[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]







 
               ASSESSING THE U.S.-E.U. COVERED AGREEMENT

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 16, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 115-2
                            
                            
                            
                            
                            
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




          
              

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PETER T. KING, New York              MAXINE WATERS, California, Ranking 
EDWARD R. ROYCE, California              Member
FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico            BRAD SHERMAN, California
BILL POSEY, Florida                  GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri         MICHAEL E. CAPUANO, Massachusetts
BILL HUIZENGA, Michigan              WM. LACY CLAY, Missouri
SEAN P. DUFFY, Wisconsin             STEPHEN F. LYNCH, Massachusetts
STEVE STIVERS, Ohio                  DAVID SCOTT, Georgia
RANDY HULTGREN, Illinois             AL GREEN, Texas
DENNIS A. ROSS, Florida              EMANUEL CLEAVER, Missouri
ROBERT PITTENGER, North Carolina     GWEN MOORE, Wisconsin
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
ANDY BARR, Kentucky                  ED PERLMUTTER, Colorado
KEITH J. ROTHFUS, Pennsylvania       JAMES A. HIMES, Connecticut
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
SCOTT TIPTON, Colorado               DANIEL T. KILDEE, Michigan
ROGER WILLIAMS, Texas                JOHN K. DELANEY, Maryland
BRUCE POLIQUIN, Maine                KYRSTEN SINEMA, Arizona
MIA LOVE, Utah                       JOYCE BEATTY, Ohio
FRENCH HILL, Arkansas                DENNY HECK, Washington
TOM EMMER, Minnesota                 JUAN VARGAS, California
LEE M. ZELDIN, New York              JOSH GOTTHEIMER, New Jersey
DAVID A. TROTT, Michigan             VICENTE GONZALEZ, Texas
BARRY LOUDERMILK, Georgia            CHARLIE CRIST, Florida
ALEXANDER X. MOONEY, West Virginia   RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
                 Subcommittee on Housing and Insurance

                   SEAN P. DUFFY, Wisconsin, Chairman

DENNIS A. ROSS, Florida, Vice        EMANUEL CLEAVER, Missouri, Ranking 
    Chairman                             Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico            MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
STEVE STIVERS, Ohio                  STEPHEN F. LYNCH, Massachusetts
RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DANIEL T. KILDEE, Michigan
LEE M. ZELDIN, New York              JOHN K. DELANEY, Maryland
DAVID A. TROTT, Michigan             RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 16, 2017............................................     1
Appendix:
    February 16, 2017............................................    39

                               WITNESSES
                      Thursday, February 16, 2017

Chamness, Charles, President and Chief Executive Officer, 
  National Association of Mutual Insurance Companies (NAMIC).....     9
McRaith, Michael T., former Director, Federal Insurance Office 
  (FIO), U.S. Department of the Treasury.........................     4
Nickel, Hon. Ted, Commissioner, Office of the Commissioner of 
  Insurance, State of Wisconsin, on behalf of the National 
  Association of Insurance Commissioners (NAIC)..................     6
Pusey, Leigh Ann, President and Chief Executive Officer, American 
  Insurance Association (AIA)....................................     7

                                APPENDIX

Prepared statements:
    Chamness, Charles............................................    40
    McRaith, Michael T...........................................    49
    Nickel, Hon. Ted.............................................    59
    Pusey, Leigh Ann.............................................    66

              Additional Material Submitted for the Record

Duffy, Hon. Sean:
    Letter from the American Agricultural Insurance Company......    71
    Written statement of the American Council of Life Insurers...    73
    Letter from Chubb Global Government Affairs..................    77
    Written statement of the Cincinnati Insurance Companies......    79
    Letter from Lloyd's America, Inc.............................    81
    Letter from the OdysseyRe Group..............................    82
    Letter from the Reinsurance Association of America...........    84
    Letter from the Transatlantic Reinsurance Company............    86
Heck, Hon. Denny:
    Letter from the Intergovernmental Policy Advisory Committee 
      on Trade...................................................    90
Chamness, Charles:
    Written responses to questions for the record submitted by 
      Representatives Duffy and Luetkemeyer......................    91
McRaith, Michael T.:
    Written responses to questions for the record submitted by 
      Representatives Duffy and Hultgren.........................    95
Nickel, Hon. Ted:
    Written responses to questions for the record submitted by 
      Representatives Duffy and Luetkemeyer......................   104
Pusey, Leigh Ann:
    Written responses to questions for the record submitted by 
      Representative Duffy.......................................   108


                        ASSESSING THE U.S.-E.U.



                           COVERED AGREEMENT

                              ----------                              


                      Thursday, February 16, 2017

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy 
[chairman of the subcommittee] presiding.
    Members present: Representatives Duffy, Ross, Royce, 
Pearce, Posey, Luetkemeyer, Hultgren, Rothfus, Zeldin, 
MacArthur, Budd; Cleaver, Velazquez, Sherman, Lynch, Beatty, 
Kildee, Delaney, and Kihuen.
    Ex officio present: Representative Hensarling.
    Also present: Representatives Green and Heck.
    Chairman Duffy. The Subcommittee on Housing and Insurance 
will now come to order. Today's hearing is entitled, 
``Assessing the U.S.-E.U. Covered Agreement.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of the subcommittee may 
participate in today's hearing for the purposes of making an 
opening statement and questioning the witnesses.
    The Chair now recognizes himself for 4 minutes for an 
opening statement.
    I first want to welcome our members to the first hearing of 
the Housing and Insurance Subcommittee in the 115th Congress. I 
am pleased to have the opportunity to work with Mr. Cleaver, 
our ranking member, and my vice chairman, Mr. Ross. We have a 
full agenda this year, including reauthorization of the 
National Flood Insurance Program, GSE reform, and many other 
priorities.
    I had not intended our first hearing to be on the U.S.-E.U. 
covered agreement, but given the 90-day layover period, which 
just began a month ago, it is our duty to study the agreement, 
to solicit feedback from the insurance industry, to assess its 
impact on policyholders, and ultimately, to weigh in on its 
merits.
    I have been listening to many stakeholders, some of whom we 
will hear from today, about the merits and the demerits of this 
agreement. Those points notwithstanding, I must say that I come 
from a place of a skepticism over this agreement that was 
signed or put into effect on Friday the 13th with just 1 week 
left in the Obama Administration. I would also remind those in 
the room that the centerpiece of Donald Trump's campaign for 
President was negotiating better international deals.
    There is no doubt in my mind that President Trump's 
election weighed heavily on European and American negotiators 
to get a deal done before he took office. The President and his 
new Treasury Secretary should be afforded the chance to decide 
for themselves whether to renegotiate or to sign this deal.
    Furthermore, I believe the committee should consider 
improvements to international insurance negotiations, to 
enhance the role of State insurance regulators like 
Commissioner Nickel, and the role of Congress in that process. 
This committee has had an interest in international insurance 
negotiations for some time and has expressed concerns about 
transparency and the potential for state-based regulatory 
systems to be undermined.
    I would also note that there has been bipartisan attention 
paid to this matter, and I commend Mr. Heck for all of the work 
he did last year to protect our State-based system. So to be 
blunt, I think a 90-day layover is an insult to this 
institution and does nothing more than pay lip service to the 
notion of congressional consultation and input.
    In the E.U., it is my understanding that there will be at 
least two affirmative votes to approve this agreement. In the 
U.S., Congress will have no affirmative votes on this deal, 
much less an ability to easily disapprove of it if we decide to 
pursue that course of action.
    So I look forward to working with my colleagues in a 
bipartisan fashion on this subcommittee to address this issue.
    I now want to recognize my colleague from Florida, the Vice 
Chair of the subcommittee, Mr. Ross, for 1 minute.
    Mr. Ross. Thank you, Mr. Chairman. And thank you for 
holding this important hearing.
    The U.S. insurance market is the largest and most vibrant 
of any nation in the world. Our market is strongly regulated by 
the States, putting an emphasis on the protection of 
policyholders. I support this system of regulation, which has 
existed for nearly 150 years. In the global insurance 
marketplace, however, regulatory systems vary. Recently, the 
E.U. implemented a directive that has created market access 
barriers for the U.S. insurers. This harms U.S. businesses and 
is a problem for our domestic companies and must be addressed.
    Today, we will discuss the covered agreement negotiated 
between the U.S. and the E.U. Ultimately, when I analyze the 
covered agreement, I am focused on its impact on consumers and 
policyholders. I want to know how this agreement will impact 
the homeowners and families in my district and the crop 
insurance premiums of those citrus growers across Florida. I 
look forward to the testimony today and I yield back the 
balance of my time.
    Chairman Duffy. The gentleman yields back. It is now my 
pleasure to recognize the ranking member of the subcommittee, 
the gentleman from Missouri, Mr. Cleaver, for 5 minutes for an 
opening statement.
    Mr. Cleaver. Thank you, Mr. Chairman. And I look forward to 
working with you on a number of critical issues. This is, of 
course, just one. And our vice ranking member, Dan Kildee, is 
also here today and will play a major role in whatever we are 
able to get going to the benefit of the country.
    I remember that under Title V of the Dodd-Frank Act, this 
hearing is supposed to take place along with a consultation. 
And I see the covered agreement as something that enhances and 
protects U.S. insurance consumers and increases, in my 
estimation, opportunities for U.S. insurance companies and 
reinsurers.
    Today, it gives us an opportunity to assess the finalized 
covered agreement that has been reached between the U.S. and 
the E.U. regarding international insurance and reinsurance 
issues. The Federal Insurance Office (FIO) and the United 
States Trade Representative (USTR) announced their intention to 
move forward with the negotiations in November of 2015. A final 
agreement was reached on January 13th of this year and a copy 
of the text was submitted to the relevant congressional 
committees, beginning a 90-day layover period. No further 
action from Congress is required for this agreement to go into 
effect.
    The covered agreement focuses on three areas of prudential 
supervision: reinsurance collateral; group capital; and 
exchange of information between supervisory authorities. As we 
all know, on January 1, 2016, the E.U. began to implement its 
insurance regulatory scheme, commonly known as Solvency II, and 
U.S. reinsurance companies began to be subjected to burdensome 
and expensive E.U. standards as our system was not equivalent 
to that of the Solvency II system.
    The covered agreement works to address this issue and will 
allow U.S. reinsurance companies to be able to continue to 
operate in the E.U. without costly new obligations. 
Additionally, the covered agreement recognizes the U.S. State-
based system. And of course, having made a commitment a long 
time ago, I would never do anything, say anything or support 
anything which would damage our State system. I think it has 
been an integral part of our system of insurance and I will do 
everything that I can to make sure it stays that way.
    So I am hopeful that this agreement will provide certainty 
for our insurance system and enhance consumer protection. I 
know there are a number of questions regarding this covered 
agreement, and I look forward to hearing them answered today. 
Thank you, Mr. Chairman.
    Chairman Duffy. The gentleman yields back. I now want to 
welcome our panel, our witnesses for today's hearing. Thank you 
for being here.
    I first want to introduce Mr. Michael McRaith. In 2011, Mr. 
McRaith was appointed as the Director of the Federal Insurance 
Office by former Treasury Secretary Tim Geithner, where he 
served until last month. He is now appearing as a private 
citizen. Mr. McRaith was integral to the negotiation of the 
covered agreement that we are now here to discuss, so we are 
grateful for his appearance. Immediately prior to his 
appointment as FIO Director, Mr. McRaith served more than 6 
years as the Director of the Illinois Department of Insurance.
    Next, from probably the greatest State in the Nation, 
Wisconsin, Commissioner Ted Nickel was appointed by Governor 
Scott Walker as Commissioner of Insurance for the State of 
Wisconsin in 2011. In December 2016, Commissioner Nickel was 
elected as President of the National Association of Insurance 
Commissioners. Commissioner Nickel is also a member of the 
National Association of Insurance Supervisors. And in 2014, he 
was appointed to the Federal Advisory Committee on Insurance, 
which serves as an advisory committee to the Federal Insurance 
Office.
    Commissioner Nickel has been actively engaged in the 
insurance industry affairs in Wisconsin. Prior to his 
appointment, Commissioner Nickel worked for almost 18 years as 
Director of government and regulatory affairs for Church Mutual 
Insurance Company in Merrill, Wisconsin. So I am proud to call 
Commissioner Nickel a friend, but also a constituent. No bias 
from the chairman here.
    Next, I want to recognize Ms. Leigh Ann Pusey. Ms. Pusey is 
the president and CEO of the American Insurance Association 
(AIA). AIA is the leading property and casualty insurance 
organization, representing more than 325 insurers that write 
more than $127 billion in premiums each year. A veteran of the 
insurance industry, Ms. Pusey joined AIA in December of 1996 
and was elevated to president and CEO in February of 2009.
    And finally, I want to introduce Chuck Chamness, who serves 
as president and CEO of the National Association of Mutual 
Insurance Companies, or NAMIC, a 1,400-member company property 
and casualty insurance trade association. Mr. Chamness served 
in the first Bush Administration as Deputy Assistant Secretary 
for Public Affairs under HUD Secretary Jack Kemp, before being 
named to his current position in 2003.
    Now, the witnesses will each be recognized for 5 minutes to 
give an oral presentation of their testimony. And without 
objection, the witnesses' written statements will be made a 
part of the record.
    Once the witnesses have finished presenting their 
testimony, each member of the subcommittee will have 5 minutes 
within which to ask questions of the witnesses.
    On your table, you will note there are three lights: green 
means go; yellow means you have 1 minute left; and red means 
your time is up.
    And with that, I now recognize Mr. McRaith for 5 minutes 
for his opening statement.

