[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON THE
COMPETITIVENESS OF U.S. INSURERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JUNE 13, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-31
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
RANDY NEUGEBAUER, Texas, Chairman
BLAINE LUETKEMEYER, Missouri, Vice MICHAEL E. CAPUANO, Massachusetts,
Chairman Ranking Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey BRAD SHERMAN, California
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin CAROLYN McCARTHY, New York
ROBERT HURT, Virginia KYRSTEN SINEMA, Arizona
STEVE STIVERS, Ohio JOYCE BEATTY, Ohio
C O N T E N T S
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Page
Hearing held on:
June 13, 2013................................................ 1
Appendix:
June 13, 2013................................................ 35
WITNESSES
Thursday, June 13, 2013
McRaith, Michael, Director, Federal Insurance Office, U.S.
Department of the Treasury..................................... 5
Nelson, Hon. E. Benjamin, Chief Executive Officer, National
Association of Insurance Commissioners (NAIC).................. 7
Woodall, Hon. S. Roy, Jr., member, Financial Stability Oversight
Council........................................................ 8
APPENDIX
Prepared statements:
Neugebauer, Hon. Randy....................................... 36
Garrett, Hon. Scott.......................................... 39
McRaith, Michael............................................. 40
Nelson, Hon. E. Benjamin..................................... 46
Woodall, Hon. S. Roy, Jr..................................... 52
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Written statement of the American Council of Life Insurers
(ACLI)..................................................... 58
Written statement of the Financial Services Roundtable....... 60
Written statement of the National Association of Mutual
Insurance Companies (NAMIC)................................ 63
Royce, Hon. Ed:
NAIC travel article entitled, ``Tramp A Perpetual Journey''.. 68
Written responses from Hon. E. Benjamin Nelson to questions
submitted for the record................................... 71
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON THE
COMPETITIVENESS OF U.S. INSURERS
----------
Thursday, June 13, 2013
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 1:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Royce, Miller, Garrett, Hurt, Stivers, Ross; Capuano, Cleaver,
Sherman, Himes, and Beatty.
Ex officio present: Representative Hensarling.
Also present: Representative Green.
Chairman Neugebauer. This hearing of the Subcommittee on
Housing and Insurance will come to order. Today's hearing is
entitled, ``The Impact of International Regulatory Standards on
the Competitiveness of U.S. Insurers.'' I ask unanimous consent
that any Members who aren't on the Housing and Insurance
Subcommittee be allowed to participate in this hearing as if
they were a member of the subcommittee.
Without objection, it is so ordered.
This is the first hearing that I am aware of where we
really kind of start to dive into some of the role of the
Federal Insurance Office (FIO) and its interaction in the
insurance industry along with other stakeholders, and
particularly as we begin to examine a range of international
regulatory standards and how we can balance the need to
coordinate international regulatory efforts with our duty to
ensure a globally competitive marketplace for U.S. companies.
So this will be the first of, I think, many hearings examining
the international competitiveness of the U.S. insurance
industry.
We have three objectives for this hearing: to gain a better
understanding of the strategic objectives being pursued by our
insurance supervisors and how they are working together to
achieve these shared goals; to receive assurances from our
witnesses that the agenda being pursued is a net positive for
the domestic policyholders and insurers; and to raise awareness
of certain international proposals that could undermine our
system of State-based insurance regulation that has performed
pretty well for over 150 years.
Additionally, we want to make sure that better
international coordination can prevent regulatory gaps and
promote efficiency. The IAIS is moving away from a regulatory
coordination to an international standards setter.
Given the unique nature of our insurance regulatory model,
the consolidated bank-like model favored by the International
Association of Insurance Supervisors (IAIS) could
disproportionately impact U.S. policyholders and insurers. We
would like to learn more about what the National Association of
Insurance Commissioners (NAIC) and FIO are doing to prevent the
importation of European style bank-like regulations into the
United States.
Also, we want to learn more about ComFrame. The current
ComFrame draft would create a one-size-fits-all regulatory
regime for global insurers, including group-wide capital
assessments and prescriptive prudential standards. Given the
unique nature of our regulatory model, this proposal has the
potential to increase the costs for U.S. insurers, which would
be borne by the policyholders themselves. I would also like to
hear how our witnesses view the ComFrame proposal and how they
believe it would affect our insurance markets.
Additionally, the IAIS selection method to determine
designation of systemic insurers or Global Systemically
Important Financial Institutions (G-SIFIs) lacks transparency
and reasonableness due to the process of appealing decisions. I
would also like to hear how our witnesses plan to harmonize our
efforts to designate Systemically Important Financial
Institutions (SIFIs) here at home and other efforts overseas.
So I think this is going to be a very important hearing, and I
think Members can use this, obviously, as an educational
opportunity, as some of these things that we are going to be
discussing today are being played out literally as we go here.
And with that, I would like to recognize the ranking member
of the subcommittee, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
I want to thank all the panel members. I think this may be
the most distinguished panel I have ever seen. I have had
distinguished individuals--but the whole panel; you guys are
pretty heavyweight. I am looking forward to learning a whole
bunch from you.
Again, Mr. Chairman, thank you for having this hearing. I
think this is one of many hearings we are going to have on how
the whole Federal involvement, whatever limited involvement or
whatever it might be relative to insurance regulation, it is an
important issue. It is a very delicate issue. It is a very
controversial issue, and I think it is important for us to try
to keep on top of it, but I do want to point out the irony that
just yesterday, we had a significant hearing, and we passed
several bills on the Floor, all of which were designed to
embrace foreign regulations, to say foreign regulations are
better than our regulations because we like them better, and
yet here, just the concept of foreign regulations scares some
people. My answer is that there are some good, and some bad.
Let's figure out what is good, let's figure out what is bad,
and adopt the ones that aren't and fight the ones that are.
But all that being said, I am looking forward to the
hearing today, and a continuous relationship with all three of
you gentlemen because each of you holds a very important
position in this issue to keep us educated and enlightened and
involved.
So thank you for being here, and thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Royce, is
recognized for 2 minutes.
Mr. Royce. Thank you, Mr. Chairman.
I think some historical context is necessary for this
hearing. The Federal Insurance Office was created to solve a
problem. Both the Bush Administration's Blueprint and the Obama
Administration's White Paper called for its creation. Both
highlighted the need for a lead negotiator in the promotion of
international insurance policy for the United States, as the
paper said, and that the lack of a Federal entity with
responsibility and expertise for insurance has hampered our
Nation's effectiveness in engaging internationally.
Dr. Terri Vaughan, a former CEO and president of the NAIC,
applauded its creation, stating that in a post-FIO world,
unlike now, there would be a single office capable of
articulating a global policy considering U.S. interests broadly
and enforcing the policy. In this increasingly global world,
that is something the United States can no longer live without,
she said. The facts are the facts. What was known then is known
now. State regulators and most certainly the NAIC are
structurally and constitutionally incapable of representing
U.S. insurance interests abroad.
The NAIC lacks the legal standing as a self-proclaimed
standard-setting and regulatory support organization, while
State insurance regulators lack the authority under the U.S.
Constitution to negotiate binding international agreements.
What was contemplated at the time was not simply adding another
Federal voice to international discussions regarding insurance
issues, as Senator Nelson states in his testimony. No. It was
to create a single voice for the United States on these
matters, and the problem, as Dr. Vaughan noted at the time, was
that there was no clear leader for U.S. insurance regulation;
no single person could articulate a U.S. policy on a global
stage.
This hearing should not be about revisionist history, and
it should not be focused on whether the NAIC is getting along
with the FIO. We should put U.S. insurance consumers first.
This committee's oversight should be focused on empowering the
FIO to encourage healthy competition at home and a level
playing field for U.S. insurers abroad.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from Ohio, Mrs. Beatty, is recognized for 3
minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member.
And certainly I agree with my colleagues, as we are excited
to hear from this distinguished group of gentlemen. This is an
area that I am quite interested in, and hopefully when we get
into the question areas, there will be some questions that I
could delve into with Basel and TRIA and the uniform
enforcement of international insurance. We have been looking at
the international issue as it relates to housing, and now we
are here in insurance.
I am from Ohio, and just recently, I have had a couple of
financial institutions, a credit union give me an example of
them being engaged with an insurance company that then had some
financial difficulties, and then, as you can imagine, when they
went into bankruptcy, what happened to the credit union and all
of those individuals that they were representing. So, as we
talk about that further, I would like to hear your opinions on
that.
Also, so often, I have people who come in, and they are
insurers, and they act like a bank, but they are not a bank.
And then, we have others who are saying they are. So as we look
at this and the examples of what we are doing internationally,
I will be really excited to hear some of your responses, and I
am sure I will have some questions after we hear your
presentations.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from California, Mr. Miller, is
recognized for 2 minutes.
Mr. Miller. Thank you, Chairman Neugebauer. Thank you for
holding this hearing, and I welcome our guests today.
I am looking forward to hearing from you. For the past
century, and through multiple financial crises, the State-based
insurance regulatory system in the United States has been
successful and has protected policyholders. However, in the
response to the financial crisis, global regulators are now
seeking to set new regulatory standards for all insurers. It is
essential that Congress fully understand the impact
international regulatory standards will have on the
competitiveness of U.S. insurers.
As negotiations proceed, we must recognize that the U.S.,
EU, and other regions have vastly different regulatory
structures for the insurance industry and adjust them
accordingly. While I strongly believe in coordination among
international regulators, we must resist the tendency of
pursuing a one-size-fits-all approach. If we subject U.S.
insurance firms to inappropriate international regulatory
standards, it will hurt U.S. competitiveness domestically and
internationally, and it will create an unlevel playing field
that will hurt U.S. jobs and economic growth.
Currently, there are proposals in the United States and
internationally to use bank-centered capital standards for U.S.
companies. The U.S. insurance model is vastly different from
both the banking system and the EU insurance model. I don't
know why regulators keep trying to fit a square peg in a round
hole, but they need to stop trying. The difference in our
countries' systems should be recognized and embraced.
Regulatory coordination efforts should focus on effective
principles and avoid specific standards. We should be looking
at effectiveness of regulations, not making them the same. To
defend and promote the strength of our regulatory system and
make certain that U.S. insurers can effectively compete
overseas, the U.S. representatives need to be unified in their
strategy, and it is imperative that the U.S. representatives
coordinate to form a unified strategy, because if you fail to
coordinate, we will all fail to succeed.
I yield back.
Chairman Neugebauer. I thank the gentleman.
I would now like to recognize the gentleman from Missouri,
Mr. Cleaver, to make a special introduction.
Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking
Member. I appreciate the opportunity to introduce one of our
panelists.
I am very proud and pleased to introduce--actually, I guess
I can't introduce someone who has served with distinction in
the Senate, but let me introduce to this committee Senator Ben
Nelson, from my neighboring State of Nebraska.
There might be a question of, why would somebody in
Missouri want to introduce someone from Nebraska, particularly
considering how the University of Nebraska's football team has
treated Missouri historically? However, I am very pleased that
Senator Nelson, who actually became involved in the insurance
industry right out of law school, was the key figure in moving
the National Association of Insurance Commissioners' national
office to the downtown area of my congressional district, and
they have over 450 employees in the downtown area, so we are
very proud of that.
As I said earlier, Senator Nelson is a familiar face here
on Capitol Hill, a two-term Senator, and he also served two
terms as the Governor of Nebraska. And one of the things I hope
I can match is during his time, he tried to bridge the gap
between the urban and the rural parts of Nebraska. And I think
the more we can bring people together and have one America, the
better we are.
So, I am very pleased to welcome Senator Ben Nelson to our
committee.
Chairman Neugebauer. I thank the gentleman, and we will now
recognize our witnesses. Each one of you will be allowed 5
minutes to give your opening statements. And without objection,
your full written statements will be made a part of the record.
The first panelist is Mr. Michael McRaith. He is the
Director of the Federal Insurance Office, referred to as FIO.
The second panelist is, of course, former Senator Nelson, who
was just introduced by Mr. Cleaver. And the third panelist is
Mr. Roy Woodall, who is an independent member of the Financial
Stability Oversight Council, with insurance expertise.
Mr. McRaith, you are recognized for 5 minutes.
STATEMENT OF MICHAEL McRAITH, DIRECTOR, FEDERAL INSURANCE
OFFICE, U.S. DEPARTMENT OF THE TREASURY
Mr. McRaith. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for inviting me to
testify. I am Michael McRaith, Director of the Federal
Insurance Office at the U.S. Department of the Treasury.
As you know, we released our first annual report yesterday,
and we are working to release our modernization report soon.
FIO's express statutory mandate authorizes our Office to
monitor all aspects of the industry. The statute also expressly
authorizes our Office to coordinate Federal efforts and develop
Federal policy on prudential aspects of international insurance
matters and to represent the United States at the International
Association of Insurance Supervisors (IAIS). When I arrived in
June 2011, in fact 2 years ago to the day, the United States
faced three primary international issues: one, the IAIS had
begun work on the designation of global systemically important
insurers; two, it had begun the development of the common
framework for the supervision of internationally active
insurance groups or ComFrame; and three, the threat of a
unilateral equivalence assessment by the EU of U.S. insurance
regulation.
It was important for the Federal voice established by
Congress to engage in these three areas in order to protect
U.S. interests, and I will address each of the three.
FIO serves as a nonvoting member of the U.S. Financial
Stability Oversight Council, and we also serve on the IAIS
committee responsible for the G-SII work. The IAIS designation
process is consensus driven. Our view is that the IAIS process
should align with that of the FSOC in substance, methodology,
and timing. We have seen significant improvement in the IAIS
work, and we look forward to continued engagement on this
project.
The second IAIS priority is ComFrame, a regulatory
framework applicable to international insurance groups.
Importantly, the IAIS is a standard-setter and not a regulator.
For this reason, ComFrame will promote comparability and lead
to improved confidence and trust among regulators from
different countries. It will have qualitative and quantitative
elements. Beginning in early 2014, the concepts of ComFrame
will be field tested directly with insurers. The companies to
which ComFrame will apply will thereby directly influence its
standards. The increasing internationalization of the insurance
market, which we strongly support, makes ComFrame an important
project in which we should be engaged. I am privileged to serve
as the Chair of the IAIS committee overseeing ComFrame
development.
The facts are that the EU and the U.S. are the world's
leading insurance jurisdictions, both in terms of premium
volume and as the home of globally active insurers. Interaction
between supervisors in the EU and the U.S. is essential to
industry and consumers. For this reason, we hosted the EU and
State insurance leadership in January 2012 to launch the EU-
U.S. Insurance Dialogue Project. Through 2012, representatives
of FIO and State regulators and the EU insurance leaders worked
to identify commonalities and differences in seven areas,
including group supervision, capital insolvency, and
reinsurance.
Thanks to all the participants, an unprecedented gap
analysis was released to the public in September 2012. In
December 2012, the EU and the U.S. agreed on high-level
objectives to be pursued in the coming years. Areas for
improved convergence will be identified, as will the areas
where the gaps are too divergent to reconcile. Importantly, the
EU and the U.S. share a commitment to this collaborative and
constructive project.
So these are three key areas of our international
involvement, although we have more. Among others, we work with
State regulators at the Organization for Economic Cooperation
and Development (OECD), and we formed the first North American
insurance supervisory forum. Insurance is an enormous
multifaceted industry, subject to complicated regulatory
oversight.
Chairman Neugebauer, I affirm our commitment to work with
State regulators and to work in support of Congress as you seek
to further understand insurance sector developments of local,
national, or international interests. On every issue, our
priority will remain the best interests of the U.S.-based
insurance consumers and industry and jobs and prosperity for
the American people. Thank you for your attention. I am happy
to answer your questions.
[The prepared statement of Mr. McRaith can be found on page
40 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Nelson, you now are recognized for 5 minutes.
STATEMENT OF THE HONORABLE E. BENJAMIN NELSON, CHIEF EXECUTIVE
OFFICER, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
Mr. Nelson. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for the opportunity
to testify today. I am Ben Nelson, CEO of the NAIC.
In the international arena, U.S. insurance regulators and
the NAIC have been active at the IAIS in developing ComFrame.
We believe there is merit in developing a framework for greater
coordination and cooperation among supervisors for such groups.
However, we are concerned that the current scope and
prescriptive nature of ComFrame overshoots those goals and
overcomplicates what is necessary for effective cross-border
supervision. Rather, ComFrame should support the work of
international supervisory colleges which serve as the vehicle
to achieve these relationships designed to enhance insurance
activity.
We are also troubled by related discussions on the need for
a global capital standard for insurance, which could result in
a bank-like approach that is not appropriate. We urge Congress
to be wary of any international prescriptions seeking to impose
new standards on the United States.
The NAIC is also involved in the identification of Global
Systemically Important Insurers, or G-SIIs through IAIS. To the
extent that an insurer engages in activities which could result
in that designation, U.S. and international regulators should
work collaboratively to address these activities and eliminate
their systemic threat. Thus, we continue to examine the scope
of our authorities and resources to ensure that systemic risk
does not emanate from insurance activities or entities within
our purview.
Additionally, we have concerns that two tiers of companies
could reduce market discipline, create competitive distortions,
and encourage undesirable consolidation and concentration in
the insurance sector. Therefore, designation should be the
product of rigorous analysis that reflects a very thorough
understanding of the insurance business model and regulatory
system. The domestic and international processes should be
aligned to the greatest extent possible with appropriate
deference to domestic authorities. As such, the G-SII list
should not contain any U.S. insurers that haven't been
designated Systemically Important Financial Institutions, or
SIFIs, by the Financial Stability Oversight Council. This would
also ensure that the impact of any designation of a U.S. firm
is rooted in clear legal authority and process.
State insurance regulators have been actively involved as
well in the U.S.-EU Insurance Dialogue Project, which builds on
a decade-long bilateral discussion. Last December, a joint
report and paper were issued outlining a set of common
objectives and a series of initiatives designed to enhance
insurance regulatory cooperation. Many of these initiatives are
already under way or under consideration within the NAIC
process. While much work still lies ahead, U.S. State insurance
regulators are working diligently to enhance this transatlantic
relationship.
In some of these international areas, we have been working
with the FIO. The NAIC believes that the FIO adds another
Federal voice and can enhance existing efforts of the NAIC and
the insurance regulators. However, the FIO does not speak for
insurance regulators. Accordingly, we expect the Treasury
Department to give deference to and be supportive of the views
of the regulators in forums that focus almost exclusively on
regulatory issues, such as the IAIS.
Moreover, it is inappropriate for the FIO or any other
nonregulator to seek to participate in supervisory colleges
without an invitation from the regulators.
In conclusion, U.S. insurance regulators have a strong
track record of supervision and are committed to coordinating
with our international counterparts to help ensure open,
competitive, and stable markets around the world. Congress has
delegated insurance regulatory authority to the States, so we
have a continuing obligation to engage internationally in those
areas that impact the U.S. State-based system, companies, and
consumers. Uniform global standards are not necessary to
achieve this compatibility or equivalent results. We appreciate
international developments. We recognize that we should not
toss aside our time-tested, State-based system in pursuit of
untested and overly burdensome approaches, even for the sake of
diplomacy and collegiality. Thank you, and I look forward to
your questions.
[The prepared statement of Senator Nelson can be found on
page 46 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And finally, Mr. Woodall, you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE S. ROY WOODALL, JR., MEMBER,
FINANCIAL STABILITY OVERSIGHT COUNCIL
Mr. Woodall. Thank you, Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee for inviting me to
appear before you today.
I am pleased to be here, along with my friend, Ben Nelson,
whom I have known for 45 years, since we were both State
insurance regulators back in the 1960s. I am also pleased to be
here with Federal colleague Mike McRaith from the Treasury
Department, where I have really, in a sense, preceded him and
the FIO in serving as Treasury's Principal Senior Insurance
Advisor for 8 years under 4 Secretaries of the Treasury and 2
Administrations.
My varied background also includes serving Congress itself,
both at the Congressional Research Service and also at this
committee back in 2004 as a detailee to assist your staff in
developing proposed insurance legislation.
As you said, I am now a voting member of the Financial
Stability Oversight Council or FSOC--it is a little shorter--in
the position that was created by Congress in the Dodd-Frank Act
for ``an independent member having insurance expertise.'' That
is a direct quote.
I am joined at the FSOC by the nine voting members, made up
of the Secretary of the Treasury and members who are Federal
financial service regulators, as well as the five nonvoting
members who serve in an advisory capacity, including Mike
McRaith, in his capacity as the Director of the FIO, and John
Huff, the Missouri director of insurance representing the State
insurance regulators.
As this hearing focuses on international insurance
developments affecting U.S. insurers, some have asked, why is
Roy testifying? Why was he invited? That is a good question,
since I do not lead an agency. I don't have any regulatory or
supervisory authority. And most of the work that I do at FSOC
is confidential and thus can't be discussed or commented upon.
