[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON
THE COMPETITIVENESS OF U.S.
INSURERS, PART II
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 18, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-100
________
U.S. GOVERNMENT PUBLISHING OFFICE
92-875 PDF WASHINGTON : 2015
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
RANDY NEUGEBAUER, Texas, Chairman
BLAINE LUETKEMEYER, Missouri, Vice MICHAEL E. CAPUANO, Massachusetts,
Chairman Ranking Member
EDWARD R. ROYCE, California NYDIA M. VELAAZQUEZ, New York
GARY G. MILLER, California EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey CAROLYN McCARTHY, New York
LYNN A. WESTMORELAND, Georgia BRAD SHERMAN, California
SEAN P. DUFFY, Wisconsin GWEN MOORE, Wisconsin
ROBERT HURT, Virginia JOYCE BEATTY, Ohio
STEVE STIVERS, Ohio STEVEN HORSFORD, Nevada
DENNIS A. ROSS, Florida
C O N T E N T S
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Page
Hearing held on:
November 18, 2014............................................ 1
Appendix:
November 18, 2014............................................ 33
WITNESSES
Tuesday, November 18, 2014
Breslin, Hon. Neil D., Senator, State of New York; and President,
National Conference of Insurance Legislators (NCOIL)........... 11
Consedine, Hon. Michael F., Commissioner, Pennsylvania State
Insurance Department, on behalf of the National Association of
Insurance Commissioners (NAIC)................................. 9
McRaith, Michael, Director, Federal Insurance Office, U.S.
Department of the Treasury..................................... 6
Sullivan, Thomas, Senior Adviser, Board of Governors of the
Federal Reserve System......................................... 7
APPENDIX
Prepared statements:
Breslin, Hon. Neil D......................................... 34
Consedine, Hon. Michael F.................................... 55
McRaith, Michael............................................. 61
Sullivan, Thomas............................................. 68
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Written statement of the American Academy of Actuaries....... 76
Written statement of the National Association of Mutual
Insurance Companies (NAMIC)................................ 79
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 86
Study entitled, ``Unnecessary Injury: The Economic Costs of
Imposing New Global Capital Requirements On Large U.S.
Property and Casualty Insurers,'' by Robert J. Shapiro and
Aparna Mathur, dated November 2014......................... 94
Huizenga, Hon. Bill:
Written responses to questions submitted to Michael McRaith.. 132
Written responses to questions submitted to Thomas Sullivan.. 134
THE IMPACT OF INTERNATIONAL
REGULATORY STANDARDS ON
THE COMPETITIVENESS OF U.S.
INSURERS, PART II
----------
Tuesday, November 18, 2014
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2167, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Royce, Garrett, Duffy, Hurt, Stivers, Ross; McCarthy of New
York, Sherman, and Beatty.
Also present: Representatives Huizenga and Green.
Chairman Neugebauer. Good afternoon, and we will call this
hearing to order. The title of this hearing is, ``The Impact of
International Regulatory Standards on the Competitiveness of
U.S. Insurers, Part II.''
I would mention that our folks on the other side of the
aisle--this is the time of the year, as some of you may have
heard, where people are trying to see if they are going to keep
their job or get a new job, get a new committee. And that
process is going on with our colleagues on the Democratic side.
I talked to Mr. Capuano, and he is going to try to attend later
on today.
So what we are going to do is, we are going to give the
opening statements on our side, and then we will have our
witnesses give their testimony. And we will kind of proceed
with the question-and-answer period. Then, when Mr. Capuano and
some of our Democratic colleagues show up, we may pause and let
some of them do an opening statement. And then, we will put
them back into the queue for the question-and-answer period.
So with that, I will begin with my opening statement.
Thank you all for attending this important hearing which
will examine a range of international regulatory standards
being proposed by the International Association of Insurance
Supervisors (IAIS). Through this hearing, our members hope to
get a better understanding of how our insurance supervisors are
balancing the need to coordinate regulatory efforts overseas
with their responsibility to promote a global marketplace that
benefits domestic policyholders and insurers.
We have somebody here I think is going to--
[Audio problem.]
I think it is kind of ironic. We are getting an upgrade in
the sound system in our old committee room and, hopefully, it
will be--aha, okay.
The IAIS represents insurance regulators and supervisors in
nearly 140 countries. It is tasked with coordinating global
insurance policy and promoting globally consistent regulations.
Overall, this committee does see the benefit of better
international coordination in terms of preventing regulatory
gaps and promoting efficiency; however, I am concerned that the
IAIS' role has evolved from being an international coordinator
to that of an international promulgator.
The IAIS' most recent proposal to harmonize insurance
regulation--commonly referred to as ComFrame--would create a
one-size-fits-all regime for global insurers, including
burdensome group-wide capital assessments and prescriptive
prudential standards.
Members of this committee have expressed concerns with the
prescriptive nature of the ComFrame proposal, but many are
equally concerned that it seems to be a mechanism for the EU to
export its consolidated, bank-like approach to regulating
insurance here in the United States. While this system might
work well for our allies across the Atlantic, it is
inconsistent with our system of insurance regulation and I
don't believe it is in the best interest of U.S. consumers and
insurers.
It is not just the substance of the workstream coming out
of the IAIS that worries our members, but also the apparent
lack of transparency of the organization. For example, U.S.
firms that have been designated systemically important have
complained about the opacity of the selection methodology by
the IAIS and the Financial Stability Board (FSB), and the lack
of due process to appeal such decisions. And more recently, the
IAIS, with the support of the FIO, decided to eliminate the
``observer status,'' which was the only avenue for U.S.
insurers and consumers to present their views before the
organization.
So if I understand international developments correctly, we
are on the verge of importing the European model of insurance
regulation here at home and exporting the non-transparent FSOC
model to our trading partners at the IAIS.
With that being said, I am beginning to receive positive
feedback about our insurance regulators and supervisors
becoming more unified. In particular, I would like to commend
our witnesses for vigorously pushing back against global
standards that would include ``market-based accounting'' for
insured assets. I am optimistic that we can continue this
momentum and change the direction at the IAIS. I want to thank
our witnesses for participating today, and I look forward to
hearing how we can work together to achieve beneficial outcomes
for our domestic policyholders and insurers.
We will now go to the opening statements of our other
Members. And the gentleman from California, Mr. Royce, is
recognized for 3 minutes.
Mr. Royce. I want to thank you, Mr. Chairman, for your
willingness to hold a hearing looking at the governance and
oversight of the National Association of Insurance
Commissioners (NAIC). I want to thank our panel, and I am
hopeful we can schedule a hearing in the future dedicated to
that topic.
There is a clear intersection with the hearing today. The
committee's review of international regulatory standards should
also examine the transparency and accountability of the bodies
making regulatory decisions. As Commissioner Consedine put it
in his opening statement--and I will quote him here: ``The
process of standard-setting should be done in an open and
inclusive forum.''
And transparency is a key element of effective regulation.
The IAIS has clearly failed to meet this mark, but so too has
the NAIC. Last October, the NAIC sent me a letter stating that
its policy statement on open meetings ``applies to all meetings
of NAIC committees, subcommittees, task forces, working groups,
and that any guidance by any of these bodies is taken in open
session.'' Well, none of that is true. The executive committee
holds day-long closed-door meetings during commissioner-only
junkets, where it sets the NAIC policy agenda. NAIC efforts to
remake international regulatory policy have been veiled, as
well.
According to NAIC minutes this year, the group solvency
issues working group was given directions on international
regulatory policy regarding issues which were outlined in a
``regulator-only memorandum.'' Another memo on group solvency
stated that, ``The NAIC executive committee directs the working
group to use the Pennsylvania Insurance Holding Company Act as
the starting point for this work.'' Well, my staff has found no
record of this policy directive being decided in open session.
In fact, NAIC minutes and trade press accounts strongly suggest
just the opposite.
Just one day after taking these committee actions on group
solvency, the NAIC amended its open meetings policy, exempting
consideration of strategic planning issues relating to
international regulatory matters from its scope, resulting in
even less transparency.
So, let me be clear. I support pushing back against closed-
door meetings at the IAIS. But shouldn't the NAIC be opening,
rather than closing, its own meetings, to build credibility on
this subject? Frankly, I am concerned about the NAIC's role as
a private corporation, and about its arrogant response to
oversight.
I hope the panel can respond to this criticism and answer
whether you too are concerned that the NAIC's conflicting
statements and actions demonstrate inadequate concern about
transparency and policymaking. And, Mr. Chairman, I would also
like to hear from Director McRaith regarding any progress made
on moving forward with a covered agreement on reinsurance
collateral and other potential issues, such as group
supervision. The FIO has said previously that it would take
initial steps toward a covered agreement by the end of 2014.
Finally, on the issue of equivalence, or temporary
equivalence, over Europe's Solvency II regime, I am hoping the
panel can expound on whether they think a formal request to the
European Commission is needed to start the evaluation process
for the United States. And, if so, when should we expect such a
request to be made and by whom?
And I thank you again, Mr. Chairman, for this hearing.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from Ohio, Mrs. Beatty, is recognized for 3
minutes.
Mrs. Beatty. Thank you, Mr. Chairman. And thank you to our
witnesses for being here today.
As you know, today's hearing continues a dialogue this
subcommittee started last June, when we heard testimony from
international insurance supervisory authorities on the
development of policy standards. This is a very important
hearing today, and I look forward to our discussion about the
reauthorization of terrorism risk insurance, uniform
enforcement of international insurance regulations, and
supervisory authority at the Federal Reserve.
