[Senate Hearing 117-747]
[From the U.S. Government Publishing Office]
S. Hrg. 117-747
CURRENT ISSUES IN INSURANCE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE INSURANCE INDUSTRY TO ENSURE IT IS PROTECTING AMERICANS
__________
SEPTEMBER 8, 2022
__________
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
53-607 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
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THURSDAY, SEPTEMBER 8, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 29
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 30
WITNESSES
Kathleen A. Birrane, Maryland Insurance Commissioner, on behalf
of the National Association of Insurance Commissioners......... 5
Prepared statement........................................... 31
Responses to written questions of:
Chairman Brown........................................... 42
Senator Toomey........................................... 44
Senator Cortez Masto..................................... 48
Senator Warnock.......................................... 50
Senator Hagerty.......................................... 52
Senator Moran............................................ 53
Steven Seitz, Director, Federal Insurance Office, U.S. Department
of the Treasury................................................ 6
Prepared statement........................................... 39
Responses to written questions of:
Chairman Brown........................................... 54
Senator Toomey........................................... 54
Senator Cortez Masto..................................... 55
Senator Warnock.......................................... 55
Additional Material Supplied for the Record
Letter submitted by Thomas D. Gober, Insurance and Reinsurance
Fraud Expert................................................... 57
Statement submitted by Colleen Riedel............................ 82
Letter submitted by Thomas F. Goodwin, Vice President,
Exhibitions and Conferences Alliance........................... 84
Letter submitted by Mary Kate Cunningham, Senior Vice President,
Public Policy, American Society of Association Executives...... 87
(iii)
CURRENT ISSUES IN INSURANCE
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THURSDAY, SEPTEMBER 8, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:59 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
I thank my colleagues for joining us. Most of them will be
here checking in or doing some--it is a remote--I mean, it is a
hybrid hearing. Again, the witnesses are here in person. Thank
you, the two of you, for that.
A special callout to Sneha Pandya in our office, who has
been a fellow for the last year, and this is her last hearing.
She is ending with a flourish, so thank you for your service to
our--to the Senate and especially to our country.
Every American needs insurance, whether it is auto
insurance to protect us when we are on the road or homeowners'
insurance to protect the biggest investment for most families,
for life insurance to cement your family's financial security
in the event of a tragedy.
It is our job to make sure that the industry is protecting
Americans' hard-earned money, not putting it at risk. American
insurance companies are regulated by State insurance
commissioners; we know that. The State-based system of
insurance regulation is historic and ensures that local markets
and needs are taken into consideration. The National
Association of Insurance Commissioners (NAIC) coordinates State
commissioners across all jurisdictions to identify and address
risks to the entire system.
In the Wall Street Reform Act Congress created a few years
ago, a decade or so ago, Congress created the Federal Insurance
Office within the Treasury Department to promote national
coordination in the insurance sector. It is common sense;
insurers operate across all State jurisdictions and
internationally.
I am pleased to have both the Maryland Commissioner,
Kathleen Birrane, on behalf of the NAIC, and Director Seitz of
FIO testify today. Thanks for your public service on all
levels.
If we are going to keep Americans' hard-earned money safe,
it is more important than ever that they work together.
We will explore many topics today. For example, 3 months
ago, Lockheed Martin transferred $4.3 billion of its pensions
to Athene Holding, an insurance holding company specializing in
life insurance and owned by the private equity firm, Apollo
Global Management. Overnight, Lockheed Martin employees and
retirees were notified that their pensions would be managed by
Athene and no longer governed by ERISA or the Pension Benefit
Guaranty Corporation. Many employees are very, exceptionally,
nervous about that. It is one recent example of private equity
giants' expansion into people's pensions and into the insurance
industry.
We know that workers end up worse off when Wall Street
private equity firms get involved. We have seen it over and
over, in industry after industry.
In March, I asked NAIC and FIO to look into private
equity's expansion into similar pension-risk transfer
transactions. We need to understand the risks to workers whose
financial security depends on pension and retirement programs.
NAIC and FIO provided thoughtful responses to my letters. Thank
you for that.
NAIC has been monitoring the risk-taking behavior of
private equity-owners insurers. FIO has done similar work and
also looked at the wider interconnectedness of insurance and
reinsurance markets across the world. Those connections have
added to systemic risk concerns because U.S. insurance
companies depend even more on the financial health of insurance
companies outside the United States. Taken together, our
insurance authorities are focused on these emerging and complex
risks to safeguard our economy.
Our communities and our families rely on insurance
companies to protect their loved ones, their homes, their small
businesses, and so many parts of their lives. We cannot ignore
when risks buildup or firms behave irresponsibly. We know who
always pays the price when they do. It is rarely insurance
executives. It is not Wall Street. It is not private equity
executives. It is workers and families. It is taxpayers who are
forced to bail out AIG a decade and a half ago. That should
never happen again.
It means looking around the corner to make sure industry
and agencies are prepared for risks as they develop. As more
Americans face increasingly severe climate catastrophes,
wildfires, hurricanes, every year, we need to help communities
prepare, and we need to ensure that insurance watchdogs and the
companies they oversee are also prepared. In the aftermath of
some of these natural disasters, we have seen instances where
insurers either raise prices or actually stop offering
insurance altogether, leaving families, leaving businesses
struggling to find affordable coverage as they work to rebuild
their lives and rebuild their communities.
We know this industry has a long history of racial
discrimination, just like so many other big industries. Black
and Brown families face more difficulty across the board in
getting insurance. We have seen this happen in auto insurance.
Particularly earlier this year, the New York Times reported
that customers, insurance agents, and employees sued State Farm
for discrimination in the workplace and in paying out claims.
My colleague, Chairwoman Waters in the House, has been
working on learning more about this as well. Her committee
recently requested information about large life and P&C
insurers' involvement in financing chattel slavery.
I am glad FIO and NAIC are also working on this and
NAIC is investigating through its Special Committee on Race
and Insurance. I look forward to reviewing FIO's upcoming
report on availability and affordability of auto insurance. I
hope it will shed more light on racial equity in assessing this
insurance--in accessing this insurance.
Finally, later this year, the International Association of
Insurance Supervisors will need to consider whether the U.S.
insurance system's review of capital adequacy standards meets
international criteria. Because we regulate insurance
differently in the United States, where State and local markets
and international markets are served by the same companies, it
is important that representatives of the U.S. system, like you,
like FIO, like NAIC, advocate for fair treatment by
international regulators. And now that the Fed Vice Chair for
Supervision has been confirmed, Michael Barr and the offices
testifying here today will get to work with international
counterparts in this process.
All of these issues show how critical the work that you two
do is to our economy's health and stability. I expect FIO and
NAIC to prioritize monitoring these risks in their ongoing
work.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman. Welcome to our
witnesses. It has been a while since our Committee has held a
hearing on the insurance industry, and so I welcome the
occasion this morning.
There are a few topics in particular I would like to touch
on today. One is the importance of the State-based insurance
regulation model that we have, efforts to develop international
insurance standards, efforts to use the insurance industry to
effect changes in social policy, proposals to create a
federally guaranteed pandemic risk insurance program, and
finally, the importance of risk-based pricing.
So I think it is important to start by reminding everyone,
as the Chairman alluded to, that insurance firms are primarily
regulated at the State level. Insurers have been chartered and
regulated by the States for the past 150 years. When it comes
to insurance, the Federal Government has a really very
extremely limited regulatory role, and I see little need to
expand that. The system works well for consumers and for the
industry, and that is one reason we need to pay close attention
to efforts to develop and implement international insurance
standards by international bodies.
In particular, I worry, and I am not alone, that the
Insurance Capital Standard, or the ICS, currently being
developed by the International Association of Insurance
Supervisors is incompatible with the U.S. insurance market.
There is widespread concern that the ICS is too sensitive to
short-term fluctuations in market and certain asset categories
and does not take into account certain aspects of the assets
that insurers hold. The result is that the implementation of
ICS in its current form would harm the availability of long-
term insurance products that Americans rely on for financial
security. Our U.S. representatives at IAIS need to make sure
that ICS works for the U.S. market and by not allowing the
proposal to go forward until it does.
Next, I would like to touch on some troubling efforts to
use our financial system to address climate change. Now some
liberal activists want to pressure insurance companies and
other financial institutions to deny services to traditional
energy companies and other carbon-intensive industries. Such
efforts are profoundly misguided.
Addressing the difficult challenges posed by global warming
requires political decisions involving important tradeoffs, and
we have seen those tradeoffs in action in recent months:
soaring energy prices; European Nations have made plans to
reopen coal power plants and extend the lives of nuclear
plants; likewise, in the U.S., we have seen the Biden
administration's hostility to new energy production contribute
to shockingly high gasoline prices. That is a painful
consequence of policy choices.
In a democratic society, those choices and the tradeoffs
associated with them must be made by elected representatives
who are accountable to the American people, not unelected
activities, bureaucrats, or insurance executives, for that
matter.
To be sure, insurers face financial risks in the form of
natural disasters. After all, it is a core business of the
property and casualty insurance industry. Insurers must be
allowed to set premiums that accurately reflect these risks,
and to the extent that climate change exacerbates these risks,
then they are going to need to adjust their prices accordingly.
Higher premiums are an important signal to policyholders that
warn of increased risks of fire or flood or earthquakes or
other peril. Further, they create a financial incentive to
mitigate risk, which leads to safer and more resilient
communities and society.
The bottom line is that a well-functioning insurance
industry is quite capable of addressing the natural disaster
risks that it faces today and in the future.
I would also like to address plans to create a federally
guaranteed pandemic risk insurance program. As proposed, this
program would be akin to the Terrorism Risk Insurance Program,
or TRIA. As a reminder, TRIA mandates that insurers offer
terrorism insurance and in the event of an attack the Federal
Government bears an increasingly share of the cost of claims
depending on the severity.
Well, a similar program for pandemics would be very, very
problematic. First of all, it is hard to imagine that insurers
are well equipped to quickly distribute hundreds of billions or
maybe even trillions of Federal dollars. Recall that in a
matter of months the Paycheck Protection Program distributed
over half-a-trillion dollars via the banking system, but banks
and other financial institutions participated on a voluntary
basis. Compare that to the disastrous claims processing after
Superstorm Sandy.
But more importantly, a federally guaranteed pandemic risk
insurance program would encourage State and local governments
to impose economically devastating shutdowns in the future.
Such a program would in fact incentivize State and local
policymakers to quickly impose lockdowns with their
jurisdictions with the assurance that the Federal Government
risk insurance program will bail them out. Instead of
considering policies that will facilitate future lockdowns that
repeat the mistakes of the past, we should be thinking about
future mitigation measures that do not crush business, workers,
and the economy, and do not harm our children's educations.
Let me conclude with this observation. A well-functioning
insurance industry is a critical component of economic
prosperity and financial security for all Americans. Everyone
will be better off if we resist activists' efforts to use
insurance as a tool to pursue social policy goals. Insurance is
not a legitimate tool, as some have suggested, to decarbonize
the economy, to infringe on Second Amendment rights of law
abiding citizens, or to mitigate wealth inequality. Let us have
insurers stick to the business of insurance.
I look forward to discussing these issues today.
Chairman Brown. Thank you, Senator Toomey.
I will introduce today's witnesses, and then they will
begin their testimonies. The Honorable Kathleen Birrane is the
Maryland Insurance Commissioner testifying on behalf of NAIC.
She previously was a partner at DLA Piper and Principal Counsel
for the Maryland Insurance Administration at the Maryland
Office of the Attorney General.
Mr. Steven Seitz is Director of FIO at Treasury. He joined
FIO as Deputy Director, previously worked at the Office of the
Assistant General Counsel at Treasury and the CFTC.
Welcome to both of you.
Commissioner, please begin your testimony. Thank you.
STATEMENT OF KATHLEEN A. BIRRANE, MARYLAND INSURANCE
COMMISSIONER, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Ms. Birrane. Chairman Brown, Ranking Member Toomey, Members
of the Committee, thank you for the invitation to testify
today. I will use my time today to touch briefly on several
issues we know are of interest to Members of the Committee.
First, we have been actively monitoring the growth in
private equity-owned insurance. Our solvency framework includes
significant checks and balances to protect policyholders,
including public disclosures, capital requirements, and
conservative accounting requirements which are used to assess
all risks to insurers regardless of the type of ownership. As
insurers of all types are searching for investment yield to
avoid raising prices, insurance regulators are reviewing
existing guidelines and considering new requirements to ensure
our ability to assess and address the risks to policyholders.
The NAIC is working through 13 regulatory considerations
applicable to both private equity-owned insurers and other
insurers with similar features. We have extensive data
reporting and analytical capabilities to review and assess
alternative investments or unique structures and are continuing
to refine those tools. We are confident in our system to
appropriately oversee insurers no matter how they are
structured, and we will certainly keep the Committee apprised
of our work in that regard.
Next, insurance regulators also recognize the importance of
cybersecurity risk management and continue to upgrade data
security safeguards. The NAIC Insurance Data Security Model Law
updates regulatory requirements relating to data security, the
investigation of a cyber event, and the notification to State
insurance commissioners of cyber events. States continue to
adopt the model, which now covers 83 percent of the market as
measured by gross written premium.
The NAIC also created a new Innovation, Cybersecurity, and
Technology (H) Committee, which I chair, to address the
insurance implications of emerging technologies and
cybersecurity and to ensure coordination and consistency among
insurance regulators.
The NAIC also continues to facilitate tabletop exercises
with insurers, regulators, and law enforcement to explore cyber
incident response.
Another top priority is climate risk and resilience. This
year, the NAIC facilitated revisions to its Climate Risk
Disclosure Survey which is now aligned to the FSB's TCFD. These
disclosures, now covering 80 percent of the market by premium,
help insurance regulators assess insurance industry risks and
actions to mitigate climate risk.
We also monitor insurers' ability to pay claims following
catastrophic events. We recently recommended that wildfires be
explicitly added to the Risk-Based capital framework for
catastrophe risk exposure. Further, the NAIC is creating a
Catastrophe Model Center of Excellence to provide insurance
regulators with access to information and training on
catastrophe models.
Another area of activity for State insurance regulators is
the intersection of race and insurance. The NAIC's work focuses
on evaluating issues of race and diversity within the sector
and addressing market access and potential barriers.
Additionally, the NAIC formed a New Avenues in Insurance
Careers Foundation to help foster interest in the insurance
careers with a focus on students from underserved and diverse
communities.
Turning to the international front, State insurance
regulators continue to engage on a variety of issues including
the IAIS's development of an Insurance Capital Standard. The
NAIC, along with our Team USA partners, including FIO, have
been clear that the ICS does not work for the U.S. market or
our supervisory regime and therefore has developed an
aggregation method as a comparable to the ICS. We will continue
to advocate for recognition of the U.S. approach to group
capital within the IAIS and as already reflected in covered
agreements between the U.S. and the EU and U.K.
Finally, we would like to highlight a few of our Federal
priorities. We urge Congress to pass a long-term NFIP
reauthorization that encourages investment in flood mitigation
efforts, and we support Senator Scott's Primary Regulators of
Insurance Vote Act which would provide State insurance
regulators with a vote on FSOC. We are also working on
legislation to help protect policyholders during an insurance
receivership.
So thank you again for the opportunity to testify, and I am
pleased to take any of your questions.
Chairman Brown. Thank you, Commissioner. Director.
STATEMENT OF STEVEN SEITZ, DIRECTOR, FEDERAL INSURANCE OFFICE,
U.S. DEPARTMENT OF THE TREASURY
Mr. Seitz. Chairman Brown, Ranking Member Toomey, and
Members of the Committee, thank you for the opportunity to
testify today about current issues in insurance. I am the
Director of the Federal Insurance Office within the U.S.
Treasury Department. I would like to begin by briefly outlining
FIO's role and responsibilities and by describing some of our
current priorities.
The United States is the world's largest insurance market,
and its insurers provide a diverse range of products to support
the needs of consumers and businesses in the United States. The
U.S. system of insurance regulation is primarily State-based.
However, FIO has a significant role to play as reflected in its
statutory duties and authorities. FIO advises the Treasury
Secretary on major domestic and prudential international
insurance policy issues, develops Federal policy on
international insurance issues including representing the U.S.
at the International Association of Insurance Supervisors,
administers the Terrorism Risk Insurance Program, monitors the
extent to which traditionally underserved communities and
consumers have access to affordable insurance products, assists
the Secretary in negotiating covered agreements with foreign
jurisdictions, and monitors the insurance sector, including
identifying issues or gaps in the regulation of insurers that
could contribute to a systemic crisis. As FIO's Director, I
also serve as a nonvoting member of the Financial Stability
Oversight Council. These authorities reflect the need for FIO
to provide a national Federal perspective in this critical
area.
I would like to highlight five current FIO priorities.
Climate-related financial risk is a top priority for our
office. We are focused on three areas which are consistent with
President Biden's Executive Order on Climate-Related Financial
risk. First, FIO plans to publish a report assessing climate
related issues and gaps in the supervision and regulation of
insurers. Second, FIO is evaluating the potential for major
disruptions of private insurance coverage in U.S. markets that
are particularly vulnerable to the effects of climate change.
Third, we are increasing our engagement, both domestically and
internationally, on climate-related financial risk issues. As
we move forward with these efforts, we will also seek
consistent, comparable, and granular data to increase our
understanding of the risks from climate change to
policyholders, insurers, and the financial system.
A second focus area for the Federal Insurance Office is the
growing role of alternative asset managers, such as private
equity firms, in the U.S. insurance sector. This evolution is
one that our office has highlighted for several years. It
warrants increased attention to ensure that regulatory
mechanisms are appropriately designed to address the activities
and market developments that we outlined in our recent letter
to Chairman Brown. We encourage continued focus and increased
progress by State regulators in this area.
FIO will continue to prioritize four areas of research and
action on this topic: first, liquidity risk; second, credit
risk and capital adequacy; third, offshore reinsurance
implications including the increased interconnectedness between
the U.S. and Bermuda insurance markets; and fourth, potential
conflicts of interest.
FIO is also focused on cyber-related risk which is a top
priority for Treasury and the entire Federal Government. FIO
has been examining insurers' own cyber resilience as well as
the development of the cyber insurance market. We have
increased our data collection in this area with regard to the
Terrorism Risk Insurance Program and have supported the
development of Treasury's counter-ransomware strategy. We are
also working with the DHS's Cybersecurity and Infrastructure
Security Agency in connection with GAO's recommendation that we
jointly assess the need for a Federal backstop for cyber
insurance. FIO is also coordinating closely with the White
House Office of the National Cyber Director on these issues.
