    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                   ASSESSING THE U.S.-E.U. COVERED AGREEMENT

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                             HOUSING AND INSURANCE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 16, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 115-2

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PETER T. KING, New York              MAXINE WATERS, California, Ranking
    EDWARD R. ROYCE, California              Member
    FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
    PATRICK T. McHENRY, North Carolina   NYDIA M. VELAZQUEZ, New York
    STEVAN PEARCE, New Mexico            BRAD SHERMAN, California
    BILL POSEY, Florida                  GREGORY W. MEEKS, New York
    BLAINE LUETKEMEYER, Missouri         MICHAEL E. CAPUANO, Massachusetts
    BILL HUIZENGA, Michigan              WM. LACY CLAY, Missouri
    SEAN P. DUFFY, Wisconsin             STEPHEN F. LYNCH, Massachusetts
    STEVE STIVERS, Ohio                  DAVID SCOTT, Georgia
    RANDY HULTGREN, Illinois             AL GREEN, Texas
    DENNIS A. ROSS, Florida              EMANUEL CLEAVER, Missouri
    ROBERT PITTENGER, North Carolina     GWEN MOORE, Wisconsin
    ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
    ANDY BARR, Kentucky                  ED PERLMUTTER, Colorado
    KEITH J. ROTHFUS, Pennsylvania       JAMES A. HIMES, Connecticut
    LUKE MESSER, Indiana                 BILL FOSTER, Illinois
    SCOTT TIPTON, Colorado               DANIEL T. KILDEE, Michigan
    ROGER WILLIAMS, Texas                JOHN K. DELANEY, Maryland
    BRUCE POLIQUIN, Maine                KYRSTEN SINEMA, Arizona
    MIA LOVE, Utah                       JOYCE BEATTY, Ohio
    FRENCH HILL, Arkansas                DENNY HECK, Washington
    TOM EMMER, Minnesota                 JUAN VARGAS, California
    LEE M. ZELDIN, New York              JOSH GOTTHEIMER, New Jersey
    DAVID A. TROTT, Michigan             VICENTE GONZALEZ, Texas
    BARRY LOUDERMILK, Georgia            CHARLIE CRIST, Florida
    ALEXANDER X. MOONEY, West Virginia   RUBEN KIHUEN, Nevada
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                      Kirsten Sutton Mork, Staff Director
                     Subcommittee on Housing and Insurance

                       SEAN P. DUFFY, Wisconsin, Chairman

    DENNIS A. ROSS, Florida, Vice        EMANUEL CLEAVER, Missouri, Ranking
        Chairman                             Member
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    STEVAN PEARCE, New Mexico            MICHAEL E. CAPUANO, Massachusetts
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
    STEVE STIVERS, Ohio                  STEPHEN F. LYNCH, Massachusetts
    RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DANIEL T. KILDEE, Michigan
    LEE M. ZELDIN, New York              JOHN K. DELANEY, Maryland
    DAVID A. TROTT, Michigan             RUBEN KIHUEN, Nevada
    THOMAS MacARTHUR, New Jersey
    TED BUDD, North Carolina

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 16, 2017............................................     1
    Appendix:
        February 16, 2017............................................    39

                                   WITNESSES
                          Thursday, February 16, 2017

    Chamness, Charles, President and Chief Executive Officer,
      National Association of Mutual Insurance Companies (NAMIC).....     9
    McRaith, Michael T., former Director, Federal Insurance Office
      (FIO), U.S. Department of the Treasury.........................     4
    Nickel, Hon. Ted, Commissioner, Office of the Commissioner of
      Insurance, State of Wisconsin, on behalf of the National
      Association of Insurance Commissioners (NAIC)..................     6
    Pusey, Leigh Ann, President and Chief Executive Officer, American
      Insurance Association (AIA)....................................     7

                                    APPENDIX

    Prepared statements:
        Chamness, Charles............................................    40
        McRaith, Michael T...........................................    49
        Nickel, Hon. Ted.............................................    59
        Pusey, Leigh Ann.............................................    66

                  Additional Material Submitted for the Record

    Duffy, Hon. Sean:
        Letter from the American Agricultural Insurance Company......    71
        Written statement of the American Council of Life Insurers...    73
        Letter from Chubb Global Government Affairs..................    77
        Written statement of the Cincinnati Insurance Companies......    79
        Letter from Lloyd's America, Inc.............................    81
        Letter from the OdysseyRe Group..............................    82
        Letter from the Reinsurance Association of America...........    84
        Letter from the Transatlantic Reinsurance Company............    86
    Heck, Hon. Denny:
        Letter from the Intergovernmental Policy Advisory Committee
          on Trade...................................................    90
    Chamness, Charles:
        Written responses to questions for the record submitted by
          Representatives Duffy and Luetkemeyer......................    91
    McRaith, Michael T.:
        Written responses to questions for the record submitted by
          Representatives Duffy and Hultgren.........................    95
    Nickel, Hon. Ted:
        Written responses to questions for the record submitted by
          Representatives Duffy and Luetkemeyer......................   104
    Pusey, Leigh Ann:
        Written responses to questions for the record submitted by
          Representative Duffy.......................................   108

                            ASSESSING THE U.S.-E.U.

                               COVERED AGREEMENT

                                  ----------

                          Thursday, February 16, 2017

                 U.S. House of Representatives,
                                Subcommittee on Housing
                                         and Insurance,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:07 a.m., in
    room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
    [chairman of the subcommittee] presiding.
        Members present: Representatives Duffy, Ross, Royce,
    Pearce, Posey, Luetkemeyer, Hultgren, Rothfus, Zeldin,
    MacArthur, Budd; Cleaver, Velazquez, Sherman, Lynch, Beatty,
    Kildee, Delaney, and Kihuen.
        Ex officio present: Representative Hensarling.
        Also present: Representatives Green and Heck.
        Chairman Duffy. The Subcommittee on Housing and Insurance
    will now come to order. Today's hearing is entitled,
    ``Assessing the U.S.-E.U. Covered Agreement.''
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        Also, without objection, members of the full Financial
    Services Committee who are not members of the subcommittee may
    participate in today's hearing for the purposes of making an
    opening statement and questioning the witnesses.
        The Chair now recognizes himself for 4 minutes for an
    opening statement.
        I first want to welcome our members to the first hearing of
    the Housing and Insurance Subcommittee in the 115th Congress. I
    am pleased to have the opportunity to work with Mr. Cleaver,
    our ranking member, and my vice chairman, Mr. Ross. We have a
    full agenda this year, including reauthorization of the
    National Flood Insurance Program, GSE reform, and many other
    priorities.
        I had not intended our first hearing to be on the U.S.-E.U.
    covered agreement, but given the 90-day layover period, which
    just began a month ago, it is our duty to study the agreement,
    to solicit feedback from the insurance industry, to assess its
    impact on policyholders, and ultimately, to weigh in on its
    merits.
        I have been listening to many stakeholders, some of whom we
    will hear from today, about the merits and the demerits of this
    agreement. Those points notwithstanding, I must say that I come
    from a place of a skepticism over this agreement that was
    signed or put into effect on Friday the 13th with just 1 week
    left in the Obama Administration. I would also remind those in
    the room that the centerpiece of Donald Trump's campaign for
    President was negotiating better international deals.
        There is no doubt in my mind that President Trump's
    election weighed heavily on European and American negotiators
    to get a deal done before he took office. The President and his
    new Treasury Secretary should be afforded the chance to decide
    for themselves whether to renegotiate or to sign this deal.
        Furthermore, I believe the committee should consider
    improvements to international insurance negotiations, to
    enhance the role of State insurance regulators like
    Commissioner Nickel, and the role of Congress in that process.
    This committee has had an interest in international insurance
    negotiations for some time and has expressed concerns about
    transparency and the potential for state-based regulatory
    systems to be undermined.
        I would also note that there has been bipartisan attention
    paid to this matter, and I commend Mr. Heck for all of the work
    he did last year to protect our State-based system. So to be
    blunt, I think a 90-day layover is an insult to this
    institution and does nothing more than pay lip service to the
    notion of congressional consultation and input.
        In the E.U., it is my understanding that there will be at
    least two affirmative votes to approve this agreement. In the
    U.S., Congress will have no affirmative votes on this deal,
    much less an ability to easily disapprove of it if we decide to
    pursue that course of action.
        So I look forward to working with my colleagues in a
    bipartisan fashion on this subcommittee to address this issue.
        I now want to recognize my colleague from Florida, the Vice
    Chair of the subcommittee, Mr. Ross, for 1 minute.
        Mr. Ross. Thank you, Mr. Chairman. And thank you for
    holding this important hearing.
        The U.S. insurance market is the largest and most vibrant
    of any nation in the world. Our market is strongly regulated by
    the States, putting an emphasis on the protection of
    policyholders. I support this system of regulation, which has
    existed for nearly 150 years. In the global insurance
    marketplace, however, regulatory systems vary. Recently, the
    E.U. implemented a directive that has created market access
    barriers for the U.S. insurers. This harms U.S. businesses and
    is a problem for our domestic companies and must be addressed.
        Today, we will discuss the covered agreement negotiated
    between the U.S. and the E.U. Ultimately, when I analyze the
    covered agreement, I am focused on its impact on consumers and
    policyholders. I want to know how this agreement will impact
    the homeowners and families in my district and the crop
    insurance premiums of those citrus growers across Florida. I
    look forward to the testimony today and I yield back the
    balance of my time.
        Chairman Duffy. The gentleman yields back. It is now my
    pleasure to recognize 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 I look forward to
    working with you on a number of critical issues. This is, of
    course, just one. And our vice ranking member, Dan Kildee, is
    also here today and will play a major role in whatever we are
    able to get going to the benefit of the country.
        I remember that under Title V of the Dodd-Frank Act, this
    hearing is supposed to take place along with a consultation.
    And I see the covered agreement as something that enhances and
    protects U.S. insurance consumers and increases, in my
    estimation, opportunities for U.S. insurance companies and
    reinsurers.
        Today, it gives us an opportunity to assess the finalized
    covered agreement that has been reached between the U.S. and
    the E.U. regarding international insurance and reinsurance
    issues. The Federal Insurance Office (FIO) and the United
    States Trade Representative (USTR) announced their intention to
    move forward with the negotiations in November of 2015. A final
    agreement was reached on January 13th of this year and a copy
    of the text was submitted to the relevant congressional
    committees, beginning a 90-day layover period. No further
    action from Congress is required for this agreement to go into
    effect.
        The covered agreement focuses on three areas of prudential
    supervision: reinsurance collateral; group capital; and
    exchange of information between supervisory authorities. As we
    all know, on January 1, 2016, the E.U. began to implement its
    insurance regulatory scheme, commonly known as Solvency II, and
    U.S. reinsurance companies began to be subjected to burdensome
    and expensive E.U. standards as our system was not equivalent
    to that of the Solvency II system.
        The covered agreement works to address this issue and will
    allow U.S. reinsurance companies to be able to continue to
    operate in the E.U. without costly new obligations.
    Additionally, the covered agreement recognizes the U.S. State-
    based system. And of course, having made a commitment a long
    time ago, I would never do anything, say anything or support
    anything which would damage our State system. I think it has
    been an integral part of our system of insurance and I will do
    everything that I can to make sure it stays that way.
        So I am hopeful that this agreement will provide certainty
    for our insurance system and enhance consumer protection. I
    know there are a number of questions regarding this covered
    agreement, and I look forward to hearing them answered today.
    Thank you, Mr. Chairman.
        Chairman Duffy. The gentleman yields back. I now want to
    welcome our panel, our witnesses for today's hearing. Thank you
    for being here.
        I first want to introduce Mr. Michael McRaith. In 2011, Mr.
    McRaith was appointed as the Director of the Federal Insurance
    Office by former Treasury Secretary Tim Geithner, where he
    served until last month. He is now appearing as a private
    citizen. Mr. McRaith was integral to the negotiation of the
    covered agreement that we are now here to discuss, so we are
    grateful for his appearance. Immediately prior to his
    appointment as FIO Director, Mr. McRaith served more than 6
    years as the Director of the Illinois Department of Insurance.
        Next, from probably the greatest State in the Nation,
    Wisconsin, Commissioner Ted Nickel was appointed by Governor
    Scott Walker as Commissioner of Insurance for the State of
    Wisconsin in 2011. In December 2016, Commissioner Nickel was
    elected as President of the National Association of Insurance
    Commissioners. Commissioner Nickel is also a member of the
    National Association of Insurance Supervisors. And in 2014, he
    was appointed to the Federal Advisory Committee on Insurance,
    which serves as an advisory committee to the Federal Insurance
    Office.
        Commissioner Nickel has been actively engaged in the
    insurance industry affairs in Wisconsin. Prior to his
    appointment, Commissioner Nickel worked for almost 18 years as
    Director of government and regulatory affairs for Church Mutual
    Insurance Company in Merrill, Wisconsin. So I am proud to call
    Commissioner Nickel a friend, but also a constituent. No bias
    from the chairman here.
        Next, I want to recognize Ms. Leigh Ann Pusey. Ms. Pusey is
    the president and CEO of the American Insurance Association
    (AIA). AIA is the leading property and casualty insurance
    organization, representing more than 325 insurers that write
    more than $127 billion in premiums each year. A veteran of the
    insurance industry, Ms. Pusey joined AIA in December of 1996
    and was elevated to president and CEO in February of 2009.
        And finally, I want to introduce Chuck Chamness, who serves
    as president and CEO of the National Association of Mutual
    Insurance Companies, or NAMIC, a 1,400-member company property
    and casualty insurance trade association. Mr. Chamness served
    in the first Bush Administration as Deputy Assistant Secretary
    for Public Affairs under HUD Secretary Jack Kemp, before being
    named to his current position in 2003.
        Now, the witnesses will each be recognized for 5 minutes to
    give an oral presentation of their testimony. And without
    objection, the witnesses' written statements will be made a
    part of the record.
        Once the witnesses have finished presenting their
    testimony, each member of the subcommittee will have 5 minutes
    within which to ask questions of the witnesses.
        On your table, you will note there are three lights: green
    means go; yellow means you have 1 minute left; and red means
    your time is up.
        And with that, I now recognize Mr. McRaith for 5 minutes
    for his opening statement.

