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


                         THE IMPACT OF DOMESTIC
                        REGULATORY STANDARDS ON
                       THE U.S. INSURANCE MARKET

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

                                 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

                               __________

                           SEPTEMBER 29, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-53
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

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

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

                 BLAINE LUETKEMEYER, Missouri, Chairman

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

                              ----------                              
                                                                   Page
Hearing held on:
    September 29, 2015...........................................     1
Appendix:
    September 29, 2015...........................................    33

                               WITNESSES
                      Tuesday, September 29, 2015

Huff, John M., Director, Missouri Department of Insurance, 
  Financial Institutions, and Professional Registration, on 
  behalf of the National Association of Insurance Commissioners 
  (NAIC).........................................................     7
McRaith, Michael, Director, Federal Insurance Office (FIO), U.S. 
  Department of the Treasury.....................................     4
Sullivan, Thomas, Associate Director, Board of Governors of the 
  Federal Reserve System.........................................     5
Woodall, Hon. S. Roy, Jr., independent member, Financial 
  Stability Oversight Council (FSOC).............................     8

                                APPENDIX

Prepared statements:
    Huff, John M.................................................    34
    McRaith, Michael.............................................    46
    Sullivan, Thomas.............................................    50
    Woodall, Hon. S. Roy, Jr.....................................    56

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Written statement of the American Academy of Actuaries.......    63
    Written statement of the Independent Insurance Agents and 
      Brokers of America.........................................    68
    Written statement of the National Association of Mutual 
      Insurance Companies........................................    72
    Written statement of the Property Casualty Insurers 
      Association of America.....................................    87
    Written statement of the National Association of Professional 
      Insurance Agents...........................................    95
Posey, Hon. Bill:
    Written statement of the American Council of Life Insurers...    99
    Written statement of the American Insurance Association......   100
    Letter to Senator David Vitter from the California Department 
      of Insurance, dated April 20, 2015.........................   101
    Letter to Senator David Vitter, Senator Jon Tester, 
      Representative Bill Posey, and Representative Brad Sherman 
      from the Council of Insurance Agents & Brokers, dated April 
      21, 2015...................................................   102
    Written statement of the National Organization of Life and 
      Health Insurance Guaranty Associations and the National 
      Conference of Insurance Guaranty Funds.....................   103
    Letter to Senator David Vitter, Senator Jon Tester, 
      Representative Bill Posey, and Representative Brad Sherman 
      from the Independent Insurance Agents and Brokers of 
      America, the National Association of Mutual Insurance 
      Companies, and the Property Casualty Insurers Association 
      of America, dated March 18, 2015...........................   105
    Letter to Senator David Vitter, Senator Jon Tester, 
      Representative Bill Posey, and Representative Brad Sherman 
      from the National Association of Insurance Commissioners 
      and the Center for Insurance Policy and Research, dated 
      March 18, 2015.............................................   107
    Letter to Senator David Vitter, Senator Jon Tester, 
      Representative Bill Posey, and Representative Brad Sherman 
      from the National Association of Professional Insurance 
      Agents, dated March 31, 2015...............................   109
    Letter to Senator David Vitter, Senator Jon Tester, 
      Representative Bill Posey, and Representative Brad Sherman 
      from the National Conference of Insurance Legislators, 
      dated March 18, 2015.......................................   110
Huff, John M.:
    Written responses to questions for the record submitted by 
      Representatives Sherman, Rothfus, Barr, Ross, and 
      Luetkemeyer................................................   111
McRaith, Michael:
    Written responses to questions for the record submitted by 
      Representatives Luetkemeyer, Sherman, Ross, Barr, and 
      Rothfus....................................................   119
Sullivan, Thomas:
    Written responses to questions for the record submitted by 
      Representatives Luetkemeyer, Barr, Ross, and Rothfus.......   130
Woodall, Hon. S. Roy, Jr.:
    Written responses to questions for the record submitted by 
      Representatives Ross, Rothfus, and Barr....................   140

 
                         THE IMPACT OF DOMESTIC
                        REGULATORY STANDARDS ON
                       THE U.S. INSURANCE MARKET

                              ----------                              


                      Tuesday, September 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 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Members present: Representatives Luetkemeyer, Royce, 
Pearce, Posey, Stivers, Ross, Barr, Rothfus; Cleaver, 
Velazquez, Clay, Green, Moore, Ellison, Beatty, and Kildee.
    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. Votes are scheduled in 
the 3:30 to 4:00 range, so hopefully we will be able to get 
through everybody's testimony and questions ASAP. So we are 
going to try to get going here as quickly as possible.
    Today's hearing is entitled, ``The Impact of Domestic 
Regulatory Standards on the U.S. Insurance Market.'' Before we 
begin, I would like to thank the witnesses for appearing before 
the subcommittee today. I look forward to your testimony.
    I now recognize myself for 4 minutes to give an opening 
statement.
    Our Nation enjoys the most robust policyholder-centric 
insurance system in the world. The U.S. industry performed well 
during the financial crisis, and policyholders enjoy the safety 
and soundness that comes with our Nation's unique regulatory 
structure.
    Despite its proven track record, the domestic regulatory 
landscape is being forced into significant changes. Today, we 
see more intrusion in insurance by not only the Federal 
Government but also international financial regulators. The 
Dodd-Frank Act has allowed that to happen through the creation 
of the Federal Insurance Office (FIO) and the powers granted to 
the Federal Reserve Board of Governors. The subcommittee has 
spent a great deal of time focused on international factors 
affecting our insurance impact.
    Thanks to Team USA, we have experienced some victories at 
the International Association of Insurance Supervisors (IAIS). 
The timeline for international capital standards has been 
extended, which came as welcome news to this committee, and 
conversations seem to be pointing us in the right direction on 
accounting standards.
    However, the approach on the IAIS higher loss absorbency 
rule, or HLA, has created some alarm throughout the U.S. 
insurance space and has the potential to damage our domestic 
system. The proposal unjustly harms products relied on by 
millions of American consumers, an issue that must be addressed 
without delay. It is imperative that the United States press 
the IAIS and the Financial Stability Board to push back on this 
concept and work toward what should be the mission of Team USA 
to represent and advocate for the existing insurance regulatory 
regime.
    Today, we turn our attention to the many domestic pressures 
facing the industry. The designation of insurers as 
systemically important financial institutions (SIFIs) to the 
Federal Reserve's rulemaking on insurance capital standards, it 
is essential that changes made to the regulatory landscape be 
done appropriately and in response to issues that pose risk to 
policyholders. That is particularly true of the Fed's domestic 
capital standard. The standard should be done in close 
coordination with State insurance regulators and should be 
tailored to meet the unique model and needs of the United 
States, not based on international conversations or a desire to 
appease Federal and foreign regulators.
    There is a tremendous need for the Federal Reserve, which 
as a reminder is subject to congressional legislative action, 
to get this rulemaking right. It is imperative that the Fed 
develop a domestic standard first, then export it to the rest 
of the world. It is my hope that today's discussion will also 
focus on the designation of insurers as SIFIs. The 
Administration has told this committee time and time again that 
the decisions on these designations were not born of 
international conversations and were made based on the 
extensive research and actual risk posed to the financial 
system. Yet insurance experts in this room, from whom we will 
receive testimony today, dissented and have in subsequent 
situations outlined their concerns over these designations.
    There are numerous other issues that have the potential to 
negatively impact the competitiveness of U.S. insurers. Despite 
statutory language that calls for a board to be established by 
April, we have yet to see any progress on the National 
Association of Registered Agents and Brokers Reform Act of 2015 
(NARAB II). We continue to prop up a flood insurance program 
that doesn't work, and are now requiring the insurance industry 
to comply with costly duplicative data requests at both the 
State and Federal levels. While some progress has been seen 
internationally, I fear that coordination and cooperation has 
stalled domestically. It is time that the witnesses appearing 
today work with Congress, industry, and, most importantly, each 
other to ensure that our domestic insurance system remains the 
most robust in the world.
    With that, the Chair now recognizes the ranking member of 
the subcommittee, the gentleman from Missouri, Mr. Cleaver, for 
5 minutes for an opening statement.
    Mr. Cleaver. Thank you, Mr. Chairman.
    And to the other members of the subcommittee, good 
afternoon. I would like to begin by first thanking our 
witnesses for their appearance here today, and I would like to 
issue a special welcome, of course, to John Huff from the great 
State of Missouri, which is preparing for an I-70 World Series. 
I am not saying the other teams are not important. They are 
just not winners.
    What I would like to do is welcome all of you, but 
obviously, I have a special appreciation for the Missourian. 
Today's hearing will focus on domestic insurance issues. With 
the passage of the Dodd-Frank Act, the Federal Insurance Office 
(FIO) was also created. Among many things, this office monitors 
all aspects of the insurance industry and identifies any gaps 
that could contribute to the systemic crisis.
    The U.S. insurance industry is, of course, primarily 
regulated by States. However, the consequences of the 2008 
worldwide economic crash revealed the extent to which our U.S. 
financial regulatory framework had allowed for supervisory gaps 
to exponentially grow. There was simply no single regulator 
responsible for understanding and supervising the enterprise as 
a whole.
    Though changes have been made to our insurance system as a 
whole, much of the State regulatory power remains. The FIO is 
not a financial regulator. They have been, as authorized by 
Dodd-Frank, working on a number of issues on the domestic 
level, many of which are referenced in their annual report on 
the insurance industry that was released yesterday.
    Overall, both the life insurance and property and casualty 
insurance sectors were profitable in 2014. Life insurance net 
written premiums totaled $648 billion in 2014, and property and 
casualty net written premiums reached $503 billion in 2014, 
which was a record high.
    I would like to again thank our witnesses for their 
participation, and I am eager for this conversation on domestic 
insurance issues to continue and that we will have a robust 
dialogue.
    Thank you very much, Mr. Chairman.
    Chairman Luetkemeyer. Thank you, Mr. Cleaver.
    With that, we will begin the testimony. Today, we welcome 
Director Michael McRaith from the Federal Insurance Office, 
U.S. Treasury Department; Mr. Tom Sullivan, Senior Adviser, 
Department of Banking Supervision and Regulation, Federal 
Reserve Board of Governors; Mr. John Huff, Director, Missouri 
Department of Insurance, Financial Institutions, and 
Professional Registration, and president-elect of the National 
Association of Insurance Commissioners--obviously, Mr. Cleaver 
and I have a connection to Mr. Huff, and welcome him, with a 
special welcome--and the Honorable S. Roy Woodall, Jr., 
independent member, Financial Stability Oversight Council, U.S. 
Department of the Treasury.
    Gentlemen, thank you for being here this afternoon. We have 
a very distinguished panel, and I am excited to have you here 
with us. You will each be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
your written statements will be made a part of the record.
    With that, Mr. McRaith, you are recognized for 5 minutes.

