    [House Hearing, 114 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 FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 25, 2016

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-76

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    DAVID SCHWEIKERT, Arizona
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas
    TOM EMMER, Minnesota

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

                     BLAINE LUETKEMEYER, Missouri, Chairman

    LYNN A. WESTMORELAND, Georgia, Vice  EMANUEL CLEAVER, Missouri, Ranking
        Chairman                             Member
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    SCOTT GARRETT, New Jersey            MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            WM. LACY CLAY, Missouri
    BILL POSEY, Florida                  AL GREEN, Texas
    ROBERT HURT, Virginia                GWEN MOORE, Wisconsin
    STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
    DENNIS A. ROSS, Florida              JOYCE BEATTY, Ohio
    ANDY BARR, Kentucky                  DANIEL T. KILDEE, Michigan
    KEITH J. ROTHFUS, Pennsylvania
    ROGER WILLIAMS, Texas

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 25, 2016............................................     1
    Appendix:
        February 25, 2016............................................    37

                                   WITNESSES
                          Thursday, February 25, 2016

    Cobb, Carolyn, Vice President and Chief Counsel, Reinsurance and
      International Policy, American Council of Life Insurers (ACLI).    10
    Thompson, Gary, President and Chief Executive Officer, Columbia
      Mutual Insurance Company, on behalf of the National Association
      of Mutual Insurance Companies (NAMIC)..........................     5
    Torti, Joseph III, Vice President, Regulatory Affairs, Fairfax
      Financial Holdings Limited, on behalf of the Property Casualty
      Insurers Association of America (PCI)..........................     8
    Zaring, David, Associate Professor, Legal Studies and Business
      Ethics, The Wharton School, University of Pennsylvania.........     6

                                    APPENDIX

    Prepared statements:
        Cobb, Carolyn................................................    38
        Thompson, Gary...............................................    51
        Torti, Joseph III............................................    62
        Zaring, David................................................    67

                  Additional Material Submitted for the Record

    Luetkemeyer, Hon. Blaine:
        Written statement of the American Insurance Association......    79
    Williams, Hon. Roger:
        Written responses to questions for the record submitted to
          Gary Thompson..............................................    81

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

                                  ----------

                          Thursday, February 25, 2016

                 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 2128, Rayburn House Office Building, Hon. Blaine
    Luetkemeyer [chairman of the subcommittee] presiding.
        Members present: Representatives Luetkemeyer, Royce,
    Garrett, Pearce, Posey, Stivers, Ross, Barr, Rothfus, Williams;
    Cleaver, Green, Moore, and Beatty.
        Ex officio present: Representatives Hensarling and Waters.
        Also present: Representative Duffy.
        Chairman Luetkemeyer. The Subcommittee on Housing and
    Insurance will come to order. Without objection, the Chair is
    authorized to declare a recess of the subcommittee at any time.
        Today's hearing is entitled, ``The Impact of International
    Regulatory Standards on the Competitiveness of U.S. Insurers-
    Part II.''
        Before we begin, I would like to thank the witnesses for
    appearing before the subcommittee today. We look forward to
    your testimony. I now recognize myself for 3 minutes to give an
    opening statement.
        This subcommittee has spent a great deal of time focusing
    on international factors affecting our domestic insurance
    markets. Today's hearing provides an opportunity to hear from
    the industry firsthand on implications, both positive and
    negative, stemming from international insurance standards and
    agreements.
        Today's hearing will also focus on draft legislation that
    would create a more formalized role for congressional
    monitoring of these standards and agreements. This legislation
    has been drafted with the input of a wide variety of
    stakeholders, and today's testimony will help to improve the
    bill before it is introduced.
        Legislation discussed today would establish a series of
    reasonable requirements to be met before Treasury's Federal
    Insurance Office (FIO), the Federal Reserve, or any other party
    to these international conversations could consent to the
    adoption of any final insurance standard. Similar standards
    would be set for negotiations on covered agreements, including
    the covered agreement currently being negotiated with the
    European Union.
        The draft also outlines a more robust role for the FSOC
    independent member with insurance expertise, strengthening Team
    USA in its ability to advocate for policies that suit U.S.
    insurance markets and consumers.
        This bill is not intended to bring the international
    process to a grinding halt. Team USA has experienced victories
    at the International Association of Insurance Supervisors
    (IAIS) and has kept this body informed of its intent to
    negotiate the first of what could be many covered agreements.
    We should not underestimate the importance of these
    conversations or the implications that they have on insurers.
    The higher loss absorbency draft rule and lingering questions
    around temporary equivalency for U.S. insurers conducting
    business in the European Union have demonstrated that the
    United States hasn't always ended up with the best deal.
        It is imperative that the United States, that is the
    States, the Executive Branch, and Congress work cooperatively
    to signal to the IAIS, the Financial Stability Board, and
    foreign governments that we will only lend our name to
    standards and agreements that benefit U.S. consumers and allow
    us to maintain a robust insurance marketplace.
        This draft legislation aims to do just that. It will
    provide greater transparency, allow for a stronger Team USA,
    and indicate to foreign bodies the United States will lead and
    not be led.
        I thank our distinguished panel for being here today. We
    look forward to your testimony and your comments about the
    discussion draft.
        The Chair now recognizes the ranking member of the
    subcommittee, the gentleman from Missouri, Mr. Cleaver, for an
    opening statement.
        Mr. Cleaver. Thank you, Mr. Chairman. Chairman Luetkemeyer,
    members of the subcommittee, I would like to begin by thanking
    our witnesses for their appearance here today. Today's hearing,
    ``The Impact of International Regulatory Standards on the
    Competitiveness of U.S. Insurers-Part II,'' is an opportunity
    for an additional look at the insurance standards that are
    being developed on an international level through the U.S.'s
    participation in the International Association of Insurance
    Supervisors and the Financial Stability Board (FSB).
        Following the financial crash of 2008, the passage of the
    Dodd-Frank Act created the Federal Insurance Office (FIO). FIO
    has been tasked with coordinating Federal efforts and
    developing Federal policy on prudential aspects of
    international insurance matters, including representing the
    United States in the IAIS. FIO, along with the National
    Association of Insurance Commissioners (NAIC), and the Federal
    Reserve has been serving as the U.S. representatives to the
    IAIS. It is important to note that no standard agreed to
    internationally is binding on the United States unless adopted
    domestically.
        Our witnesses today will provide the subcommittee with
    their perspective on how the discussions on the international
    level are proceeding. As members of this subcommittee, it is
    important that we remain focused on the work being done
    internationally to ensure transparency and stakeholder input. I
    look forward to the hearing and their insight.
        Thank you, Mr. Chairman. I yield back.
        Chairman Luetkemeyer. I thank the gentleman.
        The Chair now recognizes the gentleman from California, Mr.
    Ross, for 2 minutes for his opening statement.
        Mr. Ross. Thank you, Mr. Chairman, and let me say at the
    outset that I share the stated goals of increasing transparency
    and accountability in international regulatory discussions. I
    think we should also be looking at governance and transparency
    reforms in domestic regulatory decision-making.
        I am concerned, however, that Congress may be exporting the
    State versus Federal turf war into the international arena to
    the detriment of U.S. companies and consumers. We are at a
    watershed moment in international insurance regulation.
        The United States has much to gain by moving forward with a
    covered agreement on reinsurance collateral with the E.U.
    Formal negotiations would give the United States leverage in
    discussions about equivalency under the European Solvency II
    regime. Simply put, without action, U.S. companies lose. They
    are either cut out of the European market or they are forced to
    post billions in additional capital, which is then unavailable
    to invest in the United States or to invest in emerging
    markets.
        Reforming arbitrary and discriminatory State reinsurance
    collateral laws through a covered agreement has been a
    bipartisan goal of this committee since 2010. Representative
    Kanjorski, the architect of the key language that we put into
    Dodd-Frank, on this said that, ``Covered agreements and pre-
    emption were designed to harmonize reinsurance standards across
    national borders.'' That was the goal.
        These covered agreement negotiations, I might add, are
    already subject to substantial congressional oversight,
    including a 90-day layover period, so there is little we need
    to fear in terms of a lack of transparency.
        In conclusion, Mr. Chairman, there is widespread agreement
    on the issues related to domestic capital standards and
    increased transparency in international negotiations. And
    respectfully, if we are going to move legislation, we should
    stick to those issues and ensure that we are not intruding on
    the important covered agreement negotiations already taking
    place.
        Thank you again, Mr. Chairman.
        Chairman Luetkemeyer. The gentleman yields back.
        We will now yield 2 minutes, or whatever time she may
    consume, to the ranking member of the full Financial Services
    Committee, the gentlelady from California, Ms. Waters.
        Ms. Waters. I thank you, Mr. Chairman, and I would like to
    welcome our witnesses. We are here today to discuss the United
    States' participation at international standard-setting
    organizations and our efforts to prevent another global
    financial crisis. I applaud this work, and I look forward to
    continued collaboration on these issues.
        Dodd-Frank included several changes to help us prevent the
    possibility of a future collapse of large, globally active
    insurance companies like AIG. In particular, Dodd-Frank created
    the Financial Stability Oversight Council, known as FSOC, an
    entity that for the first time is responsible for examining
    risks facing our entire financial system.
        The FSOC has authority to designate non-bank financial
    companies after thorough consideration of several factors
    including, but not limited to, insurance companies for enhanced
    supervision. Congress likewise gave regulators the authority to
    require enhanced standards for these non-bank firms accounting
    for the fact that the business model of insurance companies may
    demand a different regulatory response.
        Dodd-Frank also lays out the Federal Government's role in
    coordinating a U.S. response to international issues and
    developing Federal policy on prudential aspects of
    international insurance matters. These authorities were all
    enacted with one goal in mind, to protect financial stability
    and prevent the next financial crisis.
        I believe that our State-based regulatory system certainly
    has its strengths. The California Insurance Department does
    particularly good work and tends to set a high standard for the
    protection of policyholders.
        But I also strongly support the reforms provided by Dodd-
    Frank to fill important gaps in oversight and increase
    collaboration by ensuring that we are looking at the big
    picture, both domestically and internationally. We can help
    ensure long-term financial stability while also strengthening
    consumer protections as we continue to learn more about
    potential risks that insurers can pose to national and global
    financial stability. I look forward to continuing our
    conversation so that we can be sure we do not repeat the
    mistakes of the past.
        So I thank you, Mr. Chairman, and I will yield back the
    balance of my time.
        Chairman Luetkemeyer. The gentlelady yields back. Before we
    get started, I just want to explain what is going on here. We
    anticipated having some votes shortly, but they have been
    postponed now until 3:00, I understand, so we will continue to
    go as far as we can. And as soon as they call votes, we will
    take a recess.
        I understand that they are looking at probably an hour for
    votes. And after the completion of those votes, we will come
    back and continue our hearing.
        So with that, let me welcome the witnesses today: Mr. Gary
    Thompson, president and chief executive officer of Columbia
    Insurance Group, on behalf of the National Association of
    Mutual Insurance Companies; Mr. David Zaring, associate
    professor, Department of Legal Studies and Business Ethics, The
    Wharton School; Mr. Joseph Torti, III, vice president for
    regulatory affairs, Fairfax, Inc., on behalf of the Property
    Casualty Insurance Association of America; and Ms. Carolyn
    Cobb, vice president and chief counsel for reinsurance and
    international policy, the American Council of Life Insurers.
        Each of you will be recognized for 5 minutes to give an
    oral presentation of your written testimony. And without
    objection, your written testimony will be made a part of the
    record. A quick tutorial on the buttons in front of you: green
    means go; yellow means you have a minute left; and red means
    you are out of time.
        Mr. Thompson, my fellow Missourian, living just a few miles
    up the road, in fact, from where I live, thank you very much
    for traveling all the way to D.C. You are recognized now for 5
    minutes.