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

        Mr. McRaith. Chairman Duffy, Ranking Member Cleaver, and
    members of the subcommittee, thank you for inviting me to
    testify. I appear on my own behalf as the former Director of
    Treasury's Federal Insurance Office and as Treasury's lead
    negotiator for the covered agreement.
        First, thanks to Commissioner Nickel and his colleagues for
    the integral role they played in the negotiations. We created
    an unprecedented mechanism for State regulators to join our
    delegation, and they attended and participated in person in
    every negotiation except the final one in Brussels, which they
    joined by telephone.
        Through a confidential Web portal, State regulators
    received every E.U. document shortly after it arrived, and
    before any U.S. document was sent to the E.U., we shared it
    with the States and then held a conference call with them to
    receive their feedback. State regulators were an essential part
    of our delegation.
        The issues addressed by the agreement are not new.
    Reinsurance collateral reform and Solvency II implications have
    been discussed in the U.S. for years. The agreement brings
    closure to these issues. While the States have undertaken to
    reform reinsurance collateral requirements, reform that
    benefits E.U. reinsurers, the States received nothing of
    benefit for the U.S. industry. Nothing.
        Through the agreement, U.S. reinsurers now have access to
    the entire E.U. market on the same terms as E.U. reinsurers
    operating in the U.S. With respect to U.S. insurer groups, the
    agreement caps the application of Solvency II to the E.U.
    operations of U.S. insurers. To repeat: The agreement affirms
    that the U.S. supervises its insurance sector as the U.S. deems
    appropriate. This outcome saves our insurers potentially
    billions of dollars, preserving American jobs and benefiting
    U.S. industry and consumers.
        States have been developing a group capital calculation for
    more than 2 years. The agreement, which applies only to those
    insurers operating in the E.U. and the U.S., does not prescribe
    the content of that calculation and does not even imply that
    States should create a holding company capital requirement.
    That notion, a complete fiction, would completely contravene
    the entire purpose of the agreement. The agreement endorses
    States for what they do, or in the case of group capital, what
    they have publicly committed to do, and gives them 5 years to
    do it.
        The agreement is cross-conditional. Neither the E.U. nor
    the U.S. receives the benefits without satisfying the
    conditions. And if a question arises, the agreement provides
    for the resolution. If both sides satisfy the conditions within
    the 5-year period, then the terms of the agreement become
    permanent, final.
        We entered into the negotiations seeking to improve the
    rigor, uniformity, and consumer protections of U.S. reinsurance
    oversight. We sought to endorse the U.S. system. We sought to
    include the U.S. State regulators in a manner without precedent
    in American history. We achieved these goals.
        We sought to remove excessive regulation that neither
    protected consumers nor supported industry. We sought to ensure
    that U.S. insurers operated in the E.U. on a level playing
    field. We achieved these goals, saving our industry potentially
    billions of dollars. While providing equal benefits to the
    E.U., this covered agreement puts America first. Our diverse
    U.S. insurance sector will no doubt always include skeptics,
    but this is not a time for our predictable debate. This is not
    a theoretical discussion about concepts or statutory
    prerogatives. This agreement answers real-time questions about
    the allocation of capital by U.S. insurers, about business
    opportunities for U.S. insurers and reinsurers, and whether
    U.S. industry operating in the E.U. employs more Americans or
    fewer.
        Will U.S. industry grow or will it be stifled? Some will
    continue to conjure up the elaborate fictions, but now is the
    time to skip the usual script, to see the real threat to U.S.
    insurers' growth and the threat to insurance jobs in States
    around our country, and to show American leadership. Now is the
    time to solve a real problem, and this agreement does just
    that.
        Thanks for your attention. I look forward to your
    questions.
        [The prepared statement of Mr. McRaith can be found on page
    49 of the appendix.]
        Chairman Duffy. Thank you. Commissioner Nickel, you are now
    recognized for 5 minutes.

    STATEMENT OF THE HONORABLE TED NICKEL, COMMISSIONER, OFFICE OF
    THE COMMISSIONER OF INSURANCE, STATE OF WISCONSIN, ON BEHALF OF
       THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

        Mr. Nickel. Thank you, Chairman Duffy. Chairman Duffy,
    Ranking Member Cleaver, and members of the subcommittee, thank
    you for the opportunity to testify here today.
        The NAIC is very concerned with the disparate treatment
    some E.U. jurisdictions are imposing on U.S. insurers and is
    committed to working with Congress and the Administration to
    address this important issue. While a covered agreement is one
    way to resolve these issues, we oppose this one. We urge
    Congress and the Administration, with direct involvement of the
    States, to expeditiously reopen negotiations with the E.U. to
    reach an agreement which brings finality to these issues and
    better protects U.S. consumers, insurers, and the State
    regulatory system.
        While we recognize that the United States received some
    benefits, including the apparent elimination of the local
    presence requirements, the current agreement does not provide
    for full equivalence or recognition of our regulatory system.
    In fact, the word ``equivalence'' is nowhere to be found in
    this document.
        This agreement places conditions on the ability of
    regulators to obtain information or to take certain actions
    currently authorized under State laws. There are potential
    conflicts between this agreement and State reporting processes,
    as well as critical examination and hazardous financial
    condition authorities.
        The group capital provisions imply State regulators are
    required to adopt a group capital requirement, but also include
    language suggesting the E.U. could apply its own group capital
    requirements and reimpose local presence requirements if the
    States choose not to act or fail to meet E.U.'s expectations.
    This is not a win for the U.S. insurers and consumers who will
    have to absorb these costs.
        This agreement does not include any evaluation of the
    creditworthiness of foreign reinsurers backing up U.S. risks.
    The Treasury Department had committed that it would never wipe
    out insurance collateral, yet it did just that. Collateral
    protects U.S. insurers and consumers from counterparty risk.
    More than $30 billion of E.U. reinsurer collateral is
    eliminated by this agreement. Absent that protection,
    regulators will likely have to find other mechanisms with which
    to protect insurers and your constituents from the risks posed
    by those counterparties.
        This agreement is also littered with ambiguities to be
    resolved by an undefined and unaccountable joint committee,
    leading to perpetual renegotiation and uncertainty. In a single
    agreement with an outgoing Administration, the E.U. achieved
    its primary objective of eliminating collateral requirements.
        In return, U.S. companies and our regulatory system
    received a form of probation which could be revoked at any
    time. The burden for this is placed almost entirely upon the
    States, with its underlying costs ultimately paid for by the
    U.S. insurers and consumers.
        These defects should be no surprise. This flawed document
    resulted from a flawed process. Unlike a trade agreement, there
    was no formal consultation with U.S. stakeholders. Despite
    assurances to the contrary, the few of us in the room were
    merely observers subject to strict confidentiality with no
    ability to consult with our fellow regulators. The process
    favored the E.U., which retains the European Parliament's and
    Council's ability to approve the agreement, whereas the U.S.
    has virtually no comparable congressional authority. This
    agreement sets a precedent that others around the world may try
    to imitate, and forces the U.S. to weaken our standards in
    exchange for very little.
        Going forward, we would like the Administration to
    establish a transparent process for negotiating and allowing
    more robust congressional and stakeholder engagement and
    providing meaningful and direct participation by all impacted
    insurance regulators.
        In terms of specific substantive improvements, the new
    agreement should provide for permanent mutual recognition,
    equivalence, or comparable treatment for U.S. firms operating
    in the E.U. It should recognize the U.S. regulatory system,
    including group supervision and capital, provide clarity in the
    agreement's terms, and finality in its application.
        In conclusion, we are committed to working toward an
    agreement which is truly in the best interest of the U.S. and
    brings closure to the issue of equivalence, but this is not
    such an agreement. Thank you, Mr. Chairman, and with that, I
    would be pleased to answer any questions.
        [The prepared statement of Commissioner Nickel can be found
    on page 59 of the appendix.]
        Chairman Duffy. Thank you, Commissioner. Ms. Pusey, you are
    recognized for 5 minutes.

      STATEMENT OF LEIGH ANN PUSEY, PRESIDENT AND CHIEF EXECUTIVE
             OFFICER, AMERICAN INSURANCE ASSOCIATION (AIA)

        Ms. Pusey. Thank you, Chairman Duffy, Ranking Member
    Cleaver, and subcommittee members. I appreciate the opportunity
    to testify today on behalf of our member companies. This is a
    tremendously important issue to the insurance industry, and it
    really needs immediate attention.
        I can't tell you how I hate to have to disagree with
    Commissioner Nickel and our leadership at the NAIC. But on this
    issue, we really see it very differently. We see this as a real
    win for insurers, for U.S. insurers.
        This was a win not only for companies operating in the
    U.S., but for our regulatory system. And for that matter, for
    our consumers, who are going to continue to be protected
    because all the provisions of the U.S. regulatory system are
    carried forward in this agreement.
        As the ranking member articulated in his opening comments,
    we all know what the problem is. We have U.S. insurers
    operating in the European Union who are being discriminated
    against today. And this was a result of the implementation of
    Solvency II over there, so whether it was in the U.K. or in the
    E.U., they were beginning to require things of our primary
    insurers operating there and their subsidiaries of their
    branches. They were requiring us to--they were basically
    enforcing Solvency II upstream into the holding company,
    requiring everything from corporate governance rules of the
    E.U. to reporting requirements to capital requirements that
    could be enforced back onto the U.S. parent, because that was
    the way they were reading Solvency II.
        For the reinsurance community, and again, as the Director
    pointed out, this was not a new issue, but what was
    increasingly difficult on the collateral front was that there
    was a reaction in Europe and they were beginning to require
    reinsurers to have a physical presence in the E.U. to do
    business there. Again, a discrimination which was not something
    they were requiring of their own companies.
        So for us, we saw this agreement as timely and a win. It
    was a win for the U.S. insurance industry because no longer can
    they export Solvency II requirements upstream to the U.S.
    holding company. That is huge. It is a recognition of our
    State-based regulatory system. It will also eliminate this
    requirement for reinsurers to have a physical presence in the
    E.U. in order to compete.
        For U.S. insurance consumers, as I just mentioned, we
    believe this continues to be a win, because it is not only
    going to bring forward the protections that are in U.S. law,
    but they will also, we believe, increase competition, which we
    think is also good for consumers to having more choices.
        For the U.S. insurance regulatory regime, we see this as a
    big win. It provides really historic recognition and respect
    for the U.S. insurance regulatory system in an international
    agreement. That has never been done before.
        And with respect to group capital, it relies on existing
    authority without demanding any specific capital requirement,
    and it carefully references the group capital calculation
    effort already under way at the NAIC.
        With respect to collateral, it utilizes existing NAIC rules
    and even builds the language into the agreement. We take those
    prescriptions from NAIC's model law, and they are put into this
    covered agreement. I would say that we are not taking
    collateral. In practical effort, in 2011 when the NAIC began
    to--they agreed to a model law on collateral and it began to
    move its way through the States, and it is approved in 35
    States, it reduces effectively collateral from 100 percent
    which AIA used to support, but under this new model that we all
    agreed to support, it will effectively reduce it to around 20
    percent on average.
        So this is not going to eviscerate U.S. collateral rules.
    In fact, it builds on what the NAIC is already doing. It just
    helps us get there in a more uniform way, and it has a unique
    approach for E.U. reinsurers. That is true. But again, it is
    not eviscerating collateral. And all the rules and protections
    around collateral, the ability to require timely payments, the
    ability to negotiate additional requirements for collateral
    around your agreement, these are--and to require prompt
    payment, all of those things were carried forward into this
    agreement.
        For U.S. negotiators, we haven't talked about this, but as
    this committee knows well in your efforts, we have all been
    involved for many years now at the international level, at the
    IAIS, as well as, quite frankly, at the FSB on insurance global
    matters. And for our negotiators, they will be in a very strong
    position empowered by this agreement, because now we have the
    E.U., the second largest market, recognizing our regulatory
    system and our capital standards, and we are going to go into
    those negotiations much stronger off, we believe. So we believe
    it is a win.
        We acknowledge that the process could be improved. We would
    fully support efforts to review efforts to be more transparent
    and inclusive. We were among the earliest to call for a robust
    role for the NAIC. So we would look forward to that.
        Let me wrap up quickly. We think this is a win. And the
    only concern we have with scrapping this deal is we believe
    there is no guarantee that we would have a timely result that
    can affect our companies today. What is going to take the place
    of this agreement for U.S. companies that are currently being
    discriminated against in Europe if we don't do this? Thank you,
    Mr. Chairman.
        [The prepared statement of Ms. Pusey can be found on page
    66 of the appendix.]
        Chairman Duffy. Thank you. And the Chair now recognizes Mr.
    Chamness for 5 minutes.

     STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CHIEF EXECUTIVE
      OFFICER, NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES
                                (NAMIC)

        Mr. Chamness. Good afternoon, Chairman Duffy, Ranking
    Member Cleaver, and members of the subcommittee. Thank you for
    the opportunity to speak with you today. My name is Chuck
    Chamness, and I am president and CEO of the National
    Association of Mutual Insurance Companies (NAMIC).
        NAMIC is the largest property-casualty insurance trade
    association in the country, with more than 1,400 member
    companies representing nearly 40 percent of the insurance
    market. We appreciate the subcommittee's focus on assessing the
    impact of the recent U.S.-E.U. covered agreement. As the first
    of its kind, this bilateral agreement with the authority to
    preempt existing State insurance law merits careful scrutiny to
    understand its impact on the U.S. domestic insurance industry
    and policyholders.
        Let me start by saying that NAMIC has long had serious
    concerns about the use of an international trade agreement and
    negotiation process to alter or preempt State-based insurance
    regulation. This final draft covered agreement validates our
    long-held concerns.
        We also believe that the covered agreement does not address
    the problems the FIO and the USTR committed to resolve when the
    negotiations were started, and the agreement represents a bad
    deal for the U.S. domestic property-casualty insurance
    industry.
        First, in announcing the negotiations, the FIO and the USTR
    sent a letter to Congress outlining their objectives. Chief
    among them was to obtain permanent treatment of the U.S.
    insurance regulatory system as equivalent by the E.U. This had
    become an issue due to last year's implementation of the E.U.'s
    insurance regulatory reform known as Solvency II.
        Under the new regime, an insurer doing business in the E.U.
    will have heightened regulatory requirements in the event the
    insurer's country of domicile is not deemed equivalent for
    purposes of insurance regulation. This created a real and
    present difficulty for the relatively small number of U.S.
    insurers doing business overseas.
        It also provided an opportunity for the E.U. to push for
    something it had always wanted for reinsurers, its reinsurers,
    that is: the elimination of requirements on foreign reinsurers
    to post collateral in the U.S. The covered agreement was seen
    as a vehicle to resolve both issues.
        To be clear, NAMIC strongly supports U.S. insurers doing
    business overseas, and we are fundamentally opposed to the
    unfair trade barriers the E.U. is attempting to erect. It is
    important to remember that the equivalency determination is an
    entirely contrived problem of the E.U.'s manufacture. That
    determination is being used simply as a source of pressure on
    the U.S. to continue to alter its regulatory system to the
    E.U.'s liking.
        Even if we were to stipulate that equivalence was a real
    problem and that the covered agreement and forfeiting
    reinsurance collateral were necessary to solve it, the
    agreement fails on its own terms. There is no finding anywhere
    in the covered agreement that the U.S. group supervision is
    adequate, mutual, or equivalent.
        Instead, it merely calls for the E.U. to return to the pre-
    Solvency II status quo of not unfairly punishing U.S.-based
    insurers. Nor is there any guarantee that this status quo will
    continue at the end of the agreement's 5-year term. Even the
    Treasury's own summary of the agreement provides that
    continuation of this accord between the U.S. and the E.U. is
    merely an expectation, not a commitment.
        This lack of commitment, coupled with the establishment of
    a joint committee with the power to amend the agreement, will
    likely lead to a process of endless renegotiation with the E.U.
    when the E.U. decides it would like to see further changes in
    the U.S. system.
        Of perhaps greatest concern is the requirement for a new
    group capital standard for all U.S.-based insurance groups. If
    these group capital standards are not adopted, the E.U. will
    not live up to its side of the agreement, but if they are
    adopted, it will impact even those companies not doing business
    in the E.U. This provision is at odds with the U.S. legal
    entity system of regulation.
        The agreement also states that the U.S. group capital
    standard must apply to the complete ``worldwide parent
    undertaking,'' and include corrective or preventative measures
    up to and including capital measures. It seems to include the
    power to require increases in capital, capital movement between
    affiliates, or other fungibility mandates.
        Implementation of this kind of group capital standard will
    shift the U.S. from a legal entity regulatory system that
    protects policyholders towards an E.U.-style group supervision
    system designed to protect investors and creditors. This would
    not be a win for U.S. policyholders.
        The 2015 letter announcing negotiations with the E.U.
    clearly stated that Treasury and the USTR will not enter into a
    covered agreement with the E.U. unless the terms of that
    agreement are beneficial to the United States. NAMIC does not
    believe this agreement meets that criteria.
        On the whole, it is bad for the vast majority of U.S.
    insurers which do not have operations in Europe and which lose
    reinsurance collateral and get nothing in return other than new
    group supervision and future regulatory uncertainty.
        We urge Congress to work with the Administration to reject
    this agreement and work on a new solution that meets the needs
    of the U.S. insurance industry and the insurance-buying public.
        Again, thank you for the opportunity to speak here today,
    and I look forward to answering any questions you may have.
        [The prepared statement of Mr. Chamness can be found on
    page 40 of the appendix.]
        Chairman Duffy. The gentleman yields back.
        I want to thank our witnesses for their opening statements.
    The Chair now recognizes himself for 5 minutes for questions.
        Commissioner Nickel, I don't know if you heard Mr. McRaith
    testify that you were able to attend and participate in this
    great deal that puts America first. Do you agree with that
    assessment?
        Mr. Nickel. There was a small band of brothers of insurance
    commissioners who were put together to be a part of the
    process, that is correct. We were allowed to participate in
    various forms throughout the negotiation, as Mike clearly
    stated. I suspect we will have some different arguments today
    about the process. Unfortunately, the content of the meetings I
    can't discuss, because I am bound under strict confidentiality.
        And the most difficult part of--
        Chairman Duffy. Even now?
        Mr. Nickel. Yes.
        Chairman Duffy. You can't tell Congress?
        Mr. Nickel. I don't think I can tell anybody, unless
    somebody gives me the authority to do that. But the most
    difficult part about that process was I was even bound from
    speaking with my own legal counsel, my own chief financial
    people, so you can imagine--put yourself in those shoes, where
    you are trying to understand something about which you can only
    talk to this small cadre of your fellow commissioners.
        Chairman Duffy. You were given active input in consulting
    continuously with Mr. McRaith, taking the ideas that you had,
    the concerns that you had into consideration as this deal was
    negotiated?
        Mr. Nickel. We were sharing our thoughts and opinions with
    Mr. McRaith and his team.
        Chairman Duffy. Okay. Were your thoughts and concerns, do
    you think, heard and taken into consideration as this deal was
    negotiated?
        Mr. Nickel. I would say, to be fair, Mr. Chairman, that
    some of our input found its way into the agreement. Quite a bit
    of it probably did not, which is why I am here today, because
    the membership of the NAIC, all 56 members, came to the
    conclusion that this deal was not a good deal for the U.S.
    regulatory system, consumers, and insurers.
        Chairman Duffy. Thank you. I want to move to you, Mr.
    McRaith. I think in your written testimony you said, ``The
    covered agreement does not need to be clarified with further
    written materials. This would be a fool's errand. The covered
    agreement terms painstakingly negotiated are abundantly clear,
    even if not written, to resolve every stakeholder's nuanced
    fantasies.''
        I have had a number of meetings--colorful language, by the
    way; it was good--with those who support and those who disagree
    with this agreement, and almost everyone agrees that there is a
    lack of clarity here. And even those who agree there is a lack
    of clarity, said that they might be concerned about how much
    time it would take us to get clarification, and they don't want
    to see the deal be torpedoed, but everybody has come together
    and said that there is a need for clarification, and it gives
    me pause that you are in essence saying, ``No, not at all; it
    is crystal-clear.''
        The lawyers who have represented all the companies that are
    here today have basically given us the same feedback. One
    commonly cited portion is Article 4A, which lays out capital
    assessments as a lack of clarity. So what happens if the States
    create a capital standard that the E.U. disagrees with? Is that
    specified in the agreement?
        Mr. McRaith. First of all, I appreciate you reading my
    testimony and the colorful prose is mine. And obviously, it is
    a reflection of the fact I don't have to clear this through the
    Treasury Department any longer.
        Chairman Duffy. Duly noted.
        Mr. McRaith. As someone who practiced law for 15 years--and
    I say this with great respect and affection for the lawyers--it
    doesn't surprise me that people who have a perspective and
    angle they are pursuing would have lawyers who would support
    that perspective and angle.
        What the agreement does is, it is absolutely clear on
    capital and group supervision that nothing is expected of the
    States other than what they have already said they will do.
        Chairman Duffy. I only have a minute. So what happens if
    the States create a capital standard that the E.U. disagrees
    with? Is that clear in there?
        Mr. McRaith. The agreement is clear that it can be
    developed however the States want. It does not require anything
    other than what the States have already said they will do.
        Chairman Duffy. Then what happens if the E.U. disagrees? If
    the E.U. disagrees, how is that resolved? And where is that in
    the agreement?
        Mr. McRaith. The agreement establishes a process, like
    every international agreement, questions about interpretation
    and implementation, if there is a question, we will meet and we
    will work it out and sort it out. It is entirely common
    practice.
        Chairman Duffy. All right, I have to be quick. So if it is
    not clear, it will be determined by a body that will be put
    together. And on the committee, who is going to represent the
    U.S. on the joint committee?
        Mr. McRaith. Good question. One thing we did not want to do
    was--
        Chairman Duffy. No, no, I want to--you said, ``We are clear
    on how this thing is going to work.''
        Mr. McRaith. That is right.
        Chairman Duffy. Where is the clarity of who is representing
    the U.S.? We don't know.
        Mr. McRaith. The joint committee--it would depend on the
    issue. If it is an issue, for example, concerning a Wisconsin
    company, my expectation is that the Wisconsin commissioner--
        Chairman Duffy. But ``depends'' doesn't work well. There is
    no specificity in who is on the joint committee. I don't even
    know. It is not in here. Again, it goes to the point of the
    first question, you are referring me to the joint committee,
    and when I talk about the joint committee, we don't even know
    who is going to represent us.
        And again, I just would ask you to--and maybe as we talk
    about this today, that is maybe a point of agreement that,
    again, I think there has been unanimous agreement that if the
    deal was still to go through, clarification would be still
    really important.
        So my time is long expired. I now recognize the gentleman
    from Missouri, Mr. Cleaver, for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Mr. Nickel, are you aware that the covered agreement also
    has to go before not only this committee, House Financial
    Services, but also the House Ways and Means Committee, and the
    Senate Banking Committee?
        Mr. Nickel. I was not aware of that, but I would look
    forward to the opportunity to be there myself or have someone
    else present in front of those two bodies.
        Mr. Cleaver. So you would agree, I think, that this is not
    something that is being rushed through and that we are not
    giving optimum participation to interested and impacted
    parties?
        Mr. Nickel. Absolutely, Congressman Cleaver. I think it is
    a great opportunity. But what we struggle with is the fact that
    the language itself--there doesn't seem to be any authority to
    do anything about it. It is a holdover. It has allowed for
    review by these three pertinent committees, but not to be
    vetoed or changed, et cetera.
        Mr. Cleaver. Right, right. Now, do you know any trade
    agreement where States are involved?
        Mr. Nickel. Sir, that is not in my wheelhouse. I don't
    spend my time on trade. I work to support State insurance
    regulation.
        Mr. Cleaver. I think it would be defined as a trade
    agreement, don't you agree?
        Mr. Nickel. I wish it was a trade agreement which would
    have a lot more clarity and participation on the behalf of
    interested parties and all--
        Mr. Cleaver. I know, but a trade agreement doesn't mean
    that--if we define a trade agreement only by what we are able
    to--how we are able to influence it, that is kind of a weak
    definition. The point is, my question was going to be--and you
    answered it--and that is that some of your recommendations did,
    in fact, find their way into the agreement, right?
        Mr. Nickel. That is correct, sir.
        Mr. Cleaver. And nobody should expect everything they want
    into everything, is that right?
        Mr. Nickel. That is correct, sir.
        Mr. Cleaver. Okay, now, thank you. We have over 7,000
    insurers in the United States. And all of them are controlled
    by the State in which they are domiciled. And so this is a
    unique system. And you said--I don't know if you are minimizing
    it--a small group of States were participants.
        Ms. Pusey, can you talk about transparency in this whole
    process?
        Ms. Pusey. I think we are probably in the camp that the
    chairman was referencing, that while we were enthusiastic and
    supportive of the results of this, I think the process could
    clearly have been improved from what we understand. So how do
    you oppose transparency? I think making all efforts, at the
    same time recognizing I think that there will be some
    restraints on that.
