[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF THE U.S.-EU DIALOGUES
ON U.S. INSURANCE MARKETS
=======================================================================
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
__________
SEPTEMBER 28, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-108
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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:
September 28, 2016........................................... 1
Appendix:
September 28, 2016........................................... 27
WITNESSES
Wednesday, September 28, 2016
McPeak, Julie Mix, Commissioner, Tennessee Department of Commerce
and Insurance, on behalf of the National Association of
Insurance Commissioners (NAIC)................................. 7
McRaith, Michael T., Director, Federal Insurance Office (FIO),
U.S. Department of the Treasury................................ 4
Sullivan, Thomas, Associate Director, Board of Governors of the
Federal Reserve System......................................... 5
APPENDIX
Prepared statements:
McPeak, Julie Mix............................................ 28
McRaith, Michael T........................................... 36
Sullivan, Thomas............................................. 44
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the American Council of Life Insurers... 53
Written statement of the American Insurance Association...... 56
Written statement of Ambassador Robert Holleyman, Deputy
United States Trade Representative......................... 75
Written statement of the Property Casualty Insurers
Association of America..................................... 78
Sullivan, Thomas:
Written responses to questions for the record submitted by
Representative Luetkemeyer................................. 90
Written responses to questions for the record submitted by
Representative Posey....................................... 93
THE IMPACT OF THE U.S.-EU DIALOGUES
ON U.S. INSURANCE MARKETS
----------
Wednesday, September 28, 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 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, Ross, Barr, Rothfus, Williams; Cleaver,
Clay, Green, and Beatty.
Also present: Representative Heck.
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,
and unfortunately, today we probably will have to have a recess
somewhere between probably 2:45 and 3 o'clock, as we do expect
votes to take place.
I apologize to the witnesses today, but unfortunately that
is the way things happen in an afternoon session. So, I
appreciate you sticking around whenever that happens because--
depending on how far we get here, but hopefully, we can get
through a lot of questions and testimony as quickly as
possible.
Today's hearing is entitled, ``The Impact of the U.S.-EU
Dialogues on U.S. Insurance Markets.'' 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 5 minutes for an opening
statement. This subcommittee has spent a great deal of time
focused on international factors affecting our domestic
insurance markets. Today, we continue our oversight of the
evolving international regulatory environment and the direct
impact on U.S. policyholders.
I would ask everyone to please take a look at the chart on
the screens. It is all around you. This is a depiction of the
meetings of the International Association of Insurance
Supervisors (IAIS) happening in the current 5-month window.
Eighty percent of these meetings take place behind closed doors
without public or congressional access.
Today's hearing will serve as an opportunity to hear from
Team U.S.A. as to what exactly is being discussed and to press
for badly needed transparency.
As I have said before, I don't believe it is necessarily in
our best interest nor do we want to bring these international
processes to a grinding halt. However, we should never
underestimate the importance of these conversations or the need
for greater transparency into these proceedings.
That is why my colleagues and I authored H.R. 5143, the
Transparent Insurance Standards Act. H.R. 5143 will codify a
stronger role for State governments and the U.S. Congress to
conduct oversight of these international conversations. It also
provides our regulators with leverage when entering into
discussions with our European counterparts.
Today, we also have Congress' first real opportunity to
examine the covered agreement negotiations between the Treasury
Department and the U.S. Trade Representative and the European
Union.
While I believe that insurers are best regulated at the
State level, a covered agreement with the European Union, when
structured properly and with input from State insurance
commissioners and stakeholders, presents a unique opportunity
to level the playing field for U.S. insurers and reinsurers.
That is particularly important given the actions we are
beginning to see out of European regulatory bodies.
Look no further than Shelter Re, domiciled in my home State
of Missouri. Shelter Re was recently sent a letter by BaFin,
the German financial regulator, demanding the creation of a
German branch in order to continue to operate in that country.
Without objection, that letter and supporting material will
be entered into the record.
It is my understanding that other insurers have received
similar letters and that other nations are set to follow
Germany's lead. It is obvious we are beginning to see how
Solvency II-governed Europe operates in a world without a
covered agreement.
That being said, I do have serious concerns for the lack of
transparency surrounding the covered agreement process. I fail
to see why our negotiators feel the need to be so secretive
about this process. And the Chair will note the unfilled spot
at the witness table designated for the U.S. Trade
Representative.
The United States and the European Union are the largest
insurance markets in the world, and ensuring that our model for
insurance regulation is adequately and appropriately respected
in this deal is of the utmost importance. That covered
agreement should be narrow, in accordance with the law, and be
focused on achieving mutual recognition of each other's group
supervisory regimes as well as each other's regulation of
reinsurance. It should create an equal platform for reinsurance
collateral and avoid any unnecessary Federal intrusion into
group supervision.
I have said in each of these hearings that it is vital for
the United States to participate in these discussions and to be
in a position to lead, not be led. I believe it serves the
Nation well when all parties--the States, the Executive Branch,
Congress, and all stakeholders--work in concert to grant
negotiators with the greatest possible leverage.
We need to work cooperatively to signal to the European
Union, the IAIS, and the Financial Stability Board that we will
only lend our name to standards and agreements that benefit the
United States consumers and allow us to maintain a robust
insurance marketplace at home.
I thank our distinguished panel for being here today. I
look forward to your testimony.
With that, the Chair now recognizes the ranking member of
the subcommittee, the gentleman from Missouri, my good friend
Mr. Cleaver, for 5 minutes for an opening statement.
Mr. Cleaver. Chairman Luetkemeyer, thank you very much for
this hearing, and I thank the members of the subcommittee.
And to the witnesses, thank you for joining us this
afternoon.
This hearing provides us with an opportunity to hear an
overview on the ongoing negotiations between the United States
and the EU, specifically in regards to a covered agreement. As
we all know, the Federal Insurance Office and the United States
Trade Representative announced their intention to move forward
with the negotiations in November of 2015.
This agreement, as defined by the Dodd-Frank Act, is a
written bilateral or multilateral agreement regarding
prudential matters with respect to the business of insurance or
reinsurance or stop insurance. On January 1, 2016, the EU began
to implement its insurance regulatory scheme commonly known as
Solvency II.
I think, for me at least, it is important to hear from the
witnesses today on the ongoing process regarding the
negotiations to ensure that the unique U.S. insurance market
continues to thrive, both nationally and on a global level.
Additionally, given the importance of the insurance market to
the U.S. economy, this hearing provides another opportunity to
discuss the work being done by Team U.S.A. at the International
Association of Insurance Supervisors.
Following the financial crash of 2008, the Federal
Insurance Office (FIO) was created with the passage of Dodd-
Frank. 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.
Though the U.S. insurance industry is, of course, primarily
regulated by the States, I would like to take note of the
importance of having a Federal Insurance Office to assess the
financial stability of the system as a whole and to represent
the United States, along with the Federal Reserve and the NAIC,
in these international discussions. And I look forward to
having this discussion. I think this could be quite
educational. Thank you.
Chairman Luetkemeyer. Very good.
Today, we welcome the testimony of Mr. Michael McRaith,
Director of the Federal Insurance Office, U.S. Department of
the Treasury; Mr. Thomas Sullivan, Associate Director, Board of
Governors of the Federal Reserve System; and Ms. Julie Mix
McPeak, Commissioner, Tennessee Department of Commerce and
Insurance, who is testifying on behalf of the National
Association of Insurance Commissioners.
And we also have an open seat there. The subcommittee
extended an invitation to Ambassador Robert Holleyman, our
Deputy United States Trade Representative, or a designee from
USTR. I am disappointed to report that USTR chose not to
provide a witness today for our hearing. I fully expect that
they will comply with this subcommittee's request to respond to
all questions submitted for the record, and I am disappointed,
especially when they are specifically required to participate
in negotiating covered agreements, that they chose not to be
here. That is not good.