   STATEMENT OF MICHAEL T. MCRAITH, FORMER DIRECTOR, FEDERAL 
    INSURANCE OFFICE (FIO), U.S. DEPARTMENT OF THE TREASURY

    Mr. McRaith. Chairman Duffy, Ranking Member Cleaver, and 
members of the subcommittee, thank you for inviting me to 
testify. I appear on my own behalf as the former Director of 
Treasury's Federal Insurance Office and as Treasury's lead 
negotiator for the covered agreement.
    First, thanks to Commissioner Nickel and his colleagues for 
the integral role they played in the negotiations. We created 
an unprecedented mechanism for State regulators to join our 
delegation, and they attended and participated in person in 
every negotiation except the final one in Brussels, which they 
joined by telephone.
    Through a confidential Web portal, State regulators 
received every E.U. document shortly after it arrived, and 
before any U.S. document was sent to the E.U., we shared it 
with the States and then held a conference call with them to 
receive their feedback. State regulators were an essential part 
of our delegation.
    The issues addressed by the agreement are not new. 
Reinsurance collateral reform and Solvency II implications have 
been discussed in the U.S. for years. The agreement brings 
closure to these issues. While the States have undertaken to 
reform reinsurance collateral requirements, reform that 
benefits E.U. reinsurers, the States received nothing of 
benefit for the U.S. industry. Nothing.
    Through the agreement, U.S. reinsurers now have access to 
the entire E.U. market on the same terms as E.U. reinsurers 
operating in the U.S. With respect to U.S. insurer groups, the 
agreement caps the application of Solvency II to the E.U. 
operations of U.S. insurers. To repeat: The agreement affirms 
that the U.S. supervises its insurance sector as the U.S. deems 
appropriate. This outcome saves our insurers potentially 
billions of dollars, preserving American jobs and benefiting 
U.S. industry and consumers.
    States have been developing a group capital calculation for 
more than 2 years. The agreement, which applies only to those 
insurers operating in the E.U. and the U.S., does not prescribe 
the content of that calculation and does not even imply that 
States should create a holding company capital requirement. 
That notion, a complete fiction, would completely contravene 
the entire purpose of the agreement. The agreement endorses 
States for what they do, or in the case of group capital, what 
they have publicly committed to do, and gives them 5 years to 
do it.
    The agreement is cross-conditional. Neither the E.U. nor 
the U.S. receives the benefits without satisfying the 
conditions. And if a question arises, the agreement provides 
for the resolution. If both sides satisfy the conditions within 
the 5-year period, then the terms of the agreement become 
permanent, final.
    We entered into the negotiations seeking to improve the 
rigor, uniformity, and consumer protections of U.S. reinsurance 
oversight. We sought to endorse the U.S. system. We sought to 
include the U.S. State regulators in a manner without precedent 
in American history. We achieved these goals.
    We sought to remove excessive regulation that neither 
protected consumers nor supported industry. We sought to ensure 
that U.S. insurers operated in the E.U. on a level playing 
field. We achieved these goals, saving our industry potentially 
billions of dollars. While providing equal benefits to the 
E.U., this covered agreement puts America first. Our diverse 
U.S. insurance sector will no doubt always include skeptics, 
but this is not a time for our predictable debate. This is not 
a theoretical discussion about concepts or statutory 
prerogatives. This agreement answers real-time questions about 
the allocation of capital by U.S. insurers, about business 
opportunities for U.S. insurers and reinsurers, and whether 
U.S. industry operating in the E.U. employs more Americans or 
fewer.
    Will U.S. industry grow or will it be stifled? Some will 
continue to conjure up the elaborate fictions, but now is the 
time to skip the usual script, to see the real threat to U.S. 
insurers' growth and the threat to insurance jobs in States 
around our country, and to show American leadership. Now is the 
time to solve a real problem, and this agreement does just 
that.
    Thanks for your attention. I look forward to your 
questions.
    [The prepared statement of Mr. McRaith can be found on page 
49 of the appendix.]
    Chairman Duffy. Thank you. Commissioner Nickel, you are now 
recognized for 5 minutes.

STATEMENT OF THE HONORABLE TED NICKEL, COMMISSIONER, OFFICE OF 
THE COMMISSIONER OF INSURANCE, STATE OF WISCONSIN, ON BEHALF OF 
   THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

    Mr. Nickel. Thank you, Chairman Duffy. Chairman Duffy, 
Ranking Member Cleaver, and members of the subcommittee, thank 
you for the opportunity to testify here today.
    The NAIC is very concerned with the disparate treatment 
some E.U. jurisdictions are imposing on U.S. insurers and is 
committed to working with Congress and the Administration to 
address this important issue. While a covered agreement is one 
way to resolve these issues, we oppose this one. We urge 
Congress and the Administration, with direct involvement of the 
States, to expeditiously reopen negotiations with the E.U. to 
reach an agreement which brings finality to these issues and 
better protects U.S. consumers, insurers, and the State 
regulatory system.
    While we recognize that the United States received some 
benefits, including the apparent elimination of the local 
presence requirements, the current agreement does not provide 
for full equivalence or recognition of our regulatory system. 
In fact, the word ``equivalence'' is nowhere to be found in 
this document.
    This agreement places conditions on the ability of 
regulators to obtain information or to take certain actions 
currently authorized under State laws. There are potential 
conflicts between this agreement and State reporting processes, 
as well as critical examination and hazardous financial 
condition authorities.
    The group capital provisions imply State regulators are 
required to adopt a group capital requirement, but also include 
language suggesting the E.U. could apply its own group capital 
requirements and reimpose local presence requirements if the 
States choose not to act or fail to meet E.U.'s expectations. 
This is not a win for the U.S. insurers and consumers who will 
have to absorb these costs.
    This agreement does not include any evaluation of the 
creditworthiness of foreign reinsurers backing up U.S. risks. 
The Treasury Department had committed that it would never wipe 
out insurance collateral, yet it did just that. Collateral 
protects U.S. insurers and consumers from counterparty risk. 
More than $30 billion of E.U. reinsurer collateral is 
eliminated by this agreement. Absent that protection, 
regulators will likely have to find other mechanisms with which 
to protect insurers and your constituents from the risks posed 
by those counterparties.
    This agreement is also littered with ambiguities to be 
resolved by an undefined and unaccountable joint committee, 
leading to perpetual renegotiation and uncertainty. In a single 
agreement with an outgoing Administration, the E.U. achieved 
its primary objective of eliminating collateral requirements.
    In return, U.S. companies and our regulatory system 
received a form of probation which could be revoked at any 
time. The burden for this is placed almost entirely upon the 
States, with its underlying costs ultimately paid for by the 
U.S. insurers and consumers.
    These defects should be no surprise. This flawed document 
resulted from a flawed process. Unlike a trade agreement, there 
was no formal consultation with U.S. stakeholders. Despite 
assurances to the contrary, the few of us in the room were 
merely observers subject to strict confidentiality with no 
ability to consult with our fellow regulators. The process 
favored the E.U., which retains the European Parliament's and 
Council's ability to approve the agreement, whereas the U.S. 
has virtually no comparable congressional authority. This 
agreement sets a precedent that others around the world may try 
to imitate, and forces the U.S. to weaken our standards in 
exchange for very little.
    Going forward, we would like the Administration to 
establish a transparent process for negotiating and allowing 
more robust congressional and stakeholder engagement and 
providing meaningful and direct participation by all impacted 
insurance regulators.
    In terms of specific substantive improvements, the new 
agreement should provide for permanent mutual recognition, 
equivalence, or comparable treatment for U.S. firms operating 
in the E.U. It should recognize the U.S. regulatory system, 
including group supervision and capital, provide clarity in the 
agreement's terms, and finality in its application.
    In conclusion, we are committed to working toward an 
agreement which is truly in the best interest of the U.S. and 
brings closure to the issue of equivalence, but this is not 
such an agreement. Thank you, Mr. Chairman, and with that, I 
would be pleased to answer any questions.
    [The prepared statement of Commissioner Nickel can be found 
on page 59 of the appendix.]
    Chairman Duffy. Thank you, Commissioner. Ms. Pusey, you are 
recognized for 5 minutes.

  STATEMENT OF LEIGH ANN PUSEY, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, AMERICAN INSURANCE ASSOCIATION (AIA)

    Ms. Pusey. Thank you, Chairman Duffy, Ranking Member 
Cleaver, and subcommittee members. I appreciate the opportunity 
to testify today on behalf of our member companies. This is a 
tremendously important issue to the insurance industry, and it 
really needs immediate attention.
    I can't tell you how I hate to have to disagree with 
Commissioner Nickel and our leadership at the NAIC. But on this 
issue, we really see it very differently. We see this as a real 
win for insurers, for U.S. insurers.
    This was a win not only for companies operating in the 
U.S., but for our regulatory system. And for that matter, for 
our consumers, who are going to continue to be protected 
because all the provisions of the U.S. regulatory system are 
carried forward in this agreement.
    As the ranking member articulated in his opening comments, 
we all know what the problem is. We have U.S. insurers 
operating in the European Union who are being discriminated 
against today. And this was a result of the implementation of 
Solvency II over there, so whether it was in the U.K. or in the 
E.U., they were beginning to require things of our primary 
insurers operating there and their subsidiaries of their 
branches. They were requiring us to--they were basically 
enforcing Solvency II upstream into the holding company, 
requiring everything from corporate governance rules of the 
E.U. to reporting requirements to capital requirements that 
could be enforced back onto the U.S. parent, because that was 
the way they were reading Solvency II.
    For the reinsurance community, and again, as the Director 
pointed out, this was not a new issue, but what was 
increasingly difficult on the collateral front was that there 
was a reaction in Europe and they were beginning to require 
reinsurers to have a physical presence in the E.U. to do 
business there. Again, a discrimination which was not something 
they were requiring of their own companies.
    So for us, we saw this agreement as timely and a win. It 
was a win for the U.S. insurance industry because no longer can 
they export Solvency II requirements upstream to the U.S. 
holding company. That is huge. It is a recognition of our 
State-based regulatory system. It will also eliminate this 
requirement for reinsurers to have a physical presence in the 
E.U. in order to compete.
    For U.S. insurance consumers, as I just mentioned, we 
believe this continues to be a win, because it is not only 
going to bring forward the protections that are in U.S. law, 
but they will also, we believe, increase competition, which we 
think is also good for consumers to having more choices.
    For the U.S. insurance regulatory regime, we see this as a 
big win. It provides really historic recognition and respect 
for the U.S. insurance regulatory system in an international 
agreement. That has never been done before.
    And with respect to group capital, it relies on existing 
authority without demanding any specific capital requirement, 
and it carefully references the group capital calculation 
effort already under way at the NAIC.
    With respect to collateral, it utilizes existing NAIC rules 
and even builds the language into the agreement. We take those 
prescriptions from NAIC's model law, and they are put into this 
covered agreement. I would say that we are not taking 
collateral. In practical effort, in 2011 when the NAIC began 
to--they agreed to a model law on collateral and it began to 
move its way through the States, and it is approved in 35 
States, it reduces effectively collateral from 100 percent 
which AIA used to support, but under this new model that we all 
agreed to support, it will effectively reduce it to around 20 
percent on average.
    So this is not going to eviscerate U.S. collateral rules. 
In fact, it builds on what the NAIC is already doing. It just 
helps us get there in a more uniform way, and it has a unique 
approach for E.U. reinsurers. That is true. But again, it is 
not eviscerating collateral. And all the rules and protections 
around collateral, the ability to require timely payments, the 
ability to negotiate additional requirements for collateral 
around your agreement, these are--and to require prompt 
payment, all of those things were carried forward into this 
agreement.
    For U.S. negotiators, we haven't talked about this, but as 
this committee knows well in your efforts, we have all been 
involved for many years now at the international level, at the 
IAIS, as well as, quite frankly, at the FSB on insurance global 
matters. And for our negotiators, they will be in a very strong 
position empowered by this agreement, because now we have the 
E.U., the second largest market, recognizing our regulatory 
system and our capital standards, and we are going to go into 
those negotiations much stronger off, we believe. So we believe 
it is a win.
    We acknowledge that the process could be improved. We would 
fully support efforts to review efforts to be more transparent 
and inclusive. We were among the earliest to call for a robust 
role for the NAIC. So we would look forward to that.
    Let me wrap up quickly. We think this is a win. And the 
only concern we have with scrapping this deal is we believe 
there is no guarantee that we would have a timely result that 
can affect our companies today. What is going to take the place 
of this agreement for U.S. companies that are currently being 
discriminated against in Europe if we don't do this? Thank you, 
Mr. Chairman.
    [The prepared statement of Ms. Pusey can be found on page 
66 of the appendix.]
    Chairman Duffy. Thank you. And the Chair now recognizes Mr. 
Chamness for 5 minutes.

 STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 
                            (NAMIC)

    Mr. Chamness. Good afternoon, Chairman Duffy, Ranking 
Member Cleaver, and members of the subcommittee. Thank you for 
the opportunity to speak with you today. My name is Chuck 
Chamness, and I am president and CEO of the National 
Association of Mutual Insurance Companies (NAMIC).
    NAMIC is the largest property-casualty insurance trade 
association in the country, with more than 1,400 member 
companies representing nearly 40 percent of the insurance 
market. We appreciate the subcommittee's focus on assessing the 
impact of the recent U.S.-E.U. covered agreement. As the first 
of its kind, this bilateral agreement with the authority to 
preempt existing State insurance law merits careful scrutiny to 
understand its impact on the U.S. domestic insurance industry 
and policyholders.
    Let me start by saying that NAMIC has long had serious 
concerns about the use of an international trade agreement and 
negotiation process to alter or preempt State-based insurance 
regulation. This final draft covered agreement validates our 
long-held concerns.
    We also believe that the covered agreement does not address 
the problems the FIO and the USTR committed to resolve when the 
negotiations were started, and the agreement represents a bad 
deal for the U.S. domestic property-casualty insurance 
industry.
    First, in announcing the negotiations, the FIO and the USTR 
sent a letter to Congress outlining their objectives. Chief 
among them was to obtain permanent treatment of the U.S. 
insurance regulatory system as equivalent by the E.U. This had 
become an issue due to last year's implementation of the E.U.'s 
insurance regulatory reform known as Solvency II.
    Under the new regime, an insurer doing business in the E.U. 
will have heightened regulatory requirements in the event the 
insurer's country of domicile is not deemed equivalent for 
purposes of insurance regulation. This created a real and 
present difficulty for the relatively small number of U.S. 
insurers doing business overseas.
    It also provided an opportunity for the E.U. to push for 
something it had always wanted for reinsurers, its reinsurers, 
that is: the elimination of requirements on foreign reinsurers 
to post collateral in the U.S. The covered agreement was seen 
as a vehicle to resolve both issues.
    To be clear, NAMIC strongly supports U.S. insurers doing 
business overseas, and we are fundamentally opposed to the 
unfair trade barriers the E.U. is attempting to erect. It is 
important to remember that the equivalency determination is an 
entirely contrived problem of the E.U.'s manufacture. That 
determination is being used simply as a source of pressure on 
the U.S. to continue to alter its regulatory system to the 
E.U.'s liking.
    Even if we were to stipulate that equivalence was a real 
problem and that the covered agreement and forfeiting 
reinsurance collateral were necessary to solve it, the 
agreement fails on its own terms. There is no finding anywhere 
in the covered agreement that the U.S. group supervision is 
adequate, mutual, or equivalent.
    Instead, it merely calls for the E.U. to return to the pre-
Solvency II status quo of not unfairly punishing U.S.-based 
insurers. Nor is there any guarantee that this status quo will 
continue at the end of the agreement's 5-year term. Even the 
Treasury's own summary of the agreement provides that 
continuation of this accord between the U.S. and the E.U. is 
merely an expectation, not a commitment.
    This lack of commitment, coupled with the establishment of 
a joint committee with the power to amend the agreement, will 
likely lead to a process of endless renegotiation with the E.U. 
when the E.U. decides it would like to see further changes in 
the U.S. system.
    Of perhaps greatest concern is the requirement for a new 
group capital standard for all U.S.-based insurance groups. If 
these group capital standards are not adopted, the E.U. will 
not live up to its side of the agreement, but if they are 
adopted, it will impact even those companies not doing business 
in the E.U. This provision is at odds with the U.S. legal 
entity system of regulation.
    The agreement also states that the U.S. group capital 
standard must apply to the complete ``worldwide parent 
undertaking,'' and include corrective or preventative measures 
up to and including capital measures. It seems to include the 
power to require increases in capital, capital movement between 
affiliates, or other fungibility mandates.
    Implementation of this kind of group capital standard will 
shift the U.S. from a legal entity regulatory system that 
protects policyholders towards an E.U.-style group supervision 
system designed to protect investors and creditors. This would 
not be a win for U.S. policyholders.
    The 2015 letter announcing negotiations with the E.U. 
clearly stated that Treasury and the USTR will not enter into a 
covered agreement with the E.U. unless the terms of that 
agreement are beneficial to the United States. NAMIC does not 
believe this agreement meets that criteria.
    On the whole, it is bad for the vast majority of U.S. 
insurers which do not have operations in Europe and which lose 
reinsurance collateral and get nothing in return other than new 
group supervision and future regulatory uncertainty.
    We urge Congress to work with the Administration to reject 
this agreement and work on a new solution that meets the needs 
of the U.S. insurance industry and the insurance-buying public.
    Again, thank you for the opportunity to speak here today, 
and I look forward to answering any questions you may have.
    [The prepared statement of Mr. Chamness can be found on 
page 40 of the appendix.]
    Chairman Duffy. The gentleman yields back.
    I want to thank our witnesses for their opening statements. 
The Chair now recognizes himself for 5 minutes for questions.
    Commissioner Nickel, I don't know if you heard Mr. McRaith 
testify that you were able to attend and participate in this 
great deal that puts America first. Do you agree with that 
assessment?
    Mr. Nickel. There was a small band of brothers of insurance 
commissioners who were put together to be a part of the 
process, that is correct. We were allowed to participate in 
various forms throughout the negotiation, as Mike clearly 
stated. I suspect we will have some different arguments today 
about the process. Unfortunately, the content of the meetings I 
can't discuss, because I am bound under strict confidentiality.
    And the most difficult part of--
    Chairman Duffy. Even now?
    Mr. Nickel. Yes.
    Chairman Duffy. You can't tell Congress?
    Mr. Nickel. I don't think I can tell anybody, unless 
somebody gives me the authority to do that. But the most 
difficult part about that process was I was even bound from 
speaking with my own legal counsel, my own chief financial 
people, so you can imagine--put yourself in those shoes, where 
you are trying to understand something about which you can only 
talk to this small cadre of your fellow commissioners.
    Chairman Duffy. You were given active input in consulting 
continuously with Mr. McRaith, taking the ideas that you had, 
the concerns that you had into consideration as this deal was 
negotiated?
    Mr. Nickel. We were sharing our thoughts and opinions with 
Mr. McRaith and his team.
    Chairman Duffy. Okay. Were your thoughts and concerns, do 
you think, heard and taken into consideration as this deal was 
negotiated?
    Mr. Nickel. I would say, to be fair, Mr. Chairman, that 
some of our input found its way into the agreement. Quite a bit 
of it probably did not, which is why I am here today, because 
the membership of the NAIC, all 56 members, came to the 
conclusion that this deal was not a good deal for the U.S. 
regulatory system, consumers, and insurers.
    Chairman Duffy. Thank you. I want to move to you, Mr. 
McRaith. I think in your written testimony you said, ``The 
covered agreement does not need to be clarified with further 
written materials. This would be a fool's errand. The covered 
agreement terms painstakingly negotiated are abundantly clear, 
even if not written, to resolve every stakeholder's nuanced 
fantasies.''
    I have had a number of meetings--colorful language, by the 
way; it was good--with those who support and those who disagree 
with this agreement, and almost everyone agrees that there is a 
lack of clarity here. And even those who agree there is a lack 
of clarity, said that they might be concerned about how much 
time it would take us to get clarification, and they don't want 
to see the deal be torpedoed, but everybody has come together 
and said that there is a need for clarification, and it gives 
me pause that you are in essence saying, ``No, not at all; it 
is crystal-clear.''
    The lawyers who have represented all the companies that are 
here today have basically given us the same feedback. One 
commonly cited portion is Article 4A, which lays out capital 
assessments as a lack of clarity. So what happens if the States 
create a capital standard that the E.U. disagrees with? Is that 
specified in the agreement?
    Mr. McRaith. First of all, I appreciate you reading my 
testimony and the colorful prose is mine. And obviously, it is 
a reflection of the fact I don't have to clear this through the 
Treasury Department any longer.
    Chairman Duffy. Duly noted.
    Mr. McRaith. As someone who practiced law for 15 years--and 
I say this with great respect and affection for the lawyers--it 
doesn't surprise me that people who have a perspective and 
angle they are pursuing would have lawyers who would support 
that perspective and angle.
    What the agreement does is, it is absolutely clear on 
capital and group supervision that nothing is expected of the 
States other than what they have already said they will do.
    Chairman Duffy. I only have a minute. So what happens if 
the States create a capital standard that the E.U. disagrees 
with? Is that clear in there?
    Mr. McRaith. The agreement is clear that it can be 
developed however the States want. It does not require anything 
other than what the States have already said they will do.
    Chairman Duffy. Then what happens if the E.U. disagrees? If 
the E.U. disagrees, how is that resolved? And where is that in 
the agreement?
    Mr. McRaith. The agreement establishes a process, like 
every international agreement, questions about interpretation 
and implementation, if there is a question, we will meet and we 
will work it out and sort it out. It is entirely common 
practice.
    Chairman Duffy. All right, I have to be quick. So if it is 
not clear, it will be determined by a body that will be put 
together. And on the committee, who is going to represent the 
U.S. on the joint committee?
    Mr. McRaith. Good question. One thing we did not want to do 
was--
    Chairman Duffy. No, no, I want to--you said, ``We are clear 
on how this thing is going to work.''
    Mr. McRaith. That is right.
    Chairman Duffy. Where is the clarity of who is representing 
the U.S.? We don't know.
    Mr. McRaith. The joint committee--it would depend on the 
issue. If it is an issue, for example, concerning a Wisconsin 
company, my expectation is that the Wisconsin commissioner--
    Chairman Duffy. But ``depends'' doesn't work well. There is 
no specificity in who is on the joint committee. I don't even 
know. It is not in here. Again, it goes to the point of the 
first question, you are referring me to the joint committee, 
and when I talk about the joint committee, we don't even know 
who is going to represent us.
    And again, I just would ask you to--and maybe as we talk 
about this today, that is maybe a point of agreement that, 
again, I think there has been unanimous agreement that if the 
deal was still to go through, clarification would be still 
really important.
    So my time is long expired. I now recognize the gentleman 
from Missouri, Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Nickel, are you aware that the covered agreement also 
has to go before not only this committee, House Financial 
Services, but also the House Ways and Means Committee, and the 
Senate Banking Committee?
    Mr. Nickel. I was not aware of that, but I would look 
forward to the opportunity to be there myself or have someone 
else present in front of those two bodies.
    Mr. Cleaver. So you would agree, I think, that this is not 
something that is being rushed through and that we are not 
giving optimum participation to interested and impacted 
parties?
    Mr. Nickel. Absolutely, Congressman Cleaver. I think it is 
a great opportunity. But what we struggle with is the fact that 
the language itself--there doesn't seem to be any authority to 
do anything about it. It is a holdover. It has allowed for 
review by these three pertinent committees, but not to be 
vetoed or changed, et cetera.
    Mr. Cleaver. Right, right. Now, do you know any trade 
agreement where States are involved?
    Mr. Nickel. Sir, that is not in my wheelhouse. I don't 
spend my time on trade. I work to support State insurance 
regulation.
    Mr. Cleaver. I think it would be defined as a trade 
agreement, don't you agree?
    Mr. Nickel. I wish it was a trade agreement which would 
have a lot more clarity and participation on the behalf of 
interested parties and all--
    Mr. Cleaver. I know, but a trade agreement doesn't mean 
that--if we define a trade agreement only by what we are able 
to--how we are able to influence it, that is kind of a weak 
definition. The point is, my question was going to be--and you 
answered it--and that is that some of your recommendations did, 
in fact, find their way into the agreement, right?
    Mr. Nickel. That is correct, sir.
    Mr. Cleaver. And nobody should expect everything they want 
into everything, is that right?
    Mr. Nickel. That is correct, sir.
    Mr. Cleaver. Okay, now, thank you. We have over 7,000 
insurers in the United States. And all of them are controlled 
by the State in which they are domiciled. And so this is a 
unique system. And you said--I don't know if you are minimizing 
it--a small group of States were participants.
    Ms. Pusey, can you talk about transparency in this whole 
process?
    Ms. Pusey. I think we are probably in the camp that the 
chairman was referencing, that while we were enthusiastic and 
supportive of the results of this, I think the process could 
clearly have been improved from what we understand. So how do 
you oppose transparency? I think making all efforts, at the 
same time recognizing I think that there will be some 
restraints on that.
    States are not constitutionally recognized to be able to 
