[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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