[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




                 THE IMPACT OF INTERNATIONAL REGULATORY

                    STANDARDS ON THE COMPETITIVENESS

                            OF U.S. INSURERS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 29, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-17
                           
               [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______
                                 

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95-061 PDF                WASHINGTON : 2015
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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


                     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
ROBERT HURT, Virginia                AL GREEN, Texas
STEVE STIVERS, Ohio                  GWEN MOORE, Wisconsin
DENNIS A. ROSS, Florida              KEITH ELLISON, Minnesota
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DANIEL T. KILDEE, Michigan
ROGER WILLIAMS, Texas


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 29, 2015...............................................     1
Appendix:
    April 29, 2015...............................................    35


                               WITNESSES
                       Wednesday, April 29, 2015

McCarty, Kevin M., Commissioner, Florida Office of Insurance 
  Regulation, on behalf of the National Association of Insurance 
  Commissioners (NAIC)...........................................     6
McRaith, Michael, Director, Federal Insurance Office (FIO), U.S. 
  Department of the Treasury.....................................     3
Van Der Weide, Mark E., Deputy Director, Division of Banking 
  Supervision and Regulation, Board of Governors of the Federal 
  Reserve System.................................................     4


                                APPENDIX

Prepared statements:
    Waters, Hon. Maxine..........................................    36
    McCarty, Kevin M.............................................    38
    McRaith, Michael.............................................    44
    Van Der Weide, Mark E........................................    52

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Written statement of the American Council of Life Insurers...    61
    Written statement of the American Academy of Actuaries.......    63
    Written statement of the American Insurance Association......    67
    Written statement of the National Association of Mutual 
      Insurance Companies and the Property Casualty Insurers 
      Association of America.....................................    70
    Written statement of the National Association of Professional 
      Insurance Agents...........................................    99
McCarty, Kevin M.:
    Written responses to questions for the record submitted by 
      Representative Garrett.....................................   101
    Written responses to questions for the record submitted by 
      Chairman Luetkemeyer.......................................   103
    Written responses to questions for the record submitted by 
      Representative Royce.......................................   106
McRaith, Michael:
    Written responses to questions for the record submitted by 
      Chairman Luetkemeyer.......................................   108
    Written responses to questions for the record submitted by 
      Representative Royce.......................................   110
    Written responses to questions for the record submitted by 
      Representative Garrett.....................................   111
Van Der Weide, Mark E.:
    Written responses to questions for the record submitted by 
      Representative Garrett.....................................   113
    Written responses to questions for the record submitted by 
      Chairman Luetkemeyer.......................................   115
    Written responses to questions for the record submitted by 
      Representative Westmoreland................................   118


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

                              ----------                              


                       Wednesday, April 29, 2015

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room HVC-210, the Capitol Visitor Center, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Members present: Representatives Luetkemeyer, Westmoreland, 
Garrett, Pearce, Hurt, Stivers, Ross, Barr, Rothfus, Williams; 
Cleaver, Capuano, Green, Beatty, and Kildee.
    Ex officio present: Representatives Hensarling and Waters.
    Also present: Representative Duffy.
    Chairman Luetkemeyer. The Subcommittee on Housing and 
Insurance will come to order. Without objection, the Chair is 
authorized to declare a recess of the subcommittee at any time. 
We are going to start just a tad early this morning because we 
do have some other activities around the Capitol today, so I 
will get to it in a second here.
    Today's hearing is entitled, ``The Impact of International 
Regulatory Standards on the Competitiveness of U.S. Insurers.''
    Before we begin, I would like to thank today's witnesses 
for traveling to HVC-210 for today's hearing. The audio/visual 
system in the Financial Services Committee's main hearing room 
is being replaced, and the room is being updated to meet the 
requirements of the Americans with Disabilities Act. So I want 
to thank all of you for your patience as we beg, borrow, and 
steal hearing room space over the next few weeks here. As I go 
by the hearing room every day, it looks like we are making 
progress, albeit very, very slowly.
    I want to inform the witnesses that the Speaker's office 
has asked that Members be on the Floor by 10:35 for the joint 
session of Congress for the Japanese Prime Minister. This 
subcommittee will recess no later than 10:45 for the joint 
session. The hearing will reconvene immediately following the 
Prime Minister's remarks, and I encourage our witnesses and 
Members to return to the hearing room as quickly as possible.
    I now recognize myself for 3 minutes to give an opening 
statement. First, I want to start by thanking our distinguished 
witnesses for appearing today. Our Nation enjoys the most 
robust policyholder-centric insurance system in the world. The 
industry performed well during the financial crisis, and 
policyholders enjoyed the safety and soundness that comes with 
our Nation's unique regulatory structure.
    It is vital that we uphold the system that has served 
Americans so well for so many generations. Any discussion or 
compromise that jeopardizes the U.S. insurance industry, or 
more importantly the policyholder, should be rejected.
    This is a complex time for insurance, and while much 
attention has been paid to international discussions, I want to 
assure the witnesses that this committee will not lose sight of 
what is happening domestically, particularly as the Federal 
Reserve begins the rulemaking process for a domestic capital 
standard.
    It is essential that Federal regulators, who are, as a 
reminder, subject to congressional legislative action, work 
with the States and with industry to base any role on the 
system we have in place today. Then, if appropriate, our 
representatives to the International Association of Insurance 
Supervisors (IAIS) can export our insurer-and-policyholder-
centric model to the international insurance community.
    The United States finds itself with the opportunity to lead 
and not be led. We must seize the opportunity. It is vital that 
the gentlemen appearing today work in concert and in the 
interest of the United States to ensure that no ground is ceded 
to foreign regulators and that the necessary time is taken to 
produce commonsense rules.
    International conversations taking place at the IAIS 
continue to cause consternation in the industry. It is my hope 
that today's hearing will help calm those fears, and that our 
witnesses will be forthcoming and give this committee a clear 
vision of where we are headed and when we will get there.
    I look forward to today's testimony and I thank our 
witnesses for attending. With that, I yield 5 minutes to the 
ranking member of the subcommittee, the gentleman from 
Missouri, Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman, and thank you for the 
hearing.
    This probably doesn't happen much, but I would like to 
associate myself with the comments of the chairman. I think he 
pretty much set the tone for the hearing. I recognize that the 
G20 has, in fact, continued to push for the strengthening of 
the international regulatory regime. And I, like my colleague 
from Missouri, would like to make sure that there is a minimum 
of regulatory burden on the insurance industry. After all, the 
problems that generated the 2007- 2008 economic collapse were 
not generated by the insurance industry.
    At the same time, we have to make sure that we don't end up 
with inconsistent requirements across 50 separate jurisdictions 
that could negatively impact the industry.
    So I yield back my time and hope that this will be one of 
those times when everybody works together for a common solution 
to a problem that I think even industry would like to see some 
unity on.
    I yield back.
    Chairman Luetkemeyer. I thank the gentleman.
    And with that, we welcome the testimony of our witnesses 
today. We have Mr. Michael McRaith, Director of the Federal 
Insurance Office, at the U.S. Department of the Treasury; Mr. 
Mark Van Der Weide, Deputy Director, Division of Banking 
Supervision and Regulation, at the Federal Reserve Board of 
Governors; and Mr. Kevin McCarty, Commissioner, Florida 
Insurance Department, who is testifying on behalf of the NAIC.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    If you are not familiar with the box in front of you, green 
means start; yellow means you have 1 minute left; and red means 
that is it. We will try and keep our questions succinct up 
here.
    But with that, Mr. McRaith, you are recognized for 5 
minutes. Thank you.

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

    Mr. McRaith. Thank you, Chairman Luetkemeyer, Ranking 
Member Cleaver, and members of the subcommittee for the 
invitation and the opportunity to join you today. I am pleased 
to be here with my fellow panelists.
    We released the FIO's second annual report on the insurance 
industry in September 2014. The report cited 2013 data showing 
the U.S. industry reported record surplus levels of 
approximately $990 billion. Non-health insurers in 2013 
collected more than $1.1 trillion in premium, nearly 7 percent 
of U.S. GDP.
    The report also cites data showing that private market 
volume is increasing dramatically in developing countries. For 
example, China's private insurance market increased by more 
than $137 billion in the last 5 years, South Korea by nearly 
$50 billion in that same period, and Brazil by more than $41 
billion.
    These facts illustrate the globalization of the insurance 
market and explain the increased focus on global standards. For 
this reason, 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 (IAIS).
    In this work, we collaborate extensively with our 
colleagues at the Federal Reserve and my former colleagues at 
the State regulatory system, including my two colleagues on 
this panel. Our multi-part supervisory structure must be 
coordinated in order for the United States to assert leadership 
in international developments. That is exactly what happens 
today.
    International insurance standards are not new. The IAIS was 
formed in 1994, and State regulators were among the founding 
members. International standards reflect best practices based 
on the collective analysis and judgment of the participants. 
Importantly, international standards are not self-executing in 
the United States. Federal and State authorities will study, 
test, and analyze the potential value and impact of any 
international standard prior to implementation.
    The United States has the most diverse and competitive 
insurance market in the world, with insurers that operate in 
one part of one State and insurers that are multinational and 
engaged in a variety of financial services. With this in mind, 
we work with our international counterparts to build a global 
consensus that works for the United States. Simply put, 
international standards must, when implemented, serve the 
interest of U.S. consumers and industry and the national 
economy.
    The IAIS recently completed structural reform. These 
changes eliminated the pay-for-play dynamic and increased the 
IAIS's transparency and independence. No longer will the IAIS 
depend upon the $20,400 annual fee paid by industry observers. 
Now, open meetings and information will be available to all 
stakeholders, not just those who can afford the annual fee.
    Consultation with stakeholders will be more rigorous and 
uniform. After 12 months of extensive public consideration, in 
2015 the IAIS implemented a better approach to both governance 
and transparency. At the Federal Insurance Office we continue 
to create opportunities for stakeholders to meet in one place 
with all U.S. IAIS participants.
    In 2015, we have continued with the EU-U.S. insurance 
project. The EU and the U.S. are two important jurisdictions, 
both as markets and as homes for insurers. With the 
collaboration of State regulators, we have worked with our EU 
counterparts to improve understanding and, where appropriate, 
consistency and compatibility.
    One objective identified in the project is a covered 
agreement. Not a trade agreement, a covered agreement is an 
agreement between the United States and another country 
involving prudential insurance measures. We look forward to 
engaging with this committee before and during the negotiations 
of a covered agreement.
    The U.S. market and its oversight are unique. Through 
effective collaboration at home and abroad, U.S. authorities 
will continue to provide leadership that complements our shared 
interest in a vibrant, well-regulated market that promotes 
competition and financial stability and protects consumers. And 
finally, in all of our work, internationally and domestically, 
Treasury priorities will remain the best interest of U.S. 
consumers and insurers, the U.S. economy, and jobs for the 
American people.
    Thank you for your attention. I look forward to your 
questions.
    [The prepared statement of Director McRaith can be found on 
page 44 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. McRaith.
    Mr. Van Der Weide, you are recognized for 5 minutes.