Given the recent crises, which hurt American families, and
certainly sent our Nation into a recession and crippled some of
the largest banks in the country, it is critical to clarify and
review the regulations of the financial industry. The insurance
industry and the banking sectors are separate, but intimately
integrated, sectors of our economy. And our job here is to
ensure that when there are similarities, regulations make sense
and are not duplicative, and protect the American consumer.
We must also recognize that we live in an ever-changing,
rapidly-growing global economy, but that uniqueness of the
United States insurance market requires open communication and
transparency with our foreign partners.
In today's hearing, I look forward to finding ways to
ensure domestic and international insurance regulations do not
just have strong guarantee funds but, in fact, have the
required regulatory structures to prevent failures in the first
place.
Also, Mr. Chairman and to our witnesses, I represent the
great State of Ohio--specifically, central Ohio--home to one of
the Nation's largest insurers in addition to at least three
other large insurance companies. And so, I have a great concern
in talking to my home district folks and various other
insurance trade associations, that I want to hear more about
the need for a reauthorization of TRIA prior to its expiration
at the end of this year.
Thank you, and I yield back.
Chairman Neugebauer. I thank the gentlewoman.
And now, the chairman of our Capital Markets Subcommittee,
the gentleman from New Jersey, Mr. Garrett, is recognized for 2
minutes.
Mr. Garrett. Thank you, Mr. Chairman. I appreciate the
chairman holding this follow-up hearing on the impact of
international regulatory standards and also on the global
competitiveness of the U.S. insurance companies. And I would
like to thank all our witnesses who are here, as well.
Today, U.S. insurers are facing a critical time, as
international regulatory efforts threaten to impose bank-like
regulations on U.S.-based insurers. We have seen that
international insurance supervisory efforts are moving away
from a coordinated approach--instead, towards a top-down
prescriptive standard. Because insurance companies maintain
very different capital structures from banks, these
institutions should not be treated in the same manner when it
comes to assessing capital requirements. And while a move
towards a top-down standard is certainly a concern to all of
us, I am equally troubled that this increased international
regulation is taking place against what you would call a
backdrop of less transparency.
For example, the International Association of Insurance
Supervisors is looking at whether to hold what they call
``closed door meetings,'' which close all of its workings, the
president's and task force meetings to the public, beginning in
just a few months, on January 1, 2015. I, for one, cannot see
how pulling the curtain over the activities of international
regulators will help U.S. consumers or insurers. Unfortunately,
we have seen this same type of transparency concerns right here
at home in the United States, with both the Federal Reserve and
the Financial Stability Oversight Council (FSOC).
With this tidal wave of regulation under the Dodd-Frank
Act, I think, Mr. Chairman, that we need to be moving in the
direction of more transparency both here at home and abroad as
well, and not less. And so, Mr. Chairman, I look forward to
hearing from our witnesses on all of these important issues.
And with that, I yield back.
Chairman Neugebauer. I thank the gentleman.
I now recognize the gentleman from Wisconsin, Mr. Duffy,
who has taken a great deal of interest in this issue and who
has been very vocal and very supportive in looking at some
policy that would make this a better process.
So I recognize the gentleman for 2 minutes.
Mr. Duffy. Thank you, Mr. Chairman. And I appreciate the
witnesses for being here today. Many of you may not know, but
Wisconsin is the fourth-largest home to insurance in the United
States. I know you are all surprised; a little trivia fact for
you. And those insurers, and our State regulators and
policyholders, have been contacting me, concerned over some of
the proposals coming out of the International Association of
Insurance Supervisors. These proposals could force European-
style regulation on our State-regulated system that, as we all
know, has developed over the past 200 years.
The fact is, unlike Europe, our State insurance regulators
seek to protect the policyholder: the family with a homeowner,
or the life insurance policy, not the insurance company
providing the policy. The Treasury and the Federal Reserve are
supposed to represent that philosophy on the IAIS. But I, like
many others, don't necessarily think that they are doing that.
They are not listening to the insurers, the policyholders,
the State regulators, and the lawmakers who are voicing their
concerns and offering expertise because a conduit for these
stakeholders doesn't exist. While the Federal Insurance Office
has established an advisory committee on insurance, and
Wisconsin's own commissioner, Ted Nickel, serves as a member,
it doesn't provide advice on international insurance-related
matters.
Additionally, I believe Congress should be kept apprised
during the entire negotiation process of international
insurance agreements just like we are during the Federal Trade
Commission negotiations. During that time, the FTC must do
economic assessments on the affected industries and consumers,
providing that information to all of us here in Congress. I
believe Treasury and the Fed should be required to do the same.
For these reasons, I have been developing and working on
legislation that would require Treasury and the Fed to report
to Congress throughout the negotiation process, while also
providing economic assessments just like the FTC does.
And my legislation would strengthen FIO's Federal advisory
committee on insurance so that they could influence Treasury
and the Fed on all international insurance negotiations, as
well as domestic insurance issues. This is an important issue.
As Mr. Garrett mentioned, transparency--especially with some
recent comments that were made--is key.
And with that, Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentleman. And we will now
hear from our panel. We again thank the panel for their
testimony today, and remind each of you that you will have 5
minutes to summarize your testimony, but your full testimony
will be made a part of the record.
Our panel today consists of: Mr. Michael McRaith, Director
of the Federal Insurance Office, U.S. Department of the
Treasury; Mr. Thomas Sullivan, Senior Adviser, Board of
Governors of the Federal Reserve System; the Honorable Michael
F. Consedine, Commissioner, Pennsylvania State insurance
commission; and the Honorable Neil Breslin, State Senator, New
York, and ranking member of the New York State Insurance
Committee. Welcome, gentlemen.
And with that, Mr. McRaith, you are recognized for 5
minutes.
STATEMENT OF MICHAEL MCRAITH, DIRECTOR, FEDERAL INSURANCE
OFFICE, U.S. DEPARTMENT OF THE TREASURY
Mr. McRaith. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for inviting me to
testify today. I am Michael McRaith, Director of the Federal
Insurance Office at Treasury, or FIO. We released our second
annual report on the insurance industry in September. The
report cited 2013 data showing that the U.S. industry's
reported surplus reached a record level of approximately $990
billion. Non-health insurers collected more than $1.1 trillion
in premiums in 2013, or nearly 7 percent of U.S. GDP.
The report also cites data showing that private market
volume is increasing dramatically in developing countries. For
example, China's private insurance market increased by more
than $137 billion in the last 5 years; South Korea by nearly
$50 billion in that same period; and Brazil by more than $41
billion in that time period. These facts illustrate
globalization of the insurance marketplace, and explain the
increased focus on global standards. For this reason, among
others, FIO has a statutory role to correct and develop Federal
policy on prudential aspects of international insurance
matters, including representing the United States at the IAIS.
In this work, we collaborate extensively with our
colleagues at the Federal Reserve, and the U.S. State
regulators, including my two colleagues on this panel.
International insurance standards are not new. The IAIS was
formed in 1994, and U.S. State regulators were among the
founding members.
International standards reflect best practices based on
collective analysis and judgment of the participants.
Importantly, nothing about international standards is self-
executing in the United States. Federal and State authorities
will study, test, and analyze the potential value and impact of
any international standard prior to implementation.
The United States has the most diverse and competitive
insurance market in the world, with insurers that operate in
one part of one State and insurers that are multinational and
engaged in a variety of financial services. With this in mind,
we work with our international counterparts to build a global
consensus that makes sense for the United States. Simply put,
international standards must, when implemented, serve the
interests of U.S. consumers and industry and the national
economy.
The IAIS is also mid-stream in structural reform. These
proposed changes will eliminate the previous pay-for-play
dynamic and increase the IAIS' transparency and independence.
No longer will the IAIS depend upon the $20,400 annual fee paid
by observers. Now, open meetings and the Web site will be
accessible to all stakeholders, not just those who can afford
to pay the annual fee. Consultation with stakeholders will be
more rigorous, including a more rigorous process for
publication of materials and requests for comment.
Nevertheless, the proposed stakeholder engagement at the IAIS
can be improved through a second public consultation process
that began just yesterday.
At FIO, building on our experience will increase the number
of opportunities for stakeholders to meet in one place with all
U.S. IAIS participants. In 2014, we continued the EU-US
insurance project. The E.U. and the U.S. are two important
insurance jurisdictions both as markets and as homes for
insurers. With the collaboration of State regulators, we have
worked with our E.U. counterparts to improve compatibility,
understanding, and, where appropriate, consistency. One
identified objective in the project is a covered agreement. Not
a trade agreement, a covered agreement is an agreement between
the United States and another country involving prudential
insurance measures.
Indeed, the U.S. market and its oversight are unique.
Through effective collaboration at home and abroad, U.S.
authorities will continue to provide leadership that
complements our shared interest in a vibrant, well-regulated
market that promotes competition and financial stability and
protects consumers. Finally, in all of our work internationally
and domestically, Treasury priorities, FIO priorities will
remain the best interests of U.S. consumers and industry, the
U.S. economy, and jobs for the American people.
Thank you for your attention, and I look forward to your
questions.
[The prepared statement of Mr. McRaith can be found on page
61 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Sullivan, you are recognized for 5 minutes.
STATEMENT OF THOMAS SULLIVAN, SENIOR ADVISER, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Sullivan. Chairman Neugebauer, and members of the
subcommittee, thank you for inviting me here on behalf of the
Federal Reserve. The Federal Reserve welcomes the opportunity
to participate in today's hearing, and is pleased to be joined
by our colleagues from the U.S. Treasury Federal Insurance
Office, the National Association of Insurance Commissioners,
and the National Conference of Insurance Legislators.
And while we each have our own unique authority and mission
to carry out, we remain committed to working collaboratively on
a wide range of insurance, supervisory and regulatory issues,
including the subject of today's hearing: international
insurance regulation.
