[Senate Hearing 115-24]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 115-24

 
                EXAMINING THE U.S.-EU COVERED AGREEMENT

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE U.S.-EU COVERED AGREEMENT TO GATHER THE PERSPECTIVES OF 
 THE PARTIES INVOLVED WITH CRAFTING OR WHO ARE AFFECTED BY THE COVERED 
                               AGREEMENT

                               __________

                              MAY 2, 2017

                               __________

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Jared Sawyer, Senior Counsel

                Brandon Beall, Professional Staff Member

                Graham Steele, Democratic Chief Counsel

             Megan Cheney, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                     Cameron Ricker, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                          TUESDAY, MAY 2, 2017

                                                                   Page

Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                               WITNESSES

Michael T. McRaith, Former Director, Federal Insurance Office, 
  Department of the Treasury.....................................     4
    Prepared statement...........................................    29
    Responses to written questions of:
        Senator Corker...........................................    82
Julie Mix McPeak, Commissioner, Tennessee Department of Commerce 
  and Insurance, on behalf of the National Association of 
  Insurance Commissioners........................................     5
    Prepared statement...........................................    46
    Responses to written questions of:
        Senator Corker...........................................    82
Michael C. Sapnar, President and Chief Executive Officer, 
  Transatlantic Reinsurance Company, on behalf of the American 
  Insurance Association, American Council of Life Insurers, and 
  the Reinsurance Association of America.........................     7
    Prepared statement...........................................    50
Stuart Henderson, President and Chief Executive Officer, Western 
  National Mutual Insurance Company, on behalf of the National 
  Association of Mutual Insurance Companies......................     9
    Prepared statement...........................................    70
David Zaring, Associate Professor of Legal Studies and Business 
  Ethics, The Wharton School, University of Pennsylvania.........    11
    Prepared statement...........................................    75

              Additional Material Supplied for the Record

Views of the Cincinatti Insurance Companies on Covered Agreements    84

                                 (iii)


                EXAMINING THE U.S.-EU COVERED AGREEMENT

                              ----------                              


                          TUESDAY, MAY 2, 2017

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. This hearing will come to order.
    Today we are joined by a panel of witnesses who will 
provide the Committee with a comprehensive discussion of the 
U.S.-EU Covered Agreement. These witnesses represent a broad 
range of views on the agreement, including companies in support 
and in opposition.
    We will also hear from the lead negotiator of the Covered 
Agreement, a representative of State insurance commissioners, 
and, finally, an independent expert specializing in 
international financial regulation.
    In the United States, a State-based model for insurance 
regulation has been the preferred standard for over 100 years 
and was solidified with the passing of McCarran-Ferguson in 
1945. With an ever-increasing globalization of insurance and 
reinsurance services, it is healthy to examine and debate how 
the American model fits within the global regulatory framework.
    Title V of the Dodd-Frank Act authorized the Federal 
Insurance Office, within the Department of Treasury, and the 
U.S. Trade Representative to enter into ``covered agreements'' 
with foreign jurisdictions regarding prudential regulation of 
insurance and reinsurance.
    In November 2015, this Committee was notified that the 
United States planned to begin negotiations with the EU on a 
covered agreement. In notifying Congress, the Obama 
administration laid out several priorities it hoped to achieve 
from the negotiations, including equivalence for U.S. insurers 
with respect to Solvency II and gaining EU recognition of the 
U.S. insurance regulatory framework.
    In January, this Committee was presented with a final 
Covered Agreement negotiated between the United States and the 
European Union. The Covered Agreement represents more than a 
year of negotiations on many complex, cross-border regulatory 
issues. The terms of the agreement address three main areas of 
prudential insurance supervision: reinsurance, group 
supervision, and information sharing.
    I look forward to engaging with our witnesses on a number 
of important questions.
    First, I would like to better understand the implications 
for the U.S. insurers and the State insurance commissioners on 
the removal of reinsurance collateral requirements.
    Second, what benefits will U.S.-based, internationally 
active insurance and reinsurance companies receive from the 
agreement?
    Third, what are the implications of the group supervision 
and group capital requirements for our U.S. regulatory 
framework?
    And, finally, if an exchange of letters is necessary to 
clarify the agreement, what are the items that must be 
addressed, and can the items be addressed without reopening the 
agreement?
    As a new Administration undertakes its review of the 
Covered Agreement and Congress provides input, these are some 
foundational questions that must be addressed.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, for holding today's 
hearing. Thanks to the witnesses for your testimony. It is good 
to meet you all.
    Our State-based insurance system is unique, as we know, 
throughout the world. It has largely served us well. We should 
fight to maintain it, including by rejecting efforts to impose 
the Solvency II accord, Europe's insurance capital rules, on 
our insurers. At the same time, it means that companies that 
want to operate internationally face challenges. We need a 
system that works, too, for them.
    The financial crisis of several years ago, almost a decade 
ago, showed there were shortcomings in the consolidated 
supervision of international insurance conglomerates. Since the 
crisis, State insurance regulators have worked on proposals to 
develop comprehensive supervision and capital frameworks for 
insurance companies. While some progress has been made, there 
is clearly much to be done.
    At the Federal level, the Federal Reserve's work on both 
fronts has been encouraging. It has proposed a useful group 
capital framework for the insurers that it supervises. It has 
developed consolidated governance and risk management standards 
for systemically important insurers.
    Turning to the Covered Agreement that we are here to 
discuss, as a single entity that speaks on behalf of the U.S. 
on insurance matters, I believe that the Federal Insurance 
Office, Mr. McRaith in particular, has served a valuable role. 
This agreement offers U.S. and EU reinsurers alike relief from 
both requirements to have a local presence and local 
collateral. It is not a small consideration when EU countries 
like Germany have put our companies on notice to set up 
physical locations, which surely is a significant cost to U.S. 
companies. It also establishes certainty about when U.S. 
standards will qualify as equivalent under Solvency II for U.S. 
insurers, preventing Europe from imposing its rules on our 
companies, if not permanently at least for 5 years. To the 
extent that there is some disagreements on the meaning of terms 
in the agreement, particularly as they relate to capital, I 
hope today's hearings will offer an opportunity to clarify 
those terms. If there are concerns about the level of 
transparency and consultation in this and other international 
negotiations, that is certainly a matter that should be 
debated, including whether any reasonable reforms are 
necessary.
    Let me close with two concerns that I have.
    First, I am concerned by efforts to hamstring or eliminate 
FIO. Eliminating an important voice domestically and 
internationally on insurance regulations, handing these 
negotiations over to the U.S. Trade Rep who lacks insurance 
expertise would be a step in the wrong direction.
    Second, I do not think the answer to discontent with the 
process of some of these international financial discussions is 
to include financial regulations in future free trade 
agreements. Former Treasury Secretary Lew said that watering 
down in any way U.S. regulatory standards is not appropriate in 
trade agreements, and I think there is a resounding emphasis 
that we all have on that. He said the U.S. should call on the 
world community in appropriate settings like the G-20 and the 
Financial Stability Board ``to try to drive that race to the 
top,'' his words, instead of the other way, mine.
    We should push other countries to raise standards, not 
engage in a race to the bottom, as so many of these free trade 
agreements do and have done. I am skeptical that the answer to 
concerns about transparency in insurance agreements is to 
replace them with a trade negotiation process where corporate 
CEOs often have better access to information about trade 
negotiations than the American people's elected representative, 
a significant problem over the last 2 or 3 years during the 
negotiations of the Trans-Pacific Partnership.
    So, again, I thank the Chairman for holding this hearing, 
and I look forward to hearing from our witnesses.
    Chairman Crapo. Thank you, Senator Brown.
    As we go to our witnesses today, first we will receive 
testimony from Michael McRaith, former Director of the Federal 
Insurance Office at the U.S. Department of Treasury.
    Second, we will hear from Commissioner Julie Mix McPeak of 
the Tennessee Department of Commerce and Insurance, on behalf 
of the National Association of Insurance Commissioners.
    Next we will hear from Michael Sapnar, CEO of Transatlantic 
Reinsurance, on behalf of the American Insurance Association, 
the American Council of Life Insurers, and the Reinsurance 
Association of America.
    Then we will hear from Stuart Henderson, CEO of Western 
National Mutual Insurance Company, on behalf of the National 
Association of Mutual Insurance Companies.
    And, finally, we will hear from David Zaring, associate 
professor of legal studies at the Wharton School at the 
University of Pennsylvania.
    As we move to our witnesses, I want to remind our Senators 
that when we go to questions, we will hold ourselves to our 5-
minute limit. Sometimes Senators want to move that up a little 
bit.
    And to the witnesses, that may happen at the end of the 5 
minutes of the Senator. I encourage you, when that happens, to 
try to keep your responses as brief as possible so we can let 
every Senator have an opportunity for questions.
    To the witnesses, also, you have been asked to keep your 
verbal remarks to 5 minutes. You will have many opportunities 
to add to and supplement them, and your written testimony has 
been made a part of the record.
    With that, let us begin. Mr. McRaith.

   STATEMENT OF MICHAEL T. MCRAITH, FORMER DIRECTOR, FEDERAL 
          INSURANCE OFFICE, DEPARTMENT OF THE TREASURY

    Mr. McRaith. Chairman Crapo, Ranking Member Brown, Members 
of the Committee, thank you for inviting me to testify. I 
appear on my own behalf today as the former Director of the 
Federal Insurance Office at Treasury and as Treasury's lead 
negotiator for the Covered Agreement.
    First, thanks to Commissioner McPeak and her colleagues for 
the integral role they played in the negotiation. 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 when they 
joined by telephone.
    Through a confidential web portal, State regulators 
received every EU document shortly after it arrived. Before any 
U.S. document was sent to the EU, we shared it with the States 
and then held a conference call to receive their input. State 
regulators were an essential part of our negotiating 
delegation.
    The prudential issues addressed by the agreement are not 
new. Reinsurance collateral reform and Solvency II implications 
have long been discussed in the United States. The agreement 
brings closure to these issues.
    The States have undertaken to reform reinsurance collateral 
requirements, reform that benefits EU reinsurers, and in 
exchange, the States receive nothing of benefit for the U.S. 
industry operating in the EU. Nothing.
    Through the agreement, U.S. reinsurers will now have access 
to the entire EU market on the same terms as EU reinsurers 
operating in the U.S. For U.S. insurer groups, the agreement 
caps the application of Solvency II to the EU operations of 
U.S. insurers. The agreement affirms that the U.S. supervises 
its insurance sector as the U.S. deems appropriate. This 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 both in the EU and the U.S., does not 
prescribe the content or the manner of that calculation. The 
agreement endorses what the States 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 EU nor the 
U.S. receive the benefits of the agreement without satisfying 
the conditions. And if a question arises, the agreement 
provides a resolution mechanism. If all conditions are 
satisfied within the 5-year period, then the terms of the 
agreement become permanent.
    In 2016, U.S. reinsurers lost existing business in the EU 
and opportunities for new business. In 2016, U.S. primary 
insurers operated with uncertainty about treatment by their EU 
supervisors, including whether they would be required to 
establish multiple subsidiaries.
    We entered into negotiations seeking to improve the rigor, 
uniformity, and consumer protections of U.S. reinsurance 
oversight. We sought to include 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. industry operated in the EU on a level playing field. 
We achieved these goals, saving our industry potentially 
billions of dollars. While providing equal benefits to the EU, 
this Covered Agreement puts America first.
    Now, our diverse insurance sector will always include 
skeptics. Some opponents might complain about a projected 
hypothetical concern in 5 years as if just one more piece of 
writing is necessary, even when that writing would entirely 
duplicate what is already in the agreement. But this is not the 
time for the predictable insurance debate about statutory 
prerogatives or who does what. This is not a theoretical 
discussion about conceptual international standards of zero 
effect in the U.S.
    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 EU employs more Americans or 
fewer. Will U.S. industry grow or will it be stifled?
    Now is the time to show American leadership, to skip the 
usual insurance script, and to endorse this resolution of a 
real-time threat to U.S. insurers' growth and to insurance jobs 
in States around our country. Now is the time to solve a real 
problem, and this agreement does just that.
    Thank you for your attention. I look forward to your 
questions.
    Chairman Crapo. Thank you. And before we move to Ms. 
McPeak, I should indicate some of you may notice that the room 
is a little bit unusually warm. If you are feeling that, it is 
not necessarily because you are nervous. It actually is a 
little bit too warm in here. We are trying to get that fixed, 
and we apologize.
    Ms. McPeak, please proceed.

    STATEMENT OF JULIE MIX MCPEAK, COMMISSIONER, TENNESSEE 
DEPARTMENT OF COMMERCE AND INSURANCE, ON BEHALF OF THE NATIONAL 
             ASSOCIATION OF INSURANCE COMMISSIONERS

    Ms. McPeak. Thank you, Chairman Crapo, Ranking Member 
Brown, and Members of the Committee. I appreciate the 
opportunity to testify today on behalf of State insurance 
regulators.
    My written testimony details the NAIC's concerns with the 
EU Solvency II regime and its equivalence process, our 
historical dialogs with the EU to resolve the issue, and the 
subsequent negotiations of a potentially preemptive Covered 
Agreement. While we take serious issue with the lack of 
meaningful involvement in those negotiations and believe there 
are lessons to be learned going forward, my testimony today 
will center on the agreement's substance.
    The focus from supporters has been on the perceived 
benefits of the agreement for the subset of U.S. firms doing 
business in the EU. However, as Congress and the Administration 
weigh the merits of the agreement, consideration must be given 
to what is sacrificed.
    With regards to reinsurance collateral, the NAIC has made 
great strides in addressing the EU's concerns. Thirty-nine 
States representing 70 percent of the market have adopted the 
NAIC model reducing collateral. To drive further adoption, the 
model becomes an accreditation requirement on January 1, 2019. 
Notwithstanding our progress, this agreement fully eliminates 
collateral requirements and does not include a fulsome 
evaluation of a reinsurer's creditworthiness.
    Considering that significantly reduced collateral 
protections represent commitments to policyholders, wiping them 
out will force regulators to find other mechanisms with which 
to protect them and insurers from the risks posed by 
reinsurance counterparties.
    Notably, the agreement contains several ambiguities that 
make it difficult to evaluate and implement. By way of example, 
it is unclear the extent to which regulators can even impose 
alternatives to collateral that address reinsurance 
counterparty risk. The agreement appears to supersede existing 
authority of regulators to obtain information currently 
authorized under State law. The agreement also requires a group 
capital assessment, but implies State insurance regulators must 
have authorities to remedy any deficiency with capital, even 
though other regulatory tools may be more appropriate.
    All of the ambiguities would have to be resolved by an 
undefined joint committee composed of representatives of the 
U.S. and EU, with no mention of a role for State insurance 
regulators. If the joint committee cannot reach resolution, 
this agreement may be voided, thereby creating the real 
prospect of perpetual renegotiation and uncertainty for the 
U.S. insurance sector.
    Earlier this year, Mr. McRaith testified to what he 
believed the agreement accomplished. Candidly, we were 
surprised. Notwithstanding our concerns with eliminating 
collateral, Mr. McRaith's characterization of the agreement, if 
shared by the present Treasury Department and, more 
importantly, by the EU, is more promising than a plain reading 
of the text suggests. As such, the focus of our request to 
Congress, Treasury, and the USTR has evolved to urge 
confirmation of some of these key assertions.
    Last week, the NAIC submitted to Treasury and USTR a list 
of provisions to be clarified before the United States moves 
forward with implementation of the agreement. We urge the 
Administration to expeditiously provide the needed clarity of 
these provisions now rather than taking an imprudent leap of 
faith that differing interpretations will be worked out later 
through a joint committee.
    Absent this, there is no assurance that State 
implementation will meet the terms of the agreement and satisfy 
the current Administration or the EU. That could put us in a 
position of changing State laws only to have the EU challenge 
compliance at a later date and revert to unfair treatment of 
U.S. companies. Under these circumstances, it is hard to see 
how our sector can achieve certainty and finality regarding 
their concerns. We simply want to ensure that all parties agree 
that we have the deal that we have been told that we have.
    Confirmation can be achieved without renegotiation and 
without undue delay. Without clarification, it is entirely 
unacceptable to ask 50 State Governors, legislatures, and 
regulators to revise fundamental elements of our system based 
on the informal interpretations of a former Treasury official. 
Such confirmation of intent will also ensure that the EU will 
not be able to use the agreement's ambiguity as a means of 
imposing their regulatory system and ultimately their will on 
our insurance sector to the detriment of U.S. insurance 
companies and policyholders.
    In conclusion, working together, we can obtain a level of 
comfort and clarity that will achieve finality and certainty 
for our sector without sacrificing consumer protections. As the 
States are the primary regulators of the insurance sector and 
it will be our responsibility to implement the provisions of 
the agreement, our involvement and buy-in is essential to its 
success. We have confidence that, through the bipartisan 
efforts of this Congress as well as commitment of this 
Administration, we can resolve the ambiguities and ensure that 
the U.S. obtains the best deal possible for our constituents.
    Thank you again for the opportunity to share our views, and 
I am pleased to answer any of your questions.
    Chairman Crapo. Thank you very much.
    Mr. Sapnar.

 STATEMENT OF MICHAEL C. SAPNAR, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, TRANSATLANTIC REINSURANCE COMPANY, ON BEHALF OF THE 
   AMERICAN INSURANCE ASSOCIATION, AMERICAN COUNCIL OF LIFE 
      INSURERS, AND THE REINSURANCE ASSOCIATION OF AMERICA

    Mr. Sapnar. My name is Michael Sapnar, and I am president 
and CEO of Transatlantic Reinsurance Company. I am testifying 
today on behalf of my company, the RAA, the American Insurance 
Association, the American Council of Life Insurers, and the 
Council of Agents and Brokers. I am pleased to appear before 
you today to express our strong support for the Covered 
Agreement between the U.S. and the European Union. I commend 
Chairman Crapo and Ranking Member Brown for holding this 
important hearing and welcome the opportunity to address the 
Banking Committee.
    We strongly support prompt signing of the Covered 
Agreement, which is consistent with our equally strong support 
for the State-based insurance regulatory system. The Covered 
Agreement is a targeted Federal tool that supplements the 
State-based system by dealing with important international 
regulatory issues that State regulators cannot constitutionally 
address. It does not create regulatory authority at the Federal 
level, and the limited preemption authority is narrowly 
targeted to the collateral issue.
    I would like to make two main points today.
    One, the Covered Agreement provides U.S. companies full 
access to the world's largest insurance market without having 
to establish a local presence or be subject to European 
regulation, capital, and governance standards.
    Two, prompt signature is critical to full realization of 
the agreement's benefits, and any requests for clarification 
are unnecessary and may jeopardize the deal.
    First, the Covered Agreement addresses multiple issues, 
many of which have been outstanding for years. It is a shrewd 
deal for the U.S. as we gain access through a mutual 
recognition approach without compromising our regulatory 
structure and by simply accelerating or formalizing initiatives 
around collateral and capital that State regulators have 
already begun to address.
    One of the agreement's key attributes is the avoidance of 
applying the EU Solvency II insurance regulation and capital 
requirements to U.S. companies. In 2014, U.S. State regulators 
wisely decided not to seek Solvency II equivalence because of 
its inflexibility and the changes that would be required to the 
U.S. system, which has been proven. However, without this 
equivalence designation, U.S. reinsurers could only trade in 
the EU if they have a Solvency II-compliant branch in every 
country where the business is conducted or they have a 
subsidiary in a third country that has been deemed equivalent.
    In 2012, I testified to the House Insurance Subcommittee 
about the issues and obstacles like equivalence that my 
company, TransRe, and our peers were encountering in the EU. 
Since then, Transatlantic Re has been forced to move capital 
and jobs from the U.S. to the EU, has lost business in certain 
EU member countries, and has incurred significant additional 
compliance costs, all of which make us less competitive. The 
Covered Agreement, however, places us on equal footing. The 
agreement provides U.S. companies with the benefits of Solvency 
II equivalence without its requirements. U.S. companies get 
full access to the EU without having to establish a local 
presence and without being subjected to European group 
governance and capital standards.
    Second, it is critical that the Administration promptly 
sign the Covered Agreement. Delaying signature could eliminate 
benefits U.S. companies receive under the agreement. EU 
countries are not currently enforcing Solvency II on U.S. 
companies in anticipation of signature of the agreement. For 
example, the German regulator is conditionally suspending its 
local presence requirements for U.S. reinsurers pending 
signature of the agreement. If the agreement is delayed or not 
finalized, they will apply the rules, perhaps retroactively, to 
U.S. companies.
    In fact, without the Covered Agreement, U.S. reinsurers 
lost significant business at January 1, 2017, because of these 
local presence requirements. If the Covered Agreement is not 
signed, U.S. companies will not be able to renew much less 
write any new business in the EU without first creating 
branches in member States or subsidiaries in equivalent 
countries. These adjustments require time and relocation of 
capital and people from the United States, and they raise 
costs. It is imperative that U.S. companies and the EU market 
have timely certainty regarding U.S. companies' ability to 
write business in the EU when the renewal process begins in 
early September. Failure to act promptly will adversely affect 
U.S. companies' ability to acquire and retain business.
    In addition, the Covered Agreement should not be delayed by 
requests for clarification or suggested improvements in the 
process. A few companies have requested a formal signed 
clarification of certain provisions before the agreement is 
signed. The joint committee in the agreement is intended to 
address the exact types of issues being raised. It is also 
likely that this clarification would be viewed as an attempt to 
renegotiate the agreement.
    Finally, some of the objections seem to stem from process 
rather than product. However, this agreement was conducted in 
accordance with law, and no one has asserted otherwise.
    In conclusion, the Covered Agreement is a narrowly tailored 
tool that solves real costly problems for U.S.-based companies 
while providing the first formal recognition of the strength of 
the State-based system. It is time to sign the agreement and 
begin the implementation process.
    Thank you.
    Chairman Crapo. Thank you, Mr. Sapnar.
    Mr. Henderson.

