[Senate Hearing 116-181]
[From the U.S. Government Publishing Office]


                                                 S. Hrg. 116-181


                 DEVELOPMENTS IN GLOBAL INSURANCE 
                REGULATORY AND SUPERVISORY FORUMS

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

                                HEARING

                               BEFORE THE

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

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 RECEIVING AN UPDATE FROM TEAM USA ON DEVELOPMENTS IN GLOBAL INSURANCE 
                   REGULATORY AND SUPERVISORY FORUMS

                               __________

                           SEPTEMBER 12, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                Available at: https: //www.govinfo.gov /

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
40-381 PDF                 WASHINGTON : 2021                     
          
-----------------------------------------------------------------------------------   

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                Laura Swanson, Democratic Staff Director

                Brandon Beall, Professional Staff Member

           Corey Frayer, Democratic Professional Staff Member

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)
                                  
                                  
                            C O N T E N T S

                              ----------                              

                      THURSDAY, SEPTEMBER 12, 2019

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    23

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     3
        Prepared statement.......................................    24

                               WITNESSES

Steven E. Seitz, Director, Federal Insurance Office, Department 
  of the Treasury................................................     4
    Prepared statement...........................................    25
    Responses to written questions of:
        Senator Toomey...........................................    35
        Senator Menendez.........................................    35
        Senator Warren...........................................    36
        Senator Sasse............................................    39
        Senator Cortez Masto.....................................    41
        Senator Sinema...........................................    46
Thomas Sullivan, Associate Director, Board of Governors of the 
  Federal Reserve System.........................................     6
    Prepared statement...........................................    28
    Responses to written questions of:
        Senator Toomey...........................................    46
        Senator Menendez.........................................    46
        Senator Warren...........................................    47
        Senator Sasse............................................    49
        Senator Cortez Masto.....................................    51
        Senator Sinema...........................................    55
Eric A. Cioppa, Superintendent, Maine Bureau of Insurance, on 
  behalf of the National Association of Insurance Commissioners..     7
    Prepared statement...........................................    30
    Responses to written questions of:
        Senator Toomey...........................................    56
        Senator Menendez.........................................    57
        Senator Warren...........................................    57
        Senator Sasse............................................    60
        Senator Cortez Masto.....................................    61
        Senator Sinema...........................................    70

              Additional Material Supplied for the Record

Statement submitted by the National Association of Mutual 
  Insurance Companies............................................    71
Statement of the U.S. Chamber of Commerce........................    80
Letter submitted by the American Property Casualty Insurance 
  Association....................................................    83
Statement submitted by the American Council of Life Insurers.....    91
Letter to European Regulators from Insurance Europe and the Pan-
  European Insurance Forum regarding the global Insurance Capital 
  Standard (ICS), submitted by Senator Rounds....................    95
Letter from a coalition of Senators, dated May 13, 2019, to 
  Randal K. Quarles, Board of Govenors of the Federal Reserve 
  System, regarding the ICS, submitted by Senator Rounds.........    98
Response from Randal K. Quarles, Board of Govenors of the Federal 
  Reserve System, to Senators' May 3, 2019, letter...............   104

 
   DEVELOPMENTS IN GLOBAL INSURANCE REGULATORY AND SUPERVISORY FORUMS

                              ----------                              


                      THURSDAY, SEPTEMBER 12, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 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 welcome to the Committee the three members of Team 
USA representing the United States in international insurance 
supervisory and regulatory forums, including Steven Seitz, 
Director of the Federal Insurance Office in the Treasury 
Department; Thomas Sullivan, Associate Director at the Board of 
Governors of the Federal Reserve System; and Eric Cioppa, 
Superintendent of the Maine Bureau of Insurance, on behalf of 
the National Association of Insurance Commissioners.
    On September 6, 2019, the Treasury and Federal Reserve 
issued their annual report regarding their efforts with the 
National Association of Insurance Commissioners in 
international forums, such as the International Association of 
Insurance Supervisors.
    The report and accompanying testimony are required by the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
to encourage greater transparency into and reinforce a unified 
approach to efforts by Team USA at those international forums.
    A key driver of this provision is the IAIS's multiyear 
effort to develop a group-wide, risk-based insurance capital 
standard, often referred to as ICS 2.0, as a part of its Common 
Framework for the Supervision of Internationally Active 
Insurance Groups.
    In July 2018, the IAIS issued a consultative document 
proposing ICS 2.0, and several aspects of the proposal and 
process have caused serious concern in the United States 
insurance market. Among those concerns are, one, the proposed 
use of a market-adjusted valuation; two, the use of internal 
models; and three, a lack of clarity about the processing 
moving forward and how outcome equivalency will ultimately be 
determined.
    ICS 2.0 is set to be implemented in two phases, including a
5-year monitoring period at the end of which IAIS will assess
whether it considers the United States approach to be outcome 
equivalent.
    There should be clarity about the path forward for further 
adjusting ICS 2.0 during the monitoring period as well as a 
better understanding of how outcome equivalency will be 
determined.
    It is also important that ICS 2.0 be structured in a way 
that appropriately reflects the uniqueness of insurers and that 
works for U.S. insurers, including those operating abroad.
    Treasury Secretary Mnuchin spoke earlier this year about 
ICS 2.0's development, where he highlighted three areas on 
which the Treasury is focused, including working to improve the 
design of ICS so it more appropriately reflects the unique 
business model of insurers, advocating for the IAIS to create a 
defined structure and process for further work and revision of 
ICS during the monitoring period, and ensuring that the final 
ICS is implementable in the United States.
    Also, while speaking about the Federal Reserve's Building 
Blocks Approach to a risk-based insurance capital requirement, 
Federal Reserve Vice Chairman for Supervision, Randy Quarles, 
acknowledged the challenges of ICS 2.0 and potential 
consequences for consumers. He said:

        A capital standard that uses market-based valuation can 
        introduce volatility and procyclicality, and one that is 
        excessively volatile or procyclical can influence a firm to 
        veer away from a long-term perspective and concentrate on the 
        short term. This can have undesirable consequences, including 
        diminishing product availability.

    He also added about efforts at the IAIS on ICS 2.0: ``In 
order for any form of an ICS to be implementable globally, it 
needs to be suitable for the U.S. insurance market. The current 
core proposal in the ICS would face implementation challenges 
in the United States.''
    While the IAIS has been working on its standard, the NAIC 
has worked on a Group Capital Calculation that is currently in 
field testing, and the Federal Reserve recently issued its 
proposed Building Blocks Approach.
    Prior to a vote on ICS 2.0 and during the monitoring 
period, Team USA should leverage its work and progress on these 
U.S.-based standards to continue advocating for a more 
appropriate international standard and toward ultimately 
achieving outcome equivalency.
    Furthermore, the Economic Growth, Regulatory Relief, and 
Consumer Protection Act calls for the Treasury and Federal 
Reserve, in consultation with the NAIC, to complete and submit 
to Congress a study on the impact on U.S. consumers and markets 
before supporting or consenting to the adoption of any final 
international ICS. I look forward to that update at the 
appropriate time.
    Aside from a group capital standard, Team USA has also been 
engaged on several other projects at international forums, 
including a holistic framework for the mitigation of systemic 
risk, continued development of Insurance Core Principles, cyber 
resilience and big data, and governance, among others.
    During this hearing, I look forward to receiving an update 
on Team USA's ongoing efforts to influence the development of 
ICS 2.0 so that it works for U.S. insurers, including those 
operating abroad, and our consumers, what aspects of group 
capital standards developed in the United States can help to 
improve ICS 2.0, changes that could be made to the ICS 2.0 
development processes going forward to better understand 
opportunities to improve it and how to achieve outcome 
equivalency, and other key initiatives at international forums 
on which Team USA is actively working.
    I appreciate, again, each of you joining us today and the 
work you have done to advance U.S. interests abroad.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman.
    Welcome to all of you. Thanks for joining us.
    Eleven years ago today, September 12, 2008, executives from 
AIG walked into the Federal Reserve Bank of New York to beg for 
a bailout. Supervisors at the Office of Thrift Supervision, 
whose leadership was so incompetent that OTS no longer exists, 
failed to identify risky transactions in AIG's Financial 
Products subsidiary in London. State regulators did not catch 
them either.
    During the mortgage boom, AIG sold credit default swaps 
that allowed Wall Street banks to say that they were protected 
against losses from the toxic subprime mortgage securities that 
they owned. Some might even say they were insured. But AIG's 
failure would have taken down the banks it traded with, the 
biggest banks in the country. So AIG got a massive bailout, 
and--you guessed it--executives still got their bonuses.
    Millions of Americans, on the other hand, lost their jobs, 
their homes, their retirement savings. The effects of the 
financial crisis incapacitated economies around the world and 
are still felt in many neighborhoods in my State.
    Given the complexity and interconnectedness of the global 
financial system, it is critical for our regulators and our 
representatives at the Financial Stability Board and the 
International Association of Insurance Supervisors to work 
together to promote financial stability. I understand that we 
regulate insurance a little differently here in the United 
States. I support State-based insurance regulation. It allows 
U.S. insurers to serve small local markets as well as large 
international markets.
    That need for some regulatory discretion is why I worked 
with Nebraska Republican Senator Johanns to pass a bill 
allowing the Fed to implement insurer-specific capital 
standards. It is also why I think it is important for our 
regulators to work with their international counterparts to 
make sure that our regulatory system is recognized and 
respected around the world.
    Unfortunately, under the Trump administration, the 
Financial Stability Oversight Council, FSOC, no longer applies 
enhanced prudential standards or heightened supervision created 
under Dodd-Frank to even the largest insurance companies.
    I can understand why international regulators might have 
the impression that we are not taking financial stability 
seriously in our country. We want international regulators to 
recognize our insurance regulatory system as credible. So it is 
imperative that our regulators recognize credible threats to 
financial stability.
    The Administration must address emerging risks in the 
financial system. Instead, they are working to undermine the 
trust we regained by passing Wall Street reform. Some argue 
that a deregulatory race to the bottom is the only way for 
American insurance companies to be competitive. But the secret 
to America's success in financial markets is surely safety and 
soundness.
    The United States has a long history of financial stability 
and independent regulation of our financial markets. That is 
why other countries trust our markets and our currency. I am 
concerned that this Administration has eroded the trust and is 
diminishing our leadership role in global financial regulation.
    Today I hope to hear about how our regulators are working 
to curb financial risks at the largest insurance companies so 
that working families are not forced to bail them out again, 
and how they plan on restoring American leadership on these 
issues.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Brown.
    We will now move to the testimony of our witnesses.
    Mr. Seitz, you may begin.

   STATEMENT OF STEVEN E. SEITZ, DIRECTOR, FEDERAL INSURANCE 
               OFFICE, DEPARTMENT OF THE TREASURY

    Mr. Seitz. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, thank you for the opportunity to 
testify today about developments in global insurance regulatory 
and supervisory forums.
    Among its statutory authorities, the Federal Insurance 
Office, or FIO, provides advice to the Treasury Secretary on 
major domestic and prudential international insurance issues. 
It represents the United States at the International 
Association of Insurance Supervisors and assists the Secretary 
in negotiating covered agreements. The FIO Director also serves 
as a nonvoting member of the Financial Stability Oversight 
Council.
    As you know, the U.S. insurance sector plays a critical 
role in the U.S. economy. The United States has the largest and 
most diverse market in the world. Thousands of insurers operate 
in the United States, ranging from small mutual companies to 
large global firms operating across the world.
    Turning to FIO's international engagement, as U.S. 
insurance companies compete globally and increasingly look 
overseas for growth opportunities, the Federal Government's 
participation in various international forums is crucial to 
ensuring that the U.S. insurance sector and our companies 
remain competitive internationally, and that international 
standards do not inappropriately affect the U.S. insurance 
companies operating here or the U.S. domestic insurance market.
    It is important that the United States speak with the 
authority of a national government when addressing key 
international insurance matters during any international 
engagement.
    Treasury and the Federal Insurance Office support the 
State-based system of insurance regulation, and we work closely 
with the U.S. States, the National Association of Insurance 
Commissioners, and the Federal Reserve Board.
    As part of our collective advocacy, strong collaboration 
among all members of Team USA is critical to ensuring that the 
United States conveys a coordinated view in international 
discussions.
    It is also important to note that international standards 
are not in and of themselves binding in the United States, 
unless they are adopted as law through domestic processes at 
either the Federal or State level.
    However, as noted by the Secretary in his May remarks, as 
U.S. insurers expand into foreign markets, they will have to 
navigate the supervisory regimes of other jurisdictions that 
may be influenced by these standards.
    I will now turn to some of the ongoing work at the IAIS. 
Last week, Treasury and the Federal Reserve issued a joint 
report to this Committee on our efforts in global insurance 
regulatory or supervisory forms. This report summarizes the 
work of the Federal Insurance Office at international standard-
setting bodies.
    First, I would like to briefly touch on our efforts to 
promote transparency at these bodies and then highlight two 
important initiatives--the insurance capital standard and the 
holistic framework.
    As noted in our November 2018 joint report to this 
Committee, Treasury and the Federal Reserve support increased 
transparency and stakeholder input into IAIS decisionmaking. 
Domestically, Treasury routinely hosts meetings with U.S. 
stakeholders for open dialogue regarding the policy issues 
being discussed at the IAIS. Treasury and the Federal Insurance 
Office will continue to provide opportunities for U.S. 
stakeholders to engage with all members of Team USA on the 
issues arising before the IAIS.
    Treasury appreciates and has contributed to the work of the 
IAIS on the insurance capital standard, and we support its 
overall objective of working to create a common language for 
supervisors around the world. However, we have concerns about 
certain aspects of ICS development, and we are working with our 
Team USA colleagues in pursuing constructive ways to address 
those concerns within the IAIS.
    First, Treasury is working to improve the design of the 
insurance capital standard so that it more appropriately 
reflects the unique business model of insurers, particularly 
those that provide long-term savings products.
    Second, Treasury believes it is important that the IAIS 
create a defined structure and process for further revisions 
and improvements to the ICS during the 5-year monitoring period 
from 2020 to 2024.
    Third, it is important that the IAIS strengthen its efforts 
to develop a final insurance capital standard that can be 
implementable here in the United States.
    Finally, getting the insurance capital standard right is 
more important than meeting any fixed schedule that mandates 
completion of this project at a specific point in time.
    Another important initiative at the IAIS is the holistic 
framework for assessing and mitigating systemic risk in the 
insurance sector. Treasury supports shifting the focus of 
systemic risk analysis away from individual insurance entities 
and toward the activities of insurers and other market 
participants. Treasury also
supports the efforts at the IAIS to develop improved standards 
for liquidity management and planning.
    Thank you again for the opportunity to testify today, and I 
look forward to your questions.
    Chairman Crapo. Thank you, Mr. Seitz.
    Mr. Sullivan.

  STATEMENT OF THOMAS SULLIVAN, ASSOCIATE DIRECTOR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Sullivan. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, thank you for your time and the 
opportunity to testify today.
    The Federal Reserve Board engages in insurance issues 
chiefly through its participation at the IAIS along with the 
Federal Insurance Office, the States, and the NAIC, and 
together, we act as Team USA and advocate for standards that 
are in the best interest of the United States.
    The Fed regulates insurance holding companies that own 
federally insured depository institutions or firms that are 
designated by the FSOC. We leverage the work of the State 
insurance regulators wherever possible and continuously look 
for opportunities to coordinate with them.
    The Fed also participates in insurance policy work streams 
as a member of the FSB. The FSB provides a framework for the 
work of the IAIS, but the responsibility for setting detailed 
standards for insurance rests with the IAIS.
    In my testimony today, I would like to highlight and 
elaborate on a few items discussed in our joint report on 
international insurance engagement, as called for under S. 
2155.
    In 2013, the IAIS announced its plan to develop the 
international capital standard, or ICS. The ICS is intended to 
be a global risk-based capital standard that is fit for 
application for certain large international insurance groups.
    Later this year, the IAIS plans to approve the ICS for a 
confidential use during a 5-year monitoring period. An 
international standard like the ICS could limit regulatory 
arbitrage and could help provide a level playing field for 
global insurers. It could also help to insure that U.S. 
companies are not held to bespoke or onerous regulations when 
they operate abroad.
    There are concerns, however, that the ICS currently 
includes a valuation method and other requirements that may not 
be optimal for the U.S. Insurers that generally operate in a 
buy-and-hold, long-term approach to investing, yet the ICS 
currently uses a market-based valuation method whose volatility 
could ultimately reduce the availability of insurance products 
with long-term guarantees.
    Because of these concerns, the board has proposed applying 
a building block approach, or the BBA, to insurers we supervise 
domestically rather than an ICS-type approach as currently 
designed. The BBA builds upon existing, well-known, State-based 
insurance standards to establish a group-wide minimum 
requirement.
    Further, we support the NAIC's effort to develop a similar 
Group Capital Calculation, or as they call it, the GCC. We will 
continue to work with the NAIC to align these approaches to the 
greatest extent possible.
    Through Team USA's efforts, we believe that we have created 
space in the international deliberations for the BBA and the 
GCC to be recognized as outcome-equivalent. The BBA can assist 
in our collective advocacy by demonstrating how an approach 
that leverages existing capital requirements can function and 
achieve the goals of the ICS.
    Meanwhile, Team USA has continued to advocate for 
increasing transparency at the IAIS. For example, all 
significant policy proposals are now subject to at least a 60-
day consultation period.
    We have also advocated for obtaining stakeholder feedback 
much earlier on in the process. The development of the holistic 
framework is a good example of this. Three separate 
consultations have been conducted early on at the conceptual 
level, before the proposal became more granular. While this 
extensive engagement required more time, we would argue that 
the IAIS has benefited from it, and the stakeholder reaction 
thus far has been supportive.
    The Fed has also worked to increase transparency at the 
FSB. Fed Vice Chair for Supervision Randal Quarles serves as 
the FSB Chair. He has made increasing FSB transparency and 
stakeholder engagement a key part of the group's agenda. In 
fact, as part of this, the FSB has also increased its direct 
engagement with insurers, including on the topic of the ICS.
    Recently, the FSB and the IAIS held a joint stakeholder 
engagement event with representatives of large insurance 
groups.
    Thank you for the opportunity to be with you this morning, 
and I will be happy to take your questions.
    Chairman Crapo. Thank you, Mr. Sullivan.
    Mr. Cioppa.

 STATEMENT OF ERIC A. CIOPPA, SUPERINTENDENT, MAINE BUREAU OF 
 INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                         COMMISSIONERS