 STATEMENT OF MARK E. VAN DER WEIDE, DEPUTY DIRECTOR, DIVISION 
 OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Van Der Weide. Chairman Luetkemeyer, Ranking Member 
Cleaver, and members of the subcommittee, thank you for 
inviting me to testify on behalf of the Federal Reserve. The 
Federal Reserve welcomes the opportunity to participate in 
today's hearing, and I am pleased to be joined by my colleagues 
from the FIO and the NAIC. While we each have our own unique 
authority and mission to carry out, we remain committed to 
working collaboratively on a wide range of international and 
domestic insurance issues.
    With the enactment of the Dodd-Frank Act, the Federal 
Reserve assumed responsibility as the consolidated supervisor 
of insurance holding companies that own banks or thrifts, as 
well as insurance holding companies designated by the Financial 
Stability Oversight Council (FSOC). Since the passage of the 
Act, we have been hard at work creating a supervisory framework 
that is appropriate for the insurance groups that we oversee. 
Our principal supervisory objectives for the insurance holding 
companies that we oversee are protecting the safety and 
soundness of the consolidated firm and their subsidiary 
depository institutions, while at the same time mitigating any 
risks to financial stability. We conduct our consolidated 
supervision of these firms in coordination with State insurance 
regulators, who continue their established oversight of the 
insurance legal entities.
    Congress recently amended the Dodd-Frank Act to enable the 
Federal Reserve to focus on constructing a domestic regulatory 
capital framework for our supervised insurance firms that is 
well-tailored to the business of insurance. Since the passage 
of this amendment to the Dodd-Frank Act, the Fed has been 
engaging extensively with insurance supervisors and insurance 
firms, to solicit views on the various approaches to the 
development of an appropriate consolidated capital regime for 
insurance holding companies.
    We are committed to continuing this engagement and 
following formal notice and comment processes as we move 
forward on our insurance capital work.
    The Federal Reserve is also participating in the 
development of international insurance standards. Some of the 
insurance holding companies that we supervise are 
internationally active firms that compete with global insurers 
to provide insurance products to businesses and consumers 
around the world. Accordingly, in November 2013 the Fed joined 
our State insurance supervisory colleagues from the NAIC and 
FIO and became members of the International Association of 
Insurance Supervisors, or IAIS.
    Through our membership in the IAIS, the Fed has been and 
will continue to be engaged in the development of global 
standards for regulating and supervising internationally active 
insurers. As a general proposition, we believe in the utility 
of having effective global standards for global financial 
firms. When implemented consistently across jurisdictions, such 
standards can help provide a level playing field for global 
firms, can help limit regulatory arbitrage and jurisdiction 
shopping, and can promote financial stability.
    Since joining the IAIS in late 2013, the Fed has been an 
active participant in several key committees, working groups 
and work streams. Throughout our first year-and-a-half as a 
member of the organization, and consistent with our statutory 
mandate, we have been particularly focused on the financial 
stability and consolidated supervision work of the IAIS.
    One of the key strategic priorities of the IAIS is the 
development of a supervisory framework and consolidated capital 
framework for internationally active insurance groups. The Fed 
has supported the construction of group-wide supervisory 
frameworks and consolidated capital standards for international 
insurance groups, so long as they are transparently developed, 
well-tailored to the U.S. insurance risks, properly calibrated, 
and complementary to our insurance standards at the legal 
entity level.
    A second focus of the IAIS involves the identification of 
global systemically important insurers (G-SIIs), and the design 
of an enhanced regulatory and supervisory framework for G-SIIs. 
It is important to note that any standards adopted by the IAIS 
are not binding on the Fed, the FIO, State insurance 
regulators, or any U.S. insurance company.
    And during the buildout of standards for global insurance 
firms, the Fed will work to ensure that the standards do not 
conflict with U.S. law and are appropriate for U.S. insurance 
markets, U.S. insurance firms, and U.S. insurance consumers. 
Moreover, the Fed would only adopt IAIS regulatory standards 
after following the well-established rulemaking protocols under 
U.S. law, which include a transparent process for proposal 
issuance, solicitation of public comment, and rule 
finalization.
    The Federal Reserve has acted and will continue to act on 
the international insurance stage in an engaged partnership 
with our colleagues from the FIO, the State insurance 
commissioners, and the NAIC. Our multi-party dialogue strives 
to develop a central Team USA position on the most critical 
matters of global insurance policy. The Fed will also continue 
to actively engage with the U.S. insurance industry to help 
ensure that any global insurance regulatory standards work well 
for U.S.-based firms.
    Mr. Chairman, thank you for inviting me to testify today. I 
look forward to an active dialogue on these issues with you and 
other members of the subcommittee.
    [The prepared statement of Deputy Director Van Der Weide 
can be found on page 52 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Van Der Weide.
    Mr. McCarty, you are now recognized for 5 minutes.

STATEMENT OF KEVIN M. MCCARTY, COMMISSIONER, FLORIDA OFFICE OF 
INSURANCE REGULATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                 INSURANCE COMMISSIONERS (NAIC)