 STATEMENT OF STUART HENDERSON, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, WESTERN NATIONAL MUTUAL INSURANCE COMPANY, ON BEHALF 
   OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES

    Mr. Henderson. Good morning, Chairman Crapo, Ranking Member 
Brown, and Members of the Committee. Thank you for holding this 
important hearing.
    My name is Stu Henderson. I am the president and CEO of 
Western National Insurance Group. Western National is a mutual 
company which has been serving policyholders since, well, over 
115 years. Originally formed in St. Paul, we now operate as a 
regional insurance company serving individuals, families, and 
businesses all over the Midwest, Northwest, and southwestern 
U.S., plus Alaska.
    I am here today on behalf of the National Association of 
Mutual Insurance Companies. NAMIC is the largest property/
casualty insurance trade in the country, with 1,400 members 
representing nearly 40 percent of the U.S. market. I have had 
the privilege of serving as the association's chairman 2 years 
ago, and I have a deep appreciation for and understanding of 
its membership.
    NAMIC also appreciates the Committee's focus on the recent 
U.S.-EU Covered Agreement. This bilateral agreement merits 
careful scrutiny to understand its impact on the U.S. domestic 
insurance industry and our policyholders.
    Let me start by clarifying. Western National is a U.S.-only 
company. Just like the vast majority of the U.S. insurance 
industry, we do not operate internationally. However, we deal 
with international reinsurers all the time, and, in fact, I 
once worked for an international reinsurance company.
    The implementation of Solvency II in 2016, the EU's new 
insurance regulatory system, has created heightened regulatory 
requirements for U.S. companies doing business in EU all 
because the U.S. has not been deemed equivalent under the EU's 
new system. This has created a real and present difficulty for 
a relatively small number of U.S. insurers and reinsurers doing 
business in the U.S.
    To summarize, under a new, untested, and unproven 
regulatory scheme, the EU, number one, granted itself the role 
of supreme arbiter of valid insurance regulation; two, decided 
that the 150-year-old U.S. system was inadequate and not good 
enough for them; and, three, proceeded to treat U.S. companies 
unfairly. All of a sudden, U.S. companies need heightened 
scrutiny at the group level and reinsurers need a local 
presence to continue doing business in the EU--all this after 
allowing those very same insurers to safely operate in Europe 
for decades. It would seem to me that the appropriate response 
to this would be for the U.S. Government to strenuously object 
and to demand the mutual recognition of our system of 
regulation. Instead, they have attempted to solve this narrow 
problem invented by the EU and in the process have created a 
whole new set of problems.
    To obtain permanent recognition of the U.S. insurance 
regulatory system as mutual or equivalent, the FIO and USTR 
negotiated an agreement to eliminate requirements for those EU 
insurers to post collateral in the U.S. to meet their 
obligations. Even if we stipulate that the equivalence problem 
can only be addressed through a Covered Agreement and that 
forfeiting $40 billion of reinsurance collateral is necessary 
to solve it, the agreement fails on its own terms. There is no 
language anywhere in the Covered Agreement that confirms U.S. 
group supervision as mutually recognized or equivalent.
    In exchange for the release of $40 billion of collateral, 
the EU has only agreed to return U.S. insurers to pre-Solvency 
II status, and there is no guarantee that this reprieve will 
continue at the end of the 5-year term. Uncertainty is the 
enemy of business and of good Government.
    But the EU is not satisfied there. They successfully 
negotiated additional changes to the regulatory system. 
Specifically, the agreement requires a group capital standard 
for U.S.-based insurance companies. If that standard is not 
adopted, the EU will not live up to its side of the agreement. 
If it is adopted, it will impact those of the 94 percent of the 
3,200 property/casualty companies in the U.S. who do not do 
business internationally such as Western National.
    Section 4(h)(2) of the agreement clearly states that the 
new U.S. group capital standard must apply to worldwide parent 
undertaking and include corrective or preventive measures up to 
and including capital measures. This would mean increases in 
capital, movement of capital between affiliates, and/or 
fungibility mandates. This is plainly not a simple capital 
calculation, such as the NAIC has been contemplating for the 
U.S. In fact, this kind of group capital standard will shift 
the U.S. from a legal entity regulatory system protecting 
policyholders to an EU-style group supervision system designed 
to protect investors and creditors. This is not a win for U.S. 
policyholders whom we represent.
    This agreement is bad for the vast majority of U.S. 
insurers who lose reinsurance collateral protection and get 
nothing but new requirements in return. We urge Congress to 
work with the Administration to resolve issues with the current 
agreement. While we cannot allow the EU to continue treating 
U.S. insurers operating there unfairly, this current deal costs 
U.S. companies only too much and falls short of obtaining 
mutual recognition of our regulatory system. At a minimum, we 
need to begin a process to formally clarify aspects of the 
agreement and, if necessary, the U.S. should not hesitate to go 
back to the drawing board and secure a better deal.
    Again, thank you for the opportunity to speak here today. I 
look forward to answering your questions.
    Chairman Crapo. Thank you.
    Mr. Zaring.

STATEMENT OF DAVID ZARING, ASSOCIATE PROFESSOR OF LEGAL STUDIES 
    AND BUSINESS ETHICS, THE WHARTON SCHOOL, UNIVERSITY OF 
                          PENNSYLVANIA