    Mr. Cioppa. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, thank you for the invitation, and I 
am pleased to be here testifying alongside my Team USA 
colleagues.
    Today I would like to focus my oral remarks on the IAIS's 
development of an insurance capital standard, or ICS. The NAIC 
has long contributed to the development of international 
insurance standards and adopted those that make sense for our 
market, but we have significant concerns with the direction and 
construction of the ICS.
    The ICS remains not only technically flawed but also 
contrary to key policy initiatives in the United States, such 
as retirement security, long-term care, infrastructure 
investment, and disaster resiliency.
    Rather than developing a truly global standard that has an 
appropriate level of flexibility, the ICS work to date largely 
reflects Europe's approach to regulation and would be 
unworkable for our system and harmful to the products our 
consumers rely on.
    A regulatory standard that cannot be adopted by the world's 
largest jurisdictions does not create safer insurance markets 
globally and is not an international standard, regardless of 
the label applied to it.
    Because the ICS is currently unworkable for our market, we 
are developing an aggregation method to group capital, which is 
different than the ICS, but that will provide comparable 
outcomes for the group-wide supervision of internationally 
active insurance groups. The IAIS has agreed to assess the 
aggregation method during the upcoming 5-year monitoring 
period.
    The aggregation method is informed by our U.S. Group 
Capital Calculation and by the proposed Building Block Approach 
recently released by the Federal Reserve, but it has been 
designed to have utility for other markets as well. We believe 
that an aggregation method is not only comparable but superior 
to the current ICS as it provides more transparency into the 
capital structure and local risks within a group and uses less 
volatile accounting methods. The aggregation method will allow 
us to assess group capital and discuss related issues with our 
foreign counterparts but in a manner that will work with the 
U.S. regulatory framework and avoid the troubling aspects of 
the ICS.
    We recognize that some large U.S. insurers who do business 
in other jurisdictions may have to comply with the ICS or ICS-
like standards elsewhere. Consequently, in addition to 
developing the aggregation method, we are advocating for design 
changes to the ICS to lessen its deficiencies. However, even 
with such changes, the ICS remains fundamentally unfit for 
purpose in the U.S. market.
    We are also working to develop and promote an approach to 
assessing the aggregation method so that by the conclusion of 
the monitoring period, it should be deemed a comparable 
jurisdictional alternative.
    In the short term, between now and November, there are 
several meetings that will give Team USA the opportunity to 
further influence the discussions going forward. From our 
perspective, the IAIS should establish a definition of 
comparability that provides a viable path forward for the 
aggregation method and continue to improve the ICS.
    The focus of comparability should be on whether regulators 
are empowered to take action on a group capital basis, and not 
a granular compliance exercise to a flawed ICS standard.
    While we remain committed to engaging in the process, it is 
premature, if not irresponsible, to make more definitive 
commitments to a standard that presently all members of Team 
USA view as inherently flawed. Such a commitment would 
undermine the very point of a monitoring period, which should 
not be the conclusion of the ICS development but another 
opportunity to test it along with the aggregation method.
    But let me also be clear. We will not be implementing the 
current ICS in the United States. States are moving forward 
with a Group Capital Calculation, and the Fed is moving forward 
with a Building Block Approach, both of which are compatible 
with the aggregation method. We believe this is the best path 
forward for U.S. consumers and market participants, while 
remaining consistent with the underlying purpose of the ICS.
    In conclusion, the NAIC is committed to developing an 
appropriate approach for group capital for U.S. markets and 
continued engagement in international insurance standard 
setting alongside our Team USA colleagues with the primary 
objective of ensuring the United States remains the largest and 
strongest insurance market in the world.
    Thank you for the opportunity to testify today, and I would 
be pleased to take your questions.
    Chairman Crapo. Thank you very much, Mr. Cioppa.
    I will begin with the questions. First of all, I want to 
state to each of you, I appreciate the approach that Team USA 
is taking and the efforts to try to resolve this issue in a way 
that is beneficial to the U.S. markets.
    Mr. Cioppa, the first question I have, I will refer to you, 
and that is, How is the IAIS-made U.S. representatives and 
other stakeholders aware of what outcome equivalency standards 
will be? In other words, how will the IAIS determine outcome 
equivalency, or have they engaged with us on that issue?
    Mr. Cioppa. Thank you, Senator, for that question.
    I think today the guard lanes or guardrails, if you will, 
for comparability are murky, and I think we are pushing back 
and trying to work with the IAIS, that we think going into the 
monitoring period, it is critically important that we have 
definitions of comparability and principles upon which we can 
develop the continued development of the aggregation method. 
Today I think more work needs to be done, but we, the NAIC, 
along with other members of Team USA are pushing very hard for 
comparability guidelines going forward as we move into the 
monitoring period.
    Chairman Crapo. So, basically, we are not yet confident 
that we even understand how outcome equivalency will be 
determined?
    Mr. Cioppa. Correct. Again, we are making that a condition 
that has to be established and being more transparent and 
forthright going into the monitoring period about those issues 
of comparability.
    Chairman Crapo. All right. Thank you.
    To Mr. Sullivan and Mr. Seitz, it seems to me that outcome 
equivalency is becoming a key factor here, and the fact that we 
will be focusing on trying to make sure that our approach in 
the United States is determined to be outcome equivalent is 
critical.
    What aspects of the approaches to group capital under 
development in the United States are more appropriate for U.S. 
insurance market compared to ICS 2.0? In other words, what are 
these differences that we are trying to make sure are 
acceptable?
    Mr. Sullivan. So, as you know, we released our proposal 
last week, which is a very detailed proposal, and it is 
foundationally built on an aggregation chassis. The BBS, as I 
talked about, leverages existing capital regimes, and so 
importantly, insurance products are very local. So by 
leveraging existing capital regimes in the Building Block 
Approach, we do not discriminate against the locality of where 
insurance products are underwritten. So we think that is a 
crucial tenet to what makes an aggregation approach work 
successfully.
    As I pointed out in my opening remarks, the ICS, as 
currently designed, is built off the market valuation chassis, 
and that is detrimental to a long-term buy-and-hold approach.
    Chairman Crapo. Thank you.
    Mr. Seitz?
    Mr. Seitz. I would just agree with Mr. Sullivan.
    One of the main concerns that we have flagged with the ICS 
is the market-based valuation approach. It causes excessive 
volatility. It is not appropriately designed for the business 
model of insurers, and it does have the potential to 
significantly affect the ability of us to offer long-term 
guaranteed products here in the United States. And those 
products are critical to millions of Americans.
    Chairman Crapo. OK. All right. Thank you.
    Then one last question that any of you can respond to, if 
you would like, and this is on big data.
    On September 2, the IAIS issued a draft consultative 
document on the use of big data analytics in insurance, and the 
paper walks through sources of data used by insurers, including 
nontraditional data and supervisory considerations.
    Their strategic plan also points to alternative data and 
fintech as a key strategic them over the next 5 years.
    The NAIC has also done work on the issue of using 
alternative data by insurers and big data, and giving 
individuals more control over their data is a priority of mine 
at least and I think many on the Banking Committee here today.
    Director Seitz, maybe I will focus this one to you and to 
Superintendent Cioppa. How is the use of alternative data 
shaping the insurance marketplace in the United States and 
abroad? And I apologize. You each only have about 20 seconds to 
answer that.
    Mr. Seitz. We are aware of the important issue and have 
been working with the IAIS on that paper.
    We are also looking into these issues as part of our 
insurtech work at the Federal Insurance Office, and we plan to 
summarize the landscape of these issues in our upcoming annual 
report.
    Chairman Crapo. Thank you.
    Mr. Cioppa?
    Mr. Cioppa. Yes. Big data is one of the current top 
priorities for the NAIC. We recognize the significance and the 
implications for consumers and for companies as they utilize 
big data, and it is important to point out that one of the 
rating--the rating laws in every State say rates cannot be 
unfairly discriminatory, and there are certainly implications 
for that in the utilization of big data. So that is, as I said, 
one of our priorities.
    Chairman Crapo. All right. I appreciate your attention to 
this, and as I am sure you know, we have a strong concern about 
consumer privacy and the management and utilization of big 
data. So thank you for that attention.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    This is a question for all three of you, and I would prefer 
you to answer yes or no, if you can.
    Do you agree with FSOC that there are no insurance 
companies in the United States whose material financial 
distress could pose risk to the broader economy?
    Mr. Seitz?
    Mr. Seitz. We support the move that the FSOC has made 
toward the activities-based approach, and that guidance is 
currently under proposal. And the FSOC is currently taking back 
stakeholder feedback.
    Senator Brown. Mr. Sullivan, did FSOC make the right 
decision in their de-designation? Same question.
    Mr. Sullivan. Yes, I believe they had, and Chairman Powell 
has voted as such.
    Chairman Crapo. Mr. Cioppa?
    Mr. Cioppa. Yes. I also believe they have. I mean, I think 
the activities-based approach is a much more appropriate 
approach to insurance risk.
    Senator Brown. I am not surprised at your answer. I kind of 
expected that answer, but I think it identifies the problems 
that we are not using the tools--that you are not using the 
tools we gave you to combat systemic risk.
    Let me go somewhere else. Let us focus on the vast majority 
of U.S. insurance companies whose business is mostly domestic.
    Mr. Sullivan, a moment ago in response to Chairman Crapo, 
you said insurance products are very local. So each of you 
again, I will start with you, Mr. Cioppa, and go this way this 
time.
    Do you think FSOC's failure to regulate the largest 
international insurance companies has made foreign regulators 
less sympathetic to our smaller domestic insurers?
    Mr. Cioppa. I do not know if they made it less sympathetic 
to our smaller domestic insurers, but I think Europe 
fundamentally does not understand our system.
    I mean, we do a lot at the group level in regulating 
insurers, including insurers like AIG. At the group level, I 
think they--they being Europe--need to focus on. We also do a 
lot with Own Risk and Solvency Assessment (ORSA). We do 
enterprise risk management. We have got a whole host in our 
toolkit that we are utilizing, and I think effectively, to 
regulate these large multinational companies, and I think it is 
more a case of Europe needs to become more aware of that fact.
    Senator Brown. Well, saying that Europe--you did not quite 
say it this way, but Europe is too stupid to understand how we 
do things does not exactly open the avenues of--I mean, do 
they--well, I will just leave it at that, Mr. Sullivan, and 
give your answer, if you would.
    Mr. Sullivan. So I would align myself with Superintendent 
Cioppa's remarks.
    I would also add that the U.S. insurance markets is as 
robust as it has ever been. There is a high level of 
competition in our insurance market, and it is quite healthy.
    And, also, some of the larger insurers who you would have 
looked at as being more risky have gone through quite a large 
degree of de-risking over time.
    Senator Brown. I will get to you in a second.
    So did de-designation send a message or did it not send a 
message to European regulators?
    Mr. Sullivan. There is much more discipline today in how 
insurers behave.
    I will give you an example. No one is writing variable 
annuities with the kind of untethered risk that they used to 
write pre-crisis. So I believe there has been a good degree of 
de-risking of most large insurers, but from the risk they are 
underwriting and from how they manage their own risk internally 
with their assets and other----
    Senator Brown. That is a good answer, but it was not an 
answer to did de-designation send a message to European 
regulators.
    Mr. Seitz?
    Mr. Seitz. The IAIS and the FSB are also moving toward the 
holistic framework, which is an activities-based approach that 
is consistent with the work that is being done here 
domestically at the Financial Stability Oversight Council. Both 
of those projects are substantively in the same direction.
    And, additionally, the NAIC has been making steps through 
its Macro Prudential Initiative to deal with these issues 
related to macro prudential issues such as surveillance and 
liquidity management and planning.
    Senator Brown. One last question for the three of you. IAIS 
has identified climate change as an emerging risk to stability 
in insurance markets. We have seen staggering losses. The 
Bahamas, I do not know what the cost of that is, but tragic and 
huge; estimated $125 billion in the Houston area, flooding from 
Hurricane Harvey; $96 billion devastation in Puerto Rico from 
Hurricane Maria.
    In 2016 alone, you know what has happened with agriculture 
and fires. Ohio farmers, most Ohio farmers, did not even get 50 
percent of their corn and soybeans in. You cannot always 
attribute every single thing, obviously, to climate, but 
insurance companies are certainly recognizing this risk.
    What are Federal and State regulators doing to address the 
impact of climate change on insurance companies?
    Mr. Seitz?
    Mr. Seitz. We are working with FEMA on a variety of issues 
related to mitigation. We are part of the team that put out, 
under FEMA's leadership, the National Mitigation Investment 
Strategy, which was issued last month. We are also working on 
these issues from our Federal Advisory Committee on Insurance, 
they are particularly looking at what the insurance sector can 
do to help bridge the protection gap between the economic 
losses of disaster and then the insured losses.
    Senator Brown. Mr. Sullivan?
    Mr. Sullivan. We only currently supervise eight insurers. 
The largest part of the market is supervised by Superintendent 
Cioppa and his colleagues at the NAIC. So the firms that we do 
supervise, we do not dive deep into how they are looking at 
climate risk and how they are responding to natural 
catastrophes. We accept the work of the State insurance 
supervisors.
    Senator Brown. OK. Mr. Cioppa?
    Mr. Cioppa. Senator, climate risk is another top issue we 
are dealing with. Obviously, it is a significant issue and it 
is worth noting the last few losses have been significant, if 
not unprecedented, but insurers have, by and large, paid the 
bills they promised policyholders. That is a testament to the 
strength of the industry.
    But at the NAIC, we have developed capital charges for 
catastrophe losses, and when we do our examination, making sure 
the board of directors is completely engaged in their risk 
management program planning for a climate risk and climate 
change as it relates to their ability to meet their obligations 
to policyholders.
    Senator Brown. Thank you.
    I will close, Mr. Chairman. You all were either Trump 
nominees or you work for people who are Trump nominees. I hope 
that you can get that message.
    You do not. I am sorry, Mr. Cioppa. So I guess two out of 
three. Sorry.
    But your work is so important. I hope you can get that 
message to the Administration about climate and what is 
happening.
    Thank you.
    Chairman Crapo. Thank you.
    Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and thank you to 
the witnesses for joining us today.
    My understanding is that during the November IAIS meeting 
in Abu Dhabi, the ICS is likely to be approved and, thus, 
begins the monitoring period.
    Yet each of the witnesses today have identified specific 
concerns with the ICS as it is currently drafted.
    So my question, I guess, is kind of a process question. To 
the extent that your concerns are not adequately addressed 
prior to Abu Dhabi, what does Team USA do to make sure that the 
IAIS does address the concerns and fix these problems during 
that subsequent monitoring period?
    Whoever would like to address that, it would be welcome.
    Mr. Seitz?
    Mr. Seitz. It is critical that the ICS work for our markets 
here, and this will be a focus of our attention in the upcoming 
meetings over the next few months. And we are going to push the 
IAIS hard to make sure that the monitoring period is recognized 
as a milestone but is not the end of the game, and that the 
process will continue over the next 5 years to not only fix the 
current flaws in the reference to ICS, but also to continue the 
important work so that our U.S. system is deemed comparable.
    Senator Toomey. Mr. Sullivan?
    Mr. Sullivan. I would agree that November, while a 
significant milestone, is not the end of the road. We are going 
to continue to push and advocate hard to get what we need to be 
responsive to the U.S. market, but I do not think November 
should be looked at as kind of a drop-dead.
    Senator Toomey. OK. Mr. Cioppa, did you want to add 
anything?
    Mr. Cioppa. No. I agree. Again, it is critical that we stay 
engaged, and it is critical we keep pressing the point that the 
current construct of the ICS does not work for our system. But, 
at the same time, to repeat myself, we have to stay engaged in 
the process.
    Senator Toomey. Each of your testimonies suggest that there 
are specific products that are very common, very popular in the 
United States, that could be jeopardized by the current 
framework, and that would include life insurance and annuities, 
right? They are very, very standard, common practice.
    So could you get into a little bit of detail on what 
specifically needs to change in the ICS proposal so that we do 
not undermine these products that serve so many of our 
constituents?
    Mr. Seitz?
    Mr. Seitz. Those products that you mentioned are critical 
to millions of Americans, adding retirement, and our team is 
working with the Team USA colleagues to evaluate the data that 
firms are voluntarily setting up to make sure that the discount 
rates and other technical issues are appropriately designed so 
that it reflects those products.
    Chairman Crapo. Mr. Sullivan?
    Mr. Sullivan. There are a number of technical--I would not 
even call them nuances, because they are substantial, but when 
taken together, they do show a gaping hole in the design of the 
ICS.
    I would say, fundamentally, the biggest one is the market-
based valuation which, again, takes risk and puts it in a 1-
year prism, when insurers are underwriting annuities and life 
products that have a 30-, 40-year duration.
    Senator Toomey. Specifically, just so I understand, we are 
talking about the methodology of valuing the assets insurance 
companies old to generate the income to pay the policyholders?
    Mr. Sullivan. That is right. They match their insurance 
liabilities with assets that have a similar duration, and if 
you create noise that disrupts that, we fear that it will 
affect product offerings.
    Senator Toomey. Kind of undermines the fundamental model of 
a long-term asset serving the long-term liability.
    Mr. Cioppa, did you want to add anything on that?
    Mr. Cioppa. I absolutely agree it is critical, and insurers 
are able to match their assets to the liabilities in a prudent 
fashion, and the current construct seems to inhibit that.
    I am hearing over in some markets, insurers are actually 
abandoning those products.
    Senator Toomey. I have heard a characterization of the 
comparison between the regulatory and specifically capital 
approach in Europe versus the United States that I wonder if 
you would agree with. Roughly speaking, the characterization 
was that the U.S. model tends to emphasize and prioritize 
ensuring that insurance companies can honor their commitments 
to policyholders, and it is the survivability of the policy 
that is the primary focus.
    Whereas, in Europe, there is greater emphasis on the 
survivability of the firm as a whole, and that is the mechanism 
by which they hope to insure the policyholder. Is that a fair 
characterization of the difference between our regulatory 
approaches? Anybody?
    Mr. Cioppa. I can start. At least as for the U.S. system, 
we do have a base of accounting called statutory base of 
accounting, which is a liquidation-based accounting, which, in 
other words, we do not allow intangible assets to be counted as 
assets like deferred acquisition costs strictly for that 
reason, to make sure an insurer can pay, because you cannot pay 
claims with those assets.
    Senator Toomey. Exactly right.
    Mr. Cioppa. So it is very firmly based in protecting policy 
holders, and in Europe, it seems to be more keeping the entity 
alive at a higher level, at the holding-company level.
    Senator Toomey. Mr. Sullivan?
    Mr. Sullivan. Senator Toomey, I would say there is another 
dimension too. I mentioned earlier how insurance products are 
quite local. If your market does not have a need for annuity 
products, for instance, because there are robust government 
pensions, then you will likely design your regulatory regime to 
not be sensitive to those types of products. Whereas, we need 
those here. So we need a regulatory regime, which is reflective 
and responsive to the types of risks that our insurance 
underwriters are taking.
    Senator Toomey. Mr. Seitz?
    Mr. Seitz. I would just agree with the comments by 
Superintendent Cioppa and Mr. Sullivan.
    Senator Toomey. Great. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman. Thank you to the 
witnesses.
    If ICS Version 2.0 is adopted in November, a 5-year 
monitoring or field testing period will start next year. The 
IAIS has indicated that it is open to possible clarification 
and refinements of major flaws or unintended consequences 
identified with the ICS during the monitoring period.
    To all of our witnesses, what actions are expected to 
result from this 5-year monitoring period? We can just go down 
the line.
    Mr. Seitz. Thank you, Senator.
    That will be one of the main topics of discussion in the 
upcoming meetings. I think our view at FIO is that the 
monitoring period needs to be structured in a way such that it 
allows for continued transparent involvement of U.S. insurers 
and the IAIS on improving those design flaws and making sure 
that the ICS is not fixed in place by November but can continue 
to evolve as it needs to over the next 5 years.
    Mr. Sullivan. Senator, while we support the utility of 
group capital, because we do think that looking at capital 
through a prism of just legal entities has some risks, we are 
not going to sign on to ICS if it is fundamentally poorly 
designed or flawed, and that is why, as Director Seitz pointed 
out, we will continue to push for changes so that it is 
properly designed and calibrated.
    Mr. Cioppa. I would only add, Senator, I agree with their 
comments, but it is also critically important during the 
monitoring
period that the IAIS communicates what the ICS is not during 
the monitoring period. It is not a capital standard in which a 
regulator will take action on and then could be used 
inappropriately by rating agencies or banks to judge the 
financial strength of what we feel is a flawed capital 
standard. I think that is an important element in the 
monitoring period as well as that communication to ensure that 
is communicated to the broader audience at large.
    Senator Menendez. If your IAIS counterparts have different 
expectations, how should Team USA go about resolving 
differences and expectations?
    Mr. Sullivan. I would just say that is the ebb and flow of 
kind of international dialogue.
    I think we, the United States, have a big stake in this, 
since we are the world's largest insurance market. I do not 
think a standard produced by the IIS which ignores the United 
States is going to be viewed as an international standard if it 
disrespects the world's largest insurance market.
    Senator Menendez. Any other remarks?
    Mr. Seitz. I would just agree with Mr. Sullivan. I mean, I 
think all of us at the panel are in alignment on the importance 
of this issue and will continue to push it with our 
international counterparts.
    Senator Menendez. How are the IAIS and FSB planning to 
design and implement the impact analysis to ensure that it will 
be conducted in a credible and independent manner, and what are 
each of your agencies doing to ensure that such analysis is 
undertaken?
    Mr. Sullivan. Sure. I mentioned in my opening remarks how 
Vice Chair Quarles and the current Chair of the FSB held a 
joint stakeholder meeting with members of the IAIS, the FSB, 
and interested parties. That was really a first in terms of 
beginning the process to listen to the stakeholders about that 
and to get after doing exactly what you said in your question. 
So we are in an early stage, I would say.
    Senator Menendez. OK.
    Mr. Seitz. It is also an issue that we are discussing at 
our Federal Advisory Committee on Insurance. We have an 
international subcommittee, and it has been one of the issues 
that has been raised there. And we are looking into it.
    Senator Menendez. During the monitoring period, all 
internationally active insurance groups are subject to 
confidential
reporting, and it is important to keep this reporting exactly 
that, confidential. While the IAIS has taken some initial steps 
to explicitly state that the monitoring period is confidential 
to prevent third parties like debt underwriters and rating 
agencies from seeking data, companies continue to tell us that 
more assurances are needed.
    How will each of you advocate in the IAIS to keep company 
results reported during this 5-year period confidential? What 
else is Team USA doing to protect the release of this data?
    Mr. Cioppa. Again, Senator, that relates to my prior 
comment. Again, I think it is critically important we continue 
to press for the IAIS to make public statements, what this is 
and what it is not, and again, it is during a monitoring 
period. It is not a prescribed capital requirement at this 
point in time, and you cannot stress that enough. If a number 
gets out, that it could cause material harm to companies. So I 
think it is incumbent upon us, each individual and as Team USA 
to continue to press that.
    Senator Menendez. Finally, Director Seitz, if we were to 
remove U.S. representatives from international organizations on 
insurance standards, would those standards look more like EU 
standards or American standards?
    Mr. Seitz. We are committed to continued engagement in the 
international process. It is important that we engage because 
our U.S. companies want to compete internationally, and it is 
critical that we are there to help that happen as well and also 
because we do not want inappropriate standards to come back and 
affect our U.S. insurance market.
    Senator Menendez. Right. So if the United States is not at 
the negotiating table, international insurance standards will 
be written without us, and I think it is important to remember 
that these conversations continue. The United States needs to 
have a seat at the table in order to effectively shape 
international standards to match the strong standards that we 
have here in the United States.
    We look forward to your work.
    Thank you very much, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    This hearing could not come at a more critical time for our 
insurance regulatory system. The International Association of 
Insurance Supervisors, or IAIS, is weeks away from convening a 
meeting of international insurance regulators in Abu Dhabi that 
will involve voting on a framework for assessing global 
insurance capital standards known as the ICS.
    In May, I led a letter from 42 Senators to Governor Quarles 
at the Federal Reserve raising a number of concerns about the 
ICS. I would like to ask unanimous consent that my letter, the 
response from Governor Quarles, and a statement expressing 
similar concerns from the American Council of Life Insurers be 
entered into the record.
    Chairman Crapo. Without objection.
    Senator Rounds. Thank you, Mr. Chairman.
    We should not kid ourselves as to what is really going on 
here. It is increasingly clear that the European Union is using 
the ICS as a means of forcing the EU's Solvency II framework on 
the rest of the world.
    In a letter to its regulators dated August 26th, the 
European insurance industry said that an allowance for internal 
calculation models, common among European insurers and 
recognized in the Solvency II, should be a permanent and 
integral part of the ICS.
    I would like to ask unanimous consent that this letter also 
be entered into the record.
    Chairman Crapo. Without objection.
    Senator Rounds. Thank you, Mr. Chairman.
    I would also like to take a moment to thank my good friend 
and the Ranking Member for comments that he has offered at 
similar hearings in 2017. During that hearing, Senator Brown 
said that the State-based insurance system is unique and--I 
quote him--``We should fight to maintain it, including by 
rejecting efforts to impose the Solvency II accord, Europe's 
insurance capital rules on our insurers,'' end of quote.
    We may not agree on GSE, sir, but I think we have agreement 
on this one.
    Finally, to our European friends, we treasure our 
relationship, but it is unacceptable for the European Union to 
promote its regulatory framework at the expense of another. As 
my letter from May demonstrated, without a recognition of the 
U.S. State-based insurance regulatory system, the ICS will 
become a political problem.
    I have got just a couple of questions that I would like to 
lead into and then a few concluding remarks.
    Gentlemen, I have made it clear that an ICS that does not 
guarantee an explicit mutual recognition of the American 
aggregation
method would be unacceptable. If the IAIS proceeds with an ICS 
that does not guarantee recognition of the aggregation method, 
will you vote no at the IAIS meeting in November?
    I just want to go down the line. Commissioner Cioppa?
    Mr. Cioppa. I think it is vitally important we stay 
engaged, and to be clear, we are not going to adopt an ICS that 
does not work for our system, period. I mean, that is the 
position of the NAIC.
    But I think it is a little premature to say we would vote 
no in November. I think the guardrails need to be established. 
The comparability definition needs to be established, and we 
need to ensure that.
    Senator Rounds. Mr. Thomas?
    Mr. Sullivan. So I would agree with the superintendent. 
There is a lot to be done between now and November.
    Senator Rounds. Excuse me. Mr. Sullivan. I apologize.
    Mr. Sullivan. That is OK.
    To the earlier question directed to Director Seitz, 
disengagement is not going to help anyone.
    Senator Rounds. Director Seitz?
    Mr. Seitz. I would just agree that all of us at the table 
are going to advocate strongly for U.S. interests and continue 
the work to make sure that the ICS works for our system.
    Senator Rounds. In each particular case, if we move forward 
and we do not make it very clear that at the international 
level, there has to be an allowance for the way that our 
companies do business, then I think this becomes a failure.
    And the one thing we do not want to do is to have a failure 
on our hands in this particular case, but there has to be a 
recognition. If they simply seem to move forward and allow us 
to kick this can down the road without making it very clear, 
then I think we failed in this particular case. Would that be a 
fair statement?
    Mr. Cioppa. Well, I think we need to make it clear, and I 
think we are making it clear. And I want to thank the Senator 
for this hearing because I think this helps make it clear. We 
are not going to adopt something that harms our consumers and 
our companies, and I think that message is starting to resonate 
loud and clear.
    As Director Sullivan said, we are the largest insurance 
jurisdiction in the world, and you cannot have, in my opinion, 
a truly international capital standard that ignores the largest 
jurisdiction in the world.
    Senator Rounds. Would you have agreement with his 
statement, gentlemen? I see nods.
    Well, Mr. Chairman, as I wrap up, I just want to make a 
point that the United States has already established a 
bilateral deal with the European Union on insurance standards 
in the U.S.-EU covered agreement on insurance and reinsurance. 
That agreement guaranteed mutual recognition of each of our 
systems of insurance regulation. So it seems that it would be 
inconsistent of the European Union to expect anything different 
with the ICS.
    In addition, I would strongly urge Team USA to vote no at 
the IAIS meeting in Abu Dhabi this November if the ICS does not 
guarantee a mutual recognition of the American aggregation
method. I think anything less than that type of an assurance is 
simply not appropriate for the insurers and the business 
community here within the United States.
    Mr. Chairman, I thank you, and I yield back.
    Chairman Crapo. Thank you.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman, and thank you to 
the panel for being here this morning.
    Like Senator Rounds, I spent a fair amount of time in the 
insurance industry and love the concept of protecting a State-
regulated system that has been the marvel of the world, and I 
think will continue to do so as long as Team USA sings with one 
voice.
    I heard, Mr. Cioppa, your comments about the question of 
how you would vote in November, but I did not really hear a no, 
that you would vote no. In as few words as possible, which 
would be like a no or a yes, can you confirm to me what I heard 
you say which is it would be unacceptable? Therefore, my 
assumption is if something is unacceptable, that the only vote 
would be no. Am I correct in assuming that if it is, indeed, 
unacceptable that your vote would be no? And if it is not no, 
tell me why it is not no, because what you said is it is 
unacceptable, and if something is unacceptable, then the answer 
should be no.
    Mr. Cioppa. I will try to do this in as few words as 
possible.
    Senator Scott. You could just say, ``Then I would vote 
no.''
    [Laughter.]
    Mr. Cioppa. Well, it really is about two things. One, a lot 
is going to happen between here and November. There are several 
meetings, but more importantly, that 5-year monitoring period, 
a lot could change during the monitoring period. And I think if 
there is a viable path forward, I think we seriously have to 
consider going along, but we have to stay engaged. That is a 
needle we have to thread. By voting no, do we disengage 
prematurely?
    Senator Scott. If you are not voting no, do you abstain?
    Mr. Cioppa. It could be any along the spectrum, but again, 
all the time making it clear, the current construct is just not 
going to work for us. And at the end of the day, you cannot put 
lipstick on a pig if they do not change the pig.
    Senator Scott. Yes. I still did not hear no or at least an 
abstention.
    I am going to ask the same question to everyone, because if 
I cannot have great confidence in the fact that you guys are 
voting no as Team USA--and, in fact, everything I have heard so 
far this morning, I had questions I wanted to ask, but you guys 
have done such a good job of answering the question before I 
have had a chance to ask the question. The only question that I 
have left really is to clarify the few things that I do not 
fully understand because you have said already that equivalency 
and protecting our system is paramount.
    You have said that because we are 40 percent of the market, 
we should have an outsized position. You have inferred in your 
comments that, ultimately, not being at the table, it almost 
pains me to quote and suggest that Senator Brown has good 
ideas, but he really does this time around. It is painful, but 
I have to agree with him that protecting the American model--
and Senator Menendez said that being at the table helps us 
protect that American model, and if we are at the table, but 
yet we are not making progress with the ICS, then it tells me 
that being at the table is not enough. That, in fact, we should 
do something that sends a clear signal that protecting our 
insurance market and frankly protecting the policyholders who--
I used to sell annuities. I am sure, Senator Rounds, you sold 
annuities. Frankly, to have the liability exposure covered 
requires us to have a long-term view that is inconsistent with 
the international model because they have such a defined 
benefit concept that the defined contribution concept does not 
become invoked. Therefore, in order for us to protect those who 
are planning for their own retirement, we have to have a very 
different system.
    But when I look at the results of the international body, 
we seem to be not gaining ground in that area. So that is why 
for me, while November 20th may not be the drop-dead date, but 
it is, in fact, a very important marker--and I am hoping that 
if I am voting yes for the three candidates that I am going to 
have a no or an abstention when it comes time to protect our 
system, if that is what it takes.
    Maybe it does not take that, but I need the confidence that 
the system has to be protected against all odds, or I should 
rethink my commitment to those folks who are going to represent 
Team USA.
    So I want to be that clear that in order for me to be in a 
very comfortable position moving forward--and I think this 
Committee should embrace and adopt that concept that it is that 
important for Team USA to speak with one voice from one page 
consistently in a world where we are 40 percent of the market, 
and our system protects our policyholders from something that 
other folks do not have to be protected from--I want to know 
that we are as close to a no or an abstention as possible.
    Mr. Sullivan?
    Mr. Sullivan. So your words are very encouraging, Senator 
Scott. I think I would say that, directionally, we are there, 
but there is nuance in the give-and-take of international 
dialogue. We do not want to disengage, but we are also not 
going to accept a bad deal.
    Senator Scott. So if it is a bad deal, is that a no or an 
abstention? Am I accurate in assuming that?
    Mr. Sullivan. We have to see what is in front of us, come 
November.
    Senator Scott. OK. Maybe I am voting no for him.
    Mr. Seitz?
    Mr. Seitz. We are going to advocate strongly for U.S. 
interests. All three of us at the table are very committed to 
that process, and at this stage, the questions on the ICS are 
not a binary question. But we are going to continue to push our 
international colleagues over the next few months for progress 
on these important areas.
    Senator Scott. I just want to make sure I understand this 
correctly. So pushing for advocating, on behalf of, having the 
need to protect, I have to vote--believe it or not, Senators 
actually vote more than most Americans may think. I am 
surprised that we are actually voting as much as we are, but 
this is a good thing. And we are having to make decisions about 
future votes, and I know that when my constituents ask me a 
question about protecting their assets, they want to know that, 
except for a catastrophic occurrence, exactly what I tell them 
is exactly what I am going to do. And I think this is an easy 
one to say no or an abstention to, from my perspective.
    Thank you.
    Chairman Crapo. Thank you.
    Senator McSally.
    Senator McSally. Thank you, Mr. Chairman.
    Well, I want to join my colleagues to reinforce the 
importance of advocating for international recognition of the 
United States approach to insurance regulation. Our system of 
State-based regulation works, and it protects consumers and 
gives companies accountable regulator.
    My time serving abroad in uniform solidified my commitment 
for U.S. sovereignty. Working with many partners and 
coalitions, those are fine, but the importance, to make sure 
that international rules work the way that the United States 
does things.
    International agreements can be great when they help 
protect our interests is the bottom line. Our insurance 
regulatory system does work here and has worked here for a long 
time. So let us not allow some international body to force us 
to put into place something that does not work, and I think you 
have heard a lot about that today.
    It is vital that our representatives of these international 
bodies do everything they can to protect U.S. interests. So 
that means U.S. approaches to insurance regulation are 
recognized internationally.
    So I am just asking a commitment for me that each of you 
personally, you will do everything you can to make sure that 
standards are put in place by the International Association of 
Insurance Supervisors that are working for the United States 
and are recognizing the U.S. approach.
    Mr. Sullivan. I am fully committed to that.
    Mr. Cioppa. Completely committed to that.
    Senator McSally. OK.
    Mr. Seitz. Same here.
    Senator McSally. All right. Thank you.
    Thank you, Mr. Chairman. Yield back.
    Chairman Crapo. All right. Thank you very much.
    That concludes the questioning for this hearing. I again 
want to thank each of our witnesses for not only being here 
today but for your advocacy for the interest of the United 
States in this process.
    I think you got a very clear message that there is 
bipartisan support on this Committee for that strong advocacy 
to protect the U.S. interest in this decision.
    With that, I would like to announce to our Senators, those 
who wish to submit further questions for the record, that those 
questions are due to the Committee by Thursday, September 19th. 
We ask that you respond to these questions as quickly as you 
can when you receive them.
    Again, I thank each of you for being here today.
    This hearing is adjourned.
    [Whereupon, at 11:05 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follows:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today, we welcome to the Committee the three members of ``Team 
USA'' representing the United States in international insurance 
supervisory and regulatory forums, including: Steven Seitz, Director of 
the Federal Insurance Office in the Treasury Department; Thomas 
Sullivan, Associate Director at the Board of Governors of the Federal 
Reserve System; and Eric Cioppa, Superintendent of the Maine Bureau of 
Insurance, on behalf of the National Association of Insurance 
Commissioners.
    On September 6, 2019, the Treasury and Federal Reserve issued its 
annual report regarding their efforts, with the National Association of 
Insurance Commissioners (NAIC), in international forums, such as the 
International Association of Insurance Supervisors (IAIS).
    The report, and accompanying testimony, are required by the 
Economic Growth, Regulatory Relief and Consumer Protection Act, to 
encourage greater transparency into, and reinforce a unified approach 
to efforts by ``Team USA'' at those international forums.
    A key driver of this provision is the IAIS's multi-year effort to 
develop a group-wide, risk-based insurance capital standard, often 
referred to as ICS 2.0, as a part of its Common Framework for the 
Supervision of Internationally Active Insurance Groups.
    In July 2018, the IAIS issued a consultative document proposing ICS 
2.0, and several aspects of the proposal and process have caused 
serious concern in the U.S. insurance market. Among those concerns are: 
the proposed use of a market-adjusted valuation; use of internal 
models; and a lack of clarity about the processing moving forward and 
how outcome equivalency will ultimately be determined.
    ICS 2.0 is set to be implemented in two phases, including a 5-year 
``monitoring period,'' at the end of which the IAIS will assess whether 
it considers the U.S. approach to be ``outcome equivalent.''
    There should be clarity about the path forward for further 
adjusting ICS 2.0 during the monitoring period, as well as a better 
understanding of how outcome equivalency will be determined.
    It is important that ICS 2.0 be structured in a way that 
appropriately reflects the uniqueness of insurers and that works for 
U.S. insurers, including those operating abroad.
    Treasury Secretary Mnuchin spoke earlier this year about ICS 2.0's 
development, where he highlighted three areas on which the Treasury is 
focused, including: working to improve the design of ICS so it more 
appropriately reflects the unique business model of insurers; 
advocating for the IAIS to create a defined structure and process for 
further work and revision of ICS during the monitoring period; and 
ensuring that the final ICS is implementable in the United States.
    Also, while speaking about the Federal Reserve's ``Building Blocks 
Approach'' to a risk-based insurance capital requirement, Federal 
Reserve Vice Chairman for Supervision Randy Quarles acknowledged the 
challenges of ICS 2.0 and potential consequences for consumers.
    He said, ``A capital standard that uses market-based valuation can 
introduce volatility and procyclicality, and one that is excessively 
volatile or procyclical can influence a firm to veer away from a long-
term perspective and concentrate instead on the short term. This can 
have undesirable consequences, including diminishing product 
availability.''
    He also added about efforts at the IAIS on ICS 2.0, In order for 
any form of an ICS to be implementable globally, it needs to be 
suitable for the U.S. insurance market. The current core proposal in 
the ICS would face implementation challenges in the United States.
    While the IAIS has been working on its standard, the NAIC has 
worked on a Group Capital Calculation that is currently in field 
testing and the Federal Reserve recently issued its proposed ``Building 
Blocks Approach.''
    Prior to a vote on ICS 2.0 and during the monitoring period, ``Team 
USA'' should leverage its work and progress on these U.S.-based 
standards to continue advocating for a more appropriate international 
standard and toward ultimately achieving outcome equivalency.
    Furthermore, the Economic Growth, Regulatory Relief, and Consumer 
Protection Act calls for the Treasury and Federal Reserve, in 
consultation with the NAIC, to complete and submit to Congress a study 
on the impact on U.S. consumers and markets before supporting or 
consenting to the adoption of any final international ICS. I look 
forward to that update at the appropriate time.
    Aside from a group capital standard, ``Team USA'' has also been 
engaged on several other projects at international forums, including a 
holistic framework for the mitigation of systemic risk; continued 
development of Insurance Core Principles; cyber resilience and big 
data; and governance, among others.
    During this hearing, I look forward to receiving an update on 
``Team USA's'' ongoing efforts to influence the development of ICS 2.0 
so that it works for U.S. insurers, including those operating abroad, 
and consumers; what aspects of group capital standards developed in the 
United States can help to improve ICS 2.0; changes that could be made 
to the ICS 2.0 development process going forward to better understand 
opportunities to improve ICS 2.0 and how to achieve outcome 
equivalency; and other key initiatives at international forums on which 
``Team USA'' is actively working.
    I appreciate each of you joining us today and the work you have 
done to advance U.S. interests abroad.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Eleven years ago today, September 12, 2008, executives from AIG 
walked into the Federal Reserve Bank of New York to beg for a bailout.
    Supervisors at the Office of Thrift supervision, whose leadership 
was so incompetent it doesn't exist anymore, failed to identify risky 
transactions at AIG's ``Financial Products'' subsidiary in London. 
State regulators didn't catch them either.
    During the mortgage boom, AIG sold Credit Default Swaps that 
allowed Wall Street banks to say that they were protected against 
losses from the toxic subprime mortgage securities they owned. Some 
might even say they were ``insured.'' But, AIG's failure would have 
taken down the banks it traded with--the biggest banks in the country. 
So, AIG got a massive bailout. And, you guessed it, the executives 
still got their bonuses.
    Millions of Americans, on the other hand, lost their jobs, their 
homes, and their retirement savings. The effects of the financial 
crisis incapacitated economies around the world.
    Given the complexity and interconnectedness of the global financial 
system, I think it is critical for our regulators and our 
representatives at the Financial Stability Board and the International 
Association of Insurance Supervisors to work together to promote 
financial stability.
    I understand that we regulate insurance a little differently here 
in the United States, and I support State-based insurance regulation. 
It allows U.S. insurers to serve small, local markets as well as large, 
international markets. That need for some regulatory discretion is why 
I worked with Republican Senator Johanns to pass a bill allowing the 
Fed to implement insurer-specific capital standards. That's also why I 
think it's important for our regulators to work with their 
international counterparts to make sure our regulatory system is 
recognized and respected around the world.
    Unfortunately, under the Trump administration, the Financial 
Stability Oversight Council no longer applies enhanced prudential 
standards or heightened supervision created under the Dodd-Frank Act to 
even the largest insurance companies. I can understand why 
international regulators might have the impression that we are not 
taking financial stability seriously here at home.
    We want international regulators to recognize our insurance 
regulatory system as credible. So it is imperative that our regulators 
recognize credible threats to financial stability.
    This Administration must address emerging risks in the financial 
system. Instead, they are working to undermine the trust we regained by 
passing Wall Street Reform.
    Some argue that a deregulatory race to the bottom is the only way 
for American insurance companies to be competitive. But the secret to 
America's success in financial markets is safety and soundness. The 
United States has a long history of financial stability and independent 
regulation of our financial markets. That's why other countries trust 
our markets and our currency. I am concerned that this Administration 
has eroded that trust and is diminishing our leadership role in global 
financial regulation.
    Today, I hope to hear about how our regulators are working to curb 
financial risks at the largest insurance companies so that working 
families aren't forced to bail them out again, and how they plan on 
restoring American leadership on these issues.
    I thank the Chairman for holding this hearing, and the witnesses 
for their testimony today.
                                 ______
                                 