My written statement provides details about the work of the
Federal Reserve with respect to international insurance issues,
but I would like to highlight a few key areas for you.
The Federal Reserve assumed responsibility as a
consolidated supervisor of certain insurance holding companies
as a result of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010. Insurance holding companies for which
the Federal Reserve is the consolidated supervisor hold
approximately one-third of U.S. industry assets. The Federal
Reserve supervisory teams for the insurance holding companies
are a combination of Federal Reserve staff as well as newly-
hired insurance experts.
We are committed to tailoring our supervisory framework to
specific business lines and risk profiles of the insurance
holding companies that we do oversee. Our supervisory efforts
to date have focused on strengthening the firm's risk
identification, risk measurement and management, internal
controls, and corporate governance.
Some of the insurance holding companies subject to Federal
Reserve supervision are internationally active firms which
compete with other global insurers to provide insurance
products to businesses and consumers around the world. Last
year, the Federal Reserve joined our State insurance
supervisory colleagues and the FIO as a member of the IAIS.
The Federal Reserve has been, and will continue to be,
engaged in the development of global standards for regulating
and supervising internationally active insurers. As a general
proposition, we believe in the utility of having effective
global standards for regulation of supervising internationally
active financial firms. When implemented consistently across
global jurisdictions, such standards help to provide a level
playing field for global financial institutions. Further,
consistent global regulatory standards can help limit
regulatory arbitrage, jurisdiction shopping, and promote
broader financial stability.
The IAIS Common Framework Initiative, or ComFrame, includes
the development of a global consolidated capital standard for
large, complex international insurance companies. For the
largest, most active global insurers, the Federal Reserve
supports group-wide consolidated capital standards, which are
well-tailored. Such standards must be deliberately developed
through a transparent process, and properly calibrated. It is
important to note that any standards adopted by the IAIS are
not binding on the Federal Reserve, the FIO, State insurance
regulators, or any U.S. company. During the development of
global standards for insurance firms by the IAIS, the Federal
Reserve will work to ensure that the standards do not conflict
with U.S. law and are appropriate for U.S. insurance markets
and U.S. insurers.
Moreover, the Federal Reserve will only adopt IAIS
regulatory standards after following the well-established
rulemaking protocols under U.S. law, which include a
transparent process for proposal issuance, solicitation of
public comments, and rule finalization.
The Federal Reserve, along with the FIO and the NAIC,
continues to actively engage with U.S. insurance companies on
the development of global regulatory standards for U.S. firms.
Recently, the FIO hosted a session with the Federal Reserve,
the NAIC, and State insurance regulators, along with U.S.
firms, to talk about these very issues and understand what
their concerns were around some of these developments.
The Federal Reserve is committed to continuing this
dialogue and our work with the FIO and State and international
insurance regulators to develop standards for global insurance
firms that are consistent across countries and appropriate for
internationally active U.S. insurers.
Nothing in ComFrame, including the development of a group
capital requirement, seeks to lessen the critical role of the
individual insurance legal entity supervision conducted by the
U.S. States and foreign countries. Rather, group-wide
consolidated supervision and consolidated capital requirements
supplement this approach with a perspective that considers the
risks across the entire firm, including risks that emanate from
non-insurance subsidiaries and entities within the group.
The Federal Reserve is a consolidated holding company
supervisor that focuses on identifying and evaluating risks,
capital and liquidity adequacy, governance and controls across
its supervised organization. U.S. insurers with a global
footprint or global aspirations stand to benefit considerably
from a level global regulatory framework that is strong, but
pragmatic. Reasonably consistent global insurance standards for
internationally active insurers and international cooperation
among global regulators provide the means to that end.
The Federal Reserve has acted on the international
insurance stage in an engaged partnership with our colleagues
from the FIO, the State insurance commissioners, and the NAIC.
Our multi-party dialogue, while respectful of our
individual authorities, strives to develop a central team USA
position on these most critical issues. Mr. Chairman, thank you
for inviting me here today, and I look forward to an active
dialogue with the subcommittee.
[The prepared statement of Mr. Sullivan can be found on
page 68 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Consedine, you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE MICHAEL F. CONSEDINE, COMMISSIONER,
PENNSYLVANIA STATE INSURANCE DEPARTMENT, ON BEHALF OF THE
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)
Mr. Consedine. Thank you, Mr. Chairman, and thank you all
for the opportunity to testify today. U.S. insurance consumers
benefit from some of the most dynamic and competitive insurance
markets in the world. Taken individually, U.S. States make up
24 of the world's 50 largest insurance markets. Pennsylvania,
for example, is the 14th largest insurance jurisdiction
worldwide, with over $95 billion in written premium. The NAIC
has long been committed to providing leadership on global
insurance issues, with a focus on ensuring policyholder
protections and maintaining stable and competitive insurance
markets.
The NAIC, as mentioned, was a founding member of the IAIS,
recognizing that while insurance is a local product, it is a
global business. For over 2 decades, U.S. State insurance
regulators have been extensively engaged with our international
counterparts in developing the elements of a stronger
international insurance regulatory framework. All along, our
focus has been to ensure that any international standards are
adaptable to our markets and benefit our consumers. Standards
developed at the FSB and the IAIS are not binding, but can
serve as a guide for regulators to encourage a degree of
consistency in approach, if not necessarily in structure or
execution.
If these standards collectively elevate the quality of
insurance regulation around the globe, it is a positive thing
for U.S. insurers and consumers. However, any international
standards must be flexible enough to deal with existing
structural and legal differences to avoid putting U.S. insurers
and consumers at a disadvantage in one market relative to
another. Where the Federal Reserve and the Treasury Department
engage at the IAIS, we are committed to cooperating and sharing
our perspectives with them. Recognizing that we each have
distinct responsibilities, it is up to each of us to contribute
and commit to international standards to the extent we feel is
appropriate and have the authority to do so.
However, it is difficult to reach consensus around
standards without the input of those most impacted, in
particular the consumers we protect and the companies we
supervise. Transparency does not require that regulators hand
over the power of the pen to those we regulate. It simply
requires that the process of standard-setting be done in an
inclusive form. That is a fundamental aspect of our democratic
system in the United States, and that is why State insurance
regulators vigorously opposed efforts at the IAIS to limit
stakeholder engagement and why we remain committed to a
transparent process here at home.
The NAIC has long provided forums for significant
engagement by all stakeholders, while preserving a capacity for
regulators to meet confidentiality on sensitive matters. In
fact, as I speak, my colleagues are holding meetings with
stakeholders right here in D.C. to discuss a host of
initiatives being undertaken by the States, including our work
at the IAIS.
The IAIS is developing three capital standards targeted for
different purposes, including an insurance capital standard for
internationally active insurance groups. Although State
insurance regulators have concern with the pace of the work,
and it is not yet fully understood what benefit these standards
will bring to U.S. policyholders, the IAIS is moving forward.
Insurance regulators therefore have an obligation to be at
the table on behalf of our consumers and our marketplace to
seek an outcome that works for our system and doesn't stagnate
growth, jobs, and innovation. If tailored for our system, there
is value in understanding the capital adequacy of insurance
groups, particularly when part of a larger conglomerate. But
that value only exists if it wraps around our existing legal
entity standards. We also remain concerned with the more
volatile market valuation accounting approach as an
international standard which represents a short-term focus
rather than a long-term view.
In our view, taking a homogeneous approach that treats
insurers more like banks may actually encourage new risk-taking
in the insurance industry. The IAIS must also recognize that a
system with existing safeguards for the movement of capital
within a group may take a different approach than jurisdictions
without similar requirements. The IAIS' objectives on capital
standards are not easily achievable and will require
significant commitment of resources over many years to ensure
that they are compatible with the U.S. system of insurance
regulation.
In conclusion, as international standard-setting continues,
the NAIC will remain directly engaged to determine whether the
concepts under discussion make sense and add real benefit for
U.S. policyholders. We are committed to working with our
Federal colleagues where appropriate and sharing our views with
Congress and our State legislatures on these important matters.
The NAIC is pleased to work closely with this committee to
ensure that the long-standing strengths of our State-based
system are preserved, that U.S. policyholders remain well-
protected, and that insurance markets remain stable and
competitive.
And again, thank you for the opportunity to testify today.
[The prepared statement of Mr. Consedine can be found on
page 55 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Senator Breslin, you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE NEIL D. BRESLIN, SENATOR, STATE OF
NEW YORK; AND PRESIDENT, NATIONAL CONFERENCE OF INSURANCE
LEGISLATORS (NCOIL)
Mr. Breslin. Good afternoon, Mr. Chairman, and members of
the subcommittee. Thank you for inviting me here today to
discuss the regulatory standards and their impacts on the U.S.
insurance industry. My name is Neil Breslin. I am a State
Senator from New York and also the president of the National
Conference of Insurance Legislators.
I think, to all of us, it is clear that regulation of
insurance in the United States is under attack. Our more than
150 years of effective oversight, which strikes a balance
between the needs of the consumers and those of committed
markets, is under fire. Our system, which came through the
financial crisis relatively unscathed, is being second-guessed
by officials from countries that had a far different
experience. My colleagues at NCOIL and I believe strongly that
global insurance discussions must be open and allow for broad
comment during development of proposed standards; must do no
harm to State regulation; and absolutely must include a vehicle
for State legislators, as well as regulators, to weigh in.