I thank our three witnesses for each of you taking your
time to testify before the committee today. Each of you will be
recognized for 5 minutes to give an oral presentation of your
testimony, and without objection, your written statements will
be made a part of the record.
I think you probably have all been here before and know how
to utilize the lighting system in front of you: green means go;
yellow means you have a minute left; and red means I have the
last word.
With that, Mr. McRaith, you are recognized for 5 minutes.
STATEMENT OF MICHAEL T. MCRAITH, DIRECTOR, FEDERAL INSURANCE
OFFICE (FIO), U.S. DEPARTMENT OF THE TREASURY
Mr. McRaith. Chairman Luetkemeyer, Ranking Member Cleaver,
and members of the subcommittee, thank you for inviting me to
testify.
We will soon release FIO's 2016 annual report on the
insurance industry, our fourth annual report, which will cite
2015 data showing that the $8.1 trillion U.S. insurance
industry reported surplus levels of over $1 trillion. Nonhealth
insurers collected more than $1.1 trillion in premiums or
nearly 8.4 percent of U.S. GDP. The report will show the
changing U.S. insurance market, the expanding global insurance
market, and the supervisory standards that are evolving in
order to reflect these changes.
For these reasons, among others, FIO has a statutory role
to coordinate and develop Federal policy on prudential aspects
of international insurance matters, including representing the
United States at the International Association of Insurance
Supervisors.
International insurance standards are not new. The IAIS was
formed in 1994. State regulators were among the founding
members. International standards are neither self-executing nor
binding in the United States. In the United States., Federal
and State authorities would test a standard and may then tailor
and implement that standard through the U.S. system of
oversight.
In our IAIS work, we collaborate extensively with the
Federal Reserve and State insurance regulators, including Tom
Sullivan and Julie McPeak. For the United States to assert
international leadership, the U.S. participants must be
coordinated, and that is exactly what happens today. Today, the
Federal Reserve, all 56 NAIC members, NAIC staff, and the FIO
represent the United States at the IAIS.
With the most diverse and competitive insurance market in
the world, the United States is well-positioned to work with
our global counterparts to build consensus. Simply put, IAIS
standards must serve the interests of U.S. consumers and
industry and our national economy, or those standards will
neither receive our support nor be implemented in our country.
In 2015, to enhance stakeholder input, the IAIS eliminated
the pay-for-play requirement which required observers to pay an
annual fee. The IAIS held approximately 14 hours of public
engagement in 2014, a total that increased tenfold in 2015.
U.S. stakeholders are also invited to meet at Treasury directly
with the U.S. IAIS members. These sessions, which include our
State and Federal Reserve colleagues, are one path for input
from consumers and industry on key issues.
One key issue known as the insurance capital standard has
been the subject of IAIS consultation papers, including one
released in July. ICS progress continues incrementally.
Working jointly with the USTR, and receiving feedback from
State regulators and industry stakeholders, we are negotiating
a covered agreement with the EU. The EU is implementing its
insurance regulatory reform known as Solvency II, which could
have significant negative implications for U.S. insurers and
reinsurers.
If successful, a covered agreement would help resolve
longstanding prudential insurance disputes between the U.S. and
the EU and further clarify that the U.S. system of insurance
oversight protects consumers, supports financial stability, and
promotes global engagement.
A covered agreement would preserve our national interests,
protect our consumers, and promote a level playing field for
U.S. insurers. We will continue to report to this committee and
others about development in the negotiations.
Finally, the U.S. market and its oversight are unique.
Through effective collaboration, U.S. authorities will continue
to provide global leadership in support of a vibrant, well-
regulated market that promotes competition and financial
stability, and protects consumers. In all of our work, Treasury
priorities will remain the best interest of U.S. consumers and
industry, the U.S. economy, and jobs for the American people.
Chairman Luetkemeyer, Ranking Member Cleaver, and members
of the subcommittee, I want to thank you for the courtesies
that you have extended to me throughout this Congress. Our
conversations have always been informative, appreciated, and
helpful. Thank you for your attention. I look forward to your
questions.
[The prepared statement of Director McRaith can be found on
page 36 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. McRaith.
And I want to assure you that the feeling is mutual. You
have been very forthcoming in all of our discussions that we
have had, and we appreciate your willingness to share your
information.
Mr. Sullivan, you are recognized for 5 minutes. Welcome.
STATEMENT OF THOMAS SULLIVAN, ASSOCIATE DIRECTOR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Sullivan. Thank you, Chairman Luetkemeyer, Ranking
Member Cleaver, and members of the subcommittee. I appreciate
the opportunity and your invitation to testify on behalf of the
Federal Reserve. The Fed welcomes the opportunity to
participate in today's hearing, and I am pleased to be joined
by my colleague from the Federal Insurance Office, Director
McRaith, and the representative of the NAIC, Commissioner
McPeak.
While each of us have our own unique authority and mission,
the Federal Reserve remains committed to working
collaboratively on a wide range of issues, including insurance
prudential matters, both domestic and international.
Dodd-Frank gave the Fed regulatory responsibilities for two
populations of insurance firms: those that own a federally-
insured bank or thrift; and those designated as systemically
important by the FSOC. The Federal Reserve's supervisory
objectives for the insurance firms it supervises encompass
protecting the firm's safety and soundness while promoting
financial stability.
We continue to develop regulatory and supervisory measures
appropriate for these insurance firms, and in addition, we
collaborate with State insurance supervisors and respect the
important work that they do. For instance, we continue to be
cognizant of the State insurance supervisors, regulate the
types of insurance products offered by insurance companies and
the manner in which insurance is provided.
Because of the overall structure of insurance regulation as
specified by Congress in the McCarran-Ferguson Act and
elsewhere, the line here is rather bright. The Federal
Reserve's approach to insurance supervision distinguishes
between insurance companies that we oversee solely because they
control and insure depository institution and those that have
been designated as systemically important by the FSOC.
In our advanced notice of proposed rulemaking, the Board
has conceptually set out two capital frameworks: one which may
be appropriate for large, complex, systemically important
firms; while the other may be appropriate for firms such as the
current population of insurance, savings and loan holding
companies. In addition, the Board has issued proposals on
reporting requirements and enhanced prudential standards for
the FSOC-designated insurance companies.
As we continue exploring regulatory frameworks that we have
set out and the other areas of our supervision, we appreciate
the comments we have received on these outstanding proposals
and the constructive observations contained in those comments.
We also continue to meet with industry and other parties. In
the last year-and-a-half alone, we have held over 60 meetings
with stakeholders. Among other things, this reaffirms our
continued commitment to increasing transparency in our
rulemaking development.
The Federal Reserve has acted and will continue to act in
international insurance standards in an engaged partnership and
a multiparty collaboration with our colleagues from the NAIC,
State insurance commissioners, and the FIO.
Last year, the Board was invited to join the NAIC and the
FIO and their work on the EU-U.S. dialogue project to engage in
a healthy exchange among supervisors and to determine a way
forward as to the supervision of insurers whose operations span
across these jurisdictions.
Alongside this dialogue project has been the negotiation of
the possible covered agreement under the leadership and
authorities of the FIO and the USTR. We respect the work of the
FIO and the USTR toward an agreement that would enhance
regulatory certainty for U.S. insurers and reinsurers operating
in the EU.
We appreciate our current ability to advocate for
international standards that work for U.S. firms, U.S.
insurance consumers, and U.S. financial markets more broadly.
