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THE IMPACT OF THE U.S.-EU DIALOGUES 

ON U.S. INSURANCE MARKETS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 28, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–108 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

BLAINE LUETKEMEYER, Missouri, Chairman 

LYNN A. WESTMORELAND, Georgia, Vice 

Chairman 

EDWARD R. ROYCE, California 

SCOTT GARRETT, New Jersey 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

DENNIS A. ROSS, Florida 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

ROGER WILLIAMS, Texas 

EMANUEL CLEAVER, Missouri, Ranking 

Member 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

JOYCE BEATTY, Ohio 

DANIEL T. KILDEE, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 28, 2016 .......................................................................................... 1 

Appendix: 

September 28, 2016 .......................................................................................... 27 

WITNESSES 

WEDNESDAY, SEPTEMBER 28, 2016 

McPeak, Julie Mix, Commissioner, Tennessee Department of Commerce and 

Insurance, on behalf of the National Association of Insurance Commissioners (NAIC) ...................................................................................................... 7 

McRaith, Michael T., Director, Federal Insurance Office (FIO), U.S. Department of the Treasury ........................................................................................... 4 

Sullivan, Thomas, Associate Director, Board of Governors of the Federal 

Reserve System .................................................................................................... 5 

APPENDIX 

Prepared statements: 

McPeak, Julie Mix ............................................................................................ 28 

McRaith, Michael T. ......................................................................................... 36 

Sullivan, Thomas .............................................................................................. 44 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written statement of the American Council of Life Insurers ....................... 53 

Written statement of the American Insurance Association .......................... 56 

Written statement of Ambassador Robert Holleyman, Deputy United 

States Trade Representative ........................................................................ 75 

Written statement of the Property Casualty Insurers Association of 

America .......................................................................................................... 78 

Sullivan, Thomas: 

Written responses to questions for the record submitted by Representative Luetkemeyer .......................................................................................... 90 

Written responses to questions for the record submitted by Representative Posey ....................................................................................................... 93 

(1) 

THE IMPACT OF THE U.S.-EU DIALOGUES 

ON U.S. INSURANCE MARKETS 

Wednesday, September 28, 2016 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING

AND INSURANCE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Blaine Luetkemeyer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Luetkemeyer, Royce, Garrett, 

Pearce, Posey, Ross, Barr, Rothfus, Williams; Cleaver, Clay, Green, 

and Beatty. 

Also present: Representative Heck. 

Chairman LUETKEMEYER. The Subcommittee on Housing and Insurance will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time, and unfortunately, today we probably will have to have a recess somewhere 

between probably 2:45 and 3 o’clock, as we do expect votes to take 

place. 

I apologize to the witnesses today, but unfortunately that is the 

way things happen in an afternoon session. So, I appreciate you 

sticking around whenever that happens because—depending on 

how far we get here, but hopefully, we can get through a lot of 

questions and testimony as quickly as possible. 

Today’s hearing is entitled, ‘‘The Impact of the U.S.-EU Dialogues on U.S. Insurance Markets.’’ Before we begin, I would like 

to thank the witnesses for appearing before the subcommittee 

today. We look forward to your testimony. 

I now recognize myself for 5 minutes for an opening statement. 

This subcommittee has spent a great deal of time focused on international factors affecting our domestic insurance markets. Today, 

we continue our oversight of the evolving international regulatory 

environment and the direct impact on U.S. policyholders. 

I would ask everyone to please take a look at the chart on the 

screens. It is all around you. This is a depiction of the meetings of 

the International Association of Insurance Supervisors (IAIS) happening in the current 5-month window. Eighty percent of these 

meetings take place behind closed doors without public or congressional access. 

Today’s hearing will serve as an opportunity to hear from Team 

U.S.A. as to what exactly is being discussed and to press for badly 

needed transparency. 

2 

As I have said before, I don’t believe it is necessarily in our best 

interest nor do we want to bring these international processes to 

a grinding halt. However, we should never underestimate the importance of these conversations or the need for greater transparency into these proceedings. 

That is why my colleagues and I authored H.R. 5143, the Transparent Insurance Standards Act. H.R. 5143 will codify a stronger 

role for State governments and the U.S. Congress to conduct oversight of these international conversations. It also provides our regulators with leverage when entering into discussions with our European counterparts. 

Today, we also have Congress’ first real opportunity to examine 

the covered agreement negotiations between the Treasury Department and the U.S. Trade Representative and the European Union. 

While I believe that insurers are best regulated at the State 

level, a covered agreement with the European Union, when structured properly and with input from State insurance commissioners 

and stakeholders, presents a unique opportunity to level the playing field for U.S. insurers and reinsurers. That is particularly important given the actions we are beginning to see out of European 

regulatory bodies. 

Look no further than Shelter Re, domiciled in my home State of 

Missouri. Shelter Re was recently sent a letter by BaFin, the German financial regulator, demanding the creation of a German 

branch in order to continue to operate in that country. 

Without objection, that letter and supporting material will be entered into the record. 

It is my understanding that other insurers have received similar 

letters and that other nations are set to follow Germany’s lead. It 

is obvious we are beginning to see how Solvency II-governed Europe operates in a world without a covered agreement. 

That being said, I do have serious concerns for the lack of transparency surrounding the covered agreement process. I fail to see 

why our negotiators feel the need to be so secretive about this process. And the Chair will note the unfilled spot at the witness table 

designated for the U.S. Trade Representative. 

The United States and the European Union are the largest insurance markets in the world, and ensuring that our model for insurance regulation is adequately and appropriately respected in this 

deal is of the utmost importance. That covered agreement should 

be narrow, in accordance with the law, and be focused on achieving 

mutual recognition of each other’s group supervisory regimes as 

well as each other’s regulation of reinsurance. It should create an 

equal platform for reinsurance collateral and avoid any unnecessary Federal intrusion into group supervision. 

I have said in each of these hearings that it is vital for the 

United States to participate in these discussions and to be in a position to lead, not be led. I believe it serves the Nation well when 

all parties—the States, the Executive Branch, Congress, and all 

stakeholders—work in concert to grant negotiators with the greatest possible leverage. 

We need to work cooperatively to signal to the European Union, 

the IAIS, and the Financial Stability Board that we will only lend 

our name to standards and agreements that benefit the United 

3 

States consumers and allow us to maintain a robust insurance 

marketplace at home. 

I thank our distinguished panel for being here today. I look forward to your testimony. 

With that, the Chair now recognizes the ranking member of the 

subcommittee, the gentleman from Missouri, my good friend Mr. 

Cleaver, for 5 minutes for an opening statement. 

Mr. CLEAVER. Chairman Luetkemeyer, thank you very much for 

this hearing, and I thank the members of the subcommittee. 

And to the witnesses, thank you for joining us this afternoon. 

This hearing provides us with an opportunity to hear an overview on the ongoing negotiations between the United States and 

the EU, specifically in regards to a covered agreement. As we all 

know, the Federal Insurance Office and the United States Trade 

Representative announced their intention to move forward with the 

negotiations in November of 2015. 

This agreement, as defined by the Dodd-Frank Act, is a written 

bilateral or multilateral agreement regarding prudential matters 

with respect to the business of insurance or reinsurance or stop insurance. On January 1, 2016, the EU began to implement its insurance regulatory scheme commonly known as Solvency II. 

I think, for me at least, it is important to hear from the witnesses today on the ongoing process regarding the negotiations to 

ensure that the unique U.S. insurance market continues to thrive, 

both nationally and on a global level. Additionally, given the importance of the insurance market to the U.S. economy, this hearing 

provides another opportunity to discuss the work being done by 

Team U.S.A. at the International Association of Insurance Supervisors. 

Following the financial crash of 2008, the Federal Insurance Office (FIO) was created with the passage of Dodd-Frank. FIO has 

been tasked with coordinating Federal efforts and developing Federal policy on prudential aspects of international insurance matters, including representing the United States in the IAIS. 

Though the U.S. insurance industry is, of course, primarily regulated by the States, I would like to take note of the importance of 

having a Federal Insurance Office to assess the financial stability 

of the system as a whole and to represent the United States, along 

with the Federal Reserve and the NAIC, in these international discussions. And I look forward to having this discussion. I think this 

could be quite educational. Thank you. 

Chairman LUETKEMEYER. Very good. 

Today, we welcome the testimony of Mr. Michael McRaith, Director of the Federal Insurance Office, U.S. Department of the Treasury; Mr. Thomas Sullivan, Associate Director, Board of Governors 

of the Federal Reserve System; and Ms. Julie Mix McPeak, Commissioner, Tennessee Department of Commerce and Insurance, 

who is testifying on behalf of the National Association of Insurance 

Commissioners. 

And we also have an open seat there. The subcommittee extended an invitation to Ambassador Robert Holleyman, our Deputy 

United States Trade Representative, or a designee from USTR. I 

am disappointed to report that USTR chose not to provide a witness today for our hearing. I fully expect that they will comply with 

4 

this subcommittee’s request to respond to all questions submitted 

for the record, and I am disappointed, especially when they are 

specifically required to participate in negotiating covered agreements, that they chose not to be here. That is not good. 

I thank our three witnesses for each of you taking your time to 

testify before the committee today. Each of you will be recognized 

for 5 minutes to give an oral presentation of your testimony, and 

without objection, your written statements will be made a part of 

the record. 

I think you probably have all been here before and know how to 

utilize the lighting system in front of you: green means go; yellow 

means you have a minute left; and red means I have the last word. 

With that, Mr. McRaith, you are recognized for 5 minutes. 

STATEMENT OF MICHAEL T. MCRAITH, DIRECTOR, FEDERAL 

INSURANCE OFFICE (FIO), U.S. DEPARTMENT OF THE TREASURY 

Mr. MCRAITH. Chairman Luetkemeyer, Ranking Member 

Cleaver, and members of the subcommittee, thank you for inviting 

me to testify. 

We will soon release FIO’s 2016 annual report on the insurance 

industry, our fourth annual report, which will cite 2015 data showing that the $8.1 trillion U.S. insurance industry reported surplus 

levels of over $1 trillion. Nonhealth insurers collected more than 

$1.1 trillion in premiums or nearly 8.4 percent of U.S. GDP. The 

report will show the changing U.S. insurance market, the expanding global insurance market, and the supervisory standards that 

are evolving in order to reflect these changes. 

For these reasons, among others, FIO has a statutory role to coordinate and develop Federal policy on prudential aspects of international insurance matters, including representing the United 

States at the International Association of Insurance Supervisors. 

International insurance standards are not new. The IAIS was 

formed in 1994. State regulators were among the founding members. International standards are neither self-executing nor binding 

in the United States. In the United States., Federal and State authorities would test a standard and may then tailor and implement 

that standard through the U.S. system of oversight. 

In our IAIS work, we collaborate extensively with the Federal 

Reserve and State insurance regulators, including Tom Sullivan 

and Julie McPeak. For the United States to assert international 

leadership, the U.S. participants must be coordinated, and that is 

exactly what happens today. Today, the Federal Reserve, all 56 

NAIC members, NAIC staff, and the FIO represent the United 

States at the IAIS. 

With the most diverse and competitive insurance market in the 

world, the United States is well-positioned to work with our global 

counterparts to build consensus. Simply put, IAIS standards must 

serve the interests of U.S. consumers and industry and our national economy, or those standards will neither receive our support 

nor be implemented in our country. 

In 2015, to enhance stakeholder input, the IAIS eliminated the 

pay-for-play requirement which required observers to pay an annual fee. The IAIS held approximately 14 hours of public engageVerDate Nov 24 2008 12:20 Nov 17, 2017 Jkt 025968 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\25968.TXT TERI
5 

ment in 2014, a total that increased tenfold in 2015. U.S. stakeholders are also invited to meet at Treasury directly with the U.S. 

IAIS members. These sessions, which include our State and Federal Reserve colleagues, are one path for input from consumers and 

industry on key issues. 

One key issue known as the insurance capital standard has been 

the subject of IAIS consultation papers, including one released in 

July. ICS progress continues incrementally. 

Working jointly with the USTR, and receiving feedback from 

State regulators and industry stakeholders, we are negotiating a 

covered agreement with the EU. The EU is implementing its insurance regulatory reform known as Solvency II, which could have significant negative implications for U.S. insurers and reinsurers. 

If successful, a covered agreement would help resolve longstanding prudential insurance disputes between the U.S. and the 

EU and further clarify that the U.S. system of insurance oversight 

protects consumers, supports financial stability, and promotes global engagement. 

A covered agreement would preserve our national interests, protect our consumers, and promote a level playing field for U.S. insurers. We will continue to report to this committee and others 

about development in the negotiations. 

Finally, the U.S. market and its oversight are unique. Through 

effective collaboration, U.S. authorities will continue to provide 

global leadership in support of a vibrant, well-regulated market 

that promotes competition and financial stability, and protects consumers. In all of our work, Treasury priorities will remain the best 

interest of U.S. consumers and industry, the U.S. economy, and 

jobs for the American people. 

Chairman Luetkemeyer, Ranking Member Cleaver, and members 

of the subcommittee, I want to thank you for the courtesies that 

you have extended to me throughout this Congress. Our conversations have always been informative, appreciated, and helpful. 

Thank you for your attention. I look forward to your questions. 

[The prepared statement of Director McRaith can be found on 

page 36 of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. McRaith. 

And I want to assure you that the feeling is mutual. You have 

been very forthcoming in all of our discussions that we have had, 

and we appreciate your willingness to share your information. 

Mr. Sullivan, you are recognized for 5 minutes. Welcome. 

STATEMENT OF THOMAS SULLIVAN, ASSOCIATE DIRECTOR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. SULLIVAN. Thank you, Chairman Luetkemeyer, Ranking 

Member Cleaver, and members of the subcommittee. I appreciate 

the opportunity and your invitation to testify on behalf of the Federal Reserve. The Fed welcomes the opportunity to participate in 

today’s hearing, and I am pleased to be joined by my colleague 

from the Federal Insurance Office, Director McRaith, and the representative of the NAIC, Commissioner McPeak. 

While each of us have our own unique authority and mission, the 

Federal Reserve remains committed to working collaboratively on 

6 

a wide range of issues, including insurance prudential matters, 

both domestic and international. 

Dodd-Frank gave the Fed regulatory responsibilities for two populations of insurance firms: those that own a federally-insured 

bank or thrift; and those designated as systemically important by 

the FSOC. The Federal Reserve’s supervisory objectives for the insurance firms it supervises encompass protecting the firm’s safety 

and soundness while promoting financial stability. 

We continue to develop regulatory and supervisory measures appropriate for these insurance firms, and in addition, we collaborate 

with State insurance supervisors and respect the important work 

that they do. For instance, we continue to be cognizant of the State 

insurance supervisors, regulate the types of insurance products offered by insurance companies and the manner in which insurance 

is provided. 

Because of the overall structure of insurance regulation as specified by Congress in the McCarran-Ferguson Act and elsewhere, the 

line here is rather bright. The Federal Reserve’s approach to insurance supervision distinguishes between insurance companies that 

we oversee solely because they control and insure depository institution and those that have been designated as systemically important by the FSOC. 

In our advanced notice of proposed rulemaking, the Board has 

conceptually set out two capital frameworks: one which may be appropriate for large, complex, systemically important firms; while 

the other may be appropriate for firms such as the current population of insurance, savings and loan holding companies. In addition, the Board has issued proposals on reporting requirements and 

enhanced prudential standards for the FSOC-designated insurance 

companies. 

As we continue exploring regulatory frameworks that we have 

set out and the other areas of our supervision, we appreciate the 

comments we have received on these outstanding proposals and the 

constructive observations contained in those comments. We also 

continue to meet with industry and other parties. In the last yearand-a-half alone, we have held over 60 meetings with stakeholders. 

Among other things, this reaffirms our continued commitment to 

increasing transparency in our rulemaking development. 

The Federal Reserve has acted and will continue to act in international insurance standards in an engaged partnership and a 

multiparty collaboration with our colleagues from the NAIC, State 

insurance commissioners, and the FIO. 

Last year, the Board was invited to join the NAIC and the FIO 

and their work on the EU-U.S. dialogue project to engage in a 

healthy exchange among supervisors and to determine a way forward as to the supervision of insurers whose operations span 

across these jurisdictions. 

Alongside this dialogue project has been the negotiation of the 

possible covered agreement under the leadership and authorities of 

the FIO and the USTR. We respect the work of the FIO and the 

USTR toward an agreement that would enhance regulatory certainty for U.S. insurers and reinsurers operating in the EU. 

We appreciate our current ability to advocate for international 

standards that work for U.S. firms, U.S. insurance consumers, and 

7 

U.S. financial markets more broadly. These international standards 

include work at the IAIS. The Federal Reserve participates in the 

development of international supervisory standards and guidance 

to ensure that they are appropriate for the U.S. market. 

Indeed, the Federal Reserve continues to participate actively in 

standards setting at the IAIS while in consultation and collaboration with the States, the NAIC, and the FIO to present a coordinated U.S. voice. And crucially, it is important to remain mindful 

of the fact that the IAIS standards and FSB determinations have 

no binding force in the United States, and they are not self-executing. We remain committed to a supervisory framework that best 

meets the needs of U.S. insurers as they compete internationally 

and is appropriate for U.S. insurance markets and consumers. 

Mr. Chairman, Ranking Member Cleaver, and members of the 

subcommittee, I would be happy to take your questions. Thank you. 

[The prepared statement of Associate Director Sullivan can be 

found on page 44 of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Sullivan. 

And Ms. McPeak, you are recognized for 5 minutes. Welcome. 

STATEMENT OF JULIE MIX MCPEAK, COMMISSIONER, TENNESSEE DEPARTMENT OF COMMERCE AND INSURANCE, ON 

BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 

COMMISSIONERS (NAIC) 

Ms. MCPEAK. Thank you. Chairman Luetkemeyer, Ranking 

Member Cleaver, and members of the subcommittee, thank you for 

the invitation to testify on behalf of the National Association of Insurance Commissioners. 

There are a number of international developments important to 

our sector, but I want to focus today on the impact of the EU’s new 

Solvency II regime on U.S. insurers and U.S. regulation and the 

Federal Government’s misguided approach to addressing that issue 

with the covered agreement. 

EU law requires an assessment of whether another country’s regulatory system is equivalent to elements of Solvency II and then 

penalizes that country’s insurers with additional regulatory requirements when that country is not deemed equivalent by the EU. 

This has the effect of either imposing the EU approach on the rest 

of the world or placing companies from those jurisdictions at a competitive disadvantage to its own industry when operating within 

the EU. 

The EU may argue that serving as judge and jury of other countries’ regulatory systems is an important tool for ensuring emerging markets are safe for EU investment. But the United States is 

the largest market in the world and has proven to be as effective 

as the best aspirations of Solvency II. Keep in mind, Europe’s new 

system won’t be fully implemented for another decade, may yet be 

revised further, and has been deemed inappropriate for the U.S. insurance sector by State insurance regulators and the Federal Reserve. 

We are already subject to assessment and scrutiny by Governor’s 

offices, State legislatures, Congress, Government watchdogs, and 

international standard-setters. And our track record of ensuring a 

competitive and fair market for over 145 years speaks for itself. 

8 

But as the saying goes, the EU doesn’t have to take our word for 

it. We have directly engaged our EU counterparts for years on regulatory issues and to coordinate the oversight of global market 

players. 

As part of the U.S.-EU dialogue project with Treasury and the 

EU, we have explored both our regulatory regimes indepth and discovered that, despite our structural differences, we have much in 

common. On the heels of the project, the EU granted provisional 

equivalents to the United States group solvency regime, which 

largely benefited EU insurers, and acknowledged our system’s substantial confidentiality protections—all without a covered agreement. 

The one remaining area of concern for the EU is State reinsurance collateral requirements posted by EU reinsurers. In spite of 

serving as a layer of protection for U.S. policyholders, particularly 

in times of national disasters, and questions about the enforceability of judgments to ensure foreign reinsurers pay U.S. insurer 

claims, we have nevertheless responded to this concern and worked 

to carefully reduce those requirements. Thirty-five States have now 

adopted those changes, and they recently became an NAIC accreditation requirement, virtually assuring that all States will come on 

board. 

Despite this progress and the obvious lack of any other legitimate concerns with our system, the EU and our Federal Government have entered into closed-door negotiations for a covered 

agreement to resolve a problem that largely no longer exists, potentially at the expense of State insurance consumer protections. 

Setting aside for a moment whether or not the U.S. regulatory 

system is equivalent to Solvency II, the Treasury and the USTR 

have moved forward with a covered agreement without answering 

an important question: Does the benefit outweigh the cost? To our 

knowledge, neither the Treasury nor the USTR have gathered data 

to address this question. 

Further, the process has been conducted largely in secret. State 

insurance directors have been repeatedly promised direct and 

meaningful participation in negotiations, but the small group of us 

included in the process are merely observers, subject to strict confidentiality with no ability to consult our fellow regulators. This 

must change, and we are aware of no rule or law that applies to 

the covered agreement process that would preclude broader transparency and accountability. 

Additionally, we urge Treasury and the USTR to take preemption of State insurance consumer protections and any expansion of 

the Federal Government’s role in insurance regulation off the table. 

State legislatures and Congress should decide the specifics of U.S. 

insurance regulatory power and who shall exercise it, not Federal 

bureaucrats and certainly not the EU. 

In conclusion, after more than a decade of dialogue and information exchange, the EU has all of the information it needs to recognize the U.S. insurance regulatory system and avoid future regulatory retaliation. Instead of negotiating a potentially preemptive 

agreement behind closed doors to solve a problem of the EU’s creation, we urge our Federal colleagues to push back on the EU and 

urge them to reconsider their laws before agreeing to preempt ours. 

9 

Thank you again for the opportunity to be here on behalf of the 

NAIC, and I look forward to your questions. 

[The prepared statement of Commissioner McPeak can be found 

on page 28 of the appendix.] 

Chairman LUETKEMEYER. Thank you for your testimony. 

And, with that, I will recognize myself for 5 minutes for questions. 

Mr. McRaith, I have a copy of a press release from the Treasury 

Department here. This is a joint statement between you and the 

EU with regards to—‘‘Bilateral Agreement on Insurance and Reinsurance Measures’’ is the headline and it says that you are very 

close on some key issues. Can you give us an update on where you 

are with the negotiations on a covered agreement? 

Mr. MCRAITH. As reflected in that public statement, Mr. Chairman, the recent discussions in Washington that occurred last week 

did provide for some progress, some increased opportunity to reach 

an agreement through negotiations. However, it is and it remains 

unclear whether we will be successful in those negotiations. We intend to pursue the covered agreement, but we do want to be clear 

it is uncertain the outcome at this time. 

Chairman LUETKEMEYER. So what you’re telling me is you have 

agreed on a couple of things, but you are a long way from agreement, and there is none imminent? Is that right, what I read from 

your statement? 

Mr. MCRAITH. I think I would characterize it more as saying that 

we are improving and increasing our understanding of the respective arguments and the negotiating positions. I would not say that 

we reached agreement on key issues. We did increase understanding on the key issues, and I would say we closed the gap of 

misunderstanding. 

Chairman LUETKEMEYER. Do you have a timeframe within which 

you believe this will be done? 

Mr. MCRAITH. Our aspiration is to move forward as quickly as 

possible given the implications for companies, including like Shelter Re, the one that you mentioned in your opening statement. 

Chairman LUETKEMEYER. Now, following up on that part of it, 

this would appear to me to be kind of a dangerous situation we are 

letting sort of hang out there. Is this being addressed? Are you 

working on this issue? Are you pushing back? 

I know I have had a lot of folks in the industry come to me and 

say now, with this situation, we need to push even harder for the 

bill that I have offered to make sure it is in place to be able to give 

you the leverage, to give us the oversight that is needed to be able 

to push back against these folks. Because if my companies in my 

district are getting it, I am sure there are other companies around 

the country that are getting this as well. And I understand there 

are other countries in Europe that are starting to look at this as 

well. 

Mr. MCRAITH. We are acutely concerned about the implications 

for U.S. industry and U.S. consumers. Putting aside the characterization of the EU approach that some might offer, it is fundamentally their determination and their decision. We disagree with it. 

We don’t like it. It will never work in the United States. It will not 

apply to U.S. firms outside of the EU. But we need to reach an 

10 

agreement at the Federal level in order to ensure that becomes the 

reality. 

Chairman LUETKEMEYER. Okay. Is this included in your covered 

agreement discussions? 

Mr. MCRAITH. The potential—if we were to reach an agreement, 

it would resolve all of these issues for our—it could potentially resolve all of these issues for our industry. That is the objective of 

our negotiation. 

Chairman LUETKEMEYER. Mr. Sullivan, do you concur with how 

Mr. McRaith has characterized the negotiations at this point? 

Mr. SULLIVAN. We recognize the authorities of the FIO and the 

USTR. I wouldn’t characterize the negotiations because I am not as 

close to them as he is. 

Chairman LUETKEMEYER. Okay. Ms. McPeak, you heard me discuss the situation with Shelter Re here in my State and with Mr. 

McRaith. And you made a statement earlier that said that problems no longer exist. That would appear to be kind of a problem 

to me. Do you see a way that you can resolve that without a covered agreement or without negotiations? Or what is your opinion 

of that? 