        States are not constitutionally recognized to be able to
    negotiate international deals. That is why--that was a lot of
    the impetus, as you also referenced, Congressman, for why we
    created the Federal Insurance Office with this very, very
    limited authority. It has no regulatory authority, but it has
    limited authority on international agreements.
        So while I think we would all embrace more transparency,
    nothing is ever wrong with a little more clarity, there is a
    limitation I think constitutionally with just how much the
    States could be involved in an international agreement. And
    that is where I think we all argue that there should be a
    consultative role, which it sounds like there was some of that.
        Mr. Cleaver. Mr. McRaith, if you would speak to the issue
    of stakeholder involvement?
        Mr. McRaith. We asked the State regulators in an
    unprecedented, unprecedented in any--State regulators are not
    involved in any trade agreement delegation, not involved ever
    before in any international agreement in a negotiation
    delegation, never before we asked the State regulators to
    create a small task force--we didn't tell them how many, we
    didn't tell them whom--those State regulators were invited to
    and did participate in every negotiating session.
        We briefed them before and after every negotiating session.
    We shared with them documents before they went to the E.U. We
    received their input on those documents before they went to the
    E.U. During the negotiating sessions, they were asked for
    technical insight and input. They provided it at the table, not
    in the room, at the table as a member of the U.S. delegation.
        So we received State regulator impact. We worked with this
    committee. The other three committees of jurisdiction spoke
    with them before and after every negotiating session multiple
    times in recent months. We worked with all of our stakeholders,
    particularly those engaged in the E.U. and the U.S. Not all of
    Mr. Chamness's companies, but those that operate in the E.U.
    and the U.S. and have a stake in the outcome of this agreement.
        And we worked with the entire Executive Branch of the
    Federal Government to get a deal to this committee and the
    other three committees that puts America first.
        Mr. Cleaver. Thank you.
        Chairman Duffy. The gentleman's time has expired. The Chair
    now recognizes the vice chairman of this subcommittee, the
    gentleman from Florida, Mr. Ross, for 5 minutes.
        Mr. Ross. Thank you, Mr. Chairman. And I thank the panel
    for being here. My first impression has to do with process. And
    that is what concerns me, because this isn't a trade agreement.
    If it was a trade agreement, we would have an up-or-down vote.
    And we have the opportunity to review for 90 days, but really
    what can we do as a Congress? This is going to be left up to
    the Administration, to the Treasury Secretary. And so that
    concerns me from one aspect that will stay over there.
        My other concern is, as I mentioned in my opening
    statement, what benefit do we have for the consumer, for the
    policyholders? And I know that it was said that we will have
    the benefit of the consumer protections that are so good under
    the State regulation system.
        My question to the panel is, what other benefits do the
    consumers or the policyholders anticipate from the
    implementation of this agreement? And specifically, is there a
    benefit in the rate-making process that will inure to the
    benefit of the consumer? In other words, will they have a
    better rate as a result of this?
        And, Commissioner, I will start with you.
        Mr. Nickel. Thank you, Congressman. Our concern with the
    elimination of collateral for European reinsurers is the fact
    that we now, as U.S. regulators, are going to have to figure
    out a new mechanism by which to assess that risk which has now
    been transferred to more of us--
        Mr. Ross. Will you put it in the guarantee fund? Will you
    require more assessment in the guarantee fund? Or how will you
    balance that? And is it going to impact the rate?
        Mr. Nickel. Correct. Hopefully, nothing will end up in the
    guarantee fund as a result of this. But what I would say is, as
    regulators, now that there is no collateral, and there are
    words on a paper now that insurance regulators are going to
    have to trust from E.U. reinsurers as to their financial
    strength, no more collateral here, $30 billion will be going
    out the door, that the U.S. insurers are going to have to work
    now with ceding companies to manage that risk, possibly
    employing other financial strength indicators or capital
    requirements which will ultimately raise rates that your
    constituents will pay.
        Mr. Ross. Mr. McRaith, as a former insurance commissioner,
    how do you respond to that?
        Mr. McRaith. Two pieces. Let's be factual about reinsurance
    collateral relief. The States adopted it as an accreditation
    standard effective in 2019, meaning every State would have to
    adopt collateral reform. Of the States that have adopted it, 31
    companies have received relief. Thirty of those companies are
    now posting 10 percent or 20 percent of the collateral they
    posted a few years ago. So the notion that we are going from
    100 to zero is complete fiction.
        Second, that cost savings gets passed on to our primary
    insurers. But third, and more importantly, our flagship
    companies operating in the U.S. and the E.U. will not have to
    post billions of dollars in Europe in compliance costs that
    otherwise can be used to support affordable, accessible
    insurance products in the United States.
        Mr. Ross. Ms. Pusey, the impact of reduced or no collateral
    at all being held, does that increase reinsurance capacity? Or
    how does--
        Ms. Pusey. We would hope it would be filled up and down the
    chain, yes. We think you are going to have more creativity,
    more products available, and clearly I think one could expect
    some impact to the rating side.
        If I could, Mr. Ross, I just wanted to come back to a
    comment made about the quality in some of the perception that
    the consumers are exposed because some of the rules won't be
    carried forward. As we understand it, they are quite robust,
    because they do take quite literally from the current NAIC
    model. So there will be a capital surplus requirement on these
    insurers from Europe, a consent to jurisdiction in our courts,
    a consent to a service of process, 100 percent collateral if
    they resist timely payments.
        And I have four or five others. The point is, it does carry
    forward a lot of those protections. So we would certainly hope
    that this would not threaten and, to the contrary, would
    actually enhance the U.S. policyholders' experience with
    insurance, both in terms of product and price.
        Mr. Ross. And, Mr. Chamness, if I might, because I am
    running out of time here, how do we unscramble the egg? Let's
    assume the covered agreement goes through. Let's assume that 2
    years from now, as we get close to permanency in the 5 years,
    it is not what we thought it would be. How do we get out of it?
    Or can we get out of it? And what impact will that be?
        Mr. Chamness. I think the greater concern is the covered
    agreement obligates the State regulatory system to take certain
    steps. And if those steps aren't taken, I think it comes apart
    on its own. So I think there is significant concern over that.
        Also, I would point out--and to your earlier statement, and
    it was a discussion just previously about why were State
    regulators in the room, are they with any other trade
    agreement, this is a very particular type of trade agreement.
    It has no oversight in terms of State regulators, State
    legislators, or Congress, in terms of an up-or-down vote. It is
    simply a 90-day layover period. And it is binding and it
    preempts State law.
        So I think having State regulators in the room for this
    type of agreement is a very prudent measure.
        Mr. Ross. Thank you, and I yield back.
        Chairman Duffy. The gentleman's time has expired. The Chair
    now recognizes the gentlelady from New York, Ms. Velazquez, for
    5 minutes.
        Ms. Velazquez. Thank you, Mr. Chairman. Ms. Pusey, many
    observers note that this agreement is vital because of its
    commercial significance and for the level playing conditions it
    creates. At the same time, others note a less tangible, but
    equally important outcome. This is the first time the E.U. has
    taken such significant steps to recognize the U.S. State-based
    insurance regulatory framework.
        Can you talk about that?
        Ms. Pusey. As I said in my testimony, I agree with you. I
    think it is a historic recognition. We have never had an
    agreement where the second-largest market to the U.S. would
    actually say, we recognize your State-based system.
        And the implications are pretty important. They are not
    just important today for relieving this pressure that is on our
    companies doing business there, because as we said, it is going
    to prevent them from imposing this upstreaming, if you will, of
    Solvency II, which no one in the U.S., regulators or industry,
    ever advocated for here.
        So it is helpful in that sense. But we also think it is
    important because it is going to, I think, increase the
    leverage that the U.S. has at the international negotiating
    table. We have talked, I think, before this committee about
    Team USA, which is a collaborative effort between the FIO, the
    Federal Reserve, and our NAIC, and at the international table
    dealing with issues on ComFrame, which is a common framework
    for internationally active insurance groups. And within the
    ComFrame is a discussion about an insurance capital standard,
    which is again a global capital standard.
        For the U.S. to be at that table empowered by European
    recognition of our system, we ought to be pretty forceful at
    pushing back. So we have been good at pushing back. This is
    further ammunition. So to your point, I think it is incredibly
    valuable, not only historic, but valuable.
        Ms. Velazquez. And can you please comment on specific
    commercial or supervisory barriers that this agreement will
    eliminate?
        Ms. Pusey. Specifically, we have companies that are U.S.-
    based and they are doing business through a subsidiary or
    branch in the European Union, and about a year ago, what we
    started to feel--this is different from the reinsurer issue,
    which has been ongoing, but in the primary space, regulators in
    Europe were telling our companies we don't recognize your home
    jurisdiction is equivalent to Solvency II in Europe, and
    therefore we are going to require you to hold more capital,
    consistent with their rules under Solvency II. We are going to
    require you to do an E.U. ORSA, which is a self-assessment that
    companies have to do, and comply with corporate governance
    rules.
        We even had companies talking about threats to executive
    compensation being sort of snatched back because the European
    governance rules are different than the U.S. governance rules.
    So those are some of the specific ways in which we were feeling
    threatened, if not outright discriminated against, under the
    situation if it is not cured by this.
        Ms. Velazquez. Thank you. Mr. McRaith, the joint committee
    established by the agreement is an interesting concept that is
    used quite frequently in trade agreements, and we have alluded
    to that. Do you support NAIC and State regulator involvement in
    that joint committee? And how do you see the joint committee
    strengthening the relationship between the U.S. and Europe on
    insurance issues?
        Mr. McRaith. As mentioned earlier, we did not build out all
    the details of the joint committee in the agreement itself.
    That would have required potentially 40 or 50 more pages to
    identify what is a quorum and what is the membership, all of
    these kinds of details you are familiar with for committee
    construction.
        Absolutely, a State regulator should be on the joint
    committee, particularly the State regulator whose company might
    be affected or who would be the thought leader on the issue
    that is being discussed. What the joint committee is intended
    to do and the purpose--the role it will provide in relation to
    the broader agreement is to allow for collaboration and
    cooperation, because both the E.U. and the U.S. receive
    benefits from this agreement, important benefits for our
    consumers and our industry, and both sides want to see it work.
    The joint committee will foster that collaboration, which will
    be so important in the coming years.
        Ms. Velazquez. Thank you. Ms. Pusey, would you like to
    comment on that?
        Ms. Pusey. No, we would be in agreement that we have to
    have robust participation by the NAIC on this joint committee.
    We think it will further enhance the relationship with the
    European Union. We fully expect that they will be consulting
    with the European Insurance and Occupational Pensions Authority
    (EIOPA), which is their sort of parallel to--in many ways, not
    exactly, but in many ways parallel to our State regulatory
    system, because you are going to want that expertise in the
    room to deal with those unique issues that will come up.
        Ms. Velazquez. Thank you. I yield back, Mr. Chairman.
        Chairman Duffy. The gentlelady yields back. The Chair now
    recognizes Mr. Pearce from New Mexico for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman. I appreciate each one
    of the witnesses being here today.
        Mr. Nickel, you just heard Ms. Pusey say that Solvency II
    is going to completely recognize the State-based system. Do you
    find that to be an accurate assessment?
        Mr. Nickel. I wish that were true, Congressman, but I think
    it is the other way around. I think the Europeans are trying to
    impose the Solvency II model on the United States, and this is
    one avenue to do that. We are very concerned about that piece,
    as well as the language in the covered agreement itself, which
    ultimately preempts what we have been trying to do with regards
    to collateral reduction, the fine work we have been doing on
    collateral reduction.
        It takes all the work that we have been doing and then
    forces us to map over an agreement that was put together--
        Mr. Pearce. Sure, I need to move on, but tell me a little
    bit more deeply about the impact on consumers of the collateral
    changes that you are saying need to be implemented. Tell us
    more at the individual policyholder level what that means?
        Mr. Nickel. Sure. First and foremost, ultimately the
    collateral that is posted to recognize the risk taken is the
    ultimate safety net for consumers.
        Mr. Pearce. I understand. But what's the difference between
    the U.S. and the European markets?
        Mr. Nickel. The U.S. market requires collateral on behalf
    of foreign reinsurers, because of the fact that we are not
    comfortable with--
        Mr. Pearce. At a greater level?
        Mr. Nickel. Sorry?
        Mr. Pearce. At a greater level?