    Mr. Zaring. I am an associate professor of legal studies at 
the Wharton School, and I study international financial 
regulation there. It is a pleasure to be here today. I want to 
put the Covered Agreement in context, and in my testimony on 
the agreement between the United States and the European Union, 
I would like to focus on three points.
    First--and this is the point on which I will spend the most 
time--the Covered Agreement grew out of an effort in the wake 
of the financial crisis to improve the regulation of financial 
companies, including insurance companies, given the 
repercussions of the failure of the large insurance company AIG 
during that crisis. For insurance, that effort has involved a 
number of different channels, and the goals have been twofold:
    One has been to make sure that globally active insurance 
companies are sensibly regulated as whole enterprises rather 
than as a series of operating subsidiaries in a variety of 
different jurisdictions.
    The second has been to ensure that internationally active 
insurance companies and reinsurance companies have faced a 
level playing field when it comes to doing business at home or 
overseas.
    The Covered Agreement accompanies efforts to reduce 
nontariff barriers through trade agreements and efforts to 
increase the quality of global insurance supervision through 
organizations like the International Association of Insurance 
Supervisors. It offers the reduction of two barriers to trade 
and two regulatory agreements that will improve the supervision 
of insurance conglomerates in both the United States and 
Europe, serving objectives identified by regulators and trade 
negotiators in the wake of the financial crisis.
    As a general matter, covered agreements are meant to serve 
as a bilateral backstop for regulatory cooperation in cases 
where multilateral regulation has not made progress. An analogy 
might be drawn to this country's approach to trade. When 
multilateral agreements like the Doha Round have foundered, the 
United States has increasingly looked to pursue its trade 
interests through regulatory cooperation or bilateral trade and 
investment deals.
    In the case of post-crisis insurance supervision, the hope 
evinced in Dodd-Frank is that where multilateral efforts to 
either level the playing field or to improve the supervision of 
systemically risky insurance companies has foundered, bilateral 
covered agreements might serve as a useful supplement. It can 
stand in stead when the trade negotiations are not working or 
are not appropriate or when multilateral regulatory cooperation 
is going too slowly.
    Second, the agreement deepens cooperation through an 
exchange of information, includes a deal that reduces trade 
barriers in both the United States and the European Union, and 
provides a sensible framework, in my view, for the supervision 
of insurance conglomerates and groups. As a matter of content, 
it is likely to be good for insurance companies and consumers. 
And, in addition, it rationalizes the supervision of insurance 
companies by looking at the totality of their operations, just 
as banking supervisors do when it comes to banking financial 
conglomerates.
    Third, the critics of the transparency of the process in 
concluding the Covered Agreement are, in my view, misguided. 
The United States never hid the fact that it was engaging in 
negotiations with the European Union, and now that the result 
of those negotiations have been made public, the covered 
agreement is being appropriately reviewed by Congress, as it is 
in this hearing that we are all pleased to be at today, and by 
the stakeholders who are most likely to be affected by the 
agreement. That is the right way to conduct transparent 
international processes: congressional approval to engage in 
international negotiations is given beforehand, and the results 
of those negotiations are reviewed after the fact. Requiring 
more and different consultations during the negotiation would 
be both inconsistent with the way the negotiations work and I 
think entirely unnecessary process. I would also like to 
emphasize that the Covered Agreement itself provides for an 
elaborate panoply of procedural protections when it comes to 
the implementation of the accord, protections that I think will 
involve State insurers, State insurance regulators, and other 
stakeholders with a stake in the agreement.
    More generally, international regulatory cooperation is not 
easy, and it must certainly be paired with procedural 
protections; but the United States cannot ignore the efforts 
and interests of foreign regulators when it thinks about its 
own position in international financial markets. The global 
effort to create a single common set of accounting standards 
exemplifies the risks of failing to engage. The United States 
largely stayed out of that process, but the resulting 
International Financial Reporting Standards have now been 
adopted by essentially every jurisdiction in the world except 
one. And the Securities and Exchange Commission is now 
accepting IFRS for foreign filers. This country can take a 
leadership role in devising international regulatory standards, 
or it can let others develop the standards and adopt them 
later. But it cannot ignore them.
    Thank you, and I look forward to your questions.
    Chairman Crapo. Thank you very much, and I commend all of 
our witnesses for paying attention to the clock. That is truly 
appreciated.
    I want to start out my questions with regard to the 
question of an exchange of letters. Obviously, from the 
testimony you can see here that there is some disagreement 
about whether there is adequate clarity in the agreement on 
certain issues.
    Perhaps first I should ask you, Ms. McPeak, do you agree--I 
think I heard you say in your testimony that if the agreement 
means what it has been said to mean, you do not have as many 
concerns, but it is not that clear in the text of the 
agreement. Is that a fair estimate or statement of what you 
said?
    Ms. McPeak. I think that is fair, Mr. Chairman. I believe 
that our members would not oppose the agreement if we could 
reach clarity on some of the ambiguities that we have provided 
through staff in a list to this Committee, actually.
    Chairman Crapo. And so you and some others, I think, or at 
least some have suggested that we have an exchange of letters, 
that the USTR and Treasury work to have an exchange of letters 
to provide clarity up front as to what the actual meaning of 
the terms of the agreement are.
    Mr. McRaith, is that possible to do?
    Mr. McRaith. Mr. Chairman, I am, as you know, no longer 
with the Treasury Department. I suppose anything is possible. I 
would express serious concern about that prospect. It is 
notable that those seeking clarity are also opponents of the 
agreement. What we see is the requests for clarification, 
particularly those from the NAIC, these are issues in which the 
NAIC directly participated. They were part of the conversation 
that generated the words on the page of the agreement that led 
to the understanding between the EU and the U.S.
    With respect to the industry, there were two issues I have 
heard: One, what happens 5 years from now? Well, having a 
second document that repeats what is in the first document does 
not provide any clarity about what happens in 5 years. The 
other question is whether the reinsurance reforms would be 
retroactive based on the word ``amendment,'' and it is basic 
Contract Law 101 that both parties have to agree to an 
amendment to a reinsurance contract. I do not think we need 
that clarification from the EU.
    Chairman Crapo. But are you saying that the words are 
clear?
    Mr. McRaith. The agreement is clear on its face. The 
agreement, like any international agreement, may require 
interpretation and implementation clarity as things move 
forward. So once the agreement is signed, it is entirely 
natural and expected and a mechanism is established for the 
parties to coordinate and sort through any of these questions 
that might come up.
    Chairman Crapo. And, Ms. McPeak, would you respond on the 
question of whether your interests were adequately represented 
in the negotiations?
    Ms. McPeak. Certainly. Well, we have been very instructive 
on the process, and I will say that six of us were included in 
the discussions, myself included, but we were not able to brief 
our colleagues or even consult with our individual general 
counsels in our Departments of Insurance.
    But that process aside, the actual issue is the very public 
agreement that we have before us today is not clear on how to 
implement this on behalf of State insurance regulators. We do 
not know from the terms of the agreement itself whether we can 
impose additional consumer protection matters that might be 
substantially the same as reinsurance collateral because that 
might void the agreement. We do not know if our capital 
assessment tool is going to be sufficient to meet the terms of 
the agreement. And I think before we go forward with model laws 
and processes through State insurance regulators and our State 
legislatures, we need to know the rules of the road, and we 
need to know that our actions are going to be exactly what is 
contemplated in the agreement. And these issues should be 
worked out ahead of time.
    Chairman Crapo. Thank you. Both Mr. Henderson and Mr. 
Sapnar are asking to be heard. I have got 71 seconds, so if you 
could each take about 30 seconds, I would appreciate it.
    Mr. Sapnar. Sure. In my experience, contracts never read 
perfectly clear. We have a direction to go in. A bird in the 
hand is worth two in the bush, in my opinion. The joint 
committee is there to clarify or go through any issues. And we 
believe any delay will mean more lost business for U.S. 
companies trading abroad.
    Chairman Crapo. Thank you.
    Mr. Henderson.
    Mr. Henderson. The agreement is 24 pages long, and yet 
there is no words in it that we need to see which are the words 
that was the goal in the first place: mutually recognize the 
two systems. The whole agreement could probably be a page, 
lawyers aside, if it simply said mutually recognizing systems, 
and the other problems go away.
    Chairman Crapo. Well, thank you. And I think we will have 
an opportunity here to get back to this issue some more.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Three years ago, Senator Collins and Senator Johanns and I 
worked to ensure the Federal Reserve should not subject U.S. 
insurers to the bank-like capital framework. You may remember 
that. I would likewise be concerned--and this question is for 
Mr. McRaith. I would likewise be concerned if Europe's bank-
like Solvency II capital framework were forced upon U.S. 
insurers. Walk through with us, Mr. McRaith, the intent behind 
the provisions of the Covered Agreement that address capital 
rules for insurers, if you would.
    Mr. McRaith. Sure. First, Senator, I want to acknowledge 
the great leadership by you and your colleagues to address that 
issue a couple years ago. It was important and essential for 
the insurance industry.
    With respect to the agreement, that is the entire purpose 
and objective of the agreement, that in the United States our 
regulators at the State level will decide how to supervise U.S. 
insurance groups. So contrary to what I have heard from at 
least one witness today, the agreement is entirely clear that 
there are boundaries now drawn. The EU will supervise its 
companies at the group level as it determines appropriate. In 
the United States, through the States, whether capital, 
governance, reporting, solvency oversight, it is the United 
States and our system and structure--in your opening remarks, 
you mentioned your support for the State system. It is that 
system that will have the authority and the capacity, only that 
system that will decide how are U.S. groups to be supervised, 
including with respect to capital. That is the objective of the 
agreement, and that very clear distinction and bright line is 
articulated in Article 4 of the agreement.
    Senator Brown. Thank you.
    Professor Zaring, two questions about FIO. First of all, do 
you think it serves a useful role both domestically and 
internationally? And then as you explore that, if you would 
give us your interpretation of FIO's authority to preempt State 
capital rules.
    Mr. Zaring. I think that FIO has served a critical role in 
making progress in what is increasingly a globalized insurance 
marketplace. And what it has done, in my view, are two very 
useful different things, at least two.
    For starters, it served this important coordinative 
function in creating a forum through which a consistent and 
commonly held United States approach to international 
negotiations can be taken. And that has made progress in 
international affairs easier and meant that the United States 
is better represented when it goes to these global fora and 
making decisions about whether it should get involved or not.
    It has also served a disciplining function when it monitors 
regulatory quality in the United States, and I think that is an 
independent and useful thing as well.
    One thing that FIO does not have is the power to preempt 
State insurance laws, and there is nothing in this agreement 
that suggests anything otherwise to me. It cannot replace 
capital rules. It cannot replace the statewide system on 
supervision. Indeed, it depends on that system of supervision 
to make the American side of the agreement work.
    The limited things that could happen under FIO I view more 
as a notification process. To the extent that there would be 
any preemption at all, it would be when a State and FIO were at 
loggerheads about a collateral requirement for reinsurance, an 
approach to reinsurance, and FIO then would be in a position 
where it would basically be forced to make very clear to the 
State that it cannot operate the reinsurance collateral 
provision that it has. And it would in the same way be 
notifying the European Union that in its view there is some 
portion of the agreement that is not being met.
    Senator Brown. Thank you.
    Mr. Chairman, one motion. I ask unanimous consent to submit 
the statement of a company in my State, Cincinnati Financial, 
for the record of today's hearing.
    Chairman Crapo. Without objection.
    Senator Brown. Thank you.
    Chairman Crapo. Thank you.
    Senator Shelby.
    Senator Shelby. Thank you.
    If the Secretary of the Treasury signs the Covered 
Agreement, in what circumstances and in what ways will Federal 
requirements preempt previously negotiated State-based 
insurance regulations? Ms. McPeak.
    Ms. McPeak. Thank you for the question, Senator. The 
preemption provisions are related to the reinsurance collateral 
article in the Covered Agreement, and so if States are unable 
to create a system that is compliant with the Covered 
Agreement, we would be looking at preemption of those State 
laws requiring reinsurance collateral.
    But more problematic for us is that the uncertainty in the 
agreement, being it is a cross-conditional agreement, if we 
have an issue with compliance, even on the group supervision or 
group capital side, it could void the entire agreement, and we 
would be back in the same position that we are today.
    So we are very concerned about preemption. We want to make 
sure that as States we can comply with the provisions as 
intended in the agreement to avoid that preemption. But equally 
concerning to us is the voiding of the agreement if we do not 
know the rules to comply with the group supervision and group 
capital provisions.
    Senator Shelby. Mr. Henderson, who are the winners and 
losers in this agreement? There are always winners and losers.
    Mr. Henderson. Absolutely. Thank you. You are absolutely 
correct. The losers in this case--well, let me take the winners 
first because that is easy. It is the EU. They got their way in 
the agreement----
    Senator Shelby. The EU wins.
    Mr. Henderson. And Mr. Sapnar does not have to open a local 
office like he does not want to. The losers in my mind are the 
NAIC, which is already working on its own fixing some of these 
things, and now their legs are cut out from under them. And 
companies like mine, if there really is a need for a group 
assessment, which is what is in the material, then my company 
has to look at capital differently. So that could raise our 
costs and, hence, costs to policyholders.
    Most concerning, which I do not hear anyone talking about 
at all, is the significance of the collateral being gone, 
because basically this agreement simply says there is no 
collateral. If I can give you a quick example, a real-life----
    Senator Shelby. Explain what you mean.
    Mr. Henderson. I will give you a real-life example. Last 
year--I have a customer called Coin-Tainer, and they actually 
wash coins and then put them in those little paper things that 
nobody uses anymore. They had a chemical fire at night, and it 
burned the place down. We paid $5 million to them to rebuild 
their business. However, I actually pay $500,000 of that. The 
other $4.5 million is split between three reinsurers, each of 
whom must pay me $1.5 million so I can get back to whole. 
Collateral ensures that they do that. Without the collateral, I 
cannot be sure that I will get that money. If that happens over 
and over and over again, then my capital will have to go up. 
That causes more expense to my operation and the policyholders 
will see higher rates.
    Senator Shelby. So that is a game changer for you.
    Mr. Henderson. It is.
    Senator Shelby. And other people situated like you.
    Mr. Henderson. Yes, sir.
    Senator Shelby. Historically, have the European insurance 
companies been better capitalized than the U.S. or vice versa?
    Mr. Henderson. Well, I think the real difference----
    Senator Shelby. Differently, isn't it?
    Mr. Henderson. The real difference, sir, is in their 
system. So capital is everything to them. So as long as you 
have the capital, they really do not pay a lot of attention to 
anything else. Whereas, in the U.S. what the NAIC does as a 
legal entity rule, they look at each company individually, what 
are their liabilities, what are their assets, what does their 
capital have to be? I think that is a much more reasoned 
approach. So they examine us constantly. We have seven 
companies in six States. All of them come and examine us every 
3 to 5 years. They look at rates; they look at forms. They are 
doing a lot more regulatory-wise than the people system.
    Senator Shelby. All of us are consumers. We buy different 
forms of insurance, whether individuals, businesses, 
professionals, and so forth.
    Ms. McPeak, you represent the Commissioners in the United 
States of America. We have regulated insurance at the State 
level for a long time. Do the consumers lose on this Covered 
Agreement, or who loses?
    Ms. McPeak. Well, the NAIC would certainly have preferred 
our model to reduce reinsurance collateral on a reasoned, step-
by-step approach rather than a wholesale elimination of 
reinsurance collateral. We do not know if we can continue to 
require the reporting from the European insurers that you were 
just requesting information about their level of capitalization 
under the terms of this agreement. So I think our insurance 
consumers could lose because we as insurance regulators are 
going to be looking for another way to protect consumers from 
that reinsurance counterparty risk. And, again, we do not know 
the extent of mechanisms that might be available to us under 
the terms of this agreement as it is written. And so we feel 
like we will need to be taking measures to protect insurance 
consumers from that reinsurance counterparty risk, but we do 
not know exactly what mechanisms would be acceptable under this 
agreement, and that is why we are asking for clarification.
    Senator Shelby. If there had been more transparency in the 
negotiations, could that have helped you a lot?
    Ms. McPeak. Well, just clarification in the language and 
transparency with all of our colleagues, several of our members 
did not get to see the language of this agreement until it was 
public, and so that transparency certainly would have helped 
throughout the process.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman
    In my former life, I sold insurance at the regional level, 
and we did business with a lot of regional carriers who really, 
during the really tough times, they stayed with us. And some of 
the larger ones basically were not able to provide us the 
services that we needed where the regionals stuck around. So I 
come with that as a background on it.
    But I also know that they definitely need reinsurance and 
access to reinsurance markets, and it is a major part of their 
costs as well.
    But I was just curious, and I want to give a couple of you 
an opportunity to clarify just a little bit. Ms. McPeak, former 
Director McRaith has just stated that the insurance 
commissioners were involved in the negotiation process 
basically at historic and unprecedented levels. You have 
indicated that there was a group of you that were there and 
participated in this, and yet, Director McRaith, you also 
indicated--and I just want to let you clarify first before I go 
to Ms. McPeak--that there is always the opportunity, the need 
to look at and to review and to update after the item has been 
adopted. That sounds kind of a lot like we went through here in 
2009 when certain Members here actually promoted legislation 
that they had to pass in order to find out what was in it. That 
did not go over very well, and it continues to be an item of 
contention and a reminder to all of us.
    Can you clarify a little bit about what you meant by that 
in terms of--you really did not mean sign it and then find out 
what is in it?
    Mr. McRaith. Senator----
    Senator Rounds. Or did you?
    Mr. McRaith. No. We created an unprecedented historic 
mechanism to include officials appointed by Governors in most 
States in the negotiating delegation for an international 
agreement. These are individuals--and I was one, so I have 
great respect and affection for Julie and her colleagues and 
the work they do. But these are not--we were not policymakers 
at the State level. But we included the regulators in the 
negotiating delegation out of respect for and appreciation for 
and support for the role and primacy of the State regulators in 
oversight of insurance in the United States.
    Now, my point is----
    Senator Rounds. So you feel like you went above and beyond 
what would have been required.
    Mr. McRaith. Far beyond what has ever happened in the 
history of our country. In addition, to answer your second 
question, the agreement is clear. But as any international 
agreement which covers, you know, thousands of potential fact 
patterns, there will be idiosyncratic questions that come up. 
Julie has raised a couple; Stuart, Mr. Henderson, raised a 
couple. These are things that can be addressed after the 
agreement is signed. To do that now imperils and would likely 
kill the entire arrangement.
    Senator Rounds. It is interesting because it seems to me 
that if it might kill the entire arrangement, it would seem to 
be a pretty significant idiosyncratic question or comment.
    May I go to Ms. McPeak just to follow up?
    Ms. McPeak. I would agree with your comments. If the 
testimony by Mr. McRaith is, in fact, what has been intended by 
the parties all along, confirmation of that fact by current 
Treasury Department officials and the European Commission would 
not seem to be that difficult and would, in fact, be prudent 
and reasonable. If that is going to potentially damage the 
agreement in itself, it would indicate to me and to my 
colleagues as insurance regulators that perhaps we did not have 
a meeting of the minds to begin with. We are just asking for 
clarification before we begin implementation of this agreement.
    Senator Rounds. Yes, sir, Mr. Henderson.
    Mr. Henderson. It just occurs to me listening to this, 
naturally that is unprecedented and historic because it is the 
only one that has ever been done. So that adjective does not 
really mean much.
    I believe that Mr. McRaith is an honorable man and he 
really thinks that is what it says. But when there are so many 
other honorable men and women who read it and do not think that 
is what it says, that is an ambiguity, and that is what has got 
to be clarified.
    Senator Rounds. Yes, sir?
    Mr. Sapnar. As we heard, it took 10 years to get to this 
point, and as people change, we would not necessarily have the 
same people at the table. If you go back to discuss for 
clarification, there is a process set forth clearly in the 
agreement to resolve anything that people need more clarity on. 
I do not think there is a lot--in our opinion, it is a clear 
document.
    Senator Rounds. You know, I am just going to go back here 
because it is exactly the follow-up that I wanted to do on Mr. 
McRaith, and I would like to come back just for a second. Could 
you tell me who will be representing the United States on the 
joint committee? It seems that there is a possibility--would 
State insurance commissioners be included in the joint 
committee?
    Mr. McRaith. It is an excellent question, and we did not 
flesh out all the details of the joint committee in the 
agreement, but we----
    Senator Rounds. It seems like that would be a pretty 
important one to find out.
    Mr. McRaith. Well, we would absolutely--I would suggest and 
have said publicly other places that absolutely State 
regulators should be involved. Now, there is a question----
    Senator Rounds. But it does not state in the joint 
committee who would be on it?
    Mr. McRaith. But we also did not spell out what is a 
quorum. We did not spell out where the meetings should occur. 
We did not spell out whether there should be minutes 
maintained, whether there are votes on items. We did not spell 
out any of those things. But these are entirely natural, 
organic questions that we would expect to be answered 
reasonably, Senator, and as you would expect, in a conversation 
like this where the State regulators were included in the 
negotiating and drafting, we would, of course--I would expect 
they would be included in a joint committee. The question is 
which State commissioner. If it is an issue involved South 
Dakota, we would hope for the South Dakota commissioner. If it 
is an issue involving national policy, say, on reinsurance, we 
would want the representative from the States who leads their 
reinsurance work. If it involves a New York company or an Idaho 
company, we would want the Idaho or New York commissioner 
involved.
    Senator Rounds. Thank you.
    Mr. Chairman, my time has expired. Thank you.
    Chairman Crapo. Thank you.
    Senator Brown. Mr. Chairman?
    Chairman Crapo. Yes?
    Senator Brown. Yes, thank you. Before Senator Warren asks 
her questions, I have just one interjection. As has been 
established, the comment of Senator Rounds about Speaker 
Pelosi's comments about reading the health care bill have been 
proven as simply--has been taken out of context. No legislative 
leader would say, ``I have got to find out what is in the bill. 
I have got to read it now that we have passed it,'' or however 
it is interpreted that she said it. The fact is there are 
900,000 people in my State that have insurance now that did not 
have it before the Affordable Care Act, and I do not know why 
this place needs to continue to relitigate that, that the House 
is struggling, and nobody is reading any of those bills because 
they come so fast and furious. So let us just stick to what 
this issue is.
    Thank you.
    Senator Rounds. Well, Mr. Chairman, if I could respond. It 
is not intended to be derogatory. It is simply a matter that it 
is one thing that we most certainly do not want to have happen 
in here. Most of us, I think, we do not pass things to find out 
what is in----
    Senator Brown. Well, her comments were taken out of 
context, and we all know that, and it has been established. Let 
us focus on----
    Senator Rounds. I thought they were pretty clear.
    Senator Brown. All right.
    Chairman Crapo. OK. So the debate on Obamacare will now 
return to----
    [Laughter.]
    Chairman Crapo. ----covered agreements. Senator Warren.
    Senator Warren. All right. I am ready to rock and roll on 
this. So thank you, Mr. Chairman, I appreciate it. And thanks 
to you and the Ranking Member for holding this hearing.
    So I have taken a look at the written testimony of all of 
the witnesses. I am very glad you are here today to talk about 
this. There are obviously a number of technical but important 
issues at stake in this agreement. But for me, this boils down 
to a pretty basic question. What will it mean for Americans who 
buy insurance, both individuals and companies, if this Covered 
Agreement is adopted and implemented? Or, on the flip side, 
what will it mean for policyholders if this agreement is 
abandoned?
    I recognize that changing reinsurance collateral standards 
will not have a direct impact on policyholders, but I want to 
understand what the secondary effects might be.
    Now, Mr. McRaith, you were the lead negotiator on this, so 
I thought maybe I would just start with you and then hear from 
everyone else. What is the ultimate policyholder impact here as 
you see it?
    Mr. McRaith. Very clearly, U.S. companies that operate both 
in the EU and the U.S., primary insurers, people selling car 
insurance, home insurance, those companies will not have to add 
billions of dollars potentially in capital and compliance costs 
because of the EU regime. They will be able to use that capital 
to keep rates affordable, to offer better products to people on 
the coasts and elsewhere. They will be able to invest that 
capital in growth in other developing economies potentially or 
in new markets in the United States.
    Senator Warren. So you are basically saying a lower cost 
for insurers, and in a perfect market what that will mean is 
passed-along benefits to customers who either can buy at lower 
rates because there is more competition in the marketplace. Is 
that----
    Mr. McRaith. That is a potential benefit to U.S. consumers, 
exactly.
    Senator Warren. OK. And downsides to consumers?
    Mr. McRaith. So I have heard this concern about collateral, 
and I think some facts are important which we have not heard 
yet. As Commissioner McPeak mentioned, 39 States have adopted 
reinsurance collateral reform at the State level. That is 
fantastic progress. This is going to become an accreditation 
standard in 2019, meaning every State has to adopt it.
    When we surveyed the companies that have received relief 
under that reform, there were 31 published by the NAIC; 30 of 
those are posting 10 or 20 percent of the collateral they 
posted several years ago, so----
    Senator Warren. OK. And have prices----
    Mr. McRaith. So it is not going from 100 to----
    Senator Warren. Have prices gone down for their customers?
    Mr. McRaith. That is right, so it improves the--whether it 
affects consumers directly, as you know, there is the chain, 
reinsurer, insurer, consumer.
    Senator Warren. So there is no data yet to show that prices 
actually dropped?
    Mr. McRaith. I think Mr. Sapnar could probably answer that 
question better than I.
    Senator Warren. OK. Ms. McPeak----
    Mr. McRaith. But that would be the expectation.
    Senator Warren. OK, the expectation but no data.
    Mr. McRaith. That is right.
    Senator Warren. Ms. McPeak.
    Ms. McPeak. Thank you. I would disagree with my colleague 
Mr. McRaith. I would say that our States and our colleagues 
that have adopted the Credit for Reinsurance Model Act have 
reduced collateral requirements to 10 to 20 percent. This 
agreement is a wholesale removal of reinsurance collateral. We 
as regulators are going to be looking for consumer protection 
benefits through that counterparty reinsurance risk, and we 
will be trying to create other mechanisms to protect insurance 
consumers and our domestic companies that are purchasing 
reinsurance and no longer have collateral available.
    The uncertainty surrounding the ambiguity in this agreement 
and what mechanisms will be available to us that are 
jurisdictionally agnostic add uncertainty to the market, and I 
think that increases prices to consumers.
    Senator Warren. OK. So you just say higher uncertainty, 
prices go up. All right.
    Mr. Sapnar.
    Mr. Sapnar. Well, the trend of pricing for consumers over 
the last 5 years by almost any line of business in the United 
States has been favorable. It has been what we call a softening 
market, price declines, to the point where, in fact, they were 
not even covering lost costs in the automobile industry, which 
is now having an issue on the insurance side because the 
pricing was so cheap.
    As far as collateral is concerned, nothing prevents people 
from still requesting collateral. It is just not regulatory 
mandated. There are hundreds of companies that post collateral 
without regulation, including my own.
    Senator Warren. I understand that. The question I am trying 
to ask is: If this were adopted or abandoned, what do you see 
is the likely impact on the ultimate user, the policyholder?
    Mr. Sapnar. The other issue as collectibles, we would be--
if it is not adopted and we want to trade in the EU, we would 
move capital outside the United States. That capital would be 
available first to EU policyholders before U.S. policyholders. 
So that is a disadvantage to U.S. policyholders who would be 
second in line to access that capital.
    Senator Warren. So you are saying that you think if we 
abandon this, it means higher risk for U.S. policyholders.
    Mr. Sapnar. Higher risk----
    Senator Warren. Because there will be less capital for them 
to draw on if there is a problem.
    Mr. Sapnar. In the United States, that is correct.
    Senator Warren. All right. I know I am over. Can I have 
just a little bit longer?
    Chairman Crapo. A little.
    Senator Warren. Just a little bit. So the last two, you 
have got to be short. I am out of time. Mr. Henderson? And the 
Chair is being very indulgent.
    Mr. Henderson. Great question. So reinsurers get less costs 
because no offices, they do not have to have the collateral 
there. I can tell you that pricing will not go down. It is an 
all-time low today, and their capital is an all-time high. This 
is a recipe for low pricing. It is not going to change. So that 
cost to me will not go down. That is a cost that is passed on 
to the policyholder.
    The regulator in the U.S., I have just heard, which scares 
the heck out of me, that they are saying, well, if collateral 
is gone, then we are going to have to carry more capital, 
because now we cannot rely on their collateral to pay it; we 
have got to put up our own. If that is the case, costs will go 
up, direct to the consumer.
    If it is abandoned--your next question, if it is abandoned, 
then reinsurers, the only thing that we will really get is 
reinsurers are going to have to open an office in the EU. He is 
going to pay more money for it. He is not going to be happy 
about it. But, again, prices an all-time low, capital is an 
all-time high, there is going to be no increase in reinsurance 
pricing. We will find out when I negotiate; I go to London 
tomorrow where more of this business is done. No one is talking 
higher prices.
    Senator Warren. OK. And, Mr. Zaring, if you could do this 
really quickly.
    Mr. Zaring. I will just say very briefly that, look, this 
agreement increases competition in the reinsurance market, and 
I really hope and expect that it will be eventually and 
ultimately good for consumers.
    And, second, there is nothing in this agreement that 
changes the traditional focus of State regulators on consumer 
protection. This does not touch it, and so I expect that 
consumer protection mission will continue unchanged.
    Senator Warren. OK. I very much appreciate it. Thank you, 
Mr. Chairman. You know, I think if we are thinking about 
signing on to an international agreement like this, this is the 
question we should dig down in. And I am a little disturbed 
about the fact that we do not have some good data based analogs 
that we can see how, when you make changes, it affects prices 
one way or the other.
    Chairman Crapo. I agree.
    Senator Warren. But thank you very much. I appreciate it, 
Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. And thank you for, 
A, holding this important hearing; B, having a unique panel 
with very varied opinions that are very clear and stark; and, 
C, having spent about 23 years in the insurance business, I am 
a fan of the State model. Without any question I think it is 
the best model we have seen, and it has been successful for a 
very long time for a couple of very important reasons.
    At the same time, I know that as we engage in an 
international conversation about insurance regulations and 
norms, it is important for us to look for that equilibrium that 
we--obviously, I do not think we have found it today, as I 
listen to the hearing, but I do have a couple of questions 
about who is in the room and who is at the table. So being in 
the room is one question that you guys have done a pretty good 
job of answering. NAIC, in the room, without staff, without 
general counsel, without the experts that could help you 
understand and appreciate the direction of the agreement. I 
heard Senator Rounds talk about the--I will not say the words 
because I do not want to upset Senator Brown. I will not say we 
have to pass it in order to know what is in it and then create 
30,000 pages of regulations to get that clarity. I will not say 
that. But I will suggest, however, that it feels like the 
certainty and the clarity is not there yet. The negotiations, 
as I was listening to it in my office, seems to suggest that 
the negotiations themselves will help us get that clarity 
because, after all, that is what you do after an agreement is 
signed. Well, I would hope that is what you do before the 
agreement is signed, just personally.
    But the question I have, not about being in the room or 
being at the table, my question is, Ms. McPeak, do you have any 
confidence that the NAIC will be not a part of the conversation 
but at the table represented in a way that preserves what I 
believe is the best insurance model in the world?
    Ms. McPeak. Well, I think it is important to say we do not 
know. Based on the plain language of this agreement, it is 
unclear who will be serving on that joint committee to resolve 
these very important issues. My colleagues and I are willing to 
implement the terms of this agreement to solve this problem, 
again, not of our making, but we just need to know the rules of 
the road. We need to know that the blueprint for our house that 
we are building will actually suffice under the terms of this 
agreement. If not, then there is going to be some kind of 
resolution through a joint committee that we may not even be 
able to participate in.
    Senator Scott. A second question for you, and then we will 
work around the panel. It is my understanding that permanent 
equivalence was granted to companies based in the Bahamas and 
Switzerland but not in the U.S. Is that accurate, Ms. McPeak? 
And then everyone can chime in.
    Ms. McPeak. That is accurate. Bermuda and Switzerland went 
through an equivalence process through Solvency II that was 
specified, and the United States has chosen not to participate 
in that determination. It was going to require changes to our 
financial regulatory system that we were not willing to 
undertake.
    I think that it is a bit absurd that the two most 
sophisticated insurance markets in the world have to undergo 
some equivalence process, again, under the creation of the 
European Commission's direction in Solvency II.
    Senator Scott. Anyone else want to weigh in? Mr. Sapnar.
    Mr. Sapnar. Well, what this agreement does is actually 
formally recognize the U.S. State regulatory system as a strong 
and robust system for the first time ever. There are no 
requirements for the States to change the regulation 
whatsoever. So I think that is a great outcome for that, and 
that will set the standard as other global negotiations go on 
on accounting standards and other capital standards. The 
recognition of the U.S. system is clear in this agreement, and 
that is very important.
    Senator Scott. Mr. Henderson.
    Mr. Henderson. Well, I guess if it was really clear, you 
would not have Julie Mix McPeak saying it is not. I think that 
sort of speaks for itself.
    Mr. McRaith. I think, Senator, if--oh, I am sorry.
    Senator Scott. Mr. McRaith.
    Mr. McRaith. Just very clearly and briefly, as a State 
commissioner I testified in front of this Committee and others 
expressing our opposition undergoing an equivalence process. 
When we started the negotiations, our focus was: How will U.S. 
industry be treated? How will the U.S. system be recognized? So 
we did not want to use the term ``equivalence.'' That is an EU 
term. Nobody quite knows entirely what it means. We in the 
agreement negotiated terms that are clear about how the U.S. 
system is recognized and respected and how the U.S. will 
supervise its companies as it deems appropriate.
    Senator Scott. Mr. Zaring.
    Mr. Zaring. In my view, the agreement does not require the 
Solvency II process to go ahead, but resolves most of the 
problems posed by imposing a Solvency II type regime on 
American insurers. So in that sense, it is better than a 
Solvency II equivalence demonstration.
    I also just wanted to say that I have reviewed this 
agreement, and I look at these international regulatory 
cooperative agreements on occasion, and they can be very, very 
short and terse. This is longer than the first Basel Capital 
Accord, longer than the Memorandum of Understanding the SEC has 
with its foreign counterparts. I think there is a level of 
detail here that is appropriate, and when it comes to 
international regulatory cooperation, we do not necessarily 
want or expect something like a trade treaty or a 1,000-page 
bill or something like that. So I think that is important to 
remember.
    Senator Scott. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. Thank you all for 
being here.
    Mr. Henderson and Ms. McPeak, you all have--well, actually, 
I think Mr. Henderson first, you were talking about how this 
would have an impact on premiums. I think Mr. Zaring said that 
hopefully this would result in a positive impact. So one thinks 
that there is some optimism in this agreement that will get us 
to a positive outcome. The other one who sits on top of an 
insurance company as the CEO says it is going to raise 
premiums. Can you help me reconcile that or give your basis for 
that?
    Mr. Henderson. Well, no disrespect to Mr. Zaring, but he 
studies the stuff. I live it, and I know how the pricing works 
and all the pieces of it. We are a mutual company, so we do not 
have stockholders. It is pretty much we serve our 
policyholders. We try to keep the prices reasonable, not make 
too much money and all that stuff. And there is nothing I see 
in here that is going to cause us anything but higher costs, 
most particularly because of the capital which is going to be 
required because of no collateral.
    Senator Tillis. Mr. Sapnar.
    Mr. Sapnar. With due respect, I think I was the one who 
said there would be benefits, and I am a CEO of a reinsurance 
company. And I would say that when you have collateral, you tie 
it up. You cannot sell that same capacity again. So, by 
definition, you have limited capacity and, therefore, prices 
could go up. By releasing collateral, there is more ability to 
sell to the client.
    Second, again, without this agreement, companies will be 
forced to move capital outside the U.S. You may not see the 
cost tomorrow, but when the failure comes or a financial crisis 
comes and that capital is not in the U.S., you will see the 
cost. And that is a big and dear cost to pay as opposed to 
incremental costs on a daily basis.
    Senator Tillis. Ms McPeak, can you tell me a little--well, 
actually, I have maybe a question that I want you and Mr. 
McRaith to respond to. Mr. McRaith, you said that the joint 
committee, the governance structure is something that needs to 
be worked out over time. I would think the stakeholders that 
are on the other side of the issue--I was in the legislature 
down in North Carolina for 8 years. Governance structures baked 
into the base of legislation tended to be the way to get the 
parties on board because they felt like they had a fair venue 
for working out differences or clarifying the ambiguities.
    What would be wrong with consideration for that as a way to 
address some of the concerns that have been expressed here?
    Mr. McRaith. I completely----
    Senator Tillis. Just time or----
    Mr. McRaith. Look, I think you are absolutely right that 
the issue, though, of who attends and participates depends on 
the underlying issue itself. So, again, I think what the 
agreement shows and demonstrates is a commitment to include 
State regulators as appropriate in the U.S. system, again, 
completely unprecedented in American history. But, second, 
which commissioner would depend on the issue. It might involve 
an issue the North Carolina commissioner should participate in. 
Why would we want a commissioner from Oregon instead? So that 
kind of flexibility is necessary for the joint committee.
    Senator Tillis. Ms. McPeak, I want you to respond to that, 
but also talk a little bit about how this would affect 
Tennessee. By the way, I have got a brother in the State House 
there. He just started back in January. But if you were to take 
the agreement as it is proposed, what do you do? What goes on 
in Tennessee? How does it affect the consumer or the business 
in Tennessee?
    Ms. McPeak. Well, that is the issue that I would like to 
reiterate today. You know, Mr. McRaith is talking about one 
insurance regulator on the joint committee. Why does it have to 
be one? Why couldn't it be a group of three? The problem is we 
just do not know. And I am saying, with all due respect to the 
rest of our panelists here, my colleagues and I are tasked with 
implementing this agreement. We are the only ones at the table 
that will have that responsibility. We do not know how to 
comply with some of the provisions that we have provided to 
this Committee in a list of issues that need clarification.
    Further, we do not know that we have one or maybe even two 
or three seats on this joint committee to be named later. That 
is an issue for us because as we have recognized, there is a 
very real problem with disparate treatment of our companies in 
the European Union, and if we do something incorrect or not 
conceived as part of this agreement, we could void the entire 
agreement because of the cross-conditional issues in the 
agreement itself. And so we could be back right here today with 
these exact same issues just because we did not have 
clarification before we started building a process to implement 
these requirements under the agreement.
    As for actions in Tennessee, we have already passed in 
Tennessee the Credit for Reinsurance Model Act adopted by the 
NAIC in 2011. So for me, we would begin working as insurance 
regulators across the Nation to come up with consumer 
protection requirements, put those into a model act to be 
adopted by the National Association of Insurance Commissioners 
and take those to our individual State legislatures and 
Governors for adoption, and keep in mind, when 39 of us have 
already been there asking for our own model for reinsurance 
collateral reduction in the last several years or so.
    So, you know, we need to be very clear that whatever 
product we come forward with to implement this agreement is 
going to be sufficient under the consideration of the agreement 
itself.
    Senator Tillis. Thank you.
    Thank you, Mr. Chair.
    Chairman Crapo. Thank you very much. That concludes the 
Senators who have sought to ask questions. I am going to ask 
one more question before we wrap up and then make a general 
request to all of the witnesses to respond in writing to 
another question.
    As a matter of fact, Senators can submit questions to you 
after the hearing is concluded, and we encourage you to respond 
within 1 week of the receipt of those questions, and I will 
tell the Senators we expect those questions to be submitted 
within 2 days.
    The question I have is just for Mr. McRaith and Ms. McPeak, 
and these can be very brief answers. I just want to try to see 
if I am understanding this accurately. In Article 4 of the 
agreement, group supervision by the host jurisdiction is not 
authorized at the worldwide parent level. However, Article 4(h) 
allows the host to apply a group capital assessment at the 
worldwide parent level if the home jurisdiction does not have a 
sufficient group capital assessment.
    Now, Mr. McRaith, first, is it your belief that the States 
are adequately protected under this clause?
    Mr. McRaith. Absolutely. Let me be clear. Article 4(h) 
says--clarifies. The States have been working on a group 
capital calculation for over 2 years now. What the agreement 
says is for those companies that operate in the EU and the 
U.S.--not Mr. Henderson's company, but those that are operating 
in those two jurisdictions, the States have an additional 5 
years to develop their group capital calculation, and it does 
not prescribe the manner, the content, the specifications of 
that calculation, period.
    Chairman Crapo. All right. And, Ms. McPeak.
    Ms. McPeak. I would completely disagree. The language that 
you read from Article 4 that talks about group supervision 
causes us concern that we may not be able to require and 
request the financial information that we are currently allowed 
to collect on European companies under State law today.
    Further, we do not know whether our group capital 
assessment tool that we are working on will be sufficient under 
Article 4 to meet the terms of the agreement because we are 
looking at the assessment as one regulatory tool, and we have a 
lot of other regulatory authority to step in; if we saw an 
issue of capital that we could require many different courses 
of action other than adding additional capital to the company. 
We believe that the pure text of the agreement would indicate 
that we can have the capital assessment or there must be some 
capital assessment that goes on, but the solution for that is 
more capital, and we do not think that that is always the 
answer.
    Again, it is an ambiguity that we just need clarification 
on before we begin the process.
    Chairman Crapo. All right, and thank you. I want to thank 
all the witnesses for bringing your expertise to us and helping 
us to understand this issue better.
    The question that I would like to submit to you that I 
would like you to respond to in writing is really the first one 
that I asked. There is obviously some disagreement about 
whether there is sufficient clarity, and that raises the 
question of can we resolve this disagreement without reopening 
the agreement. Can these issues be resolved through some type 
of joint letters of understanding or clarification? Or will 
that undo or require reopening of the agreement? I would just 
like all five of the witnesses to just respond to us on that 
question if you would.
    And, with that, again, I want to thank our witnesses. You 
have all been very helpful today. Recently, we have heard from 
many industry participants and stakeholders about a provision 
in Dodd-Frank regarding how the independent insurance expert to 
the Financial Stability Oversight Council will serve once his 
term expires. This is an important role on FSOC given the 
Council's authority to designate nonbanks. Mr. Woodall's term 
expires in September, and the statute is unclear on the 
holdover structure. I think there is an issue that Ranking 
Member Brown and I can work on in a bipartisan manner to 
provide additional clarity. I just wanted to announce that we 
intended to do so.
    Senator Brown. And we will certainly work with you. Thank 
you.
    Chairman Crapo. All right. Thank you very much.
    With that, this hearing is adjourned. And, again, thank you 
very much to all of our witnesses.
    Senator Brown. Thank you all.
    [Whereupon, at 11:20 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF MICHAEL T. MCRAITH
 Former Director, Federal Insurance Office, Department of the Treasury
                              May 2, 2017
    Chairman Crapo, Ranking Member Brown, Members of the Committee, 
thank you for inviting me to testify in this hearing ``Examining the 
U.S.-EU Covered Agreement''.
    I previously served as the Illinois Director of Insurance from 
2005-2011, and as the Director of the Federal Insurance Office (FIO) at 
the U.S. Department of the Treasury from 2011 until January 20, 2017.
    While serving as the FIO Director, among other things, I 
coordinated and developed Federal policy on prudential aspects of 
international insurance matters and served as Treasury's lead 
negotiator for the ``Bilateral Agreement Between the European Union and 
the United States of America on Prudential Measures Regarding Insurance 
and Reinsurance'' (Covered Agreement).
    The Covered Agreement will open the entire European Union (EU) 
reinsurance market to U.S. reinsurers, spare U.S. industry potentially 
billions of dollars in compliance costs, and embrace the U.S. State 
regulatory approach to insurance group supervision.
    I first testified before Congress on June 20, 2006, on behalf of 
the National Association of Insurance Commissioners (NAIC) in the U.S. 
Senate Committee on the Judiciary, and offered testimony in support of 
the limited anti-trust exemption in the McCarran-Ferguson Act. As in 
that first hearing, and in every hearing since, I reiterate today my 
support for the U.S. integrated system of insurance oversight wherein 
the States remain the primary regulators of the business of insurance.
    Most States have diverse insurance markets in which multinational 
insurers of great size, scale and complexity compete against insurers 
that operate only in one State, or in only one region of one State. As 
the Director of Insurance in Illinois, I witnessed firsthand the 
importance of all aspects of the insurance industry to consumers, to 
local and State economies, to employees, and to our national interests. 
Insurance agents, brokers, and companies are an essential feature of 
every American community.
    Insurance is a necessary component of America's promise of economic 
fairness and opportunity. Competitive insurance markets benefit 
America's working families and small businesses. Products and services 
offered by America's insurers allow families to protect and accumulate 
property, to transfer wealth between generations, and to support a 
financially secure retirement.
    Indeed, FIO's Covered Agreement authority recognizes the global 
interests of the U.S. insurance sector and the implications of those 
interests for the American insurance industry and consumers. For these 
reasons, among others, Treasury and the United States Trade 
Representative (USTR) jointly negotiated and agreed upon the Covered 
Agreement with the EU.
    On February 16, 2017, the U.S. House of Representatives Committee 
on Financial Services held a hearing entitled ``Assessing the U.S.-EU 
Covered Agreement''. Annex A to this written testimony contains replies 
to Questions for the Record that followed that hearing. In particular, 
the reply to the first QFR provides a paragraph-by-paragraph 
description of the legal benefits of the Covered Agreement for the 
United States.
    To highlight a few key points:

  1.  ``Equivalence'', as defined by the EU, would require the United 
        States to implement a global group capital requirement. The 
        Covered Agreement will preserve the independence of the U.S. 
        approach to insurance group supervision.

  2.  Reinsurance collateral reforms, drawn from the approach that 
        State insurance regulators have adopted as a requirement for 
        every State, do not have retroactive effect and cannot change 
        existing reinsurance agreements.

  3.  The entire Covered Agreement is cross-conditional. Both the 
        United States and the EU must provide the benefits in order to 
        receive the benefits. Any unilateral action adverse to the 
        other could result in the loss of the benefits of the Covered 
        Agreement.
Background
    The prudential insurance matters addressed by the Covered Agreement 
are neither new nor surprising. Reform of the U.S. State reinsurance 
laws was first debated by State regulators in 1999, if not earlier, 
well more than a decade before State regulators unanimously adopted 
modernized model laws and regulations in November 2011.
    However, despite energetic efforts by State regulators through the 
NAIC, only 32 States have adopted some version of reinsurance reforms. 
Both the content and the implementation of that reform varies across 
those 32 States. For this reason, among others, State regulators, 
through the NAIC, opted in 2016 to establish reinsurance reforms as an 
NAIC accreditation standard, effective January 1, 2019. By virtue of 
this NAIC decision, all States must adopt a law or regulation 
substantially similar to the NAIC model law and regulation by January 
1, 2019.
    While the NAIC spent years working through alternative approaches 
to reforms of State-based credit for reinsurance laws, the EU spent 
years developing its Solvency II insurance supervisory regime. Solvency 
II was first previewed and anticipated more than 10 years before its 
implementation on January 1, 2016. The EU and its member States should 
be congratulated on the successful technical development and 
implementation of Solvency II, an EU-wide system of insurance oversight 
that reflects a high level of professional and political 
accomplishment.
    Almost from the earliest days of the development of Solvency II, 
U.S. insurance sector stakeholders, including State regulators, were 
aware that Solvency II could require the EU to evaluate whether non-EU 
insurers and reinsurers operating in the EU market were domiciled in 
``equivalent'' jurisdictions. An ``equivalent'' jurisdiction is one, 
such as Switzerland, which supervises its insurers consistent with 
Solvency II practices and standards, i.e., global group capital, 
reporting and governance.
    Among other reasons, Solvency II and its supervisory approach 
matter to the United States because, in terms of premium volume, the 
EU's consolidated insurance market is the largest in the world. Also, 
EU insurers and reinsurers operating in the United States provide 
insurance and annuity products to millions of American families and 
businesses, employ tens of thousands of Americans in States around our 
country, and provide essential capital following a disaster, including 
9/11, Hurricanes Katrina, Rita, and Wilma, and Superstorm Sandy.
    As the world's largest single Nation insurance market, U.S. 
insurance authorities have repeatedly refused submission to the formal 
EU Solvency II equivalence process. The United States has long-held 
that the United States substantively and structurally regulates its 
insurance sector as the United States determines appropriate, just as 
the EU determines how to supervise the insurance sector within the EU. 
The Covered Agreement affirms this independence.
    Nevertheless, U.S. insurance stakeholders have known that failure 
to resolve the Solvency II ``equivalence'' issue could result in: (1) 
U.S. reinsurers losing opportunities in the EU reinsurance market, and 
(2) U.S. primary insurers being forced to satisfy Solvency II global 
group capita l, reporting and governance criteria that are far 
different, and far more costly, than current U.S. regulatory practices.
    As the EU moved to implement Solvency II on January 1, 2016, U.S. 
insurance stakeholders learned more about the potential negative impact 
on U.S. reinsurers and insurers. At the same time, U.S. State insurance 
regulators continued the massive (albeit piecemeal) effort to reform 
reinsurance oversight. Nevertheless, in exchange for this reform, State 
regulators received nothing of benefit for U.S.-based insurers and 
reinsurers operating in the EU. Nothing.
    Following often difficult and contentious negotiations that began 
in early 2016, the Covered Agreement will resolve these long-standing 
issues. The Covered Agreement will remove excessive unnecessary 
regulation of the global reinsurance industry in both markets, open the 
EU reinsurance market to U.S. reinsurers, and relieve U.S. primary 
insurers of potentially billions of dollars in Solvency II compliance 
costs.
    While providing an equally meaningful outcome for the EU, the 
Covered Agreement puts America's interests first. U.S. insurance 
consumers, industry and the U.S. national economy will benefit from the 
Covered Agreement.
Covered Agreement Negotiations--Process and Transparency
    U.S. State regulators, most of whom are appointed and serve at the 
will of a State Governor, have never before been directly included in 
the negotiating delegation for a U.S. international agreement. However, 
in recognition of the unique role of the States in insurance sector 
oversight, and even though not required by law, the Covered Agreement 
negotiation process created an unprecedented mechanism for State 
regulator participation.
    Treasury and USTR asked the State regulators to establish a small 
covered agreement task force of commissioners, and allowed the State 
regulators to determine the size and membership of the task force.
    State regulators were invited to, and did, participate in every 
Covered Agreement negotiating session.
    State regulators were invited to, and did, share perspectives, 
technical insights, and ask questions during U.S. delegation 
preparations in advance of any Covered Agreement negotiating session.
    State regulators were consulted throughout the Covered Agreement 
negotiation process, including during any Covered Agreement negotiating 
session.
    During the Covered Agreement negotiations, a State regulator sat at 
the table with the U.S. delegation and frequently provided technical 
insights.
    Through a confidential web portal established solely for purposes 
of sharing confidential Covered Agreement documents with the State 
regulator task force, State regulators received all documents offered 
by the EU shortly after those documents were received by Treasury and 
USTR.
    Through the same confidential web portal, State regulator s 
received all U.S. Covered Agreement documents before those documents 
were provided to the EU.
    Before any U.S. Covered Agreement document was provided to the EU, 
State regulators were invited to, and did, participate in a telephone 
call with Treasury and USTR to provide State regulator feedback and 
insight, and to ask questions. These telephone calls frequently 
resulted in important insights and perspectives that were incorporated 
into, or addressed in, the U.S. Covered Agreement document before that 
document was provided to the EU.
    Prior to my departure from Treasury, both Treasury and USTR 
expressed appreciation to Tennessee Commissioner McPeak and her 
colleagues from California, Texas, Missouri, Florida, Vermont, 
Wisconsin, Kentucky, Maine, and Montana for their constructive input 
and insights provided throughout the Covered Agreement negotiation.
    U.S. State regulators made important contributions that improved 
the outcome of the Covered Agreement. These regulators, including 
Commissioner McPeak, should be commended for contributing substantial 
time and energy to the Covered Agreement negotiations even while 
tending to the business of insurance in their home States and to the 
various NAIC activities in which they are engaged.
    In addition, throughout the Covered Agreement negotiations, 
Treasury and USTR consulted extensively with the four Committees of 
jurisdiction in Congress. These consultations occurred in person and by 
telephone, and occurred before negotiations began, before and after 
each negotiating session, and before the negotiations and the Covered 
Agreement were finalized.
    Treasury and USTR also extensively consulted with private sector 
stakeholders, particularly those U.S. insurers and reinsurers with 
operations in the EU.
    Treasury and USTR also worked closely with the entire U.S. Covered 
Agreement negotiating delegation which, in addition to Treasury and 
USTR and the State insurance regulators, also included the Departments 
of Commerce and State, and the Board of Governors of the Federal 
Reserve System.
    This extensive transparency and stakeholder engagement supported 
and informed Treasury and USTR's work throughout the Covered Agreement 
negotiating process.
Credit for Reinsurance Reform--Removing Excessive Regulation of a 
        Global Industry
    The reinsurance industry largely manages risk on a global basis. 
The reason is obvious: in order to avoid concentration of risk from 
natural catastrophes, or from a mass epidemic, reinsurers spread 
capital to different areas and continents. Insurance supervisors 
support this approach in order to promote affordable and reliable 
reinsurance markets and, in turn, promote the affordability and 
accessibility of insurance products to working families and small 
businesses throughout the United States.
    The Covered Agreement supports the U.S. State-based initiative to 
reform reinsurance regulation. In fact, the 32 U.S. States that have 
already adopted reinsurance collateral reform have, as of early 2017, 
provided collateral relief to 31 non-U.S. reinsurance entities. Of 
those 31, 30 now hold 10 percent or 20 percent of the collateral 
required under prior State laws.
    The State regulators' adoption of reinsurance collateral reform as 
an accreditation standard, effective January 1, 2019, means that all 
States would be expected to adopt a substantially similar reform by 
that date. In other words, within the next 2 years, as a matter of 
State law, every non-U.S. reinsurer could be posting as little as 10 
percent-20 percent of the collateral formerly required by the States.
    If domiciled in a non-equivalent country, a reinsurer operating in 
the EU could be subject to EU member State laws that require 
collateral, a local presence, or other prohibitive regulatory 
requirements. Beginning in mid-2016, U.S. reinsurers were losing 
existing EU clients and missing new opportunities in the EU. Before the 
Covered Agreement was provided to Congress on January 13, 2017, U.S. 
reinsurers were experiencing this burden in full force: at least two EU 
member States, with more in process, required that U.S. reinsurers 
either establish a subsidiary or operate in the EU member State only 
without the use of brokers.
    The Covered Agreement eliminates collateral and local presence 
requirements for EU reinsurers operating in the United States and U.S. 
reinsurers operating in the EU. The Covered Agreement eliminates 
excessive reinsurance regulation in the United States and the EU, and 
establishes a new global paradigm for oversight of this essential 
global industry.
    If the Covered Agreement conditions are met, current collateral 
requirements for EU-based reinsurers will be eliminated within 60 
months from the date the Covered Agreement enters into force or, 
perhaps, as early as mid-2023. States, therefore, have sufficient time 
beyond the NAIC' s existing plan for accreditation (January 1, 2019) to 
conform all State law and regulation to the terms of the Covered 
Agreement.
    In addition, if the Covered Agreement conditions are met, current 
local presence requirements for U.S. reinsurers in the EU (or EU 
reinsurers in the United States) will be eliminated within 2 years from 
the date of signature. Due to the success of the Covered Agreement 
negotiations, EU member States that were imposing local presence 
requirements on U.S. reinsurers are already forbearing from enforcement 
of local presence requirements.
    By combining meaningful reporting requirements with the potential 
for re-imposition of local presence or collateral requirements, the 
Covered Agreement enhances the protections available to primary 
insurers and consumers in both the EU and the United States. For 
example, a reinsurer must confirm in writing that it consents to the 
jurisdiction of the courts where the primary insurer is domiciled, and 
must consent in writing to pay all final and enforceable judgments 
wherever enforcement of that judgment is sought. Also, reinsurers must 
maintain a practice of prompt payment, and could be required to report 
to the ceding insurer' s supervisor semi-annually with an updated list 
of all disputed and overdue reinsurance claims that have been 
outstanding for 90 days or more.
    These protections, and the myriad others contained in the Covered 
Agreement, apply to U.S. reinsurers operating in the EU and to EU 
reinsurers operating in the United States.
    In exchange for these enhanced consumer protections, the EU and 
U.S. reinsurance markets will be open to nondomestic competition in an 
unprecedented manner, thereby providing free market opportunities that 
will meaningfully benefit ceding insurers and insurance consumers.
    Finally, and importantly, the Covered Agreement provides that U.S. 
State law and regulation (and EU law and regulation) can revert to its 
prior form if the Covered Agreement is terminated. Termination of the 
Covered Agreement will allow for the ``snap back'' of collateral or 
local presence requirements, precluding the prospect that the EU or 
United States could benefit from the Covered Agreement despite failing 
to provide the benefits.
Group Supervision--Mutual Respect Finalized
    In Article 4, the Covered Agreement describes insurance group 
supervision practices in a manner that accommodates the distinctly 
different approaches of both the United States and the EU. Annex A 
includes a description of the legal benefits of each paragraph of the 
Covered Agreement, including Article 4.
    Notably, the group supervision practices of the Covered Agreement 
(Article 4) apply only to those insurers operating in both the EU and 
the United States.
    For purposes of defining the scope of the group, the Covered 
Agreement retains flexibility for the United States and the EU to move 
forward as each deems appropriate. The scope of the group is understood 
to be consistent with Insurance Core Principle (ICP) 23 developed by 
the International Association of Insurance Supervisors and in effect in 
early 2017.
    Through the Covered Agreement, the EU and the United States agree 
that supervisors of the jurisdiction in which the insurer (or 
reinsurer) is domiciled are the only supervisors with authority to 
supervise the insurers at the global group level.
    The Covered Agreement group supervision practices memorialize the 
mutual respect shared by the EU and the United States, and comprise 
explicit recognition that neither the EU nor the United States will 
change insurance regulatory systems and structures just because of the 
other. As a factual matter, supervisors in both jurisdictions have 
adopted, or pursued, practices that originated with the other. For 
example, U.S. State regulators began development of an Own Risk 
Solvency Assessment (ORSA) based on the idea as it originated with the 
EU. Over time, U.S. State regulators adopted the ORSA but in a U.S.-
specific way. At the same time, EU supervisors have studied the U.S. 
State regulators' approach to the collection, compilation and 
publication of insurance industry data, and are developing a system of 
insurer reporting that, while different from the U.S. State approach, 
is based on ideas as originated in the United States.
    Beginning in 2014, U.S. State insurance regulators, through the 
NAIC, began development of a group capital calculation for U.S. 
insurers and reinsurers. This initiative reflects a growing awareness 
among international insurance supervisors that a common group capital 
standard for multinational insurers will allow for nondomestic 
insurance regulators to protect consumers and promote financial 
stability within their jurisdictions. Although the NAIC group capital 
initiative has been under development for over two years, it remains in 
the early phases as State regulators evaluate alternative approaches 
both to the scope and the technique for the calculation.
    It is clear, however, that the NAIC's group capital calculation 
will not be a group capital requirement, and will not require capital 
to be held by U.S.-based insurers and reinsurers in any place other 
than the insurance legal entities over which State regulators have 
authority. The Covered Agreement confirms these two facts, and provides 
U.S. State regulators with flexibility to build the U.S. group capital 
calculation on specifications that they determine appropriate. To 
repeat for clarity, the Covered Agreement only requires that U.S. State 
regulators proceed with group capital work already underway through the 
NAIC and does not specify how that work should proceed or conclude.
    To be abundantly clear, the Covered Agreement will not require that 
U.S. State regulators develop an approach that requires capital to be 
held outside of an insurance legal entity, and the reference to 
``corrective, preventive, or otherwise responsive measures'' merely 
restates existing State-based insurance holding company laws. Indeed, 
to repeat again for clarity, the Covered Agreement further limits the 
application of the State regulators' group capital calculation to a 
much smaller group of U.S. insurers and reinsurers (i.e., only those 
operating in the EU) than presently contemplated by the State 
regulators.
    Importantly, just as the United States sought respect for the U.S. 
approach to its group capital calculation, the Covered Agreement is 
also drafted in a manner that accommodates and expresses respect for 
the EU approach to a global group capital requirement. Although 
different from the U.S. approach, Solvency II has formed the basis for 
insurance regulatory reforms around the world, including in Mexico, 
South Africa, Bermuda, Brazil, and China.
    The Covered Agreement limits the application of the EU's Solvency 
II global group supervision practices to the operations and activities 
of U.S. insurers that occur in or originate from the EU. While the same 
limitation of U.S. law and regulation also applies to EU insurers 
operating in the U.S. market, the limitation on the application of 
Solvency II saves U.S. insurers potentially billions of dollars in 
additional compliance costs.
    The Covered Agreement will benefit U.S. insurance consumers through 
increased affordability, increased insurer investment in the U.S., and 
more efficient use of the capital that would otherwise be tied to 
Solvency II compliance. The Covered Agreement provides U.S. insurers 
operating in the EU with the strategic flexibility necessary for 
continued domestic and global growth.
    The Covered Agreement will provide insurers and reinsurers that 
operate in both the United States and the EU the long-sought clarity 
and certainty with respect to the relationship between the two 
different supervisory approaches. The Covered Agreement incorporates, 
and memorializes, shared mutual respect between the EU and the United 
States.
The Covered Agreement Resolves Reinsurance and Group Supervision With 
        Finality
    Neither the United States nor the EU can benefit from the terms of 
the Covered Agreement without also providing to the other the benefits 
of the Covered Agreement. In other words, the provisions of the Covered 
Agreement are cross-conditional.
    If the United States fails to perform on the reinsurance reforms, 
then the EU need not comply with the group supervision practices. If 
the EU does not comply with the group supervision practices, then the 
United States need not comply with the reinsurance reforms. The cross-
conditional nature of the Covered Agreement incentivizes compliance by 
supervisors in both the EU and the United States.
    The Covered Agreement need not be clarified with further written 
materials. The Covered Agreement terms, painstakingly negotiated, are 
abundantly clear even if not written to resolve every stakeholder's 
nuanced fantasies.
    For example, if a stakeholder were to complain about the 
uncertainty of 5 years hence, one might ask that stakeholder to explain 
whether that same question can be raised about every agreement or, for 
that matter, every facet of life, or, in fact, any subsequent written 
material that stakeholder may claim to be essential. For this reason, 
the cross-conditional nature of the Covered Agreement allows for the 
United States to provide the benefits of the Covered Agreement only 
insofar as the EU also provides the benefits. Both sides are 
disciplined into compliance with the Covered Agreement.
    To the extent that the EU and the United States have questions 
about interpretation or implementation in the coming years, the Covered 
Agreement establishes a Joint Committee to address and resolve any 
ambiguity. This Joint Committee mechanism, not unlike those established 
to implement other international agreements, would allow for both broad 
and targeted subjects to be addressed in a collaborative manner.
    Finally, if both the EU and the United States have complied with 
the Covered Agreement conditions, then the terms of the Covered 
Agreement become permanent and final. See Article 10, paragraph 1.
Federal Insurance Office
    After the devastation wrought by the financial crisis, Title V of 
the Dodd-Frank Consumer Protection and Wall Street Reform Act 
established FIO to complement the work of the States with respect to 
the U.S. insurance regulatory system. Among other authorities, FIO has 
statutory authority to represent the United States on prudential 
aspects of international matters. In doing so, FIO has worked closely 
with the insurance professionals at the Board of Governors of the 
Federal Reserve System, State regulators, and staff at the NAIC. In 
addition, working with our international counterparts, FIO supported 
international consensus that accommodates the substance and structure 
of the U.S. insurance regulatory system.
    Make no mistake--U.S. leadership in the global insurance sector is 
more important now than ever before. Developing economies around the 
world seek private capital and insurance products to provide the same 
benefits to their populations that the industry provides to families 
and businesses in the United States.
    Where the United States does not engage, or lead, then the United 
States cedes the development of regulatory concepts to other 
jurisdictions. The global insurance community will not wait for the 
United States if we repeatedly re-hash the currently unchallenged 
merits of the McCarran-Ferguson Act.
    The U.S. insurance industry, in all of its diversity, deserves 
prominent U.S. Federal leadership on important global insurance 
matters. For those who would argue that only a State (which State?) 
should have this role, the actual salient question is whether the 
United States prefers to lead or to follow.
    As an industry of $8.5 trillion in assets (2015 total) in the 
United States, and a critical tool for all aspects of American personal 
and commercial activity, the U.S. insurance sector deserves a 
heightened prominence in the U.S. Department of the Treasury. Recent 
proposals, including by the Bipartisan Policy Council, affirm the 
increasing awareness of the U.S. insurance sector's national and global 
importance.
    Industry and consumers have a shared interest in efficient, well-
regulated and competitive markets. FIO has published 16 reports, 
including on topics relating to insurance consumer matters and the 
development of an affordability index of personal auto insurance. This 
work highlights the State-by-State differences and the impact of those 
differences on the insurance industry and the American people.
    FIO has engaged domestically in, or led U.S. engagement in, a broad 
range of matters, including retirement security, resilience to severe 
weather events, cyber-security, implementation and interpretation of 
the 2015 terrorism risk insurance program, as well as nuts and bolts 
insurance projects such as flood insurance and long-term care 
insurance. This engagement has assured that insurance matters of 
national interest and concern are identified, recognized, understood, 
and appreciated at the highest levels of the Federal Government.
    As one of the most highly regulated and quickly evolving financial 
services, the U.S. insurance sector--consumers and industry--deserves 
strong national and global representation and leadership. Federal 
leadership, including through Congress, will be increasingly necessary 
to address important insurance issues of national interest.
Conclusion
    Treasury and USTR pursued a Covered Agreement that would 
memorialize the obvious prerogative of the United States to determine 
the substance and structure of U.S. insurance oversight. In addition, 
Treasury and USTR sought a Covered Agreement that would provide 
meaningful benefits for U.S. insurers, reinsurers, consumers, and for 
the U.S. economy. While providing equally meaningful benefits for the 
EU, this Covered Agreement achieves all objectives sought by the United 
States.
    At every point in the Covered Agreement negotiation, Treasury and 
USTR prioritized the best interests of U.S. consumers, U.S. insurers 
and the U.S. economy.
    Chairman Crapo, Ranking Member Brown, thank you for the opportunity 
to speak with you today. I look forward to your questions.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                 PREPARED STATEMENT OF JULIE MIX MCPEAK
Commissioner, Tennessee Department of Commerce and Insurance, on behalf 
         of the National Association of Insurance Commissioners
                              May 2, 2017
    Thank you Chairman Crapo, Ranking Member Brown, and Members of the 
Committee. My name is Julie Mix McPeak. I serve as the commissioner for 
Commerce and Insurance for the State of Tennessee and current 
President-Elect of the National Association of Insurance Commissioners 
(NAIC). I greatly appreciate your invitation to testify before you 
regarding the covered agreement between the European Union and the 
United States.
    The NAIC is well aware of the disparate regulatory treatment some 
European Union (EU) jurisdictions are imposing on certain U.S. insurers 
doing business in the EU and are committed to working with Congress and 
the Administration to address this important issue for our sector. 
While a covered agreement is one way to do so, we have serious concerns 
with the text of the current agreement. It is ambiguous in several 
respects making it difficult to evaluate the benefits to the U.S. 
insurance sector and more importantly, making it difficult to 
implement. We therefore urge the Administration to clarify or confirm 
certain provisions prior to moving forward with this agreement and 
asking the States to take on the significant undertaking related to any 
implementation.
Background
    Under the EU's new Solvency II regime, which went into effect on 
January 1, 2017, an assessment is required to determine whether another 
country's regulatory system is equivalent to elements of their new 
regime, and then penalizes that nonequivalent country's insurers with 
additional regulatory requirements. This has the effect of either 
imposing the EU approach on the rest of the world, or placing companies 
from those jurisdictions at a competitive disadvantage when operating 
within the EU. Last year, certain EU member countries such as Germany 
and the U.K. began imposing additional regulatory requirements on U.S. 
companies as they implement Solvency II. Though the materiality of the 
impact to the U.S. insurance sector does not appear extensive, this is 
troubling.
    The EU may argue that serving as judge and jury of other countries' 
regulatory systems is an important tool for ensuring emerging markets 
are safe for EU investment. But the U.S. is the largest market in the 
world and has proven to be as effective as the best aspirations of 
Solvency II. Keep in mind, Europe's new system won't be fully 
implemented for another decade, may undergo further revisions, and has 
been deemed inappropriate for the U.S. insurance sector by State 
insurance regulators and the Federal Reserve. We are already subject to 
assessment and scrutiny by governors' offices, State legislatures, 
Congress, Government watchdogs, and international standard setters, and 
our track record of ensuring a competitive and fair market for more 
than 145 years speaks for itself.
    That's not to say U.S. insurance regulators are unwilling to work 
with our colleagues overseas to address regulatory cooperation and 
areas of convergence. For several years, we have engaged our EU 
counterparts on regulatory issues, and to coordinate the oversight of 
global market players. As part of the U.S./EU dialogue project with 
Treasury and the EU, we have explored both our regulatory regimes in 
depth and discovered that despite our structural differences, we have 
much in common. On the heels of the project, the EU granted provisional 
equivalence to the United States' group solvency regime--which largely 
benefited EU insurers--and acknowledged our system's substantial 
confidentiality protections; all without a covered agreement.
    Nevertheless, on November 20, 2015, the previous Administration's 
Treasury Department and the Office United States Trade Representative 
(USTR) notified Congress they intended to initiate negotiations to 
enter into a covered agreement with the European Union to address the 
disparate treatment of U.S. firms operating in the EU. \1\ They made it 
clear they would not enter into a covered agreement unless terms of the 
agreement were beneficial to the United States. State insurance 
regulators were also promised a meaningful role during the covered 
agreement process. In that notification, the Treasury Department and 
USTR set out the following negotiating objectives:
---------------------------------------------------------------------------
     \1\ Anne Wall and Michael Harney. Letter to Congress Re: 
Initiation of Covered Agreement Negotiations, 20 Nov. 2015.