       STATEMENT OF GARY THOMPSON, PRESIDENT AND CHIEF EXECUTIVE
     OFFICER, COLUMBIA MUTUAL INSURANCE COMPANY, ON BEHALF OF THE
       NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)

        Mr. Thompson. Good afternoon, Chairman Luetkemeyer, Ranking
    Member Cleaver, and members of the subcommittee. Thank you for
    the opportunity to speak to you today.
        As you said, my name is Gary Thompson and I am president
    and chief executive officer of Columbia Mutual Insurance
    Company, a mid-sized regional company headquartered in
    Columbia, Missouri. We are an insurance group which does
    business in 14 States and is licensed to do business in 22
    States. For over 140 years, it has been our mission to build
    enduring relationships with our customers by providing value
    and exceptional service and fulfilling our promises.
        I am also here today in my capacity as a member of the
    board of directors of the National Association of Mutual
    Insurance Companies. NAMIC is the largest property and casualty
    insurance trade association in the country with more than 1,400
    member companies representing 40 percent of the U.S. property
    and casualty insurance in the marketplace.
        Both Columbia and NAMIC are very appreciative of this
    subcommittee's focus on international insurance issues and
    commend Chairman Luetkemeyer's efforts in crafting this
    discussion draft legislation.
        We have serious concerns about recent efforts to create
    international regulatory standards for insurance companies and
    believe Congress should conduct strong oversight in this area
    in order to protect domestic insurance markets, companies, and
    especially policyholders. We need lawmakers to weigh in on the
    debate on the side of defending the existing State-based
    regulatory structure that we know to be time-tested and strong.
        Since the financial crisis, the G20 Financial Stability
    Board and the International Association of Insurance
    Supervisors have become increasingly engaged in regulatory
    standard-setting for insurance companies ostensibly in the
    interest of providing global financial stability and regulatory
    harmonization. The primary example of this is the IAIS work on
    a new global capital standard for internationally active
    insurance groups.
        Today, we have heard no real justification of a need for
    this type of one-size-fits-all standard and are skeptical of
    regulation uniformity for uniformity's sake. We need our
    country's officials who engage in these international
    conversations to speak in defense of the U.S. market, existing
    regulatory structure, insurers, and especially policyholders.
        Columbia is not an internationally active insurer, but our
    company and companies like ours are concerned about forcing
    uniformity across very different regulatory environments with
    very different economic and political goals. The chief concern
    is the eventual importation of foreign regulatory standards for
    all companies which supplant or duplicate existing standards
    that we know to be effective and which have served our consumer
    and insurer needs for more than a century.
        Congress has a critically important role to play in helping
    ensure that the United States is appropriately represented in
    these international discussions. Given the direction of many of
    the conversations at the IAIS, we believe that legislation is
    not only timely and appropriate, but necessary. Any legislation
    must make clear that our existing State-based regulatory system
    is effective and must be defended and preserved.
        We believe the discussion draft legislation represents a
    good starting point. In my written statement, I have provided a
    detailed section-by-section analysis of the many positive
    provisions currently included in the bill. However, I would
    like to highlight what we see as the necessary improvements to
    further strengthen the bill before introduction.
        First, the bill needs to clearly acknowledge that any
    international standard is not self-executing and is entirely
    without legal effect in the United States until implemented
    through a Federal or State legislative or regulatory process.
    Clear language to this effect should be added.
        Given that the outcomes of these international standard-
    setting discussions are not binding, a second addition should
    include language that prevents participating Federal officials
    from agreeing to any standards which would require any
    additional changes to current State or Federal law.
        These international organizations have no legal authority
    and our officials have no business even appearing to obligate
    the United States to any standard that does not conform to laws
    and regulations established here at home.
        Finally, we urge the committee to include covered
    agreements under the guidelines and processes laid out in the
    discussion draft. Covered agreements have unprecedented
    authority that will pre-empt State law and could be used as a
    back channel to alter insurance regulation in this country.
    These agreements are absolutely in need of robust monitoring,
    stakeholder input, and congressional consultation on direction.
        As we move forward, NAMIC stands ready to work with the
    committee to include what we see as necessary improvements to
    the discussion draft. Again, thank you for the opportunity to
    speak here today, and I look forward to answering any questions
    you may have.
        [The prepared statement of Mr. Thompson can be found on
    page 51 of the appendix.]
        Chairman Luetkemeyer. The gentleman yields back.
        With that, Mr. Zaring, you are recognized for 5 minutes.
    You may begin.

     STATEMENT OF DAVID ZARING, ASSOCIATE PROFESSOR, LEGAL STUDIES
        AND BUSINESS ETHICS, THE WHARTON SCHOOL, UNIVERSITY OF
                              PENNSYLVANIA

        Mr. Zaring. Good afternoon, and thank you for having me. I
    am an associate professor of legal studies and business ethics
    at The Wharton School. I study financial regulation and in
    particular international financial regulation, a field of
    growing importance and one that has already transformed the way
    that banks and capital markets are regulated. It is a field of
    increasing importance to insurance as well.
        In my testimony today on international cooperation in
    insurance standards, I would like to focus on three points. The
    first is that international financial regulatory standards
    protect American consumers and American financial stability in
    two ways. International standards create a level playing field
    for financial market participants when they expand their
    businesses abroad and can also prevent disruptive financial
    contagion that starts elsewhere from affecting the American
    marketplace.
        Until recently, international insurance regulation was a
    relatively quiet field, but in the wake of the financial crisis
    that has changed. And we should generally welcome the new
    vibrancy in institutions like the Financial Stability Board and
    the International Association of Insurance Supervisors in
    creating consistent capital standards and supervisory
    approaches for insurance companies, many of whom do business at
    home and abroad.
        Second, it is important to remember that the United States
    has traditionally played a very strong role in formatting and
    formulating standards in matters of international regulatory
    cooperation, a role that would be threatened by legislation
    that ties the hands of its representatives.
        American regulators have substantially increased the degree
    of transparency of the international efforts to develop common
    capital standards for banks. They have also had a very large
    say in the sort of capital standards chosen. And they have set
    the terms of regulatory cooperation by capital markets
    overseers. It could hardly be otherwise given the size and
    strength of the American economy.
        On the other hand, where American regulators have not fully
    engaged in the international process they might find themselves
    in a position where they must later accept standards that have
    been designed without their input, as the Securities and
    Exchange Commission has come perilously close to finding with
    regard to the development of international accounting
    standards.
        It is all but assured that representatives who represent
    everyone engaged with the domestic insurance industry would
    play a critical role in international insurance regulation
    given the size, strength, and importance of the American
    insurance market. But if their ability to negotiate is
    curtailed, or if there are too many voices at the table, then
    their influence will likely also be curtailed and confused as
    well.
        Third, while the importance of a transparent and open
    administrative process is undoubtedly significant, the best
    sort of transparency and democratic accountability is provided
    by legislative authorization to engage in international
    negotiation at the beginning of the process followed by
    domestic implementation through regular administrative
    procedure at the end of it.
        No global terms will be imposed upon American insurers
    until American regulators adopt capital or other rules through
    notice and comment on a State-by-State basis, subject to State
    administrative law or by the Federal Reserve, subject to
    Federal administrative law.
        In the past, American regulators have tailored
    international standards to meet the needs of the American
    market. The Federal Reserve, for example, came up with a two-
    stroke procedure for implementing the second iteration of the
    Basel Capital Accord.
        In my view, it is important to remember that nothing binds
    American consumers or market participants until American
    regulators come home and go through the traditional rulemaking
    process with notice and comments.
        Attempting to add a new set of procedural obligations on
    top of this to the middle of a process that begins with
    congressional authorization and ends with domestic notice-and-
    comment rulemaking, would likely be both burdensome and
    counterproductive.
        In particular, forcing regulators to repeatedly hold notice
    and comment both before and during their international
    negotiations is a bad way to negotiate effectively. And just as
    no business or agency opens every meeting or deliberation to
    any shareholder or stakeholder who wants to show up, it is
    difficult to see why international standard-setters would
    benefit from a process where every meeting was open to
    observation by anyone at any time.
        I look forward to your questions.
        [The prepared statement of Mr. Zaring can be found on page
    67 of the appendix.]
        Chairman Luetkemeyer. Mr. Torti, you are recognized for 5
    minutes.

      STATEMENT OF JOSEPH TORTI, III, VICE PRESIDENT, REGULATORY
     AFFAIRS, FAIRFAX FINANCIAL HOLDINGS LIMITED, ON BEHALF OF THE
        PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

        Mr. Torti. Thank you, Chairman Luetkemeyer, Ranking Member
    Cleaver, and members of the subcommittee. My name is Joe Torti.
    For 13 years, I was the Rhode Island superintendent of banking
    and insurance. I am now the vice president of regulatory
    affairs for Fairfax, testifying on behalf of the Property and
    Casualty Insurers Association of America (PCI).
        Fairfax is a diversified international company that
    includes insurance operations that write everything from Main
    Street business in the United States to Odyssey Re that
    provides reinsurance to risk located in more than 100
    countries. PCI represents nearly 1,000 insurers and reinsurers
    in the United States and around the globe.
        PCI supports the subcommittee's efforts to draft consensus
    legislation clarifying congressional intent on insurance
    regulation and international representation. We appreciate and
    support the chairman's ongoing leadership and improving
    legislative drafts.
        Congress, in the Dodd-Frank Act, affirmed the State-based
    regulation of insurance and the McCarran-Ferguson Act in
    support for the States' historic focus on consumer and
    policyholder protection. But there have been a number of
    emerging gray areas as the new regulatory roles have evolved
    where additional congressional clarity could be very helpful.
        I can tell you from personal experience as both a bank and
    insurance regulator that the two supervisory perspectives can
    be dramatically different, for examples, on issues such as
    capital leveraging and liquidity risk or the more holistic
    issues of macroeconomic stability versus policyholder
    protections.
        Congressional oversight has been very helpful to the
    evolving U.S. process, particularly in encouraging regulatory
    cooperation and transparency. By working towards bipartisan
    legislation, Congress can help ensure that our Team USA
    regulators have the same priorities and objectives and greater
    congressional clarity in carrying out their missions.
        This in turn will improve the likelihood of efficient and
    effective outcomes in international insurance regulatory
    deliberations. PCI therefore appreciates the interest and
    leadership by Chairman Luetkemeyer and the members of the
    subcommittee and full committee towards that end.
        For nearly 150 years, the States have regulated insurance
    and coordinated their activities through the National
    Association of Insurance Commissioners. As a former chief
    regulator from the State of Rhode Island, I know what effective
    regulation requires and how very well my State colleagues have
    done, including during the last financial crisis.
        This success is not just an accident. The U.S. insurance
    regulatory system has been so successful because it focuses
    upon the end user, the consumer. So we strongly support
    congressional emphasis on the importance of putting consumer
    protection first, as does our State-based regulatory system.
        In recognition of this strong performance of State
    regulation, Dodd-Frank reiterated the primary supervisory role
    of the States. However, it also created the Federal Insurance
    Office (FIO) in the Treasury and gave the Federal Reserve Board
    limited regulatory authority over certain categories of
    insurers.
        Unfortunately, without more congressional guidance on their
    objectives and priorities, our U.S. and State representatives
    can have conflicting perspectives and priorities. For example,
    FIO, the Federal Reserve, and State regulators took divergent
    actions on whether to eliminate consumer group and stakeholder
    involvement in IAIS working groups. Both transparency and
    accountability have since suffered. It is important that the
    United States be at the table, but it is equally important that
    our representatives be on the same page.
        Accordingly, we support congressional clarity to encourage
    greater collaboration and consensus among regulators and to
    reverse the trend towards closing doors to consumer groups and
    other public stakeholders. PCI particularly supports a united
    effort in the negotiation of international covered agreements.
        The European Union's new regulatory system that they are
    beginning to implement, Solvency II, requires discriminatory
    regulation against insurers and reinsurers from third countries
    unless the third country is deemed to be equivalent, a highly
    prescriptive process.
        We are pleased that the Treasury and USTR have indicated
    that they will push for recognition of U.S. regulation by the
    E.U. in connection with their discussions with the E.U and do
    not intend to exceed their negotiating authority with respect
    to agreeing to domestic regulatory changes. Mutual recognition
    is a critical priority for Fairfax to avoid discrimination. We
    appreciate the congressional encouragement towards that goal.
        In conclusion, the international insurance regulatory world
    has evolved in ways that may not reflect congressional intent
    to support the strength and competitiveness of the U.S.
    insurance market and its consumer-focused State-based
    regulatory system.
        PCI commends this subcommittee for your efforts to date and
    urges committee members to work together towards bipartisan
    consensus on the Luetkemeyer draft and similar efforts to
    clarify congressional intent and improve international
    insurance regulatory deliberations and outcomes.
        I look forward to your questions.
        [The prepared statement of Mr. Torti can be found on page
    62 of the appendix.]
        Chairman Luetkemeyer. Thank you, Mr. Torti.
        And Ms. Cobb, you are recognized for 5 minutes.