                 PREPARED STATEMENT OF STEVEN E. SEITZ
     Director, Federal Insurance Office, Department of the Treasury
                           September 12, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the opportunity to testify today about developments in 
global insurance regulatory and supervisory forums. My name is Steven 
Seitz, and I am the Director of the Federal Insurance Office (FIO) 
within the U.S. Department of the Treasury (Treasury).
    FIO serves as a source of insurance expertise in the Federal 
Government. Among its other statutory authorities and responsibilities, 
FIO: provides advice to the Treasury Secretary on major domestic and 
prudential international insurance policy issues; represents the United 
States at the International Association of Insurance Supervisors 
(IAIS); assists the Treasury Secretary (together with the U.S. Trade 
Representative) in negotiating covered agreements; consults with the 
States regarding insurance matters of national importance and 
prudential insurance matters of international importance; assists the 
Treasury Secretary in administering the Terrorism Risk Insurance 
Program; and monitors the insurance industry, including identifying 
issues or gaps in the regulation of insurers that could contribute to a 
systemic crisis. The FIO Director also serves as a nonvoting member of 
the Financial Stability Oversight Council.
    As you know, the U.S. insurance sector plays a critical role in the 
U.S. economy. The United States has the largest and most diverse 
insurance market in the world. U.S. insurance premiums were over $2 
trillion in 2018, an amount that exceeds 10 percent of the U.S. gross 
domestic product. Thousands of insurers operate in the United States, 
ranging from small mutual companies operating in a single county to 
large global firms operating across the world.
    Additionally, insurers throughout the world are interested in 
offering insurance products in the United States, which speaks to both 
the attractiveness of our insurance market and the benefits of the 
geographic spreading of risk.
International Supervisory Forums
    Turning to FIO's international engagement, as U.S. insurance 
companies compete globally and increasingly look overseas for growth 
opportunities, the Federal Government's participation in various 
international forums is crucial to ensuring the U.S. insurance sector 
and our companies remain internationally competitive. Additionally, the 
Federal Government's participation is crucial to ensuring that 
international standards do not inappropriately affect U.S. insurance 
companies or the U.S. domestic insurance market. It is important that 
the United States speak with the authority of the national government 
when addressing key international insurance matters during any 
international engagement. In so doing, it is equally important that FIO 
coordinates with our State colleagues, who are the primary regulators 
of the business of insurance in the United States. Treasury and FIO 
support the State-based system of insurance regulation, and work 
closely with the U.S. States, the National Association of Insurance 
Commissioners (NAIC), and the Board of Governors of the Federal Reserve 
System (Federal Reserve).
    Before proceeding with comments regarding our engagement 
internationally, I would like to touch on efforts to promote 
transparency at the IAIS. As noted in our November 2018 joint report to 
this Committee, Treasury and the Federal Reserve support further 
increasing transparency and stakeholder input into IAIS 
decisionmaking.\1\ We have advocated for this, and, consistent with 
this message, the IAIS noted in its 2020-2024 Strategic Plan that 
increasing transparency--particularly with respect to the 
decisionmaking process--continues to be a priority for the 
organization. The IAIS has committed to build on the direction set 
forth in its 2017 Stakeholder Engagement Plan to proactively and 
effectively engage with its broad range of stakeholders.\2\ We will 
continue to engage in this area as the IAIS begins implementation of 
its new strategic plan.
---------------------------------------------------------------------------
    \1\ See Treasury and Federal Reserve, Efforts to Increase 
Transparency at Meetings of the International Association of Insurance 
Supervisors (November 2018), https://www.treasury.gov/initiatives/fio/
reports-and-notices/Documents/2018_IAIS_Transparency_Report.pdf.
    \2\ IAIS, 2020-2024 The IAIS Strategic Plan, at 6, (June 2019), 
https://www.iaisweb.org/page/about-the-iais/strategic-plan/file/82533/
2020-2024-strategic-plan.
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    Domestically, Treasury routinely hosts meetings with U.S. insurance 
industry stakeholders for open dialogue regarding policies being 
discussed at the IAIS. FIO also provides updates on its IAIS work at 
the open meetings of the Federal Advisory Committee on Insurance, which 
provides advice and recommendations to assist FIO in carrying out its 
statutory authority.
    Treasury will continue to provide formal and informal opportunities 
for U.S. stakeholders to engage with the U.S. members of the IAIS on 
issues arising before the IAIS.
    With that background, I'll turn to a discussion of the IAIS, which 
is the international standard-setting body responsible for developing, 
and assisting in the implementation of, principles, standards, and 
other supporting material for supervision of the insurance sector.\3\ 
The mission of the IAIS is to promote globally consistent insurance 
supervision in order to maintain safe insurance markets for the benefit 
of policyholders, and to contribute to global financial stability. IAIS 
members include insurance authorities from more than 200 
jurisdictions.\4\
---------------------------------------------------------------------------
    \3\ See IAIS, 2017 IAIS Annual Report, at 8 (2018), https://
www.iaisweb.org/page/about-the-iais/annual-report//file/77857/iais-ar-
2017-digital-pdf-def-dp. See also FIO, Annual Report on the Insurance 
Industry, at 36-37 (September 2018), https://www.treasury.gov/
initiatives/fio/reports-and-notices/Documents/
2018_FIO_Annual_Report.pdf.
    \4\ IAIS, 2017 IAIS Annual Report, at 8.
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    FIO has advocated for changes to the IAIS governance structure so 
that the United States can be more appropriately represented at the 
IAIS. As a result of recent governance changes, FIO now has a permanent 
seat on the IAIS Executive Committee, thereby providing all U.S. State 
and Federal representatives--which have come to be known collectively 
as ``Team USA''--with a voice at the most senior levels of the IAIS. 
This change should help Team USA better advocate for supervisory 
standards that are in the best interests of the U.S. insurance market 
and its consumers.
    Treasury is committed to continued engagement in the international 
standard-setting process. In international forums, the U.S. 
representatives advocate strongly and collectively for development of 
international standards that reflect the U.S. regulatory structure. As 
part of this advocacy, strong collaboration among members of Team USA 
is critical to ensuring that the United States conveys a coordinated 
view in international discussions.
    Additionally, in 2009, the G-20 recognized the importance of 
international cooperation when it established the Financial Stability 
Board (FSB) to coordinate the work of the international standard-
setting bodies and promote the implementation of effective regulatory, 
supervisory, and other financial sector policies. Treasury, the Federal 
Reserve, and the U.S. Securities and Exchange Commission are the U.S. 
members of the FSB. FIO coordinates with these members on insurance 
matters discussed at the FSB.
    It is important to note that international standards are not, in 
and of themselves, binding in the United States--unless they are 
adopted as law through domestic processes at the State or Federal 
level. However, it is critical that the United States engage with our 
counterparts through such bodies. If standards developed in these 
forums are adopted by non-U.S. jurisdictions, they could have 
significant implications for U.S. insurers, and potentially for our 
domestic insurance regulatory regime. As noted by the Treasury 
Secretary in his May remarks at NAIC's International Forum, as U.S. 
insurers expand into foreign markets, they will have to navigate the 
supervisory regimes of other jurisdictions that may be influenced by 
international standards.\5\
---------------------------------------------------------------------------
    \5\ Treasury, Remarks by Treasury Secretary Steven T. Mnuchin at 
the National Association of Insurance Commissioners International Forum 
(May 13, 2019), https://home.treasury.gov/news/press-releases/sm688.
---------------------------------------------------------------------------
    Let me now turn to some of the ongoing work at the IAIS, and the 
related positions and activities of Treasury and FIO.
IAIS Initiatives
    In accordance with the Economic Growth, Regulatory Relief, and 
Consumer Protection Act, Treasury and the Federal Reserve issued a 
joint report on September 6, 2019, on efforts with respect to global 
insurance regulatory or supervisory forums (Joint Report).\6\ The Joint 
Report summarizes the work of FIO at international standard-setting 
bodies. I would like to highlight two important IAIS initiatives 
discussed in the Joint Report--the insurance capital standard (ICS) and 
the holistic framework.
---------------------------------------------------------------------------
    \6\ See Treasury and Federal Reserve, Efforts of the U.S. 
Department of the Treasury and the Board of Governors of the Federal 
Reserve System with respect to Global Insurance Regulatory or 
Supervisory Forums in 2018 (September 2019), https://
www.federalreserve.gov/publications/files/Report-on-global-insurance-
regulatory-or-supervisory-forums2019.pdf.
---------------------------------------------------------------------------
a. Insurance Capital Standard
    In July 2013, the FSB stated that the IAIS ``will develop, and the 
FSB will
review, a work plan to develop a comprehensive, group-wide supervisory 
and
regulatory framework for Internationally Active Insurance Groups 
(IAIGs), including a quantitative capital standard.''\7\ The next year, 
the IAIS started to create a comprehensive, group-wide supervisory and 
regulatory framework for IAIGs, known as ComFrame. ComFrame consists of 
both qualitative and quantitative supervisory requirements tailored to 
the complexity and international scope of IAIGs. The ICS, which is now 
under development at the IAIS, is a quantitative component of ComFrame 
and aims to be a measurement of capital adequacy for IAIGs. The IAIS's 
ultimate goal for the ICS is a single ICS that includes a common 
methodology by which one ICS achieves comparable, or substantially the 
same, outcomes across jurisdictions.\8\
---------------------------------------------------------------------------
    \7\ FSB, Global systemically important insurers (G-SIIs) and the 
policy measures that will apply to them, at 2 (July 18, 2013), https://
www.fsb.org/wp-content/uploads/r_130718.pdf?
page_moved=1.
    \8\ IAIS, Risk-Based Global Insurance Capital Standard Version 2.0: 
Public Consultation Document (July 31, 2018), https://www.iaisweb.org/
page/supervisory-material/insurance-capital-standard/file/76133/ics-
version-20-public-consultation-document (ICS Version 2.0 Consultation).
---------------------------------------------------------------------------
    Since 2015, the IAIS has conducted annual field testing of 
volunteer insurers, including U.S. firms, to inform the development of 
the ICS. The IAIS is scheduled to adopt an updated--but not yet final--
version of the ICS (referred to as Version 2.0) in November 2019. This 
will be followed by a 5-year monitoring period from 2020 through 2024. 
During this period, the IAIS intends for the ICS to be used for 
confidential reporting to group-wide supervisors and for discussion in 
supervisory colleges. The present intention of the IAIS is for the ICS 
to be implemented after the monitoring period as a group-wide 
prescribed capital requirement for IAIGs. The IAIS also aims to be in a 
position by the end of the monitoring period to assess whether an 
aggregation method for group capital, such as that being developed by 
the United States, provides comparable outcomes to the ICS and can be 
considered an outcome-equivalent approach for implementation of the 
ICS.\9\
---------------------------------------------------------------------------
    \9\ IAIS, Implementation of ICS Version 2.0 (November 2, 2017), 
https://www.iaisweb.org/file/69796/implementation-of-ics-version-20.
---------------------------------------------------------------------------
    Treasury appreciates--and has contributed to--the work of the IAIS 
on the ICS effort and continues to support its overall objective of 
working to create a common language for supervisory discussion of group 
solvency.\10\ However, as the Treasury Secretary outlined in his 
remarks at the NAIC's International Forum, we have concerns about 
certain aspects of ICS development and are working with our Team USA 
colleagues in pursuing constructive ways forward to potentially address 
those concerns within the IAIS.
---------------------------------------------------------------------------
    \10\ IAIS, Risk-based Global Insurance Capital Standard Version 
2.0.