  1.  ``treatment of the U.S. insurance regulatory system by the EU as 
        `equivalent' '' under Solvency II ``to allow for a level 
        playing field for U.S. insurers and reinsurers operating in the 
---------------------------------------------------------------------------
        EU;''

  2.  ``recognition'' by the EU of the U.S. insurance regulatory 
        system, including with respect to group supervision;

  3.  ``Facilitat[ion of the] the exchange of confidential regulatory 
        information between lead supervisors across national borders;'' 
        \2\
---------------------------------------------------------------------------
     \2\ The agreement encourages, but does not require, supervisory 
authorities to cooperate in exchanging information while respecting a 
high standard of confidentiality protection. It appears to do little of 
substance in relation to laws or procedures related to information 
exchange.

  4.  ``nationally uniform treatment of EU-based reinsurers operating 
        in the United States, including with respect to collateral 
---------------------------------------------------------------------------
        requirements;'' and

  5.  ``permanent equivalent treatment of the solvency regime in the 
        United States and applicable to insurance and reinsurance 
        undertakings.''

    Following notification to Congress, the Treasury Department and 
USTR negotiated for over a year behind closed doors. Unlike a trade 
agreement, which is subject to established procedures for consultation, 
input from the States and a vote by the Congress, there was no formal 
consultation with a broader group of U.S. stakeholders including 
industry and consumer participants. State regulators were assured we 
would have direct and meaningful participation in this covered 
agreement process, but the few of us involved in the process were 
subject to strict confidentiality with no ability to consult our staff 
and fellow regulators, and with little ability to impact the outcome. 
In fact, even here testifying before this Committee, I cannot identify 
specific concerns or disagreements that may have occurred during the 
negotiation. The process was also skewed in favor of the EU from the 
beginning by the fact that it retained the ability to approve the 
agreement by the European Parliament and the European Council, whereas 
the U.S. retained virtually no congressional vetting authority prior to 
possible preemption of U.S. insurance regulations. Negotiations were 
completed in January and the Agreement was submitted to Congress on 
January 13 for the layover period mandated by the Dodd-Frank Act.
An Ambiguous Agreement Is Not an Agreement
    Based on a plain reading of the text, we believe the previous 
Administration's Treasury Department and USTR failed to meet several of 
their objectives. While we recognize the agreement appears to provide 
some benefit to certain U.S. insurers operating in the EU by 
eliminating EU local presence requirements over time, this agreement 
does not require the EU to grant the U.S. permanent equivalence (or 
comparable treatment), and in fact, the word ``equivalence'' is nowhere 
to be found in the document. This means, even post covered agreement, 
insurers based in Bermuda or Switzerland, for example, (which have 
received equivalence) receive greater benefits from the EU than U.S. 
insurers. Yet, under this agreement, the United States, one of the most 
sophisticated and well-regulated insurance marketplaces on the globe, 
continues to be treated by Europe with unjustifiable skepticism. We 
remain under suspicion, we continue to be monitored, and whatever 
freedoms afforded by this agreement can be revoked. Similarly, this 
agreement also fails to grant full ``recognition'' by the EU of the 
U.S. insurance regulatory system, including with respect to group 
supervision. While this agreement appears to prevent the EU from 
imposing its requirements on the ``worldwide parent'' located in the 
United States, it does not provide promised ``recognition'' or require 
the EU to recognize the U.S. as equivalent.
    While there is little that can be done about the process issues 
involved in reaching this agreement, this Administration still has an 
opportunity to address the substantive issues raised by the agreement 
itself, notably the myriad of ambiguities that exist. Much has been 
made by former Administration officials about how this is a great deal 
for the U.S. We would welcome an outcome that benefits the U.S. market 
and resolves the outstanding issues with finality but in looking at the 
four corners of the document, it is impossible to know whether we have 
such an outcome without confirmation from those interpreting it on both 
sides of the Atlantic. Thus we support the bipartisan requests coming 
from Congress requesting that the Treasury Department and USTR find 
some mechanism to resolve these important issues before States are 
asked to engage in the resource intensive efforts surrounding 
implementation. Let me provide just some specific examples of a few of 
the key areas of ambiguity
    Overall the language of the agreement is ambiguous as to the 
obligations of the parties and the entities to which it applies (e.g., 
the insurance group, the insurance and non-insurance group, the legal 
entities, or a combination). The agreement also appears to supersede 
existing authority of regulators to obtain information or take certain 
actions currently authorized under State laws. Indeed, there are 
potential conflicts between provisions and limitations in this 
agreement and existing State reporting processes as well as critical 
examination and hazardous financial condition authority. In addition, 
many key terms describing the circumstances which would prompt action 
by regulators to comply with this agreement are undefined or ambiguous. 
For example, the agreement acknowledges a need for a group capital 
requirement or assessment, but it also requires ``the authority to 
impose preventive, corrective, or otherwise responsive measures on the 
basis of the assessment, including requiring, where appropriate, 
capital measures.'' \3\ The provision implies State insurance 
regulators are effectively required to develop and adopt a group 
capital requirement, and also includes language suggesting the EU could 
apply its own group capital requirements and re-impose local presence 
requirements if States choose not to act. In other words, this 
agreement seems to compel States to subject a broad group of insurers 
to additional regulation with no guarantee the EU ultimately would not 
apply its own layer of requirements if it finds the U.S. approach to be 
unsatisfactory.
---------------------------------------------------------------------------
     \3\ Bilateral Agreement Between the European Union and the United 
States of America on Prudential Measures Regarding Insurance and 
Reinsurance, January 13, 2017, p. 12.
---------------------------------------------------------------------------
    As currently structured, these ambiguities would have to be 
resolved by an undefined ``Joint Committee'' composed of 
representatives of the U.S. and EU. This agreement does not set forth 
how many representatives will compose the Joint Committee or indicate 
which persons or bodies will be represented. Importantly, there is no 
mention of a role for State insurance regulators, who are charged with 
implementing much of this agreement and whose laws and regulations may 
be directly impacted or preempted. If resolution cannot be reached on 
these ambiguities, this agreement may be voided. Under its terms, the 
agreement is cross-conditional--if any single provision of this 
agreement is violated, the other party is not obligated to follow other 
provisions of this agreement. This framework inevitably will lead to 
perpetual renegotiation through the Joint Committee and uncertainty for 
U.S. industry, policyholders, and regulators.
EU Market Access at the Expense of Reduced Reinsurance Collateral
    As Congress and the Administration weigh the merits of the 
agreement, the focus from supporters has been on the perceived benefits 
of the agreement for the subset of U.S. firms doing business in the EU, 
but consideration must also be given to what is being given up to 
achieve that benefit. The one objective met was a key negotiating 
priority for the EU, total elimination of reinsurance collateral 
requirements. In fairness, this covered agreement retains a few of the 
elements from the NAIC's Credit for Reinsurance model laws, including 
requirements with respect to enforcement of final U.S. judgments, 
service of process, financial reporting requirements, prompt payment of 
claims, and solvent schemes of arrangement. These requirements are also 
applicable to U.S. reinsurers doing business in the EU, and collateral 
may be imposed if these requirements are not met under a process 
established in this agreement. However, this agreement does not include 
a fulsome evaluation of a reinsurer's creditworthiness and despite the 
Treasury Department having verbally committed it would never accept an 
agreement which totally eliminates reinsurance collateral, it did 
exactly that.
    Existence of reinsurance collateral provides strong incentives for 
reinsurers to perform on their obligations and regulatory requirements 
to protect all insurers, particularly smaller insurers that may not 
have the leverage to renegotiate and require it contractually from 
reinsurers with whom they do business. Though we believe it is 
necessary for counterparties to have ``skin in the game'' (a lesson the 
financial system was reminded of during the financial crisis with 
respect to other financial instruments), we have nevertheless attempted 
to be responsive to the European insurance industry and Governments who 
have sought reduction of such requirements. We have worked tirelessly 
to reduce collateral requirements by amending NAIC's Credit for 
Reinsurance Model Act to allow for reduction in collateral based on the 
strength of the insurer and its regulatory regime. The amendments have 
already been adopted by 39 States representing approximately 70 percent 
of direct written premium and will become an NAIC Accreditation 
requirement on January 1, 2019, leading to further adoption by States. 
Interestingly, even though certified reinsurers will likely have 
reduced collateral requirements, of the 215 EU reinsurers that we are 
aware of, only 6 have sought and received certification--the remaining 
reinsurers have not even filed an application. \4\ Under the terms of 
the Agreement, all EU reinsurers, even those that have not applied for 
certified reinsurer status, will be eligible for zero collateral even 
though they may not meet existing financial strength and other 
regulatory requirements. When you consider even significantly reduced 
collateral protections represent commitments to policyholders and a 
leverage point for regulators, wiping them out entirely will force 
regulators to find other mechanisms with which to protect insurers and 
their policyholders from the risks posed by reinsurance counterparties. 
This could possibly include additional capital charges or restrictions 
imposed on ceding insurers. This covered agreement essentially 
transfers the credit risk of foreign reinsurers to their customers: 
U.S. insurance companies, and by extension, U.S. policyholders.
---------------------------------------------------------------------------
     \4\ The States and NAIC has certified 32 reinsurers in total, most 
of which are Bermuda based.
---------------------------------------------------------------------------
    In sum, the issues addressed by this covered agreement are a 
creation of the EU's policy making decisions but they are being solved 
entirely at the expense of State insurance regulation, U.S. industry, 
and consumers and regulators. Nonetheless, State regulators are firmly 
committed to resolving these issues so U.S. firms are not put at a 
competitive disadvantage when operating in the EU.
Confusion Surrounding the Agreement's Terms
    Earlier this year, my colleague and NAIC President Wisconsin 
Commissioner Ted Nickel testified before the House Financial Services 
Subcommittee on Housing and Insurance, and detailed our concerns. \5\ 
At that time, given the seriousness of these concerns, we urged 
renegotiation of the agreement. At the same hearing, former FIO 
Director Michael McRaith, one of the chief negotiators of this 
Agreement, testified to what he believed the agreement accomplished, 
specifically that ``the Agreement affirms that the U.S. supervises its 
insurance sector as the U.S. deems appropriate.'' He noted it only 
required States to address collateral requirements in a manner that was 
supportive of State regulator efforts to implement changes to their 
credit for reinsurance laws and regulations that would reduce 
reinsurance collateral, finish our ongoing work on a group capital 
calculation, and for purposes of group supervision, treat EU-based 
insurance companies operating in the U.S. as they are treated today. He 
asserted that the Agreement recognizes the current U.S. insurance group 
supervision practices, prohibits Europe from extraterritorial 
application of its requirements on U.S. based holding companies or 
legal entities, and requires certain EU jurisdictions to immediately 
lift their requirements that U.S. reinsurers maintain a local presence 
as a condition of doing business.
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     \5\ United States. Cong. House. Financial Services Subcommittee on 
Housing and Insurance. Hearing Regarding Assessing the U.S.-EU Covered 
Agreement. February 16, 2017. 115th Cong. 1st sess. Washington: GPO, 
2017 (statement of Ted Nickel, Wisconsin Insurance Commissioner)
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    Candidly, we were surprised. Mr. McRaith's characterization of the 
Agreement, if shared by the present Treasury Department and importantly 
by the EU, is more promising than a plain reading of the text suggests. 
As such, the focus of our requests to Congress, Treasury, and the USTR 
has evolved to urge confirmation of some of these key assertions. We 
want to ensure that all parties agree that we have the deal we've been 
told we have. We believe that confirmation may be achieved without 
renegotiation and without undue delay. Critically, however, we believe 
that these ambiguities must be resolved at the outset of the agreement 
rather than at some later date through the opaque process afforded by 
the Joint Committee. It is entirely unacceptable to ask 50 State 
Governors, legislatures, and regulators to revise some of the 
fundamental elements of their system based on the informal 
interpretations of the agreement by a former Treasury official no 
longer involved in its implementation or interpretation. We have 
confidence that through the bipartisan efforts of this Congress as well 
as the commitment of this Administration to ensure the U.S. obtains the 
best deal possible for our citizens, we can resolve these ambiguities 
and find a way forward.
The Path Forward
    Last week, the NAIC submitted a list of provisions to the Treasury 
Department, the USTR, and the Congressional Committees of Jurisdiction 
that we would like clarified before the United States moves forward 
with implementation of the Agreement. Among those included on the list 
are:

  1.  Clarifying that insurance regulators can impose regulatory 
        requirements, other than collateral, to address reinsurance 
        counterparty risk;

  2.  Clarifying that existing group supervisory reporting requirements 
        under State law continue to apply to EU affiliates of U.S. 
        companies;

  3.  Clarifying that the NAIC's group capital calculation work would 
        meet the terms of the group capital assessment provisions of 
        the agreement;

  4.  Clarifying that collateral requirement for current reinsurance 
        contracts will be unaffected and confirmation as to how losses 
        treated prior to a new reinsurance agreement will be treated;

  5.  Clarify how reinsurance collateral requirements should be 
        addressed prior to the conclusion of the 5-year period for full 
        elimination of requirements.

    We urge the Administration, with the direct involvement of the 
States, to expeditiously provide the needed clarity and comfort now 
rather than taking an imprudent leap of faith that such clarifications 
will be ``worked out'' at a later date through a Joint Committee 
process. Absent such clarifications, we cannot be assured that State 
implementation will meet the terms of the agreement and satisfy the 
current Administration or the EU, potentially putting us in a position 
of perpetual renegotiations or worse yet, having made changes to State 
laws and regulations only to have the EU challenge those at later date 
and revert to treating our companies unfairly. Under these 
circumstances, it is hard to see how our sector can achieve certainty 
and finality regarding their concerns. Finally, we request that the 
Administration confirm State insurance regulators will be included in 
any joint committee and that insurance regulators from all the States 
will be consulted on all issues that the committee discusses. As the 
States are the primary regulators of the insurance sector and would 
have to implement the provisions of any agreement, our involvement and 
buy-in is essential to its success.
Conclusion
    We remain deeply concerned with the treatment of certain insurers 
by the EU and we remain committed to resolving these issues. However, 
it is not in the best interest of the United States insurance sector 
and policyholders to proceed with implementation of the Agreement 
without clarification of its ambiguous terms and a clear understanding 
shared on both sides of the Atlantic. Such confirmation of intent will 
ensure the EU will not be able to use the agreement's lack of clarity 
as a means of imposing their regulatory system and ultimately their 
will on our insurance sector to the detriment of U.S. insurance 
companies and policyholders. Working together with the Administration 
and Congress, we believe we can obtain a level of comfort and clarity 
that will achieve finality and certainty for our sector without 
sacrificing consumer protections. Thank you for this opportunity to 
testify today and I would be pleased to take your questions.
                                 ______
                                 
                PREPARED STATEMENT OF MICHAEL C. SAPNAR
   President and Chief Executive Officer, Transatlantic Reinsurance 
  Company, on behalf of the American Insurance Association, American 
  Council of Life Insurers, and the Reinsurance Association of America
                              May 2, 2017
    My name is Michael C. Sapnar and I am President and CEO of 
Transatlantic Reinsurance Company (TRC) and the immediate past Chairman 
of the Reinsurance Association of America (RAA). I am testifying today 
on behalf of my company, the RAA \1\, the American Insurance 
Association \2\ (AIA), the American Council of Life Insurers \3\ (ACLI) 
and the Council of Agents and Brokers \4\ (CIAB). I am pleased to 
appear before you today to express our collective full support for the 
recently concluded Bilateral Agreement between the European Union and 
the United States of America on Prudential Measures Regarding Insurance 
and Reinsurance (the ``Covered Agreement''). I commend Chairman Crapo 
and Ranking Member Brown for holding this important and timely hearing 
and welcome the opportunity to address the Banking Committee. I also 
want to thank the Treasury Department, the U.S. Trade Representative 
and the participating State regulators for their 13 months of hard work 
in bringing the Covered Agreement to fruition. Transatlantic 
Reinsurance Company is a New York domiciled professional reinsurer. TRC 
is a wholly-owned subsidiary of Transatlantic Holdings, Inc., a 
Delaware corporation, which is a wholly-owned subsidiary of Alleghany 
Corporation (NYSE: Y), a Delaware corporation. TRC has over 600 
employees worldwide, most of whom are in the United States. TRC is 
robustly regulated in the United States with New York as its 
domiciliary regulator and New Hampshire as its group supervisor. TRC is 
licensed or qualified in every State, the District of Columbia, Guam 
and Puerto Rico and operates globally through a network of 20 branches 
and offices and 5 subsidiaries. \5\ The worldwide branch structure is a 
more efficient use of capital because it consolidates assets into one 
entity to enhance TRC's standing as a potential counterparty for 
reinsurance transactions.
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     \1\ The RAA is a national trade association representing property-
casualty companies that specialize in assuming reinsurance in the U.S. 
In 2015, RAA's underwriting members and affiliates had surplus of $194 
billion and $125 billion in gross written premiums.
     \2\ The AIA is the leading property-casualty insurance trade 
association representing approximately 300 insurers that write more 
than $125 billion in premiums each year. AIA member companies offer all 
types of property-casualty insurance, including personal and commercial 
auto insurance, commercial property and liability coverage, specialty, 
workers' compensation, homeowners' insurance, medical malpractice 
coverage, and product liability insurance.
     \3\ The American Council of Life Insurers (ACLI) is a Washington, 
D.C.-based trade association with approximately 290 member companies 
operating in the United States and abroad. ACLI advocates in State, 
Federal, and international forums for public policy that supports the 
industry marketplace and the 75 million American families that rely on 
life insurers' products for financial and retirement security. ACLI 
members offer life insurance, annuities, retirement plans, long-term 
care and disability income insurance, and reinsurance, representing 94 
percent of industry assets, 93 percent of life insurance premiums, and 
97 percent of annuity considerations in the United States. Learn more 
at www.acli.com.
     \4\ The Council of Insurance Agents and Brokers has 205 members 
selling 80 percent of domestic commercial property/casualty premiums.
     \5\ The branches and/or offices are in: London, Paris, Munich, 
Zurich, Dubai, Buenos Aires, Panama City, Rio de Janeiro, Hong Kong, 
Shanghai, Singapore, Sydney, Tokyo, Chicago, Miami, Overland Park, San 
Francisco, Stamford, Bermuda and Toronto. There are also five 
subsidiaries: TransRe London Ltd. in the United Kingdom; Calpe 
Insurance Company Ltd. in Gibraltar; TransRe Zurich Ltd. in 
Switzerland; Fair American Insurance and Reinsurance Company in New 
York; and Fair American Select Insurance Company in Delaware.
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The Covered Agreement Solves Real Problems Today and Makes U.S. 
        Companies More Competitive
    The Covered Agreement is a ``win'' for U.S. companies doing 
business in the European Union (EU) and for the U.S. system of 
insurance regulation. It is also consistent with the current 
Administration's regulatory policy to ``enable American companies to be 
competitive with foreign firms in domestic and foreign markets, advance 
American interests in international financial negotiations and 
meetings, [and] make regulation efficient, effective and appropriately 
tailored.'' The Covered Agreement resolves several important prudential 
issues that are adversely impacting U.S. companies doing business in 
both the United States and the EU. These issues have been discussed by 
the parties for years, and in some instances decades, without 
resolution. The Covered Agreement will provide the following immediate 
benefits to the U.S. (re)insurance sector:

  1.  U.S.-based reinsurers can resume doing business in markets where 
        they were excluded because of the January 1, 2016, 
        implementation of the EU's Solvency II regime. This development 
        enables U.S. companies to keep capital and jobs in the United 
        States rather than being forced to create Solvency II compliant 
        branches or subsidiaries throughout the EU to maintain existing 
        business. The Agreement also ensures that qualifying U.S.-based 
        reinsurers will not have to post collateral in the EU.