These international standards include work at the IAIS. The
Federal Reserve participates in the development of
international supervisory standards and guidance to ensure that
they are appropriate for the U.S. market.
Indeed, the Federal Reserve continues to participate
actively in standards setting at the IAIS while in consultation
and collaboration with the States, the NAIC, and the FIO to
present a coordinated U.S. voice. And crucially, it is
important to remain mindful of the fact that the IAIS standards
and FSB determinations have no binding force in the United
States, and they are not self-executing. We remain committed to
a supervisory framework that best meets the needs of U.S.
insurers as they compete internationally and is appropriate for
U.S. insurance markets and consumers.
Mr. Chairman, Ranking Member Cleaver, and members of the
subcommittee, I would be happy to take your questions. Thank
you.
[The prepared statement of Associate Director Sullivan can
be found on page 44 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Sullivan.
And Ms. McPeak, you are recognized for 5 minutes. Welcome.
STATEMENT OF JULIE MIX MCPEAK, COMMISSIONER, TENNESSEE
DEPARTMENT OF COMMERCE AND INSURANCE, ON BEHALF OF THE NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
Ms. McPeak. Thank you. Chairman Luetkemeyer, Ranking Member
Cleaver, and members of the subcommittee, thank you for the
invitation to testify on behalf of the National Association of
Insurance Commissioners.
There are a number of international developments important
to our sector, but I want to focus today on the impact of the
EU's new Solvency II regime on U.S. insurers and U.S.
regulation and the Federal Government's misguided approach to
addressing that issue with the covered agreement.
EU law requires an assessment of whether another country's
regulatory system is equivalent to elements of Solvency II and
then penalizes that country's insurers with additional
regulatory requirements when that country is not deemed
equivalent by the EU. This has the effect of either imposing
the EU approach on the rest of the world or placing companies
from those jurisdictions at a competitive disadvantage to its
own industry when operating within the EU.
The EU may argue that serving as judge and jury of other
countries' regulatory systems is an important tool for ensuring
emerging markets are safe for EU investment. But the United
States is the largest market in the world and has proven to be
as effective as the best aspirations of Solvency II. Keep in
mind, Europe's new system won't be fully implemented for
another decade, may yet be revised further, and has been deemed
inappropriate for the U.S. insurance sector by State insurance
regulators and the Federal Reserve.
We are already subject to assessment and scrutiny by
Governor's offices, State legislatures, Congress, Government
watchdogs, and international standard-setters. And our track
record of ensuring a competitive and fair market for over 145
years speaks for itself. But as the saying goes, the EU doesn't
have to take our word for it. We have directly engaged our EU
counterparts for years on regulatory issues and to coordinate
the oversight of global market players.
As part of the U.S.-EU dialogue project with Treasury and
the EU, we have explored both our regulatory regimes indepth
and discovered that, despite our structural differences, we
have much in common. On the heels of the project, the EU
granted provisional equivalents to the United States group
solvency regime, which largely benefited EU insurers, and
acknowledged our system's substantial confidentiality
protections--all without a covered agreement.
The one remaining area of concern for the EU is State
reinsurance collateral requirements posted by EU reinsurers. In
spite of serving as a layer of protection for U.S.
policyholders, particularly in times of national disasters, and
questions about the enforceability of judgments to ensure
foreign reinsurers pay U.S. insurer claims, we have
nevertheless responded to this concern and worked to carefully
reduce those requirements. Thirty-five States have now adopted
those changes, and they recently became an NAIC accreditation
requirement, virtually assuring that all States will come on
board.
Despite this progress and the obvious lack of any other
legitimate concerns with our system, the EU and our Federal
Government have entered into closed-door negotiations for a
covered agreement to resolve a problem that largely no longer
exists, potentially at the expense of State insurance consumer
protections.
Setting aside for a moment whether or not the U.S.
regulatory system is equivalent to Solvency II, the Treasury
and the USTR have moved forward with a covered agreement
without answering an important question: Does the benefit
outweigh the cost? To our knowledge, neither the Treasury nor
the USTR have gathered data to address this question.
Further, the process has been conducted largely in secret.
State insurance directors have been repeatedly promised direct
and meaningful participation in negotiations, but the small
group of us included in the process are merely observers,
subject to strict confidentiality with no ability to consult
our fellow regulators. This must change, and we are aware of no
rule or law that applies to the covered agreement process that
would preclude broader transparency and accountability.
Additionally, we urge Treasury and the USTR to take
preemption of State insurance consumer protections and any
expansion of the Federal Government's role in insurance
regulation off the table. State legislatures and Congress
should decide the specifics of U.S. insurance regulatory power
and who shall exercise it, not Federal bureaucrats and
certainly not the EU.
In conclusion, after more than a decade of dialogue and
information exchange, the EU has all of the information it
needs to recognize the U.S. insurance regulatory system and
avoid future regulatory retaliation. Instead of negotiating a
potentially preemptive agreement behind closed doors to solve a
problem of the EU's creation, we urge our Federal colleagues to
push back on the EU and urge them to reconsider their laws
before agreeing to preempt ours.
Thank you again for the opportunity to be here on behalf of
the NAIC, and I look forward to your questions.
[The prepared statement of Commissioner McPeak can be found
on page 28 of the appendix.]
Chairman Luetkemeyer. Thank you for your testimony.
And, with that, I will recognize myself for 5 minutes for
questions.
Mr. McRaith, I have a copy of a press release from the
Treasury Department here. This is a joint statement between you
and the EU with regards to--``Bilateral Agreement on Insurance
and Reinsurance Measures'' is the headline and it says that you
are very close on some key issues. Can you give us an update on
where you are with the negotiations on a covered agreement?
Mr. McRaith. As reflected in that public statement, Mr.
Chairman, the recent discussions in Washington that occurred
last week did provide for some progress, some increased
opportunity to reach an agreement through negotiations.
However, it is and it remains unclear whether we will be
successful in those negotiations. We intend to pursue the
covered agreement, but we do want to be clear it is uncertain
the outcome at this time.
Chairman Luetkemeyer. So what you're telling me is you have
agreed on a couple of things, but you are a long way from
agreement, and there is none imminent? Is that right, what I
read from your statement?
Mr. McRaith. I think I would characterize it more as saying
that we are improving and increasing our understanding of the
respective arguments and the negotiating positions. I would not
say that we reached agreement on key issues. We did increase
understanding on the key issues, and I would say we closed the
gap of misunderstanding.
Chairman Luetkemeyer. Do you have a timeframe within which
you believe this will be done?
Mr. McRaith. Our aspiration is to move forward as quickly
as possible given the implications for companies, including
like Shelter Re, the one that you mentioned in your opening
statement.
Chairman Luetkemeyer. Now, following up on that part of it,
this would appear to me to be kind of a dangerous situation we
are letting sort of hang out there. Is this being addressed?
Are you working on this issue? Are you pushing back?
I know I have had a lot of folks in the industry come to me
and say now, with this situation, we need to push even harder
for the bill that I have offered to make sure it is in place to
be able to give you the leverage, to give us the oversight that
is needed to be able to push back against these folks. Because
if my companies in my district are getting it, I am sure there
are other companies around the country that are getting this as
well. And I understand there are other countries in Europe that
are starting to look at this as well.
Mr. McRaith. We are acutely concerned about the
implications for U.S. industry and U.S. consumers. Putting
aside the characterization of the EU approach that some might
offer, it is fundamentally their determination and their
decision. We disagree with it. We don't like it. It will never
work in the United States. It will not apply to U.S. firms
outside of the EU. But we need to reach an agreement at the
Federal level in order to ensure that becomes the reality.
Chairman Luetkemeyer. Okay. Is this included in your
covered agreement discussions?