    First, Treasury is working to improve the design of the ICS 
        so that it more appropriately reflects the unique business 
        model of insurers. In particular, one issue we have identified 
        is the ICS's market valuation approach and the negative effects 
        it could have on the ability of insurance companies to provide 
        long-term savings products, which are important to insurers and 
        policyholders in the United States. The ICS needs to 
        appropriately consider long-term savings products that are 
---------------------------------------------------------------------------
        critical to millions of Americans entering retirement.

    Second, Treasury believes it is important that the IAIS 
        create a defined structure and process for further work and 
        revisions on the ICS during the monitoring period from 2020 to 
        2024. The ICS adopted in November 2019 will most likely need 
        further development and revision. Therefore, the IAIS needs to 
        develop a process that ensures appropriate confidentiality for 
        insurers during the 5-year monitoring period, while allowing 
        the IAIS, its members, and other important stakeholders to 
        continue evaluating, revising, and improving the ICS. Team USA 
        must also remain actively engaged during this period and 
        advocate for U.S. interests so that U.S. insurers remain 
        competitive overseas and that international standards do not 
        inappropriately affect U.S. insurance companies or the U.S. 
        domestic insurance market.

    Third, it is important that the IAIS strengthen its efforts 
        to develop a final ICS that is implementable in the United 
        States. Treasury is focused on working with our Team USA 
        members, and the broader membership of the IAIS, to develop the 
        criteria and process by which the U.S. approach to group 
        capital may be deemed ``outcome equivalent'' to the ICS. FIO 
        will continue to advocate that the IAIS increase its focus on 
        the important issues of comparability of outcomes, in order to 
        enhance compatibility of the ICS with the United States' system 
        of insurance regulation.

    Finally, getting the ICS right at the IAIS is more 
        important than meeting any fixed schedule that mandates 
        completion of the ICS at a specific point in time.
b. Holistic Framework
    Another important international standard-setting initiative is the 
IAIS's proposed framework for assessing and mitigating systemic risk in 
the insurance sector (also known as the activities-based approach, or 
ABA). In 2017, the IAIS began work on the ABA, and in November 2017, 
the FSB noted that, once developed, such an approach may have 
significant implications not only for the assessment of systemic risk, 
but also for the identification of global systemically important 
insurers (G-SIIs) and G-SII policy measures.
    In November 2018, the IAIS published a consultation document on a 
proposed framework for the assessment and mitigation of systemic risk 
in the insurance sector (the Holistic Framework).\11\ In the 
consultation document, the IAIS stressed the need for additional work 
on potential liquidity risk. The IAIS also indicated that the potential 
implementation of the Holistic Framework should remove the need for an 
annual identification of G-SIIs by the FSB. The FSB has stated that it 
will review the need to either discontinue or re-establish an annual 
identification of G-SIIs by the FSB in consultation with the IAIS and 
national authorities in November 2022.
---------------------------------------------------------------------------
    \11\ IAIS, Holistic Framework for Systemic Risk in the Insurance 
Sector: Public Consultation Document (November 14, 2018), https://
www.iaisweb.org/page/consultations/closed-consultations/2019/holistic-
framework-for-systemic-risk-in-the-insurance-sector/file/77862/
holistic-framework-for-systemic-risk-consultation-document.
---------------------------------------------------------------------------
    Treasury supports shifting the focus of systemic risk analysis away 
from individual insurance entities and toward the activities of 
insurers and other market participants. Treasury also supports the 
IAIS's efforts to develop improved standards for liquidity management 
and planning. As far as next steps, the IAIS is expected to adopt the 
Holistic Framework in 2019, for implementation by IAIS members in 2020.
    Thank you again for the opportunity to testify today, and I look 
forward to your questions.
                                 ______
                                 
                 PREPARED STATEMENT OF THOMAS SULLIVAN
    Superintendent, Board of Governors of the Federal Reserve System
                           September 12, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for your time and for your invitation to testify today on the 
Federal Reserve's efforts with respect to global insurance regulatory 
and supervisory forums.
    The Board of Governors of the Federal Reserve System (Board) 
engages on global insurance regulatory and supervisory issues chiefly 
through its participation in the International Association of Insurance 
Supervisors (IAIS) alongside the U.S. Treasury's Federal Insurance 
Office, State insurance regulators, and the National Association of 
Insurance Commissioners (NAIC). The U.S. members of the IAIS are 
informally known as ``Team USA.'' The mission of the IAIS is to promote 
effective supervision of internationally active insurance companies. It 
is important to note that none of the standards set by the IAIS have 
binding effect on the United States. We believe that it is in our 
national interest to engage in the international insurance standards-
development process so that it produces standards that protect the U.S. 
market and U.S. consumers when foreign insurers operate here and are 
appropriate for U.S. companies operating abroad.
    The Federal Reserve's participation at the IAIS is consistent with 
our responsibilities under law.\1\ The Federal Reserve regulates 
insurance holding companies that own a federally insured depository 
institution and any designated by the Financial Stability Oversight 
Council (FSOC). The insurance thrift-holding companies supervised by 
the Federal Reserve represent over 10 percent of U.S. insurance 
industry assets and span a wide range of sizes, structures, and 
business activities. The core focus in our supervision is ensuring the 
safety and soundness of the supervised insurance institutions and 
protecting their subsidiary depository institutions. We leverage the 
work of State insurance regulators where possible and continuously look 
for opportunities to coordinate with them.
---------------------------------------------------------------------------
    \1\ See 12 U.S.C. section 1467a.
---------------------------------------------------------------------------
    Our collaboration with the State insurance regulators and other 
Team USA members is prominently visible in our advocacy at the IAIS. 
Collectively, Team USA brings the relevant technical expertise to the 
work of the IAIS to identify and to address a range of policy issues. 
We are committed to continuing to support approaches that are 
appropriate for U.S. companies operating internationally.
    The Federal Reserve also participates in insurance policy work 
streams as a member of the Financial Stability Board (FSB), which is 
responsible for monitoring and assessing vulnerabilities affecting the 
global financial system and recommending actions to address them. As 
part of this role, the FSB provides an appropriate framework for the 
work of the IAIS, but the responsibility for setting detailed 
international standards for insurance regulations rests with the IAIS.
    In my testimony today, I would like to highlight and elaborate upon 
a few items discussed in the submitted report Efforts of the U.S. 
Department of the Treasury and the Board of Governors of the Federal 
Reserve System with respect to Global Insurance Regulatory or 
Supervisory Forums in 2018. First, I will comment on the efforts of the 
IAIS to develop an Insurance Capital Standard (ICS), arguably its most 
significant current project. Along with that, I will discuss the 
Federal Reserve's recent proposal of a capital rule that would apply to 
depository institution holding companies significantly engaged in 
insurance. The efficacy of this domestic approach should be useful to 
us during upcoming IAIS deliberations. After this, I will provide an 
update on the Federal Reserve's efforts to increase transparency at the 
IAIS and FSB.
Insurance Capital Standard
    In 2013, the IAIS announced its plans to develop an ICS. The IAIS 
intends for the ICS to be a global, risk-based capital standard that is 
fit for application to all large internationally active insurance 
groups. To that end, the IAIS has engaged in two public consultations 
and four field tests, which assessed the impact of the ICS using data 
from large insurance companies that was provided on a voluntary basis. 
The IAIS plans to approve the ICS for confidential use during a 5-year 
monitoring period. The IAIS intends for the structure of the ICS to 
remain relatively stable during the monitoring period so that the 
current design and calibration of the ICS can be evaluated. To aid in 
the evaluation, large internationally active insurance groups will be 
able to report confidentially on the ICS to their home country 
supervisors.
    An international standard, such as the ICS, could limit regulatory 
arbitrage and help provide a level playing field for internationally 
active insurance groups. An international standard could also help to 
ensure that internationally active U.S. companies are not held to 
bespoke and onerous standards when they operate in foreign countries. 
Additionally, it could reduce risk to U.S. consumers by ensuring that 
foreign insurers operating within the United States are held to 
appropriate capital regulation by their foreign groupwide supervisor.
    There are concerns that the ICS currently includes a valuation 
method and other requirements that may not be optimal for the U.S. 
insurance market. Insurers generally operate with a buy-and-hold, long-
term approach to investing, yet the ICS, as proposed, uses a market-
based valuation method, whose volatility could ultimately reduce the 
availability of insurance products with long-term guarantees.
    Because of these concerns, the Board has proposed applying a 
building block approach (BBA) to the insurers we supervise rather than 
the ICS in its current formulation. The BBA builds on existing State-
based insurance standards, while also establishing minimum capital 
requirements that are specific to the business of insurance. The Board 
specifically sought to leverage the well-known insurance capital 
standards from State regulators to establish minimum requirements.
    I support the NAIC's efforts to move forward with developing a 
Group Capital Calculation (GCC), which they successfully have moved 
into field testing.\2\ We will continue to work with the NAIC to align 
these approaches to the greatest extent possible.
---------------------------------------------------------------------------
    \2\ See NAIC, ``Group Capital Calculation (E) Working Group,'' 
https://naic-cms.org/cmte_e_
grp_capital_wg.htm.
---------------------------------------------------------------------------
    The Federal Reserve intends to continue to advocate for the 
recognition of the building block approach internationally. Through 
Team USA's efforts, we believe space has been created in the 
international dialogue for the BBA and GCC to be evaluated and 
recognized as an outcome-equivalent approach for the ICS. The BBA can 
assist in our collective advocacy by demonstrating how an approach that 
leverages existing capital requirements can work. Because of the 
concerns regarding the current design of the ICS, U.S. members support 
continued development of the ICS during the monitoring period. 
Furthermore, substantive changes to the ICS may emerge during the 
monitoring period given that elements of the developing standard have 
not been thoroughly tested and key areas remain unresolved.
Transparency
    Team USA has continued to advocate for increased transparency at 
the IAIS. For example and most importantly, all significant policy 
proposals are subject to public consultation periods. Recently, the 
IAIS has established a norm that these periods will be for at least 60 
days, allowing adequate time for the public to comment.
    We also have advocated for obtaining stakeholder feedback earlier 
in the IAIS process. The development by IAIS of a Holistic Framework to 
mitigate systemic risk from the insurance industry is a good example of 
this. At the start of the IAIS's review of its macroprudential 
approach, key stakeholders were invited to present recommended changes. 
Several stakeholders suggested replacing the entities-based approach, 
which involved designating certain insurers as systemically risky, with 
an activities-based approach. The IAIS then worked to develop 
stakeholder ideas into a conceptual public consultation document, which 
was released in late 2017. Following this conceptual consultation, the 
IAIS released a more detailed consultation on its Holistic Framework in 
November 2018. Finally, earlier this year, the IAIS solicited input on 
the most granular details of the framework and plans to issue a final 
Holistic Framework this November. While this extensive engagement 
process required time, the IAIS has benefited from the engagement, and 
stakeholder reaction has generally been very supportive in this area.
    The Federal Reserve has also worked to increase transparency at the 
FSB through its leadership role. Since December 2, 2018, Federal 
Reserve Vice Chair for Supervision, Randal K. Quarles has served as FSB 
chair. He has made increasing FSB transparency and stakeholder 
engagement a key part the group's agenda. Earlier this year, for the 
first time in the FSB's history, the FSB publicly disseminated its 
comprehensive work program. Vice Chair Quarles and the FSB continue to 
look for ways to further increase stakeholder engagement. The FSB is 
currently conducting a study of its regional consultative groups, which 
will improve the efficacy of outreach and feedback mechanisms. The FSB 
has also increased its direct engagement with insurers, including on 
the ICS. Recently, the FSB and IAIS held a joint stakeholder engagement 
event with representatives of the large internationally active 
insurance groups.
    Thank you. I look forward to answering your questions.
                                 ______
                                 
                  PREPARED STATEMENT OF ERIC A. CIOPPA
               Superintendent, Maine Bureau of Insurance,
    on behalf of the National Association of Insurance Commissioners
                           September 12, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee. 
My name is Eric Cioppa and I am the Superintendent for the Maine Bureau 
of Insurance and the President of the National Association of Insurance 
Commissioners (NAIC).\1\ I am also the State insurance regulator 
representative to the Financial Stability Oversight Council (FSOC) and 
a member of the IAIS's Policy Development Committee. I am pleased to be 
here testifying alongside my Team USA colleagues.
---------------------------------------------------------------------------
    \1\ As part of our State-based system of insurance regulation in 
the United States, the National Association of Insurance Commissioners 
(NAIC) provides expertise, data, and analysis for insurance 
commissioners to effectively regulate the industry and protect 
consumers. The U.S. standard-setting organization is governed by the 
chief insurance regulators from the 50 States, the District of Columbia 
and five U.S. territories. Through the NAIC, State insurance regulators 
establish standards and best practices, conduct peer reviews, and 
coordinate regulatory oversight. NAIC staff supports these efforts and 
represents the collective views of State regulators domestically and 
internationally. For more information, visit www.naic.org.
---------------------------------------------------------------------------
    The U.S. insurance market is the single largest and most 
competitive in the world, with State insurance regulators supervising 
more than one-third of global premium, and taken individually, U.S. 
States make up more than half of the 50 largest insurance markets. 
Given the size, breadth, and diversity of the U.S. insurance market, it 
is critical that the United States remain engaged in global regulatory 
standard-setting. In this regard, the NAIC is committed to continuing 
to provide leadership on such issues with a focus on ensuring 
policyholder protection and maintaining stable and competitive 
insurance markets. Our system, which helped our sector largely weather 
the most significant financial crisis since the Great Depression, has 
been continually improved since then and our efforts over the last 
decade domestically inform our work internationally.
    As we work with our international counterparts and our Team USA 
colleagues, our primary objective is to develop the elements of an 
effective international insurance regulatory framework that are 
adaptable to the U.S. insurance market. While there are a variety of 
standard-setting workstreams at the International Association of 
Insurance Supervisors (IAIS), I would like to focus my testimony on two 
areas that have received the most attention here and abroad: 1) the 
development of the IAIS's Insurance Capital Standard (ICS) and 2) the 
development of the holistic framework for systemic risk in the 
insurance sector. I will also touch on the IAIS's strategic plan.
Insurance Capital Standard (ICS)
    The IAIS is currently in the process of developing a global 
Insurance Capital Standard for Internationally Active Insurance Groups 
(IAIGs). The ICS is being developed as a component of the Common 
Framework for the Supervision of Internationally Active Insurance 
Groups (ComFrame), which is part of the IAIS's response to the last 
financial crisis to improve coordination and communication among 
supervisors and make groupwide supervision of IAIGs more effective and 
efficient. The ICS is a key project for the IAIS and scheduled to reach 
another milestone in November as it is expected that the ICS will move 
into a 5-year monitoring period.\2\ It is anticipated that final 
adoption of the ICS will take place at the conclusion of the monitoring 
period, and jurisdictions will then determine whether to implement it.
---------------------------------------------------------------------------
    \2\ The purpose of this 5-year monitoring period is to evaluate the 
performance of the current ICS over a period of time. During the 
monitoring period, the ICS will be used for confidential reporting to 
group-wide supervisors and discussion in supervisory colleges as well 
as to receive feedback from IAIGs. However, it will not be used to 
measure the capital adequacy of IAIGs nor as a basis to trigger 
supervisory action. Rather, the input received during the monitoring 
period will be used to further improve the ICS.
---------------------------------------------------------------------------
NAIC Concerns With the ICS
    The NAIC has long expressed serious concerns with ICS's trajectory 
and construction, many of which are shared by our Team USA 
colleagues.\3\ Chief among them is its reliance on a market-adjusted 
valuation approach, which could create variability in company balance 
sheets and pressure insurers to sell assets contrary to the underlying 
economics of the product offering. This in turn could undermine the 
ability of firms to fulfill policyholder obligations and potentially 
disrupt financial markets. It also assumes capital is fully fungible 
between entities, which could lead to underfunding of individual 
insurance entities and increase the risk that non-insurance operations 
could pose to policyholders.
---------------------------------------------------------------------------
    \3\ See, e.g., Remarks by Treasury Secretary Steven T. Mnuchin at 
the National Association of Insurance Commissioners' International 
Forum, Washington, DC, at https://home.treasury.gov/news/press-
releases/statements-remarks (May 13, 2019); and Remarks by Federal 
Reserve Vice Chairman for Supervision Randal K. Quarles re: Insurance 
Supervision and International Engagement at the American Council of 
Life Insurers Executive Roundtable, Naples, Florida at https://
www.federalreserve.gov/newsevents/speeches.htm (January 9, 2019). See 
also, Remarks by Daniel K. Tarullo re: Insurance Companies and the Role 
of the Federal Reserve at the National Association of Insurance 
Commissioners' International Forum, Washington, DC, at https://
www.federalreserve.gov/newsevents/speech/files/tarullo20160520a.pdf 
(May 20, 2016).
---------------------------------------------------------------------------
    The ICS requirements also result in the nonrecognition of certain 
financial instruments critical to financing U.S. insurance operations 
as qualifying capital, and, includes capital charges that do not 
reflect the inherent risks of certain products. This potentially 
jeopardizes the ability of insurers to offer retirement products such 
as life insurance and annuities and make long-term investments, for 
example in infrastructure, where the marketplace plays a critical role. 
Put simply, the ICS remains not only technically flawed but also 
contrary to key policy initiatives in the United States such as 
retirement security, long-term care, infrastructure investment, and 
disaster resiliency.
    Further, rather than developing a standard that has an appropriate 
level of flexibility to recognize the realities of jurisdictional 
differences and to provide a basis for enhanced supervisory cooperation 
and coordination, the ICS work to date largely reflects Europe's 
approach to regulation. Favoring specific supervisory approaches over 
others has not been helpful to the process of developing what was 
intended to be a global standard. A regulatory standard that cannot be 
adopted by the world's largest jurisdictions, and, therefore, does not 
create safer insurance markets globally, is not an international 
standard regardless of the label applied to it. Europe has been very 
transparent about its objective of ensuring that the ICS ``remains in 
line with Solvency II principles.''\4\ Europe's efforts to protect and 
export Solvency II by reflecting it in the ICS has been to the 
detriment of meeting the IAIS's stated mission to `` . . . develop and 
maintain fair, safe and stable insurance markets for the benefit and 
protection of policyholders and to contribute to global financial 
stability.''\5\ Rather than working to develop a global capital 
standard that is broadly implementable and useful for a variety of 
jurisdictions, we are being confronted with an ICS that is simply the 
most ``convenient'' standard for Europe.
---------------------------------------------------------------------------
    \4\ See Annual Report of the European Insurance and Occupational 
Pensions Authority, https://eiopa.europa.eu/Publications/Reports/
EIOPA_2018%20Annual%20Report.pdf, at 51 (2018) (``With the aim of 
pursuit of Solvency II as the practical implementation of the 
International Association of Insurance Supervisors' (IAIS) 
International Capital Standard (ICS), EIOPA's target was for the 
ongoing development of the ICS remains in line with Solvency II 
principles: market consistency and risk-based. The ICS Field Testing 
was launched by the IAIS in May.
Due to its stability and comparability, it contained, for the reference 
ICS, a market-adjusted valuation (MAV) approach with a single 
discounting curve. All elements for a practical implementation of 
Solvency II are contained and the target was therefore judged to be 
met'').
    \5\ See https://www.iaisweb.org/home.
---------------------------------------------------------------------------
    Given our concerns, we have determined that the ICS as currently 
constructed would not be adaptable to the U.S. insurance market and 
would not be a useful tool for our supervisory framework--indeed, it 
could cause undue harm. Instead, together with our Team USA colleagues, 
we are developing an Aggregation Method which is different than the 
ICS, but an approach we feel will provide comparable outcomes for the 
group-wide supervision of IAIGs as the ICS. The IAIS has agreed to 
assess the Aggregation Method during the upcoming monitoring period.
    The Aggregation Method will be informed by our Group Capital 
Calculation (GCC) and by the proposed Building Block Approach recently 
released by the Federal Reserve for Savings and Loan Holding Companies 
predominantly engaged in insurance operations. These approaches build 
off our U.S. legal entity Risk Based Capital (RBC), which has been 
tested over time, and thus we are confident that the resulting group 
capital methodology will be a more meaningful and valuable tool for 
U.S. insurance regulators. It is to the collective credit of Team USA 
that in just 2 years we've gone from a theoretical approach for group 
capital to a working model demonstrating our commitment to a truly 
workable approach for our market.
    Unlike the ICS, which is a top-down capital standard, an 
Aggregation Method would rely on a bottom-up approach to capital, 
aggregating legal entity regulatory capital requirements and making 
scalar adjustments based on jurisdictional differences as well as risks 
that are otherwise not captured in the aggregation. It is our view that 
an aggregation method is not only comparable, but superior to the 
current ICS as it provides more transparency into the capital structure 
and local risks within a group and uses less volatile accounting 
methods. We recognize the importance of being able to assess group 
capital and discuss related issues with our foreign counterparts. The 
Aggregation Method will allow those assessments and discussions to 
occur, but in a manner that will work with the U.S. insurance 
regulatory framework and avoid some of the troubling aspects of the 
ICS.
Next Steps
    Importantly, the advancement of the ICS to the monitoring period is 
the next step in the process, but not the final one. In coordination 
with our Team USA colleagues, we will continue to move forward on a 
parallel track to address our concerns. First, we recognize that some 
large U.S. insurers who do business in other jurisdictions may have to 
comply with ICS or ICS-like standards as implemented in those markets 
in the future. Consequently, we are working with our IAIS colleagues to 
address the deficiencies of the current ICS and seek design changes 
that would take better account of how U.S. insurers operate. Second, we 
are working to develop and promote an approach to assessing the 
Aggregation Method, or any other alternatives to the ICS, such that by 
the conclusion of the ICS monitoring period it should be deemed an 
appropriate jurisdictional alternative that provides comparable 
outcomes.
    In the short term, between now and November, there are several IAIS 
meetings that will give Team USA the opportunity to further shape the 
discussions going forward. In these coming meetings, it will be 
critical that Team USA continues to translate their strong public 
statements on the ICS into an equally committed strategy heading into 
these next critical meetings. From our perspective, the IAIS should 
establish a definition of comparability that provides a viable path 
forward for the aggregation method to be recognized as providing 
comparable outcomes to the ICS, in spite of any structural differences 
that may exist. The focus of comparability should be on whether 
regulators are empowered to take action on a group capital basis, and 
not a granular compliance exercise to an ICS standard with inherent 
flaws.
    We are also working bilaterally with individual IAIS members to 
share with them our perspectives, hear their views with regards to the 
ICS and seek opportunities to build bridges and mutual respect between 
our respective jurisdictions. Furthermore, we hope the information 
collected from IAIGs and input from the relevant group-wide supervisors 
during the monitoring period will illustrate our concerns with the 
ICS's construction and demonstrate to our foreign counterparts the 
merits of the Aggregation Method.
    While we remain committed to the ultimate objective of an ICS and 
contributing to its development, it is premature if not irresponsible 
to make more definitive commitments to a standard that presently all 
members of Team USA view as inherently flawed. Such commitment would 
undermine the very point of a monitoring period, which should not be 
the conclusion of the ICS's development, but another opportunity to 
test it along with the Aggregation Method. But let me also be clear, we 
will not be implementing the current ICS in the U.S. States are moving 
forward with a Group Capital Calculation and the Fed is moving forward 
with a Building Block Approach, both of which are compatible with the 
Aggregation Method. We believe this is the best path forward for U.S. 
policyholders and market participants, while remaining consistent with 
the underlying purpose of the ICS.
Holistic Framework for Systemic Risk
    Concurrently with its work on the ICS, the IAIS is also in the 
process of developing a Holistic Framework for Systemic Risk in the 
Insurance Sector. The 2008 global financial crisis underscored the 
interconnected nature of financial institutions, as well as the risks 
they pose to the financial system when in distress. While the insurance 
industry is generally a stabilizing force by providing consumers 
products that protect them against the risk of loss, there was 
recognition that certain activities and interconnectedness could pose 
risks to the broader financial system. As a result, the IAIS and the 
Financial Stability Board worked to develop a process to assess 
insurers' systemic risk and policy measures designed to prevent 
catastrophic failure in the insurance sector. In this regard, work 
began on an entity-based approach that sought to identify Global 
Systemically Important Insurers, or G-SIIs. However, it soon became 
apparent that an entities-based approach was not a good fit for the 
sector because it was too narrow in its focus. In late 2018, the IAIS 
released a proposed Holistic Framework for Systemic Risk that 
prioritized taking more of an activities-based approach.
    The proposed Holistic Framework intends to serve as the basis for 
identifying and addressing any risks in the insurance sector that could 
emanate from distress of individual insurers or, alternatively, from 
the activities of solvent insurers through their collective exposures 
or responses to shocks to the financial system. This approach considers 
the cross-sectoral aspects of systemic risks by incorporating 
comparisons of risks among insurers and financial sector actors such as 
banks. The proposed framework involves the following key elements:

  1)  a set of preemptive supervisory tools designed to help prevent 
        insurance sector vulnerabilities and exposures from developing 
        into systemic risks;

  2)  ongoing monitoring by the IAIS designed to detect potential 
        systemic risks in the insurance sector;

  3)  supervisory authorities designed to respond to any identified 
        potential systemic risks;

  4)  mechanisms to help ensure consistent application of the of 
        framework; and

  5)  an assessment of the IAIS of the consistent implementation of 
        preemptive supervisory tools and intervention authorities.