negotiate international deals. That is why--that was a lot of 
the impetus, as you also referenced, Congressman, for why we 
created the Federal Insurance Office with this very, very 
limited authority. It has no regulatory authority, but it has 
limited authority on international agreements.
    So while I think we would all embrace more transparency, 
nothing is ever wrong with a little more clarity, there is a 
limitation I think constitutionally with just how much the 
States could be involved in an international agreement. And 
that is where I think we all argue that there should be a 
consultative role, which it sounds like there was some of that.
    Mr. Cleaver. Mr. McRaith, if you would speak to the issue 
of stakeholder involvement?
    Mr. McRaith. We asked the State regulators in an 
unprecedented, unprecedented in any--State regulators are not 
involved in any trade agreement delegation, not involved ever 
before in any international agreement in a negotiation 
delegation, never before we asked the State regulators to 
create a small task force--we didn't tell them how many, we 
didn't tell them whom--those State regulators were invited to 
and did participate in every negotiating session.
    We briefed them before and after every negotiating session. 
We shared with them documents before they went to the E.U. We 
received their input on those documents before they went to the 
E.U. During the negotiating sessions, they were asked for 
technical insight and input. They provided it at the table, not 
in the room, at the table as a member of the U.S. delegation.
    So we received State regulator impact. We worked with this 
committee. The other three committees of jurisdiction spoke 
with them before and after every negotiating session multiple 
times in recent months. We worked with all of our stakeholders, 
particularly those engaged in the E.U. and the U.S. Not all of 
Mr. Chamness's companies, but those that operate in the E.U. 
and the U.S. and have a stake in the outcome of this agreement.
    And we worked with the entire Executive Branch of the 
Federal Government to get a deal to this committee and the 
other three committees that puts America first.
    Mr. Cleaver. Thank you.
    Chairman Duffy. The gentleman's time has expired. The Chair 
now recognizes the vice chairman of this subcommittee, the 
gentleman from Florida, Mr. Ross, for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman. And I thank the panel 
for being here. My first impression has to do with process. And 
that is what concerns me, because this isn't a trade agreement. 
If it was a trade agreement, we would have an up-or-down vote. 
And we have the opportunity to review for 90 days, but really 
what can we do as a Congress? This is going to be left up to 
the Administration, to the Treasury Secretary. And so that 
concerns me from one aspect that will stay over there.
    My other concern is, as I mentioned in my opening 
statement, what benefit do we have for the consumer, for the 
policyholders? And I know that it was said that we will have 
the benefit of the consumer protections that are so good under 
the State regulation system.
    My question to the panel is, what other benefits do the 
consumers or the policyholders anticipate from the 
implementation of this agreement? And specifically, is there a 
benefit in the rate-making process that will inure to the 
benefit of the consumer? In other words, will they have a 
better rate as a result of this?
    And, Commissioner, I will start with you.
    Mr. Nickel. Thank you, Congressman. Our concern with the 
elimination of collateral for European reinsurers is the fact 
that we now, as U.S. regulators, are going to have to figure 
out a new mechanism by which to assess that risk which has now 
been transferred to more of us--
    Mr. Ross. Will you put it in the guarantee fund? Will you 
require more assessment in the guarantee fund? Or how will you 
balance that? And is it going to impact the rate?
    Mr. Nickel. Correct. Hopefully, nothing will end up in the 
guarantee fund as a result of this. But what I would say is, as 
regulators, now that there is no collateral, and there are 
words on a paper now that insurance regulators are going to 
have to trust from E.U. reinsurers as to their financial 
strength, no more collateral here, $30 billion will be going 
out the door, that the U.S. insurers are going to have to work 
now with ceding companies to manage that risk, possibly 
employing other financial strength indicators or capital 
requirements which will ultimately raise rates that your 
constituents will pay.
    Mr. Ross. Mr. McRaith, as a former insurance commissioner, 
how do you respond to that?
    Mr. McRaith. Two pieces. Let's be factual about reinsurance 
collateral relief. The States adopted it as an accreditation 
standard effective in 2019, meaning every State would have to 
adopt collateral reform. Of the States that have adopted it, 31 
companies have received relief. Thirty of those companies are 
now posting 10 percent or 20 percent of the collateral they 
posted a few years ago. So the notion that we are going from 
100 to zero is complete fiction.
    Second, that cost savings gets passed on to our primary 
insurers. But third, and more importantly, our flagship 
companies operating in the U.S. and the E.U. will not have to 
post billions of dollars in Europe in compliance costs that 
otherwise can be used to support affordable, accessible 
insurance products in the United States.
    Mr. Ross. Ms. Pusey, the impact of reduced or no collateral 
at all being held, does that increase reinsurance capacity? Or 
how does--
    Ms. Pusey. We would hope it would be filled up and down the 
chain, yes. We think you are going to have more creativity, 
more products available, and clearly I think one could expect 
some impact to the rating side.
    If I could, Mr. Ross, I just wanted to come back to a 
comment made about the quality in some of the perception that 
the consumers are exposed because some of the rules won't be 
carried forward. As we understand it, they are quite robust, 
because they do take quite literally from the current NAIC 
model. So there will be a capital surplus requirement on these 
insurers from Europe, a consent to jurisdiction in our courts, 
a consent to a service of process, 100 percent collateral if 
they resist timely payments.
    And I have four or five others. The point is, it does carry 
forward a lot of those protections. So we would certainly hope 
that this would not threaten and, to the contrary, would 
actually enhance the U.S. policyholders' experience with 
insurance, both in terms of product and price.
    Mr. Ross. And, Mr. Chamness, if I might, because I am 
running out of time here, how do we unscramble the egg? Let's 
assume the covered agreement goes through. Let's assume that 2 
years from now, as we get close to permanency in the 5 years, 
it is not what we thought it would be. How do we get out of it? 
Or can we get out of it? And what impact will that be?
    Mr. Chamness. I think the greater concern is the covered 
agreement obligates the State regulatory system to take certain 
steps. And if those steps aren't taken, I think it comes apart 
on its own. So I think there is significant concern over that.
    Also, I would point out--and to your earlier statement, and 
it was a discussion just previously about why were State 
regulators in the room, are they with any other trade 
agreement, this is a very particular type of trade agreement. 
It has no oversight in terms of State regulators, State 
legislators, or Congress, in terms of an up-or-down vote. It is 
simply a 90-day layover period. And it is binding and it 
preempts State law.
    So I think having State regulators in the room for this 
type of agreement is a very prudent measure.
    Mr. Ross. Thank you, and I yield back.
    Chairman Duffy. The gentleman's time has expired. The Chair 
now recognizes the gentlelady from New York, Ms. Velazquez, for 
5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Ms. Pusey, many 
observers note that this agreement is vital because of its 
commercial significance and for the level playing conditions it 
creates. At the same time, others note a less tangible, but 
equally important outcome. This is the first time the E.U. has 
taken such significant steps to recognize the U.S. State-based 
insurance regulatory framework.
    Can you talk about that?
    Ms. Pusey. As I said in my testimony, I agree with you. I 
think it is a historic recognition. We have never had an 
agreement where the second-largest market to the U.S. would 
actually say, we recognize your State-based system.
    And the implications are pretty important. They are not 
just important today for relieving this pressure that is on our 
companies doing business there, because as we said, it is going 
to prevent them from imposing this upstreaming, if you will, of 
Solvency II, which no one in the U.S., regulators or industry, 
ever advocated for here.
    So it is helpful in that sense. But we also think it is 
important because it is going to, I think, increase the 
leverage that the U.S. has at the international negotiating 
table. We have talked, I think, before this committee about 
Team USA, which is a collaborative effort between the FIO, the 
Federal Reserve, and our NAIC, and at the international table 
dealing with issues on ComFrame, which is a common framework 
for internationally active insurance groups. And within the 
ComFrame is a discussion about an insurance capital standard, 
which is again a global capital standard.
    For the U.S. to be at that table empowered by European 
recognition of our system, we ought to be pretty forceful at 
pushing back. So we have been good at pushing back. This is 
further ammunition. So to your point, I think it is incredibly 
valuable, not only historic, but valuable.
    Ms. Velazquez. And can you please comment on specific 
commercial or supervisory barriers that this agreement will 
eliminate?
    Ms. Pusey. Specifically, we have companies that are U.S.-
based and they are doing business through a subsidiary or 
branch in the European Union, and about a year ago, what we 
started to feel--this is different from the reinsurer issue, 
which has been ongoing, but in the primary space, regulators in 
Europe were telling our companies we don't recognize your home 
jurisdiction is equivalent to Solvency II in Europe, and 
therefore we are going to require you to hold more capital, 
consistent with their rules under Solvency II. We are going to 
require you to do an E.U. ORSA, which is a self-assessment that 
companies have to do, and comply with corporate governance 
rules.
    We even had companies talking about threats to executive 
compensation being sort of snatched back because the European 
governance rules are different than the U.S. governance rules. 
So those are some of the specific ways in which we were feeling 
threatened, if not outright discriminated against, under the 
situation if it is not cured by this.
    Ms. Velazquez. Thank you. Mr. McRaith, the joint committee 
established by the agreement is an interesting concept that is 
used quite frequently in trade agreements, and we have alluded 
to that. Do you support NAIC and State regulator involvement in 
that joint committee? And how do you see the joint committee 
strengthening the relationship between the U.S. and Europe on 
insurance issues?
    Mr. McRaith. As mentioned earlier, we did not build out all 
the details of the joint committee in the agreement itself. 
That would have required potentially 40 or 50 more pages to 
identify what is a quorum and what is the membership, all of 
these kinds of details you are familiar with for committee 
construction.
    Absolutely, a State regulator should be on the joint 
committee, particularly the State regulator whose company might 
be affected or who would be the thought leader on the issue 
that is being discussed. What the joint committee is intended 
to do and the purpose--the role it will provide in relation to 
the broader agreement is to allow for collaboration and 
cooperation, because both the E.U. and the U.S. receive 
benefits from this agreement, important benefits for our 
consumers and our industry, and both sides want to see it work. 
The joint committee will foster that collaboration, which will 
be so important in the coming years.
    Ms. Velazquez. Thank you. Ms. Pusey, would you like to 
comment on that?
    Ms. Pusey. No, we would be in agreement that we have to 
have robust participation by the NAIC on this joint committee. 
We think it will further enhance the relationship with the 
European Union. We fully expect that they will be consulting 
with the European Insurance and Occupational Pensions Authority 
(EIOPA), which is their sort of parallel to--in many ways, not 
exactly, but in many ways parallel to our State regulatory 
system, because you are going to want that expertise in the 
room to deal with those unique issues that will come up.
    Ms. Velazquez. Thank you. I yield back, Mr. Chairman.
    Chairman Duffy. The gentlelady yields back. The Chair now 
recognizes Mr. Pearce from New Mexico for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate each one 
of the witnesses being here today.
    Mr. Nickel, you just heard Ms. Pusey say that Solvency II 
is going to completely recognize the State-based system. Do you 
find that to be an accurate assessment?
    Mr. Nickel. I wish that were true, Congressman, but I think 
it is the other way around. I think the Europeans are trying to 
impose the Solvency II model on the United States, and this is 
one avenue to do that. We are very concerned about that piece, 
as well as the language in the covered agreement itself, which 
ultimately preempts what we have been trying to do with regards 
to collateral reduction, the fine work we have been doing on 
collateral reduction.
    It takes all the work that we have been doing and then 
forces us to map over an agreement that was put together--
    Mr. Pearce. Sure, I need to move on, but tell me a little 
bit more deeply about the impact on consumers of the collateral 
changes that you are saying need to be implemented. Tell us 
more at the individual policyholder level what that means?
    Mr. Nickel. Sure. First and foremost, ultimately the 
collateral that is posted to recognize the risk taken is the 
ultimate safety net for consumers.
    Mr. Pearce. I understand. But what's the difference between 
the U.S. and the European markets?
    Mr. Nickel. The U.S. market requires collateral on behalf 
of foreign reinsurers, because of the fact that we are not 
comfortable with--
    Mr. Pearce. At a greater level?
    Mr. Nickel. Sorry?
    Mr. Pearce. At a greater level?
    Mr. Nickel. Yes.