Mr. McRaith. The potential--if we were to reach an
agreement, it would resolve all of these issues for our--it
could potentially resolve all of these issues for our industry.
That is the objective of our negotiation.
Chairman Luetkemeyer. Mr. Sullivan, do you concur with how
Mr. McRaith has characterized the negotiations at this point?
Mr. Sullivan. We recognize the authorities of the FIO and
the USTR. I wouldn't characterize the negotiations because I am
not as close to them as he is.
Chairman Luetkemeyer. Okay. Ms. McPeak, you heard me
discuss the situation with Shelter Re here in my State and with
Mr. McRaith. And you made a statement earlier that said that
problems no longer exist. That would appear to be kind of a
problem to me. Do you see a way that you can resolve that
without a covered agreement or without negotiations? Or what is
your opinion of that?
Ms. McPeak. Yes, sir. Thank you for the question, Mr.
Chairman.
I said the problems no longer substantially exist because
we are addressing the reinsurance collateral being required to
be posted by EU insurers through our NAIC model and the
adoption by the States. But we are not sitting idly by with the
actions of BaFin. At the NAIC, we had a hearing at our recent
quarterly meeting asking for feedback from insurers about
integration and implementation issues from the implementation
of Solvency II. The issues of BaFin came to our attention. We
had already charged our (E) Committee to look at ways that we
might need to ensure consumer protections in the instance that
collateral might be affected.
But in the meantime, we are also looking at our qualified
jurisdiction process, because one of the aspects that we
consider in deciding whether a jurisdiction is qualified for
reduced reinsurance collateral under the model is whether they
grant reciprocity to our insurers. And so the actions by BaFin
would seem to be in violation of that, and we are certainly
considering them.
Chairman Luetkemeyer. Thank you for your response.
And I just wanted to add, we do have up on the screen--and
will continue to have it there for a while--the number of
meetings over the next 5 months, 80 percent of which are not
open and transparent. And I think this is a concern. I hope
some of my colleagues follow up with some questions with
regards to this, because I think we need to have as much
openness and fresh air to this process to make sure everybody
knows what is going on, to alleviate concerns and rumors and
conjecture and those things. So I appreciate your answers to
those questions as they come up.
With that, I yield to the ranking member, Mr. Cleaver, for
5 minutes.
Mr. Cleaver. Mr. Chairman, before I ask any questions, let
me associate myself with your earlier comments and perhaps go
even further. Realizing the need for transparency, as you just
mentioned, I am extremely disturbed by the fact that the USTR
did not come here today. And if I were a conspiracy theorist, I
would say they are meeting with the Russians. But I am
frustrated, because, as you mentioned, it just doesn't look
good. It is not a good thing.
And at a minimum, I would have thought they would have
contacted you or contacted me as ranking member, and they did
not. They didn't contact the staff. I needed to say that so I
could feel better. And I would just as soon have the chart
taken down. They are not here, and they are not going to show
up, so there is no point in having that up there.
Now, good afternoon. Thank you so much for being here. My
questions are based on trying to get some real clear
information on what is going on.
So, Mr. McRaith, if you can just kind of bring us up to
date on the status of the negotiations. Where are we on this
day?
Mr. McRaith. We have met with our European Union
counterparts on four occasions, with a State regulator at the
table for each one of those sessions. We recently concluded a
negotiating session last week in Washington that lasted 2 days.
Our hope is to reconvene with our European counterparts in the
near future to try to make further progress.
Mr. Cleaver. One of the concerns I have is Brexit. We have
had over 40 years--I don't know how--40-something years old, 40
years of England doing business can the EU or doing business in
the EU. And without, they probably have all kinds of trade
agreements. What is that--and I know the exit is not going to
take place in the next week, but how is that being factored in?
London is the economic capital of Europe. What is going on
in relation to these negotiations?
Mr. McRaith. The European Union is represented for purposes
of these discussions by the European Commission. That
representative represents all of the 28 members of the European
Union, which includes the United Kingdom. If the U.K. were to
withdraw from the European Union at some point in the future,
then we would have to address that possibility at that time.
At this time, right now, given a world of hypotheticals, it
is not something that is a key component of our negotiations.
We will deal with the EU, and resolve that issue. If there are
issues down the road that require us to deal directly with the
U.K., we would do that.
Mr. Cleaver. Ms. McPeak, or any of you, maybe Mr. McRaith
again, trade agreements are front and center in all of the
discussions politically around here. What is the covered
agreement? How does the covered agreement differ from other
trade agreements?
Mr. McRaith. A covered agreement involves prudential
measures. Prudential measures that apply to the insurance and
reinsurance industry do not--and it does not involve trade-
related or market access issues. In that sense, it is a
fundamentally different agreement or the agreement itself is of
a different nature.
Mr. Cleaver. All right. I am very concerned about the time,
and I heard the little buzzer. So I will yield back the balance
of my time. I want to make sure Mrs. Beatty has a chance.
Chairman Luetkemeyer. Okay. We will try and get one or two
more in here yet, but votes have been called, and we are down
to 12 minutes. So Mr. Ross from Florida is the first one up,
and he is recognized for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman.
In looking at that chart there, Director McRaith, it shows
all the meetings that have been held this year. Let me ask you
this question: Are you put on notice of all the meetings with
regard to the IAIS concerning the international standards? Are
you given notice?
Mr. McRaith. That is right. Yes, IAIS members receive--are
aware of or receive notice of all meetings.
Mr. Ross. So would it be safe to say that, as referenced
above, assuming those are all IAIS meetings with regard to
international standards, you were at least given notice of
those meetings?
Mr. McRaith. That is a fair statement, yes.
Mr. Ross. Did you attend or have any representative attend?
Mr. McRaith. Not necessarily. Many meetings, yes, but
because we coordinate with our U.S. colleagues, there are some
issues that specifically are within the province, for example,
of the State regulators; we don't get directly involved with
the market conduct committee, for example.
Mr. Ross. Okay. Ms. McPeak, how active--or let me ask you
this: How has this been for the NAIC to have opportunity to be
part of the negotiations?
Ms. McPeak. The covered agreement negotiations?
Mr. Ross. Yes, ma'am.
Ms. McPeak. We have a very small team of regulators that
are subject to very strict confidentiality provisions to
participate. We are allowed to have one State regulator in the
room during a negotiation, and the rest of us who have signed
that confidentiality agreement, the other five of us are
briefed afterwards.
Mr. Ross. And so, with regard to those meetings that are
shown there on the graphic, have you been put on notice of
those meetings?
Ms. McPeak. We generally have notice of those meetings if
they are IAIS-related, yes, sir.
Mr. Ross. And do you usually have a representative there?
Ms. McPeak. We would either have a State insurance
regulator representative or a staff member of the NAIC present
at the majority of those meetings. I wouldn't say all of them
because not all of the issues we are actively engaged on, and
we participate by phone if possible.
Mr. Ross. Okay. Now, you talked about something earlier,
reciprocity versus uniformity, and I think that is something
that is really important here, because we have a system in
place since McCarran-Ferguson that allows us probably by far
and undisputable, in my opinion, with the best regulatory
scheme for insurance on behalf of consumers in the world, and
that is our individual State-regulated schemes.
We protect consumers. We make sure capital requirements are
met. Now, capital requirements are somewhat heterogeneous. In
other words, risk is dependent upon the geographic region.
Would we not have a little bit different problem? You can't
make a homogeneous risk on an international standard. So my
concern is, what if we had a covered agreement that allowed for
reciprocity instead of uniformity? Is that possible?
Ms. McPeak. I would defer to Director McRaith about the
possibility of reciprocity, but I would agree with you that it
is a very challenging endeavor to create a system of an
international capital standard that is homogeneous across the
world, because our valuation systems differ, just as one
example.
