[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE FEDERAL INSURANCE OFFICE'S
REPORT ON MODERNIZING
INSURANCE REGULATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 4, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-61
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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 BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York PATRICK MURPHY, Florida
STEVE STIVERS, Ohio JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois
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
----------
Page
Hearing held on:
February 4, 2014............................................. 1
Appendix:
February 4, 2014............................................. 63
WITNESSES
Tuesday, February 4, 2014
Cimino, Anthony, Acting Head, Government Affairs, the Financial
Services Roundtable............................................ 39
Ehlert, Paul, President, Germania Insurance, on behalf of the
National Association of Mutual Insurance Companies (NAMIC)..... 41
Hughes, Gary E., Executive Vice President and General Counsel,
the American Council of Life Insurers (ACLI)................... 42
Jensen, Jon, President, Correll Insurance Group, on behalf of the
Independent Insurance Agents & Brokers of America (IIABA)...... 44
Leonardi, Thomas B., Commissioner, Connecticut Insurance
Department..................................................... 9
McRaith, Michael, Director, Federal Insurance Office (FIO), U.S.
Department of the Treasury..................................... 8
Nutter, Franklin W., President, Reinsurance Association of
America (RAA).................................................. 46
Restrepo, Robert, President, Chairman, and Chief Executive
Officer, State Auto Insurance Companies, on behalf of the
Property Casualty Insurers Association of America (PCI)........ 48
Sinder, Scott, General Counsel, the Council of Insurance Agents &
Brokers (The Council).......................................... 49
Zielezienski, J. Stephen ``Stef,'' Senior Vice President and
General Counsel, the American Insurance Association (AIA)...... 51
APPENDIX
Prepared statements:
Cimino, Anthony.............................................. 64
Ehlert, Paul................................................. 70
Hughes, Gary E............................................... 85
Jensen, Jon.................................................. 93
Leonardi, Thomas............................................. 100
McRaith, Michael............................................. 102
Nutter, Franklin W........................................... 109
Restrepo, Robert............................................. 114
Sinder, Scott................................................ 118
Zielezienski, J. Stephen ``Stef''............................ 134
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the American Academy of Actuaries....... 179
Written statement of the Consumer Federation of America...... 181
Written statement of Catherine Weatherford, President and
CEO, Insured Retirement Institute (IRI).................... 183
Written statement of Sean McGovern, Director, Risk
Management, and General Counsel, Lloyd's................... 195
Written statement of the National Association of Professional
Surplus Lines Offices (NAPSLO)............................. 200
Written statement of the National Conference of Insurance
Legislators (NCOIL)........................................ 206
Royce, Hon. Ed:
Written responses to questions submitted to Gary Hughes...... 208
Written responses to questions submitted to Jon Jensen....... 210
Written responses to questions submitted to Robert Restrepo.. 212
Written responses to questions submitted to Scott Sinder..... 213
Written responses to questions submitted to J. Stephen
``Stef'' Zielezienski...................................... 215
Written responses to questions submitted to Thomas Leonardi.. 218
Sinema, Hon. Kyrsten:
Written responses to questions submitted to Thomas Leonardi.. 225
Written responses to questions submitted to Michael McRaith.. 269
THE FEDERAL INSURANCE OFFICE'S
REPORT ON MODERNIZING
INSURANCE REGULATION
----------
Tuesday, February 4, 2014
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Royce, Garrett, Duffy, Hurt, Stivers, Ross; Capuano, Velazquez,
Clay, Sherman, Himes, Sinema, and Beatty.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representatives Ellison and Green.
Chairman Neugebauer. This hearing will come to order. As
previously agreed, each side will have 10 minutes for opening
statements. I ask unanimous consent that Representatives
Ellison and Green, who are not members of the subcommitee, be
permitted to participate in the hearing. Without objection, it
is so ordered.
With that, I will begin with my opening statement.
First of all, I want to thank you for coming to this
important hearing examining the Federal Insurance Office (FIO)
report on modernization and improving insurance regulation in
the United States. The insurance sector is an extremely vital
part of the U.S. economy, not only in terms of assets and asset
protection, but also as a direct source of domestic jobs in
this country. That is why it is imperative that Congress and
the State governments work together to promote an insurance
regulatory system that is efficient, dynamic, innovative, and
responsive to consumer needs.
Unfortunately, the absence of uniformity in the State-based
insurance regulatory system has created some inefficiencies and
burdens for insurance companies and policyholders. In fact,
according to the McKinsey & Company, the cost associated with
these inefficiencies is approaching nearly $13 billion
annually. This is unacceptable and we must, and can, do better.
Accordingly, I would also like to thank Director McRaith and
his staff for putting together a thoughtful report that will
hopefully restart the insurance regulatory modernization
debate.
Moving past arguments about the appropriate role of the FIO
in these issues and their analysis of State efforts, this
report goes a long way in educating policymakers about the
long-standing debates in the insurance marketplace, and will
hopefully facilitate additional movement by the States towards
more uniformity.
On a positive side, FIO makes some recommendations that
encourage States to improve uniformity, efficiency, and
consistency in their regulatory system. For example, the report
identifies the need for more coordinated State market conduct
exams. It addresses inefficiencies in the State product
approval process and presents useful arguments against State
regulation regimes.
These are examples of regulatory improvements that would be
very constructive and would save costs for policyholders and
the insurers. As such, the States must work diligently together
to address these areas quickly or run the risk of ceding
relevancy to the modernization debate.
On the other hand, the FIO report missed the mark in some
areas. It glossed over many of the statutory requirements of
the study, such as the feasibility of regulating certain lines
of insurance at the Federal level.
And instead of wading into the more tangible issues like
captive insurance regulation and corporate governance
standards, the report also lights FIO's ambitions that go way
beyond its statutory direction by directly advocating for the
Federal regulation of mortgage insurance and, more alarmingly,
suggesting that potential for binding Federal standards for
insurance risk classification methods.
Further, while I appreciate the hard work of Director
McRaith and his staff in this report, I am disappointed that it
failed to provide any clarity on what strategic purpose the
Federal Insurance Office serves.
The FIO has been in existence for over 3 years, and it is
still not clear what value the office brings to the
policyholders and the domestic industry. Beyond its monitoring
and consulting duties, the statutory objectives, FIO included
insisting the SIPI designations for insurance companies
administering the Terrorist Risk Insurance Program (TRIA),
coordinating Federal insurance policy overseas, and making
covered agreement preemption determinations. And yet, the
initial SIPI determinations were met with strong dissent from
the Federal insurance experts, and there have been no formal
comments on TRIA, despite its impending expiration.
Constructive coordination on international issues is
largely absent and, to date, there have been no covered
agreements. I want Director McRaith and his staff to succeed
accordingly, and I hope 2014 will be the year that we can
finally see some constructive movement on these issues and that
the FIO provides some value to the insurance consumers and
domestic insurers. Thank you.
With that, I recognize the ranking member of the
subcommittee, Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman, and I appreciate
having this hearing. Director McRaith, Commissioner Leonardi,
and everybody else in the audience--and I am guessing that
everybody else in the audience is actually on the second panel?
[laughter]
Yes. So, that counted people in the hall.
[laughter]
This is a an important and a complicated subject that will
bring out a lot of important issues that I look forward to
discussing today. In many ways, I do wish that we had had the
second panel first. Because I think there may be some things
mentioned that I would personally like to hear Director
McRaith's responses to; whatever they may be, positive,
negative, agreement or not, that is not the point. To me, I
look at this as a discussion, an ongoing discussion, ongoing
enlightenment for those of us who sit on this side. And also, I
think an opportunity for self-internal reflection of all the
people who are in the audience today who are going to testify
on this.
So, again, I appreciate today's hearing. I look forward to
the testimony. And I thank you all for being here.
Chairman Neugebauer. Now, the vice chairman of the
subcommittee, Mr. Luetkemeyer, is recognized for 1\1/2\
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. The regulation of
insurance has not historically been a topic of much
conversation in Congress, mainly because insurance has been,
and remains, regulated by the States. That seems to be
changing, and the FIO report on modernization speaks to this
evolution in both productive and troubling ways.
As I have said in the past, I remain concerned that the way
the United States has regulated insurance is taking a back seat
to international proposals. I want to remind our panelists that
the current model of regulation has, in an overwhelming
majority of cases, served the American people well.
We can have efficient and consistent insurance markets
without turning over the regulatory control to the Federal
Government. Some modernization should, and I am confident will,
happen. States should do a better job of coordinating and
creating a more efficient insurance market.
But be careful what you wish for. We can see by what is
going on today in practically every sector of our economy that
Federal regulation can be burdensome and punitive and,
therefore, counterproductive. Any modernization needs to be
focused. It needs to, first and foremost, address the needs of
the American people and policyholders.
Modernization efforts also need to bear in mind the
considerable differences between the insurance industry and
other financial services industries, and respect the unique
State regulatory model that we have in place today. I look
forward to a robust discussion, and thank our witnesses for
joining us.
And with that, Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentleman.
Mr. Himes from Connecticut is recognized for 2 minutes.
Mr. Himes. Thank you, Mr. Chairman. And I join the chairman
and the ranking member in welcoming the witnesses for what is,
as the ranking member said, going to be a very, very
interesting discussion with very difficult issues. So I look
forward to both getting through the testimony of the panels and
hearing what you have to say.
I also wanted to take a moment just to personally introduce
and welcome my fellow nutmegger, Insurance Commissioner Thomas
Leonardi of Connecticut. Mr. Leonardi, we are thrilled to have
you here. Those of you who don't know Commissioner Leonardi--
yes, he has a lengthy career in the insurance industry; 22
years before he was Commissioner, chairman and CEO of
Northington Partners. He was chosen by the Treasury Department
to serve on the FIO Federal Advisory Committee on Insurance.
And he also serves on the executive committee and technical
committee of the International Association of Insurance
Supervisors.
He has also been part of the team which, in the State of
Connecticut, while the Federal healthcare.gov Web site was
challenged, to say the least, helped roll out a spectacular
insurance exchange which has now signed up 76,000 citizens of
Connecticut for health insurance. This is in a State of 3\1/2\
million people. Many of these 76,000 people never even dreamed
that they might some day have health insurance. So I thank you,
Commissioner Leonardi, for your role in that.
I would also note that Commissioner Leonardi is thoughtful
and outspoken. He is known for his ``Jerry McGuire'' moment
with respect to a letter he wrote on the NAIC, a very
interesting memo. He is forceful, thoughtful, and clear in his
thinking. Whether you agree or disagree with him, you always
know where he stands. And Commissioner, I very much look
forward to hearing your testimony today.
Thank you. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Royce, one of
the senior members of the committee, is recognized for 2\1/2\
minutes.
Mr. Royce. Thank you, Mr. Chairman. This does feel like
deja vu all over again, as they say. We have sat right here
before. We have received testimony from Treasury on studies on
how to improve insurance regulation. We have heard from current
insurance Commissioners. And we have heard from former
Commissioners, who testified that uniformity was right around
the corner.
So in 2001--I went through my notes--2 State Commissioners
testifying on behalf of the NAIC were asked by then-Chairman
Oxley if uniformity and product approval was possible in 3 to 4
years.
And here is their response: ``We have to meet that kind of
goal. The current system is not good for consumers, and it is
not good for insurance companies. If, over the next 2 to 3
years, you haven't seen significant progress, then I think
there need to be questions raised about whether we can
effectively, at the State level, solve the problems.''
As the FIO's most recent report points out, the process for
product review and approval still varies by State. And even
where shortcomings have been addressed in life product
approval, large markets like California, Florida, and New York
have opted out. And the scope of the eligible product lines is
limited.
So we have promises made, we have the promises that were
broken and the hearings that have happened over and over and
the studies that get written. And then, they are forgotten. So
here is what I would suggest, Mr. Chairman. This committee
needs to look closely at these recommendations one by one and
prioritize next steps to make some of them a reality, for once.
And I, for one, would start with a covered agreement, product
portability and rate reforms. But we all know that this is not
a committee of one.
I challenge this committee to act on behalf of insurance
consumers to let this study not be an ending point of our
discussions, but a beginning. Otherwise, I am afraid we are
going to be right back here again.
And finally, while I was hopeful that today's hearing would
focus solely on the recently released modernization report, I
would say that the timing of Commissioner Leonardi's appearance
is fortuitous. I do think the Commissioner's recent letter
caused quite a stir, as it criticized the NAIC's internal
governance, and it promoted transparency. That was the goal of
that report. And I think that is a shared goal a lot of us
would like to explore with the Commissioner today.
And I thank you again, Mr. Chairman, for holding this
hearing.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Sherman, is
recognized for 2 minutes.
Mr. Sherman. Looking in from the outside, the idea of State
regulation of insurance looks like we would have a race to the
lowest common denominator. We have seen that with corporate
governance laws where, in the absence of the SEC, I am sure one
of our States would basically abolish shareholder voting and
install management.
But we had the best shakedown cruise one could ask for in
2008. We saw which parts of our regulatory system worked. And
we saw, particularly with AIG, that those subsidiaries which
were subject to State regulation remained healthy, and those
entities under the same management, or overall management
control which were not subject to State regulation required an
enormous bailout.
When we look at credit default swaps, we are basically
looking at insurance. You are insuring that a portfolio of
investments won't decline in value. We disguise this by saying,
well, we won't write you a check if a bad thing happens. We
will just let you, at any time, swap what is your bad
portfolio--or that becomes bad--for a good portfolio. I think
that is absurd. What if we had a fire insurance company that
didn't want to be regulated and said we don't write a check to
somebody whose house burns down. We just let you swap for the
non-burned-down house across the street.
That is fire insurance. That would be regulated. So I think
the State system has proven itself to do well. That doesn't
mean we can't do better with some action at the Federal
Government. And I look forward to applying that system to
disguised insurance when--instead of turning to the consumer
and saying if something bad happens, we write you a check, we
turn to the consumer and say, if you don't like your burned-
down house, your burned-down portfolio or whatever, you can
swap it for U.S. Treasury bonds or a non-burned-out house or
whatever. Going forward, I look forward to building on the
present system of State regulation.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the chairman of the Capital Markets Subcommittee,
Mr. Garrett, is recognized for 1 minute.
Mr. Garrett. Okay. Thank you, Mr. Chairman, for holding
this hearing for a long-awaited report on how to modernize and
improve the system of insurance regulation in the United
States. I would also like to thank the witnesses here, and the
Director, as well. After reviewing the report, I was
disappointed to learn that the report only lightly touches on
many important international regulatory concerns despite being
the area of their greatest activity behind the scenes.
Foremost, the FIO report provides little substance, analysis or
any recommendations concerning existing proposals for insurance
regulations.
For example, under the current ComFrame draft proposal,
U.S. insurers could face international regulatory efforts to
impose bank-like regulations on U.S.-based insurers. These
changes could disadvantage U.S. policyholders and U.S.
insurance companies competing overseas. You see, insurance
companies maintain very different capital structures from banks
and, as such, should not be treated in the same manner when it
comes to assessing capital requirements.
Unfortunately, international insurance supervisor efforts
are moving away from a coordinated approach and towards a top-
down prescriptive prudential approach. And this wholesale
change represents a net negative for U.S. policyholders and
insurers, especially given the success of the U.S. State-based
approach, which accomplishes the same type of protections using
less capital and a different set of regulatory measures.
Again, I thank the chairman for this hearing, and I look
forward to the testimony that follows.
Chairman Neugebauer. I thank the gentleman.
I now recognize the ranking member of the full Financial
Services Committee, Ms. Waters from California, for 2 minutes.
Ms. Waters. I would like to welcome all of our witnesses to
today's hearing. Today, this committee will discuss the
insurance industry, a sector critical to our economy and our
way of life. In fact, the United States has the largest
national insurance market in the world. In 2012, premiums in
two critical insurance sectors--life and health; and property
and casualty--totalled more than $1.1 trillion. That accounts
for approximately 7 percent of our Nation's gross domestic
product.
In addition, the insurance industry plays a significant
role in our job market, currently employing about 2.3 million
Americans. We cannot underestimate the significance of changes
to international insurance regulation. Even small changes can
have a significant impact on American jobs, consumers, our
economy, and global presence. With this in mind, Congress
created the Federal Insurance Office to coordinate Federal
efforts and develop Federal policy on prudential aspects of
international insurance matters.
Among other responsibilities, the Federal Insurance Office
is tasked with assisting the Treasury Secretary in
administering the Terrorism Risk Insurance Program (TRIA).
While not the subject of today's hearing, I want to reiterate
the widespread support amongst Democratic members of this
committee for the quick, clean, and long-term reauthorization
of TRIA. I call on my Republican colleagues to consider the
impact that unnecessary delays or significant changes to the
TRIA program will have on U.S. jobs, development, and our
economy.
I applaud the Department of the Treasury and particularly
FIO for the release of this important modernization report. It
analyzes the current framework for the U.S. insurance
regulatory system and provides recommendations for improvement
and modernization. The report notes areas where States can work
to improve uniformity, and addresses the limitations of State
law. It also identifies opportunities for a Federal role in
areas where States cannot make necessary improvements.
I would especially like to thank the Federal Insurance
Office for the recommendations on marketplace oversight and
consumer protections. While there is no question that more can
be done to improve access in underserved communities,
particularly minority and low-income communities, I see this
report as an important first step.
I know I speak for my colleagues when I say that we are
ready to work with the Federal Insurance Office, the National
Association of Insurance Commissioners, and the insurance
industry to ensure all families benefit from the protections
and opportunities afforded by insurance.
I thank you, and I look forward to the testimony of our
witnesses today. Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from Florida, Mr. Ross, is recognized
for 1\1/2\ minutes.
Mr. Ross. Thank you, Mr. Chairman. Having formerly served
as chairman of the Florida House Insurance Committee, I am
familiar with challenges and complexities inherent in insurance
regulation. Florida's geographic location and diverse
population result in a unique marketplace that varies even
within the State. Over the past few decades, our Office of
Insurance Regulation has both achieved successes and has
acknowledged failures. In many cases, we now have set industry
standards that are modeled by other States.
Florida's unique marketplace, and the developed regional
experience enjoyed by our regulators, underline for me the
importance of State authority in insurance regulation.
Accordingly, I appreciate FIO's cautious tone. I think
preserving and maintaining McCarran-Ferguson is very important.
Unlike the haste of past regulations, we should be certain that
any actions taken to improve and streamline regulation actually
do improve and streamline regulation rather than create complex
and duplicative processes.