Ms. MCPEAK. Yes, sir. Thank you for the question, Mr. Chairman. 

I said the problems no longer substantially exist because we are 

addressing the reinsurance collateral being required to be posted 

by EU insurers through our NAIC model and the adoption by the 

States. But we are not sitting idly by with the actions of BaFin. 

At the NAIC, we had a hearing at our recent quarterly meeting 

asking for feedback from insurers about integration and implementation issues from the implementation of Solvency II. The issues of 

BaFin came to our attention. We had already charged our (E) Committee to look at ways that we might need to ensure consumer protections in the instance that collateral might be affected. 

But in the meantime, we are also looking at our qualified jurisdiction process, because one of the aspects that we consider in deciding whether a jurisdiction is qualified for reduced reinsurance 

collateral under the model is whether they grant reciprocity to our 

insurers. And so the actions by BaFin would seem to be in violation 

of that, and we are certainly considering them. 

Chairman LUETKEMEYER. Thank you for your response. 

And I just wanted to add, we do have up on the screen—and will 

continue to have it there for a while—the number of meetings over 

the next 5 months, 80 percent of which are not open and transparent. And I think this is a concern. I hope some of my colleagues 

follow up with some questions with regards to this, because I think 

we need to have as much openness and fresh air to this process to 

make sure everybody knows what is going on, to alleviate concerns 

and rumors and conjecture and those things. So I appreciate your 

answers to those questions as they come up. 

With that, I yield to the ranking member, Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Mr. Chairman, before I ask any questions, let me 

associate myself with your earlier comments and perhaps go even 

further. Realizing the need for transparency, as you just mentioned, I am extremely disturbed by the fact that the USTR did not 

11 

come here today. And if I were a conspiracy theorist, I would say 

they are meeting with the Russians. But I am frustrated, because, 

as you mentioned, it just doesn’t look good. It is not a good thing. 

And at a minimum, I would have thought they would have contacted you or contacted me as ranking member, and they did not. 

They didn’t contact the staff. I needed to say that so I could feel 

better. And I would just as soon have the chart taken down. They 

are not here, and they are not going to show up, so there is no 

point in having that up there. 

Now, good afternoon. Thank you so much for being here. My 

questions are based on trying to get some real clear information on 

what is going on. 

So, Mr. McRaith, if you can just kind of bring us up to date on 

the status of the negotiations. Where are we on this day? 

Mr. MCRAITH. We have met with our European Union counterparts on four occasions, with a State regulator at the table for each 

one of those sessions. We recently concluded a negotiating session 

last week in Washington that lasted 2 days. Our hope is to reconvene with our European counterparts in the near future to try to 

make further progress. 

Mr. CLEAVER. One of the concerns I have is Brexit. We have had 

over 40 years—I don’t know how—40-something years old, 40 years 

of England doing business can the EU or doing business in the EU. 

And without, they probably have all kinds of trade agreements. 

What is that—and I know the exit is not going to take place in the 

next week, but how is that being factored in? 

London is the economic capital of Europe. What is going on in 

relation to these negotiations? 

Mr. MCRAITH. The European Union is represented for purposes 

of these discussions by the European Commission. That representative represents all of the 28 members of the European Union, 

which includes the United Kingdom. If the U.K. were to withdraw 

from the European Union at some point in the future, then we 

would have to address that possibility at that time. 

At this time, right now, given a world of hypotheticals, it is not 

something that is a key component of our negotiations. We will 

deal with the EU, and resolve that issue. If there are issues down 

the road that require us to deal directly with the U.K., we would 

do that. 

Mr. CLEAVER. Ms. McPeak, or any of you, maybe Mr. McRaith 

again, trade agreements are front and center in all of the discussions politically around here. What is the covered agreement? How 

does the covered agreement differ from other trade agreements? 

Mr. MCRAITH. A covered agreement involves prudential measures. Prudential measures that apply to the insurance and reinsurance industry do not—and it does not involve trade-related or market access issues. In that sense, it is a fundamentally different 

agreement or the agreement itself is of a different nature. 

Mr. CLEAVER. All right. I am very concerned about the time, and 

I heard the little buzzer. So I will yield back the balance of my 

time. I want to make sure Mrs. Beatty has a chance. 

Chairman LUETKEMEYER. Okay. We will try and get one or two 

more in here yet, but votes have been called, and we are down to 

12 

12 minutes. So Mr. Ross from Florida is the first one up, and he 

is recognized for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

In looking at that chart there, Director McRaith, it shows all the 

meetings that have been held this year. Let me ask you this question: Are you put on notice of all the meetings with regard to the 

IAIS concerning the international standards? Are you given notice? 

Mr. MCRAITH. That is right. Yes, IAIS members receive—are 

aware of or receive notice of all meetings. 

Mr. ROSS. So would it be safe to say that, as referenced above, 

assuming those are all IAIS meetings with regard to international 

standards, you were at least given notice of those meetings? 

Mr. MCRAITH. That is a fair statement, yes. 

Mr. ROSS. Did you attend or have any representative attend? 

Mr. MCRAITH. Not necessarily. Many meetings, yes, but because 

we coordinate with our U.S. colleagues, there are some issues that 

specifically are within the province, for example, of the State regulators; we don’t get directly involved with the market conduct committee, for example. 

Mr. ROSS. Okay. Ms. McPeak, how active—or let me ask you 

this: How has this been for the NAIC to have opportunity to be 

part of the negotiations? 

Ms. MCPEAK. The covered agreement negotiations? 

Mr. ROSS. Yes, ma’am. 

Ms. MCPEAK. We have a very small team of regulators that are 

subject to very strict confidentiality provisions to participate. We 

are allowed to have one State regulator in the room during a negotiation, and the rest of us who have signed that confidentiality 

agreement, the other five of us are briefed afterwards. 

Mr. ROSS. And so, with regard to those meetings that are shown 

there on the graphic, have you been put on notice of those meetings? 

Ms. MCPEAK. We generally have notice of those meetings if they 

are IAIS-related, yes, sir. 

Mr. ROSS. And do you usually have a representative there? 

Ms. MCPEAK. We would either have a State insurance regulator 

representative or a staff member of the NAIC present at the majority of those meetings. I wouldn’t say all of them because not all of 

the issues we are actively engaged on, and we participate by phone 

if possible. 

Mr. ROSS. Okay. Now, you talked about something earlier, reciprocity versus uniformity, and I think that is something that is 

really important here, because we have a system in place since 

McCarran-Ferguson that allows us probably by far and 

undisputable, in my opinion, with the best regulatory scheme for 

insurance on behalf of consumers in the world, and that is our individual State-regulated schemes. 

We protect consumers. We make sure capital requirements are 

met. Now, capital requirements are somewhat heterogeneous. In 

other words, risk is dependent upon the geographic region. Would 

we not have a little bit different problem? You can’t make a homogeneous risk on an international standard. So my concern is, what 

if we had a covered agreement that allowed for reciprocity instead 

of uniformity? Is that possible? 

13 

Ms. MCPEAK. I would defer to Director McRaith about the possibility of reciprocity, but I would agree with you that it is a very 

challenging endeavor to create a system of an international capital 

standard that is homogeneous across the world, because our valuation systems differ, just as one example. 

Mr. ROSS. What would you say, Director, to that? What are the 

chances of reciprocity? In other words—we have a system in place, 

which you know, as a former insurance commissioner, by far beats 

anything. 

Mr. MCRAITH. Congressman, you and I have had many conversations on this subject over the years. 

Mr. ROSS. Yes. 

Mr. MCRAITH. To be clear, the objective of the covered agreement 

is exactly that. It is a recognition that the U.S. system is the U.S. 

system. To the extent it will change, it will be your decision. It will 

not be driven by any external force or idea at all. 

Mr. ROSS. And I appreciate that, because I firmly believe that 

having to keep different standards by our domestic carriers to meet 

the qualifications of the IAIS as well—or Solvency II—as well as 

their State regulator, is only going to inure to the detriment of the 

consumer with higher policies. 

Mr. Sullivan, you talked about, again, in your statement that 

this is nonbinding and that the international standards are nonbinding. Is it us that will make the decision whether it is going to 

be binding, or is it a regulatory agency, such as the FSB, that is 

going to make it binding? 

Mr. SULLIVAN. It would absolutely be the authorities here in the 

United States, be it the States and the NAIC through the promulgation of a model law or something to enact something similar to 

a standard. Or at the Fed, we would have to do that through our 

formal rulemaking. But in either case, we, the regulators in the 

United States, make the decision around what we are going to 

adopt, and we would likely tailor it to some of the uniquenesses 

that you pointed out about the U.S. markets. 

Mr. ROSS. And I appreciate that. So, essentially, you are saying 

that it would be the FSB that would have to approve the covered 

agreement in order to make it binding? 

Mr. SULLIVAN. No. The FSB does not have a role in the covered 

agreement. I don’t know if Director McRaith— 

Mr. ROSS. I am trying to figure out, because you say in your testimony that it would be some regulatory rulemaking authority that 

would make it binding. And I am trying to figure out who that 

would be in the United States that would bind our State regulators 

to international standards. 

Mr. SULLIVAN. For international standards, it would be, again, 

either the NAIC through the promulgation of a model law and then 

the States adopting it or for the institutions that the Fed supervises us going through the rulemaking process. 

Mr. ROSS. Okay. Thank you. I see my time is up, and I yield 

back. 

Chairman LUETKEMEYER. The votes have been called. I think we 

are looking at five votes, so we will probably be back here at, I 

would say, 3:15 to 3:30, somewhere in that vicinity. So I apologize 

14 

to the witnesses, but if you can stick around, we should return 

shortly. 

And, with that, we will call a recess. 

[recess] 

Mr. LUETKEMEYER. The subcommittee will come to order. And I 

apologize, again, to the witnesses for the extended delay here. We 

were whipping votes on our side. So it takes a long time for us to 

discuss and figure out what we are going to do. And then at the 

end of the day, we change our minds anyway. You guys know how 

the process works. 

Mrs. Beatty is actually next in line, and she will go next, but to 

expedite things and maximize everybody’s time here, let’s go to Mr. 

Rothfus for 5 minutes and recognize him and begin the questioning. 

Mr. Rothfus? 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Ms. McPeak, I am concerned about the sequencing of the FSB 

and the FSOC decisions that we see coming. As you know, in some 

cases the Financial Stability Board has gotten ahead of our own domestic regulators. I view this as problematic both for regulatory accountability and quality, as well as our national sovereignty. 

I spoke about this issue earlier today with Chair Yellen, and it 

has been a frequent topic of discussion in our committee. 

Do you believe that the United States should decide its position 

on international insurance standards, such as capital standards, 

prior to agreeing to an international standard? 

Ms. MCPEAK. Certainly, I think that the domestic international 

capital standard is our priority and where we should direct our attention. We do feel like participating in a discussion on the international standard, though, is important both to influence the discussion at the international level and to make sure that our domestic standard is something that comes to a similar outcome. 

Mr. ROTHFUS. Has your organization been participating with the 

Financial Stability Board meetings on insurance standards or the 

designation of insurers as a globally systemically important insurer? 

Ms. MCPEAK. We don’t participate in the Financial Stability 

Board. We do have a seat at the FSOC, but it is a nonvoting position there. 

Mr. ROTHFUS. Did you or anyone from your organization at any 

time agree to designate any U.S. insurer as a globally systemically 

important insurer as part of any FSB discussions at all? Nothing? 

You have had no conversations with them? 

Ms. MCPEAK. No, sir, we are not entitled to participate in those 

discussions. We have been very vocal that we don’t think that we 

have any insurers in the United States that are globally significant 

and that we would not designate those as the domestic regulators 

of those companies. 

Mr. ROTHFUS. Thank you. 

Mr. Sullivan, earlier today I expressed my concerns to Chair 

Yellen about the sequencing of designation decisions coming from 

the FSB and the FSOC. There is a February 2015 letter from the 

FSB Chairman, Mark Carney, that he wrote to FSB members, and 

he wanted the FSB members to agree to full, consistent, and 

15 

prompt implementation of agreed reforms. This would seem to indicate that some FSOC decisions might follow from FSB determinations and that they don’t arise out of an independent process. 

That seems to be the spirit in which things have moved. MetLife 

and Prudential were designated by FSB in 2013 as GSII and only 

received FSOC designations after that date. 

When undertaking its domestic designation process, does FSOC 

consider the designation decisions made by foreign regulators such 

as the FSB? 

Mr. SULLIVAN. I think your question was appropriately directed 

to Chair Yellen and/or the FSOC. I would point out, though, I believe that the domestic designations did precede the FSB designations. MetLife, of course, was a bank holding company, so it was 

not subject to designation as a SIFI until it dropped its bank holding status, and then it was brought into the FSOC process. 

Mr. ROTHFUS. One concern that the committee has heard from 

a wide variety of stakeholders is the need for proper sequencing of 

the domestic and international capital standards. Where are we on 

the domestic capital standard rulemaking? 

Mr. SULLIVAN. As you may be aware, the Board issued an advance notice of proposed rulemaking in which we laid out an architectural framework for two intended paths that the board may, operative word, choose to pursue. 

The ANPR is a result of much stakeholder engagement. As I 

mentioned in my oral and written testimony, we have had over 60 

meetings with stakeholders in the last year-and-a-half. But notwithstanding that, we felt the necessity to further consult with interested of stakeholders and those that ranged in the spectrum 

from industry representatives to the Academy of Actuaries, the rating agencies, and the like. 

So I feel really good about the extent and the openness that we 

have demonstrated in arriving at an ANPR, but we are very early 

in the process. 

Mr. ROTHFUS. Can you tell us why it is important that the Federal Reserve complete its domestic capital standard work before 

consenting to the adoption of an international capital standard? 

Mr. SULLIVAN. In our ANPR, we noted that we did not believe 

that the international capital standard was mature and advanced 

enough for us to consider it as an alternative. We therefore are 

charting our own path and moving forward with our own proposals. 

Mr. ROTHFUS. Thank you. 

I yield back. 

Mr. LUETKEMEYER. With that, we will go to—Mr. Heck is not a 

member of this subcommittee, but we welcome him here today. As 

a non-member of the committee, he is the last one to be able to ask 

question. So until we get all the members through asking questions, Mr. Heck, we will ask you to wait, but we will get to you at 

the very end here if you will stick around. 

With that, we go to the gentleman from Texas, Mr. Williams. He 

is recognized for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

Thank you all for your testimony today. 

The United States has the largest pro-consumer and competitive 

insurance market in the world. For over 150 years, the U.S. StateVerDate Nov 24 2008 12:20 Nov 17, 2017 Jkt 025968 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\25968.TXT TERI
16 

based insurance model has worked, and I believe Congress has 

stated that rather clearly over the years. 

Now, while the United States has a proven system in place, moving toward an unknown, untested international standard, in my 

opinion, would be unwise. 

So that being said, Mr. Sullivan, can you provide the subcommittee with some examples of overseas insurance regulatory 

initiatives that if adopted in the United States might result in decreased U.S. competitiveness abroad? 

Mr. SULLIVAN. I don’t have any examples that come to mind. I 

would just say that our work continues to make sure that any 

standards that we would consider here comport with being in the 

best interests of U.S. consumers and our U.S. insurance markets. 

Mr. WILLIAMS. And make sure we are competitive. That is the 

main thing. 

Mr. SULLIVAN. Indeed. 

Mr. WILLIAMS. Commissioner McPeak, is it possible that those 

standards applied in Solvency II could impact or affect domesticonly insurance companies, and if so, what do you think would be 

the impact? 

Ms. MCPEAK. I think United States insurers subject to Solvency 

II requirements would be extremely detrimental to the competitive 

nature of the market. There are completely different accounting 

and valuations standards used for Solvency II that would require 

our insurers to essentially maintain a second set of accounting 

books, because the system that we have had in place for 145 years 

and has worked very well is a completely different statutory accounting system, and we feel comfortable with that. 

Mr. WILLIAMS. Now, what is the downside to applying the standards established in Solvency II to U.S. companies that conduct 

international business? I think you said a lot of that right there. 

Ms. MCPEAK. That is exactly right. It is the cost of complying 

with a completely different accounting and valuation financial 

analysis system. 

Mr. WILLIAMS. I am going to also say that there is a fear that 

without proper oversight of U.S. negotiators, the internal international regulatory standards could become the gold standard all 

over the world. 

Again to you, Ms. McPeak, how might this application of a gold 

standard with lack of proper oversight affect U.S. insurers? 

Ms. MCPEAK. Again, the actions of Team U.S.A. at the international level must always consider the implications on the United 

States market, particularly in terms of consumer protection and 

the cost to consumers to comply with those international standards. 

And I think that all three of us here who have participated in 

those discussions at the IAIS always bring forth the question of 

whether or not the standard is implementable in the United States, 

and that means something that we would be willing to adopt as 

regulators of the industry. 

And in a lot of cases, we try our best to affect those standards 

before they are passed. But we are very clear that not every idea 

or standard that comes out of the IAIS is something that is going 

to work in the United States market. 

Mr. WILLIAMS. Thanks for being clear about that. 

17 

Next question: Could international standards eventually trickle 

down to the State level even if they don’t initially adopt them? 

Ms. MCPEAK. I would be surprised. It could happen. But, generally, because of the substantial involvement of the NAIC, State 

insurance regulators are generally like-minded about the international standards and whether or not they are appropriate for the 

marketplace. And it would be very difficult for a single State or a 

group of States to adopt those standards that would create a very 

different system than the rest of the national market. 

Mr. WILLIAMS. What are some consequences for U.S. insurers 

and the U.S. regulatory structure should international negotiations 

prove disadvantageous to the current system? 

Ms. MCPEAK. As many of us have said, none of these standards 

are self-executing. And so we just certainly wouldn’t adopt those 

here in the United States either through Federal congressional action or action of our legislatures and our States or rulemaking from 

the regulators that are here today. If it is not something that 

would work for the United States, I don’t see that it would be 

something that would be adopted here. 

Mr. WILLIAMS. Thank you for having your eyes wide open and 

not necessarily—we just have to make sure that U.S. consumers 

and companies are driving it and not following it. We appreciate 

that. 

Mr. Chairman, I yield back. 

Mr. LUETKEMEYER. The gentleman yields back his time. 

With that, we go to Mr. Barr from Kentucky. He is recognized 

for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

Commissioner McPeak, it’s great to see you again. I enjoyed 

working with you in your days in Frankfort as the executive director of the Kentucky office of insurance. Congratulations on your 

move to the State of Tennessee. 

And as a Congressman who represents the University of Kentucky, we want you home. When you get a chance to finish up your 

career in Tennessee, we would love to have you back in the Commonwealth of Kentucky. 

Let me ask you a few questions about the subject of today’s hearing. Obviously, you have testified that many U.S.-domiciled insurance companies are concerned that measures that are being considered by the IAIS are really ill-suited for U.S. insurers, specifically 

draconian bank-style capital standards. And also I think you just 

testified with my colleague from Texas that the costly accounting 

standards would be problematic for American insurers. 

Specifically, can you elaborate on how the cost of compliance, if 

we were to adopt these European standards, would impact the competitiveness of American insurers? And then, what impact would it 

have on American consumers of insurance products? 

Ms. MCPEAK. Certainly. Thank you for the question and the invitation to come back to Kentucky. I look forward to doing that someday. 

Some of the standards that have been discussed at the international level cause us great concern in terms of valuing our assets 

and liabilities differently than our companies currently do in the 

United States. There are certain provisions about equity and marVerDate Nov 24 2008 12:20 Nov 17, 2017 Jkt 025968 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\25968.TXT TERI
18 

gin over equity that would be counted differently for United States 

insurers that would ultimately lead to a greater reserving in capital needs for the company, which then trickles down to the consumer in increased costs, because you would be requiring companies to hold additional levels of capital in various instances where 

United States regulators have said we are very comfortable with 

this statutory accounting system and the reserving system that is 

currently in place. 

Mr. BARR. To follow up, obviously the NAIC participates in some 

way in IAIS meetings related to covered agreement negotiations. 

Question: Is the NAIC’s participation meaningful in your estimation or is it deficient? 

Ms. MCPEAK. The NAIC does participate in covered agreement 

negotiations. Those are led by Director McRaith. There is a small 

group of us, a group of six who are allowed to participate, but only 

one individual can physically be in the room at the time of the negotiations. And so there is an issue with discussion and transparency with our group of six and then with our fellow regulators, 

our additional group of 56 States that would like to know what is 

going on there. 

Mr. BARR. Director McRaith, I did appreciate your testimony earlier that, of course, your objective at the FIO is to confirm that the 

U.S. insurance regulatory system serves the goals of insurance sector oversight. 

And, Mr. Sullivan, the same with your testimony. 

But I would ask Commissioner McPeak on behalf of the State departments of insurance whether or not you believe that to be the 

case, that we are, in fact, pursuing that objective in these international negotiations? 

Ms. MCPEAK. I think the interest from the industry and the resolving of the uncertainty that Director McRaith talked about is 

the finding of equivalence from the European Union and the European Commission on the various elements of Solvency II. 

I understand that is certainly the mission of the negotiations, 

and I do believe that is the direction that the negotiations are 

under. I would suggest, though, that there is nothing today that 

would prevent the European Union from finding the United States 

system equivalent. We have proven ourselves to be very efficient 

and effective over our history. 

Mr. BARR. And to Mr. McRaith and Mr. Sullivan, what concerns 

me, and the reason why I cosponsored H.R. 5143 with Chairman 

Luetkemeyer is that, whereas in the USTR process the information 

on negotiations that are conducted in connection with international 

trade negotiations are a very transparent back-and-forth dialogue, 

what seems to be missing in the international negotiations over insurance standards is any significant public back-and-forth dialogue 

between FIO and stakeholders in the midst of those negotiations. 

And given our interest, Congress’ interest in this legislation that 

would hoist upon you all additional transparency members, is the 

USTR process one that could be replicated by both Treasury and 

the Federal Reserve when it comes to these international insurance 

standard negotiations? 

Mr. MCRAITH. Let me talk specifically with respect to the covered 

agreement negotiations, Congressman. 

19 

Mr. BARR. Yes. 

Mr. MCRAITH. Fortunately, the work we are doing builds on 

years of public engagement with industry and stakeholders. Commissioner McPeak’s written testimony even describes that in great 

detail. All of that is public. There were reports that were published. 

Through our negotiations, we have engaged with industry stakeholders, with consumer stakeholders, we shared documents that we 

draft, documents we receive with the State regulators. The State 

regulators gave us important technical feedback. For the first time, 

I believe, we actually have a State official in the delegation and at 

the table for an international negotiation. 

So when we conclude, the text will be with you for 90 days before 

it becomes final. So you will see it. It will also be published in the 

Federal Register. 

Mr. BARR. Thank you for your testimony. 

I yield back. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from California, Mr. Royce, is recognized for 5 

minutes. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

And I agree with the chairman’s previous statement of support 

for a narrow covered agreement to be concluded as quickly as possible, because I think it serves as the only realistic hope we have 

of ensuring U.S. companies that they can really compete on a level 

playing field. 

But a year ago, I sent a letter to the Treasury and the USTR 

urging them to expeditiously negotiate a covered agreement. My 

concern, which I stated at the time, was that without action, U.S. 

companies with businesses in the EU would be put at a direct competitive disadvantage and that continued open access of U.S.-based 

reinsurers would not be assured and U.S. insurers would be exposed to the risk of additional regulatory actions by individual U.S. 

companies. 

Now, one of the reasons we are here is because, sadly, the prognostications here have been proven correct. Sadly, to date, we have 

also seen actions taken by regulators in the U.K., the Netherlands, 

Austria, Germany, and Poland to place U.S. companies at a disadvantage. In the latter two countries, U.S. reinsurers are now prohibited from conducting cross-border operations without forming 

and capitalizing a branch or a subsidiary. We could have solved 

this. 

And I would ask rhetorically when we might expect the 19 jurisdictions that have yet to adopt the NAIC’s model reinsurance law 

to get on board, but I also suspect I know the answer to that, and 

it is going to be not soon enough, and that is the comeuppance 

here. 

So Congress predicted this would be the case. I could go back to 

Kanjorski’s original observations this was exactly why the concept 

of a covered agreement was pushed on a bipartisan basis by this 

committee. The author of that provision, Paul Kanjorski, said at 

the time—and this was back in 2009—‘‘The FIO and the USTR 

would be given the authority to enter into a covered agreement to 

allow for the preemption of State laws to harmonize reinsurance 

standards across national borders.’’ 

20 

So with all due respect to everybody here, notice was served 7 

years ago about where we were headed if we didn’t get this worked 

out. 

So where does that leave us? 

And, Director McRaith, I would like to pose the question to you, 

because you know better than most how we got here. You were before us as a commissioner during the discussions on Dodd-Frank, 

and now you are leading negotiations on the covered agreement. 

And I just ask, what do you think of the notion of a State-by-State 

solution on reinsurance collateral at this point? 

Mr. MCRAITH. Congressman, you are absolutely right. We are at 

a moment in time when these concerns are not hypothetical. This 

is not some metaphysical dilemma that we can debate until the 

cows come home. The issue is real for our industry. It is real today. 

