[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
September 29, 2015
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