Finally, I hope to have a productive discussion today
regarding the efforts of the International Association of
Insurance Supervisors to create a framework for international
insurance standards. As this process moves forward, it is
critical that the interests of U.S. domestic insurers are
adequately represented and their specific business models are
recognized. I am concerned that not properly addressing these
separate business models will result in higher premiums for
American families who are already struggling with the high cost
of health insurance.
I look forward to today's testimony, and I yield back.
Chairman Neugebauer. I thank the gentleman.
We will now go to our panel. Each of our panel members will
be recognized for 5 minutes. And without objection, your
written statements will be made a part of the record.
Now, it is my pleasure to recognize Mr. Michael McRaith,
Director of the Federal Insurance Office. Mr. McRaith, welcome,
and thanks for coming.
STATEMENT OF MICHAEL MCRAITH, DIRECTOR, FEDERAL INSURANCE
OFFICE (FIO), 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 Treasury's Federal
Insurance Office, or FIO.
Title V of the Dodd-Frank Act established FIO and directed
the office to study and report on how to modernize and improve
the system of insurance regulation in the United States. The
report was issued in December and can be found on the Treasury
Web site.
In drafting the report, our seminal premise was to evaluate
the U.S. regulatory system as it is--not as it was or as one
might wish it were. We learned that in 1904, President Theodore
Roosevelt called for the establishment of a Federal insurance
regulator.
Since that time, calls for needed reform have been framed
in the same binary debate of State or Federal oversight.
However, this notion of either/or, one or the other, is a relic
of a bygone era. The insurance sector in the United States is
vast, enormous, and diverse. A critical asset protection tool
for American consumers, insurance is an essential component of
the U.S. capital markets and financial system. The sector
includes complex internationally active insurance groups that
will continue to pursue growth in non-U.S. markets.
In the not too distant future, some flagship U.S. firms
hope to generate more than half of net revenue from outside of
our country. Insurance is increasingly connected with other
aspects of the national and global economies, and our
modernization report is grounded in this fact.
As noted in the report, State regulators perform well the
essential functions of localized consumer protection, including
solvency oversight of individually licensed insurance entities.
State regulators have worked to enhance multi-State
collaboration, and the report reflects our respect for the work
of State regulators around the country.
At the same time, the inherent limits of State authority
have resulted in prominent Federal supervisory roles. For
example, the Federal Reserve supervises insurers at our savings
and loan holding companies and those insurance firms designated
by the Financial Stability Oversight Council (FSOC). The SEC
reviews hundreds of indexed annuity products every year.
And, of course, the FIO statutory mandate addresses gaps in
insurance oversight, including key turning with respect to an
insurer under Title II of the Dodd-Frank Act, the authority to
monitor all aspects of the insurance industry, including its
regulation, and the authority to represent the United States on
prudential aspects of international insurance matters.
We also note that supporters of State regulation, even
State regulators and NAIC staff, recognize the need for Federal
involvement to deal with issues of multi-State inefficiency, as
evidenced by their support for NARAB II, a Federal solution to
a multi-State problem.
In addition, the Federal Government provides support for
private insurance markets. To name a few you are familiar with:
the Federal Crop Insurance Program; the National Flood
Insurance Program; the Terrorism Risk Insurance Program; and
many others. Long-standing problems with State insurance
regulation need to be addressed.
Some are issues of inconsistency or unnecessary burden,
like multi-State licensing or oversight of reinsurance
captives. Others involve the national interest, and a direct
Federal role is needed. For example, the private mortgage
insurance industry is an essential feature of the national
housing finance system, and warrants Federal standards and
supervision. Fragmented approaches to solvency oversight do not
serve homeowners, the industry, or the national economy.
Our hybrid framework, a factual reflection of the system as
it is, calls for targeted Federal intervention to resolve both
the challenges of inefficiency and concerns of national
interest. FIO will build on our outreach efforts to consumers
and industry and to our State and Federal partners as we move
to effectuate the recommendations of the report. We will report
publicly on State and Federal progress to address the areas
identified for improvement, and we will work with Congress and
this committee to determine whether, and when, the time for
Federal action has arrived.
We will continue with our work to modernize and improve the
U.S. system of insurance regulation at every point. Our
priorities will be the best interests of the American
consumers, the U.S.-based industry, and the best interests of
the U.S. economy.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Director McRaith can be found on
page 102 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And now, Commissioner Thomas Leonardi, from the Connecticut
Insurance Department. Commissioner, welcome. Thanks for coming.
STATEMENT OF THOMAS B. LEONARDI, COMMISSIONER, CONNECTICUT
INSURANCE DEPARTMENT
Mr. Leonardi. Thank you. Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee, good morning.
My name is Thomas Leonardi. I would like to first thank the
subcommittee for providing me with the opportunity to appear
before you this morning. I know that you had a pool of 56
Commissioners to choose from, and the fact that you selected me
is both an honor and a privilege, which I greatly appreciate. I
would also be remiss if I didn't take a brief moment to thank
my boss, Dan Malloy, the Governor of the State of Connecticut,
for his unfailing support for me and my department, and for
appointing me as his insurance Commissioner, a job that has
been the most demanding and rewarding in my 35-year career; and
lastly for his vocal commitment to our national State-based
system of insurance regulation.
Hartford, Connecticut, has fondly been known as the
insurance capitol of the world for over 2 centuries. We
regulate the largest life insurance industry in the country and
the second-largest when counting all insurance lines of
business. In fact, Connecticut would rank as one of the 10
largest regulatory authorities in the world if it were a
separate country. The industry represents nearly 10 percent of
the State's gross domestic product, and is part of a huge
financial services industry that employees more than one out of
every five of our citizens.
Clearly, Governor Malloy and the citizens of the State of
Connecticut have a great interest in the issues before this
committee today. I also want to thank Senator Ben Nelson, the
NAIC CEO, for joining me. While I am here today to offer solely
my views and those of the State of Connecticut, the FIO report
impacts all of my fellow State regulators. At the outset, I
want to note that the Dodd-Frank Act did not task FIO to
provide a broad and balanced evaluation of insurance
regulation. Rather, it was specifically tasked with identifying
areas where it believed improvement was needed.
Nevertheless, the FIO report, much like last summer's GAO
report, and the Financial Stability Board's peer review,
acknowledges that State regulators have developed an effective
system of oversight that satisfies the most fundamental
regulatory objectives: insurance industry solvency, and
policyholder protection. We at the insurance department in
Connecticut pride ourselves on meeting this objective every
day. But to retain this pride, we must constantly be willing to
improve and evolve to meet the next crisis or innovation.
The FIO report contains several recommendations for near
term reform by the States, as well as a few suggestions for
direct Federal involvement in regulation. As you might imagine,
every year State regulators, legislators, and even governors
receive suggestions on various insurance regulatory issues from
Federal agencies, international bodies, the consumers we
protect, and the industry we regulate. All suggestions on any
issue deserve serious and thoughtful consideration. In this
case, State regulators are still in the process of evaluating
the FIO report recommendations. And we will be meeting to
discuss them later this month and in the months ahead.
But I will offer a few initial observations. It is worth
noting that we are already addressing many of the items
identified in the report. In particular, transitions to
principal-based reserving, the own-risk solvency assessment,
strengthening of capital adequacy regimes, implementation of
the Solvency Modernization Initiative, and discussions about
improving our efforts on corporate governance and marketplace
regulation are all ongoing. State regulation is not, and never
has been, static.
We have made significant enhancements to our system in the
last several years, and the FIO report highlights several areas
where that work continues. There are recommendations, however,
that give me serious pause. For example, I oppose and I believe
most other State regulators oppose the idea that FIO should be
allowed to participate in supervisory colleges. These are
designed to be meetings of prudential regulators to share
confidential, company-specific information. The presence of a
nonregulator, even as well-intentioned as Treasury, would
threaten the objective independence not just of State
regulators, but regulators at the Federal and international
levels, as well as the other participants in the college.
In addition to this issue, State regulators also strongly
disagree with FIO's call for the Federal oversight of mortgage
insurance. A strong regulatory framework is already in place,
and efforts are underway to strengthen it. The financial crisis
dramatically illustrated that simply federalizing regulation is
no guarantee of better results.
I appreciate FIO's efforts and all the work that went into
the report. I look forward to working alongside my State
regulator colleagues, as well as State legislators and
governors as we consider these suggestions.
I would close by offering that the ultimate assessment of
State regulation occurs not on paper, but in the outcomes we
provide to policyholders and the industry. State insurance
regulators oversee the broadest, deepest, and most stable
insurance market in the world. And those markets weathered the
worst financial crisis in generations extremely well.
And they remain stable, competitive, and a solid
cornerstone of the U.S. economy. Thank you again for the
opportunity to be here today.
[The prepared statement of Commissioner Leonardi can be
found on page 100 of the appendix.]
Chairman Neugebauer. Thank you, gentlemen. We will now go
to questions for the panel. Each Member will be recognized for
5 minutes. The chairman recognizes himself for the first
question. The identification of nonbanks and systemically
important firms is a serious exercise that has serious
implications for competitiveness in the insurance sector and
the stability of our financial markets.
And as you know, recently FSOC designated Prudential
Financial as a nonbank SIFI that was to be subject to an
enhanced prudential standard. Interesting enough though, this
was over the strong objection of all of the voting members who
have any insurance expertise.
One of those members, Director John Huff, a State insurance
Commissioner from Missouri recently stated, ``FSOC's misguided
overreliance on banking concepts is nowhere more apparent than
in FSOC's basis for the designation of Prudential Financial.''
He went on to say that the basis for the designation was
grounded in implausible, even absurd scenarios.
Commissioner Leonardi, what are your views on FSOC's
designation of Prudential Financial?
Mr. Leonardi. Congressman, let me start by saying that we
in Connecticut regulate two very large subsidiaries of
Prudential so we know the company quite well. And I completely
agree with Roy Woodall and John Huff in their dissents.
I thought the dissents were very compelling and very well
written. I have said publicly that I do not believe Prudential
is systemic. I would also note that the lead regulator,
Commissioner Kobylowski of New Jersey, has also made this same
point.
It is based on an assumption of a banking model where there
could be a run on the bank and Prudential might have to sell a
trillion dollars of assets the next day. And that is just--with
one very rare exception--not a likely scenario on which to base
a systemic designation.
Chairman Neugebauer. Director McRaith, do you agree with
that assessment?
Mr. McRaith. The FSOC process is a lengthy, detailed,
highly technical process that involves many engagements with
the individual firm. The voting members of the FSOC made the
decision that Prudential should be designated. Those are
tremendously accomplished, bright, hard-working people
supported by tremendously accomplished, bright, hard-working
staff.
The decision by the Council stands. Whether Roy Woodall or
Director Huff disagree is fundamentally of interest to the
Council. Council members did not find their views persuasive.
Chairman Neugebauer. I think the concerning thing to me is
that the voting members who had expertise in the insurance
industry and had expertise in the regulatory structure voted
against that.
And is that basically the way the structure of FSOC is now,
that as we begin to move forward with some of these other
insurance companies, this is going to be a trend in that the
people who have expertise in that area are going to be
overridden by the people who want to impose some more bank-like
regulatory structure on these entities?
Mr. McRaith. The FSOC process is a thorough process that
involves, again, many very smart people with different
perspectives--
Chairman Neugebauer. I know. You said that before. But I am
not interested in your opinion of whether those people are
smart or not. I am really interested in your opinion of, do you
think this is a troubling scenario that the people who know
something about--or does that trouble you; that is a yes-or-no
question. Yes, it troubles you, or no, it doesn't.
Mr. McRaith. It doesn't trouble me because smart people can
disagree.
Chairman Neugebauer. Director McRaith or I guess
Commissioner Leonardi, I may go back to this. As somebody who
is heavily involved in regulatory development overseas, the
IAIS is working on a conferring proposal. While there are over
140 countries involved in the IAIS, the United States
represents a staggering 40 percent of the premium volume.
So I would imagine we are the de facto leader on these
issues. Yet, the Common Framework for the Supervision of
Internationally Active Insurance Groups (ComFrame) seems to be
European-driven, a one-size-fits-all regulatory regime, which
includes bank-like capital assessments. What are your opinions
on the direction that we seem to be going where we seem to be
trying to model our regulatory structure after what the
Europeans want to do?
Mr. Leonardi. Congressman, not surprisingly, I have been
very outspoken on this issue as well. ComFrame has been out
there for the entire time I have been Commissioner. It has been
worked on and a lot of effort has gone into it. It has had
several drafts. One of the most recent drafts was over 150
pages. The new one, I am happy to say, is down to about 110
pages. It is going in the right direction.
But we have long expressed our concern as State regulators
that it is prescriptive, it is check-the-box, it is a one-size-
fits-all. In terms of the capital standards, I think that is a
broader question, but let me take a moment to talk about that,
because we have been opposed, whether they be bank-like or not,
there is a significant point there, that a global capital
standard may not be appropriate right now, but it is being
forced on the IAIS by the Financial Stability Board.
And the concern is, what is the problem we are trying to
solve? We don't have a global accounting standard in insurance,
like we do in banks. There has never been a global accounting
standard for insurance companies. We have different solvency
regimes throughout the world.
And some of those are not fully implemented yet. So, my
concern is that we are going to impose a global capital
standard and we are going to actually do three capital
standards right now. The IAIS is working on a back stock of
simple capital standard that has to be done this year, followed
by a higher loss absorbency capital standard, which is supposed
to be in place next year for systemic companies. That will be
tested by the ComFrame field testing test, and then the
following year, the global capital standard.
So we are talking about implementing three capital
standards on very large, internationally active insurance
groups where there is no global accounting standard. And we are
rushing to do them all in 3 years, in a timeframe that I
personally believe is reckless.
Chairman Neugebauer. Thank you. A quick follow-up here: Mr.
McRaith, some people have said that this is a solution trying
to find a problem. Can you quickly--and my time is already up--
identify the problem that you think they are trying to address
by changing these capital standards?
Mr. McRaith. Two issues are driving the international work:
one is from the financial crisis, we learned that financial
firms that are large, complex, and international are connected
and have impacts on local economies; and two, the international
insurance marketplace is changing dramatically so that
developing economies are seeing explosive premium volume growth
every year.
So our companies, U.S. companies, are pushing into new
markets all the time. Those markets, those jurisdictions, want
to know how is this company being supervised, can we trust its
capital--that it is capitalized adequately.
Chairman Neugebauer. Shouldn't they be trying to copy us
rather than us copy them?
Mr. McRaith. Yes, so the objective through the standard-
setting work is to bring together people with different views,
different perspectives, and different needs to talk about
approaches in their respective jurisdictions' identified best
practices that are ultimately implemented--not added to, but
implemented--as part of the native jurisdiction regulatory
approach.
Chairman Neugebauer. Thank you. I now recognize Ms.
Velazquez for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Director McRaith,
the FIO report implies that increasing Federal involvement will
provide uniformity in insurance regulation and reduce costs for
U.S. insurers and consumers. The report cites a McKinsey and
Company analysis from 5 years ago, which estimated that up to
$13 billion could be saved annually. Do you have a more recent
estimate of the dollar amount savings, or if not, do you plan
to update those numbers?
Mr. McRaith. We do not have a more recent number than that.
We are not aware of another independent study that has been
used to evaluate the cost impact. It is a continuing important
conversation for us to have, whether we will do an independent
study or monitor the friction costs of individual reform items
that we outline in our report. I can't be sure at this point,
Congresswoman.
Ms. Velazquez. Okay, according to the FIO report, there is
a disparity between the qualifying collateral requirements for
U.S. versus international reinsurers. FIO has recommended that
Treasury and USTR pursue a covered agreement for reinsurance
collateral requirements based on the NIC model collateral law.
What is the timeline for pursing such an agreement and when
will you be notifying Congress of your plans as required by
Dodd-Frank?
Mr. McRaith. Thank you for that question, Congresswoman. As
you well know, a covered agreement is a very serious
undertaking. The authority that is vested in Treasury and the
Federal Insurance Office in that context is a very serious
responsibility.
We have never done it before. We are sorting through the
process, the initial steps, and look forward to notifying
Congress once we have our own ducks, internally, in a row. We
will be in front of Congress and we look forward to working
with you in that effort.
Ms. Velazquez. Do you have a timeline?
Mr. McRaith. We look forward to moving forward as quickly
as possible.
Ms. Velazquez. Commissioner Leonardi, large-scale natural
catastrophes are becoming the norm in the United States.
Unfortunately, my district can attest to this firsthand. We saw
millions of dollars in damage done to homes and businesses
during Superstorm Sandy.
Non-flood related property and casualty claims from the
storm already top $6 billion in New York. The FIO modernization
report recommends that States identify and implement best
practices to mitigate losses from natural disaster. Can you
kindly explain to us how Connecticut and other States are
working to improve insurance practices for catastrophic events
like Sandy?
Mr. Leonardi. Thank you, Congresswoman. I think it is
important to point out first that as an insurance Commissioner,
there is a statutory authority that I have in terms of building
codes and all of those kinds of things which are impacting the
issues you are talking about.
I play one very small piece in that. So if it is a
suggestion by FIO that the States, as a whole, at the governor
level, that is something above my pay grade, so to speak, but I
do know that as your next-door neighbor, the Sandy and Irene
storms have taught all of us in the northeast an important
lesson.
For example, our property casualty Director, George
Bradner, has been involved in the Shoreline Recovery Task
Force, which is a legislative task force within Connecticut's
legislature, along with the Administration, to work on these
very kinds of issues.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentlewoman, and now the
gentleman from Missouri, Mr. Luetkemeyer is recognized for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Mr. McRaith, in
your report you say that it is not whether insurance
regulations should be State or Federal, but whether there are
areas in which Federal involvement in regulation of the State
database is warranted. Can you give me a definition of
``warranted?'' Where do you feel it is warranted for the
Federal Government to step in?
Mr. McRaith. The report identifies a number of substantive
areas where reform is appropriate if the States are unable to
impose the uniformity--
Mr. Luetkemeyer. Okay, my question is what do you believe
is the criteria for the Federal Government to be warranted to
intervene?
Mr. McRaith. I would say there is an equation where we have
to balance the consumer protection of disparate approaches
State-to-State and the benefits of uniformity for the industry.
We balance those two and arrive at a decision of what is
warranted.
Mr. Luetkemeyer. Do you work with the NAIC at all?
Mr. McRaith. I speak with insurance Commissioners from
around the country on a regular basis, with the officers of the
NAIC--
Mr. Luetkemeyer. It would seem to me that one of the
criteria for something being warranted is if they brought you
the issue and said, hey, we have a problem with this. And yet,
you didn't mention that.