As mentioned in Dodd-Frank, though, it does not specify any
duties for my position, other than having insurance expertise.
I am just two lines in the statute, but expertise is never a
static concept, even after 52 years of involvement in the
insurance sector. It requires a continuous learning experience
to keep current on developments and topical issues that may
come before the FSOC. Thus, I have tried to be guided by the
duties outlined by Congress for FSOC itself in order to define
what my own proactive role as a voting member should be.
Let me briefly cite the duties as they pertain to
international insurance matters. Section 112 of Dodd-Frank
lists among the Council duties the monitoring of domestic and
international financial regulatory proposals and developments,
including insurance and accounting issues, as well as advising
Congress and making recommendations in areas that will enhance
the integrity, efficiency, competitiveness, and stability of
the United States financial markets.
Under Section 175 of Dodd-Frank, it is clear that I am also
to be a consultant to the Treasury Secretary, for it provides
that the Chairperson of the Council, in consultation with other
members of the Council, shall regularly consult with the
financial regulatory entities and other appropriate
organizations of foreign governments or international
organizations on matters relating to systemic risk to the
international financial system.
As outlined in my written testimony, I have encountered
some difficulties in trying to be effective and proactive in
fulfilling what I perceive to be those duties and
responsibilities as a member of the Council, that is, to
monitor international insurance proposals and developments and
thus be able to maintain an optimal level of expertise to
assist the Chair of the FSOC in making recommendations to the
subcommittee of Congress on international matters. The
international forums critically important to the insurance
right now have been mentioned, the IAIS and the FSB, yet I do
not believe that their structures have been sufficiently
updated to allow for the full engagement with all members of
FSOC, which Congress established as being chiefly responsible
for the United States in monitoring, identifying, and
addressing systematic risk as well as responding to threats to
our financial stability.
As set forth more fully in my written testimony, efforts
have been under way at the IAIS to allow me and other Council
members to attend IAIS member-only meetings as nonvoting
members. Currently, the FIO, the NAIC, and our State
commissioners are voting members at the IAIS. The inability for
me and other Council members to attend the closed meetings of
IAIS would create a pattern that would be similar to what we
now have in the role that the FIO plays as a nonvoting member
of FSOC. Additionally, as discussed in my written testimony,
greater opportunity for engagement with the FSB is certainly
worthy of consideration.
I want to emphasize that my purpose in being here today is
not to be critical. I do not feel an obligation to--but I do
feel an obligation to express my concerns over certain
procedural impediments to the FSOC and its members from working
more effectively with our State insurance commissioners, the
NAIC, and the FIO, especially on international matters.
In conclusion, I have heard Ben and others say that each of
us needs to stay in our own lane, referring to our statutory
authorities, and he is right, but even though the lane lines
can be blurry at times, we need to make sure that we are all on
the same track, moving in the same direction and at the right
speed in order to best serve the interests of this country.
Thank you. I look forward to answering any questions you may
have.
[The prepared statement of Mr. Woodall can be found on page
52 of the appendix.]
Chairman Neugebauer. Thank you, gentlemen.
We will now have questions from the Members, and each
Member will be recognized for 5 minutes for questions. I would
ask the panelists to be as succinct as they can in answering
those so that we can get through the questions. One of the
things we have to remember--I think we are going to have votes
in the next 10 or 15 minutes. It is my plan to get through as
many questions as we can, then we will go vote and come back,
and we will ask the panel's indulgence to allow us to go do
this Constitutional responsibility that each one of these
Members has.
Mr. McRaith, in your testimony, both written and oral, you
used the words ``to coordinate'' our efforts on an
international front, and I assume you feel that that is your--
and I think it gives you authority to be one of the
representatives in this process. So when you are coordinating
and you are representing viewpoints, for example, in your role
as the Chair of the technical committee, what efforts are you
making to make sure you have a consensus that the viewpoints
and positions you are taking basically have the broad support
of the stakeholders in the United States?
Mr. McRaith. Two elements to answer your question: First of
all, with respect to interested parties other than the State
regulators, and other than Federal agencies who have an
interest, we have extensive active outreach and engagement with
all different industry groups and consumer groups as well. With
respect to Federal agencies, we speak with them on a regular
basis and receive their feedback.
With respect to the State regulators, let me remind you
what you may already know. I was the insurance commissioner in
Illinois for over 6 years. In fact, if I were still a
commissioner, I would be the president of the NAIC next year; I
would be the president-elect this year. I spent many years
working before, during, and after the financial crisis, long
days, late nights, and through the weekends with my colleagues
from other States. Fantastic people, tremendous professionals,
many are my friends and will be for the rest of my life.
Having said that, in terms of our actual coordination, I
can give you some examples just from recent history. Last week
in Basel, on the subcommittees, we had State regulators, FIO
staff; at the OECD meeting, State regulators right alongside
FIO staff; on Monday, deputy staff from the NAIC and the States
on a phone call working on the EU and the U.S. project with FIO
staff; on Tuesday, a telephone call with the Vermont
commissioner.
Chairman Neugebauer. Thank you. And so you are saying--let
me just summarize: you are saying that you believe you are
bringing everybody along.
Now, I want to go to Senator Nelson. Senator, do you feel
that there is a consensus being drawn here on these issues, and
that the insurance commissioners feel like their positions are
being put forth in these negotiations?
Mr. Nelson. Mr. Chairman, I would have to say that a number
of the commissioners believe that the cooperation is
intermittent, that at times we have had these conversations; we
have had meetings as late as May 17th face-to-face. We have had
discussions, but most times, it seems like the question of the
position of the Treasury or the FIO on a particular issue is
unknown and not expressed to us.
I asked the question in a telephone call about an issue,
and Director McRaith very courteously said that he couldn't
communicate the position, and I asked when he would be able to,
and he couldn't tell me when he might, and this was on a joint
call with a whole host of commissioners.
So whether or not there is an effort and we get together, I
think there is a general belief and a feeling that we don't get
the kind of information in a timely fashion consistently as we
should. We believe that the Treasury has deferred and should
defer to the States on regulatory issues, and we don't feel
that there is enough communication to complete that
responsibility.
Chairman Neugebauer. Thank you.
Now, Mr. Woodall, you and I had a good conversation the
other day, and I thank you for that. So, there is kind of an
interesting relationship here between your office and Mr.
McRaith in the sense that Mr. McRaith is sitting on a panel
internationally that may designate a number of U.S. companies,
U.S. insurance companies as G-SIIs, and you sit on the FSOC,
which has just recently, I guess, determined that--we don't
know the number, but some number of U.S. companies, and some of
those may be insurance companies, would be SIFIs, but neither
one of you--so the question I have is if, for example, Mr.
McRaith, their panel decides to put six U.S. companies as G-
SIIs, and the United States only has, say, three U.S. companies
on there, how are we going to reconcile the difference?
Mr. Woodall. I operate only as a member of the council, and
the council is charged with a specific duty, as I said, as to
what we are supposed to do, and we are supposed to coordinate,
and I try my best to do that within the boundaries, without
getting out of my lane. You are right, the two different
methods may be, they are pretty much in general concept, they
are after the same thing. They may not be identical as far as
the process between the IAIS and what the FSOC is doing, but I
think there is a continuing effort to do that. The members of
the Financial Stability Board (FSB) who are now looking at
this, what comes out of the IAIS are the three Federal people I
mentioned in my testimony--the Fed, the SEC, and they are--and
the Secretary of the Treasury, and right now, for instance,
Governor Tarullo chairs the key committee at the FSB that any
information that flows up through the IAIS goes through that
committee, and I have spoken with him several times, and I have
great confidence that he, as much as possible, will make sure
that these efforts are coordinated.
Chairman Neugebauer. I thank the gentleman.
I apologize for going over my time. I now recognize the
ranking member, Mr. Capuano, for 5 minutes.
I think that we have changed the batting order here, and
the gentleman from Missouri, Mr. Cleaver, is recognized for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I thank the panel, again, for being here. I want to take a
retro approach to this because I think it would help me. I was
here--most of us were here--in September 2008, when we bailed
out AIG, and of course, AIG was regulated in a weird kind of
way with a variety of regulators, so it is a little unlike what
you are doing. But was the problem with AIG that it was too-
big-to-fail, or did they have a problem and liquidity crisis
when they kind of moved away from what most insurance companies
do and started trading credit derivatives? What happened, and
should we be concerned about insurance companies' growth? They
were in 100-plus countries, 130 countries and jurisdictions, I
think they had over 100,000 employees worldwide. What went
wrong, and what can you tell me about how we can make sure that
nothing like that happens again? Senator?
Mr. Nelson. First of all, I want to thank you for the
introduction. I appreciate the courtesy of doing that. The NAIC
is very honored to be located in your district.
I would say that only perhaps in a misunderstood way is AIG
looked at as an insurance company problem, because the insurers
under the holding company were all solvent, were financially
regulated by various States, and there weren't any problems
with stability and solvency with the insurance operations, but
the fact that the holding company became a thrift holding
company and was subject to other, to jurisdictional regulation
at the Federal level, which would have been, I suppose, what
they call group or consolidated supervision, but the insurers
themselves were all solvent because they were regulated by the
States. It was the holding company problem that has now, I
hope, been solved at least in part because the thrift
regulatory system has been disbanded and moved into another
operation. So I think that is what you would have to say, that
it was not an insurance failure in any sense.
Mr. Cleaver. Mr. Woodall?
Mr. Woodall. Speaking from a retro type position, too, I
think it emphasizes what he said, the fact that what triggered
it was activities going on at financial products in the United
States.
Mr. Cleaver. Like credit derivatives?
Mr. Woodall. Right, right, and it shows really how there is
a need for international cooperation to make sure that
something like that is not a gap in the regulatory structure.
Mr. Cleaver. Thank you very much.
Their board had threatened to sue. That has nothing to do
with this hearing. I am just irritated, and this is the only
chance I get to say it publicly, that the board wanted to sue
us, sue Congress for bailing them out because they said it
damaged the investors. I don't want a comment; I just want the
world to hear me say that. I feel better now.
I am not going to have time to--I wasted my time on AIG's
board, so I will yield back the balance of my time, Mr.
Chairman.
Chairman Neugebauer. I thank the gentleman, and now the
gentleman from Missouri, Mr. Luetkemeyer, is recognized for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. McRaith, in the negotiations with regards to the
ComFrame work that you are doing, how are you defending the
American model of insurance that we have, the insurance
regulatory system that we have here?
Mr. McRaith. It is probably worth talking about ComFrame,
very briefly.