    Mr. Pearce. Providing greater security?
    Mr. Nickel. Right, because our U.S. reinsurers--
    Mr. Pearce. No, that is all I need, just more security.
    Mr. Nickel. Yes, sir.
    Mr. Pearce. Mr. Chamness, describe the size of your members 
basically as operations. Are they large, small? You have those 
member associations, and the Europeans want to come and sell in 
our market, and they want to bring their rules over here more 
or less. Is that correct?
    Mr. Chamness. Correct.
    Mr. Pearce. They don't want to have to piddle around with 
all the States. That is a little bit beneath us here. We don't 
want to mess with you State regulators. And so we want a nice--
we want to clear the playing field out for us, so compare the 
size of your members with the Europeans that want to come here.
    Mr. Chamness. Our members, on a consolidated basis, write 
$230 billion of premium. They range from very large, including 
international, to regionals, one State writers, and small rural 
mutual that write in rural America.
    Mr. Pearce. What percent are State and what percent are the 
small guys?
    Mr. Chamness. What percent are the small guys?
    Mr. Pearce. Roughly, just a lot or a small group or--
    Mr. Chamness. Of the 1,400, probably 600 are small guys--
    Mr. Pearce. Almost half. Almost half just mom-and-pop 
operations out there writing insurance, trying to make it work 
for their neighbors.
    Mr. Chamness. Correct.
    Mr. Pearce. Mr. McRaith described--I guess he was 
describing your positions as theatrical and conjured fiction. 
Mr. Nickel and Mr. Chamness, do you have any response to that? 
It seemed like a fairly--
    Mr. Chamness. Let me just start where you began, and that 
is, I don't think it is theatrical. When we have read this 
agreement and we know that the primary objective the U.S. had 
going into the negotiations was to obtain equivalence, which 
has a very specific meaning for the European Union, and the 
word does not appear in the document. And mutual recognition, 
other proxies for that also are not in the document. So we have 
concerns about that and we have concerns about the permanence 
of the treatment that our U.S. insurers doing business over 
there will receive.
    Mr. Pearce. Yes. So, again, trying to get this whole 
playing field underneath us, Europeans want to come here and 
use their rules to sell to our market. We would like some 
access to their market and we would like them to recognize our 
system. Is that basically the dispute, the totality of the 
dispute? Is it close enough, Mr. Nickel?
    Mr. Nickel. That is pretty close.
    Mr. Pearce. Okay, so--and you are concerned because you 
feel like the American consumer might be disadvantaged? We see 
that the operations coming in here are going to be the big 
multinationals, not going to be mom-and-pops come here. Your 
mom-and-pops are not going to go over there and sell insurance, 
are they?
    Mr. Nickel. No, they are not.
    Mr. Pearce. They are probably going to stay in their 
neighborhoods.
    Mr. Nickel. Correct.
    Mr. Pearce. So all I do is think in my simplistic way back 
to my first days in owning a small fishing and rental tool 
company in Hobbs, New Mexico, just working in that neighborhood 
oil fields, wanted to buy the best insurance possible, so we 
went out--and I didn't know anything about insurance, but 
Lloyd's of London sounded very big, so we bought that insurance 
from them.
    And we had our first claim. This was a claim, a moderate 
claim, $50,000 to $100,000. Lloyd's of London told us we are 
bankrupt, we are not going to pay. So we want to let people 
from over there that we can't have any responsibility, we can't 
touch them, they are going to come in here with their capital 
requirements and tell us they can't pay. Mr. McRaith tells me 
that is a good deal and it is theatrical for me to believe 
differently. Maybe it is.
    I yield back.
    Chairman Duffy. The gentleman's time has expired. The Chair 
now recognizes the gentleman from Nevada, Mr. Kihuen, for 5 
minutes.
    Mr. Kihuen. Thank you, Mr. Chairman.
    I just have a couple of very quick questions. Thank you all 
for your presentations this morning. Mr. McRaith, can you 
please provide some more detailed thoughts on how this covered 
agreement will impact consumer protections, particularly for 
constituents of mine in the State of Nevada?
    Mr. McRaith. Sure. First, as I mentioned earlier, the 
covered agreement will improve the affordability and 
availability of insurance products in the United States. Some 
of our flagship companies that operate in the U.S. and the E.U. 
would have to post billions of dollars potentially in 
compliance costs that can otherwise be used in the U.S. to 
invest in new products and keep their rates affordable.
    Second, the decrease in reinsurance costs will help those 
consumers, particularly in areas affected by natural 
catastrophes, so that their primary insurance products are more 
likely to be affordable.
    Third, the agreement preserves and enhances essential 
consumer protections so if there is a reinsurer from the E.U. 
who is not paying claims, that reinsurer immediately can be 
required to post additional collateral to protect the ceding 
insurers and consumers.
    And then finally, I would say it is--this is not a binary 
choice between industry and consumers. This agreement has the 
benefit of benefiting industry and those benefits will also 
benefit consumers. So in its totality, this is an agreement 
that serves all of the U.S. industry interests and U.S. 
consumer interests.
    Mr. Kihuen. Thank you. And just one more question. I know 
there have been some complaints that this could be a backdoor 
for the E.U. to impose their standards on U.S. insurers. We 
also need to recognize that we are living in an increasingly 
interconnected world where the barriers for U.S. companies to 
enter foreign markets are becoming smaller and smaller. Can you 
speak on how you think the U.S. can adequately achieve balance 
between lowering the barriers for insurers to operate 
internationally while at the same time making sure that one 
country can't single-handedly change regulatory standard 
globally?
    Mr. McRaith. First of all, what the agreement does is 
endorse, embrace, enshrine our U.S. system of supervision at 
the State level for the first time in history in an 
international agreement. The agreement does not call for the 
States to do anything other than what they are doing already.
    Second, the E.U., as a consolidated market, is actually 
larger than the U.S. market. So we need to preserve 
opportunities for our companies to operate there, to compete 
there.
    And then, third, what is even more important is that our 
companies need certainty about how the E.U. and the U.S. are 
going to work together so they can compete in those massive 
developing economies like China, India, Brazil, and Indonesia, 
they can use that capital they have accumulated and invest in 
organic growth in developing economies around the world.
    Mr. Kihuen. Thank you, Mr. Chairman.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentleman from Florida, Mr. Posey, for 5 
minutes.
    Mr. Posey. Thank you, Mr. Chairman. Mr. Chamness, outside 
the reinsurance collateral issues, I have heard concerns that 
the U.S., under this covered agreement, will be required to 
make significant changes to our State system of regulatory 
supervision, which as you know is based on legal entity 
supervision.
    Article 4H of the agreement requires the U.S. to create a 
group capital requirement which from my understanding differs 
from the current State regulation in two ways. One, it requires 
that the States adopt a group capital assessment, which we 
don't have today. It also requires a lead State regulator to 
have the authority to act, including by requiring additional 
capital, if it sees an issue as a result of the group capital 
assessment.
    How do you view the capital requirements in article 4H? 
Could the corrective preventive measures included in the 
agreement require, for instance, increases in capital, capital 
movement between affiliates, or other fungibility mandates that 
go against the United States-based system of insurance 
solvency?
    Mr. Chamness. Thank you for the question. I think you have 
summed up the elements of article H that concern us very well. 
The Europeans have a different way of regulating. We focus on 
legal entities and we focus on solvency for those legal 
entities. They focus on group capital and group supervision. 
And it is different.
    And to the extent that this agreement moves us further in 
the direction of European standards, where we would be forced 
to change the way we regulate here in the U.S. and to really 
take away the focus that we have in the U.S., which was one of 
our great benefits, is we focus on the policyholder. In Europe, 
they have much greater emphasis on creditors, on investors, and 
preserving the insurance company.
    In the U.S., we let insurance companies fail where they 
deserve to fail, and first we try to rehabilitate them. Then, 
they may fail. And we also have a guarantee fund system here, 
which is different than Europe. They don't have a similar 
structure to deal with insolvencies and to pay claims after 
insolvencies, claims that are actually paid for by the 
remaining companies in the market.
    So it is a much different system. And as we look at the 
authority to preempt State law contained in this agreement, the 
permanent committee moving forward that will further fine-tune 
the agreement and perhaps commit us to future other changes to 
our structure, we are very concerned that we will be 
implementing more European regulatory law into the U.S. system.
    Mr. Posey. Yes, I am afraid any time we talk about giving 
up sovereignty, a mini-U.N. where we carry the burden and 
everybody votes against us every opportunity they have. But a 
follow-up, last Congress, we passed legislation into law to 
ensure that the regulator of a savings and loan holding company 
cannot raid the assets of an insurance company subsidy in order 
to prop up a failing subsidy affiliated with the overall 
holding company.
    This walling off of insurance, if you will, is to me one of 
the strengths of the way that we regulate our system, and it is 
because it places the emphasis on the policyholders. In other 
words, we are protecting the policyholders, first, over failing 
institutions, and second, which you just mentioned is different 
than the way they do it in Europe. I have always considered 
this to be one of the benefits to the legal entity regulation 
in the United States, and I wonder if we move toward the group 
supervision provisions, if it will alter our system? I clearly 
believe it will. But my question to you is, do you think the 
priority will still be protecting the policyholders?
    Mr. Chamness. Again, I think if we adopt more European-
style regulation, it won't. And I think your example of the law 
to basically wall off the insurance legal entity from the 
insured depository institution that may be part of an insurance 
group is a very apt comparison to the type of challenges we are 
concerned about under this agreement if more European 
regulation comes here.
    Mr. Posey. Mr. Chairman, I see my time is about out. I 
yield back.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentlelady from Ohio, Mrs. Beatty, for 5 
minutes.
    Mrs. Beatty. Thank you so much, Mr. Chairman, and Ranking 
Member Cleaver. And let me also thank all of the witnesses who 
are here today.
    My first question goes to you, Mr. Chamness. In your 
testimony, you stated that the U.S. Trade Representative and 
the Federal Insurance Office conducted the covered agreement 
negotiating meetings in a closed, confidential manner and 
failed in their commitment to meaningfully include State 
regulators in the negotiating process. I think you went on to 
say that State regulators were mere observers in the 
negotiating process.
    I then heard Mr. McRaith in his oral testimony, I think, 
mentioning that Ranking Member Cleaver outlined a whole litany 
of inclusive things when he laid out the steps that the FIO and 
the USTR. took to include State regulators and to be 
transparent in the process.
    With all of that said, I won't go through all of the things 
that have already been outlined, but I guess, after hearing 
that compelling argument, it appears that the USTR and the 
Federal Insurance folks went far beyond the call in engaging 
the stakeholders, my question to you is, what about that 
process do you find lacked transparency or didn't adequately 
involve the State regulators?
    Mr. Chamness. Thank you for the question. We have two 
participants here at the table, so perhaps my characterization 
of the way State regulators were included in the negotiations 
could be amplified by either participant.
    But I think we just heard Leigh Ann say that the process 
could have been improved. And it was a situation where having 
an agreement that has the authority to preempt State insurance 
law, automatic authority with no oversight or up-or-down vote 
either by legislators at the State or Federal level, there was 
very much a meaningful role there for State insurance 
regulators to play.
    Whether they did effectively in these negotiations, and 
whether Commissioner Nickel can talk about his participation in 
any greater detail than he did earlier, I guess I would ask him 
or ask former Director McRaith to describe the participation 
further.
    Mrs. Beatty. I will give you a few seconds, too. I just 
thought--I understand what you are saying, it could have been 
better. But I guess to be helpful to me, and you are an expert 
here, what would be the, ``could be better?''
    Mr. Chamness. I think that having State regulators 
negotiate the agreement in conference with FIO, working side-
by-side in a transparent way, and frankly including more 
elected leaders like yourselves in the process, at least to 
review and approve the agreement that has been reached before 
it goes into effect and preempts State insurance law, bypassing 
the legislative process.
    Mrs. Beatty. And when you say ``yourselves,'' I'm assuming 
that means Congress, as I heard in this testimony that we 
already have in place where you can consult with Congress 
either in person or by telephone, before negotiations begin, 
before and after each session, and before the negotiations were 
finalized, is that not enough? Is there more that we should be 
doing? Because it said in person or in telephone with us.
    Mr. Chamness. I think the process was the process and the 
agreement is the agreement. And as we talk about and have 
presented our comments on the agreement, it was consultation 