Transparency and open deliberations are a foundation of
U.S. State legislatures and are critical if State lawmakers who
enact insurance laws in the United States are to be confident
in regulations they are asked to consider, including those that
start overseas. We assert that State lawmakers would find it
difficult to support proposals that have not benefited from
those guiding principles. Failure to allow due process and to
require accountability can have negative consequences for
insurers large and small and for the consumers who rely on
them. We at NCOIL are troubled by discussions outside the
United States that do not parallel the tenets or our own United
States regulation.
In particular, we have a concern that the International
Association of Insurance Supervisors, IAIS, while probably
well-meaning in its efforts to develop global standards, has
moved to limit the ability of interested parties to access and
to comment during its deliberations. The growing urgency of the
organization's efforts, particularly related to capital
standards, group supervision and corporate government demands a
more, not less, open approach.
It is very important that officials who represent the
United States overseas understand and stand together when it
comes to any initiative affecting U.S. insurers and,
ultimately, consumers. There must be clear understanding that
insurance companies do not operate like banks, and that bank-
centric proposals would make it more difficult for U.S.
companies to remain strong, healthy, and competitive.
In other words, regulation that works in the banking
industry may be entirely inappropriate for insurance, and
probably is. NCOIL, through an international issues task force
that I have the honor of chairing, is working with the National
Association of Insurance Commissioners and other advocates of
State oversight to ensure that Federal entities, particularly
those involved at the IAIS and at the Financial Stability
Board, the FSB, stand up for the U.S. system and challenge any
attempt to disregard its principles. We have reached out to the
FIO at the Department of the Treasury, the SEC, the Federal
Reserve and the IAIS, the FSB and others. We have pressed for
coordination and cooperation, open dialogue, and for a better
understanding of the U.S. system.
We are committed to making sure there is a meaningful way
for State legislators who are in direct contact with the
consumers, who are the ultimate winners and losers in dialogues
over insurance, to participate. The absence of a legislative
voice may present inadvertent danger to U.S. insurance markets
and to consumers and businesses they serve.
There must a formal way for State lawmakers to participate.
And though we appreciate statements of interest in working with
State legislators, we look for a more official role. In that
regard, we are pleased that the FIO recently included, for the
first time, a legislator on its Federal advisory committee. And
in particular, that individual, George Kaiser, a North Dakota
legislator, and a past president of NCOIL, was the legislator
chosen for membership.
As some in the room may know, NCOIL has been concerned that
as created under the Dodd-Frank Act, the FIO is subject to
mission creep, both domestically and internationally. And so
with the critical time in insurance regulation, we especially
welcome a legislative seat at the table.
I am here to say that while State regulation is not
perfect, State legislators and regulators are always working to
enhance areas where reform is needed, and NCOIL and the NAIC
have worked strongly together over the years to effect such
change. The United States has a long history of protecting
consumers, and promoting strong markets in both good and trying
financial times. And there is real harm in international
insurance discussions that would unravel a U.S. system that may
be different from other insurance regulation across the world.
But it works.
I and my colleagues at NCOIL are committed to ensuring that
State-based regulation is not compromised, and we look forward
to working with you to that end.
Thank you again, and I look forward to the questions.
[The prepared statement of Senator Breslin can be found on
page 34 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
I now recognize Members for questions, reminding Members
they each have 5 minutes. Before I ask my first question, I
think in this issue--and we have heard in some of the testimony
today--is the statement, don't worry about these standards
being talked about, that they have to ultimately be adopted by
the States. Now, when you get to the point where your hair is
the same color as mine, and you have raised two teenaged sons,
and somebody starts saying, don't worry, you know that is the
time to start worrying. Because I think there are two points
here. One is, why would we be at the table participating in
these if we didn't think, in some way, these standards were
going to be a part of U.S. policy?
So I think it is disingenuous to say, don't worry about
that. I think people are worried about it. And we heard
testimony about that today. I think the other part is, is I
think there will be some assumption with the people that we are
negotiating with across the pond here that we are going to
adopt some of these. And that if we don't adopt them, that
somehow our domestic companies could be penalized in
participating in overseas markets if these standards that are
being proposed are not adopted by that.
So I think for some folks to say, don't worry about this,
is disingenuous. I think there is concern here, and that is one
of the reasons that we are having this hearing today. Because I
think there are some concerns about that process.
Mr. Sullivan, I am a little concerned about the Fed's
involvement in this IAIS process. Because from the Fed's
perspective, you are solvency regulators for SIFIs, savings and
loan, holding companies. And so your participation in this
process, developing capital standards for these globally
significant companies, how are you going to differentiate your
thoughts on how we look at these SIFIs? And then how we look at
these companies that are not a part, that aren't globally
significant? And how do we--you are going to think--thinking
for different capital standards for those SIFIs based on
different capital standards for these other companies.
But as you are at that table, do your thoughts on the SIFIs
spill over into what your thoughts are on what the capital
standards should be for the non-SIFIs?
Mr. Sullivan. Thank you, Mr. Chairman. There are, as
Commissioner Consedine pointed out in his testimony, three
capital standards that are being considered by the IAIS. The
first was the recently published basic capital requirement,
which would then have a high loss absorbency, or HLA, applied
to it. And that is to apply to the GSIIs, the globally systemic
insurers. The other thing we talked about was the Insurance
Capital Standard, the ICS. That is intended to only apply to
internationally active insurance groups. So there is a
distinction upon where a particular insurer fits and what
capital standard would apply.
Chairman Neugebauer. How do you begin to reconcile that,
considering that a lot of these European countries have a
different regulatory structure than the U.S. structure? And so
when you begin to try to apply those in a global way, how do
you reconcile those differences?
Mr. Sullivan. Referring again back to my testimony, and you
heard from Director McRaith as well, once those standards are
set, they would have to be brought back to the United States
and adopted through our rulemaking process. It would only mean
something if we adopt it through our rulemaking process here
within the United States. And we would go through our process
of notification, feedback, and then final rule.
Chairman Neugebauer. I think in your testimony you
mentioned that at the point where we would accept these
consolidated capital standards, we would go through the normal
rulemaking process. To me, that, from your testimony, is an
assumption that you intend to adopt it at some point in time,
or propose these capital standards.
Mr. Sullivan. I also pointed out that it would have to
first conform with U.S. law. And I also said that it would not
have to be disruptive to U.S. markets or U.S. insurers. So it
would have to meet those tests before we would consider
adopting it here in the United States.
Chairman Neugebauer. Mr. Sullivan, in Mr. Consedine's
testimony, he stated that the State regulators are unclear what
benefit the international capital standards would bring to the
U.S. policyholders. Why would we be participating in this
process if we didn't think there was any clear benefit to
policyholders in the United States?
Mr. Sullivan. We are a consolidated supervisor at the Fed.
We do believe in consolidated group capital requirements. We
believe that they can have a leveling of the playing field
amongst market participants. So we do believe it would have a
benefit to the market. And from a regulatory perspective, it
allows us to look at the group on a consolidated basis versus
what the NAIC is doing in terms of its view of legal entity
capital.
Chairman Neugebauer. Some folks point out that during the
financial crisis, the insurance industry actually was the
bright star in the sky, that with the exception of a company
that was operating outside, really, the traditional insurance
arena, the rest of the industry fared very well. Given that,
what is driving the Fed and others to look at these enhanced
capital structures, if our current system seems to be working?
Mr. Sullivan. I hear everything is fine--you know, why fix
a problem, if nothing is broken. But I would also suggest that
markets aren't static, nor should regulation or supervisory
intervention be static. We need to constantly evolve. And I
think the one case that you cite, Mr. Chairman, actually is a
glowing example of what can happen across the entirety of an
enterprise, and the fact that we do need to look at things on a
consolidated basis, not necessarily on a legal entity basis.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from New York, Mrs. McCarthy, is recognized
for 5 minutes.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. And I
thank everybody here for giving this testimony. I think it is
something that many of us are certainly interested in. Going
back over the last couple of years, especially since Dodd-
Frank, myself and Congressman Gary Miller have been working on
capital standards and trying to make an adjustment. Because
here on the House side, we believe we had the right language.
On the Senate side, there was a little bit of confusion and,
unfortunately, language was changed. So I guess, Mr. McRaith,
and certainly anybody else who wants to jump in, when we talk
about the insurance capital standards--we have 221 bipartisan
Members of Congress. And the Senate passed it overwhelmingly on
unanimous consent.
Unfortunately, right before we went on a break, the bill
came up. But it was put together with some other bills--which,
by the way, had already passed, but the way it was written the
Senate wouldn't have accepted it. So it kind of put us back to
square one. But H.R.--and I don't know if you are all familiar
with H.R. 4510, the Insurance Capital Standards Clarification
Act. The legislation would provide clarity to the capital
standards applied to insurance companies under the Federal
Reserve supervision. Mr. McRaith, do you think that applying
the wrong capital standards, such as bank capital standards, to
an insurance company is ineffective?
Are you familiar with this legislation? Is it something
that you would support? Could it be something that you would
support? And if you do know about the legislation--this goes
for everyone--to expand on it. We definitely saw through the
hearings going back in those years that the insurance companies
really had nothing to do with the collapse of the economy that
was going on. So if you could answer that, I would be happy.
Mr. McRaith. Congresswoman, to be abundantly clear,
insurance firms should be supervised as insurance firms. I
think Senator Collins has been on record as saying that Section
165 of the Dodd-Frank Act is intended to provide the
opportunity for the Federal Reserve to tailor its supervision
to the firms that are subject to its supervision. I don't want
to comment on any pending legislation, other than to say that I
think the Federal Reserve has been clear on its view. And I
would defer to my colleagues at the Federal Reserve on that
subject.
Mrs. McCarthy of New York. Thank you. Mr. Sullivan, do you
have anything to say?
Mr. Sullivan. Yes, I do. And I would only reiterate what
Chair Yellen and Governor Tarullo have said on behalf of the
Fed: that we would support the legislation, we seek to tailor
how we supervise insurance firms, and we believe the
legislation would afford us that opportunity. So we do support
it.
Mrs. McCarthy of New York. Thank you. Do any of you think
that if this is delayed until next year, that might hurt the
insurance companies, being that they can actually come up with
a business model that we have been holding them up on for all
this time?
Mr. Sullivan. We would stress expedience in addressing--
Mrs. McCarthy of New York. It could be passed tomorrow on
suspension, to be very honest with you. Any other comments?
Mr. Consedine. Congresswoman, we at the State NAIC level
fully support the legislation, as well, and share the concerns
that if the Federal Reserve doesn't have the ability to tailor
capital standards specific to insurance companies, there could
be very significant consequences for both the companies
involved but, more importantly, the consumer. So we do, indeed,
support the legislation.
Mrs. McCarthy of New York. Thank you. Mr. Sullivan, welcome
from New York. I am a New Yorker, too. You could probably tell
by the way I talk. But, welcome. I think it is important, and
like I said, there are 221 Members, Republicans and Democrats,
evenly split working towards this. We noticed, and I am not
putting any blame on Senator Collins, there was a mix-up in the
understanding of what was going on. She is now the lead sponsor
on the Senate side. So I hope that you have some sway with our
colleagues to bring it up before the session, the 213th
session, leaves.
Because, God knows, when we get back in January, February,
it is going to take quite a while to get some votes up there,
to get some business going. Thank you, gentlemen.
And thank you again, Mr. Chairman, for holding this
hearing.
Chairman Neugebauer. I thank the gentlewoman.
The vice chairman of our Housing and Insurance
Subcommittee, Mr. Luetkemeyer from Missouri, is recognized for
5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Mr. McRaith, in
your testimony you indicate that we have had record levels of
reported capital and surplus this past year, apparently. That
is wonderful, fantastic. How do we look, from the balance sheet
standpoint, on the liability side? Have we increased our
liabilities to where we may have nice capital over here but our
liabilities have shot up even higher yet, to the point where we
are still in deep trouble? Or are we in good shape as a result
of the limited amount of liability that has been taken on? Can
you address that?
Mr. McRaith. So that element of my testimony refers to the
annual report which we released in September, Congressman. And
that annual report affirms that the industry shows improved and
continued improved resilience following the financial crisis.
In short, we are seeing appropriate reserve levels, which
measures liabilities relative to assets.
Mr. Luetkemeyer. Okay. Mr. Sullivan, the chairman talked a
little bit about the SIFI situation. And I am kind of curious.
There have been three U.S.-based insurance companies that have
been designated as SIFIs. Can you tell me, or explain to me how
we get an insurance company to be a SIFI? What are the criteria
that you think would cause an insurance company, if it went
down, to bring our whole economy down? What are the
circumstances?
Mr. Sullivan. Representative, I have not been part of the
deliberations of the Financial Stability Oversight Council
(FSOC). They have their own criteria for designation of firms,
and I am not part of that process or a member of FSOC.
Mr. Luetkemeyer. It is in your testimony today.
Mr. Sullivan. What is that?
Mr. Luetkemeyer. It is in your testimony today. You discuss
it. You discuss that IAIS has designated some SIFIs, three are
U.S.-based, and you can't discuss what your testimony was
about?
Mr. Sullivan. No, no. Are you talking about GSIIs or FSOC?
I'm sorry.
Mr. Luetkemeyer. Well, I am talking about the GSIIs, but
same thing.
Mr. Sullivan. Yes. The IAIS has published their criteria
for designation, and they have designated three U.S. firms as
GSIIs. They have an algorithm that goes through an assessment
of each insurer, and--
Mr. Luetkemeyer. I guess the question is, do you agree with
them?
Mr. Sullivan. I agree with the three designations, yes.
Mr. Luetkemeyer. Okay. If you agree with them, on what
basis do you agree? That we have three insurance companies in
this country that are systemically important enough they could
bring down the entire economy? When in 2008, during the most
disastrous economic financial debacle since the Great
Depression, there were no insurance companies that were a
problem.
Mr. Sullivan. Right.
Mr. Luetkemeyer. How does that work?
Mr. Sullivan. We are worried about systemic risk. We have
an algorithm that assesses systemic risk at the IAIS. And I
support the process that the IAIS--
Mr. Luetkemeyer. That is the same response I got from
somebody with regards to the flood of 1993 in my home district.
We had a flood in 1993 which was record-breaking, a 500-year
flood. The levee around the town saved the town, and yet it was
unaccredited and they were going to raise their insurance
premiums because the levee didn't work. Makes no sense. I'm
sorry, I have a hard time following you on that one, sir.
I guess my question to Mr. Consedine here is, we have the
hearing today entitled, ``The Impact of International
Regulatory Standards on the Competitiveness of U.S. Insurers,
Part II.'' You deal with the State guys all the time. You all
have insurance companies in your State, all the folks. How are
the FIO and the IAIS affecting your State and your insurance
companies' ability to deliver quality, competitive products at
this point?
Mr. Consedine. These standards that are being set now in
Basil, Switzerland, and other places ultimately could be
applied to U.S. companies, large companies, and could
ultimately potentially trickle down to some of our smaller
companies. So our view is, this is not just a Wall Street issue
in Pennsylvania. This is a Main Street issue, too.
And so the concern is, right now, in these discussions,
they are being influenced by different viewpoints from both
Europe and the United States. And it is very important that we
get it right at this stage. Because what happens at this stage
ultimately will then be the standards that go out global.
And yes, we will have the ability to accept or reject them.
And if we reject them because we don't like them, then we put
our market at a competitive disadvantage.
Mr. Luetkemeyer. Okay. In your discussions, in your
testimony, you also talked about some difference of opinion
with regards to IAIS and FIO and all of the different folks who
are promulgating these regulations. What is your relationship
with those folks, at this point?
Mr. Consedine. We are an active participant in the IAIS.
The NAIC, as was mentioned, was a founding member. Fifteen, or
all of our States, are members. So we are fully engaged in
those discussions, along with our counterparts at the Federal
Reserve and FIO. Domestically, we have ongoing and regular
discussions with our counterparts at FIO and the Federal
Reserve on these issues, in part in an effort to put the best
team USA game that we can because there is a lot at stake.
Mr. Luetkemeyer. Okay, one more question. You are involved
in the discussions. Are they listening to you?
Mr. Consedine. I think so. And we are seeing--
Mr. Luetkemeyer. That was a qualified yes, there, not what
I am looking for.
Mr. Consedine. We are seeing real progress.
Mr. Luetkemeyer. Okay.
Mr. Consedine. For example, as was mentioned, we came away
from this last meeting with, I think, an important win for the
United States on market-based valuation. And that was a result
of, I think, active listening and really good teamwork.
Mr. Luetkemeyer. Fantastic. Thank you.
I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Wisconsin, Mr. Duffy, is recognized for
5 minutes.
Mr. Duffy. Thank you, Mr. Chairman. Just quickly, Mr.
McRaith, would you discuss the transparency again of this
process, the negotiations? You talked about it being online, is
that right, the hearings, the meeting? Is that your testimony?
Mr. McRaith. Forgive me. Are you referring to the
transparency at the IAIS?
Mr. Duffy. Yes, I am.
Mr. McRaith. Right. So the first priority was eliminating
the pay-for-play. And you might not be aware, but eliminating
the observer status means that now observers and the public get
access to the same information, the same meetings, but don't
have to pay $20,000 for it.
Mr. Duffy. So in regard to the status of the negotiations,
what kind of information is disseminated to this institution or
to stakeholders?
Mr. McRaith. In terms of the international standard
development work, which I think is what--when you are referring
to negotiations, that is what you mean.
Mr. Duffy. Right.
Mr. McRaith. Look, we are entirely pleased to work with
this committee, to report to this committee, and to work with
stakeholders. One thing that we are committed to at FIO is to
continue to build opportunities for U.S. stakeholders to engage
with all of the U.S. IAIS participants at one time. We have
been doing this--
Mr. Duffy. But there is no process in place right now for
consistent reports to come to this committee and this Congress,
or to stakeholders. Is that right?
Mr. McRaith. We have reported and worked with the--
Mr. Duffy. I know, but there is no--
Mr. McRaith. --staff of this committee on a regular basis,
and we would be pleased to continue doing that, of course.
Mr. Duffy. When a new standard is agreed to at IAIS, is
there going to be a comment period for stakeholders and this
institution to give feedback on the agreed-to language?
Mr. McRaith. Yes, absolutely. And I think that is one
reason why we think this is an improvement. Because the process
for consultation is now formalized and expanded in a way it did
not exist before. And I would say even the consultation process
is now subject to public consultation as of yesterday. So it is
still in draft form. New ideas are still being received.
Mr. Duffy. I am going to come out with a bill in the not-
too-distant future. And I hate to ask people to comment on
bills they haven't seen. I don't do it, so I don't expect you
to. But the concept of having some form of an advisory
committee of stakeholders that participate--they don't
participate, but they give advice to you in the negotiating
process. Would you object to that? And would you object to
consistent updates to this committee on the status of
negotiation?
Mr. McRaith. You are right. I don't want to comment on a
bill I haven't seen. But I do want to say and emphasize that we
absolutely value the opportunity to have this conversation with
this committee, with the staff of this committee, and with
stakeholders. As we move forward, we welcome the opportunity to
build on what we have done to date.
Mr. Duffy. Would you object to an advisory committee,
formalized?
Mr. McRaith. We do have an advisory committee right now
that includes stakeholders from across the diverse array of the
insurance sector.
