[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




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                 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

                              ----------                              

                      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

                              ----------                              


                      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.
---------------------------------------------------------------------------
     \9\ https://content.naic.org/sites/default/files/inline-files/
government-relations-161019-nfip-guiding-principles-0.pdf
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \1\ https://www.nolhga.com/resource/code/file.cfm?ID=2984
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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
---------------------------------------------------------------------------
                                ------                                


       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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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]