Mr. Ross. What would you say, Director, to that? What are
the chances of reciprocity? In other words--we have a system in
place, which you know, as a former insurance commissioner, by
far beats anything.
Mr. McRaith. Congressman, you and I have had many
conversations on this subject over the years.
Mr. Ross. Yes.
Mr. McRaith. To be clear, the objective of the covered
agreement is exactly that. It is a recognition that the U.S.
system is the U.S. system. To the extent it will change, it
will be your decision. It will not be driven by any external
force or idea at all.
Mr. Ross. And I appreciate that, because I firmly believe
that having to keep different standards by our domestic
carriers to meet the qualifications of the IAIS as well--or
Solvency II--as well as their State regulator, is only going to
inure to the detriment of the consumer with higher policies.
Mr. Sullivan, you talked about, again, in your statement
that this is nonbinding and that the international standards
are nonbinding. Is it us that will make the decision whether it
is going to be binding, or is it a regulatory agency, such as
the FSB, that is going to make it binding?
Mr. Sullivan. It would absolutely be the authorities here
in the United States, be it the States and the NAIC through the
promulgation of a model law or something to enact something
similar to a standard. Or at the Fed, we would have to do that
through our formal rulemaking. But in either case, we, the
regulators in the United States, make the decision around what
we are going to adopt, and we would likely tailor it to some of
the uniquenesses that you pointed out about the U.S. markets.
Mr. Ross. And I appreciate that. So, essentially, you are
saying that it would be the FSB that would have to approve the
covered agreement in order to make it binding?
Mr. Sullivan. No. The FSB does not have a role in the
covered agreement. I don't know if Director McRaith--
Mr. Ross. I am trying to figure out, because you say in
your testimony that it would be some regulatory rulemaking
authority that would make it binding. And I am trying to figure
out who that would be in the United States that would bind our
State regulators to international standards.
Mr. Sullivan. For international standards, it would be,
again, either the NAIC through the promulgation of a model law
and then the States adopting it or for the institutions that
the Fed supervises us going through the rulemaking process.
Mr. Ross. Okay. Thank you. I see my time is up, and I yield
back.
Chairman Luetkemeyer. The votes have been called. I think
we are looking at five votes, so we will probably be back here
at, I would say, 3:15 to 3:30, somewhere in that vicinity. So I
apologize to the witnesses, but if you can stick around, we
should return shortly.
And, with that, we will call a recess.
[recess]
Mr. Luetkemeyer. The subcommittee will come to order. And I
apologize, again, to the witnesses for the extended delay here.
We were whipping votes on our side. So it takes a long time for
us to discuss and figure out what we are going to do. And then
at the end of the day, we change our minds anyway. You guys
know how the process works.
Mrs. Beatty is actually next in line, and she will go next,
but to expedite things and maximize everybody's time here,
let's go to Mr. Rothfus for 5 minutes and recognize him and
begin the questioning.
Mr. Rothfus?
Mr. Rothfus. Thank you, Mr. Chairman.
Ms. McPeak, I am concerned about the sequencing of the FSB
and the FSOC decisions that we see coming. As you know, in some
cases the Financial Stability Board has gotten ahead of our own
domestic regulators. I view this as problematic both for
regulatory accountability and quality, as well as our national
sovereignty.
I spoke about this issue earlier today with Chair Yellen,
and it has been a frequent topic of discussion in our
committee.
Do you believe that the United States should decide its
position on international insurance standards, such as capital
standards, prior to agreeing to an international standard?
Ms. McPeak. Certainly, I think that the domestic
international capital standard is our priority and where we
should direct our attention. We do feel like participating in a
discussion on the international standard, though, is important
both to influence the discussion at the international level and
to make sure that our domestic standard is something that comes
to a similar outcome.
Mr. Rothfus. Has your organization been participating with
the Financial Stability Board meetings on insurance standards
or the designation of insurers as a globally systemically
important insurer?
Ms. McPeak. We don't participate in the Financial Stability
Board. We do have a seat at the FSOC, but it is a nonvoting
position there.
Mr. Rothfus. Did you or anyone from your organization at
any time agree to designate any U.S. insurer as a globally
systemically important insurer as part of any FSB discussions
at all? Nothing? You have had no conversations with them?
Ms. McPeak. No, sir, we are not entitled to participate in
those discussions. We have been very vocal that we don't think
that we have any insurers in the United States that are
globally significant and that we would not designate those as
the domestic regulators of those companies.
Mr. Rothfus. Thank you.
Mr. Sullivan, earlier today I expressed my concerns to
Chair Yellen about the sequencing of designation decisions
coming from the FSB and the FSOC. There is a February 2015
letter from the FSB Chairman, Mark Carney, that he wrote to FSB
members, and he wanted the FSB members to agree to full,
consistent, and prompt implementation of agreed reforms. This
would seem to indicate that some FSOC decisions might follow
from FSB determinations and that they don't arise out of an
independent process.
That seems to be the spirit in which things have moved.
MetLife and Prudential were designated by FSB in 2013 as GSII
and only received FSOC designations after that date.
When undertaking its domestic designation process, does
FSOC consider the designation decisions made by foreign
regulators such as the FSB?
Mr. Sullivan. I think your question was appropriately
directed to Chair Yellen and/or the FSOC. I would point out,
though, I believe that the domestic designations did precede
the FSB designations. MetLife, of course, was a bank holding
company, so it was not subject to designation as a SIFI until
it dropped its bank holding status, and then it was brought
into the FSOC process.
Mr. Rothfus. One concern that the committee has heard from
a wide variety of stakeholders is the need for proper
sequencing of the domestic and international capital standards.
Where are we on the domestic capital standard rulemaking?
Mr. Sullivan. As you may be aware, the Board issued an
advance notice of proposed rulemaking in which we laid out an
architectural framework for two intended paths that the board
may, operative word, choose to pursue.
The ANPR is a result of much stakeholder engagement. As I
mentioned in my oral and written testimony, we have had over 60
meetings with stakeholders in the last year-and-a-half. But
notwithstanding that, we felt the necessity to further consult
with interested of stakeholders and those that ranged in the
spectrum from industry representatives to the Academy of
Actuaries, the rating agencies, and the like.
So I feel really good about the extent and the openness
that we have demonstrated in arriving at an ANPR, but we are
very early in the process.
Mr. Rothfus. Can you tell us why it is important that the
Federal Reserve complete its domestic capital standard work
before consenting to the adoption of an international capital
standard?
Mr. Sullivan. In our ANPR, we noted that we did not believe
that the international capital standard was mature and advanced
enough for us to consider it as an alternative. We therefore
are charting our own path and moving forward with our own
proposals.
Mr. Rothfus. Thank you.
I yield back.
Mr. Luetkemeyer. With that, we will go to--Mr. Heck is not
a member of this subcommittee, but we welcome him here today.
As a non-member of the committee, he is the last one to be able
to ask question. So until we get all the members through asking
questions, Mr. Heck, we will ask you to wait, but we will get
to you at the very end here if you will stick around.
With that, we go to the gentleman from Texas, Mr. Williams.
He is recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
Thank you all for your testimony today.
The United States has the largest pro-consumer and
competitive insurance market in the world. For over 150 years,
the U.S. State-based insurance model has worked, and I believe
Congress has stated that rather clearly over the years.
Now, while the United States has a proven system in place,
moving toward an unknown, untested international standard, in
my opinion, would be unwise.
So that being said, Mr. Sullivan, can you provide the
subcommittee with some examples of overseas insurance
regulatory initiatives that if adopted in the United States
might result in decreased U.S. competitiveness abroad?
