through our rulemaking process here 
within the United States. And we would go through our process 
of notification, feedback, and then final rule.
    Chairman Neugebauer. I think in your testimony you 
mentioned that at the point where we would accept these 
consolidated capital standards, we would go through the normal 
rulemaking process. To me, that, from your testimony, is an 
assumption that you intend to adopt it at some point in time, 
or propose these capital standards.
    Mr. Sullivan. I also pointed out that it would have to 
first conform with U.S. law. And I also said that it would not 
have to be disruptive to U.S. markets or U.S. insurers. So it 
would have to meet those tests before we would consider 
adopting it here in the United States.
    Chairman Neugebauer. Mr. Sullivan, in Mr. Consedine's 
testimony, he stated that the State regulators are unclear what 
benefit the international capital standards would bring to the 
U.S. policyholders. Why would we be participating in this 
process if we didn't think there was any clear benefit to 
policyholders in the United States?
    Mr. Sullivan. We are a consolidated supervisor at the Fed. 
We do believe in consolidated group capital requirements. We 
believe that they can have a leveling of the playing field 
amongst market participants. So we do believe it would have a 
benefit to the market. And from a regulatory perspective, it 
allows us to look at the group on a consolidated basis versus 
what the NAIC is doing in terms of its view of legal entity 
capital.
    Chairman Neugebauer. Some folks point out that during the 
financial crisis, the insurance industry actually was the 
bright star in the sky, that with the exception of a company 
that was operating outside, really, the traditional insurance 
arena, the rest of the industry fared very well. Given that, 
what is driving the Fed and others to look at these enhanced 
capital structures, if our current system seems to be working?
    Mr. Sullivan. I hear everything is fine--you know, why fix 
a problem, if nothing is broken. But I would also suggest that 
markets aren't static, nor should regulation or supervisory 
intervention be static. We need to constantly evolve. And I 
think the one case that you cite, Mr. Chairman, actually is a 
glowing example of what can happen across the entirety of an 
enterprise, and the fact that we do need to look at things on a 
consolidated basis, not necessarily on a legal entity basis.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from New York, Mrs. McCarthy, is recognized 
for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. And I 
thank everybody here for giving this testimony. I think it is 
something that many of us are certainly interested in. Going 
back over the last couple of years, especially since Dodd-
Frank, myself and Congressman Gary Miller have been working on 
capital standards and trying to make an adjustment. Because 
here on the House side, we believe we had the right language. 
On the Senate side, there was a little bit of confusion and, 
unfortunately, language was changed. So I guess, Mr. McRaith, 
and certainly anybody else who wants to jump in, when we talk 
about the insurance capital standards--we have 221 bipartisan 
Members of Congress. And the Senate passed it overwhelmingly on 
unanimous consent.
    Unfortunately, right before we went on a break, the bill 
came up. But it was put together with some other bills--which, 
by the way, had already passed, but the way it was written the 
Senate wouldn't have accepted it. So it kind of put us back to 
square one. But H.R.--and I don't know if you are all familiar 
with H.R. 4510, the Insurance Capital Standards Clarification 
Act. The legislation would provide clarity to the capital 
standards applied to insurance companies under the Federal 
Reserve supervision. Mr. McRaith, do you think that applying 
the wrong capital standards, such as bank capital standards, to 
an insurance company is ineffective?
    Are you familiar with this legislation? Is it something 
that you would support? Could it be something that you would 
support? And if you do know about the legislation--this goes 
for everyone--to expand on it. We definitely saw through the 
hearings going back in those years that the insurance companies 
really had nothing to do with the collapse of the economy that 
was going on. So if you could answer that, I would be happy.
    Mr. McRaith. Congresswoman, to be abundantly clear, 
insurance firms should be supervised as insurance firms. I 
think Senator Collins has been on record as saying that Section 
165 of the Dodd-Frank Act is intended to provide the 
opportunity for the Federal Reserve to tailor its supervision 
to the firms that are subject to its supervision. I don't want 
to comment on any pending legislation, other than to say that I 
think the Federal Reserve has been clear on its view. And I 
would defer to my colleagues at the Federal Reserve on that 
subject.
    Mrs. McCarthy of New York. Thank you. Mr. Sullivan, do you 
have anything to say?
    Mr. Sullivan. Yes, I do. And I would only reiterate what 
Chair Yellen and Governor Tarullo have said on behalf of the 
Fed: that we would support the legislation, we seek to tailor 
how we supervise insurance firms, and we believe the 
legislation would afford us that opportunity. So we do support 
it.
    Mrs. McCarthy of New York. Thank you. Do any of you think 
that if this is delayed until next year, that might hurt the 
insurance companies, being that they can actually come up with 
a business model that we have been holding them up on for all 
this time?
    Mr. Sullivan. We would stress expedience in addressing--
    Mrs. McCarthy of New York. It could be passed tomorrow on 
suspension, to be very honest with you. Any other comments?
    Mr. Consedine. Congresswoman, we at the State NAIC level 
fully support the legislation, as well, and share the concerns 
that if the Federal Reserve doesn't have the ability to tailor 
capital standards specific to insurance companies, there could 
be very significant consequences for both the companies 
involved but, more importantly, the consumer. So we do, indeed, 
support the legislation.
    Mrs. McCarthy of New York. Thank you. Mr. Sullivan, welcome 
from New York. I am a New Yorker, too. You could probably tell 
by the way I talk. But, welcome. I think it is important, and 
like I said, there are 221 Members, Republicans and Democrats, 
evenly split working towards this. We noticed, and I am not 
putting any blame on Senator Collins, there was a mix-up in the 
understanding of what was going on. She is now the lead sponsor 
on the Senate side. So I hope that you have some sway with our 
colleagues to bring it up before the session, the 213th 
session, leaves.