A fourth priority for FIO is our representation of the
United States at the IAIS in close coordination with the NAIC,
the States, and the Federal Reserve. In addition to its focus
on climate, private equity, and cyber, the IAIS is also
considering other important topics such as the development of
the Insurance Capital Standard and the related comparability
work involving the aggregation method as well as the
implementation of the holistic framework for the assessment and
mitigation of systemic risk. These topics are important global
initiatives that will affect the U.S. insurance sector, and it
is critical for FIO and the United States to remain engaged at
the IAIS on these issues.
Fifth and finally, FIO is prioritizing its work on
diversity, equity, and inclusion. Consistent with our statutory
authorities, FIO looks at these issues through the lens of the
availability and affordability of insurance products,
particularly for traditionally underserved consumers and
communities. Right now, we are working to update our study on
personal auto insurance affordability. Additionally, these
issues are also key components of our upcoming climate work.
On all these topics and many others, FIO values our close
relationship and frequent coordination with State regulators,
the NAIC, our Federal partners, and international counterparts
as well as with insurance industry stakeholders.
Thank you again for the opportunity to testify today.
Chairman Brown. Thank you, Director. Thank you, Director,
for FIO's response to my letter earlier this year about private
equity's growing role in the insurance sector. You mentioned
that once a company transfers its pension obligations in a
pension risk transfer the PBGC guaranty no longer applies;
participants would lose protections under risk. You
reemphasized that. Thank you.
What new problems--two questions: What new problems arise
from these practices where pensions are transferred to life
insurers, and how do they pose risks to workers without ERISA
and PBGC protections, and do you have--I guess three questions.
Do you have additional concerns for the broader financial
system, its impact?
Mr. Seitz. No. Thank you, Senator Brown, for that question.
We share your interest in the importance of this topic. The
U.S. insurance sector, and particularly the life and retirement
sector, is critical for millions of working Americans that are
relying on these products for their retirement security.
In our letter, we highlighted the four key areas that we
are focused on: First, enhancing FIO's monitoring of the
potential liquidity risk of the entire life insurance sector
but also particularly related to PE-owned insurers. Second, we
are looking at regulatory mechanisms and whether they are
appropriately designed for issues related to credit risk and
capital adequacy to accommodate and appropriately regulate this
type of business model. Third, we are also looking at the
offshore reinsurance implications, particularly the increased
interconnectedness between Bermuda and the U.S. markets where
certain blocks of business are being transferred offshore. And,
fourth, we are also looking at potential conflicts of interest.
These are important issues for our topic, and we will be
working closely with the NAIC and the States on their focus
going forward and look forward to further updating this
Committee as that work progresses.
Chairman Brown. Thank you, and we will ask for that. My
interest in this issue has increased in part because Congress
just worked a year ago--I mean, worked for several years and
was able to fix problems in the multi-employer pension system.
We know the human costs that failing pensions pose to workers
who earn these benefits and who have that expectation through a
lifetime of work.
Congress established, as you know, in a bipartisan way,
PBGC and passed ERISA. It is imperative that insurers--and we
are counting on both of you on this to ensure--it is imperative
that insurers not be allowed to do an end run around the system
established to protect pensioners.
Commissioner Birrane, thank you again for being here. I
have heard from nonprofit associations reaching out to the
State insurance commissioners and NAIC about difficulties
finding and affording property and casualty insurance. My
question is this: What are the tools available for State
insurance commissioners to solve this market failure? And it is
a market failure.
Ms. Birrane. So thank you, Senator Brown, for the
opportunity. As you know, the NAIC has long opposed the
expansion of the Liability Risk Retention Act to allow RRGs to
write commercial property insurance. It is our sense that
commercial property insurance is generally widely available,
and we have serious concerns that nonprofits that are already
vulnerable could be put at greater risk from a consumer
protection standpoint if they are allowed to purchase their
property insurance from an entity that is not subject to the
same rigorous standards and multistate enforcement as admitted
carriers, which really creates an uneven playing field.
Most States have a residual market for property insurance,
including commercial property insurance. I know in my State I
have queried our nonprofits and this is not an issue that we
see in at least the State of Maryland. Other commissioners
across the country are making similar efforts to look at their
markets to see where issues exist, and we would be happy to
know about specific circumstances and make ourselves available
to work with nonprofits that are having difficulty getting
commercial property insurance.
Chairman Brown. OK. Your assessment differs a bit from
ours. It is a serious problem that has not been solved in the
marketplace. In the past, when faced with similar market issues
that span the country, Congress passed the Liability Risk
Retention Act. As you know, I am working to amend the LRRA to
narrowly address this issue of affecting community-based
nonprofits.
Director Seitz, are you concerned about this gap in the
market in ensuring nonprofits have access to the insurance they
need?
Mr. Seitz. No. Thank you for that question. It is an issue
that we have also been tracking, as Commissioner Birrane
mentioned. It is an area we have been engaging with various
stakeholders on the topic with regard to their ability to get
coverage. I think we will look forward to working with the NAIC
and your team as we look into this issue in more depth.
Chairman Brown. OK. And count on us to do that. We have
been working with NAIC to find a solution. Risk Retention
Groups are regulated by State insurance commissioners under
NAIC regulations.
And, Commissioner, I just wanted to ask again, can we work
together to find a solution that responsibly increases
insurance capacity for RRGs to address this problem?
Ms. Birrane. We absolutely want to work together for a
constructive solution for nonprofits who need commercial
property insurance, and we are happy to work with you and your
staff and with FIO.
Chairman Brown. Thank you. Count on us for that.
And I wanted to ask a third question--I will not take time.
My 5 minutes is up--about climate catastrophe risk, and we will
submit something in writing or maybe as part of a second round,
or my colleagues, probably one of them will ask something about
that.
So, Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman.
The Chairman brought up the circumstances that occur
occasionally where a pension risk transfer occurs, and my
understanding is the nature of this, what we are talking about
here, is when a company has a defined benefit obligation to its
retirees. It can purchase an annuity, essentially, from an
insurance company, which then transfers the management of this
to an insurance company.
And, as the Chairman pointed out, in that scenario, it is
my understanding that the PBGC guaranty no longer applies.
However, there are insurance funds. There are insurance
guaranty funds.
And so, Ms. Birrane, would I be correct in assuming that
the insurance guaranty funds in the various States would be
there as a backstop to the ability of the insurance companies
to honor their contractual obligation to make those payments?
Ms. Birrane. Yes, Senator, that is correct.
Senator Toomey. And the transfer itself--so after the
transfer occurs, ERISA no longer applies is my understanding,
but the mechanism of the transfer itself is regulated by ERISA.
Isn't that true?
Ms. Birrane. That is correct. ERISA no longer applies to
the entity that now bears the risk----
Senator Toomey. Right.
Ms. Birrane. ----because what has really happened is that
the pension fund is buying an insurance product----
Senator Toomey. Right.
Ms. Birrane. ----in order to meet those obligations.
Senator Toomey. Right. So then it raises an interesting
question like in your experience, Ms. Birrane, I would guess
that you would probably agree with me that insurance companies,
especially like life insurance companies, have extensive
experience in managing long-term liabilities like that is what
they do. So the idea of whether they are in a good position to
manage the long-term liabilities of a defined benefit pension
plan suggests to me like they are likely to be very well suited
for managing that task. Is that your sense?
Ms. Birrane. I would agree, and I would also point out that
they are subject to rigorous financial reporting and oversight
and life insurance annuity contracts are protected by the State
guaranty funds----
Senator Toomey. Right.
Ms. Birrane. ----which have themselves noted that insurance
regulators hold life insurance companies to much stricter
standards and more intensive oversight than are applied by
pension regulations to the pension funds themselves.
Senator Toomey. Right. Now all those rigorous regulations
and supervision that you just alluded to, that does not go away
if the insurance company happens to be owned by a private
equity firm, does it?
Ms. Birrane. No, absolutely not. If anything, private
equity funds tend to be subject to stricter regulation.
Senator Toomey. Thank you.
Director Seitz, it has come to my attention that there is
work being done on an internal briefing memorandum regarding
private equity involvement in insurance, and I am not--you may
be involved in that for the international--I lose track of my
acronyms here, but it is the IAIS. Is that true? Is there such
a memo being in the works?
Mr. Seitz. With regard to the International Association of
Insurance Supervisors----
Senator Toomey. Right, that is it.
Mr. Seitz. ----they have discussed the topic of private
equity, including at its last year's annual conference there
was a panel discussion on that. And it is, I think--you know, I
cannot disclose the private conversations at the IAIS, but
obviously, it is one of the themes that we are seeing in the
macroprudential work being done at the IAIS.
Senator Toomey. So are you involved in an effort to make
recommendations to the IAIS regarding private equity's
involvement in insurance?
Mr. Seitz. As part of our work at the IAIS, we are closely
coordinating with the Federal Reserve----
Senator Toomey. Yeah.
Mr. Seitz. ----the NAIC, and the U.S. States on a variety
of issues including work related to the capital standards and
also regarding the holistic framework which the NAIC is
adopting.
Senator Toomey. OK, but you did not answer my question. Are
you personally involved in research or development of a memo or
an analysis that will include policy recommendations to the
IAIS regarding private equity in insurance?
Mr. Seitz. You know, our teams are working closely with the
NAIC and the States. You know, I am a member of the executive
committee, and there are a variety of topics that the IAIS is
discussing, and one of those topics at our upcoming meetings
will be private equity.
Senator Toomey. Yeah, so you are obviously trying to evade
my question. I do not know why it is such a difficult question
to answer. Let me try it a different way. If there is a memo or
a piece of research work that is done and you are involved in
it and it is submitted to the IAIS, do you intend to share that
with the Committee?
Mr. Seitz. You know, I think similar to the IAIS we value
the importance of transparency at the IAIS, and we would work
with our State and Federal partners at the IAIS to make sure
that there is appropriate transparency. And, this will be a
topic that we will likely include in our upcoming report to
this Committee that is issued with the Federal Reserve Board
regarding our activities in international supervisory forms.
Senator Toomey. I see I am out of time, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
Senator Reed from Rhode Island is recognized.
Senator Reed. Thank you, Mr. Chairman, and thank you, Madam
Commissioner and Director.
In May 2021, GAO released a study about challenges that
insurers and policyholders face in an evolving market for cyber
insurance. Director Seitz, can you explain the key challenges
that GAO identified with respect to pricing cyber insurance and
ensuring that policies provide appropriate coverage?
Mr. Seitz. No. Thank you, Senator, for your question on
that topic. We have closely reviewed the GAO study and
contributed to it, and we agree with the conclusions in that
study, I think, in particular, looking at some of the pricing
challenges and price increases that have been happening for the
sector. Additionally, you are seeing some of the carriers
withdraw coverage from certain parts of the market.
I think, in particular, an area of focus for our office as
we administer the Terrorism Risk Insurance Program is the
extent to which cyber coverage is available to small and medium
enterprises. I think, in particular, we have collected
information for the first time last year regarding the extent
to which SMEs can access that coverage, and that is going to be
a priority of our work going forward and additionally an aspect
of the work that we are doing with CISA regarding the
catastrophic backstop for cyber insurance.
Senator Reed. At this point, just for clarification,
terrorism insurance, would that include cyberattacks or is that
sort of a function of the type and degree of the attack?
Mr. Seitz. The Terrorism Risk Insurance Program does cover
cyber insurance written in the TRIP-eligible lines of
insurance, and with regard to our work in that area it is an
issue that we have discussed extensively in our prior reports,
particularly looking at how the certification provisions under
TRIA would apply to cyber events when you are looking at issues
of attribution and elsewhere.
Senator Reed. Thank you.
Commissioner Birrane and Director Seitz, how are NAIC and
FIO, respectively, working with the insurance industry to
address these challenges of cyber insurance? And every day
there seems to be a new, dramatic challenge presented by cyber
or something, so this is the beginning, not the end, of our
discussion. Madam?
Ms. Birrane. Thank you, Senator. I would say with respect
to the NAIC the first thing that we have done is develop a
cybersecurity supplement by insurers--for insurers' annual
statements so that we can track very closely and gather
information about insurers who are writing cyber insurance
coverage in the U.S. We utilize the data that we have captured
within this cyber supplement to monitor the risk and monitor
what is happening in the market.
I think what we can confirm is that between 2020 and 2021
there was an increase of approximately 75 percent in direct
written premium, but it is very clear that that growth was due
primarily to pricing increases rather that additional
coverages. And so our data confirms that along with an increase
in the frequency and the severity of cyberattacks, and the
number of cyber claims that are continuing to increase,
premiums are going up, limits are going down. It is a much
harder underwriting environment.
I would say with respect to the market as a whole we are
actively engaged in efforts to look at what is the appropriate
backstop, how do we make sure that there is a robust financing
mechanism available, even with--even in the event that the
insurance market does not have the appetite to cover all of it.
Senator Reed. Director Seitz, any comments?
Mr. Seitz. No. I think Commissioner Birrane said it well.
Thank you.
Senator Reed. Commissioner, you clearly point out the
increasing prices of cyber insurance, which obviously affect
every business, particularly small businesses and
municipalities. And what steps can the State regulators take to
try to reduce those premiums and ensure coverage is available?
Ms. Birrane. So insurance is fundamentally based on risk,
so pricing is based on risk. And insurers engage in risk-based
pricing; that is what we expect them to do. And so as risks
increase, so do premiums and costs.
We have switches that we can toggle in terms of opening up
markets like the surplus lines market or captive arrangements
for certain companies and certain circumstances, but at some
point there are risks that are very high. They are either too
large or they are too volatile or they are too certain to be
able to be as affordable as we would like them to be.
I would point out that what we see happening in the market,
in the tightening of the market, the increasing costs, and the
increasing underwriting standards also creates a discipline. It
also helps with good cyber hygiene. So part of what it does is
it asks businesses to themselves be more responsible in terms
of taking their cybersecurity risks seriously, and as companies
pair with insurers to do that and mitigate and reduce their
risk, then that allows their programs to be more affordable.
Senator Reed. Thank you very much.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Reed.
Senator Rounds of South Dakota is recognized.
Senator Rounds. Thank you, Mr. Chairman, and thank you to
both of you for being here with us today.
As you are both aware, in response to the development of
the proposed International Capital Standard, Team U.S.A.
proposed the aggregation method as an alternative framework.
However, comments filed in response to a recent IAIS
consultation on the proposed criteria to determine the
comparability of AM and ICS indicates that the current process
may very well be biased toward the ICS and will likely preclude
a finding of comparability for AM which we use or which we
want.
Could each of you just take a minute and explain why a
Eurocentric capital model would have a negative impact on
consumers' access to U.S. insurance products? I am assuming
that both of you feel that that may be the case. I would begin
with Commissioner Birrane.
Ms. Birrane. Sure. Thank you, Senator, for the question. So
the U.S. market includes a number of foreign-owned insurers
with U.S. businesses. So comparability would allow a foreign
jurisdiction to defer to U.S. capital requirements for that
business, so it encourages that business. Additionally, as
U.S.-based insurers seek to operate abroad, it is important
that those countries recognize relevant aspects of our system.
I would also just point out that the covered agreements
between the U.S. and the EU and U.K., along with our qualified
jurisdiction process, already require recognition of U.S. group
capital. So the IAIS process should really not seek to
contradict that recognition.
Senator Rounds. Thank you.
Director Seitz? And I made the assumption, but I am
assuming that you are in agreement with my statement that we
really want to maintain the current aggregated proposal that we
use in the United States today.
Mr. Seitz. No. Thank you, Senator, for your question on
this issue. It is one that is critically important for the U.S.
insurance sector, and it is one that our team has been working
on for the last several years in close coordination with the
NAIC, the States, and the Federal Reserve. We believe it is
critical that we remain engaged in this conversation for many
of the reasons that you noted. In particular, the international
community is moving ahead with the development of the Insurance
Capital Standard, and we need to be at the table to improve
that methodology so that it is more compatible with our U.S.
system.
As we discussed earlier, you know, the ICS does not
appropriately reflect certain aspects of our regime,
particularly for those long-dated, long-duration products which
are critical for millions of Americans entering retirement. And
I know that will be a priority issue for us over the coming
months, and we look forward to working with the States, the
NAIC, and the Fed as we take this important work forward.
Senator Rounds. Thank you. I really do believe that the
U.S. system of State-based insurance regulation is truly the
gold standard when it comes to protecting our insurance markets
and the insurance consumers in my home State of South Dakota
and across the country.
Commissioner Birrane, do you believe that our State-based
regulatory system has been effective and successful?
Ms. Birrane. Very much so. I think it was interesting, you
know, as Senator Brown referred to AIG. And I think that for
those of us that lived through that period of time and, you
know, the crash of the capital markets in 2008, what we know is
that the one set of companies that did extremely well were the
insurance companies, the P&C carriers that were regulated by
the States. So as AIG sought to recover, it was those
companies, those assets, they were able to sell in order to
fund that recovery.
So where State regulation is in place I think we have
demonstrated effectiveness over time. We talk about life
insurance companies, and we talk about the safety of life
insurance companies. The insolvency of a life insurance company
is almost unheard of, and the notion that policyholders in
those rare instances where there has been an insolvency are not
getting paid is also unheard of.
So I think that what the State-based regulatory system has
proven over and over and over again, you know, having just come
through a pandemic, having just come through a very difficult
environment, having all of the things that are going on in our
society right now, and yet the State insurance system is
protecting policyholders, claims are being paid. And so I think
that it is infinitely clear that the mechanisms that exist at
the State-based level are able to protect policyholders and
respond quickly and nimbly to changes in circumstances that
warrant additional adjustments in how we regulate.
Senator Rounds. Well, Commissioner Birrane, look, I could
not agree with you more, and I really do believe that Congress
should allow you and the NAIC to do your job. And I think it is
imperative that Congress recognizes that it has worked
successfully and that when we start talking about the other
items that are critical--and one of the items on it is private
equity--there are some very good messages out there about what
private equity has done for the insurance markets in the United
States as well.
My time is expired, but I thank you for being--I thank you
both here for your answers today.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Rounds.
Senator Menendez is recognized from his home or his office.
I do not know where he is. Senator Menendez, remote.
Senator Menendez. Thank you, Mr. Chairman.
Last year, I introduced the Clarifying Law Around Insurance
of Marijuana Act, or the CLAIM Act, to provide a safe harbor
for insurers to provide products and services to businesses
that are involved with State-legalized cannabis without the
risk of Federal prosecution. This bipartisan legislation was
included as a provision of the SAFE Banking Act, which I
strongly support.
Commissioner Birrane, can you please describe why we need
the SAFE Banking Act enacted as soon as possible?
Ms. Birrane. Thank you, Senator. As you know, the NAIC does
support the SAFE Banking Act. Insurance regulators recognize
State-legalized cannabis businesses require access to insurance
to mitigate the risks that they face like any other authorized
business. The SAFE Banking Act would help remove Federal
barriers for insurers to insure State-legalized cannabis
businesses. You know, it is really critical that businesses be
able to buy insurance, that they be able to pay for that
insurance, and when claims occur, that insurance companies be
able to use the banking system to pay those claims. The SAFE
Banking Act would allow that to happen.