    Mr. McCarty. Good morning, Chairman Luetkemeyer and Ranking 
Member Cleaver. Thank you for the invitation to testify here on 
behalf of the NAIC.
    The U.S. insurance market is the largest and most 
competitive in the world. Taken individually, U.S. States make 
up about half of the world's 50 largest insurance markets. My 
State, the State of Florida, for example, is the 12th largest 
insurance jurisdiction in the world.
    State regulators cooperate closely on a regular basis to 
provide leadership on global insurance issues and activities 
with a focus on policyholder protection and maintaining stable 
and competitive markets. As capital rules for insurers are 
developed, State regulators continue to oppose a one-size-fits-
all bankcentric set of regulations and focus instead on the 
importance of company- and product-specific analysis and 
examination.
    Capital requirements are important, but if imposed 
incorrectly or without regard to differences in products and 
institutions, they can be onerous to companies, be harmful to 
policyholders, and can even encourage new risk-taking in the 
insurance industry. Any capital requirement must be adaptable 
to our markets and benefit our consumers.
    It is also important to keep in mind that any new standards 
are in addition to and not in lieu of State risk-based capital 
requirements applicable to insurers within the group. The IAIS 
is developing capital proposals for internationally active 
groups, including many firms that are based in the United 
States. We have serious concerns about the process and the 
aggressive timeline given the legal, regulatory, and accounting 
differences around the globe.
    All the same, we are fully engaged in the process to ensure 
that any standard appropriately reflects the risk 
characteristics of the underlying business and does not lead to 
unintended consequences such as limiting products available to 
consumers, or stagnating growth, jobs, and innovation. We will 
not implement any international standard that is inconsistent 
with our time-tested solvency regime that puts policyholders 
first.
    Critical to the credibility of the decision-making of the 
IAIS is an all-inclusive and transparent process. While we 
agree that the pay-to-play structure needed to be reformed, we 
believe there was a less intrusive way to accomplish that goal. 
We will continue to advocate for increased transparency and to 
encourage our colleagues in the Federal Government to do the 
same.
    We are also concerned with the lack of transparency at the 
Financial Stability Board (FSB). We have had only limited 
access to FSB discussions directly relevant to the very sector 
that we regulate. What little participation we do have only 
occurs as a representative of the IAIS, even after requesting 
inclusion from our FSB representatives in the United States. We 
find the lack of support for our inclusion by our Federal 
colleagues troubling and not in the best interest of U.S. 
insurers and, more importantly, of our policyholders.
    For our part, the NAIC has longstanding procedures and 
ongoing responsibilities to seek input from consumers and other 
interested parties. We will continue working on these issues 
through an open and transparent NAIC process. To that end, last 
year the NAIC formed a working group, which I chair, to provide 
ongoing review of ComFrame and international group capital 
developments. We are also exploring group capital concepts 
appropriate for U.S.-based internationally active groups, and 
we have provided comprehensive feedback to the IAIS regarding 
the proposed ICS.
    State insurance regulators have also been actively involved 
in the EU-U.S. dialogue project, which is designed to achieve a 
better mutual understanding of the regulatory approaches used 
by the United States and by Europe. A core issue of discussion 
has been Europe's call for reduction in our reinsurance 
collateral requirements. State regulators have worked to 
develop an approach by which collateral can be reduced in a 
consistent manner, commensurate with the financial strength of 
the reinsurer and the nature of the regulatory regime that 
oversees it.
    By year-end, we anticipate 37 States representing 93 
percent of the premium in the United States will have adopted 
this approach. In spite of this action, Treasury has expressed 
an interest in exploring discussions with the EU on a potential 
preemptive covered agreement. Given the progress we have made, 
the NAIC is not convinced that a covered agreement is 
necessary. While we will continue to engage Treasury and the 
USTR on this issue, and would expect to be directly involved in 
these deliberations, we believe preemption of State law by 
Federal agencies should always be a last resort.
    In conclusion, State insurance regulators have a strong 
track record of effective collaboration and supervision. We 
remain committed to coordinating with our Federal partners. We 
also take seriously our obligation to engage internationally in 
those areas that impact the U.S. economy, companies, and 
consumers. State-based regulation is always evolving to meet 
challenges posed by dynamic markets, and we continue to believe 
that well-regulated markets at home and abroad make for well-
protected policyholders.
    Thank you again for the opportunity to be here on behalf of 
the NAIC. Thank you.
    [The prepared statement of Commissioner McCarty can be 
found on page 38 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. McCarty.
    And I thank all of the witnesses for your testimony this 
morning. It was very insightful.
    And with that, I recognize myself for 5 minutes for 
questions.
    Mr. McRaith, there has been much discussion surrounding the 
timeline with regard to international capital standards at the 
IAIS. And while U.S. representatives at the IAIS have indicated 
the process is slowing, we hear many reports that European 
regulators are moving ahead, in fact, conflicting reports with 
regard to depending on who you talk to here in this country.
    Can you give us an idea on the timing on this issue, from 
your perspective?
    Mr. McRaith. The international community is moving forward 
with the development of capital standards that will promote 
convergence over a long period of time. What exactly that 
period of time is, no one knows at this point. What we do know 
is that in February of this year, the international 
participants at the IAIS, frankly led by our office with the 
support of the Federal Reserve and State regulators, negotiated 
as an international community what do we mean in terms of our 
goal and our timeline.
    And what we said was, we want to move forward 
incrementally, in small steps. This is something that will take 
a long period of time because the differences country to 
country are extremely significant and we need to be extremely 
mindful of potential negative unintended consequences as we 
move forward.
    Chairman Luetkemeyer. Mr. McCarty, what is your view of the 
timeline? You are around the negotiations as well.
    Mr. McCarty. Given that risk-based capital took over a 
decade to develop in the United States, and about a decade or 
more to develop solvency to, the original timeline of 18 months 
seemed overly aggressive to impose a global capital standard 
throughout all the regions of the world.
    What Director McRaith is referring to, I think, was a very 
important achievement. There was agreement in the meeting in 
February by the IAIS to look for what would an ultimate goal 
look like without setting a timeline. However, it is important 
to point out that the committee structures are still being very 
aggressive, and my concern about the aggressive timeline with 
regard to the committee structure is that I am concerned that a 
certain amount of field testing might get shortchanged in the 
process.
    For instance, we want to make sure that we have ample time 
to test things like the GAAP plus approach and timelines other 
than a 1-year timeline. I think it is important, given the very 
significant impact this may have on American companies and 
consumers, that sufficient time is allowed for us to field test 
and test the different variables that are out there to ensure 
that we have a product that encompasses the U.S. regulatory 
framework.
    Chairman Luetkemeyer. Do you believe that your point of 
view and your concerns are being heard and addressed and are 
being taken seriously with regard to these negotiations?
    Mr. McCarty. We certainly have expressed this from the very 
beginning. I think that the Chair and the members of the 
committee understand our concern. I am just concerned somewhat 
about the progress that is being made in the committee 
structure. While this is a determination that has been made by 
the executive committee to set an ultimate goal, it really 
hasn't slowed down the pace going forward with regard to 
meeting guidelines for 2016.
    Chairman Luetkemeyer. Mr. Van Der Weide, are you 
comfortable with the negotiations at this point? And what are 
your concerns or opinions with regard to the timeline on 
capital standards? Do you have any concerns about that at all? 
I know you say in your written testimony that you want to 
continue to work with a policy-centered type of approach that 
we have here in this country. But what are your views?
    Mr. Van Der Weide. I would agree with my colleagues that it 
is important to get the global insurance capital standard 
right, and it is more important to get it done right than to 
get it done quickly. It is a pretty complicated endeavor with 
lots of moving parts. We need to make sure that the rule works 
for all of the major insurance jurisdictions around the world.
    I think the IAIS is going to operate in a deliberate 
fashion with multiple rounds of consultation on their 
proposals. I think that is the right path. I think it will take 
the IAIS several years to get that capital standard developed, 
and there will be a multi-year implementation period as well 
for each national jurisdiction.
    We need to continue as the U.S. representatives on the IAIS 
to make sure that is the case, that the IAIS focuses on getting 
the standard right and does not excessively hasten towards that 
conclusion.
    Chairman Luetkemeyer. Very good. Thank you.
    Mr. McRaith, my time is very limited, so I just have a 
couple of comments. You and I have had this discussion before, 
and I made the comment that you are an advocate and a mediator, 
not a regulator, and we want to continue to hope that you 
stress that position and continue down that road.
    I understand that you had a recent meeting over in Italy; 
is that correct?
    Mr. McRaith. I was not personally--
    Chairman Luetkemeyer. Oh, okay.
    Mr. McRaith. There was an IAIS technical group, working 
group meetings and public session in Italy recently, yes.
    Chairman Luetkemeyer. Okay. I just want to get your 
commitment that when you do have these international meetings, 
you will work in concert with my office and this committee to 
make sure we have the updated, most current information with 
regard to what went on in those meetings so we can be reactive 
and be supportive as we need to be.
    Mr. McRaith. Mr. Chairman, we welcome the opportunity to 
engage with you and members of the committee.
    Chairman Luetkemeyer. Thank you very much.
    With that, I yield to Mr. Capuano for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Thank you for 
yielding.
    Gentlemen, thank you for coming. Could any of you point out 
to me the law, the Federal law, the United States Federal law 
that empowers you to regulate non-SIFI (systemically important 
financial institution) insurance companies? Could you cite that 
law to me?
    Mr. Van Der Weide. The Federal Reserve under the Dodd-Frank 
Act, the Bank Holding Company Act, and the Home Owners' Loan 
Act has authority, in addition to regulating the non-bank SIFIs 
that have been designated by FSOC that engage in insurance--
    Mr. Capuano. There are three insurance companies that are 
SIFIs.
    Mr. Van Der Weide. Correct.
    Mr. Capuano. And those are the three you can regulate?
    Mr. Van Der Weide. Yes. But in addition to SIFIs, we are 
required by law to regulate any firm that owns a depository 
institution.
    Mr. Capuano. Right.
    Mr. Van Der Weide. A bank or thrift and several other--
    Mr. Capuano. Can you point to me the law that empowers any 
United States Federal agency at the Federal level to regulate a 
non-SIFI, non-bank-owning insurance company? I didn't think so. 
Because there isn't one. And yet, you are negotiating as if 
there is.
    Now, the thing that is amazing to me is that I would argue 
there is a lot of work to do here.
    Mr. McRaith, you have been before us many times. I hope you 
count me as one of your defenders and supporters. I think FIO's 
work is critically important, and I will clearly state that I 
have been a supporter of an optional Federal charter--I know 
that gets some people all worked up, and I will get phone calls 
tomorrow. But I always emphasize the word ``optional,'' but 
that is a different issue--which would then allow companies to 
choose to be regulated at the Federal level.
    Now, we don't have that yet. Why are you negotiating for 
Federal standards for companies you cannot enforce regulations 
on?
    Mr. McRaith. Congressman, the work at the IAIS is the 
development of standards. It is independent of the regulatory 
structure in any one country. So in this work, as we represent 
the United States and work closely with our State colleagues--
you will remember, I was the intern inspector for a long time 
in Illinois and worked with our Federal Reserve colleagues--our 
objective is to influence the consensus internationally so that 
it reflects and integrates the best interests of the United 
States. As those standards are developed, they are then 
implemented at the State level or in some cases at the Federal 
level.
    Mr. Capuano. So you are hoping that the State levels will 
adopt your work. So this is at the moment an academic endeavor, 
which is not necessarily un-worthwhile. But in the final 
analysis, after all the work that you do at the IAIS, it will 
apply to three insurance companies; is that a fair conclusion?
    And I understand you hope that these States will do it, and 
I am happy to work with anyone who wants to talk about an 