  2.  Global group supervision can only be conducted by the home 
        country supervisor: U.S. insurers with EU operating companies 
        will only be subject to worldwide prudential insurance group 
        oversight by their lead U.S. State regulator and not 
        ``upstream'' supervision by EU Member States. It is estimated 
        that this limitation on the application of Solvency II will 
        save U.S.-based property/casualty and life companies 
        potentially billions of dollars in additional capital and 
        compliance costs.

  3.  Official acceptance throughout the EU of the U.S. insurance 
        supervisory framework which benefits all U.S.-based insurance 
        groups and provides valuable support for the U.S. regulatory 
        system that can be leveraged in current and future 
        international negotiations and regulatory dialogues. For 
        example, this is important precedent for the argument that the 
        U.S. approach to group capital (including valuation) should be 
        incorporated into the IAIS International Capital Standard as an 
        acceptable approach.

    Our strong support for the Covered Agreement is consistent with 
TRC's equally strong support for the well-tested U.S. State-based 
insurance regulatory system. The Covered Agreement is a targeted 
Federal tool that is intended to supplement the State-based regulatory 
system by dealing with important international regulatory issues that 
State regulation cannot constitutionally address. No regulatory 
authority is created at the Federal level and any potential Federal 
preemptive authority is narrowly targeted.
Transatlantic's EU Issues
    As a global reinsurer, TRC specializes in managing risks, most 
notably natural and man-made catastrophes, for others. The one risk 
that is difficult to manage, however, is regulatory uncertainty. In our 
business, regulatory uncertainty leads to lost jobs, increased 
operating costs, lost growth opportunities and reluctance on the part 
of new and existing clients to choose us as a service provider.
    For over 7 years, TRC has encountered challenges arising from the 
implementation of Solvency II and the lack of fair treatment for U.S. 
companies operating in the EU. As early as 2008, TRC was tracking the 
EU's development of Solvency II and the potential negative consequences 
for U.S. companies. In testimony to the House Financial Services 
Committee Subcommittee on Insurance, Housing, and Community Opportunity 
in 2012, I identified issues that TRC was then having because of the 
impending implementation of Solvency II. I also testified that, at the 
same time the NAIC was lowering barriers by revising its Model Credit 
for Reinsurance Law in 2011 to make it easier for non-U.S. reinsurers 
to conduct U.S. business, the EU was raising barriers and making it 
more difficult for U.S. companies to do business in the EU. During the 
NAIC's deliberations, TRC repeatedly asked State regulators to seek and 
obtain reciprocity of market access (most particularly the EU) in 
return for the favorable changes for non-U.S. reinsurers. This did not 
occur. In 2012, TRC supported the U.S.-EU Insurance Dialogue involving 
regulators from both jurisdictions. While this process enhanced the 
mutual understanding of both regulatory regimes, it yielded no tangible 
results addressing U.S. companies' issues. Instead, TRC's issues in the 
EU continued, including:

  1.  TRC was confronted with having to choose between having its local 
        U.K. branch regulated on a Solvency II basis up to the U.S. 
        holding company or forming a Solvency II-compliant entity 
        somewhere in the EU to limit the upstream application of 
        Solvency II to the U.S. operations. In an effort to avoid the 
        upstream regulation, TRC chose to turn the U.K. branch into a 
        subsidiary which required TRC to tie up $500 million in capital 
        in the U.K. This corporate move continues to negatively impact 
        our operating costs. Nonetheless, the U.K. has continued to 
        require more and more from this U.K. subsidiary, including 
        requiring: additional independent directors on the board of our 
        wholly-owned subsidiary; additional local compliance and risk 
        management personnel in addition to our large U.S. home office 
        staff; implementation of a partial internal model to comply 
        with Solvency II; restrictions on various highly graded 
        investments held by the U.K. subsidiary; and the ring-fencing 
        of $800 million in assets to cover the loss reserves 
        accumulated by the branch over a 30-year period of assuming 
        reinsurance without incident. These requirements have cost TRC 
        millions of dollars annually without any additional benefit to 
        our customers. In addition, a concern by clients over TRC 
        segregating its capital to form the U.K. subsidiary (instead of 
        having the security of the company's entire U.S. capital base) 
        has cost TRC business opportunities.

  2.  In 2014, Poland, citing Solvency II, excluded U.S. Reinsurers 
        from the local market. Much discussion ensued with the Polish 
        regulator regarding this restriction, however, the regulator 
        ultimately deferred to EIOPA \6\ for clarification. TRC was 
        able to construct a workaround. Without that workaround, 
        however, TRC, like many other U.S. reinsurers, would have been 
        excluded from the Polish market unless it opened a branch in 
        Poland with its own capital and personnel.
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     \6\ The European Insurance and Occupational Pensions Authority 
(EIOPA) is a European Union financial regulatory authority whose 
responsibilities include microprudential oversight of insurance at the 
EU level (as opposed to the Member State level). EIOPA is often 
compared to the NAIC but is different in that it has certain regulatory 
authorities.

  3.  In late 2015, the U.K., again citing Solvency II, insisted that 
        all U.S. companies operating in the U.K. needed to be Solvency 
        II compliant up to the ultimate controlling entity or seek a 
        discretionary and revocable ``other methods determination'' 
        waiver from complying with Solvency II. This was a result of 
        the E.U.'s failure to formally recognize the effectiveness of 
        the U.S. State-based regulatory system for companies that are 
        members of U.S.-domiciled groups. \7\ Ultimately, TRC was 
        forced to incur the expense and time to seek a waiver of the 
        group Solvency II requirement under the ``other methods 
        determination,'' which, while granted, will expire on December 
        2018 unless revoked earlier. If the Covered Agreement is not 
        signed, TRC will have to seek another waiver request in 2018.
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     \7\ Interestingly, the E.U. deemed the U.S.-based regulatory 
system equivalent for U.S. subsidiaries of EU-domiciled groups so that 
those entities did not have to be Solvency II compliant. While U.S. 
groups were expected to fully comply with Solvency II because of their 
EU subsidiaries, U.S. subsidiaries of EU groups were exempt from 
complying with Solvency II.

    Finally, although not impacting TRC, in late 2015, the German 
regulator issued a notice stating that after January 1, 2016, U.S.-
based reinsurers would no longer be able to operate in Germany on a 
cross-border basis and would be forced to set up a local branch. This 
decision was based upon the fact the U.S. has not been deemed 
``equivalent'' under Solvency II. Because TRC has an existing regulated 
Munich branch, we were allowed to continue writing business. Other U.S. 
companies, however, lost critical business with little notice. Shortly 
thereafter, Austria adopted a similar interpretation of Solvency II. 
Later in 2016, Belgium did something similar, seriously disrupting the 
annual renewal process for U.S. reinsurers and causing TRC to lose a 
valuable account. There are at least nine other EU States with similar 
laws. This uncertainty has a chilling effect on U.S. reinsurers' 
business and may dissuade current and new customers from doing business 
with us.
Prompt Signature of the Agreement Is Critical for U.S. Companies
    The statutorily mandated 90-day Congressional layover period has 
expired and the Administration should promptly sign the Covered 
Agreement. A delay in signature could result in elimination of the 
benefits U.S.-based companies would receive under the Agreement. As a 
matter of good faith, the EU is currently forbearing from enforcing its 
Solvency II rules and regulations on U.S.-based companies doing 
business in the EU in anticipation of the parties' signature of the 
Covered Agreement. However, this forbearance is not unlimited. For 
example, the German regulator (BaFin) advised the U.S. by January 13, 
2017, letter (attached), that it would suspend its local presence 
requirements for U.S. reinsurers while both sides proceeded to finalize 
the Covered Agreement. The letter states:

        The ongoing future supervisory approach regarding U.S. 
        domiciled reinsurers will heavily depend on the fact whether 
        the EU-U.S. Agreement comes in fact finally into force. This 
        means that BaFin's current statements regarding the treatment 
        of U.S.-domiciled reinsurers on the basis of the EU-U.S. 
        Agreement will not be valid (also in a retroactively sense) 
        anymore if BaFin receives serious statements of one of the 
        final decision-making bodies of both parties that the agreement 
        will not come into force respectively the agreement will fail 
        [sic].

    The Covered Agreement's provisions eliminating local presence 
requirements are the linchpin for U.S. reinsurers to be able to write 
EU business. If the Agreement is not signed, these U.S. companies will 
not be able to renew, much less write any new, business in the EU 
without first going through the regulatory processes necessary to 
create branches and/or subsidiaries in multiple EU Member States. This 
not only requires sufficient time but also the relocation of capital 
and personnel from the U.S. to the EU. Because the annual renewal 
process begins in early September for January 1 renewals, it is 
imperative that U.S. companies--and the EU market--have certainty 
regarding U.S. companies' ability to write business in the EU before 
that time. If the Agreement is not signed soon, Germany (and the other 
nine countries that have similar laws) may suddenly decide to enforce 
their local presence requirements, possibly removing the option for TRC 
to establish the requisite local presence in time for the 2018 renewal 
season.
Asserted Challenges to the Covered Agreement Should Not Delay Signature
    Several companies contend that before the Covered Agreement can be 
signed, there must be an ``official'' clarification of certain terms 
executed by both the U.S. and the EU. These assertions are not only 
incorrect, but ignore the procedure set forth in the Agreement to 
resolve such issues. First, merely asserting something is unclear does 
not make it so. In fact, the plain meaning of the Agreement's text 
demonstrates otherwise. The Agreement's language is further reinforced 
by the National Association of Insurance Commissioners (NAIC) Model 
Laws and Regulations on which portions of the Agreement were based, the 
U.S. Treasury Department's January 18, 2017, Fact Sheet (attached), and 
the European Commission's April 4, 2017, Explanatory Memorandum to the 
European Council (attached). Second, Section 7 of the Covered Agreement 
establishes a Joint Committee of representatives from the United States 
and the EU which shall provide ``a forum for consultation and to 
exchange information on the Administration of the Agreement and its 
proper implementation.'' Any questions about implementation can and 
should be addressed in this forum after the Agreement is signed. We 
strongly support that State insurance regulators should be included in 
this forum. Finally, to the extent this proposed ``simple solution'' to 
clarify the Agreement is a call to renegotiate the Agreement, this 
should be rejected as it would erase the benefits to U.S. (re)insurers 
and return the U.S.-EU relationship to the pre-agreement status quo of 
regulatory uncertainty.
    A. The two key substantive issues addressed by the Covered 
Agreement do not need clarification:
1. Group Capital. Several have asserted that the Covered Agreement 
        mandates a group capital requirement in the U.S., and possibly 
        one that resembles Europe's Solvency II. The language does not 
        support this interpretation. First, Article 4(h) of the 
        Agreement states that for a U.S. or European insurance group to 
        enjoy the benefits of the Agreement, it needs to be subject to 
        a group capital calculation by its home supervisor. This word 
        choice is significant because it specifically contemplates the 
        NAIC's current initiative to develop a group capital assessment 
        or calculation (not a standard or requirement as in the EU). 
        Second, Article 4(h) does not (and legally could not) alter 
        existing State sovereign authority. Third, nothing in Article 4 
        (or elsewhere in the Agreement) suggests that Solvency II's 
        group capital standards should be imported into the U.S. To the 
        contrary, the Agreement's Preamble reflects a mutual acceptance 
        by the EU and the U.S. of, and respect for, each other's 
        governing insurance financial regulatory architecture.
2. Prospective Treatment of Reinsurance Collateral Relief. The Covered 
        Agreement text also does not support the assertion that 
        collateral posted pursuant to existing contracts will be 
        automatically released once the Agreement is signed. Article 3 
        incorporates text from Section 8(A)(5) of the NAIC's Model 
        Credit for Reinsurance Regulation, which does not allow 
        automatic retroactive changes to existing contractual 
        obligations based upon statutory reductions in collateral 
        requirements. The Covered Agreement and the NAIC Model require 
        changes to existing contracts to reflect changing statutory 
        collateral rules only if amendments to the contracts are 
        material (and, of course, agreed to by both parties). The Fact 
        Sheet underscores the U.S. view: ``It is understood that 
        changes to regulatory requirements for posting collateral would 
        not apply to amended agreements unless such amendment 
        constitutes a material change to the underlying terms of the 
        agreement.''
    B. A few companies also have argued that the Covered Agreement 
should have achieved an official Solvency II ``equivalence'' 
determination for the United States. Although this designation would 
have bestowed benefits on U.S. companies, it would have placed 
unacceptable requirements on the U.S. regulatory system. Importantly, 
State regulators never sought or wanted this solution for a simple 
reason: Solvency II's statutory equivalence process involves a 
prescriptive, unilateral evaluation by the EU of another jurisdiction's 
regulatory regime to assess whether its rules and regulations are 
``equivalent'' (i.e., very similar to) Solvency II. The State 
regulators understood this when, in July 2014, they advised the EU that 
the U.S. would not be pursuing ``equivalence'' because of the 
significant changes to the U.S. supervisory system such a path would 
require. \8\ The Covered Agreement reflects respect for the State 
regulators' July 2014 decision as it achieved significant benefits for 
the U.S. without any requirements that the U.S. adopt any Solvency II 
requirements. The Preamble of the Covered Agreement makes it clear that 
the U.S. does not intend to adopt any Solvency II requirements and that 
the EU understands this: ``Sharing the goal of protecting insurance and 
reinsurance policyholders and other consumers, while respecting each 
Party's system for insurance reinsurance supervision and regulation.'' 
Furthermore, the very structure of the Agreement reinforces this agreed 
parity between the two regulatory systems as the Parties' obligations 
and benefits are mutual and cross-conditional throughout the Agreement: 
both sides must continue to perform their obligations to receive the 
benefits; if one side does not perform, the other side is relieved of 
its obligations under the Agreement.
---------------------------------------------------------------------------
     \8\ July 11, 2014, letter from NAIC to Jonathan Faull (European 
Commission) (``As you know, U.S. State insurance regulators are not 
pursuing an equivalence determination. While it is possible to compare 
our respective statutory authorities on paper, it would be challenging 
to conduct a comprehensive comparison of our two regulatory systems in 
practice until Solvency II is fully operational and the outcomes it 
produces based on actual experience are better understood.'') 
(attached).
---------------------------------------------------------------------------
    C. Although the process could be improved, the Covered Agreement 
was negotiated and concluded in accordance with existing law. Process 
concerns should be addressed but should not adversely impact the 
decision to sign this Covered Agreement. One process issue that should 
be addressed is formalizing the role of State insurance regulators, who 
are essential to the negotiation and implementation of a covered 
agreement. It is important to note, however, that State regulators did 
have a formal substantive role in this Covered Agreement process. 
Former FIO Director Michael McRaith recently testified at the House 
Financial Services Committee Housing and Insurance Subcommittee Hearing 
that State insurance regulators attended and participated, often in 
person, in every negotiation. He also testified that State regulators 
promptly received every EU document and that there were conference 
calls for FIO and USTR to receive their input before documents were 
sent to the EU. NAIC President Ted Nickel testified at the same House 
hearing that NAIC suggestions were incorporated into the drafts sent to 
the EU.
    In conclusion, the Covered Agreement addresses bilateral insurance 
regulatory issues that were creating barriers for U.S. companies in the 
EU. Although there may be lessons learned about the process, the 
Agreement is a significant and timely ``win'' for the competitiveness 
of U.S.-based insurers and reinsurers, insurance consumers, and the 
U.S. insurance regulatory system. The Covered Agreement removes 
regulatory uncertainty for companies and establishes fair terms upon 
which companies operating in both the EU and the U.S. can do business 
in these jurisdictions. This was accomplished without importing 
Solvency II into the U.S., something which could not have been achieved 
with a Solvency II equivalence determination.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                 PREPARED STATEMENT OF STUART HENDERSON
    President and Chief Executive Officer, Western National Mutual 
  Insurance Company, on behalf of the National Association of Mutual 
                          Insurance Companies
                              May 2, 2017
    The National Association of Mutual Insurance Companies (NAMIC) is 
pleased to provide comments to the Senate Committee on Banking, 
Housing, and Urban Affairs on the recently completed U.S.-European 
Union (EU) covered agreement dealing with insurance regulation. We 
appreciate the Committee's focus on an important matter that has the 
potential to greatly impact the domestic U.S. property/casualty 
insurance industry.
    NAMIC is the largest property/casualty insurance trade association 
in the country, with more than 1,400 member companies representing 39 
percent of the total market. NAMIC supports regional and local mutual 
insurance companies on main streets across America and many of the 
country's largest national insurers. NAMIC member companies serve more 
than 170 million policyholders and write more than $230 billion in 
annual premiums. Our members account for 54 percent of homeowners, 43 
percent of automobile, and 32 percent of the business insurance 
markets.
Introduction
    In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank) created a new office in the Department of Treasury 
called the Federal Insurance Office (FIO). Although given no explicit 
regulatory authority, the new office was empowered, in conjunction with 
the United States Trade Representative (USTR), to negotiate and enter 
into international ``covered agreements' on insurance regarding 
prudential measures. These agreements are between the U.S. and one or 
more foreign Governments or regulatory entities and must ``achieve a 
level of protection for insurance or reinsurance consumers that is 
substantially equivalent to the level of protection achieved under 
State insurance or reinsurance regulation.''
    The ``covered agreement'' concept was wholly created by and defined 
in the Dodd-Frank Act. It is an invented term for insurance and not a 
standard type of contract, covenant, understanding, or rule subject to 
existing and recognized practices and requirements. The scope of a 
covered agreement is not well-defined in statute, but the Dodd-Frank 
Act provided the power to preempt State insurance laws that are 
inconsistent with the agreement and result in less favorable treatment 
of a non-U.S. insurer domiciled in a foreign jurisdiction that is 
subject to a covered agreement. Exactly how these agreements are to be 
negotiated, entered into, and applied are subject to interpretation of 
the high-level guidelines in Dodd-Frank. Many questions remain 
concerning these agreements, the policy decisions at the outset and 
throughout negotiations, the application of these agreements, and the 
rights of parties to participate in and/or challenge them.
    NAMIC has long had serious concerns about the use of an 
international trade negotiation process to alter or preempt the State-
based system of insurance regulation. We have argued that the USTR and 
the FIO should exercise such authority only if they determine that 
extreme circumstances demand it, and then only after full and 
transparent due process, including consultation with State legislative 
and regulatory authorities and public exposure of the policy objectives 
of the negotiations.
    Our analysis of the recently finalized draft agreement validates 
our long-held concerns. Despite claims otherwise, we believe that the 
covered agreement does not address the problems the FIO and USTR 
committed to resolve when the negotiations were started. To be clear, 
those companies that are being threatened by increased regulatory 
burdens by EU regulators need relief and we are in favor of providing 
them with that relief. However, the agreement is ambiguous and unclear, 
and does not provide sufficient protections and benefits for the U.S. 
insurance market and consumers. As drafted, the agreement represents a 
bad deal for the U.S. domestic property/casualty insurance industry. 
The U.S. can--and must--do better.
    The agreement had a 90-day layover period in Congress that ended 
April 13. This was intended to provide lawmakers the opportunity to 
review and provide comment on the agreement. However, the agreement 
does not require congressional approval. Treasury and USTR have not yet 
decided to sign the agreement or take other action. This 90-day period 
began to run 7 days before President Trump was inaugurated, before the 
new Treasury Secretary or U.S. Trade Representative was confirmed, and 
after the key U.S. negotiators had resigned their positions. That said, 
Congress should urge the Trump administration to hold off signing the 
agreement until important ambiguities are clarified. If these issues 
cannot be adequately resolved, the Administration should go back to the 
drawing board and secure a better deal.
Covered Agreement Negotiations
    On November 20, 2015, the FIO and USTR officially sent a letter to 
Congress announcing the initiation of negotiations for a covered 
agreement between the U.S. and the EU, notification required by Dodd-
Frank. Over the course of a year, representatives from the U.S. and the 
EU met five times in person for negotiations. These meetings were 
followed by a series of telephone negotiations at the end of President 
Obama's second term. Finally, in the last week of the prior 
Administration, on Friday, January 13, 2017, the USTR and the FIO 
released the final negotiated covered agreement language.
    The impetus for the initiation of negotiations was the pending 2016 
implementation of the EU's insurance regulatory reform known as 
Solvency II. Under the new regime, an insurer doing business in the EU 
is subjected to heightened regulatory and capital requirements if the 
insurer's country of domicile is not deemed ``equivalent'' for purposes 
of insurance regulation. U.S.-based insurers had begun receiving 
threatening letters from EU regulators suggesting that because the U.S. 
had not been deemed equivalent, they stood to be penalized, which would 
make them less competitive. While this created a real and present 
difficulty for the small number of insurers doing business overseas, 
the need for ``equivalency'' was completely manufactured by the EU 
through their enactment of Solvency II.
    It is likely that the EU leveraged its Solvency II equivalency 
determination to pressure the U.S. to negotiate more favorable 
treatment for its reinsurers. Foreign-based reinsurers have long chafed 
at the requirement that they must post collateral in the U.S. to 
protect ceding insurers ability to collect when due reinsurance 
recoveries. This problem was addressed by the NAIC in their 2011 
revised model Credit for Reinsurance Act. That model act provided for a 
staggered collateral system based on the credit rating of foreign 
reinsurers from qualified jurisdictions. Despite the passage of that 
model in more than 39 States, the goal of the EU has always been to 
quickly and uniformly eliminate the requirements for reinsurance 
collateral in the U.S. for the benefit of EU reinsurers.
    Whatever the case, many of the U.S. companies that do business 
internationally urged the FIO and USTR to move quickly to negotiate a 
covered agreement with the primary goal to settle--promptly and 
finally--the question of U.S. insurance regulatory equivalence with the 
EU under Solvency II. With the two sides' goals in mind, the 2015 
letter announcing the initiation of negotiations laid out the 
prudential measures the covered agreement would seek to address:

  1.  Obtain treatment of the U.S. insurance regulatory system by the 
        EU as ``equivalent'' to allow for a level playing field for 
        U.S. insurers and reinsurers operating in the EU;

  2.  Obtain recognition by the EU of the integrated State and Federal 
        insurance regulatory and oversight system in the United States, 
        including with respect to group supervision;

  3.  Facilitate the exchange of confidential regulatory information 
        between lead supervisors across national borders;

  4.  Afford nationally uniform treatment of EU-based reinsurers 
        operating in the United States, including with respect to 
        collateral requirements;

  5.  Obtain permanent equivalent treatment for the solvency regime in 
        the U.S. and applicable to insurance and reinsurance 
        undertakings. \1\
---------------------------------------------------------------------------
     \1\ November 20, 2015, letter from the U.S. Treasury Department 
and the Office of the United States Trade Representative to 
Congressional Committee leadership announcing initiation of covered 
agreement negotiations with the European Union.