    Because, God knows, when we get back in January, February, 
it is going to take quite a while to get some votes up there, 
to get some business going. Thank you, gentlemen.
    And thank you again, Mr. Chairman, for holding this 
hearing.
    Chairman Neugebauer. I thank the gentlewoman.
    The vice chairman of our Housing and Insurance 
Subcommittee, Mr. Luetkemeyer from Missouri, is recognized for 
5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Mr. McRaith, in 
your testimony you indicate that we have had record levels of 
reported capital and surplus this past year, apparently. That 
is wonderful, fantastic. How do we look, from the balance sheet 
standpoint, on the liability side? Have we increased our 
liabilities to where we may have nice capital over here but our 
liabilities have shot up even higher yet, to the point where we 
are still in deep trouble? Or are we in good shape as a result 
of the limited amount of liability that has been taken on? Can 
you address that?
    Mr. McRaith. So that element of my testimony refers to the 
annual report which we released in September, Congressman. And 
that annual report affirms that the industry shows improved and 
continued improved resilience following the financial crisis. 
In short, we are seeing appropriate reserve levels, which 
measures liabilities relative to assets.
    Mr. Luetkemeyer. Okay. Mr. Sullivan, the chairman talked a 
little bit about the SIFI situation. And I am kind of curious. 
There have been three U.S.-based insurance companies that have 
been designated as SIFIs. Can you tell me, or explain to me how 
we get an insurance company to be a SIFI? What are the criteria 
that you think would cause an insurance company, if it went 
down, to bring our whole economy down? What are the 
circumstances?
    Mr. Sullivan. Representative, I have not been part of the 
deliberations of the Financial Stability Oversight Council 
(FSOC). They have their own criteria for designation of firms, 
and I am not part of that process or a member of FSOC.
    Mr. Luetkemeyer. It is in your testimony today.
    Mr. Sullivan. What is that?
    Mr. Luetkemeyer. It is in your testimony today. You discuss 
it. You discuss that IAIS has designated some SIFIs, three are 
U.S.-based, and you can't discuss what your testimony was 
about?
    Mr. Sullivan. No, no. Are you talking about GSIIs or FSOC? 
I'm sorry.
    Mr. Luetkemeyer. Well, I am talking about the GSIIs, but 
same thing.
    Mr. Sullivan. Yes. The IAIS has published their criteria 
for designation, and they have designated three U.S. firms as 
GSIIs. They have an algorithm that goes through an assessment 
of each insurer, and--
    Mr. Luetkemeyer. I guess the question is, do you agree with 
them?
    Mr. Sullivan. I agree with the three designations, yes.
    Mr. Luetkemeyer. Okay. If you agree with them, on what 
basis do you agree? That we have three insurance companies in 
this country that are systemically important enough they could 
bring down the entire economy? When in 2008, during the most 
disastrous economic financial debacle since the Great 
Depression, there were no insurance companies that were a 
problem.
    Mr. Sullivan. Right.
    Mr. Luetkemeyer. How does that work?
    Mr. Sullivan. We are worried about systemic risk. We have 
an algorithm that assesses systemic risk at the IAIS. And I 
support the process that the IAIS--
    Mr. Luetkemeyer. That is the same response I got from 
somebody with regards to the flood of 1993 in my home district. 
We had a flood in 1993 which was record-breaking, a 500-year 
flood. The levee around the town saved the town, and yet it was 
unaccredited and they were going to raise their insurance 
premiums because the levee didn't work. Makes no sense. I'm 
sorry, I have a hard time following you on that one, sir.
    I guess my question to Mr. Consedine here is, we have the 
hearing today entitled, ``The Impact of International 
Regulatory Standards on the Competitiveness of U.S. Insurers, 
Part II.'' You deal with the State guys all the time. You all 
have insurance companies in your State, all the folks. How are 
the FIO and the IAIS affecting your State and your insurance 
companies' ability to deliver quality, competitive products at 
this point?
    Mr. Consedine. These standards that are being set now in 
Basil, Switzerland, and other places ultimately could be 
applied to U.S. companies, large companies, and could 
ultimately potentially trickle down to some of our smaller 
companies. So our view is, this is not just a Wall Street issue 
in Pennsylvania. This is a Main Street issue, too.
    And so the concern is, right now, in these discussions, 
they are being influenced by different viewpoints from both 
Europe and the United States. And it is very important that we 
get it right at this stage. Because what happens at this stage 
ultimately will then be the standards that go out global.
    And yes, we will have the ability to accept or reject them. 
And if we reject them because we don't like them, then we put 
our market at a competitive disadvantage.
    Mr. Luetkemeyer. Okay. In your discussions, in your 
testimony, you also talked about some difference of opinion 
with regards to IAIS and FIO and all of the different folks who 
are promulgating these regulations. What is your relationship 
with those folks, at this point?
    Mr. Consedine. We are an active participant in the IAIS. 
The NAIC, as was mentioned, was a founding member. Fifteen, or 
all of our States, are members. So we are fully engaged in 
those discussions, along with our counterparts at the Federal 
Reserve and FIO. Domestically, we have ongoing and regular 
discussions with our counterparts at FIO and the Federal 
Reserve on these issues, in part in an effort to put the best 
team USA game that we can because there is a lot at stake.
    Mr. Luetkemeyer. Okay, one more question. You are involved 
in the discussions. Are they listening to you?
    Mr. Consedine. I think so. And we are seeing--
    Mr. Luetkemeyer. That was a qualified yes, there, not what 
I am looking for.