optional Federal charter, but at the moment it would apply to 
three insurance companies.
    Mr. McRaith. The international standards have been around 
since 1994, and the States have implemented those international 
standards in a way that reflects the State approach--
    Mr. Capuano. So you are suggesting that the IAIS is 
something along the lines of a model law, trying to do best 
practices to suggest, to help our State friends see the light?
    Mr. McRaith. I think the IAIS's mission is to promote 
global financial stability and promote best practices and 
supervision globally.
    Mr. Capuano. I respect that, but first of all, they have no 
record of doing so, because I don't think they have done such a 
great job. Now, don't get me wrong, I think some of our State 
regulators haven't done such a great job. I kind of remember a 
little problem with AIG, but that is a different issue.
    What I do think is that if we are going to have Federal 
regulations, which I don't oppose, then you need to come to 
Congress and say, ``We want to have Federal regulations on 
insurance companies.'' We will have that debate. We will see if 
you have the support, and if you do, we will do it. But if you 
don't, I kind of think there is a lot of other things that you 
should be doing, Mr. McRaith, and certainly a lot of things the 
Fed should be doing that matter.
    Now, I have no problem going to conferences and discussing 
a United States perspective on various items, but I have to 
tell you, everything I have read from the IAIS certainly looks 
like they expect us to just adopt it the day after it is done. 
And I understand you don't want to say that, but I want to say 
it really clearly to those friends at the IAIS. We love you. We 
respect you. We want to work with you. But you are not telling 
us what to do.
    In the final analysis, it will be the United States that 
makes the decision what happens to the U.S. companies, not 
other people. And, again, if we want to talk about it in the 
long run, great idea. But I think it is going to be sad. And I 
have to tell you, from the testimony, if you read the 
testimony, there are a few things that say that, but most of 
the testimony presumes that it is going to be adopted.
    And I just think it is very important to put on the record 
that, again, good exercise, no problem with the discussions. I 
have a real problem with pretending or presuming or letting it 
go unspoken that in the final analysis, this could all be for 
nothing.
    Thank you, Mr. Chairman, for your indulgence.
    Chairman Luetkemeyer. I thank the gentleman. His time has 
expired.
    With that, we go to the gentleman from New Jersey, Mr. 
Garrett, for 5 minutes.
    Mr. Garrett. Good morning. I probably eventually will get 
along the same line as the gentleman from Massachusetts, but--
    Mr. Capuano. Oh, my God, Mr. Chairman. I would like to 
change my--
    Chairman Luetkemeyer. We are all in trouble if we associate 
ourselves with your remarks, Mr. Capuano. Although today, I am 
tempted to do so myself. I have to take my temperature here.
    Mr. Garrett. I just want to start someplace else, and by 
that time maybe I will change my mind.
    Mr. Van Der Weide--and this maybe ties into it, given the 
ongoing efforts in both here in the House and the Senate to 
bring more accountability and also transparency to the Federal 
Reserve--I would like to discuss with you in a little more 
detail the international capital standards and the setting for 
the IIAG and how it was originally conceived and, as you may 
have already indicated, how some of this has mutated over time.
    My understanding is that the initiative was originally 
intended, as also indicated, to only be for the global 
systemically important insurers. Then of course, in 2013 the 
goal changed. A list of the entities that would be subjected to 
the standards has been expanded. They now have a new category.
    And so it seems to me that the Dodd-Frank process is, in 
some sense, being circumvented through not a transparent method 
but through a more opaque, and some would even say secretive 
international process. At the end of the day, the goal would be 
to have different standards than what we have right now.
    And maybe I will just digress from Mr. Van Der Weide and go 
to Mr. McRaith. You said, as far as the process to get there, 
we are going to take small steps. The question is, to what end? 
If we are going to take small steps or move the ball down the 
field, I would assume that all of you would have some sort of 
goal in mind as to what the goal line looks like, what the end 
model looks like since you also said that we have a 
dramatically or fundamentally different structures in ours 
versus the Europeans.
    So I will start with you, Mr. McRaith. Have you envisioned 
or articulated what the end model is or goal is that you are 
trying to accomplish with these incremental steps? And then, I 
will go to Mr. Van Der Weide.
    Mr. McRaith. Let me be clear, our work at the IAIS is to 
integrate the best interests of the United States, the U.S. 
view, into any global standards. What is driving that, 
Congressman, is the globalization of the insurance marketplace.
    Mr. Garrett. I get that. But what is the goal at the end of 
the day? So you integrate something into a model, but at the 
end, you should have in mind, this is what we are going to 
strive for, this is how we are going to integrate it. And at 
the end of the day, this is what the final product is going to 
look like. Is that final product going to look like what the 
American model is today, or is that model going to look like 
what the European model is today?
    Mr. McRaith. You are absolutely right, and to echo the 
comments of Congressman Capuano, whatever is implemented in the 
United States will be a U.S. approach. It will be done by the 
States and the Federal Reserve where appropriate.
    Mr. Garrett. So the goal is a U.S. model?
    Mr. McRaith. That is correct.
    Mr. Garrett. And that is the same goal to which the 
international body is also agreeing?
    Mr. McRaith. No. The goal is to establish global standards 
that reflect and integrate the U.S. interests and impart 
implementations is in the United States.
    Mr. Garrett. Okay. So that is our goal. That is not 
necessarily their goal. I presume their goal would be a more 
European model; is that fair to say?
    Mr. McRaith. In my view, Congressman, at least, and I don't 
want to speak for the others, but this is driven really more by 
the developing economies who are welcoming our companies into 
their markets.
    Mr. Garrett. Yes. But at the end of the day, if you have 
two teams that are working towards opposite, different goals, I 
don't understand how you can then come to commonality on it. At 
the beginning of the day, you have to agree what your goal is 
going to be. But I only have a minute left.
    Mr. McRaith, can you tell us, as we go toward these goals 
and these models, how were the exact thresholds and metrics 
used to determine the standards that are being discussed in 
these discussions? Is there any empirical analysis which shows 
that companies that fit the metrics that are coming up will 
pose either more or less risk to it? And if they do pose a 
risk, what analysis or quantifiable analysis have they looked 
at to determine that? Either one of you may answer.
    Mr. McRaith. The capital standard is being developed 
through extensive feedback and engagement with stakeholders. As 
Commissioner McCarty referred to in one of his earlier 
comments, there is field testing. So the firms themselves are 
directly engaged in providing--
    Mr. Garrett. A quick question, since I only have 10 seconds 
left, Mr. McRaith, are those exact same standards being done 
right now through the Fed and the FSOC for the United States? 
If those standards are good internationally, why do we not have 
the exact same standards here in the United States?
    Mr. McRaith. The FSOC--
    Mr. Garrett. I will ask Mr. Van Der Weide, please, to 
address that.
    Mr. Van Der Weide. The FSOC has a very independent process 
around how it assesses the systemic footprint of the U.S. 
insurance firms, and it is relatively independent from what the 
IAIS is doing on its G-SII identification process.
    Mr. Garrett. So what is good for one is not good for the 
others, is what you are saying?
    Mr. Van Der Weide. They each have different goals and 
purposes.
    Mr. Garrett. Okay. So they have different standards as to 
what is good and what is bad? Okay.
    Mr. Van Der Weide. Yes.
    Mr. Garrett. Was that a ``yes?''
    Mr. Van Der Weide. Yes, they have different standards. They 
bear some resemblance to each other, but they are different in 
many ways.
    Mr. Garrett. It is incredible to try to understand why what 
is systemically important globally is not systemically 
important for the United States. I appreciate the testimony, 
but that is absolutely an incredible testimony. Thank you.
    Chairman Luetkemeyer. Thank you, Mr. Garrett.
    With that, we go to the ranking member of the subcommittee, 
the gentleman from Missouri, Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I don't have much time. What I would like for each of you 
to do is to give me one advantage, if you can, of the benefits 
of international standards, and then with time, I would like 
you to give me a negative of international standards. So if you 
could just be as succinct as possible on the benefits?
    Mr. Van Der Weide. Sure, I will start on that one. I will 
be succinct, but I will list off at least two benefits of 
comparable global international standards for financial firms 
and insurance firms in particular.
    The first is achieving a level playing field across the 
world. It is important for America, as foreign insurers operate 
in our market, that they be subject to a regulatory and 
supervisory regime that is at least as tough as ours. We don't 
want the foreign companies to be able to compete in the U.S. 
insurance market on more advantageous terms than our firms can 
compete. So having that kind of a comparable global playing 
field on some of the key regulatory and supervisory standards 
can be helpful from a global level playing field basis.
    It can also be helpful to achieve global financial 
stability to the extent that particular firms have a very large 
systemic footprint. As a general matter, systemic risk seeks 
out the place where it is least regulated, and it tends to 
collect and deposit there and grow. So having a decent floor 
around the international regulatory standards can prevent those 
sorts of accumulations of a systemic risk cesspool, so to 
speak.
    But there are some potential downsides of international 
regulations as well, and I think the key one is if you have 
international regulation that just doesn't work well for some 
of the major markets, is not well-tailored to the risks in 
those markets, that can obviously result in inferior 
macroeconomic outcomes for those countries whose firms can't 
use the rule efficiently.
    Mr. Cleaver. Mr. McCarty?
    Mr. McCarty. I definitely think there is a role for 
international standards. As Director McRaith has alluded to for 
over a dozen years, we have had insurance core principles which 
I think are very valuable for evaluating not only developed 
country markets but emerging markets as well. More and more of 
our markets are gravitating towards Asia and South America, so 
it is important that they have core principles in place to 
provide some guidance on how markets should be regulated in 
those areas.
    My concern is not so much on standards but what the 
implementation of standards, as my colleague has referred to, 
that are un-implementable, where you are putting in, for 
instance, a hoisting, for instance, a consolidated capital 
standard with a group-centric approach like banks use as 
opposed to more emphasis on a capital adequacy test or a stress 
test and looking at inter-party transactions in ways to limit 
risk.
    And I think it could be a standard, but it is not the 
standard that seems to be the preference of our colleagues 
around the world.
    Mr. Cleaver. Yes. Well, Mr. McRaith, I am not sure you said 
that but--
    Mr. McRaith. I will reply to your question succinctly.
    Mr. Cleaver. Yes.
    Mr. McRaith. The advantage of global standards is they will 
promote further opportunities for our companies that are 
seeking to grow in developing economies in Asia, South America, 
and Africa. Those supervisors in those countries are looking 
for common standards, common language. The potential negative 
is if we, the United States, are not actively engaged in 
asserting our best practices, our points of view, so that 
whatever the global standard is, it incorporates, reflects, and 
integrates the best interests of the United States.
    Mr. Cleaver. Thank you. I yield back, Mr. Chairman.
    Chairman Luetkemeyer. Thank you. With that, we are going to 
adjourn for a while. We have the Prime Minister of Japan in 
today for a joint session of Congress to give an address, and 
many of our Members would like to attend that. We will 
reconvene upon his closing remarks, as quickly as possible. I 
am sure he is a politician like the rest of us, so there is no 
telling how long he will talk. But we are hopeful that it will 
be around an hour.
    But I would ask everybody, the panel especially, to find 
your way back here around 10:30 or 10:45 just in case things go 
short.
    With that, the Members are asked to reconvene here upon the 
conclusion of the Prime Minister's speech. And with that, we 
will recess.
    [recess]
    Chairman Luetkemeyer. Let's reconvene. And as Members keep 
strolling in, we will keep a running tally of where we go next. 
I appreciate the indulgence of the panel today. We will begin 
this afternoon's questioning with the gentleman from Georgia, 
Mr. Westmoreland, for 5 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman. Before I ask my 
questions, I just want to be the first to thank Mr. Capuano and 
Mr. Garrett for their questions. And I want to follow along the 
same lines as my colleagues. I believe neither Mr. McRaith nor 
Mr. Van Der Weide could cite a relevant Federal law or statute 
that gives the Federal regulatory authority over non-SIFI, non-
bank subsidy insurance companies. But yet you continue to 
negotiate international insurance standards that you say will 