Mr. Sullivan. I don't have any examples that come to mind.
I would just say that our work continues to make sure that any
standards that we would consider here comport with being in the
best interests of U.S. consumers and our U.S. insurance
markets.
Mr. Williams. And make sure we are competitive. That is the
main thing.
Mr. Sullivan. Indeed.
Mr. Williams. Commissioner McPeak, is it possible that
those standards applied in Solvency II could impact or affect
domestic-only insurance companies, and if so, what do you think
would be the impact?
Ms. McPeak. I think United States insurers subject to
Solvency II requirements would be extremely detrimental to the
competitive nature of the market. There are completely
different accounting and valuations standards used for Solvency
II that would require our insurers to essentially maintain a
second set of accounting books, because the system that we have
had in place for 145 years and has worked very well is a
completely different statutory accounting system, and we feel
comfortable with that.
Mr. Williams. Now, what is the downside to applying the
standards established in Solvency II to U.S. companies that
conduct international business? I think you said a lot of that
right there.
Ms. McPeak. That is exactly right. It is the cost of
complying with a completely different accounting and valuation
financial analysis system.
Mr. Williams. I am going to also say that there is a fear
that without proper oversight of U.S. negotiators, the internal
international regulatory standards could become the gold
standard all over the world.
Again to you, Ms. McPeak, how might this application of a
gold standard with lack of proper oversight affect U.S.
insurers?
Ms. McPeak. Again, the actions of Team U.S.A. at the
international level must always consider the implications on
the United States market, particularly in terms of consumer
protection and the cost to consumers to comply with those
international standards.
And I think that all three of us here who have participated
in those discussions at the IAIS always bring forth the
question of whether or not the standard is implementable in the
United States, and that means something that we would be
willing to adopt as regulators of the industry.
And in a lot of cases, we try our best to affect those
standards before they are passed. But we are very clear that
not every idea or standard that comes out of the IAIS is
something that is going to work in the United States market.
Mr. Williams. Thanks for being clear about that.
Next question: Could international standards eventually
trickle down to the State level even if they don't initially
adopt them?
Ms. McPeak. I would be surprised. It could happen. But,
generally, because of the substantial involvement of the NAIC,
State insurance regulators are generally like-minded about the
international standards and whether or not they are appropriate
for the marketplace. And it would be very difficult for a
single State or a group of States to adopt those standards that
would create a very different system than the rest of the
national market.
Mr. Williams. What are some consequences for U.S. insurers
and the U.S. regulatory structure should international
negotiations prove disadvantageous to the current system?
Ms. McPeak. As many of us have said, none of these
standards are self-executing. And so we just certainly wouldn't
adopt those here in the United States either through Federal
congressional action or action of our legislatures and our
States or rulemaking from the regulators that are here today.
If it is not something that would work for the United States, I
don't see that it would be something that would be adopted
here.
Mr. Williams. Thank you for having your eyes wide open and
not necessarily--we just have to make sure that U.S. consumers
and companies are driving it and not following it. We
appreciate that.
Mr. Chairman, I yield back.
Mr. Luetkemeyer. The gentleman yields back his time.
With that, we go to Mr. Barr from Kentucky. He is
recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Commissioner McPeak, it's great to see you again. I enjoyed
working with you in your days in Frankfort as the executive
director of the Kentucky office of insurance. Congratulations
on your move to the State of Tennessee.
And as a Congressman who represents the University of
Kentucky, we want you home. When you get a chance to finish up
your career in Tennessee, we would love to have you back in the
Commonwealth of Kentucky.
Let me ask you a few questions about the subject of today's
hearing. Obviously, you have testified that many U.S.-domiciled
insurance companies are concerned that measures that are being
considered by the IAIS are really ill-suited for U.S. insurers,
specifically draconian bank-style capital standards. And also I
think you just testified with my colleague from Texas that the
costly accounting standards would be problematic for American
insurers.
Specifically, can you elaborate on how the cost of
compliance, if we were to adopt these European standards, would
impact the competitiveness of American insurers? And then, what
impact would it have on American consumers of insurance
products?
Ms. McPeak. Certainly. Thank you for the question and the
invitation to come back to Kentucky. I look forward to doing
that someday.
Some of the standards that have been discussed at the
international level cause us great concern in terms of valuing
our assets and liabilities differently than our companies
currently do in the United States. There are certain provisions
about equity and margin over equity that would be counted
differently for United States insurers that would ultimately
lead to a greater reserving in capital needs for the company,
which then trickles down to the consumer in increased costs,
because you would be requiring companies to hold additional
levels of capital in various instances where United States
regulators have said we are very comfortable with this
statutory accounting system and the reserving system that is
currently in place.
Mr. Barr. To follow up, obviously the NAIC participates in
some way in IAIS meetings related to covered agreement
negotiations. Question: Is the NAIC's participation meaningful
in your estimation or is it deficient?
Ms. McPeak. The NAIC does participate in covered agreement
negotiations. Those are led by Director McRaith. There is a
small group of us, a group of six who are allowed to
participate, but only one individual can physically be in the
room at the time of the negotiations. And so there is an issue
with discussion and transparency with our group of six and then
with our fellow regulators, our additional group of 56 States
that would like to know what is going on there.
Mr. Barr. Director McRaith, I did appreciate your testimony
earlier that, of course, your objective at the FIO is to
confirm that the U.S. insurance regulatory system serves the
goals of insurance sector oversight.
And, Mr. Sullivan, the same with your testimony.
But I would ask Commissioner McPeak on behalf of the State
departments of insurance whether or not you believe that to be
the case, that we are, in fact, pursuing that objective in
these international negotiations?
Ms. McPeak. I think the interest from the industry and the
resolving of the uncertainty that Director McRaith talked about
is the finding of equivalence from the European Union and the
European Commission on the various elements of Solvency II.
I understand that is certainly the mission of the
negotiations, and I do believe that is the direction that the
negotiations are under. I would suggest, though, that there is
nothing today that would prevent the European Union from
finding the United States system equivalent. We have proven
ourselves to be very efficient and effective over our history.
Mr. Barr. And to Mr. McRaith and Mr. Sullivan, what
concerns me, and the reason why I cosponsored H.R. 5143 with
Chairman Luetkemeyer is that, whereas in the USTR process the
information on negotiations that are conducted in connection
with international trade negotiations are a very transparent
back-and-forth dialogue, what seems to be missing in the
international negotiations over insurance standards is any
significant public back-and-forth dialogue between FIO and
stakeholders in the midst of those negotiations.
And given our interest, Congress' interest in this
legislation that would hoist upon you all additional
transparency members, is the USTR process one that could be
replicated by both Treasury and the Federal Reserve when it
comes to these international insurance standard negotiations?
Mr. McRaith. Let me talk specifically with respect to the
covered agreement negotiations, Congressman.
Mr. Barr. Yes.
Mr. McRaith. Fortunately, the work we are doing builds on
years of public engagement with industry and stakeholders.
Commissioner McPeak's written testimony even describes that in
great detail. All of that is public. There were reports that
were published.
Through our negotiations, we have engaged with industry
stakeholders, with consumer stakeholders, we shared documents
that we draft, documents we receive with the State regulators.
The State regulators gave us important technical feedback. For
the first time, I believe, we actually have a State official in
the delegation and at the table for an international
negotiation.
So when we conclude, the text will be with you for 90 days
before it becomes final. So you will see it. It will also be
published in the Federal Register.
Mr. Barr. Thank you for your testimony.
I yield back.
Mr. Luetkemeyer. The gentleman's time has expired.
The gentleman from California, Mr. Royce, is recognized for
5 minutes.
Mr. Royce. Thank you very much, Mr. Chairman.