        Mr. Nickel. Yes.
        Mr. Pearce. Providing greater security?
        Mr. Nickel. Right, because our U.S. reinsurers--
        Mr. Pearce. No, that is all I need, just more security.
        Mr. Nickel. Yes, sir.
        Mr. Pearce. Mr. Chamness, describe the size of your members
    basically as operations. Are they large, small? You have those
    member associations, and the Europeans want to come and sell in
    our market, and they want to bring their rules over here more
    or less. Is that correct?
        Mr. Chamness. Correct.
        Mr. Pearce. They don't want to have to piddle around with
    all the States. That is a little bit beneath us here. We don't
    want to mess with you State regulators. And so we want a nice--
    we want to clear the playing field out for us, so compare the
    size of your members with the Europeans that want to come here.
        Mr. Chamness. Our members, on a consolidated basis, write
    $230 billion of premium. They range from very large, including
    international, to regionals, one State writers, and small rural
    mutual that write in rural America.
        Mr. Pearce. What percent are State and what percent are the
    small guys?
        Mr. Chamness. What percent are the small guys?
        Mr. Pearce. Roughly, just a lot or a small group or--
        Mr. Chamness. Of the 1,400, probably 600 are small guys--
        Mr. Pearce. Almost half. Almost half just mom-and-pop
    operations out there writing insurance, trying to make it work
    for their neighbors.
        Mr. Chamness. Correct.
        Mr. Pearce. Mr. McRaith described--I guess he was
    describing your positions as theatrical and conjured fiction.
    Mr. Nickel and Mr. Chamness, do you have any response to that?
    It seemed like a fairly--
        Mr. Chamness. Let me just start where you began, and that
    is, I don't think it is theatrical. When we have read this
    agreement and we know that the primary objective the U.S. had
    going into the negotiations was to obtain equivalence, which
    has a very specific meaning for the European Union, and the
    word does not appear in the document. And mutual recognition,
    other proxies for that also are not in the document. So we have
    concerns about that and we have concerns about the permanence
    of the treatment that our U.S. insurers doing business over
    there will receive.
        Mr. Pearce. Yes. So, again, trying to get this whole
    playing field underneath us, Europeans want to come here and
    use their rules to sell to our market. We would like some
    access to their market and we would like them to recognize our
    system. Is that basically the dispute, the totality of the
    dispute? Is it close enough, Mr. Nickel?
        Mr. Nickel. That is pretty close.
        Mr. Pearce. Okay, so--and you are concerned because you
    feel like the American consumer might be disadvantaged? We see
    that the operations coming in here are going to be the big
    multinationals, not going to be mom-and-pops come here. Your
    mom-and-pops are not going to go over there and sell insurance,
    are they?
        Mr. Nickel. No, they are not.
        Mr. Pearce. They are probably going to stay in their
    neighborhoods.
        Mr. Nickel. Correct.
        Mr. Pearce. So all I do is think in my simplistic way back
    to my first days in owning a small fishing and rental tool
    company in Hobbs, New Mexico, just working in that neighborhood
    oil fields, wanted to buy the best insurance possible, so we
    went out--and I didn't know anything about insurance, but
    Lloyd's of London sounded very big, so we bought that insurance
    from them.
        And we had our first claim. This was a claim, a moderate
    claim, $50,000 to $100,000. Lloyd's of London told us we are
    bankrupt, we are not going to pay. So we want to let people
    from over there that we can't have any responsibility, we can't
    touch them, they are going to come in here with their capital
    requirements and tell us they can't pay. Mr. McRaith tells me
    that is a good deal and it is theatrical for me to believe
    differently. Maybe it is.
        I yield back.
        Chairman Duffy. The gentleman's time has expired. The Chair
    now recognizes the gentleman from Nevada, Mr. Kihuen, for 5
    minutes.
        Mr. Kihuen. Thank you, Mr. Chairman.
        I just have a couple of very quick questions. Thank you all
    for your presentations this morning. Mr. McRaith, can you
    please provide some more detailed thoughts on how this covered
    agreement will impact consumer protections, particularly for
    constituents of mine in the State of Nevada?
        Mr. McRaith. Sure. First, as I mentioned earlier, the
    covered agreement will improve the affordability and
    availability of insurance products in the United States. Some
    of our flagship companies that operate in the U.S. and the E.U.
    would have to post billions of dollars potentially in
    compliance costs that can otherwise be used in the U.S. to
    invest in new products and keep their rates affordable.
        Second, the decrease in reinsurance costs will help those
    consumers, particularly in areas affected by natural
    catastrophes, so that their primary insurance products are more
    likely to be affordable.
        Third, the agreement preserves and enhances essential
    consumer protections so if there is a reinsurer from the E.U.
    who is not paying claims, that reinsurer immediately can be
    required to post additional collateral to protect the ceding
    insurers and consumers.
        And then finally, I would say it is--this is not a binary
    choice between industry and consumers. This agreement has the
    benefit of benefiting industry and those benefits will also
    benefit consumers. So in its totality, this is an agreement
    that serves all of the U.S. industry interests and U.S.
    consumer interests.
        Mr. Kihuen. Thank you. And just one more question. I know
    there have been some complaints that this could be a backdoor
    for the E.U. to impose their standards on U.S. insurers. We
    also need to recognize that we are living in an increasingly
    interconnected world where the barriers for U.S. companies to
    enter foreign markets are becoming smaller and smaller. Can you
    speak on how you think the U.S. can adequately achieve balance
    between lowering the barriers for insurers to operate
    internationally while at the same time making sure that one
    country can't single-handedly change regulatory standard
    globally?
        Mr. McRaith. First of all, what the agreement does is
    endorse, embrace, enshrine our U.S. system of supervision at
    the State level for the first time in history in an
    international agreement. The agreement does not call for the
    States to do anything other than what they are doing already.
        Second, the E.U., as a consolidated market, is actually
    larger than the U.S. market. So we need to preserve
    opportunities for our companies to operate there, to compete
    there.
        And then, third, what is even more important is that our
    companies need certainty about how the E.U. and the U.S. are
    going to work together so they can compete in those massive
    developing economies like China, India, Brazil, and Indonesia,
    they can use that capital they have accumulated and invest in
    organic growth in developing economies around the world.
        Mr. Kihuen. Thank you, Mr. Chairman.
        Chairman Duffy. The gentleman yields back. The Chair now
    recognizes the gentleman from Florida, Mr. Posey, for 5
    minutes.
        Mr. Posey. Thank you, Mr. Chairman. Mr. Chamness, outside
    the reinsurance collateral issues, I have heard concerns that
    the U.S., under this covered agreement, will be required to
    make significant changes to our State system of regulatory
    supervision, which as you know is based on legal entity
    supervision.
        Article 4H of the agreement requires the U.S. to create a
    group capital requirement which from my understanding differs
    from the current State regulation in two ways. One, it requires
    that the States adopt a group capital assessment, which we
    don't have today. It also requires a lead State regulator to
    have the authority to act, including by requiring additional
    capital, if it sees an issue as a result of the group capital
    assessment.
        How do you view the capital requirements in article 4H?
    Could the corrective preventive measures included in the
    agreement require, for instance, increases in capital, capital
    movement between affiliates, or other fungibility mandates that
    go against the United States-based system of insurance
    solvency?
        Mr. Chamness. Thank you for the question. I think you have
    summed up the elements of article H that concern us very well.
    The Europeans have a different way of regulating. We focus on
    legal entities and we focus on solvency for those legal
    entities. They focus on group capital and group supervision.
    And it is different.
        And to the extent that this agreement moves us further in
    the direction of European standards, where we would be forced
    to change the way we regulate here in the U.S. and to really
    take away the focus that we have in the U.S., which was one of
    our great benefits, is we focus on the policyholder. In Europe,
    they have much greater emphasis on creditors, on investors, and
    preserving the insurance company.
        In the U.S., we let insurance companies fail where they
    deserve to fail, and first we try to rehabilitate them. Then,
    they may fail. And we also have a guarantee fund system here,
    which is different than Europe. They don't have a similar
    structure to deal with insolvencies and to pay claims after
    insolvencies, claims that are actually paid for by the
    remaining companies in the market.
        So it is a much different system. And as we look at the
    authority to preempt State law contained in this agreement, the
    permanent committee moving forward that will further fine-tune
    the agreement and perhaps commit us to future other changes to
    our structure, we are very concerned that we will be
    implementing more European regulatory law into the U.S. system.
        Mr. Posey. Yes, I am afraid any time we talk about giving
    up sovereignty, a mini-U.N. where we carry the burden and
    everybody votes against us every opportunity they have. But a
    follow-up, last Congress, we passed legislation into law to
    ensure that the regulator of a savings and loan holding company
    cannot raid the assets of an insurance company subsidy in order
    to prop up a failing subsidy affiliated with the overall
    holding company.
        This walling off of insurance, if you will, is to me one of
    the strengths of the way that we regulate our system, and it is
    because it places the emphasis on the policyholders. In other
    words, we are protecting the policyholders, first, over failing
    institutions, and second, which you just mentioned is different
    than the way they do it in Europe. I have always considered
    this to be one of the benefits to the legal entity regulation
    in the United States, and I wonder if we move toward the group
    supervision provisions, if it will alter our system? I clearly
    believe it will. But my question to you is, do you think the
    priority will still be protecting the policyholders?
        Mr. Chamness. Again, I think if we adopt more European-
    style regulation, it won't. And I think your example of the law
    to basically wall off the insurance legal entity from the
    insured depository institution that may be part of an insurance
    group is a very apt comparison to the type of challenges we are
    concerned about under this agreement if more European
    regulation comes here.
        Mr. Posey. Mr. Chairman, I see my time is about out. I
    yield back.
        Chairman Duffy. The gentleman yields back. The Chair now
    recognizes the gentlelady from Ohio, Mrs. Beatty, for 5
    minutes.
        Mrs. Beatty. Thank you so much, Mr. Chairman, and Ranking
    Member Cleaver. And let me also thank all of the witnesses who
    are here today.
        My first question goes to you, Mr. Chamness. In your
    testimony, you stated that the U.S. Trade Representative and
    the Federal Insurance Office conducted the covered agreement
    negotiating meetings in a closed, confidential manner and
    failed in their commitment to meaningfully include State
    regulators in the negotiating process. I think you went on to
    say that State regulators were mere observers in the
    negotiating process.
        I then heard Mr. McRaith in his oral testimony, I think,
    mentioning that Ranking Member Cleaver outlined a whole litany
    of inclusive things when he laid out the steps that the FIO and
    the USTR. took to include State regulators and to be
    transparent in the process.
        With all of that said, I won't go through all of the things
    that have already been outlined, but I guess, after hearing
    that compelling argument, it appears that the USTR and the
    Federal Insurance folks went far beyond the call in engaging
    the stakeholders, my question to you is, what about that
    process do you find lacked transparency or didn't adequately
    involve the State regulators?
        Mr. Chamness. Thank you for the question. We have two
    participants here at the table, so perhaps my characterization
    of the way State regulators were included in the negotiations
    could be amplified by either participant.
        But I think we just heard Leigh Ann say that the process
    could have been improved. And it was a situation where having
    an agreement that has the authority to preempt State insurance
    law, automatic authority with no oversight or up-or-down vote
    either by legislators at the State or Federal level, there was
    very much a meaningful role there for State insurance
    regulators to play.
        Whether they did effectively in these negotiations, and
    whether Commissioner Nickel can talk about his participation in
    any greater detail than he did earlier, I guess I would ask him
    or ask former Director McRaith to describe the participation
    further.
        Mrs. Beatty. I will give you a few seconds, too. I just
    thought--I understand what you are saying, it could have been
    better. But I guess to be helpful to me, and you are an expert
    here, what would be the, ``could be better?''
        Mr. Chamness. I think that having State regulators
    negotiate the agreement in conference with FIO, working side-
    by-side in a transparent way, and frankly including more
    elected leaders like yourselves in the process, at least to
    review and approve the agreement that has been reached before
    it goes into effect and preempts State insurance law, bypassing
    the legislative process.
        Mrs. Beatty. And when you say ``yourselves,'' I'm assuming
    that means Congress, as I heard in this testimony that we
    already have in place where you can consult with Congress
    either in person or by telephone, before negotiations begin,
    before and after each session, and before the negotiations were
    finalized, is that not enough? Is there more that we should be
    doing? Because it said in person or in telephone with us.
        Mr. Chamness. I think the process was the process and the
    agreement is the agreement. And as we talk about and have