Mr. Luetkemeyer. Very briefly. I only have 5 minutes.
Mr. McRaith. Very briefly. As I mentioned earlier, the IAIS
is a standards-setting organization. ComFrame will be a set of
standards. ComFrame will ultimately facilitate comparability
among supervisors, enhance confidence and trust between
supervisors, facilitating growth of U.S.-based insurers in
other parts of the world. That is why we support ComFrame.
In terms of defending the system, the IAIS, as a standards
setter, does not dictate to this country or any country how or
whether a country should restructure its existing regulatory
system.
Mr. Luetkemeyer. Okay. Through this discussion that you are
having, there is not going to be any delegation of supervisory
authority whatsoever over our insurance companies to another
supervisory group of any kind?
Mr. McRaith. No. In fact, what will happen is there will be
a set of standards developed for ComFrame, and then the U.S.--
Mr. Luetkemeyer. Okay, my problem there is when you set the
set of standards, who is going to enforce the standards?
Mr. McRaith. It is then left to the jurisdiction. In this
case, the States or Congress will determine how to implement
the standards in a way that fits for the United States.
Mr. Luetkemeyer. Okay, so we are going to have a set of
international standards that are going to be forced on us that
we will have to take, or is this something that the insurance
companies themselves will make a determination as to whether
they want to accept?
Mr. McRaith. By design, they are outcomes-based. ComFrame
will have standards that are outcomes-based, and the question
then for the State regulators and for Congress will be, how do
we want to achieve those outcomes? Are there outcomes we
disagree with? If so, that is where we push back in the
international context.
Mr. Luetkemeyer. It seemed that we would have a good model
here in this country on how to regulate insurance companies
from the standpoint that the States are doing a good job. If
you take that model worldwide, allow each jurisdiction to
continue to oversee it, if you want to have some common
standards that is fine, but I don't think they need to be
forced down anybody's throats. This is very concerning to me
from the standpoint that we have a model that is working. Let's
not break it--it wasn't a problem in 2008. It is not a problem
today. So if we go out and do something different, I hesitate
that we should be making any sort of commitments or tinkering
with the system. I am sure Senator Nelson would probably feel
the same way. Would you like to comment, sir?
Mr. Nelson. I do feel that way. What we should be seeking
to do is to find the best practices, and the best practices are
on both sides of the Atlantic, but what we need to avoid is
having a bank-centric system put in place even with standards
that are--the business model of banks and insurers, those
business models are different, and the standards that are being
primarily discussed by ComFrame as part of solvency II, or
Basel III, are bank-centric in nature. They are capital, they
are basically capital requirements even when they say that they
are not going to have a global capital standard in ComFrame.
That will be the effect of it. It will be a bank-centric
approach as opposed to finding the best practices for insurance
regulation.
Mr. Luetkemeyer. Have you looked at the cost that would be
incurred by the policyholders as a result? Now, you can say the
cost is going to be assessed to the company, but we all know
that it goes back to the policyholders. So what kind of costs
will be incurred by the policyholders if these models would be
imposed on them?
Mr. Nelson. There is no cost--to my knowledge, there is no
cost-benefit analysis on the cost of this process.
Mr. Luetkemeyer. Do you anticipate one being done before we
approve anything like that?
Mr. Nelson. Yes.
Mr. Luetkemeyer. You would hope that would be the case.
Mr. McRaith, are we definitely going to do that?
Mr. Nelson. I have been--
Mr. McRaith. In fact, the plan--I'm sorry, Senator.
Mr. Nelson. No, go ahead.
Mr. McRaith. The plan is that ComFrame as a concept will be
finalized this year. Starting in 2014, for 4 years, there will
be testing with companies to determine exactly what is the
cost, what is the benefit, how do we serve the practical
interests of supervisors and companies as we move forward?
Mr. Luetkemeyer. How do you anticipate implementing that,
Senator?
Mr. Nelson. I am as tight as three coats of paint, so what
I like to do is I like to know what something is going to cost
before we engage in testing it to find out, then what it costs
us to test it to know what it is going to cost to implement it.
So I have a different idea of that, and I think others do as
well. I am worried about the cost as well as the application of
an overburdensome, overly prescriptive--you can say that it is
not prescriptive, but once you set standards, they are
prescriptive.
Mr. Luetkemeyer. Thank you very much. My time is up.
Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Sherman, is
recognized for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman.
And thank you, Mr. Ranking Member, for letting me go in
this turn. The insurance industry survived the real-life stress
test of 2008. Virtually all of the State-regulated insurance
companies survived. AIG was perhaps the best stress test for
certain of its subsidiaries. That is to say, you had a
management of the holding company as dedicated to risk
management as any inebriated gambler in Las Vegas, and in spite
of that at the very top, the individual insurance companies all
remained solvent.
Now, what those drunken gamblers did at the holding company
level is they sold credit default swaps. That is to say, if
they had gone--somebody holds a $10 billion portfolio of, say,
mortgage-backed securities backed by a bunch of subprime loans
and says, oh, gee, maybe I won't get paid. If they had gone to
an insurance company and said, please issue me an insurance
policy that my portfolio won't drop by more than 10 percent,
there would have to be reserves. The insurance company would be
limited to the number of policies it could write because if you
write one such $10 billion policy, you have to have reserves if
you are going to write another $10 billion policy. And
certainly, we wouldn't have insurance sold by the unregulated
parent of a bunch of insurance companies, especially run by
drunken gamblers.
But for some reason, we decided that a credit default swap
wasn't insurance. Is there any practical difference between a
contract that says if your $10 billion portfolio drops and is
only worth $9 billion, we will write you a check, we will
insure you against that risk, that would be insurance, and if
we go to the same holder of a portfolio and we say, you have
the right to trade your $10 billion portfolio at anytime you
want for $9 billion worth of U.S. Government Treasuries, which
of course you would do only if the value of your $10 billion
portfolio had dropped by more than 10 percent? Why are we not
making credit default swaps which are, in essence, an insurance
policy against the decline in a portfolio of securities,
subject to insurance regulation at some level?
Mr. McRaith?
Mr. McRaith. I would distinguish CDS from other insurance
products in terms of both the size of the wager and, in many
cases, the participants. It is not a consumer per se. These are
highly sophisticated investors--
Mr. Sherman. If Wal-Mart gets fire insurance on all of
their stores, they are just as big, they are just as
sophisticated as somebody with a $10 billion portfolio.
Mr. McRaith. Right, and as you know, the Dodd-Frank Act has
looked at oversight and revision of regulation of these types
of products, as should happen. At one time--
Mr. Sherman. So you are saying the power of Wall Street has
prevented Congress from doing what obviously needs to be done?
Mr. McRaith. Actually, what happened, I remember as a
commissioner in the midst of the crisis, there were a number of
commissioners saying that perhaps we should regulate the CDS as
an insurance product. In fact, I think some of the State
legislators were suggesting that.
Mr. Sherman. Okay. I want to go on to Senator Nelson.
I wonder if you have any comment on this? Is there any
economic difference between a credit default swap in the
situation I have outlined and an insurance policy?
Mr. Nelson. I am one who believes that if you are issuing
the swaps, you ought to have adequate capital to do that for
sure. Whether you consider it an insurance product or not,
there is a risk associated with it that ought to be backed by
capital, and the problem with AIG was there was no basic cap--
sufficient capital to back the obligations made. Those
obligations were not incurred by any of the insurers, to my
knowledge.
Mr. Sherman. Yes. If it is a regulated insurance product,
there will be reserves. If it is not, then typically there
aren't reserves. If I agree to sell a bunch of coal to a
company at a particular price 10 years from now, I am not a
regulated company, I may or may not have money now or in 10
years. But those who sold credit default swaps were providing
insurance. They insured against the decline in the portfolio.
They made mistakes. They issued an unlimited number of
policies, not backed by capital, and what we have done to
prevent this from happening in the future is nothing.
I yield back.
Chairman Neugebauer. I thank the gentleman.
We are going to take one more questioner, the gentleman
from California, Mr. Royce, and after his questions are over,
we are going to recess. There are two votes, and I ask Members
to, as soon as votes are over, come back so we can reconvene
the committee. Mr. Royce, you are recognized for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman. Discussions on
international insurance regulation always bring us back to the
lack of uniformity in the State-based system. Even on issues
most of us agree on, such as solvency and producer licensing,
product approval, NAIC model laws have proven a useful
exercise, but they have consistently failed to be adopted by
all States, and even when largely adopted, we end up with
variant language among the States. The recent individual State
revisions to the solvency model law stand as yet one more
example of this. The NAIC has acknowledged that certain
insurance regulatory topics are appropriate for national
uniformity, and it has looked into mechanisms for doing so such
as a draft national insurance supervisory commission proposal.
This was an idea that may or may not have had merit, but it
never had a chance to succeed because of the manner in which it
was developed. It was drafted and discussed extensively behind
closed doors at an NAIC commissioners fly-in meeting in New
Castle, New Hampshire. As with 100 percent of all NAIC
commissioners' conferences, commissioners' roundtables,
executive committee retreats, officers meetings, and zone
retreats, this meeting again was closed to the public. The
topic and the discussion were confidential until the proposal
was leaked. Only then did NAIC engage in discussions with
stakeholders, but they had started on the wrong foot. The
headline of a trade press article was, ``NAIC Uniformity Plan
Hits Wave of Mistrust'', and State legislators hammered away at
the proposal, halting any public debate.
I wonder if the Senator can give his thoughts on the NAIC
process? When the NAIC membership meets in private to discuss
matters of public policy, and only discusses the matter
publicly after a news leak, does this undermine credibility?
These are public officials, but they are meeting as a group
under the auspices of a private corporation, the NAIC, with
private travel paid for by yet another group, NAIC-Newco. On
this point, I would also like to submit for the record a recent
article that details the travel and cost of travel of NAIC
officials.
Senator Nelson, if you have seen this article, does it
raise legitimate concerns about NAIC's influence over its
members when it pays for vacation-quality travel for
commissioners while at the same time selling its services to
those public officials as a private vendor? And if you could
also respond to questions about the open meeting policy? The
floor is yours. Thank you.
Mr. Nelson. Thank you, Congressman.
I think that the NAIC continues to improve the openness and
the transparency of the committee, subcommittee, working group
process. There may have been times when it was less robust than
it is today, but I think that there is a greater interest in
transparency than I saw 30 years ago when I held this same
position, and so I think there is more of an opportunity to
have consideration time and again because it goes through the
process.