Mr. Duffy. And standard updates, continual updates to this
committee, you would have no objection to that being
formalized?
Mr. McRaith. We welcome the chance to work with this
committee and work with the staff of this committee.
Mr. Duffy. Because I think a lot of us have had--and I
don't mean any offense to Treasury and the Fed; I think both of
you are somewhat new at engaging in the insurance base the way
you are right now--some concerns with the timeliness of getting
FIO reports. Some of them have been a couple of years late. And
so to make sure that a standard that comes out through this
negotiation, that I know you will say it is not a rule, it is
not binding. But we all know that standard is going to be met
by stakeholders and probably by our regulators. We want to have
an advisory committee making sure that you have the best
information possible and that we stay in constant communication
as this process moves forward.
And we think the process should move forward, but we don't
want to find ourselves at the end of the negotiation, agreeing
to something and the industry and this institution has great
reservation about what you have done. And so to put some
procedures in place to make sure that there is a constant
dialogue and a constant feedback for you, I think is important.
And to make sure that there will be a time period for comment
to make sure, before we sign off or you sign off on this
agreement, that there is a period for comment and there are
questions that you might ask to get feedback from the industry
on how it is going to impact us.
My time is almost up. In regard to guarantee funds versus
capital, how are we doing in the negotiations with our
international counterparts? Are we rolling over?
Mr. McRaith. I am not entirely sure I understand the
question. Is the question whether we are conceding that
guarantee funds don't work and instead requiring more capital
for the insurance firms?
Mr. Duffy. Yes.
Mr. McRaith. Absolutely not. In fact, I don't remember ever
having that discussion once. In fact, I don't think anyone has
ever discussed that. I think what we view in the United States
is--
Mr. Duffy. Are you considering--
Mr. McRaith. --the guarantee association system works well
for the insurance entities.
Mr. Duffy. My time has expired. I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Virginia, Mr. Hurt, is recognized for 5
minutes.
Mr. Hurt. Thank you, Mr. Chairman. I thank you for holding
this hearing, and I thank the witnesses for appearing today.
My first question is directed to Commissioner Consedine.
The comment that you made during your testimony indicated that
capital standards that may be adopted in a--modeled on bank-
like standards, designed to minimize risk, could actually
instead create more risk for insurance companies. And I was
wondering if you could elaborate on that a little bit?
Mr. Consedine. Thank you, Representative. One of our
concerns with capital standards, especially if they result in a
higher capital requirement for many insurance companies, is
both from an economic and policyholder perspective. And
requiring companies to hold higher amounts of capital, you
severely limit the free flow of capital, and their ability to
grow, to hire people, to create jobs, to create new products. I
think you see the opportunity for pricing swings, possibly
price increases. And ultimately, in some cases, and we have
seen this play out in other countries, you limit the
availability of products that are based on long-term
liabilities and valuation standards; products that could be
very critical here in the United States, especially with an
aging population, with pension risks that are all--could be
dependent on the availability of those types of products. And
the absence of those products could have a long-term
detrimental impact on our economy.
Mr. Hurt. Excellent. Now, Director McRaith, I wanted to ask
you, when you have testified before this committee before, you
have expressed strong support for State-based insurance
regulation. And I certainly, for one, appreciate it, as I have
said to you before. But I was wondering if you could talk a
little bit about the proposals that we are seeing overseas, the
Financial Stability Board and the E.U.'s Solvency II proposal
as well as the ComFrame from--by the FSB. If you could talk
about what risks, what dangers do you see? What dangers are you
looking for as you represent our interests in this process?
What are the things that you are looking for that could hurt
the competitiveness of American insurance companies and
policyholders?
Mr. McRaith. I think Commissioner Consedine identified a
legitimate concern, which is having a capital standard that
would affect the availability of products or the ability of the
industry to compete within the United States. As I said in my
testimony, any international standard has to serve the best
interests of the U.S. consumers, the U.S. industry, and the
U.S. economy. So as we look at capital, that is a priority. As
we look at enterprise risk management, that is a priority. As
we look at governance standards and expectations, that is a
priority. It is also, in our view, consistent with what Tom
Sullivan said in his testimony, that it is also appropriate to
look at the firms as a consolidated enterprise if they are
large, multinational, complex organizations.
And that is what ComFrame intends to do. But I want to be
clear, and emphasize--and I say this as a Chicago Bulls fan;
Michael Jordan, Scotty Pippin, and Phil Jackson were great in
their own right. Together, they won six championships. The
Federal Reserve, the State commissioners, and the FIO, working
today, we can deliver standards internationally that serve the
best interests of the United States.
Mr. Hurt. Thank you. My last question is to Commissioner
Consedine and Senator Breslin. We heard Director McRaith talk a
little bit about his commitment to transparency and a broader
participation by the stakeholders, namely insurance
commissioners in our 50 States as well as the legislators and
legislative organizations. Can you all talk just briefly, in
the few minutes we have--few seconds we have remaining about
what you think specifically needs to be done in order to bring
broader participation?
Mr. Breslin. Obviously, in a general sense, just the
transparency part is anathema to the States. The States, as was
indicated before, six of our States, including Texas,
Pennsylvania, and New York are among the top 20 insurance
producers in the world. And each of those States has strong
transparency regulations and strong State-based--
Mr. Hurt. Can you talk about the specifics, though? I think
I understand what you mean generally. Are you able to assign
any specific remedies?
Mr. Breslin. Obviously, with each of those regulatory
bodies in the international sense is to have open meetings,
open discussion. When they deal with trade agreements, those
trade agreements should be shared with the States. The States
should have--legislators should have participation so that
enhances the transparency issue.
Mr. Hurt. Excellent. Thank you.
My time has expired. Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Florida, Mr. Ross, is recognized for 5
minutes.
Mr. Ross. Thank you, Mr. Chairman. Having just come off of
an election, as all of us have, I doubt any of my colleagues,
including myself, campaigned on Basel III or Solvency II or
IAIS. And yet the impact of these regulatory schemes have a
significant role in the end user, the consumer. And believe me,
coming from Florida, I come from a State which 7 years ago
decided to affect the markets in a regulatory and statutory
form by over-expanding a property insurance company that was
run by the State, owned by the State, and backed by taxpayers,
only to effect a below market rate.
And what we have here is somewhat the antithesis of that.
Director McRaith, I truly appreciate your confidence here about
being at the table and using the analogy of the Chicago Bulls.
I just don't want us to have the luck of the Chicago Cubs when
it comes to having our role at the international table. Now, I
think that having the representation of the NAIC is very, very
important. Ever since the McCarran-Ferguson Act, what we have
in place I think is one of the best things that this world
economy has seen in providing consumer protection, solvency,
and a good regulatory scheme for domestic insurance.
And yet I still have to question why FSOC decides to want
to put into place the designation of three domestic carriers as
SIFIs. And my question to you, Mr. McRaith is, is that an
indication that the State regulatory scheme is not sufficient
if FSOC is putting into play three domestic carriers as SIFIs?
Mr. McRaith. Congressman, the council is guided by the
statute. The statute establishes the legal standard, which is
whether the material financial distress of the firm could pose
a threat to--
Mr. Ross. And I think the lack of transparency there as to
what designates a SIFI for the insurance companies is obviously
an obstacle or a hurdle we are trying to overcome. But that
also goes to the problem that we are having today when we are
dealing with international standards. Now, Director McRaith,
you said in your testimony that international standards are not
themselves self-executing. I agree with that. We don't have to
accept them. But by their very nature, are they not self-
limiting? In other words, if we don't accept them, aren't our
domestic carriers going to suffer at the table?
Mr. McRaith. There are three phases in the process:
standard-setting; testing before implementation; and
implementation. Our view is, right now we are in the early
stages of development, Congressman, and the best thing we can
do is work together to provide U.S. leadership in the
international standard-setting.
Mr. Ross. I appreciate that. And in that leadership--and,
Mr. Sullivan, I will ask you this question. Any increase in the
capital standards is going to ultimately lead to an increase in
the product. Granted, I know that Commissioner Consedine talked
about how that is going to tie up capital and keep from
expanding and creating jobs. But ultimately, in order for these
carriers to stay in business they are going to have to seek
other recourse. Which is going to most likely be, if capital
standards increase then the product price is going to have to
increase. Wouldn't you agree?
Mr. Sullivan. I would agree, but we haven't reached a point
to determine whether or not additional capital is required yet.
Mr. Ross. I think that is important. And I think that is
what I am getting at is that we have to be together, we have to
deal from a position of strength here. We probably have the
largest number of premiums out there, absent health insurance
premiums, in the world economy. We have to go into these, and
not just one person at the table who has an insurance
background. But I think a concerted effort that what we have in
place may not be the best system ever designed but it is
working very well. And to that end, I would just ask
Commissioner Consedine, what do you see as a hurdle in putting
us at the table with the IAIS in trying to make sure that we
are not just jammed with some capital standards that we are
going to be left to take de facto if not by way of the
rulemaking process?
Mr. Consedine. Thank you, Representative. I think part of
it, again, is putting together the team that we have. But the
next step, and I think the more important step, that we are
engaged in is putting the ideas together in some form that we
can offer an alternative--
Mr. Ross. I agree.
Mr. Consedine. --to what is already being pushed by
different parts of the world. We need a solid U.S.-based
proposal. We are working on it. We will get there. But that is,
to me, the turning point in this discussion.
Mr. Ross. And, Senator, I just want to tell you, as a past
boardmember of NCSL, and as a past member of NCOIL, I laud you
for what you are doing. And I think the best impact we can have
is at the State level to make sure that our constituencies
understand the significance that when those rates go up--not
because of an insurance commissioner, but because of an
international standard--our methods of recourse are going to be
severely limited.