Senator Menendez. Thank you. I am concerned that businesses
that have nothing to do with cannabis could face serious
consequences if the bill is not enacted. Imagine a scenario
where a New Jersey lightbulb manufacturer sells a product to a
State-legalized cannabis business and there is a fire related
to the lightbulb, causing the business to suffer loss. Under
current law, in the scenario I just described, could the
lightbulb manufacturer's insurance company face Federal charges
if they pay the claim?
Ms. Birrane. So the challenges that insurance companies
have is using the banking system to transfer funds to a
cannabis business. So the answer is that there is a
circumstance which could be challenging for the lightbulb
company's insurer in trying to use the banking system to pay
money to the cannabis business.
Senator Menendez. Well, the House has passed this
bipartisan measure seven times, and I think it is long past for
the Senate to do the same.
Let me turn to pandemic risk insurance. When COVID-19 first
hit our country in 2020, small business owners discovered that
most business interruption policies excluded claims from viral
contamination, disease, or pandemic, leaving many businesses
without relief. Instead, Congress quickly provided on a
bipartisan basis trillions of dollars in aid to help keep small
businesses afloat and save jobs. I am proud I voted for the
American Rescue Plan, which was critical to our COVID response,
but we should be planning ahead to get--to better protect our
economy from the risk of a new pandemic that could threaten to
overwhelm the health system. In today's interconnected world,
the question of the next pandemic is not if, but when.
Commissioner Birrane, is there still limited pandemic
business interruption coverage in the market?
Ms. Birrane. Yes, I would say that the scope of coverage
that is available in the market has certainly not changed; it
certainly has not expanded.
Senator Menendez. So wouldn't business owners, employees,
and the Federal Government be better prepared for the next
pandemic if Congress established a public-private insurance
solution to provide coverage for pandemic-related losses?
Ms. Birrane. I think that business interruption insurance
in a circumstance like this is an area where the risk is
potentially so large and so uncertain that it is not going to
be covered by the private insurance market and in those
circumstances it is certainly appropriate to discuss what
public-private partnerships could do in order to make sure that
financing is available in those extraordinary, catastrophic
circumstances.
Senator Menendez. Well, I appreciate that. It is critical
that we plan ahead for the next pandemic rather than wait until
the next outbreak of a new deadly virus, and far from
incentivizing lockdowns, what we really need is to find a way
to incentivize businesses to preserve the lessons of COVID and
accept a level of personal responsibility if they are unwilling
to do so.
And similarly, I do not know those who would simply wait
until a crisis point and have the Federal Government distribute
trillions of dollars instead of working ahead of time to
develop a more targeted response to the specific needs of an
individual business. That is what I think we should do.
Finally, Mr. Chairman, last month, FEMA reported that over
425,000 policyholders dropped out of the National Flood
Insurance Program since Risk Rating 2.0 took effect. That is
nearly 10 percent of the program. FEMA originally estimated in
a pessimistic model that 20 percent of the policyholders would
drop coverage over 10 years. The Agency predicted it would take
years for 425,000 policyholders to drop coverage, but instead,
it took 8 short months. A majority of homeowners across the
country are already uninsured against flooding, and it is clear
that Risk Rating 2.0 is only making the situation worse.
I think FEMA has misled us, and I want to work with you,
Mr. Chairman, to advance the bipartisan legislation we have
before the problem gets even worse.
Chairman Brown. Thank you, Senator Menendez.
Senator Tester from Montana is recognized.
Senator Tester. Yeah, thank you, Mr. Chairman, and I want
to thank both the folks that are here in front of us today for
testifying.
And I want to touch back on cyber a little bit.
Commissioner, is there anything that Washington, DC,
Congress or the executive branch, needs to do to deal with
cyber from your industry perspective or are we OK where we are
at?
Ms. Birrane. So, Senator, are you speaking in terms of the
protection gap?
Senator Tester. I am speaking in terms of the threat, and I
will get into the increase in premiums due to cyber. Is there
anything we need to be doing to put forth some relief? I am not
talking about writing checks out to people. I am talking about
making policies that will make cyber more manageable. Cyber
threats.
Ms. Birrane. Sure. So I think from the perspective of our
industry we are looking at assuring that there are adequate
controls in the insurance industry so that they can withstand
potential cyber threats. What the NAIC has been engaged in is,
of course, we have developed a model law which States continue
to adopt. Now 83 percent of the market has adopted or are
subject to those laws, which improve and increase the security
of data and the rapidness of notice to insurance commissioners
about when there has been a data incident. We continue to
strengthen and update our guidance for financial examiners.
Senator Tester. But, so what I am hearing you say is that
between NAIC and the State governments that the issue is being
handled adequately.
Ms. Birrane. We believe that we have an adequate framework
in place to assure that insurance companies----
Senator Tester. OK.
Ms. Birrane. ----and insurance data is protected.
Senator Tester. OK. You will have to correct me if I did
not catch this right, but when Senator Reed was asking
questions you said there was a 75 percent increase in premiums
due to cyber?
Ms. Birrane. Right. So on the one hand, we talk about what
insurance companies are doing to make their data safe.
Senator Tester. Yeah.
Ms. Birrane. When we talk about then insurance companies as
risk financiers----
Senator Tester. Yes.
Ms. Birrane. ----so when they sell policies----
Senator Tester. Yeah.
Ms. Birrane. ----policies have certainly become more
expensive for the businesses that buy those policies.
Senator Tester. And that is taking what kind of timeframe,
the 75 percent increase?
Ms. Birrane. That is over about the course of a year.
Senator Tester. One year.
Ms. Birrane. One year.
Senator Tester. Do you--the Ranking Member talked about you
guys dealing with risk, long-term, short-term. Have you guys
done that with issues around climate? Let me give you an
example. Where I live in Montana--it is a big State, but where
I live in Montana it is dry as hell. A few months ago, you
probably heard about the flood that came out over Yellowstone
Park that was a 500-year event. It seems like we are having
500-year events and 100-year events every decade. So do you
guys take that into account?
Ms. Birrane. So we certainly track very closely the
frequency and the severity of perils----
Senator Tester. Yes.
Ms. Birrane. ----and claims. So for example, in the world--
--
Senator Tester. Yeah, go ahead. Keep going, real quickly.
Ms. Birrane. I was going to say, in the world of climate--
--
Senator Tester. Yeah.
Ms. Birrane. ----specifically, we know that weather
patterns are changing and that those weather patterns are
causing increased----
Senator Tester. Yeah.
Ms. Birrane. ----claims activity, et cetera.
Senator Tester. No doubt about that. Can you give me any
kind of an idea, just from a property damage standpoint, what
the increase in premiums has been because of that?
Ms. Birrane. I have to tell you I do not have the numbers
at my fingertips, and I am happy to follow up to give you those
numbers, but the increases are exponential. So we are seeing
much, much larger numbers of claims. You know, weather events
are more frequent. They are more severe and----
Senator Tester. I would love to get those numbers----
Ms. Birrane. Absolutely.
Senator Tester. ----because there are a number of folks in
the body, in Congress, that think ignoring climate is something
that will make it go away when in fact my experience on a farm
in north central Montana is it ain't going away. It is, in
fact, getting far worse. I mean, last year was the worst crop
we ever cut. This year was the second worst crop we ever cut.
And I know I look very young, but we have been on the farm for
45 years. So it is pretty insane.
I want to talk really, really quickly about NARAB. This is
the damnedest thing I have ever seen because we passed a bill
years ago and, quite frankly, we still do not have a board, did
not have it through Obama, did not have it through Trump.
Number one, could you just give me the benefits of that NARAB
board?
Ms. Birrane. So I feel like that is an issue that we would
probably do better briefing you on afterwards in terms of the
board, but you know, the NAIC's position has been that the
board should be created and established.
Senator Tester. Can you give me any update on--Director
Seitz, give me any update on the status of that NARAB board
being fully functional?
Mr. Seitz. No. Thank you for that question. We share
recognizing the importance of NARAB. And it is an issue that we
have been meeting with a variety of stakeholders on,
particularly on the broker community, to sort of think through
that process again, and it is an issue that we have been
focused on for the last few years in our office, of trying to
move that forward.
Senator Tester. Well, and I am way out of time, but I would
just say, please be aggressive. You know, bounce some people
around. Do whatever you got to do. Get this damned thing done.
It would be, I think, a win for the consumer, a win for the
industry, and a win for the Administration. Thank you.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Tester.
Senator Hagerty of Tennessee is recognized.
Senator Hagerty. Thank you, Mr. Chairman, Ranking Member
Toomey. Thank you both, and to our guests, thank you for being
here today.
Commissioner Birrane, I would like to turn first to you.
There have been a number of concerns raised about the lack of
regulation and transparency with respect to private equity
backed insurers. I would like to talk with you from a State
regulatory standpoint. My question is: Are insurers that are
affiliated with private equity firms treated any differently
than other insurers, and are they somehow able to avoid
oversight at the State level?
Ms. Birrane. No, Senator, private equity-owned insurers are
not treated any differently than other insurers except to the
extent that it has been the--common practice since about 2013
that States have actually imposed greater requirements on PE
firms that purchase insurers. So they have generally been
required to accept additional conditions and reporting
obligation as a condition of the approval of their investments
and their investment in an insurance company. So those
stipulations are now part of the financial analysis handbook
that States use when they assess a request by any entity to
purchase an insurance company.
I would also say that more recently, in light of an
increase in PE ownership in life insurers and the complexity of
some of their investments, and investments not just made by PE
owned insurers but by life insurers generally, the NAIC's
Macroprudential Working Group has constructed a list of 13
specific regulatory considerations that are focused on
investment disclosures, ownership and collateral, reliance on
rating agencies, fees, and pension-risk transfer guidance.
Senator Hagerty. I want to come to pension-risk transfer in
just a minute, but I want to be clear. Again, you said that
there are actually additional regulations, an additional layer
of regulations, in place for private equity-owned insurers at
the State level.
Ms. Birrane. That has been the standard that has been
employed by most States.
Senator Hagerty. Thank you. Back to pension-risk transfers,
that is another topic I wanted to discuss with you. That is the
process by which a corporation might transfer its pension risk
to insurance companies. What tools do State insurance
regulators have to ensure the protection of policyholders in
that instance, and are they any less safe once the pension has
been moved to an entity that is regulated by the State
insurance regulatory system?
Ms. Birrane. So the insurance regulators have a very robust
set of tools because we are the primary regulators of the
financial solvency of insurance companies and our system is
designed to avoid failure. Our system is designed to have
tremendous optics into the financial standing of those
companies. We use a variety of tools to assure that companies
maintain the reserves that they need, particularly with life
insurers that have very long-term risk. So there are annuity
obligations; there are life insurance obligations, to assure
that they are adequately reserved.
So we have all of those systems in place. The fact that a
PE company owns that insurance company does not change any of
that.
Senator Hagerty. I would not have thought so.
Ms. Birrane, I want to stay with you for a little bit
longer. As you know, in May, the National Association of
Insurance Commissioners sent a letter to Chairman Brown,
responding to several questions that he had posed on the topic
of alternative asset management companies and the life
insurance sector. In NAIC's response, they laid out pretty
clearly that State regulators, quote, possess the tools and
resources necessary to address Chairman Brown's concerns.
I want to reiterate my support for the role of States as
the primary regulators of the insurance industry. And like any
other industry, life insurance will continue to evolve, and
over the long run I am certain they will provide new and better
products as they evolve, to consumers. And, it is clear from
NAIC's letter that State regulators have the tools they need to
continue in this role. Would you agree with that?
Ms. Birrane. Yes, I would agree with that.
Senator Hagerty. Thank you very much. I appreciate it.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Hagerty.
Senator Warren of Massachusetts is recognized.
Senator Warren. Thank you, Mr. Chairman.
So, not content with buying up hospitals and newspapers and
single-family homes, retail chains, and pretty much everything
else under the sun, private equity has now set its sights on a
new moneymaker, Americans' retirement savings. Over the past
decade, private equity has hoovered up companies that sell life
insurance and other retirement products, and today, private
equity firms control more than 10 percent of all life and
annuity assets in the United States despite having had almost
zero presence just over a decade ago.
Now these new private equity-owned insurers have developed
a particular taste for workers' pensions. Under this model,
called the pension-risk transfer, or PRT transaction, private
equity giants like Apollo are buying up pension obligations
from big employers like JCPenney and Lockheed Martin and Alcoa.
At least 300,000 Americans today have pensions that are managed
by private equity firms.
Mr. Seitz, you run the office inside the Treasury
Department that oversees insurance products, so I want to ask
you about the safety of these Americans' pensions. So let us
say someone retired from a company like JCPenney or Alcoa and
their pension was transferred over to Athene, Apollo's
insurance arm. Would you say that the retirees' pension is just
as financially secure now that it is managed by a private
equity owner-insurer as it was before?
Mr. Seitz. No. Thank you, Senator, for that question. I
mean, we share your view on the importance of this issue and
recognize the importance of pensions to millions of Americans
that are relying upon those for their retirement and a
dignified retirement, and we are working closely with the NAIC
and their regulatory considerations as they look at their
framework and how to best address not only changes in the PE
sector but also, as Commissioner Birrane mentioned, more
broadly in the life insurance sector with regard to their
investment and liquidity.
Senator Warren. Well, I appreciate that you care about
these issues, but that is not the question I asked you. I asked
you, once there has been a transfer to Apollo's insurance arm,
are the people who are covered just as secure as they were
before the transfer? That is easy. Yes or no?
Mr. Seitz. The individuals, when their policies are
transferred, as Commissioner Birrane mentioned, they are
covered by the individual State guaranty funds. And it is an
area of focus for our office to make sure that the State system
is being--regulatory mechanisms are being designed
appropriately to reflect these new transactions, and we
appreciate----
Senator Warren. I am still not hearing a ``yes'' or ``no.''
You know, just to make clear, in a September 2021 report, the
Federal Insurance Office, which you run, stated that ``PE
owners may use investment strategies for their owned insurance
entities that have heightened credit and liquidity risk
profiles as compared to other market participants'' and ``tend
to hold a more significant proportion of investments in
alternative or nontraditional insurance assets that are
associated with illiquidity and complexity premiums.'' You
still agree with what you said?
Mr. Seitz. No. Thank you, Senator. We have articulated
those same points in our letter to Chairman Brown a few months
ago, and it is an issue that we are focused on in our office,
and we appreciate the changing investment portfolio of those
companies as well as across the broader life insurance sector.
Senator Warren. All right. In other words, there is more
risk.
Mr. Seitz. It is an area of increased focus for our office,
and we are looking forward----
Senator Warren. Look, exposing Americans' retirement
savings to more risk is exactly how private equity makes its
money. Riskier and more complex investments mean that private
equity-backed insurers can jack up their returns and their
short-term profits, but the pensions are more vulnerable to
being wiped out by a market downturn which endangers the
insurance company's insolvency. This is not hard. This is just
how the pieces work.
For example, one-fifth of Athene's portfolio is invested in
risky asset-backed securities and leveraged loans made to
companies that are already highly in debt, and even worse, many
of Athene's risky investments are created or managed by the
parent company, Apollo, itself. This means that Apollo collects
fees on the investments that it directed its insurance arm to
make.
So, look, this is a problem of more risk and the risk is
borne by people who have invested for all their working lives
in their retirement security, and I want to underline the word
``security.'' My Stop Wall Street Looting Act would strengthen
private equity disclosures to empower investors and help
regulators crack down on self-dealing, but we also need Federal
and State insurance regulators to step up and address the risks
that private equity poses to pensioners and workers.
I appreciate that Treasury and NAIC are looking at this
issue closely, but enough studying. It is time to act, and I am
looking forward to working with both of your offices to ensure
that happens.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Moran from Kansas.
Senator Moran. Chairman, thank you. Chairman from Ohio,
thank you.
Let me start with you, Director Seitz. Concern has been
expressed by you and some of my colleagues about private equity
firms, however that term is defined, having a short-time
horizon for their investments in insurers and thus may be
willing to engage in riskier activities. Can you tell me if
there are insurers that have been purchased by private equity
that have been sold or up for sale, indicating a quick
turnaround?
Mr. Seitz. No. Thank you, Senator. It is an issue that we
are closely monitoring, particularly over the last--I think as
Commissioner Birrane mentioned, we have seen an increase in
activity over the last several years in this area and
particularly for certain blocks of business, and it is an area
that we are continuing to monitor.
Senator Moran. The question, though, was: Are there
examples of where insurance companies purchased by private
equity are then, in a short fashion, sold?
Mr. Seitz. No. I mean, I do not want to speak to any
specific transactions, but I think generally what we have seen
is they are not, you know, making those types of movements that
you described.
Senator Moran. Thank you. I do want to indicate that my
experience in Kansas is a PE firm's purchase of insurance
companies has turned out to be very valuable to that company,
to those companies, and it benefited the company and its
employees with an influx of capital that fueled growth and
additional jobs and helped those insurance companies continue
to be in existence and to grow their book of business and their
economic activity in our State.
And then I was listening on the television about, and from
my office about, a question that the Ranking Member asked. It
does seem to me this Administration is determined to import
financial regulations and capital standards from Europe as
quickly or as pervasive as they can. My view is that we need
the--that we do not need the importation of European policy
dictating American business and markets and that the FIO's top
priority should be defending American interests and preserving
a system that has worked so well, as I heard you indicate, of
State regulation over a century in those. You ought to be
promoting that in the international forums. And I was not quite
certain that you answered Senator Toomey's question, but I
would add my thoughts to that topic.
Thank you.
Chairman Brown. Thank you, Senator Moran.
Senator Sinema is recognized, I believe from her office,
Senator Sinema of Arizona.
Senator Sinema. Thank you, Chairman. I appreciate this.
You know I want to start by talking to our witnesses about
our working group that I convened last year, a bipartisan
Senate working group with other Members of this Committee to
identify and advance solutions around risk sharing and future
pandemics. Our goal is to improve the resiliency of the U.S.
economy to future pandemic-related economic shocks. Our group
aims to do this by creating and advancing an insurance
framework that brings forward the power of the private sector
and provides business owners with choices to buy coverage that
aligns with their needs and their risk tolerance. That will
reduce the price tag of any future pandemic response and
address some of the waste, fraud, and abuse that we are seeing
with respect to pandemic aid.
Our response to future pandemics needs to be leaner,
faster, and smarter, and it is important to me that future
responses are more fiscally responsible as it is clear that the
risk of overspending, coupled with supply chain disruptions,
can trigger an inflationary response.