Mr. McRaith. You might remember that I was insurance
Commissioner in Illinois for 6\1/2\ years before taking this
job. So many of the issues, as Commissioner Leonardi mentioned
in his comments, the States have been dealing with, in some
cases for years, and even, in some cases, for decades.
So there is a recognized need for uniformity by the States
on many of these issues and we hope to work with them to help
solve the problems of the lack of uniformity.
Mr. Luetkemeyer. Okay. In your report, you have 27 specific
reforms, and basically only one of them deals with something of
an international basis. All the rest of them deal with
something going on in this country. In our last discussion--the
last time you were here, the main impetus for your agency was
to make sure that there was a relationship and a coordinated
effort with regards to international insurance laws,
regulations, and activities that would not be harming us in a
negative way--that you could be working with them to preempt
some of this stuff and yet, there is only one recommendation
out of 27 here. It seems like our scope has changed. Am I
missing the point here?
Mr. McRaith. The focus of the report is how to modernize
and improve the U.S. system of insurance regulation. We were
not tasked with modernizing and improving the international
standard setting activities. Our focus internationally is to
represent the best interests of the United States in the
standard-setting forums at the IAIS, working with our State and
other Federal colleagues, and that is exactly what we are
doing.
Mr. Luetkemeyer. Mr. Leonardi, in your opening testimony,
you made the comment that you are not really happy with one of
the recommendations the FIO report makes mention of with
regards to overset of mortgage insurance. Would you like to
elaborate on that just a little bit?
Mr. Leonardi. I would be happy to, Congressman. As I
mentioned, there are strong regulations in place. The States
have a lot of experienced personnel. I think if the Federal
Government feels there is a role to play, in my view, it would
be to look at the poor credit underwriting and lending
practices that existed in the lending and banking industry that
led to these problems in the first place.
The other thing I would mention is that there is a
reference to permitted practices in mortgage insurance and I
think it is referred to in annuities as well. And I think it is
important to note that the permitted practices are being
allowed in cases of really financial distress of a company,
where much like in the financial crisis, the Federal Government
took all sorts of extraordinary actions to help companies that
would not have perhaps, made it through, get through.
So these permitted practices were an alternative to pulling
the plug. You have very experienced financial regulators
working with industry to try to help these companies make it
through to the other side. And in most cases, they did.
Mr. Luetkemeyer. Okay, so I guess my question would be,
where is the problem that Federal oversight would be more
important and beneficial than allowing the States to address
this in their own way?
Mr. Leonardi. I don't believe that it would be,
Congressman.
Mr. Luetkemeyer. My time is about up. I will yield back.
Thank you, Mr. Chairman.
Chairman Neugebauer. Thank you. Now, the gentleman from
California, Mr. Sherman, is recognized for 5 minutes.
Mr. Sherman. Thank you. Mr. McRaith, as you know, TRIA is
expiring at the end of this year. If TRIA expires without
reauthorization, it would have an adverse impact on consumers
and the marketplace in general. Are you working with the
Presidential working group on TRIA? Does the Administration
have an official position on TRIA and will they have one before
the bill of the program expires?
Mr. McRaith. We are working with the President's working
group on financial markets to produce a report. It should be
forthcoming in the near future. My expectation is sometime this
month. We are certainly working hard to get that done. That is
not a promise, but that is certainly our aspiration. With
respect--
Mr. Sherman. We will put that in the record. It is a
promise that it will be available by the 28th of February.
[laughter]
Mr. McRaith. No, no, please--I must learn to qualify my
comments.
Mr. Sherman. I am going to move on to the next question.
Mr. Leonardi, the report says that regulatory costs are about
6.8 times greater for an insurer operating in the United States
than for one operating in the United Kingdom. Is moving from
State to Federal regulation the solution? Is separate State
regulation the cause of that 6.8? Is that 6.8 accurate?
Mr. Leonardi. I don't know because I don't know where the
numbers came from. I would be happy to look into that and I
think the same applies to the McKinsey report that was referred
to earlier. As someone who came out of the investment world,
$13 billion gets my attention. It is a lot of money, certainly.
But I guess I would really appreciate the opportunity to
see those numbers; and as to the McKenzie report, to see the
assumptions and talk to the authors of the report to better
understand. And I think that there may be low-hanging fruit
that we could accomplish some savings without a lot of pain.
And we should certainly do that if we can. But without seeing
the report and seeing the assumptions underlying it, I don't
know.
But there are two things--
Mr. Sherman. I would hope you look at that report, and get
a chance to talk to those who put it together and be able to
provide for this subcommittee an analysis because--and I guess
one thing we are assuming is that the United Kingdom regulation
is the gold standard. And it could very well be that it is 6.8
times cheaper in the United Kingdom because they don't do
anything.
Mr. Leonardi. If I could address that--I think it is
important to note that, as I mentioned, we regulate the second-
largest industry in the country. We have a market of 3.5
million citizens. And we do it--our costs are 79 cents for
every $1,000 worth of premium. So, that is one thing that I
think puts it in perspective.
I think the more important thing is, we always tend to look
at expense, and we sometimes fail to look at what is the
alternative. And if you look at the financial crisis--
Mr. Sherman. I--
Mr. Leonardi. This is an industry where regulation has done
well and where failure is an exception, not the rule. And we
are still living--
Mr. Sherman. I--
Mr. Leonardi. --with the after-effects of the banking--
Mr. Sherman. --hear your point. I do want to go on to one
other question, and that is, the report talks about the
``failure of the mortgage insurance industry.'' We had a
circumstance where the bad actors in mortgages created a market
in which any good actor would also lose a lot of money.
If you invested in 100 pristine perfect mortgages, or
insured 100, underwritten by the angels themselves--some people
lose their job, more in 2009 than at other times. There are
divorces, there are deaths, there are disabilities. And given
what happened to the real estate market, you are going to lose
money, even if you selected these--the mortgage insurance
industry has been able to raise new capital. It is paying the
claims on existing liabilities. It hasn't needed a Federal
bailout.
You have some broad suggestion that the Federal Government
should step in with regard to mortgage insurers. What is the
basis for this insurance? And could any--look, the ship took on
a little bit of water, but it faced the most enormous storm and
hasn't needed a Federal bailout. Why do you think that--what is
the basis for your assertion?
Mr. Leonardi. Congressman, nearly half of the industry
failed through the mortgage--through the financial crisis. The
industry, in fact, was entirely displaced by the GSEs following
the crisis. That there are some companies with several hundred
millions of dollars now in the market is encouraging. But what
we need to know is that the housing finance system that is so
important to our national economy supports the private mortgage
insurance industry, replaces taxpayer exposure, supports the
housing market. One standard implemented uniformly across the
country by one agency is the best possible result for our
country.
Mr. Sherman. I would point out it is not just the mortgage
insurance industry that was displaced by Fannie and Freddie.
Basically, all lending for many years went through Fannie Mae
and Freddie Mac. And I don't think we have decided that all the
major banks in the country failed.
I believe my time has expired. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now, the gentleman from California, Mr. Royce, is
recognized for 5 minutes.
Mr. Royce. Thank you again, Mr. Chairman.
Let's see. I would like to start with Mr. McRaith, if I
could ask you a question.
As you say in the conclusion of your report, any reform
proposal must also account for the threshold issue of how that
reform will be achieved. And with that in mind, I was going to
ask you about steps that might be taken on the following reform
ideas. One was allowing auto insurance portability for military
personnel. I am working on draft legislation to sort of create
that portability for policies across State lines. And I was
going to ask you about that. And also ask you, and maybe the
Commissioner, about working on this. But that would be one.
Improving rate freedom was another issue that you raised.
And I would like to get your feedback on that.
Mr. McRaith. Great. First of all, with respect to members
of the military who are serving on military bases, it is our
understanding that they are ordered to move bases every 18 to
24 months.
Mr. Royce. Correct.
Mr. McRaith. I expect you know more about this than I do.
When people like that in the service of our country are
following their orders, we should make it as easy for them as
possible to obtain necessary personal auto insurance coverage.
We will bring together, as we say in the report, leadership
from the industry, from the regulatory community, and from
consumer and military service member advocates to arrive at the
right solution.
With respect to rate freedom or rate regulation, it is our
view that competition benefits consumers. It is our view that
rate freedom supports competition in many personal lines
insurance markets. We want to see more of that around the
country. We intend to work with regulators, and with industry
to identify pilot projects. We would like to move on that as
quickly as possible.
Mr. Royce. Thank you.
I will ask Commissioner Leonardi the same question.
After our last hearing, the NAIC took 4 months to answer my
questions for the record, stating that it needed more time to
make sure that the answers they gave us were accurate and
complete. However, the answers we did get after 4 months were
incomplete.
The NAIC provided agendas for some closed meetings. But the
dozens of handouts referenced in the agendas, which would
reveal the extent of those closed-door policy-making meetings
were not provided. And, as you know, this is an issue.
Commissioner, I hope you will help convince the NAIC to
provide the handouts for the closed policy-making meetings in
question.
The NAIC's answers were inaccurate. They claimed any
guidance by any NAIC committee or subcommittee or task force or
working group is taken in open session, as required under the
open meetings policy. That is clearly false, as people know.
The agendas show that NAIC's executive committee routinely
deliberates in private about policy issues. And a massive
regulatory modernization plan, the issues over health
insurance, producer licensing--all of that was done in private.
And just last October 25th, 4 days before its letter, NAIC
abruptly closed a crucial executive committee meeting on the
death masterfile for an hour of secret deliberations before
returning to announce no action on it.
So, the question I would ask you is, they claim to
faithfully follow the policy statement on open meetings, which
promises that the NAIC will conduct its business ``openly,'' in
their words. Is it true that all NAIC committees and
subcommittees conduct their business in open meetings? That
would be my first question to you.
Mr. Leonardi. Thank you, Congressman, for the question.
I want to start by saying that--and I am here as the
Connecticut Commissioner. I have been asked to be here as the
Connecticut Commissioner, as opposed to a representative of the
NAIC today.
I obviously take these issues very seriously. Governor
Malloy and I are very firm believers in transparency and
openness. You may know that there was a recent revision to the
statement on meetings at the NAIC. I think we have gotten very
positive feedback from industry on this.
I would like to give Louisiana Commissioner and former
president Jim Donelon a lot of credit for being the driving
force behind pursuing this this past year.
So, I do think that those are moving in the right
direction. Exactly where we are with that, I can't answer the
specifics.
I do think it is important for regulators to be able to set
aside some time for candid discussions that are not necessarily
open. And I think it is right--reaching the correct balance.
Mr. Royce. Right, but the issues I am talking about are, in
fact, policy issues. And so, because we are talking about the
executive committee meetings being done against the policy of
the NAIC, done privately, on important policy issues, these are
not the types of issues that you would exempt from the open-
meeting rules. And--
Chairman Neugebauer. Sorry, but the time of the gentleman
has expired. I appreciate his questions.
We will now recognize the gentleman from Missouri, Mr.
Clay, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman, and I thank the
witnesses for being here today.
Let me start with Director McRaith.
As your report notes, insurance premiums in the life and
health and property and casualty insurance sectors totalled
more than $1.1 trillion in 2012, or approximately 7 percent of
gross domestic product.
For several years, we have debated generally whether a
State-based system can answer the regulatory demands of such a
national and increasingly global insurance market. You have
identified several areas in your report where if the States
themselves cannot improve, a Federal role is warranted.
Can you provide a brief explanation as to how we can judge
whether the States have taken matters to regulate effectively,
and with sufficient uniformity?
Mr. McRaith. The challenges of uniformity are described in
the report. The industry is vastly different today than it was
5 years ago. It will be increasingly different in 5 years time.
We will report, as I mentioned, publicly to this committee
and otherwise on progress made to implement the reforms in the
report. It is up to this committee and other interested parties
to decide when is it appropriate for the Federal Government to
be involved to impose uniformity and necessary efficiency
improvements.
Mr. Clay. As I look through the report, I don't see any
reference to the topic of steering and red-lining within the
insurance industry. And I would be naive to think that red-
lining has been completely eliminated in the industry.
Is there a way for the FIO to take a look into this area
and report back to this committee?
Mr. McRaith. Congressman, one of our explicit statutory
responsibilities is to monitor the affordability and
accessibility of insurance to traditionally underserved
communities.
We take that statutory responsibility very seriously. And
we are moving forward consistent with the reforms described in
the report.
I should add, with respect to your state, the State
department of insurance does collect information, and that is
one of the few States that collects data on zip code and
pricing, et cetera. And that information, I know, is publicly
available.
Mr. Clay. And do you have any national data on--I guess on
different regions or metropolitan areas?
Mr. McRaith. At this point, we do not have any independent
analysis on that subject. We would rely on external sources for
information on that subject.
Mr. Clay. Okay. Thank you.
Mr. Leonardi, as the insurance Commissioner for the State
of Connecticut, you can speak very knowledgeably on the
important insurance issues facing your State.
However, you, of course, don't represent other States.
Some States, like your own, conduct a large amount of
insurance business, while others conduct very little.
Isn't this one of the reasons that there has been some
difficulty in obtaining uniformity at the State level on many
of the issues raised in the report, most of which, it seems,
are not new?
Mr. Leonardi. I guess, if I could speak to the basis
premise, because the report talks an awful lot about uniformity
and lack thereof, and a race to the bottom.
And the bottom line is, we have--I don't think we do a very
good job of explaining what we do and how well we do it. But we
have a very rigorous accreditation program at the NAIC. And
right now, every State is accredited.
But when a State gets in trouble, when it has a review--and
I was the vice chair of the accreditation committee for the
past 2 years, so I speak with some knowledge about this. We
have had States that have been brought in, much like a
regulator brings a company management in when it is concerned
about issues.
And we brought the States in before a group of
Commissioners, and said, here are the issues, whether it is
staffing, whether it is technical expertise, whether it is
sloppy practices. These are the things we have found. These are
the things you need to fix. Here is the timeframe within which
you must fix them. And if you don't, you are going to get
your--you are going to be on probation and possibly have your
accreditation pulled.
So there are some very, very good floor standards, which
everybody has to meet. And then there are States that do
perhaps a much better job because there is a need because of
the size of their industry.
But I don't think we have any States--and there is also an
issue that maybe people think, maybe it is too easy because you
have every State that is accredited.
It isn't easy. And I think we should celebrate the fact
that we have managed to get to that level, where all the States
are accredited.
Just as a brief story, back in the early 1990s when the
accreditation program was formed, Connecticut, the insurance
capital itself, was told, you are going to lose your
accreditation. You don't have enough people.
And the then-Commissioner, I think it was Commissioner Bob
Guggens went to the legislature and went into the gold dome and
kicked some chairs around and said, ``We need to hire people.
We need to do it right away.''
The legislature responded. And we have been off and running
ever since.
But that is the way the process works.
Mr. Clay. Thank you so much for your response.
Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from New Jersey, Mr. Garrett, is
recognized for 5 minutes.
Mr. Garrett. I thank the chairman.
And I thank the panel.
So what we are talking about here, as with a lot of what we
do in this committee, is somewhat technical and it is somewhat
hard to relate back down to the consumer.
Some of the topics we have talked about so far include
Basel III capital standards and their application, and, as the
chairman was talking about, a one-size-fits-all approach to
that.
Now, the second panel does talk about that, if you looked
at some of their testimony. I think they get into what this
could mean, one-size-fit-alls applying in Basel III.
If you look at some of their testimony, this approach would
create some disruption for insurance companies' balance sheets,
it could affect policyholders. It could affect long-term
guarantees, guarantees that carriers have made to families, to
savers, to retirees.
And with that background, that is why I said at the outset
that I was concerned that the report doesn't really dig into
this whole area like I would hope to.
So, briefly, Director McRaith, can you tell us how you are
going to convey this significant information and impact to the
Fed going forward, since we really just haven't seen it either
in the report or today?
Mr. McRaith. As you well know, the decisions of how to
implement Sections 165 and 171 of Title I of the Dodd-Frank
Act, those are specifically within the province of the Federal
Reserve.
Mr. Garrett. Right.
Mr. McRaith. Our role, one of the reasons we were
established, was to create a source of insurance expertise in
the Federal Government. We work with the Federal Reserve
through the FSOC context. We offer our views. But it is
fundamentally a decision for--
Mr. Garrett. But I guess the point--
Mr. McRaith. --the Federal Reserve.
Mr. Garrett. I get that. And I will skew on to the next
question. I guess the point is is that this is a crucial area,
this is an area that can directly impact my constituents back
at home, if this were to be done, and we really didn't see it.
I get the point that you are supposed to be conveying this
information. But we didn't see it here.
And playing off of something the gentleman from California
was saying, he was talking about TRIA, but if you look into the
statute, as to what you all are supposed to be doing, you have
three or four different statutory obligations. Assisting with
SIFI designations for insurance companies. Administering--
assisting with information with regard to TRIA. As he pointed
out, coordinating Federal insurance policy oversees. Making
covered agreement preemptive determinations that you had talked
about.
And, as also indicated, the initial SIFI designation had
significant impact--significant pushback from the industry.
That was already indicated.
And, of course, to come out with a report. And this report,
as we know, is somewhat overdue, a couple of years overdue.
So I guess the question again is, briefly, how do you
characterize what these three or four major areas that are your
statutory obligations and three or four areas that really
haven't been met to date on a timely basis, how do you give us
a strategic purpose to actually say that we are going to get
these things done in time?
And then, again, to inure to the benefit of the consumer?
Mr. McRaith. We have done an excellent job in fulfilling
our statutory mandate, Congressman.
One reason we were created was to reflect the importance of
the insurance sector in systemic risk--
Mr. Garrett. This report was late, though, right?
Mr. McRaith. Yes, Congressman, the report was late.
Mr. Garrett. By how much?
Mr. McRaith. The report by statute was due in January of
2012.
Mr. Garrett. Right. So, it can't be an ``excellent.''
``Excellent'' would be an A-plus or something like that, if we
would have met the deadline or came in on time.
``Excellent'' would be if you hit--we wouldn't be--the
gentleman from California wouldn't be asking about a TRIA
determination. Excellent, it wouldn't be if these other areas,
which are the statutory obligations had been met within the
timeframe.
So I just beg to differ with the classification.
Let me go down a different road altogether and deal with
something that you are familiar with: disparate impact.
I can go into more of this, but you are familiar with
disparate impact. How will you monitor underserved groups,
because I know you say that you are going to be doing that in
your report?