     STATEMENT OF CAROLYN COBB, VICE PRESIDENT AND CHIEF COUNSEL,
    REINSURANCE AND INTERNATIONAL POLICY, AMERICAN COUNCIL OF LIFE
                            INSURERS (ACLI)

        Ms. Cobb. Thank you, Mr. Chairman. Chairman Luetkemeyer,
    Ranking Member Cleaver, and members of the subcommittee, my
    name is Carolyn Cobb. I am vice president and chief counsel of
    reinsurance and international policy at the American Council of
    Life Insurers. I am pleased to present this statement on its
    behalf.
        Life insurers are essential to helping families achieve
    retirement security. Guaranteed lifetime income solutions
    provided by life insurers are the building blocks of secure
    retirement. Life insurers investments are also a powerful
    source of long-term capital and economic growth.
        That is why the development of international capital
    standards by the Federal Reserve Board and the International
    Association of Insurance Supervisors could have a significant
    impact. These standards must be appropriate for insurers, and
    they must be consistent with the long-term horizon of life
    insurance products that provide guarantees lasting many
    decades.
        This committee and the entire Congress affirmed this
    principle by unanimously passing the Insurance Capital
    Standards Clarification Act of 2014. ACLI thanks the chairman,
    the ranking member, and this committee for your strong
    leadership in support of that legislation. It gave the Federal
    Reserve Board flexibility to tailor an insurance capital
    standard to the insurance business model.
        ACLI commends the Fed for its plan to conduct formal
    rulemaking with notice and public comment and for its many
    public statements, including before this committee, that it
    intends to exercise the discretion authorized by Congress to
    tailor capital standards for insurance companies.
        The Board's domestic process, however, cannot be rushed or
    confused by the development of international capital standards.
    The United States should conclude its process before agreeing
    to any international standards. This sequencing is critically
    important. It will equip Team USA with a strong unified
    position in any IAIS or FSB discussions and so will be more
    likely to have the best outcome. We want the Fed's process to
    inform the IAIS and not the other way around.
        U.S. Federal agency leadership by Treasury and the Fed, in
    strong partnership with our State insurance regulators, is more
    important than ever before. The full involvement of Treasury
    and the Board in FSB and IAIS discussions and decisions is
    essential to influencing the international process and to
    ensuring those standards reflect the unique strengths of the
    U.S. system for insurance regulation. Any restriction, even
    inadvertent, on the ability of Team USA to participate in
    international standard-setting organizations would in no way
    protect U.S. insurers or U.S. insurance consumers.
        We are also concerned that the IAIS is currently treating
    certain types of annuities as systemically risky. They are
    called variable annuities. They provide guaranteed income in
    retirement. These products have been approved and regulated by
    our State supervisors. They have provided retirement income to
    U.S. consumers for over 60 years. They must not be placed at a
    competitive disadvantage by international capital standards.
        The principle should be that all insurance products,
    whatever their country of origin, if they have similar risk
    characteristics, they should be treated the same. We appreciate
    Team USA's continued focused attention to this concern.
        ACLI commends Chairman Luetkemeyer and other members of the
    committee for their development of the discussion draft. It
    reflects the principles of transparency, accountability, and
    due process that ACLI supports. It improves congressional
    oversight over international standard-setting initiatives and
    expresses clear objectives for them, maintaining the ability of
    the U.S. insurance industry to offer the products on which U.S.
    consumers rely. These important goals are shared by ACLI.
        ACLI would suggest some refinements to the discussion draft
    for the committee's consideration. They will be consistent with
    the view that any restriction on the ability of Team USA to
    participate fully at international standard-setting
    organizations would be harmful to U.S. interests.
        ACLI thanks the committee for its leadership on this
    legislation and looks forward to working with it on suggested
    changes.
        Thank you, Mr. Chairman, for holding the hearing. I
    appreciate the opportunity to testify and look forward to
    questions.
        [The prepared statement of Ms. Cobb can be found on page 38
    of the appendix.]
        Chairman Luetkemeyer. Thank you, Ms. Cobb. You all did a
    great job. Everybody came in under time. Thank you very much.
        Let me begin the questioning this afternoon with probably
    an opening comment in that there is a lot of interest and a lot
    of concern with regards to our ability to negotiate and what is
    being negotiated at the international level. And this is the
    reason why we are here this afternoon. That is the reason for
    the bill.
        I have had multiple Members come to me with concerns and so
    we have tried to draft something that addresses a lot of their
    concerns as well as listen to the concerns of the industry and
    continue to work with you as this is a draft, and we want to
    continue to listen to your concerns.
        So let me begin first by asking a question. All of you seem
    to have answered it, but I want to put you on record because I
    think it is important. Do you believe we need a FIO or to have
    someone representing the United States at these international
    discussions?
        Mr. Thompson?
        Mr. Thompson. Yes, we do.
        Chairman Luetkemeyer. Mr. Zaring?
        Mr. Zaring. Yes, we do.
        Chairman Luetkemeyer. Mr. Torti?
        Mr. Torti. Yes, we do, with the support of State
    regulators.
        Chairman Luetkemeyer. All right.
        Ms. Cobb?
        Ms. Cobb. Yes, we do.
        Chairman Luetkemeyer. You mentioned it multiple times in
    your discussions, but it is a formality, and I need to get that
    on record.
        We also have an independent member that we also address in
    our bill that is a member of FSOC, which really doesn't have a
    lot of input but we believe needs to be a participant in the
    process at IAIS discussions. Do you believe that it is
    important that that member also be at the table?
        Mr. Thompson?
        Mr. Thompson. Yes, sir, it is absolutely critical, as that
    individual is really the only individual with really deep
    insurance knowledge to lend itself to those discussions, so
    absolutely yes.
        Chairman Luetkemeyer. Thank you.
        Mr. Zaring?
        Mr. Zaring. I think that voting role can be filled by the
    Federal Insurance Office and having too many American
    representatives at--
        Chairman Luetkemeyer. Yes. Our bill doesn't give him a
    voting role, really. It just gives him a participant role where
    he can be at the meetings, which he cannot be in right now.
        Mr. Zaring. No, no, I mean, his voting role on FSOC, but
    maybe I should be clear. I think the Federal Insurance Office
    representative who Chairs the head of the office as a whole can
    do a sufficient job in representing American interests in a
    coordinated way without the input of the member, which I am
    sure he gets anyway.
        Chairman Luetkemeyer. Mr. Torti?
        Mr. Torti. I believe the independent expert plays a
    critical role and should have a participatory participation in
    the process.
        Chairman Luetkemeyer. Okay.
        Ms. Cobb?
        Ms. Cobb. The independent member has made significant
    contributions to discussions at various levels. We have not
    concluded our review of that portion of the bill.
        Chairman Luetkemeyer. Okay. Thank you. Mr. Thompson, you
    had a couple of different comments which we have a clause or a
    section of this that discusses covered agreements. We also have
    a section in your written testimony where you talk about
    concerns about the cost-benefit analysis, and I think we also
    have that covered in our bill.
        Do you not believe that we covered it adequately in our
    bill? Do you want to expand it or what are your concerns? Or
    did you not see those portions that I think we had covered in
    there?
        Mr. Thompson. Yes. As we said, Mr. Chairman, we think the
    bill goes a long ways, and we did suggest a couple of what we
    view as improvements of that and particular language around
    this issue of covered agreements. We absolutely think that
    there is a place for covered agreements. Don't misunderstand.
    And that U.S. negotiators should be at the table discussing
    those.
        But we also believe that should be done in a very
    transparent process because our concern is that they do have
    that unprecedented power to exempt State law. And without the
    proper oversight and regulatory process, we are concerned that
    those such agreements could be in conflict with State laws.
        Chairman Luetkemeyer. One of the things that we want to try
    and do, and we have been discussing and it hasn't completely
    gotten itself into the draft yet, it was a way for Congress to
    be able to approve those commitments that are made by the FIO
    Director. I think it is important that there is somebody on
    this side of the pond to be able to give a yes or no or thumbs
    up on some of this stuff without--we don't want to gum up the
    system.
        But by the same token, I think part of our job here in
    Congress is not just to legislate but to provide oversight,
    because all four of you asked for us to do that in your
    testimony today. And so I think it is something that we need to
    do is to be able to be--and in your situation, Mr. Thompson,
    when you talk about the covered agreements also sort of pre-
    empting State law, I think we need to have somebody here on
    this side of the pond to be able to say, hey, we believe this
    is a good deal or a bad deal and be able to say thumbs up or
    thumbs down.
        So I guess my question is, do you believe that Congress
    needs to be involved in sort of approving the agenda or
    whatever comes out of the negotiations with the FIO Director?
        Mr. Thompson. Yes, sir, we do. And that is the suggestion
    we spelled out in my written testimony for the committee to
    consider. It is a process by which that would do it. Not to
    delay the process, but to simply do as you suggest, Mr.
    Chairman, to bring those out so that there is an opportunity to
    review those to make sure there is not conflict with State law.
    And if there is, a process then that can be resolved to address
    those conflicts.
        Chairman Luetkemeyer. Mr. Zaring, do you agree with that? I
    am running out of time. Please, yes or no?
        Mr. Zaring. I don't think I agree with that as things stand
    right now, though I know the process is evolving.
        Chairman Luetkemeyer. Okay.
        Mr. Torti, do you think Congress should be able to approve
    or disapprove those actions to make sure that they are not in
    conflict with what goes on over here?
        Mr. Torti. Yes, I do.
        Chairman Luetkemeyer. Ms. Cobb?
        Ms. Cobb. We need a covered agreement with the European
    Union and the current law gives Congress the power to reject
    it.
        Chairman Luetkemeyer. Okay. Thank you very much. My time
    has expired.
        I yield to the ranking member of the subcommittee, Mr.
    Cleaver from Missouri, for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman. Thank you for your
    questions. When you look at all of the multiple bills that have
    been submitted here in the House, and I am sure you have read
    all of them instead of probably watching movies but how are we
    going to strike a balance in terms of transparency and
    accountability?
        Mr. Torti, you know, we don't get what we really want in
    negotiations. We get what we negotiate. And so I am wondering,
    number one, should our negotiators have flexibility as they are
    sitting down? And number two, it is just the same question
    about chronic accountability. How do we strike a balance
    between encouraging transparency and accountability and then
    overly narrowing our negotiators' ability?
        Mr. Torti. I think we can strike that balance. It is very
    important that we be granted, that the United States be granted
    equivalency, that the U.S. system be seen as equivalent to
    Solvency II in order for us as the insurance industry to have a
    competitive environment and to be able to compete with European
    Union companies.
        Closing working group meetings where the stakeholders, the
    insurance industry and consumers are not allowed to witness the
    deliberations could lead to a conclusion or a standard that
    perhaps is not appropriate or not the best standard for
    protection of consumers or in the best interests of a
    competitive marketplace.
        So I think you can strike that balance. There is a process
    here where your congressional hearings are all open to the
    public and very transparent and it just doesn't work that way
    at the IAIS. And it is very opaque and as stakeholders we need
    to be at the table and be able to witness what type of
    deliberations are going on and what type of decisions are being
