[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON THE
COMPETITIVENESS OF U.S.
INSURERS_PART II
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 25, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-76
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
BLAINE LUETKEMEYER, Missouri, Chairman
LYNN A. WESTMORELAND, Georgia, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico WM. LACY CLAY, Missouri
BILL POSEY, Florida AL GREEN, Texas
ROBERT HURT, Virginia GWEN MOORE, Wisconsin
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
DENNIS A. ROSS, Florida JOYCE BEATTY, Ohio
ANDY BARR, Kentucky DANIEL T. KILDEE, Michigan
KEITH J. ROTHFUS, Pennsylvania
ROGER WILLIAMS, Texas
C O N T E N T S
----------
Page
Hearing held on:
February 25, 2016............................................ 1
Appendix:
February 25, 2016............................................ 37
WITNESSES
Thursday, February 25, 2016
Cobb, Carolyn, Vice President and Chief Counsel, Reinsurance and
International Policy, American Council of Life Insurers (ACLI). 10
Thompson, Gary, President and Chief Executive Officer, Columbia
Mutual Insurance Company, on behalf of the National Association
of Mutual Insurance Companies (NAMIC).......................... 5
Torti, Joseph III, Vice President, Regulatory Affairs, Fairfax
Financial Holdings Limited, on behalf of the Property Casualty
Insurers Association of America (PCI).......................... 8
Zaring, David, Associate Professor, Legal Studies and Business
Ethics, The Wharton School, University of Pennsylvania......... 6
APPENDIX
Prepared statements:
Cobb, Carolyn................................................ 38
Thompson, Gary............................................... 51
Torti, Joseph III............................................ 62
Zaring, David................................................ 67
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the American Insurance Association...... 79
Williams, Hon. Roger:
Written responses to questions for the record submitted to
Gary Thompson.............................................. 81
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON THE
COMPETITIVENESS OF U.S.
INSURERS--PART II
----------
Thursday, February 25, 2016
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Royce,
Garrett, Pearce, Posey, Stivers, Ross, Barr, Rothfus, Williams;
Cleaver, Green, Moore, and Beatty.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representative Duffy.
Chairman Luetkemeyer. The Subcommittee on Housing and
Insurance will come to order. Without objection, the Chair is
authorized to declare a recess of the subcommittee at any time.
Today's hearing is entitled, ``The Impact of International
Regulatory Standards on the Competitiveness of U.S. Insurers-
Part II.''
Before we begin, I would like to thank the witnesses for
appearing before the subcommittee today. We look forward to
your testimony. I now recognize myself for 3 minutes to give an
opening statement.
This subcommittee has spent a great deal of time focusing
on international factors affecting our domestic insurance
markets. Today's hearing provides an opportunity to hear from
the industry firsthand on implications, both positive and
negative, stemming from international insurance standards and
agreements.
Today's hearing will also focus on draft legislation that
would create a more formalized role for congressional
monitoring of these standards and agreements. This legislation
has been drafted with the input of a wide variety of
stakeholders, and today's testimony will help to improve the
bill before it is introduced.
Legislation discussed today would establish a series of
reasonable requirements to be met before Treasury's Federal
Insurance Office (FIO), the Federal Reserve, or any other party
to these international conversations could consent to the
adoption of any final insurance standard. Similar standards
would be set for negotiations on covered agreements, including
the covered agreement currently being negotiated with the
European Union.
The draft also outlines a more robust role for the FSOC
independent member with insurance expertise, strengthening Team
USA in its ability to advocate for policies that suit U.S.
insurance markets and consumers.
This bill is not intended to bring the international
process to a grinding halt. Team USA has experienced victories
at the International Association of Insurance Supervisors
(IAIS) and has kept this body informed of its intent to
negotiate the first of what could be many covered agreements.
We should not underestimate the importance of these
conversations or the implications that they have on insurers.
The higher loss absorbency draft rule and lingering questions
around temporary equivalency for U.S. insurers conducting
business in the European Union have demonstrated that the
United States hasn't always ended up with the best deal.
It is imperative that the United States, that is the
States, the Executive Branch, and Congress work cooperatively
to signal to the IAIS, the Financial Stability Board, and
foreign governments that we will only lend our name to
standards and agreements that benefit U.S. consumers and allow
us to maintain a robust insurance marketplace.
This draft legislation aims to do just that. It will
provide greater transparency, allow for a stronger Team USA,
and indicate to foreign bodies the United States will lead and
not be led.
I thank our distinguished panel for being here today. We
look forward to your testimony and your comments about the
discussion draft.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Missouri, Mr. Cleaver, for an
opening statement.
Mr. Cleaver. Thank you, Mr. Chairman. Chairman Luetkemeyer,
members of the subcommittee, I would like to begin by thanking
our witnesses for their appearance here today. Today's hearing,
``The Impact of International Regulatory Standards on the
Competitiveness of U.S. Insurers-Part II,'' is an opportunity
for an additional look at the insurance standards that are
being developed on an international level through the U.S.'s
participation in the International Association of Insurance
Supervisors and the Financial Stability Board (FSB).
Following the financial crash of 2008, the passage of the
Dodd-Frank Act created the Federal Insurance Office (FIO). FIO
has been tasked with coordinating Federal efforts and
developing Federal policy on prudential aspects of
international insurance matters, including representing the
United States in the IAIS. FIO, along with the National
Association of Insurance Commissioners (NAIC), and the Federal
Reserve has been serving as the U.S. representatives to the
IAIS. It is important to note that no standard agreed to
internationally is binding on the United States unless adopted
domestically.
Our witnesses today will provide the subcommittee with
their perspective on how the discussions on the international
level are proceeding. As members of this subcommittee, it is
important that we remain focused on the work being done
internationally to ensure transparency and stakeholder input. I
look forward to the hearing and their insight.
Thank you, Mr. Chairman. I yield back.
Chairman Luetkemeyer. I thank the gentleman.
The Chair now recognizes the gentleman from California, Mr.
Ross, for 2 minutes for his opening statement.
Mr. Ross. Thank you, Mr. Chairman, and let me say at the
outset that I share the stated goals of increasing transparency
and accountability in international regulatory discussions. I
think we should also be looking at governance and transparency
reforms in domestic regulatory decision-making.
I am concerned, however, that Congress may be exporting the
State versus Federal turf war into the international arena to
the detriment of U.S. companies and consumers. We are at a
watershed moment in international insurance regulation.
The United States has much to gain by moving forward with a
covered agreement on reinsurance collateral with the E.U.
Formal negotiations would give the United States leverage in
discussions about equivalency under the European Solvency II
regime. Simply put, without action, U.S. companies lose. They
are either cut out of the European market or they are forced to
post billions in additional capital, which is then unavailable
to invest in the United States or to invest in emerging
markets.
Reforming arbitrary and discriminatory State reinsurance
collateral laws through a covered agreement has been a
bipartisan goal of this committee since 2010. Representative
Kanjorski, the architect of the key language that we put into
Dodd-Frank, on this said that, ``Covered agreements and pre-
emption were designed to harmonize reinsurance standards across
national borders.'' That was the goal.
These covered agreement negotiations, I might add, are
already subject to substantial congressional oversight,
including a 90-day layover period, so there is little we need
to fear in terms of a lack of transparency.
In conclusion, Mr. Chairman, there is widespread agreement
on the issues related to domestic capital standards and
increased transparency in international negotiations. And
respectfully, if we are going to move legislation, we should
stick to those issues and ensure that we are not intruding on
the important covered agreement negotiations already taking
place.
Thank you again, Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields back.
We will now yield 2 minutes, or whatever time she may
consume, to the ranking member of the full Financial Services
Committee, the gentlelady from California, Ms. Waters.
Ms. Waters. I thank you, Mr. Chairman, and I would like to
welcome our witnesses. We are here today to discuss the United
States' participation at international standard-setting
organizations and our efforts to prevent another global
financial crisis. I applaud this work, and I look forward to
continued collaboration on these issues.
Dodd-Frank included several changes to help us prevent the
possibility of a future collapse of large, globally active
insurance companies like AIG. In particular, Dodd-Frank created
the Financial Stability Oversight Council, known as FSOC, an
entity that for the first time is responsible for examining
risks facing our entire financial system.
The FSOC has authority to designate non-bank financial
companies after thorough consideration of several factors
including, but not limited to, insurance companies for enhanced
supervision. Congress likewise gave regulators the authority to
require enhanced standards for these non-bank firms accounting
for the fact that the business model of insurance companies may
demand a different regulatory response.
Dodd-Frank also lays out the Federal Government's role in
coordinating a U.S. response to international issues and
developing Federal policy on prudential aspects of
international insurance matters. These authorities were all
enacted with one goal in mind, to protect financial stability
and prevent the next financial crisis.
I believe that our State-based regulatory system certainly
has its strengths. The California Insurance Department does
particularly good work and tends to set a high standard for the
protection of policyholders.
But I also strongly support the reforms provided by Dodd-
Frank to fill important gaps in oversight and increase
collaboration by ensuring that we are looking at the big
picture, both domestically and internationally. We can help
ensure long-term financial stability while also strengthening
consumer protections as we continue to learn more about
potential risks that insurers can pose to national and global
financial stability. I look forward to continuing our
conversation so that we can be sure we do not repeat the
mistakes of the past.
So I thank you, Mr. Chairman, and I will yield back the
balance of my time.
Chairman Luetkemeyer. The gentlelady yields back. Before we
get started, I just want to explain what is going on here. We
anticipated having some votes shortly, but they have been
postponed now until 3:00, I understand, so we will continue to
go as far as we can. And as soon as they call votes, we will
take a recess.
I understand that they are looking at probably an hour for
votes. And after the completion of those votes, we will come
back and continue our hearing.
So with that, let me welcome the witnesses today: Mr. Gary
Thompson, president and chief executive officer of Columbia
Insurance Group, on behalf of the National Association of
Mutual Insurance Companies; Mr. David Zaring, associate
professor, Department of Legal Studies and Business Ethics, The
Wharton School; Mr. Joseph Torti, III, vice president for
regulatory affairs, Fairfax, Inc., on behalf of the Property
Casualty Insurance Association of America; and Ms. Carolyn
Cobb, vice president and chief counsel for reinsurance and
international policy, the American Council of Life Insurers.
Each of you will be recognized for 5 minutes to give an
oral presentation of your written testimony. And without
objection, your written testimony will be made a part of the
record. A quick tutorial on the buttons in front of you: green
means go; yellow means you have a minute left; and red means
you are out of time.
Mr. Thompson, my fellow Missourian, living just a few miles
up the road, in fact, from where I live, thank you very much
for traveling all the way to D.C. You are recognized now for 5
minutes.
STATEMENT OF GARY THOMPSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COLUMBIA MUTUAL INSURANCE COMPANY, ON BEHALF OF THE
NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)
Mr. Thompson. Good afternoon, Chairman Luetkemeyer, Ranking
Member Cleaver, and members of the subcommittee. Thank you for
the opportunity to speak to you today.
As you said, my name is Gary Thompson and I am president
and chief executive officer of Columbia Mutual Insurance
Company, a mid-sized regional company headquartered in
Columbia, Missouri. We are an insurance group which does
business in 14 States and is licensed to do business in 22
States. For over 140 years, it has been our mission to build
enduring relationships with our customers by providing value
and exceptional service and fulfilling our promises.
I am also here today in my capacity as a member of the
board of directors of the National Association of Mutual
Insurance Companies. NAMIC is the largest property and casualty
insurance trade association in the country with more than 1,400
member companies representing 40 percent of the U.S. property
and casualty insurance in the marketplace.
Both Columbia and NAMIC are very appreciative of this
subcommittee's focus on international insurance issues and
commend Chairman Luetkemeyer's efforts in crafting this
discussion draft legislation.
We have serious concerns about recent efforts to create
international regulatory standards for insurance companies and
believe Congress should conduct strong oversight in this area
in order to protect domestic insurance markets, companies, and
especially policyholders. We need lawmakers to weigh in on the
debate on the side of defending the existing State-based
regulatory structure that we know to be time-tested and strong.
Since the financial crisis, the G20 Financial Stability
Board and the International Association of Insurance
Supervisors have become increasingly engaged in regulatory
standard-setting for insurance companies ostensibly in the
interest of providing global financial stability and regulatory
harmonization. The primary example of this is the IAIS work on
a new global capital standard for internationally active
insurance groups.
Today, we have heard no real justification of a need for
this type of one-size-fits-all standard and are skeptical of
regulation uniformity for uniformity's sake. We need our
country's officials who engage in these international
conversations to speak in defense of the U.S. market, existing
regulatory structure, insurers, and especially policyholders.
Columbia is not an internationally active insurer, but our
company and companies like ours are concerned about forcing
uniformity across very different regulatory environments with
very different economic and political goals. The chief concern
is the eventual importation of foreign regulatory standards for
all companies which supplant or duplicate existing standards
that we know to be effective and which have served our consumer
and insurer needs for more than a century.
Congress has a critically important role to play in helping
ensure that the United States is appropriately represented in
these international discussions. Given the direction of many of
the conversations at the IAIS, we believe that legislation is
not only timely and appropriate, but necessary. Any legislation
must make clear that our existing State-based regulatory system
is effective and must be defended and preserved.
We believe the discussion draft legislation represents a
good starting point. In my written statement, I have provided a
detailed section-by-section analysis of the many positive
provisions currently included in the bill. However, I would
like to highlight what we see as the necessary improvements to
further strengthen the bill before introduction.
First, the bill needs to clearly acknowledge that any
international standard is not self-executing and is entirely
without legal effect in the United States until implemented
through a Federal or State legislative or regulatory process.
Clear language to this effect should be added.
Given that the outcomes of these international standard-
setting discussions are not binding, a second addition should
include language that prevents participating Federal officials
from agreeing to any standards which would require any
additional changes to current State or Federal law.
These international organizations have no legal authority
and our officials have no business even appearing to obligate
the United States to any standard that does not conform to laws
and regulations established here at home.
Finally, we urge the committee to include covered
agreements under the guidelines and processes laid out in the
discussion draft. Covered agreements have unprecedented
authority that will pre-empt State law and could be used as a
back channel to alter insurance regulation in this country.
These agreements are absolutely in need of robust monitoring,
stakeholder input, and congressional consultation on direction.
As we move forward, NAMIC stands ready to work with the
committee to include what we see as necessary improvements to
the discussion draft. Again, thank you for the opportunity to
speak here today, and I look forward to answering any questions
you may have.
[The prepared statement of Mr. Thompson can be found on
page 51 of the appendix.]
Chairman Luetkemeyer. The gentleman yields back.
With that, Mr. Zaring, you are recognized for 5 minutes.
You may begin.
STATEMENT OF DAVID ZARING, ASSOCIATE PROFESSOR, LEGAL STUDIES
AND BUSINESS ETHICS, THE WHARTON SCHOOL, UNIVERSITY OF
PENNSYLVANIA
Mr. Zaring. Good afternoon, and thank you for having me. I
am an associate professor of legal studies and business ethics
at The Wharton School. I study financial regulation and in
particular international financial regulation, a field of
growing importance and one that has already transformed the way
that banks and capital markets are regulated. It is a field of
increasing importance to insurance as well.
In my testimony today on international cooperation in
insurance standards, I would like to focus on three points. The
first is that international financial regulatory standards
protect American consumers and American financial stability in
two ways. International standards create a level playing field
for financial market participants when they expand their
businesses abroad and can also prevent disruptive financial
contagion that starts elsewhere from affecting the American
marketplace.
Until recently, international insurance regulation was a
relatively quiet field, but in the wake of the financial crisis
that has changed. And we should generally welcome the new
vibrancy in institutions like the Financial Stability Board and
the International Association of Insurance Supervisors in
creating consistent capital standards and supervisory
approaches for insurance companies, many of whom do business at
home and abroad.
Second, it is important to remember that the United States
has traditionally played a very strong role in formatting and
formulating standards in matters of international regulatory
cooperation, a role that would be threatened by legislation
that ties the hands of its representatives.
American regulators have substantially increased the degree
of transparency of the international efforts to develop common
capital standards for banks. They have also had a very large
say in the sort of capital standards chosen. And they have set
the terms of regulatory cooperation by capital markets
overseers. It could hardly be otherwise given the size and
strength of the American economy.
On the other hand, where American regulators have not fully
engaged in the international process they might find themselves
in a position where they must later accept standards that have
been designed without their input, as the Securities and
Exchange Commission has come perilously close to finding with
regard to the development of international accounting
standards.
It is all but assured that representatives who represent
everyone engaged with the domestic insurance industry would
play a critical role in international insurance regulation
given the size, strength, and importance of the American
insurance market. But if their ability to negotiate is
curtailed, or if there are too many voices at the table, then
their influence will likely also be curtailed and confused as
well.
Third, while the importance of a transparent and open
administrative process is undoubtedly significant, the best
sort of transparency and democratic accountability is provided
by legislative authorization to engage in international
negotiation at the beginning of the process followed by
domestic implementation through regular administrative
procedure at the end of it.
No global terms will be imposed upon American insurers
until American regulators adopt capital or other rules through
notice and comment on a State-by-State basis, subject to State
administrative law or by the Federal Reserve, subject to
Federal administrative law.
In the past, American regulators have tailored
international standards to meet the needs of the American
market. The Federal Reserve, for example, came up with a two-
stroke procedure for implementing the second iteration of the
Basel Capital Accord.
In my view, it is important to remember that nothing binds
American consumers or market participants until American
regulators come home and go through the traditional rulemaking
process with notice and comments.
Attempting to add a new set of procedural obligations on
top of this to the middle of a process that begins with
congressional authorization and ends with domestic notice-and-
comment rulemaking, would likely be both burdensome and
counterproductive.
In particular, forcing regulators to repeatedly hold notice
and comment both before and during their international
negotiations is a bad way to negotiate effectively. And just as
no business or agency opens every meeting or deliberation to
any shareholder or stakeholder who wants to show up, it is
difficult to see why international standard-setters would
benefit from a process where every meeting was open to
observation by anyone at any time.
I look forward to your questions.
[The prepared statement of Mr. Zaring can be found on page
67 of the appendix.]
Chairman Luetkemeyer. Mr. Torti, you are recognized for 5
minutes.
STATEMENT OF JOSEPH TORTI, III, VICE PRESIDENT, REGULATORY
AFFAIRS, FAIRFAX FINANCIAL HOLDINGS LIMITED, ON BEHALF OF THE
PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)
Mr. Torti. Thank you, Chairman Luetkemeyer, Ranking Member
Cleaver, and members of the subcommittee. My name is Joe Torti.
For 13 years, I was the Rhode Island superintendent of banking
and insurance. I am now the vice president of regulatory
affairs for Fairfax, testifying on behalf of the Property and
Casualty Insurers Association of America (PCI).
Fairfax is a diversified international company that
includes insurance operations that write everything from Main
Street business in the United States to Odyssey Re that
provides reinsurance to risk located in more than 100
countries. PCI represents nearly 1,000 insurers and reinsurers
in the United States and around the globe.
PCI supports the subcommittee's efforts to draft consensus
legislation clarifying congressional intent on insurance
regulation and international representation. We appreciate and
support the chairman's ongoing leadership and improving
legislative drafts.
Congress, in the Dodd-Frank Act, affirmed the State-based
regulation of insurance and the McCarran-Ferguson Act in
support for the States' historic focus on consumer and
policyholder protection. But there have been a number of
emerging gray areas as the new regulatory roles have evolved
where additional congressional clarity could be very helpful.
I can tell you from personal experience as both a bank and
insurance regulator that the two supervisory perspectives can
be dramatically different, for examples, on issues such as
capital leveraging and liquidity risk or the more holistic
issues of macroeconomic stability versus policyholder
protections.
Congressional oversight has been very helpful to the
evolving U.S. process, particularly in encouraging regulatory
cooperation and transparency. By working towards bipartisan
legislation, Congress can help ensure that our Team USA
regulators have the same priorities and objectives and greater
congressional clarity in carrying out their missions.
This in turn will improve the likelihood of efficient and
effective outcomes in international insurance regulatory
deliberations. PCI therefore appreciates the interest and
leadership by Chairman Luetkemeyer and the members of the
subcommittee and full committee towards that end.
For nearly 150 years, the States have regulated insurance
and coordinated their activities through the National
Association of Insurance Commissioners. As a former chief
regulator from the State of Rhode Island, I know what effective
regulation requires and how very well my State colleagues have
done, including during the last financial crisis.
This success is not just an accident. The U.S. insurance
regulatory system has been so successful because it focuses
upon the end user, the consumer. So we strongly support
congressional emphasis on the importance of putting consumer
protection first, as does our State-based regulatory system.
In recognition of this strong performance of State
regulation, Dodd-Frank reiterated the primary supervisory role
of the States. However, it also created the Federal Insurance
Office (FIO) in the Treasury and gave the Federal Reserve Board
limited regulatory authority over certain categories of
insurers.
Unfortunately, without more congressional guidance on their
objectives and priorities, our U.S. and State representatives
can have conflicting perspectives and priorities. For example,
FIO, the Federal Reserve, and State regulators took divergent
actions on whether to eliminate consumer group and stakeholder
involvement in IAIS working groups. Both transparency and
accountability have since suffered. It is important that the
United States be at the table, but it is equally important that
our representatives be on the same page.
Accordingly, we support congressional clarity to encourage
greater collaboration and consensus among regulators and to
reverse the trend towards closing doors to consumer groups and
other public stakeholders. PCI particularly supports a united
effort in the negotiation of international covered agreements.
The European Union's new regulatory system that they are
beginning to implement, Solvency II, requires discriminatory
regulation against insurers and reinsurers from third countries
unless the third country is deemed to be equivalent, a highly
prescriptive process.
We are pleased that the Treasury and USTR have indicated
that they will push for recognition of U.S. regulation by the
E.U. in connection with their discussions with the E.U and do
not intend to exceed their negotiating authority with respect
to agreeing to domestic regulatory changes. Mutual recognition
is a critical priority for Fairfax to avoid discrimination. We
appreciate the congressional encouragement towards that goal.
In conclusion, the international insurance regulatory world
has evolved in ways that may not reflect congressional intent
to support the strength and competitiveness of the U.S.
insurance market and its consumer-focused State-based
regulatory system.
PCI commends this subcommittee for your efforts to date and
urges committee members to work together towards bipartisan
consensus on the Luetkemeyer draft and similar efforts to
clarify congressional intent and improve international
insurance regulatory deliberations and outcomes.
I look forward to your questions.
[The prepared statement of Mr. Torti can be found on page
62 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Torti.
And Ms. Cobb, you are recognized for 5 minutes.
STATEMENT OF CAROLYN COBB, VICE PRESIDENT AND CHIEF COUNSEL,
REINSURANCE AND INTERNATIONAL POLICY, AMERICAN COUNCIL OF LIFE
INSURERS (ACLI)
Ms. Cobb. Thank you, Mr. Chairman. Chairman Luetkemeyer,
Ranking Member Cleaver, and members of the subcommittee, my
name is Carolyn Cobb. I am vice president and chief counsel of
reinsurance and international policy at the American Council of
Life Insurers. I am pleased to present this statement on its
behalf.
Life insurers are essential to helping families achieve
retirement security. Guaranteed lifetime income solutions
provided by life insurers are the building blocks of secure
retirement. Life insurers investments are also a powerful
source of long-term capital and economic growth.
That is why the development of international capital
standards by the Federal Reserve Board and the International
Association of Insurance Supervisors could have a significant
impact. These standards must be appropriate for insurers, and
they must be consistent with the long-term horizon of life
insurance products that provide guarantees lasting many
decades.
This committee and the entire Congress affirmed this
principle by unanimously passing the Insurance Capital
Standards Clarification Act of 2014. ACLI thanks the chairman,
the ranking member, and this committee for your strong
leadership in support of that legislation. It gave the Federal
Reserve Board flexibility to tailor an insurance capital
standard to the insurance business model.
ACLI commends the Fed for its plan to conduct formal
rulemaking with notice and public comment and for its many
public statements, including before this committee, that it
intends to exercise the discretion authorized by Congress to
tailor capital standards for insurance companies.
The Board's domestic process, however, cannot be rushed or
confused by the development of international capital standards.
The United States should conclude its process before agreeing
to any international standards. This sequencing is critically
important. It will equip Team USA with a strong unified
position in any IAIS or FSB discussions and so will be more
likely to have the best outcome. We want the Fed's process to
inform the IAIS and not the other way around.
U.S. Federal agency leadership by Treasury and the Fed, in
strong partnership with our State insurance regulators, is more
important than ever before. The full involvement of Treasury
and the Board in FSB and IAIS discussions and decisions is
essential to influencing the international process and to
ensuring those standards reflect the unique strengths of the
U.S. system for insurance regulation. Any restriction, even
inadvertent, on the ability of Team USA to participate in
international standard-setting organizations would in no way
protect U.S. insurers or U.S. insurance consumers.
We are also concerned that the IAIS is currently treating
certain types of annuities as systemically risky. They are
called variable annuities. They provide guaranteed income in
retirement. These products have been approved and regulated by
our State supervisors. They have provided retirement income to
U.S. consumers for over 60 years. They must not be placed at a
competitive disadvantage by international capital standards.
The principle should be that all insurance products,
whatever their country of origin, if they have similar risk
characteristics, they should be treated the same. We appreciate
Team USA's continued focused attention to this concern.
ACLI commends Chairman Luetkemeyer and other members of the
committee for their development of the discussion draft. It
reflects the principles of transparency, accountability, and
due process that ACLI supports. It improves congressional
oversight over international standard-setting initiatives and
expresses clear objectives for them, maintaining the ability of
the U.S. insurance industry to offer the products on which U.S.
consumers rely. These important goals are shared by ACLI.
ACLI would suggest some refinements to the discussion draft
for the committee's consideration. They will be consistent with
the view that any restriction on the ability of Team USA to
participate fully at international standard-setting
organizations would be harmful to U.S. interests.
ACLI thanks the committee for its leadership on this
legislation and looks forward to working with it on suggested
changes.
Thank you, Mr. Chairman, for holding the hearing. I
appreciate the opportunity to testify and look forward to
questions.
[The prepared statement of Ms. Cobb can be found on page 38
of the appendix.]
Chairman Luetkemeyer. Thank you, Ms. Cobb. You all did a
great job. Everybody came in under time. Thank you very much.
Let me begin the questioning this afternoon with probably
an opening comment in that there is a lot of interest and a lot
of concern with regards to our ability to negotiate and what is
being negotiated at the international level. And this is the
reason why we are here this afternoon. That is the reason for
the bill.
I have had multiple Members come to me with concerns and so
we have tried to draft something that addresses a lot of their
concerns as well as listen to the concerns of the industry and
continue to work with you as this is a draft, and we want to
continue to listen to your concerns.
So let me begin first by asking a question. All of you seem
to have answered it, but I want to put you on record because I
think it is important. Do you believe we need a FIO or to have
someone representing the United States at these international
discussions?
Mr. Thompson?
Mr. Thompson. Yes, we do.
Chairman Luetkemeyer. Mr. Zaring?
Mr. Zaring. Yes, we do.
Chairman Luetkemeyer. Mr. Torti?
Mr. Torti. Yes, we do, with the support of State
regulators.
Chairman Luetkemeyer. All right.
Ms. Cobb?
Ms. Cobb. Yes, we do.
Chairman Luetkemeyer. You mentioned it multiple times in
your discussions, but it is a formality, and I need to get that
on record.
We also have an independent member that we also address in
our bill that is a member of FSOC, which really doesn't have a
lot of input but we believe needs to be a participant in the
process at IAIS discussions. Do you believe that it is
important that that member also be at the table?
Mr. Thompson?
Mr. Thompson. Yes, sir, it is absolutely critical, as that
individual is really the only individual with really deep
insurance knowledge to lend itself to those discussions, so
absolutely yes.
Chairman Luetkemeyer. Thank you.
Mr. Zaring?
Mr. Zaring. I think that voting role can be filled by the
Federal Insurance Office and having too many American
representatives at--
Chairman Luetkemeyer. Yes. Our bill doesn't give him a
voting role, really. It just gives him a participant role where
he can be at the meetings, which he cannot be in right now.
Mr. Zaring. No, no, I mean, his voting role on FSOC, but
maybe I should be clear. I think the Federal Insurance Office
representative who Chairs the head of the office as a whole can
do a sufficient job in representing American interests in a
coordinated way without the input of the member, which I am
sure he gets anyway.
Chairman Luetkemeyer. Mr. Torti?
Mr. Torti. I believe the independent expert plays a
critical role and should have a participatory participation in
the process.
Chairman Luetkemeyer. Okay.
Ms. Cobb?
Ms. Cobb. The independent member has made significant
contributions to discussions at various levels. We have not
concluded our review of that portion of the bill.
Chairman Luetkemeyer. Okay. Thank you. Mr. Thompson, you
had a couple of different comments which we have a clause or a
section of this that discusses covered agreements. We also have
a section in your written testimony where you talk about
concerns about the cost-benefit analysis, and I think we also
have that covered in our bill.
Do you not believe that we covered it adequately in our
bill? Do you want to expand it or what are your concerns? Or
did you not see those portions that I think we had covered in
there?
Mr. Thompson. Yes. As we said, Mr. Chairman, we think the
bill goes a long ways, and we did suggest a couple of what we
view as improvements of that and particular language around
this issue of covered agreements. We absolutely think that
there is a place for covered agreements. Don't misunderstand.
And that U.S. negotiators should be at the table discussing
those.
But we also believe that should be done in a very
transparent process because our concern is that they do have
that unprecedented power to exempt State law. And without the
proper oversight and regulatory process, we are concerned that
those such agreements could be in conflict with State laws.
Chairman Luetkemeyer. One of the things that we want to try
and do, and we have been discussing and it hasn't completely
gotten itself into the draft yet, it was a way for Congress to
be able to approve those commitments that are made by the FIO
Director. I think it is important that there is somebody on
this side of the pond to be able to give a yes or no or thumbs
up on some of this stuff without--we don't want to gum up the
system.
But by the same token, I think part of our job here in
Congress is not just to legislate but to provide oversight,
because all four of you asked for us to do that in your
testimony today. And so I think it is something that we need to
do is to be able to be--and in your situation, Mr. Thompson,
when you talk about the covered agreements also sort of pre-
empting State law, I think we need to have somebody here on
this side of the pond to be able to say, hey, we believe this
is a good deal or a bad deal and be able to say thumbs up or
thumbs down.
So I guess my question is, do you believe that Congress
needs to be involved in sort of approving the agenda or
whatever comes out of the negotiations with the FIO Director?
Mr. Thompson. Yes, sir, we do. And that is the suggestion
we spelled out in my written testimony for the committee to
consider. It is a process by which that would do it. Not to
delay the process, but to simply do as you suggest, Mr.
Chairman, to bring those out so that there is an opportunity to
review those to make sure there is not conflict with State law.
And if there is, a process then that can be resolved to address
those conflicts.
Chairman Luetkemeyer. Mr. Zaring, do you agree with that? I
am running out of time. Please, yes or no?
Mr. Zaring. I don't think I agree with that as things stand
right now, though I know the process is evolving.
Chairman Luetkemeyer. Okay.
Mr. Torti, do you think Congress should be able to approve
or disapprove those actions to make sure that they are not in
conflict with what goes on over here?
Mr. Torti. Yes, I do.
Chairman Luetkemeyer. Ms. Cobb?
Ms. Cobb. We need a covered agreement with the European
Union and the current law gives Congress the power to reject
it.
Chairman Luetkemeyer. Okay. Thank you very much. My time
has expired.
I yield to the ranking member of the subcommittee, Mr.
Cleaver from Missouri, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Thank you for your
questions. When you look at all of the multiple bills that have
been submitted here in the House, and I am sure you have read
all of them instead of probably watching movies but how are we
going to strike a balance in terms of transparency and
accountability?
Mr. Torti, you know, we don't get what we really want in
negotiations. We get what we negotiate. And so I am wondering,
number one, should our negotiators have flexibility as they are
sitting down? And number two, it is just the same question
about chronic accountability. How do we strike a balance
between encouraging transparency and accountability and then
overly narrowing our negotiators' ability?
Mr. Torti. I think we can strike that balance. It is very
important that we be granted, that the United States be granted
equivalency, that the U.S. system be seen as equivalent to
Solvency II in order for us as the insurance industry to have a
competitive environment and to be able to compete with European
Union companies.
Closing working group meetings where the stakeholders, the
insurance industry and consumers are not allowed to witness the
deliberations could lead to a conclusion or a standard that
perhaps is not appropriate or not the best standard for
protection of consumers or in the best interests of a
competitive marketplace.
So I think you can strike that balance. There is a process
here where your congressional hearings are all open to the
public and very transparent and it just doesn't work that way
at the IAIS. And it is very opaque and as stakeholders we need
to be at the table and be able to witness what type of
deliberations are going on and what type of decisions are being
made. And I think our input would add greatly to the strength
of the outcome of those deliberations.
Mr. Cleaver. I have a friend who is a Federal judge, and he
says the worst thing that has ever happened to the judicial
process in this country was bringing television cameras into
the courtroom, that you get a production instead of a trial. I
am for the transparency, but I am just struggling with, how do
you ensure transparency without inhibiting the negotiations?
Yes, sir, Mr. Thompson?
Mr. Thompson. Mr. Cleaver, if I may add to Mr. Torti's
comments to respond to that, you said at the beginning that
oftentimes in negotiations neither side gets exactly what they
wanted when they get there, and I completely agree with that.
As a business man I have entered into numerous negotiations and
walked out very much the same way.
Mr. Cleaver. Don't run for Congress.
[laughter]
Mr. Thompson. That is why we think this draft legislation
is very important because it sets forth those guidelines to
Team USA, the Fed and FIO particularly, so that they know what
can be negotiated and frankly what cannot be negotiated. So it
will allow them to focus on those items or areas of negotiation
which they should be allowed to negotiate with.
But yet this committee in this draft legislation sets
boundaries or guidelines around what is off the table, and we
think that is a very helpful process to the negotiation
process.
Mr. Cleaver. Ms. Cobb?
Ms. Cobb. A covered agreement, which I think is what you
are asking about, is essential to protect the competitiveness
of U.S. insurers. And in my view, and I have read that statute
many times. I don't believe that it can be used to import
international standards. So FIO and USTR have given you a
fairly specific list of things that they want to negotiate for
the benefit of U.S. insurers.
This is our first try at a covered agreement. It is an
essential tool for the U.S. insurers to ask their Government to
use to reduce conflict among regulators in different countries.
So I think given the notice that you have had, given that you
get to say no thank you, and given how much the industry needs
this covered agreement, my view is let us see how it works.
Mr. Cleaver. I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we will go to the gentleman from California, the
chairman of the House Foreign Affairs Committee, Mr. Royce, for
5 minutes.
Mr. Royce. Thank you again, Mr. Chairman. Mr. Torti, I have
some questions for you as a reformed insurance commissioner and
much to my chagrin, and I assume yours as well, the NAIC hasn't
prioritized collateral reform. And that is what I wanted to
talk to you about because in 2011, the NAIC certified the
reinsurer provisions. They are still not an accreditation
standard. A long time has passed and a third of States haven't
modernized their laws, including major States like Texas and
Illinois.
Moreover, States who have modernized their reinsurance laws
have not done so in a uniform fashion, unfortunately. So Mr.
Torti, in November of 2014 you told NAIC's Reinsurance
Taskforce that you believed that uniformity is an important
consideration and that this should be taken to the
accreditation committee for further discussion.
But then NAIC testified to us last September that it was
going to in November start the conversation about accreditation
for credit for reinsurance--``That is a hammer we have.'' So
with the model passed in 2011, seasoned 3 years, then referred
to by you as an important consideration in 2014, shouldn't the
accreditation conversation have been finished rather than
beginning in 2015? And why didn't the NAIC listen to you and go
forward and prioritize this?
Mr. Torti. Thank you for that question, Congressman. I just
want to clarify I no longer represent the NAIC. I cannot speak
for the NAIC at--
Mr. Royce. But you can speak as a former regulator. I am
just trying to get to a point.
Mr. Torti. I can explain the accreditation process and I
can give you just a very brief description of why, in 2011, it
wasn't immediately ratified or considered to be an
accreditation standard. Generally, the way the accreditation
program works is that if a State implements a more stringent
requirement than the accreditation requirement, it is in
compliance with the accreditation program.
But prior to the implementation of the new credit for
reinsurance standard 100 percent collateral was the standard
which was considered to be a higher standard than the--
Mr. Royce. Okay. Let me ask you this, then. Given NAIC's
inability to act in the 6 years since Congress made this a
priority, I assume you now support Treasury negotiating a
covered agreement on collateral and using this as leverage in
the equivalence discussion?
Mr. Torti. I do support equivalency and mutual recognition
being the primary concern in the covered agreement discussions.
It is absolutely necessary as an industry that we attain
equivalency so that we are not disadvantaged--
Mr. Royce. Right. But do you--
Mr. Torti. --when operating--
Mr. Royce. Do you support Treasury negotiating that covered
agreement?
Mr. Torti. I do.
Mr. Royce. Okay.
Now, I would like to go to Ms. Carolyn Cobb, vice president
and chief counsel, reinsurance and international policies. Ms.
Cobb, the purpose of this hearing is to examine whether
international regulatory standards might be harmful to U.S.
insurers. I would like to clarify that I do not consider the
new covered agreement negotiations to be an imposition of an
international regulatory standard but rather a bilateral
discussion about removing barriers or potential barriers on
both sides of the Atlantic and an acceptance of each other's
domestic supervision.
Indeed, my understanding is that the U.S. insurance
industry broadly favors pursuing the agreement because it is
aimed at resolving the equivalence issue under Solvency II to
the benefit of U.S. insurers operating in the E.U. Is that a
fair statement in your opinion, and does ACLI support the
covered agreement negotiations?
Ms. Cobb. Yes, it is a fair statement. We support the
negotiation of a covered agreement. Our board asked that State
insurance regulators be included in those discussions, of
course, as our prudential supervisors.
Mr. Royce. I thank you.
Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back.
The gentleman from Texas, Mr. Green, is recognized for 5
minutes.
Mr. Green. I will reserve and be heard later.
Chairman Luetkemeyer. Okay.
We will go to Ms. Moore, from Wisconsin. She is recognized
for 5 minutes.
Ms. Moore. Thank you, Mr. Chairman, and thank you, Mr.
Ranking Member. I also want to thank the witnesses for coming
here this afternoon. Let me start out with you, Mr. Thompson. I
was looking at your testimony from the Property Casualty
Insurers and just need some clarification.
You say that when we did the Dodd-Frank Act, we abolished
the Office of Thrift Supervision, which was kind of a culprit
in dropping the ball in terms of their regulatory authority and
transferring its authorities over the thrifts with insurance
affiliates to the Federal Reserve and then created the office
of FIO.
You go on to say that the State supervision is really good
in that there ought to be coordination, but I guess what
confuses me is that you speak about insurers not wanting any
Federal regulatory framework, but it seems to me, if I am
understanding your testimony, you almost say that given the
three different approaches that you have from all of these
supervisors, it is almost compelling us to move in that
direction. I wanted you to sort of clarify what you were saying
in your testimony.
Mr. Thompson. Congresswoman Moore, I apologize. You have
referenced the Property Casualty Insurers of America, and I am
not here representing them, so I want to--
Ms. Moore. Oh, okay.
Mr. Thompson. I am representing the National Association of
Mutual Insurance Companies, so I want to make sure I am
responding to your question appropriately.
Ms. Moore. Okay.
Mr. Thompson. And it is not intended for Mr. Torti? I'm
sorry.
Ms. Moore. Oh, I'm sorry. Mr. Torti is whom I need to
respond.
Mr. Thompson. I am certainly happy to speak. I am certainly
happy to speak to State--
Ms. Moore. Okay. Mr. Torti, can you--I am so sorry.
Mr. Torti. Would you mind just repeating the last part of
that? I didn't catch it.
Ms. Moore. Basically, you observed correctly that Dodd-
Frank sort of shifted regulatory authority from the Office of
Thrift Supervision, which we eliminated and gave part of it to
the Federal Reserve and the other to the FIO. So it seems there
is some sort of gap. But you still say that the State
regulatory framework is the best one and that there is sort of
a resistance for an overarching Federal regulation.
I guess I don't want to falsely conclude from reading this
part of your testimony that you just sort of favor some sort of
Federal insurance regulator.
Mr. Torti. No, that is not the case. The intent of that
statement was to make clear that the reference to the OTS and
moving it over to the Federal Reserve, the part of AIG that did
fail, the financial products division of AIG that did fail was
an OTS-regulated part of that entity.
The insurance sector did very well during the financial
crisis and the State regulatory system performed very well
during the crisis, and that was the point of that section. It
was not to say that there is a need for Federal regulation in
any way.
Ms. Moore. Okay. Well, thank you very much for that.
I guess I do want to ask Mr. Zaring, Professor Zaring a
question about him signing on to the amicus brief in support of
FSOC's final designation on MetLife. I guess I would like for
you to give us a response. The critics will say that the
process for designations and re-designations lacks clarity and
transparency of insurance companies.
Mr. Zaring. Yes. I support the power of the FSOC to make
the kinds of designation that it did in the case of MetLife.
And I think it is a bad idea to impose too many fine-grained
administrative finding requirements on the council before it
makes these designations, which are prudential in nature,
involve macroeconomic forecasts that are difficult to reduce to
costs and benefits and numbers.
And determining, say, a cost-benefit analysis or forcing
the council to do something like that before engaging in a
designation, I think just ties the council's hands and creates
more risks for financial stability and designations that should
have been made that weren't and fewer.
Ms. Moore. My time has expired. Thank you.
Chairman Luetkemeyer. The gentlelady's time is up.
With that, we go to the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman. I appreciate each of
you being here, and I would like to try to get a close view of
just, say, one instance where regulation might disadvantage us,
then take that up to the big view of looking back at the
international standards and choices that might be made there
and then come back to see what the effect might be on our
consumers? And we are going to do that in 5 minutes, so okay.
[laughter]
So Ms. Cobb, I am on page six of your testimony where you
talk about the short-term, yes, this is comments, okay, where
you talk about the short-term view of assets by some of the
regulators and the long-term nature of your products and then
their value as cash equivalents or whatever the capital
standards might be. Is that a fair assessment of your position?
Ms. Cobb. Yes, sir.
Mr. Pearce. Okay. So do you foresee anything that would
come out of the international negotiations which would
disadvantage your products? In other words, could the
international discussion affect your ability to offer those
products safely and in the fashion you have in the past?
Ms. Cobb. With the caveat that the standards that are being
developed internationally are not self-executing, right, they
would have to be--
Mr. Pearce. I understand. But let us say that they got
executed.
Ms. Cobb. Okay. So let us say they got executed. The
principal--there are so many objections to the current version
of it that I sort of don't know where to start, but one thing I
want to call to your attention is that the current framework
disadvantages variable annuities, as I said. And it has many
other, I would say distortions, that need to be corrected.
Mr. Pearce. So if I was reading your testimony correctly,
that U.S. regulators have already described variable annuities
as being subpar products. More or less, they don't favor those.
Is that a correct interpretation of what you said?
Ms. Cobb. U.S. regulators have approved variable annuity
products. The international standard-setters believe they are
systemically risky.
Mr. Pearce. Okay. So there we are at the rub. So we are
simply saying from here you all are contending--Mr. Zaring
might take a different point of view--but basically the
industry is saying, wait. They could do things over there and
keep in mind that they are, the Europeans are implementing for
countries like Estonia, like Latvia, Bulgaria, do they have
highly developed life insurance markets in those low-income
States?
Ms. Cobb. Not to my knowledge, Congressman.
Mr. Pearce. Yes. So we have a completely different market
here. And Mr. Zaring, with respect, you are saying that we
should subjugate our market, which is highly developed. We have
a lot of disposable income. We should not be bailed out. We
shouldn't resist those efforts. We ought to just be there and
then the fact that we are there almost implicates us to enforce
those standards or we are bad faith negotiators. So how do we
resolve that, Mr. Zaring? I see you want to speak. Go ahead.
Mr. Zaring. I would just say that what these international
negotiations are supposed to result in is a modus vivendi
between the European Union which has small undeveloped
insurance markets but also markets served by Allianz and
Generale and enormous global insurance companies and the way
that American insurance companies do business and are
scrutinized by regulators.
And the goal of things like the covered agreement and the
international capital negotiations in general are to come up
with a way that is acceptable for American regulators and
regulators elsewhere in the world that let American insurance
companies do business there and do business at home in a way
that is consistent, that doesn't result in lots of regulatory
differences between countries.
Mr. Pearce. So I--
Mr. Zaring. And I think that the--
Mr. Pearce. --get the drift of what you are saying. So what
would cause me as a voter on the bill not to be concerned that
we are going to have standards implemented which cause
disadvantage to our industry and the ability of people to make
a living and to ensure the future of the life, things which are
not greatly concerned about when the income level reaches a low
enough level like it does in some of the countries around the
world? Why should I not be concerned about that?
Mr. Zaring. I would just say that first, we have done well
in these sorts of negotiations in the past. And second, that
anything we come up with has to go through notice and comment
here, and that is the saving grace for domestic stakeholders
who find that the international process has failed them.
Mr. Pearce. With respect, as I close up and I appreciate
that, I don't share the opinion that we have done that well. I
would look at the recent Iranian negotiation, and I think we
came out total losers on that. We could go back a generation to
the South Korea negotiations. All of these are on nuclear
weapons and we absolutely made North Korea--we made it possible
for North Korea to be a nuclear power based on our
negotiations. So I myself don't feel a sense of comfort.
I yield back, Mr. Chairman. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
We go to the gentleman from Texas, Mr. Green.
Mr. Green. Yes. Thank you, Mr. Chairman.
Chairman Luetkemeyer. Thank you.
Mr. Green. And I thank the witnesses for appearing as well.
In this area of enhancing the oversight ability of Congress, is
there something that is typically expected when we are
negotiating these international agreements in which Congress
would be involved?
Yes, sir?
Mr. Zaring. In my experience, regulators benefit most when
they have authorization from Congress. And in that sense,
congressional involvement is essential at the beginning of the
process. But while the negotiations are ongoing it seems to me
that passing legislation that then requires burdensome
administrative procedural requirements doesn't benefit our
perspective in coming up with the best deal we can in an
organized coordinated way by regulators who are charged with
consulting with stakeholders and interested parties, like the
clients of the other members of the organizations to which the
other witnesses belong.
Mr. Green. Yes, sir?
Mr. Thompson. Congressman, if I could just respond to that,
I guess the question we are struggling with is that FIO and the
Fed are supposed to be representing the U.S. regulatory system
at these international discussions, but they are supposed to be
representing the U.S. regulatory system, U.S. policyholders,
and U.S. companies. And without a consensus view or some type
of due process such as what is put forth in this draft
legislation, how can that important representation be achieved?
That is why we think that this draft discussion is a very
important piece of consideration for the committee.
Mr. Green. Yes, sir?
Mr. Torti. If I may? Thank you, Congressman. The point is
for Congress to set out objectives and goals for regulators so
that we can have a unified approach in these negotiations, and
that will strengthen the U.S. position. The point is not to in
any way tie the hands or put a layer of process that is
unworkable on top of what we currently have through the Dodd-
Frank Act. It is to end up with a unified approach and a
strengthened position by the U.S. negotiators in these
deliberations.
Mr. Green. Under FIO and Dodd-Frank, it appears that the
negotiator, which would be the Director of FIO, is to consult
with the State insurance regulators, is to coordinate Federal
involvement and policymaking related to these matters. So we
have a means by which we can do this under Dodd-Frank, but we
are now going to add some additional requirements. Is that the
way you see it?
Yes, sir?
Mr. Zaring. That is precisely the way I see it. FIO has
been given the authority to negotiate and the requirement to
consult and that seems to me to be a good thing and the right
way to set up the priorities for the head of the organization.
Mr. Green. Yes, sir. And in giving your response, would you
kindly address the question of, do you ever get to a point
where you have too many people trying to do one thing, which
seems to be what we have already given as an assignment, but
now we seem to want to have additional input after having given
the assignment. Yes?
Mr. Thompson. You are absolutely right. You could have too
many people at the table. And certainly, we would agree that
the Director of the Federal Insurance Office, as well as the
Fed, should be representing U.S. interests. What we are
suggesting is representing what? Under what authority and
guidelines are they negotiating on behalf of the U.S. insurance
industry and the U.S. Government?
What this draft legislation would do would be simply to
provide those guidelines, that framework which sets the
boundaries on which they can and cannot negotiate. That is all
we are asking, and that is why we are supportive of this draft
discussion. It is not to get involved in the way but it is
simply to set the guidelines so that we are all clear on what
is negotiable and what is not negotiable.
Mr. Green. Thank you, Mr. Chairman. I yield back.
Chairman Luetkemeyer. The gentleman yields back.
Mr. Posey, the gentleman from Florida, is recognized for 5
minutes.
Mr. Posey. Thank you, Mr. Chairman, and thank you for
holding this hearing. I also thank the witnesses for your
input. It is very informative.
To the chagrin of some, I guess, I don't work for the
United Nations, I don't work for the E.U., I don't work for any
other government except for the United States of America, and I
don't think that my constituents should be governed or
regulated by any other governments either.
It seems like with every international agreement we make of
any kind, we are left holding the bag. And oftentimes, as I
think Congressman Pearce was alluding to in his discussion,
there are predetermined outcomes already before we even start
negotiating before or after the document is signed that are not
beneficial to us.
We deal with other governments where it is considered
ethical to lie if you can harm America. We are supposedly under
the impression that you are not supposed to lie to anybody for
any reason. So, I think that this would be another case where
we will get the short end of the stick.
Mr. Torti, the United States has a very long-held and
proven tradition of State-based regulation. It has worked for
150 years. And you have a distinguished career of public
service as Rhode Island's Banking and Insurance Commissioner.
We are all aware of that. And you were recognized as a national
leader on insurance regulation, so I might ask you if you can
explain to members of the committee how the State system of
insurance has evolved? How it has adapted to remain effective
over time and comment on the steps that have been taken to
address the concerns that resulted from the financial crisis?
Mr. Torti. Thank you, Congressman, and I will try to the
best of my ability to do that. It would take a lot longer than
the few minutes we have left, but I will concentrate on the one
area that I think is important here. But I will clarify again
that I no longer represent the regulators or the National
Assessment of Insurance Commissioners. I am trying to--
Mr. Posey. Yes, you are running out of time. Get to
answering the question--
Mr. Torti. Okay. I am trying to describe a process and I
will. We have significantly strengthened as regulators, State
regulators have significantly strengthened group solvency
requirements. We do still have a legal entity-type of a
regulatory process, however, there are all kinds of new holding
companies' requirements in place.
There is a Form F it is called in the Holding Company
Statute. It is the model statute. That is required for
accreditation. That requires an enterprise risk management
report be filed with the regulator.
There is what is called an Own Risk and Solvency Assessment
(ORSA), that asks the industry participants to disclose all of
the risks that they are subject to enterprise-wide and not just
legal entity.
There are supervisory colleges that we hold for
internationally active insurance groups and other insurance
groups where all of the regulators from the various countries
that the companies are doing business in get together to
discuss legal entity and group-wide risks that are being faced
by those companies.
So there is much in place now to fill the perceived void
that may have been out there prior that we did not look outside
the legal entity to regulate insurance.
That is not the case. There has been a lot done over the
last few years and even prior to that we had group solvency
issues working groups, and we had groups to modernize insurance
regulation that were looking at group issues. There is also a
group capital calculation--
Mr. Posey. Let me just interrupt a minute because we are--
Mr. Torti. Sure.
Mr. Posey. --about to run out of time. In Florida, our
Insurance Commissioner, Kevin McCarty, has a long, strong
history of watching out for the consumer first and foremost. He
doesn't care if a State Senator gets in the way. He will run
over him. He doesn't care if a State Representative doesn't
like what he is doing. He will jam horns with the Governor if
necessary.
He does what he thinks is in the best interests of Florida
consumers period, end of subject. I assume you and other
Commissioners in other States do the same. My concern is that a
bunch of foreign agreement makers won't share that same loyalty
to our consumers. Would you comment, either of you?
Mr. Torti. I would be happy to. Yes, as an insurance
commissioner I did have a loyalty to those consumers. That was
my charge. That is what I did and I agree with you. It is
possible that the interests of our policyholders, our consumers
here in the United States won't be appropriately recognized in
certain international negotiations or standard-setting
procedures, I should say.
Thank you.
Mr. Posey. Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from California, the
ranking member of the full Financial Services Committee, Ms.
Waters, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to direct a couple of questions to Professor Zaring. We all
remember the damage caused by the near collapse of insurance
giant AIG. We all remember that for many reasons, regulators
did not catch the riskiness of their activities. And of course,
we all remember that many of the provisions in Dodd-Frank were
written with this very catastrophe in mind.
Now, we have draft Republican legislation before us that
would force U.S. negotiators to forget all of that. The draft
fails to list financial stability as a negotiating objective of
the United States in setting international insurance standards.
In fact, the draft specifically calls for negotiators to seek
to achieve standards that reflect the State-based U.S. solvency
regime. Do these limitations set us up to miss the next AIG?
And further, it seems that every day we hear a new story
about the potential impacts of global headwinds on the U.S.
economy. Market concerns in China, for example, have raised
questions about the effect on the U.S. and the global
economies, and yet it seems that the insurance industry is
calling on our regulators to forget about global financial
stability as it negotiates international standards. What are
the risks to the U.S. and global economies if these calls are
heeded?
Mr. Zaring. Thank you. It seems to me that one of the
points of these international negotiations and the effort to
create capital standards that work for companies both at home
and abroad, is financial stability. That is the bottom line and
critical focus of any sort of effort to create common
international standards for internationally active insurance
groups.
It is worth remembering that in the case of AIG, it was
brought low by activity that happened in a foreign subsidiary,
credit default swaps, but also by its securities lending
practice. And that was something that State regulators could
have overseen.
I think the calamitous collapse of AIG indicates that three
things are critical for controlling the way that the
international insurance system works if it is to work in a way
that is going to avoid any financial crises in the future.
First is that a group-wide perspective is critical for ensuring
that financial stability happens, that all of the entities
within an insurance conglomerate have to be supervised.
These days that increasingly necessarily requires an
international perspective given that the kinds of companies
that can threaten the financial system like AIG operate in so
many different jurisdictions.
And third, I think it suggests that subsidiaries can slip
through the cracks of regulators. In that case, OTS, State
regulators, and of course foreign regulators failed to identify
the weaknesses in AIG.
And then finally, I think it is critical to remember in
light of the problem of the global headwinds that face the
American economy that insurance companies are not just a
critical source of protection for consumers, but also a
critical source of funding for our financial markets. And I
think that is one of the things that animates supervisors when
they worry about the risk that a foreign insurance company that
provides a great deal of funding to American financial firms
might collapse if inadequately supervised.
That is the kind of supervision and worst-case scenario
that I think has meant that Congress has appropriately and
Federal regulators are increasingly worried about the stability
of foreign firms as well as domestic ones.
Ms. Waters. While our State-based system for regulating the
insurance industry certainly has its benefits, there are also
some drawbacks. For example, the ability of States to deviate
from standard insurance accounting rules by requiring less
capital or fewer reserves or allowing certain risk in non-
liquid investments to be counted as capital assets can weaken
financial protections for consumers.
Also, differences across the States make it difficult for
other countries to judge the strength of the U.S. system. Do
you think there is room for better coordination among States to
address these issues while still preserving a State-based
system and the benefits that it provides?
Mr. Zaring. I do think so. And I think that our rich
tradition of State-based consumer protection can only be
augmented by coordination. And if that coordination is
facilitated by the Federal Insurance Office, then it is all the
better and more likely to be effective.
Ms. Waters. I yield back the balance of my time.
Chairman Luetkemeyer. The gentlelady yields back.
The gentleman from Ohio, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you very much. My first question is for
Mr. Torti. We just heard some questioning from the ranking
member about the AIG failure. Was any of that based on
regulated, State-regulated insurance business?
Mr. Torti. No. The financial products division was
regulated by a Federal regulator, the OTS, which was eliminated
as a result of the Dodd-Frank bill that was out there. Mr.
Zaring mentioned securities lending. There were issues with
securities lending, but it is my understanding the AIG life
insurance companies would have survived without Federal aid
despite the securities lending issues.
Mr. Stivers. So the Securities and Exchange Commission and
the OTS were Federal regulators who failed with regard to the
failure of AIG, correct, Mr. Torti?
Mr. Torti. That is correct.
Mr. Stivers. Thank you. I just think that is really
important to bring up as State regulators were just maligned.
Under McCarran-Ferguson, we have had an incredible history of
effective and efficient State regulation in my opinion.
Mr. Torti, as I am talking to you, State regulators don't
have group capital standards today, but they have been working
on a group capital calculation. Do you know how that is going?
You are just recently transitioning and can you give us an
update of where that might stand?
Mr. Torti. Again, I cannot speak for the NAIC or the
regulators.
Mr. Stivers. From what you know when you left--
Mr. Torti. Okay.
Mr. Stivers. --are they close? Is it coming? Just tell us
what you know and--
Mr. Torti. Absolutely. The NAIC has basically voted to take
an approach, an aggregation approach, to aggregate our current
risk-based capital standard, the States' current risk-based
capital standard, to come up with a group capital standard.
They have assigned it to a subcommittee of the C Committee, the
Financial Condition, and--
Mr. Stivers. When do you expect it to be done? Give me a
round number, 2016? Early 2107?
Mr. Torti. They hope to make lots of progress by year-end,
but again, I can't speak for the regulators.
Mr. Stivers. Let me ask you the next question. Given that
we all just agreed that under McCarran-Ferguson the State
regulators are the prudential regulators, shouldn't they have
time to work on their group calculation? The one shortfall I
see in this bill is it requires the Fed to finish its capital
standard, but it does not require the State regulators to even
finish their group capital calculation. Shouldn't that be added
to this bill?
Mr. Torti. I think that would be a worthwhile addition to
this bill.
Mr. Stivers. Thank you. Let me ask the whole panel some
questions. Do you believe that the benefits to domestic
companies and consumers of reciprocity under a covered
agreement are worth negotiating a covered agreement? Raise your
hand if you believe that.
I figured everybody. Okay. Everybody, and let me note for
the record that everyone agreed we should pursue reciprocity if
it is in the interest of American consumers, American domestic
companies. Would you all agree that our State-based system is
effective at protecting both consumers and the solvency of our
insurance industry? Raise your hand if you believe that. Three
of four.
Let me ask really quickly of Mr. Zaring, do you believe in
the State-based regulation system? Yes or no? Or would you
prefer a Federal system? That is really all--I don't want a
long answer. I have a minute here.
Mr. Zaring. The State-based system does an excellent job of
consumer protection.
Mr. Stivers. Okay. Thank you.
Mr. Zaring. I worry about it for solvency.
Mr. Stivers. Got it. Okay. So the next question for the
panel is, do you think that it is reasonable to set forward a
system or a process, an orderly process for any international
agreement? Raise your hand, yes or no. Three of four again.
Thank you.
And now, since Mr. Zaring already spoke about the fact that
he thinks a cost-benefit analysis is overly burdensome, let me
ask if anybody else--and raise your hand if you think any of
these things are overly burdensome--are clear objectives overly
burdensome? No one believes that.
Is a public comment period overly burdensome? Nobody
believes that. Is a semiannual report overly burdensome? He
believes the semiannual report is too much work, one person.
Four, is studying the impact on consumers overly burdensome?
One person believes we don't want to look at what consumers
say. That would cause too much burden.
Is a report on transparency of the IAIS overly burdensome?
One person believes that transparency apparently is overly
burdensome. What about domestic capital rules being promulgated
so we know what the domestic standard is before we move to
international agreement? Who believes that is overly
burdensome? This is getting pretty repetitive, one person.
And last and finally, who believes a 90-day period to have
Congress look at this is overly burdensome? One person. Okay.
So it's pretty clear that most people believe this is not
overly burdensome at all.
Thank you, Mr. Chairman. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. Oh,
they have called votes, and as of January 1st, they have really
restricted the amount of time that they will allow us to show
up late, so as a result we have about 7 minutes to get there
and we only have 3 minutes to play with here. So if we stop
along the way to get a drink of water, we are in trouble.
But we ask for the indulgence of the panel as well as those
Members in attendance today. We will be back in probably about
an hour. Until then, we will call a recess of the subcommittee.
[recess]
Chairman Luetkemeyer. We did our due duty today to again
pass some hopefully worthwhile legislation. With that, we will
reconvene the subcommittee and go to Mr. Ross, who is up next.
I recognize the gentleman from Florida for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman. I am reminded of, as a
child, when there was a move afoot to create measurement
standards, international standards in the United States,
metric. And they attempted to do that on road signs and
whatnot. That didn't last very long, and mainly because of the
great deal of resistance to it because we believe our standard
of measure is very good.
I also think our standard of insurance regulation is by far
the best in the world. And therefore I also have concerns about
our ability to negotiate and Congress' ability to retain what I
believe to be its primary authority in whatever may transpire
in the negotiations with the International Association of
Insurance Supervisors.
Ms. Cobb, you mentioned in your opening statement that
similar risk characteristics should be treated the same, and
yet you also expounded a little bit upon variable annuities. Is
there any explanation that has been given for the unequal
treatment?
Ms. Cobb. No, Congressman, there hasn't been. The
explanation is just a statement that variable annuities are
more risky--
Mr. Ross. Right.
Ms. Cobb. --than products in other countries where the
guaranteed interest rate is, in this environment now, say, 3.5
percent. Those other countries say that their contracts don't
fall into the NTNI bucket--``Our products are not risky and
yours are.''
Mr. Ross. Right. And what is the basis for the annuity
anyway? What is going to be the benchmark for the interest
rate? Those are things that need to be discussed because right
now if we are going to it use to pay them, we are at negative
interest rates, or for that matter the European Central Bank.
Ms. Cobb. Yes.
Mr. Ross. Mr. Thompson, I understand that your company has
a footprint in 30 States but nothing internationally. Can you
describe how the impact of international standards might still
impact your company and others like yours if it is adopted by
the United States?
Mr. Thompson. Absolutely, sir. So as we all know, I think,
and can appreciate, economies around the world operate very
differently, and as I believe you were a former State
legislator--
Mr. Ross. Yes, sir.
Mr. Thompson. --and Chair of the insurance committee, you
have a pretty good understanding of the State-based regulation
here. Fundamentally, as one example, insurance regulation in
this country is entity-based.
Mr. Ross. Right.
Mr. Thompson. So the discussion of AIG came up earlier. The
insurance companies were protected. There was a discussion to
raid the assets of the insurance companies to keep AIG from
requiring Government bailout. The current regulatory framework
in this country prevented that. That is not the case in many
other countries.
And so things that are currently being discussed, which is
group capital standards being applied here, don't mesh well
with the current State regulations. And that is just one
example.
Mr. Ross. And what concerns me in addition to that, and Mr.
Torti, maybe you might be able to address this as a former rate
maker, is the matters considered in promulgating a rate
include, of course, liquidity, capital standards, things of
that nature, but what is going to be at issue is the
verification of the solvency and the capital.
And when the verification process is gone through by the
commissioner, it would expose most likely some proprietary
information. And that has been, and I think very well-preserved
by our individual insurance commissioners, but could there not
also be an adverse impact from an international standard that
would now require not only the verification of the capital but
also the increased vulnerability of disclosing proprietary
information?
Mr. Torti. That is certainly a possibility, depending on
what the standard required, depending on what type of
calculation was necessary, some proprietary information of an
insurance company could be exposed.
Mr. Ross. One thing that hasn't been discussed and I want
to just really hit on, because I think it is important back
home especially for those of my constituents who are dependent
on their financial products including their insurance products,
what would be the impact on the consumers of international
standards? Let us say we were to adopt Solvency II. What impact
would it have?
And whoever wants to take that can. Ms. Cobb? Mr. Torti?
Mr. Torti. Okay. I will take a shot at it. It could
increase costs to consumers here in the United States. Putting
it into--
Mr. Ross. Minimal cost. Just the transformation of
accounting procedures, you may be going from a risk-based
capital to who knows what? And if you have to--that is an
administrative cost that these companies are going to have to
bear. Where does it--do they absorb it? No. They are going to
pass it on.
Mr. Torti. It is passed on to the policyholders, exactly.
Mr. Ross. And without a doubt, I guess in my opinion, is
that any change is going to result in an increase in premium to
our consumers as a result of the adoption of this. One last
thing is just a comment. I laud the chairman for this bill. I
think it is important that Congress continue to be in the
driver's seat on this with instructive measures as we have done
in this part of the bill. And I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Kentucky, Mr. Barr,
for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. I would like to know
from the witnesses what your views are in terms of
congressional involvement in oversight here. Professor Zaring,
I think, commented in his prepared testimony that he didn't
view that as being constructive in terms of being an impediment
in the negotiations, in the international negotiations, to have
Congress in the middle of this.
So given that we have a draft legislation that would
enhance congressional oversight of this process, we will start
with you, Mr. Thompson. Can you comment on how having Congress
involved might enhance the process?
Mr. Thompson. Absolutely. Thank you for the question. And I
think that goes to the heart of this draft legislation. It
isn't to impair or impede negotiations. It is to provide
clarity to those negotiations and also to prevent potentially
catastrophic global regulations being back door-imposed on
companies like mine domestically here, which has been discussed
throughout this entire hearing the State-based insurance system
in this country has served it very well for over a century.
Mr. Barr. Before we go to the other witnesses, are you
concerned that not having Congress involved may exclude input
from the State regulators?
Mr. Thompson. Yes, sir. Many of these discussions are
taking place behind closed doors already. Therefore, we are
asking Congress to, again, set those guidelines, set those
boundaries. Let our negotiators at the table know what they can
negotiate and what they can't right up front.
Mr. Barr. Thank you.
Mr. Torti?
Mr. Torti. Sure. Thank you, Congressman. This is in no way
intended to impede U.S. involvement in creating international
standards. It is really to ensure a unified approach and to
strengthen our position in those international negotiations.
And increasing transparency clearly stating the goals and
objectives of Congress will help to strengthen our position in
these negotiations. We are all in a unified approach. You don't
have any disparate opinions coming from the Team USA, to which
we have referred.
Mr. Barr. Ms. Cobb, in addition to maybe answering that
question as well, could you elaborate on the consequences that
international standards imposing higher capital charges on U.S.
insurance products like variable annuities might have on the
domestic economy and especially for those policyholders?
Ms. Cobb. Certainly, Congressman. First of all, we do agree
with the current concerns that have been expressed here today.
The question before all of us is how to fix it. The NTNI
problems--I am speaking now of the IAIS standard-setting--the
G-SII methodology problems, we rely heavily on Team USA. I
could do a long list of our concerns but we don't have time.
But the question is striking a right balance in this bill
and in our approach so that Team USA, the full Team USA,
certainly including our State prudential regulators, Treasury,
and the Fed have the ability to participate fully in the
international discussions--that is critical, we think, to a
solution that can benefit U.S. interests.
Mr. Barr. What would be the consequences of substantially
higher capital charges?
Ms. Cobb. Substantially higher capital charges for NTNI
variable annuity products in this country could make that
product difficult to obtain for consumers. The consequences to
U.S. insurers who are trying to compete overseas of having to
post additional capital in that country because of these
international standards are also considerable.
Mr. Barr. And in the course of the standard-setting--the
standard-setting that is going to happen, I have been an
advocate for tailoring of regulations in the financial
regulation area based on size and complexity and activity of
banks so that community banks, for example, would be subject to
less regulation than larger more systemically important
institutions. Is a similar tailoring relevant and important in
the insurance space as well?
Ms. Cobb. It seems perfectly reasonable. Yes.
Mr. Barr. And so I think Congress does have an interest in
monitoring the process to make sure that we do take into
account a tailored approach and on the size, bearing sizes and
complexities of these insurers. Does anybody have anything else
to add to that? I think my time is running out.
Mr. Thompson. I think the time is out, but I would just say
we have concerns about trying to do such tailoring. State
regulators are not going to be inclined to have multiple tiers
of regulatory oversight and our fear is that the once common
standard would be applied to all companies that they regulate.
Mr. Zaring. I will just say that Congress should definitely
be involved however it sees fit, but if it is going to require
American regulators to come up with an approach and then engage
in international negotiations, then it is not clear what there
is anything to negotiate over or if the rest of the world won't
come up with its own standards as it is done in accounting,
much to the--
Mr. Barr. Thank you. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
The gentleman from Pennsylvania, Mr. Rothfus, is recognized
for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman. And thank you, panel,
for being here this afternoon. Mr. Torti, if I could ask you
this question? When you were a State insurance regulator, the
NAIC opposed the decision by the IAIS to exclude consumer
groups and stakeholders from working group meetings. FIO voted
against the NAIC. Do you believe transparency and accountably
have been reduced as a result of this decision?
Mr. Torti. Absolutely, Congressman. The stakeholders are no
longer allowed in the working group meetings and are not
present when the decisions are made regarding these standards.
So it definitely has reduced transparency.
Mr. Rothfus. Would the United States' position have been
stronger had our representatives been on the same page?
Mr. Torti. Yes.
Mr. Rothfus. Someone suggested that it does not matter what
international standards the United States agrees to if they are
subject to consideration in the United States before
implementation. Mr. Torti, do you have any concerns about that
approach?
Mr. Torti. I don't have any concerns. I believe we should
have a unified approach. I believe that the United States
shouldn't come to the table with several varying opinions. I
believe that we can work together to come to a consensus with
State regulators and that approach would be the best to
strengthen the U.S. position in any of these negotiations.
Mr. Rothfus. Mr. Thompson, according to many expert
observers, the U.S. insurance sector remained relatively stable
during the recent financial crisis, particularly when compared
with the banking and securities sectors. Do you share this
perspective?
Mr. Thompson. Absolutely, sir.
Mr. Rothfus. Can you attribute the strong track record to
the unique nature of the business or the quality of regulatory
supervision? Or is it a combination of both? Can you qualify
that?
Mr. Thompson. Yes. I would attribute it to very strong
oversight by State regulators who are focused first and
foremost on policyholder protection, as well as insurance
company policy protection. And I think their track record
speaks for itself over the last 150 years that they have been
responsible for regulating the insurance industry in the United
States.
Mr. Rothfus. Mr. Torti, you argue in your testimony that
without more congressional guidance on their objectives and
priorities, our U.S. and State representatives can have
conflicting perspectives and priorities, again, similar issue.
Why is it important for the U.S. representatives in
international insurance regulatory discussions, including the
Federal agencies and the NAIC, to be on the same page?
Mr. Torti. Again, I think the point is to have a unified
approach. If we appear dysfunctional, if we are sitting at the
table representing the United States yet having differing
approaches on where we want to go with an international
standard. You know, Dodd-Frank has affirmed State regulation as
the system that is acceptable in the United States.
And State regulators and our Federal representatives need
to work together to come up with that unified approach to
strengthen our position in the international arena. And I
certainly think that varying opinions among the players in this
arena would cause significant harm to us in our negotiations on
these standards.
Mr. Rothfus. Okay. Can you speak to whether States
undertook any noteworthy reforms to address concerns arising
from the financial crisis?
Mr. Torti. Yes. And again, I don't speak for the NAIC. I am
sorry to be repetitive on this, but I just want to make clear I
am no longer a regulator. However, there have been many group
solvency changes that have been made. There have been numerous
working groups at the NAIC that have enhanced solvency
regulations to look at a more group-wide approach but still
keep our legal entity approach so that we ensure that
policyholders are protected.
However, there are Own Risk and Solvency Assessment model
laws that are going to be a part of the accreditation
requirements. There are holding company modifications that were
made which deal with enterprise risk management. There are
requirements to hold supervisory colleges for internationally
active insurance groups.
There have been multiple enhancements to our financial
analysis procedures to ensure that we are looking at group-wide
risks when we look at a company. So yes, there has been a lot
done since the financial crisis, and even before the financial
crisis to look at the risk of the entire group.
Mr. Rothfus. I thank the panel, and I yield back.
Chairman Luetkemeyer. The gentleman yields back the rest of
his time.
With that, we go to the gentleman from Wisconsin, Mr.
Duffy.
Mr. Duffy. Thank you, Mr. Chairman.
Chairman Luetkemeyer. You can start your 5 minutes.
Mr. Duffy. I want to welcome the panel, and just go over
here on the far side for a quick question. In theory, and in
theory only, is a covered agreement going to have minimal to no
impact on Federal regulation or on our State regulators? Is
that a fair assessment, Mr. Thompson?
Mr. Thompson. It is my opinion that there is a very real
opportunity that future covered agreements could actually pre-
empt State regulation. And that is our concern, which is why we
think it is the purview or should be the purview of Congress to
provide oversight and direction to those to make sure they
don't bring up the obviously very successful State regulation
we have in this country.
Mr. Duffy. With that, okay. But by itself, by itself the
covered agreement--
Mr. Thompson. No, sir. Absolutely, there is a place for
covered agreements. We are not opposed to covered agreements at
all.
Mr. Duffy. But--
Mr. Thompson. We want to make sure they don't bring up
State regulations.
Mr. Duffy. I am well aware of your position, but--
Mr. Thompson. Okay.
Mr. Duffy. --I think in theory just a covered agreement
does not impact by itself--
Mr. Thompson. No, sir.
Mr. Duffy. --Federal or State regulators.
Mr. Thompson. No, sir.
Mr. Duffy. I think in this institution, some of us might
get concerned, because I don't think the original drafters of
the Environmental Protection Agency might have foreseen that
they could have stretched and pulled the EPA into the Clean
Power Plant Rule that came out. And so we do get concerned
about creeping rules and creeping regulations.
So does anybody have an objection if we by legislation
guarantee that we are going to protect our State-based model?
Is it in essence we are going to buy a little insurance, if you
will, guaranteeing that you are not going to impact our State-
based American model. Does anybody disagree with that theory?
Mr. Zaring. I will just briefly say that, again, to me the
worrisome example is accounting standards and Generally
Accepted Accounting Principles (GAAP). So we decided in the
United States we are going to do things the GAAP way and we
didn't care what the rest of the world was going to do.
Mr. Duffy. Do you disagree that we shouldn't protect it? If
we in the legislature think that we should protect the State-
based model that we shouldn't have insurance?
Mr. Zaring. Of course it wouldn't do that.
Mr. Duffy. Insurance business says we are not going to--we
are going to guarantee that we protect that model, the State-
based model. Do you disagree with that?
Mr. Zaring. The legislature has the power to regulate as it
likes, but now there is another competitor standard out there
for GAAP, International IFRS, and it is--
Mr. Duffy. So is it then your position that we negotiate a
covered agreement and we adopt it herein with the Fed and that
is going to eventually be imposed on our State-based system? Is
that what you would like to see happen here? And is that what
is going to happen here?
Mr. Zaring. My understanding and expectation is that the
hope of a covered agreement is that we can get to a modus
vivendi where our supervisors and European supervisors
recognize the quality of the work that each other are doing.
And so I--
Mr. Duffy. You are avoiding my question. It is going to say
that the intent is not to impose any new capital standards on
our State-based system, right? Is that the intent? Does anybody
disagree with that? Or if that is the intent let me know. You
would agree with that, right, given--Ms. Cobb, you agree,
right?
So there shouldn't be any disagreement with our position
that we want insurance. We want a guarantee that what you say
is actually going to happen. We want to go through the
legislative process. You wouldn't disagree with that, would
you?
Mr. Zaring. I think it is possible to get--if we are going
to empower Federal regulators to do their best job negotiating
with their foreign counterparts--
Mr. Duffy. Listen, because I am not--
Mr. Zaring. --that too much oversight is--that too many
people--
Mr. Duffy. But I want to be clear, is your testimony then
that through this international negotiation we want to have an
impact on our State-based system and the capital that they are
required to hold. Is that your position? Yes or no? I don't
have much time.
Mr. Zaring. I am not sure I understood the question maybe,
but--
Mr. Duffy. Okay. But you do disagree that we should have
insurance to protect our State-based model. And I want to move
on. I think, Mr. Zaring, you indicated that hands would be tied
if Congress set the parameters of this negotiation. Is that
correct?
Mr. Zaring. No. Congress has already authorized these sorts
of negotiations to take place, but then the question is what
kind of parameters should Congress impose?
Mr. Duffy. So you agree that we we could modify our
parameters after the negotiation takes place we can actually
approve or disapprove of an agreement?
Mr. Zaring. Congress certainly has that power.
Mr. Duffy. And do you agree with us exercising that power?
Mr. Zaring. If the agreement comes back in a way that is
unfavorable to American interests, then I don't see why it
wouldn't.
Mr. Duffy. It worked for TPA, didn't it? TPA worked pretty
well. We went through a negotiation, set the parameters, voted
on it, and sent our negotiators free. Why wouldn't it work with
international negotiations on insurance standards?
Mr. Zaring. I feel like we already have the authorization
necessary.
Mr. Duffy. Does anyone--oh, can I ask just one quick
question? Is anyone concerned about a creation of a two-tier
insurance system?
Mr. Thompson?
Mr. Thompson. I'm very much concerned about that.
Mr. Duffy. Anyone else? Ms. Cobb, are you concerned about
that?
Ms. Cobb. I am not sure what you mean.
Mr. Duffy. Do you want to have our Federal globally active
50 insurance companies have one capital standard and there
might be a different capital standard for small mutuals that do
business in a State or a few States. Does that concern you?
Ms. Cobb. It seems perfectly reasonable to me if I were a
regulator that I would want to assess companies according to
the nature, scale, and complexity of their risk.
Mr. Duffy. So you would say that you don't have a concern.
There could be two models. You are okay with a small State
mutual having a different capital standard than a large
internationally active SIFI?
Ms. Cobb. I don't know the answer to that question.
Mr. Duffy. Anybody else?
Mr. Torti. I just think that is already the case. SIFIs are
subject to regulation by the Federal Reserve so there is an
additional layer of--
Mr. Duffy. We got that in Dodd-Frank, didn't we?
Mr. Torti. --protection there.
Mr. Duffy. Yes, we got that in Dodd-Frank. So my concern is
we want to remedy Dodd-Frank and say we will have everybody
subject to the same capital standards, which will endanger our
State-based system. And that is many of our concerns.
So with that, I appreciate the indulgence of the chairman,
and I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we have a redirect from Ranking Member Cleaver.
Mr. Cleaver. Oh, thank you. This is kind of related to what
Mr. Duffy was saying, and it is just one quick question. What
would it look like? How would you paint of picture of what
would happen if the United States just decided that it was
going to retreat from participation in international
discussions on insurance standards? What do you think would
happen if we just said henceforth forevermore we are out?
Mr. Zaring. My concern, Congressman, is that then
international standards would get made and they would get made
without our input. And increasingly, as our insurance companies
tried to do business abroad, they would find that they had to
comply with those standards, and they might regret the fact
that we didn't participate in the process.
Ms. Cobb. I agree with that comment. And I would say
moreover to the extent that our domestic insurers are required
to post additional capital or whatever in order to comply with
insurance capital standards that had been determined
internationally without our input, we are diverting capital
away from our insurers selling insurance in emerging and other
markets and in effect not creating jobs here at home.
Mr. Thompson. Mr. Cleaver, it is not our suggestion that we
walk away from the table. We live in a globally connected
world. We all understand that. What we are suggesting is we
have a very good regulatory system in this country. We don't
want that to be negotiated away in the international arena.
We think we are regulators. We think our representatives
need to be at that table and they need to be negotiating and
bringing the best insurance regulatory that we have in the
world as demonstrated in this country to the table. And all we
are suggesting is Congress has a role to play in that to
provide the direction and the guidance to that negotiating team
in order to bring that very effective regulation to the global
marketplace.
Mr. Cleaver. Thank you.
Chairman Luetkemeyer. Thank you.
I think that was very succinctly put, Mr. Thompson. Let me
add--I just have some closing remarks here before we wind up.
I think we need to be in a position to be able to negotiate
as well as pushback as well as initiate. We need to be able to
promote as well as defend. And so for us to go over to the
negotiations and play defense all the time is important, but to
be on the offense to show the rest of the world why our system
works and theirs maybe doesn't work as well as ours. Maybe they
need to change their system instead of we change to their
system.
So I think, Mr. Thompson, you made a comment during the
course of this with regards to they need to focus on
regulation, the regulatory side, the industry side and the
policyholders' side when the FIO folks go over there and work
on these issues and represent us.
And Mr. Torti, you made the comment that Congress needs to
set goals or guidelines for the regulators as they go through
the process. And I think that is what we are trying to do with
this bill. I think all of you have agreed that Congress has a
role to play. We need to be in the approval process.
And a number of you have mentioned that there are Federal
regulators that already go through a comment period and sort of
approve things. But my concern is that if you look at the role
that the Administration has played, and the lack of them
listening to what we say as legislators, as what you say as
industry representatives and what the comments that come from
the consumers are ignored by the Administration time after
time, day after day, industry by industry, agency by agency,
there is great concern.
And that is the reason for the bill today is to see once if
there is a way for us to structure this so we can put
guidelines in place, guardrails, if you want to call them that,
that will not hinder but enhance and then allow Congress to be
there to be able to approve or disapprove those actions in a
way that we can protect the industry we have here, the
regulatory system we have here and the consumers.
At the end of the day we need to be more watchful for and
it is interesting because in my discussions with Mr. Sullivan
as well as Mr. McRaith, they like our oversight. They like what
we are doing here. They like a bill like this because from
their standpoint it gives them leverage when they go negotiate.
They like for us to be involved, because when they go over
there and talk to the IAIS folks they can sit there and say,
hey, you know, we can't approve that. We can't approve this. We
are going to go back and make sure this will work. And as a
result it gives them what leverage they need to actually
negotiate in better terms. So I think it is important.
This bill isn't perfect. We are still in draft form, and we
want to continue with all of you and all of the folks who are
represented behind you. Mr. Thompson, I believe in your
testimony you made the comment that getting policy right is
more important than unanimity.
I hope you all remember that as we go through the process
because I am sure there is not going to be unanimity on
everything that we do here, but end of the day we want to get
the policy right to make sure we protect the industry, our
regulators and their ability to do their job, as well as our
consumers. And we have a wide group of interests here from
very, very, very large international companies to local county
mutuals, if you will.
And so we have a lot of work to do. I would like to get
something put together in the next couple of months. So
continue to be engaged with us. Continue to work with us on
this. We want to listen to your suggestions. And hopefully, Mr.
Thompson's wise words of, get the policy right and don't worry
about unanimity, will be able to be the words of the day.
With that, again, I thank all of you for being here today.
You did a great job of representing your industries in this
important issue that I think is something we need. We have a
little hearing day and it doesn't amount to a whole lot, but it
is a really, really big deal from the standpoint of it affects
every single person in this country because every single person
in this country practically has some sort of insurance product.
And so it is important that you are here to represent all those
folks.
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 with that, this hearing is adjourned.
[Whereupon, at 4:53 p.m., the hearing was adjourned.]
A P P E N D I X
February 25, 2016
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