Typically, it starts at a working group, goes to a
subcommittee, then to the full committee, to the executive
committee, and to the plenary session. So there are numerous
opportunities for any proposal to have consideration, and, for
example, in terms of acceptance by the States of uniform
regulations or uniform laws, right now the reinsurance, model
reinsurance bill has been adopted by about 12, or about 45
percent of the total market. By the end of next year, it is
anticipated that it will cover 75 percent of the reinsurance
ceded market in the United States. So it is--whether you count
the number of States or whether you look at the size of the
market that is affected, I think there is substantial
compliance to get model legislation wherever possible.
But one of the benefits of State regulation is that State
regulation is based on the needs of folks back home. We are
talking about international issues here today. But really what
this is about is the folks back in your district.
Mr. Royce. It is. But, again, I raise that question over
influence over its members while at the same time selling its
services to those public officials as a private vendor, if you
could later give me a response on that? And the bottom line is,
will the policy be changed in terms of everything is private in
terms of these closed-door meetings. Nothing is public in terms
of these proposals. And that is a concern.
Chairman Neugebauer. The time of the gentleman has expired.
We will now recess the hearing, and as soon as votes are
over, we will reconvene.
[recess]
Chairman Neugebauer. The committee will come to order. I
now recognize the gentleman from California, Mr. Miller, for 5
minutes.
Mr. Miller. Thank you, Mr. Chairman. I really enjoyed the
testimony. I heard there had been open and vocal disagreements
in international meetings and--in front of each other and I
really enjoyed the testimony. And I guess I recommend a
marriage counselor because people need to start talking.
When we had Secretary Geithner and Chairman Bernanke in
here, I asked a specific question. I said, ``Do you believe
that banks should be regulated the same way insurance companies
are or vice versa, or should insurance companies have different
regulations than banks?'' And they both agreed they thought
that was appropriate. They don't think it is appropriate to
have both of them being regulated by the same rules. And I
guess I just--I understand that the IAIS believes it is an
obligation to adopt some global capital standard for all
insurers. So I just want to come out and ask a direct question.
Senator Nelson, do you think bank-centric capital standards
are appropriate to apply to U.S. insurance models?
Mr. Nelson. Let me answer it this way. I have respect for
both Chairman Bernanke and Secretary Geithner. I might
respectfully disagree that they need--
Mr. Miller. So you think they should be regulated the same?
Mr. Nelson. Differently. Did should--did they say they
should be regulated--
Mr. Miller. They should be regulated differently.
Mr. Nelson. Yes.
Mr. Miller. You were scaring me. Because I had really
listened.
Mr. Nelson. No, no, no.
Mr. Miller. And I thought, I am really getting old, or I
need to have my ears inspected instead of my eyes. Because I
had heard you say you thought they were completely different
and you thought applicable regulations to both would be
inappropriate. And I think it would be--we went through a huge
financial crisis.
Mr. Nelson. Now that you clarified--
Mr. Miller. That sector was not impacted. AIG, which is a
different issue.
Okay. Mr. McRaith, do you agree with Senator Nelson?
Mr. McRaith. I absolutely agree that the insurance industry
should not be subject to bank capital standards.
Mr. Miller. Mr. Chairman, I am loving these guys all of a
sudden. Because it seems like we had all kinds of questions all
day and discussion and a lot of people out there were believing
that somebody was thinking that we should regulate them both
the same. And I know there are a lot of insurance companies out
there. Some you talk about, Senator Nelson, that had a very
minor bank holding company that just did it as a courtesy to
their organization and stuff, and they have just sold them off
because they were panicked that those standards were going to
apply. And I am glad that you both have--you made me feel a lot
better, you really did, because I introduced legislation to
stop this. Because we heard it was starting again, the concept
of doing this. And then I had heard the problem with vocal
disagreements. And I am not--I didn't mean to be critical. We
need to talk.
Chairman Neugebauer and I, if we disagree on something, we
will go in a room, private, and we will have a discussion. And
we will both voice--I don't think we have ever had that kind of
discussion. We might have a difference of opinion on certain
things. We have never come out here publicly and gotten in a
brouhaha in front of everybody over an issue. We might ask
different questions and maybe we would both like different
responses.
But that answer was extremely important to me. Because we
have--I have heard both of you make your presentations, and I
appreciated both of them. But then, I had heard about the vocal
disagreements and such. So it is niceto have it out there.
Now, if we all would sit there, Mr. Woodall, everybody
agree that we all agree, and we will fight those people who
believe that one-size-fits-all internationally. And that is
good for the United States, which I don't agree with--I think
it would be a huge mistake. I think I--when I was at the State,
I got to chair the insurance committee for a while, and I
really enjoyed that. I believe in optional Federal charters for
insurance, even. I would like banks--to give them an
opportunity if they want to do that. If they want to, yes; if
they don't want to, fine. But to have some other body
determining how we should regulate our specific industries is
very scary because they don't understand our model. If you go
to the EU, it is a different model than we have here. Ours is
specific to the United States, and I think it has worked very
well.
But in recent months, I have had more meetings with people
from the insurance industry who are very, very concerned, more
so than they need to be, now that I have heard what you both
believe.
So if I have Mr. McRaith and Senator Nelson, and I have
Secretary Geithner and Chairman Bernanke all saying that is a
very bad idea, we need to record this meeting, Mr. Chairman,
and we need to replay it. Every time somebody brings this issue
up, we need to say, no, nobody believes it is going to happen.
And it is kind of like my opening statement, because I really
only asked one question, but I would really encourage all of
you to start talking about this publicly and letting other
people know that you believe this, and you are going to make
sure that you do everything possible to make sure this happens.
And then, there are a lot of us on the committee who would be
much more at ease knowing that was a sentiment, and we are all
in unison here, agreeing that, for our country, this is wrong;
for our business sector and the insurance industry, it is
wrong, and for our economy, it would be a disaster. So I am not
going to ask all these other stupid questions because they
don't really apply anymore. You gave me the answers I wanted to
hear, that you both think they are different, and they should
be regulated differently and treated differently.
And based on that, I yield back my time. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Florida, Mr. Ross, is recognized
for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman. I appreciate the
opportunity to ask some questions and to follow up with Mr.
Miller.
I come from a State, Florida, that has been used more as a
bad example for an insurance market than anything, but a demand
that is uncompromising to some of the other jurisdictions out
there. And yet, our regulatory environment under our insurance
commissioner has worked, despite some of the natural
catastrophes we have had.
Mr. Woodall, the Financial Stability Board has charged, of
course, IAIS with the responsibility of identifying the G-SIIs,
or the G-SIFIs, however you want to do that.
My concern with that is that if they find a U.S. or
domestic insurer to be one of those G-SIIs, what due process
or--at least with the SIFI, we have due process. The nonbank
financial institutions that have been identified in the last
week at least now have an appeal process. Is there any such due
process under the G-SIIs?
Mr. Woodall. Congressman, I think we discussed this a
little earlier as far as what happens if a G-SII is named by
the FSB. And the efforts that are going on to try to coordinate
that. Obviously, the systems are not identical. There are some
differences. There are some weighting factors that they use.
Mr. Ross. Couldn't the identification of a G-SII, a
domestic, a U.S. domestic insurer taint the designation as an
SIFI under our current standard here. In other words, it would
seem to me that if you are going to have a G-SII of a domestic
insurer, they would also then almost axiomatically be a SIFI
under our--our system under Dodd-Frank.
Mr. Woodall. Not necessarily. I think that certainly the
FSOC would take note of that because that is a very important
factor.
Mr. Ross. Yes.
Mr. Woodall. To take note of it. But they would not be
bound, because this Congress has set what we are supposed to
determine it on at FSOC. And we use the metrics and the
procedures that Congress set out for such determinations as a
SIFI in this country.
Mr. Ross. Again, that is why I am glad you are on FSOC. And
I am glad you are a voting member. Now, be that as it may, I
understand the IAIS is setting these standards for G-SIIs. Why
aren't you on that? Why aren't you a part of the designation
committee for G-SIIs?
Mr. Woodall. Congressman, I did cover that in my written
testimony, because I had mentioned the fact that I did feel
like that since we have a comparable situation, when we look
at--
Mr. Ross. I have confidence in you, I just want you to know
that. I would like to see you there, because I think it is a
two-way street. Not only do we have to protect our insurers,
domestics that are doing business here, but we have to protect
our domestics that are doing business there.
Mr. Woodall. I would like to be in the room, too, when Mike
McRaith is there, because I think it is important. I would like
to help him. I don't think that it is any sort of a conflict. I
think the more boots on the ground, the better, and I don't
think there can be too many eyes and ears in a meeting like
that to try to come up with a right consensus plan.
Mr. Ross. I couldn't agree more. And the lack of that--a
lack of your presence being there gives the suggestion that
maybe we are not putting forth the best effort on behalf of our
domestic insurers in dealing with international regulatory
rules and reform.
Mr. McRaith, you have been the Director of the FIO since
its inception; is that correct?
Mr. McRaith. I started 2 years ago. So approximately a year
after the Dodd-Frank Act passed.
Mr. Ross. And under FIO, we have charged them
responsibility for issuing some reports. Yesterday, we received
our report, at least I had a chance to look at the executive
summary. You talked about the modernization one. There have
been several that missed deadlines, including the market with
regard to reinsurance. Reinsurance is really important to my
jurisdiction. It becomes a villainized industry when we are
doing ratemaking processes at the OIR in Florida.
I know it has been 18 months since these reports should
have been issued. How are we coming along? Are we able to get a
draft report? Can we get a sense of what might be out there and
when you think these reports might finally be issued and
submitted to Congress?
Mr. McRaith. Absolutely. First of all, I want to recognize
the importance of the reinsurance market to the State of
Florida and, frankly, for the entire country.
Mr. Ross. Yes.
Mr. McRaith. The annual report is the first in line, first
in the queue, so to speak. We will be releasing our
modernization report, as I mentioned, soon.
Mr. Ross. Soon.
Mr. McRaith. And our hope is this summer.
Mr. Ross. Good.
Mr. McRaith. We are aware of the need to release the
reinsurance report. We will have a report on natural
catastrophes as well, also an issue of interest to the State of
Florida.
Mr. Ross. I hope we dont have any new data for you in the
next 3 months for it, either.
Mr. McRaith. Yes. We are all hoping for that. But you
should expect to see all of those in the near term. The first
one is out. We have the process in place. And we are looking
forward to providing you with those reports.
Mr. Ross. Thank you. I yield back.
Chairman Neugebauer. I now yield to the ranking member, Mr.
Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
Director McRaith, the ComFrame, the IAS stuff, this is not
going to be mandatory in the United States; is that correct?
Mr. McRaith. That is correct.
Mr. Capuano. So it is advisory with kind of a best, as they
see it--a best practices type of thing.
Mr. McRaith. Their best practices for the United States to
adopt in a way that works for the United States.
Mr. Capuano. Fair enough.
Senator, in your--you have been involved with the insurance
industry for a long time in various capacities. And in my
previous life, I was a little bit involved in insurance as
well. And I remember that there used to be--all the
commissioners would get together and they would come up with
model legislation that different States would participate in
and they would adopt or not adopt. Am I right about this? Is my
memory serving me correctly?
Mr. Nelson. That was, and still is, the process.
Mr. Capuano. And that is a similar thing. It is a
suggestion, for all intents and purposes, best practices as the
group sees it that each commission or each State could then
make a determination whether it would adopt or not adopt or
adopt some of it or amend it or whatever. Do I have that right?
Mr. Nelson. That is correct.
Mr. Capuano. So it is just like on a State-By-State level
exactly what IAIS is suggesting on a country-by-country basis.
That there is no--there is no power to enforce it. There is no
requirement that it be done. It is how they see it. The same
thing in this case how the association would see it. So,
therefore, I--though I understand fully well, and I totally
agree, we should never give up our regulatory scheme to any
other country, which, by the way, we just did yesterday on the
Floor of the House. That is a different issue. But we
shouldn't. But we should look at different countries to see
maybe they do something that we should do, or whatever.
Mr. Nelson. Absolutely.
Mr. Capuano. So I think from what I see at the moment,
especially as I understand the ComFrame, there is no intention
of adopting or enacting any of this until 2018, anyway. So
there is a lot of time to come up with the right answer, to
react to it, to say we like Section 1, we don't like Section 2.
And to have that open, public, honest discussion between
States, between countries, and to make that--again, do I have
my timeframe right, Mr. Director?
Mr. McRaith. That is correct, absolutely.
Mr. Capuano. Which, to me, again, without drawing a
conclusion on the individual proposals, I think that seems to
be the right way to go, to have the open discussion in a
debate. Some people will agree, and some people won't. What is
best? How do you work within an international framework? It is
actually what we are doing on every aspect of financial
services across the world, trying to figure out, is Basel II,
Basel III, whatever it might be for banks and insurance
companies and anybody who does international business, we are
trying to figure out how to do all that in a coordinated
manner. So I--honestly, this whole process seems to me to be
something that is quite normal. And we are not at the point yet
where we should be pulling our hair out--not that I have much
left, but whatever is left--and worrying about it. Though, I do
think it is appropriate to raise those issues.
Yes, Senator? Go ahead. Jump in.
Mr. Nelson. If I might respond to that, the NAIC, the
commissioners are not opposed to developing a common frame or a
ComFrame. As a matter of fact, we are putting together a
proposal that embraces those parts of ComFrame that we think
are appropriate, most appropriate to avoid having the
prescriptive nature of it. And, in addition, we are going to
identify those areas where we think the language in the 140-
page document is difficult to understand, and won't work. But
the biggest concern is that what ComFrame seems to be doing is
being based on a bank-centric approach. That is our biggest
concern.
Mr. Capuano. I understand.
Mr. Nelson. Not about this little piece or that piece.
Mr. Capuano. That is exactly what we went through with
FSOC. As a matter of fact, I had a lot of insurance companies
coming in on the exact same thing relative to FSOC. I think
those are fair and reasonable concerns. And I think, as we play
out over time, you will find a lot of friends here with--maybe
not the same conclusions, but the same concerns. And I for one
am happy to listen.
Mr. Woodall, have you asked either Treasury or the Fed if
you could maybe go on staff one day a month or something and
kind of sit in the room under a different hat or something? It
seems ridiculous that you can't get in the room and participate
in the discussion. That just doesn't seem like the right answer
to me.
Mr. Woodall. In other words, a detail. I was a detail to
this committee for about 10 years.
Mr. Capuano. Yes. Why can't we find a way again--
Mr. Woodall. I think we can find a way. There are always
different ways to get something done. I can be invited in the
room under the bylaws of--if someone invites me in. If I am at
the meeting, it is just the fact that if I am at the meeting
and they say, we are going into executive session, and I leave
the room and I look back there and there are IMF employees and
employees from Treasury, but I can't get in the room. That is
the frustrating thing.
Mr. Capuano. Actually, this panel is a classic example.
There is no one person or no one entity as far as I am
concerned that I want to give every ounce of power to. I want
there to be an open discussion. I want there to be an open
debate so we can get this done as best we can. And, therefore,
again, I don't even know what you think on these issues. But
you clearly hold an important position. And you should at
least, if nothing else, be aware of the discussions, even if
they don't want to listen to you, which is fine. And as far as
I am concerned, as one Member, certainly if I can do anything
to help get to these details, I am more than happy to do so for
the sake of trying to get all the right players in the same
rooms at the same time so we can have these discussions sooner
rather than later. So if there is anything we can do, please--
Mr. Woodall. It is a consensus process, just the way this
committee and this Congress works on consensus, I think I agree
with you that is the way it should be done.
Mr. Capuano. Thank you.
Thank you, Mr. Chairman. Thank you for your indulgence.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Virginia, Mr. Hurt, is recognized for 5
minutes.
Mr. Hurt. Thank you, Mr. Chairman.
I thank the panelists for being here this afternoon. I want
to direct my first question to Mr. McRaith, and then maybe have
comments from the other gentlemen.
I think that, generally speaking, people believe the U.S.
insurance regulatory structure is a fine one, is a good one.
And I guess what I would ask is, do you agree with that in
whole, Mr. McRaith, and if you do, can you talk about how you
defend that when you are talking to your EU counterparts? How
do you defend that? And then I guess the second thing is, can
you talk about the U.S. regulatory structure and its
effectiveness in the context of competitiveness, the
competitiveness issue that U.S. insurers face as a consequence
of the decisions that will be made by these bodies?
Mr. McRaith. Sir, let me try to take your three questions
in order.
The first question you asked is whether the system in the
United States is fine, from my perspective. And I think I
probably share the view of this committee, which is that the
regulatory system worked generally well through the crisis. It
has served our country generally well for decades. As with any
regulatory system, it needs to be evaluated factually, and gaps
and issues need to be identified if they exist. That is in the
best interest of our country, of our economy, of the industry,
and of consumers. So, that is my view of our system.
In terms of, how do I defend that in the international
fora, as you asked, I think it is important to remember that
first of all, we can't stomp our feet and say no and walk out
of the room. The conversations will continue in our absence.
Our view is we have an important role. The United States is
a leading insurance jurisdiction. And we need to do the best we
can to influence the outcome of international discussions so
that you, as Members of Congress, can make decisions about
whether and, if so, how our system needs to be reformed. That
is in the best interests of our industry, and that, in our view
by advocating our view, working with our international
counterparts and the State regulators, we can develop a
platform that supports the growth internationally that the U.S.
insurance-based industry wants to see. We want to support that
industry, and participating in the standard-setting is one
important way to do that.
Mr. Hurt. Along the same lines, how do you evaluate the
concerns that--in any way jeopardizing our current U.S.
regulatory structure or giving up our sovereignty, if you will,
as it relates to those issues, how does that play into the
competitiveness of our companies?
Mr. McRaith. Starting with some ineluctable realities, the
insurance industry in the United States, if it wants organic
growth, is mostly seeing that in the emerging markets. That
puts additional pressure and stress on having international
standards that make sense and support the growth that our
companies want, and what we want from our industry. That is
exactly what we want to see and that is why we are engaged in
the international processes. We want to support an
international platform that allows for competitiveness
overseas.
Mr. Hurt. Thank you.
Mr. Nelson, would you care to comment on that?
Mr. Nelson. Sure, Mr. Congressman. I would concur with what
Director McRaith has said.
I would add that in terms of working with our international
friends, we want to make sure that the standards that are
developed are appropriate for the insurance business, not bank-
centric. A global capital standard applied to all across-the-
board might work well for banking, but it is inappropriate for
insurance. So the commissioners and the NAIC, in working with
our international counterparts, want to make certain that kind
of a mistake is not made, and we will raise our voices against
that. We are not going to stomp and walk out of the room, but
we are going to raise our voices.
I think what I said earlier really applies. We are putting
together those pieces of ComFrame we agree with, that we think
work for insurers, and work on either side of the Atlantic, and
around the rest of the world. And we are pointing out those
areas and standards that we don't think are appropriate.
Mr. Hurt. Thank you.
I believe my time has expired. Thank you all.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Ohio, Mr. Stivers, is recognized
for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
And I would like to thank all of the witnesses for being
here.
Mr. McRaith, of the eight duties that are specifically
mandated to you under Dodd-Frank, one of them we have talked a
lot about is your involvement with the IAIS. Another is
consulting with insurance regulators on matters of national and
international importance. And I guess I want to open the floor
to both you and Senator Nelson to find out how that
consultation is going, whether the NAIC feels comfortable that
it is going okay, and how you feel like that is going.
Mr. Nelson. I said earlier that I think there are
intermittent times when there is a consultation. But they are
not sufficient in terms of the amount or the nature of what
Treasury's position might be with respect to certain issues
such as market-consistent valuation, or about other issues. So
we were in a position of very often not knowing. Now, I talked
to Director McRaith about it, and he has been very clear that
in some instances, the bureaucracy of the Treasury is like any
other bureaucracy; he might not know, and he doesn't know when
he is going to know. So this is not an effort to try to deal
with this other than straight up. We have to have a clearer
understanding of the positions of the Treasury Department and
the FIO, particularly as they relate to State regulation.
Outside of State regulation, we are not insisting to know.
Mr. McRaith. I am not sure, Congressman, whether you were
here when I mentioned earlier in response to the chairman's
question, after 6 years and 3 months as a State commissioner,
if I had remained a State commissioner, I would be the
president of the NAIC.
Mr. Hurt. Yes.
Mr. McRaith. And, yes, we can do things better. As you
know, we are a new office. We are learning. We want to learn.
We want to do things as well as we can to serve the interests
of our country. I think it is wrong or inaccurate to suggest
that we are not working together. And I could go through the
litany of things.
Mr. Hurt. That's great. You have answered the question.
Mr. McRaith. Yesterday--
Mr. Hurt. Because of limited time, I will cut you off
there. But I would ask you to work harder to get them the
information they need. We have a State-based regulation system
under McCarran-Ferguson that predates that. It is a 150-year
tradition in the United States, and you know it. You were the
Indiana or Illinois commissioner. Please do what you can to get
that interconnectedness inside of Treasury where you can.