    made. And I think our input would add greatly to the strength
    of the outcome of those deliberations.
        Mr. Cleaver. I have a friend who is a Federal judge, and he
    says the worst thing that has ever happened to the judicial
    process in this country was bringing television cameras into
    the courtroom, that you get a production instead of a trial. I
    am for the transparency, but I am just struggling with, how do
    you ensure transparency without inhibiting the negotiations?
        Yes, sir, Mr. Thompson?
        Mr. Thompson. Mr. Cleaver, if I may add to Mr. Torti's
    comments to respond to that, you said at the beginning that
    oftentimes in negotiations neither side gets exactly what they
    wanted when they get there, and I completely agree with that.
    As a business man I have entered into numerous negotiations and
    walked out very much the same way.
        Mr. Cleaver. Don't run for Congress.
        [laughter]
        Mr. Thompson. That is why we think this draft legislation
    is very important because it sets forth those guidelines to
    Team USA, the Fed and FIO particularly, so that they know what
    can be negotiated and frankly what cannot be negotiated. So it
    will allow them to focus on those items or areas of negotiation
    which they should be allowed to negotiate with.
        But yet this committee in this draft legislation sets
    boundaries or guidelines around what is off the table, and we
    think that is a very helpful process to the negotiation
    process.
        Mr. Cleaver. Ms. Cobb?
        Ms. Cobb. A covered agreement, which I think is what you
    are asking about, is essential to protect the competitiveness
    of U.S. insurers. And in my view, and I have read that statute
    many times. I don't believe that it can be used to import
    international standards. So FIO and USTR have given you a
    fairly specific list of things that they want to negotiate for
    the benefit of U.S. insurers.
        This is our first try at a covered agreement. It is an
    essential tool for the U.S. insurers to ask their Government to
    use to reduce conflict among regulators in different countries.
    So I think given the notice that you have had, given that you
    get to say no thank you, and given how much the industry needs
    this covered agreement, my view is let us see how it works.
        Mr. Cleaver. I yield back, Mr. Chairman.
        Chairman Luetkemeyer. The gentleman's time has expired.
        With that, we will go to the gentleman from California, the
    chairman of the House Foreign Affairs Committee, Mr. Royce, for
    5 minutes.
        Mr. Royce. Thank you again, Mr. Chairman. Mr. Torti, I have
    some questions for you as a reformed insurance commissioner and
    much to my chagrin, and I assume yours as well, the NAIC hasn't
    prioritized collateral reform. And that is what I wanted to
    talk to you about because in 2011, the NAIC certified the
    reinsurer provisions. They are still not an accreditation
    standard. A long time has passed and a third of States haven't
    modernized their laws, including major States like Texas and
    Illinois.
        Moreover, States who have modernized their reinsurance laws
    have not done so in a uniform fashion, unfortunately. So Mr.
    Torti, in November of 2014 you told NAIC's Reinsurance
    Taskforce that you believed that uniformity is an important
    consideration and that this should be taken to the
    accreditation committee for further discussion.
        But then NAIC testified to us last September that it was
    going to in November start the conversation about accreditation
    for credit for reinsurance--``That is a hammer we have.'' So
    with the model passed in 2011, seasoned 3 years, then referred
    to by you as an important consideration in 2014, shouldn't the
    accreditation conversation have been finished rather than
    beginning in 2015? And why didn't the NAIC listen to you and go
    forward and prioritize this?
        Mr. Torti. Thank you for that question, Congressman. I just
    want to clarify I no longer represent the NAIC. I cannot speak
    for the NAIC at--
        Mr. Royce. But you can speak as a former regulator. I am
    just trying to get to a point.
        Mr. Torti. I can explain the accreditation process and I
    can give you just a very brief description of why, in 2011, it
    wasn't immediately ratified or considered to be an
    accreditation standard. Generally, the way the accreditation
    program works is that if a State implements a more stringent
    requirement than the accreditation requirement, it is in
    compliance with the accreditation program.
        But prior to the implementation of the new credit for
    reinsurance standard 100 percent collateral was the standard
    which was considered to be a higher standard than the--
        Mr. Royce. Okay. Let me ask you this, then. Given NAIC's
    inability to act in the 6 years since Congress made this a
    priority, I assume you now support Treasury negotiating a
    covered agreement on collateral and using this as leverage in
    the equivalence discussion?
        Mr. Torti. I do support equivalency and mutual recognition
    being the primary concern in the covered agreement discussions.
    It is absolutely necessary as an industry that we attain
    equivalency so that we are not disadvantaged--
        Mr. Royce. Right. But do you--
        Mr. Torti. --when operating--
        Mr. Royce. Do you support Treasury negotiating that covered
    agreement?
        Mr. Torti. I do.
        Mr. Royce. Okay.
        Now, I would like to go to Ms. Carolyn Cobb, vice president
    and chief counsel, reinsurance and international policies. Ms.
    Cobb, the purpose of this hearing is to examine whether
    international regulatory standards might be harmful to U.S.
    insurers. I would like to clarify that I do not consider the
    new covered agreement negotiations to be an imposition of an
    international regulatory standard but rather a bilateral
    discussion about removing barriers or potential barriers on
    both sides of the Atlantic and an acceptance of each other's
    domestic supervision.
        Indeed, my understanding is that the U.S. insurance
    industry broadly favors pursuing the agreement because it is
    aimed at resolving the equivalence issue under Solvency II to
    the benefit of U.S. insurers operating in the E.U. Is that a
    fair statement in your opinion, and does ACLI support the
    covered agreement negotiations?
        Ms. Cobb. Yes, it is a fair statement. We support the
    negotiation of a covered agreement. Our board asked that State
    insurance regulators be included in those discussions, of
    course, as our prudential supervisors.
        Mr. Royce. I thank you.
        Mr. Chairman, I yield back.
        Chairman Luetkemeyer. The gentleman yields back.
        The gentleman from Texas, Mr. Green, is recognized for 5
    minutes.
        Mr. Green. I will reserve and be heard later.
        Chairman Luetkemeyer. Okay.
        We will go to Ms. Moore, from Wisconsin. She is recognized
    for 5 minutes.
        Ms. Moore. Thank you, Mr. Chairman, and thank you, Mr.
    Ranking Member. I also want to thank the witnesses for coming
    here this afternoon. Let me start out with you, Mr. Thompson. I
    was looking at your testimony from the Property Casualty
    Insurers and just need some clarification.
        You say that when we did the Dodd-Frank Act, we abolished
    the Office of Thrift Supervision, which was kind of a culprit
    in dropping the ball in terms of their regulatory authority and
    transferring its authorities over the thrifts with insurance
    affiliates to the Federal Reserve and then created the office
    of FIO.
        You go on to say that the State supervision is really good
    in that there ought to be coordination, but I guess what
    confuses me is that you speak about insurers not wanting any
    Federal regulatory framework, but it seems to me, if I am
    understanding your testimony, you almost say that given the
    three different approaches that you have from all of these
    supervisors, it is almost compelling us to move in that
    direction. I wanted you to sort of clarify what you were saying
    in your testimony.
        Mr. Thompson. Congresswoman Moore, I apologize. You have
    referenced the Property Casualty Insurers of America, and I am
    not here representing them, so I want to--
        Ms. Moore. Oh, okay.
        Mr. Thompson. I am representing the National Association of
    Mutual Insurance Companies, so I want to make sure I am
    responding to your question appropriately.
        Ms. Moore. Okay.
        Mr. Thompson. And it is not intended for Mr. Torti? I'm
    sorry.
        Ms. Moore. Oh, I'm sorry. Mr. Torti is whom I need to
    respond.
        Mr. Thompson. I am certainly happy to speak. I am certainly
    happy to speak to State--
        Ms. Moore. Okay. Mr. Torti, can you--I am so sorry.
        Mr. Torti. Would you mind just repeating the last part of
    that? I didn't catch it.
        Ms. Moore. Basically, you observed correctly that Dodd-
    Frank sort of shifted regulatory authority from the Office of
    Thrift Supervision, which we eliminated and gave part of it to
    the Federal Reserve and the other to the FIO. So it seems there
    is some sort of gap. But you still say that the State
    regulatory framework is the best one and that there is sort of
    a resistance for an overarching Federal regulation.
        I guess I don't want to falsely conclude from reading this
    part of your testimony that you just sort of favor some sort of
    Federal insurance regulator.
        Mr. Torti. No, that is not the case. The intent of that
    statement was to make clear that the reference to the OTS and
    moving it over to the Federal Reserve, the part of AIG that did
    fail, the financial products division of AIG that did fail was
    an OTS-regulated part of that entity.
        The insurance sector did very well during the financial
    crisis and the State regulatory system performed very well
    during the crisis, and that was the point of that section. It
    was not to say that there is a need for Federal regulation in
    any way.
        Ms. Moore. Okay. Well, thank you very much for that.
        I guess I do want to ask Mr. Zaring, Professor Zaring a
    question about him signing on to the amicus brief in support of
    FSOC's final designation on MetLife. I guess I would like for
    you to give us a response. The critics will say that the
    process for designations and re-designations lacks clarity and
    transparency of insurance companies.
        Mr. Zaring. Yes. I support the power of the FSOC to make
    the kinds of designation that it did in the case of MetLife.
    And I think it is a bad idea to impose too many fine-grained
    administrative finding requirements on the council before it
    makes these designations, which are prudential in nature,
    involve macroeconomic forecasts that are difficult to reduce to
    costs and benefits and numbers.
        And determining, say, a cost-benefit analysis or forcing
    the council to do something like that before engaging in a
    designation, I think just ties the council's hands and creates
    more risks for financial stability and designations that should
    have been made that weren't and fewer.
        Ms. Moore. My time has expired. Thank you.
        Chairman Luetkemeyer. The gentlelady's time is up.
        With that, we go to the gentleman from New Mexico, Mr.
    Pearce, for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman. I appreciate each of
    you being here, and I would like to try to get a close view of
    just, say, one instance where regulation might disadvantage us,
    then take that up to the big view of looking back at the
    international standards and choices that might be made there
    and then come back to see what the effect might be on our
    consumers? And we are going to do that in 5 minutes, so okay.
        [laughter]
        So Ms. Cobb, I am on page six of your testimony where you
    talk about the short-term, yes, this is comments, okay, where
    you talk about the short-term view of assets by some of the
    regulators and the long-term nature of your products and then
    their value as cash equivalents or whatever the capital
    standards might be. Is that a fair assessment of your position?
        Ms. Cobb. Yes, sir.
        Mr. Pearce. Okay. So do you foresee anything that would
    come out of the international negotiations which would
    disadvantage your products? In other words, could the
    international discussion affect your ability to offer those
    products safely and in the fashion you have in the past?
        Ms. Cobb. With the caveat that the standards that are being
    developed internationally are not self-executing, right, they
    would have to be--
        Mr. Pearce. I understand. But let us say that they got
    executed.
        Ms. Cobb. Okay. So let us say they got executed. The
    principal--there are so many objections to the current version
    of it that I sort of don't know where to start, but one thing I
    want to call to your attention is that the current framework
    disadvantages variable annuities, as I said. And it has many
    other, I would say distortions, that need to be corrected.
        Mr. Pearce. So if I was reading your testimony correctly,
    that U.S. regulators have already described variable annuities
    as being subpar products. More or less, they don't favor those.
    Is that a correct interpretation of what you said?
        Ms. Cobb. U.S. regulators have approved variable annuity
    products. The international standard-setters believe they are
    systemically risky.