And I agree with the chairman's previous statement of
support for a narrow covered agreement to be concluded as
quickly as possible, because I think it serves as the only
realistic hope we have of ensuring U.S. companies that they can
really compete on a level playing field.
But a year ago, I sent a letter to the Treasury and the
USTR urging them to expeditiously negotiate a covered
agreement. My concern, which I stated at the time, was that
without action, U.S. companies with businesses in the EU would
be put at a direct competitive disadvantage and that continued
open access of U.S.-based reinsurers would not be assured and
U.S. insurers would be exposed to the risk of additional
regulatory actions by individual U.S. companies.
Now, one of the reasons we are here is because, sadly, the
prognostications here have been proven correct. Sadly, to date,
we have also seen actions taken by regulators in the U.K., the
Netherlands, Austria, Germany, and Poland to place U.S.
companies at a disadvantage. In the latter two countries, U.S.
reinsurers are now prohibited from conducting cross-border
operations without forming and capitalizing a branch or a
subsidiary. We could have solved this.
And I would ask rhetorically when we might expect the 19
jurisdictions that have yet to adopt the NAIC's model
reinsurance law to get on board, but I also suspect I know the
answer to that, and it is going to be not soon enough, and that
is the comeuppance here.
So Congress predicted this would be the case. I could go
back to Kanjorski's original observations this was exactly why
the concept of a covered agreement was pushed on a bipartisan
basis by this committee. The author of that provision, Paul
Kanjorski, said at the time--and this was back in 2009--``The
FIO and the USTR would be given the authority to enter into a
covered agreement to allow for the preemption of State laws to
harmonize reinsurance standards across national borders.''
So with all due respect to everybody here, notice was
served 7 years ago about where we were headed if we didn't get
this worked out.
So where does that leave us?
And, Director McRaith, I would like to pose the question to
you, because you know better than most how we got here. You
were before us as a commissioner during the discussions on
Dodd-Frank, and now you are leading negotiations on the covered
agreement. And I just ask, what do you think of the notion of a
State-by-State solution on reinsurance collateral at this
point?
Mr. McRaith. Congressman, you are absolutely right. We are
at a moment in time when these concerns are not hypothetical.
This is not some metaphysical dilemma that we can debate until
the cows come home. The issue is real for our industry. It is
real today. The covered agreement gives us an opportunity to
bring closure to issues that have been debated and discussed
for decades. It is not to the exclusion of the States. It
supports the State system.
As you note--I was director of insurance in Illinois--I
strongly believe in the State system and the work that my
colleagues, former colleague Julie McPeak and her current
colleagues, do to protect consumers every day. The two are not
mutually exclusive. The covered agreement preserves our system
of regulation and delivers real, meaningful results for our
industry operating in the EU.
Mr. Royce. I appreciate your observations, and I certainly
concur.
And, Mr. Chairman, I thank you very much for this hearing
and the ability to get to the bottom of a problem that needs to
be solved here. So thank you.
Mr. Luetkemeyer. The gentleman yields back.
With that, we go to the gentleman from Washington. I
welcome him to our subcommittee and recognize Mr. Heck for 5
minutes.
Mr. Heck. Thank you, Mr. Chairman. Just to clarify, I am a
member of the full Financial Services Committee.
Mr. Luetkemeyer. Right.
Mr. Heck. And I appreciate the opportunity to be here very,
very much.
I would like to begin with a question that any of you can
answer, in fact I would ask all of you to answer, and that is,
are any of you seeking to either overturn or to diminish the
policy laid out in the McCarran-Ferguson Act that the States
will be the primary regulators of insurance companies? Is
anybody seeking to do that, overturn or diminish it? A verbal
answer for the record would be much appreciated.
Mr. Sullivan. No. In fact, my oral and written testimony
reflects a preservation of and a recognition of McCarran.
Mr. McRaith. Congressman, our work globally with the States
and with the Federal Reserve is intended to preserve and
support and enhance the U.S. system of oversight, which is
fundamentally reposed with the State regulators.
Mr. Heck. So you do not seek to overturn or diminish?
Mr. McRaith. Congressman, I have testified in front of this
committee and our office has published reports supporting the
work of the State regulators.
Mr. Heck. Is that, then, a yes, you do not seek to overturn
or diminish?
Mr. McRaith. I'm sorry. I thought I was being unequivocal.
I will be more unequivocal. We are absolutely not seeking to
overturn or diminish the role of the States as provided in
McCarran-Ferguson.
Mr. Heck. Thank you very much.
Ms. McPeak. And, I am sure not surprisingly, I am a strong
proponent of McCarran-Ferguson and the State regulation.
Mr. Heck. I am shocked.
Ms. McPeak. I know.
Mr. Heck. There is gambling in this establishment.
Thank you.
So I want you all to know in that spirit that today I will
be introducing an insurance bill, because I think there can be
more than one good idea about how to uphold the objectives and
principles that we seem to have agreed upon by consensus that
will codify good practices in international insurance
negotiations.
My bill is predicated on two principles, and the first is
that when the United States discusses insurance in
international forums, our representatives should include
primary insurance regulators from the States. That is the first
principle.
Do any of you disagree with that principle?
Mr. Sullivan. No, sir. I think that is a good principle.
Mr. McRaith. We greatly appreciate our current
collaboration with the States, including Commissioner McPeak,
who is the vice chairman of the Executive Committee at the
IAIS.
Mr. Heck. We seem to be struggling with being truly
unequivocal today, Director McRaith. Does that mean that you--
Mr. McRaith. I am trying to give context for my remarks,
which is we absolutely welcome and value our collaboration with
the State regulators globally, including as it occurs today.
Mr. Heck. Commissioner McPeak, surprise us again.
Ms. McPeak. Yes, certainly, we would support such
legislation.
Mr. Heck. And, Commissioner McPeak, how would you feel
about a statutory mandate to include and/or consult insurance
commissioners in international forums where insurance
regulations is being discussed, a requirement that we do that
as long as we all seem to agree upon it?
Ms. McPeak. We would certainly appreciate the structure not
only for today, but in the future, as these international
discussions will be continuing and the world of insurance is
certainly much more being played out on the global front. And
so having a statutory structure in place and a role for the
State insurance commissioners is something that we would
strongly support.
Mr. Heck. So the second principle that my bill that I will
introduce later today--I don't know if I mentioned that I will
be introducing legislation later today, but I will be--is that
U.S. financial policy should be made in the United States.
Does anybody have any objections or disagreement with that
principle?
Mr. Sullivan. I do not.
Mr. McRaith. No, sir.
Ms. McPeak. Absolutely not.
Mr. Heck. Commissioner McPeak, do you think that principle
is being consistently, unwaveringly, and in good faith upheld
at the present time and in the immediate past?
Ms. McPeak. I do in the sense that we are all currently
working on an insurance capital standard for the United States
that makes sense for us. State regulators are working on a part
of that. Certainly, the Federal Reserve Board is working on
their proposed rulemaking in that endeavor. But we are also
engaged in discussions at the international level. I do feel
like financial policy is being made in the United States for
our United States market.
Mr. Heck. So given that answer, can I assume that, like my
question regarding the other principle, you think that this one
ought to be reflected in statutory language as well?
Ms. McPeak. I do think that would be extremely helpful to
us as we are not only working on our own financial policies in
the United States but also representing the United States
internationally.
Mr. Heck. I thank you all very much. And I am only sorry,
Commissioner McPeak, that you are not a Member of this
institution so that you could cosponsor the legislation that--
did I mention--I am introducing later today.
Thank you, Mr. Chairman, very much.
Mr. Luetkemeyer. The gentleman's time has expired.