apply to all insurance companies. Now, to my knowledge, we 
still have State-based insurance regulation. Is that true? 
``Yes'' would be good.
    Mr. Van Der Weide. Yes.
    Mr. McRaith. Yes.
    Mr. Westmoreland. If you have no regulatory authority over 
99 percent of United States insurers, what do you tell your 
international partners about your ability to enforce the rules 
you agree with in our country? How do you explain that?
    Mr. McRaith. Congressman, the first thing that we wanted--
let me start at the beginning, if I may. International 
standards are not only for the United States. As I mentioned 
before the break, other countries are looking to the global 
standards to implement in their countries. So our mission is to 
shape those standards in a way that reflects the perspectives 
of the State regulators, the Federal Reserve, and the best 
interests of the United States.
    Mr. Westmoreland. What business do you have telling other 
countries how to regulate when you don't have any regulation 
over 99 percent of the insurance companies here?
    Mr. McRaith. It is important to understand that the 
international standard-setting process is very much a global 
and consensus-driven process. The State regulators are, of 
course, very involved, and the Federal Reserve. It is 
consensus-driven. The goals are to promote financial stability 
globally. As we learned through the crisis, national economies 
around the globe are connected and affect one another.
    Mr. Westmoreland. Are any of these companies SIFIs? Are 
they a problem? Are they a threat to our economy?
    Mr. McRaith. Forgive me, Congressman, I am not sure I 
understand your question.
    Mr. Westmoreland. You are talking about financial 
stability, worldwide financial stability. How do these 
insurance companies play into that? They are not banks.
    Mr. McRaith. That is correct. Insurance companies are very 
significant participants in global and national capital 
markets. They are essential participants in financial services. 
The firms that are looked at for global purposes are firms that 
are massive, complex, sophisticated enterprises that are 
engaged in a variety of financial activities around the world.
    Mr. Westmoreland. I am going to go back to the original 
question. How do you explain to the people, the Europeans or 
the rest of the world, how you are going to participate in 
effecting standards for their insurance companies to operate 
under, when you don't have any control over 99 percent of the 
insurance companies in this country? I am a little slow--I am 
from the South--and I understand that. But I am just having a 
hard time getting that. And Mr. Van Der Weide, if you want to 
jump in there at any time, I would love to hear from you.
    Mr. Van Der Weide. Sure. Thank you. As you know, we 
collectively, the States and the Federal Reserve and the FIO, 
negotiate the international insurance standards at the IAIS 
level. And as Director McRaith said, we are attempting to do 
that to advance the interests of the United States. The other 
countries around the table understand generally how the U.S. 
insurance system works. They understand it is primarily 
regulated by the States, and that the vast, vast majority of 
insurance companies are regulated only at the State level, and 
that the Federal Reserve only has a handful of holding 
companies that it supervises on a consolidated basis. So they 
understand that. But in our negotiations, we are attempting to 
make sure that the interests of the NAIC, the Federal Reserve, 
and also the FIO are reflected. And we are trying to make those 
agreements in America's best interests.
    Mr. Westmoreland. I know my time is just about up, Mr. 
Chairman, but Mr. McCarty, could you respond to my question? 
Maybe you can help me out a little bit.
    Mr. McCarty. Yes. The NAIC was a founding member of the 
IAIS. And we thought it would be very productive for insurance 
regulators in the United States and around the world to work 
together collaboratively, cooperatively, looking at ways of 
looking at risks, how we could supervise, set some basic 
insurance core principles for the developing world, the 
developing nations. But the genesis, the initial genesis was to 
be a sharing of ideas, learning, looking at best practices, 
perhaps improving our own practices back home by looking at how 
practices are done around the world.
    Insurance is very different, as you know, from banking. It 
is very specific to an individual country and jurisdiction and 
products. And so, we use it as an opportunity. Over time, the 
IAIS, through the FSB, has been tasked with responsibilities of 
setting global capital standards. Obviously, that will have a 
great impact on our country. For my purposes, in the State of 
Florida, I get 80 percent of my reinsurance from global capital 
companies. So it is very important to me what standards are 
being set. Since we do supervise 100 percent of the private 
insurance market in the United States, we think it is important 
that we have a role in discussing these issues and what impact 
they may directly have or indirectly have on our consumers of 
the United States, on our insurance firms, and of course back 
home to the people of Florida.
    Mr. Westmoreland. Thank you. And my time has expired. But I 
hope we will do one more round. Thank you.
    Chairman Luetkemeyer. I thank the gentleman. With that, we 
go to Mr. Williams, the gentleman from Texas.
    Mr. Williams. Thank you, Mr. Chairman. Thank you all for 
being here today. I am a small business owner, and have been 
for about--well, my family has been for 75 years. I am in the 
car business. I am a car dealer. I have to buy a lot of 
insurance. And I believe in the private sector. Listening to 
some of this testimony today, I am worried to death about it. 
Am I going to have to deal with somebody overseas telling me 
how to--what I need to insure my cars for and this and that, 
rather than my local insurance person? It really has me 
concerned.
    And the other thing, in listening to the testimony, I am 
concerned that you, Mr. McCarty, who actually represents me in 
this dialogue, are not really not at the table. You really 
don't have much to say. And that bothers me because I am a 
customer, I live with this every day, and I am concerned of 
where we are going forward, as you have heard, with a dialogue 
that you really don't represent anybody to have conversations 
with. So with that being said, let me say this, and I will 
address my questions to you, Mr. McCarty. The United States' 
regulatory system, I think we all agree, is very different than 
what we see in Europe and in other international markets. What 
do you see as the paramount interest of the United States when 
it is involved in negotiations, discussions with these 
international regulatory groups? I think you can probably be 
pretty simple on that.
    Mr. McCarty. Yes. I obviously share your concern about what 
potential impact global standards would have. On the local--
    Mr. Williams. I don't speak German, I don't speak Italian.
    Mr. McCarty. Yes. And that is why it is very important for 
the U.S. team, all of us, the Federal Reserve, FIO, and of 
course the regulator, to be partners at the table and to make 
sure that whatever standards are being set do not have any 
detrimental impact on our companies. Our companies not only do 
business in America, but do business abroad, where more and 
more insurance is being sold. Our concern, I think from a State 
regulator perspective, is that there really isn't a voice at 
the FSB representing insurance interests. We respect our 
colleagues from the other financial sectors who are on that, 
but it would really be in the best interests of American 
companies and American consumers to have the regulators who 
regulate insurance actually have a voice on the FSB.
    Mr. Williams. I agree. Would you say it is the job of the 
FIO Director to represent the interests of the State 
regulators?
    Mr. McCarty. My understanding of Dodd-Frank is that the 
role of the Federal Insurance Office Director is to represent 
the United States at the IAIS as appropriate. I think that is 
specific in law. I think the NAIC by and through its Directors 
and commissioners and staff members participate in all levels 
of the IAIS. The Federal Insurance Office does not regulate 
insurance, the State regulators do, but the FIO does have a 
role as specified under Dodd-Frank. And I think it is important 
to understand that while we have our differences because we 
come from different perspectives and views, we all work very 
collaboratively, and we try to have a unified U.S. team 
approach. And we do the best we can to achieve that to make 
sure that folks, small businesses back home are protected.
    Mr. Williams. It would work really well if you were there, 
having a voice. As a representative of the State regulators, do 
you and the FIO Director share the same goals, to advance the 
interests of the U.S. insurance industry and State regulators?
    Mr. McCarty. I have known Director McRaith for a number of 
years, and we have had a number of conversations. We have 
different approaches. We have an approach at the NAIC, as you 
may be aware, a very transparent process for open discussion 
and dialogue, pros and cons of developing positions. The 
Federal Reserve and the FIO are culturally different in that 
regard in how they make those. In my conversations with 
Director McRaith, I am very confident that he is very concerned 
about the role of American companies, and is only interested in 
going forward with what would protect the consumers of the 
United States. And that has been my best impression.
    Mr. Williams. My last question, quickly, given that the 
U.S. insurers are regulated by the 50 States rather than one 
Federal or national entity, what do you think is the proper 
role of the State insurance commissioners in these 
international settings in terms of complementing the FIO 
Director?
    Mr. McCarty. I do believe, as the regulators--I come from 
Florida, and I speak for Florida, and I also speak on behalf of 
the NAIC, and we do have a process for granting that authority. 
But by and large, we are still viewed as individual States. I 
think our voice in terms of what is appropriate in terms of 
establishing standards for insurance, whether it is capital 
standards or group supervision, et cetera, our opinion should 
be central to that discussion.
    But we certainly understand the role that has been given by 
the Congress to the FIO, and of course our partners with the 
Federal Reserve who are now also joining us at the IAIS. And we 
are working as best we can to make this an effective and 
efficient way of protecting American businesses and American 
consumers.
    Mr. Williams. Thank you for your testimony. Mr. Chairman, I 
yield back.
    Chairman Luetkemeyer. Thank you. The gentleman yields back. 
And with that, we go to the gentleman from Kentucky, Mr. Barr, 
for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman. And thank you to the 
witnesses for your testimony today. Mr. Van Der Weide, I have a 
question for you relating to the Fed's participation in FSOC 
and SIFI designations for insurers, and particularly these 
global systemically important insurers. My question is, what 
criteria were used to designate the three insurers as SIFIs?
    Mr. Van Der Weide. The FSOC publicizes a summary of its 
decision whenever it designates a non-bank SIFI. And that was 
true as well for the three insurance non-bank SIFIs that the 
FSOC has designated. They have also put out a public framework 
to describe the factors that they used to assess whether a 
particular non-bank financial firm is a SIFI. And those 
procedures were followed in the process that led to the 
designation of the three U.S. insurers as non-bank SIFIs.
    I think the FSOC recognizes that traditional insurance 
activities tend to generate low amounts of systemic risk. But 
there are a fair amount of nontraditional insurance activities 
that are engaged in by those three firms, and those did 
generate some amounts of systemic risk. Some of the key factors 
that were cited in the FSOC's decisions included the extent of 
short-term funding activities at those organizations, the 
extent of their capital markets activities--repos, securities, 
lending, OTC derivatives--which create interconnectedness with 
the rest of the financial system, and also the runnable 
liabilities of some of those firms embedded in their insurance 
or annuities products, which would enable the annuitant or the 
insurance policyholder to potentially take out its money from 
the firm on short notice. But those are some of the factors 
that--
    Mr. Barr. When you published the findings and the 
designations, did you discuss the extent to which those factors 
or those activities that you deemed to be more risky or 
systemically relevant--were there criteria that would send a 
signal to the insurance marketplace what a firm, a systemically 
important insurance company could do to derisk to escape the 
SIFI designation?
    Mr. Van Der Weide. Yes, the firms were informed at a deeper 
level beyond the public document--
    Mr. Barr. And I will just interject here if you don't mind, 
just because it is the input from those designated firms and 
others in the insurance industry that there is a lack of 
clarity, a significant lack of clarity as to those criteria and 
those factors and what is required of those firms to derisk 
sufficiently to be de-designated, if you will, from the SIFI 
status.
    Mr. Van Der Weide. Right. Each of the three firms was given 
a much more detailed private explanation for the factors that 
the FSOC felt were indicative of their SIFI status. So I think 
they do have a pretty good sense of the kinds of elements of 
their balance sheets and business operations that did result in 
the FSOC's decisions. I do agree with you that it is very 
important that there be a potential de-designation process. It 
is not meant to be a ``Hotel California'' stay, and it is 
important that the FSOC carry out its annual reevaluation 
process, which is written into statute, and to give each of the 
companies a chance to go through that process.
    Mr. Barr. Thank you for that answer. A quick follow-up: As 
you know, the G-20 directed the FSB to identify global 
systemically important banks (G-SIBs) that would be subject to 