The NAIC welcomed this shift in thinking as the activities-based 
approach is targeted at the risks of concern rather than at a subset of 
companies that may not fully capture the full extent of the risk to the 
system or sector. Such an approach is more aligned with our domestic 
direction, particularly with respect to the NAIC's Macroprudential 
Initiative, which is focused on risks within the insurance sector that 
could have broader impacts on the financial system and vice-versa, as 
well as the FSOC's proposed prioritization of an activities-based 
approach.
    The development of the Holistic Framework is ongoing, and we 
continue to carefully monitor how the proposals will move from concept 
to reality to ensure they do not go beyond the intended scope of 
insurers that are engaged in potentially systemically risky activities. 
The IAIS has been refining the framework this year based on input from 
members and stakeholders, and new policy measures will be up for 
adoption at the IAIS Annual General Meeting in November.
IAIS Strategic Plan and Transparency
    Turning to IAIS more broadly, in June, the IAIS approved its 2020-
2024 Strategic Plan that lays out a new strategic direction that we 
generally support. While the post-crisis policy work on systemic risk 
and group capital which has been the focus of the current plan is 
important, it has also taken up a large amount of IAIS time, resources 
and attention. In the meantime, new issues and risks have and will
continue to emerge. This new strategic plan better balances the work of 
the IAIS, makes it more forward-looking and puts more emphasis on 
supporting its membership of insurance supervisors around the globe. 
Many of the priorities the IAIS has identified are issues that the NAIC 
is actively engaged and making progress on as well: expanding our 
macroprudential surveillance toolkit; examining and addressing the 
impact of innovation and technology on the consumers, industry, and 
regulators; cybersecurity; data privacy; and climate risk and 
resilience. We look forward to contributing our knowledge, expertise 
and leadership on these important issues.
    Additionally, we continue to believe that critical to the 
credibility of the standard-setting activities at the IAIS is an 
inclusive and transparent decisionmaking process. We are pleased to see 
that the IAIS's strategic plan includes the enhancement of stakeholder 
communication as one of its goals and look forward to working with our 
IAIS colleagues to further enhance the transparency of IAIS 
discussions. For our part, the NAIC has long-standing procedures and 
ongoing responsibilities to seek input from policyholders and other 
interested parties, and we will continue to work on these issues in a 
transparent manner through our NAIC process.
Conclusion
    In conclusion, well-regulated markets, both here and abroad, make 
for well-protected policyholders. Given the important role the 
insurance sector plays in providing protection and retirement security 
to U.S. consumers, it is critically important that any international 
regulatory standards be developed in a manner that are adaptable to our 
markets and do not threaten their stability. To that end, the NAIC 
remains committed to continued engagement in international insurance 
standard-setting discussions alongside our Team USA colleagues to 
ensure this result.
    Thank you for the opportunity to testify today and I would be 
pleased to take your questions.

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM STEVEN E. 
                             SEITZ

Q.1. Should the IAIS adjust its International Capital Standards 
(ICS) to comport with the structure of the U.S. insurance 
market prior to adoption for monitoring?

A.1. The Federal Insurance Office (FIO) believes that it is 
important that the International Association of Insurance 
Supervisors (IAIS) strengthen its efforts to develop a final 
ICS that is compatible with the U.S. regulatory structure. FIO 
will continue to advocate that the IAIS increase its focus on 
the important issues regarding comparability of outcomes, in 
order to enhance comparability of the ICS with the U.S. system 
of insurance regulation.

Q.2. How can the operational effectiveness of ICS be properly 
examined if it has identified flaws from the outset?

A.2. FIO believes that it is important that the IAIS create and 
maintain a defined structure and process for further work and 
revisions on the ICS during the monitoring period from 2020 to 
2024. This process should ensure appropriate confidentiality 
for insurers during the monitoring period, while allowing the 
IAIS, its members, and other stakeholders to continue 
evaluating, revising, and improving the ICS. FIO will remain 
actively engaged during this period and advocate for U.S. 
interests so that U.S. insurers remain competitive overseas and 
so that international standards do not inappropriately harm 
U.S. insurance companies or the U.S. domestic insurance market.

Q.3. Specifically, what adjustments to ICS would you like to 
see prior to its adoption?

A.3. At the IAIS meetings in Abu Dhabi, FIO registered its 
official objection to the IAIS's advancement of version 2.0 of 
the ICS into a 5-year monitoring period. Among other things, 
the current form of the ICS could risk limiting U.S. consumers' 
access to important long-term savings products. The IAIS needs 
to continue improving and revising the design of the ICS so 
that it more appropriately reflects the business model of 
insurers. Additionally, the IAIS should consider the increased 
use of jurisdictional flexibility in the design of the ICS so 
that the ICS could better meet the differing market needs 
across various jurisdictions. During the 5-year monitoring 
period, FIO will continue to advocate strongly for further 
improvements to the ICS in these and other areas.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM STEVEN E. 
                             SEITZ

Q.1. Before the International Association of Insurance 
Supervisors (IAIS) votes on adoption of the new international 
capital standards, there will be two meetings this month and 
next to lay the groundwork for the annual General Meeting in 
November.
    How will each of you approach these meetings and what 
outcomes do you hope to achieve?

A.1. Before and during these meetings of the IAIS, the FIO 
worked closely with the other U.S. members of the IAIS--the 
U.S. States, the National Association of Insurance 
Commissioners (NAIC), and the Board of Governors of the Federal 
Reserve (collectively known as Team USA).
    FIO will continue to work collaboratively as part of Team 
USA in our engagement with the IAIS to advance U.S. interests. 
As outlined in my written testimony, FIO will work together 
with Team USA and other stakeholders to address its concerns 
with the current development of the ICS.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM STEVEN E. 
                             SEITZ

Q.1. In your view, does the capital framework that exists as 
part of the U.S. State-based insurance regulatory regime 
provide similar protections as the proposed ICS Version 2.0 
standard?

A.1. There are important differences between the capital 
framework that currently exists in the U.S. State-based 
insurance system and the proposed ICS Version 2.0 standard. The 
ICS seeks to establish a group-wide capital standard that aims 
to be a measure of capital adequacy for internationally active 
insurance groups. Under the U.S. State-based insurance regime, 
the current U.S. risk-based capital standard is applied at the 
insurance legal entity level. The U.S. States, through the 
National Association of Insurance Commissioners (NAIC), are in 
the process of developing a group capital calculation (GCC), 
which will serve as an analytical tool to provide a baseline 
quantitative measure for group risks. Additionally, the ICS is 
intended to serve as a prescribed capital requirement, whereas 
the NAIC intends for the GCC to assist regulators with taking 
informed and appropriate action in response to potential risks 
arising from other parts of the holding-company system.

Q.2. In your written testimony, you referenced a 5-year 
monitoring period following the adoption of ICS Version 2.0 in 
November 2019. During the period, IAIS intends to use the ICS 
for confidential
reporting to group-wide supervisors. In your view, is that 
additional data necessary?

A.2. It is important that the IAIS create and maintain a 
process during the monitoring period for the ICS that ensures 
appropriate confidentiality for insurers. The monitoring period 
is designed to provide feedback on the effectiveness of ICS 
Version 2.0, and should be an iterative process for the IAIS 
and its members to continue revising and improving the ICS.

Q.3. In March 2018, IAIS, in conjunction with the Sustainable 
Insurance Forum (SIF), released an issue paper that detailed 
the climate risk to the insurance sector.\1\
---------------------------------------------------------------------------
    \1\ International Association of Insurance Supervisors, ``Issues 
Paper on Climate Change Risks to the Insurance Sector,'' 2018, https://
www.iaisweb.org/file/73565/sif-iais-issues-paper-on-climate-risk-to-
the-insurance-sector-clean.
---------------------------------------------------------------------------
    Do you agree with the report's statement that the 
``potential for physical and transition risks to pose risks for 
[the] solvency of individual firms, stemming from underwriting 
and investment activities''?

A.3. U.S. State regulators are continually monitoring solvency 
risks. For example, the NAIC revised its Financial Condition 
Examiners Handbook to provide guidance for examiners on what 
questions to ask insurers regarding any potential impact of 
climate change on solvency.
    In addition, insurers do not appear to have material 
exposure to carbon-related investments. In the current 
Financial Sector Assessment Program being conducted by the IMF 
in the United States, the IMF surveyed 22 life insurers, 21 P&C 
insurers, and 7 health insurers for carbon-related exposures in 
their investment portfolios. The IMF found that less than 1 
percent of both their equity investments and bond investments 
were carbon-related.

Q.4. If not, why not?

A.4. See response above.

Q.5. Do you believe that further efforts are necessary to 
quantify the potential risks associated with climate change?

A.5. As part of its statutory mandate, FIO continuously 
monitors the status of the insurance industry. Insurers do not 
appear to have material exposure to carbon-related investments, 
as noted above. More generally, FIO is working with FEMA and 
the Mitigation Framework Leadership Group (MitFLG, a national 
structure to coordinate mitigation efforts across the Federal 
Government and with State, local, tribal, and territorial 
representatives) to improve national resilience through the 
development of the National Mitigation Investment Strategy. As 
noted in its 2019 Annual Report, FIO continues to support 
efforts to improve the availability of insurance and take-up of 
insurance. FIO is also engaging with its Federal Advisory 
Committee on Insurance, which is composed of a variety of 
stakeholders, including industry executives, consumer 
representatives, State regulators and legislators, and 
academics.

Q.6. Would requiring companies to disclose their exposure to 
greenhouse gas emissions and their fossil-fuel related assets 
help mitigate the risk some of these insurers face in their 
investment activities?

A.6. The U.S. States are the primary regulators of insurance in 
the United States, and they are best positioned to assess what 
disclosures are necessary for the insurance companies doing 
business in their States. For example, the California 
Department of Insurance has previously required all insurers 
doing business in that State to publicly disclose all of the 
carbon-related investments in their portfolios.

Q.7. In your written testimony, you stated, ``Treasury supports 
shifting the focus of systemic risk analysis away from 
individual insurance entities and toward the activities of 
insurers and other market participants.'' You also expressed 
support for removing the FSB annual identification of G-SIIs in 
the implementation of the holistic framework.
    Do you believe that American International Group, Inc., 
Prudential Financial, Inc., and MetLife, Inc., have reduced 
their risk profiles sufficiently since the financial crisis?

A.7. FSOC has the authority to require that a U.S. nonbank 
financial company, including an insurance company, be 
supervised by the Board of Governors of the Federal Reserve and 
subject to prudential standards if FSOC determines that 
material financial distress at the U.S. nonbank financial 
company, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of activities of the U.S. nonbank 
financial company, could pose a threat to the financial 
stability of the United States. No U.S. nonbank financial 
company is currently subject to such a designation by FSOC. 
FSOC voted to rescind the designations of AIG and Prudential, 
while MetLife successfully contested its designation in Federal 
court. FSOC's analyses in connection with its rescission of the 
designations of AIG and Prudential are available on FSOC's 
website.\2\
---------------------------------------------------------------------------
    \2\ See https://home.treasury.gov/system/files/261/Prudential-
Financial-Inc-Rescission.pdf, https://www.treasury.gov/initiatives/
fsoc/designations/Documents/American_International_
Group,_Inc._(Rescission).pdf.

Q.8. Do you believe that an insurance company's overall risk 
profile, including its interconnectedness to other institutions 
and overall leverage exposure, should not be considered when 
determining the appropriate regulatory framework for that 
---------------------------------------------------------------------------
company?

A.8. An insurance company's overall risk profile should be 
considered when determining the appropriate regulatory 
framework for the company.

Q.9. Describe the tools that regulators would have under an 
activities-based approach to proactively identify activities 
that insurance companies engage in that are risky and prevent 
firms from restructuring or renaming those activities?

A.9. FSOC's December 2019 final interpretive guidance on 
nonbank financial company determinations sets forth an 
activities-based approach for identifying and addressing 
potential risks to financial stability. The activities-based 
approach consists of two steps: (i) identifying and evaluating 
potential risks to financial stability from products, 
activities, or practices; and (ii) working with regulators to 
address any identified risks to financial stability. In the 
first step of the activities-based approach, FSOC's work may 
include efforts such as sharing data, research, and analysis 
among FSOC members and member agencies and their staffs; 
consulting with regulators and other experts regarding the 
scope of potential risks and factors that may mitigate those 
risks; and collaboratively developing analyses for 
consideration by FSOC. If, after engaging with relevant 
financial regulatory agencies, FSOC believes those regulators' 
actions are inadequate to address an identified potential risk 
to U.S. financial stability, FSOC has authority to make formal, 
nonbinding recommendations to primary financial regulatory 
agencies under section 120 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM STEVEN E. 
                             SEITZ

Q.1. I understand that the International Capital Standard (ICS) 
produced by the International Association of Insurance 
Supervisors (IAIS) is nonbinding to U.S. insurers until it is 
either adopted by regulators or enacted into law by Congress.
    Could you discuss the potential ramifications on U.S. 
insurers operating in markets abroad even if the standards 
produced through IAIS are nonbinding on U.S. insurers?

A.1. International standards like the ICS are not binding in 
the United States, unless they are adopted as law through 
domestic processes at the State or Federal level. However, if 
standards developed in forums such as the IAIS are adopted by 
non-U.S. jurisdictions, even if they are not adopted in the 
United States, they could have significant ramifications for 
U.S. insurers and potentially for our domestic insurance 
regulatory regime. As U.S. insurers expand into foreign 
markets, they will have to navigate the supervisory regimes of 
other jurisdictions that may be influenced by international 
standards. For example, if adopted in other jurisdictions, the 
ICS could have negative effects on the ability of U.S. insurers 
to provide long-term savings products in those jurisdictions.

Q.2. What disadvantages or repercussions could our insurers at 
home in the United States face?

A.2. The Federal Insurance Office (FIO) registered its official 
objection to the IAIS's advancement of version 2.0 of the ICS 
into a 5-year monitoring period. The current form of the ICS 
could risk limiting U.S. consumers' access to important long-
term savings products and potentially increase costs for U.S. 
insurers and U.S. consumers. Considering the importance of 
these issues to the U.S. insurance market, FIO is committed to 
strong and continued engagement at the IAIS during the ICS 
monitoring period and in other important IAIS work streams. FIO 
will continue to advocate for U.S. interests at the IAIS, and 
push for international standards that reflect the U.S. 
insurance regulatory system.

Q.3. The United States represents over 40 percent of the 
world's insurance market and has one of the most robust, well-
developed insurance regulatory systems in the world. One that 
both protects consumers, but also encourages competition and 
innovation. With this in mind, the Federal Reserve in January 
of this year at a roundtable stated that it would ``continue to 
advocate for international insurance standards that promote a 
global level playing field and work well for the U.S. insurance 
market.''
    Is the U.S. insurance industry well-regulated and 
protecting consumers today?

A.3. The U.S. insurance sector, which is primarily regulated by 
the U.S. States, plays a critical role in the U.S. economy and 
ensuring the stability of the U.S. financial system. The 
American people count on the insurance industry to help them in 
times of need. The United States has the largest and most 
diverse insurance market in the world. U.S. insurance premiums 
were over $2 trillion in 2018, an amount that exceeds 10 
percent of the U.S. gross domestic product.

Q.4. If yes, what is ICS solving for since the ICS as proposed 
would disadvantage U.S. insurers?

A.4. FIO appreciates--and has contributed to--the work of the 
IAIS on the ICS effort and continues to support its overall 
objective of working to create a common language for 
supervisory discussion of group solvency. However, at the IAIS 
meetings in Abu Dhabi, FIO registered its official objection to 
the IAIS's advancement of version 2.0 of the ICS into a 5-year 
monitoring period. The current form of the ICS could risk 
limiting U.S. consumers' access to important long-term savings 
products and potentially increase costs for U.S. insurers and 
U.S. consumers. Considering the importance of these issues to 
the U.S. insurance market, FIO is committed to strong and 
continued engagement at the IAIS during the ICS monitoring 
period and in other important IAIS work streams. FIO will 
continue to work collaboratively as part of Team USA in our 
engagement with the IAIS.

Q.5. Insurance companies in the United States have been 
regulated for over 150 years. We have a marketplace that 
services consumers well and is solvent. Why are we taking 
direction from Europe on how to best regulate our insurance 
industry?

A.5. Throughout its engagement at the IAIS and in other 
international forums, FIO will continue to strongly advocate 
for U.S. interests and the U.S. State-based system of insurance 
regulation. It is important for FIO to advocate on these issues 
because if standards developed in forums such as the IAIS are 
adopted by non-U.S. jurisdictions, even if they are not adopted 
in the United States, they could have significant ramifications 
for U.S. insurers, and potentially for our domestic insurance 
regulatory regime.

Q.6. Europe has a government-supported retirement system, 
unlike the United States where most retirement is managed in 
the private sector, how could these different systems impact 
the way capital is calculated?

A.6. The different retirement systems in Europe and the United 
States could affect how each jurisdiction calculates capital 
for insurance companies. For example, the market valuation 
approach used by Europe under Solvency II (and similarly used 
in the ICS) could have negative effects on the ability of 
insurance companies to provide long-term savings products, 
which are particularly important to insurers and policyholders 
in the United States. Depending on the retirement system of a 
particular jurisdiction, these products may not play as 
important a role for consumers saving for retirement in that 
jurisdiction.

Q.7. What is the reason that the United States needs European 
insurance standards imposed on U.S. insurance companies?

A.7. The United States has the largest and most diverse 
insurance market in the world and does not need to import EU 
insurance standards into the United States. The U.S. States are 
the primary regulators of the business of insurance in the 
United States, and it is important that international standards 
are compatible with the U.S. insurance regulatory regime. 
During the recent IAIS meetings in Abu Dhabi, FIO objected to 
the advance of version 2.0 of the ICS into the monitoring 
period. During these negotiations, FIO took positions that were 
consistent with our objectives of ensuring that U.S. insurers 
remain competitive overseas and not allowing international 
standards to inappropriately harm U.S. insurance companies or 
the U.S. domestic insurance market.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                        STEVEN E. SEITZ

Q.1. How could insurance companies pose a threat to U.S. 
financial stability?

A.1. As demonstrated during the 2008 financial crisis, an 
insurance company may pose a threat to U.S. financial stability 
due to the nature and extent of its activities (such as 
engaging in extensive capital market activities).

Q.2. How frequently in the past 15 years did property and 
casualty or life insurers become insolvent? How many of the 
claims to insolvent firms were not covered? How many of the 
claims to insolvent firms were covered by the Guarantee 
Associations?

A.2. Since 2005, there have been 22 life and health insurer 
receiverships and 98 property & casualty (P&C) company 
insolvencies.\1\ While the size of the insurers involved in 
these insolvencies varied, most were relatively small insurers. 
Average recoveries on life insurance policies have generally 
exceeded 96 cents per dollar, and average recoveries on annuity 
claims have been 95 cents per dollar. While recovery rates from 
P&C insurer insolvencies have been lower, they are still 
substantial.
---------------------------------------------------------------------------
    \1\ Life and health insurer receivership data is from the National 
Organization of Life & Health Insurance Guaranty Associations (NOLHGA), 
while the National Conference of Insurance & Guaranty Funds (NCIGF) 
provided data on P&C company insolvencies. NOLHGA receivership data 
includes only companies with operations in at least three States and 
where NOLHGA was involved. NCIGF data only includes insolvencies 
through the second quarter of 2018. By convention, companies are 
organized either as ``life and health'' (and may be authorized to write 
life, accident, and/or health insurance), ``property and casualty,'' or 
``health'' (when authorized to write only health insurance).

Q.3. Are there any insurance companies now--either from their 
nature, scope, size, scale, concentration, interconnectedness, 
or mix of activities--that could pose a threat to U.S. 
financial stability? If yes, what do you recommend we do about 
---------------------------------------------------------------------------
these potential threats?

A.3. The Financial Stability Oversight Council (FSOC) has the 
authority to require that a U.S. nonbank financial company, 
including an insurance company, be supervised by the Board of 
Governors of the Federal Reserve System (Federal Reserve) and 
subject to prudential standards if FSOC determines that 
material financial distress at the U.S. nonbank financial 
company, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of activities of the U.S. nonbank 
financial company, could pose a threat to the financial 
stability of the United States. No U.S. nonbank financial 
company is currently subject to such a designation by FSOC.
    In December 2019, FSOC published final interpretive 
guidance on nonbank financial company determinations, which 
describes the approach that FSOC intends to take in 
prioritizing its work to identify and address potential risks 
to U.S. financial stability using an activities-based approach. 
In order to fulfill its statutory duties, FSOC stated that it 
will monitor the financial services marketplace, including 
insurance, to identify potential threats to U.S. financial 
stability. Under the recently published guidance, FSOC enhanced 
the analytical rigor and transparency in the processes FSOC 
intends to follow if it were to consider making a determination 
to subject a nonbank financial company to supervision by the 
Federal Reserve.

Q.4. The International Association of Insurance Supervisors 
(IAIS) approved its 2020-2024 Strategic Plan this summer. It 
also included cyber resilience and climate risk. Can you tell 
me more about the goals the IAIS has to reduce risks related to 
cyber-attacks and climate change?

A.4. The IAIS Strategic Plan sets out the association's goals, 
including with respect to reducing cyber-attacks and climate 
change-related risks. Specifically, the Strategic Plan includes 
as Goal 2: ``The IAIS sets and maintains globally recognized 
standards for insurance supervision that are effective and 
proportionate.'' The Strategic Plan further explains that, in 
connection with this goal, the IAIS will ``incorporate a more 
strategic approach to emerging trends such as cyber, climate 
risk, insurtech, etc.'' The Federal Insurance Office (FIO) will 
advance U.S. interests by working with the IAIS and its 
members.

Q.5. What investment strategies are insurance carriers taking 
in relation to climate risk versus what new policies options or 
restrictions are becoming prevalent to address climate change?