I have a couple of redirects for the panel.
With regard to the charts that we had on the board a while
ago, there are 5 months' worth of meetings--there they are,
they are back up--and 80 percent of those are meetings that are
closed.
And I guess the first question is, Mr. McRaith and Mr.
Sullivan, do you or your staff or some representative attend
every single one of those meetings?
Mr. Sullivan. I will go first.
No, we do not. In fact, we, the Fed, have only recently
become a member. I would say recently; we just celebrated our
2-year anniversary. As a member of the IAIS, we recently stood
up my team inside of the Federal Reserve. So we are still kind
of the new kids on the block. We have to pick and choose, quite
honestly, what committees we do participate in, and those are
the ones that have the most interest to us around financial
stability and those sorts of committees--the insurance capital
standard and the related subcommittees and working groups.
We can't be everywhere. For instance, as I mentioned in my
testimony, we don't regulate insurance products or insurance
markets the way the NAIC does. There are a number of those
committees that work on those issues and there would be no need
for us to have representation at those committee meetings.
Mr. Luetkemeyer. Okay.
Mr. McRaith?
Mr. McRaith. I would echo that response. First of all, I
can't read the screen.
Mr. Luetkemeyer. I don't blame you. The one on the back is
large.
Mr. McRaith. All right.
Mr. Luetkemeyer. We have a really tight budget around here,
so we only have one big screen. We have two small ones on the
side, so--
Mr. McRaith. But generally speaking, our focus is on the
areas of prudential oversight. Not all of the committee
meetings that have occurred or will occur relate to prudential
oversight. And we don't have unlimited resources. We have a
small staff, a team who works very hard, and is very capable,
but we don't attend every meeting and are not in every
workstream.
Mr. Luetkemeyer. Do you get summaries or feedback of some
kind on those meetings so that you are aware of what was
discussed in them? Because the point I made originally was that
they are not open to the public. So, therefore, only, I assume,
you or your representative would have access to those meetings.
So, therefore, if you are not attending them, do you get
information back on what was discussed so that in case
something came up that you don't want to get blindsided by it?
I would assume that you are getting some reports of some kind.
Mr. McRaith. Thankfully, for those committees in which we
are not involved, we know the NAIC is involved, so we are
comfortable that our interests as a country are being well-
represented. But then also the IAIS has newsletters, Internet,
website updates that are available to the public, to
stakeholders at large, including the members. So we are able to
stay abreast of developments.
Mr. Luetkemeyer. Okay. So would you say, then, that by
getting those updates, there is a transparent process for you,
at least, that the public--I know Ms. McPeak has made the
comment already about not being able to attend all of the
meetings. Is there a way? I think industry would like to be
able to see what is going on so they know.
I understand there has to be, to a certain degree, some
ability to be able to work behind closed doors to be able to
get certain things done, but I think the product of that
discussion needs to be certainly available for people to see.
And is that made public, then, so that the industry can see
that on a regular basis so those 80 percent of those meetings
people know what is going on?
Mr. McRaith. Mr. Chairman, from my perspective, there are
two issues here. One is we absolutely do not want to publicly
discuss what data or information that could be confidential or
proprietary specific to an individual firm. I know you
appreciate that as well.
Mr. Luetkemeyer. I understand that there are proprietary
concerns.
Mr. McRaith. But, secondly, in terms of development, before
any standard or any development becomes something of formal
policy or final in any sense, it is subject to extensive
consultation in writing, in person, by telephone as well.
So, yes, there are meetings that occur without industry or
stakeholders present, but then industry and stakeholders
receive a lot of opportunity to contribute. In fact I
mentioned, just in 2015, 140 hours or more devoted to engaging
with stakeholders.
Mr. Luetkemeyer. Ms. McPeak, would you like to comment?
Ms. McPeak. I would add to those comments to say that also
on behalf of the NAIC, when issues are released for
consultation to stakeholders, to the interested parties, we at
the NAIC make that a very public process so that we invite
stakeholders to share comments with us in an open forum before
we submit our own comments on behalf of State insurance
regulators.
Now, the stakeholders can certainly submit their own
comments on behalf of their own perspective, but we want to
hear from them about the issues under consultation before we
even submit our comments back as well.
Mr. Luetkemeyer. Thank you.
One more quick comment here before we conclude. I don't
think Mr. Cleaver has any redirects, but I have one more
question with regards to the covered agreement situation.
If we get no covered agreement for an extended period of
time, and we have somebody like Germany that is putting out
demands that our companies who want to operate there put
offices in there and their regulators are forcing our companies
to do things, can this escalate at some point to retribution
for them with their companies here if they are going to force
our companies to do something over there? Is that a scenario
that could happen? What is going to happen here if we don't do
something with these covered agreements, I guess is the
question, and could there be retaliation?
Ms. McPeak. I should probably respond to that, Mr.
Chairman.
We are taking the actions by BaFin and other European Union
countries very, very seriously, and the--
Mr. Luetkemeyer. I would hope so. This is pretty
significant. They are trying to make demands on our companies
and dictate to them to change their business model.
Ms. McPeak. I could not agree more. And, again, I would
reiterate my position that equivalence could be determined
today. And instead, BaFin and other countries are taking
different positions and requiring some additional corporate
structures in order to participate in the markets in Germany.
So our review of the qualified jurisdiction status of
Germany and other countries following the feedback that we
received at our last quarterly meeting, one of the factors that
we will be analyzing is whether the countries are providing
reciprocal treatment to our insurers in their market.
If that is not the case, and that determination is still
under review by our panel of State regulator experts that make
that determination, if the country of Germany is no longer
deemed to be a qualified jurisdiction for purposes of our model
for reinsurance collateral reduction, the German reinsurers
that want to participate in our United States market will lose
the ability to have reduced collateral requirements and will be
required to post additional collateral up to 100 percent of the
reinsurance that they would write in the United States.
This is not insignificant, because our United States
participation in Germany is about one-fourth of what the German
interest is in our United States market in terms of
reinsurance. So if we are unable to make a lot of headway with
BaFin from regulator-to-regulator perspective, the German
reinsurance market will certainly feel the effect of the United
States' qualified jurisdiction decision.
Mr. Luetkemeyer. Mr. McRaith?
Mr. McRaith. Mr. Chairman, I think the question emphasizes
the point that we need to eliminate the world of hypotheticals,
eliminate the prospect of our companies incurring billions of
dollars of additional charges, and we need to reach an
agreement. And as I said earlier in reply to your earlier
question, that is our objective, and we hope to report back to
you in the near future.
Mr. Luetkemeyer. I appreciate that comment, Mr. McRaith,
but I think my point is that I want everybody to know that
there are consequences that are out there if the individuals
from IAIS and Germany and Great Britain, whomever is listening
today, they know that there could be consequences for the lack
of a covered agreement. There could be consequences for their
actions. I think it is incumbent on this committee to make sure
that statement is made and they know that our intentions are
sincere and we will carry them out.
So with that, I want to thank the witnesses for your
testimony today.
I know, Mr. McRaith and Mr. Sullivan, that you have been
more than generous with your time with regards to my requests
to update us on a regular basis. In the CHOICE Act, one of the
things that is in there is to change things around to be able
to come on a regular basis. Maybe we need to do that anyway
just to get an update so we know where everybody is at,
especially with the significance of this issue, to make sure
that everybody knows what is going on to allay concerns, fears,
gossip, what have you, and know what is going on.
So I certainly appreciate, again, all of you being here
today and your willingness to cooperate with myself and my
subcommittee and my staff to be able to get as much information
as we can to stay on top of this.
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 4:17 p.m., the hearing was adjourned.]
A P P E N D I X
September 28, 2016
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