    Mr. Consedine. We are seeing real progress.
    Mr. Luetkemeyer. Okay.
    Mr. Consedine. For example, as was mentioned, we came away 
from this last meeting with, I think, an important win for the 
United States on market-based valuation. And that was a result 
of, I think, active listening and really good teamwork.
    Mr. Luetkemeyer. Fantastic. Thank you.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Wisconsin, Mr. Duffy, is recognized for 
5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman. Just quickly, Mr. 
McRaith, would you discuss the transparency again of this 
process, the negotiations? You talked about it being online, is 
that right, the hearings, the meeting? Is that your testimony?
    Mr. McRaith. Forgive me. Are you referring to the 
transparency at the IAIS?
    Mr. Duffy. Yes, I am.
    Mr. McRaith. Right. So the first priority was eliminating 
the pay-for-play. And you might not be aware, but eliminating 
the observer status means that now observers and the public get 
access to the same information, the same meetings, but don't 
have to pay $20,000 for it.
    Mr. Duffy. So in regard to the status of the negotiations, 
what kind of information is disseminated to this institution or 
to stakeholders?
    Mr. McRaith. In terms of the international standard 
development work, which I think is what--when you are referring 
to negotiations, that is what you mean.
    Mr. Duffy. Right.
    Mr. McRaith. Look, we are entirely pleased to work with 
this committee, to report to this committee, and to work with 
stakeholders. One thing that we are committed to at FIO is to 
continue to build opportunities for U.S. stakeholders to engage 
with all of the U.S. IAIS participants at one time. We have 
been doing this--
    Mr. Duffy. But there is no process in place right now for 
consistent reports to come to this committee and this Congress, 
or to stakeholders. Is that right?
    Mr. McRaith. We have reported and worked with the--
    Mr. Duffy. I know, but there is no--
    Mr. McRaith. --staff of this committee on a regular basis, 
and we would be pleased to continue doing that, of course.
    Mr. Duffy. When a new standard is agreed to at IAIS, is 
there going to be a comment period for stakeholders and this 
institution to give feedback on the agreed-to language?
    Mr. McRaith. Yes, absolutely. And I think that is one 
reason why we think this is an improvement. Because the process 
for consultation is now formalized and expanded in a way it did 
not exist before. And I would say even the consultation process 
is now subject to public consultation as of yesterday. So it is 
still in draft form. New ideas are still being received.
    Mr. Duffy. I am going to come out with a bill in the not-
too-distant future. And I hate to ask people to comment on 
bills they haven't seen. I don't do it, so I don't expect you 
to. But the concept of having some form of an advisory 
committee of stakeholders that participate--they don't 
participate, but they give advice to you in the negotiating 
process. Would you object to that? And would you object to 
consistent updates to this committee on the status of 
negotiation?
    Mr. McRaith. You are right. I don't want to comment on a 
bill I haven't seen. But I do want to say and emphasize that we 
absolutely value the opportunity to have this conversation with 
this committee, with the staff of this committee, and with 
stakeholders. As we move forward, we welcome the opportunity to 
build on what we have done to date.
    Mr. Duffy. Would you object to an advisory committee, 
formalized?
    Mr. McRaith. We do have an advisory committee right now 
that includes stakeholders from across the diverse array of the 
insurance sector.
    Mr. Duffy. And standard updates, continual updates to this 
committee, you would have no objection to that being 
formalized?
    Mr. McRaith. We welcome the chance to work with this 
committee and work with the staff of this committee.
    Mr. Duffy. Because I think a lot of us have had--and I 
don't mean any offense to Treasury and the Fed; I think both of 
you are somewhat new at engaging in the insurance base the way 
you are right now--some concerns with the timeliness of getting 
FIO reports. Some of them have been a couple of years late. And 
so to make sure that a standard that comes out through this 
negotiation, that I know you will say it is not a rule, it is 
not binding. But we all know that standard is going to be met 
by stakeholders and probably by our regulators. We want to have 
an advisory committee making sure that you have the best 
information possible and that we stay in constant communication 
as this process moves forward.
    And we think the process should move forward, but we don't 
want to find ourselves at the end of the negotiation, agreeing 
to something and the industry and this institution has great 
reservation about what you have done. And so to put some 
procedures in place to make sure that there is a constant 
dialogue and a constant feedback for you, I think is important. 
And to make sure that there will be a time period for comment 
to make sure, before we sign off or you sign off on this 
agreement, that there is a period for comment and there are 
questions that you might ask to get feedback from the industry 
on how it is going to impact us.
    My time is almost up. In regard to guarantee funds versus 
capital, how are we doing in the negotiations with our 
international counterparts? Are we rolling over?
    Mr. McRaith. I am not entirely sure I understand the 
question. Is the question whether we are conceding that 
guarantee funds don't work and instead requiring more capital 
for the insurance firms?
    Mr. Duffy. Yes.
    Mr. McRaith. Absolutely not. In fact, I don't remember ever 
having that discussion once. In fact, I don't think anyone has 
ever discussed that. I think what we view in the United States 
is--
    Mr. Duffy. Are you considering--
    Mr. McRaith. --the guarantee association system works well 
for the insurance entities.
    Mr. Duffy. My time has expired. 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 thank you for holding 
this hearing, and I thank the witnesses for appearing today.
    My first question is directed to Commissioner Consedine. 
The comment that you made during your testimony indicated that 
capital standards that may be adopted in a--modeled on bank-
like standards, designed to minimize risk, could actually 
instead create more risk for insurance companies. And I was 
wondering if you could elaborate on that a little bit?