these international capital requirements. And my question would 
be did the G-20's work have any bearing or influence on 
domestic regulators' SIFI determinations, or is there any 
connection there?
    Mr. Van Der Weide. No, they were very independent 
processes. I believe the FSOC designated a firm first, and then 
the FSB made their decisions for the entire set of global 
insurers and picked out three U.S. insurers, and then the FSOC 
came back and did two more later. But the processes were quite 
independent, and the approaches that the two organizations 
take, the FSOC and the FSB, were different. They are obviously 
looking at some of the same factors, but they have different 
approaches as to how they assess the systemic footprint of an 
individual firm. For example, the IAIS methodology is a little 
bit more algorithmic or formulaic, the FSOC's approach is a 
little more firm-specific judgmental. But the--
    Mr. Barr. Let me ask you a question. I don't have much 
time. Are the three firms that were designated SIFIs by FSOC 
internationally active insurance groups?
    Mr. Van Der Weide. Yes.
    Mr. Barr. So they would be subject to this process. So you 
are saying you have independent and conflicting processes, one 
international, but you have an independent domestic designation 
process.
    Mr. Van Der Weide. I don't think they were conflicting, but 
they were independent processes.
    Mr. Barr. Okay. Really quick to Mr. McCarty, you indicated 
that preserving regulatory independence and diversity can serve 
as a buffer against contagion. Can you elaborate really quickly 
on that?
    Mr. McCarty. Absolutely. I think for all intents and 
purposes, if you look at insurance, the diversification of risk 
actually helps minimize systemic risk. And our concern is, as 
we move and move more towards a global capital standards and 
have a common assessment of risk, a common assessment of 
assets, that we are actually moving more towards emphasizing 
and potentially exacerbating systemic risk than getting away 
from it. So we think that a more jurisdictionally-based 
approach would be more prudent in minimizing risk.
    And if I could make just one quick comment about the FSOC, 
we are very concerned about the designation process, the 
transparency in the process, and making sure that the 
regulators that regulate insurance understand. Because one of 
the ways we can address this is we can put more regulation, 
more policy measures, more capital, or another approach we can 
take is to take away some of that risk. Finding out ways of 
eliminating risk. The last financial crisis we didn't--I know 
what risks were out there. One of the roles FSOC can play is to 
help us identify those risks and help companies eliminate that 
risk so we are not necessarily exacerbating a situation and not 
just trying to address it through more regulation and more 
capital.
    Mr. Barr. Thank you. I yield back.
    Chairman Luetkemeyer. Thank you. Mr. Van Der Weide, I want 
to let you know that you gave us more information in your 2 or 
3 minutes' response here than all of the other folks we have 
had before this committee, put together, when we asked that 
question about SIFIs. Thank you for your response.
    Next up is the gentleman from Florida, Mr. Ross. And then 
after that, Mr. Green wants to participate. So we will start 
with Mr. Ross.
    Mr. Ross. Thank you, Mr. Chairman. And gentlemen, thank you 
all for being here. I want to follow up on what Commissioner 
McCarty was talking about with regard to SIFI designations, 
especially for non-bank financial institutions. And I must put 
in a plug for a bill that I have filed that asked for the 
transparency for that particular designation not only as to why 
they got in there, but how they can get in there, and how 
frequently they can seek to get out of there. I also want to 
put in a plug, because I have dealt with the NAIC. And I am 
grateful to you, Commissioner, and to Senator Nelson, who is 
also here, for the efforts that you have given to me with 
regard to private flood insurance, because I think it is very 
important for consumers out there to have that option. And also 
with regard to another bill, also bipartisan, dealing with 
disaster savings accounts. As we are on the cusp of hurricane 
season starting May 1st, the more that we can incentivize 
private customers getting in and mitigating their structures, 
we know that for every $1 spent in mitigation, we save $3 in 
relief. And so, I give that out as a commercial public 
statement there.
    But now I want to get back into why you guys are here. 
Commissioner, let me ask you something. With regard to the 
international capital standards, assume, if you will, that they 
are passed and that they are imposed on the individual States, 
which would require maybe even putting more capital--set aside 
more capital, maybe some more costs of compliance, but anyway a 
greater cost. Is this something that as an insurance 
commissioner, you would expect to be allowed to be recovered in 
the rate that ultimately would have to be paid for by the 
consumer?
    Mr. McCarty. Yes. And actually, it is a little more 
complicated than that. Because if you do impose a capital 
standard, let's say it is a capital standard that is more in 
line with what we are seeing from a European model as opposed 
to what we would say is a capital adequacy model, which we 
would be advocating, there are many complications. One is that 
you run the risk of less products, because less products would 
be seen as viable under a different capital regime. That may 
punish longer-term products that many American companies sell, 
particularly in the annuities marketplace. You would see some 
disruption in the marketplace because you have visions of some 
winners and losers. And some of the people would gravitate to 
those companies that have the higher capital standards, which 
could cause disruption in the marketplace and unintended 
consequences.
    There is also the potential of other unintended 
consequences such as stagnation of growth, less products 
available, and less senior products available in particular. So 
there are a lot of things that we have to take into 
consideration that would cause unintended disruptions in the 
marketplace.
    Mr. Ross. Mr. Van Der Weide, are any of these studies that 
you may have conducted in analyzing the impact of the IAIS 
capital standards?
    Mr. Van Der Weide. The IAIS capital standards are very much 
still in development. At this point, the IAIS has not even 
settled on a basic kind of framework for how they would 
approach--
    Mr. Ross. But you would agree that there should be some 
type of impact study of--
    Mr. Van Der Weide. Yes, absolutely. We think the IAIS 
should be doing impact studies. And before we do any 
implementation of any international standards, we also need to 
do a very detailed amount of cost-benefit analysis to make sure 
they work for our country, for our insurance firms, and for our 
insurance consumers.
    Mr. Ross. Okay. And Director McRaith, I understand that you 
are going to be negotiating some covered agreements with three 
insurers coming up soon. Is that something that--what is the 
status of that right now? And what are your expectations with 
regard to the impact it is going to have on domestic reinsurers 
as opposed to foreign reinsurers?
    Mr. McRaith. The covered agreement is a serious endeavor. 
We have never done it before. We are sorting through internal 
process questions. Before we negotiate, during any 
negotiations, we will work actively with this committee to 
ensure that you are informed. The outcome of any agreement is 
very difficult to predict. Of course, we haven't even commenced 
negotiations. But I can tell you the only way in which we 
pursue and reach an agreement is if it serves the best 
interests of our country, including U.S. reinsurers who might 
be operating within the European Union.
    Mr. Ross. I appreciate that. And I appreciate the further 
guidance on that. Finally, Commissioner McCarty, is there 
anything that we can do--I understand, look, that we have 
probably the best system of insurance regulation in the world. 
And nobody else has our particular models that have been 
provided for under the McCarran-Ferguson Act that allow each 
State to do that. I assume there are always some problems and 
some issues, and that each State addresses them. Is there 
anything that you would recommend for us as Members of 
Congress, that we should be ready to be preemptive on if 
necessary in the event of anything you see coming down the pike 
with regard to IAIS capital standards?
    Mr. McCarty. Actually, I have a lot of confidence in the 
team that we have on the field. We are kind of new at this. The 
U.S. system is complicated, and a lot different than the rest 
of the world. And it is very difficult for the IMF and others 
to really understand the complexity of the U.S. system and the 
different parts that are involved. I am confident to say that I 
think we do have a powerful voice. Director McRaith sits as the 
Chair of the technical committee, and has made very significant 
progress in allowing a different path away from the market 
consistent valuation to include a GAAP plus approach. So the 
American voice is being heard. And I think if we continue to 
work together--I think it is not clear all the time just how 
much work is being done behind the scenes at the senior level 
as well as at the staff level of trying to work our way through 
to come up with comprehensive, cohesive U.S. positions. And I 
think if we continue those efforts and continue to report back 
to you, with your oversight, we will hopefully devise a system 
that complements the U.S. regulatory system and does not 
challenge the system we have in place that has worked so well 
for our consumers.
    Mr. Ross. Thank you very much, Commissioner. I yield back.
    Chairman Luetkemeyer. I don't want to keep picking on Mr. 
McCarty here, but it seems like he always gets the last 
question. And so, you need to keep your answers concise. But 
since we don't have very many people here, we are going to 
allow the questions to go a little longer. With that, I yield 
to the gentleman from Texas, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witnesses as well. Mr. McCarty, because you weren't quite 
finished, I will yield some of my time for you to continue with 
your response, if you would like. Because my question that I 
was going to lead with was one that deals with the 
international developments at the FSB as well as the IAIS and 
how they work in conjunction with the State and Federal levels. 
So you can you continue, please?
    Mr. McCarty. Just to be clear, you are talking about the 
Financial Stability Board, the FSB?
    Mr. Green. Yes.
    Mr. McCarty. Yes. We do have some concerns from State 
regulators' perspective about the FSB since the FSB is really 
comprised of largely people who have a bank-centric view. We do 
have our U.S. representatives, and we feel very comfortable 
that they represent the U.S. position. But as the U.S. 
regulators of insurance, we feel that we should play a more 
prominent role and have a voice on the FSB.
    Our concern is that oftentimes the principals at the FSB 
view the insurance through the prism of banking. And we know 
there is a very different business model for banking and 
insurance, and that it would be very problematic for the 
insurance industry, for us to have superimposed on us a 
regulatory regime that is capital-based, capital and bank-
centric. And so having a voice in that arena would be very 
helpful.
    Mr. Green. Let's talk about AIG for just a moment. I am 
sure there has been a substantial amount of discussion. But as 
you know, we bailed AIG out to the tune of about $80 billion. 
And I am also proud to announce that the government has been 
successful in collecting, which is a good thing. But with 
reference to AIG and the means by which we found ourselves 
having to bail AIG out, are there State or Federal laws or 
regulations that would prevent AIG from doing this again?
    Mr. McCarty. I don't think there has ever been any more of 
a studied case study in the history of the financial sectors 
than has been done on AIG. I have had the opportunity to 
discuss this with my colleagues across the different financial 
sectors. And it is important to understand that the failure of 
AIG was not a failure of the State regulatory system; it was a 
failure of the regulatory system because of the financial 
services division that was left largely unsupervised. It was 
under the Office of Thrift Supervision. They had a light touch, 
if you will, in terms of consolidated supervision. That, of 
course, has been remedied under Dodd-Frank. Those 
responsibilities have been moved to the Federal Reserve. I feel 
fairly confident that the Federal Reserve will not have a light 
touch when it comes to supervising from a consolidated basis 
the organization within the structure of an AIG or any other 
company under its supervision.
    So I do think appropriate steps have been taken. And I 
think that again, this is going to require--the Federal Reserve 
and the States have been working together for years. We really 
regulate very different aspects of a company. We look more at 
the insurance entity from the inside, and they look more at the 
group. I think, though, that with cooperation, collaboration, 
continuing to work with our colleagues, we will be able to 
provide a structure to prevent a future AIG. But I would like 
to emphasize once again that the way to address this is to 
identify risk, systemic risk in particular, and figure out ways 
of minimizing that so it doesn't pose a risk to the greater 
economy.
    Mr. Green. On that point, if we had been in a position such 
that there was a requirement to view the capital standards of 
the group at the group level, would we have been able to spot 
the issues that caused AIG to collapse before this happened?
    Mr. McCarty. No. I have been in conversation with a number 
of people on this subject, and from my understanding, there is 
no amount of higher loss absorbency that you could have put in 
or contemplated that would have prevented the meltdown of AIG. 
It was not a matter of insufficient capital or an overlay of 
capital; it was a matter of supervision, and quality 
supervision, and identifying the risk and finding out ways to 
deleverage that risk.