    As we will discuss in more detail below, even by the standards laid 
out by USTR and the FIO the negotiated covered agreement is a failure 
for the United States. There is no finding that U.S. group supervision 
is permanently adequate, mutual, or equivalent. In exchange for the 
elimination of $40 billion of reinsurance collateral requirements for 
EU reinsurers, the EU has only agreed to return to the pre-Solvency II 
status quo when they were not unfairly punishing U.S.-based 
(re)insurers for the U.S. State laws.
The Covered Agreement
    The covered agreement allows for a period of 5 years for each 
jurisdiction to revise laws and regulatory practice to address three 
prudential areas--Reinsurance Collateral, Group Supervision, and 
Confidential Exchange of Information. The agreement also sets up a 
permanent ``joint committee'' to oversee implementation and to consider 
amendments in the future. NAMIC believes that on the whole there are 
more negative provisions than added value, especially for those 
insurance companies that only write in the U.S. For companies writing 
internationally who need to rely on this agreement the most, its 
ambiguity raises significant questions about: (1) what they can count 
on from the EU insurance supervisors; (2) if U.S. regulators will meet 
the obligations they were not involved in negotiating; and (3) whether 
they will be disadvantaged by one of the many exceptions to the 
agreement. These companies and those who represent them are ``hopeful'' 
things will work out, and they want to believe that everyone will abide 
by the intent of the agreement. NAMIC is not so optimistic. We believe 
we can only rely on the language within the four corners of the 
document, and that language is not encouraging.
Reinsurance Collateral
    The section of the covered agreement dealing with reinsurance 
collateral states that no EU reinsurer, meeting all other requirements 
to do business in the U.S., can be required to post collateral in the 
U.S. If the States do not enact laws and regulations reflecting this EU 
reinsurer zero-collateral requirement within 5 years, the covered 
agreement allows the Federal Government to pre-empt those State laws 
which remain in conflict.
    Of course, this change will negatively impact insurers-in the U.S., 
both small and large, as these companies are no longer guaranteed the 
collateral that EU reinsurers must hold in the U.S. to assure prompt 
payment of reinsurance claims. This collateral is critical to assure 
the collectability of U.S. judgments. Reinsurance payments help 
insurers pay the money owed to policyholders in a timely fashion in the 
event of natural catastrophes or other large loss events. The 
elimination of required collateral particularly disadvantages smaller 
insurers that are more reliant on reinsurance. And though the agreement 
provides no prohibition on negotiating for collateral in reinsurance 
contracts, small insurance companies will not have the same negotiating 
power as larger companies.
    With the elimination of reinsurance collateral, State regulators 
have already proposed to eliminate credit to the companies for the 
purchase of reinsurance. Instead they would replace the lost 
reinsurance collateral by creating new obligations for the ceding 
companies in an enhanced capital requirement. This would fundamentally 
alter the way all U.S. insurance companies deal with capital 
requirements.
    We do not dispute some potential benefit from the resolution of the 
reinsurance issues between the U.S. and the EU. However, those benefits 
are exaggerated and in many cases lessened by the exceptions and 
ambiguous language in the document.
    First, there is a claim that the elimination of collateral 
requirements could result in lower reinsurance premiums. Premiums are 
affected by market cycles, and currently the soft market driven by a 
flood of new capital is causing prices to go down particularly in the 
property catastrophe reinsurance market. In addition, the enactment of 
the NAIC's model law in many States and the collateral reduction that 
resulted may have already contributed to lower prices. Second, there 
are provisions which increase the requirements applicable to the EU 
reinsurers for ensuring payment of claims owed and enforcing judgments 
in the U.S. These are positive provisions, but would be unnecessary if 
not for the covered agreement removing the collateral requirement. 
Finally, the EU supervisors can no longer require U.S. groups doing 
business in EU member States to have a ``local presence'' in the 
country unless they have a similar requirement for their domestic 
(re)insurers. While U.S. (re)insurers are considering this an important 
concession, this is only an advantage for U.S. groups doing business in 
the EU if the EU supervisor does not currently have, or doesn't decide 
to add, a similar requirement for the domestic EU companies. In 
addition, it is important to note that if the agreement fails or 
terminates, EU supervisors will be able to undo forbearance of these 
local presence demands, while the revised State laws/regulations 
eliminating reinsurance collateral will have to be repealed by all 
State legislatures. This is not an equal trade for U.S. insurers.
    The EU is unlikely to be the last jurisdiction to push for zero-
collateral requirements as Bermuda has already asked whether the U.S. 
will give them the benefit of the same deal, and the U.K. is 
positioning themselves for a similar agreement after Brexit removes 
them from the EU. This could be the beginning of zero collateral for 
all non-U.S. reinsurers. This would ignore the work State regulators 
and legislatures have done in the last several years in adopting 
changes to the NAIC's Credit for Reinsurance Model Act and Regulation. 
The State policymakers enacting these laws have considered the issues, 
listened to interested parties, and developed solutions that balance 
the interests of foreign reinsurers, the U.S. primary insurers that are 
their customers, and the policyholders of U.S. companies who expect 
their claims to be paid. The process has been methodical and 
transparent and the issues fairly and openly debated, unlike anything 
about the covered agreement. Thirty-nine States have already acted to 
enact this NAIC model and those remaining States need to enact the 
revised model before 2019 to retain their NAIC accreditation.
Group Supervision
    The covered agreement also addresses group supervision and group 
capital requirements. This issue was added to the covered agreement by 
the U.S. in order to gain acceptance of the existing U.S. system of 
group supervision in exchange for giving up reinsurance collateral. 
Observers and interested parties were expecting simple recognition of 
the supervision provided in the model holding company act adopted and 
enforced in all States.
    Instead, the agreement provides that the EU will allow U.S. 
insurance regulators to provide group supervision for their own 
domestic insurance groups that do business internationally, with 
exceptions. The EU doesn't recognize this right for parts of U.S. 
holding companies based in the EU or any of the affiliates of that EU-
based group anywhere in the world. The EU also does not recognize this 
right for any U.S. holding company with a depository institution or 
that has been designated a Systemically Important Financial Institution 
(SIFI) or Global Systemically Important Insurer (G-SII). Nor does the 
agreement recognize this right if at any time, they feel the insolvency 
of one of these U.S. companies could harm EU policyholders or threaten 
the EU economy. Finally, even if the U.S. provides supervision, the EU 
maintains the right to ask for ``information'' for purposes of 
prudential group supervision that is ``deemed necessary'' by the EU 
supervisor to protect against serious harm to policyholders or 
financial stability. This sounds as though EU regulators can apply 
Solvency II reporting requirements at their discretion.
    In concept, this group supervision provision is what U.S.-based 
insurers doing business in the EU need to avoid punitive regulatory 
requirements from EU supervisors. However, once the U.S. meets all its 
obligations under the agreement, and all the exceptions to the 
``recognition'' of group supervision are considered, there is no 
language requiring that the EU will treat the U.S. as a ``mutually 
recognized'' or ``equivalent'' jurisdiction under Solvency II. Under 
this agreement, the U.S. will be taking actions at the State level that 
will be very difficult to reverse, without any guarantee that at the 
end of 5 years the EU would continue to recognize the U.S. insurance 
regulatory structure as permanently mutual or equivalent. Allowing 
U.S.-based insurers to continue operating in the EU without regulatory 
penalty is nothing more than a return to the pre-Solvency II status 
quo. Even by the standards laid out by USTR and the FIO, this provision 
is a failure.
    Of perhaps the greatest concern for all U.S.-based insurance groups 
(internationally active or not) is that the covered agreement seems to 
require U.S. States to enact provisions that are at odds with the U.S. 
legal entity system of regulation, specifically a group capital 
requirement. If these group capital standards are not adopted, the EU 
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 EU.
    Article 4(h) requires the U.S. to impose a group capital assessment 
that sounds similar to an NAIC project underway to develop a group 
capital calculation that has specifically been designed as a tool for 
supervision, not a capital requirement. However, the covered agreement 
anticipates a calculation that is more than an assessment tool. It must 
apply to the complete ``worldwide parent undertaking'' and must include 
corrective/preventive measures, up to and including capital measures. 
It appears that the intention is 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. away from a legal entity regulatory system 
and toward an EU-style group supervision system. Capital additions and 
new requirements will affect the affordability and availability of new 
insurance products and are not in the best interests of consumers.
    As noted, these capital requirements would apply to the ``world-
wide undertaking parent'' or the entire conglomerate that holds an 
insurance company--even entities completely removed from the insurance 
and financial sectors. This scope of capital is not even required under 
Solvency II, is broader than the scope of the current IAIS group 
capital standard, and conflicts with common sense. Insurance regulators 
should not be assessing the risk of manufacturing affiliates, 
telecommunication companies, and hotels held by a conglomerate just 
because they also hold an insurance company. This is, rightfully, 
outside their authority.
    It is not clear that it was the intention of the parties to apply 
the covered agreement preemption authority to the group supervision 
provisions. However, the plain language of the agreement (Article 9) 
suggests it is not limited to the reinsurance article of the agreement. 
The Dodd-Frank Act states that the Director may only apply preemption 
to a State law that:

        (A) results in less favorable treatment of a non-United States 
        insurer domiciled in a foreign jurisdiction that is subject to 
        a covered agreement than a United States insurer domiciled, 
        licensed, or otherwise admitted in that State; and (B) is 
        inconsistent with a covered agreement. (31 uses 313(f)(1)(A) 
        and (B))

    Some interpretations provide that this language limits application 
only to the reinsurance requirements. But there is concern that the EU 
may expect the groupwide supervision language in the 2014 NAIC Holding 
Company Model Act to be adopted in every State. If that is the 
expectation, it could lead to a nullification of this agreement down 
the road--after the U.S. has already enacted difficult to reverse 
changes to State insurance law and regulation.
Process Concerns
    NAMIC has serious concerns about both how the current covered 
agreement was negotiated, and how the process will work going forward. 
Negotiations with the EU were conducted in closed, confidential 
meetings between the EU Commission, USTR, and the FIO. State insurance 
regulators were relegated to a minimal role, though these negotiations 
directly and significantly impact State laws and regulations. In the 
letter announcing negotiations both USTR and the FIO stated that 
``State insurance regulators will have a meaningful role during the 
covered agreement negotiating process.'' \2\ Both offices clearly 
failed in this commitment--only a small group of State regulators were 
included in the process as mere observers and were subject to strict 
confidentiality with no ability to consult fellow regulators or the 
broader community of stakeholders.
---------------------------------------------------------------------------
     \2\ Ibid.
---------------------------------------------------------------------------
    Going forward, we are concerned about the creation of a standing 
``joint committee'' composed of unnamed EU and U.S. representatives to 
oversee both implementation and the amendment of the current agreement. 
There may be some benefit from having a formal committee to help 
address disputes among the parties regarding the agreement. However, 
the joint committee creation and required meetings add to the 
perception that this is intended to be an ongoing evaluative process 
with EU and U.S. Federal authorities telling State regulators whether 
they are doing their jobs well enough to meet Federal and EU standards. 
The amendment process built into the agreement also conceivably allows 
Federal and EU authorities to alter the terms in such a way that could 
also lead to further preemption of State law. And these amendments 
could be made without entering into a ``new'' covered agreement, 
bypassing the transparency provisions like the 90-day lay-over period 
put in place in Dodd-Frank. The prospect of endless renegotiation with 
the EU with little in the way of transparency should be worrisome to 
all.
Conclusion
    The letter announcing the commencement of negotiations with the EU, 
clearly stated that ``Treasury and USTR will not enter into a covered 
agreement with the EU unless the terms of that agreement are beneficial 
to the United States.'' \3\ NAMIC does not believe that the offices met 
this criterion. Overall, the deal is a bad one for the vast majority of 
U.S. insurers, which do not have operations in Europe and which get 
nothing from the agreement other than new group supervision and future 
regulatory uncertainty. It is also a bad deal for consumers in America 
who ultimately pay for the additional costs associated with EU-style 
regulation being imported to the United States.
---------------------------------------------------------------------------
     \3\ Ibid.
---------------------------------------------------------------------------
    The covered agreement is an invented solution to an invented 
problem--the question of European regulators deeming our regulatory 
system equivalent. Again, to be clear, those companies threatened by 
increased regulatory burdens by EU regulators need relief and the U.S. 
should find a way to provide them with that relief. However, it is our 
view that the U.S. can and should explore other ways to address the 
unjustifiable trade barriers which the EU seems intent on throwing in 
the way of our domestic insurers attempting to do business overseas. 
That might include recourse through existing enforcement tools 
available in trade agreements, it might involve negotiating a mutual 
recognition provision in a future trade agreement or at least 
clarifying the intention of the covered agreement to provide such 
recognition. NAMIC believes that the U.S. ought to be able to request 
new language in the agreement or at least letters clarifying the 
intention of the agreement to assure our insurance and reinsurance 
markets can continue to function without unfair barriers to trade.
    In the end, if necessary, Congress should not hesitate to urge the 
Trump administration to go back to the drawing board and secure a 
better deal. A real solution must meet the needs of the insurance-
buying public, the insurance industry, and State regulators--the 
current covered agreement does not meet those needs. NAMIC appreciates 
the opportunity to testify and looks forward to working with the 
Committee going forward.
                                 ______
                                 
                   PREPARED STATEMENT OF DAVID ZARING
 Associate Professor of Legal Studies and Business Ethics, The Wharton 
                   School, University of Pennsylvania
                              May 2, 2017
    I am an associate professor of legal studies and business ethics at 
the Wharton School. I study financial regulation and, in particular, 
international financial regulation, a field of growing importance and 
one that has already transformed the way that banks and capital markets 
are regulated. It is a field of increasing importance to insurance as 
well.
Overview
    In my testimony today on the covered agreement between the United 
States and the European Union, I would like to focus on three points.
    First, the covered agreement grew out of an effort in the wake of 
the financial crisis to improve the regulation of financial companies, 
including insurance companies, given the repercussions of the failure 
of the large insurance company AIG during that crisis. For insurance, 
that effort has involved a number of different channels. The goals have 
been twofold. One has been to make sure that globally active insurance 
companies are sensibly regulated as whole enterprises, rather than as a 
series of operating subsidiaries in a variety of different 
jurisdictions. The second has been to insure that internationally 
active insurance companies have faced a level playing field when it 
comes to doing business at home or overseas.
    The covered agreement complements efforts to reduce nontariff 
barriers through trade agreements and efforts to increase the quality 
of global insurance supervision through organizations like the 
International Association of Insurance Supervisors (IAIS). It offers 
the reduction of two barriers to trade and two regulatory agreements 
that will improve the supervision of insurance conglomerates in both 
the United States and Europe, serving objectives identified by 
regulators and trade negotiators in the wake of the financial crisis.
    Second, the agreement deepens cooperation through the exchange of 
information, includes a deal on reinsurance that reduces trade barriers 
in both the United States and the European Union, and provides a 
sensible framework for the supervision of insurance conglomerates as 
groups. As a matter of content, it is likely to be good for insurance 
companies and consumers. In addition, it rationalizes the supervision 
of insurance companies by looking at the totality of their operations, 
just as banking supervisors do when it comes to banking financial 
conglomerates.
    Third, the critics of the transparency of the process in concluding 
the covered agreement are misguided. The United States never hid the 
fact that it was engaging in negotiations with the European Union, and 
now that the result of those negotiations have been made public, the 
covered agreement is being appropriately reviewed by Congress and by 
stakeholders. That is the right way to contact transparent 
international processes: congressional approval to engage in 
international negotiations is given beforehand, and the results of 
those negotiations are reviewed after the fact. Requiring more and 
different consultations during the negotiations would be both 
inconsistent with the way negotiations work and entirely unnecessary 
process.
    More generally, international regulatory cooperation is not easy, 
and must be paired with procedural protections, but the United States 
cannot ignore the efforts and interests of foreign regulators. The 
global effort to create a single common set of accounting standards 
exemplifies the risks of failing to engage. The United States stayed 
out of that process, but the resulting International Financial 
Reporting Standards have now been adopted by essentially every 
jurisdiction in the world but one--and the Securities and Exchange 
Commission is now accepting IFRS for foreign filers. This country can 
take a leadership role in devising international regulatory standards, 
or it can let others develop the standards, and adopt them later. But 
it cannot ignore them.
The Context for the Covered Agreement Between the U.S. and EU
    Before the financial crisis, insurance companies were thought to be 
relatively safe financial intermediaries. They were regulated, 
especially in the United States, more to ensure that they did not 
deceive consumers, rather than for the danger that they would collapse 
and create risks for the financial system. That perspective made sense 
in most contexts; insurance companies are less susceptible to bank runs 
or the sort of operational risks posed by rogue traders or flash 
crashes that may roil the financial and capital markets. State 
insurance commissioners have traditionally led the way in this 
oversight.
    However, the financial crisis exemplified the ways that, as 
insurance companies have taken on more varied operations, their conduct 
can threaten the stability of the system. Most notably, this occurred 
in the case of the insurance giant American International Group, one of 
the largest companies in the country. As you all know, it collapsed in 
2008. AIG provided all sorts of insurance to policyholders all over the 
world. But its diverse array of products proved to be its undoing; AIG 
was ruined by a combination of the entry into a new quasi-insurance 
market, and the dependence on a securities lending program that dried 
up just as the new business started to fare disastrously.
    The new business was run out of AIG's London subsidiary, AIG 
Financial Products. AIG-FP wrote insufficiently hedged credit default 
swaps, bolstered by the strong balance sheet of the larger insurance 
firm. As the credit crisis worsened, AIG had to post more and more 
collateral to satisfy its counterparties that it would make good on the 
credit protection contracts it had written. Eventually the need to post 
ever more collateral rendered the company essentially insolvent, with a 
large proportion of its assets encumbered. Some accounts put the losses 
on this credit insurance at $30 billion.
    To make matters worse, AIG's securities lending business collapsed 
at the same time and for largely the same reason: the collapse in 
mortgage backed-securities markets. Companies like AIG that hold a lot 
of securities against the insurance policies written by their operating 
subsidiaries often lend the securities out in exchange for cash 
collateral. When they do so, they typically take that cash collateral 
and invest it in something short term and relatively safe. But AIG 
invested in riskier assets, including assets backed by subprime 
residential mortgage loans. When the financial crisis began to deepen, 
and borrowers returned their securities, seeking the cash collateral, 
AIG found itself unable to liquidate these assets quickly, at the price 
the firm expected to receive. Estimates at the losses due to this 
securities lending have placed that deficit at around $21 billion. \1\
---------------------------------------------------------------------------
     \1\ For a discussion, see Robert McDonald and Anna Paulson, ``AIG 
in Hindsight'', 29 J. Econ. Persp. 81 (Spring 2015).
---------------------------------------------------------------------------
    The result was that a famously careful American insurer that served 
different customers across the world was undone by one relatively small 
London subsidiary, which, it turned out, was not being carefully 
overseen by British insurance regulators, the New York insurance 
commissioners who oversaw the center of the firm's operations, or the 
Office of Thrift Supervision, which oversaw AIG to the extent that the 
conglomerate served as a holding company of a thrift subsidiary. Its 
overseers had also not realized that it had found its way into a 
runnable market through its securities lending business. The securities 
held by its insurance subsidiaries had been lent out through a process 
centralized through a noninsurance, securities lending-focused 
subsidiary.
    Both disasters, which hit AIG at the same time, posed problems that 
the company's insurer supervisors were ill-equipped to solve or even 
recognize in part because they did not subject the firm to meaningful 
consolidated, or group level, supervision. \2\ Instead the various 
subsidiaries of AIG were parceled out as the responsibility of various 
regulators, with little effort made to coordinate that supervision.
---------------------------------------------------------------------------
     \2\ For a further discussion of the AIG problem, see Daniel 
Schwarcz, ``A Critical Take on Group Regulation of Insurers in the 
United States'', 5 UC Irvine L. Rev. 537 (2015).
---------------------------------------------------------------------------
    The AIG experience, and the financial crisis in general, changed 
the way that oversight over nonbank financial companies was allocated 
between the States and the Federal Government, particularly with regard 
to the effort to create international standards. Title V of the Dodd-
Frank Wall Street Reform Act created the Federal Insurance Office (FIO) 
within the Department of Treasury. That office has limited powers, 
especially domestically, where insurance supervision remains the 
province of the State insurance commissions. FIO has nonetheless been 
charged with a particularly important outward-facing role. It has 
unique international responsibilities: Congress instructed it ``to 
coordinate Federal efforts and develop Federal policy on prudential 
aspects of international insurance matters, including representing the 
United States, as appropriate, in the International Association of 
Insurance Supervisors;'' (IAIS) to ``consult with the States (including 
State insurance regulators) regarding insurance matters of national 
importance and prudential insurance matters of international 
importance;'' and to ``advise the [Treasury] Secretary on prudential 
international insurance policy issues.'' \3\
---------------------------------------------------------------------------
     \3\ 31 U.S.C. 313(c).
---------------------------------------------------------------------------
    It also has been given the power, in association with the United 
States Trade Representative, to conclude agreements on insurance 
regulation with foreign counterparties.
    These so-called covered agreements are defined in Dodd-Frank as

        a written bilateral or multilateral agreement regarding 
        prudential measures with respect to the business of insurance 
        or reinsurance that is

         (A) entered into between the United States and one or more 
        foreign Governments, or regulatory entities; and

         (B) relates to the recognition of prudential measures with 
        respect to the business of insurance or reinsurance that 
        achieves a level of protection for insurance or reinsurance 
        consumers that is substantially equivalent to the level of 
        protection achieved under State insurance or reinsurance 
        regulation. \4\
---------------------------------------------------------------------------
     \4\ 31 U.S.C. 313(r)(2).