    presented our comments on the agreement, it was consultation
    with the U.S. Treasury and the USTR informing Congress about
    their objectives here, and I read from their objectives. One
    was to obtain treatment of the U.S. insurance regulatory system
    by the E.U. as ``equivalent'' to allow for a level playing
    field for U.S. insurers and reinsurers operating in the E.U.
        Regardless of the process, though I do care about the
    process and I think the question is an excellent one, perhaps
    for future use as we consider how to do a different covered
    agreement, but on the terms of the agreement that have been
    released now and that we are talking about today, we don't
    believe it met the objective that the U.S. itself, the Treasury
    and the USTR, set forth in terms of our U.S. objective in the
    agreement.
        Mrs. Beatty. Okay.
        Mr. Nickel. Congresswoman, may I just chime in for 2
    seconds? I appreciate it. Thank you. I would just add, in terms
    of revising the process, insurance matters are very technical
    in nature. They touch each company in different ways. Having an
    avenue for participation by those key stakeholders, as well as
    our consumer representatives who would have input there, would
    have been very helpful along the way.
        Having the ability for me to consult with my own staff; for
    the insurance regulators themselves to bring in the rest of
    their group to get consensus might have driven outcomes, which
    may not have put us at this table today in opposition. Thank
    you.
        Mrs. Beatty. Thank you. I yield back.
        Chairman Duffy. The gentlelady yields back. The Chair now
    recognizes the former Chair of this subcommittee, who is the
    current Chair of the Financial Institutions Subcommittee, the
    gentleman from Missouri, Mr. Luetkemeyer, for 5 minutes.
        Mr. Luetkemeyer. Thank you, Mr. Chairman, and you are doing
    a great job today. Thank you very much for the opportunity to
    be here.
        Also, thank you for the hearing. I think it is vitally
    important that we have this hearing today. I think part of our
    duty as I have said many times is not just legislative, it is
    oversight, to provide oversight and direction. In this
    situation, we are providing oversight over the FIO Director and
    his activities. And I think it is important that we help him,
    that we guide him, and provide him the leverage that we need to
    do to help him do his job. And I hope that he comments on that.
    I think that is what our objective was for the last 2 years: to
    be able to give him the tools and leverage to get his job done.
        But before I do that, I will make a couple of comments. I
    think today we have an example of the problem we have in the
    insurance industry. We have two groups representing two groups
    of insurance companies that disagree. Imagine that.
        And then we have a regulator who had 5 years to come up
    with a solution for this problem and did nothing. And now, we
    are nipping at the heels of the agreement that we have, and we
    have dumped this whole problem in the Director's lap. And he
    has to deal with a dysfunctional group of industry folks and a
    regulator who doesn't want to get along and do anything, and he
    has to come up with an agreement to make this all work. I take
    my hat off to you, Mr. McRaith. You have done a great job. Is
    it a perfect agreement? Probably not. Could it be tweaked?
    Probably.
        But I think if the industry is serious about getting
    something done, I will tell you from my perspective they better
    get on the same page, because I am up to here with this
    dysfunctional infighting with the industry and the regulators
    and nobody getting anything done. You are going to go backwards
    as an industry if you don't get together. That is my comment.
        Now, Mr. McRaith, I have had a couple of companies in my
    district and my State who have been directly impacted by the
    request from Ireland, Belgium, and Germany to have a physical
    presence over there. So this is a big deal to me. I think that
    you have done a good job in negotiating, trying to thread the
    needle.
        One of the comments that has been made that concerns me is
    regarding ``equivalency.'' We have heard that term thrown
    around a couple of times, both from Mr. Nickel and Mr.
    Chamness. Would you please address what you believe is the
    solution to this or the addressing of this issue and the like?
        Mr. McRaith. Yes. Thank you, Mr. Chairman. First of all, we
    sent that letter in November 2015 at the commencement of the
    negotiations using the word ``equivalence.'' As we did that, we
    learned what I alluded to earlier, which is that every time you
    talk to a lawyer or a so-called Solvency II expert, you get a
    different explanation about what ``equivalence'' actually
    means. So we were focused on the outcome.
        We changed our focus. Let's have in the agreement clarity
    about how U.S. companies will be treated when they operate in
    the E.U. We don't want equivalence. And that is because an
    equivalent country like Switzerland has a global group capital
    requirement, global group reporting and governance, exactly
    what we don't want.
        So paragraph 4H, as discussed by Mr. Posey, and I regret
    that he is not here to hear this, because he misunderstood it,
    what that paragraph says is the United States will supervise
    its companies however it deems appropriate. The States have
    said for 2 years now we are going to develop a group capital
    calculation, and what that paragraph 4H says is, as the States
    do that over the next 5 years, U.S. companies operating in the
    E.U. will not have to be subject to Solvency II compliance
    burdens, including potentially billions of dollars in
    additional capital.
        So the notion of equivalence we surpassed because our
    companies are being treated entirely fairly with--and being
    able to supervise as the States deem appropriate without global
    group capital requirements, global group governance and
    reporting.
        Mr. Luetkemeyer. Thank you. One more question for you,
    quickly. One of the things that we did in a hearing last fall
    was we had a hearing similar to this and discussing this issue,
    and we made the comment during that, that if the Europeans
    wanted to penalize and punish our companies, there could be
    retribution against them in this country if they are going to
    play that game. Does this agreement affect us in any way so
    that we can't--it ties our hands so that we can't be able to
    have retribution or are penalized in any way these companies
    that try to come here and push their stuff on us?
        Mr. McRaith. Mr. Chairman, first of all, I want to thank
    you for the letter that you provided November 29th, I think of
    2016, and frankly, although our exchanges were not always
    pleasant, you were extremely forceful about the importance of
    representing U.S. interests.
        What this agreement does is allow the U.S. companies to be
    supervised in the U.S. as the U.S. determines appropriate.
    There are no penalties for that. If, however, U.S. companies in
    the E.U. are not supervised according to this agreement, then
    the reinsurance reforms that will benefit E.U. reinsurers can
    be retracted. And then vice versa. If the U.S. doesn't perform
    on the reinsurance provisions, which, by the way, the States
    have adopted as an accreditation standard, then our companies
    in the E.U. can be treated adversely.
        Chairman Duffy. The gentleman's time has expired.
        Mr. Luetkemeyer. Thank you.
        Chairman Duffy. The Chair now recognizes the gentleman from
    Massachusetts, Mr. Lynch, for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman. And I want to thank the
    witnesses for their help.
        I am very suspect of these international negotiation
    agreements that exclude Congress and exclude the State
    regulators in this case to a certain degree. I have a healthy
    distrust of what the U.S. Trade Representative has been doing
    in the past.
        I was an iron worker for about 20 years, and I used to work
    at the General Motors plant in Framingham, Massachusetts. Then
    they negotiated NAFTA, and a bunch of plants, including the one
    I had worked at, closed down and moved over the border.
        So I have real distrust about allowing industry to
    negotiate--the people with the direct financial interest to
    negotiate these agreements outside of the purview of Congress
    and outside the representation of the people who elected us. I
    have a real mistrust about that.
        We negotiated a trade agreement with South Korea. It
    included automobiles. I go to South Korea. I spent 3 or 4 days
    there. Major, major country. Big superhighways. I saw two U.S.
    cars, two. One was the one I was riding in from the embassy.
    The other one was my security detail right behind me. That was
    it.
        I went to Japan. We have a big trade agreement with Japan.
    I couldn't find an American car. If you go outside this
    building, you can't spit without hitting a Japanese or a South
    Korean car.
        So when we sit down in negotiations and want equivalency,
    that was the goal of our agreement, our insurance agreement,
    was to get equivalency for our system. And then I pick up the
    agreement and the word ``equivalency'' does not appear. It does
    not appear. We negotiated this agreement. It does not mention
    equivalency that U.S. standards will be recognized and
    acknowledged and given full force and effect in the E.U.
        So as far as I am concerned, based on reading the
    agreement, and I know there is a lot of goodwill out there and
    let's all play nice, it doesn't give us what we were looking
    for. It doesn't give us equivalency in the E.U. It gives us the
    hope that maybe in the future we could get that, but we don't
    get it.
        And what's more, it allows for the States' laws to be
    preempted. And that--I think one of the great things about our
    State-driven insurance regime, our system, is that it is very
    close to the people. And it requires support at the State
    level. And that is where I think the public's influence is the
    strongest and the big industry people's influence is the
    weakest. It is a good match.
        And I just have great, great trepidation about this whole--
    I am a new member of this committee. I have only been here for
    2 weeks. But I just have great misgivings about how we did
    this. I would like Congress to be part of this process. I
    really would. I hate this. You go negotiate the agreement, and
    when we find out at the end what it has in it, and you surprise
    us, and then we have an up-or-down vote. Or in this case, it is
    just a 90-day layover period; we don't even get a vote.
    Congress negotiates war and peace, life and death, every major
    issue in our society. But when it comes to trade agreements or
    international insurance agreements, we are excluded from the
    process.
        So I would like a process that allows the people--I have
    727,514 people that I represent in Boston, Quincy, Brockton,
    and a bunch of towns in Massachusetts. I would like my people--
    my people through me--to have some input into this process. And
    when I feel confident that their interests have been
    acknowledged and been included, then I will vote for this, then
    I will support it. I don't like the process. There is a lack of
    transparency here. And we have to change the system, the way
    this all works.
        I appreciate all the really smart people in the insurance
    industry, but having the people with the most direct financial
    interest, their own financial interest at the table negotiating
    this while the people who are going to be affected by it are
    outside the process is not right. It is just not right. And
    this system was created a long time before I got here, but I
    think we ought to have a bipartisan agreement that the people
    we represent should be part of this process at some point.
        So with that, Mr. Chairman, I yield back the balance of my
    time.
        Chairman Duffy. The gentleman yields back. The Chair now
    recognizes the Vice Chair of the Financial Institutions
    Subcommittee, the gentleman from Pennsylvania, Mr. Rothfus, for
    5 minutes.
        Mr. Rothfus. Thanks, Mr. Chairman. I want to follow up on
    Mr. Lynch here, because this is one of the issues I was
    struggling with last night. I read my Constitution. Article I,
    Section 8 provides that Congress shall have the power to
    regulate commerce with foreign nations and among the several
    States and with Indian tribes. Does this covered agreement
    regulate commerce with foreign nations, Mr. Nickel?
        Mr. Nickel. I believe so.
        Mr. Rothfus. Mr. Chamness?
        Mr. Chamness. Yes.
        Mr. Rothfus. Ms. Pusey?
        Ms. Pusey. Yes.
        Mr. Rothfus. Mr. McRaith?
        Mr. McRaith. This agreement does not regulate anything. It
    is an agreement between countries about how they will
    separately regulate and deal with the industries operating
    within their territory.
        Mr. Rothfus. You don't think this regulates commerce? Is it
    a trade--
        Mr. McRaith. This is a regulatory agreement that
    articulates how the U.S. will regulate U.S. industry and the
    E.U. will regulate E.U. industry.
        Mr. Rothfus. Is it a trade agreement?
        Mr. McRaith. It is not a trade agreement.
        Mr. Rothfus. I thought I saw--some of you were mentioning
    this being a trade agreement.
        Mr. McRaith. I have heard that. I have never said that. In
    fact, I have said the opposite. It is a covered agreement. If
    it were a trade agreement, it would be called a trade
    agreement. A covered agreement refers to prudential insurance
    and reinsurance matters.
        Mr. Rothfus. Dodd-Frank requires consultation with Congress
    on covered agreements. Does consultation equate the power to
    regulate? Again, this is a threshold issue that I was kind of
    struggling with last night as I look at this covered agreement,
    trying to figure out, where does Congress gets its say?
        Because I think this does regulate commerce with foreign
    nations, which begs the question, where is Congress' power to
    regulate? Us having a 90-day consultation period, us not having
    an opportunity to have an up-or-down vote on this, compare this
    with what we did with trade promotion authority. We have Dodd-
    Frank. We said the Secretary of the Treasury and the United
    States Trade Representative are authorized jointly to negotiate
    and enter covered agreements on behalf of the United States.
        Looking at TPA, and it says that the President and the USTR
    can enter an agreement. But then it is up to Congress to ratify
    that. And that is where we get to exercise our constitutional
    power to regulate commerce.
        We have already seen parts of Dodd-Frank, or at least one
    part of Dodd-Frank, that has been challenged constitutionally,
    and it is currently held up in court. That is with the
    structure of the CFPB. And I guess I am just struggling with
    that.
        Where do the people that we represent, the total notion of
    self-rule and self-government--we have been talking about this