A.5. In the current Financial Sector Assessment Program being 
conducted by the International Monetary Fund (IMF) in the 
United States, the IMF surveyed 22 life insurers, 21 P&C 
insurers, and seven health insurers for carbon-related 
exposures in their investment portfolios. The IMF found that 
less than 1 percent of both their equity investments and bond 
investments were carbon-related. In addition, some large 
insurers have pledged to limit their insurance coverage for 
certain fossil fuel companies. More generally, FIO is working 
with Federal Emergency Management Agency and the Mitigation 
Framework Leadership Group (MitFLG, a national structure to 
coordinate mitigation efforts across the Federal Government and 
with State, local, tribal, and territorial representatives) to 
improve national resilience through the development and 
implementation of the National Mitigation Investment Strategy. 
FIO is also engaging with its Federal Advisory Committee on 
Insurance, which is composed of a variety of stakeholders, 
including industry executives, consumer representatives, State 
regulators and legislators, and academics.

Q.6. How are different nations requiring insurance firms to 
consider the impacts of climate change?

A.6. In 2018, the IAIS and the Sustainable Insurance Forum 
(SIF) issued a paper ``Climate Change Risks to the Insurance 
Sector.'' This paper provides an overview of how climate risks 
are currently affecting and may in the future affect the 
insurance sector. The paper also reviews the relevant 
supervisory practices in different jurisdictions based on 
responses to a SIF survey. The paper outlines case studies 
highlighting the efforts and key findings in this area of nine 
different jurisdictions, including California and Washington. 
As the business of insurance in the United States is primarily 
regulated by the U.S. States, it is important that the Federal 
Government, including FIO, closely coordinate with the U.S. 
States on their respective efforts to require insurance firms 
to consider the impacts of climate change. The National 
Association of Insurance Commissioners (NAIC) also revised its 
Financial Condition Examiners Handbook to provide guidance for 
examiners on what questions to ask insurers regarding any 
potential impact of climate change on solvency.

Q.7. The International Association of Insurance Supervisors 
(IAIS) is working to evaluate the use of financial technology 
and insurance. Can you tell me more about issues related to 
artificial intelligence, the use of algorithms, and data 
privacy?

A.7. The IAIS is currently developing an issues paper on the 
use of big data analytics in insurance; a draft of the paper 
was published for public comment in September 2019. The draft 
paper identifies the following as ``supervisory 
considerations:'' the suitability, affordability, and 
availability of insurance coverage; governance and oversight of 
algorithms; third-party risk management; and issues regarding 
privacy, ownership, and sources of data.
    FIO has also done extensive work examining insurtech issues 
over the last several years and most recently in its 2019 
annual report, including issues related to AI, big data and the 
use of algorithms, and data privacy. The annual report details 
how the use of big data analytics (including the use of AI and 
algorithms) can present both opportunities and challenges for 
consumers and insurers, particularly with respect to rate model 
review. In particular, new technologies can change the relative 
market power of insurers and consumers, raise issues with 
respect to transparency, and create new supervisory challenges. 
FIO intends to continue its work with regard to insurtech and 
expects to continue writing about the topic and related issues 
such as the use of big data, data privacy, and others in future 
annual reports.

Q.8. How do you monitor the property and casualty insurance 
companies to ensure fintech and insurtech innovations do not 
lead to discrimination? How do you ensure compliance with the 
Fair Housing Act?

A.8. Among its duties, FIO monitors all aspects of the 
insurance industry, but its role is not to ensure compliance 
with the Fair Housing Act. Through FIO's research, analysis, 
and discussions with insurance stakeholders (including 
regulators, insurers, brokers, and consumer representatives), 
FIO monitors a wide range of insurance issues and reports on 
them through its various reporting requirements. FIO's 2019 
annual report discusses insurtech issues as well as the Fair 
Housing Act's Disparate Impact Rule.

Q.9. The Nevada Insurance Commissioner told me that the Covered 
Agreement standards were developed using banking capital 
standards, rather than insurance capital standards. Can you
explain the difference between the controls that banks have in 
place versus the controls that insurers have in place? I'm 
specifically interested in the use of the reinsurance tools 
that insurance carriers have available to them that banking 
systems do not.

A.9. The two covered agreements, the Bilateral Agreements 
between the United States and the European Union (EU) and the 
United States and the United Kingdom on Prudential Measures 
Regarding Insurance and Reinsurance (Covered Agreements), were 
negotiated pursuant to the Federal Insurance Office Act of 2010 
and provide meaningful benefits for the United States, its 
insurance industry, and their customers. The UK Covered 
Agreement was negotiated in anticipation of Brexit and has not 
yet entered into force. The Covered Agreements were not 
developed using banking capital standards. The Covered 
Agreements address three areas of prudential insurance 
supervision: group supervision; reinsurance, including 
reinsurance collateral; and exchange of information between 
supervisory authorities. Importantly, the agreements also 
protect consumers and affirm the U.S. system of insurance 
regulation, including the role of State insurance regulators as 
the primary supervisors of the business of insurance in the 
United States.
    For example, under the U.S.-EU Covered Agreement, a U.S. 
insurer is able to operate in the European Union without 
subjecting its U.S. parent to potentially costly worldwide 
group capital requirements (and other group supervision 
requirements), which may otherwise have been applicable under 
Solvency II. Additionally, under the U.S.-EU Covered Agreement, 
U.S. reinsurers are not required to establish a local EU 
presence in order to assume business from EU ceding insurers.

Q.10. Do you think that the international insurance supervisors 
who focus on insurance capital standards are open to alter 
their oversight standards to be considered ``substantially 
similar'' to the U.S. standards?

A.10. FIO registered its official objection to the IAIS's 
advancement of version 2.0 of the insurance capital standard 
(ICS) into a 5-year monitoring period. FIO will continue to 
advocate that the IAIS increase its focus on the important 
issues of comparability of outcomes, in order to enhance 
comparability of the ICS with the U.S. system of insurance 
regulation. FIO will continue to work collaboratively as part 
of Team USA in our engagement with the IAIS during the ICS 
monitoring period. FIO, together with the other U.S. members of 
the IAIS--the U.S. States, the NAIC, and the Federal Reserve--
are collectively known as Team USA.

Q.11. The European Union established Solvency II. Can you
describe how the Minimum Capital Requirements work? What is 
considered? What happens when an insurance company falls below 
the Minimum Capital Requirements?

A.11. Solvency II introduces two tiered capital requirements--a 
solvency capital requirement and a minimum capital requirement 
(MCR). Solvency II includes a tiered ladder of supervisory 
intervention that becomes increasingly more severe as the 
capital of an insurance company approaches the MCR. The MCR 
represents the minimum level of capital that firms are required 
to maintain and the threshold below which a regulator would 
intervene. Regulators in the European Union have a variety of 
options to address breaches of the MCR (including the potential 
withdrawal of an insurer's authorization). The MCR is 
calculated as a factor-based linear formula that is targeted at 
an 85 percent confidence level.

Q.12. Solvency II has three pillars. Pillar 3 requires insurers 
file annual reports with their regulator and make them 
available to the public. Have you had any feedback from the 
public based on one of those reports?

A.12. While FIO routinely reviews these reports, it has not 
received any feedback from the public on these reports.

Q.13. If the United States did not agree to use the same 
Solvency II standards, and could not get the European Union to 
agree to another type of solvency oversight convention, would 
U.S. carriers have to pay more for reinsurance products 
purchased from foreign companies? If so, would U.S. carriers be 
reluctant to buy foreign reinsurance products that could cost 
more?

A.13. The United States is not contemplating application of 
Solvency II standards with respect to U.S. prudential insurance 
regulation, nor is the United States seeking to prevent the 
European Union from applying its solvency oversight approach 
within the European Union. Further, under the U.S.-EU Covered 
Agreement, a U.S. insurer is able to operate in the European 
Union without subjecting its U.S. parent to potentially costly 
worldwide group capital requirements (and other group 
supervision requirements), which may otherwise have been 
applicable under Solvency II. Additionally, under the U.S.-EU 
Covered Agreement, U.S. reinsurers are not required to 
establish a local EU presence in order to assume business from 
EU ceding insurers.
    There are a number of factors that could affect the costs 
to U.S. ceding insurers for reinsurance obtained from assuming 
insurers domiciled in certain jurisdictions. In general, U.S. 
insurers are likely to prefer to obtain reinsurance from 
companies that are subject to strong and reliable prudential 
supervisory regimes.
    The United States and the European Union remain the two 
largest insurance markets in the world. As FIO has noted in 
recent annual reports, our expectation is that these markets 
will continue to provide shared opportunities for organic 
growth. U.S. insurers will continue to find that EU-based 
reinsurance is an important component of their overall 
decisions regarding risk diversification. In that regard, U.S. 
insurers may seek to access a variety of risk transfer 
products--including domestic reinsurance, international 
reinsurance, or various alternatives, such as insurance-linked 
securities.

Q.14. Can you explain why some argue that the proposed Solvency 
II standards could place the U.S. insurance carriers at a 
disadvantage?

A.14. Various parties have expressed concern that Solvency II's 
market valuation approach has negative effects on the ability 
of insurance companies to provide long-term savings products. 
Parties have raised similar concerns with the current design of 
the ICS that is being developed by the IAIS. At the IAIS 
meetings in Abu Dhabi, FIO registered its official objection to 
the IAIS's advancement of version 2.0 of the ICS into a 5-year 
monitoring period. One of the reasons for FIO's objection was 
that the current form of the ICS could risk limiting U.S. 
consumers' access to important long-term savings products, 
which are important products to insurers and critical for the 
millions of Americans saving for retirement.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM STEVEN E. 
                             SEITZ

Q.1. Under the new capital standard being developed by the 
International Association of Insurance Supervisors, insurance 
companies would be required to hold short-term assets more 
than, or instead of, long-term assets. If insurance companies 
are required to do so, will this new standard reduce the 
availability and affordability of annuities, which are longer-
term products that provide retirement security for millions of 
Americans?

A.1. The International Association of Insurance Supervisors 
(IAIS) should continue to improve the design of the ICS so that 
it more appropriately reflects the business model of insurers. 
In particular, the IAIS should improve the ICS's market 
valuation approach to mitigate the negative effects it could 
have on the ability of insurance companies to provide long-term 
saving products, which are critical to millions of Americans 
entering retirement.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM THOMAS 
                            SULLIVAN

Q.1. Should the IAIS adjust its International Capital Standards 
(ICS) to comport with the structure of the U.S. insurance 
market prior to adoption for monitoring?

A.1. Yes, the Federal Reserve Board (Board) advocates at the 
International Association of Insurance Supervisors (IAIS) that 
the structure of the International Capital Standard (ICS) 
should comport with the structure of the U.S. insurance market.

Q.2. How can the operational effectiveness of ICS be properly 
examined if it is has identified flaws from the outset?

A.2. Under its current form, the ICS is unfit for the U.S. 
market. Because of this, the Federal Reserve, Department of the 
Treasury, National Association of Insurance Commissioners 
(NAIC), and the States are pressing hard to structure the 
monitoring period so that further work and revisions will be 
made.
    An international standard could limit regulatory arbitrage 
and could help provide a level playing field for global 
insurers. It also could help ensure that U.S. companies are not 
held to unsuitable or onerous regulations when they operate 
abroad. This is why we remain committed to working with the 
IAIS to develop an international standard that works for the 
U.S. insurance market.

Q.3. Specifically, what adjustments to ICS would you like to 
see prior to its adoption?

A.3. We have concerns that the ICS currently includes a 
valuation method and other requirements that may not be optimal 
for the U.S. insurance market. Insurers generally operate with 
a buy-and-hold, long-term approach to investing, yet the ICS, 
as proposed, uses a market-based valuation method, whose 
volatility could ultimately reduce the availability of 
insurance products with long-term guarantees.
    Because of these concerns, the Federal Reserve intends to 
continue to advocate internationally for the recognition of the 
Aggregation Method (AM) at the IAIS, which in its design will 
be foundationally similar to our domestic approach, the 
building block approach (BBA) and the NAIC's Group Capital 
Calculation. The IAIS should include a path to determine that 
the Aggregation Method (AM) is an outcome equivalent or 
``comparable'' to the ICS.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM THOMAS 
                            SULLIVAN

Q.1. Before the International Association of Insurance 
Supervisors (IAIS) votes on adoption of the new international 
capital standards, there will be two meetings this month and 
next to lay the groundwork for the annual General Meeting in 
November.
    How will each of you approach these meetings and what 
outcomes do you hope to achieve?

A.1. In each of these meetings, the Federal Reserve will 
collaborate with the States, National Association of Insurance 
Commissioners, and Federal Insurance Office to advocate for the 
best interests of the U.S. insurance market. Collectively, we 
have concerns with several aspects of the International Capital 
Standard (ICS), including the ICS's market-based valuation 
approach and the standard for assessing the comparability of 
the Aggregation Method. We plan to raise these issues at each 
meeting until there is agreement on how to proceed. It is our 
intention to achieve a suitable agreement that addresses our 
concerns and recognizes the U.S. regulatory system.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM THOMAS 
                            SULLIVAN

Q.1. In your view, does the capital framework that exists as 
part of the U.S. State-based insurance regulatory regime 
provide similar protections as the proposed ICS Version 2.0 
standard?

A.1. Currently, the U.S. regulatory regime does not include 
group-level capital requirements. The Federal Reserve Board 
(Board) has proposed applying a building block approach (BBA) 
to the insurers we supervise domestically. We believe an 
approach like the BBA, domestically, in the form of the 
Aggregation Method (AM), internationally, will provide a 
comparable outcome to the protections in the International 
Capital Standards 2.0 for the groups to which it would be 
applied.

Q.2.a. In response to questions from Senator Brown during your 
oral testimony, you indicated that supported FSOC's de-
designation of insurance companies, meaning that you did not 
believe that any insurance companies in the United States today 
would pose a risk to the broader economy in the event they 
experienced material financial distress.
    Do you believe that American International Group, Inc., 
Prudential Financial, Inc., and MetLife, Inc. have reduced 
their risk profiles sufficiently since the financial crisis?

A.2.a. The financial crisis showed that the distress of large 
and systemic nonbank financial companies could imperil the 
financial stability of the United States, ultimately putting 
the American economy at risk. The Dodd-Frank Wall Street Reform 
and Consumer Protection Act gave regulators new tools to 
address this problem, and in 2013, the Financial Stability 
Oversight Council (FSOC) acted to designate AIG, Prudential, 
and MetLife for additional supervisory measures.
    Since the financial crisis, AIG has largely sold off or 
wound down its capital markets businesses, and has become a 
smaller firm that poses less of a threat to financial 
stability. For example, it has
reduced its assets by more than $350 billion, wound down its 
Financial Products division, and sold off its mortgage 
insurance company.
    The October 2018 decision to rescind Prudential's 
designation was based upon the FSOC's reevaluation of the risks 
posed by the firm. The FSOC examined the potential for 
policyholders to withdraw cash or surrender their policies from 
Prudential in the event the company experienced material 
financial distress and concluded that a forced liquidation of 
assets by Prudential to account for policyholder withdrawals 
should not be large enough to impair overall market functioning 
or impact the macroeconomy, although it could pose challenges 
to certain market participants.
    In March 2016, the U.S. District Court overturned the 
FSOC's determination that MetLife poses a threat to U.S. 
financial stability. The Government subsequently appealed the 
District Court's decision. In January 2018, the FSOC and 
MetLife filed a joint motion to dismiss the FSOC's appeal, 
which was accepted by the U.S. Court of Appeals. It should be 
noted that, in the summer of 2017, MetLife shrank substantially 
by spinning off a portion of its U.S. retail life insurance and 
annuity segment into Brighthouse Financial.
    It is important to continue to monitor large nonbank 
financial firms to ensure that, should they encounter distress, 
the functioning of the broader economy is not threatened. The 
possibility of de-designation provides an incentive for 
designated firms to significantly reduce their systemic 
footprint.

Q.2.b. Should an insurance company's overall risk profile, 
including their interconnectedness to other institutions and 
overall leverage exposure no longer be considered when 
determining the appropriate regulatory tools?

A.2.b. The Board is not the primary regulator for insurance 
companies and thus not responsible for establishing the 
regulations to which they are subject.

Q.2.c. Under an activities-based approach, how would regulators 
proactively identify activities that insurance companies engage 
in that are risky and prevent firms from restructuring or 
renaming those activities?

A.2.c. FSOC's proposed nonbank guidance promotes an activities-
based approach for identifying and mitigating risks to 
financial stability. However, it also maintains the tool of 
designating individual entities as systemically important in 
cases where the activities-based approach is either 
inappropriate or insufficient.
    The guidance represents a framework that addresses 
financial stability risks that either would not be mitigated by 
designating the largest market participants or would be more 
efficiently mitigated by directly targeting the risky activity. 
FSOC's monitoring of activities will look for activities that 
may generate leverage, interconnectedness, or run risk and that 
can generate significant spillovers to the economy. In the case 
of insurance companies, for example, it will be important to 
focus on products that offer protection and wealth accumulation 
that could be withdrawn at the discretion of the policyholder, 
such as Guaranteed Interest Contracts that generated runs in 
the 1990s.\1\
---------------------------------------------------------------------------
    \1\ Like bank CDs, the money invested in these life insurance 
contracts can generally be withdrawn at the option of the policyholder 
and is therefore subject to runs.
---------------------------------------------------------------------------
    It is important to note that we view the activities-based 
approach described in the proposed amended guidance as a 
complement to entity designations rather than as a substitute 
for the current entity-based approach of managing systemic 
risk. Individual nonbank entities can pose systemic risks, and 
we believe that it is critical that FSOC maintains the option 
to designate these firms when appropriate.

Q.3. On September 6, 2019, the Federal Reserve issued a Notice 
of Proposed Rulemaking (NPR) that described a building block 
approach (BBA) that builds on existing State-based insurance 
standards. This approach would result in capital requirements 
for insurance companies that own a depository institution.\2\ 
Does the Federal Reserve view the capital standard as a tool 
primarily for providing stability of the insurance industry 
within the financial system, providing protection to holders of 
insurance policies, or both?
---------------------------------------------------------------------------
    \2\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board invites public comment on proposal to establish capital 
requirements for certain insurance companies supervised by the Board,'' 
https://www.federalreserve.gov/newsevents/pressreleases/bcreg201909
06a.htm.

A.3. By helping to prevent insolvencies, the BBA would protect 
the U.S. system of deposit insurance and promote financial 
stability. This compliments the work of State insurance 
regulators to protect policyholders.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM THOMAS 
                            SULLIVAN

Q.1. I understand that the International Capital Standard (ICS) 
produced by the International Association of Insurance 
Supervisors (IAIS) is nonbinding to U.S. insurers until it is 
either adopted by regulators or enacted into law by Congress.

   LCould you discuss the potential ramifications on 
        U.S. insurers operating in markets abroad even if the 
        standards produced through IAIS are nonbinding on U.S. 
        insurers?

   LWhat disadvantages or repercussions could our 
        insurers at home in the United States face?

A.1. The International Capital Standard (ICS) is considered a 
group capital standard. U.S. insurers operating in foreign 
markets that have adopted the ICS would likely be expected by 
their foreign regulators to be capitalized at the group level 
based on the ICS. If the company is not using the ICS for the 
entire group (including its U.S. business), the local foreign 
regulators could potentially subject the firm to enhanced 
supervisory requirements.
    The Federal Reserve, along with the U.S. Department of the 
Treasury, National Association of Insurance Commissioners, and 
the States remain committed to working with the International 
Association of Insurance Supervisors IAIS to develop an 
international standard that is appropriate for the U.S. 
insurance market.
    An international standard like the ICS could limit 
regulatory arbitrage and could help provide a level playing 
field for global insurers. It could also help ensure that U.S. 
companies are not held to unsuitable or onerous regulations 
when they operate abroad.

Q.2. The United States represents over 40 percent of the 
world's insurance market and has one of the most robust, well-
developed insurance regulatory systems in the world. One which 
both protects consumers and but also encourages competition and 
innovation. With this in mind, the Federal Reserve in January 
of this year at a round table stated that it would ``continue 
to advocate for international insurance standards that promote 
a global level playing field and work well for the U.S. 
insurance market''.

Q.2.a. Is the U.S. insurance industry well-regulated and 
protecting consumers today?

A.2.a. The United States has the largest insurance market in 
the world\1\ and routinely receives high marks for supervision 
in assessments by third parties.
---------------------------------------------------------------------------
    \1\ See https://www.treasury.gov/resource-center/international/
Documents/cr1590.pdf and https://www.treasury.gov/initiatives/fio/
reports-and-notices/Documents/2019_FIO_Annual_
Report.pdf.

Q.2.b. If yes, what is ICS solving for since the ICS as 
---------------------------------------------------------------------------
proposed would disadvantage U.S. insurers?

A.2.b. An appropriate international standard could limit 
regulatory arbitrage and help provide a level playing field for 
internationally active insurance groups. An appropriate 
international standard could also help to ensure that 
internationally active U.S. companies are not held to 
unsuitable and onerous standards when they operate in foreign 
countries. Additionally, it could reduce risk to U.S. consumers 
by ensuring that foreign insurers operating within the United 
States are held to appropriate capital regulation by their 
foreign group-wide supervisor.

Q.3. In May of this year, a group of bipartisan Senators, 
including myself, sent a letter to Vice Chairman Quarles on 
this particular topic. In this letter we stated that we believe 
``the Financial Stability Board (FSB) should publicly state 
that aggregation approaches to group capital as well as other 
well-developed and proven jurisdictional capital regimes are 
acceptable methodologies for assessing group capital 
adequacy''.
    If the Fed and NAIC through their respective proposals, the 
Building Block Approach (BBA) and the Group Capital 
Calculation, are unsuccessful in having one of these accepted 
by the IAIS both of which are more compatible to the U.S. 
insurance structure, what are the next steps that Team USA need 
to take to ensure that our U.S. insurance companies are not 
placed on an uneven playing field?

A.3. The Federal Reserve intends to continue to advocate 
internationally for the recognition of the Aggregation Method 
(AM) at the IAIS, which in its design will be foundationally 
similar to our domestic approach, the building block approach 
(BBA) and the NAIC's Group Capital Calculation. Because of the 
concerns regarding the current design of the ICS, U.S. members 
also support continued development of the ICS to accommodate 
design changes during the monitoring period.

Q.4. You serve in the FSB and have inside knowledge about how 
the process for the ICS is being developed and where the IAIS's 
mindset is. Can you explain why they will not make this 
commitment to the United States?
    Why should U.S. insurers go through this process with a 
group that does not show sufficient consideration of U.S. 
interests?

A.4. The Federal Reserve believes that it is in our national 
interest to engage in the international insurance standards-
development process so that it produces standards that are 
appropriate for the U.S. market and U.S. consumers when foreign 
insurers operate here and are suitable for U.S. companies 
operating abroad. Without engagement, even less consideration 
would be given to U.S. interests in the development of 
international standards. Furthermore, the ICS, or any standard 
produced by the IAIS, is a voluntary standard that is not 
binding and would need to be adopted voluntarily by each member 
jurisdiction in accordance with applicable domestic laws.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                        THOMAS SULLIVAN

Q.1. How could insurance companies pose a threat to U.S. 
financial stability?

A.1. Many observers have argued that insurers do not pose 
systemic risks because such entities have longer-term 
liabilities than banks and are immune to a large influx of 
demands for funds over a short period of time or ``runs.'' 
However, history shows that there are several examples of runs 
on large insurance companies that threatened the broader 
financial system and the U.S. economy.
    Insurance products were run upon during the Great 
Depression, leading to withdrawals on certain products being 
suspended.\1\ The runs on Executive Life in April 1991, 
followed by those on First Capital Life in May 1991 and Mutual 
Benefit in July 1991, were tied to products that offer 
protection and wealth accumulation that could be withdrawn at 
the discretion of the policyholder, such as Guaranteed Interest 
Contracts.\2\
---------------------------------------------------------------------------
    \1\ See ``Insurance concerns tighten loan rules,'' New York Times, 
March 9, 1933, p. 6.
    \2\ Similar to bank CDs, the money invested in these life insurance 
contracts could generally be withdrawn at the option of the 
policyholder and was therefore subject to runs.
---------------------------------------------------------------------------
    More recently, the near-collapse of AIG during the 
financial
crisis showed that the distress of a large and systemic 
insurance
company could imperil the financial stability of the United 
States, ultimately putting the American economy at risk.
    Insurance companies can also pose risks to the financial 
system through their role as intermediaries with other parts of 
the financial system. Among other things, they play a major 
role in lending to nonfinancial companies and in the market for 
commercial real estate financing. For this reason, liquidity 
problems at life insurance companies can have serious 
implications for financial markets and the broader economy.