with the U.S. Treasury and the USTR informing Congress about 
their objectives here, and I read from their objectives. One 
was to obtain treatment of the U.S. insurance regulatory system 
by the E.U. as ``equivalent'' to allow for a level playing 
field for U.S. insurers and reinsurers operating in the E.U.
    Regardless of the process, though I do care about the 
process and I think the question is an excellent one, perhaps 
for future use as we consider how to do a different covered 
agreement, but on the terms of the agreement that have been 
released now and that we are talking about today, we don't 
believe it met the objective that the U.S. itself, the Treasury 
and the USTR, set forth in terms of our U.S. objective in the 
agreement.
    Mrs. Beatty. Okay.
    Mr. Nickel. Congresswoman, may I just chime in for 2 
seconds? I appreciate it. Thank you. I would just add, in terms 
of revising the process, insurance matters are very technical 
in nature. They touch each company in different ways. Having an 
avenue for participation by those key stakeholders, as well as 
our consumer representatives who would have input there, would 
have been very helpful along the way.
    Having the ability for me to consult with my own staff; for 
the insurance regulators themselves to bring in the rest of 
their group to get consensus might have driven outcomes, which 
may not have put us at this table today in opposition. Thank 
you.
    Mrs. Beatty. Thank you. I yield back.
    Chairman Duffy. The gentlelady yields back. The Chair now 
recognizes the former Chair of this subcommittee, who is the 
current Chair of the Financial Institutions Subcommittee, the 
gentleman from Missouri, Mr. Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and you are doing 
a great job today. Thank you very much for the opportunity to 
be here.
    Also, thank you for the hearing. I think it is vitally 
important that we have this hearing today. I think part of our 
duty as I have said many times is not just legislative, it is 
oversight, to provide oversight and direction. In this 
situation, we are providing oversight over the FIO Director and 
his activities. And I think it is important that we help him, 
that we guide him, and provide him the leverage that we need to 
do to help him do his job. And I hope that he comments on that. 
I think that is what our objective was for the last 2 years: to 
be able to give him the tools and leverage to get his job done.
    But before I do that, I will make a couple of comments. I 
think today we have an example of the problem we have in the 
insurance industry. We have two groups representing two groups 
of insurance companies that disagree. Imagine that.
    And then we have a regulator who had 5 years to come up 
with a solution for this problem and did nothing. And now, we 
are nipping at the heels of the agreement that we have, and we 
have dumped this whole problem in the Director's lap. And he 
has to deal with a dysfunctional group of industry folks and a 
regulator who doesn't want to get along and do anything, and he 
has to come up with an agreement to make this all work. I take 
my hat off to you, Mr. McRaith. You have done a great job. Is 
it a perfect agreement? Probably not. Could it be tweaked? 
Probably.
    But I think if the industry is serious about getting 
something done, I will tell you from my perspective they better 
get on the same page, because I am up to here with this 
dysfunctional infighting with the industry and the regulators 
and nobody getting anything done. You are going to go backwards 
as an industry if you don't get together. That is my comment.
    Now, Mr. McRaith, I have had a couple of companies in my 
district and my State who have been directly impacted by the 
request from Ireland, Belgium, and Germany to have a physical 
presence over there. So this is a big deal to me. I think that 
you have done a good job in negotiating, trying to thread the 
needle.
    One of the comments that has been made that concerns me is 
regarding ``equivalency.'' We have heard that term thrown 
around a couple of times, both from Mr. Nickel and Mr. 
Chamness. Would you please address what you believe is the 
solution to this or the addressing of this issue and the like?
    Mr. McRaith. Yes. Thank you, Mr. Chairman. First of all, we 
sent that letter in November 2015 at the commencement of the 
negotiations using the word ``equivalence.'' As we did that, we 
learned what I alluded to earlier, which is that every time you 
talk to a lawyer or a so-called Solvency II expert, you get a 
different explanation about what ``equivalence'' actually 
means. So we were focused on the outcome.
    We changed our focus. Let's have in the agreement clarity 
about how U.S. companies will be treated when they operate in 
the E.U. We don't want equivalence. And that is because an 
equivalent country like Switzerland has a global group capital 
requirement, global group reporting and governance, exactly 
what we don't want.
    So paragraph 4H, as discussed by Mr. Posey, and I regret 
that he is not here to hear this, because he misunderstood it, 
what that paragraph says is the United States will supervise 
its companies however it deems appropriate. The States have 
said for 2 years now we are going to develop a group capital 
calculation, and what that paragraph 4H says is, as the States 
do that over the next 5 years, U.S. companies operating in the 
E.U. will not have to be subject to Solvency II compliance 
burdens, including potentially billions of dollars in 
additional capital.
    So the notion of equivalence we surpassed because our 
companies are being treated entirely fairly with--and being 
able to supervise as the States deem appropriate without global 
group capital requirements, global group governance and 
reporting.
    Mr. Luetkemeyer. Thank you. One more question for you, 
quickly. One of the things that we did in a hearing last fall 
was we had a hearing similar to this and discussing this issue, 
and we made the comment during that, that if the Europeans 
wanted to penalize and punish our companies, there could be 
retribution against them in this country if they are going to 
play that game. Does this agreement affect us in any way so 
that we can't--it ties our hands so that we can't be able to 
have retribution or are penalized in any way these companies 
that try to come here and push their stuff on us?
    Mr. McRaith. Mr. Chairman, first of all, I want to thank 
you for the letter that you provided November 29th, I think of 
2016, and frankly, although our exchanges were not always 
pleasant, you were extremely forceful about the importance of 
representing U.S. interests.
    What this agreement does is allow the U.S. companies to be 
supervised in the U.S. as the U.S. determines appropriate. 
There are no penalties for that. If, however, U.S. companies in 
the E.U. are not supervised according to this agreement, then 
the reinsurance reforms that will benefit E.U. reinsurers can 
be retracted. And then vice versa. If the U.S. doesn't perform 
on the reinsurance provisions, which, by the way, the States 
have adopted as an accreditation standard, then our companies 
in the E.U. can be treated adversely.
    Chairman Duffy. The gentleman's time has expired.
    Mr. Luetkemeyer. Thank you.
    Chairman Duffy. The Chair now recognizes the gentleman from 
Massachusetts, Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. And I want to thank the 
witnesses for their help.
    I am very suspect of these international negotiation 
agreements that exclude Congress and exclude the State 
regulators in this case to a certain degree. I have a healthy 
distrust of what the U.S. Trade Representative has been doing 
in the past.
    I was an iron worker for about 20 years, and I used to work 
at the General Motors plant in Framingham, Massachusetts. Then 
they negotiated NAFTA, and a bunch of plants, including the one 
I had worked at, closed down and moved over the border.
    So I have real distrust about allowing industry to 
negotiate--the people with the direct financial interest to 
negotiate these agreements outside of the purview of Congress 
and outside the representation of the people who elected us. I 
have a real mistrust about that.
    We negotiated a trade agreement with South Korea. It 
included automobiles. I go to South Korea. I spent 3 or 4 days 
there. Major, major country. Big superhighways. I saw two U.S. 
cars, two. One was the one I was riding in from the embassy. 
The other one was my security detail right behind me. That was 
it.
    I went to Japan. We have a big trade agreement with Japan. 
I couldn't find an American car. If you go outside this 
building, you can't spit without hitting a Japanese or a South 
Korean car.
    So when we sit down in negotiations and want equivalency, 
that was the goal of our agreement, our insurance agreement, 
was to get equivalency for our system. And then I pick up the 
agreement and the word ``equivalency'' does not appear. It does 
not appear. We negotiated this agreement. It does not mention 
equivalency that U.S. standards will be recognized and 
acknowledged and given full force and effect in the E.U.
    So as far as I am concerned, based on reading the 
agreement, and I know there is a lot of goodwill out there and 
let's all play nice, it doesn't give us what we were looking 
for. It doesn't give us equivalency in the E.U. It gives us the 
hope that maybe in the future we could get that, but we don't 
get it.
    And what's more, it allows for the States' laws to be 
preempted. And that--I think one of the great things about our 
State-driven insurance regime, our system, is that it is very 
close to the people. And it requires support at the State 
level. And that is where I think the public's influence is the 
strongest and the big industry people's influence is the 
weakest. It is a good match.
    And I just have great, great trepidation about this whole--
I am a new member of this committee. I have only been here for 
2 weeks. But I just have great misgivings about how we did 
this. I would like Congress to be part of this process. I 
really would. I hate this. You go negotiate the agreement, and 
when we find out at the end what it has in it, and you surprise 
us, and then we have an up-or-down vote. Or in this case, it is 
just a 90-day layover period; we don't even get a vote. 
Congress negotiates war and peace, life and death, every major 
issue in our society. But when it comes to trade agreements or 
international insurance agreements, we are excluded from the 
process.
    So I would like a process that allows the people--I have 
727,514 people that I represent in Boston, Quincy, Brockton, 
and a bunch of towns in Massachusetts. I would like my people--
my people through me--to have some input into this process. And 
when I feel confident that their interests have been 
acknowledged and been included, then I will vote for this, then 
I will support it. I don't like the process. There is a lack of 
transparency here. And we have to change the system, the way 
this all works.
    I appreciate all the really smart people in the insurance 
industry, but having the people with the most direct financial 
interest, their own financial interest at the table negotiating 
this while the people who are going to be affected by it are 
outside the process is not right. It is just not right. And 
this system was created a long time before I got here, but I 
think we ought to have a bipartisan agreement that the people 
we represent should be part of this process at some point.
    So with that, Mr. Chairman, I yield back the balance of my 
time.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the Vice Chair of the Financial Institutions 
Subcommittee, the gentleman from Pennsylvania, Mr. Rothfus, for 
5 minutes.
    Mr. Rothfus. Thanks, Mr. Chairman. I want to follow up on 
Mr. Lynch here, because this is one of the issues I was 
struggling with last night. I read my Constitution. Article I, 
Section 8 provides that Congress shall have the power to 
regulate commerce with foreign nations and among the several 
States and with Indian tribes. Does this covered agreement 
regulate commerce with foreign nations, Mr. Nickel?
    Mr. Nickel. I believe so.
    Mr. Rothfus. Mr. Chamness?
    Mr. Chamness. Yes.
    Mr. Rothfus. Ms. Pusey?
    Ms. Pusey. Yes.
    Mr. Rothfus. Mr. McRaith?
    Mr. McRaith. This agreement does not regulate anything. It 
is an agreement between countries about how they will 
separately regulate and deal with the industries operating 
within their territory.
    Mr. Rothfus. You don't think this regulates commerce? Is it 
a trade--
    Mr. McRaith. This is a regulatory agreement that 
articulates how the U.S. will regulate U.S. industry and the 
E.U. will regulate E.U. industry.
    Mr. Rothfus. Is it a trade agreement?
    Mr. McRaith. It is not a trade agreement.
    Mr. Rothfus. I thought I saw--some of you were mentioning 
this being a trade agreement.
    Mr. McRaith. I have heard that. I have never said that. In 
fact, I have said the opposite. It is a covered agreement. If 
it were a trade agreement, it would be called a trade 
agreement. A covered agreement refers to prudential insurance 
and reinsurance matters.
    Mr. Rothfus. Dodd-Frank requires consultation with Congress 
on covered agreements. Does consultation equate the power to 
regulate? Again, this is a threshold issue that I was kind of 
struggling with last night as I look at this covered agreement, 
trying to figure out, where does Congress gets its say?
    Because I think this does regulate commerce with foreign 
nations, which begs the question, where is Congress' power to 
regulate? Us having a 90-day consultation period, us not having 
an opportunity to have an up-or-down vote on this, compare this 
with what we did with trade promotion authority. We have Dodd-
Frank. We said the Secretary of the Treasury and the United 
States Trade Representative are authorized jointly to negotiate 
and enter covered agreements on behalf of the United States.
    Looking at TPA, and it says that the President and the USTR 
can enter an agreement. But then it is up to Congress to ratify 
that. And that is where we get to exercise our constitutional 
power to regulate commerce.
    We have already seen parts of Dodd-Frank, or at least one 
part of Dodd-Frank, that has been challenged constitutionally, 
and it is currently held up in court. That is with the 
structure of the CFPB. And I guess I am just struggling with 
that.
    Where do the people that we represent, the total notion of 
self-rule and self-government--we have been talking about this 
for years on our side of the aisle, the opportunity for us to 
be the voice of the people.