        Mr. Pearce. Okay. So there we are at the rub. So we are
    simply saying from here you all are contending--Mr. Zaring
    might take a different point of view--but basically the
    industry is saying, wait. They could do things over there and
    keep in mind that they are, the Europeans are implementing for
    countries like Estonia, like Latvia, Bulgaria, do they have
    highly developed life insurance markets in those low-income
    States?
        Ms. Cobb. Not to my knowledge, Congressman.
        Mr. Pearce. Yes. So we have a completely different market
    here. And Mr. Zaring, with respect, you are saying that we
    should subjugate our market, which is highly developed. We have
    a lot of disposable income. We should not be bailed out. We
    shouldn't resist those efforts. We ought to just be there and
    then the fact that we are there almost implicates us to enforce
    those standards or we are bad faith negotiators. So how do we
    resolve that, Mr. Zaring? I see you want to speak. Go ahead.
        Mr. Zaring. I would just say that what these international
    negotiations are supposed to result in is a modus vivendi
    between the European Union which has small undeveloped
    insurance markets but also markets served by Allianz and
    Generale and enormous global insurance companies and the way
    that American insurance companies do business and are
    scrutinized by regulators.
        And the goal of things like the covered agreement and the
    international capital negotiations in general are to come up
    with a way that is acceptable for American regulators and
    regulators elsewhere in the world that let American insurance
    companies do business there and do business at home in a way
    that is consistent, that doesn't result in lots of regulatory
    differences between countries.
        Mr. Pearce. So I--
        Mr. Zaring. And I think that the--
        Mr. Pearce. --get the drift of what you are saying. So what
    would cause me as a voter on the bill not to be concerned that
    we are going to have standards implemented which cause
    disadvantage to our industry and the ability of people to make
    a living and to ensure the future of the life, things which are
    not greatly concerned about when the income level reaches a low
    enough level like it does in some of the countries around the
    world? Why should I not be concerned about that?
        Mr. Zaring. I would just say that first, we have done well
    in these sorts of negotiations in the past. And second, that
    anything we come up with has to go through notice and comment
    here, and that is the saving grace for domestic stakeholders
    who find that the international process has failed them.
        Mr. Pearce. With respect, as I close up and I appreciate
    that, I don't share the opinion that we have done that well. I
    would look at the recent Iranian negotiation, and I think we
    came out total losers on that. We could go back a generation to
    the South Korea negotiations. All of these are on nuclear
    weapons and we absolutely made North Korea--we made it possible
    for North Korea to be a nuclear power based on our
    negotiations. So I myself don't feel a sense of comfort.
        I yield back, Mr. Chairman. Thank you.
        Chairman Luetkemeyer. The gentleman's time has expired.
        We go to the gentleman from Texas, Mr. Green.
        Mr. Green. Yes. Thank you, Mr. Chairman.
        Chairman Luetkemeyer. Thank you.
        Mr. Green. And I thank the witnesses for appearing as well.
    In this area of enhancing the oversight ability of Congress, is
    there something that is typically expected when we are
    negotiating these international agreements in which Congress
    would be involved?
        Yes, sir?
        Mr. Zaring. In my experience, regulators benefit most when
    they have authorization from Congress. And in that sense,
    congressional involvement is essential at the beginning of the
    process. But while the negotiations are ongoing it seems to me
    that passing legislation that then requires burdensome
    administrative procedural requirements doesn't benefit our
    perspective in coming up with the best deal we can in an
    organized coordinated way by regulators who are charged with
    consulting with stakeholders and interested parties, like the
    clients of the other members of the organizations to which the
    other witnesses belong.
        Mr. Green. Yes, sir?
        Mr. Thompson. Congressman, if I could just respond to that,
    I guess the question we are struggling with is that FIO and the
    Fed are supposed to be representing the U.S. regulatory system
    at these international discussions, but they are supposed to be
    representing the U.S. regulatory system, U.S. policyholders,
    and U.S. companies. And without a consensus view or some type
    of due process such as what is put forth in this draft
    legislation, how can that important representation be achieved?
        That is why we think that this draft discussion is a very
    important piece of consideration for the committee.
        Mr. Green. Yes, sir?
        Mr. Torti. If I may? Thank you, Congressman. The point is
    for Congress to set out objectives and goals for regulators so
    that we can have a unified approach in these negotiations, and
    that will strengthen the U.S. position. The point is not to in
    any way tie the hands or put a layer of process that is
    unworkable on top of what we currently have through the Dodd-
    Frank Act. It is to end up with a unified approach and a
    strengthened position by the U.S. negotiators in these
    deliberations.
        Mr. Green. Under FIO and Dodd-Frank, it appears that the
    negotiator, which would be the Director of FIO, is to consult
    with the State insurance regulators, is to coordinate Federal
    involvement and policymaking related to these matters. So we
    have a means by which we can do this under Dodd-Frank, but we
    are now going to add some additional requirements. Is that the
    way you see it?
        Yes, sir?
        Mr. Zaring. That is precisely the way I see it. FIO has
    been given the authority to negotiate and the requirement to
    consult and that seems to me to be a good thing and the right
    way to set up the priorities for the head of the organization.
        Mr. Green. Yes, sir. And in giving your response, would you
    kindly address the question of, do you ever get to a point
    where you have too many people trying to do one thing, which
    seems to be what we have already given as an assignment, but
    now we seem to want to have additional input after having given
    the assignment. Yes?
        Mr. Thompson. You are absolutely right. You could have too
    many people at the table. And certainly, we would agree that
    the Director of the Federal Insurance Office, as well as the
    Fed, should be representing U.S. interests. What we are
    suggesting is representing what? Under what authority and
    guidelines are they negotiating on behalf of the U.S. insurance
    industry and the U.S. Government?
        What this draft legislation would do would be simply to
    provide those guidelines, that framework which sets the
    boundaries on which they can and cannot negotiate. That is all
    we are asking, and that is why we are supportive of this draft
    discussion. It is not to get involved in the way but it is
    simply to set the guidelines so that we are all clear on what
    is negotiable and what is not negotiable.
        Mr. Green. Thank you, Mr. Chairman. I yield back.
        Chairman Luetkemeyer. The gentleman yields back.
        Mr. Posey, the gentleman from Florida, is recognized for 5
    minutes.
        Mr. Posey. Thank you, Mr. Chairman, and thank you for
    holding this hearing. I also thank the witnesses for your
    input. It is very informative.
        To the chagrin of some, I guess, I don't work for the
    United Nations, I don't work for the E.U., I don't work for any
    other government except for the United States of America, and I
    don't think that my constituents should be governed or
    regulated by any other governments either.
        It seems like with every international agreement we make of
    any kind, we are left holding the bag. And oftentimes, as I
    think Congressman Pearce was alluding to in his discussion,
    there are predetermined outcomes already before we even start
    negotiating before or after the document is signed that are not
    beneficial to us.
        We deal with other governments where it is considered
    ethical to lie if you can harm America. We are supposedly under
    the impression that you are not supposed to lie to anybody for
    any reason. So, I think that this would be another case where
    we will get the short end of the stick.
        Mr. Torti, the United States has a very long-held and
    proven tradition of State-based regulation. It has worked for
    150 years. And you have a distinguished career of public
    service as Rhode Island's Banking and Insurance Commissioner.
    We are all aware of that. And you were recognized as a national
    leader on insurance regulation, so I might ask you if you can
    explain to members of the committee how the State system of
    insurance has evolved? How it has adapted to remain effective
    over time and comment on the steps that have been taken to
    address the concerns that resulted from the financial crisis?
        Mr. Torti. Thank you, Congressman, and I will try to the
    best of my ability to do that. It would take a lot longer than
    the few minutes we have left, but I will concentrate on the one
    area that I think is important here. But I will clarify again
    that I no longer represent the regulators or the National
    Assessment of Insurance Commissioners. I am trying to--
        Mr. Posey. Yes, you are running out of time. Get to
    answering the question--
        Mr. Torti. Okay. I am trying to describe a process and I
    will. We have significantly strengthened as regulators, State
    regulators have significantly strengthened group solvency
    requirements. We do still have a legal entity-type of a
    regulatory process, however, there are all kinds of new holding
    companies' requirements in place.
        There is a Form F it is called in the Holding Company
    Statute. It is the model statute. That is required for
    accreditation. That requires an enterprise risk management
    report be filed with the regulator.
        There is what is called an Own Risk and Solvency Assessment
    (ORSA), that asks the industry participants to disclose all of
    the risks that they are subject to enterprise-wide and not just
    legal entity.
        There are supervisory colleges that we hold for
    internationally active insurance groups and other insurance
    groups where all of the regulators from the various countries
    that the companies are doing business in get together to
    discuss legal entity and group-wide risks that are being faced
    by those companies.
        So there is much in place now to fill the perceived void
    that may have been out there prior that we did not look outside
    the legal entity to regulate insurance.
        That is not the case. There has been a lot done over the
    last few years and even prior to that we had group solvency
    issues working groups, and we had groups to modernize insurance
    regulation that were looking at group issues. There is also a
    group capital calculation--
        Mr. Posey. Let me just interrupt a minute because we are--
        Mr. Torti. Sure.
        Mr. Posey. --about to run out of time. In Florida, our
    Insurance Commissioner, Kevin McCarty, has a long, strong
    history of watching out for the consumer first and foremost. He
    doesn't care if a State Senator gets in the way. He will run
    over him. He doesn't care if a State Representative doesn't
    like what he is doing. He will jam horns with the Governor if
    necessary.
        He does what he thinks is in the best interests of Florida
    consumers period, end of subject. I assume you and other
    Commissioners in other States do the same. My concern is that a
    bunch of foreign agreement makers won't share that same loyalty
    to our consumers. Would you comment, either of you?
        Mr. Torti. I would be happy to. Yes, as an insurance
    commissioner I did have a loyalty to those consumers. That was
    my charge. That is what I did and I agree with you. It is
    possible that the interests of our policyholders, our consumers
    here in the United States won't be appropriately recognized in
    certain international negotiations or standard-setting
    procedures, I should say.
        Thank you.
        Mr. Posey. Thank you, Mr. Chairman.
        Chairman Luetkemeyer. The gentleman's time has expired.
        With that, we go to the gentlelady from California, the
    ranking member of the full Financial Services Committee, Ms.
    Waters, for 5 minutes.
        Ms. Waters. Thank you very much, Mr. Chairman. I would like
    to direct a couple of questions to Professor Zaring. We all
    remember the damage caused by the near collapse of insurance
    giant AIG. We all remember that for many reasons, regulators
    did not catch the riskiness of their activities. And of course,
    we all remember that many of the provisions in Dodd-Frank were
    written with this very catastrophe in mind.
        Now, we have draft Republican legislation before us that
    would force U.S. negotiators to forget all of that. The draft
    fails to list financial stability as a negotiating objective of
    the United States in setting international insurance standards.
    In fact, the draft specifically calls for negotiators to seek
    to achieve standards that reflect the State-based U.S. solvency