Can you briefly talk about that, in 40 seconds or less?
Mr. McRaith. One thing we are committed to not doing is
repeating what has been done already.
And, as you well know, Congressman, this debate about
disparate impact, risk classification, insurance scores, is one
that has been written about for 10, 15 years or more by many
people from many different perspectives.
We intend to talk to the industry, talk to consumers, as we
have, to move the conversation forward in a way that is
responsible, not--
Mr. Garrett. Very briefly, in 10 seconds, Mr. Leonardi,
have the States not done an adequate job themselves in dealing
with this issue?
Mr. Leonardi. I can only speak for Connecticut, but I think
we have done a very good job. And we constantly do outreach on
social media and education to reach the communities that we are
trying to target.
Mr. Garrett. And do you need the Federal Government to
assist you to get the job done?
Mr. Leonardi. Absolutely not.
Mr. Garrett. Okay.
Chairman Neugebauer. I thank the gentleman.
And now, the gentlewoman from Ohio, Mrs. Beatty, is
recognized for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and ranking members.
Let me, certainly, join my colleagues in welcoming the
witnesses on this first panel today. I am from Ohio, the 3rd
Congressional District, and in Columbus, Ohio, a part of my
district, we are the home to many insurers of all sizes and
types.
Let me shift the question to talk about terrorism risk
insurance. When I reflect back on Boston and how traumatic and
bad that was, although it wasn't at the level enough to warrant
being certified, I wanted to pose the question, and certainly
you are aware that without congressional action, the terrorism
risk insurance will expire at the end of this year.
This program creates a catastrophic government backstop for
certified acts of terrorism in the United States. And many
insurers have stated that they will not renew their terrorism
risk policies unless the program is reauthorized.
The modernization report that was released last year does
not address terrorism or TRIA, but in footnote 77, it explains
that the President's working group on financial markets is
studying it, and will issue a report on TRIA.
Director, do you know how long it will be before this
report will be released? And has your office looked at
terrorism risk insurance?
Mr. McRaith. Congresswoman, the expectation is that report
will be released soon. By virtue of the fact that it is a
President's working group, that means there are four agencies
involved with the discussion. And that process is moving
forward. Thoughtful people are looking at every word of a
document.
We expect that to be released soon.
We, in our office, as you know, have the statutory
responsibility of assisting the Secretary with administering
the Terrorism Risk Insurance Program. We are very well-versed
on it, very well-versed on the issues.
I think the expectation is that we will continue to be
engaged on this issue. The Administration is likely to offer a
policy view. Secretary Lew has previously acknowledged to the
Senate and House committees his recognition of the importance
of the program.
Mrs. Beatty. Okay.
Being from Columbus, Ohio, where we have one of the largest
universities in the country, the Ohio State University, which
is the home of the fifth largest stadium in this country. And,
as you can imagine, the cost of insurance coverage for both
liability and property in the event of a terrorist attack is
extremely high.
In speaking with the financial department at the
university, they estimate that if they were forced to purchase
the same coverage in surplus lines market, like through Lloyd's
of London, that cost would be 2 to 3 times what they currently
pay. How can we, as lawmakers, work to ensure that the long-
term development of the robust terrorism risk insurance
market--with limited government involvement--does not make it
too prohibitive for them to purchase it? Do you have any
thoughts on that?
Mr. McRaith. I don't want to offer specific policy thoughts
at this time, because the Administration has not offered a view
on that subject yet. However, what we see is that the terrorism
risk insurance market right now functions well with the
existence of the Terrorism Risk Insurance Program. The
expectation is that if there are modifications or changes to
that program, they should be thoughtful, with the objective of
preserving an affordable and accessible terrorism risk
insurance product.
Mrs. Beatty. Okay. Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. Okay. I thank the gentlewoman. That
issue of TRIA has been brought up a number of times, Mr.
McRaith. And you have used the word ``soon'' on that report.
You and I have had some conversations about report dates, and
``soon'' turned out to be later, rather than sooner. So I would
say that if the Administration intends to have some input into
this process, sooner would be better here. Because we are
already beginning to put some policy together to address that.
So, you might pass that along to the working group. That is, if
they have some ideas, they probably need to be sending those
over sooner, rather than later.
I now recognize another Ohioan, Mr. Stivers.
Mr. Stivers. Thank you, Mr. Chairman, I appreciate that.
And thank you, Director McRaith and Commissioner Leonarid, for
being here. I appreciate your work on behalf of the U.S.
regulatory system of insurance. And I want to ask Director
McRaith the first question. How does the FIO coordinate with
the Fed and the SEC and State regulators? And by that, I don't
want you to tell me that you have a great relationship with so-
and-so, or you talk to so-and-so. I am curious what the process
for that coordination is, if there is one? Is there a formal
process for that coordination with State regulators, as well as
the Fed and the SEC?
Mr. McRaith. Let me take those on separately. With the
States, we have a variety of issues. And for domestic issues,
we deal with them by speaking with NAIC officers, or going
directly to the Commissioner responsible for--
Mr. Stivers. So, no formal process, other than--
Mr. McRaith. We have a formal--last year we spoke--we had a
regularly scheduled call, or discussion every 2 weeks. This
year for international matters, because the Fed is also a
participant at the IAIS now, for every meeting scheduled
through the end of this calendar year, we have calls scheduled
with the States and the Fed so all three parties will be on one
call in advance of each meeting. And those calls are scheduled
through the end of the year. The expectation is we will build
on that, we will learn. Do we need to do more? Should we have
meetings in person? But we will build on that.
Mr. Stivers. I will say, it troubles me that the Fed, with
no insurance regulation experience, is now representing us in
the international forum. I would rather have seen another State
insurance Commissioner who has expertise. That is a personal
opinion. And frankly, you have a role there, but I am bothered
personally that the Fed, with no experience, is sitting at the
table. We don't need an empty suit at the table. I appreciate
the Fed for many things, but I am not sure they add a lot of
value at that table. I am not asking you to comment on that;
that is a statement.
The second question I have for you is, can you talk a
little bit about the IAIS and transparency? I am really
concerned that there is really not a lot of open access to the
meetings. They won't let observer members come into the
meetings. They close a lot of information down. I just think
that opaque nature makes it really hard for folks who are the
dominant players in insurance in many of those jurisdictions.
Mr. McRaith. The precise and appropriate level of
engagement with interested parties is always a question. I
heard it as a Commissioner at the NAIC. I heard it in--and we
hear this now at the IAIS. I think the model we want is one
where the industry, the interested parties are heard. Their
views are respected. They are integrated where appropriate. And
then standards are developed based on that information. Now,
the process of doing that, the mechanics of that process, we
need to work through. Because what we don't want to do is, we
don't want to send people around the world to meetings where we
repeat what we talked about months before and rehash the
argument. So we need to make the meetings efficient, but we
need to integrate importantly, the views of interested parties.
Mr. Stivers. Thank you. One last question for Director
McRaith, and then I hope to ask the Commissioner one question.
What has the FIO done to advance the competitive position of
the United States insurance industry since its inception? Have
you--is that a focus for you at all to make sure that U.S.
companies are competitive in foreign jurisdictions and--
Mr. McRaith. Absolutely, that is a priority for us. The
standard-setting activities, if developed and implemented
appropriately, will promote competition and fair competition in
the developing economies where our companies want to grow.
Mr. Stivers. Okay, that is a great transition to my
question for the Commissioner. The United States has about 40
percent of the premium volume. The ComFrame appears to be very
Eurocentric in my opinion, and I am just curious, what value
does the ComFrame add to domestic policyholders, and domestic
insurers? Commissioner, can you give me your opinions on those
things?
Mr. Leonardi. I would be happy to, Congressman. I think the
concern I have had with ComFrame, in addition to what I said
earlier, is that we have policymakers debating policy in large
documents. And then we have people who are in the field,
actually managing supervisory colleges. If you look at the
United States--when I became Commissioner, I looked at the
Financial Sector Assessment Program (FSAP) the IMF did, and it
pointed out one of the few areas of weakness in the U.S.
insurance regulatory system was the use of colleges and group
supervision, which goes right back to the heart of the
financial crisis. And when I joined the Connecticut department,
we had participated in three colleges: ING; Swiss Re; and
Berkshire Hathaway. We led none.
Today, we are involved in 16 colleges, and we lead six. We
are the North American lead for three international companies,
for a total of nine. We are working closely and collaboratively
with, not only our State regulators, but regulators throughout
the world. We are hosting regulators from the Swiss Financial
Market Supervisory Authority (FINMA), and regulators from
Taiwan and Saudi Arabia. We are coming to learn how we regulate
companies. So I think what we need to do is step back and say
again, what is the problem we are trying to solve with this
very complex structure?
Mr. Stivers. Thank you. I yield back the negative balance
of my time.
Chairman Neugebauer. Now, the gentleman from Texas, Mr.
Green is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank you and the
ranking member for allowing me to interlope today, and I am
honored to have this opportunity to ask a few questions. I
thank the witnesses for appearing. I would like to visit with
you briefly, Mr. Director, on the question of arbitrage. With
the different standards, and you have a multiplicity of
jurisdictions, the opportunity for arbitrage exists and the
report addresses this. Could you elaborate for just a moment on
some of your concerns associated with arbitrage?
Mr. McRaith. With 56 jurisdictions, the 50 States, the
District of Columbia and five territories, there are different
laws, regulations that are--even if adopted verbatim, are
implemented differently. It is important, and our report
emphasizes the importance of uniformity, not only of standards
but of implementation and enforcement. An example of this is in
the subject of reinsurance captives. Where while some might
suggest it is an issue of the industry, our view is that it is
less an issue of the industry, which is adhering to State laws,
and far more an issue for the State regulators.
States are competing against one another. Ultimately the
transparency, the accountability, the capital supporting those
captives remains a mystery in many circumstances. We need to do
better as a country.
Mr. Green. Thank you. And for edification purposes, for
those who are not a part of the industry and don't understand
all of the jargon, would you just give a brief definition of
``arbitrage?'' The type that you are talking about, as it
relates to the industry, please?
Mr. McRaith. When I use the term ``arbitrage'' in this
context, it is the pursuit of a lower level--the choice of a
lower degree--of regulation or supervision as an alternative to
a higher level of supervision.
Mr. Green. The report recommends some 20 actions that
should take place. And I am curious as to whether or not you
think there are some things that Congress can do to assist in
this effort? If so, could you kindly give us a few things that
you might have us do?
Mr. McRaith. Eventually--first, we want to keep you
informed. We want you to be able to make determinations about,
what are the issues of greatest interest to you? And when
should Congress be involved in the immediate term?
Our view is, Congress should look at two issues of
particular importance. One is mortgage insurance. Housing
finance is an issue this committee has dealt with, and with
which Congress is dealing. The mortgage insurance industry
should be subject to uniform standards implemented by a Federal
regulator.
Secondly, NARAB II, a bill this committee has considered,
passed. The Senate has dealt with that issue. Multi-State
licensing for agents and brokers is an issue in need of a
national solution.
Mr. Green. Final question, let's talk about AIG for just a
moment.
As you know, AIG nearly collapsed. And my concern, or
question, really goes to, with a functioning entity oversight,
could AIG have been properly regulated such that the
derivatives and all of these other exotic products would not
have created the economic circumstance that caused us to have
to go in and provide assistance?
Mr. McRaith. It is hard to give a definitive answer to know
whether a consolidated supervisor could have prevented all of
the risk that the AIG financial products unit subjected to the
entire economy, indeed to the global economy. What we do know
is that we would have had a much better chance of identifying
the problem earlier, stifling it much earlier, reducing or
mitigating the damage much earlier than we ultimately were able
to learn under the system we had in place at the time of the
crisis.
Mr. Green. I will leave you with my speculation. My
speculation is this: With a functioning entity, there would
have been many who would have said that you should back off of
AIG, that AIG was serving a specific role that was meaningful
and that it would be inappropriate to have regulated AIG to any
great extent.
I am sure there would have been many voices who would have
screamed, lay off AIG. I think that this work you are doing is
vitally important to the stability of our economy and possibly
to the global economy.
I thank you for your service.
I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Virginia, Mr. Hurt, is recognized for 5
minutes.
Mr. Hurt. Thank you, Mr. Chairman. I want to thank both of
you gentlemen for appearing before us today on this important
hearing.
I represent a rural district in Virginia. We obviously have
a lot of policyholders who benefit from the products that are
generated through the insurance industry.
One of the things that I hear as I travel around the
district, though, especially as it relates to Dodd-Frank and
access to capital on Main Streets all across our district, is
that while there is often, as it relates to Dodd-Frank, a
negligible, if any benefit to some of the rules that have been
adopted, there is also a great cost.
And that cost, when it outweighs the benefits, results in
higher costs for consumers and fewer choices.
So, I wonder about this report, and I recognize that there
are several things in your report, Mr. McRaith, that you set
out for direct Federal regulation, I guess my question is, is
as you look at the--not getting into the possible things in the
future, but the things that you all think that there really
should be some direct Federal involvement in, to what extent
have you all been able to analyze the sort of the costs and the
benefits as it relates to having Federal involvement in
mortgage insurance or any of the other items that you have laid
out?
And what has guided you and what is your--what do you
report?
Mr. McRaith. With respect to mortgage insurance, let's be
clear: Nearly half of the industry failed in the financial
crisis. The proposal is a uniform standard implemented at the
Federal level through a Federal supervisor.
That will benefit homeowners and policyholders who have
uniform capital standards implemented and enforced by a
regulator at the Federal level.
In the report, we look at a couple of options to promote
product availability and to reduce price. First, how do we get
products approved more quickly? We talk about the interstate
insurance product review compact that promotes the more
efficient approval of life products. We want to see more States
participate in that compact.
Second, rate regulation, as we talked about earlier, if we
can restrict it in certain areas, if we can promote market
competition by reducing rate oversight, consumers--both
families and individuals, and commercial consumers--will see
more products available at less cost.
Mr. Hurt. Okay.
And I think that every regulation that comes out of
Washington is always, I am sure, very well-intended, and it is
hoped, I guess, that the cost will outweigh the benefits.
What are the costs that need to be looked--that you should
be aware of? What are the costs? What are the risks that are
associated with this, in your mind?
And then I would like to hear from--in my time, which is
diminishing, Mr. Leonardi, if he has any comments.
So if you could just quickly--
Mr. McRaith. I will be brief, Congressman. To be clear, in
our report we do not call for the Federal Government to take
over these issues.
What we call for is the States to implement uniformity in a
way they have been unable to do thus far and at a point that
you will be involved with when their Federal action is needed,
we will have a cost-benefit analysis for you, we will be able
to to determine if some Federal role is the best alternative at
this--
Mr. Hurt. Okay. And of course, Dodd-Frank requires that
cost-benefit analysis, statutorily.
Mr. McRaith. Required or not, we would do that.
Mr. Hurt. All right.
Mr. Leonardi, do you have any comments? A response to that?
Mr. Leonardi. I want to go back to the arbitrage question
and AIG. As I mentioned in the accreditation issue, there are
very strong accreditation processes in place.
As to AIG, there is no question there were serious
regulatory failures. What I think seems to be forgotten is
those regulatory failures were Federal regulatory failures.
In spite of the glossing over of the Office of Thrift
Supervision's role, it was the consolidated regulator. And if
there was a lesson to be learned, it was that if there were
supervisory colleges, if the Model Holding Company Act had been
in place, if we had a group of all of the regulators at the
table, including the Office of Thrift Supervision and the
company, and somebody put the company on the block and said,
what is the growth in this business and financial products in
London, what does that mean, what are the risks associated with
it, which is what colleges do. They want to understand
management's view of the risks that are being addressed by the
management for what the company is writing.
There would be far more confidence in a group of very smart
people who are regulating pieces of the business, looking
carefully at the company as a whole and that might have--I am
not saying it would have, but it might have had a much better
opportunity to stop that train wreck than by just depending on
one consolidated regulator who has admitted in subsequent
testimony that they didn't understand what they had, and that
it was a much, much bigger task and a much more complicated
entity than any one regulator could have controlled.
Mr. Hurt. Thank you, Mr. Leonardi.
My time has expired.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Minnesota, Mr. Ellison, is
recognized for 5 minutes.
Mr. Ellison. Let me thank the chairman and also thank
Ranking Member Waters for your consideration. I am very
grateful.
Mr. Leonardi, I just want to ask you a quick follow-up
because I didn't quite catch what you said. It sounded like you
said that there was a Federal regulatory failure.
With regard to the whole financial crash of 2008 and after,
I agree. But I also agree it is a multisystem failure. And with
respect to insurance, and in particular AIG was mentioned, do
you say that was exclusively a Federal failure?
Or do you think that the fact that we do insurance 50
different ways at least was partially at fault as well?
Mr. Leonardi. This may surprise you, Congressman, but I do
believe that. I believe that it was a failure at the Federal
level. If you look at the operating companies, those companies
that the State regulators were regulating, they did extremely--
when in fact Superintendent Dinallo in New York had approved an
extraordinary dividend of $20 billion from the operating
companies that he regulated that could go up to the holding
company to help some of those problems in financial products
group.
So the other thing I think that needs--
Mr. Ellison. You know what? I do appreciate--maybe we could
talk more later--
Mr. Leonardi. Sure.
Mr. Ellison. Five minutes, you know how it is.
Mr. Leonardi. Sure.
Mr. Ellison. But I just wanted to get clear on how you felt
about that. Let me just ask--
Mr. Leonardi. Could I mention just one other quick thing,
very quickly?
Mr. Ellison. Okay, yes, please quick, because--
Mr. Leonardi. I appreciate it. The Commodities
Modernization Act of 2000 prohibited and prevented and
preempted the States from regulating financial products, like
derivatives.
Mr. Ellison. Okay, I get your point. And I thank you for
making it clear. Director McRaith, I just want to get right to
the heart of a question that has been in front of this
committee, and that has to do with title insurance. As I
reviewed your report, I noticed that title insurance wasn't
included in the report.
I want to know, did you guys look into it? Some people on
our committee might claim that--or their view would be that the
affiliations are solely for efficiency. And others might argue
that the affiliations hide hidden referral fees that cause
customers to pay more. I actually am of the second school of
thought.
Did you all look into this? And what are your views on the
topic?
Mr. McRaith. Title insurance is an important issue, an
important consideration. We did not cover the entire waterfront
of potential areas for reform. There are many areas we heard
about and learned about that we did not include in the report.
That does not mean it is not important.
Mr. Ellison. Okay.