    for years on our side of the aisle, the opportunity for us to
    be the voice of the people.
        The Congress is where government of the people, by the
    people, for the people happens. And here we have a covered
    agreement that will regulate commerce among the nations, and we
    are not getting a say. We just get to consult.
        Mr. McRaith, one of the many things that stands out to me
    about this covered agreement is the date it was sealed, 1 week
    before the inauguration of a new President. As you know,
    President Trump made negotiating better deals a hallmark of his
    campaign. He has argued that the U.S. has not made deals with
    other countries that provide the most benefit possible for
    American workers and firms.
        Since the covered agreement was reached before the new
    President could come into office and leave his mark on these
    negotiations, I am curious about the extent to which
    negotiators consulted with the transition team before the
    election. Were there such any consultations with the transition
    team?
        Mr. McRaith. These agreements were conducted confidentially
    with the input of the entire delegation after extensive
    consultations--
        Mr. Rothfus. Okay, so the question was, was there
    consultation with the transition team, yes or no?
        Mr. McRaith. The transition team was not part of our
    confidential U.S. delegation.
        Mr. Rothfus. Okay. Why was the covered agreement reached on
    January 13th? Any significance to that date?
        Mr. McRaith. First of all, our industry, U.S. reinsurers
    were losing opportunities every day. Our primary insurers were
    confronting potentially billions of dollars in compliance costs
    on an urgent basis.
        Mr. Rothfus. Was January 20th at all a figure? Was January
    20th a consideration?
        Mr. McRaith. No. So we provided to you on January 13th--
    because it needed to be provided on a day that both Chambers of
    Congress were in session, so I suppose theoretically we could
    have provided it the morning of the 20th, but I think our
    perspective was to get it to you as soon as we finished it,
    which was that day.
        Mr. Rothfus. Last question. I just want to go back to the
    earlier issue. Have any of you ever considered the
    constitutionality, or have your groups considered the
    constitutionality, of this covered agreement? Yes or no?
        Mr. Chamness. No.
        Mr. Rothfus. Has that been studied?
        Mr. Chamness. Not by us.
        Mr. Rothfus. Mr. McRaith?
        Mr. McRaith. I am not a constitutional lawyer, Congressman,
    but the question is, can we reach an agreement that serves the
    best interests of the United States? And that is what we did.
        Mr. Rothfus. I yield back. Thank you.
        Chairman Duffy. The gentleman's time has expired. The Chair
    now recognizes the gentleman from California, Mr. Sherman, for
    5 minutes.
        Mr. Sherman. In Washington, there are lies, there are fibs,
    and there is misuse of the word ``consultation.'' All too
    often, consultation means you go to a few leaders in Congress,
    you say here is what we are doing, but we don't care what you
    think, we will pretend to care what you think, we won't tell
    anybody else in Congress what you are doing, and we will call
    that a ``consultation.'' And that somehow makes us a democracy,
    though I haven't figured out how.
        Speaking of consultation, to what degree were the 50 U.S.
    insurance regulators at the State level involved in this
    process, Mr. McRaith?
        Mr. McRaith. Sir, Congressman, as I mentioned before your
    arrival, in a completely unprecedented manner, we established a
    mechanism to include the State regulators as part of the
    negotiating delegation. So we asked--
        Mr. Sherman. Is this agreement--
        Mr. McRaith. --them to form a small team, which they did--
        Mr. Sherman. --binding on--
        Mr. McRaith. They were part of every step of the
    negotiations.
        Mr. Sherman. Thank you. I hear you. I am going on to
    another question. Is this agreement binding on them? And on
    the--do they have to comply with it in how they regulate
    insurance companies around this country?
        Mr. McRaith. In fact, the provisions regarding group
    supervision are already what the States do or what they have
    committed to do and it gives them 5 years to do it. In terms of
    reinsurance--
        Mr. Sherman. They have committed to do it, but they might
    change their mind and decide they don't want to do it. But this
    binds them to it.
        Mr. McRaith. No, the agreement provides them latitude to
    supervise as they have done historically and have planned to do
    publicly. With respect to reinsurance, there is the potential
    for preemption, but they have adopted that reform as an
    accreditation standard, meaning every State, including
    California and Washington, has to adopt it as a matter of law
    or regulation within the next 2 or 3 years.
        Mr. Sherman. And what if they choose not to? What if the
    legislature of California says, we hate everything you did?
    What happens?
        Mr. McRaith. Then that State, California, would lose its
    accreditation status with the NAIC, which would punish
    California industry and consumers, but that is an NAIC issue.
        Mr. Nickel. Congressman, may I--I'm sorry.
        Mr. Sherman. Yes, go ahead.
        Mr. Nickel. May I just jump in a little bit? A couple of
    things. One, yes, we do have an accreditation process. And we
    will be finished with that accreditation process, where we do
    have a reinsurance law on the books. But our reinsurance law
    does not go to zero, unless there is an extraordinarily well-
    capitalized company.
        We will be preempted and we will be asked to change our law
    to the law that will already be in effect in most States to
    recognize the fact that we either need to change it or to be
    preempted.
        Mr. Sherman. And as Mr. McRaith pointed out, if you choose
    not to do that, you and your consumers and your companies will
    be punished through an act of the U.S. Federal Government? Do I
    have that right?
        Mr. McRaith. That would be an act of the States.
        Mr. Nickel. There would be preemption, yes.
        Mr. Sherman. Excuse me. Go ahead.
        Mr. Nickel. That would be the preemption piece, that--if a
    State decides not to comply.
        Mr. Sherman. If a State chooses not to comply, what--Mr.
    McRaith was saying that results in the consumers and/or
    companies in that State suffering. How would they suffer?
        Mr. Nickel. In my opinion, we all suffer by having the--if
    we focus on the reinsurance collateral piece a bit, for just
    one more second, that we lose the reinsurance collateral
    provisions of our model. There are 216 reinsurers in the
    European Union. Only six of them have gone through our process
    to reach financial security review, financial stability review.
    The other ones haven't. They are at 100 percent collateral.
        When this goes into effect, the other two hundred and
    whatever go--216 go from 100 to zero. But right now, they are
    operating fully comfortable at 100 percent collateral. So just
    so we are clear, this isn't just a couple of companies wanting
    to do business in the United States. We will have a large
    number of European reinsurers now operating in the U.S. that
    didn't either want to follow or chose not to follow our
    financial review.
        Mr. Sherman. Ms. Pusey, do you regard this as a threat to
    our State-based system of regulation? I know that you have
    generally taken the view that this is a win-win. So why is it a
    win for the concept of State regulation?
        Ms. Pusey. Because it really enshrines it. It preserves it.
    So we took a contrary view, because we actually see that this
    does not threaten the State-based system. It actually preserves
    it. I don't know whether we wore the Europeans out over time or
    what has happened. They certainly have had an interest in
    exporting Solvency II to other jurisdictions. That is very
    true. And it is also very true that the U.S., from industry
    perspective and regulator perspective and Federal Government
    perspective, has said no to that and have resisted it.
        So for whatever combination of reasons, late this fall,
    there was a wearing down, if you will, in the deal--from a
    product--if you look at the results, our view is that this is
    respecting the U.S. system. It is going to let us regulate
    ourselves under our group supervisory rules and our group
    capital rules.
        Mr. Sherman. I yield back.
        Chairman Duffy. The gentleman yields back. The Chair now
    recognizes the gentleman from California, Mr. Royce, for 5
    minutes.
        Mr. Royce. Thank you, Mr. Chairman. I know in my
    committees, there is a practical limitation. I usually only
    have three or four witnesses. But in this particular case, if
    we are going to have a full conversation about this agreement,
    we do need to think about all the negotiating parties and all
    the parties affected that are not at the table, the USTR here,
    the life insurers, the reinsurers, the major brokers.
        And the practical limitations don't allow us really to make
    the hearing that broad. But I would make that point. And if I
    could summarize where I think we are today, in terms of these
    tracks, on the one hand, the States are going down a path where
    reinsurance collateral requirements are already being lowered,
    albeit at a snail's pace, and in return the E.U. has not agreed
    to any relief for U.S. insurers or reinsurers. It is possible
    we get nothing then for something. So that is one path.
        And meanwhile, Congress gives Treasury and the USTR the
    power to negotiate a covered agreement, a power, by the way,
    which was debated in this very committee and unanimously
    supported by both sides of the aisle on a bipartisan basis.
    Treasury and the USTR then negotiated an agreement that
    effectively agrees to what the States have already agreed to do
    and lower the reinsurance collateral.
        In return, we open up the entire E.U. reinsurance market to
    U.S. reinsurers without discrimination and we save direct
    writers billions of dollars in European compliance costs, which
    as we have heard today can be passed along to consumers.
        So I would just ask Ms. Pusey, am I missing something here
    in the way this appears to me?
        Ms. Pusey. No, sir, that is our read, as well.
        Mr. Royce. And I would ask Mr. McRaith, without this
    agreement in place, we have seen regulators in the U.K. and in
    the Netherlands, Austria, Germany, and Poland place U.S.
    companies at a severe disadvantage. If we scrap this agreement,
    as some are suggesting today, where does that leave us? And
    what are State regulators authorized to do to adequately
    address these issues? Is the E.U. looking to sign MOUs with 50
    States?
        Mr. McRaith. U.S. reinsurers were being denied
    opportunities 9, 10 months ago in the E.U. We resolved that
    issue through the agreement and opened the entire European
    market to U.S. reinsurers. U.S. primary companies were being
    asked to comply with extraordinary regulatory requirements in
    the E.U. that could be increasingly burdensome, but for this
    agreement.
        I can't speak to what the Europeans would do in the event
    this agreement were to fail in the United States. But I know
    that our industry and American insurance jobs have a lot--our
    industry has a lot to lose and American insurance jobs are at
    stake.
        Mr. Royce. Well, that was my read of the situation, as
    well, Mr. McRaith. And I will yield back, Mr. Chairman. Thank
    you very much.
        Chairman Duffy. Thank you. The gentleman yields back. The
    Chair now recognizes the gentleman from Washington, whom I
    would just note has a strong interest in protecting our State-
    based model and has introduced legislation on a similar issue.
    The gentleman from Washington, Mr. Heck, is recognized for 5
    minutes.
        Mr. Heck. Thank you, Mr. Chairman. Thanks very much for the
    opportunity even to participate today.
        Mr. McRaith, you and I kind of went back and forth on this
    quite a bit last year. And I took the position of a protector
    of State-based regulation. You assured me as a former State
    regulator that that would be the case verbally, and then you
    wrote--or your office wrote me a letter that said the law did
    not require that Treasury and the USTR include State insurance
    regulators in the negotiations.
        Nevertheless, in recognition of the role of States in U.S.
    insurance oversight, Treasury and the USTR are including and
    engaging with State regulators in a direct and meaningful
    manner throughout the ongoing negotiations.
        And I take it from your earlier somewhat impassioned
    remarks that you believe that you complied with both the letter
    and the spirit of that assurance to me. Yes or no?
        Mr. McRaith. The agreement is a better agreement because
    State regulators were at the table--
        Mr. Heck. Did you comply with the spirit--
        Mr. McRaith. --in the room. They absolutely contributed.
        Mr. Heck. Did you comply with the letter and spirit of what
    you wrote?
        Mr. McRaith. Absolutely.
        Mr. Heck. Thank you, sir. Mr. Nickel, you said in your
    opening statement that State regulators were assured that we
    would have direct and meaningful participation, but the small
    group of us included were merely observers: only one allowed in
    the room subject to strict confidentiality with no ability to
    consult our staff and fellow regulators. Is it fair to
    characterize your view that the spirit and letter of what was
    assured to me and which I just quoted was not adhered to?
        Mr. Nickel. I think that is a fair characterization,
    Congressman.
        Mr. Heck. And, Mr. Nickel, is it accurate that you are the
    elected or chosen voice on behalf of the State regulators
    throughout our country, and you are speaking on their behalf?
        Mr. Nickel. I am speaking on their behalf today.
        Mr. Heck. So in addition to that irreconcilable points of
    view, I would like to quite literally, Mr. Chairman, seek
    permission to enter into the record the voice of yet another
    entity, that of the Intergovernmental Policy Advisory Committee
    on Trade (IGPAC), a letter from the Chair of IGPAC. May I, sir?
        Chairman Duffy. Without objection, it is so ordered.
        Mr. Heck. So IGPAC, as you may all know, is the trade
    advisory committee appointed by the USTR, and it provides trade
    policy advice on matters that have a significant relationship
    to the affairs of State and local governments. I think this is
    significant, because it is a voice actually beyond insurance
    regulators, per se, but on behalf, as it were, the corporate
    interest of State Government.
        And I want to, if I may, quote briefly from the letter that
    I am in receipt of from the Chair, Mr. Robert Hamilton, ``After
    it was reported that the U.S. and the E.U. were negotiating a
    covered agreement, on multiple occasions, the IGPAC requested
    that the USTR and the Treasury Department closely consult with
    the relevant stakeholders and provide regular briefings to the