So first, to Commissioner Birrane, I appreciate your
joining us today. As you know, for insurance policies that
cover event cancellation and business interruption, virtually
all of them include an exclusion that exempts pandemics from
coverage. Despite this inclusion, I have heard from businesses
and insurance brokers alike that event cancellation and
business interruption coverage is increasingly difficult to
find and it is expensive if you can find it. What do you see in
the market for these lines of insurance?
Ms. Birrane. Well, I think your characterization of the
current market condition is correct, and I do not see that
changing in the near future. I think that there are certain
types of risk that are, as I have said before, too large, too
volatile, too certain for the market to be able to absorb them.
Senator Sinema. Thank you. Our working group is concerned
about this because we want businesses to be able to find and
afford the insurance policies they need to qualify for
financing and to responsibly plan for the future.
So my next question is also for you, Commissioner. For a
future pandemic, I would like to also see an insurance solution
for small businesses so that they can take a level of
responsibility that aligns with their risk tolerance. In 2020,
some Arizona businesses had to wait months to get their PPP
loans, and they had to go from bank to bank to access relief. I
would rather have a framework where businesses could purchase
subsidized coverage, where it is affordable to the business
owner, and the business owner knows exactly how much coverage
they are getting. Would you agree that a pre-established,
private insurance policy would generally provide faster and
more predictable relief for businesses to plan around?
Ms. Birrane. Well, what I would suggest is that, you know,
the NAIC has supported the idea of a Federal backstop of sorts
with respect to BI coverage, and certainly it is important that
business owners have a sense of certainty about, you know, what
their coverage options are and what their costs are. There are
a variety of models that work well when the Government and
private industry couple together. That draws on the strength of
each, the strength of Government to be able to fund more
broadly and the strengths of insurance companies to be able to
appropriately underwrite and price and adjudicate claims and
assist businesses in risk mitigation.
So I would say, overall, there is a case here to be made
for such a partnership and the particular model of that
partnership is something that the NAIC does not really have a
position on.
Senator Sinema. Thank you. And would you agree that the
risk management and auditing capacities that private insurance
brings would be helpful in reducing waste, fraud, and abuse in
a future pandemic?
Ms. Birrane. I would certainly say that insurance
companies, part of what they bring to the table in any
circumstance is expertise in underwriting and in risk
mitigation as well as risk financing and fraud detection.
Senator Sinema. Thank you. Now I have a question for you
about insurance more generally. In your experience regulating
insurance companies, would you say that an insurance carrier
bearing some level of risk incentives incentivizes them to
conduct more robust auditing and risk management since their
own capital is on the line?
Ms. Birrane. I would say that insurance companies are very,
generally very, effective at reviewing risks and in helping
their insureds to mitigate those risks. So that is certainly
part of what you get when you have an insurance policy,
particularly in the property and casualty area that--or
workers' compensation--the insurance company often plays a very
integral role through the underwriting process and the pricing
process in helping companies to mitigate the risk that they are
trying to finance.
Senator Sinema. Thank you. And finally, I will just say, we
are working to identify a thoughtful and bipartisan Federal
solution to address this issue and create a smarter response
for future pandemics. Our working group appreciates the
National Association of Insurance Commissioners strong
leadership in endorsing a Federal solution in this space, and I
am looking forward to working with you and other key
stakeholders to find a path forward here.
So thank you, Mr. Chairman. I yield back.
Chairman Brown. Thank you, Senator Sinema.
Senator Van Hollen of Maryland is recognized.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you to
both of our witnesses here today.
And, Commissioner Birrane, it is great to have a fellow
Marylander here. Thank you for your work protecting the
interest of Marylanders and your work at NAIC.
And I also want to thank you and NAIC for helping me and
some of my colleagues prepare legislation to protect seniors
from financial fraud. The legislation is entitled Empowering
States to Protect Seniors from Bad Actors Act, and it would
provide an authorization grant program to the SEC to provide
both State securities and insurance regulators with additional
resources to crack down on fraud, which we know is a huge
problem, $3 billion a year at least in financial scams. Can you
just speak briefly to the importance of passing this
legislation to protect seniors from financial fraud?
Ms. Birrane. Absolutely, Senator. We have been very happy
to work with you on that initiative. I mean, consumer
protection is what insurance regulation is all about, and there
is probably no more important area of consumer protection than
assuring that our seniors are not subject to aggressive
marketing tactics and to, you know, other fraudulent practices.
So it is really critically important that we have all the
resources available to assure that we are on the ground,
working with seniors directly, to be able to prevent them from
being caught up in fraud.
Senator Van Hollen. Thank you. And I am going to take this
chance to ask the Chairman and the Ranking Member to join us in
getting that bipartisan out of the Committee.
Chairman Brown. Senator Van Hollen, we were just speaking
about it quietly while you are asking----
Senator Van Hollen. Thank you. I appreciate that. I thank
you. Thank you.
Chairman Brown. Thank you.
Senator Van Hollen. Let me ask you a couple questions
regarding capital standards in the context of climate risk. As
you well know, an important role of a State insurance regulator
is to monitor the capital adequacy of insurers to ensure their
ability to pay their claims following catastrophic events. One
of the concerns is that with increasing severity and frequency
of extreme weather events that the risk-based capital models
may overemphasize the trends of older historical data and not
adequately assess newer risk.
So, a two-part question, Commissioner Birrane: What is the
NAIC doing to ensure that its models incorporate the most
recent and relevant climate data in order to reflect the true
risks, and second, from a risk management and capital adequacy
perspective, how important is it for insurance regulators to
have standardized, comparable data on climate risk?
Ms. Birrane. So with respect to the first issue, I would
say that what our solvency workstream is doing and what our E
Committee is doing is working very closely and making sure that
our models are accurate and are up to date, and we are adding
additional perils to the RBC capital framework to assure that
we capture more broadly the various events that can occur. So
that is the first thing.
And second, with respect to data collection, the NAIC has a
rigorous process of data collection that we think captures what
needs to be captured, and that is something that is subject to
constant update and improvement. So we have both on the
individual State level and in the aggregate through the NAIC
the ability to capture data in a way that insurance regulators
use that data to understand what are claims patterns and where
claims are occurring, and why and how, you know, claims are
being paid and what the impact of that is on the solvency and
the financial status of entities.
Senator Van Hollen. So is there an effort to create some
kind of national standard so that States are not using, you
know, 50 different standards for this purpose?
Ms. Birrane. There is conversation through our center of
excellence on the development of a single standard and being
able to work through, with insurance companies, what would be
appropriate in that regard. So that is a conversation that is
occurring as to whether a centralized and standardized approach
is the one that makes the best sense, but I want to assure you
that in the interim the data collection that occurs around
natural disasters and in terms of insurance companies is very
robust.
Senator Van Hollen. Thank you.
Mr. Seitz, I do not know if you want to, in my remaining
time, just comment on those two parts of that question.
Mr. Seitz. No. I would just say we share your view on the
importance of consistent, comparable, and granular data. I
think, particularly for our office, we are looking at it
through the lens of the availability and affordability of
coverage, particularly in the homeowners' business line, and it
is an area that we have seen a need for some national standards
and approaches to.
Senator Van Hollen. Thank you. If you could just get for
me--I was--we have obviously seen a huge increase in losses,
property losses, due to extreme weather events over the last
couple decades. There have been a number of reports. If you
could maybe try to quantify for me and the Committee what the
increased premiums have been as a result of increased climate
risk, I realize that is an imperfect science, but I would like
a ballpark estimate if you could get back to us on that. All
right? Thank you.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Cortez Masto from Nevada is recognized from her
office.
Senator Cortez Masto. Thank you, Mr. Chairman. Thank you to
the two speakers today.
First, let me at the very beginning show support for
Menendez's, Senator Menendez's, line of questioning around the
SAFE Banking Act. The SAFE Banking Act is about supporting
small businesses in this country, which are the backbone of our
economy, and it is bipartisan, has bipartisan support. I think
it should be passed. So I hope my colleagues feel the same way.
Mr. Seitz, Director Seitz, let me talk to you a little
about the Federal Home Loan Banks review that is happening. The
FHFA recently announced a thorough review of our Nation's
Federal Home Loan Banks system. My first question to you is:
Are you aware of the proposed review? And if you are, I really
have a question about whether the Federal Insurance Office
plans to monitor or participate in the review, the Federal Home
Loan Banks' review, is going to happen as well.
Let me just put this out there. It was surprising to me to
realize that 548 insurance companies are members of the Federal
Home Loan Banks and that they receive about one-quarter of the
advances. So I am curious if your organization is going to be
reviewing and following what the FHFA is doing.
Mr. Seitz. No. Thank you, Senator, for that question. The
Federal Home Loan Banks play an important role in our housing
markets, and we are very well aware in FIO that insurance
companies, particularly life insurers, are increasing
participants and are taking significant advances from the
FHLBs. It is an area that we have been discussing with our
colleagues at the FHFA, and we look forward to continuing to
engage with them as they begin the review process which just
recently started.
Senator Cortez Masto. Good. Thank you. And I hope you do; I
hope you do continue to monitor.
Let me jump to an issue that my colleagues have been
talking about, which is private equity, but before we get
there, I want to follow up on business interruption insurance.
Mr. Seitz, in March of 2020, when the COVID-19 pandemic
began, my office received calls from business owners who had
bought insurance. They chose policies that included business
interruption insurance, and they paid their premiums. Then when
the pandemic hit, they had to close down due to a risk of
contamination, obviously, but they were not covered.
So I guess my question to both of you is--and you talked a
little bit about it. Is it feasible for insurance companies to
provide pandemic insurance? That is one.
But then, two, when it comes to private equity, Ms.
Birrane, let me ask you this because you talked about in
particular the transfer of ownership or risk from private
equity to insurance companies. And one of the things you
identified is that there are certain types of risk that are too
large and too volatile for the market to absorb them, but you
do not feel that way about private equity as they come in and
purchase so many of, unfortunately, insurance companies and
have so much--so many assets.
And I know I am asking and conflating two questions, but
they are similarly related. And this is the concern; if
insurance companies are not covering the risk when there is a
pandemic even though companies are paying for it, if there are
some risks related with private equity and there is, God
forbid, some disaster economically, how can we guarantee that
that coverage will exist by insurance companies as well? Is
there a correlation between the two? Do you not see that?
Or, do you feel that protections have been put in place, as
you say, Ms. Birrane, by the NAIC adopting these new
regulations when it comes to private equity? Maybe let us start
with you.
Ms. Birrane. Sure. So what I would say is like let us think
about this as a matter of contract. So when you think about the
business interruption insurance that was baked into policies
that were purchased by businesses, those contract terms
actually, for the most part, exempted business interruptions
that are caused by things like contamination, you know, that
would fall within a pandemic or that did not result from a
physical covered peril. So from a contract perspective, those
gaps in coverage were baked into the policies, and
unfortunately, many business owners were not as--were not
really aware that those limitations existed.
If we look at private equity as a general matter, I would
come back to the notion that the private equity firm, as an
owner of the insurance company, does not run the insurance
company in the same way. Insurance companies are subject to a
set of very clear rules and guidelines around what insurance
companies can do, from the kinds of investments that they can
make to the credit they get for those investments, to the risk
based capital standards that are in place. None of those are
different because the owner is a private equity company. So we
continue to monitor and regulate the performance of the company
regardless of the ownership.
So, hopefully, that helps contrast those two circumstances.
Senator Cortez Masto. And I know my time is running out,
and thank you for that. That is very helpful.
But, Director Seitz, do you feel the same way with respect
to private equity companies, that they can be adequately
protected by additional conditions or these 13 new regulations
that NAIC has adopted?
Mr. Seitz. No. I mean, we appreciate the importance of
retirement security products for millions of Americans, and we
are working closely with the NAIC and the States as they
develop the regulatory considerations. And as our letter noted
to Chairman Brown, there are certain areas of focus for our
office and also they extend, you know, to the life insurance
sector more generally irrespective of sometimes the business
models as well.
Senator Cortez Masto. Thank you.
Thank you, Mr. Chairman. I know my time is up. I appreciate
it.
Chairman Brown. Thank you, Senator Cortez Masto.
Thanks, Commissioner, and thanks, Director, both of you,
for answering questions forthrightly and being here today and
especially for your public service.
I would like to submit for the record the testimony of
Colleen Riedel, a retiree of Qwest through the Northwest Bell
Telephone Company, a member of Communication Workers of
America, whose pension is now administered by Athene.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today, Thursday, September
15th.
You would be getting those. To the witnesses, please submit
your responses to questions for the record 45 days, no more
than 45 days, from the day you receive them. Thank you again.
With that, the hearing is adjourned.
[Whereupon, at 11:26 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Every American needs insurance--whether it's auto insurance to
protect us when we're on the road, or homeowners' insurance to protect
the biggest investment for most families, or life insurance to cement
your family's financial security in the event of a tragedy.
It's our job to make sure that the industry is protecting
Americans' hard-earned money--not putting it at risk.
American insurance companies are regulated by State insurance
commissioners. The State-based system of insurance regulation is
historic, and ensures local markets and needs are taken into
consideration.
The National Association of Insurance Commissioners coordinates
State commissioners across all jurisdictions, to identify and address
risks to the entire system.
In the Wall Street Reform Act, Congress created the Federal
Insurance Office within the Treasury Department to promote national
coordination in the insurance sector. It's common sense--insurers
operate across all State jurisdictions and internationally.
I'm pleased to have both the Maryland Commissioner Kathleen Birrane
on behalf of the NAIC, and Director Seitz of FIO testify today.
If we're going to keep Americans' hard-earned money safe, it is
more important than ever that they work together.
Today we'll explore many important topics.
For example, 3 months ago, Lockheed Martin transferred $4.3 billion
of its pensions to Athene Holding--an insurance holding company
specializing in life insurance and owned by the private equity firm,
Apollo Global Management.
Overnight, Lockheed Martin employees and retirees were notified
that their pensions would be managed by Athene and no longer governed
by ERISA or the Pension Benefit Guaranty Corporation.
This is just one recent example of private equity giants' expansion
into people's pensions and the insurance industry.
We know that workers end up worse off when Wall Street private
equity firms get involved. We've seen it over and over, in industry
after industry.
In March, I asked the NAIC and FIO to look into private equity's
expansion into similar pension-risk transfer transactions. We need to
understand the risks to workers whose financial security depends on
pension and retirement programs.
The NAIC and FIO provided thoughtful responses to my letter. The
NAIC has been monitoring the risk-taking behavior of private equity-
owned insurers.
FIO has done similar work, and also looked at the wider
interconnectedness of insurance and reinsurance markets across the
world. Those connections have added to systemic risk concerns, because
U.S. insurance companies depend even more on the financial health of
insurance companies outside the United States.
Taken together, our insurance authorities are focused on these
emerging and complex risks to safeguard our economy.
Our communities and families rely on insurance companies to protect
their loved ones, their homes, small business, and so many parts of our
lives. We can't ignore when risks build up, or firms behave
irresponsibly.
And we know who always pays the price when they do. It's not
insurance executives. It's not private equity executives. It's not Wall
Street.
It's workers and their families. And it's taxpayers, who were
forced to bail out AIG 15 years ago.
That should never happen again.
That also means looking around the corner to make sure the industry
and agencies are prepared for risks as they develop. As more Americans
face increasingly severe climate catastrophes like wildfires and
hurricanes each year, we need to help communities prepare--and we need
to ensure insurance watchdogs and the companies they oversee are
prepared.
In the aftermath of some of these natural disasters, we have seen
instances where insurers either raise prices or stop offering insurance
altogether, leaving families and businesses struggling to find
affordable coverage as they rebuild their lives and communities.
We also know this industry has a long history of racial
discrimination, just like so many big industries.
Black and Brown families face more difficulty in getting insurance
across the board. We've seen this happen in auto insurance.
Earlier this year, the New York Times also reported that customers,
insurance agents, and employees sued State Farm for discrimination in
the workplace and in paying out claims.
My colleague Chairwoman Waters has been working on learning more
about this as well. Her committee recently requested information about
large life and P&C insurers' involvement in financing chattel slavery.
And I'm glad FIO and NAIC are also working on this. NAIC is
investigating through its Special Committee on Race and Insurance.
And I look forward to reviewing FIO's upcoming report on
availability and affordability of auto insurance, and hope it will shed
more light on racial equity in accessing this insurance.
Finally, later this year, the International Association of
Insurance Supervisors will meet to consider whether the U.S. insurance
system's review of capital adequacy standards meets international
criteria.
Because we regulate insurance differently here in the U.S., where
State and local markets and international markets are served by the
same companies, it's important that representatives of the U.S. system
like FIO and the NAIC advocate for fair treatment by the international
regulators.
And now that the Fed Vice Chair for Supervision has been confirmed,
Michael Barr and the offices testifying here today will get to work
with our international counterparts in this process.
All of these issues show how critical the work of FIO and NAIC is
to our economy's health and stability. I expect FIO and NAIC to
prioritize monitoring these risks in their ongoing work.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman. And welcome to our witnesses.
It has been quite some time since this Committee has held a hearing
on the insurance industry. There are several topics that I'd like to
discuss today, including the importance of State-based insurance
regulation, efforts to develop international insurance standards,
efforts to use the insurance industry to effect changes in social
policy, proposals to create a federally guaranteed pandemic risk
insurance program, and, finally, the importance of risk-based pricing.
I think it's important to remind everyone that insurance firms are
primarily regulated at the State level. Insurers have been chartered
and regulated by the States for the past 150 years. When it comes to
insurance, the Federal Government has an extremely limited regulatory
role, which I see little need to expand.
This system works well for both consumers and industry. That's one
reason why we need to pay close attention to efforts to develop and
implement international insurance standards by international bodies. In
particular, I worry, as do others, that the Insurance Capital Standard,
or ICS, currently being developed by the International Association of
Insurance. Supervisors is incompatible with the U.S. insurance market.
There is widespread concern that the ICS is too sensitive to short-
term fluctuations in markets and does not take into account certain
assets that insurers hold. As a result, the implementation of ICS in
its current form would harm the availability of long-term products that
Americans rely on for financial security. Our U.S. representatives at
IAIS need to make sure ICS works for the U.S. market by not allowing
the proposal to go forward.
Next, I'd like to touch on troubling efforts to use our financial
system to address climate change. Some liberal activists want to
pressure insurance companies and other financial institutions to deny
services to traditional energy companies and other carbon intensive
industries. Such efforts are profoundly misguided.
Addressing contentious issues like global warming requires
political decisions involving important tradeoffs. We've seen those
tradeoffs in action in recent months.
With soaring energy prices, European Nations have made plans to
reopen coal power plants and extend the lives of nuclear plants.
Likewise, in the U.S. we've seen the Biden administration's hostility
to new energy production lead to shockingly high gasoline prices.