Mr. McRaith. So we--
Mr. Ellison. You don't plan on touching on the issue?
Mr. McRaith. We appreciate your admonition, and it is
consistent with our own understanding of the importance of that
subject. And I don't want to comment too much on all of what we
might do, but I think it is fair to say an issue like that is
on our radar screen.
Mr. Ellison. I will just say for the record that it would
be great to know what you all think about it as soon as you
come up with a position.
Mr. McRaith. Absolutely.
Mr. Ellison. And then, next, I think I have a map that I
would like to put up, if it is available. I have a lot of
constituents, as all of us do, from diverse backgrounds. Many
of my constituents are same-sex couples. And one of the issues
that has come to our attention is discrimination in insurance
against same-sex couples. As you see, this is addressed on page
48, box 6.
And as we know, same-sex couples face legal discrimination
in 33 States, all the pink States. And then on the screen,
there is a map showing 17 States where same-sex couples have
equal rights. So I guess my question is, why is marital status
considered in underwriting decisions? Has the insurance
industry done any studies of the risk levels of same-sex
couples? And what does your report recommend to eliminate the
discrimination in insurance?
Mr. McRaith. Sir, I am not aware of whether the insurance
industry has studied whether same-sex couples compare to
different-sex couples with respect to marital status as a
rating factor. We do know that marital status is a
consideration on personal lines insurance policies, that the
impact on auto insurance, for example, could be anywhere from 4
percent to 15 percent to 20 percent, depending on the
individual and other characteristics. There are many variables
that go in.
And recently, we have learned that at least one
standardized advisory organization is proposing rates for
nonmarried people above the age of 30, which is a new
development. Not a significant increase or adjustment, but a
meaningful indication of change.
Our report calls the question, asks the States, is it fair
for same-sex couples to be lawfully married in one State, then
prohibited from being married in another State, and then
charged more by an insurance company for what they are
prohibited from doing?
Mr. Ellison. But would do if they could do.
Mr. McRaith. Would do if they could. So it is fundamentally
a question of fairness, and the report calls upon the States to
examine this issue and explore the fundamental fairness issue
of using marital status against a same-sex couple.
Mr. Ellison. I want to thank you gentlemen. And I yield
back the time I do not have.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Wisconsin, Mr. Duffy, is
recognized for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
Just quickly, Mr. McRaith, what is FIO's budget for 2011,
2012, and 2013?
Mr. McRaith. I don't know the numbers. Our budget is part
of the larger departmental offices at Treasury, so I don't know
the--
Mr. Duffy. How many full-time employees do you have?
Mr. McRaith. We presently have 13 full-time employees.
Mr. Duffy. Okay. So you don't know what that line item
would be and how much FIO spends per year?
Mr. McRaith. I don't personally know that number off the
top of my head, no.
Mr. Duffy. All right. Because I am concerned, as we look
at--10 reports were to be submitted, as required by Dodd-Frank,
and some were never submitted to Congress. Others were a little
bit late, or a lot late. The one we are talking about today was
almost 2 years late. And one report was submitted on time.
I think earlier you said one of the main goals that you
have is to be responsive: ``We want to keep Congress
informed.'' That was your quote. When you don't submit reports
to Congress as directed by Dodd-Frank, it is pretty hard to
keep us informed.
So if there is an issue with your staffing, if there is an
issue with resources that is prohibiting you from providing
these reports--I haven't seen a letter that you have submitted
that I have been cc'd on. I don't know if you have sent a
letter to the chairman.
But if we are asking for reports from FIO, we expect to get
them, and get them on time. I would just leave that point out
there. And maybe another point I would ask is, do you deem
these reports necessary, number one? Number two, is FIO
incompetent in drafting these reports and sending them to
Congress? Or do you not have the staff? Which is it?
Mr. McRaith. The reports are important. Congress has asked
for them. They are important subjects, and it is appropriate
for the Treasury's Federal Insurance Office to offer them to
the country, to Congress, and ultimately to the international
community, to understand the views of the Federal Insurance
Office on the subjects to be addressed.
Mr. Duffy. We agree on that. Why haven't they been
submitted?
Mr. McRaith. It is not a--excuse me?
Mr. Duffy. Why haven't they been submitted or been
submitted late?
Mr. McRaith. I think the important reality for us is that
we submit a report to you that is of appropriate quality, of
appropriate depth and insight. And while we regret that--
Mr. Duffy. What--
Mr. McRaith. -- the modernization report was not provided
in January 2012, we are pleased with the quality and importance
of the report.
Mr. Duffy. What we expect is a quality report as asked for
by Congress and on time. And that is not what you have done. So
I will leave that point alone, but I think it is disrespectful
to the elected body to not provide those reports as required.
I want to move to mortgage insurance. You have indicated we
have had failure in the mortgage insurance space, and it is
your opinion that we should have a Federal regulator in the
mortgage insurance space. Is that right?
Mr. McRaith. That is the recommendation in our report.
Mr. Duffy. And some of those failures came during our Great
Recession. So if the Federal regulator model works so well, can
you point to me other regulators, Federal regulators, that
performed well during the Great Recession, during the financial
crisis, that didn't have any failures, that you can point to
and say, listen, the State model doesn't work, but the Federal
regulating model does work, look at this agency that did so
well, in insurance or in the financial sector? Because I think
they have all had issues. What makes you think that you can do
it any better than everyone else, leading up to the crisis?
Mr. McRaith. I think the point of the recommendation is
that there was failure throughout the mortgage insurance
industry. We had to learn from that experience, learn from the
crisis, learn, is there a better way to do that? That is why
this committee and others in the House and Senate have dealt
with reforming the housing finance system. As part of that, it
is appropriate to have a federally-supervised private mortgage
insurance industry.
Mr. Duffy. Sure. And I guess those recommendations would be
taken far more seriously if you could provide high-quality
reports in a timely manner. One other issue that I want to
bring up--and I guess I am concerned about the role of the
Federal Government in our insurance space, if you can't tell
that. And Dodd-Frank was pretty clear that you are here to
monitor it.
But in Treasury's press release that came out recently,
they said that you were proposing a hybrid Federal-State
regulatory system. Does it say that in Dodd-Frank? Does it give
that authority in Dodd-Frank? Where in that press release--
where is that coming from, this hybrid model?
Mr. McRaith. Fundamentally, Congressman, that is what we
have today. We have convened Federal agencies involved with the
insurance sector, either operating a program or involved with
supervision. We have over 35 agencies attending a meeting like
that. So as I mentioned in my opening comments, the Federal
Reserve is involved, the SEC, the Department of Labor, the
Department of Agriculture, the Department of Energy, and the
Department of Housing and Urban Development all have some role
in the insurance sector.
So the report really doesn't call for a Federal regulator,
as you appreciate. What the report says is, we need to deal
with real problems that are longstanding in the U.S. system of
insurance regulation, and some of those will require Federal
involvement, much like, for example, NARAB II, multi-State
agent licensing. How do we solve a problem of a multi-State
inefficiency? Congress passes a law.
Mr. Duffy. Thank you. And my time is up. I was hoping to
ask some questions in regard to your view, Mr. Leonardi, on the
expanded role of the Federal Government in our State insurance
space, but my time has expired, and I will yield back to the
Chair.
Chairman Neugebauer. I thank the gentleman.
And now the ranking member of the full Financial Services
Committee, Ms. Waters, is recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
I welcome our panel here this morning. And let me just say
that I recognize that Mr. McRaith came into this position
almost a year after we passed Dodd-Frank, I believe. So I am
sympathetic to any reports that were not released on time, as
it was described by my colleague, and certainly I would not
expect that you would have responsibility for that entirely. So
I appreciate the work that you are doing and what it takes to
do the work.
Some of my colleagues here today have talked about some of
the issues that I am concerned about. Mr. Clay asked about red-
lining. Representative Hurt talked about costs versus benefits.
And these are some of the areas that I am certainly interested
in.
I was a member of the California State Assembly for 14
years, and I worked on red-lining for almost all of those
years. And, of course, having come from St. Louis, Missouri, in
a low-income community, I learned a lot about insurance
products and what was being pushed in the communities in my
neighborhood. And I think a lot of that has been cured, but I
am still concerned about what is happening in underserved
communities.
Now, as I understand it, part of FIO's mission is to
monitor the extent to which traditionally underserved
communities and consumers, minorities, and low- and moderate-
income persons have access to affordable insurance products.
What have you done? And how did you do it?
Mr. McRaith. The statutory responsibility to monitor
affordability and accessibility is very important to our
office. We have compiled data from external sources and are
evaluating the best ways to measure affordability and
accessibility.
Our report identifies the subject of risk classification.
How do companies go about pricing insurance products? The
fundamental reality is that the data-mining technology
available today is so much more powerful than even a few years
ago. The data that any one of us could find out about any one
individual is so much greater in volume than it ever used to
be.
We want to have a conversation about--and do--first of all,
research and report on and discuss, what are the appropriate
boundaries of the use of that now expansive world of personal
information that is available about any individual, not just
for insurance companies, although that is our area of interest,
but really throughout the world?
The data-mining technology is so much more powerful than it
ever used to be. Individual products are sometimes priced with
hundreds or more different factors, considerations about any
one individual. We need to know, what are those factors? Do the
States understand them? And then, thirdly, what are the
boundaries that are appropriate on the use of all of that
information?
Ms. Waters. I am very interested in keeping up with what
kind of information you are putting together and how it is
going to impact the underserved communities and what we can do
to make sure that there is fair access.
Let me just ask Mr. Leonardi, do you think that there has
been significant improvement over the years in serving the
underserved populations and minorities and our consumers in
general, even in the rural communities that Mr. Hurt referred
to?
Mr. Leonardi. I can only speak as the Commissioner from
Connecticut on this issue, although I did, before I was
Commissioner of Connecticut, live in a very, very rural part of
upstate New York. But I will say that one of the things that
Director McRaith just mentioned that I agree with is, there was
a time when you might have 6 to 10 risk characteristics that
the companies would look at, and now they are looking at 50 to
75. So there is a huge amount of data that they have access to,
a lot of computing power to slice and dice that, and what we do
is--and I think we are one of the few States that requires it,
we require that they provide their guidelines so that we can
see what those results will lead to.
And it may look fine on the surface, but if below the
surface, if the conclusion is--of the data is that there is the
potential to be red-lining--for example, some group, then we
don't allow that. And we are very strict about that.
Ms. Waters. Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from Florida, Mr. Ross, is recognized
for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman.
Director McRaith, since 1945 the McCarran-Ferguson Act has
been the foundation upon which we have had strong consumer
protections because of good and sometimes bad State regulation,
but I think a good market for consumers. You have alluded to--
and I agree with you--that what we have in this country now is
a hybrid market, and you have given some examples of that,
TRIA, NFIP, and even the Affordable Care Act are involvements
of the Federal Government in the regulation of insurance
markets in this country.
And my concern is, is that based on your report, the FIO
report, and your recommendations, if those recommendations are
not met, what would you anticipate FIO to do?
Mr. McRaith. The first thing we are going to do is bring
people together to try to solve the problem. We are doing that
already. If we get to a point where the problem is not solved,
then there needs to be--hopefully we can present a solution--
Mr. Ross. And that is where my next question goes to, that
solution. Do you anticipate coming back to Congress asking for
regulatory authority?
Mr. McRaith. No, my expectation is this--the report, as you
note, does not call for a Federal regulator, to the surprise--
Mr. Ross. I appreciate that.
Mr. McRaith. --of some. What we say is we need to solve the
problem. And rather than focus on, should we develop some
structure that implements something one way or another, our
objective is, solve the problem. So, for example, I cited NARAB
II, something that this committee has supported. That is an
example of a Federal role to impose uniformity where needed.
Mr. Ross. So you don't anticipate seeking any regulatory
authority for FIO in any time in the future or at all?
Mr. McRaith. What I anticipate is working hard to fulfill
our current statutory mandate.
Mr. Ross. And having been an insurance Commissioner for 6
years--in fact, I think you and I were on a panel years ago in
Illinois--
Mr. McRaith. That is right.
Mr. Ross. --you have been very familiar with McCarran-
Ferguson. Let me ask you directly: Do you think that the
McCarran-Ferguson Act as it exists today should either be
upheld and left alone, modified, or repealed, and why?
Mr. McRaith. I don't have an opinion on the McCarran-
Ferguson Act. The bottom line is, we need to move away from the
State versus Federal debate, because it has stifled solutions
to problems that in some cases have been around for decades.
We need as a country to provide better and more efficient
regulation for consumers. In many cases, the States can do
this. In some cases, it is going to require Federal help.
Mr. Ross. And you have acknowledged, I think in your
report, that consumer protections have been handled better by
way of State regulation. Would you agree with that?
Mr. McRaith. Generally speaking, that is true. And the
reason is exactly the reason you stated in your opening
comments, which is, in the P&C industry in particular, there
are very localized needs. Sometimes, within a State, one county
is different from another.
Mr. Ross. Exactly. Risks are not homogeneous. They are
heterogeneous, essentially.
Mr. McRaith. That is correct.
Mr. Ross. We see that on all types of geographic locations.
Speaking in terms of our domestic insurers and their
protections, we are losing market share, we are losing premium
to foreign and especially European carriers. My concern is
Solvency II. My concern is the backdoor of ComFrame. What
guarantees or assurances can you give us that our domestic
carriers can be protected, especially in light of different
standards of capital requirements there may be as a result of
Solvency II?
Mr. McRaith. Importantly, the international activity is the
development of standards. It is the development of best
practices for companies around--for supervisors and companies
that are operating around the world. Before those standards are
implemented, it will require some action by the States or the
Federal Government to implement those--
Mr. Ross. And then that is where FIO plays a role, to sort
of be the spokesperson in those negotiations?
Mr. McRaith. Our view is, we should assert on behalf of the
United States leadership in these conversations, work to
develop consensus with our international counterparts, but
provide the leadership that the United States justifiably
should provide.
Mr. Ross. And protect--thank you.
Mr. Leonardi, quickly, I have only 45 seconds left. Talk to
me about mitigation and its importance.
Mr. Leonardi. Mitigation, in terms of catastrophe?
Mr. Ross. Yes.
Mr. Leonardi. I think it is extremely important. I think
that a number of the insurance companies, the large property,
casualty, and reinsurance companies have recognized the need
for mitigation. I think the issue is getting those provisions
passed through legislatures, whether it be shutters for
windstorms or fixing the shoreline, moving back from the
shoreline and rebuilding, and things like that.
Mr. Ross. Thank you. And one really quick last question,
Mr. Leonardi, is there anything that you would propose to allow
for the investment of private insurance for flood insurance
purposes in your State? Any changes to the law today?
Mr. Leonardi. We actually have just allowed a private
insurer or a private insurer of flood insurance to sell, along
with about 15 other States just in the last 3 weeks. So we
would--
Mr. Ross. It is out there. Capacity is out there, in your
opinion?
Mr. Leonardi. Yes.
Mr. Ross. Thank you. I yield back.
Chairman Neugebauer. I thank the gentleman.
Now the ranking member of the subcommittee, Mr. Capuano, is
recognized for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
Thank you, gentlemen, for I think a thoughtful and
insightful discussion. Mr. Leonardi, I think you have advocated
for a while now very effectively a very strong States' rights
approach towards insurance regulation, and I respect that. And
I agree with some of it. I am not sure I agree with all of it.
But I want to be sure that I understand how vehement you
might be. Do you agree that some reasonable, thoughtful people
might disagree with the absolute ban on any Federal involvement
in overseeing any part of the insurance industry?
Mr. Leonardi. I am not sure if I--I don't want to answer
that in the negative. The answer is, yes, I obviously--as the
Director has pointed out on several occasions here this
morning--that the Federal Government has a role in a number of
areas, flood insurance, whether that is a good or bad thing,
TRIA, health insurance, and so on.
So, it is what it is. I guess what I wouldn't want is to
use the fact that we have these in place for specific reasons
to open the floodgates of saying, we don't need State
regulation anymore. We really need to have the Federal
Government come in and do things, again, fixing what is not
broken, I guess is what--
Mr. Capuano. Right. I am not aware--there must be
somebody--of anybody that I have talked to who would advocate
such a wholesale, immediate transition. But there are those of
us who think that some companies--never mind the individuals--
may be tired of dealing with potentially 91 different
regulators, 56 on the State and regional level and 35 Federal
agencies. Some people might want to reduce that number and deal
with only 30 or whatever the number might be, number one.
Number two is--I have been involved with financial services
for a long time, mostly in the banking end of it, and I will
tell you that I remember very clearly it wasn't long ago that
banks had to be incorporated in a State, and it was a big
brouhaha about interstate banking. Today, nobody would think
twice about that, and actually some people in this room
probably don't even remember that. Not many. A lot of you are
at least as old as I am.
But things change. The insurance industry has clearly and
unequivocally changed over the years, as you have said
yourself, and become much more complicated. And by the way, as
far as all those rating factors go, there is still red-lining
going on, in my opinion. It may not be the old-fashioned, evil
intended red-lining, but the effect is still the same. Even
with all those rating factors, I know people whose auto
insurance is significantly different simply by living one
street away; because they live in a different ZIP Code, their
insurance is half as much, and ZIP Codes do relate to certain
red-lining-related issues. But that is a different discussion.
I don't have much to add to this discussion at the moment.
I think the Director has thrown a lot of issues on the table,
rightfully so, obviously not all of them, but a lot of them for
discussion. And I think that your participation in this
discussion is very important. I think it has been very
thoughtful, very enlightening, and I just want to say thank you
very much.
Because this is a very difficult area where I think it is
inevitable that we will slowly move towards more Federal
involvement, simply because of the complexity and difficulty
and the internationalization of all businesses, not just
insurance. So I think that is inevitable, but I also think that
it should not be done quickly. It should not be done simply by
throwing out a system that has worked relatively well up until
this time.
And I do think that it requires the engagement and the
involvement of everybody at the table, and I just want to thank
the Director for your thoughtful and insightful report that
raises a lot of questions. And, Mr. Leonardi, yours and NAIC's
involvement with your views of the world, too, that I actually
think some of them are very valuable. Some of them we may have
disagreements on, but they are professional disagreements, and
not esoteric ones for me.
So I just want to say thank you very much for your
participation today.
Chairman Neugebauer. I thank the gentleman. And I think
that is all of the Members who have questions. Mr. McRaith, I
want to thank you again for your support for NARAB II. We are
hopeful to get that across the line. We think that is a
positive step for the industry.
Mr. Leonardi, thank you, again, for your attendance. And
this panel is now dismissed.