    IGPAC throughout the covered agreement negotiations in light of
    the potential for this agreement to impact State sovereignty,
    discriminatory actions by E.U. member countries, and potential
    national treatment violations by the E.U. Unfortunately, the
    Treasury Department and the USTR failed to honor this promise
    and provided only one superficial briefing in December 2015
    before the first round of negotiations and failed to provide
    any briefings during the ongoing negotiations.''
        Mr. Chairman, I would submit not just this letter, but fact
    that the preponderance of evidence is, in fact, on the side of
    those who believe that the process did not meaningfully involve
    the State regulators and those who had that interest at stake.
    But look, I don't seek to protect State-based regulation for
    its own sake in and of itself. Good process, bad process,
    evidence suggests bad process. Good product, bad product,
    arguable. I do so because, in fact, what we have observed is an
    undercutting of the State-based regulation.
        And that to me is harmful in two ways. Number one, it is
    violative in spirit, if not technically, of the underlying
    policy framework of insurance regulation in this country,
    namely the McCarran-Ferguson Act. And let me remind everybody
    that the basic covenant of McCarran-Ferguson is that if you
    will to submit to State-based regulation, you are exempt from
    antitrust.
        I strongly suspect--I am not even going to ask, Ms. Pusey--
    that you do not want to have our antitrust exemption pulled
    from you. But if McCarran-Ferguson is no longer the law of this
    land, directly or indirectly, that is exactly the debate we
    ought to have.
        And secondly, I protect State-based regulation because it
    works. Because we provide good safety and soundness regulation,
    prudential regulation, and consumer regulation. And if you are
    asking who is better to do this, the Feds or the States, I just
    want to remind you that AIG was regulated by the Feds. How did
    that work out for us?
        State-based regulation works. And we should not go down the
    path of that which undercuts it. With that, I yield back the
    balance of my time, and I thank you, Mr. Chairman.
        Chairman Duffy. The gentleman yields back. The Chair now
    recognizes the gentleman from New Jersey, Mr. MacArthur, for 5
    minutes.
        Mr. MacArthur. Thank you. Before I get to my questions, I
    would actually like to ask Ms. Pusey if you would answer that
    question. Would you like to see your members be subject to
    antitrust regulation and see McCarran-Ferguson overturned?
        Ms. Pusey. Thank you for that opportunity. We are very
    strong supporters of the State-based regulatory system. We have
    no interest in supporting and have arduously opposed any
    efforts to undermine State-based regulation. And it is in that
    spirit that we can support this agreement, because we think it
    actually recognizes it and props it up and gives it global
    recognition.
        Mr. MacArthur. But you would not want to see your position
    relative to antitrust changed?
        Ms. Pusey. No, sir.
        Mr. MacArthur. Your members wouldn't want that?
        Ms. Pusey. Congress delegated that authority to the States
    from McCarran. Yes, sir, we appreciate that recognition on the
    antitrust.
        Mr. MacArthur. Mr. Nickel, could you--and you could go on
    for a while, but I need you to be brief--
        Mr. Nickel. I will try.
        Mr. MacArthur. --because I don't want to have to cut you
    off, and I have a few other questions. Could you very briefly
    remind us of the benefits of State-based regulation to
    consumers?
        Mr. Nickel. Sure. We are the boots on the ground
    representing consumers in front of insurance companies. When
    there are issues, we work in their States. We know them by
    name. They call us. We take care of consumers. And then we
    ultimately take care of and monitor the financial solvency of
    the companies domiciled in our State.
        Mr. MacArthur. When an insurer fails, is it fair to say
    that the home State is generally the one that is impacted the
    most?
        Mr. Nickel. Generally speaking, yes. But sometimes
    companies have a broad footprint throughout many States.
        Mr. MacArthur. I understand. But generally, it is local
    people, another reason I think for State-based regulation. I
    want to explore this idea of preemption. Mr. McRaith, I thought
    your answer before was really very interesting. And I am
    paraphrasing, so correct me if I didn't get this right, but you
    said that this doesn't regulate industry participants; it
    controls how the regulators oversee those participants or
    impacts. Is that basically what you said?
        Mr. McRaith. It is an agreement of mutual respect, where
    the E.U. says, ``U.S., you do it how you want to do it.'' And
    we say to the E.U., ``You can do it how you want to do it.''
        Mr. MacArthur. But what happens if an insurer, an
    individual, not a group, but an individual writer of insurance
    in a State has a different opinion of what it needs to hold in
    capital and the regulator in that State agrees with the capital
    requirement? What happens if that is different from what the
    FIO believes should be held or what the E.U. regulators believe
    should be held? Whose opinion carries the day on how much
    capital needs to be held?
        Mr. McRaith. The only party authority relative--that can
    determine whether a U.S. insurance company has sufficient
    capital is a State regulator. And this agreement endorses
    exactly that.
        Mr. MacArthur. Is there any circumstance where the covered
    agreement could preempt a State's determination of capital
    requirements?
        Mr. McRaith. No. The group supervision practices, including
    the--
        Mr. MacArthur. So what is the 5 years that a State
    regulator has to comply--what does that apply to?
        Mr. McRaith. So for over 2 years, the States have been
    developing a group capital calculation. The agreement gives
    them an additional 5 years to do that for the insurers that are
    operating--only the insurers operating both in the U.S. and the
    E.U. So not every company, not every State, not every company
    in any State.
        Mr. MacArthur. But those are the very ones I am asking you
    about. So if there is a difference of opinion with one of those
    groups, whose determination prevails?
        Mr. McRaith. It is the State regulator who will decide how
    companies are regulated. If hypothetically, to the Chair's
    question earlier, if the E.U. has a different view of that, and
    the adequacy of that, that is discussed. Supervisors, by the
    way--as you well know--deal with these issues every day. These
    are nuts and bolts regulatory questions dealt with--
        Mr. MacArthur. I have to cut you off, because I have only
    30 seconds. And I just want to make a point. Where you stand on
    this issue I suspect depends on what your business interests
    are. It is sort of, ``whose ox is being gored.''
        So I understand why the insurance commissioners see it as
    an erosion of their control. I understand why the mutual
    companies--and I was once a member of NAMIC and was once a
    member of AIA--so I understand both--and AIA's members, unless
    it is changed, are companies like Munich Re, Swiss Re, Allianz.
    These are global insurers. And so it is no surprise to me that
    your members welcomed this sort of a change in the oversight,
    because your members are very different than NAMIC's members.
    Is that not true?
        Ms. Pusey. Hartford, Travelers.
        Mr. MacArthur. I know that there are those. But two-thirds
    of your board members are global insurers.
        Ms. Pusey. No, with all due respect--
        Mr. MacArthur. I know, because I checked. I checked this
    morning. So it is not meant to be a criticism. It is just the
    reality that your perspective is very open to this shifting to
    a globalization of insurance control. And I don't think that
    comports at all well with McCarran-Ferguson and the State-based
    system that has served us so well.
        My time has expired. I yield back.
        Chairman Duffy. The gentleman yields back. The Chair now
    recognizes the gentleman from Illinois, the vice chairman of
    the Capital Markets Subcommittee, Mr. Hultgren, for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman. And thank you all so
    much for being here today. I appreciate your work.
        Director McRaith, it's good to see you. We worked together
    in Illinois and also out here, as well. And I appreciate all of
    you being here today.
        I am new to the Housing and Insurance Subcommittee. I am
    grateful to be working with Chairman Duffy and everybody else.
    I think this is so important. And especially for Illinois. We
    have a lot of challenges in Illinois. One of the things we
    actually do well is insurance. And I have some wonderful
    entities there and I am grateful for them, but I am also
    grateful for the work that they provide to my constituents. So
    these are important issues that we are discussing.
        Illinois, as I said, has a number of insurance companies
    that are vital to ensuring customers. Consumers and businesses
    are able to manage their risk in all of their endeavors.
    Today's topic regarding the recently negotiated covered
    agreement between the U.S. and the E.U. is an important one,
    and I am glad Chairman Duffy worked expeditiously to convene
    this hearing in the 90-day review period provided to Congress.
        Mr. McRaith, I wonder if I could address my first question
    to you: Does the covered agreement require States to change
    collateral rules? And if so, this is only perspective, correct?
    Is that true? And would existing reinsurance contracts be
    affected?
        Mr. McRaith. The agreement would potentially require States
    to do what they have already committed to doing with respect to
    reinsurance collateral reform. Period. And I'm sorry. Your
    second question?
        Mr. Hultgren. Would existing reinsurance contracts be
    affected?
        Mr. McRaith. Oh, I'm sorry, yes.
        Mr. Hultgren. But let me finish. The text of the covered
    agreement says amended reinsurance contracts could be impacted
    by the agreement. Can you clarify this definition and explain
    what effect an amendment to a reinsurance contract would have
    on reinsurers' obligation to post collateral?
        Mr. McRaith. Yes, exactly. The agreement is clear that it
    only applies prospectively. Questions come up about what does
    the word ``amendment'' mean? First of all, an amendment to a
    contract requires two parties to agree, so if the ceding
    insurer doesn't agree, there is not an amendment to the
    contract.
        However, if there were an amendment, in this context, that
    would have to be a material change to the underlying
    reinsurance contract. It could not be just some clerical or
    administrative change. It would have to be a meaningful
    material change to the underlying contract.
        Mr. Hultgren. Okay. Staying with you, Mr. McRaith, I wonder
    if you could walk me through the process of how this covered
    agreement was negotiated. As someone who served as a former
    insurance commissioner of Illinois, your perspective certainly
    is important to me and valuable to me. What role did the State
    of Illinois have in negotiating the covered agreement? And if
    they did not have a seat at the table, who was speaking on
    their behalf, and what mechanism for input did they have?
        Mr. McRaith. We began the negotiations actually in early
    2016 after announcing the start in late 2015. We asked the
    States to identify the membership of a small task force that
    would participate directly in the negotiation. As a former
    State regulator, and as the Director of the Federal Insurance
    Office, I have said repeatedly, written repeatedly, and
    strongly believe that McCarran-Ferguson serves our consumers
    and our industry, our country very well. This agreement is
    intended to further support that.
        So we did get the perspective of Illinois, but the States
    opted--they chose who the membership of their task force would
    be. Illinois was then represented by Commissioner Ted Nickel
    and his colleagues in the effort.
        Mr. Hultgren. Commissioner Nickel, going to you, what role
    do you feel like you and other State insurance regulators had
    in the covered agreement process? Since the covered agreement
    process is new, can you tell us how it compared with other
    international discussions where State insurance regulators are
    involved?
        Mr. Nickel. Sure. I will try to be brief. Thank you for the
    question. I have just met your new Director, Director Hammer.
    She is great. I think you will be well-served. The statement
    was made that we selected a group to represent the NAIC. We
    negotiated a group to be--that not everybody that we wanted to
    have at the table with us was allowed. We did negotiate a
    group. It was a small group.
        There were seven of us at the table. We would have loved to
    share updates with interested parties and--there were seven of
    us. There are 13,000 insurance regulators working every day in
    the United States that we represent. There were seven of us
    allowed at the table. Actually, there were seven of us allowed,
    normally just one at the table.
        The process itself was difficult. And it would have been
    better served if we would have been able to have more ability
    to share opinions with our members and bring back more thought
    to the process.
        Mr. Hultgren. I wish that could have happened, as well. My
    time has expired. We do have a few more questions, so we may
    follow up with you in writing to see if we could get answers to
    them. With that, I yield back, Mr. Chairman. Thank you.
        Chairman Duffy. The gentleman yields back. I want to thank
    our panel for their testimony today. And maybe just to note, it
    is pretty clear we have a wide array of views on this covered
    agreement. And it is good for us to hear everyone's different
    positions. And I think it was Mr. MacArthur who mentioned your
    business model might dictate your support or lack thereof. And
    it is good for us to hear from you all.
        I also think it is important to note that there may be a
    need for us as we move forward to look at clarification. I know
    Mr. McRaith might disagree with that, but I know others have
    agreed with the clarification point. There has been concern
    about the process that was used. And there is concern about
    preemption. And I think you heard unanimous concern for the
    congressional involvement, should there be any future deals
    that are put together. Just a couple of my takeaways.
        But I think all of us are engaged in this issue, and I look
    forward to working with not just the panel, but also those who
    participated, who have shown up to this hearing. So again,
    thank you all.
        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 without objection, this hearing is now adjourned.
        [Whereupon, at 12:04 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               February 16, 2017

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