That's a painful consequence of their policy choices. In a
democratic society, those tradeoffs must be made by elected
representatives, who are accountable to the American people, not
unelected activists and bureaucrats.
To be sure, insurers face financial risks in the form of natural
disasters. After all, that's a core business of the property and
casualty insurance industry. Insurers must be allowed to set premiums
that accurately reflect such risk, and to the extent climate change
exacerbates these risks, they should adjust their prices accordingly.
Higher premiums are an important signal to policyholders that warn
of increased risk of fire, flood, earthquake, or other peril. Further,
they create a financial incentive to mitigate risk, leading to a safer
and more resilient society. The bottom line is that a well-functioning
insurance industry is quite capable of addressing the natural disaster
risks it faces today and in the future.
I'd also like to address calls to create a federally guaranteed
pandemic risk insurance program. As proposed, this program would be
akin to the Terrorism Risk Insurance Program, or TRIA.
As a reminder, TRIA mandates that insurers offer terrorism
insurance, and in the event of an attack, the Federal Government bears
an increasing share of the cost of claims, depending on the severity. A
similar program for pandemics would be misguided.
First of all, it's hard to imagine that insurers are well equipped
to quickly distribute hundreds of billions or even trillions of Federal
dollars. Recall that in a matter of months the Paycheck Protection
Program distributed over half-a-trillion dollars via the banking
system, but banks and other financial institutions participated on a
voluntary basis. Compare that to the disastrous claims processing after
Super Storm Sandy.
But most importantly, a federally guaranteed pandemic risk
insurance program would encourage State and local government officials
to impose economically devastating shutdowns in the future. Such a
program would, in fact, incentivize State and local policymakers to
quickly impose lockdowns with the justification that the Federal
pandemic risk insurance will bail them out.
Instead of considering policies that will facilitate future
lockdowns that repeat the mistakes of the past, we should be thinking
about future mitigation measures that don't crush businesses, workers,
and the economy, and harm our children's educations.
Let me conclude with this observation. I believe a well-functioning
insurance industry is a critical component of economic prosperity and
financial security for all Americans. Everyone will be better off if we
resist activist efforts to use insurance as a tool to pursue a social
policy agenda.
Insurance is not a legitimate tool, as some have suggested, to
decarbonize the economy, infringe on the Second Amendment rights of
law-abiding Americans, or mitigate wealth inequality.
Let's have insurers stick to the business of insurance. I look
forward to discussing these issues today.
______
PREPARED STATEMENT OF KATHLEEN A. BIRRANE
Maryland Insurance Commissioner, on behalf of the National Association
of Insurance Commissioners
September 8, 2022
Introductory Remarks
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you for the invitation to testify today. My name is
Kathleen Birrane and I serve as the Maryland Insurance Commissioner. As
such, I am a member of the National Association of Insurance
Commissioners (NAIC), where I serve on the Executive Committee and as
the Chair of the Innovation, Cybersecurity, and Technology Committee,
Vice-Chair of the Climate and Resiliency Task Force and Co-Chair of the
Health Insurance Work Stream of the Special Committee on Race and
Insurance. On behalf of my department, my fellow State and territory
insurance regulators, and the NAIC, I appreciate the opportunity to
testify today. I look forward to discussing the ongoing work of
insurance regulators and the NAIC, as well as our views on several
topics of interest to this Committee and insurance sector stakeholders.
The U.S. insurance market is the single largest and most
competitive in the world. State insurance regulators supervise more
than one-third of global premium. As of 2021, the life insurance
industry reported $1.1 trillion in total direct written premium and
deposits. \1\ Property and casualty insurance companies reported $798
billion in direct premiums written for 2021. \2\ The U.S. insurance
industry's cash and invested assets surpassed $8 trillion at the year-
end of 2021. \3\ Taken individually, U.S. States make up more than half
of the 50 largest insurance markets.
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\1\ https://content.naic.org/sites/default/files/inline-files/
2021%20Life%20Annual%
20Industry%20Commentary.pdf
\2\ https://content.naic.org/sites/default/files/inline-files/
2021-Annual-Property-26-Casualty-and-Title-Insurance-Industry-
Report.pdf
\3\ https://content.naic.org/capital-markets-bureau
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State regulators share a mission to ensure a stable, competitive,
and well-regulated insurance marketplace where U.S. consumers are well-
informed and well-protected. States work hard to strike an appropriate
balance between solvency and product availability and affordability,
providing the risk financing that allows individuals and businesses to
thrive, while preserving the ability of the sector to meet those
financing obligations and pay claims. As we look ahead, we are
addressing a number of evolving dynamics, such as the impact of
inflation on pricing and claims, the rise of interest rates and the
fall of investment returns, risk-taking in insurers' investments, the
intersection of race and insurance, climate risk and resilience, cyber
risk, and the impact of technology on consumers, companies, and
supervisors, among a host of others.
As a national system of State-based regulation, we collaborate
closely on a regular basis and have long been committed to providing
leadership across the entire spectrum of global and domestic insurance
issues and activities. The financial strength of our insurance system
was tested simultaneously by a global pandemic, historic natural
catastrophes, financial volatility, and social unrest, and yet it
persevered. In fact, an S&P Global rating report on the insurance
industry found that North America appeared to be the ``most resilient
region'' in the face of COVID-19. \4\ That is because as our insurance
markets grow and become ever more complex and sophisticated, our
regulatory tools and priorities continually evolve. With that, allow me
to update you on some of the long-standing and new initiatives State
regulators are working on through the open and transparent NAIC
process.
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\4\ Dennis P. Sugrue, ``Down But Not Out: Insurers' Capital
Buffers Are Proving Resilient in the Face of COVID-19'', S&P Global
Ratings, Sept. 22, 2020, at 9, available at https://www.spglobal.com/
ratings/en/research/articles/200922-down-but-not-out-insurers-capital-
buffers-are-proving-resilient-in-the-face-of-covid-19-11656633.
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Innovation, Cybersecurity, and Technology
State insurance regulators understand that insurers are
increasingly using technology, big data, and predictive analytics to
reshape the insurance marketplace and the way insurers approach risk
and engage with consumers. These technological developments have the
potential to improve how an insurer does business and can benefit
policyholders. However, we recognize the complexity of these processes
and the need to ensure they comply with State insurance laws and
regulations designed to protect consumers. Insurance regulators are
committed to striking the appropriate balance between encouraging
innovation while maintaining the strong consumer protections embedded
in our regulatory system.
To this end, last year, we formed a new NAIC Innovation,
Cybersecurity, and Technology (H) Committee, which I chair, to address
the insurance implications of emerging technologies, cybersecurity, and
data privacy. The new committee, and its work, demonstrates our
commitment to recognizing the significant impact data and technology is
having in the insurance industry and ensures consistent and
collaborative coordination among State regulators.
One of the H Committee's key projects is the establishment of a
Collaboration Forum as a mechanism for multiple NAIC committees to
coordinate their work on issues relating to technology, cybersecurity,
and data privacy. The Collaboration Forum bring work groups together to
identify and address foundational regulatory issues and to develop a
common regulatory framework that can inform further work. The first
project of the Collaboration Forum is on algorithmic bias, more
specifically, how digital decisional systems and complex predictive
models driven by artificial intelligence and machine learning can
result in unfair and illegal discrimination in the insurance market.
From such inclusive forums we are better able to make informed
decisions on how to structure an appropriate regulatory framework
around these emerging areas. For example, in the case of insurers' use
of AI and algorithmic models for rating, underwriting and other
decisional purposes, we are building on the AI Principles that the NAIC
adopted two years ago to establish principles-driven guidelines and
directives for the application of antidiscrimination laws to the use of
artificial intelligence.
Additionally, the committee has several specialized working groups,
including a Cybersecurity Working Group, coordinating, and
communicating amongst State regulators on cyber events, trends, and
overall industry cybersecurity posture. It is also developing tools to
support State insurance departments' cybersecurity oversight and
response duties. Our Privacy Protections Working Group is drafting
updates to certain NAIC privacy models, which address insurance privacy
protections on the collection, use, and disclosure of information
gathered in connection with insurance transactions. Finally, our Big
Data and Artificial Intelligence Working Group is analyzing data
received through the NAIC's artificial intelligence and machine
learning private passenger automobile survey and initiating similar
surveys for homeowners and life insurance. In each of these areas, our
work is focused on gaining a granular understanding of how AI/ML
supported models are being used by insurers and their vendors across
the insurance value chain and, most particularly, in making decisions
that impact consumers. These surveys enable State regulators to
identify and dig deeply into areas of regulatory concern, such as
oversight of third-party data and model vendors and their work product.
State insurance regulators continue to upgrade safeguards to
protect the security of data through standards, the examination
processes, and model laws. For example, in 2017, the NAIC adopted the
Insurance Data Security Model Law, which updated State insurance
regulatory requirements relating to data security, the investigation of
a cyber event, and the notification to State insurance commissioners of
cybersecurity events at regulated entities. Thus far, 21 States
(including the State of Maryland) have adopted the model, which covers
nearly 3,000 insurers representing over 80 percent of the market by
gross written premium. Further, the NAIC is continuing to update and
strengthen guidance in its Financial Condition Examiners Handbook to
draw more focus to cybersecurity during a financial exam. The NAIC
continues to sponsor tabletop exercises with insurers, regulators, and
law enforcement to explore cyber incident response and recovery.
Maryland will host its tabletop exercise this October. Finally, we
engage with State and Federal counterparts on cyber security issues
impacting our Nation's financial infrastructure, through the Financial
and Banking Information Infrastructure Committee (FBIIC).
Race and Insurance
Another area of significant activity for State insurance regulators
is the intersection of race and insurance. In 2020, in the wake of a
national call to action on race and inequality issues, the NAIC created
a Special Committee on Race and Insurance, the first of its kind in
NAIC history, to evaluate racial inequity in the insurance sector. Our
formation of such a committee was emulated by others throughout the
insurance sector leading to a national discussion on this important
topic. The committee is focused on addressing access to the insurance
sector and market barriers to the acquisition and use of insurance
products by researching: (1) the level of diversity and inclusion
within the insurance sector and developing recommended action steps for
insurance regulators and companies that reflect a broad consensus among
NAIC members; (2) diversity, equity, and inclusion best practices
within State insurance departments and developing forums for sharing
relevant information among States and stakeholders; and (3) barriers
that may disproportionately impact people of color and/or historically
underrepresented groups within the property and casualty, life
insurance and annuities, and health insurance lines of business.
This year we have taken a particular focus on addressing barriers
that prevent or limit access to the insurance market. As we identify
these barriers, we are formulating targeted strategies that open up the
insurance market to diverse and underserved communities. We firmly
believe that if more consumers have the benefit of protections provided
by quality products they and their families will be better protected
and, in a position, to build generational wealth.
We are also pleased to share that the NAIC has formed the New
Avenues to Insurance Careers Foundation. The Foundation will focus on
fostering interest in careers in insurance and insurance regulation,
with particular focus on students from underserved and diverse
communities. We believe the lack of diversity in the insurance sector
is one of those barriers to entry that we can help address. As a
result, this is an important step that will advance one of the key
goals of the Special Committee on Race and Insurance and support our
members' efforts to increase diversity and inclusion in the regulatory
community.
State regulators believe there should be equal access to insurance
markets and products, and we must ensure that insurance companies are
not unfairly discriminating at any stage of the insurance process, from
underwriting to rate setting, to claims handling. The volume of data
being created, combined with ever evolving computational techniques,
have resulted in unprecedented data mining capabilities that fuel the
development of predictive models used to support decision making by
insurers. These AI/ML driven decisional systems can and do incorporate
and amplify unfair bias which can result in unfair discrimination when
applied to consumers. The Algorithmic Bias Project of the H Committee's
Collaboration Forum is addressing unfair algorithmic bias, how it
emerges, and the right regulatory approach to mitigation and detection.
The Project recently held a multiday collaboration session for State
insurance regulators featuring academics and experts on this topic.
These issues are complex and far reaching, and our work is necessarily
measured and deliberative to avoid unintended consequences in the
market. We are committed to continuing these important efforts and
welcome your engagement.
Climate Risk, Natural Catastrophes, and Resiliency
Another top priority for the NAIC is climate risk and resiliency.
State insurance regulators, through the NAIC, have had a climate-
specific working group for more than a decade. In 2020, the working
group evolved into our Climate and Resiliency Task Force, which serves
as the coordinating NAIC body for discussion and engagement on climate-
related risk and resiliency issues. It builds on existing efforts to
address the economic consequences of natural disasters, including
efforts to mitigate their toll. In addressing this evolving risk, we
are focusing on the analysis of climate-related financial risk, the
availability and affordability of insurance, and stakeholder risk
awareness and engagement. We continue to advocate for resiliency and
mitigation efforts that can reduce the risk of property loss. This
keeps people in their homes and businesses open. Resiliency and
mitigation are particularly important for communities that cannot
afford to bear the burden of catastrophes and are most challenged to
recover.
Our detailed work to address climate-related risks in the insurance
sector is highlighted in our letter to the U.S. Department of the
Treasury regarding its request for information for its upcoming climate
report. \5\ The NAIC also issued a report titled, ``Adaptable to
Emerging Risks: The State-Based Insurance Regulatory System is Focused
on Climate-Related Risk and Resiliency.'' \6\
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\5\ https://content.naic.org/sites/default/files/testimony-letter-
response-fio-rfi-climate-financial-risk-211111.pdf
\6\ https://content.naic.org/sites/default/files/climate-
resiliency-resource-report-adaptable-emerging-climate-related-risk-
resiliency-2021.pdf
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Of note, this year, our Task Force facilitated revisions to the
Climate Risk Disclosure Survey for participating States, which is now
aligned to the Financial Stability Board's Taskforce on Climate-related
Financial Disclosure (TCFD). The survey, which was first adopted by the
NAIC in 2010, is a risk management disclosure tool for States to
require of their insurers. These disclosures help insurance regulators
assess and evaluate insurance industry risks and actions to mitigate
climate risk. Currently, 15 States are participating in the survey with
nearly 80 percent of the market captured by direct written premium.
This year, participating States will require licensed insurers writing
at least $100 million in direct premium to publicly report a TCFD.
State insurance regulators also continuously monitor the capital
adequacy of insurers to ensure their ability to pay claims following
catastrophic events. A fundamental tool for monitoring capital adequacy
is the NAIC's Risk Based Capital (RBC) formula, which determines the
minimum amount of capital an insurer should hold based on its risk
profile. Regulators continually update RBC charges to address the
evolving risk landscape. For example, in 2017, the NAIC expanded the
risks quantified in the RBC formula to include a specific charge for
hurricane and earthquake catastrophe risk in order to recognize
increased exposure to catastrophic events. Most recently, the solvency
workstream of the Task Force recommended that wildfires be added to the
RBC framework for catastrophe risk exposures. In addition, based on the
recommendations of the Task Force, the NAIC's Financial Condition
Committee is considering specific enhancements to the solvency
oversight tools used by State insurance regulators that will expand the
evaluation of an insurer's exposure and response to climate-related
financial risk, particularly in areas such as transition risk. The Task
Force is also evaluating viable approaches to scenario analysis and
stress testing for insurers as the data necessary to conduct such
exercises becomes available.
The role that State regulators play with respect to climate risk
involves more than just ensuring financially strong insurance companies
and a viable market; it also includes ensuring strong and resilient
homes and communities. Insurers are risk financers and, as such, are
risk managers and risk mitigators. Leveraging that, our members are
leaders in the effort to help State and local governments build more
resilient communities. State insurance regulators encourage the use of
innovative building materials, technology, and mitigation methods to
reduce the impact of climate risk across a broad spectrum of natural
catastrophe risks, and, most importantly, they work with insurers to
design new and innovative products, and to establish partnerships with
insurers that can help guide and finance community efforts.
Significantly, the NAIC has established a catastrophe model center
of excellence within its Center for Insurance Policy and Research. This
center will provide State insurance regulators with access to
information, education, and training regarding catastrophe models, as
well as conduct applied research to address regulatory climate risk and
resilience priorities.
Financial Regulatory Oversight
Turning to our continued efforts to ensure effective insurer
financial solvency regulation, we would like to highlight a few
specific developments in addition to those already referenced. Over the
past decade, State insurance regulators have made many enhancements to
group supervision, informed by lessons from the financial crisis. We
have expanded and strengthened our holding company statutes,
implemented stronger corporate governance requirements, and now require
larger insurers to file an Own Risk and Solvency Assessment (ORSA),
which is a globally recognized report of all the risks posed to an
insurance group, both from within the insurers, and from non-insurance
affiliates regardless of their geographic location. Additionally, we
have rolled out our Group Capital Calculation (GCC), giving regulators
groupwide insight into capital allocation. Those improvements
demonstrated their value over the last 3 years where even in the midst
of historic market volatility and stress, the U.S. insurance sector
proved to be financially strong and resilient.
Group Capital Calculation and Liquidity Stress Test
The NAIC's Insurance Holding Company System Regulatory Act and
Insurance Holding Company System Model Regulation have historically
provided State insurance regulators with the framework for insurance
group supervision. In 2020, the NAIC adopted revisions to these models
to create a GCC and Liquidity Stress Test (LST).
The GCC adds another analytical tool to State insurance regulators'
toolbox on group supervision. It assists regulators in holistically
understanding the financial condition of non-insurance entities. It
provides key financial information on the insurance group, quantifies
risk across the insurance group, supports transparency into how capital
is allocated, and aids in understanding whether and to what degree
insurance companies may be supporting the operations of non-insurance
entities. The GCC was built to strengthen State regulation, but it also
serves to satisfy the group capital assessment requirements of the
Covered Agreements with the EU and U.K.
The LST was developed to provide State insurance regulators with
insights into a key macroprudential risk monitored by the Financial
Stability Oversight Council (FSOC) and other jurisdictions
internationally, but it also enhances group supervision. The LST
requires insurers to file the results of a specific year's Liquidity
Stress Test with the lead State insurance commissioner.
Credit for Reinsurance Model Law
With regard to reinsurance collateral, in 2017, the U.S. Department
of the Treasury and the United States Trade Representative, concluded
negotiations on an agreement with the European Union that eliminates
U.S. collateral requirements for EU reinsurers provided certain
regulatory criteria are met. In 2018, a separate Covered Agreement was
signed between the U.S. and the U.K., which mirrors the language from
the agreement with the EU and has the same timing requirements for
implementation. The EU and U.K. have agreed to recognize the States'
approach to group supervision, including group capital, and eliminate
any local presence requirements for U.S. firms operating in the EU. The
U.S. and EU have 5 years until September 2022 to comply with the
Agreement's provisions, and we are confident the States will meet our
obligations.