The covered agreement gives us an opportunity to bring closure to 

issues that have been debated and discussed for decades. It is not 

to the exclusion of the States. It supports the State system. 

As you note—I was director of insurance in Illinois—I strongly 

believe in the State system and the work that my colleagues, 

former colleague Julie McPeak and her current colleagues, do to 

protect consumers every day. The two are not mutually exclusive. 

The covered agreement preserves our system of regulation and delivers real, meaningful results for our industry operating in the 

EU. 

Mr. ROYCE. I appreciate your observations, and I certainly concur. 

And, Mr. Chairman, I thank you very much for this hearing and 

the ability to get to the bottom of a problem that needs to be solved 

here. So thank you. 

Mr. LUETKEMEYER. The gentleman yields back. 

With that, we go to the gentleman from Washington. I welcome 

him to our subcommittee and recognize Mr. Heck for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. Just to clarify, I am a 

member of the full Financial Services Committee. 

Mr. LUETKEMEYER. Right. 

Mr. HECK. And I appreciate the opportunity to be here very, very 

much. 

I would like to begin with a question that any of you can answer, 

in fact I would ask all of you to answer, and that is, are any of 

you seeking to either overturn or to diminish the policy laid out in 

the McCarran-Ferguson Act that the States will be the primary 

regulators of insurance companies? Is anybody seeking to do that, 

overturn or diminish it? A verbal answer for the record would be 

much appreciated. 

Mr. SULLIVAN. No. In fact, my oral and written testimony reflects 

a preservation of and a recognition of McCarran. 

Mr. MCRAITH. Congressman, our work globally with the States 

and with the Federal Reserve is intended to preserve and support 

and enhance the U.S. system of oversight, which is fundamentally 

reposed with the State regulators. 

Mr. HECK. So you do not seek to overturn or diminish? 

Mr. MCRAITH. Congressman, I have testified in front of this committee and our office has published reports supporting the work of 

the State regulators. 

21 

Mr. HECK. Is that, then, a yes, you do not seek to overturn or 

diminish? 

Mr. MCRAITH. I’m sorry. I thought I was being unequivocal. I 

will be more unequivocal. We are absolutely not seeking to overturn or diminish the role of the States as provided in McCarranFerguson. 

Mr. HECK. Thank you very much. 

Ms. MCPEAK. And, I am sure not surprisingly, I am a strong proponent of McCarran-Ferguson and the State regulation. 

Mr. HECK. I am shocked. 

Ms. MCPEAK. I know. 

Mr. HECK. There is gambling in this establishment. 

Thank you. 

So I want you all to know in that spirit that today I will be introducing an insurance bill, because I think there can be more than 

one good idea about how to uphold the objectives and principles 

that we seem to have agreed upon by consensus that will codify 

good practices in international insurance negotiations. 

My bill is predicated on two principles, and the first is that when 

the United States discusses insurance in international forums, our 

representatives should include primary insurance regulators from 

the States. That is the first principle. 

Do any of you disagree with that principle? 

Mr. SULLIVAN. No, sir. I think that is a good principle. 

Mr. MCRAITH. We greatly appreciate our current collaboration 

with the States, including Commissioner McPeak, who is the vice 

chairman of the Executive Committee at the IAIS. 

Mr. HECK. We seem to be struggling with being truly unequivocal today, Director McRaith. Does that mean that you— 

Mr. MCRAITH. I am trying to give context for my remarks, which 

is we absolutely welcome and value our collaboration with the 

State regulators globally, including as it occurs today. 

Mr. HECK. Commissioner McPeak, surprise us again. 

Ms. MCPEAK. Yes, certainly, we would support such legislation. 

Mr. HECK. And, Commissioner McPeak, how would you feel 

about a statutory mandate to include and/or consult insurance commissioners in international forums where insurance regulations is 

being discussed, a requirement that we do that as long as we all 

seem to agree upon it? 

Ms. MCPEAK. We would certainly appreciate the structure not 

only for today, but in the future, as these international discussions 

will be continuing and the world of insurance is certainly much 

more being played out on the global front. And so having a statutory structure in place and a role for the State insurance commissioners is something that we would strongly support. 

Mr. HECK. So the second principle that my bill that I will introduce later today—I don’t know if I mentioned that I will be introducing legislation later today, but I will be—is that U.S. financial 

policy should be made in the United States. 

Does anybody have any objections or disagreement with that 

principle? 

Mr. SULLIVAN. I do not. 

Mr. MCRAITH. No, sir. 

Ms. MCPEAK. Absolutely not. 

22 

Mr. HECK. Commissioner McPeak, do you think that principle is 

being consistently, unwaveringly, and in good faith upheld at the 

present time and in the immediate past? 

Ms. MCPEAK. I do in the sense that we are all currently working 

on an insurance capital standard for the United States that makes 

sense for us. State regulators are working on a part of that. Certainly, the Federal Reserve Board is working on their proposed 

rulemaking in that endeavor. But we are also engaged in discussions at the international level. I do feel like financial policy is 

being made in the United States for our United States market. 

Mr. HECK. So given that answer, can I assume that, like my 

question regarding the other principle, you think that this one 

ought to be reflected in statutory language as well? 

Ms. MCPEAK. I do think that would be extremely helpful to us 

as we are not only working on our own financial policies in the 

United States but also representing the United States internationally. 

Mr. HECK. I thank you all very much. And I am only sorry, Commissioner McPeak, that you are not a Member of this institution 

so that you could cosponsor the legislation that—did I mention— 

I am introducing later today. 

Thank you, Mr. Chairman, very much. 

Mr. LUETKEMEYER. The gentleman’s time has expired. 

I have a couple of redirects for the panel. 

With regard to the charts that we had on the board a while ago, 

there are 5 months’ worth of meetings—there they are, they are 

back up—and 80 percent of those are meetings that are closed. 

And I guess the first question is, Mr. McRaith and Mr. Sullivan, 

do you or your staff or some representative attend every single one 

of those meetings? 

Mr. SULLIVAN. I will go first. 

No, we do not. In fact, we, the Fed, have only recently become 

a member. I would say recently; we just celebrated our 2-year anniversary. As a member of the IAIS, we recently stood up my team 

inside of the Federal Reserve. So we are still kind of the new kids 

on the block. We have to pick and choose, quite honestly, what 

committees we do participate in, and those are the ones that have 

the most interest to us around financial stability and those sorts 

of committees—the insurance capital standard and the related subcommittees and working groups. 

We can’t be everywhere. For instance, as I mentioned in my testimony, we don’t regulate insurance products or insurance markets 

the way the NAIC does. There are a number of those committees 

that work on those issues and there would be no need for us to 

have representation at those committee meetings. 

Mr. LUETKEMEYER. Okay. 

Mr. McRaith? 

Mr. MCRAITH. I would echo that response. First of all, I can’t 

read the screen. 

Mr. LUETKEMEYER. I don’t blame you. The one on the back is 

large. 

Mr. MCRAITH. All right. 

23 

Mr. LUETKEMEYER. We have a really tight budget around here, 

so we only have one big screen. We have two small ones on the 

side, so— 

Mr. MCRAITH. But generally speaking, our focus is on the areas 

of prudential oversight. Not all of the committee meetings that 

have occurred or will occur relate to prudential oversight. And we 

don’t have unlimited resources. We have a small staff, a team who 

works very hard, and is very capable, but we don’t attend every 

meeting and are not in every workstream. 

Mr. LUETKEMEYER. Do you get summaries or feedback of some 

kind on those meetings so that you are aware of what was discussed in them? Because the point I made originally was that they 

are not open to the public. So, therefore, only, I assume, you or 

your representative would have access to those meetings. So, therefore, if you are not attending them, do you get information back on 

what was discussed so that in case something came up that you 

don’t want to get blindsided by it? I would assume that you are getting some reports of some kind. 

Mr. MCRAITH. Thankfully, for those committees in which we are 

not involved, we know the NAIC is involved, so we are comfortable 

that our interests as a country are being well-represented. But 

then also the IAIS has newsletters, Internet, website updates that 

are available to the public, to stakeholders at large, including the 

members. So we are able to stay abreast of developments. 

Mr. LUETKEMEYER. Okay. So would you say, then, that by getting 

those updates, there is a transparent process for you, at least, that 

the public—I know Ms. McPeak has made the comment already 

about not being able to attend all of the meetings. Is there a way? 

I think industry would like to be able to see what is going on so 

they know. 

I understand there has to be, to a certain degree, some ability 

to be able to work behind closed doors to be able to get certain 

things done, but I think the product of that discussion needs to be 

certainly available for people to see. And is that made public, then, 

so that the industry can see that on a regular basis so those 80 percent of those meetings people know what is going on? 

Mr. MCRAITH. Mr. Chairman, from my perspective, there are two 

issues here. One is we absolutely do not want to publicly discuss 

what data or information that could be confidential or proprietary 

specific to an individual firm. I know you appreciate that as well. 

Mr. LUETKEMEYER. I understand that there are proprietary concerns. 

Mr. MCRAITH. But, secondly, in terms of development, before any 

standard or any development becomes something of formal policy 

or final in any sense, it is subject to extensive consultation in writing, in person, by telephone as well. 

So, yes, there are meetings that occur without industry or stakeholders present, but then industry and stakeholders receive a lot 

of opportunity to contribute. In fact I mentioned, just in 2015, 140 

hours or more devoted to engaging with stakeholders. 

Mr. LUETKEMEYER. Ms. McPeak, would you like to comment? 

Ms. MCPEAK. I would add to those comments to say that also on 

behalf of the NAIC, when issues are released for consultation to 

stakeholders, to the interested parties, we at the NAIC make that 

24 

a very public process so that we invite stakeholders to share comments with us in an open forum before we submit our own comments on behalf of State insurance regulators. 

Now, the stakeholders can certainly submit their own comments 

on behalf of their own perspective, but we want to hear from them 

about the issues under consultation before we even submit our 

comments back as well. 

Mr. LUETKEMEYER. Thank you. 

One more quick comment here before we conclude. I don’t think 

Mr. Cleaver has any redirects, but I have one more question with 

regards to the covered agreement situation. 

If we get no covered agreement for an extended period of time, 

and we have somebody like Germany that is putting out demands 

that our companies who want to operate there put offices in there 

and their regulators are forcing our companies to do things, can 

this escalate at some point to retribution for them with their companies here if they are going to force our companies to do something over there? Is that a scenario that could happen? What is 

going to happen here if we don’t do something with these covered 

agreements, I guess is the question, and could there be retaliation? 

Ms. MCPEAK. I should probably respond to that, Mr. Chairman. 

We are taking the actions by BaFin and other European Union 

countries very, very seriously, and the— 

Mr. LUETKEMEYER. I would hope so. This is pretty significant. 

They are trying to make demands on our companies and dictate to 

them to change their business model. 

Ms. MCPEAK. I could not agree more. And, again, I would reiterate my position that equivalence could be determined today. And 

instead, BaFin and other countries are taking different positions 

and requiring some additional corporate structures in order to participate in the markets in Germany. 

So our review of the qualified jurisdiction status of Germany and 

other countries following the feedback that we received at our last 

quarterly meeting, one of the factors that we will be analyzing is 

whether the countries are providing reciprocal treatment to our insurers in their market. 

If that is not the case, and that determination is still under review by our panel of State regulator experts that make that determination, if the country of Germany is no longer deemed to be a 

qualified jurisdiction for purposes of our model for reinsurance collateral reduction, the German reinsurers that want to participate 

in our United States market will lose the ability to have reduced 

collateral requirements and will be required to post additional collateral up to 100 percent of the reinsurance that they would write 

in the United States. 

This is not insignificant, because our United States participation 

in Germany is about one-fourth of what the German interest is in 

our United States market in terms of reinsurance. So if we are unable to make a lot of headway with BaFin from regulator-to-regulator perspective, the German reinsurance market will certainly 

feel the effect of the United States’ qualified jurisdiction decision. 

Mr. LUETKEMEYER. Mr. McRaith? 

Mr. MCRAITH. Mr. Chairman, I think the question emphasizes 

the point that we need to eliminate the world of hypotheticals, 

25 

eliminate the prospect of our companies incurring billions of dollars 

of additional charges, and we need to reach an agreement. And as 

I said earlier in reply to your earlier question, that is our objective, 

and we hope to report back to you in the near future. 

Mr. LUETKEMEYER. I appreciate that comment, Mr. McRaith, but 

I think my point is that I want everybody to know that there are 

consequences that are out there if the individuals from IAIS and 

Germany and Great Britain, whomever is listening today, they 

know that there could be consequences for the lack of a covered 

agreement. There could be consequences for their actions. I think 

it is incumbent on this committee to make sure that statement is 

made and they know that our intentions are sincere and we will 

carry them out. 

So with that, I want to thank the witnesses for your testimony 

today. 

I know, Mr. McRaith and Mr. Sullivan, that you have been more 

than generous with your time with regards to my requests to update us on a regular basis. In the CHOICE Act, one of the things 

that is in there is to change things around to be able to come on 

a regular basis. Maybe we need to do that anyway just to get an 

update so we know where everybody is at, especially with the significance of this issue, to make sure that everybody knows what is 

going on to allay concerns, fears, gossip, what have you, and know 

what is going on. 

So I certainly appreciate, again, all of you being here today and 

your willingness to cooperate with myself and my subcommittee 

and my staff to be able to get as much information as we can to 

stay on top of this. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 4:17 p.m., the hearing was adjourned.] 

(27) 

A P P E N D I X 

September 28, 2016 

28 


25968.001

For release on delivery 

2:00 p.m. EDT 

September 28, 2016 

Testimony of 

Julie Mix McPeak 

Commissioner 

Tennessee Department of Commerce and Insurance 

On Behalf of the National Association of Insurance 

Commissioners 

Before the 

Subcommittee on Housing and Insurance 

Committee on Financial Services 

United States House of Representatives 

Regarding: 

The Impact ofU.S.-EU Dialogues on U.S. Insurance Markets 
29 


25968.002

Introductory Remarks 

Chairman Luetkemeyer, Ranking Member Cleaver, and members of the Subcommittee, thank 

you for the invitation to testify today. My name is Julie Mix McPeak, and I am the 

Commissioner of the Tennessee Department of Commerce and Insurance, the Vice President of 

the National Association of Insurance Commissioners (NAIC), the Chair of the NAIC's 

International Relations Committee, and Vice-Chair of the International Association of Insurance 

Supervisors' (IAIS) Executive Committee. On behalf of my Department, my fellow state 

insurance regulators, and the NAlC, I appreciate the opportunity to testify today. 

For 145 years, state insurance regulation has had a demonstrated track record of protecting U.S. 

policyholders, promoting financial stability in the insurance sector, and ensuring a competitive 

U.S. insurance marketplace. Whenever there have been issues of concern, we have addressed 

them. Whenever there have been periods of economic and financial distress, we have 

surmounted them. Today we can say the U.S. insurance sector is stronger than ever and our 

regulatory oversight is more effective than at any time in our history because state regulators 

never stop enhancing a system that works for the U.S. marketplace. Notwithstanding this track 

record and recent years of intense dialogue and substantive work, including collaboration in 

international supervisory colleges, the European Union (EU) has yet to fully recognize our 

system as equivalent under its new Solvency II insurance regime. In doing so, the EU appears to 

be seeking a competitive advantage for its domestic insurance industry at the expense of our 

own. Compounding the problem, rather than encouraging the EU to recognize our system on its 

merits, or encouraging the EU to overturn its discriminatory equivalence mandate, the Treasury 

and the Office of the United States Trade Representative (USTR) are now pursuing a formal 

Covered Agreement under the pretense that U.S. concessions are necessary to achieve EU 

recognition. Not only are we skeptical of the need for a Covered Agreement, we are also wary of 

its potential substance and strongly object to the lack of transparency in the process. We are 

simply not convinced that the perceived benefits of a potentially preemptive Covered Agreement 

to the U.S. insurance sector are worth the cost of U.S. insurance consumer protection. 

Insurance Marketplace in the U.S. and EU 

By way of background. the United States represents nearly 39% of all global insurance 

premium-more than $2 trillion. Taken individually, U.S. states make up 26 of the world's 50 

largest insurance markets, including my home state of Tennessee. By comparison, the European 

Union represents 26% of global premium, approximately $1.36 trillion, and European countries. 

taken individually, make up 12 of the world's top 50 insurance markets. In 2015, EU-based 

reinsurers 1 wrote approximately $24.2 billion in reinsurance premium in the U.S .• while U.S.-

1 As Switzerland is not part of the EU. it is worth noting that Swiss-based reinsurers separately wrote approximately 

$12.6 billion in reinsurance premium in the U.S. in 2015. 
30 


25968.003

based reinsurers wrote approximately $7.2 billion in the EU-a three-fold advantage. As you can 

sec, the U.S. market is open and attractive to European insurers and reinsurers, so the EU has 

strong economic incentives to protect its companies' ability to do business in the United States 

while having other countries conform to their Solvency II system. These market conditions have 

weighed heavily on the EU's interest in promoting Solvency II as a worldwide standard, as well 

as promoting the perceived notion that a federal Covered Agreement is required in order to 

afford the U.S. equivalence under Solvency Il's equivalence mandate. Our view is that a 

Covered Agreement is not necessary to resolve the uncertainty caused by EU's equivalence 

mandate, and international standards should be flexible and reflect consensus best practices, and 

not be a validation of one regional system in an attempt to impose that approach on the rest of 

the world. 

Solvencv II 

A product more than ten years in the making, the EU began implementing its new Solvency II 

regime in January 2016. Certain key aspects, such as discount rates, will not be implemented for 

another 16 years and implementation thus far has been uneven across the EU despite claims that 

it is a uniform system. The European Union's Solvency II Directive provides for the European 

Commission to make "equivalence" determinations for third countries in the areas of group 

supervision, group solvency (i.e., group capital), and reinsurance. Each of these equivalence 

determinations also require that an appropriate confidentiality regime be in place. Non-EU-based 

companies from countries that have been deemed equivalent arc subject to significantly less 

regulatory duplication to operate in the European Union than those jurisdictions that have not 

heen deemed equivalent. 

However, at this point, it is unclear the degree to which an equivalence determination would 

benefit the United States in economic terms. First, many European subsidiaries of U.S. 

companies are already structured in a way to meet the new Solvency II requirements in the 

absence of equivalence. Second, the United Kingdom, the 4th largest insurance market in the 

world, recently voted to exit the European Union and has announced an initiative to reexamine 

their insurance regulatory regime creating uncertainty as to the long-term application of 

Solvency II. Third, Europe has embarked on a mission to seek worldwide conformity with their 

system, which benefits their companies relative to companies in other countries. In fact, most of 

the countries that have received an equivalency detennination have received it only on a 

temporary or provisional basis with significant conditions attached, designed to conform their 

regulatory systems to Europe's. Finally, while the Solvency II paradigm might be appropriate for 

the EU, state insurance regulators and, more recently, the Federal Reserve have determined that 

it is inappropriate for the U.S. market and unworkable for regulatory purposes. As Federal 

Reserve Board Governor Daniel Tarullo explained in May: 

2 
31 


25968.004

"The valuation frameworks for insurance liabilities adopted in Solvency II differ starkly 

from U.S. GAAP and may introduce excessive volatility. [Solvency II] is also 

inconsistent with [the Federal Reserve's] strong preference for building a predominantly 

standardized risk-based capital rule that enables comparisons across firms without 

excessive reliance on internal models. Finally, it appears that Solvency II could be quite 

pro-cyclical."2 

The case simply has not been made that the benefit to the U.S. insurance industry and consumers 

of conforming U.S. standards to more closely resemble European standards in order to achieve 

an EU Solvency II "equivalence" determination is worth the cost of preempting our U.S. 

regulatory regime, undermining U.S. consumer protections, and disrupting our own competitive 

and resilient marketplace. 

U.S.-EU Dialogue 

Nevertheless, for many years leading up to the launch of Solvency li earlier this year, state 

insurance regulators and European regulators have been meeting on a regular basis to facilitate 

mutual regulatory understanding and cooperation. We have long contended that although our 

regulatory system is structured differently than Europe's, it results in similar outcomes, and 

should not be a basis for imposing duplicative regulation on U.S. insurers operating abroad. 

In 2012, the NAIC, Treasury's Federal Insurance Office (FlO), the European Commission, and 

European Insurance and Occupational Pensions Authority (EIOPA) convened a joint project 

(known as the U.S.-EU Insurance Project) to enhance the understanding of each other's approach 

to solvency oversight and to explore ways to increase transatlantic cooperation, with the implicit 

understanding that the project would lead to mutual recognition of our respective regulatory 

systems. 

As part of this project, technical groups were formed to explore several core areas of insurance 

regulation including three areas subject to an equivalency determination and are now at issue in 

the Covered Agreement negotiations: 1) Confidentiality/Professional Secrecy, 2) Group 

Supervision, and 3) Reinsurance. With respect to confidentiality, the incorporation of freedom of 

information principles and public records access into our legal system, which we view as an 

appropriate transparency and accountability feature of our system, often has been characterized 

as a deficiency by EU counterparts. This view, however, has ignored the ability of state 

insurance regulators to collect and maintain certain confidential information that should be 

protected from disclosure and share that information with other regulatory and law enforcement 

bodies, including internationally, that can commit to keeping that information confidential. The 

2 Governor Daniel Tarullo, Board of Governors of the federal Reserve System, "Insurance Companies and the Role 

of the Federal Reserve," May 20,2016, National Association oflnsurance Commissioners' International Fomm, 

Washington, D.C., Keynote Address 

3 
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25968.005

technical committee charged with reviewing these issues concluded that while there may be 

ditTerences in the form and application of professional secrecy and confidentiality laws in the 

U.S. and EU, the two systems are substantially similar in the subject matter addressed and the 

outcome to be achieved. We will always remain open to addressing any one-off issues that arise; 

however, in our experience, and as the technical committee found, both systems tend toward the 

same outcomes in terms of protecting confidential information and facilitating information 

exchange among regulatory bodies. Last year, the European Commission found that the U.S. 

system had substantial confidentiality protections in place as part of its provisional equivalence 

finding for the U.S. group solvency approach. 

With respect to Group Supervision, despite significant educational efforts and the exchange of 

technical information on the part of the NAIC, it remains unclear what specific deficiencies the 

EU believes exist with our system of group supervision. The technical group received multiple 

detailed presentations from the NAIC regarding, among other things, U.S. insurance holding 

company laws and regulatory practices, how U.S.-led supervisory colleges are conducted, the 

U.S. Own Risk and Solvency Assessment (ORSA) requirements and use, corporate governance 

standards and disclosure, and group financial analysis. By all accounts, the NAIC believed 

Europe was generally satisfied with the state-based system regarding group supervision. 

With respect to reinsurance regulation, while there is much we have in common, there are 

differences with respect to our approach to collateral requirements for foreign reinsurers 

operating in our respective jurisdictions. By way of background, collateral is used to ensure rapid 

payment by reinsurers to ceding insurers and ultimately to ensure policyholders' claims are paid. 

Under its Solvency 11 regime, Europe does not require collateral for reinsurance transactions 

between EU countries and with those countries that have received an equivalence determination. 

In the United States, historically, state insurance regulators had required that an unlicensed 

reinsurer, foreign or domestic, post collateral in a U.S. financial institution equal to 100% of the 

reinsurer's financial obligation as a means of ensuring payment of claims, and in the case of 

foreign reinsurers, rendering moot the potential challenge of enforcing judgments in a foreign 

court. In spite of some compelling arguments to maintain collateral, we recognized the concern 

of our European colleagues for a more level playing field and began the process of reducing 

collateral requirements. In 2011, the NAIC adopted revisions to our Credit for Reinsurance 

Model Law in November 2011, allowing reduction of the 100% collateral requirement for 

reinsurers in solid financial health (certified reinsurer) subject to a an dTective regulatory regime 

(a qualified jurisdiction).3 The NAIC has also established a peer review system surrounding the 

certification of foreign reinsurers by states, which provides a foreign reinsurer an opportunity for 

a passport4 throughout the U.S. 

3 Determinations arc made by the NAIC Qualified Jurisdiction (E) Working Group. Jurisdictions are evaluated based 

both upon the authorities they have as well as their administrative practices. 4 "Passporting" refers to the process under which a state has the discretion to defer to the certification of a reinsurer 

and the rating assigned to that certified reinsurer by another state. 

4 
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25968.006

As of today, 35 states and U.S. territories have adopted amendments to our credit for reinsurance 

laws that would implement this reduction. Those 35 jurisdictions represent more than 68% of 

direct insurance premium written in the U.S. across all lines of business. We are currently aware 

of nine additional jurisdictions that are actively considering the model or similar proposals, 

which would raise this market share to approximately 93%. This new approach on collateral will 

also become a NAIC accreditation requirement on January I, 2019, which will help drive further 

state adoption and achieve a high degree of uniformity and consistency. As of September I, 

2016, the NAIC has approved seven jurisdictions as qualified jurisdictions, including the only 

four EU countries that applied, and 28 certified reinsurers, including seven European-based 

reinsurers that have been approved through the NAIC's process.5 We believe this is an excellent 

example of states responding quickly to global market developments while preserving our focus 

on U.S. policyholder protection. To the extent the main political driver of a covered agreement is 

the reduction of collateral requirements across the country, we are confident we will achieve that 

result in relatively short order without the threat of federal preemption. We would urge our 

federal colleagues, and Congress, to bear in mind that the states are charged with the protection 

of U.S. policyholders, and thus it is both our responsibility and our obligation to dctennine the 

appropriate reinsurance collateral rules and levels to ensure insurance consumers are protected. 