The second panel is a fairly large panel, so as one group
leaves, if the other group could get in place, and we will try
to get started here as quickly as we can. Again, thank you for
your service.
So, we will get started. If those of you who would like to
have a sidebar conversation would do that outside, we would
appreciate that, so we can close the doors, and get started.
As it has been alluded to, we have a large, but very
distinguished second panel. And the reason that the panel is
the size it is, is that it has been the commitment of this
chairman and our subcommittee to be as transparent and open and
give people an opportunity to express themselves, and this is
kind of new territory for the Federal Government to be in this
role of FIO, a new organization. It has an impact on the
industry, has an impact on consumers, and so we wanted to give
the industry and other interested parties an opportunity to
make their comments on this very first report.
And so, we have Mr. Anthony Cimino, vice president of
insurance and trade for the Financial Services Roundtable.
Welcome. He is a former Hill staffer; he served on the staff of
this committee, I believe, in the past.
Mr. Paul Ehlert, president, Germania Farm Insurance, on
behalf of the National Association of Mutual Insurance
Companies. I might mention that Paul is from Texas. It is good
to have you here.
Mr. Gary Hughes, general counsel for the American Council
of Life Insurers. It is good to have you here.
Jon Jensen, president, Correll Insurance Group, on behalf
of the Independent Insurance Agents & Brokers of America.
Mr. Frank Nutter, president, Reinsurance Association of
America.
Mr. Robert Restrepo, president, chairman, and CEO of the
State Auto Insurance Companies, on behalf of the Property
Casualty Insurers Association of America.
Mr. Scott Sinder, partner, Steptoe and Johnson, on behalf
of the Council of Insurance Agents & Brokers.
And Mr. Stef Zielezienski is general counsel for the
American Insurance Association. I thank all of you for being
here.
And with that, we will recognize Mr. Cimino for 5 minutes.
I will remind each one of you that without objection, your
written statements will be made a part of the record, as well.
STATEMENT OF ANTHONY CIMINO, ACTING HEAD, GOVERNMENT AFFAIRS,
THE FINANCIAL SERVICES ROUNDTABLE
Mr. Cimino. Thank you. Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee, thank you for the
opportunity to testimony before you today.
My name is Anthony Cimino, and I am the acting Director of
Federal affairs at the Financial Services Roundtable (FSR). My
testimony today is going to focus on four key points. I will
detail the need for a strong and effective Federal Insurance
Office. I will identify the principles FSR believes should
underpin insurance regulatory modernization. I will address
certain report recommendations in greater detail. And I will
urge Congress and the FIO and the NAIC to develop an action
plan to improve the insurance regulatory system.
To start, FSR shares the view of many that the insurance
regulatory system can be improved. To advance reforms, FIO must
be a strong, effective force which will allow it to examine
insurance reform on a broad national scale, interacting with
State regulators on a consistent basis and objectively
measuring progress.
In addition, FIO should serve as an educational resource to
the Federal Government. The Federal Reserve, for instance, will
oversee certain insurers that have banking operations or have
been designated as SIFIs. Consequently, the Fed must now
develop expertise in the insurance sector, which has vastly
different risk, capital, and business models than banking
institutions. FIO has a clear role in serving as that
educational resource to the Fed and other Federal agencies.
Further, international forums and standard-setting efforts
are influencing U.S. regulation. FIO must be a strong voice
representing the U.S. interests, coordinating effectively with
other stakeholders, including USTR, the Federal Reserve, and
the NAIC.
Now, as to the principles of reform, FSR urges policymakers
to use the following principles to underpin any modernization
efforts. First, reform should establish uniform regulatory
standards. Uniformity is a critical aspect of effective
insurance regulation. Different standards and treatment across
States increase compliance costs that ultimately drive up
prices for consumers and, in some cases, restrict product
offerings. FIO should elaborate on uniform standards that will
bring greater efficiency to consumers and the carriers.
Second, reforms should facilitate open and competitive
markets. Regulatory policy should encourage innovation and
product offerings and spur healthy price competition. Consumers
benefit from competition and the ability to choose products and
services that suit their needs and that are priced
appropriately because of competitive market pressures.
Third, reforms should establish effective and streamlined
regulations. FSR supports improved regulations. We caution that
the model articulated in the report could lead to increased
dual regulation, which may result in duplicative and consistent
or possibly even conflicting demands. It will be important that
we make sure to avoid those pitfalls.
Now, as to specific recommendations contained in the
report, FSR supports many and has questions on a couple. With
respect to capital standards, FIO notes in its report the
different business model and risk profile of insurance
companies compared to banking institutions and, as a result,
the need to craft different and more appropriate tailored
standards for insurers as they hold capital. FSR represents
both banks and insurance companies and is uniquely positioned
to understand the difference between these two models and the
need to apply a more tailored capital approach to insurance
companies. FSR supports efforts to do so.
Second, FSR agrees with FIO's recommendations on the
improvement of the product approval process. We also urge
Congress to adopt NARAB II. And we understand the need to
identify and implement natural catastrophe mitigation
standards.
There are, however, issues where we look forward to further
information regarding FIO's plans. For instance, the report
recommends States examine the impact of different rate
regulation regimes and that FIO work with the States to
establish a pilot program for rate regulation to maximize
insurers in the marketplace.
FSR believes that an environment that increases competition
ultimately drives down prices and serves consumers better. We
look forward to more guidance on FIO, on how to--on how it
might advance this objective.
Second, the report recommends that Treasury and USTR pursue
a covered agreement on reinsurance collateral requirements to
achieve national uniform treatment of reinsurers. FIO's desire
to achieve this uniform treatment is welcome, but at this time,
the contours of such an agreement are unknown, and FSR requests
the ability to work with FIO and other stakeholders to ensure
that we have our input heard.
Perhaps most importantly, we have to discuss the path
forward. For the next steps, FSR urges FIO to work with
Congress and the NAIC to identify this path. We see this FIO
report as the first step, not an ending in and of itself or the
end of the discussion, so it is going to be critical that we
put in place these next steps and an action plan that moves us
forward to advance insurance regulatory reform. To the extent
that Congress agrees with certain recommendations or has its
own reforms to advance, FSR recommends it work with FIO and
NAIC to do so.
We look forward to being a part of this process, and we
appreciate the opportunity to testify today. Thank you. I am
happy to answer any of your questions.
[The prepared statement of Mr. Cimino can be found on page
64 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And now Mr. Ehlert, you are recognized for 5 minutes.
STATEMENT OF PAUL EHLERT, PRESIDENT, GERMANIA INSURANCE, ON
BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE
COMPANIES (NAMIC)
Mr. Ehlert. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for this opportunity
to speak to you today. My name is Paul Ehlert, and I am
president of the Germania Insurance Companies, a group of
property and casualty companies that operate in Brenham, Texas.
Germania only operates across the State of Texas. We employ
335 people, and we protect 200,000 families and individuals, as
well as a few small businesses within the State. We have been
proudly serving our member policyholders and our State for 118
years.
I also serve on the board of Directors of the National
Association of Mutual Insurance Companies (NAMIC). NAMIC
represents more than 1,400 property and casualty insurance
companies, including small farm mutuals, State and regional
carriers, and large national writers. NAMIC members write half
of all personal, property, and casualty lines and one-third of
the commercial business in the United States.
NAMIC believes the FIO report represents a series of
conversation starters for potential next steps in insurance
regulatory reform, and we appreciate the subcommittee calling
this hearing today. To begin, the current State-based insurance
regulatory system is robust and well-positioned to meet the
needs of the Nation's insurance marketplace. However, it is not
perfect.
The FIO report correctly observes that regulation can be
too costly and often too complex. And we wholeheartedly share
the twin goals of maximizing efficiency and uniformity.
NAMIC appreciates the fact that the FIO report attempted to
rise above the traditional debate of State versus Federal
regulation. While it points to the increased costs of State-
based insurance regulatory system, it also acknowledges the
local nature of many insurance products and the cost and
complexity of starting up a Federal regulatory system.
FIO concludes that the proper balance is maintenance of the
State system with Federal involvement in areas where warranted,
a hybrid approach. In a few targeted areas, this model could
work. NAMIC supports NARAB II, for example. However, Congress
should do everything in its power to avoid creating an additive
system that simply layers Federal regulation on top of existing
State regulation.
The report contains the implicit, but pervasive view that
Federal involvement will automatically translate into increased
regulatory efficiency and efficacy. The report suggests that,
``if States fail to accomplish the necessary modernizations in
the near term, Congress should strongly consider direct Federal
involvement.''
With all due respect, it is not at all clear that Federal
Government involvement will be a cure for all insurance
regulatory ills. In general, the report did not go far enough
in recognizing some of the limitations and potential negative
consequences of increased Federal involvement.
One area which does not warrant Federal involvement,
contrary to the report, is the development of binding, uniform
Federal standards to restrict insurers' use of risk
classification factors that are already extensively regulated
in the States.
Federal regulation of insurer underwriting practices would
simply substitute Congress' judgment on these matters for those
of the State. NAMIC believes that FIO's focus should remain
firmly on the actions and initiatives at the international
level. It is our position that cooperation and coordination
internationally is a positive thing, but should not result in
abdication of regulatory authority to foreign jurisdictions and
quasi-governmental bodies.
Too much focus on regulatory equivalence with other nations
could result in significant and costly changes in the U.S.
insurance regulatory system. Our system is strong and time-
tested. Many of the international regulatory principles are
theoretical and have never been implemented, as in the case of
Solvency II. Yet, the E.U. is using these principles as a
benchmark against which to compare other countries.
We believe that the FIO should be a strong advocate for the
U.S. system. After all, less than 1 percent of the 2,800 U.S.
property and casualty insurance companies are internationally
active. We urge FIO to coordinate with State regulators to
advocate for international standards that are consistent with
the sound U.S. insurance regulatory approaches and that add
value to our member policyholders.
At a minimum, any international standards must not impose
unnecessary burdens for U.S. companies, especially the domestic
foreign mutuals like my own. As we move forward, NAMIC stands
ready to work with Congress on these issues. I again thank you
for this opportunity to speak, and I look forward to answering
your questions.
[The prepared statement of Mr. Ehlert can be found on page
70 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Hughes, you are recognized for 5 minutes.
STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI)
Mr. Hughes. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, I appreciate the opportunity
to provide you with the views of the American Council of Life
Insurers on the FIO report.
Overall, we believe the report presents a fair and balanced
picture of our State-based system of regulation and the various
challenges it faces. I would like to focus my remarks today on
two issues: first, global initiatives affecting the regulation
of U.S. life insurance companies; and second, capital standards
that the Federal Reserve is now required to impose on certain
life insurance groups.
The regulatory landscape for U.S. life insurers is changing
dramatically. Dodd-Frank now gives the Federal Reserve a
significant regulatory role with respect to those insurers that
are designated as systemically important. Two of the ACLI's
member companies have received that designation, and one
additional company is under review for possible designation.
Dodd-Frank also gives the Federal Reserve jurisdiction over
another 12 of our member companies that control savings and
loan institutions.
At the same time, the Financial Stability Board is
directing the International Association of Insurance
Supervisors to develop group capital and group supervisory
standards applicable to internationally active insurance
groups. We estimate that at least 18 of our member companies
fall into this category.
Taken together, the initiatives of the Federal Reserve and
the IAIS will directly affect companies comprising
approximately 60 percent of the premiums of ACLI's overall
membership. Let me put that in different terms. In the very
near future, a major segment of the U.S. insurance business
will have material aspects of its capital structure dictated or
influenced by someone other than a State insurance regulator.
In addition, 55 of our member companies conduct significant
business in the United States, but have their ultimate parent
located in another country, mostly within the European Union.
And the E.U. is modernizing its insurance capital standards
through Solvency II.
The point here is that life insurance regulation in the
United States can no longer be viewed as a purely domestic
matter. And if the capital standards of the States, the Federal
Reserve, the IAIS, and the E.U. are not generally consistent,
the resulting competitive disparities--mainly involving the
relative cost of capital--will significantly disrupt the U.S.
and the global life insurance markets. That is why we believe
it is imperative for all of our U.S. Representatives to work on
a unified and constructive basis with the FSB and other
international standard-setting bodies.
Various Federal regulatory agencies are now directly
involved in matters going to the very heart of a life insurer's
financial structure. And while the Federal Reserve and other
agencies are making a concerted effort to enhance their
understanding of our business, there is still a significant
knowledge gap. We believe the FIO can be invaluable in helping
fill this gap, given its mission of being the Federal
repository of information on insurance and its regulation.
The office is also well-positioned to interact with the
NAIC, the States, the FSB, the IAIS, and the E.U., as global
capital and supervisory standards evolve. It is critical for
that evolution to occur on a rational and consistent basis, and
that will not happen absent strong advocacy by the FIO and the
States, all working in concert and working toward common goals.
The second issue I want to address involves the holding
company capital standards Dodd-Frank requires the Federal
Reserve to impose on insurers that are designated as SIFIs or
that own savings and loan associations.
Any holding company capital requirements made applicable to
a life insurer must be compatible with the company's basic
business model. Unfortunately, the scenario we face due to the
Federal Reserve's interpretation of Dodd-Frank is one of
applying a bank-centric regulatory regime to a life insurer.
The life insurance business is fundamentally different than
the business of banking. Assets, liabilities, reserves,
capital, accounting, products--each of these elements of
insurance structure and regulation differs significantly from
those of commercial banks.
The issue here is not whether these life insurers should be
subject to holding company capital standards. They have
accepted the fact they will be. The issue is making certain
those standards actually work for a life insurer.
The whole purpose of these provisions of Dodd-Frank is to
stabilize the U.S. financial system. Disrupting the operations
of well-run insurance companies by applying ill-fitting
standards is fundamentally at odds with that purpose and
shouldn't occur under any circumstances.
I would like to express our appreciation to Congressman
Miller and Congresswoman McCarthy for introducing H.R. 2140.
This measure would enable the Federal Reserve to apply
appropriate insurance-based capital standards to those life
insurers under its jurisdiction. Similar legislation has been
introduced in the Senate, and we look forward to working with
both houses of Congress to see this important legislation
enacted.
Mr. Chairman, thank you for holding this hearing, and I
would be glad to answer any questions.
[The prepared statement of Mr. Hughes can be found on page
85 of the appendix.]
Mr. Luetkemeyer [presiding]. Thank you, Mr. Hughes.
Mr. Jensen, you are next. And I would again advise all of
the panelists today to be sure and pull the microphone as close
to you as possible. Just take a bite out of it. That is how
close it needs to be, really, because the acoustics in here are
very poor, and we want to make sure everybody in the audience
has a chance to hear, as well.
So, thank you very much. Mr. Jensen, you may proceed.
STATEMENT OF JON JENSEN, PRESIDENT, CORRELL INSURANCE GROUP, ON
BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA
(IIABA)
Mr. Jensen. Thank you, Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee. My name is Jon
Jensen, and I am president of Correll Insurance Group, which
has 185 employees and is headquartered in South Carolina. I am
also chairman of the Government Affairs Committee for the
Independent Agents & Brokers of America, also known as the
``Big I.''
The Federal Insurance Office was charged with a massive
assignment, and the Big I commends Director McRaith and his
staff for producing a comprehensive and largely balanced
assessment of the insurance regulatory system. The report has
generated well-deserved attention and analysis and identifies
and recommends several areas of reform.
The recommendations offered in the report suggest that the
insurance regulatory system is functioning at a high level and
does not require significant overhaul and restructuring. The
Big I agrees strongly with this assessment and several of the
recommendations in the report, including FIO's call for the
adoption of the NARAB II agent licensing legislation.
While many of the recommendations are worthy of discussion
and review, I would like today to highlight four of the broader
themes the Big I found in the report. First, the report reminds
us that insurance regulations, as with any system of regulatory
oversight, are imperfect and can always be enhanced. However,
State insurance regulation has a strong and successful record
and has performed particularly well when compared to other
financial sectors, especially in recent years. The report
reminds us of the success, but also that the system must
continue to evolve and improve.
Second, the Big I believes that the report observes that
the establishment of a full-blown Federal regulatory framework
is not a prudent or viable option. While some expected this
recommendation from FIO, the report instead indicates, ``the
proper formulation for the debate at present is not whether
insurance regulation should be State or Federal, but whether
there are areas in which Federal involvement in regulation
under the State-based system is warranted.''
Third, the recommendations in the report are noticeably
modest. They reaffirm the relative health of State insurance
regulation and indicate that sweeping and wholesale changes are
unnecessary and unwarranted. The report recognizes that State
officials have identified and are working to remedy certain
flaws within the existing system, and many of FIO's suggestions
encourage States to continue their pursuit of existing efforts
and note that FIO intends to simply monitor their progress.
Fourth, the report recommends the use of targeted Federal
intervention should be limited to those instances where
demonstrated deficiencies exist and where States are unable as
a result of practical hurdles or collective action issues to
resolve the challenges themselves.
The report states, ``In all events, Federal involvement
should be targeted to areas in which that involvement would
solve problems resulting from the legal and practical
limitations of regulations by States, such as the need for
uniformity or the need for a Federal voice in U.S. interactions
with international authorities.''
One specific example of such targeted Federal intervention
that the report recommends is the NARAB II legislation to
reform agent licensing. Specifically, FIO discusses the need
for agent licensing reform at length, and we greatly
acknowledge and appreciate the emphasis given to this issue in
this report.
We are equally appreciative of the leadership of the
chairman, and of Representative David Scott, who have been
steadfast supporters of this legislation over the past several
years. In fact, last June the NARAB II legislation passed the
full House by a vote of 397-6, and we are also pleased that the
measure was approved by the full Senate last week.
The NARAB II proposal is a textbook example of how targeted
action at the Federal level can enhance and improve State
regulation without Federal regulation. The Big I is pleased
that the NARAB II continues its progress through the
legislative process, and the agent and broker community is
optimistic that this much-anticipated measure will be enacted
into law in the near future.
I thank the subcommittee for this opportunity to testify
today, and I look forward to a continued discussion regarding
the issues addressed in my testimony.
[The prepared statement of Mr. Jensen can be found on page
93 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Jensen.
Mr. Nutter, you are next. Please proceed.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA (RAA)
Mr. Nutter. Mr. Chairman, and members of the subcommittee,
I am Franklin Nutter, president of the Reinsurance Association
of America (RAA). The RAA is the national trade association
representing reinsurance companies doing business in the United
States. RAA members consist of both U.S.- and non-U.S.-based
companies with an interest in the regulatory environment in
which they operate, including solvency in financial oversight,
as well as market access.