    regime. Do these limitations set us up to miss the next AIG?
        And further, it seems that every day we hear a new story
    about the potential impacts of global headwinds on the U.S.
    economy. Market concerns in China, for example, have raised
    questions about the effect on the U.S. and the global
    economies, and yet it seems that the insurance industry is
    calling on our regulators to forget about global financial
    stability as it negotiates international standards. What are
    the risks to the U.S. and global economies if these calls are
    heeded?
        Mr. Zaring. Thank you. It seems to me that one of the
    points of these international negotiations and the effort to
    create capital standards that work for companies both at home
    and abroad, is financial stability. That is the bottom line and
    critical focus of any sort of effort to create common
    international standards for internationally active insurance
    groups.
        It is worth remembering that in the case of AIG, it was
    brought low by activity that happened in a foreign subsidiary,
    credit default swaps, but also by its securities lending
    practice. And that was something that State regulators could
    have overseen.
        I think the calamitous collapse of AIG indicates that three
    things are critical for controlling the way that the
    international insurance system works if it is to work in a way
    that is going to avoid any financial crises in the future.
    First is that a group-wide perspective is critical for ensuring
    that financial stability happens, that all of the entities
    within an insurance conglomerate have to be supervised.
        These days that increasingly necessarily requires an
    international perspective given that the kinds of companies
    that can threaten the financial system like AIG operate in so
    many different jurisdictions.
        And third, I think it suggests that subsidiaries can slip
    through the cracks of regulators. In that case, OTS, State
    regulators, and of course foreign regulators failed to identify
    the weaknesses in AIG.
        And then finally, I think it is critical to remember in
    light of the problem of the global headwinds that face the
    American economy that insurance companies are not just a
    critical source of protection for consumers, but also a
    critical source of funding for our financial markets. And I
    think that is one of the things that animates supervisors when
    they worry about the risk that a foreign insurance company that
    provides a great deal of funding to American financial firms
    might collapse if inadequately supervised.
        That is the kind of supervision and worst-case scenario
    that I think has meant that Congress has appropriately and
    Federal regulators are increasingly worried about the stability
    of foreign firms as well as domestic ones.
        Ms. Waters. While our State-based system for regulating the
    insurance industry certainly has its benefits, there are also
    some drawbacks. For example, the ability of States to deviate
    from standard insurance accounting rules by requiring less
    capital or fewer reserves or allowing certain risk in non-
    liquid investments to be counted as capital assets can weaken
    financial protections for consumers.
        Also, differences across the States make it difficult for
    other countries to judge the strength of the U.S. system. Do
    you think there is room for better coordination among States to
    address these issues while still preserving a State-based
    system and the benefits that it provides?
        Mr. Zaring. I do think so. And I think that our rich
    tradition of State-based consumer protection can only be
    augmented by coordination. And if that coordination is
    facilitated by the Federal Insurance Office, then it is all the
    better and more likely to be effective.
        Ms. Waters. I yield back the balance of my time.
        Chairman Luetkemeyer. The gentlelady yields back.
        The gentleman from Ohio, Mr. Stivers, is recognized for 5
    minutes.
        Mr. Stivers. Thank you very much. My first question is for
    Mr. Torti. We just heard some questioning from the ranking
    member about the AIG failure. Was any of that based on
    regulated, State-regulated insurance business?
        Mr. Torti. No. The financial products division was
    regulated by a Federal regulator, the OTS, which was eliminated
    as a result of the Dodd-Frank bill that was out there. Mr.
    Zaring mentioned securities lending. There were issues with
    securities lending, but it is my understanding the AIG life
    insurance companies would have survived without Federal aid
    despite the securities lending issues.
        Mr. Stivers. So the Securities and Exchange Commission and
    the OTS were Federal regulators who failed with regard to the
    failure of AIG, correct, Mr. Torti?
        Mr. Torti. That is correct.
        Mr. Stivers. Thank you. I just think that is really
    important to bring up as State regulators were just maligned.
    Under McCarran-Ferguson, we have had an incredible history of
    effective and efficient State regulation in my opinion.
        Mr. Torti, as I am talking to you, State regulators don't
    have group capital standards today, but they have been working
    on a group capital calculation. Do you know how that is going?
    You are just recently transitioning and can you give us an
    update of where that might stand?
        Mr. Torti. Again, I cannot speak for the NAIC or the
    regulators.
        Mr. Stivers. From what you know when you left--
        Mr. Torti. Okay.
        Mr. Stivers. --are they close? Is it coming? Just tell us
    what you know and--
        Mr. Torti. Absolutely. The NAIC has basically voted to take
    an approach, an aggregation approach, to aggregate our current
    risk-based capital standard, the States' current risk-based
    capital standard, to come up with a group capital standard.
    They have assigned it to a subcommittee of the C Committee, the
    Financial Condition, and--
        Mr. Stivers. When do you expect it to be done? Give me a
    round number, 2016? Early 2107?
        Mr. Torti. They hope to make lots of progress by year-end,
    but again, I can't speak for the regulators.
        Mr. Stivers. Let me ask you the next question. Given that
    we all just agreed that under McCarran-Ferguson the State
    regulators are the prudential regulators, shouldn't they have
    time to work on their group calculation? The one shortfall I
    see in this bill is it requires the Fed to finish its capital
    standard, but it does not require the State regulators to even
    finish their group capital calculation. Shouldn't that be added
    to this bill?
        Mr. Torti. I think that would be a worthwhile addition to
    this bill.
        Mr. Stivers. Thank you. Let me ask the whole panel some
    questions. Do you believe that the benefits to domestic
    companies and consumers of reciprocity under a covered
    agreement are worth negotiating a covered agreement? Raise your
    hand if you believe that.
        I figured everybody. Okay. Everybody, and let me note for
    the record that everyone agreed we should pursue reciprocity if
    it is in the interest of American consumers, American domestic
    companies. Would you all agree that our State-based system is
    effective at protecting both consumers and the solvency of our
    insurance industry? Raise your hand if you believe that. Three
    of four.
        Let me ask really quickly of Mr. Zaring, do you believe in
    the State-based regulation system? Yes or no? Or would you
    prefer a Federal system? That is really all--I don't want a
    long answer. I have a minute here.
        Mr. Zaring. The State-based system does an excellent job of
    consumer protection.
        Mr. Stivers. Okay. Thank you.
        Mr. Zaring. I worry about it for solvency.
        Mr. Stivers. Got it. Okay. So the next question for the
    panel is, do you think that it is reasonable to set forward a
    system or a process, an orderly process for any international
    agreement? Raise your hand, yes or no. Three of four again.
    Thank you.
        And now, since Mr. Zaring already spoke about the fact that
    he thinks a cost-benefit analysis is overly burdensome, let me
    ask if anybody else--and raise your hand if you think any of
    these things are overly burdensome--are clear objectives overly
    burdensome? No one believes that.
        Is a public comment period overly burdensome? Nobody
    believes that. Is a semiannual report overly burdensome? He
    believes the semiannual report is too much work, one person.
    Four, is studying the impact on consumers overly burdensome?
    One person believes we don't want to look at what consumers
    say. That would cause too much burden.
        Is a report on transparency of the IAIS overly burdensome?
    One person believes that transparency apparently is overly
    burdensome. What about domestic capital rules being promulgated
    so we know what the domestic standard is before we move to
    international agreement? Who believes that is overly
    burdensome? This is getting pretty repetitive, one person.
        And last and finally, who believes a 90-day period to have
    Congress look at this is overly burdensome? One person. Okay.
    So it's pretty clear that most people believe this is not
    overly burdensome at all.
        Thank you, Mr. Chairman. I yield back.
        Chairman Luetkemeyer. The gentleman's time has expired. Oh,
    they have called votes, and as of January 1st, they have really
    restricted the amount of time that they will allow us to show
    up late, so as a result we have about 7 minutes to get there
    and we only have 3 minutes to play with here. So if we stop
    along the way to get a drink of water, we are in trouble.
        But we ask for the indulgence of the panel as well as those
    Members in attendance today. We will be back in probably about
    an hour. Until then, we will call a recess of the subcommittee.
        [recess]
        Chairman Luetkemeyer. We did our due duty today to again
    pass some hopefully worthwhile legislation. With that, we will
    reconvene the subcommittee and go to Mr. Ross, who is up next.
        I recognize the gentleman from Florida for 5 minutes.
        Mr. Ross. Thank you, Mr. Chairman. I am reminded of, as a
    child, when there was a move afoot to create measurement
    standards, international standards in the United States,
    metric. And they attempted to do that on road signs and
    whatnot. That didn't last very long, and mainly because of the
    great deal of resistance to it because we believe our standard
    of measure is very good.
        I also think our standard of insurance regulation is by far
    the best in the world. And therefore I also have concerns about
    our ability to negotiate and Congress' ability to retain what I
    believe to be its primary authority in whatever may transpire
    in the negotiations with the International Association of
    Insurance Supervisors.
        Ms. Cobb, you mentioned in your opening statement that
    similar risk characteristics should be treated the same, and
    yet you also expounded a little bit upon variable annuities. Is
    there any explanation that has been given for the unequal
    treatment?
        Ms. Cobb. No, Congressman, there hasn't been. The
    explanation is just a statement that variable annuities are
    more risky--
        Mr. Ross. Right.
        Ms. Cobb. --than products in other countries where the
    guaranteed interest rate is, in this environment now, say, 3.5
    percent. Those other countries say that their contracts don't
    fall into the NTNI bucket--``Our products are not risky and
    yours are.''
        Mr. Ross. Right. And what is the basis for the annuity
    anyway? What is going to be the benchmark for the interest
    rate? Those are things that need to be discussed because right
    now if we are going to it use to pay them, we are at negative
    interest rates, or for that matter the European Central Bank.
        Ms. Cobb. Yes.
        Mr. Ross. Mr. Thompson, I understand that your company has
    a footprint in 30 States but nothing internationally. Can you
    describe how the impact of international standards might still
    impact your company and others like yours if it is adopted by
    the United States?
        Mr. Thompson. Absolutely, sir. So as we all know, I think,
    and can appreciate, economies around the world operate very
    differently, and as I believe you were a former State
    legislator--
        Mr. Ross. Yes, sir.
        Mr. Thompson. --and Chair of the insurance committee, you
    have a pretty good understanding of the State-based regulation
    here. Fundamentally, as one example, insurance regulation in
    this country is entity-based.
        Mr. Ross. Right.
        Mr. Thompson. So the discussion of AIG came up earlier. The
    insurance companies were protected. There was a discussion to
    raid the assets of the insurance companies to keep AIG from
    requiring Government bailout. The current regulatory framework
    in this country prevented that. That is not the case in many
    other countries.
        And so things that are currently being discussed, which is
    group capital standards being applied here, don't mesh well
    with the current State regulations. And that is just one
    example.
        Mr. Ross. And what concerns me in addition to that, and Mr.
    Torti, maybe you might be able to address this as a former rate
    maker, is the matters considered in promulgating a rate
    include, of course, liquidity, capital standards, things of