The U.S.-EU Dialogue project's factual report documented how the U.S. and EU have many 

more commonalities than differences including in the areas subject to a potential Ell equivalence 

determination. As evidence of this, last year, the Ell granted provisional equivalence to the 

United States regulatory system's group solvency regime and, as indicated earlier, acknowledged 

that the regulatory system had substantial confidentiality protections in place-without federal 

action or a covered agreement. However, while this allows European companies to continue 

operating in the U.S. without additional regulatory requirements, it did little for U.S. companies 

operating in Europe. Notwithstanding this recent decision and the substantive evidence produced 

through the Dialogue project, the Eli still has not reached an equivalence determination on the 

United States in the areas of group supervision and reinsurance. This is not a surprise given the 

EU's incentives to create a more favorable competitive environment for its companies at the 

expense of other countries. 

Covered Agreement 

Yet, in lieu of pressing the European Commission to recognize our proven system and pushing 

back on disparate treatment of U.S. insurers and reinsurers, the Treasury and USTR instead have 

pursued a covered agreement presumably with hopes of resolving the equivalency question for 

5 As of January I, 2015, Bermuda, France. Gem>any. Ireland. Japan, Switzerland, and the United Kingdom are 

qualified jurisdictions. 

5 
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25968.007

the United States.6 This federal action could lead to unnecessary preemption of insurance 

consumer protections and otherwise undermine our regulatory system. In fact, FlO has suggested 

that it plans to use a Covered Agreement to insert itself in the process for qualifying jurisdictions 

for collateral reduction7

, a clear contravention of the Dodd-Frank Act, which specifically 

prohibits the office from exercising regulatory or supervisory authorities or using the covered 

agreement process to establish such authorities.8 Any attempt to use a covered agreement to 

expand the federal government's involvement in insurance regulatory process is something the 

states strongly oppose, and we urge Congress to intervene should such a federal intrusion come 

to fruition. 

Further, unlike a trade agreement, which is subject to established procedures for consultation and 

input, and which also requires a vote by the legislative branch, a covered agreement lacks these 

established processes and requires no further legislative action despite having the potential to 

preempt state laws and authorities-laws and authorities that have been carefully designed to 

supervise a multi-trillion dollar industry that touches virtually every American, and that have 

been repeatedly deferred to by Congress. Given these implications, a covered agreement should 

be subject to at least as much, if not more, transparency and input than bilateral or multilateral 

trade agreements. However, in the nine months since Treasury and USTR informed Congress of 

their intent to negotiate a covered agreement with the EU, the entirety of what is publicly known 

about the agenda, objectives, and specific impact on U.S. prudential regulation is encapsulated in 

that initial two page letter to Congress. Moreover, even though state insurance regulators had 

been repeatedly promised "direct and meaningful" participation in the negotiations, the small 

group of us included in the process are merely observers, subject to strict confidentiality with no 

ability to consult our fellow regulators, and the broader community of stakeholders has no 

insight whatsoever into the process. This must change, and we are aware of no federal rule or 

law that applies to the covered agreement process that would preclude this type of transparency 

and accountability. We urge Treasury and USTR to establish greater transparency and seek 

broader public feedback from state insurance regulators, state legislators, insurers, consumer 

representatives, and other stakeholders. Additionally, we urge Treasury and USTR to take 

preemption of state insurance consumer protections and any expansion of the federal 

government's role in insurance regulation off the table. State legislatures and Congress should 

decide the specifics of U.S. insurance regulatory power and who shall exercise it-not the EU 

and federal negotiators. 

6 The authority to pursue a covered agreement wa> included in the Dodd-Frank Act as a unique stand-by authority to 

address, if necessary, those areas where U.S. laws might treat non-U.S. insurers differently than U.S. insurers, such 

as reinsurance collateral requirements. USTR and Treasury must consult with Congress and submit any proposed 

agreement to the House Ways and Means, House Financial Services, Senate Banking, and Senate Finance 

Committees for a 90 day review period before it can become effective. 7 Treasury Department: Federal Insurance Office, "How to Modernize and Improve the System oflnsurance 

Regulation in the United States," December 2013, Washington, D.C. 8 31 USC 313(k) (''Nothing in this section or section 314 shall be construed to establish or provide the Office or the 

Department of the Treasury with general supervisory or regulatory authority over the business of insurance.'') 

6 
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25968.008

Recently, in what appears to be an attempt to gain leverage in the negotiations, certain EU 

member countries such as Germany and the U.K. have begun taking discriminatory actions 

against U.S. companies as they implement Solvency II. At our NAJC National Meeting last 

month, we provided a forum for stakeholders to report on their treatment in Europe so we could 

further evaluate the nature and extent of these new regulatory requirements being imposed on 

U.S. insurers. Though it is still not clear how material the impact is to the U.S. insurance sector, 

this is troubling and state insurance regulators are not sitting idly by. As patt of the NAIC's 

qualified jurisdiction process an assessment is required as to the extent of reciprocal recognition 

afforded by the non-U.S. supervisory authority to reinsurers domiciled in the U.S. In this regard, 

we have initiated a review of Germany and the U.K.'s recent regulatory actions relative to U.S. 

insurers for further consideration of whether sufficient reciprocity still exists. 

Conclusion 

In conclusion, the U.S. insurance regulatory system is among the best in the world and the EU 

has the authority to recognize the remaining elements of the U.S. system as equivalent without 

further action by state or federal officials. After a decade of dialogue and information exchange, 

the EU has all the information it needs to reach this obvious conclusion and avoid future 

regulatory retaliation. Instead of negotiating a potentially preemptive agreement behind closed 

doors to solve a problem of the EU's creation, we again urge our federal colleagues to push back 

on the EU and urge them to reconsider their laws before agreeing to preempt ours. 

Thank you again for the opportunity to be here on behalf of the NAIC, and I look forward to 

your questions. 

7 
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25968.009

EMBARGOED FOR DELIVERY 

Michael McRaith, Director, Federal Insurance Office 

U.S. Department of the Treasury 

Hearing on the Impact of U.S.- EU Dialogues on U.S. Insurance Markets 

House Committee on Financial Services, Subcommittee on Housing and Insurance 

September 28,2016 

Chairman Luetkemeyer, Ranking Member Cleaver, Members of the Subcommittee, thank you 

for inviting me to testify today on the impact of U.S.- EU dialogues on insurance markets. 

Today's hearing focuses on prudential aspects of international insurance matters, including the 

prospect of an agreement on such matters between the United States and the European Union. 

With respect to these topics, Congress granted the Federal Insurance Office (FlO) the following 

authority: 

to coordinate Federal efforts and develop Federal policy on prudential aspects of 

international insurance matters, including representing the United States, as appropriate, 

in the International Association of Insurance Supervisors (or a successor entity) and 

assisting the Secretary in negotiating covered agreements[.] 1 

Whether in the context of domestic regulatory modernization or in the development of 

international insurance supervisory standards. any discussion of the U.S. insurance sector must 

begin with the recognition that the United States has the world's largest and most diverse and 

competitive insurance market. Thousands of insurers operate in the United States. ranging from 

small mutual companies that serve a few rural counties to massive global insurers engaged in a 

variety of financial services. While serving as the lJlinois Director ofinsurance, I learned 

firsthand about the importance of small and mid-size insurers to local and regional economies, as 

well as to insurance consumers and claimants. FIO strongly supports this marketplace diversity. 

and advocates not only for its preservation but also its enhancement. 

This testimony describes the ways in which FlO's work serves our U.S. national interests and 

preserves both the diversity and competition within the U.S. insurance market and the unique 

U.S. insurance oversight system. In particular, this testimony discusses the ongoing negotiations 

of a covered agreement between the United States and the European Union and several other 

important international initiatives, including at the International Association ofTnsurance 

Supervisors (IAlS). 

Covered Agreement 

A covered agreement refers to a written bilateral or multilateral agreement regarding prudential 

measures, with respect to the business of insurance or reinsurance, which is entered into between 

the United States and one or more foreign governments. authorities, or regulatory entities. 

As Members of this Committee know, we have been vigorously pursuing a covered agreement 

with the European Union since Treasury and the United States Trade Representative (USTR) 

1 31 U.S.C. § 313(c)(l)(E). 
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announced our intention to do so last November? Recent EU insurance regulatory reforms have 

increased the need for a covered agreement between the United States and the EU. After years 

of conceptual and technical development, the European Union began implementation of its 

Solvency II insurance regulatory regime on January 1, 2016. Under Solvency II, insurers and 

reinsurers may be subject to an alternative regulatory regime if an insurer or reinsurer's country 

of domicile has not been determined by the EU to be an equivalent jurisdiction under Solvency 

II. 

Given tbe prominence of the United States as an insurance market, and given the longstanding 

nature and success of the U.S. insurance regulatory system, the United States will not submit to 

the EU's formal Solvency II equivalence process to assess and rule on the adequacy of the U.S. 

system. For example, 2015 year end data shows that the U.S. insurance market accounts for 

26.88% of global insurance premiums, more than twice the amount of Japan, which ranks second 

(13.04%). While Solvency II has been praised within the EU, and reflects the substantial 

commitment and expertise of insurance leaders from throughout Europe, it is not a system that 

will be duplicated within the United States. 

The U.S. insurance market- for which the states remain the primary regulators of the business of 

insurance- is the most diverse and competitive in the world, with thousands of insurers ranging 

in size, complexity, and global reach. With the complementary roles of the state regulators, the 

Board of Governors ofthe Federal Reserve System, and FlO, the United States has a system of 

insurance oversight that protects conswners, supports financial stability, and provides for global 

engagement. 

In addition, the United States is the largest insurance market for many EU insurers and 

reinsurers. The EU is not as prominent a market for U.S. insurers and reinsurers as the United 

States is for EU industry. However, U.S. insurers and reinsurers generate billions of dollars in 

revenue from the EU market. 

The Ell's Solvency II regime allows for EU member states to supervise insurers and reinsurers 

that operate in the EU but arc from non-equivalent countries, such as the United States, and may 

subject those insurers and reinsurers to additional capital, governance, and reporting 

requirements. In fact, several U.S.-based insurers and reinsurers have received written notice 

from EU supervisors of the potentially significant implications for those insurers and reinsurers 

arising from the implementation of Solvency II. In the covered agreement negotiations the 

United States seeks to level the playing field for U.S. insurers and reinsurers operating in the EU 

and to address critical prudential regulatory areas relating to group supervision and solvency, 

reinsurance supervision, including collateral, and the exchange of regulatory and supervisory 

information across borders. 

If negotiations are successful, a U.S.-EU covered agreement would be a mechanism through 

which U.S.-based insurers and reinsurers receive an assurance of balanced regulatory treatment 

when operating in the EU market. In other words, if negotiations are successful, a covered 

agreement could help eliminate the uncertainty that shrouds participation of U.S. insurers and 

2 See Press Release, "Treasury, USTR Announce Intention to Negotiate Covered Agreement with the European 

Union" (November 20, 2015), available at ]illps://www.treasury.gov/press-center/press-releases/Pages/jl0284.aspx. 

2 
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reinsurers in the EU market, and may provide greater certainty on both sides of the Atlantic 

regarding interaction between the U.S. and EU regulatory approaches. 

The U.S. system of insurance regulation is premised upon the role of the states-legislators, 

governors, and regulators. With respect to prudential oversight, state-based regulation has 

largely evolved with the recognition that the ability of an insurer to pay a claim is the bedrock on 

which the U.S. insurance market is based. To the extent that the U.S. system will change in 

substance or structure, any such change would be a determination for Congress or the states. 

Although Solvency II approaches some aspects of group supervision differently from the U.S. 

system, a covered agreement could affirm that U.S.-based insurers operating in the EU would not 

be subject to additional Solvency II requirements due to those differences. 

A covered agreement could also address concerns regarding the treatment ofEU reinsurers 

operating in the United States, particularly regarding collateral, a topic of great importance to the 

United States. By some estimates, U.S. ceding insurers purchase more than 90% of third party 

reinsurance from non-U.S. reinsurers, and the cost of that reinsurance affects the availability and 

affordability of insurance products for U.S. property owners, businesses, and consumers seeking 

retirement security, among other things. 

A covered agreement could allow EU-based reinsurers to operate in the United States with less 

restrictive use of reinsurer capital while continuing to ensure consumer protection. In addition, 

the reinsurance industry operates most effectively and efficiently when able to spread capital 

and risk- globally. 

Further, a covered agreement could lead to more nationally consistent application of certain 

essential aspects of reinsurance collateral reform, which was unanimously approved by state 

insurance regulators in November 2011 in the form of an NAIC model law. These reforms have, 

to date, been implemented thoughtfully in many states, although not in all states and not in a 

consistent manner. In short, the United States could provide appropriate protections for U.S. 

consumers, and collateral relief to EU-based reinsurers, by agreeing to follow an approach 

substantially similar to one already approved by state insurance regulators. 

As importantly, through a covered agreement the United States intends to ensure that U.S.-based 

reinsurers can continue existing business and seek to expand such meaningful business 

opportunities in the Ell by ensuring a level playing field for U.S. reinsurers throughout the EU 

market. 

Regulators and supervisors for multinational financial services firms must have the capacity to 

exchange sensitive regulated entity information across national borders on a confidential basis 

for regulatory and supervisory purposes. For this reason, another component of the covered 

agreement negotiations relates to the exchange of regulatory and supervisory information, and 

the maintenance of the confidentiality or professional secrecy of such information. In the 

covered agreement, the United States seeks to identify principles and procedures that could serve 

as guidance to facilitate information sharing between supervisors and regulators in both markets. 

A covered agreement may enter into force with respect to the United States only upon expiration 

of a period of 90 calendar days after the Secretary of the Treasury and USTR jointly submit a 

copy of the final legal text of the agreement to the relevant committees of Congress, including 

3 
39 


25968.012

the House Financial Services Committee. We have and will continue to provide regular 

briefings for this and other Committees as we move forward. 

State insurance regulators across the United States combine expertise and commitment that 

protects consumers. My personal experience as a state regulator, working with many great 

regulatory professionals from around the United States, further emphasized the importance of 

state regulator participation in the U.S.- EU covered agreement negotiations. To this end, 

Treasury and USTR have sought the views and expertise of state regulators and have made 

engagement and feedback with representatives of state regulators an integral part of the covered 

agreement process. On November 20, 2015, promptly after giving notice to and consulting with 

Congress regarding the joint intention of Treasury and USTR to negotiate a covered agreement, 

USTR and FlO met with state regulator leadership to discuss the process and the mechanism by 

which state regulator representatives would be included in a direct and meaningful manner. 

In order to facilitate direct and meaningful feedback, as we develop U.S. positions in the context 

of the negotiations, we regularly engage and consult with a group of state insurance regulators. 

State regulator representatives review and provide feedback on U.S. documents before those 

documents are shared with our EU counterparts as well as providing additional feedback on the 

negotiations. Not surprisingly, the technical perspective offered by state regulators has been a 

strong component of the U.S. engagement. 

In addition, both USTR and FlO have engaged with stakeholders throughout the negotiation 

process. In meetings with groups of company and trade association representatives, as well as 

with individual insurer consultations, stakeholders have provided invaluable insights into all 

three subject matter areas that are being addressed in the covered agreement negotiations. 

Multilateral Standard-Setting at the International Association oflnsurance Supervisors 

(IAIS) 

In multilateral standard-setting work at the IAIS, FlO works closely with our colleagues at the 

Board of Governors of the Federal Reserve System (Federal Reserve), state insurance regulators, 

and staff of the National Association ofinsurance Commissioners (NAIC). Notably, state 

insurance regulators participate in greater numbers at the lAIS than any other lA IS member, and 

each state insurance regulator has a vote in the JAIS plenary sessions. 

IAIS- End of Pay-For-Play and the Advent of Increased Transparency 

2015 brought structural reform to the IAIS that has eliminated the pay-for-play dynamic and 

significantly enhanced IAIS transparency. Before 2015, stakeholders paid an annual fee and, in 

exchange, received special access to IAIS materials and meetings. In 2015, the IAIS eliminated 

the annual fee, increased transparency through in-person stakeholder engagement, and enhanced 

engagement through the internet and by telephone. The success of this increased transparency is 

reflected in the exponential increase in direct, in-person stakeholder engagement, from 

approximately 12 hours in 2014 to over 140 hours in 2015. 

In addition, the following examples illustrate the increased transparency at the IAIS: 

• The lAIS website contains information available to the public, not just to stakeholders 

who pay the annual fee. 

4 
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• Although for years the I AIS has used a public consultation process, since 2015 the IAIS 

has hosted explanatory meetings and telephone calls so that stakeholders can learn and 

ask questions about the substance and structure of the consultation document in advance 

of providing comments. 

• After receiving comments on a consultation paper, since 2015 the IAIS has published the 

comments received, released a summary of comments, and offered a written reply to the 

comments. 

For the various work streams (e.g., capital, governance, and market conduct), stakeholder 

contact lists have been developed so that those stakeholders now provide preliminary 

input on a consultation paper prior to the paper's release for formal comment. 

• IAIS now publishes a monthly newsletter to describe developments in the preceding 

month and events scheduled for the coming month. 

While only a few IAIS work streams were directly open to stakeholders before 2015, the new 

governance and transparency practices provide a uniform approach to openness and stakeholder 

engagement for alllAIS activities. 

U.S. stakeholders also have opportunities to meet and work with the U.S. participants. Working 

with state regulators and the Federal Reserve, FlO has coordinated opportunities for stakeholders 

(including industry and consumer advocates) to meet and present to all U.S. members of the 

IAIS at the same time, thereby enabling the U.S. members to receive the views of U.S. 

stakeholders in a U .S.-based forum. Each such meeting reflects a coordinated effort by the U.S. 

participants at the lAIS to benefit from U.S. stakeholder perspectives on the international 

standards under consideration. 

IAIS- U.S. Participants Collaborate Extensively 

The U.S.-based members of the IAIS include FlO, the Federal Reserve, the 56 state and territory 

insurance regulators who represent the individual sovereign jurisdictions within the United 

States, and NAIC staff. State regulators were among the founding members of the IAIS in 1994 

and have been actively engaged ever since. Indeed, the state regulators and NAIC typically have 

more people participating and in attendance at an IAIS meeting than any other IATS member. 

FlO became a full member of the IAIS in late 2012, and the Federal Reserve became a full 

member of the IAIS in late 2014. 

In 2014, FlO coordinated the establishment of a steering committee comprised of the U.S. 

participants at the !A IS. The steering committee addresses pending and emerging international 

insurance matters and, while each member of the steering committee is independent of the 

others, including in their IAIS engagement, the steering committee works to promote shared 

understanding and open dialogue and alignment on relevant issues. Since being established, the 

steering committee has held regularly scheduled calls and in person meetings, with additional ad 

hoc calls or meetings occurring often. 

In addition to the Steering Committee, FlO works and communicates daily with counterparts at 

numerous state insurance departments and the Federal Reserve. This collaboration occurs in 

relation to various !AIS working group meetings and in activities involving matters such as 

governance, risk management, capital standards, cybcrsecurity and financial crimes, and 

financial stability, among others. Collaboration occurs by telephone, through email, and full or 

5 
41 


25968.014

partial day in-person meetings. U.S. participants also meet and speak in person before and 

during IAIS meetings. 

FlO's participation at the IAIS and in other international initiatives benefits U.S. insurance 

consumers and the U.S. insurance industry by promoting high quality and consistent prudential 

standards around the world, which helps maintain a level playing field and shield the United 

States from financial vulnerabilities that may affect other countries. Separately, and 

independently, the United States considers whether to adopt international standards and, if the 

decision is to adopt these standards, then implements them through federal or state regulatory 

authorities in a manner tailored to the U.S. market and regulatory structure. 

Working together, FIO, the Federal Reserve, and state regulators inform the development of 

international standards so that the dual priorities of consumer protection and financial stability 

are reflected in IAIS standards that accommodate the U.S. approach. 

IAIS- Insurance Capital Standard (ICS) 

The IAIS continues development of the Insurance Capital Standard, or ICS, which, once 

developed and implemented, will allow for supervisors from around the world to understand and 

assess the group capital position of a large, multinational insurer. Many questions regarding the 

JCS remain open and under consideration, although the U.S. participants have worked in support 

of an approach that recognizes U.S. statutory accounting practices. 3 

Development of the ICS is incremental and will occur over a period of years. This will transpire 

only after extensive consultations with stakeholders and field testing. Field testing is the 

exercise through which volunteer insurers submit data to the IAIS in response to a standardized 

set of questions, thereby allowing for fact-based analyses of the issues under consideration. At 

present, 42 insurers from around the world are involved with field testing, nine of which are 

U.S.-bascd insurers. 

The I AIS is also continuing development of the Common Framework for the Supervision of 

Internationally Active Insurance Groups (ComFrame).4 This principles-based initiative will 

serve as a template for regulators to understand, evaluate, and oversee insurers that operate in 

multiple markets around the world. The lAIS is also reviewing certain insurance core principles 

(I CPs), or the standards that are developed through the IAIS, and that countries around the world, 

including the United Stales, will decide whether to adopt in a tailored manncr. 5 

1 See 1AIS, "Risk-based Global1nsurance Capital Standard Version 1.0, Public Consultation Document" (July 19. 

2016); IAlS "2016 Quantitative Field Testing package" (July 19, 2016), both available at 

http://www. iaisweb.org/page/supervi sory -material/insurance-capital-standard/ /fi le/61565/20 16-risk -based-globalinsurance-capital-standard-ics-consultation-document. 

4 More information about Comframe, including the most recent draft, is available at 

http://www.iaisweb.org/page/supervisory-material/cornmon-framework#. 

5 See IA1S, "Insurance Core Principles" (November 2015), available at http:/i!Y)VW.iaisweb.org/page/supervisorymateriailinsurance-core-pri nciples#. 

6 
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Recently, the !A IS has submitted to the Financial Stability Board a revised methodology for 

identifying global systemically important insurers (G-Slls).6 The revised methodology 

incorporated improvements that allow for a more comprehensive, factual analysis of insurers 

under consideration, although more work needs to be done to eliminate potential legacy 

deficiencies from the previous G-SII methodology. Again, working with our international 

colleagues, the U.S. participants at the IAIS have promoted an approach to global financial 

stability that supports the development of insurance markets, enhances competition, protects 

consumers, and serves the interests of financial stability. 

Global and Regional Partnerships 

EU U.S. Insurance Project 

Beyond covered agreement negotiations, collaboration between EU and l.J.S. insurance 

authorities is an essential component for protection of U.S. insurance consumers. The EU and 

the United States are both significant insurance markets. In terms of premium volume, despite 

the growing prominence of developing markets, the EU ranks first and the United States ranks 

second as consolidated markets. The EU and the United States are home to many of the world's 

most prominent global insurers large multinational insurance groups are finding opportunities 

for important organic growth in new markets around the world. As markets and regulatory 

approaches have evolved, supervisors in both jurisdictions have undertaken significant 

modernization and reform efforts. 

In light of these facts, FIO convened the insurance supervisory leadership of both jurisdictions at 

Treasury in January 2012. At this initial meeting, participants included FlO, state regulators, the 

European Commission, the European Insurance and Occupational Pension Authority, and the 

United Kingdom's Prudential Regulatory Authority. We call this the EU- U.S. Insurance 

Project. State insurance regulators, including Commissioners Voss, McCarty, Consedine, 

Lindeen and Huff: have made valuable contributions to the eftort. In 2016, we have also 

welcomed the participation ofthc Federal Reserve. 

Thanks to participants and supporting staff, the Project has been a demonstrably successful 

transatlantic collaboration. In September 2012, the Project released a report that identified 

similarities and differences between regulatory approaches in the EU and the United States and, 

in December 2012, the Project released an initial Way Forward, 7 which outlined common policy 

objectives and milestones through 2017. Following the EU's adoption of Solvency II in late 

2013, and the December 2013 release of FlO's report entitled How To Modernize And Improve 

The System Of Insurance Regulation In The United States, 8 continued modernization by state 

6 See !AIS, "Global Systemically Important Insurers: Updated Assessment Methodology" (June 16, 2016). available 

at http:/lwww.iaisweb.org/page/supervisory-material/financial-stability-and-.'!lacroprudential-policy-andsurveillance. 

7 See "EU-U.S. Dialogue Project: The Way Forward" (December 2012), available at 

https://www.trcasury.gov/initiatives/fio/EU-US%20Jnsurance%20Project/Pages/default.aspx. 

'See FlO, "How To Modernize And Improve The System Of Insurance Regulation In The United States" 

(December 20 I 3 ), available at h!!mi:/ IV>'W"!. tre<\s!!_ry,gQviin itiati ves/fio/reports-and-notices/Pages/ default.aspx. 

