[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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