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

    Mr. McRaith. Chairman Luetkemeyer, Ranking Member Cleaver, 
and members of the subcommittee, thank you for inviting me to 
testify. We released FIO's 2015 annual report on the insurance 
industry yesterday: 2014 data showed the $8.3 trillion U.S. 
industry reported capital and surplus levels of approximately 
$1.15 trillion. Total direct premiums collected in 2014 were a 
record high of $1.2 trillion, or roughly 7 percent of U.S. GDP. 
Just in the last 10 years, U.S. premium volume has grown by 
more than $170 billion.
    At FIO, we are working to implement the reauthorized 
Terrorism Risk Insurance Act (TRIA), including working with 
stakeholders so that we can collect meaningful data in an 
efficient way. Industry continues to educate us about what data 
is available and in what format. We are also prepared to 
release soon a study on the TRIA certification process. FIO is 
also moving forward with monitoring the affordability and 
accessibility of personal auto insurance. We need a standard 
that makes sense from an insurance perspective, and stakeholder 
input has provided great insight. FIO also serves as a 
nonvoting FSOC member participating in the analysis of systemic 
risk and individual firms. In this work, we work closely with 
staff from other FSOC member agencies, including those 
represented on this panel.
    Our annual report also cites data showing that while U.S. 
premium volume increased in 2014, the U.S. share of the global 
insurance market declined from 27.5 to 26.8 percent. This 
development reflects both the continued vibrancy of the U.S. 
market, by far the world's largest, and the increasing global 
growth opportunities for U.S.-based insurers. The globalization 
of the insurance market explains the increased focus on global 
standards, and 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 IIS. In this 
work, we collaborate extensively with our colleagues at the 
State level and at the Federal Reserve.
    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 operating 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 U.S. and international 
counterparts to build a global consensus that works for the 
United States. In 2014, the IIS completed structural reform 
that improved the organization's transparency, and we are 
pleased to note that in 2015, stakeholders have already had 
more than 60 hours of public engagement with IIS members, far 
more than ever before. With open meetings available to all 
stakeholders, the IIS is better able to fashion fact-based 
standards. One such standard known as higher loss absorbency, 
or HLA, will be completed as an initial version this year but 
subject to meaningful improvement in the coming years.
    We also hope to commence negotiations on a covered 
agreement soon. Before we do, we will notify and consult with 
this and other committees. We look forward to meaningful 
engagement with all stakeholders throughout the covered 
agreement process. Not a trade agreement, a covered agreement 
is an agreement between the United States and another country 
involving prudential insurance measures. Our objective will be 
to provide tangible benefits for the U.S. insurance industry 
and consumers.
    Through our respective roles at home and abroad, U.S. 
authorities will continue to provide leadership that 
complements our shared interests in a vibrant, well-regulated 
market that promotes competition and financial stability and 
that protects consumers. In all of our work, internationally 
and domestically, Treasury priorities will remain the best 
interests 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 46 of the appendix.]
    Chairman Luetkemeyer. Thank you, Director.
    Mr. Sullivan, you are recognized for 5 minutes.

  STATEMENT OF THOMAS SULLIVAN, ASSOCIATE DIRECTOR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Sullivan. Thank you, Mr. Chairman, Ranking Member 
Cleaver, and members of the subcommittee. I appreciate the 
opportunity to testify on behalf of the Federal Reserve.
    As a result of the Dodd-Frank Act, the Federal Reserve is 
responsible for the consolidated supervision of insurance 
holding companies that own an insured bank or thrift as well as 
insurance holding companies designated by the FSOC for Federal 
Reserve supervision. Insurance holding companies for which the 
Federal Reserve is the consolidated supervisor hold roughly $3 
trillion in total assets, which is roughly one-third of the 
U.S. industry assets. These insurance holding companies vary 
greatly in terms of their size, the products they offer, and 
their geography.
    After passage of the Dodd-Frank Act, the Federal Reserve 
moved quickly to develop a supervisory framework that is 
appropriate for insurance holding companies that own depository 
institutions, and we promptly assigned supervisory teams to 
handle day-to-day supervision of each company. We have also 
acted promptly to commence supervision of three insurance 
holding companies designated by the FSOC for Federal Reserve 
supervision. Our supervisory teams are a combination of 
experienced Federal Reserve staff as well as newly hired staff 
with insurance expertise. We currently have approximately 90 
full-time equivalent employees devoted to the supervision of 
insurance firms. Many of our supervisors are individuals with 
substantial prior experience in State insurance departments or 
the insurance industry. We plan to continue to add staff as 
appropriate to both the Board and the Reserve Banks to ensure 
that we have the proper depth and experience to carry out our 
mandates.
    Our supervisory efforts to date have focused on 
strengthening firms' internal controls, corporate governance, 
risk identification, measurement, and risk management. Our 
principal supervisory objectives are protecting the safety and 
soundness of the consolidated firms and their subsidiary 
depository institutions, while mitigating any risks to 
financial stability.
    Last year, Congress enacted the Insurance Capital Standards 
Clarifications Act, which amended the provision of the Dodd-
Frank Act that had required minimal capital standards for banks 
to be applied to any insurance holding company supervised by 
the Fed. Using greater adaptability provided by this amendment, 
the Federal Reserve is now focusing on constructing a domestic 
regulatory capital framework that is well tailored to the 
business of insurance. We are exercising great care as we 
approach this challenging mandate. The Federal Reserve is 
investing significant time and effort into enhancing our 
understanding of the insurance industry and the firms we 
supervise. We are committed to tailoring our framework to the 
specific business lines, risk profiles, and systemic footprints 
of the firms we oversee. We have increased our staffing and 
have been engaging extensively with other insurance 
supervisors, experts, regulated entities, market participants 
and others, to solicit feedback on the various potential 
approaches of the development of an appropriate consolidated 
groupwide capital regime that would be consistent with Federal 
requirements.
    Our consolidated supervision and capital requirements will 
supplement existing legal entity supervision with a perspective 
that considers the risks across the entirety of the firm, 
including risks that emanate from noninsurance subsidiaries and 
other entities within a group. Our role as a consolidated 
supervisor does not seek to lessen the critical importance of 
supervising individual insurance legal entities by the States. 
We do not regulate the manner in which insurance is provided by 
these companies or the types of insurance products they 
provide. Those important aspects of the actual business of 
providing insurance are the province of the relevant State 
insurance supervisors. We conduct our consolidated supervision 
efforts in a manner that is complementary to and coordinated 
with other insurance regulators. We do this both informally and 
formally through mechanisms such as supervisory colleges. We 
also enter into agreements that allow us to share confidential 
information with State supervisors.
    An example of our collaboration with the States is 
evaluating a company's own risk solvency assessment, or ORSA. 
Many States have enacted legislation that requires State-
regulated insurers to produce this assessment on a groupwide 
basis. While we recognized that the ORSA process belongs to the 
lead State regulator, it is a potentially useful and valuable 
tool for us as well because it is fashioned on a groupwide 
basis. It has helped us to understand some of the institution's 
processes for monitoring, measuring, controlling, and managing 
risks in a way that avoids unnecessary duplication in our 
oversight function. We have been meeting with State insurance 
departments to discuss views on ORSA submissions, and we have 
appreciated their perspective on these subjects. We will 
continue our active collaboration with State regulators.
    Mr. Chairman, thank you for inviting me here today. I look 
forward to an active dialogue with committee members.
    [The prepared statement of Associate Director Sullivan can 
be found on page 50 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Sullivan.
    Mr. Huff, you are now recognized for 5 minutes.

  STATEMENT OF JOHN M. HUFF, DIRECTOR, MISSOURI DEPARTMENT OF 
      INSURANCE, FINANCIAL INSTITUTIONS, AND PROFESSIONAL 
    REGISTRATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                 INSURANCE COMMISSIONERS (NAIC)

    Mr. Huff. Good afternoon, Chairman Luetkemeyer and Ranking 
Member Cleaver. I appreciate the opportunity to testify today. 
As insurance markets grow more complex, State insurance 
regulators' tools and priorities also evolve. While here in 
Washington, much of the focus has been on the uncertainty of 
the international landscape, the capital standards the Federal 
Reserve will impose, and the operations of the FSOC, State 
insurance regulators have been working through the open and 
transparent NAIC process to make significant improvements to 
key areas of insurance regulation.
    As my written testimony details, in the past few years 
State insurance regulators have made improvements to our 
Holding Company Act that enhance our ability to regulate 
interactions among insurance companies and other entities 
within a holding company system. We have begun implementing a 
principles-based reserving system that right-sizes reserves for 
life insurers and reduces the incentives for company 
workarounds, and we have enhanced the consistency and 
transparency of life insurer use of captive reinsurance that 
has been primarily used to address admittedly excessive 
reserving requirements for certain lines of life insurance. And 
we work to protect insurance consumers who have been victims of 
a data breach.
    In addition to these enhancements, State insurance 
regulators have reduced the collateral amounts of requirements 
for foreign reinsurance transactions in a measured and 
transparent manner. Historically, we required foreign 
reinsurers to hold 100 percent collateral on shore in the 
United States to protect U.S. consumers. Responding to concerns 
raised by foreign reinsurers and foreign governments, we are 
permitting collateral reductions if a reinsurer is in a solid 
financial health position and is overseen by an effective 
regulator in its home country.
    Today, 32 States have adopted proposed revisions 
representing more than two-thirds of premiums written in the 
United States across all lines of business. Five more States 
are considering similar proposals, which would raise this 
market share to about 93 percent. This is an excellent example 
of the States responding quickly to global market developments 
while preserving our focus on U.S. policyholder protection. 
Despite extensive State responsiveness, we understand that the 
Treasury Department and the USTR are preparing to start 
negotiations on a covered agreement with the EU to address 
further reduction of reinsurance collateral and resolve 
uncertainty arising from Solvency II. This Federal action could 
unnecessarily preempt State laws and our progress on 
reinsurance reforms. We have long contended that although our 
regulatory system is structured differently than Europe's, it 
results in similar outcomes and should not be a basis for 
imposing duplicative regulation on U.S. insurers operating 
abroad. We question whether a covered agreement or any formal 
action by the Federal Government is necessary to resolve 
equivalence as it is clear that recognition can be achieved 
through other mechanisms.
    Before the Federal Government begins negotiating directly 
with a foreign government on an agreement that could preempt 
our State insurance laws, we do expect a clear and compelling 
case to be made for such drastic action. No such case has been 
made. And should Treasury and the USTR nevertheless move 
forward, State regulators should be at the table, directly 
involved in any discussions or negotiations to ensure our State 
regulatory system is not compromised.
    In 2010, I was selected to serve on the FSOC, and I served 
for two consecutive terms until September of last year. I 
continue to believe that the FSOC can be a robust vehicle for 
monitoring risks facing our financial system. However, FSOC has 
now voted twice to designate insurance companies over the 
objections of members who know the insurance industry best. 
Neither the designated companies nor the primary regulators 
have been given the insights necessary to de-risk these firms. 
This is unacceptable and contributes to rather than reduces 
risk to the financial system.
    If FSOC is unable or unwilling to change its process to 
develop an exit ramp for designated firms, we strongly urge 
Congress to do so. SIFI designations are not merely academic 
exercises. They will have real consequences for firms subject 
to the Federal Reserve's new capital standards. NAIC supported 
legislation last year granting our colleagues at the Fed 
flexibility to apply capital rules consistent with the 
insurance business model and our legal entity regulation. For 
our part, State insurance regulators also support the need to 
assess the adequacy of an insurance group's capital position as 
part of coordinated solvency oversight, and we are developing 
our own group capital calculation.
    In conclusion, State insurance regulators continue our 
efforts to improve regulation in the best interests of U.S. 
insurance consumers. State regulation has a strong 145-year 
track record of evolving to meet the challenges posed by 
dynamic markets, and we continue to believe that well-regulated 
markets make for well-protected policyholders. Thank you, and I 
look forward to your questions.
    [The prepared statement of Mr. Huff can be found on page 34 
of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Huff, for your 
testimony.
    And Mr. Woodall, you are recognized for 5 minutes.

