[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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Printed for the use of the Committee on Banking, Housing, and Urban Affairs
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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
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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
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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\
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\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)
---------------------------------------------------------------------------
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.
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\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).
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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.
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\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).
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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.
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\8\ For more on this, see David Zaring, ``International
Institutional Performance in Crisis'', 10 Chi. J. Int'l L. 475, 485
(2010).
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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