With that, I will yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Ohio, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
holding this hearing, and I appreciate all the witnesses for
their time. Director McRaith, one of the things you said a
minute ago was you talked about team USA and the only group at
the table you left out are the legislators at NCOIL that,
frankly, help, under the McCarran-Ferguson, set the rules of
the road in our 50 States, and I guess I am curious how you are
soliciting input from them. Because if we are going to indeed
have an American approach here, team USA, we need everybody at
the table. So what have you and the others, the Federal
Reserve, done to reach out to the members of NCOIL to solicit
their input?
Mr. McRaith. Let me start with the recognition that--as I
think you are aware--before starting this job I was the State
commissioner in Illinois. And it was a fantastic opportunity to
work with people who cared about their constituents, as you
well know, Congressman, from your days in the Ohio general
assembly. My appreciation for Senator Breslin and his
colleagues I expressed earlier. We have a member--as he
repeated in his testimony--of the State legislature on our
advisory committee. We know that the legislators work closely
with the NAIC and the State regulators, and we are absolutely
open to continuing to build on our engagement with the State
legislators.
Mr. Stivers. Great. There was a recent study done by Robert
Shapiro which indicated that there is no evidence that higher
capital standards are needed for the solvency and operation of
large U.S. insurance companies. In fact, they concluded that
compared to banks, insurance companies have neither the size
nor the interconnectedness to drive correlated losses that can
pose any systemic risk. Is there anybody at the table of
witnesses who is not familiar with that study? Have you used
that study in your conversations with our international
partners to help them understand that anything we would do on
capital standards needs to really make sense? I think it is an
important study, and there are findings there that can back up
what the team USA position should be.
Mr. McRaith. Congressman, I think I heard about that study
maybe less than an hour ago. And forgive me, I have not had a
chance to read it.
Mr. Stivers. Please review it. I will send it to all four
of you. I really appreciate it. Have any of the rest of you had
a chance to see it?
Mr. Sullivan. I have not.
Mr. Stivers. Okay. I will get it to all of you, and I think
it can be an important study in team USA's approach.
So the U.S. State system has always received high marks in
the past in a number of areas, although the last report, which
was a peer review done by FSB, suggests that more Federal
involvement in insurance is necessary. Is there anybody who led
a U.S. response to this last review of our U.S. insurance
system, and what was that response?
Mr. Consedine. Congressman, I will speak on behalf of the
State insurance regulators, and we are currently going through
our most recent FSAP review. But the last one that we did, I
believe, about 5 years ago. I think we certainly responded,
from a State perspective, that our view is that State insurance
regulation doesn't necessarily require additional layers of
Federal regulation.
As you said, we have a great track record, especially
during the financial crisis. But more importantly, we do take
the lessons learned from those reviews and apply them. We have,
for the last 5 years, engaged in a modernization initiative to
improve our system at a State level, and those improvements
continue today.
Mr. Stivers. Great. Director McRaith, or let me actually
ask Mr. Sullivan. Are you familiar with Fed Governor Tarullo's
comments during the Senate hearing in September when he said
that traditional insurance does not pose a systemic risk?
Mr. Sullivan. Yes.
Mr. Stivers. Okay. And do you agree with those comments?
Mr. Sullivan. I support Governor Tarullo's comments, yes.
Mr. Stivers. If so, how does the Fed justify imposing
discriminatory standards against insurance affiliates of U.S.
insurance holding companies it regulates if the Dodd-Frank Act,
Collins Amendment is fixed along the lines of the House- and
Senate-passed legislation, will the Fed use U.S. insurance
standards for companies under your jurisdiction? Or to what
extent are you considering applying a version of the
international standard that would otherwise be adopted in the
United States?
Mr. Sullivan. I am not sure on your question. But Governor
Tarullo also said we would like relief under Collins and we
would like to be able to tailor our standards to the business
model of insurance, which I also support.
Mr. Stivers. Thank you.
Chairman Neugebauer. I thank the gentleman.
The gentleman from New Jersey, Mr. Garrett, is recognized
for 5 minutes.
Mr. Garrett. Thank you. Let's just follow up on that really
quick, then. Do you have the discretionary authority right now
without the passage of that amendment?
Mr. Sullivan. Governor Tarullo will talk about very limited
authority, or limited flexibility.
Mr. Garrett. Right.
Mr. Sullivan. Outside of Collins.
Mr. Garrett. Why I asked that is because earlier in your
testimony, you seemed to indicate that you were going to be
flexible as far as applying them, when the question was with
regard to capital standards and other standards regulatory
requirements. Earlier, it sounded like you had the flexibility,
and now--did I hear wrong before?
Mr. Sullivan. I would not say that it is unlimited
flexibility, Congressman. I think there are some opportunities
to distinguish between the assets held by an insurer versus a
bank, but I am not sure how much lift there would be there.
Mr. Garrett. Right. So going forward, you do not have the
authority that you would need to have in order to provide the
flexibility to this, correct?
Mr. Sullivan. Correct. We would like more flexibility--
Mr. Garrett. Right. And so making the designations without
that authority means that you--and without the passage of the
change of the law means you are going to impose standards that
are not applicable and not appropriate for them. Is that
correct?
Mr. Sullivan. We have to abide by the law.
Mr. Garrett. Right. And you are saying that you don't have
the authority to do the correct thing with the correct amount
of flexibility. So if it is not the standards that are correct,
then they would be incorrect standards that you would be
applying. Otherwise, you wouldn't need the flexibility, right?
Mr. Sullivan. We would prefer the flexibility.
Mr. Garrett. So you are going to be imposing standards that
are not appropriate.
The whole panel, whole discussion, seems to have been
focused on the issue of transparency, or 90 percent of it. And
certainly with regard to the Fed, their level of transparency
is something that some of you may know I have questioned in the
past, in general. I could just run down one. One is when the
Fed issues regulations right now, outside of this area, there
is no cost-benefit analysis being done, as we have recalled,
that is also required over at the SEC, the CFTC, or almost any
other Federal agency. And I have always wondered why the Fed
doesn't do it there. I guess I will get back to the question of
seeing whether or not cost-benefit analysis is part of the
discussion when you engage on the international front.
Second, at the Fed, the fact that it has been tailored down
to the rulemaking process and what has been driven by a single
Fed Governor, which I think is--and consolidated in a manner
that is overly concentrated I think is problematic in
transparency.
And third, in the whole area outside of this area in stress
testing of the financial institutions and banks and what have
you is--a lot of critics have said is highly secretive and
gives way too much discretion without going through the normal
administrative notice and comment process.
And that is not me making those comments. It was the
president of the Federal Reserve Bank in Kansas City who called
for more transparency in what has been called an opaque testing
process. So we see that the Fed comes into this realm with a
questionable and checkered past with regard to transparency.
And so that is why I am wondering, Mr. Consedine and Senator
Breslin, whether you feel that is an entity that we should be
confident in going forward, and relying on transparency
considering their past track record. Senator?
Mr. Breslin. I have made the general comment throughout
that each of the Federal agencies aren't sufficiently
transparent to satisfy State legislators in their role of
supervising insurance in the States. And unless and until there
is that participation by State legislatures, they will continue
to make mistakes in doing so without that degree of
transparency.
Mr. Garrett. Mr. Consedine, can you add anything else?
Mr. Consedine. Thank you, Congressman. Again, in the sort
of limited context of our world and insurance regulation, I can
attest to the Fed's outreach efforts at this point on some of
the issues that we have been talking about today. In the area
of consolidated supervision, where they, in fact, are the
consolidated supervisor for a number of large insurance
companies or thrifts--
Mr. Garrett. Is your State different from--you said you are
one of the top 20 in the States. Is your State's and your
interests different from the other States? Do we need you there
anymore if the Fed is able to do this going forward? Are all 50
States and their departments so similar that there is not
something unique about Pennsylvania and New Jersey and
elsewhere?
Mr. Consedine. No. I would like to think you absolutely
need us. We are--
Mr. Garrett. Well, not if, at the end of the day, they get
your input and they get the input from the other 49 States, and
they make a decision that is adverse to your State.
Mr. Consedine. And, again, the Fed only regulates a small
segment of the insurance marketplace.
Mr. Garrett. So for that small a segment, you are willing
to abrogate your authority and sovereignty in that area?
Mr. Consedine. Absolutely not, and that is part--
Mr. Garrett. Okay, so there is something unique and special
about Pennsylvania that maybe--that you are there defending.
Mr. Consedine. I am speaking on behalf of Pennsylvania, but
also the NAIC. And, again, we work with the Fed. But we have
not, nor will we ever, abrogate our responsibilities to our
consumers in our State markets as part of a--
Mr. Garrett. But then, at the end of the day the law allows
them to abrogate that--allows them to supplant that authority,
right?
Mr. Consedine. We haven't seen that to date. Again, at a
legal entity insurance company level, we are still the
regulators.
Mr. Garrett. Okay. And, Mr. McRaith, you were saying
earlier that as far as to the question that SIFI designation,
that it is clear as far as the process, as far as that is in
statute I think is the word you said, correct?
Mr. McRaith. I recited the legal standards in the statute,
yes.
Mr. Garrett. Yes. Is it really that clear? Because it is--I
haven't even been able to find that standard in the statute,
and I don't think that the players were able to find that in
this statute. I thought that there actually is broad discretion
and that is the reason that there is not transparency in that
area. But you are able to actually cite the statute where it
actually says that they make this determination for these
SIFIs?
Mr. McRaith. I cited--I don't want to cite the entire
statute because I can't do that.
Mr. Garrett. Yes.