  STATEMENT OF THE HONORABLE S. ROY WOODALL, JR., INDEPENDENT 
      MEMBER, FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC)

    Mr. Woodall. Thank you, Mr. Chairman, Mr. Ranking Member, 
and members of the subcommittee for inviting me to appear 
before you today.
    As you know, I serve on the Financial Stability Oversight 
Council as the voting member with insight as to the insurance 
sector of our economy. The other voting members are Federal 
banking regulators, Federal market and housing regulators, and 
the Treasury Secretary.
    The work of the Council affects many aspects of the 
financial system, but most prominently with respect to our 
domestic insurance market has been the Council's work in 
designating nonbank financial companies as systemically 
important financial institutions or SIFIs. It has been 7 years 
now since the financial crisis, 5 years since Dodd-Frank was 
passed, and to date the Council has designated only four SIFIs, 
three of which are insurance companies: AIG; Prudential; and 
MetLife.
    Upon designation as SIFIs, the insurance companies become 
subject to Federal supervision and regulation by the Federal 
Reserve Board of Governors. And as Tom Sullivan mentioned, this 
is regulation in addition to that of their primary regulators, 
our State insurance commissioners. Thus, the Council SIFI 
designations have impacted the regulatory framework of our 
domestic insurance market more than any other sector of the 
economy. But it was not the intent of Dodd-Frank that SIFIs be 
forever regulated by the Fed. Under Dodd-Frank, the Council has 
to reevaluate the SIFIs each year and then either confirm that 
they are still SIFIs or de-designate them. Dodd-Frank 
envisioned that over time the Council and regulators would 
supervise the SIFIs to eventually eliminate whatever systemic 
risks they posed to the U.S. system.
    As I explained in my written testimony, I was critical of 
the way in which the insurer SIFIs were designated. Dodd-Frank 
provides two tests for SIFI designation. Under one of the 
tests, the Council can presume that a company is under material 
financial distress, about to fail, and could pose a threat to 
the financial stability of the country. This is the only test 
by which all four of the SIFIs were judged.
    Under the other test in Dodd-Frank, the Council can look at 
the activities of the company, regardless of whether the 
company is about to fail, and then judge whether those 
activities are systemically risky and pose a threat to the 
financial stability of the United States.
    The Council used the material financial distress test in 
designating all three of the insurance companies as SIFIs 
rather than the activities test which, as I explained in my 
written testimony, I had advocated.
    Now I would like to focus on what comes next for the three 
insurance companies SIFIs. Had the Council used the activities 
test as I had advocated, it would have let the SIFIs, other 
companies, and regulators know what it was about the companies' 
risk activities that needed to be addressed in order to remove 
whatever threat to the U.S. financial system the companies 
might pose. As a result of the Council's failure to undertake 
this approach, the companies and their primary regulators are 
in the dark.
    It is my hope that the insurance SIFIs are not stuck in a 
``Hotel California'' and that the Council will begin to provide 
guidance to the companies and their primary regulators as to 
what the companies can do to lessen their systemic risk 
footprint, and not just so they can exit Fed supervision but so 
whatever systemic risk they pose can be mitigated and they will 
no longer pose a risk to the entire U.S. financial system.
    From my perspective, each year that a SIFI is, again, 
judged to still be a SIFI, it is no longer a reflection on that 
company. Rather, it becomes a measure of the success and 
effectiveness of the Council and of the Fed supervision. If we 
are not improving them, and the SIFIs are, year after year, 
still found to have systemic risk, what will the labeling of 
these companies as SIFIs have achieved?
    As previously stated, I think the Council should provide 
some degree of guidance as to the SIFIs as to how they could 
mitigate their systemic risk, and I will continue my efforts to 
encourage the Council to provide such guidance.
    Thank you, Mr. Chairman. I am happy to answer your 
questions.
    [The prepared statement of Mr. Woodall can be found on page 
56 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Woodall. This panel is 
going to get a blue ribbon with a gold star, because every 
single one of you stayed within your 5 minutes. That is a first 
for me in my 7 years of being here. Well done, gentlemen.
    Let me begin the questioning this afternoon with Mr. 
Sullivan. Dodd-Frank requires the Fed to develop a domestic 
capital standard that you discussed a minute ago. Where are you 
in that process? And when do you expect we can receive the 
final capital standard?
    Mr. Sullivan. Thank you, Mr. Chairman. We are not being 
driven by an artificial timeline to develop that standard. 
Right now, in terms of our progress, we continue to solicit 
views from external parties, some degree of internal 
deliberation, as we prepare to present to the Board an array of 
options that could be considered for a domestic capital 
standard. So we don't have a specific timeframe; we continue to 
work at it. And as I said in my testimony, we had a very open 
door in terms of soliciting the views from many, including our 
friends in the State regulatory communities and others.
    Chairman Luetkemeyer. So it could be anywhere from 2 months 
to 2 years, is that what you just said?
    Mr. Sullivan. I don't think this is something you want to 
hurry or rush along. I think this is something about which we 
want to be very careful and thoughtful and deliberate.
    Chairman Luetkemeyer. I think that begs the question, then, 
what we would like to see is a domestic standard set first 
before we go to the international standard. Would you commit to 
doing that as well?
    Mr. Sullivan. Well, ours is an obligation under the law to 
fulfill our obligations under Dodd-Frank. The standard setting 
at the IAIS I would differentiate insofar as Director McRaith--
    Chairman Luetkemeyer. Are we are not putting the cart 
before the horse? Are we not going to sort of endanger your 
ability to do your job if the international group decides to 
set capital standards, and suddenly you have to take that into 
consideration with your standards. Is that not going to happen? 
Isn't that a possibility?
    Mr. Sullivan. We are not obligated to enact anything--
    Chairman Luetkemeyer. I didn't say you are obligated. I 
asked if that is a possibility?
    Mr. Sullivan. I suppose, from a timing perspective, it 
could play out that way.
    Chairman Luetkemeyer. Therefore, my question is, Mr. 
Sullivan, are you willing to put in place the domestic 
standards, before you allow the international standards, or 
agree to putting international standards in place?
    Mr. Sullivan. Our development of the domestic standards 
will be done on our timeframe after a thorough and deliberative 
process through the Board. And anything that we consider 
internationally will have to meet the test of, is it 
appropriate for the U.S. market? Is it appropriate for U.S. 
consumers?
    Chairman Luetkemeyer. Well, it is hard to understand how it 
could be appropriate, sir, if you haven't gotten them in place 
yet, whenever you try to make a determination on an 
international basis.
    Mr. McRaith, would you agree with that statement?
    Mr. McRaith. Forgive me, I didn't get every word of your 
comment.
    Chairman Luetkemeyer. Okay. Mr. Sullivan thinks that we 
need to take into consideration--well, I don't want to put 
words into Mr. Sullivan's mouth, so let him rephrase his 
comment.
    Mr. Sullivan. My statement was that we would develop our 
domestic capital standard on a timeframe that we deem 
appropriate, and that we would consider any international 
standards for adoption, but they would only be adopted in the 
United States if they were appropriate for U.S. markets.
    Chairman Luetkemeyer. If they were appropriate for U.S. 
markets, that is the concern I have. Mr. McRaith?
    Mr. McRaith. I support Tom Sullivan's comments. I think we 
have two separate issues that are at play, one is the global 
standard. What we are doing collaboratively is ensuring the 
U.S. leadership in that conversation is provided domestically, 
which has the force of law and a requirement the Federal 
Reserve should proceed in a way that is deliberative and 
tailored to the companies under their supervision.
    Chairman Luetkemeyer. Further, I want to congratulate and 
thank Mr. McRaith and Mr. Sullivan for being open and available 
to myself and this committee. I know that part of our job here 
is not just legislative, it is also oversight, and to work with 
Mr. Sullivan and the Fed and Mr. McRaith, the FIO, to sort of 
peek over their shoulders and watch what they are doing, 
especially with this international discussion going on. They 
have been very cooperative and very forthcoming, and I want to 
thank you for that.
    Mr. Woodall and Mr. Huff, you guys are working with the 
SIFIs and have long comments in your opening statements about 
it. You know, Mr. Woodall, you talked about the material 
financial stress and not using activities to mean, because they 
don't do that, they can't figure how the how to de-risk. This 
is extremely important. This is a really big problem, because 
how can you tell somebody is doing something wrong, but you 
don't tell them how to fix the problem. Would you elaborate 
just a little more?
    Mr. Woodall. That restates it beautifully, because if the 
companies don't know what they need to do to not be a SIFI, 
then they are in the dark, the regulators are in the dark, then 
we haven't really accomplished anything.
    Chairman Luetkemeyer. It is kind of like if you have a 
teenage driver, and they keep running in the ditch, you don't 
tell them you have to turn to the left once in a while instead 
of keep turning to the right to get into the ditch, they will 
never get out of the ditch, will they?
    Mr. Woodall. Exactly.
    Chairman Luetkemeyer. I am out of time. So Mr. Huff, 
hopefully you will be able to answer my question regarding that 
shortly.
    Let me recognize the gentleman from Missouri, my good 
friend and colleague, and ranking member, Mr. Cleaver, for 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. I want to continue 
along the lines the chairman established. Let me first 
recognize--I didn't see him earlier--Senator Ben Nelson from 
Nebraska. I appreciate you being with us here today.
    Mr. Sullivan, I think I understood every word you said. I 
am just a little concerned about it, and I am wondering whether 
or not this won't end up being a major mistake. It would seem 
to me that, you know, I want to set the rules in my house first 
before I started passing city ordinances, regulating what you 
can do--I mean, the curfew is set in my house, because if we 
end up being, somehow, ending up placing our standards based on 
international standards, it may put some kinds of undue 
pressure and influence on our insurance companies.
    And I know, I heard what you said, I just think it is 
difficult to take into account what is happening 
internationally if we are going to put this framework together 
first.
    I may be asking the same question in a different fashion. 
Are you concerned about it at all?
    Mr. Sullivan. We are obviously concerned, but we are--we 
have a seat at the table, as Director McRaith pointed out in 
his testimony, the U.S. insurance market is the world's largest 
insurance market. I fail to see how an insurance standard would 
be widely accepted around the globe if you ignore the world's 
largest insurance market.
    So collectively, with representatives from the NAIC, and 
Director McRaith, and the Fed, we are at the table at the IAIS 
working to fashion and craft an international standard that we 
believe will be appropriate for U.S. insurance markets and U.S. 
insurance consumers. That work has, thankfully, because of the 
good efforts of Director McRaith and Director Huff and others, 
been extended. Some of the timelines have been pushed out, as 
the chairman noted in his opening statement.
    So I think we have some room. I don't underestimate the 
gravity of what you have pointed out, Mr. Cleaver, but I think 
if we continue to work together and represent the United States 