    Mr. Consedine. Thank you, Representative. One of our 
concerns with capital standards, especially if they result in a 
higher capital requirement for many insurance companies, is 
both from an economic and policyholder perspective. And 
requiring companies to hold higher amounts of capital, you 
severely limit the free flow of capital, and their ability to 
grow, to hire people, to create jobs, to create new products. I 
think you see the opportunity for pricing swings, possibly 
price increases. And ultimately, in some cases, and we have 
seen this play out in other countries, you limit the 
availability of products that are based on long-term 
liabilities and valuation standards; products that could be 
very critical here in the United States, especially with an 
aging population, with pension risks that are all--could be 
dependent on the availability of those types of products. And 
the absence of those products could have a long-term 
detrimental impact on our economy.
    Mr. Hurt. Excellent. Now, Director McRaith, I wanted to ask 
you, when you have testified before this committee before, you 
have expressed strong support for State-based insurance 
regulation. And I certainly, for one, appreciate it, as I have 
said to you before. But I was wondering if you could talk a 
little bit about the proposals that we are seeing overseas, the 
Financial Stability Board and the E.U.'s Solvency II proposal 
as well as the ComFrame from--by the FSB. If you could talk 
about what risks, what dangers do you see? What dangers are you 
looking for as you represent our interests in this process? 
What are the things that you are looking for that could hurt 
the competitiveness of American insurance companies and 
policyholders?
    Mr. McRaith. I think Commissioner Consedine identified a 
legitimate concern, which is having a capital standard that 
would affect the availability of products or the ability of the 
industry to compete within the United States. As I said in my 
testimony, any international standard has to serve the best 
interests of the U.S. consumers, the U.S. industry, and the 
U.S. economy. So as we look at capital, that is a priority. As 
we look at enterprise risk management, that is a priority. As 
we look at governance standards and expectations, that is a 
priority. It is also, in our view, consistent with what Tom 
Sullivan said in his testimony, that it is also appropriate to 
look at the firms as a consolidated enterprise if they are 
large, multinational, complex organizations.
    And that is what ComFrame intends to do. But I want to be 
clear, and emphasize--and I say this as a Chicago Bulls fan; 
Michael Jordan, Scotty Pippin, and Phil Jackson were great in 
their own right. Together, they won six championships. The 
Federal Reserve, the State commissioners, and the FIO, working 
today, we can deliver standards internationally that serve the 
best interests of the United States.
    Mr. Hurt. Thank you. My last question is to Commissioner 
Consedine and Senator Breslin. We heard Director McRaith talk a 
little bit about his commitment to transparency and a broader 
participation by the stakeholders, namely insurance 
commissioners in our 50 States as well as the legislators and 
legislative organizations. Can you all talk just briefly, in 
the few minutes we have--few seconds we have remaining about 
what you think specifically needs to be done in order to bring 
broader participation?
    Mr. Breslin. Obviously, in a general sense, just the 
transparency part is anathema to the States. The States, as was 
indicated before, six of our States, including Texas, 
Pennsylvania, and New York are among the top 20 insurance 
producers in the world. And each of those States has strong 
transparency regulations and strong State-based--
    Mr. Hurt. Can you talk about the specifics, though? I think 
I understand what you mean generally. Are you able to assign 
any specific remedies?
    Mr. Breslin. Obviously, with each of those regulatory 
bodies in the international sense is to have open meetings, 
open discussion. When they deal with trade agreements, those 
trade agreements should be shared with the States. The States 
should have--legislators should have participation so that 
enhances the transparency issue.
    Mr. Hurt. Excellent. Thank you.
    My time has expired. Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Florida, Mr. Ross, is recognized for 5 
minutes.
    Mr. Ross. Thank you, Mr. Chairman. Having just come off of 
an election, as all of us have, I doubt any of my colleagues, 
including myself, campaigned on Basel III or Solvency II or 
IAIS. And yet the impact of these regulatory schemes have a 
significant role in the end user, the consumer. And believe me, 
coming from Florida, I come from a State which 7 years ago 
decided to affect the markets in a regulatory and statutory 
form by over-expanding a property insurance company that was 
run by the State, owned by the State, and backed by taxpayers, 
only to effect a below market rate.
    And what we have here is somewhat the antithesis of that. 
Director McRaith, I truly appreciate your confidence here about 
being at the table and using the analogy of the Chicago Bulls. 
I just don't want us to have the luck of the Chicago Cubs when 
it comes to having our role at the international table. Now, I 
think that having the representation of the NAIC is very, very 
important. Ever since the McCarran-Ferguson Act, what we have 
in place I think is one of the best things that this world 
economy has seen in providing consumer protection, solvency, 
and a good regulatory scheme for domestic insurance.
    And yet I still have to question why FSOC decides to want 
to put into place the designation of three domestic carriers as 
SIFIs. And my question to you, Mr. McRaith is, is that an 
indication that the State regulatory scheme is not sufficient 
if FSOC is putting into play three domestic carriers as SIFIs?
    Mr. McRaith. Congressman, the council is guided by the 
statute. The statute establishes the legal standard, which is 
whether the material financial distress of the firm could pose 
a threat to--
    Mr. Ross. And I think the lack of transparency there as to 
what designates a SIFI for the insurance companies is obviously 
an obstacle or a hurdle we are trying to overcome. But that 
also goes to the problem that we are having today when we are 
dealing with international standards. Now, Director McRaith, 
you said in your testimony that international standards are not 
themselves self-executing. I agree with that. We don't have to 
accept them. But by their very nature, are they not self-
limiting? In other words, if we don't accept them, aren't our 
domestic carriers going to suffer at the table?
