[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]
U.S. GOVERNMENT PUBLISHING OFFICE
27-201 PDF WASHINGTON : 2018
____________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]