at the international fora, we will hopefully get to something 
that will be acceptable.
    Mr. Cleaver. I am assuming that all four of the witnesses 
agree with some variance of that?
    Mr. McRaith. Congressman, one point that I think is 
important to make is the alternative of not participating in 
the global discussions would be far more detrimental to U.S. 
interests than us being involved as we are right now, working 
together to assert and provide U.S. leadership in those fora. 
That is exactly what we are doing. When the Federal Reserve 
develops its rule, it will be tailored appropriately following, 
as Mr. Sullivan said, a lot of good work. That allows us to 
further lead the conversation. Right now, we want to be sure in 
these early days of development that we are very clear and 
assertive about the U.S. views on these important topics.
    Mr. Cleaver. Okay. I would like to have more conversation 
on this, but I want to go to Director Huff. The Missouri 
insurance industry is, right now, about a $34 billion industry, 
with over $112 billion in State-chartered financial 
institutions. What condition would you say the State's 
insurance agency is in? I know somebody probably thinks it is a 
softball thrown up in the air, please view it as such.
    Mr. Huff. Thank you, Congressman. The Missouri market is 
very competitive at this point in time in most lines of 
business. Workers' comp, in particular, we have over 320 active 
writers in the State and insurers are actively competing for 
employees to offer workers' compensation.
    Our auto market has just been rated by an outside source as 
the seventh most competitive in the United States. In the auto 
industry, again, we have about 175 active writers, so those 
markets are very competitive.
    The health side, not so much. We are struggling on our 
health insurance side of having active writers in the market, 
and really 4 health insurers control almost 90 percent of the 
market. That is an area we struggle in.
    The other area that we have quite a bit of expertise in is 
the reinsurance market. We are home to two of the largest 
reinsurers in the world. And at this point, due to the 
redomestication of a reinsurer, about 40 percent of all the 
life reinsurance in the United States is written out of a 
Missouri domestic.
    Mr. Cleaver. Thank you. I yield back, Mr. Chairman.
    Chairman Luetkemeyer. The gentleman's time has expired. 
With that, we go to the gentleman from Florida, Mr. Posey, for 
5 minutes.
    Mr. Posey. Thank you very much, Mr. Chairman. And I thank 
all of you for being here today. I really appreciate you taking 
the time to testify before us today.
    My question is for Mr. Huff. In your written testimony--it 
wasn't in your oral testimony; I understand that time 
constraints wouldn't allow you to expand too much--you noted 
that the National Association of Insurance Commissioners, which 
consists of chief insurance regulators from the States, which 
we know are political bodies that actually balance their 
budgets, and regulate in a way that we could hope the Federal 
Government might achieve some day--they do a lot better job of 
regulating actually--is supportive of House Resolution 1478, 
the Policyholders Protection Act.
    Mr. Chairman, at this time I would also like to submit an 
additional stack of letters of support for the Policyholders 
Protection Act that has been received by my office.
    Chairman Luetkemeyer. Without objection, it is so ordered.
    Mr. Posey. I would also like to echo Mr. Huff's testimony 
that this bill enjoys wide support from the States, the 
consumers and the insurance industry and the people that it 
protects. This legislation is a bipartisan effort introduced 
with Representative Sherman. It would limit the ability of 
Federal bank regulators to raid certain solvency threatening 
insurer assets as a source of strength for banks.
    My question, Mr. Huff, for you is that, I hope you could 
explain to us in a more detailed manner how this legislation is 
important to protecting insurance consumers and why 
policyholders need this protection?
    Mr. Huff. Thank you, Congressman. State insurance 
regulators strongly support your bill, the Policyholder 
Protection Act, mainly because it preserves our ability to 
protect consumers within complex financial firms so that 
policyholder dollars necessary to pay claims, for instance for 
a damaged house, or even for a life claim for a deceased 
breadwinner, those claims are not jeopardized by complex bets, 
risk taking or poor management elsewhere within the firm. The 
bill ensures the State insurance regulators continue to have 
the ability to specifically protect insurance-related assets in 
order to pay claims when they come due, and the policyholders 
remain protected from undue harm.
    Insurance regulators have long had the ability to wall off 
insurance company operating entities within large diverse 
financial groups from the risk posed by other affiliates to 
protect policyholders. And your legislation guarantees a level 
playing field and confirms that authorities, and existing State 
law, and Federal law governing bank holding companies, apply to 
insurers organized as savings and loan holding companies. It 
also clarifies insurance regulators' authority to protect 
policyholders during a resolution of an insurance company or 
its affiliate. Thank you for sponsoring the bill.
    Mr. Posey. I thank you for your comments. A question for 
any of the four of you, have any of you heard of TRG, an 
insurance company? They sold health insurance in 49 States, 
every State but their own State. People died because they 
didn't pay claims. They paid their premiums, but the insurance 
company just never paid any claims. They were protected from 
the States for years under ERISA; the Federal Government did 
nothing, nothing, zero, nada, zilch, to stop the perpetrators 
of this horrendous crime against honest, law-abiding citizens 
who were just trying to insure loved ones for future 
misfortune, health misfortune, which they had.
    There never was any justice until 13 different State 
agencies got together for the first time in history, crossed 
State lines to enforce crimes, insurance crimes and--pretty 
precedent setting matter, the point is that the State 
regulators made it happen, the Federal regulators did nothing.
    And so, I learned a lot from that experience. And I cannot 
thank the State regulators enough for their dedication, and 
actually their ability to get things done, and protect the 
consumers in ways that the Federal Government has never been 
able to do. They write plenty of regulations, but there are 
Federal statutes that would have made those perpetrators serve 
life in prison because people died for them failing to pay for 
the coverage, yet they never pursued the cases again them. 
Thank you very much, Mr. Chairman. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired. We 
go to the gentlelady from New York, Ms. Velazquez. She is 
recognized for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Director McRaith, one area of the market which is 
particularly important to my constituents is affordable flood 
insurance. As you know, many homeowners in New York City faced 
enormous rate hikes in the aftermath of Superstorm Sandy. What 
role does the FIO play in studying the flood insurance market 
and what suggestions do you have to keep it affordable?
    Mr. McRaith. Treasury certainly has an interest in the 
flood program. As you know, the Treasury lends money to the 
National Flood Insurance Program (NFIP). The NFIP is 
administered by FEMA within DHS, and we--and they, of course, 
do their best in that work every day. To the extent that they 
have asked for or sought our assistance or our perspective, we 
have been happy to share that.
    Ms. Velazquez. Thank you. Mr. Sullivan, the State risk-
based capital regime is focused on policyholder protection. 
Yet, the Federal Reserve supervisory system takes a far more 
macro approach to protect the safety and soundness of the 
entire financial system. How can the Federal Reserve establish 
a supervisory framework for insurance companies to both protect 
policyholders and preserve financial stability?
    Mr. Sullivan. Thank you, Representative. Ours is a macro 
role, and we do look at our role as that of looking at the 
entirety of the enterprise. As I said in my opening statement, 
we don't intend to replicate the work of the States, and we 
will defer. We are absolutely deferential to the States in 
their mission to protect policyholders. I was once a State 
regulator; I take that very seriously. And I think the State 
regulators are doing a fine job of protecting policyholders.
    Ms. Velazquez. Thank you. Mr. Huff, would you like to 
comment?
    Mr. Huff. Yes, we have a good working relationship with the 
Fed. You may know Missouri is the only State with two Federal 
Reserve banks. And, so, we have a Kansas City Fed and the St. 
Louis Fed and we also have a good working relationship with the 
Fed here in Washington. But we do take protection of 
policyholders; that is our number 1 priority, and, of course, 
building competitive and maintaining competitive markets. But 
everything we do in terms of financial regulation starts and 
stops with protecting policyholders, whether it is looking at 
the--strengthening our RBC system, and as we work on capital 
standards, or if it is our work related to reinsurance 
collateral and our work on covered agreements. So we do start 
and stop with policyholders.
    Ms. Velazquez. Thank you. Mr. Huff, in 2013, then-New 
York's Superintendant of Financial Services found life insurers 
were exploiting the State-based regulatory scheme to inflate 
their books to the tune of $48 billion. This revelation has 
troubling similarities to the issues surrounding mortgage-
backed securities that precipitated the 2008 financial crisis. 
Don't these practices threaten the legitimacy of the State-
based insurance regulatory structure and, in turn, fuel calls 
for more Federal involvement?
    Mr. Huff. Just to clarify, were you talking about the New 
York study on captives?
    Ms. Velazquez. The New York Superintendent of Financial 
Services found life insurers were exploiting the State-based 
regulatory scheme to inflate their books; a New York Times 
article.
    Mr. Huff. Right, I think you are talking about the New York 
Times article now about the use of captives. And we have made a 
great deal of progress. As I said in my opening comments, 
really the origin of captives was, in large measure, to address 
admittedly excessive reserves. Primarily when we took a look at 
it, in term insurance and universal life insurance with 
secondary guarantees.
    So what we did was we began with a study of life insurers 
in 2012, we finished a White Paper that outlined these issues 
in 2013. And then in 2014, the NAIC adopted a comprehensive 
reinsurance framework such that a life insurer would be allowed 
to take financial credit for the reinsurance transaction with 
its captive only if certain financial criteria are met.
    And a very consistent reserving method was developed and 
adopted by the NAIC, you may have heard of it, Actuarial 
Guideline 48, and it was effective on 1/1/15 on all new 
policies issued. So we have taken very certain action on these 
life insurer captives. Of course, our permanent solution to 
address this is our principle-based reserving methodologies.
    Ms. Velazquez. So you are confident that these issues have 
been taken care of?
    Mr. Huff. I am confident we are on a path to take care of 
them, yes, ma'am.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Luetkemeyer. I thank the gentlelady. Her time has 
expired. With that, we go to the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Sullivan, Chair Yellen, in testimony before the House 
Financial Services Committee this year, stated that the FSOC 
has not discussed pursuing an activities-based systemic risk 
review for insurance companies. What is the rationale for not 
pursuing an activities-based systemic risk review for insurers?
    Mr. Sullivan. I think you should direct your question to 
the Chair. She is the seated member of the FSOC. I believe--
    Mr. Rothfus. Has the FSOC conducted a study or an analysis 
that demonstrates that it is inappropriate to use an 
activities-based approach to regulating systemic risk for 
insurers?
    Mr. Sullivan. May I have the question again? I'm sorry.
    Mr. Rothfus. Has the FSOC conducted a study, or an 
analysis, that demonstrates that it would be inappropriate to 