    Mr. Green. With my 15 seconds that are left, would anyone 
else care to comment on that?
    Mr. Van Der Weide. I will just comment briefly that I think 
Commissioner McCarty has identified correctly the main tool 
that is now available to deal with an AIG problem going 
forward, and that is the FSOC has the ability to designate any 
systemically important non-bank financial firm and to hand them 
to the Federal Reserve to provide consolidated supervision and 
regulation of the entire group. And I think that is probably 
the most targeted tool that Congress has now developed to 
prevent a recurrence of an AIG-style event.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    Mr. Westmoreland [presiding]. The gentleman yields back. 
Mr. Pearce is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate the 
testimony that you have each brought here. Mr. McRaith, I think 
I might talk with you first. Tell me a little bit about the 
driving compulsion behind this regulation of the insurance 
market. Where is that coming from? It is my understanding that 
there is not a law that says we should do it. So what is it 
that is not functional about the system that says we need to 
start changing things?
    Mr. McRaith. Congressman, are you asking about the 
international standards?
    Mr. Pearce. No, I am just asking why the underlying--what 
is the underlying value that says now we have to start 
regulating this market? Why did your position get created? Why 
is the Federal Government getting into the market? Is that a 
fair question, Mr. McCarty?
    Mr. McCarty. I think there are specific things under Dodd-
Frank that require the Federal Insurance Office, for instance, 
to identify gaps in insurance regulation in the U.S. 
marketplace, but also serve as a role representing the U.S. 
Government as appropriate at the IAIS. And I think that is the 
function that--
    Mr. Pearce. As a previous buyer of insurance for a 
business, I am alarmed when I see the Federal Government come 
in. So I am going to come back to you, Mr. McRaith. But does 
your agency, Mr. McCarty, see some reason for concern in what 
is coming out of the Federal Government?
    Mr. McCarty. We obviously have concerns with a new partner 
in the arena, a new player in the arena, as to what role they 
will play and how much jurisdiction they will exercise. So we 
are very guarded in making sure that State regulation is 
protected. We will do so with an eye towards collaboration and 
cooperation. But we certainly want to protect what we think is 
appropriately the Congress' view, which was restated in Dodd-
Frank: insurance regulation is by the States.
    Mr. Pearce. Mr. McRaith, you used to be a State regulator. 
Is that system not working? Is that the reason that you all are 
getting into it? Do you see your regulations being in addition 
to, on top of, or in place of State regulations?
    Mr. McRaith. Congressman, we are not establishing 
regulations or imposing regulations. Our work internationally 
is to take the best ideas of our State system, and of the 
Federal Reserve, and to ensure that those ideas are reflected 
in the global standards that are set at the IAIS.
    Mr. Pearce. You don't think that eventually those standards 
will seep down into the market here?
    Mr. McRaith. The only way those standards are implemented 
in the United States is either through the State system or 
through the Federal Reserve. International standards in the 
insurance sector have been around--the IAIS was founded in 
1994. Standards have been around for 15, 20 years. They are not 
new.
    Mr. Pearce. Mr. Garrett's questions evidently eased into 
this area, and it didn't--the words I got back were not quite 
as clear-cut, that there was this great delineation between the 
markets that in fact they are tending towards being the same. 
So you are just saying that is not true, that we are going to 
keep ourselves nice and clear. Because take a look at it from 
our perspective in the West. Back when we had local 
jurisdiction over local forests, we had operating Forest 
Service, we cut timber, the West thrived, we had jobs there. 
The Federal Government got into the business of the forests, 
and now 85 percent of the Forest Service is dead--85 percent of 
the forest market is dead, the companies are gone, jobs have 
disappeared in our district. And what I see is that any time 
the Federal Government starts playing around with anything 
regarding business, then it tends to choke that business off. 
So when I sit here and talk and listen to Mr. McCarty saying 
that we have cause for concern, and I hear you saying, oh, 
don't worry about it, I tend to believe I have cause for 
concern rather than the ``don't worry'' piece of it. And just 
know that we in the West struggle because there is so much 
public land, so much public, Federal Government involvement in 
the processes that they are choking off our economies one piece 
at a time, whether it is oil and gas, whether it is the 
Endangered Species Act, using a spotted owl to stop all the 
timber and later the Federal Government says, sorry we 
shouldn't have done that, it was never the problem, logging was 
not the problem. We are the ones who live at the end of that 
pipeline. So I am concerned about the direction that you are 
headed, the fact that we have created your spot. And I am 
concerned that it feels like it is tending towards concerns 
that Mr. McCarty might have and his association might have. 
Because I will be speaking for the people who buy insurance out 
there trying to just make a living day to day and hire a few 
people in the local area. That is what I don't want you 
involved in. Thanks, Mr. Chairman. I yield back.
    Mr. Westmoreland. The gentleman yields back. I now 
recognize the gentleman from Pennsylvania, Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman. And thank you, panel, 
for sticking with us. We have a lot going on this afternoon. I 
apologize if any of my questions might be redundant. I haven't 
had a chance to take a look at what other Members have asked. 
But Director McRaith, I wanted to start with you. When 
participating in international discussions on insurance 
regulation, and the United States is considering its position, 
how do you take into account the position of State regulators 
and the NAIC?
    Mr. McRaith. We have extensive engagement and consultation 
with the State regulators on a constant basis. So we have 
regularly scheduled calls at least monthly. We have weekly, if 
not daily engagement at the staff or leadership level. Meetings 
that are ongoing will meet throughout the day or during the day 
of the meeting itself to ensure that we are all aware of and on 
the same page.
    Mr. Rothfus. I want to move to Commissioner McCarty and get 
your feedback. Would you say that the Federal Insurance Office 
and the Feds seek your feedback and represent States 
appropriately?
    Mr. McCarty. I would say that we have a very complex 
interaction with the Federal Reserve and the FIO. We have, as 
Mike has indicated, multi-level work streams working at the 
IAIS and the EU-U.S. dialogue on a number of issues. We do do a 
lot of interaction, and we certainly would welcome the 
opportunity to provide them with our history and background on 
solvency, prudential regulation in the United States. Mike, of 
course, is very familiar with that in his former position. We 
think that we are the subject matter experts on this, and would 
certainly like to give deference to that, but they have their 
own respective roles in this regard, and they make their 
decisions accordingly.
    Mr. Rothfus. Have you proposed or are you considering 
proposing ways to improve coordination and representation when 
international insurance discussions come up?
    Mr. McCarty. Frankly, what started out as a relatively 
informal process has become a much more formalized process. And 
we continue to improve that. In advance of our IAIS meetings, 
we have a number of meetings in advance of that to look at the 
different decision points that are coming up, finding 
commonalities where we can agree, and figure out ways of 
strategically presenting those in the best interests of the 
United States.
    Mr. Rothfus. I wonder if Deputy Director Van Der Weide and 
Director McRaith could maybe comment on coordination and ways 
to do things better? Are there any proposals on the table?
    Mr. Van Der Weide. In the past months we have increased 
extensively the amount of engagement that occurs amongst the 
FIO, the Federal Reserve, and the NAIC and the States on how we 
go about doing the international negotiations. It is quite 
important that to the maximum extent possible, we present a 
united American front in those negotiations with our European, 
Asian, and other international colleagues. And we are trying 
the best we can to do that. I think the consultations have been 
going quite well, and the collaboration has improved 
considerably as we have now entered into the more active phase 
of those negotiations. So I think the trend line is quite 
positive on increasing collaboration. And I am reasonably 
optimistic that we will be able to keep that increase going.
    Mr. McRaith. Congressman, my only additional point is that 
when we started a few years ago, we started for the first time 
in the history of the country integrating the national and the 
State perspectives internationally. We have learned as we have 
moved forward. We have a very rigorous, aggressive engagement, 
coordination effort right now. We will, of course, continue to 
learn as we move forward. But we are in a good place, and we 
will only get better.
    Mr. Rothfus. Director Van Der Weide, do you expect to 
finish our domestic standards before the IAIS sets its 
standards?
    Mr. Van Der Weide. I can't give you any definitive timeline 
on the Fed's development of its capital framework for the 
domestic insurance holding companies that we supervise. We are 
extensively engaged right now in outreach with U.S. insurers, 
and U.S. insurance supervisors to better understand how the 
U.S. State level risk-based capital regime works, and to 
measure the cost and benefits of various alternatives that we 
might take towards establishing those holding company capital 
requirements.
    Mr. Rothfus. So as far as finishing our standards before 
the international standards are set, you can't make a 
commitment that say our standards are going to be first and 
then use that as a benchmark going in discussing the 
international ones?
    Mr. Van Der Weide. Yes. I can't give you a definitive time 
as to when we will complete our process. We are going to--
    Mr. Rothfus. Would it be a good idea if we did that?
    Mr. Van Der Weide. I think it is important when we 
negotiate those international capital standards, that we do 
have a good vision, a shared vision among us as to the right 
outcomes. I think that is right. But at the same time, the 
pressure on us is we do want to get the domestic capital regime 
right. And it is a pretty complicated endeavor. We have a very 
diverse set of insurance firms that we need to devise a capital 
framework for, and we don't want to hastily produce a rule that 
doesn't work well for those firms. So it is important that we 
get that rule right. And we don't want to excessively 
accelerate that process.
    But it is important, I think you are right, your instinct 
is right, that we need to, when we negotiate internationally at 
the IAIS, have a reasonably good shared vision of kind of the 
outcomes that we are driving towards.
    Mr. Rothfus. Thank you, Mr. Chairman. I yield back.
    Mr. Westmoreland. The gentleman yields back. I will 
recognize Mr. Green from Texas.
    Mr. Green. Thank you, Mr. Chairman. I would like to borrow 
some of the language from my colleague. I wasn't available to 
hear and see all of the hearing, so this may be redundant as 
well. But I do appreciate the testimony that I have heard. We 
do have a good many things going on today, I assure you. But 
with reference to competitiveness not only nationally but 
internationally, I think that we all understand that we don't 
want American companies to be at a disadvantage. And 
specifically as it relates to the insurance market, there seems 
to be a notion that the regulators have a better understanding 
of banking than insurance law or insurance needs. What are some 
of the risks that are unique to the insurance industry? And if 
you have already answered, I beg your forgiveness, but I think 
it is good for me to hear this and for it to be repeated. Some 
things bear repeating.
    Mr. Van Der Weide. I will field that one. I think it is 
important, as the Federal Reserve devises its insurance 
supervision and regulatory framework for the 17 insurance 
holding companies that we supervise, that we make it reflect 
the insurance risks and the insurance business models of those 
firms. It is not appropriate for us to take a bank-centric 
model and apply it those firms. The Collins Amendment to the 
Dodd-Frank Act had required us to do that on the capital front, 
but thanks to congressional action in December, those shackles 
have been removed and we are now free to implement fully 
insurance-centric regulatory regime for those firms.
    Insurance is different from banking in a significant number 
of ways. I will just mention a few of the key ways in which we 
think it is different. Insurers, particularly life insurers, 
tend to have longer-term liabilities than banking 
organizations. And they tend to engage in less liquidity 
transformation and maturity transformation. I think that 
militates in favor of a different regulatory regime. They also 
tend to have liabilities that are uncertain in amount. Bank 
liabilities tend to be of a fixed amount. The insurers' classic 
insurance liabilities are of an uncertain amount. The size of 
those liabilities will depend upon the eventuation of future 
mortality risks, longevity risks, morbidity risks, and natural 
catastrophe risks. That makes insurers quite different from a 
bank. And the last thing I will mention is on the asset side of 
the insurance balance sheet. Many American insurers, again life 
insurers principally, have a separate account capacity. And 
that is a major asset class of many life insurers that simply 
isn't present on bank balance sheets. So there are a lot of 
ways in which insurers are different from banks. And we need to 