7 
43 


25968.016

regulators, and developments at the TAIS, the Project released a revised Way Forward in August 

20!4 which updated the common objectives and milestones.9 

The understanding developed through the Insurance Project provided the forum for authorities in 

the U.S. and EU to build technical awareness and provided a basis for resolution of certain longstanding issues through the covered agreement negotiations. The EU- U.S. Insurance Project 

continues to serve as an essential forum for sharing information and regulatory practices, 

especially in relation to regulatory modernization and implementation initiatives. With the 

advent of Solvency II and recent developments at the U.S. state and federal levels, consistent and 

substantive engagement between insurance authorities in the EU and the United States will 

remain an important area of focus. Indeed, after highly successful public events in each of the 

last four years including more than 225 attendees at an NAIC meeting in December 2015- the 

E.U.-U.S. Insurance Project will host another public meeting in October 2016 in Frankfurt, 

Germany. More than 200 attendees have already registered for this event. 

Insurance Supervision in the Americas 

FlO is privileged to work closely with counterparts from all regions of the world, and these 

relationships allow FlO, and the United States, to learn about the markets and regulatory 

practices in both developed and developing economies. On September 8 and 9, FlO hosted at 

Treasury the first ever "Insurance Supervision in the Americas" forum and invited leading 

insurance authorities from North, Central, and South America to attend. Attendees included lead 

supervisors for 16 countries, including the United States, which was represented by state 

regulators, the Federal Reserve, and FlO. Participants addressed topics including natural 

catastrophes, financial stability, and retirement security, and the discussions provided critical 

insights into the challenges for supervisors, consumers, and insurers throughout the Americas. 

The information FlO received from our North, Central, and South American colleagues helps us 

better understand and shape the direction of international developments, including standardsetting. 

Conclusion 

Through effective collaboration at home and abroad, U.S. insurance authorities- FlO, state 

regulators, and the Federal Reserve- continue to work collaboratively to promote a 

well-regulated insurance marketplace that protects consumer, promotes financial stability, and 

fosters competitive markets. 

In all of our work, both internationally and domestically, Treasury priorities will always be the 

best interests of U.S. consumers, U.S. insurers, the U.S. economy, and jobs for the American 

people. 

We welcome the chance to work with this Committee, and look forward to more discussions on 

these important topics. 

Thank you for your attention. I look forward to your questions. 

'See "ElJ-U.S. Dialogue Project: The Way Forward-July 2014 Update" (July 2014), available at 

b1!P2:/J~w.treasury.gov/initiativ~s/fioiEU-US%20lnsurance%20Project!Pagesidefault.asp);. 

8 
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25968.017

For release on delivery 

2:00 p.m. EDT 

September 28, 20 16 

Statement by 

Thomas Sullivan 

Associate Director 

Board of Governors of the Federal Reserve System 

before the 

Subcommittee on Housing and Insurance 

of the 

Committee on Financial Services 

U.S. House of Representatives 

Washin1,;ton, D.C. 

September 28, 2016 
45 


25968.018

Introduction 

Chairman Luetkemeyer, Vice Chairman Westmoreland, Ranking Member Cleaver, and 

other members of the subcommittee, thank you for inviting me to testifY on behalf of the 

Federal Reserve. 

The Federal Reserve welcomes the opportunity to participate in today's hearing, and I am 

pleased to be joined by my colleagues from the Federal Insurance Office (FlO) of the U.S. 

Treasury Department, the National Association of Insurance Commissioners (NAIC), and the 

United States Trade Representative (USTR). While we each have our own unique authority and 

mission, the Federal Reserve remains committed to working collaboratively on a wide range of 

issues, including insurance prudential matters both domestically and internationally. I will 

briefly address both of these areas: the Federal Reserve's work to develop domestic and 

international supervisory and regulatory standards that are appropriate for the U.S. insurance 

market and U.S. insurance consumers. 

The Federal Reserve's Role in Supervising Insurance Institutions 

Let me first touch on the statutory role of the Federal Reserve in supervising and 

regulating insurance firms. The Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) gave the Federal Reserve regulatory responsibilities for insurance firms that 

own a federally insured bank or thrift and for insurance companies designated as systemically 

important by the Financial Stability Oversight Council (FSOC). These firms are highly diverse: 

they range in size from firms with total assets of approximately $3 billion to firms with total 

assets of over $700 billion. They engage in a wide variety of insurance and non-insurance 

activities. Some are fully domestic and others have material international operations. Some are 

organized as mutual companies, while others are owned by public shareholders. Some produce 
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-2-

only statutory accounting statements, while others also produce statements under U.S. Generally 

Accepted Accounting Principles. 

The approach of the Federal Reserve in regulating insurance firms, complementary to and 

in coordination with the states, is derived from its overall statutory responsibilities for financial 

regulation as those have evolved over the years, most recently through the changes arising from 

the Dodd-Frank Act. First, as was the case before enactment of the Dodd-Frank Act, we are 

responsible for supervision of depository holding companies to ensure that they operate in a safe 

and sound manner and do not pose risks to their subsidiary depository institutions. This includes 

insurance companies that have subsidiary banks or thrifts. Second, the Dodd-Frank Act 

enhanced our statutory mandate for regulating and supervising holding companies with a view to 

the safety and soundness of the holding company and its functionally regulated subsidiaries. 

Third, the Dodd-Frank Act changed our statutory mandate to require that we consider the 

stability of the U.S. financial system in supervising large holding companies. 

At the same time, the Dodd-Frank Act maintained the Federal Reserve Board's (Board) 

ability to tailor its supervision of firms based on the kind of financial intermediation in which 

they are engaged. For example, with respect to capital, the Board is now permitted to tailor its 

minimum capital requirements for firms that may also be regulated by state or foreign insurance 

regulators. In pursuing what might be termed its dual regulatory mandate of protecting the safety 

and soundness of depository institution holding companies and promoting U.S. financial 

stability, the Federal Reserve continues to develop regulatory and supervisory measures that are 

appropriate for its supervised insurance firms. In addition, we continue to be cognizant that 

states and state insurance supervisors regulate the types of insurance products offered by 

insurance companies that are part of holding companies we supervise and the manner in which 
47 


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- 3 -

the insurance is provided. Because of the overall structure of insurance regulation as specified 

by Congress in the McCarran-Ferguson Act and elsewhere, the line here is rather bright. 

The Federal Reserve's Regulatory Framework for Supervised Insurance Institutions 

Tn this regard, the Federal Reserve's approach to insurance supervision distinguishes 

between insurance companies that we oversee solely because they control an insured depository 

institution and those that have been designated as systemically important by the FSOC. In its 

Advance Notice of Proposed Rulemaking (ANPR), the Board has set out two conceptual 

frameworks--one of which may be more appropriate for large, complex, systemically important 

institutions, while the other may be more appropriate for firms such as the current population of 

insurance savings and loan holding companies. We have used the flexibility given us by the 

December 2014 changes to the Collins Amendment to fashion an approach that reflects the ways 

in which insurance activities differ from those of banks and other forms of financial 

intermediaries. The bifurcated approach set out in the ANPR would efficiently advance the 

Board's differing supervisory objectives for the two populations of supervised insurance firms. 

For the insurance companies that the FSOC has determined should be supervised by the 

Board, the ANPR sets out a capital framework termed the consolidated approach. The financial 

crisis demonstrated the need for stronger regulatory and supervisory assessments of the 

consolidated resiliency of large financial firms. Among other things, it revealed that too narrow 

a focus on the safety and soundness of individual legal entities in a corporate group could result 

in a failure to detect threats to the group and to financial stability that emerge from unregulated 

or less-regulated subsidiaries of the group. Hence the crisis reaffinncd the importance of 

consolidated supervision, encompassing the parent company and all its subsidiaries, which 

allows the Board to understand a supervised institution's activities, resources, and risks across 
48 


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-4-

the entire enterprise. The ANPR's proposal of the consolidated approach reflects the importance 

of maintaining an enterprise-wide perspective and minimizing regulatory arbitrage at 

systemically important insurance companies. Because these firms are large, active domestically 

and internationally, internally and externally complex, and systemically important, the 

consolidated approach appears more suitable than the approach set out for the insurance savings 

and loan holding companies. 

For the insurance savings and loan holding companies, the Board's ANPR sets out a 

capital framework termed the building block approach. The building block approach uses 

existing capital requirements for the various legal entities in an insurance group to construct an 

enterprise-wide capital requirement. The building block approach relies significantly on the 

state-based capital requirements for state-regulated insurance companies, in conjunction with the 

Board's existing bank capital requirements for other subsidiaries, to achieve an aggregated 

capital requirement for an insurance savings and loan holding company. Generally, the building 

block approach would aggregate capital resources and capital requirements across the firm's 

subsidiaries, with some adjustments, to calculate combined capital resources and requirements 

for the firm. For the insurance savings and loan holding companies, the building block approach 

would streamline implementation costs and other burdens while achieving the Board's 

supervisory objectives of ensuring the holding company's overall safety and soundness and 

protecting the subsidiary depository institution. 

In addition to setting conceptual frameworks for capital standards, the Board has issued 

proposals on reporting requirements and enhanced prudential standards for the FSOC-designated 

systemically important insurance companies. The proposed reporting requirements differ 

substantially from reporting requirements for bank holding companies that are predominantly 
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5-

engaged in banking and other non-insurance activities and are tailored to the assets, liabilities, 

and risks of insurance companies. They are designed, among other things, to keep the Board 

informed as to the financial condition and risk profile of these firms, including risks posed to the 

financial stability of the United States. The enhanced prudential standards would require firms 

to implement enterprise-wide risk management, establish a risk committee of the company's 

board of directors, and appoint both a chief risk officer and a chief actuary as well as meets 

institute liquidity risk-management requirements. The firm would also be required to have shortand long-term cash-flow projections, a contingency funding plan, liquidity risk limits, and 

monthly liquidity stress tests with a liquidity buffer covering net stressed cash flows over a 90-

day period. We believe these proposed requirements are well-tailored to the business and risks 

ofFSOC-designated insurance companies, and we look forward to reviewing the comments 

received. 

The Importance of Stakeholder Engagement and Transparency 

We have taken a good bit of time in arriving at some potential insurance regulatory 

capital frameworks precisely because we wanted to consider these issues thoroughly, and get 

them right. As we continue exploring the regulatory frameworks we have set out, and other 

areas of our supervision. we appreciate the comments we have received on the outstanding 

proposals, including 28 on the capital ANPR, 13 on the notice of proposed rulemaking on 

enhanced prudential standards for the systemically important insurance companies, and 4 on the 

proposed reporting requirements for these companies. Indeed, to allow interested parties 

additional time, we extended the comment period for our ANPR on domestic capital. We have 

found that the comments we have received offer many constructive observations. We also 

continue to meet with industry and other interested parties. In the last year and a half alone, we 
50 


25968.023

- 6-

have held over 60 meetings with stakeholders. Among other things, this reaffinns our 

commitment to increasing transparency in our insurance rulemaking development. We value the 

input of stakeholders and, together with the Board's supervisory objectives, it enhances the 

quality of our regulation. 

Improving Regulatory and Supervisory Treatment for U.S. Insurers Operating in the 

European Union 

The Federal Reserve has acted and will continue to act in international insurance standard 

setting in an engaged partnership with our colleagues from the NAIC, the state insurance 

commissioners, and the FIO. The Board is committed to continuing our multiparty collaboration 

with the state insurance regulators and the FIO on advocating standards internationally that are 

appropriate for the U.S. market. Last year, the Board was invited to join the NAIC and the FlO 

in their work on the EU-U.S. Dialogue Project to engage in healthy exchange among supervisors 

and determine the way forward as to supervision of insurers whose operations span across these 

jurisdictions. Alongside this dialogue project has been the negotiation of a possible covered 

agreement, under the leadership of the FlO and the USTR. We respect the work of the FIO and 

the USTR toward an agreement that would enhance regulatory certainty for U.S. insurers and 

reinsurers operating in the European Union. 

The Federal Reserve's Participation in Developing Appropriate International Insurance 

Standards 

As the consolidated supervisor of large, complex, and internationally active insurance 

firms, the Federal Reserve participates in the development of international supervisory standards 

and guidance to ensure that they best meet the needs ofthe U.S. insurance market. Our 

participation focuses on those aspects most relevant to the supervision of FSOC-designated 
51 


25968.024

- 7-

insurance firms. The Federal Reserve is participating alongside the FlO, the NAIC, and state 

insurance regulators in the development of a global group capital standard for internationally 

active insurance firms, in development of other policy measures for internationally active and 

systemically important insurers, and in research and analysis related to financial stability topics. 

We appreciate our current ability to advocate for international standards that work for U.S. 

insurance firms, U.S. insurance consumers, and the U.S. financial markets more broadly. 

Indeed, the Federal Reserve continues to participate actively in standard setting at the 

International Association ofinsurance Supervisors (IAIS) in consultation and collaboration with 

state insurance regulators, the NAIC, and the FlO to present a coordinated U.S. voice in these 

processes. 

In addition, since the financial crisis, U.S. authorities and foreign regulators have been 

working to identify financial institutions whose failure or distress may pose a threat to financial 

stability, including nonbank financial companies like insurance firms. The leaders of the Group 

of 20 nations, including the United States, charged the Financial Stability Board (FSB) with 

identifying firms whose distress would threaten the global economy. The FSB has coordinated 

its work in this area with global standard-setting bodies like the Basel Committee on Banking 

Supervision and the !AIS. The identification of a global systemically important insurer (G-SH) 

by the FSB and the JA!S requires a careful evaluation of the firm and its global systemic 

footprint in accordance with the methodology developed by the IAIS. The IAIS has developed 

its G-SJI identification methodology through a public notice-and-comment process and updated 

its methodology for identifying G-Sils this year. 

Crucially, FSB designation of an entity as a G-SII does not result in the Federal Reserve 

becoming the entity's prudential regulator. Moreover, it is important to remain mindful of the 
52 


25968.025

- 8-

fact that IAIS standards and FSB determinations have no binding force in the United States 

unless the policies are adopted by a U.S. agency in compliance with applicable administrative 

rulemaking process. Neither the FSB, nor the IAIS, has the ability to implement requirements in 

any jurisdiction, and implementation in the United States would have to be consistent with U.S. 

law. Additionally, none of the global standards being developed by the IAIS are intended to 

replace the existing legal-entity requirements that are already in place for U.S. insurance finns. 

We remain committed to a supervisory framework that best meets the needs of U.S. insurers as 

they compete internationally and that is appropriate for the U.S. insurance market and 

consumers. 

Mr. Chaim1an, members of the subcommittee, I thank you for inviting me here today. 

look forward to an active dialogue on these issues with you all, and continued collaboration with 

this subcommittee. 
53 


25968.026

ffACLI 

Statement for the Record 

Subcommittee on Housing & Insurance 

House Committee on Financial Services 

U.S. House of Representatives 

Hearing titled "The Impact of US-EU Dialogues on U.S. Insurance Markets" 

September 28, 2016 

The American Council of Life Insurers (ACU) is pleased to submit this statement for the hearing record 

expressing the views of the life insurance industry regarding the impact of U.S.-EU dialogue on U.S. 

insurance markets. A critical component of that dialogue, now underway, is the negotiation of a mutual 

recognition covered agreement. The ACU supports the negotiation of a covered agreement with the 

European Union that strengthens U.S. competitiveness. Furthermore, the ACLI believes that state 

insurance regulators must be involved in the process and we have shared that view with the Federal 

Insurance Office (FlO), United States Trade Representative (USTR), and other stakeholders. As the primary 

financial regulators, state insurance regulators are essential to the negotiation and implementation of an 

effective covered agreement. 

The American Council of Life Insurers (ACU) is a Washington, D.C.-based trade association with 

approximately 280 member companies operating in the United States and abroad. ACU advocates in 

state, federal, and international forums for public policy that supports the industry marketplace and the 

75 million American families that rely on life insurers' products for financial and retirement security. ACU 

members offer life insurance, annuities, retirement plans, long-term care and disability income insurance, 

and reinsurance, representing 95 percent of industry assets, 92 percent of life insurance premiums, and 

97 percent of annuity considerations in the United States. 

ACU Supports the Negotiation of a Mutual Recognition Covered Agreement 

In July of 2015, ACll President & Chief Executive Officer, Governor Dirk Kempthorne, wrote to Secretary of 

the Treasury Jack lew and United States Trade Representative Michael Froman, urging the start of 

negotiations on a mutual recognition covered agreement. That letter said: "Our Board has directed that 

ACU advocate for negotiations with the European Commission on a covered agreement to begin soon. It 

has also directed that state insurance regulators must be involved in the process. We believe that 

involving state regulators is the most appropriate, useful, and effective approach. We are communicating 

this position to your Department, state insurance regulators, and to the United States Trade 

Representative." ACU has consistently supported the negotiation of a covered agreement that would 

American CDuncll of Ufe Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

WMoW.acJI.com 
54 


25968.027

2 

resolve differences between the two largest insurance and reinsurance markets in the world to ensure 

that U.S. insurers and reinsurers would not be subject to new regulatory burdens when operating in the 

EU. Last week, the ACU joined Insurance Europe, the Reinsurance Association of America {RAA) and the 

American Insurance Association {AlA) in issuing a joint statement welcoming the resumption of 

negotiations between the U.S. and the EU. We reiterated our support for negotiation of a covered 

agreement and noted that a covered agreement has the potential for a win-win for consumers and 

competitive markets on both sides of the Atlantic. We continue to believe that the significant trade 

relationship in insurance and reinsurance between the U.S. and EU warrants continued dialogue and 

understanding between government agencies on both sides. 

Mutual Recognition Covered Agreement Would Strengthen U.S. Competitiveness 

In the absence of a mutual recognition covered agreement, U.S. insurers and reinsurers doing business in 

the EU are subject to considerable uncertainty and the prospect of adverse regulation. Since January 1, 

2016, when the EU's Solvency II insurance regulatory framework became effective, any insurer in a 

country not recognized by the EU as equivalent could be subject to regulatory action in each EU member 

state in which they do business. In fact, EU member states have already contemplated new conditions and 

requirements on U.S. companies doing business in the EU, such as requiring the establishment of local 

operations. United States insurers and reinsurers doing business in the EU have received inquiries from 

regulators in multiple EU member states, including the United Kingdom and Germany, raising concerns 

that additional regulatory action may soon follow. 

In this kind of unpredictable environment, U.S. businesses have little recourse against unexpected 

regulatory actions that are not based on market conditions. European competitors are not subject to the 

same uncertainty and can operate with greater confidence in their standing with local regulators. This 

unlevel playing field makes it more difficult for U.S. businesses to compete effectively. The longer that this 

regulatory uncertainty exists, the more likely it is that U.S. businesses may face unanticipated challenges 

across EU member states. We hope that negotiators will continue to meet, make progress, and work 

through remaining issues. We appreciate the commitment to these negotiations from the Federal 

Insurance Office and the United States Trade Representative, in consultation with state insurance 

regulators. 

Covered Agreements Authority Establishes a Comprehensive Process for Consultation and Negotiation 

It is important to note that the covered agreements authority establishes a comprehensive process for 

consultation and negotiation. The Dodd-Frank Act provides for joint Treasury and USTR authority, 

consistent consultation with Congress, and submission and layover of a final agreement to Congress. The 

comprehensive and inclusive process established in the law is designed to ensure that there is ample 

opportunity for input and oversight by Congress and other stakeholders. We would also urge U.S. 

negotiators to communicate with industry stakeholders throughout the process. 

Conclusion 

ACLI appreciates the committee's oversight of the covered agreements process and its impact on the 

American Council of Life Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

www.acli.com 
55 


25968.028

3 

competitiveness of the U.S. insurance and reinsurance industry. ACU supports the negotiation of a mutual 

recognition covered agreement, in consultation with state insurance regulators, and believes that a 

properly constructed agreement would benefit U.S. consumers and insurers. Thank you for convening 

this important hearing and for your consideration of the views of ACU and its member companies. 

Amerlcan Council of Ufe Insurers 

101 Constitution Avenue, NW, Washington, DC 20001·2133 

www.acli.com 
56 


25968.029

• )P/1 AMERICAN 

INSURANCE 

ASSOCIATION 

September 28, 2016 

The Honorable Blaine Luetkemeyer, Chairman 

Subcommittee on Housing and Insurance 

House Financial Services Committee 

U.S. House of Representatives 

Washington, DC 20515 

The Honorable Emmanuel Cleaver, Ranking Member 

Subcommittee on Housing and Insurance 

House Financial Services Committee 

U.S. House of Representatives 

Washington, DC 20515 

VIA Electronic Mail 

555121hStreet NW 

Suite550 

Washington, DC 20004 

202-828-7100 

Fax202·293-1219 

www.aiadc.org 

RE: Hearing entitled "The Impact of US-EU Dialogues on U.S. Insurance Markets" 

Dear Chainnan Luetkemeyer and Ranking Member Cleaver: 

The American Insurance Association (AlA) writes to express our appreciation for holding the 

hearing entitled "The Impact ofUS-EU Dialogues on U.S. Insurance Markets.'' AIA represents 

approximately 325 major U.S. insurance companies that provide all lines of property-casualty 

insurance to U.S. consumers and businesses, and write more than $127 billion annually in 

premiums. It is crucial that Congress use its oversight capability to monitor on-going US-EU 

dialogues and maintain focus on competitiveness issues that impact U.S. insurers and reinsurers 

doing business in an international marketplace. 

AlA bas consistently advocated for a united U.S. voice on international insurance issues and 

supports Congressional oversight and increased transparency in both domestic and international 

standard-setting fora. It is our hope that the subcommittee will recognize that the ability of U.S. 

insurers to provide insurance risk in markets around the world, as well as the capital to do so, is 

increasingly affected by the international regulatory environment. 

The reality is that the major barriers to U.S. insurers in the rest of the world are largely 

regulatory. Now that the Solvency IT Directive in the EU is being implemented, it is clear that 

U.S. insurance groups with operations outside of the United States will face significant 

competitive challenges if issues surrounding mutual recognition are not addressed. 
57 


25968.030

These barriers that U.S. insurance groups are facing in the EU are growing in number and 

severity, and arc inconsistent with the international principles of fair treatment and open markets. 

Specifically, regulators in the U.K., Germany, Poland, Austria, Spain and the Netherlands have 

all taken steps that further disadvantage U.S. companies and, in some instances, inhibit access to 

their markets. Therefore, it is imperative that international negotiations continue on how best to 

address these issues. U.S. negotiators must be supported to ensure that regulatory changes in the 

EU do not result in conditions that disadvantage U.S. insurers and reinsurers. 

Negotiations such as those for covered agreements are also important opportunities where the 

strengths of the U.S. state-based system and its interoperability with other systems can be 

affirmed. To that end, we are pleased that state commissioners were given a formal role in the 

covered agreement process to consult and support negotiators during and between negotiating 

rounds. 

Achieving timely and meaningful prudential recognition, including a permanent solution to 

regulatory barriers, must be the goal of the covered agreement negotiations. Furthermore, while 

the parties negotiate the covered agreement, it is equally important that European regulators stop 

taking steps that discriminate against U.S. insurers conducting business within their borders. 

Though opponents of the covered agreement have stated that the covered agreement is 

unnecessary, no other viable, short-term, alternative plans have been proposed for addressing the 

discriminatory barriers that U.S. insurers are facing in Europe. 

We believe that negotiations to address regulatory barriers in other markets are essential for the 

continued health and growth of U.S. insurers and reinsurers. So, we look forward to promoting 

an international insurance marketplace that supports the U.S. state-based system and allows U.S. 

insurers to compete on a level playing field outside the U.S. 

Respectfully submitted, 

Wes McClelland 

Vice President, Federal Affairs 

American Insurance Association 
58 


25968.031

Summary of the Issue 

Solvency II is an insurance legislative program aimed at unifying the EU market 

Implementation of the program became effective on January 1, 2016. The program states the 

main directive is to introduce a new and unified EU regulatory regime into the insurance 

business. Lloyds of London states that the key objectives of the program are to improve 

consumer protection, modernized supervision, deepen EU market integration, and increase 

international competitiveness of EU insurers. However, the program limits business 

opportunities for insurance and reinsurance companies established outside of the EU. 

Sa Fin, is the legislative authority in Germany that is enforcing guidelines with the Solvency II 

implementation. Its stringent commitment to the policy is seen in the threats that are made to 

non-compliant German insurance companies. As stated in the BaFin document, " Please note 

that the operation or commencement of reinsurance business without the authorization required 

pursuant to section 67 (1) sentence 1 of the VAG is considered a criminal offence punishable 

with imprisonment (section 331 (1) and (3) of the VAG), regardless of whether the lack of 

authorization is due to intent or negligence." See Exhibit A. Furthermore, the BaFin website 

(https://www.bafin.de/EN/Homepage/homepage node.html) also encourages "whistleblowers". 