Mr. McRaith. But I can tell you that the legal standard is
what I cited earlier. But remember, the council is governed by
the statute and the considerations and factors in the statute.
And it also has a rule and guidance that have been published
following three public consultation periods. So all of that is
clear and based on feedback from interested parties.
Mr. Garrett. Interesting.
I yield back my time.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Michigan, who has sponsored
resolutions on the transparency of the IAIS, Mr. Huizenga, is
recognized for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate the
opportunity to sit in. And yes, in fact, I have sponsored House
Resolution 735, along with my colleague across the aisle, Greg
Meeks from New York. And a similar resolution expressing the
sense of the Senate being very concerned with this has been
introduced by Senators Heller and Tester.
It just seems to me that as we are moving forward, or as I
should say IAIS is moving forward with eliminating this
observer status, the question is, as I am understanding Mr.
Sullivan and others, that somehow being there as observers is
going to influence and damage the independence of the IAIS.
Congress is very transparent, we are very transparent. To
my colleagues from the States, I served in the State
legislature, as well, in Michigan. Extremely transparent. There
are cameras here that are all transparent. It doesn't mean we
are not independent. It doesn't mean that we somehow are going
to bend to the will of the Administration. Talk to our
colleagues on the other side. They are very concerned about
that sometimes, right? So it seems to me that these are being
conflated. And I am especially concerned, Director McRaith,
that Roy Woodall--he is the insurance voting member of FSOC, an
insurance position that we created specifically as to matters
dealing with systemic risk--asked to be invited to sit in on
some recent IAIS systemic risk meetings but was turned down.
You may recall that at the subcommittee's hearing earlier
this year there was a bipartisan support for the FSOC's
insurance member attending these meetings, IAIS. And I
understand you are on the IAIS executive committee. That is
correct? Yes, you are--he is nodding. So can you tell us why
this FSOC member was turned down, or turned away, and not
invited?
Mr. McRaith. Congressman, the transparency of the IAIS as
proposed eliminates the fee. So that any stakeholder, whether
it is Roy Woodall or anybody else, can attend meetings--
starting January 1st, will be able to attend meetings, access
information on the Web site, and obtain material relating to
important matters without having to pay the fee. That is the
issue of the pay-to-play that we were looking--
Mr. Huizenga. So Mr. Woodall is going to be able to go into
all these meetings.
Mr. McRaith. The same meetings that he would have been able
to attend as an observer.
Mr. Huizenga. All right. And as our representative--because
it is my understanding that, as a result, the observer members
will no longer be able to attend or participate in the meetings
unless a specific non-member group is invited to attend as a
guest. Am I wrong, then, or is that contrary to what you are
saying?
Mr. McRaith. It is wrong in the sense--and forgive me for
correcting you--that it is a statement of policy that is an
improvement over the prior policy. So now, the--
Mr. Huizenga. Oh, you may think it is an improvement, but
there are a whole bunch of other people who don't think it is
an improvement. But continue, please.
Mr. McRaith. The problem--the difference now is that
individuals who were observers and had to pay $20,000 no longer
have to pay that fee. They will have the same access to the
same meetings, and more access to other information without
paying--
Mr. Huizenga. So why are people opposed to this? If they
are going to save $20,000, why are they opposed to i? Or is
that the question you are asking?
Mr. McRaith. I would also add, the process is still under
development. So just yesterday, the consultation process was
released for a second consultation. So those who are interested
in its outcome still have another opportunity to provide ideas.
Mr. Huizenga. So why would they put this in place without
having this process, that you have cut off the highway before
you have built the off ramp? There is no off ramp or on ramp to
have these people participating. You have just said they can no
longer come in. Mr. Woodall was denied being able to come in to
the meetings. But don't worry, we are going to get you back in
once we develop this process. That, to me, just flies in the
face of the whole idea of transparency. So I am assuming, then,
that if you will be making sure that he is able to get into
these meetings. If not, will you assure me and the rest of this
body that you will be working on making sure he is invited by
IAIS?
Mr. McRaith. What I have committed to members of the
observer community is that we, the Federal Insurance Office,
need to ensure that stakeholders are able to engage in a
substantive and meaningful way at the IAIS. The current
proposal improves upon the prior process, among other things
because they don't have to pay a fee. But also, as I mentioned
earlier, Congressman, in the United States we need to give
opportunities for stakeholders to meet with all of the IAIS
participants at one time. And we are committed to doing that,
as well.
Mr. Huizenga. I still stand by my resolution. But thank
you, Mr. Chairman, I appreciate the opportunity.
Chairman Neugebauer. I thank the gentleman.
The gentleman from California, Mr. Sherman, is recognized
for 5 minutes.
Mr. Sherman. Thank you. Let me comment that the U.S. system
for regulating insurance companies did well in the greatest
stress test I could have imagined, which is 2008. The system
survived. And even those regulated insurance subsidiaries of
AIG, a parent company that was not well-run, those entities
that were under State insurance regulation survived quite well
and have even returned AIG to something approaching
profitability.
I happened to be the lead Democrat on the Policyholder
Protection Act, which is designed to make sure that
policyholders and the regulated insurance companies are not
viewed as cash to be devoured if a related bank or depository
institution is in trouble. And specifically, would ensure that
Bank Holding Company Act provisions are extended to thrift
holding companies to ensure that funds that are dedicated to
policyholder claims are not used to support a failing bank.
Mr. Sullivan, what is the Fed doing in its oversight of
insurance companies that are also--that are thrift holding
companies to ensure that policyholders are protected and their
funds are not used as a source to protect the insured
depository institution?
Mr. Sullivan. Thank you, Representative Sherman. Our role
is that of the consolidated supervisor, and we are working in
conjunction with our colleagues at the NAIC and the individual
States who have dominion over that particular insurer to make
sure that our efforts to supervise the entirety of the firm,
and look at it across the enterprise, look at its risk
management, its governance and the rest of its structure, while
complimenting the work that the States are doing from the
supervision of the legal entities. And in that work, we look at
the safety and the soundness and the source of strength of the
entire enterprise and whether or not the parent can support the
insured depository institution. So we are not--
Mr. Sherman. So are you moving toward a system in which the
assets of the insurance corporation, often a subsidiary of a
holding company, that those assets are available for the
policyholders and cannot be tapped in order to reduce the cost
to the FDIC or in other ways--otherwise deal with the problems
of a troubled depository institution?
Mr. Sullivan. We are not moving in that direction. I doubt
Commissioner Consedine or any of his colleagues would allow us
to get our hands on those assets. So we are looking, as I--
Mr. Sherman. So you are moving in the direction of not--of
providing rules so that policyholders could be confident that
you are not going to get your hands on those assets.
Mr. Sullivan. That is correct. We are looking at the
totality of the enterprise.
Mr. Sherman. Thank you. I have also cosponsored legislation
designed to make sure that when we look at the capital
standards of insurance companies that we clarify that we are
using capital standards measures appropriate to insurance
companies, not just graft on bank standards.
How certain are we that when we--that we will continue to
use insurance standards for evaluating insurance companies? I
will ask Mr. Sullivan, but also others on the panel to comment.
Mr. Sullivan. I guess I would say, Representative, is I am
living proof of that by virtue what the Fed has done in terms
of bringing me on board and the rest of the insurance talent
that we continue to add to the Federal Reserve. We continue to
build our knowledge base and our expertise around supervising
insurance companies.
As you may or may not know, I was previously an insurance
commissioner and a member of the NAIC. And I have nearly 30
years in this industry. So I think that should be a comforting
sign to you and to others that the Fed is serious about
understanding the business of insurance, making sure--I used
the word earlier--``tailoring'' our approach to how we
supervise these institutions.
Mr. Sherman. Does any other panelist have a comment?
Mr. Consedine. Congressman, I would just add I think we
have heard already today though that when it comes to the issue
of giving the Fed the additional flexibility it needs to design
capital standards that are tailored, truly, to insurance
company we do need the action of this Congress. And we support
that.
Mr. Sherman. Thank you.
I yield back.
Chairman Neugebauer. I thank the gentleman. Without
objection, I would like to submit for the record testimony from
the American Academy of Actuaries, the National Association of
Mutual Insurance Companies, the Property Casualty Insurers
Associations of America, and a study by Robert Shapiro and
Aparna Mathur that was referred to by one of the other Members.
Without objection, it is so ordered.
I would like to thank each member of the panel for being
here today. I would say that I hope what you heard from both
sides of the aisle here is, we want transparency. I think the
American people deserve that transparency, and I think the
industry deserves that transparency. We want you to be working
together and representing a team USA, and a unified voice is
you bringing forth your perspective on that.
I think one of the things that is a hope also that you
heard is that we are pretty proud of the regulatory structure
that was already in place today, and which I think has proven
to be very resilient. As Commissioner Sherman mentioned, it
went through, I think, what would be the ultimate stress test
and did quite well.
And so we are not ready to give up a lot of ground. Why
this is important, it is not necessarily--we are not talking
about the companies and policies, but what we are really
talking about is the policyholders. American families all
across this country enjoy some of the best insurance products
in the world. And they enjoy them at a nice price. Now, some
people think they may be a little bit overpriced. But what we
don't want to do is inject regulation where regulation is not
needed, which ultimately drives up the cost of those products
or even limits the availability of some of those products
because of actions that were taken.
So it is a delicate balance. But I think what you heard
from everybody is, we are watching and we want to see some
action. We heard a lot of talk today, but we would like to see
some action.
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.
With that, thank you for coming, and this committee is
adjourned.
[Whereupon, at 3:41 p.m., the hearing was adjourned.]
A P P E N D I X
November 18, 2014
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