use an activities-based approach to regulate a systemic risk 
review for insurers?
    Mr. Sullivan. I am not aware of what the FSOC has or has 
not conducted for studies.
    Mr. Rothfus. Mr. Woodall, in your written testimony you 
discuss the benefits of incorporating an activities-based 
systemic risk approach and the exit ramp that should follow 
based on activities or a combination of activities identified 
as riskier than others.
    Both the Treasury and the Fed have testified that a path to 
de-designation is available, but have been hesitant to provide 
details. Do you believe that a SIFI designation exit ramp 
exists?
    Mr. Woodall. As I said in my statement, I think that it 
should exist, but I think right now the companies don't really 
know where that exit ramp is, and whether it is multi-lane or 
not, as it has been called. It is hard to find. I think going 
back to your other question about the activities based, I think 
on the other side of the question you ask, FSOC has looked at 
the activities thing in regard to asset managers, and they have 
essentially set aside making any further designations on any 
basis until they can look at the activities of the asset 
management industry as a whole, and that is what they are in 
the process of doing right now. So I am encouraged that they 
are starting to look at the activities based.
    Mr. Rothfus. Mr. McRaith, in January Congress passed The 
National Association of Agents and Brokers Reform Act of 2015, 
better known as NARAB II. This bipartisan legislation was meant 
to streamline licensing compliance measures for insurance 
agents while maintaining a high standard of State-based 
regulation.
    As you know, NARAB II won't go into effect until a board is 
selected and appointed. Though the President signed this bill 9 
months ago, it appears that little progress has been made in 
appointing a board, and the process of reform that Congress 
worked hard on appears to be at a standstill.
    Our chairman, Mr. Luetkemeyer, wrote to your agency 
expressing his concerns and inquiring as to NARAB II's delayed 
implementation. I was disappointed that Treasury's response to 
his letter was noncommittal and failed to provide a meaningful 
update on the implementation process. Can you provide us with 
an update on the NARAB II board appointments?
    Mr. McRaith. Congressman, as you know, the law requires 13 
Presidentially-appointed Senate-confirmed board members. We 
received applications--the White House has received 
applications. Candidates are being considered, evaluated, 
vetted, and I am sure at an appropriate time the White House 
will forward those--
    Mr. Rothfus. Has the Treasury Department completed its work 
on the vetting process?
    Mr. McRaith. We have done what we can to support the 
effort. I think the Administration, which supports NARAB as an 
objective, continues to see the value and wants to see NARAB 
initiated as soon as possible.
    Mr. Rothfus. Back to Mr. Woodall again. You have complained 
that your role in international negotiations as the only voting 
member of FSOC with insurance expertise has been constrained. 
Why do you think that is?
    Mr. Woodall. Essentially, what they call Team USA or the 
gentlemen to my right here, the three people who are involved 
at the IAIS. I have a duty as a member of FSOC to monitor 
international developments in insurance and accounting. That is 
the way it works. Obviously, Mr. McRaith has the charge, as he 
said, to represent the United States at the IAIS, as 
appropriate.
    I felt that being the insurance expert on FSOC, I needed to 
be involved in the room where the systemic issues are being 
discussed, and that is what we talked about 2 years ago when I 
was before this subcommittee. At that time, several people said 
they wanted me in the room. I tried to make an effort to get in 
the room.
    Mr. Rothfus. Do you believe that the FSOC approaches 
international negotiations on insurance matters with a 
sufficient understanding of the industry?
    Mr. Woodall. I am supposed to be the expert to try to 
advise FSOC. And right now, I can't say that FSOC has that 
comprehensive a view of what is happening at the international 
level. I think there is a feeling that the international may be 
driving that car, as far as what is being done at the 
international level coming down into the other. Because, as you 
know, when our people are at the FSB, and they make commitments 
to carry out something that the IAIS has done, as has been said 
many times, they can't guarantee it, but they consent, it is a 
consensual process.
    That is what happened with the three companies, the 
insurance companies that were designated as global SIFIs. And 
two of those were before we ever even said they were a U.S. 
SIFI. And I really feel like we have a situation where the 
international people have been driving that car.
    Mr. Rothfus. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We now go to another gentleman from Missouri, Mr. Clay, for 
5 minutes.
    Mr. Clay. Thank you, Mr. Chairman. And thank you, 
gentlemen, for being here.
    Let me start with Mr. Sullivan. In its development of 
capital standards, is the Federal Reserve attempting to draw a 
distinction between traditional or core insurance activities 
versus nontraditional or non-core activities?
    Mr. Sullivan. So as we construct a domestic capital regime, 
we will be looking at the totality of the enterprise, including 
insurance activities and nontraditional, or non insurance 
activities, because we are charged, under the law, with 
developing a comprehensive consolidated capital framework. So 
we will be looking at the totality of the enterprises we 
supervise.
    Mr. Clay. Stress tests serve as an effective tool for 
measuring the health of financial institutions. Will the 
Federal Reserve engage in stress testing for insurance 
companies?
    Mr. Sullivan. Yes, likely at a minimum for the designated 
firms, and in consultation as prescribed under Dodd-Frank with 
the Federal Insurance Office.
    Mr. Clay. Will these tests specifically look at systemic 
circumstances and stresses to the broader financial system that 
could occur simultaneously with stresses to the supervised 
firm?
    Mr. Sullivan. It is too early to speculate on that, but 
probably.
    Mr. Clay. What do you think are the differences between 
testing stresses at an insurance company versus a bank?
    Mr. Sullivan. The business models are very different. And, 
so, therefore, whatever stress testing regime we design needs 
to be appropriate and designed for the differences in the 
business models.
    Mr. Clay. Thank you for your response.
    Mr. Huff, as the International Association of Insurance 
Supervisors continues to work on the development of capital 
standards, some have raised concerns about its application in 
the United States.
    Mr. Huff, as a State insurance commissioner, can you 
discuss the steps that your department, for example, would take 
in reviewing any internationally-developed standards and 
discuss what actions would need to be taken for those standards 
to apply in Missouri?
    Mr. Huff. Thank you, Congressman Clay. It is important to 
remember that nothing that the IAIS does in terms of 
international capital standards, or any of the work they do for 
that matter, is automatically implementable in the United 
States for insurance firms. Unless the NAIC, with State 
regulators working collectively through the National 
Association of Insurance Commissioners, adopts those standards 
through its open and transparent process, then it would not be 
applicable to the insurance market, or unless the Federal 
Reserve decides to adopt those standards for their limited 
portfolio of the thrift holding company insurers, or the 
systemically importantly financial institutions as designated 
by FSOC. So nothing would come directly from the IAIS.
    Mr. Clay. I see. Mr. Woodall, you have expressed concerns 
with international developments related to insurance, but as 
you know very well, while the Federal Government can certainly 
agree to reforms at the international level, domestic 
implementation would largely occur State by State. Even for 
implementation that would occur at the Federal Reserve Board, 
there would still be a notice-and-comment period prior to 
implementation.
    Can you please discuss in more detail the process that any 
State insurance commissioner would go through when deciding 
whether or not to implement international reforms, in full or 
in part?
    Mr. Woodall. I am not a regulator at this point. Fifty 
years ago, I was. But I know how it works and I know that each 
State has to look at it to see whether or not that is what they 
want to do. I think more than likely, some of these things 
won't affect that many States because there won't be that many 
States that have companies that might be subject to some of 
these things.
    Now, whether that would go down to non-internationally-
active companies, it is still a question as to how far some of 
the recommendations that come out of the international level 
will go.
    Mr. Clay. Thank you for your response.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Luetkemeyer. I thank the gentleman from Missouri. 
With that, Mr. Pearce from New Mexico is the next gentleman to 
be recognized, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate each of 
you being here. I am trying to sort through this situation that 
we have faced.
    Mr. Sullivan, you mentioned to Mr. Rothfus that he needed 
to direct his question elsewhere, and we in anticipation of 
that did just that. We asked the Chair of the Board of 
Governors of the Federal Reserve System, Janet Yellen, after 
her last appearance here about a couple of things regarding 
this particular issue. And we asked, does the FIO communicate 
and coordinate, pre-plan policy objectives with independent 
State regulators, insurance regulators who are responsible for 
insurance supervision in the United States.
    Her response back was Team USA--that, yes, we approach it 
as a team, and NAIC takes the lead in coordinating the views 
and comments of State regulators into the the feedback the U.S. 
members provide on IAIS standards.
    So my question to you is, is it safe to assume that the Fed 
does not propose any ideas before the IAIS or FSB without 
NAIC's approval or previous knowledge of those positions? So is 
it actually Team USA, and I am visualizing the Tour de France, 
the postal team on bicycles are riding and high-fiving each 
other, but the yellow jersey is worn by the NAIC. Is that the 
way it is going?
    Mr. Sullivan. We continue to work hard at our collaborative 
efforts--
    Mr. Pearce. You are far enough behind the yellow jersey 
that you can hardly see them over the hill, huh?
    Mr. Sullivan. I would tell you that it takes hard work and 
good old-fashioned shoe leather to be committed to the process.
    Mr. Pearce. Mr. McRaith, do you have an opinion about the 
communication process and the NAIC taking a lead?
    Mr. McRaith. The key for our work is that we are working 
together building consensus as a group.
    Mr. Pearce. I didn't ask that. Do you agree with the 
assessment that nothing goes before it is run by the NAIC?
    Mr. McRaith. As a practical matter, and as the GAO noted in 
its report about 7 weeks ago, we are all working together to 
develop--
    Mr. Pearce. You are just not going to answer the question. 
I will quit asking the questions if you don't want to answer.
    Mr. Woodall, Mr. Rothfus brought up, he was kind of 
dragging into this direction with the crafting of international 
standards. I think Mr. McRaith said that we are trying to craft 
international standards that will be acceptable to the U.S. 
market. Mr. Rothfus sort of got into this. Is it your opinion 
that we were actually doing that, is--are we crafting standards 
that will be acceptable to the U.S. market, I mean, he led in 
with it is a big piece of world equation and that. Is that 
actually occurring?
    Mr. Woodall. It is really hard for me to say, because as I 
mentioned, I am not a member of Team USA.
    Mr. Pearce. Have you ever objected--have you ever dissented 
on any of these comments before?
    Mr. Woodall. Which comments, sir?
    Mr. Pearce. Anything along this track that says, hey, we 
are running a nice, tight ship here, and we are Team USA and we 
are moving right along. That is nothing that you have ever--
    Mr. Woodall. Well, no, I have just tried to get in the room 
with them and have not been successful.
    Mr. Pearce. Okay. Mr. Huff, you said that the protection of 