In June 2019, the NAIC adopted revisions to the NAIC Credit for
Reinsurance Model Law and Model Regulation that are intended to
implement the reinsurance collateral provisions of the Covered
Agreements. The revisions eliminate reinsurance collateral requirements
for reinsurers that have their head office or are domiciled in any of
the following ``Reciprocal Jurisdictions'': an EU-member country (or
any other non-U.S. jurisdiction) that is subject to an in-force covered
agreement, thereby addressing the elimination of reinsurance collateral
requirements with U.S. ceding insurers; a U.S. jurisdiction that meets
the requirements for accreditation under the NAIC financial standards
and accreditation program; and a non-U.S. jurisdiction recognized as a
Qualified Jurisdiction that meets additional requirements consistent
with the terms of a covered agreement. For reinsurers domiciled in
Qualified Jurisdictions to obtain similar treatment as those
jurisdictions subject to the Covered Agreements, they must provide to
the States the same treatment and recognition afforded by EU countries
pursuant to the EU/U.S. Covered Agreement. Therefore, our revisions
include the requirement that the Qualified Jurisdiction must agree to
recognize the States' approach to group supervision, including group
capital. As of August 2022, 56 jurisdictions have adopted the 2019
revisions to the Credit for Reinsurance Model Law. With respect to the
Credit for Reinsurance Model Regulation, 52 jurisdictions have adopted
so far, and another four are pending (the District of Columbia,
Florida, New Jersey, and the U.S. Virgin Islands). These numbers
include America Samoa, Guam, and the Northern Mariana Islands who
issued orders bringing them into compliance with the Covered
Agreements.
Private Equity
Turning to an issue that has generated significant media attention
and Congressional interest, State insurance regulators have been
actively monitoring the recent growth of alternative asset management
companies, private equity (PE) firms among them, in the life insurance
sector.
It is important to emphasize that any insurer, regardless of its
ownership structure, is subject to a comprehensive regulatory regime
that is experienced at both microprudential and macroprudential
supervision. These existing regulatory requirements, designed
explicitly to protect policyholders, have been refined and strengthened
by lessons learned from past recessions, natural disasters, terrorist
attacks, the 2008 financial crisis, and most recently the COVID-19
pandemic, all of which put our system to the test. Our system focuses
on risks at the individual insurer and group level, with extensive
disclosure, analysis, capital requirements, and regulatory authority to
protect solvency, while promoting product availability and
affordability. The form of ownership is generally irrelevant to the
financial oversight and supervision. Where it is considered, it is
generally a basis for enhanced supervision and reporting.
The State regulatory approach to PE firm ownership of insurers
corresponds to what typically motivates PE investment in insurers and
the concerns that arise from those motivations. PE and alternative
asset manager interest in the insurance sector is driven by access to a
large pool of assets, primarily in the form of mandatory reserves, that
are available for investment. A decades long low interest environment
has placed pressure on insurers to take more risk in a percentage of
their investment portfolios in order to increase yield. PE firms and
alternative asset managers believe that they are better equipped to
structure investments that will provide that yield and generate better
returns that will benefit both the insurer (and, hence, its
policyholders) and the PE firm/alternative asset manager. While
recognizing that potential, State regulators have also recognized the
risks associated with such investments and have been proactive in
addressing those risks.
State regulators first came together through the NAIC in 2013 to
consider concerns arising from the proposed acquisition of certain
insurers by PE firms. In light of what was then a new market dynamic,
regulators premised approval of several early transactions on
additional stipulations designed to provide greater safeguards in the
form of greater regulator optics, oversight, and control with respect
to financial transactions, investments, distributions, and reporting. A
list of some of these stipulations was published by the NAIC as best
practices and, in time, the additional stipulations were included in
the NAIC's Financial Analysis Handbook, a process manual that is used
by all States in performing their financial analysis of their domestic
insurers, including analysis triggered by an acquisition or other
significant financial event.
In addition, State regulators are particularly mindful of
investment strategies by some PE-controlled insurers that may be more
aggressive than traditional insurance asset managers. State insurance
regulators continue to review and refine existing guidance to ensure
their ability to assess and address the risks to the insurers. It
should be noted, however, that some of these affiliated arrangements
are not limited to just private equity owned companies. Increasingly,
we have seen traditional life insurers also adopt some of these
structures.
The NAIC's Macroprudential Working Group has developed a list of 13
regulatory considerations related to their ability to adequately assess
risks posed to insurers because of recent increases in the complexity
of investments and other developments. This list is being used to
identify where existing disclosures, policies and/or procedures should
be modified, or new ones created, to address any gaps based on the
increase in the number of PE owners of insurers as well as the increase
in asset managers' involvement in insurance, the increase of private
investments in insurers' portfolios, and other causes. Our work here is
focused on the activities in question, and therefore not limited to
private equity backed insurers alone. The prolonged low interest rate
environment has been challenging for life insurers in particular, who
must take on enough risk in their portfolios to generate yield
sufficient to pay claims without raising rates too high for consumers,
while satisfying regulators' requirements to protect solvency and pay
claims. We have extensive data reporting and analytical capability, to
review and assess alternative investments or unique structures, and we
are continuing to refine those tools as we speak. More specifics of
this work are highlighted in our letter to Chairman Brown regarding his
request for information on this issue. \7\
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\7\ https://content.naic.org/sites/default/files/government-
affairs-letter-naic-pe-response-sen-brown-220531.pdf
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S&P Global's Rating Proposal
Another noteworthy issue we wrote to this Committee about was S&P
Global's proposal to revise its methodology for assessing insurers'
financial strength, Insurer Risk-Based Capital Adequacy--Methodology
and Assumptions. \8\ While S&P ultimately withdrew its proposed
approach and the NAIC typically refrains from commenting on the
methodologies of the Nationally Recognized Statistical Ratings
Organizations (NRSROs), this proposal compelled us to raise our
concerns.
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\8\ https://content.naic.org/sites/default/files/government-
affairs-letter-s%26p-proposed-capital-model-house-financial-services-
cmte-030922.pdf
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As background, insurer investments typically fall into one of two
categories--investments assigned a rating by a NRSRO recognized by the
NAIC, and investments that are not rated by a NRSRO and for which the
NAIC's Securities Valuation Office (SVO) then performs a credit risk
assessment on behalf of State insurance regulators. Most U.S. insurer
investments fall into the first category and are rated by at least one
of the NRSROs. Those investments are then assigned an NAIC designation
for the purpose of identifying capital requirements associated with the
risk. NAIC designations derived from NRSRO ratings are mapped directly
to those NRSRO ratings with no additional analysis conducted by SVO
staff. Further, because we do not conduct additional analysis, all
NRSRO ratings effectively are treated equally by our system.
While this reliance on NRSROs may have benefits in terms of
regulatory efficiency, given the extensive nature of the sector's
holdings, it has been an area of concern for the NAIC. This concern has
grown as discrepancies between various NRSRO ratings for the same
security have increased in recent years, introducing greater potential
for ``rating shopping'' by our sector. Indeed, the NAIC's Valuation of
Securities Task Force, comprised of regulators from around the country,
has put this concern on its agenda for 2022.
As outlined in our letter, we had concerns with a key aspect of the
S&P proposal. Specifically, for those investments not otherwise
assigned a rating by the NRSROs (e.g., private placements, certain
asset backed securities, etc.), the NAIC SVO staff do conduct a
detailed analysis to evaluate the risk and develop an appropriate NAIC
designation for use by State insurance regulators. This, coupled with
investment oversight laws, gives State regulators comfort to allow or
disallow such investments and ensure they are backed by sufficient
capital for claims payment purposes. This is a critical regulatory
function that allows the insurance sector to invest its substantial
resources in a diverse cross section of the U.S. economy while
prioritizing the strength of insurers to pay claims. We were troubled
that S&P's (withdrawn) proposal lumped NAIC designations assigned by
the SVO staff, designed by and for regulators, in with NAIC
designations derived from ratings provided by S&P and its for-profit
competitors, with no input from regulators or SVO staff. This could
have disrupted a critical source of diversification and investment for
the U.S. insurance sector.
International Engagement
On the international front, State insurance regulators and the NAIC
continue to engage with international colleagues on a variety of
important issues at the International Association of Insurance
Supervisors (IAIS). Over the past few years, the IAIS has been working
to finalize and implement key post-financial crisis reforms as well as
pivot to better address emerging issues--a number of which I have
already touched on: innovation and technology; cyber; diversity,
equity, and inclusion; and climate and resiliency. As founding members
of the IAIS, the NAIC and its members are pleased to continue sharing
our expertise and knowledge, as well as learning from other
jurisdictions as we collectively look to address the evolving risks,
challenges, and opportunities in the insurance sector.
On financial stability, we contributed to developing the IAIS
Holistic Framework for systemic risk in the insurance sector and
welcomed its adoption in 2019, as it provides a variety of tools,
fosters better understanding of potential risks and incorporates an
activities-based approach rather than relying solely on an entities-
based approach. As focus on macroprudential supervision has expanded,
we have been pleased to share our domestic experiences on topics such
as data collection and analysis, liquidity stress testing, and private
equity. Jurisdictions around the globe, including the U.S., have made
great strides to implement the Holistic Framework and having this
better approach for systemic risk in place should convince the
Financial Stability Board to discontinue identification of global
systemically important insurers when it comes time to make such a
decision later this year.
In addition to financial stability, another post-financial crisis
key area of focus has been improving groupwide supervision. Another
important IAIS milestone in 2019 was adoption of ComFrame, the Common
Framework for Supervision of Internationally Active Insurance Groups,
or IAIGs. IAIGs are defined as groups with more than $50 billion in
assets or $10 billion in Gross Written Premium, operating in three or
more countries and doing at least 10 percent of their business outside
of their home jurisdiction. ComFrame helps foster better cooperation
and coordination amongst those involved in supervising IAIGs. Since its
adoption, work has been underway to review ComFrame and identify ways
to incorporate it into our own regime in an appropriate manner,
including revisions to our financial analysis and examiners handbooks.
One part of ComFrame yet to be finalized is the Insurance Capital
Standard (ICS). Additionally, the U.S., with input from other
interested jurisdictions, is developing the Aggregation Method (AM) as
a comparable alternative to the ICS. Both the ICS and AM are intended
to be applied to IAIGs.
The ICS is in the third year of a 5-year monitoring period, the
purpose of which is to monitor the performance of the ICS over time and
inform any potential improvements before finalizing and adopting.
Another key decision to be made at the end of the monitoring period is
whether the AM provides comparable outcomes to the ICS. If deemed
comparable, the AM will be considered ``outcome-equivalent'' to the
ICS. This summer, the IAIS conducted a public consultation on detailed
draft criteria that will be used to assess comparability. Such
consultations provide transparency, which is something we push for at
the IAIS, as well as an opportunity to hear directly stakeholders'
views and receive their feedback, which should help shape revised
criteria. IAIS members agreed that the comparability assessment should
neither give the AM a free pass nor preclude comparability at the
outset. Keeping this in mind will be crucial as the IAIS works to
finalize the criteria later this year and to ensure a fair path forward
for the AM by focusing on the outcomes produced by these two approaches
rather than their conceptual differences.
The NAIC, as well as the U.S. Department of the Treasury and the
Federal Reserve, have been clear with the IAIS, and international
colleagues, that the ICS does not work for the United States market or
our supervisory regime, and therefore States will be implementing an AM
approach. The AM leverages proven legal entity reported available and
required capital to produce a measure of group capital adequacy. For
the State system, the AM is implemented as the Group Capital
Calculation referenced previously, and for the Federal Reserve, it is
the Building Block Approach. These complementary approaches provide a
group lens on solvency while maintaining legal entity building blocks
that allow supervisors to analyze, identify, and address capital
deficiencies where they reside.
We, and hopefully the rest of Team USA, will continue to advocate
for recognition of the U.S. approach to group capital. Absent
recognition through either a comparability process or some other means,
the IAIS will have failed in its goal of a global approach to
evaluating group capital.
While we hope for the best outcome on comparability, as you have
heard, this is just one of many projects, topics, and priorities at the
IAIS, and we will continue to remain at the table and work together
with our international colleagues on this broad array of issues in
order to protect policyholders and contribute to financial stability.
Federal Policy Priorities
Finally, while State insurance regulators are putting significant
energy into our regulatory priorities this year, we also would like to
highlight several Federal priorities.
First, we urge Congress to pass a long-term reauthorization of the
National Flood Insurance Program (NFIP) prior to its September 30,
2022, expiration to provide certainty for insurance consumers. The
NAIC's guiding principles \9\ for NFIP Reauthorization for Congress
emphasize the importance of long-term reauthorization, encourage
greater private market growth to help provide consumers with additional
choices for flood insurance products, and increase investment in
mitigation planning. Insurance regulators support the inclusion of
mitigation discounts--such as premium discounts or insurance rate
reductions to persons who build, rebuild, or retrofit their properties
to better resist flood events--and allowing individuals to set aside
funds in a tax-preferred savings account for disaster mitigation and
recovery expenses. We also support the Disaster Mitigation and Tax
Parity Act (S. 2432) that would ensure that State-based disaster
mitigation grants receive the same Federal tax exemptions as Federal
mitigation grants. This would help provide greater incentives for
homeowners to protect their homes from natural disasters. These
actions, along with building and maintaining structures that
incorporate mitigation strategies, have the potential to reduce future
program losses and improve the financial condition of the NFIP.
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\9\ https://content.naic.org/sites/default/files/inline-files/
government-relations-161019-nfip-guiding-principles-0.pdf
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Second, the NAIC and State regulators would like to thank Senator
Tim Scott for introducing the Primary Regulators of Insurance Vote Act
of 2022 (S. 4110), which would provide State insurance regulators with
a vote on the Financial Stability Oversight Council (FSOC). Currently,
State regulators have a nonvoting seat on FSOC. The insurance sector--
which historically has been a primary focus of FSOC--is the only
financial services sector whose primary regulator is not a voting
member. We encourage Members of this Committee to support the Primary
Regulators of Insurance Vote Act.
Finally, the NAIC is working on proposed legislation that would
help protect policyholders during insurance receivership proceedings.
Current law provides no deadline to the Federal Government for filing
claims in an insurance receivership. This causes the proceedings to
drag on for years and reduces recoveries for consumers. The NAIC is
working on proposed legislation that would set a deadline for the
Federal Government to file claims it may have against insolvent
insurance companies. We encourage Members of this Committee to
cosponsor and support the legislation once it is introduced.
Conclusion
As you can see, there is considerable activity by State insurance
regulators on a variety of important topics in a variety of venues. The
NAIC and State regulators continue our ongoing efforts to improve
regulation in the best interests of U.S. insurance consumers while
fostering an innovative and competitive insurance sector. State
regulation has a strong 151-year track record of evolving to meet the
challenges posed by dynamic markets, and we continue to believe that
well-regulated markets make for well-protected policyholders. Thank you
again for the opportunity to be here on behalf of my fellow
Commissioners who make up the NAIC. I look forward to your questions.
______
PREPARED STATEMENT OF STEVEN SEITZ
Director, Federal Insurance Office, U.S. Department of the Treasury
September 8, 2022
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you for the opportunity to testify today about current
issues in insurance. I am the Director of the Federal Insurance Office
(FIO) within the U.S. Treasury Department.
I would like to begin by briefly outlining FIO's role and
responsibilities, and by describing some of FIO's current priorities.
The United States is the world's largest insurance market, and its
insurers provide a diverse range of products to support the needs of
consumers and businesses in the United States The U.S. system of
insurance regulation is primarily State-based; however, FIO has a
significant role to play, as reflected in its statutory duties and
authorities. FIO advises the Treasury Secretary on major domestic and
prudential international insurance policy issues; coordinates Federal
efforts and develops Federal policy on prudential aspects of
international insurance matters--including representing the United
States at the International Association of Insurance Supervisors
(IAIS); assists the Treasury Secretary in administering the Terrorism
Risk Insurance Program (TRIP); monitors the extent to which
traditionally underserved communities and consumers, minorities, and
low- and moderate-income persons have access to affordable insurance
products regarding all lines of insurance, except health insurance;
assists the Secretary in negotiating covered agreements with foreign
jurisdictions; and monitors the insurance industry, including
identifying issues or gaps in the regulation of insurers that could
contribute to a systemic crisis. As FIO's Director, I also serve as a
nonvoting member of the Financial Stability Oversight Council. Finally,
FIO regularly and extensively consults with the States, including State
regulators, regarding insurance matters of national importance, as well
as on prudential insurance matters of international importance. These
authorities reflect the need for FIO to provide a national, Federal
perspective in this critical area.
Every year, FIO issues a report on the insurance industry. \1\
FIO's next annual report will be published later this month.
Separately, by the end of this year, FIO will submit its annual joint
report with the Federal Reserve Board on our efforts with respect to
global insurance regulatory or supervisory forums, as required by the
Economic Growth, Regulatory Relief, and Consumer Protection Act.
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\1\ FIO's 2021 Annual Report on the Insurance Industry and other
FIO publications are available at https://home.treasury.gov/policy-
issues/financial-markets-financial-institutions-and-fiscal-service/
federal-insurance-office/reports-notices.
---------------------------------------------------------------------------
I would like to highlight five current FIO priorities.
Climate-related financial risk is a top priority for FIO. We are
focused on three areas, which are consistent with President Biden's
Executive Order on Climate-Related Financial Risk. \2\ First, FIO plans
to publish a report assessing climate-related issues and gaps in the
supervision and regulation of insurers. Second, FIO is evaluating the
potential for major disruptions of private insurance coverage in U.S.
markets that are particularly vulnerable to climate change. The adverse
effects of climate change are disproportionately borne by financially
vulnerable communities, which have fewer resources and may face
challenges in finding affordable insurance. Third, we are increasing
our engagement domestically and internationally on climate-related
financial risk issues. As we move forward with these efforts, we will
also seek consistent, comparable, and granular data to increase our
understanding of the risks from climate change to policyholders,
insurers, and the financial system.
---------------------------------------------------------------------------
\2\ Executive Order 14030 (May 20, 2021).
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A second focus area for FIO is the growing role of alternative
asset managers, such as private equity firms, in the U.S. insurance
sector. This evolution--which includes but is not limited to increased
private equity ownership of U.S. insurers--is one that our office has
highlighted for several years. It warrants increased attention to
ensure that regulatory mechanisms are appropriately designed to address
the activities and market developments highlighted in our recent letter
to Chairman Brown. \3\ FIO's upcoming annual report will further
address this topic, and we encourage continued focus and increased
progress by State regulators in this area. FIO will continue to
prioritize four areas for research and action on this topic: (1)
liquidity risk, (2) credit risk and capital adequacy, (3) offshore
reinsurance implications, including increased interconnectedness
between the U.S. and Bermuda insurance markets, and (4) potential
conflicts of interest.