As of July 2, 2016, BaFin has established a contact point This procedure allows persons with 

knowledge of a suspected breach or improper relationship to expose those in their organization 

without ramifications. See Exhibit 8 

Sa Fin is requiring outside insurance companies to "establish a German branch office if they 

wish to carry on primary insurance or reinsurance business in Germany." However, one 

exemption is allowed. "Section 67 (1) sentence 2 first half-sentence of the VAG provides an 

exemption for insurance undertakings that wish to carry on solely reinsurance business in 

Germany. According to this exemption, the requirement for authorization and the establishment 

of a branch office does not apply if primary insurers or reinsurers from third countries carry on 

solely reinsurance business in Germany through provision of cross-border services and if the 

European Commission has decided in accordance with Article 172(2) or (4) of Directive 

2009/138/EC that the solvency regimes for reinsurance activities carried out by undertakings in 

the relevant country are equivalent to the regime described in that Directive" Sa Fin is 

challenging the 50 different state-based regulations and the varying requirements for each. In 

order to be allowed to conduct business within the insurance industry in the EU, the United 

States needs to be recognized as an "equivalent regime". Exhibit C 
59 


25968.032

Timeline of Events 

On January 5, 2008, Shelter Reinsurance supplied a Department of Insurance 

Certificate to BaFin certifying that Shelter Re was an approved reinsurance company in 

the state of Missouri operating in good standing_ 

On January 19, 2009 we received a letter from BaFin stating that the certificate had 

been received and upon review BaFin agreed to allow Shelter Re to conduct business in 

Germany from its registered office in the United States. The letter stated that the 

decision was subject to future EU assessment of the situation. Exhibit D 

On September 27, 2011 an additional letter and certificate was sent to obtain 

certification for Shelter Mutual to be approved as a mixed reinsurer in Germany in 

addition to Shelter Reinsurance. Exhibit E 

On November 21, 2011 Shelter Mutual received a letter from BaFin asking for additional 

information. This was passed onto Shelter attorney Jim Tuley. It is believed that the 

certification for Shelter Mutual was never completed due to the fact that Shelter Re 

would be the sole writer for German business. Exhibit F 

On June 13, 2016 we received a letter stating the German Insurance Supervision Act 

had taken effect on January 1, 2016 and the before mentioned confirmation was now 

considered void. Exhibit G 

On September 6, 2016 Joel Smith, Account Executive for Shelter Reinsurance, received 

an email from a German client, canceling a scheduled meeting at the Baden Baden 

Reinsurance Conference. The reason for the cancellation was referenced as the BaFin 

Solvency II policy. The email referenced a threat from BaFin which stated that anyone 

conducting reinsurance business with a non-admitted reinsurer may be fined and receive 

up to 5 years in prison. Exhibit H 

Greg Lockard, Director of Reinsurance, traveled to Monte Carlo on September 10, 2016 

and was schedule to meet with European insurance companies. However, one meeting 

with a broker that produces German business for Shelter Re, was canceled the day 

before due to the current BaFin decision. Exhibit I 
60 


25968.033

Shelter Reinsurance Limits and Premium from German Companies 

Shelter Reinsurance currently participates on eight different programs with five German 

companies. The premium earned from these five companies is $6,266,457. The breakdown of 

limit and premium are shown below. This loss in yearly premium will create a substantial 

hardship on Shelter Re and prohibit the company from pursuing any new business in the region. 

Shelter Mutual Ceded Program 

Shelter Mutual currently has 22 companies on their reinsurance panel. Of the 22 companies, 

three are German reinsurers. In 2016, Shelter Mutual paid $1,455,250 in premium to the three 

German companies shown below. 

2016 Shelter Mutual Ceded Premium Paid to Gennanv 

Company Layer 1 Laver 2 Laver 3 Laver4 LaverS Total 

Como A $ 48,000.00 $ 43,500.00 $ 47,500.00 $ 35,000.00 $ 67,500.00 $ 241,500.00 

ComoB $ - $ 163,125.00 $ 178,125.00 $ 131.250.00 $ $ 472,5Q~ 

Comp C $ 180,000.00 $ 163,125.00 $ 142,500.00 $ 70,000.00 $ 185,625.00 $ 741,250.00 

$ 1,455,250.00 
61 


25968.034

Exhibit A 
62 


25968.035

Exhibit 13 
63 


25968.036

Exhibit C 

H View Favorites Tools. ! ~} 

Introduction 

68 

Cy thirdImpact on existing and I1elV business 

The p~-ovislo1s 

into force 1 January 2016. Reinsurance er,tered mto or before 31 

December 2015 can be run-off >Vtthout author;sat1on. If the renewei 

ren1surar1cecontract between a Genr.an l:1surer reqwres a 

agreement between the pa;-ties (m particular regarding key elements such cs 

of cover or prerr-1ums), reir1surar1ee 

2016 are VAG) or 
64 


25968.037

Exhibit D 

Bundesanstalt filr 

Finanzdienstlelstungsaufsicht 

Baf·n 1 Postfach 12 53 t 53002 Bonn 

Board of Directors 

Shelter Reinsurance Company 

1817 West Broadway 

Columbia MISSOURI, USA, 65218 

VEREINIGTE STAATEN VON AMERIKA 

19.01.2009 

Reference: VA 42-Sch-2008/0027 (Please quote in your reply) 

Confirmation of approval for conducting reinsurance business on the 

freedom to provide services from Iowa according to section 121i 

subsection 1 sentence 3 of the German Insurance Supervision Act 

Your letter January 5, 2008 

Dear Sir or Madam, 

Based on the certificate provided by the Department of Insurance, 

Financial Institutions and professional Registration of the State of 

Missouri and our assessment made in accordance with the requirements 

of section 1211 (1) sentence 3 of the German Insurance Supervision Act 

(Versicherungsaufsichtsgesetz- VAG), the company 

Shelter Reinsurance Company, 

Columbia, Missouri, USA 

is permitted to conduct reinsurance business in Germany from its· 

registered office in all insurance classes under the freedom to provide 

services. 

However, I would like to explicitly point out that the current 

administrative practice is subject to a future uniform European 

assessment of the equivalence of the supervisory system of the relevant 

home country and has no weight as a precedent with regard to future 

interpretations of section 121i (1) sentence 3 of the VAG. Moreover, I 

reserve the right to request updates of the certificate on a regular basis. 

Furthermore, this approval should not be regarded as a precedent for 

the treatment of third-country reinsurers in other EU/EEC member 

states or for future equivalence assessments. 

Finally, I would like to point out that the approval will be denied or 

revoked if satisfactory cooperation between BaFin and the relevant 

BaFin 

Insurance and Pension Fund 

Supervision 

Offlce address: 

Bundesan5talt fUr 

Flnanzdienst!eL<>tVf1 gsaufs!cht 

Graurhelndorfer Str. 108 

53117 Bonn j Germany 

contact: 

Arho-ld 

Section VA 42 

Fon +49(0)228 4108~3988 

Fax +49(0)228 4108-1550 

thorsten .or hold@bafin. de 

www.bafin.de 

Operator: 

Foo +49 (0)2 28 41 09-0 

Fax +49 (0)2 2S 41 OS-1550 

Official reSidences: 

53117 Bonn 

Grat.:rhelndorfer Str. 108 

Georg-von-eoese!ager-Str. 25 

friedrich-WOhler-Str. 2 

60439 frankfur.: 

lurglal!ee 12 
65 


25968.038

Exhibit D Second Page 

Bundesanstalt fur 

Finanzdienstleistungsaufsicht 

Seite 2 I 2 

supervisory authority of the home country is no longer ensured or if 

your company starts conducting insurance business other than 

reinsurance business. 

Yours faithfully, 

I J ·' ,/.jl!vf./ 

Waclawik 

BaFin 
66 


25968.039

Exhibit E 

SHELTER 

INSURANCE 

COMPANIES 

September27, 2011 

BAFIN 

MR.ARHOLD 

BUNDESANSTALT FUR 

FINANZDIENSTLEISTUNGSAUFSICHT 

GRAURHEINDORFER STR. 108 

53117BONN 

GERMANY 

RE: BAFIN 

Shelter Mutual Certificate 

Dear Mr. Arhold: 

TeresaHeim 

Assistant Reinsurance Specialist 

573-214-6307 

theirn@sheltcrinsurance.com 

Shelter Mutual Insurance Company would like to be approved as a mixed reinsurer in the 

country of Germany. 

Enclosed you should find a certificate from the State of Missouri showing our professional 

registration. This certificate states that Shelter Mutual Insurance is an upstanding business in the 

United States. The State ofMissouri has no objection to allowing Shelter Mutual to participate 

in reinsurance activity in Germany. 

Please feel free to contact me if you need any other information in order to approve Shelter 

Mutual as a mixed reinsurer. /' 

I look forward to receiving your approval soon. 

Respectfully, 

TeresaHeim 

Shclterlnsurance.com • 1-800-SIIELTER (743-5837) 

1817 West Broadway • Columbia, MO 65218-0001 
67 


25968.040

Exhibit E - Second Page 

7 

DEPARTMENT OF . . . . . FINANCIAL 

INSTITUTIONS AND PROFESSIONAL REGISTRATION 

1bis is to certify that 

P.O. Box 690, ·Jefferson City, Mo. 65102-0690 

Shelter Mutual Insurance Qompany 

1817WestBroadway 

Columbia, MO 65218 

Was organized in 1945 as an insurance company under the laws of the state ofMissouri, has its 

principal place of business in the United States of America, and has been exclusively operating in 

the business of insurance, including reinsurance, since i~ organization. Pursuant to Missouri 

Revised Statutes section 379.010 et seq . .t)le company is subject to supervision by the Missouii 

Department oflnsurance, Financial Institutions and Professional Registration. Under the abovementioned law and its charter the company is authorized io transact business by reinsuring risks 

from all insunmce classes other than life ii)surance and annuities, in both the United States and 

abroad. To the best of my knowledge, within the past five years the company has not committed 

any violations of laws or rules of this state which would impair its authority Jo transact business 

and has not committed any violation which would give rise to crilninal prosecution. 

This department has no objection to the mentioned company operating its reirisunmce. activity 

also in Germany and meeting any obligations that may result from that activity in freely 

convertible currency. 

Furthem10re, this department has the willingness and is able to cooperate v..:ith the Federal 

Financial Supervisory Authority (BaFin- Bundesanstalt fur Finanzdienstl<~istungsaufsicht) in a 

satisfactory. manner. 

So signed and official seal affixed this~ 1ft' day of~ 11 , 2011 at my office in the City of 

Jefferson, State of Missouri, United States of America. 

John M. Huff, Director 
68 


25968.041

Exhibit F 

Bundesanstalt fiir 

Finanzdienstleistungsaufsicht 

Bafln 1 Postfach 12 53 1 53002 Bonn 

To the Board of Management 

Shelter Mutual Insurance Company 

1817 West Broadway 

Columbis MO 65218·0001 

VEREINIGTE STAATEN VON AMERIKA 

21.11.2011 

GZ: VA 31-I 4401-US-2011/0001 (Bitte stets angeben) 

2011/0650297 

-

Betrieb des Ruckversicherungsgeschafts durch gemischte 

Erstversicherungsunternhmen mit Sitz in einem Drittstaat gem. § 105 

Abs. 2 Satz 2 VAG 

Hier: Shelter Mutual Insurance Company 

Your letter dated 27. September 2011 - Teresa Helm 

Dear Madame, 

dear Sir, 

thank you very much for your aforementioned letter and the enclosed 

certificate. 

Pursuant to section 105 Subsection 2 sentence 2 of the VAG 

(Versicherungsaufsichtsgesetz, Insurance Supervision Law), insurance 

companies which are authorized to carry out direct insurance business 

as well as reinsurance business (mixed insurance companies) and·:are 

domiciled in a non-member state may, in principle, conduct reinsurance 

business in Germany via intermediaries. 

This presupposes that the mixed insurance company 

1. is authorised to carry on direct insurance business as well as 

reinsurance business In its home country, 

2. has its registered office in that country, 

3. is supervised in its home country in compliance with 

internationally accepted standards and that 

4. there is satisfactory cooperation between the competent 

authority of the home country and the Federal Financial 

BaFin 

Versicherungs~ und 

Pensionsfandsaufslcht 

Hau~nschrlft: 

Bundesanstalt fQr 

F!nanzd!enstfeistungsaufslcht 

Graurheindorfer Str. 108 

53117 Bonn I Germany 

Kontakt: 

Herr SchOps 

Referat VA 31 

Fon +49(0)2:284108·7170 

Fax +49(0)2284108~7668 

VA31@bafin.de 

www.bafin.de 

Zentra!e: 

fon +49(0)2284108·0 

Fax +49(0)228 4108~1550 

Dienstsitze: 

53117 Bonn 

Graurhelr'!dorter Str. 108 

Georg-von·Boesclager·Str. 25 

53175 Bonn 

Drclzchr'lrnorgenweg 44-48 

60439 Frankfurt 

Lurgiallee 1Z 

Mar!e-Curle-Str. 24-28 
69 


25968.042

Exhibit F - Page 2 

Bundesanstalt fiir 

Finanzdienstleistungsaufsicht 

Seite 2 I 2 

Supervisory Authority (Bundesanstalt fOr 

Finanzdienstlelstungsaufsicht - BaFin). 

-BaFin 

As the issue "satisfactory cooperation" is concerned I would very much 

appreciate if the State of Missouri, Department of Insurance, Financial 

Institutions and Professional Registration could confirm the following in 

writing: 

The State of Missouri, Department of Insurance, Financial 

Institutions and Professional Registration will, upon written 

request, confirm or verify information relevant for supervisory 

purposes or obtain such information about the entity in question 

or its key functionaries, 

The State of Missouri, Department of Insurance, Financial 

Institutions and Professional Registration will, without having 

received a request, inform the BaFin without delay if it becomes 

aware of an incipient crisis relating to the entity in question, 

BaFin asserts to request confidential information only if it is 

relevant to lawful supervision or examination of a regulated 

entity or person, and shall use the confidential information 

received only for those purposes and any related criminal court 

proceedings. BaFin asserts to obtain prior written consent of the 

Authority before voluntarily passing on of any confidential 

information. 

Yours sincerely, 
70 


25968.043

Exhibit G 

Bundesanstalt ffir 

Flnanzdienstleistungsaufslcht 

BaFln 1 Postfach 12 53 1 53002 Bonn 

Shelter Reinsurance Company 

1817 West Broadway 

65218 COLUMBIA, MISSOURI 

VEREINIGTE STAATEN VON AMERIKA 

13.06.2016 

Reference: VA 45-I 2271-2016/0009 {Please quote in your reply) 

2016/1045237 

Conducting reinsurance business in Germany 

My letter of 09 January 2009 

Dear Sir or Madam, 

in my letter dated 09 January I informed you that Shelter Reinsurance 

Company was permitted to conduct reinsurance business in Germany 

from its registered head office. This information was based on the legal 

basis in section 121i (1) sentence 3 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz VAG) in the version which was 

valid until 31 December 2015. 

In consequence of an amendment of the German Insurance Supervision 

Act with effect from 01 January 2016 the regulation regarding insurance 

and reinsurance uhdertaklngs which are domiciled in non-EU/EEA member states conducting reinsurance business in Germany by the provision 

of cross-border services changed from 01 January 2016. 

Therefore, my aforementioned confirmation has expired and is not valid 

anymore. 

According to section 67 ( 1) sentence 1 of the German Insurance Supervision Act in the version of the Act to modernise Financial Supervision of 

Insurance Undertakings of 1 April 2015 (hereinafter VAG 2016) insurance and reinsurance undertakings domiciled in non-EU/EEA member 

states will need a licence from BaFin to conduct insurance or reinsurance 

business In Germany. These undertakings have to establish a branch in 

Germany (see section 68 (1) sentence 1 VAG 2016). Insurance andreinsurance undertakings which exclusively conduct reinsurance business 

from their registered head offices will not need a licence, if the European 

Commission has decided on the basis of Art. 172 (2) or (4) of DireCtive 

2009/138/EC of the European Parliament and of the European Council of 

25 November 2009 on the taking-up and pursuit of the business of InInsurance and 

Pension Funds Supervision 

Office address: 

Bundesanstalt fUr 

Flnanzdlenst!elstungsaufsicht 

Graurhelndorfer Str. 108 

53117 Bonn J Germany 

Contact: 

Mr. Skrobis 

Section VA 45 

Fon +49(0)228 4108-2373 

Fax +49(0)2284l08-1550 

poststellc@bafin.de 

www,bafln.de 

Operator; 

fon +49(0)2284108·0 

fax -i-49 (0)2 28 41 08-1550 

Official residences: 

53117 Bonn 

Graurhelndo:fer Str. 108 

53175 Bonn 

DrelzehnmorgenWeg 13-15 

Dreizehnmorgenweg 44·48 

60439 Frankfurt 

Marie-f:urie-Str. 24-28 
71 


25968.044

Exhibit G - Page 2 

Bundesanstalt fliiFinanzdienstleistungsaufsicht 

Page 21 2 

surance and Reinsurance (Directive 2009/138/EC) that the solvency regime of the relevant third country that applies to reinsurance activities 

of undertakings with their head office in that third country is equivalent 

to the system laid down in Directive 2009/138/EC. 

However, so far the European Commission has not decided on the solvency regime in Missouri resp. USA on the basis of Art. 172 (2) or (4) 

Directive 2009/138/EC. Thus, Shelter Reinsurance Company is notallowed to conduct reinsurance business in·Germany from its head office 

in Missouri anymore. If Shelter Reinsurance Company intends to conduct 

reinsurance business by underwriting new reinsurance contracts, Shelter 

Reinsurance Company has to apply for a licence and to establish a 

branch in Germany. Only the administration of the existing portfolio in 

order to terminate the activities in Germany does not require a licence. 

Please inform me whether Shelter Reinsurance Company conducts business in Germany and intends to continue its activities in Germany. 

Please confirm receipt of and compliance with this letter in writing. 

Yours faithfully, 

Skrobis 
72 


25968.045

Exhibit H 

Fw: Meeting in Baden Baden - decision by Gennan regulator BaFin iro 

non-adm~ted reinsurance Gmt;~~ TeresaHeim 091211201611:22AM 

Shelter Re Greg Lockard, CPCU, ChFC, ARe 

Director of Reinsurance Operations 

Shelter Reinsurance Company 

Office: (573)214-4326 

Cell: (573)489-1380 

glcckard@Shelterinsurance.com 

www.ShelterRe.com 

-- For.Narded by Greg Lockard/Reins:urancefShe!ter on 09!21/2016 11·22 .C..M--

To 

Joel A Smith/Reinsurance/Shelter 

Greg LockardiReinsuranceiShelter@shelter insurance, Trina J 

G ooch/Reinsura ncefShe!ter@ shelter insurance 

0910612016 12:42 PM 

Joel Smith, CPCU, CLU, ChFC, ARe 

Account Executive 

Shelter Reinsurance Company 

Phone: 1 (417)891-5824 

Cell 1(417)827-6'509 

Begin fO!warded message 

Meeting in Baden Baden- decision by German ro<ml~><•r 

non-admitted reinsurance 

Dear Joel, 

I hope yuu are doing well. 
73 


25968.046

Exhibit H - Page 2 

We write to you in respect of a recent interpretative decision published by German regulator 

BaFin regarding admitted reinsurance offered by Non-EU or Sll-equivalent-country reinsurers. 

According to this decision and German regulatory law non-admitted reinsurance is no longer (w. 

e. f. 1/1/16) permitted. This means that US reinsurers need authorization by BaFin to conduct 

reinsurance, which inter alia includes a branch office within Germany. Conducting reinsurance 

with an non-admitted reinsurer does not only preclude the deduction of reinsurance for the 

purpose of the solvency capital calculation. Even more so the conducting of reinsurance is an 

offense which may be fined by up to 5 years of prison I Conducting does not only include the 

formation of a reinsurance contract but already any action with the purpose of forming a 

reinsurance contract- therefore even a meeting. 

In view of this BaFin decision we would like to cancel our mutual meeting in Baden Baden and 

trust for your understanding. 

Please find herewith a link to the English version of the BaFin decision. 

https:lfwww. bafin.de/SharedDocsNeroeffentlichungen/EN/ Auslegungsentscheidung!VA/ae 1609 

01 rueckversicherung drittstaaten va en. html?nn-7858880 

If you have any questions please do not hesitate to call 

Cheers 
74 


25968.047

Fw: Monte Carlo Meeting with- G1'119~ TeresaHeim 

Shelter Re Greg lockard, CPCU, ChFC, ARe 

Director of Reinsurance Operations 

Shelter Reinsurance Company 

Office: (573)214·4326 

Cell: (573)489-1380 

glockard@Shelterinsurance.com 

www.ShelterRe.com 

----Forwarded by Greg LockardiReins uranceiShelter on 0912112016 11:20 AM---

DE>ar Greg, 

0912112016 11:20 .tiM 

Unfortunately we have to inform you tha has to cancel your meeting tomorrow based on 

the current decision of the German BaFin (Bundesanstaltfur Finanzdienstleistungsaufsicht) about the 

cooperation with reinsurance companies from third countries. 

We trust on your understanding aboutthis short-term information. 

Best regards 
75 


25968.048

For release on deJjvery 

2:00p.m. EDT 

September 28, 2016 

Testimony of 

Ambassador Robert Holleyman 

Deputy United States Trade Representative 

Office of the United States Trade Representative 

Executive Office of the President 

Before the 

Subcommittee on Housing and Insurance 

Committee on Financial Services 

United States House of Representatives 

Regarding: 

The Impact of U.S.- EU Dialogues on U.S. Insurance Markets 
76 


25968.049

Chaim1an Luetkemeyer, Ranking Member Cleaver, Members of the Subcommittee, the Office of 

the United States Trade Representative (USTR) regrets that we are unable to attend this hearing 

and respectfully submits the following written statement for the record. 

U.S. financial services and insurance firms help Americans to secure and grow wealth, finance 

opportunities, and prepare for retirement. These firms provide services critical to every sector of 

the economy, including small- and medium-sized businesses. Financial services exports 

contribute a $68 billion surplus to the U.S. balance of payments, reflecting the competitiveness 

of the American financial and insurance industries. 

Financial services, including insurance services, are an essential component to the transatlantic 

trade and investment relationship. Both the United States and the European Union (EU) have 

well developed and diverse insurance markets. U.S. insurance and reinsurance suppliers and 

workers have engaged with the EU market for many years and continue to find new market 

opportunities in the EU, while EU insurance and reinsurance companies fully pa~ticipate in the 

U.S. market. In general, USTR negotiates trade commitments to ensure expanded and continued 

access to global markets. 

The covered agreement with the European Union is a new type of agreement, for which we share 

statutory negotiating responsibility with the Department of the Treasury. A covered agreement is 

a specific type of agreement for the recognition of prudential measures relating to insurance or 

reinsurance. The Federal Insurance Office (FIO) Act of2010 (Pub. L. lll-203, title V, § 502) 

defines a "covered agreement" as "a written bilateral or multilateral agreement regarding 

prudential measures with respect to the business of insurance or reinsurance that- (A) is entered 

into between the United States and one or more foreign governments, authorities, or regulatory 

entities; and (B) relates to the recognition of prudential measures with respect to the business of 

insurance or reinsurance that achieves a level of protection for insurance or reinsurance 

consumers that is substantially equivalent to the level of protection achieved under State 

insurance or reinsurance regulation." 

The Department of Treasury and USTR are currently involved in negotiations with the EU for a 

covered agreement pursuant to the terms of the FlO Act and intend for this agreement with the 

European Union to help address challenges experienced by U.S. insurers and reinsurers resulting 

from implementation of Solvency II, the new insurance regulatory framework of the EU and to 

address concerns relating to treatment of EU reinsurers in the U.S. market. Our two agencies are 

vigorously pursuing these negotiations for a successful outcome. 

The EU's Solvency II regime allows for EU Member States to supervise insurers and reinsurers 

that operate in the EU but are from "non-equivalent" countries, such as the United States. 

Member States may subject those insurers and reinsurers to additional capital, governance, and 

reporting requirements. Treasury and USTR have made plain to the EU our concerns about 

several U.S.-based insurers and reinsurers that have received written notice from EU supervisors 

of potential action that could harm the competitiveness of these companies in the EU market. In 

the covered agreement negotiations underway, the United States seeks to level the playing field 

for U.S. insurers and reinsurers engaged with the EU market. We seek to address critical 
77 


25968.050

prudential regulatory areas relating to group supervision and solvency, reinsurance supervision, 

including collateral, and the exchange of regulatory and supervisory information across borders. 

In the United States, state insurance regulators are the main supervisors of the business of 

insurance and Treasury and USTR are engaged in the covered agreement negotiations within this 

existing regulatory framework. 

In addition to resolving concerns with respect to Solvency II, and as Treasury and USTR 

outlined in our letter of November 20, 2015, to Chairman Hensarling and Ranking Member 

Waters upon launch of these negotiations last year, we are pursuing objectives with respect to 

certain aspects of reinsurance regulation and exchange of information among insurance 

supervisors. We have welcomed our discussions with the relevant committees of jurisdiction as 

we have engaged in this work. 