    The Congress is where government of the people, by the 
people, for the people happens. And here we have a covered 
agreement that will regulate commerce among the nations, and we 
are not getting a say. We just get to consult.
    Mr. McRaith, one of the many things that stands out to me 
about this covered agreement is the date it was sealed, 1 week 
before the inauguration of a new President. As you know, 
President Trump made negotiating better deals a hallmark of his 
campaign. He has argued that the U.S. has not made deals with 
other countries that provide the most benefit possible for 
American workers and firms.
    Since the covered agreement was reached before the new 
President could come into office and leave his mark on these 
negotiations, I am curious about the extent to which 
negotiators consulted with the transition team before the 
election. Were there such any consultations with the transition 
team?
    Mr. McRaith. These agreements were conducted confidentially 
with the input of the entire delegation after extensive 
consultations--
    Mr. Rothfus. Okay, so the question was, was there 
consultation with the transition team, yes or no?
    Mr. McRaith. The transition team was not part of our 
confidential U.S. delegation.
    Mr. Rothfus. Okay. Why was the covered agreement reached on 
January 13th? Any significance to that date?
    Mr. McRaith. First of all, our industry, U.S. reinsurers 
were losing opportunities every day. Our primary insurers were 
confronting potentially billions of dollars in compliance costs 
on an urgent basis.
    Mr. Rothfus. Was January 20th at all a figure? Was January 
20th a consideration?
    Mr. McRaith. No. So we provided to you on January 13th--
because it needed to be provided on a day that both Chambers of 
Congress were in session, so I suppose theoretically we could 
have provided it the morning of the 20th, but I think our 
perspective was to get it to you as soon as we finished it, 
which was that day.
    Mr. Rothfus. Last question. I just want to go back to the 
earlier issue. Have any of you ever considered the 
constitutionality, or have your groups considered the 
constitutionality, of this covered agreement? Yes or no?
    Mr. Chamness. No.
    Mr. Rothfus. Has that been studied?
    Mr. Chamness. Not by us.
    Mr. Rothfus. Mr. McRaith?
    Mr. McRaith. I am not a constitutional lawyer, Congressman, 
but the question is, can we reach an agreement that serves the 
best interests of the United States? And that is what we did.
    Mr. Rothfus. I yield back. Thank you.
    Chairman Duffy. The gentleman's time has expired. The Chair 
now recognizes the gentleman from California, Mr. Sherman, for 
5 minutes.
    Mr. Sherman. In Washington, there are lies, there are fibs, 
and there is misuse of the word ``consultation.'' All too 
often, consultation means you go to a few leaders in Congress, 
you say here is what we are doing, but we don't care what you 
think, we will pretend to care what you think, we won't tell 
anybody else in Congress what you are doing, and we will call 
that a ``consultation.'' And that somehow makes us a democracy, 
though I haven't figured out how.
    Speaking of consultation, to what degree were the 50 U.S. 
insurance regulators at the State level involved in this 
process, Mr. McRaith?
    Mr. McRaith. Sir, Congressman, as I mentioned before your 
arrival, in a completely unprecedented manner, we established a 
mechanism to include the State regulators as part of the 
negotiating delegation. So we asked--
    Mr. Sherman. Is this agreement--
    Mr. McRaith. --them to form a small team, which they did--
    Mr. Sherman. --binding on--
    Mr. McRaith. They were part of every step of the 
negotiations.
    Mr. Sherman. Thank you. I hear you. I am going on to 
another question. Is this agreement binding on them? And on 
the--do they have to comply with it in how they regulate 
insurance companies around this country?
    Mr. McRaith. In fact, the provisions regarding group 
supervision are already what the States do or what they have 
committed to do and it gives them 5 years to do it. In terms of 
reinsurance--
    Mr. Sherman. They have committed to do it, but they might 
change their mind and decide they don't want to do it. But this 
binds them to it.
    Mr. McRaith. No, the agreement provides them latitude to 
supervise as they have done historically and have planned to do 
publicly. With respect to reinsurance, there is the potential 
for preemption, but they have adopted that reform as an 
accreditation standard, meaning every State, including 
California and Washington, has to adopt it as a matter of law 
or regulation within the next 2 or 3 years.
    Mr. Sherman. And what if they choose not to? What if the 
legislature of California says, we hate everything you did? 
What happens?
    Mr. McRaith. Then that State, California, would lose its 
accreditation status with the NAIC, which would punish 
California industry and consumers, but that is an NAIC issue.
    Mr. Nickel. Congressman, may I--I'm sorry.
    Mr. Sherman. Yes, go ahead.
    Mr. Nickel. May I just jump in a little bit? A couple of 
things. One, yes, we do have an accreditation process. And we 
will be finished with that accreditation process, where we do 
have a reinsurance law on the books. But our reinsurance law 
does not go to zero, unless there is an extraordinarily well-
capitalized company.
    We will be preempted and we will be asked to change our law 
to the law that will already be in effect in most States to 
recognize the fact that we either need to change it or to be 
preempted.
    Mr. Sherman. And as Mr. McRaith pointed out, if you choose 
not to do that, you and your consumers and your companies will 
be punished through an act of the U.S. Federal Government? Do I 
have that right?
    Mr. McRaith. That would be an act of the States.
    Mr. Nickel. There would be preemption, yes.
    Mr. Sherman. Excuse me. Go ahead.
    Mr. Nickel. That would be the preemption piece, that--if a 
State decides not to comply.
    Mr. Sherman. If a State chooses not to comply, what--Mr. 
McRaith was saying that results in the consumers and/or 
companies in that State suffering. How would they suffer?
    Mr. Nickel. In my opinion, we all suffer by having the--if 
we focus on the reinsurance collateral piece a bit, for just 
one more second, that we lose the reinsurance collateral 
provisions of our model. There are 216 reinsurers in the 
European Union. Only six of them have gone through our process 
to reach financial security review, financial stability review. 
The other ones haven't. They are at 100 percent collateral.
    When this goes into effect, the other two hundred and 
whatever go--216 go from 100 to zero. But right now, they are 
operating fully comfortable at 100 percent collateral. So just 
so we are clear, this isn't just a couple of companies wanting 
to do business in the United States. We will have a large 
number of European reinsurers now operating in the U.S. that 
didn't either want to follow or chose not to follow our 
financial review.
    Mr. Sherman. Ms. Pusey, do you regard this as a threat to 
our State-based system of regulation? I know that you have 
generally taken the view that this is a win-win. So why is it a 
win for the concept of State regulation?
    Ms. Pusey. Because it really enshrines it. It preserves it. 
So we took a contrary view, because we actually see that this 
does not threaten the State-based system. It actually preserves 
it. I don't know whether we wore the Europeans out over time or 
what has happened. They certainly have had an interest in 
exporting Solvency II to other jurisdictions. That is very 
true. And it is also very true that the U.S., from industry 
perspective and regulator perspective and Federal Government 
perspective, has said no to that and have resisted it.
    So for whatever combination of reasons, late this fall, 
there was a wearing down, if you will, in the deal--from a 
product--if you look at the results, our view is that this is 
respecting the U.S. system. It is going to let us regulate 
ourselves under our group supervisory rules and our group 
capital rules.
    Mr. Sherman. I yield back.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentleman from California, Mr. Royce, for 5 
minutes.
    Mr. Royce. Thank you, Mr. Chairman. I know in my 
committees, there is a practical limitation. I usually only 
have three or four witnesses. But in this particular case, if 
we are going to have a full conversation about this agreement, 
we do need to think about all the negotiating parties and all 
the parties affected that are not at the table, the USTR here, 
the life insurers, the reinsurers, the major brokers.
    And the practical limitations don't allow us really to make 
the hearing that broad. But I would make that point. And if I 
could summarize where I think we are today, in terms of these 
tracks, on the one hand, the States are going down a path where 
reinsurance collateral requirements are already being lowered, 
albeit at a snail's pace, and in return the E.U. has not agreed 
to any relief for U.S. insurers or reinsurers. It is possible 
we get nothing then for something. So that is one path.
    And meanwhile, Congress gives Treasury and the USTR the 
power to negotiate a covered agreement, a power, by the way, 
which was debated in this very committee and unanimously 
supported by both sides of the aisle on a bipartisan basis. 
Treasury and the USTR then negotiated an agreement that 
effectively agrees to what the States have already agreed to do 
and lower the reinsurance collateral.
    In return, we open up the entire E.U. reinsurance market to 
U.S. reinsurers without discrimination and we save direct 
writers billions of dollars in European compliance costs, which 
as we have heard today can be passed along to consumers.
    So I would just ask Ms. Pusey, am I missing something here 
in the way this appears to me?
    Ms. Pusey. No, sir, that is our read, as well.
    Mr. Royce. And I would ask Mr. McRaith, without this 
agreement in place, we have seen regulators in the U.K. and in 
the Netherlands, Austria, Germany, and Poland place U.S. 
companies at a severe disadvantage. If we scrap this agreement, 
as some are suggesting today, where does that leave us? And 
what are State regulators authorized to do to adequately 
address these issues? Is the E.U. looking to sign MOUs with 50 
States?
    Mr. McRaith. U.S. reinsurers were being denied 
opportunities 9, 10 months ago in the E.U. We resolved that 
issue through the agreement and opened the entire European 
market to U.S. reinsurers. U.S. primary companies were being 
asked to comply with extraordinary regulatory requirements in 
the E.U. that could be increasingly burdensome, but for this 
agreement.
    I can't speak to what the Europeans would do in the event 
this agreement were to fail in the United States. But I know 
that our industry and American insurance jobs have a lot--our 
industry has a lot to lose and American insurance jobs are at 
stake.
    Mr. Royce. Well, that was my read of the situation, as 
well, Mr. McRaith. And I will yield back, Mr. Chairman. Thank 
you very much.
    Chairman Duffy. Thank you. The gentleman yields back. The 
Chair now recognizes the gentleman from Washington, whom I 
would just note has a strong interest in protecting our State-
based model and has introduced legislation on a similar issue. 
The gentleman from Washington, Mr. Heck, is recognized for 5 
minutes.
    Mr. Heck. Thank you, Mr. Chairman. Thanks very much for the 
opportunity even to participate today.
    Mr. McRaith, you and I kind of went back and forth on this 
quite a bit last year. And I took the position of a protector 
of State-based regulation. You assured me as a former State 
regulator that that would be the case verbally, and then you 
wrote--or your office wrote me a letter that said the law did 
not require that Treasury and the USTR include State insurance 
regulators in the negotiations.
    Nevertheless, in recognition of the role of States in U.S. 
insurance oversight, Treasury and the USTR are including and 
engaging with State regulators in a direct and meaningful 
manner throughout the ongoing negotiations.
    And I take it from your earlier somewhat impassioned 
remarks that you believe that you complied with both the letter 
and the spirit of that assurance to me. Yes or no?
    Mr. McRaith. The agreement is a better agreement because 
State regulators were at the table--
    Mr. Heck. Did you comply with the spirit--
    Mr. McRaith. --in the room. They absolutely contributed.
    Mr. Heck. Did you comply with the letter and spirit of what 
you wrote?
    Mr. McRaith. Absolutely.
    Mr. Heck. Thank you, sir. Mr. Nickel, you said in your 
opening statement that State regulators were assured that we 
would have direct and meaningful participation, but the small 
group of us included were merely observers: only one allowed in 
the room subject to strict confidentiality with no ability to 
consult our staff and fellow regulators. Is it fair to 
characterize your view that the spirit and letter of what was 
assured to me and which I just quoted was not adhered to?
    Mr. Nickel. I think that is a fair characterization, 
Congressman.
    Mr. Heck. And, Mr. Nickel, is it accurate that you are the 
elected or chosen voice on behalf of the State regulators 
throughout our country, and you are speaking on their behalf?
    Mr. Nickel. I am speaking on their behalf today.
    Mr. Heck. So in addition to that irreconcilable points of 
view, I would like to quite literally, Mr. Chairman, seek 
permission to enter into the record the voice of yet another 
entity, that of the Intergovernmental Policy Advisory Committee 
on Trade (IGPAC), a letter from the Chair of IGPAC. May I, sir?
    Chairman Duffy. Without objection, it is so ordered.
    Mr. Heck. So IGPAC, as you may all know, is the trade 
advisory committee appointed by the USTR, and it provides trade 
policy advice on matters that have a significant relationship 
to the affairs of State and local governments. I think this is 
significant, because it is a voice actually beyond insurance 
regulators, per se, but on behalf, as it were, the corporate 
interest of State Government.
    And I want to, if I may, quote briefly from the letter that 
I am in receipt of from the Chair, Mr. Robert Hamilton, ``After 
it was reported that the U.S. and the E.U. were negotiating a 
covered agreement, on multiple occasions, the IGPAC requested 
that the USTR and the Treasury Department closely consult with 
the relevant stakeholders and provide regular briefings to the 
IGPAC throughout the covered agreement negotiations in light of 