make sure that our regulatory and supervisory regime reflects 
those differences.
    Mr. Green. And you are indicating that you believe you are 
in a position to do that at this time?
    Mr. Van Der Weide. Yes. We had been impeded by the Collins 
Amendment, but we feel like the change that Congress made to 
the Collins Amendment of the Dodd-Frank Act in December frees 
us up to devise a fully appropriate insurance-centric model for 
the 17 firms that are prominently engaged in insurance that we 
have.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    Mr. Westmoreland. The gentleman yields back. And before I 
recognize Mr. Duffy, I want to thank all of you for your 
patience. I haven't seen one of you all make a face yet when 
these different Members are coming in. But this is something 
that is very important to all of us. And so, I do appreciate 
your patience.
    But I did want to ask just a couple of questions. Mr. Van 
Der Weide, is the business philosophy of international 
insurance companies or European insurance companies any 
different than what you might say the philosophy of a domestic 
insurance carrier might be?
    Mr. Van Der Weide. The internationally active insurance 
companies certainly do expose themselves to additional risks 
that the purely domestic firms do not. They also have 
additional diversification opportunities that the purely 
domestic firms do not. And our work in the international 
regulatory space is to try to help make sure that we have a 
globally consistent supervision and capital framework for the 
foreign firms that operate in our markets.
    Mr. Westmoreland. Let me ask it in a little bit different 
way. Is their philosophy about what should happen if there was 
a failure, who their allegiance might be to as far as what 
might happen to the assets of that company?
    Mr. Van Der Weide. I am not sure if I would draw a 
distinction between the--
    Mr. Westmoreland. Okay. Let me ask you this. I know that 
our insurance companies are liable for the policyholder. That 
is who they protect. My understanding on the European model is 
that they protect the creditors, and not the policyholder, that 
the policyholder comes after the creditor. And in the United 
States, the policyholder is first. Is that your understanding?
    Mr. Van Der Weide. Yes. Different international insurance 
regulators have different objectives for their regimes. Part of 
the challenge that we will have collectively as we engage in 
those negotiations with the IAIS is to make sure that our 
vision of the appropriate way to do insurance regulation is put 
forward in a powerful way and is convincing. But one of the 
challenges, not just in insurance, but in any kind of 
international negotiation, is to deal with the different 
objectives that different regulators have around the world and 
try to meld those into a framework that from our perspective, 
works for America.
    Mr. Westmoreland. So you are committed, or whomever is 
doing the negotiating is committed to making sure that the 
policyholders are put in first place.
    Mr. Van Der Weide. Yes. Absolutely. That will be a key goal 
of ours.
    Mr. Westmoreland. Mr. McCarty, do you foresee, or do you or 
the State insurance commissioners have a fear that what they 
are negotiating is only for these international--or companies 
that participate internationally? When they write the rules for 
that, is it your fear that you may have to apply those same 
rules to all the insurance companies that you regulate? And how 
would you do that? Would you regulate different companies in 
different ways?
    Mr. McCarty. You raise a very valid point. I think it is 
the concern that companies have, the large internationally 
active groups that may find them subject to higher capital 
standards or different enhanced policy measures. Their concern 
is that would put them at a disadvantage back home, where they 
are competing, whether it is homeowners, or auto, or business, 
liability insurance, medical malpractice, or you name it. So 
the concern they have is, they are certainly not going to put 
themselves at a disadvantage, and would encourage that State 
legislatures apply those standards uniformly, which could have 
consequences in the marketplace, both terms and pricing and 
product availability.
    Mr. Westmoreland. Yes. Because you wouldn't want to treat 
one insurance company differently than you would treat another. 
And that is what I am afraid would actually happen. And we want 
to make sure that those policyholders, the people who pay the 
premiums, are the first to be protected.
    Mr. McCarty. Can I circle back to something you mentioned 
earlier, which I think is the absolute key issue going into the 
discussions about an insurance capital standard, which is, what 
is the guiding principle? Is the guiding principle policyholder 
protection, which for the U.S. perspective is a ground-up, 
entity-based ring fencing? You ring fence those assets so they 
are available. The other concepts are the ongoing concern or 
creditor protection, very different policy measures and 
outcomes depending upon whether you are predicated on the 
policyholder protection, which we think is key.
    Mr. Westmoreland. Thank you. The Chair now recognizes the 
gentleman from Wisconsin, Mr. Duffy.
    Mr. Duffy. Thank you, Mr. Chairman. And I appreciate the 
panel being here today, and for not making any funny faces. 
That is a new standard that we have in the committee. But I do 
appreciate all of your appearances. I plan later today to 
introduce a bill that I have been working on for several 
months, the International Insurance Standards Transparency and 
Policyholder Protection Act. My staff has sent you guys all 
copies, or your teams copies of the legislation this morning. I 
can't imagine you have had a chance to review it thoroughly and 
comment on it today. I understand that you are all fast 
readers, but maybe not that fast. So I was hoping to get some 
of your initial thoughts on some of our key elements of the 
bill.
    The bill establishes notification and reporting 
requirements for Federal regulators like yourselves to inform 
this committee and the Senate Banking Committee when you intend 
to enter into negotiations and agree to international 
regulatory frameworks on behalf of the United States.
    My bill also establishes a public notice and comment period 
so that all interested parties may make their voices known 
throughout the process. And my bill also creates objectives 
that regulators must meet during the negotiation process. These 
objectives promote the U.S. State-based system of insurance and 
our commitment to protecting policyholders. Hopefully, you will 
have a chance to review that after today's hearing and I can 
get your feedback on that. But in regard to Mr. McRaith and Mr. 
Van Der Weide, neither of you have an objection to keeping 
Congress informed on a regular, ongoing codified basis, do you? 
Mr. McRaith?
    Mr. McRaith. We welcome the engagement with this committee, 
with members and staff of the committee, and also with members 
and staff of the Senate Banking Committee, and look forward to 
that engagement. We have had that over the last few years, and 
look forward to continuing that.
    Mr. Duffy. But engagement might be a little bit different. 
I am saying, hey, listen, we are going to systematically keep 
Congress informed. And so we know what information is going to 
flow from FIO and you know what information we expect to 
receive, as opposed to a looser arrangement where we are just 
going to have an engagement. You agree we should probably have 
some kind of system in place where we kind of have a certain 
timeline of getting information with regard to this process? Do 
any of you disagree with that?
    Mr. McRaith. I am not sure--I haven't seen your bill, so I 
don't want to comment too specifically. But I don't know why 
something like that would be necessary when we are happy to 
visit with the committee and the staff on a regular basis and 
are happy to provide updates, engagement, and share thoughts 
and analysis as the work unfolds.
    Mr. Duffy. I guess sometimes systems are important in 
making sure certain requirements are met and certain 
expectations have a bright line so you know what we want and 
what we expect. And if you don't set up a process yourself on 
the flow of information, I think that we here can set up a 
process to say this is very clear for you what we want to know 
in regard to the process and how it unfolds. Mr. Van Der Weide, 
would you have an objection to a proposal such as this in 
regard to keeping Congress apprised?
    Mr. Van Der Weide. I think my views are very similar to 
those of Director McRaith. It is important for us to keep 
Congress very well-apprised on a frequent basis of our 
activities collectively as we negotiate international insurance 
regulatory standards. There is no question that is in the 
public interest. And we feel like we have been doing that. If 
there is additional consultation or information that you need 
from us, we are happy to do that. But I haven't seen your bill, 
and so I don't feel like I could comment upon increasing the 
systematicness of the relationship in any particular way.
    Mr. Duffy. Okay. And I appreciate that. But both of you 
have an interest in keeping Congress informed. I do appreciate 
that. Commissioner McCarty, my bill would require FIO and 
Treasury and the Federal Reserve to consult with the National 
Association of Insurance Commissioners throughout the 
negotiation process. Do you believe that you have been kept up 
to speed thus far on the process, or the commissioners have?
    Mr. McCarty. It has been an evolving process. As Director 
McRaith has articulated, I think we are in a good place now in 
terms of those discussions and negotiations. It wasn't a 
perfect process getting here, but I think we are in a good 
place. I have not had an opportunity to review the bill. The 
NAIC has a process for going through and commenting on 
legislation. But we certainly conceptually would agree with 
oversight. We are particularly concerned, sir, about the lack 
of transparency at the Financial Stability Board and the lack 
of transparency at the IAIS. And if there is a way for Congress 
to provide some more transparency in that process, that would 
be welcomed.
    Mr. Duffy. I know my time is almost up, or I am 15 seconds 
over, but you do believe that NAIC should be involved in the 
process and kept abreast of the process, correct?
    Mr. McCarty. Absolutely.
    Mr. Duffy. Why is that important?
    Mr. McCarty. First of all, we have been in this business 
for over 130 years. We have a remarkably strong record of 
providing solvency for our companies and providing a path for 
ensuring that policyholders get paid even in the resolution of 
a company. We have withstood many financial crises. And we have 
on-the-ground knowledge of insurance regulation, which everyone 
knows is very different than banking and securities. And so for 
us to have an equal partnership at the table is critical.
    Mr. Duffy. Thank you. And I would just ask that you guys 
share your thoughts with me. I look forward to partnering with 
you and working with all of you to make sure we get a process 
that works for everybody and for our committee. And so with 
that, Mr. Chairman, I yield back.
    Mr. Westmoreland. The gentleman's time has expired. I want 
to thank all the witnesses for being here. I think that at 
least what I have taken away from this hearing, and the other 
information that we received that what happened at AIG was 
nothing but greed, and a lot of people were making a lot of 
money. And as usual, what the Federal Government did was way 
overreach to solve one very targeted problem that we could have 
fixed. But as people close to this Administration have said, 
you never let a crisis go by that you don't move the ball 
forward. And so what Dodd-Frank did, specifically with 
insurance companies in putting them under the SIFI rule and the 
other things, is cast a net so broad that you caught all the 
little fishes that you were not intending to catch. And so as a 
result, we have what we have.
    And there are going to be all type of unintended 
consequences, as there is with anything that is complex as 
Dodd-Frank and all the many rules that it has put on different 
businesses, that we wonder why we only had a growth of .02 
percent in our economy. It is a direct result of the 
overregulation that we have today. Our confidence is more into 
our State officials. I know Mr. McCarty was appointed. And I 
believe you may be the first appointed State tax commissioner 
from the State of Florida. Our insurance commissioner is 
elected, accountable to the people. And Mr. Van Der Weide, I 
don't think you were elected by anybody, were you?
    Mr. Van Der Weide. No.
    Mr. Westmoreland. Mr. McRaith, you are not elected by 
anybody, are you?
    Mr. McRaith. No, I am not.
    Mr. Westmoreland. Most of our State insurance commissioners 
are elected, and they are held accountable to the people. And 
therefore, they put those people first. So I thank all of you 
for your testimony. Thank you for sticking around.
    Mr. Green. Mr. Chairman?
    Mr. Westmoreland. Without objection, I would like to submit 
the following statements for the record: the American Council 
of Life Insurers; the National Association of Professional 
Insurance Agents; the American Insurance Association; the 
American Academy of Actuaries; the Property Casualty Insurers 
Association of America and the National Association of Mutual 
Insurance Companies.
    Mr. Green. Mr. Chairman, if I may. I beg you, Mr. Chairman, 
to give me about 10 seconds to--
    Mr. Westmoreland. Okay, sure.
    Mr. Green. --have one comment. I do believe that, Mr. 
Chairman--I agree with you that there are technical corrections 
that can be made to Dodd-Frank. But I want to make sure that I 
let people know that there is another opinion. And that while 
we can mend it, I am not one who believes we should end it. And 
I thank you for the time.
    Mr. Westmoreland. I thank my friend. I am glad to hear you 
think there needs to be some adjustments. And I will help you 
with that in any way I can.
    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 1:18 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             April 29, 2015


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