Q.2. How frequently in the past 15 years did property and 
casualty or life insurers become insolvent? How many of the 
claims to insolvent firms were not covered? How many of the 
claims to insolvent firms were covered by the Guarantee 
Associations?

A.2. Over 200 licensed insurance companies became insolvent 
between 2000 and 2017. Guarantee associations covered most of 
the cost of these insolvencies, but these guarantees are 
restricted by policy type and coverage limit.

Q.3. Are there any insurance companies now--either from their 
nature, scope, size, scale, concentration, interconnectedness, 
or mix of activities--that could pose a threat to U.S. 
financial stability? If yes, what do you recommend we do about 
these potential threats?

A.3. The financial crisis showed that the distress of large and 
systemic nonbank financial companies could imperil the 
financial stability of the United States, ultimately putting 
the American economy at risk, as noted above. The Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 
gave regulators new tools to address this problem and in 2013, 
the Financial Stability Oversight Council (FSOC) moved to 
designate AIG, Prudential, and MetLife for additional 
supervisory measures.
    Since then, reflecting changes in size and business 
activities of AIG, and a re-evaluation of the risks posed by 
Prudential, FSOC has rescinded the designation of these 
firms.\3\
---------------------------------------------------------------------------
    \3\ The Financial Stability--Oversight Council rescinded the 
designations on Prudential and AIG in October 2018 and September 2017, 
respectively, (see https://www.treasury.gov/initiatives/fsoc/
designations/Pages/default.aspx for additional detail).
---------------------------------------------------------------------------
    In March 2016, the U.S. District Court overturned the 
FSOC's determination that MetLife poses a threat to U.S. 
financial stability. The Government subsequently appealed the 
District Court's decision. In January 2018, FSOC and MetLife 
filed a joint motion to dismiss FSOC' s appeal, which was 
accepted by the U.S. Court of Appeals. It should be noted that 
in the summer of 2017, MetLife shrank substantially by spinning 
off a portion of its U.S. retail life insurance and annuity 
segment into Brighthouse Financial.
    It is important for the FSOC to continue to monitor large 
nonbank financial firms to ensure that, should such firms 
encounter distress, the functioning of the broader economy is 
not threatened. The possibility of de-designation provides an 
incentive for designated firms to significantly reduce their 
systemic footprint.

Q.4. The International Association of Insurance Supervisors 
(IAIS) approved its 2020-2024 Strategic Plan this summer. It 
also included cyber resilience and climate risk. Can you tell 
me more about the goals the IAIS has to reduce risks related to 
cyber-attacks and climate change?

A.4. The International Association of Insurance Supervisors 
(IAIS) regards both cyber risk and risks from climate change as 
important emerging risks and has prioritized these, along with 
fintech and other issues, in its strategic plan. The IAIS has 
set up high-level groups on these topics. The groups will 
explore these risks, propose any needed revisions to IAIS 
standards, and produce materials that will help supervisors to 
mitigate these risks.

Q.5. What investment strategies are insurance carriers taking 
in relation to climate risk versus what new policies options or 
restrictions are becoming prevalent to address climate change?

A.5. U.S. insurance companies have responded to climate risk in 
various ways, including--by implementing policies that 
incorporate Environmental, Social, and Corporate Governance 
(ESG) factors into their investment strategies. Many large 
insurers also produce an annual sustainability report.

Q.6. How are different nations requiring insurance firms to 
consider the impacts of climate change?

A.6. Regulators in most jurisdictions have not introduced new 
requirements for insurance firms related to the impacts of 
climate change. However, as with any emerging risk, regulators 
expect firms to include risks related to climate change in 
their risk identification and risk management activities, and 
expect boards to question management about the firm's exposure 
to climate risk.

Q.7. The International Association of Insurance Supervisors 
(IAIS) is working to evaluate the use of financial technology 
and insurance. Can you tell me more about issues related to 
artificial intelligence, the use of algorithms, and data 
privacy?

A.7. The IAIS formed a FinTech Forum (Forum) in 2018 to study 
the possible impact of new technology to the insurance sector. 
The Forum meets approximately six times per year to present on 
various topics including artificial intelligence, distributed 
ledger technology, and other possible emerging risks.
    The Forum aggregates data from many jurisdictions to 
understand and assess how these risks are identified, 
monitored, reported, and controlled. If necessary, risks are 
escalated to the IAIS Executive Committee for better 
understanding of how the Insurance Core Principles may apply.

Q.8. How do you monitor the property and casualty insurance 
companies to ensure fintech and insurtech innovations do not 
lead to discrimination? How do you ensure compliance with the 
Fair Housing Act?

A.8. The important aspects of the actual business of providing 
insurance are the province of the relevant State insurance 
supervisors. The Federal Reserve does not regulate the manner 
in which property and casualty insurance is provided by 
supervised institutions or the types of insurance that they 
provide.
    The Federal Reserve does supervise all State member banks 
for compliance with the Fair Housing Act, which prohibits 
discrimination in residential real-estate-related transactions, 
including the making and purchasing of mortgage loans--on the 
basis of race, color, religion, sex, handicap, familial status, 
or national origin. Our fair lending supervision program 
includes review of fintech practices to ensure that the 
financial institutions under our jurisdiction fully comply with 
applicable Federal consumer protection laws and regulations.

Q.9. The Nevada Insurance Commissioner told me that the Covered 
Agreement standards were developed using banking capital 
standards, rather than insurance capital standards.
    Can you explain the difference between the controls that 
banks have in place versus the controls that insurers have in 
place? I'm specifically interested in the use of the 
reinsurance tools that insurance carriers have available to 
them that banking systems do not.

A.9. A Covered Agreement is an agreement authorized by the 
Title V of the Dodd-Frank Act related to the recognition of 
insurance prudential standards. The Secretary of the Treasury 
and U.S. Trade Representative must approve covered agreements, 
and these agencies led the negotiation of the U.S.-EU Covered 
Agreement.
    The U.S.-EU Covered Agreement does not require applying 
banking capital standards to insurers. The U.S.-EU Covered 
Agreement was negotiated in consultation with State insurance 
regulators and reflects insurance-centric concepts.

Q.10. Do you think that the international insurance supervisors 
who focus on insurance capital standards are open to alter 
their oversight standards to be considered ``substantially 
similar'' to the U.S. standards?

A.10. The United States has the largest insurance market in the 
world \4\ and routinely receives high marks for supervision in 
assessments by third parties. Most other jurisdictions aspire 
to having substantially similar protections as the U.S. market. 
Many jurisdictions are, however, committed to their current 
approach to assessing insurance capital and would like to avoid 
significant changes.
---------------------------------------------------------------------------
    \4\ See https://www.treasury.gov/resource-center/internationa/
Documents/cr1590.pdf and https://www.treasury.gov/initiatives/fio/
reports-and-notices/Documents/2019_FIO_Annual_
Report.pdf.

Q.11. The European Union established Solvency II. Can you 
describe how the Minimum Capital Requirements work? What is 
considered? What happens when an insurance company falls below 
---------------------------------------------------------------------------
the Minimum Capital Requirements?

A.11. Under Solvency II, the Minimum Capital Requirement (MCR) 
represents the capital needed to cover (based on an 85 percent 
confidence interval) the variation over 1 year in the company's 
``basic own funds'' (roughly equivalent to shareholders' 
equity). The MCR considers variation that arises from insurance 
underwriting risk, market risk, counterparty default risk, and 
operational risk. If a company's capital position falls below 
the MCR, the supervisor may put the company into receivership, 
require it to stop selling new business, and/or revoke its 
insurance license. There is a higher level, called the Solvency 
Capital Requirement (SCR) which is calibrated to a 99.5 percent 
confidence level. Firms subject to Solvency II typically manage 
to a level above the SCR and supervisors typically view the SCR 
as the first point of supervisory intervention.

Q.12. Solvency II has three pillars. Pillar 3 requires insurers 
file annual reports with their regulator and make them 
available to the public. Have you had any feedback from the 
public based on one of those reports?

A.12. At this time, we have not been contacted with feedback on 
Solvency II disclosures.

Q.13. If the United States did not agree to use the same 
Solvency II standards, and could not get the European Union to 
agree to another type of solvency oversight convention, would 
U.S. carriers have to pay more for reinsurance products 
purchased from foreign companies? If so, would U.S. carriers be 
reluctant to buy foreign reinsurance products that could cost 
more?

A.13. This scenario would be a continuation of the status quo 
and, by itself, would not lead to an increase in reinsurance 
premiums.

Q.14. Can you explain why some argue that the proposed Solvency 
II standards could place the U.S. insurance carriers at a 
disadvantage?

A.14. Solvency II is the regulatory framework applied to 
insurers who operate in the European Union (EU). Foreign 
subsidiaries of U.S. insurance carriers operating in the 
European Union are subject to Solvency II just as subsidiaries 
of foreign insurers operating in the United States are subject 
to the State Risk-Based Capital framework applicable in the 
U.S. Solvency II is a group capital standard. Since the United 
States does not currently have a group capital standard, it is 
possible that foreign regulators could subject the EU-based 
subsidiaries of U.S. insurance carriers to enhanced supervisory 
requirements unless the terms of the Covered Agreement are met.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM THOMAS 
                            SULLIVAN

Q.1. Under the new capital standard being developed by the 
International Association of Insurance Supervisors, insurance 
companies would be required to hold short-term assets more 
than, or instead of, long-term assets. If insurance companies 
are required to do so, will this new standard reduce the 
availability and affordability of annuities, which are longer-
term products that provide retirement security for millions of 
Americans?

A.1. Under its current form, the International Capital Standard 
(ICS) is unfit for the U.S. insurance market, and the Federal 
Reserve is advocating at the International Association of 
Insurance Supervisors that the structure of the ICS should 
comport with the structure of the U.S. insurance market. 
Adopting the ICS as it is currently construed would result in 
capital requirements for longer duration products, like 
annuities, that are higher than current requirements. This 
would likely increase the cost of offering these products. The 
higher cost could result in reduced interest by companies in 
offering these products and/or higher costs for these products 
for consumers.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM ERIC A. 
                             CIOPPA

Q.1. Should the IAIS adjust its International Capital Standards 
(ICS) to comport with the structure of the U.S. insurance 
market prior to adoption for monitoring?

A.1. As an international standard-setting body, the IAIS needs 
to accommodate the diversity of practices across the globe, and 
particularly as it regards the United States, one of the 
largest and strongly supervised and tested insurance markets in 
the world. We are disappointed at the current state of the ICS 
discussions. The NAIC believes that the IAIS should provide a 
clear path forward in assessing whether the Aggregation Method 
(AM) provides comparable outcomes to the ICS prior to the 
adoption of the ICS for monitoring. We hope the IAIS will 
develop a definition and overarching guidelines for the 
comparability assessment between the reference ICS and the 
Aggregation Method by the time of the IAIS Annual Meeting in 
Abu Dhabi that will provide us with the certainty we require.

Q.2. How can the operational effectiveness of ICS be properly 
examined if it is has identified flaws from the outset?

A.2. The IAIS is in its fifth year of field testing the ICS. 
This process will continue through a 5-year Monitoring Period. 
The NAIC and the other IAIS Members will continue to review the 
financial results submitted during the Monitoring Period. These 
findings will inform our opinions on the appropriateness of the 
ICS and changes that may need to be made. We are encouraging 
the IAIS to perform reasonableness checks of the results 
against a number of benchmarks and perspectives. Whether 
analysis and monitoring leads to rectifying the inherent flaws 
in the ICS remains to be seen, but we have stressed that the 
monitoring period should be approached with an open mind and as 
an opportunity to fix those flaws.

Q.3. Specifically, what adjustments to ICS would you like to 
see prior to its adoption?

A.3. The ICS has largely been modeled on Solvency II, which has 
a different valuation and architecture than our U.S. capital 
framework. It is difficult to merely tweak the ICS in order to 
make it work well in our U.S. system. Thus, we would like to 
see changes in the ICS that allow for more jurisdictional 
flexibility and national discretion in its implementation.
    In terms of specific adjustments, we would like to see 
changes to the criteria for recognition of capital financial 
instruments. While some positive movement has been made to 
recognize surplus notes for mutual insurers and structural 
subordination of debt, there are still significant issues in 
allowing elements of senior debt recognized as capital 
resources.
    Another area where we would like to see adjustments relates 
to the treatment of margins over current estimates in reserves. 
The margins we use in the U.S. reserving methodology, together 
with capital, jointly aim to provide for severely adverse 
scenarios whereas the IAIS wishes to add additional margins 
even after a severely adverse scenario has been addressed 
through a capital requirement. We think that other elements of 
our regulatory framework are available to help ensure 
policyholders are paid should capital be depleted.
    Finally, as it relates to matching assets to liabilities, 
our approach supports suitably stressed liabilities over the 
lifetime of the liability portfolio with assets that include 
future premiums and reinvestment of proceeds rather than the 
ICS's approach of a year-by-year matching with no carry forward 
of surplus assets that have previously been accumulated over 
the early years of the cash-flow testing. In this case, the ICS 
is in conflict with the way U.S. insurance firms actually 
manage their business and may create disincentives to offer 
certain types of products.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM ERIC A. 
                             CIOPPA

Q.1. Before the International Association of Insurance 
Supervisors (IAIS) votes on adoption of the new international 
capital standards, there will be two meetings this month and 
next to lay the groundwork for the annual General Meeting in 
November.
    How will each of you approach these meetings and what 
outcomes do you hope to achieve?

A.1. We are working with our Team USA colleagues to provide 
joint views on the issues both in advance of and during the 
meetings. We have also been reaching out to other jurisdictions 
to share our perspective and obtain a better understanding of 
views and possible ways forward. The outcome we hope to achieve 
is a clear path forward for assessing the comparability of the 
Aggregation Method and for changes to the reference ICS.

 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM ERIC A. 
                             CIOPPA

Q.1. The increasing prevalence of big data, artificial 
intelligence, and new innovations in financial technology have 
wide-reaching implications for the insurance industry.

Q.1.a.i. In response to these trends, NAIC created a Big Data 
(EX) Working Group. On the NAIC webpage for the group, there 
are three ``2019 Charges'' listed. One of these charges is to 
``review current regulatory frameworks used to oversee 
insurers' use of consumer and non-insurance data. If 
appropriate, recommend modifications to model laws and/or 
regulations regarding marketing, rating, underwriting and 
claims, regulation of data vendors and brokers, regulatory 
reporting requirements, and consumer disclosure 
requirements.''\1\
---------------------------------------------------------------------------
    \1\ National Association of Insurance Commissioners, ``Big Data 
(Ex) Working Group,'' https://naic-cms.org/cmte_ex_bdwg.htm.

---------------------------------------------------------------------------
   LWhen does NAIC anticipate completing that review?

A.1.a.i. The discussions of the Big Data Working Group will 
continue into 2020 and will likely extend beyond next year as 
the practices of insurance companies and producers continually 
evolve. The working group continues to focus on marketplace 
practices of both data vendors and insurance companies across 
multiple lines of authority and multiple business functions. 
These include rating, underwriting, marketing, and claims 
settlement.
    Arising out of these broader discussions, other NAIC 
committees are also focusing on related issues. The NAIC's 
Accelerated Underwriting Working Group is considering the use 
of external data and data analytics in accelerated life 
underwriting and, if appropriate will draft guidance for 
States. They plan to complete this work by the NAIC's November 
2020 national meeting. A new Privacy Protections Working Group 
was formed in October 2019 and is directed to complete its work 
by the August 2020 national meeting. The working group is 
reviewing State insurance privacy protections regarding the 
collection, use, and disclosure of information gathered in 
connection with insurance transactions. If necessary, they will 
make changes to certain NAIC models, such as the NAIC Insurance 
Information and Privacy Protection Model Act (#670) and the 
Privacy of Consumer Financial and Health Information Model 
Regulation (#672). Finally, the Casualty Actuarial and 
Statistical Task Force is completing a white paper on 
regulatory best practices for the review of predictive models 
and analytics filed by insurers to justify rates and provide 
guidance for the review of rate filings based on predictive 
models. This white paper should be completed in 2020.

Q.1.a.ii. Upon completion, does NAIC intend on making its 
findings and recommendations public?

A.1.a.ii. Yes, the NAIC is committed to conducting its business 
openly and transparently. NAIC discussions about the formation 
of its findings are open to the public and all final findings 
and recommendations will also be available to the public.

Q.1.b. What efforts are being taken at NAIC to promote 
transparency among insurers with respect to the type of data 
they obtain from their consumers?

A.1.b. A new Privacy Protections Working Group is reviewing 
State insurance privacy protections regarding the collection, 
use, and disclosure of information gathered in connection with 
insurance transactions and, if necessary, make recommended 
changes to certain NAIC models, such as the NAIC Insurance 
Information and Privacy Protection Model Act (#670) and the 
Privacy of Consumer Financial and Health Information Model 
Regulation (#672). To support these efforts, there has been 
extensive research on State data privacy legislation to 
identify existing State notice and disclosure requirements.

Q.1.c. What efforts are being taken to ensure that the 
algorithms insurers use in their underwriting procedures are 
not producing discriminatory results?

A.1.c. For property and casualty insurance, the Casualty 
Actuarial and Statistical Task Force is completing a white 
paper on regulatory best practices for the review of predictive 
models and analytics filed by insures to justify rates and 
provide guidance for the review of rate filings based on 
predictive models. To support State insurance regulators in 
their review of rate filings, the NAIC will be offering 
additional assistance for the technical review of filings to 
help document information needed for State insurance regulators 
to make decisions about unfair discrimination. For life 
insurance, the Accelerated Underwriting Working Group is 
considering the use of external data and data analytics in 
accelerated life underwriting and, if appropriate, will draft 
guidance for States.

Q.2. In 2010, the NAIC adopted the Insurer Climate Risk 
Disclosure Survey to help better understand how climate change 
is impacting the insurance industry.\2\
---------------------------------------------------------------------------
    \2\ National Association of Insurance Commissioners, ``Climate Risk 
Disclosure,'' https://www.naic.org/cipr_topics/
topic_climate_risk_disclosure.htm.

Q.2.a. How has NAIC used the results of that survey and other 
research to establish standards and best practices for 
---------------------------------------------------------------------------
insurance companies with respect to climate change risk?

A.2.a. The NAIC Climate Risk Disclosure Survey collects 
information from more than 1,000 insurers capturing more than 
70 percent of the U.S. insurance market and provides insurance 
regulators with useful insight regulators identify trends, 
vulnerabilities, and industry best practices. Some of these 
best practices go into how insurers assess and manage climate 
risks. It helps practices include engaging policyholders to 
reduce climate-related risks, including monetary incentives for 
mitigation and resiliency efforts; investing in modeling and 
analytics to better evaluate the impact of climate variables; 
and partnering with organizations to improve sustainable 
infrastructure to help reduce exposure to climate risks. In 
addition to the survey, the NAIC developed guidance for 
financial examiners on assessing an insurer's climate risks and 
the impact on how the insurer invests its assets and prices its 
products. The NAIC also incorporated a catastrophe risk charge 
into the property and casualty Risk-Based Capital formula to 
help ensure insurers hold enough capital to remain solvent in 
the face of extreme weather events. Climate risk and resiliency 
remains one of the NAIC's strategic priorities and we are 
pursuing initiatives through our Catastrophe Insurance Working 
Group and Climate Risk and Resiliency Working Group to improve 
sustainability and enhance mitigation efforts. We are also 
working to develop a centralized location for the collection 
and sharing of States' resilience-related resources and 
activities.

Q.2.b. What are some of the best practices described in the 
survey related to insurers' responses to climate change?

A.2.b. The following are some of the best practices described 
by insurers in the survey responses:

   LIncorporate climate risk into comprehensive 
        enterprise-risk management.

   LDiversify climate-related risks on both sides of 
        the balance sheet.

   LEmbed sustainability and climate risk into 
        corporate leadership.

   LBuild a culture of sustainability throughout the 
        company by setting, measuring, and rewarding 
        sustainability priorities.

   LAlign climate risk-related goals with business 
        strategy.

   LInvest in modeling and analytics to better evaluate 
        the impact of climate variables on a micro and macro 
        level.

   LEngage policyholders to reduce climate-related 
        risks, including monetary incentives for resilience 
        measures and education.

   LEngage key constituencies on climate change, 
        including membership/funding/participation in research, 
        education and advocacy organizations, such as the Build 
        Strong Coalition, Institute for Building and Home 
        Safety (IBHS), international associations/initiatives 
        and trade organizations.

   LBuild partnerships to support resilience efforts. 
        Some examples include Travelers Insurance's partnership 
        with IBHS to help Habitat for Humanity build more 
        resilient homes in coastal communities; United Services 
        Automobile Association's partnership with Colorado 
        Springs Fire Department and the nonprofit FIREWISE 
        Organization to underscore the importance of fuel 
        reductions and fire mitigation for homeowners and 
        USAA's sponsorship of Wildfire Partners, a public-
        private partnership mitigation program to help 
        homeowners prepare for wildfire.

Q.2.c. Based on the survey and your interactions with various 
stakeholders at the State level, what conclusions has NAIC 
drawn regarding the impact of climate change on the 
affordability and availability of insurance?

A.2.c. The Climate Risk Disclosure Survey is intended to 
provide insurance regulators with a window into how insurers 
assess and manage climate risks. It is not specifically 
designed to measure the impact of climate change on 
affordability and availability of insurance. However, we 
recognize that the affordability and availability of insurance 
is highly reflective of local market, economic, regulatory, and 
exposure characteristics and can vary widely by line of 
business.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM ERIC A. 
                             CIOPPA

Q.1. I understand that the International Capital Standard (ICS) 
produced by the International Association of Insurance 
Supervisors (IAIS) is nonbinding to U.S. insurers until it is 
either adopted by regulators or enacted into law by Congress.

   LCould you discuss the potential ramifications on 
        U.S. insurers operating in markets abroad even if the 
        standards produced through IAIS are nonbinding on U.S. 
        insurers?

   LWhat disadvantages or repercussions could our 
        insurers at home in the United States face?

A.1. As noted, IAIS standards are nonbinding on all IAIS 
members and not effective until they are implemented in each 
jurisdiction. However, a number of jurisdictions have already 
indicated that they intend to implement the ICS in their local 
markets. Subsidiaries of U.S. insurers operating in those 
markets would be required to comply with those local 
requirements potentially including the ICS. In theory, these 
insurers could be required to hold more capital than is 
necessary on a worldwide basis, which might discourage their 
offering long-term products such as annuities that help 
individuals better plan for retirement.

Q.2. The United States represents over 40 percent of the 
world's insurance market and has one of the most robust, well-
developed insurance regulatory systems in the world. One which 
both protects consumers, but also encourages competition and 
innovation. With this in mind, the Federal Reserve in January 
of this year at a round table stated that it would ``continue 
to advocate for international insurance standards that promote 
a global level playing field and work well for the U.S. 
insurance market.''

Q.2.a. Is the U.S. insurance industry well-regulated and 
protecting consumers today?

Q.2.b. If yes, what is ICS solving for since the ICS as 
proposed would disadvantage U.S. insurers?

A.2.a.-b. Yes, the U.S. insurance sector is well-regulated and 
protects consumers today. The primary purpose of the ICS is to 
ensure that there is sufficient regulation of the group capital 
position of Internationally Active Insurance Groups. A U.S.-
based IAIG, by definition, does at least 10 percent of its 
business outside the United States. Given the unique challenges 
of regulating such groups, we can understand the IAIS's desire 
to develop a capital standard for IAIG's. Our objections have 
been to the form that the ICS has taken on and not the concept 
of an ICS. A suitable principles-based (as opposed to 
prescriptive) standard that allows regulators to build on our 
existing regulatory tools would be welcome. Unfortunately, that 
is not the ICS that is being proposed. In the United States, 
there are already numerous tools available for group analysis 
and another one--the Group Capital Calculation (GCC)--is being 
developed. We believe that the GCC should be recognized as 
jurisdictional alternatives to the ICS.