    Mr. McRaith. There are three phases in the process: 
standard-setting; testing before implementation; and 
implementation. Our view is, right now we are in the early 
stages of development, Congressman, and the best thing we can 
do is work together to provide U.S. leadership in the 
international standard-setting.
    Mr. Ross. I appreciate that. And in that leadership--and, 
Mr. Sullivan, I will ask you this question. Any increase in the 
capital standards is going to ultimately lead to an increase in 
the product. Granted, I know that Commissioner Consedine talked 
about how that is going to tie up capital and keep from 
expanding and creating jobs. But ultimately, in order for these 
carriers to stay in business they are going to have to seek 
other recourse. Which is going to most likely be, if capital 
standards increase then the product price is going to have to 
increase. Wouldn't you agree?
    Mr. Sullivan. I would agree, but we haven't reached a point 
to determine whether or not additional capital is required yet.
    Mr. Ross. I think that is important. And I think that is 
what I am getting at is that we have to be together, we have to 
deal from a position of strength here. We probably have the 
largest number of premiums out there, absent health insurance 
premiums, in the world economy. We have to go into these, and 
not just one person at the table who has an insurance 
background. But I think a concerted effort that what we have in 
place may not be the best system ever designed but it is 
working very well. And to that end, I would just ask 
Commissioner Consedine, what do you see as a hurdle in putting 
us at the table with the IAIS in trying to make sure that we 
are not just jammed with some capital standards that we are 
going to be left to take de facto if not by way of the 
rulemaking process?
    Mr. Consedine. Thank you, Representative. I think part of 
it, again, is putting together the team that we have. But the 
next step, and I think the more important step, that we are 
engaged in is putting the ideas together in some form that we 
can offer an alternative--
    Mr. Ross. I agree.
    Mr. Consedine. --to what is already being pushed by 
different parts of the world. We need a solid U.S.-based 
proposal. We are working on it. We will get there. But that is, 
to me, the turning point in this discussion.
    Mr. Ross. And, Senator, I just want to tell you, as a past 
boardmember of NCSL, and as a past member of NCOIL, I laud you 
for what you are doing. And I think the best impact we can have 
is at the State level to make sure that our constituencies 
understand the significance that when those rates go up--not 
because of an insurance commissioner, but because of an 
international standard--our methods of recourse are going to be 
severely limited.
    With that, I will yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Ohio, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
holding this hearing, and I appreciate all the witnesses for 
their time. Director McRaith, one of the things you said a 
minute ago was you talked about team USA and the only group at 
the table you left out are the legislators at NCOIL that, 
frankly, help, under the McCarran-Ferguson, set the rules of 
the road in our 50 States, and I guess I am curious how you are 
soliciting input from them. Because if we are going to indeed 
have an American approach here, team USA, we need everybody at 
the table. So what have you and the others, the Federal 
Reserve, done to reach out to the members of NCOIL to solicit 
their input?
    Mr. McRaith. Let me start with the recognition that--as I 
think you are aware--before starting this job I was the State 
commissioner in Illinois. And it was a fantastic opportunity to 
work with people who cared about their constituents, as you 
well know, Congressman, from your days in the Ohio general 
assembly. My appreciation for Senator Breslin and his 
colleagues I expressed earlier. We have a member--as he 
repeated in his testimony--of the State legislature on our 
advisory committee. We know that the legislators work closely 
with the NAIC and the State regulators, and we are absolutely 
open to continuing to build on our engagement with the State 
legislators.
    Mr. Stivers. Great. There was a recent study done by Robert 
Shapiro which indicated that there is no evidence that higher 
capital standards are needed for the solvency and operation of 
large U.S. insurance companies. In fact, they concluded that 
compared to banks, insurance companies have neither the size 
nor the interconnectedness to drive correlated losses that can 
pose any systemic risk. Is there anybody at the table of 
witnesses who is not familiar with that study? Have you used 
that study in your conversations with our international 
partners to help them understand that anything we would do on 
capital standards needs to really make sense? I think it is an 
important study, and there are findings there that can back up 
what the team USA position should be.
    Mr. McRaith. Congressman, I think I heard about that study 
maybe less than an hour ago. And forgive me, I have not had a 
chance to read it.
    Mr. Stivers. Please review it. I will send it to all four 
of you. I really appreciate it. Have any of the rest of you had 
a chance to see it?
    Mr. Sullivan. I have not.
    Mr. Stivers. Okay. I will get it to all of you, and I think 
it can be an important study in team USA's approach.
    So the U.S. State system has always received high marks in 
the past in a number of areas, although the last report, which 
was a peer review done by FSB, suggests that more Federal 
involvement in insurance is necessary. Is there anybody who led 
a U.S. response to this last review of our U.S. insurance 
system, and what was that response?
    Mr. Consedine. Congressman, I will speak on behalf of the 
State insurance regulators, and we are currently going through 
our most recent FSAP review. But the last one that we did, I 
believe, about 5 years ago. I think we certainly responded, 
from a State perspective, that our view is that State insurance 
regulation doesn't necessarily require additional layers of 
Federal regulation.
    As you said, we have a great track record, especially 
during the financial crisis. But more importantly, we do take 
the lessons learned from those reviews and apply them. We have, 
for the last 5 years, engaged in a modernization initiative to 
improve our system at a State level, and those improvements 
continue today.
    Mr. Stivers. Great. Director McRaith, or let me actually 
ask Mr. Sullivan. Are you familiar with Fed Governor Tarullo's 
comments during the Senate hearing in September when he said 
that traditional insurance does not pose a systemic risk?
    Mr. Sullivan. Yes.
    Mr. Stivers. Okay. And do you agree with those comments?
    Mr. Sullivan. I support Governor Tarullo's comments, yes.
    Mr. Stivers. If so, how does the Fed justify imposing 
discriminatory standards against insurance affiliates of U.S. 
insurance holding companies it regulates if the Dodd-Frank Act, 
Collins Amendment is fixed along the lines of the House- and 
Senate-passed legislation, will the Fed use U.S. insurance 
standards for companies under your jurisdiction? Or to what 
extent are you considering applying a version of the 
international standard that would otherwise be adopted in the 
United States?
    Mr. Sullivan. I am not sure on your question. But Governor 
Tarullo also said we would like relief under Collins and we 
would like to be able to tailor our standards to the business 
model of insurance, which I also support.
    Mr. Stivers. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from New Jersey, Mr. Garrett, is recognized 
for 5 minutes.
    Mr. Garrett. Thank you. Let's just follow up on that really 
quick, then. Do you have the discretionary authority right now 
without the passage of that amendment?
    Mr. Sullivan. Governor Tarullo will talk about very limited 
authority, or limited flexibility.
    Mr. Garrett. Right.
    Mr. Sullivan. Outside of Collins.
    Mr. Garrett. Why I asked that is because earlier in your 
testimony, you seemed to indicate that you were going to be 
flexible as far as applying them, when the question was with 
regard to capital standards and other standards regulatory 
requirements. Earlier, it sounded like you had the flexibility, 
and now--did I hear wrong before?
    Mr. Sullivan. I would not say that it is unlimited 
flexibility, Congressman. I think there are some opportunities 
to distinguish between the assets held by an insurer versus a 
bank, but I am not sure how much lift there would be there.
    Mr. Garrett. Right. So going forward, you do not have the 
authority that you would need to have in order to provide the 
flexibility to this, correct?
    Mr. Sullivan. Correct. We would like more flexibility--
    Mr. Garrett. Right. And so making the designations without 
that authority means that you--and without the passage of the 
change of the law means you are going to impose standards that 
are not applicable and not appropriate for them. Is that 
correct?
    Mr. Sullivan. We have to abide by the law.
    Mr. Garrett. Right. And you are saying that you don't have 
the authority to do the correct thing with the correct amount 
of flexibility. So if it is not the standards that are correct, 
then they would be incorrect standards that you would be 
applying. Otherwise, you wouldn't need the flexibility, right?
    Mr. Sullivan. We would prefer the flexibility.
    Mr. Garrett. So you are going to be imposing standards that 
are not appropriate.
    The whole panel, whole discussion, seems to have been 
focused on the issue of transparency, or 90 percent of it. And 
certainly with regard to the Fed, their level of transparency 
is something that some of you may know I have questioned in the 
past, in general. I could just run down one. One is when the 
Fed issues regulations right now, outside of this area, there 
is no cost-benefit analysis being done, as we have recalled, 
that is also required over at the SEC, the CFTC, or almost any 
other Federal agency. And I have always wondered why the Fed 
doesn't do it there. I guess I will get back to the question of 
seeing whether or not cost-benefit analysis is part of the 
discussion when you engage on the international front.
    Second, at the Fed, the fact that it has been tailored down 
to the rulemaking process and what has been driven by a single 
Fed Governor, which I think is--and consolidated in a manner 
that is overly concentrated I think is problematic in 
transparency.
    And third, in the whole area outside of this area in stress 
testing of the financial institutions and banks and what have 
you is--a lot of critics have said is highly secretive and 
gives way too much discretion without going through the normal 
administrative notice and comment process.
    And that is not me making those comments. It was the 
president of the Federal Reserve Bank in Kansas City who called 
for more transparency in what has been called an opaque testing 
process. So we see that the Fed comes into this realm with a 
questionable and checkered past with regard to transparency. 
And so that is why I am wondering, Mr. Consedine and Senator 
Breslin, whether you feel that is an entity that we should be 
confident in going forward, and relying on transparency 
considering their past track record. Senator?
    Mr. Breslin. I have made the general comment throughout 
that each of the Federal agencies aren't sufficiently 
transparent to satisfy State legislators in their role of 
supervising insurance in the States. And unless and until there 
is that participation by State legislatures, they will continue 
to make mistakes in doing so without that degree of 
transparency.
    Mr. Garrett. Mr. Consedine, can you add anything else?
    Mr. Consedine. Thank you, Congressman. Again, in the sort 
of limited context of our world and insurance regulation, I can 
attest to the Fed's outreach efforts at this point on some of 
the issues that we have been talking about today. In the area 
of consolidated supervision, where they, in fact, are the 
consolidated supervisor for a number of large insurance 
companies or thrifts--
    Mr. Garrett. Is your State different from--you said you are 
one of the top 20 in the States. Is your State's and your 
interests different from the other States? Do we need you there 
anymore if the Fed is able to do this going forward? Are all 50 
States and their departments so similar that there is not 
something unique about Pennsylvania and New Jersey and 
elsewhere?
    Mr. Consedine. No. I would like to think you absolutely 
need us. We are--
    Mr. Garrett. Well, not if, at the end of the day, they get 
your input and they get the input from the other 49 States, and 
they make a decision that is adverse to your State.
    Mr. Consedine. And, again, the Fed only regulates a small 
segment of the insurance marketplace.
    Mr. Garrett. So for that small a segment, you are willing 
to abrogate your authority and sovereignty in that area?
    Mr. Consedine. Absolutely not, and that is part--
    Mr. Garrett. Okay, so there is something unique and special 
about Pennsylvania that maybe--that you are there defending.
    Mr. Consedine. I am speaking on behalf of Pennsylvania, but 
also the NAIC. And, again, we work with the Fed. But we have 
not, nor will we ever, abrogate our responsibilities to our 
consumers in our State markets as part of a--
    Mr. Garrett. But then, at the end of the day the law allows 
them to abrogate that--allows them to supplant that authority, 
right?