I do want to follow up on a question Mr. Ross asked
earlier. He mentioned reinsurance, but he didn't talk about
nonadmitted carriers that are also in that study. I just wanted
to quickly mention that they are an important part of making
our markets work really well, too. And I know that both you and
Mr. Ross mentioned half of that study, but I hope you do the
whole study, including nonadmitted carriers.
Mr. McRaith. Absolutely.
Mr. Stivers. The next thing I wanted to talk about is to
follow up on one of the questions that you have heard a lot
about, and I don't recall whether Basel standards have come up
specifically, but you answered Mr. Miller's question, both of
you, about this. But the Basel standards are really created for
banks. And I hope you will resist their imposition on our
insurance industry.
So I guess I won't ask you to comment on that. But I will
urge you to make sure that they use appropriate standards, not
just ones that were created for banks.
The next question I have is a follow up on something that
Mr. Hurt was talking a little bit about. So, the ComFrame
initiative has really become focused on technical details and
standards rather than just establishing a consensus or a set of
principles. And I am curious if--Mr. McRaith, could you address
this concern, and what you are doing to make it move more
toward principles as opposed to prescriptive standards?
Mr. McRaith. Congressman, I became the chair of the
committee that oversees development of ComFrame in October of
2011. I can't attest to or vouch for the work product preceding
that other than to say very smart people from around the world
worked together to get to that point. We have heard frequently
and with great emphasis from the industry that those provisions
of ComFrame that apply to the industry should be principles-
based. When the next version of ComFrame is released, which
will probably be in late September, early October of this year,
you will see a much more principles-based document. It will be
focused on outcomes. It will have guidance for supervisors and
companies, and ideas for those supervisors and companies on how
best to achieve those outcomes. But we are moving in that
principles-based direction.
Mr. Stivers. Great. I will yield back the balance of my
time and hope for a second round, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman. The chairman of
the Capital Markets Subcommittee, Mr. Garrett from New Jersey,
is recognized for 5 minutes.
Mr. Garrett. Thanks. And I may not use the whole 5 minutes.
This sort of plays off, Mr. McRaith, some of the questions
and answers that you have given already. So what I understand
from everything I am hearing here, you are moving--not you,
ComFrame is moving off from the coordinated, regulated
coordination approach to standard-setting. Okay.
But if that is done, does that mean that when we have
jurisdictional differences here versus there in the area of
solvency, which is one of my pet issues as previously being
on--chairing the insurance committee back on the State level,
which I always said the only issue that a regulator should
really focus on is solvency, everything else becomes secondary
after that. Solvency, accounting, capital requirements,
corporate governance. They will be what? If you said it was
going to be an outcome-based system, so therefore the standard-
setting in your understanding would not be particular on all
those four or five areas that I just ran down?
Mr. McRaith. I would answer--let me try to answer your
question as precisely as I can without getting into too much of
the technical details.
Mr. Garrett. Okay.
Mr. McRaith. Generally speaking, the ComFrame provisions
that apply to the companies, the risk management, corporate
governance, those will move in a much more principles-based
direction. The objective of ComFrame is to allow for the
supervisors from countries around the world. We want our
companies expanding, growing into all these emerging markets.
Those supervisors want to know, what is this company we are
looking at? And how is it capitalized? What is its financial
condition?
So, ComFrame will establish a common vocabulary. But it is
not going to be a solvency assessment, per se. It will be a
common method, a simple basic formula, how do we evaluate the
financial status of the company?
Now, the best part about it is that what we will see at the
end of this year is a concept and a proposal. And it will be 4
years of testing with the companies to get their direct
feedback.
Mr. Garrett. I appreciate you not getting too much in the
weeds. So let's take something like the capital standards or
what have you, so they will come up with a terminology term and
that sort of thing. I get you, I think, on that.
Mr. McRaith. Yes.
Mr. Garrett. But what pops into my head is another analogy
where we talk in these committees on setting of standards in
education and then, of course, their--what is the expression
they always use? We are going to teach to the test, then,
which, basically, you are teaching to the standards, right? So
if you have these core requirements, if you will, which would
be the standards here, does that then implicitly, if not
explicitly, then, say to the company, to the carrier, this is
how your capital standards will have to be met in order to be
satisfied, in order to satisfy these standards, as opposed to
just saying, you have a standard--and I am not alluding to the
whole banking issue.
Mr. McRaith. Right.
Mr. Garrett. That is a valid argument, as well.
Mr. McRaith. In fact, I think, on the contrary, what it
allows the supervisors of these companies--and, as you know,
some of the U.S.-based companies are in 40, 50, 100 or more
countries. That is great. That is what we want. And what we
want to see is those supervisors be able to understand what is
the financial strength of the company. It is not setting a
standard; it is allowing them to communicate in a way that
builds confidence and trust.
Mr. Garrett. All right. Just two other questions. If the
company is designated as a global systemically important
insurer by the IAIS and the Financial Stability Board, what
will the consequences be, then, for that U.S. company group?
Mr. McRaith. It is important to know--and I was, by the
way, pleased to hear Roy talk about this, because our
situations with him, obviously, have informed him very well.
The FSB, the IAIS will make a recommendation to the FSB, which
will make its determination. That is not self-executing. There
is no legal effect of that in the United States. Any
determination at the FSB level for any country--for any company
would be referred to the domestic authority, the domestic risk-
analysis process. And in the United States, that is the
Financial Stability Oversight Council. No aspect of the FSOC is
going to be abrogated, altered, modified, or reduced because of
the international process.
Mr. Garrett. We will see.
My last questions are on the FIO, they are responsible as
far as reports under Dodd-Frank. I don't know whether someone
else has asked you this, about the fact that I guess there are,
all together, one, two, three, four, five reports. Two of them
are done. There are three of them whose timeline has come and
passed, January of last year, September 30th. Can you tell me
why are they late, and when should we anticipate them?
Mr. McRaith. I can tell you that the reports--we released
our first annual report yesterday. We are pleased to have that
out. We look forward to feedback from you and other members of
the committee on that report. It is our first effort. That is
the first in our queue. We are working to produce additional
reports. You will see our modernization report, which, as you
might know, Congressman, I think is the one of interest to many
people. That will be out in the near future.
Mr. Garrett. That was due back in January of last year,
right?
Mr. McRaith. That is right.
Mr. Garrett. So shouldn't we have that?
Mr. McRaith. We recognize that it is not on schedule. We
haven't delivered it as punctually as we would like. But we
want to provide this committee with a meaningful, thoughtful
report. That is what you will get from us.
Mr. Garrett. I would think--with the chairman's
permission--that sort of information would be information that
you would want to have in hand as you are negotiating or
discussing the aspect of defending our system vis-a-vis the
international system. And we are a year-and-a-half behind
there. That would be problematic, I would think.
Mr. McRaith. More importantly, we want you to have that
information as well.
Mr. Garrett. Thank you.
Mr. McRaith. Thank you.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from Ohio, Mrs. Beatty, is recognized for 5
minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member.
I will try to be brief, and I am going to combine two
questions. As you heard earlier, I am from the great State of
Ohio. And we have one of the Nation's largest insurance
companies in my district. We also have the largest single
campus in my district. And in talking with some of the
financial managers at the Ohio State University, one of the
questions came up about terrorist insurance, risk insurance.
And with the backstop here in the U.S. Government, the
university is paying thousands and thousands of dollars. And so
they wanted to know--to obtain coverage for a terrorist attack,
without TRIA, will the cost be prohibitive? Will it be
impossible to get the insurance? Or do you think they will have
to go through surplus lines outside of the United States?
Briefly, please?
Mr. McRaith. Briefly, as you know, TRIA, as a program, is
set to expire at the end of 2014. These are exactly the issues
that we will be studying, considering, and evaluating over the
next 18 months. And we look forward to hearing the views of
your constituents, the industry, and others, of course,
regulators, as we make that evaluation.
Mrs. Beatty. Okay. Thank you. The second question is, as we
look at insurance companies who own banks and then insurance
companies, as someone earlier said, that are designated as
systemically important financial institutions, if each of these
companies are wholly domestic, will they be subject to an
international agreement on capital rules?
Mr. McRaith. Congresswoman, if I understand the question,
it is whether a bank or savings and loan holding company in the
United States would be subject to international capital rules.
I think those determinations are made by the lead supervisor of
the bank holding company or savings and loan holding company.
And in our case, that would be the Federal Reserve.
Mrs. Beatty. Okay. Thank you. I yield back.
Chairman Neugebauer. I thank the gentlewoman.
Mr. McRaith, in your discussions with European officials,
does the Treasury have any specific concerns with the proposed
Solvency II standards for insurance companies operating in
Europe and their potential impact on the U.S. insurers?
Mr. McRaith. We have--first of all, Solvency II is not a
final document. So the exact terms and provisions of Solvency
II are unclear at this point. We have certainly heard from
industry, both in the EU and the U.S., about Solvency II's
impact. Our primary concern was the threat of a unilateral
equivalence assessment of U.S. regulation by the EU. And our
work with the State regulators and our EU counterparts that has
been a constructive, good faith effort now for 18 months, has
removed that equivalence threat from the supervisory
relationship, and we have worked to improve, as I mentioned
earlier, our understanding, our analysis of both systems.
Chairman Neugebauer. Would you support then--is it your
position that the United States should adopt Solvency II
standards?
Mr. McRaith. Absolutely not. I think we have a system here;
you are well-versed in it. Our system works for the United
States. Whether it should be changed or not is in the purview
of this body. Solvency II is a system that can work well for
the EU. It has some very good ideas. And very smart people have
developed that approach. It has, in fact, been adopted in part
in Mexico, China, South Africa, and other countries around the
world. We shouldn't turn our back on it. And we wish our best
to our EU counterparts. But as a system, it is not one that
would work for the United States.
Chairman Neugebauer. My next question is about something
that was I think in the New York Times yesterday about captive
insurance companies. I think it was a New York attorney general
who mentioned that there should be some additional
investigation of that--I guess since we have State regulations,
you are involved in monitoring what is going on, do we feel
that the States have a handle on captive insurance companies?
And I will start with Mr. McRaith and go across the panel.
Mr. McRaith. Yesterday's action by the New York Department
of Financial Services, which includes their insurance
regulators, illustrates, I think, that this is an issue of
importance. It is an issue in which the States are engaged, and
there are opinions on both ends of the spectrum on this issue.