the potential for this agreement to impact State sovereignty, 
discriminatory actions by E.U. member countries, and potential 
national treatment violations by the E.U. Unfortunately, the 
Treasury Department and the USTR failed to honor this promise 
and provided only one superficial briefing in December 2015 
before the first round of negotiations and failed to provide 
any briefings during the ongoing negotiations.''
    Mr. Chairman, I would submit not just this letter, but fact 
that the preponderance of evidence is, in fact, on the side of 
those who believe that the process did not meaningfully involve 
the State regulators and those who had that interest at stake. 
But look, I don't seek to protect State-based regulation for 
its own sake in and of itself. Good process, bad process, 
evidence suggests bad process. Good product, bad product, 
arguable. I do so because, in fact, what we have observed is an 
undercutting of the State-based regulation.
    And that to me is harmful in two ways. Number one, it is 
violative in spirit, if not technically, of the underlying 
policy framework of insurance regulation in this country, 
namely the McCarran-Ferguson Act. And let me remind everybody 
that the basic covenant of McCarran-Ferguson is that if you 
will to submit to State-based regulation, you are exempt from 
antitrust.
    I strongly suspect--I am not even going to ask, Ms. Pusey--
that you do not want to have our antitrust exemption pulled 
from you. But if McCarran-Ferguson is no longer the law of this 
land, directly or indirectly, that is exactly the debate we 
ought to have.
    And secondly, I protect State-based regulation because it 
works. Because we provide good safety and soundness regulation, 
prudential regulation, and consumer regulation. And if you are 
asking who is better to do this, the Feds or the States, I just 
want to remind you that AIG was regulated by the Feds. How did 
that work out for us?
    State-based regulation works. And we should not go down the 
path of that which undercuts it. With that, I yield back the 
balance of my time, and I thank you, Mr. Chairman.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentleman from New Jersey, Mr. MacArthur, for 5 
minutes.
    Mr. MacArthur. Thank you. Before I get to my questions, I 
would actually like to ask Ms. Pusey if you would answer that 
question. Would you like to see your members be subject to 
antitrust regulation and see McCarran-Ferguson overturned?
    Ms. Pusey. Thank you for that opportunity. We are very 
strong supporters of the State-based regulatory system. We have 
no interest in supporting and have arduously opposed any 
efforts to undermine State-based regulation. And it is in that 
spirit that we can support this agreement, because we think it 
actually recognizes it and props it up and gives it global 
recognition.
    Mr. MacArthur. But you would not want to see your position 
relative to antitrust changed?
    Ms. Pusey. No, sir.
    Mr. MacArthur. Your members wouldn't want that?
    Ms. Pusey. Congress delegated that authority to the States 
from McCarran. Yes, sir, we appreciate that recognition on the 
antitrust.
    Mr. MacArthur. Mr. Nickel, could you--and you could go on 
for a while, but I need you to be brief--
    Mr. Nickel. I will try.
    Mr. MacArthur. --because I don't want to have to cut you 
off, and I have a few other questions. Could you very briefly 
remind us of the benefits of State-based regulation to 
consumers?
    Mr. Nickel. Sure. We are the boots on the ground 
representing consumers in front of insurance companies. When 
there are issues, we work in their States. We know them by 
name. They call us. We take care of consumers. And then we 
ultimately take care of and monitor the financial solvency of 
the companies domiciled in our State.
    Mr. MacArthur. When an insurer fails, is it fair to say 
that the home State is generally the one that is impacted the 
most?
    Mr. Nickel. Generally speaking, yes. But sometimes 
companies have a broad footprint throughout many States.
    Mr. MacArthur. I understand. But generally, it is local 
people, another reason I think for State-based regulation. I 
want to explore this idea of preemption. Mr. McRaith, I thought 
your answer before was really very interesting. And I am 
paraphrasing, so correct me if I didn't get this right, but you 
said that this doesn't regulate industry participants; it 
controls how the regulators oversee those participants or 
impacts. Is that basically what you said?
    Mr. McRaith. It is an agreement of mutual respect, where 
the E.U. says, ``U.S., you do it how you want to do it.'' And 
we say to the E.U., ``You can do it how you want to do it.''
    Mr. MacArthur. But what happens if an insurer, an 
individual, not a group, but an individual writer of insurance 
in a State has a different opinion of what it needs to hold in 
capital and the regulator in that State agrees with the capital 
requirement? What happens if that is different from what the 
FIO believes should be held or what the E.U. regulators believe 
should be held? Whose opinion carries the day on how much 
capital needs to be held?
    Mr. McRaith. The only party authority relative--that can 
determine whether a U.S. insurance company has sufficient 
capital is a State regulator. And this agreement endorses 
exactly that.
    Mr. MacArthur. Is there any circumstance where the covered 
agreement could preempt a State's determination of capital 
requirements?
    Mr. McRaith. No. The group supervision practices, including 
the--
    Mr. MacArthur. So what is the 5 years that a State 
regulator has to comply--what does that apply to?
    Mr. McRaith. So for over 2 years, the States have been 
developing a group capital calculation. The agreement gives 
them an additional 5 years to do that for the insurers that are 
operating--only the insurers operating both in the U.S. and the 
E.U. So not every company, not every State, not every company 
in any State.
    Mr. MacArthur. But those are the very ones I am asking you 
about. So if there is a difference of opinion with one of those 
groups, whose determination prevails?
    Mr. McRaith. It is the State regulator who will decide how 
companies are regulated. If hypothetically, to the Chair's 
question earlier, if the E.U. has a different view of that, and 
the adequacy of that, that is discussed. Supervisors, by the 
way--as you well know--deal with these issues every day. These 
are nuts and bolts regulatory questions dealt with--
    Mr. MacArthur. I have to cut you off, because I have only 
30 seconds. And I just want to make a point. Where you stand on 
this issue I suspect depends on what your business interests 
are. It is sort of, ``whose ox is being gored.''
    So I understand why the insurance commissioners see it as 
an erosion of their control. I understand why the mutual 
companies--and I was once a member of NAMIC and was once a 
member of AIA--so I understand both--and AIA's members, unless 
it is changed, are companies like Munich Re, Swiss Re, Allianz. 
These are global insurers. And so it is no surprise to me that 
your members welcomed this sort of a change in the oversight, 
because your members are very different than NAMIC's members. 
Is that not true?
    Ms. Pusey. Hartford, Travelers.
    Mr. MacArthur. I know that there are those. But two-thirds 
of your board members are global insurers.
    Ms. Pusey. No, with all due respect--
    Mr. MacArthur. I know, because I checked. I checked this 
morning. So it is not meant to be a criticism. It is just the 
reality that your perspective is very open to this shifting to 
a globalization of insurance control. And I don't think that 
comports at all well with McCarran-Ferguson and the State-based 
system that has served us so well.
    My time has expired. I yield back.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentleman from Illinois, the vice chairman of 
the Capital Markets Subcommittee, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. And thank you all so 
much for being here today. I appreciate your work.
    Director McRaith, it's good to see you. We worked together 
in Illinois and also out here, as well. And I appreciate all of 
you being here today.
    I am new to the Housing and Insurance Subcommittee. I am 
grateful to be working with Chairman Duffy and everybody else. 
I think this is so important. And especially for Illinois. We 
have a lot of challenges in Illinois. One of the things we 
actually do well is insurance. And I have some wonderful 
entities there and I am grateful for them, but I am also 
grateful for the work that they provide to my constituents. So 
these are important issues that we are discussing.
    Illinois, as I said, has a number of insurance companies 
that are vital to ensuring customers. Consumers and businesses 
are able to manage their risk in all of their endeavors. 
Today's topic regarding the recently negotiated covered 
agreement between the U.S. and the E.U. is an important one, 
and I am glad Chairman Duffy worked expeditiously to convene 
this hearing in the 90-day review period provided to Congress.
    Mr. McRaith, I wonder if I could address my first question 
to you: Does the covered agreement require States to change 
collateral rules? And if so, this is only perspective, correct? 
Is that true? And would existing reinsurance contracts be 
affected?
    Mr. McRaith. The agreement would potentially require States 
to do what they have already committed to doing with respect to 
reinsurance collateral reform. Period. And I'm sorry. Your 
second question?
    Mr. Hultgren. Would existing reinsurance contracts be 
affected?
    Mr. McRaith. Oh, I'm sorry, yes.
    Mr. Hultgren. But let me finish. The text of the covered 
agreement says amended reinsurance contracts could be impacted 
by the agreement. Can you clarify this definition and explain 
what effect an amendment to a reinsurance contract would have 
on reinsurers' obligation to post collateral?
    Mr. McRaith. Yes, exactly. The agreement is clear that it 
only applies prospectively. Questions come up about what does 
the word ``amendment'' mean? First of all, an amendment to a 
contract requires two parties to agree, so if the ceding 
insurer doesn't agree, there is not an amendment to the 
contract.
    However, if there were an amendment, in this context, that 
would have to be a material change to the underlying 
reinsurance contract. It could not be just some clerical or 
administrative change. It would have to be a meaningful 
material change to the underlying contract.
    Mr. Hultgren. Okay. Staying with you, Mr. McRaith, I wonder 
if you could walk me through the process of how this covered 
agreement was negotiated. As someone who served as a former 
insurance commissioner of Illinois, your perspective certainly 
is important to me and valuable to me. What role did the State 
of Illinois have in negotiating the covered agreement? And if 
they did not have a seat at the table, who was speaking on 
their behalf, and what mechanism for input did they have?
    Mr. McRaith. We began the negotiations actually in early 
2016 after announcing the start in late 2015. We asked the 
States to identify the membership of a small task force that 
would participate directly in the negotiation. As a former 
State regulator, and as the Director of the Federal Insurance 
Office, I have said repeatedly, written repeatedly, and 
strongly believe that McCarran-Ferguson serves our consumers 
and our industry, our country very well. This agreement is 
intended to further support that.
    So we did get the perspective of Illinois, but the States 
opted--they chose who the membership of their task force would 
be. Illinois was then represented by Commissioner Ted Nickel 
and his colleagues in the effort.
    Mr. Hultgren. Commissioner Nickel, going to you, what role 
do you feel like you and other State insurance regulators had 
in the covered agreement process? Since the covered agreement 
process is new, can you tell us how it compared with other 
international discussions where State insurance regulators are 
involved?
    Mr. Nickel. Sure. I will try to be brief. Thank you for the 
question. I have just met your new Director, Director Hammer. 
She is great. I think you will be well-served. The statement 
was made that we selected a group to represent the NAIC. We 
negotiated a group to be--that not everybody that we wanted to 
have at the table with us was allowed. We did negotiate a 
group. It was a small group.
    There were seven of us at the table. We would have loved to 
share updates with interested parties and--there were seven of 
us. There are 13,000 insurance regulators working every day in 
the United States that we represent. There were seven of us 
allowed at the table. Actually, there were seven of us allowed, 
normally just one at the table.
    The process itself was difficult. And it would have been 
better served if we would have been able to have more ability 
to share opinions with our members and bring back more thought 
to the process.
    Mr. Hultgren. I wish that could have happened, as well. My 
time has expired. We do have a few more questions, so we may 
follow up with you in writing to see if we could get answers to 
them. With that, I yield back, Mr. Chairman. Thank you.
    Chairman Duffy. The gentleman yields back. I want to thank 
our panel for their testimony today. And maybe just to note, it 
is pretty clear we have a wide array of views on this covered 
agreement. And it is good for us to hear everyone's different 
positions. And I think it was Mr. MacArthur who mentioned your 
business model might dictate your support or lack thereof. And 
it is good for us to hear from you all.
    I also think it is important to note that there may be a 
need for us as we move forward to look at clarification. I know 
Mr. McRaith might disagree with that, but I know others have 
agreed with the clarification point. There has been concern 
about the process that was used. And there is concern about 
preemption. And I think you heard unanimous concern for the 
congressional involvement, should there be any future deals 
that are put together. Just a couple of my takeaways.
    But I think all of us are engaged in this issue, and I look 
forward to working with not just the panel, but also those who 
participated, who have shown up to this hearing. So again, 
thank you all.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And without objection, this hearing is now adjourned.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]

                            A P P E N D I X




                           February 16, 2017
                           
                           
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