    that nature, but what is going to be at issue is the
    verification of the solvency and the capital.
        And when the verification process is gone through by the
    commissioner, it would expose most likely some proprietary
    information. And that has been, and I think very well-preserved
    by our individual insurance commissioners, but could there not
    also be an adverse impact from an international standard that
    would now require not only the verification of the capital but
    also the increased vulnerability of disclosing proprietary
    information?
        Mr. Torti. That is certainly a possibility, depending on
    what the standard required, depending on what type of
    calculation was necessary, some proprietary information of an
    insurance company could be exposed.
        Mr. Ross. One thing that hasn't been discussed and I want
    to just really hit on, because I think it is important back
    home especially for those of my constituents who are dependent
    on their financial products including their insurance products,
    what would be the impact on the consumers of international
    standards? Let us say we were to adopt Solvency II. What impact
    would it have?
        And whoever wants to take that can. Ms. Cobb? Mr. Torti?
        Mr. Torti. Okay. I will take a shot at it. It could
    increase costs to consumers here in the United States. Putting
    it into--
        Mr. Ross. Minimal cost. Just the transformation of
    accounting procedures, you may be going from a risk-based
    capital to who knows what? And if you have to--that is an
    administrative cost that these companies are going to have to
    bear. Where does it--do they absorb it? No. They are going to
    pass it on.
        Mr. Torti. It is passed on to the policyholders, exactly.
        Mr. Ross. And without a doubt, I guess in my opinion, is
    that any change is going to result in an increase in premium to
    our consumers as a result of the adoption of this. One last
    thing is just a comment. I laud the chairman for this bill. I
    think it is important that Congress continue to be in the
    driver's seat on this with instructive measures as we have done
    in this part of the bill. And I yield back.
        Chairman Luetkemeyer. The gentleman's time has expired.
        With that, we go to the gentleman from Kentucky, Mr. Barr,
    for 5 minutes.
        Mr. Barr. Thank you, Mr. Chairman. I would like to know
    from the witnesses what your views are in terms of
    congressional involvement in oversight here. Professor Zaring,
    I think, commented in his prepared testimony that he didn't
    view that as being constructive in terms of being an impediment
    in the negotiations, in the international negotiations, to have
    Congress in the middle of this.
        So given that we have a draft legislation that would
    enhance congressional oversight of this process, we will start
    with you, Mr. Thompson. Can you comment on how having Congress
    involved might enhance the process?
        Mr. Thompson. Absolutely. Thank you for the question. And I
    think that goes to the heart of this draft legislation. It
    isn't to impair or impede negotiations. It is to provide
    clarity to those negotiations and also to prevent potentially
    catastrophic global regulations being back door-imposed on
    companies like mine domestically here, which has been discussed
    throughout this entire hearing the State-based insurance system
    in this country has served it very well for over a century.
        Mr. Barr. Before we go to the other witnesses, are you
    concerned that not having Congress involved may exclude input
    from the State regulators?
        Mr. Thompson. Yes, sir. Many of these discussions are
    taking place behind closed doors already. Therefore, we are
    asking Congress to, again, set those guidelines, set those
    boundaries. Let our negotiators at the table know what they can
    negotiate and what they can't right up front.
        Mr. Barr. Thank you.
        Mr. Torti?
        Mr. Torti. Sure. Thank you, Congressman. This is in no way
    intended to impede U.S. involvement in creating international
    standards. It is really to ensure a unified approach and to
    strengthen our position in those international negotiations.
    And increasing transparency clearly stating the goals and
    objectives of Congress will help to strengthen our position in
    these negotiations. We are all in a unified approach. You don't
    have any disparate opinions coming from the Team USA, to which
    we have referred.
        Mr. Barr. Ms. Cobb, in addition to maybe answering that
    question as well, could you elaborate on the consequences that
    international standards imposing higher capital charges on U.S.
    insurance products like variable annuities might have on the
    domestic economy and especially for those policyholders?
        Ms. Cobb. Certainly, Congressman. First of all, we do agree
    with the current concerns that have been expressed here today.
    The question before all of us is how to fix it. The NTNI
    problems--I am speaking now of the IAIS standard-setting--the
    G-SII methodology problems, we rely heavily on Team USA. I
    could do a long list of our concerns but we don't have time.
        But the question is striking a right balance in this bill
    and in our approach so that Team USA, the full Team USA,
    certainly including our State prudential regulators, Treasury,
    and the Fed have the ability to participate fully in the
    international discussions--that is critical, we think, to a
    solution that can benefit U.S. interests.
        Mr. Barr. What would be the consequences of substantially
    higher capital charges?
        Ms. Cobb. Substantially higher capital charges for NTNI
    variable annuity products in this country could make that
    product difficult to obtain for consumers. The consequences to
    U.S. insurers who are trying to compete overseas of having to
    post additional capital in that country because of these
    international standards are also considerable.
        Mr. Barr. And in the course of the standard-setting--the
    standard-setting that is going to happen, I have been an
    advocate for tailoring of regulations in the financial
    regulation area based on size and complexity and activity of
    banks so that community banks, for example, would be subject to
    less regulation than larger more systemically important
    institutions. Is a similar tailoring relevant and important in
    the insurance space as well?
        Ms. Cobb. It seems perfectly reasonable. Yes.
        Mr. Barr. And so I think Congress does have an interest in
    monitoring the process to make sure that we do take into
    account a tailored approach and on the size, bearing sizes and
    complexities of these insurers. Does anybody have anything else
    to add to that? I think my time is running out.
        Mr. Thompson. I think the time is out, but I would just say
    we have concerns about trying to do such tailoring. State
    regulators are not going to be inclined to have multiple tiers
    of regulatory oversight and our fear is that the once common
    standard would be applied to all companies that they regulate.
        Mr. Zaring. I will just say that Congress should definitely
    be involved however it sees fit, but if it is going to require
    American regulators to come up with an approach and then engage
    in international negotiations, then it is not clear what there
    is anything to negotiate over or if the rest of the world won't
    come up with its own standards as it is done in accounting,
    much to the--
        Mr. Barr. Thank you. I yield back.
        Chairman Luetkemeyer. The gentleman's time has expired.
        The gentleman from Pennsylvania, Mr. Rothfus, is recognized
    for 5 minutes.
        Mr. Rothfus. Thank you, Mr. Chairman. And thank you, panel,
    for being here this afternoon. Mr. Torti, if I could ask you
    this question? When you were a State insurance regulator, the
    NAIC opposed the decision by the IAIS to exclude consumer
    groups and stakeholders from working group meetings. FIO voted
    against the NAIC. Do you believe transparency and accountably
    have been reduced as a result of this decision?
        Mr. Torti. Absolutely, Congressman. The stakeholders are no
    longer allowed in the working group meetings and are not
    present when the decisions are made regarding these standards.
    So it definitely has reduced transparency.
        Mr. Rothfus. Would the United States' position have been
    stronger had our representatives been on the same page?
        Mr. Torti. Yes.
        Mr. Rothfus. Someone suggested that it does not matter what
    international standards the United States agrees to if they are
    subject to consideration in the United States before
    implementation. Mr. Torti, do you have any concerns about that
    approach?
        Mr. Torti. I don't have any concerns. I believe we should
    have a unified approach. I believe that the United States
    shouldn't come to the table with several varying opinions. I
    believe that we can work together to come to a consensus with
    State regulators and that approach would be the best to
    strengthen the U.S. position in any of these negotiations.
        Mr. Rothfus. Mr. Thompson, according to many expert
    observers, the U.S. insurance sector remained relatively stable
    during the recent financial crisis, particularly when compared
    with the banking and securities sectors. Do you share this
    perspective?
        Mr. Thompson. Absolutely, sir.
        Mr. Rothfus. Can you attribute the strong track record to
    the unique nature of the business or the quality of regulatory
    supervision? Or is it a combination of both? Can you qualify
    that?
        Mr. Thompson. Yes. I would attribute it to very strong
    oversight by State regulators who are focused first and
    foremost on policyholder protection, as well as insurance
    company policy protection. And I think their track record
    speaks for itself over the last 150 years that they have been
    responsible for regulating the insurance industry in the United
    States.
        Mr. Rothfus. Mr. Torti, you argue in your testimony that
    without more congressional guidance on their objectives and
    priorities, our U.S. and State representatives can have
    conflicting perspectives and priorities, again, similar issue.
    Why is it important for the U.S. representatives in
    international insurance regulatory discussions, including the
    Federal agencies and the NAIC, to be on the same page?
        Mr. Torti. Again, I think the point is to have a unified
    approach. If we appear dysfunctional, if we are sitting at the
    table representing the United States yet having differing
    approaches on where we want to go with an international
    standard. You know, Dodd-Frank has affirmed State regulation as
    the system that is acceptable in the United States.
        And State regulators and our Federal representatives need
    to work together to come up with that unified approach to
    strengthen our position in the international arena. And I
    certainly think that varying opinions among the players in this
    arena would cause significant harm to us in our negotiations on
    these standards.
        Mr. Rothfus. Okay. Can you speak to whether States
    undertook any noteworthy reforms to address concerns arising
    from the financial crisis?
        Mr. Torti. Yes. And again, I don't speak for the NAIC. I am
    sorry to be repetitive on this, but I just want to make clear I
    am no longer a regulator. However, there have been many group
    solvency changes that have been made. There have been numerous
    working groups at the NAIC that have enhanced solvency
    regulations to look at a more group-wide approach but still
    keep our legal entity approach so that we ensure that
    policyholders are protected.
        However, there are Own Risk and Solvency Assessment model
    laws that are going to be a part of the accreditation
    requirements. There are holding company modifications that were
    made which deal with enterprise risk management. There are
    requirements to hold supervisory colleges for internationally
    active insurance groups.
        There have been multiple enhancements to our financial
    analysis procedures to ensure that we are looking at group-wide
    risks when we look at a company. So yes, there has been a lot
    done since the financial crisis, and even before the financial
    crisis to look at the risk of the entire group.
        Mr. Rothfus. I thank the panel, and I yield back.
        Chairman Luetkemeyer. The gentleman yields back the rest of
    his time.
        With that, we go to the gentleman from Wisconsin, Mr.
    Duffy.
        Mr. Duffy. Thank you, Mr. Chairman.
        Chairman Luetkemeyer. You can start your 5 minutes.
        Mr. Duffy. I want to welcome the panel, and just go over
    here on the far side for a quick question. In theory, and in
    theory only, is a covered agreement going to have minimal to no
    impact on Federal regulation or on our State regulators? Is
    that a fair assessment, Mr. Thompson?
        Mr. Thompson. It is my opinion that there is a very real
    opportunity that future covered agreements could actually pre-
    empt State regulation. And that is our concern, which is why we
    think it is the purview or should be the purview of Congress to
    provide oversight and direction to those to make sure they
    don't bring up the obviously very successful State regulation
    we have in this country.
        Mr. Duffy. With that, okay. But by itself, by itself the
    covered agreement--
        Mr. Thompson. No, sir. Absolutely, there is a place for