Historically, in order for a U.S. insurance company purchasing reinsurance to obtain statutory 

credit for the liabilities assumed by the reinsurer, certain foreign reinsurance companies have 

been required to post collateral in order to engage in the U.S. market. The National Association 

of Insurance Commissioners adopted a revised Model Law in 20 II and since that time many 

states have revised collateral requirements based on that model. A covered agreement could 

address concerns regarding the treatment ofEU reinsurers operating in the United States, 

particularly regarding collateral, using an approach substantially similar to one already approved 

by state insurance regulators. 

The majority of non-affiliated reinsurance purchased by U.S. insurers is from non-U.S. 

domiciled reinsurance companies, with European Union reinsurance providers having significant 

U.S. market share. As we consider this issue for the covered agreement, Treasury and USTR 

will ensure that strong consumer protection continues and will seek to ensure the continued 

availability and affordability of insurance products for U.S. businesses and consumers. 

Regulators and supervisors for multinational financial services firms must have the capacity to 

exchange sensitive regulated entity information across national borders on a confidential basis 

for regulatory and supervisory purposes. Treasury and USTR are therefore discussing with the 

EU principles and procedures that could serve as guidance to facilitate information sharing 

between supervisors and regulators in both markets. 

As we move forward, we look forward to continued engagement with Congress, regulators and 

supervisors, and stakeholders. Treasury and USTR remain committed to working to conclude an 

agreement with the European Union that continues strong consumer protection and seeks to level 

the playing field for U.S. insurance and reinsurance suppliers. 
78 


25968.051

STATEMENT OF PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA 

HEARING ON "THE IMPACT OF US-EU DIALOGUES ON US INSURANCE MARKETS" 

HOUSE COMMITTEE ON FINANCIAl SERVICES 

SUBCOMMITTEE ON HOUSING AND INSURANCE 

SEPTEMBER 28, 2016 

The Property Casualty Insurers Association of America {PCI) represents nearly 1000 insurers and 

reinsurers that write more than $200 billion annually in coverage throughout the U.S. and world. 

Reflecting the strength in diversity that is a hallmark of our sector in the U.S. and internationally, our 

members range from small one state writers to companies that operate in more than 100 countries. 

Background 

Congress in the Dodd-Frank Act affirmed the state-based regulation of insurance and the McCarranFerguson Act and the states' historic focus on consumer and policyholder protection. But there have 

been a number of emerging gray areas as the new regulatory roles have evolved where additional 

Congressional clarity could be very helpful. For example, Congress abolished the Office of Thrift 

Supervision and transferred its authorities over thrifts with insurance affiliates to the Federal Reserve 

Board. But the Federal Reserve has taken a dramatically different approach to its supervisory role than 

the OTS, including actively participating in the International Association of Insurance Supervisors {IAIS) 

together with the newly created Federal Insurance Office {FlO) and numerous state insurance 

regulators. The Dodd-Frank Act includes a brief reference to FlO's role at the IAIS, but provides no 

guidance as to how the Federal Reserve, FlO and states should work together, what their goals should 

be, or how they should defend the U.S. insurance regulatory system internationally. 

The two supervisory perspectives of banking regulation and insurance regulation can be dramatically 

different, for example on issues such as capital leveraging and liquidity risk, or the more holistic issues of 

macro-economic stability versus policyholder protection. Congress recognized the need to address the 

regulatory divergence and provide more guidance with passage of the Insurance Capital Standards 

Clarification Act two years ago, clarifying that the Federal Reserve Board can apply insurance-based 

capital standards rather than bank-centric rules- to the insurance activities of insurance holding 

companies it supervises. legislation recently approved by the House Financial Services Committee, the 

Transparent Insurance Standards Act of 2016 {H.R. 5143), would similarly clarify the intent of Congress 

on international issues for U.S. federal negotiators to follow a more insurance-centric approach for 

insurance standards, including collaborating with the state insurance regulators and seeking mutual 

recognition of the U.S. insurance regulatory system internationally. 

Our state and federal representatives negotiating international insurance standards do their best to 

represent their agencies and ultimately the United States, but they have very different perspectives, 

constituencies and priority objectives. For example, in 2008 the Department of the Treasury, in its 

Blueprint for a Modernized Financial Regulatory Structure, recommended an optional federal charter for 

insurance. The Federal Reserve is in the process of creating a consolidated supervisory system for 

entities within its jurisdiction, essentially creating a second layer of holding company oversight. The 

states have generally opposed federal regulation of insurance except in limited instances. And yet all 

1 
79 


25968.052

with their very different regulatory perspectives and goals are in some manner representing the United 

States at the IAIS in the development of global insurance standards that could have profound 

implications for the future of our regulatory system, but no benefit to consumers. 

Congressional oversight has been very helpful to the evolving U.S. process, particularly in encouraging 

regulatory cooperation and transparency. By enacting legislation such as H.R. 5143 Congress can help 

ensure that our Team USA regulators have the same priorities and objectives and greater public 

transparency and Congressional clarity and oversight in carrying out their missions. This in turn will 

improve the likelihood of efficient and effective outcomes in international insurance regulatory 

deliberations that will serve consumers and maximize competition and innovation. 

H.R. 5143 does not hinder our federal representatives in international discussions. Instead, it gives them 

greater power and leverage because our negotiating partners will understand that all key players in the 

U.S., state and federal, have the same position to support or oppose a proposition. 

Specific Issues 

The State-Based Insurance Regulatory System Has Been Successful Because It Is Consumer Focused. 

For nearly 150 years, the states have regulated insurance and coordinated their activities through the 

National Association of Insurance Commissioners. Our state system of regulation has performed well in 

good times and bad, including during the financial crisis of 2008-2009. 

Indeed, the overall performance of the state-based regulatory system compares favorably with that of 

any other financial services regulation. In terms of size, degree of consumer protection, financial 

strength and amount and diversity of competition, the U.S. state-based insurance regulatory system is 

unmatched by any other system. We are pleased therefore that H.R. 5143 begins its findings with a 

recitation of this fundamental reality. 

This success is not just an accident or an historical anomaly. The U.S. insurance regulatory system has 

been so successful because it focuses on the end user-the consumer. So we strongly support H.R. 

51 43's emphasis on putting consumer protection first (as does our state-based regulatory system), and 

the bill's focus on assuring that state regulation is respected in all final outcomes of international 

regulatory discussions. 

The U.S. Needs to Speak with One Voice in International Regulatory Discussions. 

In recognition of the strong performance of state regulation, Dodd-Frank reiterated the primary role of 

the states in insurance regulation. However, it also created the FlO in the Treasury, which under Title V 

is to coordinate federal policy and represent the Secretary of the Treasury, as appropriate, at the 

International Association of Insurance Supervisors. The FlO Director has since assumed a leadership 

role at the IAIS, chairing one of its two most important committees. In addition, Dodd-Frank gave the 

Federal Reserve Board regulatory authority over insurers with thrifts and those designated as 

systemically important. Based on this regulatory authority, it, too, is an active member of the IAIS. 

Meanwhile, the NAIC and states also serve on IAIS committees, and the states have the largest amount 

of technical expertise in all areas and are legally responsible and accountable for the health and 

regulation of the insurance markets in their states. 

2 
80 


25968.053

Unfortunately, without more Congressional guidance on their objectives and priorities, our U.S. and 

state representatives can have conflicting perspectives and priorities. For example, state and two 

federal representatives all took different positions on whether to eliminate consumer group and 

stakeholder involvement in IAIS working groups. Both transparency and accountability have since 

suffered. 

Accordingly, we support the Congressional clarity provided in H.R. 5143 to encourage greater 

collaboration and consensus among the regulators, requiring the regulators to work towards achieving 

consensus on policy positions in all international insurance regulatory discussions, backed up by 

reporting mandates. Congress often requires joint rulemakings or actions by agencies with overlapping 

jurisdiction. Federal agencies often fail to achieve such consensus within the statutorily required time, 

continue working on the issues in the meantime, and under Congressional pressure eventually get to the 

same page. While agreement among multiple agencies can be difficult, it is a critical effort to assure all 

representatives of the U.S. speak with one voice. It strengthens that voice and also increases the 

likelihood that any international standard will be effective and worthy of serious consideration. While 

there is no penalty in the bill that would limit the agencies' ability to work together, Congress can and 

should set the appropriate goals and required outcomes to ensure a cooperative approach. 

Transparency and Accountability Are Often lacking in International Regulatory Discussions. 

As previously noted, the IAIS voted in 2014 to close its working group meetings, with a few rare 

exceptions, thereby reducing the ability of U.S. companies and consumers to participate meaningfully in 

the process. Every bit as important, the Financial Stability Board, which was given extremely broad 

powers by the G20 ministers to set the regulatory agenda for all financial services sectors including 

insurance, operates behind closed doors with an occasional invitation to selected companies. The 

Treasury, Fed and SEC are the sole representatives of the U.S. and the states are not present, even when 

insurance regulatory issues are considered. 

Because transparency is a core value and is fundamental to our system, and because it produces the 

best overall outcomes, it is critically important that Congress act to reverse the trend toward closing 

doors and excluding interested parties. The NAIC holds open meetings and conference calls of the great 

majority of its working groups and offers a good model of openness that has contributed substantially to 

the success of our system. 

H.R. 5143 will assure increased transparency by establishing greater transparency as a negotiating 

objective and providing specific procedures to assure transparency and accountability (for example 

public notice and comment periods in connection with the congressional layover provisions). The bill 

also requires special and periodic reports on transparency. 

The other element of transparency that H.R. 5143 addresses is the current lack of information from 

federal agencies before, during, and after international insurance regulatory deliberations at the IAIS, 

FSB and elsewhere. Congress makes the laws and has a unique role in protecting state regulation and 

setting the boundaries and limits for federal involvement in insurance. Congress can and should fulfill its 

role consistent with the McCarran-Ferguson Act, in which Congress generally reserved insurance 

regulatory authority to the states. Under H.R. 5143, Congress will be kept regularly involved in 

international trade negotiations and the draft bill would appropriately require a measure of 

accountability to Congress for international standard setting negotiations as well. 

3 
81 


25968.054

The Urgent Need for Mutual Recognition with the EU 

The European Union --the second largest insurance market in the world-- is now beginning 

implementation of Solvency II, a new insurance regulatory approach for Europe. Solvency II is based in 

part on global banking standards that reflect Europe's more concentrated and interconnected market, 

its tradition of greater intervention into the private sector, and its desire for a more one-size-fits-all 

common market standard. Solvency ll's approach and structure is fundamentally different from the 

time-tested state-based insurance regulatory system in the U.S. that is more focused on consumer 

protection and supported by extensive data reporting and guaranty funds in every state. Solvency II is 

more focused on protecting investors than consumers. It may be the right system for Europe, but it is 

not right for the U.S. For example, all of the Team USA representatives have suggested that portions of 

Solvency II, such as required market valuation of liabilities, would not be beneficial to U.S. consumers. 

Unfortunately, Solvency II contains a requirement that companies from "third countries", including the 

U.S., be treated differently unless the third country is deemed to be equivalent, a highly prescriptive 

process. The U.S. understandably, and in consideration of the success of our different and time tested 

system, declined to engage in that process. 

Just before Solvency II implementation, UK regulators demanded extensive data reporting from U.S. 

companies, reaching beyond Europe to the U.S. holding companies, thereby impliedly giving 

extraterritorial effect to Solvency II. Since then, German regulators have gone much farther-actually 

terminating the ability of U.S. companies to operate there in their current forms, even though they had 

been in the market and fully regulated for decades. This kind of unjustified punitive action is no longer 

just a threat-it is happening right now. 

Ironically, the European Union found the U.S. sufficiently "equivalent" to prevent Solvency II from 

requiring more capital for its companies doing business in the U.S. However, they have so far refused an 

entirely consistent finding of equivalence that would equally benefit U.S. companies doing business in 

Europe. 

We have been in nearly constant touch with our covered agreement negotiators at the Treasury and 

USTR and with the NAIC. Attached to this testimony is a copy of a letter PC! President and CEO David 

Sampson wrote to the key US negotiators. The letter sets forth PCI's views on the appropriate U.S. 

priorities for a covered agreement and, in particular, the need to ensure that any final deal includes 

mutual recognition. We also appreciate the many expressions of congressional concern and we urge 

Congress to continue to exercise oversight over the covered agreement process. We believe that all U.S. 

parties fully understand the gravity of the situation and are doing their best at the negotiating table. 

But, if we do not succeed diplomatically, we fear there will be louder and more persistent calls for 

retaliatory action. 

The Need for Continued Vigilance and Engagement in all Areas of International Regulatory Discussions 

There is no area of insurance regulation not being discussed in international forums-capital, 

governance, executive remuneration, market conduct, resolution, cyber security and the role of 

technology, among others. The U.S. regulatory system has addressed each of these areas-often with 

decades of successful results for consumer protection and for a competitive and financially strong 

4 
82 


25968.055

market. So the collective challenge for all of us-Team USA, the Congress and U.S. consumers and 

industry is to work together for outcomes that respect our system as fully compliant with Solvency II. 

This means working for outcomes in every area that are sufficiently high level and principles based that 

they allow proven effective systems, although different, to be fully recognized. Below we provide a few 

examples of potentially beneficial outcomes. 

Capital issues have tended to dominate international discussions. We think the proven effective 

jurisdictional systems should be the essential elements of any international system. Additional 

capital, if any, should only be required when well identified vulnerabilities and systemic risk is 

demonstrated. 

With regard to governance, the critical issue is to maintain a flexible and proportional approach 

that focuses on outcomes and essential functions, not a one-size-fits-all mandate that does not 

reflect jurisdictional law and/or very different corporate structures. So far, the work of the FSB, 

IAIS and OECD are consistent with these notions and we urge that all players continue in that 

vein. 

• Executive compensation is receiving increasing attention. Our view is that compensation should 

be a market determination, subject, however, to over-all consistency with high level principles. 

International market conduct standards should be based on the reality that consumers benefit 

not just from regulatory restrictions but also from innovation and competition. Therefore, a 

careful balance should be struck and costs as well as benefits should be weighed. 

Resolution of distressed or insolvent insurers is now receiving significant regulatory focus. The 

U.S. has a proven effective system that should not be impinged upon. Specifically, the role of the 

courts in the U.S. system should be emulated elsewhere and different levels of intervention 

provided pursuant to duly enacted legislation. 

Cyber security of insurers is being comprehensively addressed in the U.S. at the federal and 

state level. We are still working on achieving the best balance of security, cost and cooperation. 

Accordingly, other than some high level papers, US negotiators should not agree to positions in 

international regulatory discussions before the U.S. completes its process. 

As with cyber security, U.S. regulators are deeply involved in considering the effects of 

technology on insurers and the consumers they serve. Again, we think this process should reach 

finality before international standard setters go beyond their current work on identifying the 

impacts and challenges technology presents. 

5 
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25968.056

Conclusion 

Since the enactment of Dodd-Frank, the international insurance regulatory world has evolved in ways 

that may not reflect congressional intent to protect the strength and competitiveness of the U.S. 

insurance market and its consumer focused state-based regulatory system. We commend the Congress 

for its efforts to date and urge swift action on H.R. 5143, which will improve international insurance 

regulatory deliberations and outcomes and clearly and effectively promote U.S. markets, the interests of 

our consumers and our proven effective state-based insurance regulatory system. 

6 
84 


25968.057

..... Pel .~~! • ...• .... ...... Property Casualty Insurers 

Association of America 

Advocacy. Leadership. Results. 

August 14, 2015 

The Honorable Jacob J. Lew 

Secretary of the Treasury 

US Department of the Treasury 

1500 Pennsylvania Av., NW 

Washington, DC 20220 

Mr. Michael Froman 

US Trade Representative 

Office of the US Trade Representative 

600 17th Street N.W. 

Washington, DC 20SD6 

Mr. Ben Nelson 

Chief Executive Officer 

National Association of Insurance Commissioners 

1100 Walnut Street, Suite 1500 

Kansas City, MO 64106-2197 

Dear Secretary lew, Ambassador Froman and Senator Nelson: 

David A. Sampson 

President and CEO 

The Property Casualty Insurers Association of America's (PCI) approximately one thousand member 

companies provide insurance and reinsurance throughout the US and the world. Our membership 

includes single state mutual insurers, regional powerhouses, and international diversified financial firms. 

PCI has members in every US state and every global region, including a majority of the top 50 

performing insurers ranked by Ward's and half of the top 10 insurers ranked by JD Power for consumer 

satisfaction. PCI's mission is to promote and protect the viability of a competitive private insurance 

market to the benefit of consumers and insurers. 

The US Treasury Department, the United States Trade Representative (USTR) and the state insurance 

regulators are approaching a critical juncture in determining how to assure mutual recognition of the US 

insurance regulatory system by major trading partners, especially the European Union (EU), and 

whether to address issues regarding the US collateral for reinsurance system (potentially using the 

covered agreement authority under Dodd-Frank). This letter provides perspectives on how best to 

proceed in resolving each of these matters of importance. PCI has a long history of support for state 

regulation of insurance, but we also recognize Treasury's statutory responsibilities under the DoddFrank Act. PCI will continue to work constructively with Treasury, USTR, and state insurance regulators 

on these important issues. 

444 North capitol Street NW, Suite 801, Washington, DC 20001-1508 Telephone 202-639-0490 Facsimile 202-639-0494 \VWW.pciaa.net 
85 


25968.058

2 

I. Mutual Recognition 

Treasury, the USTR and the state regulators have worked diligently for many years to encourage a 

robust international insurance trade, including actively working to facilitate trading of risks between the 

two largest insurance markets -the European Union and the United States (who together oversee 

roughly 70% of the world's insurance market). The EU has recently adopted a new regulatory framework 

intended to modernize its insurance regulatory system, Solvency II, which generally provides that, in 

order for non-EU insurers to be treated in the same way as European insurers, their home regulatory 

system must be deemed "equivalent" to Solvency II. Specifically, the Solvency II Directive (Directive 

2009/138/EC), targeted for implementation from January 1, 2016, requires foreign countries to apply for 

an "equivalence" determination to avoid discriminatory treatment. Equivalence determinations are 

based on a series of requirements that the foreign country must have equivalent rules in areas such as 

group capital requirements, group supervision and reinsurance. State and federal representatives have 

indicated that the US will not apply for an equivalence determination, raising questions about whether 

US (re)insurers with subsidiaries in Europe will receive discriminatory treatment, such as being subjected 

to additional layers of EU group supervision and capital requirements. 

In 2012, Treasury, US state regulators, the European Commission and EU regulators began the US-EU 

Dialogue Project to improve mutual understanding of the region's different regulatory systems, 

processes and markets. The state regulators also made significant modifications in state insurance 

regulation, including adoption of NAIC models that are now being implemented in the states on Own 

Risk and Solvency Assessment, Enterprise Risk Management requirements, and expansion of the Model 

Holding Company Act. 

Most relevant, in 2011 the NAlC also adopted changes to the Credit for Reinsurance Model law and 

Regulation reducing (in some cases to zero) required reinsurance collateral for non-US reinsurers 

reinsuring risks in the US, provided they are domiciled in a "qualified jurisdiction" and their security 

level, as determined by several recognized rating agencies, meet certain levels. These developments 

should have helped achieve greater mutual recognition and appreciation for the US state-based 

regulatory system. This does not seem to be the case based on European statements to date, and 

Treasury's Federal Insurance Office (FlO} has indicated that it will be seeking EU assurances of fair 

treatment of US (re)insurers. However, with no specific equivalence application in process, time is 

quickly running out for a mutual recognition agreement or understanding before January 1, 2016 in 

order to avoid the uncertainty of discriminatory treatment and a potential trade war. In particular, 

significant pressure continues from parts of Europe for the US to completely eliminate reinsurance 

collateral requirements. Conversely, in some European countries, US reinsurers are no longer acceptable 

for credit for reinsurance purposes and in other countries, regulators are requiring US reinsurance 

companies to convert their branches to subsidiaries and ring-fence capital in excess of the amounts 

required in the US. 

PCI strongly supports mutual recognition of robust regulatory regimes, including the US and EU, and has 

raised with the federal agencies, states, and members of Congress the importance of preventing EU 

discrimination against US (re)insurers. PC! has also encouraged US insurance stakeholders, to the extent 

that a covered agreement with the EU is negotiated, to insist that a full mutual recognition commitment 

be a fundamental part of any overall deal. 
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3 

II. Covered Agreement- Reinsurance Collateral 

Background 

The Dodd-Frank Act authorizes the Treasury Secretary and the USTR to jointly negotiate and enter into 

covered agreements on behalf of the United States, after consultation with Congress on the nature of 

the agreement, how it would achieve statutory goals, and its implementation and general effect. 

Covered agreements are defined under the law as agreements between the US and foreign authorities 

regarding prudential measures with respect to the business of insurance or reinsurance that achieve a 

level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of 

protection achieved under State insurance or reinsurance regulation. State insurance measures are only 

subject to preemption to the extent that FlO determines that the measure results in less favorable 

treatment of a non-US insurer that is subject to a covered agreement than a US insurer domiciled, 

licensed, or otherwise admitted in that State. The single issue that Congress discussed during the DoddFrank Act that fit this description is state requirements for reinsurance collateral. 

While state Insurance regulators do not have direct oversight over non-US reinsurers, the regulators set 

the qualifications for the reinsurance credit claimed by primary insurers who purchase reinsurance. 

Primary insurers do not receive solvency credit from state regulators for reinsurance unless a state 

regulator finds that the non-US reinsurer is financially sound and, where appropriate, there is 

reinsurance collateral in place. The Treasury Department adopts a similar approach in requiring that 

non-US reinsurers post collateral on risks ceded to them by Treasury-approved surety bond writers. 

Reinsurance collateral can add additional transactional costs and is not needed by all primary insurers. 

However, a majority of reinsurance is purchased from foreign reinsurers and some primary insurers are 

concerned about their ability to collect in the event of a dispute. Regulators want the ability to ensure 

that primary insurers have access to adequate collateral to compensate policyholders in large events 

that trigger reinsurance coverage. 

In 2011, the NAIC passed changes to its Credit for Reinsurance Model Law and Regulation that create a 

sliding scale for reinsurance collateral requirements based on the reinsurer's financial strength, claims 

payment history, and licensure in a qualified jurisdiction. A number of European countries, Bermuda and 

Japan have been recognized by the NAIC as qualified jurisdictions and more than 30 foreign reinsurers 

have been certified, most benefitting from significantly reduced reinsurance collateral requirements for 

their primary Insurance purchasers to receive full credit for reinsurance. A majority of states 

representing a majority of insurance premiums have implemented the new model law over the past 

couple of years. Most of the remaining states will likely have achieved that goal in the near future. 

(Re)insurers have largely supported the NAIC model in the states and PCI has discouraged state 

deviations. The NAIC has also developed a process both for certifying reinsurers at the state level (the 

"passporting" process) and for designating "qualified jurisdictions," which are identified as having 

sufficiently robust regulatory standards for reinsurers. While they have not yet achieved complete 

national uniformity, the states have made rapid progress and are well on their way toward that goal. 

We also note that the NAIC is committed to reviewing, on a periodic basis, the collateral levels 

established in the current model law and regulation, creating the potential for further relaxation of 

collateral requirements in the future as circumstances may warrant. 
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4 

Stakeholder concerns 

There are three primary criticisms raised by the Federal Insurance Office (FlO) regarding the NAIC 

process: (1) qualifying determinations are not nationwide; (2) the federal government is better 

positioned to balance insurance determinations with broader US economic or regulatory policy; and (3) 

the NAlC model depends too heavily upon assessments of reinsurers' creditworthiness by credit rating 

agencies (CRAs). FlO has suggested that it is well-positioned to make determinations about qualifying 

foreign jurisdictions. lt is further suggested that the states' lack of uniformity and focus on national 

interest leads to a conclusion that Treasury and USTR should pursue a covered agreement for 

reinsurance collateral requirements, based on the NAIC for Reinsurance Model Law and Regulation. 

State regulators have highlighted that the business of insurance is regulated by the states as Congress 

has confirmed multiple times with reference to the McCarran-Ferguson Act, partly in recognition of the 

local insurance risks and needs that vary across the country. State regulators have also observed that 

the NAIC process for determining reinsurance collateral requirements is rapidly moving towards national 

uniformity without a covered agreement and that shifting from the states to the Federal Insurance 

Office control of the balance between protecting insurance policyholders and other national interests is 

not an express statutory goal of the Dodd-Frank Act. 

There was broader consensus during Congressional Dodd-Frank Act deliberations that federal 

government reliance on CRAs was suboptimal. However, replacing existing private sector analysis with 

new government evaluations has to be done carefully to avoid creating much more burdensome and 

expensive certification. 

Supporters of state insurance regulation have also noted that there are alternatives to achieving 

uniformity without a fully preemptive covered agreement, such as setting a deadline for state uniformity 

(as done in NARAB legislation in the Gramm-leach-Billey Act) or having a covered agreement preempt 

only those states that have failed to uniformly implement the NAIC model. The threat of covered 

agreement negotiations has probably encouraged the state race towards a more uniform system of 

reduced collateral and a covered agreement could be structured to further expedite this process. 