the policyholders is your number one priority. Is that the 
viewpoint shared by the Feds and FIO?
    Mr. Huff. I will let the Fed and FIO speak for themselves, 
but our number one mandate continues to be the protection--
    Mr. Pearce. But you heard my comment from the chairman that 
you are the one taking the lead here. You are wearing the 
yellow jersey, everybody is following you. Is that actually 
occurring or is that not?
    Mr. Huff. We certainly are--
    Mr. Pearce. I don't know if are you afraid of what is going 
to happen after you answer the question.
    Mr. Huff. I will tell you one place we are taking the 
lead--if I could give you an example of where we are taking the 
lead, we are moving forward with the group capital calculation, 
State insurance regulators are getting together and moving 
forward. We will have a concept paper later this year for our 
November meeting that will be at the National Harbor in 
November.
    Mr. Pearce. You also made the comment that no case has been 
made, and you don't want the system to compromise the State 
systems. Is that a viewpoint you would share, Mr. McRaith? You 
are trying not to compromise the State systems that Mr. Huff 
said have been working pretty well. And no case has been made 
to overturn them for international standards?
    Mr. McRaith. Absolutely, the global standard setting does 
not get into the structures or the architecture of a country's 
regulatory system. In our view, the State system works very 
well. I was a former State regulator, as were my colleagues on 
this panel.
    Mr. Pearce. This is true confessions. Several of you were 
apparently in the State regulatory system. Okay, thanks. I 
yield back, Mr. Chairman.
    Chairman Luetkemeyer. The gentleman's time has expired. We 
now go to the gentleman from Texas, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the ranking 
member as well. And I thank the witnesses for appearing.
    Mr. Woodall, you have raised questions about SIFIs and how 
they can be delisted. Is your question how can a specific 
entity, company, corporation be delisted, or is there a means 
by which you can have a standardized methodology in place for 
delisting?
    Mr. Woodall. So far, we have just talked about the 
individual SIFIs. And I think in that case what I was saying is 
that these individual companies don't have a road map as to how 
to get off. Now there is one; we talked about the insurance 
companies, the GE Capital is the fourth SIFI that was 
designated. And as you probably know, it is public information, 
they are in the process of getting rid of all their financial 
activities, and probably will lose their SIFI identity. But I 
am not sure that insurance companies are in the position to do 
the nuclear option and get rid of all their financial business 
in order not to be a SIFI.
    As far as a group--
    Mr. Green. Let me do this, because I would like for Mr. 
Sullivan to respond, I am interested in hearing his take on it. 
Mr. Sullivan, Mr. Woodall makes a point that because of the 
nature of the business of insurance companies, delisting 
becomes a bit more difficult than for a GE Capital. How do you 
respond to that?
    Mr. Sullivan. Representative, mine is to design the 
regulatory regime and architecture for firms after they are 
designated by the FSOC. So what I am doing in my day job is 
doing just that, making sure that we put together a regulatory 
regime designed for firms designated by the FSOC.
    Mr. Green. So no one on this panel can address Mr. 
Woodall's question then, I take it?
    Mr. McRaith. Actually, Congressman, just to be--I think it 
is important to be factual in this conversation. The firms that 
are designated by the Council, after following months of 
engagement with the firm, thousands of pages of analysis, hours 
spent with the firm by all Council members, the firm designated 
receives several hundred pages of analysis that provides 
detailed and explicit statements about where the Council sees 
risk or threats to financial stability in the firm. So the firm 
does have a very clear sense of the basis for the Council's 
determination.
    Mr. Green. I understand. But Mr. Woodall seems to be asking 
another question, not what is it that caused the company to 
become a SIFI. He seems to be asking what can be done so that 
the company can no longer be a SIFI?
    Mr. Woodall. That is the difference, that is the next 
point.
    Mr. Green. Mr. Woodall, you have to let me have a minute 
here now. My time is very limited.
    So how do you address his question? I think he raises a 
good question, and I would like to hear a good answer.
    Mr. McRaith. The Council has an annual review process for 
firms that have been designated. That process was enhanced this 
year based on stakeholder and public comment and comments from 
Members of Congress as well. So each firm designated has an 
opportunity to come to the Council, provide information about 
how it has changed its approach over the course of the year. 
And throughout the year, the Council and its staff and members 
who serve on the Council have an open-door policy whereby a 
firm designated can come in at any time, share any information 
and provide any insight they would like to.
    Mr. Green. I see. Let me just make this comment. It seems 
to me that we are talking about something similar to strict 
liability. As you know, we have negligence and intentional 
torts, but you can also be liable just because of the inherent 
nature of what you do.
    And I think Mr. Woodall is getting to this point, he 
doesn't believe that insurance companies are inherently 
dangerous to the extent that they become SIFIs and they are 
never going to cease to be SIFIs.
    So the question becomes--and I am going to visit more with 
people about this, I am just curious now because of the way he 
raised the question. How do they--we are new at this, we are in 
our infancy. All of this is fledgling in a sense, and given 
that we are in our nascency, these kinds of questions do have 
to be answered. And perhaps with more opportunities, we will 
get some answers, but I am still curious of Mr. Woodall's 
question of moving from designation to no longer being listed 
or de-risking is a case with GE Capital. Thank you very much. 
And Mr. Chairman, you have allowed me 11 more seconds than I 
deserve. I yield back.
    Chairman Luetkemeyer. I am always glad to accommodate the 
gentleman from Texas with a couple of extra moments for his 
wonderful insights. Thank you, Mr. Green from Texas. With that, 
the gentleman from Kentucky, Mr. Barr, is recognized for 5 
minutes.
    Mr. Barr. Thank you, Mr. Chairman. And I thank the 
witnesses, as well. There has been much discussion outside this 
hearing, and, of course, today in this hearing about the 
sequencing and the timing of the international capital 
standards and our new domestic capital standards under the fix 
to the Collins Amendment.
    For Mr. Sullivan, I would like to kind of drill down a 
little bit more on the timing. I know you said we are working 
on our own timeline. Do we have any kind of ballpark timeframe 
in terms of the draft of capital standards? And give me an idea 
of the process. Is there going to be a notice of proposed 
rulemaking?
    Mr. Sullivan. Yes, we are committed. We said to this 
committee and other Members that we are committed to a formal 
rulemaking process. We will not be doing it by order, so we 
will publish a notice for proposed rule. We will solicit 
interested party commentary when we reach the point where we 
actually have the architecture and design for the capital 
framework better nailed down.
    Mr. Barr. Mr. McRaith and Mr. Sullivan, how much does your 
work at the FSB and IAIS influence the development? You say you 
are very deliberative, and you are seeking input, but how much 
does that work over there influence the development of the 
capital standards here?
    Mr. Sullivan. I will go first, but I would say that when we 
attend international fora, Representative, other regulators 
around the globe are quite interested in what the U.S. view is. 
As Director McRaith pointed out, we are the world's largest 
insurance market, so I think the rest of the global regulatory 
community would stand up and recognize what the United States 
does. So I think it does go back to the chairman's earlier 
questions around the importance of getting things right. And we 
are cognizant of that, and we want to make sure we are 
deliberate and we do nail it down.
    Mr. Barr. Can you give me an idea of the progress of the 
international capital standards, because we are hearing that 
whereas you are on your timetable here and it is very 
deliberative, that the IAIS is pushing ahead. So is the risk 
then that the sequencing is going to be backwards?
    Mr. Sullivan. We always have the fallback that we don't 
have to adopt an international standard if it is not suitable 
for our market, right? We have said that a number of times 
today and in the past. With that being said, sequencing here, 
one is a fulfillment under the law, what we do in terms of 
fulfilling our obligations under the law. The other is standard 
setting. I would describe the standard-setting climate as much 
more evolutionary because it has to be.
    Director McRaith has used the term when talking about the 
international capital standard, ICS 1.0, and how ICS 1.0 will 
look much different or may look much different than ICS 10.0. I 
would share that view, that the developments in the 
international standard need to evolve more over time, over a 
much longer time period. And we were successful in removing 
some of the time constraints that were in some of the goal 
statements that were previously published by the IAIS.
    Mr. Barr. I would just encourage you all as representatives 
of Team USA to be prepared to back off, and push back from the 
IAIS negotiating table if you perceive them getting ahead of 
you all.
    Let me just shift over to Mr. Huff really quickly. One of 
your colleagues who was before this committee, Kevin McCarty, 
the Florida insurance commissioner, said in a Senate Banking 
Committee hearing earlier this year that in regards to 
international capital standards being developed, and the 
historical differences between the United States and European 
approaches, when you try to harmonize those two, you are 
creating a potential for great disruption in the delivery of 
different services in the marketplace and potential rise in the 
price for the consumers in the United States that potentially 
jeopardizes the availability of products.
    And so, to Mr. Huff, how are State regulators and the NAIC 
working with the Fed to make sure that domestic capital 
standards are finalized before completion of the international 
capital standards?
    Mr. Huff. Yes, thank you for the question. We are actively 
involved at the IAIS along with the Fed and FIO, and with the 
State insurance regulators and a full complement of NAIC staff. 
So it is important that we continue that work, even when we 
reach disagreements with the IAIS process, because we always do 
have that ability to walk away.
    But what we are doing--the State regulators are doing is we 
are moving ahead with our own work on a group capital 
calculation to be used as a consistent regulatory analytical 
tool for all U.S. insurance groups. And by building this 
calculation tool, we are able to assess group capital and then 
make--and have an open forum with--an open and transparent 
forum with industry and with consumer groups an then allow the 
Fed and FIO also to participate as we build that tool. So that 
will help us as we inform our work at the IAIS.
    Mr. Barr. Thank you. I know Mr. Sullivan testified they are 
collaborating with you, appreciate you collaborating with them. 
Team USA, go first. Thank you.
    Chairman Luetkemeyer. I thank the gentleman. Your time has 
expired. Understanding we have votes at 3:45 as scheduled, I 
think we probably have time if everybody stays within 5 minutes 
here to get everybody in today. So with that, I recognize the 
gentlelady from Wisconsin, Ms. Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman. I want to thank 
the panel for this very important hearing. I guess I want to 
follow up on my colleague. Mr. Huff, I note that in your 
credentials you served as a State insurance commissioner from 
Missouri, as well as served on the FSOC.
    Pardon me, I wasn't here for the beginning of the hearing, 
so just indulge me, perhaps you have already answered this 
question. You have indicated that the FSOC perhaps does not 