    Mr. Consedine. We haven't seen that to date. Again, at a 
legal entity insurance company level, we are still the 
regulators.
    Mr. Garrett. Okay. And, Mr. McRaith, you were saying 
earlier that as far as to the question that SIFI designation, 
that it is clear as far as the process, as far as that is in 
statute I think is the word you said, correct?
    Mr. McRaith. I recited the legal standards in the statute, 
yes.
    Mr. Garrett. Yes. Is it really that clear? Because it is--I 
haven't even been able to find that standard in the statute, 
and I don't think that the players were able to find that in 
this statute. I thought that there actually is broad discretion 
and that is the reason that there is not transparency in that 
area. But you are able to actually cite the statute where it 
actually says that they make this determination for these 
SIFIs?
    Mr. McRaith. I cited--I don't want to cite the entire 
statute because I can't do that.
    Mr. Garrett. Yes.
    Mr. McRaith. But I can tell you that the legal standard is 
what I cited earlier. But remember, the council is governed by 
the statute and the considerations and factors in the statute. 
And it also has a rule and guidance that have been published 
following three public consultation periods. So all of that is 
clear and based on feedback from interested parties.
    Mr. Garrett. Interesting.
    I yield back my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Michigan, who has sponsored 
resolutions on the transparency of the IAIS, Mr. Huizenga, is 
recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate the 
opportunity to sit in. And yes, in fact, I have sponsored House 
Resolution 735, along with my colleague across the aisle, Greg 
Meeks from New York. And a similar resolution expressing the 
sense of the Senate being very concerned with this has been 
introduced by Senators Heller and Tester.
    It just seems to me that as we are moving forward, or as I 
should say IAIS is moving forward with eliminating this 
observer status, the question is, as I am understanding Mr. 
Sullivan and others, that somehow being there as observers is 
going to influence and damage the independence of the IAIS.
    Congress is very transparent, we are very transparent. To 
my colleagues from the States, I served in the State 
legislature, as well, in Michigan. Extremely transparent. There 
are cameras here that are all transparent. It doesn't mean we 
are not independent. It doesn't mean that we somehow are going 
to bend to the will of the Administration. Talk to our 
colleagues on the other side. They are very concerned about 
that sometimes, right? So it seems to me that these are being 
conflated. And I am especially concerned, Director McRaith, 
that Roy Woodall--he is the insurance voting member of FSOC, an 
insurance position that we created specifically as to matters 
dealing with systemic risk--asked to be invited to sit in on 
some recent IAIS systemic risk meetings but was turned down.
    You may recall that at the subcommittee's hearing earlier 
this year there was a bipartisan support for the FSOC's 
insurance member attending these meetings, IAIS. And I 
understand you are on the IAIS executive committee. That is 
correct? Yes, you are--he is nodding. So can you tell us why 
this FSOC member was turned down, or turned away, and not 
invited?
    Mr. McRaith. Congressman, the transparency of the IAIS as 
proposed eliminates the fee. So that any stakeholder, whether 
it is Roy Woodall or anybody else, can attend meetings--
starting January 1st, will be able to attend meetings, access 
information on the Web site, and obtain material relating to 
important matters without having to pay the fee. That is the 
issue of the pay-to-play that we were looking--
    Mr. Huizenga. So Mr. Woodall is going to be able to go into 
all these meetings.
    Mr. McRaith. The same meetings that he would have been able 
to attend as an observer.
    Mr. Huizenga. All right. And as our representative--because 
it is my understanding that, as a result, the observer members 
will no longer be able to attend or participate in the meetings 
unless a specific non-member group is invited to attend as a 
guest. Am I wrong, then, or is that contrary to what you are 
saying?
    Mr. McRaith. It is wrong in the sense--and forgive me for 
correcting you--that it is a statement of policy that is an 
improvement over the prior policy. So now, the--
    Mr. Huizenga. Oh, you may think it is an improvement, but 
there are a whole bunch of other people who don't think it is 
an improvement. But continue, please.
    Mr. McRaith. The problem--the difference now is that 
individuals who were observers and had to pay $20,000 no longer 
have to pay that fee. They will have the same access to the 
same meetings, and more access to other information without 
paying--
    Mr. Huizenga. So why are people opposed to this? If they 
are going to save $20,000, why are they opposed to i? Or is 
that the question you are asking?
    Mr. McRaith. I would also add, the process is still under 
development. So just yesterday, the consultation process was 
released for a second consultation. So those who are interested 
in its outcome still have another opportunity to provide ideas.
    Mr. Huizenga. So why would they put this in place without 
having this process, that you have cut off the highway before 
you have built the off ramp? There is no off ramp or on ramp to 
have these people participating. You have just said they can no 
longer come in. Mr. Woodall was denied being able to come in to 
the meetings. But don't worry, we are going to get you back in 
once we develop this process. That, to me, just flies in the 
face of the whole idea of transparency. So I am assuming, then, 
that if you will be making sure that he is able to get into 
these meetings. If not, will you assure me and the rest of this 
body that you will be working on making sure he is invited by 
IAIS?
    Mr. McRaith. What I have committed to members of the 
observer community is that we, the Federal Insurance Office, 
need to ensure that stakeholders are able to engage in a 
substantive and meaningful way at the IAIS. The current 
proposal improves upon the prior process, among other things 
because they don't have to pay a fee. But also, as I mentioned 
earlier, Congressman, in the United States we need to give 
opportunities for stakeholders to meet with all of the IAIS 
participants at one time. And we are committed to doing that, 
as well.