However, if a covered agreement is subsequently adopted preempting state law there could be 

potential significant complications as state insurance departments still ultimately regulate primary 

insurers and determine their solvency standards. A covered agreement would not be striking down 

explicit state requirements for reinsurance collateral, but rather in essence demanding that the states 

recognize f\111 credit for reinsurance for primary insurers despite contrary state laws·· creating practical 

implementation challenges and potential constitutional questions if not carefully constructed. 

PC! has advocated in several instances for increased uniformity in credit for reinsurance provisions. PCl 

is open to multiple approaches towards the same outcome but we are concerned about the unintended 

consequences of federal standards layered on top of and potentially conflicting with state requirements. 

Preemption would create more uncertainty to the extent that a covered agreement compromise 

reduces reinsurance collateral as the Dodd-Frank Act requires, as a condition of preemption, that the 

agreement achieve a level of protection for insurance or reinsurance consumers that is substantially 

equivalent to the level of protection achieved under State insurance or reinsurance regulation. 
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5 

Members of Congress are expressing increasing concern about international pressures being applied to 

state insurance regulation. The growing angst is evidenced in the number of bills being introduced or 

that have passed key Senate committees or in House appropriations reports that would clarify 

Congressional intent in opposition to international pressures for a harmful, global, one-size-fits-all 

regulatory approach. Congress dearly intended the covered agreement process to be an option to 

facilitate improved mutual recognition for reinsurance and to address foreign complaints about US 

discrimination in reinsurance collateral. However Congress also kept the provision intentionally very 

limited and not mandatory. Suggestions by some foreign parties that a covered agreement be used as a 

vehicle to address issues unrelated to reinsurance collateral requirements, such as trying to facilitate 

further federal intrusion into insurance group supervision, fall far outside the limited Congressional 

delegation and could generate significant Congressional and stakeholder opposition. The greater the 

departure from the NAIC credit for reinsurance models, and the more extraneous issues are included, 

the greater the danger of creating controversy and even opposition. 

Transparency and Cooperation 

Treasury and USTR could help pave the way for acceptance of any agreement negotiated by ensuring 

that the negotiations are conducted with full transparency. The Dodd-Frank Act requires consultation 

with Congress before covered agreement negotiations are initiated and again 90 days before the 

agreement may enter into force. Complaints have been escalating in Congress, with bipartisan and 

bicameral concern, against the worsening lack of transparency in international insurance negotiations. 

Similar bipartisan and bicameral calls have been made for federal and state agencies to work together 

with respect to insurance to coordinate US policy and negotiating strategy. Concerns about covered 

agreements reflect not only opposition by some to further preemption of state law (or layering of 

additional federal law), but also anxiety that the US negotiators will reduce consumer protections, tack 

on extraneous provisions, fail to demand real value for the US in return (such as mutual recognition), or 

fail to coordinate between the states and federal agencies a common approach so that any federal 

commitments can be incorporated into the state solvency process as seamlessly as possible. 

The USTR typically leads a very robust public and Congressional vetting process when negotiating trade 

agreements, which includes extensive opportunity for stakeholders to weigh in. When negotiating on 

issues affecting insurers, USTR has worked closely and productively with state insurance regulators. This 

was an important reason for the inclusion of the USTR in the covered agreement negotiating process. All 

covered agreement stakeholders would benefit from a similar transparent and inclusive consultation 

process throughout negotiations, including close and regular consultation with state insurance 

regulators and domestic (re)insurers. PC! appreciates the initial efforts by the USTR, FlO and the states 

to solicit and receive stakeholder input. PC! strongly believes that the best possible outcome can only be 

obtained ifTreasury and USTR as well as state insurance regulators engage proactively with each other 

regarding any negotiation of a covered agreement. The more Congressional and other stakeholder 

consultation can be achieved with adequate transparency and cooperation, the greater the likelihood of 

mutual satisfaction with lessened political opposition. 
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6 

Ill. Conclusion 

PCI strongly supports efforts to achieve mutual recognition especially from the EU for US (re)insurers. 

PCI also appreciates the desire for increased uniformity and ongoing improvements in the regulation of 

reinsurance collateral. While PCI will not take a position in support or against a covered agreement until 

our members know specifically what it would include, we have and will continue to express our views on 

how best to achieve mutual recognition and how best to move forward to address remaining 

reinsurance collateral issues. 

PCI hopes our comments will be received in the constructive spirit in which they are offered and we 

pledge to continue to work cooperatively with all stakeholders. If you have questions or need further 

information from J>CI please contact me or Bob Woody at (202} 639-0496 or Robert.Woody@pciaa.net. 

Sincerely, 

~:~ David A. Sampson 
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Questions for Thomas Sullivan, Associate Director, Board of Governors of the Federal 

Reserve System from Chairman Luetkemeyer: 

1. The pending notice of proposed rulemaking (NPR) on incentive-based compensation 

does not distinguish between insurance savings and loan holding companies (ISLHCs) and 

large banks. Given that the Board has acknowledged the important differences in the 

business models of these two types of institutions, will you commit to a horizontal review of 

ISLHCs before the rule is made final for these companies? 

Consistent with the statutory requirements of section 956 of Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), the Agencies1 joint notice of proposed rule-making2 

covers all depository institution holding companies, including all savings and loan holding 

companies.3 As described in the preamble, the proposed ru1e does not establish a rigid, one-sizefits-all approach. Rather, the Agencies have tailored the requirements of the proposed rule to the 

size and complexity of covered institutions. In addition, the proposed rule would allow firms to 

tailor 1he incentive-based compensation arrangements to the nature of a particular institution's 

business and risks, as long as those incentive-based compensation arrangements appropriately 

balance risk and reward. The Agencies have encouraged institutions to provide feedback on the 

potential impact of the proposed rule on covered institutions through the comment process.4 The 

Agencies have included numerous questions, touching on all aspects of the rule. The comment 

process is intended to help us assess and address the impact of the rule on all types of covered 

institutions, including insurance savings and Joan holding companies. At the request of certain 

insurance companies, we have met with those companies, and will include summaries of these 

meetings in the rulemaking record. Through these meetings, we will be able to obtain a deeper 

understanding of how their compensation practices work to inform the final rule. Similarly, the 

Agencies will consider your comments, and all other comments received, as a final rule is 

developed. 

1 Office of the Comptroller of the Currency; Board of Governors of the Federal Reserve System; Federal Deposit 

Insurance Corporation; Federal Housing Finance Agency; National Credit Union Administration; and U.S. 

Securities and Exchange Commission. 2 81 FR 37670 (July 10, 2016). 3 Section 956 ofthe Dodd-Frank Act defines "covered financial institution" to include any of the following types of 

institutions that have $1 billion or more in assets: (A) a depository institution or depository institution holding 

company, as such terms are defined in section 3 of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1813); 

(B) a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o); (C) a · 

credit union, as described in section 19(b)(I)(A)(iv) of the Federal Reserve Act; (D) an investment adviser, as 

such tennis defined in section 202(a)(ll) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(l J )); (E) 

the Federal National Mortgage Association (Fannie Mae); (F) the Federal Home Loan Mortgage Corporation 

(Freddie Mac); and (G) any other fmanciaJ institution that the appropriate federal regulators, jointly, by rule, 

detennine should be treated as a covered fmancial institution for these purposes. 

' As of the preparation of this response, the Agencies have already received multiple comments letters regarding the 

application of the proposal to insurance SLHCs and have met with insurance industry representatives. 
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Questions for The Honorable Thomas Sullivan, Associate Director, Board of Governors of 

the Federal Reserve Svstem from Chairman Luetkemeyer: 

2. The incentive-based compensation NPR would subject not only ISLHCs, but their 

insurance subsidiaries, to restrictions on incentive-based compensation. Given that (1) 

other financial regulators did not apply the rule's restrictions to functionally regulated 

subsidiaries, (2) ISLHCs' insurance subsidiades are functionally regulated by the states, 

and (3), the statute does not require the rule to apply to insurance subsidiaries, will you 

exclude ISLHCs' insurance subsidiaries from the final rule'! 

Section 956 ofthe Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 

Act) requires the Agencies 1 to adopt rules regarding incentive based compensation that apply to 

depository institution holding companies, including all savings and loan holding companies.2 

Section 956 does not grant the Agencies explicit exemptive authority. 

The Agencies continue to consider the comments received on the proposaL At the request of 

certain insurance companies, we have met with those companies, and will include summaries of 

these meetings in the rulemaldng record. Through these meetings, we have been able to obtain a 

deeper understanding of how their compensation practices work to inform our work towards a 

final rule. 

1 Office of the Comptroller of the Currency (OCC); Board of Governors of the Federal Reserve System (Board); 

Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); National Credit Union 

Administration (NCUA); and U.S. Securities and Exchange Commission (SEC). 2 Section 956 of the Dodd· Frank Act defmes "covered financial institution" to include any of the following types of 

institutions that have $1 billion or more in assets: (A) a depository institution or depository institution holding 

company, as such terms are defined in section 3 of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1813); 

(B) a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o); (C) a 

credit union, as described in section 19(b)(l)(A)(iv) of the Federal Reserve Act; (D) an investment adviser, as 

such term is defined in section 202(a)(ll) ofthe Investment Advisers Act of 1940 (15 U.S. C. &Ob-2(a)(ll)); (E) 

the Federal National Mortgage Association (Farmie Mae): (F) the Federal Home Loan Mortgage Corporation 

(Freddie Mac); and (G) any other fmancial institution that the appropriate federal regulators, jointly, by rule, 

dctennine should be treated as a eovered financial instii1Jtion for these purposes. 
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25968.065

Questions for Thomas Sullivan, Associate Director, Board of Governors of the 

Federal Reserve Svstem from Chairman Luetkemeyer: 

3. In its ANPR on insurance capital standards published this summer, the Fed has 

worked to tailor capital standards to the insurance companies under its supervision. 

As you know, Congress supports that approach and enacted legislation to provide 

the Fed with that flexibility. However, the building blocks approach (BBA) in the 

ANPR is much more consistent with the state insurance risk-based capital system 

than the consolidated approach (CA). Would you consider keeping the BBA 

framework for all insurance companies under Fed supervision? What arc the 

advantages of such an approach? 

The Dodd-Frank Wall Street Reform and Consumer Protection Act was amended to 

allow the Federal Reserve Board (Board) to tailor its minimum capital requirements as 

they would apply to persons regulated by state or foreign insurance regulators. The 

Board has flexibility to develop risk-based capital requirements that are tailored to 

appropriately retlect the risks of supervised institutions significantly engaged in insurance 

activities. Moreover, our supervisory program, complementary to and in coordination 

with the states, continues to be tailored to consider the unique characteristics of insurance 

operations and rely on the work of the state regulator(s) to the greatest extent possible. 

The Board's advance notice of proposed rulemaking (ANPR) requests input from the 

public on two possible options for capital standards for supervised insurers. The Board 

has not reached decisions on approaches to be used to build a capital standard for 

supervised insurers. As stated in the ANPR, the Board's initial analysis of the relative 

strengths and weaknesses of the consolidated approach indicates that this approach may 

be an appropriate regulatory capital framework for the systemically important insurance 

companies. As a consolidated capital framework, this approach would cover all material 

risks of the systemically important insurance companies, reduce the opportunity for 

regulatory arbitrage and risk of double-leverage, and more easily enable supervisory 

stress testing and other macroprudential measures for these companies. We remain 

mindful of the advantages of the building block approach, which we discuss in the 

ANPR, and appreciate advantages to applying this approach to all supervised firms 

significantly engaged in insurance activities. In light of the Board's supervisory 

objectives, the advantages of the consolidated approach for the systemically important 

insurance companies, which tend to be large, internally and externally complex 

institutions, are most salient. It would be premature for me to comment on this 

framework before staff has finished its research vetting potential options. As indicated 

by the questions included in the ANPR, the Board welcomes comment on the 

considerations that should guide the development of its insurance regulatory capital 

framework for the two populations of supervised institutions significantly engaged in 

insurance activities, as well as whether the consolidated approach is appropriate to apply 

to systemically important insurance companies and key challenges in tllis application. 
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Queslions for Thomas Sullivan, Associate Director, Board of Governors of the Federal 

Reserve System from Representative Posey: 

1. The mission of the state insurance regulators is to protect the interests of the 

policyholder and those who rely on the insurance coyerage provided to the policyholder 

first and foremost. The regulators also support facilitating the financial stability and 

reliability of insurance institutions for an effective and efficient marketplace for insurance 

products. What is the mission of the Board of GoYernors Federal Reserve System (FRB) 

with respect to insurance and how does it differ from the state regulations? What is the 

FRB's mission with regard to international insurance regulation? 

With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protect Act 

(Dodd-Frank Act), the Federal Reserve Board (Board) was assigned responsibility as the 

consolidated supervisor of insurance holding companies that own thrifts (insurance depository 

institution holding companies), as well as insurance companies designated by the Financial 

Stability Oversight Council (FSOC) to be supervised by the Federal Reserve (systemically 

important insurance companies). The Federal Reserve's principal supervisory objectives for the 

insurance fmns that it oversees include protecting the safety and soundness of the consolidated 

firms, as well as mitigating risks to U.S. financial stability. These objectives complement the 

primary mission of state legal entity insurance supervisors, which tends to focus on the 

protection of policyholders, adding the Federal Reserve's perspective that considers the risks 

across the entire firm. Moreover, the Federal Reserve's insurance prudential standards will not 

alter or replace the existing state-based framework, including capital requirements at the legal 

entity level, that are already in place. We continue to coordinate with state insurance regulators 

in the protection of policyholders and aim to avoid duplications of their supervision, leveraging 

the work of state insurance regulators where possible. The state insurance regulators' mission of 

protecting policyholders and the Federal Reserve's objectives of ensuring the safety and 

soundness of the consolidated firm and mitigating an FSOC-dcsignatcd firm's risk to U.S. 

financial stability are not mutually exclusive propositions. 

With regard to international insurance standard setting, some of the insurance holding companies 

subject to Federal Reserve supervision are internationally active firms that compete with other 

global insurers to provide insurance products to businesses and consumers around the world. 

Onr supervisory activities for these finns include collaborating with our regulatory counterparts 

internationally. As part of this role, in late 2013, the Federal Reserve joined our &iate insurance 

supervisory colleagues from the National Association of Insurance Commissioners (NAIC) and 

the Federal Insurance Office (FIO) as members of the International Association of Insurance 

Supervisors (IATS). Accordingly, the Federal Reserve has been and will continue to be engaged, 

in partnership with fellow U.S. members -the FlO, NAIC, and state insurance regulators in the 

development of global standards for regulating and supervising internationally active insnrers. 

These standards include, among others, capital, liquidity planning and management, effective 

resolution, and group supervision. As a general proposition, we believe in the utility of having 

effective global standards for regulation and supervision of internationally active financial firms. 

When implemented consistently across global jurisdictions, such standards help provide a level 

playing field for global financial institutions. Further, consistent global regulatory standards can 

help limit regulatory arbitrage and jurisdiction shopping and can promote financial stability. 
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-2-

It is important to note that the IAIS does not have the ability to impose requirements on any 

national jurisdiction, and implementation in the U.S. of any IAIS standard would have to be 

consistent with U.S. law and comply with U.S. administrative rulemaking process. 

2. Does the l<'RB agree with the proportionality principle, namely that regulation should 

take into account a company's nature, scale and complexity? If so, please explain how the 

FRB will implement a proportional supervision approach to the insurance holding 

companies it supervises. 

In its consolidated supervision of insurance finns, the Federal Reserve remains cmmiritted to 

tailoring its supervisory approach, including a domestic capital framework and other prudential 

standards, to the business of insurance, reflecting the different size, scale, complexity, and nature 

of the business models and systemic importance of the supervised institutions. In particular, 

among other requirements for consolidated supervision, section 171 of the Dodd-Frank Act 

requires the Board to develop minimum risk-based capilal requirement<> for supervised insurance 

firms. The Board will take into account the greater flexibility provided by the Insurance Capital 

Standards Clarification Act of2014. The Board currently supervises twelve insurance 

depository institution holding companies and two systemically important insurance companies. 

These firms are highly diverse: they range in size fTom tlnns with total assets of approximately 

$3 billion to firms with total assets of over $700 billion. They engage in a wide variety of 

insurance and non-insurance activities. Some are fully domestic and others have material 

international operations. Some are organized as mutual companies, while others are owned by 

public shareholders. Some produce only statutory accounting statements, while others also 

produce statements under U.S. Generally Accepted Accounting Principles. Tndeed, the 

bifurcated approach set ont in the Board's advance notice of proposed rulcmaking (ANPR) on 

capital requirements for supervised institutions significantly engaged in insurance activities 

would efficiently advance the Board's differing supervisory objectives for the two populations of 

supervised insurance firms. The Board aims to develop regulatory capital frameworks tor 

insurance depository institution holding companies and systemically important insurance 

companies that are consistent with the Board's supervisory objectives and appropriately tailored 

to the firms and the business of insurance. Moreover, our supervisory prob>Tam, complementary 

to and in coordination with the states, continues to be tailored to consider the unique 

characteristics of the firms and their insurance operations. 

3. What are the reasons the FRB has considered applying a more efficient and stateregulation-friendly building block approach to the insurers subject to the FRB's 

jurisdiction? 

As explained in the Federal Reserve's ANPR, the Federal Reserve considered key strengths of 

the building block approach (BBA) including that: (i) it efficiently uses existing 

legal-entity-level regulatory capital frameworks; (ii) it is an approach that could be developed 

and implemented expeditiously; (iii) it would involve relatively low regulatory costs and burdens 

for the institutions; and (iv) it would produce regulatory capital requirements that are tailored to 

the risks of each distinct jurisdiction and line of business of the institution. The strengths of the 

BBA would appear to be maximized and its weakness minimized were the BBA to be applied to 
95 


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- 3 -

insurance depository institution holding companies, which generally are less complex, less 

international, and not systemically important. Tn this contcJ<-'t, incremental safety and soundness 

benefits would appear to be complemented by the lower compliance costs due to the smaller 

number ofjurisdictions involved. In particular, the BBA is standardized, executable, applies 

U.S.-based accounting principles for U.S.legal entities, accounts for material insurance risks, 

strikes a balance between risk-sensitivity and simplicity, and is well-tailored to the business 

model and risks of insurance. However, the BBA may not capture the full set of risks that the 

systemically important insurance companies impose on the financial system without significant 

use of adjustments and scalars to the legal entity capital requirements, 1 thereby negating any 

potential burden reduction from the approach. 

4. In the domestic and international systemic importance designation process will the FRB 

consider advocating an activity-based approach that weighs the comparative risk of 

insurance companies being considered for designation against banks and other financial 

firms to determine relative systemic importance, rather than only comparing insurance 

companies to other insurance companies? 

Since the financial crisis, U.S. authorities and foreign regulators have been working to identify 

institutions whose failure or distress may pose a threat to financial stability, including nonbank 

financial companies like insurance finns. The leaders of the Group of20 nations, including the 

United States, charged the Financial Stability Board (FSB) with identifying firms whose distress 

would threaten the global economy. The methodology by which the FSB identifies global 

systemically important insurers (G-SIIs) is developed by the IAIS and has been updated this 

year. The FSOC undertakes a process for desiguating nonbank firms as systemically important 

that assesses the potential hann that a firm's distress or failure could cause to the financial 

stability of the United States. In accordance with the Dodd-Frank Act, the FSOC's analysis is 

based on a broad range of quantitative and qualitative information available to the FSOC through 

existing public and regulatory sources and as submitted to the FSOC by the firms under 

consideration. The analysis is tailored, as appropriate, to address company-specific risk factors, 

including, but not limited to, the nature, scope, size, scale, concentration, interconnectedness, and 

mix of the activities of the firms. In this sense, the activities, risk profile, and systemic impact of 

each firm under consideration arc integral to the FSOC's analysis, rather than a comparison of 

insurers against other insurers or banks, aud designations reflect activities of the iinn that could 

pose threats to U.S. financial stability. The IAIS' methodology for identifying G-Slls also 

incorporates analysis ofthe fmn' s activities and increasingly reflects absolute reference values 

for indieators of systemic risk rather than relative comparisons of insurers against peer insurers. 

Additionally, as advocated by the Federal Reserve, the revised IAIS methodology requires a 

cross sectoral comparison of insurers against banks and other financial intermediaries in 

identifying systemically important insurers, together with an analysis of how the insurance 

industry's systemic risk changes over time. The federal Reserve continues to advocate the 

broader use of absolute reference values and increased cross sectoral analysis in the IAIS' G-Sll 

methodology. 

1 Under the BBA, existing legal enlity level capital requirements may need to be "scaled" so that the various legal 

entity level capital requirements are brought to a comparable basis for aggregation. 
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4 

5. Is the FRB considering expanding its source of strength doctrine to inappropriately 

apply it to insurers or rcquiringinsurancc legal! entity capital different from state 

rcgnlatory requirements? 

As stated in the Board's ANPR, lo the greatest extent possible, the capital fi·ameworks applicable 

to supervised institutions significantly engaged in insurance activities should take account of 

risks across the entire firm- in the holding company, in regulated subsidiaries, and in 

unregulated subsidiaries. The financial crisis demonstrated that risks of financial distress often 

spread across an organization from unregulated subsidiaries to regulated subsidiaries. In this 

regard, a consolidated capital requirement must talze into account the risks within the 

consolidated organization, including insurance risks. The ANPR put forth frameworks that are 

intended to ensure that the institution has sufficient capital, commensurate with its overall 

institution-wide risk profile (i) to absorb losses and continue operations as a going concern, 

including through times of economic, fmancial, and insurance-related stress; (ii) to serve as a 

source of strength to any subsidiary depository institutions;2 and (iii) to substantially mitigate 

any threats to U.S. financial stability that the institution might pose. 

The Board appreciates the comments on the A1'-11'R that it has received thus far. It would be 

premature for me to comment on the Board's consolidated insurance capital frameworks before 

staff has finished our research vetting potential options. The Board continues to focus on 

constructing, with engagement of stalzeholders at various levels, a domestic regulatory capital 

framework for our supervised insurance firms that achieves the Board's regulatory objectives, is 

well tailored to the business of insurance, and relies on the work ofthe state supervisors as 

primary functional regulator(s) to the greatest extent possible. 

6. What has the Fed done at the FSB to include U.S. state regulators and legislators as part 

of our delegation when insurance issues are being considered? 

The Federal Reserve has acted on the international insurance stage in a continued, engaged 

partnership with our colleagues from the NAIC, the state commissioners, and the FlO. Our 

multipmiy dialogue, while respectful of each of our individual authorities, strives to develop a 

central position on the most critical matters of global insurance regulatory policy. Several U.S. 

agencies participate in the work ofthe FSD and the TATS, and provide input that considers 

implications for U.S. domiciled firms that we supervise. The FSB, in its identification ofG-SJTs, 

relied on the methodology and analytical work conducted by the members of the IAIS. 

Numerous state insurance regulators, including those with significant insurance market,~, the 

NAJC, the FIO, and the Federal Reserve were all active participants in this analysis and 

recommendation process. Moreover, the Federal Reserve, along with other members of the U.S. 

delegation at the NAIC and the FIO, actively engages U.S. interested parties on issues being 

considered by the IAfS. 

7. Does the FRB support more transparency at the IAIS working group discussions of 

potential global insurance standards? 

----~ ~~-~~---

2 12 U.S. C. § l83lo-l. See also 12 U.S.C. § 1844 and Section 706, Division 0, of the Consolidated Appropriations 

Act, 2016, Public Law 114-1 I 3, 129 Stat. 2242 (20 15). 
97 


25968.070

- 5-

The Federal Reserve supports transparency in the development of international insurance 

standards at the lAlS. With regard to the lAlS' G-STI methodology, for instance, on 

November 25, 2015, the IAIS issued a public consultation document on the methodology used to 

identifY and analyze potential G-SIIs. The Federal Reserve participated in the review of 

comments received from stakeholders in the U.S. and around the world. The revised 

methodology was released as a public paper on June 16, 2016, and has been implemented. The 

revisions to the G-SII identification process increased the involvement of the insurance 

companies and their relevant supervisors in the process through its five phases: (1) the collection 

of data; (2) quality control on the data, initial scoring of the company, and grouping relative to a 

quantitative threshold for the score; (3) additional information collection and methodical 

assessment of companies that cross the quantitative threshold; ( 4) information exchange between 

the company, relevant authorities, and the TATS; and (5) recommendation by the IAIS to the FSB, 

which then deliberates on a confidential basis to protect the confidentiality of company data. 

The updated assessment methodolot,'Y contemplates transparency that was not part of the prior 

assessment methodology, including transparency with companies that are subject to phases 1 

through 4 and other transparent engagement with companies subject to only phases 1 and 2, as 

well as certain public disclosure of aggregate and methodology information after the G-SII 

identification process is complete. Furthermore, the IAIS has committed to further developing 

public disclosure. 

Moreover, we support the publication for public comment of consultation documents that present 

proposed approaches and frameworks for the supervision of internationally active insurance 

groups. We further support transparency and communication with stakeholders through 

participation in meetings with U.S. stakeholders either individually or jointly with the NAJC, 

state insurance commissioners, and the FIO. 

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