    covered agreements. We are not opposed to covered agreements at
    all.
        Mr. Duffy. But--
        Mr. Thompson. We want to make sure they don't bring up
    State regulations.
        Mr. Duffy. I am well aware of your position, but--
        Mr. Thompson. Okay.
        Mr. Duffy. --I think in theory just a covered agreement
    does not impact by itself--
        Mr. Thompson. No, sir.
        Mr. Duffy. --Federal or State regulators.
        Mr. Thompson. No, sir.
        Mr. Duffy. I think in this institution, some of us might
    get concerned, because I don't think the original drafters of
    the Environmental Protection Agency might have foreseen that
    they could have stretched and pulled the EPA into the Clean
    Power Plant Rule that came out. And so we do get concerned
    about creeping rules and creeping regulations.
        So does anybody have an objection if we by legislation
    guarantee that we are going to protect our State-based model?
    Is it in essence we are going to buy a little insurance, if you
    will, guaranteeing that you are not going to impact our State-
    based American model. Does anybody disagree with that theory?
        Mr. Zaring. I will just briefly say that, again, to me the
    worrisome example is accounting standards and Generally
    Accepted Accounting Principles (GAAP). So we decided in the
    United States we are going to do things the GAAP way and we
    didn't care what the rest of the world was going to do.
        Mr. Duffy. Do you disagree that we shouldn't protect it? If
    we in the legislature think that we should protect the State-
    based model that we shouldn't have insurance?
        Mr. Zaring. Of course it wouldn't do that.
        Mr. Duffy. Insurance business says we are not going to--we
    are going to guarantee that we protect that model, the State-
    based model. Do you disagree with that?
        Mr. Zaring. The legislature has the power to regulate as it
    likes, but now there is another competitor standard out there
    for GAAP, International IFRS, and it is--
        Mr. Duffy. So is it then your position that we negotiate a
    covered agreement and we adopt it herein with the Fed and that
    is going to eventually be imposed on our State-based system? Is
    that what you would like to see happen here? And is that what
    is going to happen here?
        Mr. Zaring. My understanding and expectation is that the
    hope of a covered agreement is that we can get to a modus
    vivendi where our supervisors and European supervisors
    recognize the quality of the work that each other are doing.
    And so I--
        Mr. Duffy. You are avoiding my question. It is going to say
    that the intent is not to impose any new capital standards on
    our State-based system, right? Is that the intent? Does anybody
    disagree with that? Or if that is the intent let me know. You
    would agree with that, right, given--Ms. Cobb, you agree,
    right?
        So there shouldn't be any disagreement with our position
    that we want insurance. We want a guarantee that what you say
    is actually going to happen. We want to go through the
    legislative process. You wouldn't disagree with that, would
    you?
        Mr. Zaring. I think it is possible to get--if we are going
    to empower Federal regulators to do their best job negotiating
    with their foreign counterparts--
        Mr. Duffy. Listen, because I am not--
        Mr. Zaring. --that too much oversight is--that too many
    people--
        Mr. Duffy. But I want to be clear, is your testimony then
    that through this international negotiation we want to have an
    impact on our State-based system and the capital that they are
    required to hold. Is that your position? Yes or no? I don't
    have much time.
        Mr. Zaring. I am not sure I understood the question maybe,
    but--
        Mr. Duffy. Okay. But you do disagree that we should have
    insurance to protect our State-based model. And I want to move
    on. I think, Mr. Zaring, you indicated that hands would be tied
    if Congress set the parameters of this negotiation. Is that
    correct?
        Mr. Zaring. No. Congress has already authorized these sorts
    of negotiations to take place, but then the question is what
    kind of parameters should Congress impose?
        Mr. Duffy. So you agree that we we could modify our
    parameters after the negotiation takes place we can actually
    approve or disapprove of an agreement?
        Mr. Zaring. Congress certainly has that power.
        Mr. Duffy. And do you agree with us exercising that power?
        Mr. Zaring. If the agreement comes back in a way that is
    unfavorable to American interests, then I don't see why it
    wouldn't.
        Mr. Duffy. It worked for TPA, didn't it? TPA worked pretty
    well. We went through a negotiation, set the parameters, voted
    on it, and sent our negotiators free. Why wouldn't it work with
    international negotiations on insurance standards?
        Mr. Zaring. I feel like we already have the authorization
    necessary.
        Mr. Duffy. Does anyone--oh, can I ask just one quick
    question? Is anyone concerned about a creation of a two-tier
    insurance system?
        Mr. Thompson?
        Mr. Thompson. I'm very much concerned about that.
        Mr. Duffy. Anyone else? Ms. Cobb, are you concerned about
    that?
        Ms. Cobb. I am not sure what you mean.
        Mr. Duffy. Do you want to have our Federal globally active
    50 insurance companies have one capital standard and there
    might be a different capital standard for small mutuals that do
    business in a State or a few States. Does that concern you?
        Ms. Cobb. It seems perfectly reasonable to me if I were a
    regulator that I would want to assess companies according to
    the nature, scale, and complexity of their risk.
        Mr. Duffy. So you would say that you don't have a concern.
    There could be two models. You are okay with a small State
    mutual having a different capital standard than a large
    internationally active SIFI?
        Ms. Cobb. I don't know the answer to that question.
        Mr. Duffy. Anybody else?
        Mr. Torti. I just think that is already the case. SIFIs are
    subject to regulation by the Federal Reserve so there is an
    additional layer of--
        Mr. Duffy. We got that in Dodd-Frank, didn't we?
        Mr. Torti. --protection there.
        Mr. Duffy. Yes, we got that in Dodd-Frank. So my concern is
    we want to remedy Dodd-Frank and say we will have everybody
    subject to the same capital standards, which will endanger our
    State-based system. And that is many of our concerns.
        So with that, I appreciate the indulgence of the chairman,
    and I yield back.
        Chairman Luetkemeyer. The gentleman's time has expired.
        With that, we have a redirect from Ranking Member Cleaver.
        Mr. Cleaver. Oh, thank you. This is kind of related to what
    Mr. Duffy was saying, and it is just one quick question. What
    would it look like? How would you paint of picture of what
    would happen if the United States just decided that it was
    going to retreat from participation in international
    discussions on insurance standards? What do you think would
    happen if we just said henceforth forevermore we are out?
        Mr. Zaring. My concern, Congressman, is that then
    international standards would get made and they would get made
    without our input. And increasingly, as our insurance companies
    tried to do business abroad, they would find that they had to
    comply with those standards, and they might regret the fact
    that we didn't participate in the process.
        Ms. Cobb. I agree with that comment. And I would say
    moreover to the extent that our domestic insurers are required
    to post additional capital or whatever in order to comply with
    insurance capital standards that had been determined
    internationally without our input, we are diverting capital
    away from our insurers selling insurance in emerging and other
    markets and in effect not creating jobs here at home.
        Mr. Thompson. Mr. Cleaver, it is not our suggestion that we
    walk away from the table. We live in a globally connected
    world. We all understand that. What we are suggesting is we
    have a very good regulatory system in this country. We don't
    want that to be negotiated away in the international arena.
        We think we are regulators. We think our representatives
    need to be at that table and they need to be negotiating and
    bringing the best insurance regulatory that we have in the
    world as demonstrated in this country to the table. And all we
    are suggesting is Congress has a role to play in that to
    provide the direction and the guidance to that negotiating team
    in order to bring that very effective regulation to the global
    marketplace.
        Mr. Cleaver. Thank you.
        Chairman Luetkemeyer. Thank you.
        I think that was very succinctly put, Mr. Thompson. Let me
    add--I just have some closing remarks here before we wind up.
        I think we need to be in a position to be able to negotiate
    as well as pushback as well as initiate. We need to be able to
    promote as well as defend. And so for us to go over to the
    negotiations and play defense all the time is important, but to
    be on the offense to show the rest of the world why our system
    works and theirs maybe doesn't work as well as ours. Maybe they
    need to change their system instead of we change to their
    system.
        So I think, Mr. Thompson, you made a comment during the
    course of this with regards to they need to focus on
    regulation, the regulatory side, the industry side and the
    policyholders' side when the FIO folks go over there and work
    on these issues and represent us.
        And Mr. Torti, you made the comment that Congress needs to
    set goals or guidelines for the regulators as they go through
    the process. And I think that is what we are trying to do with
    this bill. I think all of you have agreed that Congress has a
    role to play. We need to be in the approval process.
        And a number of you have mentioned that there are Federal
    regulators that already go through a comment period and sort of
    approve things. But my concern is that if you look at the role
    that the Administration has played, and the lack of them
    listening to what we say as legislators, as what you say as
    industry representatives and what the comments that come from
    the consumers are ignored by the Administration time after
    time, day after day, industry by industry, agency by agency,
    there is great concern.
        And that is the reason for the bill today is to see once if
    there is a way for us to structure this so we can put
    guidelines in place, guardrails, if you want to call them that,
    that will not hinder but enhance and then allow Congress to be
    there to be able to approve or disapprove those actions in a
    way that we can protect the industry we have here, the
    regulatory system we have here and the consumers.
        At the end of the day we need to be more watchful for and
    it is interesting because in my discussions with Mr. Sullivan
    as well as Mr. McRaith, they like our oversight. They like what
    we are doing here. They like a bill like this because from
    their standpoint it gives them leverage when they go negotiate.
        They like for us to be involved, because when they go over
    there and talk to the IAIS folks they can sit there and say,
    hey, you know, we can't approve that. We can't approve this. We
    are going to go back and make sure this will work. And as a
    result it gives them what leverage they need to actually
    negotiate in better terms. So I think it is important.
        This bill isn't perfect. We are still in draft form, and we
    want to continue with all of you and all of the folks who are
    represented behind you. Mr. Thompson, I believe in your
    testimony you made the comment that getting policy right is
    more important than unanimity.
        I hope you all remember that as we go through the process
    because I am sure there is not going to be unanimity on
    everything that we do here, but end of the day we want to get
    the policy right to make sure we protect the industry, our
    regulators and their ability to do their job, as well as our
    consumers. And we have a wide group of interests here from
    very, very, very large international companies to local county
    mutuals, if you will.
        And so we have a lot of work to do. I would like to get
    something put together in the next couple of months. So
    continue to be engaged with us. Continue to work with us on
    this. We want to listen to your suggestions. And hopefully, Mr.
    Thompson's wise words of, get the policy right and don't worry
    about unanimity, will be able to be the words of the day.
        With that, again, I thank all of you for being here today.
    You did a great job of representing your industries in this
    important issue that I think is something we need. We have a
    little hearing day and it doesn't amount to a whole lot, but it
    is a really, really big deal from the standpoint of it affects
    every single person in this country because every single person
    in this country practically has some sort of insurance product.
    And so it is important that you are here to represent all those
    folks.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        And with that, this hearing is adjourned.
        [Whereupon, at 4:53 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               February 25, 2016

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