    Mr. Huizenga. I still stand by my resolution. But thank 
you, Mr. Chairman, I appreciate the opportunity.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from California, Mr. Sherman, is recognized 
for 5 minutes.
    Mr. Sherman. Thank you. Let me comment that the U.S. system 
for regulating insurance companies did well in the greatest 
stress test I could have imagined, which is 2008. The system 
survived. And even those regulated insurance subsidiaries of 
AIG, a parent company that was not well-run, those entities 
that were under State insurance regulation survived quite well 
and have even returned AIG to something approaching 
profitability.
    I happened to be the lead Democrat on the Policyholder 
Protection Act, which is designed to make sure that 
policyholders and the regulated insurance companies are not 
viewed as cash to be devoured if a related bank or depository 
institution is in trouble. And specifically, would ensure that 
Bank Holding Company Act provisions are extended to thrift 
holding companies to ensure that funds that are dedicated to 
policyholder claims are not used to support a failing bank.
    Mr. Sullivan, what is the Fed doing in its oversight of 
insurance companies that are also--that are thrift holding 
companies to ensure that policyholders are protected and their 
funds are not used as a source to protect the insured 
depository institution?
    Mr. Sullivan. Thank you, Representative Sherman. Our role 
is that of the consolidated supervisor, and we are working in 
conjunction with our colleagues at the NAIC and the individual 
States who have dominion over that particular insurer to make 
sure that our efforts to supervise the entirety of the firm, 
and look at it across the enterprise, look at its risk 
management, its governance and the rest of its structure, while 
complimenting the work that the States are doing from the 
supervision of the legal entities. And in that work, we look at 
the safety and the soundness and the source of strength of the 
entire enterprise and whether or not the parent can support the 
insured depository institution. So we are not--
    Mr. Sherman. So are you moving toward a system in which the 
assets of the insurance corporation, often a subsidiary of a 
holding company, that those assets are available for the 
policyholders and cannot be tapped in order to reduce the cost 
to the FDIC or in other ways--otherwise deal with the problems 
of a troubled depository institution?
    Mr. Sullivan. We are not moving in that direction. I doubt 
Commissioner Consedine or any of his colleagues would allow us 
to get our hands on those assets. So we are looking, as I--
    Mr. Sherman. So you are moving in the direction of not--of 
providing rules so that policyholders could be confident that 
you are not going to get your hands on those assets.
    Mr. Sullivan. That is correct. We are looking at the 
totality of the enterprise.
    Mr. Sherman. Thank you. I have also cosponsored legislation 
designed to make sure that when we look at the capital 
standards of insurance companies that we clarify that we are 
using capital standards measures appropriate to insurance 
companies, not just graft on bank standards.
    How certain are we that when we--that we will continue to 
use insurance standards for evaluating insurance companies? I 
will ask Mr. Sullivan, but also others on the panel to comment.
    Mr. Sullivan. I guess I would say, Representative, is I am 
living proof of that by virtue what the Fed has done in terms 
of bringing me on board and the rest of the insurance talent 
that we continue to add to the Federal Reserve. We continue to 
build our knowledge base and our expertise around supervising 
insurance companies.
    As you may or may not know, I was previously an insurance 
commissioner and a member of the NAIC. And I have nearly 30 
years in this industry. So I think that should be a comforting 
sign to you and to others that the Fed is serious about 
understanding the business of insurance, making sure--I used 
the word earlier--``tailoring'' our approach to how we 
supervise these institutions.
    Mr. Sherman. Does any other panelist have a comment?
    Mr. Consedine. Congressman, I would just add I think we 
have heard already today though that when it comes to the issue 
of giving the Fed the additional flexibility it needs to design 
capital standards that are tailored, truly, to insurance 
company we do need the action of this Congress. And we support 
that.
    Mr. Sherman. Thank you.
    I yield back.
    Chairman Neugebauer. I thank the gentleman. Without 
objection, I would like to submit for the record testimony from 
the American Academy of Actuaries, the National Association of 
Mutual Insurance Companies, the Property Casualty Insurers 
Associations of America, and a study by Robert Shapiro and 
Aparna Mathur that was referred to by one of the other Members.
    Without objection, it is so ordered.
    I would like to thank each member of the panel for being 
here today. I would say that I hope what you heard from both 
sides of the aisle here is, we want transparency. I think the 
American people deserve that transparency, and I think the 
industry deserves that transparency. We want you to be working 
together and representing a team USA, and a unified voice is 
you bringing forth your perspective on that.
    I think one of the things that is a hope also that you 
heard is that we are pretty proud of the regulatory structure 
that was already in place today, and which I think has proven 
to be very resilient. As Commissioner Sherman mentioned, it 
went through, I think, what would be the ultimate stress test 
and did quite well.
    And so we are not ready to give up a lot of ground. Why 
this is important, it is not necessarily--we are not talking 
about the companies and policies, but what we are really 
talking about is the policyholders. American families all 
across this country enjoy some of the best insurance products 
in the world. And they enjoy them at a nice price. Now, some 
people think they may be a little bit overpriced. But what we 
don't want to do is inject regulation where regulation is not 
needed, which ultimately drives up the cost of those products 
or even limits the availability of some of those products 
because of actions that were taken.
    So it is a delicate balance. But I think what you heard 
from everybody is, we are watching and we want to see some 
action. We heard a lot of talk today, but we would like to see 
some action.
    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.
    With that, thank you for coming, and this committee is 
adjourned.

    [Whereupon, at 3:41 p.m., the hearing was adjourned.]
    
                            A P P E N D I X



                           November 18, 2014
                           
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