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\3\ See letter from U.S. Department of the Treasury to The
Honorable Sherrod Brown (June 29, 2022), https://
www.banking.senate.gov/imo/media/doc/fio-85.pdf.
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FIO is also focused on cyber-related risks, which is a top priority
for Treasury and the entire Federal Government. FIO has been examining
insurers' own cyber resilience, as well as the development of the cyber
insurance market and how it may help improve policyholder resilience to
cyber events and also serve as a risk-management tool. FIO has
increased its data collection in this area with regard to TRIP and has
supported the development of Treasury's counter-ransomware strategy.
\4\ FIO is working with the Department of Homeland Security's
Cybersecurity and Infrastructure Security Agency (CISA) in connection
with the Government Accountability Office's recommendation that FIO and
CISA jointly assess the need for a Federal backstop for cyber
insurance. FIO is coordinating closely with the White House Office of
the National Cyber Director on these issues. Relatedly, we will be
working with CISA as it implements the Cyber Incident Reporting and
Critical Infrastructure Act of 2022. Finally, FIO continues to monitor
and coordinate with the NAIC and States on cyber-related risks.
---------------------------------------------------------------------------
\4\ See FIO, Report on the Effectiveness of the Terrorism Risk
Insurance Program (2022), https://home.treasury.gov/system/files/311/
2022%20Program%20Effectiveness%
20Report%20%28FINAL%29.pdf.
---------------------------------------------------------------------------
A fourth priority for FIO is our representation of the United
States at the IAIS, in close coordination with the Federal Reserve, the
NAIC, and the States. In addition to its focus on climate, private
equity, and cyber, the IAIS is considering other important topics such
as the development of the Insurance Capital Standard (ICS) and the
related comparability work involving the aggregation method, as well as
the implementation of the Holistic Framework for the assessment and
mitigation of systemic risk in the insurance sector. The development of
the ICS, the aggregation method comparability assessment, and the
IAIS's macroprudential work are important global initiatives that will
affect the U.S. insurance sector, and it is critical for FIO and the
United States to remain engaged at the IAIS on these issues as the
international community develops global standards for the insurance
sector.
Fifth and finally, FIO is prioritizing work on diversity, equity,
and inclusion, or ``DE&I.'' Consistent with FIO's statutory
authorities, FIO looks at these issues through the lens of the
availability and affordability of insurance products, particularly for
traditionally underserved communities and consumers, minorities, and
low- and moderate-income persons. Right now, FIO is working to update
its study on personal auto insurance affordability. Additionally, DE&I
issues are also key components of our upcoming climate work.
On all of these topics, and many others, FIO values our close
relationship and frequent coordination with State regulators, the NAIC,
our Federal partners, and international counterparts, as well as
insurance industry stakeholders.
Thank you again for the opportunity to testify today.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM KATHLEEN A. BIRRANE
Q.1. With historic heat waves, wildfires, floods, droughts, and
extreme storms this summer, communities across the country
found climate disaster knocking at their door. Black and Brown
families especially living in disaster-prone areas have borne
the brunt of these crises each time. As climate change
increases the severity and frequency of storms and disasters,
more and more Americans will face risks not only to their
lives, but to their homes, cars, and businesses. How do these
increasingly severe climate events impact the affordability and
availability of insurance to families across the country?
A.1. As State insurance regulators, we strive to maintain the
critical balance between insurer solvency and reasonable rates,
which can be challenging in certain areas that insurers view as
presenting a greater risk of loss. As losses continue to rise,
insurers must have enough funds to pay claims, making it
critically important that we do what we can predisaster to
mitigate the potential impacts of catastrophes. Risk reduction
and mitigation can protect consumers and reduce the losses paid
by insurers--or otherwise absorbed through Federal spending--
helping to maintain solvent insurance markets while keeping
rates more affordable. Through the NAIC's Climate and
Resiliency Task Force, we have been working with consumer
stakeholders to help promote mitigation to individual
consumers. Individual resilience is only part of the solution.
The most vulnerable communities may benefit more from whole-
community protection. Underserved communities are the least
likely to have adequate insurance and the least likely to be
able to afford mitigation retrofits, which is why resiliency
funding is essential. For this reason, the Task Force is also
exploring community-based solutions and working with States to
identify resiliency funding programs and public-private capital
frameworks.
Q.2. Insurers help policy holders deal with unexpected risk to
their homes, their businesses, or their loved ones. Insurers
assume this risk in the hope that premiums will generate
profits--or return on capital. When excessive risk is taken,
policy holders and the entire economy can be at risk.
Reinsurance--the practice of transferring risk to others--can
pose a threat to policy holders and annuitants and is seen as a
potential blind spot for regulators as some firms have as much
as 80 percent of their obligations placed with offshore
reinsurers. That can mean hundreds of thousands of workers and
families facing increasing risks when insurers hold less
capital and there is little or no transparency about where
those assets are held. What is the risk to State guaranty
systems if U.S.-based insurers use offshore reinsurance to hold
less capital, so that in time of crisis, and States must foot
the bill to policyholders?
A.2. Reinsurance serves a valuable function for both insurers
as well as the U.S. economy, because it allows U.S. insurers to
write the coverage that U.S. consumers and the U.S. economy
needs, but does so by accessing markets beyond the U.S. This
assists with both risk mitigation and diversification of U.S.
insurers. Historically, offshore reinsurance has been and
continues to be used extensively and successfully by U.S.
property casualty reinsurers for these specific reasons. Over
the past decade, U.S. life insurers have also begun to utilize
offshore reinsurance more extensively. The NAIC believes that
what is driving the increase in cessions to offshore reinsurers
is the low interest rate environment and potential tax
advantages offshore. The increase in cessions to non-U.S.
reinsurers has also been caused by an elimination of collateral
requirements as a result of the Covered Agreements and
resulting change in the States approach to reinsurance credit
risk.
State regulators require U.S. insurers to identify each
reinsurer they utilize in the annual statutory financial
statements, along with key information on each of those
cessions (ceded reserves, ceded premium, jurisdiction, credit
rating, etc.). This information is used to help understand the
credit risk associated with each U.S. insurers reinsurance
strategy. The information is also used within each U.S.
insurer's annual Risk-Based Capital filing to set aside capital
for this credit risk. Prior to the Covered Agreement, State
regulators also mitigated credit risk associated with offshore
reinsurance with the use of collateral requirements on cessions
to reinsurers outside of the U.S. The State-based system of
financial oversight of insurers is focused on preventing
insolvencies.
Because the U.S. regulator continues to closely monitor the
financial performance of the U.S. insurer, regardless of its
reinsurance arrangements, the mere ceding of business to an
offshore reinsurer does not make it more likely that a U.S.
insurer will fail. Each U.S. insurer is required to hold enough
capital to compensate for any additional credit risk that might
be associated with ceding a large portion of their business to
a reinsurer with a lower credit rating. Additionally, as U.S.
regulators see insurers with a greater cession to a non-U.S.
insurer that may pose a greater amount of credit risk to the
insurer, the regulator would request the insurer further
diversify their credit risk through additional reinsurers.
Further, in the event that an offshore reinsurer that is
not required to post collateral to back-up its reinsurance
obligations (under agreements made by the Federal Government)
fails to meet its reinsurance obligations and, further, that
that failure has the ultimate effect of rendering the U.S.
insurer insolvent, it is very unlikely that the annuity
obligations of the U.S. insurer would not be paid. The National
Association of Life and Health Guaranty Associations (NOLHGA)
reports that policyholders of insurance insolvencies between
1991 and 2009 have average recoveries of 96 percent on life
claims and 94 percent on annuity claims. \1\
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\1\ https://www.nolhga.com/resource/code/file.cfm?ID=2984
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In addition, in 2016, NOLHGA published a Consumer
Protection Comparison of the Federal pension system and the
State insurance regulatory system. The State-based system of
financial oversight of insurers is focused on preventing
insolvencies and the early warning mechanisms that were enacted
after 2008 have been even more effective in preventing
insolvencies from happening in the first place. NOLHGA
Comparison Report notes that since 2008, no operating annuity
issuers with an active book of annuities had failed, and only a
single former annuity issuer--Executive Life Insurance Company
of New York, which had been in receivership since 1991--had
been placed into liquidation. In that same period, NOLHGA
reports that 931 single-employer pension plans, affecting over
560,000 pension plan participants, failed.
Q.3. At the September 8 hearing, I asked you to identify what
tools NAIC and regulators possess to address market failures.
What can NAIC and/or State regulators do, if anything, to
create coverage and capacity if insurers decide not to offer a
particular coverage? What tools does NAIC have at its disposal,
if any?
A.3. As State insurance regulators, our focus is on the dual
objectives of protecting insurance consumers and ensuring
competitive and stable markets in our States. If for some
reason, consumers cannot obtain a particular coverage in their
State (either because of the nature of the risk or the
availability of the specific product they seek), a variety of
mechanisms exist to secure coverage, depending on the kind of
coverage. For example, the surplus lines market often provides
coverage for risks that are difficult to place in the admitted
market. Vehicular and property coverage would also be available
through the State's residual market mechanism. We would
encourage consumers that have difficulties with obtaining a
particular coverage to contact their State's insurance
department, which can seek to address such issues through
appropriately tailored State-based regulatory solutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM KATHLEEN A. BIRRANE
Q.1. Private Equity in Insurance--During the September 8th
Banking Committee hearing, you noted that insurers owned by
private equity firms are often subject to greater regulatory
scrutiny than other insurance firms.
Please describe how regulatory treatment differs between
private equity owned insurers versus insurers with more
traditional ownership.
A.1. Any insurer, regardless of its ownership structure, is
subject to our comprehensive regulatory regime that is
experienced at both microprudential and macroprudential
supervision. Our system focuses on risks at the individual
insurer and group level, with extensive disclosure, analysis,
capital requirements, and regulatory authority to protect
solvency, while promoting product availability and
affordability. Each form of ownership involves different
potential risks for regulators to assess and mitigate as
needed, as do different types of investments in the insurer's
portfolio. Due to the recent increase in private equity owners,
related party asset managers, and complexity of investments, we
are reviewing existing guidance and considering updates and/or
new requirements to ensure our ability to assess and address
the risks to the insurers and their policyholders. The NAIC's
Macroprudential Working Group has constructed a list of 13
specific regulatory considerations to ensure our ability to
assess and address the risks to the insurers and their
policyholders. This includes but is not limited to potential
changes in the capital requirements for certain asset backed
securities such as collateralized loan obligations, changes in
the asset adequacy analysis testing requirements, and a review
of several risks that are more common within private equity
firms but that may also be held by other insurers. This ongoing
work will identify where existing disclosures, policies,
affiliation requirements, and other controls and procedures
should be modified, or new ones created, to address any gaps.
Q.2. Climate Financial Risk--At the September 8th Banking
Committee hearing, Senator Tester of Montana suggested that the
U.S. is seeing 500-year events and 100-year events every decade
and weather events are getting far worse. You stated ``we know
that weather patterns are changing and that those weather
patterns are causing increased claims activity, et cetera. . .
. You know, weather events are more frequent. They are more
severe . . . .''
What data were you drawing from to support the assertion
that climate related losses are getting worse?
A.2. State insurance regulators are on the front lines of
climate-related natural catastrophe preparedness and response,
protecting policyholders and maintaining well-functioning
insurance markets. For more than 150 years, State insurance
regulators have experience and insight into the impact of
climate-related risks on insurance and consumers.
The NAIC collects data from insurers to allow for
regulatory analysis of climate risk including detailed
quarterly and annual financial data from over 4,500 insurers,
representing more than 98 percent of the premiums written in
the U.S., as well as the collection of annual climate risk
disclosure data from over 1,300 companies with 80 percent of
the U.S. market captured by direct written premium.
Additionally, the NAIC collects loss data from insurers and
through that data, you can see a correlation between extreme
weather events and a spike in losses for the industry (See
table below). Obviously, there are other factors at play, such
as population sprawl and inflation, among other issues but
those issues are only exacerbated by severe weather events. We
measure the profitability of the industry on an annual basis
and compare that against the U.S. Department of Commerce's
National Oceanic and Atmospheric Administration (NOAA) data
regarding severe weather events. \1\ According to NOAA, the
1980-2021 annual average of weather/climate disaster events
with losses exceeding $1 billion each is 7.7 events while the
annual average for the most recent 5 years (2017-2021) is 17.8
events. \2\
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\1\ https://www.climate.gov/news-features/blogs/beyond-data/2016-
historic-year-billion-dollar-weather-and-climate-disasters-us
\2\ https://www.ncei.noaa.gov/access/billions/
#::text=In%202022%20(as%20of%
20October,events%20%20and%201%20wildfire%20event
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Q.3. Roger Pielke, a prominent climate researcher who has
testified before this Committee, argues that losses arising
from extreme weather events are actually decreasing as a
percentage of GDP even though coastal development has increased
significantly. \3\ Do you agree or disagree with his
assessment? Please explain why.
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\3\ Testimony of Dr. Roger Pielke, Jr., Professor of Environmental
Studies at the University of Colorado before the U.S. Senate Committee
on Banking, Housing, and Urban Affairs hearing entitled 21st Century
Communities: Climate Change, Resilience, and Reinsurance. July 20,
2021. https://www.banking.senate.gov/imo/media/doc/
Pielke%20Testimony%207-20-2l.pdf
A.3. The NAIC recognizes that a rigorous scientific process,
one that is constantly evaluating and reevaluating data,
assumptions, and outcomes, is beneficial to decision makers and
ultimately creates better policies. The NAIC has no specific
---------------------------------------------------------------------------
opinion on the research of Roger Pielke.
Q.4. Property insurers carefully manage risk associated with
severe weather. If they fail to do so, they won't be in
business very long. In your experience, do the firms you
regulate effectively manage severe weather risks?
A.4. From the NAIC perspective, we have observed insurance
industry efforts to manage risk associated with severe weather.
The insurance industry is at the forefront of several
collaborative efforts to reduce catastrophic risk. For example,
through the property (re)insurers funding of the Institute for
Business and Home Safety (IBHS), the insurance industry
supports improved construction on, maintenance and preparedness
practices. The IBHS conducts building safety and mitigation
research to identify the most effective ways to create more
resilient communities. Its research center in South Carolina is
used to test how residential and commercial structures uphold
against simulated weather events including hailstorms,
windstorms, wind-driven rain, wildfires, and fires. It also
performs field testing in States with high exposure to
tornadoes. The data gathered through its scientific research is
then used to inform builders, homeowners, and businesses on
disaster-resistant construction and mitigation practices. It
also serves as the basis for IBHS's FORTIFIED national
standards for resilient construction.
Additionally, insurers are collaborating with actuaries in
order to identify their tail risk--the risk of how severe
catastrophic losses could impair solvency. The Casualty
Actuarial Society (CAS), the Canadian Institute of Actuaries
(CIA), the Society of Actuaries (SOA), and the American Academy
of Actuaries (AAA) began collaborating on research aimed at
assessing climate risk and its potential risk implications to
the insurance industry. As part of this effort, the group
released a research paper entitled, ``Determining the Impact of
Climate Change on Insurance Risk and the Global Community''.
The paper laid the framework for the development of the soon-
to-be-released Actuaries Climate Index (ACI) and the Actuaries
Climate Risk Index (ACRI).
These are a few examples of the many ways in which the
insurance industry is working to manage its exposure to severe
weather risks. The NAIC will continue to closely monitor these
and other initiatives.
Q.5. Is risk management around severe weather something you
monitor and regulate for?
A.5. Yes, State insurance regulators monitor and regulate for
risk management and severe weather. This year, the NAIC's
Climate and Resiliency Task Force facilitated revisions to the
Climate Risk Disclosure Survey for participating States. The
survey, which was first adopted by the NAIC in 2010, is a risk
management disclosure tool for States to require of their
insurers. These disclosures help insurance regulators assess
and evaluate insurance industry risks and actions to mitigate
climate risk. Currently, 15 States are participating in the
survey with nearly 80 percent of the market captured by direct
written premium.
As part of our insurance solvency regulatory framework, we
collect information from insurers to monitor their exposures to
both their underwriting and investment portfolios. Our State-
based insurance regulatory system has developed an extensive
set of tools to assess and analyze insurer's solvency and
liquidity, and it is accustomed to adapting to an evolving risk
landscape and is well-positioned to address the challenges
presented by climate-related risks for insurers' underwriting,
investments, and solvency. We have developed and implemented
longstanding and well-established tools to address solvency
concerns that incorporate exposure to climate-related
catastrophes including the Own Risk and Solvency Assessment
(ORSA), the Risk Based Capital (RBC) formula, and the NAIC's
Financial Condition Examiner's Handbook. For example, in 2017,
the NAIC expanded the risks quantified in the RBC formula to
include a specific charge for hurricane and earthquake
catastrophe risk in order to recognize increased exposure to
catastrophic events. Most recently, the solvency workstream of
the Task Force, which I chair, recommended that wildfires be
added to the RBC framework for catastrophe risk exposures. In
addition, based on the recommendations of our workstream and
the Task Force, the NAIC's Financial Condition Committee is
considering specific enhancements to the solvency oversight
tools used by State insurance regulators that will expand the
evaluation of an insurer's exposure and response to climate-
related financial risk, particularly in areas such as
transition risk. The Task Force is also evaluating viable
approaches to scenario analysis and stress testing for insurers
as the data necessary to conduct such exercises becomes
available.
Our detailed work to address climate-related risks in the
insurance sector is highlighted in our letter to the U.S.
Department of the Treasury regarding its request for
information for its upcoming climate report. \4\ The NAIC also
issued a report titled, ``Adaptable to Emerging Risks: The
State Based Insurance Regulatory System is Focused on Climate-
Related Risk and Resiliency''. \5\
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\4\ https://content.naic.org/sites/default/files/testimony-letter-
response-fio-rfi-climate-financial-risk-211111.pdf
\5\ https://content.naic.org/sites/default/files/climate-
resiliency-resource-report-adaptable-emerging-climate-related-risk-
resiliency-2021.pdf
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM KATHLEEN A. BIRRANE
Q.1. Insurance companies benefit from being members of Federal
Home Loan Banks in two important ways: first, they receive
significant dividend income, and second, they benefit from
taxpayer-subsidized advances.
How do insurance companies use those advances?
A.1. How insurance companies use advances is specific to each
insurer. Although insurers provide a narrative disclosure \1\
on the use of funding, it is fairly limited. From a review of a
few large insurance entities, they reference the use of funding
as a source of ``contingent liquidity'' and for ``spread
margin/spread products/spread strategy.'' Regulators, through
their ongoing solvency oversight and via projects such as the
NAIC Liquidity Stress Test (LST), have recognized the important
role the FHLB serves for life insurers as a primary source of
ad hoc liquidity needs.