have the knowledge base and a--doesn't see the dissimilarity 
between the insurance industry and the banking industry to 
perhaps serve--to perhaps designate folks as SIFIs or to 
undesignate them as SIFIs. And I am wondering what you think 
ought to be done to enable the Federal Office of Insurance to, 
and the FSOC, to have more insight into what ought to be done 
with regard to regulating the insurance industry?
    Mr. Huff. Thank you for the question. I have not yet spoken 
about my FSOC service, and I did serve 4 years. I was one of 
the original members of FSOC as a nonvoting member representing 
State insurance regulators from fall 2010, and then I served 
until September of just last year. And I did issue a dissent, a 
nonvoting dissent on the Prudential designation. And I echo Mr. 
Woodall's comments on the exit ramp, if you will, for the 
designation.
    So I do believe it is a failure of FSOC to not set forth a 
clear rationale for the reasons for designation, because 
really, they are not giving the company an ability to de-
designate; but more importantly, FSOC is not giving the 
primarily regulators, and in the insurance space, that is the 
State regulators, not giving the State regulators the 
identification of those risks that need to be mitigated.
    We don't yet know what the impact will be of a designation 
because the capital standards are still pending. But at some 
point additional capital standards will be applied to those 
firms that are designated, and then we will have a distortion 
in the marketplace of firms competing head to head, one against 
each other, one with a different cost of capital. We don't know 
how significant that will be, but we think it is only fair that 
FSOC come out with a clear exit ramp, not only for the company, 
but for State-based regulators.
    Ms. Moore. Thank you for that. And this is for Mr. Woodall, 
or maybe Mr. McRaith. I am very interested in private mortgage 
insurers who are recapitalized. I believe that there will 
continue--there ought to be at least a continued option for 
placing private capital in the first loss position. 
Unfortunately, there has been a discussion around here of 
completely destroying the GSEs, and I don't believe there is 
enough private capital to fill that gap. So the FIO report 
outlines some of the past problems, issues. But I am really 
interested in what you think the future is going to look like, 
what it ought to look like with regard to private mortgage 
insurers.
    Mr. McRaith. The private mortgage insurers suffered greatly 
through the crisis. They are in a stronger position right now, 
and, in fact, I think some recent entrants into the market are 
domiciled in your home State.
    Ms. Moore. They are in my city.
    Mr. McRaith. Right. And we are pleased to see that. We do 
want to see more private capital in that space. It promotes 
home ownership in a way that supports people of low and middle 
incomes when they seek to purchase a home. That is excellent 
public policy and a goal that we all share. In terms of the 
housing market more broadly, and the housing finance system, I 
think would defer to my colleagues at Treasury who are more 
expert in that conversation.
    Ms. Moore. Okay. Just one quick--I have 30 seconds left. I 
am really interested in the auto insurance--I guess I am 
interested in, Mr. McRaith, why, of your statutory 
responsibilities, you decided to focus on the auto industry 
first?
    Mr. McRaith. We, by statute, are required to monitor the 
affordability and accessibility of non-health insurance to 
traditionally underserved communities.
    Ms. Moore. And just very quickly--
    Mr. McRaith. We chose auto because studies show auto 
insurance and automobile ownership enable lower-income people 
to commute to jobs that they need.
    Ms. Moore. Exactly, exactly. We don't want to cut off 
those--that credit to low-income people, already low-income 
people are suffering tremendously from the pendulum swing of 
financial services being available to them. Thank you. Thank 
you, Mr. Chairman, for your indulgence.
    Chairman Luetkemeyer. The gentlelady's time has expired. 
With that, we go to the gentleman from California, Mr. Royce. 
He is recognized for 5 minutes.
    Mr. Royce. Thank you very much, Mr. Chairman.
    Director Huff, I will just go back to some of your 
testimony. You mentioned that 32 jurisdictions have now passed 
legislation implementing the NAIC model reinsurance collateral 
law. But the reality is that 4 years is a long time, and we are 
still at a point where major States like Texas and Illinois are 
not part of that.
    And so, I was wondering if you say that we need to avoid 
the variation between the States by reducing collateral 
requirements in a consistent manner, it looks to me like, by 
your own test, we are not close to implementing this. And the 
presumption I would have had was that the pressure that would 
have been applied by the threat of a covered agreement might 
have brought everybody to the table.
    The worry I have is that since 1871, we have been trying to 
get the States to adopt a common framework. Give me your 
thoughts on why you think this is going to be done in a timely 
way, and stave off the problems that I anticipate here?
    Mr. Huff. So on the topic of credit for reinsurance 
revisions that have taken place, the process has been 
deliberate. It has been very methodical; it is very measured 
and transparent in the way we are reducing collateral for 
foreign reinsurers. We have had 32 States, that is about two-
thirds of the U.S. market, about 66 percent of the U.S. market 
in terms of premium. We have five other States that are 
seriously considering it and are ramping it up for their 
legislatures to consider, which will take us over 90 percent, 
to about 93 percent of the market.
    Mr. Royce. If you can get there. By way of example, if we 
went back through testimony in the past in terms of how many 
times we thought we were a year away from achieving this goal 
from 1871 on, in terms of reaching unanimity, it hasn't 
happened yet. Now 4 years may not seem like a long frame by 
that standard, or certainly by congressional standards, to be 
fair here, but I am highly skeptical that you are going to 
bring States into line based upon what I have seen in past 
performance here with respect to getting this unanimity.
    Mr. Huff. Well, Congressman, I would point to the fact that 
we have yet to have the decision whether we would make the 
credit for reinsurance provision an accreditation standard. So 
I will give you the example that we just went through from the 
model holding company act, a model that we developed in 2010 to 
allow insurance regulators access to the information from the 
holding company. That model was developed in 2010, is an 
accreditation standard as of 1/1/16, and we plan to have all 50 
States, plus D.C., having adopted that model. So as we in 
November start the conversation--
    Mr. Royce. I understand.
    Mr. Huff. --about accreditation for reinsurance. That is a 
hammer we have, is my point.
    Mr. Royce. Okay. Director McRaith, as you know, I am going 
to share this with you today, I sent a letter to the Treasury 
Secretary and the USTR calling for a covered agreement with the 
EU. Based on your diligent work on this issue, I assume you 
agree such an agreement is a positive tool that the United 
States should use in attempting to tackle reinsurance 
collateral and make progress on the question of U.S. regulatory 
equivalency?
    Mr. McRaith. That is exactly right, Congressman. What we 
know is that effective January 1, 2016, the European Union, 
which is the largest consolidated market in the world, will be 
subjecting U.S. insurers to regulatory standards that differ 
from those applied to insurers domiciled in some other 
jurisdictions. A covered agreement will provide clarity, 
finality, and certainty for U.S. insurers that either are now 
or seek to operate in the European Union market.
    Mr. Royce. Let me jump in on another topic. On January 
27th, the Homeland Security chairman, Mike McCaul, and I sent 
an unanswered letter to the President asking how the 
Administration classifies and defines different types of cyber 
attacks. Specifically, we asked whether the use of different 
terms like cyber warfare, cyber vandalism, or cyber terrorism 
would impact the Treasury Secretary's authority to certify a 
cyber attack as an act of terrorism under TRIA.
    So I assume this is a question you have contemplated as 
part of a larger question. And I think a clear statement from 
Treasury on what is and is not covered under TRIA as it relates 
to cyberterrorism would increase certainty in the market and 
help encourage individual capacity for cyber insurance. Can you 
help make that happen?
    Mr. McRaith. I absolutely appreciate that perspective. The 
statute does not specify what are the causes or types of 
terrorist attacks. In 2007, when I testified as a State 
regulator in support of renewal of TRIA, nobody talked about 
cyber. So the fact it is not specifically listed does not mean 
it is not included. If an event, a cyber event or any type of 
event, satisfies the statutory criteria, then it is eligible 
for TRIA certification.
    Mr. Royce. Thank you, Director McRaith.
    Chairman Luetkemeyer. The gentleman's time has expired.
    I will now go to the very patient gentleman from Michigan, 
Mr. Kildee.
    Mr. Kildee. Thank you, Mr. Chairman. And I thank the 
witnesses for your testimony. I do want to follow up very 
briefly on the question that Ms. Moore raised right at the very 
end. So if I could start with Mr. McRaith, and I appreciate 
your work and your willingness to confer with me in the past on 
issues important to the industry, but I want to follow up. When 
Ms. Moore asked why FIO determined to make auto insurance the 
focus of your first steps towards implementing the specific 
responsibility regarding affordability and access, you 
indicated, I think appropriately, that often it is the barrier, 
perhaps of transportation access to affordable transportation 
that could stand in the way of an individual living in an 
impoverished community from access to economic opportunity.
    I don't want to put words in your mouth, but implicit in 
that is that there may not be available, affordable insurance 
to some of those populations. I wonder if you would just 
perhaps elucidate a bit more on what would cause you to 
conclude that--and I don't want to disagree with the 
conclusion; don't get me wrong--is a problem that needs to be 
addressed. If you could just touch on that.
    And I would actually, Mr. Huff, perhaps because some of the 
communities within your State, you might make the same 
observation.
    Mr. McRaith. You are absolutely right in the sense that 
transportation and personal vehicles allow people to have more 
than one job, to deal with children. Often people don't own a 
home but do have a car because they need it to survive. We know 
that.
    Now, whether there is an issue with affordability and 
accessibility is an issue debated within the insurance sector. 
Some people would say no because the residual markets are very 
sparsely populated. Others would say yes because there is a 
relatively high percentage of uninsured in urban areas.
    What we are trying to do, Congressman, is establish a 
standard to answer that question exactly and precisely for you.
    Mr. Kildee. But do you, just based on your experience in 
Illinois, for example--and, Mr. Huff, in Missouri--and I know 
anecdotes are often difficult to extrapolate to a larger trend, 
but is it safe to say that it is certainly the case in older, 
particularly impoverished communities, that the cost of 
insurance is often beyond the reach of many of the individuals 
because the premiums are much greater in those communities than 
they might be in a neighboring community with fewer challenges?
    Mr. McRaith. That is a fair statement, and certainly the 
State of Michigan, we know, has some issues and challenges with 
the personal auto market, and I think your statement, broadly 
speaking, is true.
    Mr. Kildee. Mr. Huff?
    Mr. Huff. So NAIC does have an auto insurance study group, 
and they have already been conducting some of their own 
analysis related to low-income households and the auto 
insurance marketplace, and we issued a report last year that 
included some consumer and industry perspectives as well as an 
overview of State programs and initiatives to address these 
affordability and availability issues.
    I will tell you in my State, we collect data not only for 
auto, but also for homeowners at a ZIP Code level. And that is 