Q.3. As I understand, the United States is the largest 
insurance market in the world with over 40 percent of the 
world's insurance premiums. One of the messages that I have 
heard from stakeholders is the importance for the IAIS to 
recognize the U.S. system of insurance regulation.
    Given that the United States is one of the most well-
regulated and developed insurance marketplaces in the world, 
why are we asking for a multilateral standard-setting body and 
other countries to recognize the U.S. system?

A.3. Some U.S. insurers operate in other countries. It is 
important that those countries recognize relevant aspects of 
our system to ensure that U.S. insurers operating abroad are 
not subject to additional requirements in the jurisdictions in 
which they operate.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                         ERIC A. CIOPPA

Q.1. How could insurance companies pose a threat to U.S. 
financial stability?

A.1. It is highly unlikely that an insurance company today 
could pose a threat to U.S. financial stability given the 
insurance business model and its regulation. Property & 
Casualty companies and health insurance companies' businesses 
are not correlated with broader financial markets. Life 
insurers do hold investments to back their life insurance 
liabilities. However, regulators require life insurers to 
engage in asset/liability duration matching and those 
investments tend to be long dated. Further, life insurance 
liabilities are fairly sticky, and therefore, do not present 
significant asset liquidation risk. By way of comparison, a 
bank's liabilities assets and liabilities are, by virtue of the 
business model, mismatched and deposits can be withdrawn on 
demand.
    We did learn from AIG that affiliates of more traditional 
insurers could pose threats to financial stability. To address 
these potential risks, State insurance regulators enhanced its 
group supervisory framework by providing regulators more 
authorities to identify and address risks within a group 
outside the insurance legal entities.
    In addition, while it is unlikely that legal entity 
insurers could pose a threat to financial stability, like other 
financial firms, it is possible that in a stressed economic 
environment, the insurance sector's activities, particularly 
its investment activities, could have additive effects to the 
stresses depending on the conditions and the investments at 
issue. The NAIC has launched a Macroprudential Initiative (MPI) 
designed to identify and address any broader risks within the 
insurance sector. Currently, as part of this initiative, 
insurance regulators are developing a Liquidity Stress test 
framework for large life insurers. We also believe FSOC's 
proposed activities-based approaches is particularly suited to 
address potential systemic risks within the insurance sector or 
across the financial system. Like our MPI, it focuses on 
identifying risks and addressing risks in a more holistic 
manner than the entity-based approach, which focuses on a small 
set of individual firms.

Q.2. How frequently in the past 15 years did property and 
casualty or life insurers become insolvent? How many of the 
claims to insolvent firms were not covered? How many of the 
claims to insolvent firms were covered by the Guarantee 
Associations?

A.2. According to the NAIC's Global Receivership Information 
Data base (GRID), which is a voluntary reporting database for 
States, of the approximately 6,000 insurers that operate in the 
United States at any given time, 220 property/casualty/title 
insurance and 110 life/health insurance legal entities entered 
receivership for the 15-year period between 2004 and 2018.
    In the State insurance regulatory framework, a receivership 
is triggered when a company becomes impaired or insolvent. 
However, the term receivership includes liquidation, which 
means the company is no longer viable and is being liquidated, 
as well as conservation and rehabilitation actions, in which 
the receiver of the company, usually the commissioner, works to 
assist the company in improving its financial status. Only a 
liquidation with a finding of insolvency triggers guaranty fund 
coverage. Most insolvent companies retain sufficient assets to 
fund a significant portion of their policyholder obligations. 
Other healthy insurance companies fill the gap between the 
failed insurer's assets and guaranty association protection 
levels. Historical information on company assessments can be 
found on the National Organization of Life and Health Insurance 
Guaranty Associations and National Conference of Insurance 
Guaranty Funds websites.\1\
---------------------------------------------------------------------------
    \1\ See https://www.ncigf.org/industry/guaranty-fund-assessment-
liability-information/ and https://www.nolhga.com/resource/file/
capacity/R1.pdf.
---------------------------------------------------------------------------
    The NAIC does not have information regarding the claims of 
insolvent insurers. However, I understand from the guaranty 
associations that in the over 40-year history of the insurance 
guaranty system, guaranty funds and associations have protected 
over 2.6 million policyholders, paid more than $30 billion in 
policy benefits, and guaranteed another $25 billion in 
insurance coverage over the course of 650+ insolvencies.

Q.3. Are there any insurance companies now--either from their 
nature, scope, size, scale, concentration, interconnectedness, 
or mix of activities--that could pose a threat to U.S. 
financial stability? If yes, what do you recommend we do about 
these potential threats?

A.3. No, I do not believe that there are currently any 
insurance companies that could by themselves pose a threat to 
the financial stability of the United States. To the extent 
insurance companies may be engaging in particular activities 
that could potentially raise concerns, I think FSOC's proposal 
to work with primary regulators through an activities-based 
approach is the appropriate means to address such risks. This 
approach is consistent with our own efforts to address these 
potential risks through our enhancements to the insurance group 
supervisory framework and our Macropru-
dential Initiative (MPI), which is designed to identify and 
address broader risks within the insurance sector.

Q.4. The International Association of Insurance Supervisors 
(IAIS) approved its 2020-2024 Strategic Plan this summer. It 
also included cyber resilience and climate risk. Can you tell 
me more about the goals the IAIS has to reduce risks related to 
cyber-attacks and climate change?

A.4. There is a general recognition that as the IAIS finalizes 
and implements its post-financial crisis related reforms (e.g., 
Holistic Framework for Systemic Risk, Insurance Capital 
Standard (ICS), it will be able to pivot and devote more 
resources to other emerging areas, including fintech, cyber 
risk, climate risk, and the challenge of sustainable 
development. While the post crisis-related work-
streams only directly impact a relatively small number of IAIS 
members, these emerging issues are relevant to most IAIS 
members, regardless of size. With regard to cyber risk, the 
IAIS is looking at the issue both from an enterprise cyber 
resilience perspective, but also in the context of cyber 
underwriting activities. The IAIS has published an issues paper 
on cyber risk in the insurance sector in 2016 and an 
application paper relating to the supervision of insurer cyber 
security in 2018. The IAIS has also formed a cyber underwriting 
small group to look specifically at cyber underwriting 
practices. In 2018, the IAIS in coordination with the 
Sustainable Insurance Forum (SIF) (which is a network of 
insurance supervisors and regulators from around the world who 
are working together on sustainability challenges facing the 
insurance sector)--published an issues paper on climate change 
risk to the insurance sector which addresses the different 
views and approaches in place.

Q.5. What investment strategies are insurance carriers taking 
in relation to climate risk versus what new policies options or 
restrictions are becoming prevalent to address climate change?

A.5. Investment Strategies
    At this time, I am not aware of any material shifts in 
portfolio composition or investment strategies across the 
industry directly related to climate change. However, I have 
heard that a few insurers are making changes to their business, 
including their investments, to address climate risk.
Policy Options
    Property and casualty insurers have indicated that they 
manage loss experience on weather-related exposures by use of 
loss control, higher pricing, deductibles, and limited 
coverage. Loss control activities include 1) advice to 
policyholders to use protective measures to protect their 
property from catastrophic weather-related events; 2) customer 
access to safety and disaster preparedness materials; and 3) 
financial incentives for policyholders to move covered items 
out of harm's way during an event.
    Insurers also reported offering discounts and credits for 
superior construction materials used by policyholders to reduce 
weather-related event losses. In wind-affected States, 
discounts are often offered for mitigation devices/techniques, 
such as storm shutters, in addition to pricing incentives for 
higher deductibles. Several offer ``Green Coverage'' options 
for property insurance policyholders who already have green 
measures in place or wish to upgrade to green measures if and 
after a loss occurs to their property. For some, this coverage 
also provides the ability to replace damaged electronic 
equipment with environmentally friendly equipment. Property and 
casualty insurers also tended to support new International Code 
Council codes that promote sustainable building practices via 
industry advocacy groups.
    Climate risk strategies were limited for life insurers and 
especially limited for health insurers (who are extremely 
short-tailed and have very limited asset exposure). Some health 
insurers reported encouraging policyholders to participate in 
climate conservation projects, such as prescription medication 
collection to reduce water contamination. Many life and health 
insurers acknowledged the longer-term impacts of climate 
change, such as disease frequency and severity, have the 
potential to increase claims or costs. However, they felt 
policyholder engagement specific to climate change was 
premature given the impacts are not yet fully quantified.

Q.6. How are different nations requiring insurance firms to 
consider the impacts of climate change?

A.6. Jurisdictions have different views and approaches to 
addressing climate risk. Many regulatory bodies and 
organizations are considering the impact of climate change and 
there has been an increase in the number of papers issued by 
regulatory bodies and organizations on climate risk. The 
Financial Stability Board (FSB) has a task force on Climate-
Related Financial Disclosures (TCFD), with a goal of making the 
dangers of climate change more visible. The IAIS in 
coordination with the Sustainable Insurance Forum (SIF) (which 
as of June 2019 has 25 jurisdictions as members) published an 
issues paper on climate change risk to the insurance sector in 
2018 and in March of 2019 the SIF conducted a global survey on 
TCFD Implementation within the insurance sector, gathering 
responses from nearly 1,200 insurers across 15 jurisdictions.
    In August 2018, the European Insurance and Occupational 
Pensions Authority (EIOPA) received a request from the European 
Commission for an Opinion on Sustainability within Solvency II, 
with a particular focus on aspects relating to climate change 
mitigation. EIOPA's Opinion published September 2019 addresses 
the integration of climate-related risks in Solvency II Pillar 
I requirements. The European Commission will take the Opinion 
into account in the preparation of its report on Directive 
2009/138/EC (Solvency II Directive), due by 1 January 2021.
    The Bermuda Monetary Authority (BMA) publishes an annual 
``Catastrophe Risk in Bermuda'' report. As Bermuda-domiciled 
insurers largely specialize in catastrophe reinsurance, this 
report includes a high-level overview of the catastrophe risk 
stress testing and modeling practices in Bermuda.
    Japan's Financial Services Agency and the Ministry of 
Economy, Trade and Industry have urged businesses to 
voluntarily disclose the risks posed by climate change to their 
businesses and participate in a new alliance toward greater 
transparency.
    It is worth noting that in the United States, the NAIC 
adopted the Insurer Climate Risk Disclosure Survey in 2010. The 
survey questions cover many of the same areas as the FSB's 
TCFD, including insurers' strategies and preparedness in 
investment, mitigation, financial solvency, carbon footprint 
and engagement with consumers. The results are intended to 
provide information relating to trends, vulnerabilities and 
best practices on insurers' response to climate change.
    I would note there has been a noted increase in focus on 
sustainability strategies, particularly amongst larger insurers 
who must adhere to policies or regulations outside the United 
States. This includes establishing company executive/officer 
positions and internal task forces related to sustainability, 
incorporating assessments of changing climatic patterns in the 
underwriting process, improving energy efficiency, investing in 
renewable energies, providing insurance to underserved 
populations, strengthening business continuity plans, launching 
ESG Funds, new products offering green or hardier rebuilding 
upgrades and the creation of new tracking metrics.

Q.7. The International Association of Insurance Supervisors 
(IAIS) is working to evaluate the use of financial technology 
and insurance. Can you tell me more about issues related to 
artificial intelligence, the use of algorithms, and data 
privacy?

A.7. The IAIS recently formed the FinTech Forum to look at 
fintech developments that impact insurance and insurance 
supervision. The Forum's discussions are designed to raise 
awareness of emerging fintech technologies; share information 
on technical risks relevant to supervisory approaches for 
fintech; and engage with the financial services industry and 
other stakeholders on the topic of fintech. In addition, in 
2018 the IAIS published an issues paper on digitalization of 
the insurance business model and an application paper on the 
use of digital technology in inclusive insurance. This year, 
the IAIS is expected to finalize an issues paper on use of big 
data analytics in insurance. Note that there are variety of 
other international bodies that have been active in this area 
including the OECD (which recently published guidance). 
Further, as part of the U.S.-EU Insurance Dialogue Project U.S. 
and EU regulators are also discussing issues surrounding Big 
Data and AI publishing a paper in November 2018 on developments 
and regulatory approaches in the United States and European 
Union in these areas.
    The uses and benefits of data analytics, more sophisticated 
algorithms, and artificial intelligence are appealing to all 
industries and the insurance industry is no different. Insurers 
are leveraging these new capabilities in marketing and customer 
engagement, underwriting, rating, claims processing, and fraud 
detection. While these technological developments have the 
potential to improve how an insurer does business and can 
benefit policyholders, insurance regulators recognize the 
complexity of these new processes and the need to ensure they 
comply with State insurance laws and regulations designed to 
protect consumers. Some of these evolving techniques have made 
it challenging for insurance regulators to evaluate rating 
plans that incorporate complex predictive models and the NAIC's 
Casualty Actuarial and Statistical Task Force is developing 
regulatory best practices for the review of these models. We 
are committed to monitoring any potential for bias in insurers' 
algorithms used to synthesize big data. The NAIC's Innovation 
and Technology Task Force and Big Data Working Group are 
continuing to explore these regulatory issues. The NAIC also 
formed an Artificial Intelligence Working Group that is 
developing AI guiding principles for the insurance industry. 
With regard to data privacy, the NAIC recently formed a Privacy 
Protections Working Group to review State insurance privacy 
protections regarding the collection, use, and disclosure of 
information gathered in connection with insurance transactions 
to determine whether updates to our models are necessary.

Q.8. How do you monitor the property and casualty insurance 
companies to ensure fintech and insurtech innovations do not 
lead to discrimination? How do you ensure compliance with the 
Fair Housing Act?

A.8. State insurance regulators are committed to striking the 
appropriate balance between encouraging innovation while 
maintaining the strong consumer protections embedded in our 
regulatory system. To that end, the NAIC established a Big Data 
Working Group and an Innovation and Technology Task Force to 
facilitate greater understanding of these emerging technologies 
and to identify regulatory issues that may need to be 
addressed. Through these discussions, regulators are examining 
how insurers are using consumer data and what practices they 
have in place to prevent unfair discrimination in this changing 
marketplace and ensuring that we have the necessary tools to 
combat any unfair treatment of insurance consumers. The NAIC's 
Casualty Actuarial and Statistical Task Force is completing a 
white paper on regulatory best practices for the review of 
predictive models and analytics filed by insures to justify 
rates and provide guidance for the review of rate filings based 
on predictive models. To support State insurance regulators in 
their review of rate filings, the NAIC will be offering
additional assistance for the technical review of filings to 
help
document information needed for State insurance regulators to 
make decisions about unfair discrimination.
    With regard to ensuring compliance with the Fair Housing 
Act (FHA), the U.S. Department Housing and Urban Development 
has sole enforcement authority over the FHA, which prohibits 
discrimination in housing transactions. While State insurance 
regulators do not have enforcement authority over the FHA, they 
do have authority to enforce State insurance laws prohibiting 
discrimination by insurance companies. Those laws typically 
apply not only to companies providing homeowners insurance, as 
addressed by the FHA, but to all insurers in the context of 
rating, underwriting, and other insurance practices. In fact, 
as early as 1946, the NAIC adopted model laws prohibiting 
``unfair discrimination'' in property and casualty rating.\2\ 
Today, those model laws specifically ban insurers from basing 
risk classification upon ``race, creed, national origin or the 
religion of the insured.''\3\ Additionally, the NAIC Unfair 
Trade Practices Act (#880) inhibits insurers from ``[r]efusing 
to insure, refusing to continue to insure, or limiting the 
amount of coverage available to an individual because of the 
sex, marital status, race, religion or national origin of the 
individual.''\4\
---------------------------------------------------------------------------
    \2\ See Casualty and Surety Rating Bill, 1946 Proc. 396, 397-410; 
and Fire and Inland Marine Rating Bill, 1946 Proc. 396, 410-422. In 
1963, these model laws were combined into what is now the Property and 
Casualty Model Rating Law (Prior Approval Version) (#1780), available 
at https://www.naic.org/store/free/GDL-1780.pdf?4.
    \3\ See Property and Casualty Model Rating Law (File and Use 
Version) (#1775) at Section 5(4)(b); Property and Casualty Model Rating 
Law (Prior Approval Version) (#1780) at Section 4C; and Property and 
Casualty Model Rate and Policy Form Law Guideline (#1776) at Section 
5(4)(b), available at: https://www.naic.org/prod_serv_model_laws.htm.
    \4\ See Unfair Trade Practices Act (#880) at Section 4G(5), 
available at: https://www.naic.org/store/free/MDL-880.pdf?62.

Q.9. The Nevada Insurance Commissioner told me that the Covered 
Agreement standards were developed using banking capital 
standards, rather than insurance capital standards. Can you 
explain the difference between the controls that banks have in 
place versus the controls that insurers have in place? I'm 
specifically interested in the use of the reinsurance tools 
that insurance carriers have available to them that banking 
---------------------------------------------------------------------------
systems do not.

A.9. The 2017 Covered Agreement with the European Union, which 
was negotiated by the U.S. Treasury Department and the U.S. 
Trade Representative, requires a group capital assessment to be 
developed for insurance groups based in the United States. 
Since 2015 State insurance regulators, through the NAIC, have 
been working on a Group Capital calculation. Once completed, 
that work should satisfy the obligation under the Covered 
Agreement. I cannot speak to the controls banks have in place, 
but it is true that insurers carriers are able to utilize risk 
mitigations strategies, such as reinsurance, as a means of 
minimizing risks that could come to fruition even under the 
extreme scenarios that tend to be a focal point of bank capital 
standards.

Q.10. Do you think that the international insurance supervisors 
who focus on insurance capital standards are open to alter 
their oversight standards to be considered ``substantially 
similar'' to the U.S. standards?

A.10. As an international standard, the ICS is not binding on 
the States or the Federal Government, but it is the first 
attempt at a globally harmonized approach to capital for 
insurance groups and many jurisdictions around the globe could 
consider adopting it. The NAIC has no intention of taking on 
board any international standard that does not fit with and add 
value to the U.S. State-based system of regulation. Bearing 
this in mind, the NAIC is trying to embed as much as possible 
our approach to capital regulation in the ICS. This has been 
difficult as elements of the ICS largely mirror a European 
Solvency II approach. Furthermore, we are trying to ensure that 
a jurisdictional alternative to the ICS that is based on a U.S. 
aggregation approach and compatible with the Federal Reserve's 
BBA and the NAIC's GCC, will be accepted as comparable. Other 
countries may also consider adopting an aggregation approach 
similar to our model; however, we are not seeking to impose our 
standards on any other jurisdiction. We are also seeking the 
necessary jurisdictional flexibility in order to minimize the 
risk of duplicative regulation or pressure on U.S. firms.

Q.11. The European Union established Solvency II. Can you 
describe how the Minimum Capital Requirements work? What is 
considered? What happens when an insurance company falls below 
the Minimum Capital Requirements?

A.11. This question is best answered by European insurance 
regulators, but based on my understanding, Solvency II 
established two intervention levels, ``solvency capital 
requirement'' (SCR) and the ``minimum capital requirement'' 
(MCR). For regulatory purposes, the SCR and MCR should be 
regarded as ``soft'' and ``hard'' floors, respectively.
    Solvency Capital Requirement (SCR) is the (economic) 
capital that should be held to ensure that the insurance 
company can meet its obligations to policyholders and 
beneficiaries with certain probability and should be set to a 
confidence level of 99.5 percent over a 1-year period, which 
limits the chance of breaching that threshold to a less than 
one in 200 year event. Minimum Capital Requirement (MCR), 
represents an 85 percent confidence level instead of 99.5 
percent over a 1-year period. Underlying both requirements are 
``market consistent principles'' for the valuation of assets 
and liabilities. The excess of assets over liabilities (plus 
any recognized subordinated debt) is referred to as ``own 
funds''. Regulators begin to intervene when ``own funds'' fall 
below the SCR. If ``own funds'' fall below the MCR, then the 
Solvency II Directive provides European regulators with several 
options to address breaches of the MCR, including the complete 
withdrawal of authorization from selling new policies and 
forced closure of the company.

Q.12. Solvency II has three pillars. Pillar 3 requires insurers 
file annual reports with their regulator and make them 
available to the public. Have you had any feedback from the 
public based on one of those reports?

A.12. Again, this is best answered by European regulators, but 
based on my conversations with European insurers and 
regulators, reactions to Pillar 3 have been more positive. The 
Pillar 3 reporting requirements have expanded the availability 
of information on European insurers that is available to the 
public. One key piece of reporting is the ``Solvency and 
Financial Condition Report'' (SFCR) which is analogous to the 
NAIC Annual Statement that U.S. legal entities make available 
to the public.

Q.13. If the United States did not agree to use the same 
Solvency II standards, and could not get the European Union to 
agree to another type of solvency oversight convention, would 
U.S. carriers have to pay more for reinsurance products 
purchased from foreign companies? If so, would U.S. carriers be 
reluctant to buy foreign reinsurance products that could cost 
more?

A.13. Many factors influence the pricing of reinsurance 
including the nature of the risks being reinsured, the 
competitive landscape and, in certain instances, regulatory 
requirements. If the ICS remains as currently constructed and 
foreign jurisdictions adopt it or other Solvency II--like 
standards, it is possible that pricing could be impacted. 
However, it is difficult to know the extent of such impact and 
how U.S. ceding insurers may respond.

Q.14. Can you explain why some argue that the proposed Solvency 
II standards could place the U.S. insurance carriers at a 
disadvantage?

A.14. Based on my understanding, a few issues stand out. First, 
the Solvency II construct is quite volatile because of its 
market consistent principles which can lead to an over-reaction 
to short-term market movements and reduces the availability of 
long-term products. The life insurance business is based on 
buying-and-holding investments through the economic cycle. 
Market-based approaches provide incentives to sell investments 
at market lows and buy at market highs. Many U.S. retirees 
depend on the protections offered by long-term life insurance 
products with options and guarantees. We understand that the 
availability of these products declined as a result of the 
introduction of Solvency II in Europe. We would not want a 
similar impact on the U.S. life insurance market.
    Second, Solvency II is overly complex and costly to comply 
with. Much of this complexity arises from attempts to address 
the (1) excess volatility and/or (2) overly conservative 
requirements. Examples of requirements designed to address 
excess volatility are the ``matching adjustment'' and 
``volatility adjustment'' which are meant to reduce the 
sensitivity of long-term products to market movements. Examples 
of requirements meant to address conservatism include various 
incentives to use internal capital models instead of the 
Solvency II Standard formula. Internal capital models are 
costly for companies to create and costly for supervisors to
review.
    Third, Solvency II is built for different legal systems 
with different regulatory tools. For example, while guaranty 
funds are a critical component of our solvency framework in the 
United States, they are found in just a few European countries. 
Thus, the Solvency II framework has to ignore the protections 
that guaranty funds would otherwise provide and, instead, 
imposes additional regulatory requirements in their place.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM ERIC A. 
                             CIOPPA

Q.1. Under the new capital standard being developed by the 
International Association of Insurance Supervisors, insurance 
companies would be required to hold short-term assets more 
than, or instead of, long-term assets. If insurance companies 
are required to do so, will this new standard reduce the 
availability and affordability of annuities, which are longer-
term products that provide retirement security for millions of 
Americans?

A.1. The ICS, like our system, encourages asset-liability 
matching. However, the ICS requires higher capital requirements 
for investments that aren't perfectly matched to the 
liabilities being backed. Since it will sometimes be difficult 
to find investments that perfectly and precisely match long-
term products with guarantees, firms will be subject to higher 
capital requirements. That will lead to reluctance among firms 
to offer these products, which are important retirement 
security product offerings.

              Additional Material Supplied for the Record
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