The RAA supported the provision in the Dodd-Frank Act that
authorizes the Federal Insurance Office, working with the U.S.
Trade Representative to enter into covered agreements. This
gives those governmental entities the authority--indeed, we
believe the mandate--to pursue bilateral or multilateral
agreements regarding prudential measures with respect to the
business of insurance or reinsurance between the United States
and one or more foreign governments. These covered agreements
will provide uniform regulatory criteria for transactions
between U.S. and non-U.S. insurers and reinsurance.
Insurance is widely regarded as facilitating economic
activity, and reinsurance provides insurers with capital
support, diversification of risk, and risk transfer for extreme
loss events. Covered agreements will facilitate the provision
of global capital and risk-taking capacity and, therefore will
benefit economic activity in the United States and in other
countries.
We envision these covered agreements to provide the
regulatory framework for U.S. reinsurers in foreign countries
and non-U.S.-reinsurers in the United States. We do not see
this as a new layer of regulation, but rather as a federally-
authorized tool that would be applied in the context of their
State regulatory system.
We are pleased to see the Federal Insurance Office report
endorse the pursuit of covered agreements. The FIO report
defines its interest in the context of financial security
provided by unauthorized reinsurers based on the NAIC's
recently revised model law and credit for reinsurance. The RAA
supports the recent NAIC model law revisions and has worked
vigorously to see them enacted in various States.
It is clear, however, that it will take many years for
these changes to be adopted by all the States. The NAIC model
law process as applied to this model law also assumes the
States individually, based on an NAIC-approved list of
qualified jurisdictions, will make a determination of the
equivalence of a foreign country's reinsurance regulation.
The RAA believes covered agreements, based on Federal
statutory and constitutional authority between the United
States and countries or governmental entities representing
major reinsurance trading partners, provide the preferred
approach for addressing the basis of regulatory equivalence and
appropriate regulatory security.
It is clear that the statutory authority in Dodd-Frank does
not limit covered agreements to matters related to collateral
for unauthorized reinsurance. There are a host of Federal
prudential issues that could be addressed in a covered
agreement as the basis upon which companies from one
jurisdiction do business in the other jurisdiction.
We recognize the use of this authority beyond collateral
may concern some. However, the statute requires a process of
review by four congressional committees, including this one,
the likely involvement of the States with FIO and the USTR in
negotiating any such agreement, and, finally, implementation
within the State regulatory system, not a new Federal system.
We think these protections should allay those concerns.
We believe the European Union under its reinsurance
directive and Solvency II when implemented has the authority to
enter into covered agreements. In addition, regulatory and
trade officials in countries that host major insurance and
reinsurance trading partners, including the U.K., Bermuda,
Germany, France, Italy, Australia, Japan, and Switzerland have
all expressed interest in resolving the issue of cross-border
reinsurance relationships.
The United States is a major attractive market for the
global reinsurance industry. The United States is also the home
jurisdiction for several major reinsurers that operate on a
global basis and provide financial security for worldwide
insurance markets. A covered agreement should and could be
tailored to be of mutual value to both of these interests.
We encourage the committee to insist that USTR and Treasury
move forward on negotiation of one or more covered agreements.
This committee originated the idea and was right to do so, and
we look forward to working with the committee, FIO, and USTR to
implement this valuable tool. Thank you very much, Mr.
Chairman.
[The prepared statement of Mr. Nutter can be found on page
109 of the appendix.]
Mr. Luetkemeyer. The next witness is Mr. Restrepo. I think
Mrs. Beatty wants to provide the introduction, so, Mrs. Beatty,
you are up.
Mrs. Beatty. Thank you so much, Mr. Chairman and Mr.
Ranking Member. It is certainly an honor for me to not only
serve on the House Financial Services Committee, but it is not
often that you get a constituent who has done so much in the
area of insurance in your district, so it gives me great
pleasure to not only introduce, but to welcome Mr. Robert
Restrepo to the committee, and I look forward to hearing his
testimony today.
Mr. Luetkemeyer. Thank you. Mr. Restrepo, you may proceed.
STATEMENT OF ROBERT RESTREPO, PRESIDENT, CHAIRMAN, AND CHIEF
EXECUTIVE OFFICER, STATE AUTO INSURANCE COMPANIES, ON BEHALF OF
THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)
Mr. Restrepo. Thank you, Mr. Chairman and Mr. Ranking
Member, for inviting PCI to testify today. My name is Bob
Restrepo, and I am president, chairman, and CEO of the State
Auto Insurance Companies and chairman of PCI. For nearly a
century, State Auto has provided a wide range of protection for
consumers and businesses through independent agents and
brokers, and we employ 2,500 people across the country.
PCI has more than 1,000 member companies that account for
39 percent of the premium for the United States home, auto, and
business insurance marketplace. My written testimony discusses
the current regulatory system and how it could be improved.
There are four key points, though, that I would like to
highlight for the committee today.
The U.S. property and casualty insurance market is the
largest and most diverse in the world. Our market weathered the
financial crisis of 2008 better than most federally-regulated
sectors, and is financially sound, highly competitive, and
comprehensively regulated, with a strong consumer focus.
State regulators are able to respond quickly to local needs
and realities. Property casualty financial strength and
capitalization is at a record high, and our regulation and
marketplace is constantly evolving to meet consumer needs and
underserved markets.
PCI welcomes a better Federal understanding of the
challenges our marketplace faces, which were described in the
FIO report. PCI has analyzed each recommendation based on our
mission. And we asked ourselves, does it promote and protect
the viability of a competitive private insurance marketplace
for the benefit of consumers and insurers?
Several FIO recommendations could potentially improve our
current insurance regulatory system. Among these are its calls
for more free-market competition in pricing, better coordinated
market conduct exams, streamlining of commercial lines
regulation, better disaster risk mitigation, congressional
enactment of NARAB II, and more standardization of surplus
lines rules.
Recommendations that could harm our market and consumers
include a federalization of insurance rating factors and
pressure to adopt bank-like global standards that have not been
proven to benefit domestic home, auto, and business insurance
consumers or our marketplace.
While the FIO report is an insightful compilation of
current regulatory challenges, there are two particular areas
where FIO's leadership would be helpful and consistent with the
Dodd-Frank Act statutory priorities. First, FIO should play a
greater role in establishing meaningful ongoing coordination
among all Federal and State governmental and private voices in
international discussions.
Second, we need FIO to be a strong advocate for
transparency, due process, and cost-benefit analysis in all
regulatory forums on behalf of our marketplace and our
consumers.
In conclusion, I would like to suggest that Congress can
consider this report in two different ways. If the goal is
primarily to encourage the States towards greater efficiency,
consistency, and coordination, domestically and
internationally, then it should serve a useful purpose,
considering each recommendation separately.
To the extent the report becomes a foundation for piecemeal
hybrid, Federal-State regulation policy, then the policymakers
need to be careful of just adding additional layers of
supervision, keeping in mind the oath that two of my brothers
took as doctors of medicine, ``First, do no harm.''
Thank you for the opportunity.
[The prepared statement of Mr. Restrepo can be found on
page 114 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Restrepo.
And Mr. Sinder, you are next. You may proceed. Thank you,
and welcome.
STATEMENT OF SCOTT SINDER, GENERAL COUNSEL, THE COUNCIL OF
INSURANCE AGENTS & BROKERS (THE COUNCIL)
Mr. Sinder. Thank you, Mr. Chairman, Ranking Member
Capuano, and members of the subcommittee. My name is Scott
Sinder. I am a partner at the law firm of Steptoe and Johnson,
where I chair the government affairs and public policy group,
and I also serve as the general counsel for the Council of
Insurance Agents & Brokers, on whose behalf I testify today.
The Council has about 240 members. They sell or place about
85 percent of all commercial business insurance in the United
States, as well as billions of dollars of benefits work, and
they also do business abroad. Forty of their members are
located abroad, but most of their members do work
internationally.
Today, the business of insurance is no longer a local
business. It is a Statewide business. It is a national
business. It is an international business. And that is true on
at least three levels. It is true for our members who do work
in all those areas. It is true for their clients who have
exposures on all those levels. And it is also true from the
regulatory perspective as they are subject to regulations at
all those levels, both here and abroad.
Chairman Neugebauer began the hearing by asking what role
FIO is to play and was sort of critical of the report for not
clarifying that. I think you have heard a lot of answers to
that, but I would answer it directly by saying that I think
that the role of FIO falls into three buckets. There is the
leadership on the international level on the policymaking side.
There is the oversight of the State system in an effort to spur
them to modernize and rationalize and harmonize the regulatory
structures. And there is the repository of insurance expertise
at the Federal level, which we have never had before, and I
think is a welcome addition. And in some respects, the report
does touch on all three of those areas.
As the report says, it is not so much the question of
Federal versus State authority, but what are the best ways to
rationalize and harmonize regulatory oversight of insurance.
Mr. Royce commented that he went back and looked at his notes
from 2001, and he commented on the pace of reform. There is a
quote on page 11 of the report, of which I am particularly
fond, that is a quote from the very first meeting of the NAIC
in 1871, where they said that the entire purpose of the NAIC is
to create a system of uniform national insurance regulations.
I would argue that absent Federal oversight and prodding,
there has been very little progress on that. Even the
accreditation project and system that Commissioner Leonardi
discussed was the outgrowth of the Dingell oversight
proceedings in the early 1990s, when there was an insolvency
crisis in the industry that was also cited in the report. And
so, we think that FIO can play a very important role in doing
that prodding.
On the international level, we welcome this point of entry
and effort to try to coalesce around a single voice for the
United States. We think it is a welcome addition. There is
something that is not mentioned in the report that we are very
focused on as an industry at the moment, and that is the
Foreign Account Tax Compliance Act (FATCA). I think that is a
place where the international requirements of the office meet
its informational role. FACTA is an act that the IRS is
intending to apply to the property and casualty industry. It is
an act that is designed to spur reporting of cash value
accounts that are maintained by U.S. citizens living abroad.
By applying it to us, you have a tremendous additional
compliance cost with, I would argue, no regulatory bang for
your buck. And so we are working--and we hope that you will
work with us--to try to get that limited so FACTA does not
apply to the reporting of property and casualty insurance
premiums, which really are completely unrelated to the regime.
On the domestic side, we would note three things. First of
all, many of you commented on TRIA, which is only mentioned in
the footnote in the report. Ranking Member Waters said that she
is looking for a quick, clean, and long-term resolution to the
TRIA issues and that time is of the essence. We couldn't agree
more.
From a policyholder perspective, what is really important
is that we have the capacity in the market to cover terrorism
risks. We think that TRIA offers that. Already in the market,
you are seeing renewals that have riders which say that the
terrorism portion of the coverage will expire on December 31st,
absent extension of the program.
With respect to surplus lines reform, Dodd-Frank included
the NRRA provisions. We agree with what Director McRaith and
FIO said in the report about the pace of reform there. We, too,
are disappointed that some States are not complying with the
same rules as the rest of the States, and we would argue that a
single State taxation regime that most of the States have
adopted is the right way to go. It is the most efficient. And
it is the best, I think, both from a regulatory perspective, as
well as the regulatee perspective.
Finally, several folks have mentioned NARAB II. It did pass
the Senate last week. We thank Chairman Neugebauer and
Representative Scott for their leadership in the House on this.
This is a bill that has passed the House 3 times. It would, I
think, both raise the standard of regulation of insurance
licensure for multi-State licensing and make it much more
efficient. Rather than going through 56 relatively low bars to
get a license, there would just be 2, your home State
regulation and the admission to NARAB, which would require a
higher level of standards to be satisfied in order to be
licensed.
NARAB II has been included in the flood bill in the Senate.
We urge you to include it as you consider the flood bill when
it moves back through the House. I am happy to answer any
questions, and I thank you again for the opportunity to
testify.
[The prepared statement of Mr. Sinder can be found on page
118 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Sinder.
And finally, Mr. Zielezienski, you may proceed.
STATEMENT OF J. STEPHEN ``STEF'' ZIELEZIENSKI, SENIOR VICE
PRESIDENT AND GENERAL COUNSEL, THE AMERICAN INSURANCE
ASSOCIATION (AIA)
Mr. Zielezienski. Thank you, Mr. Chairman, Ranking Member
Capuano, and members of the subcommittee. My name is Stef
Zielezienski, and I am senior vice president and general
counsel of the American Insurance Association.
AIA members write property and casualty insurance across
the country and around the world. Our membership is diverse and
includes U.S. insurers that write insurance only within the
United States, U.S. insurers that write inside and outside the
United States, and insurers that are U.S. subsidiaries of
multinational insurers. As a result, while our focus is on the
property and casualty lines of business, our perspective is
grounded in our diversity.
AIA strongly supported the establishment of FIO and worked
with the Congress to create it. We continue to support its
mission, particularly in helping to promote regulatory advances
at home and abroad that will improve competitive markets.
As FIO prepared its report, AIA submitted extensive
comments that recommended: first, that FIO study the extent to
which State rate and form regulation undermines competition,
decreases consumer choice, and detracts from the goals of
financial solvency oversight; second, that FIO use the report
as an opportunity to identify and facilitate uniformity of
State regulation; third, that FIO vigorously implement its
Dodd-Frank responsibilities, take a leadership role for the
United States on international regulatory modernization
initiatives and work with States, the NAIC, and Federal
financial regulators to present a single, unified U.S. voice to
preserve U.S. competitiveness and to promote sound regulatory
policy.
We are pleased that the report advances our three
recommendations. With regard to rate regulation, FIO
acknowledges the evidence that personal lines rate regulation
has been counterproductive and calls for the States to identify
rate regulatory practices that best foster competitive markets.
At the same time, however, the report contemplates the
adoption of uniform Federal standards for use of risk
assessment tools. Further regulation of a company's use of risk
classification assessment is nothing more than rate regulation
by another name. If insurance rate regulation is harmful, it
should be jettisoned in favor of competitive pricing and not be
reintroduced in the form of national risk classification
standards.
On the issue of government product regulation, AIA concurs
with FIO's call to the States to ``streamline and improve the
regulation of commercial products.'' Establishing or broadening
the interstate compact to encompass commercial lines policy
forms is a recommendation worth exploring, particularly if it
leads to a shorter timeline for the introduction of new
commercial policy forms into the marketplace.
AIA also supports FIO's call for increased uniformity in
State market conduct examination standards and for establishing
requirements for contract examiners, assuming, of course, that
the standards themselves recognize the benefits of diverse
business plans among insurers.
Finally, it is critically important that FIO carry out its
important Dodd-Frank mission for enhancing the prudential
supervision of insurers internationally and to work together
with the NAIC, States, and Federal financial services agencies
to present a unified U.S. perspective.
While FIO has a clear role on international prudential
matters and initiatives, it also participates domestically with
the State regulatory representative as an adviser to the
Financial Stability Oversight Council and makes recommendations
regarding potential insurer designations to the Council.
It is therefore imperative that the U.S. contingent
coordinate both here and abroad on policy matters that may
shape the future of U.S. insurance regulation. Our perspective
is grounded in the recent financial crisis and the ongoing
implementation of Dodd-Frank. As a result of these events,
insurers must manage their businesses in a turbulent,
tripartite environment involving the States, the Federal
Government, and our international trade partners.
Capital standards for insurers, systemic risk oversight,
accounting principles, and group-wide supervision are the tip
of the iceberg, but hardly the whole iceberg itself. In
carrying out these discussions in each of the three regulatory
environments, FIO must be careful to advance a consistent and
balanced position that removes barriers to U.S.
competitiveness, while at the same time preserving the domestic
laws and regulations that currently work for insurers and
consumers.
That is certainly easier said than done due to the existing
statutory limitations that apply to FIO's role in developing,
negotiating, and implementing any new rules. But FIO's role is
no less crucial even with those limitations in place. The
stakes are high, and we must all pull in the same direction to
get it right.
Thank you very much.
[The prepared statement of Mr. Zielezienski can be found on
page 134 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Zielezienski. I appreciate
your testimony.
We have votes called, I understand, about 1:10. So with
that in mind, I am going to defer my questions to the end. I
think Mr. Capuano has done the same. And we are going to go to
Mr. Stivers, the gentlemen from Ohio, to begin the questions.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate that.
My first question is for Mr. Hughes. It was alluded to in
Director McRaith's report, but can you talk about the benefit
of the interstate compact to life and health companies that
happen to have homogenous risk, as far as benefit to customers
of products being able to make it to market sooner and things
like that?
Mr. Hughes. I would be glad to. The compact has certainly
been a very positive step forward for State regulators. One of
the frustrations that we have had over the years is in product
approval. The timing really works against us. We have been a
big supporter of the compact, but a bit frustrated that large
States like New York and California, after a number of years,
still haven't gotten on board with it.
Mr. Stivers. That is unfortunate. I was the sponsor in
Ohio. We are proud to be members of it. But some of the big
States have not joined.
Mr. Hughes. They have not.
Mr. Stivers. And that is one of the problems, but it
certainly has streamlined things and made life easier for your
customers and people who want to buy life insurance. Is that
correct?
Mr. Hughes. It has, indeed.
Mr. Stivers. Great. My follow-up to that is for Mr.
Restrepo. So given that property and casualty insurance does
not have homogenous risk--in fact, it has very heterogeneous
risk--are there things that can be done where the States come
together, much like they did in the interstate compact for life
and health? Because certainly I live in Ohio, like you do. And,
by the way, your company is in Joyce Beatty's district now, but
you were in my district for a couple of years, and it is a
great company, but you guys insure a lot of very different
risks.
I don't want our customers in Ohio paying for coastal
exposure in Florida. So are there other things we can do inside
property and casualty, inside the State-based system that might
benefit customers in the way that the compact has for--or for
life and health?
Mr. Restrepo. Both as an industry and as a company, we
continue to work with the local State regulators to have
pricing and products in place that recognize the realities of
those local marketplaces. And as you say, Ohio is very
different than Florida and requires different solutions, and
Florida requires different solutions.
So working within the existing system, we have
significantly improved our pricing precision, with much more
sophisticated pricing. When I started in the business 40 years
ago, there were just a couple of price options for homeowners.
Now, there are thousands. And there are probably more price
points for auto insurance in this country than there are
drivers.
Mr. Stivers. And markets like Ohio and--
Mr. Restrepo. Much more sophisticated.
Mr. Stivers. --Illinois that allow you to price your
product in what--
Mr. Restrepo. The regulatory system in Illinois really
promotes competition. New carriers want to be there, want to
compete. It is a very competitive marketplace.