---------------------------------------------------------------------------
\1\ Disclosures on FHLB activity are detailed in Statement of
Statutory Accounting Principles (SSAP) No. 30, paragraph 18 (captured
in Note 11 of the financial statements). These disclosures include
narrative info on agreements, type of borrowing and use of funding, as
well as data-captured information on FHLB stock, collateral pledged and
borrowing information.
Q.2. If they use those advances to invest in housing, is that
---------------------------------------------------------------------------
affordable or market-rate housing?
A.2. Insurers are not required to, nor does the NAIC receive
disclosure on the amounts of advances used for housing or the
types of housing. Most advances are invested in fixed income
securities, which may not necessarily be used to invest in
housing related securities. Insurance company housing sector
investments are typically comprised of investments in mortgage-
backed securities, which is generally market rate housing.
Q.3. How is the public served by insurance companies'
membership in the Federal Home Loan Banks?
A.3. This question may be best addressed by the Federal Housing
Finance Agency (FHFA). FHFA's regulation on Federal Home Loan
Banks membership specifies how and when an institution must
demonstrate compliance with each of the statutory membership
eligibility requirements. An entity cannot qualify to be a
member in the FHLB without investing in housing.
Q.4. Western States have experienced unprecedented wildfires,
collectively costing the West $21 billion annually.
Is a comparable program to the National Flood Insurance
Program needed for fire and drought?
A.4. At this time, the NAIC has not taken a formal position on
this issue.
Q.5. How can we increase fire mitigation on BLM land and other
forested land overseen by the Federal Government to reduce
threats of fire?
A.5. In 2020, the NAIC's Center for Insurance Policy and
Research (CIPR) along with Risk Management Solutions Inc.
(RMS), and the Insurance Institute for Business and Home Safety
(IBHS), released a paper called ``Application of Wildfire
Mitigation to Insured Property Exposure''. \2\ Although this
paper did not specifically address BLM land management, it did
find that structural modifications can reduce wildfire risks up
to 40 percent, and structural and vegetation modifications
combined can reduce wildfire risk up to 75 percent when simply
moving to a well-built wildfire-resistant structure from a
neutral property setting. Avoided losses can be even more
significant (e.g., 5 times greater) when compared to a highly
flammable structure. From a benefit-cost perspective, the paper
also demonstrated that for a number for modeled locations, the
relative risk reduction, if enabled within insurance products
based on wildfire risk-based pricing, would provide
economically effective incentives at promoting mitigation with
pay-back periods from 10 to 25 years.
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\2\ https://content.naic.org/sites/default/files/cipr-report-
wildfire-mitigation.pdf
Q.6. Municipal governments will face an increasing amount of
humanitarian and financial strain as more--and more
destructive--weather disasters occur.
What changes are insurance firms making--or need to make--
to meet the needs of municipal government
A.6. The NAIC monitors insurance innovations in the climate
risk and resilience space and serves as a forum where insurers,
regulators, and other stakeholders can discuss their efforts to
innovate and work collaboratively on climate resilience
solutions. Through the NAIC's Climate and Resiliency Task
Force, State insurance regulators have heard from the insurance
industry and their partners regarding community-based insurance
efforts. For example, in 2021, the NAIC heard a presentation by
Munich Reinsurance America Inc. and The Nature Conservancy
regarding ``Nature's Remedy: Improving flood resilience through
community insurance and nature-based mitigation'' \3\ that
focused on coupling community-based insurance with mitigation
projects, such as preserving or restoring floodplains and
wetlands, implementing levee setbacks, and designing
appropriate flood storage to emulate river flood pulse. We also
heard from Marsh McLennan focusing on ``Community-Based
Catastrophe Insurance: One Method for Closing the Disaster
Protection Gap''. \4\ as an innovative mechanism to increase
insurance coverage and enhance resilience. Specifically,
insurance arranged by a local government or quasi-governmental
body to cover a group or designated properties or individuals
within the community's jurisdiction. These are just two of the
many ways insurance firms and municipalities can work together
to address the effects of weather disasters.
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\3\ https://content.naic.org/sites/default/files/national-meeting/
Munich%20Re-Floodmitigationpaper.pdf
\4\ https://content.naic.org/sites/default/files/inline-files/
GuyCarpenter-Presentation.pdf
Q.7. Will local governments continue to access comprehensive
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and affordable insurance coverage?
A.7. As State insurance regulators, we strive to maintain the
critical balance between insurer solvency and reasonable rates,
which can be challenging in certain areas that insurers view as
presenting a greater risk of loss. As losses continue to rise,
insurers must have enough funds to pay claims, making it
critically important that we do what we can predisaster to
mitigate the potential impacts of catastrophes. Risk reduction
and mitigation can protect policyholders and reduce the losses
paid by insurers--or otherwise absorbed through Federal
spending--helping to maintain solvent insurance markets while
keeping rates more affordable. Through the NAIC's Climate and
Resiliency Task Force, we have been working to help promote
mitigation. The most vulnerable communities may benefit more
from whole-community protection. Underserved communities are
the least likely to have adequate insurance and the least
likely to be able to afford mitigation retrofits, which is why
resiliency funding is essential. For this reason, the Task
Force is also exploring community-based solutions and working
with States to identify resiliency funding programs and public-
private capital frameworks.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM KATHLEEN A. BIRRANE
Q.1. I also believe that the United States has a strong and
resilient insurance industry because of the comprehensive
regulatory environment we have put in place. To ensure we can
continue to successfully mitigate systemic risk, what tools do
regulators have, or need, to properly supervise these
transfers?
A.1. Over the past decade, State insurance regulators have made
many enhancements to group supervision, informed by lessons
from the financial crisis. We have expanded and strengthened
our holding company statutes, implemented stronger corporate
governance requirements, and now require larger insurers to
file an Own Risk and Solvency Assessment (ORSA), which is a
globally recognized report of all the risks posed to an
insurance group, both from within the insurers, and from non-
insurance affiliates regardless of their geographic location.
Additionally, we have rolled out our Group Capital Calculation
(GCC), giving regulators groupwide insight into capital
allocation. Those improvements demonstrated their value over
the last 3 years where even in the midst of historic market
volatility and stress, the U.S. insurance sector proved to be
financially strong and resilient.
The NAIC's Insurance Holding Company System Regulatory Act
and Insurance Holding Company System Model Regulation have
historically provided State insurance regulators with the
framework for insurance group supervision. In 2020, the NAIC
adopted revisions to these models to create a GCC and Liquidity
Stress Test (LST). The GCC adds another analytical tool to
State insurance regulators' toolbox on group supervision. It
assists regulators in holistically understanding the financial
condition of non-insurance entities. It provides key financial
information on the insurance group, quantifies risk across the
insurance group, supports transparency into how capital is
allocated, and aids in understanding whether and to what degree
insurance companies may be supporting the operations of non-
insurance entities. The GCC was built to strengthen State
regulation, but it also serves to satisfy the group capital
assessment requirements of the Covered Agreements with the EU
and U.K.. The LST was developed to provide State insurance
regulators with insights into a key macroprudential risk
monitored by the Financial Stability Oversight Council (FSOC)
and other jurisdictions internationally, but it also enhances
group supervision. The LST requires insurers to file the
results of a specific year's Liquidity Stress Test with the
lead State insurance commissioner.
As noted in our testimony, State insurance regulators have
also been actively monitoring the recent growth of alternative
asset management companies, private equity (PE) firms among
them, in the life insurance sector. The NAIC's Macroprudential
Working Group has developed a list of 13 regulatory
considerations related to their ability to adequately assess
risks posed to insurers because of recent increases in the
complexity of investments and other developments. This list is
being used to identify where existing disclosures, policies
and/or procedures should be modified, or new ones created, to
address any gaps based on the increase in the number of PE
owners of insurers as well as the increase in asset managers'
involvement in insurance, the increase of private investments
in insurers' portfolios, and other causes. We have extensive
data reporting and analytical capability, to review and assess
alternative investments or unique structures, and we are
continuing to refine those tools as we speak. More specifics of
this work are highlighted in our letter to Chairman Brown
regarding his request for information on this issue. \1\
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\1\ https://content.naic.org/sites/default/files/government-
affairs-letter-naic-pe-response-sen-brown-220531.pdf
Q.2. Do you believe the insurance industry is ready or
adequately taking into consideration the multitude of risk
---------------------------------------------------------------------------
factors that climate change poses?
A.2. As State insurance regulators, we have long been committed
to monitoring and addressing how climate risks impact
policyholders and the insurance industry. We recognize the
insurance sector is exposed to potential risks on the asset
side of the balance sheet through their investments and on the
liability side through the risks insurers underwrite. As part
of our insurance solvency regulatory framework, we monitor
their exposures to both their underwriting and investment
portfolios. An important tool we use for monitoring climate-
related risks is insurer climate disclosures which help
insurance regulators assess and evaluate insurance industry
risks along with insurer actions to mitigate climate risk. In
2010, the NAIC membership adopted the Insurer Climate Risk
Disclosure Survey to identify trends, vulnerabilities, and best
practices by collecting information about how companies assess
and manage climate risk. As of 2021, 15 States are
participating in the survey with nearly 80 percent of the
market captured by direct written premium. Our detailed work to
address climate-related risks in the insurance sector is
highlighted in our letter to the U.S. Department of the
Treasury regarding its request for information for its upcoming
climate report. \2\ The NAIC also issued a report titled,
``Adaptable to Emerging Risks: The State Based Insurance
Regulatory System is Focused on Climate-Related Risk and
Resiliency''. \3\
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\2\ https://content.naic.org/sites/default/files/testimony-letter-
response-fio-rfi-climate-financial-risk-211111.pdf
\3\ https://content.naic.org/sites/default/files/climate-
resiliency-resource-report-adaptable-emerging-climate-related-risk-
resiliency-2021.pdf
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
FROM KATHLEEN A. BIRRANE
Q.1. I have read reports that the NAIC has imposed a series of
regulations that force insurance companies to obtain ratings
from the SVO, rather than allowing insurance companies to
obtain ratings from private-sector NRSROs for assets on their
balance sheets.
Please detail the categories of securities and/or assets
that the NAIC now requires an SVO designation and no longer
recognizes ratings from private sector NRSROs? Please explain
the rationale behind the NAIC SVO's actions.
A.1. As a prudential regulator, State insurance regulators are
empowered by State law to assign risk weights to insurer
investments in order to support solvency. State regulators
implement this function via the NAIC. The NAIC's Valuation of
Securities Task Force (VOS/TF), compromised of regulators,
formulates and implements NAIC's credit assessment and related
policies. The Securities Valuation Office (SVO) is the
professional staff assigned to support the VOS/TF. The SVO
conducts credit quality assessments of securities owned by
State-regulated insurance companies and performs such other
duties specified by VOS/TF in the Purposes and Procedures
Manual of the NAIC Investment Analysis Office (P&P Manual) or
assigned by other NAIC regulator groups, from time to time.
NAIC designations are intended for State regulators only and
have the sole purpose of helping State insurance departments
better identify the creditworthiness of insurance companies'
holdings and determine solvency risk.
As a default setting, all securities need to be filed with
the NAIC. The filing process involves providing the NAIC with
sufficient information so that we may assign a risk weight--a
``designation'' in NAIC parlance. However, there always have
been large exceptions to this rule. The securities which do not
need to be filed are called FE for ``filing exempt.'' Many
large corporate and municipal obligations are FE if they have
an NRSRO rating. Not all FE bonds require a NRSRO rating. For
example, U.S. Govt securities as well as bonds issued with a
full faith and credit guarantee of the U.S. qualify for the
lowest risk weight without the need for a NRSRO rating, State
insurance regulators regularly move securities in and out of
FE. For example, after NRSRO performance in the Global
Financial Crisis, the regulators moved residential mortgage-
backed securities from FE to NAIC modeled. More recently,
credit-lease backed securities were moved from NAIC to FE. This
process is ongoing and revolves around the regulators'
supervisory priorities.
With regard to the specific questions, we have included a
link to the P&P Manual https://content.naic.org/sites/default/
files/PPM-OSS-21.pdf, which includes the policy on the use of
credit ratings in Part One and the list of securities that are
not eligible for Filing Exemption (the use of credit rating
provider ratings) in Part Three. The NAIC uses credit rating
provider credit ratings when it deems them appropriate for
insurance company financial solvency regulation. We would be
willing to discuss with you further to help in understanding
the nature of our work and how NAIC policy comes about relative
to reliance on NRSROs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM KATHLEEN A. BIRRANE
Q.1. One important line of insurance subject to robust State
regulation is title insurance, which insures both homeowners
that they own their properties free of undisclosed title
defects and lenders that they have a valid lien on mortgaged
collateral. NAIC's Title Insurance Task Force is the primary
forum for State regulators to discuss and monitor impacts
affecting consumers and the regulation of the title insurance
industry.
At the direction of the FHFA, Fannie Mae and Freddie Mac
(the Enterprises) recently released Equitable Housing Finance
Plans, which announced an expansion to the use of attorney
title opinion letters in lieu of proven, State-regulated title
insurance, purportedly to lower real estate closing costs for
low-to-moderate income borrowers. Some attorney opinions being
offered in the marketplace claim to include an errors and
omissions (E&O) insurance ``wrapper'' that makes the attorney
opinion an ``alternative'' to title insurance.
However, there are a number of places, including in the
growing area of fraud, for instance, where this ``alternative''
does not provide the comprehensive coverage that title
insurance does-thus exposing consumers to both significant
costs and risks to their property rights. I understand these
products are being offered to both consumers (homeowners) and
mortgage lenders, with some providers claiming to offer them in
all 50 States.
I have concerns regarding the impact on homeowners and
consumers in particular, and hoping NAIC can provide us with
your perspectives on these issues as the public officials
directly responsible for consumer protection under State
insurance laws and the primary regulators of the insurance
industry.
How are State insurance regulators approaching attempts to
evade basic regulatory structures in place? In the
aforementioned example, a surplus lines insurer seems to be
attempting to offer an ``alternative'' to a traditional product
to avoid the robust State regulatory model.
What is the NAIC doing to address concerns about products
such as this one that purposely circumvent insurance regulatory
oversight and pose significant consumer protection risks?
A.1. As State insurance regulators, protecting policyholders
and addressing any unfair treatment of insurance consumers is
crucial to the work we do and a bedrock principle of our
regulatory framework. The NAIC's Title Insurance Task Force, of
which I am a member, is aware of the concerns that you have
raised and will be hearing presentations on this issue at our
NAIC Fall National Meeting in December 2022. We will keep the
committee apprised of any developments.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM STEVEN SEITZ
Q.1. Insurers help policy holders deal with unexpected risk to
their homes, their businesses, or their loved ones. Insurers
assume this risk in the hope that premiums will generate
profits--or return on capital. When excessive risk is taken,
policy holders and the entire economy can be at risk.
Reinsurance--the practice of transferring risk to others--can
pose a threat to policy holders and annuitants and is seen as a
potential blind spot for regulators as some firms have as much
as 80 percent of their obligations placed with offshore
reinsurers. That can mean hundreds of thousands of workers and
families facing increasing risks when insurers hold less
capital and there is little or no transparency about where
those assets are held. Are there loopholes in existing
regulations that create opportunities for insurers to use
offshore reinsurance deals to either hold less capital or load
up on riskier investments?
A.1. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM STEVEN SEITZ
Q.1. Private Equity Workstream--At the September 8th Banking
Committee hearing, I asked you if you are involved in an effort
to make recommendations to the International Association of
Insurance Supervisors (IAIS) regarding private equity's
involvement in insurance. You failed to adequately respond to
my question about your involvement in this matter.
In your capacity as Director of the Federal Insurance
Office (FIO), you are a member of the executive committee
oflAIS. In an August 12, 2022, meeting of the National
Association of Insurance Commissioners (NAIC) Financial
Stability Task Force and the Macroprudential Working Group, it
was reported that the IAIS formed a Private Equity Workstream
``to produce an internal briefing memo to the Macroprudential
Committee that provides an update on the involvement of PE in
members' jurisdictions.'' \1\ It was also reported that the
Macroprudential Supervision Working Group will continue to
monitor private equity ownership in the global insurance
industry. \2\
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\1\ National Association oflnsurance Commissioners, Financial
Stability (E) Task Force and Macroprudential (E) Working Group Meeting
Minutes. https://content.naic.org/sites/default/files/nationalmeeting/
Minutes-FSTF.pdf Pp. 7-8.
\2\ Ibid.
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Are you or anyone else from the Treasury Department
involved with the Private Equity Workstream that was formed by
IAIS?
Have you or anyone else from the Treasury Department
contributed information that may or may not be used for this
internal briefing memo to the Macroprudential Committee?
Can you commit to providing this Committee any briefing
memos or other final documents developed as a part of the
Private Equity Workstream? If not, please explain why.
A.1. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM STEVEN SEITZ
Q.1. Insurance companies benefit from being members of Federal
Home Loan Banks in two important ways: first, they receive
significant dividend income, and second, they benefit from
taxpayer-subsidized advances.
How do insurance companies use those advances?
If they use those advances to invest in housing, is that
affordable or market-rate housing?
How is the public served by insurance companies' membership
in the Federal Home Loan Banks?
A.1. Response not received in time for publication.
Q.2. Western States have experienced unprecedented wildfires,
collectively costing the West $21 billion annually.
Is a comparable program to the National Flood Insurance
Program needed for fire and drought?
How can we increase fire mitigation on BLM land and other
forested land overseen by the Federal Government to reduce
threats of fire?
A.2. Response not received in time for publication.
Q.3. Municipal governments will face an increasing amount of
humanitarian and financial strain as more--and more
destructive--weather disasters occur.
What changes are insurance firms making--or need to make--
to meet the needs of municipal government
Will local governments continue to access comprehensive and
affordable insurance coverage?
A.3. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM STEVEN SEITZ
Q.1. What are some benefits and drawbacks of the U.S. system of
insurance regulation being primarily based at the State level?
A.1. Response not received in time for publication.
Q.2. Would you describe some discussions you've had with State
regulators or stakeholders surrounding the disruptions they
expect as a result of climate change and how these approaches
differ by region?
A.2. Response not received in time for publication.
Additional Material Supplied for the Record
LETTER SUBMITTED BY THOMAS D. GOBER, INSURANCE AND REINSURANCE FRAUD
EXPERT
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY COLLEEN RIEDEL
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THOMAS F. GOODWIN, VICE PRESIDENT, EXHIBITIONS AND
CONFERENCES ALLIANCE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY MARY KATE CUNNINGHAM, SENIOR VICE PRESIDENT, PUBLIC
POLICY, AMERICAN SOCIETY OF ASSOCIATION EXECUTIVES
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]