My understanding from the regulators, and we are monitoring
the activity, is that they are working on an appropriate and
professional way to bring some uniformity, some resolution to
this issue. And I think as well that the industry is very
professionally engaged, working to bring some closure on this
issue.
Chairman Neugebauer. Senator Nelson?
Mr. Nelson. I would agree with Director McRaith on that
assessment of what the NAIC is doing. One of the efforts that
is under way is to develop principles-based reserving so that
the reserves, the assets being held to protect against the
liabilities are matched sufficiently and appropriately. If that
occurs, I think you probably will see less use of any captive,
and even in the use of a captive, there is a question of
whether or not risk has been transferred. So this is an area
that is being closely scrutinized. I think there will be a way
to harmonize it between the various different points of view.
But principles-based reserving will be one of the most
important points. Because one of the reasons that you have the
captive situation is that there is a belief among some within
the industry that the reserving requirements, which are based
on a formula, create redundant reserves, over-reserving,
unnecessarily over-reserving, not seeking to under-reserve
necessarily, but over-reserving. Those are the arguments that
are being made. Let's get this reserving system right, and then
I think some of these mechanisms will be unnecessary.
Chairman Neugebauer. And so should policyholders--is your
message to them today, ``We have it covered?''
Mr. Nelson. We want the policyholders to know that when a
promise is made to them, the promise will be kept. It matters
to your folks back home. It matters to the people all over the
United States. We want to make sure that things are done right.
And matching reserving requirements to actual needs and capital
support is critical to regulation of insurance solvency. And
you can be sure that the commissioners are working hard to
resolve this.
Chairman Neugebauer. Mr. Woodall?
Mr. Woodall. I would say in my capacity as a member of
FSOC, and trying to keep my insurance expertise up to date,
this has been an issue that I have been looking at. I have met
with companies that use captives for their reserves. I have met
with companies that oppose that. I had a consultation with
Superintendent Lawsky on this issue. And I think that if the
council, FSOC, decides to make some sort of recommendation, it
will. In the meantime, I think it is with the regulators, where
it should be. If they could come up with something--it is very
typical that when you get the industry divided on an issue, it
is pretty hard to come to a consensus. But I think this is a
very good faith effort under way to do so.
Chairman Neugebauer. Thank you.
I recognize the gentlewoman from Ohio again, Mrs. Beatty.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member.
I think I had a part two of that question. And I kind of
left it in the air, so let me take a stab at it again and ask,
even if those companies are wholly domestic, they will be
subject to the international agreement on the rules. But when
we look at Basel III, which is a banking regime, and the
Federal Reserve has stated under Dodd-Frank, it must be subject
to federally-supervised insurance companies to this banking
regime, do you feel that is appropriate?
Mr. Nelson. Congresswoman, the way I would respond to that
is that we already have developed what we call supervisory
colleges that do the examination and the oversight of globally
active insurance operations. And that consists of not only the
home State supervisor, the domestic State supervisor, but other
affected States, as well as international regulators, included
within that supervisory college working together with the
collaborating, communicating, cooperating and jointly and group
supervision already--already be engaged in that supervision,
even when a company is not designated as an SIFI or a G-SII
company.
So I think you are going to see a lot of cooperation. It is
already in place. I don't remember, but there are more than 15
of these college supervisory groups that have met, are meeting
and continue to work together, cooperatively, across borders,
across transatlantic, wherever the regulator of a jurisdiction
needs to be involved, can be involved.
Mrs. Beatty. Thank you. I yield back.
Chairman Neugebauer. I thank the gentlewoman.
The gentleman from California, Mr. Royce, is recognized for
5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
Director McRaith, you reference in yesterday's FIO annual
report, State-level reinsurance collateral requirements have
been a thorny issue between the United States and Europe for
several years. You have observed that. We have observed that.
But the conference report on Dodd-Frank noted that Treasury and
USTR's authority to negotiate covered agreements going forward
will assure uniform national application of prudential
measures, such as reinsurance collateral requirements. That
quote is from the legislation.
As covered agreements are intended to be the mechanism to
resolve this issue, can you tell me the status of FIO's efforts
to seek such an agreement?
Mr. McRaith. Congressman, there are a couple of
considerations. First of all, we are, as mentioned earlier, in
close contact with the State regulators in the EU through our
project, our dialogue, and project. And we have identified
reinsurance collateral as an important question to be resolved
between the two jurisdictions.
We have monitored very closely the work of the NAIC and the
States on this issue.
We are aware of the law in Dodd-Frank, Title V, what its
authority is. And we are evaluating the facts, and we are
evaluating whether those facts justify the pursuit of a covered
agreement.
Mr. Royce. We will, going forward, have EU/U.S. trade talks
on this subject of a trade agreement. Could that be used to
institutionalize, maybe, this discussion with Europe? I just
bring it up as a thought. You don't have to give me a response
on it. But conceptually, it might be a way to drive this issue
for a while and get it resolved. If we have a seat at that
table, and it is raised to that level, we might be able to get
this behind us, but I want to thank all three of the witnesses
for their testimony here today, Mr. Chairman.
Mr. McRaith. Thank you, Congressman.
Mr. Royce. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Ohio, Mr. Stivers, is recognized
for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman, for this second round
of questions.
My first question is for Mr. McRaith. We talked a little
bit about how you think the ComFrame is going to hopefully
transform back to a more principles-based approach. In the
current 138-page proposal, it details a description of how
assets and liabilities should be calculated that don't
currently match the U.S. system. And I am just curious whether
you are working to fix that, and what the status of that piece
of it is, if you can say.
Mr. McRaith. Sir, and again, I don't want to get into too
much of the technical detail. But to answer your question as
well as I can in a meaningful way, the most recent draft of
ComFrame is July of 2012. There have been various proposals,
additions, edits, and changes that have been part of a
circulating draft. The next formal draft of ComFrame will be
released in late September or early October. Now, are there
issues in terms of a quantitative assessment, a quantitative
element of ComFrame that raise questions about the intersection
of the U.S. approach versus other approaches? Absolutely. And
that is the conversation that we are having at the IAIS.
Mr. Stivers. And the point there is if we can't figure out
how to calculate our assets and liabilities similarly, it is
going to be really complicated as we try to figure out how to
regulate folks.
Mr. McRaith. I completely agree with you. It is an
incredible challenge. What we do know, though, is that
insurance groups operating internationally do this all the
time. And we also know that the credit rating agencies that
evaluate the capital or financial position of those same groups
do it all the time.
Mr. Stivers. And here is my bigger question and concern
under ComFrame. Because it imposes a new additional layer of
regulation, especially on large U.S. companies competing in
foreign markets against more domestic players that in some
cases would not be subject to ComFrame. What are you doing to
prevent the creation of an unlevel playing field or a
competitive disadvantage for our U.S. insurers?
Mr. McRaith. So, first, let me say and repeat that our
priority is to establish a level playing field to support.
Mr. Stivers. You said that earlier about international. I
just want to know what you are doing to make sure that happens.
Mr. McRaith. Leading the discussion, participating
actively, engaging in the important and difficult questions
will allow us to shape the outcome of ComFrame. It is important
to know--the premise of your question--I am sorry.
Mr. Stivers. Do you think we are put at a competitive
disadvantage by the structure? Maybe several of our State
insurance commissioners from States that are as big as
countries in Europe should be at the table.
Mr. McRaith. And they are. The NAIC--
Mr. Stivers. They are there through Mr. Nelson. But how
many votes does our NAIC get?
Mr. McRaith. There are five votes at the Executive
Committee for North America. And three of those are for the
United States. One is for--
Mr. Stivers. So take out Canada and Mexico for--
Mr. McRaith. Three for the United States.
Mr. Stivers. I am elected to the United States Congress.
Mr. McRaith. There are three for the United States. One is
the Federal Insurance Office; the other two are the States.
Mr. Stivers. Those are votes from North America. How many
from Europe?
Mr. McRaith. I don't know. I know that there is regional
balance. And I don't know the exact number, but I would be
happy to let you know.
Mr. Stivers. I guess the point is, maybe the structure is
something that we should take a serious look at. And I don't
want to walk away, but I just want to make sure that our
regulatory structure is not at a competitive disadvantage just
because of the structure of this international organization
that makes our big insurance companies have to be at a
competitive disadvantage when they try to do business in Europe
or in Asia or anywhere in the world.
Mr. McRaith. I absolutely appreciate that concern.
I would say that is one advantage of having the Federal
Insurance Office as Chair of the committee that is developing
ComFrame. And all the more reason for us to collaborate, and
coordinate with the State regulators.
Mr. Stivers. And I do appreciate that you are doing that.
We have about 30 seconds left. Is there anything that you want
to talk about in that time? Mr. Nelson or Mr. Woodall? Senator
Nelson, I'm sorry.
Mr. Nelson. I think, Congressman, you have hit on one of
the most important parts of the concerns about ComFrame, about
getting it right for the State-based system in the United
States.
And when you look to the number of votes, there is a
concern that we could be voted down and the ComFrame could go
through. It is supposed to be a collaborative process. And in
some respects, maybe it is. But I can tell you that many of the
commissioners who participate at the ComFrame level question
whether or not our positions in our requirements are being
heard, or are being heard but not being listened to.
Mr. Stivers. I guess I would just propose a quick--and I
know I am out of time--alternative. Maybe we should look at the
total asset size of our industries compared to other folks and
have a proportion of voting share that way.
I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman. I ask unanimous
consent that the testimony from NAMIC, a letter from ACLI, and
a letter from FSR be made a part of this record. Without
objection, it is so ordered.
I will close by saying I think this has been a good
hearing. I appreciate the Members' questions. I appreciate the
witnesses' candid answers. I think what I would say to you, to
this panel, is there is a lot of expertise here at the table
today on this issue.
This is an important issue to our country. Our American
insurance industry is one of the crown jewels of our country.
And we have a bunch of really fine companies here that create a
lot of jobs. And they create a lot of GDP for our Nation. So if
there are ways that the three of you can figure out how to work
better together, I think that is important.
If I can figure out a way to get Mr. Woodall more engaged
in those activities, he obviously brings some things to the
table, and he brings a perspective from a table that neither
one of you sit at, as well. So I think the collaboration is an
important part of the process, and particularly one--such an
important one is making sure that we have a level playing field
and we also, more importantly, in the end, making sure that
these promises that these entities have made to their customers
they will be able to keep.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
So, with that, this hearing is adjourned.
[Whereupon, at 3:28 p.m., the hearing was adjourned.]
A P P E N D I X
June 13, 2013
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