Mr. Stivers. Thank you. The follow-up I have to that is,
since now all of you are regulated by--or could be regulated by
Federal entities, the Fed and others, from your perspective--
and anybody can answer this--I asked Director McRaith whether
there was true coordination between the FIO, the Fed, and the
SEC, with regard to having a singular voice both domestically
and internationally. He does a few conference calls, which I
certainly appreciate, but I am not sure I feel comfortable that
there is a process in place to really create a singular voice,
because when there is a disagreement, who wins? And I don't
think we know that yet.
Does anybody have an opinion on that? And I only have a
minute and 22 seconds left, so I will take it to volunteers.
Mr. Nutter?
Mr. Nutter. Mr. Stivers, a comment that we would make is
that with the introduction of the Federal Reserve into this
process and the driver being the Financial Stability Board at
the IAIS, I must admit, for many of us, it has become much more
opaque about how you engage those regulators or whether or not
at the Financial Stability Board there is really insurance
expertise that is represented there. So there is--
Mr. Stivers. Clearly not as a voting member. And you make
that point very well. And I think that--let me ask just a yes-
or-no question. Are there any of you who believe that we would
benefit from a much more clear process as to how we create a
singular voice, both domestically and internationally? Do you
think we would benefit from a better process? Raise your hand
if you think so.
Mr. Hughes. Absolutely, yes.
Mr. Stivers. Does anybody disagree with that statement?
Great, thank you. I think that is really the heart of where I
think we need to go, because several of you made this point
very, very well about how overlapping and conflicting
regulation could really hurt our competitiveness. I am also
very worried that a lot of the Europeans and international
folks have a singular voice and we do not. And we also have a
dominant share of the insurance market, and it could really put
our American companies that want to do business internationally
at a huge competitive disadvantage, if the structure is built
around a foreign model.
And so, thank you for being here. Thanks for what you guys
do. I had a very brief time to ask questions, but I appreciate
those of you who responded. Thanks for being here, Mr.
Restrepo.
Mr. Luetkemeyer. I thank the gentleman. We will now go to
the gentlelady from Ohio, Mrs. Beatty.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member. We have heard a lot about capital standards this
afternoon. Mr. Hughes, if our goal is to have the best
prudential supervision and the most effective regulation of the
financial services industry, does it make sense to apply bank
capital standards to insurance companies? And would it make
more sense to apply insurance-based standards to insurance
companies?
Mr. Hughes. We feel very strongly that the only standards
that ought to be applied to an insurance enterprise are
insurance-based standards. And that has been our great
frustration at the moment with the Federal Reserve's
interpretation of Dodd-Frank, which is sending us in the other
direction. I know you have had discussions with some of your
constituents on that point, and we are working very hard with
this body and the Senate to see if we can correct that.
Mrs. Beatty. Thank you. Let me ask one other question. As I
was reading, Mr. Restrepo, in your testimony, let me, first,
thank you for the statement about the questions that we should
be asking, best standards for good regulation and good
regulators, and where can the current system be improved. That
is a great starting point, I think, for me. What is it that we
can do?
So hearing your testimony from all of you today is very
helpful. But my question to you, Mr. Restrepo, is, if the
Federal Reserve proposes a bank capital standard for insurance
companies under supervision, while the State insurance
regulators enforce an insurance standard, are you concerned
about any confusion and uncertainty that could result from
that?
Mr. Restrepo. I am very much concerned. You could rapidly
go from a hybrid structure to a hydra structure, with multiple
heads you are dealing with, and multiple heads will certainly
confuse the marketplace.
We are a very strong industry and really don't need the
kind of standards--certainly the single standards that are
being talked about. It is a diverse industry. We all have
different risk profiles, different capital requirements, and
those solutions--or those issues are best addressed locally.
Mrs. Beatty. With that--and from hybrid to hydra--is it
plausible that there could arise a situation in which two
different regulators are trying to enforce two different
incompatible standards on the same company?
Mr. Restrepo. No question.
Mrs. Beatty. Okay.
Mr. Restrepo. In fact, that is bound to happen.
Mrs. Beatty. Thank you. That was very helpful. And I yield
back my time, Mr. Chairman.
Mr. Luetkemeyer. Okay. Next, we have the ranking member of
the subcommittee, the gentleman from Massachusetts, the Boston
Red Sox's greatest fan here in the Capitol, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
While the gentlelady from Ohio is here, based on your early
questions, I do--there are some misinformed people in America
who wouldn't mind if Ohio State's football program shut down. I
am not one of them, of course, but there are those who might
be--not, of course--
Mrs. Beatty. Am I supposed to say thank you to that or am I
supposed to pause, Mr. Chairman?
Mr. Luetkemeyer. Remember, he is the ranking member.
Mrs. Beatty. Then, thank you.
Mr. Capuano. Yes, big job.
First of all, gentlemen, thank you all very much for being
here and putting up with all this. And, by the way, is there
anybody in the audience who has not testified who would like
to, because--as I said earlier, this is an interesting
discussion. And I am tempted--I don't--I didn't hear anybody
who actually said that you would rather have the Fed doing this
than FIO. I just want to be clear that I didn't hear anybody
say that. Did you? Good, because this was part of the
discussion we had when we did Dodd-Frank. If we didn't do
something like this, the Fed or somebody in the banking
industry would step in and do it. It was either something like
this or banking regulators doing it.
And I think all of us agree that banking regulators are
fine and wonderful people in banking issues. And they may have
some interest in some of the things that some of you companies
do, but in general, insurance is a different animal and
deserves different treatment. And that is what this was all
about.
I am tempted, to be perfectly honest, to ask each of you
whether you think that any individual company who wished to
have an optional Federal charter should be able to do so, but
because I respect you all and don't want to position you too
much, I won't do that. But that is a discussion for another
time.
I think that a lot of the things that you have said and
others have said argue strongly in favor of allowing a
company--if they so choose--and allowing companies to choose
not to, to do it--again, similar to what banking does. There
are banks that have chosen to do State charters, and there are
banks that have chosen to do Federal charters, but that is a
different issue.
I am, however, interested, because we will have this
discussion. There are some of my colleagues here who hate the
concept that FIO even exists. They hate the concept of them
even asking questions and trying to put a focus on this
discussion. And for my purposes, I would like to ask each of
you, if you had a choice, if I made you emperor of the
universe, and you could unilaterally make this decision, now,
you only have two choices here. I am not going to give you
multiple choices, because that gets too complicated, and I
don't have that choice. I get to vote red or green, so you may
as well vote red or green.
If your choice was to keep FIO as it is, pretty much with
its authority or limited authority as it is, to have these
discussions, would you repeal it outright? Would you repeal it?
Or would you keep it as is? And, Mr. Cimino, I may as well
start with you.
Mr. Cimino. Yes, we would support a strong, effective FIO
as it currently stands.
Mr. Capuano. Mr. Ehlert?
Mr. Ehlert. I think FIO definitely has a role in the
international market. And we would support FIO in that market,
as well.
Mr. Capuano. Mr. Hughes?
Mr. Hughes. We absolutely support FIO.
Mr. Capuano. Mr. Jensen?
Mr. Jensen. FIO as it stands.
Mr. Capuano. Mr. Nutter?
Mr. Nutter. FIO, yes, with the authority they have for
covered agreements in particular.
Mr. Capuano. Mr. Restrepo?
Mr. Restrepo. FIO as it is.
Mr. Capuano. Mr. Sinder?
Mr. Sinder. We have been big supporters of FIO since day
one.
Mr. Capuano. Mr. Zielezienski?
Mr. Zielezienski. Yes, we support FIO, and believe it has a
crucial international role.
Mr. Capuano. That is all I wanted to hear, because to be
perfectly honest, we will continue this discussion about how--
because, again, as I said earlier--I am sure you all hear me--I
do believe that slowly but surely over time we are going to
come to a more federalized system. I don't think we will ever
get to a fully federalized system. I don't even think I really
want that.
But I think we are going to go that way. We have already
started. You know that as well as I do. It is inevitable, and
with your help, we will be able to get there in a thoughtful
way as opposed to a fits and starts way.
My hope is that it gets done absent the financial crisis.
We all know that financial crises--and there will be another
one someday, hopefully not in my lifetime, but there will be--
don't always result in the best reaction by Congress. I think
things are better done in a thoughtful manner, and my hope is
that FIO allows us or encourages us to have this discussion as
we move forward, and I hope that you all participate in that.
And again, thank you for what you have done here today.
Mr. Luetkemeyer. I thank the gentleman. And you notice
today so far that our panel has had some softball questions
from us. We recognize you have us outnumbered, so we are going
to behave ourselves.
And with that, we go to the gentleman from California, if
he is ready, Mr. Royce.
Mr. Royce. I want to thank Mr. Sinder for his statement on
the IRS move to issue supplemental regulations, implementing
FATCA. Non-cash-value insurance products are not vehicles for
tax evasion and should not be treated as such. I have mentioned
this issue to the FIO and to the Treasury. And I would like to
work with you to ensure that the reporting requirements do not
apply to these products.
But I am sure many of you attend NAIC meetings on a regular
basis, and I did want to ask you a question, Mr. Hughes. I was
hoping you could comment on whether NAIC committees and
subcommittees all always follow the open meetings policy
mentioned in my questioning to the first panel, and
specifically, if you or a member of your trade participated in
the executive committee meeting via conference call on October
25th regarding the master death file, and do you feel that
meeting was open? And I would ask if any others would care to
comment?
Mr. Hughes. You put your finger on an issue that is
significant to us. The role of the NAIC has grown substantially
over the years, and governance has not kept pace with it. So we
are very strong believers that the NAIC needs to have due
process and accountability. The things it is doing today,
whether you are talking about open meetings or pushing for
accreditation standards that essentially have the force and
effect of law, we think it is imperative that the NAIC do
something along the lines of what you would have in any State,
which is your administrative due process statute. So we are
very strong proponents of engaging the NAIC in a constructive
discussion on how to improve governance.
Mr. Royce. I think transparency is important and it is done
at the State level. And it is not done here. The other
question, Mr. Hughes, and I would ask you and others if you
could please outline in your view what the costs are to
consumers of the lack of uniformity in State insurance
regulation, because I remember well the original quote by the
original NAIC Commissioner back in the late 1800s about the
ideal of having for the consumer--having uniform regulation
everywhere.
That was the original goal. That goal has never been
achieved. What about the costs to the consumer as a
consequence?
Mr. Hughes. From our perspective, the costs are
significant, and they are passed along in our pricing to
consumers. You may recall that former FDIC Chair Sheila Bair
did a study some years ago that analyzed this, and reached the
same conclusion that McKinsey did, that there are substantial
cost savings that could be realized if the system were uniform
from one jurisdiction to another.
Mr. Royce. Let me ask Mr. Sinder that same question, should
he want to comment on it.
Mr. Sinder. I agree completely. One of the issues is, at
some level, the NAIC is a confederacy. No one is bound by the
model rules that they issue. And so without the Federal
pressure, it is harder for them to achieve a harmonious,
uniform result.
Mr. Royce. Mr. Cimino, would you like to comment on that,
as well?
Mr. Cimino. Yes, I would be happy to. Thank you for the
question. Given the patchwork system we have in place here, we
ultimately have companies that aren't able to necessarily offer
products throughout the Nation. And so even though there might
be model laws in place, States may adopt them in some form of
derivative, so ultimately it raises barriers and increases
costs.
So not only are consumers not able to necessarily purchase
the products that might suit their needs, but it ultimately
raises barriers, which forces out competitors in the
marketplace. And it is that competitive pressure that lowers
the prices and ultimately serves those consumers.
Mr. Royce. So, you have both factors. Would you hazard a
guess in terms of what the costs are to the consumer, in terms
of the first aspect of the lack of uniformity?
Mr. Cimino. I don't know if I could quantify that cost for
you, sir.
Mr. Royce. Yes, sir?
Mr. Zielezienski. There are certainly costs of non-
uniformity. But I would like to point out that even if it is
uniform, there is inconsistent application. And let's just talk
about product review for a minute.
I remember doing an internal survey of AIA member companies
probably about a decade ago to try to determine how long it
took to get a product to market. And what I learned was there
are costs associated with such a lengthy product approval delay
that the product never made it to market.
So not only are there costs to consumers, but there are
costs to consumers of not having the product option even
available because the time it takes to review it and approve it
at the State level is not worth the investment for the company.
Mr. Royce. It is interesting. If you go back to the
McCarran-Ferguson decision, the decision also said that
insurance is interstate commerce, right? It is part of the
decision. And if you go back to the original reason we gave up
on the Articles of Confederation, maybe some of the
confederates in Congress would still argue this point, but the
reason we have an interstate commerce clause is because of what
was happening between the States with respect to barriers of
entry.
And it became very clear to the architects of this republic
that the reason it didn't work was because we hadn't created a
national market. Instead, we had these tariffs, these barriers
to entry at every State border, and the consumers were the
losers for it.
So the concept behind our system of federalism was that we
would establish one market in the United States, and we are
still struggling with the fact that, with respect to insurance,
we have built in a great disadvantage for our consumers because
of these barrier to entry problems which create then something
of a lack of competition on one hand. You don't have the
efficiencies that would come from a national market driving
down prices. And it is time we, I think, have a paradigm shift
in terms of how we view this and how we come together in order
to get some of these economies of scale and a more competitive
market for insurance to benefit our consumers.
Thank you very much, Mr. Chairman. I appreciate the time.
Mr. Luetkemeyer. Thank you. We have a few statements that
we need to add to the record here: the National Conference of
Insurance Legislators; the American Academy of Actuaries; the
National Association of Professional Surplus Lines Offices;
Lloyds of London; and the Insured Retirement Institute.
Without objection, it is so ordered.
And let me just wrap up here with a few remarks and a
couple of questions. I think that we have--from the discussion
today--seen that FIO's role is still one of evolving into
something that we hope will be a benefit to the industry. All
of you have made comments with respect to, we would like to see
them in their role of protecting our interest internationally,
of staying in that role.
And I would just add that you all are in a position to
really push the agenda and push back on things. And I would
hope that you would encourage them to be leading when it comes
time to do something on the international level, from the
standpoint--we are the big boys on the block. Why do we have to
follow what Europe does or whoever else? Let them follow us. We
need to be leading this situation and not allow our industries
and our markets to be harmed by something internationally, if
we don't like it, then they can conform to us. That would be my
suggestion.
From the standpoint of what goes on within our own country
here, it has been said most of you don't like the capital
standard suggestion from the international folks. A couple of
you have made mention of the fact that you--the risk
classification standards are something that they need to stay
away from.
And I guess my question would be, what is your plan of
action against pushing back on areas where you believe that
they don't need to be involved, or they seem to make
suggestions that they may get involved in? Do you have a plan
of action to do that, Mr. Cimino?
Mr. Cimino. I think it goes to the question that Mr.
Stivers was talking a bit about, which is, how do we better
coordinate this to make sure we have a unified voice? And I
think that most of the folks up on this panel are working
hard--
Mr. Luetkemeyer. It is a pretty unified voice from where I
am sitting here, with all of you today. I am just--there needs
to be some sort of a coordinated plan. I hope that there is one
there. There is this sense I get that you are coordinated, that
you are unified, and that you will work with these folks and
push back on areas where you believe that they will be
encroaching.
Mr. Hughes in particular, you have some interesting areas
where you like what they do, and other areas where you are very
concerned about some of the things they do.
Mr. Hughes. Yes, and I think that the watchword for us is
really ``consistency.''
Mr. Luetkemeyer. Yes.
Mr. Hughes. And I think it is incumbent upon the United
States--if the world would coalesce around us, I think that
would be wonderful. We did weather the crises well, but I think
what we have to do is have the FIO, the States, the Federal
Reserve, and anybody else that is a stakeholder in this,
advocating on the same page with the same message with these
international bodies. At the end of the day, we hope that we
have that consistency globally that we need and that it doesn't
upset our system of regulation.
Mr. Luetkemeyer. As somebody who was in the business for 35
years, it always gives me some trepidation when I see the
Federal Government start to get their nose in the tent. Seeing
what has happened here over the last several years, it seems
like once the nose is in the tent, the Federal Government never
goes away. You have to put up with it from then on.
Mr. Sinder, you had a couple of comments with regards to
TRIA that I was kind of curious about. Your group deals with it
probably more than the rest of these folks, and I was curious,
has the fact that we haven't addressed TRIA as a Congress yet
started to affect your members and their ability to not only
sell their product, but their clients and their ability to do
their business?
Mr. Sinder. Yes, sir, it has. It affects their clients. We
are already seeing--for renewals that are coming up now that
aren't aligned with the calendar year, there are riders on the
policies that say the terrorism coverage will expire on
December 31st absent extension of the TRIA program. So we are
already seeing it. You have policyholders who are buying
partial coverage because they can't get the rest.
Mr. Luetkemeyer. And, Mr. Hughes, you talked about covered
agreements. That is where--I want to go to, I think, Mr.
Nutter. Can you give me just a little background on that really
quick, exactly what you are talking about and how FIO can be
impactful for you?
Mr. Nutter. You asked a question a minute ago about a plan
in dealing with concerns about European-driven capital
standards. The Congress included in the Dodd-Frank Act the
authority for FIO to enter into covered agreements, so think of
them as treaties, not subject to Senate approval, but subject
to a whole host of checks and balances, including review by
this committee, the House Ways and Means Committee, and the
Senate Banking and Senate Finance Committees, both when they
are initiated during the course of them, and then when they are
concluded, as well as the involvement of the NAIC or the
Commissioners in that process.
It clearly is a way to deal with the mutuality that you
would want between regulatory officials both in the E.U., in
Bermuda and Switzerland, and other major trading partners. So
it does seem to be the one operating authority that FIO has
that can deal with issues beyond the narrow issue that is often
characterized as dealing with collateral or security on
reinsurance transactions.
Mr. Luetkemeyer. Very good. With that, I am finished with
my questions. I think the panel is also finished. I would like
to thank each of you for being here today. I appreciate your
testimony. It has been very insightful. While we didn't have,
perhaps, as many people here as you may have thought, your
testimony is extremely important from the standpoint of drawing
conclusions from what your industry believes is important, what
you want us to focus on, and your priorities so that we can
work with you to try and come up with some good solutions here.
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.
And without objection, this hearing is adjourned.
[Whereupon, at 1:14 p.m., the hearing was adjourned.]
A P P E N D I X
February 4, 2014
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