    These covered agreements are meant to both strengthen insurance 
regulation and level the playing field between the United States and 
other countries, and are meant to serve as a bilateral backstop for 
regulatory cooperation in cases where multilateral regulation has not 
made progress. An analogy might be drawn to this country's approach to 
progress on reducing barriers to trade. When multilateral agreements 
like the Doha Round have foundered, the United States has increasingly 
looked to pursue its trade interests through regulation or bilateral 
trade and investment deals. In the case of post-crisis insurance 
supervision, the hope evinced in Dodd-Frank is that where multilateral 
efforts to either level the international playing field or to improve 
the supervision of systemically risky insurance companies has 
foundered, bilateral covered agreements might serve as a useful 
supplement.
    The work of IAIS continues and, of course, trade negotiations, on 
both the bilateral and a multilateral basis, are part of the mix that 
will affect the playing field on which insurers from a variety of 
different jurisdictions can seek to market their products to consumers 
both at home and abroad.
    In my view, the covered agreements occupies a place in the middle 
of these international efforts to solve some of the problems posed by 
the modern insurance market. On the one hand, trade negotiations are 
about reducing trade barriers and making it more possible for insurance 
companies to access foreign markets. Trade uses its national treatment 
principle to do so--that principle provides that members of the World 
Trade Organization ``shall accord to the nationals of other Members 
treatment no less favorable than that it accords to its own nationals'' 
for a variety of products and services. \5\ The goal is to remove 
discriminatory regulation of foreign imports as much as possible.
---------------------------------------------------------------------------
     \5\ GATT Article III.
---------------------------------------------------------------------------
    The IAIS efforts are also designed to level the playing field when 
it comes to the supervision of insurance companies. Here, the effort is 
not so much to remove regulations as it is to improve them. 
International financial regulation through a network like IAIS in this 
way has a harmonizing purpose just like trade agreements, but IAIS 
seeks to bring regulatory standards in member countries up to a more 
intensive standard, with national treatment serving as both a 
justification (we must measure up to the other members of the network 
in our treatment of our insurers) and a caution (we must treat our 
insurers the same way we treat foreign insurers) for more intense 
oversight. \6\
---------------------------------------------------------------------------
     \6\ A further discussion of this point may be seen in David 
Zaring, ``Finding Legal Principle in Global Financial Regulation'', 52 
VA. J. Int'l L. 685, 707 (2012).
---------------------------------------------------------------------------
    In the wake of the financial crisis, IAIS, and the coordinator of 
financial oversight, the Financial Stability Board, under instruction 
from the G20, has taken new steps to create consistent global standards 
for supervisors designed to improve the safety and soundness of 
financial firms, including capital standards and group standards.
    Efforts to create international insurance standards make sense as 
American firms increasingly enter foreign markets, and foreign firms 
enter the American one. Common standards level the playing field, and 
invite the sort of competition that can only benefit insurance 
consumers. And in a world where an insurance group can be destabilized 
by a faltering subsidiary in a single country, the value of coordinated 
supervision is obvious.
    Nonetheless, international processes are almost by definition more 
difficult to follow than domestic ones. IAIS and the FSB have taken, 
often at the behest of American regulators, steps towards improving 
their transparency. They have websites, they issue consultative 
documents and accept comment upon them, and they hold increasingly open 
annual meetings. And the IAIS has usefully dropped the very high fee it 
required of those who hoped to attend its annual meeting. But 
transparency should not be viewed as requiring that any and every 
interested party be able to attend any meeting at any moment. No 
business works that way, and nor does any agency. Policymaking requires 
opportunities for deliberation, and the importance of a role for 
deliberation should not be gainsaid.
    The covered agreement between the United States and the European 
Union occupies a middle ground once this context is taken into account. 
On one hand, the portion of the agreement that deals with reinsurance 
reduces trade barriers in both the European Union and the United 
States. On the other hand, the group supervision agreement improves the 
quality and consistency of the supervision of insurance conglomerates 
by encouraging regulators to assess the solvency and capital adequacy 
of insurance companies at the group level, rather than solely at the 
operating subsidiary level.
    Finally, I think it would be remiss not to observe that the 
agreement provides for an information exchange that is likely to deepen 
the contacts between regulators in the U.S. and EU in a way that will 
be a great benefit the next time that a large insurance company runs 
into financial trouble.
The Content of the Covered Agreement
    Once the context of the covered agreement is understood, its 
content makes a great deal of sense.
    The reinsurance portion of the agreement reduces trade barriers in 
both the United States and the European Union in a way likely to 
benefit American consumers. I therefore view it as something like a 
trade deal, contained within the more narrow confines of a limited 
agreement on international insurance regulation. In particular, the 
requirement that foreign reinsurance firms post 100 percent collateral 
to do business in certain American jurisdictions makes little sense for 
well supervised European reinsurers. This problem has been apparent for 
years, and yet any reduction in the collateral requirements, which 
thereby would open up the U.S. reinsurance market and introduce new 
competitors, to the benefit of insurance companies and ultimately 
consumers, has been slow.
    The agreement would prevent U.S. State insurance regulators from 
requiring EU reinsurers to post such high levels of collateral as a 
condition for U.S. firms to be credited for their contracts with EU 
reinsurers. These provisions do not limit the power of American 
regulators to apply requirements for entering into reinsurance 
agreements. The Treasury Department views this requirements as one that 
builds on the reinsurance collateral reform adopted unanimously by U.S. 
State regulators in 2011 and implemented in many, but not all, States. 
I am inclined to agree.
    In addition to improving the reinsurance market, the 
rationalization of reinsurance collateral requirements will likely help 
the United States as it pursues further nontariff barrier concessions 
from the European Union. The participation of the USTR in the 
negotiations over the covered agreement underscores the relevance of 
the reinsurance arrangements for the more general reduction in trade 
barriers on both sides of the Atlantic.
    The United States also got something for American reinsurance 
companies as well. One of the covered agreement's objectives, as 
announced in its Article I, is ``the elimination, under specified 
conditions, of local presence requirements.'' Specifically, the 
agreement relieves U.S. reinsurers from the obligation to establish a 
local presence--i.e., a branch or subsidiary--in the EU. The local 
presence requirement in the EU was also a real burden on the ability of 
American reinsurers to access that market. The elimination of that 
burden will level the playing field for American and European 
reinsurance firms by making it easier for American reinsurers to access 
the European market without opening an office in every jurisdiction in 
which they do business.
    The agreement also contains provisions on group supervision. Under 
the EU's ``Solvency II'' regime, European insurers are subject to group 
supervision, and foreign insurers seeking to do business in the EU are 
required to establish that they are supervised in a comparable way. 
Most worryingly for American firms, the EU reserved for itself the 
right to impose additional capital and other regulatory requirements on 
firms if its country of domicile was not determined by the EU to have a 
supervisory system that is ``equivalent'' to the Solvency II 
supervisory system.
    The covered agreement provides that this requirement will not be 
imposed upon American insurers doing business in Europe, provided that 
they can establish that they are being adequately supervised as groups. 
The agreement was in this way designed to ``establish[] that the 
[American] supervisory authority, and not the [European] supervisory 
authority, will exercise worldwide prudential insurance group 
supervision,'' as the agreement provides in Article I. It means that 
U.S. insurance groups operating in the EU will be supervised at the 
worldwide group level by the relevant U.S. insurance supervisors, 
rather than through a European process imposed on American insurers and 
based on Solvency II.
    Group supervision is, in my view, the appropriate way to supervise 
any large financial conglomerate. Banks are supervised at the holding 
company level by the Federal Reserve, and the single point of entry 
resolution scheme also looks to manage firms in crisis in a 
consolidated way. Dodd-Frank, in the way it treats nonbank subsidiaries 
of broker dealers and derivatives desks also looks to the group rather 
than the operating subsidiary in assessing systemic risk.
    The group supervision component of the covered agreement brings 
this sort of focus to insurance conglomerates, and appropriately so. I 
have observed that some of the problems posed by the supervision of AIG 
were likely attributable to the fact that its American regulators were 
not sufficiently focused on its London financial products affiliate, as 
well as on its non-insurance securities lending affiliate. It makes 
sense to assess the riskiness of an insurance company with a view to 
the whole insurance company, and not by only looking at its operating 
subsidiaries on a State-by-State basis.
    Moreover, it appears that the approach taken in group supervision 
of insurance conglomerates mimics the program that the National 
Association of Insurance Commissioners is already rolling out. State 
regulators used to regulating firms at the operating subsidiary level 
are unaccustomed to group supervision, and may not have the incentives 
to cooperate in a way likely to make group supervision successful. They 
are, however, beginning to address the issue with their ``windows'' and 
``walls'' approach to groups. The ``walls'' of the State regulatory 
process are designed to ring-fence individual regulated entities from 
various risks that may be associated with their affiliates or holding 
companies, and include rules requiring that insurers' transactions with 
affiliates be on terms that are ``fair and reasonable'' and subject to 
regulatory disapproval. The ``windows'' of U.S. insurance regulation 
are designed to allow regulators of individual operating entities to 
assess potential risks from affiliates that may impact the operating 
entity. The ``windows'' provide regulators with financial information 
from any entity controlling the insurer, financial statements of all 
affiliates, and the right to acquire information seek further 
information about large risks faced by the insurance group. \7\ The 
covered agreement recognizes this approach, as well as the Own Risk and 
Solvency Assessment used by State regulators, which would be shared 
with European regulators.
---------------------------------------------------------------------------
     \7\ For an overview of these rules, see Daniel Schwarcz, ``A 
Critical Take on Group Regulation of Insurers in the United States'', 5 
UC Irvine L. Rev. 537 (2015).
---------------------------------------------------------------------------
    Finally, the agreement provides for an information exchange that 
will amplify and improve contacts between regulators in the U.S. and 
EU. Over four decades of cooperation among central bankers and 
securities regulators has contributed to the capacity for the 
coordinated response that we have seen, to the degree that we have seen 
it, in the response to the last crisis, by both. In the midst of that 
crisis, the Securities and Exchange Commission coordinated its shorting 
ban with its international counterparts at an International 
Organization of Securities Commissions (IOSCO) meeting, even though the 
coordination was done in the hallways rather than during the official 
session. By the same token, the coordination of the injections of 
capital through swap lines and other mechanisms by the world's central 
bankers was facilitated by their already extant supervisory 
cooperation. In other words, cooperation on matters of enforcement and 
understandings along those lines can create or further the 
relationships that can facilitate an international response to the next 
crisis. \8\ That precedent is why I view the agreement on information 
exchange as a worthy and useful aspect of the agreement.
---------------------------------------------------------------------------
     \8\ For more on this, see David Zaring, ``International 
Institutional Performance in Crisis'', 10 Chi. J. Int'l L. 475, 485 
(2010).
---------------------------------------------------------------------------
Finding the Right Level of Transparency for the Covered Agreement
    How can we ensure that the sorts of international processes 
represented by the covered agreement have the right amount of 
accountability and democratic legitimacy? At best, Congress will begin 
the process by authorizing, or in some cases blessing, efforts at 
international regulatory cooperation. Second, the regulators will 
engage in that cooperation. And finally, regulators must come engage in 
a domestic administrative process.
    So far, this is the process that has been followed in the covered 
agreement. Congress gave Treasury and the USTR the power to negotiated 
covered agreements in Dodd-Frank. And American regulators participating 
in the process notified Congress and the industry before they began to 
negotiate an agreement with their European counterparts, and provided 
updates over the course of the negotiation.
    Complaining about the transparency of the negotiations as they are 
happening is, in my view misplaced, provided there is a full and fair 
opportunity to review the product of those negotiations. This hearing 
is part of that review. Too many consultation or participation 
requirements limit the ability of negotiators to in fact negotiate.
    Finally, the text of the final agreement was sent to all of the 
relevant committees as required by Dodd-Frank. There is much process 
required before the U.S. can take action against any State that fails 
to bring its rules into line with the covered agreement:

    No later than 42 months following execution of the 
        Agreement, the U.S. must begin evaluating potential preemption 
        determinations with respect to any State insurance measure that 
        results in less favorable treatment of an EU insurer or 
        reinsurer than a U.S. insurer or reinsurer in a manner 
        inconsistent with the agreement. The U.S. has agreed to 
        consider the States with the biggest reinsurance market first, 
        and to finish within five years following execution of the 
        agreement.

    If it makes a preemption determination, Treasury must 
        notify and consult with the State insurance regulator, take 
        comment on the proposed determination, and give the State some 
        time before finalizing preemption.

    A State has the right to challenge that preemption 
        determination in court.

    Covered agreements are meant to strengthen insurance regulation and 
level the playing field between the United States and European Union. 
There has been talk in the past about pre-conclusion publication 
requirements, or elaborate rounds of comment, sometimes involving 
congressional committees, before beginning the process of negotiating 
the agreement. But requiring draft agreements, or the American 
negotiating position, to be published in the Federal Register simply 
slows the process of implementing these agreements. It also suggests 
that the United States might not be able to live up to its bargains, 
which makes these agreements--which were blessed by Congress in Dodd-
Frank--all the more difficult to conclude. It is also, for that matter, 
no way to conduct an international negotiation--you don't reveal your 
hand before you head to the bargaining table.
The Risks of Non-Participation: The International Accounting Standards 
        Saga
    In my testimony, I have emphasized that international regulatory 
cooperation provides opportunities for American regulators to improve 
the stability of the financial system at home, and abroad, and 
therefore better meet their domestic regulatory mandates. I'd like to 
conclude with a cautionary tale about what can happen if American 
regulators reject an international process.
    The accounting story is particularly instructive. It is a 
cautionary tale for Americans because American regulators, by 
essentially abandoning an already ongoing harmonization effort in the 
1990s, lost their ability to affect the effort, and now have had to 
begin the process of conforming to it.
    International accounting standards--the idea that companies listed 
on stock exchanges from Stockholm to Shanghai might report their 
results in the same way--have always been an attractive regulatory 
goal. In the 1980s, capital market regulators agreed to endorse an 
effort by professional accounting organizations to try for global 
harmonization of accounting rules. But the effort proved controversial, 
as American regulators comfortable with the unique American approach to 
financial statements withdrew their support for the enterprise in the 
early 1990s.
    That exit, however, did not stop the process of devising common 
accounting standards. Instead, the international efforts moved to 
Europe; the creation of international accounting standards after the 
SEC's rejection of the prospect of them, has been managed by the 
International Accounting Standards Board (IASB), a public-private 
arrangement based in London created in 2001. The IASB has devised a set 
of accounting standards, the International Financial Reporting 
Standards (IFRS), which has enjoyed quick adoption in European and 
other countries. IFRS was essentially created without American 
participation.
    And therefore, perhaps unsurprisingly, IFRS is rather different 
from American accounting rules. It is a principles--rather than rules--
based accounting system, in that it is less technical than traditional 
American accounting, and relies more on the gestalt of a company's 
returns to assess its accuracy. The United States had--and, for the 
moment, still has--a unique rules-based and reputedly challenging set 
of accounting standards that differ greatly from those of any other 
Nation, the Generally Accepted Accounting Principles (GAAP).
    But, faced with a cascade of adoptions of IFRS, those GAAP 
principles have a very tenuous future, despite the SEC's doubling down 
on their necessity in the 1990s. As foreign jurisdictions have gained 
more and more of the business of floating stocks and bonds and raising 
capital, American capital market regulators have given up hope that 
they might do so in ways consistent with the complicated GAAP. The SEC 
has permitted foreign companies that list on American stock markets to 
use IFRS to file their American annual and quarterly reports. And the 
SEC will surely accede to IFRS eventually for all filers.
    Accounting is technical, and acronyms like GAAP and IFRS daunt 
almost as much as they reveal what, exactly, the distinction between 
rules-based and principles-based accounting really amounts to. But the 
import of the triumph of IFRS can be gleaned by abstracting away from 
it, and from the details of accounting. The commitment to an 
international effort in accounting has worked a sea change in the way 
that companies report their results, and the sea change has come 
without much American involvement--even though it will, in the near 
future, affect American companies as much as anyone else.
    Thus, this story of accounting standards illustrates what happens 
when international efforts are not pursued, even though safeguards on 
cooperation are important. Its propensity towards momentum is not a 
universal law, to be sure, but regulators ignore cross-border efforts 
at their peril, because those efforts can set the standards for even 
the most independent and recalcitrant jurisdictions, if the 
circumstances are right.
    Thank you.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                    FROM MICHAEL T. MCRAITH

Q.1. There was some discussion during the hearing about 
potential opportunities to enhance the process for soliciting 
State insurance regulators and other stakeholders' input in 
connection with future Federal Insurance Office-led 
negotiations of covered agreements. Could you describe with 
some additional detail how that process should be enhanced in 
future negotiations?

A.1. Response not received in time for publication.

Q.2. How should the Joint Commission process work to ensure 
that stakeholders' input is considered in addressing any issues 
that might arise under this covered agreement?

A.2. Response not received in time for publication.

Q.3. Assuming the covered agreement is implemented by both the 
United States and the European Union without an exchange of 
letters or other comfort on the interpretative questions raised 
by the National Association of Insurance Commissioners and 
others, to what extent would the United States' ability to 
terminate the agreement provide an effective means of 
mitigating risks to U.S. interests in the event that the 
European Union were to construe those interpretive questions 
against U.S. interests?
A.3. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                     FROM JULIE MIX MCPEAK

Q.1. There was some discussion during the hearing about 
potential opportunities to enhance the process for soliciting 
State insurance regulators and other stakeholders' input in 
connection with future Federal Insurance Office-led 
negotiations of covered agreements. Could you describe with 
some additional detail how that process should be enhanced in 
future negotiations?

A.1. It isn't clear that a covered agreement authority will be 
necessary for the future. The agreement with the EU was the 
product of fairly unique circumstances as the EU had something 
to give the United States in exchange for concessions by the 
United States, specifically addressing the disparate treatment 
that U.S. insurers were receiving by certain EU member 
countries under the Solvency II regime.
    With that stated, if the authority is to be preserved going 
forward, then we would suggest the following changes. First, 
State insurance regulators should be included in the 
negotiation process and should be able to consult with their 
general counsels and other pertinent department staff, as well 
as their fellow regulators. Unfortunately, during this 
negotiation, only a few of us were permitted to participate and 
we could not share information and obtain reactions from the 
other States. Second, there needs to be more stakeholder 
involvement throughout the process and formal mechanisms for 
doing so, including a notice and comment period on the proposed 
agreement and its framework. Last but not least, Congress 
should have more formal mechanisms for weighing in including 
voting on the proposed agreement.

Q.2. How should the Joint Commission process work to ensure 
that stakeholders' input is considered in addressing any issues 
that might arise under this covered agreement?

A.2. Along with other unknowns, the nature of the committee, 
its responsibilities and its membership should have been 
clearly spelled out in the agreement itself.
    Optimally, if a Joint Committee is to be convened to 
address interpretation issues, the process should be 
transparent and allow for the meaningful participation of State 
insurance regulators. While we would not expect all insurance 
regulators to be included in every meeting, there should be 
mechanisms by which all States can be consulted regarding the 
deliberations. Much of this agreement must be implemented by 
State insurance regulators, governors and legislators, and 
therefore the involvement of the States in the process to 
resolve disputes is critical.

Q.3. Assuming the covered agreement is implemented by both the 
United States and the European Union without an exchange of 
letters or other comfort on the interpretative questions raised 
by the National Association of Insurance Commissioners and 
others, to what extent would the United States' ability to 
terminate the agreement provide an effective means of 
mitigating risks to U.S. interests in the event that the 
European Union were to construe those interpretive questions 
against U.S. interests?
A.3. We don't think the threat of ending the agreement is an 
effective means of mitigating risks to U.S. interests. The key 
benefit to the agreement for the United States is resolving the 
disparate treatment that certain U.S. insurers are receiving 
from the EU. If we threaten to terminate the agreement, the EU 
will revert to their disparate treatment of our companies and 
the U.S. will not have achieved certainty and finality for the 
insurance sector. While some may argue that that the EU 
receives benefits such as the elimination of collateral, the 
U.S. stands to lose more if we wait to resolve any ambiguities 
through the Joint Committee. Over time, we could very well be 
in the position of having changed State laws in a manner that 
is favorable to the EU and not be able to easily or fully 
unwind the implementation that has already been undertaken by 
the States. If we terminate the agreement, the EU will preserve 
some of the benefits while the U.S. insurers operating in the 
EU could lose the main benefit U.S. negotiators obtained for 
them. We think the better approach is to resolve the 
ambiguities up front to avoid this situation and maximize the 
likelihood of finality and certainty for our sector.
              Additional Material Supplied for the Record
   VIEWS OF THE CINCINATTI INSURANCE COMPANIES ON COVERED AGREEMENTS
   
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT