[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF INTERNATIONAL REGULATORY
STANDARDS ON THE COMPETITIVENESS
OF U.S. INSURERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
APRIL 29, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-17
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
95-061 PDF WASHINGTON : 2015
_______________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office
Internet: http://bookstore.gpo.gov Phone toll free (866)512-1800; DC area (202)512-1800
Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001
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
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
ROBERT HURT, Virginia AL GREEN, Texas
STEVE STIVERS, Ohio GWEN MOORE, Wisconsin
DENNIS A. ROSS, Florida KEITH ELLISON, Minnesota
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DANIEL T. KILDEE, Michigan
ROGER WILLIAMS, Texas
C O N T E N T S
----------
Page
Hearing held on:
April 29, 2015............................................... 1
Appendix:
April 29, 2015............................................... 35
WITNESSES
Wednesday, April 29, 2015
McCarty, Kevin M., Commissioner, Florida Office of Insurance
Regulation, on behalf of the National Association of Insurance
Commissioners (NAIC)........................................... 6
McRaith, Michael, Director, Federal Insurance Office (FIO), U.S.
Department of the Treasury..................................... 3
Van Der Weide, Mark E., Deputy Director, Division of Banking
Supervision and Regulation, Board of Governors of the Federal
Reserve System................................................. 4
APPENDIX
Prepared statements:
Waters, Hon. Maxine.......................................... 36
McCarty, Kevin M............................................. 38
McRaith, Michael............................................. 44
Van Der Weide, Mark E........................................ 52
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the American Council of Life Insurers... 61
Written statement of the American Academy of Actuaries....... 63
Written statement of the American Insurance Association...... 67
Written statement of the National Association of Mutual
Insurance Companies and the Property Casualty Insurers
Association of America..................................... 70
Written statement of the National Association of Professional
Insurance Agents........................................... 99
McCarty, Kevin M.:
Written responses to questions for the record submitted by
Representative Garrett..................................... 101
Written responses to questions for the record submitted by
Chairman Luetkemeyer....................................... 103
Written responses to questions for the record submitted by
Representative Royce....................................... 106
McRaith, Michael:
Written responses to questions for the record submitted by
Chairman Luetkemeyer....................................... 108
Written responses to questions for the record submitted by
Representative Royce....................................... 110
Written responses to questions for the record submitted by
Representative Garrett..................................... 111
Van Der Weide, Mark E.:
Written responses to questions for the record submitted by
Representative Garrett..................................... 113
Written responses to questions for the record submitted by
Chairman Luetkemeyer....................................... 115
Written responses to questions for the record submitted by
Representative Westmoreland................................ 118
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON THE
COMPETITIVENESS OF U.S. INSURERS
----------
Wednesday, April 29, 2015
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room HVC-210, the Capitol Visitor Center, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Westmoreland,
Garrett, Pearce, Hurt, Stivers, Ross, Barr, Rothfus, Williams;
Cleaver, Capuano, Green, Beatty, and Kildee.
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.
We are going to start just a tad early this morning because we
do have some other activities around the Capitol today, so I
will get to it in a second here.
Today's hearing is entitled, ``The Impact of International
Regulatory Standards on the Competitiveness of U.S. Insurers.''
Before we begin, I would like to thank today's witnesses
for traveling to HVC-210 for today's hearing. The audio/visual
system in the Financial Services Committee's main hearing room
is being replaced, and the room is being updated to meet the
requirements of the Americans with Disabilities Act. So I want
to thank all of you for your patience as we beg, borrow, and
steal hearing room space over the next few weeks here. As I go
by the hearing room every day, it looks like we are making
progress, albeit very, very slowly.
I want to inform the witnesses that the Speaker's office
has asked that Members be on the Floor by 10:35 for the joint
session of Congress for the Japanese Prime Minister. This
subcommittee will recess no later than 10:45 for the joint
session. The hearing will reconvene immediately following the
Prime Minister's remarks, and I encourage our witnesses and
Members to return to the hearing room as quickly as possible.
I now recognize myself for 3 minutes to give an opening
statement. First, I want to start by thanking our distinguished
witnesses for appearing today. Our Nation enjoys the most
robust policyholder-centric insurance system in the world. The
industry performed well during the financial crisis, and
policyholders enjoyed the safety and soundness that comes with
our Nation's unique regulatory structure.
It is vital that we uphold the system that has served
Americans so well for so many generations. Any discussion or
compromise that jeopardizes the U.S. insurance industry, or
more importantly the policyholder, should be rejected.
This is a complex time for insurance, and while much
attention has been paid to international discussions, I want to
assure the witnesses that this committee will not lose sight of
what is happening domestically, particularly as the Federal
Reserve begins the rulemaking process for a domestic capital
standard.
It is essential that Federal regulators, who are, as a
reminder, subject to congressional legislative action, work
with the States and with industry to base any role on the
system we have in place today. Then, if appropriate, our
representatives to the International Association of Insurance
Supervisors (IAIS) can export our insurer-and-policyholder-
centric model to the international insurance community.
The United States finds itself with the opportunity to lead
and not be led. We must seize the opportunity. It is vital that
the gentlemen appearing today work in concert and in the
interest of the United States to ensure that no ground is ceded
to foreign regulators and that the necessary time is taken to
produce commonsense rules.
International conversations taking place at the IAIS
continue to cause consternation in the industry. It is my hope
that today's hearing will help calm those fears, and that our
witnesses will be forthcoming and give this committee a clear
vision of where we are headed and when we will get there.
I look forward to today's testimony and I thank our
witnesses for attending. With that, I yield 5 minutes to the
ranking member of the subcommittee, the gentleman from
Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman, and thank you for the
hearing.
This probably doesn't happen much, but I would like to
associate myself with the comments of the chairman. I think he
pretty much set the tone for the hearing. I recognize that the
G20 has, in fact, continued to push for the strengthening of
the international regulatory regime. And I, like my colleague
from Missouri, would like to make sure that there is a minimum
of regulatory burden on the insurance industry. After all, the
problems that generated the 2007- 2008 economic collapse were
not generated by the insurance industry.
At the same time, we have to make sure that we don't end up
with inconsistent requirements across 50 separate jurisdictions
that could negatively impact the industry.
So I yield back my time and hope that this will be one of
those times when everybody works together for a common solution
to a problem that I think even industry would like to see some
unity on.
I yield back.
Chairman Luetkemeyer. I thank the gentleman.
And with that, we welcome the testimony of our witnesses
today. We have Mr. Michael McRaith, Director of the Federal
Insurance Office, at the U.S. Department of the Treasury; Mr.
Mark Van Der Weide, Deputy Director, Division of Banking
Supervision and Regulation, at the Federal Reserve Board of
Governors; and Mr. Kevin McCarty, Commissioner, Florida
Insurance Department, who is testifying on behalf of the NAIC.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection,
each of your written statements will be made a part of the
record.
If you are not familiar with the box in front of you, green
means start; yellow means you have 1 minute left; and red means
that is it. We will try and keep our questions succinct up
here.
But with that, Mr. McRaith, you are recognized for 5
minutes. Thank you.
STATEMENT OF MICHAEL MCRAITH, DIRECTOR, FEDERAL INSURANCE
OFFICE (FIO), U.S. DEPARTMENT OF THE TREASURY
Mr. McRaith. Thank you, Chairman Luetkemeyer, Ranking
Member Cleaver, and members of the subcommittee for the
invitation and the opportunity to join you today. I am pleased
to be here with my fellow panelists.
We released the FIO's second annual report on the insurance
industry in September 2014. The report cited 2013 data showing
the U.S. industry reported record surplus levels of
approximately $990 billion. Non-health insurers in 2013
collected more than $1.1 trillion in premium, nearly 7 percent
of U.S. GDP.
The report also cites data showing that private market
volume is increasing dramatically in developing countries. For
example, China's private insurance market increased by more
than $137 billion in the last 5 years, South Korea by nearly
$50 billion in that same period, and Brazil by more than $41
billion.
These facts illustrate the globalization of the insurance
market and explain the increased focus on global standards. For
this reason, among others, FIO has a statutory role to
coordinate and develop Federal policy on prudential aspects of
international insurance matters, including representing the
United States at the International Association of Insurance
Supervisors (IAIS).
In this work, we collaborate extensively with our
colleagues at the Federal Reserve and my former colleagues at
the State regulatory system, including my two colleagues on
this panel. Our multi-part supervisory structure must be
coordinated in order for the United States to assert leadership
in international developments. That is exactly what happens
today.
International insurance standards are not new. The IAIS was
formed in 1994, and State regulators were among the founding
members. International standards reflect best practices based
on the collective analysis and judgment of the participants.
Importantly, international standards are not self-executing in
the United States. Federal and State authorities will study,
test, and analyze the potential value and impact of any
international standard prior to implementation.
The United States has the most diverse and competitive
insurance market in the world, with insurers that operate in
one part of one State and insurers that are multinational and
engaged in a variety of financial services. With this in mind,
we work with our international counterparts to build a global
consensus that works for the United States. Simply put,
international standards must, when implemented, serve the
interest of U.S. consumers and industry and the national
economy.
The IAIS recently completed structural reform. These
changes eliminated the pay-for-play dynamic and increased the
IAIS's transparency and independence. No longer will the IAIS
depend upon the $20,400 annual fee paid by industry observers.
Now, open meetings and information will be available to all
stakeholders, not just those who can afford the annual fee.
Consultation with stakeholders will be more rigorous and
uniform. After 12 months of extensive public consideration, in
2015 the IAIS implemented a better approach to both governance
and transparency. At the Federal Insurance Office we continue
to create opportunities for stakeholders to meet in one place
with all U.S. IAIS participants.
In 2015, we have continued with the EU-U.S. insurance
project. The EU and the U.S. are two important jurisdictions,
both as markets and as homes for insurers. With the
collaboration of State regulators, we have worked with our EU
counterparts to improve understanding and, where appropriate,
consistency and compatibility.
One objective identified in the project is a covered
agreement. Not a trade agreement, a covered agreement is an
agreement between the United States and another country
involving prudential insurance measures. We look forward to
engaging with this committee before and during the negotiations
of a covered agreement.
The U.S. market and its oversight are unique. Through
effective collaboration at home and abroad, U.S. authorities
will continue to provide leadership that complements our shared
interest in a vibrant, well-regulated market that promotes
competition and financial stability and protects consumers. And
finally, in all of our work, internationally and domestically,
Treasury priorities will remain the best interest of U.S.
consumers and insurers, the U.S. economy, and jobs for the
American people.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Director McRaith can be found on
page 44 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. McRaith.
Mr. Van Der Weide, you are recognized for 5 minutes.
STATEMENT OF MARK E. VAN DER WEIDE, DEPUTY DIRECTOR, DIVISION
OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Van Der Weide. Chairman Luetkemeyer, Ranking Member
Cleaver, and members of the subcommittee, thank you for
inviting me to testify on behalf of the Federal Reserve. The
Federal Reserve welcomes the opportunity to participate in
today's hearing, and I am pleased to be joined by my colleagues
from the FIO and the NAIC. While we each have our own unique
authority and mission to carry out, we remain committed to
working collaboratively on a wide range of international and
domestic insurance issues.
With the enactment of the Dodd-Frank Act, the Federal
Reserve assumed responsibility as the consolidated supervisor
of insurance holding companies that own banks or thrifts, as
well as insurance holding companies designated by the Financial
Stability Oversight Council (FSOC). Since the passage of the
Act, we have been hard at work creating a supervisory framework
that is appropriate for the insurance groups that we oversee.
Our principal supervisory objectives for the insurance holding
companies that we oversee are protecting the safety and
soundness of the consolidated firm and their subsidiary
depository institutions, while at the same time mitigating any
risks to financial stability. We conduct our consolidated
supervision of these firms in coordination with State insurance
regulators, who continue their established oversight of the
insurance legal entities.
Congress recently amended the Dodd-Frank Act to enable the
Federal Reserve to focus on constructing a domestic regulatory
capital framework for our supervised insurance firms that is
well-tailored to the business of insurance. Since the passage
of this amendment to the Dodd-Frank Act, the Fed has been
engaging extensively with insurance supervisors and insurance
firms, to solicit views on the various approaches to the
development of an appropriate consolidated capital regime for
insurance holding companies.
We are committed to continuing this engagement and
following formal notice and comment processes as we move
forward on our insurance capital work.
The Federal Reserve is also participating in the
development of international insurance standards. Some of the
insurance holding companies that we supervise are
internationally active firms that compete with global insurers
to provide insurance products to businesses and consumers
around the world. Accordingly, in November 2013 the Fed joined
our State insurance supervisory colleagues from the NAIC and
FIO and became members of the International Association of
Insurance Supervisors, or IAIS.
Through our membership in the IAIS, the Fed has been and
will continue to be engaged in the development of global
standards for regulating and supervising internationally active
insurers. As a general proposition, we believe in the utility
of having effective global standards for global financial
firms. When implemented consistently across jurisdictions, such
standards can help provide a level playing field for global
firms, can help limit regulatory arbitrage and jurisdiction
shopping, and can promote financial stability.
Since joining the IAIS in late 2013, the Fed has been an
active participant in several key committees, working groups
and work streams. Throughout our first year-and-a-half as a
member of the organization, and consistent with our statutory
mandate, we have been particularly focused on the financial
stability and consolidated supervision work of the IAIS.
One of the key strategic priorities of the IAIS is the
development of a supervisory framework and consolidated capital
framework for internationally active insurance groups. The Fed
has supported the construction of group-wide supervisory
frameworks and consolidated capital standards for international
insurance groups, so long as they are transparently developed,
well-tailored to the U.S. insurance risks, properly calibrated,
and complementary to our insurance standards at the legal
entity level.
A second focus of the IAIS involves the identification of
global systemically important insurers (G-SIIs), and the design
of an enhanced regulatory and supervisory framework for G-SIIs.
It is important to note that any standards adopted by the IAIS
are not binding on the Fed, the FIO, State insurance
regulators, or any U.S. insurance company.
And during the buildout of standards for global insurance
firms, the Fed will work to ensure that the standards do not
conflict with U.S. law and are appropriate for U.S. insurance
markets, U.S. insurance firms, and U.S. insurance consumers.
Moreover, the Fed would only adopt IAIS regulatory standards
after following the well-established rulemaking protocols under
U.S. law, which include a transparent process for proposal
issuance, solicitation of public comment, and rule
finalization.
The Federal Reserve has acted and will continue to act on
the international insurance stage in an engaged partnership
with our colleagues from the FIO, the State insurance
commissioners, and the NAIC. Our multi-party dialogue strives
to develop a central Team USA position on the most critical
matters of global insurance policy. The Fed will also continue
to actively engage with the U.S. insurance industry to help
ensure that any global insurance regulatory standards work well
for U.S.-based firms.
Mr. Chairman, thank you for inviting me to testify today. I
look forward to an active dialogue on these issues with you and
other members of the subcommittee.
[The prepared statement of Deputy Director Van Der Weide
can be found on page 52 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Van Der Weide.
Mr. McCarty, you are now recognized for 5 minutes.
STATEMENT OF KEVIN M. MCCARTY, COMMISSIONER, FLORIDA OFFICE OF
INSURANCE REGULATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC)
Mr. McCarty. Good morning, Chairman Luetkemeyer and Ranking
Member Cleaver. Thank you for the invitation to testify here on
behalf of the NAIC.
The U.S. insurance market is the largest and most
competitive in the world. Taken individually, U.S. States make
up about half of the world's 50 largest insurance markets. My
State, the State of Florida, for example, is the 12th largest
insurance jurisdiction in the world.
State regulators cooperate closely on a regular basis to
provide leadership on global insurance issues and activities
with a focus on policyholder protection and maintaining stable
and competitive markets. As capital rules for insurers are
developed, State regulators continue to oppose a one-size-fits-
all bankcentric set of regulations and focus instead on the
importance of company- and product-specific analysis and
examination.
Capital requirements are important, but if imposed
incorrectly or without regard to differences in products and
institutions, they can be onerous to companies, be harmful to
policyholders, and can even encourage new risk-taking in the
insurance industry. Any capital requirement must be adaptable
to our markets and benefit our consumers.
It is also important to keep in mind that any new standards
are in addition to and not in lieu of State risk-based capital
requirements applicable to insurers within the group. The IAIS
is developing capital proposals for internationally active
groups, including many firms that are based in the United
States. We have serious concerns about the process and the
aggressive timeline given the legal, regulatory, and accounting
differences around the globe.
All the same, we are fully engaged in the process to ensure
that any standard appropriately reflects the risk
characteristics of the underlying business and does not lead to
unintended consequences such as limiting products available to
consumers, or stagnating growth, jobs, and innovation. We will
not implement any international standard that is inconsistent
with our time-tested solvency regime that puts policyholders
first.
Critical to the credibility of the decision-making of the
IAIS is an all-inclusive and transparent process. While we
agree that the pay-to-play structure needed to be reformed, we
believe there was a less intrusive way to accomplish that goal.
We will continue to advocate for increased transparency and to
encourage our colleagues in the Federal Government to do the
same.
We are also concerned with the lack of transparency at the
Financial Stability Board (FSB). We have had only limited
access to FSB discussions directly relevant to the very sector
that we regulate. What little participation we do have only
occurs as a representative of the IAIS, even after requesting
inclusion from our FSB representatives in the United States. We
find the lack of support for our inclusion by our Federal
colleagues troubling and not in the best interest of U.S.
insurers and, more importantly, of our policyholders.
For our part, the NAIC has longstanding procedures and
ongoing responsibilities to seek input from consumers and other
interested parties. We will continue working on these issues
through an open and transparent NAIC process. To that end, last
year the NAIC formed a working group, which I chair, to provide
ongoing review of ComFrame and international group capital
developments. We are also exploring group capital concepts
appropriate for U.S.-based internationally active groups, and
we have provided comprehensive feedback to the IAIS regarding
the proposed ICS.
State insurance regulators have also been actively involved
in the EU-U.S. dialogue project, which is designed to achieve a
better mutual understanding of the regulatory approaches used
by the United States and by Europe. A core issue of discussion
has been Europe's call for reduction in our reinsurance
collateral requirements. State regulators have worked to
develop an approach by which collateral can be reduced in a
consistent manner, commensurate with the financial strength of
the reinsurer and the nature of the regulatory regime that
oversees it.
By year-end, we anticipate 37 States representing 93
percent of the premium in the United States will have adopted
this approach. In spite of this action, Treasury has expressed
an interest in exploring discussions with the EU on a potential
preemptive covered agreement. Given the progress we have made,
the NAIC is not convinced that a covered agreement is
necessary. While we will continue to engage Treasury and the
USTR on this issue, and would expect to be directly involved in
these deliberations, we believe preemption of State law by
Federal agencies should always be a last resort.
In conclusion, State insurance regulators have a strong
track record of effective collaboration and supervision. We
remain committed to coordinating with our Federal partners. We
also take seriously our obligation to engage internationally in
those areas that impact the U.S. economy, companies, and
consumers. State-based regulation is always evolving to meet
challenges posed by dynamic markets, and we continue to believe
that well-regulated markets at home and abroad make for well-
protected policyholders.
Thank you again for the opportunity to be here on behalf of
the NAIC. Thank you.
[The prepared statement of Commissioner McCarty can be
found on page 38 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. McCarty.
And I thank all of the witnesses for your testimony this
morning. It was very insightful.
And with that, I recognize myself for 5 minutes for
questions.
Mr. McRaith, there has been much discussion surrounding the
timeline with regard to international capital standards at the
IAIS. And while U.S. representatives at the IAIS have indicated
the process is slowing, we hear many reports that European
regulators are moving ahead, in fact, conflicting reports with
regard to depending on who you talk to here in this country.
Can you give us an idea on the timing on this issue, from
your perspective?
Mr. McRaith. The international community is moving forward
with the development of capital standards that will promote
convergence over a long period of time. What exactly that
period of time is, no one knows at this point. What we do know
is that in February of this year, the international
participants at the IAIS, frankly led by our office with the
support of the Federal Reserve and State regulators, negotiated
as an international community what do we mean in terms of our
goal and our timeline.
And what we said was, we want to move forward
incrementally, in small steps. This is something that will take
a long period of time because the differences country to
country are extremely significant and we need to be extremely
mindful of potential negative unintended consequences as we
move forward.
Chairman Luetkemeyer. Mr. McCarty, what is your view of the
timeline? You are around the negotiations as well.
Mr. McCarty. Given that risk-based capital took over a
decade to develop in the United States, and about a decade or
more to develop solvency to, the original timeline of 18 months
seemed overly aggressive to impose a global capital standard
throughout all the regions of the world.
What Director McRaith is referring to, I think, was a very
important achievement. There was agreement in the meeting in
February by the IAIS to look for what would an ultimate goal
look like without setting a timeline. However, it is important
to point out that the committee structures are still being very
aggressive, and my concern about the aggressive timeline with
regard to the committee structure is that I am concerned that a
certain amount of field testing might get shortchanged in the
process.
For instance, we want to make sure that we have ample time
to test things like the GAAP plus approach and timelines other
than a 1-year timeline. I think it is important, given the very
significant impact this may have on American companies and
consumers, that sufficient time is allowed for us to field test
and test the different variables that are out there to ensure
that we have a product that encompasses the U.S. regulatory
framework.
Chairman Luetkemeyer. Do you believe that your point of
view and your concerns are being heard and addressed and are
being taken seriously with regard to these negotiations?
Mr. McCarty. We certainly have expressed this from the very
beginning. I think that the Chair and the members of the
committee understand our concern. I am just concerned somewhat
about the progress that is being made in the committee
structure. While this is a determination that has been made by
the executive committee to set an ultimate goal, it really
hasn't slowed down the pace going forward with regard to
meeting guidelines for 2016.
Chairman Luetkemeyer. Mr. Van Der Weide, are you
comfortable with the negotiations at this point? And what are
your concerns or opinions with regard to the timeline on
capital standards? Do you have any concerns about that at all?
I know you say in your written testimony that you want to
continue to work with a policy-centered type of approach that
we have here in this country. But what are your views?
Mr. Van Der Weide. I would agree with my colleagues that it
is important to get the global insurance capital standard
right, and it is more important to get it done right than to
get it done quickly. It is a pretty complicated endeavor with
lots of moving parts. We need to make sure that the rule works
for all of the major insurance jurisdictions around the world.
I think the IAIS is going to operate in a deliberate
fashion with multiple rounds of consultation on their
proposals. I think that is the right path. I think it will take
the IAIS several years to get that capital standard developed,
and there will be a multi-year implementation period as well
for each national jurisdiction.
We need to continue as the U.S. representatives on the IAIS
to make sure that is the case, that the IAIS focuses on getting
the standard right and does not excessively hasten towards that
conclusion.
Chairman Luetkemeyer. Very good. Thank you.
Mr. McRaith, my time is very limited, so I just have a
couple of comments. You and I have had this discussion before,
and I made the comment that you are an advocate and a mediator,
not a regulator, and we want to continue to hope that you
stress that position and continue down that road.
I understand that you had a recent meeting over in Italy;
is that correct?
Mr. McRaith. I was not personally--
Chairman Luetkemeyer. Oh, okay.
Mr. McRaith. There was an IAIS technical group, working
group meetings and public session in Italy recently, yes.
Chairman Luetkemeyer. Okay. I just want to get your
commitment that when you do have these international meetings,
you will work in concert with my office and this committee to
make sure we have the updated, most current information with
regard to what went on in those meetings so we can be reactive
and be supportive as we need to be.
Mr. McRaith. Mr. Chairman, we welcome the opportunity to
engage with you and members of the committee.
Chairman Luetkemeyer. Thank you very much.
With that, I yield to Mr. Capuano for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. Thank you for
yielding.
Gentlemen, thank you for coming. Could any of you point out
to me the law, the Federal law, the United States Federal law
that empowers you to regulate non-SIFI (systemically important
financial institution) insurance companies? Could you cite that
law to me?
Mr. Van Der Weide. The Federal Reserve under the Dodd-Frank
Act, the Bank Holding Company Act, and the Home Owners' Loan
Act has authority, in addition to regulating the non-bank SIFIs
that have been designated by FSOC that engage in insurance--
Mr. Capuano. There are three insurance companies that are
SIFIs.
Mr. Van Der Weide. Correct.
Mr. Capuano. And those are the three you can regulate?
Mr. Van Der Weide. Yes. But in addition to SIFIs, we are
required by law to regulate any firm that owns a depository
institution.
Mr. Capuano. Right.
Mr. Van Der Weide. A bank or thrift and several other--
Mr. Capuano. Can you point to me the law that empowers any
United States Federal agency at the Federal level to regulate a
non-SIFI, non-bank-owning insurance company? I didn't think so.
Because there isn't one. And yet, you are negotiating as if
there is.
Now, the thing that is amazing to me is that I would argue
there is a lot of work to do here.
Mr. McRaith, you have been before us many times. I hope you
count me as one of your defenders and supporters. I think FIO's
work is critically important, and I will clearly state that I
have been a supporter of an optional Federal charter--I know
that gets some people all worked up, and I will get phone calls
tomorrow. But I always emphasize the word ``optional,'' but
that is a different issue--which would then allow companies to
choose to be regulated at the Federal level.
Now, we don't have that yet. Why are you negotiating for
Federal standards for companies you cannot enforce regulations
on?
Mr. McRaith. Congressman, the work at the IAIS is the
development of standards. It is independent of the regulatory
structure in any one country. So in this work, as we represent
the United States and work closely with our State colleagues--
you will remember, I was the intern inspector for a long time
in Illinois and worked with our Federal Reserve colleagues--our
objective is to influence the consensus internationally so that
it reflects and integrates the best interests of the United
States. As those standards are developed, they are then
implemented at the State level or in some cases at the Federal
level.
Mr. Capuano. So you are hoping that the State levels will
adopt your work. So this is at the moment an academic endeavor,
which is not necessarily un-worthwhile. But in the final
analysis, after all the work that you do at the IAIS, it will
apply to three insurance companies; is that a fair conclusion?
And I understand you hope that these States will do it, and
I am happy to work with anyone who wants to talk about an
optional Federal charter, but at the moment it would apply to
three insurance companies.
Mr. McRaith. The international standards have been around
since 1994, and the States have implemented those international
standards in a way that reflects the State approach--
Mr. Capuano. So you are suggesting that the IAIS is
something along the lines of a model law, trying to do best
practices to suggest, to help our State friends see the light?
Mr. McRaith. I think the IAIS's mission is to promote
global financial stability and promote best practices and
supervision globally.
Mr. Capuano. I respect that, but first of all, they have no
record of doing so, because I don't think they have done such a
great job. Now, don't get me wrong, I think some of our State
regulators haven't done such a great job. I kind of remember a
little problem with AIG, but that is a different issue.
What I do think is that if we are going to have Federal
regulations, which I don't oppose, then you need to come to
Congress and say, ``We want to have Federal regulations on
insurance companies.'' We will have that debate. We will see if
you have the support, and if you do, we will do it. But if you
don't, I kind of think there is a lot of other things that you
should be doing, Mr. McRaith, and certainly a lot of things the
Fed should be doing that matter.
Now, I have no problem going to conferences and discussing
a United States perspective on various items, but I have to
tell you, everything I have read from the IAIS certainly looks
like they expect us to just adopt it the day after it is done.
And I understand you don't want to say that, but I want to say
it really clearly to those friends at the IAIS. We love you. We
respect you. We want to work with you. But you are not telling
us what to do.
In the final analysis, it will be the United States that
makes the decision what happens to the U.S. companies, not
other people. And, again, if we want to talk about it in the
long run, great idea. But I think it is going to be sad. And I
have to tell you, from the testimony, if you read the
testimony, there are a few things that say that, but most of
the testimony presumes that it is going to be adopted.
And I just think it is very important to put on the record
that, again, good exercise, no problem with the discussions. I
have a real problem with pretending or presuming or letting it
go unspoken that in the final analysis, this could all be for
nothing.
Thank you, Mr. Chairman, for your indulgence.
Chairman Luetkemeyer. I thank the gentleman. His time has
expired.
With that, we go to the gentleman from New Jersey, Mr.
Garrett, for 5 minutes.
Mr. Garrett. Good morning. I probably eventually will get
along the same line as the gentleman from Massachusetts, but--
Mr. Capuano. Oh, my God, Mr. Chairman. I would like to
change my--
Chairman Luetkemeyer. We are all in trouble if we associate
ourselves with your remarks, Mr. Capuano. Although today, I am
tempted to do so myself. I have to take my temperature here.
Mr. Garrett. I just want to start someplace else, and by
that time maybe I will change my mind.
Mr. Van Der Weide--and this maybe ties into it, given the
ongoing efforts in both here in the House and the Senate to
bring more accountability and also transparency to the Federal
Reserve--I would like to discuss with you in a little more
detail the international capital standards and the setting for
the IIAG and how it was originally conceived and, as you may
have already indicated, how some of this has mutated over time.
My understanding is that the initiative was originally
intended, as also indicated, to only be for the global
systemically important insurers. Then of course, in 2013 the
goal changed. A list of the entities that would be subjected to
the standards has been expanded. They now have a new category.
And so it seems to me that the Dodd-Frank process is, in
some sense, being circumvented through not a transparent method
but through a more opaque, and some would even say secretive
international process. At the end of the day, the goal would be
to have different standards than what we have right now.
And maybe I will just digress from Mr. Van Der Weide and go
to Mr. McRaith. You said, as far as the process to get there,
we are going to take small steps. The question is, to what end?
If we are going to take small steps or move the ball down the
field, I would assume that all of you would have some sort of
goal in mind as to what the goal line looks like, what the end
model looks like since you also said that we have a
dramatically or fundamentally different structures in ours
versus the Europeans.
So I will start with you, Mr. McRaith. Have you envisioned
or articulated what the end model is or goal is that you are
trying to accomplish with these incremental steps? And then, I
will go to Mr. Van Der Weide.
Mr. McRaith. Let me be clear, our work at the IAIS is to
integrate the best interests of the United States, the U.S.
view, into any global standards. What is driving that,
Congressman, is the globalization of the insurance marketplace.
Mr. Garrett. I get that. But what is the goal at the end of
the day? So you integrate something into a model, but at the
end, you should have in mind, this is what we are going to
strive for, this is how we are going to integrate it. And at
the end of the day, this is what the final product is going to
look like. Is that final product going to look like what the
American model is today, or is that model going to look like
what the European model is today?
Mr. McRaith. You are absolutely right, and to echo the
comments of Congressman Capuano, whatever is implemented in the
United States will be a U.S. approach. It will be done by the
States and the Federal Reserve where appropriate.
Mr. Garrett. So the goal is a U.S. model?
Mr. McRaith. That is correct.
Mr. Garrett. And that is the same goal to which the
international body is also agreeing?
Mr. McRaith. No. The goal is to establish global standards
that reflect and integrate the U.S. interests and impart
implementations is in the United States.
Mr. Garrett. Okay. So that is our goal. That is not
necessarily their goal. I presume their goal would be a more
European model; is that fair to say?
Mr. McRaith. In my view, Congressman, at least, and I don't
want to speak for the others, but this is driven really more by
the developing economies who are welcoming our companies into
their markets.
Mr. Garrett. Yes. But at the end of the day, if you have
two teams that are working towards opposite, different goals, I
don't understand how you can then come to commonality on it. At
the beginning of the day, you have to agree what your goal is
going to be. But I only have a minute left.
Mr. McRaith, can you tell us, as we go toward these goals
and these models, how were the exact thresholds and metrics
used to determine the standards that are being discussed in
these discussions? Is there any empirical analysis which shows
that companies that fit the metrics that are coming up will
pose either more or less risk to it? And if they do pose a
risk, what analysis or quantifiable analysis have they looked
at to determine that? Either one of you may answer.
Mr. McRaith. The capital standard is being developed
through extensive feedback and engagement with stakeholders. As
Commissioner McCarty referred to in one of his earlier
comments, there is field testing. So the firms themselves are
directly engaged in providing--
Mr. Garrett. A quick question, since I only have 10 seconds
left, Mr. McRaith, are those exact same standards being done
right now through the Fed and the FSOC for the United States?
If those standards are good internationally, why do we not have
the exact same standards here in the United States?
Mr. McRaith. The FSOC--
Mr. Garrett. I will ask Mr. Van Der Weide, please, to
address that.
Mr. Van Der Weide. The FSOC has a very independent process
around how it assesses the systemic footprint of the U.S.
insurance firms, and it is relatively independent from what the
IAIS is doing on its G-SII identification process.
Mr. Garrett. So what is good for one is not good for the
others, is what you are saying?
Mr. Van Der Weide. They each have different goals and
purposes.
Mr. Garrett. Okay. So they have different standards as to
what is good and what is bad? Okay.
Mr. Van Der Weide. Yes.
Mr. Garrett. Was that a ``yes?''
Mr. Van Der Weide. Yes, they have different standards. They
bear some resemblance to each other, but they are different in
many ways.
Mr. Garrett. It is incredible to try to understand why what
is systemically important globally is not systemically
important for the United States. I appreciate the testimony,
but that is absolutely an incredible testimony. Thank you.
Chairman Luetkemeyer. Thank you, Mr. Garrett.
With that, we go to the ranking member of the subcommittee,
the gentleman from Missouri, Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I don't have much time. What I would like for each of you
to do is to give me one advantage, if you can, of the benefits
of international standards, and then with time, I would like
you to give me a negative of international standards. So if you
could just be as succinct as possible on the benefits?
Mr. Van Der Weide. Sure, I will start on that one. I will
be succinct, but I will list off at least two benefits of
comparable global international standards for financial firms
and insurance firms in particular.
The first is achieving a level playing field across the
world. It is important for America, as foreign insurers operate
in our market, that they be subject to a regulatory and
supervisory regime that is at least as tough as ours. We don't
want the foreign companies to be able to compete in the U.S.
insurance market on more advantageous terms than our firms can
compete. So having that kind of a comparable global playing
field on some of the key regulatory and supervisory standards
can be helpful from a global level playing field basis.
It can also be helpful to achieve global financial
stability to the extent that particular firms have a very large
systemic footprint. As a general matter, systemic risk seeks
out the place where it is least regulated, and it tends to
collect and deposit there and grow. So having a decent floor
around the international regulatory standards can prevent those
sorts of accumulations of a systemic risk cesspool, so to
speak.
But there are some potential downsides of international
regulations as well, and I think the key one is if you have
international regulation that just doesn't work well for some
of the major markets, is not well-tailored to the risks in
those markets, that can obviously result in inferior
macroeconomic outcomes for those countries whose firms can't
use the rule efficiently.
Mr. Cleaver. Mr. McCarty?
Mr. McCarty. I definitely think there is a role for
international standards. As Director McRaith has alluded to for
over a dozen years, we have had insurance core principles which
I think are very valuable for evaluating not only developed
country markets but emerging markets as well. More and more of
our markets are gravitating towards Asia and South America, so
it is important that they have core principles in place to
provide some guidance on how markets should be regulated in
those areas.
My concern is not so much on standards but what the
implementation of standards, as my colleague has referred to,
that are un-implementable, where you are putting in, for
instance, a hoisting, for instance, a consolidated capital
standard with a group-centric approach like banks use as
opposed to more emphasis on a capital adequacy test or a stress
test and looking at inter-party transactions in ways to limit
risk.
And I think it could be a standard, but it is not the
standard that seems to be the preference of our colleagues
around the world.
Mr. Cleaver. Yes. Well, Mr. McRaith, I am not sure you said
that but--
Mr. McRaith. I will reply to your question succinctly.
Mr. Cleaver. Yes.
Mr. McRaith. The advantage of global standards is they will
promote further opportunities for our companies that are
seeking to grow in developing economies in Asia, South America,
and Africa. Those supervisors in those countries are looking
for common standards, common language. The potential negative
is if we, the United States, are not actively engaged in
asserting our best practices, our points of view, so that
whatever the global standard is, it incorporates, reflects, and
integrates the best interests of the United States.
Mr. Cleaver. Thank you. I yield back, Mr. Chairman.
Chairman Luetkemeyer. Thank you. With that, we are going to
adjourn for a while. We have the Prime Minister of Japan in
today for a joint session of Congress to give an address, and
many of our Members would like to attend that. We will
reconvene upon his closing remarks, as quickly as possible. I
am sure he is a politician like the rest of us, so there is no
telling how long he will talk. But we are hopeful that it will
be around an hour.
But I would ask everybody, the panel especially, to find
your way back here around 10:30 or 10:45 just in case things go
short.
With that, the Members are asked to reconvene here upon the
conclusion of the Prime Minister's speech. And with that, we
will recess.
[recess]
Chairman Luetkemeyer. Let's reconvene. And as Members keep
strolling in, we will keep a running tally of where we go next.
I appreciate the indulgence of the panel today. We will begin
this afternoon's questioning with the gentleman from Georgia,
Mr. Westmoreland, for 5 minutes.
Mr. Westmoreland. Thank you, Mr. Chairman. Before I ask my
questions, I just want to be the first to thank Mr. Capuano and
Mr. Garrett for their questions. And I want to follow along the
same lines as my colleagues. I believe neither Mr. McRaith nor
Mr. Van Der Weide could cite a relevant Federal law or statute
that gives the Federal regulatory authority over non-SIFI, non-
bank subsidy insurance companies. But yet you continue to
negotiate international insurance standards that you say will
apply to all insurance companies. Now, to my knowledge, we
still have State-based insurance regulation. Is that true?
``Yes'' would be good.
Mr. Van Der Weide. Yes.
Mr. McRaith. Yes.
Mr. Westmoreland. If you have no regulatory authority over
99 percent of United States insurers, what do you tell your
international partners about your ability to enforce the rules
you agree with in our country? How do you explain that?
Mr. McRaith. Congressman, the first thing that we wanted--
let me start at the beginning, if I may. International
standards are not only for the United States. As I mentioned
before the break, other countries are looking to the global
standards to implement in their countries. So our mission is to
shape those standards in a way that reflects the perspectives
of the State regulators, the Federal Reserve, and the best
interests of the United States.
Mr. Westmoreland. What business do you have telling other
countries how to regulate when you don't have any regulation
over 99 percent of the insurance companies here?
Mr. McRaith. It is important to understand that the
international standard-setting process is very much a global
and consensus-driven process. The State regulators are, of
course, very involved, and the Federal Reserve. It is
consensus-driven. The goals are to promote financial stability
globally. As we learned through the crisis, national economies
around the globe are connected and affect one another.
Mr. Westmoreland. Are any of these companies SIFIs? Are
they a problem? Are they a threat to our economy?
Mr. McRaith. Forgive me, Congressman, I am not sure I
understand your question.
Mr. Westmoreland. You are talking about financial
stability, worldwide financial stability. How do these
insurance companies play into that? They are not banks.
Mr. McRaith. That is correct. Insurance companies are very
significant participants in global and national capital
markets. They are essential participants in financial services.
The firms that are looked at for global purposes are firms that
are massive, complex, sophisticated enterprises that are
engaged in a variety of financial activities around the world.
Mr. Westmoreland. I am going to go back to the original
question. How do you explain to the people, the Europeans or
the rest of the world, how you are going to participate in
effecting standards for their insurance companies to operate
under, when you don't have any control over 99 percent of the
insurance companies in this country? I am a little slow--I am
from the South--and I understand that. But I am just having a
hard time getting that. And Mr. Van Der Weide, if you want to
jump in there at any time, I would love to hear from you.
Mr. Van Der Weide. Sure. Thank you. As you know, we
collectively, the States and the Federal Reserve and the FIO,
negotiate the international insurance standards at the IAIS
level. And as Director McRaith said, we are attempting to do
that to advance the interests of the United States. The other
countries around the table understand generally how the U.S.
insurance system works. They understand it is primarily
regulated by the States, and that the vast, vast majority of
insurance companies are regulated only at the State level, and
that the Federal Reserve only has a handful of holding
companies that it supervises on a consolidated basis. So they
understand that. But in our negotiations, we are attempting to
make sure that the interests of the NAIC, the Federal Reserve,
and also the FIO are reflected. And we are trying to make those
agreements in America's best interests.
Mr. Westmoreland. I know my time is just about up, Mr.
Chairman, but Mr. McCarty, could you respond to my question?
Maybe you can help me out a little bit.
Mr. McCarty. Yes. The NAIC was a founding member of the
IAIS. And we thought it would be very productive for insurance
regulators in the United States and around the world to work
together collaboratively, cooperatively, looking at ways of
looking at risks, how we could supervise, set some basic
insurance core principles for the developing world, the
developing nations. But the genesis, the initial genesis was to
be a sharing of ideas, learning, looking at best practices,
perhaps improving our own practices back home by looking at how
practices are done around the world.
Insurance is very different, as you know, from banking. It
is very specific to an individual country and jurisdiction and
products. And so, we use it as an opportunity. Over time, the
IAIS, through the FSB, has been tasked with responsibilities of
setting global capital standards. Obviously, that will have a
great impact on our country. For my purposes, in the State of
Florida, I get 80 percent of my reinsurance from global capital
companies. So it is very important to me what standards are
being set. Since we do supervise 100 percent of the private
insurance market in the United States, we think it is important
that we have a role in discussing these issues and what impact
they may directly have or indirectly have on our consumers of
the United States, on our insurance firms, and of course back
home to the people of Florida.
Mr. Westmoreland. Thank you. And my time has expired. But I
hope we will do one more round. Thank you.
Chairman Luetkemeyer. I thank the gentleman. With that, we
go to Mr. Williams, the gentleman from Texas.
Mr. Williams. Thank you, Mr. Chairman. Thank you all for
being here today. I am a small business owner, and have been
for about--well, my family has been for 75 years. I am in the
car business. I am a car dealer. I have to buy a lot of
insurance. And I believe in the private sector. Listening to
some of this testimony today, I am worried to death about it.
Am I going to have to deal with somebody overseas telling me
how to--what I need to insure my cars for and this and that,
rather than my local insurance person? It really has me
concerned.
And the other thing, in listening to the testimony, I am
concerned that you, Mr. McCarty, who actually represents me in
this dialogue, are not really not at the table. You really
don't have much to say. And that bothers me because I am a
customer, I live with this every day, and I am concerned of
where we are going forward, as you have heard, with a dialogue
that you really don't represent anybody to have conversations
with. So with that being said, let me say this, and I will
address my questions to you, Mr. McCarty. The United States'
regulatory system, I think we all agree, is very different than
what we see in Europe and in other international markets. What
do you see as the paramount interest of the United States when
it is involved in negotiations, discussions with these
international regulatory groups? I think you can probably be
pretty simple on that.
Mr. McCarty. Yes. I obviously share your concern about what
potential impact global standards would have. On the local--
Mr. Williams. I don't speak German, I don't speak Italian.
Mr. McCarty. Yes. And that is why it is very important for
the U.S. team, all of us, the Federal Reserve, FIO, and of
course the regulator, to be partners at the table and to make
sure that whatever standards are being set do not have any
detrimental impact on our companies. Our companies not only do
business in America, but do business abroad, where more and
more insurance is being sold. Our concern, I think from a State
regulator perspective, is that there really isn't a voice at
the FSB representing insurance interests. We respect our
colleagues from the other financial sectors who are on that,
but it would really be in the best interests of American
companies and American consumers to have the regulators who
regulate insurance actually have a voice on the FSB.
Mr. Williams. I agree. Would you say it is the job of the
FIO Director to represent the interests of the State
regulators?
Mr. McCarty. My understanding of Dodd-Frank is that the
role of the Federal Insurance Office Director is to represent
the United States at the IAIS as appropriate. I think that is
specific in law. I think the NAIC by and through its Directors
and commissioners and staff members participate in all levels
of the IAIS. The Federal Insurance Office does not regulate
insurance, the State regulators do, but the FIO does have a
role as specified under Dodd-Frank. And I think it is important
to understand that while we have our differences because we
come from different perspectives and views, we all work very
collaboratively, and we try to have a unified U.S. team
approach. And we do the best we can to achieve that to make
sure that folks, small businesses back home are protected.
Mr. Williams. It would work really well if you were there,
having a voice. As a representative of the State regulators, do
you and the FIO Director share the same goals, to advance the
interests of the U.S. insurance industry and State regulators?
Mr. McCarty. I have known Director McRaith for a number of
years, and we have had a number of conversations. We have
different approaches. We have an approach at the NAIC, as you
may be aware, a very transparent process for open discussion
and dialogue, pros and cons of developing positions. The
Federal Reserve and the FIO are culturally different in that
regard in how they make those. In my conversations with
Director McRaith, I am very confident that he is very concerned
about the role of American companies, and is only interested in
going forward with what would protect the consumers of the
United States. And that has been my best impression.
Mr. Williams. My last question, quickly, given that the
U.S. insurers are regulated by the 50 States rather than one
Federal or national entity, what do you think is the proper
role of the State insurance commissioners in these
international settings in terms of complementing the FIO
Director?
Mr. McCarty. I do believe, as the regulators--I come from
Florida, and I speak for Florida, and I also speak on behalf of
the NAIC, and we do have a process for granting that authority.
But by and large, we are still viewed as individual States. I
think our voice in terms of what is appropriate in terms of
establishing standards for insurance, whether it is capital
standards or group supervision, et cetera, our opinion should
be central to that discussion.
But we certainly understand the role that has been given by
the Congress to the FIO, and of course our partners with the
Federal Reserve who are now also joining us at the IAIS. And we
are working as best we can to make this an effective and
efficient way of protecting American businesses and American
consumers.
Mr. Williams. Thank you for your testimony. Mr. Chairman, I
yield back.
Chairman Luetkemeyer. Thank you. The gentleman yields back.
And with that, we go to the gentleman from Kentucky, Mr. Barr,
for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. And thank you to the
witnesses for your testimony today. Mr. Van Der Weide, I have a
question for you relating to the Fed's participation in FSOC
and SIFI designations for insurers, and particularly these
global systemically important insurers. My question is, what
criteria were used to designate the three insurers as SIFIs?
Mr. Van Der Weide. The FSOC publicizes a summary of its
decision whenever it designates a non-bank SIFI. And that was
true as well for the three insurance non-bank SIFIs that the
FSOC has designated. They have also put out a public framework
to describe the factors that they used to assess whether a
particular non-bank financial firm is a SIFI. And those
procedures were followed in the process that led to the
designation of the three U.S. insurers as non-bank SIFIs.
I think the FSOC recognizes that traditional insurance
activities tend to generate low amounts of systemic risk. But
there are a fair amount of nontraditional insurance activities
that are engaged in by those three firms, and those did
generate some amounts of systemic risk. Some of the key factors
that were cited in the FSOC's decisions included the extent of
short-term funding activities at those organizations, the
extent of their capital markets activities--repos, securities,
lending, OTC derivatives--which create interconnectedness with
the rest of the financial system, and also the runnable
liabilities of some of those firms embedded in their insurance
or annuities products, which would enable the annuitant or the
insurance policyholder to potentially take out its money from
the firm on short notice. But those are some of the factors
that--
Mr. Barr. When you published the findings and the
designations, did you discuss the extent to which those factors
or those activities that you deemed to be more risky or
systemically relevant--were there criteria that would send a
signal to the insurance marketplace what a firm, a systemically
important insurance company could do to derisk to escape the
SIFI designation?
Mr. Van Der Weide. Yes, the firms were informed at a deeper
level beyond the public document--
Mr. Barr. And I will just interject here if you don't mind,
just because it is the input from those designated firms and
others in the insurance industry that there is a lack of
clarity, a significant lack of clarity as to those criteria and
those factors and what is required of those firms to derisk
sufficiently to be de-designated, if you will, from the SIFI
status.
Mr. Van Der Weide. Right. Each of the three firms was given
a much more detailed private explanation for the factors that
the FSOC felt were indicative of their SIFI status. So I think
they do have a pretty good sense of the kinds of elements of
their balance sheets and business operations that did result in
the FSOC's decisions. I do agree with you that it is very
important that there be a potential de-designation process. It
is not meant to be a ``Hotel California'' stay, and it is
important that the FSOC carry out its annual reevaluation
process, which is written into statute, and to give each of the
companies a chance to go through that process.
Mr. Barr. Thank you for that answer. A quick follow-up: As
you know, the G-20 directed the FSB to identify global
systemically important banks (G-SIBs) that would be subject to
these international capital requirements. And my question would
be did the G-20's work have any bearing or influence on
domestic regulators' SIFI determinations, or is there any
connection there?
Mr. Van Der Weide. No, they were very independent
processes. I believe the FSOC designated a firm first, and then
the FSB made their decisions for the entire set of global
insurers and picked out three U.S. insurers, and then the FSOC
came back and did two more later. But the processes were quite
independent, and the approaches that the two organizations
take, the FSOC and the FSB, were different. They are obviously
looking at some of the same factors, but they have different
approaches as to how they assess the systemic footprint of an
individual firm. For example, the IAIS methodology is a little
bit more algorithmic or formulaic, the FSOC's approach is a
little more firm-specific judgmental. But the--
Mr. Barr. Let me ask you a question. I don't have much
time. Are the three firms that were designated SIFIs by FSOC
internationally active insurance groups?
Mr. Van Der Weide. Yes.
Mr. Barr. So they would be subject to this process. So you
are saying you have independent and conflicting processes, one
international, but you have an independent domestic designation
process.
Mr. Van Der Weide. I don't think they were conflicting, but
they were independent processes.
Mr. Barr. Okay. Really quick to Mr. McCarty, you indicated
that preserving regulatory independence and diversity can serve
as a buffer against contagion. Can you elaborate really quickly
on that?
Mr. McCarty. Absolutely. I think for all intents and
purposes, if you look at insurance, the diversification of risk
actually helps minimize systemic risk. And our concern is, as
we move and move more towards a global capital standards and
have a common assessment of risk, a common assessment of
assets, that we are actually moving more towards emphasizing
and potentially exacerbating systemic risk than getting away
from it. So we think that a more jurisdictionally-based
approach would be more prudent in minimizing risk.
And if I could make just one quick comment about the FSOC,
we are very concerned about the designation process, the
transparency in the process, and making sure that the
regulators that regulate insurance understand. Because one of
the ways we can address this is we can put more regulation,
more policy measures, more capital, or another approach we can
take is to take away some of that risk. Finding out ways of
eliminating risk. The last financial crisis we didn't--I know
what risks were out there. One of the roles FSOC can play is to
help us identify those risks and help companies eliminate that
risk so we are not necessarily exacerbating a situation and not
just trying to address it through more regulation and more
capital.
Mr. Barr. Thank you. I yield back.
Chairman Luetkemeyer. Thank you. Mr. Van Der Weide, I want
to let you know that you gave us more information in your 2 or
3 minutes' response here than all of the other folks we have
had before this committee, put together, when we asked that
question about SIFIs. Thank you for your response.
Next up is the gentleman from Florida, Mr. Ross. And then
after that, Mr. Green wants to participate. So we will start
with Mr. Ross.
Mr. Ross. Thank you, Mr. Chairman. And gentlemen, thank you
all for being here. I want to follow up on what Commissioner
McCarty was talking about with regard to SIFI designations,
especially for non-bank financial institutions. And I must put
in a plug for a bill that I have filed that asked for the
transparency for that particular designation not only as to why
they got in there, but how they can get in there, and how
frequently they can seek to get out of there. I also want to
put in a plug, because I have dealt with the NAIC. And I am
grateful to you, Commissioner, and to Senator Nelson, who is
also here, for the efforts that you have given to me with
regard to private flood insurance, because I think it is very
important for consumers out there to have that option. And also
with regard to another bill, also bipartisan, dealing with
disaster savings accounts. As we are on the cusp of hurricane
season starting May 1st, the more that we can incentivize
private customers getting in and mitigating their structures,
we know that for every $1 spent in mitigation, we save $3 in
relief. And so, I give that out as a commercial public
statement there.
But now I want to get back into why you guys are here.
Commissioner, let me ask you something. With regard to the
international capital standards, assume, if you will, that they
are passed and that they are imposed on the individual States,
which would require maybe even putting more capital--set aside
more capital, maybe some more costs of compliance, but anyway a
greater cost. Is this something that as an insurance
commissioner, you would expect to be allowed to be recovered in
the rate that ultimately would have to be paid for by the
consumer?
Mr. McCarty. Yes. And actually, it is a little more
complicated than that. Because if you do impose a capital
standard, let's say it is a capital standard that is more in
line with what we are seeing from a European model as opposed
to what we would say is a capital adequacy model, which we
would be advocating, there are many complications. One is that
you run the risk of less products, because less products would
be seen as viable under a different capital regime. That may
punish longer-term products that many American companies sell,
particularly in the annuities marketplace. You would see some
disruption in the marketplace because you have visions of some
winners and losers. And some of the people would gravitate to
those companies that have the higher capital standards, which
could cause disruption in the marketplace and unintended
consequences.
There is also the potential of other unintended
consequences such as stagnation of growth, less products
available, and less senior products available in particular. So
there are a lot of things that we have to take into
consideration that would cause unintended disruptions in the
marketplace.
Mr. Ross. Mr. Van Der Weide, are any of these studies that
you may have conducted in analyzing the impact of the IAIS
capital standards?
Mr. Van Der Weide. The IAIS capital standards are very much
still in development. At this point, the IAIS has not even
settled on a basic kind of framework for how they would
approach--
Mr. Ross. But you would agree that there should be some
type of impact study of--
Mr. Van Der Weide. Yes, absolutely. We think the IAIS
should be doing impact studies. And before we do any
implementation of any international standards, we also need to
do a very detailed amount of cost-benefit analysis to make sure
they work for our country, for our insurance firms, and for our
insurance consumers.
Mr. Ross. Okay. And Director McRaith, I understand that you
are going to be negotiating some covered agreements with three
insurers coming up soon. Is that something that--what is the
status of that right now? And what are your expectations with
regard to the impact it is going to have on domestic reinsurers
as opposed to foreign reinsurers?
Mr. McRaith. The covered agreement is a serious endeavor.
We have never done it before. We are sorting through internal
process questions. Before we negotiate, during any
negotiations, we will work actively with this committee to
ensure that you are informed. The outcome of any agreement is
very difficult to predict. Of course, we haven't even commenced
negotiations. But I can tell you the only way in which we
pursue and reach an agreement is if it serves the best
interests of our country, including U.S. reinsurers who might
be operating within the European Union.
Mr. Ross. I appreciate that. And I appreciate the further
guidance on that. Finally, Commissioner McCarty, is there
anything that we can do--I understand, look, that we have
probably the best system of insurance regulation in the world.
And nobody else has our particular models that have been
provided for under the McCarran-Ferguson Act that allow each
State to do that. I assume there are always some problems and
some issues, and that each State addresses them. Is there
anything that you would recommend for us as Members of
Congress, that we should be ready to be preemptive on if
necessary in the event of anything you see coming down the pike
with regard to IAIS capital standards?
Mr. McCarty. Actually, I have a lot of confidence in the
team that we have on the field. We are kind of new at this. The
U.S. system is complicated, and a lot different than the rest
of the world. And it is very difficult for the IMF and others
to really understand the complexity of the U.S. system and the
different parts that are involved. I am confident to say that I
think we do have a powerful voice. Director McRaith sits as the
Chair of the technical committee, and has made very significant
progress in allowing a different path away from the market
consistent valuation to include a GAAP plus approach. So the
American voice is being heard. And I think if we continue to
work together--I think it is not clear all the time just how
much work is being done behind the scenes at the senior level
as well as at the staff level of trying to work our way through
to come up with comprehensive, cohesive U.S. positions. And I
think if we continue those efforts and continue to report back
to you, with your oversight, we will hopefully devise a system
that complements the U.S. regulatory system and does not
challenge the system we have in place that has worked so well
for our consumers.
Mr. Ross. Thank you very much, Commissioner. I yield back.
Chairman Luetkemeyer. I don't want to keep picking on Mr.
McCarty here, but it seems like he always gets the last
question. And so, you need to keep your answers concise. But
since we don't have very many people here, we are going to
allow the questions to go a little longer. With that, I yield
to the gentleman from Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. And I thank the
witnesses as well. Mr. McCarty, because you weren't quite
finished, I will yield some of my time for you to continue with
your response, if you would like. Because my question that I
was going to lead with was one that deals with the
international developments at the FSB as well as the IAIS and
how they work in conjunction with the State and Federal levels.
So you can you continue, please?
Mr. McCarty. Just to be clear, you are talking about the
Financial Stability Board, the FSB?
Mr. Green. Yes.
Mr. McCarty. Yes. We do have some concerns from State
regulators' perspective about the FSB since the FSB is really
comprised of largely people who have a bank-centric view. We do
have our U.S. representatives, and we feel very comfortable
that they represent the U.S. position. But as the U.S.
regulators of insurance, we feel that we should play a more
prominent role and have a voice on the FSB.
Our concern is that oftentimes the principals at the FSB
view the insurance through the prism of banking. And we know
there is a very different business model for banking and
insurance, and that it would be very problematic for the
insurance industry, for us to have superimposed on us a
regulatory regime that is capital-based, capital and bank-
centric. And so having a voice in that arena would be very
helpful.
Mr. Green. Let's talk about AIG for just a moment. I am
sure there has been a substantial amount of discussion. But as
you know, we bailed AIG out to the tune of about $80 billion.
And I am also proud to announce that the government has been
successful in collecting, which is a good thing. But with
reference to AIG and the means by which we found ourselves
having to bail AIG out, are there State or Federal laws or
regulations that would prevent AIG from doing this again?
Mr. McCarty. I don't think there has ever been any more of
a studied case study in the history of the financial sectors
than has been done on AIG. I have had the opportunity to
discuss this with my colleagues across the different financial
sectors. And it is important to understand that the failure of
AIG was not a failure of the State regulatory system; it was a
failure of the regulatory system because of the financial
services division that was left largely unsupervised. It was
under the Office of Thrift Supervision. They had a light touch,
if you will, in terms of consolidated supervision. That, of
course, has been remedied under Dodd-Frank. Those
responsibilities have been moved to the Federal Reserve. I feel
fairly confident that the Federal Reserve will not have a light
touch when it comes to supervising from a consolidated basis
the organization within the structure of an AIG or any other
company under its supervision.
So I do think appropriate steps have been taken. And I
think that again, this is going to require--the Federal Reserve
and the States have been working together for years. We really
regulate very different aspects of a company. We look more at
the insurance entity from the inside, and they look more at the
group. I think, though, that with cooperation, collaboration,
continuing to work with our colleagues, we will be able to
provide a structure to prevent a future AIG. But I would like
to emphasize once again that the way to address this is to
identify risk, systemic risk in particular, and figure out ways
of minimizing that so it doesn't pose a risk to the greater
economy.
Mr. Green. On that point, if we had been in a position such
that there was a requirement to view the capital standards of
the group at the group level, would we have been able to spot
the issues that caused AIG to collapse before this happened?
Mr. McCarty. No. I have been in conversation with a number
of people on this subject, and from my understanding, there is
no amount of higher loss absorbency that you could have put in
or contemplated that would have prevented the meltdown of AIG.
It was not a matter of insufficient capital or an overlay of
capital; it was a matter of supervision, and quality
supervision, and identifying the risk and finding out ways to
deleverage that risk.
Mr. Green. With my 15 seconds that are left, would anyone
else care to comment on that?
Mr. Van Der Weide. I will just comment briefly that I think
Commissioner McCarty has identified correctly the main tool
that is now available to deal with an AIG problem going
forward, and that is the FSOC has the ability to designate any
systemically important non-bank financial firm and to hand them
to the Federal Reserve to provide consolidated supervision and
regulation of the entire group. And I think that is probably
the most targeted tool that Congress has now developed to
prevent a recurrence of an AIG-style event.
Mr. Green. Thank you, Mr. Chairman. I yield back.
Mr. Westmoreland [presiding]. The gentleman yields back.
Mr. Pearce is recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman. I appreciate the
testimony that you have each brought here. Mr. McRaith, I think
I might talk with you first. Tell me a little bit about the
driving compulsion behind this regulation of the insurance
market. Where is that coming from? It is my understanding that
there is not a law that says we should do it. So what is it
that is not functional about the system that says we need to
start changing things?
Mr. McRaith. Congressman, are you asking about the
international standards?
Mr. Pearce. No, I am just asking why the underlying--what
is the underlying value that says now we have to start
regulating this market? Why did your position get created? Why
is the Federal Government getting into the market? Is that a
fair question, Mr. McCarty?
Mr. McCarty. I think there are specific things under Dodd-
Frank that require the Federal Insurance Office, for instance,
to identify gaps in insurance regulation in the U.S.
marketplace, but also serve as a role representing the U.S.
Government as appropriate at the IAIS. And I think that is the
function that--
Mr. Pearce. As a previous buyer of insurance for a
business, I am alarmed when I see the Federal Government come
in. So I am going to come back to you, Mr. McRaith. But does
your agency, Mr. McCarty, see some reason for concern in what
is coming out of the Federal Government?
Mr. McCarty. We obviously have concerns with a new partner
in the arena, a new player in the arena, as to what role they
will play and how much jurisdiction they will exercise. So we
are very guarded in making sure that State regulation is
protected. We will do so with an eye towards collaboration and
cooperation. But we certainly want to protect what we think is
appropriately the Congress' view, which was restated in Dodd-
Frank: insurance regulation is by the States.
Mr. Pearce. Mr. McRaith, you used to be a State regulator.
Is that system not working? Is that the reason that you all are
getting into it? Do you see your regulations being in addition
to, on top of, or in place of State regulations?
Mr. McRaith. Congressman, we are not establishing
regulations or imposing regulations. Our work internationally
is to take the best ideas of our State system, and of the
Federal Reserve, and to ensure that those ideas are reflected
in the global standards that are set at the IAIS.
Mr. Pearce. You don't think that eventually those standards
will seep down into the market here?
Mr. McRaith. The only way those standards are implemented
in the United States is either through the State system or
through the Federal Reserve. International standards in the
insurance sector have been around--the IAIS was founded in
1994. Standards have been around for 15, 20 years. They are not
new.
Mr. Pearce. Mr. Garrett's questions evidently eased into
this area, and it didn't--the words I got back were not quite
as clear-cut, that there was this great delineation between the
markets that in fact they are tending towards being the same.
So you are just saying that is not true, that we are going to
keep ourselves nice and clear. Because take a look at it from
our perspective in the West. Back when we had local
jurisdiction over local forests, we had operating Forest
Service, we cut timber, the West thrived, we had jobs there.
The Federal Government got into the business of the forests,
and now 85 percent of the Forest Service is dead--85 percent of
the forest market is dead, the companies are gone, jobs have
disappeared in our district. And what I see is that any time
the Federal Government starts playing around with anything
regarding business, then it tends to choke that business off.
So when I sit here and talk and listen to Mr. McCarty saying
that we have cause for concern, and I hear you saying, oh,
don't worry about it, I tend to believe I have cause for
concern rather than the ``don't worry'' piece of it. And just
know that we in the West struggle because there is so much
public land, so much public, Federal Government involvement in
the processes that they are choking off our economies one piece
at a time, whether it is oil and gas, whether it is the
Endangered Species Act, using a spotted owl to stop all the
timber and later the Federal Government says, sorry we
shouldn't have done that, it was never the problem, logging was
not the problem. We are the ones who live at the end of that
pipeline. So I am concerned about the direction that you are
headed, the fact that we have created your spot. And I am
concerned that it feels like it is tending towards concerns
that Mr. McCarty might have and his association might have.
Because I will be speaking for the people who buy insurance out
there trying to just make a living day to day and hire a few
people in the local area. That is what I don't want you
involved in. Thanks, Mr. Chairman. I yield back.
Mr. Westmoreland. The gentleman yields back. I now
recognize the gentleman from Pennsylvania, Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman. And thank you, panel,
for sticking with us. We have a lot going on this afternoon. I
apologize if any of my questions might be redundant. I haven't
had a chance to take a look at what other Members have asked.
But Director McRaith, I wanted to start with you. When
participating in international discussions on insurance
regulation, and the United States is considering its position,
how do you take into account the position of State regulators
and the NAIC?
Mr. McRaith. We have extensive engagement and consultation
with the State regulators on a constant basis. So we have
regularly scheduled calls at least monthly. We have weekly, if
not daily engagement at the staff or leadership level. Meetings
that are ongoing will meet throughout the day or during the day
of the meeting itself to ensure that we are all aware of and on
the same page.
Mr. Rothfus. I want to move to Commissioner McCarty and get
your feedback. Would you say that the Federal Insurance Office
and the Feds seek your feedback and represent States
appropriately?
Mr. McCarty. I would say that we have a very complex
interaction with the Federal Reserve and the FIO. We have, as
Mike has indicated, multi-level work streams working at the
IAIS and the EU-U.S. dialogue on a number of issues. We do do a
lot of interaction, and we certainly would welcome the
opportunity to provide them with our history and background on
solvency, prudential regulation in the United States. Mike, of
course, is very familiar with that in his former position. We
think that we are the subject matter experts on this, and would
certainly like to give deference to that, but they have their
own respective roles in this regard, and they make their
decisions accordingly.
Mr. Rothfus. Have you proposed or are you considering
proposing ways to improve coordination and representation when
international insurance discussions come up?
Mr. McCarty. Frankly, what started out as a relatively
informal process has become a much more formalized process. And
we continue to improve that. In advance of our IAIS meetings,
we have a number of meetings in advance of that to look at the
different decision points that are coming up, finding
commonalities where we can agree, and figure out ways of
strategically presenting those in the best interests of the
United States.
Mr. Rothfus. I wonder if Deputy Director Van Der Weide and
Director McRaith could maybe comment on coordination and ways
to do things better? Are there any proposals on the table?
Mr. Van Der Weide. In the past months we have increased
extensively the amount of engagement that occurs amongst the
FIO, the Federal Reserve, and the NAIC and the States on how we
go about doing the international negotiations. It is quite
important that to the maximum extent possible, we present a
united American front in those negotiations with our European,
Asian, and other international colleagues. And we are trying
the best we can to do that. I think the consultations have been
going quite well, and the collaboration has improved
considerably as we have now entered into the more active phase
of those negotiations. So I think the trend line is quite
positive on increasing collaboration. And I am reasonably
optimistic that we will be able to keep that increase going.
Mr. McRaith. Congressman, my only additional point is that
when we started a few years ago, we started for the first time
in the history of the country integrating the national and the
State perspectives internationally. We have learned as we have
moved forward. We have a very rigorous, aggressive engagement,
coordination effort right now. We will, of course, continue to
learn as we move forward. But we are in a good place, and we
will only get better.
Mr. Rothfus. Director Van Der Weide, do you expect to
finish our domestic standards before the IAIS sets its
standards?
Mr. Van Der Weide. I can't give you any definitive timeline
on the Fed's development of its capital framework for the
domestic insurance holding companies that we supervise. We are
extensively engaged right now in outreach with U.S. insurers,
and U.S. insurance supervisors to better understand how the
U.S. State level risk-based capital regime works, and to
measure the cost and benefits of various alternatives that we
might take towards establishing those holding company capital
requirements.
Mr. Rothfus. So as far as finishing our standards before
the international standards are set, you can't make a
commitment that say our standards are going to be first and
then use that as a benchmark going in discussing the
international ones?
Mr. Van Der Weide. Yes. I can't give you a definitive time
as to when we will complete our process. We are going to--
Mr. Rothfus. Would it be a good idea if we did that?
Mr. Van Der Weide. I think it is important when we
negotiate those international capital standards, that we do
have a good vision, a shared vision among us as to the right
outcomes. I think that is right. But at the same time, the
pressure on us is we do want to get the domestic capital regime
right. And it is a pretty complicated endeavor. We have a very
diverse set of insurance firms that we need to devise a capital
framework for, and we don't want to hastily produce a rule that
doesn't work well for those firms. So it is important that we
get that rule right. And we don't want to excessively
accelerate that process.
But it is important, I think you are right, your instinct
is right, that we need to, when we negotiate internationally at
the IAIS, have a reasonably good shared vision of kind of the
outcomes that we are driving towards.
Mr. Rothfus. Thank you, Mr. Chairman. I yield back.
Mr. Westmoreland. The gentleman yields back. I will
recognize Mr. Green from Texas.
Mr. Green. Thank you, Mr. Chairman. I would like to borrow
some of the language from my colleague. I wasn't available to
hear and see all of the hearing, so this may be redundant as
well. But I do appreciate the testimony that I have heard. We
do have a good many things going on today, I assure you. But
with reference to competitiveness not only nationally but
internationally, I think that we all understand that we don't
want American companies to be at a disadvantage. And
specifically as it relates to the insurance market, there seems
to be a notion that the regulators have a better understanding
of banking than insurance law or insurance needs. What are some
of the risks that are unique to the insurance industry? And if
you have already answered, I beg your forgiveness, but I think
it is good for me to hear this and for it to be repeated. Some
things bear repeating.
Mr. Van Der Weide. I will field that one. I think it is
important, as the Federal Reserve devises its insurance
supervision and regulatory framework for the 17 insurance
holding companies that we supervise, that we make it reflect
the insurance risks and the insurance business models of those
firms. It is not appropriate for us to take a bank-centric
model and apply it those firms. The Collins Amendment to the
Dodd-Frank Act had required us to do that on the capital front,
but thanks to congressional action in December, those shackles
have been removed and we are now free to implement fully
insurance-centric regulatory regime for those firms.
Insurance is different from banking in a significant number
of ways. I will just mention a few of the key ways in which we
think it is different. Insurers, particularly life insurers,
tend to have longer-term liabilities than banking
organizations. And they tend to engage in less liquidity
transformation and maturity transformation. I think that
militates in favor of a different regulatory regime. They also
tend to have liabilities that are uncertain in amount. Bank
liabilities tend to be of a fixed amount. The insurers' classic
insurance liabilities are of an uncertain amount. The size of
those liabilities will depend upon the eventuation of future
mortality risks, longevity risks, morbidity risks, and natural
catastrophe risks. That makes insurers quite different from a
bank. And the last thing I will mention is on the asset side of
the insurance balance sheet. Many American insurers, again life
insurers principally, have a separate account capacity. And
that is a major asset class of many life insurers that simply
isn't present on bank balance sheets. So there are a lot of
ways in which insurers are different from banks. And we need to
make sure that our regulatory and supervisory regime reflects
those differences.
Mr. Green. And you are indicating that you believe you are
in a position to do that at this time?
Mr. Van Der Weide. Yes. We had been impeded by the Collins
Amendment, but we feel like the change that Congress made to
the Collins Amendment of the Dodd-Frank Act in December frees
us up to devise a fully appropriate insurance-centric model for
the 17 firms that are prominently engaged in insurance that we
have.
Mr. Green. Thank you, Mr. Chairman. I yield back.
Mr. Westmoreland. The gentleman yields back. And before I
recognize Mr. Duffy, I want to thank all of you for your
patience. I haven't seen one of you all make a face yet when
these different Members are coming in. But this is something
that is very important to all of us. And so, I do appreciate
your patience.
But I did want to ask just a couple of questions. Mr. Van
Der Weide, is the business philosophy of international
insurance companies or European insurance companies any
different than what you might say the philosophy of a domestic
insurance carrier might be?
Mr. Van Der Weide. The internationally active insurance
companies certainly do expose themselves to additional risks
that the purely domestic firms do not. They also have
additional diversification opportunities that the purely
domestic firms do not. And our work in the international
regulatory space is to try to help make sure that we have a
globally consistent supervision and capital framework for the
foreign firms that operate in our markets.
Mr. Westmoreland. Let me ask it in a little bit different
way. Is their philosophy about what should happen if there was
a failure, who their allegiance might be to as far as what
might happen to the assets of that company?
Mr. Van Der Weide. I am not sure if I would draw a
distinction between the--
Mr. Westmoreland. Okay. Let me ask you this. I know that
our insurance companies are liable for the policyholder. That
is who they protect. My understanding on the European model is
that they protect the creditors, and not the policyholder, that
the policyholder comes after the creditor. And in the United
States, the policyholder is first. Is that your understanding?
Mr. Van Der Weide. Yes. Different international insurance
regulators have different objectives for their regimes. Part of
the challenge that we will have collectively as we engage in
those negotiations with the IAIS is to make sure that our
vision of the appropriate way to do insurance regulation is put
forward in a powerful way and is convincing. But one of the
challenges, not just in insurance, but in any kind of
international negotiation, is to deal with the different
objectives that different regulators have around the world and
try to meld those into a framework that from our perspective,
works for America.
Mr. Westmoreland. So you are committed, or whomever is
doing the negotiating is committed to making sure that the
policyholders are put in first place.
Mr. Van Der Weide. Yes. Absolutely. That will be a key goal
of ours.
Mr. Westmoreland. Mr. McCarty, do you foresee, or do you or
the State insurance commissioners have a fear that what they
are negotiating is only for these international--or companies
that participate internationally? When they write the rules for
that, is it your fear that you may have to apply those same
rules to all the insurance companies that you regulate? And how
would you do that? Would you regulate different companies in
different ways?
Mr. McCarty. You raise a very valid point. I think it is
the concern that companies have, the large internationally
active groups that may find them subject to higher capital
standards or different enhanced policy measures. Their concern
is that would put them at a disadvantage back home, where they
are competing, whether it is homeowners, or auto, or business,
liability insurance, medical malpractice, or you name it. So
the concern they have is, they are certainly not going to put
themselves at a disadvantage, and would encourage that State
legislatures apply those standards uniformly, which could have
consequences in the marketplace, both terms and pricing and
product availability.
Mr. Westmoreland. Yes. Because you wouldn't want to treat
one insurance company differently than you would treat another.
And that is what I am afraid would actually happen. And we want
to make sure that those policyholders, the people who pay the
premiums, are the first to be protected.
Mr. McCarty. Can I circle back to something you mentioned
earlier, which I think is the absolute key issue going into the
discussions about an insurance capital standard, which is, what
is the guiding principle? Is the guiding principle policyholder
protection, which for the U.S. perspective is a ground-up,
entity-based ring fencing? You ring fence those assets so they
are available. The other concepts are the ongoing concern or
creditor protection, very different policy measures and
outcomes depending upon whether you are predicated on the
policyholder protection, which we think is key.
Mr. Westmoreland. Thank you. The Chair now recognizes the
gentleman from Wisconsin, Mr. Duffy.
Mr. Duffy. Thank you, Mr. Chairman. And I appreciate the
panel being here today, and for not making any funny faces.
That is a new standard that we have in the committee. But I do
appreciate all of your appearances. I plan later today to
introduce a bill that I have been working on for several
months, the International Insurance Standards Transparency and
Policyholder Protection Act. My staff has sent you guys all
copies, or your teams copies of the legislation this morning. I
can't imagine you have had a chance to review it thoroughly and
comment on it today. I understand that you are all fast
readers, but maybe not that fast. So I was hoping to get some
of your initial thoughts on some of our key elements of the
bill.
The bill establishes notification and reporting
requirements for Federal regulators like yourselves to inform
this committee and the Senate Banking Committee when you intend
to enter into negotiations and agree to international
regulatory frameworks on behalf of the United States.
My bill also establishes a public notice and comment period
so that all interested parties may make their voices known
throughout the process. And my bill also creates objectives
that regulators must meet during the negotiation process. These
objectives promote the U.S. State-based system of insurance and
our commitment to protecting policyholders. Hopefully, you will
have a chance to review that after today's hearing and I can
get your feedback on that. But in regard to Mr. McRaith and Mr.
Van Der Weide, neither of you have an objection to keeping
Congress informed on a regular, ongoing codified basis, do you?
Mr. McRaith?
Mr. McRaith. We welcome the engagement with this committee,
with members and staff of the committee, and also with members
and staff of the Senate Banking Committee, and look forward to
that engagement. We have had that over the last few years, and
look forward to continuing that.
Mr. Duffy. But engagement might be a little bit different.
I am saying, hey, listen, we are going to systematically keep
Congress informed. And so we know what information is going to
flow from FIO and you know what information we expect to
receive, as opposed to a looser arrangement where we are just
going to have an engagement. You agree we should probably have
some kind of system in place where we kind of have a certain
timeline of getting information with regard to this process? Do
any of you disagree with that?
Mr. McRaith. I am not sure--I haven't seen your bill, so I
don't want to comment too specifically. But I don't know why
something like that would be necessary when we are happy to
visit with the committee and the staff on a regular basis and
are happy to provide updates, engagement, and share thoughts
and analysis as the work unfolds.
Mr. Duffy. I guess sometimes systems are important in
making sure certain requirements are met and certain
expectations have a bright line so you know what we want and
what we expect. And if you don't set up a process yourself on
the flow of information, I think that we here can set up a
process to say this is very clear for you what we want to know
in regard to the process and how it unfolds. Mr. Van Der Weide,
would you have an objection to a proposal such as this in
regard to keeping Congress apprised?
Mr. Van Der Weide. I think my views are very similar to
those of Director McRaith. It is important for us to keep
Congress very well-apprised on a frequent basis of our
activities collectively as we negotiate international insurance
regulatory standards. There is no question that is in the
public interest. And we feel like we have been doing that. If
there is additional consultation or information that you need
from us, we are happy to do that. But I haven't seen your bill,
and so I don't feel like I could comment upon increasing the
systematicness of the relationship in any particular way.
Mr. Duffy. Okay. And I appreciate that. But both of you
have an interest in keeping Congress informed. I do appreciate
that. Commissioner McCarty, my bill would require FIO and
Treasury and the Federal Reserve to consult with the National
Association of Insurance Commissioners throughout the
negotiation process. Do you believe that you have been kept up
to speed thus far on the process, or the commissioners have?
Mr. McCarty. It has been an evolving process. As Director
McRaith has articulated, I think we are in a good place now in
terms of those discussions and negotiations. It wasn't a
perfect process getting here, but I think we are in a good
place. I have not had an opportunity to review the bill. The
NAIC has a process for going through and commenting on
legislation. But we certainly conceptually would agree with
oversight. We are particularly concerned, sir, about the lack
of transparency at the Financial Stability Board and the lack
of transparency at the IAIS. And if there is a way for Congress
to provide some more transparency in that process, that would
be welcomed.
Mr. Duffy. I know my time is almost up, or I am 15 seconds
over, but you do believe that NAIC should be involved in the
process and kept abreast of the process, correct?
Mr. McCarty. Absolutely.
Mr. Duffy. Why is that important?
Mr. McCarty. First of all, we have been in this business
for over 130 years. We have a remarkably strong record of
providing solvency for our companies and providing a path for
ensuring that policyholders get paid even in the resolution of
a company. We have withstood many financial crises. And we have
on-the-ground knowledge of insurance regulation, which everyone
knows is very different than banking and securities. And so for
us to have an equal partnership at the table is critical.
Mr. Duffy. Thank you. And I would just ask that you guys
share your thoughts with me. I look forward to partnering with
you and working with all of you to make sure we get a process
that works for everybody and for our committee. And so with
that, Mr. Chairman, I yield back.
Mr. Westmoreland. The gentleman's time has expired. I want
to thank all the witnesses for being here. I think that at
least what I have taken away from this hearing, and the other
information that we received that what happened at AIG was
nothing but greed, and a lot of people were making a lot of
money. And as usual, what the Federal Government did was way
overreach to solve one very targeted problem that we could have
fixed. But as people close to this Administration have said,
you never let a crisis go by that you don't move the ball
forward. And so what Dodd-Frank did, specifically with
insurance companies in putting them under the SIFI rule and the
other things, is cast a net so broad that you caught all the
little fishes that you were not intending to catch. And so as a
result, we have what we have.
And there are going to be all type of unintended
consequences, as there is with anything that is complex as
Dodd-Frank and all the many rules that it has put on different
businesses, that we wonder why we only had a growth of .02
percent in our economy. It is a direct result of the
overregulation that we have today. Our confidence is more into
our State officials. I know Mr. McCarty was appointed. And I
believe you may be the first appointed State tax commissioner
from the State of Florida. Our insurance commissioner is
elected, accountable to the people. And Mr. Van Der Weide, I
don't think you were elected by anybody, were you?
Mr. Van Der Weide. No.
Mr. Westmoreland. Mr. McRaith, you are not elected by
anybody, are you?
Mr. McRaith. No, I am not.
Mr. Westmoreland. Most of our State insurance commissioners
are elected, and they are held accountable to the people. And
therefore, they put those people first. So I thank all of you
for your testimony. Thank you for sticking around.
Mr. Green. Mr. Chairman?
Mr. Westmoreland. Without objection, I would like to submit
the following statements for the record: the American Council
of Life Insurers; the National Association of Professional
Insurance Agents; the American Insurance Association; the
American Academy of Actuaries; the Property Casualty Insurers
Association of America and the National Association of Mutual
Insurance Companies.
Mr. Green. Mr. Chairman, if I may. I beg you, Mr. Chairman,
to give me about 10 seconds to--
Mr. Westmoreland. Okay, sure.
Mr. Green. --have one comment. I do believe that, Mr.
Chairman--I agree with you that there are technical corrections
that can be made to Dodd-Frank. But I want to make sure that I
let people know that there is another opinion. And that while
we can mend it, I am not one who believes we should end it. And
I thank you for the time.
Mr. Westmoreland. I thank my friend. I am glad to hear you
think there needs to be some adjustments. And I will help you
with that in any way I can.
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 1:18 p.m., the hearing was adjourned.]
A P P E N D I X
April 29, 2015
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]