very important because then you are able to work through any 
issues, and identify if there are any issues in certain ZIP 
Codes that may require action by the regulator.
    You may have missed my opening comments or comments that I 
made to Congressman Cleaver's question. Right now, Missouri has 
a very competitive auto market. We have just been named the 
seventh most competitive in the country, so our auto industry, 
we have about 175 carriers actively writing business. And as 
you noted, or Director McRaith noted, our residual market has 
almost no participants. So we are in pretty good shape on the 
auto side in my State, but I am very sensitive to these areas--
issues in other States as well.
    Mr. Kildee. Starting with Mr. McRaith, could you address 
the tools that a State insurance commissioner might have 
available to them or statutory approaches at the State level? 
Assuming that there would be some disparity that is not going 
to be overcome by just increased awareness, what tools would a 
State commissioner have available to deal with significant 
disparity, lack of access to insurance, auto insurance in 
particular?
    Mr. McRaith. The regulatory tools vary from State to State. 
The cost drivers vary from State to State. Generally speaking, 
I think Director Huff made an excellent initial point, which is 
that information is essential. Presently, Missouri collects 
information, and a couple of other States do, but by and large, 
detailed information about personal auto market and costs on a 
ZIP Code basis is not collected. So information is the first 
tool that a regulator has. And then in other States, there are 
regulatory mechanisms where the State regulators can evaluate 
the rate proposed by the firm and then decide whether to 
approve or disapprove that. But, again, it depends on the 
State. In the State of Illinois, for example, we did not have 
rate approval, and frankly, in many cases and in most parts of 
the State, that worked just fine for us.
    Mr. Kildee. Thank you. Thank you for your testimony.
    And thank you, Mr. Chairman, for your indulgence.
    Chairman Luetkemeyer. The gentleman from Michigan's time 
has expired.
    With that, we recognize the gentleman from Ohio, Mr. 
Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    Thank you for this very important hearing. My first 
question is for Director McRaith and Mr. Sullivan. So the IAIS 
is issuing its first version of the high loss absorbency rule, 
which is a capital surcharge on nine of the world's largest 
insurers, three of which are headquartered in the United 
States, and the IAIS is about to at the same time launch 
consultations to revise two of the important components of HLA: 
first, the definition of nontraditional insurance; and second, 
the assessment criteria used to designate systemic insurers. I 
am curious if you think that we need to maybe change those two 
critical elements of the formula before finalizing the capital 
surcharge, which is largely based on those two components?
    Mr. McRaith. You are absolutely correct. The HLA that is 
developed this year, and I mentioned this earlier, is just the 
initial version, the initial iteration. It is subject to change 
because many of the components are in flux. The document itself 
when it is publicly released, which will be soon, will 
explicitly state it is subject to change depending upon 
revisions to NTNI and the G-SII methodology. So your point is 
exactly right, and the United States. participants at the IAIS 
strongly supported and endorsed that concept.
    Mr. Stivers. Great. I would like to move on to Director 
McRaith. Mr. Sullivan, did you have anything to add to that?
    Mr. Sullivan. I would associate myself with all those 
comments.
    Mr. Stivers. Great. I do want to move on, Director McRaith, 
to something the gentleman from Michigan was just talking 
about. With regard to your study on underserved communities and 
the affordability of insurance products, especially auto 
insurance, I am curious how you chose to define, and why did 
you choose that definition of affordable? You can be very brief 
on that.
    Mr. McRaith. We have not settled on a definition of 
affordable. We have now offered two Federal Register proposals 
and received comment. We are working to get to the best 
approach, recognizing that it is not going to satisfy 
everybody.
    Mr. Stivers. I appreciate that, and I will tell you I am 
very concerned about a very big data call like this where there 
is a lot of publicly available data. If you would choose a 
definition of affordability based on consumer spending, you 
would get a lot of opportunity to use Bureau of Labor 
Statistics data. If you would go another direction, you could 
get a lot of NAIC data. I just feel like it is really important 
for you to use publicly available data first before you have a 
very large and burdensome data call. Can you comment on your 
thought process with regard to that?
    Mr. McRaith. One of the questions that we ask in both of 
our Federal Register notices is what are the best sources of 
data and information. We completely agree with you. Publicly 
available data is best. We have no desire, no objective, to 
initiate some data call. We want to obtain information that 
satisfies the statutory mandate, but we do not want to increase 
the burden on industry participants. We certainly do not want 
to increase the burden on our limited resources. We do have to 
meet the mandate of the statute, and we are going to do that in 
an effective and efficient way.
    Mr. Stivers. Thank you. I appreciate that. And I appreciate 
the efficient and effective part of it, and obviously, 
efficient is part of efficient and effective, so please do your 
best on that.
    The next question I have is for Commissioner Huff. With 
regard to your regulatory jurisdiction, you have a lot of 
jurisdiction in your State over the regulation of annuities, 
and I am curious if anyone at the Department of Labor has 
talked to you about their new rule with regard to fiduciary 
duty and input they have gotten from you or what they have 
sought from you?
    Mr. Huff. Yes, thank you. So we do appreciate the 
Department of Labor's intent to protect consumers as they make 
important decisions to provide for their retirement security. 
We were a bit dismayed that we were not contacted before the 
rule was put out by the Department of Labor, but we have since 
been contacted as State insurance regulators through the NAIC. 
We have engaged with the Department of Labor and the 
Administration since the proposed rule was released in the 
spring. There are obviously some issues with the rule on 
clarity, and there is quite a bit of regulatory uncertainty in 
what is in the rule today, and we have expressed those concerns 
to the Department of Labor.
    Mr. Stivers. I appreciate that, and I hope they will reach 
out to you, the SEC, FINRA, the Treasury, and the IRS. There 
are a whole bunch of people in this space, and it seems like 
the Department of Labor has not been very coordinated or 
information-seeking in their efforts. Thank you.
    I yield back, Mr. Chairman.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We go to the gentleman from Minnesota, Mr. Ellison, for 5 
minutes.
    Mr. Ellison. Thank you, Mr. Chairman, and I also thank the 
ranking member.
    Director McRaith, I want to thank you and your team for the 
2015 annual report. Good job. American families need and value 
quality and affordable insurance to enable their financial 
stability. And I wanted to ask you about a couple of things in 
the report. Last year's report did not mention title insurance, 
and I am happy to see that this year's report does mention 
title insurance. And I have asked for a quote from Treasury's 
annual insurance report to be shown on the screen, which you 
can probably recognize up there. I guess my question is, could 
you describe for me how your team feels about the present state 
of affairs regarding reverse competition and kickbacks in the 
realty industry?
    Mr. McRaith. Congressman, I think our report speaks for 
itself in the sense that it is an issue in the insurance 
sector. It is something that several States have expressed 
concern about. We think State regulators, the States should be 
looking at this closely. We look to monitor and assess those 
developments as we move forward.
    Mr. Ellison. Thanks a lot. In your view, is it unusual in 
the insurance world for a referral source to receive 
compensation either at a lower desk rents, tickets to special 
events, or shared ownership in other insurance products? Is 
that unusual?
    Mr. McRaith. I hesitate to comment on what is typical or 
usual or unusual other than to say, clearly, in some cases, 
those practices were abusive, and law enforcement and others 
looked at them very closely.
    Mr. Ellison. Would strict liability in this industry, that 
is requiring underwriters to have equal financial liability for 
all of the actions of agents ensure that home buyers get 
services in their own best interests?
    Mr. McRaith. Forgive me for not wanting to offer a view on 
the question of strict liability or appropriate causes of 
action, but I think we are focused on the issues with insurance 
and look to support this committee and your interest in this 
subject.
    Mr. Ellison. Thank you for your hard work.
    Mr. Huff, I have a question for you, sir. Why should a 
referral source receive a financial benefit for the referral? 
Why should a REALTOR, mortgage broker or builder benefit from 
referring a home buyer to a title insurance agent?
    Mr. Huff. That is an area we are exploring very heavily. I 
know you have spoken to my colleague, Minnesota Insurance 
Commissioner Mike Rothman. He is very interested in this issue. 
We have established our NAIC title insurance task force. They 
continue to discuss the issue of affiliated title insurers and 
ways to avoid conflicted referral advice from entities we 
regulate that play a role in a home purchase transaction, 
which, as you know, for many people, that is the biggest 
transaction of their lives.
    So we have reached out to stakeholders. The task force is 
meeting, collecting comments from regulators. And we will 
discuss this further at our fall national meeting, which is 
being held in Maryland this year. So, in fact, I think we have 
reached out to your staff to invite them to hear what is going 
on in that task force. So this is an issue that is receiving 
regulatory attention.
    Mr. Ellison. I appreciate it, and I want to say thank you 
to you as well. I wonder if you might comment on the National 
Association of Insurance Commissioners and what they are doing 
to ensure home buyers are not harmed by reverse competition and 
conflicted referrals?
    Mr. Huff. Through this task force, that is sort of the 
starting point, if you will, for insurance regulators to come 
together, and then they will make a decision at that task force 
whether there is action required. And then there are a variety 
of ways to do that. We can go through a model law, if you will, 
or a model regulation and then decide how that is teed up for 
the States to consider at adoption.
    Mr. Ellison. I want to say thank you for your work. I have 
a bill, Ensure Fair Practices in Title Insurance, H.R. 1799, 
and my bill prohibits the financial benefit for a referral. So 
I would welcome your input, and I just want to say thank you to 
the panel.
    And I will I yield back my 25 remaining seconds to the 
Chair.
    Chairman Luetkemeyer. I thank the gentleman for yielding.
    I would like to thank the witnesses for their testimony 
today. You guys have been great, fantastic, as a matter of 
fact.
    I know I mentioned a while ago that one of the important 
aspects of this committee is oversight. I know in talking to 
Mr. Sullivan and Mr. McRaith that they made comments to me that 
our oversight, the willingness of us to delve into issues and 
to support them and to push for certain protections for our 
insurance industry gives them the ability to push back at the 
international level in their discussions. So I think it is 
important that we continue to make that point to them that we 
are here to push back or help them push back. And we are here 
to protect the domestic insurance companies and want to work 
with them with regard to international capital standards as 
well.
    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 3:55 p.m., the hearing was adjourned.]

                            A P P E N D I X



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